In VRA Family Limited Partnership v. Salon Management USA, LLC , decided on May 6, 2020, the Appellate Division, Second Department, affirmed the motion court’s grant of summary judgment in favor of a commercial landlord as against a tenant that abandoned the subject premises and improperly assigned its rights under the subject lease. The facts of VRA are simple, plaintiff, as landlord, and Salon Management USA, LLC, as tenant, entered into a 10-year commercial lease.  At the same time, two of Salon’s members executed limited personal guaranties of the lease.  VRA commenced the action against Salon and the guarantors after Salon, inter alia , failed to pay rent, made renovations without VRA’s consent causing damage to the premises, and abandoned the premises.  Accordingly, VRA’s complaint sought to recover damages for unpaid rent, late fees, unpaid insurance premiums and for physical damage to the premises. In opposition to VRA’s motion for summary judgment, defendants argued that they had no liability under the lease because Salon “assigned the lease to nonparty Ocean Beach Spa, Inc. (hereinafter OBS), with the plaintiff’s knowledge and consent, and therefore, the defendants could not be liable for any breach of the lease agreement.”  Supreme court granted VRA’s motion as to liability and directed that “all remaining issues, including damages, would proceed to trial.”  The Second Department affirmed.  In so doing, the Court held that VRA made its prima facie case for liability against defendants by proffering “a signed copy of the lease, as well as evidence of unpaid rent, late fees, unpaid insurance premiums, and damage to the premises.”  (Citations omitted.)  The Court also found that VRA established that “the assignment of the lease without the plaintiff’s written consent was prohibited by the express terms of the lease and that the plaintiff did not provide the required consent.” Salon’s waiver argument was flatly rejected by the Court.  A waiver is “an intentional relinquishment of a known right and should not be lightly presumed.”  Gilbert Frank Corp. v. Fed. Ins. Co. , 70 N.Y.2d 966 (1988) (citation omitted).  See also, Jefpaul Garage Corp. v. Presbyterian Hosp. , 61 N.Y.2d 442, 446 (1984).  Relying on, inter alia, Jefpaul, the Court noted that while waiver can sometimes be inferred from the acceptance of rent “it may not be inferred, and certainly not as a matter of law, to frustrate the reasonable expectations of the parties embodied in a lease when they have expressly agreed otherwise" (quoting Jefpaul , 61 N.Y.2d at 446).  The subject lease, however, expressly provided that it shall not be deemed a waiver if landlord accepts rent with knowledge of a breach and that there can be no waiver of any provision of the lease unless “expressed in writing and signed by the landlord.”  In addition, the lease provided that “if the lease were assigned, or if the premises were occupied by anyone other than Salon, then the plaintiff may collect rent from the assignee, under-tenant or occupant, but ‘no such collection shall be deemed a waiver of the covenant herein against assignment and underletting or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of the tenant from the further performance by the tenant of the covenants herein contained on the part of the tenant.’"  Based on the unambiguous language of the lease, the Court found that “the plaintiff’s acceptance of rent from OBS cannot be deemed a waiver or acceptance of OBS as the assignee of the lease…” (citations omitted).   Nor was the Court moved by defendants’ argument that Plaintiff’s “direct communications with OBS indicated a clear manifestation of intent to waive the nonassignment and nonwaiver provisions of the lease.”  The Court went on to note that even if an inferred consent to the assignment was found, defendants would not be relieved of their obligations under the lease “absent an express agreement to that effect or one that can be implied from facts other than the lessor’s mere consent to the assignment and its acceptance of rent from the assignee” (citations omitted).

An appraisal is the valuation of property, such as a business, stock in a private company, real estate, collectibles, antiques, or other valuables, by an authorized (and neutral) person. Appraisals are used in many types of transactions. Business men and women typically seek an appraisal when they sell their business, they gift or transfer their ownership interest in the business or property, they make changes to the composition of their business, such as by adding partners or shareholders, they separate from the business, or they are seeking financing for the business. Sometimes an appraisal is judicially ordered, and sometimes it is contractually bargained for. In today’s article, this Blog examines the process of confirming a contractually required appraisal. Yakuel v. Gluck , 2020 N.Y. Slip Op. 31251(U) (Sup. Ct., N.Y. County May 7, 2020) ( here ). The Standard for Confirming or Vacating An Appraisal Award Under CPLR § 7601, “ special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy to be determined by a person named or to be selected.” Importantly, “ he court may enforce such an agreement as if it were an arbitration agreement.” Id. In that case, the proceeding is to “be conducted as if brought under article seventy-five” of the CPLR. As readers of this Blog know, Article 75 of the CPLR governs confirmation and vacatur of arbitral awards.  Under the Federal Arbitration Act (“FAA”), appraisals are also considered to be arbitration awards. See , e.g. , Milligan v. CCC Info. Servs., Inc. , 920 F.3d 146, 152 (2d Cir. 2019) (finding that a binding appraisal process “constitutes arbitration for purposes of the FAA”); Seed Holdings, Inc. v. Jiffy Int’l AS , 5 F. Supp. 3d 565, 576-78 (S.D.N.Y. 2014) (finding that binding price appraisal by accounting firm constituted an arbitration under the FAA). Since appraisal awards are to be treated as arbitration awards, there is a strong presumption in favor of confirming appraisal awards. For this reason, the court’s role in reviewing an appraisal award is limited. Indeed, like an arbitration award, an appraisal “award must be upheld when the ‘offer even a barely colorable justification for the outcome reached.’” Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479-80 (2006) (“ n arbitrator’s rulings, unlike a trial court’s, are largely unreviewable.”); see also In re Falzone (New York Cent. Mut. Fire Ins. Co.) , 15 N.Y.3d 530, 534 (2010). Thus, an appraisal award will not be vacated “for errors of law and fact committed by the .” Id. “‘A party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high.’” US. Elecs., Inc. v. Sirius Satellite Radio, Inc. , 17 N.Y.3d 912, 915 (2011) (quoting Ecoline, Inc. v. Local Union No. 12 of lnt’l Ass’n of Heat & Frost Insulators & Asbestos Workers, AFL-CIO , 271 F. App’x 70, 72 (2d Cir. 2008)). Under the FAA, which applies in all cases involving interstate commerce, an arbitration award may be vacated, inter alia , if the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Section 10(a)(3) of the FAA has been interpreted to require that arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” Tempo Shain Corp. v. Bertek, Inc. , 120 F3d 16, 20 (2d Cir. 1997); see also Bowles Fin. Grp., Inc. v. Stifel, Nicolaus & Co., Inc. , 22 F.3d 1010, 1013 (10th Cir. 1994) (fundamentally fair hearing requires, inter alia , an “opportunity to be heard and to present relevant and material evidence and argument before the decision makers”); Yonir Techs., Inc. v. Duration Sys. (1992) Ltd. , 244 F. Supp. 2d 195, 208-209 (S.D.N.Y. 2002) (“ rbitrators must give both parties to the dispute an opportunity to present their evidence and argument” and “ n award can be vacated if an arbitrator refuses to hear material and pertinent evidence”). New York courts agree that “ he right of a party to have appraisers receive all pertinent evidence offered is a fundamental procedural right to which plaintiff was entitled, and its denial by the umpire and the company’s appointed appraiser has been characterized as ‘misconduct, in a legal sense’ which is sufficient ... to set aside the award in equity.” Gervant v. New England Fire Ins. Co. , 306 N.Y. 393, 399-400 (1954); see also McMahan & Co. v Dunn Newfund I Ltd. , 230 A.D.2d 1, 4 (1st Dept. 1997) (“Fundamental unfairness often involves insufficient notice or refusal to receive appropriate evidence.”) (citations omitted); Olympia & York 2 Broadway Co. v. Produce Exchange Realty Tr. , 93 A.D.2d 465, 471 (1st Dept. 1983) (finding that party to an appraisal did not have a right to see its opponent’s submission, but noting that each party must have “an opportunity to submit his view to the appraiser”) (citing Matter of Delmar Box Co. , 309 N.Y. 60 (1955); Coty Inc. v. Anchor Const. Inc. , 2003 WL 139551 (Sup. Ct., N.Y. County Jan. 8, 2003) (finding party was denied a “fundamentally fair hearing” because, among other things, he was “denied the opportunity to be heard” and “the opportunity to present evidence”). Yakuel v. Gluck Background Petitioner Joseph Yakuel (“Yakuel”) and Respondent Andrew Gluck (“Gluck”) founded and jointly owned Agency Within LLC (the “Company”), which was formed pursuant to a Limited Liability Company Agreement dated February 20, 2015 (“LLC Agreement”). Yakuel owned, directly and indirectly, a 65% interest in the Company and was the managing member. Gluck owned the remaining 35%. In March 2018, the parties amended the LLC Agreement (the “Amendment”). Section 3(a) of the Amendment gave the Company (effectively, Yakuel) the option to repurchase all (but not less than all) of Gluck’s Units for a Purchase Price determined by the Fair Market Value (“FMV”) of those Units. FMV was to be determined by an Appraisal conducted by “a third party appraisal firm, whose appraisal be final and binding on all parties.” The cost of the appraisal would be borne by Gluck and the Company on a 50-50 basis. Section 3(a) further provided that the third-party appraisal firm would be one of the following accounting firms: PricewaterhouseCoopers (“PwC”), Deloitte Touche, Ernst & Young (“E&Y”), KPMG, or BDO Seidman. Yakuel and Gluck had the right to veto any one of the firms within seven (7) days after notification of the Company’s intent to exercise the option and retain an appraiser. Thereafter, with respect to the firms that had not been vetoed, the Company would engage the firm that offered to perform the appraisal at the lowest cost. Under Section 3(f) of the Amendment, upon exercising the repurchase option, Yakuel had “the right to exclude ... Gluck from participating in the affairs of the Company, including without limitation the business operations of the Company, and ... entering the business offices of the Company.” Upon such exercise, Gluck’s sole right with respect to the Company and its business operations was to receive the Purchase Price for the Units. Notably, Section 3(f) did not reference Section 3(e) or otherwise indicate that it extended to the appraisal process. Less than two months after the Amendment, on May 11, 2018, the Company gave Gluck notice that it was exercising its repurchase option. Under the terms on Section 3(e), the Company vetoed E&Y and Gluck vetoed BDO Seidman. The Company then selected PwC to be the third-party appraiser. In July 2018, Gluck brought an action in New York Supreme Court to rescind the Amendment on the grounds of fraud, want of consideration, and mutual mistake, and alleged breach of contract and fiduciary duty in connection with the appraisal process. As the appraisal drew near, Gluck moved for an injunction on the ground that he was being improperly excluded from participating in the process. The Court (Sherwood, J.) denied Gluck’s motion for a temporary restraining order. With assistance from the Court, the parties entered into a So Ordered stipulation under which Yakuel “agreed in good faith to allow to participate in the Appraisal without waiver of his rights,” and Gluck “agreed to participate in the Appraisal in good faith, without delay or obstruction.”  Yakuel contended that he held up his end of the bargain and permitted Gluck to participate in the appraisal process, including by providing information and arguments to PwC with respect to valuation. Gluck disagreed. According to Yakuel, Gluck’s “bad faith and litigious approach to the appraisal process eventually caused PwC to halt its work and threaten to quit,” and Gluck’s obstructionist behavior “forced to exercise its right under Section 3 of the Amendment to exclude him from the appraisal process.” Peace between the parties was short lived. The parties returned to court to continue litigating Gluck’s motion to preliminarily enjoin the appraisal. The Court denied that motion. In doing so, the Court found that Gluck had not demonstrated a likelihood of success because “ he parties’ contract clearly provides at Section 3(f) that upon exercise of the repurchase contract, the company shall have the right to exclude Gluck from participating in the affairs of the company, from entering into the business offices ... and above that in Section 3(e) it provides for the company obtaining an appraisal by a well-known accounting firm.” But, he found, “more important than that is the question of irreparable harm .... he issue really has to do with how much money Mr. Gluck is entitled to ... upon the buyout. That’s a claim for money. He could be ... completely satisfied by money judgment.” The Court left open the question whether Gluck might have an opportunity to seek a money judgment and made no ruling as to whether an appraisal (which had not yet occurred) would be subject to challenge. Gluck contended that Yakuel blocked him from participating meaningfully in the appraisal process. He pointed to the engagement letter between the Company ( i.e. , the client) and PwC, which provided that PwC would “perform[] Services on the basis that the information provided is accurate and complete,” and that PwC “will not audit or verify any information provided to it.” Gluck interpreted this language to prohibit PwC from accepting information from anyone other than Yakuel. Gluck further maintained that the appraisal was “rigged” because he “never had an opportunity to participate, present evidence, or object to false and inaccurate evidence provided by Mr. Yakuel.” In sum, Gluck contended that the appraisal was not “fair, neutral and balanced” and was fueled by “false and misleading information” submitted by Yakuel that resulted in undervaluing Gluck’s LLC Units by tens of millions of dollars.  Yakuel filed the action to confirm the appraisal award on August 21, 2019. Gluck crossed-moved to vacate the appraisal award.  The Court’s Decision The Court denied the petition and cross-petition. The Court observed that the case “present an unusual circumstance in which there evidence to suggest that the appraiser/arbitrator ( i.e. , PwC) wanted to hear Gluck’s side of the story, and repeatedly asked for that opportunity, but may have been hindered by Yakuel.” Slip Op. at *9. The Court rejected “Yakuel’s contention that Section 3(f) of the Amendment gave him the unfettered right to exclude Gluck from presenting evidence during the appraisal process” as “not persuasive.” Id. The Court reasoned “ hat provision limits Gluck from being involved in the business or coming to the corporate office. It not, on its face, suggest any agreed upon limitation on Gluck’s ability to tell his side of the story on the significant question of the value of his Units.” Id. Nor, said the Court, did Section 3(e), “which governs the dispute resolution process.” Id. The Court explained that the “core question is whether the facts support Gluck’s assertion that he did not have a fair opportunity to present his case.” Slip Op. at *10. The Court found that “ he record not sufficiently clear at stage to permit a decision on this question one way or the other.” Id. Consequently, the Court denied the motion to confirm and to vacate the appraisal award. Takeaway Vacating an arbitration award is often difficult. This is especially so given the strong presumption in favor arbitration awards and the limited role courts take in reviewing them. Nevertheless, when the facts are such that vacatur is appropriate, courts will not hesitate to do so. In Yakuel , however, the record was not developed enough to make a decision. But it was developed enough for the Court to seek more evidence in order to rule one way or the other.

This Blog has examined cases involving the duty to disclose information, often in the context of an alleged omission ( E.g. , here ). In today’s article, we primarily look at the duty to another in the context of negligence and negligent misrepresentation causes of action. Shavolian v. Donegan , 2020 N.Y. Slip Op. 31181(U) (Sup. Ct., N.Y. County May 5, 2020) ( here ). Negligence and Negligent Misrepresentation To establish a cause of action sounding in negligence, a plaintiff must establish the existence of a duty on the defendant’s part to the plaintiff, in addition to an actual breach of the duty and damages. See Greenberg, Trager & Herbst, LLP v. HSBC Bank USA , 17 N.Y.3d 565, 576 (2011).  “A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” J.A.O. Acquisition Corp. v. Stavitsky , 8 N.Y.3d 144, 148 (2007); see also Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 180 (2011). “‘ iability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.’” Fresh Direct, LLC v. Blue Martini Software, Inc. , 7 A.D.3d 487, 489 (2d Dept. 2004) (quoting Kimmell v. Schaefer , 89 N.Y.2d 257, 263 (1996). Notably, the relationship “requires a closer degree of trust than an ordinary business relationship.” Fleet Bank v. Pine Knoll Corp. , 290 A.D.2d 792, 795 (3d Dept. 2002) (internal quotation marks and citation omitted). For this reason, arm’s-length transactions between sophisticated parties do not give rise to privity. See Greenberg, Trager & Herbst , 17 N.Y.3d at 579.  The common thread between the two causes of action is the duty to another. The Duty to Another As a general matter, in the context of a fraud cause of action, a duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter ( see Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013)); (2) there is a fiduciary relationship between the plaintiff and defendant ( see Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016)); or (3) the defendant possesses “special facts” about the matter not known by the plaintiff ( Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010).  In the context of a negligent misrepresentation cause of action, the existence of a duty to another is often difficult to plead and prove. As discussed, the plaintiff must plead (and prove) a special relationship approaching privity to establish a duty to another. As the reporters show, this is often a difficult standard to satisfy. In Glanzer v. Shepard , 233 N.Y. 236 (1922) (Cardozo, J.), the Court of Appeals found that a “public weigher” of beans owed a duty of care to a plaintiff with which it had no prior relationship. The bean weigher was retained by the bean seller but knew that the result of the weighing would be relied upon by the bean buyer (who received a copy of the weighing certificate). On those facts, the buyer’s reliance was the “end and aim of the transaction,” and therefore “assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed.... Diligence was owing, not only to him who ordered, but to him also who relied.” Id. at 238-39, 242. Nine years later, in Ultramares Corp. v. Touche , 255 N.Y. 170 (1931) (Cardozo, J.), the Court of Appeals rejected a cause of action in negligence against a public accounting firm for preparing inaccurate financial statements which were relied upon by a plaintiff who had no contractual privity with the accountants. The Court distinguished Glanzer on the ground that the service rendered by the public weigher in Glanzer was “primarily for the information of a third person, in effect..., and only incidentally for that of the formal promisee.” Id. at 183. In other words, in Glanzer , the allegedly negligent party owed a duty of care to a specific party for a specific purpose, compared to Ultramares , where the defendant could not be liable for negligent misrepresentation to a broad and undefined class of persons unknown to the defendant. Id. Notably, the Court made clear that its holding “ not emancipate accountants from the consequences of fraud.” Id. at 189. In Credit All. Corp. v. Arthur Andersen & Co. , 65 N.Y.2d 536, 545-46 (1985), the Court of Appeals reaffirmed Ultramares , and set forth a three-part test for determining when an accountant may be held liable to noncontractual third parties who relied to their detriment on inaccurate financial reports: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties' reliance.” Id. at 551. “Although this rule first developed in the context of accountant liability, it has applied equally in cases involving other professions,” such as architects, lawyers and engineering consultants. Parrott v. Coopers & Lybrand , 95 N.Y.2d 479, 483 (2000) (citations omitted); see also North Star Contracting Corp. v. MTA Capital Const. Co. , 120 A.D.3d 1066, 1069-70 (1st Dept. 2014) (applying rule to construction manager); Sutton Apartments Corp. v. Bradhurst 100 Dev. LLC , 107 A.D.3d 646, 648-49 (1st Dept. 2013) (applying rule to architect). Consistent with the approach in Glanzer , Ultamares and their progeny, courts have applied the three-part test to appraisers. See Chemical Bank v. National Union Fire Ins. Co. of Pittsburgh , 74 A.D.2d 786, 787 (1st Dept. 1980) (“If it be shown that a real estate appraiser, retained by a property owner to make an appraisal that he knows the owner will use to obtain financing, makes it in a grossly negligent manner so as to inordinately overstate the value, we are not ... prepared to hold the appraiser exempt from liability to the damaged financing party.”), app dismissed , 53 N.Y.2d 864 (1981); Federal Home Loan Mortgage Corp. v. Portnoy , 1992 WL 320813 (S.D.N.Y. 1992) (sustaining negligence claim by federal agency that relied on defendant’s appraisal report prepared for a Florida lender); Guildhall Ins. Co., Ltd. v. Silberman , 688 F Supp. 910 (S.D.N.Y. 1988) (sustaining negligence claim by insurer that relied on defendant’s appraisal prepared for owner of certain artifacts specifically for the purpose of obtaining insurance). Against the foregoing, we examine Shavolian v. Donegan. Shavolian v. Donegan Shavolian involved an appraisal that the plaintiff, Dan Shavolian (“Shavolian”), claimed was artificially inflated to benefit the interest of non-party Ben Mokhtar (“Mokhtar”). According to the complaint, Shavolian agreed to buy out Mokhtar’ interest in an office building located in Great Neck, New York (the “Property”) pursuant to an “arbitration agreement.” Under the agreement, Shavolian and Mokhtar agreed to each retain their own appraiser to “accurately and fairly value the Property.” Per the arbitration agreement, an identified arbitrator would average the two party-tendered valuations to determine the buy-out price. Shavolian’s appraiser valued the Property at $14 million. Mokhtar retained Defendants to serve as his appraiser under the arbitration agreement. Defendants appraised the Property at $38 million (the “Appraisal”). The arbitrator averaged the two appraisals and set a valuation of the Property in excess of $28 million. Shavolian alleged that Defendants conspired with Mokhtar to appraise the Property at an inflated amount, so that Mokhtar could receive a larger buy-out price. Shavolian further alleged that Defendants were aware that Shavolian would be relying upon their Appraisal. As a result of Defendants’ allegedly deceptive Appraisal, Shavolian claimed that he suffered damages in excess of $850,000. Shavolian asserted claims against Defendants for negligence, negligent misrepresentation, and fraudulent misrepresentation. Defendants argued that the complaint should be dismissed because, inter alia , Defendants owed no duty of care to Shavolian (with whom they had no prior relationship, contractual or otherwise) when preparing their Appraisal and because the Appraisal merely reflected an “opinion.” The Court addressed the negligence and negligent misrepresentation claims first.  The Court observed that these claims did “not fit neatly within the confines of” Glanzer and Ultramares . Slip Op. at *5. “On the one hand,” said the Court, “as in Glanzer et al. , Defendants allegedly were aware that their appraisal was to be provided to Shavolian, albeit indirectly, for a narrow purpose that specifically implicated Shavolian’s interests.” Id. Thus, the action did “not present the risk of exposing Defendants to liability from a large and indeterminate group.” Id. at *5-*6. “On the other hand,” said the Court, the action differed “from the above line of cases in that Shavolian cannot be said to have ‘relied’ on Defendants’ appraisal in making a commercial decision. Instead, the appraisal was relied upon by the arbitrator.” Id. at *6. Thus, “ nlike the insurers and lenders in the appraisal cases noted above, Shavolian does not claim to have been fooled or misled by the appraisal, which on its face conflicted with the report of his own appraiser.” Id. “His only claim,” explained the Court, “is that he was harmed by the appraisal because it skewed the result of a rigid valuation process - which apparently gave the arbitrator no discretion to do anything other than blindly accept the parties’ appraisals and average them - to which he voluntarily agreed.” Id. “On balance,” the Court found that “Defendants did not undertake a duty of care to Shavolian.” Id. The Court reasoned that Defendants “were engaged by Mokhtar as part of an arbitration process. Shavolian was affected by the appraisal, but he did not rely upon it.” Id. Accordingly, the Court dismissed the negligence and negligent misrepresentation claims. Having addressed the negligence and negligent misrepresentation claims, the Court turned its attention to the fraudulent inducement claim. To state a claim for fraudulent misrepresentation, a plaintiff must allege that the defendant made material misrepresentations of fact; that the misrepresentations were made intentionally in order to defraud or mislead the plaintiff; that the plaintiff reasonably relied on the misrepresentations; and that the plaintiff suffered damages as a result of his/her reliance on the defendant’s misrepresentations. See Mandarin Trading Ltd. , 16 N.Y.3d at 177. Privity is not an element of a fraudulent misrepresentation cause of action. See John Blair Communications, Inc. v. Reliance Capital Group L.P. , 157 A.D.2d 490, 492 (1st Dept. 1990). The Court found that Shavolian “sufficiently allege facts to support his fraud claim.” Slip Op. at *6. In this regard, said the Court, “Shavolian allege that Defendants, acting in concert with Mokhtar, made misrepresentations of fact in their Appraisal, intending to overvalue the Property for the arbitrator to Shavolian’s detriment.” Id. The Court rejected Defendants’ argument that there was no false statement because the appraisal was nothing more than an opinion. “To be sure,” noted the Court, “there is case law suggesting that appraisals ordinarily cannot support a claim for fraud, because an appraisal is a form of non-actionable opinion,” but, said the Court, where the grounds supporting the opinion are alleged to be “so flimsy as to lead to the conclusion that there was no genuine belief” to back it up, a plaintiff can state a claim. Id. at 7 (quoting Ultramares Corp. , 255 N.Y. at 18). See also MBIA v. Countrywide , 87 A.D.3d 287, 294 (1st Dept. 2011); Stewardship Credit Arbitrage Fund LLC v. Charles Zucker Culture Pearl Corp. , 31Misc. 3d 1223(A), at *5 (Sup. Ct., N.Y. County 2011). That, according to the Court, was what Shavolian alleged: Here, Shavolian alleges that Defendants’ Appraisal is based on misrepresented facts and does not reflect Defendants’ honest opinion. Shavolian alleges, for example, that Defendants intentionally used an incorrect percent capitalization rate, undertook no rental comparisons, and failed to account for a wide arrange of expenses, including taxes, utilities, used water, all as part of a scheme to harm Shavolian. Accordingly, the Court denied Defendants’ motion to dismiss the fraudulent inducement cause of action. Takeaway As discussed, before a party can recover damages “as a result of another’s negligent misrepresentation<,> there must be a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity.” Prudential Ins. Co. of Am. V. Dewey, Ballantine, Bushby, Palmer & Wood , 80 NY2d 377, 382 (1992). Privity or a privity-like relationship requires an awareness by the defendant that his or her statement is for a particular purpose; reliance on the statement in furtherance of that purpose; and conduct linking the defendant to the relying party and evincing its understanding of that reliance. Sykes v. RFD Third Ave. 1 Associates, LLC , 67 A.D.3d 162, 167 (1st Dept. 2009). In Shavolian , the plaintiff could not establish that he relied on defendants’ conduct as opposed to the appraisal. Slip Op. at *6 (“Shavolian was affected by the appraisal, but he did not rely upon it.”).

Statutes of limitations limit the time within which a defendant can be held liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue for a lawyer and client to discuss. This Blog often examines the statute of limitations in the context of fraud and contract actions. In today’s article, we look at the statute of limitations in the context of a breach of fiduciary duty action.   New York law does not provide a single statute of limitations for breach of fiduciary duty claims. IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009). Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Loengard v. Santa Fe Indus. , 70 N.Y.2d 262, 266 (1987). Where the remedy sought is purely monetary in nature, courts construe the suit as alleging “injury to property” within the meaning of CPLR § 214 (4), which has a three-year limitations period. See, e.g., Yatter v. Morris Agency , 256 A.D.2d 260, 261 (1st Dept. 1998). Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR § 213 (1) applies. Loengard , 70 N.Y.2d at 266-267. Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts apply a six-year statute of limitations under CPLR § 213 (8). Kaufman v. Cohen , 307 A.D.2d 113, 119 (1st Dept. 2003). A breach of fiduciary duty is a tort. A tort claim accrues when “the claim becomes enforceable, i.e. , when all elements of the tort can be truthfully alleged in a complaint.” Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 94 (1993). As with other torts in which damage is an essential element, the claim “is not enforceable until damages are sustained.” Id . at 94. To determine timeliness, the courts consider whether the plaintiff’s complaint alleges, as a matter of law, “damages suffered so early as to render the claim time-barred.” Id. at 94-97. The statute of limitations “on claims against a fiduciary for breach of its duty is tolled until such time as the fiduciary openly repudiates the role.” AccessPoint Med. LLC v. Mandell , 106 A.D.3d 40, 45 (1st Dept. 2013). This rule exists "to protect beneficiaries in the event of breaches of duty by fiduciaries such as ... corporate officers ... in circumstances in which the beneficiaries would otherwise have no reason to know that the fiduciary was no longer acting in that capacity." Id. (emphasis added); Knobel v. Shaw , 90 A.D.3d 493, 496 (1st Dept. 2011); Golden Pac. Bancorp v. FDIC , 273 F.3d 509, 518-19 (2d Cir. 2001). This rule has been repeatedly applied to toll the limitations period on claims against corporate officers and directors. See , e.g. , Westchester Religious Inst. v. Kamerman , 262 A.D.2d 131, 132 (1st Dept. 1999) (tolling limitations period on breach of fiduciary duty claim against corporate officers until officers left their positions of trust); Steele v. Anderson , No. 03-CV-1251, 2004 WL 45527, at *1 (N.D.N.Y. Jan. 8, 2004) (tolling limitations period on claims against corporate directors and officers for breach of fiduciary duty, corporate waste, and accounting until termination of fiduciary relationship).  Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id . (internal quotation marks and citation omitted). The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id. It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id. (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). In Ganzi v. Ganzi , 2020 N.Y. Slip Op. 02740 (1st Dept. May 7, 2020) ( here ), the Appellate Division, First Department, affirmed the denial of a post-trial motion to dismiss breach of fiduciary duty claims on statute of limitations grounds, holding that the plaintiffs timely brought their claims. Ganzi involved allegedly improper transactions and practices by the majority shareholders of closely-held family businesses: Just One More Restaurant Corp. (“JOMR”), which owned the now-shuttered, renowned New York City establishment, the original Palm Restaurant (“Palm”); and Just One More Holding Corp. (“JOMH”), which owned real property at which the Palm was located. The actions challenged by plaintiffs Gary Ganzi (“Gary”), Claire Breen (“Claire”), and the Estate of Charles Cook (“Cook’s Estate”) occurred decades after the ownership and management of the businesses had been passed down the family trees to the defendants, Bruce Bozzi Sr. (“Bruce”) and Walter Ganzi, Jr. (“Wally”), plaintiffs’ cousin. Plaintiffs asserted derivative claims for breach of fiduciary against defendants, as the majority shareholders of JOMR. The claims fell into two general categories relating to undervaluation of JOMR’s intellectual property assets, and challenge: (1) JOMR’s issuance of below market rate license agreements to restaurants and related entities owned in whole or in part by defendants; and (2) JOMR’s issuance of a below market rate agreement granting exclusive licensing/sublicensing rights to its valuable intellectual property assets to defendants’ wholly-owned management company, the Palm Management Corporation (“PMC”), and the transactions that occurred thereunder. Plaintiffs also asserted a derivative claim that defendants, as the majority shareholders of JOMH, breached their fiduciary duties by leasing JOMH’s real property to JOMR for below market rates. Since 1972, defendants have opened new Palm restaurants around the world (“New Palms”) and have an ownership interest in numerous New Palms and their associated business entities. All of the New Palms entered license agreements with JOMR, from the 1970s to 2011, which identified JOMR as the licensor and owner of “long established, famous and valuable service marks used in connection with the operation of distinctive, high quality restaurants,” and that JOMR had “devised and developed certain confidential know-how relating to the management and operation of restaurants, including business practices, unique recipes, and formulae”; under those agreements, the New Palms agreed to pay JOMR an annual licensing fee of $6,000 “for the use of Licensed Trademark and . . . know-how.” The $6,000 annual fee was imposed for all New Palms in which defendants had an ownership interest, regardless of when those restaurants first opened. At issue were 54 license agreements, all of which included the $6,000 fee, entered between JOMR and the New Palms owned by defendants: 26 licenses in 2007, backdated to January 1, 2004 (“2007 Licenses”); and 28 licenses in 2011, backdated to January 1, 2010 (“2011 Licenses”). The parties stipulated to the validity and enforceability of the 2007 and 2011 Licenses.  In 2007, PMC and JOMR entered into a Master License Agreement (“MLA”) through which PMC acquired the “exclusive, worldwide, royalty bearing, sub-licensable license” to the Palm IP for an annual flat payment of $12,000. Under the MLA, PMC entered into sublicense agreements for the use of Palm IP with third parties for at or near market rate value, as opposed to the $6,000 flat fee paid by the New Palms. Plaintiffs alleged that defendants engaged in a decades-long pattern of exploiting the Palm IP to benefit defendants’ own businesses ( i.e. , by licensing Palm IP to the New Palms for below market rates), and by improperly entering the MLA between JOMR and PMC and using the MLA to divert substantial revenue from JOMR to PMC. Plaintiffs further alleged that defendants breached their fiduciary duties to JOMH, which owned the real estate in New York City at which the Palm and its offices were located, by leasing the space at below market level rates to JOMH’s detriment. Defendants asserted a statute of limitations defense, among others.  Following a bench trial, the Court held that plaintiffs’ breach of fiduciary duty claims were not time barred. Defendants appealed. The First Department affirmed. Defendants argued that the breach of fiduciary duty claims were time-barred because JOMR had previously executed license agreements that included the same $6,000 annual license fee provision for the use of its intellectual property. Defendants contended that the execution of the 2007 and 2011 Licenses merely renewed, updated, and reaffirmed preexisting allegedly tortious licensing arrangements, and did not constitute new, discrete acts causing new injury that restarted the applicable six-year statute of limitations. The First Department rejected the argument, holding that “ he trial court correctly rejected defendants’ statute of limitations defense to the derivative claims.” Slip Op. at *1. The Court explained that “the 2007 and 2011 licenses, even if they stated the same terms, were not mere ‘renewals’ of prior, written agreements. Rather, they were new and fully enforceable contracts entered into between JOMR and defendants’ wholly-owned restaurants within the limitations period, as they included a recital providing that ‘Licensor and Licensee have previously entered into a certain License Agreement and desire to enter into a new License Agreement under the terms and conditions as herein set forth,’ as well as a merger clause providing that ‘this Agreement contains all of the terms and conditions agreed upon by the parties hereto and no promises or representations have been made other than as herein set shall be valid unless made in writing executed by an authorized officer of the Licensee or Licensor.’” Id. at *2. The Court concluded that “ hese are formal, complete agreements that have legal effect, and any associated breach of fiduciary duty occurred upon the execution of those agreements, regardless of identical breaches that occurred in connection with prior license agreements that were in place for unspecified terms and that were superseded by the new agreements.” Thus, “ hile defendants argue that the old licenses, including the $6,000 fee term, would have remained in place indefinitely even if the agreements had not been re-papered in 2007 and 2011, such that there was no injury in 2007 and 2011, the formalizing of the licenses in 2007 and 2011 was a new, overt act that constituted an injurious breach of fiduciary duty.” Id. In reaching the decision, the Court distinguished the facts in Ganzi with Madison Squ. Garden, L.P. v National Hockey League , 2008 WL 4547518, 2008 US Dist. LEXIS 80475 (S.D.N.Y. 2008). In the latter case, the agreements at issue were not new and independent contracts that could be enforced in their own right. As the court observed: “The allegations in the Complaint … do not plausibly allege any ‘new and independent acts’ that inflicted ‘new and accumulating injury’ on MSG.” 2008 WL 4547518, at *10.  Takeaway In the post-trial memoranda, plaintiffs argued that the statute of limitations was tolled under the continuing wrong doctrine. Plaintiffs maintained that defendants repeatedly breached their fiduciary obligations every time defendants failed to distribute profits to JOMR in a fair and reasonable manner. In other words, every underpayment made within six years prior to the commencement of the action was a new self-dealing transaction that could have been remedied, altered or corrected, or reviewed. In addition, plaintiffs argued (and prevailed) on the argument that defendants committed new breaches of fiduciary duty by causing JOMR to enter into new license agreements within the limitations period.  Though mentioning the continuing wrong doctrine, the First Department focused its decision on the enforceability of the 2007 and 2011 License Agreements. And, it is that focus that makes Ganzi notable. As the Court explained, although those agreement were essentially carbon copies of existing license agreements, they were different in that they specifically provided they were new, independent agreements. That finding was reinforced by the merger clause in each of the agreements. Thus, according to the Court, whether JOMR would have continued to license the Palm IP for $6,000 per year pursuant to the preexisting licenses regardless of whether the 2004 and 2010 agreements had ever been prepared was of no moment. For statute of limitations purposes, the claims accrued when the 2007 and 2011 license agreements were entered – i.e. , “the formalizing of the licenses in 2007 and 2011”, each of which “was a new, overt act that constituted an injurious breach of fiduciary duty.”

Article 63 of New York’s Civil Practice Law and Rules (“CPLR”) governs, inter alia , the provisional remedy of the preliminary injunction.  Thus, CPLR 6301 provides, in relevant part: Grounds for preliminary injunction and temporary restraining order.   A preliminary injunction may be granted in any action where it appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiff's rights respecting the subject of the action, and tending to render the judgment ineffectual, or in any action where the plaintiff has demanded and would be entitled to a judgment restraining the defendant from the commission or continuance of an act, which, if committed or continued during the pendency of the action, would produce injury to the plaintiff…. The purpose of a preliminary injunction is to “preserve the status quo pending a trial.”  Trump on the Ocean, LLC v. ASH , 81 A.D.3d 713, 715 (2 nd Dep’t 2011) (citations omitted).  A preliminary injunction is an “drastic” remedy that should be used “sparingly.”  Trump , 81 A.D.3d at 715 (citations omitted).  Such “extraordinary” relief will be granted only where the movant can demonstrate: (1) the likelihood of success on the merits of the underlying action; (2) irreparable injury in the absence of the preliminary injunction; and, (3) the balance of the equities tipping in the movant’s favor.  Harris v. Patients Medical, P.C. , 169 A.D.3d 433, 434 (1 st Dep’t 2019) (citations omitted); see also , Aetna Insurance Co. v. Capasso , 75 N.Y.2d 860 (1990) (citations omitted); Trump , 81 A.D.3d at 715 (citations omitted).  The granting of preliminary injunctive relief “is committed to the sound discretion of the motion court.”  Harris Medical , 169 A.D.3d at 434. It is generally accepted that irreparable injury will not be found, and, therefore, a preliminary injunction will be denied, if the movant’s “alleged damages are compensable in money damages and capable of calculation.”  Trump , 81 A.D.3d at 716 (citations omitted).  In Mar v. Liquid Management Partners, LLC , 62 A.D.3d 762 (2 nd Dep’t 2009), plaintiff was a distributor of defendant manufacturer’s energy drink.  Plaintiff alleged that defendant breached their distribution agreement by distributing the energy drink in plaintiff’s territory.  The trial court granted plaintiff a preliminary injunction “prohibiting the defendant from competing with the plaintiffs by distributing certain beverage products in specified territories, and compelling the defendants to sell such beverage products to the plaintiff….”.  Mar , 62 A.D.3d at 762.  The Appellate Division reversed the trial court and denied plaintiff’s motion for a preliminary injunction.  Mar , 62 A.D.3d at 762.  After recognizing that full compensation by a monetary award could undermine injunctive relief due to the absence of irreparable harm, the Mar Court stated: The plaintiffs argue on appeal that they demonstrated a risk of "injury for which monetary damages will be inadequate" by showing that the failure to grant a preliminary injunction will likely result in the dissolution of their business. However, in their complaint, they seek nothing more than monetary damages. Accordingly, the plaintiffs have effectively acknowledged that they will be fully compensated by obtaining such damages, and thus are not entitled to a preliminary injunction Mar , 62 A.D.3d at 763 (citations omitted). On April 24, 2020, the Appellate Division, Fourth Department, decided Eastview Mall, LLC v. Grace Holmes, Inc. , in which the Court vacated the trial court’s grant of a preliminary injunction to plaintiff.  The defendant/tenant in Eastview held a 10-year lease in the mall owned by plaintiff/landlord.  The lease permitted defendant to terminate the lease early if its “gross sales” failed to meet the contracted for threshold during the lease’s fifth year.  During the fifth year, plaintiff was advised that defendant failed to meet the bargained for sales goals.  Instead of terminating the lease, the parties modified the lease by reducing the rent and extending the termination option for one year. The following year, plaintiff was again advised that defendant had still not met its sales goals and, accordingly, that it was exercising its right to terminate the lease.  Plaintiff’s retort was that it had learned through auditor’s reports that defendant had “wrongly excluded certain sales from their calculation of gross sales and were thus precluded from exercising the option to terminate the lease.”  Plaintiff, landlord, commenced action seeking a declaratory judgment and asserting causes of action for breach of contract and anticipatory repudiation.  In addition, plaintiff moved for and obtained “a preliminary injunction enjoining defendants from ceasing business operations or otherwise taking steps to terminate the lease.” In reversing the trial court, the Eastview Mall Court determined, inter alia , that plaintiff failed to establish that it would suffer “irreparable injury” absent injunctive relief.  In so doing, the Eastview Mall Court reiterated that “ t is an anodyne proposition that irreparable injury, for purposes of equity means any injury for which money damages are insufficient” and that “where any loss of sales caused by the allegedly improper conduct of the defendant can be calculated, a plaintiff has an adequate remedy in the form of money damages and is not entitled to injunctive relief.”  (Citation and internal quotation marks, ellipses and brackets omitted.)  The Court’s analysis was as follows: Here, the lease contains a liquidated damages provision that entitles plaintiff to certain money damages if defendants prematurely vacate the premises and cease operations. The lease also contains an integration clause stating that the lease is "the entire and only agreement between the parties." Thus, because the lease specifically provides that plaintiff is entitled to certain money damages in the event that defendants vacate the premises in breach of the agreement—the very injury that serves as the predicate for plaintiff's action— we conclude that plaintiff has an adequate remedy at law and, moreover, that plaintiff has not suffered irreparable harm because the liquidated damages clause was intended as the sole remedy for such a breach ( cf. Karpinski v Ingrasci , 28 NY2d 45, 52-53 <1971> ; Picotte Realty, Inc. v Gallery of Homes, Inc. , 66 AD2d 978, 979 <3d dept 1978> ). The Majority rejected the Dissent’s view that irreparable injury was established by “the loss of goodwill that would occur if defendant[ was] to cease operations by prematurely terminating the lease.  According to the Dissent, plaintiff established that “defendant<‘s> store is a premier retailer in the mall and that their tenancy impacts the leases of the other tenants of the mall.”  Unless stores like defendant’s operate in a certain percentage of the square footage of the mall, “other tenants are not required to operate under their lease agreements.”  According to the Dissent: The potential injury to plaintiff is not limited to the loss of rental income from one of approximately 150 tenants in the mall, a loss that is easily quantified and remedied by monetary compensation pursuant to the lease. Here, the potential injury to plaintiff include domino effect involving other tenants in the mall. Stated simply, if defendant[] breach the lease by vacating the mall prior to the expiration of lease term, plaintiff will be entitled to recover liquidated damages based on that breach. Plaintiff's other tenants in the mall whose co-tenancy provisions in their leases depend on defendant<‘s> continued occupancy in the mall throughout its lease term, however, will have the ability to terminate their leases based on defendant<‘s> premature departure, thereby causing irreparable harm to plaintiff. In our view, plaintiff sufficiently demonstrated that the premature termination of defendant<‘s> lease will cause a loss of goodwill and damage to plaintiff's customer relationships that will not be remedied by an award of liquidated damages and thus that temporary injunctive relief is appropriate.

In times of crisis, unscrupulous people often disseminate false information to the public in the hope of securing a personal benefit from the fear and concern surrounding the event. Such is the case with the COVID-19 pandemic. Since February of this year, the Securities and Exchange Commission (“SEC” or “Commission”) has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency (here). In fact, the SEC has halted trading in the securities of at least 26 companies in connection with alleged false and misleading statements relating to COVID-19. In its warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump and dump schemes. The SEC noted that microcap stocks “may be particularly vulnerable to fraudulent investment schemes, including coronavirus-related scams.” The SEC explained that fraudsters can easily spread false information because there is often limited publicly available information about the companies’ management, products, services, and finances. “This can make it easier for fraudsters to spread false information about the company and to profit at the expense of unsuspecting investors,” said the SEC. On April 28, 2020, SEC announced (here) that it had brought charges against Praxsyn Corp. (”Praxsyn” or the “Company”) and its Chief Executive Officer, Frank J. Brady (“Brady”), for allegedly issuing false and misleading press releases, claiming the Company was able to acquire and supply large quantities of N95 or similar masks to protect wearers from the COVID-19 virus. The SEC previously issued an order (here) on March 26, 2020, temporarily suspending trading in Praxsyn securities. Praxsyn is a Nevada corporation with its principal offices purportedly located in West Palm Beach, Florida. Praxsyn claims to be a “specialty finance company focused on providing cash flow solutions and medical receivables financing to healthcare providers in the US that focus on personal injury and workers compensation.” Neither Praxsyn nor its securities are registered with the SEC. Praxsyn’s common stock is quoted on OTC Link (previously “Pink Sheets”) operated by OTC Markets Group Inc. According to the SEC’s complaint (here), Praxsyn issued a press release on February 27, 2020, stating that it was negotiating the sale of millions of N95 masks and “evaluating multiple orders and vetting various suppliers in order to guarantee a supply chain that can deliver millions of masks on a timely schedule.” On March 4, 2020, Praxsyn issued another press release claiming it had a large number of N95 masks on hand and had created a “direct pipeline from manufacturers and suppliers to buyers” of the masks. Brady was quoted in the release as telling any interested buyers that the company was accepting orders of a minimum of 100,000 masks. Despite these claims, according to the SEC, Praxsyn never had any masks in its possession, any orders for masks, or a single contract with any manufacturer or supplier to obtain masks. After regulatory inquiries, Praxsyn issued a third press release on March 31, 2020, admitting that it never had any masks available to sell. “As alleged in the complaint, in the midst of the ongoing COVID-19 pandemic, Praxsyn and Brady sought to exploit unsuspecting investors by issuing false and misleading press releases concerning Praxsyn’s ability to source and supply N95 masks for the COVID-19 virus,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Today’s fraud action against Praxsyn and its CEO demonstrates the SEC’s dedication to investor protection and accountability,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement. “We will move swiftly against those who seek to profit off this national emergency by cheating or misleading investors.” “The Enforcement Division is committed to swiftly shutting down COVID-19 investment scams, seeking trading suspensions where appropriate, and pursuing fraud charges against both entities and individuals when warranted,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement. The SEC filed its complaint in the United States District Court for the Southern District of Florida. The SEC charged Praxsyn and Brady with violating the antifraud provisions of the federal securities laws. The SEC is seeking permanent injunctive relief and civil penalties and an officer and director bar against Brady.

On April 24, 2020, this BLOG detailed the substance of Chief Judge DiFiore’s April 20, 2020 weekly on-line video message in which the Chief Judge stressed the strong desire that the New York Court System move to more “normal” operations.  Consistent with the Chief Justice’s goals, Chief Administrative Judge Marks issued a memorandum yesterday further outlining the Court System’s plans to move cases along. In the memorandum, Chief Judge Marks recounted how “the Unified Court System has been increasingly active and productive since we transitioned to virtual court appearances….”  In this regard, the Chief Judge reported on the move to “deliberat and methodical ” expand the virtual presence of New York’s courts.  The courts have moved from hearing only “essential” and “emergency” matters to hearing “non-essential” matters.  In a matter of weeks, trial judges have “conducted conferences or other court proceedings in over 25,000 cases one-third of those cases have been settled or otherwise disposed.”  The memorandum notes that judges have been addressing and resolving “fully-submitted motions and other undecided matters,” recognizing that by eliminating backlogs the court system “will be in a far better position to absorb what promises to be a surge of new litigation once the court system returns to more normal operations.” Against this backdrop, the memorandum outlines the next steps to “increase access to justice and expand judicial services.”  Chief Judge Marks explicitly noted that the latest steps “do not include the filing of new non-essential cases.”  Thus, the new steps, which take effect on Monday, May 4, 2020, will include: 1. Expanded motion practice .  Litigants in pending cases can now electronically file “new motions, responsive papers to previously filed motions, and other applications (including post-judgment applications).”  Such papers can be filed: through the NYSCEF system, where available; or, “through a new electronic document delivery system that that we have created for courts and jurisdictions where e-filing is unavailable” (the details of which “are available on the court system’s website and from your Administrative Judge”). 2. Problem-solving courts .  “Problem-solving courts may conduct virtual court conferences with counsel, court staff, and service providers, via skype for Business.” 3. ADR .  Referrals of matters by judges for alternative dispute resolution may resume. 4. Appeals .  Litigants can file notices of appeal electronically – whether through NYSCEF or through the new document delivery system discussed in the memorandum and herein. This Blog will continue to address the steps the Court System is taking to return to normalcy.

On October 30, 2019, we posted an article, titled “How Short Is Too Short?” ( here ). The article examined the enforceability of a contractual provision that shortened the statute of limitations in a non-payment litigation. In today’s article, we revisit the issue with our examination of Murphy v. Williams , 2020 N.Y. Slip Op. 31009(U) (Sup. Ct., N.Y. County April. 23, 2020) ( here ), a case involving a breach of contract claim.  The Law It is well settled that parties are free to contractually shorten a limitations period as long as their intent to do so is clearly stated and the time period is reasonable. Whitney Lane Holdings, LLC v. Don Realty, LLC , 159 A.D.3d 1163, 1165 (3d Dept. Mar. 8, 2018); John J. Kassner & Co. v. City of New York , 46 N.Y.2d 544, 550-551 (1979); see also CPLR § 201, CPLR § 213. But what is reasonable? The answer to the foregoing question depends upon the facts and circumstances of each case. And, in that regard, it is “ he circumstances, not the time, the determining factor.” Executive Plaza, LLC v. Peerless Ins. Co. , 22 N.Y.3d 511, 519 (2014) (internal quotation marks and citation omitted). Often, the issue of reasonableness turns on the accrual date for the cause of action. For this reason, “an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date.” Executive Plaza , 22 N.Y.3d at 519. Indeed, the enforceability of a contractual accrual date depends upon “whether the plaintiff had a reasonable opportunity to commence its action within the period of limitation.” Id. (internal quotation marks and citation omitted). As the Court of Appeals noted, “ ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.” Id. at 518. Murphy v. Williams Background On February 2, 2015, plaintiffs, Jeffrey Murphy (“Murphy”) and Katherine Dillon (“Dillon”), purchased real property in New York City (the “property”) from defendant, Michael Williams (“Williams”). At the closing, Williams was required to sign and file a real property transfer tax return (“RPT”) with the City of New York (the “City”) to report the sale of the property and to pay the appropriate New York City transfer tax (“transfer tax”) pursuant to New York City Administrative Code § 11-2102. Williams informed plaintiffs that the transfer tax owed was $46,312.50, and that no further amounts would be due to the City.  The parties executed a hold harmless agreement (the “agreement”), pursuant to which Williams promised to indemnify and hold harmless plaintiffs from any liability or claims made against them in connection with the transfer tax, and any amount underpaid by Williams pursuant to the RPT, including interest, penalties and reasonable attorneys’ fees. On June 16, 2017, due to an alleged tax classification discrepancy, the City issued a further assessment with interest and penalties against the property in the amount of $46,980.04. Although the notification was sent to Dillon at an address where she no longer resided, plaintiffs later learned about the additional assessment on June 1, 2018 and, upon being so apprised, notified Williams to provide the payment. Williams refused. As a result, plaintiffs paid the additional assessment, as well as the related accrued penalties and interest, totaling $57,193.20.  On July 30, 2019, plaintiffs commenced the action by filing a summons with notice, alleging, inter alia , that Williams breached the agreement and that they were therefore entitled to recover $57,193.20. Plaintiffs subsequently filed a complaint on September 4, 2019. Williams filed a motion to dismiss on October 18, 2019, arguing that, inter alia , the action was untimely having been commenced on July 30, 2019, more than 17 months after the parties’ contractually agreed-upon statute of limitations expired ( i.e. , February 2, 2018). The provision to which Williams relied, provided that the right to indemnification would “survive Closing until the sooner of the statutory limit by New York City or the transfer of title by Purchaser.” Slip Op. at *3. Williams claimed that the “statutory limit” referenced in the agreement was defined by Section 11-2116 (b) of the New York City Administrative Code, which provides, in relevant part, that “no assessment of additional tax shall be made after the expiration of more than three years from the date of the filing of a return.” Id. Williams maintained that under this provision, plaintiffs should have commenced the action on or before February 2, 2018, the date the original RPT was filed.  In opposition, plaintiffs argued, inter alia , that it was unclear from the agreement whether Section 11-2116 (b) of the New York City Administrative Code applied. In light of this ambiguity, plaintiffs maintained that their claims were governed by the six-year statute of limitations under CPLR § 213 (2). Moreover, plaintiffs contended that, under Williams’ interpretation of the agreement, if the City had waited three years to issue the additional assessment, the statute of limitations would have expired on that same day, which “flies in the face of a contractually agreed upon statute of limitations being upheld if it is deemed reasonable as drafted.” Slip op. at *3. Even if Administrative Code § 11-2116 (b) applied, argued plaintiffs, the statute of limitations should begin to run from the date that the City issued the notice on June 16, 2017, because it was only then that they possessed a legal right to demand payment. The Court’s Decision The Court denied the motion, finding that Williams failed to meet his prima facie burden of demonstrating that the action was time-barred. On a motion to dismiss under CPLR § 3211 (a) (5) ( i.e. , that the claim is barred by the statute of limitations), the movant bears the initial burden of establishing, prima facie, that the time in which to sue has expired. Benn v. Benn , 82 A.D.3d 548, 548 (1st Dept. 2011) (internal quotation marks and citations omitted); see also Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 158 (1st Dept. 2017). If the initial burden is met, “ he burden then shifts to the to raise a question of fact as to whether the statute of limitations is inapplicable or whether the action was commenced within the statutory period.” MTGLQ Invs., LP v. Wozencraft , 172 A.D.3d 644, 645 (1st Dept. 2019) (citation omitted). In explaining its holding, the Court observed that the agreement never mentioned Section 11-2116 (b) of the New York City Administrative Code. Slip Op. at *5. It was, therefore, “unclear whether the reference to ‘the statutory limit by New York City’ in the agreement implicate the statute.” Id. “Given this ambiguity,” concluded the Court, “Williams prevail on a motion based on CPLR 3211 (a) (5).” Id. (citations omitted). Finally, although the Court held that there was an issue of fact as to whether Section 11-2116 (b) of the Administrative Code applied, the Court nonetheless tipped its hand on how it might rule, stating that the Administrative Code did not apply: “Importantly, New York City Administrative Code § 11-2116 (b) precludes the City from making an assessment of additional tax after three years from the filing of a return. It does not, as Williams suggests, impose a three-year statute of limitations for actions based on an additional tax assessment.” Id. at *6 (orig’l emphasis). Takeaway Parties may contractually shorten a limitations period as long as their intent to do so is clearly stated and the time period is reasonable. Intent must be determined from the writing itself. Indeed, “ he best evidence of what parties to a written agreement intend is what they say in their writing” Riverside South Planning Corp. v. CRP/Extell Riverside LP , 60 A.D.3d 61, 66 (1st Dept. 2008), aff’d, 13 N.Y.3d 398 (2009) (internal quotation marks omitted). Thus, if the agreement is clear and unambiguous on its face, the court must enforce it according to the terms of the writing. Id. Extrinsic evidence of the parties’ intent may be considered, as in Murphy , “only if the agreement is ambiguous.”

In past articles, this Blog has written about qui tam actions under the federal False Claims Act (“FCA”). Typically, the whistleblower (known as the “relator”) adds a claim under the state analogue to the FCA. In today’s article, this Blog examines a claim under New York’s qui tam statute. State of N.Y. ex rel. Edelweiss Fund, LLC v. JPMorgan Chase & Co. , 2020 N.Y. Slip Op. 50380(U) (Sup. Ct., N.Y. County (Mar. 27, 2020) ( here ). Background Edelweiss involved a claim under the New York False Claims Act (“NYFCA”) by Edelweiss Fund, LLC (“Relator”) on behalf of the State of New York. Relator alleged that defendants — financial institutions and their subsidiaries — collectively engaged in a decade’s-long fraudulent scheme to reset interest rates for certain municipal bonds, known as Variable Rate Demand Obligations (“VRDOs”). New York issues VRDOs to raise money to fund various long-term projects and infrastructure, such as airport, port, transportation, and affordable housing facilities. New York engaged defendants as remarketing agents (“RMAs”) to market and price the VRDOs at the lowest possible interest rates and paid them fees to perform said services. Defendants allegedly represented that they would (i) reset interest rates for VRDOs at the lowest possible rate, and (ii) do so “actively and individually” based on an assessment of each bond’s unique “characteristics.” According to Relator, however, defendants did not perform the services as promised and instead engaged in “robo-resetting” the interest rates by using an “algorithm or some other mechanical basis” to reset the rates by placing the bonds with different characteristics in the same buckets and applying the algorithm without considering the individual bond characteristics, the associated market conditions, or investor demand, and, thus, breached their obligations to set the rate at the lowest possible rate to trade at par. Relator further alleged that defendants “robo-reset” these rates in the manner they did in order to keep the bonds in the hands of their holders and therefore alleviate the need for defendants to remarket the bonds so as to collect tens of millions of dollars in annual remarketing fees without providing the remarketing services for which New York allegedly paid them. In addition, Relator alleged that defendants failed to set the rates at the lowest possible interest rates, as their agreements with the State of New York allegedly required, and instead employed the “robo-resetting” algorithm to collectively impose artificially high interest rates on the VRDOs, which was the opposite of what New York hired them to do. Relator claimed that defendants benefited from keeping the VRDO interest rates artificially high because it caused VRDO investors — who are typically tax-exempt money market funds, which defendants in many instances own or manage — to hold the bonds rather than redeem them at face value plus interest. This “put” option is one of the defining features of a VRDO, and it is the responsibility of the remarketing agent to find another investor when the “put” option has been exercised. If the remarketing agent is unable to find another investor, a liquidity provider (who is often the remarketing agent itself) must step in and purchase the VRDO from the redeeming investor. Thus, Relator alleged, by setting the rates for VRDOs artificially high, defendants assured that the holders of the bond would not exercise the “put” option and defendants would not have to find other investors to purchase the bonds or buy the bond themselves.  The Complaint asserted a single claim against all defendants for violation of the NYFCA (NYSFL § 187 et seq.), alleging that defendants (i) “knowingly present , or cause to be presented a false or fraudulent claim for payment” to a government entity, (ii) knowingly , use , or cause to be made or used, a false record or statement material to a false or fraudulent claims,” and (iii) conspire to commit a violation” (NYSFL §§ 189<1> - ). Defendants jointly moved to dismiss, arguing that the Complaint (1) failed to allege the elements of a NYFCA claim with the requisite particularity, (2) should be dismissed pursuant to the public disclosure bar, and (3) with respect to the conduit bonds, should be dismissed because the State had no payment obligations.  With respect to the public disclosure bar, the NYFCA permits the State of New York to oppose a dismissal on public disclosure grounds (NYSFL § 190<9> ). The Attorney General of the State of New York notified the Court that pursuant to NYSFL § 190 (9)(b), and as required in part by 13 NYCRR § 440.5(b), the State of New York would be exercising its right to object to dismissal of the Complaint on the basis of the public disclosure bar. As a consequence, the Court declined to rule on this aspect of the motion with defendants reserving their rights with respect thereto. M & T also separately moved to dismiss, arguing that it did not submit a “false claim” because virtually all of its VRDOs are conduit bonds in which the costs were paid by private-equity borrowers, and, therefore, no government funds were at risk in these transactions. The Court’s Decision As an initial matter, the Court considered whether Relator satisfied the particularity pleading requirement for a claim under the NYFCA and concluded that Relator met this standard. A claim under the NYFCA ( i.e. , New York State Finance Law §§ 189 (a)-(c)) sounds in fraud and therefore is subject to a heightened pleading standard under CPLR § 3016(b). State of New York ex rel. Seiden v. Utica First Ins. Co. , 96 A.D.3d 67, 72 (1st Dept. 2012). However, in contrast to traditional fraud claims, to satisfy CPLR § 3016(b), a qui tam plaintiff: shall not be required to identify specific claims that result from an alleged source of misconduct, or any specific records or statements used, if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication that one of more violations of <§ 189> are likely to have occurred, and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct to permit the state or local government effectively to investigate and defendants fairly to defend the allegations made. NYSFL § 192(1-a). In other words, a heightened pleading standard applies to a relator’s claims, but as modified by NYSFL § 192(1)(a). As the court in Total Asset Recovery Servs., LLC v. Metlife, Inc. explained, “§ 192 (1-a) does not relieve a qui tam plaintiff of an obligation to plead facts with particularity it only relieves the plaintiff of an obligation to ‘identify specific claims that result from an alleged course of misconduct.’” 2019 WL 1470203, *9 (Sup. Ct., N.Y. County Apr. 3, 2019) (citation omitted).  Turning to the failure to state a claim argument, the Court denied the motions. To state a claim under NYSFL §§ 189 (1)(a)-(c), the relator must allege that each defendant (1) made a statement or claim to the State, (2) which was fraudulent, (3) with knowledge of its falsity, (4) that was material to the State’s payment decision, and (5) that each defendant knew was material. New York ex rel. Khurana v. Spherion Corp. , 246 F. Supp. 3d 995, 998 (S.D.N.Y. 2017).  As discussed above, Relator’s claims were primarily based on its allegations that defendants (i) agreed to set the lowest possible interest rate for the VRDOs, and (ii) misrepresented that they would be doing so individually for each VRDO. The Court held that “the Complaint sufficiently allege that the defendants bucketed VRDOs that had different characteristics and applied the algorithm without taking into account the differences between the VRDOs in the buckets. And, as a a result, the defendants violated their obligations by (i) misrepresenting that they were setting the lowest possible interest rate in remarketing agreements and other documents and by (ii) misrepresenting the performance of their remarketing and letter of credit services.” Slip Op. at *8. The Court rejected defendants’ contention that Relator did not sufficiently allege the falsity of their representations to individually price each VRDO at the lowest possible rate. The Court concluded that “Relator’s forensic analysis of VRDO rates and market data sufficient at this point to withstand a motion to dismiss.” Id. As noted above, Relator compared VRDO rates to interest rates for 7-day AA non-financial commercial paper, a security that it contends is closely analogous to VRDOs. Whereas historically VRDO rates have been significantly lower than commercial paper rates because VRDOs are tax-exempt and commercial paper is not (and, thus, investors expected a lower yield in return for the stability and tax exempt status of VRDOs), Relator’s analysis found that, during the time period examined, average VRDO rates climbed statistically higher than commercial paper rates. Inasmuch as the defendants argue that Relator “cherry-picked” the time period for its analysis and that all rates were informed by the 2008 financial crisis, this is an analysis that is better suited for a motion for summary judgment, following discovery, not a motion to dismiss. Id. “Assuming these allegations to be true,” said the court, “this is sufficient to allege a claim under the NYFCA as, if proven, such allegations would show that the defendants failed to set the lowest possible rates for at least some of these VRDOs.” Id. With regard to the conspiracy claim, the Court held that Relator adequately plead one.  To state a conspiracy claim under the NYFCA, a relator must allege that (1) the defendants conspired with each other to get a false or fraudulent claim allowed or paid by the government, and (2) that one or more of the conspirators performed any act to effect the object of the conspiracy. United States ex rel. Grubea v. Rosicki, Rosicki & Assocs., P.C. , 318 F. Supp. 3d 680, 705 (S.D.N.Y. 2018). The Court found that Relator satisfied these elements: Here, Relator adequately alleges conspiracy on the part of the defendants by pleading that (i) interest rates for hundreds of different VRDOs managed by multiple different defendants all moved in lockstep, (ii) the defendants had a joint response to certain key events such as a sudden VRDO interest rate move following a December 15, 2015 Federal Reserve rate hike, (iii) overlap by defendants in coordinating same (e.g., where one defendant serves as RMA for a VRDO where another defendant is the LOC provider or a significant investor), and (iv) that the defendants used third-party pricing services such as the J.J. Kenny Index to coordinate their rate-setting activity.  Id. at *8-*9. “In addition,” explained the Court, “the Complaint alleges that a ‘senior’ Bank of America employee confirmed that the defendants had met and coordinated their response to an April 2012 Bank of America credit downgrade by agreeing to keep buying Bank of America backed bonds so as to protect Bank of America from an investor run on those bonds which would result in Bank of America having to draw down the letter of credit it committed to supposed the bond.” Id. at *9. The Court concluded that “taken as a whole and assumed as true for purposes of this motion to dismiss,” these allegations were “sufficient to allege that the defendants conspired to artificially create a market for municipal bonds with a higher rate than would otherwise exist.” Id. Finally, the Court held that Relator stated a claim against M & T.  M & T claimed that substantially all its VRDOs were conduit bonds. Conduit bonds are a “subset of municipal bonds used to finance projects by private entities.” E.g. , Department of Revenue of KY v. Davis , 553 U.S. 328, 333, n.2 (2008). While the government is the issuer of the bonds, the actual borrower is a private entity. Thus, it is the conduit borrower that is liable for making debt service payments on the bonds, not the government issuer. The same holds for related fees and interest, which are also generally paid by the private entity borrower. M & T argued that it did not submit a “false claim” because “virtually” all of its VRDOs were conduit bonds in which costs were paid by private-entity borrowers, and not the government. The Court held that “ his argument misses the point.” In the case of conduit VRDOs, New York issues bonds to conduit borrowers (i.e., non governmental entities who advance certain key state interests) to develop various critical infrastructure using tax-exempt financing. Conduit borrowers typically agree to repay the government issuer who pays the interest and principal on the bonds. Importantly, conduit VRDO borrowers obtain funds from New York, and thus, necessarily, some portion of New York’s funds is included in the payments conduit VRDO borrowers made to M & T. Conduit borrowers made payments in response to demands for payment that M & T submitted, which, according to the Complaint, were tainted by false claims and statements. Moreover, under the NYFCA, M & T may be liable for making false claims or statements to an “agent of the state,” which M & T may have done when it submitted invoices for RMA and LOC services to the bond trustees and/or paying agents (see NYSFL §188<1> ). Id. The Court explained that “Relator allege that New York provided the funds to the conduit VRDO borrower and therefore at least some portion of New York’s funds was necessarily included in the payments that the conduit VRDO borrowers made to M & T in response to the allegedly false claims for payment that M & T submitted.” Id. at *10. The Court reasoned that the “purpose of the False Claims Act supports such a ‘broad interpretation.’” Id. (citation omitted). “The fact that, here, New York’s money passed to M & T through private VRDO borrower entities,” said the Court, “does not make the government any less its source.” Id. (internal quotation marks and citation omitted). The Court also denied M & T’s motion to dismiss the conspiracy claim on the same grounds as it did with respect to the other defendants. Additionally, the Court addressed M & T’s argument that there could be no conspiracy because M & T did not actually receive the funds, holding that receipt of the money was “simply irrelevant to the analysis if M & T ha conspired with the other defendants to commit a violation of either NYSFL §§ 189 (1)(a) or (1)(b).” Id. The Court explained that “ ayment by New York to M & T not necessary if M & T colluded with the other defendants to defraud New York by automatically resetting the VRDO rates without regard to their individual characteristics at rates higher than the lowest possible rate and by acting in concert to prop up Bank of America VRDOs, as the Complaint alleges.” Id. (citing Allison Engine Co., Inc. v. United States ex rel. Sanders , 563 U.S. 662 (2008)).  Takeaway Edelweiss shows that “what” and “how” a plaintiff pleads his/her cause of action makes the difference as to whether the court will sustain the complaint. The Edelweiss Fund has filed multiple lawsuits around the country under state false claims acts analogous to the NYFCA, each containing nearly identical allegations to the complaint before Justice Andrew Borrok of the Supreme Court, New York County Commercial Division. As Justice Borrok noted, these courts reached differing conclusions as to the sustainability of its claims.  Edelweiss is notable because of the difference in application of the particularity pleading requirement. As readers of this Blog know, in a fraud action, CPLR § 3016(b) requires the plaintiff to allege sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). In the context of a claim under the NYFCA, the standard is modified by relieving the plaintiff of the obligation to “identify specific claims that result from an alleged course of misconduct.” Total Asset Recovery Servs., 2019 WL 1470203, at *9; NYSFL § 192(1)(a).

In an April 20, 2020 on-line video message appearing on the New York Court System website ( https://www.nycourts.gov/ ), Chief Judge DiFiore explained the court system’s efforts to “not only to keep our courts up and running but to gradually and safely expand access to justice for litigants and lawyers across the state.” Judge Fiore reported that as of Monday April 13, 2020, the scope of temporary virtual courts was expanded beyond “essential” and “emergency” matters to enable “judges and staff to get back to work on their pending caseloads of tort, commercial, matrimonial, trusts and estates, criminal, family and other important cases.”  Thus, Judges and staff are scheduling and conferencing cases by skype or telephone and, by so doing, are “resolving outstanding issues, addressing discovery disputes and facilitating a significant number of settlements.”  Impressively, in the first week of expanded virtual operations, Judges and professional staff have: Conferenced and heard nearly 8,000 matters;  Settled or disposed of over 2,600 cases, a third of all matters heard; and  Issued over 1,400 written decisions on motions and other undecided matters, taking advantage of this period to clear our existing backlog of undecided motions.  The Chief Judge has committed to “continue to evaluate and make necessary adjustments to our virtual court model” to “carefully expand virtual access, keeping in mind the special challenges faced by the self-represented and those lacking the technology to participate in a virtual forum.”  The long-term goal, however, is to return to normal operations when “possible and appropriate.” It was noted that the State’s appellate courts “have gone virtual,” and that the Second Department has already presided over virtual arguments.  The other Departments and the Court of Appeals are scheduling or planning such arguments in upcoming sessions. In addition, Court of Appeals Judge Michael Garcia was appointed to lead a “working group” to address the administration of the September bar examination and/or to address contingencies in the event that a bar examination is not feasible.  Such contingencies may include providing “temporary authorization for qualified candidates to engage in the limited practice of law.”  The working group “is also considering possible dispensations with regard to law school instructional requirements and the bar admissions process.”  All such proposals will be considered by the Court of Appeals in the near future and details will be announced. The Court of Appeals is taking such steps as are necessary to keep the administration of justice moving in a forward direction.  This Blog will continue to monitor and report on the New York Court System’s response to the issues created by the Coronavirus Pandemic.

It is well settled, and understood, that “the business and affairs of every corporation are managed by a board of directors.” Stone ex. re. AmSouth Bancorp. v. Ritter , 911 A2d 362 (Del. 2006). By its very nature a derivative litigation “impinges on the managerial freedom” of the corporation’s directors. Id. “Therefore, the right of a stockholder to prosecute a derivative suit is limited to situations where either the stockholder has demanded the directors pursue a corporate claim and the directors have wrongfully refused to do so, or where demand is excused because the directors are incapable of making an impartial decision regarding whether to institute such litigation.” Id. Accordingly, the shareholder plaintiff must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” Id. Under Delaware law, the factors to be examined in determining whether demand is excused depends on whether the plaintiffs’ complaint concerns affirmative board actions and transactions or a board’s alleged failure to act. Where the plaintiff seeks to challenge affirmative board action, Delaware courts apply the two-prong test set forth in Aronson v. Lewis , 473 A.2d 805, 814 (Del. Ch. 1984), overruled in part on other grounds , Brehm v. Eisner , 746 A.2d 244 (Del. 2000), to assess the futility of a demand. Under this test, demand is excused when there is a reasonable doubt that: (1) the directors are disinterested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Id. Since the test is in the disjunctive, if either prong is satisfied, pre-suit demand is excused. Where the plaintiff alleges board inaction, demand futility can be established by particularized facts creating a reasonable doubt that at the time the complaint was filed, the board could not have properly exercised its independent and disinterested business judgment in responding to the demand. Rales v. Blasband , 634 A.2d 927 (Del. 1993). In Barrientos v. Salmirs , 2020 N.Y. Slip Op. 30942(U) (Sup. Ct., N.Y. County Apr. 13, 2020) ( here ), the Court dismissed a shareholder complaint because Plaintiffs failed to make the required demand on the board of directors and failed to allege facts to show that demand was excused. In doing so, the Court determined that board inaction was at play, despite plaintiffs’ allegation that the Individual Defendants ( i.e. , certain current and former members of ABM’s Board of Directors) made a “conscious” decision not to act, which, Plaintiffs claimed, was “akin to affirmative board action for purposes of determining which standard < i.e. , the aronson test or the rales test> i.e., the aronson test or the rales test> to use.” Slip Op. at *7. Background Nominal defendant ABM Industries, Inc. (“ABM”) is a Delaware corporation with its principal place of business in New York City. ABM provides “janitorial, facilities engineering, parking, and specialized mechanical and electrical technical solutions.” Id. at *2.  ABM allegedly collects and stores highly sensitive private information (“PI”) about its employees, including its former employees. On or about August 1, 2017, ABM discovered that it had incurred a data breach. A phishing attack was successfully executed, resulting in the theft of PI. Plaintiffs alleged that ABM did not notify its employees of the data breach until the week of March 5, 2018, more than seven months later.  ABM suffered another attack in 2018. On or around June 14, 2018, ABM was alerted to suspicious activity related to certain employee email accounts. ABM determined that an unknown actor gained access to certain ABM employee email accounts through another phishing attack. Following an investigation, ABM determined that the unauthorized access occurred between January 8, 2018 and August 7, 2018. Plaintiffs claimed that the 2018 data breach affected approximately 60,000 current and former ABM employees. Plaintiffs commenced the action in September 2018, alleging: (1) breach of fiduciary duty against ABM’s current and former directors (first cause of action); (2) breach of fiduciary duty against ABM’s CEO (second cause of action); and breach of fiduciary duty against ABM’s non-director officers (third cause of action). In particular, in their amended verified complaint, Plaintiffs alleged that the Individual Defendants breached their fiduciary duties to ABM by: (i) failing to implement and enforce a system of effective internal controls and procedures to protect employees’ PI; (ii) failing to exercise their oversight duties by not monitoring ABM’s compliance with internal procedures and federal and state regulations; (iii) storing the PI of employees, former employees and vendors; (iv) failing to have proper cybersecurity safeguards to adequately secure the PI; (v) failing to have a sufficient incident response plan to immediately respond to a data breach; (vi) failing to ensure that ABM notified all potentially affected individuals and entities in a timely manner upon discovering the data breaches; (vii) failing to make adequate public disclosure of the data breaches and related Employees’ Class Action; and (viii) allowing ABM to violate state and federal laws and regulations concerning data privacy. Plaintiffs claimed that, because of the Individual Defendants’ breach of their fiduciary duties, ABM had and will in the future be required to expend significant amounts of money, and that ABM had lost “credibility, reputation and goodwill.” Plaintiffs did not make a demand on the Board to investigate their allegations before commencing the action and did not make a demand before serving the amended verified complaint. Plaintiffs alleged that “demand would be a futile and useless act because the Individual Defendants incapable of making an independent and disinterested decision to institute and vigorously prosecute th action.” Slip Op. at *4-*5. Defendants moved to dismiss on the ground that Plaintiffs lacked standing because they did not make the required demand on the Board and failed to allege facts to show that demand was excused. The Court granted the motion. The Court’s Decision In dismissing the complaint, the Court held that the Rales Test was the appropriate test to apply to determine whether demand was excused. The Court reasoned that even though the Board formed a subcommittee and appointed a Chief Information Officer (“CIO”) to address (among other things) cybersecurity issues, neither were, as Plaintiffs alleged, “adequately prepared for, or responded to, the data breaches.” Such an allegation, observed the Court, “plainly support application of the Rales demand futility standard.” Slip Op. at *8. So too did Plaintiffs’ allegation that the Board failed to ensure adequate and full disclosure of the data breaches in ABM’s public filings. Id. (citing Deckter on Behalf of Bristol–Myers Squibb Co. v. Adreotti , 170 A.D.3d 486, 487 (1st Dept. 2019), quoting Steinberg v. Bearden , 2018 WL 2434558, *8 (Del. Ch. 2018)). Having decided which test to apply, the Court held that Plaintiffs failed to satisfy the Rales Test. Under this test, as noted, where, a plaintiff’s claims are based upon failure of a board of directors to exercise its oversight duties, “ nly a sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists – will establish the lack of good faith that is a necessary condition to liability.” In re Caremark Int’l Inc. Derv. Litig , 698 A.2d 959, 971 (Del. Ch. 1996). “ he mere threat of personal liability ... is insufficient to challenge either the independence or disinterestedness of directors.” Deckter , 170 A.D.3d at 487, quoting Rales , 634 A.2d at 934-36. The threat of personal liability must be substantial. Madison Sullivan Partners LLC v. PMG Sullivan Street LLC , 173 A.D.3d 437, 438 (1st Dept. 2019) (plaintiffs must set forth “particularized facts establishing that defendants faced a ‘substantial likelihood’ of personal liability.”).  The Court held that Plaintiffs failed to plead facts showing a “sustained or systematic failure of the board to exercise oversight” with the requisite specificity. Slip Op. at *10. “At most,” said the Court, “they plead facts showing that the Board did not act quickly enough to disclose the data breaches, did not disclose enough about the data breaches, and did not do enough to protect against past and future data breaches.” Id. Such allegations, concluded the Court, did “not amount to the ‘utter failure’ of the Board to respond to the challenges of cybersecurity.” Id. In addition, the Court found the board to be insulated from monetary liability for the breach of the fiduciary duty claims under an exculpation provision in ABM’s restated certificate of incorporation. Id. (citing, among others, 8 Del. C. § 102(b)(7)). Under Delaware law, to survive a motion to dismiss on demand futility grounds made by an independent director protected by an exculpation clause, the plaintiff must plead “facts supporting a rational inference that director harbored self-interest adverse to the stockholders’ interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith.” Id. at *10-*11 (quoting In re Cornerstone Therapeutics, Inc. Stockholder Litig. , 115 A.3d 1173, 1179-80 (Del. 2015) (internal quotation marks and orig’l footnote omitted)). The Court held that “Plaintiffs generically claim that the Board advanced their own self-interest above that of the ABM shareholders because they paid themselves ‘lavishly.’” Id. at *11. They failed, however, “to state specific facts showing that the Board members’ alleged lavish compensation caused them to fail properly to oversee ABM’s cybersecurity.” Id. The Court noted that Plaintiffs did not even “allege that any of the Individual Defendants personally profited from the Board’s alleged failure to oversee ABM’s cybersecurity.” Id. The Court also held that Plaintiffs failed to plead facts sufficient to show that the Board acted with bad faith. Id. The Court explained that Plaintiffs did “not plead any underlying facts showing that the Board took any specific action to misreport or underreport the data breaches. Instead, Plaintiffs broadly allege that ABM’s public statements and disclosures were insufficient or too general, and therefore false and misleading.” Id. at *11-*12. Such allegations lacked the required specificity to withstand a motion to dismiss. Id. at *12. “Likewise,” noted the Court, “Plaintiffs’ allegation that the Board, in bad faith, caused ABM to violate federal securities regulations on disclosure, as well as state privacy laws, impermissibly broad.” Id. The Court explained that Plaintiffs failed to make any “particularized allegations as to what type of violation occurred, or as to which Board Member caused the alleged violations.” Id. The Court concluded that Plaintiffs provided “no particularized facts to support the assertion that a security law violation even occurred, let alone which Board Member acted to cause the violation.” Id. Accordingly, the Court dismissed the complaint with prejudice. Takeaway Barrientos demonstrates that a board’s failure to act is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Asbestos Workers Phila. Pension Fund Asbestos Workers v. Bell , 137 A.D.3d 680, 684 (1st Dept. 2016). One reason for such difficulty is the demand requirement. The cases show that the demand requirement is rigorous. Factual particularity is necessary. As the Court found in Barrientos , Plaintiffs could not meet those requirements.

It has been some time since this Blog examined claims for indemnification and contribution ( See , e.g. , here and here ). In today’s post, we get the opportunity to examine these principles once more through our examination of Allergan Fin., LLC v. Pfizer Inc. , 2020 N.Y. Slip Op. 50422(U) (Sup. Ct. Apr. 13, 2020) ( here ). Allergan involved a claim for indemnification and other related claims arising out of an Asset Purchase Agreement (the “APA”), dated December 17, 2008, by and between Actavis Elizabeth, LLC (“Actavis”) and King Pharmaceuticals, Inc. n/k/a King Pharmaceuticals LLC (“King”), pursuant to which Actavis acquired from King the prescription opioid Kadian®.  A Quick Primer on The Law Generally speaking, indemnity and contribution sort out the degree of culpability of multiple defendants and their responsibility for the payment of damages to the plaintiff. In the “classic indemnification case,” the one seeking indemnification “had committed no wrong, but by virtue of some relationship with the tort-feasor or obligation imposed by law, was nevertheless held liable to the injured party.” D’Ambrosio v. City of New York , 55 N.Y.2d 454, 461 (1982). Thus, “where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent.” Id. at 462. Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.” Mas v. Two Bridges Assocs. , 75 N.Y.2d 680, 690 (1990) (internal citations omitted). Where the right to indemnification is based upon a written agreement, the specific language of the contract is paramount to the court’s decision. Roldan v. New York Univ. , 81 A.D.3d 625, 628 (2d Dept. 2011).  Under the well-settled rules of contract interpretation, courts must construe contracts so as to give full meaning and effect to all their material provisions. Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 323 (2007). A contract should not be construed so as to render any portion of it meaningless. Id.   In addition, a contract should be read as a whole and, whenever possible, interpreted to give effect to its general purpose. Id. (citing Matter of Westmoreland Coal Co. v. Entech, Inc. , 100 N.Y.2d 352, 358 (2003)). Therefore, under the foregoing rules, the promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances. See Roldan , 81 A.D.3d at 628 (citing Hooper Assoc. v. AGS Computers , 74 N.Y.2d 487, 491-492 (1989); 905 5th Assoc., Inc. v. Weintraub , 85 A.D.3d 667, 668 (1st Dept. 2011) (indemnification provisions “must be strictly construed so as to avoid reading unintended duties into them”). The principle of equitable indemnification, also known as common law indemnification, allows a non-culpable party who has been compelled to make a payment to shift the entire burden of loss to the liable party and obtain from that party full reimbursement for its loss. Live Invest, Inc. v. Morgan , 57 Misc. 3d 762 (Sup. Ct., Suffolk County Sept. 7, 2017). “ he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that forms the basis for the liability arises from the principle that every one is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.” Raquet v. Braun , 90 N.Y.2d 177, 183 (1997) (internal quotation marks, citations, and ellipsis omitted.) “ here a party is held liable at least partially because of its own negligence, contribution against other culpable tort-feasors is the only available remedy.” Glaser v. Fortunoff , 71 N.Y.2d 643, 646 (1988).  “ n contribution, the tort-feasors responsible for plaintiffs loss share liability for it …. heir common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss.” Mas , 75 N.Y.2d at 689-690 (internal citation omitted). See also Godoy v. Abamaster of Miami , 302 A.D.2d 57, 61 (2d Dept. 2003) (Contribution is available where two or more tortfeasors combine to cause injury and is determined in accordance with the relative culpability of each party). Under Article 14 of the Civil Practice Law and Rules, “ he ‘critical requirement’ for apportionment by contribution … is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.” Raquet , 90 N.Y.2d at 183 (citations omitted). A claim for contribution generally does not arise until the prime obligation to pay has been established. However, in appropriate circumstances, courts have allowed claims for contribution to go forward on the basis of liability. See Mars Assoc., Inc. v. N.Y. City Educ. Constr. Fund , 126 A.D.2d 178, 192 (1st Dept. 1987); Gorton v. Marmon , 2012 WL 1463416 (Sup. Ct., N.Y. County Apr. 16, 2012). Allergan Finance, LLC v. Pfizer Inc. Background As noted, Allergan concerned a claim for indemnification pursuant to the terms of the APA.  Allergan Finance, LLC (“Allergan”), the successor to Actavis’s rights and obligations under the APA, had been sued in a multidistrict litigation in connection with its marketing of Kadian®. See In re: Natl. Prescription Opiate Litig. , No. 1:17-MD-2804, ECF No. 1201, at *1 (N.D. OH. Dec. 17, 2018) (the “Opioid Lawsuits”).  The primary basis for the allegations against Allergan was the allegedly improper marketing and sale of Kadian®, including in the months and years before Actavis acquired Kadian® in December 2008.  Allergan sought indemnification from Defendants. Under the APA, King agreed to indemnify Actavis and its successors, for, among other things, “the use by or its Affiliates of the Marketing Materials prior to the Closing” and for any third party claims “incurred in connection with, arising out of, or resulting from the ownership and operation of the Purchased Assets or the conduct of the Business prior to the Closing.” Slip Op. at *1-*2.  King also agreed to reimburse Actavis “on a quarterly basis” for the “reasonable and verifiable costs and expenses, including fees and disbursements of counsel” incurred “in connection with any claim,” with a right of refund in the event that King was found not to be obligated to indemnify Actavis.  Defendants rejected any obligation to indemnify Allergan and have not reimbursed Allergan for any of its defense costs, denying that the Opioid Lawsuits involve any pre-2009 conduct (as required under the APA). Consequently, Allergan filed claims against Pfizer, Inc. (“Pfizer”), the successor to King’s obligations, alleging: (1) breach of contract, (2) contractual indemnification, (3) declaratory judgment ( i.e. , that Allergan is entitled to indemnification and reimbursement), (4) equitable indemnification, and (5) contribution. Defendants argued that Allergan’s claims were premature because Allergan had not yet been held to be liable for any pre- or post-closing conduct and, therefore, “it entirely speculative whether Allergen ever be held liable and, if so, what the basis of that liability would be.” Slip Op. at *2. Defendants said that, to date, all Allergan had paid in connection with the Opioid Lawsuits were the costs and legal fees for its defense.  The Court’s Decision The Court held that Defendants were contractually obligated to pay Allergan’s defense costs and to indemnify Allergan for any liability assessed against it in the Opioid Lawsuits. As an initial matter, the Court found that the “Opioid Lawsuits do not concern pre-2008 conduct (the ‘Pre-Closing Conduct’).…” Slip Op. at *4-*5. Although the Opioid Lawsuits alleged that Allergan engaged in deceptive marketing techniques as far back as the 1990s, including through the circulation of Kadian® patient brochures starting in 2003, publications in medical journals regarding Kadian® in or about 2005, and through representations made by sales representatives concerning Kadian® between 2006 and 2008, the Court observed that Allergan and its predecessors did not and could not have committed any of those actions because Actavis did not acquire Kadian® from King until December of 2008. Id. at *5. “Sales and marketing of Kadian® prior to December 2008 was conducted by Pfizer, King and its predecessors and the APA makes clear that they ‘remain solely responsible for’ such Pre-Closing Conduct.” Id. The Court determined that Defendants’ reading of the APA was “limited”. Id.   The Court explained that Defendants’ reading of the APA ( i.e. , that Allergan was not entitled to its costs and expenses unless and until its liability was “adjudicated in the underlying opioid cases”), was “plainly at odds with the other provisions of that contract. To wit, …, the term ‘Indemnified Party’ is defined as ‘ he Person entitled to indemnification under this Agreement.’” Id. The Court further explained that “the provision not require an adverse determination as a precondition to the right to receive indemnification. And, significantly, Section 12.02(e) entitle Allergan to receive reimbursement on a quarterly basis — i.e., now— and, provides that defendants may obtain a refund ‘in the event’ that the Defendants are ‘ultimately held not to be obligated to indemnify’ Allergan.” Id. (orig’l emphasis). “The provision simply makes no sense,” observed the Court, “if the Defendants are not obligated to provide defense costs until liability is adjudicated.” Id. (orig’l emphasis). Therefore, “ o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Id. “Put another way,” concluded the Court, “Section 12.02(e) contemplates this exact situation where there is a dispute as to whether indemnification will ultimately be required and provides for reimbursement of costs and expenses on a quarterly basis in the interim, with the possibility of a refund at a future time .” Id. (orig’l emphasis). As a result, said the Court, “a party is not required to wait until its liability is established in an underlying action before it can bring a declaratory action under New York law.” Id. at *6. (citing Hudson Ins. Co. v. AK Const., LLC , 92 AD3d 521 <1st dept 2012> ). This was especially true in Allergan , where “a live and justiciable controversy exists as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id. Further, the Court held that the foregoing analysis was “true for other provisions of the APA, such as Section 12.02(d)(i), which allow Defendants to ‘assume the defense of any Third Party Claim.’” Id.   (orig’l emphasis). Outside of the insurance context, where the duty to defend is exceedingly broad and distinct from the duty to indemnify, contractual defense obligations are generally treated like any other contractual provision. See Viacom Inc. v. Philips Electronics N. Am. Corp. , 16 A.D.3d 215 (1st Dept. 2005); Mercolla v. Manmall, LLC , 2008 WL 4699066 (Sup. Ct., N.Y. County Oct. 14, 2008) (“Although, as often proclaimed, the duty to defend is broader than the duty to indemnify, this rule is generally applicable to insurers”). The Court concluded that, as with the analysis of the APA for indemnification purposes, this provision “would also be rendered superfluous by the Defendants’ narrow reading of the term ‘Indemnified Party’” Id. The Court dismissed Allergan’s claim for equitable indemnification because the obligations that Defendants undertook with respect to Kadian® were expressly defined in the APA. Id. Under New York law, a valid and enforceable contract generally precludes recovery in quasi contract for losses arising from the same subject matter. Id. (citing Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382 (1987). The Court concluded that “Allergan cannot circumvent the APA by proceeding under an equitable theory of indemnification to recover more than it would otherwise be entitled to under the APA.” Id. (citing CSC Scientific Co., Inc. v. Manorcare Health Serv., Inc. , 867 F. Supp. 2d 368 (S.D.N.Y. 2011)). Nevertheless, the Court gave Allergan 30 days to replead the claim if it could do so on a non-contractual basis. Id. Finally, the Court denied the motion to dismiss the contribution claim. Defendants argued that the claim was premature because no finding of responsibility had been made in the Opioid Lawsuits. Although contribution generally does not arise until the prime obligation to pay has been established, in appropriate circumstances, such as in Allergan , “courts have allowed claims for contribution to go forward on the basis of liability.” Id. (citations omitted). “This is particularly compelling here,” observed the Court, “because it is not at all clear that this action is wholly independent from the Opioid Lawsuits. In fact, there are likely to be significant issues of fact development and liability that may well be determined in the Opioid Lawsuits that might effect the Defendants’ obligations in this action.” Id. Takeaway Contractual indemnification “requires a clear expression or implication, from the language and purpose of the agreement as well as the surrounding facts and circumstances, of an intention to indemnify.” Martins v. Little 40 Worth Assocs., Inc. , 72 A.D.3d 483, 484 (1st Dept. 2010) (quoting Drzewinski v. Atlantic Scaffold & Ladder Co. , 70 N.Y.2d 774, 777 (1987)). Customary rules of contract interpretation are used to determine an intent to indemnify. In Allergan , the Court found that the language of the APA, when read as a whole, embodied such an expression of intent. As the Court noted, “ o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Slip Op. at *5.  Allergan is also notable for its holding concerning the ripeness of a declaratory judgment claim for contractual indemnification. In a typical case, it is premature to assert such a claim until there is a finding of liability. In these cases, liability is contingent upon “future events that may not occur as anticipated, or indeed may not occur at all.” Dresser-Rand Co. v. Ingersoll Rand Co. , 2015 WL 4254033 (S.D.N.Y. July 14, 2015). In Allergan , however, the issue of indemnification for defense costs was not contingent on any future event. In fact, as the Court noted, the APA provided “for a refund of advanced defense costs to the Indemnifying Party in the event that indemnification ultimately not found to be required.” Slip Op. at *5. Thus, there was “a live and justiciable controversy … as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id. at *6.