As baseball fans know, Major League Baseball (“MLB”) was rocked by the sign-stealing scandal involving the Houston Astros and, to a somewhat lesser extent, the Boston Red Sox. Not only did opposing players feel cheated by the Astros’ conduct – just ask any player on the Yankees how he feels about losing to the Astros in the playoffs, but so did the fans. Indeed, during spring training (before the league shutdown because of the COVID-19 pandemic), fans could be heard booing and jeering certain Astros for no reason other than their participation in the scandal. Some fans found a different outlet for their anger – the courts. These fans, also participants in daily fantasy baseball contests hosted by DraftKings Inc. (“DraftKings”), sued Major League Baseball, MLB Advanced Media, L.P. (MLB’s marketing entity), the Houston Astros, LLC, and the Boston Red Sox Baseball Club, L.P., in connection their efforts to conceal the sign-stealing scandal from sports bettors who wagered on fantasy baseball. See Olson v. Major League Baseball et al. , Case No. 20-cv-632 (JSR) (S.D.N.Y.) ( here ). mlb officially determined and announced in a january 2020 press release by mlb commissioner robert manfred (“manfred”) that the astros engaged in such electronic sign stealing in the 2017 and 2018 seasons.> mlb officially determined and announced in a january 2020 press release by mlb commissioner robert manfred (“manfred”) that the astros engaged in such electronic sign stealing in the 2017 and 2018 seasons.> In Olson , plaintiffs alleged that defendants knew of the sign-stealing scheme but did nothing to stop it in order to protect their financial interest and investment in DraftKings. Plaintiffs further alleged that defendants made various false statements and omissions designed to conceal the fact of the sign stealing in order to deceive plaintiffs into believing that DraftKings’s daily fantasy sports baseball (“MLB DFS”) competitions were a game of skill based on fair and legitimate player performance statistics. Such deception, plaintiffs claimed, was intended to induce them and other DraftKings players to play MLB DFS, which they would not have done had they “known that the honesty of the player performance statistics on which wagers were based and the results of wagers were determined was compromised by MLB teams’ and players’ electronic sign stealing.” Plaintiffs brought a nationwide class action alleging fraud, negligence, and unjust enrichment, well as violations of state consumer protection statutes. In a 32-page decision by Judge Jed Rakoff, the Court rejected plaintiffs’ claims that the league had committed fraud in addition to other torts. Judge Rakoff found that most of the allegedly false statements were not in fact false. And, as to the statements that might have been false or misleading, which, according to the Court, were close calls, Judge Rakoff found that plaintiffs failed to adequately allege that they relied on those statements when deciding to participate in the fantasy baseball competitions.  A Closer Look at The Court’s Decision As readers of this Blog know, to state a claim for common law fraud, a plaintiff must allege (1) a material misrepresentation or omission of fact; (2) that the defendant knew to be false; (3) that the defendant made with the intent to defraud; (4) upon which the plaintiff reasonably relied; and (5) that caused injury to the plaintiff. The failure to allege any of the foregoing elements will result in dismissal. With regard to the falsity element, plaintiffs based their claims on defendants’ affirmative misrepresentations ( i.e. , misrepresentations about fantasy baseball and maintaining the integrity and honesty of the game), as well as defendants’ omissions ( i.e. , failing to disclose the existence of the sign-stealing schemes). Slip Op. at 16. Affirmative Misrepresentations Plaintiffs alleged that defendants, through public statements by MLB Commissioner Manfred, repeatedly misrepresented that defendants were committed to “making sure that appropriate safeguards were in place to insure that fantasy baseball wagering competitions were fair.” Id. at 11. “But these are the words of the complaint, not of Commisioner Manfred,” observed the Court. Id. at 9. The Court found that “plaintiffs fail to allege actual statements by Manfred that plausibly support the existence of such a misrepresentation.” Id. In fact, noted the Court, “the actual statements by Manfred particularized in the complaint directed to his commitment to preventing gambling from impacting the integrity of live action baseball games and his concerns about whether fantasy organizations were properly self-regulating.” Id. at 9-10. “None of these statements,” concluded the Court, “plausibly indicate defendants’ commitment to safeguarding fantasy baseball from MLB rules violations.” Id. at 10. The Court rejected plaintiffs’ attempt to cure the foregoing deficiency by pointing to a statement defendants allegedly made that fantasy baseball is a “game of skill”. Id. “Even drawing all inferences in plaintiffs’ favor,” the Court held that “this statement cannot support claim that the defendants repeatedly ‘promoted and induced participation in contests as games of skill.’” Id. (citation omitted). “Taken in context,” explained the Court, “the statement simply addresse Manfred’s lay opinion that fantasy baseball contests qualify as “games of skill” under existing federal law relating to gambling.” Id. Thus, concluded the Court, “Plaintiffs have … failed to allege that the defendants made any misrepresentations about fantasy baseball contests themselves.” Id. at 10-11. Plaintiffs also alleged that Manfred, on behalf of all defendants, falsely represented “that maintaining the integrity and honesty of the game of baseball was MLB’s most important priority.” Id. at 11. However, said the Court, plaintiffs failed “to plausibly allege that these statements were false.” Id. The Court explained that plaintiffs undermined the strength of their assertion by identifying various investigations undertaken by MLB. Id. “More importantly,” noted the Court, “even accepting as true plaintiffs’ contention that defendants inadequately investigated player misconduct, such a fact is not inconsistent with a ‘commitment’ to integrity.” Id. at 11-12. The Court noted that plaintiffs did allege “a few particularized statements” that each defendant made “that are plausibly false.” Id. at 12. These misrepresentations included statements by (a) Astros President of Baseball Operations and General Manager, Jeff Luhnow, and Astros Field Manager A.J. Hinch denying that the Astros were involved in any sign stealing, even though, both allegedly knew of the sign stealing at the time they made the statements; (b) Manfred claiming to have performed a “thorough investigation” of reports that the Astros had sent an individual to take pictures of an opponent’s dugout for purposes of sign stealing, when it later became clear they were guilty of wrongdoing; and (c) the Red Sox and the Astros stating that they would adhere to MLB’s rules and regulations when they agreed to the Major League Baseball Constitution. Id. at 12-13.  Though plaintiffs pleaded some falsity, albeit some of which Judge Rakoff considered to be “a bit of a stretch,” those misrepresentations could not support plaintiffs’ fraud claims because plaintiffs failed to adequately allege reasonable reliance on those statements. Id. at 14 (citing Ramiro Aviles v. S & P Glob., Inc. , 380 F. Supp. 3d 221, 291 (S.D.N.Y. 2019) (plaintiff “must allege with particularity that it actually relied upon the supposed misstatements”) (quoting In re Bear Stearns Companies, Inc. Sec., Derivative & ERISA Litig. , 995 F. Supp. 2d 291, 312 (S.D.N.Y. 2014)). See also Fed. R. Civ. P. 9(b) (providing that “a party must state with particularity the circumstances constituting fraud”). The complaint did not “even allege that the plaintiffs ‘saw, read, or otherwise noticed’ any of the few actionable misrepresentations noted above, and thus completely fail to meet this standard,” said the Court. Id. at 15 (quoting In re Fyre Festival Litig. , 399 F. Supp. 3d 203, 217 (S.D.N.Y. 2019) (finding that such a failure does not meet even the general pleading requirements of Fed. R. Civ. P. 8(a)). Apart from the heightened pleading requirements, the Court found the “complaint’s generalized allegations of reliance” to be insufficient to support plaintiffs’ fraud claims. Slip Op. at 15-16. Plaintiffs claimed that they would not have entered DraftKings’ MLB DFS contests but for defendants’ representations that fantasy baseball contests were games of skill, the integrity of which defendants would ensure by protecting the integrity of major league baseball. The Court held this theory of reliance was divorced from the allegations in the complaint, noting that “no such specific representations concerning fantasy baseball actually set forth in the complaint.” Id. at 16.  “Absent such a misrepresentation,” concluded the Court, “plaintiffs’ generalized theory of reliance must fall.” Id. Misrepresentation by Omission Under this theory, which plaintiffs asserted as an alternative to their theory of affirmative misrepresentations, plaintiffs claimed that they were deceived by defendants because they failed to disclose the existence of the sign-stealing scheme, thereby making “the statistics on which the MLB DFS contests were based … illegitimate and unreliable.” Id. at 16. The problem with this theory, said the Court, was plaintiffs’ failure to allege a duty to disclose the true facts. Id. at 16-17 (citing, inter alia , Adams v. Nissan N. Am., Inc. , 395 F. Supp. 16 3d 838, 849 (S.D. Tex. 2018)).  The Court rejected plaintiffs’ attempt to “manufacture such a theory”. Id. at 17. The Court explained that Section 551 of the Restatement of Torts, on which the theory was based, was inapplicable “on its face” because “it applie only between “ ne party to a business transaction” and “the other.” Id. (noting “ he plain language of Section 551 thus appears to contemplate imposing a duty to disclose only in the context of a business transaction”) (citing In re Rumsey Land Co., LLC , 944 F.3d 1259, 1273 (10th Cir. 2019) (“The disclosure duties described in § 551(2)(a)-(e) apply only to ‘part to a business transaction.’”)). “Because plaintiffs have not alleged the existence of any transaction -- or any other comparable business relationship -- between themselves and the defendants,” concluded the Court, “the Restatement does not support imposing a duty to disclose here.” Id. at 18. Aside from the foregoing, the Court found that there were no facts on which to base a finding that the relationship between the parties was so close as to warrant imposing a duty on defendants. Defendants did not make misrepresentations “specifically designed for the plaintiffs’ use in deciding whether to” participate in the DraftKings’ MLB DFS contests, instead, noted Judge Rakoff, “defendants made representations to the public at large unrelated to the fantasy baseball transaction plaintiffs entered.”  Id. at 18-19. The Court also rejected plaintiffs’ attempt to demonstrate the existence of a duty through a purported joint venture between DraftKings (with whom plaintiffs had a relationship) and MLB. Id. Aside from not being pleaded, the theory failed because the essential elements of a joint venture were lacking. Id. at 18-19. In sum, the Court held that plaintiffs failed to offer any “basis for imposing a duty to disclose on any of the defendants.” Id. at 21.  “As such,” continued the Court, “they have failed to plead any actionable omission by the defendants that could give rise to a fraudulent misrepresentation claim.” Id. “Because plaintiffs’ affirmative misrepresentation claims also fail,” concluded the Court, “plaintiffs’ common law fraud claims against all defendants must be dismissed.” Id. Takeaway As this Blog has noted in previous posts, every element of a fraud claim must be satisfied to withstand a motion to dismiss. While many of our posts have focused on the reliance element of a fraud claim, Olson shows that plaintiffs can get tripped up on the falsity element as well. In Olson , this meant both affirmative misrepresentations and misrepresentations by omission. And, as to the latter, the Court’s decision illustrates the difficulty a plaintiff encounters in trying to establish a duty to disclose in the absence of statements by the defendant speaking directly to the plaintiff on the subject, a fiduciary relationship between the plaintiff and defendant, and “special facts” about the matter known to the defendant but not the plaintiff. here.=">here."> Because the Olson plaintiffs failed to state a claim upon which relief could be granted, the Court dismissed the complaint with prejudice, even though Judge Rakoff noted that a few of the identified “deficiencies might conceivably be cured by giving plaintiffs another chance to amend their already amended complaint.” It will be interesting to see if plaintiffs appeal the decision to the Second Circuit. As baseball fans, and students of fraud actions, this Blog will continue to monitor the action.

Regulators and enforcement authorities have often expressed concerns about the revenue recognition practices of corporate entities and those who implement them. Indeed, improper revenue recognition is one of the most common accounting errors pursued by the Securities and Exchange Commission (“SEC” or “Commission”). To properly recognize revenue, the revenue must be realized and earned. Under generally accepted accounting principles, revenue may be recognized when all the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of the product has occurred or services have been rendered, (3) the seller’s fee or price is fixed or determinable, and (4) collectibility is reasonably assured. See SEC Staff Accounting Bulletin No. 104, 17 C.F.R. Part 211 (2003) (originally issued in 1999) (here). Improper revenue recognition practices come in many shapes and sizes. Some of the more representative forms of improper revenue recognition include: (1) reporting fictitious sales through, among other mechanisms, the use of false sales documents, side agreements, and senior management overrides and adjustments; (2) reporting revenue from “round trip” transactions (i.e., a series of transactions between companies that increase the revenue of the companies involved but, in the end, do not provide any economic benefit to either company), barter arrangements (i.e., the exchange of goods or services between companies) or swaps; (3) “channel stuffing” by using price discounts, extended payment terms or other concessions reflected in undisclosed oral or written side agreements that induce customers to purchase goods they have an unconditional right to return at a later date; (4) “bill and hold” transactions wherein revenue is recognized from a sales transaction that is billed but the goods are not shipped; (5) recognizing revenue for transactions in which there are material contingencies associated with the transaction that are not resolved by the close of the reporting period; and (6) recognizing revenue when the goods or services have not been delivered, or where delivery is not complete, or where delivery has not been accepted by the customer. SeeRecent Enforcement Actions Involving Revenue Recognition Fraud, PLI Current: The Journal of PLI Press, Vol. 4, No. 1, 2020 (here) (citing Fictitious Revenues, Revenue-Related Financial Statement Fraud (2014-2015 AICPA), slideshare (here), and Understanding Fraud and Our Responsibilities, presented by Jason Lundell (here)). On April 8, 2020, the SEC announced that it charged three former executives of Ironclad Performance Wear Corp. (“Ironclad”) with fraud for allegedly inflating the company’s revenues through a series of manipulative and deceptive accounting gimmicks. Ironclad’s former Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) agreed to settle the Commission’s claims. Based in Farmers Branch, Texas, Ironclad manufactured high-performance gloves for construction, manufacturing, oil, gas, and automotive work. In February 2014, Ironclad hired Jeffrey D. Cordes (“Cordes”) to serve as its CEO. By mid-2014, Cordes brought in William M. Aisenberg (“Aisenberg”) to serve as CFO and Thomas J. Felton (“Felton”) to serve as Senior Vice President of Supply Chain. According to the SEC’s complaint (here), prior to joining Ironclad, the individual defendants worked together at a private company that sold sporting apparel. Cordes, Aisenberg, and Felton served as Chief Operating Officer, Chief Financial Officer, and Chief Administrative Officer, respectively. That company was acquired and, in August 2014, the acquiring company filed a civil lawsuit against Cordes, Aisenberg, and other associated people and entities, alleging that, among other things, they orchestrated a scheme to inflate the value of certain inventory by staging sham sales and re-purchasing the products at inflated prices. The parties settled the case in 2015. From at least December 2015 through June 2017 (the “Relevant Period”), alleged the SEC, Cordes, Aisenberg, and Felton falsely inflated Ironclad’s revenues by, among other things, (i) recognizing revenue in the quarter before it was earned and (ii) recognizing revenue that was never earned because the products: (a) were never shipped to, or paid for, by a customer; (b) were exchanged for old products; (c) were cancelled or refused by customers; and/or (d) were never ordered by a customer, including booking nearly $1 million in revenues from a single client for gloves the client never bought, and that Ironclad never shipped. The SEC further alleged that these defendants took affirmative steps to hide their conduct by, among other things, moving products to a warehouse across the street, delaying moving returned product back into inventory, shipping product to different clients, and altering documents, which inflated the quarterly revenues Ironclad publicly reported during the Relevant Period by as much as 24 percent. The alleged improper revenue recognition was reported to the company by an anonymous source during the second quarter of 2017. In response, Ironclad’s audit committee engaged the company’s outside counsel to review the allegations, and a committee of independent directors later retained an independent law firm to oversee an internal investigation into accounting irregularities. On July 6, 2017, Ironclad announced in a Form 8-K that investors should no longer rely on the company’s financial statements as of and for the fiscal years ended December 31, 2016 and 2015, and as of fiscal quarters ended March 31, 2017 and March 31, 2016, June 30, 2016, and September 30, 2016. The company also announced that Cordes and Aisenberg resigned from their positions with the company. Felton was terminated the following week by Ironclad’s new management. On September 8, 2017, Ironclad and Ironclad Performance Wear Corp. California (“ICPW California”), a wholly owned subsidiary of Ironclad and the entity through which all Ironclad-related operations were conducted, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Later that month, Ironclad’s auditor resigned effective September 22, 2017, noting material weaknesses in Ironclad’s tone at the top, entity-level controls, and revenue recognition. On November 14, 2017, Ironclad and ICPW California completed a sale of substantially all of their assets. The companies also filed a plan of liquidation, which was approved by the United States Bankruptcy Court for the Central District of California and became effective on February 28, 2018. The SEC filed its complaint in the U.S. District Court for the Northern District of Texas. The Commission alleged that Cordes, Aisenberg, and Felton violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5(a) and 10b-5(c) promulgated thereunder, or in the alternative that Felton aided and abetted these violations by Cordes and Aisenberg. The complaint further alleged that Cordes and Aisenberg violated Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. The complaint also charged Cordes, Aisenberg, and Felton with violating the reporting, books and records, and internal accounting control provisions of Sections 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder, and Cordes and Aisenberg with violating Section 13(b)(2)(B) of the Exchange Act and Rule 13a-14 thereunder. Without admitting or denying the allegations, Cordes and Aisenberg consented to the entry of final judgments that imposed permanent injunctions and officer and director bars and required each to pay a $173,437 civil penalty. The settlements are subject to court approval. The SEC’s litigation against Felton remains ongoing. See Lit. Rel. No. 24792 (April 8, 2020) (here).

Too often, a plaintiff claiming breach of contract fails to identify the provision(s) of the contract alleged to have been breached, let alone that the fact that a contract was formed in the first place. While this seems elementary, the law reporters are brimming with cases where the plaintiff failed to do the foregoing. Indeed, this Blog recently wrote about case in which the plaintiff failed to identify the provision of the contract alleged to have been breached. ( Here .) In today’s post, we examine two breach of contract cases involving contract formation ( Drone USA, Inc. v. Antonelos , 2020 N.Y. Slip Op. 30907(U) (Sup. Ct., N.Y. County Apr. 5, 2020) ( here ) and the failure to identify the provision(s) of the contract alleged to have been breached ( Icon DE Holdings, LLC v. Mondani Handbags & Accessories, Inc. , 2020 N.Y. Slip Op. 30904(U) (Sup. Ct., N.Y. County Apr. 2, 2020) ( here ). Applicable Principles of Law The elements of a cause of action for breach of contract are (1) the formation of an agreement, (2) performance of the agreement by one party, (3) breach by the other party, and (4) damages. E.g. , Furia v. Furia , 116 A.D.2d 694 (2d Dept. 1986). All the elements must be pleaded in order to avoid dismissal. See Bonamii v. Straight Arrow Publs. , 133 A.D.2d 585 (1st Dept. 1987). A cause of action for breach of contract will be dismissed if it fails to allege the breach of a specific contractual provision. E.g. , Kraus v. Visa Intl. Serv. Assn. , 304 A.D.2d 408 (1st Dept. 2003); Lebow v. Kakalios , 156 A.D.2d 301 (1st Dept. 1989).  With regard to the first element of a breach of contract claim ( i.e. , the formation of a contract), the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent and an intent to be bound. 22 N.Y. Jur. 2d, Contracts Section 9.  “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” Restatement (Second) of Contracts § 24. Acceptance of an offer is effective if it clearly, unambiguously and unequivocally complies with the terms of the offer. King v King , 208 A.D.2d 1143, 1143-1144 (3d Dept. 1994) (citing 21 N.Y. Jur. 2d, Contracts § 53 at 470 (1982), and 2 Williston on Contracts § 6:10 at 68 (4th ed. 1990)).  “ o constitute consideration, a performance or a return promise must be bargained for.” See Restatement (Second) of Contracts §71. Thus, the plaintiff must demonstrate some performance or a return promise that was bargained for by the defendant’s promise to fulfill the terms of the agreement. Kolchins v. Evolution Markets, Inc. , 128 A.D.3d 47, 59-60 (1st Dept. 2015). Mutual assent requires an agreement as to the essential terms and conditions of the agreement, and intent to be bound requires that such assent be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. Joseph Martin, Jr., Delicatessen v. Schumacher , 52 N.Y.2d 105, 109 (1981); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp. , 93 N.Y.2d 584, 589 (1999). A “mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” Joseph Martin, Jr., Delicatessen , 52 N.Y.2d at 109. If the alleged contract “is not reasonably certain in its material terms, there can be no legally enforceable contract.” Edelman v. Poster , 72 A.D.3d 182, 184 (1st Dept. 2010). In addition, under the doctrine of definiteness, the court must be able to determine what, in fact, the parties agreed to in order to enforce a contract. Matter of 166 Mamaroneck Ave. Corp. v. 151 E. Post Rd. Corp. , 78 N.Y.2d 88, 91 (1991); Korff v. Corbett , 18 A.D.3d 248, 250 (1st Dept. 2005) (agreement language indicated meeting of minds, refers to consideration, specifies amount clearly agreed to).  Drone USA, Inc. v. Antonelos Drone involved the enforcement of a settlement agreement. On July 10, 2016, plaintiff, Drone USA, Inc. (“Drone”), and Paulo Ferro (“Ferro”) entered into an Employment Agreement (the “Agreement”), pursuant to which Drone hired Ferro as its Chief Strategy Officer. Under the Agreement, Ferro was to serve on Drone’s board of directors and receive an annual base salary of $400,000, in addition to a $100,000 signing bonus, and stocks. The Agreement provided for a three-year term of employment. Prior to the execution of the Agreement, but around the same time, defendant, Dennis Antonelos (“Antonelos”), Drone’s former Chief Financial Officer and director, received the option to purchase 10 million additional shares of Drone stock. After exercising that option, Antonelos contacted plaintiff, Michael Bannon (“Bannon”), Drone’s President and Chief Executive Officer, and told him to hire Ferro. To induce Ferro to accept the offer, Antonelos and Bannon personally guaranteed Drone’s payment and performance obligations to Ferro for two years. In pertinent part, the “Corporate Guarantee” that Antonelos and Bannon executed stated that they “personally and unconditionally guarantee and promise to pay or perform any and all obligations listed above for two full years” and that they “will share the personal guarantee 50-50.” Drone unconditionally guaranteed and promised “to pay or perform any and all obligation listed above for the remaining 3rd year.” When Ferro cashed in his stock, the personal guarantees would be reduced “dollar for dollar.” On July 7, 2017, Drone terminated Ferro’s employment “for cause.” Drone claimed that Ferro refused to disclose the identities of the customers he had worked with during his employment. Ferro said that the identities and details of those customers belonged to him, and not to Drone.  On July 10, 2017, Antonelos resigned from the board of directors. On July 12, 2017, Drone, Bannon, and TCA Global Credit Master Fund, LP (“TCA”), a hedge fund that provided Drone with financing, sued Ferro in California District Court (the “California Action”). On July 31, 2017, Ferro filed an answer and counterclaims. Ferro denied working against Drone’s interests. He said that the Company did not terminate him “for cause.” Instead, Ferro argued that Drone terminated him because he had refused to take a pay cut on Bannon’s insistence after Bannon failed to obtain outside investments, and, alternatively, had to take out interest loans from TCA. Ferro asserted counterclaims for breach of contract and intentional interference of the Agreement. On November 27, 2018, Drone, Bannon, and Ferro settled the California Action for $600,000.00. Bannon paid Ferro $299,999.99. The balance of the sum was owed in monthly installments, through December 2019. Despite demands for payment, Antonelos refused to pay any portion of the settlement amount under the personal guarantee. On February 11, 2019, Drone and Bannon brought action in New York Supreme Court for breach of contract against Antonelos for $300,000.00 – the remaining portion of the California Action settlement sum.  On March 28, 2019, Antonelos filed a motion to dismiss the complaint. On April 10, 2019, plaintiffs filed an amended complaint, rendering that motion moot. On April 29, 2019, Antonelos filed a motion to dismiss the first amended complaint. He argued that the “Corporate Guarantee” failed to specify consideration, or the nature of Antonelos’s obligations in writing, and was, therefore, unenforceable. The Court rejected defendant’s argument, holding that it “misses the mark.” Slip Op. at *3. The Court explained that the guarantee, which “plaintiff and defendant both signed” and which required Antonelos and Bannon to “share the personal guarantee 50-50,” constituted “a contract in which defendant must split the costs paid under the guarantee.” Id. The Court rejected the notion that the Agreement lacked any consideration, holding that the “consideration lies in many things, including the benefits of Ferro’s work or avoiding a lawsuit.” Id. Icon DE Holdings, LLC v. Mondani Handbags & Accessories, Inc. Icon arose out of a contractual relationship between Icon DE Holdings, LLC (“plaintiff” or “Icon DE Holdings”) and Mondani Handbags and Accessories Inc. (“defendant” or “Mondani”). Around August 2007, Icon DE Holdings’ affiliate, IP Holdings LLC (“IP Holdings”), entered into a Handbag Agreement with Mondani (the “Agreement”). Pursuant to the Agreement, IP Holdings, which owned all right, title and interest in and to the trademark London Fog and Tower Design and certain variations thereof (the “Licensed Mark”), exclusively licensed the Licensed Mark to Mondani for use in connection with the design, manufacture, sale, marketing distribution, advertising and promotion of Handbags and Small Leather Goods in a specified geographic area for a specified period of time. The Agreement was subsequently amended in December 2010 (“First Amendment”), December 2016 (“Second Amendment”), and May 2018 (“Third Amendment”). Following the execution of the Third Amendment, effective June 1, 2018, IP Holdings assigned the Agreement, as amended, and all rights and remedies thereunder, including the exclusive right to enforce the Agreement and its terms against Mondani, to Icon DE Holdings. Plaintiff brought a breach of contract action against Mondani, alleging that Mondani was, and is, required to pay to Icon DE Holdings certain royalties under the Agreement. Plaintiff notified Mondani of its alleged default on March 6, 2019 and terminated the Agreement on June 24, 2019. Plaintiff sought $474,000 in damages, plus costs related to the prosecution of the action.  On October 28, 2019, defendant Mondani filed its answer and counterclaim. Plaintiff moved to dismiss defendant’s counterclaim. The Court granted plaintiff’s motion because the counterclaim as “currently stated … lack specificity.” Slip Op. at *2. The Court explained that dismissal was appropriate because “ he Counterclaim not indicate which specific provisions of the Agreement and/or Amendments plaintiff purportedly violated, nor it provide dates of the alleged conduct.” Id. However, because defendant attempted “to supplement its pleadings with an affidavit based on personal knowledge,” the Court granted defendant leave to replead for “clarity” purposes, directing defendant to “identify[ ] specific provisions of the Agreement and/or Amendments plaintiff allegedly breached with dates and details such that the Court make a determination on the merits.” Id. at *3. Takeaway In claiming a breach of contract ( i.e. , enforcing or attempting to enforce a contract), the first step for a plaintiff is to plead the existence of a valid contract. In that regard, the plaintiff must demonstrate that the parties created a contract. Drone highlights this issue and shows that each element of contract formation must be pleaded. The next step for the plaintiff is to identify the specific terms of the contract that the defendant is alleged to have breached. As Icon DE Holdings shows, general allegations that the contract has been breached will not suffice. Kraus v. Visa Int’l Serv. Assoc. , 304 A.D.2d 408 (1st Dept. 2003).

In today’s Fraud Notes, we examine two cases decided by the Appellate Division, First Department: Knox, LLC v. Lakian , 2020 N.Y. Slip Op. 02255 (1st Dept. Apr. 9, 2020) ( here ), and WCapital Invs. LLC v CWCapital Cobalt VR Ltd. , 2020 N.Y. Slip Op. 02240 (1st Dept. Apr. 9, 2020) ( here ). Knox concerned the justifiable reliance element of a fraud claim and WCapital Invs. concerned the damages element of a fraud claim.  Hints of Falsity New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions and the businesses they are acquiring. See , e.g. , Abrahami v. UPC Constr. Co. , 224 A.D.2d 231, 234 (1st Dept. 1996) (sophisticated businessmen had a duty to exercise ordinary diligence and conduct an independent appraisal of the risk they were assuming). When the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. Banque Franco-Hellenique de Commerce Intl. et Mar., S.A. v. Christophides , 106 F.3d 22, 27 (2d Cir. 1997). It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy. Keywell Corp. v. Weinstein , 33 F.3d 159, 164 (2d Cir. 1994). When a party fails to make further inquiry or insert appropriate language in the agreement for its protection, it has willingly assumed the business risk that the facts may not be as represented. Rodas v. Manitaras , 159 A.D.2d 341, 343 (1st Dept. 1990). Under those circumstances, a claim for fraudulent inducement will be dismissed. In Knox, LLC v. Lakian , 2020 N.Y. Slip Op. 02255 (1st Dept. Apr. 9, 2020) ( here ), the Appellate Division, First Department affirmed the entry judgment against the defendants on the grounds that, inter alia , the plaintiffs justifiably relied on the defendants’ misrepresentations.  Plaintiffs sought to recover the investments they made in nonparty Capital L Group, LLC (“Capital L”), which were diverted to personal bank accounts held by Capital L’s chief executive officer, defendant John R. Lakian (“Lakian”). Plaintiffs claimed that they were fraudulently induced into making the investments and sought summary judgment on that cause of action. Defendants contended that an issue of fact existed as to whether plaintiffs’ reliance on the statements made to them by Lakian was justified. In that regard, Defendants argued that nonparty, Donald J. Whelley (“Whelley”), the sole manager and member of plaintiff, DJW Advisors, LLC, expressed concerns about Capital L’s accounting systems and back-office operations, but ignored those “red flags” in deciding to make the investments. Therefore, Defendants said, plaintiffs were responsible for that risk. The Court rejected this argument, finding that “Whelley’s concerns were unrelated to the eventual fraudulent diversion of the funds.” Slip Op. at *1. As such, Defendants “failed to demonstrate that Whelley ‘ha hints of falsity’ and therefore had a duty to probe further.” Id . (citation omitted). The Court rejected Defendants’ contention that Whelley should have inspected a full set of financial documents because “they failed to show that if he had done so he would have been alerted to the potential fraudulent diversion of funds.” Id . (citing UST Private Equity Invs. Fund v. Salomon Smith Barney , 288 A.D.2d 87, 88 (1st Dept. 2001). The Court concluded that Defendants’ “references to the ‘tangled accounts’ and ‘problematic transactions’ that Whelley would have seen had he reviewed unspecified documents too vague to raise an issue of fact.” Id . The Court also rejected Defendants’ contention that Whelley’s expressed concerns about Capital L’s accounting systems and back-office operations “were in fact concerns about where Capital L’s money was going.” Id .  The Court observed that Whelley was certain that Capital L’s record keeping and back-office problems had been solved by its acquisition of Capital Guardian Holding LLC. Id . “If Whelley had been concerned about a potential fraudulent diversion of funds,” reasoned the Court, “his concern would not have been alleviated by the acquisition of a new company.” Id . Finally, the Court rejected Defendants’ contention that Whelley should have insisted on language in the subscription agreement to ensure that the investment would be used solely to acquire registered investment advisors.” Id . The Court explained that “the fraudulent inducement claim based not on defendants’ use of plaintiffs’ funds for general business operations instead of the acquisition of registered investment advisors but on the diversion of their funds for personal purposes.” Id . at *1-*2. The Failure to Plead Damages To allege a cause of action based on fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996) (citations omitted). Each element of the claim must be pleaded in order to withstand a challenge to the cause of action. In WCapital Invs. LLC v CWCapital Cobalt VR Ltd. , 2020 N.Y. Slip Op. 02240 (1st Dept. Apr. 9, 2020) ( here ), the Appellate Division, First Department reversed the denial of defendants’ motion to dismiss the fraudulent inducement claims because plaintiffs failed to allege damages. WCapital Invs. involved a 2007 collateralized debt obligation (“CDO”) in which various classes of notes were issued by defendant, CWCapital Cobalt VR Ltd. (“Cobalt”). The transaction was governed by an indenture and a collateral management agreement (“CMA”). Under the CMA, plaintiff, CWCapital Investments LLC (“CWCI”), was named as collateral manager and appointed as Cobalt’s “exclusive agent” to provide Cobalt with certain services, including exercising the right to appoint or act as the controlling class representative or directing holder (together the “CCR”). CWCI exercised that right by appointing itself as the CCR. It served in that role since the inception of the CDO in 2007. During the course of the CDO, the notes were transferred several times. In August 2016, pursuant to five separate sale agreements, former defendant Merrill Lynch, Pierce, Fenner and Smith Incorporated sold certain notes to defendants, OZ Master Fund, Ltd., OZ Enhanced Master Fund, Ltd., OZ Credit Opportunities Master Fund, Ltd., OZ GC Opportunities Master Fund, Ltd. and OZSC, L.P. (collectively, the “OZ Funds”). Among other things, the OZ Funds promised not to aid in the removal of the collateral manager. Plaintiff Galaxy Acquisition LLC (“Galaxy”), CWCI’s parent, which purportedly had the power to veto any transfer of the notes, approved the sales. Shortly thereafter, the OZ Funds transferred the notes to defendant, Carbolic, LLC (“Carbolic”). In connection with that transaction, Carbolic wrote five letters to Galaxy (the “letter agreements”) in which it made the same promises that the OZ Funds had made in the sale agreements. In April 2018, Cobalt sent notice letters designating Carbolic as the new CCR. Thereafter, CWCI and Galaxy commenced the action alleging that in replacing CWCI with Cobalt as the CCR, the various defendants breached the indenture, the CMA, the sale agreements and the letter agreements, and engaged in tortious conduct. They also alleged breach of contract and fraud in connection with the sale of the notes to the OZ Funds. By separate motions, Cobalt and Carbolic, and the OZ Funds and the OZ Management defendants, moved to dismiss the amended complaint. In January 2019, after the motions were briefed but before the motion court’s decision, Cobalt withdrew its appointment of Carbolic as the CCR. Carbolic never took over as the CCR; CWCI has always retained that role. After supplemental briefing, the motion court denied the motions. Defendants appealed. The Court held that the fraud claims (in addition to the other claims) should have been dismissed because plaintiffs failed to allege damages. “Although a plaintiff is not obligated to show, on a motion to dismiss, that it actually sustained damages,” noted the Court, “it must plead ‘allegations from which damages attributable to might be reasonably inferred.’” Slip Op. at *4 (quoting InKine Pharm. Co. v. Coleman , 305 A.D.2d 151, 152 (1st Dept. 2003) (internal quotation marks omitted). The Court held that plaintiffs failed to do so. The Court found that plaintiffs failed to “explain how they sustained damages as a result of Cobalt’s designation of Carbolic as the new CCR.” Id . Indeed, noted the Court, “the notice letters appointing Carbolic as the CCR were never given effect, the appointment of Carbolic was withdrawn, and CWCI continued operating as the CCR.” Id .  “Because cognizable damages cannot be reasonably inferred,” the Court concluded that the fraud causes of action “should be dismissed.”  Id . (citing Arts4All, Ltd. v. Hancock , 5 A.D.3d 106, 110 (1st Dept. 2004). The Court also rejected plaintiffs’ argument that it incurred damages because “they were allegedly forced to engage in ‘costly litigation.’” Slip Op. at *4. Under settled law, held the Court, “attorneys’ fees . . . are not recoverable unless authorized by statute, court rule, or written agreement of the parties” and plaintiffs failed to allege any of the foregoing. Id . (quoting Reif v. Nagy , 175 A.D.3d 107, 131 (1st Dept 2019) (internal quotation marks omitted)).  Takeaway A claim for fraudulent inducement requires a plaintiff to establish a misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and which plaintiff justifiably relied on, resulting in damages. Ventur Group, LLC v. Finnerty , 68 A.D.3d 638, 639 (1st Dept. 2009) (internal quotation marks and citation omitted). As this Blog has often noted, the justifiable reliance element is typically the most difficult to satisfy. This is especially so when the plaintiff is sophisticated, such as in Knox . When there are hints of falsity, the obligation to root out the fraud is heightened. For this reason, plaintiffs often fail to satisfy the justifiable reliance element.  In Knox , the alleged fraud – i.e. , the diversion of funds – could not have been discovered with reasonable, indeed heightened, diligence. As noted by the Court, review of the financial records and concerns about accounting systems and back-office operations were not themselves sufficient to put plaintiffs on notice that funds had been diverted for personal use. In fact, as the Court observed, the red flags identified by defendants “were unrelated to the … fraudulent diversion of funds.” Slip Op. at *1.  WCapital Invs. reminds us of the importance of pleading recoverable damages resulting from the misrepresentation or omission. As noted, although a plaintiff is not required to demonstrate, on a motion to dismiss, that it actually sustained damages, he/she must plead facts from which damages are reasonably inferred. The failure to do so will, as in WCapital Invs. , result in dismissal.

The New York State Court System On April 7, 2020, Chief Administrative Judge Lawrence K. Marks issued a memorandum to all trial court justices and judges advising them that, starting on Monday, April 13, 2020, the courts will begin to open their doors, albeit remotely, “for non-essential pending cases” – i.e. , “tort (including medical practice and asbestos), commercial, matrimonial, trusts and estates, and other categories of cases.” ( Here .) To this end, judges are being asked to “review their case inventories to identify cases in which court conferences can be helpful in advancing the progress of the case, including achieving a resolution of the case.” Judges are encouraged to schedule conferences at the request of the attorneys and be available during normal court hours to address discovery disputes and other ad hoc concerns. Such conferences, said Chief Administrative Judge Marks, are to be “conducted remotely, by Skype or by telephone.” Judges’ personal staff will be able to assist judges remotely, as needed.  Courts that have high-volume calendar parts, such as compliance and trial assignment parts (primarily Supreme Court in New York City and the large downstate suburban counties) are to review their existing calendars and identify cases that can be assigned to judges to conduct remote conferences. “ he goal,” said Chief Administrative Marks, “is for judges to help advance the progress of the cases and facilitate their resolution.”  Additionally, judges are being asked “to decide fully submitted motions” and “resolve … other matters in their case inventories.”  Remote Witnessing On April 7, 2020, Governor Andrew Cuomo issued a new executive order that addresses, among other things, remote witnessing. here.=">here."> The order provides clarification regarding the requirements needed to conduct remote signings of documents, such as deeds, wills, powers of attorney forms and healthcare proxies. Under the order, the act of remote witnessing ( i.e. , using audio-video technology) is permissible provided the following conditions are met: The person requesting that their signature be witnessed, if not personally known to the witness(es), must present valid photo ID to the witness(es) during the video conference, not merely transmit it prior to or after; The video conference must allow for direct interaction between the person and the witness(es), and the supervising attorney, if applicable (e.g. no pre-recorded videos of the person signing); The witnesses must receive a legible copy of the signature page(s), which may be transmitted via fax or electronic means, on the same date that the pages are signed by the person; The witness(es) may sign the transmitted copy of the signature page(s) and transmit the same back to the person; and The witness(es) may repeat the witnessing of the original signature page(s) as of the date of execution provided the witness(es) receive such original signature pages together with the electronically witnessed copies within thirty days after the date of execution.

It is not often that the Court of Appeals issues an opinion about the same statute within a short period of time. But, in the span of nine days, the Court issued two opinions addressing General Business Law § 349.  On March 24, 2020, the Court of Appeals decided Plavin v. Group Health Inc. , 2020 N.Y. Slip Op. 02025 (Mar. 24, 2020) ( here ), a case in which the Court was asked to decide whether an insurance company’s alleged misstatements and omissions about its insurance plan satisfied the consumer-oriented element of a claim under General Business Law §§ 349 and 350. Less than 10 days later, on April 2, 2020, the Court decided Collazo v. Netherland Prop. Assets LLC , 2020 N.Y. Slip Op. 02128 ( here ), a case in which the Court was asked to decide whether a defendant violates GBL § 349 in the absence of affirmative conduct that tends to deceive consumers. As discussed below, the Court held that there is no violation of the statute under those circumstances. Plavin="Plavin" here.=">here."> In Collazo , plaintiffs sought a declaration that their apartments were subject to rent stabilization laws, and recovery for overcharges, treble damages and attorney’s fees, as well as damages pursuant to GBL § 349.  Plaintiffs are 30 current or former tenants of 18 apartments in a building currently owned and operated by defendants. The building is subject to the Rent Stabilization Law. From 1990-2016, defendants and their predecessors received J-51 tax benefits pursuant to Administrative Code of City of NY § 11-24. Nevertheless, 15 of the apartments at issue were registered as permanently exempt, high rent vacancies – i.e. , were deregulated – during that time period ( see Rent Stabilization Law of 1969 (Administrative Code of City of NY) former § 26-504.2 (a)). Following guidance issued by the New York State Division of Housing and Community Renewal in 2016, defendants reregistered the 15 apartments as rent stabilized. Plaintiffs alleged that, following the issuance of the Court’s decision in Roberts v. Tishman Speyer Props., L.P. , 13 N.Y.3d 270 (2009), defendants knew, or should have known, that high rent vacancy deregulation was not available with respect to apartments in buildings for which a landlord was receiving J-51 benefits. Plaintiffs also alleged that defendants violated GBL § 349 by engaging in deceptive, consumer-oriented acts – namely, representing to the public at large that the apartments in question were exempt from rent regulation. In Roberts , the Court held that apartments in buildings receiving benefits under New York City’s J-51 tax incentive program remained subject to rent stabilization for at least as long as the building continued to enjoy J-51 benefits. Defendants moved to dismiss the complaint, claiming, among other things, that the GBL cause of action failed to state a claim upon which relief. Supreme Court granted defendants’ motion, and the Appellate Division, First Department affirmed. 155 A.D.3d 538 (1st Dept 2017). The Court affirmed the dismissal of the GBL claim. Relying on Schlessinger v. Valspar Corp. , 21 N.Y.3d 166, 172 (2013), the Court held that plaintiffs failed to allege “any affirmative conduct that would tend to deceive consumers.” Slip Op. at *1.  In Schlessinger , furniture buyers brought a putative class action against a provider of furniture protection plans for breach of contract and violation of GBL § 349 based upon the defendant’s violation of GBL § 395-a, which generally prohibits providers of maintenance agreements from terminating the agreement during the contract term. Under the terms of the plan, the defendant would try to repair or replace any damaged furniture if the damage occurred during the contract period. However, if the furniture store where the plaintiff purchased the furniture closed, the defendant would instead issue a refund of the plan price. The plaintiffs argued that the store closure provision was voided by GBL § 395-a. As a result, said the plaintiffs, the defendant breached the contracts by denying their claims under the plan and “engaged in ‘deceptive practices’ . . . by selling maintenance agreements which contain the purportedly illicit store closure provision.” The Court understood the plaintiffs to be arguing that the defendant’s “violation of section 395-a is perforce a violation of section 349(a) because, by inserting an unlawful provision in the contract, Valspar impliedly represented that this provision was valid and thereby engaged in a deceptive act or practice.” Id. at 172. However, this reasoning was “too attenuated to be plausible,” said the Court, because “ ection 349 does not grant a private remedy for every improper or illegal business practice, but only for conduct that tends to deceive consumers.” Id . It could not “fairly be understood to mean that everyone who acts unlawfully, and does not admit the transgression, is being ‘deceptive,’” as “ uch an interpretation would stretch the statute beyond its natural bounds to cover virtually all misconduct by businesses that deal with consumers.” Id. ; see also Fuchs v. Wachovia Mortg. Corp. , 9 Misc.3d 1129(A), 2005 N.Y. Slip Op. 51852(U), at *2-3 (Sup. Ct., Nassau County Nov. 15, 2005) (dismissing GBL § 349 claim based upon defendant charging an allegedly illicit document preparation fee because defendant represented that it would charge such a fee and did not have a duty to advise plaintiffs that the charge violated the law or to disclose the relevant provisions of the law). Against the foregoing analysis, the Collazo Court found that plaintiffs only alleged “that defendants failed to admit that they violated the Rent Stabilization Law in deregulating plaintiffs’ apartments – three of which were, in fact, never deregulated.” Slip Op. at *1. They did not allege “any affirmative conduct that would tend to deceive consumers.” Id. In a brief dissent, Judge Rivera concluded that the conduct at issue satisfied the element of consumer-oriented deception under GBL § 349. Slip Op. at *2. In that regard, Judge Rivera explained that, in the landlord-tenant context, “nothing prevents a plaintiff from asserting a claim based on a misrepresentation that an apartment was exempt from rent regulation following deregulation in violation of the Rent Stabilization Law.” Id. The reason, Judge Rivera said, is because “section 349 contemplates that a cause of action under that section may overlap with other statutory prohibitions and remedies.” Id. (citing GBL § 349 (g) (“This section shall apply to all deceptive acts or practices declared to be unlawful, whether or not subject to any other law of this state”)). Takeaway GBL § 349 provides a remedy to consumers who have been subject to deceptive or misleading acts or business practices. Oswego Laborers Local 214 Pension Fund v. Marine Midland Bank, N.A. , 85 N.Y.2d 20 (1985). A deceptive act or practice, for the purposes of GBL §349, is one which is likely to mislead a reasonably prudent consumer. Karlin v. IVF America, Inc. , 93 N.Y.2d 282 (1999). Collazo shows that a plaintiff cannot show a deceptive business practice when the alleged deception is based upon a failure to admit the violation of a contract or statute. More is needed – as in an affirmative act of consumer-oriented deception.   The dissenting opinion is notable because it considered the failure to admit the violation of a contract or statute to be an act of consumer-oriented deception. In many ways, this reasoning is similar to the United States Supreme Court’s adoption of the implied false certification theory of liability under the False Claims Act (“FCA”). Universal Health Services, Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016). Under the “implied false certification” theory, a defendant may violate the FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement. In other words, “misrepresentations by omission can give rise to liability.”  Escobar="Escobar" here.=">here."> It will be interesting to see whether Judge Rivera’s dissent will one day find its way to the majority of the Court. In the meantime, under New York law, a plaintiff will not satisfy GBL § 349 without alleging affirmative conduct that tends to deceive consumers – i.e. , the plaintiff alleges more than a failure to admit a violation of law or contract.

Once an action is commenced, litigants have numerous discovery devices at their fingertips to help flesh-out facts to prove, or defend against, asserted claims.  Sometimes, however, a potential litigant believes that a viable claim exists but, for one or more reasons, has insufficient information to bring a claim.  The answer is provided by CPLR 3102 (c) , which permits disclosure “before an action is commenced, … to aid in bringing an action, to preserve information or to aid in arbitration…but only by court order.”  This Blog previously addressed CPLR 3102 (c) < HERE =">HERE"> . Pre-action disclosure in aid of bringing a claim is appropriate “only where a petitioner demonstrates that it has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.”  Sandals Resorts Int’l Ltd. v. Google, Inc. , 86 A.D.3d 32, 38 (1 st Dep’t 2011) (citation, internal quotation marks and brackets omitted).  CPLR 3102 (c) cannot be used by a potential plaintiff to assist in determining whether a cause of action exists.  Ero v. Graystone Materials, Inc. , 252 A.D.2d 812, 814 (3 rd Dep’t 1998) (citation omitted).  Where a petitioner already possesses sufficient information to frame a complaint but brought a proceeding under CPLR 3102 (c) to “explore alternative theories of liability” the granting of its petition would be improper.  Western Inv. LLC v. Georgeson Shareholder Securities Corp. , 43 A.D. 3d 333 (1 st Dep’t 2007) (citation omitted).   New York courts have explained that limitations on the use of pre-action disclosure are “designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.” Matter of Stewart v. New York City Transit Auth. , 112 A.D.2d 939, 940 (2d Dept. 1985) (citation and internal quotation marks omitted). However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” Id . (citation and internal quotation marks omitted). Pre-action disclosure is also available to ascertain the identity of potential defendant.  Thus, in Alexander v. Spanierman Gallery, LLC , 33 A.D.3d 411 (1 st Dep’t 2006), the Court permitted disclosure of the purchaser of stolen artwork so that plaintiff could commence a replevin action.  The procedure may also be used to preserve evidence.  Holtzman v. Manhattan and Bronx Surface Transit Operating Authority , 271 A.D.2d 346, 347 (1 st Dep’t 2000).  For example, a court may order a pre-action deposition where it is necessary to “preserve testimony” due to the ill-health of a potential claimant/plaintiff ( Matter of Davis , 178 Misc. 2d 65, 66 (N.Y. Ct. Claims 1998)), or to prevent “a potential defendant or other person from disposing of physical evidence” ( Lemon Juice v. Twitter, Inc. , 44 Misc. 3d 1225(A) at *5). The First Department addressed these issues in Delgrange v. The RealReal, Inc. (April 2, 2020).  The petitioner in Delgrange was a collector of rare and unique clothing – much of which was from the collections of designer Marc Jacobs.  Respondent runs an on-line consignment website.  Petitioner frequently monitored respondent’s website looking to find additional Marc Jacobs clothing and noticed that numerous items similar to those already owned by her were being posted for sale.  This caused petitioner concern, which, in turn, caused her to inventory her collection.  This inventory revealed that numerous missing items from her collection appeared to be offered for sale on respondent’s website.  Petitioner purchased some of the suspicious items and, thereby, confirmed that some of the items being offered for sale on respondent’s website were hers.  All told, petitioner confirmed that 153 items offered for sale were stolen from her collection.   Petitioner wanted to bring a conversion claim against the unknown that stole clothing from her collection.  Accordingly, petitioner brought a petition pursuant to CPLR 3102 (c) against respondent to ascertain the identity of the individual that consigned the stolen clothing.  In granting the relief sought by the petition, the Court determined that petitioner “demonstrated a meritorious cause of action for conversion” and that the discovery sought from respondent, “the identity of the people who posted – is material and necessary to the prosecution of her posited cause of action.” The Court also noted that the “Supreme Court providently exercised in shaping and executing the confidentiality order governing disclosure by ” so as to address respondent’s concerns about the manner in which petitioner could contact respondent’s customers.

The coronavirus (“COVID-19”) has impacted the public and private sectors in so many ways – many of which are unprecedented and beyond the scope of this article. The Securities Exchange Commission (“SEC” or the “Commission”), the Financial Industry Regulatory Authority, Inc. (“FINRA”), other governmental authorities have worked to ensure that the markets have functioned and will function in an open, orderly and transparent fashion. In today’s article, we consider some of these efforts.   The SEC: Division of Enforcement Since the COVID-19 outbreak, the SEC has emphasized the importance of maintaining market integrity and following corporate controls and procedures. Like the rest of the agency, the Division of Enforcement (the “Division” or “Enforcement”) and the Office of Compliance Inspections and Examinations (“OCIE”) have continued to execute on their mission of protecting investors during the COVID-19 crisis. The Division is actively monitoring the markets for frauds, illicit schemes and other misconduct – and as circumstances warrant, will issue trading suspensions and use enforcement tools as appropriate. On March 23, 2020, the Co-Directors of Enforcement released a statement ( here ) highlighting market participants’ obligations with respect to material non-public information, including the importance of maintaining controls and procedures to keep material nonpublic information confidential unless and until it is appropriately disclosed. The statement emphasized the need for market participants to be mindful of the prohibitions on illegal securities trading, and to follow related controls and procedures, especially during the COVID-19 outbreak where material nonpublic information may be more prevalent and arise in less common contexts. The statement also discussed the Division’s commitment to Main Street investors and its focus on those who seek to prey on them during the COVID-19 health crisis. OCIE remains fully operational and, with adjustments to take into account health and safety measures, business continuity plans, firm-specific operational matters and other factors, continues to execute on its investor protection mission. OCIE has moved to conducting examinations off-site through correspondence, unless it is absolutely necessary to be on-site. OCIE is working with registrants to address the timing of its requests, availability of registrant personnel, and other matters to minimize disruption.  OCIE’s statement on its operations and examinations can be found here . The Commission is implementing numerous COVID-19 initiatives ( see here ) so that it can continue its regular operations. The SEC has continued to advance rulemaking initiatives, conduct risk-based inspections, bring enforcement actions, and review and comment on issuer and fund filings. In sum, the SEC has remained fully operational and committed to its tripartite mission to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.  FINRA FINRA remains fully operational, albeit remotely, and continues to carry out its regulatory responsibilities to protect investors and market integrity. In this regard, FINRA continues to perform its risk monitoring, market surveillance and enforcement programs, prioritizing matters that present the most risk during the COVID-19 crisis. In addition, FINRA is focusing on monitoring for fraud, illicit schemes, and other manipulative activities by those who seek to take advantage of the tumultuous conditions created by COVID-19 and ongoing market volatility. As such, FINRA is reviewing, investigating and addressing situations where it suspects, detects or is made aware of potential investor or market harm. FINRA is providing temporary relief for member firms from certain rules and requirements ( here ). The relief provided (discussed, in part, below) does not extend beyond the rules and requirements set forth in the FINRA’s regulatory notice. As COVID-19-related risks decrease, member firms should expect to return to meeting any regulatory obligations for which relief has been provided. When appropriate, FINRA said it will publish a regulatory notice announcing a termination date for the regulatory relief that will provide member firms with time to make necessary operational adjustments. Remote Offices or Telework Arrangements : As discussed in Regulatory Notice 20-08 ( here ), a member may consider employing methods such as social distancing, travel restrictions, revised sick leave policies, special pandemic leave time, or specialized seating plans for densely populated floors or buildings. These methods may also involve remote offices or telework arrangements ( e.g. , working from home or a backup or recovery location) for a broad range of employees.  Since FINRA is permitting the use of remote offices or telework arrangements, members are, nonetheless, required to supervise their associated persons who change their work locations or arrangements during the pandemic. As such, members are expected to establish and maintain a supervisory system that is reasonably designed to supervise the activities of each associated person while working from an alternative or remote location, and to document any changes to their current written supervisory procedures.  With respect to oversight obligations, a member’s scheduled on-site inspections of branch offices may need to be temporarily postponed during the pandemic. If this happens, FINRA said that it would re-evaluate the member’s ability to complete its annual regulatory obligation in light of the duration and severity of the pandemic.  Temporary Relocation :  As discussed in Regulatory Notice 20-08 ( here ), if a member relocates personnel to a temporary location that is not currently registered as a branch office or identified as a regular non-branch location, the firm should use its best efforts to provide written notification to its FINRA Risk Monitoring Analyst as soon as possible after establishing a new temporary office or space-sharing arrangement. The notification should also indicate whether the member’s personnel will be sharing space with another entity, and if so, the type of business in which it is engaged ( e.g. , an affiliated investment adviser or an organization in the securities business). While the pandemic may create exigent circumstances that result in emergency relocations, firms are reminded to take into account the risks associated with sharing office space with another entity ( e.g. , customer privacy, information security or recordkeeping considerations) and take steps to mitigate the risks during the emergency relocation. Notably, FINRA does not expect to receive written notification regarding each associated person’s location ( e.g. , the person’s home residence if working from home) or if another person ( e.g. , a spouse or another immediate family member) is also teleworking in the same residence as the associated person.  In addition, where a non-branch location or branch office has been relocated, or customer calls are being rerouted to another office, members are required to exercise diligence in validating the identity of the customer ( e.g. , when accepting orders and request for disbursement of funds) as well as provide heightened supervision of the affected customer accounts. Best Execution Rule : Under Rule 5310, firms must exercise “reasonable diligence” to ascertain the best market for the security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.  Evaluating a broker-dealer’s satisfaction of its duty of best execution necessarily requires a “facts and circumstances” or case-by-case analysis.  While broker-dealers are not relieved of their best execution obligations during the pandemic, the best execution obligation is being assessed in the context of the security involved and market conditions, including price, volatility, relative liquidity, and pressure on available communications.   Inquiries and Investigations :  As discussed in Regulatory Notice 20-08, members may have difficulty making timely regulatory filings and responding to regulatory inquiries or investigations. Unless FINRA has otherwise provided relief to all member firms, members that require extra time to respond to open inquiries, investigations or upcoming filings should contact their Risk Monitoring Analysts or the relevant FINRA department to seek extensions. FINRA said it may waive any late fees incurred by a member based on the member’s particular circumstance. In addition, if any data communications are disrupted, members should retain the relevant data until it can be transmitted to FINRA. Arbitration and Mediation :  On March 31, 2020, FINRA administratively postponed all in-person arbitration and mediation proceedings scheduled through May 31, 2020 ( here ). Parties with in-person hearing or mediation sessions scheduled through this date will be contacted by FINRA staff to reschedule or discuss remote scheduling options. All case deadlines will continue to apply and must be timely met unless the parties jointly agree otherwise.  Further, FINRA will waive postponement fees when parties stipulate to adjourn in-person hearing dates scheduled from June 1 through September 4, 2020. To avoid postponement fees, parties must provide written notice of the stipulation to adjourn more than 20 days prior to the first scheduled hearing date. Parties stipulating to adjourn in-person hearing dates should also consider stipulating to changing other case deadlines. If the parties wish to proceed virtually, and the panel agrees to proceed in that manner, FINRA is providing virtual hearing services (via Zoom and teleconference). FINRA is encouraging the parties and its panels to avail themselves of these virtual technologies as an alternative to postponing existing hearing dates.  The Blog’s Message We understand that the operations of the SEC and FINRA are not a priority of our readers at this difficult time. But, for those who are concerned about, among other things, the integrity of the markets, the enforcement efforts of market regulators and the viability of initiating an arbitration or mediation or continuing one of these forms of dispute resolution, we hope that this article provides you with some information.  As we noted in our last article about the operations of the New York State Courts ( here ), we want you to know that nothing is more important to us than the health and safety of our families, friends, readers, clients, colleagues and communities. We therefore hope that all are healthy and safe and remain so during this public health crisis.

It is said that justice never sleeps. This is true, even as we adjust to life during the coronavirus pandemic. Although state and federal courts around the country have limited the business they handle, they nonetheless remain open. But what does this mean?  The Lower Courts The State of New York has answered this question through several recent court orders. These orders make clear that the courts are, as Chief Judge Janet DiFiore stated in a recent online message, “up and running” so as “to provide access for all essential and emergency matters during the coronavirus outbreak.” ( Here .) On March 22, 2020, Chief Administrative Judge Lawrence Marks issued administrative order AO/78/20 ( here ), which markedly curtailed the receipt of papers filed in the Uniform Court System (“UCS”) and by county clerks in litigation matters. The order applies to both paper and electronic filings and extends to all trial courts. Chief Administrative Judge Marks issued the order in light of the public health concerns of the coronavirus, and to comport with Governor Cuomo’s recent Executive Order, which suspended and tolled the statutes of limitations for the commencement or filing of legal actions, as well as the time limits governing all actions and proceedings in the State’s criminal, family, civil, surrogate’s and appellate courts. ( See Executive Order 202.8, here .)  The order makes clear that the courts will accept filings only in matters deemed to be “essential.” Arraignments and emergency proceedings, such as (a) mental hygiene applications, civil commitments and guardianships, (b) child protection proceedings, juvenile delinquency proceedings, family offenses, emergency support orders, and (c) landlord lockouts, serious code violations, repair orders and post-eviction relief, fall into the definition of “essential”. A complete list of essential matters is attached to the order. In addition, judges may deem any individual matter to be “essential” as circumstances require. This catch-all provision is intended “to address the very rare case[] where individual facts necessitate an immediate hearing notwithstanding current public health concerns.” However, the catch-all provision “will be interpreted restrictively.” It is important to note that the order concerns legal papers relating to litigation matters filed in the UCS. It does not pertain to filings with the County Clerk acting other than as a clerk of the court – including matters set forth in CPLR § 8021. Moreover, the order does not address discovery in pending matters, which remains governed by a prior administrative order and relies on the agreement of the parties to the fullest extent possible. In the event that discovery disputes and conduct require judicial intervention, the courts will address them at a later date. Finally, the order addresses only the filing of documents and does not address service of process. As Chief Judge DiFiore explained in her recent message, “in light of the filing prohibition and the Governor’s extension of statutes of limitation, service of (unfiled) process should and will be suspended by parties in non-essential matters.”  As to preliminary, compliance and status conferences, Chief Administrative Judge Marks severely limited their occurrence in a prior administrative order ( here ). However, since that order on March 13, 2020, judges have been adjourning such conferences without a new date.  On March 25 and 26, 2020, two courts went virtual. On March 25, 2020, the New York City Criminal Court initiated its second phase of videoconferencing arraignments. Under this phase, all parties will participate in court proceedings by videoconferencing using Skype for Business. All arraignments will be virtual, with the judge, prosecution and defense attorney and defendant appearing from remote locations. On March 26, 2020, the New York City Family Court started virtually hearing the following matters: child-protective intake cases involving removal applications, newly-filed juvenile delinquency intake cases involving remand applications, emergency family offense petitions and writ applications where there is a court order of custody or parenting time. The Appellate Courts The State’s four appellate divisions have their own rules to deal with the coronavirus health emergency.  In the First Department ( here ), the Court maintained the filing deadlines for its May and June Terms, but suspended the deadlines to perfect, file, or otherwise comply with the rules of court until further order of the Court, except where mandated by statute. As of the date of this post, the Court adjourned all arguments scheduled for the April Term; these arguments will be re-scheduled at a later date. Notably, the Court said that all filings made in connection with appeals subject to mandatory e-filing must be filed via NYSCEF in a timely manner and in accordance with the procedural and electronic rules of the Court. However, the Court suspended the requirement that the hard copy filing must follow the e-filing. In fact, the Court is not permitting the filing of hard copy documents.  The Court will also consider emergency applications and attorney grievance committee matters. In the Second Department, the Court has essentially closed its physical doors to the public, but not its virtual ones, at least for emergency matters. Pursuant to a recent notice and order ( here , here ), the Court will entertain emergency applications only. While litigants may continue to make electronic filings on the NYSCEF portal, the filings will not be reviewed as the Clerk’s Office will not be staffed to do so until further notice.  Like the First Department, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended until further order of the Court. The Court will continue to process its calendars through April 2, 2020. Thus, for litigants with an appeal on one of the Court’s calendars, that appeal will be taken on submission unless the litigant contacts the Court by email to request an argument via Skype. The Court will also entertain emergency applications and attorney grievance committee matters. In the Third Department ( here , here ), the Court is considering all appeals from the March Term on submission only and adjourning all appeals for the April Term. The Court will re-calendar all April Term matters for a later term. Any appeal deemed to be an emergency by the parties may be treated as urgent.  Like the First and Second Departments, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended pending further order of the Court, except where mandated by statute.  The Third Department is open with limited staff to accept NYSCEF filings and paper submissions where the parties choose to continue to file. The Court will entertain only emergency applications.  In the Fourth Department ( here , here , here , here and here ), all matters calendared for the March/April 2020 Term will be considered on submission only, without oral argument. All matters currently scheduled for the May 2020 Term have been adjourned and will be re-calendared for a later term. For matters scheduled during the March/April 2020 Term or the May 2020 Term that the parties deem to be urgent, an application may be made in writing, on notice to all parties, to request that the Court consider the matter on an expedited basis. Such notification must be made by email no later than April 9, 2020.  The Court will entertain only emergency applications brought by order to show cause.  Such emergency applications are to be filed by email. The Fourth Department is accepting digital filings through NYSCEF for appropriate cases and through its digital portal in other cases. The Court suspended the requirement of hard copy submissions until further order of the Court. In fact, the Court is not permitting the filing of hard copy documents.  Similar to its sister departments, all deadlines to perfect, file, or otherwise comply with the rules of court are suspended pending further order of the Court, except where mandated by statute. In the New York State Court of Appeals ( here ), all filing deadlines and filing procedures remain in place, except that no in-person filings are permitted without prior arrangements made upon telephonic consultation with the Clerk’s Office. The Court has adjourned oral arguments for the remainder of the March Term. The Court is considering changes to the April/May oral argument sessions and will notify parties directly as to how it will proceed. The Court will continue to consider cases that have been submitted. The Blog’s Message We understand that questions concerning the State’s court system are not high on the list of questions our readers have been asking about the coronavirus. But, for those who are thinking of starting an action, or who have a pending one, we hope that this post provides you with some answers.  While we will continue to post articles on this Blog about substantive legal issues, we want you to know that nothing is more important to us than the health and safety of our families, friends, readers, clients, colleagues and communities. We therefore hope that all are healthy and safe and remain so during this public health crisis.

Historically, an individual was required to appear, in person, before the notary public acknowledging his/her signature.  See In re Napolis , 169 A.D. 469, 471 (1 st Dep’t 1915) (“The court again wishes to express its condemnation of the acts of notaries taking acknowledgments or affidavits without the presence of the party whose acknowledgment is taken or the affiant, and that it will treat as serious professional misconduct the act of any notary thus violating his official duty.”); Ambulatory Surgery Center of Brooklyn v. Helpers of God’s Precious Infants, Inc. , 283 A.D.2d 528, 529 - 530 (2 nd Dep’t 2001) (finding that counsel’s false representation that affiants signed affidavits in his presence was “wholly improper” and “had no probative value”).  Similarly, the Notary Public License Law New=">New" York="York" Secretary="Secretary" of="of" State="State" Website="Website"> , relying in part on In re Napolis , provides that the: se of the office of notary in other than the specific, step-by-step procedure required is viewed as a serious offense by the Secretary of State. The practice of taking acknowledgments and affidavits over the telephone, or otherwise, without the actual, personal appearance of the individual making the acknowledgment or affidavit before the officiating notary, is illegal. Indeed, a notary public that commits “fraud or deceit” in performing his/her duties “is guilty of a misdemeanor.”  New York Executive Law § 135-a (2) . Similarly, the Uniform forms of certificates of acknowledgement or proof within ( see RPL § 309-a ) and without ( see RPL § 309-b ) the state of New York recites that the affiant “personally appeared” before the notary public taking the acknowledgment. Recognizing the difficulty and the dangers of requiring in person meetings for notaries due to the coronavirus pandemic, on March 19, 2020, Governor Andrew Cuomo issued an Executive Order temporarily relaxing the notary public laws to permit the completion of notary services “utilizing audio-visual means.”  Thus, the operative provisions of Executive Order 202.7 provide: Any notarial act that is required under New York State law is authorized to be performed utilizing audio-video technology provided that the following conditions are met:  The person seeking the Notary's services, if not personally known to the Notary, must present valid photo ID to the Notary during the video conference, not merely transmit it prior to or after;  The video conference must allow for direct interaction between the person and the Notary (e.g. no pre-recorded videos of the person signing); The person must affirmatively represent that he or she is physically situated in the State of New York;  The person must transmit by fax or electronic means a legible copy of the signed document directly to the Notary on the same date it was signed;  The Notary may notarize the transmitted copy of the document and transmit the same back to the person; and,  The Notary may repeat the notarization of the original signed document as of the date of execution provided the Notary receives such original signed document together with the electronically notarized copy within thirty days after the date of execution. The ability for the general public to have their signatures (whether on an acknowledgment, an affidavit or otherwise) notarized through the use of audio/video means will further the objectives of the stay-at-home and social distancing rules established to lessen the impact of the coronavirus pandemic.

On March 24, 2020, the New York Court of Appeals decided Plavin v. Group Health Inc. , 2020 N.Y. Slip Op. 02025 (Mar. 24, 2020) ( here ), a case in which the Court was asked by the United States Court of Appeals for the Third Circuit to decide whether an insurance company’s alleged misstatements and omissions about its insurance plan, made to over 600,000 current and former New York City employees and retirees, sufficed to satisfy the consumer-oriented element of a claim under General Business Law §§ 349 and 350. As discussed below, the Court found that the claim did not involve a contract dispute between the parties over policy coverage; instead, the claim concerned consumer-oriented conduct. Consequently, the Court answered the certified questions in the affirmative. A Primer on General Business Law §§ 349 and 350 In 1970, the New York Legislature enacted General Business Law § 349, which made unlawful any “ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” GBL § 349 (a). Seven years earlier, the New York Legislature enacted GBL § 350, which made unlawful “ alse advertising in the conduct of any business, trade or commerce or in the furnishing of any service in this state.” These consumer protection statutes were enacted to “strik down all forms of deceptive acts and practices.” Slip Op. at *6 (internal quotation marks and citations omitted).  Initially, only the Attorney General could sue to enforce these laws. However, the Legislature subsequently amended both Section 349 and Section 350 to add a private right of action for “any person who has been injured by reason of any violation of th section ,” allowing injunctive relief and damages, as well as reasonable attorney’s fees. GBL § 349(h) and GBL § 350-e(3). To state a claim under GBL §§ 349 and 350, “a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive act or practice. Koch v. Acker, Merrall & Condit Co. , 18 N.Y.3d 940, 941 (2012); see Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 324 n.1 (2002). A claim under these statutes does not lie when the plaintiff alleges only “a private contract dispute over policy coverage and the processing of a claim which is unique to the[] parties, not conduct which affects the consuming public at large.” New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 321 (1995) (internal quotation marks omitted). Thus, a plaintiff claiming the benefit of either Section 349 or Section 350 “must charge conduct of the defendant that is consumer-oriented” or, stated differently, “demonstrate that the acts or practices have a broader impact on consumers at large.” Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995).  Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003) (citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999)). In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” Gaidon , 94 N.Y.2d at 343. For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). In addition, a plaintiff must prove “actual” injury to recover under the statutes, though not necessarily pecuniary harm. Stuntman , 95 N.Y.2d at 29; Oswego , 85 N.Y.2d at 26. And, the plaintiff must prove the deceptive act caused the injury. Id. ; Oswego , 85 N.Y.2d at 26. Plavin v. Group Health Inc. Background Plaintiff is a retired New York City police officer, who received health insurance coverage through the health care plan of defendant Group Health Incorporated (“GHI”). GHI offered City employees a “Comprehensive Benefits Plan,” which provided in-network coverage and partial reimbursement for out-of-network services (the “GHI Plan” or “Plan”). Plaintiff alleged that the GHI Plan was among 11 plans the City offered to approximately 600,000 employees and retirees on an annual or biannual basis. The terms of these plans were negotiated between the City, the insurance vendors, and the New York City Municipal Labor Committee, which was comprised of various employee unions.  Prior to an open enrollment period, the New York City Office of Labor Relations, on behalf of the City, assembled and distributed to employees and retirees a summary program description, which contained health plan descriptions prepared by each insurer. Plaintiff alleged that this document was the only one distributed to City employees and retirees regarding the GHI Plan before they were required to select a plan. In addition, GHI created its own online summary of benefits and coverage, which was available on its website. If an employee or retiree selected the GHI Plan, the City sponsored and paid the entire cost of the premiums therefor. Plaintiff alleged that the summary program description and online summary (collectively, the “summary materials”) represented the GHI Plan as furnishing its members with extensive out-of-network coverage subject to deductibles and coinsurance, and “the freedom to choose any provider worldwide.” Further, the summary materials stated that the GHI Plan contained “additional Catastrophic Coverage” for “100% of the Catastrophic Allowed Charge as determined by GHI” if a member’s out-of-network expenses for predominantly in-hospital care exceeded $1,500, and also represented that the Plan offered its members an optional rider, at an additional cost, that would provide enhanced coverage for certain services, increasing out-of-network reimbursements “on average, by 75%.”  Plaintiff further alleged that, beginning in 1984, he annually selected the GHI Plan and optional rider as his family’s health insurance plan. From 2014 through 2015, plaintiff’s wife received numerous medical services, which GHI determined were out-of-network. As a result, contrary to plaintiff’s expectations based on the summary materials provided or available to him, GHI covered only a modicum of the medical claims, leaving plaintiff responsible for payment of the balance.  The Federal Court Proceedings Plaintiff commenced the action in the United States District Court for the Middle District of Pennsylvania claiming, among other things, violations of GBL §§ 349 and 350 based on GHI’s allegedly misleading representations to City employees and retirees about the terms of its Plan. Plaintiff alleged that GHI made misleading statements and omissions in its summary materials regarding the Plan’s out-of-network reimbursement rates, how often the reimbursement rate schedule was updated, the catastrophic coverage reimbursement rate, and the breadth of coverage of the optional rider – in order to induce plaintiff, and others similarly situated, to select the GHI Plan.  GHI moved to dismiss the complaint for failure to state a claim. The District Court concluded that plaintiff did not adequately allege that, among other things, GHI’s conduct was consumer oriented. See 323 F. Supp. 3d 684, 695-698 (M.D. Pa. 2018).  Initially, the court rejected plaintiff’s argument that GHI’s alleged misconduct was consumer-oriented simply because it affected numerous City employees and retirees, reasoning that “the fact that a large class of members is affected not automatically transform the plan into something that has a broader impact on consumers at large.” Id. at 696 (quoting Oswego , 85 N.Y.2d at 25 (internal quotations omitted)). The court opined that “the alleged deception out of a private contract negotiated between” GHI and the City – “two sophisticated institutions” ( id. ) – and, comparing the case to NYU , supra. , concluded that plaintiff was “not a mere consumer of the public” because the City had contracted with GHI on behalf of its employees and, therefore, “ he contract was aimed to benefit only a circumscribed class of individuals.” Id. Thus, the court held that “ ecause there is no indication in the omplaint that the plan would have been available to anyone who was not an employee of the City of New York, and because it is undisputed that receipt of benefits from arises from a contractual policy, claims fail to plead consumer-oriented conduct.” Id. at 698. Plaintiff appealed. The Third Circuit determined that the dispositive issue was whether GHI had engaged in consumer-oriented conduct. Because, in its view, existing New York law did not clearly dictate the outcome of the issue, the Third Circuit certified the following questions: Where a contract of insurance is negotiated by sophisticated parties such as the City of New York and an insurance company, and where hundreds of thousands of City employees and retirees are third-party beneficiaries of that contract, and where the insurance company’s policy created pursuant to the contract is one of several health insurance policies from which employees and retirees can select, has the insurance company engaged in consumer-oriented conduct under the GBL when:   (1) The insurance company drafts summary plan information that allegedly contains materially misleading misrepresentations and/or omissions about the coverage and benefits of the insurance policy and sends these summary materials to the City, and the City does not check or edit these materials before sending them on to the City employees and retirees; OR  (2) The insurance company directs City employees and retirees to information on the insurance company’s website that allegedly contains materially misleading misrepresentations and/or omissions about the coverage and benefits of the insurance policy? The Court accepted the foregoing questions (33 N.Y.3d 998 (2019), and, as noted, answered them in the affirmative. The Court’s Decision The Court noted that although there was an underlying insurance contract negotiated by sophisticated entities neither plaintiff, nor any of the other hundreds of thousands of employees and retirees who participated in the GHI Plan, were participants in its negotiation. Slip Op. at *8. “ ritically,” said the Court, “that negotiation was followed by an open enrollment period, which exposed City employees and retirees to marketing resembling a traditional consumer sales environment.” Id. It was during the enrollment period that City employees and retirees were exposed to GHI’s alleged misstatements and omissions. Id. Thus, “it was the allegedly misleading summary materials” that plaintiff complained about, “not the contract between the City and GHI, which purportedly was never provided to City employees and retirees.” Id. The Court explained that the conduct of which plaintiff complained was the type that the GBL was “intended to address.” Plaintiff alleged that GHI created misleading benefit and coverage summaries, which it published on its website and caused to be distributed by the City to all similarly situated employees and retirees, and that this marketing was critical to GHI’s effort to induce City employees and retirees to select its Plan. Plaintiff asserted that GHI collected premiums only for its Plan, and it was, therefore, in GHI's financial interest for individual City employees and retirees to choose its Plan over the other available options. Simply put, plaintiff alleged that GHI was incentivized by the competition created during the open enrollment period to leverage its information advantage in order to gain the business of the employees and retirees over other insurers. In that manner, the open enrollment period resembles the sort of sales marketplace – characterized by groups of similarly-situated consumers subjected to the competitive tactics of a relatively more powerful business – that GBL claims were intended to address. Id. To underscore the consumer-oriented nature of the complaint, the Court explained that plaintiff’s claims “arose from the allegedly deceptive marketing materials distributed to plaintiff and the other City employees in order to induce them to select the GHI Plan over the other options available to them, as well as to pay additional premiums for the allegedly worthless out-of-network rider.” Id. at *8-*9. Such information, disseminated to hundreds of thousands of City employees “in order to solicit their selection of its plan ‘is precisely the sort of consumer-oriented conduct that is targeted by General Business Law §§ 349 and 350.’” Id. at *9 (quoting Karlin , 93 N.Y.2d at 293). Thus, “ nder these circumstances, ‘plaintiff[] ha satisfied the threshold test’ by alleging that marketing actions ‘are consumer-oriented in the sense that they potentially affect similarly situated consumers.’” Id. (quoting Oswego , 85 NY2d at 26-27.  Finally, and perhaps most significantly, the Court explained that “the General Business Law provisions at issue do not impose a requirement that consumer-oriented conduct be directed to all members of the public.” Slip Op. at *9 (orig’l emphasis). Indeed, said the Court, “we have never implied that such a requirement exists.” Id. It is enough that the conduct reach consumers as whole.  Takeaway GBL §§ 349 and 350 are broad in scope and prohibit deceptive and misleading business practices. To state a cognizable claim under Section 349 and Section 350, a plaintiff must identify consumer-oriented misconduct, which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages. In many cases, the plaintiff fails to satisfy one or more of the elements of the claim because the conduct is not deceptive or not recurring. In Plavin , however, the claim at issue had all the attributes of a GBL §§ 349 and 350 cause of action: it had deceptive conduct, which was consumer oriented. Plavin is important because of its clarification about who must be the target of consumer-oriented conduct. In this regard, the Court made it clear that “the General Business Law provisions at issue do not impose a requirement that consumer-oriented conduct be directed to all members of the public.” Slip Op. at *9 (orig’l emphasis). It is sufficient for the conduct to be directed to some members of the public, or, as in Plavin , a discrete group of consumers ( i.e. , 600,000 employees and retirees of the City of New York). See Oswego , 85 N.Y.2d at 25 (the conduct must have an “impact on consumers at large.”).

Sometimes this Blog gets to address numerous issues in its examination of a case. In MDK Hijos Trust v. Nordlicht , 2020 N.Y. Slip Op. 30793(U) (Sup. Ct., N.Y. County Mar. 10, 2020) ( here ), we get the opportunity to do so again. MDK Hijos Trust v. Nordlicht Background Plaintiff, MDK Hijos Trust (“Plaintiff” or “MDK”), sought damages for, among other claims, fraudulent inducement and breach of fiduciary duty in connection with investments by the Katz family (Marcos Katz and Adela Kenner de Katz) in Platinum Partners Value Arbitrage Fund International Ltd. (“PPVA” or “Platinum”). PPVA was managed by Platinum Management LLC (“Management”), whose principals were defendants Mark Nordlicht (“Nordlicht”), Murray Huberfeld (“Huberfeld”), David Bodner (“Bodner”), Bernard Fuchs (“Fuchs”) and Gilad Kalter (“Kalter” and together with Nordlicht, Huberfeld, Bodner and Fuchs, “Defendants”). MDK is a trust and the assignee of the claims of the Katz family, which invested approximately $39 million in PPVA. Though managed by Management, PPVA was managed by Huberfeld, Bodner and Nordlicht, who were the alleged “primary principals and decision-makers” of Management.  According to Plaintiff, Defendants repeatedly represented that PPVA had more than a decade of positive returns, averaging 17% between 2003 and 2015, and that PPVA was liquid, thereby permitting investors to redeem their investments on 60 or 90 days’ notice and receive payment of 90% of their redemption requests within 30 days thereafter. As a result, between 2006 and May 1, 2015, the Katz family invested approximately $39.9 million in PPVA. Plaintiff alleged that unbeknownst to investors, PPVA faced a material liquidity crisis. According to Plaintiff, PPVA’s concentration of illiquid assets made it increasingly difficult for Management to pay investor redemptions as requested. Indeed, said Plaintiff, as early as November 2012, redemption requests overwhelmed PPVA, a phenomenon Defendants described as “daunting” and “relentless.” Nevertheless, claimed Plaintiff, Defendants kept investors in the dark about PPVA’s liquidity crisis, while Management continued to market the fund’s flexible redemption terms even as it struggled to pay redemptions. According to Plaintiff, Defendants repeatedly represented that PPVA was liquid, had sufficient assets to permit withdrawals and was structurally sound. Plaintiffs alleged that Defendants knew these statements were false, given the extent of PPVA’s illiquidity problems and the amount of redemption requests, which far exceeded PPVA’s overstated assets. In June 2016, the United States Attorney’s Office for the United States District Court for the Southern District of New York brought criminal charges against Huberfeld in connection with a bribery scheme in which he was alleged to have paid “kickbacks” to a union official to obtain the union’s retirement fund investments in PPVA when it was experiencing liquidity problems. Nordlicht and other members of Management were indicted for fraud, and the SEC sued Management, Nordlicht and others for violating the federal securities laws.  The Complaint alleged that prior to June 2016, the Katzes were unaware and could not have been aware that Defendants, Management and PPVA were part of a fraudulent scheme, and that Defendants’ statements were knowingly false, given their positions within Management and PPVA and their access to inside information. Plaintiff alleged that it was owed at least $39 million. Each of the Defendants moved to dismiss, among other claims, the breach of fiduciary duty and fraudulent inducement causes of action. The Court denied the motions. The Court’s Decision The Breach of Fiduciary Duty Claim To state a claim for breach of fiduciary duty, a plaintiff must allege the existence of a fiduciary duty owed by the defendant, a breach of that duty and resulting damages. Jones v. Voskresenskaya , 125 A.D.3d 532, 533 (1st Dept. 2015). Defendants claimed that Plaintiff failed to satisfy the first element of the claim, arguing that a fiduciary duty “will not be found to exist where the complaint only alleges an arms-length business relationship involving sophisticated business people or where the parties are adversaries,” or where the gravamen of the claim is “advice alone”. EBC I, Inc. v. Goldman Sachs & Co. , 91 A.D.3d 211, 214-215 (1st Dept. 2011). Defendants (other than Fuchs (the “Other Defendants”)) also contended that the Complaint failed to allege sufficient facts to show that each of them was a fiduciary to the Katzes; that even though Management was a registered investment advisor, there were no allegations that each of them served as an advisor to the Katzes; that a fiduciary duty cannot be imposed unilaterally; that the losses sustained by the Katzes were due to the underperformance of their investments, which is inadequate to sustain a breach of fiduciary duty claim; and that MDK failed to plead the claim with specificity as required by CPLR § 3016(b). The Court found Defendants’ arguments and reliance on EBC to be “unpersuasive”. Slip Op. at *12. The Court explained that “until the lawsuit was filed, the Katzes and Fuchs were not adversaries, and Fuchs not allege otherwise.” Id. More significantly, noted the Court, there was no fiduciary relationship in EBC – the case involved an underwriter and an issuer of stock working at arm’s length; no fiduciary duty arose from “the underwriting agreement alone”. Id. (citing EBC , 91 A.D.3d at 214). By contrast, observed the Court, a fiduciary relationship existed between the Katzes and Defendants due to Defendants’ failure “to disclose to the Katzes that PPVA had liquidity issues and that the value of PPVA’s assets were grossly overstated,” and Defendants’ “superior expertise or knowledge regarding the operations of Management and PPVA,” upon which “the Katzes relied … when making their investments.” Id. at **12-13. In other words, held the Court, “the breach of fiduciary duty claim not based on a written agreement with Defendants.” Id. at *12. Thus, concluded the Court, “ EBC’s holding and rationale” was “inapplicable”. Id. The Fraudulent Inducement Claim To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraudulent inducement must satisfy each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to satisfy any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). In addition, the allegations must be stated with particularity to satisfy CPLR § 3016(b). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016(b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Fuchs argued that the fraudulent inducement claim should be dismissed because it was based on “information and belief” and otherwise failed to allege that Defendants knew their statements were false when made and intended to induce the Katzes to invest and keep such investments in PPVA. The Court found these arguments to be “unavailing”. Slip Op. at *14.  The Court explained that “CPLR 3016 (b) simply require that a complaint allege ‘the basic facts’ to establish a fraud claim, which is met when the alleged facts are ‘sufficient to permit a reasonable inference of the alleged conduct.’” Id. (citing Sargiss v. Magarelli , 12 N.Y.3d 527, 530-531 (2009), quoting Pludeman , 10 N.Y.3d at 491-492). Notably, the Court warned that the particularity requirement “should not be confused with unassailable proof of fraud.” Id. (citing id. ) Against these principles, the Court found that the Complaint contained a rational basis for “inferring that the alleged misrepresentation was knowingly made because allege that Defendants, including Fuchs, made misrepresentations when PPVA was in fact suffering a liquidity crisis and was unable to pay redemptions.” Id. (citing Houbigant, Inc. v. Deloitte & Touche, LLP , 303 A.D.2d 92, 98 (1st Dept. 2003) (complaint did not need not to prove scienter; sufficient that it contained “some rational basis for inferring that the alleged misrepresentation was knowingly made”)). The Court rejected Defendants’ argument that Plaintiff failed to plead justifiable reliance because it could have discovered the truth in connection with the many roadblocks encountered in trying to redeem its investment. Slip Op. at *15, *27. The Court held that the “argument insufficient.” Slip Op. at *15. The Court reasoned that “ hile it is true that a heightened degree of diligence is needed when a party to whom a misrepresentation is made has hints of its falsity, ‘the question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.’” Id. (quoting ACA Fin. Guar. , 25 N.Y.3d at 1045, and citing Allenby, LLC v. Credit Suisse, AG , 134 A.D.3d 577, 580-581 (1st Dept. 2015)). The Other Defendants argued that these claims should be dismissed because they were actually breach of contract claims. In response, Plaintiff argued that it was not seeking contract damages because the Other Defendants “were not parties to any enforcement contract with the Katzes.” Slip Op. at *29. The Court agreed with Plaintiff. In doing so, the Court explained that the PPVA was not a defendant in the action and no breach of contract claim was asserted against it or the Other Defendants. Therefore, concluded the Court, “the fraud and misrepresentation claims not ‘duplicative’ of the non-asserted breach of contract claim.” Id. at **29-30. In addition, the Court held that Defendants as principals and officers of a corporation or other business entity could be held personally liable for their own fraudulent misconduct or other tortious acts. Id. at *30 (citing Espinosa v. Rand , 24 A.D.3d 102, 102 (1st Dept. 2005) (corporate officer who participated in the commission of a tort may be held individually liable regardless of whether he acted on behalf of the corporation and regardless of whether the corporate veil is pierced); American Express Travel Related Servs. Co. v. North Atl. Resources, Inc. , 261 A.D.2d 310, 311 (1st Dept. 1999) (same)).  Finally, the Court rejected Bodner’s argument that the Complaint failed to meet the particularity requirement of CPLR § 3016(b), because the Complaint suffered from “group pleading”. In that regard, the Court noted that group pleading “is permissible in some circumstances, and that CPLR 3016 (b) only requires that a complaint alleges the ‘basic facts,’ which is met when the alleged facts are ‘sufficient to permit’ a reasonable inference of the alleged conduct.” Slip Op. at *30 (citing, among other cases, Pludeman ).  The Statute of Limitations and The Continuing Wrong Doctrine  The statute of limitations for a fraudulent inducement claim is the greater of (a) six years from the date when the cause of action accrued or (b) two years from the time plaintiff discovered the fraud or could with reasonable diligence have discovered the fraud. CPLR § 213(8). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). The two-year discovery rule requires an inquiry into “whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred.” Kaufman v. Cohen , 307 A.D.2d 113, 123 (1st Dept. 2003) (internal quotation marks and citation omitted); see also Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Eberle , 3 N.Y.2d at 326. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, “where an allegation of fraud is essential to a breach of fiduciary duty claim, courts a six-year statute of limitations under CPLR 213 (8).” IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009). Huberfeld argued that, of the $39 million invested by the Katzes, $26.5 million was invested prior to May 1, 2011 (allegedly induced by fraud and misrepresentation). Thus, the claims related to the $26.5 million portion of the investments were time-barred as they accrued more than six years before commencement of the action in September 2018. Huberfeld also argued that Plaintiff’s fraudulent inducement claim was time-barred under the discovery rule. In that regard, Huberfeld maintained that the remaining investments were made between August 2014 and May 2015, more than three years before commencement of the action and more than two years after the fraudulent scheme was allegedly discovered by the Katzes in June 2016, when the government brought criminal charges against Nordlicht and other members of Management in connection with the bribery scheme and the securities laws violation.  In opposition, Plaintiff contended that the continuing wrong doctrine applied to toll the statute of limitations. Plaintiff maintained that, because the last actionable act occurred in May 2016, when the Other Defendants met with the Katzes and misrepresented the liquidity of PPVA and its ability to pay redemption requests, its fraudulent inducement and misrepresentation claims accrued within six years and, therefore, were timely.  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).  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. 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). The Court agreed with Plaintiff, finding that subsequent to May 2011 (after the Katzes made their $26.5 million investment), “the Other Defendants continued to defraud the Katzes by, among other things, misrepresenting the asset values of PPVA, concealing or failing to disclose its liquidity problems, and misleadingly representing that PPVA had sufficient assets to honor their redemption requests.” Slip Op. at *24. The Court explained that “ lthough the continuing wrong doctrine must be narrowly applied, the Complaint adequately alleges that the Other Defendants continued to defraud the Katzes and made misrepresentations to them, which caused them to maintain their investment in PPVA, invest more money, and sustain additional losses.” Id. “Because these claims are premised upon ‘continuing unlawful acts and not on the continuing effects of earlier unlawful conduct,’” said the Court, “the continuing wrong doctrine is applicable to claims that accrued earlier in May 2011, so long as the Complaint also adequately alleges that the ‘last actionable act’ of the Other Defendants occurred in May 2016, as Plaintiff contends.” Id. The Court also rejected Huberfeld’s reliance on the discovery rule, holding that “even though the Katzes admittedly discovered the alleged fraud in June 2016, more than two years before this action was commenced, that allegation has no adverse effect because the limitations period is the greater of six years from when the claim accrued or two years from when the fraud was discovered.” Id. Finally, the Court held that “the fraud claim essential to the breach of fiduciary duty claim,” and, therefore, the six-year limitations period was applicable to the breach of fiduciary duty claim. Id. at *25. As such, the claim was “timely, even in the context of a May 1, 2015 claim accrual date.…” Id. Accordingly, the Court concluded that the fraudulent inducement, misrepresentation and breach of fiduciary duty claims were not time-barred. Takeaway As the title of this post indicates, MDK involved several claims and related principles of law. Aside from the number of issues addressed by the Court, MDK reveals a reluctance by the Court to dismiss a fraud- and fiduciary duty-based complaint at the early stages of the litigation – presumably because many of the issues are traditionally ones that are infused with factual disputes that are not ripe for determination on a pre-answer motion to dismiss. This reluctance is consistent with the New York Court of Appeals’ warning that courts should not, in determining a motion to dismiss, consider whether the plaintiff can “ultimately establish its allegations.” J P. Morgan Sec. Inc. v Vigilant Ins. Co. , 21 N.Y.3d 324, 334 (2013) (internal quotation marks and citation omitted).