“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac , 27 N.Y.3d at 624 (citing Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac , 27 N.Y.3d at 624 (quoting Matter of Jacqueline F. , 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac , 27 N.Y.3d at 624. (quoting Rossi v Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Where the communications are made in the presence of third parties, whose presence is known to the client, the communications are not privileged from disclosure because they are no longer deemed to be confidential. Ambac , 27 N.Y.3d at 624 (citations omitted). Similarly, communications lose their protection where a communication is made in confidence but subsequently revealed to a third party. Id . As the Court of Appeals has held: “A lack of confidentiality and subsequent disclosure also destroy the privilege as a matter of fairness: ‘when conduct touches a certain point of disclosure, fairness requires that the privilege shall cease whether he intended that result or not.’” Id . Attorney-Client Privilege and Corporations “Corporations, as other clients, may avail themselves of the attorney-client privilege for confidential communications with attorneys relating to their legal matters,” whether that attorney is in-house or outside counsel. Rossi , 73 N.Y.2d at 592. The privilege thus applies to communications “between a corporation’s employees and the corporation’s in-house” or outside counsel “for the purpose of providing legal advice to the corporation.” Stock v. Schnader Harrison Segal & Lewis LLP , 142 A.D.3d 210, 216 (1st Dept. 2016). In Frank v. Morgans Hotel Grp. Mgt. LLC , 2020 NY Slip Op 20010 (Sup. Ct., N.Y. County Jan. 13, 2020) ( here ), Justice Gerald Lebovits addressed the question whether the privilege applies to communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis. As discussed below, Justice Lebovits held that it does. The Functional-Equivalent Doctrine Under the functional-equivalent doctrine, the attorney-client privilege will shield otherwise-qualifying communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis, where the individual is acting as a corporate employee rather than a fully independent contractor. See Pecile v. Titan Capital Grp. , 119 A.D.3d 446, 447 (1st Dept. 2014), citing Matter of Copper Mkt. Antitrust Litig. , 200 F.R.D 213, 219-219 (S.D.N.Y. 2001). Since the functional-equivalent doctrine expands the scope of the privilege, courts narrowly apply it. In applying the doctrine, the courts consider whether a consultant or other contractor has in practice “assum the functions and duties of full-time employee” and has been “so thoroughly integrated” into the corporation’s structure that he or she “is a de facto employee of the company.” Export-Import Bank of the U.S. v. Asia Pulp & Paper Co. , 232 F.R.D. 103, 113 (S.D.N.Y. 2005); Matter of Copper Mkt. Antitrust Litig. , 200 F.R.D. 213, 219 (S.D.N.Y. 2001) (holding that a contractor should be treated as the functional equivalent of a division of the client corporation because the contractor “was, essentially, incorporated into to perform a corporate function that was necessary in the context” of the corporation’s affairs at the relevant time). In determining whether to apply the doctrine, courts look at “whether the consultant had primary responsibility for a key corporate job” and could make decisions on the corporation’s behalf, whether the consultant enjoyed “a continuous and close working relationship” with “the company’s principals on matters critical to the company’s position in litigation,” and whether “the consultant is likely to possess information possessed by no one else at the company.” Asia Pulp & Paper , 232 F.R.D. at 113. Frank v. Morgans Hotel Group Management LLC Background Frank concerned a discovery dispute in a personal injury action in which the plaintiff, Ilana Frank (“Frank”), alleged that while a patron of the bar at a hotel owned and operated by the defendants (collectively, “Morgans”), she fell and seriously injured her foot due to unsafe conditions on the premises. In discovery, Morgans produced non-party Steven Benjamin (“Benjamin”) for deposition as a person with knowledge of the circumstances of the accident. At the time of Frank’s fall in 2015, Morgans employed Benjamin as its director of risk management. Benjamin left Morgans and thereafter functioned as Morgans’ director of risk management on a contract basis. During Benjamin’s deposition, Frank’s counsel sought to question him about, among other things, (i) communications between Benjamin and Morgans’ outside counsel, and (ii) a conversation that Benjamin had with another Morgans employee, Schantel Mansfield (“Mansfield”), in a three-way conference call among Benjamin, Mansfield, and outside counsel. In each instance, counsel for Morgans objected and directed Benjamin not to answer the questions, asserting that Benjamin was shielded by the attorney-client privilege as the functional equivalent of a Morgans employee. Frank requested a judicial determination as to the validity of Morgans’ assertion of the attorney-client privilege over the disputed conversations involving Benjamin. Morgans did not object to Frank’s request for a privilege determination; it merely argued that its counsel’s assertions of privilege were proper. The Court’s Decision Justice Lebovits concluded that Benjamin qualified as the functional equivalent of a Morgans employee. Slip Op. at *2. The Court noted that the overlap between Benjamin’s duties and responsibilities as an employee and as a consultant of Morgans were material and supportive of its conclusion. Benjamin was previously employed by Morgans as its director of risk management from 2007 to 2018; after his position with the corporation was eliminated, he was immediately retained as a consultant to perform many of the same duties, retaining the title of director of risk management. Benjamin has a Morgans email address, a Morgans phone number, and access to a Morgans file server. In his current capacity as a consultant serving as director of risk management for Morgans, Benjamin retains responsibility for performing significant corporate functions: among other things, managing Morgans’ insurance programs nationwide (including negotiating the terms and conditions of Morgans’ various insurance policies), and working with Morgans’ financial staff regarding insurance-related budget and loss-forecasting issues. Benjamin is the only individual performing the duties and functions of the director of risk management role for Morgans, and is the only individual at Morgans with the requisite knowledge and experience of its insurance programs and the overall landscape of claims and litigation brought against it. Benjamin also continues to have decision-making authority on corporate matters: With respect to suits brought against Morgans, Benjamin is responsible for assigning defense counsel to represent Morgans, and has authority to make settlement offers within certain insurance policy limits. Benjamin reports directly to a corporate principal, namely Morgans’ general counsel; and he has a direct line of communication with Morgans’ chief operating officer. Id . (footnotes and citations to the record omitted). Against these facts, the Court found that, even though Benjamin was formally “serving as a corporate consultant rather than an employee, in practice he performing ‘the functions and duties of full-time employee’ while being ‘thoroughly integrated’ into the corporation’s structure and staff.” Id ., citing Asia Pulp & Paper , 232 F.R.D. at 113. Consequently, “to treat Benjamin as equivalent to an independent third party for privilege purposes, rather than as the functional equivalent of a corporate employee, would exalt form over substance,” said the Court. Id . The Court therefore held that the conversations between Benjamin and counsel for Morgans were “shielded by Morgans’ attorney-client privilege.” Id . The Court rejected Frank’s argument that Benjamin was not the functional equivalent of an employee because, as a consultant, he was likely to possess information that no one else at the company would be privy to. Id . Justice Lebovits noted that under those circumstances, the consultant would be “more likely to be integrated within the corporation’s structure and acting on behalf of the corporation rather than as an ‘outsider.’” Id . (citation omitted). Notwithstanding, the Court noted that in the case before it, there were other individuals besides Benjamin who would be likely to have knowledge of the details of an accident irrespective of whether Benjamin was acting as an independent third party or as a de facto Morgans employee. Id .  “That fact, without more,” said the Court, “says little about whether Benjamin is sufficiently integrated into Morgans’ corporate structure to be the functional equivalent of a Morgans employee.” Id . The Court also addressed whether Benjamin’s assertion of privilege over the details of what he discussed with Mansfield during their conference call with Morgans’ counsel was privileged. After noting the difference between asking for facts and asking about discussions with counsel, the Court found that “counsel for Morgans expressly represented at the deposition that the call ‘was a legal conversation regarding the preparation for this case wherein we discussed legal theory, strategy, et cetera, of the sort that is protected by attorney-client privilege.’” Id . at *3. The Court further noted that “Frank provide no basis … to reject that characterization, or to believe that Benjamin and Mansfield merely engaged in a conversation about the factual background of the case with counsel for Morgans silently on the line.” Id . (citations omitted). Therefore, held the Court, “ he call among Benjamin, Mansfield, and their counsel is … shielded by the attorney-client privilege, and counsel for Morgans properly directed Benjamin not to answer questions about what he had discussed with Mansfield during that call.” Id . Finally, the Court considered whether the attorney-client privilege shielded Benjamin’s conversation with his counsel during Benjamin’s deposition. The discussion occurred in connection with a photograph that Frank’s counsel produced during Benjamin’s deposition. Frank’s counsel asked Benjamin several questions about the substance of what Benjamin and his attorney had discussed during the deposition break—including whether the attorney had coached Benjamin about how to answer those very questions. Id . In response to the questions, Benjamin testified that his attorney had not asked him any questions about the photograph or coached him; but instead that he did not “know what this a picture of for sure,” and that he “ not comment on anything” relating to the photograph. Id . Morgans’ counsel also represented on the record that “the majority” of the break was spent by Benjamin conducting a private call unrelated to the action rather than “conferencing . . . regarding the photograph you produced.” Id . The Court held that “Frank provide no basis … to reject either Benjamin’s testimony about the deposition break or counsel for Morgans’ representations.” Id . Thus, the Court concluded “that Frank ha not established a basis to question Benjamin further on this topic.” Id . Takeaway The functional equivalent doctrine – an exception to the attorney-client privilege – originated in In re Bieter Co. , 16 F.3d 929, 933-34, 939-40 (8th Cir. 1994), where the Eighth Circuit held that an individual who aided a two-person company’s development of a parcel of land was functionally equivalent to a company employee where he assisted with the project from its inception and for several years thereafter; worked out of the company’s office; was the company’s sole representative at meetings with potential tenants and local officials; appeared at public hearings on the company’s behalf; and often spoke with the company’s counsel alone. See also United States v. Graf , 610 F.3d 1148, 1158-59 (9th Cir. 2010). Although several district courts within the Second Circuit have recognized the functional-equivalent doctrine as an exception to the protection of the attorney-client privilege, not all courts within the Circuit have embraced its application. Some district courts in the Circuit have questioned whether the Court of Appeals would adopt the doctrine given that it “has recognized very limited exceptions to privilege waiver.” Church & Dwight Co. v. SPD Swiss Precision Diagnostics, GmbH , 2014 WL 7238354, at *2 (S.D.N.Y. Dec. 19, 2014); In Re Restasis Antitrust Litig. , 352 F. Supp. 3d 207, 213 (E.D.N.Y. Jan. 17, 2019); Homeward Residential, Inc. v. Sand Canyon Corp. , 2017 WL 4676806, at *14 n.21 (S.D.N.Y. Oct. 17, 2017). In contrast, courts outside of the Second Circuit have embraced the doctrine, stating that the approach by the courts in the Second Circuit was too restrictive. E.g. , In re Flonase Antitrust Litig. , 879 F. Supp. 2d 454, 459-60 (E.D. Pa. 2012); Fed. Trade Comm’n v. GlaxoSmithKline , 294 F.3d 141, 148 (D.C. Cir. 2002). As a result, these courts have endorsed “a broad practical approach” to account for the realities of “‘today’s marketplace, where businesses frequently hire contractors and still expect to be able to seek legal advice.’” Flonase , 879 F. Supp. 2d at 459-60 (quoting US. ex rel. Fry v. Health All. of Greater Cincinnati , 2009 WL 5033940, at *4 n.1 (S.D. Ohio Dec. 11, 2009)). Regardless of the foregoing debate, as Frank shows, in New York State courts, the doctrine remains a viable exception to the waiver rules relating to the attorney-client privilege.

Ponzi schemes remain a familiar and unfortunate risk for investors. Because Ponzi schemes purport to offer high returns with little or no risk, and rely on inflated credentials of a financial professional, investors are attracted to the investment products these scammers offer. The most notorious Ponzi scheme in recent years was perpetrated by Bernie Madoff. In 2016, there were 59 Ponzi schemes uncovered in the United States, with losses totaling $2.4 billion, according to the Financial Times. See “Investors beware: the Ponzi scheme is thriving,” March 30, 2017 ( here ). In today’s post, this Blog looks at a Ponzi-like scheme in which the promoter, Kenneth D. Courtright, III (“Courtright”), the founder, co-owner, and Chairman of Todays Growth Consultant Inc. (“TGC”), allegedly promised more than 500 investors a minimum guaranteed rate of return, in perpetuity, on revenues generated by websites that TGC acquired or built for the investors and then developed, maintained, and hosted. On January 14, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it filed an emergency enforcement action and obtained a temporary restraining order and asset freeze against Courtright and TGC in connection with an alleged Ponzi-like scheme that raised at least $75 million from more than 500 investors throughout the United States and abroad. According to the SEC, from at least 2017 through at least October 2019, TGC, which also operated under the name “The Income Store,” and Courtright, promised investors an “endless minimum guaranteed rate of return on revenues generated by websites.” In exchange for an investor’s “upfront fee,” TGC claimed that it would either buy or build a website for the investor, and develop, market, and maintain the website. As alleged, TGC falsely promised that it would use investors’ funds exclusively for expenses related to the investor’s website. In reality, the SEC alleged, the sales were conducted through unregistered securities offerings (through Consulting Performance Agreements advertised via websites and radio ads), and TGC used new investors’ funds to pay investor returns, in Ponzi-like fashion, and to pay Courtright’s personal expenses, including his mortgage and private school tuitions for his family. In particular, according to the SEC complaint ( here ), TGC promised investors the larger of either 50% of their website revenues or a minimum annual guaranteed return (typically ranging from 13% to 20% of the initial investment amount) to be paid monthly, even if the investor’s website revenue was insufficient to pay that return. TGC allegedly backed its guarantee with various representations, including that it was in “‘satisfactory financial condition, solvent, able to pay its bills when due and financially able to perform its contractual duties’ and that it ‘debt-free ... with no accounts payable or loans outstanding.’” The SEC maintained, however, that TGC was not a successful business, was not in satisfactory financial condition, and was not able to perform its contractual duties under Consulting Performance Agreements. According to the Commission, from at least January 2017 through the present, investor websites generated materially less revenue than the guaranteed amounts specified in TGC’s Consulting Performance Agreements. From January 1, 2017 through at least October 31, 2019, alleged the SEC, investor websites generated approximately $9 million in advertising and product sales revenue. During the same period, TGC paid investors at least $30 million. The SEC contended that “TGC’s financial statements and bank records show that, in classic Ponzi-like fashion, from at least January 2017 into at least May 2019, TGC funded the gap between website revenues and its guaranteed investor payouts primarily through the offer and sale of Consulting Performance Agreements to new or repeat investors.” The SEC said that “ n December 13, 2019, TGC informed investors that it was putting a temporary moratorium on investor payouts due to cash flow problems.” Commenting on the SEC’s action, Antonia Chion, Associate Director in the SEC’s Division of Enforcement, said: “TGC and Courtright’s alleged fraud promised a guaranteed return when the company’s business model and financial condition could not possibly support it. To avoid further harm to investors and preserve the misused assets that have not already been dissipated, we have sought and obtained emergency relief.” The SEC filed its complaint in U.S. District Court for the Northern District of Illinois on December 27, 2019. The complaint was unsealed on January 14, 2020. The Commission charged Courtright and TGC with violating the antifraud and registration provisions of the federal securities laws and sought certain emergency relief as well as the imposition of permanent injunctions, return of ill-gotten gains with prejudgment interest, and civil penalties. On December 30, 2019, the Court issued a temporary restraining order, ordered an asset freeze and other emergency relief, and appointed a receiver for TGC ( here ). The Court case is captioned: SEC v. Todays Growth Consultant Inc., et al. , Civil Action No. 19-cv-08454 (N.D. Ill.).

On January 16, 2020, the Appellate Division, First Department recalled and vacated its September 17, 2019 decision in Ambac Assur. Corp. v Countrywide Home Loans Inc. , 175 A.D.3d 1156 (1st Dept. 2019), for the primary purpose of deciding whether the motion court properly denied Countrywide’s motion to strike Ambac’s jury demand on its fraudulent inducement cause of action. In its decision replacing the recalled and vacated decision (2020 N.Y. Slip Op. 00367 ( here )), the First Department affirmed the denial. In doing so, the Court left intact (with some minor edits) the ruling with regard to Ambac’s fraudulent inducement claim and whether it was duplicative of its contract claim. This Blog examined the Court’s September 2019 decision in the article, titled “ First Department Declines to Dismiss Fraudulent Inducement Claim as Duplicative of Contract Claim Based On Expert Analysis .” The Court’s revised decision was issued in response to Defendants’ motion to reargue and, in the alternative, leave to appeal to the Court of Appeals the issue whether, among others, “the Court should clarify that it did not decide whether Countrywide’s motion to strike Ambac’s jury demand should be granted, where that issue was not addressed in the Court’s opinion ….” In the September 17, 2019 Decision and Order, the Court affirmed, without discussion, the motion court’s order denying Countrywide’s motion to strike Ambac’s jury demand on the fraudulent inducement claim. [Ed. Note: On the issue this Blog examined – whether the damages sought by the fraudulent inducement claim were duplicative of the contract claim, thereby necessitating dismissal of the fraudulent inducement claim – the Court held that the motion court “correctly denied the Countrywide defendants’ motion” to dismiss the claim. This Court reasoned that “the Countrywide defendants not establish[ ], as a matter of law, that the damages sought in connection with the fraud claim the same as those sought in connection with the contract claims.” The Court noted that “at oral argument before the Court of Appeals,” Countrywide’s attorney recognized that “there was a different measure of damages for the fraud and contract claims” and that the “Court of Appeals itself” recognized that the measures of damages for the fraudulent inducement claim and the contract claims were separate and distinct. The Court further noted that Ambac’s damages expert, who was not challenged by the Countrywide defendants, “explain that the damages for the fraud and contract claims ‘qualitatively and quantitatively distinct.’” In this regard, the expert explained that “whereas the contract damages are calculated based on the terms of the contractual repurchase protocol, the fraud damages are determined based on the portion of Ambac’s claims payments that flow from nonconforming loans.” Thus, in light of the “expert affidavit already submitted,” and the motion to supplement that affidavit filed by Ambac, the Court held that “it premature to dismiss the fraud claim as duplicative.”] Since this Blog did not address the jury waiver issue in our examination of the case ( here ), a little context is provided below. Before the motion court, Countrywide contended that the agreements at issue each contained a jury waiver provision and, therefore, Ambac’s jury demand for its fraudulent inducement claim should be stricken. Countrywide argued that under established law contractual jury waivers are broad enough to cover fraud claims, including claims for fraudulent inducement, associated with the contract that contains the jury waiver. As noted by the motion court, this argument was rejected by the First Department in Ambac Assur. Corp. v. DLJ Mtge. Capital, Inc ., 102 A.D.3d 487 (1 st Dept 2013), which it noted was “strikingly similar to the instant action.” In DLJ Mtge. , the First Department held that the jury waiver provision in a contract Ambac entered into in connection with its insurance of an RMBS transaction did not deprive Ambac of its right to a jury trial on its fraudulent inducement claim related to the same RMBS transaction. The motion court observed that Ambac brought virtually identical claims against DLJ as it did against Countrywide and that the same arguments in support of the motion to strike Ambac’s jury demand were made in both cases. In DLJ , Ambac alleged that it was fraudulently induced by defendants to enter into an insurance agreement and provide financial guaranty insurance on certain RMBS transactions, and, in the alternative, that the defendants had breached representations and warranties in the parties’ insurance agreement. Ambac requested a jury trial on its fraudulent inducement claim, but not on its breach of contract claims. The defendants moved to strike Ambac’s jury demand, and the trial court granted that motion. Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc ., 33 Misc. 3d 1208(A) *14-15 (Sup. Ct., N.Y. County 2011). On appeal, the First Department reversed, holding that “the complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim. Thus, the provision of the agreement that waives the right to trial by jury does not apply.” Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc. , 102 A.D.3d at 487-88. Under New York law, a jury waiver clause does not apply where the party alleging fraudulent inducement challenges the validity of the contract. See , e.g. , Zahar CDO 2003-1 Ltd v. Xinhua Sports & Entertainment Ltd ., 158 A.D.3d 594, 594 (1st Dept 2018) (“a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission, may, under certain circumstances, still challenge the validity of the underlying agreement in a way that renders the contractual jury waiver provision in that agreement inapplicable to the fraudulent inducement cause of action”); China Dev. Indus. Bank v. Morgan Stanley & Co. Inc. , 86 A.D.3d 435, 436-43 7 (1st Dept. 2011) (holding that a challenge to the validity of the contract as a whole also invalidates the jury waiver clause in the contract). The motion court found that “as in DLJ , Ambac’s claim for fraudulent inducement challenges the validity of the parties’ I&I Agreements.” Therefore, the motion court concluded, “Ambac is entitled to a jury trial on its fraudulent inducement claim because that claim challenges the validity of the I&I Agreements that contain the jury waiver provision that Countrywide invokes.” In its revised decision and order, the First Department affirmed. Like the motion court, the First Department found that Ambac “repeatedly allege that the insurance agreements were obtained through various types of fraudulent conduct.” Slip Op. at *2. Thus, explained the Court, “because it is clear that Ambac’s primary claim is fraudulent inducement, the agreements’ provisions waiving the right to a jury trial do not apply.” Id . (citing MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC , 102 A.D.3d 488, 488 (1st Dept. 2013); and Ambac Assur. Corp. v DLJ Mtge. Capital , 102 A.D.3d at 487-488). Takeaway Under New York law, where a plaintiff challenges the validity of an agreement because of fraud, a provision waiving the right to a jury trial arising out of that agreement does not apply. See , e.g. , China Dev. Indus. Bank v. Morgan Stanley & Co. Inc. , 86 A.D.3d 435, 436-437 (1st Dept. 2011); Wells Fargo Bank, N.A. v. Stargate Films, Inc. , 18 A.D.3d 264 (1st Dept. 2005). Where fraudulent inducement is the plaintiff’s primary claim, “ t is of no consequence that the complaint does not contain the word ‘rescission’ or expressly state that it challenges the validity of the ... agreement.” Ambac Assur. Corp. v. DLJ Mtge. Capital , 102 A.D.3d at 488). Since Ambac’s primary claim was fraudulent inducement, the Ambac Court found that the jury waiver clause was no bar to a jury trial.

Commercial contracts typically include a liquidated damages provision that allows for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Courts will sustain such a provision if the liquidated amount is reasonably proportionate to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is grossly disproportionate to the probable loss, then the provision amounts to nothing more than a penalty and will not be enforced. Given the consequences of a liquidated damages clause, it is important to understand when and how such a clause will be enforced. A Primer on Liquidated Damages What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977) (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). Are Liquidated Damages Clauses Enforceable? If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). Although the party challenging the liquidated damages provision has the burden to prove that the liquidated damages are, in fact, an unenforceable penalty ( see JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005); Parker v. Parker , 163 A.D.3d 405, 406 (1st Dept. 2018)), the party seeking to enforce the provision must have been damaged in order for the provision to apply ( see , e.g. , J. Weinstein & Sons, Inc. v. City of New York , 264 App. Div. 398, 400 (1st Dept.) (“The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever.”), aff’d , 289 N.Y. 741 (1942)). The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. Truck Rent-A-Center , 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding , 4 N.Y.3d at 380. New York courts often strike liquidated damage clauses when they fail to meet the foregoing. See, e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from the time of the breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which the tenant forfeited $63,500 in deposits regardless of whether the tenant terminated agreement with several months’ notice). “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Rubin v. Napoli Bern Ripka Shkolnik, LLP On January 14, 2020, the Appellate Division, First Department addressed the enforceability of a liquidated damages clause in an employment agreement, holding that the defendants did not make a prima facie showing of entitlement to those damages. Rubin v. Napoli Bern Ripka Shkolnik, LLP , 2020 N.Y. Slip. Op. 00250 (1st Dept. Jan. 14, 2020) ( here ). Background Rubin involved claims brought by plaintiff, Denise A. Rubin (“Rubin”), for, among other things, employment discrimination and breach of contract against her former employers, defendants Napoli Bern Ripka Shkolnik, LLP, Worby Groner Edelman & Napoli Bern, LLP, and Napoli Bern & Associates, LLP (collectively, the “Law Firm Defendants” or the, “Law Firms”), and one of the Law Firms’ partners, defendant Paul J. Napoli (“Napoli”). Rubin was employed by one or more of the Law Firm Defendants, as an associate attorney and general counsel, from 2003 until September 2014. Rubin entered into a written employment agreement with the Law Firm Defendants in 2004 and again in 2007 (the “Employment Agreement”). The Employment Agreement remained in effect until her employment was terminated in September 2014. Rubin alleged that during her tenure at the Law Firms, she was paid less in base salary and bonuses than several less experienced and less skilled male attorneys, was denied a promotion to partner when less experienced and less skilled male attorneys were promoted, and was fired without cause when male attorneys with performance issues remained employed. Rubin also claimed that defendants agreed to but did not pay her a guaranteed bonus for matters on which she performed work. She further alleged that after Napoli fired her, she continued to work on the Law Firms’ matters, at the direction of another partner at the Law Firms, but was not paid for the work she performed from October 14, 2014 until early December 2014. Rubin commenced the action on April 24, 2015 (the “First Action”). The original complaint alleged four causes of action against all defendants: sex-based employment discrimination in violation of the New York City Human Rights Law (“NYCHRL”) (first); breach of contract for failure to pay a promised bonus (second); breach of contract for failure to pay salary or benefits from October 14, 2014 until early November 2014 (third); and quantum meruit, for work performed from October 14, 2014 until early December 2014 (fourth). The Law Firm Defendants answered the complaint in August 2015. Napoli filed a pre-answer motion to dismiss as against him in June 2015, and Rubin cross-moved for sanctions. Napoli’s motion was granted, and Rubin’s cross motion was denied on September 2, 2015. In October 2015, plaintiff commenced a new action against Napoli (“Second Action”), asserting one cause of action under the NYCHRL for employment discrimination. Napoli moved to dismiss the complaint on res judicata grounds. The court denied Napoli’s motion in February 2016 and consolidated the Second Action with the First Action. Between March 2016 and July 2016, the parties engaged in motion practice related to, among other things, Napoli’s filing of counterclaims. On September 29, 2016, the court permitted Napoli to amend his answer solely to the extent of permitting him to assert a counterclaim for tortious interference with contractual relations. Napoli appealed the denial of his motion to amend his answer with respect to his other counterclaims. The First Department affirmed the motion court’s decision on June 20, 2017. In May 2016, Napoli moved to seal documents submitted by Rubin with her papers in support of her motion to dismiss Napoli’s counterclaims. The motion was resolved by stipulation of the parties dated May 17, 2016. One week later, the Law Firm Defendants moved to compel Rubin to return all documents in her possession to which she had access during her employment with the Law Firms, including documents containing confidential, privileged, proprietary or sensitive information related to the Law Firms’ matters and clients. The parties resolved the motion pursuant to a stipulation on June 14, 2016. On August 18, 2016, the Law Firm Defendants moved for leave to amend their answer to include a counterclaim for breach of contract, alleging that Rubin breached the Employment Agreement by disclosing privileged and confidential information related to the Law Firms’ business and clients, in documents submitted to the court in support of her motion to dismiss Napoli’s counterclaims, and claiming they were entitled to liquidated damages under the contract. The motion court granted the motion on December 5, 2016. Rubin sought to amend her complaint to add a cause of action for retaliation against all defendants, based on their conduct during the litigations, and to add an additional cause of action for breach of contract against the Law Firm Defendants for failing to provide “tail” insurance. The Law Firm Defendants moved for summary judgment dismissing the second cause of action for breach of contract based on allegations that they failed to pay a non-discretionary bonus to Rubin; and granting judgment in their favor on their breach of contract counterclaim in the amount of $100,000 as liquidated damages. The motion court denied the Law Firm Defendants’ motion for summary judgment on their counterclaim for liquidated damages. Defendants claimed that Rubin violated the confidentiality provision of the Employment Agreement by filing four documents with the court during earlier motion practice in the case, and contended that they were entitled to $100,000 in liquidated damages, or $25,000 for each violation, under the agreement. Rubin claimed that she did not believe she was breaching the confidentiality provision of the Employment Agreement when she submitted the documents in question to the court. “Assuming, without deciding, that the four documents at issue, or any one of them, contained confidential ‘business information, trade secrets and other proprietary information and data’ subject to … the Employment Agreement,” the motion court held that it could not determine on the record before it that the disclosure of the information was done “knowingly, intentionally or willfully.”  Moreover, the motion court held that defendants failed to demonstrate what, if any, injury or loss they sustained as a result of the disclosure of the four documents at issue. The First Department’s Decision The First Department affirmed the denial of the Law Firm’s Defendants’ motion for liquidated damages. The Court held that although defendants demonstrated that Rubin triggered the liquidated damages provision of the Employment Agreement when she “knowingly, intentionally or willfully” filed the four documents in question, they “did not make a prima facie showing of entitlement to those damages.” The law firm defendants established as a matter of law that plaintiff violated the confidentiality provision of her employment agreement when she filed four confidential documents - three email chains discussing client and law firm business issues and a written audit report of the firms' policies and procedures prepared by another law firm - on NYSCEF (New York State Courts Electronic Filing), making them publicly available. At the time of the filing, plaintiff was an attorney licensed in New York and was represented by counsel. Accordingly, under the circumstances, her actions qualified as “knowing[], intentional[] or willful[]” and triggered the liquidated damages provision of her employment agreement. However, on this record, defendants did not make a prima facie showing of entitlement to those damages. Slip Op. at *1. The Court explained that “defendants did not identify … any damages that they sustained as a result of plaintiff’s breach of the agreement.” Id . at **1-2. Takeaway Liquidated damages clauses can be found in a wide array of commercial contracts, such as contracts for the sale of real property, commercial leases, employment contracts, and construction contracts. While such provisions are generally enforceable under New York law, Rubin shows that a necessary element of the claim for such damages is injury or damages. Without such proof, the claim for liquidated damages will be denied.

John loans Jane money to help Jane grow her company. Unfortunately, Jane fails to repay John as promised. John demands that the Jane repay him. In front of a group of people known to both John and Jane, John calls Jane a “scammer”, a “thief” and a “con artist.” John sues Jane for breach of contract and fraud. Jane counterclaims, alleging that John defamed her in front of their friends. The foregoing fact pattern is not uncommon. Prospective clients often tell lawyers of such incidents. Sometimes the alleged defamation is found in social media. Again, it is not uncommon for a person to post a negative comment about a business, claiming that he/she was scammed or taken by the business owner. The question for the lawyer is whether such name calling is actionable for purposes of a defamation claim? In Levy v. Nissani , 2020 N.Y. Slip Op. 00113 (2d Dept. Jan. 8, 2020) ( here ), the Court held that such statements were actionable as they were capable of being proven false. Defamation and the Difference Between a Statement of Fact and An Expression of Opinion The elements of a cause of action sounding in defamation are: (1) a false statement that tends to expose a person to public contempt, hatred, ridicule, aversion, or disgrace; (2) published without privilege or authorization to a third party; (3) amounting to fault as judged by, at a minimum, a negligence standard; and (4) either causing special harm or constituting defamation per se. See Kasavana v. Vela , 172 A.D.3d 1042, 1044 (2d Dept. May 15, 2019); Stone v. Bloomberg L.P. , 163 A.D.3d 1028, 1029 (2d Dept. 2018); Greenberg v. Spitzer , 155 A.D.3d 27, 41 (2d Dept. 2017). A statement is defamatory per se if it (1) charges the plaintiff with a serious crime; (2) tends to injure the plaintiff in her or his trade, business or profession; (3) imputes to the plaintiff a loathsome disease; or (4) imputes unchastity to a woman. Liberman v. Gelstein , 80 N.Y.2d 429, 435 (1992). Where the plaintiff is a public figure, the plaintiff is required to prove, by clear and convincing evidence, that the defamatory statements were published with actual malice . Mahoney v. Adirondack Publ. Co. , 71 N.Y.2d 31, 39 (1987). “Truth is an absolute defense to an action based on defamation.” Heins v. Board of Trustees of Inc. Vil. of Greenport , 237 A.D.2d 570, 571 (2d Dept. 1997); Goldberg v. Levine , 97 A.D.3d 725, 726 (2d Dept. 2012). Therefore, to satisfy the falsity element of a defamation claim, a plaintiff must allege that the complained of statement is “substantially false.” “If an allegedly defamatory statement is ‘substantially true,’ a claim of libel is ‘legally insufficient and … should dismissed.’” Biro v. Condé Nast , 883 F. Supp. 2d 441, 458 (S.D.N.Y. 2012) (ellipsis and alteration in original), quoting Guccione v. Hustler Mag., Inc. , 800 F.2d 298, 301 (2d Cir. 1986) (applying New York law). The test to determine whether a statement is substantially true “is whether as published would have a different effect on the mind of the reader from that which the pleaded truth would have produced.” Fleckenstein v. Friedman , 266 N.Y. 19, 23 (1934); Franklin v. Daily Holdings, Inc. , 135 A.D.3d 87, 94 (1st Dept. 2015). It is well settled “that an alleged libel is not actionable if the published statement could have produced no worse an effect on the mind of a reader than the truth pertinent to the allegation.” Guccione , 800 F.2d at 302, citing Fleckenstein , 266 N.Y. at 23. See also Fulani v. New York Times Co. , 260 A.D.2d 215 (1st Dept. 1999). “Since falsity is a necessary element of a defamation cause of action and only facts are capable of being proven false,” then “only statements alleging facts can properly be the subject of a defamation action.” Gross v. New York Times Co. , 82 N.Y.2d 146, 152-153 (1993), quoting 600 W. 115th St. Corp. v. Von Gutfeld , 80 N.Y.2d 130, 139 (2014). Thus, “ n expression of pure opinion is not actionable …, no matter how vituperative or unreasonable it may be.” Steinhilber v. Alphonse , 68 N.Y.2d 283, 289 (1986). “A pure opinion may take one of two forms. It may be a statement of opinion which is accompanied by a recitation of the facts upon which it is based, or it may be n opinion not accompanied by such a factual recitation so long as it does not imply that it is based upon undisclosed facts.” Davis v. Boeheim , 24 NY3d 262, 269 (2014) (internal quotation marks omitted). Conversely, “an opinion that implies that it is based upon facts which justify the opinion but are unknown to those reading or hearing it, is a mixed opinion and is actionable.” Id . (alterations and internal quotation marks omitted). The latter is actionable “not because they convey false opinions ‘but rather because a reasonable listener or reader would infer that the speaker knows certain facts, unknown to audience, which support opinion and are detrimental to the person whom .’” Gross , 82 N.Y.2d at 153-154, quoting Steinhilber , 68 N.Y.2d at 290. In distinguishing between facts and opinion, the court considers the following factors: (1) whether the specific language has a precise meaning that is readily understood, (2) whether the statements are capable of being proven true or false, and (3) whether the context in which the statement appears signals to readers or listeners that the statement is likely to be opinion, not fact. Silverman v. Daily News, L.P. , 129 A.D.3d 1054, 1055 (2d Dept. 2015); see also Thomas H. v. Paul B. , 18 N.Y.3d 580, 584 (2012); Mann , 10 N.Y.3d at 276; Steinhilber , 68 N.Y.2d at 292. “The essential task is to decide whether the words complained of, considered in the context of the entire communication and of the circumstances in which they were spoken or written, may be reasonably understood as implying the assertion of undisclosed facts justifying the opinion.” Steinhilber , 68 N.Y.2d at 290. “Whether a particular statement constitutes an opinion or an objective fact is a question of law.” Mann v. Abel , 10 N.Y.3d 271, 276 (2008). See also Kamchi v. Weissman , 125 A.D.3d 142, 157 (2d Dept. 2014); Abakporo v. Daily News , 102 A.D.3d 815, 816 (2d Dept. 2013). Levy v. Nissani Levy involved an action for breach of contract and fraud. The individual defendants counterclaimed, alleging causes of action sounding in defamation. The individual defendants, Ronen Nissani and David S. Nissani (together, the “Nissanis”), had a close social relationship with the plaintiff, Haim Levy (“levy”), for many years. The Nissanis own defendant, Davron Corp. (“Davron”), a jewelry business. From February 2015 through September 2015, Levy allegedly loaned the Nissanis large sums of money for the purpose of acquiring, enhancing, and reselling rare and valuable gems for a profit. When the Nissanis failed to repay Levy the full amount of the loans, plus his share of the profits within the timeframe promised, Levy began demanding that defendants repay him. On July 15, 2017, during a religious service, Levy allegedly called the Nissanis “scammers” or “con artists”, and warned those in attendance not to do business with them. Following services, Levy allegedly repeated the charge that the Nissanis were “thieves.”  As Ronen Nissani began to walk home from the service, Levy allegedly threatened him in the presence of others that he was “going to be on your ass until I get my money! I’m not going to leave you alone! You will see! You are thieves!” On July 20, 2017, Levy commenced the action to, inter alia , recover damages for breach of contract and fraud. In their answer, defendants asserted counterclaims for, inter alia , defamation per se. In the order appealed from, the motion court, inter alia , denied those branches of Levy’s motion which were for summary judgment dismissing the first and second counterclaims, concluding that the challenged statements constituted false assertions of fact rather than mere nonactionable expressions of opinion, and were defamatory per se because they tended to injure the Nissanis in their profession. Levy appealed. The Second Department’s Ruling The Court affirmed the motion court’s order. The Court held that Levy “failed to establish, prima facie, that these statements < i.e ., the nissanis were “scammers” or “con artists” and “thieves”> i.e., the nissanis were “scammers” or “con artists” and “thieves”> did not constitute false assertions of fact.” Slip Op. at *2. (citation omitted). Viewing the statements “in the context in which the allegedly defamatory statements were made,” the Court found that “a reasonable listener would likely understand those statements to imply that the Nissanis swindled the plaintiff out of money in connection with their business.” Id . (citation omitted). The Court explained that the “statements readily be proven true or false and, given the tone and overall context in which the statements were made, signaled to the average listener that the plaintiff was conveying facts about the Nissanis.” Id . (citations omitted). Notably, the Court held that “ ven if the challenged statements had not conveyed assertations of fact, they would nonetheless be actionable as mixed opinion, since a reasonable listener would have inferred that the plaintiff had knowledge of facts, unknown to the audience, which supported the assertions he made.” Id . (citation omitted). Finally, the Court held that Levy “failed to establish, prima facie, that the challenged statements were not defamatory per se, since they charged the Nissanis with the commission of a serious crime and would tend to injure the Nissanis in their business by imputing ‘fraud, dishonesty, misconduct, or unfitness in conducting profession.’” Id . (quoting Greenberg , 155 A.D.3d at 47 (internal quotation marks omitted). Accordingly, the Second Department affirmed the motion court’s “determination denying those branches of the plaintiff’s motion which were for summary judgment dismissing the first and second counterclaims….” Id . (citation omitted). Takeaway Although the alleged defamation in Levy occurred in a group setting, Levy teaches that the risks of defamation can extend beyond in-person meetings and gatherings. For example, in today’s digital world, people post reviews about a company’s products or services. It is fair to say that some posters do not think about the legal ramifications of their review. Indeed, there are many times when the review goes beyond a bad experience or a non-working product. Levy highlights the exposure one has when “name calling” becomes part of the review.

This Blog has addressed many issues related to mortgage foreclosure. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> ,  < HERE =">HERE"> , < HERE =">HERE"> and .  As to the issues relating to the standing of a lender to commence a foreclosure action, this Blog has noted that, in  general, a foreclosing mortgagee makes out its prima facie case by producing the “mortgage, the unpaid note, and evidence of default.”  Deutsche Bank Nat. Trust Co. v. Abdan , 131 A.D.3d 1001, 1002 (2 nd Dep’t 2015).  When standing is raised as a defense, plaintiff must also prove its standing to obtain relief from the court.  Nationstar Mortgage, LLC v. LaPorte , 162 A.D.3d 784, 785 (2 nd Dep’t 2018).  A plaintiff in a mortgage foreclosure action establishes its standing by demonstrating that it “is the holder or assignee of the underlying note at the time the action is commenced.”  Nationstar , 162 A.D.3d at 785.  A “holder” is “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”  N.Y.U.C.C 1-201 <21> ; Deutsche Bank Nat. Trust Co. v. Brewton , 142 A.D.3d at 684 (2 nd Dep’t 2016).  A written assignment of the note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation.  Brewton , 142 A.D.3d at 684 (citation omitted).  The mortgage, because it is merely security for the maker’s obligation to repay the underlying debt, passes with the debt as an inseparable incident when the note is assigned.  Brewton, 142 A.D.3d at 684 (citation omitted) .   Where, however, a note is “neither indorsed in blank nor specifically indorsed” to the person in physical possession of the note, that person cannot be “the lawful holder thereof for purposes of enforcing it.”  McCormack v. Maloney , 160 A.D.3d 1098, 1100 (3 rd Dep’t 2018) (citations omitted).  Therefore, such a person would not, inter alia , have standing to commence a mortgage foreclosure action.  McCormack , 160 A.D.3d at 1100 (citations omitted). Section 3-202 of New York’s Uniform Commercial Code governs the “negotiation” of a negotiable instrument, which is the “transfer of an instrument in such form that the transferee becomes the holder.”  UCC § 3-202(1) .  “If the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.” UCC § 3-202(1) .    "Holder status is established where the plaintiff possesses a note that, on its face or by allonge, contains an indorsement in blank or bears a special indorsement payable to the order of the plaintiff.”  Wells Fargo Bank, NA v. Ostiguy , 127 A.D.3d 1375, 1376 (3 rd Dep’t 2015) (citations omitted).  An allonge is an additional piece of paper “so firmly affixed as to become a part thereof.”  NY UCC § 3-202(2) ; U.S. Bank National Assoc. v. Moulton (2 nd Dep’t January 8, 2020).  An allonge may be needed where “there is insufficient space on the itself for the endorsements; as long as the allonge remains firmly affixed to the note, it becomes part of the note.”  Id. (citation omitted). The Moulton Court analyzed the importance of complying with the UCC’s rules concerning allonges.  The plaintiff in Moulton commenced a mortgage foreclosure action after defendants’ default on the underlying obligation.  In their answer, defendants, inter alia , raised plaintiff’s lack of standing to commence the action.  The motion court granted plaintiff’s motion for summary judgment, struck defendants’ answer and appointed a referee to compute the amounts due to plaintiff and denied the defendants’ cross-motion for summary judgment dismissing the complaint. On appeal, the Second Department reversed holding that plaintiff “failed to establish, prima facie, its status as a holder of the note at the time the action was commenced.”  Moulton , at page 2.  In so doing, the Moulton Court found that “plaintiff failed to show that the note was properly endorsed and thus validly transferred to it.”  Moulton , at page 3 (citations omitted).  The note in question was made payable to “Chevy Chase Bank, F.S.B.” and not plaintiff.  The Court in strictly interpreting the UCC’s requirements relating to allonges, found that plaintiff’s “proof” of its standing was inadequate and stated: In the record on appeal, the piece of paper immediately following the copy of the note contains only a purported endorsement specially endorsed to the plaintiff by Chevy Chase Bank, F.S.B. This page is not referred to at all in the affidavit of servicer for the plaintiff (hereinafter the loan servicer), or any other evidence submitted in support of the plaintiff's motion.  Although the affirmation of the plaintiff's counsel refers to the document as an endorsement, and states that the note is specially endorsed to the plaintiff, the document does not meet the Uniform Commercial Code requirements necessary to constitute an allonge containing an endorsement, since no evidence was submitted to indicate that the paper containing the purported endorsement was so firmly affixed to the note so as to become a part thereof, as required under UCC 3-202(2). The last page of the note indicates that it is page 5 of 5 and has sufficient white space on the page to fit an endorsement; the purported allonge, which is undated, contains no pagination or writing in any way to demonstrate its connection to the note or that it was firmly affixed thereto. The affidavits of the plaintiff's counsel and the plaintiff's loan servicer, submitted in support of the plaintiff's motion, also fail to indicate that the purported allonge is connected to the note or that it was firmly affixed thereto. Thus, this so-called allonge fails to meet the legal requirements of an allonge (see UCC 3-202<2> ), and is not connected to the note by any admissible evidence, and cannot serve as an evidentiary basis for summary. Since the plaintiff failed to establish, prima facie, its standing, summary judgment should have been denied. Moulton , at pages 3-4 (some citations omitted).

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s). Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv. dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming , 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104(a): (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution without a hearing. BCL § 1111(a). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. (2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). “In determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists. Matter of Kaufmann , 225 A.D.2d 775 (2d Dept. 1996). “ he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman v. Lovett , 200 A.D.2d 670, 670-71 (2d Dept. 1994). Even if dissension and/or deadlock exists, allegations that a petitioner acted in bad faith by creating the underlying disputes to justify dissolution “constitute a defense to a dissolution proceeding,” and therefore require a hearing to determine the issue. Myers v. Gold , 77 A.D.2d 652, 653 (2d Dept. 1980) (internal citations omitted); Matter of Rappaport , 110 A.D.2d 639, 641 (2d Dept. 1985). But see Matter of Eklund Farm Machinery, Inc. , 40 A.D.3d 1325, 1326-27 (3d Dept. 2007) (summarily granting dissolution despite allegations that petitioner acted in bad faith by “creat dissension to obtain dissolution” where the record clearly established that the petitioner was completely excluded from control and operation of the corporation by respondent). In Doshi v. Besen , 2019 N.Y. Slip Op. 33771(U) (Sup. Ct., N.Y. County Dec. 30, 2019) ( here ), the Court granted the motion of a 50% shareholder to dissolve the corporation on the grounds that the internal dissension between the two shareholders was so severe that dissolution was “inevitable” and beneficial to them. Doshi was a special proceeding brought pursuant to BCL §1104(a), in which Petitioner, Amit Doshi (“Doshi”), sought the judicial dissolution and an accounting of Besen & Associates, Inc. (“B&A” or the “Company”), a New York Corporation in which Doshi and Michael Besen (“Besen”) each owned fifty percent of the Company’s outstanding shares. The Company was formed in 1988 for the primary purpose of operating a commercial real property sales brokerage business. Doshi and Bensen worked together in the Company for almost thirty years and are the Company’s only two shareholders. Together, Doshi and Bensen were B&A’s only officers and directors until July 20, 2018, when Doshi resigned his positions as an officer, director and employee of B&A, “due to the severe dissension between the parties and Petitioner’s complete distrust of Respondent.” According to Doshi, the dissention began in 2017. Doshi maintained that “ here was such severe disagreement and dissention between us about the direction and operation of B&A<,> and the use of its funds that we were, in fact, in a deadlock and could not continue.” Doshi opposed the way in which Besen operated B&A and accused Besen of using B&A assets for his personal enjoyment. As a result, Doshi and Bensen discussed separating their joint interest in B&A and other jointly held businesses. Besen blamed Doshi for abandoning B&A and joining Meridian Capital, a competitor of B&A. Besen accused Doshi of misconduct and breaches of his fiduciary duty, including: converting millions of dollars from B&A; misappropriating B&A funds to participate in deals not involving B&A; loaning money to clients of B&A through his own entity, without earning fees or commissions for B&A; and interfering with the payment of commissions to B&A. Besen repeatedly alleged that “the differences between are irreconcilable”, and that any attempt to settle their differences “will continue to be fruitless.” Based upon the dissention between the parties, and their tolerance of such at the expense of B&A (Slip Op. at *4), the Court held that “B&A escape the fallout of the admitted collapse in the relationship between Doshi and Besen.” For this reason, explained the Court, “ he parties need not come to blows to satisfy BCL §1104 (a).” Id . at *6. The Court reasoned that “ egardless of whether Doshi, Besen, or both, are responsible for the demise of B&A, it is apparent to this court that these parties are so divided that they can accomplish nothing but destroy the successful company they created together.” Id . at *7. For that reason, concluded the Court, there was no purpose in “delay the inevitable” because to do so would inflict “even more harm to the corporation.” Id . Because “it is clear that there is ‘internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders’” ( id . at *7), the Court granted the motion to dissolve B&A and conduct an accounting after the dissolution. Id . at *8. Takeaway Internal dissension, reflected by an intense personal hostility, often poses an irreconcilable barrier to the continued functioning and prosperity of a corporation. Where a deadlock exists to the extent that dissension becomes the norm, the impasse may effectively destroy the loyalty and good faith required of shareholders in their dealings with each other. The inevitable result is the destruction of the business. In such a case, dissolution affords the court a remedy to direct what is obvious to all, that the deadlock and dissension effectively destroyed the orderly functioning of the corporation. As a consequence, when the shareholders of a company who are actively conducting the business of the corporation cannot agree, it becomes in the best interests of those shareholders for a court to order a dissolution. Such was the situation in Doshi . The animosity and hostility between these parties had created a hopeless situation in which they were “so divided that they accomplish nothing but destroy the successful company they created together.” Contact a business litigation lawyer in NYC about your case.

Under New York’s rules of contract interpretation, “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.” Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 403 (2009); W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). The courts are “extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include.” Rowe v. Great Atl. & Pac. Tea Co. , 46 N.Y.2d 62, 72 (1978). Consequently, courts will not “by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Reiss v. Financial Performance Corp. , 97 N.Y.2d 195, 199 (2001) (internal quotation marks and citation omitted). When the parties to a contract dispute its meaning, resolution of the dispute often turns on the meaning of a term or terms in the agreement. Such was the case in Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp. , 2019 N.Y. Slip Op. 29402 (Sup. Ct., N.Y. County Dec. 23, 2019) ( here ), an action involving the meaning of a term in the proprietary lease of a co-op apartment building and the rights attendant to the “unsold shares” status of the shares corresponding to an apartment in the building. It is well settled that “ he relationship between the shareholder/lessees of a cooperative corporation and the corporation is determined by the certificate of incorporation, the corporation’s bylaws and the proprietary lease.” Fe Bland v. Two Trees Mgt. Co. , 66 N.Y.2d 556, 563 (1985). Whether a particular shareholder is a holder of unsold shares is determined by the cooperative documents, such as the offering plan and propriety lease. 210-220-230 Owners Corp. v. Arancio , 24 Misc. 3d 1228(A), 899 N.Y.S.2d 63, 2009 WL 2356893 (City Ct., City of New Rochelle 2009). Accordingly, the qualification for being deemed a holder of unsold shares may vary depending upon the corporate document provisions of a given cooperative. Id . To enjoy the status of a holder of unsold shares, a shareholder or his or her direct predecessor in interest must have obtained shares in an apartment that was occupied at the time of cooperative conversion, never occupied it himself or herself, and the original purchaser of the occupied apartment’s shares must have been either “produced” by the sponsor at the cooperative’s closing as a purchaser/holder of unsold shares, or, after such cooperative’s closing, “designated by” the cooperative’s sponsor as a holder of unsold shares. 210-220-230 Owners Corp. , supra . See also Sassi-Lehner v. Charton Tenants Corp. , 55 A.D.3d 74 (1st Dept. 2008); LJ Kings, LLC v. Woodstock Owners Corp. , 46 A.D.3d 321 (1st Dept. 2007). A holder of “unsold shares” is not subject to many of the cooperative’s rules and regulations that bind other shareholders. 210-220-230 Owners Corp. , supra . Among other things, a holder of unsold shares who has not occupied his or her apartment need not obtain the permission of the cooperative’s board to sublet his or her apartment or sell his or her shares to a particular individual. Id . See also Kralik v. 239 E. 79th Street Avenue Corp ., 5 N.Y.3d 54 (2005); Craig v. Riverview East Owners Inc. , 156 A.D.2d 157 (1st Dept. 1989). Given the benefits attendant to unsold shares, it is not surprising that the status of such shares is often litigated. Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp. Background Bellstell concerned the legal status of unsold shares in a cooperative apartment building located on Park Avenue in New York County (the “Building”). Plaintiff, Bellstell 7 Park Avenue, L.L.C. (“Belstell”), held all the unsold shares in the Building. Bellstell is a New York limited-liability company. Its sole member is Beni Internazionali (U.S.A.) Inc. (“Beni”), a New York corporation. Beni’s sole shareholder is Edilverde e Beni Internazionali S.p.A. (“Edilverde”), an Italian corporation. Bellstell sought a declaration that defendant, Seven Park Avenue Corp., impermissibly determined that Bellstell had lost its unsold-shareholder rights with respect to one of the apartments that Bellstell owned in the building. The Building was converted into a cooperative building by its then-owner, Seven Park Associates, beginning in 1982. Most of the shares in the cooperative were subscribed before the closing date of the conversion offering plan. The offering plan treats the shares that remained unsubscribed as of the closing date as “unsold shares.” Relevant to the dispute, under the proprietary lease, once sold by the co-op sponsor ( i.e. , Seven Park Associates) to one or more individuals under certain requirements of the offering plan, a block of unsold shares “retain their character as such (regardless of transfer) until . . . the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment” to which the shares are allocated. In 1987, Seven Park Associates sold all the unsold shares to Alvin Rosenthal in accordance with the terms of the offering plan. In 1998, Rosenthal sold all his unsold shares to Bellstell. Bellstell executed leases for all the apartments to which the unsold shares were allocated. The cooperative offering plan was amended to reflect that Bellstell was the holder of the outstanding unsold shares (and had leased the corresponding apartments). In November 2015, with the approval of Seven Park Avenue’s managing agent, Bellstell sublet one of its leased apartments to Ciro Campagnoli (“Campagnoli”). Campagnoli and his sister each hold a 50% contingent remainder interest in Edilverde (with their father holding a 100% interest during his lifetime). Campagnoli occupied the apartment on and off until January 2017. In April 2017, Seven Park Avenue’s counsel wrote to Bellstell, informing it that Campagnoli qualified as a family member of Bellstell for purposes of the proprietary lease and, therefore, the shares corresponding to the apartment that Campagnoli had occupied would no longer be treated as unsold shares. After Bellstell’s objections to this conclusion proved unavailing, Bellstell brought the action, seeking a declaratory judgment that Campagnoli was not – and could not be – a family member of Bellstell and, therefore, the apartment’s shares retained their unsold shares status. Bellstell moved for summary judgment on its claims. Seven Park Avenue also moved for summary judgment, seeking dismissal of Bellstell’s claims and a declaration that the apartment’s shares were no longer unsold within the meaning of the proprietary lease and the offering plan. The Court’s Decision As an initial matter, the Court noted that “ he parties’ respective summary-judgment motions , in substance, a motion and cross-motion addressing the same issue – whether the shares corresponding to the apartment occupied by Campagnoli still ‘unsold shares.’” Slip Op. at **2-3. This issue, observed the Court, “appear … to be one of first impression.” The Court noted that although issues relating to unsold share status had been litigated many times since the Court of Appeals decided Kralik v. 239 E. 79th St. Owners Corp. , 5 N.Y.3d 54 (2005), the issue of “entity holders of unsold shares . . . avoid their obligations” under “proprietary leases” had never arisen before. Slip Op. at *4 n.4. Having framed the issue, the Court determined that its resolution depended not on a ruling concerning a material issue of disputed fact, but rather on an issue of law. Slip Op. at *3 (“There is no material dispute of fact in this case, however. The question is, instead, whether this court may determine the status of the disputed shares as a matter of law.”). “To resolve th question,” the Court applied “ordinary contract principles to interpret the relevant terms of the controlling cooperative documents, which the parties considered to be the proprietary lease. See Kralik , 5 N.Y.3d at 59. In Kralik , the Court of Appeals held that whether a shareholder is a holder of unsold shares turns on the documents central to the formation of the cooperative corporation and its relationship to its shareholders, i.e. , the cooperative’s certificate of incorporation, offering plan, and proprietary lease. In particular, the Court held that it would “apply[ ] ordinary contract principles” to the interpretation of those documents: We conclude that whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. . . In short, the terms of the controlling documents ... determine whether plaintiffs are holders of unsold shares. Plaintiffs status must be decided by applying the usual rules of contract interpretation to those documents. Id . at 59. Against this analytical framework, the Court looked at the proprietary lease, which provided that unsold shares retained their status until “the holder of such shares (or a member of his family) a bona fide occupant of the apartment.” The Court concluded that “as a matter of law, the only reasonable reading of ‘member of his family’ in 38 (b) of the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Slip Op. at *5. In so holding the Court avoided the question of whether a limited liability company can be a person for purposes of the lease: Bellstell contends first that “member of his family” appears most naturally to refer only to individual, natural persons and that there is no basis to extend its scope to apply to artificial persons like limited-liability companies, which cannot be said in ordinary usage to have “family members.” On the other hand, as Seven Park Avenue rightly points out in response, this very language, read literally for all it is worth, might indicate that artificial persons like limited-liability companies cannot hold unsold shares in the first place, precisely because they do not have families. That interpretive issue, to be sure, is not properly before this court now, and the court therefore does not reach it or how the court’s resolution of the status of an LLC’s contested shares in a particular case might be affected by principles of waiver or estoppel. At a minimum, though, the fundamental interpretive tension here inclines this court against giving significant weight to the argument that because LLCs by definition do not have family members, LLCs cannot be subject to the bona-fide-occupant restriction on unsold shares. Slip Op. at **3-4. The Court next addressed the definition of “family members”. In particular, the Court considered whether the proprietary lease extended “to individuals who have some connection to an LLC (or corporation)” and, if so, “how close the connection must be for an individual to be considered a member of the LLC’s “family.” Id . at *4. Answers to those questions created difficulties too, noted the Court, “both ‘vertically’ (when the individual in question has a share of the LLC’s control only through multiple levels of corporate ownership) and ‘horizontally’ (when the individual is only one of a number of members or officers of the LLC, or shareholders of the corporation that is a member of the LLC).” Id . Given the definitional difficulties, the Court held that it saw “no principled or practical means of defining when an individual’s ties to an LLC should suffice to make them a ‘family member’ of the LLC for purposes of determining when the individual’s occupancy of an apartment strips the apartment’s shares of unsold-share status under the lease.…” Id . (Orig’l emphasis.) Accordingly, the Court concluded that “the only reasonable reading of “member of his family” in … the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Id . The Court rejected Seven Park Avenue’s assertion that Campagnoli qualified as a family member of Bellstell because he was a “legal representative” of the company under the lease. Seven Park Avenue claimed that Campagnoli is a manager of Bellstell, that he has the authority as a manager to bind his principal through his actions, and that this authority makes him a “legal representative” of Bellstell, such that in occupying the apartment at issue he stood in Bellstell’s shoes for purposes of the proprietary lease. Id . at *5. The Court said that it was “not persuaded” by the argument. Id . The Court reasoned that the term “legal representative” had narrow a meaning: “A legal representative . . . in the ordinary sense is one who manages the legal affairs of another because of incapacity or death – not merely an agent, but a principal who has been assigned the rights and obligations of the party itself.” Id . (citations and internal quotation marks omitted). The Court saw no “reason why should disregard the ordinary, limited scope of the term ‘legal representative.’” Id . “Indeed,” said the Court, “the language of 40 itself confirms that this term is being used in the conventional sense.” Id . In that regard, observed the Court, the term appeared in a list of parties formally “assigned the rights and duties” of the lessee, whether through a written instrument or a court filing “associated with Surrogate’s Court practice.” Id . “Each term,” concluded the Court, “denoted a party that ha taken on the legal rights and responsibilities of the party itself in some form, not merely one who is serving as a high-level agent of the party.” Id . Accordingly, the Court held that “Campagnoli was not a ‘legal representative’ of Bellstell within the meaning of 40 of the co-op lease” and that his occupancy of the apartment “did not affect the ‘unsold share’ status of the apartment’s corresponding co-op shares.” Id . Takeaway Whether a plaintiff is a holder of unsold shares is determined by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. Kralik , 5 N.Y.3d at 59. Under this standard, the Bellstell court determined that the character of the unsold shares at issue had not changed. Bellstell remained the holder of the shares within the meaning of the proprietary lease, and the shares never lost their character as unsold because Campagnoli occupied the apartment.

As discussed in previous Blog posts, business owners and entrepreneurs wishing to insulate themselves from personal liability for the acts taken in the name of their business can generally do so by forming a corporation ( e.g. , C-Corp. or an S-Corp.) or limited liability company (“LLC”). Such protection, however, is not absolute; there are exceptions to the rule. For instance, a creditor or other third party can “pierce the corporate veil” – i.e. , go behind the corporate form to hold an officer, director, or shareholder liable when he/she fails to follow corporate formalities, comingles corporate funds with personal funds, or perpetrates a fraud or other wrongdoing on a third party. TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 340 (1998) (the corporate veil may be pierced to impose liability for corporate wrongs upon persons who have “misused the corporate form for personal ends.”); Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 142 (1993) (the corporate veil may be pierced where the owners have “abused the privilege of doing business in the corporate form” by “perpetrat a wrong or injustice . . . such that a court in equity will intervene.”). Additionally, an officer, director, member or shareholder can be sued individually when the corporation is accused of committing a tort in which the individual personally participated. Hamlet at Willow Cr. Dev. Co., LLC v. Northeast Land Dev. Corp. , 64 A.D.3d 85, 116 (2d Dept. 2009) (“A corporate officer may be liable for torts committed by or for the benefit of the corporation if the officer participated in their commission.”). Notably, tort liability applies regardless of whether the third party can pierce the corporate veil. There are three general categories of torts: intentional; negligent; and strict liability. Intentional torts are wrongs that the defendant knew or should have known would result through his/her actions or omissions (such as fraud). Negligent torts occur when the defendant’s actions were taken without reasonable care. Strict liability torts focus on whether a particular result or harm manifested from the actions taken by the defendant. In the business context, there are numerous types of torts, including, but not limited to, fraudulent misrepresentation, misappropriation, conversion, interference with contractual or business relations, breach of fiduciary duty, negligence, and defamation. In addition to the foregoing, an officer, director, member or shareholder can be sued individually under the responsible corporate officer doctrine (a/k/a the “Park doctrine,” referring to the 1975 case decided by the U.S. Supreme Court in which the doctrine was articulated) – that is, when the corporation is accused of violating laws that implicate public health and safety. United States v. Park , 421 U.S. 658, 672 (1975). The doctrine permits the imposition of liability against corporate officers for the violations of law that implicate the health and safety of the public when they are in a “position of authority” and fail to prevent or remedy the situation. In New York, the doctrine has been applied to violations of, inter alia , state environmental laws. See , e.g. , Matter of Carney’s Rest., Inc. v. State of New York , 89 A.D.3d 1250, 1253-1254 (3d Dept. 2011); Lake George Park Commn. v. Salvador , 72 A.D.3d 1245, 1247-1248 (3d Dept. 2010); State of New York v. Markowitz , 273 A.D.2d 637, 641 (3d Dept. 2000); Matter of Jackson’s Marina v. Jorling , 193 A.D.2d 863, 866 (3d Dept. 1993). In Matter of Carney’s Restaurant , for example, the Appellate Division, Third Department upheld a finding of personal liability against the sole officer and shareholders of a corporate entity for violations of the State Pollutant Discharge Elimination System (“SPDES”) involving a restaurant’s sewage disposal system. 89 A.D.3d at 1253-1254. The court held that liability should be imposed because the individual owner knew about the system failures and, despite repeated requests by the New York State Department of Environmental Conservation (“DEC”), failed to take timely steps to remedy the situation. Id . In State of New York v. C & J Enters., LLC , 2020 N.Y. Slip Op. 00024 (3d Dept. Jan. 2, 2020) ( here ), the Appellate Division, Third Department affirmed the judgment of the Supreme Court, holding the managing member of an LLC liable for DEC violations under the responsible corporate officer doctrine. State of New York v. C and J Enterprises, LLC Background From 1996 until 2015, defendant, C and J Enterprises, LLC (“C & J”), owned and operated Deerfield Estates Mobile Home Park (the “Park”) in Fulton County, New York. C & J had two members, defendant, James P. Burr (“Burr”) and Charles A. Glessing (“Glessing”), each of whom had an equal ownership interest in the company. C & J’s operating agreement named Burr as the company’s managing member. In June 1998, Burr applied for and subsequently obtained an SPDES permit from DEC, a plaintiff in the action, to operate a sewage treatment system at the Park, which included approximately 43 residential sites. The permit expired on January 1, 2004 and was never renewed by DEC. After DEC investigated and discerned numerous sewage surface discharges in violation of the SPDES permit and ECL 17-0803, DEC and C & J entered into an order on consent in October 2003, which was signed by Glessing. The order imposed a civil penalty and required C & J to correct the wastewater treatment system. An order on consent modification between DEC and C & J was executed in November 2003 by Burr. By December 2003, C & J installed an interim sand filter system, but problems persisted. In early October 2008, C & J and DEC entered into a second order on consent that superseded the 2003 order. Burr signed the second order as C & J’s “managing agent.” The order included a schedule of compliance requiring C & J to complete a new wastewater treatment system by April 1, 2009. The order further specified that, effective October 7, 2008, if the interim system failed to meet the required interim discharge limits, C & J was required to “immediately cease all discharges from the wastewater treatment and collection system” and utilize a “hold and haul” system, by which the wastewater would have to be trucked off site. Notably, the order included a schedule of stipulated per diem penalties in the event that C & J failed “to strictly and timely comply with any provision of th rder.” The stipulated penalties were to be imposed on a graduated schedule, starting at $100 a day for 10 days, increasing to $250 a day for the next 20 days and thereafter imposed at a rate of $1,000 a day. The violations continued and defendants did not complete construction of a new sewage treatment system until June 2010. In particular, by notice dated November 6, 2008, DEC informed defendants that a site inspection revealed surface discharges in violation of the 2008 order. As a result, DEC directed defendants to operate “a ‘hold and haul’ system until further notice.” Defendants failed to do so, only utilizing the required “hold and haul” system during a brief period in June 2009. Plaintiffs commenced the action in April 2010, asserting that defendants failed to comply with the 2008 consent order and seeking stipulated penalties as against defendants on a joint and several basis. Issue was joined and, in 2015, the Park was sold. A year later, Glessing passed away. Thereafter, Supreme Court granted plaintiffs’ motion for partial summary judgment, finding, as relevant to the appeal, that both Burr and C & J were jointly and severally liable for violations of the 2008 consent order, and imposed a stipulated penalty as calculated pursuant to the order. For the delay in completing the system, the court imposed a penalty measured from the April 1, 2009 completion deadline to the commencement of the action on April 23, 2010. For the failure to implement a “hold and haul” system, the penalty was measured from the November 6, 2008 notice date through the commencement of the action. Together, a total penalty of $858,650 was imposed. Defendants appealed. The Third Department’s Decision The Court affirmed. The Court held that, under the responsible corporate officer doctrine, it was proper to impose personal liability on Burr for the violations of the 2008 order – an order that Burr signed on C & J’s behalf. The Court explained that imposition of liability on Burr was appropriate because he knew about the violations and, despite the requirements of the consent order, Burr failed to implement any of the options available to the company under the consent order: There can be little dispute that Burr was well aware of the ongoing sewage violations at the park, and, as managing member, he held a position of authority to address the problem. In particular, the 2008 consent order, which Burr signed on C & J’s behalf, expressly provided for stipulated penalties in the event that C & J “fail to strictly and timely comply.” The order further specified that it was binding on C & J and its officers. In the event that C & J was unable to meet the requirements of the order, the governing schedule directed C & J to surrender its SPDES permit and operate only a “hold and haul” system. Upon doing so, C & J was required to “immediately notify, in writing, the tenants and of its intention to close .” By its terms, the consent order outlined the various options available to Burr — timely remediate the system, convert to a “hold and haul” system or close the park. Although Burr maintains that he lacked the financial means to timely implement the first two options, closure of the park remained an available, acknowledged option. Slip Op. at *1 The Court also held that the penalty, though substantial, was not unreasonable. The Court explained that “it is particularly egregious that defendants disregarded DEC’s November 6, 2008 directive to immediately implement a “hold and haul” system to alleviate ongoing surface sewer discharge.” Id . “Given the extended history of violations and the many opportunities that DEC accorded defendants to remedy the violations,” the Court said that “the penalty imposed” did not “constitute[] an abuse of discretion. Id . (citing Matter of Carney’s Rest. , 89 A.D.3d at 1254-1255). Takeaway Under Park and its progeny, corporate officers can be criminally prosecuted for their company’s violation of federal law, such as the Federal Food, Drug and Cosmetic Act, without showing intent, negligence, knowledge of the violation or participation in the violation of law. To impose liability, the government need only prove that the officer held a position of authority in the corporation, had the ability to prevent the violation and failed to prevent or remedy it. A conviction under the doctrine can result in imprisonment, criminal fines and/or restitution. C & J Enterprises shows that the doctrine can be, and has been, applied in the state law context.

An interesting question sometimes arises in the tort arena in which a third-party to a transaction claims to have been injured by one of the parties. Do the parties to the transaction owe a duty to the third party? The answer depends on whether the third party can show privity or near privity with the alleged tortfeasor. In this regard, the third party must demonstrate that the parties were aware that their report, agreement or transaction documentation would be used by the third party for a particular purpose, the parties intended the third party to rely on such documents, and the parties took action linking them to the third party thereby evincing their understanding of the third party’s reliance on their documents. In Artemus USA LLC v. Paul Kasmin Gallery, Inc. , 2019 N.Y. Slip Op. 09391 (1st Dept. Dec. 26, 2019) ( here ), the Appellate Division, First Department addressed this issue. As discussed below, Artemus involved the purchase and sale of an artwork named La Scienza de la Fiacca (“La Scienza”) by Frank Stella. The plaintiff, Artemus USA LLC (“Artemus”), alleged that defendant, Paul Kasmin Gallery, Inc. (“PKG”), an art gallery, created materially false, back-dated invoices at the request of non-party Anatole Shagalov (“Shagalov”), for retransmission to Artemus. Plaintiff alleged that those invoices falsely represented that Shagalov purchased La Scienza for $430,000. According to plaintiff, Shagalov had, in fact, purchased only a 60% interest of La Scienza at the stated price, and owed a substantial balance. In reliance on those fraudulent invoices, Artemus maintained that it agreed to purchase La Scienza and entered into a multimillion-dollar transaction with Shagalov, which it would not have done had it known the truth. The motion court (Justice Eileen Bransten) upheld the complaint, finding that Artemus stated a claim for fraud. The First Department affirmed. The Privity or Near Privity Doctrine In dealing with liability for the tortious acts of persons not in privity with the alleged tortfeasor (typically a professional, such as an accountant, lawyer, and architect), New York courts apply a special analysis that was first established by Chief Judge Cardozo in Ultramares Corp. v. Touche , 255 N.Y. 170, 174 (1931). In Ultramares , the New York Court of Appeals was asked to consider whether an accounting firm could be held liable for negligently preparing a balance sheet that its client subsequently furnished to the plaintiff. Although the accountants knew that their client would show the balance sheet to various persons as a basis for financial dealings ( e.g. , “banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion”), no mention was made of the plaintiff or of any other specific party to whom the sheet would be furnished, or of any particular transaction in which it would be used. In that regard, the Court emphasized the following: Nothing was said as to the persons to whom these would be shown or the extent or number of the transactions in which they would be used. In particular there was no mention of the plaintiff, a corporation doing business chiefly as a factor, which till then had never made advances to the , though it had sold merchandise in small amounts. The range of the transactions in which a certificate of audit might be expected to play a part was as indefinite and wide as the possibilities of the business that was mirrored in the summary. Id. at 174. After reviewing legal developments permitting recovery by non-privity plaintiffs for harm resulting from the release of “a physical force” (255 N.Y. at 181), the Court raised the question of whether liability should attach for injury caused by “the circulation of a thought or a release of the explosive power resident in words.” Id . Noting that there existed no practical way to predict or limit the number or character of persons who might learn about and rely upon any written or oral statement, the Court concluded that creating an unlimited duty would impermissibly lead to “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Id . at 179. The Ultramares court distinguished its approach from Glanzer v. Shepard , 233 N.Y. 236 (1922), a case decided in an opinion also written by Cardozo nine years earlier. In Glanzer , a public weigher had been held liable in negligence to a purchaser who had not been in privity with it, where the seller had requested the weigher to certify the official weight sheets and furnish a copy to the buyer. In such circumstances, the Ultramares court explained, “ he bond was so close as to approach that of privity,” and did not expose the defendant to indeterminate liability because “the transmission of the certificate to another was not merely one possibility among many, but the ‘end and aim of the transaction.’” Id . 255 N.Y. at 182. The Court went on to observe that in Glanzer , the services rendered by the weigher had been “primarily for the information of a third person ... and only incidentally for that of the formal promisee.” Id . In reaching its decision, and the imposition of a non-contractual duty of care to the third party, the Glanzer explained: We think the law imposes a duty toward buyer as well as seller in the situation here disclosed. The use of the certificates was not an indirect or collateral consequence of the action of the weighers. It was a consequence which, to the weighers’ knowledge, was the end and aim of the transaction. ordered, but to use. The defendants held themselves out to the public as skilled and careful in their calling. They knew that the beans had been sold, and that on the faith of their certificate payment would be made. They sent a copy to the for the very purpose of inducing action. All this they admit. In such circumstances, assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has none the less an origin not exclusively contractual. Given the contract and the relation, the duty is imposed by law.” Id . at 238-239. The Court of Appeal’s restatement of Glanzer in Ultramares established the principle that liability for misstatements or omissions to a third party not in contractual privity may attach where the representation is made for the principal purpose of having it relied upon by such person, and where its benefit to the party authorizing the representation stems precisely from such reliance by the third party. Vereins-Und Westbank, AG v. Carter , 691 F. Supp. 704, 709 (S.D.N.Y.1988). This principle came to be known as the “Ultramares doctrine.” Following the issuance of Ultramares , the Court of Appeals reiterated the requirement of a “contractual relationship or its equivalent” in State St. Trust Co. v. Ernst , 278 N.Y. 104, 111 (1938), White v. Guarente , 43 N.Y.2d 356 (1977), Credit Alliance Corp. v. Arthur Andersen & Co. , 65 N.Y.2d 536 (1985), and William Iselin & Co. v. Mann Judd Landau , 71 N.Y.2d 420 (1988). In White , the accountants had contracted with a limited partnership to perform an audit and prepare the partnership’s tax returns. The nature and purpose of the contract, to satisfy the requirement in the partnership agreement for an audit, made it clear that the accountants’ services were obtained to benefit the members of the partnership who, like the plaintiff, a limited partner, were necessarily dependent upon the audit to prepare their own tax returns. After outlining the principles articulated in Ultramares and Glanzer , the Court observed that: “ his plaintiff seeks redress, not as a mere member of the public, but as one of a settled and particularized class among the members of which the report would be circulated for the specific purpose of fulfilling the limited partnership agreed upon arrangement.” 43 N.Y.2d, at 363. Because the accountants knew that a limited partner would have to rely upon the audit and tax returns of the partnership, and because such awareness fell within the contemplation of the parties under the retainer agreement ( Vereins-Und Westbank , 691 F. Supp. 709), the Court held that, “at least on the facts here, an accountant’s liability may be so imposed.” Id. at 358. The resulting relationship between the accountants and the limited partner was one “approach that of privity, if not completely one with it.” Id . (citing Ultramares , 255 N.Y. at 183). In Credit Alliance , the Court revisited and elaborated upon the Ultramares doctrine. After reviewing the applicable authorities – both within and outside of New York – the Court reaffirmed and restated the Ultramares rule as follows: Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties’ reliance. 65 N.Y.2d at 551. The Court went on to observe that while “these criteria permit some flexibility in the doctrine” they were “intended to preserve the wisdom of the policy set forth” in Ultramares and Glanzer . Id . Finally, in William Iselin & Co. , the Court applied the Ultramares doctrine to affirm the grant of summary judgment to the defendant accountant. There, the plaintiff (Iselin) was seeking to charge an accountant (Mann) (with whom it had no privity) with liability for a misstatement in a report that Mann had prepared for a client (Suits) who subsequently obtained credit from Iselin. In explaining why summary judgment had been properly granted to the defendant, the Court made the following summary of the facts which the plaintiff would have been required to establish in order to prevail under the Ultramares doctrine: Iselin was obligated to submit evidence of Mann’s awareness that Suits, intending that Iselin would rely on the Reports, would use them for the purpose of procuring credit from Iselin. Beyond that, Iselin was required to show a nexus with Mann from which Mann’s understanding of Iselin’s reliance could be drawn. 71 N.Y.2d at 426. In Artemus , one of the issues before the First Department was whether PKG intended Artemus to rely on the allegedly fraudulent invoices. Artemus USA LLC v. Paul Kasmin Gallery, Inc. Background As noted, Artemus involved a claim for fraud based on defendant’s alleged materially false representations in certain invoices. Artemus alleged that PKG sold a 60% interest in La Scienza to Shagalov for $430,000, and that, two years later, when Artemus was conducting due diligence in connection with purchasing La Scienza and three other artworks from Shagalov, PKG provided Shagalov with a backdated invoice that indicated that Shagalov would acquire full title to La Scienza upon payment of the $430,000. Plaintiff alleged that Shagalov made PKG aware that the invoice was either for itself or for a potential purchaser. Thereafter, at Shagalov’s request, PKG provided a second backdated invoice, which included a previously omitted resale certificate number and showed the purchaser as Shagalov’s company, rather than Shagalov personally. After completing due diligence, Artemus and Shagalov entered into a transaction that Artemus characterized as a “sale-leaseback,” wherein Artemus purchased four artworks, including La Scienza, for $3.4 million, and leased those artworks back to Shagalov, with a repurchase option for Shagalov. Thereafter, PKG filed a UCC-1 financing statement on La Scienza, and Shagalov commenced an action alleging, inter alia , that Artemus violated his rights under article 9 of the UCC by trying to dispose of the artwork. In an appeal in the Shagalov action, the First Department affirmed the grant of a preliminary injunction enjoining Artemus from selling, transferring or disposing of, inter alia , La Scienza. See Shagalov v. Edelman , 161 A.D.3d 455, 456 (1st Dept. 2018). PKG moved to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) and (7). PKG argued that the complaint failed to plead with particularity (as required by CPLR § 3016(b)) that (1) PKG intended to defraud Artemus or another in its position, and (2) there were facts from which anyone could infer that PKG was the proximate cause of any damages incurred by Artemus. Justice Bransten denied the motion on the record, ruling in part that Artemus “sufficiently pleaded that the Defendant misrepresented the ownership interest the non-party was acquiring on the invoice for La Scienza, that the Defendant knew that the invoice falsely reflected the conveyance of full title, and that the invoice was intended for the purpose of resale of the painting, which the Plaintiff relied upon.” PKG appealed. The First Department unanimously affirmed. The First Department’s Decision The Court held that Artemus sufficiently pleaded the requisite intent under the Ultramares doctrine, stating: “Plaintiff’s allegations are sufficient to permit the inference that defendant intended that the fraudulent invoices would be provided to potential purchasers or lessors.” Slip Op. at *1. The Court rejected PKG’s argument that the inference was based on information and belief without any factual support: “While the allegations concerning Shagalov’s direct statements to defendant about the necessity of the invoices were made ‘upon information and belief,’ additional alleged facts, such as the timing of defendant’s furnishing of the invoice and its accommodation to Shagalov’s requests for revisions, support the inference that defendant knew the purpose and the recipient of the invoices.” Id . (citing Aozora Bank, Ltd. v. J.P. Morgan Sec. LLC , 144 A.D.3d 440, 441 (1st Dept. 2016). The Court also rejected PKG’s causation arguments. There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). See also Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co. , 149 A.D.3d 146, 149 (1st Dept. 2017) (“Transaction causation is akin to reliance” and requires the plaintiff to allege that “but for the claimed misrepresentation or omissions, the plaintiff would not have entered into the detrimental … transaction.”) (internal quotation and citation omitted). The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir.2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co. , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact-intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). The Court held that Artemus satisfied the (transaction and loss) causation requirement, noting that “ he complaint also adequately alleges that defendant’s misrepresentations induced plaintiff to enter into the ‘sale-leaseback’ transaction with Shagalov and that they directly caused plaintiff’s loss. Slip Op. at *1 (citing Basis PAC-Rim , 149 A.D.3d. at 149). The Court explained that “Plaintiff allege that it would not have entered into the transaction had it known that defendant’s invoices falsely represented Shagalov’s ownership of La Scienza” – the transaction causation requirement of the claim. The Court went on to say that the complaint “further allege that the misrepresentation of Shagalov’s 100% ownership interest directly caused to pay more than it would have paid for a 60% interest, and that it incurred costs in uncovering the truth after defendant filed its UCC-1” – the loss causation requirement. Id . Accepting these allegations as true on the motion, the Court found them to be “sufficient to sustain plaintiff’s claim that it may be entitled to recover some of its litigation costs in the Shagalov action as damages because it would not have incurred those costs had it not been for defendant’s alleged fraud.” Id . at *2. Takeaway In Ultramares , the Court of Appeals held that a misrepresentation or omission by a defendant can give rise to an action for fraud by a third party not in privity with the defendant if the statement was “made with the intent to be communicated to the persons or class of persons who act upon it to their prejudice.” 255 N.Y. at 187. Not all jurisdictions agree with the Ultramares approach. As the Court of Appeals noted, “ ome courts continue to insist that a strict application of the privity requirement governs the law of liability except, perhaps, where special circumstances compel a different result …. an increasing number of courts have adopted what they deem to be a more flexible approach than that permitted under this court’s past decisions.” Credit Alliance , 65 N.Y.2d at 551. Regardless of the divide, in New York, liability will attach where the third party falls within the class of persons the defendant intended to, or had reason to expect would, rely on its misrepresentations – i.e. , to wit: “(1) the must have been aware that the … reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the linking them to that party or parties, which evinces the understanding of that party or parties’ reliance.” Id .

Clients often ask if their oral agreement is enforceable. To support their claim, they point to emails and text messages as evidence of such an agreement. As this Blog has noted in the past, whether an oral agreement is enforceable and whether emails and text messages are sufficient documentary evidence to demonstrate the existence of such an agreement are dependent upon whether the evidence is admissible and irrefutable. See , e.g. , here , here , and here . In today’s post, this Blog examines Ripka v. Stenzler , 2019 N.Y. Slip Op. 33688(U) (Sup. Ct., N.Y. County Dec. 19, 2019) ( here ), a case in which the Court determined that emails and text messages did not conclusively show the absence of an oral agreement. Dismissal Due to Documentary Evidence Under Section 3211(a) of the Civil Practice Law and Rules (“CPLR”), a party can file a motion, before a responsive pleading, to dismiss one or more causes of action alleged against that party. For purposes of a motion under CPLR § 3211(a), a “cause of action” includes counterclaims, crossclaims, and third-party claims. There are several grounds under CPLR § 3211(a) on which a party may move to dismiss.  These include: (1) documentary evidence; (2) lack of subject matter jurisdiction; (3) lack of capacity; (4) another action pending between the same parties for the same cause of action in another court; (5) disposition in a prior proceeding; (6) improper counterclaim; (7) failure to state a cause of action; (8) lack of personal jurisdiction; (9) improper extra-jurisdictional service; (10) failure to join necessary party; and (11) immunity for voluntary non-profit officers. In most cases, the moving party will invoke more than one of the foregoing bases for his/her motion. However, the movant may choose to base his/her motion solely upon the existence of documentary evidence. CPLR § 3211(a)(1) provides that basis. Under CPLR § 3211(a), a party may move to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.” For this reason, courts described the phrase as “fuzzy” because “what is documentary evidence for one purpose, might not be documentary evidence for another.” Fontanetta v. Doe , 73 A.D.3d 78, 84 (2d Dept. 2010). To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. See also VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC , 171 A.D.3d 189 (1st Dept. 2019) (“A paper will qualify as ‘documentary evidence’ only if it satisfies the following criteria: (1) it is ‘unambiguous’; (2) it is of ‘undisputed authenticity’; and (3) its contents are ‘essentially undeniable.’”) (quoting Fontanetta , 73 A.D.3d at 86, 87 (citation omitted). Materials that unquestionably qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta , 73 A.D.3d at 84-85 (citation omitted). The Standard of Review For a Motion to Dismiss On a motion to dismiss, the court must accept as true the facts alleged in the complaint and all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp. , 60 A.D.3d 491 (1st Dept. 2009). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged and the inferences that can be drawn from them, the complaint states the elements of a legally cognizable cause of action. Skillgames, LLC v. Brody , 1 A.D.3d 247, 250 (1st Dept. 2003), citing Guggenheimer v. Ginzburg , 43 N.Y.2d 268, 275 (1977). If the defendant seeks dismissal of the complaint based upon documentary evidence, then, as noted, dismissal under CPLR § 3211(a)(1) is warranted only when the documentary evidence “utterly refutes plaintiff’s factual allegations” ( Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002)), and “conclusively establishes a defense to the asserted claims as a matter of law.” Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc. , 10 A.D.3d 267, 270-71 (1st Dept. 2004) (internal quotation marks omitted). In other words, the documents relied upon must “definitely dispose of plaintiff’s claim.” Blonder & Co. v. Citibank, N.A. , 28 A.D.3d 180, 182 (1st Dept. 2006). Are Emails Documentary Evidence for Purposes of CPLR § 3211(a)(1)? In the Second Department, affidavits, emails, and letters, are not considered documentary evidence “within the intendment of CPLR 3211(a)(1).” Phoenix Grantor Trust v. Exclusive Hospitality, LLC , 2019 N.Y. Slip Op. 3635 (2d Dept. May 8, 2019), quoting Nero v. Fiore , 165 A.D.3d 823, 826 (2d Dept. 2018). In the First Department, like the Second Department, affidavits are not documentary evidence within the meaning of CPLR § 3211(a)(1). Tsimerman v. Janoff , 40 A.D.3d 242 (1st Dept. 2007). However, unlike in the Second Department, the First Department will consider correspondence and emails “under appropriate circumstances” to qualify as documentary evidence, so long as they meet “the essentially undeniable test.” Amsterdam Hospitality Grp. , 120 A.D.3d at 432; Langer v. Dadabhoy , 44 A.D.3d 425, 426 (1st Dept. 2007). Accord Art & Fashion Grp. Corp. v. Cyclops Prod., Inc. , 120 A.D.3d 436, 438 (1st Dept. 2014) (“ mail correspondence can, in a proper case, suffice as documentary evidence for purposes of CPLR 3211(a)(l)”); Tozzi v. Mack , 169 A.D.3d 547, 548 (1st Dept. 2019) (affirming dismissal of complaint under CPLR § 3211(a)(1) where options agreement and emails utterly refuted plaintiffs’ claim and conclusively established a defense as a matter of law); MCAP Robeson Apartments Ltd. P’ship v. Munimae TE Bond Subsidiary, LLC , 136 A.D.3d 602, 603 (1st Dept. 2016) (affirming dismissal of complaint where email correspondence demonstrated that plaintiff understood, at the time, that such emails constituted notice of termination of the parties’ agreement). Enforceability of Oral Agreements To sustain a breach of contract cause of action, a plaintiff must show: (1) an agreement; (2) plaintiff’s performance; (3) defendant’s breach of that agreement; and (4) damages. See , e.g. , Furia v. Furia , 116 A.D.2d 694, 695 (2d Dept. 1986). “The fundamental rule of contract interpretation is that agreements are construed in accord with the parties’ intent . . . and ‘ he best evidence of what parties to a written agreement intend is what they say in their writing’ …. Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain terms, and extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous.” Riverside South Planning Corp. v. CRP/Extell Riverside LP , 60 A.D.3d 61, 66 (1st Dept. 2008), aff’d , 13 N.Y.3d 398 (2009). Whether a contract is ambiguous presents a question of law for resolution by the courts. Id . at 67. When, however, there is no writing between the parties, the plaintiff must show the elements of a binding contract, e.g. , an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms.  In other words, an oral agreement will not be enforced unless there is “a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.” Kelly v. Bensen , 151 A.D.3d 1312, 1313 (3d Dept. 2017). See also Schwartz v. Greenberg , 304 N.Y. 250, 254 (1952); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp. , 93 N.Y.2d 584, 589 (1999); Towne v. Kingsley , 121 A.D.3d 1381, 1382 (3d Dept. 2014). “In making the determination, the court looks not to the parties’ after-the-fact professed subjective intent, but rather at their objective intent as manifested by their expressed words and conduct at the time of the agreement.” Kelly , 151 A.D.3d at 1313 (internal quotation marks and citation omitted). In the First Department, this is where correspondence, emails and text messages can play a material role. Ripka v. Stenzler Background Ripka involved a breach of contract claim (though other causes of action were alleged) in which the plaintiff, Brian Ripka (“Ripka”), the founder and CEO of a fitness company called Ripped Fitness (“Ripped”), claimed to have an oral agreement for an interest in Rumble Fitness LLC (“Rumble”), a boxing-based fitness company established by the defendant, Andrew Stenzler (“Stenzler”). According to Plaintiff, Stenzler solicited him to participate in Rumble in February 2016. Plaintiff alleged that Stenzler orally agreed to provide him with a 10% stake in Rumble in exchange for Plaintiff’s services in assisting Stenzler with the company’s early development. Plaintiff claimed that Stenzler orally reaffirmed this agreement on multiple occasions. In consideration for the 10% equity grant, Plaintiff claimed he performed his end of the bargain by providing Stenzler with proprietary information about Ripped’s operations and the names of its vendors and that he performed various services to benefit Rumble, such as analyzing traffic at competing businesses to scout for optimal locations. Plaintiff alleged that Stenzler reneged on their agreement after bringing in two additional partners, defendants Eugene Remm (“Remm”) and Anthony DiMarco (“DiMarco”), who purportedly told Stenzler that Plaintiff should not be given such a large equity stake. After Ripka insisted that their alleged oral agreement be reduced to writing, Stenzler allegedly refused. Instead, Stenzler offered Plaintiff a 3% stake in Rumble in exchange for a 3% stake in Ripped. According to Plaintiff, he has not been issued a membership interest in Rumble. Plaintiff filed his original complaint on June 18, 2019, asserting claims for (1) a declaratory judgment that he owned a 10% stake in Rumble; (2) breach of the alleged oral agreement; and (3) unjust enrichment. On July 8, 2019, defendants moved to dismiss, principally arguing that the parties’ emails and text messages only reflected the 3% offer and did not reflect the alleged oral agreement to provide 10% equity. Defendants also sought to strike unrelated allegations of wrongdoing. On September 4, 2019, Plaintiff cross-moved for leave to file a second amended complaint, which included additional causes of action seeking recovery for breach of fiduciary duty, common law tort and fraud. The Court’s Ruling The Court granted the motion to dismiss the three claims in the original complaint to the extent of dismissing the breach of contract and unjust enrichment claims asserted against Remm and DiMarco and the breach of contract claim asserted against Rumble. The Court held that the emails and text messages did not “definitively prove that Stenzler never made the 10% equity promise.” Slip Op. at **3-4. The Court reasoned that since Defendants cherry-picked the communications that purportedly supported their defense, they could not utterly refute plaintiff’s allegations. Id . at *4. The Court explained that Defendants’ failure to cite “a single case where a complaint was dismissed with such a showing”, i.e. , that less than all the possible documentary evidence sufficed to dismiss a complaint under CPLR § 3211(a)(1), further supported its ruling. Indeed, noted the Court, “had one of the emails contained an admission by plaintiff that he never reached an agreement for a 10% stake, that would be another matter.…” Id . However, said the Court, “defendants simply ask this court to infer that plaintiff’s claims are not plausible based on their cherry-picked submissions.” Id . The Court rejected Defendants’ request to shift the burden to Plaintiff to refute their evidentiary showing with other emails in his possession, stating that Plaintiff “has no obligation to do so.” Id .  “On the contrary,” said the Court, “defendants bear the entire burden of proving that ‘the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.’” Id . (quoting Goshen , 98 N.Y.2d at 326). The Court explained that “ his is not summary judgment; there is no burden shifting on a motion to dismiss.” Id . (citation omitted). Finally, the Court rejected Defendants’ attempt to procure dismissal of the alleged oral agreement “by proving that such agreement is not reflected in writing.” Id . at *5. That “there may not be any dispositive documentary evidence” to prove the existence of an agreement is “an inherent[ ] … feature of many alleged oral agreements.” Id . at *4. For this reason, held the Court, “ hether documentary evidence ultimately suggests the existence of an oral agreement is a question of fact” not ripe for determination on a motion to dismiss. Id . As to Remm and DiMarco, the Court said that they were not parties to the alleged oral agreement between Ripka and Stenzler. Id . at * 5. Thus, neither party could be held liable for a breach of that agreement. Id . (citing Leonard v. Gateway IL LLC , 68 A.D.3d 408 (1st Dept. 2009)). Takeaway CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, Ripka demonstrates the need to present the court with documents that utterly refute the cause of action. As in Ripka , cherry-picked emails will not suffice. Thus, in the absence of documents that utterly refute a plaintiff’s claim, dismissal will be inappropriate.

In November of 2018, this Blog wrote about Unique Goals International, Ltd. v. Finskiy ( here ), a case involving a fraud cause of action that was dismissed because the plaintiff failed to satisfy the justifiable reliance element of the claim. On December 26, 2019, the Appellate Division, First Department unanimously affirmed the dismissal of the fraud claim. Unique Goals Intl., Ltd. v. Finskiy , 2019 N.Y. Slip Op. 09381 (1st Dept. Dec. 26, 2019) ( here ). Background Plaintiffs, three entities controlled by nonparty Sergey Yanchukov (“Yanchukov”), a wealthy Russian businessman, were allegedly induced by defendants, Maxim Finskiy (“Finskiy”), also a wealthy Russian businessman, and several entities under his control or otherwise affiliated with him, to purchase defendants’ controlling interest in White Tiger Gold, Ltd. (“White Tiger”), a gold-mining company. Plaintiffs alleged that defendants misled them about White Tiger’s financial condition and the gold reserves of its mines, principally by means of (1) Finskiy’s oral statements to his personal friend Yanchukov; (2) a false report publicly filed pursuant to the securities laws of Canada (where White Tiger was listed on the Toronto Stock Exchange); and (3) false information provided to a consulting firm engaged by plaintiffs to prepare a report for them on White Tiger. Relevant to the appeal (as well as the decision before the motion court), plaintiffs did not undertake an independent due diligence inquiry to verify defendants’ claims about White Tiger. Specifically, before closing the transaction, plaintiffs conducted neither their own review of White Tiger’s books and records nor their own geological survey of White Tiger’s mining properties. Rather, the complaint merely alleged that “plaintiffs were deceived into taking immediate action . . . to buy defendants out of White Tiger” by Finskiy’s representation that there existed an imminent prospect of the seizure of White Tiger’s assets by a major creditor, which creditor, Finskiy claimed, “had withheld funding to create an exigency.” After the deal closed, an audit commissioned by plaintiffs revealed that $30 million of White Tiger’s cash, which had been reported as having been used to pay for drilling, had been misappropriated. The audit further revealed that White Tiger’s management had paid itself excessive bonuses. In addition, a post-closing geological survey of White Tiger’s only operating gold mine commissioned by plaintiffs revealed that the previous management had substantially overstated both the amount of ore stored at the mine and the mine’s provable gold reserves. Plaintiffs learned that the mine’s remaining “life” was only four years, which was insufficient to generate enough ore to pay off White Tiger’s major creditor. here) discussing=">here) discussing" motion="motion" court’s="court’s" decision.="decision."> The First Department’s Decision The motion court found that Yanchukov, who controlled the plaintiffs, “plainly, a sophisticated businessperson with access to plentiful resources to protect himself and his investments, to obtain the requisite inspections and perform the necessary due diligence.” Though Yanchukov “may have lacked experience in the mining industry,” noted the motion court, “he clearly had the resources necessary to obtain expert advice or, indeed, do an investigation.”  Since Yanchukov failed to utilize those resources and conduct any due diligence, he could not claim that he was defrauded, held the motion court. The First Department agreed with the motion court, affirming the dismissal of the fraud claim on justifiable reliance grounds. Under New York law, sophisticated parties must show that they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing the means of verification available to them at the time. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015) (if a plaintiff has failed to make use of “the means available to it of knowing, by the exercise of ordinary intelligence, the truth or real quality of the subject of the representation,” that plaintiff “will not be heard to complain that it was induced to enter into the transaction by misrepresentations”) (internal quotation marks and brackets omitted); DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154-155 (2010) (a sophisticated investor claiming to have been defrauded must allege that it took reasonable steps to protect itself against deception); VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (“ ophisticated investors must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time”). In Unique Goals , the Court agreed with the motion court that plaintiffs were “financially sophisticated investors.” Slip op. at *2. As such, they had an obligation to conduct due diligence “to verify defendants’ representations about White Tiger’s financial condition and gold reserves.” Id . Like the motion court, the First Department found that plaintiffs failed to conduct such due diligence, “or even sought to do so, even though they were aware that White Tiger was experiencing financial difficulties.” Id .  Accordingly, the Court concluded, “the complaint fail to state a legally sufficient cause of action for fraud.” Takeaway In our prior “takeaway” of the case, this Blog said that the motion court’s decision reflected adherence to the message conveyed by the Court of Appeals about assessing the sufficiency of a justifiable reliance allegation: where sophisticated parties are involved, they must verify and investigate the truthfulness of the assurances and representations on which they rely. With the First Department’s unanimous affirmance, that message is reaffirmed – to wit: “where a person or entity, especially a sophisticated one, does not verify and investigate the truthfulness of assurances and representations, or is lax in doing so, the claim should be dismissed for failing to satisfy the justifiable reliance element.”