From time to time, this Blog writes about procedural issues that arise during the course of a litigation. Today, we write about the note of issue and certificate of readiness. A note of issue is a form that is filed and served on all parties confirming that the case is ready for trial. CPLR § 3402(a). Although any party may file the note of issue after issue is joined, it is usually the plaintiff who files the form. In addition to the note of issue, the party making the filing must also file a certificate of readiness. 22 NYCRR § 202.21. A certificate of readiness provides a certification that, among other things, all pretrial discovery has been completed, there are no outstanding requests for discovery, there has been a reasonable opportunity to complete all discovery proceedings, and the case is ready for trial. “The purpose of a note of issue and certificate of readiness is to assure that cases which appear on the court’s trial calendar are, in fact, ready for trial.” Tirado v. Miller , 75 A.D.3d 153 (2d Dept. 2010). Sometimes, the parties are not in agreement that the case is ready for trial. When that happens, a motion to vacate the note of issue typically follows. Such was the case in Cioffi v. S.M. Foods, Inc. , 2019 N.Y. Slip Op. 09250 (2d Dept. Dec. 24, 2019) ( here ). Pursuant to the Uniform Rules for Trial Courts, “ ithin 20 days after service of a note of issue and certificate of readiness, any party to the action or special proceeding may move to vacate the note of issue, upon affidavit showing in what respects the case is not ready for trial, and the court may vacate the note of issue if it appears that a material fact in the certificate of readiness is incorrect.” 22 NYCRR § 202.21(e). A statement in a certificate of readiness to the effect that all pretrial discovery has been completed is a material fact, and where that statement is incorrect, the note of issue should be vacated. Barrett v. New York City Health & Hosps. Corp. , 150 A.D.3d 949, 951-952 (2d Dept. 2017).  Thus, “ here a party timely moves to vacate a note of issue …, it need show only that a material fact in the certificate of readiness is incorrect, or that the certificate of readiness fails to comply with the requirements of ... section <202.21> in some material respect.” Vargas v. Villa Josefa Realty Corp. , 28 A.D.3d 389, 390 ([1st Dept. 2006); 22 NYCRR § 202.21(e). The movant is not required to establish that additional discovery was necessary because unusual or unanticipated circumstances had developed subsequent to the filing of the note of issue. Jacobs v. Johnston , 97 A.D.3d 538, 538 (2d Dept. 2012); 22 NYCRR § 202.21(d)(e). Where the movant fails to timely seek vacatur of the note of issue and certificate of readiness, however, he or she must demonstrate “good cause” for vacatur. 22 NYCRR § 202.21(e). To satisfy the “good cause” requirement, the party seeking vacatur must “demonstrate that unusual or unanticipated circumstances developed subsequent to the filing of the note of issue and certificate of readiness requiring additional pretrial proceedings to prevent substantial prejudice.” Ferraro v. North Babylon Union Free School Dist. , 69 A.D.3d 559, 561 (2d Dept. 2010 (quoting White v. Mazella-White , 60 A.D.3d 1047, 1049 (2d Dept. 2009) (internal quotation marks omitted)). Further, where the court has directed the completion of discovery by a certain date or where the party seeking vacatur has failed to timely comply with court orders and discovery demands, denial of a motion to vacate is proper. Encarnacion v. Monier , 81 A.D.3d 875 (2d Dept. 2011); Rampersant v. Nationwide Mut. Fire Ins. Co. , 71 A.D.3d 972, 973 (2d Dept. 2010); Savin v. Brooklyn Mar. Park Dev. Corp. , 61 A.D.3d 954, 955 (2d Dept. 2009). Whether to grant the motion to vacate a note of issue and certificate of readiness rests within the sound discretion of the court. Rampersant , 71 A.D.3d at 973. Cioffi v. S.M. Foods, Inc. Cioffi involved an action to recover damages for, among other things, personal injuries. The plaintiffs appealed from an order of the Supreme Court, Westchester County (Joan B. Lefkowitz, J.), dated December 2, 2015, which, inter alia , denied their motion to strike the note of issue and certificate of readiness and to direct further discovery. The Appellate Division, Second Department affirmed. The Second Department agreed with the motion court that plaintiffs had ample opportunity to conduct the discovery plaintiffs claimed was needed. Thus, even though the plaintiffs timely filed the note of issue and certificate of readiness as ordered by the motion court, the Second Department found no basis to disturb that order: Here, the Supreme Court issued a trial readiness order on August 27, 2015, which, inter alia , directed the plaintiffs to serve and file a note of issue within 20 days. At that time, it had been 6½ years since the injured plaintiff’s accident, 6 years since the original summons and complaint were filed, and 4 years since the present action was commenced. In that time, the plaintiffs had served more than 50 discovery demands and moved more than 36 times to compel various disclosure. On September 21, 2015, the plaintiffs filed their note of issue as directed, but the following day moved to strike the note of issue and certificate of readiness due to a need for further discovery and to direct certain disclosure. The court found that the plaintiffs had been given “every opportunity to conduct discovery” and had done so “extensively,” and that vacatur of the note of issue and certificate of trial readiness was not warranted. Under these circumstances, we agree with the court’s denial of the plaintiff’s motion. Slip op. at *2. Takeaway The court may vacate a note of issue where a material fact set forth therein, i.e. , the representation that discovery is complete, is incorrect. Cioffi shows that the court’s discretion in determining the correctness of that fact is broad.

Whether to permit discovery of insurance coverage decisions is often hotly contested. The issue typically arises in cases in which the carrier performs an investigation into the facts and circumstances of a potential or actual claim. The fruits of such an investigation can be very illuminating. For this reason, plaintiffs request the disclosure of all documents concerning such investigations. Defendants and insurers often resist producing these materials on privilege and work product grounds. To obtain such protection, these parties must demonstrate that the investigative materials were prepared solely in anticipation of litigation. Sounds easy. But, as is often the case, it is not. Attorney-Client Privilege and Mixed Purpose Reports The starting point for the analysis begins with Section 3101 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3101, “all matter material and necessary to the prosecution or defense of an action” is to be disclosed. Reid v. Soults , 138 A.D.3d 1091, 1092 (2d Dept. 2016) (citing Allen v. Crowell-Collier Pub. Co. , 21 N.Y.2d 403, 406-07 (1968)). Courts are to determine whether documents and information are “material and necessary” liberally so that there will be disclosure of “any facts bearing on the controversy will assist preparation for trial” and “sharpen[ ] the issues and reduc delay and prolixity.” Yoshida v. Hsueh-Chih Chin , 111 A.D.3d 704, 705 (2d Dept. 2013). Stated differently, the documents and information must be relevant. Id . at 705-06. CPLR § 3101 also “establishes three categories” of materials that are protected from production: “privileged matter, absolutely immune from discovery (CPLR 3101 ); attorney’s work product, also absolutely immune (CPLR 3101 ); and trial preparation materials , which are subject to disclosure only on a showing of substantial need and undue hardship.” Forman v. Henkin , 30 N.Y.3d 656, 661-662 (2018). Because withholding documents based on one of the foregoing privileges obstructs the truth-finding process ( Spectrum Sys. Int’l Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)), “ he burden of establishing a right to protection under these provisions is with the party asserting it – the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity.” Id . at 662; see Rickard v. New York Cent. Mut. Fire Ins. Co. , 164 A.D.3d 1590, 1591-1592 (4th Dept 2018). “ court is not required to accept a party’s characterization of material as privileged or confidential.” Rickard , 164 A.D.3d at 1592 (internal quotation marks omitted). “Ultimately, resolution of the issue whether a particular document is . . . protected is necessarily a fact-specific determination . . . , most often requiring in camera review.” Id . (internal quotation marks omitted). See also Spectrum , 78 N.Y.2d at 378 (citation omitted). To fall within the conditional privilege of CPLR 3101(d)(2), the material sought must be prepared solely in anticipation of litigation. Hawley v. Travelers Ind. Co. , 90 AD2d 684, 684 (4th Dept. 1982); New England Seafoods of Amherst v. Travelers Cos. , 84 AD2d 676, 677 (4th Dept. 1981). Whether material is prepared solely in anticipation of litigation is determined by looking at the facts objectively, rather than subjectively, “because litigation can be anticipated at the time almost any incident occurs.” For this reason, there must be “a substantial and significant threat of litigation” before a party’s anticipation of litigation is considered ‘reasonable.’” See , e.g. , Royal Indem. Co. v. Salomon Smith Barney , Index. No. 125889/99 (Sup. Ct., N.Y. County July 8, 2004) ( here ) (quoting Harper v. Auto-Owners Ins. Co. , 138 F.R.D. 655, 659 (S.D. Ind. 1991)). In the context of insurance coverage disputes, “ ocuments prepared in the ordinary course of an insurance company’s investigation to determine whether to accept or reject coverage and to evaluate the extent of a claimant’s loss are not privileged and are, therefore, discoverable.” Brooklyn Union Gas Co. v. American Home Assur. Co. , 23 A.D.3d 190, 191 (1st Dept. 2005). Importantly, such documents do not become privileged “merely because an investigation was conducted by an attorney.” Id . (quoting Spectrum Sys. , 78 N.Y.2d at 379). Attorney-Client Privilege and Third Parties Under CPLR § 3101(b), attorney-client communications are immune from discovery. “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 reason for such immunity: the privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum , 78 N.Y.2d at 377. As the Court of Appeals observed: “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). 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 and Blue Shield of Greater New York , 73 N.Y.2d 558, 593-594 (1989)). Communications made in the presence of third parties ordinarily are not subject to the attorney-client privilege. Ambac , 27 N.Y.3d at 624. Where, however, the third party is an agent of the attorney or the client, and his or her presence is deemed necessary to enable the attorney-client communications and the client has a reasonable expectation of confidentiality, the attorney-client privilege is not waived. Id . See also Sevenson Envtl. Servs., Inc. v Sirius Am. Ins. Co. , 64 A.D.3d 1234, 1236 (4th Dept. 2009), lv. dismissed , 13 N.Y.3d 893 (2009). Likewise, the attorney work product privilege “extends to experts retained as consultants to assist in analyzing or preparing the case.” Beach v. Touradji Capital Mgt., LP , 99 A.D.3d 167, 170 (1st Dept. 2012). In John Mezzalingua Assoc., LLC v. Travelers Indem. Co. , 2019 N.Y. Slip Op. 09157 (Dec. 20, 2019) ( here ), the Appellate Division, Fourth Department addressed the foregoing principles, reversing much of the motion court’s decision shielding documents and information on work product and privilege grounds. John Mezzalingua Associates, LLC v. Travelers Indemnity Co. Background Plaintiff, John Mezzalingua Associates, LLC (“JMA”), the owner of an engineering and manufacturing facility, commenced the action after rainfall entered and caused damage to the facility in October 2016. JMA asserted a negligence cause of action against defendant, Campany Roofing Company, Inc. (“Company”), stemming from certain roofing work that Campany performed at the facility and asserted a breach of contract cause of action against defendants, the Travelers Indemnity Company and the Phoenix Insurance Company (collectively, “Travelers Defendants”), based upon the Travelers Defendants’ disclaimer of coverage for the loss. JMA had filed a claim with the Travelers Defendants for the loss and, on October 24, 2016, the Travelers Defendants sent Plaintiff a letter reserving their rights under the insurance contract and noting an exclusion in the policy for rain damage. Consequently, JMA hired litigation counsel and other consultants. On January 5, 2017, the Travelers Defendants disclaimed coverage. During discovery, a dispute arose over allegedly privileged documents that JMA withheld or redacted. In its privilege logs, JMA asserted that many of the documents were protected from disclosure on three grounds, i.e. , that they were material prepared in anticipation of litigation ( see CPLR §3101(d)(2)), attorney work product ( see CPLR § 3101(c)), or protected by the attorney-client privilege ( see CPLR § 4503(1)). JMA asserted that a few documents were not discoverable on the sole basis that they were materials prepared in anticipation of litigation. Campany and the Travelers Defendants separately moved to, inter alia , compel JMA’s disclosure of various documents or, in the alternative, for an in camera review of the documents. JMA moved for, among other things, a protective order, contending that all communications involving attorneys or litigation experts on and after October 24, 2016, were presumptively privileged because the Travelers Defendants and JMA contemplated litigation at that time. The motion court denied the Travelers Defendants’ motion, denied in part Campany’s motion, and granted JMA’s motion by, as relevant to the appeal, ordering that all documents that JMA created on and after October 24, 2016, were not discoverable because they were material prepared in anticipation of litigation. Campany and the Travelers Defendants appealed. The Fourth Department’s Decision The Court modified the motion court’s order by denying that part of JMA’s motion seeking a protective order with respect to documents created on or after October 24, 2016, which JMA alleged to be immune from discovery under CPLR § 3101(d)(2). Slip Op. at *3. The Court found that these communications ( e.g. , communications involving attorneys or litigation experts) were not privileged because the Travelers Defendants and JMA did not solely contemplate litigation at the time. The Court explained the materials were “mixed purpose reports” and, therefore, were not “prepared solely in anticipation of litigation.” Id . at *2 (citations omitted). “Because plaintiff ‘did not establish that the requested material was protected by the qualified immunity privilege set forth in CPLR 3101 (d) for material prepared exclusively in anticipation of litigation,’” concluded the Court, “‘the burden did not shift to to establish that they had substantial need’ for the material and could not obtain it without undue hardship.” Id . (quoting Peralta v. New York City Hous. Auth. , 169 A.D.3d 1071, 1074-1075 (2d Dept. 2019)). “With respect to documents that contend were attorney work product or protected by the attorney-client privilege,” said the Court, “many of the documents were shared with or prepared by third parties.” Slip Op. at *3. However, because it was unclear whether the third parties were agents of the attorney or the client, and whether their presence was necessary to enable the attorney-client communications for which the client had a reasonable expectation of confidentiality, the Court remanded to the motion court for an in camera review “to determine if the privileges were actually applicable.” Id . (citations omitted). Takeaway It is well settled that the trial court is given broad discretion to supervise disclosure. See Those Certain Underwriters at Lloyds, London v. Occidental Gems, Inc. , 41 AD3d 362, 364 <2007> , aff’d , 11 N.Y.3d 843 (2008). Under CPLR § 3101, such disclosure is “generous, broad, and is to be construed liberally.” Mann v. Cooper Tire Co. , 33 AD3d 24, 29 (1st Dept. 2006); Allen , 21 N.Y.2d at 406. Consequently, a party is entitled to “full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” CPLR § 3101.   The party claiming immunity from disclosure has the initial burden of showing that the materials being sought were prepared solely and exclusively for litigation purposes. 148 Magnolia, LLC v. Merrimack Mut. Fire Ins. Co. , 62 A.D.3d 486, 487 (1st Dept. 2009). “ his burden cannot be satisfied with wholly conclusory allegations.” Claverack Cooperative Ins. Co. v. Nielsen , 296 AD 2d 789, 789 (3d Dept. 2002). The reason: every request for disclosure must be considered in the context of each case in which it is sought and in light of the evidence presented to the court. Andon v. 302-304 Mott St. Assoc. , 94 N.Y.2d 740, 747 (2000). Consequently, as shown in John Mezzalingua Assocs. , the “resolution of the issue whether a particular document is . . . protected …, most often require in camera review.” Rickard , 164 A.D.3d at 1592 (internal quotation marks omitted). John Mezzalingua Assocs. also highlights the difficulties litigants have satisfying their burden of demonstrating that an investigative report was prepared “solely” in anticipation of litigation. Too often, the claim of privilege is supported by attorney affidavits rather than affidavits from persons with first-hand knowledge. E.g. , Claverack Coop. Ins. Co. v Nielsen , 296 AD2d 789, 789 (3d Dept. 2001). Even reference to emails and letters can come up short if they do not conclusively show that the disputed materials were related solely to future litigation and “not also used to evaluate claim or that retention of an independent investigator was other than ordinary course of business practice.…” Carden v. Allstate Ins. Co. , 105 A.D.2d 1048, 1049 (3d Dept. 1984). Thus, John Mezzalingua Assocs. serves as a reminder to litigants that because immunity from disclosure is a fact-intensive analysis, litigants should come to court with facts and evidence, not conclusory statements, demonstrating that investigative reports were prepared solely in anticipation of litigation.

Recording a mortgage puts the world on notice of the mortgagee’s interest in the real property that is the subject of the mortgage.  “New York has a ‘race-notice’ recording statutory scheme whereby the mortgage recorded first by a mortgagee without notice of any other mortgages will maintain priority over such other mortgages.”  Alliance Funding Co. v. Taboada , 39 A.D.3d 784 (2 nd Dept. 2007).  Section 291 of New York’s Real Property Law , which governs the recording of conveyances in real property, provides: A conveyance of real property, within the state, on being duly acknowledged ... may be recorded in the office of the clerk of the county where such real property is situated, and such county clerk shall, upon the request of any party, on tender of the lawful fees therefor, record the same in his said office. Every such conveyance not so recorded is void as against any person who subsequently purchases or acquires by exchange or contracts to purchase or acquire by exchange, the same real property or any portion thereof, or acquires by assignment the rent to accrue therefrom as provided in section two hundred ninety-four-a of the real property law, in good faith and for a valuable consideration, from the same vendor or assignor, his distributees or devisees, and whose conveyance, contract or assignment is first duly recorded, and is void as against the lien upon the same real property or any portion thereof arising from payments made upon the execution of or pursuant to the terms of a contract with the same vendor, his distributees or devisees, if such contract is made in good faith and is first duly recorded. Notwithstanding the foregoing, any increase in the principal balance of a mortgage lien by virtue of the addition thereto of unpaid interest in accordance with the terms of the mortgage shall retain the priority of the original mortgage lien as so increased provided that any such mortgage instrument sets forth its terms of repayment. The preferred status of a good faith purchaser for value “cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such.”  Chen v. Geranium Development Corp ., 243 A.D.2d 708, 709 (2 nd Dep’t 1997) (citations omitted).  In Chen , plaintiff contracted with the owner to purchase real property.  Plaintiff’s deposit was returned and the contract was cancelled after a dispute arose between the parties.  Thereafter, plaintiff, Chen, commenced an action to foreclose its contract-vendee’s lien in which the court entered a judgment of foreclosure and sale (the “Judgment”) directing the sale of the subject property.  The property was purchased by Fandy Corp., who moved to intervene in the action to vacate the Judgment that permitted the sale of the property now owned by it.  Fandy’s deeds were recorded prior to any recorded interest by Chen.  In denying Fandy the relief it sought, the Court found that Fandy had “actual knowledge of the prior contracts” that Chen entered into with the owner of the property but Fandy “merely accepted, without any proof or inquiry, independent or otherwise, a bare representation prior to their closing that the contracts had been cancelled.”  Chen , 243 A.D.2d at 709.  Thus, the court found that Fandy was not a good faith purchaser for value and its recording of its deed did not prime Chen’s interest in the property. In Emigrant Bank v. Drimmer , 171 A.D.3d 1132 (2 nd Dep’t 2019), the Court also determined whether a party was a good faith purchaser.  In 1999, Drimmer purchased property and obtained a mortgage from lender, which, for some reason, was not recorded until 2006.  However, in 2002 Drimmer sold the property to Sternberg, whose title report did not reveal lender’s yet unrecorded mortgage.  Following the sale to Sternberg, Drimmer continued to make monthly mortgage payments to lender, which included real estate tax escrows.  In 2007, lender learned of Drimmer’s sale to Sternberg and, as a result, accelerated the debt and stopped accepting Drimmer’s monthly payments.  Lender commenced action to “impose its mortgage on the premises, to foreclose the mortgage, and for a judgment declaring that its mortgage is a valid lien against the premises.”  The motion court granted Sternberg’s motion for summary judgment; finding that he was a “good faith purchaser for value … and took the property free of the subject mortgage.” The Second Department reversed.  The Emigrant Court explained what is necessary to be deemed a good faith purchaser as follows: The status of good faith purchaser for value cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such  The intended purchaser must be presumed to have investigated the title, and to have examined every deed or instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record would have led.  If the purchaser fails to use due diligence in examining the title, he or she is chargeable, as a matter of law, with notice of the facts which a proper inquiry would have disclosed" Emigrant , 171 A.D.3d at 1134 (citations and internal quotation marks omitted).  The Court found that Sternberg established his prima facie entitlement to judgment by submitting evidence that he purchased the property “for valuable consideration, without prior notice of mortgage, and without knowledge of facts that would lead a reasonably prudent purchaser to make such an inquiry, and that he recorded his deed prior to the recording of mortgage.”  Emigrant , 171 A.D.3d at 1134 (citations omitted).  Nonetheless, the Court found triable issues of fact precluding summary judgment based on evidence that lender paid real estate taxes on the property before and after Sternberg’s purchase, which might have provided Sternberg with “actual knowledge of the mortgage prior to his purchase and whether due diligence in examining the tax records for the property would have placed him on inquiry notice of the mortgage prior to his purchase.”  Emigrant , 171 A.D.3d at 1134 (citations omitted). Related issues were recently addressed in Bank of America v. Giwa (Sup. Ct. New York Co. December 13, 2019).  The defendant in Giwa was one of the first individuals to purchase a new unit in a recently converted condominium.  Prior to the conversion, the entire building had a single tax lot designation.  “However, because a condominium is real property, each unit gets its own block and lot designation when the new condos are created. In the condominium declaration, the individual units were assigned individual lots and defendant's condominium was designated Block 2041 Lot 1307.”  At the time defendant purchased his unit, he obtained a mortgage from lender and, thereafter, obtained a loan modification from lender increasing the principal balance of the loan.  The original mortgage and the documents relating to the subsequent loan modification were mistakenly recorded against the prior lot number relating to the entire building before conversion, instead of the lot number related to defendant’s individual, post-conversion, unit. Giwa defaulted on the loan and lender commenced foreclosure proceedings.  The record was clear that lender realized its mistake but took no steps to correct them with the County Clerk; as it would have been permitted to do under New York County Law § 919(j).  In the meantime, Giwa failed to pay his condominium charges and his unit was sold at a Sheriff’s sale (the “Sale”) to pay the judgment.  The purchaser at the Sale (the “Purchaser”) recorded the deed against the correct parcel. The Giwa Court found that Purchaser was a “bona fide purchaser for value and it takes title to the property free and clear of lender’s mortgage because of improper recording.”  The Court was not moved by lender’s argument that at the time the mortgage was executed “the new condo lots had been designated but had not yet been formed by the city.”  Lender was not “absolved” of its “responsibility to ensure its mortgage was recorded against the correct lot in the intervening time since the mortgage was executed.”  The Court found that lender had numerous opportunities, but failed, to correct its mistake over a rather long period of time.  Thus, the Court found that “ he simple fact is that plaintiff had many chances to correct its mistake in the past twelve years but did nothing to put anyone on notice that it claimed an interest in this condominium unit.  Had plaintiff taken any action, this situation could have been avoided.”  The Court determined that Purchaser was entitled to rely on its title search, which failed to disclose the existence of lender’s mortgage recorded improperly on the wrong unit.  The Court also found that Purchaser was not “on inquiry notice that there was a possible mortgage recorded on the property because the deed was not recorded on tax lot.” In denying lender’s motion for summary judgment and granting Purchaser’s motion for summary judgment, the Court expressed its concerns with lender’s position and stated: An extremely cautious purchaser might have considered looking at the Base Lot. But that type of purchaser might also do searches on the neighbors' condo units or on the surrounding buildings. The fact is that attempts to blame for not discovering < lender's > lender's> mistake. Apparently, did not realize this mistake for nearly a decade. and yet it claims should have somehow realized it.  (Emphasis in original.)

In August of this year, this Blog wrote about Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 32470(U) (Sup. Ct., N.Y. County Aug. 20, 2019) ( here ), a case involving several elements of a fraud claim. ( Here .) As we noted at the time, Norddeutsche was a good example of why the courts refrain from dismissing fraud claims – there are issues of fact that are best left to the trier-of-fact to decide. Shortly after this decision, Defendants appealed the motion court’s order. On December 17, 2019, the Appellate Division, First Department unanimously affirmed the decision. Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 08965 (1st Dept. Dec. 17, 2019) ( here ). To give context to the First Department’s decision, a brief discussion of the facts of the case follows. The case arose in 2005 with the investment by Norddeutsche Landesbank Girozentrale, a German financial institution, and Hannover Funding Company, a Delaware LLC and a commercial paper conduit administered by Norddeutsche (together “Plaintiffs”), in one of the two funds managed by Defendant Patriarch Partners (“Patriarch”). The funds at issue, Zohar II and Zohar III (the “Funds”), were created in January 2005 and April 2007, and had maturity dates of January 20, 2017, and April 15, 2019, respectively. Zohar II and Zohar III each issued over $1 billion in notes that were rated at issuance either AAA/Aaa or AA/Aal by S&P and Moody’s, respectively (the “Notes”). Before purchasing the Notes, Plaintiffs received transaction documents, marketing materials, indentures, and collateral management agreements relating to each fund, as well as an offering memorandum for the Zohar III Fund. In January 2005, Plaintiffs purchased $75 million of Notes in Zohar II. In April 2007, Plaintiffs purchased $60 million of Notes in Zohar III. The Funds performed poorly. Plaintiffs claimed that Defendants withheld fund performance and related information from them by furnishing fraudulent reports that concealed the actual performance of the underlying loans in the Funds. Plaintiffs sold their Notes for a loss of approximately $45 million in April 2012, before the maturity date of either fund. Plaintiffs claimed that they sold the Notes due to their poor performance, multiple ratings downgrades (of which they were aware), and the increasing capital requirements generated by the investment. Defendants claimed that Plaintiffs sold the Notes for independent business reasons. Plaintiffs also alleged that instead of running the Funds as represented, Defendants Lynn Tilton (“Tilton”) and Patriarch ran the Funds as private equity funds. Plaintiffs maintained that Defendants used the money from the Funds to purchase equity in distressed assets, contrary to Defendants’ representations. Plaintiffs further alleged that Defendants collected management fees, dividends, preferred share buyouts, and income distributions from the companies that were owed to the Funds. Additionally, Plaintiffs alleged they were told that Tilton and the Patriarch entities were supposed to pay for and own the underlying equity in the portfolio companies, while the Funds would make loans to the companies. Plaintiffs alleged that they understood the Funds would be entitled to an equity kicker in some cases (to participate in the upside if Defendants were successful in turning the companies around) but would not be exposed to the downside risk of holding equity positions. Defendants moved for summary judgment on, inter alia , the following grounds: 1) Plaintiffs’ claims were time-barred; 2) Plaintiffs did not justifiably rely on any alleged misrepresentation by Defendants; and 3) Plaintiffs could not prove loss causation. The motion court denied the motion. Before the motion court, Defendants claimed that Plaintiffs could not prove that their losses were proximately caused by Defendants’ alleged misrepresentations and omissions. According to Defendants, Plaintiffs conceded during discovery that there was an independent reason for their losses – namely, the “heavy capital usage” imposed by the investment. The motion court rejected this contention: A finder of fact could determine that the decision to sell was causally linked to the alleged fraud, which Plaintiff contends led it to assume a certain level of performance, credit rating, and capital requirements, which in tum impacted whether to hold or sell the notes. A finder of fact could also reasonably conclude that had Plaintiffs known about the actual Fund structure, they would never have entered into the transaction in the first place. While Mr. Weber’s testimony might be fodder for cross-examination, it is insufficient to establish a loss causation defense as a matter of law. Like the motion court, the First Department held that there were issues of fact “as to whether plaintiffs’ losses were proximately caused by defendants’ alleged fraud.” Slip Op. at *1. Turning its attention to the justifiable reliance element, the Court said that the case before it was not “the rare circumstance in which the issue of reasonable reliance be resolved at the summary judgment stage of a fraud case.” Id . (citation omitted). The reason, explained the Court, was found in its prior decision in the case in which it held that “much of the information and disclosures that defendants contend triggered a duty of inquiry beyond the inquiry that plaintiffs undertook ‘ be interpreted in a myriad of ways and not facially clash with plaintiffs’ position that, even having some knowledge that the Funds had an equity component to them, they could not have known before the SEC proceeding the extent to which defendants used plaintiffs’ investment to acquire and control the Portfolio Companies, or otherwise had an obligation, based on that evidence, to further investigate.’” Id . (quoting Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 161-162 (1st Dept. 2017). Nothing “surfaced” after “discovery that would warrant a different conclusion,” noted the Court. Id . Finally, the Court agreed with the motion court that the fraud claims were not barred by the statute of limitations. Before the motion court, Defendants argued that Plaintiffs were aware of the truth about the structure of the funds from the marketing materials distributed to them in 2004 and 2006. In particular, Defendants maintained that statements in these materials sufficed to inform Plaintiffs that the Funds would hold equity and thus be at risk of suffering a loss. As such, Defendants contended that the claims were time-barred because Plaintiffs knew or should have known of the alleged fraud before 2005 and 2007, when they made their investments in the respective Funds. The motion court rejected this argument. The First Department agreed, holding that “the evidence adduced in discovery as to plaintiffs’ knowledge that the Zohar Funds included equity interests in distressed companies not eliminate issues of fact as to whether the information plaintiffs had was sufficient to place them on inquiry notice of the alleged fraud before May 2013, and therefore not permit a conclusion as a matter of law that the fraud claim barred by the statute of limitations.” Id . (citation omitted). Takeaway This Blog has written about numerous cases, both on the appellate and trial court level, in which the courts have dismissed fraud claims on justifiable reliance grounds. Perhaps, the stage of the proceedings plays a significant role in those decisions. After all, in Norddeutsche, the First Department made a point of noting that the case before it came at the summary judgment stage of the proceedings. If the issue of whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted)), then it stands to reason that the same should hold true at the motion to dismiss stage. Yet, as noted in this Blog’s August 2019 post about the case, “ he law reporters (not to mention the pages of this Blog) are brimming with cases in which the courts have dismissed fraud actions due to pleading and proof deficiencies.” It therefore remains to be seen whether those aggrieved by fraudulent misconduct will survive motions to dismiss, let alone motions for summary judgment because issues of fact prevail.

A common fact pattern for accounting fraud involves a public company recognizing revenues before they are realized or realizable and earned. Senior executives who engage in such fraud often do so to meet or beat analysts’ revenue and earnings estimates. Case after case shows that the pressure to satisfy Wall Street (that is, meet or beat analysts’ estimates) is strong. When a public company and its senior executives issue materially false and misleading statements about the company’s accounting practices and procedures, it usually draws the attention of the Securities and Exchange Commission (the “SEC”) and investors and shareholders, who file class action lawsuits to recover the damages caused from the decline in the price of the company’s stock resulting from the revelation of the truth about the company’s accounting practices. Sometimes, the conduct is egregious enough that criminal proceedings commence against the company and/or the responsible senior executives. Litigation involving Iconix Brand Group, Inc., the clothing and fashion brand-management company, and certain of its former senior executives, is a recent example of the foregoing. On June 23, 2015, shareholders filed class action complaints against Iconix Brand Group, Inc. (“Iconix” or the “Company”) and, among others, Neil Cole (“Cole”), the Company’s former Chief Executive Officer, Seth Horowitz (“Horowitz”), the Company’s former Chief Operating Officer, and Warren Clamen (“Clamen”), the Company’s former Chief Financial Officer. Following the appointment of Lead Plaintiffs, and motion practice directed to the sufficiency of the allegations in the complaint, Lead Plaintiffs filed a second amended complaint alleging that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) by issuing materially false and misleading statements regarding the Company’s accounting treatment for, inter alia, overseas joint ventures Iconix entered into to conceal its deteriorating financial condition. Specifically, Lead Plaintiffs alleged that Iconix formed overseas joint ventures, “sold” a 50% stake to local partners for millions of dollars, then immediately booked the entire purchase price – of which the joint venture partners paid only a fraction at closing, with the majority due in installments over a number of years – as profits for Iconix. Lead Plaintiffs alleged that, throughout the class period, defendants repeatedly assured the SEC and investors that the joint venture partners were obligated to pay their installments in full; that these partners were “well-capitalized” and “predetermined” to pay; and that if they did not pay, Iconix had “full recourse” and would sue to collect. Lead Plaintiffs alleged that these statements, made in direct response to an SEC inquiry into Iconix’s joint venture accounting that began in December of 2014 (the “SEC Inquiry”), were false. In July 2019, the class action lawsuit was settled as to the Iconix defendants for $6 million. On September 23, 2019, the court preliminarily approved the proposed settlement. Notice was disseminated and a final approval hearing date was scheduled for January 23, 2020. here.=">here."> On December 5, 2019, the SEC announced (here) that it charged Iconix, Cole, Horowitz and Clamen with fraud. As discussed below, Horowtiz and Clamen agreed to settle the claims. Cole did not. Consequently, the SEC’s litigation against him remains ongoing. See="See" Candie’s="Candie’s" Inc.,="Inc.," Securities="Securities" Release No.="Release No." (Apr.="(Apr." 30,="30," 2003),="2003)," available="available" at="at" https://www-test.sec.gov/litigation/admin/33-8228.htm. In=">https://www-test.sec.gov/litigation/admin/33-8228.htm. In" 1996,="1996," Candie’s="Candie’s" Securities Act="Securities Act" (the="(the" “Securities="“Securities" Act”)="Act”)" in="in" connection="connection" scheme="scheme" to="to" evade="evade" the registration="the registration" requirements="requirements" respect="respect" four="four" offerings.="offerings." See="See" Inc., Securities="Inc., Securities" Release="Release" No.="No." (Feb.="(Feb." 21,="21," 1996),="1996)," >https://www.sec.gov/litigation/admin/3436865.txt.=">https://www.sec.gov/litigation/admin/3436865.txt."> In its complaint against Cole and Horowitz (here), the SEC alleged that these senior executives devised a fraudulent scheme to create fictitious revenue, allowing Iconix to meet or beat Wall Street analysts’ consensus estimates in the second and third quarters of 2014. According to the SEC, Cole and Horowitz realized substantial profits on Iconix stock sales as a result of the alleged fraud. In order to conceal the fraud, Cole and Horowitz allegedly deleted emails and caused Iconix to make false and misleading statements in response to the SEC Inquiry. In its complaint against Iconix (here), the SEC charged the Company with fraud for recognizing false revenue and manipulating its reported earnings in 2014, entering into transactions to conceal distressed finances at two licensees who could not meet licensing royalty payments owed to Iconix, and failing to recognize over $239 million in impairment charges for three brands over a multi-year period. Additionally, alleged the SEC, Iconix and Clamen failed to recognize losses from Iconix’s failing licensees, disclose that Iconix entered into transactions to secretly and temporarily bolster its licensees’ finances, and properly test for impairments. As a result of these alleged accounting improprieties, Iconix overstated net income by hundreds of millions of dollars between 2013 and the third quarter of 2015. “As the Commission alleges, Iconix and its top executives deceived investors by manipulating revenue and a key earnings metric, schemed to hide the lackluster results of its top brands and concealed growing losses,” said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement. “Today’s actions reflect our efforts to hold companies and executives accountable and obtain meaningful relief for investors.” Without admitting or denying the allegations, Iconix agreed to injunctive relief and to pay a $5.5 million penalty, an amount that reflected the Company’s cooperation and remediation efforts, said the SEC. Horowitz consented to injunctive relief and a permanent officer and director bar, and agreed to disgorgement and prejudgment interest of over $147,000, and a penalty in an amount to be determined at a later date. The settlements are subject to court approval. Clamen, without admitting or denying the SEC’s findings, agreed to cease and desist from future violations of the securities laws and pay disgorgement and prejudgment interest of nearly $50,000 and a $150,000 penalty. According to the SEC order (here), Clamen is suspended from appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after three years. In its litigation against Cole, the SEC is seeking monetary and injunctive relief, including a permanent officer and director bar, and reimbursement to Iconix of certain incentive-based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act. In parallel actions, the U.S. Attorney’s Office for the Southern District of New York also announced on December 5, 2019, the filing of criminal charges against Cole and Horowitz (here). Horowitz pled guilty to the charges and is cooperating with the Government. Commenting on the charges, United States Attorney Geoffrey S. Berman said: “As alleged, Neil Cole entered into illegal secret agreements with joint venture partners to artificially inflate the value to his company. Further, as alleged, Cole lied to outside auditors and to the SEC, and took steps to destroy evidence. Now Neil Cole is in custody and facing serious criminal charges for his alleged conduct. This is the third accounting fraud case brought by our Office in the last four months, which illustrates both the pervasiveness of this crime and my Office’s commitment to policing it.” FBI Assistant Director William F. Sweeney Jr. added: “As alleged, Cole and Horowitz falsely represented the financial standing of Iconix’s revenue at the expense of its shareholders and the investing public. To aggravate matters further, they allegedly destroyed and concealed evidence from the SEC during their inquiry into the company’s joint ventures. This is not a crime to be taken lightly, and as our charges today prove, this type of alleged dishonorable behavior will not go unpunished.”

This Blog, in “ The New York Court of Appeals Addresses the Issue of When a Mechanic’s Lien Can Be Placed on a Landlord’s Property By A Contractor Performing Work For A Tenant ,” quoting John P. Kane Co. v. Kinney , 12 Bedell 69 (1903), explained the purpose of a mechanic’s lien as follows: The object and purpose of mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest. Section 3 of New York’s Lien Law provides, in pertinent part: A contractor, subcontractor, laborer, materialman , who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor … or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien as prescribed in this chapter. Thus, a mechanic’s lien is a powerful tool as it becomes an incumbrance on the real property that was purportedly improved by the work of the lienor.  This Blog has also addressed mechanisms to discharge a mechanic’s lien, which may present a problem for an owner ( here ). Due to the leverage that a mechanic’s lien provides to a lienor, the Lien law permits a lienor to be “punished” if the filed lien is “willfully exaggerated”.  Howdy Jones Const. Co., Inc. v. Parklaw Realty, Inc. , 76 A.D.2d 1018 (3 rd Dep’t 1980), affirmed , 53 N.Y.2d 718 (1981).  Lien Law § 39 declares that willfully exaggerated liens are void.  Lien Law § 39-a , which sets forth the penalties that can be assessed against a lienor when a lien is found to be “willfully exaggerated,” provides: Where in any action or proceeding to enforce a mechanic's lien upon a private or public improvement the court shall have declared said lien to be void on account of wilful exaggeration the person filing such notice of lien shall be liable in damages to the owner or contractor.   The damages which said owner or contractor shall be entitled to recover, shall include the amount of any premium for a bond given to obtain the discharge of the lien or the interest on any money deposited for the purpose of discharging the lien, reasonable attorney's fees for services in securing the discharge of the lien, and an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceeded the amount actually due or to become due thereon. Numerous courts have noted that the “wilful exaggeration” provisions of the lien law were “intended to punish wilful exaggeration and not honest differences in contract interpretation.   Howdy Jones , 76 A.D.2d at 1018 (citations omitted).  If the amount of a lien is both inflated due to a wilful exaggeration and an honest mistake, “the damages are limited to the amount by which the lien is wilfully exaggerated.”  Goodman v. Del-Sa-Co Foods, Inc. , 15 N.Y.2d 191 (1965) (citations and internal quotation marks omitted).  The Goodman Court noted that: As has been true more than once of statutory language — even of opinions of courts — the language may not perfectly fit the thought, but the intention of the Legislature is plain. The draftsman of the statute was thinking of the simple situation where the entire amount of the exaggeration is willful. The purpose was manifestly to allow the recovery of a civil penalty by the owner, to recompense him for the extra trouble and expense to which he has been put by the filing against his property of a deliberately exaggerated mechanic's lien, in the amount by which the lien was thus exaggerated. There is no suggestion of an idea that the owner is entitled to recover anything on account of an honest mistake. Goodman , 15 N.Y.2d at 195 - 96. In Goodman , it was clear that the lien was exaggerated by a combination of honest mistakes and willfulness, but the lower court failed to make findings as to the extent of each.  Therefore, the Court remanded the case to make the necessary findings on which the penalties of Lien law 39-a could be based.  Goodman , 15 N.Y.2d at 199. “In interpreting the Lien Law, our courts have held that damages under section 39-a may not be awarded unless the lien has been declared void for wilful exaggeration after a trial in an action to foreclose the lien.”  Wellbilt Equipment Corp. v. Fireman , 275 A.D.2d 162, 166 (citations omitted).  Accordingly, if the mechanic’s lien is discharged prior to trial and, therefore, the “action is … merely one in contract” and is “no longer one seeking to enforce a mechanic’s lien,” there “remains no lien to be declared void by the court” and a “wilful exaggeration claim is precluded.”  Wellbilt , 275 A.D.2d at 166 – 67 (citations omitted). On December 11, 2019, the Appellate Division, Second Department, decided Degraw Const. Group, Inc. v. McGowen Builders, Inc. In Degraw , the plaintiff subcontracted with the defendant general contractor on several projects.  The subcontracts were terminated pursuant to a settlement agreement pursuant to which “the parties would release each other from all potential claims arising from the projects except, inter alia, for claims arising from latent defects in workmanship.”  The agreement also provided that “if either party breached the agreement, the other party’s sole remedy would be to seek enforcement of the terms of the agreement.”   The general contractor made $100,000 of the $150,000 in installment payments that were due to the subcontractor under the settlement agreement, but stopped “because latent defects had been discovered in the plaintiff’s work.” Notwithstanding the terms of the settlement agreement, however, the plaintiff subcontractor filed mechanic’s liens against the subject properties and commenced action to foreclose same.  The defendant general contractor and its surety that posted bonds to discharge the liens served “answers interposing counterclaims alleging, inter alia, that the mechanic’s liens were barred by the settlement agreement and therefore were willfully exaggerated.”  On the motion for summary judgment of the general contractor and its surety, the motion court awarded the general contractor “damages in the sum of $25,645, representing the sum paid in premiums for the bonds given to obtain discharge of the liens.  On appeal, the general contractor and its surety argued that “they were entitled to additional damages and attorney’s fees under Lien Law § 39-a based on the plaintiff’s alleged willful exaggeration of the mechanic’s liens.” In affirming the motion court “insofar as appealed from,” the Second Department determined that remedies under Lien Law § 39-a were unavailable to the general contractor and its surety.  In so doing, the Degraw Court stated: However, the Legislature intended the remedy in Lien Law § 39-a to be available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action. Moreover, the remedy in Lien Law § 39-a requires a finding that the lienor deliberately and intentionally exaggerated the lien amount, and is available only where the lien is otherwise valid.  (Citations, internal quotation marks and brackets omitted.) Because the general contractor and its surety “contended in their motion for summary judgment, and the Supreme Court determined, that both of the plaintiff's mechanic's liens were invalid in their entirety because the plaintiff was precluded by the settlement agreement from asserting them, and was instead relegated to seeking enforcement of the agreement as its sole remedy for 's alleged breach of the agreement's terms” “damages under Lien Law § 39-a for willful exaggeration of the liens were unavailable, as the liens were not otherwise valid.

It is not uncommon for parties settling an action to negotiate a confidentiality provision that prohibits them from disclosing the terms of their agreement. While there may be reasons for requiring non-disclosure (a topic for another day), courts often grapple with the circumstances under which disclosure is warranted. In Appleyard v. Tigges , 2019 N.Y. Slip Op. 29373 (Sup. Ct., Bronx County Dec. 6, 2019) ( here ), the Court declined to order the disclosure of a confidential settlement between the plaintiff and one of the defendants because the request was made for purely tactical reasons, rather than for determining the underlying issue of fault and damages. Courts Favor Settlement Courts favor negotiated settlements because a resolution of a dispute avoids costly, time-consuming litigation and conserves the resources of the judicial system. Hallock v. State of N.Y. , 64 N.Y.2d 224 (1984); Denburg v. Parker , 82 N.Y.2d 375 (1993). In addition, there is a societal benefit in recognizing the autonomy of parties to shape their own solution to a controversy rather than having one judicially imposed upon them. Denburg , 82 N.Y.2d 375. Under certain circumstances, it is necessary to maintain the confidentiality of a settlement in order to protect the litigants and/or encourage a fair resolution. In re NY County Data Entry v. A.B. Dick Co. , 162 Misc. 2d 263 (Sup. Ct., N.Y. County 1994), aff’d , 222 A.D.2d 381 (1st Dept. 1995). When that happens, the courts must weigh the agreed upon provision for confidentiality against the rights of those who are not privy to the settlement agreement. When a plaintiff settles with one of the defendants, the non-settling defendant(s) may be entitled to discovery of the confidential settlement if the terms of the settlement are material and necessary to the prosecution and/or defense of an action. CPLR § 3101(a); Allen v. Crowell-Collier , 21 N.Y.2d 403 (1968). This does not mean that the non-settling defendant(s) can obtain the terms of the settlement by merely invoking the term “material and necessary”. Rather, the stated need for the information must be relevant to the prosecution and/or defense of the action. Trial strategy is not sufficient to meet this standard. In In re N.Y. County Data Entry Worker Prod. Liab. Litig. , 222 A.D.2d 381 (1st Dept. 1995), the First Department held that the desire to use the terms of a settlement to assess a defendant’s maximum exposure, or to determine whether to settle or continue the litigation, was not material and necessary to the defense of the action to warrant usurping the confidentiality of the agreement. In Osowski v. AMEC , 69 A.D.3d 99 (1st Dept. 2009), the defendant, AMEC, commenced a third-party action against its subcontractor, DCM. Sometime during the litigation, the plaintiff and AMEC settled and entered into a confidential settlement agreement. The First Department determined that DCM was entitled to disclosure of the confidential settlement agreement because the “settlement of the main action directly the underlying issue of fault and damages.” The court reasoned that “since the third-party action was one for indemnification and was necessarily predicated on the fact that AMEC/NYTB was ‘out-of-pocket’ for a loss which should have been borne by DCM,” the “the question of who funded the settlement of the main action was critical to whether AMEC/NYTB could continue to maintain the third-party action.” 69 A.D.3d at 106. In reaching its decision, the court rejected AMEC/NYTB’s reliance on Matter of New York County Data Entry Worker Prod. Liab. Litig. , because “the terms of agreement were not material to the resolution of the issues involved in the case.” Id . at 107. “Specifically,” said the court, “we concluded that other than the amount of settlement, a confidential settlement between the plaintiffs and the codefendants had no relevance to a possible postverdict apportionment under General Obligations Law § 15-108.” Id . GOL § 15-108(a) provides that when a plaintiff settles with one of the defendants, the plaintiff’s recovery against the remaining defendants is reduced by the greater of the amount paid in the settlement or the settling defendant’s equitable share of fault as apportioned by the jury. The statute requires the disclosure of the confidential agreement’s settlement amount, but only after a verdict is rendered against the non-settling defendants to determine post-verdict apportionment. Matter of Steam Pipe Explosion , 128 A.D.3d 493 (1st Dept. 2015). In Mahoney v. Turner , 61 A.D.3d 101 (2009), a confidential settlement agreement was entered into between the plaintiff and two of the defendants, Turner (general contractor) and FDA (site owner). Earlier in the litigation, these defendants commenced a third-party action against the defendant, Williams, a sub-contractor. Williams sought disclosure of the confidential settlement agreement out of concern that Turner and FDA were improperly colluding. Williams contended, and Turner and FDA did not dispute, that these two defendants were planning to continue participating in the underlying trial between the plaintiff and Williams. The First Department was concerned with the uncertainty about whether Turner and FDA planned to participate in the trial, and if they did, the reason for their continued participation, and whether this could result in prejudice to Williams. To address these concerns, the First Department limited the disclosure to an in-camera inspection of the confidential settlement agreement by the Supreme Court. Against these principles, the Appleyard Court held that the non-settling defendants were not entitled to the terms of the confidential settlement. Background Appleyard arose in August 2012, when defendants administered the antibiotic, Vancomycin, to treat an MRSA infection that developed in plaintiff’s left knee following arthroscopy surgery. Plaintiff claimed that the procedure was performed negligently. In February 2017, plaintiff settled with and discontinued the action against defendant, Vassar Brothers Hospital. Defendants, Russel G. Tigges and Orthopedic Associates of Dutchess County, P.C. (“Orthopedic Associates”), moved to compel plaintiff or Vassar Brothers Hospital to disclose the terms of the settlement agreement. In opposition, plaintiff argued that the settling parties agreed to keep the terms of the settlement agreement confidential, and that they were only obligated to disclose the settlement amount after a verdict was rendered against Tigges and/or Orthopedic Associates. According to the non-settling defendants, the terms of the settlement were necessary “to determine what evidence to submit during the trial of the case, in particular whether to put in a case against the hospital and the infectious disease consult, Dr. Feinstein.” They went on to argue that “ f the settlement seems small given the plaintiff’s injuries, then in light of the provisions of Gen. Oblig. Law 15-108(a), the non-settling defendants will want to introduce evidence of Dr. Feinstein’s negligence . . . f the settlement appears close to the full value of the case, it will be enough for the non-settling defendants to fend off the claims against them, and challenge the severity of the injuries claimed.” The Court’s Decision The Court held that the terms of the settlement were not material and necessary to the defense of the action. In particular, the Court said that the non-settling defendants were seeking the information for trial strategy and not to defend the action: It appears that in making this argument, Mr. Tigges and Orthopedic Associates are of the opinion that Vassar Brothers Hospital’s fault or the severity of plaintiff’s injury can somehow be determined by the settlement amount. This is pure speculation and amounts to nothing more than trial strategy, and is insufficient to qualify as material and necessary to the defense of the action to warrant disclosure of the instant settlement agreement. Slip Op. at *3 (citing Matter of New York County Data Entry Worker Prod. Liab. Litig. , 222 A.D.2d 381.) Accordingly, the Court denied the motion to compel. Takeaway Appleyard shows that whether a confidential settlement should be disclosed is determined by the standard New York courts employ to determine questions about the disclosure of documents and information – i.e. , whether the information sought is material and necessary to the prosecution and/or defense of the action. In Appleyard , the Court found that the settlement was not material and necessary because of the speculative grounds upon which the settlement terms were sought and because the settlement was not relevant to the resolution of the action.

Judgments from sister states are enforceable in New York (and other sister states as well) by virtue of the “Full Faith and Credit” clause (article IV, section 1) of the Unites States Constitution (the “Clause”), which provides: Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof. In Matter of Farmland Dairies v. Barber , 65 N.Y.2d 51 (1985), the New York Court of Appeals was called on to determine, inter alia , whether Farmland Dairies’ required license to sell milk in New York should be revoked because of a New Jersey price rigging conviction.  Normally, “ nder New York Law, the New Jersey judgment would be admissible in the New York proceedings, it would be conclusive proof of the underlying facts and it would, without more, warrant the denial of application.”  Farmland , 65 N.Y.2d at 52 (citation omitted).  New Jersey’s criminal procedure rules, however, permitted that a final criminal judgment of conviction include language indicating that a guilty plea “not be evidential in any civil proceeding.”  Rule 3:9-2 of the Rules Governing the Courts of the State of New Jersey. At a hearing in New York on the renewal of Farmland’s license, the hearing officer received into evidence a certified copy of Farmland’s New Jersey conviction, but ultimately recommended that Farmland’s license not be revoked and that its extension application be granted.  The respondent Commissioner of the of the Department of Agriculture and Markets rejected the recommendation and denied Farmland’s application based on the New Jersey conviction admitted into evidence.  On Farmland’s appeal, the Court answered in the affirmative, the question of “whether the full faith and credit clause in the Federal Constitution mandates recognition of th condition to bar use of the New Jersey judgment in the New York administrative proceeding.”  In explaining the purpose of the Clause, the Farmland Court stated: Under our Federal structure, each State has its own judicial system capable of adjudicating the rights and responsibilities of the parties brought before it. Given this structure, there is always a risk that two or more States will exercise their power over the same case or controversy with the uncertainty, confusion, and delay that necessarily accompany relitigation of the same issue. The purpose of the full faith and credit clause was to avoid such conflicts and weld the independent States into a Nation.  Its provisions require that the public acts, records and judicial proceedings of each State shall be given full faith and credit in every other State (US Const, art IV, § 1). The doctrine does not make a foreign State judgment a judgment in the forum State. Before that occurs and a locus remedy may be obtained, an action must be brought and a judgment entered on the foreign judgment in the forum State. The doctrine establishes a rule of evidence, however, which requires recognition of the foreign judgment as proof of the prior-out-of-State litigation and gives it res judicata effect, thus avoiding relitigation of issues in one State which have already been decided in another. Farmland , 65 N.Y.2d at 55 (some citations omitted). The Farmland Court noted that generally criminal judgments are not entitled to full faith and credit because “no State is bound to enforce the penal laws of another State or to punish a person for a wrong committed against it.  Farmland , 65 N.Y.2d at 56 (citation omitted).  That general rule, the Farmland Court found, had no application in that case because “New York is not being asked by the State of New Jersey to enforce its penal laws” but, instead, “respondent wishes to recognize the New Jersey judgment as evidence of the misconduct underlying it.”  Farmland , 65 N.Y.2d at 57.  Under the plain language of the judgment as dictated by New Jersey law, however, such recognition is improper because the Court does “not perceive any overriding interest in the State of New York which would permit its agencies to rely on the New Jersey judgment to prove the misconduct but disregard the condition in it which induced the plea on which the judgment is based This State is bound by the bargain just as New Jersey is and must give the judgment the same effect as New Jersey courts give it.”  Farmland , 65 N.Y.2d at 58 (citation omitted). The law is also clear that review by the forum state of a judgment issued by the court of a sister state is limited to “whether the rendering court had jurisdiction, an inquiry which includes due process considerations.”  Fiore v. Oakwood Plaza Shopping Ctr. , 78 N.Y.2d 572, 577 (1991) (citations omitted).  Accordingly, “inquiry into the merits of the underlying dispute is foreclosed….”  Fiore , 78 N.Y.2d at 577 (citation omitted). The Second Department had occasion to discuss these issues in Balboa Capital Corp. v. Plaza Auto Care, Inc. (December 4, 2019).  The plaintiff in Balboa obtained a money judgment from a California court and subsequently commenced an action in New York to enforce same.  After supreme court denied its motion for summary judgment, plaintiff appealed.  The Second Department in Balboa , briefly reviewed the purpose of the Clause and noted that “ bsent a challenge to the jurisdiction of the issuing court, New York is required to give the same preclusive effect to a judgment from another state as it would have in the issuing state.”  The Court then found that reversal was appropriate because: the defendants did not challenge the jurisdiction of the California court, but instead, sought to relitigate the merits underlying that court's determination. The Supreme Court should not have considered the defendants' attack on the merits of the California determination. Since the defendants failed to raise a triable issue of fact in opposition to the plaintiff's prima facie showing, the court should have granted the plaintiff's motion for summary judgment….

In Benjamin v. Yeroushalmi , 2019 N.Y. Slip Op. 08647 (2d Dept. Dec. 4, 2019) ( here ), the Appellate Division, Second Department considered an appeal involving an action to recover damages for breach of contract, breach of fiduciary duty and fraudulent inducement. The action involved the acquisition and development of real properly located in Mineola and Brooklyn, New York. Beginning in 2007, the plaintiffs, Jim Benjamin (“Jim”), a real estate developer and investor, and his brother Behrouz Benyaminpour (“Bruce”), Jim’s brother and investment partner, entered into a joint venture agreement with the defendants, Moussa Yeroushalmi (“Moussa”) and his wife, Farzaneh Yeroushalmi (together, the “Yeroushalmi Defendants”), the purpose of which was to, among other things, purchase and develop properties in Mineola and Brooklyn, New York. According to plaintiffs, in April 2007, the parties entered into a written joint venture agreement in connection with the acquisition and development of certain real properly located in Mineola, New York (the “Mineola Property”). The property was owned by the Metropolitan Transportation Authority (the “MTA”), which was selling the Mineola Property through a closed bid procedure. The MTA ultimately awarded the right to purchase the Mineola Property to the plaintiffs and the Yeroushalmi Defendants, with the parties agreeing to assign their rights to a third party. The difference between the purchase price of $12,222,000 and the assignment price of $13,500,000 was, according to plaintiffs, to be distributed as profits, with Jim to receive 30% of those profits. Plaintiffs alleged that the Yeroushalmi Defendants failed to distribute plaintiffs’ share of the profits pursuant to the Mineola Property joint venture agreement. Plaintiffs further alleged that in April 2007, Moussa and Jim entered into a joint venture agreement for the purchase and development of certain real property located in Brooklyn, New York (the “Albemarle Property”). This transaction involved an entity owned by Moussa known as A1 Universal Construction Realty, LLC (“A1 Universal”), which entered into a contract of sale to purchase the Albemarle Property for $1,200,000. A1 Universal immediately flipped the purchase contract to a third party who agreed to purchase the Albemarle Property for $2,000,000. According to plaintiffs, they contributed $30,000 toward the down payment, and, pursuant to the joint venture agreement, the joint venture was entitled to 50% of any profits and the return of its closing costs upon a subsequent sale of the Albemerle Property. Plaintiffs claimed, inter alia , that Moussa failed to distribute the proceeds of a subsequent sale of the Albemerle Property. In addition, Plaintiffs alleged that in July 2008, Moussa solicited them to invest funds in a beverage company called Hip Pop Beverages, LLC (“HPB”). According to Plaintiffs, Moussa made specific oral misrepresentations of material fact to induce them to invest $75,000 in HPB, which he allegedly knew to be false at the time he made them. Plaintiffs commenced the action asserting, inter alia , a cause of action alleging breach of contract with regard to the Mineola Property joint venture agreement (first cause of action), a cause of action alleging fraud in the inducement with respect to the HPB transaction (fourth cause of action), a cause of action alleging fraud with regard to the sale of the Albemarle Property (fifth cause of action), a cause of action alleging conversion of Bruce’s membership interest in a limited liability company that owned an interest in the Albemarle Property (“Albemarle LLC”) (sixth cause of action), causes of action alleging breach of fiduciary duty (seventh and twelfth causes of action), and a cause of action for a declaratory judgment as to Bruce’s membership interest in the Albemarle LLC (tenth cause of action). In April 2015, the Yeroushalmi Defendants moved to dismiss the first, fourth, sixth, seventh, tenth, and twelfth causes of action, and the fifth cause of action insofar as asserted against them. The motion court granted the motion as to the first, fourth, seventh, and twelfth causes of action and denied the motion as to the fifth cause of action insofar as asserted against the Yeroushalmi Defendants and the sixth and tenth causes of action. Plaintiffs appealed, and the Yeroushalmi Defendants cross appealed. The Appellate Division, Second Department affirmed the decision and order of the motion court. Breach of the Mineola Property Joint Venture Agreement The Court agreed with the motion court’s determination that the first cause of action, alleging breach of the 2007 Mineola Property joint venture agreement, should have been dismissed. The reason, said the Court, was due to a subsequent agreement dated July 2, 2008 (“2008 Agreement”), which the Yeroushalmi Defendants submitted, and which superseded and constituted a novation of the Mineola Property joint venture agreement. Slip Op. at *2. Under New York law, a novation occurs “where the parties have clearly expressed or manifested their intention that a subsequent agreement supersede or substitute for an old agreement.” Northville Indus. Corp. v. Fort Neck Oil Terms. Corp. , 100 A.D.2d 865, 867 (2d Dept. 1984), aff’d , 64 N.Y.2d 930 (1985). When that happens, “the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement.” Id .; Citigifts, Inc. v. Pechnik , 112 A.D.2d 832, 834 (1st Dept. 1985), aff’d , 67 N.Y.2d 774 (1986). Consequently, since the Court found a novation of the Mineola Property joint venture agreement, it concluded that “the cause of action alleging breach of the Mineola roperty joint venture agreement be maintained. Slip Op. at *2 (citations omitted). Breach of Fiduciary Duty The Court agreed with the motion court’s determination to dismiss the seventh and twelfth causes of action alleging breach of fiduciary duty. “A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” but generally does not arise “between those involved in arm’s length business transactions.” EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005) (citations and quotation marks omitted). “If the parties … do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Id . at 20. To plead a cause of action for a breach of fiduciary duty, a plaintiff must demonstrate: “(1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC , 83 A.D.3d 804, 807 (2d Dept. 2011) (quoting Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2d Dept. 2010)). A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR § 3016(b). Litvinoff v. Wright , 150 A.D.3d 714, 715 (2d Dept. 2017). The Court affirmed the dismissal of these claims because plaintiffs failed to provide any detail upon which to find a breach of fiduciary duty. In this regard, the Court explained that the complaint “contained only bare and conclusory allegations, without any supporting detail.” Slip Op. at *2 (citations omitted). Fraudulent Inducement The Court agreed with the motion court to dismiss the fourth cause of action, alleging fraud in the inducement with respect to the HPB transaction. A cause of action alleging fraud requires the plaintiff to plead: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance, and (5) damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). As this Blog has noted previously, one of the more challenging elements of the claim to satisfy is justifiable reliance. In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). The Court held that plaintiffs failed to satisfy the justifiable reliance element of their claim. The reason, found the Court, was because “Jim relied solely upon Moussa’s alleged misrepresentations without conducting any investigation into the factual basis for that information or into the viability of HPB as a business opportunity.” Slip Op. at *2. As such, plaintiffs “failed to adequately allege justifiable reliance,” thereby making “the cause of action alleging fraud in the inducement … subject to dismissal.” Id . Takeaway Benjamin stands as a good reminder of the pleading hurdles a plaintiff must overcome when alleging a breach of fiduciary duty and fraudulent inducement. As Benjamin shows, particularity is crucial, even in the more relaxed pleading environment of New York state court. See this Blog’s discussion of the differences between federal and state court with respect to pleading a claim with particularity ( here and here ). Benjamin is also important for its application of the novation doctrine. Although novation typically occurs in the context of the original parties and a third party, Benjamin is an example of the doctrine’s application to the original parties only – the original parties sign a new agreement that supersedes the former one. The critical point here is the signed writing. An agreement that amends or modifies the terms of the original obligation ( i.e. , agreement) is valid only if it agreed to and signed by all parties.   Note that novation differs from an assignment. An assignment only transfers a party’s obligations and does not require the consent of the third party, unless the contract specifically provides otherwise. An assignment does not terminate the obligations set forth in the original contract, while novation does.

Decision day in the Appellate Division, First Department involved several cases in which the Court addressed allegations of fraud or fraudulent inducement. Many of the cases focused on the elements of the claim, while others focused on the absence of particularity and the duplication of claims doctrine.  We look at some of those cases in today’s post. Lerner v. Newmark & Co. Real Estate, Inc. In Lerner v. Newmark & Co. Real Estate, Inc. , 2019 N.Y. Slip Op. 08611 (1st Dept. Dec. 3, 2019) ( here ), the Court considered, among others causes of action, a fraud claim in the context of an action to recover commissions alleged to be due and owing under two related employment agreements. Plaintiff, Justin Lerner (“Lerner”), is a licensed real estate broker. Lerner alleged that, in November 2014, he and defendant, Newmark & Company Real Estate, Inc. (“Newmark”), entered into an agreement, for a two-year term, pursuant to which Lerner was to be paid commissions as set forth in the appended Schedule 1 (the “Engagement Agreement”). The Engagement Agreement provided that most of its terms, including Schedule 1, would survive its termination or expiration. Lerner alleged that the parties mutually agreed to his departure before the expiration of the two-year term. Lerner departed on or about March 14, 2016. Lerner claimed that, under Schedule 1, he was entitled to be paid his share of any commissions received for pending transactions within a specified time after his departure. Lerner submitted a list of pending transactions by April 11, 2016, within 30 days of the termination date as provided for in Schedule 1. According to Lerner, defendants refused to pay him his share of the commissions. In addition to the Engagement Agreement, defendants drafted a Termination Agreement, dated June 16, 2016, which did little more than confirm the Engagement Agreement’s post-termination provisions, including maintenance of confidentiality by Lerner and non-solicitation of defendants’ clients, and payment of commissions per the “pending list” mechanism of Schedule 1. Lerner alleged that he complied with his obligations thereunder, including submission of his list of pending transactions as of the date of his departure. Lerner alleged that defendants accepted his resignation, drafted the Termination Agreement to lay out a framework for payment of commissions on transactions that he brokered but that closed only after his departure and then quibbled over the terms of payment, drawing out indefinitely the matter of payment, while controlling all information about which transactions had closed. Lerner further alleged that defendants’ goal was to obstruct and refuse to pay commissions that he had earned by virtue of brokering the transactions. The Court held that Lerner stated a claim for breach of the Engagement Agreement and Termination Agreement. In addition to the contract claims, Lerner contended that defendants induced him to enter into the Termination Agreement, knowing that they had no intention of carrying out their end of the bargain. The Court held, without specifically stating it, that Lerner’s fraudulent inducement claim duplicated his contract claims and was otherwise not particularized to state a claim. New York courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement. Thus, the courts will dismiss such a claim as “redundant of the contract claim.” See Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017) (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011)). Moreover, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). In Lerner , the Court noted that Lerner sought the same measure of damages in both his fraud and contract claims and made no detailed factual allegations to support the claim of fraud. Slip Op. at *1. Instead, said the Court, Lerner simply inferred a fraud “from the fact that negotiations were drawn out, and ended up with non-payment, that the entire Termination Agreement was conceived of as a plot to withhold commissions that he had earned.” Id . Consequently, the Court held that Lerner “failed to state a cause of action for fraud.” Id . Pritsker v. Oppenheimer Acquisition Corp. In Pritsker v. Oppenheimer Acquisition Corp. , 2019 N.Y. Slip Op. 08621 (1st Dept. Dec. 3, 2019) ( here ), the First Department considered a fraud claim in the context of an action for conversion involving an investment in a Madoff feeder fund. pritsker action are taken from the decision of the motion court.> pritsker action are taken from the decision of the motion court.> Plaintiff, Robert L. Pritsker (“Pritsker”), filed the action to recover damages related to an investment (the “Investment”) of $586,000 in limited partnerships in which the general partner was defendant, Tremont International Insurance Fund, L.P. (“Tremont International”), a former Madoff feeder fund based in Rye, New York. The Investment comprised a portion of the excess cash value of Pritsker’s variable life annuity (the “Annuity”), which was underwritten by non-party American General Insurance Co. (“American General”). Pritsker alleged that by August 2012, the Annuity had received restitution, of all but $102,788 (the “Remaining Balance”), after Tremont International’s settlement with the Madoff trustee (the “Settlement”). Pritsker claimed that it was improper for Tremont International not to return the Remaining Balance because the Investment was made after December 31, 2007, the deadline for the clawback by the Madoff trustee. In March 2009, Tremont International set aside a reserve of $11,740 from Pritsker’s account for the purpose of the trustee’s clawback efforts. In November 2009, Pritsker received communications from American General advising him that the Madoff trustee had asked that all Tremont funds of funds with Madoff exposure having assets that remained for distribution to not make any further distribution pending the completion of the trustee’s review and analysis. Pritsker claimed that these communications led him to believe that he had Madoff exposure beyond the $11,740 initial reserve, when, in fact, he did not have such exposure. According to the motion court, documentary evidence showed that at no time after the Investment did Tremont International have any investments in limited partnerships with Madoff exposure. Tremont International stopped making distributions to Pritsker after June 30, 2009. Pritsker claimed that Tremont International either improperly applied the Remaining Balance to the clawback or converted the funds. Pritsker stated that he first learned that he did not have Madoff exposure when his claim was denied by the Madoff Victim Fund. Pritsker alleged that he was informed by the Madoff Victim Fund on December 13, 2016, that he was not entitled to restitution as an indirect investor in Maddoff investments, because any restitution had to come from funds assembled by the Madoff trustee as a result of setting aside fraudulent transfers, and that, because American General made the investment after December 31, 2007, the funds invested by American General on behalf of Pritsker could not be reached by the trustee as part of the clawback. The complaint contained three causes of action: fraud, constructive fraud, and fraudulent conversion. In the fraud cause of action, Pritsker alleged that defendants knew the date of Pritsker’s investment and knew that his funds were not subject to clawback. He further alleged that defendants misled him into believing that he had Madoff exposure and that some of his balances would have to be diverted to the Settlement. The motion court dismissed the fraud claim, finding that it was “insufficiently pleaded.” The motion court held that Pritsker failed to plead causation (which the First Department would describe as reliance). The reason, said the motion court, was because of the timing of the alleged misrepresentations – they occurred after the loss allegedly occurred. Pritsker’s claim was based on an alleged conversion of money on March 31, 2009, when $11,740 was reserved for the Madoff clawback and the misrepresentations were alleged to occur later in 2009. The motion court also found that the complaint failed to adequately plead scienter – that is, Pritsker failed to allege facts that a misrepresentation of fact was knowingly made by any defendant to Pritsker, with knowledge of its falsity, and intent to deceive. The First Department affirmed, holding that the complaint failed “to allege scienter and reliance.…” Slip Op. at *1. Both elements, said the Court, “are essential elements of fraud.” Id . (citing Lama Holdings Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); Meyercord v. Curry , 38 A.D.3d 315, 316 (1st Dept. 2007). meyercord is notable. in that case, the first department appeared to describe the causation and reliance elements interchangeably, holding that the plaintiff could not establish detrimental reliance ( i.e. , causation) “since he could not have changed his position or suffered a loss based on the alleged misrepresentations.” 38 a.d.3d at 316.> meyercord is notable. in that case, the first department appeared to describe the causation and reliance elements interchangeably, holding that the plaintiff could not establish detrimental reliance ( i.e. , causation) “since he could not have changed his position or suffered a loss based on the alleged misrepresentations.” 38 a.d.3d at 316.> Moore Charitable Found. v. PJT Partners, Inc. In Moore Charitable Found. v. PJT Partners, Inc. , 2019 N.Y. Slip Op. 08627 (1st Dept. Dec. 3, 2019) (here), the First Department dismissed fraud claims based upon the theories of respondeat superior and agency. moore are taken from the complaint and the motion court’s decision.> moore are taken from the complaint and the motion court’s decision.> Moore arose from an alleged fraud in which Andrew W.W. Caspersen (“Caspersen”), a senior executive of defendant, PJT Partners (“PJT”), an investment bank and advisory services firm, convinced The Moore Charitable Foundation ("The Foundation”), a nonprofit foundation with a mission to preserve and protect natural resources, to invest nearly $25 million of its endowed funds in a deal that PJT was sponsoring. To make the opportunity appear legitimate, Caspersen allegedly made use of PJT’s name, reputation, resources, and personnel. The Foundation transferred its money according to the wire instructions that Caspersen provided. However, the money went to an account that Caspersen controlled, rather than a PJT-controlled account. He took more than $8 million of the money that had been wired and gave it to PJT; the remainder he took for himself. After the Foundation detected and reported the alleged wrongdoing, federal authorities, including the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Southern District of New York, and the Securities and Exchange Commission, caught Caspersen trying to perpetrate a further fraud. He confessed to his role in defrauding the Foundation, entered a plea of guilty, and is currently serving a four-year sentence in federal prison. PJT returned $8.6 million to the Foundation – money that was sitting in PJT’s own bank account – but only after PJT’s insurance carrier promised to make PJT whole for the amount. PJT’s insurer did not, however, promise to cover the millions of dollars that the Foundation lost. The Foundation asserted causes of action for fraud against PJT and defendant, Park Hill Group, LLC (“Park Hill”), a division of PJT that provides asset advisory and fundraising services. The Foundation claimed that PJT and Park Hill were liable for Caspersen’s fraud under a theory of apparent authority and under a theory of respondeat superior. Defendants moved to dismiss the claims.  The motion court granted defendants’ motion to dismiss the cause of action for fraud based on respondeat superior and denied the motion as to the cause of action for fraud based on apparent authority. The First Department reversed the dismissal of the fraud claim based on apparent authority, and otherwise affirmed the dismissal on respondeat superior grounds. In New York, an employer may be vicariously liable for its employees’ tortious acts on a theory of respondeat superior only if they were committed in furtherance of the employer’s business and within the scope of employment. Riviello v. Waldron , 47 N.Y.2d 297, 303 (1979); see also Bowman v. State of New York , 10 A.D.3d 315, 316 (1st Dept. 2004). The tortious conduct must be generally foreseeable and a natural incident of the employment.” Judith M. v. Sisters of Charity Hosp. , 93 N.Y.2d 932, 933 (1999). “If, however, an employee ‘for purposes of his own departs from the line of his duty so that for the time being his acts constitute an abandonment of his service, the master is not liable.’” Id . Based upon the foregoing principles, the Court found that the corporate defendants were not liable for Caspersen’s fraud as Caspersen “orchestrated a fraudulent scheme through a fictitious transaction solely for personal gain.” Slip Op. at *1. “Thus,” held the Court, “defendants are not liable for that fraud under the doctrine of respondeat superior.” Id . The Court held that the cause of action for fraud based on apparent authority should have been dismissed because the complaint failed to identify any words or conduct by the defendants that would give rise to a reasonable belief on plaintiffs’ part that Caspersen had the authority to enter into the transaction. Id . (citing Hallock v. State of New York , 64 N.Y.2d 224, 231 (1984)). To show that an agent possesses apparent authority, the principal must communicate to a third party, through words or conduct, that the agent possesses the authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Hallock , 64 N.Y.2d at 231. “Rather, the existence of ‘apparent authority’ depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.” Ford v. Unity Hosp. , 32 N.Y.2d 464, 473 (1972); see also Restatement, Agency 2d, § 27. Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable. Hallock , 64 N.Y.2d at 231 (citations omitted). In Moore , the Court observed that “ t most, the allegations establish that defendants had imbued with actual authority with respect to a somewhat related but different type of transaction.” Slip Op. at *1 (citing Standard Funding Corp. v. Lewitt , 89 N.Y.2d 546, 551 (1997).

It is not uncommon for a nonparty to a litigation to ask their attorney whether they must comply with a subpoena duly served upon them. As the court in Manswell v. Baptiste , 2019 N.Y. Slip Op. 29360 (Civ. Ct., Kings County, Nov. 20, 2019) ( here ), made clear, non-compliance is not an option. A subpoena is a document that commands a person to testify at a trial or deposition and/or to produce documents specifically demanded. A subpoena duces tecum differs from a subpoena ad testificandum in that the former “requires production of books, papers and other things,” whereas the latter “requires the attendance of a person to give testimony.” CPLR § 2301; see also N.Y. Crim. Proc. Law § 610.10(3). It is served in the same manner as a summons and complaint, except under certain circumstances enumerated in the CPLR. A proper subpoena will include a provision that explicitly states that the failure to comply with the commands therein is punishable as a contempt of court, making the recipient of the subpoena liable to the person on whose behalf the subpoena was issued for a penalty not to exceed one hundred fifty dollars and all damages sustained by reason of the failure to comply. See CPLR §§ 2308(a) (“Failure to comply with a subpoena issued by a judge, clerk or officer of the court shall be punishable as a contempt of court”) and 5251 (“Refusal or willful neglect of any person to obey a subpoena shall each be punishable as a contempt of court.”). In addition, refusal to comply with the subpoena may subject the contemnor to a sentence of imprisonment. CPLR § 2308(a). Contempt is a drastic enforcement tool, which derives from statute, and is available to courts to punish parties for their failure to adhere and comply with the court’s mandates and to preserve the court’s authority over the conduct of litigation. Because of the possible consequences, including incarceration, contempt punishment is not readily granted. After all, “ ontempt punishment is a crime in and of itself and therefore is punished within the penal system just as any other crime, which carries with it the imposition of a sentence of incarceration to the contemnor.” Slip Op. at *3. Since courts are reluctant to impose contempt punishment, whether by fine or the more drastic form of punishment, incarceration, particularly in civil matters, contempt punishment will not be granted “without the utmost of fastidious due diligence and due deliberation.…” Id . This is even more so when, as in Manswell , the matter before the court is the enforcement of a money judgment. As the Court noted, “ t is quite evident why the more drastic sentence of incarceration is so much more problematic to the courts in such an instance” – the avoidance of a de-facto “resurgence of the Debtors Prisons of old.…” Slip Op. at *3 and n.5. In Manswell , the Court found that the defendants had engaged in “a blatant unabashed pattern of defiance” sufficient “to sustain an imposition of contempt punishment.” Slip Op. at *5. As businessmen and service providers, the Court deemed “their willful refusals to adhere to the mandates of the branch … even more untenable” as “ t belies public policy and consumer protection to allow businesses to merely flout all judicial protocols procedures to the detriment of public consumers” without consequence. Id . Both Defendants have flouted all judicial protocols and procedures from the very beginning of the case, in failure to respond to the jurisdiction of the court, evidencing a trivialization of the inherent power of the civil court’s authority over their persons as operators of business marketed to the public. Id . See also Home Heating Oil Corp. v. Parris , 2019 N.Y. Slip Op. 51663 (Civ. Ct., Kings County, Oct. 21, 2019) ( here ). Speaking to the conduct at hand, the Court addressed the “pattern defiance” the defendants showed to the processes and rules of the Court: Defendants failed to interpose an answer pursuant to summons and complaint duly served. Defendants never appeared to challenge default judgment filed and duly served. Defendants willfully refused to appear as well as to respond in any way shape or form to the duly served subpoena with its boldfaced warning as to the penal consequences of failure to comply. Defendants’ continued willful disregard of the orders and authority of court is ever so evident in their utter disregard of this instant matter to punish them, where it clearly states, again, in bold large font the consequence of non-compliance of the duly served subpoena can be imprisonment. Still, threat of incarceration was of no moment to these recalcitrant Defendants. Id . The Court concluded by summing up defendants’ conduct and the circumstances in which the conduct occurred ( e.g. , operating businesses that provide services to the public). In doing so, the Court made it clear that contempt punishment for failing to submit to a post-judgment examination and production of documents for the enforcement of a money of judgment would not be countenanced. Defendants’ obvious disregard of all the court mandates from inception of this civil case up to and including failure to comply with the subpoena, a judicial mandate of the civil court, demonstrates refusal and willful neglect to obey this subpoena and rejection of the inherent power and authority of the civil court. Both judgment debtors D. Baptiste and K. Baptiste were duly served with post-judgment subpoenas by Plaintiff- judgment creditor for both testimony and document production “on all matters relevant to the satisfaction of such judgment.” The Second Department Appellate Division has long affirmed the holding of civil contempt punishment against judgment debtors for failing to submit to a post-judgment examination and production of documents for the enforcement of money judgments pursuant to CPLR Article 52. With emphasis: since these contemnor Defendants hold themselves out as engaging in business marketed to the public consumer, their willful refusal to comply with the post-judgment subpoena is even more so contemptible. Id . at **5-6. Consequently, the Court held the defendants in contempt, fining each of them $160.  However, the Court did not incarcerate the defendants. Takeaway “A party seeking disclosure from a nonparty witness need not move for a court order, but may proceed by serving a subpoena and notice.” McNulty v. McNulty , 81 A.D.2d 581, 581 (2d Dept. 1981) (citing, inter alia , CPLR §§ 3101(a)(4), 3106(b) and 3107). The nonparty witness or adversary may then apply for a protective order ( id . (citing CPLR § 3103(a)) and/or move to quash the subpoena (CPLR § 2304) if he/she chooses to resist the examination or production. But, as demonstrated in Manswell , non-compliance with the subpoena is not an option.

Statutes of limitations, which are a critical part of litigation, are designed to prevent litigants from sitting on their rights.  A brief primer on New York’s Statute of Limitations, is contained within this Blog’s post, “ Second Department Finds No Issue of Fact as to Whether Defendant Should be Estopped From Asserting a Statute of Limitations Defense. ”  Article 2 of New York’s CPLR addresses Statute of Limitations issues. The CPLR contains several provisions that toll or otherwise extend applicable limitations periods.  For example, CPLR 205 provides that, under certain circumstances, when an action is timely commenced but is subsequently terminated, a new action may be commenced within six months of the termination despite the running of the applicable statute of limitations.  CPLR 208 , 209 and 210 provide tolls in the event of infancy or insanity, war and death of a claimant or a person liable, respectively.  The subject of today’s post, however, is CPLR 204(a) , which tolls the applicable statute of limitations, and provides: here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced .  In Lubonty v. U.S. Bank National Association , (November 25, 2019), the New York Court of Appeals was tasked to determine “whether the bankruptcy stay 11=">11" U.S.C.="U.S.C." §="§" 362(a)="362(a)"> qualifies as a ‘statutory prohibition’ under CPLR 204(a), and if so, whether a party may later avail itself of the toll where, at the time the stay was imposed, that party had a pending action asserting the same claim.”  The Lubonty Court, in affirming the decision of the Second Department, answered both questions affirmatively. The plaintiff in Lubonty , borrowed $2.5 million secured by real property in Southampton, New York, and subsequently defaulted in his payments.  On June 11, 2007, the lender accelerated the debt and commenced a foreclosure action (the “First Foreclosure Action”), which triggerd the six year statute of limitations imposed by CPLR 213(4) .  Prior to interposing his answer in the First Foreclosure Action, Lubonty filed a bankruptcy petition, which “invoke the automatic stay and barr continuation of the irst oreclosure ction.”  Approximately 882 days after filing, Lubonty voluntarily dismissed the pending bankruptcy action and the automatic stay was lifted.  Thereafter, lender moved for a default judgment in the First Foreclosure Action and, subsequently, the trial court granted Lubonty’s ex-parte application to dismiss the First Foreclosure Action as abandoned pursuant to CPLR 3215(c) , because a default judgment was not taken within a year of Lubonty’s default.  (This Blog has analyzed CPLR 3215(c) < here =">here"> .)  The Lubonty Court noted that in dismissing the First Foreclosure Action, the trial court did not mention Lubonty’s bankruptcy filing, and, therefore, the automatic stay imposed thereby. The original lender’s assignee commenced a second foreclosure action (the “Second Foreclosure Action”), which Lubonty moved to dismiss for improper service.  Prior to the return date of that motion, Lubonty filed a second bankruptcy petition, which imposed a second automatic stay.  The automatic stay of the second bankruptcy was lifted after 769 days and, thereafter, on October 21, 2014, the trial court granted Lubonty’s motion to dismiss the Second Foreclosure Action for improper service of process. Two weeks after the dismissal of the Second Foreclosure Action, Lubonty commenced an action pursuant to RPAPL § 1501(4) to “discharge the mortgage, asserting that the statute of limitations on lender’s foreclosure claim had expired.  (This Blog has analyzed RPAPL § 1501(4) < here =">here"> .)  The trial court dismissed the action because the statute of limitations was tolled for the period of time that the automatic stay imposed by the bankruptcy code.  “The Appellate Division unanimously affirmed, concluding that ‘plaintiff’s contention that CPLR 204 (a) does not apply here because the earlier foreclosure actions had already been commenced when the petitions in bankruptcy were filed is without merit.’”  (Emphasis supplied.)  The Court of Appeals granted Lubonty leave to appeal. The Lubonty Court quickly resolved the “issue of first impression” of “whether the automatic bankruptcy stay constitutes a ‘statutory prohibition’ under CPLR 204 (a)” by determining that it was.  The Court then moved onto the next question of “whether the toll provided in CPLR 204 (a) is available to a claimant who, when the bankruptcy stay was imposed, had already commenced an action against the debtor – later dismissed – on the claim now asserted.”  (Emphasis supplied.) In his action to discharge the mortgage, Lubonty made the “cramped” argument that CPLR 204(a) could not apply because the bankruptcy stay could not have prevented lender from “ commencing ” a foreclosure action because at the time that the respective automatic stays were imposed, the foreclosure actions were already commenced .  (Emphasis supplied.)  The Court of Appeals, like the trial court and the Second Department, flatly rejected Lubonty’s literal reading of CPLR 204 (a).  Indeed, the Court noted that “ laintiff’s brand of literalism quickly loses sight of the forest for the trees, producing an outcome antagonistic to the purpose and design of the tolling provision.”  (Citation omitted.) The Court recognized that in ruling on Lubonty’s RPAPL 1501 claim to determine if the mortgage should be discharged, it “must look to whether the ‘applicable statute of limitations for the commencement of an action to foreclose’ had expired.”  In reaching its conclusion that the statute of limitations had not expired, the Court determined that: Because the two bankruptcy stays prevented defendant from commencing a foreclosure action for at least 1651 days, that time is not part of the time within which such an action must be commenced . Put another way, in determining whether the statute of limitations on a foreclosure action had expired when plaintiff filed this RPAPL action, the duration of any bankruptcy stay must be excluded, regardless of whether an earlier action on the same claim had been initiated or was pending when the stay was imposed. This interpretation of “ commencement ” promotes the purpose of CPLR 204 (a) and, unlike plaintiff’s proposed rule, is reconcilable with both the bankruptcy stay’s effect, and the policies underlying the enforcement of limitations periods.  (Footnote omitted; emphasis supplied.) The historical roots of New York’s tolling statutes springs from the “equitable principle that plaintiffs should not be penalized for failing to assert their rights when a court or statute prevents them from doing so.”  The bankruptcy stay’s effect on litigation is far-reaching “and limit virtually all judicial action against the debtor and any co-debtors … not only prevents an action from being continued, but also from being discontinued and recommenced.”  (Citations omitted.)  Moreover, the commencement of the automatic stay is controlled by the debtor and “brings any potential and ongoing litigation to a standstill at a debtor’s behest.”  Thus, the Court found that lender was “prevented from asserting its rights as a direct result of the actions of Lubonty” in filing his bankruptcy petitions.  In finally concluding that Lubonty’s action pursuant to RPAPL 1501 should be dismissed, the Court stated: Applying the above rule to the instant action, defendant’s claims were not time-barred when Supreme Court granted defendant’s motion to dismiss.  The statute of limitations for a foreclosure claim is six years (CPLR 213 <4> ). Here, the limitations period began to run on June 11, 2007, upon AHMA’s acceleration of plaintiff’s mortgage. The property was subject to bankruptcy stays for at least 1651 days, during which defendant was statutorily prohibited from commencing any action concerning the property. Adding the duration of the stay to the six-year statute of limitations period, defendant had until on or about December 18, 2017 to commence the foreclosure action. Dismissal of plaintiff’s action to discharge the mortgage was thus proper.  In his lengthy dissent, Judge Stein shared Lubotny’s view that CPLR 204(a) is unambiguous and only applies when a stay prevents the “ commencement ” of an action – which is not the case in the subject action.  Therefore, the majority’s view is not consistent with the legislature’s intent.  The dissent’s position is bolstered, Judge Stein argues, by, inter alia , the existence of CPLR 205(a), which provides a remedy “where an action is timely commenced, but subsequently terminated after the statute of limitations expires.”