It is well settled that parties are free to contractually shorten a limitations period as long as their intent to do so is clearly stated and the time period is reasonable. Whitney Lane Holdings, LLC v. Don Realty, LLC , 159 A.D.3d 1163, 1165 (3d Dept. Mar. 8, 2018); John J. Kassner & Co. v. City of New York , 46 N.Y.2d 544, 550-551 (1979); see also CPLR 201, 213. But what is reasonable? As one might think, the answer to the question depends upon the facts and circumstances of each case. And, in that regard, it is “ he circumstances, not the time, the determining factor.” Executive Plaza, LLC v. Peerless Ins. Co. , 22 N.Y.3d 511, 519 (2014) (internal quotation marks and citation omitted). Often, the issue of reasonableness turns on the accrual date for the cause of action. For this reason, “an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date.” Executive Plaza , 22 N.Y.3d at 519. Indeed, the enforceability of a contractual accrual date depends upon “whether the plaintiff had a reasonable opportunity to commence its action within the period of limitation.” Id . (internal quotation marks and citation omitted). As the Court of Appeals noted, “A ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.” Id . at 518. In DiGesare Mech., Inc. v. U.W. Marx, Inc. , 2019 N.Y. Slip Op. 07668 (3d Dept. Oct. 24, 2019) ( here ), the Appellate Division, Third Department, was asked to decide, among other things, whether a shortened limitations period was too short to be considered fair and reasonable. DiGesare Mech. arose from the work at an improvement to public property known as the SUNY New Paltz New Residence Hall (“Project”). Defendant, U.W. Marx, Inc. (“Marx”), was engaged to construct the Project for the Dormitory Authority of the State of New York (“DASNY”) pursuant to a written agreement. The plaintiff, DiGesare Mechanical, Inc. (“DiGesare”), was engaged by Marx to perform certain work on the Project. Defendant, Liberty Mutual Insurance Company (“Liberty Mutual”), issued the Labor and Material Payment Bond required by State Finance Law §137, which promised, in relevant part, to pay unpaid subcontractors and suppliers to Marx under certain conditions. The Project began in mid-2014. According to DiGesare, it performed the necessary work and properly invoiced Marx, who did not object to the submitted invoices within the statutorily provided l2-day period. DiGesare contended that FOIL requests made to DASNY revealed that DASNY paid the total amount of the Project cost “less only retainage<,> ” including payment for DiGesare’s work on the Project. However, claimed DiGesare, Marx failed to remit $213,230.41 owed to Plaintiff for its services and supplies. DiGesare further noted that when it made a claim with Liberty Mutual for compensation, Liberty Mutual declined to make the payment, arguing that it was not obliged to do so under the bond. According to Defendants, DiGesare was not paid due to its faulty workmanship, which resulted in remediation, and DiGesare’s failure to maintain its schedule in connection with both its exterior and interior work, thus causing significant delays in the Project which resulted in litigation between DASNY and Marx. As a result, said Marx, DASNY held $l,893,115.20 from Marx due to the significant delays. Defendants contended that DiGesare knew of these delays, as there were several meetings and correspondence sent regarding the payments. These included threats made to DiGesare that monies owed to it would be held, which Defendants contended DiGesare understood as its last invoice was for “payment in full, less only retainage.” Plaintiff commenced the action on April 26, 2016. The Complaint alleged four causes of action against the Defendants: three against Marx, including breach of contract by non-payment, account stated on the unpaid invoices, and recovery in quantum meruit; as well as a single cause of action against Liberty Mutual seeking to collect against the statutorily required Labor and Material Payment Bond posted by Liberty Mutual. Marx answered the complaint by general denials, alleging various affirmative defenses, including that the action was time-barred by a shortened statute of limitations, as well as a single counterclaim alleging that it was DiGesare that breached the written contract. Liberty Mutual joined issue by denying the allegations of the Complaint and asserting eight affirmative defenses. DiGesare moved for summary judgment on its first, second and fourth causes of action (breach of contract by non-payment, account stated on the unpaid invoices, and against Liberty Mutual on the obligations of the Payment Bond), and Defendants cross-moved for summary judgment dismissing the complaint against Marx. Liberty Mutual opposed the relief sought by DiGesare, but made no affirmative application for relief. The motion court denied DiGesare’s motion, finding that a triable issue of fact existed as to whether Marx had breached the contract, and granted Defendants’ cross motion for summary judgment dismissing the complaint against Marx on the ground that DiGesare’s claims against Marx were time-barred by a six-month limitation period set forth in the subcontractor agreement. The motion court found the language of the two contracts at issue to be “clear and distinct”. Under the subcontractor agreement, “ ny claim by the Subcontractor against the Contractor must be filed with the Court within six (6) months after the Subcontractor’s last day of work on the Project site and must be commenced in New York State Supreme Court, County of Rensselaer.” Under the Payment Bond, “ o suit or action shall be commenced hereunder by any claim . . . fter expiration of one (1) year following the date on which ceased work of said Contract,” unless the limitation was prohibited by law. Similarly, the motion court found the shortened limitations periods to be fair and reasonable, noting that other courts had found a 6-month period in claims similar to the one at issue in the action to be permissible, including “this exact contract provision between a subcontractor and Marx. See Pace Plumbing & Heating, Inc. v. Ellis Hosp. , Index No. 242191-12 (Sup. Ct., Rensselaer County 2015) (noting exact provision against Marx). Thus, concluded the motion court, DiGesare had six months from October 13, 2015 to commence an action against Marx, and had one year from August 2015 to commence an action against Liberty Mutual. DiGesare did not commence the action until April 26, 2017. DiGesare appealed. The Third Department reversed. The Court found that the shortened limitations period in the subcontractor agreement nullified DiGesare’s claims because it did not provide DiGesare a reasonable opportunity to commence a litigation for non-payment. Here, plaintiff had no such opportunity, because the timing of its payment was subject to a condition – Marx’s receipt of payment from DASNY – that plaintiff could not control and that did not occur before the limitation period expired. Had plaintiff attempted to commence an action within the six-month period, the action would have been subject to dismissal as premature, as plaintiff’s claim had not yet accrued. Marx’s argument that plaintiff could have timely commenced its action within six months after the submission of its sixteenth invoice – the first invoice that Marx did not pay – is without merit, as Marx neither claimed nor showed that it had received payment from DASNY for plaintiff’s work within that time period, so that the claim would then have been due and payable. …The conflict in the subcontractor agreement between the limitation period and the payment provisions had the effect of nullifying plaintiff’s breach of contract claim; thus, the six-month limitation period is unreasonable and unenforceable, and Supreme Court should not have dismissed plaintiff’s complaint as time-barred. Slip Op. at *1. The Court noted that the facts and circumstances surrounding the payment from DASNY to Marx supported its reversal: The subcontractor agreement provided for plaintiff to receive monthly progress payments while work on the project was ongoing, less a specified percentage withheld as retainage, to be paid within seven days after Marx received payment from DASNY. Plaintiff was entitled to final payment of the entire unpaid balance following completion of the project and upon Marx’s receipt of payment from DASNY. Plaintiff established that it submitted a total of 20 invoices to Marx for its work on the project; Marx paid plaintiff for the first 15 of these invoices, but neither paid the amounts claimed in the final five invoices nor gave plaintiff written notice of disapproval of any of the invoices as required by the subcontractor agreement. In addition, plaintiff submitted pleadings from a separate litigation commenced by Marx against DASNY and the project architect. In that action, Marx had asserted that its work had been delayed by design defects and other errors and omissions on the part of DASNY and the project architect, and that DASNY had failed to make full payment to Marx for its work. DASNY counterclaimed against Marx for delay damages. Plaintiff submitted evidence revealing that this litigation was settled in February 2018, and that Marx received a settlement payment from DASNY thereafter. Plaintiff asserts that this settlement amount constituted DASNY’s final payment to Marx within the meaning of the subcontractor agreement. Therefore, plaintiff argues that Marx’s contractual obligation to make final payment to plaintiff was not triggered, and plaintiff’s cause of action for breach of contract did not accrue until the settlement was paid in 2018 — long after the six-month contractual limitation period expired in 2016. Id . Based upon the foregoing facts, the Third Department rejected Marx’s argument that DASNY’s settlement payment should not be considered the final payment for purposes of determining DiGesare’s entitlement to final payment by Marx under the subcontractor agreement as that payment was to settle a litigation only. “Marx commenced the litigation against DASNY to collect the unpaid balance it was allegedly owed,” observed the Court, “and it has neither claimed nor shown that DASNY made a payment that should be considered final payment to Marx on any other date.” Id . Takeaway Contractually shortened statutes of limitation limit a plaintiff’s right of action because they require him/her to act more quickly than the law would have otherwise permitted. “Generally intended to prevent stale claims which are difficult to defend,” a shortened limitations period encourages vigilance by the parties to a contract, thereby making it less likely there will be continued wrongdoing. Oppedisano v. D’agostino , 2017 N.Y. Slip Op. 32882 (Sup. Ct., Queens. County 2017). Thus, as long as the shortened period is reasonable, and otherwise conforms with the law, a shortened period of limitation is legally valid. Parties run into difficulties when, as in DiGesare Mech. , the shortened limitations period prevents the plaintiff from commencing his/her action within the limitations period. If the period “expires before suit can be brought,” then, as the Court of Appeals noted, and the DiGesare Mech . Court held, it “is not really a limitation period at all, but simply a nullification of the claim.”

To assert a fraud claim, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v Smith Barney , 88 N.Y.2d 413, 421 (1996). Often, plaintiffs complain that statements couched in terms of “belief” or “expectation” are false and should be actionable. Not surprisingly, however, courts have declined to find such statements actionable. The reason: they are “mere puff” or statements of opinion or exaggeration that no reasonable person would take seriously. Thompson v. Procter & Gamble Co. , 2018 WL 5113052, at *2 (S.D. Fla. Oct. 19, 2018); see also Hamilton Exhibition, LLC v. Imagine Exhibitions, Inc. , 2019 WL 2590639, at *3 (S.D.N.Y. June 11, 2019); Barilli v. Sky Solar Holdings, Ltd. , 389 F. Supp. 3d 232, 252 (S.D.N.Y. 2019); Davis v. Avvo, Inc. , 345 F. Supp. 3d 534, 542 (S.D.N.Y. 2018) (“ efendant’s … advertising of attorneys as ‘highly qualified,’ ‘the right,’ or the ‘best’ nonactionable puffery” under the Lanham Act and New York General Business Law). In contrast to puffery and expressions of opinion, a misrepresentation is a false statement of present or historical fact. Oregon Public Employees Retirement Fund v. Apollo Group Inc. , 774 F.3d 598, 606 (9th Cir. 2014). Misrepresentations of fact are actionable because they are capable of objective verification. E.g. , White v. Davidson , 150 A.D.3d 610, 611 (1st Dept. 2017). See also SEC v. Todd , 642 F.3d 1207, 1216-17 (9th Cir. 2011). On October 25, 2019, Judge William H. Pauley III addressed the foregoing principles in The Hertz Corp. v. Accenture LLP , 19-cv-3508 (S.D.N.Y. Oct. 25, 2019) ( here ), wherein he dismissed a claim for violations of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) because the challenged statements, which the Court held sounded in fraud, were mere puffery or too vague to be actionable. The Hertz Corp. v. Accenture LLP Background In 2016, Hertz decided to undergo a digital makeover by developing a new website and a suite of mobile applications for its vehicle rental brands (the “Project”). Since Hertz did not have the necessary expertise, it solicited proposals from technology service firms, including Accenture. Ultimately, Hertz hired Accenture following a one-day marketing presentation in which Accenture touted its expertise in website and mobile application development. The presentation contained slides stating that Accenture’s staff consisted of “800 xperts” who comprised “ he best talent in the world.” The presentation also stated “ e’ve got the skills you need to win” and that Accenture would “put the right team on the ground day one.” The Project was to be conducted in phases, and the services and deliverables for each phase were, in turn, specified in letters of intent (“LOIs”) and corresponding statements of work (“SOWs”). The LOIs and SOWs were governed by a Consulting Services Agreement between Hertz and Accenture that had been in place since 2004. Between August and November 2016, Accenture completed work on Phase 1, which involved various planning services and the development of a “Solution Blueprint” describing the processes and technologies needed to complete the Project. On January 30, 2017, Accenture and Hertz entered Phase 2 of the Project pursuant to an LOI that required Accenture to design, build, test, and deploy the website and mobile applications. Accenture committed to a December 2017 “go-live” date. Phase 2, however, was plagued with difficulties. By September 2017, Accenture informed Hertz that it would not be able to meet the promised December 2017 go-live date and requested an extension until January 2018. Accenture later requested a second extension until April 2018. Hertz alleged that many of Accenture’s problems in completing the Project were related to Accenture’s misrepresentations about the expertise of its staff. Hertz contended that Accenture’s developers were not experts as promised. Instead, they were inexperienced and unfamiliar with the technologies that Accenture recommended to Hertz for the Project. This inexperience, claimed Hertz, manifested itself in Accenture’s poor website and mobile application coding. Hertz further alleged that Accenture struggled to implement its “RAPID” technology, which was intended to streamline the development of portions of Hertz’s new website. Accenture recommended the RAPID technology, explaining that its implementation required expertise which Accenture’s developers possessed. Based upon the foregoing, Hertz acquired licenses for the technology. Ultimately, however, according to Hertz, Accenture failed to implement RAPID, and it later acknowledged that it “spent a good deal of time” trying to “fight[] through integration of RAPID” into the Project. Thereafter, Hertz hired a new technology services provider for the Project in June 2018 and terminated Accenture’s services. After Hertz removed Accenture from the Project, Hertz allegedly learned that Accenture had misrepresented the extent of its code testing. In total, Hertz paid Accenture over $32 million in fees and expenses during the Project. Hertz filed suit alleging, inter alia , that Accenture violated the FDUTPA. In that regard, Hertz alleged that Accenture made two categories of misrepresentations: (1) misstatements contained in the 2016 marketing presentation; and (2) misstatements concerning Accenture’s expertise with RAPID technology and the extent of its code testing. Accenture moved to dismiss the FDUTPA claims on the grounds that they failed to state a claim.  Specifically, Accenture argued that the alleged misstatements in the first category ( i.e. , misstatements contained in the 2016 marketing presentation) were not actionable as they were mere puffery, and the misstatements in the second category ( i.e. , misstatements concerning Accenture’s expertise with RAPID technology and the extent of its code testing) failed to satisfy the heightened pleading requirements of Rule 9(b). The Court agreed with Accenture and dismissed the FDUTPA claims. The Court’s Decision Hertz contended that, within the 2016 marketing presentation, Accenture falsely represented that its staff consisted of “800 xperts” amounting to “ he best talent in the world” and that Accenture would “put the right team on the ground day one” – a team that Accenture represented possessed “the skills you need to win”. Hertz averred that Accenture’s personnel were not experts. According to Hertz, most of Accenture’s developers were junior, inexperienced, and located offshore. Accenture claimed that, although the alleged misstatements satisfied the heightened pleading requirements of Fed. R. Civ. P. 9(b), they were nevertheless deficient because they were non-actionable puffery. Judge Pauley held that Accenture’s representation that it housed “800 xperts” amounting to “ he best talent in the world,” along with its promise that it had “the skills you need to win” and would “put the right team on the ground day one,” were “quintessential examples of puffery.” Slip Op. at 9. Such statements, noted the Court, were “analogous to statements that courts within ircuit have routinely dismissed as non-actionable puffery, albeit in non-FDUTPA cases.” Slip Op. at 8 (citations omitted). The Court rejected Hertz’s reliance on two Florida cases in which the courts held the puffery to be actionable. In the first one, the statements involved consumer goods ( e.g. , beer and dish soap) that were purchased by ordinary shoppers who could consider them to be “more than just a salesman’s lavish claims” ( Thompson , 2018 WL 5113052, at *2), and in the second one, the statements were part of a larger marketing campaign and packaging ( Marty v. Anheuser-Busch Cos. , 43 F. Supp. 3d 1333, 1342 (S.D. Fla. 2014)). The Court observed that Hertz did not resemble the plaintiffs in Thompson and Marty because it is a sophisticated, multi-billion-dollar company, which had a long-standing relationship with Accenture dating back to 2004. Slip Op. at 9. Accordingly, the Court concluded that the alleged misstatements in the marketing presentation were not actionable. Judge Pauley also held that Hertz failed to satisfy the heightened pleading requirements of Fed. R. Civ. P. with respect to Hertz’s claim that Accenture falsely represented its RAPID expertise and the extent of its website and mobile application code testing. Slip Op. at 9-10. The Court noted that the claim rested “on a single, vague accusation that ‘Accenture falsely led Hertz to understand that its developers had the required expertise to use RAPID properly.’” Id . at 10, citing the Complaint. “This conclusory allegation,” held the Court, “cannot satisfy Rule 9(b), as the Complaint fail to explain how or when Accenture led Hertz to develop that understanding.” Id . (citation omitted).  Under Rule 9(b), a plaintiff must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent. Rombach v. Chang , 355 F.3d 164, 170 (2d Cir. 2004) (quotation marks omitted). In other words, the plaintiff must “set forth the who, what, when, where and how of the alleged fraud.” U.S. ex rel. Resnick v. Weill Med. Coll. of Cornell Univ. , 2010 WL 476707, at *4 (S.D.N.Y. Jan. 21, 2010) (quotation marks omitted). The Court explained that although Hertz discussed Accenture’s recommendation that Hertz use RAPID for the Project, it failed to plead more – i.e. , the who, what, when, where and how of the alleged fraud. “ s Accenture notes,” said Judge Pauley, “the mere fact that Accenture recommended RAPID to Hertz not support Hertz’s assertion that Accenture misrepresented its expertise.” Slip Op. at 10. Judge Pauley deemed Hertz’s allegations concerning Accenture’s code testing to be “likewise insufficient.” Id . In this regard, the Court noted that Hertz failed to identify any misstatement, stating that “ he Complaint baldly assert that ‘Accenture’s developers . . . misrepresented the extent of their testing of the code’” without specifying “what Accenture represented about its code testing in the first place.” Id . Thus, the Court dismissed “Hertz’s FDUTPA claim … with prejudice in its entirety.” Id . Takeaway Hertz shows that regardless of the circumstance, a plaintiff alleging fraud must plead the claim with particularity. Hertz also reminds litigators that mere puffery will not suffice to state a claim for relief. More is needed. The plaintiff must come forward with statements that are objectively verifiable. Finally, Hertz teaches that if a litigant is going to allege fraud, he/she must identify the statement or omission alleged to be false. Vague assertions about a fact or circumstance will not suffice to withstand a motion to dismiss.

Under the present “commencement by filing” system, an action (or proceeding) (collectively, an “Action”) is commenced by filing ( CPLR 304 (a))the initiatory paper(s) with the “clerk of the court in the county in which the ction … is brought or any other person designated by the clerk of the court for that purpose (CPLR 304(c)).  Once an Action is commenced, the plaintiff (or petitioner) (collectively, a “Plaintiff”) must effectuate service of process pursuant to the parameters of CPLR 306-b , which provides: Service of the summons and complaint, summons with notice, third-party summons and complaint, or petition with a notice of petition or order to show cause shall be made within one hundred twenty days after the commencement of the ction, provided that in an ction, except a proceeding commenced under the election law, where the applicable statute of limitations is four months or less, service shall be made not later than fifteen days after the date on which the applicable statute of limitations expires.  If service is not made upon a defendant within the time provided in this section, the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service. Among other things, CPLR 306-b provides that, in general, service of process on a defendant (or respondent) (collectively, a “Defendant”) must be effectuated within 120 days of the commencement of an Action.  The Court of Appeals in Leader v. Maroney, Ponzini & Spencer , 97 N.Y.2d 95 (2001), explained the history of CPLR 306-b. According to Leader , “ s originally enacted in 1992, CPLR 306-b transformed New York from a commencement-by-service to a commencement-by-filing jurisdiction.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Plaintiffs were “considerabl benefit ” by “making the act of filing the point at which a claim is interposed for Statute of Limitations purposes.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Under the old statute, a Plaintiff was afforded 120 days to effectuate service of process and the Action would be “deemed dismissed” if service was not timely made.  Leader , 97 N.Y.2d at 100 (citation omitted).  “The plaintiff was free to commence a new ction and serve process within a second 120-day period from the date of the automatic dismissal, even if the Statute of Limitations had expired.”  Leader , 97 N.Y.2d at 100 (citation omitted).  For a variety of reasons, the “deemed dismissed” provisions of the old statute were deemed “unnecessarily harsh” and was amended. Thus, the statute was amended to provide that if service of process is not made within the 120-day period after the commencement of the Action, an unserved Defendant can move for the dismissal, without prejudice, or the court could extend Plaintiff’s time to serve a Defendant “upon good cause shown or in the interest of justice.”  Leader , 97 N.Y.2d at 101 (citing CPLR 306-b). The Leader Court, in a trio of cases, was called upon to determine the circumstances under which a Plaintiff would be permitted to avail itself of the extension provisions of CPLR 306-b.  Importantly, the Leader Court made clear that, under CPLR 306-b, “good cause” and “the interest of justice” are “two separate standards by which to measure an application for an extension of time to serve” a Defendant if service is not made within 120 days of the commencement of an Action. Good Cause “To establish good cause, a plaintiff must demonstrate reasonable diligence in attempting service.”  Bumpus v. New York City Tr. Auth. , 66 A.D.3d 26, 31 (2 nd Dep’t 2009) (citing Leader ).  “Good cause will not exist where a plaintiff fails to make any effort at service or fails to make at least a reasonably diligent effort at service.”  Bumpus , 66 A.D.3d at 31 (citations omitted).  Where “good cause” is not established, “courts must consider the ‘interest of justice’ standard of CPLR 306-b.”  Bumpus , 66 A.D.3d at 32 (citations omitted). Interest of Justice To satisfy the “interest of justice” standard, a court must “careful ” analyze “the factual setting of the case and … balance … the competing interests presented by the parties.”  Leader , 97 N.Y.2d at 105.  Significantly, the Leader Court made clear that to satisfy the “interest of justice” standard, “a plaintiff need not establish reasonably diligent efforts at service as a threshold matter,” although it may consider plaintiff’s efforts to serve a defendant as one of many factors in its analysis.  Leader , 97 N.Y.2d at 105.  In determining whether the “interest of justice” compels the granting of the extension, the court may consider “any other factor in making its determination, including expiration of the Statute of Limitations, the meritorious nature of the cause of action, the length of delay in service, the promptness of a plaintiff’s request for the extension of time, and prejudice to defendant.  Leader , 97 N.Y.2d at 105-6 (footnote omitted). By Decision and Order dated October 23, 2019, the Appellate Division, Second Department, performed a CPLR 306-b analysis in Nationstar Mortgage, LLC v. Wilson .  The plaintiff in Nationstar , after a series of assignments, became the holder of a note and mortgage that was in default.  In October of 2014, Nationstar commenced a foreclosure action and, within a week, “purportedly” served a defendant by suitable age and discretion at the property being foreclosed. Defendant answered, asserted a defense based on improper service and, thereafter, moved to dismiss the complaint on that ground alleging that he did not reside at the subject premises.  Just over two weeks after making the motion, plaintiff “purportedly” served defendant at his residence.  Defendant made another motion to dismiss arguing that a surveillance camera in the lobby of his building contradicted the process server’s affidavit that he gained entry to the building to serve defendant. Supreme court issued an order dated January 11, 2016, granting defendant’s motion to the extent of scheduling a hearing on the issue of service.  The court also found that defendant’s first motion to dismiss was rendered moot by the second service.  On April 20, 2016, plaintiff moved for extension of time to serve defendant pursuant to CPLR 306-b.  After a hearing, the court determined that defendant was not properly served and that the process server was “totally lacking in credibility” based on the security camera footage.  Nonetheless, the court granted plaintiff’s motion under CPLR 306-b. On defendant’s appeal, the Second Department found that “the Supreme Court improvidently exercised its discretion in granting the plaintiff’s motion pursuant to CPLR 306-b for leave to extend the time to serve with the summons and complaint.”  As to “good cause,” the Court found that plaintiff did not establish that it “exercised diligent efforts in attempting to effect proper service on defendant.”  Plaintiff’s first attempt at service was made at a location that was not defendant’s residence and defendant so stated in his answer and in his first motion to dismiss.  Further, the Court noted that plaintiff waited until the day before the expiration of the 120-day period to attempt to reserve defendant.  However, “in regard to the second attempt at service, which the Supreme Court totally discredited, it cannot be said that the plaintiff exercised reasonable diligence in attempting service.” The Court, after noting that that the “interest of justice” standard is broader than that of “good cause” and is meant to “’accommodate late service that might be due to mistake, confusion or oversight, so long as there is no prejudice to the defendant’” (quoting Leader ), found that: the plaintiff failed to establish entitlement to an extension of time for service in the interest of justice. Even though was on notice in April 2015—when moved to dismiss for the second time based on improper service, relying on the surveillance video recording of the process server—that the February 2015 service was defective, and even though a copy of the video was sent to counsel for on February 26, 2016, still waited until April 2016 to move for an extension of time to serve . The plaintiff’s motion therefore was not made until one year after moved to dismiss, and 16 months after the expiration of the 120-day service period. The facts that the action was timely commenced, that had actual notice of the action within the 120-day service period, and that the statute of limitations had expired by the time the plaintiff moved to extend the time to serve, militate in favor of granting the plaintiff’s motion to extend the time to serve. However, these factors are outweighed by the lack of diligence evidenced by the Supreme Court’s finding that the process server never served , despite the process server’s affidavit claiming he did serve . (Citations omitted.)

Melville, NY ( Law Firm Newswire ) October 23, 2019 -  Freiberger Haber LLP is pleased to announce that co-founding partner, Jeffrey M. Haber, has been named by Super Lawyers magazine to be among the top lawyers in the New York metropolitan area for the eighth consecutive year. Mr. Haber was recognized for his work in business litigation. As part of his history of professional achievements, he was also recognized as a Super Lawyer in 2008-2010 and 2012-2019. Super Lawyers Magazine® is an affiliate of Thomson Reuters. It recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year, no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 50 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2019 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact Jeffrey M. Haber: Freiberger Haber LLP Melville Office (Main Office): 425 Broadhollow Road, Suite 416 Melville, New York 11747 Tel: (631) 282-8985 Fax: (631) 390-6944 New York Office: 420 Lexington Avenue Suite 300 New York, NY 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email:  info@fhnylaw.com

Stenographic services are an important part of any litigation. After all, deposition and trial testimony must be recorded, as they are part of the record. Typically, the attorney noticing the testimony retains the court reporter and commits to be directly responsible for the costs of the services. In some states, such as New York, the attorney is legally responsible (by rule, regulation or statute) for the stenographer’s fees, unless specifically disclaimed in writing. There are times, however, when the attorney and the client have an arrangement whereby the court reporter is requested to bill the client directly for the services performed. New York’s Statute of Frauds and General Business Law require this arrangement to be in writing and communicated in writing to the court reporter. Otherwise, the attorney will be held personally liable for the costs of such services. Disputes arise when the court reporter bills the attorney for the services rendered and does not receive any payment therefor. The court reporter claims that it has an actionable claim for an account stated. But, as Justice Margaret A. Chan of the Supreme Court, New York County, found in Veritext Corp. Servs. v U.S. Adjustment Corp . , 2019 N.Y. Slip Op. 33058(U) (Sup. Ct., N.Y. County Oct. 15, 2019) ( here ), the statute of frauds may be a defense to such a claim. Below, this Blog examines the account stated doctrine and the statute of frauds applicable to a promise by an attorney to answer for the debt of his/her client – that is, the attorney’s promise as the agent of the client to pay a court reporter’s fees on behalf of that client. The Doctrine of Account Stated The common-law doctrine of account stated is rooted in medieval England. Citibank (S. Dakota) N.A. v. Jones , 184 Misc. 2d 63, 64 (Dist. Ct., Nassau County 2000), citing Teeven, A History of Legislative Reform of the Common Law of Contracts, 26 U. Tol. L. Rev. 35, 46 (1994). The doctrine “is widely accepted, not only in New York, but in most jurisdictions….” Id . An account stated may be defined, broadly, as an agreement, express or implied, between the parties to an account based upon prior transactions between them, with respect to the correctness of the separate items composing the account, and the balance due. Jim-Mar Corp. v. Aquatic Constr. , 195 A.D.2d 868, 869 (3d Dept. 1993), citing, inter alia, Interman Indus. Prods. v R. S. M. Electron Power , 37 N.Y.2d 151 (1975), and Chisholm-Ryder Co. v Sommer & Sommer , 70 A.D.2d 429 (4th Dept.1979). Stated differently, an account stated is an agreement, independent of the underlying agreement ( Episcopal Health Servs., Inc. v. Pom Recoveries, Inc. , 138 A.D.3d 917 (2d Dept. 2016)), regarding the amount due on past transactions ( JP Morgan Chase Bank, N.A. v. Rabel , 27 Misc. 3d 656 (N.Y. City Civ. Ct. 2010)). An account stated is predicated upon a transaction between the parties such that it creates a debtor and creditor relationship, prior to the statement of the account. Bank of New York-Delaware v. Santarelli , 128 Misc. 2d 1003, 1004 (County Ct., Broome County 1985). To make an account stated, the indebtedness must refer to an existing debt; it cannot be made to create a liability where none existed before. Ryan Graphics, Inc. v. Bailin , 39 A.D.3d 249, 250 (1st Dept. 2007). A cause of action alleging an account stated cannot be used to collect under a disputed contract. Ross v. Sherman , 57 A.D.3d 758 (2d Dept. 2008). Since an account stated sounds in breach of contract, the agreement may be implied as well as express ( i.e. , an express agreement to treat a statement of debt as an account stated). Chisholm-Ryder , 70 A.D.2d at 431 (citation omitted); Grinnell v. Ultimate Realty, LLC , 38 A.D.3d 600 (2d Dept. 2007). An agreement may be implied if a party receiving a statement of account keeps it without objecting to it within a reasonable time because the party receiving the account is bound to examine the statement and object to it, if there is an objection. Id . Notably, silence is deemed acquiescence and warrants enforcement of the implied agreement to pay. Id . (citations omitted). An agreement may also be implied if the debtor makes partial payment. The partial payment is considered acknowledgment of the correctness of the account. Id ., citing, inter alia , Parker Chapin Flattau & Klimpl v Daelen Corp. , 59 A.D.2d 375, 377 (1st Dept. 1977). See also Shea & Gould v. Burr , 194 A.D.2d 369 (1st Dept. 1993) (receipt and retention of account without objection within a reasonable time coupled with a partial payment gives rise to an actionable account stated entitling plaintiff to summary judgment). An account presented to and accepted by the debtor does not lose its character as an account stated by reason of the account including installment payments. However, an account stated may only encompass amounts not yet due if there remains no further obligation to be performed by the party claiming payment. Gurney, Becker & Bourne, Inc. v. Benderson Dev. Co., Inc. , 47 N.Y.2d 995, 996 (1979). To state a cause of action for an account stated, a plaintiff must allege that: (1) the defendant is indebted to the plaintiff for a specific amount, constituting the sum of one or several billing invoices delivered to the defendant over a particular period of time; (2) the plaintiff’s demands have not been complied with; (3) the accounts remain outstanding; and (4) there is an absence of objection from the defendant. In the absence of fraud, mistake or other equitable considerations making it improper to recognize the agreement, if the foregoing elements are satisfied, then the account is conclusive. A cause of action for an account stated will fail where the defendant has rendered to the plaintiff its objections to its obligation to pay the amounts billed within a reasonable time. Joe O’Brien Investigations Inc. v. Zorn , 263 A.D.2d 812 (3d Dept. 1999). For purposes of a claim of account stated, whether a bill has been held without objection for a period of time sufficient to give rise to an inference of assent is typically a question of fact, and becomes a question of law only in those cases where only one inference is rationally possible. Accent Collections, Inc. v. Cappelli Enterprises, Inc. , 94 A.D.3d 1026, 943 N.Y.S.2d 189 (2d Dept. 2012); Whiteman, Osterman & Hanna, LLP v. Oppitz , 105 AD3d 1162, 1163 (3d Dept. 2013). However, generalized objections lodged by a defendant after receiving a plaintiff’s billing statements do not constitute objections to the billing statements. Costopoulos v. DeCoursey , 151 A.D.3d 1452, 57 N.Y.S.3d 249 (3d Dept. 2017). The Statute of Frauds Relating to Stenographic Services In New York, the statute of frauds is found in General Obligations Law (GOL) § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to, agreements to answer for the debt of another person. GOL § 5-701(a)(2). The purpose of the Statute of Frauds is “to avoid fraud by preventing the enforcement of contracts that were never in fact made.”  Fox Co. v Kaufman Org. , 74 N.Y.2d 136, 140 (1989). Where a party promises to answer for the debt of another, the promise, if it is to be enforceable, “must either be evidenced by writing or plaintiff must prove it is supported by a new consideration.” Martin Roofing v Goldstein , 60 N.Y.2d 262, 265 (1983). When an attorney, during the course of litigation, obtains court reporting services on his/her client’s behalf, he/she will be held personally liable for the costs of such services unless the attorney expressly disclaims such responsibility. Urban Ct. Reporting v. Davis , 158 A.D.2d 401, 402 (1st Dept. 1990). “This is   ... t seems to us to be more equitable to hold the attorney liable in the absence of his express indication to the contrary, since the attorney may avoid liability by the simple expedient of indicating to the reporting service or other provider of services that the client and not the attorney is liable for the obligations incurred.” Id . This view was adopted by the Legislature in its enactment of General Business Law (GBL) § 399-cc. Elisa Dreier Reporting Corp. v. Global Naps Network, Inc. , 84 A.D.3d 122, 125 (2d Dept. 2011) GBL § 399-cc provides that “when an attorney of record orders a stenographic record of any judicial proceeding, deposition, statement or interview of a party ... it shall be the responsibility of such attorney to pay for the services and the costs of such record except where ... the attorney expressly disclaims responsibility for payment of the stenographic service or record in writing at the time the attorney orders ... that the record be made.” The Legislature enacted Section 399-cc “to protect court reporters in the event they unable to recover payment for their services.” Elisa Dreir Reporting , 84 A.D.3d at 126-127. Veritext Corp. Servs. v U.S. Adj. Corp. Plaintiff, Veritext Corporate Services (“Veritext”), provided court reporting and deposition services to defendant, U.S. Adjustment Corp. (“USAC”). Veritext alleged that it provided the services to various USAC attorneys and law office clients with the understanding that all billing would be submitted to and paid by USAC. Veritext maintained that it sent invoices to USAC for these services and that USAC made sporadic payments leaving invoices in the amount of $100,817.83 outstanding. Veritext averred that it had no record of any objection to the amounts listed on the invoices and since partial payment was made by USAC at various points, Veritext continued to provide the court reporting services until August 2015. Veritext moved for summary judgment against USAC for an account stated. USAC opposed the motion. Veritext argued that USAC made partial payment on the outstanding invoices and retained the invoices without objection. USAC’s failure to object to any of the statements, coupled with the payments on the account, argued Veritext, indicated an acquiescence to the balance due, thereby entitling it to summary judgment on the account stated. USAC argued that the motion should be denied because there was no proof that there was an underlying contract obligating it to pay Veritext’s invoices. USAC maintained that because Veritext failed to submit an affidavit by anyone with personal knowledge of the alleged “understanding” between the parties or any express written agreement evidencing that USAC would be responsible for payment, Veritext’s claim for account stated must be denied. USAC further argued that Veritext’s claim was barred by the statute of frauds ( i.e. , G0L § 701(a)(2) and GBL § 399-cc) because Veritext provided services to “various clients of defendant” and “to different law offices and attorneys” without any writing evidencing an assignment or agreement by those parties for USAC to pay for the stenographic services. USAC explained that under GOL §701(a)(2) and GBL § 399-cc, Veritext’s claim for an account stated should fail as the stenographic services must be paid by the attorneys of record, not USAC, in the absence of proof of a written assignment. The Court denied the motion. The Court’s Decision The Court found issues of fact concerning USAC’s liability for the invoices – that is, USAC’s obligation to pay the invoices sent to Veritext. Slip Op. at *3. The Court explained its finding as follows: Crucially, it is unclear whether defendant is required to pay plaintiffs invoices. GBL 399-cc requires that an attorney of record pay for stenographic services. The submitted invoices include the phrase “Bill To”, followed by the name of the attorney of record, and an address of USAC’s place of business. Additionally, it is unclear from the submitted evidence whether the attorneys of record assigned their obligations to pay plaintiff to defendant. Viewed in the light most favorable to defendant, this indicates that the attorneys of record, not defendant, are obligated to pay plaintiff. As such, summary judgment is inappropriate at this time. Id . at **3-4. Takeaway GBL § 399-cc provides that the attorney of record must pay for the requested stenographic services unless such responsibility is expressly disclaimed in writing at the time the services are requested. In Veritext , issues of fact prevented the grant of summary judgment because it was unclear who was responsible for the payment of Veritext’s invoices.

Purchasing real estate, a new home for example, is an expensive proposition.  It is rare that a new home buyer has enough cash on hand to make the purchase.  Therefore, it is typical for such a purchaser to seek mortgage financing to fund the purchase.  For this very reason, a real estate buyer would be reluctant to enter into a contract for the purchase of real estate without the ability to cancel the contract if a lender declines the purchaser’s application for purchase money financing.  Enter the mortgage contingency clause, which is a contractual provision typically found in contracts relating to real estate transactions. The precise language of a mortgage contingency clause can vary from contract to contract, but typically provide that a contract can be cancelled if the purchaser is unable to qualify for the type of mortgage specified in the contract.  Which combination of parties can cancel the contract and the circumstances under which a contract can be cancelled is based on the specific language of the clause. A mortgage contingency clause does not only benefit a purchaser.  Such clauses are “also for the benefit of the seller who wants to limit the period of time in which the property is off the market.  In addition, it is reasonable to infer that the seller would prefer the guaranteed financial commitment of a bank rather than the sometime uncertain personal financial obligation of a purchaser.”  W.W.W. Associates, Inc. v. Giancontieri , 152 A.D.2d 333, 340 (2 nd Dep’t 1989), reversed on other grounds , 77 N.Y.2d 157 (1990) (citation omitted).  If a “mortgage contingency clause was solely for the benefit of the … purchaser and not grant the seller the option to cancel the contract in the event the purchaser failed to obtain a mortgage commitment by a specified date,” then the seller cannot cancel the contract if the buyer failed to obtain a mortgage.  Coneys v. Game , 141 A.D.2d 795 (2 nd Dep’t 1988) (citation omitted).  A mortgage contingency clause will be deemed to be for the benefit of a seller when the seller has the right to cancel the contract upon the buyer’s failure to obtain a mortgage.  Grossman v. Perlman , 132 A.D.2d 522, 523 (2 nd Dep’t 1987) (citation omitted). Further, “ mortgage contingency clause is construed to create a condition precedent to the contract of sale he purchaser is entitled to return of the down payment where the mortgage contingency clause unequivocally provides for its return upon the purchaser's inability to obtain a mortgage commitment within the contingency period.”  Blair v. O’Donnell , 85 A.D.3d 954 (2 nd Dep’t 2011) (citations and internal quotation marks omitted). In any event, mortgage contingency clauses are a fertile source of litigation.  As is made plain by the caselaw, courts will rely on the language of the mortgage contingency clause in question to define the parties’ rights and remedies.  Some examples of related litigation follow. On October 16, 2019, the Second Department decided Federico v. Dolitsky .  The defendants in Federico entered into a contract to purchase a real property from the plaintiff and made a sizable down payment.  In addition: rider to the contract contained a mortgage contingency clause providing that the buyers' obligation to purchase the subject property was contingent upon them obtaining a mortgage commitment for a conventional mortgage "in an amount not more than $292,300.00 for 25/30 years at the prevailing rate of interest." The buyers were required to "use due diligence" in providing documentation to their institutional lender. The rider also provided that if the buyers were unable to obtain a mortgage commitment within 45 days of the execution of the contract, "the Seller may either cancel this agreement or extend this provision for an additional period of up to thirty (30) days, at the end of which, either party may cancel this agreement without any further liability to the other." After the mortgage application was denied, the buyer’s attorney advised the seller’s attorney, in writing, of the denial and cancelled the contract pursuant to the mortgage contingency clause.  The Federico action was commenced after the seller refused to return the down payment.  Both parties moved for summary judgment – the buyers arguing that they “properly canceled the contract upon receiving notice that their application had been denied” and the seller arguing that the “buyers’ ‘unilateral cancellation of the contract…was a willful default under the contract of sale,’” requiring the return of the down payment. The Federico supreme court denied the buyers’ motion and granted summary judgment to the seller.  In affirming the lower court, the Second Department found the mortgage contingency clause to be “clear and unambiguous” and, therefore, under traditional rules of contract interpretation, “the intent of the parties must be found within the four corners of the contract, giving practical interpretation to the language employed and the parties’ reasonable expectations.”  (Citation and internal quotation marks omitted.)  Under the subject clause, the Second Department found, the seller “had the unilateral right to either cancel the contract or extend the mortgage contingency period for an additional 30 days.  The buyers were only entitled to cancel the contract upon the expiration of that 30-day period.”  Thus, the buyer’s cancellation of the contract immediately upon the declination of its initial application was found to be improper. The mortgage contingency clause in Lot 57 Acquisition Corp. v. Yat Yar Equities Corp. , 63 A.D.3d 1109 (2 nd Dep’t 2009) lot 57> lot 57>, provided: …In the event, however, that the Purchaser is unable to obtain by one hundred and eighty (180) days from the date Purchaser’s attorney receives a countersigned contract, and the purchaser has notified the attorney for the Seller by certified mail, return receipt requested by said date, then either party shall have the option to cancel this contract, and in which event the Purchaser’s down payment shall be refunded with interest earned thereon, if any. The purchaser in Lot 57 still wanted the property although it did not obtain a mortgage.  Accordingly, purchaser did not notify the seller that it did not obtain the mortgage.  Thus, purchaser could not cancel the contract for that reason and would have to purchase the property for cash.  Nonetheless, Yat Yar, the seller, sent a cancellation notice.  In modifying supreme court’s denial of summary judgment in favor of purchaser and granting summary judgment in favor of purchaser, the Lot 57 Court stated: On its renewed cross motion, Yat Yar failed to demonstrate its prima facie entitlement to judgment as a matter of law, since it did not establish the facial validity of its cancellation of a contract for the sale of the subject property pursuant to a particular contractual provision.  Specifically, although Yat Yar established that the plaintiff failed to timely procure a mortgage loan for the purchase of the subject property, Yat Yar's right to cancel the contract pursuant to the mortgage contingency clause did not arise until the purchaser notified it by certified mail, return receipt requested, of such failure. Under these circumstances, Yat Yar's purported cancellation of the contract, concededly before it even had knowledge of the plaintiff's admitted failure to obtain a mortgage commitment within the period prescribed by the contract, was not valid.  Where the procedures for cancellation provided for by the contract specify conditions precedent to the right of termination, those procedures must be followed. The plaintiff, on the other hand, made a prima facie showing of its entitlement to judgment as a matter of law on the complaint, which sought to compel specific performance of the contract, by submitting proof of the validity of the contract of sale, its performance thereunder, and that it was ready, willing, and able to proceed to closing.  In opposition, the defendant failed to raise a triable issue of fact. (Citations omitted.)

Readers of this Blog know that, as a general matter, New York courts will not permit a tort claim to survive a motion to dismiss when the claim arises from a breach of contract. here).=">here)."> Indeed, courts routinely dismiss a tort claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). See also Cronos Grp. v. Xcomip, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017); McKernin v. Fanny Farmer Candy Shops, Inc. , 176 A.D.2d 233, 234 (2d Dept. 1991).  This is arguably so even when the damages sought in the tort action overlap with the contract action. ( Financial Structures Ltd. v. UBS A.G. , 77 A.D.3d 417, 419 (1st Dept. 2010) (requiring each of the following elements to be present to find duplication: a tort is “based on the same facts that underl the contract cause of action, not collateral to the contract, and d not seek damages that would not be recoverable under a contract measure of damages.”). In the Southern District of New York, the courts are split on the impact of overlapping damages. Compare Blackrock Core Bond Portfolio v. U.S. Bank Nat’l Ass’n , 165 F. Supp. 3d 80, 106 (S.D.N.Y. 2016) and Triaxx Prime CDO 2006-1, Ltd. v. Bank of New York Mellon , No. 16-cv-1597, 2018 WL 1417850, at **6-7 (S.D.N.Y. Mar. 8, 2018), aff’d sub nom ., Triaxx Prime CDO 2006-1, Ltd. v. U.S. Bank Nat’l Ass’n , 741 F. App’x 857 (2d Cir. 2018) (summary order) (dismissing tort claims as barred by the economic loss doctrine) with Ambac Assurance Corp. v. U.S. Bank Nat’l Ass’n , 328 F. Supp. 3d 141, 157-60 (S.D.N.Y. 2018); Phoenix Light SF Ltd. v. Deutsche Bank Nat’l Tr. Co. , 172 F. Supp. 3d 700, 719 (S.D.N.Y. 2016) (“ Phoenix Light/DB ”); Commerzbank AG v. U.S. Bank Nat’l Ass’n , 277 F. Supp. 3d 483, 496-97 (S.D.N.Y. 2017) (“ Commerzbank/U.S. Bank ”) (allowing tort claims to proceed).  “This schism centers on whether a defendant’s alleged breach of extra-contractual legal duties is independently sufficient to foreclose application of the economic loss rule, or whether a plaintiff must also allege damages flowing from the tort claims that are independent of the damages flowing from the contract claims.” Ambac Assurance Corp. , 328 F. Supp. 3d at 158.  The district courts dismissing tort claims that arise from collateral facts or independent duties do so under the economic loss doctrine – e.g. , courts dismiss claims even where the plaintiff alleged an extra-contractual duty because the damages alleged “in connection with the breach of fiduciary duty claims arise entirely from defendants’ obligations under the .” Phoenix Light SF Ltd. v. U.S. Bank Nat’l Ass’n , No. 14-cv-10116, 2016 WL 1169515, at *9 (S.D.N.Y. Mar. 22, 2016) (“ Phoenix Light/U.S. Bank ”). Under the economic loss doctrine, “ plaintiff cannot seek damages by bringing a tort claim when the injury alleged is primarily the result of economic injury for which a breach of contract claim is available.” Phoenix Light/DB , 172 F. Supp. 3d at 718-19 (citing BNP Paribas Mortg. Corp. v. Bank of Am., N.A. , 949 F. Supp. 2d 486, 505 (S.D.N.Y. 2013)). Significantly, “Plaintiffs’ allegations that Defendant breached duties independent of its contracts do not, themselves, ‘allow evasion of the economic loss rule, which presents a second, distinct barrier’ to tort claims stemming from contractual relationships.” BlackRock Allocation Target Shares: Series S. Portfolio v. Wells Fargo Bank, Nat’l Ass’n , 247 F. Supp. 3d 377, 399 (S.D.N.Y. 2017) (“ Wells Fargo I ”) (quoting Royal Park Invs. SA/NV v. HSBC Bank USA, Nat’l Ass’n , 109 F. Supp. 3d 587, 599 (S.D.N.Y. 2015)). “The economic-loss rule provides that ‘a contracting party seeking only a benefit of the bargain recovery may not sue in tort notwithstanding the use of familiar tort language in its pleadings.’” Wells Fargo I , 247 F. Supp. 3d at 399 (quoting Phoenix Light/U.S. Bank , 2016 WL 1169515, at *9). In National Credit Union Admin. Bd. v. Deutsche Bank Nat’l Trust Co. , 14-cv-8919 (SHS) (S.D.N.Y. Oct. 15, 2019) ( here ), Judge Sidney H. Stein sided with the courts that applied the economic loss doctrine to dismiss negligence/gross negligence and breach of fiduciary duty claims seeking damages that overlapped with those sought by the plaintiff’s contract claims. National Credit Union Administration Board v. Deutsche Bank National Trust Co. Background The National Credit Union Administration Board (“NCUA”) is an independent federal agency that regulates federal credit unions. Among NCUA’s powers is the authority to place failed credit unions into liquidation. Upon liquidation, NCUA succeeds to “all rights, titles, powers, and privileges of the credit union, and of any member, accountholder, officer, or director of such credit union with respect to the credit union and the assets of the credit union.” 12 U.S.C. § 1787(b)(2)(A)(i). According to NCUA, in 2009 and 2010, in the aftermath of the financial crisis, it placed several failed corporate credit unions into liquidation and thus succeeded those entities. The failed corporate credit unions had assets that included residential mortgage-backed securities (“RMBS”) in trusts for which Deutsche Bank served as trustee. Each trust consisted of hundreds of individual residential mortgage loans that were pooled together and securitized for sale to investors. The trusts were governed by agreements called Pooling and Servicing Agreements (“PSAs”). Plaintiff filed suit against Deutsche Bank in connection with its duties as Trustee to the RMBS trusts. According to the complaint, Deutsche Bank had both common law and contractual duties as Trustee to, inter alia , (1) review the underlying mortgage files for completeness and accuracy, (2) notify appropriate parties and take various actions should it discover breaches of representations and warranties (“R&Ws”) concerning the mortgage loans, and (3) take similar protective actions upon learning of events of default concerning the trust. NCUA alleged that Deutsche Bank was derelict in its duties and failed to perform its obligations. According to NCUA, reports of systemic problems with the mortgages and the trusts, as well as Deutsche Bank’s own involvement in the RMBS market, supported the likelihood that Deutsche Bank had notice of the issues with the underlying mortgages, and yet it allegedly took no remedial action. Plaintiff asserted claims for: (1) breach of contract related to Deutsche Bank’s alleged breaches of the PSAs; (2) negligence and gross negligence related to Deutsche Bank’s alleged neglect of its duties as trustee; (3) breach of fiduciary duty; (4) declaratory judgment that Deutsche Bank was not permitted to use trust funds to pay its litigation costs; and (5) breach of contract for Deutsche Bank’s alleged unlawful withdrawals from the trust funds to pay its litigation costs. The contract claims stemmed from Deutsche Bank’s contractual duties as Trustee under the PSAs. Among the duties alleged to have been breached include: (1) pre-Event of Default (“EOD”) obligations, such as taking possession of and reviewing mortgage files conveyed to the trust and notifying relevant parties of any defects as well as providing notice of and enforcing repurchase rights with respect to mortgages that were found to be in breach of the R&Ws, and (2) post-EOD obligations where, after Deutsche Bank had notice of an EOD, it was required to provide notice to all certificateholders and act prudently in managing the EOD. The negligence/gross negligence claims stemmed from Deutsche Bank’s alleged duty to “administer the trusts without negligence” which it purportedly violated though the “fail to avoid conflicts of interest” and thus “protect the interests of the certificateholders,” specifically by not “(1) acting in good faith; (2) providing notice to certificateholders when appropriate ... and (3) acting with undivided loyalty to certificateholders.” The breach of fiduciary duty claim stemmed from Deutsche Bank’s alleged fiduciary duty “following Events of Default to act in good faith, with due care and undivided loyalty, and without conflicts of interest, when performing the obligations set forth in the PSAs,” which NCUA alleged that Deutsche Bank failed to do. On October 5, 2018, NCUA filed a motion for leave to file a proposed second amended complaint. Deutsche Bank opposed the amendment and moved to dismiss the amended allegations on the merits. With regard to the negligence/gross negligence and breach of fiduciary duty claims, Deutsche Bank argued that those claims should be dismissed because: (1) they were barred by the economic loss doctrine; (2) they were duplicative of plaintiff’s contract claims; (3) there was no fiduciary duty and the allegations of conflicts of interest were conclusory; and (4) there could be no negligence because Deutsche Bank’s duties were limited under the PSAs. Among other things, the Court denied the motion to dismiss Plaintiff’s contract claims and granted the motion to dismiss the negligence/gross negligence and breach of fiduciary duty claims. The Court’s Decision a) The Economic Loss Doctrine The Court agreed with the courts within the Southern District of New York that found the economic loss doctrine to apply to tort claims asserted against RMBS trustees. The Court rejected NCUA’s assertion that the economic loss doctrine did not apply because it pleaded “a legal duty separate from the contract claim,” holding that “even if true, the economic loss doctrine ‘presents a second, distinct barrier’ to the tort claims.” Slip Op. at 26, quoting Wells Fargo I , 247 F. Supp. 3d at 399. See also Nat’l Credit Union Admin. Bd. v. U.S. Bank Nat’l Ass’n , No. 14-cv-9928, 2016 WL 796850, at *11 (S.D.N.Y. Feb. 25, 2016) (even where a claim “may arise from common law duties and not from the PSA, ‘the injury’ and ‘the manner in which the injury occurred and the damages sought persuade us that plaintiff’s remedy lies in the enforcement of contract obligations,’ and are barred by the economic loss doctrine.”) (quoting Bellevue S. Assocs. v. HRH Const. Corp. , 78 N.Y.2d 282, 293 (1991)). The Court held that “the basis for plaintiff’s damages sound in Deutsche Bank’s failures to take actions under the PSAs, for which the asserted contractual remedies would be appropriate.” Slip Op. at *26.  The Court found support in its decision in the Second Circuit’s summary affirmance of Triaxx and the Appellate Division, First Department’s decision in Blackrock Balanced Capital Portfolio in which the court affirmed the dismissal of the plaintiff’s tort claims against the RMBS trustee, finding that “‘the court correctly determined that the tort claims barred by the economic loss doctrine.’” Id. , quoting Blackrock Balanced Capital Portfolio (FI) v. U.S. Bank Nat’l Ass’n , 165 A.D.3d 526, 528 (1st Dept. 2018). The Court took issue with NCUA’s argument that it had “actually asserted separate duty owed by Deutsche Bank,” noting that “although the contain the proper words to make out an independent tort claim, the pleading quite hollow on substance.” Id . at *27. Citing to the language of the proposed complaint, the Court stated: “The fact that Deutsche Bank’s alleged duty stems from the PSAs is revealed by the glaring oxymoron nestled within the PSAC’s negligence allegations: ‘Defendant owed the certificateholders, including Plaintiffs, extracontractual duties under the PSAs.’” Id . The Court rejected NCUA’s explanation that the use of the quoted language was intended to “to demonstrate that there were ‘extracontractual duties’, viewing such language as a mere label “to somehow transmogrify them into extracontractual claims.” Id ., quoting Triaxx , 2018 WL 1417850, at *6. The Court also found that the fiduciary duty claim suffered from the same infirmity. Id . “Less conspicuous but also consistent the reference to the PSAs in the fiduciary duty count.” Id . The Court concluded that “ ecause, among other indicators, the consistent references to the PSAs reveal how reliant NCUA’s tort claims are on the contracts at issue, the Court grant defendant’s motion to dismiss plainitff’s tort claims on economic loss grounds.” Id . b) NCUA’s Tort Claims Were Deemed to Be Largely Duplicative of Its Contract Claims “Independently”, the Court granted Deutsche Bank’s motion to dismiss NCUA’s tort claims because they were “duplicative of the contract claims - with one exception.” Id ., citing Bayerische Landesbank, N. Y. Branch v. Aladdin Capital Mgmt. LLC , 692 F.3d 42, 58 (2d Cir. 2012) (where “the basis of a party’s claim is a breach of solely contractual obligations, such that the plaintiff is merely seeking to obtain the benefit of the contractual bargain through an action in tort, the claim is precluded as duplicative.”); Bakal v. U.S. Bank Nat’l Ass’n , No. 15-cv-6976, 2018 WL 1726053 (S.D.N.Y. Apr. 2, 2018), aff’d , 747 F. App’x 32 (2d Cir. 2019). With respect to the negligence claim as it related to pre-EOD duties, the Court held that Deutsche Bank owed NCUA a duty to avoid conflicts of interest. Slip Op. at *28.  “Allegations of breach of an independent duty to avoid conflicts of interest,” said the Court, “are properly pled as negligence claims, not as breaches of any fiduciary duty.” Id ., citing Phoenix Light SF Ltd. v. Bank of New York Mellon , No. 14-cv-10104, 2015 WL 5710645, at *7 (S.D.N.Y. Sept. 29, 2015). “Therefore,” concluded the Court, “solely to the extent that plaintiff’s negligence claim in Count Two alleges a breach of duty to avoid conflicts of interest, that claim is not duplicative.” Id ., citing Commerzebank/BNYM , 2017 WL 1157278, at *6 (dismissing all tort claims as duplicative save for claims relating to trustee's conflict of interest); Fixed Income Shares: £Series M v. Citibank N.A. , 130 F. Supp. 3d 842, 857-58 (S.D.N.Y. 2015) (same). However, the Court dismissed the claim “because of the economic loss doctrine.” Id . Takeaway The economic loss doctrine preserves the distinction between claims sounding in contract and those sounding in tort and protects defendants from disproportionate damages awards that a judgment in tort may impose. Though originated in the context of product liability and construction cases, the economic loss doctrine has been applied in a wide variety of cases having nothing to do with their forerunners. Consequently, what was a straightforward way to achieve the goals of the doctrine has become a principle of law with no standard application.   Given the split in authority within the Southern District of New York, the question remains whether the economic loss doctrine can truly be applied outside the products liability and construction law context.   National Credit Union answers this question by adding to the uncertainty surrounding application of the doctrine.

In today’s commercial world, businesses claiming breach of an agreement often seek lost profits resulting from the breach. The hurdle that the plaintiff must overcome when seeking such relief, however, can be high. As discussed below, the reason has to do with the type of damages sought and the applicable standard of proof. There are two types of damages recoverable as lost profits: (1) lost profits that are general damages; and (2) lost profits that are consequential or special damages. As the New York Court of Appeals has noted: “The distinction between general and special contract damages is well defined but its application to specific contracts and controversies is usually more elusive.” Biotronik A.G. v. Conor Medsys. Ireland, Ltd. , 22 N.Y.3d 799, 805-806 (2014) (internal quotation marks and citation omitted). Lost profits as general damages “are the natural and probable consequence of the breach” of a contract. Biotronik , 22 N.Y.3d at 805, citing American List Corp. v. U.S. News & World Report , 75 N.Y.2d 38, 43 (1989); Kenford Co. v County of Erie , 73 N.Y.2d 312, 319 (1989). General damages include “money that the breaching party agreed to pay under the contract.” Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc. , 487 F.3d 89, 109 (2d. Cir 2007), citing American List Corp. , 75 N.Y.2d at 44. In other words, “a claim for general damages” exists where the plaintiff “seeks only what it bargained for—the amount it would have profited on the payments promised to make.” Tractebel , 487 F.3d at 110; see also Biotronik , 22 N.Y.3d at 806 (the “direct and immediate fruits” of a contract are general damages) (quoting Tractebel , 487 F.3d at 109 n.20). Lost profits may be recovered as general damages if there is a “stable foundation for a reasonable estimate.” Tractebel , 487 F.3d at 110 (internal quotation and citations omitted). To plead a stable foundation, a plaintiff must show that “ here are some facts upon which a jury could base a judgment, not certain nor strictly accurate, but sufficiently so for the administration of justice.” Wakeman v. Wheeler & Wilson Mfg. Co. , 101 N.Y. 205, 216 (1886); accord Plant Planners, Inc. v. Pollock , 60 N.Y.2d 779, 780–81 (1983) (lost profits are “recoverable where plaintiff has supplied some adequate basis for computing the amount.”). This standard flows from the principle that a party who breaches “his contract should not be permitted entirely to escape liability because the amount of the damage which he has caused is uncertain.” Tractebel , 487 F.3d at 110 (quoting Wakeman , 101 N.Y. at 209).  Under the stable foundation standard, therefore, general damages may be awarded for lost profits even where they are uncertain and difficult to estimate. See Randall-Smith, Inc. v. 43rd St. Estates Corp. , 17 N.Y.2d 99, 105 (1966) (“The rule to be applied is a flexible one”); see also Tractebel , 487 F.3d at 112 (“New York courts have significant flexibility in estimating general damages once the fact of liability is established.”). Lost profits as consequential, or special damages, do not “directly flow from the breach.” American List Corp. , 75 N.Y.2d at 43. Where the damages were the result of a separate agreement with a nonparty, they are consequential damages. Typically, consequential damages involve a breach of contract that interferes with “the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions” such that “profits from potential collateral exchanges are ‘lost.’” Tractebel , 487 F.3d at 109. Lost profits as consequential or special damages “are only recoverable when ‘(1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.’” Biotronik , 22 N.Y.2d at 806, quoting Tractebel , 487 F.3d at 109, citing Kenford Co. v. County of Erie , 67 N.Y.2d 257, 261 (1986). As to the second requirement, the damages must be capable of measurement based upon known reliable factors. Ashland Mgt. Inc. v. Janien , 82 N.Y.2d 395, 403 (1993). They cannot be “speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach.” Id . Finally, the damages cannot be “remote or the result of other intervening causes.” Id . Notably, if a new business is seeking to recover for the loss of future profits, the courts impose “a stricter standard … for the obvious reason that there does not exist a reasonable basis of experience upon which to estimate lost profits with the requisite degree of reasonable certainty.” Id. , citing Cramer v. Grand Rapids Show Case Co. , 223 N.Y. 63 (1918); 25 CJS, Damages, § 42(b). In Electron Trading LLC v. Perkins Coie LLP , 2019 N.Y. Slip Op. 33019(U) (Sup. Ct., N.Y. County Oct. 9, 2019) ( here ), Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, addressed the foregoing principles in dismissing the plaintiff’s claim for lost profits. electron trading llc v. morgan stanley & co. llc, 157 a.d.3d 579 (1st dept. 2018), as well as the factual recitation by justice sherwood.> electron trading llc v. morgan stanley & co. llc, 157 a.d.3d 579 (1st dept. 2018), as well as the factual recitation by justice sherwood.> Plaintiff, Electron Trading LLC (“Electron”), a developer of intellectual property relating to “spread” trading, a type of electronic securities trading, entered into two agreements with Morgan Stanley & Co. LLC (“Morgan Stanley”): an Exclusive License Agreement (“ELA”) whereby it granted Morgan Stanley an exclusive license for its alternative trading system (“ATS”) and a Consulting Services Agreement (“CSA”) whereby it agreed to perform related consulting services. The ELA required Morgan Stanley to use commercially reasonable efforts to develop and implement necessary software and systems, to operate and market the ATS, and to launch the ATS by a defined deadline. Morgan Stanley conceded, for the sake of argument, that it breached the ELA by not performing any of its obligations. The parties disputed whether Electron’s damages were limited by the ELA’s limitation of liability provision. Morgan Stanley moved to dismiss.  The Court (Saliann Scarpulla, J.) granted Morgan Stanley’s motion with regard to, inter alia , Electron’s breach of contract claim but only to the extent that Electron sought damages above the amount allowed under the contractual limitation of liability clause in the ELA. The Appellate Division, First Department, unanimously affirmed. Thereafter, Electron commenced a legal malpractice action against defendants Perkins Coie, LLP and Bracewell LLP. Both firms represented Electron in negotiating the ELA and CSA. Plaintiff claimed that defendants failed to properly advise it as to the limitation of liability provision set forth in the ELA. Among other damages, Electron sought the lost profits it would have received if Morgan Stanley had developed the system and third parties using the system had generated revenue to cover costs. Defendants moved to dismiss the claim for lost profits, arguing that such damages were inherently speculative and not within the parties’ contemplation when plaintiff and Morgan Stanley signed the ELA. Defendants also claimed that any diminution in value of the intellectual property due to Morgan Stanley’s breach was not caused by defendants and in any event, such claim was precluded by the Appellate Division’s decision. Justice Sherwood granted the motion. First, Justice Sherwood held that Electron failed to demonstrate that its lost profit damages were consequential or special damages. In fact, noted the Court, “ he complaint not allege that the parties ever discussed lost profits damages in the event of breach of the License Agreement.” Slip Op. at *3. Thus, concluded the Court, plaintiff failed to meet “the foreseeability branch of the applicable standard.…” Id . Second, the Court held that Electron failed to demonstrate that its lost profit damages were general damages. Justice Sherwood rejected the notion that Electron’s alleged damages were “quintessential general damages”. Id . (internal quotation marks and citation to briefing omitted). Electron claimed that under the License Agreement, it was owed royalties as a consequence of Morgan Stanley’s breach. However, said the Court, there was no mechanism in the ELA or the CSA “for calculating the amount of royalties to be paid.” Id . The Court explained: No comparable formula can be found in the parties’ agreements here. There is no provision for any specific payments to be used in the Spread Trading System. Morgan Stanley was not required to pay Electron any fixed amount. There was no minimum volume of trades acquired or commission amounts provided. In fact, there were no metrics by which the parties could project future receivables and therefore on which lost profits might be calculated. Id . The Court further explained: The License Agreement only required Morgan Stanley to provide Electron 25% of the Net Revenue generated by the Spread Trading System if the parties were successful in fully developing it…. Thus, for Electron to receive any payment, third parties would have had to elect to use the system to execute spread trades; Morgan Stanley and Electron would then have to set a competitive amount of commissions to charge third parties for use of the system; and those commissions would have to generate revenues that exceed various expenses before Morgan Stanley would owe Electron the type of profit payments Electron might seek to recover. Id . at **3-4. Based upon the foregoing, the Court found that whether or how the system would have been received by third parties was “entirely speculative” – a conclusion, noted the Court, both Justice Scarpulla and the First Department reached. Id . at *4. Accordingly, the Court granted defendants’ motion and dismissed plaintiff’s claims for lost profits and diminution-in-value damages. Takeaway As discussed above, the distinction between general and special or consequential damages is meaningful, especially given the standard of proof that attaches to each one. While the standard of proof applicable to general damages is less demanding than that which is applicable to consequential damages, it nevertheless requires a stable foundation upon which the trier of fact can base an award. In Electron Trading , the Court held that the plaintiff could not satisfy the less demanding standard of proof because there was no formula or metric by which the parties could project future receivables and, therefore, calculate the amount of lost profits that flowed from Morgan Stanley’s breach.

In Pari Delicto, the Adverse Interest Exception and the Alleged Failure to Uncover Fraudulent Activity The doctrine of in pari delicto has been a part of the common law for at least two centuries. Kirschner v. KPMG LLP , 15 N.Y.3d 446 (2010), citing  Woodworth v. Janes , 2 Johns Cas 417, 423 (N.Y. 1800) (parties in equal fault have no rights in equity); Sebring v. Rathbun , 1 Johns Cas 331, 332 (N.Y. 1800) (where both parties are equally culpable, courts will not “interpose in favour of either”). It requires the court to refrain from resolving a dispute between two wrongdoers. As the Court of Appeals explained more than 70 years ago: o court should be required to serve as paymaster of the wages of crime, or referee between thieves. Therefore, the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them. Stone v. Freeman , 298 N.Y. 268, 271 (1948) (internal quotation marks omitted). The doctrine ( i.e. , that a wrongdoer should not profit from his own misconduct) “is so strong in New York” that the Court of Appeals has held that it “applies even in difficult cases and should not be ‘weakened by exceptions.’” Kirschner , 15 N.Y.3d at 464, quoting McConnell v. Commonwealth Pictures Corp. , 7 N.Y.2d 465, 470 (1960); see also Saratoga County Bank v. King , 44 N.Y. 87, 94 (1870) (characterizing the doctrine as “inflexible”). Agency Law and the Principle of Imputation “Traditional agency principles play an important role in an in pari delicto analysis.” Kirschner , 15 N.Y.3d at 465. In this regard, “of particular importance” is the principle of imputation – that is, “the acts of agents, and the knowledge they acquire while acting within the scope of their authority are presumptively imputed to their principals.” Id . (citations omitted). Thus, the law “presumes imputation even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud.” Id . (citation omitted). The foregoing applies equally to corporations. Corporations act through their officers or other duly authorized agents. Id . (citation omitted). Thus, although corporations are not natural persons, they are, nonetheless, responsible for the acts of their authorized agents even if the acts were unauthorized. Id . (citation omitted). As the Court of Appeals “explained long ago, a corporation ‘is represented by its officers and agents, and their fraud in the course of the corporate dealings[ ] is in law the fraud of the corporation.’” Id ., quoting Cragie v. Hadley , 99 N.Y. 131, 134 (1885). See also Wight v. BankAmerica Corp. , 219 F.3d 79, 86-87 (2d Cir. 2000) (under “fundamental principle(s) of agency,” managers’ misconduct within the scope of their employment is imputed and “bars a trustee from suing to recover for a wrong that he himself essentially took part in”). Likewise, “ hen corporate officers carry out the everyday activities central to any company’s operation and well-being—such as issuing financial statements, accessing capital markets, handling customer accounts, moving assets between corporate entities, and entering into contracts—their conduct falls within the scope of their corporate authority.” Kirschner , 15 N.Y.3d at 465-66 (citation omitted). “And where conduct falls within the scope of the agents’ authority, everything they know or do is imputed to their principals.” Id . at 466. In every case, the law presumes that agents “communicate information to their principals.” Id . This is so “except where the corporation is actually the agent’s intended victim.” Id ., quoting Center v. Hampton Affiliates , 66 N.Y.2d 782, 784 (1985) (“when an agent is engaged in a scheme to defraud his principal . . . he cannot be presumed to have disclosed that which would expose and defeat his fraudulent purpose”). However, “ here the agent is defrauding someone else on the corporation’s behalf, the presumption of full communication remains in full force and effect. Id . (citations omitted). Adverse Interest Exception to Imputation As with most rules, there are exceptions. With the in pari delicto doctrine, the Court of Appeals has recognized “adverse interest” to be an exception to the rule. “‘To come within the exception, the agent must have totally abandoned his principal’s interests and be acting entirely for his own or another’s purposes. It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.” Kirschner , 15 N.Y.3d at 466, quoting Center , 66 N.Y.2d at 784-785 (emphasis added). The exception “avoids ambiguity where there is a benefit to both the insider and the corporation, and reserves this most narrow of exceptions for those cases—outright theft or looting or embezzlement—where the insider’s misconduct benefits only himself or a third party; i.e. , where the fraud is committed against a corporation rather than on its behalf.” Id . at 466-67. Thus, where “the agent is perpetrating a fraud that will benefit his principal,” as opposed to himself/herself (which is “adverse” to the principal), the exception will not apply. Id . at 467. In the context of fraud, therefore, the exception will not be invoked where the fraud benefits the corporation, because “ fraud that by its nature will benefit the corporation is not ‘adverse’ to the corporation’s interests.” Id . This is so “even if was actually motivated by the agent’s desire for personal gain.” Id . (citations omitted). In Kirschner , the Court of Appeals underscored the point that the exception requires adversity: Again, because the exception requires adversity, it cannot apply unless the scheme that benefitted the insider operated at the corporation’s expense. The crucial distinction is between conduct that defrauds the corporation and conduct that defrauds others for the corporation’s benefit. “Fraud on behalf of a corporation is not the same thing as fraud against it” ( Cenco Inc. v Seidman & Seidman , 686 F2d 449, 456 <7th cir 1982> ), and when insiders defraud third parties for the corporation, the adverse interest exception is not pertinent. Thus, as we emphasized in Center , for the adverse interest exception to apply, the agent “must have totally abandoned his principal’s interests and be acting entirely for his own or another’s purposes,” not the corporation’s ( Center , 66 NY2d at 784-785 ). So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive—to attract investors and customers and raise funds for corporate purposes—this test is not met ( Baena , 453 F3d at 7 <“a fraud by top management to overstate earnings, and so facilitate stock sales or acquisitions, is not in the long-term interest of the company; but, like price-fixing, it profits the company in the first instance”> ). Kirschner , 15 N.Y.3d at 467-68. Notably, “any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies.” Id . at 468.  The Court of Appeals reasoned that “ he disclosure of corporate fraud nearly always injures the corporation. If that harm could be taken into account, a corporation would be able to invoke the adverse interest exception and disclaim virtually every corporate fraud—even a fraud undertaken for the corporation’s benefit—as soon as it was discovered and no longer helping the company.” Id . at 468. The foregoing principles were recently considered by the Appellate Division, First Department in Conway v. Marcum & Kliegman LLP , 2019 N.Y. Slip Op. 07338 (1st Oct. 10, 2019) ( here ). There, the Court held that issues of fact surrounding application of the adverse interest exception precluded dismissal of the action on summary judgment grounds. Conway involved an accounting malpractice action in which the plaintiffs, the liquidators of several hedge funds, alleged that the defendants failed to uncover fraudulent activity by the funds’ investment managers. The issue before the Court was whether “the adverse interest exception to the equitable defense of in pari delicto bar the defense in th case.” Slip Op. at *1. The motion court held that the exception did not apply and granted summary judgment to the defendants.  The First Department reversed, holding that “plaintiffs raised issues of fact as to the adverse nature of their interests vis-a-vis those of their agents, the funds’ investment managers,” sufficient to “preclude summary dismissal of the complaint on the ground of the in pari delicto defense.” In the motion court, defendants argued, among other things, that the adverse interest exception did not apply because the fraudulent activities of the funds’ investment managers benefited the funds. Defendants maintained that their audits of the funds’ financial statements allowed the funds to remain a going concern much longer than if no audit was performed. According to defendants, the audits allowed the investment managers to restructure the funds, thereby allowing investors to move their investments into another fund and limit their ability to redeem their money. As such, the audits allowed the funds the opportunity to survive, even for a short period of time, which, defendants claimed, was a benefit that made the adverse interest exception inapplicable. The First Department rejected this argument: Moreover, reliance on speculation about the benefits to be derived from the continued existence of an entity is inconsistent with the analysis of the adverse interest exception in Kirschner . It may be possible in every case to construct a hypothetical scenario where the company teetering on the brink of insolvency because of its agent’s fraud meets with an opportune circumstance that allows it to resume legitimate business operations. Permitting such speculation would render the adverse interest exception meaningless. Further, an ongoing fraud and a continued corporate existence may harm a corporate entity: The agent may prolong the company’s legal existence so that he can continue to loot from it, as appears to have been the case here. Slip Op. at *1. The Court also found that “ he other purported ‘benefits’ cited by defendants also insufficient to show that the adverse interest exception inapplicable, there factual questions as to whether the funds were beneficiaries, rather than victims, of the investment managers’ fraud.” Id . Takeaway The in pari delicto doctrine serves two important public policy purposes. First, it deters illegal activity by denying judicial relief to an admitted wrongdoer. Second, it conserves judicial resources because it avoids entangling courts in disputes between wrongdoers. Kirschner , 15 N.Y.3d at 464. Notwithstanding, the doctrine will not bar an action when an agent totally abandons his/her principal’s interests and acts entirely for his/her own purposes or those of another ( i.e. , the agent’s acts are “totally” adverse to the principal). Id . at 466. In Conway , Defendants were unable to persuade the Court that the investment managers acted solely for the funds’ benefit. As such, denial of summary judgment was deemed appropriate.

Specific Performance is an equitable remedy used to compel a party to perform under a contract.  McGinnis v. Cowhey , 24 A.D.3d 629 (2 nd Dep’t 2005).  Specific Performance is frequently used to enforce a party’s rights under real estate contracts.  In EMF General Contracting Corp. v. Bisbee , 6 A.D.3d 45 (2004), the First Department set forth the elements of a specific performance claim: The elements of a cause of action for specific performance of a contract are that the plaintiff substantially performed its contractual obligations and was willing and able to perform its remaining obligations, that defendant was able to convey the property, and that there was no adequate remedy at law. *     *     * Generally, the equitable remedy of specific performance is routinely awarded in contract actions involving real property, on the premise that each parcel of real property is unique. EMF , 774 N.Y.S.2d at 44 (citations omitted). The Second Department, in Utica Builders, LLC v. Collins (October 9, 2019), affirmed Supreme Court’s dismissal of a complaint in which the plaintiff, a potential purchaser of real property, sought specific performance of a contract of the sale. As a result of the Utica parties’ negotiations for a purchase/sale of real property in Brooklyn, the plaintiff sent defendant a purchase proposal in which it offered to purchase the property for $590,000 and delivered a $29,500 deposit.  In response, the defendant forwarded to the plaintiff an unexecuted contract of sale that, among other things, was consistent with plaintiff’s price terms and which provided that the property was being sold “as is.”  The plaintiff, in turn, returned to defendant executed contracts and an additional deposit check in the amount of $29,000.  Plaintiff, however, included on the contract executed by it, handwritten amendments in the form of representations by the defendant that the property was improved with a legal two-family dwelling.  Defendant’s attorney returned to plaintiff fully executed contracts after modifying plaintiff’s changes from “two family” to “one family.” Despite defendant’s attempts to schedule a closing, plaintiff refused to close without “a certificate of occupancy designating the premises as a two-family dwelling or a letter of no objection to that effect.”  Plaintiff advised that without proof that the property could be used as a legal two-family dwelling, plaintiff would deem the contract cancelled and seek the return of the $59,000 deposit.  Subsequently, defendant declared a default and indicated that plaintiff could cure by closing on or before June 8, 2015.  In response, the plaintiff urged that the parties did not have a binding contract and sought the return of the deposit.  In correspondence between the parties on June 2, 2015, defendant continued to argue that the parties had a binding contract and the plaintiff again demanded the return of its deposit. Almost a year later, in May of 2016, plaintiff commenced an action for specific performance.  Supreme Court granted defendant’s motion for summary judgment dismissing the complaint, finding that the parties “never entered into an enforceable contract for the sale of the subject property” and the Second Department affirmed. The Second Department found that the parties never had a “meeting of the minds” as to material terms of the purchase/sale contract and that “specific performance may be awarded only where there is a valid existing contract for which to compel performance.”  (Citations omitted.) The Second Department’s decision was based on the fact that the: … documentary evidence established that the parties were never truly in agreement with respect to all material terms, because the plaintiff did not intend to pay the proposed contract price for a one-family dwelling, and the defendant could not or would not represent that the subject property was a legal two-family dwelling. The plaintiff's signing of the proposed contract did not create a binding agreement between the parties, as the plaintiff's acceptance was conditioned on material changes to the contract and, thus, constituted a counteroffer, which the defendant did not accept. Because the parties never came to a meeting of the minds regarding essential terms of the agreement, there was no binding and enforceable contract between the parties. (Citations omitted.) In Utica , while the Court determined that the remedy of specific performance is unavailable absent an enforceable contract, it should be noted that there was a lengthy delay before plaintiff commenced its action for specific performance.  Because specific performance is an equitable remedy, the “available defenses include serious unfairness, undue hardship, and laches, or unreasonable prejudicial delay.”  EMF , 6 A.D.3d at 52 (citations omitted).  In this regard, specific performance will not be granted where speculation related delay is a factor.  Thus, “where it is established that the buyer has made excuses in order to delay closing on the contract, with an actual purpose of waiting to see whether to enforce the contract depending upon whether the market value of the subject property increases or decreases, the courts will not grant specific performance.”  EMF , 6 A.D.3d at 53 (citations omitted). While it is not suggested that the delay present in Utica would have vitiated plaintiff’s claim for specific performance had there been an enforceable contract between the parties, it is important to consider the impact of the delay in exercising one’s rights to, inter alia , this equitable remedy.

It is not uncommon for a client to claim that he/she had an agreement with another based on oral representations that were not memorialized in the writing between them. The question for practitioners and the courts is whether the oral assurances constitute a binding agreement. In LiTrenta v. Chappaqua Cent. Sch. Dist. , 2019 N.Y. Slip Op. 51556(U) (Sup. Ct., Westchester County Oct. 4, 2019) ( here ), the Court answered the question in the negative. LiTrenta involved an action to recover damages for breach of contract. Plaintiff, Marie LiTrenta (“Plaintiff” or “LiTrenta”), claimed that her employer, Defendant Chappaqua Central School District (“Defendant” or the “District”), owed her medical benefits pursuant to an oral agreement following her retirement as an administrator of the District. LiTrenta began her employment with the District on August 1, 2000, as Assistant Superintendent for Curriculum and Technology. At the time, the District provided retirees with lifetime health benefits on the District’s group health plan. Pursuant to the District’s Handbook on Personnel Practices and Procedures (the “Handbook”), however, those benefits were available only to retirees with a minimum District service of five years. On January 10, 2002, the then Superintendent of Schools, James F. Donovan (“Donovan”), issued a memo to the benefits clerk stating that Plaintiff was entitled to the administrator’s benefit package as a vested employee upon her retirement, which included medical, dental, vision, and life insurance as per the current administrator’s contract. Thereafter, Plaintiff advised Superintendent Donovan that she would be retiring effective February 2, 2003. Although Plaintiff retired with less than five years of service, the District paid her medical benefits through 2019. In May 2019, Plaintiff was notified by the District that she was not eligible for health insurance through the school district and that such coverage would terminate after June 30, 2019. She was further advised that the District would no longer contribute to reimbursement of the cost of Medicare Part B. As a result, Plaintiff commenced the action for breach of contract. Plaintiff sought a temporary restraining order to restrain Defendant from taking any action to terminate her current medical coverage which the Court granted on the record pending the resolution of a motion for a preliminary injunction. Thereafter, Plaintiff moved for a preliminary injunction to enjoin Defendant from taking any action to terminate her medical coverage. The Court held a preliminary injunction hearing on June 17, 2019. Plaintiff testified that upon accepting employment with the District, the then Superintendent, Dr. Donald Parker (“Parker”), assured her that upon retirement, the District would pay her lifetime benefits for medical coverage. She testified that she would not have taken the position with the District without that assurance since she was eligible for lifetime medical benefits with her prior school district. Plaintiff further testified that she retired from the District in 2003 to work in private schools in Miami and in Manhattan. According to Plaintiff, upon her retirement, she was assured by Superintendent Donovan that the District would provide her with lifetime medical benefits even though she had less than five years of service with the District. Plaintiff admitted during the hearing that she was aware that for a school district to contract with an employee, the terms of the contract must be authorized by the district’s Board of Education. John Chow (“Chow”) testified for the District. As the Assistant Superintendent for Business for the Chappaqua Central School District, Chow was responsible for the District’s finances, including salaries, benefits, and operations. Chow confirmed that under the Handbook, retirement benefits, such as continued medical coverage, were available to retirees who had at least five years of service with the District. Chow also referenced the Board of Education meeting minutes of November 5, 2002, which reflected Plaintiff’s resignation for purpose of retiring as effective on February 2, 2003. Chow testified that he found no employment contract between the District and Plaintiff. Notably, Chow testified that there was nothing in the minutes from the November 5th meeting reflecting a decision by the Board of Education to waive the Handbook requirement of minimum service to the District in connection with Plaintiff’s retirement. Chow further testified that Plaintiff was not a vested employee because she had less than five years of service with the District. Chow explained that the reason the Board of Education was unaware that Plaintiff received the medical benefits was because the budget it received only included a budget line for health insurance and all retirees and current employees were collectively on that one line represented by a dollar figure. Following the hearing and post-hearing briefing, the Court denied the motion, holding that Plaintiff failed to satisfy the elements required to obtain a preliminary injunction – that is, a probability of success on the merits, danger of irreparable injury ( i.e. , injury for which money damages are insufficient) in the absence of an injunction and a balance of equities in its favor. Slip Op. at *3, citing Nobu Next Door, LLC v. Fine Arts Hous., Inc. , 4 N.Y.3d 839 (2005); CPLR 6301. First, the Court held that Plaintiff failed to demonstrate a likelihood of success on her breach of contract claim. Under the Handbook, lifetime medical benefits were funded by the District for certain employees with a minimum district service requirement of five years. To obtain such benefits with less than the required minimum, an employee needed a waiver of the requirement from the Board of Education. “The plaintiff has not presented any contract with the Board of Education waiving the five-year requirement,” observed the Court. Slip Op. at *4. The Court explained that the minutes of the July 11, 2000, Board of Education meeting, when Plaintiff was hired, were devoid of any resolution by the Board approving a waiver of the five-year minimum service requirement for Plaintiff to receive lifetime benefits. Id . Similarly devoid of such a waiver was the July 13, 2000 letter from Superintendent Parker wherein he advised Plaintiff that the Board accepted his recommendation for her employment. Id . The Court explained that pursuant to the Education Law, only a board of education is vested with the power to enter into employment contracts and, therefore, issue a waiver. Id ., citing Kight v. Wyandanch Union Free Sch. Dist. , 84 A.D.2d 749 (2d Dept. 1981); Education Law, § 1709<16> ). “Thus,” said the Court, “the plaintiff’s reliance on Superintendent Parker’s oral assurance upon her hiring that she would be provided with lifetime medical benefits and the January 2002 internal correspondence from Superintendent Donovan to the benefits clerk that plaintiff is entitled to the administrator’s benefit package upon her retirement as a vested employee, i.e. an employee with at least five years of service, does not avail plaintiff of entitlement to a preliminary injunction.” Id . The Court explained that “ he superintendents did not have the power or authority to enter into any contract with the plaintiff to waive the five-year employment requirement for lifetime medical benefits.” Id . Since “ either the verbal assurance of the superintendent nor the correspondence came from the Board of Education,” there could be no enforceable contract. Id . Simply stated, “ here has been no evidence submitted nor testimony elicited at the hearing establishing that the District’s Board of Education waived the five-years of service requirement so that plaintiff would be entitled to lifetime health insurance.” Id . The Court rejected Plaintiff’s argument that the Board ratified the oral assurances by paying the benefits since she retired in 2003. The Court found “no evidence … that the Board of Education knew that plaintiff was being treated as vested even though she had less than five years of service with the District.…” Id . Finally, the Court held that Plaintiff “failed to allege damages of a noneconomic nature and therefore, not demonstrate[ ] irreparable injury.” Id ., citing DiFabio v. Omnipoint Communications, Inc. , 66 A.D.3d 635 (2d Dept. 2009). Takeaway “It is well settled that unless an employment is for a specified period, it is presumed to be an employment at will, and that, ‘absent a constitutionally impermissible purpose, a statutory proscription, or an express limitation in the individual contract of employment, an employer’s right at any time to terminate an employment at will remains unimpaired.’” Collins v. Hoselton Datsun, Inc. , 120 A.D.2d 952, 952 (4th Dept. 1986), quoting Murphy v. American Home Prods. Corp. , 58 N.Y.2d 293, 305 (1983); see also Lobosco v. NY Tel. Co./Nynex , 96 N.Y.2d 312, 316 (2001). New York “does not recognize the tort of wrongful discharge” upon which an employee at will may base a cause of action.   Id . Nevertheless, New York courts have held that provisions in an employee handbook or policy manual may constitute an employment contract on which a breach of contract action may be based. Lobosco , 96 N.Y.2d at 316 citing Weiner v. McGraw-Hill, Inc. , 57 N.Y.2d 458 (1982). In LiTrenta , though not explicitly stated, the Court found that the Handbook constituted a binding contract between the parties. As such, it spoke to the issue of lifetime healthcare benefits and the requirements necessary to receive such benefits. Since Plaintiff could not demonstrate a waiver of those requirements ( e.g. , minimum service of five years to the District), she could not demonstrate a breach of the Handbook. Thus, Plaintiff’s reliance on the assurances of those without the statutory authority to make them simply was not enough to support her claim.

The Foreign Corrupt Practices Act (“FCPA”) requires issuers to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” all transactions are “executed” and “recorded … to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and … to maintain accountability for assets.” 15 U.S.C. §§ 78m(b)(2)(B). As discussed below, compliance with this requirement has been a continued focus of the Securities and Exchange Commission (“SEC” or the “Commission”) for many years. (Here.) The internal controls provisions of the FCPA apply to all issuers (i.e., entities that register their securities pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) or file reports (periodic or otherwise) pursuant to Section 15(d) of the Exchange Act) whether they are publicly traded or based in the United States. Under the FCPA, issuers are responsible for their internal controls as well as those of their subsidiaries. However, the FCPA limits the obligations of the parent corporation when the parent owns less than 50% of the subsidiary. Under that circumstance, the parent need only demonstrate a good faith effort to ensure the sufficiency of the subsidiary’s internal controls. 15 U.S.C. § 78m(b)(6). Compliance with the internal controls provisions of the FCPA requires issuers to give “reasonable assurance” that transactions are executed, and assets are accounted for in accordance with management’s authorization and recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles. The FCPA defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” 15 U.S.C. § 78m(b)(7). Courts interpret the “reasonable assurance” standard as follows: The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of “reasonable assurances” . . . recognizes that the costs of internal controls should not exceed the benefits expected to be derived.” It does not appear that either the SEC or Congress . . . intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies. . . and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness.… It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.” SEC v. World-Wide Coin Invs., Ltd., 567 F. Supp. 724, 751 (N.D. Ga. 1983). Since compliance with the FCPA’s internal controls provision is a fact-dependent, analysis, courts and the Commission look at several factors to determine whether the issuer has established and maintained an effective internal accounting controls system. Among the factors considered are the “size of the business, diversity of operations, degree of centralization of financial and operating management, amount of contact by top management with day-to-day operations.…” Id. See also Foreign Corrupt Practices Act of 1977: Statement of Policy, SEC Release No. 34-17500 (Jan. 29, 1981) (46 F.R. 11544). (Here at Appendix L.) Notably, the materiality of the transaction is not a factor considered by the courts or the Commission. As noted, enforcement of the FCPA remains “a high priority area for the SEC.” (Here.) In 2010, the SEC’s Enforcement Division created a specialized unit to enhance its enforcement of the FCPA (here). Since that time, the SEC has commenced and/or settled numerous enforcement proceedings involving the anti-bribery and/or internal controls provisions of the FCPA. Today, this Blog examines In the Matter of Westport Fuel Systems, Inc. et al., Administrative Proceeding File No. 3-19543 (Sept. 27, 2019), which involved alleged violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. According to the SEC, Westport Fuels Systems, Inc. (“Westport”), a Canadian clean fuel technology company headquartered in Vancouver, Canada, and its former chief executive officer (“CEO”), Nancy Gougarty (“Gougarty”), of Leesville, South Carolina, violated the anti-bribery, books and records, and internal controls provisions of the FCPA by paying bribes to a foreign government official in China. Westport registers its common stock with the SEC pursuant to Section 12(b) of the Exchange Act and trades its securities on the NASDAQ and the Toronto Stock Exchange. The proceeding arose from a joint venture (“JV” or “Joint Venture”) between Westport and a Chinese state-owned entity (“SOE-1”). In March of 2013, at the direction of a Chinese Government Official, SOE-1 proposed taking the JV public in China through an initial public offering (“IPO”). The JV’s manager, appointed by SOE-1, falsely represented to Westport that Chinese law required SOE-1 to have a majority interest in the Joint Venture to qualify for an IPO. Accordingly, the manager of the JV advised Westport that a preliminary step in the IPO process would involve restructuring the Joint Venture so that a portion of the shares held by Westport and a privately held Hong Kong conglomerate would have to be transferred to SOE-1 and a Chinese private equity fund (in which the Government Official held a financial interest). Although the shares were transferred to the private equity fund, the contemplated IPO never took place. Once the proposed restructuring was complete, SOE-1 would own 51% of JV’s shares, Westport would own 23.33% through its Hong Kong subsidiary, the Hong Kong conglomerate would own 16.67%, and the Chinese private equity fund would own 9%. On February 11, 2014, the JV board of directors approved the proposed share transfer. Gougarty, who at the time was Westport’s Chief Operating Officer, led the Westport team in the negotiations with SOE-1. In April 2014, Gougarty recruited and hired a Chinese national to head Westport’s Asia Pacific regional office (the “Asia Pacific GM”). The Asia Pacific GM played a central role in the negotiations with SOE-1 and the Chinese private equity fund. Early in the negotiations, the Asia Pacific GM reported that the Government Official had a significant but undisclosed financial interest in the Chinese private equity fund that was to receive the JV shares from Westport and the Hong Kong conglomerate. He also reported that it was the Government Official’s personal financial interest, not Chinese law, which was motivating the transfer of shares to the private equity fund. According to the SEC, the Government Official’s personal interest became a central part of Westport’s negotiation strategy. Gougarty recommended alternatives that included seeking a supply agreement in exchange for a transfer of shares to the private equity fund. No later than March 2015, Westport explicitly conditioned the share transfer on obtaining a long-term sales agreement. Having acknowledged Westport’s position of “no component sales contract, no share transfer,” Gougarty instructed Westport employees working for her on the transaction in March 2016 that the component supply agreement was a necessary element to complete the deal. The negotiations progressed slowly as the Government Official and Westport disagreed on the share transfer price, a figure derived from the valuation of the Joint Venture. In March 2015, after meeting with executives at the private equity fund, the Asia Pacific GM reported that the Government Official was seeking a low valuation in order to “make quick and big money” outside the scrutiny of Chinese regulators. At the same time, Westport was seeking to maximize its value in order to alleviate its deteriorating financial condition and cash needs. However, as oil prices declined in 2014 and 2015, increasing the market for gasoline-powered car engines and reducing the market for Westport’s alternative fuel products, Westport became more willing to accept a lower valuation in order to close the deal and obtain the much-needed, albeit smaller, infusion of cash. On June 29, 2015, Westport’s Board of Directors (the “Board”) authorized Westport’s management to complete the negotiations and execute the share transfer. Gougarty did not disclose to the Board what the Asia Pacific GM had told her about the Government Official’s personal financial interest in the private equity fund or that the Government Official had requested a discount in the share transfer price. In fact, alleged the SEC, approximately nine months before obtaining the Board’s approval, Gougarty withheld this information from the Board, deleting a sentence in a September 2014 draft letter to the Board prepared by the Asia Pacific GM that described the proposed transfer. If Gougarty had not redacted the sentence, the SEC maintained, it would have reported to the Board that the Government Official had a financial interest in the Chinese private equity fund. By early December 2015, Westport and the Government Official, negotiating through SOE-1 and the private equity fund, struck a deal. They agreed on a valuation of $70 million for the JV, and Westport agreed to transfer shares to SOE-1 and the private equity fund in exchange for a long-term framework supply agreement and a cash dividend of 30% of undistributed profits – 20% more than what was provided for under the joint venture agreement and more than Westport had received in the past. Westport also agreed, as Gougarty explained earlier in November 2015, that the public announcement of the deal would be limited to “talk about the transfer of share to and unidentified Chinese company.” On August 20, 2016, Gougarty, by then Westport’s CEO, executed the share transfer agreements with the Chinese private equity fund and with SOE-1. That same day, the JV and Westport entered into a framework supply agreement pursuant to which the JV eventually would purchase approximately $500,000 of engine components from Westport. By separate resolution, executed on the same day, the JV authorized the distribution of a 30% dividend to all of the shareholders. On September 29, 2016, as reflected in bank records maintained as source documents in Westport’s files, the private equity fund wired a payment of approximately $3 million to Westport’s bank in Vancouver, Canada, from its bank in China through a correspondent bank in the United States. However, even though Westport’s accounting controls required the comparison of source documents with journal entries, Westport’s books and records accounting for the transaction falsely reflected the identity of the counterparty in the transaction as SOE-2, an entity related to SOE-1, rather than the true counterparty, the private equity fund. In October 2016, Westport received approximately $3.5 million, representing the increased dividend approved by the JV board of directors on August 20, 2016, the same day that Westport executed the share transfer agreements to the private equity fund and SOE-1. The $3.5 million dividend was credited to Westport’s bank account in Vancouver, Canada, having been sent from a bank in China through a correspondent bank in the United States. On November 9, 2016, Westport filed its Form 6-K with the SEC which, according to the Commission, falsely described the identity of the counterparty in the share transfer as SOE-2 instead of the Chinese private equity fund. Even though Westport’s internal accounting controls purported to establish a process to reconcile public filings with source documents to provide reasonable assurance with respect to the accuracy and consistency of its filings, it failed to follow this process, alleged the SEC. On March 31, 2017, Westport filed its annual report on Form 40-F for the year ended December 31, 2016. According to the SEC, the Management Discussion & Analysis and financial statements attached to the Form 40-F falsely reported the identity of the counterparty in the share transfer as SOE-2 instead of the Chinese private equity fund. In connection with the filing of the Form 40-F, Gougarty executed a certification attesting that Westport had disclosed all significant deficiencies and material weaknesses in the design and operation of its internal controls to the outside auditors. However, said the SEC, the certification was knowingly false because Gougarty failed to disclose the deficiencies and weaknesses in the internal controls that she had exploited in carrying out the transaction in circumvention of Westport’s anti-bribery policies and its key accounting controls. Westport and Gougarty agreed to settle the SEC’s charges for $4.1 million without admitting or denying the SEC’s findings. In that regard, Westport agreed to pay $2,546,000 in disgorgement and prejudgment interest and a civil penalty of $1,500,000, and Gougarty agreed to pay a civil penalty of $120,000. In determining to accept Westport’s offer, the SEC considered remedial actions undertaken by Westport concerning its anti-corruption and financial reporting compliance programs, and its cooperation with the SEC’s investigation. “A company’s commitment to compliance is only as strong as the effort put in by senior management,” said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. “Here, the chief executive exploited weaknesses in the company’s controls to engage in bribery, undermining shareholder interests.” A copy of the September 27, 2019 press release announcing the settlement can be found here. A copy of the Order can be found here.