In New York, to plead (and prove) a fraud claim, a plaintiff must demonstrate the following: “a misrepresentation or a material omission of fact which was false and known to be false by the 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.” Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (internal citations and quotation marks omitted). Today, this Blog looks at the injury element of a fraud claim; in particular, whether the injury was proximately caused by the alleged fraud. It is well settled that loss causation or proximate causation is “ n essential element” of a fraud claim. Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Therefore, a plaintiff alleging a fraud claim must “demonstrate that a defendant’s misrepresentations were the direct and proximate cause of the claimed losses.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 151 A.D.3d 83, 86 (1st Dept. 2017), aff’d , 31 N.Y.3d 569 (2018), quoting Vandashield Ltd. v. Isaacson , 146 A.D.3d 552, 553 (1st Dept. 2017) (internal quotation marks omitted). To do so, “ plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Id. , quoting Laub , 297 A.D.2d at 31. Notably, “ here may be more than one proximate cause of a plaintiff’s injuries.” Santaiti v. Town of Ramapo , 162 A.D.3d 921, 926 (2d Dept. 2018). For this reason, a plaintiff asserting a fraud cause of action must “show that the was a substantial cause of the events which produced the injury.” Derdiarian v. Felix Contr. Corp. , 51 N.Y.2d 308, 315 (1980). “Where the acts of a third person intervene between the defendant’s conduct and the plaintiff’s injury, the causal connection is not automatically severed.” Id . at 315. “In such a case, liability turns upon whether the intervening act is a normal or foreseeable consequence of the situation created by the defendant’s .” Id .; Turturro v. City of New York , 28 N.Y.3d 469, 484 (2016). “This is true even where the intervening acts of a third party may be characterized as intentional, reckless, or criminal.” Id .; Nallan v. Helmsley-Spear, Inc. , 50 N.Y.2d 507, 520-521 (1980). Accordingly, although “an intervening intentional or criminal act will generally sever the liability of the original tort-feasor,” the principle “has no application when the intentional or criminal intervention of a third party or parties is reasonably foreseeable.” Kush v. City of Buffalo , 59 N.Y.2d 26, 33 (1983); Turturro , 28 N.Y.3d at 484. More generally, “ n intervening act may not serve as a superseding cause, and relieve an actor of responsibility, where the risk of the intervening act occurring is the very same risk which renders the actor” liable for fraud. Derdiarian , 51 N.Y.2d at 316; Hain v. Jamison , 28 N.Y.3d 524, 531 (2016). On the other hand, “ f the intervening act is extraordinary under the circumstances, not foreseeable in the normal course of events, or independent of or far removed from the defendant’s conduct, it may well be a superseding act which breaks the causal nexus.” Derdiarian , 51 N.Y.2d at 315. “As with determinations regarding proximate cause generally, ‘ ecause questions concerning what is foreseeable and what is normal may be the subject of varying inferences,’ whether an intervening act is foreseeable or extraordinary under the circumstances ‘generally for the fact finder to resolve.’” Turturro , 28 N.Y.3d at 484, quoting Derdiarian , 51 N.Y.2d at 315. With the foregoing principles in mind, this Blog looks at Designer Limousine, Inc. v. Authority Transp., Inc. , 2019 N.Y. Slip Op. 07049 (2d Dept. Oct. 2, 2019) ( here ). Designer Limousine, Inc. v. Authority Transp., Inc. Plaintiff, Designer Limousine, Inc. (“Designer”), is a limousine company that operated a fleet of buses and other vehicles for hire in New York. Plaintiff, Kenneth Caldwell (“Caldwell”), was Designer’s principal. On several occasions in late 2011 and early 2012, Defendant, Michael Cassano (“Cassano”), who was in the business of conducting automobile damage appraisals, appraised damage to and the cost of repairing certain of Designer’s vehicles in connection with claims for coverage Designer made to its insurer. In March 2016, Plaintiffs commenced the action alleging, inter alia , that Cassano had falsely inflated the damage amounts he reported in his appraisals as part of a scheme to defraud Designer’s insurer. Plaintiffs alleged that Cassano’s fraudulent conduct caused Designer’s insurance premiums to increase exponentially and, in turn, forced the company to discontinue operations. Cassano moved for summary judgment dismissing, inter alia , the fraud cause of action against him. Cassano argued, among other things, that his alleged fraudulent conduct was not a proximate cause of Plaintiffs’ claimed losses, and that an August 2012 fatal accident involving one of Designer’s buses and the impact of the accident on the business constituted superseding causes of Plaintiffs’ claimed losses, thereby relieving him of any liability. The motion court denied the portion of Cassano’s motion for summary judgment dismissing the fraud cause of action asserted against him. Cassano appealed. The Second Department affirmed, holding that the motion court correctly found issues of fact surrounding the issue of proximate causation. Slip Op. at *1. In that regard, the Court held that Cassano “failed to demonstrate that the events subsequent to the alleged fraud relating to the August 2012 accident constituted superseding causes relieving him of liability for the plaintiffs’ claimed losses.” Id . The Court also rejected Cassano’s contention that Plaintiffs failed to “adequately alleg definite, measurable out-of-pocket damages resulting from his alleged fraud.” Id . Takeaway Loss causation is a well-established requirement of a common-law fraud claim for damages. Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569, 580-581 (2018). “Central to the notion of proximate cause is the idea that a person is not liable to all those who may have been injured by his conduct, but only to those with respect to whom his acts were ‘a substantial factor in the sequence of responsible causation,’ and whose injury was ‘reasonably foreseeable or anticipated as a natural consequence.’” First Nationwide Bank v. Gett Funding Corp. , 27 F.3d 763, 769 (2d Cir. 1994). Thus, if the fraud causes no loss ( e.g. , the loss was not reasonably foreseeable or was the result of a superseding event), then the plaintiff suffered no damages. Ambac Assur. , 31 N.Y.3d at 580-581.   Since the determination of loss causation turns upon questions of foreseeability and “what is foreseeable and what is normal may be the subject of varying inferences,” the issue is left for the fact finder to resolve. Kriz v. Schum , 75 N.Y.2d 25, 34 (1989), quoting Derdiarian , supra at 315. In Designer Limousine , the Second Department held that proximate causation should be left for the jury to decide because Cassano failed to establish, as a matter of law, that Plaintiffs’ damages were unforeseeable or that Plaintiffs’ damages were the result of superseding causes that severed any nexus between Cassano’s alleged fraud and Plaintiffs’ damages.

This Blog has previously addressed issues surrounding various evidentiary issues faced by foreclosing mortgage lenders, among others, in proving their prima facie case on summary judgment. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> . On September 25, 2019, the Appellate Division, Second Department, in JPMorgan Chase Bank v. Grennan , yet again analyzed the sufficiency of the foreclosing lender’s evidence submitted on its motion for summary judgment. One of the defendants in JPMorgan , defaulted on the repayment of a note (that was secured by a mortgage encumbering her home) in the amount of $280,000 and made payable to CTX Mortgage Company, LLC.  As a result of the defaults, JPMorgan Chase commenced a foreclosure action by the filing of a summons and verified complaint, annexed to which was a copy of the note.  In their answer, the defendants asserted among other defenses, lack of standing and failure to comply with RPAPL 1304 .  (This Blog has previously treated the standing issue < HERE ,=">HERE," HERE=">HERE" and="and"> and the RPAPL 1304 issue < HERE ,=">HERE," HERE=">HERE" and="and"> .) Plaintiff’s motion for, inter alia , summary judgment and to appoint a referee to compute was granted over defendants’ opposition.  Thereafter, plaintiff’s motion to confirm the referee’s report and for a judgment of foreclosure and sale was granted; again, over defendants’ objection.  On the JPMorgan Defendants’ appeal, the Second Department reversed the Judgment of Foreclosure and Sale and denied plaintiff’s motion for summary judgment and for an order of reference. The JPMorgan Court noted that a foreclosing plaintiff makes its prima facie case by “producing the mortgage, the unpaid note, and evidence of default. (Citations omitted.)  Also, when a standing defense is raised, a foreclosing plaintiff “must prove its standing as part of its prima facie showing on a motion for summary judgment” (citations omitted), which is done by “demonstrating that, when the action was commenced, it was either the holder or assignee of the underlying note” (citations omitted).  A “written assignment” or “physical delivery of the note” sufficiently transfers the obligation (citations omitted).  According to the JPMorgan Court, standing as the holder of the note may be established by “demonstrating that a copy of the note, including an endorsement in blank, was among the exhibits annexed to the complaint at the time the action was commenced” (citations omitted). A promissory note is a negotiable instrument within the meaning of the Uniform Commercial Code ( see UCC 3-104<2> ). A "holder" is "the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession" ( UCC 1-201 <21> ; see UCC 3-301 ). Where an instrument is endorsed in blank, it may be negotiated by delivery ( see UCC 3-202<1> ; 3-204[2) . "An indorsement must be . . . on the instrument or on a paper so firmly affixed thereto as to become a part thereof" ( UCC 3-202<2> ).  (Some citations, internal quotation marks and brackets omitted.) The JPMorgan Court found that the plaintiff failed to establish its standing as a matter of law because “it cannot be ascertained from the copy of the note annexed to the complaint whether the separate page that bears the endorsement in blank was stamped on the back of the note, as alleged by the plaintiff, or on an allonge, in which case the plaintiff would have to prove that the endorsement was ‘so firmly affixed thereto as to become a part thereof,’ as required under UCC 3-202(2).” The JPMorgan Court also found that the lender failed to establish the borrower’s default as a matter of law due to the insufficiency of the affidavit of lender’s vice president.  A lender’s prima facie case can be based on a variety of business records “so long as the plaintiff satisfies the admissibility requirements of CPLR 4518(a) , and the records themselves actually evince the facts for which they are relied upon.”  (Citations and internal quotation marks omitted.)  The Court found that although the bank officer’s affidavit “sufficient establish a proper foundation for the admission of a business record pursuant to CPLR 4518(a), the plaintiff failed to submit copies of the business records themselves.”  (Some citations omitted.)  Citing Bank of N. Y. Melon v. Gordon , 171 A.D.3d 197, 205 (2 nd Dep’t 2019), the JPMorgan Court stated that “ he business record exception to the hearsay rule applies to a writing or record and it is the record itself, not the foundational affidavit, that serves as proof of the matter asserted.”  (Some citations, internal quotation marks, brackets and ellipses omitted.) Because the bank officer failed to annex copies of the records on which he relied in attempting to establish the borrower’s default in his affidavit, the narrative descriptions about those records in the affidavit were “inadmissible hearsay.”  (Citations omitted.)  Thus, the JPMorgan Court stated: While "a witness may always testify as to matters which are within his or her personal knowledge through personal observation" (Bank of N.Y. Mellon v Gordon, 171 AD3d 197, citing Jerome Prince, Richardson on Evidence §§ 4-301, 6-210 ), did not attest to such personal knowledge. Contrary to the plaintiff's assertion, a review of records maintained in the normal course of business does not vest an affiant with personal knowledge. Since affidavit was the only evidence of default proffered in support of the motion, the plaintiff failed to establish its prima facie entitlement to summary judgment on the complaint on this additional ground.” The JPMorgan Court also found that lender failed to meet its burden of demonstrating compliance with the mailings required by RPAPL 1304 because the affiant bank officer “did not have personal knowledge of the purported mailing by first-class mail, and failed to attest that he was familiar with the plaintiff’s mailing practices and procedures.”

The title of this post comes from the observation Justice Saliann Scarpulla made in Jobar Holding Corp. v. Halio , 2019 N.Y. Slip Op. 32813(U) (Sup. Ct., N.Y. County Sept. 23, 2019) ( here ), wherein she was asked to decide a motion to dismiss a complaint that asserted both direct and derivative claims.  As discussed below, because, among other things, the complaint “mingled” the direct and derivative claims and otherwise failed to differentiate between the causes of action, the Court dismissed the complaint with leave to replead. The Law: Direct vs. Derivative Claims It is well-settled that a plaintiff asserting a derivative claim seeks to recover for injury to the business entity. A plaintiff asserting a direct claim seeks redress for injury to himself/herself individually. Sometimes, the distinction between the two types of actions is not readily apparent. Yudell v. Gilbert , 99 A.D.3d 108, 113 (1st Dept. 2012). In considering whether a claim is direct or derivative, courts look to the nature of the wrong and the person or entity to whom the relief should go. Tooley v. Donaldson, Lufkin & Jenrette, Inc. , 845 A2d 1031, 1039 (Del. 2004). See also Yudell , 99 A.D.3d at 114; Higgins v. New York Stock Exch., Inc. , 10 Misc. 3d 257, 264 (Sup. Ct. N.Y. County 2005) (citation omitted). Thus, for a shareholder’s injury to be direct it must be independent of any alleged injury to the corporation. The shareholder must demonstrate that the duty breached was owed to the stockholder and that he/she can prevail without showing an injury to the corporation. Tooley , 845 A2d at 1039. “The pertinent inquiry is whether the thrust of the plaintiff’s action is to vindicate his personal rights as an individual and not as a stockholder on behalf of the corporation.” Maldonado v. DiBre , 140 A.D.3d 1501, 1504 (3d Dept. 2016). Therefore, the plaintiff must show that the duty allegedly breached was owed to the shareholder, and that he/she can prevail without showing an injury to the corporation. Yudell , 99 A.D.3d at 114. If the individual claim of harm is “confused with or embedded” within the harm to the corporation, then it must be dismissed. Serino v. Lipper , 123 A.D.3d 34, 40 (1st Dept. 2014); Patterson v. Calogero , 150 A.D.3d 1131, 1133 (2d Dept. 2017) (even where individual harm is claimed, if it is confused with or embedded in the harm to corporation, it cannot stand separately). Jobar Holding Corp. v. Halio Background Plaintiff, Jobar Holding Corp. (“Jobar” or the “Company”), is a small family-run corporation organized in 1958 under the laws of the State of New York. Jobar was owned and managed by Otto and Kitty Buck, the parents of Defendant, Barbara Halio (“Halio”) and Joan Buck. Until the 1980s, the Buck family operated Cake Masters, a bakery located on the property. After the bakery closed, Jobar continued to operate the property. Upon Kitty Buck’s death in 2001, Halio and Joan Buck served as co-presidents of Jobar until Joan Buck’s death in 2005, when Halio became the Company’s sole president. In May 2006, Jobar sold the property for $22,000,000, and began winding down its operations under Halio’s supervision. At the time of the sale, Plaintiff, Robert Buck (“Buck”), in his personal and executory capacities, owned 38 shares of Jobar common stock, equal to a 38% ownership interest in the Company. Buck alleged that, following the sale, Halio embezzled $1,500,000 from Jobar’s bank accounts, by misappropriating funds in a variety of ways, including disguising the embezzlement as “bogus management fees, officer compensation, or as fake loans which were never intended to be repaid.” Halio maintained that the withdrawals were used for proper purposes, including the recoupment of loans made to Jobar by Halio from her husband’s pension and a home equity loan, payment of fees for the loans, executory and management fees, deferred salary, and payment of other post-closing fees. According to Buck, in March 2007, Halio and Yeskoo Hogan & Tamblyn (“Yeskoo”) arranged for the $1,500,000 sale proceeds to be held in a “reserve”, which Halio then used for her personal use. Buck alleged that, as holders of 38% of Jobar’s interest, he and Joan Buck’s estate were owed $570,000 from the reserve. On July 26, 2016, Buck filed a petition pursuant to Business Corporation Law (“BCL”) § 624 to inspect the Company’s books and records. According to Plaintiffs, although the records were incomplete, they revealed that Halio fraudulently transferred at least $1.5 million of the Company’s funds to herself. Plaintiffs maintained that by the time her fraud was discovered in mid-2017, Halio had stolen all of Jobar’s funds that had remained after the property was sold in 2006. Plaintiffs commenced the action in 2017 against Halio, her accountants, Turman & Eimer LLP (“Turman”), and her attorneys. Against Halio, plaintiffs alleged causes of action for fraudulent conveyance, conversion, unjust enrichment, breach of fiduciary duty and accounting. Plaintiffs alleged aiding and abetting claims against her accountants. Turman moved to dismiss the complaint, arguing that the claims asserted against it were time barred and otherwise failed to state a claim for which relief could be granted. According to Turman, Halio’s theft purportedly began in 2006 with the sale of the property. As such, because the action was commenced in 2017, the statute of limitations barred all the claims asserted against it. In opposition, Plaintiffs argued that the statute of limitations did not bar their causes of action because they only discovered Halio’s alleged wrongdoing and Turman’s claimed involvement when the Company’s books and records were obtained in 2017. Plaintiffs also claimed that the statute of limitations did not begin to run until the last unlawful act under the continuous wrong doctrine. In addition to the statute of limitations, Turman contended that Plaintiffs failed to plead any individual injury apart from the alleged injury to Jobar. Turman also claimed that the derivative allegations in the complaint were improperly interspersed with the non-derivative allegations. Thus, because Plaintiffs’ individual claims were “confused with or embedded” within the harm to the Company, the entire complaint should be dismissed as against it. Plaintiffs maintained that the derivative claims alleged in the complaint were only asserted against Halio and that “Buck, as an individual, not seeking to pursue any derivative claims” against Turman. The Court granted the motion without prejudice. The Court’s Decision As an initial matter, the Court observed that the complaint lacked clarity about whether the claims asserted against Turman were direct or derivative: Although the complaint is rife with allegations that a serious wrong was committed, the drafting of the pleading makes it difficult to determine the precise causes of action that are being pled. Plaintiffs state in their opposition papers that derivative claims are only being asserted against Halio, however, some of the allegations stated in the causes of action asserted against Turman support derivative causes of action as well. In addition, while the causes of action asserted against Turman are stated as being on behalf of Buck individually, some of those causes of action would be inappropriate or unsustainable as causes of action on behalf of an individual. Slip Op. at *5. With regard to Turman’s statute of limitations arguments, the Court held that “the complaint not clearly state when the claims accrued” and that “ urther information s needed to determine whether the statute of limitations causes of action against Turman.” Id . at *7 n.3. For example, explained the Court, the BCL § 624 proceeding on which Buck relied did not provide the clarity needed to make a determination:  “It appears that Buck did not obtain certain documents until 2016 pursuant to the BCL § 624 proceeding, while others were allegedly obtained before then.” Id .  Additional information was also needed to determine whether there was privity or a fiduciary duty sufficient to toll the statute of limitations. Id . Turning to the claims asserted against Turman, Justice Scarpulla held that they were “an unclear mix of Buck’s personal claims, derivative claims on behalf of Jobar, and other claims that not sustainable to any of the plaintiffs.” Id . at *7. Although the complaint explicitly sets forth a cause of action based on BCL § 626 (shareholders’ derivative action) against Halio and does not do the same against Turman, it is not clear from the complaint that derivative allegations are not also being asserted against Turman. For example, the aiding and abetting breach of fiduciary duty cause of action is based on the allegation that Turman aided and abetted Halio’s wrongs against Jobar, not against Buck individually. Regarding plaintiffs’ allegations that Turman caused Buck individual harm, the complaint states that Turman consistently delayed delivery of K-1s to Buck and many times intentionally interfered with Buck’s attempts to obtain financial information for Jobar. The complaint alleges that Buck relied on the allegedly falsified tax forms prepared by Turman to prepare his own and his mother's estate's taxes. These are not derivative claims, as Buck, not Jobar, suffered the alleged harm and would receive the benefit of any recovery. However, plaintiffs do not allege a clear injury to Buck or damages sustained by him resulting from this alleged misconduct. Id . at **6-7. Finally, the Court found that because the direct and derivative claims were “based on the same operative facts<, they could not> be interspersed in the same action.” Id . at *7 (citing Abrams v. Donati , 66 N.Y.2d 951 (1985); Barbour v. Knecht , 296 A.D.2d 218, 228 (1st Dept 2002)). Consequently, the Court dismissed the complaint as against Turman with leave to replead. Id . (“Because of the mixing of derivative and individual claims, and the unclear nature of the allegations being asserted against Turman, the complaint is dismissed insofar as asserted against Turman without prejudice to bring properly pled causes of action against this defendant.”). Takeaway The theme that runs throughout Jobar is the importance of filing a well pled complaint. As indicated by the Court, allegations of serious wrongdoing may get lost in a pleading that does not identify the precise claims being asserted: “Although the complaint is rife with allegations that a serious wrong was committed, the drafting of the pleading makes it difficult to determine the precise causes of action that are being pled.” In Jobar , the absence of such clarity affected the Court’s consideration of the claims asserted against Turman – that is, whether the claims asserted were direct or derivative. To be sure, the difference between a direct and derivative claim is not always easy to discern. In fact, the distinction between the two types of claims can be elusive. Nuance and subtlety often rule the day, leading to confusion and uncertainty. For this reason, as Plaintiffs learned in Jobar , it is important to present direct and derivative causes of action in a clear way to avoid the dismissal of the claims (even if the dismissal is without prejudice, as in Jobar ).

On September 19, 2013, Andrew Ceresney, then Co-Director of the Division of Enforcement of the Securities and Exchange Commission (“SEC” or the “Commission”), told an audience attending a continuing legal education program at the American Law Institute in Washington, D.C. about the importance of pursuing those who commit financial and accounting fraud (here). Comprehensive, accurate and reliable financial reporting is the bedrock upon which our markets are based because false financial information saps investor confidence and erodes the integrity of the markets. For our capital markets to thrive, investors must be able to receive an unvarnished assessment of a company’s financial condition. Financial reports must provide transparency for investors, and must not obscure the truth, even if that truth is inconvenient. Ceresney’s words reflect the SEC’s vigilance in cracking down on accounting and auditing fraud. Indeed, since the end of the financial crisis, the SEC has turned its attention to, among other things, the circumstances that create accounting fraud. To that end, the SEC has established a financial reporting and audit task force, implemented an array of investigatory techniques (such as data mining), and relied on tips from whistleblowers to identify the circumstances that allow accounting fraud to occur (here). These efforts continue to show results: in fiscal year 2018, accounting and auditing fraud constituted 16% of the standalone actions (i.e., actions brought in federal court or as administrative proceedings) brought by the SEC. i.e., 16% of the cases), preventing and stopping accounting and auditing fraud remains an important priority of the commission.>i.e., 16% of the cases), preventing and stopping accounting and auditing fraud remains an important priority of the commission.> In today’s post, this Blog looks at two enforcement proceedings involving alleged accounting fraud. One involved accounting and disclosure fraud by Comscore, Inc., and its former Chief Executive Officer (“CEO”), and the other involved violations of the SEC’s auditor independence rules by PwC and one of its partners. Both actions resulted in settlements. In the Matter of Comscore, Inc. Comscore concerned a financial accounting and disclosure fraud allegedly committed by Comscore, Inc. (“Comscore” or the “Company”), a publicly-traded data services and measurement company, principally through the conduct of its former Chief Executive Officer (“CEO”), Serge Matta (“Matta” and, together with Comscore, the “Respondents”). According to the SEC, from February 2014 through February 2016 (the “Relevant Period”), Comscore materially overstated revenue by approximately $50 million as result of a scheme to manipulate non-monetary and monetary contracts. Respondents’ actions, claimed the SEC, enabled the Company to artificially exceed analysts’ consensus revenue target in seven consecutive quarters. In addition, said the SEC, from April 2014 through February 2016, Comscore and Matta made false and misleading statements about two important performance metrics. The Contracts at Issue Comscore allegedly entered into non-monetary transactions (“NMTs”) for the purpose of improperly increasing revenue recognition. According to the SEC, Comscore valued these NMTs, which involved the exchange of data between Comscore and a counterparty, by assessing the fair value of the data it surrendered in each transaction. In negotiating certain of these arrangements, however, Matta allegedly included certain data that the counterparty did not ask for, want, need, or use. In addition, in communications with internal accountants and the independent auditor regarding the NMTs, Matta and other Comscore employees allegedly made false or misleading statements about the true purpose of the agreements, the commercial substance of the transactions, and the fair value of the assets. As a result, said the SEC, Comscore’s revenue related to these transactions was overstated by over $34.5 million during the Relevant Period. Comscore also allegedly entered into certain monetary transactions that improperly increased revenue recognition. In two instances, said the SEC, Matta knew that contracts he negotiated were related and linked but he misrepresented or failed to disclose the true facts to Comscore’s internal accountants and its independent auditor, which had the impact of overstating revenue by approximately $12 million in 2015. In two other instances, noted the SEC, Matta agreed to deliver data to a counterparty by the end of a quarter and then entered into undisclosed side agreements to deliver additional data after the quarter closed. Placing future data delivery obligations into a side agreement, claimed the SEC, allowed Comscore to take the position that all data at issue had been delivered before the current quarter closed, thereby permitting Comscore to recognize all of the revenue associated with the transaction in that quarter rather than defer some or all of the revenue to subsequent quarters. Comscore’s Performance Metrics In addition, the SEC alleged that Comscore made false or misleading disclosures regarding two important performance metrics. In 2014 and 2015, Comscore disclosed customer totals that falsely conveyed a consistent increase in the number of net new customers added. In fact, said the SEC, the number of net new customers was declining. Comscore disclosed these overstated numbers in its periodic filings with the SEC and Matta highlighted them during earnings calls with investors. Also, in the third and fourth quarters of 2015, alleged the SEC, Comscore disclosed misstated revenue growth percentages concerning one of its flagship data analytic products. Matta described this purported revenue growth in earnings calls. In fact, contended the SEC, the product’s revenue had been declining. In both instances, said the SEC, Matta directed or approved incremental changes within Comscore to the methodology by which the disclosed figures were calculated without disclosing those changes to investors. The Restatement In February 2016, Comscore’s audit committee commenced an internal investigation. On March 23, 2018, Comscore, under new management, filed its Form 10-K for the year ended December 31, 2017, which included a restatement (the “Restatement”). The Restatement provided restated and corrected financial information for the years ended December 31, 2014 and 2013. The Restatement also provided that Comscore restated certain information for the quarters ended March 31, June 30, and September 30, 2015, and adjusted information previously furnished on Form 8-K for the year ended December 31, 2015. In total, Comscore reversed approximately $50 million in revenue due to Respondents’ improper conduct and accounting. The Restatement also identified various material weaknesses in Comscore’s internal control over financial reporting and acknowledged that prior senior management did not establish or maintain an acceptable corporate culture. The Settlement With the SEC The SEC charged Comscore with violating Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. Respondents settled the charges without admitting or denying the SEC’s findings. In connection with the settlement, Comscore and Matta agreed to cease-and-desist from future violations of the antifraud provisions of the federal securities laws and to pay penalties of $5 million and $700,000, respectively. Matta also agreed to reimburse Comscore $2.1 million, representing profits from the sale of Comscore stock and incentive-based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act and to the entry of an order barring him from serving as an officer or director of a public company for 10 years. “As the SEC orders find, Comscore and its former CEO manipulated the accounting for non-monetary and other transactions in an effort to chase revenue targets and deceive investors about the performance of Comscore’s business,” said Melissa R. Hodgman, Associate Director in the SEC's Enforcement Division. “We will continue to hold issuers and executives accountable for such serious breaches of their fundamental duty to make accurate disclosures to the investing public while giving appropriate credit for a company’s prompt remedial acts and cooperation.” The press release announcing the settlement can be found here. The SEC Orders relating to Comscore and Matta can be found here and here. In the Matter of PricewaterhouseCoopers LLP The SEC charged PricewaterhouseCoopers LLP (“PwC”) with improper professional conduct in connection with 19 engagements on behalf of 15 SEC-registered issuers and violating auditor independence rules in connection with engagements for one issuer where the firm performed prohibited non-audit services. The SEC also charged PwC partner Brandon Sprankle (“Sprankle”) with causing the firm’s independence violations. Both respondents agreed to settle the charges; PwC agreed to pay over $7.9 million in monetary relief. The SEC found that PwC violated the SEC’s auditor independence rules by performing prohibited non-audit services during an audit engagement, including exercising decision-making authority in the design and implementation of software relating to an audit client’s financial reporting, and engaging in management functions. In connection with performing non-audit services for 15 SEC-registered audit clients, the SEC concluded that PwC violated Public Company Accounting Oversight Board Rule 3525, which requires an auditor to describe in writing to the audit committee of the company the scope of work, discuss with the audit committee the potential effects of the work on independence, and document the substance of the independence discussion. According to the SEC, PwC’s actions deprived numerous issuers’ audit committees of information necessary to assess PwC’s independence. As further detailed by the SEC, the alleged violations occurred due to breakdowns in PwC’s independence-related quality controls, which resulted in the firm’s failure to properly review and monitor whether non-audit services for audit clients were permissible and approved by clients’ audit committees. “Auditors play a fundamental role in protecting the reliability and integrity of financial reporting and must ensure that non-audit services do not come at the cost of their independence on audits of public companies,” said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement. “PwC repeatedly provided non-audit services without having effective quality controls in place for monitoring whether the services impaired its independence on audit engagements and were properly disclosed to audit committees.” The SEC also found that PwC and Sprankle violated the auditor independence provisions of the federal securities laws and caused one audit client to violate its obligation to have its financial statements audited by independent public accountants. The SEC further found that PwC and Sprankle engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice. The press release announcing the settlement can be found here. The SEC Orders relating to PwC and Sprankle can be found here and here.

As this Blog has noted previously, the courts (in New York and Delaware) have refused to approve the settlement of shareholder litigation where class members receive no financial benefit and are asked to give broad releases to the defendants that are inimical to their rights. The latest court to follow this path is the Supreme Court, New York County, Commercial Division. In Matter of Xerox Corp. Consol. Shareholder Litig. , 2019 N.Y. Slip Op. 51467(U) (Sept. 10, 2019), Justice Barry Ostrager denied a motion, among others, to approve a shareholder class action settlement because the putative class received no financial benefit from the settlement and relinquished rights that they could have otherwise asserted in derivative litigation. As explained by Justice Ostrager, the proposed settlement would have released current and former corporate directors from potential liability for, among other things, giving control over the board of directors (the “Board”) of the Xerox Corporation (“Xerox”) to activist investors and potentially exposing Xerox to significant liability in a contract action brought by Fujifilm Holdings Corporation (“Fuji”) concerning termination of the potential merger of the two companies. Background On January 30, 2018, Xerox and Fuji agreed to a proposed transaction, whereby Fuji would receive a 50.1% controlling interest in Xerox in exchange for its 75% interest in Fuji-Xerox (the “Transaction”). Xerox shareholders would receive a “special dividend” funded by new company debt. Despite sitting on over $8 billion in cash reserves and getting most of the future benefits of the deal, Fuji would not pay out any cash in the Transaction. On February 13, 2018, Darwin Deason (“Deason”), the second-largest individual shareholder of Xerox, initiated an action to enjoin the Transaction. Deason v. Fujifilm Holdings , Index No. 650675/2018 (“Deason I”). On March 2, Deason filed a second lawsuit to enjoin Xerox from enforcing the advance notice bylaw deadline for the nomination of directors to be elected at the 2018 Annual Meeting. Deason v. Xerox Corp. , Index No. 650988/2018 (“Deason II”). At or about this same period of time, four putative class actions were filed on behalf of pension funds for the Asbestos Workers, the Iron Workers, and Carpenters, as well as by Robert Lowinger, each of which also sought to enjoin the Transaction on the ground that, by approving the Transaction, the Xerox Board had breached its fiduciary duties to the Xerox shareholders. On March 9, 2018, the Court consolidated the four putative class actions under the caption In Re Xerox Corporation Consolidated Shareholder Litigation . Following expedited discovery, on April 27, 2018, the Court held that the Xerox Board and Jeff Jacobson, the then CEO of Xerox, had breached their fiduciary duties in agreeing to the proposed Transaction. The Court also issued a mandatory injunction that directed the Xerox Board to waive its advance notice bylaw to allow Deason to run a competing slate of directors. On May 1, 2018, two business days after the Court issued the preliminary injunction, the parties advised the Court that they had reached a potential settlement. In connection with the potential settlement, the parties ( i.e. , the class plaintiffs, Deason and Xerox) presented the Court with a fully executed Memorandum of Understanding (“MOU”), setting forth the salient terms of their settlement in principle. On May 13, 2018, Deason and Xerox settled their dispute pursuant to which six directors of the Xerox Board resigned and were replaced by directors nominated by Deason and Carl Icahn (“Icahn”), thereby effectively giving Deason and Icahn control of the Xerox Board. Icahn had supported the Deason action and with Deason was waging a proxy contest to oust the Xerox directors. According to the Court, the language of the settlement agreement indicated that termination of the Transaction was a condition of the Deason/Icahn settlement with Xerox, though neither Deason nor Icahn could be held liable for the decision. The Deason/Icahn/Xerox settlement was private; no release of the class claims was included. Also, on May 13, 2018, counsel for the putative class resubmitted the Memorandum of Understanding pursuant to which class counsel agreed to the release of all Xerox directors in exchange for no consideration other than the terms of the private Deason settlement. In that regard, the Memorandum of Understanding contemplated the release of all resigning and continuing Xerox directors from any liability relating to the change in control of the Xerox Board and any liability arising out of the termination of the Transaction. The Memorandum of Understanding provided that neither Xerox nor Deason would oppose, and Xerox would fund, an award of attorney’s fees of $7.5 million to counsel for the class plaintiffs, provided the Court approved the class settlement. On May 24, 2018, Carmen Ribbe (“Ribbe”) commenced a derivative action against the resigning and continuing Xerox directors for breach of fiduciary duty because, among other things, of the possibility that Fuji might sue Xerox over termination of the Transaction. That action was dismissed on December 6, 2018, without prejudice based on issues related to demand futility. Ribbe initiated a second derivative action on April 11, 2019, and is awaiting a response from Xerox on its demand. On June 18, 2018, Fuji initiated an action against Xerox in the United States District Court for the Southern District of New York seeking $1 billion in damages for breach of the January 31, 2018 Transaction agreement. Fujifilm Holdings Corp. v. Xerox Corp. , 1:18-cv-05458. Xerox moved to dismiss the complaint, which was subsequently denied. The case is being actively litigated. On June 21, 2018, the Court discontinued the Deason I action “on the express condition that the discontinuance of the Deason action in no way, shape or form constitute approval of any elements of any settlement agreement among any parties,” thereby terminating all litigation between Deason and Xerox. The Court also denied class plaintiffs’ motion to stay the litigation as to the Xerox defendants only and to vacate the preliminary injunction as to the Xerox defendants only, notwithstanding class counsel’s representation that “part of the settlement between us and Xerox defendants was that we would move the Court for an order lifting the injunction....” Nevertheless, on July 13, 2018, the newly constituted Xerox Board approved the settlement of the class litigation on the same basis contemplated by the Memorandum of Understanding. Shortly after Fuji filed the federal court action, class plaintiffs moved for preliminary approval of the proposed settlement. At a July 16, 2018 hearing on class plaintiffs’ motion, the Court declined to preliminarily approve the proposed settlement. Instead, the Court directed counsel to send notice to the class to apprise them of the status of the proceedings. On May 23, 2019, the Court approved the form of notice, a finalized copy of which was filed with the Court on June 3, 2019. On September 6, 2019, the Court heard argument on three motions filed by counsel for the putative class. The motions sought certification of a class for settlement purposes and appointment of class representatives, approval of the class settlement, and an award of attorneys’ fees of $7.5 million. Ribbe opposed the motions and approximately 34 members of the putative class opted out of the settlement. Following extensive oral argument on the motions, the Court found that the class representatives were inadequate, and the proposed settlement was unreasonable and unfair to Xerox shareholders. The Court’s Decision The Court held that the proposed class representatives were not adequate representatives of the class because they bound the class to corporate actions that occurred before the settlement had been reached. Slip Op. at *6 (noting that “material terms of the settlement took effect on May 13, 2018, at least insofar as it called for the resignation of certain Board members and the designation of new Board members” notwithstanding the fact that the settlement was reached three months later on July 13, 2018).  “By agreeing to the Memorandum of Understanding, which contained broad releases for the resigning Board members,” said the Court, “the class representatives were potentially shielding the Xerox directors from any potential liability for the subsequently filed Fuji action.” Id . “Turning to the proposed settlement,” the Court concluded that it was not in the best interests of Xerox shareholders because “it achieve no material benefit for shareholders other than Icahn and Deason.” Id . “On the contrary,” continued the Court, “the proposed settlement releases any claims shareholders may have concerning the change of control orchestrated by Deason and Icahn and any liability for the subsequently filed Fuji case.” Id . In fact, said the Court, “ he benefit to Xerox as a company s also questionable in light of the $1 billion lawsuit by Fuji that remain pending. Id . The Court concluded as follows: The purported class members will “get” no financial benefit, and they are being asked to “give” broad releases of any derivative claims they may have. The Memorandum of Understanding contemplated full releases to the directors at a time when this Court had held the directors to be faithless fiduciaries, largely in exchange for fees to the purported class counsel of $7.5 million. There were no exigent circumstances requiring purported class counsel to enter into the Memorandum of Understanding other than the desire of Deason and Icahn to achieve control of the Xerox Board, which purported class counsel facilitated. The purported class counsel had no authority to settle on behalf of the class without having been appointed as counsel for the class, without a class having been certified, and without their clients having been designated as class representatives. The net result of the actions of the purported class representatives and purported class counsel was to transfer control of a public corporation to Messrs. Deason and Icahn via a private agreement that offered no tangible benefit to the interests of the class. Id . at **6-7. Finally, the Court denied the request for attorney’s fees, holding that “ ince … class counsel conferred no benefit on the Xerox shareholders, there is no basis for any award of counsel fees.” Id . at *7. Takeaway In Gordon v. Verizon Communications, Inc. , 148 A.D.3d 146 (1st Dept. 2017), on which Justice Ostrager relied, the First Department observed that “ uch has been written on the subjects of whether settlements of shareholder class action suits challenging corporate mergers and acquisitions should be rejected in the absence of monetary damage awards, and the propriety of the attorney fee awards attendant to such agreements.” Id . at 148. The use of nonmonetary settlements has become increasingly disfavored because they provide minimal benefits to shareholders and to their corporations. Id . at 154. The increasingly negative view of nonmonetary settlements was memorialized in recent decisions coming from the courts in both Delaware and New York in which the judges found such lawsuits to amount to “meritless lawsuits filed in order to raise a threat of enjoining or delaying closure of the transaction, and thereby incentivizing settlement.” Id. , citing Matter of Trulia, Inc. Stockholder Litig. , 129 A.3d 884, 887 (Del. Ch. 2016); Matter of Allied Healthcare Shareholder Litig. , 49 Misc. 3d 1210 , 2015 N.Y. Slip Op. 51552 , *2 (Sup. Ct., N.Y. County 2015). In Xerox , the Court followed in the footsteps of the foregoing courts.

This Blog has often noted that “securities fraud comes in all shapes and sizes.” (E.g., here.) Though the alleged fraudulent scheme may differ, the types of schemes implemented tend to fall into one of the following (non-exclusive) categories: financial statement/accounting fraud; pyramid schemes; Ponzi schemes; pump-and-dump schemes; affinity fraud; promissory note fraud; Internet fraud; “microcap” stock fraud; and fraud concerning information about a company, its operations and future prospects (id.). Many of the techniques used by alleged wrongdoers are designed to persuade a target or victim into buying the security at issue. Some of these techniques include: (1) phantom riches representation – that is, the investment will yield “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk”; (2) guaranteed returns – that is, high returns and low risk are “guaranteed” or “can’t miss”; (3) source credibility or “halo” effect – the fraudster tries to build credibility by claiming to be with a reputable firm or to have a special credential or experience; (4) “I believe in the company, so should you” assurance – the fraudster tries to assure the target that the investment is a sound one because he/she also invested in the company; (5) “everyone is buying it” representation – the fraudster stresses that other people are buying the security and, therefore, so should the target or victim; and (6) the reciprocity representation – the fraudster offers to do a small favor for the target or victim in return for a big favor: “I’ll give you a break on my commission if you buy now.” In today’s post, this Blog looks at SEC v. Mediatrix Capital Inc., 1:19-cv-02594-RM (D. Colo. Sept. 12, 2019), an enforcement action brought by the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) in which the defendants are alleged to have employed many of the foregoing techniques to place at risk more than $125 million of investors’ funds. According to the SEC, from March 2016 to the present (the “Relevant Period”), Michael S. Young (“Young”), Michael S. Stewart (“Stewart”), Bryant E. Sewall (“Sewall”) (collectively, the “Individual Defendants”), through Mediatrix Capital Inc. (“Mediatrix Capital”), Blue Isle Markets Inc. (“Blue Isle 1”), and Blue Isle Markets Ltd. (“Blue Isle 2”) (collectively, the “Entity Defendants”), raised more than $125 million from investors in unregistered securities offerings by representing to investors that their money would be pooled and invested using Defendants’ successful and profitable algorithmic trading strategy. Defendants claimed that from December 2013 through at least March 2019, their trading strategy had never had an unprofitable month and had returned more than 1,600%. Defendants further claimed that their trading strategy had enabled Mediatrix Capital to accumulate assets under management of $225 million at the end of 2018. The SEC maintained that none of the foregoing representations were true. According to the SEC, since mid-2016, Defendants had misappropriated more than $35 million of investors’ money by transferring it out of the Entity Defendants’ bank and brokerage accounts instead of using the money for trading. Defendants purportedly used investors’ money to purchase luxury properties and vehicles and diverted more than $5 million of additional investors’ funds for other expenditures to perpetuate the alleged fraud. Even when Defendants used the remaining portion of investors’ money for trading, claimed the SEC, Defendants consistently lost money – losing more than $18 million from trading in 2018 alone. Because of Defendants’ alleged misappropriation and trading losses, maintained the Commission, Mediatrix Capital’s assets under management were nowhere near the amounts represented by Defendants. For example, said the SEC, at year-end 2018, Defendants represented that Mediatrix Capital had $225 million under management, when the firm actually had approximately $35.3 million in assets under management (less than 16% of the amount claimed). To induce investment into the trading strategy, alleged the SEC, Defendants repeatedly misrepresented the profitability of their trading, falsified investors’ account statements to show phantom profits, and made Ponzi-like payments to investors who opted to cash out their “profits” — all in order to prop-up the façade of profitable trading. The SEC alleged that Defendants made numerous additional, material misrepresentations and omissions to investors regarding the purported transparency of Mediatrix Capital’s trading, as well as third party involvement in verifying trading results. Defendants allegedly falsified investors’ account statements and manipulated trading results to reflect profits rather than the actual losses resulting from their trading. The SEC maintained that Defendants falsely claimed that Mediatrix Capital’s trading results had been audited. Defendants also allegedly made numerous misleading statements implying that Blue Isle 1 and Blue Isle 2 were independent, third-party administrators that received Mediatrix Capital’s trading data directly from brokerage firms before reporting it to investors, when in fact, said the SEC, Defendants owned and controlled the Blue Isle entities and manipulated the trading data they conveyed to investors. According to the SEC, Defendants’ misrepresentations, omissions, and other misconduct had the same goal and effect: provide investors with a false picture of trading profitability and a false sense of security to induce additional investment and to perpetuate the alleged fraud. As alleged, Defendants’ misappropriation and trading losses caused the collapse of the fraud. According to the SEC, Mediatrix Capital’s most recent bank and brokerage account records indicated that only a fraction of investors’ funds remained, causing investors to lose tens of millions of dollars of their money. As a result of the conduct described in the SEC’s complaint, the SEC alleged that Defendants violated Sections 5(a) and (c) and Section 17(a) of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77e(a) and (c) and §77q(a), and Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Commission also alleged that Mediatrix Capital, Young, Stewart, and Sewall violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act 1940 (“Advisers Act”), 15 U.S.C. §§ 80b6(1), 80b-6(2), and 80b-6(4), and Rule 206(4)-8 promulgated thereunder, 17 C.F.R. § 275.206(4)-8, and, in the alternative, Defendants Young, Stewart, and Sewall aided and abetted Mediatrix Capital’s violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. The SEC also named numerous persons and entities as relief defendants because Defendants allegedly transferred millions of dollars of investors’ money to spouses, other relatives, friends, and shell companies they owned or controlled. The SEC claimed that each of the relief defendants received illicit proceeds from Defendants’ fraud to which they had no legitimate claim. The SEC is seeking permanent injunctions against each of the Defendants, enjoining them from future violations of the securities laws, disgorgement of all Defendants’ and relief defendants’ ill-gotten gains from the alleged unlawful activity, together with prejudgment interest, and civil penalties against Defendants under Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d)(3) of the Exchange Act, 15 U.S.C. §78u(d)(3), and Section 209(e) of the Advisers Act, 15 U.S.C. § 80b-9(e). Commenting on the allegations, Kurt L. Gottschall, Director of the SEC’s Denver Regional Office, said: “We allege that this scheme has resulted in tens of millions of dollars in investor losses, in part, to fund defendants’ luxurious lifestyle. The SEC will do all it can to hold these defendants accountable and ensure money is returned to those who were deceived.” The SEC press release announcing the commencement of the action can be found here. The SEC Complaint can be found here.

A temporary receivership, which is one of the provisional remedies available during litigation, is governed by Article 64 of the CPLR.  CPLR 6401 addresses the “appointment and powers” of a temporary receiver and provides, in pertinent part: (a) Appointment of temporary receiver; joinder of moving party. Upon motion of a person having an apparent interest in property which is the subject of an action in the supreme or a county court, a temporary receiver of the property may be appointed, before or after service of summons and at any time prior to judgment, or during the pendency of an appeal, where there is danger that the property will be removed from the state, or lost, materially injured or destroyed. A motion made by a person not already a party to the action constitutes an appearance in the action and the person shall be joined as a party. (b) Powers of temporary receiver. The court appointing a receiver may authorize him to take and hold real and personal property, and sue for, collect and sell debts or claims, upon such conditions and for such purposes as the court shall direct. A receiver shall have no power to employ counsel unless expressly so authorized by order of the court. Upon motion of the receiver or a party, powers granted to a temporary receiver may be extended or limited or the receivership may be extended to another action involving the property. A temporary receiver’s powers are limited to those “granted pursuant to statute (CPLR 6401 ), as delimited by court order.”  Jacynicz v. 73 Seaman Assoc ., 270 A.D.2d 83 (1 st Dep’t 2000) (some citations omitted).  Further, a temporary receiver is “an officer of the court and not an agent of .”  Jacynicz , 270 A.D.2d at 85 (citations and internal quotation marks omitted).  The temporary receiver’s duty is to “preserve and operate the property, within the confines of the order of appointment and any subsequent authorization granted to him by the court.”  Jacynicz , 270 A.D.2d at 85 (citations and internal quotation marks omitted). Suissa v. Baron , 107 A.D.3d 689 (2 nd Dep’t 2013), was a partition action in which plaintiff moved to appoint a receiver “to, among other things, maintain the real property and ensure that all items contained within the property remain therein, and authorized the receiver to collect the reasonable value of use and occupancy of the property from any and all occupants of said property.”  Suissa , 107 A.D.3d at 689.  The Suissa Court noted that the appointment of a temporary receiver is “an extreme remedy” because it results “in the taking and withholding of possession of property from a party without an adjudication on the merits.”  Suissa , 107 A.D.3d at 689 (citations and quotation marks omitted).  Accordingly, a motion for a temporary receiver should only be granted “where the moving party has made a clear evidentiary showing of the necessity for the conservation of the property at issue and the need to protect the moving party’s interests.  Suissa , 107 A.D.3d at 689 (citations and quotation marks omitted).  Finding that the plaintiff met its burden of establishing the need for a receiver, the Suissa Court affirmed supreme court’s appointment of a receiver. The Court in, in Schachner v. Sikowitz , 94 A.D.2d 709 (2 nd Dep’t 1983), an action for specific performance of a contract, reversed supreme court’s appointment of a temporary receiver because the “general accusations set forth by the plaintiffs have not sufficiently established by clear and convincing evidence the need for such a drastic remedy.”  Schachner , 94 A.D.2d at 709. Similarly, the Second Department, in Board of Managers of Nob Hill Condominium Section II v. Board of Managers of Nob Hill Condominium Section I , 100 A.D.3d 673 (2012), reversed supreme court’s appointment of a temporary receiver to “operate and maintain certain recreational facilities.”  The Court noted that a “party moving for the appointment of a temporary receiver must submit clear and convincing evidence of irreparable loss or waste to the subject property and that a temporary receiver is needed to protect their interests.”  Board of Managers , 100 A.D.3d at 673 (citations and internal quotation marks omitted).  The Board of Managers Court, however, found that “plaintiff failed to offer any nonspeculative allegations or evidence indicating that the defendants were committing waste or that there was a danger that the subject recreational facilities would be dissipated or lost absent the appointment of a temporary receiver.”  Board of Managers , 100 A.D.3d at 673. On September 18, 2019, the Court in Manning-Kranes v. Manning-Franzman , reversed an order granting plaintiff’s motion for the appointment of a temporary receiver in an action for the partition and sale of real property.  The Manning-Kranes Court found that plaintiff failed to meet her burden because her “speculative and conclusory assertions about certain expenditures the defendants made of rental income derived from the property were insufficient to demonstrate that the defendants were using that income for their own personal benefit.”  Further, the Court found that plaintiff failed to demonstrate that expenditures made for renovations to the subject property were “unnecessary or wasteful” and that other challenged expenditures “were not so significant as to present an imminent danger of irreparable loss or waste” (citation and internal quotation marks omitted). It should be noted that there are other types of receiverships, but those addressed herein relate to temporary receiverships under Article 64 of the CPLR, which do “not continue after final judgment unless otherwise directed by the court.”  CPLR 6401(c).

The elements of a common law fraud claim in New York are well known to readers of this Blog: “a misrepresentation or a material omission of fact which was false and known to be false by the 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.” Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (internal citations and quotation marks omitted). To prevail on a claim of fraud, the plaintiff must plead and prove each element. But as plaintiffs often find that is not so easy. In addition, where the plaintiff alleges a breach of contract, he/she must demonstrate that the fraud claim is not duplicative of the contract claim. One way to do so is to show that the fraud damages are not recoverable under a contract measure of damages. As with the elements of a fraud claim, demonstrating the absence of an overlap in the measure of damages often proves to be a difficult endeavor. On September 17, 2019, the Appellate Division, First Department, had the opportunity to address the duplication of damages doctrine, holding that plaintiff demonstrated it had sustained more than contract damages sufficient to sustain its fraudulent inducement claim against defendants. Ambac Assur. Corp. v. Countrywide Home Loans, Inc ., 2019 N.Y. Slip Op. 06570 (1st Dept. Sept. 17, 2019) ( here ). Background Ambac has a long history. Approximately nine years ago, Ambac Assurance Corporation (“Ambac”), a financial-guaranty insurer, filed a complaint in New York Supreme Court against Countrywide Home Loans, Inc. and certain affiliates and Bank of America Corp. (collectively, “Countrywide”). Ambac alleged that Countrywide fraudulently induced it to insure payments on residential mortgage-backed securities from 2004 through 2006. Ambac claimed that Bank of America, which acquired Countrywide in 2008, was liable for Countrywide’s conduct as its successor-in-interest. Between 2004 and 2006, Ambac provided financial guaranty insurance to Countrywide with respect to 17 residential mortgage-backed securitizations issued to investors. The securitizations were backed by more than 300,000 individual mortgage loans, which Countrywide had originated or acquired and then sold into securitization trusts. In exchange for substantial premiums, Ambac issued unconditional, irrevocable insurance policies (an important fact to the Court), agreeing to insure certain payments to investors if the underlying mortgage holders failed to make payments. Pursuant to the insurance agreements with Ambac (“Insurance Agreements”), and to effect each of the securitization transactions, Countrywide provided over 60 representations and warranties covering a range of issues, including each underlying loan’s compliance with underwriting guidelines, compliance with federal regulations, appraisal issues, and the accuracy of the information in the loan schedules. In other sections of the Insurance Agreements, Countrywide represented and warranted that there were no material untrue statements in the securitization documents or in the information provided to Ambac regarding the loans and Countrywide’s operations and financial condition. The Insurance Agreements provided that the sole remedy for a breach of the representations and warranties, as well as any defective mortgage loan, was to require Countrywide to either repurchase, cure, or substitute non-conforming loans. By 2007, with the housing market in decline, mortgage default and delinquency rates increased. As a result, Ambac had to pay out far more claims than anticipated. Ambac began to review the origination files of defaulting loans and found that approximately 7,900 out of 8,800 that were reviewed contained material breaches of the representations and warranties in the Insurance Agreements. Pursuant to the Insurance Agreements, Ambac initiated the repurchase protocol by submitting notices of breach to Countrywide – that is, Ambac requested that Countrywide repurchase or cure the defaulting mortgages or substitute new ones. In 2010, Ambac filed suit against Countrywide, asserting claims for: (i) breach of the Insurance Agreements, the representations and warranties in the Insurance Agreements, and the repurchase protocol; (ii) fraudulent inducement; and (iii) indemnification and reimbursement of attorney fees and expenses. Ambac also included a claim of successor and vicarious liability against Bank of America. Both parties moved for partial summary judgment. The motion court held, relying on Insurance Law § 3105, that Ambac did not need to demonstrate justifiable reliance and loss causation to succeed on its fraudulent inducement claim. Section 3105 provides, in relevant part, that “ o misrepresentation shall avoid any contract of insurance or defeat any recovery thereunder unless such misrepresentation was material” and “no misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.” With respect to Ambac’s claims alleging breaches of the representations and warranties, the court found that the sole remedy provision did not apply “beyond Section 2.01 (l),” of one of the agreements, so “to the extent that Ambac can prove breaches of other sections of the I Agreements, it is not limited to the sole remedy of repurchase.” However, the court determined that, “to the extent that Ambac is entitled to receive an award of damages unrelated to the repurchase protocol,” Ambac was not entitled to recover all payments made to investors pursuant to the Insurance Agreements as compensatory damages because that would be “effectively equivalent to rescissory damages,” and that any damages calculation “must be calculated in reference to claims payments made due to loans breaching” representations and warranties. Finally, the court found that Ambac was not entitled to recover attorneys’ fees. The Appellate Division, First Department, modified the motion court’s decision. Ambac Assurance Corp. v Countrywide Home Loans , 151 A.D.3d 83 (1st Dept. 2017) ( here ).  The First Department held that justifiable reliance and loss causation are required elements of a fraudulent inducement claim and that Insurance Law § 3105 is not applicable to a common law fraud claim for money damages. The First Department rejected the motion court’s holding that the repurchase protocol was not the sole remedy for Ambac’s claims for breach of representations and warranties, holding instead that “Ambac cannot avoid the consequences of the sole remedy provision by relying on what it terms ‘transaction-level’ representations, because the heart of Ambac’s lawsuit is that it was injured due to a large number of defective loans.” The First Department affirmed the motion court’s method of damages calculation for any claims not subject to the repurchase protocol, holding that Ambac was not entitled to compensatory damages “amounting to all claims payments it made or will make under the policies, regardless of whether they arise from a breach or misrepresentation.” Finally, the First Department affirmed the motion court’s holding that Ambac was not entitled to attorneys’ fees. The New York Court of Appeals affirmed. Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018) ( here ). The Court of Appeals held that “Insurance Law § 3105 play no role” in the case, reasoning that “Section 3105 does not provide an affirmative, freestanding, fraud-based cause of action through which an insurer may seek to recover money damages” and does not “‘inform’ a court’s assessment of the longstanding common law elements of fraudulent inducement.” 31 N.Y.3d at 580. The Court noted that “ y its terms, section 3105 is only relevant when an insurer seeks rescission of an insurance contract or is defending against claims for payment under an insurance contract, relief that Ambac cannot, and does not, seek.” Id . The Court further noted that Section 3105 was enacted to benefit policyholders by requiring insurers who were seeking to nullify their contracts to prove material misstatements; the statute did not relax the elements required to show fraud in an “insurer-only” exception. Id . As a consequence, the Court held that Section 3105 “does not remove required elements for a showing of common law fraudulent inducement.…” Id . The Court next turned to two elements of a fraudulent inducement claim relevant to the appeal: justifiable reliance and loss causation. First, the Court underscored the importance of proving justifiable reliance, noting that the element is critical to pleading (and proving) a fraudulent inducement claim: “to plead a claim for fraud in the inducement or fraudulent concealment, plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” Id . at 579 (citation and internal quotations omitted). Second, the Court declined to eliminate the loss causation element of a fraudulent inducement claim. The Court noted that loss causation is a “well-established requirement of a common law fraudulent inducement claim for damages.” Id . Noting that the Court “recently affirmed this requirement,” the Court reiterated that a false representation must result in an injury to give rise to a cause of action for fraud: “if the fraud causes no loss, then the plaintiff has suffered no damages.” Id . at 581. Accordingly, the Court held that “Ambac’s request for compensatory damages in the form of all claims payments made to investors must be rejected.” Id .  In other words, Ambac could not recover damages based on losses suffered on all defaulting loans without establishing that the losses resulted from a breach. To hold otherwise, explained the Court, would give Ambac the equivalent of rescissory damages, which it was unable to seek on its unconditional, irrevocable policies. In holding that loss causation remained a required element of a fraudulent inducement claim, the Court specifically distinguished between the damages recoverable for fraud and breach of contract: The Appellate Division correctly determined that justifiable reliance and loss causation are required elements of a fraudulent inducement claim; that Ambac may only recover damages on its fraudulent inducement claim that flow from nonconforming loans; that the remedy for Ambac’s contract claims is limited to the repurchase protocol provided for in the contract’s sole remedy provision, and that Ambac is not entitled to attorneys’ fees. Id . at 584-585. Thus, the Court expressly differentiated the remedies available for the two claims, referring to its fraud ruling as “the method of damages calculation for any claims not subject to the repurchase protocol.” Id . at 581. Following, inter alia , expert proceedings, Defendants moved for, among other things, summary judgment dismissing Plaintiff’s fraudulent inducement claim as being duplicative of the contract claim due to an overlap in the measure of damages for the contract and fraud claims. The motion court denied the motion, recognizing that Ambac sought fraud damages distinct from those arising out of the contract claims. ( Here .) As the motion court observed: “When appearing before the Court of Appeals, Countrywide decided to distinguish Ambac’s fraudulent inducement cause of action from its contract cause of action. Countrywide’s goal was to have the Court of Appeals declare that Ambac can only use the repurchase protocol to measure the damages in the contract cases. Countrywide prevailed.” On appeal, the First Department affirmed. The First Department’s Decision The Court held that the Countrywide defendants did not establish, as a matter of law, “that the damages sought in connection with the fraud claim are the same as those sought in connection with the contract claims.” Slip Op. at **1-2. The Court noted that Ambac had “submitted an affidavit from its expert,” explaining that “the damages for the fraud and contract claims ‘qualitatively and quantitatively distinct.’” Id . at *2. The expert explains that whereas the contract damages are calculated based on the terms of the contractual repurchase protocol, the fraud damages are determined based on the portion of Ambac’s claims payments that flow from nonconforming loans. Thus, according to the expert, the calculation of the fraud damages does not rely in any way on the contractual repurchase price that governs the contract damages calculation. Id . The Court further noted that, according to the expert, “the fraud damages differ from the contract damages because they include additional expenses incurred by Ambac that are not recoverable in contract.” Id . Notably, Ambac’s expert report went “unchallenged by the Countrywide defendants.” Id . Finally, the Court noted that Ambac’s expert intended to submit a supplemental report in which he would include revised damages calculations. Ambac filed a motion to permit such a report, which the Court presumed would contain “a more detailed explanation of the differences between the contract and fraud damages.” Id . In light of that motion, and the “expert affidavit already submitted,” the Court held that “it premature to dismiss the fraud claim as duplicative.” Id . “Thus,” concluded the Court, “denial of the motion to dismiss the fraud claim, without prejudice to renewal after the conclusion of the proceedings below related to the expert affidavit is appropriate.” Id . The Court rejected Defendants’ contention that MBIA Ins. Corp. v. Credit Suisse Sec . (USA) LLC , 165 A.D.3d 108 (1st Dept. 2018) and Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital I Inc ., 164 A.D.3d 1126 (1st Dept. 2018), commanded a different result: “ either MBIA nor Financial Guar . stands for the sweeping proposition that, in all residential mortgage-backed security cases, a fraudulent inducement claim brought by a monoline insurer is, as a matter of law, duplicative of contract claims based on the same nonconforming loans.” Slip Op. at *2. MBIA Ins. Corp. v Credit Suisse Sec . LLC (165 AD3d 108 <1st dept 2018> ) and Financial Guar. Ins. Co. v Morgan Stanley ABS Capital I Inc . (164 AD3d 1126 <1st dept 2018> ) do not require a different result. In MBIA, the court concluded that fraud damages in the form of all claims payments made were not recoverable, and that “repurchase damages” were duplicative of contract damages (165 AD3d at 113-114). Here, Ambac does not seek to recover all claims payments made, nor does it seek repurchase damages under its fraud claim. Instead, it only seeks fraud damages based on claims payments flowing from nonconforming loans, the precise measure sanctioned by the Court of Appeals ( see Ambac , 31 NY3d at 581 ). In Financial Guar ., the court merely found, on the specific facts alleged, that the fraud damages duplicated the contract damages (164 AD3d 1126). There was no indication that the plaintiff in that case submitted an expert affidavit explaining any differences between the measures of damages sought by the fraud and contract claims. Id . Takeaway As readers of this Blog know, most of the cases we discuss involving the duplication of claims doctrine occur at the motion to dismiss stage of the proceeding. Ambac goes beyond that stage into summary judgment proceedings. In that stage of the proceedings, the issue of damages often comes into sharper focus. This is especially so, as in Ambac , with expert disclosure and reports. Perhaps, then, a lesson to be gleaned from Ambac is the desirability of retaining a damages consultant at the pleading stage of the action. This can be important since plaintiffs often have a difficult time articulating the difference between contract damages and fraud damages. Of course, not every case warrants such a retention. But, where appropriate, a damages consultant can help a plaintiff withstand a challenge to a fraud claim on the grounds that the alleged fraud damages are not separate and distinct from the alleged contract damages.

This Blog has often written about contract issues; in particular, the enforceability of a contract whether it be oral or written. In today’s post, we examine an implied contract – that is, an agreement arising from the conduct of the parties. In K2 Intelligence, LLC v. Frydman , 2019 N.Y. Slip Op. 32684(U) (Sup. Ct., N.Y. County Sept. 9, 2019) ( here ), the Court denied a motion to dismiss an implied contract action, holding that there was an issue of material fact as to whether the circumstances alleged in the complaint supported the existence of an implied contract, let alone a written contract. K2 involved an action to recover $114,133.40 from the defendants for breach of an implied contract in connection with the performance of investigative, compliance, corporate intelligence, and cyber defense services. What is an Implied Contract? An implied contract is a “not really a contract at all, but rather a legal obligation imposed to prevent a party’s unjust enrichment.” Universal Constr. Resources, Inc. v. New York City Hous. Auth. , 2018 N.Y. Slip Op. 32846 (U) (Sup. Ct., N.Y. County 2018), citing Parsa v. State of New York , 64 N.Y.2d 143, 148 (1984). It is an agreement created by the conduct of the parties and the circumstances surrounding their relationship: “A contract implied in fact may result as an inference from the facts and circumstances of the case, although not formally stated in words, and is derived from the ‘presumed’ intention of the parties as indicated by their conduct.” Jemzura v. Jemzura , 36 N.Y.2d 496, 503-504 (1975) (internal citations omitted). The elements of an implied-in-fact contract are the same as those of an express contract: “consideration, mutual assent, legal capacity and legal subject matter.” Maas v. Cornell Univ. , 94 N.Y.2d 87, 93-94 (1999). Like an express contract, an implied-in-fact contract requires a showing that there was a meeting of the minds. I.G. Second Generation Partners, L.P. v Duane Reade , 17 A.D.3d 206, 208 (1st Dept. 2005). A contract implied-in-fact “is just as binding as an express contract … since in the law there is no distinction between agreements made by words and those made by conduct.” Id . A cause of action for breach of an implied contract is not viable where this is an express contract covering the same subject matter, as “the theories of express contract and of contract implied in fact ... are mutually exclusive.” Bowne of New York, Inc. v International 800 Telecom Corp. , 178 A.D.2d 138, 138 (1st Dept. 1991). K2 Intelligence, LLC v. Frydman Background Plaintiff, K2 Intelligence, LLC (“K2”), provides investigative, compliance, and cyber defense services to its clients. On October 17, 2016, Herrick Feinstein LLP (“Herrick”) contacted K2 about providing expert advisory services to Jacob Frydman (“Frydman”) in connection with a lawsuit in which Frydman was a named party. According to Plaintiff, it was agreed that in connection with K2’s retention, Frydman would be solely responsible for the payment of K2’s fees and expenses and Herrick, as Frydman’s attorneys, would be K2’s agent and point of contact for any communications with Frydman. As a result, Plaintiff sent its written engagement letter to Herrick for Frydman sign. Plaintiff alleged that after it signed and delivered the Agreement to Herrick, Frydman, without K2’s knowledge, consent, or permission, altered the signature page from “Jacob Frydman” to “United Realty Partners, LLC, Jacob Frydman, Manager.” Plaintiff maintained that it never consented to the alteration or change of the signature page. K2 claimed that Frydman made the change to obligate URP, a company without little or no assets, to pay for Plaintiff’s services instead of Frydman in his individual capacity. Plaintiff commenced the action, alleging breach of an implied contract and account stated. Defendants moved to dismiss, claiming that the retainer letter was a binding contract between the parties and conclusively showed that any payment obligations were between K2 and URP, the actual signatory to the agreement. The Court’s Decision The Court denied the motion, holding that “ he conflicting submissions of the parties raise a triable issue of fact as to whether the purported contract exhibited by defendants is actually a contract, at all; let alone whether one or both of the defendants is a party, or are parties, thereto.” Slip Op. at *2. The Court found that the language in the letter agreement was devoid of any reference to URP and indicated that there was no meeting of the minds between Plaintiff and URP: “ t would seem that, as far as plaintiff was concerned, it was contracting with defendant Frydman.” Id . The Court noted that the signature page supported Plaintiff’s position that the retention letter had been altered by Frydman: “Nowhere does that portion of the document identify an anticipated signatory as being United Realty Partners, LLC. Remarkably, though – or perhaps not – the document contains a handwritten modification of the Frydman signatory section, identifying him as the “Manager” of “United Realty Partners, LLC.” Id . at *3. Notwithstanding, the Court found issues of fact, especially since Frydman contended that “he executed the K2 engagement agreement as Manager of' United Realty Partners, LLC, implying that such was his understanding of the contracting parties.” Id . (internal quotation marks omitted). As a result, the Court denied the motion: In view of the foregoing patent issue of material fact - to wit, whether there was a contract, and with whom, regarding the foundational predicate for the claims in this lawsuit – it is simply impossible at this time for the court to render summary adjudication on the merit of plaintiff’s claims, which is what defendants are now prematurely asking this court to do. Therefore, the motion to dismiss is denied. Takeaway K2 is a good example of the tension between a contract manifested in writing and a contract manifested by the conduct of the parties. The determination of the type of contract at issue is determined on a case-by-case basis. Where, as alleged in K2 , the parties’ conduct evinces an intent to be bound by an agreement between them, in the absence of a written agreement, the parties can find themselves in a binding contract.

It is well settled that when an agreement is clear and unambiguous, the parties’ rights are to be governed exclusively by that agreement and the courts are to give the words of that agreement their plain, ordinary, and usual meaning. It is equally well-settled law that parties engaged in an arm's-length business transaction are not fiduciaries, especially when the parties are sophisticated businesspeople. Despite the clarity of these principles, they are, nevertheless, tested in litigation. Such was the case in Saltini v. North Sea Dev. LLC , 2019 N.Y. Slip Op. 51456(U) (Sup. Ct., Suffolk County Sept. 9, 2019) ( here ). Saltini concerned three properties located in the Town of Southampton, New York (sometimes referred to as Lots 1, 2, and 3, and collectively the “Properties”). In 2015, Saltini and defendant, Coast Development Group LLC (“Coast”), formed defendant, North Sea Development LLC (“North Sea”), to construct high-end homes on the Properties (the “Project”). Coast owns 51% of North Sea and Saltini owns the remaining 49% of the company. Coast has three members – the individual defendants (Richard J. Gheradi, Richard F. Gherardi, and Glenn Callahan) – each of whom has a one-third interest in the company. In order to obtain financing for the Project, Saltini conveyed title to the lots to three separate LLCs (one for each parcel) in which North Sea had a 100% membership interest (the “Property LLCs”). The Property LLCs then obtained financing from defendants Acres Capital, LLC (“Acres”) and Reliance Standard Life Insurance Co. (“Reliance” and collectively with Acres, the “Lender”). On February 5, 2016, the Property LLCs borrowed a total of $11,580,000 from the Lender (the “Senior Loan”): $4,212,439 as an acquisition loan, $5,048,300 as a building loan, and $2,319,261 as a project loan. Each of the three loans was evidenced by a promissory note and secured by a mortgage on the three parcels, among other things. Also, on February 5, 2016, Saltini sold the three parcels to North Sea for $8,090,000. At the closing, Saltini was paid $3,829,806, and North Sea executed a promissory note in his favor for the balance, $4,260,194 (the “Mezzanine Note” or “Mezzanine Loan”). The Mezzanine Loan was secured by a pledge agreement executed by Coast granting Saltini a security interest in Coast’s membership interest in North Sea. The Mezzanine Note contained two repayment options: (1) at such time and in such amount as provided in North Sea’s operating agreement, or (2) $784,634 at the closing of the sale of Lot 1, $1,105,860 at the closing of Lot 2, and the balance (unpaid principal and interest) on the sale of Lot 3 or November 1, 2019, whichever was sooner. The relationship between the Lender and Saltini (the “Mezzanine Lender”) was governed by an Intercreditor Agreement dated February 5, 2016. Among other things, the Mezzanine Lender agreed to subordinate and make junior the Mezzanine Loan, the Mezzanine Loan Documents and the liens and security interests to the Senior Loan and the Senior Loan Documents. Thus, the Mezzanine Lender’s rights to payment of the Mezzanine Loan and the obligations evidenced by the Mezzanine Loan Documents were subordinated to the Senior Lender’s right to payment of the Senior Loan. The Senior Loan was set to mature on August 5, 2017. In September 2017, the Property LLCs were in default, and the parties to the Senior Loan executed the first modification, which gave the Property LLCs up to three extensions of the maturity date for a period of three months each, provided they met certain conditions. The first modification also increased the release amounts for Lots 1 and 2 from $4,303,500 to $6,000,000, respectively. The Property LLCs received two extensions, but they were unable to meet the conditions for the third extension. The Senior Loan matured on February 5, 2018, and the parties agreed to a second modification, which extended the maturity date to June 5, 2018. A third modification extended the maturity date to August 23, 2019, and increased the principal amount of the loan from $11,850,000 to $13,385,000. The third modification also reduced the release amounts to $5,000,000 each for Lots 1 and 2. The homes on Lots 1 and 2 are near completion and are being marketed for sale at listing prices of $6,495,000 and $6,995,000, respectively. Plaintiff commenced the action on March 5, 2018, alleging that Coast and the individual defendants (collectively the “Coast Defendants”) assumed full and complete control over all aspects of the Project and made substantial errors in the design and construction of the homes, which caused extensive and unnecessary delays. Plaintiff also alleged that the Coast Defendants misused and converted funds that were to be used for construction of the homes. Plaintiff claimed that, as a result, the homes would be sold at prices well below those anticipated for the Project and that North Sea would be unable to pay him the amounts due under the Mezzanine Loan. Plaintiff further alleged that the Lender aided and abetted the Coast Defendants. Acres and Reliance moved to dismiss the complaint. The Court granted the motion. Plaintiff contended that a fiduciary duty existed between the Lender and him. Saltini alleged that such a duty existed by reason of his reliance on promises that the Lender purportedly made which caused him to relinquish his position of security and control over the Project in order to become a mezzanine lender. These promises, maintained Saltini, required the Lender to perform its duties such that there would be sufficient funds from the sale of the homes to pay both the Lender and him. The Court held that there was no fiduciary duty. The Court found that the relationship was simply contractual “whereby one creditor agree to subordinate its claim against a debtor in favor of the claim of another.” Slip Op. at *4. This finding, noted the Court, was supported by the plain language of the Intercreditor Agreement, which specifically disclaimed any fiduciary relationship between the parties: The Intercreditor Agreement, which is the only contractual agreement between the plaintiff and the Lender, provides, “Mezzanine Lender agrees that Senior Lender owes no fiduciary duty to Mezzanine Lender in connection with the administration of the Senior Loan and the Senior Loan Documents and Mezzanine Lender agrees not to assert any such claim.” Acceptance of the plaintiff’s version of the transaction would require the improper consideration of parol evidence, contradicting the clear terms of the Intercreditor Agreement, which contains a merger clause, precluding any extrinsic proof to add or vary its terms. Id . (citations omitted). “In any event,” said the Court, the “parties engaged in an arms’ length business transaction” and as sophisticated businesspeople, they “are not fiduciaries”. Id . (citations omitted). The Court rejected Plaintiff’s attempt to impute “to the Lender duties to supervise and manage the project that not found in the record.” Id . “The documentary evidence,” said the Court, “establishe that the Lender’s obligation was merely to provide financing. Other defendants, specifically North Sea and the Coast defendants, were responsible for construction of the homes.” Id . The Court, therefore, refused to accept Saltini’s attempt to allege “special circumstances” that would transform “the business relationship between the plaintiff and the Lender into a fiduciary relationship, such as control by one party of the other for the good of the other or creation of an agency relationship.” Id . The Court concluded by observing the following: The plaintiff, an experienced architect, was not under the control of the Lender. That he was under financial pressure and had to give up certain things in order to obtain financing for the project does not create a fiduciary relationship. Accordingly, the ninth cause of action is dismissed. Id . at **4-5. Takeaway There are two types of fiduciary relationships: 1) those created by law ( e.g. , statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue. While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship ( e.g. , the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty (e.g., the second type of fiduciary relationship). Id . In Saltini , as discussed, the Court looked at the contract to determine the relationship between the parties and determined that the language of the agreement was clear and unambiguous such that there was no fiduciary relationship between them.

In today’s post, this Blog looks at enforcements actions brought by the Securities and Exchange Commission (“SEC”) that involve fraudulent misconduct and the failure to comply with the registration requirements for the offering of securities. Securities and Exchange Commission v. Toon Goggles Inc. On September 6, 2019, the SEC announced ( here ) that it charged Toon Goggles Inc. (“Toon Goggles”), a Los Angeles-based company that offers on-demand entertainment content for children, and its founder, Ira Warkol (“Warkol”), for conducting a $19 million illegal securities offering. The SEC also charged Warkol for acting as an unregistered broker-dealer in connection with the offering. In the complaint filed in the U.S. District Court for the Central District of California ( here ), the SEC alleged that from at least August 2012 through late 2016, Toon Goggles and Warkol raised over $19 million from approximately 400 retail investors. According to the SEC, Warkol, acting as an unregistered broker, set up boiler rooms inside Toon Goggles’ offices and hired sales agents to cold-call investors. Warkol allegedly provided the sales agents with scripts to induce investors into purchasing the offered securities. According to the complaint, Toon Goggles also failed to maintain accurate and complete records of its investors, the number of shares sold to each investor, and the amount of money raised from each investor. The SEC charged Toon Goggles and Warkol with violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and Warkol with violating the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934. Without admitting or denying the allegations in the complaint, Warkol consented to the entry of a final judgment permanently enjoining him from violating the charged provisions, ordering disgorgement plus prejudgment interest of $2 million, and imposing an $189,427 penalty. The settlement is subject to court approval. The SEC’s litigation against Toon Goggles will proceed, with the SEC seeking a permanent injunction, disgorgement plus prejudgment interest, and a civil penalty. In a separate administrative proceeding, the SEC also charged Toon Goggles’ director of operations, Brendan Pollitz, for facilitating broker-dealer registration violations. Pollitz consented to the entry of a cease-and-desist order ( here ), and agreed to pay disgorgement plus prejudgment interest of $34,117, and civil penalties of $9,472. Securities and Exchange Commission v. John F. Thomas On September 4, 2019, the SEC announced ( here ) that it brought charges against two individuals and six entities relating to an ongoing, Nevada-based $29 million sports betting investment scheme impacting over 600 investors from more than 40 states, as well as other charges against three individuals and a company who sold the investments. In the complaint ( here ), the SEC alleged that John F. Thomas and Thomas Becker, both whom are convicted felons, and several entities controlled by them, promised investors 250% to 600% returns from pooled investments in sports betting, using what they claimed was a proprietary handicapping system. According to the SEC, however, the defendants used the majority of investor money to fund their lifestyles, pay commissions to brokers and agents, or make Ponzi-like payments to other investors. The SEC further alleged that the defendants misrepresented to investors the investment performance of the funds that were actually invested in sports betting. The SEC also alleged that Douglas Martin, Paul Hanson, Damian Ostertag, and a company owned by Martin sold unregistered securities without being registered as brokers or associated with a registered broker. The complaint, which was filed in the United States District Court for the District of Nevada on August 30, 2019, charged Thomas, Becker, Einstein Sports Advisory, LLC, QSA, LLC, Vegas Basketball Club, LLC, Vegas Football Club, LLC, Wellington Sports Club, LLC, and Welscorp, Inc. with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act. The complaint also charged Martin, Hanson, Ostertag, and Executive Financial Services, Inc. with violating the broker-dealer registration provisions of 15(a) of the Securities Act and the registration provisions of Section 5(a) and 5(c) of the Securities Act. Securities and Exchange Commission v. E. Herbert Hafen On September 4, 2019, the SEC announced ( here ) that it charged E. Herbert Hafen (“Hafen”) with defrauding multiple retail clients by misappropriating approximately $1.6 million of client assets. According to the SEC’s complaint ( here ), from 2011 through 2018, Hafen, while employed as a New York City-based registered representative and investment adviser at large financial institutions, engaged in a scheme to defraud his retail clients. The SEC alleged that Hafen convinced his clients that he had access to an investment opportunity separate from those offered by the financial institution at which he worked, and this opportunity would pay an annual six percent return. According to the complaint, Hafen instructed his clients to withdraw their money from the financial institution, including liquidating stock holdings and personal retirement accounts; deposit that money into their personal bank accounts; and then transfer or wire the money to Hafen’s personal bank account. The SEC further alleged that, once Hafen received his clients’ money, he did not invest it as promised, but instead used it for his own personal purposes, including paying house, car, and credit card expenses for himself and family members. The SEC alleged that Hafen violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Hafen ( here ). Commenting on the charges, U.S. Attorney Geoffrey S. Berman said: “Elias Hafen promised his investment clients significant returns in a ‘special’ fund.  With fake statements and guaranteed returns, Hafen was every investor’s worst nightmare.  He never invested his clients’ money and instead used it to fund his own lavish lifestyle.  Today, Hafen admitted his crimes and he will soon likely spend time in prison for his misdeeds.”

Attorneys are often asked whether an oral agreement is enforceable. Most will say that the answer depends on the law and the facts surrounding the agreement. As an initial matter, to be enforceable, an oral agreement must contain the elements of a binding contract, e.g. , an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms. Even if these elements are present, the agreement must still satisfy the Statute of Frauds. In New York, the statute of frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally. The Statute of Frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons , 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 454 (1984). The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  Id . at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id . In D&N Boening , the Court of Appeals provided examples of oral agreements that fell outside the Statute of Frauds despite questions surrounding the possibility of performance within one year.  These included agreements: where either party had the option to terminate the agreement on seven months’ notice ( Blake v Voigt , 134 N.Y. 69); where the agreement merely set the terms of anticipated prospective purchases but did not bind either party to any particular transaction ( Nat Nal Serv. Stas. v Wolf , 304 N.Y. 332); where defendant had the option to discontinue at any time the activities upon which the agreement was conditioned ( North Shore Bottling Co. v Schmidt & Sons , 22 N.Y.2d 171); where defendant had the option of selling at any time the property on lease to plaintiff for four years ( Coinmach Inds. Corp. v Domnitch , 37 N.Y.2d 889); where no provision in the agreement directly or indirectly regulated the time for performance despite the extreme unlikelihood of its completion within one year ( Freedman v Chemical Constr. Co. , 43 N.Y.2d 260, 265); where employment was terminable for any just and sufficient cause wherever dismissal was deemed necessary for the welfare of the company ( Weiner v McGraw-Hill, Inc. , 57 N.Y.2d 458, 462). Id . at 455-56. However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id . at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id . at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id . If an alleged agreement is found to fall within the scope of GOL § 5-701(a)(1) (or any other subsection of GOL § 5-701(a)), it is void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent. ...” There is sufficient tangible evidence that a contract has been made if, inter alia : (i) there is admissible “electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval) ... sufficient to indicate that in such communication a contract was made between the parties”; (ii) “ he party against whom enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made”; or (iii) “ here is a note, memorandum or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.” Id . GOL § 5-701(b)(3). Email communications can satisfy the “writing” requirement. See Sassoon v. CDx Diagnostics , 172 A.D.3d 617 (1st Dept. May 28, 2019); Naldi v. Grunberg , 80 A.D.3d 1, 13 (1st Dept. 2010). The “writing” need not be a communication between the parties to the contract. It can be an internal communication by the party against whom enforcement is sought. See Int’l Trading & Sales, Inc. v. Philipp Bros. , 99 A.D.2d 983, 984 (1st Dept. 1984) (“If defendant has such a note or memorandum even though it be internal, that could satisfy the Statute of Frauds.”); Scura Partners Sec. LLC v Universal Stainless & Alloy Prods., Inc. , No. 653308/11, 2013 WL 1127733, at *6 (Sup. Ct. N.Y. Cty. Mar. 6, 2013) (permitting discovery to satisfy Statute of Frauds because the defendant “may have internal emails and memorandums which would confirm the existence of the agreement, and these documents are ‘peculiarly within the knowledge’ of .”). With these standards in mind, we look at Cohen v. Trump Organization LLC , 2019 N.Y. Slip Op. 32565(U) (Sup. Ct., N.Y. County Aug. 28, 2019) ( here ), a case involving an alleged oral agreement by the defendant to pay the legal fees and expenses of the plaintiff in pending and future matters. Background Michael Cohen (“Plaintiff” or “Cohen”) claimed he had an oral agreement with the Trump Organization LLC (“Defendant” or “Trump Organization”) to pay his legal expenses for civil, criminal, and investigatory matters arising out of his employment and his “ill-defined role” as Donald J. Trump’s “fixer.” Slip Op. at *1. Cohen claimed the Trump Organization paid his legal fees for a time under the agreement but then stopped when Cohen agreed to cooperate in ongoing investigations into his work for the Trump Organization and its principals, directors, and officers. Id . Cohen began his employment with the Trump Organization in 2006 as Executive Vice President and Special Counsel. His duties and responsibilities for the Defendant continued through the campaign and election. On January 20, 2017, Cohen resigned from the Trump Organization to serve full time as the President’s personal attorney. A week before the inauguration and continuing through May 2017, a number of investigations into the President, the Trump Campaign and the Trump Organization were opened by the federal government. By the end of May 2017, Cohen had emerged as a person of interest in the foregoing investigations and received a subpoena from the House Intelligence Committee as part of its investigation. Cohen retained McDermott Will & Emery LLP (“McDermott”) to represent him in connection with the investigations on the recommendation of an attorney for President Trump. According to Cohen, President Trump and members of the Trump Organization supported such retention and “encouraged to cooperate with the Investigations.” Id . at *4. In July 2017, faced with these ongoing investigations, and in consideration of Cohen’s cooperation in a joint defense, Cohen and the Trump Organization allegedly reached an oral agreement “under which the Organization agreed to indemnify and, separately, to pay for all of attorneys’ fees and costs in connection with representation and defense in the Investigations and other matters arising from work with and on behalf of the Organization and its principals, directors, and officers” (the “Agreement”). Id . (internal definitions omitted). On July 24, 2017, Cohen’s counsel at McDermott sent Alan Garten (“Garten”), Defendant’s Executive Vice President and Chief Legal Officer, an email in which the former wrote: “Pursuant to our oral agreement that your client will indemnify my client for this matter, please find enclosed our firm’s statement for services rendered on behalf of Mr. Michael D. Cohen regarding a congressional investigation.” Id .  A few months later, on October 25, Garten informed Cohen’s counsel that “ wire was sent to your firms account for $136,460.99 this afternoon (representing ½ the current outstanding balance that has been billed),” and noting that “ he other ½ will be wired in the next few days.” Id . at *4. Garten’s correspondence did not confirm or reference the Agreement. Id . In December 2017, the Trump Organization confirmed that it would continue to indemnify Cohen and pay his attorneys’ fees and expenses in connection with the Investigations, including the outstanding amounts owed to McDermott. As late as June 2018, Cohen claims that he received continued assurances from the Trump Organization that it would continue to indemnify him and pay his legal expenses in connection with the Investigations. Notably, Cohen did not plead these confirmations and assurances as separate agreements with separate consideration. Id . at *5. By June 2018, Cohen was the subject of additional investigations and lawsuits relating to his work for the Trump Organization. The various legal actions that proliferated around him fell into three distinct categories, some of which existed at the time the parties allegedly formed the Agreement (“Pending Matters”), and some which did not (“Future Matters”): (1) Investigations: defined to include congressional investigations and the special counsel investigation; (2) Matters: defined as eleven civil and criminal matters and investigations that commenced after the Agreement was allegedly formed in July 2017; (3) Other Matters: defined to include the specific Matters in category two and any other “potential related matters, related to Cohen’s services on behalf of President Trump and the Trump Organization. Id . at **5-6. In or around June 2018, Cohen’s relationship with the Trump Organization broke down. That month, Cohen began to consider cooperating with the Special Counsel and federal prosecutors in connection with a separate investigation in the Southern District of New York and President Trump began distancing himself from Cohen. The Trump Organization allegedly ceased to pay the invoices of Cohen’s counsel without notice or justification. Consequently, Cohen’s attorney withdrew as counsel, leaving $1,037,868.87 in unpaid fees allegedly owed by Defendant. Cohen subsequently retained additional counsel to represent him in the Investigations and other matters covered by the Agreement. On August 21, 2018, Cohen pleaded guilty to eight criminal charges, including campaign finance violations, tax evasion, and bank fraud, in the Southern District of New York. Additionally, on November 29, Cohen pleaded guilty to lying to Congress. Cohen was sentenced to prison on December 12, 2018 and ordered to pay fines and other amounts. In January 2019, Cohen wrote to the Trump Organization requesting reimbursement pursuant to the Agreement. The Trump Organization did not respond to that request and did not pay any of the amounts requested. Cohen commenced the action on March 7, 2019. Cohen asserted claims for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) a declaratory judgment setting forth the scope of his rights under the “indemnification agreement,” and (4) promissory estoppel. In response, the Trump Organization moved to dismiss the complaint on the grounds that the Agreement was not properly pleaded and was barred by the Statute of Frauds, and that the remaining claims failed to state any legally viable claims for relief. As discussed below, the Court granted in part and denied in part the Trump Organization’s motion to dismiss the claim for breach of contract. The Court held that the Agreement was enforceable to the extent it covered legal proceedings and investigations that were pending in July 2017, when the Agreement allegedly was made. The Agreement was not enforceable, however, with respect to legal proceedings and investigations that began after the Agreement was reached. This Blog looks at the Court’s ruling with regard to the Statute of Frauds. The Court’s Decision As an initial matter, the Court found that Cohen sufficiently pleaded the existence of a viable contract, by setting “forth the parameters of the deal he allegedly struck with the Trump Organization.” Slip Op. at *9.  In this regard, the Court found that Cohen described “what type of agreement being alleged, when it was entered into, with whom it was entered, and the agreement’s terms and scope.” Id .  “These and other alleged facts contained in the Complaint and Affidavit,” said the Court, gave Defendant “sufficient notice as to the facts on which Cohen’s claim founded, and the material elements of the claim.” Id . “That is all that is required at this stage of the case,” concluded the Court. Id . Next the Court turned to the issue of enforceability under the Statute of Frauds. Specifically, the Court addressed whether the Agreement was capable of performance within one year of the Agreement being reached. Id . Pending Matters The Court agreed with Cohen that the Agreement could be performed within one year. Slip Op. at *13. The Court rejected Defendant’s argument that the Agreement could not be performed within one year because it was a contract of indefinite duration. Id . at *14.  Such an argument, said the Court, “goes too far.” Id . “If the terms of the contract ... include[ ] an event which might end the contractual relationship of the parties within a year, defendant’s possible liability beyond that time would not bring the contract within the statute.” Id ., quoting Martocci v. Greater New York Brewery , 301 N.Y. 57, 62 (1950) (internal quotation marks omitted). The Court found that the House and Senate Intelligence Committee investigations were capable of concluding within one year since they “could have ended in a matter of weeks or months” of the Agreement. Id . at *13 (quoting Cohen’s memorandum of law and noting that the analysis was “correct with respect to Pending Matters that were underway in July 2017”). Future Matters As to Future Matters, the Court agreed with the Trump Organization. The Agreement as to Future Matters is void under the Statute of Frauds because it could not by its terms be performed within one year. Indeed, it could not ever be fully performed because the Trump Organization’s obligations under such an agreement would be triggered by any new action or investigation occurring at any time in the future. The only way to terminate this open-ended obligation within one year would be to breach it. But “ he possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.” Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957). Slip Op. at *15. In finding for the Trump Organization, the Court found “cases involving open-ended agreements to pay sales commissions” to be “instructive.” Id .  In those cases, the employer and employee agreed that the latter would obtain a share of the future sales generated by customers who the employee procured. The courts have held that such agreements must be in writing because they “impermissibly ‘extend[] indefinitely” the agreement, are “dependent solely on the acts of a third party and beyond the control of the defendant.…’” Id ., quoting Apostolos v. R.D.T Brokerage Corp. , 159 A.D.2d 62, 64-65 (1st Dept. 1990). The same is true with regard to “open-ended distributorship agreements,” which the Court found to “further illustrate the point.” Id . at *16. In those cases, noted the Court, the courts did not apply the Statute of Frauds to oral agreements because the oral agreements could be terminated within one year without a breach thereof. Id ., citing North Shore Bottling , 22 N.Y.2d at 176-177. The Court further reasoned that by definition Future Matters could not be capable of performance within one year because the parties “did not know about at the time” the Agreement was reached. Slip Op. at *17. Accordingly, “ ecause the Agreement covers both Pending and Future Matters,” said the Court, “it cannot by its terms be performed within one year and is unenforceable unless it is supported by tangible evidence of the type required by the Statute of Frauds.” Id . Was There a Writing? Having determined that the Agreement had to be in writing, the Court considered whether the correspondence between Cohen’s lawyer and the Trump Organization sufficed “to create an enforceable written agreement under the Statute of Frauds; if not, whether the Trump Organization’s payment of Cohen’s initial legal bills sufficient to create an enforceable agreement to pay his remaining bills; and if not, whether the Agreement be severed so that Cohen’s claims limited to the portion of the Agreement relating to indemnification for Pending Matters.” Id . (Orig’l emphasis.) The Court held that the email sent by Cohen’s counsel referencing the Agreement, in and of itself, could not constitute the written “note or memorandum” required under the Statute of Frauds because it was “not signed or otherwise endorsed by … the Trump Organization.” Id . at *18. The email from the Trump Organization likewise failed to satisfy the writing requirement of the Statute of Frauds. Id . The Court held that the responding email “did not acknowledge … any agreement to pay Cohen’s legal bills, let alone one broad enough to extend beyond ‘this matter’ to an unlimited number of civil, criminal, investigatory, and ‘other’ matters that arose after the agreement supposedly was made.” Id . at **18-19. The Trump Organization’s Partial Performance Did Not Satisfy the Statute of Frauds The Court rejected Cohen’s argument that the Trump Organization’s payment of some of the invoices “at the outset” satisfied the Statute of Frauds. Id . at *19. The Court held that “ lthough ‘partial performance’ can satisfy the Statute of Frauds for certain types of real estate-related agreements under N.Y. Gen. Oblig. L. § 5-703, it not apply to N.Y. Gen. Oblig. L. § 5-701(a)(1), which is the only provision upon which Defendant relies.” Id ., citing Castellotti v. Free , 138 A.D.3d 198 (1st Dept. 2016). The Agreement Can Be Severed So That It Can Be Enforced In Part The Court held that “it is appropriate to sever the Agreement so as to permit enforcement of the alleged oral agreement to pay Cohen’s legal fees and costs for the Pending Matters.” Slip Op. at *21. The Court noted that “ hroughout Cohen’s pleadings and filings, the Investigations consistently demarcated from the ‘other matters’” and the pending Investigations “specifically … spurred the parties to form the agreement in the first place.” Id . Thus, “ ar from ‘doing violence’ to the terms of the agreement,” concluded the Court, “severance reflect the delineation evident in Cohen’s allegations - allegations which, in turn, indicate that the two portions of the agreement ‘separate and distinct.’” Id . Takeaway In a perfect world, all agreements would be reduced to a writing signed by all parties, so that in the event of a dispute a court could determine the rights and obligations of the parties thereto. Cohen illustrates the difficulties a party must overcome to demonstrate the existence of an oral agreement. Cohen is also notable because of the Court’s decision to sever the Agreement to permit enforcement as to Pending Matters.