On August 29, 2018, the Securities and Exchange Commission (”SEC”) announced (here) that it charged a Tallahassee-based investment advisory firm and its two former principals with defrauding investors, most of whom were retired NFL players who had joined the class-action lawsuit against the National Football League (“NFL”) claiming they suffered brain injuries as a result of concussions. The SEC charged Cambridge Capital Group Advisors, LLC (f/k/a Cambridge Capital Advisors, LLC); Cambridge’s president Phillip Timothy Howard (“Howard”), a Florida attorney who represented the retired players in the class action lawsuit; and Don Warner Reinhard (“Reinhard”), a former registered investment adviser previously barred by the SEC, with defrauding 20 investors in two proprietary hedge funds operating out of Howard’s law offices. According to the SEC’s complaint (here), the defendants represented that the Funds would invest in a variety of instruments, when, in fact, they invested monies almost exclusively in settlement advance loans to more than 70 of Howard’s NFL class-action clients. As alleged, from no later than October 5, 2015 until at least March 31, 2017, the defendants raised approximately $4.1 million from about 20 investors (about half of whom rolled over their NFL 401(k) accounts to make the investments) through the offer and sale of securities in the form of limited partnership interests in two private investment funds for which Cambridge was the general partner and investment manager – namely, Cambridge Capital Partners LP (“Cambridge Partners”) and Cambridge Capital Group Equity Option Opportunities LP (“Cambridge Opportunities”) (collectively, the “Funds”). According to the SEC, the defendants distributed offering documents in which they made materially false and misleading statements about the Funds’ investment focus, the ways in which the Funds would use investor money, and Reinhard’s background and experience in the securities industry. More specifically, the defendants falsely told investors that the Funds were invested in a diverse range of securities with a secondary focus on litigation settlement advances. In truth, the Funds primarily paid settlement advances to former NFL players – including 18 of the 20 investors – in connection with the class action lawsuit. Moreover, the defendants allegedly represented that Reinhard was an “extremely successful investment manager,” but failed to disclose that he had served jail time for bankruptcy and tax fraud and had been barred by the SEC from working for any investment adviser firm. The SEC further alleged that Howard defrauded investors by borrowing $612,000 in undisclosed personal mortgage loans from the Funds, which he never repaid, and that Howard and Reinhard used investor funds to pay themselves fabricated “broker fees” on settlement advance loans to Howard’s legal clients. Additionally, in 2015 and 2016, Howard filed disclosure statements with the SEC on behalf of Cambridge in which Cambridge represented that in the past ten years no affiliate had pleaded guilty to a felony or been enjoined by a domestic court in connection with any investment-related activity. According to the SEC, these statements were false. As alleged, at the time of the filings, Reinhard was or had been an affiliate of Cambridge and in 2009 had pleaded guilty to a felony. In 2008, a court permanently enjoined Reinhard from violating the anti-fraud provisions of the federal securities laws in a civil enforcement action the SEC filed against him for securities fraud for misleading clients regarding investments. In 2011, as noted above, the SEC barred Reinhard from being affiliated with an investment adviser. “We allege that Cambridge, Howard and Reinhard defrauded these particularly vulnerable investors, many of whom invested their retirement savings,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Instead of investing all of the funds’ assets as promised, Howard and Reinhard used a significant portion of investor money to line their own pockets.” The SEC’s complaint filed in federal district court in the Northern District of Florida charges Howard, Reinhard, and Cambridge with violating the anti-fraud provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of allegedly ill-gotten gains, prejudgment interest, and financial penalties.

Unscrupulous bookkeepers or other employees have great potential to embezzle money using forged or other types of bogus checks.  In such instances, Article 4 of New York’s Uniform Commercial Code (“Bank Deposits and Collections”) is implicated.  “Articles 3 and 4 of the UCC envisions a series of shifting burdens of risk with respect to forged checks.”  Putnam Rolling Ladder Co. v. Manufacturers Hanover Trust Co. , 74 N.Y.2d 340, 345 (1989).  Under Article 3 of the UCC, a check containing a forged signature is “wholly inoperative as that of the person whose name is signed.” New York UCC 3-404 (1). According to New York’s UCC, the bank’s liability is not without bounds, for: The UCC, however, imposes certain reciprocal duties on the customer. Failure to comply with those duties shifts the burden of loss from bank to customer. UCC 4-406 imposes upon a customer the duty to inspect its statement and canceled checks with reasonable care and promptness. Failure to do so results in preclusion of any claim against the bank for repeated forgeries by the same wrongdoer after the first such forged check and statement reflecting it are made available to the customer.  This rule reflects the fact that the customer is generally in a better position than the bank to prevent repetition of forgery. A skillful forgery may not be detected by even a careful bank inspector, but the customer to whom the canceled check and statement are returned should know whether or not it actually intended to authorize payment of its funds to the named payee ( see , UCC 4-406, comment 3). Thus, the shifting burden of loss is intended as well to encourage the parties to use reasonable care in situations where, from a systemic point of view, that is the efficient loss-avoidance mechanism. Finally, UCC 4-406 (3) shifts the loss of even repeated forgeries back to the bank when the customer, although in breach of its own duty to inspect its canceled checks and statements, is able to establish that the bank lacked ordinary care in paying the forged checks…. By reallocating the burden of loss to the bank the Code thus encourages proper business practices on the part of banks as well as their customers. Putnam , 74 N.Y.2d at 345 - 46 (footnote omitted). In Putnam , the defendant bank paid 37 checks written by Putnam’s bookkeeper containing forged signatures of Putnam’s officers. Ultimately, the Putnam Court found that because “plaintiff adduced sufficient evidence of the bank’s lack of ordinary care in paying the 37 forged checks (thereby avoiding preclusion under UCC 4-406 <2> for its own negligence), and the bank offered no evidence whatever of general rules or usage, judgment should have been awarded to plaintiff in the undisputed amount of its loss. The Appellate Division, Second Department addressed these issues in Redgrave Electrical Maintenance, Inc. v. Capital One, N.A. , 161 A.D.3d 801 (2018).  Plaintiff’s bookkeeper in Redgrave , forged 20 checks over a six-month period that were honored by defendant bank.  The Second Department affirmed supreme court’s denial of bank’s motion for summary judgment seeking to dismiss plaintiff’s causes of action for negligence and negligent misappropriation in its payment of the forged checks.  In its decision the Redgrave Court followed the Court of Appeals’ blame shifting analysis in Putnam .  Among other things, the Redgrave Court recognized that “the loss of repeated forgeries may be shifted back to the bank in the circumstance where the bank failed to use ordinary care in paying forged checks.”  Redgrave , 161 A.D.3d at 802 (citations omitted).  As to what constitutes “ordinary care,” the Redgrave Court stated: With regard to the issue of ordinary care, UCC 4–103 (3) provides that “in the absence of special instructions, action or nonaction consistent with clearing house rules and the like or with a general banking usage not disapproved by this Article, prima facie constitutes the exercise of ordinary care.” Thus, under this “safe harbor” provision, a bank can ensure that its conduct at least prima facie meets an ordinary care standard, by showing that it acted in accordance with general banking rules or practices ( see UCC 4–103<3> ). However, it is the bank, as the party that benefits from the “safe harbor” provision, that bears the burden of proving general clearing house rules or general banking usage in order to establish ordinary care. Redgrave , 161 A.D.3d at 802 (some citations omitted).  While the Redgrave Court found that the bank established that Redgrave “failed to exercise reasonable care and promptness to examine its bank statements and to timely notify the bank of the checks allegedly forged by ,” it “did not meet its burden of showing that it acted in accordance with general banking rules or general clearing house rules, and, therefore, it failed to demonstrate prima facie that it exercised ordinary care in paying the forged checks.”  Redgrave , 161 A.D.3d at 802 – 803 (citations omitted). On September 3, 2019, the Appellate Division, First Department, decided Weiser v. Citigroup, Inc. , in which plaintiffs alleged that “their long-time bookkeeper … perpetrated a fraud against them over a period of seven years, presenting checks drawn on their checking account with Citibank to plaintiff Dr. Weiser for signature, representing that the checks were for payment of business expenses, and later altering the checks to add her own personal credit card account number, and using the checks to pay her own credit card bills.”  Among other things, the First Department affirmed the dismissal of certain claims against Citibank because they were “barred by plaintiffs’ failure to satisfy a condition precedent to suit created by UCC 4-406(4) and Citibank’s checking account rules and regulations as set forth in its CitiBusiness Client Manual” under both of which discrepancies had to be timely reported. Further, in rejecting Plaintiffs’ contention that Citibank’s knowledge of the bookkeeper’s fraud should act as an estoppel to its raising UCC 4-406 as a bar to plaintiffs’ suit, “the record demonstrate that, far from concealing the fraud, Citibank gave plaintiffs all the documentation they needed to discover it.”  In that regard, the Court found that the account statements and cancelled checks forwarded by Citibank to plaintiffs were sufficient for that purpose.  Indeed, the cancelled checks “showed personal credit card number written on the ‘re:’ line.”

The title of this post captures the recent observation of Justice Joel M. Cohen of the Supreme Court, New York County, Commercial Division. In , 2019 N.Y. Slip Op. 32487(U) (Sup. Ct., N.Y. County Aug. 22, 2019) (here), Justice Cohen stated the following: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement. This is not one of those cases.” Slip Op. at *1, citing , 559 U.S. 662 (2010). Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. In recent years, arbitration has increased in popularity and is part of most business and commercial contracts and employment agreements. This increase in popularity reflects the federal and state policy that arbitration is a favored means of resolving disputes. , , , 460 U.S. 1, 24 (1983) (stating that the FAA evinces a “liberal federal policy favoring arbitration”); , 138 S. Ct. 1612, 1621 (2018); , 82 A.D. 2d 87, 91-93 (1st Dept.), , 56 N.Y.2d 627 (1981) (“ his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties. . . .”). In 1925, Congress enacted the United States Arbitration Act, now known as the Federal Arbitration Act (“FAA”), for the express purpose of making “valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations.” Its primary purpose is to ensure that “private agreements to arbitrate are enforced according to their terms.” , 489 U.S. 468, 479 (1989). Whether enforcing an agreement to arbitrate or construing an arbitration clause, courts and arbitrators must “give effect to the contractual rights and expectations of the parties.” , 489 U.S. at 479. “ s with any other contract, the parties’ intentions control.” , 473 U.S. 614, 626 (1985). This is because an arbitrator derives his/her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution. , 475 U.S. 643, 648-649 (1986). Underscoring the consensual nature of private dispute resolution, parties are “generally free to structure their arbitration agreements as they see fit.” , 475 U.S. at 648-649. And, they may specify with whom they choose to arbitrate their disputes. , , 460 U.S. at 20. It therefore falls to courts and arbitrators to give effect to contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties. , 489 U.S. at 479. The Court’s role in reviewing an arbitration award is limited. An arbitration award will be upheld even when the award does not conform to a court’s sense of justice so long as the arbitrator “offer even a barely colorable justification for the outcome reached.” , 6 N.Y.3d at 479-80 (internal quotations omitted). Thus, an arbitral award will not be subject to vacatur for ordinary errors, even if an arbitrator’s legal and procedural rulings might reasonably be criticized on the merits. As the United States Supreme Court observed: “The potential for . . . mistakes is the price for agreeing to arbitration.” , 569 U.S. 564, 572-573 (2013). , 169 N.Y. 494, 497 (1902) (noting that “however disappointing may be,” parties that have bargained for arbitration “must abide by it”). Under Section 10(a) of the FAA, a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. , 333 F.3d 383, 388 (2d Cir. 2003); , 306 F.3d 1214, 1216 (2d Cir. 2002) (citing , 121 F.3d 818, 821 (2d Cir 1997)). Importantly, the doctrine does not apply to the facts. , 6 N.Y.3d at 483. Application of the doctrine is limited. , 867 F.2d 130, 133 (2d Cir. 1989). It is a doctrine of last resort. , 333 F.3d at 389. It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. . Thus, to modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. , 378 F3d 182, 189 (2d Cir. 2004) (quoting , 344 F.3d 255, 263 (2d Cir 2003)). also , 6 N.Y.3d at 480-481 (footnotes omitted). The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” , 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010). In 2008, the United States Supreme Court addressed the doctrine. In , 552 U.S. 576, 584–85 (2008), the Court held that the grounds for judicial review of an arbitral award under Sections 10 and 11 of the FAA are exclusive but declined to state how its ruling affected the continued viability of the manifest disregard doctrine. In recognizing the potential implications of its ruling for the doctrine, the Court expressed doubt as to whether “the term ‘manifest disregard’ was meant to name a new ground for review, it merely referred to the § 10 grounds collectively, rather than adding to them.” . at 585. Alternatively, the Court recognized that “as some courts have thought, ‘manifest disregard’ may have been shorthand for § 10(a)(3) or § 10(a)(4), the paragraphs authorizing vacatur when the arbitrators were ‘guilty of misconduct’ or ‘exceeded their powers.’” . Following , the Circuit Courts of Appeal have split over whether the doctrine remains viable. On one side of the split are the Seventh, Eighth, and Eleventh Circuits, which have determined that the doctrine is no longer a valid basis for vacatur ( , , 660 F.3d 281, 284–85 (7th Cir. 2011); , 614 F.3d 485, 489 (8th Cir. 2010); , 604 F.3d 1313, 1323–24 (11th Cir. 2010)), while on the other side are the Second, Fourth, Sixth, and Ninth Circuits, which have held that arbitrators who manifestly disregard the law have “exceeded their powers” under Section 10(a)(4) of the FAA. , , , 551 F. App’x 814, 819 n.1 (6th Cir. 2014); , 671 F.3d 472, 480 (4th Cir. 2012); , 553 F.3d 1277, 1290 (9th Cir. 2009); , 548 F.3d 85, 95 (2d Cir. 2008), , 559 U.S. 662 (2010). In the , vacatur was sought on two grounds: evident partiality in the arbitrators and arbitrator misconduct in refusing to postpone the hearing. Sections 10(a)(2) and (3). An arbitration award may be vacated “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(2). “To vacate an award because of evident partiality under the FAA (9 U.S.C. § 10(a)(2)), the movant bears the burden of showing that a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one party to the arbitration .... Although this requires ‘something more than the mere appearance of bias,’ ‘ roof of actual bias is not required.’ Rather, a finding of partiality can be inferred ‘from objective facts inconsistent with impartiality.’” , 153 A.D.3d 140, 150-51 (1st Dept. 2017). Speculation, however, will not suffice to show evident partiality. , 57 Misc. 3d 391, 401 (Sup. Ct., Albany County 2017) (citation omitted). An arbitral award may be vacated the ground that the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Courts have interpreted this section to mean that the arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” , 120 F.3d 16, 20 (2d Cir. 1997). An arbitral award may be vacated where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). The inquiry is whether the arbitrators had the authority under the parties’ agreement to consider an issue, not whether they correctly decided the issue. , 2005 WL 857352, at **4-5 (S.D.N.Y. Apr. 12, 2005). Section 10(a)(4) imposes a heavy burden on the movant. Thus, “ t is not enough ... to show that the committed an error – or even a serious error.… he sole question … is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” , 569 U.S. at 569-571. TCR Sports Broadcasting Holding, LLP v. WN Partner LLC The case involved a dispute between the Washington Nationals Baseball Club (the “Nationals”) and the Baltimore Orioles Baseball Club (the “Orioles”) and related entities regarding the division of television revenues and profits through their jointly owned television network MASN. As required by their contract, the teams submitted the dispute for resolution by Major League Baseball’s Revenue Sharing Definitions Committee (“RSDC”) in January 2012. The RSDC issued its decision two years later. It was promptly challenged in court by the Orioles. After three years of litigation, the arbitration award was vacated on the ground that the law firm representing the Nationals concurrently represented Major League Baseball (“MLB”) and the three arbitrators’ teams in other matters, resulting in “evident partiality.” A second arbitration was conducted with a different RSDC panel. That panel rendered an award that was nearly identical in dollar terms to the first one five years earlier. The Nationals moved to confirm the award. In response, the Orioles moved to vacate the award on the ground of MLB and RSDC bias and remand for a third arbitration before a non-MLB arbitration panel. The Court granted the Nationals’ motion, confirmed the RSDC’s award, and terminated the proceeding. In 2005, the Montreal Expos (then owned by MLB) were relocated to Washington, D.C. and renamed the Nationals. The move aggrieved the Orioles, whose fan base and exclusive television viewing rights extended to Washington D.C. and its surrounding area. To address the Orioles’ concerns, MLB, the Orioles, and the Nationals entered into an agreement dated March 28, 2005 (“2005 Agreement”). Pursuant to the 2005 Agreement, the parties agreed that a jointly-owned regional sports network (MidAtlantic Sports Network or “MASN”) would have exclusive broadcast rights to all available Orioles and Nationals games to viewers in Maryland, Virginia, Delaware and the District of Columbia, and certain counties in West Virginia, Central Pennsylvania and Eastern North Carolina. The agreement gave the Orioles supermajority ownership and management control of MASN. The Nationals received a minority equity stake in MASN, starting at 10% and growing by 1 % per year after 2010 to a maximum of 33%. The 2005 Agreement provided a fixed schedule of annual fees that MASN would pay the Nationals from 2005 through 2011 for the right to broadcast Nationals games. Beginning with the 2012 season, MASN had to pay rights fees to the Nationals at “fair market value,” to be determined for each five-year period beginning with 2012-2016. The 2005 Agreement provided for a three-step mechanism to resolve disputes between the Nationals and MASN over the fair market value of the rights fees: first negotiation, then mediation, and finally arbitration before the RSDC, which is a standing committee composed of MLB club owners and executives that regularly determines the market value of broadcast rights fees for purposes of MLB’s revenue-sharing plan. In determining the fair market value of the Nationals’ rights fees, the RSDC is to apply “the RSDC’s established methodology for evaluating all other related party telecast agreements in the industry.” The parties were unable to agree upon a fair market value for the Nationals’ telecast rights for the years 2012-2016. They jointly waived the mediation portion of the dispute resolution process and proceeded directly to arbitration before the RSDC in January 2012. At the time, the RSDC was made up of executives of the Tampa Bay Rays, Pittsburgh Pirates, and New York Mets. The Nationals were represented in the proceedings by Proskauer Rose LLP (“Proskauer”). Concurrently, Proskauer represented MLB and the RSDC arbitrators’ teams (and other teams) in unrelated matters. The Orioles complained about the perceived partiality, “to no avail.” Slip Op. at *5. In the arbitration, the Orioles asserted that the average annual fair market value of the Nationals’ broadcast rights for 2012-2016 was “roughly $34 million.” The Nationals asserted that the annual average was “roughly $109 million.” The RSDC decided that neither approach was appropriate and opted instead to apply its established methodology. The RSDC reached a decision in mid-2012 but withheld issuing the final award while the parties engaged in settlement discussions, which proved unsuccessful. To facilitate settlement discussions, MLB and the Nationals entered into an agreement whereby MLB would advance the Nationals approximately $25 million as “make whole” payments with respect to 2012 and 2013 rights fees, to be repaid from the anticipated RSDC award or a potential sale of MASN to Comcast. In the end, the RSDC determined that each side had overstated its position. Its final award, issued on June 30, 2014, valued the Nationals’ rights at an average of approximately $59.6 million per year over the 2012-2016 period (the “First Award”). On July 2, 2014, MASN and the Orioles moved for an order pursuant to CPLR § 7511 and Section 10 of the FAA to vacate the First Award. The Court rejected most of the grounds raised by the Orioles. The Court found that: (i) the RSDC’s explanation for applying its methodology in valuing the Nationals’ broadcast rights more than sufficed to uphold the result on its merits; (ii) MLB did not improperly control or influence the arbitration process or usurp the RSDC’s decision making role; and (iii) MLB’s $25 million loan to the Nationals did not give it an improper financial stake in the outcome of the arbitration or otherwise indicate it was biased in favor of the Nationals. However, the Court found that the First Award should be vacated because Proskauer’s concurrent representation of the Nationals, MLB, and the arbitrators’ teams created “evident partiality.” On appeal, the First Department unanimously affirmed the Court’s decision that the First Award should be vacated. The Court did not address whether the Orioles’ other asserted grounds for relief warranted vacating the award. The Court splintered on other issues in which the justices issued their own decisions. The Nationals were represented in the second arbitration by different counsel and the RSDC panel was made up of executives of three different teams (the Milwaukee Brewers, Seattle Mariners, and Toronto Blue Jays). On February 9, 2018, prior to the commencement of the arbitration, MLB and the Nationals reached an agreement under which the Nationals agreed to repay in full (with interest) the $25 million advance that MLB had provided to the Nationals in connection with the first arbitration (the “Loan Prepayment Agreement”). The agreement provided that the lump sum payment would be made no less than ten business days before the RSDC commenced a hearing and would be held in escrow until commencement of the hearing. The Loan Prepayment Agreement further provided that if the arbitration hearing did not commence within 14 days of its scheduled commencement, the lump sum payment would be returned to the Nationals. The agreement did not by its terms amend the original loan agreement between MLB and the Nationals or otherwise provide that the return of the lump sum payment, if it occurred, would relieve the Nationals of its obligation to repay the loan per its original terms. The RSDC issued its written decision (the “Second Award”) on April 15, 2019. The RSDC determined that the “fair market value” of the telecast rights was approximately $59.4 million. The Orioles claimed that the similarity between Second Award (average of $59.4 million) and the First Award ($59.6 million) was evidence that the second arbitration was infected by the same “evident partiality” as the first. Slip Op. at *11. On April 15, 2019, the same day the Second Award was issued, the Nationals moved to confirm the arbitration award. The Orioles opposed the motion and asked the Court to vacate the Second Award and remand the parties for a third arbitration in a non-MLB forum. The Orioles advanced five arguments in support of vacatur: (i) the Loan Prepayment Agreement, which they maintained was secret, improperly gave MLB a financial stake in the arbitration, created “evident partiality” and rendered the arbitration fundamentally unfair; (ii) the RSDC acted with evident partiality by failing to disclose MLB’s role in the arbitration or RSDC’s communications with MLB; (iii) MLB and the RSDC denied them the right to present their case by refusing to disclose post-2005 Agreement communications but then relying on such communications in the award, and by refusing to disclose all of their evaluations of related-party telecast agreements for the 2012-2016 period; and (iv) the RSDC exceeded its powers under the 2005 Agreement by failing to properly follow Maryland law with respect to the interpretation of a contract. The Court rejected the notion that the agreement was secret or somehow concealed from the Orioles: “The Orioles were told about the Loan Prepayment Agreement one month after it was signed, and eight months before the arbitration hearing took place.” Slip Op. at *16. Such notice, observed the Court, was far different than the situation with Proskauer, where “the full extent of Proskauer’s conflicting relationships in the first arbitration did not come to light until discovery took place on the motion to vacate the First Award.” . More importantly, noted the Court, “the Loan Prepayment Agreement … alleviated the substantive concerns expressed by the Orioles in connection with the First Award – , that the loan purportedly gave MLB a financial stake in the outcome of the arbitration.” . Indeed, explained the Court, “ nder the agreement, MLB would be fully repaid before the second arbitration, removing any lingering concerns that MLB might have a financial interest in the outcome.” . Finally, the Court found that the Loan Prepayment Agreement did not create a conflict of interest because of the “threatened financial forfeiture” resulting from the scheduling of the arbitration. . at *18. “Even if the agreement led to a precipitous scheduling of the arbitration, which it clearly did not (indeed it was delayed for months at the Orioles’ request and over the Nationals’ objection, without triggering the prepayment provision),” said the Court, “there is nothing in the Loan Prepayment Agreement to suggest that MLB could “lose $25 million” if the RSDC decided to recuse itself from the arbitration.” . “At most,” explained the Court, “MLB would lose the benefit of receiving a lump sum payment rather than being repaid under the original terms of the loan.” . Moreover, noted the Court, “the impact of any such loss on the RSDC members, who represent only three of thirty MLB teams, is highly diluted.” . The Court found persuasive the Nationals’ argument that there was a legitimate business reason for providing that the lump sum payment would have to be returned if the RSDC hearing was delayed substantially: “Without some right to recall the cash in the event of a substantial delay in commencing the scheduled arbitration, the Nationals would be out of pocket the entire amount of the repayment for an indefinite period of time.” . “Such an arrangement,” reasoned the Court, “would have undermined the very purpose of the loan, which was to facilitate negotiations by advancing funds to tide the Nationals over while the dispute was resolved.” . The Orioles claimed that there was evident partiality because the RSDC “fail to disclose either MLB’s role in the second arbitration or MLB’s communications with the RSDC about the arbitration’s subject matter, which it claimed would show that MLB “has clearly and publicly prejudged the merits of this dispute.” The Court rejected this argument: “The 2005 Agreement expressly mandates that disputes regarding telecast rights would be resolved by the RSDC, which all parties understood is composed of MLB-chosen executives from other MLB teams …. MLB’s role should not have been a surprise in the first arbitration and certainly was not in the second one.” . at *19. The Court rejected the Orioles’ argument that public statements made by MLB during the arbitration showed evident partiality, corruption, or fundamental unfairness that would require vacating the RSDC’s award. The Court held that “although it would certainly be prudent for MLB to be more circumspect in commenting on pending disputes that are the subject of MLB sponsored arbitration, the stray public statements referenced by the Orioles are not sufficient to meet the Orioles’ heavy burden of showing evident partiality ….” . at *21. The Court explained that the “RSDC made the final decisions, with the assistance of experienced counsel and based on an exhaustive analysis of an extensive record. The Court does not believe that public statements such as those referenced by the Orioles are sufficient to throw into doubt the fairness of a process that was handled and resolved by the RSDC with obvious thoroughness and care.” . The Court found that the Orioles were not denied the opportunity to present its case. The Court explained that the real objection pertained to the RSDC’s alleged failure to permit more discovery into certain issues during the course of the arbitration. . at *22. That objection was without foundation in the 2005 Agreement: he 2005 Agreement did not provide a right to any discovery in a dispute regarding rights fees. If the parties wanted to provide for civil litigation-type discovery in connection with such disputes, they could have done so in the agreement. They did not. The record shows that the RSDC considered the Orioles’ various discovery requests and rejected them in a formal, reasoned order on the ground that they did not relate to the merits of the dispute, but instead they were intended to explore the impartiality of the RSDC. . at *23. The Court concluded that “ he record not reveal any legitimate concern that the panel intentionally hobbled or interfered with the Orioles’ ability to vigorously present or state its case, which it most certainly did.” . Finally, the Court rejected the Orioles’ argument that “the RSDC exceeded its powers by failing to correctly apply Maryland law in assessing the parties’ respective positions under the contract.” . Finding that the argument was “meritless”, the Court explained that “the RSDC obviously had the authority to consider the interpretation of relevant language in the agreement and the application of the facts to that language.” . To the extent the argument was a disguised challenge to the award on manifest disregard grounds, the Court held that “ he Orioles’ arguments with respect to the RSDC’s misapplication of Maryland law do not come close to the required showing that the RSDC exceeded its powers or showed manifest disregard for the law.” . at *24. Takeaway As Justice Cohen observed: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement.” Slip Op. at *1 (citation omitted). Sometimes, the stakes are so high that it is difficult to achieve the efficiencies and benefits of arbitration. is a good example of this phenomenon.  Given the past intensity with which the parties have arbitrated and litigated their dispute, this Blog would not be surprised if the Court’s decision is appealed. We will continue to watch the docket for any updates.

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s). Dissolution Under the BCL Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv. dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming , 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104: (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. BCL § l 104(a). Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution. BCL § 1111(a); Matter of Kemp & Beatley , 64 N.Y.2d 63, 73 (1984). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. 2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). “In determining what is beneficial to the stockholders, the court must take into consideration the type of corporation dealing with in case.” Matter of Pivot v. Punch & Die Corp. , 15 Misc. 2d 713, 715 (Sup. Ct., Erie County 1959). Courts recognize that “in the case of a close corporation, the relationship between the shareholders is akin to that of partners.” Greer v. Greer , 124 A.D.2d 707, 708 (2d Dept. 1986). When the relationship deteriorates and “the record demonstrates sufficient differences and animosity between the shareholders,” dissolution is often granted. Patti v. Fusco , 809 N.Y.S.2d 482 (Sup. Ct., Nassau County 2005). Notably, dissolution should not be denied because the corporation has been conducted at a profit ( see BCL § 1111(b)(3)) or because the dissension has not impacted the profitability of the corporation. The cases make clear that profitability is simply not the issue. E.g. , Application of Bankhalter , 128 N.Y.S.2d 81, 83 (Sup. Ct., N.Y. County 1953). Moreover, “ n determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists.” Matter of Kaufmann , 225 A.D.2d 775 (2d Dept. 1996). “ he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman v. Lovett , 200 A.D.2d 670, 670-71 (2d Dept. 1994). In the Matter of Cellino v. Cellino & Barnes, P.C. , 2019 N.Y. Slip Op. 06365 (4th Dept. Aug. 22, 2019) ( here ), the Court addressed the question of the corporation’s profitability and its impact, if any, on the decision whether to grant dissolution. In doing so, the Court held that “dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit ( see § 1111 <3> ) or because the dissension has not yet had an appreciable impact on the profitability of the corporation ( see Molod v Berkowitz , 233 AD2d 149, 150 <1st dept 1996> , lv dismissed 89 NY2d 1029 <1997> ).” Slip Op. at *2. Matter of Cellino v. Cellino & Barnes, P.C. Background Cellino & Barnes, P.C. (the “PC”) was for formed in 1998 by Petitioner, Ross Cellino (“Cellino”), and Respondent, Stephen Barnes (“Barnes”). The PC began as a regional law firm with offices in Buffalo and Rochester, New York. In 2008, the PC expanded into the downstate market. In 2013, Barnes approached Cellino about opening an office in California. Cellino declined but, according to Cellino, by that time Barnes and the chief operating officer (“COO”) of the PC had already made preparations to open an office in Los Angeles. Barnes thereafter formed Cellino & Barnes, L.C. (the “LC”), a California corporation that was separate from the PC and in which Barnes had a 99.9% interest. Cellino became a minority owner with a .1% ownership in the LC. In 2017, Cellino filed an initial petition for dissolution of the PC and also withdrew from and divested himself of his interest in the LC. Petitioner subsequently filed an amended petition for dissolution, pursuant to BCL § 1104 (a) (1) and (3), alleging, among other things, that there had been a breakdown in communication between himself and Barnes with respect to the management and direction of the PC. In particular, Cellino alleged that Barnes had favored the LC to the detriment of the PC by allowing the LC to utilize the PC’s computer network, telephone number, and employees without adequate compensation. Cellino further alleged, inter alia , that Barnes had directed to the LC mass tort cases solicited by the PC in the Northeast; paid a bonus to the PC’s COO from the PC’s account for work that the COO did on behalf of the LC; refused Petitioner’s request to terminate the COO as a PC employee and hire him as an LC employee; and rejected Petitioner’s request to restrict the COO’s access to the PC’s bank account. Respondents moved, inter alia , for summary judgment dismissing the amended petition, and Petitioner cross-moved for the appointment of a temporary receiver pursuant to BCL § 1202(a)(1). The supreme court granted in part Petitioner’s cross-motion for the appointment of a temporary receiver and denied Respondents’ motion insofar as it sought summary judgment dismissing the amended petition. The Appellate Division, Fourth Department, affirmed both orders. The Court’s Decision Respondents argued that the supreme court erred in denying their motion insofar as it sought dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC had continued to function effectively and prosperously. The Court rejected the argument, holding that corporate profitability is not the proper focus; rather, it is “the benefit to the shareholders of a dissolution” that “is of paramount importance” in making the determination. BCL § 1111(b)(2). Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit or because the dissension has not yet had an appreciable impact on the profitability of the corporation. Slip Op. at *2 (citations omitted). The Court explained that “the record contain ample evidence of dissension and deadlock between petitioner and Barnes,” sufficient to raise “issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders.” Id . To underscore the point, the Court noted that the proper focus should be on the relationship of the shareholders. Id . In a close corporation like the PC, “the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation ( Greer v Greer , 124 AD2d 707, 708 <2d dept 1986> , appeal dismissed 69 NY2d 947 <1987> ). When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders ( see Matter of Gordon & Weiss , 32 AD2d 279, 281 <1st dept 1969> ).… Id . Accordingly, the Court affirmed the denial of summary judgment, holding “that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.” Id . (citations omitted). Addressing the appointment of a temporary receiver, the Court affirmed the supreme court’s decision, holding that the court “did not abuse its discretion in appointing a temporary receiver … for the limited purposes of ‘oversee the separation of the LC and the PC; . . . assess the appropriate amounts due and owing from the LC to the PC, if any; and . . . oversee the separation of clients between the two entities.’” Id ., citing Greer , 124 A.D.2d at 708; Nelson v. Nelson , 99 A.D.2d 917, 918 (3d Dept. 1984). The Court found that the supreme court properly exercised discretion “to ‘make all such orders as it may deem proper in connection with preserving the property and carrying on the business of the corporation, including the appointment . . . of a receiver under article 12 (Receivership).’” Id. , quoting BCL § 1113. See also BCL § 1202(a)(1). In particular, the Court noted that Petitioner adequately supported his application by demonstrating “the entanglement of the PC and the LC” and the “danger of irreparable loss” for which a receivership was “necessary for the protection of the interests of the parties.” Id . Specifically, the affidavits of petitioner, a licensed certified public accountant (CPA) and certified valuation analyst retained by petitioner, a former CPA for the PC, and an office manager for the PC supported petitioner’s allegations of economic improprieties in the form of inadequate reimbursement by the LC to the PC for cross-charges. Those affidavits also raised issues of fact whether the LC was taking mass tort cases that otherwise would have been handled by the PC and whether it was using web addresses owned by the PC to redirect clients to the LC’s new website. Inasmuch as it likely will be difficult to quantify what, if any, economic harm the PC has suffered as a result of clients being shepherded from the PC to the LC and inasmuch as respondents have refused to allow petitioner’s CPA to speak with the COO of the PC, we conclude that the court did not abuse its discretion in appointing a temporary receiver to determine what if any amount the LC owes the PC, rather than ordering an accounting. Id . (citation omitted). Takeaway Cellino addresses the question whether past and/or current profitability means that the corporation can continue to function effectively and prosperously. Though not articulated explicitly, the Fourth Department answered the question that it does not. As noted, the key question is whether the dissention or deadlock impedes the daily functioning of the corporation. This makes sense given the determination is based on the continued functioning of the corporation. Thus, as in Cellino , the courts examine whether the deadlock or dissention will, on a going forward basis, “preclude the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman , 200 A.D.2d at 670-71. If it does, then dissolution is appropriate, regardless of past and/or current profitability.

As readers of this Blog know, pleading and proving fraud is not easy. The law reporters (not to mention the pages of this Blog) are brimming with cases in which the courts have dismissed fraud actions due to pleading and proof deficiencies. Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 32470(U) (Sup. Ct., N.Y. County Aug. 20, 2019) ( here ), is a recent example of this phenomenon. In Norddeutsche , Plaintiffs contended that they were defrauded into investing in two high-risk private equity funds that Defendants claimed were relatively safe “collateralized loan obligation” funds. Defendants moved for summary judgment on the grounds that: Plaintiffs’ claims were time-barred; Plaintiffs did not rely on Defendants’ representations (which, Defendants claimed were, in any event, truthful); Plaintiffs caused their own losses by selling the notes prematurely; and Plaintiffs’ claims were precluded by a judgment rejecting a nearly identical claim brought by the Securities Exchange Commission (“SEC”). As discussed below, the Court denied the motion, finding that there were disputed issues of fact that were material to Plaintiffs’ claims. A Fraud Refresher Fraud and the Statute of Limitations In New York, an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). The defendant ( i.e. , the party most frequently making the motion) has the initial burden of establishing “that the time in which to commence the action has expired.” Zaborowski v. Local 74, Serv. Empls. Intl. Union, AFL-CIO , 91 A.D.3d 768, 768 (2d Dept. 2012). If the defendant meets that burden, the burden then shifts to the plaintiff to “aver evidentiary facts establishing that the action was timely or to raise a question of fact as to whether the action was timely.” Lessoff v. 26 Ct. St. Assoc., LLC , 58 A.D.3d 610, 611 (2d Dept. 2009). Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “ he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis , 44 A.D.3d 1033, 1034 (2d Dept. 2007); Lefkowitz v. Appelbaum , 258 A.D.2d 563 (2d Dept. 1999) (“The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.”). Accord Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman , 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). Justifiable Reliance In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). Causation There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Transaction Causation “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir. 1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss Causation The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact-intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Norddeutsche Landesbank Girozentrale v. Tilton Background The action arose in 2005 with the investment by Norddeutsche Landesbank Girozentrale, a German financial institution, and Hannover Funding Company, a Delaware LLC and a commercial paper conduit administered by Norddeutsche (together “Plaintiffs”), in one of the two funds managed by Defendant Patriarch Partners (“Patriarch”). The funds at issue, Zohar II and Zohar III (the “Funds”), were created in January 2005 and April 2007, and had maturity dates of January 20, 2017, and April 15, 2019, respectively. Zohar II and Zohar III each issued over $1 billion in notes that were rated at issuance either AAA/Aaa or AA/Aal by S&P and Moody’s, respectively (the “Notes”). Before purchasing the Notes, Plaintiffs received transaction documents, marketing materials, indentures, and collateral management agreements relating to each fund, as well as an offering memorandum for the Zohar III Fund. In January 2005, Plaintiffs purchased $75 million of Notes in Zohar II. In April 2007, Plaintiffs purchased $60 million of Notes in Zohar III. The Zohar II Notes were “wrapped” by insurance from MBIA Insurance Corp. (“MBIA”). MBIA guaranteed full repayment of the Notes upon maturity if the Funds could not afford to do so. The Funds performed poorly. Plaintiffs claimed that Defendants withheld fund performance and related information from them by furnishing fraudulent reports that concealed the actual performance of the underlying loans in the Funds. Plaintiffs sold their Notes for a loss of approximately $45 million in April 2012, before the maturity date of either fund. Plaintiffs claimed that they sold the Notes due to their poor performance, multiple ratings downgrades (of which they were aware), and the increasing capital requirements generated by the investment. Defendants claimed that Plaintiffs sold the Notes for independent business reasons. Plaintiffs also alleged that instead of running the Funds as represented, Defendants Lynn Tilton (“Tilton”) and Patriarch ran the Funds as private equity funds. Plaintiffs maintained that Defendants used the money from the Funds to purchase equity in distressed assets, contrary to Defendants’ representations. Plaintiffs further alleged that Defendants collected management fees, dividends, preferred share buyouts, and income distributions from the companies that were owed to the Funds. Additionally, Plaintiffs alleged they were told that Tilton and the Patriarch entities were supposed to pay for and own the underlying equity in the portfolio companies, while the Funds would make loans to the companies. Plaintiffs alleged that they understood the Funds would be entitled to an equity kicker in some cases (to participate in the upside if Defendants were successful in turning the companies around) but would not be exposed to the downside risk of holding equity positions. On March 31, 2015, the SEC issued an order commencing an administrative proceeding against Defendants. According to Plaintiffs, the SEC investigation uncovered fraudulent behavior by Defendants, including that Defendants used the Funds to obtain control over portfolio companies, and that Defendants concealed their fraudulent behavior from investors such as Plaintiffs. The administrative proceeding was ultimately dismissed in September 2017 (the “SEC Decision”). Defendants moved for summary judgment on four grounds: 1) Plaintiffs’ claims were time-barred; 2) Plaintiffs did not justifiably rely on any alleged misrepresentation by Defendants; 3) Plaintiffs could not prove loss causation; and 4) the SEC Decision collaterally estopped Plaintiffs’ claims. The Court denied the motion in its entirety. The Court’s Decision Statute of Limitations Defendants argued that Plaintiffs were aware of the truth about the structure of the funds from the marketing materials distributed to them in 2004 and 2006. In particular, Defendants maintained that statements in these materials ( e.g. , the “equity upside” and “equity participation” of the Funds) sufficed to inform Plaintiffs that the Funds would hold equity and thus be at risk of suffering a loss. As such, Defendants contended that the claims were time-barred because Plaintiffs knew or should have known of the alleged fraud before 2005 and 2007, when they made their investments in the respective Funds. The Court rejected this argument. The Court found that Defendants failed to “put forward incontrovertible evidence that the marketing materials and disclosures presented to Plaintiffs were sufficient to inform Plaintiffs of the alleged fraud.” Slip Op. at *6.  The Court explained that Defendants’ evidence could be interpreted in myriad ways and, therefore, did not disprove Plaintiff’s position that having some knowledge that the Funds had an equity component to them did not put them on notice of the alleged fraud prior to the SEC proceeding. Id. , citing Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 161-162 (1st Dept. 2017). The Court also found that there were issues of fact as to whether Plaintiffs should have discovered the alleged fraud in 2012 when the SEC began its investigation into Defendants and/or through investor calls held in December 2011. Id . at *7. Justifiable Reliance Defendants argued that they made robust disclosures about the strategy of the Funds and that as sophisticated investors, Plaintiffs could have and should have done more to learn how the Funds operated. Thus, Defendants claimed, Plaintiffs could not have justifiably relied on the alleged fraudulent statements to induce them into investing in the Funds. Id . at *8. The Court rejected Defendants’ argument. The Court held that Defendants did not conclusively show that Plaintiffs failed to make use of the means of verification that were available to them or did not put forth evidence showing conclusively that Plaintiffs failed to make any effort to verify the representations. Id . Loss Causation Defendants claimed that Plaintiffs could not prove that their losses were proximately caused by Defendants’ alleged misrepresentations and omissions. According to Defendants, Plaintiffs conceded during discovery that there was an independent reason for their losses – namely, the “heavy capital usage” imposed by the investment. Id . at *9. The Court rejected this contention: A finder of fact could determine that the decision to sell was causally linked to the alleged fraud, which Plaintiff contends led it to assume a certain level of performance, credit rating, and capital requirements, which in tum impacted whether to hold or sell the notes. A finder of fact could also reasonably conclude that had Plaintiffs known about the actual Fund structure, they would never have entered into the transaction in the first place. While Mr. Weber’s testimony might be fodder for cross-examination, it is insufficient to establish a loss causation defense as a matter of law. Id . The Court also rejected Defendants’ contention that Plaintiffs could not demonstrate loss causation because the funds were insured by MBIA and Plaintiffs would have recovered their investment had they held the notes to maturity. Id . The Court explained that “a finder of fact could determine that Plaintiffs made their decisions based on facts traceable to the alleged fraud and in part on concerns about MBIA’s financial condition.” Id . at *10. “Defendants’ reasoning,” said the Court, “would preclude a finding of loss causation with respect to the sale of virtually any insured note.” Id . “That is not the law,” concluded the Court. Id . Takeaway Many elements of a fraud claim are inherently factual. For example, proving justifiable reliance is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt. , 15 N.Y.3d at 155 (2010) (internal quotation marks omitted). The same is true with regard to whether the plaintiff can satisfy the scienter and loss causation elements. For these reasons, proving fraud is not easy. And, as Norddeutsche shows, whether a fraud has been committed is often left for the trier of fact.

It is the end of summer. With Labor Day around the corner, people will be taking vacations or visiting family. Many will be traveling by airplane, train or cruise ship. To do so, they will need a ticket. Many travelers do not realize that their ticket is an important legal document. It not only allows the person to board the means of transportation, but often includes limitations and restrictions, affecting such matters as the forum for dispute resolution, choice of law, and liability. In Jieming Liang v. NCL (Bahamas) Ltd. , 2019 N.Y. Slip Op. 51345(U) (Sup. Ct., Queens County Aug. 20, 2019) ( here ), a passenger on the Norwegian Breakaway cruise ship had her personal injury case dismissed because of the enforceability of a forum selection clause printed on the back her ticket. Liang arose from a cruise taken by plaintiff and her family in January 2018. Plaintiff booked the trip on December 26, 2017. After Plaintiff paid for the trip, NCL sent Plaintiff an e-mail notification (the “e-Docs letter”) with a link to the cruise tickets and travel documents (the “e-Docs”). On December 27, 2017, the day after the booking, the e-Docs were “READY” to be “PRINTED”. To print the documents, however, plaintiff had to acknowledge and accept the terms and conditions of the “Guest Ticket Contract”. Plaintiff did so on December 28, 2017, one week before the start of the cruise. Thereafter, on December 28, 2017, and again on January 4, 2018, a day before the cruise, Plaintiff printed the cruise tickets and travel documents. The Guest Ticket Contract, in addition to being available for inspection during the check-in and ticket-printing process on December 28, 2017, was also available for viewing on-line both before and after the cruise was booked on NCL’s website. In addition to the acknowledgment and acceptance of the Guest Ticket Contract during check-in, according to NCL, plaintiff and her family again accepted the terms and conditions of the Guest Ticket Contract by boarding the ship and taking the cruise. In order to gain entry onto the ship on January 5, 2018, plaintiff had to present to NCL’s boarding agents the single page in the travel documents entitled “GUEST TICKET TO BE PRESENTED FOR PASSAGE”. The “GUEST TICKET TO BE PRESENTED FOR PASSAGE” contained notices near the bottom that “specifically directed to the Terms and Conditions of th contract which you have accepted during the online registration process” that “affect important legal rights” and the passenger is “advised to read them carefully”. The “Guest Ticket Contract” consists of clauses that are printed in black lettering against a clear white background and can be easily read. Before those clauses, an “IMPORTANT NOTICE” appears in clear black ink against a white background, advising guests “to carefully read the terms and conditions of the Guest Ticket Contract” because they “affect your legal rights and are binding.” Guests were specifically directed to read “Paragraphs 10 and 14 of the Terms and Conditions of the Guest Ticket Contract,” the latter of which contained a forum selection clause. Under that clause, any disputes were to be brought “before the United States District Court for the Southern District of Florida in Miami, Florida, U.S.A., or as to those lawsuits for which the United States District Court for the Southern District of Florida lacks subject matter jurisdiction, before a court of competent jurisdiction in Miami-Dade County, Florida, U.S.A., to the exclusion of the Courts of any other country, state, city or county where suit might otherwise be brought.” Guests were further advised that the “ cceptance or use of this Contract shall constitute the agreement of Guest to these Terms and Conditions.” Defendant, NCL (Bahamas) Ltd. (“NCL”) moved for summary judgment to dismiss the action based upon a forum selection clause in the Guest Ticket Contract. The Court granted the motion. Noting that the “validity of the terms of a contract for a cruise turn on federal principles of maritime law” (Slip Op. at **3-4) (citations omitted), the Court held that pursuant to such principles, so long as the forum selection clause at issue “was reasonably communicated” to the plaintiff, it was enforceable. Id . at *4 (citations omitted). The Court explained that with such communication, forum selection clauses “do not violate notions of ‘fundamental fairness,’ either because the passenger’s assent was the result of fraud or overreaching or the forum restriction is inconvenient.” Id . (citations omitted). With the foregoing principles in mind, the Court found that plaintiff failed to meet her “heavy burden” of demonstrating why enforcement of the clause was unreasonable. Id . (citations omitted). The Court rejected plaintiff’s argument that they were not reasonably notified of the forum selection clause because of a language barrier. “Failure to read a ticket will not relieve a passenger of the contractual limitation,” said the Court. Id . The Court also rejected plaintiff’s claim that the forum selection clause was unenforceable because she paid for the cruise before receiving the ticket. The Court explained that “the reasonable communication of the ticket, that is, the ability to become informed, and not the timing of its purchase or receipt, controls the issue of whether the forum selection clause, or any other clause for that matter, was reasonably communicated to the passenger.” Id . at **4-5 (citations omitted). Thus, the Court found, based upon the record before it, that the forum selection clause was reasonably communicated to plaintiff, and she was informed of it prior to embarking on the cruise. Id . at *5. Accordingly, the Court granted NCL’s motion and dismissed the action pursuant to the forum selection clause. Takeaway As shown in Liang , binding contracts can come in many forms. For the traveler, such agreements are often found on the back of a ticket or in pre-travel documentation. Since these agreements are generally enforceable, it is important to read them before traveling. Failure to do so will not render the terms and conditions of the agreement unenforceable. Reading them will, however, inform the traveler of his/her rights. And, as the plaintiff in Liang learned, those terms can include a forum selection clause that could divest the court of jurisdiction over his/her action.

The location of the place of trial ( or venue) of a legal proceeding in New York State is the location where the action is brought.  The plaintiff, as the party bringing the proceeding, generally gets to choose, in the first instance, venue.  Plaintiffs, however, do not always choose a proper venue (“Improper Venue Selection”).  In such instances, a defendant has an opportunity to change the Improper Venue Selection to a proper one.  See CPLR 510 (1) .  Other times, although venue is proper, a defendant (or even a plaintiff) may seek a change based on considerations such as the convenience of witnesses and/or potential prejudice to a party should the action proceed in the venue chosen by the plaintiff (a “Discretionary Change”).  See CPLR 510 (2) and (3) . There are specific procedures that must be employed to, and certain circumstances under which a party may, change venue.  The purpose of this post is to briefly outline some of those basic procedures. CPLR 503 (a) provides that: Except where otherwise prescribed by law, the place of trial shall be in the county in which one of the parties resided when it was commenced;  the county in which a substantial part of the events or omissions giving rise to the claim occurred;  or, if none of the parties then resided in the state, in any county designated by the plaintiff.  A party resident in more than one county shall be deemed a resident of each such county. Notwithstanding the general provisions of CPLR 503(a), the CPLR specifies proper venues for particular types of actions.   See CPLR 504 , 505 , 506 , 507 , 508 and 509 . For example, the proper venue for an action affecting title to real property is in the County where “any part of the subject of the action is situated.”  CPLR 507.  Similarly, courts will enforce contractual venue provisions.  See CPLR 501 ; Casale v. Sheepshead Nursing & Rehab. Center , 131 A.D.3d 436, 437 (2 nd Dep’t 2015) (“A contractual forum selection clause is prima facie valid and enforceable unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court" (citations and quotation marks omitted).) The procedure to follow when a plaintiff makes an Improper Venue Selection is set forth in CPLR 511 .  Pursuant to CPLR 511, a defendant that believes a plaintiff selected an improper venue must serve a written demand (a “Demand”) to change the place of trial to a county deemed proper by the defendant.  CPLR 511(a) and (b).  The Demand must be served “with the answer or before the answer is served.”  CPLR 511(a).     If, within 5 days of defendant’s service of a Demand the Plaintiff does not serve written consent to change venue to the place specified in the Demand, the Defendant has 15 days from service of the Demand to move to change the place of trial to the venue set forth in the Demand. In Coluck Inc. v. SEM Sec. Sys,. Inc. , decided by the Appellate Division, Second Department on August 21, 2019, the Court reversed the grant of a motion to change venue based on an Improper Venue Selection as “untimely since no demand to change venue was served with the answer or before the answer was served,” although the Court did note that under “certain limited circumstances” an untimely motion to change venue can be granted by a court in the “exercise its discretion.”  Coluck at *1 (citations omitted).  The Coluck Court cited to Philogene v. Fuller Auto Leasing , 167 A.D.2d 178 (1 st Dep’t 1990), for the proposition that in “limited circumstances” a court might grant an untimely Improper Venue Selection motion.  In reversing the trial court’s denial of the Philogene defendant’s motion on timeliness grounds, the First Department stated: Thus, since neither defendant is a New York County resident and plaintiff at all relevant times has resided in Staten Island, Richmond is the proper county for venue. A change of venue sought as of right on the ground that the county selected is an improper one must be sought by service of a demand (CPLR 511 ) followed by a motion, if the demand is not acceded to, within 15 days after service thereof (CPLR 511 ). Noncompliance with the statutory time requirements should not act as a bar where, as here, a plaintiff's willful omissions and misleading statements regarding his residence are the cause of such noncompliance and the defendant moves promptly after ascertaining the true state of affairs. Here, defendants' motion for a change of venue — made the day after they ascertained plaintiff's residence — could not have been made more promptly. Philogene , 167 A.D.2d at 178 – 79. The Court in Deas v. Ahmed , 120 A.D.3d 750 (2 nd Dep’t 2014), in deciding a motion under CPLR 510(1), stated: In order to prevail on a motion pursuant to CPLR 510(1) to change venue, a defendant must show that the plaintiff's choice of venue is improper, and also that the defendant's choice of venue is proper. To succeed on his motion here, the defendant was obligated to demonstrate that, on the date that this action was commenced, neither of the parties resided in Kings County. Only if the defendant made such a showing would the plaintiff have been required to establish, in opposition, that the venue that he selected was proper. Deas , 120 A.D.3d at 750-51 (citations omitted).  In denying the Deas defendant’s motion, the Court  found that the requisite burden was not met because defendant relied on plaintiff’s residence as set forth in a police report of the subject accident, which “failed to demonstrate that the plaintiff did not maintain a residence in Kings County at the time the action was commenced, more than two years after the accident.”  Deas , 120 A.D.3d at 751 (citations omitted). The most typical scenario for a Discretionary Change is based on the convenience of witnesses. A party moving for a discretionary change of venue pursuant to CPLR 510(3) has the burden of demonstrating that the convenience of material witnesses and the ends of justice will be promoted by the change. In so doing, the moving party must set forth (1) the names, addresses, and occupations of the prospective witnesses, (2) the facts to which the witnesses will testify at trial, so that the court may judge whether the proposed evidence is necessary and material, (3) a statement that the witnesses are willing to testify, and (4) a statement that the witnesses would be greatly inconvenienced if the venue of the action was not changed. Coluck at *2 (citations and internal quotation marks omitted). In Jansen v. Bernhang , 149 A.D.2d 468 (2 nd Dep’t 1989), the Court reversed the denial of a Discretionary Change motion.  After setting forth a list of criteria similar to that of the Coluck Court, the Jansen Court stated: Here, the movants' papers suffice to demonstrate that at least three prospective witnesses live in New York County whose testimony is material and necessary with respect to the issue of whether or not the plaintiffs performed their contractual duty to make periodic inspections during the alterations to the defendants' apartment in New York County to see that the work generally conformed to the construction documents. Moreover, it is apparent from the record that the majority of triable issues pertain to the parties' respective claims which arose from the contract made in New York County and providing for its performance in New York County. Absent cogent reasons to direct otherwise, venue should be in the county where the cause of action arose. Jansen , 149 A.D.2d at 469 (citations omitted). In Walsh v. Mystic Tank Lines Corp. , 51 A.D.3d 908 (2 nd Dep’t 2008), the Court affirmed the denial of a motion for a Discretionary Change due to the inadequacy of defendant’s moving papers, and, in so doing, stated: Here, the defendants identified seven potential nonparty witnesses, contending that their convenience would be served by a change of venue from Queens County to Suffolk County. Each witness submitted an affidavit which contained his or her name, address, occupation, and county of employment (where applicable). Then, in identical language, each affiant stated that he or she (1) had "personal knowledge of the facts and circumstances" concerning the motor vehicle accident, (2) was willing to testify, and (3) would be "great inconvenience " if venue remained in Queens County. The defendants' motion papers were not sufficient to justify a discretionary change in venue. The affidavits by the potential nonparty witnesses failed to disclose the nature of their anticipated testimony. In other words, the affidavits did not contain the basic detail necessary to ascertain whether the affiants would be material witnesses. Walsh , 51 A.D.3d at 908-09. TAKEAWAY There are many reasons why a party may seek to challenge a plaintiff’s venue selection.  If the proper procedures are not followed, or if a party’s motion does not set forth all of the necessary information, courts have no qualms about denying such motions.

There is a broad presumption that the public is entitled to access to judicial proceedings and court records. Mosallem v. Berenson , 76 A.D.3d 345, 348 (1st Dept. 2010); Mancheski v. Gabelli Grp. Capital Partners , 39 A.D.3d 499, 501 (2d Dept. 2007); Gryphon Dom. VI, LLC v. APP Intl. Fin. Co., B.V. , 28 A.D.3d 322, 324 (1st Dept. 2006); Danco Labs. v. Chemical Works of Gedeon Richter , 274 A.D.2d 1, 6 (1st Dept. 2000). New York has “long recognized that civil actions and proceedings should be open to the public in order to ensure that they are conducted efficiently, honestly, and fairly.” Matter of Brownstone , 191 A.D.2d 167, 168 (1st Dept. 1993). For this reason, Section 4 of the Judiciary Law requires that, with certain exceptions, “ he sittings of every court within this state shall be public, and every citizen may freely attend the same.” Likewise, Sections 255 and 255-b of the Judiciary Law mandate that court records and docket books be available to the public. Mosallem , 76 A.D.3d at 348. “The right of access to court proceedings and records also is firmly grounded in the common law.” Mosallem , 76 A.D.3d at 348, quoting Gryphon Dom. , 28 A.D.3d at 324 (internal quotation marks and citations omitted). This right of access also derives from the constitutional “presumption, arising from the First and Sixth Amendments, as applied to the states by the Fourteenth Amendment, that both the public and the press are generally entitled to have access to court proceedings.” Id . at 348-49 (citations omitted). Despite the broad presumption of public access, the courts have made it clear that the right to such access is not absolute.   Mosallem , 76 A.D.3d at 349, citing Danco Labs. , 274 A.D.2d at 6. Indeed, public inspection of court records has been limited by numerous statutes, e.g. , Family Court records (Family Ct. Act § 166), records in matrimonial actions (Domestic Relations Law § 235), sealed records in criminal cases (CPL 160.50), adoption proceeding records (Domestic Relations Law § 114) and proceedings seeking disclosure of HIV-related information (Public Health Law § 2785(3)). In addition to the statutory exceptions to public access, a court is empowered to seal court records pursuant to Section 216.1(a) of the Uniform Rules for Trial Courts (22 N.Y.C.R.R. 216.1 (a)). That rule states that xcept where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Although the rule does not define the term “good cause”, “a sealing order should clearly be predicated upon a sound basis or legitimate need to take judicial action.” Gryphon Dom. , 28 A.D.3d at 325. “A finding of ‘good cause’ presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant.” Mancheski , 39 A.D.3d at 502. However, since there is no “absolute” definition, good cause, in essence, “boils down to” the Court’s discretion ( id ., quoting Coopersmith v. Gold , 156 Misc. 2d 594, 606 (Sup. Ct., Rockland County 1992)), which is to be exercised on “a case-by-case” basis. Id ., citing Matter of Twentieth Century Fox Film Corp. , 190 A.D.2d 483, 485-486 (1st Dept. 1993). Notably, merely because the parties mark documents “confidential” or “private” does not make them so. Eusini v. Pioneer Elecs. (USA), Inc. , 29 A.D.3d 623, 626 (2d Dept. 2006). In fact, courts routinely hold that an agreement by the parties to seal is not a substitute for establishing “good cause.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 2012 N.Y. Slip Op. 33147(U), at * 9 (Sup. Ct., N.Y. County 2012. For this reason, the moving party must demonstrate good cause for a confidentiality request. Grande Prairie Energy LLC v. Alstom Power, Inc. , 2004 N.Y. Slip Op. 51156 , at *2 (Sup. Ct., N.Y. County 2004). And, because “ onfidentiality is … the exception, not the rule” ( Matter of Hofmann , 284 A.D.2d at 93-94), courts are reluctant to seal court records ( Mosallem , 76 A.D.3d at 349), even where both sides to the litigation have asked for such relief. Gryphon Dom. , 28 A.D.3d at 324. So, what constitutes good cause? Protection of a company’s business advantage, trade secrets and other forms of confidential information are often cited as reasons that satisfy the “good cause” standard. “Sealing, however, is not appropriate merely to protect the advantage that one side might have over the other in negotiating an agreement in a commercial dispute between sophisticated business entities.” Gryphon Dom. , 28 A.D.3d at 326. Recently, Justice Andrea Masley of the Supreme Court, New York County, Commercial Division, addressed the foregoing principles in Prager Metis CPAS, LLC v. Castellanos , 2019 N.Y. Slip Op. 32417(U) (Sup. Ct., N.Y. County Aug. 12, 2019) ( here ), wherein she denied a motion to seal judicial records because the public’s right to know outweighed any claim of confidentiality. Prager Metis CPAS, LLC v. Castellanos Background In 2015, plaintiff, Prager Metis CPAS, LLC (“Prager” or the “Firm”), sued Alicea Castellanos, a former employee of the firm, and International Wealth Tax Advisors, LLC (“IWTA”), the accounting firm that she formed upon her departure from Prager. The Firm claimed that Castellanos breached her employment agreement, her fiduciary duty, and misappropriated confidential information, among other things, when she left Prager. On May 9, 2018, the parties discontinued the action. Although the complaint and answer had been open to the public’s view for the last four years, Castellanos and IWTA moved to redact the pleadings because they allegedly contained “scandalous” information. According to defendants, these public filings “unfairly tarnish the reputation.” Slip Op. at *2. Prager took no position on the motion “despite asserting that all factual allegations in pleadings were made in good faith under New York law.” Id . At oral argument, the Court provided defendants with an opportunity to submit redactions for the Court’s consideration. Id . The Court’s Decision The Court denied the motion, declining to permit the redactions to the pleadings proposed by the defendants. The Court found that defendants failed to demonstrate “compelling circumstances to justify restricting the public’s access to pleadings.” Slip Op. at *3. Justice Masley explained that the strength of the argument to seal the subject pleadings was undermined by the delay in seeking such relief: “Defendants waited approximately four years to redact this public information, calling into question whether there is truly ‘a sound basis or legitimate need to take judicial action.’” Id ., quoting Danco Labs ., 274 A.D.2d at 9. The Court also rejected the alleged harm to reputation as a basis upon which to grant the motion, noting that “‘neither the potential for embarrassment or damage to reputation ... constitutes good cause to seal court records.’”  Id ., quoting Mosallem , 76 A.D.3d at 351. “Indeed,” said the Court, “the portions sought to be redacted are nothing more than dramatically phrased allegations.” Id . at *4. Finally, the Court rejected the notion that the subject pleadings were “tantamount to the kind of threat to a business’s competitive advantage that warrants judicial action.” Id . “Indeed,” concluded the Court, “the pleadings do not reveal trade secrets, financial arrangements, or other information of that sort.” Id . Takeaway Prager Metis underscores the heavy burden the movant seeking to seal information from the public bears. To be sure, the four-year delay in seeking the relief did not help. But Prager Metis shows that damage to reputation, embarrassment, or the general desire for privacy are insufficient reasons to conceal judicial pleadings and papers from public view. More is needed, such as a threat to a business’s competitive advantage or the revelation of trade secrets, financial information and/or similar forms of confidential information. None of the foregoing bases were present in Prager Metis .

Statutes of limitations are statutory mechanisms that limit the duration of a defendant’s liability for all types of alleged wrongdoing. Depending upon the circumstances, the statute of limitations can be an important topic of discussion between lawyer and client. As many practitioners know, there are exceptions to the general rule that the statute of limitations runs from the time of the tort or breach though no damage occurs until a later time. One exception that practitioners often try to invoke is the continuing wrong doctrine. Under the doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id . (internal quotation marks and citation omitted). The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id . It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id . (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). In contract actions, the doctrine is applied to extend the statute of limitations when the contract imposes a continuing duty on the breaching party. Bulova Watch Co. v. Celotex Corp. , 46 N.Y.2d 606, 611 (1979); King v. 870 Riverside Dr. Hous. Dev. Fund Corp. , 74 A.D.3d 494, 496 (1st Dept. 2010). Thus, where a plaintiff asserts a single breach – with damages increasing as the breach continues – the continuing wrong theory does not apply. Henry , 147 A.D.3d at 601-02. Earlier this month, in Newman v. HSBC Bank USA, N.A. , 2019 N.Y. Slip Op. 32398(U) (Sup. Ct., N.Y. County Aug. 9, 2019) ( here ), Justice Robert D. Kalish of the Supreme Court, New York County, dismissed an action on statute of limitations grounds, holding that the continuous wrong doctrine did not save the claims from dismissal. Newman v. HSBC Bank USA, N.A. Background Newman arose out of a banking relationship between Defendant, HSBC Bank USA, N.A. (“HSBC”), and Plaintiffs, Michael and Linda Newman (collectively, the “Newmans”). Between 1980 and 2001, the Newmans owned and operated Card Rack, Inc. (“Card Rack”). In connection with a commercial lease, the Newmans obtained from Republic National Bank (“Republic”) a $25,000 letter of credit and a $300,000 line of credit and deposited approximately $500,000 worth of stock certificates into an account as collateral for the line of credit and letter of credit. In 1999, HSBC acquired Republic and converted the collateral account into a brokerage account (the “Securities Account”). As the Card Rack business wound down in 2001, the Newmans attempted to cancel the letter of credit. HSBC did not agree to their request. In 2003, the Newmans made a second attempt to cancel the letter of credit. Again, HSBC did not agree to cancel the letter of credit. In December 2006, after closing the line of credit, HSBC agreed to release the contents of the Securities Account on the condition that the Newmans deposit $25,000.00 into an HSBC savings account (the “Bank Account”) as collateral for the letter of credit. The Newmans complied and deposited the funds into a savings account, whereupon the contents of the Securities Account were transferred to the Newmans’ brokerage account at Charles Schwab Co. On September 26, 2006, the Newmans made another attempt to terminate the letter of credit and to obtain the funds in the Bank Account that were being held as collateral for the letter of credit. Again, HSBC did not agree to the request, prompting Michael Newman to commence an action against HSBC in December 2011, which was ultimately abandoned for failure to serve a complaint. On March 2, 2016, the Newmans commenced the action. In their amended complaint, the Newmans asserted causes of action for conversion, breach of contract, unjust enrichment, attorney’s fees, and punitive damages arising from the alleged improper restraint of the Securities Account and the Bank Account after discovering that all the funds in the Bank Account were notated as a “pending miscellaneous debit.” On May 10, 2016, and October 26, 2017, HSBC notified the Newmans that there were no restrictions on the Bank Account and that the funds were readily accessible. Since that time, the Newmans obtained access to the funds, made withdrawals, and continued to use the Bank Account. HSBC moved for summary judgment dismissing the amended complaint. HSBC argued that the causes of action were time barred and that the causes of action were moot because (1) the Securities Account had been closed as of 2006, and (2) the funds in the Bank Account were released to the Newmans in May 2016. The Court’s Decision The Court granted the motion, holding that the causes of action for conversion, breach of contract, and unjust enrichment were time barred under the relevant statutes of limitations. Under New York law, a cause of action for conversion is subject to a three-year statute of limitations. Vigilant Ins. Co. of Am. V. Housing Auth. of City of El Paso, Tex. , 87 N.Y.2d 36, 44 (1995). A breach of contract action is subject “to a six-year statute of limitations.” Chase Scientific Research. V. NIA Grp. , 96 N.Y.2d 20, 25 (2001) (citation omitted). Although New York does not identify a “statute of limitations period within which to bring a claim for unjust enrichment,” where the “unjust enrichment and breach of contract claims are based upon the same facts and pleaded in the alternative, a six-year statute of limitations applies.” Maya NY, LLC v. Hagler , 106 A.D.3d 583, 585 (1st Dept. 2013) (citation omitted). The Court held that “to the extent any of the Newmans’ claims arise from the Securities Account and the Bank Account, those claims accrued in 2006 upon HSBC’s first failure to comply with the Newmans’ demands to release its contents and cancel the letter of credit.” Slip Op. at *3. Since the Newmans initiated the action in 2016, observed the Court, “the causes of action were over 10 years old and already barred by the statute of limitations.” Id . Turning to the issue of tolling, the Court held that the continuous wrong doctrine did not apply to the Newmans’ claims because the alleged continuing wrong was not a continuing wrong. Id . Rather, said the Court, “the Newmans were subject to continuing effects of HSBC’s wrongful act in 2006.” Id . at *4. Such effects, held the Court “do[ ] not equate to a continuing series of wrongs … that would render the continuing wrong doctrine applicable and toll the statute of limitations.” Id . Takeaway The continuing wrong doctrine is predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct. The cases, such as Newman , make clear that the distinction is between a single wrongful act that has continuing effects and a series of independent, distinct wrongs. It is, therefore, inapplicable where, as in Newman , there is one tortious act and continuing consequential damages that result therefrom.

It has been some time since this Blog has written an article about whistleblowers and qui tam actions. Those articles typically involved lawsuits arising under the Federal False Claims Act (“Federal False Claims Act”). In today’s post, this Blog looks at City of New York v. Siemens Elec., LLC , 2019 N.Y. Slip Op. 29251 (Sup. Ct., N.Y. County Aug. 7, 2019) ( here ), a qui tam action brought under the New York False Claims Act (“NYFCA”) ( here ) against, among others, Siemens Electrical, LLC (“Siemens Electrical”) for misrepresentations about defendants’ compliance with two statutes that defendants were required to comply with pursuant to contracts with the City of New York Department of Environmental Protection (“DEP”).  Since this Blog has not written about the NYFCA, we provide an overview of the NYFCA and the differences between the NYFCA and the Federal FCA below. The NYFCA On April 1, 2007, the New York State Legislature passed the NYFCA.  The purpose of the NYFCA, like the legislation on which it was modeled, the Federal FCA, is to assist local governments in recovering payments made to individuals or corporations by reason of fraud or related misconduct. The NYFCA applies to false claims made to the state or any municipality, school district, or public benefit corporation within the state, or to any contractor whose funding derives, in whole or in part, from the state or a local government. The NYFCA gives the New York Attorney General (“NYAG”), a local government or a private citizen the right to litigate lawsuits under the act.  When the party bringing the action is a private citizen, the NYFCA provides for an award to the individual if the action is successful and results in a payment to the government. If the NYAG supersedes in the qui tam action ( i.e. , converts the civil qui tam action into an enforcement action), then the whistleblower who filed the action (also known as a “relator”) is entitled to receive 15% to 25% of the proceeds recovered in the action or settlement thereof. If the NYAG does not supersede in the action, and the relator continues to litigate the case and successfully concludes the action, then he/she can recover between 25% to 30% of the proceeds recovered. The court determines the percentage payable to the whistleblower by considering a number of factors, including, but not limited to, the extent to which the relator contributed to the prosecution of the action. In August 2010, the New York State Legislature amended the NYFCA, following amendments to the Federal FCA in 2009 and 2010. Although the two statutes remain largely the same, there are some important differences. The Differences Between the NYFCA and the Federal FCA As noted, there are differences between the Federal FCA and the NYFCA that are important to discuss.  First, the NYFCA allows for three times the damages (two times the damages for self-reporting the fraud) and civil penalties of $6,000 to $12,000 per violation, plus “the costs, including attorneys’ fees, of a civil action brought to recover any such penalty or damages.” N.Y. State Fin. L. § 189(1)(h). The Federal FCA allows for $5,500 to $11,000 per violation. 31 U.S.C. § 3729(a)(1)(g). Second, the NYFCA allows a relator to bring a qui tam action alleging tax fraud, which the Federal FCA does not permit. N.Y. State Fin. L. § 189(4). To bring a tax fraud claim, the relator must plead that the defendant has “net income or sales” exceeding $1 million and damages exceeding $350,000.  Third, the NYFCA provides for a statute of limitations of 10 years – that is, an action must be commenced no later than 10 years after the date on which the violation of the act is committed. N.Y. State Fin. L. § 192(1). The Federal FCA has a statute of limitations of six years. U.S.C. § 3731(b).  Fourth, if the government declines to intervene in the qui tam action while the case is under seal, the NYFCA allows the relator to withdraw his/her case without public knowledge. Under the Federal FCA, once the government declines intervention and the case is unsealed, the relator cannot withdraw his/her action under seal. Fifth, the NYFCA does not require allegations of fraud to be stated with the same particularity required by the CPLR. Rather, a qui tam complaint should survive a motion to dismiss “if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication of one or more violations … and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct.” N.Y. State Fin. L. § 192(1-a). Qui tam complaints alleging fraud under the Federal FCA must meet the heightened pleading requirements under Rule 9(b) of the Federal Rules of Civil Procedure. Finally, the NYFCA anti-retaliation protections are broader than those under the Federal FCA. For example, the person against whom retaliatory action is taken does not have to file a qui tam action to be protected. In this regard, the NYFCA covers “ ny current or former employee, contractor, or agent of any private or public employer who is discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment, or otherwise harmed or penalized by an employer, or a prospective employer, because of lawful acts done by the employee, contractor, agent, or associated others in furtherance of an action brought under or other efforts to stop one or more violations of” the NYFCA.  Also, the definition of “lawful act” covers a wide of array of conduct, including the investigation, the potential filing, or actual filing of a qui tam action, and a broad scope of materials that can be obtained or transmitted in connection with such activity “even though such act may violate a contract, employment term, or duty owed to the employer or contractor, so long as the possession and transmission of such are for the sole purpose of furthering efforts to stop one or more violations of” the NYFCA. If an employee seeks protection under the anti-retaliatory provisions of the NYFCA, he/she may recover, among other forms of relief: “(a) an injunction to restrain continued discrimination; (ii) hiring, contracting or reinstatement to the position such person would have had but for the discrimination or to an equivalent position; (c) reinstatement of full fringe benefits and seniority rights; (d) payment of two times back pay, plus interest; and (e) compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees.” N.Y. State Fin. L. § 191(1). New York City False Claims Act Like the State of New York, the City of New York (the “City”) has a false claims act (“NYCFCA”) that is modeled after the Federal FCA. Signed into law on May 19, 2005, the NYCFCA allows private citizens to bring qui tam actions to recover treble damages for fraudulent claims submitted to the City. The NYCFCA was amended in 2012 to bring the NYCFCA into closer conformance with the NYFCA by clarifying that the City may waive the “public disclosure bar” and increasing the minimum awards from proceeds to which private citizens are entitled. City of New York v. Siemens Electrical, LLC Background Siemens arose from five contracts between the DEP and Siemens Electrical in connection with the upgrade and construction of water treatment facilities in Manhattan, the Bronx and Brooklyn. The total value of the contracts was $234,415,844. In 2012, a whistleblower (the “Relator”), a former vice president of one of the defendants who served on Siemens Electricals’ board of managers, filed a qui tam complaint under seal, alleging that between 2005 and 2012 Siemens Electrical violated the NYFCA by misrepresenting its compliance with two statutes that Siemens Electrical was required to comply with under each of the DEP contracts.  First, Relator alleged that Siemens Electrical submitted claims for payment overstating the work performed by Minority Business Enterprises (“MBE”) and that Siemens Electrical schemed to evade MBE subcontracting requirements by fabricating a relationship with a contractor to fulfill the requirement that certain contracts be given to MBEs for all five contracts it had with the DEP, when in fact, the equipment was installed by a non-MBE firm. Second, Relator alleged that Siemens Electrical fraudulently represented itself as a business with a licensed Master Electrician as an officer of the company, in violation of New York City Administrative Code § 27-3017(a)(1), in order to win its bid on the five contracts with the DEP, and in violation of Siemens Electrical’s contracts. In 2015, the City and the Siemens defendants engaged in settlement discussions before a mediator. No agreement was reached. Soon thereafter, the City, with authorization from the State pursuant to State Finance Law § 190(2)(c)(iii), filed its superseding complaint substituting the original plaintiff in this action and converting the qui tam civil action into a civil enforcement action by the City. N.Y. State Fin. L. § 190(2)(c)(i). The superseding complaint alleged claims under N.Y. State Fin. L. §§ 189(1)(a), (b), and (c) and the NYCFCA (N.Y.C. Admin. Code §§ 7-803(a)(1), (2), and (3)). The City’s superseding complaint differed from Relator’s qui tam complaint to the extent that it elaborated on the factual allegations of the Master Electrician and MBE related claims against the Siemens defendants. Soon thereafter, the Siemens defendants moved for summary judgement on the basis of the United States Supreme Court’s decision in Universal Health Servs., Inc. v. United States ex rel. Escobar , 136 S Ct. 1989 (2016). In Escobar , the Supreme Court held that the “implied false certification” theory “can be a basis for liability.” Under the implied false certification theory, a defendant may violate the Federal FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement.   This Blog wrote about Escobar , here . The Court denied the Siemens defendants’ motion. After resuming discovery, the parties again engaged in settlement discussions. This time, the City and the Siemens defendants reached an agreement and settled the claims for $1.5 million. The settlement of the City’s claims was negotiated and executed contemporaneously with the agreement to settle three separate actions by the Siemens defendants against the City (the “commercial settlement”). The City and the Siemens defendants agreed that the proposed settlement amount is to be paid by a setoff against the commercial settlement amount. The amount of the proposed settlement was reviewed and authorized by the Office of the New York City Comptroller. The City moved pursuant to N.Y. State Fin. L. § 190 (5)(b)(ii) for a determination that the proposed settlement between the City and Siemens defendants is fair, adequate, and reasonable. The Relator opposed the proposed settlement. The Siemens defendants supported the motion. The Court granted the City’s motion and denied the Relator’s request for an evidentiary hearing to supersede the City in the action, and for the Court to calculate his qui tam award. The Court’s Decision Under the NYFCA, N.Y. State Fin. L. § 190(5)(b)(ii), “ he state or a local government may settle the action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after an opportunity to be heard, that the proposed settlement is fair, adequate, and reasonable with respect to all parties under all the circumstances.” The NYFCA does not, however, provide the standard to determine whether a “proposed settlement is fair, adequate, and reasonable with respect to all parties under all the circumstances.” Given the absence of New York authority, the Court looked to federal jurisprudence for the standard. See State ex rel. Seiden v. Utica First Ins. Co. , 96 A.D.3d 67, 71 (1st Dept. 2012). Noting that the federal courts are split on the standard to apply, the Court found the approach adopted by the Eleventh Circuit to be the most appropriate one. In United States v. Everglades Coll., Inc. , 855 F.3d 1279 (11th Cir. 2017), the panel determined that the court must “ask whether the government has advanced a reasonable basis for concluding the settlement is in the best interests of the United States, and whether the settlement unfairly reduces the Relator’s potential qui tam recovery.” Id . at 1289. In Everglades , the panel held that “ n the FCA context there must be considerable deference to the settlement rationale offered by the government” because of the “loose similarity between government-obtained FCA settlements and decisions by the government not to prosecute or enforce an administrative remedy, which are presumptively unreviewable.” Id. (citation omitted). The Court found that the approach in Everglades was consistent with the language of the NYFCA and the legislative intent behind the NYFCA. Slip Op. at **5-6.  Against the Everglades standard, the Court held that “ he City ha demonstrated a reasonable basis to determine that the proposed settlement in the best interest of the City and not unfairly reduce the Relator’s potential qui tam recovery.” Id . at *6.  The proposed settlement imposes a civil penalty for each of the alleged regulatory violations . According to the City, the $1.5 million settlement “reflects the civil penalties that would be available if Defendants’ defenses were rejected wholesale and liability were imposed for every one of the approximately 260 payment requisitions at issue.” While the civil penalty amount is on the low end of the penalty scheme, the negotiation of a settlement wherein each regulatory violation was accounted for clearly benefits the City and carries out the intent of the FCA. In fact, Relator admits that the settlement was “beneficial to the City,” and suggests that the settlement amount was favorable. Id . at **6-7 (citations omitted). The Court also found that the settlement conserved the City’s limited resources, avoided the complexity, expense, and duration of ongoing litigation, and considered the precedential impact of a potentially adverse decision. Id . at *7. The Court noted that “an adverse decision in this matter limit the City’s enforcement efforts” and “further conserved the City’s resources.…” Id .  The Court further held that the City demonstrated that the proposed settlement represented a fair outcome considering the risk of litigation. Id . The Court agreed with the City that the uncertainty surrounding proof of materiality under Escobar weighed in favor of settlement: The record includes evidence demonstrating, and the parties do not dispute, that the City continued paying Siemens Electrical despite knowing of their regulatory non-compliance. Accordingly, an issue of fact may exist as to whether Siemens Electrical’s alleged implied and express false certifications of compliance with the MBE and Master Electrician requirements were material to the City’s payment decisions. Id . The Court rejected Relator’s contention that the proposed settlement was unfair because the City may have been “entitled to disgorgement damages in excess of $750 million if the damages trebled” – i.e. , that the settlement unfairly reduced his award. Id .  Noting that the there was a dispute as to whether the City was entitled to any damages, the Court observed that “the City may be unsuccessful in showing that it incurred damages because of Siemens Electrical’s false statements regarding the credits improperly claimed for work performed by MBEs, since the City received the benefit of the supply and installation of the equipment.” Id . The Court explained that “ his litigation risk further compounded by the unique nature of the City’s claims: the City’s bargained-for-benefit involved both tangible and intangible benefits. Considering the real risk that the City may not recover on its claims, it cannot be said that Relator’s potential award was unfairly reduced.” Id . Having determined that the settlement was fair and reasonable to the City, the Court next addressed whether Relator was entitled to an evidentiary hearing and additional discovery on the issue.  Noting that the issue was a “novel” one ( id . at *8), the Court denied the request.  “Initially, the court that Relator not entitled to an evidentiary hearing as of right.” Id . Under the NYFCA, noted the Court, it could approve a proposed settlement notwithstanding the objections of the relator “after an opportunity to be heard.” Id ., citing N.Y. State Fin. L. § 190(5)(b)(ii). The Court found that “Relator was given notice of the City’s motion to confirm the proposed settlement and an opportunity to be heard on the motion.” Id . Relator availed himself of this opportunity, said the Court, when he submitted a brief in opposition to the motion to approve the settlement and presented oral argument on the motion. Id . Moreover, said the Court, “Relator fail to establish grounds for an evidentiary hearing and additional discovery.” Id .  Relator contends that the difference between the proposed settlement amount and the purported value of the case, and the fact that the settlement amount is to be paid as a setoff against the City in the commercial settlement demonstrates the unreasonableness and impropriety of the settlement. Relator's contention is addressed in the preceding section—the City has adequately explained its rationale behind the proposed settlement. Relator next argues that his exclusion from the settlement negotiations between the City and Siemens defendants demonstrates collusion. This argument is speculative, and the City apprised Relator of its settlement negotiations with the Siemens defendants. In any event, the City was substituted as plaintiff in this action and was entitled to conduct settlement negotiations without informing the Relator (State Finance Law § 190<5> ). Id . Since Relator failed to “‘ ome forward with a colorable and non-speculative claim that the government’s settlement rationale improper and that further disclosures needed,’ his requests for an evidentiary hearing and discovery denied.” Id . at **8-9, quoting Everglades , 855 F.3d at 1291. The Court rejected Relator’s request that he be permitted to “take over the litigation” from the City. Id . at *9. The Court held that “Relator fail to cite to any basis to support his request.” Id . The Court explained that the request ran counter to the legislative direction that “‘the local government shall have primary responsibility for investigating and prosecuting the action.’” Id. , quoting N.Y. State Fin. L. § 190(5)(a). Accordingly, the Court denied Relator’s request that he be permitted to supersede the City in the action.Finally, the Court rejected Relator’s request to have the Court calculate his qui tam award (State Fin. L. § 190(6)(a)), holding that the request was premature since the City did not address the amount of the award to which Relator was entitled and Relator did not cross-move for the court to calculate his award. Id .

On July 15, 2019, New York Surrogate Nora Anderson denied, in part, a motion to dismiss the petition filed by Radio Drama Network, Inc. (“Radio Drama” or “Petitioner”), in which Radio Drama sought to invalidate testamentary instruments that deprived it of a $100 million bequest from Himan Brown (“Brown”), the creator of “Dick Tracy” and “Inner Sanctum Mysteries,” and founder of the Himan Brown Revocable Trust (the “Revocable Trust”). Radio Drama Network, Inc. v. Kay , File No. 2010-2056 A (Sur. Ct., N.Y. County July 15, 2019) ( here ). In the petition, Radio Drama claimed that Brown’s long-time lawyer, Richard L. Kay (“Respondent”), defrauded Radio Drama out of $100 million when he allegedly deceived Brown into substituting a charitable trust that he controlled as the beneficiary of his estate. Petitioner claimed that Brown, who at the time was 94 years old, intended to bequest the money to Radio Drama, but instead left the money to another trust that Respondent controlled. Brown died six years later in June 2010, at the age of 99. Petitioner claimed that Respondent exploited his position as a trusted adviser for his own benefit.  Background On June 4, 2010, Brown died, leaving an estate valued at approximately $850,000. During the decade before his death, Brown had transferred property worth millions of dollars to the Revocable Trust, of which he was the sole trustee and primary beneficiary, under an instrument dated November 20, 2002. Under the terms of the Revocable Trust instrument as originally stated, at Brown’s death, the majority of the trust remainder (after relatively modest provisions for family and friends) was to be distributed to Radio Drama, which Brown established to “create, produce, market and distribute radio dramas.” On July 8, 2003, Brown amended the trust instrument (the “First Restatement”) to provide that his successor trustee would be entitled to commissions “in an amount equal to the commission payable to an executor of estate, the total principal of which equals the trust principal.” According to Radio Drama, this provision (the “Commissions Provision”) resulted in an additional $1.7 million in trustee commissions that Respondent received. The First Restatement did not alter Radio Drama’s share of the trust remainder. However, on October 20, 2004, Brown eliminated Radio Drama’s designation as the remainder beneficiary, created a new trust (the “Charitable Trust”), and named the latter as remainder beneficiary in Radio Drama’s place (the “Second Restatement”). The primary purpose of the Charitable Trust, as identified in the Second Restatement, was to advance “language and the spoken word.” On the same day, Brown executed a new will in which he left his by-then relatively modest estate to Radio Drama. As noted by the Court, Respondent or another lawyer at Respondent’s law firm drafted the trust and testamentary instruments discussed above. Respondent is the executor of Brown’s estate and is the sole trustee of both the Revocable Trust and the Charitable Trust. He is also one of four directors of Radio Drama; Brown’s two granddaughters, Melina and Barri, are two of the three other directors. Radio Drama alleged that, through the foregoing revisions, Respondent carried out a fraudulent scheme to divert virtually all of Brown’s assets from Radio Drama to the Charitable Trust, over which Respondent, as trustee, had complete control, and to Respondent individually, through steeply increased commissions. According to Radio Drama, Respondent misled and confused Brown, who was elderly ( e.g. , 94 years old) and hearing-impaired, into changing the provisions of the Revocable Trust relating to the computation of commissions and to the disposition of the Revocable Trust remainder. Radio Drama filed a petition in Surrogate’s Court on December 14, 2015, requesting the following relief: (1) invalidation of specific provisions of the instruments amending the Revocable Trust and the consequent reinstatement of Radio Drama as the remainder beneficiary of the Revocable Trust; (2) imposition of a constructive trust for Petitioner’s benefit on the assets of the Charitable Trust; (3) removal of Respondent from his position as a director of Radio Drama; (4) declarations that Respondent defrauded both Brown and Petitioner, unduly influenced Brown, breached his fiduciary duty to Petitioner, and violated Judiciary Law § 487; and (5) an award of compensatory, punitive, exemplary and treble damages consistent with such declarations. In connection with the foregoing, Radio Drama asserted the following six causes of action: (1) fraud; (2) fraudulent concealment; (3) undue influence; (4) breach of fiduciary duty; (5) violation of Judiciary Law § 487; and (6) unjust enrichment (asserted against Respondent both individually and as trustee of the Charitable Trust). Respondent moved to dismiss the Petition for failure to state a claim. Additionally, Respondent sought dismissal of the first, second, third, fourth and sixth causes of action as time-barred. Finally, Respondent moved to dismiss Petitioner’s request to remove Respondent from its board of directors, on the ground that the Court lacked subject matter jurisdiction over such a claim for relief. This Blog will discuss the Court’s ruling with regard to the fraud/fraudulent concealment, undue influence, and unjust enrichment causes of action and the application of the statute of limitations. The Court’s Decision Fraud and Fraudulent Concealment To withstand a motion to dismiss a fraud claim, a plaintiff must allege a misrepresentation or omission of a material fact, made with knowledge of its falsity, and an intent to induce reliance thereon; justifiable reliance thereon; and injury resulting from such reliance. See , e.g. , Lama Holding Co. v. Smith Barney, Inc. , 88 N.Y.2d 413, 421 (1996). To state a claim for fraudulent concealment, in addition to pleading the foregoing elements, a plaintiff must allege that a defendant had a duty to disclose the information to him and failed to do so. Mandarin v. Wildenstein , 16 N.Y.3d 173, 179 (2011) (citation omitted). Both claims must be pleaded with particularity. They cannot be grounded in speculation and supposition. Radio Drama based its fraud claim, in part, on Respondent’s actions in connection with the 2003 and 2004 restatements of the Revocable Trust. Radio Drama alleged that Respondent inserted “misleading revisions” into the restatements in order to deceive Brown into significantly increasing the commissions to which he would be entitled and changing the remainder beneficiary from Radio Drama to the Charitable Trust over which he was the sole trustee, thereby giving him more control over Brown’s assets. Radio Drama contended that Respondent’s alleged failure to disclose the impact of such revisions constituted a material omission by which Respondent induced Brown to execute the restatements and that Radio Drama was thereby damaged when assets allegedly intended for its benefit were diverted to the Charitable Trust. The Court held that these allegations sufficed to state a claim for fraud and fraudulent concealment. However, the Court granted the motion with regard to Petitioner’s other fraud-based claims because the damages sought were too speculative. Connaughton v. Chipotle Mexican Grill, Inc. , 29 N.Y.3d 137, 142 (2017) (noting that a plaintiff cannot be compensated under a fraud cause of action “for what might have gained”). Radio Drama argued that Respondent’s alleged failure to disclose the testamentary changes to Radio Drama’s other directors prior to Brown’s death constituted fraud and/or fraudulent concealment since the other directors would have tried to convince Brown to undo the revisions had they been made aware of them. The Court found the possibility that the directors would have reversed the changes to be “too speculative to constitute a stated injury.” “For the same reason,” said the Court, “Radio Drama’s allegation that respondent did not provide notice of the probate proceeding to Radio Drama’s three other directors, thereby depriving Radio Drama of an ‘opportunity to participate actively in the ... objections, or ... to explore its rights and potential claims,’ not state a claim for fraudulent concealment.” At its core, the Court held that this allegation was too speculative because “Radio Drama demonstrate any injury resulting from its nonparticipation in the probate proceeding.” Undue Influence The Court held that “Radio Drama … stated a viable claim for rescission on the ground of undue influence.”  To state such a claim, a plaintiff must allege that the defendant had both the motive and the opportunity to exercise undue influence over the grantor and that the defendant actually exercised such influence. Matter of Walther , 6 N.Y.2d 49, 55 (1959). The Court held that Petitioner “clearly state a claim for undue influence, finding that it alleged “that: (i) respondent was motivated by the prospect of increased commissions and control over trust assets; (ii) as grantor’s lawyer, respondent had ample opportunity to influence grantor; and (iii) he actually exercised such influence.” Unjust Enrichment and Imposition of a Constructive Trust To state a claim for unjust enrichment, a petitioner must show that the respondent was enriched at the petitioner’s expense and that “it is against equity and good conscience to permit to retain what is sought to be recovered.” Mandarin , 16 N.Y.3d at 182. Radio Drama alleged that Respondent and the Charitable Trust were enriched at Radio Drama’s expense when Brown executed the 2003 and 2004 restatements to the Revocable Trust. Specifically, Petitioner claimed that Respondent benefited from the First Restatement by the insertion of a new provision in the trust instrument increasing Respondent’s trustee commissions, and both the Charitable Trust and Respondent (as its sole trustee) benefited from the Second Restatement by the substitution of the Charitable Trust in place of Radio Drama as the remainder beneficiary of the Revocable Trust. The Court held that the foregoing “stated a claim for unjust enrichment for which the imposition of a constructive trust may be an appropriate remedy.” Beatty v. Guggenheim Exploration Co. , 225 N.Y. 380, 386 (1919). Statute of Limitations Under CPLR § 213(8), claims based on fraud and/or fraudulent concealment must be brought within either six years from the date on which the claims accrued or two years from the time the fraud was, or should have been, discovered, whichever is later. Radio Drama filed the petition in December 2015, about five and a half years after Brown’s death, and more than ten years after Respondent alleged to have committed the fraud and/or exercised undue influence over Brown. The parties disagreed over the date on which the fraud-based claims accrued. Respondent argued that the limitations period began to run on the respective dates on which the restatements were executed, while Radio Drama contended that the claims did not accrue until Brown’s death in 2010, because prior to that point it had no vested interest in the Revocable Trust and thus would have lacked standing to challenge the restatements. The Court agreed with Petitioner, holding that the date of accrual was at the time of death. Thus, since Radio Drama filed its petition within six years of Brown’s death, its fraud, fraudulent concealment, undue influence, and unjust enrichment claims were timely. In so holding, the Court found the analysis in Matter of Tisdale , 171 Misc. 2d 716 (Sur. Ct., N.Y. County 1997), and Matter of Heumann , 2006 WL 6897055 (Sur. Ct., Westchester County 2006), to be persuasive. In Heumann , which relied on Tisdale , the settlor had executed a revocable trust instrument in 1996 which provided that, at her death, the trust remainder was to be distributed among her six children. The settlor amended the trust instrument in 1997 to remove one of her children (the petitioner) as a beneficiary. The settlor died in 2004, and the petitioner commenced a proceeding in 2005 challenging the validity of the 1997 amendment on the ground of undue influence. The successor trustees moved to dismiss the proceeding as time-barred, noting that more than six years had passed between the execution of the amendment execution and the filing of the petition and that the petitioner knew, or should have known, of the amendment in 2002, more than two years prior to filing his petition. The court denied the motion, holding that, because the petitioner could not have commenced the proceeding until after the settlor had died, the six-year limitations period did not begin to run until the date of the settlor’s death. The Court found further support in Matter of Dalton, N.Y.L.J., Feb. 2, 2009, at 47, col 4 (Sur. Ct., Suffolk County 2009), which cited to both Tisdale and Heumann with approval, and which held that proceedings challenging revocable trusts can be instituted only after the settlor’s death, and therefore “the running of the statute of limitations regarding the underlying trust instrument not commence until the death of the grantor.” Id . Based upon the foregoing authorities, the Court held that “Radio Drama could not demonstrate any injury to a cognizable interest in the Revocable Trust until death had given it standing to claim such an injury.” “Accordingly, since Radio Drama filed its petition within six years of death, its fraud, fraudulent concealment, undue influence and unjust enrichment claims are timely, and the motion to dismiss these claims is denied.” Takeaway Radio Drama is notable for a few reasons. First, with regard to the fraud-based claims, Radio Drama not only illustrates the degree of specificity needed to withstand a motion to dismiss but also highlights the importance of seeking relief that is quantifiable and not speculative.    Second, Radio Drama makes an important distinction over the date on which a fraud claim accrues when dealing with a revocable trust. In a typical fraud case, the cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). But cases involving a revocable trust instrument are not typical in so far as the underlying instrument is ambulatory subject to change or revocation at any time prior to the settlor’s death. Proceedings challenging revocable trusts can be instituted only after the settlor’s death because the plaintiff has no vested interest in the trust prior thereto. Therefore, as the Radio Drama Court found, the statute of limitations involving the underlying trust instrument could not commence until the death of the grantor. Third, in New York, there is a question over whether the courts should recognize undue influence as an independent cause of action. Some courts have held that undue influence is not a cause of action or a claim in its own right, but rather a ground for the rescission of an instrument or transaction. E.g. , Spinella v. Costantino , 33 Misc. 3d 1232(A) (Sup. Ct., Kings County 2011); Weinberg v. Kaminsky , 2017 N.Y. Slip Op. 31628(U) (Sup. Ct., N.Y. County 2017). Other courts treat undue influence as an independent claim, subject to dismissal if not adequately pleaded or supported by the evidence. See , e.g. , Matter of Nealon , 57 A.D.3d 1325 (3d Dept. 2008); Kelly v. Overbaugh , 2008 N.Y. Slip Op. 32124 (Sup. Ct., Greene County 2008). Rather than wade through the differing views, the Court took a pragmatic approach to the issue, holding that “ egardless of how the claim is characterized, Radio Drama has stated a viable claim for rescission on the ground of undue influence.” Finally, though not discussed herein, Radio Drama explores the boundaries of the Surrogate Court’s subject matter jurisdiction – a discussion that many readers might find interesting.

In New York, Section 3211(a) of the Civil Practice Law and Rules (“CPLR”) provides the primary mechanism by which a party can make a motion, before a responsive pleading, to dismiss one or more causes of action alleged against that party. A “cause of action” subject to dismissal under CPLR § 3211(a), includes counterclaims, cross-claims, and third-party claims. There are several grounds under CPLR § 3211(a) on which a party may move to dismiss.  These include (but are not limited to) the following: (1) documentary evidence; (2) lack of subject matter jurisdiction; (3) lack of capacity; (4) another action pending between the same parties for the same cause of action in another court; (5) disposition in a prior proceeding; (6) improper counterclaim; (7) failure to state a cause of action; (8) lack of personal jurisdiction; (9) improper extra-jurisdictional service; (10) failure to join necessary party; and (11) immunity for voluntary non-profit officers. Although in most cases, the moving party invokes more than one of the foregoing bases for his/her motion, the movant may base his/her motion solely upon the existence of documentary evidence. Dismissal under CPLR § 3211(a)(1) is a unique feature of New York motion practice.  Under CPLR § 3211(a), a party may make a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.” For this reason, courts described the phrase as “fuzzy” because “what is documentary evidence for one purpose, might not be documentary evidence for another.” Fontanetta v. Doe , 73 A.D.3d 78, 84 (2d Dept. 2010). To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. Materials that clearly qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta , 73 A.D.3d at 84-85 (citation omitted). Relevant to today’s post, a valid lease may qualify as “documentary evidence” within the meaning of CPLR § 3211(a)(1). Sunset Cafe, Inc. v. Mett’s Surf & Sports Corp. , 103 A.D.3d 707, 709 (2d. Dept. 2013). Thus, in order for evidence to qualify as “documentary,” it must be unambiguous, authentic and undeniable.” Granada Condominium III Assn. v. Palomino , 78 A.D.3d 996, 996-997 (2d Dept. 2010). In the Second Department, affidavits, emails, and letters, are not considered documentary evidence “within the intendment of CPLR 3211(a)(1).” Phoenix Grantor Trust v. Exclusive Hospitality, LLC , 2019 N.Y. Slip Op. 3635 (2d Dept. May 8, 2019), quoting Nero v. Fiore , 165 A.D.3d 823, 826 (2d Dept. 2018). In the First Department, like the Second Department, affidavits are not documentary evidence within the meaning of CPLR § 3211(a)(1). Tsimerman v. Janoff , 40 A.D.3d 242 (1st Dept. 2007). However, unlike in the Second Department, the First Department will consider correspondence and emails “under appropriate circumstances” to qualify as documentary evidence, so long as they meet “the essentially undeniable test.” Amsterdam Hospitality Grp. , 120 A.D.3d at 432; Langer v Dadabhoy , 44 A.D.3d 425 (1st Dept. 2007). A motion to dismiss under CPLR § 3211(a)(1) requires the court “to accept the complaint’s factual allegations as true, according to plaintiff the benefit of every possible favorable inference, and determining only whether the facts as alleged fit within any cognizable legal theory.” Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc. , 10 A.D.3d 267, 270 (1st Dept. 2004). Dismissal is warranted only if the documentary evidence submitted “utterly refutes plaintiff’s factual allegations” ( Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002)), and “conclusively establishes a defense to the asserted claims as a matter of law.” Weil, Gotshal , 10 A.D.3d at 270-271 (internal quotation marks omitted). In other words, the documents relied upon must “definitely dispose of plaintiff's claim.” Blonder & Co. v. Citibank, N.A. , 28 A.D.3d 180, 182 (1st Dept. 2006). On August 5, 2019, Justice Robert Reed of the Supreme Court, New York County, dismissed a damages action brought by a commercial tenant against its landlord on the basis of documentary evidence. Abigael’s on Broadway Inc. v. Shorenstein Realty Servs., LP. , 2019 N.Y. Slip Op. 32357(U) (Sup. Ct., N.Y. County Aug. 5, 2019) ( here ). As discussed below, Justice Reed held that the plain and unambiguous terms of the lease between the parties mandated dismissal of the action. Plaintiff, Abigael’s on Broadway, Inc., a commercial tenant, commenced the action against Defendant, SRI Eleven 1407 Broadway Operator, LLC (“SRI”), its landlord, for, inter alia , damages allegedly caused by Defendant’s renovation and remodeling of the subject building.  In or about April 2016, Defendant began a capital improvement project to update and modernize the building (the “Project”). The Project included the renovation of the tenants’ spaces, including the portion of the building leased by Plaintiff, and the building’s lobby and exterior facade.  On October 18, 2017, Plaintiff filed the action, asserting six causes of action against SRI, the first two of which were for breach of contract and lost profits and business.  Defendant moved to dismiss under CPLR §§ 3211(a)(1) and 3211(a)(7), claiming that Plaintiff’s first and second causes of action for lost business and profits should be dismissed as contradicted by the express terms of the lease between the parties. The Court granted the motion. Under the lease, noted the Court, the landlord is specifically exculpated from liability “arising from the making of any repairs, alterations, additions or improvements in or to any portion of the building or the premises ….” Slip Op. at *2. The Court explained: The first and second causes of action are expressly barred by paragraphs 7 and 19 of the lease. In this court’s reading, the language of paragraph 7 is unambiguous: “there shall be no liability on part of Landlord by reason of ... injury to ... business arising from the making of any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises” (emphasis added). The rider to paragraph 7 does not contradict the paragraph’s essential point. Consequently, the Court held that “Plaintiffs first and second causes of action … must be dismissed.” Id . at *3. Takeaway As shown in Abigael’s on Broadway , CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, Abigael’s on Broadway demonstrates that where the document is clear, unambiguous, and undeniable, and “utterly refutes” the claims asserted, dismissal is appropriate.