Working with friends can be both rewarding and challenging. The comfort that brings friends together often is replaced by the stress and rigors of running a business. Because friends have a history together, professional disagreements often become heated, especially when there are pent up issues or grudges that one holds about the other. Similarly, the character traits that created the friendship are often replaced by a professional (and, some would say, ugly) demeanor that was not seen until the partnership was formed. For this reason, many partnerships formed in friendship find that the relationship among the founders is too toxic for the partnership to continue as originally formed, if at all. Such was the case in Delibasic v. Manojlovic , 2019 N.Y. Slip Op. 05613 (3d Dept. July 11, 2019) ( here ). Delibasic involved a dispute among friends who became business partners in connection with four (4) parcels of real estate located in Lake Placid, New York. The parties formed an oral partnership for the purpose of acquiring and improving real property and operating a vacation rental business through VRBO, Air B N B and the like. The plan was for the Delibasics to provide the initial money and for the Manojlovics to provide the knowledge and know-how and to later invest their funds. According to plaintiffs, defendants mismanaged the rental properties, misrepresented the amount of money they contributed to the partnership and tried to steal one of the properties. Plaintiffs commenced the action alleging, inter alia , claims for breach of fiduciary duty and fraud. Following joinder of issue, plaintiffs moved for summary judgment on their claims for breach of fiduciary duty and fraud. In March 2018, the motion court denied the motion. Plaintiffs appealed. Background here), the=">here), the" facts="facts" of="of" which,="which," incorporated="incorporated" into="into" its="its" summary="summary" judgment decision.="judgment decision."> Plaintiffs Samir Delibasic and Snjezana Delibasic (“plaintiffs” or “Delibasic”) are married and reside in Mississauga, Ontario, Canada. Defendants Neven Manojlovic and Edvina Uzunovic (“defendants”) are married and reside in Stamford, Connecticut. In early 2010 – after plaintiffs visited defendants’ vacation home in Lake Placid – the parties decided to go into business together for the purpose of owning and renting properties in the Lake Placid area. An oral partnership was then formed whereby each of the four partners was to receive a 25% ownership interest in the business. The partners were to contribute equal amounts to the business and share equally in all profits and losses. In May 2010, the partnership purchased certain unimproved property on Planty Way in Lake Placid. The property was later subdivided into two separate parcels – 8 Planty Way and 10 Planty Way, respectively – and a log home was built on each. In August 2010, the partnership purchased vacant property on Cascade Road in Lake Placid. The property – located adjacent to Planty Way – enabled the parties and renters to access the Planty Way properties without crossing an easement over neighboring property. The deeds to both the Planty Way and Cascade Road properties were placed in all four of the partners’ names. Later, in December 2011, the partnership purchased certain unimproved property on Seneca Trail in Lake Placid. In March 2012, the partnership created Srajevo Place LLC (the “LLC”) with the assistance of a law firm in Lake Placid. The firm also assisted the partnership in transferring both Planty Way properties to the LLC, with the Cascade Road and Seneca Trail properties remaining as partnership assets. At the commencement of the partnership, plaintiffs contributed $410,000.00, which the parties used to purchase the properties on Planty Way and Cascade Road. A portion of the $410,000.00 was also used to build the home at 8 Planty Way, as well as the foundation at 10 Planty Way. Defendants, who did not contribute any capital at the commencement of the partnership, financed the remainder of the construction at 10 Planty Way. The former owner of the Seneca Road property agreed to hold the mortgage on that property. The note called for the partnership to make 36 monthly payments of $711.11, with payments to begin on January 9, 2012. On January 1, 2012, plaintiffs took over management of rentals for the Planty Way properties. Plaintiffs apparently noticed some discrepancies in the amounts defendants claimed to pay for the construction of 10 Planty Way and the amounts actually charged by the builder. As a result, plaintiffs requested a full accounting from defendants and the LLC in early 2013. The relationship between the parties subsequently deteriorated and, on December 31, 2013, defendants took over the management of 8 Planty Way without plaintiffs’ consent, changing the locks so as to prevent plaintiffs from entering the property. Plaintiffs contended that defendants refused to honor any of the rental contracts on 8 Planty Way, which resulted in lost revenue for the partnership. Plaintiffs further contended that defendants declined to pay their portion of the monthly mortgage on the Seneca Road property, as the result of which the partnership missed the February, March and April 2014 mortgage payments. Finally, plaintiffs contended that, unbeknownst to them, defendants paid off the mortgage on the Seneca Road property in April 2014 and assigned it to their company, defendant Lake Placid Properties, LLC (“Lake Placid Properties”). On April 11, 2014, Lake Placid Properties sent correspondence to all four of the partners declaring “the full amount of the debt to be due and owing” and further advising that the “ ailure to remit sum by May 12, 2013 may cause the commencement of foreclosure proceedings.” According to plaintiffs, they did not discover that Lake Placid Properties was owned by defendants until after receiving the correspondence. Plaintiffs commenced the action on May 27, 2014, seeking, inter alia , dissolution of the partnership and the LLC and damages for breach of fiduciary duty and fraud. Plaintiffs moved for summary judgment on, inter alia , their breach of fiduciary duty and fraud claims. The motion court denied the motion. In denying the motion, the motion court held that there were: material issues of fact … with respect to: the terms of the partnership agreement between the parties, including the management of the partnership, whether the parties contributed to the partnership account, the commingling of personal and partnership funds and whether the parties agreed or consented to the same, whether defendants refused to honor rental agreements plaintiffs had in place; the mortgage related to the Seneca Trail property, including the circumstances surrounding the assignment of the same and why payments on the same were not timely made by plaintiffs; preparation of the Kenny invoices for work related to the construction of 8 Planty Way and 10 Planty Way; whether defendants made any material misrepresentations of fact with respect to the amount of utility bills defendants claim to have paid and the creation and/or amount of a number of construction related invoices defendants claim to have paid and/or with respect defendant’s investment in, and capital contribution to, the partnership, and defendants’ intent. The motion court also held that “material issues of fact exist with respect to whether defendants engaged in misconduct and whether plaintiffs sustained damages that were directly caused by defendants’ misconduct.” Finally, addressing plaintiff’s fraud claim, the motion court concluded that material issues of fact existed concerning each element of plaintiffs’ fraud claim – that is, there were issues of fact concerning “whether defendants made any material misrepresentation, with knowledge of its falsity, for the purpose of inducing plaintiffs to rely upon it, and, if so, whether plaintiffs justifiably relied on the misrepresentation and sustained injury as a result.” As noted, plaintiffs appealed. The Appellate Division, Third Department, affirmed. The Third Department’s Decision To succeed on a claim for breach of fiduciary duty, a plaintiff must establish the existence of a fiduciary relationship, misconduct by the defendant and damages directly caused by the defendant’s misconduct. Loch Sheldrake Beach & Tennis Inc. v. Akulich , 141 A.D.3d 809, 811 (2016), lv. dismissed , 28 N.Y.3d 1104 (2016); Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2010). In New York, “ artners … and particularly managing partners, owe a fiduciary duty to the other partners.” Birnbaum v. Birnbaum , 73 N.Y.2d 461, 465 (1989) (citations omitted). Among the duties owed is the duty of loyalty – that is, a duty that not only bars “blatant self-dealing, but also avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.” Id . at 466 (citations omitted). The Court found that the motion court correctly found issues of fact regarding whether defendants engaged in misconduct that caused plaintiffs’ damages: As part of this cause of action, plaintiffs submitted documentary proof establishing that partnership funds were used by defendants to pay off expenses on their personal credit cards. The record, however, also reflects that some of the charges on defendants' personal credit cards were partnership expenses and that, in order to refinance one of the properties owned by the partnership, the bank required that the credit cards be fully paid off. To the extent that plaintiffs contend that defendants improperly commingled personal and partnership funds or used their personal bank account to hold partnership funds, the record discloses a triable issue of fact as to whether plaintiffs acquiesced to such practice. Slip Op. at **1-2. The Court also concurred with the motion court in finding issues of fact concerning plaintiffs’ claims that defendants mismanaged the rental properties. Id . at *2 (“In addition, to the extent that plaintiffs argue that defendants breached a fiduciary duty by mismanaging the rental properties, the parties offer conflicting testimony on this issue.”) Finally, the Court held that the motion court did not err in finding issues of fact surrounding plaintiffs’ claim “that defendants surreptitiously tried to usurp the Seneca Trail property.” Id . at *2.  The Court rejected plaintiffs’ contention that assignment of the mortgage for the Seneca Trail property to the LLC was improper and entitled them to summary judgment on the fiduciary duty claim. The record, however, indicates that mortgage payments for the Seneca Trail property had not been paid and that the original mortgagee had threatened legal action with respect to this property. Manojlovic testified in his deposition that he consulted with an attorney to determine what action should be taken with respect to the Seneca Trail property and was advised to have a third party assume the mortgage. Upon this advice, the mortgage for the Seneca Trail property was ultimately assigned to the limited liability company. Furthermore, according to Manojlovic, neither he nor Uzunovic had any ownership interest in this limited liability company and that he merely managed it. Id . To plead a fraud claim, plaintiffs must demonstrate that “defendants knowingly misrepresented a material fact with the intent to deceive and, after having justifiably relied upon such misrepresentation, experienced pecuniary loss.” State of New York v. Industrial Site Servs., Inc. , 52 A.D.3d 1153, 1157 (2008); see also Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016). Plaintiffs alleged that defendants: (1) attempted to steal the Seneca Trail property by failing to contribute to the mortgage payments for the property, then surreptitiously procuring an assignment of the mortgage by one of their other companies, and threatening to foreclose on the property; with the net effect being that plaintiffs would lose their investment in the property and defendants would hold it free and clear; (2) misrepresented and overstated the amounts allegedly paid for utilities on the properties in an effort to artificially increase the amount of their partnership contribution; and (3) created false invoices concerning expenses to be paid to the contractor on the Planty Way properties that inflated the amount contributed by defendants as capital contributions. The Court agreed with the motion court that there were triable issues of fact that prevented the grant of summary judgment on the fraud claim. Plaintiffs point to defendants’ actions regarding the Seneca Trail property as one basis for the fraud claim but, as discussed, a question of fact exists concerning the propriety of those actions. Plaintiffs also claim that defendants overstated the amount they had paid for utility expenses in connection with some of the subject properties. In his affidavit, Manojlovic did not dispute that there was an overstatement, but further stated that any overstatement was an accounting error and that any errors were fixed prior to the commencement of this action. Plaintiffs also claim that defendants created false invoices concerning expenses to be paid to a contractor that inflated the amount contributed by defendants as capital contributions. Other than speculation, however, plaintiffs failed to substantiate their claim of forgery. Furthermore, Manojlovic explained that he created invoices because the contractor’s record keeping was inadequate and that such invoices reflected what had already been paid to the contractor. The contractor also testified at his deposition that he assisted Manojlovic in typing the invoices and creating their format. Finally, the record discloses a triable issue of fact as to what defendants contributed to the partnership as capital contributions. Id . at *2. “In view of the foregoing,” the Court found “that plaintiffs were not entitled to summary judgment on their fraud cause of action.” Id . (citation omitted). Takeaway It has been said that “ business partnership is like a marriage.” ( Here .) Like any marriage, “trust, communication, honesty, respect and the ability to compromise” are key traits in a successful relationship. Id . Just as good marriages grow over time, so too do business relationships. Having said that, however, “not all friendships can evolve into business partnerships, so carefully choosing who you work with is essential.” Id . As Delibasic shows, the relationship between the parties devolved, not evolved, with one set of friends accusing the other of misconduct and fraud.   From a legal perspective, Delibasic shows the difficulties a party encounters trying to obtain summary judgment. Because “ ummary judgment is a drastic remedy,” courts grant it “only where the moving party has ‘tender sufficient evidence to demonstrate the absence of any material issues of fact.’” Alvarez v. Prospect Hosp. , 68 N.Y.2d 320, 324 (1986). Thus, if the moving party fails to make the requisite showing, “it is not entitled to summary judgment.” Maines Paper & Food Serv., Inc. v. Restaurant Mgmt. by D.C. Corp. , 229 A.D.2d 748, 750 (3d Dept. 1996). Mere conclusions, speculation, unsubstantiated allegations or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman v. City of N.Y. , 49 N.Y.2d 557, 562 (1980). As the Third Department noted, some of Delibasic’s allegations fell into that category. Slip Op. at *2 (“Other than speculation, however, plaintiffs failed to substantiate their claim of forgery”). Other allegations were simply disputed – that is, Delibasic could not “demonstrate the absence of any material issues of fact.” Alvarez , 68 N.Y.2d at 324. As noted, Delibasic highlights the challenges the proponent of a summary judgment motion must overcome to obtain such relief. These challenges can be considerable. Indeed, a study of cases in three federal district courts ( here ) found that only about 10% of contract and tort cases succeeded in obtaining summary disposition. (“Contract and tort cases have reasonably uniform low summary judgment rates, with results across our districts and time periods that are all consistent with rates being less than 10%.”) No doubt, the reason for such a low percentage of success has to do with the fact that it is easier to find material issues of disputed fact when trying to resolve issues of scienter (or state of mind), causation, or breach of a duty (such as negligence). As the Third Department noted in Delibasic , “the record disclose … triable issue of fact” with regard to many of the elements of Delibasic’s breach of fiduciary duty and fraud claims. Does this mean that parties should not move for summary judgment? Delibasic (as well as the studies) show that the answer is dependent upon the facts and evidence of the case. To be sure, questions of law, issues that can be proven through documentary evidence, and the inability to support a claim or an element of a claim with evidence may militate in favor of making a motion for summary judgment. But, as Delibasic illustrates, obtaining summary judgment on issues that are inherently factual ( e.g. , scienter, breach of duty and causation) may prove to be too challenging.

Frequently, important terms of a contract are intended to be incorporated by reference into other documents.  Litigation frequently arises when one party disputes whether the terms of extrinsic documents were indeed made part of the executed agreement. The parties in Movado Group, Inc. v. Mozaffarian , 92 A.D.3d 431 (1 st Dep’t 2012), entered into a credit agreement in which defendants “expressly acknowledged receipt of, and agreed to be bound by, terms and conditions contained in an extrinsic document, which defendants neither read nor requested a copy to read.”  Subsequent to credit approval, the defendants first saw the “terms and conditions,” which contained a New York forum selection clause.  The Movado plaintiff sued defendant in New York under the credit agreement.  Supreme court denied plaintiff’s motion for a default judgment and granted defendants’ motion to dismiss for lack of personal jurisdiction. The First Department unanimously reversed supreme court and remanded the matter for a determination on the merits, holding: Plaintiff proved by a preponderance of the evidence that the terms and conditions of the extrinsic document were incorporated into the credit agreement, and that defendants' acknowledged receipt and agreed to be bound by the same. The credit agreement, which identified the terms and conditions as those contained on each invoice, was sufficient to put defendants on notice that there was an additional document of legal import to the contract they were executing. Defendants' decision not to inquire as to the terms and conditions is one by which they are bound. Movado , 92 A.D.3d at 431 – 32 (citations omitted). One of the authorities on which the Movado Court relied in reaching its result was Shark Information Services Corp. v. Crum and Forster Commercial Ins. , 222 A.D.2d 251 (1 st Dep’t 1995).  The plaintiff in Shark made a claim under an insurance policy after its business was interrupted due to a storm.  Defendant insurer indicated that it would disclaim coverage under the policy despite the fact that the “policy as delivered to plaintiff plainly covered the claimed loss and contained no applicable exclusion….”  Shark , 222 A.D.2d at 251.  The insurer argued that the exclusion on which they otherwise would have relied to disclaim coverage “was inadvertently omitted from the policy and that its reliance upon the exclusion should not be precluded by the inadvertent error.”  Shark , 222 A.D.2d at 251.  Plaintiff sued the insurer for, inter alia , breach of the insurance contract.  In deciding summary judgment motions from both sides, supreme court “was apparently of the view that although the endorsement containing the claimed exclusion was concededly absent from the policy as issued, there was some factual question as to whether the exclusion might be viewed as incorporated in the policy by reference.”  Shark , 222 A.D.2d at 252. The First Department in Shark , rejected the insurer’s “incorporation by reference” argument and stated: In our view, defendants' reliance upon the doctrine of incorporation by reference must, as a matter of law, be held ineffective to bring the claimed exclusion within the terms of subject policy. Incorporation by reference, of course, is appropriate only where the document to be incorporated is referred to and described in the instrument as issued so as to identify the referenced document beyond all reasonable doubt.  It is clear that none of the instant policy's oblique references to an otherwise unidentified “Coverage Form” meet this exacting standard. Indeed, the policy as issued gives every appearance of being a complete statement of the terms, conditions, and limitations of coverage and makes no obvious reference to any unincluded endorsement, much less one containing so critically important an exclusion from coverage. Shark , 222 A.D.2d at 252 (citations and quotation marks omitted). On July 9, 2019, the Appellate Division, First Department, addressed the “incorporated by reference” issue in Eshaghpour v. Zespa Industries, Inc.   The parties in Eshaghpour entered into a contract pursuant to which defendant was to supply architectural woodwork in an apartment owned by plaintiff’s wife.  Plaintiff signed the front page of the agreement which stated that the “prices, specifications and conditions above and on the back of this proposal were satisfactory” (brackets omitted).  A dispute arose and plaintiff sued defendant in New York.  Relying on the North Carolina forum selection clause appearing as one of the “terms and conditions” purportedly printed on the reverse side of the proposal page, defendant moved to dismiss the New York action. The First Department affirmed supreme court’s denial of defendant’s motion.  In so doing, the Court found that the “terms and conditions” section never appeared in the agreement that plaintiff reviewed and signed, and that plaintiff never saw the subject page.  Significantly, the lengthy contract “was paginated consecutively and signed on each page by both parties contrary to defendants’ suggestions, plaintiff had no reason to ask for any other documents.”  The Court further explained: Although documents may be incorporated by reference as part of an executed agreement, the doctrine of incorporation by reference is grounded on the premise that the material to be incorporated is so well known to the contracting parties that a mere reference to it is sufficient.  The referenced material must be described in the contract such that it is identifiable beyond all reasonable doubt. Here the agreement's oblique reference to an otherwise unidentified Terms and Conditions page, which was never provided to plaintiff, is insufficient to meet this exacting standard. (Citations and internal quotation marks omitted.) TAKEAWAY While it sounds silly to say, it is critically important to carefully read the agreements that you sign.  Further, if there is any mention of documents that are to be incorporated by reference, make sure that those documents are thoroughly reviewed attached to the final signed contract.  By proceeding in this manner there should be no confusion as to all of the terms and conditions of the parties’ agreement.

On July 9, 2019, the Appellate Division, First Department, issued three decisions involving claims of fraud and/or fraudulent inducement that piqued this Blog’s interest.  One case involved whether a fraudulent inducement claim duplicated a contract claim ( Man Advisors, Inc. v. Selkoe , 2019 N.Y. Slip Op. 05483 (1st Dept. July 9, 2019) ( here ), while the other two involved the justifiable reliance element of a fraud cause of action ( Mann v. Thomas-Senior , 2019 N.Y. Slip Op. 05496 (1st Dept. July 9, 2019) ( here ), and OmniVere, LLC v. Friedman , 2019 N.Y. Slip Op. 05494 (1st Dept. July 9, 2019) ( here )). We look at each case below. Man Advisors, Inc. v. Selkoe In Man Advisors , the Court unanimously reversed the dismissal of a fraudulent inducement claim, holding that the plaintiff “state a claim for fraudulent inducement, which is not duplicative of claim for breach of the guarantee.” Slip Op. at *1. Plaintiff entered into a $2,040,00 million secured promissory note agreement with Karmaloop, Inc. (“Karmaloop”), that defendants Gregory Selkoe (“Gregory”) and Dina Selkoe (collectively, “Selkoe”) guaranteed. After Karmaloop was unable to meet its obligations under the note and declared bankruptcy (13 months after the initial deal), plaintiff sued defendants for breach of contract, claiming that they were personally responsible for the balance remaining on the note ($1,615,000) plus fees and interest. Plaintiff also sued Gregory for fraudulently inducing it to enter the note by making false statements about Karmaloop’s past defaults, its financial condition, and Gregory’s own history of personal guarantees. Plaintiff sought an additional $1,615,000.00 against Gregory pursuant to that claim. The motion court held that the fraudulent inducement claim duplicated the contract claim. In order to state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). In the context of a case alleging both contract and tort claims, the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of a breach of contract claim. Id . Moreover, the misrepresentations of present fact must be “collateral to the contract and induced the allegedly defrauded party to enter into the contract.” Orix Credit Alliance v. Hable Co. , 256 A.D.2d 114, 115 (1st Dept. 1998). Therefore, “ s a general rule, to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract.” Non-Linear Trading Co. v. Braddis Assoc. , 243 A.D.2d 107, 118 (1st Dept. 1998) (internal quotation marks omitted). Against the foregoing, the motion court held that “the alleged fraudulent statements made by Mr. Selkoe substantially related to the contract and under the same facts as the breach of contract.” In so holding, the court found that plaintiff had “failed to establish a duty that distinct from, or in addition to, the defendant’s contractual obligations.” Therefore,” held the motion court, “the fraud cause of action duplicative of the breach of contract action.” Plaintiff appealed. As noted, the First Department unanimously reversed. The Court held that plaintiff adequately stated a claim for fraudulent inducement because Gregory made two representations that were false: Gregory “had previously given only one other personal guarantee, and that Karmaloop had never defaulted on any loan payment.” Slip Op. at *1. The Court noted that, in fact (as alleged), “ had previously guaranteed a loan issued to another Karmaloop executive, and Karmaloop had defaulted on that loan.” Id . The Court also held that these allegations did not duplicate the guarantee claim, finding that “Plaintiff not allege that misrepresented the intent to perform on the guarantee and underlying promissory note, which would render the fraud claim duplicative, but rather allege that misrepresented his and Karmaloop’s ability to perform.” Id . Notably, the Court departed from its customary rulings with regard to alleged duplication, holding that it was premature to make that determination at such an early stage of the proceedings: “At this early juncture, we find that plaintiff should be ‘permitted to plead in the alternative ( see CPLR 3014),’ and its claim ‘for fraud, should not be dismissed as duplicative of the breach-of-contract cause of action.’” Id. , quoting Citi Mgt. Group, Ltd. v. Highbridge House Ogden, LLC , 45 A.D.3d 487, 487 (1st Dept. 2007). Mann v. Thomas-Senior In Mann , the First Department addressed the reasonable reliance element of a fraud claim, holding that the failure to exercise adequate due diligence in ascertaining the truth of a representation was fatal to plaintiff’s fraud claim. The justifiable reliance requirement is one of the five elements of a fraud cause of action: (1) a misrepresentation or a material omission of fact; (2) which was false and known to be false by the defendant(s); (3) made for the purpose of inducing another person to rely upon it; (4) justifiable reliance of the other party on the misrepresentation or material omission; and (5) damages. Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (citation omitted). Because the determination of whether a plaintiff justifiably relied on a misrepresentation or omission is a factually “nettlesome” one ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010)), “ 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). If the plaintiff fails to make use of the means available to discover the truth, his/her claim will be dismissed. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). Mann arose from plaintiffs’ purchase of a luxury condominium apartment in the Schaefer Landing North Condominium complex (the “Complex”) during the spring 2017. The Complex is located at the eastern edge of the East River in Williamsburg. The unit is located in a Northwest corner of the Complex, with windows facing west to Manhattan, as well as windows facing north to the Williamsburg Bridge and a new building that was under construction at the time of purchase. Plaintiffs purchased the unit for $1,900,000. According to plaintiffs, defendants falsely represented the extent to which the building under construction would obstruct the views from the north side of the building. Defendants moved to dismiss, claiming, inter alia , that plaintiffs could not demonstrate that they justifiably relied on any alleged misrepresentation. Among other things, defendants contended that plaintiffs explicitly acknowledged in the contract of sale that they did not rely on any representations, and that defendants did not make any representations, other than those specifically identified in the contract documents. Defendants also argued that plaintiffs saw and were aware of the pending construction project to the north of the Complex during their visit(s) to the building and were not precluded from investigating, and did not investigate, the construction plans and the height of the anticipated building. In this regard, defendants noted that there were various publicly available documents from real estate publications and government offices that described the project and contained various depictions of it. The motion court agreed with defendants and dismissed the complaint. Plaintiffs appealed. The First Department “unanimously affirmed,” holding that plaintiffs failed to demonstrate that they justifiably relied on “defendants’ representations concerning the view from the apartment that they were purchasing.” Slip Op. at *1 (citation omitted).  In fact, noted the Court, “ he complaint devoid of any allegations that plaintiffs exercised adequate due diligence in ascertaining the extent to which the adjacent building would impact the view.” Id. , citing Jee Foo Realty Corp. v. Lemle , 259 A.D.2d 401, 402 (1st Dept. 1999). OmniVere, LLC v. Friedman In OmniVere , the First Department unanimously affirmed the dismissal of fraud claims in a counterclaim and third-party complaint because, inter alia , plaintiff failed to satisfy the justifiable reliance element of the cause of action. In February 2014, Intelligent Discovery Management, LLC (“IDM”) and Balint Brown & Basri, LLC (“B3” and with IDM, “IDMB”) and OmniVere LLC, OmniVere Holding Company LLC and Eric S. Post (“Post”) (collectively, “Omnivere”) commenced negotiations in which OmniVere would acquire IDMB. After weeks of due diligence and negotiations, the parties reached an agreement on the terms of a deal, which they memorialized in an Asset Purchase Agreement (“APA”). Under their agreement, OmniVere, LLC would acquire substantially all IDMB’s assets for $9.9 million in cash and $2 million in preferred equity in OmniVere Holding, LLC in the form of 1,153,846 Class B Units (“Units”) pursuant to a simultaneously executed Operating Agreement of OmniVere Holding, LLC. IDMB alleged that Post told IDMB that Omnivere expected to have a combined $40 million in annual sales and earnings of at least $10 million a year by closing. IDMB claimed that this was a misrepresentation because actual annual sales at the time of closing were only projected to be $33 million. IDMB also alleged that OmniVere falsely claimed to have a $10 million war chest to make additional acquisitions and had secured a $3 million revolving line of credit. OmniVere moved to dismiss, claiming, among other things, that IDMB failed to plead that it justifiably relied on the alleged misrepresentations. The motion court agreed, stating that IDMB made no effort to determine whether the information claimed to be false was, in fact, false: “IDMB, however, does not explain how these projections were calculated or where the numbers came from, other than in informal emails” and “admitted that it conducted no projections of its own.” The court explained that “IDMB not demonstrate how its reliance on any representation could be reasonable when it could have obtained background information about the anticipated state of Omnivere on its own through legal and financial advisors” but failed to do so. The First Department agreed with the motion court, holding that “IDMB failed to sufficiently allege justifiable reliance on the alleged misrepresentations regarding Omnivere’s financial projections and financing since IDMB had the means to discover the true nature of the transaction by the exercise of ordinary diligence but failed to make use of those means.” Slip Op. at *1, citing Ventus Grp. LLC v. Finnerty , 68 A.D.3d 638, 639 (1st Dept. 2009). Takeaway As readers of this Blog know, courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from a breach of contract. In fact, courts routinely dismiss a fraudulent inducement claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Grp. Ltd. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. The former will result in dismissal, while the latter will not. Gosmile , supra . In Gosmile , the First Department explained: “that a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract, is collateral to the contract, even though it may have induced the plaintiff to sign it, and therefore involves a separate breach of duty.” 81 A.D.3d at 81 (citations omitted). Thus, a fraud claim that is premised on a misrepresentation of a prior or existing fact will not be dismissed “as an insincere promise of future performance” and, therefore, as duplicative of a breach of contract claim. First Bank v. Motor Car Funding, Inc. , 257 A.D.2d 287, 292 (1st Dept. 1999) (citations omitted). Man Advisors reiterates the foregoing principles. It is notable, however, because the First Department (albeit in dicta ) permitted plaintiff to plead its fraud claim in the alternative (Slip Op. at *1 (citing CPLR § 3014)), an approach that some trial court level judges employ. Readers of this Blog also know that courts will not sustain a fraud claim in which the plaintiff fails to avail himself/herself/itself of the means to discover the truth or falsity of representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation into the veracity of a representation or omission when the aggrieved party has the ability to do so, or ignoring facts that are in plain sight ( i.e. , facts that are publicly available), are reasons to dismiss a fraud claim. Mann and OmniVere are the most recent examples coming out of the First Department to underscore these principles.

Sometimes state appellate courts affirm or modify lower court decisions without providing much in the way of analysis. With overburdened dockets and substantially similar issues being decided, it is no surprise these courts issue short decisions that have more value to the parties than to the bar. Such is the case in BML Properties Ltd. v. China Construction America Inc. , 2019 N.Y. Slip Op. 05339 (1st Dept. July 2, 2019) ( here ).   Overview and the First Department’s Decision In late 2017, BML Properties Ltd. (“BML” or “Plaintiff”) filed an action against China Construction America Inc. (“CCA”), an indirect subsidiary of China State Construction Engineering Co. Ltd., claiming that CCA falsely represented and assured BML that the multi-billion dollar Baha Mar resort complex in Nassau, Bahamas, would be opened on time and within budget. CCA argued that the dispute belonged in arbitration under an amendment to the construction contract that was originally signed by its local unit, CCA Bahamas Ltd. (“CCA Bahamas”), and Baha Mar Ltd. (“Bar Mar”), an entity owned by BML that had been created to develop the resort. The motion court (Scarpulla, J.) rejected BML’s argument, noting that the claims actually arose under a different contract signed by CCA, its affiliates and BML when the latter made an $830 million investment in the development of the project. here ).=">here)."> According to the motion court, CCA Bahamas and a non-party to the lawsuit signed the agreement to which the parties agreed to arbitrate disputes arising under their contract. The Appellate Division, First Department, unanimously affirmed the motion court’s decision, holding that the motion “court correctly denied the branch of defendants’ motion seeking to compel arbitration because plaintiff was not a party to the agreement containing the arbitration clause and the claims at issue were, by separate agreement, required to be litigated in New York.” Slip op. at *1, citing Matter of Cammarata v. InfoExchange, Inc. , 122 A.D.3d 459, 460 (1st Dept. 2014), and Oxbow Calcining USA Inc. v. American Indus. Partners , 96 A.D.3d 646, 649-650 (1st Dept 2012). Defendants also argued that BML’s fraud claims should be dismissed because it failed to allege that it justifiably relied on any claimed misstatement and omission cited in the complaint.  In the complaint, BML alleged that CCA orchestrated a “massive fraudulent scheme” by creating the false and misleading impression that it was meeting on-time and on-budget schedules necessary to open the resort in December 2014, when in fact, Defendants were concealing massive delays that, inter alia , increased the costs of construction to the detriment of BML. Justice Scarpulla disagreed, denying the motion to dismiss. The First Department affirmed, holding that “Plaintiff adequately stated a claim for fraud, by asserting justifiable reliance upon assurances, alleged to have been false when made, regarding the project’s status, and the workforce and resources available to meet the deadline for completion of the project, which were collateral to, and not duplicative of plaintiff’s claims for breach of contract.” Id. , citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011); and GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). Background On March 9, 2009, Baha Mar and CCA Bahamas entered into an agreement (known as the “Main Construction Contract” or the “MCC”) regarding the development of the multi-billion-dollar Baha Mar resort complex in Nassau, Bahamas (the “Project”). Among other things, the MCC contained a dispute resolution provision that required any claims arising under the agreement to “be initially decided by a three-person Dispute Resolution Board <“drb”> as a condition precedent to commencement of any legal proceedings.” On January 13, 2011, BML and Defendants entered into an Amended and Restated Investors Agreement (the “Investors Agreement”), pursuant to which BML made an $830 million equity investment in the development of the Project. Under the Investors Agreement, BML was responsible for Baha Mar’s day-to-day management, subject to the direction of the Board ( i.e. , a five member panel consisting of three members, a chairman nominated by BML, and one member nominated by CSCEC (Bahamas), Ltd. a/k/a “China State”). On February 14, 2011, Baha Mar issued a Notice to Proceed to CCA Bahamas, pursuant to the MCC, effective May 1, 2011, with a contractual construction completion schedule of 44 months (which expired on November 20, 2014). Progress on the Project was slow. To resolve disputes arising from the delays, on May 17, 2013, Baha Mar and CCA entered into a Memorandum of Understanding (“MOU”). In the MOU, CCA represented that it would provide Baha Mar with access on or before March 31, 2014 to, at a minimum, the key ballrooms and meeting rooms of the Convention Center. Further, the MOU required CCA to expedite labor mobilization in exchange for BML’s agreement to award the Convention Center MEPF (mechanical, electrical, plumbing and fire protection) package to CCA. Defendants did not meet the October and December 2013 milestone dates. To address the delays, the parties engaged in several “summits” in December 2013 and January 2014, during which CCA agreed to address its missed milestones. In May 2014, Baha Mar demanded, pursuant to the MCC, that the DRB convene to address the Convention Center delays and, among other things, establish that CCA had breached the MCC and not adequately staffed the Convention Center or the entire Project. In July 2014, the DRB convened, reviewed the parties’ written submissions, and held two days of testimony. The DRB ruled, on August 13, 2014, that “the weight of the evidence show that CCA ha proceeded in breach of the Contract by failing to proceed expeditiously with adequate forces sufficient to comply with the Contract.” Slip Op. at *7. In addition, the DRB ordered CCA, among other things, “to continue to maintain at least that level of labor and resources on the Convention Center, in good faith, as permitted by law, until further order of the DRB, at CCA’s own expense, sufficient to maintain maximum progress on the Convention Center, while not adversely impacting the Substantial Completion date for the Project as a whole” and to “provide to BML . . . an accurate, complete and realistic Construction Schedule that strictly meets all requirements of the Contract.” Id . Notwithstanding the DRB ruling, none of the milestones to which CCA “committed” were achieved. Id . In another effort to resolve Project disputes pertaining to finances and scheduling, a series of meetings were held by China Exim Bank, CCA and Baha Mar in November 2014, which resulted in signed minutes (the “November 2014 Meeting Minutes”). Under the November 2014 Meeting Minutes, CCA received a $54 million advance on disputed “change orders” and in exchange promised an increased workforce, refocused and increased efforts of senior management, and accelerated work to achieve an opening date of March 27, 2015. The March 27, 2015, deadline was not met. Consequently, Defendants produced revised schedules, which they also did not meet. Id. at *9. Bankruptcy and Receivership On June 29, 2015, Baha Mar filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware and took measures to secure the Project site and all the on-site offices, including those occupied by CCA. On July 16, 2015, the Attorney General of the GOB filed a “winding up” action against Baha Mar and affiliates, including BML. The Supreme Court of the GOB (the trial level court) dismissed the winding up petition against BML (and other Baha Mar affiliates) on September 4, 2015. On October 30, 2015, China Exim Bank commenced proceedings in The Bahamas to appoint a receiver to marshal the assets of Baha Mar and its subsidiaries, pursuant to a Credit Facility Agreement (“CFA”) between Baha Mar and China Exim Bank, and exercised its rights under the Pledge Agreements dated January 2011 (in which BML pledged its shares in Baha Mar as collateral for the loan proceeds provided under the CFA), and thereby took control over the entirety of the BML’s common shares in Baha Mar. The Bahamian receivership proceedings resulted in an agreement for the sale of Baha Mar’s assets to Perfect Luck Assets Ltd. (“Perfect Luck”), an entity owned by China Exim Bank, on or about September 27, 2016, pursuant to an undisclosed agreement followed by a conditional agreement of merger of Perfect Luck into an entity known as Chow Tai Fook Enterprises Limited (“CTFE”). Consequently, BML lost its investment in Baha Mar, or approximately $845 million, as well as its expected future profits from the resort. On August 30, 2016, Perfect Luck (as owner) and CCA Bahamas (as construction manager) entered into an agreement (“Amendment No. 9”), which amended the MCC. Amendment No. 9 set out conditions for the completion of the Project, including the scope of the work and payment amounts. Amendment No. 9 also deleted the DRB dispute resolution clause and the forum selection clause of the MCC and inserted a new section which stated that any dispute would be referred to and finally resolved by arbitration under the Rules of the International Chamber of Commerce. The Complaint and Motion Proceedings On December 26, 2017, BML filed a 259-page complaint, alleging causes of action for fraud and breach of contract. BML alleged that CCA, acting as China State, failed to advise the Board of its findings and concerns regarding the Project’s construction as required by both the Investors Agreement and the MCC. In that regard, BML alleged that Defendants failed to report accurately, or at all, the true state of its scheduling, deadline compliance, the amount or experience of its workforce and status of its procurement. Moreover, BML stated that from 2012 to 2013 and beyond, CCA failed to deliver the documentation required by the MCC and Investors Agreement preventing it from effectively monitoring the Project’s progress and governing its finances. BML contended that the accuracy of Defendants’ reporting directly affected its ability to predict and protect against risks to its equity investment. BML also alleged that Defendants made false representations regarding the progress and status of the Project. Defendants moved to compel mediation and arbitration or, alternatively, to dismiss BML’s complaint based on, inter alia , the failure to state a cause of action for fraud. The Court’s Decision: Motion to Compel Arbitration 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. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). See also Holick v. Cellular Sales of New York, LLC , 802 F.3d 391, 395 (2d Cir. 2015) (because arbitration is contractual, “a party cannot be required to submit to arbitration any dispute which has not agreed so to submit.”) (citation and internal quotation marks omitted); Brookfield Clothes, Inc. v. Tandler Textiles, Inc. , 78 A.D.2d 841, 841 (1st Dept. 1980) (holding that “ nly persons who expressly agree to arbitrate can be compelled to do so”). Against these principles, Justice Scarpulla denied the motion to compel arbitration, holding that BML was not a signatory to any arbitration agreement, including Amendment No. 9, which “clearly define the parties bound to the agreement as Perfect Luck and CCA Bahamas.” Slip Op. at *13. The Court rejected Defendants’ argument that BML’ claims were subject to arbitration “despite that BML Properties did not execute Amendment No. 9 (containing the agreement to arbitrate).…” Id . Defendants claimed that even if BML was not a signatory to Amendment No. 9, New York courts “‘frequently’ impute the intent to arbitrate to a non-signatory.” Id . In rejecting the argument, the Court explained that “the Court of Appeals has held that only in ‘certain limited circumstances’ should courts impute the intent to arbitrate to a non-signatory.” Id ., quoting TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 339 (1998). Those circumstances arise, said the Court, when the non-signatory “either acted in a way that evinced an intent to be bound or received a direct benefit from a contract containing an arbitration clause which precluded them from disavowing the arbitration clause.” Id . In BML , neither circumstance was present. First, Defendants failed to allege any facts to show that BML intended to be bound by the arbitration clause in Amendment No. 9. This was especially so, said the Court, because “Amendment No. 9 post-date the events at issue here and was not discovered by BML Properties until it was produced in th litigation.” Id . at **13-14. Second, Defendants failed to demonstrate that BML’s reliance on the MCC in the complaint “tether the claims to the arbitration clause.” Id . at *14. In fact, noted the Court, Defendants’ reliance on the MCC was misplaced because “BML Properties’ claims … do not stem from the MCC.” Id .  They arise, said the Court, “pursuant to the Investors Agreement,” in which “Defendants were obligated accurately to relay findings and concerns regarding the construction work to BML Properties.” Id . The construction work was governed by the MCC and Defendants allegedly repeatedly failed to meet the MCC’s obligations. BML Properties contends that Defendants’ alleged repeated failures under the MCC rendered its statements to BML Properties false and therefore violated its Investors Agreement obligation to accurately report to BML. While referring to Defendants’ obligations under the MCC, BML’s claims arise under the Investor Agreement. Id . Thus, because “Defendants failed to produce evidence of BML Properties’ intent to be bound by the arbitration clause or furnish a basis for imputing such intention to it,” the Court denied the motion to compel arbitration. Id . at *15. The Court’s Decision: Motion to Dismiss Fraud Claim To plead a fraud claim, a plaintiff must plead with particularity each of the following elements: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); CPLR § 3016(b) (requiring fraud to be pleaded with particularity). In BML , Defendants argued that Plaintiff failed to plead that it justifiably relied on “any alleged misrepresentation,” because BML was “‘responsible for the day-to-day management of the Company’ and that this role prevent BML Properties from claiming ignorance about Defendants’ alleged misrepresentations.” Slip Op. at *21. The Court rejected this argument finding that “the complaint describe numerous meetings, discussions and emails in which BML Properties sought (and received) alleged false assurances from Defendants about their existing workforce, available resources and ability to complete the Project.” Id . At the pre-discovery phase of the litigation, noted the Court, such allegations sufficed. Id. , citing ACA Fin. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015) (noting, the issue of justifiable reliance “is not generally a question to be resolved as a matter of law on a motion to dismiss”). Defendants also argued that BML’s fraud claims duplicated its contract claims. The Court rejected the argument. First, “neither of BML Properties’ claims for breach of contract” were “based on obligations created by the MCC” – they were based on the Investors Agreement, the MOU and the November 2014 Meeting Minutes. Id . at *21. Second, noted the Court, the fraud claims were based on misrepresentations concerning workforce numbers and Project status “and allege misrepresentations of then-present facts collateral to the Investors Agreement.” Id. at **21-22, citing GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010) (finding that under New York law, plaintiffs may plead a fraud claim, as well as a contract claim, if the fraud claim alleges “a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract....”). Finally, the Court found that the damages sought by BML under the fraud claim were not identical to those under its contract claim. The former sought damages “for the loss of mitigation expenses and further investment efforts,” while the latter sought “damages for the value of the Project if it was timely completed on budget.” Id . at *22.

On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) ( here ). Hoffman involved a motion, under CPLR § 2201, to stay an action filed in state court, alleging claims under the Securities Act of 1933 (the “1933 Act”), in favor of a parallel action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061 (2018). Less than one week after the article was published, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Group Sec. Litig. , 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) ( here ).  Like Justice Ostrager in Hoffman , Justice Scarpulla, who cited to Hoffman , denied the motion.  However, unlike Justice Ostrager, Justice Scarulla applied CPLR § 2201 in making her decision. Matter of PPDAI Group Securities Litigation Background PPDAI involved alleged violations of the 1933 Act in connection with an initial public offering (“IPO”) in November 2017 of American Depository Shares (“ADS”) by PPDAI Group, Inc. (“PPDAI” or the “Company”), a Cayman Islands corporation with primary operations in China. The offering materials (“Offering Materials”) issued by Defendants included a prospectus (“Prospectus”) and Forms F-1 and F-5 registration statements (the “Registration Statement”). The Securities and Exchange Commission (“SEC”) declared the Registration Statement effective on November 9, 2017 and, on November 13, 2017, Defendants priced the ADSs at $13 per share and filed the final Prospectus for the IPO. PPDAI was co-founded by defendants Jun Zhang (“Zhang”), Tiezheng Li (“T. Li”), Honghui Hu (“Hu”) and Shaofeng Gu (“Gu”) in 2007. The Company is an online consumer finance marketplace that connects borrowers and investors “whose needs have not been met by traditional financial institutions.” PPDAI, through its full-service peer-to-peer (“P2P”) lending platform, generates revenue “primarily from fees charged to borrowers for services in matching them with investors and for other services provide over the loan lifecycle.” Other revenue-generating services include loan facilitation service fees, post-facilitation service fees, collection fees and management fees. To raise additional capital, PPDAI engaged in the IPO. Credit Suisse Securities (USA) LLC (“Credit Suisse”), Citigroup Global Markets Inc. (“Citigroup”), and Keefe, Bruyette & Woods (“KBW”) served as underwriters for the IPO. Plaintiffs alleged that the underwriters generated $221 million in proceeds before underwriting discounts and commissions. According to the complaint, plaintiffs Yizhong Huang (“Huang”) and Ravindra Vora (“Vora”) (together, “Plaintiffs”) acquired PPDAI’s ADSs in connection with the IPO “pursuant and/or traceable to” the Offering Materials. Plaintiffs alleged that, by the effective date of the Offering Materials, China had increased its scrutiny and regulation of the P2P lending industry due to widespread complaints about lending and collection improprieties. Plaintiffs also alleged that PPDAI engaged in the type of lending and collection misconduct, such as usurious loan rates and abusive collection practices, that was the subject of China’s scrutiny. Plaintiffs further alleged that investors to whom Defendants solicited to purchase ADSs in the IPO, and investors who purchased ADSs pursuant and/or traceable to the Offering Materials, were not aware of the scope of the threat to PPDAI’s business that was posed by China’s existing and prospective regulations. Based on the foregoing, Huang filed a complaint on September 10, 2018, alleging violations of Sections 11, 12(a)(2) and 15 of the 1933 Act in connection with the alleged materially misleading statements and omissions in the Offering Materials. Vora filed a similar complaint on September 27, 2018. The two actions were consolidated by a stipulation that the Court so ordered on October 16, 2018. On November 26, 2018, about two weeks after the parties met for a preliminary conference, Weichen Lai filed an action in the United States District Court for the Eastern District of New York, alleging violations of the 1933 Act (“EDNY Action”). Lai asserted virtually the same allegations contained in the earlier-filed Huang and Vora complaints. On December 17, 2018, Plaintiffs filed a consolidated class action complaint (“CAC”), which amplified the factual allegations and added Law Debenture Corporate Services Inc. (“Law Debenture”), PPDAI’s agent for the service of process in the United States, as a defendant. On January 8, 2019, plaintiff in the EDNY Action filed an amended complaint, prior to the appointment of a lead plaintiff, and added a fraud claim under the Exchange Act. Defendants moved to stay the state court action by order to show cause. That motion was later withdrawn without prejudice. Defendants refiled the motion for a stay, pursuant to CPLR § 2201, on notice. Defendants also requested an order staying discovery until the resolution of any motions to dismiss. The Court denied the motion. The Court’s Decision: Motion to Stay Proceedings The Court analyzed the motion to stay the action through the lens of CPLR § 2201. Under CPLR § 2201, “ xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Mook v. Homesafe Am., Inc. , 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs. , 307 A.D.2d 211, 211-212 (1st Dept. 2003); see also Reaves v. Kessler , No. 654485/2015, 2017 WL 2482948 (Sup. Ct., N.Y. County June 8, 2017). Identity of Parties, Substantial Overlap of Issues and Complete Disposition The Court found that there was not complete identity of parties between the state and federal action: there were four defendants in the state action that were not named in the EDNY Action. In that regard, the Court rejected Defendants’ argument “that a ‘majority of the Defendants are named in both actions.’” Slip Op. at *4. The Court also found that the issues did not substantially overlap and that the EDNY Action would not provide a complete disposition of the state court action. This was especially so, if, as Plaintiffs contended, the 1933 Act claims in the EDNY Action were time-barred by the one-year statute of limitations. Id . at *5. In that case, the Court would be “the only forum that resolve the ‘33 Act claims.” Id .  In fact, noted the Court, “if only the ‘34 Act claims survive in federal court, overlapping of issues will be reduced.” Id . Thus, concluded the Court, “consideration of party identity, substantial overlap of issues and complete disposition not support imposition of a stay in action.” Id . First to File Rule “Although it is not dispositive on a motion to stay, the ‘general rule in New York is that the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.’” Id ., quoting In re Topps Co., Inc. S’holder Litig. , No. 600715/07, 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007) (citation omitted). “The first to file rule, however, should not be applied mechanically irrespective of other considerations.” Id. , citing AIG Fin. Prods. Corp. v. Penncara Energy, LLC , 89 A.D.3d 495, 496 (1st Dept. 2011). The Court held that “ lthough it is not dispositive, being first to file is still “significant.” Id. , citing Certain Underwriters at Lloyds, London v. Millennium Holdings LLC , No. 600626/06, 2006 WL 2546202, at *7 (Sup. Ct., N.Y. County Aug. 8, 2006). After Cyan , this was especially so. Indeed, citing to Cyan and Hoffman , Justice Scarpulla observed that if the first file rule were abandoned, it would render meaningless the jurisdiction conferred upon state courts to adjudicate 1933 Act cases: If the first-to-file rule is uniformly abandoned whenever later filed federal court actions assert other federal claims along with ‘33 Act claims, New York state courts would never exercise their jurisdiction to resolve first-filed ‘33 Act claims. This result would render Cyan meaningless.” Id . at *6. Thus, concluded the Court, “ he fact that Plaintiffs commenced action before the EDNY Action … significantly favor litigation of Plaintiffs’ ‘33 Act claims in court.” Id . Expertise Justice Scarpulla rejected Defendants’ argument that because federal courts have “‘greater experience and familiarity’ with federal claims,” the state action should be stayed.” Id . Similar to Justice Ostrager, Justice Scarpulla found pre- Cyan cases advancing this argument to be “irrelevant” to a post- Cyan world: “However, these cases are irrelevant, as the Supreme Court expressly held in Cyan that state courts have jurisdiction to ‘adjudicate class actions alleging only 1933 Act violations.’” Id. , quoting Cyan , 138 S.Ct. at 1078. Moreover, Justice Scarpulla found that the Commercial Division’s “long-standing” existence as a “specialized business court which deals exclusively with complex commercial litigation ” to be a factor that “weigh in favor of keeping th action in the Commercial Division.” Id .  In so finding, the Court found support in Justice Ostrager’s observation that “liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week.” Id. , citing Hoffman , 2019 WL 2578360 at *2. Duplication of Effort Finally, the Court rejected Defendants’ assertion that absent a stay, “they will have to duplicate efforts to litigate the same claims in two courts.” Id . The Court agreed with Plaintiffs “that this concern is tempered by the alleged untimeliness of the ‘33 Act claims in the EDNY Action.” Id . The Court concluded by noting that “ he possibility that at some point there might be two trials is not an appropriate basis for granting a stay.” Id. , citing Mt. McKinley Ins. Co. v. Corning Inc. , 33 A.D.3d 51, 59 (1st Dept. 2006) (citation omitted). The Court’s Decision: Motion to Stay Discovery Defendants sought to stay discovery in the state court action pursuant to the automatic stay of discovery provision in the Private Securities Law Reform Act of 1995 (“PSLRA”).  In this regard, Defendants argued that “Plaintiffs should not be permitted to ‘skirt the PSLRA’s mandatory stay of discovery, which automatically stays all discovery until any motions to dismiss have been resolved.’” Slip Op. at *7. To Defendants, “if Congress intended the stay to only apply to federal court actions, it would have said so.” Id . The Court rejected the argument. First the Court held that although Cyan was silent on the issue, applying the “automatic discovery stay would undermine Cyan’s holding that ‘33 Act cases may be heard in state courts.” Id . Second, applying the stay would conflict with the rules of the Commercial Division in which “discovery generally continues during motion practice.” Id . Takeaway In this Blog’s takeaway about Hoffman , we noted that motions to stay 1933 Act claims under New York law had been met with mixed results, even after Cyan . Compare Hoffman with In re Qudian Sec. Litig. , 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan , staying 1933 Act class action pending resolution of federal securities action). Although the parties in PPDAI mentioned Qudian in their briefing, the Court did address its analysis or holding. In fact, the Court stated that Defendants did not cite to any post- Cyan authority to support their arguments in favor of staying the action. Id . at **6-7. Based upon its holding, it is apparent that the Court was referring to appellate court decisions. Id . at *7 (“Indeed, there are no decisions by the New York appellate courts addressing a motion to stay a ‘33 Act claim in favor of a later filed federal court action in a post- Cyan universe.”). Nevertheless, with the Hoffman decision, the PPDAI decision may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.

In mortgage foreclosure actions, and other actions in which a party is suing on a promissory note (or other negotiable instruments) ( a “Note”), a plaintiff must allege that it is in possession of the underlying Note in order to establish that it has standing to prosecute the action.  As this Blog has previously noted in the Blog < The=">The" Second="Second" Department="Department" Denies="Denies" Summary="Summary" Judgment="Judgment" to="to" Another="Another" Foreclosing="Foreclosing" Mortgagee="Mortgagee" Due="Due" the="the" Insufficiency="Insufficiency" of="of" Evidence="Evidence" Presented="Presented" on="on" Motion ="Motion"> : …a foreclosing mortgagee makes its prima facie case by the production of the note, the mortgage and evidence of default. The Court did note, however, that “when a defendant places standing in issue, the plaintiff must prove its standing in order to be entitled to relief.” (Citations omitted.) The Brody Court further recognized that standing is conferred on a plaintiff in a mortgage foreclosure action “when it is the holder or assignee of the underlying note at the time the action is commenced.” A “holder,” according to the Brody Court, “is the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.  (Quoting, U.S. Bank National Assoc. v. Brody, 156 A.D.3d 839 (2 nd Dep’t 2017)) (citations and internal quotation marks omitted).) Because possession of a Note is a critical component of a mortgage foreclosure action (or actions involving other negotiable instruments) one may wonder whether a potential plaintiff is out of luck if a Note, for some reason, cannot be produced or otherwise is not in the potential plaintiff’s possession.  If the Note was lost, destroyed or stolen, the answer is provided by section 3-804 of New York’s Uniform Commercial Code, which provides that “ he owner of an instrument which is lost, whether by destruction, theft or otherwise, may maintain an action in his own name and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms….” UCC section 3-804 was recently discussed in Bank of New York Mellon v. Hardt (2 nd Dep’t June 26, 2019).  The plaintiff in Hardt was a lender foreclosing on a mortgage delivered by borrower Hardt.  Plaintiff’s summons and complaint contained a lost note affidavit and a copy of the original note. Hardt defaulted in answering the complaint and supreme court granted plaintiff’s motion for the appointment of a referee to compute the amounts due to the lender under the mortgage.  Thereafter, Hardt moved pursuant to CPLR 317 to vacate her default and for leave to file an answer.  In order to obtain relief pursuant to CPLR 317, a defendant must demonstrate that “he or she did not personally receive notice of the summons in time to defend the action and that he or she has a potentially meritorious defense.”  Deutsche Bank Natl. Trust Co. v. Russo , 170 A.D.3d 953 (2 nd Dep’t 2019). Presumably, in support of her motion to vacate her default, Hardt called plaintiff’s standing into question, which, if demonstrated, would provide a meritorious defense.  (This blog has previously addressed the issue of a foreclosing lender’s standing to bring a foreclosure action < here ,=">here," here=">here" and="and"> .)  In response, supreme court appointed a special referee to “hear and determine” the issue of plaintiff’s standing and, in conjunction with the hearing, the parties stipulated that the only issue that needed to be determined was “whether, in the absence of physical possession of the original note or valid assignment thereof, the plaintiff, as a matter of law, lacks standing.”  After reviewing the facts, the special referee concluded that the lender had standing to pursue the foreclosure action.  Supreme court agreed. On Hardt’s appeal, the Appellate Division, Second Department, found that in denying Hardt’s motion to vacate her default, supreme court “in effect, … found that the defendant lacked a meritorious defense…”.  The Second Department agreed with the referee and rejected Hardt’s contention that “a mortgagee cannot, as a matter of law, establish standing where, as here, the original note was lost and there is no valid assignment of the note to the plaintiff.”  In so doing, the Court recognized that UCC 3-804 is an appropriate vehicle to prove ownership of a lost, destroyed or stolen note if the “holder” “prove ownership of the notes, the circumstances of the loss and their terms”  (quoting, Marazzo v. Piccolo , 163 A.D.2d 369, 370 (2 nd Dep’t 1990).  The Court also noted that it recently applied UCC 3-804 to a foreclosure action “reiterating that ‘ ursuant to UCC 3-804, the owner of a lost note may maintain an action upon due proof of <1> jhis ownership, <2> the facts which prevent his production of the instrument and <3> its terms’” (quoting U.S. Bank N.A. v. Cope , 167 A.D.3d 965, 967 (2 nd Dep’t 2018) (brackets in original). By way of contrast, the Second Department, in Deutsche Bank Nat. Trust Co. v. Anderson , 161 A.D.3d 1043 (2018), did not find lost note affidavits persuasive and denied summary judgment to the foreclosing lender.  While the Anderson Court found that the copy of the note produced by lender was “sufficient evidence of its terms,” it also found that the lost note affidavits submitted by the lender were “inconsistent with each other and contain vague and conclusory statements.”  Anderson , 161 A.D.3d at 1044.  Thus, t was not clear when the loan servicer or its agent acquired possession of the note, or whether the loan servicer or an agent of the loan servicer acquired the note. Moreover, Matz's affidavit fails to provide sufficient facts as to when the search for the note occurred, who conducted the search, the steps taken in the search for the note, or when or how the note was lost.  Thus, the affidavits failed to sufficiently establish the plaintiff's ownership of the note. Anderson , 161 A.D.3d at 1044 – 45 (citations omitted).

On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court. This Blog wrote about the decision here . Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in federal court: Class action plaintiffs asserting claims only under the 1933 Act will most likely file their complaints exclusively in state court. After Cyan , such exclusivity could subject defendants to litigating 1933 Act cases in state court while at the same time litigating in federal court Exchange Act claims arising under substantially the same facts and circumstances as the 1933 Act claims. At the time of the article, we noted that Cornerstone Research had found that this phenomenon had already been happening, albeit on a small scale. < Here =">Here" (noting="(noting" that="that" there="there" were="were" seven="seven" Act="Act" actions="actions" pending="pending" in="in" state="state" court="court" since="since" 2014,="2014," all="all" of="of" which="which" had="had" parallel="parallel" federal="federal" court).="court)."> One year later, parallel 1933 Act litigation has materially increased. According to a study by Stanford Securities Litigation Analytics, at the request of Professional Liability Underwriting Society, titled “State Section 11 Litigation in the Post- Cyan Environment” (the “White Paper”) ( here ), “ n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id . In the three years prior to Cyan , defendants only faced parallel litigation in 16% of the cases. Id . Recently, Justice Barry R. Ostrager of the Supreme Court, New York, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act “in favor of a subsequently filed and unquestionably more comprehensive federal action” involving “broader issues and multiple classes of shareholders.” Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U), at **1, 3 (Sup. Ct. N.Y. County, June 21, 2019) ( here ). As discussed below, the Court denied the motion. Hoffman v. AT&T Inc. Background Hoffman is a securities class action brought on behalf of the former shareholders of Time Warner Inc. (“Time Warner”), who alleged violations of the 1933 Act in connection with AT&T Inc.’s (“AT&T”) June 2018 acquisition of Time Warner (the “Acquisition”). Slip Op. at *1. In order to acquire Time Warner, AT&T issued the putative class 1.185 billion shares of new AT&T stock pursuant to a registration statement and prospectus (collectively, the ‘Registration Statement’) that, Plaintiff alleged, failed to disclose material deterioration in AT&T’s DirecTV and DirecTV Now business. Id . On February 7, 2019, Plaintiff, Robert Hoffman (“Hoffman”), filed a complaint in New York Supreme Court asserting claims under Sections 11, 12(a)(2), and 15 of the 1933 Act “on behalf of all persons who acquired AT&T common stock pursuant or traceable to the issued in connection with” the Acquisition. Plaintiff alleged that the “Registration Statement touted yearly and quarterly growth trends in AT&T’s Entertainment Group segment, particularly Video Entertainment, including quarterly subscriber gains in its DirecTV Now service sufficient to offset any decrease in traditional satellite DirecTV subscribers, such that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that, “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”. Plaintiff requested that the Court certify a class action, award damages and reasonable costs and expenses, and order “such other equitable or injunctive relief as deemed appropriate by the Court.” On April 10, 2019, “the Court granted on consent a motion to designate” lead counsel “for the proposed class.” Slip Op. at *2. On May 7, 2019, lead counsel filed a First Amended Class Action Complaint, together with discovery requests. Id . On April 1, 2019, plaintiff, Melvin Gross (“Gross”), filed a complaint in the United States District Court for the Southern District of New York, alleging violations of both the 1933 Act and the Securities Exchange Act of 1934 (the “1934 Act”), Gross v. AT&T Inc. , No. 19 Civ. 2892 (S.D.N.Y.) (Caproni, J.) (the “Federal Action”). Like the Hoffman action, the Gross action asserted claims under Sections 11, 12(a)(2), and 15 of the 1933 Act against the same defendants, on behalf of the same putative class, based on the same allegations of wrongdoing ( i.e. , that the “Registration Statement touted . . . that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”), and seeking the same relief ( i.e. , certification as a class action, an award of damages and reasonable costs and expenses, and “such other and further relief as th Court may deem just and proper”). In addition, Gross asserted claims under Sections 10(b) and 20(a) of the 1934 Act on behalf of an additional class of persons who “purchased or acquired AT&T securities between October 22, 2016 and October 24, 2018”, and alleged additional misstatements and omissions not in the Registration Statement.  Thus, the Federal Action asserted “broader claims on behalf of classes of variously situated Time Warner and AT&T shareholders.” Pursuant to the Private Securities Litigation Reform Act (“PSLRA”), the federal court is considering motions by at least five sets of plaintiffs to be appointed lead or co-lead plaintiff. The Court’s Decision Justice Ostrager noted that prior to the establishment of the Commercial Division, courts evaluating a motion to stay securities litigation often placed great weight on the action that would provide the most comprehensive disposition – most generally the parallel federal action. Slip Op. at *2, citing Barron v. Bluhdorn , 68 A.D.2d 809 (1st Dept. 1979). The Court observed that this was so even when the first-filed action was in the Supreme Court. Id .   Justice Ostrager explained that the rationale behind “ Barron and its progeny is that where there is a substantial overlap between the parties and issues and relief sought in both state and federal courts, staying the state court case would avoid the waste of judicial resources, potential inconsistent rulings, and duplication of effort.” Id . This was especially so given the perception that the federal courts “have a greater familiarity with securities law.” Id . That changed, held the Court, with the creation of the Commercial Division and the United States Supreme Court’s decision in Cyan . No longer should the reasoning of Barron and its progeny be “mechanically applied<,> ” said the Court. Id . at *3. [Ed. Note: CPLR § 2201 provides that, “ xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.”  Despite its apparent broad scope, CPLR § 2201 “has been limited by decision.” Hope’s Windows v. Albro Metal Prods. Corp. , 93 A.D.2d 711, 712 (1st Dept. 1983). Thus, “ is appropriate to stay an action in deference to another only where the determination in the other will resolve all of the issues in the stayed action and the judgment on one trial will dispose of the controversy in both actions. The possibility or actuality of two trials is of no importance.” Mt. McKinley Ins. Co. v. Corning Inc. , 33 A.D.3d 51, 58-59 (1st Dept. 2006). In considering a motion for a stay under CPLR § 2201, courts consider the following factors: (i) whether there is substantial overlap between the parties, issues, and relief requested; (ii) where a more complete disposition may be obtained; (iii) which court has greater familiarity with the issues; (iv) whether a stay will avoid waste of judicial resources, the potential for inconsistent rulings, and duplication of effort; (v) whether plaintiffs have demonstrated that they would be prejudiced by a stay; and (vi) which action was commenced first and whether discovery has been completed. Asher v. Abbot Labs. , 307 A.D.2d 211, 211-12 (1st Dept. 2003). In addition, New York courts consider whether to apply the first-filed rule – that is “the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.” In re Topps Co., Inc. S’holder Litig. , 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007).] Free of the mechanical application of Barron and its progeny, Justice Ostrager held that it was not appropriate to stay the Hoffman action in favor of the Gross action: Here, a New York plaintiff has initiated discrete claims on behalf of Time Warner shareholders that can be well on the way to judicial resolution while five sets of plaintiffs lawyers jockey for control of a federal court action that includes claims on behalf of individuals who are not members of the state court class as well as the members of the state court class. The liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week. Defendants are free to test the merits of plaintiff<’> s claims before this Court, which is familiar with the issues in this case, and there is no reason to believe that the merits of plaintiff<’> s claims cannot be resolved as efficiently and, perhaps, more expeditiously than the 1933 Act claims asserted in the federal action because the likelihood is that more than one set of counsel will be appointed to represent differently situated shareholders in the federal action and the pleadings in the federal court may not be fixed for an extended period of time. Slip Op. at *3. The Court also floated the possibility that Judge Caproni could stay litigation of the 1933 Act claims in the Gross action under the Colorado River Abstention Doctrine: “because the federal action involve broader issues and multiple classes of shareholders, the federal court may consider staying the 1933 Act claims in the federal action in favor of this earlier filed action.” Id. , citing Krieger v. Atheros Communications, Inc. , 776 F. Supp. 2d 1053, 1057-63 (N.D. Cal. 2011) (staying state law claims under the Colorado River Doctrine while allowing 1934 Act claims to proceed). [Ed. Note: Under the Colorado River Abstention Doctrine, a federal court may abstain from exercising its jurisdiction in favor of parallel state proceedings where doing so would serve the interests of “ ise judicial administration, giving regard to the conservation of judicial resources and comprehensive disposition of litigation.” Colorado River Water Conservation Dist. v. United States , 424 U.S. 800, 818 (1976). Colorado River and its progeny set forth seven factors, that, although not exclusive, are relevant to determining whether it is appropriate to stay proceedings: (1) whether the state court first assumed jurisdiction over property; (2) inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained by the concurrent forums; (5) whether federal law or state law provides the rule of decision on the merits; (6) whether the state court proceedings are inadequate to protect the federal litigant's rights; and (7) whether exercising jurisdiction would promote forum shopping. Id . at 870; Krieger , 776 F. Supp. 2d at 1057. “Exact parallelism” between the state and federal actions is not required; it is enough if the two actions are “substantially similar.” Krieger , 776 F. Supp. 2d at 1057, quoting Nakash v. Marciano , 882 F.2d 1411, 1416 (9th Cir. 1989). “These factors should be weighed in a ‘pragmatic, flexible manner with a view to the realities of the case at hand’ and ‘with the balance heavily weighted in favor of the exercise of jurisdiction.’”   Id ., quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 16, 21 (1983). Courts have cautioned that the existence of a substantial doubt as to whether the state proceedings will resolve the federal action generally precludes the granting of a stay pursuant to Colorado River . Krieger , 776 F. Supp. 2d at 1058, citing Intel Corp. v. Advanced Micro Devices, Inc. , 12 F.3d 908, 913 (9th Cir.1993).] “In short,” concluded the Court, “the ‘first filed’ rule must have some vitality in a post- Cyan world. Otherwise, 1933 Act cases could never proceed in state court whenever a subsequently filed federal court action asserts claims in addition to 1933 Act claims.” Takeaway In the wake of Cyan , there has been an uptick in the number of cases in which defendants face parallel actions involving the same or substantially the same subject matter and requested relief. In New York, motions to stay a state court securities action in favor of a substantially similar federal securities action have been met with mixed results. Compare Hoffman with Reaves v. Kessler , 2017 WL 2482948, at *5 (Sup. Ct., N.Y. County June 8, 2017) (in a pre- Cyan case, the court stayed the state action, holding “Because the federal court has exclusive jurisdiction over the … claims under the Exchange Act, the federal court will provide a more complete disposition of the claims. A stay avoids the risk of inconsistent rulings, duplication of effort, and waste of judicial resources.”), and In re Qudian Sec. Litig. , 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan , staying 1933 Act class action pending resolution of federal securities action). In addition to a stay motion, defendants can seek to enjoin the state action in federal court under the All Writs Act and the Anti-Injunction Act. See White Paper at 15. However, the likelihood of success seems dubious. Two such motions were made prior to Cyan . Id . Both were denied. Id . and id . at n.30 (explaining the injunctive relief under both acts). Defendants can also seek abstention under the Colorado River Abstention Doctrine, as suggested by Justice Ostrager, though it seems unlikely defendants would avail themselves of this option. While Justice Ostrager left the door open to revisit the decision if developments in the federal action “provide sufficient cause”, it is unclear to what developments the Court is referring. Perhaps he is referring to the possibility that settlement discussions involving all claims could begin in the federal action, requiring a stay of the state action during such discussions.  Or, that it becomes apparent the putative class in the state action will be prejudiced by having two sets of lead plaintiffs and lead counsel litigating their claims – e.g. , the class representative in the state action is found to be conflicted or has some other disabling reason for not being able to adequately represent the putative class, plaintiffs in both actions incur excessive and duplicative fees that reduce any class recovery, and two sets of putative class representatives advancing materially inconsistent case strategies. In any event, it remains to be seen whether “developments in the federal action provide sufficient cause for Court to revisit the disposition of motion to stay proceedings in action.…” Slip Op. at *4. This Blog will continue to monitor the developments in the Hoffman

Since the early 20th century, a plaintiff alleging fraud in New York can recover only the actual pecuniary loss sustained as a result of the misrepresentation or omission, i.e. , the plaintiff’s out-of-pocket damages. Reno v. Bull , 226 N.Y. 546 (1919); see also Continental Cas. Co. v. PricewaterhouseCoopers, LLP , 15 N.Y.3d 264 (2010). The damages recoverable under the out-of-pocket rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained. See Lama Holding v. Smith Barney , 88 N.Y.2d 413, 421 (1996); Clearview Corp. v. Gherardi , 88 A.D.2d 461, 468 (2d Dept. 1982) (“the defrauded party is entitled solely to recovery of the sum necessary for restoration to the position occupied before the commission of the fraud”) (citations omitted). The rule not only prohibits the recovery of lost profits or lost business or investment opportunities ( see Foster v. Di Paolo , 236 N.Y. 132, 134 (1923)), but also pain and suffering damages that are often sought in other tort actions. Williams v. Mann , 143 A.D.3d 813 (2d Dep’t 2016). Notably, however, “out of pocket considerations do not … prevent recovery of other consequential damages proximately caused by reliance upon the misrepresentation.” Clearview , 88 A.D.2d at 468 (citations omitted). Therefore, a plaintiff may recover “expenditures which would not otherwise have been incurred” had s/he not relied on the false information. Id . When the misrepresentation or omission is willful, wanton, or malicious, a plaintiff may be entitled to punitive damages. Chase Manhattan v. Perla , 65 A.D.2d 207, 211 (4th Dept. 1978). However, to recover such damages, the plaintiff must demonstrate that the purpose of seeking punitive damages is to “not only … punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future.” Walker v. Sheldon , 10 N.Y.2d 401,404 (1961). On June 27, 2019, the Appellate Division, First Department, affirmed the dismissal of fraud-based claims because the plaintiff failed to allege an “actual pecuniary loss” resulting from the alleged fraud. Sapienza v. Becker & Poliakoff , 2019 N.Y. Slip Op. 05218 (1st Dept. June 27, 2019). A copy of the decision can be found here . Background Sapienza involved allegations of, among other things, legal malpractice and fraud. The case arose from the Defendant law firm’s representation of Total Office Planning Services, Inc. (“TOPS”) in connection with the wind down of the business by its two equal shareholders, Francis Sapienza (“Sapienza”) and James Fenimore (“Fenimore”). In addition to TOPS, Sapienza and Fenimore were the sole and equal members of F&J Realty Enterprises LLC (“F&J”), a realty holding company that acquired an office cooperative unit in Manhattan. In or about 2014, Sapienza’s health began to deteriorate. According to the amended complaint, as Sapienza’s health worsened in 2014, Fenimore and his son, James Fenimore Jr., formed Office Solutions Group LLC (“OSG”) and Office Solutions Installation LLC (“OSI”) with the assistance of the Defendant law firm, Becker & Poliakoff (“B&P”). Plaintiff maintained that shortly after their formation, OSI and OSO generated approximately $4.4 million dollars in revenues; by the end of 2015, that number increased to $22 million dollars. Plaintiff alleged that the revenues were generated from customers who were diverted to OSI and OSO from TOPS. Relevant to the First Department’s decision, Plaintiff alleged that B&P failed to disclose the details of the work that it performed for Fenimore prior to and/or after Sapienza retained B&P, including, but not limited to, the formation of OSI and OSG. Plaintiff maintained that the omission was a material and ongoing fraud with the intent of inducing Sapienza to retain B&P and sign a letter of intent that defined the relationship between Fenimore and Sapienza in advance of a formal Plan of Dissolution in which TOPS’s assets would be accounted for and distributed. Plaintiff further maintained that B&P’s alleged fraud provided Fenimore with an opportunity to direct clients to OSI and OSG and allowed him the ability to divide TOPS’s and F&J’s assets for his benefit. Finally, Plaintiff alleged that as a consequence of the alleged fraud, Plaintiff sustained millions of dollars in lost business opportunities and surreptitiously transferred client assets. Defendants moved to dismiss the amended complaint, which the motion court granted. Plaintiff appealed. The First Department’s Decision In a short decision, the First Department held that the motion court properly dismissed the amended complaint because, among other reasons, Plaintiff failed to plead out-of-pocket damages. In that regard, the Court found that “ he alleged ‘lost opportunity’ damages too speculative to support a recovery, since a plaintiff cannot be compensated under a fraud cause of action ‘for what might have gained.’” Slip Op. at *1, quoting Connaughton v. Chipotle Mexican Grill, Inc. , 29 N.Y.3d 137, 142 (2017) (internal quotation marks omitted). Takeaway In Connaughton , relied upon by the Sapienza court, the Court of Appeals explained that under the out-of-pocket damages rule, damages should compensate the plaintiff “for what lost because of the fraud,” not “what might have gained.” 29 N.Y.3d at 142. Consequently, “there can be no recovery of profits which would have been realized in the absence of fraud.” Id . (citations omitted). The Court underscored this point by noting that it had “consistent refus to allow damages for fraud based on the loss of a contractual bargain, the extent, and, indeed, … the very existence of which is completely undeterminable and speculative.” Id . at 142-143, quoting Dress Shirt Sales v. Hotel Martinique Assoc. , 12 N.Y.2d 339, 344 (1963). In following Connaughton , the Sapienza Court made it clear that a plaintiff alleging fraud cannot recover lost opportunity damages. Such damages are too speculative to be quantified. Thus, the plaintiff in Sapienza could only recover for what she lost because of the alleged fraud, not for what she might have gained ( i.e. , lost opportunity damages).

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. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id . Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions. The person(s) who will resolve these questions is dependent upon the agreement at issue. As a general matter, questions of arbitrability are decided by a court. However, the parties to an arbitration agreement can agree to delegate questions of arbitrability to an arbitrator. MetLife v. Buscek , 919 F.3d 184, 189 (2d Cir. 2019) (“In general, what is determinative for deciding whether the arbitrability of a dispute is to be resolved by the court or by the arbitrator is the arbitration agreement”).  When the parties agree to delegate the question of arbitrability to an arbitrator, the parties must clearly and unmistakably express their intent to do so. Howsam v. Dean Witter Reynolds, Inc. , 537 U.S. 79, 83 (2002). In the absence of such a clear and unmistakable expression of intent, the presumption favors the courts deciding arbitrability. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938 (1995). Recently, the United States Supreme Court held that, when the parties have agreed to submit the question of the arbitrability to an arbitrator, the courts must respect and enforce that contractual agreement. Henry Schein Inc. v. Archer & White Sales, Inc. , 139 S.Ct. 524 (2019). Consistent with this holding, the Second Circuit recently observed that “parties are free to enter into a binding contract by which either party can compel the other to have every aspect of a future dispute between them, including its arbitrability, determined by arbitrators.”   MetLife , 919 F.3d at 190, citing Rent-A-Ctr. , , 561 U.S. at 66, 69 (finding that an arbitration agreement giving the arbitrators “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this contract” empowered the arbitrators to resolve arbitrability of an unconscionability claim). The foregoing rules were intended to guard against “the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Howsam , 537 U.S. at 83-84. “Were the courts to cede to arbitrators resolution of the arbitrability of the dispute (absent the clear and unmistakable agreement of the parties to that effect), this would incur an unacceptable risk that parties might be compelled to surrender their right to court adjudication, without their having consented.” MetLife , 919 F.3d at 190, citing First Options , 514 U.S. at 945. Accordingly, in the absence of an arbitration agreement that clearly and unmistakably provides for the issue of arbitrability to be decided by the arbitrator, the question whether the dispute is subject to an arbitration agreement “is typically an issue for judicial determination.” Id. , quoting Granite Rock Co. v. Int’l Bhd. of Teamsters , 561 U.S. 287, 296 (2010) (internal citation and quotation marks omitted). Recently, Justice Joel M. Cohen of the Supreme Court, New County, Commercial Division, addressed the foregoing principles in deciding to stay a FINRA arbitration. Lek Sec. Corp. v. Elek , 2019 N.Y. Slip Op. 31770(U) (Sup. Ct., N.Y. County June 14, 2019) ( here ). Background On March 22, 2019, Respondent, Istvan Elek (“Elek”), commenced an arbitration before FINRA against LekUS, Lek Holdings Limited, Charles Lek and Samuel Lek. Elek sought, among other things, compensatory damages, punitive damages and attorney’s fees in connection with his claim that LekUS improperly froze his account and deducted fees therefrom pursuant to a contractual right of indemnification. The dispute arose in July 2014, when Elek opened a brokerage account with Lek Securities UK Limited (“LekUK”). Elek used the account to trade microcap securities. His relationship with LekUK was governed by LekUK’s Client Agreement Form and Terms of Business (“Terms of Business Agreement”). The Terms of Business Agreement contained an indemnity provision that required Elek to indemnify and hold LekUK harmless from any losses, claims or expenses incurred by virtue of LekUK’s performance of services on Elek’s behalf. Between May 2015 and December 2016, Elek engaged in 11 microcap transactions with shares of Cannabis Science, Inc. (“CBIS”). Elek acquired his CBIS shares on his own and purchased the shares pursuant to stock purchase agreements that he prepared. He did not use LekUK or LekUS to negotiate these transactions. Upon the deposit of the CBIS shares in his account at LekUK, Elek indicated that the shares were not registered with the Securities and Exchange Commission (“SEC”) and that he nevertheless wanted to sell his stock in the United States. LekUK then indicated to LekUS that LekUS could anticipate an order (from LekUK) to sell unregistered securities in the United States. Once LekUS satisfied itself that the stock could be sold pursuant to a valid exemption from registration, LekUS deposited the stock in its account at Depository Trust & Clearing Corporation and credited the account of LekUK. Upon receiving the credit from LekUS, LekUK credited Elek’s account and the stock was reflected in his LekUK account statement. On or about October 31, 2018, Elek contacted Charles Lek at LekUK and requested that his account be closed. Thereafter, on November 26, 2018, FINRA filed an enforcement action against LekUS and Samuel Lek (the “FINRA Action”). The FINRA Action alleged, in pertinent part, that LekUS failed to investigate suspicious activity with regard to CBIS trading, including (1) failing to investigate trades involving shares obtained from the conversion of debt instruments, which FINRA alleged did not contain stock conversion features; (2) failing to conduct an inquiry to determine whether the shares qualified for a resale exemption pursuant to SEC Rule 144; and (3) failing to determine whether the holding period relied on by the customer could relate back to the date the debt at issue was acquired.   The FINRA Action related to transactions that occurred from July 17, 2015 to June 30, 2016, a time period in which Elek was actively trading CBIS shares through his account at LekUK. All of Elek’s trades allegedly fit the pattern of activity identified by FINRA as suspicious – i.e. , they involved conversions of debt to CBIS stock and relied on SEC Rule 144 resale exemptions. On November 26, 2018, Charles Lek notified Elek that LekUK intended to enforce the indemnity provision of the Terms of Business Agreement to cover LekUK’s anticipated expenses and obligations to LekUS stemming from the FINRA Action and from an allegation that Elek failed to abide by the Applicable Rules. Based on these indemnity claims, LekUK had frozen Elek’s account and notified Elek of its intent to deduct applicable costs and counsel fees. Petitioners initiated the action, pursuant to CPLR § 7503(b) and the Federal Arbitration Act (9 U.S.C. § 1 et seq.), seeking to stay the FINRA arbitration that was commenced on March 22, 2019. Respondent cross-moved to compel arbitration. The Court granted the motion to stay and denied the motion to compel arbitration. The Court’s Decision The Court held that on the facts, “the evidence clearly show dispute not subject to mandatory FINRA arbitration.” Slip Op. at *2. The Court found that “the record demonstrate convincingly that the parties did not agree to arbitrate the claims asserted by Respondent.” Id . The Court explained that “ he only tether to FINRA arbitration is the assertion by Respondent that he is suing as a customer of LekUS, which is a member of FINRA. The record show that is not the case.” Id .  The Court went on to say that “Respondent’s customer relationship clearly was with Lek Securities UK Limited …, not with Petitioner Lek Securities Corporation …. Respondent’s attempt to shoehorn this into a customer dispute with Lek US is unavailing.” Id . Takeaway Lek is notable for its adherence to the proposition that the facts triggering mandatory arbitration before a FINRA arbitration panel must be clear and unmistakable. The fact that a broker-dealer is a FINRA member does not mean that there must be an arbitration before FINRA. The person against whom arbitration is sought to be compelled must be a “customer” within the meaning of FINRA’s Code of Arbitration Procedure for Customer Disputes.  Under FINRA Rule 12200, a customer is one who either purchases a good or service from a FINRA member or has an account with a FINRA member. Citigroup Glob. Market Inc. v. Abbar , 761 F.3d 268, 275 (2d Cir. 2014).  In Lek , Elek was not a customer of LekUS or the individual petitioners Charles Lek and Samuel Lek within the foregoing definition. The Lek Court found Citigroup to be “directly on point.”  There, the defendant purchased, through his private banker, complex options from a Citigroup affiliate in the United Kingdom. Although Citigroup personnel in New York provided advice to their UK counterpart ( e.g. , supporting risk management and due diligence services), the securities were held in the United Kingdom by the U.K. affiliate. The defendant maintained complete oversight over the funds and assets held in the options. When the value of the options declined, the defendant commenced a FINRA arbitration against the U.S.-based Citigroup. The Second Circuit held that the defendant was not a customer of Citigroup and stayed the arbitration before FINRA. Id . at 275. In so holding, the court found that the defendant never held an account with Citigroup in New York, and the services it purchased were from the U.K. affiliate. Id . at 276. Like the defendant in Citigroup , Elek opened his account with LekUK, not with LekUS. Slip Op. at *3. There was no evidence that Elek purchased any services from LekUS. Id . Instead, the record indicated “that the services performed by Lek US were on behalf of Lek UK, which paid for those services in a manner that was not based on transaction volume and thus not tied to Respondent’s trading.” Id . Thus, as in Citigroup , Lek stands for the proposition that unless the evidence demonstrates that the parties clearly and unmistakably intended to arbitrate their dispute, the presence of a mandatory arbitration requirement will not necessarily send the parties to arbitration. In the FINRA world, this means that customers of a broker-dealer must be a “customer” of that firm – i.e. , the person opened an account with the FINRA member; or the person purchased services from the FINRA member. As Lek teaches, in the absence of the foregoing, arbitration will not be triggered.

On June 17, 2019, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that KPMG LLP (“KPMG”) agreed to settle charges that it altered prior audit work after receiving information about inspections of the firm by the Public Company Accounting Oversight Board (“PCAOB”). In connection with the settlement, KPMG agreed to pay a $50 million penalty and comply with a set of remedial measures to prevent the conduct at issue, including retaining an independent consultant to review and assess the firm’s ethics and integrity controls and its compliance with various undertakings. “High-quality financial statements prepared and reviewed in accordance with applicable accounting principles and professional standards are the bedrock of our capital markets. KPMG’s ethical failures are simply unacceptable,” said SEC Chairman Jay Clayton. “The resolution the Enforcement Division has reached holds KPMG accountable for its past failures and provides for continuing, heightened oversight to protect our markets and our investors.” “The breadth and seriousness of the misconduct at issue here is, frankly, astonishing,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “This settlement reflects the need to severely punish this sort of wrongdoing while putting in place measures designed to prevent its recurrence.” “This conduct was particularly troubling because of the unique position of trust that audit professionals hold,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Investors and other market professionals rely on these gatekeepers to fulfill a critical role in our capital markets.” Last year, the SEC alleged that former senior members of KPMG’s Audit Quality and Professional Practice Group – which is responsible for the firm’s system of quality control – improperly obtained and used confidential data and information belonging to the PCAOB to detect audit deficiencies at the firm. The data and information obtained included lists of the specific audit engagements the PCAOB planned to inspect, the criteria the PCAOB used to select engagements for inspection, and the focus areas of the inspections. According to the SEC, those now-former partners sought and obtained the PCAOB data and information to address KPMG’s high rate of audit deficiency findings in prior inspections. Armed with the information and data, those partners oversaw a program to review and revise certain audit work papers after the audit reports had been issued to reduce the likelihood of deficiencies being found during inspections. here.=">here."> In addition, the SEC announced that numerous KPMG audit professionals were found to have cheated on internal training exams by improperly sharing answers and manipulating test results. The exams at issue related to continuing professional education and training mandated by a prior SEC order finding audit failures. According to the SEC, those professionals, which included engagement partners, not only sent exam answers to other partners, but also solicited answers from and sent answers to their subordinates. After discovering the training-related misconduct, KPMG reported the matter to Commission staff and appointed a Special Committee of its Board of Directors to oversee an internal investigation. The Special Committee retained an outside law firm to investigate the extent of such conduct within the past three years and recommend employment actions to KPMG management as appropriate. Further, the SEC found that certain KPMG audit professionals manipulated an internal server hosting training exam to lower the score required for passing. By changing a number embedded in a hyperlink, those professionals manually selected the minimum passing scores required for exams. According to the SEC, at times, audit professionals achieved passing scores while answering less than 25 percent of the questions correctly. “The sanctions will protect our markets by promoting an ethical culture at KPMG,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “To that end, KPMG will take additional remedial steps to address the misconduct and further strengthen its quality controls, all of which will be reviewed and assessed by an independent consultant.” In addition to paying a $50 million penalty, KPMG is required to evaluate its quality controls relating to ethics and integrity, identify audit professionals who violated ethics and integrity requirements in connection with training examinations within the past three years, and comply with a cease-and-desist order. The SEC’s order requires KPMG to retain an independent consultant to review and assess the firm’s ethics and integrity controls and its investigation. Notably, KPMG admitted the facts in the SEC’s order. It also acknowledged that its conduct violated a PCAOB rule requiring the firm to maintain integrity in the performance of a professional service and provides a basis for the SEC to impose remedies against the firm pursuant to Sections 4C(a)(2) and (a)(3) of the Securities Exchange Act of 1934 and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. A copy of the SEC Order can be found here.

Rule 3213 of the CPLR – which permits a litigant to move for summary judgment in lieu of filing a complaint to streamline litigation in situations where the statute is applicable – provides: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise.  The Court of Appeals has described CPLR 3213 as a procedural device that “for the limited matters within its embrace, melded pleading and motion practice into one step, allowing a summary judgment motion to be made before issue was joined.”  Weissman v. Sinorm Deli, Inc. , 88 N.Y.2d 437, 443 (1996) .  The provision is “intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious … a formal complaint is superfluous and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.”  Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (citations and internal quotation marks omitted).  “CPLR 3213 begins with the seemingly straightforward – though stringent – requirement that the action be based on an instrument for the payment of money only or a judgment … he prototypical example of an instrument within the ambit of the statute is of course a negotiable instrument for the payment of money – an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.”  Weissman , 88 N.Y.2d at 443 – 44 (citations, internal quotation marks and footnote omitted). While CPLR 3213 is designed to simplify litigation, courts and commentators have noted that the application of CPLR 3213 could be problematic.  See Interman Indus. , 37 N.Y.2d at 155 (listing cases in which CPLR 3213 was accepted and rejected).  The Court of Appeals, in Interman Indus. noted: However, in order to qualify for CPLR 3213 treatment, it is incumbent upon the appellant to show that the accounts stated, on which its action is based, ‘(are) instruments for the payment of money only.’ The question of what constitutes an ‘instrument for the payment of money only’ may appear to be a vexing problem (4 Weinstein-Korn-Miller, NYCivPrac, par 3213.02a), and, according to one commentator, there is already a plethora of irreconcilable case law on this subject (Siegel, Practice Commentaries, McKinney's Cons.Laws of N.Y., Book 7B, CPLR 3213:3, p. 829). The Advisory Committee's reports do not define what is meant by ‘an instrument for the payment of money only’ nor is case law prior to the enactment of the CPLR informative, since CPLR 3213 had no earlier counterpart (4 Weinstein-Korn-Miller, NYCivPrac, par 3213.02a). Interman Indus. , 37 N.Y.2d at 154.  In Interman Indus. the Court of Appeals affirmed the ruling of the Appellate Division that “an account stated does not constitute an instrument of the payment of money only, and … that appellant may not avail itself of the procedure provided in CPLR 3213.”  Interman Indus. , 37 N.Y.2d at 152.  In Weissman , the Court of Appeals reversed the Appellate Division and determined that the indemnification agreement at issue “falls far short of satisfying the 3213 threshold requirement.”  Weissman , 88 N.Y.2d at 444. On June 18, 2019, the Appellate Division, First Department, decided SpringPrince, LLC v. Elie Tahari, Ltd. , and determined that the guaranty in defendant’s commercial lease fell within the purview of CPLR 3213.  The SpringPrince Court found that there was “no dispute that defendant guaranteed the payment of the tenant’s rent obligations, and that the tenant ceased making rent payments thereunder defendant is obligated under the guaranty for the tenant’s default under the lease.”  The Court rejected defendant’s argument that its obligations under the guaranty were “relieved” because “subsequent to the signing of the lease and guaranty, the tenant and the landlord signed an agreement to reduce the tenant’s rent obligation for a period of time, to which defendant alleges it did not consent.” The SpringPrince Court found that the “subsequent agreement between the tenant and the landlord reducing the tenant’s obligations did not discharge defendant’s obligations under the guaranty as it merely constituted leniency on the part of the landlord and did not create a new contract between the parties.” TAKEAWAY CPLR 3213 can be a useful device to streamline the duration and cost of litigation when used appropriately.  A significant amount of litigation, however, has resulted from plaintiffs that attempt to utilize CPLR 3213 in situations where the instrument sued upon was not the type contemplated by the statute.

Lawyers should be mindful that the signed writing aspect of CPLR 2104 can be satisfied by e-mails exchanged between counsel.  CPLR 2104 provides, in relevant part that: An agreement between parties or their attorneys relating to any matter in an action, other than one made between counsel in open court, is not binding upon a party unless it is in a writing subscribed by him or his attorney or reduced to the form of an order and entered. One of the first cases in New York to thoroughly analyze whether e-mails could satisfy the requirements of CPLR 2104 was Forcelli v. Gelco Corp. , 109 A.D.3d 244 (2 nd Dep’t 2013).  The Forcelli plaintiff sued defendant for damages after an auto accident.  After discovery, plaintiff moved for summary judgment and defendant cross-moved for summary judgment dismissing the Complaint.  On the same day as the motions were submitted, the parties appeared for mediation.  While a settlement was not reached at mediation, the discussions continued between plaintiff’s counsel and the adjuster for defendant’s insurance carrier.  In a phone conversation, plaintiff’s counsel orally agreed to accept a settlement offer made by the adjuster.  In a subsequent e-mail to plaintiff’s counsel, the adjuster memorialized the settlement, which required the insurer to make a payment of $230,000 in exchange for a release from plaintiff prepared by plaintiff’s counsel.  At the end of her e-mail the adjuster wrote “Thanks Brenda Greene.” On May 4, 2011, the Forcelli plaintiff executed a release.  On May 11, 2011, supreme court granted defendant’s cross-motion to dismiss the complaint.  The same day, defendant’s counsel served on plaintiff the order with notice of entry and plaintiff’s counsel, by fax and certified mail, sent defendant’s counsel the release and a signed stipulation of discontinuance.  The adjuster received the “settlement documents” and forwarded them to defendant’s counsel, who promptly “rejected” the release and stipulation of discontinuance.  Counsel asserted that a “settlement consummated under CPLR 2104 between the parties” and that defendant considered the matter dismissed by court’s order resolving the cross-motion. The Forcelli plaintiff moved to vacate the order dismissing the case arguing that the adjuster’s e-mail “constituted a binding written settlement agreement pursuant to CPLR 2104,” Forcelli, 109 A.D.3d at 247, and, in opposition, defendant argued that it did not.  The Forcelli defendant appealed from supreme court’s granting of plaintiff’s motion. In affirming the Forcelli supreme court, the Second Department noted that “ tipulations of settlement are judicially favored, will not lightly be set aside and are enforced with rigor and without a searching examination into their substance as long as they are clear, final and the product of mutual accord.”  Forcelli , 109 A.D.3d at 247-48 (citations and internal quotation marks omitted).  The Court then recognized that the settlement “must conform to the criteria set forth in CPLR 2104” and, since it was not made in open court, the settlement “must be in writing, signed by the party (or attorney) to be bound.”   Forcelli , 109 A.D.3d at 248 (citations and internal quotation marks omitted).  In addition, the Forcelli Court noted that “settlement agreements are subject to the principles of contract law for an enforceable agreement to exist, all material terms must be set forth and there must be a manifestation of mutual assent.” Forcelli , 109 A.D.3d at 248 (citations and internal quotation marks omitted). With that in mind, the Forcelli Court found that the adjuster’s e-mail set forth the material terms of the parties’ settlement.  The Forcelli Court, in rejecting defendant’s argument that the settlement agreement was invalid because neither defendant nor its counsel executed same, held that the adjuster was an agent with apparent authority to settle the case.  “A party will be bound by the acts of its agent in settlement negotiations and an agreement will be binding where the agent has either actual or apparent authority.  Forcelli , 109 A.D.3d at 248 (citations omitted). As to the “subscription” requirement, the Forcelli Court noted that while e-mails cannot be signed in the traditional sense, “the lack of ‘subscription’ in the form of a handwritten signature has not prevented other courts from concluding that an e-mail message, which is otherwise valid as a stipulation between parties, can be enforced pursuant to CPLR 2104.”  Forcelli , 109 A.D.3d at 248.  In reaching its decision, the Forcelli Court also recognized the “widespread use of e-mail” and how “unreasonable” it would be to determine that, due to the absence of a traditional signature, an e-mail could not conform to CPLR 2104.  The Court also noted that the adjuster purposely added her name at the end of the e-mail and that it was not automatically generated by the e-mail software.   Forcelli , 109 A.D.3d at 251. On May 29, 2019, the Second Department decided Herz v. Transamerica Life Ins. Co. , a case in which the Court enforced a settlement agreement based on e-mail exchanges between counsel.  Plaintiff in Herz brought an action against the insurance company that insured her late husband’s life.  After several months of negotiations, plaintiff’s counsel accepted an offer to settle the case for $12,500.  Plaintiff was to sign a stipulation prepared by her counsel and defendant was to prepare a release.  Plaintiff’s counsel, after some modifications, approved the release.  The following day, however, plaintiff’s counsel emailed defendant’s counsel and requested additional changes to the release that were not acceptable to defendant. Thereafter, the Herz plaintiff obtained new counsel, who advised defendant’s counsel that plaintiff would not execute a release and stipulation of discontinuance.  In opposition to defendant’s motion to enforce the settlement, plaintiff’s new counsel argued that there was no settlement between the parties.  The Herz Court affirmed supreme court’s finding that “the settlement, made via email exchanges entered into by counsel and the plaintiff’s prior counsel, was valid and enforceable” as was the direction “to execute the release exchanged between counsel and file a stipulation of discontinuance.” The Herz Court, relying largely on Forcelli found that: Here, the emails were subscribed by counsel, set forth the material terms of the agreement—the acceptance by the plaintiff's counsel of an offer in the sum of $12,500 to settle the case in exchange for a release in favor of Transamerica—and contained an expression of mutual assent. Contrary to the plaintiff's contention, the settlement was not conditioned on any further occurrence, such as the formal execution of the release and settlement. Therefore, the plaintiff's subsequent refusal to execute the release did not invalidate the agreement.  (Citations omitted.)