On November 18, 2018, this Blog wrote about Brown v. Cerebus Capital Management, LP , 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018) ( here ). Brown involved the grant of employment compensation that plaintiffs claimed, among other things, was part of a fraudulent scheme to deprive them of their benefits. The gravamen of the article pertained to the difference between the standards for pleading fraud with particularity under the Civil Practice Law and Rules (“CPLR) and federal law ( e.g. , the Federal Rules of Civil Procedure and the securities laws) and the estoppel effect dismissal of a fraud claim under the latter has on a fraud claim brought pursuant to the former. On June 13, 2019, the Appellate Division, First Department, 2019 N.Y. Slip Op. 04772 (1st Dept. June 13, 2019) ( here ), affirmed the motion court’s decision on this point, holding that the claims arising from the dismissal of plaintiffs’ prior federal action were not collaterally estopped due to the differences between pleading fraud under the CPLR, on the one hand, and the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995, on the other hand: The claims that require scienter are not barred by collateral estoppel arising from the dismissal of plaintiffs’ prior federal action, because the standard for pleading scienter for federal securities fraud claims is more stringent than the standard for pleading scienter in New York state court ( see Williams v Citigroup, Inc. , 104 AD3d 521, 522 <1st dept 2013> ). Slip Op. at *1. The First Department also addressed the motion court’s holding that Brown’s claims were barred by a general release in the Repurchase Agreement. here).=">here)."> That document contained a provision in which Brown allegedly released all claims “arising from, on account of, related to or in connection with” defendants or her Profits Interests. The motion court held that Brown “completely, clearly, and unambiguously discharged all of the claims Brown … purport to assert against defendants.” The First Department reversed, holding that the release was not effective since defendants had not signed the agreement (as modified by Brown) in which the release was contained: Contrary to defendants’ contention, Brown did not release her claims. The purported release appears in a Repurchase Agreement that defendants Covis Pharmaceuticals, Inc. (CPI), Covis Management Investors US LLC (Management Investors US), and Covis US Holdings, LLC (Covis US) sent Brown. These defendants had not yet signed it when they sent it to her. Brown signed it but made a handwritten change. Hence, the document that she returned was a counteroffer and a rejection of the offer made by these defendants. None of the defendants signed the Repurchase Agreement as modified by Brown, so it was not a binding contract. Id . (citation omitted). The Court affirmed the motion court’s denial of defendants’ motion to dismiss the fraud claims. Slip Op. at *2. The Court noted that the claims were not based on a mere failure to perform under the agreements but, rather, were predicated on “specific misrepresentations of fact.” Id . at *1. Moreover, the Court rejected the argument that the merger clause barred the fraud claims. The Court found that the clause at issue was mere “boilerplate” and, therefore, not sufficiently specific to preclude a claim of fraudulent inducement. Id . citing Laduzinski v Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015). here=">here" and="and" >here.=">here."> Brown v. Cerebus Capital Management, L.P. , 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018), can be found here . General Release, Contract, Fraud, Fraudulent Inducement, Merger Clause, Pleading Fraud with Particularity, CPLR, Federal Rules of Civil Procedure, Commercial Litigation, Business Litigation

Litigations often get settled before trial. When parties decide to settle their disputes, they typically agree to exchange mutual releases – i.e. , they agree to give up any claims they have, and may have, against each other.  By exchanging releases, the parties to a settlement are, therefore, securing for themselves, and those bound by the release, complete peace from future litigation involving the same subject matter in their dispute. Generally, a “release constitutes a complete bar to an action on a claim which is the subject of the release.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (internal quotation marks and citation omitted). In fact, “a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is ‘fairly and knowingly made.’” Centro Empresarial Cempresa , 17 N.Y.3d at 276, quoting Mangini , 24 N.Y.2d at 566-567.  Thus, “if ‘the language of a release is clear and unambiguous, the signing of a release is a “jural act” binding on the parties.’” Id. , quoting Booth v. 3669 Delaware , 92 N.Y.2d 934, 935 (1998), quoting Mangini v. McClurg , 24 N.Y.2d 556, 563 (1969). “Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden of going forward . . . to the to show that there has been fraud, duress or some other fact which will be sufficient to void the release.’” Centro Empresarial Cempresa , 17 N.Y.3d at 276 (“A release may be invalidated, however, for any of the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake”) (internal quotation marks and citation omitted), quoting Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). “A plaintiff seeking to invalidate a release due to fraudulent inducement must ‘establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.’” Id. , quoting Global Mins. & Metals Corp. v Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). A party that releases “a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release.” Id . (citation omitted). “Were this not the case,” observed the Court of Appeals, “no party could ever settle a fraud claim with any finality.” Id . In Frenk v. Solomon , 2019 N.Y. Slip Op. 04654 (1st Dept. June 11, 2019) ( here ), the Appellate Division, First Department, applied the foregoing principles to affirm the dismissal of an action to recover certain art allegedly stolen during the Holocaust. Frenk v. Solomon Background here).=">here)."> Frenk involved the art collection of the Paul Westheim (“Westheim”), a Jewish art critic, who specialized in German expressionist art. In particular, the action involved five pieces in Westheim’s collection: Paul Klee’s Opus 18; Otto Mueller’s Drei Akte (also known as The Bathers); Max Pechstein’s Portrait of Paul Westheim (also known as Portrait of a Standing Man); Edgar Jene’s Plastische Imagination; and Erich Heckel’s The Violinist (collectively, “Five Works”). In 1933, Westheim fled Nazi Germany for Paris and left his collection with Charlotte Weidler (“Weidler”), an art dealer in Berlin. During World War II, Westheim fled from France to Spain, then Portugal. Ultimately, he settled in Mexico in 1941, where he met and was later married to Marianna Westheim-Frenk, plaintiff’s mother. He also corresponded extensively, and in code, with Weidler during the war; however, those communications terminated after the war when Westheim inquired about the whereabouts of his art collection. Westheim died in 1963. In 1973, Westheim-Frenk learned that Weidler had sold a painting from Westheim’s collection, the Portrait of Dr. Robert Freund, to a gallery in New York City. Westheim-Frenk commenced an action in the Supreme Court, New York County, against Weidler and others for damages and for “possession of all items of art collection” in Weidler’s custody (“1973 Action”). Westheim-Frenk also sought an accounting of Westheim’s art collection and “whatever sums of money found to be due . . . on the basis of said account.” Weidler filed a pre-answer motion to dismiss. Before the motion was decided or any discovery was exchanged, the parties agreed to discontinue the action “with prejudice” by stipulation, dated March 21, 1974. In connection with the settlement, Westheim-Frenk executed a broad release (“Release”) discharging Weidler, among others, of any claims that she had and may have had with respect to the art collection. The Release also specified that it could not be amended orally. No other documents set forth the terms of the settlement of the 1973 Action. In consideration for the Release, Westheim-Frenk received $7,500. In the current action, plaintiff, Westheim-Frenk’s daughter, alleged that, in August 2010, defendants admitted that they possessed (or, in the case of The Violinist, had possessed before its sale at auction in 1998) the Five Works. Plaintiff initiated the action in January 2013 seeking a judgment declaring her rightful ownership of the Five Works, replevin, and an accounting, as well as damages for unjust enrichment, conversion, and violation of both a bailment and a constructive trust. In December 2013, defendants filed a pre-answer motion to dismiss, which the motion court denied, except to the extent that plaintiff’s claim for breach of warranty of title was dismissed without prejudice. The First Department affirmed that decision, stating that “ iven plaintiff’s allegation raising the inference that the stipulation of discontinuance with prejudice and the general release of claims in were not intended to encompass the instant claims, and her allegations of fraudulent inducement raising equitable considerations,” dismissal without discovery would be premature. Frenk v. Solomon , 123 A.D.3d 416, 416 (1st Dept. 2014) ( here ). After discovery, defendants moved for summary judgment. The motion court granted the motion, holding, in part, that the Release barred the action. Here, the doctrines of contractual release and res judicata apply to the Release and 1974 stipulation of discontinuance. After filing a lawsuit involving “all items of art collection,” Ms. Westheim-Frenk chose to settle and discontinue the 1973 Action “with prejudice” on the advice of her New York counsel. Ms. Westheim-Frenk also contemporaneously executed the Release, supported by consideration, which bars “all manner of actions” against Ms. Weidler and Ms. Weidler's “successors and assigns.” By its terms, the Release applies to all actions Ms. Westheim-Frenk’s “heirs . . . can, shall or may have” involving “any matter, cause or thing whatsoever from the beginning of the world to the day of the date of these presents.” The motion court also rejected plaintiff’s contention that the Release applied to only one painting, the Kokoschka painting, Portrait of Dr. Robert Freund. The court found that the argument was not supported by sufficient admissible evidence. The motion court further rejected plaintiff’s argument that the Release was procured by fraud – i.e. , that there were no other pieces of artwork from Westheim’s collection. In this regard, the court held that the “alleged fraudulent misrepresentation was precisely the subject of the terminated 1973 Action: whether there were more artworks from Mr. Westheim’s collection” and, thus, insufficient to state a claim for a fraud separate from the release. Plaintiff appealed. The First Department unanimously affirmed. The First Department’s Decision The Court held that the “motion court correctly found that action … barred by the general elease and stipulation of discontinuance in the 1973 Action….” Slip Op. at *1. Like the motion court, the First Department found that “Plaintiff failed to present evidence that intended to release claims with regard to one single painting only.” Id . The Court explained that, “on its face, the elease encompasse all claims of any kind whatsoever, and the 1973 lawsuit sought the return of any and all works of art alleged to have been formerly owned by Westheim.” Id . The Court also held that “ laintiff failed to present evidence” demonstrating that the Release was procured by a fraud separate from the Release. Id . Lying about the whereabouts of the artwork was the subject of the complaint in the 1973 Action. Therefore, concluded the Court, the facts supporting the Release were the same as those that supported the alleged fraud: The claim of fraudulent inducement is supported by the allegations that Charlotte Weidler, Westheim’s former colleague, friend, and lover, had converted art entrusted to her by Westheim and lied about its whereabouts in the years after the Second World War. These allegations do not establish a fraud separate from the subject of the release but are the same facts as those alleged in the 1973 complaint. Id . (citations omitted). Moreover, the Court held that even if plaintiff did allege a fraud separate from the Release, her claims would still fail.  Plaintiff could not satisfy the reasonable reliance element of a fraud claim: “plaintiff cannot establish reasonable reliance upon any statements allegedly given by Weidler to Frenk-Westheim that Weidler had no other knowledge of the Westheim art collection, in view of the fact that Weidler had advised Frenk-Westheim’s counsel that she had additional works, but they were all either gifts from Westheim or purchased from him.” Id . (citation omitted). Takeaway General releases are viewed as any other contract provision. When they are clear and unambiguous, the courts will enforce them according to their terms. In Frenk , the Release was broad and encompassed any and all claims, known and unknown, concerning the 1973 Action. In light of the broad scope of the Release, Frenk serves as a reminder (and a warning) to practitioners to tailor their releases to the subject matter intended by the parties. Otherwise, a party challenging the release may find that it covered more than what was thought or intended.

Investing in the market or starting a business is hard. There are risks, of varying degrees, involved with such activities. Indeed, investors and entrepreneurs knowingly accept these risks in the hope of generating a high return on their investment. They do not, however, accept the risk that they are the victims of fraud. Unfortunately, anyone is susceptible to falling victim to a Ponzi scheme or a pyramid scheme. Ponzi schemes and pyramid schemes ensnare people of all ages and income levels, bilking investors/recruits out of their hard-earned money. For this reason, the Securities and Exchange Commission (“SEC” or “Commission”), the Federal Trade Commission and state Attorneys General actively seek to stop promoters of these fraudulent schemes. What is a Ponzi Scheme? “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See SEC Spotlight, “SEC Enforcement Actions Against Ponzi Schemes” ( here ). Shutting down Ponzi schemes and holding the organizers accountable for such frauds is an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at two SEC enforcement actions against Ponzi scheme organizers responsible for bilking investors out of tens of millions of dollars in collective losses. What is a Pyramid Scheme? A relative of the Ponzi scheme is the pyramid scheme. ( See Debra A. Valentine, “International Monetary Funds Seminar on Current Legal Issues Affecting Central Banks.” Here .)  A pyramid scheme differs from a Ponzi scheme in that “it revolves around continuous recruiting” to sustain itself, while a Ponzi scheme “has no product to sell and pays no commission to investors who recruit new ‘members.’” Id . As noted, in a Ponzi scheme, the promoter “collects payments from a stream of people, promising them all the same high rate of return on a short-term investment.” Id . The promoter “uses the money from new recruits to pay obligations owed to longer-standing members of the program.” Id . In effect, the Ponzi scheme operator is robbing Peter to pay Paul. Id . In contrast, “ pyramid scheme is an illegal investment scam based on a hierarchical setup.” ( See Investopedia.com here .)  In the classic pyramid scheme, “participants attempt to make money solely by recruiting new participants, usually where: he promoter promises a high return in a short period of time; o genuine product or service is actually sold; and he primary emphasis is on recruiting new participants.” ( See SEC.gov, here .) Promoters of a pyramid scheme often encourage investors to participate in the fraud through social media, company websites, group seminars, Internet advertising, YouTube videos, and other media. To lure recruits into the scheme, pyramid scheme promoters try very hard to make the operation look legitimate. But, as discussed below, they are not and ultimately collapse because the promoter cannot raise enough money from new investors to pay earlier ones. A pyramid scheme begins with an individual or a company who recruits investors, typically by promising high rates of return. As the earliest investors in the pyramid, these individuals typically receive high returns. These gains are paid for, however, by new recruits, not by a return on any real investment. Because returns are dependent upon investment by new recruits, ultimately the pyramid becomes too big for new recruits to fund returns for those at the top of the pyramid. For this reason, it is mathematically impossible for every investor in the pyramid to make money. For example, if each investor needs to recruit 10 people to recoup his/her initial investment, the bottom levels of the pyramid would have to recruit over one billion people to break even – i.e. , make back the money initially invested. See="See" N.Y.="N.Y." AG, “ Don’t="AG, “Don’t" Get="Get" Caught="Caught" in="in" a="a" Pyramid="Pyramid" Scheme .”="Scheme.”" Here.=">Here."> What is The Difference Between A Pyramid Scheme and A Multi-level Marketing Company? It is often difficult to tell the difference between a legitimate multi-level marketing program (“MLM”) and a pyramid scheme. Both share the same or similar business models of “multiple levels” of distributors and recruits. A legitimate MLM relies on a network of distributors and recruits who sell the company’s product. Think of companies like Amway, Tupperware, Herbalife, Avon, and Mary Kay. The only way to make money in a legitimate MLM is by selling the company’s product directly to the consumer or by managing a team of salespeople. Managers receive a percentage of the sales made by each recruit under their management and supervision. A legitimate MLM does not require the recruit to buy a starter kit from which the earlier investor receives a commission or a recruiting “bonus” or require mandatory training and a non-refundable membership fee. In short, a legitimate MLM does not require investors to recruit new ones to earn money; the business is focused on selling the company’s products. *          *          * Stopping pyramid schemes and holding their promoters accountable is also an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at an SEC enforcement action against a pyramid scheme organizer responsible for bilking investors out of millions of dollars. SEC Seeks Injunctive Relief to Stop a Ponzi Scheme Run by a Recent College Graduate On June 3, 2019, the Securities and Exchange Commission (SEC) announced ( here ) that it filed an emergency action against a recent college graduate for operating a Ponzi scheme that targeted college students and young investors. The SEC is seeking, among other things, an asset freeze, a temporary restraining order, and preliminary and permanent injunctive relief. In its complaint ( here ), the SEC alleged that Syed Arham Arbab (“Arbab”) conducted a Ponzi scheme from a fraternity house near the University of Georgia campus in Athens, Georgia. Arbab allegedly offered investments in a purported hedge fund called “Artis Proficio Capital,” which he claimed had generated returns of as much as 56% in the prior year and for which investor funds were guaranteed up to $15,000. Arbab also allegedly sold “bond agreements”, which promised investors the return of their money along with a fixed rate of return. The SEC alleged that at least eight college students, recent graduates, or their family members invested more than $269,000 in these investments. According to the SEC, no hedge fund existed, Arbab’s claimed performance returns were fictitious, and he never invested the funds as represented. Instead, as money was raised, Arbab allegedly placed substantial portions of investor funds in his personal bank and brokerage accounts, which he used for his own benefit, including trips to Las Vegas, shopping, travel, and entertainment. Arbab also allegedly used portions of new investor money to pay earlier investors who had asked for their money back, the hallmark of a Ponzi scheme. Arbab even instructed some new investors to send their money – unwittingly – to existing investors through payment applications such as Venmo, Zelle, and Cash App, and misleadingly told them that the existing investors were either a “partner” or “manager” in the fund. “We allege that Mr. Arbab used his college affiliations to operate a Ponzi scheme that drained valuable resources from current and former students. This is a reminder that investors of all ages and experience levels—whether long-time investors or recent graduates investing funds from their first few paychecks—should carefully research investment opportunities and the people offering them,” said Richard R. Best, Regional Director of the SEC’s Atlanta Office. The SEC filed its complaint in the United States District Court for the Middle District of Georgia. The SEC charged Arbab, Artis Proficio Capital Investments LLC, and Artis Proficio Capital Management LLC, with violating the antifraud provisions of the federal securities laws. As noted, the SEC is seeking an order freezing certain assets of Arbab and his entities, as well as a temporary restraining order, preliminary and permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. SEC Seeks Injunctive Relief to Stop Ponzi-Like Scheme by Real Estate Developer On May 23, 2019, the SEC announced ( here ) that it had filed an emergency action against Robert C. Morgan (“Morgan”), a New York residential and commercial real estate developer, and two of his entities, Morgan Mezzanine Fund Manager LLC and Morgan Acquisitions, LLC, with fraud for misappropriating investor funds. The SEC is seeking an asset freeze and other emergency relief. In its complaint ( here ), the SEC alleged that Morgan financed his development projects in different ways, including through sales of securities directly to more than 200 retail investors, many of whom invested through their retirement accounts. Morgan represented to investors that their money would be used to improve multifamily properties. Based on these representations, Morgan raised more than $80 million. As alleged in the SEC’s complaint, Morgan and his entities diverted investor funds to facilitate Ponzi scheme-like payments to earlier investors. In addition, the SEC alleged that Morgan improperly used more than $11 million in investor funds to repay an inflated, fraudulently obtained loan for an unrelated apartment complex. “In seeking this emergency relief, the SEC is acting to protect current and potential future victims of this elaborate scheme by halting Morgan’s fraud, which we allege involves the improper use of more than $25 million dollars in investor funds,” said Daniel Michael, Chief of the SEC's Division of Enforcement’s Complex Financial Instruments Unit. The SEC filed its complaint in the United States District Court for the Northern District of New York in Buffalo. The SEC charged Morgan and his two entities with violating the antifraud provisions of the federal securities laws. The SEC requested an order freezing Morgan’s assets and appointing a temporary receiver over the relevant funds. The SEC further sought permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, and a permanent receiver over the entities. here.=">here."> SEC Files Action Against an Alleged Pyramid Scheme Organizer Who Promised Investors High Returns in Cryptocurrency Fraud On the same day that the SEC announced the action against Morgan, the Commission announced ( here ) that it filed a civil injunctive action against Daniel Pacheco (“Pacheco”), a resident of San Clemente, California, and the alleged perpetrator of a multimillion-dollar pyramid scheme. In its complaint ( here ), the SEC alleged that from January 2017 through March 2018, Pacheco conducted a fraudulent, unregistered offering of securities through two California-based companies he controlled, IPro Solutions LLC and IPro Network LLC (collectively, “IPro”). IPro raised more than $26 million from investors by selling instructional packages that provided lessons on e-commerce. Investors also received “points” that could be converted into a digital asset known as PRO Currency. Investors who contributed additional funds could earn a mixture of cash commissions and additional convertible points by recruiting new investors into the IPro network. As alleged in the SEC’s complaint, however, IPro was a fraudulent pyramid scheme. IPro’s collapse was hastened by Pacheco’s fraudulent use of investor funds, which included, among other things, the all-cash purchase of a $2.5 million home and a Rolls Royce. Pacheco’s misappropriation accelerated the rate at which IPro became unable to pay the commissions and bonuses due its investors. The SEC further alleged that Pacheco’s offer and sale of IPro instructional packages constituted an unregistered sale of securities because the IPro instructional packages involved: (i) an investment in a pyramid scheme; and/or (ii) an investment in the PRO Currency digital assets, and therefore should have been registered with the SEC. Notably, alleged the SEC, no registration exemption applied to Pacheco’s offer and sale of IPro instructional packages. “We allege that Pacheco hid an old fraud under the guise of cutting-edge technology,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “He enticed investors by offering them the opportunity to speculate in cryptocurrency, when in fact he was simply operating a pyramid scheme.” The SEC’s complaint, filed in U.S. District Court for the Central District of California, charged Pacheco with violating Sections 5(a), 5(c), 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and (c) thereunder.  The complaint also named seven relief defendants for the purpose of recovering investor proceeds in their possession. The SEC did not allege wrongdoing with respect to those relief defendants.

In Henry VI , William Shakespeare wrote, “ efer no time, delays have dangerous ends” - a quote apropos to a discussion of laches.  “The doctrine of laches is an equitable doctrine which bars the enforcement of a right where there has been an unreasonable and inexcusable delay that results in prejudice to a party.”  Skrodelis v. Norbergs , 272 A.D.2d 316 (2 nd Dep’t 2000). In Kverel v. Silverman (2 nd Dep’t May 29, 2019), the Appellate Division, Second Department, applied the doctrine of laches and dismissed plaintiff’s action in which he sought to enjoin the construction of a house being built on neighboring property. The simplified facts are as follows.  The plaintiff in Kverel owned property in Southampton.  The defendant was a contract vendee who ultimately purchased a lot (the “Defendant’s Lot”) on which he intended to construct a house that was situated between plaintiff’s house and the beach.  In 2010, defendant entered into a contract to purchase the Defendant’s Lot, which was undeveloped at the time.  Thereafter, plans for a house were prepared by an architect and defendant applied for a building permit.  Two months after the building permit was issued in May of 2012, plaintiff filed an administrative appeal with the Town Zoning Board of Appeals (the “ZBA”) in which the height of defendant’s proposed house was challenged. In August of 2012, in response to the appeal, defendant’s architect applied to amend the building permit and submitted revised building plans.  The application was approved.  In September of 2012, plaintiff withdrew his appeal to the ZBA because the revised plans and the amended building permit application “appear to be in substantial compliance with the Town Building and Zoning Code.”  The record reflected that despite the withdrawal of the ZBA appeal, defendant understood that plaintiff remained opposed to the construction and intended to urge that a restrictive covenant required plaintiff’s approval before a house could be constructed on Defendant’s Lot (the “Restrictive Covenants”). In December of 2012, defendant commenced an action in which he sought a declaratory judgment that plaintiff could not enforce the Restrictive Covenants.  The Restrictive Covenant action was resolved when the parties entered into a “so-ordered” stipulation (the “Stipulation”) in which the plaintiff consented to the entry of a judgment declaring that defendant is “entitled to build upon the Premises any single family residence for which obtained a building permit from the Town, whether the residence is the one currently planned by defendant or one larger and more extensive so long as it complied with Town law, ordinances, and regulations.”  (Internal brackets and ellipses omitted.) In April of 2013, defendant purchased the defendant’s lot from the contract vendor.  The building permit was amended several times thereafter. In August of 2014, after the parties could not agree on a deal to sell the Defendant’s Lot to the Plaintiff, construction began on the house.  In March of 2015, after another building permit amendment, plaintiff commenced an action to enjoin the construction of a home that plaintiff alleged violated Town Code.  Plaintiff also moved for a preliminary injunction preventing the construction of the top floor of the home.  Defendant cross-moved to dismiss the Complaint. Supreme court granted plaintiff’s motion for a preliminary injunction and denied defendant’s motion to dismiss and defendant appealed.  In reversing supreme court, the Second Department found that plaintiff’s actions were barred by the doctrine of laches.  The Court explained that: o establish laches, a party must show: (1) conduct by an offending party giving rise to the situation complained of, (2) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so, (3) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief, and (4) injury or prejudice to the offending party in the event that relief is accorded the complainant.  The mere lapse of time without a showing of prejudice will not sustain a defense of laches. In addition, there must be a change in circumstances making it inequitable to grant the relief sought.  Moreover, as the effect of delay may be critical to an adverse party, delays of even less than one year have been sufficient to warrant the application of the defense. (Citations omitted.) The Second Department found that plaintiff’s action for injunctive relief was commenced almost three years after the first building permit was issued and defendant withdrew his ZBA appeal, two years after the Stipulation and six months after construction began on the home.  The Court also found that plaintiff had been aware since July of 2012 (and before the defendant purchased the property) that “defendant’s construction was in violation of the Town Code.”  The Court also found that while it was clear that plaintiff opposed the construction, he did not seek ZBA review or injunctive relief prior to the commencement of the underlying action.  The Court further found that subsequent to the plaintiff’s withdrawal of the ZBA appeal and the execution of the Stipulation, defendant knew that plaintiff would again urge that the construction was in violation of Town Code.  Finally, the Court found that defendant would be prejudiced by plaintiff’s “undue delay in challenging the construction.” In light of plaintiff’s delay in seeking to safeguard interests and failure to offer any viable reason for failure to act sooner, the doctrine of laches serves as a bar to this action.”  (Citations and internal quotation marks omitted.)

Sometimes a decision goes in a direction that the reader does not expect. Bashian & Farber, LLP v. Syms , 2019 N.Y. Slip Op. 04348 (2d Dept. June 5, 2019) ( here ), is such a case. Bashian involved what appeared to be a straightforward case concerning an alleged fraud and fraudulent conveyance in the context of a fee dispute between a law firm and its former client. While the case involved the elements of those claims, its holding focused on the concept of scheme liability – that is, liability premised on the knowing participation in a scheme to defraud, even where the participation did not involve all of the elements of a fraud claim (such as the making of a statement). Since scheme liability is not typically alleged in a common law fraud and fraudulent conveyance action, this Blog will take a closer look at Bashian in today’s post.    A Quick Primer on the Applicable Law Common Law Fraud To state a claim for fraud, a plaintiff must allege a material misrepresentation of 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, 558 (2009). Notably, “ iability for fraud may be premised on knowing participation in a scheme to defraud, even if that participation does not by itself suffice to constitute the fraud.” Danna v. Malco Realty, Inc. , 51 A.D.3d 621, 622 (2d Dept. 2008). See also see CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 286 (1987). Fraud allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Fraudulent Conveyance: DCL § 276 Under Section 276 of the DCL, “ very conveyance made … with actual intent … to hinder, delay, or defraud either present or future creditors, is fraudulent.…” To plead a claim under DCL § 276, the plaintiff “must allege that (1) the thing transferred has value of which the creditor could have realized a portion of its claim; (2) that this thing was transferred or disposed of by the debtor and (3) that the transfer was done with actual intent to defraud.” Brunner v. Estate of Lax , 47 Misc. 3d 1206(A) (Sup. Ct., N.Y. County 2015), aff’d , 137 A.D.3d 553 (2d Dept. 2016). Like a common law fraud claim, a claim under DCL § 276 must be pleaded with particularity. Syllman v. Calleo Dev. Corp. , 290 A.D.2d 209, 210 (1st Dept. 2002). The burden of proving actual intent is on the party seeking to set aside the conveyance. Marine Midland Bank v. Murkoff , 120 A.D.2d 122, 126 (2d Dept. 1986); see also ACLI Gov’t Sec., Inc. v. Rhoades , 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987). Actual intent to defraud must be proven by clear and convincing evidence. Marine Midland Bank , 120 A.D.2d at 128; ACLI Gov’t Sec. , 653 F. Supp. at 1394. Since it is rarely susceptible to direct proof, actual intent is typically established through circumstantial evidence surrounding the allegedly fraudulent act. Id . Consequently, courts allow creditors “to rely on badges of fraud to support his case, i.e. , circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Wall St. Assoc. v. Brodsky , 257 A.D.2d 526, 529 (1st Dept. 1999) (internal quotation marks and citations omitted). Among the circumstances considered are: secrecy and haste in making the transfers; “a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance.” Id . See also Dempster v. Overview Equities, Inc. , 4 A.D.3d 495, 498 (2d Dept. 2004); United Parcel Service v. Jay Norris Corp. , 102 Misc. 2d 231, 233 (Sup. Ct., Nassau County 1979) (inference raised from the relationship of the parties to the transaction and the secrecy of the sale); Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (“Inadequacy of consideration, secret or hurried transactions not in the usual mode of doing business, and the use of dummies or fictitious parties are common examples of ‘badges of fraud.’”). A conclusory allegation that the plaintiff has been defrauded is not sufficient. Syllman , 290 A.D.2d at 210. Bashian & Farber, LLP v. Syms Background Plaintiffs are the former attorneys of the defendant Richard Syms (“Richard”). Beginning in 2010, plaintiffs represented Richard in a sharply contested probate proceeding. Plaintiffs alleged that in mid-2012, Richard stopped paying plaintiffs’ legal fees. Richard allegedly told plaintiffs that he would sell certain real property owned by him to pay the outstanding legal fees. According to plaintiffs, instead of selling the property and paying his legal fees as promised, in August and December 2011, Richard and his wife, defendant Ineva Syms (“Ineva”), transferred to Ineva solely, for nominal or no consideration, three jointly owned unimproved properties located at 113 Depot Hill Road, Amenia, N.Y. (the “113 Depot Hill Property”); 108 Depot Hill Road, Amenia, N.Y. (the, “108 Depot Hill Property”); and 221 North Salem Road, Lewisboro, N.Y. (the “221 North Salem Property”). Plaintiffs further alleged that on July 22, 2013, Richard and Ineva sold the 221 North Salem Property to a third party for more than $1.2 million. At the time, Richard allegedly had outstanding legal fees of approximately $239,142.25, but failed to make any payments. In October 2013, Richard and Ineva listed for sale a property known as 3313 Route 343, Amenia, N.Y. In March 2014, Ineva transferred, allegedly for no valuable consideration, the 108 Depot Hill Property, a property known as 199 North Salem Road, Lewisboro, N.Y. (the “199 North Salem Property”), and the 113 Depot Hill Property from her name into the Syms Family Revocable Trust dated March 11, 2014 (the “Trust”), for which she and Richard served as trustees. At the time of the second transfer, Richard allegedly owed plaintiffs $329,068.90 in legal fees. The 199 North Salem Property was later transferred from the Trust to Ruth Merns, Richard’s mother, for $1.00. In July 2014, plaintiffs commenced the action to recover, inter alia , on an account stated for legal fees and pursuant to Debtor and Creditor Law article 10 against Richard and Ineva, both individually and as trustees of the Trust, and the Trust. According to plaintiffs, Richard and Ineva transferred the various properties with the intent and purpose to hinder, delay, and defraud plaintiffs from collecting the indebtedness owed by Richard, and were part of a common plan, scheme, or conspiracy to defraud plaintiffs. Plaintiffs later amended the complaint to include other defendants alleged to have been involved in the alleged scheme to defraud. Defendants moved for summary judgment to dismiss the third and fourth causes of action of the amended complaint, which alleged fraud and fraudulent conveyance, respectively, against Ineva, both individually and as trustee, the fifth cause of action, which alleged unjust enrichment, against Ineva individually, and the third and fourth causes of action against the Trust and Richard, as trustee. As discussed in the motion court’s decision, defendants argued that the fraud and fraudulent conveyance claims against Ineva and the Trust should be dismissed because there were assets sufficient to satisfy a judgment if plaintiffs were to prevail. Defendants claimed that the transfers did not involve any element of fraud; that Richard was current in his payment of the legal fees not only at the time of the transfers but for a significant period thereafter; that Richard did not make himself insolvent or judgment proof with the transfers; and that plaintiffs knew that Richard had assets to satisfy any judgment entered against him. Thus, defendants contended that the fraud and fraudulent conveyance claims were without merit and should be dismissed. As to Ineva, defendants maintained, among other things, that the fraud claim against her did not identify a single representation that she made and otherwise was not pleaded with the requisite particularity. Plaintiffs opposed the motion. Plaintiffs argued that Ineva essentially admitted at her deposition that she and Richard created the Trust in order to avoid creditors such as plaintiffs, thereby admitting that they were participants in the effort to defraud plaintiffs. Plaintiffs relied on Richard’s representation that he had sufficient assets in the form of real property, that once liquidated he would use to satisfy his current, as well as anticipated future debts to plaintiffs. Based on that representation, plaintiffs continued to provide legal services to Richard. The motion court denied the motion determining, inter alia , that triable issues of fact existed as to whether defendants engaged in a fraudulent scheme to defraud creditors, including plaintiffs. Defendants appealed. The Second Department’s Decision The Second Department affirmed the motion court’s decision and order. The Court held that “defendants failed to establish their prima facie entitlement to judgment as a matter of law dismissing the third and fourth causes of action, which alleged fraud and fraudulent conveyance, respectively, insofar as asserted against Ineva, both individually and as trustee, Richard as trustee, and the Trust.” Slip Op. at *2. The Court found that although there were badges of fraud indicating that defendants had engaged in fraud and fraudulent transfers, there were nevertheless questions of fact concerning whether Ineva and Richard participated in a scheme to defraud Richard’s creditors: Here, Ineva’s deposition testimony confirmed that the various properties were transferred out of her and Richard’s joint names into her name solely, and later into the Trust, in an effort to shield those properties from potential creditors. Furthermore, by transferring the properties into Ineva’s name solely and then into the Trust, for which Richard and Ineva were the trustees, Richard and Ineva retained control over those properties. Retention of control of properties after a conveyance is regarded as an indication that the conveyance was fraudulent. In addition, Richard and Ineva sold the 221 North Salem property in July 2013 for $1,232,000, but failed to pay the outstanding debt owed to the plaintiffs. Thus, a triable issue of fact exists as to whether Ineva, both individually and as trustee, Richard as trustee, and the Trust, acting in concert, participated in a scheme to defraud Richard’s creditors. Id . Takeaway Bashian is notable for its reliance on scheme liability to affirm the motion court’s decision and order – that is, liability premised on the knowing participation in a scheme to defraud, even when that participation does not by itself suffice to constitute the fraud. CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 286 (1987); Danna , 51 A.D.3d at 622; Kuo Feng Corp. v. Ma , 248 A.D.2d 168, 168-69 (1st Dept. 1998). While there are many issues of fact involved in the case, such as those identified by the motion court ( e.g. , the nature of the transfers of the properties, whether there was fair consideration for the transfers, whether Richard was solvent or made insolvent by the transfers; whether Richard and Ineva had the ability to satisfy a judgment, and whether there was intent to defraud), the focus of the case is on the participation of Ineva and the Trust in the alleged fraud and fraudulent conveyance. Thus, the lesson of Bashian is clear: when a complaint “describes a scheme — involving all the defendants — devised and executed for the specific purpose of defrauding” the plaintiff, then all the “parties to the underlying fraudulent conspiracy, , nonetheless, be liable for independent actions done in furtherance of it.” CPC Intl. , 70 N.Y.2d at 286, citing Dewey v. Moyer , 72 N.Y. 70, 80 (1878).

A forum selection clause is contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g. , employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries. Under New York law, “a contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 321l(a)(l).” Landmark Ventures, Inc. v. Birger , 147 A.D.3d 497, 497 (1st Dept. 2017); see Lifetime Brands, Inc. v. Garden Ridge, L.P. , 105 A.D.3d 1011, 1012 (2d Dept. 2013) (affirming dismissal “pursuant to CPLR 3211 (a) (1) on the ground that the forum selection clause precluded commencement of the action in New York”). It is “prima facie valid and enforceable” unless the challenging party can show the forum selection clause “to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching,” or “that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.” Molino v. Sagamore , 105 A.D.3d 922, 923 (2d Dept. 2013) (citation and internal quotation omitted). Forum selection clauses can be mandatory or permissive. The former requires the dispute to be litigated only in the designated venue, while the latter permits litigation in a particular venue but does not prohibit it in another jurisdiction. In interpreting forum selection clauses, courts apply the principles of contract construction. Such construction can be challenging where, as in Lilis Energy, Inc. v. Blackwell , 2019 N.Y. Slip Op. 31523(U) (Sup. Ct., N.Y. County May 29, 2019) ( here ), there are related agreements with forum selection clauses that designate different venues for dispute resolution. Lilis Energy, Inc. v. Blackwell Background Lilis involved an effort by plaintiff, Lilis Energy, Inc. (“Lilis”), to claw back certain stock and stock options that it awarded to Seth Blackwell (“Blackwell”), a former employee of the company, on the grounds that Blackwell had been fired for cause and, therefore, was not entitled to retain the securities. Blackwell sued Lilis in Texas state court, asserting that Lilis breached an employment agreement it had with him because it required “any dispute that arises directly or indirectly from the relationship of the Parties evidenced by Agreement” to be litigated exclusively in Texas. Id . Lilis argued that “a nearly identical forum selection clause in the contracts governing Blackwell’s stock and stock option awards require that the dispute be heard in New York.” Id . Lilis is an independent oil and gas company headquartered in Houston, Texas. It hired Blackwell as its Executive Vice President of Land and Business Development on December 1, 2016. In connection with his hiring, Blackwell entered into an Executive Employment Agreement (the “Employment Agreement”), which outlined Lilis’s policies on, among other things, compensation, bonuses, and severance payments. Under the Employment Agreement, Blackwell was eligible to receive, among other incentives and benefits, bonuses and awards of equity and non-equity compensation from the company. The Employment Agreement also included detailed definitions of key terms related to Blackwell’s employment, including termination for “Cause.” In addition, the Employment Agreement contained a broadly worded forum selection clause which directed Lilis and Blackwell to litigate any disputes arising from the employment relationship in the State of Texas: For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of Texas and agree that any related litigation shall be conducted solely in the courts of Harris County, Texas or the federal courts for the United States for the Southern District of Texas, where this Agreement is made and/or to be performed, and no other courts. Id . at *2. In accordance with the Employment Agreement, Lilis granted Blackwell a series of equity awards, documented in certain stock and stock option agreements (collectively, the “Award Agreements”). The Award Agreements provided that if Blackwell was fired by the company “for Cause,” his stock options would immediately expire, and his unvested stock would immediately be forfeited. If Blackwell left the company for other reasons, he could be entitled to keep some, if not all, of his stock options and unvested stock. The Award Agreements, like the Employment Agreement, contained a forum selection clause. The clause identified New York, not Texas, as the forum for any disputes related to the “relationship of the parties evidenced by the Award Agreement”: For purposes of resolving any dispute that arises directly or indirectly from the relationship of the parties evidenced by the Award Agreement, the Grantee hereby submits to and consents to the exclusive jurisdiction of the State of New York and agrees that any related litigation shall be conducted solely in the courts of New York County, New York or the federal courts for the United States for the Southern District of New York, where the Award Agreement is made and/or to be performed, and no other courts. Id . at *4. According to the complaint, Blackwell was fired from his employment at Lilis on April 3, 2018, in the wake of allegations of impropriety. The company claimed that Blackwell was fired “for Cause,” as defined in the Employment Agreement; Blackwell disagreed with that assertion. The “parties vigorously dispute the proper forum to hear th case.” Id .  According to Blackwell, the dispute should be litigated in Texas under the forum selection clause found in the Employment Agreement. To underscore this point, Blackwell filed a lawsuit in Texas state court on June 21, 2018, “alleg that Lilis breached the contract because he was not terminated for Cause under his Employment Agreement.” Id . A few weeks later, on July 10, 2018, Lilis filed the New York action, relying on the forum selection clause in the Award Agreements. Id . at **4-5. Lilis alleged that Blackwell breached his fiduciary duty to the company, and sought declaratory relief, which would amount to a ruling that Blackwell was terminated for Cause and thereby surrendered his rights to certain awards, bonuses, and severance payments. Blackwell moved to dismiss Lilis’s complaint on the ground that the forum selection clause in the Employment Agreement controlled, and thus Texas was the appropriate forum for the dispute. Alternatively, Blackwell argued, the action should be dismissed under the doctrine of forum non conveniens (CPLR § 327(a)(4)), or in light of the first-filed Texas action (CPLR § 321l(a)(4)). The Court’s Decision “The first order of business,” noted the Court, was “to decide which forum selection clause applie to Plaintiff’s claims.” Slip Op. at **5-6 (internal quotation marks omitted, quoting    Encompass Aviation, LLC v. Surf Air Inc. , No. 18 CIV. 5530 (CM), 2018 WL 6713138, at *7 (S.D.N.Y. Nov. 30, 2018)). See also DeSola Grp., Inc. v. Coors Brewing Co. , 199 A.D.2d 141, 141 (1st Dept. 1993) (“ orum selection clause is inapplicable since plaintiff’s complaint does not pertain to the Agreement”); Schmelkin v. Garfield , 85 A.D.3d 755, 755-56 (2d Dept. 2011) (holding that the defendant “failed to sustain his burden of establishing that the forum selection clause applies here, since the allegations in the complaint are not based on” the relevant agreement). The Court found that “Blackwell’s eligibility to receive any of the compensation at issue originate in the Employment Agreement.” Slip Op. at *6. Thus, held the Court, the dispute “hinge on the Employment Agreement, not the Award Agreements.” Id . To underscore this holding, the Court explained that the claims for declaratory relief largely depended “on whether Blackwell was validly fired ‘for Cause’ – a term defined in the Employment Agreement.” Id . Lilis’s breach of fiduciary duty claims also “stem directly from the Employment Agreement.” Indeed, noted the Court, Lilis acknowledged that Blackwell owed such duties only “by virtue of his role as an executive officer and employee of” the company, “a role defined by the Employment Agreement” and admitted that “whether Blackwell’s incentive stock options ... accelerated and became immediately exercisable or expired as of the date of Blackwell’s termination entirely dependent on whether or not he was terminated for ‘Cause,’ as solely defined in his Employment Agreement.” Id . at *7. In fact, Lilis even argued that there was “no dispute that Blackwell received the equity awards at issue solely as a result of his employment relationship with Lilis.” Id . The Court rejected Lilis’s argument “that the Award Agreements’ forum selection clause envelop all disputes relating to the Award Agreements as well as all disputes relating to an awardee’s Employment Agreement.” Id . Such a reading, noted the Court, constituted “a remarkable rewriting of the agreements, and as a matter of contract interpretation” was “untenable.” Id . The Court sharply criticized the company for advancing an interpretation that produced “impractical, if not absurd, results.” Id . Lilis’s Texas-based employees seeking to litigate disputes with the company about disability benefits, vacation days, or the non-compete policy – found in the Employment Agreement …, respectively – would be forced to do so in New York simply because they signed a separate agreement concerning an entirely different aspect of employment. Nothing in the text of the Award Agreements’ forum selection clause suggests such all-encompassing breadth. Id . at **8-9. The Court went on to say that “Lilis’s interpretation would read the forum selection clause out of the Employment Agreement altogether.” Slip Op. at *7. Such a result “runs afoul of the general rule that ‘ here interrelated agreements contain competing forum selection clauses, a Court must avoid interpretation[ ] that render a provision of either agreement superfluous.’” Id . at **7-8, quoting Adar Bays, LLC v. Aim Expl., Inc. , 251 F. Supp. 3d 704, 708 (S.D.N.Y. 2017) (internal quotation marks omitted). Yet, found the Court “Lilis’s reading exactly that.” Id . at *8. The Court also rejected Lilis’s argument that the Award Agreements superseded the Employment Agreement such that the forum selection clause in the former controlled the matter. Id . at *9. Although the Award Agreements were executed after the Employment Agreement, the substance of the agreements was different; thus, the forum selection clause in the Award Agreements could not control. Id. , citing Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc. , 165 A.D.3d 413, 413-14 (1st Dept. 2018); Kramer v. Danalis , 49 A.D.3d 263, 264 (1st Dept. 2008). Indeed, noted the Court, “the Employment Agreement addresse an employee’s entitlement to compensation, including the award of stock options, while the Award Agreements address the specifics of those options.” Id .  Since the “dispute between Blackwell and Lilis was about Blackwell’s entitlement to the incentive awards and other compensation, not about the specifics of the options” the forum selection clause in the Employment Agreement controlled. Accordingly, the Court granted Blackwell’s motion to dismiss and dismissed Lilis’s complaint. Takeaway As discussed above, Court determined that the dispute between the parties was about the Employment Agreement, not the Award Agreements. “Either Blackwell was fired for Cause under the Employment Agreement, or he was not. Once that fundamental determination is made, the consequences < e.g. , application of the forum selection clause> e.g., application of the forum selection clause> will then inexorably ripple out to the Award Agreements.” Slip Op. at *8. “In other words,” said the Court, “ t is the Employment Agreement, which will work its effect on the Award Agreements, not vice versa.” Id .   Lilis is, therefore, a good example of a court “ pplying well-worn canons of construction” to determine how two related agreements could be “read to govern separate, albeit related, areas of potential discord.” Slip Op. at *8.

It has been a little over one year since President Trump signed into law the Senior Safe Act of 2018 (“Act”) ( here ). Enacted as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Act is designed to “enlist[] financial institutions as allies in the fight against financial abuse of older adults by allowing banks, credit unions, investment advisers and brokers to report suspected fraud to law enforcement without fear of being sued, as long as they have trained their employees in how to detect suspicious activity.” See Victoria Sackett, “New Law Targets Elder Financial Abuse.” (AARP May 24, 2018 ( here ).) To mark the one-year anniversary of the Act, the Securities and Exchange Commission (“SEC”), the North American Securities Administrators Association (“NASAA”), and the Financial Industry Regulatory Authority (“FINRA”) have issued a fact sheet to increase awareness “among broker-dealers, investment advisers, and transfer agents of the Act and how the Act’s immunity provisions work.” (The SEC’s announcement can be found here .) The fact sheet provides information on the immunity and training provisions of the Act, as well as additional resources from the SEC, NASAA, and FINRA. The Act was modeled after a Maine statute with a similar name, the Senior$afe Program. That program was the result of a joint effort between regulators and the financial and legal communities to help financial and banking advisors identify and prevent the financial abuse and exploitation of seniors and vulnerable adults. Like the Senior$afe Program, the Act was intended to “empower and encourage our financial service representatives to identify warning signs of common scams and help prevent seniors from becoming victims.” See statement by Sen. Susan Collins (R-Maine), co-author of the Senate version of the Act ( here ). It gives “financial professionals—those on the front lines who can best spot fraud and abuse—the tools they need to safely and securely take steps to protect seniors and their life savings.” Id . (quoting Sen. Claire McCaskill (D-Missouri), co-author of the Act).   According to AARP, “ ne in 5 older Americans are victims of financial exploitation each year.” ( Here .) These “victims lose $3 billion annually, or more than $120,000 apiece, ‘the amount a typical 50-plus household has in retirement savings.’” See 2016 report by the AARP Public Policy Institute ( here ).   The Act provides immunity under bank privacy laws to banking and financial institutions ( i.e. , a “covered institution”) for reporting suspected financial abuse and exploitation of seniors and vulnerable adults to a “covered agency” ( i.e. , a state regulatory agency, the SEC, “a State or local agency responsible for administering adult protective service laws,” and a law enforcement agency). Notably, the Act neither requires reporting financial abuse and exploitation nor the implementation of educational and training programs to detect and stop such activity. Thus, to encourage the training necessary to identify and report suspected abuse and exploitation, the Act conditions the grant of immunity on the provision of educational and training programs by the participating financial and banking institutions. Under Section 303(b)(2)(A)(ii)-(iv) of the Act, the training must: (1) instruct “how to identify and report the suspected exploitation of a senior citizen internally and, as appropriate, to government officials or law enforcement authorities, including common signs that indicate the financial exploitation of a senior citizen”; (2) “discuss the need to protect the privacy and respect the integrity of each individual customer of the covered financial institution,” and (3) “be appropriate to the job responsibilities of the individual attending the training.” Training for current employees should be conducted “as soon as reasonably practical.” Section 303(b)(2)(B)(i). For an “individual who begins employment, or becomes affiliated or associated, with a covered financial institution after the date of enactment of th Act”, training should be conducted “not later than 1 year after the date on which the individual becomes employed by, or affiliated or associated with, the covered financial institution.” Section 303(b)(2)(B)(ii). The Act also requires the covered institution to maintain records showing the individuals who completed the training and the content of the training provided. Section 303(b)(2)(C). Commenting on the one-year anniversary of the Act and the issuance of the fact sheet, SEC Chairman, Jay Clayton, stated: “Financial professionals can provide a critical frontline role in identifying and reporting senior financial exploitation. The SEC strongly encourages broker-dealers and investment advisers to train their personnel in accordance with the Senior Safe Act. We also encourage all investors, including our most vulnerable, to ensure they are dealing with a registered investment professional.” Michael S. Pieciak, NASAA President and Vermont Commissioner of Financial Regulation, also commented on the anniversary of the Act and the issuance of the fact sheet, stating: “In reminding broker-dealers and investment advisers of the Senior Safe Act’s important immunity provisions, we hope to encourage firms to train their employees on how to detect and report suspected senior financial exploitation. Early detection and reporting are critical to help prevent elder financial abuse and the devastating financial and emotional impacts that ensue.” Finally, FINRA President and CEO Robert Cook marked the anniversary of the Act and the issuance of the fact sheet by saying: “Protecting senior investors has long been a top priority for FINRA. The Senior Safe Act seeks to empower financial professionals to detect and report cases of suspected abuse of senior investors and we believe it is important to broaden awareness and understanding of the Act throughout the securities industry.” here).=">here).">

In 1975, the New York Legislature adopted Article 9 of the Civil Practice Law and Rules (“CPLR”) to replace the State’s prior class action mechanism. City of New York v. Maul , 14 N.Y.3d 499, 508 (2010). The Legislature did so because Section 1005, which remained virtually unchanged for more than a century, “had been judicially restricted over the years and was subject to inconsistent results.” Id . at 508-509, citing Sperry v. Crompton Corp. , 8 N.Y.3d 204, 210 (2007). By adopting Article 9, the Legislature intended “to set up a flexible, functional scheme whereby class actions could qualify without … undesirable and socially detrimental restrictions.” Id . at 509 (citation omitted). Given this intended flexibility, courts have broadly construed the requirements of CPLR § 901(a), “not only because of the general command for liberal construction of all CPLR sections ( see CPLR 104), but also because it is apparent that the Legislature intended article 9 to be a liberal substitute for the narrow class action legislation which preceded it.” Id . at 509, quoting Friar v. Vanguard Holding Corp. , 78 A.D.2d 83, 91 (2d Dept. 1980). In applying Article 9, New York courts not only look to New York case authority for guidance, but also “ ederal jurisprudence” ( Friar v. Vanguard Holding , 78 A.D.2d 83, 96 (2d Dept. 1980), because Article 9 “has much in common with Federal rule 23.” Matter of Colt Indus. Shareholder Litig. , 77 N.Y.2d 185, 194 (1991). Indeed, “ he prerequisites to the filing of a New York class action are virtually identical to those contained in rule 23 ( compare , CPLR 901 and Fed Rules Civ Pro, rule 23 ).” Id . at 194. For example, (a) the class must be “so numerous that joinder of all members, whether otherwise required or permitted, is impracticable”, (b) common questions of law or fact must predominate over individual claims, (c) the claims of the representative parties must be typical of those of the class, (d) the representatives must fairly and adequately represent the class, and (e) the class action must be superior to other methods of settling the controversy. Id. , citing Weinberg v. Hertz Corp. , 116 A.D.2d 1 (1st Dept. 1986), aff’d , 69 N.Y.2d 979; Friar , 78 A.D.2d at 96-100. On a motion for class certification, the plaintiff bears the burden of demonstrating the prerequisites for class certification. Williams v. Air Serv. Corp. , 121 A.D.3d 441, 441 (1st Dept. 2014). Whether an action qualifies as a class action under CPLR §§ 901(a) and 902 is within the court’s discretion. Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 52 (1999); see also Kudinov v. Kel-Tech Const. Inc. , 65 A.D.3d 481, 481 (1st Dept. 2009). Conclusory allegations in pleadings and affidavits are insufficient to meet the plaintiff’s burden. Rallis v. City of New York , 3 A.D.3d 525, 526 (2d Dept. 2004). The court should neither decide substantive issues concerning the merits of the underlying claims nor determine credibility. Genxiang Zhang v. Hiro Sushi at Ollie’s Inc. , 2019 WL 699179, at *6 (S.D.N.Y. Feb. 5, 2019) (internal quotation marks and citations omitted). Against this background, this Blog looks at Henix v. LiveOnNY, Inc. , 2019 N.Y. Slip Op. 31444(U) (Sup. Ct., N.Y. County May 23, 2019) ( here ). Henix v. LiveOnNY, Inc. Background Plaintiffs were formerly employed by defendant, LiveOnNY, Inc. (“LiveOnNY”), as tissue recovery specialists (“TRSs”). As TRSs, plaintiffs traveled to hospitals, recovered tissue, facilitated the recovery of tissue for transplant, completed paperwork, and otherwise communicated with other members of the recovery team. Until May 15, 2016, TRSs were misclassified as exempt employees and paid a flat fee per tissue recovery case. On May 15, 2016, the TRSs were re-classified as non-exempt hourly workers. Plaintiffs brought suit, on behalf of themselves and those similarly situated, claiming violations of, among other things, New York Labor Law § 190(3). Plaintiffs moved for class certification under CPLR §§ 901(a) and 902, seeking to certify a class consisting of: “All current and former TRSs who worked for Defendant in the State of New York during the Class Period and who (a) were not compensated for all time spent traveling to jobs and between jobs; (b) were not compensated for all time spent on-call; (c) were not paid at their straight or agreed upon rate for all hours worked under forty (40) hours in a week; (d) were not paid overtime of time and one-half their regular rate of pay for all hours worked over forty ( 40) in a week; (e) were not paid spread of hours pay and/or (f) were not provided accurate wage statements.” Slip Op. at *2. As discussed below, the Court granted the motion with a modification to the class definition. The Court’s Decision Numerosity Plaintiffs maintained that there were approximately 38 members of the proposed class: 28 putative class members identified by Defendant, and an additional 10 identified by Plaintiffs. Defendants argued that plaintiffs’ proposed class consisted of 28 members, too few to satisfy the numerosity requirement, and that the additional class members identified by Plaintiffs should not be considered because they were not “per diem TRSs like plaintiffs,” and, therefore, were not similarly situated with Plaintiffs and the other members of the class. The Court agreed with Plaintiffs. In doing so, the Court observed that “ here is no mechanical test to determine whether the requirement of numerosity has been met” ( Globe Surgical Supply v. GEICO Ins. Co. , 59 A.D.3d 129, 137 (2d Dept. 2008) (citations omitted), and that classes of 40 members or fewer “have been deemed sufficient for class certification.” Slip Op. at *4, citing Stecko v. Three Generations Contracting Inc. , 2013 N.Y. Slip Op. 31524(U) (Sup. Ct., N.Y. County 2013), aff’d , 121 A.D.3d 542 (1st Dept. 2014); Galdamez v. Biordi Const. Corp. , 13 Misc. 3d 1224(A) (Sup. Ct., N.Y. County 2006), aff’d , 50 A.D.3d 357 (1st Dept. 2008) (class consisting of between 30 and 70 members sufficiently numerous); Caesar v. Chem. Bank , 118 Misc. 2d 118, 120 (Sup. Ct., N.Y. County 1983), aff’d , 106 A.D.2d 353 [1st Dept. 1984), mod. , 66 N.Y.2d 698 (1985) (class of 38 members sufficiently numerous). In finding numerosity, the Court held that “Defendant’s assertion that the additional ten proposed class members should not be considered because they not similarly situated with the plaintiffs a question of commonality and typicality, not numerosity.” Slip Op. at *5. Commonality Whether common issues predominate over individual issues requires the court to examine the conduct alleged to be wrongful. In that regard, the proposed class must have been subjected to the same, or substantially the same, alleged unlawful conduct of the defendant. Weinstein v. Jenny Craig Operations, Inc. , 138 A.D.3d 546, 547 (1st Dept. 2016). Consideration of the proposed class members’ damages is not part of the analysis. Id . Plaintiffs argued that common questions existed among the proposed class members, including “whether they were misclassified as exempt, whether they were unlawfully denied pay for travel time, on-call time, and straight time, and whether they owed overtime pay.” Slip Op. at *5. Plaintiffs further argued that these issues “predominate over individual issues because they concern whether defendant instituted an unlawful wage policy or practice.” Id . Defendants contended that common issues did not predominate over individual ones “because there were: (1) different starting points for each job assignment; (2) different job locations; (3) different job durations; (4) different ending points for each job assignment; (5) different compensation structures depending on level of TRS; (6) different job titles; (7) different times when employees were on-call; (8) different times where employees accepted a job while on-call; (9) different times where employees declined a job while on-call; and, (10) different employment statutes.” Id . at **5-6. The Court held that “common issues predominate over individual issues because each proposed class member was subject to the same allegedly unlawful wage policy.…” Id . at *6. The Court rejected Defendant’s argument, finding that “the issues highlighted by defendant reflect differences in the damages alleged by the class members.” Id . “Thus,” concluded the Court, “the assessment of liability is identical for each class member, and certification is not precluded.”   Id . (citations omitted). Typicality Plaintiffs contended that their claims were typical of the proposed class because Defendant’s wage policies and practices affected all class members in the same manner: they were not adequately paid for travel time and/or on-call time. Slip Op. at *7. Defendant argued that Plaintiffs’ claims were different than those of the proposed class because they asserted claims based only travel time and failure to compensate on-call time, whereas the proposed class possessed claims based on minimum wage, overtime, spread-of-hours compensation, and accurate wage statements. Thus, Plaintiffs’ claims were not typical of the proposed class. The Court agreed with Plaintiffs. “Claims are typical when the named plaintiffs’ claims ‘derive[] from the same practice or course of conduct that gave rise to the remaining claims of other class members and based upon the same legal theory.’” Slip Op. at *7, quoting Friar , 78 A.D.2d at 99. The Court found that Plaintiffs’ claims were “premised on the same allegedly unlawful wage policy.” Id .  The Court rejected Defendant’s argument that because “some class members may not advance all the claims asserted by the named plaintiffs,” the claims were not typical. Id . Adequacy “When assessing the adequacy of the representative parties, the court considers the ‘potential conflicts of interest between the representative and the class members, personal characteristics of the proposed class representative ( e.g. familiarity with the lawsuit and his or her financial resources), and the quality of the class counsel.’” Slip Op. at *8, quoting Globe Surgical Supply , 59 A.D.3d at 144, citing Ackerman v. Price Waterhouse , 252 A.D.2d 179 (1st Dept. 1998). The Court held that Plaintiffs were adequate representatives of the proposed class. First, the Court found that there were no conflicts of interest between the proposed class and Plaintiffs; the claims asserted by Plaintiffs were “identical to those of the proposed class.…” Slip Op. at *9. Second, the Court found that Plaintiffs understood “the nature of the case and the claims asserted therein.” Id . (citation omitted). Finally, the Court found that counsel was more than qualified to serve as class counsel, having “practiced employment law and litigation for 30 years, and successfully handled numerous wage and hour class actions, some as lead or co-lead class counsel.” Id . Superiority The Court held that a class action was “a superior method of adjudication” because there was a large enough “number of proposed class members with similar claims and a relatively small potential recovery for each member.” Slip Op. at *10 (citation omitted). Moreover, the Court noted that class certification was well-suited for wage and hour actions, even where an administrative remedy was available. Id . citing Weinstein , 138 A.D.3d at 547 (“Class action is an appropriate method of adjudicating wage claims arising from an employer’s alleged practice of underpaying employees”); Dabrowski v. Abax Inc. , 84 A.D.3d 633, 635 (1st Dept. 2011) (“class action is superior to the prosecution of individualized claims in an administrative proceeding in view of the difference in litigation costs, the laborers’ likely insubstantial means, and the modest damages to be recovered by each individual laborer, if anything”); Nawrocki v. Proto Const. & Dev. Corp. , 82 A.D.3d 534, 536 (1st Dept. 2011) (class action vehicle superior to administrative remedies under Labor Law). CPLR § 902 In addition to satisfying the requirements of CPLR § 901(a), the proposed class representative must meet the requirements of CPLR § 902. In determining whether to certify a class, the court must consider: (1) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (2) the impracticability or inefficiency of prosecuting or defending separate actions; (3) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; ( 4) the desirability or undesirability of concentrating the litigation of the claim in the particular forum; and (5) the difficulties likely to be encountered in the management of a class action. Slip Op. at **10-11, citing Jiannaras v. Alfant , 124 A.D.3d 582, 584 (2d Dept. 2015), aff’d , 27 N.Y.3d 349 (2016). The Court held that Plaintiffs satisfied the requirements of CPLR § 902. It is uncontested that there are no pending actions by proposed class members concerning the claims advanced here, and given the relatively small individual potential recovery, there is little incentive for a class member to forego certification in favor of prosecuting individual claims. Id. at *11 (citation omitted). Moreover, the Court found that “ he availability of administrative remedies not render this forum inappropriate.” Id . Class Definition Finally, the Court redefined the proposed class because it was a fail-safe class. Slip Op. at **12-13. A fail-safe class is one “whose membership can only be ascertained by a determination of the merits of the case because the class is defined in terms of the ultimate question of liability.” Hicks v. T.L. Cannon Corp. , 35 F. Supp. 3d 329, 356 (W.D.N.Y 2014), quoting In re Rodriguez , 695 F.3d 360, 369-370 (5th Cir. 2012). A fail-safe class is impermissible because it “shields the putative class members from receiving an adverse judgment.” Hardgers-Powell v. Angels in Your Home LLC , 2019 WL 409276, at *6 (W.D.N.Y. 2019), quoting Hicks , 35 F. Supp. 3d at 356. The Court held that “Plaintiffs’ proposed class definition constitute an impermissible fail-safe class as it presume liability.” Slip Op. at *13. Plaintiffs defined the proposed class “as TRSs who were not provided accurate wage statements. If it were ultimately determined that the wage statements provided were accurate, class members other than plaintiffs would not be bound by the adverse judgment because there would be no class.” Id .  Since Plaintiffs sought to represent all TRSs employed by LiveOnNY within the class period, the Court redefined the class as follows: “All current and former tissue recover specialists who worked for LIVEONNY, INC. in the State of New York from September 29, 2010 to the present.” Hardgers-Powell , 2019 WL 409276, at *8 (the court “retains the discretion to redefine a faulty class definition”); B&R Supermarket, Inc. v. MasterCard Int’l Inc. , 2018 WL 1335355, at *10 n.17 (E.D.N.Y. 2018) (same).

It has long been the law in New York that a party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. On May 28, 2019, the Appellate Division, First Department, affirmed the dismissal of a fraudulent inducement claim because of the existence of an integration or merger clause and a “no representations” clause in which the defendants disclaimed liability for any extra-contractual representations.   DuBow v. Century Realty, Inc. ,  2019 N.Y. Slip Op. 04116 (1st Dept. May 28, 2019) ( here ). here.=">here."> DuBow v. Century Realty, Inc. Background Plaintiff, Kenneth DuBow (“DuBow”), worked for defendant, Century Realty, Inc. (“Century”), from 1990 until his termination in 2013. In August 2007, DuBow entered into a one-page agreement with Century, whereby he would be entitled to a $10,000 bonus for each building he successfully redeveloped, as well as $150,000 in the event of the sale or exchange of the developed property (“2007 Agreement”).  The 2007 Agreement also stated that in the event DuBow was voluntarily terminated or if he retired, he would be entitled to receive up to $150,000 per building made payable over the course of eight years.  In the event Century terminated DuBow for cause, however, DuBow would receive no payments. In 2012, Century decided to sell two of its properties. DuBow tried to purchase the properties using his accrued bonuses from the developed properties (approximately $2.7 million) as collateral to obtain a mortgage commitment necessary to purchase the buildings. According to DuBow, on August 20, 2013, he was informed that he had been terminated for cause for allegedly stealing electricity in the Century-owned building where he resided. Plaintiff was presented with a termination agreement and severance agreement, which he did not sign. After a series of negotiations, DuBow signed a severance agreement which provided that Century would sell the two buildings to him, allow him to stay in his Century apartment for six months’ rent free, pay him $50,000, and forgive the balance of a $1,214,000 loan made by Century to him (the “Settlement Agreement”). In exchange, DuBow signed a release of claims arising under New York’s employment laws, as well as claims arising out of the 2007 Agreement. Plaintiff alleged that he never received the $2.7 million earned under the 2007 Agreement. Plaintiff also stated that he did not receive the payments provided for in the Settlement Agreement. DuBow filed an action claiming breach of the 2007 Agreement, failure to pay wages under the New York Labor Law, fraudulent inducement into the Settlement Agreement, and breach of the implied covenant of good faith and fair dealing. Defendants moved to dismiss the complaint. On March 6, 2018, the motion court granted defendants’ motion under the Labor Law for failure to pay wages and denied it with regard to the breach of contract, fraudulent inducement and breach of the implied covenant of good faith and fair dealing claims. Defendants moved for reconsideration, arguing that the Settlement Agreement precluded plaintiff’s fraudulent inducement claim because of the merger clause and no additional representations clause therein. Specifically, defendants argued that the Settlement Agreement contained a mutual representation by the parties (under the heading “Entire Agreement”) that the agreement before them was the entire agreement and that no prior written or oral modifications or understandings could be relied upon. The motion court agreed with defendants. The court noted that the “Entire Agreement” section of the Settlement Agreement provided that the agreement constituted the complete understanding of the parties and superseded any and all agreements, understandings, and discussions, whether written or oral, between them with respect to the subject matter of the agreement. The section further provided that the parties were not relying on any promises or representations not contained therein. The final clause of the “Entire Agreement” section, included an express representation by the parties that they were solely relying on the document before them. The motion court held that reliance on extra-contractual representations and omissions was, therefore, improper given the express, specific language of the Entire Agreement section of the Settlement Agreement. The motion court also found the no additional representations clause in the “Entire Agreement” section to be dispositive. That clause provided that “no other promises or agreements shall be binding unless in writing and signed by the parties after the date of the agreement.” Thus, held the motion court, “nothing relied upon previously could have been given effect unless there was a writing signed by both parties made after the Settlement date.” Accordingly, on reconsideration, the motion granted defendants’ motion to dismiss the fraudulent inducement claim. The First Department’s Decision On appeal, the First Department “unanimously affirmed” the motion court’s dismissal of the complaint. Slip Op. at *1. The Court agreed with the motion court that the integration clause and no representations clause in the Settlement Agreement precluded plaintiff’s fraudulent inducement claim: Given the “no representations” clause and the other language of the integration clause in a settlement agreement negotiated by the parties (Settlement Agreement), the court correctly dismissed the fraudulent inducement claim, which was based on an alleged promise that defendants would pay the tax liability for the loan to plaintiff they were forgiving. Id. , citing Pate v. BNY Mellon-Alcentra Mezzanine III, LP , 163 A.D.3d 429, 430 (1st Dept. 2018); WT Holdings Inc. v. Argonaut Group, Inc. , 127 A.D.3d 544 (1st Dept. 2015). Takeaway DuBow underscores the cumulative effect of a merger clause and a no additional representations clause. While the merger clause at issue seems to be too general to be enforceable ( i.e. , it did not identify the specific representations and communications being integrated into the Settlement Agreement), the no additional representations clause underscored the parties’ agreement to be bound only by the terms of the Settlement Agreement.

Financial exploitation of seniors and vulnerable adults is all too common in today’s day and age. According to a MetLife study, titled “ Broken Trust: Elders, Family & Finances ,” about one million seniors lose an estimated $2.6 billion annually from financial exploitation. In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. Financial exploitation occurs when individuals misappropriate the financial assets and property of elderly and vulnerable adults for profit or personal gain, often without the knowledge of their victim. According to a 2016 study by the New York State Office of Children and Family Services, titled “The New York State Cost of Financial Exploitation Study,” approximately five million seniors and vulnerable Americans are financially exploited each year.” ( Here .) The financial exploitation of senior and vulnerable adults takes many forms. The most common forms include: churning; unauthorized trading; unsuitable investing; over-concentrating an investor’s portfolio in a single type of investment or industry segment; and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions. In prior posts, this Blog has written about the financial exploitation of the country’s senior population. ( Here , here , here , here , and here .) As noted in these posts, unscrupulous professionals (such as stockbrokers, financial advisors, and insurance brokers) often exploit the lack of financial sophistication that many elder and vulnerable adults possess, as well as the trust they place in professionals having a position of authority. They capitalize on the fact that seniors and vulnerable adults are often hesitant to admit they do not understand what is being presented to them. In today’s post, this Blog looks at Jackson v. Ffriend , 2019 N.Y. Slip Op. 31386(U) (Sup. Ct. N.Y. County May 16, 2019) ( here ), a case involving the sale of a $1 million “life only” annuity by insurance agents with the knowledge that the buyer was eighty years old, in poor physical and mental health, and a resident in an assisted living facility. Jackson v. Ffriend Background In August 2016, defendants sold Phyllis Harrison-Ross, M.D. (“Harrison-Ross”) a $1 million single premium immediate life annuity (the “Annuity”) from defendant, Security Mutual Life Insurance Company of New York (“Security Mutual”). Defendants, Ivanhoe V. Ffriend (“Ffriend”) and Ffriend Enterprises, Ltd. (“Ffriend Enterprises”), acted as the producing agents for Security Mutual on the transaction. The annuity contract obligated Security Mutual to pay Harrison-Ross $8,637.87 per month for the remainder of her life. Upon Harrison-Ross’ death, Security Mutual’s payment obligation would end. On September 24, 2016, the Annuity went into effect and Harrison-Ross began receiving the monthly payments. On January 16, 2017, Harrison-Ross, at the age of 80, died of lung cancer and Security Mutual ceased the annuity monthly payments. Security Mutual had made four payments to Harrison-Ross, before its payment obligation ended. Plaintiffs, Jane Jackson, Susane K. Berg (“Berg”), and Lewis E. Duckett (“Duckett”), as co-executors of the Estate of Phyllis Harrison-Ross (the “Estate”), demanded payment to the Estate of the unpaid balance under the Annuity. Security Mutual refused to make the demanded payment. Plaintiffs commenced the action to recover the unpaid funds. Plaintiffs alleged that Defendants fraudulently induced Harrison-Ross to purchase the Annuity and breached their fiduciary duty to her by inducing her to purchase a financial product that was unsuitable and unreasonable given her age, inability to handle her personal financial affairs, state of health, reduced life expectancy, and financial circumstances, and that other investment strategies would have better suited her needs. Plaintiffs asserted causes of action for fraud, fraudulent inducement, rescission, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, and violations of the Insurance Law, Insurance Regulations, Title 11, Part 224 and General Business Law § 349. Defendants moved to dismiss the complaint, contending that Harrison-Ross was fully aware of, and understood, the terms of the Annuity and their consequences, when she executed the Annuity contract. In opposition, plaintiffs contended that the motion should be denied as premature and plaintiffs should be permitted to conduct discovery regarding Harrison-Ross’ state of mind, comprehension of the Annuity terms, and ability to handle her financial affairs in 2016. The Court’s Decision The granted the motion in part and denied it in part. No Fraud As readers of this Blog know, to plead a claim for fraud, a plaintiff must allege “a representation of a material existing fact, falsity, scienter, deception and injury.” New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995) (internal quotation marks omitted); Nicosia v. Bd. of Mgrs. of Weber House Condominium , 77 A.D.3d 455, 456 (1st Dept. 2010). Similarly, to plead a claim for fraudulent inducement, a plaintiff must allege facts demonstrating “the misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury.” Braddock v. Braddock , 60 A.D.3d 84, 86 (1st Dept. 2009). Under either claim, a plaintiff must comply with CPLR § 3016(b), that is, plead fraud with particularity. The reason for the requirement is “to give adequate notice to the court and to the parties of the transactions and occurrences intended to be proved.” Accurate Copy Serv. of Am., Inc. v. Fisk Bldg. Assoc. L.L.C. , 72 A.D.3d 456, 456 (1st Dept. 2010). Conclusory allegations are insufficient to state a fraud claim. Daly v. Kochanowicz , 67 A.D.3d 78 (2d Dept. 2009). Against the foregoing standards, the Court found that plaintiffs “fail to plead any actionable misrepresentation or material omission of fact by defendants.” Slip Op. at *5. The Court explained that Plaintiffs did “not identify any sales presentations, materials, or marketing techniques” that were purportedly false. Id . Nor did plaintiffs “specify the substance of the alleged misrepresentations,” or identify “when, where, and by whom, other than Ffriend, the alleged misrepresentations were made.”   Id . Further, “Plaintiffs not specify what other annuities or investment strategies were available and better suited to Harrison-Ross’ needs.” Id . Instead, plaintiffs merely alleged in conclusory fashion that Defendants “falsely and fraudulently represented to Phyllis Harrison-Ross that the subject annuity would serve her financial interests given her health, life expectancy and financial needs.” Id ., quoting the complaint (internal quotation mark omitted). Moreover, plaintiffs failed to demonstrate that Harrison-Ross was deceived by anything that Defendants said to her. Id . In fact, the record showed that she understood the terms of the Annuity, i.e. , that the payments would cease upon her death. Id . at **6-7. The Court found support for its holding in Muller-Paisner v. TIAA , 289 Fed. Appx. 461 (2d Cir. 2008), and 528 Fed. Appx. 37 (2d Cir. 2013). There, a 70-year-old professor, in ill health, purchased a fixed annuity from the defendants for more than $1 million, which represented the bulk of her accumulated assets. To recover the purchase price, the professor needed to live about twelve years after the purchase date. Like in Jackson , the annuity paid the professor $8,000 per month for life, which would terminate at her death. The professor wrote letters to the defendants acknowledging the terms of the annuity. The professor died six months after purchasing the annuity, having collected only $48,000; the remainder of the payments inured to the benefit of the defendants. The professor’s estate sued, alleging, in part, fraud and breach of fiduciary duty. The Second Circuit affirmed the dismissal of the fraud claims. Significantly, the court found that there was no misrepresentation as the professor acknowledged that all payments would cease after her death and the annuity contained language that provided for no inclusion of beneficiaries and a guarantee period. Accordingly, the Court dismissed the fraud and fraudulent inducement claims, concluding that “Harrison-Ross’ own words and the terms of the annuity demonstrate the unsustainability of the fraud claims.” Slip Op. at *8. Breach of Fiduciary Duty The Court granted the motion to dismiss the breach of fiduciary duty claim against Security Mutual. Slip Op. at *9. Under “long established” New York law, there is no fiduciary relationship “between an insurance company and the insured.” Id. , citing Rabouin v. Metropolitan Life Ins. Co. , 182 Misc. 2d 632, 634 (Sup. Ct. N.Y. County 1999), aff’d , 282 A.D.2d 381 (1st Dept. 2001) (citation omitted). The reason being “‘ xcept as required by statute, insurance companies deal with insureds at arm’s length. No relation involving trust or confidence is present.’” Id. , quoting New York Hotel Trades Council & Assn. Ins. Fund v. Prudential Ins. Co. of Am. , 1 Misc. 2d 245, 250 (Sup. Ct. N.Y. County 1955), aff’d , 1 A.D.2d 952 (1st Dept. 1956). Thus, held the Court, “the branch of the claim asserted against Security Mutual is fatally defective as a matter of law.” Slip Op. at *9. However, as to Ffriend and Ffriend Enterprises, the Court held that plaintiffs sufficiently stated a cause of action for breach of fiduciary duty, necessitating discovery “to glean additional information from defendants” about the nature of the relationship between them and Harrison-Ross. Id . The Court noted that there is no fiduciary duty between an insurance agent or broker “ n the absence of a special relationship.” Cathy Daniels, Ltd. v. Weingast , 91 A.D.3d 431, 433 (1st Dept. 2012). This is especially so, “when an insurance broker or financial advisor … does not have discretionary authority over client’s assets or investments.” Slip Op. at *10, citing Barrett v. Grenda , 154 A.D.3d 1275, 1278 (4th Dept. 2017). Notwithstanding, “where the insured can ‘establish the existence of a legally cognizable special relationship with their insurance agent ’, a duty may arise in the insurance context upon the showing of the requisite trust and confidence.” Id. , quoting Murphy v. Kuhn , 90 N.Y.2d 266, 272 (1997). Courts have found a special relationship under circumstances in which an insurance broker maintains a long-time relationship with the client and sells that client an annuity, or other insurance product, knowing that the client is elderly and in poor physical and/or metal health. Muller-Paisner v. TIAA , 528 Fed. Appx. 37, 42 (2d Cir. 2013) (insurance broker sold 70-year-old investor in ill health an annuity knowing it was “against ‘normal logic.’”). The Court found that the over two decade long relationship between Ffriend and Harrison-Ross, as well as the fact that Ffriend or Ffriend Enterprises “may have had discretionary authority over Harrison-Ross’ financial accounts or investments,” sufficed to establish a special relationship akin to a fiduciary one. Slip Op. at **10-11. “Indeed,” said the Court, “defendants admit the existence of that relationship. Id . at *10.  “The relationship between Ffriend and Harrison-Ross,” observed the Court, “reached beyond the typical professional procurement of insurance products to even extending a personal loan to her as well as Ffriend’s wife acting as Harrison-Ross’ attorney for estate planning purposes.” Id . at **10-11. Thus, “ ccepting the … facts as true, plaintiffs have alleged the requisite trust and confidence to create a special relationship between Ffriend and Harrison-Ross.” Id . at *11. “For those reasons,” held the Court, “the branch of the motion to dismiss the fourth cause of action for breach of fiduciary duty is granted as to defendant Security Mutual only, and is otherwise denied.” Id . Takeaway An annuity is a complex financial product. It is an investment contract between the buyer (often a retiree, or a soon-to-be-retired person) and an insurance company in which the buyer makes an upfront payment or a series of payments in return for periodic disbursements (typically, monthly) beginning either immediately or at some point in the future.  The purpose of an annuity is to provide the investor with a steady stream of income during retirement. Insurance brokers and agents often receive substantial commissions for selling an insurance company’s annuities. Over the past few years, the sale of annuities, and other insurance products, to America’s seniors has been seen as a “way to take advantage of the U.S. senior population.” See Investment News , “Elder Financial Abuse Grows More Prevalent In Annuity, Life Insurance Products” (Feb. 11, 2016) ( here ); see also Pittsburgh Post-Gazette , “As Annuity Sales Soar, Fraud Claims Have Increased” (Dec. 10, 2018) ( here ). According to regulators, annuities can be unsuitable for seniors, especially those in ill health and/or having a shorter life expectancy (as in Jackson and Muller ). See NYS, Dept. of Fin. Servs., “Elder Financial Exploitation” (noting that seniors “most vulnerable” to exploitation “tend to be between the ages of 80 and 89”) ( here ). Among the reasons, reduced liquidity and the inability to receive the benefit of the initial investment. This is not to say that all annuity products are per se unsuitable. Financial products, such as annuities, are often developed specifically for seniors because they offer benefits that are created for their circumstances. Whether such products are suitable requires a fact-intensive inquiry. And, as Jackson demonstrates, the inquiry must include the existence of a fiduciary or special relationship.

In today’s post, this Blog looks at two cases decided by the Appellate Division, Second Department, involving the first element of a common law fraud and insurance fraud cause of action: the making of a misrepresentation of material fact. In Tsinias Enters. Ltd. v. Taza Grocery, Inc. , 2019 N.Y. Slip Op. 04020 (2d Dept. May 22, 2019) ( here ), the Court affirmed the dismissal of a fraud and fraudulent inducement action because the plaintiff failed to plead a misrepresentation of fact, and in 2900 Stillwell Ave., LLC v. U.S. Underwriters Ins. Co. , 2019 N.Y. Slip Op. 03939 (2d Dept. May 22, 2019) ( here ), the Court affirmed the dismissal of an insurance action and rescission of an insurance policy because the defendant established that the plaintiff made a material misrepresentation on its insurance application. Tsinias Enterprises Ltd. v. Taza Grocery, Inc. Tsinias arose out of a landlord-tenant relationship at a commercial building located on Park Avenue South in New York City. The parties entered into four separate agreements related to that relationship: a ten-year lease and three extensions of the lease. Plaintiff filed the action to rescind the three amendments on the ground that they were procured by fraud. In essence, plaintiff claimed that defendants made misrepresentations of material fact about the terms of the amendments ( i.e. , the rent) by concealing the amendments in a stack of documents that Nicholas Tsinias (“Nicholas”), plaintiff’s former general partner, signed but did not read. Specifically, plaintiff claimed that defendant, Jamil Yabroudi (“Yabroudi”), president of defendant Taza Grocery, Inc. (“Taza”), befriended Nicholas and began assisting Nicholas with the management of the building. Plaintiff contended that Yabroudi placed the first amendment (which extended his business’ lease at the building) in a stack of other documents for Nicholas to sign. Plaintiff claimed that Nicholas did not read this amendment or any of the other amendments extending Taza’s lease, although plaintiff conceded that Nicholas signed the documents. Plaintiff complained that Nicholas and Yabroudi never had any negotiations about the lease extensions. Defendants moved to dismiss the complaint on the ground that plaintiff failed to plead fraud with the requisite particularity. Defendants contended that simply not reading documents before signing them, even if true, could not support a claim that Nicholas was misled. Defendants also claimed that plaintiff was bound by the terms of the agreements Nicholas signed. Moreover, defendants argued that the complaint failed to identify any false statements made by Yabroudi to Nicholas about the amendments and failed provide enough details to state a claim for fraud. The motion court (Justice Arlene P. Bluth) granted the motion. After noting the elements of a fraudulent inducement cause of action ( e.g. , “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”), Justice Bluth held that plaintiff failed to identify any misrepresentation fact. The court noted that “ here is nothing on the face of these agreements that evidences a misrepresentation or an intent to deceive. Nor is there anything suspicious about them ….” “In fact,” noted the court, “each of these lease extensions include rent increases for each year through 2035.” Justice Bluth rejected the argument that each amendment was procured by fraud simply because the rent under each amendment was below market: “The fact that plaintiff’s new general partner might have tried to bargain for a better deal for the third amendment does not establish that Yabroudi made a material misrepresentation.” Buyer’s remorse is not the basis for a fraud claim reasoned the court: “Just because plaintiff now regrets entering into these agreements does not mean they were procured by fraud.” The court also rejected the argument that “Nicholas was deceived because he did not read” the agreements. “Nicholas, as a signatory to these documents, ‘is presumed to know the contents of the instrument signed and to have assented to such terms.’” (Citation omitted.) On appeal, the Second Department affirmed. The Court held that “the complaint not contain any specific allegations setting forth the misrepresentations allegedly made by the defendants.” Slip Op. at *1. The Court also rejected the argument, like Justice Bluth, that Nicholas’ failure to read the agreements supported a fraud cause of action: “To the extent that the plaintiff alleged that Nicholas did not read the lease extensions, ‘ party who signs a document without any valid excuse for having failed to read it is conclusively bound by its term.’” Id . (citations omitted). Accordingly, the Court affirmed the dismissal of the fraudulent inducement and fraud claims. 2900 Stillwell Avenue, LLC v. U.S. Underwriters Insurance Co. In 2900 Stillwell Avenue , plaintiff sought to recover the proceeds of a commercial insurance policy. Before the Second Department was an appeal of an order granting defendant summary judgment and rescission of the insurance policy in question. Although the Court did not provide a discussion of the factual background, the decision provides a good discussion of the law pertaining to the rescission of an insurance policy in the context of an alleged fraudulent insurance application. “To establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when securing the policy.” Slip Op. at *1. Under insurance law, “ representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” Id ., citing Insurance Law § 3105(a); Piller v. Otsego Mut. Fire Ins. Co. , 164 A.D.3d 534 (2d Dept. Aug. 1, 2018); Joseph v. Interboro Ins. Co. , 144 A.D.3d 1105 (2d Dept. 2016). “A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.” Id ., citing Insurance Law § 3105(b). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application.” Id . (citations omitted). However, “ onclusory statements by insurance company employees, unsupported by documentary evidence, are insufficient to establish materiality as a matter of law.” Schirmer v. Penkert , 41 A.D.3d 688, 691 (2d Dept. 2007). Based upon these legal principles, the Court held that defendants met their burden of proving a material misrepresentation of fact at the time plaintiff secured the subject policy. The defendants established their prima facie entitlement to judgment as a matter of law through evidence demonstrating that the plaintiff made a material misrepresentation on its application. That evidence included the affidavit of a senior vice president of corporate underwriting and a copy of the underwriting guidelines, which established that the plaintiff’s misrepresentation induced the defendants to issue a policy it otherwise would not have issued. The plaintiff failed to raise a triable issue of fact in opposition. Slip Op. at *1 (citations omitted). Accordingly, the Court affirmed the motion court’s grant of summary judgment and rescission of the insurance policy.

This Blog has written about the justifiable reliance element of a fraud cause of action on many occasions. We have noted that whether a plaintiff justifiably relied on the misrepresentations and omissions of a defendant is a fact-intensive inquiry. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 NY3d 147, 155 (2010). In today’s post, we look at Buechel v. Sovereignty, LLC , 2019 N.Y. Slip Op. 31372(U) (Sup. Ct. Tompkins County May 16, 2019) ( here ), a case in which the issue was decided at trial. What is The Justifiable Reliance Element? The justifiable reliance element of a fraud causation of action has been described as a “fundamental precept” ( Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here )) and a “venerable rule”. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). The 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. , 15 N.Y.3d at 155), “ 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. , 25 N.Y.3d at 1044. “ hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.” Centro Empresarial Cempresa S.A. v. Am érica M óvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011), quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 2006), lv. denied , 8 N.Y.3d 804 (2007). Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). With the foregoing principles in mind, the Court in Buechel found that the defendants failed to satisfy their burden of proving by clear and convincing evidence ( Simcuski v. Saeli , 44 N.Y.2d 442 (1978)) that they justifiably relied on the plaintiff’s alleged misrepresentations. Buechel v. Sovereignty, LLC Background Buechel arose from the sale of IP Custom Plastics, Inc. (“IP”) to Zachary Shulman (“Shulman”) and his business entity, Sovereignty, LLC (“Sovereignty” and together with Shulman, the “Defendants”). IP was wholly owned by Richard E. Buechel and Sharon Buechel (collectively, the “Buechels” or “Plaintiffs”). The terms of the sale were memorialized in an agreement dated January 5, 2016. The transaction closed on March 1, 2016. Pursuant to the agreement, Shulman agreed to purchase the assets of IP, but not its property, which was retained by the Buechals and leased to Defendants. Shulman financed the transaction through, among other things, a mortgage on his home for $226,000, the proceeds of which were paid to the Buechels at the closing. Shulman and Sovereignty gave the Buechals three promissory notes for the remainder of the purchase price: $120,000, $80,000 and $56,600. The $120,000 note was payable at 4% interest in monthly payments of $1,214.94 for a term of 10 years with payments to commence on April 1, 2016. The $80,000 note was payable at 4% interest in monthly payments of $809.96 for a term of 10 years with payments to commence on April 1, 2016. The $56,000 note was payable at $2,830 per month from July 1, 2016 to February 1, 2018 at which time the entire principal balance was due. Defendants defaulted on the installment payments that came due on July 1, 2016. The Buechels accelerated the maturity of the notes. Thereafter, on October 12, 2016, the Buechels commenced the action. Plaintiffs asserted three causes of action for payment of the three notes at 4% interest. The fourth cause of action was for a breach of a training agreement wherein Richard Buechel agreed to provide instruction and training at $30.00 per hour and claimed $300.00 in unpaid fees. The Fifth Cause of action was effectively mooted by the eviction of Defendants from the subject property and subsequent sale. Issue was joined by the filing and service of a verified answer with counterclaims and third-party claims against IP on November 2, 2016. Sovereignty ceased doing business in December of 2016. The counterclaims and third-party claims sounded in fraud, negligent misrepresentation, breach of warranty and indemnification. Defendants sought rescission of the purchase agreement and monetary damages. The parties did not dispute the authenticity of the notes that Shulman signed. Rather, Defendants argued that they were not payable due to fraud and misrepresentation. After a bench trial and post-trial briefing, the Court ruled that Defendants failed to satisfy their burden of proving that they justifiably relied on Plaintiff’s alleged misrepresentations. The Court’s Decision and Analysis Pursuant to the asset purchase agreement, the parties agreed that the Buechels would make available various documents including tax returns, payable and receivable receipts and internal balance sheets related to statements of income. Defendants claimed that the last category of documents contained materially false information. Specifically, Defendants alleged that Plaintiffs withheld statements pertaining to sales for 2015, which showed a 20% drop in gross revenue. Defendants claimed that had they known the truth, they would have “either renegotiate the agreement or withdraw the purchase offer.” Slip Op. at *4. The Court found that Defendants were on notice of the decline in gross revenue from the documents and evidence that were made available to them. For example, Defendants were made aware that “there was a clear trend line of decreased sales to Hi-Speed which was readily apparent to Shulman.” Id . at *5. In response, in late December of 2015, Moore advised him that Hi-Speed business was down from $349,000 in 2014 to $261,000 in 2015… Moore further advised sales revenue had also declined from 2013 to 2014… In other words, Defendants were made aware of a decrease in sales to Hi-Speed of $159,000 from 2013 thru 2015… In 2013, Hi-Speed accounted for approximately 67% of the gross sales of the business, and in 2014 approximately 66% of gross sales. Between 2014 and 2015, overall gross sales for IP fell by approximately $101,000, $88,000 of which was attributable to the decline in sales to Hi-Speed of which Shulman was advised. Id . The Court also found that although Defendants were not given printed reports concerning 2015 sales, they were given access to the sales figures by the Buechels. Id . at *6. Regarding the 2015 sales figures, Sharon Buechel testified that they were not available at, or before, Romer’s financial review on January 21, 2016. She did not print a report of 2015 sales. However, she did testify that her QuickBooks program was open and made available to Romer. She was unsure whether he reviewed it. Id . Finally, the Court found that Defendants’ decision to proceed with the transaction despite knowing that sales to IP’s most significant customer were trending downward between 2014 and 2015, and without investigating further ( i.e. , insisting on the 2015 sales reports), negated any argument that Defendants justifiably relied on the alleged misrepresentations. Defendants chose to proceed notwithstanding their knowledge of the significant decrease in sales to IP’s biggest customer between 2014 and 2015. This single customer decrease ultimately accounted for 89% of lP’s gross sales reduction. Moreover, Defendants proceeded without insisting on the production of 2015 sales figures prior to closing.                                            *          *          * Shulman, with the assistance of counsel and an accountant, knowingly proceeded to close despite not having 2015 gross sales figures. Defendants failed to exercise due diligence in the time leading to the closing. It might be suggested that Shulman accepted the risk of not knowing what the sales figures were for 2015. However, in reality, he was fully aware of the drop in sales to Hi-Speed which accounted for the vast majority of the 2015 shortfall.  Id . at **6-7. Accordingly, “the Court that Defendants failed to establish, by clear and convincing evidence …, that Plaintiffs fraudulently induced them purchase IP. Id . at *7. Takeaway Plaintiffs that have a hint of falsity have an obligation to investigate the matter further. As shown in Buechel , such hints of falsity come in many forms. They can be manifest in documents and discussions with others. And, hints of falsity can arise in the course of due diligence performed by professionals. Buechel makes clear that proceeding with a transaction in the wake of information suggesting falsity, and the failure to investigate such information, negates any reliance, justifiable or otherwise, on the representations of the alleged wrongdoer.