Obtaining jurisdiction over a corporation that is incorporated and headquartered outside of the state can be difficult. A plaintiff must plead and prove that the corporation purposefully availed itself of the resources of the state for a court to exercise personal jurisdiction over the defendants. The failure to do so, as in Poms v. Dominion Diamond Corp. , Index No. 655733/2017, 2019 NY Slip Op 31364(U) (Sup. Ct. N.Y. County May 15, 2019) ( here ), will result in dismissal of the action. Poms v. Dominion Diamond Corp. Background Poms was a putative class action brought by Nadav Poms (“POMS”), on his own behalf and on behalf of the common stock holders of Dominion Diamond Corporation (“Dominion” or the “Company”), for negligent misrepresentation, breach of fiduciary duty and quasi-appraisal in connection with the proposed acquisition of Dominion by the Washington Companies (the “Proposed Transaction”). On July 15, 2017, Dominion’s Board of Directors approved a definitive arrangement agreement (the “Arrangement Agreement”) with Northwest Acquisitions ULC, an affiliate of the Washington Companies, pursuant to which each share of Dominion’s common stock would be converted into the right to receive $14.25 per share in cash. To enable Dominion’s stockholders to vote in favor of the Proposed Transaction, Dominion’s Board authorized the filing of an Information Circular (the “Circular”) with the Securities and Exchange Commission. The Circular was also mailed to Dominion’s shareholders. Poms alleged that the Circular violated New York and Canadian law because it contained incomplete and materially misleading information regarding: (i) the process leading to the Proposed Transaction; (ii) the financial analyses conducted by Dominion’s financial advisors, TD Securities Inc. (“TD Securities”) and Morgan Stanley Canada Limited (“Morgan Stanley”), in connection with the Proposed Transaction; and (iii) the projections relied upon by TD Securities and Morgan Stanley in performing their valuation analyses. Defendants argued that because Dominion is a “foreign private issuer’ under the U.S. Securities laws, it was exempt from complying with Section 14(a) of the Securities Exchange Act of 1934, which concerns an issuer’s obligations to file a proxy statement in connection with a proposed merger or acquisition and the contents thereof. Defendants further maintained that Dominion was required to follow the specific proxy rules applicable under the Canada Business Corporations Act (“CBCA”) and the applicable Canadian Securities law. According to Defendants, Dominion provided all required information required by the applicable Canadian law about the Proposed Transaction. Pursuant to the CBCA, a hearing was held before the Ontario Superior Court of Justice (the “Ontario Court”) regarding the merger. Poms did not raise any objection or oppose the merger in Canada, but instead commenced the New York action. The Dominion shareholders voted in favor of the transaction and the Ontario Court entered a final order approving the transaction as “fair and reasonable.” At the final hearing on September 22, 2017, the Ontario Court noted that “no Dominion shareholders have delivered responding materials to indicate an intention to oppose court approval of the arrangement, as permitted by paragraphs 26 and 27 of the interim order” and that “Mr. Poms has, through counsel advised that he does not oppose the order sought, but he intends to pursue the litigation that he commenced in the State of New York for damages, and if the State of New York is later found to be forum non-convenien , that he intends to pursue his claim for damages in Ontario. Mr. Poms has not exercised rights as a dissenting shareholder.” After the Ontario Court issued its final order, Poms amended his complaint in the New York action. Defendants moved to dismiss the amended compliant on several grounds: (i) the Court lacked either general or specific personal jurisdiction over either Dominion or the Director Defendants; (ii) Plaintiff’s claims concerning the Circular described a Canadian transaction with no connection to New York and should be dismissed on the grounds of forum non-conveniens; (iii) international comity, res judicata or collateral estoppel applied because the Ontario Court had already ruled that the transaction was “fair and reasonable”; (iv) the Securities Litigation Uniform Standards Act of 1998 precluded state law claims seeking damages on behalf of a class that alleged misrepresentations or omissions of material facts in connection with the purchase or sale of securities listed on a national exchange; (v) Plaintiff’s claim for negligent misrepresentation failed to state a claim; and (vi) Plaintiff’s claim for ‘quasi appraisal’ failed because quasi-appraisal is a remedy rather than a cause of action and Poms failed to advance any underlying cause of action that provided a basis for a quasi-appraisal remedy. The Court granted the motion. The Court’s Decision In granting the motion, the Court addressed the first basis for dismissal – the court lacked general and specific personal jurisdiction. As to general jurisdiction, the Court held that it did not possess jurisdiction over the Defendants because they were not at home in the state. In this regard, the Court observed: “Dominion is a Canadian corporation with its head and principal place of business in Calgary, Canada. Its registered office is located in Toronto, Canada and it does not conduct any business in New York. The Directors Defendants reside in Canada and/or the United Kingdom and have no connection to New York.” Slip Op. at *5, n.3. Moreover, Poms did “not assert any basis for New York to exercise general jurisdiction over Defendants….” Id . Regarding specific jurisdiction, the Court held that it did not have such jurisdiction. Specifically, the Court held that under CPLR 302(a)(l), there was no transaction within the state and no relationship between the transaction at issue and the claims asserted sufficient to exercise jurisdiction over the Defendants. Coast to Coast Energy, Inc. v. Gasarch , 149 A.D.3d 485, 486 (1st Dept. 2017) (internal citation and quotation marks omitted). The Court rejected Poms’ argument that it had jurisdiction over the Defendants because Dominion’s common stock was traded on the New York Stock Exchange and each of the Director Defendants had sufficient contacts with New York as a director/officer of a company whose common stock was traded on the New York Stock Exchange. Slip Op. at *5. The Court held that the mere listing of shares on the New York Stock Exchange does not confer jurisdiction over out-of-state defendants with no other contacts within the state: “However, it has been long held that a corporation is not doing business in New York for the purposes of conferring jurisdiction merely because its shares are listed on a New York Stock Exchange.” Id . at *6 (citations omitted). Next, the Court rejected Poms’ argument that the Court possessed jurisdiction over the Defendants because the Arrangement Agreement selected New York as the forum in which to litigate claims relating to the debt financing of the Proposed Transaction. Id . The Court explained that Poms overstated the reach of the forum selection clause in the agreement. In fact, noted the Court, under the agreement, “ only related to debt-financing source and nothing more” could be litigated in New York. (Orig’l emphasis.) Thus, “ ecause debt financing is not at all related to the causes of action alleged by Poms – which concern the sufficiency and accuracy of disclosures made in connection with the Proposed Transaction, Poms ha not shown a substantial relationship between the debt financing and the cause of action pled to confer jurisdiction over the Defendants pursuant to the forum selection clause.” Id . at **6-7. The Court also rejected Poms’ argument that the Court had jurisdiction over the Defendants because the proxy solicitation firm (Kingsdale Advisors, a Canadian proxy solicitation agent) hired to solicit proxies had an office in New York. Id . at *7. “The fact that Defendants retained a Canadian proxy solicitation agent, which has an office in New York is not sufficient, in and of itself, to show that Defendants have subjected themselves to jurisdiction here.” Id . The Court explained that “Poms fail to plead facts sufficient to demonstrate that simply by appointing Kingsdale Advisors as the proxy solicitation agents, Defendants transacted business in New York.” Id . “In addition,” said the Court, “Poms ha failed to plead facts to show that his claims arose out of the appointment of a proxy solicitation agent.” Id . Finally, the Court rejected Poms’ argument “that New York courts may exercise specific jurisdiction because the Defendants purposefully availed themselves of the resources of New York by retaining Paul Weiss, a law firm headquartered in New York, as their legal counsel in connection with the Proposed Transaction.” In doing so, the Court explained that “Defendants here concluded the Arrangement Agreement in Canada with no connection to New York. Although the Defendants consulted Paul Weiss’s Toronto and New York offices, including some New York based attorneys, the center of gravity for the Proposed Transaction was in Canada with a very remote, if any, contact in New York.” Id . at **8-9. “Moreover,” observed the Court, “a foreign entity hiring a law firm, which has a presence in New York, but without a substantial connection between the law firm’s engagement and the subject matter of the litigation, has been held an insufficient basis to confer New York jurisdiction over the foreign entity.” Id . at *9 (citations omitted). The Court found confirmation in Bristol-Meyers Squibb Co. v. Supreior Court of California , 137 S.Ct. 1773 (2017), in which the Supreme Court held that “ n order for a court to exercise specific jurisdiction over a claim, there must be an affiliation between the forum and the underlying controversy, principally, an activity or an occurrence that takes place in the forum State.” Id . at 1781 (internal quotation marks and brackets in original omitted), citing Goodyear Dunlop Tires Operations, S.A. v. Brown , 131 S.Ct. 2846 (2011). “When there is no such connection, specific jurisdiction is lacking regardless of the extent of a defendant's unconnected activities in the State.” Id . at 1781. In light of the foregoing, the Court held that “the fact that Defendants consulted attorneys who have an office in New York about a Canadian Proposed Transaction (and some New York based attorneys may have even been consulted about the Canadian Proposed Transaction) without more, does not supply the required link between Defendants New York presence and the subject matter of the litigation.” Slip Op. at *10. In sum, the Court found that Poms did nothing more than try to “manufacture specific jurisdiction” through “a few, detached connections between Defendants and New York.” Id . Instead Poms lists a few, detached connections between Defendants and New York in an attempt to manufacture specific jurisdiction. These connections, however, are not substantially related to his claim – that disclosures concerning the proposed acquisition in Canada of a Canadian company by an affiliate of a Montana company were inadequate and/or misleading. Poms list of unconnected relationships between New York and his claims concerning the Proposed Transaction in Canada are at best tangential and insufficient to show the required “affiliation between the forum and the underlying controversy” for New York to exert specific jurisdiction over this proposed class action litigation. Id ., citing Bristol-Meyers Squibb , 137 S.Ct. at 1781. Takeaway Poms is a good example of a court looking at the totality of the contacts with the state to determine whether a defendant has “on his or her own initiative project himself of herself into th state to engage in a sustained and substantial transaction of business.” Berkshire Capital Group, LLC v. Palmet Ventures, LLC , 307 Fed. App’x. 479, 481 (2d Cir.2008) (Internal quotations and citation omitted)). Thus, where, as in Poms , the transaction occurred “entirely outside of New York” “ he mere fact that engaged in some contact with a New York does not mean that transacted business in New York.” Id .

In today’s post, this Blog takes a look at fraud allegations in foreclosure action involving two commercial mortgages that secured more than $24 million in indebtedness. Orchard Hotel LLC v. D.A.B. Group LLC , 2019 N.Y. Slip Op. 03893 (1st Dept. May 16, 2019) ( here ). Relevant to today’s article is the motion court’s denial of a motion to dismiss fraud-based cross-claims and the First Department’s affirmance of that decision. Orchard Hotel LLC v. D.A.B. Group LLC Background In 2007, Defendant, Brooklyn Federal Savings Bank (“BFSB”), granted a loan for property located on Orchard Street in New York (the “Property”) to Defendant, D.A.B. Group LLC (“DAB”), secured by a mortgage (the “Project Loan Mortgage”) in the approximate amount of $5,500,000 (“Project Loan”). In 2008, BFSB granted a building loan to DAB for construction work on the Property, secured by a mortgage (the “Building Loan Mortgage”) in the amount of $19,050,000 (“Building Loan”). The Building Loan Promissory Note (the “Note”) stated that the Building Loan’s initial maturity date was September 1, 2009. After this date, BFSB had the option to extend the Building Loan for an additional six-month period ending on March 1, 2010 (the “First Extension Date”), provided that all the conditions stated in the Note were fulfilled. After the First Extension Date, BFSB had the option to extend the Building Loan a second time to September 1, 2010 (the “Second Extension Date”), again provided that all the conditions stated in the Note were fulfilled. After the Second Extension Maturity Date, provided that the conditions set forth in the Note were fulfilled, BFSB had the option to extend the Building Loan for a third time to March 1, 2011. BFSB exercised all three options to extend the Building Loan. Therefore, March 1, 2011 became the deadline after which the Note matured (the “Expiration Date”). In or about June and July 2008, Flintlock Construction Services LLC (“Flintlock”) bid on the construction project of a hotel on the Property (the “Project”). Flintlock’s bid was not selected, and DAB gave the job to Cava Construction & Development, Inc. (“Cava”). Because Cava ceased working on the project, DAB asked Flintlock to complete it. DAB advised Flintlock that it was in the process of securing consent from BFSB for Flintlock to be approved to start construction. On or about March 30, 2010, Flintlock entered into a contract with DAB (the “Contract”), wherein Flintlock agreed to provide labor, equipment and materials for the Project for $13 million. Flintlock was given 430 calendar days to complete the work. Thereafter, BFSB contacted Flintlock and represented to Flintlock that its consent was required so that loan monies could be advanced to DAB to pay Flintlock in accordance with the Project Loan Agreement and the Building Loan Agreement. DAB requested that Flintlock cooperate with it to obtain BFSB’s consent. Flintlock started working in early August in anticipation of BFSB’s approval of the Contract. On or about August 20, 2010, BFSB emailed Flintlock various documents that were needed in connection with BFSB’s approval of Flintlock. Within those documents was a document, titled “Affidavit and Estoppel Certificate” (the “Estoppel Certificate”), which BFSB prepared and which Flintlock needed to sign as a condition of the Contract. DAB and BFSB were copied on the email. BFSB was the beneficiary of the Estoppel Certificate and did not sign it. Flintlock signed the Estoppel Certificate on August 26, 2010. The Estoppel Certificate represented, in pertinent part that: “ he sum of $12,040,000 is available to which sum may be increased by the amount, if any, by which the Cava Construction mechanic’s lien is resolved, to the satisfaction of for a sum less than $960,000, provided that no assurances are made as to the availability of any such additional funds.” On August 27, 2010, BFSB emailed Flintlock confirming that BFSB could start processing requisitions for Flintlock’s construction work paid from the Building Loan. Section 1.23 of the Building Loan Agreement defined a requisition as “a written certification and request for an Advance.” In a letter dated March 23, 2011, BFSB informed DAB that the Building Loan had matured on March 1, 2011, that BFSB did not consent to any further extension, and that the notes were payable in full as of March 23, 2011. At that point, payments by DAB to Flintlock stopped. Consequently, Flintlock terminated the Contract effective June 7, 2011. On June 17, 2011, BFSB assigned the Loans and related mortgages to Plaintiff, Orchard Hotel, LLC (“Orchard”). On July 1, 2011, Orchard filed a complaint against DAB, Flintlock, BFSB and other defendants having or claiming to have some interest or lien upon the Property, with Orchard seeking foreclosure of the Project Loan Mortgage and the Building Loan Mortgage. On August 8, 2013, Flintlock filed an answer, asserting affirmative defenses and counterclaims against Orchard for mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, trust fund diversion, and conversion; cross-claims against DAB for breach of contract, quantum merit, account stated, mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, and trust fund diversion; and cross-claims against BFSB for mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, trust fund diversion, promissory estoppel and conversion. BFSB and State Bank of Texas moved to dismiss Flintlock’s cross-claims. On May 21, 2018, the motion court granted the motion, except with respect to Flintlock’s fraud and fraudulent concealment cross-claims. An appeal followed. The First Department’s Decision To state a claim for fraud, a plaintiff must allege: “(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). See also Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011). A plaintiff alleging fraud must meet each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to meet any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). To plead a cause of action for fraudulent concealment, a plaintiff must satisfy the elements of a fraud claim, as well as demonstrate that the defendant was under a duty to disclose truthful information. Mandarin Trading , 16 N.Y.3d at 179 (citation omitted). A duty to disclose information arises when there is a fiduciary relationship between the parties, or when the special facts doctrine applies. Jana L. v. West 129th Street Realty Corp. , 22 A.D.3d 274, 277 (1st Dept. 2005). A misleading partial disclosure or half-truth also gives rise to a duty to disclose. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 135 (1st Dept. 2014). “Under the ‘special facts doctrine,’ a duty to disclose arises where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky v. Dreyer & Traub , 219 A.D.2d 321, 327 (1st Dept. 1996) (internal citation omitted). The special facts doctrine requires the satisfaction of a two-prong test: the material fact omitted was “peculiarly within the knowledge” of the omitting party, and the information could not have been discovered by “the exercise of ordinary intelligence.” Jana L. , 22 A.D.3d at 278, citing Black v. Chittenden , 69 N.Y.2d 665, 669 (1986). If a party has means of learning the information, then that party must use those means, or its complaint for fraud will not be heard. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). Against this legal background, the First Department held that “Flintlock adequately allege all of the elements of its fraud and fraudulent concealment claims.” Slip Op. at *1. The Court found that Flintlock properly alleged an actionable half-truth. Slip Op. at *1 (citation omitted). In reaching this conclusion, the Court explained that BFSB, though “not a signatory to the Estoppel Certificate” was, for pleading purposes, responsible for the representations in the Estoppel Certificate, especially since BFSB advised Flintlock that execution of the Estoppel Certification was a condition of being hired. Slip Op. at *1. As such, “BFSB knew that Flintlock understood representation to apply to the entire contract term and knew that the promised funds would not be available during this whole time.…” Thus, even though the funds “were indisputably available when the subject statement was made,” they were not available during the duration of the Project, thereby making the statement a half-truth. Id .  The Court noted that although the Estoppel Certificate provided that “BFSB had ‘no obligation to provide any Advances . . . except as provided for in the Building Loan Agreement,’” that “caveat” was “not sufficient to ‘save’ the statement of fund availability.” Id . at **1-2. The Court explained that “ lthough the loan agreement would have revealed the expiration date of the loans, Flintlock allege that BFSB intentionally prevented it from gaining access to this document by wrongfully withholding it and insisting upon execution of the Certificate in a compressed time period so that Flintlock would not be able to independently obtain or review it.” Id . at *2. Such “allegations sufficient to permit an inference that BFSB wrongfully prevented Flintlock from verifying whether anything in the loan documents affected its rights.”  Whether Flintlock was required to insist upon copies of the loan documents or on more time for investigation could not be decided as a matter of law pre-discovery. Id . at *2. The foregoing allegations, said the Court, were also sufficient “to permit an inference that Flintlock justifiably relied on the Estoppel Certificate, notwithstanding its failure to read the referenced loan documents, especially in view of Flintlock’s allegations that it sought assurances from BFSB regarding the sufficiency of loan funds during the contract term and understood the statement in the Estoppel Certificate to be a confirmation that the funds were sufficient.” Id ., citing ACA Fin. , 25 N.Y.3d at 1045. See also DDJ Mgt., LLC v. Rhone Group LLC , 15 N.Y.3d 147, 154 (2010) (holding that, where plaintiffs had obtained warranties that financial statements were not misleading, whether they were justified in relying on the warranties was a question of fact); Phoenix Light SF Ltd. v. Credit Suisse AG , 144 A.D.3d 537, 538 (1st Dept. 2016) (holding that the plaintiff could reasonably rely on the offering documentation concerning the purchase of residential mortgage backed securities, and was not required to request actual loan files). Since Defendants did not identify any hints of a misrepresentation, Flintlock was not required to make “additional inquiry” in the sufficiency of the loan funds. Id ., citing Loreley Fin. No. 3, Ltd. v. Morgan Stanley & Co. Inc. , 146 A.D.3d 683, 684 (1st Dept. 2017) (internal quotation marks omitted). Finally, the Court held that the misrepresentations and half-truths alleged by Flintlock were “sufficient to permit an inference that BFSB had a duty to disclose information to Flintlock. Slip Op. at *2. These representations created “an inference that BFSB was aware that Flintlock was operating under the mistaken assumption that the funds were available throughout the contractual term.…” Id . Consequently, the special facts doctrine applied. Id . Takeaway Like many fraud cases discussed by this Blog, Orchard Hotel involves the justifiable reliance element of a fraud cause of action. The case is notable on this point because Flintlock obtained a written representation in the Estoppel Certificate that the funds were available. As such, much like a plaintiff who can rely on a written warranty, Flintlock could rely on the written statement in the Estoppel Certificate. As the motion court observed, courts rarely find that a plaintiff could not justifiably rely on a written representation unless the plaintiff actually knew the representation to be false. Orchard Hotel is also notable for its treatment of half-truths and the duty to disclose the full truth that arises therefrom. While the statement in the Estoppel Certificate was “the truth so far as it goes” (Restatement, Torts, § 529), the Court found that BFSB knew that the sum would not be available after the Expiration Date. Thus, the statement in the Estoppel Certificate that $12,040,000 was available to Flintlock without disclosing the Expiration Date was a half-truth, and, therefore, a misrepresentation. As the New York Court of Appeals observed: “Silence may … constitute fraud where one of two parties to a contract has notice that the other … is acting upon a mistaken belief as to a material fact. Bank v. Board of Educ. of City of N.Y. , 305 N.Y. 119, 133-134 (1953).

On April 25, 2018, this Blog wrote about INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 2018 N.Y. Slip Op. 30646(U) (Sup. Ct., N.Y. County, Apr. 9, 2018) ( here .) The case involved a motion for summary judgment involving claims that Defendant, Corrib Oil Co. Ltd. (“Corrib”), owed the plaintiff, INTL FCStone Markets, LLC (“FCStone”), nearly $3.5 million in connection with investment in more than 800 derivatives transactions over a four-year period. In granting the motion, Justice Shirley Werner Kornreich had some harsh words about the strength of the defenses proffered in opposition to the motion. She described the defenses as “border on the frivolous.” On May 9, 2019, the Appellate Division, First Department, unanimously affirmed, with costs, Justice Kornreich’s decision. INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 2019 N.Y. Slip Op. 03682 (1st Dept. May 9, 2019) ( here ). Background The action arose from the investment by Corrib in hundreds of derivatives transactions with FCStone, which Corrib made as a hedge on its exposure to oil price fluctuations. The trades were governed by an ISDA Master Agreement, Schedule, and Credit Support Annex, along with trade confirmations (“Confirmations”) governing each of the transactions. Until 2014, Corrib made money on the transactions because the price of oil increased. But in June 2014, the oil market crashed, and so too did Corrib’s positions on the trades. Margin calls followed. Corrib initially satisfied FCStone’s margin calls but, eventually, as Corrib’s positions went even more into the red, Corrib stopped making payments. Corrib first defaulted on a margin call in September 2015. It then defaulted on FCStone’s subsequent margin calls and payment demands. On December 11, 2015, FCStone declared an event of default under the Master Agreement and, on December 29, 2015, FCStone noticed an early termination. At that time, Corrib owed FCStone approximately $3.4 million on 59 trades. FCStone again demanded payment in May 2016, but Corrib did not pay. On June 24, 2016, FCStone commenced the action by filing a summons and motion for summary judgment in lieu of complaint. By order dated February 23, 2017, the Court denied the motion because FCStone failed to submit the Confirmations governing the trades. On March 15, 2017, Corrib filed an answer with counterclaims. At a preliminary conference conducted shortly thereafter, problems with the counterclaims were discussed. On April 17, 2017, Corrib filed an amended answer in which it asserted various counterclaims, including, but not limited to: breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; and fraudulent inducement. At a compliance conference a few weeks later, the court stayed discovery because it became “apparent that Corrib’s defenses and counterclaims bordered on the frivolous.…” Corrib admitted that after production of the trade Confirmations, “it never objected to them,” it never had any written investment advisory agreement with FCStone, and, more importantly, Corrib had “no defense to nonpayment.” On August 7, 2017, FCStone filed a motion for summary judgment. Corrib opposed the motion on the strength of the “supposed merits of its counterclaims.” Those counterclaims, however, “have no merit,” said the Justice Kornreich in a decision issued on April 9, 2018. Consequently, the court held that “ here is no question of fact regarding Corrib’s liability to FCStone.” Corrib appealed. The First Department’s Decision In granting summary judgment and rejecting Corrib’s fraud-based counterclaims, Justice Kornreich held that Corrib could not show justifiable reliance on any purported misstatement. Noting that these defenses were based on alleged misrepresentations about the terms of the trades and FCStone’s promise not to serve as a counterparty, the Court found that the “terms of the trades set forth in the Confirmations, which clearly disclose that FCStone was the counterparty.” As such, Corrib could not claim any fraud or fraudulent inducement – Corrib could not claim “to have justifiably relied on a representation when that very representation negated by the terms of a contract.” Citations omitted. The First Department agreed. The Court held that “ he fraud counterclaims barred by the express terms of the ISDA master agreement, which contain directly contrary representations, and by the trade onfirmations, which contain the very information as to which defendant claims to have been deceived.” Slip Op. at *1 (citations omitted). Justice Kornreich also found that Corrib could not claim justifiable reliance on the alleged misrepresentations because it failed “to review and challenge terms of a Confirmation.” “Having failed to do so,” Corrib could not “claim it was justified in not noticing that terms in the Confirmations conflicted with oral assurances allegedly provided by FCStone.” On appeal, Corrib maintained that it could not rely on the Confirmations because it did not understand them. The First Department rejected this argument, finding that Corrib was a sophisticated investor that should understand the contents of a trade confirmation: “Defendant is a sophisticated business doing millions of dollars’ worth of trades. Its claim that it did not understand the trade onfirmations is unavailing.” Id . (citations omitted). The Court also held that Corrib failed to plead fraud with particularity. To plead fraud with particularity, a plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). This means that the plaintiff should describe the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). Conclusory allegations will not suffice. Eurycleia Partners , 12 N.Y.3d at 559-60. 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.”). In FCStone , the Court held that, “with minimal exceptions,” Corrib failed “to identify who made the misrepresentations, when the misrepresentations were made, and the substance of the misrepresentations.” Slip Op. at *1, citing E1 Entertainment U.S. LP v. Real Talk Entertainment, Inc. , 85 A.D.3d 561, 562 (1st Dept. 2011). Finally, the Court held that Corrib failed to plead scienter. To satisfy the scienter element, a plaintiff is required to allege facts “from which it is possible to infer defendant knowledge of the falsity of statements” when they were made. MP Cool Invs. Ltd. v. Forkosh , 142 A.D.3d 286, 292 (1st Dept. 2016) (citation omitted). In FCStone , the Court rejected Corrib’s argument that FCStone had a financial motive to commit fraud – i.e. , “to increase its commissions revenue.” Under New York law, as well as under Federal law, “the motive to earn a fee, without more, cannot be used to infer scienter.” Celtixconnect Equity Invs. LLC v. Sea Fibre Network Ltd , 52 Misc. 3d 1210(A), 2016 N.Y. Slip Op. 51103(U), at *8-9 & n.7 (Sup. Ct. N.Y. County 2016). See also In re Tower Grp. Int’l, Ltd. Sec. Lit. , 2015 WL 5813393, at *6 (S.D.N.Y. 2015) (collecting cases); Saltz v. First Frontier, L.P. , 485 F. App’x 461, 464 (2d Cir. 2012) (noting that Second Circuit has “consistently rejected” the notion that pleading “generic motive” to earn fees may be used to infer scienter). Takeaway FCStone serves as a good reminder of the hurdles that a plaintiff pleading fraud must overcome. Aside from pleading each element of the claim, a fraud plaintiff must satisfy the particularity requirement of CPLR § 3016(b). As this Blog has noted in previous posts, the failure to satisfy the foregoing will result in dismissal of the action. The hurdles become even higher when, as in FCStone , the facts undermine the claim.

Arbitration is an alternative form of dispute resolution. Most often, parties will voluntarily agree to arbitrate their disputes, instead of allowing a judge or jury in a court of law to do so. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Sometimes, however, arbitration can be compulsory. In those instances, the obligation to arbitrate arises not through voluntary agreement, but through statutory mandate. MVAIC v. Aetna Cas. & Sur. Co. , 89 N.Y.2d 214, 223 (1996), citing Insurance Law § 5105(b); § 5221(b)(6). The distinction between voluntary and compulsory arbitration is important when one party seeks to vacate an arbitral award under CPLR § 7511. here).=">here)."> An arbitration award may be vacated on three narrow grounds: “it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Matter of United Fed. of Teachers, Local 2, AFT, AFL-CIO v. Bd. of Educ. of City School Dist. of City of N.Y. , 1 N.Y.3d 72, 79 (2003) (citations omitted). Where arbitration is pursued by the parties’ voluntary agreement, the arbitrator’s factual and legal determinations are conclusive and not subject to judicial review in the absence of fraud, corruption, or other misconduct. MVAIC , 89 N.Y.2d at 223. Errors of fact or law committed by the arbitrator, or his/her misconstruing evidence or arguments, are insufficient grounds for setting aside or disregarding a voluntary arbitration award. 23A Carmody-Wait 2d § 141:273 (2019); Merrill Lynch, Pierce, Fenner & Smith, Inc. v Graef , 34 A.D.3d 220 (1st Dept. 2006) (holding that it is “well settled” that arbitration award may not be vacated for arbitrator’s errors of law or fact). Where arbitration is compulsory, the courts impose closer judicial scrutiny of the arbitrator’s determination under CPLR 7511(b). MVAIC , 89 N.Y.2d at 223 (citations omitted). To be upheld, an award in a compulsory arbitration proceeding must have evidentiary support and cannot be arbitrary and capricious. Id . (citations omitted). In National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc. , 2019 N.Y. Slip Op. 31262(U) (Sup. Ct. N.Y. County May 6, 2019) ( here ), the Court addressed the foregoing issues in confirming an arbitral award pursuant to CPLR § 7510. National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc. Background National Union , and a companion action, involved insurance claims made by TransCanada Energy USA, Inc. and TC Ravenswood Services Corp. (collectively, “TransCanada”) to ACE INA Insurance (“ACE”), Arch Insurance Company (“Arch”), and other insurance companies for damages arising from an incident at TransCanada’s Ravenswood, New York power plant. In National Union , the insurance companies sought a judgment declaring that they were not obligated to pay the claims, while in the companion case, the claimants sought a declaration of coverage and damages. On March 2, 2016, the Court granted TransCanada’s motions for partial summary judgment in both actions, and awarded it a judgment declaring that the insurance policy at issue covered the incident and a claim for loss of capacity sales; the Court denied the insurance companies’ motion for partial summary judgment seeking a declaration that the lost sales were not covered by the policy. On September 19, 2017, the decision was affirmed by the Appellate Division, First Department. See 153 A.D.3d 1153. As a result of the First Department’s ruling, by the end of 2017, the only remaining insurance company defendants were Ace and Arch (collectively, “ACE/Arch”). On March 2, 2018, TransCanada and ACE/Arch stipulated to certain damages (the “March 2018 Stipulation”). The parties did not, however, agree as to: (1) the amount of the time element deductible; (2) the amount of TransCanada’s capacity revenue losses; or (3) the date on which prejudgment interest started to accrue on a portion of TransCanada’s claim. On March 29, 2018, counsel for TransCanada advised the Court that the parties had agreed to proceed to binding arbitration in lieu of a jury trial and to reduce the arbitrator’s ruling to a final judgment for entry in the action. While the parties had agreed to binding arbitration, the arbitrator, nonetheless, inquired whether the parties had a formal written agreement to arbitrate. In response, TransCanada’s counsel advised that the final award would be included in the damages calculations to be submitted to the Court for inclusion in a final judgment. On September 10, 2018, the parties stipulated to the prejudgment interest, and reserved the other two issues for the arbitration, which was scheduled to proceed on September 2018. The same day, ACE/Arch submitted to the arbitrator their proposed form of award, which incorporated the figures for the ancillary revenue and energy revenue losses stipulated to in the March 2018 stipulation. During the arbitration, in connection with the proposed final award, counsel advised the arbitrator that the damages numbers were undisputed and that they had stipulated to the ancillary loss and energy loss. In the proposed award that submitted to the arbitrator, the energy loss was incorrectly stated to be $609,683 and the ancillary loss was incorrectly stated to be $1,429,833. The parties stipulated that those were the claim amounts, not the loss amounts. On September 21, 2018, the arbitrator issued an award. On October 3, 2018, TransCanada argued that the arbitrator made erroneous findings as a result of incorrect amounts presented by ACE/Arch for TransCanada’s business interruption losses. TransCanada asked that ACE/Arch correct the error in the award. By letter dated October 5, 2018, ACE/Arch denied any error. The parties wrote to the arbitrator about the alleged error, and by email dated October 30, 2018, the arbitrator denied TransCanada’s request to modify or correct the award. By order to show case, ACE/Arch moved, pursuant to CPLR 7510, for an order confirming the arbitration award, among other relief. TransCanada opposed the motion. ACE/Arch argued that the award should be confirmed absent a basis for vacating or modifying it pursuant to CPLR 7511(b)(1) or (c), which limits a court’s ability to vacate an arbitrator’s award to certain narrow grounds. TransCanada asserted that CPLR §§ 7511 and 7510 did not apply because the parties had not agreed to their application. Rather, TransCanada claimed that the applicable standard of review was akin to that employed in reviewing the decision of a judicial hearing officer, thus warranting vacatur of the award as irrational and reflective of the wrong amounts for the revenue losses. Consequently, TransCanada’s actual insurance claims or losses applied. The Court’s Decision The Court confirmed the award. In confirming the award, the Court considered whether the award resulted from fraud, corruption, or other misconduct. Slip Op. at *6. In reviewing the record, the Court found that award was free of such wrongdoing. In fact, noted the Court, TransCanada neither “allege nor establishe that the award resulted” from such misconduct. “Thus,” concluded the Court, “even had the arbitrator erred in calculating the award and/or applied the amounts of TransCanada’s losses, the award must be confirmed.” Id ., citing Henvill v. Metro. Transp. Auth. , 148 A.D.3d 460 (1st Dept. 2017) (argument that award irrational and required vacatur rejected as court in considering award arising from voluntary arbitration may not review arbitrator’s findings of fact); Adolphe v. New York City Bd. of Educ. , 89 A.D.3d 532 (1st Dept. 2011), lv. denied , 19 N.Y.3d 808 (2012) (mistakes of law or disregard of evidence do not constitute grounds for vacating award). The Court also found that TransCanada failed “to show that the arbitrator’s calculations were irrational or erroneous, given the parties’ March 2018 stipulation, providing that the amounts set forth for ancillary and revenue losses were inclusive of ‘all’ such ‘claimed’ losses, and the undisputed representation made at the hearing that those were the correct amounts for those damages.” Id . “Thus,” concluded the Court, “even if the standard of review is whether the award is irrational, the arbitrator’s findings are supported by the record.” Slip Op. at *7, citing Matter of Hanover Ins. Co. v. Vasquez , 143 A.D.3d 612 (1st Dept. 2016) (whether arbitration voluntary or compulsory was irrelevant, as even under compulsory standard of review, award rationally supported by record). Takeaway As noted, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.”  Westinghouse v. New York City Tr. Auth. , 82 N.Y.2d 47, 54 (1993). Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards.  Tullett Prebon v. BGC Fin. , 111 A.D.3d 480, 482 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”). In fact, judicial review of arbitration awards is severely limited in New York.  Id . As long as an arbitral award is rationally based and free of fraud, corruption or other misconduct, it will be confirmed. National Union is a good example of that principle.

On May 7, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) announced (here) that it had settled an insider trading action against Brian Fettner (“Fettner”), a Nevada resident who obtained confidential, inside information about a potential corporate merger from a lifelong friend and used it to generate more than $250,000 in illicit trading profits. The action involved unlawful trading in the securities of G&K Services, Inc. (“G&K”) prior to an August 16, 2016 announcement that Cintas Corporation (“Cintas”) had reached an agreement with G&K to purchase all of G&K’s outstanding common stock for a substantial premium over the stock’s then publicly-traded price. While the acquisition was being negotiated, and before it had been publicly announced, Fettner obtained non-public information about the transaction in breach of a duty of trust and confidence to his friend, and purchased G&K stock in a brokerage account of his ex-wife, Relief Defendant Liselotte Sandberg, and in a brokerage account of a former girlfriend, Relief Defendant Kathy M. Micali. Fettner also persuaded others to purchase shares of G&K common stock before the public announcement of the transaction. In December 2015, officers of Cintas approached G&K about a possible business combination. Talks broke off in January 2016, but resumed in May 2016 when Cintas submitted a revised offer to G&K. Only a few Cintas senior officers were aware of and participated in the negotiations with G&K. One such officer was the Senior Vice President, Secretary, and General Counsel of Cintas (the “General Counsel”). In mid-June 2016, G&K provided the General Counsel with a draft non-disclosure and standstill agreement (“Non-Disclosure Agreement” or “Agreement”) for his review. The General Counsel took home a folder that included the Agreement and a few other merger-related documents. The folder was labeled with the code name for the prospective merger and was kept on the desk in the General Counsel’s home in a room that served as the General Counsel’s home office and den. On Monday, June 20, 2016, the General Counsel executed the Non-Disclosure Agreement on behalf of Cintas. Fettner was a long-time friend of the General Counsel. Whenever Fettner visited Cincinnati, he stayed at his friend’s home, even when visiting family. Cintas is headquartered in Cincinnati. On June 14, 2016, Fettner stayed at the General Counsel’s home for several days while he played golf at a charity outing. According to the SEC’s complaint (here), on June 15, 2016, while Fettner was a guest in the General Counsel’s home, he surreptiously viewed documents contemplating the acquisition of G&K by Cintas, including the draft Non-Disclosure Agreement. Fettner did not tell the General Counsel that he had seen the merger documents. Based on that information and without telling his friend, Fettner purchased G&K stock in the brokerage accounts of his ex-wife and a former girlfriend and persuaded his father and another girlfriend to purchase G&K shares. Fettner did not purchase G&K stock in any account of his own. He did not receive proceeds from any of the G&K trades he placed or from any of the G&K trades he persuaded others to place. On August 16, 2016, prior to the opening of the U.S. financial markets, G&K and Cintas announced that the companies had entered into an Agreement and Plan of Merger, pursuant to which Cintas would acquire G&K for $97.50 in cash per share of G&K common stock. On the day of the announcement, G&K common stock closed at $96.70 per share, up approximately 17.7% from a closing price of $82.30 the previous day, resulting in illicit profits from Fettner’s alleged misconduct of more than $250,000. The SEC filed its complaint in the U.S. District Court for the Southern District of Florida. SEC v. Fettner, Case 9:19-cv-80613 (May 7, 2019). The SEC alleged that Fettner violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder. Without admitting or denying the allegations in the complaint, Fettner consented to the entry of a final judgment permanently enjoining him from violating the charged provisions of the federal securities laws and imposing a penalty of $252,995. The Relief Defendants also consented to the entry of a final judgment agreeing to disgorge their profits with prejudgment interest. The settlement is subject to court approval. “Those who illegally use confidential information to financially benefit others will be held liable for their misconduct,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement. “The penalty in this action takes such improper trading profits into account.” The SEC press release can be found here. The SEC Complaint can be found here.

FOLLOW-UP – THE NEW YORK COURT OF APPEALS AFFIRMS THE APPELLATE DIVISION, SECOND DEPARTMENT’S, ENFORCEMENT OF WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION APPLICATION Our February 9, 2018, Blog post, entitled: “ APPELLATE DIVISION, SECOND DEPARTMENT, ENFORCES WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION ,” addressed the decision in 159 MP Corp. v. Redbridge Bedford, LLC , in which the Appellate Division, Second Department, recognized that the “appeal raises an issue of first impression in the appellate courts of New York…” to the extent that it “address the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.”  Our earlier Blog discusses the underlying facts of 159 MP and the Second Department’s basis for its holding. On May 7, 2019, the New York Court of Appeals affirmed < HERE =">HERE"> , over a lengthy dissent, “that, under the circumstances of this case, the waiver clause 159 mp> 159 mp> is enforceable, requiring dismissal of the complaint.”  At its core, the Court of Appeals’ decision is based on the principle that a written agreement, when “clear complete…, should be enforced according to its terms.”  (Quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470 (2004) (ellipses omitted).)  The Court of Appeals found that the lease provision at issue in 159 MP “could not be clearer.”  According to the Court, “this unambiguous waiver clause reflects the parties' intent that plaintiffs be precluded from commencing precisely the type of suit they initiated here and, as such, this action was foreclosed by the plain language of the leases.” The Court rejected the 159 MP plaintiff’s argument that the waiver provision at issue violated “a public policy strong enough to warrant a departure from the bedrock principle of freedom of contract.”  The Court reiterated that “ reedom of contract is a ‘deeply rooted’ public policy of this state ( New England Mut. Life Ins. Co. v Caruso , 73 NY2d 74, 81 <1989> ) and a right of constitutional dimension ( U.S. Const. art. I, § 10<1> ).”  Further, the Court reasoned that the “enforcement of commercial contracts according to the terms adopted by the parties a pillar of the common law” because of “New York's status as the preeminent commercial center in the United States, if not the world.” Thus, y disfavoring judicial upending of the balance struck at the conclusion of the parties' negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.” While the Court noted that unconscionable contracts and those entered unknowingly or under duress or coercion may not be enforced, the 159 MP plaintiff raised no such defenses.  Plaintiff’s sole challenge to the waiver provision in question – “that the right to bring a declaratory judgment action is so central and critical to the public policy of this state that it cannot be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant” – was found to be “unpersua ” by the Court. The Court described the interplay between the enforcement of contracts and public policy considerations as follows: We have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy. But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after "balancing" the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although we possess the power to set aside agreements on this basis, our usual and most important function is to enforce contracts rather than invalidate them "on the pretext of public policy, unless they clearly . . . contravene public right or the public welfare. (Citations, internal quotation marks, footnotes and ellipses omitted.) After indicating numerous instances where the Court had previously held that certain contractual provisions were void as against public policy, the Court stated that “ ere, the declaratory judgment waiver is clear and unambiguous, was adopted by sophisticated parties negotiating at arm's length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.”  Specifically, as related to the public policy considerations raised by the 159 MP plaintiff, the Court stated that: there is simply nothing in our contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions or, more generally, to a full suite of litigation options without limitation, is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease. CPLR 3001 enables Supreme Court to grant declaratory judgments in the context of justiciable controversies but in no way indicates that sophisticated parties may not voluntarily waive the right to seek such relief. A declaratory judgment is a useful tool for providing clarity as to parties' obligations and may, in some circumstances, enable parties to perform under a contract they might otherwise have breached. Access to declaratory relief benefits the parties as well as society in quieting disputes. However, a declaratory judgment is merely one form of relief available to litigants in enforcing a contract. In codifying the right to seek declaratory relief, the Legislature neither expressly nor impliedly made access to such a claim nonwaivable with respect to any party, much less sophisticated commercial tenants. The Court after analyzing the history and utility of declaratory relief, found significant that the subject waiver provision did not preclude the plaintiff from access to courts because plaintiff could raise its defenses in such summary proceedings brought by the defendant landlord. The Court also found that the declaratory judgment waiver was not rendered unenforceable because, “under the circumstances presented here, it resulted in an inability to obtain Yellowstone relief.  Because the Civil Court cannot issue injunctive relief, requests for Yellowstone injunctions must be made in supreme court.  In describing why Yellowstone relief was not available to the 157 MP plaintiff, the Court stated: Yellowstone relief is not an end in itself but merely a means of maintaining the status quo by tolling a contractual cure period during a pending action, permitting a tenant who loses on the merits of the lease dispute to cure the defect and retain the tenancy. Here, because plaintiffs' declaratory judgment action was barred by the lease waiver, there was no pending action in which to adjudicate the parties' rights and to support interim relief in the form of a Yellowstone injunction. Indeed, the request was rendered academic by the dismissal of the complaint. The Court reiterated that the inability to obtain Yellowstone relief would not leave plaintiff without remedy because it could raise such defenses as appropriate in summary proceedings. In his lengthy dissent, Judge Wilson, among other things, expressed his view that there was a strong public policy in favor of declaratory relief and Yellowstone injunctions.  Justice Wilson feared that “ he majority’s decision today will result in the elimination of the “Yellowstone injunction”, and, therefore, “enable to terminate the leases based on a tenant's technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations.” TAKEAWAY The majority’s decision reinforces the primacy of freedom of contract in New York.  However, as the dissent argues, the result could be devastating to commercial tenants.  Undoubtedly, most new commercial leases will contain waivers such as those that appear in the leases that are the subject of 159 MP .  The dissent’s argument that the majority’s view will create uncertainty in contract for tenants is prescient.  It will be interesting to see how this ruling plays out.

This Blog has previously written about the equitable estoppel doctrine in the context of the statute of limitations ( here ). See General Stencils v. Chiappa , 18 N.Y.2d 125, 128 (1966); Zumpano v. Quinn , 6 N.Y.3d 666, 674 (2006); Matter of Steyer , 70 N.Y.2d 990, 993 (1988). The doctrine has also been used as a basis to reject a jurisdictional defense. Matre v. Erie County Pub. Adm’r. , 283 A.D.2d 1025, 1026 (4th Dept. 2001) (applied to personal jurisdiction and statute of limitations defenses); Brown v. Snell , 57 N.Y. 286, 303 (1874) (court applied the doctrine to prevent the defendant from asserting lack of jurisdiction). While the circumstances under which the doctrine is asserted may differ, the analysis of the doctrine remains the same: a plaintiff seeking to apply the doctrine of equitable estoppel must establish that the defendant’s actions prevented him/her from taking action and that he/she justifiably relied on the defendant to his/her detriment. “The purpose of equitable estoppel is to preclude a person from asserting a right after having led another to form the reasonable belief that the right would not be asserted, and loss or prejudice to the other would result if the right were asserted.” Matter of Shondel J. v. Mark D. , 7 N.Y.3d 320, 326 (2006). In Shondel J. , the Court of Appeals observed, the doctrine is applied “as a matter of fairness.” Id . Courts apply the defense “to prevent someone from enforcing rights that would work injustice on the person against whom enforcement is sought and who, while justifiably relying on the opposing party’s actions, has been misled into a detrimental change of position.” Id . See also Nassau Trust Co. v. Montrose Concrete Prods. Corp. , 56 N.Y.2d 175, 184 (1982). Application of the doctrine requires only reliance and prejudice; it does not require the “existence of fraud or an intent to deceive.” Rodriguez v. Morales , 200 A.D.2d 406, 407 (1st Dept. 1994). Whether the doctrine applies “rests largely on the facts and circumstances of the particular case.” Ayer v. Board of Educ. , 69 Misc. 2d 696, 699 (Sup. Ct. Monroe County 1973) (citation omitted). In Homeward Residential, Inc. v Thompson Hine, LLP , the court addressed the foregoing principles, affirming the dismissal of an action on personal jurisdiction grounds. Homeward Residential, Inc. v Thompson Hine, LLP , 2019 N.Y. Slip Op. 03542 (1st Dept. May 7, 2019) ( here ). In doing do, the court rejected the plaintiff’s equitable estoppel defense that its attorneys relied on the defendant’s filings as a foreign partnership with the New York Department of State (“DOS”), which identified a New York address as the Defendant’s “Principal Executive Office,” and on a complaint filed by the defendant in an unrelated action in which it alleged that its principal place of business was in New York. Homeward Residential arose out of legal work performed by the defendant for the plaintiff in connection with a lawsuit pending in a federal court in Georgia. Plaintiff serviced home mortgage loans and hired the defendant to represent it in a lawsuit brought by a property owner. Plaintiff claimed that the defendant failed to timely assert a claim relating to punitive damages resulting in a $3 million punitive damages judgment awarded against it. Plaintiff contended that had the defendant provided proper representation, it would have cited to a Georgia statute that limited punitive damages to $250,000. The defendant moved to dismiss for lack of personal jurisdiction, arguing that the court did not possess general jurisdiction or specific jurisdiction over it. The defendant maintained that it is a limited liability partnership organized under the laws of Ohio and its principal place of business is in Cleveland, Ohio. The defendant argued that New York had no connection to the underlying lawsuit that occurred in Georgia, and that none of its New York-based attorneys were involved in the Georgia action. The defendant also noted that it registered with the Department of State as a foreign limited liability partnership. The plaintiff argued in opposition that it found information about the defendant on the DOS website, which showed that the defendant had changed its principal place of business from Cleveland to New York City. The plaintiff also pointed to a filing in another litigation based in New York in which the defendant asserted that its principal place of business is in New York City. The motion court granted the motion to dismiss. ( Here .)   The court held that there was no general or specific jurisdiction over the defendant – it found that the defendant was incorporated in Ohio and maintained its principal place of business in Ohio. The Court rejected the plaintiff’s equitable estoppel defense that the defendant held itself out to be a New York entity because of the information filed with the DOS: Here, plaintiffs purported reliance on these DOS printouts to support its equitable estoppel argument is simply unreasonable. The fact is that New York had nothing to do with the parties’ relationship. Plaintiff is not based in New York. Defendant represented plaintiff in a lawsuit in Georgia. Plaintiff does not even contend that any of defendant’s lawyers based in New York did anything in connection with the Georgia trial. And, in reply, defendant submits check vouchers in connection with the Georgia action that purportedly show that payments were made to defendant in Cleveland. The Court observes that the term ‘Principal Executive Office’ appears to relate primarily to issues of venue; it is not a synonym for principal place of business. Moreover, defendant argues that it means its principal office within New York state; that claim is supported by the current registration form for foreign LLPs created by DOS the third box asks the entity to list “the address of the principal office of the foreign limited liability partnership in New York state”. It is not defendant’s fault if the DOS extrapolates from that form to put on its website something that may not be accurate. Orig’l emphasis; citations omitted. The motion court went on to say that “to arrive at plaintiff’s conclusion,” “one would have to selectively rely on information that supports plaintiff’s position to the exclusion of everything else.” That is not how the equitable estoppel doctrine works said the court: “Equitable estoppel cannot apply where plaintiff cherry-picks which information to rely on and which facts to ignore.” The plaintiff appealed. The Appellate Division, First Department, “unanimously affirmed, with costs.” The Court found that the defendant had “demonstrated that there no basis for asserting specific or general personal jurisdiction over it in New York because it is a limited liability partnership formed in Ohio, with a principal place of business in Ohio, and it rendered legal services to plaintiff in Georgia and Ohio only, not in New York.” Slip Op. at *1. The Court further found that the plaintiff was aware of facts, which had it conducted an investigation would have revealed that the defendant was not at home in New York. As such, the equitable estoppel doctrine was not available to it: However, defendant presented evidence showing that any search for public information would disclose that it is an Ohio-based law firm, with its principal place of business in Cleveland, and, moreover, that plaintiff was aware of this, as it had dealt with the firm in Georgia and Ohio only and sent payments to the Cleveland office. Defendant also showed that it did not affirmatively misrepresent its place of business in its DOS filings, which disclose that it is a foreign limited liability corporation and provide its Cleveland address for service of process. Plaintiff’s “timely awareness of the facts requiring to make further inquiry” and failure to make such inquiry before bringing suit in New York render equitable estoppel inappropriate as a matter of law. Id . at **1-2 (citation omitted). Takeaway Homeward Residential is an interesting case because of the approach taken by the plaintiff to demonstrate personal jurisdiction. Instead of trying to affirmatively show that the defendant had sufficient contacts in New York to establish specific jurisdiction, the plaintiff “claim that defendant equitably estopped from arguing about personal jurisdiction.” (Orig’l emphasis.) To the motion court, if it were to adopt such an approach, it would have “require the ourt to block out all other information showing the reality: that defendant is based in Ohio and that plaintiff is aware of that fact given the parties’ prior relationship in Georgia.” As the motion court concluded, since “the principle of equitable estoppel relies on fairness,” “it would be inherently unfair for defendant to be subject to general jurisdiction in New York because plaintiff relied exclusively on its own interpretation of information compiled by a third-party over which defendant had no control.” Or, as the First Department observed, a plaintiff cannot avail itself of the doctrine if it is aware of information that calls into question its reliance and fails to investigate further.

On April 29, 2019, the Securities and Exchange Commission (“SEC”) announced (here) that it filed charges against a New York City man for continuing a previously charged ticket resale scheme, in which investors were falsely promised that their funds would be used for the purchase and resale of tickets to Broadway shows and a sporting event. According to the SEC, at least 12 investors were defrauded out of approximately $2.7 million as a result of the scam. According to the SEC’s complaint (here), James Siniscalchi (“Siniscalchi”), Chief Compliance Officer of a company that claimed to have special access to profitable and highly sought-after event tickets (“Entertainment Company”), knowingly misused investor money to benefit himself and his extended family. The SEC alleged that Siniscalchi and his business partners rebranded businesses formerly run by his cousin, Joseph Meli (“Meli”), who settled fraud charges with the SEC (here) and pleaded guilty to securities fraud in a parallel criminal action (here), and that this rebranding was done with Meli’s knowledge and assistance. Following Meli’s arrest, Siniscalchi and his business partners allegedly raised approximately $2.7 million net from investors. According to the SEC, investors were promised that their money would be used only to purchase tickets on the secondary market to events such as the Broadway shows Harry Potter and the Cursed Child, Hello Dolly, and Bruce Springsteen on Broadway, and a professional boxing match between Floyd Mayweather Jr. and Conor McGregor. In actuality, alleged the SEC, Siniscalchi misused investor funds to benefit himself, Meli, and his family. The SEC alleged that Siniscalchi took steps to conceal from investors Meli’s involvement given the widely publicized civil and criminal cases that were then pending against Meli. To hide Meli’s role in the alleged fraud, Siniscalchi purportedly instructed staff not to include Meli on emails to investors, and referred to Meli as “Keyser Soze,” in reference to a fictional movie character from the movie The Usual Suspects who secretly operated as a crime kingpin. “As alleged in our complaint, investors were lured in with promises of big profits, but Siniscalchi really just took over his cousin’s fraudulent scheme to steal money,” said Paul Levenson, Director of the SEC’s Boston Regional Office. The SEC filed its complaint in the U.S. District Court for the Southern District of New York. The Commission charged Siniscalchi with violating the antifraud provisions of the federal securities laws and sought a permanent injunction from future violations, disgorgement of allegedly ill-gotten gains, with interest, and financial penalties. In addition to the SEC, the U.S. Attorney’s Office for the Southern District of New York filed criminal charges against Siniscalchi and Meli (here). In that regard, Siniscalchi and Meli were charged with securities fraud, wire fraud, and conspiracy to commit securities and wire fraud, stemming from their participation in the alleged fraudulent ticket investment scheme. U.S. Attorney Geoffrey S. Berman said: “As alleged, Joseph Meli and James Siniscalchi engaged in a scheme to defraud investors by lying about purported access to blocks of Broadway tickets. As alleged, the acting was all done by the defendants, who posed as legitimate businessmen but appropriated the money they said would be invested in theatre tickets.” If convicted, the conspiracy count carries a maximum sentence of five years in prison and a maximum fine of $250,000, or twice the gross gain or loss from the offense; the securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense; and the wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. The SEC action, SEC v. James Siniscalchi, Case 1:19-cv-03792 (S.D.N.Y. Apr. 29, 2019), can be found here. The DOJ action, U.S. v. Meli et al., 19 MAG 4079 (S.D.N.Y.), can be found here.

In Siwiec v. United Rest. Group Inc. , 2019 N.Y. Slip Op. 31152(U) (Sup. Ct. Kings County Apr. 11, 2019) ( here ), the Court reminds litigants that if they want to bring a fraud claim along with a contract claim, they must allege misrepresentations that are collateral or extraneous to the contract. Siwiec involved a dispute over the management of a restaurant. According to the complaint, the parties met in May 2016, when Defendant, Christian Vega (“Vega”), the Chairman and Chief Executive Officer of Defendant, United Restaurant Group, Inc. (“URG”), allegedly approached Plaintiffs about entering into a partnership whereby Defendants would manage a soon-to-be-opened restaurant in Brooklyn. Vega purportedly represented that he and URG owned and operated several successful restaurants in New York City. On June 9, 2016, Plaintiff, El Sotano and URG executed an “Operating Agreement” pursuant to which URG would be an operating partner and help run and manage the restaurant. Plaintiffs claimed that Defendants were not successful restaurateurs. According to the complaint, Defendants were engaged in a stock-swapping, pyramid-type scheme in which Defendants (and others associated with them) would approach restauranteurs and propose a partnership, equity, or management relationship. Defendants would then allegedly use the relationship with the restauranteur as a basis to enter into a new one with another restauranteur to create the impression that Defendants were successfully managing multiple restaurants. Plaintiff commenced the action alleging numerous causes of action, including breach of contract and fraud. Defendants counterclaimed alleging, among other things, breach of contract, conversion, unjust enrichment and fraud. Plaintiff moved to dismiss the counterclaims, contending that Defendants failed to set forth the elements of each claim and that the fraud claim was duplicative of the contract claim.  The Court sustained the breach of contract and conversion claims. Breach of Contract To succeed on a breach of contract claim, the plaintiff must establish the existence of a contract, the plaintiff’s performance, the defendant’s breach and resulting damages. Harris v. Seward Park Housing Corp. , 79 A.D.3d 425 (1st Dept. 2010). In addition, the plaintiff must identify the specific provision of the contract alleged to have been breached. Gianelli v. RE/MAX of New York , 144 A.D.3d 861 (2d Dept. 2016). The Court held that Defendants satisfied the foregoing requirements. In particular, the Court found that Defendants properly identified the provisions of the operating agreement that were “were allegedly violated by the plaintiff.” Slip Op. at *3. The Court rejected Plaintiffs’ argument that merely “listing the titles of the alleged breached sections of the contract, without the text of those sections and without incorporating an attached copy of the agreement,” left the Court without sufficient information “as to what essential terms of the Operating Agreement at issue allegedly breached by Plaintiffs.” Id . (internal quotation marks omitted). In doing so, the Court noted that “there is no requirement the text of a contractual provision must be included within a pleading.” Id . Accordingly, the Court denied the motion to dismiss the breach of contract counterclaim. Conversion To allege a claim for conversion, the plaintiff must show the legal right to an identifiable item(s) and that the other party had exercised unauthorized control and ownership over the item(s). Fiorenti v. Central Emergency Physicians, PLLC , 305 A.D.2d 453 (2d Dept. 2003). Further, a conversion does not occur until the owner makes a demand for the return of the property and the one in possession refuses to do so. Matter of Asch , 164 A.D.3d 787 (2d Dept. 2018). According to Defendants, Plaintiff entered the restaurant and removed various items, including, but not limited to, furniture, antique decor, custom made items, place settings, imported crystal, and other equipment. Defendants claimed to have purchased the items in question. Defendants also alleged that their prior attorney demanded the return of the items. The Court found that Defendants had stated a claim for conversion. Slip Op. at **3-4. Fraud To succeed on a claim of fraud, the plaintiff must demonstrate that there was a material misrepresentation of fact, made with knowledge of the falsity, the intent to induce reliance, reliance upon the misrepresentation and damages. Cruciata v. O'Donnell & Mclaughlin, Esqs , 149 A.D.3d 1034 (2d Dept. 2017). These elements must each be supported by factual allegations containing details constituting the wrong alleged. JPMorgan Chase Bank, N.A. v. Hall , 122 A.D.3d 576 (2d Dept. 2014). Moreover, where a fraud claim is alleged along with a breach of contract claim, the misrepresentations must be collateral or extraneous to the terms of the parties’ agreement. McKernin v. Fanny Farmer Candy Shops Inc. , 176 A.D.2d 233(2d Dept. 1991). The Court found that the “fraud allegations essentially further elaborations of the breach of contract counterclaim.” Consequently, the Court granted the motion to dismiss the fraud counterclaim. Takeaway Siwiec serves a reminder to litigants who allege both a contract claim and fraud claim in the same pleading that the two can stand side-by-side as long as the subject misrepresentations are collateral or extraneous to the terms of the contract. One way to do so is to allege a misrepresentation of present fact. First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 292 (1st Dept. 1999), citing Deerfield Commc’ns Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986). Another way is to allege a breach of duty separate from, or in addition to, a breach of the contract. Id . at 291. In any event, merely elaborating on the contract claim, as in Siwiec , is insufficient to withstand a motion to dismiss.

This Blog has strived to highlight cases and issues that may be of interest to our readers. Sometimes, however, a case involves so many issues it is hard to isolate one or two for discussion purposes. Such is the case with RKA Film Fin., LLC v. Kavanaugh , 2019 N.Y. Slip Op. 03302 (1st Dept. Apr. 30, 2019) ( here ). RKA Film involved allegations of fraud, fraudulent inducement and negligent misrepresentation in connection with a series of loans that RKA Film Financing, LLC (“RKA”) issued to Relativity Media, LLC (“Relativity”) during the period between June 2014 and March 2015. While it would be easy to write that the case was dismissed for failure to plead fraud with particularity, that would not really give the reader a taste of the issues involved. RKA Film covers more turf than a typical CPLR § 3016(b) dismissal; it addresses issues such as group pleading, puffery and opinion, causation, duplication of claims and justifiable reliance. Legal Principles Involved rka film, there are many.  while we do not want to bore our readers with legalese, we find it helpful to include a discussion of the legal principles involved to aid the reader’s experience with the article.> rka film, there are many.  while we do not want to bore our readers with legalese, we find it helpful to include a discussion of the legal principles involved to aid the reader’s experience with the article.> Pleading Fraud with Particularity To state a claim for fraud/fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraud must satisfy each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to satisfy any one element will result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). In addition, the plaintiff’s allegations must be stated with particularity. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). 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). Group Pleading It is not uncommon for practitioners to group multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. This form of pleading, commonly known as “group pleading,” runs afoul of the particularity requirement of CPLR § 3016(b). Thus, a complaint will be dismissed on particularity grounds if the plaintiff group pleads the alleged fraud against multiple defendants. See , e.g. , Jonas v. National Life Ins. Co. , 147 A.D.3d 610, 612 (1st Dept. 2017); MP Cool Invs. Ltd. v. Forkosh , 142 A.D.3d 286, 291 (1st Dept.), lv. denied , 28 N.Y.3d 911 (2016); Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co. , 84 A.D.2d 736 (1st Dept. 1981).   Puffery/Opinions One of the issues that courts have to address when deciding the viability of a fraud claim is whether the subject statement contains hyperbole or concrete facts. The former, which are not actionable, includes puffery, optimism, future expectations, and opinion, while the latter, which are actionable, includes statements of present or historical fact. Sometimes, the line between these types of statements is blurred or non-existent. Other times, the line is easy to discern.  While determining the difference is difficult enough, the task becomes more complicated when the representation at issue contains both present facts and hyperbole. Statements couched in terms of “belief” or “expectation” are not actionable because they are “mere puff” or statements of opinion or exaggeration that no reasonable person would take seriously. They are not concrete and measurable statements. In contrast, a misrepresentation is a false statement of present or historical fact. It is actionable because it is capable of objective verification. E.g. , White v. Davidson , 150 A.D.3d 610, 611 (1st Dept. 2017). Causation and Damages The causation element has two components: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Transaction Causation “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss Causation The loss causation requirement is synonymous with the proximate cause concept found in other tort causes of action. Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. County June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Justifiable Reliance In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See, e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). RKA Film Financial, LLC v. Kavanaugh Background As noted, the action arose out of a series of loans that RKA issued to Relativity. RKA alleged that it made the loans to provide Relativity with funding for print and advertising (“P&A”) expenses related to the release of major motion picture films by special purpose entities (“Film SPEs”). RKA alleged that, in 2012, certain of the defendants associated with Relativity realized that the company was in financial trouble and needed additional capital to survive. They developed a plan to market a P&A credit facility (“P&A Facility”) for Relativity’s Film SPEs. RKA contended that, between April 2014 and April 2015, Defendants repeatedly and incorrectly marketed the P&A Facility to RKA, leading it to believe that its loans would be used only for P&A expenses. In June 2014, RKA agreed to loan $58.5 million for the P&A expenses of certain Relativity films. The Funding Agreement, dated June 30, 2014, memorialized the investment terms. Defendants were not parties to the Funding Agreement. Nevertheless, RKA alleged that some, but not all, of Defendants’ misrepresentations were memorialized therein. In August 2014, RKA increased its loan by $22.5 million based on additional misrepresentations that Defendants allegedly made to RKA through emails and telephone calls. Between September 2014 and March 2015, Defendants drew $73.6 million from the P&A Facility, purportedly for four yet unreleased films (“Unreleased Films”). In February and April of 2015, Defendants allegedly stated to RKA that the Unreleased Films would be released later that year, that RKA’s money was safe and accounted for, and that Relativity was financially sound. RKA alleged that Defendants’ statements were materially false. On April 1, 2015, one of the defendants allegedly told RKA that the P&A funds were not earmarked, allocated, or used for P&A expenses. In an April 13, 2015 telephone call with RKA, one of the defendants allegedly admitted that Relativity used the funds for improper purposes. RKA filed its first complaint on July 24, 2015. RKA filed a second amended complaint (“SAC”) on February 2, 2017, alleging fraud, fraudulent inducement and negligent misrepresentation. RKA sought damages in excess of $110 million, plus fees. Defendants moved to dismiss the SAC for failure to state a claim. The motion court granted Defendants’ motions. RKA appealed. The First Department’s Decision The First Department affirmed. As an initial matter, the Court found that RKA impermissibly lumped most of the defendants “together with the others against whom specific acts had been pleaded.” Slip Op. at *1. As such, RKA failed to plead fraud with particularity as against those defendants. Turning to some of the statements alleged to be false, the Court determined that they were non-actionable expressions of opinion: he facts alleged in the SAC do not support a claim of fraud against Colbeck Capital Management, LLC (Colbeck) or David Aho. Aho’s alleged statement that plaintiff’s investment was “low risk,” was a non-actionable expression of hope, and his presentation of slides prepared by Relativity is insufficient to impute representations within the slides to him personally. Id . (Citations omitted.) With regard to transaction causation, the Court found that RKA failed to satisfy this element because it “had already invested in Relativity” before the alleged misrepresentations were made: The alleged misrepresentations attributed to defendants Ramon Wilson, Andrew Matthews, and Greg Shamo, officers of Relativity, are similarly insufficient to give rise to a fraud claim. The alleged misrepresentations attributed to these defendants were made after plaintiff had already invested in Relativity, precluding a conclusion that they induced plaintiff to engage in the transaction. To the extent plaintiff claims that these defendants’ misrepresentations caused it to abstain from taking legal action, plaintiff has not demonstrated that it sustained damages as a result of such forbearance, an essential element of its claim. Id. at *2. (Citations omitted.) As to loss causation, the Court held that “any misrepresentations made after plaintiff had already invested the funds are insufficient to give rise to fraud as there was no nexus between the alleged statements and plaintiff’s losses.” Id . Finally, addressing the justifiable reliance element of RKA’s fraud claim, the Court agreed with the motion court, finding that RKA could not have justifiably relied on the misrepresentations regarding Relativity’s financial health. The Court observed that as a sophisticated investor, RKA “did not demonstrate that it fulfilled its affirmative obligation to verify the nature and quality of its investment.” Id . Takeaway As readers of this Blog know, in this section of the article, we often try to tie together the principles of law with the facts and holding of the case on which we are writing. Some cases lend themselves to an extensive treatment, while others do not. RKA is different in that it is not necessarily the holding or the facts of the case that piqued our interest (although we found both interesting nonetheless). Instead, it was the number of elements of a fraud claim, and the issues related thereto, that we found notable. For this reason, we expect that RKA will be cited for the many the legal principles it discusses in the fraud context, in addition to the usual reasons a litigant may cite to a case.

On April 25, 2019, the Securities and Exchange Commission (“SEC”) announced (here) that it had charged Indianapolis-based Celadon Group Inc. (“Celadon”), a truckload freight transportation provider, with an accounting fraud that allowed it to avoid disclosing substantial losses and misrepresent its financial condition. The SEC alleged (here) that, between mid-2016 and April 2017, Celadon avoided recognizing at least $20 million in impairment charges and losses – almost two-thirds of its 2016 pre-tax income – by selling and buying used trucks at inflated prices from third parties. According to the complaint, as a result of the alleged scheme, Celadon overstated its pre-tax and net income and earnings per share in its annual report for the period ending June 30, 2016, and in its subsequent public filings for the first two fiscal quarters of 2017. The SEC’s case against Celadon is the latest in a line of actions brought against companies or their executives for committing accounting fraud, by entering into sham agreements with third-parties, suppliers or customers. SeeSEC v. Tangoe, Inc. et al., 3:18-cv-01479 (D. Conn. 2018); SEC v. Axesstel, Inc., et al., 3:18-cv-01486-L-AGS (S.D. Cal. 2018); SEC v. Bhushan Dandawate, No. 18-cv-4927 (N.D. Ill., 2018); SEC v. Quadrant 4 System Corp., et al., No. 17-cv-4883 (N.D. Ill., 2017). The Basics of the Alleged Fraud Celadon owned more than 1500 tractor trucks – the front of a “tractor trailer” containing the engine. These trucks required costly maintenance. As a consequence, the company developed a cost-containment strategy, which involved, in part, Celadon continuously refreshing its fleet – newer trucks cost less to maintain. In mid-2016, the “net book value” for many of its trucks – i.e., the value Celadon had attributed to the trucks in its internal bookkeeping – greatly exceeded the amount the trucks could have actually been sold for in the open market. Therefore, alleged the SEC, if Celadon sold these trucks for less than its net book value, Celadon would have had to recognize the shortfall as a loss on its financial statements. Given the hundreds of trucks involved, Celadon’s resulting losses either through sale or by adjusting net book values to fair values (also known as “impairment charges”) would have been significant. To avoid having to recognize such charges, claimed the SEC, Celadon orchestrated a fraudulent scheme. According to the complaint, Celadon found a truck dealer (“Party A”) to buy hundreds of used trucks at the inflated net book values. In some cases, the company sold the trucks for even more than the already inflated book values in order to claim a profit from the sales. In some cases, the value that Celadon was carrying on its books for a truck was more than double what it could have actually received in the open market. Celadon sold many of its trucks to Party A for prices substantially in excess of their fair value. Consequently, the price Celadon paid Party A for the newer trucks was similarly inflated – in certain instances approximately triple their fair value. In several instances, said the SEC, Party A purchased trucks with the express purpose of selling them to Celadon. Between June and October of 2016, Celadon sold more than 900 trucks to Party A and purchased more than 600 trucks from Party A. The prices in these transactions were at least $20 million more than the trucks were worth. According to the SEC, by failing to recognize impairment charges on its trucks, Celadon materially overstated the value of its assets and, by extension, materially overstated its income before income taxes, net income and earnings per share in various public filings between 2016 and 2017. The Alleged Violations and Relief Sought The SEC charged Celadon with fraud and with reporting, books and records, and internal control violations. Celadon admitted to those violations and agreed to a permanent injunction and to remediate the material weaknesses in its internal control over financial reporting. Celadon agreed to pay $7 million in disgorgement, which the SEC will consider to be satisfied by Celadon’s payment of restitution in a criminal matter brought by the Department of Justice (here). In that matter, Celadon entered into a deferred prosecution agreement, pursuant to which the company agreed to pay $42.2 million in restitution. The settlement with the SEC is subject to court approval. SEC v. Celadon Group, Inc., Case 1:19-cv-01659-RLY-MJD (S.D. Ind. 2019).

Proper service of process is necessary before the court can acquire personal jurisdiction over the defendant to a lawsuit.  If service of process is not properly effectuated the court is “…without personal jurisdiction over the defendant, and all subsequent proceedings are thereby rendered null and void.”    Citimortgage, Inc. v. Twersky , 153 A.D.3d 1230 (2 nd Dep’t 2017) (citations and internal quotation marks omitted).  CPLR 308 sets forth several methods by which service of process may be effectuated on an individual.  CPLR 308(1) permits service to be made by personally delivering the summons to the defendant.  Pursuant to CPLR 308(2) service can be made by delivering the summons to ” a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served and by either mailing the summons to the person to be served at his or her last known residence or by mailing the summons by first class mail to the person to be served at his or her actual place of business….”  Pursuant to CPLR 308(3), an agent designated under CPLR 318 can be served with the summons on behalf of the defendant.  In the event that “service under one and two cannot be made with due diligence,” CPLR 308(4) permits service to be made “by affixing the summons to the door of either the actual place of business, dwelling place or usual place of abode within the state of the person to be served and by either mailing the summons to such person at his or her last known residence or by mailing the summons by first class mail to the person to be served at his or her actual place of business….”  Service on an individual pursuant to CPLR 308(5) is the subject of this Blog and will be discussed further herein. “Service of process must be made in strict compliance with statutory methods for effecting personal service upon a natural person pursuant to CPLR 308.”   Washington Mut. Bank v. Murphy , 127 A.D.3d 1167, 1174 (2 nd Dep’t 2015) (citations and internal quotation marks omitted).  Even if a defendant becomes aware of a pending litigation it “will not affect the absence of jurisdiction over him or her where service of process is not effectuated in compliance with CPLR 308.”  Washington Mut. , 127 A.D.3d at 1174 (citations omitted).  Indeed, where service of process is not properly effectuated, a defendant may move to dismiss a complaint on the ground that “the court has not jurisdiction of the person of the defendant.”  CPLR 3211(a)(8); Washington Mut. , 127 A.D.3d at 1174. Section 308 of the CPLR, which permits the court to direct an alternative method of service, provides: Personal service upon a natural person shall be made by any of the following methods:                                     *          *          * in such manner as the court, upon motion without notice, directs, if service is impracticable under paragraphs one, two and four of this section. Service by publication is often directed by the court as a means of alternative service.  However, more creative methods of alternative service have been ordered.  For example, in Baidoo v. Blood-Dzraku , 48 Misc.3d 309 (Sup. Ct. N.Y. County 2015), plaintiff was unsuccessful in obtaining a business or home address for the defendant to serve a summons and complaint notwithstanding diligent efforts and, therefore, the Court found that plaintiff “met her burden of demonstrating that it would be impracticable to attempt to serve defendant .”  See Baidoo , 48 Misc.3d at 312.  The Baidoo Court having determined that plaintiff established a basis for relief under CPLR 308(5), analyzed whether plaintiff demonstrated that the proposed alternative method of service “is one that the court can endorse as being reasonably calculated to apprise defendant that he is being sued for divorce.”  See Baidoo , 48 Misc.3d at 312. In Baidoo , the court permitted service of divorce papers through the defendant’s Facebook account after submitting proof verifying that the Facebook account through which service was to be made indeed belonged to the defendant.  See Baidoo , 48 Misc.3d at 314 - 315.   Because plaintiff had neither other physical addresses nor e-mail addresses for defendant, and because service by publication was thought to provide no actual notice at all, Facebook service only was deemed to be adequate.  See Baidoo , 48 Misc.3d at 315 - 316.   Jean v. Csencsits , decided by the Supreme Court of the State of New York, Appellate Division, Second Department on April 24, 2019, addressed issues related to alternative service of process.   The plaintiff in Jean was the buyer under a contract for the sale of real property who sued the seller for specific performance after he failed to show up at a “time of the essence” closing.  Plaintiff unsuccessfully attempted to personally serve defendant at the San Diego, California, address provided on the contract of sale. The court then granted plaintiff’s ex parte application for an alternative method of service pursuant to CPLR 308(5), although the case does not indicate what method of service was directed.  Service was effectuated pursuant to the court’s order, but defendant failed to answer or appear and, accordingly, the court granted plaintiff’s motion to enter a default judgment and scheduled an inquest to calculate damages. The Jean seller’s motion to vacate the default judgment was denied by supreme court and an appeal ensued.  The Second Department affirmed and, in so doing, held that defendant, seller, was properly served pursuant to CPLR 308(5) due to the impracticality of service pursuant to CPLR 308(1), (2) or (4).  The Court noted that the “impracticality standard does not require the applicant to satisfy the more stringent standard of due diligence under CPLR 308(4) nor make an actual showing that service has been attempted pursuant to CPLR 308(1), (2) and (4).” Citations omitted.  “Once the practicality standard is satisfied, due process requires that the method of service be reasonably calculated, under all the circumstances, to apprise the defendant of the action.”  (Citations and internal quotation marks omitted.)  In Jean , the Court determined that the service on the defendant was impractical and that the alternative method of service directed by supreme court was “reasonably calculated to apprise the seller of the of the action under the circumstances of the case.” The Court also rejected defendants argument to vacate the default judgment pursuant to CPLR 317 , which provides, inter alia , that: A person served with a summons other than by personal delivery to him or to his agent for service designated under rule 318 , within or without the state, who does not appear may be allowed to defend the action within one year after he obtains knowledge of entry of the judgment, but in no event more than five years after such entry, upon a finding of the court that he did not personally receive notice of the summons in time to defend and has a meritorious defense…. The Court found that defendant failed to demonstrate that “he did not receive actual notice of the summons and complaint in time to defend the action.”  Citations omitted.