This Blog has written about cases in which the plaintiff claims to have been defrauded but fails to allege with particularity the elements of the claim. As readers of this Blog know, the element that most often spells failure for the plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. Today’s article looks at another case in which the plaintiff alleged reliance on alleged misrepresentations but failed to assert facts showing that such reliance was justified – that is, the plaintiff used the means available to discover the true nature of the transactions being challenged.   In Rubin v. Sabharwal , 2019 N.Y. Slip Op. 02975 (1st Dept. Apr. 23, 2019) ( here ), the Appellate Division, First Department, affirmed the dismissal of a fraudulent inducement claim on the grounds that the plaintiff,  Shelley Rubin (“Rubin”), failed to allege sufficient facts to establish reasonable reliance,   i.e. , Rubin failed to allege facts showing that she diligently inquired into the true value of the property at issue. Justifiable Reliance is a “Fundamental Precept” of a Fraud Claim In Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018), the New York Court of Appeals emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. As such, the justifiable reliance requirement is considered to be a necessary tool to weed out fraud claims by plaintiffs who “are lax in protecting themselves”. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds). In assessing whether the plaintiff’s reliance was justified, the courts look to see whether the plaintiff’s reliance on the alleged misrepresentation was reasonable. Epifani v. Johnson , 65 A.D.3d 224, 230 (2d Dept. 2009). As stated by the Court of Appeals more than one hundred years ago, this means the plaintiff must exercise “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Schumaker v. Mather , 133 N.Y. 590, 596 (1892); see also ACA Fin. Guar. , 25 N.Y.3d at 1044; DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). Thus, “where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt. , 15 N.Y.3d at 155 (2010) (internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957).  Rubin v. Sabharwal Background Rubin arose from a series of 80 transactions occurring over a five-year period during which Rubin, the co-founder and co-chair of a museum specializing in Himalayan and Indian art, purchased hundreds of pieces of jewelry for approximately $18.1 million from Defendant, Nisha Sabharwal (“Sabharwal”). Rubin claimed that, among other things, she was fraudulently induced to purchase the jewelry. Defendants moved to dismiss the complaint, arguing, inter alia , that Rubin failed to allege the elements of a fraud claim with any specificity. The motion court agreed. ( Here .)   [Ed Note: 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). Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016(b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987).] The motion court noted that Rubin did not provide any facts to reasonably support the inference that there was fraudulent conduct in all 80 of the transactions. Even as to the 10 transactions highlighted in the complaint, the motion court observed that the complaint contained only conclusory allegations of an alleged fraud.   The motion court further noted that the alleged misrepresentations ( e.g. , “that pieces of jewelry were from the ‘same set’ as ones in a magazine, that the jewelry has ‘significance,’ that the jewelry came from a ‘friend or family's’ collection, and that the pieces were ‘museum quality’ or ‘generational’”) were of a general nature ( i.e. , opinion or puffery) and, therefore, insufficiently specific to establish fraudulent inducement. Rubin appealed. The First Department’s Decision The First Department unanimously affirmed, holding that Rubin’s “claims for fraudulent inducement, fraud, and conspiracy to commit fraud were properly dismissed.” Slip Op. at *1. In particular, the Court held that “Plaintiff failed to assert sufficient facts to establish reasonable reliance and that she exercised due diligence to determine the value of the” jewelry that she purchased from Sabharwal.’ Id .  The Court explained that Rubin, “ s the co-founder and co-chair of a museum specializing, in part, in Indian art, … had the means to conduct an appraisal of the jewelry prior to purchasing , and yet … took no steps to verify the alleged  misrepresentations.” Id . “Moreover,” observed the Court, “plaintiff had the wherewithal to conduct an appraisal several years after the first transaction when she wanted to sell some of the items and verify the authenticity of the jewelry” but failed to do so. Id . In fact, “Plaintiff could have discovered the truth had she conducted an inquiry into the value of the property during the many transactions at issue in this case.” Id . Rubin’s failure to use the means available to discover the true nature of the transactions by the exercise of ordinary intelligence, negated any allegation of justifiable reliance on the alleged misrepresentations. Id . Finally, the Court held that the alleged misrepresentations – “that the items were of ‘museum quality,’ of ‘highest quality,’ and ‘generational’ – were nonactionable opinion and puffery. Id . (citations omitted). Takeaway As the Court explained in Rubin , a plaintiff cannot shut his/her eyes to the possibility that they may be the victim of a fraud. The plaintiff must take some action to show that the fraud was hidden or could not be discovered in the absence of extraordinary efforts. The Rubin Court determined that, in that case, extraordinary efforts were not necessary. Instead, Plaintiff could have sent the jewelry for appraisal before purchasing the items or at any time thereafter. After all, there were approximately 80 transactions over a five-year period. While the fraud seems egregious, Rubin stands for the proposition that to do nothing will not suffice to demonstrate justifiable reliance.

In Sotheby’s, Inc. v. Chowaiki , 2019 N.Y. Slip Op. 30970(U) (Sup. Ct. N.Y. County Apr. 4, 2019) ( here ), Justice Andrea Masley of the New York Supreme Court, Commercial Division, issued an opinion addressing the question “whether a guarantor remains bound by a guarantee whose underlying contract has since been modified without notice to the guarantor.” As discussed below, the Court held that a guarantor is bound by his/her guaranty notwithstanding modifications to the underlying agreement when he/she agrees to be so bound even when the agreement is amended or modified in the future. Applicable Legal Principles “A guaranty is a promise to fulfill the obligations of another party.” Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank International,” N.Y. Branch v. Navarro , 25 N.Y.3d 485, 492 (2015) (citation omitted). See also 63 N.Y. Jur. 2d, Guaranty and Suretyship §§ 2, 89.  Like other contracts, a guaranty is subject to ordinary principles of contract construction. Id .  Under those principles, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” Id . at 493, quoting Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). The obligations of a guarantor or surety are construed strictissimi juris (that is, the obligations undertaken by the guarantor are to be strictly applied). People v. Stuyvesant Ins. Co. , 98 Misc. 2d 210, 214 (Sup. Ct. Bronx County 1979). “Thus, after the intention of the parties is ascertained by the ordinary rules of construction, the principle of strictissimi juris applies, and the court must protect the surety against a liability which is not strictly within the terms of the contract.” Id . See also General Phoenix Corp. v. Cabot , 300 N.Y. 87, 92 (1949); Argyle v. Plunkett , 226 N.Y. 306, 310 (1919). Moreover, “ guarantor is bound by an anticipatory agreement in his undertaking that he will not be relieved of liability by a modification of the principal contract.” Banque Worms v. Andre Cafe, Ltd. , 183 A.D.2d 494 (1st Dept. 1992). Thus, a guarantor is not relieved of his obligations where the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of those changes. Rose Food v. Saleh , 292 A.D.2d 377, 378 (2d Dept. 2002). Sotheby’s, Inc. v. Chowaiki Background Defendant, Luba Mosionzhnik (Mosionzhnik”), was an officer and 25% shareholder of the Chowaiki Mosionzhnik Gallery Ltd. (the “Gallery”). On October 20, 2008, she was terminated from the Gallery’s employment. Third-party defendant, David E.R. Dangoor (“Dangoor”), and Defendant, Ezra Chowaiki (“Chowaiki”), purchased her shares giving Dangoor a 62.5% share in the Gallery. Prior to the purchase, Dangoor owned 50% and Chowaiki owned 25% of the Gallery. In December 2008, Dangoor and Chowaiki incorporated Chowaiki & Co. Fine Art Ltd. (“New Gallery”). Plaintiff, Sotheby’s Inc. (“Sotheby’s”), the international auction house that engages in art auction, private sales, and art-related financing, and the Gallery entered into a Purchase Agreement, dated March 26, 2008, whereby the parties agreed that the Gallery would purchase a Henri Matisse painting, titled “Titine Trovato in Dress and Hat” (the “Painting”), on Sotheby’s behalf for $12 million. Sotheby’s agreed to offer the Painting for sale from the date of purchase until September 10, 2008 (“Offering Period”) for $20 million, with a minimum net price of $15 million. If the Painting remained unsold at the end of the Offering Period, Sotheby’s would try to sell the Painting at Sotheby’s Impressionist and Modern Art auction in November 2008 for a mutually agreed upon reserve price. Sotheby’s and the Gallery agreed to split either the Net Profit or the Net Loss equally. If there was a Net Loss, the Gallery agreed to reimburse Sotheby’s for half of the Net Loss within 5 business days of receipt of an accounting from Sotheby’s. If the Painting was not sold, then Sotheby’s and the Gallery would mutually agree to its disposition. In further consideration for Sotheby’s entering into the Purchase Agreement, Chowaiki and Mosionzhnik each signed a guaranty (the “Guaranty”). Among other things, Mosionzhnik and Chowaiki guaranteed the performance obligations under the Purchase Agreement “regardless of any amendment, waiver or forbearance by Sotheby’s with respect to th Agreement.” The Painting did not sell during the Offering Period, leading the parties to amend the Purchase Agreement. On October 28, 2008, eight days after Mosionzhnik’s shares were transferred to Dangoor and Chowaiki, Sotheby’s and the Gallery amended the Purchase Agreement (“First Amendment”) without releasing Mosionzhnik from her obligations under the Guaranty. The First Amendment lowered the reserve price for the Painting to $9.5 million. If a Net Loss occurred, the Gallery agreed to pay Sotheby’s in two equal installments on June 30, 2009 and December 15, 2009. Sotheby’s further agreed to reduce the Interest Rate if the Gallery chose to consign additional property to be offered for sale at the auctions in May and November 2009. The Purchase Agreement was to remain in full force and effect. Only Chowaiki executed the First Amendment. The Painting was sold at a loss on May 10, 2012 for $4.75 million. On September 7, 2012, Sotheby’s entered into an Amendment and Forbearance Agreement (“Second Amendment”) with the New Gallery. The Second Amendment also referenced the Purchase Agreement and the First Amendment. In total, under the agreements, defendants allegedly owed Sotheby’s $3.625 million, plus 50% of the Interest due (the “Chowaiki Net Loss”). Having to split the Net Loss, the New Gallery agreed to pay Sotheby’s $100,000 and, notwithstanding anything set forth in the Purchase Agreement or First Amendment, agreed to also pay Sotheby’s in installments of $300,000 beginning on June 30, 2012 and each successive December 31 and June 30 thereafter until Sotheby’s received $3.625 million and 50% of the interest accruing on the $12 million amount (as reduced by the payments received). Upon any default, the outstanding Chowaiki Net Loss became immediately due and payable. Despite the “previous guarantees remaining in full force and effect, Chowaiki signed an additional guaranty (“Second Guaranty”). Defendants made $2.1 million in payments to Sotheby’s through December 31, 2016. However, since that date, they stopped doing so. As of the filing of the compliant, there was a balance of $2,969,180.00, exclusive of interest, due and owing. Sotheby’s brought suit in November 2017. Mosionzhnik initiated a third-party action against Dangoor in March 2018 and amended her third-party complaint in May 2018. Dangoor moved to dismiss the third-party complaint. Among other things, Dangoor maintained that under the Guaranty, Mosionzhnik was responsible for the outstanding balance due, regardless of whether there were amendments to the Purchase Agreement. The Court agreed. The Court’s Decision The Court held that Mosionzhnik, as a guarantor, remained bound by her guarantee because the underlying Purchase Agreement contained language in which she agreed to be bound even if the agreement were amended or modified in the future. Slip Op. at *5. In fact, “ sing strictissimi juris , the black and white language of the Guaranty leaves Mosionzhnik unconditionally and irrevocably personally liable for the obligations of the Gallery regardless of any future amendments.” Id . The Court also addressed the issue of whether Mosionzhnik’s termination from, and the sale of her shares in, the Gallery extinguished her responsibility for payment under the Guaranty. The Court held that those events did not relieve Mosionzhnik of her obligations under the Guaranty. The Court explained that the determination of the issue depended on “whether the changes in the entity ‘have the effect of creating a principal with a new identity and one of the debts of which the guarantor never intended to guarantee when he executed the agreement.’” Slip Op. at *6, quoting Fehr Bros., Inc. v. Scheinman , 121A.D.2d 13,18 (1st Dept. 1986) (citations omitted). In making that determination, the Court said that it would consider “whether the changes in the entity, the debts of which, are guaranteed significantly alter the business dealings between the debtor and the creditor and the nature of the guarantor’s undertaking, in particular the degree of risk the guarantor is obligated to assume.” Id ., quoting Fehr Bros. , 121 A.D.2d at 19. “A change in the name of a corporation, without changing the legal status or business nature,” noted the Court, “does not create a new entity.” Id . quoting Fehr Bros. , 121 A.D.2d at 20. Against this legal analysis, the Court concluded that Mosionzhnik remained liable under the Guaranty: Against this legal analysis, the Court concluded that Mosionzhnik remained liable under the Guaranty: The Gallery changed its name to the New Gallery but is treated as the same entity by Sotheby’s. The Second Amendment made by Sotheby's refers to the previous agreements and acknowledges the name change. The shares of the New Gallery are held by two of three of the same shareholders, and it conducts the same business. Further, the New Gallery did not take on new debt in its dealings with Sotheby’s. The New Gallery is liable for the same debts that Mosionszhnik guaranteed, the Second Amendment simply states the sale price, the Net Loss owed, and the payment schedule. Mosionzhnik knew that she was liable for the debts of the Gallery in regards to the Painting. Id . at **6-7. Accordingly, the Court granted Dangoor’s motion to dismiss the third-party complaint. Takeaway Under New York law, a surety is not discharged from its obligation unless its undertaking has been altered without its consent. However, as Sotheby’s shows, a surety will not be discharged from its obligations if the surety agrees in advance to remain liable in the event of amendments or modifications to the underlying contract.

The Second Department has held that “ o state a cause of action to recover damages for legal malpractice, a plaintiff must allege that the attorney failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession, and that the breach of this duty proximately caused the plaintiff to sustain actual and ascertainable damages.”  Board of Managers of Bay Club v. Borah, Goldstein, Schwartz, Altschuller & Nahins, P.C. , 97 A.D.3d 612, 613 (2 nd Dep’t 2012) (citations and internal quotation marks omitted).  Many times, plaintiffs that sue their attorney because they are aggrieved by the conduct of the attorney assert numerous causes of action in their complaint. Sometimes duplicative causes of action are dismissed and sometimes they survive.  For example, in Cherry Hill Market Corp. v. Cozen O’Connor P.C. , 118 A.D.3d 514 (1 st Dep’t 2014), the First Department agreed with supreme court that two causes of action sounding in common-law negligence and breach of fiduciary duty were properly treated as legal malpractice causes of action, and were appropriately dismissed due to “insufficient allegations as to proximate cause.”  Cherry Hill , 118 A.D.3d at 514.  Nonetheless, the Cherry Hill Court reversed the dismissal, as duplicative, of an additional breach of fiduciary duty claim based on the averment that the law firm “either collected and/or billed plaintiffs for excessive and/or unearned fees.”  Cherry Hill , 118 A.D.3d at 514.  In so doing, the Cherry Hill Court, found that the fiduciary duty claim was not based on the same facts as the malpractice claim and that a fiduciary duty breach could be based on the charging of excessive legal fees. The plaintiff in Postiglione v. Castro , 119 A.D.3d 920 (2 nd Dep’t 2014), brought an action sounding in negligence, legal malpractice, fraud, breach of contract and conversion against his former attorney.  Among other things, supreme court dismissed the contract and fraud claims as duplicative of the dismissed, time-barred, legal malpractice claim.  In reversing supreme court, the Second Department recognized that “where a cause of action alleging breach of contract or fraud arises from the same facts as a legal malpractice cause of action and does not allege distinct damages, the breach of contract or fraud cause of action must be dismissed as duplicative of the legal malpractice cause of action.”  Postiglione , 119 A.D.3d at 922 (citations omitted).  However, the Postiglione Court held that the breach of contract cause of action was not duplicative of the legal malpractice cause of action, and should not have been dismissed, because the claim was not based on the quality of the legal representation, and, instead, resulted from over billing and allegations of pilfered escrow money in violation of the parties’ retainer agreement.  Similar analyses were made by the First Department in Ullmann-Schneider v. Lacher & Lovell-Taylor, P.C. , 121 A.D.3d 415 (2014).  There, the Court affirmed the motion court’s finding that plaintiff’s breach of contract claim against its former law firm, in which it was alleged that defendant over billed and performed unnecessary services, was not duplicative of plaintiff’s legal malpractice claim.  The Court reasoned that the contract claim “does not speak to the quality of defendants’ work.”  Ullmann , 121 A.D.3d at 416.  See also , Johnson v. Proskauer Rose LLP , 129 A.D.3d 59 (1 st Dep’t 2015) (holding that an excessive fee claim and an unjust enrichment claim were not duplicative of a malpractice claim because “the former is stated regardless of the quality of the work performed, so long as a plaintiff can reasonably allege that the fee bore no rational relationship to the product delivered” and the latter, “which is predicated on the excessiveness of the … fee also properly survived the motion to dismiss”). The Appellate Division, First Department addressed these issues most recently in  Cascardo v. Dratel (April 18, 2019).  There, plaintiff asserted claims against her former law firm sounding in legal malpractice, fraud, excessive legal fees and breach of fiduciary duty.   Supreme court denied defendant’s motion to dismiss the fraud, excessive legal fees and breach of fiduciary duty claims.  On appeal, the First Department sustained the excessive fee cause of action and dismissed the fraud and fiduciary duty claims as being “subsumed in the excessive attorney fees claim….”  As to the excessive legal fee claim, the Court stated that: The claim for excessive legal fees (and the related discussion in the complaint of defendants' alleged breach of fiduciary duty based on the alleged overcharges) was correctly sustained. Plaintiff alleged that " fee bore no rational relationship to the product delivered," and detailed that, in exchange for the $25,000 fee, defendants produced only a draft complaint that was essentially identical to the one that she had presented to them. This claim is not duplicative of the legal malpractice claim, as plaintiff's complaints regarding the over billing were not a direct challenge to the quality of the work but instead a claim that the fee paid bore no rational relationship to the work performed. To the extent that the motion court read the pro se complaint as alleging a separate cause of action for breach of fiduciary duty, these allegations are subsumed in the cause of action for excessive attorney fees.  (Citations omitted.) TAKEAWAY The distinction between fraud and contract claims in which excessive fees are alleged and legal malpractice claims is significant for a number of reasons.  Legal malpractice actions are governed by a three-year statute of limitations. Contract, fraud claims and breach of fiduciary duty (in this context) claims are governed by a longer six-year statute of limitations.  Under circumstances where a malpractice action is time-barred, a plaintiff may still be able to assert an excessive fee claim under a contract, fraud and/or breach of fiduciary duty theory.

As every lawyer knows, the practice of law requires compliance with various deadlines. Some are court ordered, while others are statutory. To be sure, there are many practitioners who do not sweat the time constraints imposed by a deadline. Indeed, “ oo many pages of the Reports, and hours of the courts, are taken up with deadlines that are simply ignored.” Miceli v. State Farm Mut. Auto Ins. Co. , 3 N.Y.3d 725, 727 (2014). However, most lawyers likely wake up in the middle of the night worrying about whether they can meet a court-ordered or statutory deadline. In New York’s Civil Practice Law and Rules (“CPLR”), there are many deadlines that require compliance. In addition to the CPLR, there are deadlines in the rules of the judge before whom a case is pending that require compliance by litigants. In Appleyard v. Tigges , 2019 N.Y. Slip Op. 02820 (1st Dept. Apr. 16, 2019) (here), the Appellate Division, First Department, addressed the deadlines set by the CPLR and the judge before whom the case was pending for filing a motion for summary judgment, concluding that the motion court’s denial of such a motion on compliance grounds was proper. Appleyard was originally assigned to Justice Stanley Green of the Supreme Court, Bronx County, on July 1, 2015. On October 24, 2016, Justice Green signed a so-ordered stipulation setting February 16, 2017 as the date for a compliance conference before Justice Douglas E. McKeon. Plaintiff filed her note of issue on December 16, 2016. Justice Green’s individual rules required that motions for summary judgment be filed within 120 days of the filing of the note of issue, which would have made the deadline for filing such a motion April 17, 2017. On December 31, 2016, Justice Green retired from the bench. The action was administratively reassigned to Justice Wilma Guzman on January 7, 2017. Justice Guzman’s rules require that “a motion for summary judgment shall be made no later than sixty (60) days after the filing of the Note of Issue, except with leave of court on good cause shown.” Thus, under Justice Guzman’s individual rules, in the absence of a showing of good cause, the deadline for filing a motion for summary judgment was 60 days after the filing of the note of issue or February 14, 2017. Defendants’ counsel averred that on February 10, 2017, he first learned of the reassignment of the case to Justice Guzman when a scheduling clerk in his office consulted the court system’s e-Courts electronic calendar to confirm the previously scheduled February 16, 2017 conference. Counsel acknowledged that shortly thereafter, he reviewed Justice Guzman’s individual rules and noted the requirement that summary judgment motions be made within 60 days of the filing of the note of issue. On March 29, 2017, approximately 43 days after the February 14 deadline, defendants filed a motion for summary judgment and, “if necessary,” to extend the deadline to file same. Citing Brill v. City of New York , 2 N.Y.3d 648, 652 (2004), the motion court denied both motions as untimely, reasoning that defendants were aware of the reassignment of the matter to the motion court prior to the February 14 deadline, yet failed to move for an extension of time to file the motion for summary judgment prior to that date. In Brill , the Court of Appeals addressed the question of what constitutes “good cause” in determining whether to consider untimely motions for summary judgment. The Court held that “good cause” under CPLR 3212 (a) required “a satisfactory explanation for the untimeliness” rather than a statement that the motion is meritorious and nonprejudicial.  2 N.Y.3d at 651. The Court explained that “ o excuse at all, or a perfunctory excuse, cannot be ‘good cause.’” Id . The First Department affirmed, holding that the motions were untimely. In so holding, the Court emphasized the importance of complying with court-ordered and statutory deadlines, noting that “‘statutory time frames — like court-ordered time frames . . . are not options, they are requirements, to be taken seriously by the parties.” Id. , quoting Miceli , 3 N.Y.3d at 726 (internal citation omitted). With the emphasis on compliance, the Court concluded that “defendants’ motions for summary judgment and alternatively an extension of time were properly denied.” Id . at *2.  Aside from the deadline itself, the Court noted that defendants conceded their awareness of the reassignment of the action to Justice Guzman and the 60-day filing period provision in her rules in advance of the filing deadline. Id . Nevertheless, noted the Court, “they waited 47 days after learning of Justice Guzman’s timeliness rule and 43 days after the expiration of her statutorily authorized 60-day filing period to seek leave of court for additional time to file their motions….” Id . Such actions, the Court held, rendered “their motions untimely.” Id . Moreover, the Court held that defendants did not establish “good cause for their belated filing.” Id . The Court rejected defendants’ argument that good cause was demonstrated by the filing of their motions within 120 days after the note of issue was filed, noting that defendants failed “to comply with the court’s own deadline.” Id. , citing Giudice v. Green 292 Madison, LLC , 50 A.D.3d 506, 506 (1st Dept. 2008) (good cause not found where the parties failed to file their summary judgment motions by the court-imposed deadline, even if they were filed within the statutory 120-day period). Accordingly, the Court held that “Defendants’ failure to inform themselves of the identity of the new judge and her part rules not constitute good cause for failing to adhere to them.” Id . Takeaway Appleyard serves as good reminder that compliance with deadlines, whether court-ordered or statutory, is mandatory, not optional. As Appleyard demonstrates, practitioners who fail to comply with deadlines do so at their own peril.   Appleyard is also a reminder that to demonstrate good cause, one must provide a satisfactory explanation for the delay in brining the motion. As the plaintiff in Appleyard learned, failing to meet the deadline with knowledge that one is violating that deadline is not sufficient.

In Deutsche Bank National Trust Co. v. Flagstar Capital Markets , the New York Court of Appeals held that an agreement to “delay the commencement” of the statute of limitations “was inconsistent with New York law and public policy.” ( Here .) Thus, although parties may agree after a cause of action has accrued to extend the statute of limitations, they may not do so before their agreement. John J. Kassner & Co. v City of New York , 46 N.Y.2d 544, 550, 551 (1979). Since the parties to a contract cannot extend the statute of limitations, they can, however, shorten it. Kassner , 46 N.Y.2d at 551. “Such an agreement does not conflict with public policy but, in fact, ‘more effectively secures the end sought to be attained by the statute of limitations.’” Id. , quoting Ripley v. Aetna Ins. Co. , 30 N.Y. 136, 163 (1864). “Thus, an agreement which modifies the Statute of Limitations by specifying a shorter, but reasonable, period within which to commence an action is enforceable provided it is in writing.” Id . (citations omitted). Often, insurance contracts contain provisions that shorten the statute of limitations for a breach of the policy. Under New York law, the statute of limitations applicable to a breach of contract cause of action is ordinarily six years. CPLR § 213(2). The statute of limitations on a breach of insurance contract cause of action generally starts to run on the date that coverage is disclaimed by the insurer ( see Ely—Cruikshank Co. v. Bank of Montreal , 81 N.Y.2d 399, 402 (1993)); however, the parties to an insurance contract may agree that accrual of the claim runs from the date of the underlying loss as opposed to the date of the disclaimer of coverage. Mercedes-Benz Fin. Servs. USA, LLC v. Allstate Ins. Co. , 162 AD3d 1183, 1184-85 (2018). If the parties agree to change the accrual date to the date of loss, they must express their intention through distinct language. Generic “date of loss” language, as opposed to “inception of loss” or other similarly specific terms of art, is insufficient to evince such an intent. Id . On April 11, 2019, the Supreme Court, Appellate Division, Third Department, addressed these issues in affirming the dismissal of a contract claim arising under an insurance policy. Anderson v. Allstate Ins. Co. , 2019 N.Y. Slip Op. 02768 (3d Dept. Apr. 11, 2019) ( here ). As discussed below, the Court found the language in the subject insurance policy sufficient to shorten the statute of limitations thereby making the plaintiff’s contract claim untimely. Anderson v. Allstate Ins. Co. Background Plaintiff, Nicole Anderson (“Anderson”), owns a multiunit residential building in the City of Troy, Rensselaer County that she used for rental income. As owner and landlord of the premises, Anderson obtained an insurance policy from defendant James Mylod, through defendant Jim Mylod Insurance Depot Agency (collectively, “Mylod”), as an agent of defendant, Allstate Insurance Company (“Allstate”). In 2013, Mylod transferred its book of business to defendant Michael Slovak (“Slovak”). Anderson renewed her insurance policy through Slovak. In the fall of 2014, while the building was undergoing renovations, it was burglarized, resulting in the furnace, hot water heater, plumbing fixtures and copper piping being stolen, and numerous other physical damages being sustained to the interior of the premises. Thereafter, Anderson filed a claim with Allstate seeking coverage for the damages sustained to the building. On September 18, 2014, Allstate denied the claim citing Anderson’s lack of coverage for theft and water damage. Anderson commenced the action against defendants on October 19, 2016, alleging, as relevant to the appeal, that Allstate breached the parties’ insurance contract. In lieu of answering, Allstate moved to dismiss the complaint, claiming that the action was not timely commenced within the 24-month time limitation provided for in the parties’ insurance policy. Mylod and Slovak each separately moved to dismiss the complaint for failure to state a cause of action. The motion court denied Mylod’s and Slovak’s motions, but granted Allstate’s motion, finding that Anderson’s breach of contract cause of action against Allstate had not been timely commenced. Anderson appealed. The Third Department’s Decision The Third Department affirmed. The Court found that the relevant language in the insurance policy contained specific and distinct language that shortened the statute of limitations to 24 months “after inception of loss.” Slip Op. at *1. Thus, “although the date of the underlying burglary s not specifically set forth in the record,” the Court held that “the date of the underlying loss” “clearly occurred prior” to the date Allstate disclaimed coverage on September 18, 2014. Id . Accordingly, since Anderson did not file her summons with notice until October 19, 2016, her lawsuit was untimely; it “was unquestionably commenced beyond the applicable 24-month limitations period provided for in the contract.” Id . The Court also rejected Anderson’s contention that Allstate should have been estopped from asserting that the statute of limitations had run. According to Anderson, Allstate did not provide her with a copy of the policy, despite numerous requests. As a result, she was “unaware of the applicable limitations period provided for therein.” Id . In rejecting the argument, the Court observed that “Allstate did, in fact, provide her with a sample copy of the insurance policy that was in effect on the purported date of loss.” Id . That sample included the relevant statute of limitations language. “Moreover,” said the Court, “even assuming that Allstate failed to timely provide a copy of the subject insurance policy, such conduct, standing alone, fail to establish that Allstate willfully withheld disclosure of same, nor it demonstrate any affirmative deception, fraud or misrepresentations by Allstate intended to prevent plaintiff from filing suit or otherwise ‘justifiably lull[] into inactivity.’” Id . (citations omitted).   here.=">here."> Takeaway Anderson serves a good reminder that before bringing a claim arising under a contract, practitioners should check the fine print to be sure that there are no statute of limitations provisions that shorten the time within which to bring an action.

There are numerous ways in which a defendant can respond to a summons and complaint.  Among other options, a defendant can interpose an answer or move to dismiss some or all of the complaint.  The time to respond to the complaint depends on, among other things, the manner of service of process ( see, e.g. , CPLR 308 ; CPLR 320 ).  CPLR 3211(f) , which grants an automatic extension of time to interpose an answer to a complaint in the event that a motion to dismiss is made, provides that the “ ervice of a notice of motion under subdivision (a) or (b) before service of a pleading responsive to the cause of action or defense sought to be dismissed extends the time to serve the pleading until ten days after service of notice of entry of the order.” In the event that notice of entry of an order deciding a motion to dismiss pursuant to CPLR 3211(a) or (b) is not served, a defendant’s time to answer the complaint does not begin to run.  The Supreme Court, Appellate Division, Second Department recently addressed this issue in JBBNY, LLC v. Dedvukaj , decided on April 10, 2019. JBBNY Defendants Victor and Violeta Dedvukaj (collectively, “Dedvukaj”) were served with process in a mortgage foreclosure.  In response, Dedvukaj moved to dismiss the complaint pursuant to CPLR 3211(a), which motion was denied by order dated June 24, 2015 (the “June Order”).  On August 11, 2015, plaintiff served notice of entry of the June Order, by mail, on the attorney for another defendant, but not Dedvukaj.  As this was a NYSCEF case, promptly upon the mail service, plaintiff electronically filed the notice of entry of the June Order, with proof of mailing.  Accordingly, a NYSCEF “confirmation notice” was sent to Dedvukaj’s counsel.  There is no dispute that notice of entry of the June Order was not served on Dedvukaj or their counsel.  In October of 2015, Dedvukaj served an answer with counterclaims, which was rejected as “untimely” by plaintiff.  Thereafter, plaintiff moved for, inter alia , a default judgment against Dedvukaj and for an order of reference.  Dedvukaj cross-moved for a default judgment against plaintiff for failure to answer their counterclaims.  Supreme Court granted plaintiff’s motion, denied Dedvukaj’s motion and entered a judgment of foreclosure and sale.  Dedvukaj appealed. The Second Department reversed, holding that “ ontrary to the determination of the Supreme Court, since the plaintiff never served the Dedvukaj defendants with notice of entry of the denying their motion to dismiss the complaint, their answer was timely served, as their time to answer never started to run.”  (Citations omitted.)  In so holding, the Second Department analyzed 22 NYCRR 202.5-b , the relevant e-filing rules, and stated: Pursuant to 22 NYCRR 202.5-b, the court rule governing electronic filing for the Supreme Court, a party may serve an interlocutory document upon another party by filing the document electronically: "Upon receipt of interlocutory document, the NYSCEF site shall automatically transmit electronic notification to all e-mail service addresses in such action . . . . Except as provided otherwise in subdivision (h)(2) of this section, the electronic transmission of the notification shall constitute service of the document on the e-mail service addresses identified therein" (22 NYCRR 202.5-b <2> ). Subdivision (h)(2), which appears in a subsection entitled "Entry of Orders and Judgments and Notice of Entry," provides, in relevant part: " party may serve electronically by filing them with the NYSCEF site and thus causing transmission by the site of notification of receipt of the documents, which shall constitute service . . . by the filer. In the alternative, a party may serve a copy of the order or judgment and written notice of its entry in hard copy by any method set forth in CPLR 2103(b)(1) to (6). If service is made in hard copy by any such method and a copy of the order or judgment and notice of its entry and proof of such hard copy service are thereafter filed with the NYSCEF site, transmission by NYSCEF of notification of receipt of those documents shall not constitute additional service of the notice of entry on the parties to whom the notification is sent" (22 NYCRR 202.5-b <2> ). According to the Second Department, the “plain language” of E-filing rules compelled the conclusion that Dedvukaj could not be deemed to have been served with notice of entry of the June Order by virtue of their receiving the E-file confirmation receipt of plaintiff’s service of the June Order on the other defendant.  Therefore, Dedvukaj did not default in answering the complaint and “Supreme Court should have granted that branch of their first cross-motion which was to compel the plaintiff to accept their answer.”  (Citation omitted.)

On April 10, 2019, the Appellate Division, Second Department, reversed the denial of motions to dismiss fraud claims alleged in connection with the purchase and sale of a $6.2 million home in Harrison, New York. Comora v. Franklin , 2019 N.Y. Slip Op. 02671 (2d Dept. Apr. 10, 2019) ( here ). The decision addresses whether contractual disclaimers can preclude a fraudulent concealment claim. As readers of this Blog know, we recently addressed this issue here and here . Under New York law, to recover damages for fraud, a “plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also Hecker v. Paschke , 133 A.D.3d 713, 716 (2d Dept. 2015).  When the fraud involves an omission of material fact, it is actionable “only if the non-disclosing party has a duty to disclose.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V. , 68 F.3d 1478, 1483 (2d Cir. 1995). A duty to disclose arises if “one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party.” Id . (internal quotation marks omitted).  The existence of a special relationship between the plaintiff and defendant, such as a fiduciary relationship, also gives rise to a duty to disclose.  Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011).  In addition, the “special facts” doctrine can trigger a duty to disclose.  Under this doctrine, a duty to disclose arises “‘where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair’ …” See P.T. Bank Central Asia v. ABN AMRO Bank N.V. , 301 A.D.2d 373 (1st Dept. 2003). In the context of real estate transactions, “New York adheres to the doctrine of caveat emptor and imposes no duty on the seller or the seller’s agent to disclose any information concerning the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent which constitutes active concealment.” Hecker , 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski v. Rapalje , 14 A.D.3d 484, 485 (2d Dept. 2005). “If however, some conduct ( i.e. , more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.” Hecker , 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski , 14 A.D.3d at 485. “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.” Jablonski , 14 A.D.3d at 485. Apart from the foregoing, a fraud claim will be dismissed where: (1) a party’s disclaimer of reliance is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). In the context of a real estate transaction, a specific disclaimer of reliance on representations as to the condition of real property will generally bar related fraud-based claims. Danann Realty , supra . “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. Comora v. Franklin Background Comora arose from the plaintiffs’ purchase of a $6.2 million home in Harrison, New York from defendant Martin Franklin (“Franklin”), on November 27, 2013. Franklin’s sister, defendant Caroline Freidfertig (“Freidfertig” and, together with Franklin, the “Individual Defendnats”), was his real estate agent in the transaction and the alleged caretaker of the home prior to the sale; no one had been living at the home immediately prior to the sale. Freidfertig is employed by defendants JBF 2, LLC, doing business as Julia B. Fee Sotheby’s International Realty, and for JBF Holdings, LLC, doing business as Julia B. Fee Sotheby’s International Realty (“Sotheby’s”). The home featured an indoor pool wing that included a large swimming pool and hot tub and was described in the real estate listing prepared by Sotheby’s as being “humidity controlled.” In March 2013, before the property was listed for sale, non-party Belfor Property Restoration (“Belfor”) had been hired to perform a mold remediation project in the indoor pool wing at a cost of more than $1 million. The project included replacing the ceiling and attic area as a result of it being compromised by significant mold growth. As part of the work, Belfor agreed to monitor the humidity alarm located in the pool area that would trigger when the humidity was too high. On April 18, 2013, after Belfor completed the mold remediation, Franklin hired non-party Bohlander Home Inspection, Inc. (“Bohlander”) to inspect the remediation work and conduct mold clearance testing. Bohlander issued a letter/report, on April 18, 2013, in which it confirmed that the remediation was successful. However, Bohlander expressly warned that the mold growth could return if certain specified steps and conditions were not followed. Thereafter, on May 20, 2013, Freidfertig listed the home for sale. Freidfertig did not include any reference to the mold remediation project in the listing. In September 2013, plaintiffs met with Freidfertig to view the home. Soon thereafter, the parties reached an agreement with regard to the sale of the home. Prior to entering into the contract of sale, plaintiffs hired non-party ENCO Home Inspection, LLC d/b/a Housemaster (“Housemaster”) to inspect the premises, including the indoor pool wing. On October 7, 2013, Housemaster inspected the pool house wing, the HVAC system and “other related systems in the pool area.” Housemaster reported “no visual evidence of or musty odors associated with fungi during the inspection, and there were no elevated moisture levels to indicate fungal proliferation.” On October 11, 2013, the parties signed the contract of sale. Plaintiffs ordered a title report but it did not reflect the mold remediation work. Plaintiffs purchased the property on November 23, 2013, and shortly after closing, plaintiffs turned on the swimming pool and the humidity alarm sounded. Plaintiffs immediately called Franklin about the alarm; Franklin told them to contact Belfor. Belfor visited the property several times attempting to resolve the humidity issue. It was during this time that plaintiffs allegedly learned for the first time about the prior mold problem, and the remediation project. In January 2014, mold began appearing on the surfaces of the pool wing. Plaintiffs hired Housemaster, on January 13, 2014, for a limited inspection of the pool area. Housemaster found that the attic area above the pool area was “saturated with moisture” and that the humidistat and the air registers associated with the humidity system were incorrectly placed, causing skewed humidity percentages and excessive moisture. Plaintiffs sought a second opinion, which confirmed Housemaster’s conclusion. In Spring 2014, plaintiffs hired non-party Five Boro Mold Removal to remove the mold that spread throughout the pool house wing. Ultimately, plaintiffs elected to redo the indoor pool area at a cost of approximately $1,114,000.00. Plaintiffs commenced the action, alleging nine causes of action based in fraud against all defendants with the exception of the first cause of action which was alleged only against Franklin. Plaintiffs alleged that defendants were liable for fraud because they had particular knowledge of the humidity and mold problems in the indoor pool wing and never informed plaintiffs of same. Instead, plaintiffs asserted that Franklin and Freidfertig actively concealed these issues from plaintiffs until months after plaintiffs had purchased the home. Plaintiffs further alleged that Sotheby’s was liable on the basis of respondeat superior/vicarious liability given the agency/employment relationship with Freidfertig. Defendants moved to dismiss the complaint. The motion court denied the Individual Defendants’ motion with regard to the first cause of action and the second and fourth through ninth causes of action. The motion court denied Freidfertig’s motion to dismiss, or in the alternative for summary judgment, the second and fourth through ninth causes of action insofar as asserted against her individually. Defendants appealed. The Second Department’s Decision The Second Department reversed the motion court’s denial of the motions. The Court held that the motions should have been granted because plaintiffs could not satisfy the reliance element of their fraud-based claims due to the presence of specific disclaimers in the contract for sale. These disclaimers, noted the Court, provided that plaintiffs were “‘fully aware of the physical condition and state of repair of the Premises’” because of “‘ own inspection and investigation thereof’” and that they entered into the contract “‘solely upon such inspection and investigation and not upon any information . . . or representations . . . given or made by Seller or its representatives.’” Slip Op. at *2. Citing to Danann Realty , the Court held that these specific disclaimers as to the condition of the home barred plaintiffs’ fraud-based claims. Id . “Accordingly,” concluded the Court, the motion court “should have granted that branch of the individual defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the first cause of action, which was asserted against Franklin only, and those branches of the defendants’ separate motions which were pursuant to CPLR 3211(a) to dismiss the second and fourth through ninth causes of action insofar as asserted against each of them.” Id . at **2-3. Takeaway As noted, in a real estate transaction, the law does not impose a duty on the seller or the seller’s agent to disclose information about the premises when the parties deal at arm’s length, unless the seller or the seller’s agent actively conceal material information. Instead, the buyer has a duty to satisfy himself/herself as to the quality of his/her bargain. See London v. Courduff , 141 A.D.2d 803, 804 (2d Dept. 1988). In Comora , the Court did not address whether the caveat emptor doctrine barred the plaintiffs’ fraud claims because they could not avoid the consequences of their disclaimers. These disclaimers were specific and addressed their knowledge of the physical condition and state of repair of the home. As the Court of Appeals observed in Danann Realty : “Such … specific disclaimer destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 5 N.Y.2d at 320-21.

In 1970, the New York Legislature enacted General Business Law (“GBL”) § 349, New York’s deceptive trade practices act. As enacted, Section 349 empowered the Attorney General to bring an action to enjoin “ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in th state.” In 1980, the Legislature amended the statute to add Section 349(h), which provides a private right action to consumers seeking to recover damages caused by deceptive trade practices. “The typical violation contemplated by the statute involves an individual consumer who falls victim to misrepresentations made by a seller of consumer goods usually by way of false and misleading advertising.” Genesco Entm’t v. Koch , 593 F. Supp. 743 (S.D.N.Y 1984). The deception, however, must be of a recurring nature and have ramifications for the public at large. Id . at 750-52. Private transactions not of a recurring nature or without public ramifications are not actionable under the statute. Id . A Plaintiff alleging a violation of GBL § 349 must prove three elements: the challenged act or practice was consumer-oriented; it was misleading in a material way; and the plaintiff suffered injury as a result of the deceptive act. Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A. , 85 N.Y.2d 20, 25 (1995). “Whether a representation or an omission, the deceptive practice must be ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.”   Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000). Courts consider whether an act is deceptive objectively. Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003). Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” Id. , citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999). In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” Gaidon , 94 N.Y.2d at 343. For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Stuntman , 95 N.Y.2d at 29; Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). In addition, a plaintiff must prove “actual” injury to recover under the statute, though not necessarily pecuniary harm. Stuntman , 95 N.Y.2d at 29; Oswego Laborers’ , 85 N.Y.2d at 26. And, the plaintiff must prove the deceptive act caused the injury. Id. ; Oswego Laborers’ , 85 N.Y.2d at 26. Although a GBL § 349 claim does not rise to the level of a fraud claim, it is nonetheless susceptible, like its fraud companion, to dismissal for being duplicative of a contract claim. Thus, a GBL § 349 loss must be distinct from the loss incurred by reason of a breach of contract. See Spagnola v. Chubb , 574 F.3d 64, 66-73 (2d Cir. 2009) (“ lthough a monetary loss is a sufficient injury to satisfy the requirement under § 349, that loss must be independent of the loss caused by the alleged breach of contract.”).    In Hobish v. AXA Equitable Life Insurance Company , 2019 N.Y. Slip Op. 02653 (1st Dept. Apr. 9, 2019) ( here ), the Appellate Division, First Department, considered these issues in affirming the denial of a motion to dismiss a GBL § 349(h) claim. As discussed below, the Court found that, for pleading purposes, the conduct at issue was deceptive and the losses sustained distinct from those incurred by reason of the alleged breach of contract. Hobish v. AXA Equitable Life Insurance Company Background here).=">here)."> Hobish involved a $2 million universal life insurance policy, known as the Athena Equitable Flexible Premium Universal Life II Policy (the “Policy” or “Athena Policy”), of which Toby Hobish (“Hobish”) was the insured person. The Policy was issued by AXA Equitable Life Insurance Company (“AXA”) to the Hobish Irrevocable Trust (“Trust”) in 2007. Plaintiffs alleged that AXA improperly changed Hobish’s classification as the insured person, resulting in the increase of cost of insurance (“COI”) rates and the premium payments required to maintain the Policy. Plaintiffs alleged that they were forced to surrender the Policy due to the inequitable imposition of increased COI rates. According to plaintiffs, an AXA agent presented Hobish with life insurance policy options from various insurance carriers in 2007 and misrepresented that the Athena Policy contained more favorable terms than the policy that they previously purchased (the “Lincoln Policy”). Plaintiffs alleged that, in reliance on the agent’s misrepresentations, the Lincoln Policy was surrendered, and the Athena Policy was purchased with the proceeds of the cash surrender. They also asserted that Hobish made additional payments totaling $249,468, for a total amount of $913,804. The court noted that the Trust and not Hobish owned and surrendered the Lincoln policy in 2007, purchased the Athena Policy with the proceeds, and made the initial premium payment. The court further noted that the payments were made variously by the Trust and its beneficiaries, not by Hobish personally. AXA notified the Trust by letter dated October 5, 2015, that a COI rate increase would be implemented, effective in March 2016. As a result of that increase, the Trust’s annual premiums would be increased to “more than $164,300” in order to maintain the Policy. According to Plaintiffs, the Trust surrendered the Policy “under protest” in July 2016 because they determined that “paying the increased annual premiums . . . made no financial sense, as the value of the Policy would be quickly approached by the new premium.” While plaintiffs had paid $913,804 to maintain the Policy through the surrender date in July 2016, the surrender value was only $448,274.50, less charges of $35,586.49; thus, the Trust received $412,688.01. AXA moved to dismiss the complaint pursuant to CPLR 3211 (a) (1), (a) (3), and (a) (7) on the grounds that, among other things, plaintiffs failed to plead the elements of either a breach of contract claim or a GBL § 349 claim. The motion court granted the motion in part and denied it in part. The Motion Court’s Decision As an initial matter, the motion court (Justice Andrea Masley of the Supreme Court, New York County, Commercial Division) determined that Hobish could not assert a contract claim because she did not purchase, own, or surrender the Policy. The court rejected plaintiffs’ argument that Hobish was a third-party beneficiary under the Policy because the Policy facilitated her estate planning. The court noted that there was no case authority supporting the proposition that an insured person who did not purchase, own, or expect a contractual benefit from an insurance policy had standing to sue as a third-party beneficiary. The motion court denied the motion with respect to the Trust’s claim for breach of contract, finding issues of fact concerning the provision in the Policy permitting AXA to raise COI rates for persons of a “given class”. The court observed, among other things, that the Policy was silent on the meaning of the term “given class” and, therefore, could not be resolved on a motion to dismiss. Turning to the GBL § 349 claim, the motion court denied the motion to dismiss. In doing so, the court rejected AXA’s argument that plaintiffs did not adequately plead the requisite elements of deception, injury, or consumer-oriented conduct. The court also rejected AXA’s contention that Hobish lacked standing to assert the GBL claim because she suffered no injury arising from the alleged deceptive practices. Consumer-oriented conduct AXA argued that the alleged misconduct conduct was not consumer-oriented because it pertained to “a unique interaction specific to the Hobish Family,” and did not affect the public at large. The motion court disagreed, finding that the alleged deceptive practices not only affected the Hobish family but also AXA’s elderly insureds having insurance policies with face values of $1 million or more. The motion court explained: laintiffs have adequately pleaded consumer-oriented conduct in that they allege that defendant engaged in a nation-wide scheme which targeted and raised the COI rates and premiums for the policies insuring 1,700 elderly persons, including Ms. Hobish, in contravention of identical form policy agreements. laintiffs have adequately pleaded consumer-oriented conduct in that they allege that defendant engaged in a nation-wide scheme which targeted and raised the COI rates and premiums for the policies insuring 1,700 elderly persons, including Ms. Hobish, in contravention of identical form policy agreements. This finding, held the court, was buttressed by the fact there were “numerous ongoing matters against defendant AXA, including a putative class-action in federal court, involving the same or similar facts, form policy, and rate increases that are at issue in this case.” Deceptive practices AXA argued that plaintiffs could not establish that they were deceived by any acts or practices because the possibility that COI rates would be increased was disclosed in the Policy and the sales illustrations signed by Hobish and the then-trustee of the Trust. Plaintiffs did not contest whether AXA disclosed the possibility of rate increases; rather, they contended that AXA failed to disclose that it would reclassify Hobish (and the other insureds over age 70 with policies of $1 million or more), then inequitably increase that new group’s COI rates. The motion court declined to rule on the issue, holding that there were issues of fact not ripe for resolution on the motion. GBL § 349 Injury and Standing AXA contended that Hobish could not have been deceived and injured because she did not purchase or own the Policy, or suffer any economic injury from its surrender and, therefore, lacked standing to assert a GBL § 349 claim. The motion rejected the argument. First, the court noted that there was “no doubt” that the Trust had “adequately pleaded an injury that directly resulted from the claimed deceptive practices in that it allege that it suffered pecuniary harm and was forced to surrender the Policy.” Second, the court noted that although Hobish did not own the Policy, she nevertheless adequately pleaded an injury from the alleged deceptive acts. The court explained: The court agrees with plaintiffs that Ms. Hobish alleges a sufficiently direct injury resulting from the purported deceptive practices in that her right and ability, as a consumer, to plan and maintain her estate were harmed. Apart from the pecuniary loss of premium payments she alleges, Ms. Hobish claims that she was deceived by defendant throughout her participation in the sales transactions and the maintenance of the Policy, and that she sustained injuries to her estate planning interests as a result. Plaintiffs allege that “AXA’s deceptive acts and practices . . . were designed to mislead elderly consumers into believing that they would not be targeted for premium increases that would be both substantial and not applied generally and equitably to all members of a designated class.” Citations to the complaint omitted. Duplication of Damages Finally, the Court addressed the argument that plaintiffs’ GBL § 349 claim was duplicative of their contract claims. In particular, AXA maintained that the damages alleged for both claims were the same. Plaintiffs responded by claiming that they alleged distinct losses in two ways: they paid increased premiums as a result of the breach of contract, and they surrendered the Policy due to defendant’s “deceptive practices that targeted its elderly insured.” With respect to Hobish, plaintiffs maintained that her ability to plan her estate was harmed by the alleged deceptive practices. The motion court agreed with plaintiffs. In doing so, the court held that “plaintiffs assert two distinct injuries: (1) the payment of inequitably increased premiums in violation of the Policy (the contract injury), and (2) the surrender of the Policy under protest caused by the alleged deceptive practices.” The court also held that the injuries allegedly sustained by Hobish “represent harms distinct from those pertaining strictly to the breach of the Policy itself.” AXA appealed the denial of its motion to dismiss the GBL § 349 claim. The First Department’s Decision The First Department “unanimously affirmed.” On the issue of standing, the Court agreed with the motion court. The Court held that the injury sustained by Hobish – the impairment of estate planning and the forced surrender of the Policy – was “distinct from injuries sustained by her trust, and thus sufficient to confer standing upon her to assert a General Business Law § 349 claim.” Slip Op. at *1 (citation omitted). The Court also agreed with the motion court that the “General Business Law claim not duplicative of plaintiffs’ breach of contract claim.” The Court explained that plaintiff adequately alleged “both a monetary loss stemming from defendant’s deceptive practices and an independent loss derived from defendant’s failure to deliver contracted for services.” Such a distinction sufficed to affirm the motion court’s holding. Finally, the Court held that the complaint sufficiently alleged deception: It contends that the policy at issue does not define the term “a given class,” the group for which defendant is contractually permitted to raise insurance rates. It also assert that the policy does not address whether, when, or how an insured person can be reclassified. Finally, it assert that defendant targeted elderly individuals and raised their premiums to a degree that they were forced to surrender their insurance. Such collective conduct meets the standard for deception, because the insurer’s acts were “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Id ., quoting Oswego Laborers’ , 85 N.Y.2d at 26. Takeaway GBL § 349 is broad in scope and prohibits deceptive and misleading business practices. To state a cognizable claim under Section 349(h), a plaintiff must identify consumer-oriented misconduct, which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages. In many cases, the plaintiff fails to satisfy one or more of these elements because the conduct is not deceptive or not recurring. In Hobish , however, the claim at issue had all the attributes of a GBL § 349 cause of action: it had deceptive conduct, which was consumer oriented, and which had public implications – much of the facts and circumstances alleged in Hobish were the subject of a federal class action. Hobish is also notable because of the argument that the GBL § 349 claim duplicated the plaintiffs’ contract claim. As shown by both decisions, the analysis under GBL § 349 is similar to that involving other tort claims, i.e. , whether the damages are distinct from those sought by a contract claim. Thus, practitioners should take note that a motion to dismiss on duplication grounds may ensue when a GBL § 349(h) claim is asserted along with a breach of contract claim.

As a general rule, a corporation that acquires the assets of another company is not liable for the liabilities of its predecessor. Schumacher v. Richards Shear Co. , 59 N.Y.2d 239, 245(1983). As with many rules, there is an exception. In this instance, the de facto merger doctrine. Under the doctrine, “ corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor’s tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.” Id . Courts apply the de facto merger doctrine “when the acquiring corporation has not purchased another corporation merely for the purpose of holding it as a subsidiary, but rather has effectively merged with the acquired corporation.” Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573, 574 (1st Dept. 2001).  Courts look for certain “hallmarks” of a de facto merger to determine whether the doctrine applies.  These include: “continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets and general business operation.” Id . See also Sweatland v. Park Corp. , 181 A.D.2d 243, 245-246 (4th Dept. 1992). Notably, “ ot all of these elements are necessary to find a de facto merger.” Fitzgerald , 286 A.D.2d at 574-75.  Courts will look to the substance of the transaction to determine “whether the acquiring corporation was seeking to obtain for itself intangible assets such as good will, trademarks, patents, customer lists and the right to use the acquired corporation’s name.” Id . at 575. See also Wensing v. Paris Indus. , 158 A.D.2d 164 (3d Dept. 1990). The concept upon which the doctrine is based is “that a successor that effectively takes over a company in its entirety should carry the predecessor’s liabilities as a concomitant to the benefits it derives from the good will purchased.” Grant-Howard Assocs. v. General Housewares Corp. , 63 N.Y.2d 291, 296 (1984). In Atkins v. Ovation Risk Planners, Inc. , 2019 N.Y. Slip Op. 30815(U) (Sup. Ct. N.Y. County Mar. 27, 2019) ( here ), Justice Arlene P. Bluth of the Supreme Court, New York County, considered these rules in denying a motion to dismiss and granting a motion to amend a complaint. Atkins v. Ovation Risk Planners, Inc. Background Plaintiffs Arthur Atkins (“Arthur”) and Stefanii Ruta-Atkins (collectively, “Atkins”) are the successor trustees of a trust established by Arthur’s mother (the “Trust”). The Trust is comprised of two adjacent properties; one is located at 1038 Eastern Parkway, Brooklyn and the other is at 1040 Eastern Parkway, Brooklyn. Atkins maintained homeowner’s insurance on the properties through Castlepoint Insurance Company. The policy had been purchased by Arthur’s mother prior to her death in 2012. John W. Dolan Jr.’s insurance company (“Dolan”) brokered the policy for Arthur’s mother. Upon the death of Arthur’s mother, plaintiffs became successor trustees and renewed the insurance policies Arthur’s mother had purchased through Dolan. Plaintiffs alleged that they contacted Dolan to request that the polices be changed to indicate that plaintiff “Arthur Atkins as Successor Trustee” be named as an insured. Plaintiffs claimed that Dolan incorrectly listed the named insured as Arthur Atkins in his individual capacity as opposed to his capacity as successor trustee. Additionally, plaintiffs claimed that Dolan failed to indicate on the insurance policy that plaintiffs lived at the 1040 Eastern Parkway property, not the 1038 Eastern Parkway property. In 2014, M&R Insurance Company (“M&R”) bought Dolan’s book of business, thereby becoming plaintiffs’ insurance broker. M&R did not correct the deficiencies Dolan purportedly made to plaintiffs’ insurance policy. Also in 2014, Atkins was sued for the personal injuries that occurred on the 1038 Eastern Parkway property. Atkins put in a claim with Castlepoint, which denied coverage, claiming that plaintiffs were not named in the 2014 policy as “insureds,” Castlepoint did not insure properties owned by trusts, and at the time of the incident, 1038 Eastern Parkway was not plaintiffs’ “residence premises.” As a result, plaintiffs lacked insurance coverage. In 2017, M&R entered into a Business Transition Installment Purchase Agreement with defendant Ovation Risk Planners, Inc. (“Ovation”). In the agreement, Ovation agreed to purchase M&R’s book of business, thereby taking over M&R’s clients. The agreement obligated M&R to transfer all of its records related to customers over to Ovation. Pursuant to the agreement, Ovation has the “exclusive right to solicit and offer customers insurance products.” Plaintiffs commenced the action against M&R and Ovation in connection with the alleged mistakes made by M&R in failing to make the necessary changes to plaintiffs’ insurance policy. Plaintiffs alleged that Ovation should be held responsible for M&R’s negligence through the theory of successor liability. Ovation moved to dismiss the complaint, claiming that it could not be liable for any negligence committed by M&R because Ovation is a corporation unrelated to M&R. According to Ovation, the only dealing between the two companies was the 2017 transaction in which Ovation bought a client list from M&R. The Court’s Decision The Court denied the motion to dismiss. The Court held that there were issues of fact as to whether the de facto merger doctrine applied. The Court found that by the transaction “Ovation purchased almost all of M&R’s assets including those necessary for the uninterrupted continuation of M&R’s business.” Slip Op. at *4.  The Court observed that the Business Transition Installment Purchase Agreement confirmed “that Ovation purchased the entirety of M&R’s client list” as well as “the good will of the business as a going concern, which included but not limited to any and all transferable rights to all intellectual property ....” Id . According to the agreement, M&R’s intellectual property included “M&R’s phone numbers, email addresses, and website.” Id . As further evidence of a de facto merger, noted the Court, “the agreement explicitly state this was done ‘In an effort to maximize retention of renewing policies and maintain continuity for existing client base.’” Id . at **4-5. The Court further observed that Ovation’s homepage advised visitors that Ovation was formerly known as M&R Insurance. Id . at *5. “Thus,” the Court concluded, “the evidence suggests that Ovation could have been set up to be a continuation of M&R, which can constitute a de facto merger.” Such evidence, the Court held, was “enough to defeat the motion to dismiss.” Id . In denying the motion, the Court rejected Ovation’s evidence that there was no de facto merger. That evidence – an email sent by plaintiffs to Mary Montemarano, one of the individuals who signed the Transition Agreement between Ovation and M&R, and whose email signature said “M&R Insurance Agency” after execution of the agreement – was “not enough to grant the motion to dismiss.” Id . In light of the reasoning used to deny the motion to dismiss, the Court granted the cross-motion to amend. Takeaway Practitioners are taught that they should not elevate form over substance. Atkins is an example of this teaching. As discussed above, the Atkins Court looked at the various “hallmarks” of a de facto merger and concluded that many of them were present. Thus, rather than rely on the form, the Court looked to the substance of the deal to conclude that the transaction was “set up” for Ovation “to be a continuation of M&R.” Although the Court denied the motion to dismiss, its analysis of the evidence shows the importance of examining the substance of transactions. After all, the point of the de facto merger doctrine is to elevate substance over form.

One of the issues that courts have to address when deciding fraud claims is whether a 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 representations at issue contain present or historical facts and hyperbole.  In Solomon Capital, LLC v. Lion Biotechnologies, Inc. , 2019 N.Y. Slip Op. 02621 (1st Dept. Apr. 4, 2019) ( here ), the First Department held that such mixed statements satisfy the falsity element of a fraud claim. What is the Difference Between Puffery and a Concrete Statement of Fact? To assert a fraud claim, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v Smith Barney , 88 N.Y.2d 413, 421 (1996). Often, plaintiffs complain that statements couched in terms of “belief” or “expectation” are false and should be actionable. Not surprisingly, however, courts have declined to find such statements actionable. The reason: they are “mere puff” or statements of opinion or exaggeration that no reasonable person would take seriously. In contrast to puffery and expressions of opinion, a misrepresentation is a false statement of present or historical fact. Oregon Public Employees Retirement Fund v. Apollo Group Inc. , 774 F.3d 598, 606 (9th Cir. 2014). Misrepresentations of fact are actionable because they are capable of objective verification. E.g. , White v. Davidson , 150 A.D.3d 610, 611 (1st Dept. 2017). See also SEC v. Todd , 642 F.3d 1207, 1216-17 (9th Cir. 2011). Sometimes, as in Solomon Capital , the statement at issue is a mix of hyperbole and verifiable fact. Depending on the facts and circumstances, such statements may be actionable. Solomon Capital, LLC v. Lion Biotechnologies, Inc. Solomon Capital involved two Israeli businessmen (plaintiffs Solomon Sharbat (“Sharbat”) and Shelhav Raff (“Raff”)) who were retained by defendant Lion Biotechnologies, Inc. (“Lion”) to raise capital to fund the biotech’s growth and research efforts. In June 2012, Sharbat and Raff were introduced to Lion’s chief financial officer who told them that Lion needed to raise $30 million to fund research and development. During a conference call with Lion representatives, Sharbat made a number of representations that the plaintiffs alleged to be false. These included that: (1) Sharbat had formerly run a U.S. public company and, therefore, was aware of the obligations of public companies; (2) Sharbat had previously raised “hundreds of millions of dollars” for biotech companies such as Lion; (3) Sharbat and Raff had “massive investors” who were prepared to invest in Lion, (4) the investments were a “done deal”; (5) Sharbat was personally acquainted with at least one major investor who would make a sizable investment in Lion of at least $500,000; and (6) Sharbat and Raff would make substantial investments in Lion themselves. Thereafter, Sharbat claimed that (1) “he could obtain financing for Lion, especially in Israel,” (2) he and Raff “could obtain investments” from Sheba Medical Center, a hospital in Israel, and (3) he and Raff “had obtained high-value investors for Lion in Israel.” Lion asserted that these statements were also false. In addition to the foregoing alleged misrepresentations, the plaintiffs claimed that Sharbat failed to disclose that he had been the target of investigations by the Financial Industry Regulatory Authority, Inc.  (“FINRA”). In July 2012, FINRA filed a complaint against Sharbat for illegally inducing clients to participate in a restricted securities transaction, which resulted in a default judgment entered against him in November 2012. Sharbat also allegedly failed to disclose that he had been involved in litigations over his business practices. Lion, which was then-based in California and had no contacts in New York, did not conduct a litigation search on the plaintiffs and did not discover this information until sometime later. Thereafter, Lion engaged the plaintiffs to obtain investors in the United States and in Israel. The plaintiffs, however, were unable to do so. In connection with their efforts, the plaintiffs sought reimbursement of $135,000 in expenses. Lion refused to pay, claiming that the plaintiffs induced it to offer them a promissory note in the amount of $135,000, one-half (½) of a share of Lion common stock for each dollar invested (67,500 shares), and the right to convert in the next financing of Lion on the same terms offered to the investors they brought to the company. Proceedings Before the Motion Court In April 2016, the plaintiffs brought an action for breach of contract and unjust enrichment, seeking recovery of their expenses, and investment in Lion. On June 3, 2016, Lion filed its original counterclaims. On January 11, 2017, the motion court, inter alia , dismissed without prejudice the counterclaims for fraud and breach of fiduciary duty with leave to replead. Lion then filed amended counterclaims, asserting claims for fraudulent misrepresentation, fraudulent concealment, breach of fiduciary duty, negligent misrepresentation (the first through fourth counterclaims), and breach of implied-in-fact contract (fifth counterclaim). The plaintiffs moved to dismiss the first through fourth counterclaims, and the 11th affirmative defense for fraudulent inducement, which sought rescission of the parties’ agreement. The plaintiffs contended, among other things, that the fraud counterclaims and the fraud affirmative defense should be dismissed because the alleged misrepresentations were puffery or involved expectations of future conduct. The motion court agreed with the plaintiffs and granted the motion to dismiss. The motion court found that the alleged misrepresentations could not form the basis of a fraud claim because they were “mere puffery” and “ pinions of value or future expectations.” The motion court also found that “ he statements alleged in the counterclaims” were “representations of future conduct” that were “not actionable statements of fact.” These statements included: “plaintiffs had investors who ‘were prepared to invest,’ a major investor who ‘would make a sizable investment,’ Sharbat and Raff ‘would make substantial investments,’ Sharbat ‘could obtain financing,’ and ‘could obtain investments from representatives and affiliates’ of a hospital in Israel.” In addition, the motion court found that statements in which Sharbat said that he and his “colleagues had ‘massive investors,’ the investments ‘were a done deal’, raised ‘hundreds of millions of dollars’ for biotech companies like defendant, and he had obtained ‘high-value investors’ in Israel” were mere puffery or expectation. Similarly, noted the motion court, “a broad assertion that Sharbat raised a lot of money in his career, clearly is puffery.” Finally, the statement that Sharart and Raff “would invest their own money” was held to be “non-actionable opinion or future expectations.” The First Department’s Decision On appeal, the First Department “unanimously reversed, on the law.” Slip Op. at *1. The Court found that “that the eleventh affirmative defense and first through fourth counterclaims adequately pleaded.” Id . Although the Court reinstated the affirmative defense and counterclaims, the Court found that one of the statements was “mere puffery”: In support of the eleventh affirmative defense and first counterclaim alleging fraudulent inducement, defendant alleges, as relevant herein, that, during a conference call with its CEO and CFO, plaintiff Solomon Sharbat, who was at the time a registered broker dealer with the Financial Industry Regulatory Authority (FINRA), represented, on behalf of himself and the other plaintiffs, that he had previously run a publicly traded U.S. company, that he had raised hundreds of millions of dollars for other biotech companies, that he had “massive investors” who were prepared to invest in defendant, and that these investments were “a done deal.” Sharbat allegedly later asserted that he “had obtained high-value investors for in Israel.” The statement that investments were “a done deal” is mere puffery; it has no fixed meaning. Id . (citation omitted). Regarding the mixed statements of hyperbole and verifiable fact, the Court stated as follows: However, Sharbat’s statements that he had “massive investors” who were prepared to invest in defendant and that he “had obtained high-value investors for in Israel,” while partially hyperbolic, make concrete factual representations that go beyond mere puffery. Simply stated, Sharbat asserted that he had investors lined up and ready to go, when in fact he had none. Since plaintiffs were retained by defendant to bring investors in, these statements constitute misrepresentations of material facts for purposes of the fraudulent inducement counterclaim. Finally, the Court held that the statements concerning Sharbat’s experience – i.e. , that Sharbat had previously run a publicly traded U.S. company and that he had raised hundreds of millions of dollars for other biotech companies – were “concrete and measurable misrepresentations.” Id . (citations omitted). Takeaway A fraud plaintiff must allege that a statement would be misleading to a reasonable person given the information available to him or her. Within this mix of information are expressions of puffery, opinion, and optimism that do not give rise to a claim sounding in fraud. The reason is that puffery, opinion, and statements of expectation are too general to cause a reasonable person to rely upon them. As Judge Learned Hand explained over 100 years ago: “ here are some kinds of talk which no sensible man takes seriously, and if he does he suffers from his credulity. If we were all scrupulously honest, it would not be so; but, as it is, neither party usually believes what the seller says about his own opinions, and each knows it.” Vulcan Metals Co. v. Simmons Mfg. Co. , 248 F. 853, 857 (2d Cir. 1918). Solomon Capital is an example of a case in which general statements of opinion, which are not actionable, are considered in context such that they are examined for their objective falsity. By doing so, Solomon Capital teaches that mixed statements of hyperbole and verifiable fact may form a basis for a fraud claim when those statements address circumstances that the speaker knows to be false and can be objectively verified as such.

This Blog has featured numerous treatments of the procedural, substantive and evidentiary law in residential mortgage foreclosure actions. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , and < HERE =">HERE"> .  The Supreme Court of the State of New York, Appellate Division, Second Department, recently issued a decision in Bank of New York Mellon v. Gordon (March 27, 2019) , addressing and clarifying numerous issues frequently litigated in mortgage foreclosure actions – many of which are applicable to every litigation.  The Court believed that a primer addressing such issues was necessary because the “challenges presented by dramatic increase in litigation have been compounded by poor record-keeping practices, a changing regulatory environment, inordinate delays, and inadequate legal representation.”  As a result of the “consistent and repeated confusion about some of the most fundamental aspects of the procedural, substantive, and evidentiary, law … routinely applied in a foreclosure context,” the Court thought it “appropriate to collect and reiterate some of these foundational principles in the hope that such clarity will eliminate many of the disputes that make up an ever-increasing proportion of the trial-level dockets.” In Gordon , lender commenced a mortgage foreclosure action and borrower, Gordon,  answered and, inter alia, asserted 55 affirmative defenses and 5 counterclaims against lender (“MERS”).  Supreme Court granted lender’s motion for summary judgment, appointed a referee to compute and dismissed borrower’s defenses and counterclaims and, inter alia , denied borrower’s cross-motion to dismiss the complaint and to compel disclosure.  On Gordon’s appeal, the Court modified Supreme Court’s order. The Court began by analyzing the general standards for the granting of summary judgment motions.  In the context of that discussion, the Court addressed certain evidentiary issues.  Thus, the Court stated that “a motion for summary judgment will not be granted if it depends on proof that would be inadmissible at the trial under some exclusionary rule of evidence.”  (Citations, internal quotation marks and brackets omitted.)  The Court continued by noting that “ ut-of-court statements offered for the truth of the matters they assert are hearsay and may be received in evidence only if they fall within one of the recognized exceptions to the hearsay rule, and then only if the proponent demonstrates that the evidence is reliable.”  (Citations and internal quotation marks omitted.)   Finally, the Court cautioned that the admissibility of evidence should only be examined if “the nonmoving party has specifically raised that issue in its opposition to the motion” … because “inadmissible hearsay admitted without objection may be considered and given such probative value as, under the circumstances, it may possess.”  (Citations and internal quotation marks omitted.) An issue that frequently is raised in mortgage foreclosure actions is whether the plaintiff has standing.  The Appellate Court in Gordon affirmed Supreme Court’s finding that BONY had standing to bring the foreclosure action.  The Court explained that when “standing is not an essential element of the cause of action, under CPLR 3018(b) a defendant must affirmatively plead lack of standing as an affirmative defense in the answer in order to properly raise the issue in its responsive pleading.”  (Citations and quotation marks omitted.)   When standing is raised by a defendant in a mortgage foreclosure action, as was the case in Gordon , “a plaintiff must prove its standing in order to be entitled to relief against the defendant.”  (Citations omitted.)   Because BONY demonstrated that it was “in physical possession of the note, which had been endorsed in blank, at the time the action was commenced,” standing was established. Standing was established through business records annexed to the affidavit of an employee of BONY’s law firm.  The Court rejected Gordon’s assertion that the employee’s affidavit failed to lay a proper foundation for the admissibility of the records. Without a proper foundation, “ ecords made in the regular course of business are hearsay when offered for the truth of their contents.”  (Citations omitted.)  CPLR 4518(a) , the statutory business records rule, provides that a business record “shall be admissible in evidence in proof of the act, transaction, occurrence or event, if the judge finds that it was made in the regular course of any business and that it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event, or within a reasonable time thereafter.”  Notwithstanding the statutory requirements of CPLR 4518(a), “the Court of Appeals has held that unless some other hearsay exception is available, admission may only be granted where it is demonstrated that the informant has personal knowledge of the act, event or condition and he or she is under a business duty to report it to the entrant.”  (Citations, internal quotation marks and brackets omitted.)  The Court also noted that it is the business record itself, and not the foundational affidavit by which same is submitted, that “serves as proof of the matter asserted.”  Thus, the underlying records must be introduced before “evidence of the contents of the records is admissible.”  (Citations, internal quotation marks and brackets omitted.)  Put another way, without the introduction of the underlying business records, “a witness’s testimony as to the contents of the records is inadmissible hearsay.”  (Citations and internal quotation marks omitted.)  Against this backdrop, the Court found that the affidavit of the law-firm’s employee sufficed to establish standing. While Gordon argued that the employee’s affidavit was insufficient because it failed to demonstrate familiarity with the record keeping practices of the prior assignors along the way, the Court did not agree that that such knowledge was relevant on the standing issue.  The employee, the Gordon Court found, sufficiently laid a foundation “for a business record maintained by her employer.”  Thus, in her affidavit the employee explained, among other things, that her group is responsible, in the ordinary course of business, for receiving and electronically cataloguing original loan documents and that it was “the normal course of business to store as computer entries.”  The copies of the records attached to the motion were compared to the original and were, according to the employee, “true and accurate.” The Court, however, determined that the Supreme Court should not have granted summary judgment to BONY because it failed to meet its “burden of demonstrating that defaulted in the repayment of the subject note.”  The Court reiterated that a lender in a foreclosure action meets its prima facie burden by producing a copy of the mortgage, the unpaid note, and evidence of default and that “ plaintiff may establish a payment default by an admission made in response to a notice to admit, by an affidavit from a person having personal knowledge of the facts, or by other evidence in admissible form.”  (Citations, internal quotation marks and brackets omitted.) BONY attempted to lay a foundation for the business records purporting to demonstrate Gordon’s payment default through the affidavit of an employee of the lender’s loan servicer.  However, the affidavit merely indicated the affiant’s familiarity with the servicer’s business practices and summarized the business records allegedly reviewed.  None of the servicer’s business records were attached to the affidavit.  In determining that BONY’s submission was insufficient to establish Gordon’s payment default, the Court stated, “to the extent that purported knowledge of Gordon’s default was based upon her review of unidentified business records created and maintained by , her affidavit constituted inadmissible hearsay and lacked probative value.”  Further, the only document annexed to the servicer’s employee to “prove” Gordon’s default was created by the original lender and the employee’s affidavit does not indicate that she is familiar with the original lender’s record keeping practices.  Because the employee did not have “personal knowledge of the maker’s business practices and procedures,” a proper foundation for the admissibility of the record was not laid.  (Citation omitted, emphasis in original.)  That a business record created by the original lender does not mean that the loan servicer’s employee was incompetent to lay a proper foundation to the document’s admissibility.  “… uch records may be admitted into evidence if the recipient can establish personal knowledge of the maker’s business practices and procedures, or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business.”  The Gordon Court found that the affidavit of the servicer’s employee was inadequate.

In June of 2018, this Blog wrote about the United States Supreme Court’s decision to grant certiorari in a case concerning the scope of investor protection laws. ( Here .) In Lorenzo v. SEC , No. 17-1077 (certiorari granted on June 18, 2018), the Court agreed to consider whether an individual who passed along false statements about a company’s financial condition could be found liable for engaging in securities fraud under the scheme liability provisions of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder. On March 27, 2019, in a decision written by Justice Breyer, a 6-2 majority of the Court ruled that a person who disseminates the false and misleading statements of another, even though he/she did not make the statement, can be held liable under the scheme liability provisions of Section 10(b) of the Exchange Act. ( Here .) Background Francis Lorenzo (“Lorenzo”), the petitioner, was the director of investment banking at Charles Vista, LLC (“Charles Vista”), a registered broker-dealer in Staten Island, New York. Lorenzo’s only investment banking client at the time relevant to the action was Waste2Energy Holdings, Inc. (“Waste2Energy”), a company developing technology to convert “solid waste” into “clean renewable energy.” In a June 2009 public filing, Waste2Energy stated that its total assets were worth about $14 million. This figure included intangible assets, namely, intellectual property, valued at more than $10 million. Lorenzo was skeptical of the valuation, later testifying that the intangibles were a “dead asset” because the technology “didn’t really work.” During the summer and early fall of 2009, Waste2Energy hired Charles Vista to sell $15 million worth of debentures to investors. In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its intellectual property was worthless, that it had written off all of its intangible assets. As a result, Waste2Energy reported total assets (as of March 31, 2009) of $370,552. Shortly thereafter, on October 14, 2009, Lorenzo sent two e-mails to prospective investors describing the debenture offering. According to Lorenzo, he sent the e-mails at the direction of his boss, who supplied the content and “approved” the messages. The e-mails described the investment in Waste2Energy as having “3 layers of protection,” including $10 million in “confirmed assets.” The e-mails did not reveal the fact that Waste2Energy had publicly stated that its assets were in fact worth less than $400,000. Lorenzo signed the e-mails with his own name, he identified himself as “Vice President-Investment Banking,” and he invited the recipients to “call with any questions.” In 2013, the Securities and Exchange Commission (“SEC” or “Commission”) instituted proceedings against Lorenzo (along with his boss, Gregg Lorenzo (the owner of Charles Vista), and Charles Vista). The Commission alleged that Lorenzo violated Rule 10b-5, Section 10(b) of the Exchange Act, and Section 17(a)(1) of the Securities Act of 1933 (the “Securities Act”). Ultimately, the Commission found that Lorenzo had violated these provisions by sending false and misleading statements to investors with the intent to defraud. As a sanction, the Commission fined Lorenzo $15,000, ordered him to cease and desist from violating the securities laws, and barred him from working in the securities industry for life. Lorenzo appealed, arguing primarily that in sending the e-mails he lacked the intent required to establish a violation of Rule 10b-5, Section 10(b), and Section 17(a)(1). With one judge dissenting (then-Judge Kavanaugh), the Court of Appeals for the D.C. Circuit rejected Lorenzo’s lack-of intent argument. Lorenzo v. SEC , 872 F. 3d 578, 583 (D.C. Cir. 2017). Lorenzo did not challenge the panel’s scienter finding. Lorenzo also argued that, in light of Janus Capital Group, Inc. v. First Derivate Traders , 564 U.S. 135 (2011), he could not be held liable under subsection (b) of Rule 10b-5. Id . at 586-87. The panel agreed. Because his boss “asked Lorenzo to send the emails, supplied the central content, and approved the messages for distribution” ( id. at 588), it was the boss that had “ultimate authority” over the content of the statement “and whether and how to communicate it,” Janus , 563 U. S. at 142. Nevertheless, the Court of Appeals sustained the Commission’s finding that, by knowingly disseminating false information to prospective investors, Lorenzo had violated Rule 10b-5(a) and (c), as well as Section 10(b) and Section 17(a)(1) of the Securities Act. Lorenzo then filed a petition for certiorari in the Court. The Court granted review to resolve disagreement about whether someone who is not a “maker” of a misstatement under Janus could be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerned a misstatement. The Court’s Decision “After examining the relevant language, precedent, and purpose” of Section 10(b) and Rule 10b-5, the Court concluded that “dissemination of false or misleading statements with intent to defraud” can be actionable under the federal securities laws, “even if the disseminator did not “make” the statements. Slip Op. at 5. Justice Breyer noted that Lorenzo understood that the emails he sent contained material untruths. After all, said the Court, “Lorenzo not challenge the appeals court’s scienter finding,” that he sent the emails with the “intent to deceive, manipulate, or defraud” the recipients of the emails. Slip Op. at 6. Under those facts, Justice Breyer concluded that it was “difficult to see how actions could escape the reach” of Rule 10b-5(a) and (c). Id . Recognizing the potential wide reach of its holding, the Court cautioned that its ruling should not be interpreted to reach every scenario, underscoring the factual nature of each case: “These provisions capture a wide range of conduct. Applying them may present difficult problems of scope in borderline cases. Purpose, precedent, and circumstance could lead to narrowing their reach in other contexts.” Id . at 6-7.  To emphasize the point, the Court distinguished the conduct of a peripheral actor, such as a mailroom clerk, and someone like Lorenzo who was directly involved in the dissemination of the false information: But we see nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospective investors with the intent to defraud. And while one can readily imagine other actors tangentially involved in dissemination – say, a mailroom clerk – for whom liability would typically be inappropriate, the petitioner in this case sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company. Id . at 7. The Court rejected Lorenzo’s argument, also shared by Justice Thomas, writing for the dissent (in which Justice Gorsuch joined), that each section of Rule 10b-5 “should be read as governing different, mutually exclusive, spheres of conduct.” Id . The Court noted that the underlying premise of the argument was inconsistent with the recognition by the Court and the Commission of the “considerable overlap among the subsections of the Rule and related provisions of the securities laws.” Id . (citations omitted). Given such overlap and the Court’s repeated rejection of attempts to narrow the reach of the proscriptions of Rule 10b-5, the Court concluded that it “should not hesitate to hold that Lorenzo’s conduct ran afoul of subsections (a) and (c), as well as the related statutory provisions.” Id . at 9. The Court also observed that if Lorenzo’s reading of Rule 10b-5 was correct, “behavior that, though plainly fraudulent, might otherwise fall outside the scope of the Rule.” Id .  It would mean that “those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether.” Id .  Such a result, said Justice Breyer, was inimical to the “basic purpose behind” the Rule –  “to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry” – and the enforcement of the securities laws: “We do not know why Congress or the Commission would have wanted to disarm enforcement in this way.” Id . Justice Breyer addressed other arguments raised by Lorenzo and the dissent, rejecting each one as inconsistent with the securities laws and Congress’ intent in enacting them. For example, both Lorenzo and the dissent claimed that the majority’s decision rendered Janus “a dead letter,” Id . at 10 and Dissent at 9. Justice Breyer noted that the Janus Court did not address the application of Rule 10b-5 “to the dissemination of false or misleading information.” Id .  Instead, the focus in Janus was on the “maker” of the statement – that is, “the “person or entity with ultimate authority over the statement.” Id . (quoting Janus , 564 U. S. at 142). Thus, the Court concluded that “ Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information.” Id .