On March 27, 2019, the Appellate Division, Second Department, issued a decision involving charges of fraud and fraud on the court. In Sammy v. Haupel , 2019 N.Y. Slip Op. 02372 (2d Dept. Mar. 27, 2019) ( here ), the Court was asked to consider the dismissal of claims arising under, inter alia , Judiciary Law § 487 and common law fraud. As discussed below, the Court affirmed the dismissal of both claims. Sammy arose from a transaction to purchase real property located in Queens, New York. In connection with the transaction, Plaintiff hired Expedient Title, Inc. (“Expedient”) to perform “title closing” services, including issuing title insurance. Expedient was an authorized agent of First American Title Insurance Company (“First American”). Through Expedient, First American issued a title insurance policy to Plaintiff. On May 31, 2007, the transaction closed, though, according to Plaintiff, Expedient failed to file the deed immediately thereafter. This made a difference because the seller subsequently re-sold the property to South Ozone Park Realty (“South Ozone”). Before Plaintiff could file her deed, South Ozone filed its deed. Thereafter, South Ozone commenced an action against Plaintiff to quiet title of the subject premises. As a result of the foregoing, Plaintiff made a claim under the title insurance policy she had with First American. First American disclaimed coverage partially because Plaintiff had executed a general release in favor of Expedient, First American and their agents. Plaintiff alleged, however, that the general release was fraudulent and did not provide a basis to disclaim coverage. Plaintiff commenced an action in the Supreme Court, Queens County, against First American, Expedient, and Robert Tambini (“Tambini”), who was the vice-president of Expedient in connection with the denial of her claim (the “claim denial action”). Tambini and Expedient retained Wilson Elser Moskowitz Edelman & Dicker, LLP to serve as counsel in the action. First American retained DelBello Donnellan Weingarten Wise & Wiederkehr, LLP to do the same. Plaintiff alleged that the defendants knew that Plaintiff had been defrauded in the sale of the property and that their reliance on the general release (as an affirmative defense) was improper because the release was itself fraudulent. In the action before the Second Department, Plaintiff sued the lawyers and the law firms at which they were employed on the grounds that, in connection with the claim denial action, they knew she had been defrauded and that the affirmative defense they asserted relating to the general release was based on a fraud. Plaintiff maintained that the continued assertion of the affirmative defense constituted a pattern of deceitful conduct that was intended to thwart and/or delay the resolution of the claim and line the pockets of the Defendants with legal fees. Plaintiff asserted causes of action against Defendants for violation of Judiciary Law § 487, fraud, filing of a false instrument, tortious interference, and offering a false instrument for filing in the first degree. Defendants moved to dismiss the Judiciary Law, fraud and tortious interference causes of action. The motion court granted the motion and the Second Department affirmed. Judiciary Law § 487 Judiciary Law § 487 imposes civil and criminal liability on any attorney who “(1) s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party; or, (2) ilfully delays his client’s suit with a view to his own gain.” Judiciary Law § 487; see Gumarova v. Law Offs. of Paul A. Boronow, P.C. , 129 A.D.3d 911 (2d Dept. 2015); Betz v. Blatt , 160 A.D.3d 696, 698 (2d Dept. 2018). A plaintiff pleading a cause of action alleging a violation of Judiciary Law § 487 must do so with specificity. Betz , 160 A.D.3d at 698; Putnam County Temple & Jewish Ctr., Inc. v. Rhinebeck Sav. Bank , 87 A.D.3d 1118, 1120 (2d Dept. 2011). Judiciary Law § 487 “focuses on the attorney’s intent to deceive, not the deceit’s success.” Amalfitano v. Rosenberg , 12 N.Y.3d 8, 14 (2009). Accordingly, although injury to the plaintiff is an essential element of a Judiciary Law § 487 cause of action seeking civil damages ( see Klein v. Rieff , 135 A.D.3d 910, 913 (2d Dept. 2016)), “recovery of treble damages under Judiciary Law § 487 does not depend upon the court’s belief in a material misrepresentation of fact in a complaint.” Amalfitano , 12 N.Y.3d at 15. A party’s legal expenses in defending the lawsuit may be treated as the proximate result of the misrepresentation. Id . Against the foregoing, the motion court dismissed the claim.  The Second Department affirmed, finding that Plaintiff “failed to set forth ‘with specificity,’ either in her complaint or in her papers opposing the motions, how the defendants knew or should have known that she did not sign the release upon which they relied in asserting affirmative defenses on behalf of their clients in the claim denial action.” Slip Op. at *2 (citation omitted). The Court noted that “ ven if the plaintiff had sufficiently pleaded th allegation,” she nevertheless “‘failed to allege sufficient facts to establish that the [ ] defendants intended to deceive the court’ or the plaintiff.” Id . (citations omitted). The Court concluded that Plaintiff’s allegations of attorney intent were conclusory and “not sufficient to state a cause of action alleging a violation of Judiciary Law § 487.” Id . Fraud As readers of this Blog know, to state a claim for fraud, “the 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). In addition, the plaintiff must plead the elements of the claim with particularity. Nabatkhorian v. Nabatkhorian , 127 A.D.3d 1043, 1044 (2d Dept. 2015). Relevant to the Court’s decision was the element of reliance. While this Blog has often written about the element of reliance in the context of whether it was justifiable, in Sammy , the focus was also on the issue of whether such reliance was induced by the acts or omissions of the defendants. Thus, the Court’s focus was on whether Sammy “demonstrated that was induced to act or refrain from acting to detriment by virtue of the alleged misrepresentation or omission.” Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1998) (internal quotation marks and brackets omitted). In affirming the dismissal of the fraud claim, the Second Department found that Plaintiff “failed to allege facts that would support an inference that asserting affirmative defenses based on the plaintiff’s purported release constituted knowing ‘misrepresentation or a material omission of fact which was false.’” Slip Op. at *2 (citations omitted). The Court also found that Plaintiff “failed to allege facts that would support the element of justifiable reliance.” Id . The Court reasoned that “ iven that the plaintiff alleged that she did not sign the release, she could not also claim to have believed that the affirmative defense of release was true, nor could she claim to have ‘change position in reliance on that belief.” Id . at **2-3, citing Nabatkhorian , 127 A.D.3d at 1044. “Moreover,” noted the Court, “the alleged statements – the assertion of an affirmative defense – ‘were undertaken in the course of adversarial proceedings and were fully controverted,’ further undermining any claim of reliance by the plaintiff.” (citation omitted). Takeaway As the Court of Appeals observed in Amalfitano , Section 487 “is not a codification of a common-law cause of action for fraud.” 12 N.Y.3d at 14.  Notwithstanding, application of the statute shares an important similarity with a fraud claim – the requirement to plead attorney intent with particularity. As noted above, to recover for fraud, a plaintiff must plead each element of the claim with particularity. In Sammy , the plaintiff was unable to meet this pleading requirement for her Judiciary Law and fraud claims.

In McKissack Group, Inc. v. MacFarland , 2019 N.Y. Slip Op. 30694(U) (Sup. Ct. N.Y. County Mar. 18, 2019) ( here ), Justice Kathryn E. Freed of the Supreme Court, New York County, recently upheld a challenge to a claim for fraudulent inducement, finding that the plaintiff satisfied the elements of the claim and did so with the particularity required under CPLR § 3016(b). A Quick Primer on Pleading A Fraudulent Inducement Claim To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraud must satisfy each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to satisfy any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). In addition, the allegations must be stated with particularity to satisfy CPLR § 3016(b). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016(b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). McKissack Group, Inc. v. MacFarland Background McKissack stemmed from a consulting agreement between Plaintiff, The McKissack Group, Inc. (“Plaintiff” or “McKissack”), and Defendant Rance Macfarland (“MacFarland”). The agreement came about because of McKissack’s need for an experienced business leader to become its president. In furtherance thereof, McKissack conducted an executive search in March of 2017 pursuant to which MacFarland was referred to Plaintiff as a candidate for the position. Plaintiff’s Chief Executive Officer, Cheryl McKissack Daniel (“Daniel”), interviewed MacFarland for the position. During the interview, Daniel allegedly advised MacFarland that, as a condition of employment, MacFarland had to be free from any activities and engagements that would jeopardize her confidence in his ability to perform the duties of the position consistent with “the standard of integrity and fiscal responsibility expected of and inherent in the position of President.” Slip Op. at *2 (internal quotations omitted). Plaintiff alleged that MacFarland fraudulently induced it to hire him by “purposefully and intentionally” concealing substantial money judgments issued against him and “by giving ... false and fraudulent assurances that his past business activities reflected a proven record of integrity and fiscal responsibility and were fully consistent with the professional and ethical standards required” by Daniel. Id . (internal quotations omitted). Plaintiff argued that MacFarland created Defendant MSK Business Solutions, LLC to coverup the judgments (issued in the Supreme Court, New York County in actions in which he was a named defendant) that were awarded against a different corporate entity named IBC Business Groups, LLC. On or about March 8, 2017, Plaintiff entered into a Consultant Agreement with MSK pursuant to which MacFarland was hired as President. The Agreement was executed by MacFarland as a member of MSK. Plaintiff alleged that MacFarland and Defendant Melissa Kearns (“Kearns”), also a member of MSK, were parties to, and helped facilitate, MacFarland’s fraudulent misrepresentations. During the fall of 2017, McKissack became aware of Defendants’ alleged misrepresentations when it received Marshal’s Notices, Garnishments, and Levies against MacFarland’s salary. On December 1, 2017, Plaintiff commenced the action, asserting three causes of action for fraud in the inducement against MacFarland, Kearns, and MSK, respectively. Plaintiff claimed that it never would have hired MacFarland had it been aware of the judgments against him. Plaintiff alleged that as a result of the misrepresentations, it was damaged in the amount of at least $220,000.00. On February 15, 2018, Defendants filed a pre-answer motion, pursuant to CPLR § 321l(a)(7), seeking to dismiss the complaint for failure to state a cause of action. Defendants maintained that (1) Plaintiff failed to plead fraud with particularity, (2) Plaintiff failed to plead any duty owed by Defendants to it, and (3) Plaintiff failed to plead justifiable reliance on any representations. On March 18, 2019, the Court denied the motion as to MacFarland. The Court’s Decision The Court held that Plaintiff satisfied the elements of a claim for fraudulent inducement and did so with the requisite particularity required by CPLR § 3016(b). In so holding, the Court found that: Mac arland met with plaintiff’s CEO and intentionally failed to disclose to her material information regarding his background and finances; that his actions were calculated to defraud or mislead plaintiff; that plaintiff reasonably relied on MacFarland’s omission; and that plaintiff sustained damages as a result. Slip Op. at *5. The Court dismissed the claims against MSK and Kearns because Plaintiff failed to plead facts from which “a reasonable inference that MSK and Kearns committed fraud, or aided and abetted MacFarland in committing a fraud.” Id .  In the absence of such facts, the Court held that Plaintiff’s allegation that “Kearns and MSK were parties to and facilitated the fraudulent misrepresentations made by McFarland in an effort to fraudulently induce to hire Macfarland ....” was merely conclusory. Id . Takeaway McKissack serves as a reminder that courts will sustain a fraud complaint when the plaintiff pleads sufficient facts to support a reasonable inference that the allegations of fraud are true. When this happens, it means that the plaintiff, as in McKissack , satisfied each element of a fraud claim. Of course, McKissack also shows what happens when a plaintiff bases his/her fraud complaint on conclusions, as opposed to facts. The complaint will be dismissed, as was the case against MSK and Kearns.

A common issue for litigators concerns the computation of time for statute of limitations purposes, answers to pleadings, and responses to motions and discovery requests. In particular, what to do when the last day for filing falls on a weekend or holiday. Under Rule 6(a)(1)(C) of the Federal Rules of Civil Procedure, when the last day to file falls on a weekend or holiday, the filing date is carried over to the next business day. See also Rule 26(a)(1)(C).   Under the New York Civil Practice Law and Rules (“CPLR”), however, there is no provision that addresses the effect of a due date falling on a weekend or holiday. Given the absence of such a provision, New York practitioners have looked to New York General Construction Law (“GCL”) § 25-a for guidance. Like its federal counterparts, this provision provides that when a filing date lands on a weekend or holiday, the filing date is carried over to “the next succeeding business day.” GCL § 25-a (“When any period of time, computed from a certain day, within which or after which or before which an act is authorized or required to be done, ends on a Saturday, Sunday or a public holiday, such act may be done on the next succeeding business day”). See also Wilson v. Exigence of Team Health , 151 A.D.3d 1849 (4th Dept. 2017); Richey v. Hamm , 78 A.D.3d 1600, 1601 (4th Dept. 2010) (finding that the filing of a summons and complaint on the next business day following the expiration of the statute of limitations, which fell on a Saturday, was timely under GCL § 25a-(1)); Way v. NIHAR Corp. , 2010 N.Y. Slip Op. 33816 (Sup. Ct. N.Y. County 2010); Butchers’ Mut. Casualty Co. v. City of New York , 182 Misc. 809 (Sup. Ct. N.Y. County 1944) (finding that the action was timely filed where the period within which the plaintiffs could sue expired on January 1, a public holiday, and January 2 fell on Sunday). On March 12, 2019, Justice Adam Silvera of the New York Supreme Court, New York County, addressed this issue in the context of the statute of limitations, holding that, under GCL § 25-a, the plaintiffs timely commenced their action even though the last day to file their complaint fell on a Sunday. Moran v. Delacruz-Espinal , 2019 N.Y. Slip Op. 30616(U) (Sup. Ct. N.Y. County Mar. 12, 2019) ( here ). Moran v. Delacruz-Espinal Moran arose from a motor vehicle accident occurring on February 5, 2014, at a gas station near an intersection in lower Manhattan. Plaintiffs, Holger Moran and Mariel Guaman (“Guaman”), alleged that they were seriously injured as the result of a collision between the motor vehicle in which they were passengers and a vehicle owned by defendant Goddard Riverside Community Center and driven by defendant Shemir Donaldson Prentiss. Plaintiffs filed the action on February 6, 2017, three years and one day after the accident at issue. Defendants moved to dismiss on the following grounds: (1) the statute of limitations as set forth in CPLR § 214(5) expired prior to the filing of the action; and (2) Plaintiffs did not effectuate service of the summons and complaint, and file the corresponding affidavits of service, in compliance with CPLR § 306-b. The Law Applicable to the Dispute Under CPLR § 214(5), the statute of limitations for a negligence cause of action is three years. Once the complaint is filed, pursuant to CPLR § 306-b, the plaintiff has one hundred twenty (120) days to effectuate service on the defendant(s). Estate of Jervis v. Teachers Ins. & Annuity Ass’n , 279 A.D.2d 367 (1st Dept. 2001) (finding that a plaintiff who timely filed a summons and complaint but failed to properly effectuate service on the defendant within the one hundred twenty- day period was not entitled to an extension). CPLR § 306-b provides that “ f service is not made upon a defendant within the <120-day period> provided in this section, the court, upon motion shall dismiss the action without prejudice as to the defendant or upon good cause shown or in the interest of justice, extend time of service.” Under CPLR § 201, “an action ... must be commenced within the time specified in this article ... No court shall extend the time limited by law for the commencement of an action.” Under GCL § 25-a: “When any period of time, computed from a certain day, within which or after which or before which an act is authorized or required to be done, ends on a Saturday, Sunday or a public holiday, such act may be done on the next succeeding business day.” “Public holidays” are defined in GCL § 24. The Court’s Initial Ruling The Court held that Plaintiffs “failed to file suit within the three-year Statute of Limitations.”  The Court also held that Plaintiffs “did not effectuate service within the one hundred twenty-day time limit<,> ” though Plaintiffs’ counsel did provide “good cause for the failure to effectuate service ….” However, since Plaintiffs failed “to timely commence suit, the court use its discretion under CPLR § 306-b to extend the time of service.” Consequently, the Court granted the motion to dismiss, holding that Plaintiffs violated CPLR § 201 and CPLR § 214, and, therefore, were not entitled to an extension under CPLR § 306-b. The Motion to Renew Thereafter, Plaintiffs filed a motion to renew. Plaintiffs argued that the Court misapprehended both the law and the facts, as the action was timely commenced within the statute of limitations. Plaintiffs contended that the Court misapprehended the date in which the statute of limitations ran, as such date fell on a weekend. Plaintiffs further contended that the Court overlooked the law regarding filing papers when a deadline falls on a weekend. Slip Op. at **1-2. Although much of the Court’s decision focused on whether the motion was one to reargue or to renew, the Court addressed the timeliness issue, finding that it had overlooked the application of GCL § 25-a in holding that the action was brought after the statute of limitations had run. Id . at *4. As such, since the last day to file the complaint fell on a Sunday, the filing of the summons and complaint on the succeeding Monday was timely. Id . Takeaway When it comes to filing dates, the old idiom, “better safe than sorry”, serves as good advice. Thus, it is best to avoid situations in which there is a question as to whether a filing would be deemed timely filed, especially in the context of the statute of limitations.  If, however, the circumstances do not permit such caution, Moran shows that GCL § 25-a may be available to save the day.

Statute of limitations issues frequently arise in residential mortgage foreclosure actions.  Mortgage foreclosure actions are governed by a six-year statute of limitations.  See CPLR 213(4) .  Generally, the statute of limitations for each missed payment runs from the date of the missed payment.  Bank of New York Mellon v. Celestin , 164 A.D.3d 733 (2 nd Dep’t 2018).  In order to avoid having to sue on each missed payment or groups of missed payments, mortgages usually contain language permitting a mortgagee to accelerate the entire mortgage debt upon the occurrence of certain defaults, including, but not limited to, payment defaults.  “ nce a mortgage debt is accelerated, the borrowers’ right and obligation to make monthly installments cease and all sums become immediately due and payable, and the six-year Statute of Limitations begins to run on the entire mortgage debt.”  EMC Mortgage Corp. v. Patella , 279 A.D.2d 604, 605 (2 nd Dep’t 2001) (citations, internal quotation marks and brackets omitted). The New York State Appellate Division, Second Department, addressed, inter alia , residential mortgage statute of limitations issue in MLB Sub I, LLC v. Grimes (March 20, 2019).  The facts of Grimes are convoluted.  In 2006, Grimes borrowed $464,000 from BNC Mortgage and delivered to it, a note and mortgage in that amount.  Within a year, Grimes defaulted in his payment obligations. In March of 2017, U.S. Bank National Association (“US Bank”) commenced an action to foreclose the Grimes mortgage (the “First Foreclosure Action”), although the Grimes mortgage was assigned to US Bank by assignment dated April of 2017.  In January of 2018, a default judgment was entered against Grimes.  Thereafter, Grimes moved to vacate the default because US Bank had no standing to bring the First Foreclosure Action at the time it was commenced.  In his motion, Grimes argued that the assignment of the underlying loan documents did not occur until one month after the action was commenced.  “A plaintiff has standing in a mortgage foreclosure action when it is the holder or assignee of the underlying note, either by physical delivery or execution of a physical assignment prior to the commencement of the action with the filing of the complaint.”  U.S. Bank National Assoc. v. Clement (2 nd Dep’t 2018) (citation omitted).  Grimes’ motion was granted and the First Foreclosure Action was dismissed. In March of 2009, US Bank commenced another foreclosure action (the “Second Foreclosure Action”).  In September of 2013, MLB Sub I, LLC obtained physical possession of the original Grimes note and, by assignment of mortgage dated March of 2014, the Grimes mortgage was assigned to MLB.  US Bank moved to discontinue the Second Foreclosure Action on September 17, 2014, which motion was granted on November 19, 2014. On October 3, 2014, MLB commenced a foreclosure action against Perfect Home Repairs, Inc. (“Perfect”) (an entity that acquired ownership to the subject property in January of 2014) (the “Third Foreclosure Action”).  Thereafter, MLB moved for summary judgment and for an order of reference.  Perfect opposed MLB’s summary judgment motion and cross-moved to dismiss the complaint pursuant to CPLR 3211(a)(5) on statute of limitations grounds and pursuant to CPLR 3211(a)(4) and RPAPL 1301(3) due to the pendency of the Second Foreclosure Action at the time the Third Foreclosure Action was commenced.  The motion court granted MLB’s motion and denied Perfect’s cross-motion. The Second Department affirmed.  The Court recognized that while the “ ommencement of a foreclosure action may be sufficient to put the borrower on notice that the option to accelerate the debt has been exercised,” such is not the case where the plaintiff “does not have the authority to accelerate the debt or to sue to foreclose at that time (citations and internal quotation marks omitted).  Thus, the Court found that the commencement of the Second Foreclosure Action did not cause the statute of limitations to run on the underlying debt because it was determined that US Bank did not have standing to prosecute that action.  Therefore, the service of the complaint in that Action was not a valid exercise of the option to accelerate the debt triggering the statute of limitations countdown. The Court also affirmed the rejection of Perfect’s argued that the complaint should have been dismissed pursuant to CPLR 3211(a)(4) and RPAPL 1301(3) .  CPLR 3211(a)(4) provides that an action may be dismissed if “there is another action pending between the same parties for the same cause of action in a court of any state or the United States; the court need not dismiss upon this ground but may make such order as justice requires.”  RPAPL 1301(3) provides that “ hile the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.” Perfect argued that at the time that the Third Foreclosure Action was commenced, the Second Foreclosure was still pending (although US Bank had moved to discontinue, but the motion had not yet been granted) and, therefore, the commencement of the Third Foreclosure Action violated RPAPL 1301(3).  In rejecting Perfect’s argument, the Court held that “where a prior foreclosure action is not formally discontinued, the effective abandonment of that action is a de facto discontinuance which militates against dismissal of the present action pursuant to RPAPL 1301(3).”  (Citations and internal quotation marks omitted.)  In Grimes , the Second Foreclosure Action was not dismissed prior to the commencement of the Third Foreclosure Action, the Court found that the Second Foreclosure Action “was effectively abandoned” when the motion to dismiss that Action was filed several weeks earlier when the motion to dismiss that action was filed.

On March 19, 2019, the Appellate Division, First Department, issued two decisions involving a number of issues related to the assertion of a fraudulent inducement claim – i.e. , whether (a) the claim was duplicative of a contract claim, (b) the plaintiff justifiably relied on the alleged misrepresentations, and (c) disclaimer and merger clauses operated to render reliance on the alleged misstatements unreasonable – and a fraud claim – i.e. , whether there was falsity. Ohm NYC LLC v. Times Sq. Assoc. LLC , 2019 N.Y. Slip Op. 02034 (1st Dept. Mar. 19, 2019) ( here ), and SFR Holdings Ltd. v Rice , 2019 N.Y. Slip Op. 02032 (1st Dept. Mar. 19, 2019) ( here ). In Ohm , the Court unanimously reversed the dismissal of a fraudulent inducement claim on the grounds that it did not duplicate the breach of contract claim – i.e. , the alleged misrepresentations “were not promises of future performance, but misrepresentations of a then present fact” – and the disclaimers and merger clause did not render reliance on the alleged misrepresentation improper because the facts related to those clauses were “peculiarly within defendants’ knowledge.” Slip Op. at *1 In SFR , the Court unanimously affirmed the denial of motions for summary judgment (except as to one plaintiff) related to a fraud claim on the grounds that there were issues of fact concerning the falsity of defendants’ statements. A Primer on The Law Contract Claim and Fraud Claim Together in One Action To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). When a fraudulent inducement claim is asserted in the context of a contract case, “the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of a breach of contract claim.” Wyle , 130 A.D.3d at 439.  Thus, to maintain a fraudulent inducement claim under New York law, a plaintiff must allege (i) that the fraud was “collateral or extraneous to the contract” or (ii) “a breach of duty separate from a breach of the contract” or (iii) special damages “not recoverable under a contract measure of damages.” Coppola v. Applied Elec. Corp. , 288 A.D.2d 41, 42 (1st Dept. 2001). here.=">here."> Disclaimer Clauses In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. Justifiable Reliance New York courts have found that “ here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). here=">here" and="and" >here.=">here."> Ohm NYC LLC v. Times Square Associates LLC Ohm involved leased commercial space by the plaintiff, Ohm NYC LLC (“Ohm”). According to the complaint, Ohm entered into a lease agreement for commercial space on the ground floor of a building located on West 43rd Street in New York City (the “Building”). Ohm planned to use the space for “an upscale food hall” in which a number of upscale brands/vendors would offer their food and services. Ohm alleged that defendants breached the lease by advising it, after the lease had been executed, that a non-exclusive public corridor, known as the “Bridge” area (the “Bridge”), leading from a common, public entrance on West 44th Street in Times Square to the leased space, was not part of the leased space and that the space was, therefore, smaller than the space actually leased. Ohm sued for, among other things, breach of the lease, fraudulent inducement, and rescission. Defendants moved to dismiss the fraudulent inducement and rescission claims. Defendants argued that the “No Representations” and “Merger” clauses in the lease negated any reliance on the alleged fraudulent statements. Defendants maintained that, by these clauses, Ohm was not induced to sign the lease by any “warranties, representations, statements or promises” regarding the rentable and usable areas of the space, or suitability of the space for any particular purpose. Defendants also argued that the fraudulent inducement cause of action was duplicative of Ohm’s breach of contract cause of because it was based upon the same facts underlying Ohm’s breach of contract cause of action. Finally, Defendants argued that Ohm failed to plead justifiable reliance on the alleged misrepresentations, claiming that the representations did not pertain to facts, but mere expressions of opinion, enthusiasm or future expectation. The motion court granted the motion, finding that the alleged misrepresentations related to the performance of the contract ( i.e. , the lease). On appeal, the First Department reversed. The Court found that Ohm had alleged “multiple instances” in which defendants misrepresented “that the Bridge, … , would be included in the leased premises.” As such, those “misrepresentations, which the complaint allege were made to induce plaintiff into entering into the lease, were not promises of future performance, but misrepresentations of a then present fact.” Accordingly, the Court held that the fraudulent inducement claim was “not duplicative of the breach of contract claim.” The Court also rejected defendants’ argument that the disclaimer and merger clauses in the lease precluded Ohm’s fraudulent inducement claim, holding that “ here nothing in the record to suggest that plaintiff knew or should have known that the Bridge would not be included in the leased premises, as was originally represented.” Finally, the Court rejected defendants’ justifiable reliance challenge, holding that “ here nothing in the record to suggest that plaintiff could have discovered the terms of the lease of the adjacent premises or any promises about the Bridge that defendants may have made to the tenants of the adjacent premises, which would be facts peculiarly within defendants’ knowledge.” SFR Holdings Ltd. v. Rice Plaintiffs alleged that defendants fraudulently induced them to invest in certain partnerships by misrepresenting their investment strategy as based on only asset-based lending (ABL), trade finance, and factoring. Plaintiffs further alleged that defendants assured them that they would not invest plaintiffs’ funds in real estate ventures. Despite those assurances, defendants allegedly invested more than $150 million of plaintiffs’ funds in subordinated loans to real estate development ventures that were illiquid and high risk. Plaintiffs added that, without their knowledge or consent, defendants funded nonparty Capstone Realty Investment Partnership (“CRIP”) with loans from Capstone Business Credit that were funded by the Capstone Partnerships’ investments. Plaintiffs alleged that defendants fraudulently concealed those unauthorized investments for almost one year after they made the investments and continued to misrepresent to plaintiffs the true magnitude of those investments, even after plaintiffs submitted redemption requests. Plaintiffs further asserted that defendants delayed complying with those requests until no funds were left with which to repay plaintiffs. In July 2012, plaintiffs commenced the action to recover monetary damages and legal fees on claims for fraudulent inducement, fraud, breach of fiduciary duty, unjust enrichment, actual and constructive fraudulent conveyance, and breach of contract.  Plaintiff also sought a declaratory judgment. Defendants moved to dismiss the complaint. By decision and order dated November 24, 2014 and entered December 3, 2014, the motion court granted the motion in part and dismissed all claims asserted in the complaint except for the fraudulent inducement claim asserted against Capstone Capital Management, Capstone Cayman Special Purpose Fund, and Capstone Special Purpose Fund (Capstone entities), John Rice (Rice) and Joseph Ingrassia (Ingrassia) ( here ). The Appellate Division, First Department, modified, and otherwise affirmed, the November 2014 order to deny the branches of the motion seeking dismissal of the cause of action for fraud asserted against Rice, Ingrassia, and the Capstone entities. SFR Holdings Ltd. v Rice , 132 A.D.3d 424 (1st Dept. 2015) ( here ). Following the completion of discovery, defendants moved for summary judgment on the fraudulent inducement, contract and fraud causes of action. Plaintiffs moved for summary judgment on the fraud claim. The motion court granted the motion with regard to the fraudulent inducement claim and denied the parties’ respective motions with regard to the fraud claim. ( SFR Holdings Ltd. v. Rice , 2017 N.Y. Slip Op. 31974 (Sup. Ct. N.Y. County 2017) ( here ). Regarding the fraud claim, the motion court held that: “There were genuine triable issues of material fact regarding whether, after execution of the Subscription Agreements, defendants expressly stated that they would follow an ABL investment strategy and refrain from investing plaintiffs’ funds in real estate ventures, yet invested plaintiffs’ funds in such ventures, without plaintiffs’ knowledge and consent and hid the fact of such improper investments from plaintiffs for a period of, perhaps, 11 months.” On appeal, the First Department affirmed the motion court’s order with regard to the fraud claim, except as to one plaintiff. The Court rejected defendants’ argument, advanced before the motion court, that plaintiffs’ “had every piece of information necessary to withdraw from the investments, yet chose not to act until the beginning of February 2008” and, therefore, there could be no falsity. The Court found that the fraud “claim supported by monthly progress reports that failed to reveal the nature and extent of the real estate investments, and testimony and sworn statements about a meeting at which defendants significantly understated the amount of money used to fund real estate deals and about defendants’ assurances that 90% of the improper investments would be transferred to another fund.” Slip Op. at *1.

Stephen King is quoted as saying that “the truth is in the details. No matter how you see the world …, the truth is in the details.” This quote fairly sums up the pleading requirement that all plaintiffs must satisfy when alleging a fraud. They must provide sufficient details of the alleged misconduct to support a reasonable inference that the allegations of fraud are true. In Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC , 2019 N.Y. Slip Op. 30603(U) (Sup. Ct., N.Y. County Mar. 12, 2019) ( here ), Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, dismissed a fraudulent inducement claim because the plaintiff, Q Semiconductor Inc. (“Q”), failed to provide the details necessary to support a reasonable inference that a fraud occurred. In other words, Q failed to plead fraud with particularity as required by CPLR § 3016(b). Pleading Fraud with Particularity To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC Background Q designed a semiconductor chip which, it believed, could be manufactured in a more cost-effective process than those in use. To bring its design to market, Q sought a manufacturer with the capability to fabricate the chip as intended.  One manufacturer that was interested in working with Q was Defendant, GlobalFoundries US 2 LLC (“GF2”). GF2 represented it had a mature, “qualified”, “130 nm RF SOI EDMOS” manufacturing process on 300mm wafers that was in use for other large customers (the “EDMOS Process”) and was capable of meeting Q’s manufacturing needs in the specified time frame. GF2 also represented that it did not receive any complaints from its other customers about the EDMOS Process. Q entered into an agreement with GF2 on October 31, 2016, for the manufacture of Q’s chips (the “Agreement”). The Agreement was later amended on November 15, 2016 (the “Amendment”). As it turned out, the EDMOS Process was not capable of manufacturing the chips. As a result, GF2 had to continually tweak the process to resolve the problems. At the same time, however, GF2 allegedly attempted to create a new manufacturing process. As alleged, GF2 failed to disclose the foregoing. Slip Op. at **1-2. Notwithstanding, Q alleged that throughout the relationship, Defendants represented that the EDMOS Process was qualified and tested. Id . at *2. However, alleged Q, “ t was not.” Id . Q placed an order and sent payment to defendant, GlobalFoundries Singapore PTE LTD (“GFS”), which was responsible for doing the actual manufacturing. GF2 shipped the chips on March 30, 2017. However, because the chips had to be cut, Q did not immediately test the chips. According to the complaint, when Q did test the chips, “ one of the chips worked.” Id . at *2. On April 9, 2017, GF2 allegedly admitted that it learned the chips did not work. Plaintiff contended that GF2 knew earlier. On April 26, 2017, GF2 informed Q that the chips would not work, “admitting it had skipped a step in the testing process which would have revealed the problem.” Id . In September 2017, GF2 announced a new manufacturing process. The announcement indicated that the EDMOS Process used for the Q chips had not been qualified and caused Q to believe that GF2 had used the Agreement with Q to improve its new process, so it could get bigger jobs from Q’s competitors. Id . As a result of the failure of the manufacturing process, Q allegedly missed the window to sell itself for millions of dollars, “instead having to have a fire sale of its Intellectual Property.” Id . As Q was unable to fill its orders with the non-working chips, it was unable to close a pending M&A deal or obtain more investment funding. Id . Q brought suit, asserting three causes of action: fraud, breach of contract and breach of express warranty. Id . Defendants moved to dismiss the complaint. With regard to the fraud claim, GF2 argued, among other things, that Q failed to allege facts supporting the claim with the specificity required under the CPLR. To that end, GF2 argued that Q failed to allege with particularity the “date, time or place, or” the identity of the speaker of the alleged false statements. Id . at *7. The Court’s Decision The Court agreed with Defendants and dismissed the fraudulent inducement claim for failure to plead fraud with particularity. The Court held that the allegations concerning the EDMOS Process were vague, noting that Q failed to identify the specific statements alleged to be false and the speaker of those representations: Plaintiff states only generally that the representations about the maturity of the manufacturing process were made in August of 2016 by GF2. While plaintiff names two individuals with whom it had discussions about the process to be used for manufacturing, it does not claim either of those individuals made representations as to the EDMOS Process’s maturity. Id . at *9. The Court went on to say that: The person making the representation, where, how, and when are not alleged, only that GF2 made representations about the maturity of the Process. It is not specifically alleged that the representations were made in August of 2016, but instead that Q approached GF2 and began discussions at about that time. The fact that Q does business in California does not make an allegation that the representation was made in any particular place, and the fact that the Agreement was signed in Laguna Hills, CA, is irrelevant to the details of when and how the misrepresentations were made. Id . at *10. Accordingly, the Court dismissed the fraud claim “for failure to state a claim with sufficient specificity, as required by CPLR 3016.” Id . Takeaway As noted above, “the truth is in the details.” In Q Semiconductor , the Court made it clear that the details of an alleged fraud matter. Although the particularity standard is not as rigorous under the CPLR as it is under the Federal Rules of Civil Procedure, a plaintiff pleading fraud must, nevertheless, provide sufficient details of the alleged misconduct to support a reasonable inference that a fraud occurred. here.=">here."> This means that the plaintiff should describe the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). In the absence of such detail, as in Q Semiconductor , even under the reasonable inference standard of the CPLR, a plaintiff cannot maintain a fraud claim.

On March 14, 2019, the Appellate Division, First Department, unanimously affirmed the denial of a summary judgment motion seeking to dismiss a fraudulent inducement claim alleged in connection with the purchase of a mixed-use property on Union Avenue in the Bronx, New York (the “Subject Property”). Union Ave. Estates, LLC v. Garsan Realty Inc. , 2019 N.Y. Slip Op. 01827 (1st Dept. Mar. 14, 2019) ( here ). The decision, though short and concise, addresses a couple of principles ripe for discussion in today’s post: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the representations and warranties supporting the fraudulent inducement claim. Background On February 18, 2015, YMY Acquisitions LLC (“YMY”) entered into a written contract of sale to purchase the Subject Property from Defendants (the “Contract” or “Contract of Sale”). In April 2015, YMY assigned the Contract to Plaintiff. On April 27, 2015, Defendants conveyed the Property to Plaintiff by a bargain and sale deed, thereby vesting Plaintiff with title to the Property. Pursuant to various paragraphs of the rider to the Contract of Sale, Defendants provided a rent roll for the Subject Property and copies of all leases affecting the Subject Property. Defendants allegedly represented and warranted that the rent roll was true and accurate as of February 18, 2015, and correctly reflected the expiration dates of each of the leases affecting the Subject Property. According to Plaintiff, Defendants represented and warranted that the leases of two commercial tenants (the “Commercial Tenants”) had expired and, therefore, the Commercial Tenants were occupying the Subject Property on a month-to-month basis. The rider to the Contract also required Defendants to deliver all leases, files, and records affecting the Subject Property upon closing. Pursuant to the requirement, Defendants delivered leases in their possession demonstrating that the leases of the Commercial Tenants had expired in July 2014. Also, at the closing, Defendants allegedly provided Plaintiff with a rent arrears report containing further representations that the leases of the Commercial Tenants had expired in July 2014 and that the Commercial Tenants were therefore month-to-month tenants. Subsequent to the closing, Plaintiff sought to evict the Commercial Tenants from the Subject Property. Plaintiff learned, however, that the Commercial Tenants had extended their leases until 2024. As such, the Commercial Tenants were not month-to-month tenants. Plaintiff commenced the action on October 23, 2015. During discovery, Defendants moved for summary judgment. Among other things, Defendants argued that the fraudulent inducement claim was barred by a merger clause and “as is” disclaimer clauses in the Contract of Sale and related documents. The Motion Court denied the motion. Defendants appealed. The First Department’s Decision Whether Contractual Disclaimers Can Preclude A Fraudulent Inducement Claim In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. In Union Ave., the disclaimer at issue pertained to a merger clause and “as is” provisions in various documents related to the purchase of the Subject Property. The Court held that these provisions were “not sufficiently specific to preclude the claim that defendants fraudulently induced plaintiff to purchase the property by misrepresenting the status of the commercial tenants’ leases.” Slip Op. at *1. The Court explained that “ one of the provisions relied upon by defendants specifically disclaim any warranties about the status of commercial tenants’ leases, or indeed of any leases.” Id . Whether Union Ave. Justifiably Relied on the Alleged Representations and Warranties As a general matter, the term “justifiable reliance” refers to the extent to which a person can be found to have properly relied on the representations of another. As this Blog has noted on several occasions, to determine whether the plaintiff justifiably relied on a representation, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty , 5 N.Y.2d at 322; 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, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 NY3d 147, 155 (2010) (internal quotation marks omitted). The inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily….”  Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017). “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). Moreover, where “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred. In particular, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.” DDJ Mgt., LLC , 15 N.Y.3d at 154); Lunal Realty, LLC v. DiSanto Realty, LLC , 88 A.D.3d 661, 664 (2d Dept. 2011). In Union Ave. , the Court found that it was an issue of fact “ hether plaintiff’s reliance on defendants’ alleged misrepresentations – that the commercial tenants were month-to-month tenants and that their respective leases expired on July 31, 2014 – was reasonable or whether due diligence would have revealed the truth….” Id . Takeaway Although brief in length, Union Ave. is notable for its reiteration of the law concerning contractual disclaimers and fraudulent inducement claims. As the Court observed, contractual disclaimers will not preclude a fraudulent inducement claim unless the disclaimers specifically address the subject of the alleged misrepresentation.  In Union Ave. , the disclaimers relied upon by the defendants were not specific enough to preclude the fraudulent inducement claim.

On March 11, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it had settled charges against 79 investment advisers who agreed to return more than $125 million to their clients (the “Actions”). A a substantial majority of the funds to be returned are earmarked for retail investors. The Actions arose from the SEC’s Share Class Selection Disclosure Initiative (“SCSDI” or the “Initiative”) ( here ), which the Division of Enforcement (the “Division”) created to address the harm caused by investment advisory firms that failed to disclose to clients that they had received 12b-1 fees for selling the funds.  Under the Initiative, investment advisers can avoid financial penalties by self-reporting violations of the Investment Advisers Act of 1940 (the “Advisors Act”) resulting from undisclosed conflicts of interest, compensating investors for the harm done as a result of the conflicts of interest, and reviewing and correcting their fee disclosures. The orders issued by the SEC concerned advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices. The SEC found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.  Specifically, the SEC found that the investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.  According to the SEC, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees. The SEC’s Crackdown on Share Class Selection-Related Violations of the Federal Securities Laws Investment advisers owe a fiduciary duty to their clients. See , e.g. , Securities and Exchange Commission v. Capital Gains Research Bureau, Inc. , 375 U.S. 180 (1963). This means that an investment adviser has an obligation to act in the best interests of his/her clients and to provide investment advice in his/her clients’ best interests. In this regard, investment advisers owe their clients a duty of undivided loyalty and utmost good faith. Thus, investment advisers should not engage in any activity that conflicts with the interests of their clients and should take all steps reasonably necessary to fulfill their fiduciary obligations. Additionally, investment advisers must exercise reasonable care to avoid misleading clients and provide full and fair disclosure of all material facts to their clients and prospective clients. This means that investment advisers are required to disclose any and all material conflicts of interest, including conflicts arising from financial incentives, to clients and prospective clients. Since at least 2013, the Commission has been cracking down on investment advisers who have failed to disclose conflicts of interest and failed to implement reasonably designed policies and procedures relating to mutual fund share classes in violation of the Advisers Act.  In those cases, the Commission generally required the investment advisers to pay disgorgement and penalties, and to distribute the funds to harmed clients. In 2016, share class disclosures rose to the forefront. The Commission’s Office of Compliance Inspections and Examinations issued a Risk Alert ( here ) specifically addressing share class disclosure and cautioning investment advisers to examine their policies and procedures.  FINRA has also addressed share class selection issues with brokers, imposing censures and fines on brokers that failed to provide adequate disclosures ( here ). The SCSDI In February 2018, the Division announced the creation of the Initiative to address concerns that investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices.  These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes.  The Initiative enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents. SEC Comments About The Initiative “The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.” “The initiative leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.” “Investment advisers play a vital and trusted role in our markets.  They offer a wide array of products and services to our retail investors, ranging from one-time advice on a model investment portfolio to comprehensive planning combined with continuous investment advice and other services.  Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” said SEC Chairman Jay Clayton.  “I am pleased that so many investment advisers chose to participate in this initiative and, more importantly, that their clients will be reimbursed.  This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure.  Also, I am once again proud of our Division of Enforcement for their vigorous and effective pursuit of matters that substantially benefit our long-term, retail investors.” The Settlements The SEC found that the settling investment advisers, other than the state-registered only advisers, violated the Advisers Act by: 1) failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or 2) failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund. Each of the settling investment advisers consented to the entry of the cease-and-desist orders without admitting or denying the findings in their respective orders.  The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute those monies with prejudgment interest to affected advisory clients.  Each adviser also agreed to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary.  Consistent with the terms of the Initiative, the Commission has agreed not to impose penalties against the investment advisers.

As a general matter, a faithless servant is one who acts contrary to the interests of his/her employer. When an employee or agent acts faithlessly, he/she must forfeit the compensation earned (whether wages or commissions) as a result of the wrongful act. A question that sometimes arises is whether an at-will employee is subject to the faithless servant doctrine. In TMT Entertainment Group, Inc. v. Gasparro , 2019 N.Y. Slip Op. 30542(U) (Sup. Ct., N.Y. County Mar. 4, 2019) ( here ), Justice Andrew Borrok of the Supreme Court, New York County, answered the question in the affirmative. here,=">here," >here=">here" and="and" >here.=">here."> The Faithless Servant Doctrine Discussed It is well settled that, under certain circumstances, an employee owes a fiduciary duty to his/her employer during the course of the employment. Markowits v. Friedman , 144 A.D.3d 993, 996 (1st Dept. 2016) (citing Lamdin v. Broadway Surface Advertising Corp. , 272 N.Y. 133, 138-39 (1936)). This means that the employee is “‘at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’” W. Elec. Co. v. Brenner , 41 N.Y.2d 291, 295 (1977) (quoting Lamdin , 272 N.Y. at 138). An employee who violates his/her fiduciary duty of loyalty is deemed a “faithless servant” and forfeits the right to any compensation earned during the period of disloyalty. Visual Arts Found., Inc. v. Egnasko , 91 A.D.3d 578, 579 (1st Dept. 2012). An employer states a claim under the faithless servant doctrine by alleging that a former employee, during the period of his/her employment and using company resources, acts directly against the employer’s interests such as, by embezzling money, improperly competing with the current employer, or usurping business opportunities. Veritas Capital Mgt., LLC v. Campbell , 82 A.D.3d 529, 530 (1st Dept. 2011); Pozner v. Fox Broadcasting Co. , 59 Misc. 3d 897, 900 (Sup. Ct., N.Y. County, Apr. 2, 2018); CBS Corp. v. Dumsday , 268 A.D.2d 350, 353 (1st Dept. 2000) (citing Maritime Fish Prod., Inc. v. World-Wide Fish Prods., Inc. , 100 A.D.2d 81, 88 (1st Dept. 1984)). The courts have applied the foregoing rules to at-will employees. E.g. , Veritas Capital , 82 A.D.3d at 530; Beach v. Touradji Capital Mgt., LP , 144 A.D.3d 557, 562 (1st Dept. 2016). To establish a breach of fiduciary duty claim, a plaintiff “must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party’s misconduct.” Pokoik v. Pokoik , 115 A.D.3d 428, 429 (1st Dept. 2014); Castellotti v. Free , 138 A.D.3d 198, 209 (1st Dept. 2016). “A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” Roni LLC v. Arfa , 18 N.Y.3d 846, 848 (2011) (internal quotation marks and citations omitted); see also EBC I v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005). “Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions. EBC I , 5 N.Y.3d at 19. TMT Entertainment Group, Inc. v. Gasparro In September 2005, the plaintiff, TMT Entertainment Group, Inc. (“TMT”), hired the defendant, Michael Gasparro (“Gasparro”), as a talent manager and producer. TMT agreed to compensate Gasparro through a a base salary, benefits and a discretionary portion of the management fees he generated. However, any fees that Gasparro received in connection with his role as a producer were to be remitted to TMT. TMT sued Gasparro, among others, for, inter alia , breach of fiduciary and usurpation of corporate opportunities. In particular, TMT alleged that Gasparro: (i) surreptitiously exploited TMT’s time, resources and reputation in order to establish the defendant, Gasparro Management LLC (“GM LLC” and together with Gasparro, the “Gasparro Defendants”), while working at TMT; (ii) induced the actor defendants to breach their management agreements with TMT; (iii) misappropriated management fees due TMT to GM LLC; (iv) misappropriated producer fees from TMT to GM LLC; and (v) interfered with TMT’s existing business relations. Defendants moved to dismiss the complaint. With regard to the breach of fiduciary duty/faithless servant cause of action, the defendants argued that Gasparro did not owe TMT a fiduciary duty because he was neither a corporate officer, or director of TMT nor an employee with an employment agreement that defined the terms and conditions of his employment ( e.g. , restrictive covenants). Absent such a relationship, argued the defendants, the breach of fiduciary duty/faithless servant cause of action should be dismissed. The Court rejected the defendants’ argument. In a terse holding, the Court found that even though Gasparro did not have an employment agreement with TMT ( i.e. , he was an employee at will) and did not serve as an officer or director of the company he was, nevertheless, “under a duty to act and give advice for the benefit of on matters within the scope of their relationship.” Slip Op. at *2 (quoting EBC I , 5 N.Y.3d at 19) (internal quotation marks omitted). Thus, “ aking the allegations … in the Complaint as true,” the Court denied the defendants’ motion to dismiss the breach of fiduciary duty/faithless servant cause of action. Id . With regard to the usurpation of a corporate opportunity cause of action, which the Court considered to be related to the breach of fiduciary duty/faithless servant cause of action, the Court denied the motion to dismiss. Having found that TMT adequately alleged the breach of a fiduciary duty, the Court held that TMT stated a cause of action for the usurpation of a corporate opportunity. Slip Op. at *2. In doing so, the Court rejected the defendants’ argument that only a corporate actor could usurp a corporate opportunity: As explained above, Mr. Gasparro was in a fiduciary relationship with the plaintiff. The plaintiff asserts that Mr. Gasparro advised TMT of two projects where he would work as a producer: the “Kalief Project” and the “Trayvon Project.” The plaintiff alleges that Mr. Gasparro and other parties then entered into separate agreements to provide production services for these projects, and Mr. Gasparro would receive producer’s fees of $50,000 for the Kalief Project and $375,000 for the Trayvon Project. The plaintiff asserts that Mr. Gasparro then advised that the Kalief Project producer’s fee was only $10,000 and paid $5,000 to plaintiff. The plaintiff seeks the remaining $45,000 balance for Mr. Gasparro’s work on the Kalief Project. Regarding the Trayvon Project, the plaintiff alleges that Mr. Gasparro claimed exclusive entitlement to the associated producer’s fee on the same date that he resigned from employment with the plaintiff in July 2017. The pleaded facts sufficiently allege that the plaintiff could expect to receive producer’s fees from the two projects and that Mr. Gasparro diverted fees that should have been treated as an asset of the plaintiff’s management company. Accordingly, the Court denied the defendants’ motion to dismiss the cause of action for usurpation of a corporate opportunity against Gasparro. Takeaway TMT Entertainment shows that the faithless servant doctrine remains a potent weapon for employers faced with an employee who allegedly acts disloyal during his/her employment. Perhaps, more importantly, TMT Entertainment confirms that the doctrine will be applied to at-will employees who act faithlessly and in breach of their fiduciary duty to their employer.

On March 5, 2019, the Securities and Exchange Commission (“SEC”) announced (here) that BB&T Securities, LLC (“BB&T Securities”), a wholly owned brokerage subsidiary of BB&T Corp., had agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired, Valley Forge Asset Management, LLC (“Valley Forge”), misled its advisory clients into believing they were receiving full service brokerage services at a discount while significantly less expensive options were available externally. BB&T acquired Valley Forge from Susquehanna Bancshares Inc. in 2015 and merged with BB&T Securities in March 2016. According to the SEC, from at least 2013 to 2016 (the “Relevant Period”), Valley Forge made misleading statements in its Forms ADV Part 2A and investment advisory contracts with clients regarding the services and prices offered by its in-house broker that led numerous clients to choose Valley Forge for brokerage services over other significantly less expensive options. Valley Forge benefitted financially from these advisory clients selecting its in-house broker and failed to disclose the extent of its conflict of interest in its Forms ADV Part 2A or otherwise. In particular, the SEC claimed that Valley Forge misled clients by stating that its affiliated brokerage option provided “full service brokerage services.” Under this option, Valley Forge served as the introducing broker for another broker who was not associated with Valley Forge or its parent or affiliates. In addition, Valley Forge had a clearing agreement with the broker for those clients who chose the affiliated brokerage option. According to the SEC, the firm did not provide any services to affiliated brokerage clients that were not also provided to clients that chose the other brokerage options, which had significantly lower costs. Moreover, because Valley Forge did not disclose the services it was providing to its affiliated brokerage clients, clients could not effectively “carefully consider the services offered relative to the brokerage commission being paid” as Valley Forge stated in its Form ADV Part 2 and Exhibit 1 of the Investment Advisory Contract. In addition, the SEC alleged that Valley Forge made misleading statements regarding the costs associated with its affiliated brokerage option. While Valley Forge told clients that, “imilar services by other brokers may be offered at higher or lower prices elsewhere,” the SEC found that Valley Forge’s rates were significantly higher than those clients would have paid under the other brokerage options offered by the firm. According to the SEC, the average commission rate paid by clients selecting the affiliated brokerage option was $.18/share, while the average commission paid by clients selecting the directed brokerage option was $.04/share, and those choosing the discretionary brokerage option, who tended to be large institutional clients, paid even less. Under the directed brokerage option, clients could designate a third-party broker-dealer to handle all aspects of the brokerage relationship and negotiate the fees and/or commissions directly with that broker-dealer. Under the discretionary brokerage option, the client would choose where its assets would be custodied and designate a “preferred broker”. However, Valley Forge retained the discretion to select the broker-dealer for each trade on a “best price and execution basis.” The SEC contended that Valley Forge was aware that the directed brokerage option could result in clients paying roughly 4.5 times less than they would have paid under the affiliated brokerage option. The SEC further claimed that Valley Forge misled clients regarding the benefits of the affiliated brokerage option by stating that affiliated brokerage clients could negotiate a discounted rate with Valley Forge. In reality, the SEC found that nearly 92% of Valley Forge’s affiliated brokerage clients received a “discount” from the “full commission” retail rate, with the vast majority receiving a price 70% lower than the supposed retail rate. As noted, this discounted price stood significantly higher than other available options, rendering inaccurate Valley Forge’s suggestion that the pricing of the affiliated brokerage option would benefit its clients. In total, the SEC claimed that advisory clients paid Valley Forge more than $4.7 million in excess compensation. Commenting on the settlement, Kelly L. Gibson, Associate Director of Enforcement in the SEC’s Philadelphia Regional Office, said: “Valley Forge put its own interests ahead of its advisory clients, causing them to spend more money unnecessarily by portraying inaccurate costs and benefits of using its in-house brokerage. Dual registrants and advisers with affiliated broker-dealers must accurately disclose all conflicts of interest arising from their brokerage arrangements. The SEC’s examination and enforcement programs will continue to identify these types of violations and return money to harmed retail investors as quickly as possible.” In the SEC’s cease-and-desist order, the SEC found that BB&T Securities, as the successor in interest to Valley Forge, violated Sections 206(2) and 207 of the Investment Advisers Act of 1940. Without admitting or denying the findings, BB&T Securities consented to the order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected current and former clients through a Fair Fund, as well as a $500,000 penalty. According to the SEC, BB&T Securities ended Valley Forge’s existing directed brokerage program by amending its cost structure and its disclosures. A copy of the SEC’s cease-and-desist order can be found here.

In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here ), the Court of Appeals described the justifiable reliance requirement of a fraud claim as a “fundamental precept” of the cause of action. 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.” f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. 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). When the plaintiff “has hints” that the statement is false, the courts impose a “heightened degree of diligence” on the plaintiff. Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011) (quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 20016)). Under such circumstances, the courts require the plaintiff to make an “additional inquiry to determine” the “accuracy” of the statement. Id . (citation and internal quotation marks omitted). If the plaintiff fails to make such an inquiry, as in ISS Action, Inc. v. Tutor Perini Corp. , 2019 N.Y. Slip Op. 01577 (2d Dept. Mar. 6, 2019) (here), the plaintiff will not be found to have reasonably relied on the alleged misrepresentation. ISS Action, Inc. v. Tutor Perini Defendant, Tutor Perini Corporation (“Tutor Perini”), is a construction company that had a contract with the Port Authority of New York and New Jersey to make improvements to a runway at John F. Kennedy International Airport. In connection with the project, Tutor Perini hired the plaintiff, ISS Action, Inc. (“ISS”), as a subcontractor to provide security services at the job site. On July 31, 2009, ISS and Tutor Perini entered into a one-page agreement (the “2009 Agreement”) in order for ISS to begin work immediately. Under the agreement, ISS was to receive various rates of compensation in exchange for the security services it was providing. Those rates were “subject to New York State Sales Tax.” In accordance with the 2009 Agreement, ISS performed the required services and invoiced Tutor Perini for the work performed.  Tutor Perini paid the full amount of the invoice, including charges for sales tax. According to ISS, “one or more representatives” informed it that the security services ISS provided “were, as a matter of fact and law, exempt from New York State and local sales and use taxes.” Subsequent to those representations, Tutor Perini provided ISS with a New York State and Local Sales and Use Tax Contractor Exempt Purchase Certificate (the “Tax Exemption Certificate”). The Tax Exemption Certificate was signed by an employee of Tutor Perini and stated that “ he tangible personal property or service being purchased” by the defendant were “exempt from sales and use tax” and then listed a number of possible exemptions. The exemption which was marked on the Tax Exemption Certificate stated that “ he tangible personal property will be used . . . to improve real property . . . owned by an organization exempt under section 1116(a) of the Tax Law.” After receiving the completed Tax Exemption Certificate, ISS refunded the sales tax paid by Tutor Perini in connection with the first invoice and did not charge Tutor Perini any further sales tax. A more formal subcontract between the two parties was executed on February 12, 2010 (the “2010 Agreement”). The 2010 Agreement provided, among other things, that ISS would be responsible for “all payments of taxes,” including “sales and use taxes.” ISS alleged that “ n light of the representations made by . . . that the services being performed by on the runway roject were exempt from sales and use taxes,” it signed the 2010 Agreement. In March of 2013, ISS was audited by the New York State Department of Taxation and Finance, which determined that ISS owed approximately $125,000 in back taxes plus interest with respect to the work it performed for Tutor Perini. After Tutor Perini refused ISS’s demands to pay the back taxes, ISS commenced the action. ISS asserted four causes of action against Tutor Perini. The first cause of action sought a declaration that Tutor Perini was legally obligated to pay all sales tax, including interest and penalties, if any, owed as a result of ISS’s provision of services to the defendant. The second, third, and fourth causes of action sought to recover damages for breach of contract, unjust enrichment, and fraudulent misrepresentation, respectively. In the fourth cause of action, ISS sought to recover damages for fraudulent misrepresentation. ISS alleged that Tutor Perini’s misrepresentations as to the tax-exempt status of ISS’s services induced ISS to enter into the 2010 Agreement and forgo the collection of taxes from the defendant in connection with the runway project. Tutor Perini maintained that any reliance on the representations about the tax-exempt status of ISS’s services was unreasonable. ISS subsequently moved for summary judgment on the first, third, and fourth causes of action. Tutor Perini cross-moved for summary judgment dismissing the complaint. The motion court denied ISS’s motion and granted Tutor Perini’s cross motion. ISS appealed. The Appellate Division, Second Department affirmed. The Court’s Decision The Court held that Tutor Perini “established, prima facie,” that ISS’s reliance on Tutor Perini’s statements “was unreasonable as a matter of law.” Slip op. at *3. The Court noted that since ISS was “aware of the nature of the services it was providing to the defendant”, it did not “allege that the defendant was in the exclusive possession of any facts which bore upon the tax-exempt status of the plaintiff’s work.”   Id . “As such, the only representation upon which the plaintiff could have relied was the defendant’s legal opinion as to the taxable status of the plaintiff’s work.” Id . That opinion and the law on which it was based, observed the Court, was equally available to ISS. Id . (“In that regard, the plaintiff was in an equal position to discover the applicable law.”) Since the applicable law was available to ISS, the Court held that ISS could not have reasonably relied on Tutor Perini’s legal opinion. The Court also found that ISS had a “hint” of falsity from the “face” of the Tax Exemption Certificate because the certificate showed that ISS was providing services to Tutor Perini, rather than “tangible personal property.” Id . “Under such circumstances, a ‘heightened degree of diligence required’ and yet the plaintiff failed to utilize the means it had to determine the truth of the defendant’s legal representations.” Id . (citations omitted). Takeaway In Ambac , the Court of Appeals reinforced the importance of satisfying the justifiable reliance element of a fraud claim.  Thus, a plaintiff alleging fraud must exercise “ordinary intelligence” to ascertain “the truth of the subject of the alleged false representation.” The failure to do so will result in dismissal of the claim. When the plaintiff has a “hint” of the falsity, he/she must exercise a heightened degree of diligence in ascertaining “the truth of the subject of the alleged false representation.” In ISS Action , the plaintiff could not satisfy this heightened burden.

Around two centuries ago, German writer and statesman, Johann Wolfgang von Goethe, wrote that “precaution is better than cure.”  While von Goethe’s quote is applicable to a variety of situations, it seems particularly prescient in the context of Yellowstone injunctions as made plain in the recent decision of the Supreme Court of the State of New York, Appellate Division, First Department, in Bliss World LLC v. 10 West 57 th Street Realty LLC , decided on March 5, 2019. This Blog has previously addressed issues involving Yellowstone injunctions: “ Commercial Tenants Must Remain Aware Of Yellowstone Injunctions ” and “ Appellate Division, Second Department, Enforces Waiver Of Declaratory Relief In Commercial Lease Resulting In The Denial Of Tenant’s Yellowstone Injunction ,” so the history of such relief will not be recounted. By way of brief background, “ he purpose of a Yellowstone injunction is to maintain the status quo so that the tenant served with notice to cure an alleged lease violation may challenge the propriety of the landlord’s notice while protecting a valuable leasehold interest.”  Garland v. Titan West Associates , 147 A.D.2d 304 (1 st Dep’t 1989) (citing, among other cases, First Nat. Stores v. Yellowstone Shopping Center , 21 N.Y.2d 630 (1968)). “To obtain a Yellowstone injunction, the tenant must demonstrate that (1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.” Riesenburger Props., LLLP v. Pi Assoc., LLC , 155 A.D.3d 984 (citation and internal quotation marks omitted).) The ability and desire to cure the alleged default is critical to obtaining Yellowstone injunctive relief.  Bliss World .  A plaintiff makes such a showing “by indicating in its motion papers that it is willing to repair any defective condition found by the court and by providing proof of the substantial effort it has already made in addressing the default listed on the notice to cure.”  146 Broadway Assoc., LLC v. Bridgeview at Broadway, LLC , 164 A.D.3d 1193 (2 nd Dep’t 2018). It is axiomatic that incurable defaults are not amenable to Yellowstone injunctive relief.  In Kim v. Idylwood, N.Y., LLC , 66 A.D.3d 528 (1 st Dep’t 2009), the tenant sought a Yellowstone injunction following receipt of a default notice predicated on the failure to “previously and continuously maintain[] insurance coverage as required by their commercial lease….”  Kim , 66 A.D.3d at 529 (citations omitted).  In affirming the denial of Yellowstone relief, the Kim court noted the “incurable” nature of the “violation”  and noted that, “ laintiffs’ attempt to demonstrate their ability and readiness to cure the alleged violation by procuring, during the cure period, insurance coverage prospectively for the remaining 10 months of their lease term is unavailing, as such policy does not protect defendant against the unknown universe of any claims arising during the period of no insurance coverage.”  Kim , 66 A.D.3d at 529. Issues similar to those decided in Kim were decided in Bliss World in which the Appellate Division, First Department, reversed supreme court’s grant of tenant’s motion to extend a Yellowstone injunction.  The notice to cure in Bliss World related to, inter alia , the tenant’s failure to procure insurance.  While the Court noted that the “tenant provides various steps that it will take to cure if it is ultimately found to be in material violation of the insurance provisions of the lease<,> … proposed cures involve any retroactive change in coverage, which means that the alleged defaults raised by the landlord are not susceptible to cure.”  Bliss World (citations omitted). Simply because the commercial tenant in Bliss World was not entitled to a Yellowstone injunction does not necessarily mean that it will lose its lease because the denial of the Yellowstone injunction, does not resolve the merits of the underlying default notice.  As the Court noted “ here is still an ongoing dispute between the parties regarding whether the landlord’s claimed defaults are meritorious, either because they are not really defaults or they are not sufficiently substantial.”  Indeed, the reversal by the First Department in Bliss World “does not relieve the landlord of proving the bona fides of the claimed default or prevent the tenant from defending itself … will be resolved either in connection with the complaint and counterclaim in this action or in a subsequently commenced commercial summary holdover proceeding.” The Bliss World Court also rejected the Tenant’s claim that it was still entitled to a preliminary injunction even though it was not entitled to a Yellowstone .  Because the necessary showing to obtain a Yellowstone injunction is far less than that which is required for a preliminary injunction, the Court held that if “the Yellowstone injunction fails, the preliminary injunction does as well.”  The Court continued: n any event, no injunction is needed to preserve the status quo because the landlord cannot evict the tenant unless and until there is a determination of the merits in the landlord’s favor.  If the tenant prevails, then there will be no eviction.  The right lost by the denial of a Yellowstone injunction is the right to cure any default.   TAKEAWAY The Yellowstone injunction can be effectively employed to preserve a commercial tenant’s rights in a valuable commercial lease when faced with a default notice from a landlord.  However, “precaution is better than cure.”  It is in the tenant’s best interest to take all reasonable steps to avoid lease defaults and related Yellowstone injunction and/or other lease default litigation.  As highlighted by the Bliss World and Kim Courts, among others, it is critically important that commercial tenants avoid incurable defaults, which, if proven by the landlord, could result in the termination of a valuable lease without the right to cure.