The title of a today’s post sums up the difficulties a plaintiff encounters when trying to pierce the corporate veil to hold a corporate officer, director or shareholder responsible for the wrongs alleged to have been perpetrated on the plaintiff. This is not to say that a plaintiff can never prevail. Rather, it is a reflection of the fact that the plaintiff bears a heavy burden to do so. ABN AMRO Bank, N.V. v. MBIA Inc. , 17 N.Y.3d 208, 235 (2011). In Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc. , 2019 N.Y. Slip Op. 01443 (2d Dept. Feb. 27, 2019) ( here ), the subject of today’s post, the plaintiff met its burden and successfully withstood a motion for summary judgment on its veil piercing claims. The Law in New York It is axiomatic that a corporation acts through its officers, directors and owners. Thus, these individuals are normally not liable for the debts incurred by the corporation. However, when an officer, director or shareholder abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable. TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 340 (1998) (the corporate veil may be pierced to impose liability for corporate wrongs upon persons who have “misused the corporate form for personal ends.”); Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 142 (1993) (the corporate veil may be pierced where the owners have “abused the privilege of doing business in the corporate form” by “perpetrat a wrong or injustice . . . such that a court in equity will intervene.”); Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citation omitted). “Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury.” Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 18 (2015) (internal quotation marks omitted); TNS Holdings , 92 N.Y.2d at 339 (1998). Importantly, it is not enough for the plaintiff to demonstrate that the officer, director or shareholder dominated and controlled the corporate entity. Matter of Morris , 82 N.Y.2d at 141-142; TNS Holdings , 92 N.Y.2d at 339. The plaintiff must show that the officer, director or member used the corporation for his/her personal benefit and the corporation was nothing more than an “alter ego” or instrumentality of the officer or member. TNS Holdings , 92 N.Y.2d at 339. Conclusory allegations of domination and control are insufficient. East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc. , 16 N.Y.3d 775, 776 (2011) (noting that at the pleading stage, “a plaintiff must do more than merely allege that engaged in improper acts or acted in ‘bad faith’ while representing the corporation”). The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable. While application of the doctrine depends on the facts and circumstances of each case ( Ledy v. Wilson , 38 A.D.3d 214, 214 (1st Dept. 2007)), several factors have emerged in determining whether the plaintiff has made the requisite showing. These factors include, among others: (1) the failure to adhere to corporate formalities; (2) inadequate capitalization (that is, the corporation or LLC does not have sufficient funds to operate); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the corporation or LLC; and (5) use of corporate funds for personal benefit. Shisgal v. Brown , 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted). No one factor controls the consideration. Tap Holdings , 109 A.D.3d at 174 (citation omitted). Courts recognize, however, “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting Wm. Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir. 1989) (applying New York law)). Accord , Leslie, Semple & Garrison, Inc. v. Gavit & Co., Inc. , 81 A.D.2d 950, 951 (3d Dept. 1981) (recognizing that it is often difficult and impractical for small closely-held corporations to comport with the typical corporate formalities). See also Bahar v. Schwartzreich , 204 A.D.2d 441, 443 (2d Dept. 1994); Bullard v. Bullard , 185 A.D.2d 411, 413 (3d Dept. 1992). In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of. Matter of Morris , 82 N.Y.2d at 141; Guptill Holding Corp. v. State of N.Y. , 33 A.D.2d 362, 365 (3d Dept. 1970) (noting that an element of veil piercing is “an injury proximately caused by said wrong”) (citation omitted); East Hampton Union Free School Dist. v. Sandpepple Builders, Inc. , 66 A.D.3d 122, 132 (2d Dept. 2009) (noting that the plaintiff must articulate conduct by the individual that creates a nexus between it and the “transactions or occurrences” alleged in the complaint), aff’d , 16 N.Y.3d 775 (2011). Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc. Town-Line involved the purchase of a car wash business (defendant, Don’s Kleen Machine Kar Wash, Inc. (“DKM”)) by the plaintiff, Town-Line Car Wash, Inc., in March 2004. Town-Line sought to pierce the corporate veil to hold Barry Brookstein (“Brookstein”), the sole shareholder of DKM, liable for DKM’s alleged obligation to Town-Line. At the time of the transaction, DKM’s business consisted of only “a car wash and automobile detailing business.” The purchase price included a down payment of $200,000, a cash payment of $1,100,000 at the time of closing, and a note in the principal amount of $1,200,000, payable by Town-Line over a period of 180 months in equal monthly installments of $10,785.94. Town-Line reserved the right to prepay the note at any time without penalty. The agreement also included an indemnity provision for any claim made within 7½ years after the closing and arising out of or in connection with, inter alia , the breach, or inaccuracy, of any of DKM’s representations or warranties. The indemnity was payable by DKM, and was not personally guaranteed by the company’s principals, the defendants Brookstein and Donald Berman (“Berman”). On December 20, 2007, more than three years after the closing, Town-Line exercised its right to prepay the installment note in full. On April 23, 2008, Brookstein caused DKM to be dissolved. On or about September 15, 2011 – nearly seven years after the closing – Town-Line notified DKM of an alleged breach of DKM’s representations and warranties under the agreement. It maintained that since DKM had since been dissolved, “Town-Line holds and jointly and severally responsible for the obligations of under the Agreement.” Town-Line commenced the action in March 2012 against DKM, Brookstein, and Berman, asserting causes of action against all defendants based on fraud, breach of contract, and unjust enrichment, and asserting a further cause of action against Brookstein and Berman predicated on piercing the corporate veil. Following discovery, Brookstein moved for summary judgment dismissing the complaint against him and Town-Line cross moved for summary judgment on the issue of liability as against Brookstein. The motion court granted Brookstein’s motion and denied the cross motion. Town-Line appealed. The Appellate Division, Second Department, reversed the grant of summary judgment in favor of Brookstein. The Majority Opinion The Court held that there was a triable issue of fact as to whether Brookstein stripped DKM of assets, leaving the corporation “without sufficient funds to pay its contractual contingent liabilities.” Slip op. at *2. The Court noted that “ t undisputed that Brookstein dissolved DKM without making any reserves for contingent liabilities, despite the existence of a provision in the contract of sale pursuant to which DKM agreed to indemnify Town-Line for any breach of warranty for a period of 7½ years after the closing of the sale.” Id . “This factor” alone, said the Court, “was sufficient to raise a triable issue of fact.” Id . The Court also held that the motion court correctly denied the cross motion for summary judgment, noting that there were triable issues of fact “as to whether Brookstein exercised complete domination of DKM in the transaction at issue and whether he abused the corporate form to commit a wrong or fraud causing injury to Town-Line.” Id . The Dissenting Opinion Justice Cheryl E. Chambers concurred in part and dissented in part. Justice Chambers agreed with the majority that the motion court properly denied Town-Line’s cross motion but disagreed with the majority as to the motion court’s order granting summary judgment to Brookstein. To the dissent, “Town-Line improperly invoking the equitable doctrine of piercing the corporate veil in order to secure a personal guarantee from Brookstein – a contractual benefit that Town-Line omitted, or was unable, to negotiate when it purchased DKM’s assets in 2004.” Id . at *3 “As a threshold matter,” the dissent observed that “by purchasing all or substantially all of DKM’s assets in 2004, DKM would be left with no source of revenue going forward – thereby presenting a very real risk that DKM might not be able to pay indemnification claims made some 7½ years later.” Id .  To manage the risk that DKM might not be able to pay on indemnification claims, Town-line “retain part of the purchase price and it gradually over a term exceeding the indemnification period.” Id . However, Town-Line forfeited that protection when it “elected to prepay the note in full,” in 2007. Thus, observed the dissent, Town-Line gave “up the only security it had for the payment by DKM of any future claim during the remainder of the indemnity period.” Justice Chambers rejected Town-Line’s theory that Brookstein abused the corporate form by causing DKM to be dissolved in 2008, after the note was repaid in full, and without making adequate reserves to cover potential indemnification claims arising during the final years of the indemnification period. That theory, concluded Justice Chambers, “lack merit.” Id . Equally important, noted the dissent, Brookstein “established, prima facie, that he had no involvement in the day-to-day operations of DKM and no personal knowledge of the operative facts underlying Town-Line’s indemnification claims against DKM.” Id . at *4. Justice Chambers rejected Town-Line’s position that it was entitled to contractual indemnification from DKM regardless of what Town-Line may or may not have known at the time of the sale through due diligence, and that Brookstein, regardless of his own state of mind, should be held liable simply because he caused the company to be dissolved before the end of the contractual indemnification period. Id . Takeaway Litigants should remain mindful that merely tracking the elements of veil piercing is not enough to withstand a dismissal challenge. Plaintiffs must do more; they must proffer facts. Town-Line is a good example of the fact-intensive nature of the veil piercing inquiry.

It is not uncommon for the owners of a business wishing to remove or buy-out one of their own, or who wish to dissolve the entity, to retain a valuation expert to perform an appraisal of the entity or the ownership interest at stake. When the parties cannot reach an agreement and choose to litigate their dispute, the question arises whether the valuation report is discoverable? Like many questions under the law, the answer depends upon the circumstances under which report was commissioned.  If the appraisal was requested for reasons that are not “of a legal character,” as in Galasso v. Cobleskill Stone Products, Inc. , 2019 N.Y. Slip Op. 01483 (3d Dept. Feb. 28, 2019) ( here ), the report is discoverable. In holding that the appraisal report was discoverable, the Galasso Court considered whether the report was relevant to the action and privileged. We consider the legal principles underlying the decision below. Generally, “ here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” CPLR § 3101(a). The Court of Appeals has “emphasize ” time and again that the “ he words, ‘material and necessary,’ are to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial.” Forman v. Henkin , 30 N.Y.3d 656, 661 (2018) (internal quotation marks, brackets, ellipsis and citations omitted); Andon v. 302-304 Mott St. Assoc. , 94 N.Y.2d 740, 746 (2000). In short, CPLR § 3101(a) requires the production of information that is “relevant” to the disposition of the action. Id . Importantly, “ he right to disclosure, although broad, is not unlimited.” Forman , 30 N.Y.3d at 661. “The test is one of usefulness and reason.” Allen v. Crowell-Collier Publ. Co. , 21 N.Y.2d 403, 406 (1968). In addition, privileged matter, attorney work product, and trial preparation materials are protected from disclosure unless the moving party can demonstrate a “substantial need” for the information and an “undue hardship” if the material is not disclosed. Forman , 30 N.Y.2d at 661-662; Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 376-377 (1991). The burden of establishing a right to protection under the CPLR is with the party asserting it — “the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity.” Spectrum , 78 N.Y.2d at 377. “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” NYAHSA Servs., Inc., Self-Ins. Trust v. People Care Inc. , 155 AD3d 1208, 1209-1210 (3d Dept. 2017) (internal quotation marks and citation omitted); see also Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). “The party asserting the privilege bears the burden of establishing . . . that the communication at issue was between an attorney and a client for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship that the communication was predominately of a legal character.” Ambac , 27 N.Y.3d at 624 (internal quotation marks and citation omitted). The purpose of the privilege is “to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). “Generally, communications made in the presence of third parties, whose presence is known to the client, are not privileged.” Ambac , 27 N.Y.3d at 624 (internal quotation marks and citation omitted). However, “statements made to the agents or employees of the attorney or client, or through a hired interpreter, retain their confidential (and therefore, privileged) character, where the presence of such third parties is deemed necessary to enable the attorney-client communication and the client has a reasonable expectation of confidentiality.” Id . at 624. Notably, “ he scope of the privilege is not defined by the third parties’ employment or function, however; it depends on whether the client had a reasonable expectation of confidentiality under the circumstances.” People v. Osorio , 75 N.Y.2d 80, 84 (1989). Galasso v. Cobleskill Stone Products, Inc. In December 2015, plaintiff, Mark A. Galasso (“Galasso”), a shareholder of defendant Cobleskill Stone Products, Inc. (“Cobleskill” or the “Company”), commenced the action against, among others, the Company pursuant to Business Corporation Law §§ 706(d) and 716(c) for injunctive relief and damages. Plaintiff alleged, among other things, that the defendants wasted the Company’s assets and engaged in self-dealing. In November 2017, the defendants made a discovery demand for, among other things, a valuation report that was created by Management Planning Inc. (“MPI”), a business valuation and advisory firm, for the estate of Martin Galasso (the “Decedent”). Plaintiff did not provide the defendants with the valuation report, asserting that it was not discoverable on several grounds, including that it was not material and necessary to the disposition of the action and was otherwise privileged. Defendants subsequently moved to compel discovery, which Galasso opposed. After a conference, the motion court, among other things, granted the defendants’ motion and required Galasso to produce the final valuation report. Plaintiff appealed. The Court’s Decision The Court affirmed. The Court concluded that the valuation report was material and necessary to the disposition of the action. As noted by the Court, Galasso retained MPI to appraise his ownership interest in the Company for estate tax filing purposes. According to Galasso, after conclusion of the appraisal, MPI raised “serious and substantial concerns” that prompted him to commence the action against the defendants. Based upon these facts, the Court concluded that the valuation report was relevant to the action: “ ecause played a role in the commencement of the action, … it may be probative as to why plaintiff believe that defendant is guilty of gross malfeasance.” Slip op. at *2 (citations omitted). Additionally, the Court held that the motion court “correctly determined” that “the valuation report, which values decedent’s stock in defendant, provides a benchmark ‘by which to . . . evaluate plaintiff’s damages.’” Id . The Court also rejected Galasso’s argument that the valuation report was protected by the attorney-client privilege. “Although MPI was hired by plaintiff’s counsel and the agreement between MPI and plaintiff’s counsel state that its communications would be confidential,” the Court held that “the primary purpose for which MPI was hired was to appraise plaintiff’s stocks in defendant for estate tax filing purposes.” Id . “In fact,” said the Court, “the instant action was not commenced until after MPI expressed ‘serious and substantial concerns’ upon completion of its appraisal.” Id . Therefore, concluded the Court, “the mere fact that MPI’s report now supports plaintiff’s legal action not eliminate the fact that the report was not initially done for legal purposes.” Id . Takeaway Galasso is a good example of how the courts determine whether an expert report is privileged – they look to “whether the client had a reasonable expectation of confidentiality under the circumstances.” In Galasso , the plaintiff did not have such an expectation. Indeed, as the Court noted, it did not help that Galasso “confirmed” “during a court conference… that the valuation report did not include any legal information, nor did it disclose plaintiff’s confidences.” Under those circumstances, the Court easily concluded that Galasso had no “reasonable expectation of confidentiality” in the report.

There are five elements to a fraud claim: “(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). A plaintiff alleging fraud must meet each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to meet any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). Recently, in Shainwald v. Professionals for Non-Profits, Inc. , 2019 N.Y. Slip Op. 50209(U) (Sup. Ct. N.Y. County Feb. 25, 2019) ( here ), Justice Carmen Victoria St. George of the New York Supreme Court, New York County, dismissed a plaintiff’s fraud claim precisely because she failed to meet all the elements of her fraud claim. Sybil Shainwald (“Shainwald” or “Plaintiff”) commenced the action against defendant, Professionals for Non-Profits, Inc. (“PNP”), a temporary employment staffing agency, to recover damages for fraud and negligent hiring. Plaintiff alleged that she retained PNP to provide her with a personal assistant, primarily for administrative and organizational tasks. The assistant was to work out of Plaintiff’s New York City apartment during the summer of 2017, while she resided in her summer home on Long Island. According to the complaint, Shainwald requested that the assistant “have nothing checkered in his or her past given that would not be present in her apartment.” On or about July 13, 2017, PNP recommended Brooke Wright (“Wright”) to serve as Plaintiff’s assistant. PNP allegedly represented that it “had conducted due diligence into” Wright’s “background and confirmed that … Wright was trustworthy enough to be placed in Shainwald’s apartment for several months while Shainwald was not there.” Wright began performing administrative services for Plaintiff and continued to do so until September 22, 2017. On August 1, 2017, while Plaintiff was residing at her Long Island home, Wright allegedly stole “approximately $100,000 worth of jewelry.” Plaintiff alleged that she did not learn of the missing jewelry until approximately October 15, 2017, when she discovered a receipt from Federal Express showing that a package was shipped from her to Wright on August 1, 2017. Thereafter, plaintiff commenced the action. Among other claims, Plaintiff alleged that PNP committed a fraud in placing Wright to perform as her assistant. PNP moved to dismiss, arguing that Plaintiff’s fraud claim was not plead with the requisite particularity under CPLR § 3016(b). In that regard, PNP claimed that Plaintiff failed to satisfy the elements of her fraud claim, arguing, for example, that Plaintiff did not allege a misrepresentation of fact, justifiable reliance, and loss causation/damages. The Court granted the motion because Plaintiff failed to plead loss causation/damages. Analysis of the Court’s Decision In a fraud action, the plaintiff must plead each element with particularity. CPLR § 3016(b). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners , 12 N.Y.3d at 558. 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). Against the foregoing, the Court considered each element of Shainwald’s fraud claim. Falsity and Knowledge of Falsity At its core, a misrepresentation refers to a statement that is false or untrue. A fraud claim is pleaded with particularity under CPLR § 3016(b) when the complaint identifies “who made the misrepresentation to whom, the date the misrepresentation was made, and its content.” El Entm’t U.S. LP v. Real Talk Entm’t, Inc. , 85 A.D.3d 561, 562 (1st Dept. 2011). In Shainwald , Plaintiff alleged that PNP materially misrepresented that it “conducted a background check on Ms. Wright and thoroughly vetted her in advance to ensure that it was appropriate to place Ms. Wright in apartment while was not living there.” The Court found that this allegation sufficed to satisfy the falsity element of Plaintiff’s fraud claim. In this regard, the Court observed that Plaintiff identified the “who”, “what”, “where” and “when” of the alleged misrepresentation with sufficient detail to inform PNP of the substance of her claims: “Plaintiff not only identified Brandel as the source of the material misrepresentations, but the date and the words used by Brandel.” Slip Op. at *6. Therefore, the Court held that Plaintiff satisfied the particularity requirement of CPLR § 3016(b) in that she adequately detailed PNP’s misrepresentations in a manner that was sufficient “to inform PNP of the substance of plaintiff’s claims.” Id . The Court also held that Plaintiff sufficiently alleged that PNP knew that its representations were false and that such representations were false when made. Id . (citing Black v. Chittenden , 69 N.Y.2d 665, 668 (1986) (allegations that defendant’s statements “were false and were known by the defendant to be false when made by are sufficient to plead a defendant’s knowledge of falsity”)). Scienter or Intent to Deceive As a general matter, scienter refers to a defendant’s state of mind at the time he/she made the statement or omission. Courts look to whether the defendant possessed an intent “to deceive, manipulate, or defraud.” ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co. , 553 F.3d 187, 197 (2d Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 319 (2007)). In doing so, courts are mindful that “ raudulent intent, by its very nature, is rarely susceptible to direct proof and must be established by inference from the circumstances surrounding the allegedly fraudulent act.” Setters v. AI Props. & Devs. (USA) Corp. , 139 A.D.3d 492, 493 (1st Dept. 2016). In Shainwald , the Court held that Plaintiff adequately alleged intent, noting that PNP possessed sufficient motive to make the false statement: “Plaintiff alleges that made the above statements ‘with the intent that plaintiff would rely upon them in permitting Ms. Wright to perform services in plaintiff's apartment while plaintiff was not there, so that PNP could earn money.” Slip Op. at *6 (quoting complaint.) Justifiable Reliance In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here ), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“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 Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). In Shainwald , the Court held that it was premature to decide the issue given the factual issues that needed to be decided: Plaintiff states that these false statements were material to her decision to allow Ms. Wright in her apartment, that she justifiably relied on them, and permitted Ms. Wright to perform services in her apartment while she was not there. Moreover, plaintiff alleges that her reliance on Brandel’s assurances were reasonable in that she “had no knowledge of the falsity of the representations and had no reason to know that the representations were false.” Regardless, the reasonableness of plaintiff’s reliance “implicates factual issues whose resolution would be inappropriate at this early stage.” As such, PNP’s argument regarding justifiable reliance comes prematurely. Id . (citation omitted). Causation and Damages There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Transaction Causation “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss Causation The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir.2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co. , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Damages for fraud are calculated according to the “out-of-pocket” rule and must reflect “the actual pecuniary loss sustained as a direct result of the wrong.” Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1986). Under CPLR § 3016(b), “ t is not necessary that the measure of damages be pleaded, so long as the facts are alleged from which damages may be properly inferred.” Black , 69 N.Y.2d at 668. In Shainwald , the Court found that Plaintiff failed to plead facts from which damages could be reasonably inferred. Specifically, the Court held that Plaintiff failed to allege facts demonstrating a direct causal link between PNP’s alleged misrepresentation and the alleged theft. “Put another way, even assuming Brandel made false representations regarding PNP’s vetting process, Plaintiff’s claim that Ms. Wright stole $100,000 worth of jewelry, which she claims is evidenced by a Federal Express receipt is far too attenuated for this Court to entertain.” In so holding, the Court agreed with PNP’s argument that since Plaintiff failed to allege that Wright had a criminal record or a propensity to commit a crime, PNP’s alleged failure to perform a criminal background check caused Shainwald’s damages. Consequently, the Court granted PNP’s motion to dismiss “based on plaintiff’s failure sufficiently plead loss causation….” Slip Op. at *6. Takeaway In New York, a plaintiff alleging fraud must do so with particularity. This requirement applies to each element of the claim.  Shainwald is a good reminder that a plaintiff can get to the finish line but not cross it because of a failure to satisfy one of the elements of his/her fraud claim.

As readers of this Blog know, we cover a broad range of issues that fall under the umbrella of commercial and business litigation. Two issues that often receive treatment from this Blog are the application of the statute of limitations to fraud-based claims, and the court’s ability to exercise jurisdiction over a defendant. Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, issued an opinion that involves both of these issues. Magomedov v. Lebedev , 2019 N.Y. Slip Op. 30378(U) (Sup. Ct. N.Y. County Feb. 19, 2019) ( here ). The Applicable New York Law Statute of Limitations for Fraud Under CPLR § 213(8), an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “ he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis , 44 A.D.3d 1033, 1034 (2d Dept. 2007). Accord Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). This 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 on statute of limitations grounds.”  Berman , 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). here.=">here."> Equitable Estoppel Tolling In New York, the courts will equitably estop the assertion of a statute of limitations defense when the defendant affirmatively takes action such that it creates a “long delay between the accrual of the cause of action and the institution of the legal proceeding.” General Stencils v. Chiappa , 18 N.Y.2d 125, 128 (1966); see also Zumpano v. Quinn , 6 N.Y.3d 666, 674 (2006); Matter of Steyer , 70 N.Y.2d 990, 993 (1988). Claims of fraudulent inducement, misrepresentation or deception are sufficient to invoke the equitable estoppel doctrine.  Zumpano , 6 N.Y.3d at 674 (quoting Simcuski v. Saeli , 44 N.Y.2d 442, 449 (1978)); Putter v. North Shore Univ. Hosp. , 7 N.Y.3d 548, 552-553 (2006); MBI Intern. Holdings Inc. v. Barclays Bank PLC , 151 A.D.3d 108, 116-17 (1st Dept. 2017). Importantly, the plaintiff must demonstrate reasonable reliance on the defendant’s misrepresentations to invoke the doctrine. Simcuski , 44 N.Y.2d at 449. In this regard, the plaintiff must use “the means available to him,” by the “exercise of ordinary intelligence,” to ascertain “the truth or the real quality of the subject of the representation.” Centro Empresarial Cempresa S.A. v. American Movil, S.A.B de C.V. , 17 N.Y.2d 269, 268 (2011). The failure to make such a showing will result in the application of the statute of limitations. Gleason v. Spota , 194 A.D.2d 764, 765 (2d Dept. 1993) (“Equitable estoppel will not toll a limitations statute, however, where a plaintiff possesses “‘timely knowledge’ sufficient to place him or her under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable Statute of Limitations.”) (quoting McIvor v. Di Benedetto , 121 A.D.2d 519, 520 (2d Dept. 1986)). Finally, when the plaintiff bases his/her claim of equitable estoppel on concealment, instead of fraud, misrepresentation or deception, “the plaintiff must demonstrate a fiduciary relationship … which gave the defendant an obligation to inform him or her of facts underlying the claim.” Gleason , 194 A.D.2d at 765. here.=">here."> Specific Jurisdiction Under CPLR § 302(a)(1), a court can exercise specific personal jurisdiction over a non-domiciliary who “transacts any business within the state.” CPLR § 302(a)(1). To satisfy CPLR § 302(a)(1), a plaintiff must satisfy a two-part test. First, the defendant must have “transacted business” in New York. McGowan v. Smith , 52 N.Y.2d 268, 271 (1981). Second, the plaintiff must demonstrate “some articulable nexus between the business transacted and the cause of action sued upon.” Id . at 272. CPLR § 302(a)(1) is a “single act statute,” whereby “proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” Deutsche Bank Secs., Inc. v. Mont. Bd. of Invs. , 7 N.Y.3d 65, 71 (2006). “Purposeful activities are those with which a defendant, through volitional acts, ‘avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.”’ Fischbarg v. Doucet , 9 N.Y.3d 375, 380 (2007) (quoting McKee Elec. Co. v. Rauland–Borg Corp. , 20 N.Y.2d 377, 382 (1967)). Whether a non-domiciliary has engaged in sufficient purposeful activity to confer jurisdiction requires an examination of the totality of the circumstances. Id . (quoting Farkas v. Farkas , 36 A.D.3d 852, 853 (2d Dept. 2007)). The quality of a defendant’s contacts is the “primary consideration” in establishing jurisdiction. Id . As to the required nexus, the courts require “a relatedness between the transaction and the legal claim such that the latter is not completely unmoored from the former, regardless of the ultimate merits of the claim.” Licci ex rel. Licci v. Lebanese Canadian Bank, SAL , 20 N.Y.3d 327, 339 (2012) “ here at least one element arises from the New York contacts, the relationship between the business transaction and the claim asserted supports specific jurisdiction under the statute” Id . at 341. Magomedov v. Lebedev Background Magomedov involved a dispute over an alleged joint venture between the plaintiffs, Magomed Magomedov (“Magomedov”) and Akhmed Bilalov (“Bilalov”) and the defendants, Leonard Blavatnik (“Blavatnik”) and Viktor Vekselberg (“Vekselberg”), and the sale of a Russian oil company, OJSC Tyumenskaya Neftyanaya Kompaniya (“TNK”), for more than one billion dollars. In 1997, the Russia Federation placed 40% of TNK up for public auction. Blavatnik and Vekselberg purchased that interest, but the sale was allegedly conditioned on Blavatnik and Vekselberg later obtaining a controlling interest in a Russian oil company, OJSC Nizhnevartovskneftgaz (“NNG”), which was owned by plaintiffs and defendant, Leonid Lebedev (“Lebedev”). Plaintiffs and Lebedev allegedly provided Blavatnik and Vekselberg with the majority control in NNG that they sought. According to the complaint, in connection with the transaction, plaintiffs and Lebedev agreed to act jointly in all matters related to their respective NNG shares, to share in the profits and losses of the venture, and not sell or take unilateral action regarding their respective shares in NNG without unanimous consent (“1997 Joint Venture”). Two years later, in 1999, plaintiffs sold their interest in NNG to Oleg Kim, a Russian businessman. Plaintiffs alleged that, prior to the sale of their NNG shares, Vekselberg and Blavatnik secretly approached Lebedev to sell his NNG shares to them. According to the complaint, in violation of the 1997 Joint Venture, Lebedev agreed to sell his interest in NNG in exchange for a stake in a different joint venture with Vekselberg and Blavatnik (“Defendants’ Joint Venture”). Plaintiffs further alleged that, in violation of the 1997 Joint Venture, Lebedev failed to disclose the sale of his NNG shares to Vekselberg and Blavatnik, as well as his conflict of interest in negotiating the sale of plaintiffs’ NNG shares. Blavatnik and Vekselberg eventually purchased the NNG shares that plaintiffs sold. Defendants’ Joint Venture is the subject of another action before Justice Scarpulla, Lebedev v. Blavatnik (the “Lebedev Action”). In the Lebedev Action, Lebedev alleged that he negotiated the terms of Defendants’ Joint Venture in New York in 2001. Lebedev further alleged that in October 2012, TNK was sold to a Russian state-owned conglomerate. Blavatnik and Vekselberg allegedly received $13.8 billion from that sale, and Lebedev sought $2.07 billion as part of his stake in Defendants’ Joint Venture. Plaintiffs alleged that neither knew of defendants’ misconduct until the Lebedev Action was filed in February 2014. According to plaintiffs, Lebedev met with Magomedov in 2014, at which time he disclosed his prior dealings with Blavatnik and Vekselberg. Lebedev allegedly reaffirmed the 1997 Joint Venture and discussed entering into a new agreement, whereby Lebedev would split any recovery from the Lebedev Action in exchange for Magomedov’s assistance in the Lebedev Action (“2014 Agreement”). Magomedov subsequently memorialized the 2014 Agreement and started to assist Lebedev in the Lebedev Action. However, throughout 2014, 2015, and January 2016, the parties were unable to finalize and execute a written agreement. According to the complaint, once plaintiffs realized that Lebedev had no intention of fulfilling the terms of the 2014 Agreement, they commenced the Magomedev action in February 2017. In their amended complaint, plaintiffs alleged, among other things, fraud and breach of fiduciary duty against Lebedev. Lebedev moved to dismiss on statute of limitations grounds, lack of personal jurisdiction and for failure to state a claim. The Court’s Decision Statute of Limitations In seeking dismissal of the tort-based claims ( e.g. , fraud and breach of fiduciary duty) on statute of limitations grounds, Lebedev argued that the complaint was untimely and barred by the statute of limitations. Lebedev maintained that regardless of whether a three-year or six-year statute of limitation period applied, the statute of limitations expired as to each of the claims connected to the 1997 Joint Venture. Lebedev further argued that neither the two-year discovery rule nor equitable estoppel applied to save plaintiffs’ claims against him. The Court held that the tort-based claims connected to the alleged 1997 Joint Venture had accrued decades ago, when plaintiffs sold their shares of NNG. Thus, those claims were untimely under the six-year statute of limitations. The Court held, however, that Lebedev had met his burden of showing that the two-year discovery rule did not apply, thereby shifting the burden to plaintiffs to provide an evidentiary basis to raise “a question of fact as to why Lebedev should be equitably estopped from asserting the statute of limitations.” Slip op. at *9. Based on the record before it, the Court found that plaintiffs did not diligently act to file their fraud claims within two years of the discovery of the alleged fraud and, therefore, could not avail themselves of equitable estoppel to toll the two-year period. The Court noted that plaintiffs admittedly “discovered the essential elements of their claims against Lebedev in 2014” and, therefore, “could have commenced the action at that time.” Id . Instead, “ hey voluntarily chose … to try and collaborate with Lebedev in exchange for a part of any compensation Lebedev received in the Lebedev Action.” Id . The “protracted delay in executing the 2014 Agreement”, said the Court, “ t a minimum … should have caused plaintiffs to proceed with diligence before January 2016.”   Id . at *10. The Court concluded that plaintiffs, “who are sophisticated business people and have been represented by counsel since 2014,” did not “reasonably investigate their claims. Instead, for reasons not alleged in the complaint or on th motion, plaintiffs waited another year, until February 2017, before commencing th action.” Id . Based on the foregoing, the Court found that plaintiffs failed to raise an issue of fact sufficient to withstand Lebedev’s statute of limitations challenge. Consequently, the Court dismissed the tort-based claims against Lebedev. Specific Jurisdiction Lebedev, a non-domiciliary of New York, argued that the Court lacked personal jurisdiction over him. Plaintiffs disagreed, arguing that they satisfied CPLR § 302(a)(1) and that Lebedev had waived any objection to jurisdiction by selecting a New York state court to litigate the Lebedev Action. In particular, plaintiffs maintained that Lebedev was subject to personal jurisdiction under CPLR §302(a)(1), because their claims against him arose from the 2014 agreement, which specifically reaffirmed the 1997 Joint Venture. The Court agreed with plaintiffs. The Court found that to pursue the Lebedev Action, Lebedev transacted business in New York by hiring a New York lawyer. Moreover, the Court noted that because 2014 Agreement was the subject of the lawsuit, it was directly related to Lebedev’s activities in New York and, therefore, sufficient to confer jurisdiction over him. The Court also held that Lebedev had waived any jurisdictional defense he had by selecting New York to litigate the Lebedev Action. The Court noted that a contrary result would be inequitable. See New Media Holding Co., LLC v. Kagalovsky , 118 A.D.3d 68, 77 (1st Dept. 2014) (“ waived the right to challenge personal jurisdiction by freely using the protections of the New York courts when pursuing rights related to the partnership ... filing the first lawsuit against in the Southern District of New York”). Consequently, the Court denied the jurisdictional challenge advanced by Lebedev. Takeaway Magomedeov highlights the factual nature of motions to dismiss on statute of limitations and jurisdictional grounds. It also highlights the difficulty sophisticated parties have demonstrating that they acted with diligence to protect their rights. Magomedov therefore is a good reminder of how courts will take a fact-based approach to deciding these motions.

In today’s world of e-commerce, a person cannot buy something online, subscribe to a service, or join a club or organization without agreeing to the provider’s “terms of service”. These terms are often lengthy and difficult to read ( i.e. , they are not written in plain English). For these reasons, among others, most consumers simply click the “I agree” button or link without reading the text or thinking about what they agreed to. To many consumer advocates, such electronic terms of service should not be binding. The reason, important terms, such as arbitration requirements or other conditions precedent to a claim, are buried in a sea of words that consumers do not read or understand.  Thus, argue these advocates, it is unfair to bind consumers to agreements that are nothing more than contracts of adhesion. As discussed in O’Brien v. Trooper Fitness LLC , 2019 NY Slip Op 30319(U) (Sup. Ct. N.Y. County Feb. 8, 2019) ( here ), the courts do not agree with the critics of online contracts. Indeed, courts have held that “ here is nothing automatically offensive about such agreements, as long as the layout and language of the site give the user reasonable notice that a click will manifest assent to an agreement.” Sgouros v. Trans Union Corp. , 817 F.3d 1029, 1033-34 (7th Cir. 2016). For this reason, “ ourts around the country have recognized that electronic ‘click’ can suffice to signify the acceptance of a contract.” Id . See also Meyer v. Uber Techs., Inc. , 868 F.3d 66, 75 (2d Cir. 2017). There are two common types of electronic agreements: clickwrap and browsewrap. Each provides a different manner of assent by the user. Nicosia v. Amazon.com, Inc. , 834 F.3d 220, 229 (2d Cir. 2016). The former requires users to click an “I agree” box after being presented with a list of terms and conditions of use, while the latter requires the user to click on a hyperlink at the bottom of the screen that takes the user to the terms and conditions on a website. Id . at 233; Meyer , 868 F.3d at 75; Nguyen v. Barnes & Noble Inc. , 763 F.3d 1171, 1175-76 (9th Cir. 2014). In addition to the foregoing, some online agreements require the user to scroll through the terms before the user can indicate his/her assent by clicking “I agree.” See , e.g. , Berkson v. Gogo LLC , 97 F. Supp. 3d 359, 386, 398 (E.D.N.Y. 2015) (terming such agreements “scrollwraps”); Meyer , 868 F.3d at 75. Other agreements notify the user of the existence of the website’s terms of use and, instead of providing an “I agree” button, advise the user that he/she is agreeing to the terms of service when registering or signing up. Id . at 399 (describing such agreements as “sign-in-wraps”). See also Meyer , 868 F.3d at 75-76. Courts routinely uphold clickwrap agreements for the principal reason that the user has affirmatively assented to the terms of agreement by clicking “I agree.” Meyer , 868 F.3d at 75; Fteja v. Facebook, Inc. , 841 F. Supp. 2d 829, 837 (S.D.N.Y. 2012) (collecting cases). “Under New York law, contracts are enforced so long as the consumer is given a sufficient opportunity to read the , and assents thereto after being provided with an unambiguous method of accepting or declining the offer.” People ex rel. Spitzer v. Direct Revenue, LLC , 19 Misc. 3d 1124(A), 2008 N.Y. Slip Op. 50845(U), *4 (Sup. Ct., N.Y. County 2008) ( here ). “Claims that a consumer was not aware of the agreement or did not actually read it must be disregarded where … the agreement was acknowledged and accepted by clicking on the relevant icon.” Id . (holding that the click-wrap agreement was binding and barred a claim for deceptive or unlawful conduct). Browsewrap agreements, on the other hand, do not require the user to expressly assent. Meyer , 868 F.3d at 75 (citing Juliet M. Moringiello, Signals, Assent and Internet Contracting , 57 Rutgers L. Rev. 1307, 1318 (2005) (“ rowse-wrap encompasses all terms presented by a web site that do not solicit an explicit manifestation of assent.”)). “Because no affirmative action is required by the website user to agree to the terms of a contract other than his or her use of the website, the determination of the validity of the browsewrap contract depends on whether the user has actual or constructive knowledge of a website’s terms and conditions.” Nguyen , 763 F.3d at 1176 (citation omitted). In O’Brien , the Court dismissed a personal injury complaint involving a clickwrap agreement, finding that the plaintiff was bound by the terms and conditions in the agreement. O’Brien v. Trooper Fitness LLC O’Brien arose in the context of a personal injury action. Plaintiff, Kristen O’Brien (“Plaintiff” or “O’Brien”), claimed that she was injured while exercising at a gym (the “Gym”) owned, operated, managed and maintained by defendant, Trooper Fitness LLC (“Trooper”). O’Brien claimed that she was at the Gym pursuant to a subscription she had with the defendant, Class Pass Inc. (“Class Pass”), which “provided access, via an pp, to its members and/or subscribers, to a variety of ym locations,” including the Gym. Plaintiff became a member of Class Pass, which “own and operate an e-commerce platform through which subscribed members enroll in health and fitness classes offered by independent studios, gyms, and fitness centers”, by creating an account with the company. Only members of Class Pass were permitted to sign up for classes at Trooper through the Class Pass app. Before O’Brien could join Class Pass, she was required to accept the company’s Terms of Use. Among other things, the Terms of Use provided that: “By accessing and/or using the ite, you accept and agree to be bound by , just as if you had agreed to these terms in writing. If you do not agree to these erms do not use the ite.” The Terms of Use required that all disputes between Class Pass and one of its members had to be resolved by arbitration unless the member opted out of arbitration in the manner prescribed in the agreement. Further, Class Pass members seeking to bring a claim against the company were required to provide written notice of such a claim in order to afford Class Pass an opportunity to resolve the dispute before it was litigated or arbitrated. O’Brien conceded that when she signed up for Class Pass, she did not “see any language on the website or App where agreed to waive her right to trial in favor of rbitration” and had “no specific recollection of seeing any disclaimers or waivers to that effect.” Like most consumers, O’Brien did not “specifically review during the sign up process or subsequent to the sign up process.” O’Brien commenced the action alleging, among other things, that, prior to the date of the accident, she reserved access to the Gym by means of the Class Pass app. She claimed that Trooper and Class Pass negligently caused her accident since they either created a dangerous condition at the Gym or had actual and/or constructive notice of a dangerous condition at the premises and failed to address it. Class Pass moved to dismiss the complaint based on documentary evidence (CPLR § 3211(a)(1)) or, in the alternative, to compel arbitration pursuant to CPLR § 7501. Class Pass argued that the complaint should be dismissed because O’Brien waived the right to bring personal injury claims against the company under the Terms of Use and because she failed to provide Class Pass with notice of the claim as required by the Terms of Use. Alternatively, Class Pass argued that, in the event the complaint was not dismissed, Plaintiff should be compelled to arbitrate her dispute pursuant to CPLR § 7501 and the Terms of Use. In opposition, O’Brien argued that the arbitration provisions were unenforceable as a matter of public policy because they were buried in the Terms of Use, which “require an additional click or scrolling to display.” In reply, Class Pass argued that O’Brien was bound by the Terms of Use, whether she read them or not, since she clicked on the link agreeing to accept them. The Court’s Ruling The Court agreed with Class Pass and dismissed the compliant. The Court held that the agreement was enforceable and, therefore, O’Brien was bound by the Terms of Use therein. Plaintiff admits that she was at the gym on the day of her accident through the use of her Class Pass membership. However, plaintiff could not have joined Class Pass without agreeing to its Terms and Conditions, which were accessible through a hyperlink on the sign in page and which she accepted by clicking on a box on the said page. By agreeing to the Terms and Conditions, she is now bound by them. Slip Op. at *5. Since the agreement was enforceable, the Court found that O’Brien had waived her right to bring a personal injury claim against Class Pass. Id . The Court also held that O’Brien failed to satisfy the notice requirement set forth in the Terms of Use. As such, she failed “to satisfy a condition precedent to suit” necessitating dismissal of her complaint. Id . at *6. Finally, the Court addressed the dilemma consumers often find themselves in when they use an app to buy goods or services: they must agree to lengthy terms and conditions in order to use the app or access the website. In this regard, the Court found that neither case authority nor public rendered clickwrap agreements unenforceable: She essentially opposes the motion by arguing that information such as the Terms and Conditions is “often contained in hyperlinks that generally require an additional click or scrolling to display” and that, even if a user accesses such information, it is too “onerous to actually read through from start to finish.” However, she speaks only in generalities and does not address the Terms and Conditions at issue herein. Additionally, she admits that she “never read” the Terms and Conditions and “has no specific recollection of even seeing when she signed up for Class Pass.” Thus, she does not deny that the Terms and Conditions existed or that she was able to access them. Further, plaintiff cites no legal authority whatsoever for the foregoing arguments, or for her contention that the Terms and Conditions are unenforceable as against public policy. Id . Takeaway The courts have been clear that the “making of contracts over the internet ‘has not fundamentally changed the principles of contract.’” Hines v. Overstock.com , Inc., 668 F. Supp. 2d 362, 366 (E.D.N.Y. 2009) (quoting Register.com, Inc. v. Verio, Inc. , 356 F.3d 393, 403 (2d Cir. 2004), aff’d , 380 Fed. App’x 22, 25 (2d Cir. 2010) (summary order)). Accordingly, parties seeking to enforce an electronic contract must demonstrate “an offer, acceptance, consideration, mutual assent and intent to be bound.” Register.com , 356 F.3d at 427 (internal citation and quotation marks omitted). As shown in O’Brien , these elements are satisfied with respect to clickwrap agreements because the terms and conditions are available for the user to review and require the user to affirmatively declare their assent to them before the user can use the app or access the website. Serrano v. Cablevision Sys. Corp. , 863 F. Supp. 2d 157, 164 (E.D.N.Y. 2012).

A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” Marx v. Akers , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. Auerbach v. Bennett , 47 N.Y.2d 619, 631 (1979). See also Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). In New York, as in most jurisdictions, a derivative plaintiff must be a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. See , e.g. , BCL § 626(b); Pessin v. Chris-Craft Indus. , 181 A.D.2d 66, 70 (1st Dept. 1992).  See also Lewis v. Anderson , 477 A.2d 1040, 1049 (Del. 1984). “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. Lewis , 477 A.2d at 1049. Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” Honzawa Holding Co. v. Hiro Enter. USA , 291 A.D.2d 318, 318 (1st Dept. 2002). To satisfy the requirement, the plaintiff must have owned stock in the corporation throughout the course of the activities that constitute the primary basis of the complaint. This is not to say that a plaintiff must have owned stock in the company during the entire course of all relevant events. It does mean, however, that a proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired. In re Bank of New York Deriv. Litig. , 320 F.3d 291, 298 (2d Cir. 2003). “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” Roy v. Vayntrub , 15 Misc. 3d 1127(A), 2007 N.Y. Slip Op. 50868(U) (Sup. Ct. Nassau County 2007), at *6 (citing Barr v. Wackman , 36 N.Y.2d 371 (1975)). For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. See , e.g. , In re Computer Sciences Corp. Deriv. Litig. , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). The foregoing standing rules apply to limited liability companies (“LLCs”). Tzolis v. Wolff , 10 N.Y.3d 100, 102 (2008); Jacobs v. Cartalemi , 156 A.D.3d 605 (2d Dept. Dec. 6, 2017). Thus, a person may bring a derivative action so long as he/she is a “member” of the company. To be a member of an LLC, a person must have been admitted to the company’s membership “in accordance with the terms and provisions of the Limited Liability Company Law and the limited liability company’s operating agreement,” and possess “a membership interest” in the LLC “with the rights, obligations, preferences, and limitations specified under the Limited Liability Company Law and the operating agreement.” Limited Liability Company Law § 102(q). Under the Limited Liability Company Law, a “ embership interest” means “a member’s aggregate rights in a limited liability company, including, without limitation: (i) the member’s right to a share of the profits and losses of the limited liability company; (ii) the member’s right to receive distributions from the limited liability company; and (iii) the member’s right to vote and participate in the management of the limited liability company.” Limited Liability Company Law § 102(r). In Kaminski v. Sirera , 2019 N.Y. Slip Op. 01067 (2d Dept. Feb. 13, 2019) ( here ), the Appellate Division, Second Department addressed the standing of a derivative plaintiff seeking relief on behalf of an LLC and found that the plaintiff failed to satisfy the standing requirements for bringing a derivative action. Kaminski v. Sirera Kaminski arose in connection with the acquisition of membership units in Melange Med Spa, LLC (the “LLC”) by the plaintiff, Jill Kaminski (“Kaminski” or “Plaintiff”). Kaminski acquired the units from a prior member in or about 2009 or 2010. In 2016, Kaminski commenced the action individually and derivatively on behalf of the LLC against, among others, Christina Sirera, a managing member of the LLC, seeking, inter alia , declaratory and injunctive relief, an accounting, and damages for waste and breach of fiduciary duty. Kaminski also asserted causes of action against Allyson Avila (“Avila”) and Wilson, Elser, Moskowitz, Edelman & Dicker, LLP (“Wilson Elser”), attorneys for the LLC, alleging legal malpractice, breach of contract, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. Avila and Wilson Elser moved to dismiss the complaint on the ground that, inter alia , Kiminski lacked standing to assert claims on behalf of the LLC. The motion court denied the motion to dismiss the derivative causes of action alleging breach of fiduciary duty (fifth and sixth causes of action), aiding and abetting breach of fiduciary duty (seventh and eighth causes of action), and entitlement to the attorneys’ fees and costs incurred in prosecuting the action (seventeenth cause of action). Avila and Wilson Elser appealed the denial of their motion to dismiss. The Second Department reversed. The Court held that Kaminski lacked standing to bring the action derivatively. The Court found that Kaminski failed to comply with the terms of the LLC’s operating agreement. In that regard, Kaminski “failed to obtain the consent of the nonselling members to be admitted as a member of the LLC when she acquired her membership interest,” a requirement in the LLC operating agreement: Here, the plaintiff does not dispute that she failed to obtain the consent of the nonselling members to be admitted as a member of the LLC when she acquired her membership interest. Paragraph 8 of the LLC’s operating agreement provides that “ ew members may be admitted only upon the unanimous consent of the Members and upon compliance with the provisions of this agreement,” and paragraph 32(e) of the operating agreement provides that “ non-member purchaser of a member’s interest cannot exercise any rights of a Member unless, by unanimous vote, the non-selling Members consent to him becoming a Member” ( see Limited Liability Company Law § 602). Slip Op. at *2. Therefore, concluded the Court, “the plaintiff, as a nonmember purchaser who had not been admitted as a member of the LLC, lack standing to pursue derivative causes of action on behalf of the LLC.” Id .  As such, the motion court “should have granted those branches of the motion of Avila and Wilson Elser which were to dismiss the fifth, sixth, seventh, and eighth causes of action and, in addition, the seventeenth cause of action insofar as asserted against them.” Id . Takeaway The derivative standing rules are designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred. See , e.g. , Independent Investor Protective League v. Time, Inc. , 50 N.Y.2d 259, 263 (1980). Although there are exceptions to the rule, the law has long required plaintiffs bringing a derivative action to have a stake in the company on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the company, then he/she has no right to vindicate the company’s rights and obtain a judgment on its behalf. In Kaminski , the Second Department reinforced this rule. Kaminski also reinforces the importance of an LLC’s operating agreement. As this Blog has noted in the context of judicial dissolution, courts look to an LLC’s operating agreement to determine whether it contains provisions that govern the outcome of the dispute between the parties. In Kaminski , the operating agreement contained such provisions and, therefore, controlled the outcome of the appeal.

Section 470 of New York’s Judiciary Law , provides: A person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state. Section 470 requires that “non-resident attorneys must maintain an office within New York to practice in .”  ( Schoenefeld v. State , 25 N.Y.3d 22 (2015).) Our July 3, 2018, Blog post, “ Out Of State Attorneys Admitted In New York, Cannot Rely On New York Virtual Offices If They Intend To Practice In New York ,” addressed the need for an attorney admitted to practice law in New York, but who resides outside of the State, to maintain a physical office within the State in order to practice law in the State.  The Blog highlighted case-law holding that the in-state office requirement is not satisfied by maintaining a “virtual” office. In our follow-up Blog posted on January 2, 2019, we reported that one of the cases discussed in the July 3 Blog, Arrowhead Capital Finance v. Cheyne Specialty Finance Fund , 154 A.D.3d 523 (1st Dep’t 2017), was scheduled for oral argument before the New York Court of Appeals.  The Court of Appeals heard oral argument on January 9, 2019 < HERE=">HERE" FOR="FOR" THE="THE" VIDEO="VIDEO" OF="OF" ORAL="ORAL" ARGUMENT ="ARGUMENT"> .  We now report that on February 14, 2019, the Court rendered a decision . In Arrowhead , the First Department affirmed the dismissal of the underlying action, without prejudice, because it was commenced by a non-resident attorney admitted in New York, but without an office in New York.  The First Department, subscribing to the “nullity” rule, found that “Plaintiff's subsequent retention of co-counsel with an in-state office did not cure the violation, since the commencement of the action in violation of Judiciary Law § 470 was a nullity.” In its brief before the Court of Appeals, Arrowhead argued, among other things, that the First Department’s “nullity” rule should not be the law in New York State.  Instead, Arrowhead argued that the New York Court of Appeals should resolve the conflict that exists amongst the Departments by adopting the rule followed by the Second and Third Departments, which permits a party to cure a section 470 violation.   See, e.g. , Elm Mgmt. Corp. v. Sprung , 33 A.D.3d 753 (2nd Dep’t 2006); Sovereign Bank v. Calderone , 84 A.D.3d 778 (2nd Dep’t 2011); Stegemann v. Rensselaer County Sheriff’s Office , 153 A.D.3d 1053 (3d Dep’t 2017). In their brief, the Arrowhead defendants/respondents argued, inter alia , that adopting a “cure” rule as followed by the Second and Third Departments, would render section 470 meaningless.  Accordingly, the respondents argued that the Court of Appeals should, like the First Department, establish the “nullity” rule as the law in New York for violations of Judiciary Law section 470. Arrowhead argued and the Court of Appeals agreed, that the Court of Appeals’ decision in Dunn v. Eickhoff , 35 N.Y.2d 698 (1974), is dispositive of the Arrowhead appeal.   In Dunn , plaintiff’s attorney was disbarred in the middle of a personal injury trial.  Defendant’s motion for a mistrial was denied several days before the jury rendered a defense verdict.  Thereafter, and unhappy with the outcome of the trial, plaintiff moved for a mistrial.  The denial of the motion was affirmed by the Appellate Division, First Department.  The Dunn Court of Appeals affirmed, on the Appellate Division’s majority opinion and added that “ he disbarment of a lawyer creates no ‘nullities’, the person involved simply loses all license to practice law, that is, to hold himself out as a lawyer or to receive compensation for legal services.  As for the infant plaintiff, he is generally bound, with obvious limitations, by those who act in his behalf for better or worse, but mostly for his benefit.  Otherwise, as a practical matter, none would be able to deal with an infant’s affairs, to his detriment.”  (Citation omitted.)  Arrowhead, relying on the reasoning of the Second and Third Departments, argued that if the actions of a disbarred attorney were not deemed a nullity, the actions of a New York attorney, in good standing, but who does not maintain an office in New York should not be a nullity. The Court of Appeals recognized that “ hether an action, such as filing a complaint, taken by a lawyer duly admitted to the bar of this State but without the required New York office, is a ‘nullity’ is an issue of first impression for this Court.”  In reversing the First Department, the Court held that a “violation of Judiciary Law § 470 does not render the actions taken by the attorney involved a nullity nstead, the party may cure the section 470 violation with the appearance of compliant counsel or an application for admission pro hac vice by appropriate counsel.”  (Citation omitted.) The Court Reasoned that if “further relief is warranted, the trial court has discretion to consider any resulting prejudice and fashion an appropriate remedy and the individual attorney may face disciplinary action for failure to comply with the statute.”  (Citations omitted.)  Following the outlined procedure, the Court reasoned, would ensure “that violations are appropriately addressed without disproportionately punishing an unwitting client for an attorney’s failure to comply with section 470.”

It is well settled that stipulations of settlement are favored by the courts. Hallock v. State , 64 N.Y.2d 224, 230 (1984). Stipulations of settlement not only serve the interests of efficient dispute resolution but also are essential to the management of court calendars and integrity of the litigation process. Id .  For these reasons, stipulations of settlement are not lightly cast aside. Id . See also Matter of Galasso , 35 N.Y.2d 319, 321 (1972). Notwithstanding, a stipulation of settlement will be invalidated, and a party relieved from the consequences of the agreement, when there is evidence of, inter alia , fraud, collusion, mistake or accident.  Hallock , 64 N.Y.2d at 230; Matter of Frutiger , 29 N.Y.2d 143, 149-150 (1971). Recently, the Appellate Division, First Department, reversed the denial of a motion to invalidate a settlement agreement and allowed an amendment to a class action complaint on the grounds that the plaintiffs sufficiently alleged, among other things, a breach of fiduciary duty by the defendants. Cohen v. Saks, Inc. , 2019 N.Y. Slip Op. 01162 (1st Dept. Feb. 14, 2019) ( here ). Cohen v. Saks Incorporated Cohen arose from the 2013 acquisition of Saks, Inc. (“Saks”) by defendant Hudson’s Bay Company (“Hudson’s Bay”) (the “Merger”). here).=">here)."> The Merger was jointly announced by Hudson’s Bay and Saks on July 29, 2013. Pursuant to the merger agreement, Hudson’s Bay agreed to acquire all the outstanding shares of Saks for $16 per share. In connection with the Merger, Goldman Sachs & Co. (“Goldman”), the financial advisor for Saks, issued a fairness opinion dated July 28, 2013, stating that, in its opinion, the Merger was fair and reasonable to Saks’ shareholders. Shortly after the announcement, shareholders of Saks (the “Shareholders”) filed suit against Saks’ individual directors (the “Saks Parties”) for breach of fiduciary duty and against Hudson’s Bay and Harry Acquisition, Inc. for aiding and abetting the breach of fiduciary duty, alleging that they received grossly inadequate consideration in connection with the Merger. On October 22, 2013, the Shareholders and the Saks Parties executed a settlement stipulation in the action (the “Settlement Stipulation”). In the Settlement Stipulation, the parties agreed to mutual releases of any and all claims arising from the subject matter of the action. Thereafter, the Shareholders conducted discovery to confirm the fairness and reasonableness of the settlement (“Confirmatory Discovery”). During these proceedings, Goldman testified that the fairness material used in the Merger did not contain any valuation of Saks’ real estate. The Merger closed in November 2013. At that time, Saks operated 41 Saks Fifth Avenue stores, including its flagship store at 611 Fifth Avenue (the “Flagship Store”). The Flagship Store had not been appraised prior to the Merger.  Because the Saks’ board of directors (the “Board”) did not have an up-to-date appraisal of its real estate prior to the Merger, the Shareholders alleged that they breached their fiduciary duty in connection with the transaction. On February 3, 2014, approximately three months after the settlement, Goldman presented a real estate portfolio overview to Hudson’s Bay that provided an updated valuation of Saks’ real estate. In pertinent part, the presentation stated: “ anagement preliminary portfolio valuation of $7.7bn with heavy concentration in Saks Fifth Avenue, New York ((approximately) $4bn).” On November 22, 2014, more than one year after the Merger, the news media were reporting that Hudson’s Bay purchased Saks for too low a price. Subsequently, the Shareholders moved to compel the Saks Parties to produce additional discovery to examine the substance of the news reports; the motion was subsequently withdrawn. The Shareholders sought to rescind the settlement and amend the complaint to pursue additional claims against the Saks Parties and Goldman. The Shareholders argued that the Saks Parties and Goldman procured the Settlement Stipulation by providing information to the shareholders they knew or should have known to be false at the time of execution, and alleged that Goldman misrepresented the true value of the Flagship Store and misled the Board in the transaction. The Shareholders maintained that they were not aware of the fact that Saks’ real property in New York City exceeded the total price of the transaction by approximately $1 billion until the publication of the newspaper article and the newly disclosed information was inconsistent with the testimony given during the discovery prior to the execution of the Settlement Stipulation. The Shareholders contended that Goldman misled the Board to believe that Saks’ real estate was worth only between $1 and $1.2 billion because Goldman intended Hudson’s Bay to be a future client, while an appraisal revealed that the Flagship Store itself was worth $4 billion. The Trial Court Ruling The trial court denied the motion, holding that the Shareholders failed to plead fraud with particularity ( i.e. , failed to plead the elements of fraudulent inducement to enter the Settlement Stipulation). (Citing Eurycleiz Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009)). In that regard, the court found that “ he additional discovery” taken by the Shareholders did “not reveal[] any evidence that either the Saks Parties or Goldman knowingly misrepresent a material fact, nor it demonstrate that the Shareholders were induced by the alleged misrepresentation to settle the claim of inadequate consideration.” Characterizing the allegation as “ ere speculation,” the court held that simply because “Goldman may have known the value of Saks’ real property before the was consummated” to be greater than presented, was “insufficient to establish fraudulent inducement.” The court underscored the failure to satisfy the elements of fraud by noting that “ rior to consummation of the , … the Shareholders knew that the Board did not obtain an appraisal of its real estate since 2006.” Thus, the Shareholders could not claim there was a material misrepresentation or omission when they were apprised of the same information as the Board. As the court observed, “Goldman’s determination of the value of Saks’ real property only came after the was consummated and the Settlement Stipulation was executed.” “Thus,” held the court, “because the Shareholders fail to demonstrate sufficient cause to rescind the Settlement Stipulation, their proposed amended complaint fail .” An appeal followed. The First Department’s Decision The First Department reversed, holding that the Shareholders sufficiently alleged a breach of fiduciary duty against the Saks Parties “insofar as the sale price failed to account for the significant value of Saks's flagship store in Manhattan” and aiding and abetting a breach of fiduciary duty against Goldman. Slip Op. at *1 (“The majority of plaintiffs’ proposed new allegations and claims are not palpably insufficient or clearly without merit under the law of Tennessee, where Saks was incorporated, and leave to amend is granted as to those allegations and claims.”). Consequently, the Court permitted an amendment on those grounds. Although the Court declined to rule on the request to rescind the settlement, by its decision to allow the amendment, it effectively found that the Shareholders sufficiently alleged fraudulent inducement to cast aside the Settlement Stipulation. Id . at *2. The Court rejected the argument that the releases in the Settlement Stipulation barred the amendment. Id .  The Court held that because the releases, though broad enough to cover the claims in the amendment, did not become effective until final approval of the settlement, there was no impediment to the requested amendment: Although the releases in the parties' stipulation of settlement are sufficiently broad to cover the new allegations and claims, they do not pose an independent basis for denying the motion to amend, because, while class action settlements may generally be binding on the named plaintiffs even before judicial approval, the terms of the instant stipulation make clear that the releases do not become effective until after court approval, which has not yet occurred. Id . The Court also rejected the argument that the Shareholders were contractually obligated to defend the settlement and the Settlement Stipulation. In so doing, the Court held that the obligation to defend was not enforceable. Id . The Court reasoned that the Shareholders “and their counsel owe fiduciary duties to absent class members and thus cannot be required to support a settlement that is contrary to the best interests of those class members.” Id . (citing Wyly v. Milberg Weiss Bershad & Schulman, LLP , 12 N.Y.3d 400, 412 (2009); Desrosiers v. Perry Ellis Menswear, LLC , 30 N.Y.3d 488, 497 (2017)). Takeaway Cohen is an important case because it shows how an alleged breach of fiduciary duty can be used to support an allegation of fraud, in particular, an alleged omission of material fact. As noted, although not stated explicitly, the Court in Cohen essentially found that the Shareholders sufficiently alleged that they were fraudulently induced by an omission. See Eurycleia Partners , 12 N.Y.3d at 559 (“The elements of a cause of action for fraud a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”). While a duty to disclose material facts arises only under certain circumstances, such as under the ‘special facts’ doctrine where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” ( Jana L. v. W. 129th St. Realty Corp. , 22 AD3d 274, 277 (1st Dept. 2005)), the courts will require such disclosure in the context of a fiduciary relationship. SNS Bank, N.V. v Citibank, N.A. , 7 A.D.3d 352, 356 (1st Dept. 2004); Kaufman v. Cohen , 307 A.D.2d 113, 120 (1st Dept. 2003) (“where a fiduciary relationship exists, the mere failure to disclose facts which one is required to disclose may constitute actual fraud, provided the fiduciary possesses the requisite intent to deceive”) (citation and quotation marks omitted). In the corporate context, there is no question that a fiduciary relationship exists between corporate officers and directors and the corporation’s shareholders. E.g. , Agostino v. Hicks , 845 A.2d 1110, 1122 n.54 (Del. Ch. 2004) (“it is beyond dispute that an officer or director of a Delaware corporation owes fiduciary duties to both the company and its shareholders”). In light of the foregoing principles, it naturally followed that having concluded that the Shareholders adequately alleged a breach of fiduciary duty against the Saks Parties for amendment purposes, the Court would find that the Shareholders adequately alleged a claim of fraudulent inducement sufficient to cast aside the Settlement Stipulation. As such, Cohen teaches that the failure by a fiduciary to disclose material facts in breach of his/her fiduciary duty may constitute an actionable fraud (assuming the elements of the claim are satisfied) and support a motion to invalidate a settlement agreement.

Securities fraud comes in all shapes and sizes. While the substance of a fraudulent investment scheme may change depending upon the circumstances and the fraudster involved, the types of securities fraud tend to fall into one of the following (non-exclusive) categories: financial statement/accounting fraud; pyramid schemes; Ponzi schemes; pump-and-dump schemes; affinity fraud; promissory note fraud; Internet fraud; “microcap” stock fraud; and fraud concerning information about a company, its operations and future prospects. Fraudsters use techniques that are designed to persuade a target or victim into buying the security at issue. Some of these techniques include: (1) phantom riches representation – that is, the investment will yield “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk”; (2) guaranteed returns – that is, high returns and low risk are “guaranteed” or “can’t miss”; (3) source credibility or “halo” effect – the fraudster tries to build credibility by claiming to be with a reputable firm or to have a special credential or experience; (4) “I believe in the company, so should you” assurance – the fraudster tries to assure the target that the investment is a sound one because he/she also invested in the company; (5) “everyone is buying it” representation – the fraudster stresses that other people are buying the security and, therefore, so should the target or victim; and (6) the reciprocity representation – the fraudster offers to do a small favor for the target or victim in return for a big favor: “I’ll give you a break on my commission if you buy now.” e.g.,="(e.g.," here,=">here," >here).=">here)."> As FINRA notes, “lmost anyone who invests is a potential fraud target.” FINRA, Avoiding Investment Scams, http://www.finra.org/investors/alerts/avoiding-investment-scams. The reason, says FINRA, is the psychology behind the pitch. “raudsters are masters of persuasion, tailoring their pitches to match the psychological profiles of their targets.” Id. Because of their ability to identify the risk profile of their victims, fraudsters are adept at fleecing investors out of their money. In this regard, some of the risk factors identified by FINRA include: investing in or owning high-risk investments, such as start-up companies and penny stocks; relying on friends, family, co-workers for investment advice; attending investment seminars; failing to perform any type of check or due diligence on the fraudster; and an inability to detect that something is amiss. Id. SEC v. Alexander Recently, the SEC charged the founder and principal of an online digital sweepstakes company with conducting a $9 million securities fraud that involved some of the foregoing risk factors. On February 7, 2019, the SEC announced that it had charged Robert Alexander (“Alexander”) with fraudulently raising approximately $9 million from approximately 53 individuals by selling investments in Kizzang LLC (“Kizzang”), a purported “new media sweepstakes company” that offered digital sweepstakes entertainment on mobile devices, via social media, and on the web. (A copy of the SEC’s press release can be found here.) Shortly after Kizzang’s incorporation on January 10, 2013, Alexander allegedly solicited friends and business associates, among others, to invest in Kizzang. According to the SEC’s complaint (here), he did so by, among other representations, (1) telling investors how their money would be used by Kizzang and how much had been raised previously, (2) guaranteeing that Kizzang would break even within three years, (3) telling investors they would make a minimum of 10 times their investment, (4) telling investors that he had personally invested millions of dollars in Kizzang, and (5) telling investors that he had led the creation of a prominent video game. As alleged by the SEC, these and other representations were materially false and misleading. For example, rather than using investor funds for Kizzang’s business, Alexander misappropriated at least $1.3 million, including spending more than $450,000 on gambling sprees. Alexander also used investor funds to finance his daily living and other personal expenses, including credit card bills, shopping and entertainment, and expenses for his daughter, including culinary school tuition and luxury car payments. On November 13, 2017, Alexander informed shareholders that Kizzang had been inactive for five months and that the company was “hopelessly insolvent.” The SEC filed the complaint in the U.S. District Court for the Southern District of New York. The SEC charged Alexander and Kizzang with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking a permanent injunction, civil monetary penalties, and disgorgement of ill-gotten monetary gains, plus interest. Commenting on the charges, Carolyn Welshhans, Associate Director in the SEC’s Division of Enforcement, stated: “As alleged in our complaint, Alexander promoted Kizzang as an opportunity for investors to profit from the early success of a technology start-up. In reality, Alexander brazenly converted investor proceeds for his personal use, sometimes within days of receiving investor funds.” In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Alexander (here). The charges were based upon the same conduct alleged in the SEC complaint, to wit: “ALEXANDER solicited and maintained investments in the Company through numerous false representations, including concerning his own professional background, the Company’s financial condition, expected returns on investment, and assurances to investors that their investments would be used solely for the Company’s business purposes.” Commenting on the allegations, U.S. Attorney Geoffrey S. Berman, stated: “As alleged, Robert Alexander lied to investors in his online gaming company, fabricating information about his professional background and promising to use investor money solely to further the aims of the business. Instead, Alexander allegedly used more than $1.3 million in investor funds on, among other things, gambling excursions, entertainment venues, and other personal expenses. As this arrest demonstrates, fraud on investors is no game, and we will continue to partner with the FBI to investigate and prosecute those who defraud investors.” FBI Assistant Director-in-Charge William F. Sweeney, Jr. also commented on the allegations, stating: “Time and time again, we come across evidence of investment funds being misappropriated to pay off personal debts or fund extravagant lifestyles. As evidenced by today’s arrest, those who allegedly use these funds for other than their intended purpose are taking a gamble – the bigger the risk does not always mean the greater the reward.” Alexander was charged with one count of securities fraud and one count of wire fraud. If convicted, the securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million or twice the gross gain or loss from the offense, and the wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. Takeaway The SEC’s stated mission “is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” See SEC website (here). “Crucial to the SEC’s effectiveness in each of areas is its enforcement authority.” Id. In that regard, the SEC commences “hundreds of civil enforcement actions against individuals and companies for violation of the securities laws.” Id. Typical violations fall within the categories of fraud identified above – e.g., insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. Since investor protection is one of the tripartite components of the SEC’s mission, the Commission has identified investor protection as one of its five core principles. See Division of Enforcement Annual Report for Fiscal 2018 at 6 (here). In furtherance of this principle, the SEC has devoted resources and initiated programs to protect retail investors. These efforts have resulted in more than half of the SEC’s stand-alone enforcement actions in FY 2018 to involve wrongdoing against retail investors. Id. Alexander is an example of the SEC’s efforts to protect Main Street investors.

It is well settled that New York has a “long and strong public policy favoring arbitration,” such that the “courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49-50 (1997) (internal quotation marks omitted). In light of this public policy, arbitration is encouraged “as a means of conserving the time and resources of the courts and the contracting parties” to a dispute. Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am. , 37 N.Y.2d 91, 95 (1975). In Smith Barney Shearson , the Court of Appeals observed that preventing arbitration when the parties have agreed to the forum “would curtail or divert this progressive and prudent policy favoring arbitration.” Id . at 50. The court went on to say that “ ourts should be very hesitant … to impinge upon the rights and obligations derived from commitments to integrated, relatively speedier and less costly alternative dispute resolution modalities.” Id . What if, however, the parties do not agree to arbitrate their disputes but a statute governing their conduct does require arbitration? In Dakota, Inc. v. Nicholson & Galloway, Inc. , 2019 N.Y. Slip Op. 30270(U) (Sup. Ct. N.Y. County Jan. 30, 2019) ( here ), Justice Barry Ostrager of the Commercial Division held that the statutory requirement prevails. The statute in question is the Prompt Payment Act (the “PPA”), Article 35-E of the General Business Law, sections 756-758. The PPA “governs payment procedures and remedies for private non-residential construction contracts in excess of a specified dollar threshold.” Capital Siding & Constr., LLC v. Alltek Energy Sys., Inc. , 2016 N.Y. Slip Op. 31043 (Sup. Ct. Albany County), aff’d , 138 A.D.3d 1265 (3d Dept. 2016); see GBL § 756 (1). “If efforts to resolve a dispute arising under the PPA are unsuccessful, the aggrieved party may refer the matter to expedited arbitration before the American Arbitration Association.” Id . § 756-b (3). Thus, if the parties do not have an agreement to arbitrate, the PPA provides a mechanism for them to avail themselves of the forum. “ claim alleging a violation of the PPA is subject to arbitration so long as the prerequisites of § 756-b (3) have been satisfied.” Pike Co., Inc. v. Tri-Krete Ltd. , 2018 WL 6060927, at *7 (W.D.N.Y. Nov. 20, 2018). “The prerequisites include: (1) third-party verification of delivery of written notice of the PPA violations; and (2) third-party verification of delivery of the demand, to AAA, for an expedited arbitration.” Dakota , Slip Op. at *4 (citing GBL § 756-b (3)). The PPA also addresses the situation in which the parties have an agreement to litigate rather than arbitrate their disputes. In this regard, the PPA provides that, ‘ xcept as otherwise provided in this article,’ the terms and conditions of the parties’ written agreement will supersede the PPA’s provisions.”  Capital Siding & Constr. , 138 A.D.3d at 1266 (quoting GBL § 756-a). However, if the parties’ agreement conflicts with the arbitration requirement in the PPA, the PPA governs, making the parties’ contractual provision “void and unenforceable.” GBL § 757 (3) (directing that “ provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that expedited arbitration as expressly provided for and in the manner established by is unavailable to one or both parties” is “void and unenforceable.”) See also Capital Siding & Constr. 138 A.D.3d at 1266. Dakota, Inc. v. Nicholson & Galloway, Inc. Dakota involved a dispute for payment between a residential cooperative apartment corporation, The Dakota, Inc. (“The Dakota”), and Nicholson & Galloway, Inc. (“N&G”), a general contractor hired to undertake a $28 million roof replacement and facade renovation of the cooperative building. N&G claimed that it was owed a final payment of $637,500 under a construction agreement between the parties (the “Agreement”). The Agreement provided for retainage payments of 10% of progress payments, capped at $1,250,000. The vast majority, if not all, of the construction work was allegedly completed in April 2018. Shortly thereafter, The Dakota released 50% of the retainage to N&G. The Dakota withheld the balance of the retainage after alleging that N&G caused damage to the building during renovations. Thus, The Dakota claimed offsets against the balance of the retainage due to N&G’s alleged misconduct. On November 28, 2018, N&G noticed a Demand for Arbitration on The Dakota (the “Demand”) pursuant to the expedited arbitration procedure within the PPA. N&G claimed that The Dakota violated the PPA. The Dakota sought to stay the arbitration pursuant to CPLR § 7505(b), arguing that the Agreement provided for litigation, not arbitration.  The Court denied the petition and dismissed the special proceeding. The Court held that the “PPA’s expedited arbitration procedure precluded by parties’ contractual agreement to litigate disputes.” Slip Op. at *3. The Court found that “the plain language of the PPA makes void and unenforceable the parties’ purported agreement to litigate disputes arising out of the Agreement to the extent the Agreement precludes the PPA’s expedited arbitration procedure.” Id . at *3. In reaching its holding, the Court found Capital Siding & Construction to be “particularly instructive.” Capital Siding & Construction involved a dispute between a contractor and a subcontractor where the former was alleged to have withheld certain payments from the latter. 138 A.D.3d at 1265. The subcontractor sought expedited arbitration pursuant to the PPA. The contractor resisted that effort and commenced a proceeding under CPLR § 7503 to stay the arbitration. Id . The contractor argued that the agreement at issue “expressly state that litigation, not arbitration, the parties’ chosen method of dispute resolution.” Id . The Third Department held that the contractor’s reading of the PPA was incorrect because it “ignore the existence of General Business Law§ 757(3), which … unambiguously voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties.” Id . at 1266.  See also Pike , 2018 WL 6060927, at *7 (“However, § 757 prohibits any contractual provision that causes the PPA’s expedited arbitration remedy to become unavailable to one or both parties.”). Having determined that the expedited arbitration procedures of the PPA superseded the parties’ agreement, the Court addressed whether the alleged violations fell within the scope of the PPA. Id . at *5. The Court held that the alleged violations did. Id . First, the Court held that N&G provided written notice of a PPA violation, stating “N&G’s Demand for Arbitration plainly allege that the nature of the dispute a ‘ iolation of New York Prompt Payment Act.’” Id . The Court declined to “engage in an extensive analysis of whether the PPA ha been violated” because to do so “would necessarily render the PPA’s expedited arbitration remedy useless as a tool to avoid protracted and expensive litigation.” Id . (citing Pike , 2018 WL 6060927, at *9). Notwithstanding, the Court observed that there was a question as to whether “some, none, or all” of N&G’s claims were arbitrable. In the Demand, N&G alleged PPA violations and a breach of contract. Yet, said the Court, “‘the AAA’s authority to issue an arbitral award is limited to the alleged violation of the PPA.’” Id . (quoting Pike , 2018 WL 6060927, at *10). Consequently, the AAA could not arbitrate whether N&G had a cause of action for breach of contract. Slip Op. at *5. The Court concluded that “ ny allegations of common law breach of contract must necessarily be litigated in a court of competent jurisdiction pursuant to the Agreement’s dispute resolution provisions.…” Id . Second, the Court held that N&G satisfied the delivery requirement GBL § 756-b (3). Id . The Court noted that on October 26, 2018, N&G provided written notice of the PPA violations to The Dakota pursuant to the notice provisions of the Agreement. Id . The Dakota received the notice, as confirmed by its General Counsel on November 7, 2018. “Therefore,” the Court held, “there was third party verification of delivery of written notice of the Dakota’s purported PPA violations.” Id . (footnote omitted). As a result, the Court denied The Dakota’s motion to permanently enjoin the arbitration proceedings demanded by N&G and dismissed The Dakota’s petition to stay the Demand to Arbitrate and discontinued the special proceeding. Takeaway Typically, disputes over the arbitrability of claims arise in connection with an agreement to arbitrate. In Dakota , the opposite was true – the dispute arose in connection with an agreement not to arbitrate. Dakota is important because there are “only a limited number of” cases “interpreting the PPA, and virtually no case” authority “describing the scope of the PPA’s arbitration provision in any depth.” Pike , 2018 WL 6060927, at *5.  As such, like Capital Siding and Construction and Pike , Dakota is instructive for its consideration of the interplay between a contractual provision rejecting arbitration and a statutory provision requiring arbitration and the primacy of the latter over the former. As explained by the Legislature in enacting the PPA, the arbitration requirement was intended to promote “speedier resolutions,” reduce the “time and funds wasted in litigation,” and hasten the “payment of moneys owed.” Id . at *6 (quoting N.Y. Bill Jacket, 2009 A.B. 6493, Ch. 417). Section 757 of the PPA achieves those goals by prohibiting any contractual provision that causes the statute’s expedited arbitration remedy to become “unavailable to one or both parties.” GBL § 757(3). Dakota is another case to further these legislative purposes.

Like the iconic scene when a cruise ship is leaving the dock, the New York Supreme Court, Appellate Division, Second Department, in BAC Home Loans Servicing, LP v. Alvarado (January 30, 2019), has everyone waiving. CPLR 3018(b) requires that “ party plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading….”  Generally, affirmative defenses are waived by the defendant if not raised in the answer or made the subject of a pre-answer motion to dismiss. 23/23 Communications Corp. v. General Motors Corp. , 257 A.D. 367 (1 st Dep’t 1999); see also , CPLR 3211(e) (“Any objection or defense based upon a ground set forth in paragraph one, three, four, five and six of subdivision (a) is waived unless raised either by such motion or in the responsive pleading.”)  The defense of lack of standing is an affirmative defense that is subject to this waiver rule.    HSBC Mortgage Corp. v. Johnston , 145 A.D.3d 1240 (3 rd Dep’t 2016); see also, US Bank Nat. Assoc. v. Nelson (2 nd Dep’t June 23, 2019) (same and indicating that the “mere denial of factual allegations will not suffice for this purpose”).  It should be noted that, under appropriate circumstances, the court may grant leave to a defendant to amend an answer to assert an affirmative defense omitted from the party’s original answer.  Marks v. Macchiarola , 221 A.D.2d 217 (1 st Dep’t 1995). The issue of a foreclosing Mortgagee’s standing to bring a mortgage foreclosure action has been discussed in this Blog. See “ The Second Department Determines That A Line Of Credit Agreement Is Not A Negotiable Instrument Under The UCC When Addressing Plaintiff’s Standing To Commence A Mortgage Foreclosure Action ” and  ” The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion .”  The First Department in BAC adds a new twist to this recurring issue. As expected, the plaintiff in BAC is a mortgagee that commenced an action to foreclose a $490,000.00 mortgage.  In its complaint, BAC alleged, inter alia , that it is that holder and owner of the subject note.  The BAC defendant answered the complaint, pro se , by making general denials only.  The defendant neither asserted an affirmative defense of lack of standing nor did he make a pre-answer motion to dismiss the complaint based on lack of standing.  The plaintiff moved for summary judgment and for an order of reference.  In response, the defendant opposed the motion and cross-moved to dismiss the complaint based on plaintiff’s lack of standing.  In reply to its motion and in opposition to defendant’s cross-motion, the plaintiff addressed the standing issue on the merits by introducing evidence of its standing to commence the foreclosure action.  Significantly, however, the BAC plaintiff “never contended in the Supreme Court that the defendants had waived the issue of standing.”  The Supreme Court granted the plaintiff’s motion “and, in effect, denied the … cross-motion.” On the appeal, now with retained counsel, the defendant urged that the plaintiff’s motion for summary judgment should have been denied and the complaint should have been dismissed due to the plaintiff’s lack of standing.  In response, the plaintiff improperly argued for the first time on appeal, that defendant waived the issue of standing by not raising standing as an affirmative defense or in a pre-answer motion to dismiss and that it, nonetheless, established its standing to commence the foreclosure action. The Second Department “modified” the Supreme Court’s order by substituting the provision granting the plaintiff summary judgment and issuing an order of reference with a provision denying the motion.  In so doing, the Second Department noted that instead of arguing waiver below, the plaintiff “sought to establish that it had standing to commence the action … having litigated the standing defense on the merits in the Supreme Court – both on the original motion and in opposition to reargument – the plaintiff argues on appeal that the issue of standing is waived.”  In this regard, the Second Department held that “ aving neglected to raise that dispositive issue in the Supreme Court, the plaintiff may not raise it for the first time on this appeal.” In any event, the Second Department also found that the plaintiff failed to establish on the merits that it had standing to commence the action because of the “conclusory” nature of the loan servicer’s affidavit attempting to establish that the plaintiff “was in possession of the Note at the time of commencement of this action.” TAKEAWAY The BAC plaintiff may have been better served by arguing waiver and not addressing the merits of the standing issue.

Parties to commercial/business transactions are no doubt familiar with “term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle”. As the parties to these documents know, they outline the fundamental terms of the transaction being negotiated. Not surprisingly, disputes arise over the enforceability of these documents. In A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC , 2019 N.Y. Slip Op. 30215(U) (Sup. Ct. Kings County Jan. 28, 2019) ( here ), Justice Sylvia G. Ash considered this question in connection with Forest City’s plan to develop the Atlantic Yards (now Pacific Park), located adjacent to the Barclay’s Center and the Atlantic Terminal. As discussed below, the Court held that the letter of intent at issue (“LOI”) was a binding and enforceable agreement, finding that the document “set forth all of the material terms of the agreed-upon transaction” between the parties. When is a Letter of Intent Binding? In determining the rights and obligations of parties to a written instrument, courts will enforce the agreement according to its terms when the agreement “is complete, clear and unambiguous on its face.” Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002); RIS Assoc. v. N.Y. Job Dev. Auth. , 98 N.Y.2d 29, 32 (2002). The aim of the court when interpreting a written instrument is to arrive at a construction that gives fair meaning to all of its terms and provisions, and to reach a “practical interpretation of the expressions of the parties so that their reasonable expectations will be realized.” Pellot v. Pellot , 305 A.D.2d 478 (2d Dept. 2003). Courts do so by employing “an objective test,” which “means that the manifestation of a party’s intention rather than the actual or real intention is ordinarily controlling.” Four Seasons Hotels v. Vinnik , 127 A.D.2d 310, 317 (1st Dept. 1987); see also Conopco, Inc. v. Wathne Ltd. , 190 A.D.2d 587, 588 (1st Dept. 1993). In determining the party’s intentions, the courts look to the language and terms of the instrument at issue. Conopco , 190 A.D.2d at 588; Lake Constr. & Dev. Corp. v. City of New York , 211 A.D.2d 514, 515 (1st Dept. 1995). “If the language of the agreement is free from ambiguity, its meaning may be determined as a matter of law on the basis of the writing alone without resort to extrinsic evidence.” Salerno v. Odoardi , 41 A.D.3d 574, 575 (2d Dept. 2007). As it is a question of law whether or not a contract is ambiguous ( W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157 (1990)), a court must first determine whether the agreement at issue on its face is reasonably susceptible to more than one interpretation ( see Chimart Assoc. v. Paul , 66 N.Y.2d 570 (1986)). When a contract term or clause is ambiguous, and the determination of the parties’ intent depends on the credibility of extrinsic evidence or a choice among inferences to be drawn from extrinsic evidence, then the interpretation of such language presents a question of fact and the determination is a matter for trial. Amusement Bus. Underwriters v. American Intl. Group , 66 N.Y.2d 878,880 (1985). Any ambiguity in a contract is to be construed against the party who drafted the contract. See Guardian Life Ins. Co. of Am. v. Schaefer , 70 N.Y.2d 888 (1987). When the writing is a letter of intent or a memorandum of understanding the foregoing rules apply. And, where the letter of intent or memorandum of understanding contain all of the essential terms of the contract, “the fact that the parties intended to negotiate a ‘fuller agreement’ does not negate its legal effect.” Conopco , 190 A.D.2d at 588. Thus, a letter of intent or a memorandum of understanding is not rendered ineffective simply because certain non-material terms are left for future negotiation or because the agreement states that the parties will execute a formal agreement in the future. RES Exhibit Servs., LLC v. Genesis Vision, Inc. , 155 A.D.3d 1515, 1518 (4th Dept. 2017); Sustainable PTELtd. V. Peak Venture Partners LLC , 150 A.D.3d 554, 555 (1st Dept. 2017). The writing must expressly reserve the right not to be bound until a more formal agreement is signed. Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008); Emigrant Bank v. UBS Real Estate Sec., Inc. , 49 A.D.3d 382, 383-384 (1st Dept. 2008). In fact, the lack of an expressed reservation of the right not to be bound by the letter of intent or memorandum of understanding in the absence of further agreements strongly favors a finding of a binding agreement. Netherlands Ins. Co. v. Endurance Am. Specialty Ins. Co. , 157 A.D.3d 468, 469 (1st Dept. 2018). here,=">here," >here=">here" and="and" >here.=">here."> A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC Background In early 2005, the City of New York entered into a Memorandum of Understanding (“MOU”) with Forest City, authorizing the company to develop the Atlantic Yards Project. The MOU contemplated that the Empire State Development Corp. (“ESDC”) would seek approval for the acquisition by eminent domain of the ownership interests of the tenants occupying space on the site (“Site 5”). In early 2006, when the Atlantic Yards Project was in its early stages, Forest City made a proposal to A.J. Richard, whereby it would purchase the property from A.J. Richard in exchange for a replacement property in the same location after the redevelopment of Site 5 was complete (“Replacement Property”). At the time, Forest City was planning to redevelop the property as a mixed-use building and convert the building to a condominium form of ownership with retail and/or commercial spaces on the ground floor and a residential or office tower. Discussions over the proposal ensued. Between September and December 2006, the parties negotiated the terms of the LOI, and exchanged multiple drafts of the LOI with each other. On December 2, 2006, the parties executed the LOI. The LOI set forth the proposed terms of the transaction between A.J. Richard and Forest City with respect to the proposed redevelopment of the property. In that regard, the LOI contained a number of provisions relevant to the action: a) an exclusivity provision, in which Forest City agreed to be A.J. Richard’s exclusive purchaser of the property and exclusive developer for the Replacement Property and the proposed redevelopment; b) an agreement to negotiate a purchase and sale agreement related to the property on Site 5 in which certain terms and condition of sale were agreed upon and required to be included in the final agreement; c) a “Proposed Redevelopment” section, which described in detail the proposed redevelopment of a mixed use building at Site 5, and which required A.J. Richard to cease operations at the property and vacate the property on 90 days’ notice from Forest City; d) a “Development Agreement” in which Forest City agreed to, among other things, develop the Replacement Property in accordance with the terms of the development agreement to be entered into by the parties, and substantially complete the Replacement Property within 18 months of the “Go Dark Period”; e) provisions governing the duties of each of the parties; f) a section governing the payments that Forest City would make to A.J. Richard annually ($3,800,000 per year each year) during the Go Dark Period, representing A.J. Richard’s “lost profits during such Go Dark Period”; g) sections governing the purchase price for the Replacement Property, required approvals and inducements from relevant governmental entities to enable the Proposed Redevelopment; h) a confidentiality agreement; i) amendment and assignment sections; j) a compliance with laws section; and k) an agreement section that required the parties to negotiate and finalize the Purchase and Sale Agreement and Development Agreement “within a commercially reasonable period of time.” Thereafter, A.J. Richard and Forest City drafted detailed purchase and sale agreements and development agreements (the “Implementing Documents”), as provided by the LOI, in order to implement the transaction that had been agreed upon in the LOI. From February 2007 to January 2008, A.J. Richard and Forest City exchanged various drafts of the Implementing Documents and their comments concerning them. By letter dated April 11, 2008, A.J. Richard advised Forest City that it had learned of Forest City’s intention to exclude A.J. Richard as an occupant with ownership of the store at the proposed site, as contemplated in the LOI. The letter sought an assurance from Forest City that it intended to perform all of its obligations pursuant to the LOI, noting that A.J. Richard considered the LOI to be a binding contract, notwithstanding the absence of a more formal contract. The letter further stated that if A.J. Richard did not receive the requested assurance by April 18, 2008, A.J. Richard would consider the agreement set forth in the LOI to have been anticipatorily breached by Forest City and would seek appropriate remedies. By letter dated April 17, 2008, Forest City expressed disagreement with A.J. Richard’s assertion that the LOI was a binding contract. Notwithstanding, however, Forest City subsequently reached out to A.J. Richard to resume work on the Implementing Documents. By letter dated April 22, 2008, A.J. Richard advised Forest City that it disagreed with the latter’s legal characterization and effect of the LOI and reserved all rights with respect to the issue. A.J. Richard noted, however, that further debate on that issue would serve no purpose since the parties were proceeding towards finalizing the Implementing Documents. The parties exchanged additional drafts of the Implementing Documents in June 2008 and January 2009. By mid-2009, the Implementing Documents were almost finalized. By October 2009, however, Forest City informed A.J. Richard that due to economic uncertainty caused by the recession and financial crisis, it was delaying the proposed development of Site 5 and that there was a good chance Forest City would never develop the site. Forest City advised that because of the uncertainty surrounding the future of Site 5 and the Atlantic Yards Project as a whole, Forest City wanted to suspend discussions regarding the Implementing Documents and avoid expending further resources on the Implementing Documents at that time. In response, A.J. Richard advised Forest City that it viewed the LOI as a binding contract and asked whether Forest City intended to consummate the transaction. In mid-November 2015, Forest City advised A.J. Richard that it did not consider the LOI to be a binding agreement for the purchase and sale of the property. Forest City further informed A.J. Richard that it intended to proceed with the development of Site 5 without delivering the Replacement Property to A.J. Richard in exchange for A.J. Richard’s existing property at Site 5, and that A.J. Richard would no longer be permitted to operate at the property site. Forest City stated that the ESDC would imminently bring an action to take title to the property by eminent domain. The Lawsuit On December 4, 2015, A.J. Richard filed the action. A.J. Richard asserted four causes of action. The first cause of action sought a declaratory judgment that (a) the LOI was a valid and binding contract, (b) it performed under the LOI, (c) Forest City breached the LOI, (d) it would be irreparably harmed if Forest City or those working in concert with Forest City were to obtain the property other than pursuant to the terms of the LOI, and (e) it had no adequate remedy at law. The second cause of action alleged that Forest City breached its obligations under the LOI by directing the ESDC to initiate proceedings to take title to the property without Forest City purchasing the property and without conveying to it the Replacement Property, and by explicitly repudiating its obligations under the LOI. The third cause of action alleged that Forest City breached its contractual obligations under the LOI by failing to negotiate in good faith, including by, in September 2015, directing the ESDC to seize title to the property by eminent domain, and, in November 2015, explicitly repudiating its obligations under the LOI and declaring that it would not honor the LOI. In its second and third causes of action, A.J. Richard sought specific performance, and an award of incidental damages resulting from Forest City’s alleged breaches of the LOI. The fourth cause of action alleged, in the alternative, that A.J. Richard was entitled to specific performance because Forest City should be estopped from acquiring the property by a method other than that prescribed in the LOI or upon terms other than those set forth in the LOI. A.J. Richard contended that it reasonably and foreseeably relied upon Forest City’s promises in the LOI to its detriment, and that it would suffer irreparable harm if Forest City was not ordered to specifically perform its obligations under the LOI. On February 18, 2016, the Court granted a motion by A.J. Richard for a preliminary injunction restraining Forest City and all those acting in concert with it from developing the project as it pertained to A.J. Richard.  Forest City appealed the February 18, 2016 order, and later withdrew its appeal. By order dated October 13, 2016, the Court directed A.J. Richard to provide an undertaking in the amount of $500,000. Forest City moved for an order: (1) granting it partial summary judgment dismissing plaintiff’s first, second, and fourth causes of action against it; and (2) vacating the preliminary injunction issued on February 16, 2016. A.J. Richard cross-moved for an order: (1) granting it summary judgment on all causes of action set forth in its complaint; (2) declaring that: (a) the LOI was a valid and binding contract; (b) it had performed under the LOI; (c) Forest City was in breach of the LOI; (d) it would be irreparably harmed if Forest City or those working in concert with Forest City obtained its property, other than pursuant to the terms of the LOI; and (e) it had no adequate remedy at law; (3) enjoining Forest City and those working in concert with Forest City from breaching the LOI; (4) compelling Forest City to specifically perform its obligations pursuant to the LOI; and (5) setting the matter down for a hearing to award it incidental damages resulting from Forest City’s prior breaches of the LOI. The Court’s Decision The Court held that the LOI constituted a valid and binding agreement between the parties. The Court found that the “LOI set forth all of the material terms of the agreed-upon transaction, including the parties, purchase price, location, and size of the Replacement Property; mortgage arrangements; Go Dark Payments; assumption of costs; and terms of delivery.” Slip Op. at *14. In addition, the Court found that the LOI “included detailed specifications with respect to the Replacement Property, including parking spaces, loading dock requirements, and a preliminary floor plan …” and a delivery requirement in which Forest City agreed to “deliver the Replacement Property to Richard substantially complete in ‘vanilla box’ condition,” which the LOI defined to mean “specified electrical system capacity,” “air conditioning system requirements, accessibility requirements, and requirements for plumbing, sprinklers, and modes of ingress and egress.” Id . at **14-15. The Court rejected Forest City’s argument that because the LOI required the parties to negotiate the specific terms and conditions of the sale of the property in a purchase and sale agreement and a development agreement, the LOI was “a non-binding agreement to agree and unenforceable as a contract.” Id . at *15. The Court noted that the agreement was “not rendered ineffective simply because certain non-material terms left for future negotiation or because the agreement state that the parties execute” a more formal agreement. Id . at *16 (citation and internal quotation marks omitted). The Court concluded that the “matters to be negotiated non-essential terms that ‘concern fine details,’ which ‘may still be decided by the parties without effecting the viability of the contract.’” Id . (quoting Tetz v. Schlaier , 164 A.D.2d 884, 885 (2d Dept. 1990)). The Court found it dispositive that the LOI did not “contain an express reservation by either party of the right not to be bound until a more formal agreement signed. Id . See also id . at *18 (“The lack of an expressed reservation of the right not to be bound by the LOI in the absence of further agreements strongly favors a finding of a binding agreement”) (citations omitted).  As a result, the Court rejected Forest City’s assertion that the LOI was non-binding because it “did not state that the parties intended to be legally bound”: “there is no requirement in a contract that it state that the parties are bound by it. Rather, it is the fact that the language of the agreement evinces a binding contract which determines that the parties are bound.” Id . at *17 (citations omitted). The Court summarized its findings as follows: The plain language used in the LOI manifests the intention of the parties to be bound by it. The LOI contained extensive language that makes sense only in the context of a binding contractual commitment. The LOI used mandatory terms with respect to the parties’ obligations, such as “shall” and “will” throughout its provisions, indicating its binding nature. There is no explanation as to why the parties would use such mandatory language to refer to commitments if they were merely optional or precatory. Furthermore, the LOI stated that by signing, the parties “indicate ... agreement with the terms of this .” This is indicative of a binding agreement.… Forest City does not explain why a document that created no binding rights would provide for the termination of “rights hereunder,” or why a document that created no binding obligations would nonetheless provide for their “automatic[] release[].” … Forest City offers no explanation as to why the parties would provide for amendment procedures and governing law, or a liquidated damages provision for a document that it believed was of no legal effect. Thus, the LOI was replete with the terminology of a binding contract, evincing the parties’ intention to create mutually binding contractual obligations, which is incompatible with Forest City’s contention that it was free to walk away from the deal upon deciding that its interests were no longer served by it. Slip Op. at *18-19 (citations omitted). Accordingly, the Court denied Forest City’s motion, except as to the promissory estoppel claim and granted A.J. Richard’s cross-motion, to wit: (1) granting a declaratory judgment, finding that (a) the LOI was a valid and binding contract, (b) Forest City breached the LOI, (c) A.J. Richard performed under the LOI; (d) A.J. Richard would be irreparably harmed if Forest City or those working in concert with Forest City obtained the property, other than pursuant to the terms of the LOI; and (e) A.J. Richard had no adequate remedy at law; (2) granting summary judgment in favor of A.J. Richard on its second and third causes of action for breach of contract; (3) Forest City was directed to specifically perform its contractual obligations under the LOI, and, pursuant to the terms of the LOI, Forest City was directed to negotiate and finalize the Implementing Documents in good faith in order to complete the transaction; and (4) Forest City and those working in concert with Forest City were enjoined from breaching the LOI, as previously provided in the preliminary injunction, pending the completion of the transaction. Takeaway Courts have repeatedly held that agreements in principle, letters of intent and memoranda of understanding, as well as other less formal written documents, such as terms sheets and emails, can serve as an enforceable agreement. Documents containing words that evince an agreement, along with language demonstrating contract formation, will suffice to create an enforceable agreement.  A.J. Richard illustrates these points. A.J. Richard also shows that whether a less-than-formal agreement is binding is often a hotly contested issue. It is not surprising, therefore, that Forest City has already filed a notice of appeal. This Blog will continue to follow the case as it winds its way through the appellate system.