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Black’s Law Dictionary has defined “escheat” as “ reversion of property to the state in consequence of a want of any individual competent to inherit.”  Many people are aware that money in forgotten bank accounts is frequently deemed abandoned and is escheated to the State, however, the scope of the APL, is significantly broader. New York’s Abandoned Property Law (“APL”), sets forth various circumstances in which property is deemed to be abandoned and thus escheated to New York State.  Thus, section 102 of the APL, which is the declaration of the policy behind the APL, provides that “ t is hereby declared to be the policy of the state, while protecting the interest of the owners thereof, to utilize escheated lands and unclaimed property for the benefit of all the people of the state, and this chapter shall be liberally construed to accomplish such purposes”. Unclaimed property held or owing by banking organizations is governed by Article III of the APL.  Other provisions in the APL relate to unclaimed deposits and refunds for utility services (Article IV), unclaimed property held or owing for payment to security holders (Article V), unclaimed property held by securities brokers (Article V-A), unclaimed life insurance funds (Article VII), unclaimed condemnation awards (Article X), unclaimed property paid or deposited into federal courts (Article XII), unclaimed or abandoned property in the possession, custody or control of the United States of America (Article XII-A) and various categories of miscellaneous unclaimed property (such as, but not limited to, unclaimed property resulting from the administration of the NYS Vehicle and Traffic Law, uncashed travelers checks and money orders, unclaimed consumer credit balances) (Article XII). This blog reflects upon Article VI of the APL, which addresses the escheatment to New York State of unclaimed or unknown court funds.  Attorneys and litigants routinely deposit money into court for a variety of reasons pursuant to statute and/or court order.  These deposited funds are subject to section 600 of the APL, which deems, with some exceptions, the following unclaimed property as abandoned: (a) “any monies including the monetary proceeds from the sale of tangible personal property and securities or other intangible property paid into court which … shall have remained in the hands of any county treasurer, or the commissioner of finance of the city of New York, for three years.…”; (b) certain “…monetary proceeds representing any legacy or distribution share to which an unknown person is entitled….”; and, (c) “… monies paid to a support bureau of a family court, for the support of a spouse or child, which shall have remained in the custody of a county treasurer, or the commissioner of finance of the city of New York, for three years….”  The potentially absurd result of the blind application of Article VI of the APL is illustrated by the circumstances of the case discussed below (the true names of the parties having been changed). ABC Corporation (“ABC”) was the owner of real property in New York State on which it constructed a large building (the “Project”).  The general contractor on the Project (“GC”) was terminated, for cause.  The GC and almost two dozen subcontractors filed mechanics liens approximating $1.8 million (the “Liens”). In March of 2012, the GC commenced an action to foreclose its lien (the “Lien Foreclosure Action”).  In April of 2012, ABC moved the Court for an order pursuant to section 20 of New York’s Lien Law fixing the amount necessary for ABC to pay into Court to discharge all of the Liens (the “Discharge Motion”).  In May of 2012, the Court granted ABC’s Discharge Motion and directed that upon the deposit of the sum of $1.1 million with the County Clerk (the “Deposit”), the Liens would be discharged.  The Deposit was promptly made and, accordingly, the Liens were discharged. In the summer of 2016, ABC’s accountants, in conjunction with a routine audit, and in light of the significant amount of the Deposit, wrote to the County Clerk to inquire on the status of the Deposit.  In the County’s response to the request (the “Response”), ABC was advised that in the spring of 2016, the County Clerk deemed the Deposit abandoned and turned same over to the NYS Office of Unclaimed Funds, less a 2% “Treasurer’s Fee” that the County retained for itself (the “Turnover”).   In its Response, the County also advised that it provided notice of the Turnover in a legal advertisement placed in the local press. The news that the County turned over to New York State as abandoned property the $1.1 million Deposit was met with a resounding “HOLY ESCHEAT”. While the Turnover appears to be authorized under the APL, the County Clerk’s actions seem to lack sensibility.  The Deposit was made pursuant to an Order of the Court under section 20 of the Lien Law, which provides, in pertinent part, that a deposit made pursuant to that section “shall be repaid to the party making the deposit…upon the discharge of the liens against the property pursuant to law”, that such deposits of money “shall be considered as paid into court and shall be subject to the provisions of law relative to the payment of money into court and the surrender of such money by order of the court” and that orders for the surrender of such deposits to the lienor or depositor “may be made by any court of record having jurisdiction of the parties….”  Thus, the Deposit should have remained in the County Clerk’s possession until further order of the Court. Further, at the time the Turnover was made, the parties were still actively litigating the Lien Foreclosure Action and the Clerk was aware of the name and address of each and every litigant and their respective counsel.  Nonetheless, the only “notice” of the Turnover was made by publication pursuant to APL section 601(1), which provides that “ n or before the First day of February in each year, such county treasurer or the commissioner of finance of the city of New York shall cause to be published a notice entitled: ‘NOTICE OF NAMES OF PERSONS APPEARING AS OWNERS OF CERTAIN UNCLAIMED PROPERTY HELD BY (title of officer).’”  Under the facts of the case discussed herein, it should be apparent that published notice was not the best way to notify known and active litigants that their valuable property was about to be turned over to the State. Section 1406 of the APL establishes various claims procedures for the return of property deemed abandoned.  In the case discussed herein, upon learning of the Turnover, ABC moved the Court in the Lien Foreclosure Action pursuant to APL section 1406(2) for an order directing New York State to return the Deposit (the “Return Motion”).  Pursuant to Section 1406(2), claims is in the amount of $10,000 or more based on turnovers to New York State pursuant to, inter alia, APL section 600(1)(a), “…may be established only on order of the court which had original jurisdiction of the underlying matter, after service of a notice upon the state comptroller and upon due notice to all parties to the action or proceeding which resulted in the monies being paid into court….” At the time the Return Motion was made, the Lien Foreclosure Action was still active and the Deposit was still required to be in place pursuant to section 20 of the Lien Law.  ABC was reluctant to have the Deposit returned to the County Clerk because of its prior decision to deem the Deposit abandoned.  Thus, in its Return Motion ABC requested that the Deposit be delivered to ABC’s counsel to be held in an escrow account (as opposed to returning the Deposit to the County Clerk).  The Return Motion was granted and ABC’s counsel retained the Deposit until the matter was resolved and a subsequent court order permitted the delivery of the Deposit to ABC. Takeaway Whenever deposits into court are required, a review of the APL should be made to determine whether the circumstances present one in which the deposit may be deemed abandoned after three years and, if so, steps should be taken before the end of three years to ensure that any such deposits are not deemed abandoned pursuant to the APL. In addition, query whether it might make sense to request that the Court include in any order directing that a deposit be made into court, language prohibiting the County Clerk from deeming such deposit to be abandoned without further order of the court and/or without personally notifying the litigants of such intentions so that prophylactic steps can be taken to prevent such actions by the County Clerk.

The claim of assumpsit (from the Latin indebitatus assumpsit ) was “developed to redress circumstances involving unjust enrichment or to ‘prevent a man from retaining the money of, or some benefit derived from, another which it is against conscience that he should keep.’” Tri-State Chem., Inc. v. Western Organics, Inc. , 83 S.W.3d 189, 193-94 (Tex. App.-Amarillo 2002, pet. denied) (citation omitted); Parsa v. State of New York , 64 N.Y.2d 143, 148 (1984). “It encompassed an obligation imposed by law on one to pay a sum of money or to deliver specific property to another.” Tri-State Chem ., 83 S.W.3d at 193-94. Over time, assumpsit was divided into various categories, two of which lawyers know today as money had and received and quantum meruit. Id . at 194. Money had and received is a common law claim in which the plaintiff seeks the return money from another on equitable grounds. Parsa , 64 N.Y.2d at 148; New York v. Park , 204 A.D.2d 531 (2d Dept. 1994). All the plaintiff need show is that the defendant holds money, which in equity and good conscience, belongs to him. Staats v. Miller , 150 Tex. 581, 584, 243 S.W.2d 686, 687-88 (1951) (citation omitted). As the U.S. Supreme Court has observed, a cause of action for money had and received is “less restricted and fettered by technical rules and formalities than any other form of action. It aims at the abstract justice of the case, and looks solely to the inquiry, whether the defendant holds money which . . . belongs to the plaintiff.” United States v. Jefferson Elec. Mfg. Co. , 291 U.S. 386, 402-03 (1934). The Law in New York A claim for money had and received requires a showing that: (1) the defendant received money belonging to the plaintiff; (2) the defendant benefited from the receipt of the money; and (3) under principles of good conscience the defendant should not be allowed to retain that money. Litvinoff v. Wright , 150 A.D.3d 714 (2d Dept. 2017). On August 17, 2017, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, dismissed a claim for money had and received because the plaintiff failed to establish that the defendant retained or benefitted from the receipt of the money. 413 W. 48th St. Housing Development Fund Corp. v. Saparn Realty, Inc . , 2017 NY Slip Op. 31773(U) (Sup. Ct., N.Y. Co. Aug. 17, 2017). 413 W. 48th St. Housing Development Fund Corp. v. Saparn Realty, Inc. Background In May 2012, the plaintiff, 413 West 48th Street Housing Development Fund Corporation (“HDFC”), retained the defendant, Saparn Realty, Inc. (“Saparn”), as the managing agent for its property. As part of Saparn’s responsibilities, it was required to collect and deposit funds in a separate bank account as agent of HDFC, without commingling them with any other funds collected from other properties managed by Saparn. Saparn was also required to provide copies of bank statements to HDFC every month. In October 2012, HDFC implemented a policy requiring that at least $200,000 be kept in its reserve account, to be used for emergency purposes only. HDFC communicated that policy to Saparn. Over time, Saparn stole funds from HDFC’s reserve account. In August 2013, HDFC learned that its bank accounts with Saparn were closed out, and its reserve fund had “vanished.” To conceal the theft of funds, Saparn delivered false reports to HDFC, containing altered bank statements showing a balance of more than $200,000 in the reserve account. HDFC investigated and discovered that Saparn had been transferring money out of HDFC’s bank accounts since May 2013. HDFC reported the theft to the New York District Attorney and informed other building owners defrauded by Saparn, including The Oaks at La Tourette Condominium Section II (“Oaks”), one of the defendants in the action. HDFC commenced the action against Saparn and its principals to recover the money that was stolen from it. Thereafter, it discovered that approximately $91,000 of the money taken from the reserve account was deposited into two bank accounts held by Oaks. HDFC had no dealings with Oaks, so there was no agreement or obligation pursuant to which that payment was made. HDFC informed Oaks of its findings and demanded the return of its funds in March 2014, and again in September 2014. Oaks refused to return any of the money demanded by HDFC. Thereafter, HDFC sued Oaks for the funds. HDFC moved for summary judgment on, among other things, its cause of action for money had and received against Oaks. HDFC argued that its money was wrongfully deposited into Oaks’ bank accounts, thereby conferring a benefit on Oaks. HDFC argued that, even though Oaks did not participate in the wrongdoing, it could not retain the windfall. Oaks also moved for summary judgment, arguing that because it was a victim just like HDFC, it should not have to lose money twice by having its own money stolen and then having to pay another of Saparn’s victims. One victim of a fraudulent scheme should not be permitted to recover from another victim. Oaks further claimed that Saparn admitted to moving funds between accounts and creating false bank statements, so it could not be established that any money Oaks had in its account belonged to HDFC. The Oaks account was used as a vehicle to move money between other third parties. The money deposited into its account from HDFC could have just as easily been transferred out. The Court’s Decision The Court held that HDFC failed to meet its burden of establishing “that Oaks benefitted from the receipt of HDFC’s money,” finding that “any factual conclusion to that effect could only be made on speculation.” The Court agreed with Oaks that “ oth parties were victims of Saparn’s fraud.” While HDFC has demonstrated that Oaks received money from HDFC’s account, HDFC has not made a prima facie showing that Oaks either retained or benefitted from the receipt of that money. HDFC has not provided any forensic report of its own, or any expert analysis of Oaks’ accounts. There is simply no probative evidence submitted to establish that Oaks benefitted from the receipt of HDFC’s money, and any factual conclusion to that effect could only be made on speculation. Both parties were victims of Saparn’s fraud. Accordingly, the Court dismissed HDFC’s claim for money had and received. Takeaway Money had and received is a category within the common law cause of action of assumpsit. The remedy for the claim is restitution, or the return of money, to restore the plaintiff to his/her original position. 413 W. 48th St. Housing Development Fund Corp . teaches that even where a plaintiff can demonstrate that a third party received money belonging to the plaintiff, the plaintiff must nevertheless make a prima facie showing of entitlement to the relief requested. As HDFC learned that showing cannot be based on speculation.  It must be based on evidence.

In prior posts, this Blog has written about the financial exploitation and abuse of vulnerable adults. ( Here , here and here .) Late last month, CNBC ran a story about this growing and disturbing problem. ( Here .) Financial exploitation of the elderly and vulnerable is a common occurrence. According to the U.S. Department of Justice, financial exploitation of senior adults is one of the most frequently reported forms of elder abuse. Indeed, a recent survey from the North American Securities Administrators Association (“NASAA”) found that three in 10 state securities regulators had reported an increase in complaints from victims of financial fraud and exploitation. ( Here .) As the incidence of exploitation and abuse increase, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. ( Here .) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies, estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. ( Here .) The numbers from these studies show that the financial exploitation of senior and vulnerable adults is growing, and not just with older adults experiencing cognitive decline. “Many of the victims of financial fraud are not demented or disabled,” Patricia Boyle, professor of behavioral sciences at Rush University Medical Center in Chicago, told the International Association of Gerontology and Geriatrics conference in July. Indeed, one in 18 “cognitively intact” seniors fall victim to financial fraud and exploitation each year, according to a recent study in the American Journal of Public Health. ( Here .) Researchers believe that the true prevalence of exploitation and abuse is underestimated. Financial Exploitation of Investors Financial exploitation occurs when individuals steal and/or misuse a vulnerable adult’s financial assets and property for their own personal gain, often without the informed celder exploitation elder exploitation and abuseand abusonsent or knowledge of their victim. According to a recent study by the New York State Office of Children and Family Services, titled “The New York State Cost of Financial Exploitation Study,” approximately five million seniors and vulnerable Americans are financially exploited each year.” ( Here .) The financial exploitation and abuse of senior and vulnerable investors ( e.g. , senior citizens and the disabled) takes many forms. The most common involves: churning, unauthorized trading, unsuitable investing, over-concentrating an investor’s portfolio in a single type of investment or iEndustry segment, and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions. Unscrupulous investment professionals (such as, stockbrokers, financial advisors and insurance brokers) often exploit the fact that many elder and disabled investors are not market savvy and financially sophisticated or are trusting of those in a position of knowledge and authority. They prey on the fact that senior and vulnerable investors are often hesitant to admit they do not understand what is being presented to them. Regulatory Action Last October, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities and Exchange Commission (“SEC”) to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers. (This Blog wrote about the proposed rule changes here .) On March 30, 2017, FINRA announced that the SEC approved the proposed rule changes. In connection with the announcement, FINRA issued Regulatory Notice 17-11, and set February 5, 2018, as the effective date for the new rules. ( Here .) The changes approved by the SEC involve two key protections for seniors and other vulnerable investors. First, member firms will be required to make reasonable efforts to obtain the name and contact information of a trusted contact person for a customer’s account. Second, member firms will be permitted to place a temporary hold on the disbursement of funds or securities when there is a reasonable belief of financial exploitation and abuse. The NASAA Model Act In 2016, NASAA adopted a model act that resembles FINRA’s rule. ( Here .) The model act requires brokers and advisers to report instances of suspected elder abuse to state authorities, and authorizes them to delay disbursements of funds for up to 15 days if they believe their clients were being abused, conferring civil and administrative liability protections in those cases. The model act has served as the basis of legislation or regulations in five states. Alabama and Indiana adopted laws, and Vermont promulgated a regulation, which implements the model act’s mandatory reporting requirements, immunity, and delayed disbursement provisions. Louisiana passed a law that maintains the model act’s immunity and disbursement provisions, but relaxed its reporting requirements, making them only voluntary. Texas recently passed a bill that closely tracks the model act, requiring investment professionals to report suspected exploitation and abuse and offering a 10-day hold on suspicious disbursement requests. Some, like California, adopted the model act’s mandatory reporting requirements, while others, like Washington State, enacted more robust statutory schemes that are nearly identical to the model act. Dozens of states have used the model act as the template for their own proposed legislation and/or regulations. Maryland, Mississippi, New Mexico, North Dakota, and Oregon, for instance, are considering legislation that imposes mandatory reporting requirements in line with the model act. At least two states, New York and Tennessee, are considering bills that would provide for voluntary reporting of suspected financial exploitation. Takeaway Financial exploitation and abuse of senior and vulnerable adults remains an all too common fact of life. Defending seniors and vulnerable adults from financial exploitation and abuse starts with trusted persons who are sensitive to facts and circumstances that are, or seem to be, out of the ordinary. Recent legislative and regulatory efforts should help. At the end of the day, however, vigilance by trusted individuals in overseeing and monitoring the property and assets of the elderly and vulnerable is the best way to help detect and stop financial exploitation and abuse before it results in financial ruin.

Ponzi schemes seem to be in vogue lately. Last week the Securities and Exchange Commission (“SEC”), and the Department of Justice, announced the filing of two enforcement and criminal proceedings involving Ponzi schemes ( here and here ), one involving New York sports radio personality, Craig Carton, and the other involving a New Jersey-based tax preparer and investment adviser. Both are charged with bilking investors out of millions of dollars. What is a Ponzi Scheme? Named after the originator of this type of investment fraud, Charles Ponzi, a Ponzi scheme involves the payment of purported returns to existing investors from funds contributed by new investors. To make the scheme work, the perpetrator solicits new investors by promising to invest money in securities that will generate high returns with little or no risk.  Ponzi schemes rely on a constant flow of money from new investors in order to provide “returns” to earlier ones. This constant payment of “returns” gives the illusion that the investor is receiving “profits” from a legitimate business. However, when the cash flow stops, the scheme falls apart. Bernie Madoff is probably the most well-known perpetrator of a Ponzi scheme. Over more than 17 years, Madoff carried out the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars. What are the Common Characteristics of a Ponzi Scheme? Many Ponzi schemes share the following characteristics: Guaranteed promise of high returns with little or no risk to principle. Consistent returns regardless of market conditions. Unregistered investments. Undisclosed and/or complex investment strategies. Periodic statements, confirmation tickets and other documentation withheld from investors. Inability to withdraw client money. WFAN Radio Host Charged with Ticket Ponzi Scheme On September 6, 2017, the SEC charged Craig Carton, a New York sports radio personality, and Joseph Meli (“Meli”), a New York City resident, with stealing millions of dollars from investors who were allegedly promised their funds would be used for the purchase and resale of concert tickets. (The SEC’s announcement can be found here .) The SEC alleged that Carton and Meli falsely claimed they had access to large blocks of face value tickets to popular concert performances.  (The SEC’s complaint can be found here .) According to the complaint, investors were falsely promised high returns from the price markups in ticket resales.  However, instead of purchasing tickets for resale, Carton and Meli allegedly misappropriated at least $3.6 million to repay earlier investors and cover such other expenses as Carton’s gambling debts.  Additionally, Carton allegedly misappropriated $2 million “by making misrepresentations to investor and a third-party concert venue, so as to trick the concert venue into forwarding the investor’s funds to an entity controlled by Carton.” According to the SEC’s complaint, one investor was provided documents falsely representing that large blocks of Adele tickets were being purchased at face value directly from Adele’s management company when in fact there was no such agreement. “As alleged in our complaint, investors were lured with promises of big profits from resales of A-list concert tickets, but little did they know their money was being used to cover Carton’s gambling debts among other things,” said Paul Levenson, Director of the SEC’s Boston Regional Office. The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties against Carton and Meli along with six businesses they control: Advance Entertainment LLC, AdvanceM Ltd., Misoluki Inc., Misoluki LLC, Ticket Jones LLC, and Tier One Tickets LLC. Meli is no stranger to run-ins with the law. Earlier this year, he was charged with operating a Ponzi scheme involving the purported resale of tickets to the Broadway musical Hamilton and other events. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced ( here ) that it filed criminal charges against Carton and his associate, Michael Wright. Carton and Wright were charged with securities fraud, wire fraud, and conspiracy to commit those offenses. (The criminal complaint can be found here .) Acting Manhattan U.S. Attorney Joon H. Kim said: “As alleged, Craig Carton and Michael Wright deceived investors and raised millions of dollars through misrepresentation and outright lies. Their schemes were allegedly propped up by phony contracts with two companies to purchase blocks of concert tickets, when in fact, Carton and Wright had no deals to purchase any tickets at all. As alleged, behind all the talk, the Wright and Carton show was just a sham, designed to fleece investors out of millions ultimately to be spent on payments to casinos and to pay off other personal debt.” FBI Assistant Director-in-Charge William F. Sweeney Jr. said: “Carton and Wright thought they could get off easy by allegedly paying off their debts with other people’s money. They then attempted to pay off investors with money that would eventually become future debt, as alleged. We see this time and time again, the rise and fall of a Ponzi scheme destined for failure. The truth is, the time will come when your luck runs out. Unfortunately for those arrested today, that time is now.” If convicted, Carton can serve up to 45 years of prison time and pay fines that can exceed $5 million. Tax Preparer and Investment Advisor Charged With Stealing Investor Money Also on September 6, 2017, the SEC announced that it charged a New Jersey-based tax preparer and investment adviser with stealing more than $1 million from clients to support his gambling habit and other personal expenditures. In its complaint , the SEC alleged that Scott Newsholme (“Newsholme”) “fabricated account statements, doctored stock certificates, and forged promissory notes as part of a scheme in which he convinced clients seeking his financial planning advice to give him their money to invest in various securities.”  Instead of investing clients’ money, Newsholme allegedly cashed their investment checks and pocketed the funds “while assuring clients that their assets were safe and flourishing.”  According to the SEC, “Newsholme used investor money for personal expenses, gambling in Atlantic City, and Ponzi-like payments to clients who sought a return of their funds.” In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced the filing of criminal charges against Newsholme. In that regard, Newsholme was charged with one count of mail fraud, wire fraud, and securities fraud. (The criminal complaint can be found here .) If convicted on the mail and wire fraud counts, Newsholme can serve a maximum sentence of 30 years in prison and pay a $1 million fine. The securities fraud count carries a maximum sentence of 20 years in prison and a $5 million fine. Takeaway The SEC has warned investors to be vigilant in protecting themselves before they invest money. ( Here .) “Whether you are a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.” Many of the questions investors should ask are based upon the common features of a Ponzi scheme. If these questions are not answered, investors should not be afraid to request more information. Any push-back or doublespeak should raise red flags. After all, as the proverb says: “if it sounds too good to be true, then it probably is.”

Implicit in every contract is a covenant of good faith and fair dealing. New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995). “The covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other.” Michaan v. Gazebo Hort., Inc. , 117 A.D.3d 692, 693 (2d Dept. 2014) (citation and quotation omitted).  “While the duties of good faith and fair dealing do not imply obligations inconsistent with other terms of the contractual relationship, they do encompass any promises which a reasonable person in the position of the promisee would be justified in understanding were included.” 511 W 232nd Owners Corp. v. Jennifer Realty Co. , 98 N.Y.2d 144, 153 (2002). This Blog previously wrote about the covenant here and here . On August 23, 2017, the Supreme Court, Appellate Division, Second Department, considered these principles in affirming the dismissal of a claim alleging a breach of the implied covenant of good faith and fair dealing. Rayham v. Multiplan, Inc. , 2017 NY Slip Op 06306 (2d Dept. Aug. 23, 2017). Rayham v. Multiplan, Inc. Background Roman Rayham (“Rayham”), a plastic surgeon, and his private practice, RR Plastic Surgery P.C. (“RR Office”), commenced the action on June 17, 2013 against one the defendants, Multiplan, Inc. (“Multiplan”), a preferred provider organization, alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment and quantum meruit. In 2009, in connection with his practice at New York Methodist Hospital (“Methodist”), Rayham executed a limited power of attorney authorizing Allegiance Billing & Consulting, LLC (“Allegiance”) to contract on his behalf with network providers and health insurance companies for services performed at Methodist. In 2010, Allegiance executed an agreement (the “Beech Street Agreement”) on Rayham’s behalf with one of the defendants, Beech Street Corporation (“Beech Street”), a preferred provider organization. The Beech Street Agreement provided that its terms could be amended upon “30 days prior written notice from Beech to ” and that the “amendment shall be effective at the conclusion of such 30 day notice period unless objects to the amendment and notifies Beech in writing of intent to terminate prior to the conclusion of such notice period.” The address to which the Beech Street Agreement required the written notice to be sent was the address for the office of Park Slope Physician Services P.C. (“PSPS”), which handled all of Methodist’s billing, including the billing for services Rayham provided at Methodist. The Beech Street Agreement further provided that Beech Street could assign its rights under the contract to a “Beech Affiliate,” which was defined as any “entity” that is “controlled by or is under common control of Beech .” In 2010, Multiplan acquired Beech Street’s parent company. In March 2011, Multiplan sent two letters to Rayham at PSPS’s address. Both letters advised that Multiplan had acquired Beech Street and that, effective July 15, 2011, the Beech Street and Multiplan networks would integrate and claims would be processed under Multiplan’s fee schedule. The second letter, dated March 28, 2011, advised that the Beech Street Agreement would be amended so as to include the claims for services Rayham provided at Methodist in the Multiplan network. Rayham claimed he never received these letters. In November 2011, the Plaintiffs faxed Beech Street a letter requesting that the RR Office be added “to our profile,” with a retroactive date of July 1, 2011. The letter provided the RR Office’s address and tax-identification number, and a W-9 form was attached. Upon receiving the fax, the Defendants retroactively enrolled the RR Office in their networks and processed the RR Office’s claims according to Multiplan’s fee schedule. A few months later, after realizing that the RR Office was receiving lower reimbursements than were once provided by Beech Street, Rayham learned that Multiplan had acquired Beech Street and that claims were being processed pursuant to Multiplan’s fee schedule. Rayham requested the RR Office’s removal from the Defendants’ networks. This request was granted, but the request for the reprocessing of the RR Office’s claims was denied. In their complaint, the Plaintiffs alleged that the Defendants unilaterally altered the terms of the Beech Street Agreement by placing the RR Office in the Multiplan network and repricing its claims under the Multiplan fee schedule without affording the Plaintiffs notice or an opportunity to object as required under the Beech Street Agreement. Following joinder of issue and the completion of discovery, the Plaintiffs moved for summary judgment on the complaint, and the Defendants cross-moved for summary judgment dismissing the complaint. The motion court denied the Plaintiffs’ motion and granted the Defendants’ cross motion. The Plaintiffs appealed. The Court’s Ruling On the breach of contract claim, the Court held that the motion court “properly granted that branch of the defendants’ motion….” The Court found that the Defendants “complied with the Beech Street Agreement by sending the March 2011 letters, which advised Rayham that Multiplan had acquired Beech Street and that claims would be processed under the Multiplan fee schedule, to the address expressly required by the contract for such written notices.” The Court rejected the Plaintiff’s argument that Beech Street should have sent the notice, as opposed to Multiplan, because Multiplan “met the definition of a ‘Beech affiliate’ under the Beech Street Agreement.” Consequently, there could be no breach of contract “since the defendants provided Rayham with proper notice that the Beech Street Agreement would be amended so as to subject claims to the Multiplan fee schedule, and Rayham failed to object in writing within the 30-day notice period.” Having disposed of the contract claim, the Court turned its attention to the breach of the implied covenant of good faith and fair dealing. Noting that “ he covenant is breached where one party to a contract seeks to prevent its performance by, or to withhold its benefits from, the other,” the Court found that the Defendants’ “submissions established, prima facie, that they did not withhold the benefits of, or seek to prevent the performance of, the Beech Street Agreement either in its original form, or as amended.” Consequently, the motion court “properly granted that branch of the defendants’ motion which was for summary judgment dismissing the cause of action alleging a breach of the implied covenant of good faith and fair dealing.” Takeaway Rayham teaches that in order to breach the implied covenant of good faith and fair dealing, one party must act in way that denies the fruits of the contract for the other. Rayham learned this lesson the hard way – the Defendants acted consistent with the terms of the Beech Street Agreement.

Previously, this Blog considered the rules for judicial dissolution of a limited liability company (“LLC”). Here . A brief reminder follows below. Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court sitting in the judicial district in which the office of the company is located may dissolve the company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. To successfully petition for the dissolution of a limited liability company under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC , 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC , 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See e.g. , Matter of Natanel v. Cohen , 43 Misc.3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean , 72 A.D.3d at 130-132. (This Blog wrote about a case, In the Matter of The Dissolution of 47th Road LLC, a New York Limited Liability Company , 2017 NY Slip Op. 50196(U), (Sup. Ct. Queens Co. Feb. 16, 2016), in which the discord between the partners was so severe, it became violent, thereby persuading the court that dissolution was appropriate < here =">here"> ). Today, this Blog revisits judicial dissolution under LLCL § 702 by discussing a decision coming out of the Supreme Court, Appellate Division, Second Department, wherein the Court held that questions of fact precluded the dismissal of an application to dissolve an LLC. Mace v. Tunick , 2017 NY Slip Op. 06170 (Aug. 17, 2017). Mace v. Tunick Background In July 2007, the plaintiff, David Mace (“Mace”), the defendant Nicholas Tunick (“Tunick”), and Tunick’s father, Peter Tunick (collectively” the “Owners”), formed Pedani Realty Services, LLC (“Pedani”). Mace and Tunick each owned 20% interests in the company, while Peter Tunick owned a 60% interest. In addition, each owned Ceres Chemical Co., Inc. (“Ceres”), in the same percentages as their ownership interests in Pedani. According to Mace’s complaint, the Owners formed Pedani for the sole purpose of purchasing and holding real property in Pound Ridge, New York (the “Property”) to serve as the headquarters for Ceres. Pedani took title to the Property in September 2007. Each of the Owners funded the purchase of the Property in same percentages as their ownership interests in Ceres. With the exception of a small amount of cash, the Property was the sole asset of Pedani. From approximately October 2007 through December 2013, Ceres occupied the Property under a lease with Pedani and paid monthly rent to Pedani. In or about 2012, Peter Tunick retired from Ceres and transferred his remaining stock in Ceres to his son, Nicholas Tunick. Additionally, Peter Tunick assigned his ownership in Pedani to his son with the consent of all members of Pedani. In October 2013, Mace retired from Ceres and sold his interest to Tunick, with the understanding that Ceres would remain at the Property and continue to pay rent to Pedani. However, subsequent to Mace’s retirement from (and sale of his interest in) Ceres, Tunick moved Ceres’ headquarters to South Carolina and vacated the Property. In October 2015, Mace commenced the action, inter alia , for the judicial dissolution of Pedani. Mace claimed, among other things, that the relocation deprived Pedani of the monthly income generated from the lease with Ceres, and was inimical to the purpose for which Pedani was formed. The defendants moved to dismiss, inter alia , the first cause of action, seeking judicial dissolution. The motion Court granted that portion of the motion. Mace then moved, inter alia , for leave to renew his opposition to the motion seeking dismissal of the first cause of action. That motion was also denied. Mace appealed. The Court’s Ruling The Second Department reversed. Applying the principles discussed above, the Court found that the operating agreement at issue did not did not set forth any particular purpose to warrant dismissal of the petition for dissolution: Here, the plaintiff alleged in the complaint that Pedani was formed for the purpose of acquiring title to and managing property to serve as Ceres’ headquarters, and that it became impossible to fulfill that purpose once Ceres relocated to a different property, not owned by Pedani. Contrary to the defendants’ contention and the Supreme Court’s conclusion, the defendants did not show, through the operating agreement or any other evidence, that the material fact alleged by the plaintiff regarding Pedani’s purpose “is not a fact at all” and that “no significant dispute exists regarding it.” In this respect, the operating agreement did not set forth any particular purpose for Pedani. The court’s determination that Pedani’s purpose was simply to acquire and manage property constituted an impermissible factual finding. Moreover, the defendants were not entitled to dismissal of the first cause of action under CPLR 3211(a)(1). Neither the operating agreement nor the leases of the property to Ceres and, upon Ceres’ relocation, a third party, utterly refuted the plaintiff’s allegation as to Pedani’s purpose so as to conclusively establish a defense as a matter of law to the plaintiff’s dissolution cause of action. Citations omitted. Takeaway Mace is instructive for two reasons. First, it underscores the importance of negotiating and drafting an operating agreement that includes a provision governing how members can exit the LLC. While not every situation demands consideration of exit provisions at the outset of the company, the parties to the operating agreement should understand the consequences of that decision and the risk that they may not be able to agree on dissolution terms at a later date. Mace learned this lesson the hard way. Second, it underscores the importance of identifying with specificity the purpose of the LLC at the time of formation. While many states permit general-purpose clauses in the operating agreements, indicating that the LLC is formed to engage in “all lawful business,” other states require a more specific explanation of the products and/or services the LLC will provide. Maces shows that even where a general-purpose clause is all that is required, the better practice is to provide specificity in describing the business purpose of the company.

Melville, NY ( Law Firm Newswire ) August 31, 2017 -  Freiberger Haber LLP to leverage more than 50 years of combined experience in delivering results oriented, client-centric representation to corporations, small businesses, partnerships and individuals. Jonathan Freiberger and Jeffrey Haber, former partners at prominent New York law firms, have come together to launch  Freiberger Haber LLP . The new law firm will represent businesses and individuals involved in a broad range of complex business and commercial litigation matters. “Forming the firm gives us an opportunity to marshal our diverse and extensive experience,” Freiberger said. “Through litigation and counsel, we have helped guide our clients through all types of litigation, legal and business challenges. Together, we offer our clients the sophistication and counsel of a large national law firm with the economy, flexibility, and personal attention of a small firm,” Haber added. Both Freiberger and Haber bring broad experience to their new enterprise. Freiberger is a dedicated and experienced litigator with more than 27 years’ experience, first with a large multi-national law firm with an office in New York City, and for the past seventeen years as a member of a Long Island, New York law firm. Throughout his career, he has successfully represented clients in construction, banking and real estate related litigation, as well as other types of commercial litigation and corporate counseling. “Jonathan is a smart and creative lawyer who has provided insightful guidance and forceful advocacy to his clients,” said Haber. “Over the years, he has produced extraordinary results for his clients. I am excited to start this venture with him.” Haber is an effective litigator with more than 28 years’ experience, having been a member of two New York City-based, national plaintiffs’ law firms (the second of which was for 16 years), where he concentrated his practice in complex class action litigation involving securities fraud and shareholders’ rights, as well as whistleblower litigation, complex commercial litigation and corporate counseling. Prior to forming the new firm, he was the principal of his own business and commercial litigation law firm. Mr. Haber has been recognized as a leading lawyer in securities and business litigation by Super Lawyers Magazine (2008–2010; 2012–2016) and by Super Lawyers Business Edition (2011, 2013, and 2016), has been repeatedly “recommended” in the Legal 500 (2011–2012; 2014–2016) and was recognized as a “local litigation star” for his securities work in the 2013–2015 editions of Benchmark Plaintiff. He also has published articles on topics involving securities and whistleblower litigation. “Jeff is an effective and tenacious litigator who combines an analytical approach with outstanding instincts to deliver results for his clients,” said Freiberger. “Just as importantly, he understands the need to align his strategy with his clients’ objectives. I look forward to growing our firm with Jeff.” The firm is located in New York City and Melville, New York (the firm’s primary office location). “It is important to us to have offices that are conveniently located and easily accessible to our clients,” Haber said. “This is especially so for our clients who travel from out of state,” added Freiberger. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals involved in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan Freiberger and Jeffrey Haber, Freiberger Haber leverages more than 50 years of combined experience to deliver sophisticated and creative representation to their clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2017 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 105 Maxess Rd., Suite 124, Melville, NY 11747, (631) 574-4454; 708 Third Avenue, 5th Floor, New York, New York 10017, (212) 209-1005. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact: Freiberger Haber LLP Melville Office: 105 Maxess Rd., Suite 124 Melville, New York 11747 Tel: (631) 574-4454 New York Office: 708 Third Avenue, 5th Floor New York, N.Y. 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email: info@fhnylaw.com

In July, this Blog wrote about the settlement in connection with Wells Fargo & Co.’s phony accounts scandal that will require the bank to pay millions of dollars to aggrieved customers. Now, Wells Fargo has disclosed in a regulatory filing that the Consumer Finance Protection Bureau ("CFPB") is investigating whether the bank incorrectly closed real accounts and left customers without access to their funds. CFPB Probes Wells Fargo Account Closures The CFPB probe was commenced after the consumer watchdog received numerous complaints from Wells Fargo customers who suffered financial hardship after the bank inexplicably froze or closed their accounts.  In particular, some of the complaints raised the possibility that fraudulent deposits of unknown origin were made. Additionally, customers who said they were victims of identity theft claimed that Wells Fargo closed their accounts and refused to reopen them or open new ones. The complaints noted that there was confusion over why the accounts were frozen or closed. Customers were not only unable to access their money, they did not receive assistance from the bank’s customer service representatives. Although the CFPB does not reveal details of consumer complaints, it does not appear that similar regulatory probes at other money center banks are underway. A spokesman for Wells Fargo said that the company is cooperating with the regulator and that its goal is to protect customers and the bank from fraud while minimizing the risk and impact on customers. Unlike the the phony accounts scandal that appeared to be an effort to drive revenue, some observers believe this matter may have arisen from an abundance of caution to protect customers from suspicious activity. Nonetheless, the probe adds to the bank’s woes. Since Wells Fargo settled with the customers who were swept up in the phony accounts fiasco, the bank has also acknowledged that customers were charged for insurance they did not request and required others to pay unnecessary mortgage fees. The question remains as to whether Wells Fargo was overzealous in closing the accounts to prevent fraud or whether this is part of a larger pattern of its mistreatment of customers.

The hits keep coming for money center banks, such as Goldman Sachs, JP Morgan Chase and others, as three U.S. pension funds have filed a class action lawsuit over alleged stock lending abuses. The suit, brought by the Iowa Public Employees’ Retirement System, Orange County Employees’ Retirement System, and Sonoma County Employees’ Retirement Association, claims the banks’ stock lending practices violate federal antitrust laws. The funds allege that the banks colluded to boycott start-up lending platforms by threatening and intimidating potential clients. An attorney representing the funds said that the banks colluded to corner the lucrative stock lending market for years and harmed investors and retirees by forcing them to pay high fees to conduct transactions that involved stock lending. What is stock lending? Securities lending is generally conducted between broker/dealers and institutional investors, although pension funds and other entities may also lend securities to hedge funds. This essentially involves loaning a stock, derivative or other security to an investor, typically in connection with short selling. In a short sale, an investor looks to sell the borrowed securities at a higher price in anticipation of the price falling, and then buying the securities back at a lower price. The borrower is required to put up collateral in the form of cash, security or a letter of credit, and also pay a fee to the lender. The Pension Funds’ Claims The lawsuit claims that the banks conspired to undermine AQS, a startup lending platform that was developed by Quadriserv Inc. and SL-x. The AQS platform was designed to allow lenders and borrowers to interact directly, with lower fees being charged by AQS compared to traditional stock lending firms. The funds contend that the banks jointly created a securities lending platform, Equilend LLC. in 2009, to prevent access to other marketplaces. One tactic Equilend allegedly employed was buying certain AQS intellectual property and shelving it, effectively keeping the platform off the stock lending market. The lawsuit also contends that in 2012, Goldman Sachs threatened to cut off Bank of New York Mellon if it continued to support the AQS platform and that the bank acquiesced. Takeaway Other banks named in the suit include Bank of America Corp., Credit Suisse AG, Morgan Stanley, UBS AG, and Equilend. The pension funds are seeking unspecified treble damages and an order forcing the banks to stop the alleged collusion. Whether the funds will successfully demonstrate the necessary elements to prevail on their antitrust claims under the Sherman Act remain to be seen. Nonetheless, the resolution of this case, either way, will have far reaching implications for the securities lending market and the development of alternative lending platforms.

When disputes arise over the meaning of a contract or a clause within a contract, courts are called upon to interpret the agreement to give it meaning. Courts in textualist jurisdictions will examine the language of the contract as whole – the “four corners rule” – rather than the disputed clause in isolation. And, when the contract is clear, unambiguous and fully integrated ( i.e. , the parties have integrated their agreement into a single writing), all prior negotiations and agreements with regard to the same subject matter of the contract are excluded from consideration and cannot be used to expand or vary the terms of the contract. When reviewing a contract in dispute, courts will give the terms used by the parties their plain, ordinary, and generally accepted meaning, unless the agreement shows that the parties used them in a technical or different sense. Extrinsic evidence is inadmissible under these circumstances ( i.e. , it cannot be used to contradict or change the meaning of clear, unambiguous language). Only after a contract is found to be ambiguous will courts admit parol evidence to ascertain the intentions of the parties. A contract is ambiguous when its meaning is uncertain and doubtful or is reasonably susceptible to more than one interpretation. This Blog recently wrote about the rules of contract interpretation ( here ). Today’s post looks at another case, this time coming out of Texas (a textualist jurisdiction), where the meaning of a contract was at the heart of a dispute, even though the parties did not think so. Holmes v. Newman , No. 01-16-00311-CV (Tex. App. – <1 dist.> July 6, 2017). Holmes v. Newman Background The case involved an investment in a start-up internet company that provides betting tips to gamblers for a fee. The company, SportsPicks.com, was formed by the defendant, Leonard Holmes (“Holmes”), a former broker for TD Ameritrade. Holmes asked Steven Newman (“Newman”), a former customer of his, if Newman wanted to help fund the internet startup company. In April 2013, Holmes invested $50,000 in return for a 50% interest in SportsPicks.com. The parties memorialized their agreement through a series of emails on April 3 and 4, 2017. The first email set forth the terms of their percentage ownership in the new company, as well as their return of capital: “50k for 50%. We also agreed the first return of capital would go to you up to 50k (your investment) and then be split according to ownership perpetually. Capital will be distributed quarterly, 4 times a year.” The April 4 emails confirmed the terms with a slight variation on the timing of the payment and a discussion about formation of the company as a limited liability corporation. Over the next the next 10 months, the company struggled to turn a profit. On February 19, 2014, Newman and the other investor in the company, Rob Abbott (“Abbott”), requested an additional capital contribution from Holmes, which Holmes declined to make. Newman and Abbott made additional capital contributions, which Holmes alleged diluted his interest in the company. SportsPicks.com did not return a profit, and Newman did not receive any capital distributions. Contending that the agreement required that he receive capital distributions regardless of profit, Newman sued Holmes for breach of contract, fraud and breach of fiduciary duty. Holmes filed a combined traditional and no-evidence motion for summary judgment. The trial court granted Newman’s motion for summary judgment without specifying whether it was granting the no-evidence motion or the traditional motion and dismissed all claims asserted in Holmes’s seventh amended petition. Holmes appealed. The Court’s Ruling Regarding the breach of contract claim, the Court had to determine “whether Newman breached his contractual duties to Holmes by not returning his capital.” To do so, the Court had to “decide the meaning” of the term “return of capital” and the word “capital” in the parties’ email agreement. Neither party claimed that the terms were ambiguous, though each offered “differing interpretations of the provisions.” Noting that under Texas law a court can review the language of the contract to determine whether it is ambiguous “even in the absence of a claim of ambiguity by the parties” ( J.M. Davidson, Inc. v. Webster , 128 S.W.3d 223, 231 (Tex. 2003)), the Court found that the parties’ agreement contained ambiguous language. Reviewing the contract de novo, and giving the language in the contract its ordinary and generally accepted meaning, the Court found that the terms “first return of capital” and “capital,” were susceptible to different meanings. Though not defined by the parties, the terms “first return of capital” and “capital,” referred to a disbursement that returned one’s investment. In this case, the contract required Newman “to return a portion of Holmes’s investment four times per year.”  That finding was underscored by “the requirement that ‘capital will be distributed quarterly’ suggests that something would be distributed four times per year.” (Orig’l emphasis). However, other terms in the agreement “suggest that the parties’ meant something other than the ordinary and generally accepted meaning of “capital.” For example, noted the Court, language in the agreement suggested that the parties intended the terms to refer “to profits or dividends rather than capital, because capital cannot be split ‘perpetually’ once the amount of a shareholder’s investment has been returned.” The Court further noted: Similarly, “capital,” if defined as one’s investment, is not generally returned quarterly, but remains invested until the company shows a profit. To return capital quarterly would pull money out of the company before it has had an opportunity to become profitable. Further, the clause does not say how much capital would be returned quarterly, or when such quarterly payments would commence. Consequently, the Court found that the agreement was ambiguous and susceptible to more than one meaning: In sum, the court cannot determine from the face of this contract what the parties meant when they agreed that Holmes would be entitled to the “first return of capital,” and that such “capital” would be split according to ownership and distributed quarterly. While the plain language of the term suggests that the parties meant that a portion of Holmes’s investment would be returned quarterly (but does not state how much of the investment would be returned), the manner in which that term “first return of capital” is used suggests that the parties may have meant profits or dividends would be paid quarterly, or may have intended to create a priority for Holmes to receive his investment, i.e. his capital, out of the corporation’s first profits. Indeed, it appears that the parties’ may have used the same word—capital—to mean a shareholder’s investment in one place and profits or dividends in another place. In light of the ambiguity, the Court reversed the grant of summary judgment on Holmes’s breach of contract claim and remanded for further proceedings. Was There a Fiduciary Duty? In addition to the contract claim (and the fraud claim), Holmes alleged that because he had relied on Newton “for financial guidance as his broker at TD Ameritrade and thereafter up to and including his investment in SportsPicks.com,” Newton had breached his fiduciary duty to him. The Court affirmed the grant of summary judgment as to this claim. In affirming the lower court’s ruling, the Court noted that the fiduciary relationship that once existed at TD Ameritrade had concluded. As such, it did not carry over into other aspects of their relationship which “would give rise to a continuing, informal relationship imposing even broader fiduciary duties than Newman held under the prior relationship”: There is nothing in the record to show that Holmes’s account with TD Ameritrade was discretionary or that the broker/client relationship between the two gave rise to anything other than a principal/agent duty to execute the trades ordered. Thus, Holmes has not raised a fact question regarding whether Newman owed him any fiduciary duty other than fulfilling the trades authorized by Newman. Because Newman’s fiduciary duty was satisfied once the trades were made in accordance with Holmes’s instructions, it is not the sort of preexisting relationship of trust and confidence that would give rise to a continuing, informal relationship imposing even broader fiduciary duties than Newman held under the prior relationship. The Court’s decision can be found here . Takeaway Texas, like other textual jurisdictions, adheres to the “four corners” approach to contract interpretation. Thus, when a dispute arises over a term in a contract, Texas courts will consider the entire writing to harmonize and give effect to all provisions of the contract so that none will be rendered meaningless. No single provision, taken alone, will be given controlling effect; rather, all provisions are considered within the context of the entire instrument. In performing this analysis, these courts will give the words in the writing their plain, ordinary, and generally accepted meaning absent some different indication by the parties. Parol evidence may not be admitted to give meaning to a contract unless the writing is ambiguous – i.e. , the term in dispute is susceptible to more than one reasonable meaning. Holmes illustrates these principles of contract interpretation. Holmes is notable, however, because the Court determined sua sponte whether the contract in question was ambiguous. Under Texas law, because the issue of ambiguity is for the court to determine, courts can examine the disputed contract for that purpose even in the absence of a claim of ambiguity by the parties. In fact, an appellate court can do so for the first time on appeal. Finally, Holmes is noteworthy for its discussion of an informal fiduciary duty. In this regard, the Court observed that, while not every relationship “involving a high degree of trust and confidence rises to the stature of a fiduciary relationship,” an informal fiduciary duty can arise from “a moral, social, domestic or purely personal relationship of trust and confidence.” In a commercial setting, such a duty will be found only where the relationship of trust and confidence exists prior to, and apart from, the agreement that is the basis of the lawsuit.  Holmes learned that his prior broker/client relationship with Newman, though a formal fiduciary relationship, did not give rise to an informal fiduciary duty because that prior relationship (which was based on a non-discretionary account) concluded when Newman left TD Ameritrade.

On August 8, 2017, the U.S. Department of Justice (“DOJ”) announced a nearly $75 million settlement with PHH Mortgage Corporation (NYSE: Symbol PHH) and PHH Home Loans (collectively, “PHH”) to resolve allegations that PHH violated the False Claims Act by knowingly originating and underwriting mortgage loans insured by the U.S. Department of Housing and Urban Development’s (“HUD”) Federal Housing Administration (“FHA”), guaranteed by the United States Department of Veterans Affairs (“VA”), and purchased by the Federal National Mortgage Association (“Fannie Mae”), and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), that did not meet applicable origination, underwriting, and quality control requirements. PHH agreed to pay $65 million to resolve the FHA allegations, and $9.45 million to resolve the VA and FHFA allegations. The settlement was reached following negotiations that began in March of this year. “PHH submitted defective loans for government insurance, and homeowners and taxpayers paid the price. This significant resolution helps rectify the misconduct by returning more than $74 million in wrongfully claimed funds to the government,” said Acting U.S. Attorney for the District of Minnesota Gregory Brooker. Allegations and Admitted Facts Between January 1, 2006, and December 31, 2011, PHH certified for FHA insurance mortgage loans that did not meet HUD underwriting requirements and did not comply with FHA’s self-reporting requirements. In the press release, the DOJ provided examples of loan defects that PHH admitted resulted in loans being ineligible for FHA mortgage insurance.  These included: Failing to document the borrowers’ creditworthiness, including paystubs, verification of employment, proper credit reports, and verification of the borrowers’ earnest money deposit and funds to close. Failing to document the borrower’s claimed net equity in a prior residence or obtain documentation showing that the borrower had paid off significant debts. Including these debts in the borrower’s liabilities resulted in the borrower exceeding HUD’s debt-to-income ratio requirements for FHA-insured loans. Insuring a loan for FHA mortgage insurance even though the borrower did not meet HUD’s minimum statutory investment for the loan. In 2007, PHH audited a targeted sample of government loans for closing or pre-insuring requirements and found that its “percent accurate” did not exceed 50 percent during 2007. Since at least 2006, HUD has required self-reporting of material violations of FHA requirements. However, between January 1, 2006, and December 31, 2011, PHH Home Loans did not self-report any loans to HUD; rather, PHH Home Loans did not self-report any loans to HUD until 2013, after the Government commenced its investigation resulting in the settlement. As a result of PHH’s conduct and omissions, PHH admitted, HUD insured loans endorsed by PHH that were not eligible for FHA mortgage insurance, and that HUD would not otherwise have insured. PHH admitted that HUD subsequently incurred substantial losses when it paid insurance claims on those loans. In addition, from at least 2005 to 2012, PHH submitted for guarantee by the VA mortgage loans that did not meet the VA’s requirements. PHH is a VA approved lender that originates and underwrites mortgage loans and obtains VA loan guarantees (wherein the VA guarantees a portion of home loans). Also from at least 2009 to 2013, PHH sold mortgage loans to Fannie Mae and Freddie Mac, two entities that Congress created to provide stability and liquidity in the secondary housing market.  During this period, PHH originated and sold loans to Freddie Mac and Fannie Mae that did not meet their requirements. “We have agreed to resolve these matters, which cover certain legacy origination and underwriting activities, without admitting liability, in order to avoid the distraction and expense of potential litigation,” said PHH in a press release ( here ). “While we cooperated fully in these investigations since receiving subpoenas in 2013, we concluded that settling these matters is in the best interest of PHH and its constituents. Adhering to high legal, regulatory and ethical standards is at the core of how we conduct business, and we remain committed to serving our customers and all of our stakeholders consistent with that principle.” Whistleblower Lawsuit Some of the allegations resolved by the settlements were included in a whistleblower lawsuit filed under the False Claims Act against PHH Home and PHH Mortgage by a former employee of PHH, Mary Bozzelli (“Bozzelli”). Bozzelli worked as an underwriter and supervisor for PHH for nearly three decades.  Two years after she left PHH, Bozzelli filed the qui tam action to redress misconduct she had observed during her tenure. See United States ex rel. Mary Bozzelli v. PHH Mortg. Corp. and PHH Corp. , 13-cv-3084 (E.D.N.Y. May 28, 2013). “It is great to see PHH finally held accountable for its actions,” said Bozzelli. “Mortgage fraud is hardly victimless. Not only did PHH defraud taxpayers, but instead of helping deserving borrowers obtain home loans through the government loan programs, I witnessed firsthand the ways in which PHH abused the programs to line its own pockets.” As a result of the settlement, Bozzelli will receive over $9 million as a whistleblower award. Under the False Claims Act, a whistleblower can sue on behalf of the government and share in any recovery . The settlement agreements can be found here and here . Takeaway The settlements with PHH are notable because False Claims Act investigations of mortgage lenders typically focus on the lender’s participation in government-insured lending programs, such as those offered by the FHA and VA. The settlements not only involve those lending programs, but also involve lender certifications to Fannie Mae and Freddie Mac, a rare instance of the False Claims Act being used as an enforcement tool. The settlements are also notable because even though PHH denied wrongdoing, the company nevertheless admitted that it failed to satisfy certain program requirements, such as failing to document the borrowers’ creditworthiness, including verifying income, assets, and funds during underwriting. Typically, no such admissions are made in settlements.

The foundation of virtually every business and commercial transaction is a contract. Indeed, it is hard to imagine any transaction for the purchase or sale of goods, the merger or acquisition of a business, or the provision of services that is not founded upon a contract. There is almost nothing more frustrating, or potentially costlier, to businesses and commercial practitioners than a dispute over the meaning of a contract. Such disputes often arise over the performance or non-performance of a term in the contract. The dispute as to the meaning of a contract can take many forms. It may be that the language used is ambiguous; or the language is reasonably clear but is susceptible to different meanings; or although the language is clear, taken literally, it might not reflect the parties’ intent; or, as is often the case, an event has occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for it. When parties enter into a contract, each assumes that the language in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id . at 7. When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Id .  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources. Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and seek to afford the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 404 (2009); Abiele Contr. V. New York City School Constr. Auth. , 91N.Y.2d1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 NY3d 675, 680 (2015) (citation and internal quotation marks omitted). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id . at 163. This rule is especially applicable where the parties are commercially sophisticated and their contract contains a merger clause. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Finally, since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Id . (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id . Hoeg Corporation v. Peebles Corporation These principle were at play recently in Hoeg Corp. v. Peebles Corp. , 2017 NY Slip Op. 06066 (2d Dept. Aug. 9, 2017). There, the Second Department ruled that the contract before it was clear, complete and unambiguous and, therefore, should have been enforced according to its terms. Background Hoeg arose from a dispute over a contract concerning a joint venture the parties formed in May 2012. The venture came about in December 2011, when Hoeg contacted Peebles about the possibility of forming the relationship for the purpose of responding to requests for proposals from the New York City Economic Development Corporation (“EDC”). Thereafter, the parties entered into a written retainer agreement in May 2012 (the “Retainer Agreement”), setting forth the terms of their relationship and, inter alia , the compensation to be paid to the plaintiff. Hoeg alleged that, notwithstanding the written Retainer Agreement, it had earlier entered into a separate oral agreement with Peebles for the joint venture wherein the equity would be split 75%/25% in favor of Peebles. Hoeg filed suit asserting, inter alia , that Peebles breached that oral agreement. According to Hoeg, after Peebles used it to win a bid to purchase and develop an EDC property and ultimately sold the development rights to that property in a multimillion dollar deal, Peebles failed to honor the terms of the oral agreement. Peebles moved to dismiss. Relying on parol evidence, the motion court granted Peebles’ motion. The Second Department reversed. The Court’s Ruling The Court held that the motion court should have granted Peebles’s motion to dismiss the breach of contract claim. The Court found that the written Retainer Agreement was “a complete written instrument,” which prohibited the motion court from considering “evidence of what may have been agreed orally between the parties prior to the execution of this integrated written instrument.” The Court held that because the written Retainer Agreement “was comprehensive in its scope and coverage,” the motion court should not have received parol evidence “to vary the terms of the writing.” The Court explained: The written retainer agreement provided that the plaintiff would act as a consultant in order to facilitate the defendant’s acquisition and development of real property in New York City. The written retainer agreement did not limit its application to any particular project or property, or carve out any exceptions to the plaintiff’s full-time dedication to the purpose of the agreement. The written retainer agreement also set forth different commission structures for work performed by the plaintiff in facilitating the defendant’s acquisition and development of certain specified properties in Harlem, as well as the acquisition and development of properties other than the specified Harlem properties. Additionally, the written retainer agreement provided for the reimbursement of all expenses incurred by the plaintiff in connection with any work performed by the plaintiff on the defendant’s behalf.… Thus, the documentary evidence submitted by the defendant conclusively disposed of the plaintiff’s claim alleging breach of the purported oral joint venture agreement. Citation omitted. Takeaway Hoeg is yet another case in a long line of New York cases that stand for the proposition that a written agreement, which is complete, clear, and unambiguous on its face, must be enforced to give effect to the meaning of its terms, even in the absence of a merger clause. (This Blog recently discussed merger clauses and their effect on contract interpretation here .)  As Hoeg demonstrates, a contract is considered to be complete, clear and unambiguous where the language used has a definite and precise meaning, unaccompanied by the risk of misconception in the language of the agreement itself, and where there is no reasonable basis for a difference of meaning or opinion. Thus, as Hoeg learned, parol evidence of a communication made during negotiations of the written agreement that contradicts, varies, or explains the agreement or a term therein cannot be used to vary or contradict the terms of that writing.