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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.

According to the latest  report  from Cornerstone Research, which it jointly prepared with the Stanford Securities Class Action Clearinghouse, titled “Securities Class Action Filings – 2017 Mid-Year Assessment,”  securities class action lawsuits hit a record pace during the first 6 months of 2017. (The press release announcing the issuance of the Report can be found here .) By the end of June 2017, plaintiffs filed 226 securities fraud class actions in federal court, more than in any equivalent period since the enactment of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The surge in 2017 represents an increase of 135 percent of the semiannual average of class action filings (96 filings) between 1997 and 2016, and a 49 percent increase over the 152 filings in the second half of 2016. Projecting forward for the entire year, plaintiffs are on pace to file 452 federal securities fraud class actions, which would represent an increase of 135 percent over the 1997-2016 annual average of 192 filings, and an increase of 66 percent over the number of filings in 2016 (272 actions). To put this surge in even more perspective, over the last year and a half, there have been more securities class action filings in federal court than in any comparable period since the PLSRA became law. “If the litigation rate of traditional securities class actions in the second half of 2017 equals that of the first half, the annual rate will nearly double the historical average,” said Dr. John Gould, a senior vice president at Cornerstone Research. “If one considers M&A filings as well, 2017 is on pace to be more than double the historical average.” According to the Report, the spike in securities fraud filings is due, in part, to an increase in the number of lawsuits challenging the price and/or fairness of mergers and acquisitions ("M&A") in federal court. Plaintiffs filed 95 M&A objection lawsuits in the first half of 2017, compared to 85 during the entire year in 2016. The authors attribute the increase in the number M&A cases in federal court to a shift away from state court due to the Delaware Chancery Court's hostility to disclosure only settlements in M&A objection actions. In addition to the shift from state court to federal court, the authors attribute the spike in filings to a change in the business model used by plaintiffs' counsel.  In the press release accompanying the Report, Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, opined: “ nother part of the spike seems attributable to a decline in the quality of complaints filed by attorneys who have recalibrated their business strategies to pursue a portfolio of cases with more remote payoffs because the costs of building such a portfolio remains low.” The Report also contains an interesting analysis of the frequency with which individual and institutional investors have served as the lead plaintiff in securities class actions (excluding M&A objection cases) over the past 20 years.  The authors found that from 1997 to 2003, individual investors were appointed more frequently than institutional investors in traditional securities class actions. Over the next nine years, from 2004 through 2012, institutional investors were as or more likely to be appointed lead plaintiff as individuals. However, since 2013, individual investors have been appointed lead plaintiff more frequently than institutional investors.  Finally, the percentage of filings in which the lead plaintiff was both an individual and institution has declined since 2000; in fact, it has been below 10 percent since 2009. Finally, the report highlights a number of key trends: Disclosure dollar loss or DDL (which measures the change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the end of the class period) rose to $74 billion during the time period (23 percent higher than the historical semiannual average); Mega filings declined to 24 percent of DDL and 43 percent of Mega Dollar Loss or MDL (which measures the change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the end of the class period). There were three mega filings with a DDL of at least $5 billion and eight with an MDL of at least $10 billion; Cases are being filed more quickly for traditional filings. The median lag time to file from the end of the class period fell to just 8 days — the shortest lag time since the enactment of the PSLRA; The number of filings against S&P 500 firms in the first half of 2017 occurred at an annualized pace of 11.2 percent, the highest rate since 2002; and Pharmaceutical firms were the most common targets of filings—the number at 2017 midyear already exceeds the full-year 2016 total.

As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended ( i.e. , parole evidence) is generally inadmissible. Golden Gate Yacht Club v. Societe Nautique De Geneve , 12 N.Y.3d 248 (2009). Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions. W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses ... infirmity of memory.…” Id . Notwithstanding, questions arise about the enforceability of commitments made alongside a commercial transaction.  These questions tend to play out in disagreements over the meaning and effect of a contract, where one party attempts to rely on the extra-contractual statements of the other ( e.g. , in emails, telephone calls, or meetings) to support an argument, claim or defense. One way to address such disputes before they happen is to include a “merger clause” or “integration clause,” in the contract or agreement. What is a Merger Clause? A merger clause is a provision in a contract that declares the writing to be the complete and final agreement between the parties.  The following is a common example of a merger clause: The Agreement constitutes the entire agreement and understanding between the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Merger Clauses: Broad vs. Specific Merger clauses typically are found at the end of a contract or agreement, among the other “boilerplate” provisions, and, as such, are often neglected or ignored during negotiations. Boilerplate merger clauses are given little weight by the courts. However, when the merger clause evidences a negotiation by the parties, courts accord such clauses more weight in determining the parties’ intent. In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president). Without such specificity, the courts have allowed parole evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement. Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, operation”); Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by .”) (internal quotation marks and citation omitted) (alteration in original). Merger Clauses: Anti-Reliance Provisions In order for a party to disclaim reliance on extra-contractual representations, an agreement must contain language that makes it clear that the parties are not relying on such representations. The following is an example of a common anti-reliance provision: Each of the Parties acknowledges that no other party, nor any agent or attorney of any other party, has made any promise, representation, or warranty whatsoever, and acknowledges that the Party has not executed or authorized the execution of this Agreement in reliance upon any such promise, representation or warranty, that is not expressly contained herein. Courts will enforce anti-reliance language that identifies the specific information on which a party has relied and which forecloses reliance on other information. Danann , 5 N.Y.2d at 320 (finding that the plaintiff purchaser of a building could not assert that it was relying on oral representations made by the seller outside of a contract in which the plaintiff had specifically agreed in writing not to rely on such representations). See also Laxer v Edelman , 75 A.D.3d 584, 585–86 (2d Dept. 2010) (holding a fraudulent inducement claim concerning flooding and mold issues in building was barred by merger clause that disclaimed reliance on any statements by defendants regarding condition of premises). There is, however, an exception to the enforceability of an anti-reliance provision – where the defendant has unique or peculiar knowledge of an allegedly misrepresented fact.  Under such circumstances, even a specific contractual disclaimer will not defeat a plaintiff’s contention that it reasonably relied on the misrepresentation. Danann , 5 N.Y.2d at 322. The exception is designed to address circumstances under which a party would expend significant resources, or find it extraordinarily difficult to determine the truth or falsity of an oral misrepresentation (for example, where the information is not easily verifiable, such as a latent property defect). Schooley v. Mannion , 241 A.D.2d 677, 678 (3d Dept. 1997).  It does not apply, however, where the other party has the ability to learn the truth by the exercise of ordinary intelligence. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). “In assessing whether reliance on allegedly fraudulent misrepresentations is reasonable or justifiable, New York takes a contextual view, focusing on the level of sophistication of the parties, the relationship between them, and the information available at the time of the operative decision.” JP Morgan Chase Bank v. Winnick , 350 F. Supp. 2d 393, 406 (S.D.N.Y. 2004). Sophisticated parties are held to a higher standard, especially since they have “the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation.” Mallis v. Bankers Trust Co. , 615 F.2d 68, 80-81 (2d Cir.1980) (quoting Schumaker v. Mather , 133 N.Y. 590, 596 (1892)). Therefore, “where sophisticated businessmen engaged in major transactions enjoy access to critical information but fail to take advantage of that access, New York courts are particularly disinclined to entertain claims of justifiable reliance.” Grumman Allied Indus. v. Rohr Indus., Inc. , 748 F.2d 729, 737 (2d Cir.1984). In addition, “ heightened degree of diligence is required where the victim of fraud had hints of its falsity.” JP Morgan Chase Bank , 350 F. Supp. 2d at 406. This rule applies where the “ ircumstances so suspicious as to suggest to a reasonably prudent plaintiff that the defendants’ representations may be false”; in such cases, a plaintiff “cannot reasonably rely on those representations, but rather must make additional inquiry to determine their accuracy.” Id . (citations and internal quotation marks omitted). Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala On July 31, 2017, Justice Sherwood of the Supreme Court, New York County, Commercial Division dismissed a fraud claim relating to the acquisition of a pharmaceutical company based on a merger clause in the transaction agreements. Representaciones E Investigaciones Medicas, S.A. De C.V. v. Abdala , 2017 NY Slip Op. 31619(U) . Background The action arose out of two merger and acquisition transactions between sophisticated and well-represented parties, Teva Pharmaceutical Industries Limited (“Teva”) and Representaciones e Investigaciones Médicas, S.A. de C.V. (“Rimsa”), a Mexican pharmaceutical company owned by the defendants Fernando Espinosa Abdalá and Leopoldo de Jesús Espinosa Abdalá (the “Espinosas”). The first transaction involved the acquisition of Rimsa by Teva for $460 million pursuant to a Share Purchase Agreement (“SPA”) with the Espinosas; the second involved the acquisition of certain intellectual property for $1.84 billion that had been licensed to Rimsa by PPTM International S.à.r.l., a company controlled by the Espinosas located in Luxembourg, pursuant to a separate Asset Purchase Agreement. According to Teva, the Espinosas operated Rimsa as a fraud and took elaborate steps to conceal their wrongdoing from both Mexican regulators and Teva. Under the Espinosas’ leadership, claimed Teva, Rimsa obtained registrations to sell its products from regulators by submitting made-up “paper” formulations and false test results for products not yet developed or tested. When Rimsa actually finished the products, it unlawfully sold them under the guise of those false registrations, even though the actual formulations were often completely different. To conceal the fraud from regulators during audits, Teva alleged that Rimsa concocted an elaborate scheme of “double paperwork” and parallel computing systems. The Espinosas then concealed the fraud from Teva during due diligence by using that same fraudulent double paperwork. After the transactions closed, Teva received an anonymous email containing allegations of fraud. Teva investigated and, over the following months, uncovered what the Espinosas had known all along – Rimsa was selling numerous products in violation of the law. As a result of the alleged violations, Teva claimed that it suffered substantial losses because it could not derive any revenue from products it could not lawfully sell. It also claimed that it had incurred costs from idle capacity and employee severance, as well as expenses investigating and attempting to develop and implement remediation plans. Finally, Teva alleged that the fraud imperiled its reputation as a reliable pharmaceutical manufacturer. The Parties’ Arguments and Motion to Dismiss Teva sued the Espinosas for fraud and breach of contract . The Espinosas moved to dismiss . Regarding the fraud claim, the Espinosas argued, among other things, that the claim was barred by the merger clause in the SPA, which provided that Teva was not relying on any statements outside the SPA, itself, including statements made in due diligence. In this regard, the Espinosas argued that even if misstatements made during due diligence were actionable, the merger clause in the SPA was specific and integrated any statements made during Teva’s due diligence. Moreover, the information allegedly concealed from Teva was or could have been known to it.  Teva performed its own due diligence, and must have concluded that the issues raised in the complaint were not sufficiently problematic to stop it from making the purchase. According to the Espinosas, Teva failed to allege that the information “could not be discovered through the exercise of reasonable diligence” and that it is not its “own evident lack of due care which is responsible for predicament,” as Teva had access to the Rimsa’s books and facilities during its due diligence. Teva responded by stating that the merger clause in the SPA was not sufficiently specific to exclude the use of parol evidence to show fraud in the inducement. Teva also contended that, even if the merger clause was sufficiently specific, it would still be unenforceable because the fraud was peculiarly within the Espinosas’ knowledge. TIAA Glob. Investments, LLC v. One Astoria Sq. LLC , 127 A.D.3d 75, 87 (1st Dept. 2015). The Court’s Ruling The Court agreed with the Espinosas, finding that the merger clause was specific and directed to the claims asserted by Teva in its complaint: Here, plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded. Such a specific disclaimer destroys the allegations in plaintiffs’ complaint that the agreement was executed in reliance upon these contrary oral representations.… This merger clause specifies that the purchaser expressly acknowledges and agrees ... that it is not relying on any statement, representation or warranty ... in any materials made available ... during the course of its Due Diligence Investigation, which are the representations and materials providing the basis for the remainder of the fraud claim. Citation and internal quotation marks omitted; alteration added. The Court went on to note that since the merger clause was negotiated by sophisticated parties, if Teva wanted to carve-out statements and representations made during due diligence from the merger clause, it could have done so. But, it did not. As such, Teva could not claim the merger clause was unenforceable. Teva is a sophisticated entity and performed extensive due diligence … before entering into a major transaction, including a site visit and employee interviews. If it had wanted to include a carve-out that it could rely on the materials presented to it, or information included in due diligence, or a representation that the material it viewed during due diligence was correct, it could have done so. It did not. The Court also rejected Teva’s argument that the exception to the anti-reliance provision of the merger clause saved its fraud claim, noting that Teva failed to “allege[] how the alleged misrepresentations remained particularly in the knowledge of the defendants despite Teva’s access to Rimsa’s personnel, facility, and products.” Accordingly, the Court enforced the merger clause and dismissed Teva’s fraud claim. Takeaway Parties to a transaction should carefully negotiate and consider the content of their merger clauses, and not rely on boilerplate language. In that regard, they should specify the representations and matters being merged or integrated into the agreement. If the parties intend complete integration, then they should ensure that the merger clause clearly articulates their intention. And, if they include anti-reliance language in the merger clause, such language should be specific and identify the representations and matters to be included or excluded. In Rimsa , many of these takeaways were at play. The merger clause was negotiated by sophisticated parties; it was not mere boilerplate. Because it was negotiated, it was specific in content and scope, thereby demonstrating the parties’ intent as to representations and matters covered by the clause. And, because Teva was sophisticated and had, by its own admission, conducted an extensive and thorough due diligence, it could not escape the anti-reliance provision in the merger clause directed to its due diligence. Rimsa therefore exemplifies the effect of a negotiated and specific merger clause on a dispute between parties to a contract.

Robocalls.  We all get them.  They are annoying. But, are they legal? Not surprisingly, the answer depends on the circumstances involved. In 1991, Congress passed the Telephone Consumer Protection Act (“TCPA”) to protect consumers from businesses that use automatic telephone dialing systems to deliver prerecorded messages without prior consent. Mims v. Arrow Fin. Servs., LLC , 565 U.S. 368, 370-71 (2012) (noting that the TCPA was enacted in response to “ oluminous consumer complaints about abuses of telephone technology.”); see also In re Rules & Regs Implementing the Tel. Consumer Prot. Act of 1991 , 30 FCC Rcd. 7961, 7979-80 (2015) (citing S. Rep. No. 102-178, at 2, 4-5 (1991)). The TCPA bans various privacy-invading practices, including, but not limited to: calling homes before 8 a.m. or after 9 p.m. local time; making unsolicited phone calls or sending unsolicited text messages without prior written consent; making robocalls with prerecorded messages; using an automatic telephone dialing system to place phone calls; and calling consumers who registered their name and number(s) on the National Do Not Call Registry. The TCPA allows consumers who receive such calls to recover the greater of their actual monetary loss or $500 per violation, and allows for treble damages where a violation is willful or knowing. 47 U.S.C. § 227(b)(3). Mejia v. Time Warner Cable, Inc. Numerous lawsuits have been filed across the country by consumers who seek to hold businesses accountable for violating the TCPA. In August 2015, one such lawsuit was filed against Time Warner Cable Inc. (“Time Warner”) by a former customer who alleged, on behalf of all others similarly situated, that the company violated the TCPA. Mejia v. Time Warner Cable, Inc. , 15-CV-6445 (JPO) (S.D.N.Y. Aug. 14, 2015). In her complaint, Raquel Mejia (“Mejia”) alleged that Time Warner used an autodialer to make at least two unsolicited sales calls a day to her cellphone in an attempt to win back her business. Mejia claimed that she never consented to the calls, and did not have any business relationship with Time Warner after 2007. Mejia claimed that she terminated her service in 2007. Mejia also claimed that she repeatedly informed Time Warner that she was not interested in the cable provider’s products and requested that the company stop calling her. According to the complaint, Time Warner denied her request and continued to make the unwanted cell phone calls at a rate Mejia contended “amounted to harassment.” Mejia alleged that Time Warner violated the TCPA by calling her without her prior express written consent and by using an automatic telephone dialing system to make the unsolicited phone calls to her cell phone. Mejia sought to enjoin the practices complained of and recover damages for Time Warner’s violations of the act. Procedural Background Mejia filed her complaint on August 14, 2015. An amended complaint was filed on March 28, 2016, removing Mejia and adding Leona Hunter and Anne Marie Villa as plaintiffs. Shortly thereafter, Allan Johnson filed a complaint in the Southern District of New York against Time Warner alleging violations of the TCPA, stemming from calls made to Johnson’s phone by the company using an “interactive voice response” calling system. Johnson v. Time Warner Cable Inc. , No. 15 Civ. 6518 (S.D.N.Y. Aug. 18, 2015). The parties moved for summary judgment in both the Mejia and Johnson actions. Time Warner also moved for judgment on the pleadings in both actions on the grounds that the TCPA violates the First Amendment. The Court denied the motions , except for Time Warner’s motion for summary judgment, which it granted in part and denied in part. This Post addresses Time Warner’s motion on the pleadings. The Court’s Ruling Time Warner challenged the constitutionality of Section 227(b)(1)(A)(iii) of the TCPA under the First Amendment, arguing that the act impermissibly draws distinctions that are content based (relying on Reed v. Town of Gilbert , 135 S. Ct. 2218 (2015)), and failed strict scrutiny analysis (which “which requires the Government to prove that the restriction furthers a compelling interest and is narrowly tailored to achieve that interest.” ( Arizona Free Enterprise Club’s Freedom Club PAC v. Bennett , 131 S.Ct. 2806, 2817 (2011) (citation and internal quotation marks omitted)). First, Time Warner argued that Section 227(b)(1)(A)(iii), which exempts from liability “call made solely to collect a debt owed to or guaranteed by the United States,” is content based on its face, because it “define regulated speech by particular subject matter.” (Quoting Reed , 135 S. Ct. at 2227). Second, Time Warner argued that because recent judicial and FCC decisions have made it clear that Section 227(b)(1) of the TCPA exempts governmental speakers, it contains a speaker-based restriction. The Court agreed with Time Warner, finding that Section 227(b)(1)(A)(iii) of the TCPA is content-based. Notwithstanding, the Court found that the statute withstood constitutional challenge on the strength of two recent district court cases, in which the courts held that although the debt-collection exemption under Section 227(b)(1)(A)(iii) was content based, the TCPA satisfied strict scrutiny consideration. See Holt v. Facebook, Inc. , No. 16 Civ. 02266, 2017 WL 1100564, at *7-10 (N.D. Cal. Mar. 9, 2017); Brickman v. Facebook, Inc. , No. 16 Civ. 00751, 2017 WL 386238, at *4-9 (N.D. Cal. Jan. 27, 2017). First, the Court found that the TCPA “serves a compelling government interest” – “to protect the privacy interests of residential telephone subscribers by placing restrictions on unsolicited, automated telephone calls to the home and to facilitate interstate commerce by restricting certain uses of facsimile (fax) machines and automatic dialers.” Citing S. Rep. No. 102-178, at 1 (1991).  This interest, held the Court, more than satisfied the first prong of the strict scrutiny analysis. Carey v. Brown , 447 U.S. 455, 471 (1980) (noting that “ he State’s interest in protecting the well-being, tranquility, and privacy of the home is certainly of the highest order in a free and civilized society.”). In so holding, the Court rejected Time Warner’s argument that there is a distinction between residential privacy and cell phone privacy, and that the TCPA only applied to the former. he Court sees no reason that this compelling interest does not also extend to cell phones. See Patriotic Veterans, Inc. v. Zoeller , 845 F.3d 303, 305-06 (7th Cir. 2017) (“No one can deny the legitimacy of the state’s goal: Preventing the phone (at home or in one’s pocket) from frequently ringing with unwanted calls. Every call uses some of the phone owner’s time and mental energy, both of which are precious.”); see generally Riley v. California , 134 S. Ct. 2473, 2494-95 (2014) (“Modern cell phones are not just another technological convenience. With all they contain and all they may reveal, they hold for many Americans ‘the privacies of life.’” (quoting Boyd v. United States , 116 U.S. 616, 630 (1886))). Second, the Court found that the TCPA was narrowly tailored because “ t imposes liability only on a party using an autodialer or artificial voice to make calls without the recipient’s consent.” The Court noted that Section 227(b)(1)(A)(iii) does not impose restrictions on calls made without the use of an autodialer or artificial voice, and “allows autodialer or artificial voice calls so long as consent has been secured.” In short, observed the Court, “Congress… carefully targeted the calls most directly raising its concerns about invasion of privacy, while also furthering its interest in collecting federal government debts.” The Court rejected Time Warner’s argument that Section 227(b)(1)(A)(iii) of the TCPA was underinclusive: Here, the government debt carve-out is a narrow exception from liability in furtherance of a compelling interest … . Indeed, the statute expressly authorizes the FCC to further “restrict or limit the number and duration of calls made . . . to collect a debt owed to or guaranteed by the United States.” And . . . “ he government debt exception would likewise be limited by the fact that such calls would only be made to those who owe a debt to the federal government.” This narrow exception, and the provision as a whole, are well-designed to further the interests that Congress sought to pursue with the TCPA. Takeaway In Mejia , Judge J. Paul Oekten joins two other district courts in finding that although the TCPA imposes content-based restrictions on speech, it nevertheless passes constitutional muster.  In so holding, Mejia answers the question at the top of this post by making it clear that robocalls and autodialed calls are legal only if the recipient gives prior written consent to receive them. The absence of such consent will result in a violation of the TCPA, even though the statute is not content neutral. Under the strict scrutiny test, such a narrowly tailored approach suffices to pass constitutional muster.

As this Blog has noted in a previous post ( here ), to state a retaliation claim, both the Sarbanes-Oxley Act of 2002 (“SOX”) and the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) require plaintiffs to demonstrate, among other things, that they engaged in protected whistleblowing activity, that their employer knew they engaged in protected activity, and that there was a causal connection between the protected activity and an adverse employment action. Failure to satisfy these requirements will result in the dismissal of the claim. Recently, the Ninth Circuit affirmed the grant of summary judgment in an employer’s favor because the plaintiff failed to demonstrate that she had engaged in protected activity under either SOX or Dodd-Frank. Rocheleau v. Microsemi Corporation, Inc. , No. 15-56029 , 2017 WL 677563 (9th Cir. Feb. 21, 2017). Background  The defendant, Microsemi Corporation, Inc. (“Microsemi”), a publicly traded company, hired the plaintiff, Ramona Lum Rocheleau (“Rocheleau”), as an independent contractor in 2006.  Beginning in 2008, Rocheleau internally reported concerns that Microsemi (1) engaged in certain technical violations of the affirmative action requirements imposed by the Office of Federal Contract Compliance Programs (“OFCCP”), (2) misclassified Rocheleau and two other employees as independent contractors, and (3) asked Rocheleau to retroactively change hiring and recruiting data in violation of OFCCP regulations. Microsemi terminated her employment on February 17, 2010. Thereafter, Rocheleau filed a whistleblower retaliation lawsuit in the United States District Court for the Central District of California, claiming violations of the anti-retaliation provisions in SOX and Dodd-Frank.  Rocheleau maintained that Microsemi defrauded its shareholders by creating an unreported risk to Microsemi’s business ( i.e. , an investigation by OFCCP into Microsemi) and by engaging in payroll tax fraud. Microsemi moved for summary judgment on the grounds that Rocheleau failed to establish that she was engaged in a protected activity under either statute, as she could not hold an objectively reasonable belief that Microsemi violated the securities laws such that it and its shareholders suffered losses.  The district court granted Microsemi’s motion for summary judgment and Rocheleau appealed. The Court’s Ruling.  The Ninth Circuit affirmed the district court’s ruling, concluding that Rocheleau failed to demonstrate that she engaged in protected activity under either SOX or Dodd-Frank.  The Court noted that to demonstrate that she was engaged in protected activity, Rocheleau had to show that she possessed a reasonable belief that the information she was providing to Microsemi related to a securities law violation. In this regard, the Court held that Rocheleau had to allege “at least … the basic elements of a claim of securities fraud.”  According to the Court, Rocheleau failed to make this showing because she only complained about violations of OFCCP rules and regulations and misclassifications of individuals as independent contractors: Reports of violations of OFCCP regulations are not themselves protected under SOX or Dodd-Frank, and no objectively reasonable basis existed to believe that any such violations would cause Microsemi and its shareholders to suffer significant losses, as required to establish a prima facie case of reasonable belief in shareholder fraud. Similarly, Rocheleau’s belief in misclassification of employees was reasonable only in regard to herself, and the misclassification of a single employee as an independent contractor falls far short of the materiality standard for shareholder fraud. As to the claim that Microsemi defrauded its shareholders by failing to disclose a risk to Microsemi’s business (namely, OFCCP’s investigation into Microsemi), the Court held that Rocheleau’s claim failed for temporal reasons: the annual report on Form 10-K in which Microsemi would disclose such information was not due to be filed until after Rocheleau made her report. Takeaway  Being a whistleblower involves personal sacrifice and professional risk.  Many violations of the law go unreported because people who know about them are afraid of being disciplined, losing their job, being demoted, or being passed over for promotion. For these reasons, it is important for whistleblowers and their counsel to be reasonably sure that the conduct about which the whistleblower is complaining is actionable under the securities laws. This means that the whistleblower should come forward with facts supporting the basic elements of a securities fraud claim. Anything less, as Rocheleau learned, will not suffice.

In business, relationships are important. One relationship that is essential to successful businesses is the principal-agent relationship. A principal-agent relationship may be established by evidence of the consent of one person to allow another to act on his or her behalf and subject to his or her control, and consent by the other to act, even where the agent is acting as a volunteer. 5015 Art Fin. Partners, LLC v. Christie’s Inc. , 58 A.D.3d 469, 471 (1st Dept. 2009) (quotation marks and citation omitted). In simple cases, the principal is an individual who asks another individual to perform a task. In more complex cases, the principal may be a corporation, a nonprofit organization, a government agency or a partnership. An agency relationship may be based on the actual or apparent authority of the agent to act on behalf of the principal. Actual authority may be based on an express or direct grant of authority to the agent or may be implied based on the principal’s “manifestations which, though indirect, would support a reasonable inference of an intent to confer such authority.” Greene v. Hellman , 51 N.Y.2d 197, 204 (1980). Implied actual authority must be based on a showing that the principal “performed verbal or other acts that gave the reasonable impression that he had authority to enter into the .” Site Five Hous. Dev. Fund Corp. v. Estate of Bullock , 112 A.D.3d 479, 480 (1st Dept. 2013). See also Greene , 51 N.Y.2d at 204. Apparent authority must be based on “words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority.” Hallock v. State of New York , 64 N.Y.2d 224, 231 (1984). “‘Rather, the existence of “apparent authority” depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.’” Id. at 231 (citing Ford v. Unity Hosp. , 32 N.Y.2d 464, 473 (1973)). “Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.” Id . See also Wen Kroy Realty Co. v. Public Nat. Bank & Trust Co. , 260 N.Y. 84, 92-93; Restatement, Agency 2d, § 8, Comment c. Thus, “ ey to the creation of apparent authority is that the third person, accepting the appearance of authority as true, has relied upon it.” Greene , 51 N.Y.2d at 204 (citing Restatement, Agency 2d, § 27, and Comment a). Even if the agent possessed no actual authority and there was no apparent authority on which the third person could rely, the principal may still be liable if s/he ratifies or adopts the agent’s acts before the third party withdraws from the transaction. Ramsay v. Miller , 202 NY 72, 75-76 (1911). Ratification usually relates back to the time of the undertaking, creating an agreement after-the-fact as though it had been formed initially. To ratify the acts of another, the principal may expressly tell the parties concerned or, by his/her conduct, manifest his/her willingness to accept the benefits of the transaction as though the acts were authorized. La Candelaria E. Harlem Community Ctr., Inc. v. First Am. Tit. Ins. Co. of N.Y. , 146 A.D.3d 473, 473 (1st Dept. 2017). Silence or a prolonged failure to object to the act can constitute ratification. E.g. , Matter of Cologne Life Reins. Co. v. Zurich Reins. (N.Am.), Inc. , 286 A.D.2d 118, 126-28 (1st Dept. 1991); Clark v. Bristol-Myers Squibb & Co. , 306 A.D.2d 82, 85 (1st Dept. 2003) (holding that “plaintiff implicitly ratified the settlement by making no formal objection for months after she was told about it”). A common question that arises in the principal-agent relationship is who is liable for the violations of law and/or the breaches of duty or contract committed by the agent. Typically, the principal will be held liable for the agent’s misconduct or illegal activities when the agent is acting within the scope of his/her authority, and has been specifically instructed to perform the act on the principal’s behalf.  However, the principal will not be held liable when the agent acts outside the scope of the authority granted. Though these principles seem straightforward, their application is not. Disputes over who is liable for the wrongs committed against third parties by an agent are common place. One such dispute was recently resolved on August 1, 2017, by Justice Friedman of the Supreme Court, New York County, Commercial Division in Arnon Ltd (IOM) v. Beierwaltes , 2017 NY Slip Op. 31605(U) . There, Justice Friedman held that an intermediary negotiating on behalf of a trust was not an agent with the authority to bind the trust with respect to the purchase of an ancient statue. Background At its core, Arnon is a breach of contract action based on the alleged wrongful refusal by the defendants to sell an ancient Greek statue – known as the Kore – to the plaintiff Arnon Ltd (IOM), a company owned by a British trust, which holds the artwork of David Sofer (“Sofer”), a British and Israeli citizen residing in London (“Arnon” or the “Trust”). According to the complaint, the defendants entered into a contract to sell the sculpture to Arnon for $650,000, but within days of entering into the agreement, cancelled it without any basis in the contract. Arnon sued the defendants for breach of contract, and after discovery, both parties moved for summary judgment. The defendants contended that Sofer, an intermediary who negotiated with the defendants to purchase the Kore on Arnon’s behalf, did not have the authority to enter into a contract to acquire the Kore, and that Arnon never ratified Sofer’s purported agreement to purchase the statue. Alternatively, the defendants contended that the parties never reached a meeting of the minds on “the time and method of payment” or that, if a contract was made, it was cancelled by the breach of the payment terms. In opposition to the defendants’ motion and in support of its own motion for summary judgment, Arnon maintained that although “Sofer did not have formal agency powers” ( i.e. , he was not expressly appointed by Arnon to act as its agent), he had either implied actual or apparent authority with respect to the acquisition of the Kore. In addition, Arnon contended that the parties reached an agreement on material terms. The Court’s Ruling The Court found that Sofer did not have apparent or implied actual authority to purchase the Kore on Arnon’s behalf. The Court rejected Arnon’s argument that an email Sofer sent to the defendants, which was carbon copied to a representative of Arnon, demonstrated Sofer’s implied and/or apparent authority to bind Arnon in the purchase of the Kore: he silence of Ms. de Carte in response to the January 12 email is insufficient as a matter of law to manifest either implied actual or apparent authority. Ms. de Carte is neither directly addressed in the email, nor identified as a representative of Arnon.… Further, the email does not detail the terms of the sale of the Kore, and it affirmatively states that Arnon is part of Mr. Sofer’s trust and is managed by independent directors. Ms. de Carte’s failure to respond, within a very short time frame, to such an email could not have led a reasonable person in defendants’ position to conclude that Ms. de Carte, and through her, Arnon, bestowed on Mr. Sofor the authority to bind Arnon to a $650,000 contract. … Ms. de Carte’s non-response to the January 12 email could not have given Mr. Sofer the reasonable impression that he had authority to enter into this one contract. At most, Ms. de Carte’s silence could be interpreted as manifesting agreement that Mr. Sofer was authorized to engage in intermediary discussions or negotiations, but that the independent directors referred to in the January 12, 2013 email must still make the final decision as to whether to bind Arnon to the purchase and must approve a formal written contract. Arnon’s reliance on prior dealings is also insufficient to raise a triable issue of fact as to Mr. Sofer’s apparent authority to bind Arnon to the one Kore transaction. As a general rule, the mere creation of an agency for some purpose does not automatically invest the agent with apparent authority to bind the principal without limitation. An agent’s power to bind his principal is coextensive with the principal’s grant of authority. Further, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentations of the agent because of some misleading conduct on the part of the principal not the agent. At most, said the Court, “the evidence supports a finding that Arnon bestowed on Mr. Sofer authority to recommend artworks to Arnon, but not to bind Arnon to the purchases.” In so holding, the Court rejected Arnon’s contention that the evidence demonstrated its intention to authorize Sofer to contract for the Kore on Arnon’s behalf. The Court noted that Arnon ignored the evidence that only it had the authority to enter into a contract for purchases of antiquities (even if Arnon may have effectively acted as a rubber stamp for Sofer’s recommendations). Significantly, observed the Court, Sofer never testified that he was authorized, or that Arnon even believed him to be authorized, to contract on Arnon’s behalf in the purchase of the Kore. The court cannot ignore, however, that Mr. Sofer created a trust under which he was required to obtain Arnon’s approval of contracts for purchases in order to avail himself of the benefits … of the trust structure, and that he failed to do so before defendants cancelled the contract for the Kore. Next, the Court examined the question whether Arnon ratified the alleged contract. After identifying the applicable principles, the Court found that even if Sofer had entered into an agreement with the defendants, “ratification of an agent’s acts requires knowledge of material facts concerning the allegedly binding transaction,” which the evidence showed could not be imputed to Arnon: “The January 12, 2013 email does not outline any details of the alleged agreement but, rather, explicitly anticipates a future document that would contain ‘the logistics of the sale (formal short agreement, invoice with photos etc.).’” “More important,” said the Court, “any claim of ratification based on Ms. de Carte’s silence in response to the January 12 email would be plainly inconsistent with Ms. de Carte’s repeated testimony, that Arnon required compliance with a formal process in order to approve the contract.” Takeaway The key to determining whether a principal will be held liable for the acts of his/her agent is authority: was the agent authorized to act on the principal’s behalf? If a person has no authority to act as an agent, or an agent has no authority to act in a particular way, the question becomes can the principal be held liable for the wrongs perpetrated on a third party? As Arnon shows, the answer depends on whether the agent has apparent authority – that is, whether the third party reasonably believed from the principal’s words or conduct that s/he had in fact consented to the agent’s actions. And, as in Arnon , the answer to that question is often hotly contested.

On July 10, 2017, new Securities and Exchange Commission ("SEC") rules went into effect that permit companies, regardless of their size, to file  paperwork for initial public offerings without immediately making public disclosures.  The SEC's announcement of the new policy can be found here .  "This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors," said Director of the Division of Corporation Finance, Bill Hinman. "This process makes it easier for more companies to enter and participate in our public company disclosure-based system." The new policy is an expansion of rules promulgated under the Jumpstart Our Business Startups ("JOBS") Act of 2012 that allowed emerging growth companies (those with under $1 billion in revenue) to make such confidential filings. The new policy is intended to help companies resolve any issues during the registration process out of public view, further restore the market for IPOs and subsequently boost job growth. "By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital," said Chairman Jay Clayton. "We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy." Under the new policy, the SEC will review a draft of the initial “S-1” registration statement and amendments filed pursuant to the Securities Act of 1933 on a non-public basis. The new policy applies to both domestic and foreign issuers. However, responses to any SEC staff comments must be made in a public filing, not in a revised, non-public draft of the registration statement. Additionally, issuers must publicly file registration statements at least 15 days prior to any road show presentations to investors, or in the alternative, 15 days prior the the requested effective date of the registration statement. The so-called “stealth” filing procedures should help issuers time their IPOs with favorable market conditions. At the same time, companies have the option of withdrawing a filing in the event of a market downturn or other adverse event. The confidential filing procedures will also help issuers maintain the privacy of sensitive financial and business information. Nonetheless, a company that proceeds with a public offering after filing must disclose the S-1 according to the 15-day requirements mentioned above. Since emerging growth companies were given the option of making confidential filings under the JOBS Act, it has proven to be a popular option, with companies like Snapchat, Shake Shack and Twitter taking that route. While the JOBS Act was intended to increase the number of IPOs, the market continues to face a number of challenges. These include a rise in merger and acquisition activity and the ability of companies to raise capital through multiple rounds of venture funding. At this juncture, it remains to be seen what effect the new rules will have on the IPO market or whether the new registration procedures will trigger investor lawsuits.

Notice and reporting requirements in public contracts are common in public works projects. They provide public agencies with timely notice of deviations from budgeted expenditures or of any supposed malfeasance, and allow them to take early steps to avoid extra or unnecessary expense, make any necessary adjustments, mitigate damages and avoid the waste of public funds. A.H.A. Gen. Constr. v. New York City Hous. Auth. , 92 N.Y.2d 20, 33-34 (1998).  Such provisions are important both to the public treasury and to the integrity of the bidding process. Because of these public policy considerations, expressly agreed-upon notice provisions “must be literally performed.” Phoenix Signal & Elec. Corp. v. New York State Thruway Auth. , 90 A.D.3d 1394, 1396-1397 (3d Dept. 2011) (internal quotation marks and citation omitted). Failure to strictly comply with such provisions is a condition precedent to recovery and constitutes waiver of a claim for additional compensation. A.H.A. Gen. Constr. , 92 N.Y.2d at 30-31; see also Kingsley Arms, Inc. v. Sano Rubin Constr. Co., Inc. , 16 A.D.3d 813, 814 (3d Dept. 2005). Recently, in Ridley Electric Company, Inc. v. Dormitory Authority of The State of New York , a public contractor had its case dismissed because it failed to comply with the notice and reporting requirements in its contract with the State. Ridley Elec. Co., Inc. v. Dormitory Auth. of The State of New York , 2017 NY Slip Op 05907 (3d Dept. July 17, 2017). Ridley Electric Company, Inc. v. Dormitory Authority of The State of New York Background In May 2006, the plaintiff, Ridley Electric Company (“Ridley”) entered into a contract with the defendant, the Dormitory Authority of The State of New York (the “Authority”), to act as the prime contractor for electrical work in the construction of the New York State Veteran’s Home. Due to certain issues related to the ceiling design, Ridley had difficulty completing the work. To assist Ridley in resolving the issues, the Authority made various adjustments to the project. Ridley substantially completed its work by September 2008, and the entire project was substantially completed by October 2008. In March 2009, Ridley requested additional compensation for the “extra work” that it allegedly performed related to the ceiling and other specified problems. In February 2010, the Authority advised Ridley that following a preliminary review, it had concluded that Ridley was due some additional funds for labor costs incurred in performing the extra work related to the ceiling, but denied Ridley’s other claims. Change orders allowing the proposed additional funds were attached to the February 2010 correspondence. Ridley refused to sign these work orders, and instead submitted two proposed change orders requesting additional sums. In response, the Authority again issued change orders for the original sum. Thereafter, Ridley commenced an action for, inter alia , breach of contract, seeking damages representing the unpaid contract balance and delay damages. Ridley claimed that it performed extra work, by having to install cable trays and run wires inside them in ceiling spaces that were too small to accommodate them, and by performing certain cleanup work. Ridley maintained that it became aware of the ceiling issue soon after work commenced in May 2007, and that the Authority advised it in writing in April 2008 that the cleanup work fell within the scope of the contract. Notably, Ridley conceded that it did not provide the Authority with timely notice of these claims as required by the contract (it filed the claims after the project had been substantially completed, almost two years after construction commenced), but contended that the Authority knew that it was performing extra work and waived the notice and reporting requirements by offering to make partial payment in response to its belated request. The Authority answered and asserted affirmative defenses claiming, among other things, that Ridley had failed to comply with the notice and reporting requirements in the contract.  These requirements provided, in pertinent part, that if a contractor believes it has been ordered to perform a task that should be considered extra work within the meaning of the contract, the contractor must notify the Authority of its extra work claim by filing a written notice within the time period specified in the contract. Failure to comply with the notice and reporting requirements was deemed to be “ conclusive and binding determination on the part of the ontractor that does not involve extra work and is not contrary to the terms and provisions of the ontract” and, also, “ waiver . . . of all claims for additional compensation or damages as a result of .” Ridley moved for summary judgment as to liability, and the Authority cross-moved for summary judgment to dismiss the complaint. The motion court denied Ridley’s motion, granted the Authority’s cross motion, and dismissed the complaint. Ridley appealed. The Court’s Decision On the issue of waiver (that is, the Authority’s cross motion), the Court affirmed the motion court’s ruling to dismiss the complaint, finding that Ridley “failed to comply with the notice and reporting requirements of the contract.” In so doing, the Court rejected Ridley’s argument that the Authority’s actual knowledge of the ceiling issues “suffice to excuse lack of compliance with strict contractual notice requirement … at issue here.” (Citations omitted.) The Court also rejected Ridley’s contention that the Authority waived the notice requirements by offering partial compensation for the extra work related to the ceiling issue in February 2010. An offer to make partial payment did not suffice, said the Court, to waive the Authority’s rights under the notice and reporting requirements in the contract. Such a waiver, noted the Court, “must be explicit, unmistakable, and unambiguous.” (Citation and internal quotation marks omitted.) In any event, the terms of the contract itself contradicted any notion that the Authority’s partial payment constituted a waiver of the notice and reporting requirements: Here, review of the pertinent documents reveals multiple provisions contradicting the claim that partial payment constitutes a waiver of the notice and reporting requirements. The parties” contract gives defendant the general authority to order extra work and compensate contractors through change orders, as it did here, “ ithout invalidating the ontract,” and further provides that “ ny partial payment made shall not be construed as a waiver of the right of to require the fulfillment of all the terms of the ontract” (emphasis added). Further, the change orders by which defendant tendered payment to plaintiff provide that “ reserves its rights to rely on and enforce the terms of the ontract . . . in connection with this change” and that “ either this change order nor any extension of time for performance granted hereunder constitutes an admission by that it is responsible for any delays or hindrances to ork under the ontract.” In view of these express reservations, and in the absence of any statement to the contrary, defendant’s willingness to compensate plaintiff for a limited amount of extra work cannot be construed as an express and unequivocal manifestation of its intent to waive reliance upon the contract’s notice and reporting requirements as to the extra work claim as a whole. Citations omitted. Takeaway Contracts that contain notice and reporting provisions are conditions precedent to any recovery for breach of contract. As such, no party can prevail on a breach of contract claim if that party has failed to perform a specified condition precedent. As Ridley demonstrates, failure to strictly comply with such provisions constitutes a waiver of the claim for relief.

It is well settled that “ very contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Restatement (Second) of Contracts § 205 (1981). See also 511 W 232nd Owners Corp. v Jennifer Realty Co. , 98 N.Y.2d 144, 153 (2002) (“In New York, all contracts imply a covenant of good faith and fair dealing in the course of performance”). “This covenant embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” 511 W 232nd Owners , 98 N.Y.2d at 153 (citations and internal quotation marks 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.” Id . (citations and internal quotation marks omitted). To state a cognizable claim, “ plaintiff must allege a specific implied contractual obligation and allege how the violation of that obligation denied the plaintiff the fruits of the contract.” Kagan v. HMC-New York, Inc. , 94 A.D.3d 67, 77 (1st Dept. 2012) (citation omitted). Conduct that frustrates the purpose of a contract is often described as bad faith, and is identified by, among other things, “evasion of the spirit of the bargain,” “abuse of a power to specify terms,” “interference with or failure to cooperate in the other party’s performance,” and willful rendering of imperfect performance. E.g. , Restatement (Second) of Contracts § 205 cmt. d. General allegations of bad faith are insufficient. Kagan , 94 A.D.2d at 77. This Blog previously wrote about the covenant here . On July 13, 2017, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, considered these principles in holding that a defendant who gave a defective notice of lease renewal with the intent to prevent the plaintiff from finding another tenant stated a claim for breach of the covenant of good faith and fair dealing. Foscarini, Inc. v. Greenestreet Leasehold Partnership , 2017 NY Slip Op. 31493(U) . Background On January 16, 2011, the plaintiff, Foscarini, Inc. (Foscarini”), leased a storefront from the defendant, The Greenestreet Leasehold Partnership (“Greenestreet”), for a five-year term that expired on January 16, 2015. The lease provided that Foscarini could renew the lease for an additional five years upon written notice of its intent to renew. Notice had to be provided between six and twelve months prior to the initial expiration of the lease. On January 2, 2015, Foscarini informed Greenestreet in writing that it intended to renew the lease. Greenestreet alleged that the notice was defective, in that it was addressed and sent to the wrong party, and was equivocal regarding Foscarini’s intent to renew.  For various reasons, Greenestreet alleged that Foscarini merely acted as though it were renewing to give it time to seek alternate premises and to cloud title to the space. The parties negotiated the renewal for several months. Unable to agree upon a renewal with acceptable terms, Foscarini sued Greenestreet seeking a declaratory judgment that it properly exercised its option to renew the lease, and that the lease had been renewed for a five-year term beginning on January 1, 2016; and for breach of the lease by failing to recognize Foscarini’s renewal. Greenestreet answered the complaint. Upon the expiration of the initial term on January 15, 2016, Foscarini failed to vacate the premises. The following month, the parties entered into a so-ordered stipulation setting forth the terms of use and occupancy for the premises while Foscarini still occupied it. Greenestreet alleged that, having agreed to the stipulation, Foscarini continued to search for alternate commercial space without telling Greenestreet that it was doing so. On August 9, 2016, Foscarini told Greenestreet that it was vacating the premises at the end of the month, and that it was withdrawing its cause of action for a declaratory judgment. Greenestreet alleged that three weeks’ notice was insufficient notice to vacate, as it left it unable to quickly locate a new tenant for the premises. Foscarini vacated the premises on August 31, 2016, and, thereafter, demanded the return of its security deposit. Greenestreet disputed Foscarini’s right to vacate the premises, to withdraw its cause of action, and to recover the security deposit. On October 25, 2016, the parties stipulated that Greenestreet could file an amended answer to the complaint. In the amended answer, Greenestreet asserted five counterclaims for: (1) breach of the lease; (2) breach of the lease’s implied covenant of good faith and fair dealing; (3) abuse of process; (4) holdover at fair market value; and (5) for a declaratory judgment that Greenestreet could retain all of Foscarini’s security deposit. Foscarini moved, pursuant to CPLR 3211(a)(7), to dismiss the second and third counterclaims for breach of the implied covenant of good faith and fair dealing and abuse of process. Greenestreet later withdrew the abuse of process counterclaim. Greenestreet claimed that Foscarini breached the implied covenant in three ways: 1) Foscarini commenced “a litigation it knew to be without merit” to gain a negotiating advantage over Greenestreet and to continue paying “under-market use and occupancy” while looking for a new location; 2) Foscarini failed to vacate the premises when the lease expired; and 3) Foscarini sent a renewal notice that it knew was defective. Greenestreet argued that Foscarini acted in bad faith in that it had no intention of staying in the premises and that it refused to vacate the premises at the end of the lease term, and then, by leaving on only twenty days’ notice, depriving Greenestreet of the six-month notice period provided for in the lease, and the ability to timely market the premises or obtain a new tenant. In response, Foscarini maintained that the counterclaim was duplicative of Greenestreet’s counterclaim for breach of the lease, as both claims alleged that Foscarini failed to comply with the lease by sending a proper renewal notice or by vacating the premises when the lease expired. Foscarini also claimed that Greenestreet had not been denied the fruits of its bargain. The Court’s Decision Justice Scarpulla rejected the first two bases asserted by Greenestreet for a breach of the implied covenant, but sustained the third one – that Foscarini sent the renewal notice to Greenestreet with no intent to remain in the premises. In doing so, the Court accepted Greenestreet’s contention that implied from the renewal provisions of the lease was an obligation to send a renewal notification only if Foscarini actually intended to renew. Foscarini’s defective notice impeded Greenestreet’s ability to lease the premises once the lease expired and, therefore, frustrated the fruits of the parties’ bargain: The strict notice period provided for renewing the lease is alleged to have been part of the fruits of Greenestreet’s bargain, allowing it the necessary time to relet the premises if Foscarini decided not to renew the lease. Foscarini’s faulty notice impeded Greenestreet’s ability to lease the premises once the lease expired. Indeed, Greenestreet alleges that the faulty renewal notice was merely the beginning of Foscarini’s attempts to prolong its occupancy while searching for new space, as shown by Foscarini’s principal telling a real estate broker in June 2015 that it would either renew the lease or look for new space. Greenestreet has successfully alleged that Foscarini breached its implied obligation to send a renewal notice only if it genuinely meant to renew the lease, and that Greenestreet was damaged in its inability to relet the premises upon Foscarini’s departure. The Court also rejected Foscarini’s argument that Greenestreet alleged that the improper renewal of the lease was a basis for both a breach of contract and implied covenant claim, finding that “Greenestreet’s claim of a bad faith renewal could not be brought as an express breach claim.” In this regard, the Court noted that “ he lease does not place any express, stated conditions on Foscarini’s decision to exercise its right to renew, nor … does the lease provide that Foscarini’s exercise of its right to renew the lease is irrevocable.” Takeaway “The essence of contract law is the bargain: parties of equivalent bargaining power negotiate the terms of the transaction and each is then entitled to the benefit of the bargain.” Detroit Edison Co. v. NABCO, Inc. , 35 F.3d 236, 239 (6th Cir. 1994).  “Neither ha the right to undermine the other’s reasonable expectations, or to make performance more difficult.” Standard Chartered Bank v. AWB (USA) LTD. , No. 05 Civ. 2013 (AKH) (S.D.N.Y. Feb. 16, 2010). When one party acts in way that denies the fruits of the contract for the other, he/she breaches the implied covenant of good faith and fair dealing – a lesson that Foscarini learned in its case with Greenestreet.

Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against a defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action. The requirements for obtaining a prejudgment attachment order vary from state to state; there is no federal law or common law right to prejudgment attachment. Generally, the plaintiff (or creditor) must: (1) have a pending lawsuit for damages, (2) identify the property or asset to be attached in detail, (3) claim a legal right to that property or asset, and (4) demonstrate the need to secure the property or asset prior to the conclusion of the lawsuit. The Law in New York In New York, the grounds for obtaining a prejudgment attachment are set forth in Civil Practice Law & Rules Sections 6201(1) through 6201(5). Under these sections, a plaintiff may obtain a prejudgment attachment order when, for example: the defendant is a foreign corporation not qualified to do business in New York (CPLR 6201(1)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR 6201(3)); or the  cause  of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York. (CPLR 6201(5).) Attachment is considered to be a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR 6212(a).  The moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought.  ( Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp. , 118 A.D.2d 769, 773 (2d Dept. 1986). Because prejudgment attachment is a drastic remedy, New York courts “strictly construe[ ]” CPLR 6201 “in favor of those against whom it may be employed.” Northeast United Corp. v. Lewis , 137 A.D. 3d 1387, 1388 (3d Dept. 2016) (citation and internal quotation marks omitted). Where fraud is alleged, under CPLR 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff'.” VNB NY, LLC v. Rapaport , 2016 NY Slip Op 50099 (Sup. Ct., Kings Co. Jan. 29, 2016) (citations omitted). “ ere removal, assignment or other disposition of property is not grounds for attachment.” ( Computer Strategies v. Commodore Bus. Machs. , 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id .  Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc. , 2016 NY Slip Op 32405 (Sup. Ct., N.Y. Co. Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id . (citation and internal quotation marks omitted). However, even when the plaintiff satisfies the statutory grounds for an attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp. , 2017 NY Slip Op 30813 (Sup. Ct., N.Y. Co. Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 60 (1st Dept. 2013)); see also Siegel, NY Prac, § 317 (5th ed) (“Even if the plaintiff makes out a case for attachment under CPLR 6201, its granting is still discretionary with the court. . . . f the judge should perceive from the papers that the plaintiff does not need an attachment, either for jurisdiction or security, discretion is appropriately exercised against it even though a CPLR 6201 showing has been made.”).  The risk “should be real.” VisionChina , 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position ( i.e. , whether the defendant is in “serious financial distress” ( Elton Leather Corp. v. First Gen. Resources Co. , 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina , 109 A.D.3d at 60. In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g. , Von Bock v Metropolitan Life Ins. Co. , 223 A.D.2d 700 (2d Dept. 1996). Finally, a plaintiff may obtain an order of attachment on an ex parte basis (without notice to the defendant being attached). However, if an attachment order is granted on an ex parte basis, the plaintiff must move within five (5) days after levy on notice to the defendant, garnishee and sheriff for an order confirming the attachment. Del Forte USA, Inc. v. Blue Beverage Group, Inc. On July 17, 2017, in Del Forte USA, Inc. v. Blue Beverage Group, Inc. , 2017 NY Slip Op. 31525(U) , Justice Ash of the New York Supreme Court, Kings County, Commercial Division, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR 6201(3) due to a lack of evidence of fraudulent intent. Background The case arose from a dispute between the plaintiff Del Forte USA, Inc., a manufacturer and seller of cold coffee beverages, and Blue Beverage Group Inc. over, among other things, the latter’s alleged failure to carry out the retort process ( i.e. , the process that enables beverages containing milk to remain on retail shelves unrefrigerated for about a year) for Del Forte’s coffee beverages. Based on Blue Beverage’s alleged failures, Del Forte claimed that it sustained direct and consequential damages in excess of $500,000. Del Forte moved for a temporary restraining order to prevent the sale of Blue Beverage’s assets to the Kuzari Group LLC (“Kuzari”), another defendant in the action, unless at least $500,000 of the sale proceeds were placed in escrow for the benefit of the plaintiff, or, in the alternative, for appointment of a receiver, because the transaction would result in a fraudulent transfer under New York Debtor and Creditor Law § 279 (“DCL”). In the alternative, Del Forte sought an order of attachment against the funds paid by Kuzari for Blue Beverage’s assets to ensure that any judgment that may be obtained by Del Forte against the Blue Beverage defendants could be satisfied. Del Forte sought an attachment of at least $500,000 to pay the damages owed by Blue Beverage, and its two owners, Joseph Goldberger (“Goldberger”) and Joseph Menczer (“Menczer”). Del Forte contended that Blue Beverage was insolvent and had intentionally failed to pay its creditors and suppliers. It claimed that numerous pending lawsuits, some of which had resulted in default judgments against Blue Beverage, demonstrated this point, in addition to fraudulent judgments that were filed against Blue Beverage in favor of the Blue Beverage defendants’ family members and insiders, which totaled over $13 million, including a judgment for nearly $7 million in favor of Goldberger’s wife. Del Forte argued that these fraudulent and collusive judgments, combined with Blue Beverage’s repeated failure to pay its creditors, demonstrated that any proceeds received from the sale of Blue Beverage and its assets would be dissipated by the Blue Beverage defendants through payments to their family members and insiders, leaving Blue Beverage insolvent and unable to satisfy any judgment it obtained. In response, the Blue Beverage defendants argued that the Kuzari Group’s contemplated investment in Blue Beverage would result in no harm to Del Forte because it could continue to litigate its claims (namely, its breach of contract claim) against Blue Beverage. The Blue Beverage defendants further argued that Del Forte was not entitled to relief under CPLR 6201 or the DCL because Del Forte failed to satisfy its burden of proving fraud or intent to defraud by the Blue Beverage defendants. The Court’s Decision After citing to some of the authorities mentioned above, the Court denied Del Forte’s motion and vacated the temporary restraining order it had previously granted.  In doing so, the Court found that Del Forte failed to satisfy its burden of proving that Blue Beverage intended to defraud by entering into the transaction with the Kuzari Group: Here, upon consideration of the foregoing and the record before the Court, the Court finds that Plaintiff has not sufficiently satisfied its burden to obtain the relief that it seeks. Specifically, Plaintiff has not demonstrated that the Blue Beverage Defendants are entering into the subject transaction with the intent to defraud creditors. Plaintiff also fails to establish that $5 million constitutes inadequate consideration for what the Kuzari Group seeks to purchase from Blue Beverage and, further, what the value or worth of Blue Beverage is overall. Although Plaintiff provides plenty of evidence of potential judgment creditors of Blue Beverage, there is no evidence that the proposed transaction between the Kuzari Group and Blue Beverage is one that aims to defraud or frustrate potential creditors, nor is there any indication that the proposed sale will render Blue Beverage an “empty shell” of a corporation. Accordingly, the relief that Plaintiff seeks must be denied at this time. Takeaway To obtain an order of attachment under CPLR 6201(3), a plaintiff must demonstrate, with evidence, that the defendant has concealed or is about to conceal property, “and has acted or will act with the intent to defraud creditors, or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff.” Benedict v. Browne , 289 A.D.2d 433, 433 (2d Dept. 2001). Since New York courts strictly construe CPLR 6201 “in favor of those against whom it may be employed” ( Hume v. 1 Prospect Park ALF, LLC , 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. Del Forte learned this lesson the hard way.