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By: Jeffrey M. Haber An operating agreement is the primary document that establishes the rights, powers, duties, liabilities, and obligations of the members of a limited liability company (“LLC”) between themselves and with respect to the company. The purpose of the document is to govern the internal operations of an LLC in a way that addresses the needs of the company’s owners (also known as “members”). Notwithstanding its importance, not every state requires an LLC to have an operating agreement. In New York, the members of an LLC are required to adopt a written operating agreement. The operating agreement may be entered into before, at the time of, or within 90 days after the filing of the articles of organization. The operating agreement is not filed with the New York Department of State. The LLCL is silent on the consequences of not adopting an operating agreement. When the parties fail to adopt an operating agreement, the State’s default rules governing LLCs apply. In New York, the rules governing LLCs are in the LLCL. Article 7 of the LLCL governs the dissolution of an LLC. Under Section 701(a), an LLC will be dissolved and its affairs wound up upon the first of the following: a) the latest date provided in the articles of organization or the operating agreement; if no date is specified, then the existence of the LLC is perpetual; b) the happening of events specified in the operating agreement; c) the vote or written consent of at least a majority in interest of the members (subject to the provisions in the operating agreement); d) at any time there are no members in the LLC, unless a legal representative of the last remaining member agrees in writing within 180 days to continue the LLC and to the admission of the legal representative as a member; and e) the entry of a decree of judicial dissolution pursuant to LLCL § 702.  Section 702 applies only when the articles of incorporation and/or the operating agreement do not provide the circumstances under which the LLC will be dissolved. Section 702 of the LLCL empowers a court to dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” The LLCL does not define the term “not reasonably practicable.” In considering dissolution, LLCL § 702 requires the court to first examine the company’s operating agreement to determine whether it is not “reasonably practicable” for the company to continue to carry on its business in conformity with the operating agreement. Where the operating agreement does not address the issue of member withdrawal or dissolution, the petitioning member is bound by the requirements set forth in the LLCL § 702. To satisfy the “not reasonably practicable” standard of Section 702, New York courts require the member seeking dissolution to establish that: (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible. Mere “ isagreement in the operation of the LLC does not necessarily entail a finding that it is not reasonably practicable to carry on the business.” [Eds. Note: This Blog examined judicial dissolution under LLCL § 702,   here ,  here here , and  here . ] In TZ Vista, LLC v. Helmer , 2025 N.Y. Slip Op 00694 (2d Dept. Feb. 5, 2025) ( here ), the Appellate Division, Second Department affirmed the denial of a motion for summary judgment to dissolve the subject LLC. As discussed below, the company’s operating agreement governed the dispute and, pursuant to that agreement, the parties had agreed to waive their right to dissolve the company. But even if the members of the LLC could seek dissolution, the Court held that the requirements for such relief were not satisfied. TZ Vista concerned disputes over certain provisions in the operating Agreement of TZ Vista LLC, in particular an option to purchase real property from defendant Foot of Main, LLC. On or about January 13, 2015, plaintiffs, Drazen Cackovic and Julia Khomut, and defendant, William Helmer, executed an operating agreement in which they became members of plaintiff TZ Vista (“the Operating Agreement”). Cackovic and Helmer are the company’s managing members, while Khomut is a member. The parties formed TZ Vista to purchase, develop, manage, sell, lease, and mortgage certain real properties located along the Hudson River in Nyack, New York (“Properties”). In the operating agreement, the members agreed that Helmer’s construction company, Helmer Cronin Construction, Inc., would provide construction management services for the TZ Vista Project. The parties also agreed that DCAK-MSA Architecture & Engineering, PC (“DCAK-MSA”), a company owned by Cackovic and Khomut, would provide the architectural and engineering services for the Properties. According to the complaint, Cackovic and Khomut performed all their duties required under the operating Agreement. DCAK-MSA allegedly performed its architectural and engineering services for TZ Vista. Plaintiffs maintained that Helmer failed to perform his obligations under the operating Agreement. Plaintiffs alleged that Helmer’s failure to diligently perform his obligations caused delays in the completion of the Properties, including delays in securing the government approvals needed to complete the work on the Properties. The operating agreement contained an option to purchase in favor of Cackovic, which gave Cackovic the irrevocable right to require TZ Vista to purchase a parcel of real property from Foot of Main, LLC, on or before January 13, 2020 (“Parcel 7”). Helmer is the sole member and manager of Foot of Main, LLC. The operating agreement contained details of the calculation and schedule of payments for Parcel 7. It also stated that, “transfer of ownership occur at such time as determine that it advisable for to become the owner of in furtherance of advancing the development of any portion of the Properties ….” After Cackovic exercised his option to purchase Parcel 7, Helmer allegedly refused to transfer Parcel 7 to TZ Vista in accordance with the terms of the operating agreement. In January 2020, plaintiffs commenced the action to, inter alia , recover damages for breach of contract and for specific performance , directing Foot of Main and Helmer to convey Parcel 7 to TZ Vista pursuant to the operating agreement. In their answer, defendants asserted, among other things, a counterclaim for the judicial dissolution of TZ Vista on the basis of frustration of purpose . Thereafter, defendants moved for, inter alia , summary judgment on that counterclaim. Plaintiffs opposed the motion and cross-moved for summary judgment on the cause of action for specific performance by “directing Foot of Main to transfer to TZ Vista in accordance with the terms of the Operating Agreement.” By order dated January 3, 2022, Supreme Court, among other things, denied that branch of defendants’ motion and granted plaintiffs’ cross-motion. Defendants appealed. The Second Department affirmed. The Court found that the parties specifically agreed in the operating agreement that they could not seek judicial dissolution of TZ Vista. As the Court put it, “pursuant to paragraph 3.5(d) of the operating agreement, the members of TZ Vista waived their right to seek judicial dissolution of TZ Vista.” “Specifically,” said the Court, “they waived their right to ‘file a complaint, or to institute any proceeding at law or in equity, to cause the termination, dissolution, or liquidation of .’” “ ven if the members of TZ Vista had not waived their right to seek judicial dissolution of TZ Vista,” the Court held that “defendants failed to demonstrate, prima facie, that the purpose of TZ Vista had been frustrated or that continuing TZ Vista had become financially unfeasible.” The Court found that the disputes upon which defendant relied were nothing more than mere disagreements in the operation of TZ Vista, which were not sufficient to support judicial dissolution. Further, said the Court, “to the extent that the defendants assert that there was disagreement and deadlock between the parties,” the operating agreement provided for certain procedures to be followed, which defendant failed to do. In that regard, “paragraph 8.5 of the operating agreement specifically provide that, in the event of disagreement as to ‘any course of action relating to the management, conduct or operation of the Company business, either Managing Member … may offer in writing to sell his Membership Interest to the other Managing Member, setting forth a demanded purchase price.’” The Court found that “defendants’ submissions reflect that Helmer failed to properly follow the procedures contained in paragraph.” _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Section 417 of the Limited Liability Company Law (“LLCL”). In The Matter of Dissolution of 1545 Ocean Ave., LLC , 72 A.D.3d 121, 128 (2d Dept. 2010). Id. E.g. , 1545 Ocean Ave., LLC , 72 A.D.3d at 131. Matter of Andris v. 1376 Forest Realty, LLC , 213 A.D.3d 923, 924 (2d Dept. 2023); see also Matter of 1545 Ocean Ave., LLC , 72 A.D.3d at 131. To find additional articles related to the judicial dissolution of an LLC, visit the “ Blog ” tile on our  website  and enter “judicial dissolution LLC,” or any other related search term in the “search” box. Operating Agreement § 9.2. Slip Op. at *2. Id. Id. Id. (citing Matter of Andris , 213 A.D.3d at 924; Matter of 1545 Ocean Ave. , 72 A.D.3d at 131). Id. Id. Id.

By: Jonathan H. Freiberger Today we revisit CPLR 3215(c) , a provision addressed by this BLOG several times before. See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . As previously discussed in our prior BLOGS, and by way of brief background, CPLR 3215(c) provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed…. (Emphasis added.) Courts have held that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”. See, e.g., US Bank v. Onuoha , 162 A.D.3d 1094, 1095 (2 nd Dep’t 2018); Wells Fargo Bank v. Cafasso , 158 A.D.3d 848, 849 (2 nd Dep’t 2018); see also Doe v. Garfinkel , 2025 WL 322930 at *1 (January 29, 2025). The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “‘requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’” Cafasso , 158 A.D.3d at 849; see also Wells Fargo Bank, N.A. v. Robinson-John , 220 A.D.3d 974, 977 (2 nd Dep’t 2023). The “reasonableness” of an excuse is within the sound discretion of the motion court. See, e.g., Onuoha, 162 A.D.3d at 1095 – 96 (citations omitted); Cafasso , 158 A.D.3d at 849 (citations omitted); Doe , 2025 WL 322930 at *1. The Doe Court noted that although “a court has the discretion to accept law office failure as a reasonable excuse, such excuse must be supported by detailed allegations of fact explaining the law office failure.” Doe , 2025 WL 322930 at *1 (citations and internal quotation marks omitted). Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated. See, e.g., Saxon Mortgage Services, Inc. v. Reynoso , 232 A.D.3d 642, 643-44 (2 nd Dep’t 2024); Bank of America v. Lucido , 163 A.D.3d 614, 615 (2 nd Dep’t 2018); see also Bank of America, N.A. v. Bhola , 219 A.D.3d 430, 432 (2 nd Dep’t 2023); Mort. Electronic Registration Systems, Inc. v. McVicar , 203 A.D.3d 915, 916 - 17 (2 nd Dep’t 2022). The Court in Citibank, N.A. v. Kerszko , 203 A.D.3d 42 (2 nd Dep’t 2022), addressed, for the first time, whether a rejected proposed order to show cause for an order of reference “qualifies as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c), so as to avoid dismissal of the complaint as abandoned under the statute.” Kerszko , 203 A.D.3d at 43-44. The Kerszko Court held that it did. The Court held that the relevant inquiry in determining whether “proceedings have been taken” should be focused on the intent of the plaintiff. Thus, the Court, being unmoved by the trial court’s failure to sign a proposed order to show cause, stated: The relevant inquiry, therefore, is not the form that an application takes when presented to the court or its result. Rather, it is the intent that can be inferred from an application presented to the court seeking to have the action “proceed,” inconsistent with that of an abandonment of the plaintiff's claims. Kerszko , 203 A.D.3d at 52. Against this backdrop, we discuss Wells Fargo Bank, N. A. v. Wint , a mortgage foreclosure action decided by the Appellate Division, Second Department, on February 5, 2025. The lender in Wint commenced a foreclosure action in 2010, in which the borrower failed to appear. Upon the borrower’s default, and within a year of the default, the lender moved for an order of reference. In 2011 the motion was denied, without prejudice, due to the lender’s failure to establish compliance with RPAPL 1304. The same relief was sought by the lender later in 2011 but was again denied without prejudice. In 2012, the trial court, sua sponte , dismissed the action as abandoned pursuant to CPLR 3215(c). Almost two years later, the lender moved pursuant to CPLR 2221(a) “to vacate the dismissal order and to restore the action to the active calendar.” In 2015 this motion, too, was denied. Thereafter, the lender moved for “leave to reargue and renew its prior motion to vacate the dismissal order and to restore the action to the active calendar.” In 2022, the trial court granted renewal and reargument but adhered to its earlier decision. The lender appealed the 2015 and 2022 orders. The Second Department reversed. In finding that the lender timely “initiated proceedings” to take a default, the Court stated: Here, the initiated proceedings for the entry of a judgment by moving for an order of reference within one year of the 's default in the action. The fact that the Supreme Court rejected the motion as defective is beside the point, as the mere presentment of it established the 's intent to proceed toward the entry of judgment and not to abandon the action. Since the did not fail to take timely proceedings for a judgment against the within the meaning of CPLR 3215(c), the was not required to demonstrate an excuse for its purported delay in moving to vacate the dismissal. Moreover, the 's motion, inter alia, in effect, pursuant to CPLR 2221(a) to vacate the dismissal order was not subject to any specific time limitation. Accordingly, the Supreme Court should have granted the 's motion, in effect, pursuant to CPLR 2221(a) to vacate the dismissal order and to restore the action to the active calendar. (Citations and internal quotation marks omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. This BLOG addressed the Kerszko decision promptly upon its issuance < here =">here"> . To find one of our numerous BLOG articles related to mortgage foreclosure, visit the “ Blog ” tile on our website and enter “mortgage foreclosure,” or any other related search term in the “search” box. This BLOG has written numerous articles about RPAPL 1304. To find such articles, visit the “ Blog ” tile on our website and enter “1304” in the “search” box.

By: Jeffrey M. Haber It is not uncommon for courts to apply the law of another jurisdiction to resolve a dispute before it. In commercial matters, choice of law contract provisions and doctrines, such as the internal affairs doctrine, typically identify the law that should apply to the parties’ dispute. Palella v. TMO VI LLC , 2025 N.Y. Slip Op. 30373(U) (Sup. Ct., N.Y. County Jan. 27, 2025) ( here ), is a recent example of a New York court applying the law of another jurisdiction – in that case, Delaware corporate law pursuant to a provision in the parties’ governing contract. In Palella , plaintiff challenged defendants’ 2020 decision to enter into a management agreement whereby 58th & 7th Parking LLC (the “Company” or the “JV”) was guaranteed 10% of revenues from the operation of a Manhattan parking garage instead of exercising the Company’s option to secure a 49-year lease of that garage at market rate nearly one year into the coronavirus pandemic. Plaintiff alleged that the Managing Members were not aware of the Company’s right to enter into the 49-year lease when they entered into the two-year management agreement that automatically converted to a one-year agreement terminable at will by the landlord. Plaintiff brought the action derivatively on behalf of the Company. In plaintiff’s second amended complaint, plaintiff alleged two causes of action against defendants sounding in (1) breach of fiduciary duty and (2) gross negligence. Defendants moved to dismiss, claiming that, among other things, the business judgment rule barred plaintiff’s claims. “To establish liability for the breach of a fiduciary duty, a plaintiff must demonstrate that the defendant owed her a fiduciary duty and that the defendant breached it.” The plaintiff must also plead facts that, if proven, would overcome the presumption inherent in the business judgment rule.   The business judgment rule “is a presumption that<,> in making a business decision<,> the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.” “In a business judgment rule case, the rule applies because the board is disinterested and thus has no apparent motive to do anything other than act in the best interests of the corporation and its stockholder.” “An application of the traditional business judgment rule places the burden on the party challenging the decision to establish facts rebutting the presumption.” “If, under the facts pled in the complaint, any reasonable person might conclude that the deal made sense, then the judicial inquiry ends.”   “Only when a decision lacks any rationally conceivable basis will a court infer bad faith and a breach of duty.” “The duty of the directors of a company to act on an informed basis … forms the duty of care element of the business judgment rule.” The fiduciary duty of due care requires that a corporate fiduciary “use that amount of care which ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available in making business decisions.”   “ eficiencies” in this decision-making process “are actionable only if the actions are grossly negligent.” Under Delaware corporate law, gross negligence “has a stringent meaning …, one which involves a devil-may-care attitude or indifference to duty amounting to recklessness.” “In the duty of care context with respect to corporate fiduciaries, gross negligence has been defined as a reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason.” “By using this standard, Delaware entity law protects fiduciaries by requiring a greater showing for liability than what is required in other areas of civil law, as well as an even greater showing than what is required to obtain a conviction for criminal negligence.” This framework means that “duty of care violations are rarely found” under Delaware law. Based upon the foregoing legal principles and the allegations in the second amended complaint, the motion court denied defendants’ motion to dismiss. The motion court held that “plaintiff’s allegations are sufficient to raise an issue of fact as to gross negligence.” The court said that “ remain to be seen whether or not management made a conscious decision to trade in the lease.” The court also said that it “remain to be seen whether it was gross negligence for management to trade in the lease, while failing to realize there was a 49-year lease right, in favor of a management contract, all at the height of the pandemic.” The motion court rejected defendants’ argument that one of the bases for plaintiff’s allegations arose from settlement discussions. “It matters not at this stage,” said the motion court, “that some of plaintiff’s knowledge regarding defendants’ lack of awareness about the 49-year lease option came from settlement discussions.” Noting that “statements made in the course of settlement would not be admissible at trial,” the motion court nevertheless held that “it sufficient at this stage to support plaintiff’s good faith allegations.” “Discovery may provide further, admissible support for plaintiff’s allegations,” said the motion court. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Royal Park Invs. SA/NV v. Morgan Stanley , 165 A.D.3d 460, 461 (1st Dept. 2018). Defendants are TMO VI LLC, Icon Intermediate Holdings, LLC, TMO LLC, Icon Parking 3, LLC, Icon Parking Holdings, LLC, Icon Parking Management, LLC, Icon Parking Services, LLC, and Icon Parking Systems, LLC. Defendants TMO VI LLC and Icon Intermediate Holdings, LLC were the managing members of the Company (“Managing Members”). Estate of Eller v. Bartron , 31 A.3d 895, 897 (Del. 2011). See Cinerama, Inc. v. Technicolor, Inc. , 663 A.2d 1156, 1162-1164 (Del. 1995). MM Cos., Inc. v. Liquid Audio, Inc. , 813 A.2d 1118, 1127 (Del. 2003) (quotation omitted). In re Dollar Thrifty S’holder Litig. , 14 A.3d 573, 598 (Del. Ch. 2010). MM Cos. , 813 A.2d at 1127-1128. Harbor Fin. Partners v. Huizenga , 751 A.2d 879, 892 (Del. Ch. 1999) (internal quotations omitted); see also In re Dollar Thrifty S’holder Litig. , 14 A.3d at 598 (“ he court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objectives”). I n re Orchard Enters., Inc. S’holder Litig. , 88 A.3d 1, 34 (Del. Ch. 2014). Cinerama , 663 A.2d at 1164 n.13 (quotation omitted). In re Walt Disney Co. Derivative Litig. , 907 A.2d at 749 (internal quotations omitted). Id. ; see also Brehm v. Eisner , 746 A.2d 244, 259 (Del. 2000); In re Lear Corp. S’holder Litig. , 967 A.2d 640, 651-652 (Del. Ch. 2008). Albert v. Alex. Brown Mgmt. Servs., Inc. , 2005 WL 2130607, at *4 (Del. Ch. Aug. 26, 2005) (internal quotations omitted); see also Lear , 967 A.2d at 652 (“The definition of gross negligence used in our corporate law jurisprudence is extremely stringent.”). Walt Disney , 907 A.2d at 750; see also Solash v. Telex Corp. , 1988 WL3587, at *9 (Del. Ch. 1988) (gross negligence under the business judgment rule requires that the challenged decision “be so grossly off-the-mark as to amount to reckless indifference … or a gross abuse of discretion”) (internal citations and quotations omitted). In re McDonald’s Corp. Stockholder Derivative Litig . , 289 A.3d 343, 372 n.17 (Del. Ch. 2023); see also In re McDonald’s Corp. Stockholder Derivative Litig. , 291 A.3d 652, 689 n.21 (Del. Ch. 2023) (“To hold a director liable for gross negligence requires conduct more serious than what is necessary to secure a conviction for criminal negligence.”). Walt Disney , 907 A.2d at 750. Slip Op. at *3. Id. Id. (citing McMullin v. Beran , 765 A.2d 910, 922 (Del. 2000) (allegations sufficient that directors breached duty of care when they approved the merger without adequately informing themselves)). Id. Id. Id.

By: Jeffrey M. Haber Pre-IPO investing involves buying a stake in a company before the company makes its initial public offering of securities. Many stock promoters invite potential investors to invest in a pre-IPO offering by providing an opportunity to make high returns in a start-up enterprise on the ground floor. While investing at the pre-IPO stage can be rewarding, it involves risk for investors, including the risk of complete loss – i.e. , that the investor can lose his/her entire investment. An early-stage company may never be successful, and the share price of the stock may never appreciate in value. In addition, the company may never go public, a market for the company’s shares may never develop, and investors may be unable to resell their shares. From a regulatory perspective, pre-IPO offerings are not registered with the Securities and Exchange Commission (“SEC” or “Commission”). Unregistered securities offerings are prohibited under the federal securities laws unless an exemption from registration is available, and many potential registration exemptions do not permit companies relying on them to broadly offer their securities to the public. As such, many pre-IPO offerings may be illegal. The SEC has warned that “ raudsters may also use unregistered offerings to conduct investment scams.” In doing so, the SEC has identified a number of common red flags that investors should look out for before investing in a pre-IPO security. Unregistered Investment Professionals : Many unscrupulous promoters of pre-IPO securities are unlicensed, unregistered persons. Aggressive Sales Practices : The promoters of pre-IPO investment scams may set up “boiler rooms” and hire unregistered sales agents to solicit investors. These boiler rooms often purchase lists of investors’ contact information. An unregistered sales agent will typically start a relationship with an investor after “cold calling” them. The agent will often use a formulated script that includes answers and rebuttals to the investor’s anticipated questions. The agents may ask investors to cash out liquid investments in their 401(k) accounts and invest in pre-IPO funds . Sometimes they facilitate setting up new brokerage accounts for the investors. Social Media Solicitations : Promoters of pre-IPO investment scams may use social media to solicit victims for pre-IPO investment scams. Trending Topics : Promoters of pre-IPO investment scams may pitch the securities of companies claiming to focus on emerging technologies or industries — for example, crypto assets or artificial intelligence—to entice investors . Imminence of Offering : Promoters of pre-IPO investment scams may make claims about the timing of the IPO—for example, they may say the IPO is “imminent” or will be conducted “this year.” No Up - Front Fees : Promoters of pre-IPO investment scams may tell investors that there are no upfront fees on pre-IPO offerings when they are actually charging exorbitant, undisclosed markups. Limited Number of Shares : Promoters of pre-IPO investment scams may falsely claim to have a very limited amount of shares or to have shares at a lower price than the anticipated public offering price. Investment Opportunities Specific to An Investor : Promoters of pre-IPO investment scams may tout that they have created investment opportunities for an investor (as opposed to just for the wealthy) and falsely claim that they will not make money until you make money. The promoter may also tell investors that there are no investment limits, net worth, or income requirements for investing. Concealment of Promoter’s Background : Promoters of pre-IPO investment scams may try to hide the identity of involved individuals who have red flags in their backgrounds, such as disciplinary actions by a government regulator (including the SEC) or a self-regulatory organization (including FINRA). Pre-IPO="Pre-IPO" Investment="Investment" Scams="Scams" –="–" Investor="Investor" Alert="Alert" (June="(June" 7,="7," 2024)="2024)" ( here).=">here)."> Many of the foregoing red flags were identified in an enforcement action recently filed by the SEC in the United States District Court for the Eastern District of New York, titled: Securities and Exchange Commission v. Max Infinity Management LLC, et al. , No. 1:25-cv-00549 (E.D.N.Y. filed Jan. 31, 2025) ( here ). According to the SEC, from at least July 2021 to April 2023 (the “Relevant Period”), Defendants engaged in a scheme to defraud investors and prospective investors using boiler room-style high-pressure sales tactics, false and misleading statements, and other means of fraud and deceit to offer and sell investment fund interests purportedly representing shares of stock in private companies that had not yet held an initial public offering (“pre-IPO stock”). The investments were offered in the names of two related funds, Max Infinity Fund and Elder Fund. Through the conduct of each Defendant, which the SEC said violated the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws, Defendants raised over $70 million from more than 550 investors throughout the United States. The SEC alleged that the scheme was orchestrated and controlled by the principals of Max Infinity Management LLC and related/affiliated entities (the “Max Principals”). Two of the Max Principals are veterans in the securities industry, each with a history of disciplinary proceedings. Both were suspended by the Financial Industry Regulatory Authority (“FINRA”) during a portion of the Relevant Period and now are permanently barred by FINRA. But, said the SEC, their control of the investment funds’ operations was largely hidden from investors, while the other Max Principal, who had virtually no experience in financial services , was held out publicly as the investment funds’ owner, organizer, adviser, and, at times, manager. The SEC alleged that the Max Principals operated their fraudulent scheme through a variety of entities, including the Max Infinity Fund and Elder Fund (collectively, the “Funds” or the “Max and Elder Entities”) and two entities that operated boiler room type activities (the “Selling Entities”). According to the SEC, the Max Principals hired and trained a workforce of unregistered sales agents, including the individual Selling Defendants, to cold call and pitch pre-IPO stock to thousands of prospective investors, many of them senior citizens, using canned scripts and rebuttals that contained false and misleading statements and deceptive devices, such as fake names, fabricated credentials and successes, and spoofed telephone numbers. The SEC said that Defendants and the sales agents that they trained and managed routinely conveyed to prospective investors that the pre-IPO stock that was purportedly held in their funds would return quick profits of 200% or more, involved no upfront fees, entailed little to no risk, and would be shielded from market volatility. Defendants allegedly portrayed themselves as private equity experts working for a Commission-registered fund. Defendants and their sales agents also represented to investors that their funds had a track record of success in previously recommending pre-IPO stock, that the pre-IPO stock was “in house” at the funds, and that investors’ proceeds would be held in an escrow account until the pre-IPO company went public. The SEC alleged that “ one of this was true”. In reality, alleged the SEC, the funds were not registered with the Commission, had no track record of success, and were organized, advised, and managed by individuals with no expertise in investment fund management. Moreover, the SEC alleged that the Funds did not hold investor proceeds in escrow, investments were not shielded from market volatility, and Defendants had no reasonable basis for representing to investors that they could expect substantial short-term profits with little or no risk. In many instances, said the SEC, Defendants sold investors shares of pre-IPO stock that were not “in house,” but instead the Max Principals had acquired an interest in an unaffiliated fund purporting to have pre-IPO stock but which also was not registered with the Commission. Despite telling investors that there were no upfront fees or commissions, said the SEC, Defendants allegedly sold interests in pre-IPO stock at a price secretly marked up by 45% to over 100% above the price that the Max and Elder Entities paid to acquire the purported shares, securing immediate, substantial profits for themselves, while increasing the risk that investors would incur substantial losses. According to the SEC, Defendants used these undisclosed charges to pay sizable and undisclosed commissions to their sales agents, as well as to fund bank accounts held in the name of the relief defendants, from which monies were then withdrawn for personal expenses, including (in the case of some Defendants) to buy cars and jewelry and take expensive vacations. To date, said the SEC, only one pre-IPO company at issue had gone public, and that event resulted in substantial financial losses for fund investors . Neither Defendants nor the offer and sale of Fund interests, alleged the SEC, were registered with the Commission or eligible for an exemption from registration during the Relevant Period. As noted, the SEC filed its complaint in the United States District Court for the Eastern District of New York. The SEC charged Defendants with violating the antifraud, securities registration, and broker-dealer registration provisions of the federal securities laws. The Commission seeks permanent injunctive relief, the return of allegedly ill-gotten gains together with prejudgment interest, and civil penalties from all Defendants, and conduct-based injunctions and officer-and-director bars against certain individual defendants. ______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Investor.gov, Pre-IPO Investment Scams – Investor Alert (June 7, 2024) ( here ). Id. Id. Id. Id. Id. Id. Id.

By: Jonathan H. Freiberger As discussed in prior BLOG articles, potential clients frequently inquire about the ability to recoup legal fees in the event of litigation. Certainly, a litigant’s ability to recoup legal fees and/or be forced to pay an adversary’s legal fees might be a significant factor in deciding whether to commence a lawsuit. Generally, the answer is explained by the “American Rule,” which provides that “the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.” Alyeska Pipeline Services Co. v. Wilderness Society , 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also Mighty Midgets, Inc. v. Centennial Ins. Co. , 47 N.Y.2d 12, 21-22 (1979). The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.” Mighty Midgets , 47 N.Y.2d at 22 (citations omitted). Exceptions to the “American Rule” exist, for example, where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.” Hooper Assoc., Ltd. v. AGS Computers, Inc. , 74 N.Y.2d 487 (1989) (citations omitted); Giannakopoulos v. Figame Realty Mgt. , 219 A.D.3d 803, 805-06 (2 nd Dep’t 2023) ( quoting Hooper ); New York City Housing Authority v. Harleysville Worcester Ins. Co. , 226 A.D.3d 804, 809 (2 nd Dep’t 2024); Wolf v. Vestra SPV3, LLC , 223 N.Y.S.3d 686, 687 (2 nd Dep’t 2024). Indeed, it is not uncommon for contracts to contain language permitting a party to collect its reasonable legal fees in the event of litigation. Further, “ n general, only a prevailing party is entitled to recover an attorney's fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.” Village of Hempstead v. Taliercio , 8 A.D.3d 476 (2 nd Dep’t 2004) (citations, internal quotation marks and brackets omitted); see also Kefalas v. Valiotis , 197 A.D.3d 698, 703 (2 nd Dep’t 2021). “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.” DKR Mortgage Asset Trust 1 v. Rivera , 130 A.D.3d 774 (2 nd Dep’t 2015) (citations and brackets omitted). Today’s article is about Kasowitz, Benson, Torres & Friedman, LLP v. JPMorgan Chase Bank, N.A. , decided on January 28, 2025, by the Appellate Division, First Department. Kasowitz is a case in which the Court found the subject attorney’s fees provision to be “unconscionable”. For the purpose of this article, the complicated facts and procedural posture are abridged for editorial purposes. The proprietary lease for the subject unit in The Dakota states that The Dakota is entitled to recoup its attorney’s fees “if the Lessee shall at any time be in default hereunder, and the Lessor shall take any action against the Lessee based upon such default, or if the Lessor shall defend any action or proceeding (or claim therein) commenced by the Lessee.” (Internal quotation marks and brackets omitted.) The Court noted that the “provision makes clear that attorneys’ fees are to be awarded under two circumstances: first, when the lessee is in default; second, whenever a lessee sues The Dakota, even if The Dakota is in default.” The Court found the provision to be “unenforceable as unconscionable” because The Dakota would be entitled its attorney’s fees “regardless of default or merit, in a dispute between a residential co-op and a shareholder tenant.” The explicit provision providing for recoupment of legal fees by The Dakota whenever it is sued by a tenant (as opposed to the proprietary lease merely being silent on the issue) was a significant factor considered by the Court in rendering its decision. Nor was the fate of the provision changed using the word “reasonable”. The Court, in its decision, relied on Matter of Krodel v Amalgamated Dwellings Inc. , 166 A.D.3d 412, 413-414 (1 st Dep’t 2018), a case with similar facts (a proprietary lease in a cooperative apartment). However, the Court compared Krodel to Glaze Teriyaki LLC v MacArthur Props. I LLC , 206 A.D.3d 513, 513 (1st Dep’t 2022), where a similar provision in a commercial lease was found to be enforceable because “parties to the lease are sophisticated entities that negotiated the lease terms through counsel.” In conclusion, the Court stated that: Bearing in mind that agreements providing for payment of attorneys’ fees should be construed strictly, we will not rewrite the parties’ agreement simply because The Dakota prevailed in the underlying litigation. To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP.This article is for informational purposes and is not intended to be and should not be taken as legal advice. Eds. Note: this BLOG has written numerous articles addressing a litigant’s entitlement to legal fees. To find BLOG articles related to the recoupment of legal fees in litigation, visit the “ BLOG ” tile on our website and enter “attorney fees” (or any related topic of interest) in the “search” box. Eds. Note: this BLOG wrote about Krodel < here =">here"> when that case was decided.

By: Jeffrey M. Haber As readers of this Blog know, to recover damages for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” The element that most often spells failure for a plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. One reason for the difficulty in demonstrating justifiable reliance is the presence of a disclaimer clause in the parties’ contract. In prior articles, we have discussed the impact a disclaimer clause can have on a fraud claim. Namely, a disclaimer clause can preclude a fraud claim when (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. In KSFB Mgt., LLC v. Focus Fin. Partners, LLC , 2025 N.Y. Slip Op. 50061(U) (Sup. Ct., N.Y. County Jan. 22, 2025 ( here ), the court examined, among other claims, fraud-based claims and the impact of disclaimers clauses on those claims. As discussed below, the court dismissed the fraud-based claims on the basis of those disclaimer clauses . KSFB involved an alleged scheme by defendants to mislead KSFB Management, LLC (“KSFB”) into pursuing a combined sale of KSFB and NKSFB, LLC (“NKSFB”), a wholly owned subsidiary of defendant Focus Financial Partners, LLC (“Focus”), while defendants secretly consummated a purportedly competing transaction without KSFB. The parties’ dispute dates back to 1981, with the formation of Nigro Karlin & Segal, an accounting firm. Eventually becoming Nigro Karlin Segal Feldstein & Bolno LLC (“Nigro Karlin”), the firm developed into a business management company providing concierge-style services to high-net-worth individuals. On April 1, 2018, Nigro Karlin and its principles sold its assets—including employees, revenue, and operating expenses—to Focus, an investor in fiduciary wealth and business management firms. Nigro Karlin’s assets were placed into NKSFB. Simultaneously, the principals of Nigro Karlin formed KSFB. Sometime following the sale of Nigro Karlin, KSFB and Focus entered into a Management Agreement pursuant to which KSFB provided management services to facilitate NKSFB’s business of providing family office, business management, consulting, tax, and other client services (the “NKSFB Business”) for a fee calculated based on NKSFB’s profits. This arrangement continued for years, allowing NKSFB to grow into Focus’s most valuable business management asset. By early 2022, the principals of KSFB considered future opportunities in anticipation of the expiration of a non-competition period in 2023. As its principals considered their options, KSFB proposed having Focus purchase KSFB’s business. Conversely, if Focus was not interested, KSFB advised that they would offer KSFB for sale elsewhere in the market or start a business to compete in the same market as NKSFB. According to the complaint, unbeknownst to NKSFB, Focus wanted to capitalize on NKSFB’s success and was working, together with its long-time investment adviser , defendant Goldman Sachs & Co. LLC (“Goldman Sachs”), to sell itself and NKSFB in a deal with a third party. By June 2022, several investors had expressed interest in such an acquisition, including, as is relevant to the action, Clayton Dubilier & Rice LLC (“CD&R”). KSFB alleged that Focus understood that the departure of either KSFB or its principals would undermine or devalue any potential deal with CD&R or other investors. As a result, Focus was determined to prevent KSFB from leaving its management role with NKSFB, and it pursued various strategies in furtherance of that goal. On September 1, 2022, Focus proposed that it and KSFB team up to pursue a joint sale with KSFB of the NKSFB Business (the “Joint NKSFB Sale”). In furtherance of this proposal, Focus allegedly urged KSFB to retain Goldman Sachs to advise and assist with the joint sale. Initially, KSFB was opposed to Goldman Sachs’s involvement, citing concerns of a potential conflict of interest in having Goldman Sachs jointly represent KSFB and Focus. Nonetheless, over time, KSFB was convinced by Goldman Sachs’s Head of FIG Americas, that Goldman Sachs, Focus, and KSFB were fully aligned on the same goals. KSFB therefore agreed in principle that Goldman Sachs would serve as its representative for the Joint NKSFB Sale. But as alleged, KSFB contended that Goldman Sachs’s representations ultimately proved to be false because it was secretly engaged with Focus to find a buyer for Focus and the NKSFB Business without KSFB. KSFB began sharing information with Goldman Sachs about the NKSFB Business and its financials in order to provide Goldman Sachs with a deep knowledge of the business and, in turn, facilitate a potential sale. In purportedly keeping up a pretense that Focus and Goldman Sachs were committed to such a transaction, Goldman Sachs began advising Focus and KSFB through the process of identifying buyers and soliciting their bids. Through this process, Goldman Sachs identified over two dozen potential buyers for the NKSFB Business, and it set up various in-person meetings with these buyers throughout December 2022 and into January 2023. Notably, KSFB alleged, Goldman Sachs never identified CD&R as a potential buyer for the Joint NKSFB Sale. The reason why, KSFB alleged, is because Goldman Sachs and Focus were simultaneously seeking to secure a deal with CD&R for the sale of Focus and NKSFB (but not KSFB). According to KSFB, Focus and Goldman Sachs’s efforts to secure a deal with CD&R began in March 2022, when Focus’s Board of Directors (the “Board”) met with Goldman Sachs to discuss long-term strategic goals and plans for the company, including a potential sale of Focus. In June 2022, after the Board approved a study of potential financing and strategic opportunities, Focus met with representatives of CD&R to discuss a potential acquisition. On September 14, 2022, CD&R submitted a written offer to acquire Focus. The offer came two days before Focus and Goldman Sachs convinced KSFB to hire Goldman Sachs for the Joint NKSFB Sale. Although it did not accept the offer, the Board authorized additional due diligence materials to be made available to CD&R, including Focus’s long-term financial projection and, as alleged upon KSFB’s information and belief, KSFB’s confidential information provided pursuant to an NDA. KSFB maintained that, with CD&R receiving non-public due diligence materials, Focus and Goldman continued its “secret” negotiations with CD&R while simultaneously negotiating terms of the NDA with KSFB. By late January 2023, Focus and Goldman Sachs were purportedly nearing a definitive deal with CD&R. At no point, KSFB averred, did either Focus or Goldman Sachs disclose their negotiation efforts with CD&R. KSFB alleged that they instead went through the motions to ensure that KSFB remained aligned with NKSFB so as to retain CD&R’s interest in purchasing Focus and NKSFB. According to KSFB, Focus and Goldman Sachs were aware that KSFB had no knowledge of its secret negotiations with CD&R and, if those negotiations were discovered, they would be exposed to significant liability. As a result, on January 25, 2023, Goldman Sachs insisted that KSFB sign an engagement letter with it (“Engagement Letter”). The Engagement Letter came just days prior to Focus and CD&R entering an exclusivity agreement. In the Engagement Letter, Goldman Sachs continued to represent that it was “exclusively engaged” by Focus and KSFB as “financial advisor in connection with the possible sale of all or a portion of (i) NKSFB . . . and/or (ii) KSFB”. The parties agreed that (i) Goldman Sachs would advise on a collective basis, (ii) that no company would be advised independently of the other, (iii) Goldman Sachs would not negotiate for one company against the other with respect to any issue which could arise in connection with the transaction, and (iv) unless otherwise directed in writing, Goldman Sachs could share any information it received from one company with any other company. But notwithstanding the foregoing acknowledgments, each party to the Engagement Letter also expressly agreed that “Goldman Sachs[] may currently be providing and may in the future provide financial advisory and/or other investment banking services that could impact the transaction contemplated by this letter.” Separately, the Engagement Letter included various terms that, in KSFB’s view, were intended to insulate Goldman Sachs from liability. For example, the Engagement letter stated that Focus and KSFB “understand[] and acknowledge[] that potential conflicts of interest, or a perception thereof, may arise as a result of” Goldman Sachs’s representation of both Focus and KSFB, and thus the parties agreed that such a situation “will not give rise to any claim of conflict of interest against Goldman Sachs.” The Engagement Letter further provided that “nothing in this letter or the nature of services in connection with this engagement or otherwise shall be deemed to create a fiduciary duty or fiduciary or agency relationship between” Goldman Sachs and Focus and KSFB, and “each of agrees that it shall not make, and hereby waives, any claim based on an assertion of such a fiduciary duty or relationship.” KSFB maintained that, by the time it signed the Engagement Letter, it had been led to believe that Focus and Goldman Sachs were genuinely committed to a joint transaction. KSFB alleged that it reasonably relied on defendants’ conduct, including their purported assurances that Focus and Goldman Sachs were committed to the Joint NKSFB Sale, and signed the Engagement Letter. On February 2, 2023, KSFB discovered that, unbeknownst to KSFB, Focus had entered into an exclusivity agreement with CD&R to negotiate the terms of a definitive agreement for CD&R to acquire Focus at $53 per share. KSFB further averred that such a deal would necessarily have involved NKSFB. Several weeks later, on February 27, 2023, Focus revealed in a press release that it had reached a definitive agreement for CD&R to acquire Focus in an all-cash transaction with an enterprise value of $7 billion. It is through this press release that KSFB contended it learned that Goldman Sachs was acting as Focus’s financial advisor for the transaction while simultaneously searching for a prospective buyer for the NKSFB Business. KSFB alleged that the CD&R transaction necessarily relied on KSFB’s confidential information so as to sell Focus on the most favorable terms possible, and it also directly conflicted with the joint sale of the NKSFB Business by including one of the assets that were contemplated in that potential transaction. KSFB maintained that, by stringing it along for months until the CD&R acquisition closed, Focus and Goldman enriched themselves at KSFB’s expense. KSFB further explained that Focus and KSFB had substantially similar business profiles, and thus defendants’ conduct spoiled the market for a transaction involving the NKSFB Business or KSFB. KSFB commenced the action on February 8, 2024, asserting claims for (i) breach of the NDA against Focus and Goldman Sachs (Count I); (ii) breach of the covenant of good faith and fair dealing against Focus and Goldman Sachs (Count IV); (iii) fraudulent concealment, misrepresentation, and inducement against all defendants, as well as declaratory judgment regarding the enforceability of the allegedly fraudulently induced Engagement Letter (Counts VI, VII, & IX — the Fraud-Based Claims); (iv) breach of fiduciary duty against Goldman Sachs and aiding and abetting breach of fiduciary duty against Focus and certain individuals (Counts II & III); (v) tortious interference with prospective economic advantage (Count V); and (vi) unjust enrichment (Count VIII). Defendants moved to dismiss each of the foregoing claims. We examine the motion court’s decision concerning the Fraud-Based Claims . Defendants sought dismissal of the Fraud-Based Claims because the claims were “contradicted by express disclaimers in the Engagement Letter” and otherwise failed to allege justifiable reliance or intent to deceive. For numerous reasons, the motion court dismissed the Fraud-Based Claims. First, the motion court held that “KSFB ha not plausibly alleged justifiable reliance on defendants’ purportedly false representations and omissions because any such reliance belied by the specific disclaimers regarding conflicts and exclusivity set forth in the Engagement Letter.” The motion court explained that “as part of the Engagement Letter, KSFB expressly agreed that ‘potential conflicts of interest, or a perception thereof, may arise as a result of rendering services to’ Focus and KSFB, and that the interests of Focus and KSFB ‘may not always be aligned.’” The motion court further explained that “the Engagement Letter … clarified … Goldman Sachs’s financial advisory services were intended to cover a ‘possible sale of all or a portion of’ the NKSFB Business ‘and/or’ KSFB.” The motion court held that “ hese not, as KSFB suggest , mere boilerplate disclaimers.” “To the contrary,” said the motion court, “construed in the context of the entire Engagement Letter, these representations contemplated the exact conflict at the center of KSFB’s claims, i.e. , a situation wherein Goldman Sachs, in the course of advising … Focus in the Joint NKSFB Sale, could advise on other potential options favorable to Focus, but not necessarily KSFB, regarding a contemplated sale of ‘all or a portion of’ the NKSFB Business.” “Consequently,” concluded the motion court, “the Engagement Letter’s specific and unambiguous conflict-of-interest disclaimer necessarily defeat KSFB’s fraud claims premised on the No Conflicts Representation.” The motion Court also held that KSFB’s Fraud-Based Claims premised on the Exclusive Engagement Representation were “similarly precluded by plain terms of the Engagement Letter.” “ ike the No Conflicts Representation,” said the motion court, “this situation was also expressly contemplated by the parties in the Engagement Letter.” “Indeed,” explained the motion court, “KSFB specifically acknowledged in the Engagement Letter that Goldman Sachs ‘may currently be providing and may in the future provide financial advisory and/or other investment banking services that could impact the transaction contemplated by this letter.’” “Again,” explained the motion court, “this not a boilerplate disclaimer that untethered to the claims at issue in this litigation . Rather, this disclaimer clear and specific, and it plainly contemplate the situation about which KSFB now complain .” Therefore, concluded the motion court, KSFB could not “plausibly allege that it was led to believe that the Joint NKSFB Sale was the only and exclusive transaction being contemplated by Goldman Sachs and Focus when it signed the Engagement Letter and agreed to continue pursuing the Joint NKSFB Sale.” Second, even if the Engagement Letter did not bar KSFB’s Fraud-Based Claims , the motion court held that the “they would still be dismissed insofar as they based on a concealment or omission theory.” For claims based on fraudulent concealment or omissions, a complaint must also allege a duty to disclose. This requires a showing of a fiduciary relationship or some other circumstances establishing an affirmative duty to disclose material facts. Generally, there is no duty to disclose in a transaction that is “at arm’s length, between sophisticated commercial parties ….” The motion court found that the complaint “paint a picture of a quintessential arm’s length transaction involving sophisticated parties with an extensive history and business relationship exploring the possibility of a joint sale of the NKSFB Business.” “There is nothing alleged that supports a conclusion, or even reasonable inference, that Goldman Sachs, Focus, or either’s principals, had a fiduciary relationship with KSFB or that there was some other affirmative duty to disclose material facts to KSFB as part of the Joint NKSFB Sale” said the motion court. The motion court rejected KSFB’s suggestion that defendants had superior knowledge of their participation in a competing transaction and, thus, were obligated to disclose that information to it. A duty to disclose exists where a party has superior knowledge of certain information. But, “superior knowledge of … alleged wrongdoing … and … admitted wrongdoing is not the type of unique or specialized expertise that would” give rise to a duty to disclose information. To establish a special relationship mandating disclosure of information acquired through superior knowledge, a plaintiff must allege that the defendant is a “person[] who possess unique or specialized expertise, or who in a special position of confidence and trust.” The motion court found that there was “no such ‘special relationship’ alleged in or even reasonably inferred from the Complaint.” Finally, the motion court held that “to the extent KSFB claims that it was induced to enter into the Engagement Letter because defendants purportedly withheld their use of confidential information under the NDA, this aspect of KSFB’s claim duplicative of its breach of contract claim.” __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also Genger v. Genger , 152 A.D.3d 444, 445 (1st Dept. 2017). Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). Slip Op. at *5-*6. Id. at *6. Id. (citing Suber v. Churchill Owners Corp. , 228 A.D.3d 414, 415 (1st Dept. 2024)). Id. Id. Id. Id. Id. at *6-*7 (quoting Fifth Partners LLC v. Foley , 227 A.D.3d 543, 543-544 (1st Dept. 2024)). The No Conflicts Representation refers to defendants’ alleged misrepresentations that “there was ‘no conflict’” in having Goldman Sachs serve as KSFB’s and Focus’s investment advisor. Id. at *5. Id. at *7. The Exclusive Engagement Representation refers to defendants creating a false impression that Focus and Goldman Sachs were exclusively engaged in the process of soliciting bidders for the Joint NKSFB Sale. Id. at *5. Id. Id. Id. Id. at *7-*8 (citing First Inter-County Bank of N.Y. v. DeFilippis , 160 A.D.2d 288, 290 (1st Dept. 1990)). Id. at *8. Kaufman v. Cohen , 307 A.D.2d 113, 119-120 (1st Dept. 2003). See SNS Bank v. Citibank , 7 A.D.3d 352, 356 (1st Dept. 2004). See Cobalt Partners, L.P. v. GSC Capital Corp. , 97 A.D.3d 35, 42-43 (1st Dept. 2012). Slip Op. at *8. Id. Id. See Banque Arabe et Internationale D’Investissement v. Maryland Natl. Bank , 57 F.3d 146, 155 (2d Cir. 1995). RKA Film Fin., LLC v. Kavanaugh, 171 A.D.3d 678, 680 (1st Dept. 2019) (alterations in original). Kimmell v. Schaefer , 89 N.Y.2d 257, 263 (1996). Slip Op. at *8. Id. at *9. (citing 110 E. 138 Realty LLC v. Rydan Realty, Inc. , 210 A.D.3d 513, 514 (1st Dept. 2022)).

By: Jeffrey M. Haber We have written frequently about the substance and scope of general releases.  In New York, “a valid release constitutes a complete bar to an action on a claim which is the subject of the release.” If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” For this reason, “ release should never be converted into a starting point for … litigation except under circumstances and under rules which would render any other result a grave injustice.” “Although a defendant has the initial burden of establishing that it has been released from any claims, a signed release ‘shifts the burden of going forward … to the to show that there has been fraud, duress or some other fact which will be sufficient to void the release.’”   “A plaintiff seeking to invalidate a release due to fraudulent inducement must ‘establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.’” A party that releases “a fraud claim may later challenge that release as fraudulently induced only if it can identify a separate fraud from the subject of the release.”  Id . (citation omitted). “Were this not the case,” observed the Court of Appeals, “no party could ever settle a fraud claim with any finality.”  Id . In Jones v. Jacobs , 2025 N.Y. Slip Op. 00377 (1st Dept. Jan. 23, 2025) ( here ), the foregoing principles were before the Appellate Division, First Department. Jones involved a breach of contract action arising out of a claimed business partnership pursuant to which the parties allegedly agreed that plaintiff would provide funds to defendant to place wagers on DraftKings Sportsbook (“DraftKings”), an online sports betting company, and split the profits. Plaintiff claimed that he made payments to defendant, that defendant placed wagers on the site, realized profits, and that the winnings either remained in defendant’s DraftKings account, or were collected and diverted by defendant. In January 2023, plaintiff asked defendant to reimburse him for the initial loan and distribute the profits. According to plaintiff, defendant converted the funds and implemented a fraudulent scheme that was intended to impair plaintiff’s ability to recover the money. Plaintiff allegedly made a number of requests that defendant take steps to compel DraftKings to pay the money into defendant’s account. Since DraftKings is licensed by the State of New York, and under the direct administrative supervision of the New York State Gaming Commission (“Gaming Commission”), plaintiff urged defendant to file an administrative complaint with Gaming Commission believing that this would compel DraftKings to release the money. According to plaintiff, defendant created a fictitious “Administrative Complaint”. In doing so, defendant advised plaintiff that he needed protection from claims that he would be responsible for the failure of DraftKings to pay him the money in the event the Administrative Complaint was unsuccessful. To address this alleged concern, defendant allegedly induced plaintiff to execute a release. The release, which the parties signed, was contingent on defendant filing the complaint with the Gaming Commission by February 8, 2023. Plaintiff signed the release agreement based on defendant’s representation that he had already filed the Administrative Complaint with the Gaming Commission to compel DraftKings to release the money. When plaintiff signed the release agreement, he allegedly did not know that defendant had withdrawn the complaint minutes after it was submitted online. Defendant maintained that the release agreement came about because of threats by plaintiff to commence legal action against him. The release agreement, which was executed on February 22, 2023, contained a broad release of liability: Each Party ... hereby releases, waives, and forever discharges the other Party ... of and from any and all actions, causes or action, suits, losses, liabilities, rights, debts, dues, sums of money ... contracts, controversies, agreements, promises ... damages, judgments ... claims, and demands, of every kind and nature whatsoever, whether now known or unknown, foreseen or unforeseen, matured or unmatured, suspected or unsuspected, in law, admiralty, or equity, which any of such Releasors ever had, now have. or hereafter can shall or may have against any of such Releasees ... from the beginning or time through the date of this Agreement. Plaintiff alleged that when he signed the release agreement, he relied upon defendant’s representations and had no means of ascertaining the truth. Plaintiff sued defendant, asserting claims for breach of contract, fraud, conversion, unjust enrichment, breach of fiduciary duty and rescission. Defendant moved, pursuant to CPLR 3211(a)(5), to dismiss the complaint on the grounds that any claims against him had been released. The motion court granted the motion. The motion court held that “the Release clear, broad and unambiguous, encompass all claims, including those based on facts that may not be known at the time.” The motion court found that “the Release expressly stated that Plaintiff did not rely on any representations made by Defendant outside of the Release.” Therefore, concluded the motion court, “Plaintiff precluded from claiming reliance on Defendant’s “artful and false communications”. In reaching the foregoing conclusion, the motion court explained that “Plaintiff’s claim for fraudulent inducement fall[] outside the scope of the Release.” The motion court further explained that plaintiff did “not identify a separate and distinct fraud from that contemplated by the Release.” Rather, said the motion court, the fraud of which plaintiff complained pertained to defendant “depriv him of a share of gambling winnings by inducing him to sign the Release.” Addressing the Administrative Complaint, the motion court held that the allegation was not actionable because it predated the execution of the release agreement: “the allegedly deceptive representations and conduct of Defendant concerning the complaint to the New York State Gaming Commission … involve acts that pre-date the Release.” Plaintiff appealed. The First Department “unanimously reversed” the motion court’s order. The Court found that plaintiff “sufficiently allege that the general release that was the basis for dismissal of the complaint was fraudulently induced based on defendant’s misrepresentations upon which plaintiff justifiably relied.” “For example,” said the Court, “the complaint alleges, among other things, that defendant induced plaintiff’s signature on the release by stating that if plaintiff did not sign, defendant would withdraw a New York Gaming Commission complaint that plaintiff had urged defendant to file, when, in fact, there was no complaint to withdraw because defendant had falsely represented he had filed the complaint.” The Court concluded “that dismissal of the complaint based on the release was not warranted” because a detailed analysis of the complaint showed that “‘plaintiff had sufficiently alleged the existence of overreaching or unfair circumstances such that enforcement of the general release[] would be inequitable.’” Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside. In Jones , plaintiff broadly released all claims he had against defendant. The release language was expansive and released “any and all” claims whether known or unknown against defendant “from the beginning or time through the date of this Agreement.” For the motion court, such language was broad enough to cover the claims asserted in plaintiff’s complaint. However, as the First Department found, the release was induced by fraud— i.e. , fraudulent representations that were separate from the fraud alleged in the complaint. ___________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See here , here , here , here , here , here , here , here , and here . Global Minerals & Metals Corp. v. Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). Booth v. 3669 Delaware, Inc. , 92 N.Y.2d 934, 935 (1998) (quoting Mangini v. McClurg , 24 N.Y.2d 556, 563 (1969)). See also Centro Empresarial Cempresa S.A. v. AmÉrica MÓvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011). Id. (internal quotation omitted). Centro Empresarial Cempresa , 17 N.Y.3d at 276 (“A release may be invalidated, however, for any of the traditional bases for setting aside written agreements, namely, duress, illegality, fraud, or mutual mistake”) (internal quotation marks and citation omitted) (quoting  Fleming v . Ponziani, 24 N.Y.2d 105, 111 (1969)). Id. (quoting  Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 98 (1st Dept. 2006)). Slip Op. at *1. Id. (citing Wimbledon Fin. Master Fund, Ltd. v. Weston Capital Mgt. LLC , 160 A.D.3d 596, 598 (1st Dept. 2018); CyCan, LLC v. Palladian Health, LLC , 217 A.D.3d 1446, 1449-1450 (4th Dept. 2023)). Id. Id. (quoting Trump v. Trump , 217 A.D.3d 594, 594 (1st Dept. 2023), lv. denied , 41 N.Y.3d 906 (2024)). Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (Sup. Ct., N.Y. County 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1st Dept. 2006).

By: Jonathan H. Freiberger As readers of this BLOG know, we frequently address issues involving mortgage foreclosure, generally, and notices of pendency, specifically. Today’s article involves both issues with a sprinkle of sanctions. By way of background, and as explained in prior articles, a notice of pendency (or lis pendens ) is a provisional remedy available to litigants seeking a judgment that affects title to real property. 5303 Realty Corp. v. O&Y Equity Corp. , 64 N.Y.2d 313 (1984). The purpose of a notice of pendency is to put defendants and the rest of the world on notice of the full scope of the rights claimed by plaintiffs to defendants’ real property. Sjogren v. Land Assoc., LLC , 223 A.D.3d 963, 965 (3 rd Dep’t 2024). Notices of pendency are governed by Article 65 of the CPLR. The filing of notices of pendency is typical in mortgage foreclosure actions. In fact, a notice of pendency must be filed at least twenty (20) days before a judgment of foreclosure and sale is rendered. See RPAPL 1331 . Because the “ability to file a notice of pendency is a privilege that can be lost if abused,” once lost a successive notice of pendency may not be filed after the initial notice is cancelled. In re Sakow , 97 N.Y.2d 436, 441 – 42 (2002) (citations omitted). The “no second chance” rule applies whether the notice expires or is cancelled. Id . An exception to the “no second chance” rule is found in CPLR 6516 , which permits successive notices of pendency in mortgage foreclosure actions due to the mandate found in RPAPL 1331. The import of a notice of pendency was discussed by the Appellate Division, Second Department, on January 22, 2024, in U.S. Bank National Association v. Tait . The borrower in Tait borrowed money from the lender and secured the repayment obligations with a mortgage on real property located in Queens, New York (the “Property”). In 2015, the lender commenced a foreclosure action and, at the same time, filed a notice of pendency. Approximately three (3) months after the notice of pendency was filed “nonparty Innovation Two, Inc. (hereinafter Innovation), allegedly purchased the subject property from the .” The borrower defaulted in appearing in the action and the trial court issued an order of reference and a judgment of foreclosure and sale in 2015 and 2016, respectively. A foreclosure sale was scheduled for April 22, 2022, and Innovation, pursuant to CPLR 5015(a) , moved to vacate the order and judgment because Innovation was not served with notice of entry of the order of reference. The lender cross-moved for sanctions pursuant to 22 NYCRR 130-1.1 . The trial court denied the motion and cross-motion and Innovation appealed. For a variety of reasons, the Second Department affirmed. First, the Court noted that Innovation failed to move to intervene in the action pursuant to CPLR 1012(a)(3) . Second, the Court found that the application was untimely under CPLR 5015(a)(1) because the application was made more than one (1) year after service of notice of entry of the related order and judgment. Third, vacatur under the “interest of justice” standard was unwarranted. Regarding the filing of the notice of pendency, the Court noted, inter alia , that “ ” person whose conveyance is recorded after the filing of a notice of pendency is bound by all proceedings taken in the action after such filing to the same extent as if he or she were a party.” (Citations, internal quotation marks, ellipses, and brackets omitted.) Thus, the Court held that: Here, the notice of pendency was filed in March 2014, before Innovation allegedly obtained title to the subject property. As such, Innovation had constructive notice of this foreclosure action, and its interest in the property was effectively foreclosed upon entry of the judgment of foreclosure and sale. Accordingly, the Supreme Court properly denied Innovation’s motion pursuant to CPLR 5015(a) to vacate the order and judgment of foreclosure and sale. [Citations, internal quotation marks and brackets omitted Finally, the Court, in addressing the appropriateness of sanctions, stated: The plaintiff seeks costs in the form of reimbursement of reasonable attorneys' fees and expenses incurred in defending this appeal pursuant to 22 NYCRR 130-1.1(c), alleging that Innovation's conduct in taking this appeal was frivolous. A court, in its discretion, may award to any party or attorney in any civil action or proceeding before the court costs in the form of reimbursement for actual expenses reasonably incurred and reasonable attorney's fees, resulting from frivolous conduct. Although the advancement of a meritless position may serve as the basis for a finding of frivolity, the standard for such a showing is high: the rule provides that a position will be deemed frivolous only where it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law. The party seeking sanctions has the burden to demonstrate that its opponent's conduct was frivolous within the meaning of 22 NYCRR 130-1.1(c). Here, the plaintiff appears to have met that burden. Prior to making the motion, by notice of motion, that is the subject of this appeal, Innovation submitted an order to show cause requesting the same relief, which the Supreme Court declined to sign, explaining that Innovation's application was without merit as it lacked standing. This Court denied Innovation's application pursuant to CPLR 5704 to execute the order to show cause, and apparently that same day Innovation made the underlying motion, without asking for leave to intervene. Further, Innovation filed this appeal despite the Supreme Court's warning that should it "file a motion on notice or Order to Show Cause seeking exactly the same relief as in the prior Orders to Show Cause and the underlying motion, plaintiff may move for sanctions. Innovation's conduct in pursuing the instant appeal appears to be completely without merit in law or fact and unsupported by a reasonable argument for an extension, modification, or reversal of existing law, or undertaken primarily to delay or prolong the resolution of litigation. Moreover, although the plaintiff has not requested that this Court impose a financial sanction against Innovation and/or its counsel, this Court may do so on its own motion, after a reasonable opportunity to be heard ( see 22 NYCRR 130-1.1 ). Accordingly, for the reasons stated above, the parties to this appeal are directed to submit affirmations or affidavits on the issue of the imposition of sanctions and/or costs against Innovation and/or its counsel pursuant to 22 NYCRR 130-1.1(c). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. To find one of our numerous BLOG articles related to mortgage foreclosure, visit the “ Blog ” tile on our website and enter “mortgage foreclosure,” “notice of pendency” or any other search term in the “search” box. This Blog has written about CPLR 5015. See, e.g., < here =">here"> ,< here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]

By: Jeffrey M. Haber In New York, litigants often grapple with the appropriate limitation period to apply to breach of fiduciary claims. There is no single statute of limitations that the courts and the parties can look to. “Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks.” “Where the remedy sought is purely monetary in nature, courts construe the suit as alleging ‘injury to property’ within the meaning of CPLR 214 (4), which has a three-year limitations period.” “Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213 (1) applies.” Moreover, “where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213 (8).” In considering the appropriate limitations period, the courts are careful not to elevate form over substance. Thus, for example, where a plaintiff uses “the term ‘disgorgement’ instead of other equally applicable terms such as repayment, recoupment, refund, or reimbursement,” it “should not be permitted to distort the nature of the claim so as to expand the applicable limitations period from three years to six.” Regardless of whether the three-year limitations period or the six-year limitations period applies, the period may be tolled under the continuous wrong doctrine. Under the doctrine, “ here there is a series of continuing wrongs,” the statute of limitations is tolled “until the date of the commission of the last wrongful act.” “The doctrine ‘may only be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct. The distinction is between a single wrong that has continuing effects and a series of independent, distinct wrongs.’” “The doctrine is<, therefore,> inapplicable where there is one tortious act complained of since the cause of action accrues in those cases at the time that the wrongful act first injured plaintiff and it does not change as a result of ‘continuing consequential damages.’” See,  e.g. ,="occasions. See, e.g.," here,=">here," >here,  here.=">here."> The initial burden of establishing that the limitations period bars the challenged claim is on the movant. “To meet its burden, the defendant must establish, inter alia , when the plaintiff’s cause of action accrued.” “A breach of fiduciary duty claim accrues where the fiduciary openly repudiates his or her obligation – i.e. , once damages are sustained.” Importantly, “ o determine timeliness, consider whether plaintiff’s complaint must, as a matter of law, be read to allege damages suffered so early as to render the claim time-barred.” As readers might expect, the determination of whether a fiduciary duty claim is equitable or monetary, or whether the claim is dependent on fraudulent and deceitful conduct, is not always easy. Not surprisingly, the reporters are brimming with cases in which the courts have to decide the appropriate statute of limitations to apply to a breach of fiduciary duty claim. One such case was recently decided by Justice Andrea Masley of the New York Supreme Court, New York County, Commercial Division. Dixie v. Scheer , 2025 N.Y. Slip Op. 30167(U) (Sup. Ct., N.Y. County Jan. 11, 2025 ( here ).    Dixie involved an individual and shareholder derivative action brought by plaintiff on behalf of New Amsterdam Distributors, LLC (“NAD”) and Terriodiol Ohio LLC (“TO”). Plaintiff alleged that he was a founding member of NAD, which through NYCI Holding, LLC (“NYCI”) owned a 50% interest in nonparty NYCANNA LLC. NYCI is solely owned by NAD. Plaintiff possessed a 13% ownership interest in NAD. In May 2015, NAD and nonparty EPMMNY, LLC discussed the formation of a partnership to jointly pursue a medical cannabis license. NAD retained defendants to provide legal services, including the formation of NYCANNA for the purpose of pursuing the license. On November 20, 2016, defendants sent NAD’s principals notice that NYCANNA was merging with nonparty NY Medicinal Research and Caring, LLC (“NYMRC”). The merger allegedly diluted plaintiff’s equity interest as it substantially divested NAD’s members of their ownership interests. Specifically, Plaintiff alleged that defendants conspired with the incoming investors to, among other things, divest NAD of its interest in NYCANNA. In May 2017, the New York State Department of Health awarded a medical marijuana license to NYCANNA. Thereafter, defendants introduced plaintiff to an individual who had an existing relationship with one of the defendants. At defendants’ recommendation, the individual became a member and manager of NAD (the “Manager”). Plaintiff alleged that he was sidelined as defendants and the Manager essentially seized control of NAD. In May 2018, NYCI sold its fifty percent interest in NYCANNA to nonparty High Street Capital Partners (“High Street”). Plaintiff alleged that defendants structured the transaction so that High Street acquired all of NYCANNA’s equity. NAD’s officers, including plaintiff were removed as NYCANNA’s management, leaving it a mere shell company. According the complaint, the transaction came about after the Manager met with representatives from High Street. Following the meeting, plaintiff was informed that there was going to be a $2 million cash call, and that if he did not meet the call by investing the necessary cash, his percentage ownership in NYCANNA would be reduced. Plaintiff was also allegedly presented an alternative to the cash call—selling NYCANNA to High Street. According to plaintiff, the transaction needed to be approved by the NYCANNA shareholders within eight hours. Plaintiff was allegedly told that the value of the transaction would be approximately $40 million based on the stock valuation. The consideration for the sale of NYCI’s interest in NYCANNA to High Street was cash and stock in High Street. Plaintiff and the other NAD members approved the transaction allegedly based upon defendants’ representations. Plaintiff alleged that defendant violated his fiduciary duty to the NAD members by falsely advising that the transaction was favorable to NYCANNA, NYCI and NAD, and immediate approval was necessary, thereby depriving them of the opportunity to conduct a proper due diligence investigation of the proposed transaction. On September 25, 2018, High Street that announced it would go public in Canada by performing a reverse takeover of a publicly traded entity, nonparty Applied Inventions Management Corp. As a part of the transaction, a 6-month lockup period governed High Street’s shares. On November 15, 2018, High Street went public, starting the lockup period. The lockup period had three phases, ending on May 15, 2019. Defendant estimated that High Street’s stock would be worth about $24 per share during the course of the redemption period. However, immediately before the first tranche of stock was eligible for release, defendants informed the NAD members that their shares were not going to be released, attributing the failure on some NAD members to sign additional necessary paperwork. Plaintiff maintained that those members signed the additional documents but delays still occurred. On March 25, 2019, NYCI’s board of managers held a special meeting to authorize the transfer of 20% of High Street’s shares from NYCI to NAD. They also authorized the transfer of all High Street shares due to the Manager (through an entity) from NYCI to the entity’s name. After further delay, on April 16, 2019, defendant emailed High Street, seeking transfer of the shares to the NAD members. High Street responded that more than a letter was needed before a transfer of shares could be approved. On April 25, 2019, defendant sent an email to NYCI’s board of managers stating that the initial NYCI authorization to transfer shares did not meet High Street’s requirements, and that that the NYCI Board of Directors needed to specifically approve the distribution directly from NYCI to the NAD members. Plaintiff alleged further delay in the transfer, which caused him to miss the opportunity to sell his shares during a High Street stock rally in April 2019. The stock reached a high of $24.13 per share, but it was not until September 2019 that Plaintiff received 50% of his shares; the stock value at that point was around $2 a share. According to the complaint, only in March 2022 did Plaintiff receive the balance of his stock transfer at barely over penny stock value. Plaintiff alleged that defendants engaged in similar conduct with respect to a venture in Ohio. Plaintiff claimed that he was also a founding member of TO, which was formed in 2018, to apply for a medical marijuana license in Ohio. According to plaintiff, defendants brought in the Manager to run TO. Plaintiff claimed that, without his knowledge, the Manager arranged a sale of TO’s pending license to another company for $20 million. The deal fell through. Thereafter, TO entered into a new deal with another company. Plaintiff alleged that he was not aware of the proposed transaction for approximately one year. Plaintiff asserted claims for breach of fiduciary duty , a derivative claim on behalf of NAD pursuant to Business Corporation Law (“BCL”) § 626 for legal malpractice, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and fraud against defendants, as well as a derivative claim on behalf of TO pursuant to BCL § 626 for breach of fiduciary duty and negligence against defendants. Defendants moved to dismiss the fiduciary duty claim concerning the alleged delay in transferring the High Street stock, claiming, among other things, that the claim was time barred. Defendants maintained that the three-year limitations period applied; plaintiff argued that the six-year limitations period applied because his claim was based on unjust enrichment, which is equitable in nature. The Court found that the plaintiff only sought monetary relief. To underscore the point, the Court noted that plaintiff advised that he would be seeking disgorgement of profits and legal fees as the result of the breach, though he had not yet amended his complaint to include such relief. The Court rejected plaintiff’s “assertion that the breach of fiduciary claim rooted in fraud.” The Court noted that the breach of fiduciary duty claim was based on two alleged actions – “failing to diligently pursue the necessary process for transferring the shares” and giving “erroneous tax advice.” “Although argue … that induced to authorize and sign off on the mergers without informing him of the terms or conditions of such, that conduct<, said the court,> is not alleged in connection with the breach of fiduciary duty claim.” “The conduct that is alleged,” explained the Court, “involve ‘allegedly impaired professional judgment;’ this claim as plead is not essentially a fraud claim.” The Court also rejected the argument that plaintiff’s fraud claim expanded the limitations period to six years. The Court explained that since plaintiff failed to plead justifiable reliance, the fraud claim could not aid in expanding the statute of limitations to six years. Having determined that the three-year statute of limitations applied, the Court found that the claim had accrued well before the complaint was filed— i.e. , on May 15, 2019, when the lockup period ended: In the complaint, alleges that, by September 2019, only 50% of the stock had been released to him and remaining 50% was released in March 2022. He alleges that delay caused to miss the opportunity to sell the stock while it was at a high at the end of April 2019, but he also alleges that, when his shares were finally released to him in September 2019 and March 2022, they were worth around $2 and “barely over penny stock value,” respectively. Thus, based on the allegations in the complaint, first sustained damages when he did not have his shares once the lockup period ended on May 15, 2019. Finally, the Court rejected the argument that the continuing wrong doctrine tolled the statute of limitations: “Here, there is one alleged tortious act – delay in transferring the stock to – which first occurred at the end of the lockup on May 15, 2019.” “Although the single alleged action of delay may have caused a continuing increase in damages,” said the Court, “the continuing wrong doctrine does not apply.” _______________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009) (citations omitted). Id. ; see also VA Mgt., LP v. Estate of Valvani , 192 A.D.3d 615, 615 (1st Dept. 2021). Id. Id. Access Point Med., LLC v. Mandell, 106 A.D.3d 40, 44 (1st Dept. 2013); see also VA Mgt. , 192 A.D.3d at 615 (stating that “ laintiff’s characterization of that relief as ‘disgorgement’ of compensation does not convert it into a claim for equitable relief to which the six-year statute of limitations would apply”) (citations omitted)). Palmeri v. Willkie Farr & Gallagher LLP , 156 A.D.3d 564, 568 (1st Dept. 2017) (citations omitted). Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017) (citations omitted). Id. (citations omitted) and id. at 601-602 (“where a plaintiff asserts a single breach—with damages increasing as the breach continued—the continuing wrong theory does not apply.” (citations omitted)). Lebedev v. Blavatnik , 144 A.D.3d 24, 28 (1st Dept. 2016) (internal quotation marks and citations omitted). Id. Id. IDT , 12 N.Y.3d at 140. High Street officially changed its name to Acreage Holdings, Inc. on November 14, 2018. Slip Op. at *7. Id. Id. Id. Id. at *7-*8 (citing Access Point Med. , 106 A.D.3d at 44 (citation omitted)). Id. at *8. Id. Id. at *9. Id. Id. at *9-*10.

By:  Jeffrey M. Haber In Katsorhis v. 718 W. Beech St, LLC , 2025 N.Y. Slip Op. 00211 (1st Dept. Jan. 15, 2025) ( here ), the Appellate Division, Second Department considered a fraud claim that the lower court sustained on the grounds that defendant failed to raise an issue of fact about a fact that was not a fact in dispute. The Court also considered whether the motion court erred in denying defendants’ motion to dismiss plaintiffs’ claims alleging violations of General Business Law (“GBL”) §§ 349 and 350. To put Katsorhis in context, it is important to understand the civil practice rules (CPLR 3211(7) and CPLR 3211(a)(1)) that the Court applied, in addition to the law governing fraud claims and alleged violations of §§ 349 and 350. On a motion to dismiss pursuant to CPLR 3211(a)(7), the court should accept the facts as alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. Where evidentiary material is submitted and considered on a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the question becomes whether the plaintiff has a cause of action, not whether the plaintiff has stated one, and, “unless it has been shown that a material fact as claimed by the to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it, … dismissal should not eventuate.” Moreover, the court may consider affidavits submitted by the pleading party to remedy any defects in the pleading, and upon considering such an affidavit, the facts alleged therein must also be assumed to be true. “To succeed on a motion to dismiss based upon documentary evidence pursuant to CPLR 3211 (a) (1), the documentary evidence must utterly refute the plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.” “ o qualify as ‘documentary evidence,’ it must be ‘unambiguous, authentic, and undeniable.’” In the Second Department, affidavits, emails, and letters are not considered “documentary evidence within the intendment of CPLR 3211 (a) (1).” However, “documents reflecting out-of-court transactions such as mortgages, deeds, contracts, and any other papers, the contents of which are essentially undeniable, … qualify as documentary evidence.…” here,=">here," and="and" >here.=">here."> The elements of a cause of action to recover damages for fraud are “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” “A claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016(b).” Notwithstanding, CPLR 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Thus, “the pleading requirements of CPLR 3016(b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct.” here,=">here," and="and" >here.=">here." To="To" additional="additional" related="related" to="to" 3016(b)’s="3016(b)’s" requirement="requirement" that="that" fraud="fraud" be="be" alleged="alleged" with="with" particularity,="particularity," visit="visit" “ Blog”=">Blog”" tile="tile" our  website and=">website and" enter="enter" “pleading="“pleading" particularity”="particularity”" (or="(or" any="any" topic="topic" interest)="interest)" in="in" “search”="“search”" box.="box."> “To successfully assert a claim under General Business Law § 349 or § 350, a party must allege that its adversary has engaged in consumer-oriented conduct that is materially misleading, and that the party suffered injury as a result of the allegedly deceptive act or practice.” “‘ arties … must, at the threshold, charge conduct that is consumer oriented.’” “Private contract disputes, unique to the parties, … not fall within the ambit of the statute.” A “single shot transaction”, which is “tailored to meet the purchaser’s wishes and requirements”, “does not, without more, constitute consumer-oriented conduct for the purposes of .” With the foregoing principles in mind, we examine Katsorhis v. 718 W. Beech St, LLC . Katsorhis is an action to recover damages for, among other things, fraud and violations of the GBL. Plaintiffs commenced the action against, among others, defendants, Up Studio Architecture + Design, PLLC (hereinafter “Up Studio”) and John Patrick Winberry (“Winberry” and together the “Up Studio defendants”), in connection with alleged construction defects that caused severe leaks and water intrusion around various windows in plaintiffs’ newly constructed, single-family residence located in Long Beach, New York (the “property”). In November 2016, defendant, 718 West Beech St, LLC (“718 West Beech”), entered into an architectural services agreement (the “architecture agreement”) with Up Studio, pursuant to which Up Studio agreed to provide architectural design and production drawings to 718 West Beech for the construction of the property. Up Studio also agreed to provide 718 West Beech with schematic, electrical, mechanical, civil, and landscape drawings for design build bidding. On or about February 17, 2017, plaintiffs entered into a contract of sale to purchase the property, which was still under construction, from 718 West Beech. Winberry, a licensed architect, allegedly owned and/or was a principal of both 718 West Beech and Up Studio. Plaintiffs alleged that Winberry was to inspect the work and ensure that the designs were executed properly. According to plaintiffs, 718 West Beech, Up Studio, and Winberry were collectively engaged in the business of real estate sales , property development, architectural design, and new home construction. On or about July 21, 2017, plaintiffs paid the purchase price for the property, and 718 West Beech conveyed the property to plaintiffs. Plaintiffs alleged that beginning in July 2019, they discovered leaks and water intrusion around various windows in the property. Plaintiffs alleged that they notified Winberry about the recurring leaks and that over the course of approximately the following two years, Winberry was “heavily involved in coordinating the inspections, corrective work, and restoration.” In October 2021, plaintiffs allegedly were told that the leaks were occurring because the windows and associated materials, hardware, and components were not installed on the property in accordance with the architect’s details and the sheathing manufacturer’s specifications. Thereafter, plaintiffs commenced the action. Plaintiffs predicated their fraud claim upon the allegation that defendants made material misrepresentations in the marketing of the property to the plaintiffs, to induce plaintiffs to enter into the contract. These alleged misrepresentations included, among others: (a) defendants’ qualifications as developers, construction administrators, architects, and builders of high-quality new homes; (b) the quality of the construction of the property ( i.e. , that it was of high quality, constructed in a manner free from defects and substantially in accordance with the plans); and (c) the Up Studio defendants’ oversight of the construction ( i.e. , that the property was constructed under the administration and oversight of their team—that the Up Studio defendants attended regular site visits, met with the general contractor and subcontractors, and performed inspections of the construction, all to ensure that the property was constructed properly). Plaintiffs alleged that defendants made these representations with knowledge of their falsity and with the intent to deceive, and that plaintiffs relied upon these representations to their detriment. Plaintiffs predicated their GBL claims upon the allegation that defendants made materially misleading statements in public advertisements and marketing materials, including on defendants’ websites and in real estate listings aimed at consumers, to induce consumers, such as plaintiffs, to contract with defendants to purchase the property. In particular, plaintiffs alleged that defendants misrepresented their knowledge, expertise and competence in performing high-end residential construction using the best quality materials and equipment. Such statements, plaintiffs alleged, were likely to mislead consumers acting reasonably under the circumstances. Further, plaintiffs alleged that they reasonably relied on such statements in making the decision to contract with defendants, and that they sustained damages as a result; including the costs to remediate the alleged construction defects. The Up Studio defendants moved, inter alia , pursuant to CPLR 3211(a)(1) and (7) to dismiss the complaint. In support of the motion, the Up Studio defendants submitted, among other things, an affidavit from Winberry and the architecture agreement between Up Studio and 718 West Beech. In opposition, plaintiffs submitted, inter alia , an affidavit from plaintiff Valerie Katsorhis. Regarding the fraud claim, the Up Studio defendants argued that plaintiffs failed to plead fraud with the requisite specificity required under CPLR 3016(b), in that plaintiffs failed to provide the details with respect to when any particular fraudulent statement was made, where any such-statement was made, or the specific contents of any such statement. Regarding the GBL claims, the Up Studio defendants argued that the conduct at issue involved a single purchase and sale of a private residence , not the type of transaction within the purview of GBL § 349. The Up Studio defendants argued that to state a claim under GBL § 349, the plaintiff must demonstrate that the defendant engaged in consumer-oriented conduct . That is, the alleged acts or practices must have a broad impact on consumers at large. Large, private, one-shot contractual transactions, argued the Up Studio defendants, fall outside the scope of the statute. The Up Studio defendants further argued that they did not engage in the conduct alleged, relying on an affidavit submitted by Winberry, wherein he averred that Up Studio was not involved in the sale of the property and did not market the property to anyone or to the public large. In an order entered on January 4, 2023, the motion court, among other things, denied those branches of the Up Studio defendants’ motion which were to dismiss the third cause of action (negligence) as asserted against Winberry and the fifth and sixth causes of action (fraud and violation of the GBL, respectively) as asserted against them. The motion court held that plaintiffs adequately pleaded each of the elements of a fraud cause of action and that the pleading contained sufficient detail to inform defendants of the circumstances constituting the alleged wrong. Accordingly, the motion court found no basis to dismiss the claim pursuant to CPLR 30l6(b). The motion court also held that plaintiffs adequately alleged claims under the GBL. The motion court found that plaintiffs sufficiently alleged that defendants disseminated false and misleading information to the public at large via their websites and real estate listings. The motion court reasoned that to the extent the representations were aimed at potential home buyers, plaintiffs sufficiently identified consumer-oriented activities to survive a motion to dismiss. The motion court explained that although the private nature of the ultimate transaction and the large amount of money at issue militated against such a conclusion, (a) the transaction, at its essence, was a simple purchase and sale of a home by a consumer, and not a large and complex commercial transaction, and (b) the allegations of public advertising and dissemination of marketing materials, among other things, distinguished the case from those cited by defendants. The motion court further found that the Up Studio defendants did not meet their burden of establishing that any of the facts alleged by plaintiffs was “not a fact at all” or that “no significant dispute exist .” Rather, said the motion court, the Winberry affidavit highlighted the existence of issues of fact. The Up Studio defendants appealed. The Second Department modified the motion court’s order by deleting the provision denying the motion to dismiss the GBL cause of action as asserted against them and substituting a provision granting the motion, and as so modified, affirmed the order. The Court held that the motion court “properly denied that branch of the Up Studio defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the fifth cause of action, alleging fraud, insofar as asserted against them.” Without explanation, the Court found that “the complaint stated in sufficient detail a cause of action to recover damages for fraud against the Up Studio defendants.” The Court noted that “Winberry’s affidavit failed to establish that a material fact alleged in the complaint concerning the fraud cause of action insofar as asserted against the Up Studio defendants was not a fact at all and that no significant dispute exist regarding it.” The Court further said that the architecture agreement “was insufficient to utterly refute the plaintiffs’ factual allegations of fraud against the Up Studio defendants.” The Court also held that the motion court “erred in denying that branch of the Up Studio defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the sixth cause of action, alleging violations of General Business Law §§ 349 and 350, insofar as asserted against them.” The Court explained that “the complaint, even as supplemented by Katsorhis’s affidavit, failed to sufficiently allege that the Up Studio defendants engaged in a consumer-oriented deceptive act or practice.” ______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Leon v. Martinez , 84 N.Y.2d 83, 87-88 (1994). Guggenheimer v. Ginzburg , 43 N.Y.2d 268, 275 (1977). See Kopelowitz & Co., Inc. v. Mann , 83 AD3d 793, 797 (2d Dept. 2011); Pike v. New York Life Ins. Co. , 72 A.D.3d 1043, 1049 (2d Dept. 2010). “An affidavit submitted by the movant will almost never warrant dismissal under CPLR 3211 unless it establishes conclusively that the proponent of the pleading has no cause of action.” Cajigas v. Clean Rite Ctrs., LLC , 187 A.D.3d 700, 701 (2d. Dept. 2020). Gould v. Decolator , 121 A.D.3d 845, 847 (2d Dept. 2014); see also Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002). Attias v. Costiera , 120 A.D.3d 1281, 1282 (2d Dept. 2014) (quoting Granada Condominium III Assn. v. Palomino , 78 A.D.3d 996, 996 (2d Dept. 2010)). Nero v. Fiore , 165 AD3d 823, 826 (2d Dept. 2018) (internal quotation marks omitted). Fontanetta v. John Doe 1 , 73 A.D.3d 78, 84—85 (2d Dept. 2010) (internal quotation marks omitted); see also Cives Corp. v. George A. Fuller Co., Inc. , 97 A.D.3d 713, 714 (2d Dept. 2012). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Id. Farro v. Schochet , 190 A.D.3d 698, 699 (2d Dept. 2021) (internal quotation marks omitted). Qureshi v. Vital Transp., Inc. , 173 A.D.3d 1076, 1077 (2d Dept. 2019). Yellow Book Sales & Distrib. Co., Inc. v. Hillside Van Lines, Inc. , 98 A.D.3d 663, 664-665 (2d Dept. 2012). North State Autobahn, Inc. v. Progressive Ins. Grp. Co. , 102 A.D.3d 5, 11-12 (2d Dept. 2013) (quoting New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 320 (1995)). Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995); New York Univ. , 87 N.Y.2d at 320. Genesco Entertainment v. Koch , 593 F. Supp. 743, 752 (S.D.N.Y. 1984) (internal quotation marks omitted). New York Univ. , 87 N.Y.2d at 321. North State Autobahn , 102 A.D.3d at 12; see also Abraham v. Torati , 219 A.D.3d 1275, 1281 (2d Dept. 2023). Sokol v. Leader , 74 A.D.3d 1180, 1181—1182 (2d Dept. 2010). Slip Op. at *1. Id. at *2. Id. (citation omitted). Id. (citing State Farm Fire & Cas. Co. v. Capital Sewer, Inc. , 220 A.D.3d 701, 702 (2d Dept. 2023)). Id. (citing Phoenix Grantor Trust v. Exclusive Hospitality, LLC , 172 A.D.3d 923, 925 (2d Dept. 2019)). Id. Id. (citations omitted).

By: Jonathan H. Freiberger As readers of this BLOG know, we frequently address issues involving mortgage foreclosure and usury. Today’s article involves both issues. By way of background, and as explained in prior articles, usury statutes were developed to “protect desperately poor people from the consequences of their own desperation.” Seidel v. 18East 17 th Street Owners, Inc. , 79 N.Y.2d 735, 740 (1992) (citations and internal quotation marks omitted). “To successfully raise the defense of usury, a debtor must allege and prove by clear and convincing evidence that a loan or forbearance of money, requiring interest in violation of a usury statute, was charged by the holder or payee with the intent to take interest in excess of the legal rate.”  Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc. , 105 A.D.3d 178, 183 (1 st Dep’t 2013). Pursuant to General Obligations Law §5-501(1) , interest on a loan or forbearance “shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.” GOL §5-501(2) prevents individuals or entities from charging interest rates exceeding those permitted pursuant to GOL §5-501(1). Banking Law §14-a(1) provides that the “maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum.” Because Corporations are “generally the antithesis of … desperately poor people”, they are “ordinarily barred from asserting a usury defense.” Seidel , 79 N.Y.2d at 740 (citations, footnote and internal quotation marks omitted). See also GOL § 5-521(1) . However, a corporation can assert usury as a defense to the extent that the usury is criminal under Section 190.40 of New York’s Penal law , which makes interest on a loan or forbearance that exceeds twenty-five percent per annum a felony. GOL § 5-521(3) .  See also Roopchand v. Mahammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017) (citation omitted). Further, in addition to the stated interest rate on the subject note, other factors are used in determining the actual interest rate for usury purposes. For example, in American E Group LLC v. Livewire Ergogenics Inc. , 2022 WL 2236947 (2 nd Cir. 2022) (applying New York law), the Court affirmed the District Court’s refusal to enforce a promissory note and the dismissal of the lender’s action to enforce the note in light of the borrower’s criminal usury defense when certain charges were deemed to be interest and added to the note rate. See also Frost v. Collateral Partners, LLC , 219 A.D.3d 587, 588 (2 nd Dep’t 2023) (finding that since borrower was charged an insurance fee for declined insurance coverage , there was a question of fact as to whether “the purported insurance fee was, in actuality, additional interest on the loan,” precluding summary judgment.); Blue Wolf , 105 A.D.3d at 183 (“If an instrument provides that the creditor will receive additional payment in the event of a contingency beyond the borrower’s control, the contingent payment constitutes interest within the meaning of the usury statutes.”) The Appellate Division, First Department, addressed these issues in NY 2015 Boat LLC v. Shapiro , decided on January 16, 2025. The defendant brothers in NY 2015 needed money to make improvements to the home they grew up in and to satisfy some outstanding financial obligations. However, due to, inter alia , poor credit ratings, banks denied their loan applications. The brothers, therefore, searched the internet and found a broker who advised them that he could find them a high-interest loan – which he did. Shortly before closing, the broker sent the brothers numerous documents including, but not limited to, a note and mortgage and a deed transferring the house to an entity called 2435 Kingsland LLC (the “Fictitious LLC.”) that the brothers never heard of before. The loan, and related, documents listed the Fictitious LLC. as the borrower. The broker explained the existence of the Fictitious LLC, and the brothers’ transfer of the house to that entity, by stating that the lender only made commercial loans. The lender also “provided” a lawyer to represent the brothers in the loan transaction. The subject promissory note “provided for an interest rate of 12%, as well as an exit fee amounting to $7,500”. Significantly, t the end of the closing, received a breakdown of the loan funds' disbursement. Various fees, including $9,000 to as a commitment fee and $4,250 to 's attorney, were deducted from the $300,000 the were to receive, resulting in net proceeds of $250,750. From that $250,750, $3,000 was to be paid to as a broker's fee, $750 to , and $143,307.96 to a title company retained to pay off the s' debts and judgments. disbursed the remaining $103,692.04 to an account opened in 's name. However, that account had been opened by with his own social security number. As a result, the could not access this account and did not receive these funds . The trial court granted the lender summary judgment and a judgment of foreclosure and sale and determined that over $365,000.00 was due on the underlying debt. The First Department unanimously reversed. The Court found that “ nder these circumstances presented, the borrower's status as an LLC did not bar the s' usury defense. Specifically, the circumstances surrounding the loan raise at least a question of fact as to whether used the corporate form to conceal a usurious loan to the .” (Citing Schneider v. Phelps , 41 N.Y.2d 238 (1977), in which the Court addressed the use of “dummy” corporations to circumvent usury laws.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. To find one of our numerous BLOG articles related to mortgage foreclosure, visit the “ Blog ” tile on our website and enter “mortgage foreclosure” in the “search” box. We have also addressed numerous issues involving usury. See, e.g ., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .

By:  Jeffrey M. Haber In Hobish v. AXA Equit. Life Ins. Co. , 2025 N.Y. Slip Op. 00183 (Jan. 14, 2025) ( here ), the New York Court of Appeals addressed the question of whether punitive damages can be awarded to a successful party under General Business Law (“GBL”) § 349. Answering the question in the negative, the Court, in an opinion written by Judge Shirley Troutman, resolved a split among the appellate divisions. GBL § 349 applies to virtually all economic activity, and its “application has been correspondingly broad.” Initially, Section 349 allowed for enforcement solely by the Attorney General, with restitution and injunctive relief the only available remedies. In 1980, the legislature added a private right to the act “ o ensure the broadest enforcement of the statute.” In do so, the legislature also added a provision (GBL § 349(h)) that gives the court discretion to “increase the award of damages to an amount not to exceed three times the actual damages up to one thousand dollars, if the court finds the defendant willfully or knowingly violated this section” and “award reasonable attorney’s fees to a prevailing plaintiff.” To state a claim under GBL § 349, “a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive act or practice. A claim under GBL § 349 does not lie when the plaintiff alleges only “a private contract dispute over policy coverage and the processing of a claim which is unique to the[] parties, not conduct which affects the consuming public at large.” Thus, a plaintiff claiming the benefit of Section 349 “must charge conduct of the defendant that is consumer-oriented” or, stated differently, “demonstrate that the acts or practices have a broader impact on consumers at large.” Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Nevertheless, a plaintiff must allege the existence of a materially misleading act or advertisement to state a cause of action under GBL § 349. The test for both a deceptive act or deceptive advertisement is whether the act or advertisement is “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Whether a particular act or advertisement is materially misleading may be made by a reviewing court as a matter of law. In addition, a plaintiff must prove “actual” injury to recover under the statutes, though not necessarily pecuniary harm. And, the plaintiff must prove the deceptive act caused the injury. While the statute covers deceptive and fraudulent acts, as discussed herein, claims under GBL § 349 are nevertheless “creature of statute based on broad consumer-protection concerns.” Accordingly, in determining whether punitive damages are available to a private plaintiff bringing a General Business Law § 349 claim, the Court “look to the statute—not to whether the nature of the wrong alleged would permit recovery under traditional concepts of punitive damages in tort law.” As noted, there is a split among the appellate divisions regarding the availability of punitive damages under GBL § 349 . The First Department has concluded that a court cannot award damages beyond the “limited punitive damages” set forth in GBL § 349. The Second Department has taken the opposite view, allowing a claim for punitive damages to proceed without reference to the statutory cap in GBL § 349. The Fourth Department has taken internally divergent positions on the question. Federal courts applying New York have also taken divergent positions. In Hobish , the Court resolved the split of authority, holding that “punitive damages for section 349 (h) claims are limited to the treble damages provided by the statute.” Hobish v. AXA Equitable Life Insurance Company Hobish involved a claim for breach of contract and a claim for violation of GBL § 349 against defendant AXA Equitable Life Insurance Company in connection with the purchase of a universal life insurance policy in 2007 and defendant’s decision to increase the effective cost of that policy in 2015. In early 2007, the Hobish Irrevocable Trust purchased an Athena Universal Life Insurance II (AULII) life insurance policy from defendant to insure Toby Hobish, then 82 years old. The policy provided for a $2 million death benefit if the policy remained in effect at the time of Ms. Hobish’'s death. Upon purchase of such a policy, an AULII policyholder opened a “Policy Account” with defendant and could make flexible premium payments into the account at their discretion. Defendant deducted a monthly charge, known as a “COI charge” (cost of insurance), from the account. The account accrued interest, and the COI charge applicable to the account would increase as the balance decreased, creating incentives for the policyholder to make premium payments in sums higher than the minimum necessary to pay the COI charge on a month-to-month basis. While the policy imposed no mandatory scheduled premium payment, the account would enter a grace period before ultimately lapsing if the account balance became insufficient to meet the monthly COI charge. At that point, the policyholder would become ineligible to receive the death benefit upon the insured’s death. The policy did not allow the Trust to withdraw money deposited into the Policy Account at will. Rather, upon Ms. Hobish’s death, any money remaining in the Policy Account would revert to defendant. While defendant also sold AULII policies pursuant to which any money remaining in the account would revert to the policyholder upon death but imposed a higher monthly COI charge, the Trust chose the option with a lower COI charge. During the insured’s lifetime, the policyholder could surrender the Policy Account, at which point defendant would return the account balance to the policyholder, less a surrender fee, and terminate the policy. The monthly COI charges were determined by a formula known as the “COI Rate Scale.” The rate scale in effect when the Trust purchased the policy in 2007 had been set by defendant in 2004. The terms of the policy expressly provided that defendant maintained the right to alter the COI Rate Scale and increase COI charges, but provided that any such increase must be “equitable to all policyholders of a given class.” The policy also included a cap on monthly COI charges, which was linked to the insured’s age. In late 2015, defendant announced plans to change the COI Rate Scale that would apply to two groups of policies: those with death benefits above $1 million where the insured was 70-79 years old at the time of inception, and those above the same death benefit threshold where the insured was 80 or older at the time of inception. Defendant alleged that under the new scale, the COI charges applicable to the Trust’s Policy Account would increase from approximately $7,000 to approximately $10,500 per month. Plaintiffs claimed that this change would result in a drastic increase in the annual premium payments necessary to keep the policy in force. Plaintiffs did not contend, however, that the new COI Rate Scale exceeded the policy’s cap on monthly charges. Defendant began applying the new COI Rate Scale to the Trust’s account in March 2016. After COI charges were imposed for four successive months, the Trust elected to surrender the policy “under protest.” Pursuant to the terms of the policy, $412,688.01 was returned to the Trust, representing the remaining account balance less a $35,586.49 surrender fee. In 2017, plaintiffs commenced the action, alleging that defendant had breached the contract and violated GBL § 349. In connection with the GBL § 349 claim, plaintiffs alleged that defendant had specifically marketed and sold AULII policies to elderly consumers with a representation that the likelihood of a COI Rate Scale change was minimal, all the while intending to raise COI charges in the future. Plaintiffs sought actual damages, attorney’s fees , and punitive damages on their section 349 claim. Supreme Court denied each party’s motions for summary judgment on liability. On the GBL § 349 claim, the court held that plaintiffs had sufficiently alleged they were affected by a deceptive business practice. Supreme Court rejected various damages theories that plaintiffs had asserted as to both causes of action. Relevant to this article, the court rejected plaintiffs’ claim for actual damages ( i.e. , the full value of the policy’s $2 million death benefit, minus the surrender value) under GBL § 349. Plaintiffs also sought approximately $250,000 in restitutionary damages under section 349, which Supreme Court found was a speculative calculation as to what would have been left on the Policy Account upon Ms. Hobish’s hypothetical death and was thus unavailable to plaintiffs. Finally, Supreme Court held that plaintiffs’ allegations were insufficient as a matter of law to establish the availability of punitive damages for either claim, noting that plaintiffs had not pointed to any evidence of AXA’s scienter or evidence of actions intended to defeat the contract. Plaintiffs appealed, and the Appellate Division affirmed. With respect to punitive damages under GBL § 349(h), the court held that the statute only allowed for “limited punitive damages” of three times actual damages. The Appellate Division granted leave to appeal, and the Court of Appeals affirmed. Looking at the text of GBL § 349(h), the Court noted that the provision provided for layered damages, but not punitive damages: The statute provides for layered damages: actual damages, or fifty dollars, whichever is greater; discretionary treble damages up to a cap of $1,000; and attorney’s fees (see General Business Law § 349 ). There is no reference to “punitive damages” in the statute, although treble damages are viewed as having some punitive effect. The foregoing damages scheme, said the Court, reflected a legislative process by which a private right of action was added to complement the Attorney General’s enforcement power, but which limited the range of available damages to private litigants. “In the 44 years since the private right of action was added to the statute,” noted the Court, “the legislature ha not altered that balance, leaving the provisions in section 349 (h), including the monetary caps, unchanged.” The Court observed that although the legislature has adopted new provisions and updated the penalties under the statute, the legislature did not increase or adjust the “remedies available under section 349 (h), despite numerous proposals to do so.” Having concluded that “the legislature carefully calibrated damages at the time section 349 (h) was enacted,” the Court “decline to alter that balance by making available a remedy that goes far beyond what the legislature contemplated.” Therefore, the Court concluded that “punitive damages in addition to the treble damages delineated in section 349 (h) are unavailable.” Judge Caitlin J. Halligan wrote a concurring opinion based only on the result. Judge Halligan took issue with the “majority’s insistence on deciding an important question of statutory interpretation,” especially since “neither side offer more than a glancing analysis of th question.” Though agreeing with the majority in the result, Judge Halligan would have decided the issue on the grounds that “plaintiffs simply not raised a triable issue of fact as to the type of egregious, deliberate conduct that ha long been the hallmark of punitive damages.” As such, Judge Halligan concluded that the ruling should have “foreclose punitive damages, period—whether for plaintiff’s breach of contract claim, section 349 claim, or any other claim that might give rise to such damages.” _______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Karlin v. IVF Am. , 93 NY2d 282, 290 (1999).  L. 1970, ch. 43, § 2. Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 176 (2021). L. 1980, ch. 346, § 1. Koch v. Acker, Merrall & Condit Co. , 18 N.Y.3d 940, 941 (2012); Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 324 n.1 (2002). New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 321 (1995) (internal quotation marks omitted). Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995). Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003) (citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999)). Gaidon v. Guardian Life Ins. Co. of Am. , 96 N.Y.2d 201, 209 (2001). Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). See Himmelstein , 37 N.Y.3d at 176; Andre Strishak & Assocs., P.C. v. Hewlett Packard Co. , 300 A.D.2d 608, 609 (2d Dept. 2002). Oswego , 85 N.Y.2d at 26. See also Andre Strishak , 300 A.D.2d at 609;  Himmelstein , 37 N.Y.3d at 178. Id. Stuntman , 95 N.Y.2d at 29; Oswego , 85 N.Y.2d at 26. Id. ; Oswego , 85 N.Y.2d at 26. Gaidon , 96 N.Y.2d at 209. Id. at 343; see also Matter of Motor Veh. Acc. Indem. Corp. v. Aetna Cas. & Sur. Co. , 89 N.Y.2d 214, 220-221 (1996) (distinguishing between claims with a common-law source codified by statute and claims that “would not exist but for the statute”); Oswego , 85 N.Y.2d at 24-25. Thoreson v Penthouse Intl. , 80 N.Y.2d 490, 496 (1992). Hobish v. AXA Equit. Life Ins. Co. , 225 A.D. 3d 487 (1st Dept. 2024). Wilner v. Allstate Ins. Co. , 71 A.D.3d 155 (2d Dept. 2010). Compare Bristol Harbour Assoc. v. Home Ins. Co. , 244 A.D.2d 885, 885-886 (4th Dept. 1997), w ith JD & K Assoc., LLC v. Selective Ins. Grp., Inc. , 118 A.D.3d 1402, 1403-1404 (4th Dept. 2014). Compare Guzman v. Mel S. Harris & Assocs., LLC , 2018 WL 1665252, at *13, 2018 US Dist LEXIS 49622, at *31 (S.D.N.Y. Mar. 22, 2018) (“Plaintiff’s punitive damages on claim are limited to $1,000”), and Bristol Vil., Inc. v. Louisiana-Pacific Corp. , 916 F. Supp. 2d 357, 370 (W.D.N.Y. 2013), with Koch v. Greenberg , 14 F. Supp. 3d 247, 278-279 (S.D.N.Y. 2014) (“ t is clear that in New York the GBL’s treble damages provision does not proscribe an additional award of punitive damages”) (citation omitted). Slip Op. at *3. Id. at *4 (citations omitted). Id. Id. at *4-*5. Id. Among other things, the proposed amendments would have “specifically allowed for punitive damages, proposing that ‘ he court may … award punitive damages in an amount not to exceed three times the actual damages.” Id. at *5. Id. Id. Id. at *5. Id. at *6. Id.