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By: Jeffrey M. Haber “Spoofing is a type of scam in which criminals attempt to obtain someone’s personal information by pretending to be a legitimate business, a neighbor, or some other innocent party.”  Spoofing can occur in any form of online communication, including emails, text messages, telephone calls, and websites.  Id . Although spoofing comes in many forms, the goal of spoofing is the same: to deceive people into divulging personal and/or financial information that the scammers can exploit for their personal gain. Common Spoofing Scams Email Spoofing Also known as “phishing”, email spoofing involves the transmission of emails having a falsified “From:” line. The point of the email is to trick the recipient into believing that the message comes from a legitimate source, such as a friend, a bank, or some other known business or entity.  Text Message Spoofing Also known as “smishing”, text message spoofing is like email spoofing. The recipient receives a text message that appears to come from a legitimate source, such as a friend or the recipient’s bank, credit card company or phone company. The message typically requests the recipient to call a certain phone number or click on a link within the message, with the goal of inducing the recipient to divulge personal information. Caller ID Spoofing With Caller ID spoofing, the scammer falsifies the phone number from which he/she is calling to get the victim to take the call. The victim’s caller ID will show that the call is coming from a legitimate business or government agency, such as the Internal Revenue Service. As with other forms of spoofing, the goal of the scam is to induce the victim to divulge personal and/or financial information. URL Spoofing URL spoofing occurs when scammers create a fraudulent website to obtain information from victims or to install malware on their computers. For instance, victims might be directed to a website that appears to belong to their bank or credit card company and be asked to log in using their user ID and password. If the person falls for the request and logs in, the scammer has the victim’s information to log into the website of the legitimate entity or government agency and access the victim’s accounts.  See Spoofing ,  supra . Market Spoofing “Spoofing” can also include a series of events in which a securities trader places and immediately cancels a quote in an attempt to trigger a market movement that the then takes advantage of to establish or liquidate a position. State differently, it is an act or practice of bidding or offering with the intent, at the time the bid or offer was placed, to cancel the bid or offer before it was executed to give the false appearance of genuine supply or demand to other market participants. Market spoofing is the subject of a settled enforcement proceeding commenced by the Securities and Exchange Commission (“SEC” or “Commission”) against TD Securities (USA) LLC, a registered broker- dealer that is headquartered in New York for allegedly spoofing the U.S. Treasury cash securities market by entering orders on one side of the market that it had no intention of executing (herein, “non-bona fide orders”). The September 30, 2024, press release announcing the charges and settlement can be found  here .  In the Matter of TD Securities (USA) LLC According to the SEC, between April 2018 and May 2019, a former TD Securities trader spoofed the U.S. Treasury cash securities market by entering orders on one side of the market that he had no intention of executing, so he could obtain more favorable execution prices on bona fide orders he was entering simultaneously on the other side of the market. After the bona fide orders were filled, said the SEC, resulting in profits to TD Securities, the trader allegedly canceled the non-bona fide orders. The SEC found that TD Securities lacked adequate controls and that it failed to take reasonable steps to scrutinize the trader after receiving warnings of his potentially irregular trading activity. TD Securities consented to the entry of the SEC’s cease and desist order finding that it violated an antifraud provision of the federal securities laws and failed to reasonably supervise the trader. TD Securities was further ordered to cease and desist from future violations of the relevant antifraud provision, was censured, and was ordered to pay disgorgement of $400,000, prejudgment interest, and a civil penalty of $6.5 million. In a related matter, TD Securities entered into a deferred prosecution agreement (“DPA”) ( here ) with the U.S. Department of Justice (“DOJ”) and agreed to pay a total monetary sanction of more than $15 million as part of that agreement, of which $400,000 will be credited by disgorgement to the SEC ( here ). TD Securities separately agreed to pay a $6 million fine to the Financial Industry Regulatory Authority to resolve related charges . Commenting on the SEC’s enforcement action and settlement, Mark Cave, Associate Director in the SEC’s Division of Enforcement, stated: “Manipulative and deceptive trading undermines the integrity of our markets. Broker-dealers and other firms cannot ignore their employees’ manipulative conduct and must take meaningful steps to detect and prevent it. Today’s action results from our continuing commitment to combating illicit trading.” Regarding the DPA, Nicole M. Argentieri, Principal Deputy Assistant Attorney General and head of the Justice Department’s Criminal Division stated: “TD Securities placed hundreds of orders to buy and sell U.S. Treasuries that it never intended to execute, in order to deceive market participants and manipulate prices by creating the false appearance of supply and demand. Such efforts to profit through unlawful trading undermine public confidence in U.S. Treasuries markets and defraud other market participants. The Criminal Division is committed to ensuring the integrity of our financial markets and holding accountable those who engage in deceptive trading practices.” _________________________________ 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  Julia Kagan,  Spoofing , Investopedia (updated June 29, 2024) (“ Spoofing ”) ( here ).

By: Jeffrey M. Haber In today’s Fraud Notes, we examine two cases involving claims of fraudulent inducement and fraudulent concealment.   In Board of Mgrs. of 570 Broome Condominium v. Soho Broome Condos LLC , 2024 N.Y. Slip Op. 04804 (1st Dept. Oct. 3, 2024) ( here ), the Court examined a fraudulent inducement claim in connection with the purchase of a condominium unit. As discussed below, the Court held that plaintiff sufficiently alleged that defendant asserted affirmative misrepresentations about the financial condition of the building that induced plaintiff to purchase the unit at issue. The Court also held that the misrepresentations did not duplicate the representations in the offering plan. In Haart v. Scaglia , 2024 N.Y. Slip Op. 04812 (1st Dept. Oct. 3, 2024) ( here ), the Court examined a fraudulent inducement and fraudulent concealment complaint in the context of a bitter business and marital breakup. As discussed below, the Court found, among other things, that plaintiff alleged actionable misrepresentations of existing fact, as opposed to inactionable representations of future performance and concealed certain facts from plaintiff in connection with the existence of preferred stock in a business that plaintiff allegedly owned. Board of Mgrs. of 570 Broome Condominium v. Soho Broome Condos LLC Plaintiff, a residential condominium, brought suit against, among others, the sponsor of the subject building (“condo” or “building”), alleging that the sponsor/developer of the condo failed to satisfy various promises made in connection with the offering plan related to the sale of the condo’s units. Plaintiff alleged that poor workmanship and faulty construction practices led to numerous deficiencies at the building for which the current board of managers must rectify. Plaintiff maintained that the sponsor and its principals deliberately misrepresented the condo’s budget and intentionally set common charges low to induce purchasers to buy units in the building. Plaintiff maintained that the shoddy construction work and the low common charges resulted in a massive assessment for the unit owners after only two years of operation as a condo. Plaintiff also alleged that the sponsor’s business partners looted the sponsor’s assets. Defendants moved to dismiss the complaint. Regarding the fraudulent inducement claim , the sponsor defendants maintained that the claim was nothing more than a breach of the offering plan dressed up as a fraud claim – that is, the fraud in the inducement claim was duplicative of the breach of contract claim. The individual defendants also claimed that they could only be liable for the alleged fraudulent inducement if plaintiff could pierce the corporate veil, which they maintained plaintiff failed to do. The motion court denied the motion with respect to the fraudulent inducement and breach of fiduciary duty claims. The motion court found that plaintiff asserted affirmative misrepresentations about the financial condition of the condo that were not made in the offering plan. In this regard, the motion court found that plaintiff detailed when the units were for sale, the fact that the condo’s operating expenses were deliberately low, and that when the units were nearly all sold, the condo’s expenses nearly doubled. In other words, noted the motion court, plaintiff alleged that the sponsor and the individual defendants deliberately misled potential purchasers about the budget until after the units were sold in order to get them to buy the units by, among other things, intentionally setting common charges at a level that did not cover the condo’s expenses. The motion court concluded that these allegations did not duplicate plaintiff’s breach of contract claim : Plaintiff’s claim is not simply reliant on the fact that the Sponsor breached the contract (the offering plan). It argues that these defendants made misrepresentations about the financial health of the condo in order to induce people to purchase units while (according to the complaint) there were questions about the condo’s ability to continue as a going concern. This is distinct from the failure to construct the building to meet certain parameters in the offering plan, such as the purportedly faulty piping and improper gas room venting. The motion court also rejected the notion that veil piercing was required to find the individual defendants liable (for pleading purposes) for fraud: “that the individual defendants signed the offering plan, which affirmatively represented that the condo’s budget was acceptable and appropriate to ensure the condo could meet its obligations,” stated a claim for fraudulent inducement. Finally, the motion court found that the individual defendants breached their fiduciary duty to plaintiff (and the other unitholders). In its complaint, plaintiff alleged that the individual defendants put the interests of the sponsor over those of the condo by keeping common charges low and directing the managing agent not to pay certain bills. Plaintiff argued that the individual defendants did this to make the units more attractive to potential purchasers (by keeping the common charges low) instead of fulfilling their fiduciary duty to the board. In addition, plaintiff detailed how the individual defendants refused to address the obvious construction defects and left plaintiff to fix the issues. The motion court held that the foregoing actions amounted to self-dealing in favor of the sponsor and constituted bad faith by the individual defendants. The motion court rejected the individual defendants’ reliance upon the business judgment rule as a basis to dismiss the complaint. Noting that the business judgment rule prohibits review of decisions within the scope of the authority of the board members, the motion court held that plaintiff alleged more than a mere disagreement with the decisions by the individual defendants. The motion court explained that plaintiff alleged that the individual defendants “made decisions that were anathema to running a functioning building” and “intentionally did not pay bills, did not set common charges at a level sufficient to cover expenses and did not address clear construction defects all to save money for and to benefit the Sponsor despite the fact that their duties were to the board.” “Maximizing the profit to the Sponsor and leaving the subsequent board to deal with financial issues,” concluded the motion court, “states a cause of action for the breach of a fiduciary duty.” On appeal, the Appellate Division, First Department affirmed the motion’s court order. The Court held that the “motion court correctly denied dismissal of plaintiff<’s> … fraud in the inducement claim against the individual defendants.” The Court found that “ laintiff alleged specific ‘affirmative misrepresentations, not omissions,’ by defendants, ‘who principals of the sponsor, and who signed the certification in the offering plan.” Such allegations concluded the Court, “set forth a scheme independent of the Martin Act disclosure requirements.” In addition, said the Court, “the allegations do not require piercing the corporate veil, as they are based on the affirmative misrepresentations by the individual defendants concerning the accuracy of the common charges and operating budget, which plaintiff asserts defendants knew to be false at the time.” The Court also held that the motion court “correctly sustained plaintiff’s breach of fiduciary duty claim against the individual defendants as members of the sponsor-controlled board.” The Court found that the “complaint sufficiently allege wrongdoing by the individual defendants in the form of self-dealing and willful misconduct, which were not actions ‘taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes,’ but rather solely for defendants’ benefit.” The Court explained that the “complaint specifically allege that rather than incrementally raise common charges to meet the condominium’s budget needs, the individual defendants directed the managing agent not to pay Con Edison bills, ignored the independent auditor’s warnings of a budget shortfall, refused to meet the staffing costs, used condominium monies to cover sponsor obligations, and intentionally set the common charges unreasonably low for no business related purpose but for the sponsor’s and the individual defendants' sole benefit.” The Court also noted that “ laintiff’s claims … supported by the allegation that the sponsor-controlled board raised the common charges and imposed a special assessment to pay for past due obligations only after the final sponsor-owned unit was in contract.” Haart v. Scaglia Haart was the fourth of five lawsuits filed by plaintiff and defendant during the last few years — one filed in Delaware and four in New York, all of which involved their personal and business divorce. Haart alleged that defendant defrauded her in two ways: fraudulent inducement and fraudulent concealment. In the former claim, plaintiff alleged that defendant represented that if she worked as CEO of Elite World Group, LLC (“EWG”), a model management company, without an employment agreement or salary, he would transfer to her 50% of the stock of a holding company – Freedom Holding, Inc. (“FHI”) – that owned EWG, in addition to an allegedly valuable apartment. Plaintiff allegedly agreed, and defendant transferred 50 common shares to her. However, according to plaintiff, defendant concealed the existence of 123,665 preferred shares he had issued to himself, thereby giving himself majority control of FHI and making plaintiff’s stock ownership virtually worthless. Consequently, plaintiff claimed that her interest in FHI amounted to a mere 0.0004% (50 of 123,765 total shares). Plaintiff further maintained that defendant and the accounting defendants repeatedly told her and others in her presence, in writing and orally, that she was a 50% owner of FHI. Plaintiff alleged that she discovered defendant’s misrepresentations about her ownership interest in FHI in March or April 2020. Upon learning the alleged truth, plaintiff maintains that she refused to continue working as CEO of EWG until defendant made her a 50% owner of FHI with equal ownership and control. In the latter claim, plaintiff alleged that defendant agreed to transfer 50% of the preferred shares to her, but he secretly directed the accounting defendants to draft a binding legal document to give her one less share of FHI and preserve his controlling interest. Defendant signed that document in June 2020 in the presence of both the accounting defendants and plaintiff. According to plaintiff, defendants told her that by doing so, defendant was transferring 50% of the preferred shares to her, knowing that he was, in fact, transferring one share less than 50%. Plaintiff maintained that thereafter, defendant continued to represent to her and others in her presence, both orally and in writing, that she owned 50% of FHI and shared equally in the control of the company with him. According to plaintiff, the accounting defendants and FHI repeated the foregoing representations, both orally and in writing. Plaintiff maintained that defendant and FHI prepared and submitted written documents to governmental entities, prospective investors, bankers, and auditors representing that he and plaintiff each owned 50% of FHI, while concealing the truth. Plaintiff claimed that she justifiably believed defendants. Plaintiff further alleged that the accounting defendants prepared and submitted FHI’s income tax returns in which the ownership of FHI was represented to 50% for each party. Based on defendants’ alleged concealment of the truth, plaintiff alleged that she continued to work as CEO of EWG. Defendants moved to dismiss. With regard to the fraud claims against defendant , the motion court granted the motion, finding that defendant did not make any actionable promise to make her a 50% partner. With regard to the fraud claims against the accounting defendants, the motion court granted the motion, finding that these parties did not have the capacity to either promise to transfer FHI ownership to plaintiff or appoint anyone as EWG’s CEO. On appeal, the Appellate Division, First Department unanimously modified the motion court’s order to deny the motions as to the first cause of action up to June 12, 2020 ( fraudulent inducement ) and the second cause of action (fraudulent concealment) to the extent it was based on the failure to disclose the existence of FHI’s preferred stock. The Court held that what started as a promise of future performance, which is not actionable, became a misrepresentation of existing fact, which is actionable. In this regard, the Court found that: when plaintiff agreed to become EWG’s CEO, promise to give her 50% of FHI was a promise about the future. However, plaintiff does not merely allege that she was induced to become CEO; she also alleges that she was induced to remain CEO without a salary or a contract for a fixed term because kept reassuring her that she owned 50% of FHI — which, at that point, would be a misrepresentation of an existing fact. Speaking to the justifiable reliance element of a fraud claim , the Court held that “it was not unreasonable for plaintiff to rely on statements that he was giving her 50% of FHI and that she owned 50% of it — he was her fiancé, and then her husband, when he said this.” “As such,” concluded the Court, “they were family members who stood in ‘a fiduciary relationship toward one another in a co-owned business venture,’ making plaintiff’s reliance on assurances ‘all the more reasonable.’” The Court held, however, that the claim should be reinstated only up to June 12, 2020. In so holding, the Court explained that, under the circumstances, plaintiff could not have been induced to continue serving as EWG’s CEO because “she executed a stock power which shows, on its face, that she was not getting 50% of the preferred shares”: Plaintiff discovered the existence of FHI’s preferred shares in April 2020. At that point, she knew that she did not own 50% of FHI; nevertheless, she continued to serve as EWG’s CEO without a regular contract or salary. Since promised to give her 50% of FHI’s preferred shares, it may have been reasonable for her to continue working as EWG’s CEO. On June 12, 2020, however, she executed a stock power which shows, on its face, that she was not getting 50% of the preferred shares. Because plaintiff continued serving as EWG’s CEO even after she knew that she was not a 50% owner of FHI, misrepresentation that she owned 50% of FHI could not have induced her to continue serving as CEO after June 12, 2020.… The Court also held that the fraudulent inducement claim against the accounting defendants should be reinstated “up to June 12, 2020.” The Court explained that “it be said, as a matter of law, that it was unreasonable for plaintiff to rely on the defendants’ statements about FHI, as they were its accountants. In addition, said the Court, the principal of the accounting defendants “was plaintiff’s accountant before he was FHI’s, and she considered him a friend and trusted advisor.” “While the defendants could not have induced plaintiff to accept the position of EWG’s CEO because they had no power to promise to give her 50% of FHI,” said the Court, plaintiff sufficiently alleged “that she was induced to continue being CEO because the defendants kept reassuring her that she owned 50% of FHI.” Among other things, plaintiff alleged that “for each tax year following receipt of the shares, prepared … tax returns identifying and as equal owners of FHI, with equal ‘total voting power.’” The Court also held that the second cause of action (for fraudulent concealment) “should be reinstated insofar as it is based on the concealment of the existence of FHI preferred stock.” “However,” noted the Court, “neither nor the defendants ‘concealed’ that plaintiff got less than 50% of the preferred shares because the stock power showed this on its face.” Finally, the Court rejected defendants’ argument that they had no duty to disclose the existence of the preferred shares. A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter; (2) there is a fiduciary relationship between the plaintiff and defendant; or (3) the defendant possesses “special facts” about the matter not known by the plaintiff. In rejecting the argument, the Court held that defendant “had a duty to disclose the existence of the preferred stock because he had a confidential or fiduciary relationship with plaintiff …, and his superior knowledge of the existence of the preferred stock rendered plaintiff’s agreement to become EWG’s CEO without a regular salary or contract ‘inherently unfair.’” Regarding the accounting defendants, the Court held that “ hile the defendants did not have a duty to disclose based on a fiduciary relationship …, they arguably had a duty to disclose based on the ‘special facts’ doctrine.’” The Court found that “it was inherently unfair for plaintiff to work as EWG’s CEO on the assumption that she owned 50% of FHI when she owned only 50 common shares and FHI also had 123,665 preferred shares.” ____________________________ 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. The motion court’s finding that plaintiff asserted affirmative misrepresentations, as opposed to omissions, is significant because a fraud claim based on omissions in an offering plan is barred by the Martin Act. See , e.g. , Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. P’ship , 12 N.Y.3d 236 (2009); Bd. of Managers of S. Star v. WSA Equities, LLC , 140 A.D.3d 405, 405 (1st Dept. 2016). “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted). The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.” Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008) (citation omitted). The complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). Thus, “ o long as the corporation’s directors have not breached their fiduciary obligation to the corporation, the exercise of for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” Matter of Levandusky v. One Fifth Ave. Apt. Corp. , 75 N.Y.2d 530, 538 (1990) (internal quotation marks and citation omitted). Bd. of Mgrs. , Slip Op. at *1. Id. (quoting Bd. of Mgrs. of the Walton Condominium v. 264 H2O Borrower, LLC , 180 A.D.3d 622, 622 (1st Dept. 2020)). Id. (citing Bd. of Mgrs. of the S. Star v WSA Equities, LLC , 140 A.D.3d 405, 405 (1st Dept. 2016)). Id. Id. Id. (quoting Tahari v. 860 Fifth Ave. Corp. , 214 A.D.3d 491, 492 (1st Dept. 2023) (internal quotation marks omitted); and citing Bd. of Mgrs. of Fairways at N. Hills Condominium v. Fairway at N. Hills , 193 A.D.2d 322, 325 (2d Dept. 1993)). Id. Id. See Braddock v. Braddock , 60 A.D.3d 84, 89 (1st Dept. 2009). Haart , Slip Op. at *1. Id. Id. at *2. Id. (quoting Braddock , 60 A.D.3d at 88, 94). Id. Id. Id. (citation omitted). Id. Id. Id. Id. Id. Id. Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013). Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016). Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). “The ‘special facts’ doctrine holds that ‘absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’” Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc. , 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied , 29 N.Y.3d 913 (2017) (quoting, Pramer, 76 A.D.3d at 99). Haart , Slip Op. at *2-*3 (citations omitted). Id. at *3 (citations omitted). The Court further held that the third cause of action, against the accounting defendants for aiding and abetting defendant’s fraud, should be reinstated. Id. (citation omitted). The Court found that the accounting defendants provided substantial assistance to defendant by preparing plaintiff’s tax returns, which were “important to the underlying fraud.” Id. (citations omitted). Id. (citations omitted). Id.

By: Jonathan H. Freiberger Today’s BLOG article relates to fraudulent concealment, caveat emptor and justifiable reliance when purchasing real property. As readers of this BLOG know, a “cause of action to recover damages for fraudulent misrepresentation requires 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.” R. Vig Props. V. Rahimzada , 213 A.D.3d 871, 872 (2 nd Dep’t 2023) (citations and internal quotation marks omitted). To sustain a cause of action for fraudulent concealment, in addition to the elements of fraudulent misrepresentation, a plaintiff must allege “that the defendant had a duty to disclose material information and that it failed to do so.” P.T. Bank Cent. Asia, N.Y. Branch v. ABN AMRO Bank N.V. , 301 A.D.2d 373, 376 (1 st Dep’t 2003) (citation omitted). When addressing the element of justifiable reliance, the “general rule” is that “if the facts represented are not matters peculiarly within the party's knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” Danann Realty v. Harris , 5 N.Y.2d 317, 322 (1959) (citations and internal quotation marks omitted). Where, however, matters are within the “peculiar knowledge” of the seller, “as is” and “no reliance” clauses in real estate contracts will not save a seller from claims of fraudulent misrepresentations. TIAA Global Investments, LLC v. One Astoria Square LLC , 127 A.D.3d 75, 87 (1 st Dep’t 2015) ( citing Danann 5 N.Y.2d at 322). For example, the Third Department, in Schooley v. Mannion , 241 A.D.2d 677 (1997), noted that “general merger or ‘as is’ clauses in contracts do not serve to exclude parol evidence of fraud in the inducement.” Schooley , 241 A.D.2d at 678. In Schooley , the plaintiff purchased an apartment building in Saratoga County. The contract of sale contained an “as is” clause. After the plaintiff took possession, the building’s tenants complained of freezing pipes and high energy bills. “In the course of performing routine maintenance and adding gas heating to certain units in an attempt to lower bills, plaintiffs discovered that the property was not insulated according to alleged representations made by defendant.” Id . Plaintiff, buyer, sued the defendant, seller, for fraud. The Appellate Division reversed the motion court’s order granting the defendant’s motion to dismiss. The Court found “a clear question of fact exists regarding whether defendants misrepresented the existence of insulation throughout the premises and, if so, whether plaintiffs reasonably relied on such statements.” Id . at 678. In so doing, the Court stated: Moreover, general merger or "as is" clauses in contracts do not serve to exclude parol evidence of fraud in the inducement. Notably, specific disclaimers contained within an agreement can provide an effective defense against allegations in a complaint which assert that the agreement was executed in reliance upon oral misrepresentations. Here, although the contract in question indicated that plaintiffs were taking the property “as is”, it did not indicate that plaintiffs had inspected the property; nor did it specify that they were not relying upon any representations as to the physical condition of the property, let alone any representations made regarding the installation of insulation. Furthermore, even if the contract had contained specific disclaimers, the fact that the alleged defect regarding insulation was peculiarly within 's knowledge would be sufficient to salvage plaintiffs' cause of action. It is significant that is alleged to have recently gutted and renovated the entire property and that insulation is a nonvisible component, not easily verified without destructive testing. Id. (citations omitted and internal quotation marks omitted). When dealing with real estate transactions, fraudulent misrepresentation claims “must be analyzed within the doctrine of caveat emptor.” 98 Gates Avenue Corp. v. Bryan , 225 A.D.3d 647, 649 (2 nd Dep’t 2024) (citation omitted). “New York adheres to the doctrine of caveat emptor and imposes no liability on a seller for failing to disclose information regarding the premises when the parties deal at arm's length, unless there is some conduct on the part of the seller which constitutes active concealment.” Id . (citations and internal quotation marks omitted). However, where affirmative conduct “on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property,” but the conduct must be “more than mere silence.” Id . at 649-50 (citations and internal quotation marks omitted). “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller's agents thwarted the plaintiff's efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.” Razdolskaya v. Lyubarsky , 160 A.D.3d 994, 996 (2 nd Dep’t 2018). On October 2, 2024, the Appellate Division, Second Department, decided Gordon v. Connie Profaci Realty, LLC , an action in which the plaintiff commenced an action against a real estate brokerage firm for fraud in conjunction with its purchase of residential real property and, in the complaint, alleged that the defendant “misrepresented the number of bedrooms in a home in Staten Island … in order to induce the plaintiff to purchase it.” The plaintiff appealed the motion court’s grant of the defendant’s motion to dismiss. The Court noted that “proof of active concealment will not suffice when the plaintiff should have known of the information which the defendant allegedly concealed.” In affirming the motion court’s dismissal of the complaint, the Court stated: Here, the plaintiff alleged that, after inspecting only four bedrooms, he executed the contract of sale in reliance upon the defendants' purported misrepresentations that the home contained six bedrooms. According to the plaintiff, during his visits to the home, the defendant Andrew S. Porazzo made certain statements indicating that two of the bedrooms were not available for inspection. Contrary to the plaintiff's contention, however, these allegations were insufficient under the circumstances to establish that the defendants thwarted his efforts to satisfy his obligations under the doctrine of caveat emptor. The plaintiff failed to allege facts demonstrating that the purported misrepresentations concerned matters peculiarly within the defendants’ knowledge which he could not have discovered by the exercise of ordinary intelligence. Since the plaintiff failed to adequately allege justifiable reliance , the Supreme Court properly granted the defendants' motion pursuant to CPLR 3211(a) to dismiss the complaint. 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: to find our BLOG articles related to any of these topics, visit the “ Blog ” tile on our website and enter your relevant search terms in the “search” box. Specifically as to “caveat emptor,” see, e.g ., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .

By: Jeffrey M. Haber In Kapitus Servicing, Inc. v. MS Health, Inc. , 221 A.D.3d 504, 505 (1st Dept. Nov. 21, 2023) ( here ), the Appellate Division, First Department addressed the issue of whether a foreign limited liability company had the capacity to sue in New York due to defects in the entity’s corporate filings. In answering the question, the Court looked at the parties involved and who was the real party in interest with regard to the allegations asserted in the action.  The plaintiff in MS Health , Kapitus Servicing, Inc. (“Kapitus”), filed suit against, among others, MS Health Inc.—a subsidiary of Epazz, Inc. (“Epazz”), which was owned by Shaun Passley (“Passley”). MS Health claimed that Kapitus could not bring suit as the agent for TVT Capital, LLC (“TVT Capital”), a foreign limited liability company, because of purported defects in TVT Capital’s corporate filings in New York. The Court rejected the argument, holding that Kapitus had standing to bring the action in its own right because it was the real party in interest in the relief sought: MS Health failed to establish prima facia entitlement to summary judgment as Kapitus Servicing, as a contracting party, generally has a right to maintain an action in its own name (CPLR 1004). Notwithstanding its status as a servicing agent for TVT Capital, Inc., Kapitus had independent authority and its own beneficial interest in the subject agreement …. MS Health does not contest that Kapitus was a corporation registered in New York with its own independent capacity to file lawsuits. Moreover, Kapitus had a pecuniary interest in the agreement. Thus, Kapitus is a “real party in interest,” entitled to maintain this action in its own name…. Further, New York’s Limited Liability Company Law § 802 (b) (i) states that a foreign limited liability company’s failure to fully comply with the filing requirements does not impair the right of any other party to maintain an action. The same issue of capacity was before the Court in Kapitus Servicing, Inc. v. Epazz, Inc. , 2024 N.Y. Slip Op. 04741 (Oct. 1, 2024) ( here ). Epazz concerned a suit to enforce a settlement agreement, dated June 30, 2017, between plaintiff and defendants Epazz, Cynergy Corporation, and Passley (collectively, the “defendants”). The settlement agreement required defendants to pay to plaintiff’s predecessor in interest a sum certain in three monthly installments. In the event of default, plaintiff was entitled to enter judgment through a confession of judgment. It was undisputed that, after making some payments, defendants ceased making the remaining payments. On December 19, 2019, plaintiff sent a notice of default. Defendants failed to cure.  Plaintiff moved for summary judgment on its claims and to strike defendants’ counterclaim and affirmative defenses. Defendants moved to dismiss the complaint or alternatively for summary judgment on their counterclaim and to dismiss plaintiff’s claims. Defendants argued that plaintiff lacked the capacity to bring the action, claiming that the complaint was brought by Kapitus as the agent and servicing provider for TVT Capital, not in its own name, as a party to the settlement agreement, or as a third-party beneficiary of the settlement agreement. As TVT Capital’s agent, defendants argued that Kapitus was without authority to bring suit for TVT Capital because TVT Capital was without authority to commence the action. According to defendants, TVT Capital failed to publish and file its certificate of publication within 120 days of its filing (for a certificate of authority) as required under the Limited Liability Law. Defendants also argued that plaintiff breached the settlement agreement because it failed to remove a UCC lien on certain assets of the defendants. Defendants maintained that for one year following the execution of the settlement agreement, defendants had to make all payments due under the settlement agreement or have cured any default within 21 days in order for plaintiff to remove the UCC lien it filed against defendants. Defendants contended that it was undisputed that plaintiffs never sent a 21 day notice to cure in compliance with sections 2 and 3 of the settlement agreement during this time period. Therefore, said defendants, plaintiff breached the settlement agreement because it failed to remove the UCC lien. The motion court granted plaintiff’s motion for summary judgment and denied defendants’ motion to dismiss. First, the motion court rejected defendants’ argument that Kapitus lacked the capacity to sue. Relying on MS Health , supra , the motion court held that “it irrelevant whether TVT Capital ha the capacity to bring suit in New York, because it undisputed that Kapitus, who is the plaintiff, has capacity as a registered corporation with active standing to file suit.”   Second, the motion court rejected defendants’ breach of contract argument, finding that their reading of the settlement agreement “eviscerate ” the meaning of the clause on which they relied. Their reading eviscerates the first clause of section 7 which allowed for lien removal if defendants made ALL payments due under this agreement. Their reading also eviscerates plaintiff’s right to receive an entire year of payments before removing the lien.  If all defendants had to do for lien removal was to cure after a default notice, there would be no reason to have the clause about paying within a year or making all scheduled payments for the year.  “At bottom,” concluded the motion court, “defendants have conceded that they did not pay all amounts due under the settlement agreement and have therefore admitted their own breach.” Since plaintiff “offered sworn testimony and documentary evidence regarding its damages in a sum certain,” the motion court granted plaintiff’s motion and denied defendants’ motion. On appeal, the Appellate Division, First Department unanimously affirmed. The Court held that the “action was not subject to dismissal for lack of capacity, for substantially the same reasons stated in recent decision” in MS Health , supra . “Regardless of whether TVT Capital LLC, a foreign limited liability company, was barred from initiating suit in New York ( see Limited Liability Company Law § 802 ),” said the Court, plaintiff was a “real party in interest” entitled to maintain the action in its own name. The Court explained that “ otwithstanding its status as a servicing agent for TVT, Kapitus was a signatory to the subject settlement agreement and had a pecuniary interest in the underlying financing agreements.” As such, concluded the Court, plaintiff was “a ‘real party in interest’ entitled to maintain th action in its own name.” Additionally, the Court held that “Kapitus … indisputably had the right to bring suit on TVT’s behalf,” notwithstanding the latter’s noncompliance with Limited Liability Company Law § 802 : “a foreign limited liability company’s noncompliance with filing requirements ‘shall not limit or impair … the right of any other party to maintain any action or special proceeding on any such contract, act or omission.’” Finally, the Court held that the “motion court correctly concluded that defendants did not comply with their obligations under ¶ 7 of the settlement agreement such that plaintiff’s obligation to remove liens was triggered.” “It is undisputed,” explained the Court, “that defendants did not make all payments due under the settlement agreement within the first year it was in effect, nor did they cure these defaults within this period.” __________________________ 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. 221 A.D.3d at 505 (citations omitted) Slip Op. at *1 Id. Id. (citing CPLR 1004; Airlines Reporting Corp. v. Pro Travel , 239 A.D.2d 233, 234 (1st Dept. 1997)). Id. Id. Id.

By:  Jeffrey M. Haber In Rabinowitz v. Clarke , 2024 N.Y. Slip Op. 04627 ( st Dept. Sept. 26, 2024) ( here ), the Appellate Division, First Department addressed legal principles and causes of action that are familiar to readers of this Blog: fraud, the particularity requirement of CPLR 3016(b), the statute of limitations applicable to fraud claims, breach of contract and the duplication doctrine. We examine Rabinowitz below. Rabinowitz arose from plaintiff providing defendant with $60,000.00 on October 5, 2016, in furtherance of a real estate investment for the benefit of both parties . However, instead of using the $60,000.00 for the agreed upon purpose, plaintiff alleged that defendant used the money for his own personal use. Plaintiff sought the return of the $60,000.00, plus interest and other related expenses as a result of defendant’s alleged breach of contract and fraud. Plaintiff filed the summons and verified complaint on June 4, 2021. Plaintiff moved for an order striking defendant’s affirmative defenses; and defendant cross-moved for an order to dismiss the complaint pursuant to CPLR 3211 (a) (5), and (a) (7), and CPLR 3016 (b). In the cross-motion, defendant argued that the complaint should be dismissed on the grounds that the applicable statute of limitations barred the action, the complaint failed to state a cause of action, the fraud claim was not pleaded with the requisite particularity, and that plaintiff’s claim for unjust enrichment was duplicative of plaintiff’s breach of contract claim. Defendant alleged that plaintiff’s breach of contract claim was conclusory and omitted the terms of the alleged agreement . Defendant maintained that the complaint was not clear as to the terms of any contract between the parties, particularly with respect to the $60,000.00 payment. Thus, without identifying the terms of the agreement between the parties, defendant maintained that there could be no claim for breach of contract. Without such a claim, said defendant, plaintiff could not take advantage of the six-year statute of limitations. Plaintiff countered by alleging that there was an agreement between the parties pursuant to which defendant provided $60,000.00, thereby establishing defendant’s performance thereunder. Plaintiff claimed that defendant breached the agreement by not using the $60,000.00 to purchase real estate and by not returning the money to plaintiff. Without much discussion, the motion court held that plaintiff stated a claim for breach of contract. As such, the motion court held that the claim was timely brought. Regarding the fraud claim, defendant argued that plaintiff failed to plead fraud with particularity as required under CPLR 3016(b). Defendant maintained that plaintiff provided no details about the nature of the alleged fraud, or how and why plaintiff was misled by it. According to defendant, plaintiff’s fraud allegations were conclusory and insufficient to support the claim . Plaintiff argued that defendant tricked him into paying $60,000.00 by misrepresenting that defendant would invest the money in real estate. Plaintiff maintained that the complaint identified the who, what, when and how of the alleged fraud. Plaintiff also alleged that he relied on the misrepresentations and gave $60,000.00 to defendant in reliance on the alleged misrepresentations. Plaintiff maintained that the complaint and the documents submitted in opposition to the motion sufficed to satisfy CPLR 3016(b ). Plaintiff further argued that since he stated a claim for fraud, the action (which was commenced in June 2021) was timely brought. The motion court agreed with plaintiff and denied the cross-motion. On appeal, the First Department unanimously affirmed the motion court’s order. The Court held that plaintiff’s fraud allegations were not conclusory “ ven if the complaint lack clarity in describing “the substance of the misrepresentations.” Plaintiff adequately alleged fraud so as to invoke the six-year limitation period under CPLR 213(8). Affording plaintiff the benefit of every possible favorable inference, the complaint alleges that, on October 5, 2016, plaintiff gave defendant $60,000 in furtherance of a real estate investment that defendant led plaintiff to believe was to be a valid transaction for the parties' mutual benefit. These allegations adequately identify, in nonconclusory fashion, “who made the misrepresentations" and “when the misrepresentations were made” …. Even if the complaint lacks clarity in describing “the substance of the misrepresentations” …, plaintiff alleges that defendant tricked into paying $60,000 by misrepresenting that defendant would invest the money in real estate. Therefore, said the Court, the foregoing allegations “sufficiently “inform ” defendant “with respect to the incidents complained of.” The Court also held that plaintiff “adequately alleged breach of contract so as to invoke the six-year limitation period under CPLR 213(2).” The Court explained that “plaintiff alleged that the parties agreed to form a partnership to purchase real estate in September 2016; that defendant was ‘given the sum of $60,000.00 on October 5, 2016,’ ‘under the guise of purchasing and renovating real property’; that plaintiff gave the money to defendant ‘in furtherance of the parties’ agreement to act as partners, to purchase and renovate real property’; and that defendant breached the agreement by using the money for himself rather than to purchase and renovate real property, causing a loss of $60,000 to plaintiff.” “These allegations,” concluded the Court, “sufficiently set forth facts constituting the basic elements of a 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. In opposition to the motion, plaintiff submitted a photograph of a $60,000.00 check from plaintiff to defendant and a partnership agreement signed by the parties. Defendant did not dispute the authenticity of those documents. Therefore, said the motion court, “the complaint, as supplemented by the documents that plaintiff submitted in opposition to defendant’s contained sufficient allegations to state a cause of action” for breach of contract. The motion court also noted that the partnership agreement included an arbitration clause. Since neither party sought to enforce it, the motion court declined to sua sponte do so. P.S. Fin., LLC v. Eureka Woodworks, Inc. , 214 A.D.3d 1, 10-11 (2d Dept. 2023); Sabr Chems. Group v. Northeast Chems. , 192 A.D.3d 647, 648 (1st Dept. 2021). Because plaintiff submitted the partnership agreement in opposition to the motion, the motion court held that plaintiff’s claim of unjust enrichment was duplicative of his claim of breach of contract. See Cooper, Bamundo, Hecht & Longworth, LLP v. Kuczinski , 14 A.D.3d 644, 645 (2d Dept. 2005); Shear Enters., LLC v. Cohen , 189 A.D.3d 423, 424 (2d Dept. 2020). As such, the motion court dismissed plaintiff’s unjust enrichment claim. Under CPLR 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Conclusory allegations will not suffice. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Slip Op. at *1 (citing INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 172 A.D.3d 492, 493 (1st Dept. 2019)). Id. (citation omitted). Id. (quoting Pludeman , 10 N.Y.3d at 491). Id. Id. Id. (citing Morris v. 702 E. Fifth St. HDFC , 46 A.D.3d 478, 479 (1st Dept. 2007)).

By: Jonathan H. Freiberger Partition is “the act or proceeding by which co-owners of property cause it to be divided into as many shares as there are owners, according to their interests therein, or if that cannot be equitably done, to be sold for the best obtainable price and the proceeds distributed according to the respective interests.” Chiang v. Chang , 137 A.D.2d 371, 373 (1 st Dep’t 1988) (citation and internal quotation marks omitted). Partition actions are governed by Article 9 of the Real Property Actions and Proceedings Law (“RPAPL”). RPAPL § 901 provides, inter alia , that a “person holding and in possession of real property as joint tenant or tenant in common, in which he has an estate of inheritance, or for life, or for years, may maintain an action for the partition of the property, and for a sale if it appears that a partition cannot be made without great prejudice to the owners.” RPAPL § 901(1). Addressing partition from an historical perspective, the First Department, in Chiang , recognized that “judicial partition” statutes “have existed in this country since the time of colonial governments” and, therefore, “so ancient is the history of judicial partitions, and so favored are partitions that it is now beyond contention that, independent of any statute, a court of equity has the inherent power to issue a decree of partition or require the sale of jointly owned property.” Id . “The actual physical partition of property is statutorily authorized as the preferred method and is presumed appropriate unless one party demonstrates that physical partition would cause great prejudice to the owners, in which case the property must be sold at public auction.” Snyder Fulton Street, LLC v. Fulton Interest, LLC , 57 A.D.3d 511, 513 (2 nd Dep’t 2008) (citations omitted). The appropriateness of physical partition, as opposed to sale, is a fact question that is determined by analyzing “whether the whole property, taken together, will be greatly injured or diminished in value if separated into parts, in the hands of different persons, according to their several rights or interests in the whole: in other words, whether the aggregate value of the several parts when held by different individuals in severalty would be materially less than the whole value of the property if owned by one person.” Id. (citation, internal quotation marks and ellipses omitted). A party asserting a partition and sale cause of action, “establishe his prima facie entitlement to judgment as a matter of law by demonstrating his ownership and right to possession of the subject property and by showing that a physical partition would lead to great prejudice.”  Goldberger v. Rudnicki , 94 A.D.3d 1048, 1050 (2 nd Dep’t 2012) (citation omitted). “The right to partition is not absolute, however, and while a tenant in common has the right to maintain an action for partition pursuant to RPAPL 901, the remedy is always subject to the equities between the parties.” Id . (citations omitted); see also Tsoukas v. Tsoukas , 107 A.D.3d 879, 880 (2 nd Dep’t 2013). For example, despite the moving party on a summary judgment motion having a name on the deed, and otherwise demonstrating a prima facie case for partition, the opposing party raised triable issues of fact “as to the parties’ respective interests, rights, and shares in the property through her sworn affidavit in which she averred that, inter alia, the defendant did not make any contributions toward the purchase price or maintenance of the property and that the defendant’s name was on the deed as a matter of convenience.” Mi King Chew v. La Chea , 175 A.D.3d 675, 676 (2 nd Dep’t 2019) (citations omitted). On September 25, 2024, the Appellate Division, Second Department, decided 459 Washington Avenue, LLC v. Atkins , a case in which the Court addressed the issue of whether individual members of an LLC can partition real property owned by the LLC in which the individual parties are members. The complaint in 459 Washington alleges that the individual plaintiffs and the defendant “were the sole ‘owners’ of the plaintiff 459 Washington Avenue, LLC (hereinafter the LLC), and that , and the defendant held title to the property as tenants in common, each possessing a one-third undivided interest.” “Irreconcilable acrimony” amongst the parties precipitated the commencement of a partition action. In their motion for summary judgment, the plaintiffs submitted, inter alia , a deed to the subject property by which the property “was conveyed to the LLC, which the plaintiffs contended represented the current ownership of the property.” In response, the defendant argued that “the evidence submitted on the plaintiffs' motion established that the property was owned by the LLC and not by tenants in common or a joint tenancy, and, therefore, partition was not an available remedy.” The defendant appealed from a grant of summary judgment in favor of the plaintiffs. The Second Department reversed and, in so doing stated: The evidence submitted by the plaintiffs on their summary judgment motion established that, contrary to the allegations in the complaint, the property was owned exclusively by the LLC and not by , and the defendant as tenants in common. Essentially, the plaintiffs contended that the three individual parties held equal membership interests in the LLC, which owned the property. "A membership interest in the limited liability company is personal property. A member has no interest in specific property of the limited liability company" ( Limited Liability Company Law § 601 ). Thus, the individual parties hold no ownership interest in the property. Further, even assuming that the plaintiffs had established that the individual parties held equal membership interests in the LLC, there is no allegation or evidence that the LLC has been dissolved or that the LLC's affairs have been properly wound up ( see id . § 703 ). Accordingly, this action, inter alia, for partition and sale of the LLC's property cannot be maintained ( see Daly v Messina , 51 AD3d 856, 857 <2 nd dep’t 2008> nd dep’t 2008>; Greshin v Sloane , 138 AD2d 569, 570 <2 nd dep’t 1988> nd dep’t 1988>; see also Sealy v Clifton , LLC , 68 AD3d 846, 847 <2 nd dep’t 2009> nd dep’t 2009>). 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.

By: Jeffrey M. Haber During the Covid pandemic, conducting discovery, especially the taking of depositions, was challenging. Parties and their counsel had to adapt to the global health crisis. One adaptation was to remotely take depositions. As the courts opened and a new normalcy came into being, many parties and attorneys nevertheless continued to avail themselves of the remote deposition. In the Commercial Division of the Supreme Court of the State of New York, the option to conduct depositions remotely was added to the rules of the court. Others, however, have refused to consent to virtual depositions, demanding that depositions be taken in person. The starting point for the analysis of where a deposition is to be taken can be found in CPLR 3110. Under CPLR 3110(1), “ deposition within the state on notice shall be taken … when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending .” (Emphasis added.) In other words, the statutory preference for the location of a deposition is, among other places, “where the action is pending.” The foregoing rule applies “to nonresidents as well as to residents of the State.” “ bsent a showing of hardship, the nonresidence of a defendant does not preclude an examination in the county where the action is pending.” Whether the deposition of a non-resident plaintiff should be conducted virtually or in person was before the court in Sumec Textile & Light Indus. Co., Ltd. v. Zee Co. Apparel Corp. , 2024 N.Y. Slip Op. 51306(U) (Sup. Ct., N.Y. County Sept. 19, 2024) ( here ). As discussed below, the motion court held that plaintiff was unable to demonstrate hardship sufficient to have the deposition conducted virtually. Plaintiff argued that good cause existed under Rule 37 of the Rules of the Commercial Division of the Supreme Court to permit its representative to be deposed virtually. Plaintiff argued that its representative resides in China and that the time and expense required for her to travel to New York for a deposition would be unduly burdensome. Plaintiff further argued that plaintiff’s representative is the principal caretaker for a young child and cares for her elderly parents, who all reside in China. Defendant argued that plaintiff advanced nothing more than an argument of “inconvenience”, which is insufficient to demonstrate “good cause for plaintiff to avoid the obligation to produce a witness for deposition in New York.” Defendant also argued that defendant had the right to conduct the deposition in person, which would provide it with an opportunity “to better assess the credibility of the witness and to present the witness with physical evidence relevant to the case, including a coat and hundreds of documents.” In addition, defendant expressed concerns “that a virtual deposition be prone to technical issues in viewing and sharing documents during the questioning of the witness.” The motion court agreed with defendant, holding that plaintiff’s representative had to be deposed in person in New York. The reasons cited by plaintiff are insufficient to overcome the presumption that a party litigating in New York should accept the costs and expenses of choosing to do so. Moreover, as plaintiff has chosen New York as the venue to present its claim, it cannot reasonably argue to be aggrieved by the accompanying obligations. Takeaway “While ‘ he preferred practice, except in cases where hardship is shown to exist, is to proceed with examinations here’, a preferred practice is not the same as an inflexible rule.” Despite the flexibility, the moving party must demonstrate hardship. While one would think that childcare responsibilities and travel across the globe would suffice, as shown in Sumec , more is needed to overcome the statutory requirement that the deposition of a party is to be taken in the forum in which the action is pending. This is especially so when the movant is the plaintiff in the action. ________________________________ 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 Rule 37 of the Rules of the Commercial Division of the Supreme Court, 22 N.Y.C.R.R. 202.70. Gazerwitz v. Adrian , 28 A.D.2d 556 (2d Dept. 1967). Id. (citations omitted). See also Gryphon Dom. VI, LLC v. APP Intl. Fin. Co., B.V. , 52 A.D.3d 219, 219 (1st Dept. 2008); Swiss Bank Corp. v. Geecee Exportaciones, Ltda. , 260 A.D.2d 254 (1st Dept. 1999); Kahn v. Rodman , 91 A.D.2d 910 (1st Dept. 1983). In determining that good cause exists, the court may consider, among enumerated and other non-enumerated factors, “the distance between the parties and the witness, including time and costs of travel by counsel and litigants and the witness to the proposed location for the deposition,” “ hether the witness is a party to the litigation,” and the “importance or significance of the testimony of the witness to the claims and defenses at issue in the litigation.” See Rule 37(b). Slip Op. at *1. Id. Id. Id. at *2. Gryphon Dom. , 52 A.D.3d at 219 (quoting Kahn , 91 A.D.2d at 911). CPLR 3110(1).

By: Jeffrey M. Haber As a general matter, “ cross trade is a practice where buy and sell orders for the same asset are offset without recording the trade on the exchange.” An adviser that arranges for a security to be purchased from or sold to a client from its own account (which can include an affiliate of the advisor) – as opposed to purchasing or selling the security in the secondary markets – is engaging in a “principal trade.” An “agency cross trade” occurs when an adviser arranges for a trade to be executed between a client and another party, and a “cross trade” occurs when an adviser effects a trade between two or more of its advisory clients’ accounts, but does not charge a fee for effecting the transaction (collectively, “cross trades”). An adviser that enters its clients into these types of transactions implicates a variety of legal obligations under the Investment Advisers Act of 1940 (“Advisers Act”), particularly its fiduciary duty. Cross trades can benefit clients because the practice enables a portfolio manager to move securities among client accounts without having to expose the security to the market thereby saving transaction and market costs that would otherwise be paid to executing broker-dealers. Conversely, cross trades can also pose substantial risks to clients due to the inherent conflict of interest for the adviser, which has a duty of loyalty and duty of care to seek best execution for each client. Cross trading involving mutual funds implicates the Investment Company Act of 1940 (“ICA”). Sections 17(a)(1) and 17(a)(2) of the ICA generally prohibit any affiliated person of a registered investment company (“RIC”) or any affiliated person of the affiliated person, acting as principal, from knowingly selling a security to or purchasing a security from the RIC unless the person first obtains an exemptive order from the Securities Exchange Commission (“Commission” or SEC”) under Section 17(b). Rule 17a-7 promulgated under the ICA exempts from these prohibitions certain cross trades where the affiliation between a RIC and its trading counterparty arises solely because the two have a common investment adviser, or investment advisers that are affiliated persons of each other, common directors, or officers, provided that the cross trades are effected in accordance with Rule 17a-7. Rule 17a-7 requires, among other things, that cross trades be executed at the “independent current market price,” which is defined in relevant part as “the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry.” If a brokerage commission, fee, or other remuneration is paid in connection with the cross trade, the cross trade is not eligible for an exemption under Rule 17a-7 and is therefore, impermissible. Section 48(a) of the ICA prohibits “any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do” under the ICA or the rules thereunder. The Commission has stated that interpositioning a dealer in cross trades does not remove the cross trades from the prohibitions of Section 17(a). On July 21, 2021, the Commission’s Division of Examinations issued a Risk Alert on cross trades and principal transactions. Among other things, the SEC Staff opined that with respect to principal trades, to comply with Section 206(3) of the Advisers Act, advisers had to make written disclosures and obtain the consent of the affected client before the transaction was completed. The Staff noted, however, that a more “robust” disclosure regimen, whereby the disclosure includes a description of the nature and significance of the advisers’ conflicts of interest relative to the impacted clients, may be required to comply with Section 206 and Rule 206(3)-2 of the Advisers Act. The Staff also provided certain “observations on ways to improve compliance,” which apply to principal transaction and cross trade situations on a broad scale). The Staff’s suggestions included: Adopt and enforce compliance policies and procedures that: (1) incorporate all applicable legal and regulatory requirements; (2) clearly articulate the activities covered by the advisers’ written compliance policies and procedures; (3) set standards that address the firms’ expectations for each of these activities; (4) include supervisory policies and procedures; and (5) establish controls to determine whether policies and procedures are being properly followed and documented in the required manner. Conduct testing for compliance with policies and procedures. Provide clients with full and fair disclosure of all material facts surrounding principal and cross trades. Provide disclosures to clients regarding principal and cross trading practices in multiple documents. In addition to written disclosures, discuss the rationale for executing principal trades during verbal conversations with clients.   Cross trading, among other things, was at issue in a settled enforcement action with Macquarie Investment Management Business Trust (“MIMBT”), in which the SEC charged MIMBT with overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (“CMO”) held in 20 advisory accounts, including 11 retail mutual funds, and executing hundreds of cross trades between advisory clients that favored certain clients over others to minimize losses to those clients. According to the SEC’s order ( here ), from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Strategy investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots. The SEC found that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices. This resulted, said the SEC, in MIMBT overstating the performance of client accounts holding the overvalued CMOs. The SEC further found that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, said the SEC, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. The SEC noted that these trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale. The SEC also found that MIMBT arranged for approximately 175 dealer-interposed cross trades in which MIMBT temporarily sold odd lot CMO positions to third-party broker-dealers and then repurchased those same positions for allocation to one or more affiliated client accounts, providing liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices. “It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.” The SEC found that MIMBT violated the antifraud and compliance provisions of the Advisers Act, and certain provisions of the ICA. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million. MIMBT also agreed to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading.  __________________________________ 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. Chen, James, “Cross Trade”, Investopedia (Updated August 6, 2024) ( here ). See , e.g. , Advisers Act Sections 206(1), (2), and (3) and Rules 206(3)-2 and 206(4)-7. An adviser’s obligation as a fiduciary is enforceable through Section 206 of the Advisers Act. See Exemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and Certain Affiliated Persons Thereof , Investment Company Act Release No. 11136, 1980 WL 29973, at *2 n.10 (Apr. 21, 1980). See Risk Alert: Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from An Examination Initiative (July 21, 2021) ( here ). The Risk Alert was issued as a follow up to a 2019 alert, which focused on common cross trade and principal transaction deficiencies observed in examinations conducted over a three-year period. See Risk Alert: Investment Adviser Principal and Agency Cross Trading Compliance Issues (Sept. 4, 2019) ( here ). Id.

By: Jonathan H. Freiberger This BLOG has frequently addressed issues related to a party’s standing, in many different contexts, to commence litigation. In prior BLOG articles we have explained that in order to prosecute a lawsuit, the plaintiff must have standing to do so. Thus, we have noted that“ tanding involves a determination of whether the party seeking relief has a sufficiently cognizable stake in the outcome so as to cast the dispute in a form traditionally capable of judicial resolution. Graziano,v. County of Albany , 3 N.Y.3d 475, 479 (2004) (citations, internal quotation marks and brackets omitted). Put another way, “ tanding to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant's request.” Caprer v. Nussbaum , 36 A.D.3d 176, 182 (2 nd Dep’t 2006). Accordingly, the question of whether a plaintiff has standing is “is a threshold determination, resting in part on policy considerations, that a person should be allowed access to the courts to adjudicate the merits of a particular dispute that satisfies the other justiciability criteria.” Caprer , 36 A.D.3d at 182 (Citations omitted). “‘Injury-in-fact has become the touchstone’ and requires ‘an actual legal stake in the matter being adjudicated.’” Big Apple Consulting USA, Inc. v. Belmont Partners , LLC, 20 Misc. 3d 1144(A) (Sup. Ct. Nassau Co. 2008) ( quoting Soc. Of Plastics Indus. Inc. v. County of Suffolk , 77 N.Y.2d 761, 772 (1991)). The Carper Court noted that the “Court of Appeals has defined the standard by which standing is measured, explaining that a plaintiff, in order to have standing in a particular dispute, must demonstrate an injury in fact that falls within the relevant zone of interests sought to be protected by law”. Caprer , 36 A.D.3d at 183 ( citing Matter of Fritz v. Huntington Hosp. , 39 N.Y.2d 339, 346 (1976). On September 18, 2024, the Second Department decided Whitson’s Food Service, LLC v. A.R.E.B.A.-Casriel, Inc. , a case in which the defendant moved to dismiss based on standing. In 2021, Whitson’s Food Service Corp. (“Corp.”) entered into a contract with the defendant by which Corp. was to provide various food-related services. The contract provided that: This Agreement and the rights granted hereunder may not be assigned by either Party, whether by operation of law, merger, change of ownership or otherwise, without the prior written consent of the other Party, and any unauthorized assignment shall be void ab initio. Eight months after entering into the contract, Corp. merged with Whitson’s Food Services, LLC (“LLC”), the plaintiff in the action. Approximately one year later, LLC commenced an action for breach of contract and unjust enrichment based on the defendant’s failure to pay in excess of $400,000.00 due under the contract. The defendant moved to dismiss the complaint arguing, inter alia , that the plaintiff, LLC, was not a party to the contract and, therefore, lacked standing to commence the action. Similarly, the defendant argued that it had not consented to any assignment of Corp.’s contract rights to LLC. The Second Department affirmed the motion court’s denial of the defendant’s motion. The Second Department found that the defendant satisfied its burden of establishing lack of standing because “ was not a party to the contract and that the defendant did not provide express consent to any assignment of the contract.” (Citation omitted.) Nonetheless, issues of fact were determined to exist because “ raised a question of fact as to its standing, primarily through its submission of an affidavit of its chief financial officer, who attested that the merger was a mere change in corporate form that had no effect on the beneficial ownership, possession, control, or daily operations of the business.” (Citation omitted.) Thus, “ nder the circumstances, raised a question of fact as to whether the merger constituted an assignment that violated the nonassignment provision of the contract.” (Citations omitted.) The Court also addressed LLC’s unjust enrichment claim. In order to plead a claim for unjust enrichment the plaintiff must allege “that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.” Georgia Malone & Company, Inc. v. Rieder , 19 N.Y.3d 511, 516 (2012) (citations and internal quotation marks omitted); see also Bedford-Carp Construction, Inc. v. Brooklyn Union Gas Co ., 219 A.D.3d 1293, 1295 (2 nd Dep’t 2023) The theory of unjust enrichment lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties.” Id. (citations internal quotation marks and brackets omitted). Claims of unjust enrichment are “rooted in the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another.” Id. (citations and internal quotation marks omitted). The Whitson’s Court noted that a “plaintiff may allege a cause of action to recover damages for unjust enrichment as an alternative to a cause of action alleging breach of contract.” (Citations and internal quotation marks omitted.) This can happen when the existence of a contract “is in dispute”. F&R Goldfish Corp. v. Furleiter , 210 A.D.3d 643, 646 (2 nd Dep’t 2022); see also Cheung v. Dolar Shop Restaurant Group, LLC , 229 A.D.3d 738, 740 (2 nd Dep’t 2024). 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: to find our BLOG articles related to standing, visit the “ Blog ” tile on our website and enter “standing” in the “search” box. Eds. Note: to find our BLOG articles related to unjust enrichment, visit the “ Blog ” tile on our website and enter “unjust enrichment” in the “search” box.

By: Jeffrey M. Haber In Murray v. Samsung Elecs. Am., Inc. , 2024 N.Y. Slip Op. 51257(U) (Sup. Ct. Monroe County Sept. 12, 2024) ( here ), the court was asked to consider the viability of claims for violations of General Business Law §§ 349 and 350, breach of contract, and breach of the warranty of merchantability. As discussed below, the motion court held that plaintiff failed to satisfy the elements of the claims asserted. In particular, the motion court held that plaintiff failed to allege facts showing that the statements claimed to be false were not likely to mislead a reasonable consumer acting reasonably under the circumstances as required under GBL §§ 349 or 350. The motion court also held that plaintiff’s breach of contract claim was deficient because she failed to allege contractual privity with defendant. Finally, the motion court held that plaintiff failed to allege any facts that would support a claim for the breach of implied warranty (of either fitness or merchantability). Summary of Allegations in the Complaint Plaintiff alleged that she purchased a Samsung Galaxy S22 Ultra smartphone in 2021 or 2022 from a cell phone carrier and/or consumer electronics store. She expected that the smartphone would come with a “charging block”; instead the smartphone only came with a charging cord. Plaintiff claimed that the only notice provided to consumers was a statement on the back of the smartphone's box stating: “Packaging Contains: Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.” The box in which the plaintiff’s smartphone was packaged for sale, however, also contained a disclaimer, in bolded lettering, stating: “Wall charger and headphones sold separately.…” Plaintiff alleged that without the charging block purchasers are unable to use the smartphone as intended, and the purchase of a charging block is required. Had plaintiff known that the S22 Ultra did not come with a charging block, she would not have paid the asking price or would not have purchased the smartphone. Plaintiff alleged violations of GBL §§ 349 and 350, breach of contract, and breach of implied warranty of merchantability/ fitness for a particular purpose. Defendant moved to dismiss. The motion court granted the motion. The GBL Claims To state a claim under GBL §§ 349 and 350, “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 these statutes 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 either Section 349 or Section 350 “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 and 350. 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. The motion court concluded, “as a matter of law, that the statements contained on the packaging box for the S22 Ultra purchased by plaintiff were not likely to mislead a reasonable consumer acting reasonably under the circumstances.” First, noted the motion court, “the box clearly identified the contents, stating that it contained: ‘Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.’” “Notably absent from the list of contents,” said the motion court, was “a wall charger (‘charging block’).” From this list, concluded the motion court, “ reasonable consumer acting reasonably would thus be aware that the purchase of the smartphone did not include a wall charger.” Second, said the motion court, “the packaging box specifically stated that the wall charger was not included. Thus, Samsung specifically disclaimed the inclusion of a wall charger.” Under New York law, “ disclaimer may not bar a General Business Law § 349 claim at the pleading stage unless it utterly refutes plaintiff’s allegations, and thus establishes a defense as a matter of law.” The motion court found that the disclaimer at issue – that no wall charger was included in the packaging – “eliminate any possibility that a consumer would be misled into believing a wall charger was included.” Since defendant did more than disclaim liability generally but, rather specifically disclaimed the allegedly deceptive conduct, “so as to eliminate any possibility that a reasonable consumer would be misled,” the motion court dismissed the GBL §§ 349 and 350 causes of action. The Breach of Contract Cause of Action The motion court held that the “breach of contract cause of action must be dismissed as the plaintiff failed to plead the existence of a valid contract and contractual privity between the plaintiff and the defendant.” The motion court found that “there no facts alleged in the complaint supporting the existence of a valid contract (implied or otherwise).” The motion court explained that plaintiff failed to allege mutual assent between her and defendant: “The essence of the plaintiff’s breach of contract claim is that the terms of the contract were that Samsung agreed to provide a wall charger. However, the documentary evidence (the photograph included by plaintiff in her complaint) establishes that Samsung specifically stated a wall charger was not included in the sale of the smartphone.” Notably, the motion court found that plaintiff failed to allege contractual privity with defendant: “Plaintiff alleges she purchased the smartphone from a vendor, not from Samsung directly and thus the complaint fails to establish contractual privity between the Samsung and the plaintiff.” Accordingly, the motion court dismissed the breach of contract cause of action. The Warranty of Merchantability Claim “The implied warranty of merchantability is a guarantee by the seller that its goods are fit for the intended purpose for which they are used and that they will pass in the trade without objection.” To establish that a product is defective for purposes of a breach of implied warranty of merchantability claim, a plaintiff must show that the product was not “reasonably fit for intended purpose,” an inquiry that “focuses on the expectations for the performance of the product when used in the customary, usual and reasonably foreseeable manners.” The motion court held that plaintiff “fail to allege any facts that would support a breach of implied warranty claim (of either fitness or merchantability).” For instance, the motion court noted that plaintiff failed “to allege an inability to charge the smartphone (as the plaintiff concede the smartphone included a charging cord allowing it to be charged through other methods).” Additionally, the motion court rejected “plaintiff’s allegation that Samsung’s smartphone was ‘not fit for the ordinary purpose for which it was intended and did not conform to the promises or affirmations of fact made on the packaging, container or label, because it was marketed as if it would be sold with the essential parts to render it functional.’” That allegation, said the motion court, was “specifically rebutted by the documentary evidence showing Samsung disclaimed inclusion of a wall charger but did include a charging cord allowing it to be charged through any compatible charging port.” The motion court also held that plaintiff “failed to allege that the alternative methods to charge the phone are unavailable to the standard consumer or unreasonable.” “Although the plaintiff prefers charging the smartphone with a charging block,” explained the motion court, “that is not the exclusive method of charging the phone.” “Absent this allegation,” concluded the motion court, “the smartphone cannot be said to be not fit for the ordinary purpose it was intended.” Finally, the motion court dismissed the implied warranty claim because there was “no privity of contract between Samsung.” As noted, “ laintiff asserted in the complaint she purchased the smartphone from a third party and was claiming only economic loss.” _______________________ 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. 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 , 94 N.Y.2d at 343. 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, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 176 (2021); 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. Slip Op. at *2. Id. Id. Id. Id. Goshen , 98 N.Y.2d at 326;  Fink v. Time Warner Cable , 714 F.3d 739, 742 (2d Cir. 2013). Slip Op. at *2. Gaidon , 94 N.Y.2d at 345; Himmelstein , 37 N.Y.3d at 180. Slip Op. at *2. Id. at *2-*3. Id. at *3. Id. (citing Collyer v. LaVigne , 202 A.D.3d 1335 (3d Dept. 2022), lv. dismissed , 39 N.Y.3d 925 (2022)). Saratoga Spa & Bath v. Beeche Sys. Corp ., 230 A.D.2d 326, 330 (3d 1997),  lv. dismissed , 90 N.Y.2d 979 (1997) (citation omitted). Id . at 330; see U.C.C. 2—314(2)(c). Denny v. Ford Motor Co ., 87 N.Y.2d 248, 258-259 (1995). See also Wojcik v. Empire Forklift, Inc. , 14 A.D.3d 63 (3d Dept. 2004). Slip Op. at *3. Id. Id. Id. Id. Id. Id. Id. Id. (citing Ofsowitz v. Georgie Boy Mfg., Inc ., 231 A.D.2d 858, 859 (4th Dept. 1996)).

By Jonathan H. Freiberger Discovery (or disclosure) in litigation, which is governed in New York State practice by Article 31 of the CPLR , is the mechanism by which litigants obtain facts and information from other parties and non-parties to support their claims and/or defenses and otherwise prepare for trial. This BLOG has previously addressed discovery issues. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and the BLOG articles hyperlinked therein. CPLR 3101 provides that “ here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” CPLR 3101(a). The Court of Appeals has interpreted the “material and necessary” requirement liberally to “require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.” Allen v. Crowell-Collier Publ’g Co. , 21 N.Y.2d 403, 406 (1968). “The test is one of usefulness and reason.” Id. Thus, “if there is any possibility that the information is sought in good faith for possible use as evidence-in-chief or in rebuttal or for cross-examination, it should be considered evidence material . . . in the prosecution or defense and thus should be disclosed pursuant to CPLR 3101(a).” Lau v. Margaret E. Pescatore Parking, Inc. , 105 A.D.3d 594, 595 (1st Dept. 2013) ( quoting Allen , 21 N.Y.2d at 407) (internal quotation omitted). When a litigant fails to comply with discovery demands or discovery related court orders, the CPLR provides remedies. For example, CPLR 3124 provides that when a “person fails to respond to or comply with any request, notice, interrogatory, demand, question or order under this article, except a notice to admit under section 3123, the party seeking disclosure may move to compel compliance or a response.” Similarly, pursuant to CPLR 3126 , when a party or its representative refuses to obey a discovery order or “willfully” fails to produce information that the court finds “ought to have been disclosed,” the court may, inter alia , issue an order: (1) deeming issues related to the requested information resolved in favor of the party obtaining the order; (2) prohibiting the recalcitrant party from “supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony … or from using certain witnesses”; or, (3) “striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party.” “Willful failure” to comply with disclosure obligations “may be established by repeated failure to comply with court orders directing disclosure, including court orders issued at conferences.” Shah v. Oral Cancer Prevention Int’l, Inc. , 138 A.D.3d 722, 724 (2 nd Dep’t 2016) (Citations omitted); see also Nationstar Mort., LLC v. Jackson , 192 A.D.3d 813, 815 (2 nd Dep’t 2021). The extent of penalties issued under CPLR 3126 is “generally left to the court’s discretion.” Guardado v. K.B.G Commercial, Inc. , 209 A.D.3d 721, 722 (2 nd Dep’t 2022) (citations omitted). In addition, the New York Administrative Code provides guidance on the procedures to be followed prior to seeking court intervention to resolve discovery disputes. See, e.g., 22 NYCRR 202.20-f . Further, a particular judge’s individual part rules may also provide related (and important) guidance. On September 11, 2024, the Second Department, in Bayview Loan Servicing, LLC v. Evanson , a mortgage foreclosure action, addressed a motion to strike under CPLR 3126(3). There, the defendant served discovery demands on the plaintiff in a mortgage foreclosure action. The Plaintiff failed to respond. Three months later the defendant again served the demands; this time with a letter threatening to move to strike the lender’s complaint if responses were not served within ninety days. There was no indication that the defendant’s counsel made any effort to confer with the lender’s counsel to resolve the discovery dispute, nor did the defendant move to compel disclosure. Instead, the defendant moved to strike the lender’s complaint pursuant to CPLR 3126(3) because of the lender’s failure to respond to the discovery demands. The motion court denied the motion “on the ground that the defendant did not proceed ‘in conformity with’ 22 NYCRR 202.20-f.” The Second Department affirmed and, in so doing, stated: “To the maximum extent possible, discovery disputes should be resolved through informal procedures, such as conferences, as opposed to motion practice” (22 NYCRR 202.20-f ). All discovery motions must include “an affirmation that counsel has conferred with counsel for the opposing party in a good faith effort to resolve the issues raised by the motion” ( id. § 202.7 ; see Muchnik v Mendez Trucking, Inc. , 212 AD3d 640, 641 <2 nd dep’t 2023> nd dep’t 2023>). “The affirmation of the good faith effort to resolve the issues raised by the motion shall indicate the time, place and nature of the consultation and the issues discussed and any resolutions, or shall indicate good cause why no such conferral with counsel for opposing parties was held” (22 NYCRR 202.7 ; see Behar v Wiblishauser , 219 AD3d 793, 794 <2 nd dep’t 2023> nd dep’t 2023>). “Failure to provide an affirmation of good faith which substantively complies with 22 NYCRR 202.7(c) warrants denial of the motion” ( Behar v Wiblishauser , 219 AD3d at 794 ). Further, citing to 22 NYCRR 202.20-f , the Court noted that, absent “exigent circumstances,” prior to seeking the involvement of the court to resolve a discovery dispute, counsel must confer and make a good faith effort to resolve the dispute and, if no resolution is reached, any resulting discovery motion must be accompanied by an affirmation of good faith containing required specifics as to the steps taken to resolve the dispute. The Court found that the defendant failed to comply with 22 NYCRR 202.7 and 202.20-f(b) and that the defendant’s showing on the motion was wholly inadequate to warrant the extreme discovery sanction of striking the complaint.” (Citations 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.

By: Jeffrey M. Haber “Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate” On numerous occasions, we have written about the Securities and Exchange Commission’s (“SEC” or the “Commission”) whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede a person, such as an employee or former employee, from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements, employment contracts, and other types of agreements to silence and discourage people from reporting wrongdoing to the Commission. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws.  The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17, which provides in relevant part: (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications. Rule 21F-17 applies to any policy or procedure, or agreement, such as confidentiality, severance, and non-disclosure agreements, that may impede a person from providing information to the SEC about a securities law violation. Rule 21F-17 became effective on August 12, 2011. Since its adoption, the SEC has vigorously enforced Rule 21F-17. Despite being effective for more than 13 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used employment contracts, severance agreements and other types of agreements to silence and discourage people from reporting violations of the securities laws to the Commission. Recently the SEC announced that it had settled charges against numerous companies for violation of Section 21F. The first action was announced on September 4, 2024 ( here ). In that action, the SEC brought charges against three affiliated registrants, Commission-registered broker-dealer Nationwide Planning Associates, Inc. and investment adviser NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC, for impeding brokerage customers and advisory clients from reporting securities law violations to the SEC. The firms agreed to pay combined civil penalties of $240,000 to settle the SEC’s charges . According to the SEC’s order ( here ), from May 2021 through February 2024, Nationwide, NPA, and Blue Point collectively asked 11 retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts. The payments were intended to compensate the clients for losses caused by the firms’ alleged breaches of federal or state securities laws. The SEC found that the agreements contained provisions that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry. As described in the order, some of the agreements further required the clients to represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting. Commenting on the enforcement action , Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit, stated: “Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment. We will continue to hold firms accountable for putting roadblocks between us and their investors.” The SEC claimed that Nationwide, NPA, and Blue Point each violated Rule 21F-17(a) under the Exchange Act. Without admitting or denying the SEC’s findings, Nationwide, NPA, and Blue Point each agreed to be censured and to cease and desist from violating the whistleblower protection rule. They further agreed to a combined penalty, which was apportioned according to their relative size and financial condition, with NPA agreeing to pay $160,000, Nationwide $70,000, and Blue Point $10,000. The second set of actions was announced on September 9, 2024 ( here ). In those actions, the SEC brought charges against seven public companies for using employment, separation, and other agreements that violated rules prohibiting actions to impede whistleblowers from reporting potential misconduct to the SEC. To settle the SEC’s charges , the companies agreed to pay more than $3 million combined in civil penalties. Each of the companies was charged with violating whistleblower protection Rule 21F-17(a). In settlement of the actions, each of the firms agreed not to violate Rule 21F in the future and has taken steps to remediate the violations, including making changes to the relevant agreements. _____________________________ 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. Creola Kelly, Chief of the SEC’s Office of the Whistleblower ( here ). In April 2015, the SEC brought the first enforcement action for a violation of the whistleblower protection rule based on a company’s use of a restrictive confidentiality agreement. See In the Matter of KBR, Inc. , Exchange Act Release No. 74619 (Apr. 1, 2015). This Blog wrote about that enforcement action here . Since 2015, the SEC has instituted numerous enforcement actions charging violations of the rule. This Blog has examined some of those enforcement actions here , here ,  here ,  here , and  here . The SEC orders can be found: here , here , here , here , here , here , and here .