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By: Jeffrey M. Haber In Seitz v. Marcum LLP , 2024 N.Y. Slip Op. 51141(U) (Sup. Ct., N.Y. County Aug. 30, 2024) ( here ), Justice Robert R. Reed of the New York County Commercial Division addressed the doctrine of in pari delicto , which “bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss.” The doctrine is available to a defendant as an affirmative defense that can be raised in any type of action. Seitz arose from defendant’s allegedly negligent services as auditor and accountant for now-bankrupt entities City Line Behavioral Healthcare, LLC, formerly known as Liberation Behavioral Health, LLC (“LBH”), and its subsidiary, Life of Purpose-Pennsylvania, LLC, formerly known as Liberation Way, LLC (“Liberation Way”) (collectively, the “Liberation companies”). Plaintiff, as trustee of the bankruptcy estates of the Liberation companies, asserted four claims against defendant for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment. Defendant moved to dismiss the complaint pursuant to CPLR 3211 (a) (5) and (a) (7). As discussed below, Justice Reed granted the motion and dismissed the complaint. Background The Liberation companies operated three facilities in Pennsylvania that provided treatment for drug and alcohol addiction. Liberation Way was a single-member limited liability company owned and controlled by LBH, which was, in turn, managed by a five-person board of directors. From 2015, the year of its founding, the CEO, CFO, and COO and President of LBH allegedly began engaging in fraudulent schemes including: “(i) fraudulently billing patients and insurance companies for treatments that were not provided, not medically necessary or were substandard; (ii) paying for patients to fraudulently obtain high-end insurance policies and fraudulently billing the insurance companies under those policies; (iii) generating kickbacks by sending thousands of medically unnecessary urine tests from the Company’s patients to co-conspiring labs in Florida; (iv) housing clients at sober-living homes associated with the Company without an inpatient license; and (v) failing to comply with regulations and licensing requirements.” In addition, the Liberation companies allegedly “manipulated financial statements , including by overstating revenue collection figures.” In or about May 2016, the Liberation companies engaged defendant, Marcum LLP, to perform accounting and auditing services for them. In 2016, Independent Blue Cross (“IBC”), an insurance company that insured many of the Liberation companies’ patients, began conducting an audit of the Liberation companies’ claims and billing practices. Through the audit, IBC discovered the alleged fraud and other misconduct that the Liberation companies committed between July 2015 and late 2017. IBC’s audit was known to the Liberation companies’ officers, directors, and critical advisors, and legal counsel to the Liberation companies disclosed the audit to defendant by no later than March 31, 2017. In December 2016, non-party Fulcrum Equity Partners, Inc. (“Fulcrum”) offered to purchase the Liberation companies and entered into a period of negotiation and due diligence. Under the proposed transaction, certain members of LBH would sell their membership units in LBH to LBH Holdings, LLC (“LBH Holdings”), a company newly created to become the parent company for LBH, and its subsidiary, LBH Holdco Corp. (“LBH Holdco”), pursuant to a Unit Purchase and Contribution Agreement (“Purchase Agreement”), in exchange for millions of dollars and membership units in LBH Holdings. In the Purchase Agreement, the selling members of LBH represented “that the and its staff had always followed all applicable laws, that they had not engaged in activity in violation of Pennsylvania law governing rehabilitation facilities, and that they maintained all required records.” These representations and warranties induced LBH Holdings and LBH Holdco to enter into the Purchase Agreement. As a result of the transaction, LBH became a wholly owned subsidiary of LBH Holdings. In connection with this proposed transaction, defendant performed accounting services for the Liberation companies, including valuation, due diligence, and opening balance sheet corrections. However, in its April 2017 audit report and accounting work, defendant allegedly never investigated or considered the implications of the IBC audit. Fulcrum and non-party Vocap Partners ultimately acquired the Liberation companies on December 11, 2017, contributing $12 million in cash and $29.6 million in funds loaned from Oxford Finance LLC (“Oxford”) and another bank, to purchase 70% of LBH Holdings. The $29.6 million loan was secured primarily by LBH’s assets. The selling members of LBH maintained a 30% stake in LBH Holdings. After the Fulcrum transaction, Fulcrum selected new officers and directors to control and direct the Liberation companies , including a new CEO. In January 2018, defendant began its 2017 audit and accounting services for the Liberation companies. During the audit, defendant allegedly learned of a material overstatement of net accounts receivable that it had missed in its 2016 audit and accounting services for the Fulcrum transaction. In addition, in reviewing the companies’ legal bills, defendant allegedly became aware of a series of governmental investigations that placed them in jeopardy, such as an order from the Pennsylvania State Department of Drug and Alcohol Programs (“DDAP”) to cease patient intake at multiple locations due to problems discovered during its inspections, an investigation by the Pennsylvania Office of the Attorney General, and an order from the federal Drug Enforcement Agency regarding violations of federal regulations governing Narcotics Treatment Programs. Defendant also allegedly learned that the Liberation companies were in default of their Credit Agreement with Oxford, according to a notice of default received on July 6, 2018. When defendant issued its 2017 audit report on August 8, 2018, it allegedly conducted no investigation into the government subpoenas or letter inquiries and never revisited findings from the IBC audit or Oxford’s notice of default. Likewise, when defendant began its audit and accounting service for 2018 in January 2019, it allegedly did not investigate or address any of these issues. On March 25, 2019, the Pennsylvania Office of the Attorney General announced criminal charges against LBH and its former officers and directors. At or about that time, defendant informed LBH’s new CEO that the Liberation companies should no longer rely on its audited financial statements. Defendant continued to perform audit and accounting services, including in connection with the Attorney General’s investigation, until the Liberation companies declared bankruptcy on April 17, 2019. Defendant did not issue an audit report for 2018. The Liberation companies declared bankruptcy on or about April 17, 2019. Plaintiff was appointed the trustee of the bankruptcy estates of the Liberation companies. On April 16, 2021, plaintiff commenced the action by filing a summons with notice. Plaintiff filed a complaint on May 20, 2021, asserting four causes of action for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment with respect to defendant’s audit and accounting services from 2016 to 2019. On June 18, 2021, defendant filed a motion to dismiss the complaint. Plaintiff opposed the motion. The Motion Court’s Ruling In its motion, defendant principally argued that the complaint should be dismissed under the in pari delicto doctrine. Relying on the Court of Appeals’ decision in Kirschner v. KPMG LLP , Justice Reed held that the doctrine barred plaintiff’s claims. The motion court found that plaintiff, as the trustee of the bankruptcy estates of the Liberation companies, stood in the shoes of the Liberation companies and had no greater rights than they would have if they had not filed for bankruptcy. This was significant since plaintiff alleged that LBH’s officers themselves engaged in fraud and other malfeasance, and those acts had to be imputed to LBH. Therefore, said the motion court, “defendant sufficiently demonstrate that, as a party in pari delicto , plaintiff barred from bringing its claims stemming from the wrongful acts of the Liberation companies’ directors and officers.” In granting defendants’ motion, the motion court rejected plaintiff’s argument that issues of fact prevented the court from applying the in pari delicto doctrine to the complaint. Noting that the Court of Appeals specifically held that “in pari delicto may be resolved on the pleadings … in an appropriate case,” the motion court found that plaintiff did “not point to any factual dispute that would preclude dismissal on the basis of th doctrine.” In fact, noted the motion court, the doctrine’s “applicability apparent on the face of pleadings.” As explained by defendant, to which the motion court agreed, “‘ here is not a single allegation in the Complaint which suggests that Marcum’s auditing services were negligent in any way other than in failing to detect the Company’s own fraud. And there is no allegation that the Company’s financial statements were inaccurate in any way other than as a result of the Company’s fraud.’” The motion court also rejected plaintiff’s argument that the “adverse interest” exception to the in pari delicto doctrine should apply, such that the wrongful actions of the company’s officers would not be imputed to LBH. Under the adverse interest exception, which is narrowly applied, “management misconduct will not be imputed to the corporation if the officer acted entirely in his own interest and adversely to the interest of the corporation.” To avail oneself of the exception, a plaintiff must show that “the agent … totally abandoned his principal’s interests and entirely for his own or another’s purposes.” “It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.” Justice Reed held that the adverse exception did not apply because plaintiff failed to allege that the LBH “officers and directors ‘totally abandoned principal’s interests and … act entirely for own or another’s purposes.’” Examining the Fulcrum transaction, which formed the basis of plaintiff’s argument, Justice Reed found that “ he transaction would have benefited the companies through the infusion of $12 million from Fulcrum and Vocap and $29.6 million in loans from Oxford. That the loan was secured by LBH’s assets alone not render the transaction in ‘adverse interest’ to the Liberation companies.” “Indeed,” said the motion court, “the transaction may, at least before discovery of the officers’ fraudulent acts, have permitted them to ‘survive,’ ‘attract investors and customers and raise funds for corporate purposes’ for the time being.” In conclusion, Justice Reed, quoting from the Court of Appeals’ decision in Kirschner, held that “the complaint must be dismissed in its entirety under the doctrine of in pari delicto”: However, as the Court of Appeals also observed in Kirschner, “ fraud that by its nature will benefit the corporation is not ‘adverse’ to the corporation’s interests, even if it was actually motivated by the agent’s desire for personal gain” ( Kirschner at 467). “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive—to attract investors and customers and raise funds for corporate purposes—this test is not met” ( id. at 468). Moreover, “any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies. The disclosure of corporate fraud nearly always injures the corporation” ( id. at 469). In addition, pertinent to this case, “the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents’ conduct was, at the time it was committed, adverse to the company” ( id. at 468). Takeaway The in pari delicto doctrine serves two salutary purposes. First, the doctrine deters illegal activity by denying judicial relief to an admitted wrongdoer. Second, it conserves judicial resources because it avoids entangling courts in disputes between wrongdoers. Notwithstanding, the doctrine will not bar an action when an agent totally abandons his/her principal’s interests and acts entirely for his/her own purposes or those of another ( i.e. , the agent’s acts are “totally” adverse to the principal). In Seitz , plaintiff was unable to persuade the motion court that the officers and directors of the Liberation companies acted solely for their benefit. As such, the motion court was compelled to dismiss the complaint. __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. This Blog previously examined the in pari delicto doctrine here . Rosenbach v Diversified Grp., Inc. , 85 A.D.3d 569, 570 (1st Dept. 2011). Kirschner v. KPMG LLP , 15 N.Y.3d 446 (2010) (malpractice); Donovan v. Rothman , 302 A.D.2d 238 (1st Dept. 2003) (breach of contract), Gitlin v. Chirinkin , 121 A.D.3d 939 (2d Dept. 2014) (breach of contract, breach of fiduciary duty, unjust enrichment). Slip Op. at *1 (quoting the complaint). Id. (quoting the complaint). Id. (quoting the complaint). Id. (citing Mediators, Inc. v. Manney (In re Mediators, Inc.) , 105 F.3d 822, 826 (2d Cir 1997)). Id. See Stokoe v. Marcum & Kleigman LLP , 135 A.D.3d 645, 645 (1st Dept. 2016). Justice Reed distinguished Stokoe by noting that in Stokoe the defendants had failed to show fraudulent activity by the plaintiffs’ agent, whereas in the case before him, “plaintiff himself … pleaded the officers’ fraudulent activity.” Slip Op. at *2. Slip Op. at *2 (citing Kirschner , 15 N.Y.3d at 459, n.3). Id. Id. (quoting defendant’s reply memorandum). Symbol Tech., Inc. v. Deloitte & Touche, LLP , 69 A.D.3d 191, 197 (2d Dept. 2009). Kirschner , 15 N.Y.3d at 466. Id. Slip Op. at *3 (quoting Kirschner , N.Y.3d at 466). Id. Id. (quoting Kirschner , 15 N.Y.3d at 468). Id. at *3-*4. Id. at *3. Kirschner , 15 N.Y.3d at 464. Id. at 466.

By: Jeffrey M. Haber In Hydraulic IP Holdings, LLC v. Tan , 2024 N.Y. Slip Op. 32930(U) (Sup. Ct., N.Y. County Aug. 16, 2024 ( here ), the court was asked to hold certain successor entities liable for the unsatisfied judgment (“Judgment”) issued by the motion court in plaintiff’s favor and against non-party Grace Apparel LLC (“Grace”). As discussed below, the motion court declined to grant summary judgment in either party’s favor, holding there were issues of fact as to whether the Successor Entities were liable under the de facto merger doctrine. The facts in Hydraulic IP Holdings are simple. Grace failed to pay the Judgment, ceased its operations as a wholesale and private-label garment manufacturer and, according to plaintiff, continued to operate the wholesale and private-label garment manufacturing business in the names of one or both of the Successor Entities, which had the same ownership, address, employees, and assets, and which assumed Grace’s liabilities. “The de facto merger doctrine creates an exception to the general principle that an acquiring corporation does not become responsible thereby for the pre-existing liabilities of the acquired corporation.” “A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger.” Courts consider the following factors to determine whether the de facto merger doctrine applies: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation; (3) assumption by the successor of the liabilities for the continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. “Not all of these elements are necessary to find a de facto merger.” Satisfaction of as few as two factors can suffice. “The question of whether a de facto merger exists is ‘analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, ‘it was the intent of to absorb and continue the operation of .’” The de facto merger doctrine is rooted in equity and exists “to ensure that a source remains to pay for the victim’s injuries.” As noted, the motion court found that there were questions of fact regarding the application of the de facto merger doctrine. Continuity of Ownership Continuity of ownership “exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets.” The motion court found that there was a question of fact as to this prong of the analysis due to the continuous ownership by Grace’s owners and the defendant GBrands but only one owner, defendant Tan, as the owner of defendant CC Apparel. The motion court also found that there was an issue of fact as to whether there was a transfer of assets sufficient to trigger the de facto merger analysis. The motion court further found that the use of the same logo by Grace and GBrands also created an issue of fact. Dissolution It is well settled that for purposes of the de facto merger analysis, the predecessor company is not required to have been legally dissolved, if it “is shorn of its assets and has become, in essence, a shell.” The motion court found an issue of fact as to whether Grace had been legally dissolved – that is, “whether Grace … maintains its own corporate records and bank accounts,” has “conducted business and has vacated its leased space.” The motion court explained that the “proffered testimony inconsistent and best suited for a finder of fact.” Assumption of Liabilities for Continuation of Business The motion court found that there was a question of fact as to this prong of the de facto merger analysis, noting “ hile defendants contend that no agreements were made between Grace and the successor entities, the payment of Grace’s debt by CC creates a question of fact, notwithstanding the remaining contentions of the defendants.” Continuity of Assets, Management and/or Business Operations As to this prong of the analysis, the motion court held that there was a question of fact preventing the grant of summary judgment. The motion court explained that notwithstanding the existence of certain undisputed facts, because defendants claimed that plaintiff failed to satisfy the other prongs of the analysis, “the remaining factors insufficient to satisfy plaintiff’s burden.” ________________________________________ 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 successor entities are: GBrands Holding, LLC (“GBrands”) and CC Apparel, LLC (“CC Apparel” and collectively with GBrands, the “Successor Entities”). Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573, 574 (1st Dept. 2001). Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc. , 775 F.3d 38, 42 (2d Cir. 1985). Fitzgerald , 286 A.D.2d at 574. See also Highland Crusader Offshore Partners, L.P. v. Targeted Delivery Techs. Holdings, Ltd. , 184 A.D.3d 116, 126 (1st Dept. 2020). Id. at 574-575. See , e.g. , Beck v. Roper Whitney, Inc. , 190 F. Supp. 2d 525 (S.D.N.Y. 2001); State of N.Y. v. N. Storonske Cooperage Co., Inc. , 174 B.R. 366 (N.D.N.Y. 1994). Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 176 (1st Dept. 2013) (quoting Nettis v. Levitt , 241 F.3d 186, 194 (2d Cir. 2001), overruled on other grounds , Slayton v. American Exp. Co. , 460 F.3d 215 (2d Cir. 2006)). Matter of New York City Asbestos Litig. , 15 A.D.3d 254, 258 (1st Dept. 2005). Id. at 256. Slip Op. at *3. Id. Id. at *3-*4. Fitzgerald , 286 A.D.2d at 575. Slip Op. at *4. Id. Id. at *5. Id. at *6.

By: Jeffrey M. Haber Often, in the pre-action investigation of a client’s claims, it becomes evident that discovery would materially aid the client in framing his/her complaint or in learning the identities of the persons against whom the complaint should be brought. Obtaining pre-action discovery from the court, however, is not easy. As discussed below, the plaintiff must demonstrate the existence of a meritorious cause of action against the proposed defendant and the materiality and necessity of obtaining the information. Under Section 3102(c) of the CPLR, a plaintiff can obtain discovery “before an action is commenced … to preserve information” or “to aid in bringing an action ….” However, such discovery can be secured only by court order. Importantly, “while pre-action disclosure may be appropriate to preserve evidence or to identify potential defendants, it may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing.” In other words, a would-be plaintiff cannot use Section 3102(c) to fish for a cause of action.  New York courts have explained that the foregoing “limitation” on the use of pre-action disclosure is “‘designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.’”   However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” Thus, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists and is only available where a petitioner demonstrates that he or she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.” The burden is on the petitioner to present “facts fairly indicating a cause of action against the adverse party.” Recently, this Blog examined Khorassani v. FINRA , No. 153819/2023, 2023 WL 4029701 (Sup. Ct., N.Y. County June 15, 2023), aff’d , 223 A.D.3d 589 (1st Dept. 2024) ( here ), a case in which the Appellate Division, First Department affirmed the denial of a request for pre-action discovery. Khorassani involved alleged fraud in connection with the merger of Torchlight Energy Resources (“Torchlight”) and Meta Materials, Inc. (“Meta Materials” or “MMAT”). After the merger, Meta Materials traded on the NASDAQ under the ticker symbol “MMAT”. In connection with the merger, Meta Materials issued a special dividend in the form of Series A Preferred shares (“MMTLP”) to Torchlight stockholders before the merger. MMLTP shares were not intended to be traded on any public exchange and were only intended to be a dividend placeholder for shareholders who owned Torchlight shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter Market (“OTC Market”) with the assistance of an unidentified securities broker. Thereafter, unidentified brokers and market makers began trading shares of MMTLP on the open market. In July 2022, the company’s board of directors voted to spin off Torchlight’s assets into a new company called Next Bridge Hydrocarbons, Inc. (“Next Bridge”). In connection with the transaction, MMAT filed a Form S-1 Registration Statement (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register the issuance of stock in Next Bridge. Shortly after the Registration Statement became effective, short interest in MMTLP shares grew. By early December 2022, the volume of short sales exceeded the volume of stock that was not shorted by traders. As a result, on December 9, 2022, FINRA halted trading of MMTLP shares. FINRA’s halt in trading resulted in the failure of unknown and unidentified brokers to settle their short positions. As a result, the petitioner claimed that he was harmed, in addition to the Company’s other retail investors. The petitioner sought the “Blue Sheets” maintained by FINRA to allow him to ascertain the names, addresses, and basis of liability of the unknown brokers and market makers to frame his claims, which the petitioner said he intended to bring against the unknown and unidentified brokers and market makers for spoofing, naked short selling, market manipulation, and fraud. The motion court denied the petition, holding that the petitioner (a) was using CPLR § 3102 for purposes other than ascertaining the identity of the defendants, and (b) failed to assert a meritorious cause of action for fraud. The motion court found that the allegations and arguments in the petition were speculative and conclusory and, as a result, concluded that the petition was an improper fishing expedition. On appeal, the First Department affirmed, holding that the petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, the Court found that the petitioner failed to state a meritorious cause of action for fraud. In Steamroller, LLC v. OTC Mkts. Group, Inc. , 2024 N.Y. Slip Op. 32891(U) (Sup. Ct., N.Y. County Aug. 20, 2024 ( here ), the court was faced with “virtually” the same request for “relief as petitioner” in Khorassani ( i.e. , “the pre-action disclosure of the identities of the brokers who traded in MMTLP shares”). Relying on Khorassani and finding the case to be dispositive, the motion court denied the motion. Steamroller was brought by an MMTLP shareholder. Petitioner sought the disclosure of the identities of the individuals who or the entities that submitted a Form 211 to FINRA for the MMTLP shares to be listed for trading on the OTC Market. Petitioner claimed that the relief requested was necessary so that he could name the brokers and marker makers responsible for the fraudulent information allegedly used to list MMTLP on the OTC Markets. The motion court held that the petition “suffer from the same infirmities as the petition in Khorassani .” The motion court found that “ etitioner failed to identify any material misrepresentation by the broker or brokers who listed MMTLP for trading on which petitioner justifiably relied in purchasing shares of the security.” The motion court explained that “petitioner specifically claim that it relied on public disclosures…, the shareholders of which were to receive MMTLP shares upon Torchlight’s merger with Meta Materials, Inc.” “That disclosure,” said the motion court, “stated that MMTLP ‘will not be listed or traded on any exchange’ and ‘ o market is expected to develop for in the foreseeable future and holders of may not be able to find a buyer and sell their shares if they desired to do so.’” Thus, “based on petitioner’s own allegations,” concluded the motion court, “not only did petitioner not rely on any misrepresentation by the unidentified brokers, but it could also not have justifiably relied on Torchlight’s public disclosure because it does not state that MMTLP would or could not be traded on an unsolicited basis in the over-the-counter market.” “Indeed,” noted the motion court, “by stating that it might be difficult for holders of MMTLP to find buyers for their shares should they desire to sell them, it implicitly recognized that the shares might be bought and sold.” The motion court also held that petitioner failed to plead fraud with particularity, finding that petitioner failed to provide the “how” and “why” of the claimed fraud, and failed to allege any damages resulting from a misrepresentation by the broker or brokers and petitioner’s reliance thereon. _____________________________ 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. CPLR 3102(c) (“Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order.”). Id. Uddin v. New York City Tr. Auth. , 27 A.D.3d 265, 266 (1st Dept. 2006). Matter of Stewart v. New York City Transit Auth. , 12 A.D.2d 939, 940 (2d Dept. 1985) (citation omitted). Id. (citation and internal quotation marks omitted). Bishop v. Stevenson Commons Assocs., L.P. , 74 A.D.3d 640, 641 (1st Dept. 2010) (citations omitted). Matter of Schenley Indus. v. Allen , 25 A.D.2d 742, 743 (1st Dept. 1966). In addition Khorassani , this Blog examined applications for pre-action discovery under CPLR 3102,  here  and  here .  Slip Op. at *1. Id. Form 211 is an application to initiate or resume quotations on an exchange of a non-exchange listed security. Rule 15c2-11(b) of the Securities Exchange Act of 1934 and FINRA Rule 6432 govern the information that must included in the Form 211. Slip Op. at *2. Id. Id. Id. (citation to court record omitted). Id. at *2-*3. Id. at *3. Id.

By: Jeffrey M. Haber In DirecTV, LLC v. Nexstar Broadcasting, Inc. , 2024 N.Y. Slip Op. 04225 (1st Dept. Aug. 15, 2024) ( here ), the Appellate Division, First Department considered the viability of a fraudulent inducement claim and whether the plaintiff satisfied the elements of the claim. As discussed below, the Court held that the motion court “should have granted summary judgment in plaintiff’s favor on” this claim. DirecTV arose out of a retransmission consent agreement (“Agreement”) between DirecTV and Nexstar Broadcasting, Inc., whereby DirecTV would retransmit television signals of numerous television broadcast stations (“Stations”) owned by Nexstar for a three-year term, with an option to renew for a fourth year, and pay fees to Nexstar to do so. The Agreement was a renewal of a previous retransmission consent agreement between DirecTV, Nexstar, and two nonparties. During the negotiations leading up to the Agreement, the parties agreed that DirecTV would pay an “Unlaunched Station Fee” for station WHAG, then an NBC affiliate. Under the Unlaunched Station Fee provision, DirecTV was not required to carry WHAG, but agreed to consider doing so in “good faith” and to pay license fees for WHAG based on a fixed number of subscribers. DirecTV maintained that it only agreed to include the Unlaunched Station Fee Provision in the Agreement because of Nexstar’s repeated assurances that WHAG was an NBC-affiliated station. On June 30, 2016, WHAG lost its NBC affiliation and was not affiliated with any Big-6 Network after that date. Discovery showed that Nexstar first learned NBC would not extend the affiliation agreement for WHAG at least one year before the term expired. NBC did not want to extend or renew WHAG’s affiliation because NBC owned its own station in the Washington, D.C. market and wanted to eliminate duplicate affiliates operating in the same market. On January 30, 2017, DirecTV exercised its option to extend the term of the Agreement to a fourth year. On July 1, 2017, Nexstar changed WHAG’s call letters to WDVM. In 2018, DirecTV was informed that WHAG had lost its NBC affiliation. On June 26, 2019, DirecTV commenced the action, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and a judgment declaring that DirecTV had no obligation to pay the Unlaunched Station Fee after WHAG lost its Network affiliation and that Nexstar is not entitled to retain the Overpayment or continue receiving the Unlaunched Station Fee. DirecTV amended its complaint to plead a cause of action for fraudulent inducement based on Nexstar’s fraudulent misrepresentations or omissions with respect to WHAG. Nexstar alleged two counterclaims in its amended answer for breach of contract predicated on DirecTV’s failure to pay the Unlaunched Station Fees and for a judgment declaring that DirecTV has no claim to the return of the Overpayment. DirecTV moved for summary judgment on its first cause of action for fraudulent inducement , the second cause of action for breach of contract, and the fourth cause of action for a declaratory judgment. DirecTV also moved for summary judgment dismissing Nexstar’s counterclaims. Nexstar also moved for summary judgment on its counterclaims and for summary judgment dismissing the amended complaint. DIRECTV’s First Cause of Action for Fraudulent Inducement 1.  Material Misrepresentation or Omission DirecTV alleged that Nexstar failed to disclose a material fact, namely WHAG’s loss of its NBC affiliation. The motion court found that any misrepresentation or omission as to station affiliation was material based on the terms of the Agreement. In that regard, the motion court cited to Section 7 of the Agreement, which stated that the “Stations’ affiliations as identified on Exhibit A are the essence of this Agreement.” Accordingly, the motion court found that Nexstar failed to raise an issue of fact as to materiality. 2.  The Duty to Disclose DirecTV maintained that Nexstar had a duty to disclose that WHAG would lose its NBC affiliation on two grounds. First, DirecTV characterized Nexstar’s repeated flaunting of WHAG’s NBC affiliation as an actionable half-truth, and that Nexstar had a duty to disclose the full facts of that affiliation. Second, DirecTV contended that Nexstar’s possession of superior knowledge regarding WHAG’s NBC affiliation triggered a duty to disclose. Nexstar argued that it had no duty of disclosure under either the special facts doctrine or the misleading partial disclosure doctrine. The motion court found that Nexstar had a duty to disclose based on a misleading partial disclosure. The motion court found that Nexstar represented that WHAG was an NBC affiliate but withheld the fact that the affiliation with NBC would terminate on June 30, 2016, and would not be renewed. The motion court noted that despite Nexstar’s hope that NBC would reconsider its decision to end its affiliation with WHAG, the NBC Agreement definitively stated that Nexstar and NBC agreed the affiliation would not be extended, and Nexstar was aware of this fact. The motion court held that Nexstar never disclosed this fact even though it repeatedly represented that WHAG was an NBC affiliate in a top market. This representation, said the motion court, could conceivably give rise to a false impression that WHAG would remain an NBC affiliate throughout the Agreement’s term. Moreover, the motion court held that the special facts doctrine was applicable, as information about WHAG was material to the transaction, and the end date for WHAG’s affiliation was not information that was easily or readily ascertainable with reasonable diligence. The motion court found that information pertaining to the expiration date on the NBC Agreement was within Nexstar’s superior knowledge, and such information could not have been obtained from the publicly filed documents. 3.  Scienter DirecTV asserted that Nexstar intentionally omitted the fact that WHAG was losing its NBC affiliation to induce DirecTV to agree to the Unlaunched Station Fee. Nexstar argued that DirecTV could not demonstrate a fraudulent intent to deceive because the NBC Agreement contained a provision prohibiting its disclosure and because Nexstar had no notice that the duration of WHAG’s affiliation was important to DirecTV. The motion court found that DirecTV’s proof on this element fell short of the clear and convincing evidence standard. The motion court found that deposition testimony had shown that Nexstar did not feel it was required to disclose that WHAG would no longer be affiliated with NBC after June 2016. At the same time, said the motion court, Nexstar did not demonstrate its entitlement to summary judgment. The motion court pointed to Section 7 of the Agreement, which provided that the essence of the Agreement was the Stations’ affiliations – language that Nexstar had agreed to include in the Agreement. Thus, held the motion court, it could not be said that Nexstar was unaware that WHAG’s NBC affiliation was important to DirecTV. Nexstar’s failure to disclose when WHAG’s NBC affiliation would end, concluded the motion court, gave rise to a reasonable inference of an intent to defraud. 4.  Justifiable Reliance The motion court held that triable issues of fact existed as to the justifiable reliance element. First, said the motion court, it was unclear whether DIRECTV could have learned of the expiration date through the exercise of ordinary diligence. Contrary to Nexstar’s contention, said the motion court, Nexstar’s 2014 Form 10-k did not publicly disclose the identity of which of its stations would lose its affiliation with NBC in June 2016. Also, noted the motion court, Nexstar admitted that the expiration dates were redacted on the affiliation agreements filed with the FCC. The motion court explained that NBC would not have disclosed when WHAG’s affiliation with it would have ended. Nor was it clear, said the motion court, that had DIRECTV directly asked, Nexstar would have disclosed the termination date. Thus, concluded the motion court, the exercise of ordinary diligence would not have disclosed that fact. DirectTV’s Second Cause of Action and Nexstar’s First Counterclaim for Breach of Contract In its second cause of action, DirecTV alleged that Nexstar breached the Agreement by collecting the Overpayment to which it was not entitled; failing to inform DirectTV that WHAG had lost its Network affiliation and had changed its call letters to WVDM; withholding the Overpayment; and demanding additional amounts for the Unlaunched License Fee. In its first counterclaim, Nexstar alleged that DirecTV breached the Agreement by failing to pay Unlaunched Station Fees owed to Nexstar. Reading the Agreement as a whole, the motion court concluded that the parties contemplated charging license fees only for those Stations that were affiliated with a Network or with CW or MNT, and that the Unlaunched Station Fee provision did not require DirecTV to pay license fees for an unaffiliated, independent WHAG. The motion court found support in Section 7 of the Agreement, which provided that a Station that changed network affiliations would be subject to license fees based on its new network affiliation. The motion court explained that Section 7 did not call for payment of license fees for Stations that lost their network affiliations during the term of the Agreement. The motion court noted that WHAG was an NBC affiliate when the Agreement was executed, and its term as an NBC affiliate ended on June 30, 2016. As such, WHAG was not affiliated with a Network, CW or MNT as of July 1, 2016. Thus, concluded the motion court, the Agreement did not require DirecTV to pay the Unlaunched Station Fee after July 1, 2016. Accordingly, the motion court denied Nexstar’s motion for summary judgment on its counterclaims and summary judgment dismissing the complaint, granted DirecTV’s motion for summary judgment on its breach of contract cause of action and summary judgment dismissing the counterclaims, and denied DirecTV’s motion for summary judgment on its cause of action for fraudulent inducement . The First Department’s Decision On appeal, the First Department unanimously modified the motion court’s order to grant DirecTV’s motion for summary judgment on its fraudulent inducement cause of action and Nexstar’s motion for summary judgment dismissing DirecTV’s causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing, and otherwise affirmed the order. Regarding the breach of contract claims, the Court held that the motion “properly granted summary judgment to plaintiff on its breach of contract claim and denied summary judgment to defendant on its breach of contract counterclaim based on a straightforward interpretation of the unambiguous terms of the parties’ agreement.” The Court found that the motion court “simply interpreted the contract — as it must — in accordance with the document as an integrated whole.” Regarding DirecTV’s fraudulent inducement cause of action, the Court held that the fraud claim and breach of contract claims were not duplicative, noting that the fraudulent inducement cause of action “could provide a separate basis for recovery of Unlaunched Station Fees.” The Court found that the damages sought by the fraudulent inducement claim did not overlap with the breach of contract claim: The fraudulent inducement cause of action alleges that the Unlaunched Station Fee Provision was fraudulently induced and seeks all Unlaunched Station Fees that plaintiff made to defendant throughout the entire agreement, as well as attorneys' fees and punitive damages . The breach of contract claim, by contrast, seeks only the Unlaunched Station Fee payments that plaintiff made after WHAG lost its NBC affiliation. The Court held that the motion court “should have granted summary judgment in plaintiff’s favor on its fraudulent inducement cause of action.” The Court found that DirecTv adequately alleged scienter and justifiable reliance, noting that there was “simply no issue of fact as to either defendant’s intent to defraud or plaintiff’s justifiable reliance on the material misrepresentation.” The Court found that “there was unrebutted testimony from two NBC employees who testified that NBC advised defendant that there would be no further extensions to WHAG’s NBC affiliation beyond its June 30, 2016 termination, and that NBC never suggested to defendant that it might reconsider this decision.” “Thus,” concluded the Court, “defendant knew that the termination of the NBC affiliation was a fait accompli and intentionally concealed this information from plaintiff.” Further, the Court held that DirecTV reasonably relied on Nexstar’s representations about WHAG becoming an NBC affiliate. The Court explained that defendant’s 2014 Form 10-K, while publicly filed on February 27, 2015 and available to plaintiff at the time the 2015 agreement was being negotiated, did not identify the specific stations that would lose their NBC affiliations. Rather, defendant misrepresented in these documents that defendant expected the network affiliations of its stations to be renewed. As plaintiff did not have access to the relevant information, it reasonably relied on the fraudulent representations of defendant to its detriment. ___________________________ 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. Slip Op at *2. DirecTV had overpaid a non-carriage fee, which was calculated from the date that WHAG lost its Network affiliation to August 2018 (“Overpayment”). Plaintiff alleged that Nexstar represented WHAG was an NBC-affiliated Station on multiple occasions; the representations were materially incomplete or were misleading partial disclosures, as Nexstar was aware WHAG would lose its affiliation with NBC on July 1, 2016; Nexstar was aware that NBC was unwilling to renew WHAG’s affiliation; Nexstar leveraged WHAG’s affiliation with NBC to induce DirecTV to agree to the Unlaunched Station Fee provision based on a misleading or materially incomplete representation that WHAG would continue its affiliation; Nextstar was aware DirecTV was acting on the basis of these misleading statements; DirecTV justifiably relied on Nexstar’s representations, even though Nexstar knew DirecTV did not have the capacity to launch or carry that Station; and DirecTV was damaged as a result. A material fact is one that goes to the “very essence of the bargain” ( Junius Const. Corp. v. Cohen , 257 N.Y. 393, 400 (1931)), and is one that is likely to influence a plaintiff’s decision-making ( Gulf Ins. Co. v. Transatlantic Reins. Co. , 69 A.D.3d 71, 96 (1st Dept. 2009); 2 Fifth Ave. Tenants Assn. v. Abrams , 183 A.D.2d 577, 578 (1st Dept. 1992) (stating that omitted material is important if the person viewing it would have seen it as significantly altering the total mix of available facts)). “A fact may not be dismissed as immaterial unless it is ‘so obviously unimportant ... that reasonable minds could not differ on the question of importance.” Swersky v. Dreyer & Traub , 219 A.D.2d 321, 328 (1st Dept. 1996), rearg denied , 232 A.D.2d 968 (1st Dept. 1996), appeal withdrawn , 89 N.Y.2d 983 (1997) (quoting Allen v. Westpoint-Pepperell, Inc. , 945 F.2d 40, 45 (2d Cir. 1991)). Materiality is normally an issue for the jury to determine. See Brunetti v. Musallam , 11 A.D.3d 280, 281 (1st Dept. 2004). When a claim for fraud is predicated upon an act of concealment or an omission, the plaintiff must establish the same elements for fraud and also show that the defendant had a duty to disclose material information but failed to do so. Gansett One, LLC v. Husch Blackwell, LLP , 168 AD3d 579, 579 (1st Dept. 2019) (citing Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 179 (2011). An affirmative duty of disclosure arises when the parties are in a confidential or fiduciary relationship. See Dembeck v. 220 Cent. Park S., LLC , 33 A.D.3d 491, 492 (1st Dept. 2006). Therefore, “ bsent a confidential or fiduciary relationship, there is no duty to disclose, and mere silence, without identifying some act of deception, does not constitute a concealment actionable as fraud.” FNF Touring LLC v. Transform Am. Corp. , 111 A.D.3d 401, 402 (1st Dept. 2013) (internal quotation marks and citation omitted). A misleading partial disclosure gives rise to a claim for fraud when a party is dependent upon the defendant for relevant facts, and “if the withheld facts are proven to have been material.” Juman v. Louise Wise Servs. , 254 A.D.2d 72, 74 <1st dept 1998> .) Indeed, “once a party has undertaken to mention a relevant fact to the other party it cannot only give half of the truth,” particularly where only a partial or ambiguous statement has been made. Brass v. American Film Tech., Inc. , 987 F.2d 142, 150 (2d Cir. 1993) (citing Junius , 257 N.Y. at 400; see also Restatement (Second) of Torts, § 529 (“ representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation”). “Under the special facts doctrine, a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky , 219 A.D.2d at 327 (internal quotation marks and citations omitted). The party invoking the doctrine must demonstrate that “the material fact was information peculiarly within knowledge of ,” and “the information was not such that could have been discovered by through the exercise of ordinary intelligence.” Jana L. v. West 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (internal quotation marks and citation omitted). Slip Op. at *2. Id. Id. Id. Id. Id. Id. at *2-*3. Id. at *3. Id. Id.

By: Jonathan H. Freiberger Sometimes this BLOG takes an in-depth look at recently decided cases from New York’s appellate courts; other times it simply reports on cases with an interesting holding. Today’s BLOG reflects the latter. Bank of New York Mellon v. Levinson , is a mortgage foreclosure action decided by the Appellate Division, Second Department, on August 14, 2024. The defendant/borrower in Bank of New York , borrowed $1.2 million from the lender and secured his repayment obligations with a mortgage on real property in Suffolk County. In 2007, upon the borrower’s default, the lender commenced a foreclosure action (the “First Foreclosure Action”). By the complaint in the First Foreclosure Action, the lender accelerated the loan balance due to it. [Eds. Note: this BLOG has addressed issues regarding acceleration of loans. See, e.g ., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] In 2016, the First Foreclosure Action was dismissed “on the ground that the lender lacked standing.” [Eds. Note: this BLOG has addressed standing in mortgage foreclosure actions. See, e.g., < here =">here"> , < here =">here"> and < here =">here"> .] In 2017, the lender commenced a new foreclosure action (the “Second Action”) against the borrower and the Homeowner’s Association to which the borrower (and the subject property) belonged (the “HOA”). The HOA’s motion to dismiss the Second Action as against it on statute of limitations grounds was denied. [Eds. Note: this BLOG has addressed statute of limitations issues in mortgage foreclosure actions. See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] The lender then moved for “summary judgment on the complaint insofar as asserted against the borrower and related defendants, for leave to enter a default judgment against the nonanswering defendants, and for an order of reference.” The lender’s notice of motion, however, did not seek summary judgment as against the HOA. Nonetheless, the motion was granted, and a referee was appointed to calculate the amounts due to the lender. Thereafter, the HOA’s interest in the property was transferred to DH Group Holdings, Inc. The lender moved to confirm the referee’s report and for a judgment of foreclosure and sale. DH Group cross-moved for leave to intervene in the Second Action as a defendant and to renew the HOA’s motion to dismiss due to a change in the law. DH Group also opposed the lender’s motion to confirm and for a judgment of foreclosure and sale on the ground that summary judgment in the lender’s favor was never obtained against the HOA. The motion court permitted DH Group to intervene in the Second Foreclosure Action, but denied its motion to renew and granted the lender’s motion to confirm the referee’s report and for a judgment of foreclosure and sale. On DH Gorup’s appeal, the Second Department reversed because summary judgment was never obtained against the HOA and, in so doing, the Court stated: To be entitled to a judgment of foreclosure and sale against a defendant, a plaintiff must first establish entitlement to judgment against that defendant via a summary judgment motion or a motion for leave to enter a default judgment, or at trial ( see generally Christiana Trust v Rashid , 228 AD3d 822 , 824-825; MTGLQ Invs., L.P. v White , 179 AD3d 790 ). Here, the record demonstrates that the plaintiff neither sought nor obtained summary judgment or leave to enter a default judgment against the HOA, the intervenor's predecessor in interest, nor was a trial held against the HOA. The plaintiff's argument that the intervenor is not aggrieved by the order and judgment of foreclosure and sale is without merit, as the intervenor opposed the plaintiff's motion, inter alia, to confirm the referee's report and for a judgment of foreclosure and sale on this specific ground ( see Mixon v TBV, Inc. , 76 AD3d 144 , 156-157). The Court also determined that DH Group’s motion to renew was properly denied. The Court found that the “evidence demonstrated that the 2007 foreclosure action was dismissed based upon an expressed judicial determination that Countrywide lacked standing, and thus, the commencement of that action did not accelerate the mortgage note ( see CPLR 213<4> ; U.S. Bank N.A. v Marrero , 221 AD3d 631 , 632).” 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 Haber A multi-level marketing program is a relative of pyramid scheme. “ pyramid scheme is an illegal investment scam based on a hierarchical setup.”  In the classic pyramid scheme, “participants attempt to make money solely by recruiting new participants, usually where: he promoter promises a high return in a short period of time; o genuine product or service is actually sold; and he primary emphasis is on recruiting new participants.” Promoters of a pyramid scheme often encourage investors to participate in the fraud through social media, company websites, group seminars, Internet advertising, YouTube videos, and other media. To lure recruits into the scheme, pyramid scheme promoters work hard to make the operation look legitimate. But, as discussed below, they are not and ultimately collapse because the promoter cannot raise enough money from new investors to pay earlier ones. A pyramid scheme begins with an individual or a company who recruits investors, typically by promising high rates of return. As the earliest investors in the pyramid, these individuals typically receive high returns. These gains are paid for, however, by new recruits, not by a return on any real investment. Because returns are dependent upon investment by new recruits, ultimately the pyramid becomes too big for new recruits to fund returns for those at the top of the pyramid. For this reason, it is mathematically impossible for every investor in the pyramid to make money. For example, if each investor needs to recruit 10 people to recoup his/her initial investment, the bottom levels of the pyramid would have to recruit over one billion people to break even –  i.e. , make back the money initially invested. See N.Y.="schemes).” See N.Y." AG,="AG," “ Don’t="“Don’t" Get="Get" Caught="Caught" a="a" Pyramid="Pyramid" Scheme .”  Here.=">Here."> As noted, a multi-level marketing program (“MLM”) and a pyramid scheme are cut from the same cloth. It is often difficult to tell the difference between a legitimate MLM and a pyramid scheme. Both share the same or similar business models of “multiple levels” of distributors and recruits. A legitimate MLM relies on a network of distributors and recruits who sell the company’s product. Think of companies like Amway, Tupperware, Herbalife, Avon, and Mary Kay. The only way to make money in a legitimate MLM is by selling the company’s product directly to the consumer or by managing a team of salespeople. Managers receive a percentage of the sales made by each recruit under their management and supervision. A legitimate MLM does not require the recruit to buy a starter kit from which the earlier investor receives a commission or a recruiting “bonus” or require mandatory training and a non-refundable membership fee. In short, a legitimate MLM does not require investors to recruit new ones to earn money; the business is focused on selling the company’s products. Stopping illegal MLMs and holding their promoters accountable is an important part of the SEC’s enforcement mission. In today’s post, this Blog looks at an SEC enforcement action against an MLM and its principals and promoters for bilking investors out of $650 million. On August 12, 2024, the SEC announced ( here ) charges against the principals of an MLM (the “Principals”), along with their company, NovaTech Ltd., for operating a fraudulent scheme that raised more than $650 million in crypto assets from more than 200,000 investors worldwide, including many in the Haitian-American community. The SEC also charged numerous individuals for their roles in promoting the MLM to investors. According to the SEC’s complaint ( here ), the Principals operated their company as a multi-level marketing and crypto asset investment program. The SEC alleged that from 2019 through 2023 defendants lured investors by claiming the company would invest their funds on crypto asset and foreign exchange markets. One of the Principals assured investors that their investments would be safe and promised that “ n this program, you are in profit from day one, because again you have access to that capital.” In reality, the company used the majority of investor funds to make payments to existing investors and to pay commissions to promoters, using only a fraction of investor funds for trading. The SEC further alleged that the Principals siphoned millions of dollars of investor assets for themselves. When the company ultimately collapsed, most investors were not able to withdraw their investments, resulting in substantial losses, said the SEC. “NovaTech and the caused untold losses to tens of thousands of victims around the world,” said Eric Werner, Director of the SEC’s Fort Worth Regional Office. “As we allege, MLM schemes of this size require promoters to fuel them, and today’s action demonstrates that we will hold accountable not just the principal architects of these massive schemes, but also promoters who spread their fraud by unlawfully soliciting victims.” The SEC also alleged that the company’s top promoters each recruited a wide network of investors and promoters. The company paid them substantial commissions for the investors they and their networks recruited. According to the SEC, when the promoters became aware of certain red flags about the company, including regulatory actions taken against it by U.S. and Canadian regulators, they continued recruiting investors and downplayed the red flags. The SEC filed its complaint in the U.S. District Court for the Southern District of Florida, charging certain defendants with violating the antifraud provisions of the federal securities laws and all the defendants with registration violations. The SEC sought permanent injunctive relief, disgorgement of ill-gotten gains, and civil penalties. Without admitting or denying the allegations, one of the defendants agreed to partially settle the SEC’s charges by consenting to a $100,000 civil penalty and to be permanently enjoined from future violations of the charged provisions, with the amount of other monetary remedies to be determined at a later date. The partial settlement is subject to court approval. ____________________________________ 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  Investopedia.com, What Is a Pyramid Scheme? How Does It Work? (Updated June 3, 2024) ( here ). See  Investor.gov, Pyramid Schemes  ( here ).

By: Jeffrey M. Haber As readers of this Blog know, New York has a “long and strong public policy favoring arbitration … as a means of conserving the time and resources of the courts and the contracting parties.” For this reason, “New York courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” The foregoing principle was at issue in McWhinney-St. Louis v. Cliftonlarsonallen LLP , 2024 N.Y. Slip Op 32747(U) (Sup. Ct., N.Y. County Aug. 6, 2024) ( here ). McWhinney-St. Louis arose from allegations of employment discrimination. Defendants argued that plaintiff’s claims were subject to arbitration pursuant to the parties’ employment agreement (the “Agreement”). The Agreement included a broad arbitration clause , requiring arbitration of: ny dispute arising under this Agreement, or arising out of the circumstances, terms, conditions or termination of relationship with or its officers, directors, members, employees, agents or independent contractors, and any claim by against any officer, director, member, employee, agent or independent contractor of for any damage or harm, including but not limited to claims arising under any state or federal employment or discrimination laws. “In deciding an application to compel arbitration pursuant to CPLR 7503 , the court is required to first make a determination whether the parties have entered into a valid arbitration agreement and, if so, whether the issue sought to be submitted to arbitration falls within the scope of that agreement.” The motion court found that the issue sought to be arbitrated fell within the scope of the Agreement because the allegations in the complaint concerned race discrimination and a hostile work environment in violation of the New York State and City Human Rights Laws. Although plaintiff’s claims fell within the scope of the parties’ agreement to arbitrate, plaintiff argued that the arbitration clause was unconscionable and therefore unenforceable. “A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made.” “Examples of procedural unconscionability include, but are certainly not limited to, high pressure commercial tactics, inequality of bargaining power, deceptive practices and language in the contract, and an imbalance in the understanding and acumen of the parties.” “ he substantive element looks to the content of the contract” to determine if any terms are unfair. Plaintiff argued that the Agreement was procedurally unconscionable because she did not have a choice in signing it when accepting the employment offer. The motion court rejected the argument, noting that an arbitration agreement being offered on a “‘take it or leave it’ basis … is not sufficient under New York law to render the provision procedurally unconscionable.” Thus, concluded the motion court, “ he employment contract … not procedurally unconscionable.” As for substantive unconscionability, plaintiff argued that the fee shifting and the forum selection clauses of the Agreement rendered the agreement to arbitrate unconscionable. The fee-shifting provision provided that in the event plaintiff brought an action against defendant, plaintiff “agree to reimburse for any attorneys’ fees, costs and expenses incurred” in connection with defendant’s successful defense of such action or proceeding. Noting that “there is nothing inherently unconscionable about a nonreciprocal attorney’s fee provision in a commercial contract,” the motion court held that plaintiff “should not be compelled to bear costs which would effectively preclude from pursuing claim.” Thus, the motion court enforced the Agreement by severing the fee-shifting provision from the Agreement, an approach the motion court said was “consistent with the state and federal policy favoring arbitration.” As such, the motion court concluded that severing the fee-shifting provision from the Agreement was “the appropriate remedy … rather than void the entire agreement.” The motion court also rejected plaintiff’s contention regarding the forum selection clause, which provided that any dispute would be governed by the laws of the State of Minnesota, and any arbitration or court action commenced by plaintiff would be exclusively conducted in the federal and state courts in Minnesota. The motion court held that the Agreement was enforceable because defendant had agreed to waive the provision. “Accordingly, as in Ragone ,” said the motion court, “‘New York law … allow for the enforcement of the arbitration agreement as modified by the defendants’ waivers.” Takeaway The threshold question in assessing whether to compel arbitration is whether there is a valid and binding agreement to arbitrate. If the court finds that a valid arbitration agreement exists, the next question to consider is whether the dispute comes within the scope of that agreement. In McWhinney-St. Louis , the parties’ agreement contained a broad arbitration provision that provided for the arbitration of “ ny dispute arising under this Agreement, or arising out of the circumstances, terms, conditions or termination of ” employment. As such, the motion court found that the arbitration agreement was enforceable. __________________________________ 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. Stark v. Molod Spitz DeSantis & Stark, P.C. , 9 N.Y.3d 59, 66 (2007). Id. CPLR § 7503(a) provides: “Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation under subdivision (b) of section 7502, the court shall direct the parties to arbitrate.” Edgewater Growth Capital Partners, L.P. v. Greenstar N. Am. Holdings, Inc. , 69 A.D.3d 439 (1st Dept. 2010). Slip Op. at *2. Gendot Assoc., Inc. v. Kaufold , 56 A.D.3d 421, 423 (2d Dept. 2008). Simar Holding Corp. v. GSC , 87 A.D.3d 688, 689-90 (2d Dept. 2011). Eichholz v. Panzer-Eichholz , 188 A.D.3d 820, 824 (2d Dept. 2020). Slip Op. at *3 (quoting Ragone v. Atl. Video at Manhattan Ctr. , 595 F.3d 115, 122 (2d Cir. 2010)). Id. Id. at *4 (quoting Lansco Corp. v. Kampeas , 87 A.D.3d 421, 422 (1st Dept. 2011) (internal quotation marks omitted). Id. (quoting Matter of Schreiber v. K-Sea Transp. Corp. , 9 N.Y.3d 331, 341 (2007) (internal quotation marks omitted) and citing Ragone , 595 F.3d at 120 (because “the defendants agreed to waive the … fee shifting provisions as set out in the arbitration agreement … these provisions do not render the arbitration agreement substantively unconscionable”)). Id. (quoting Brady v. Williams Capital Grp., L.P. , 64 A.D.3d 127, 137 (1st Dept. 2009)). Id. (quoting id. ). Id. at *4-*5. Id. at *5 (quoting Ragone , 595 F.3d at 124). Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013). Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”).

By Jonathan H. Freiberger As noted in prior BLOG articles, specific performance is an equitable remedy used to compel a party to perform under a contract. McGinnis v. Cowhey , 24 A.D.3d 629 (2 nd Dep’t 2005). The remedy is frequently used to enforce rights under a real estate contract, where monetary damages are typically insufficient to make the non-breaching party whole due to the uniqueness of real property. EMF General Contracting Corp. v. Bisbee , 6 A.D.3d 45 (1 st Dep’t 2004). This BLOG has discussed specific performance on numerous occasions. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . In January of 2021, this BLOG < here =">here"> discussed W Equities Acquisitions, LLC v. Wyckoff Heights Properties, LLC , 190 A.D.3d 881 (2 nd Dep’t 2021). W Equities involved a real estate sales contract. The seller could not deliver the premises free of all tenancies due to two tenants that refused to execute surrender agreements despite generous financial and other incentives. This presented a “title defect” beyond the seller’s control. Consistent with the provisions of the contract, because title could not be delivered seller offered “ the choice of either accepting such title as the was able to convey, with a credit no greater than the maximum amount specified in the contract, or terminating the contract with a refund of the down payment and reimbursement of the net cost of title examination.” W. Equities , 190 A.D.3d at 882. Because the seller complied with the terms of the contract, the purchaser’s insistence on closing and its action for specific performance was unsuccessful. The Second Department, on August 7, 2024, decided Special Corp. v. 3RF, LLC. Special is an action much like W. Equities , and, accordingly, the Court relied heavily on W. Equities in rendering its decision. The plaintiff in Special entered into a contract to purchase a $3,000,000 building from the defendant and, upon signing, made a $200,000 down payment. Among other provisions, the contract provided that if the seller: shall be unable (as opposed to unwilling) to convey title to the Premises at the Closing in accordance with the provisions of this Agreement, Purchaser, nevertheless, may elect to accept such title as Seller may be able to convey without any credit against the monies payable at the Closing or liability on the part of Seller. If Purchaser shall not so elect, Purchaser may terminate this Agreement, which termination shall be subject to the provisions of §13.06. Seller shall not be required to bring any action or proceeding or to incur any expense in excess <$10,000> to cure any title defect. The contract also limited the purchaser’s remedies to the cancellation of the contract and the return of the down payment. The seller represented that accurate lease information regarding all tenants was provided to the purchaser and that it would deliver to the purchaser, lease modifications and estoppel letters from each tenant. One tenant refused to deliver the requested documents and, accordingly, the seller was unable to deliver to the purchaser clean title to the premises. It was also noted that a rider extending the term of the hold-out tenant’s tenancy, was not provided to the purchaser until after the execution of the contract. Relying on the undisclosed rider, the purchaser requested a reduction in the purchase price. The seller responded by offering three solutions to the purchaser: (1) a return of the security deposit and cancellation of the contract; (2) an offer to spend up to $10,000 to convince the holdout tenant to deliver the requested documents; or, (3) a $20,000 reduction of the purchase price. The purchaser viewed the seller’s inability to convey title as an “anticipatory breach” and threatened to commence an action for specific performance of the contract and seek an abatement of the purchase price. [Eds. Note: this BLOG has previously addressed anticipatory breach. See, e.g. , < here =">here"> and < here =">here"> . The seller viewed the purchaser’s rejection of the contract terms as a termination of the contract. The purchaser commenced an action for specific performance and an abatement of the purchase price. The seller, in its answer, asserted a counterclaim to retain the down payment. Thereafter, the motion court granted the seller’s motion for summary judgment and dismissed the purchaser’s complaint and awarded the seller judgment on its counterclaim. The Second Department affirmed. In dismissing the purchaser’s complaint, the Court stated that: the record reflects that, because the refused to accept title to the building with the title defects, and because the failed to agree to allow the to further negotiate with the holdout tenant, its sole remaining remedy pursuant to was to terminate the contract. Pursuant to , the only relief available to the upon termination of the contract was a return of its down payment. Contractually, the was not entitled to specific performance or an abatement in the contract price. Further, the Court found that the motion court properly granted summary judgment to the seller on its counterclaim because the seller “acted within its rights pursuant to , and it is the —not the —that breached the contract by failing to elect one of the remedies offered to it by the pursuant to .” 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 In Villaver v. Paglinawan , 2024 N.Y. Slip Op. 04159 (2d Dept. Aug. 7, 2024) ( here ), the Appellate Division, Second Department reversed the dismissal of a legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress action on collateral estoppel grounds. As discussed below, the Court found that, among other things, the claims at issue were not identical to those in the prior litigation and were not otherwise actively litigated in the earlier action. Collateral Estoppel : A Primer The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue. The doctrine applies when: “(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and decided, (3) there was a full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits.” Collateral estoppel “is a doctrine intended to reduce litigation and conserve the resources of the court and litigants and it is based upon the general notion that it is not fair to permit a party to relitigate an issue that has already been decided against it.” The doctrine is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in prior action or proceeding.” In New York, the CPLR specifically recognizes collateral estoppel as a basis for dismissal. It is also an affirmative defense under the CPLR. Villaver v. Paglinawan On December 11, 2018, plaintiff filed an action against defendants for legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress. In early February 2019, defendants moved to dismiss the complaint on the grounds that, inter alia , they were not properly served with process and that plaintiff was required to pursue her claims in arbitration. On May 21, 2019, the motion court entered an order rejecting defendants’ assertion of improper service but granted their motion to compel arbitration. Consequently, the motion court dismissed the complaint without prejudice in favor of arbitration, and ordered the parties to proceed to arbitration before an arbitrator designated by the American Arbitration Association (“AAA”). According to plaintiff, defendants did not respond to her demand for arbitration, refused to cooperate in the appointment of an arbitrator, and refused to pay one-half of the AAA’s fee for designating an arbitrator. Defendants maintained that they had not agreed to the AAA rules under which plaintiff wanted to proceed. On July 17, 2019, defendants filed a petition to stay the arbitration. The petition was later denied. Back in arbitration, the arbitrator subsequently closed the matter on the grounds that plaintiff purportedly could not afford the required fees and defendants had not responded to the arbitrator. Thereafter, the plaintiff commenced the action (the “present action”) against defendants to recover damages for legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress, and for a judgment declaring that defendants waived their right to arbitrate plaintiff’s claims , that arbitration would be prohibitively expensive, and that requiring plaintiff to pursue her claims in arbitration would violate her due process rights. Defendants moved, inter alia , to dismiss the complaint pursuant to CPLR 3211(a)(5) on the ground that the doctrine of collateral estoppel precluded plaintiff from relitigating issues against defendants that were previously dismissed by the motion court in the prior action. The motion court granted that branch of defendants’ motion. On appeal, the Second Department reversed. The Court held that “defendants failed to establish that the issue decided in the prior action was identical to the issues raised in the present action.” The Court reasoned that the “only issue decided in the prior action was whether the retainer agreement signed by the parties contained a valid agreement to arbitrate.” Notably, the Court found that “ lthough the plaintiff raised the issues of legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress in both the prior and present actions, the defendants failed to establish that these issues were ‘actually litigated, squarely addressed, and specifically decided’ in the prior action.” Further, the Court found that the “determination in the prior action not preclude the plaintiff from raising in the present action whether the defendants waived their right to arbitrate and whether the cost of arbitration was prohibitively expensive, since issues stem from events that occurred after the prior action had been dismissed.” Accordingly, the Court held that the motion court “should not have granted that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(5) to dismiss the complaint on the ground of collateral estoppel.” ___________________________ 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. E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 17 (2015) (internal quotation marks omitted). Kaufman v. Eli Lilly & Co. , 65 N.Y.2d 449, 455 (1985) Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel. Co. , 62 N.Y.2d 494, 501 (1984). See CPLR § 3211(a)(5). See CPLR § 3018(b). Slip Op. at *2 (citation omitted). Id. Id. (quoting M. Kaminsky & M. Friedberger v. Wilson , 150 A.D.3d 1094, 1095 (2d Dept. 2017)). Id. Id.

By: Jeffrey M. Haber “A third-party beneficiary … is a person or entity that receives benefits from a contract between two other parties, even though they are not a party to the contract.” The concept of a third-party beneficiary stems from the notion that “it is just and practical to permit the person for whose benefit the contract is made to enforce it against one whose duty it is to pay” or perform. “ party asserting rights as a third-party beneficiary must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for its benefit and (3) that the benefit to it is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate it if the benefit is lost.” A third party’s right to enforce a contract arises “when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was an intent to permit enforcement by the third party.” A non-party may sue for breach of contract only if it is an intended, and not a mere incidental, beneficiary, “and even then, even if not mentioned as a party to the contract, the parties' intent to benefit the third party must be apparent from the face of the contract.” Absent clear contractual language evincing such intent, New York courts have demonstrated a reluctance to interpret circumstances to construe such intent. here=">here" and="and" >here.=">here."> In Powerflex Solar, LLC v. Solar PV Pros, LLC , 2024 N.Y. Slip Op. 04102 (3d Dept. Aug. 1, 2024) ( here ), the Appellate Division, Third Department considered the foregoing principles in affirming the dismissal of plaintiff’s cause of action for breach of contract as a third-party beneficiary. Powerflex arose from purchase order agreements to deliver solar modules to three project sites being developed by plaintiff. One site was in New York, another in Rhode Island and the third in California. Defendant Solar PV Pros, LLC (“SPVP”) subcontracted with defendant Meitus Energy Services, LLC (“Meitus”), who in turn subcontracted with defendant EoS Organization, LLC (“EoS”), to supply the solar modules, with EoS to ship them directly to plaintiff’s project sites in the respective three states. Plaintiff maintained that Meitus and EoS intended to provide components to enable the performance of plaintiff’s agreements with SPVP and intended for the benefit of the Meitus-EoS agreements ( e.g. , the subcontracts) to redound to plaintiff, making it a third-party beneficiary of the Meitus-EoS agreements. In July 2022, plaintiff filed a complaint alleging breach of contract against SPVP, unjust enrichment against all defendants, breach of contract as a third-party beneficiary against EoS and Meitus and conversion against all defendants. EoS filed a pre-answer motion to dismiss, arguing that, among other things, plaintiff failed to state claims for breach of contract as a third-party beneficiary. The motion court granted the motion, finding that, inter alia , plaintiff had failed to state a claim against EoS for breach of contract as a third-party beneficiary. Plaintiff moved for reargument, and, upon granting reargument, the motion court adhered to its original decision. Plaintiff appealed from both orders. The Court affirmed the dismissal of plaintiff’s breach of contract claim, holding that plaintiff was “not a third-party beneficiary of the agreements between Meitus and EoS.” The Court found that plaintiff failed “to plead any facts that would establish that the agreements were intended for its benefit and that any benefit to it was more than incidental.” The Court noted that plaintiff was not mentioned in the agreements between EoS and Meitus, and that EoS was unaware that plaintiff was the intended ultimate purchaser of the product. The Court explained that although EoS was aware that the product was going to be resold from Meitus to SPVP, it had no knowledge that SPVP intended to sell the product to plaintiff. Compounding the problem for plaintiff, noted the Court, was the fact neither EoS nor Meitus could assign, sell, or mortgage its interests or rights under the agreement without providing prior written notice. A merger clause, which provided that the purchase agreements and purchase orders represented the entire agreement between the parties, further confirmed that plaintiff was not intended to be a beneficiary of the agreements. “Moreover,” said the Court, “there no indication from the language of the agreements that EoS intended to benefit plaintiff, and the benefit plaintiff complain of losing, the solar modules, would have come from the performance of its agreement with SPVP, but for its breach.” “As such,” concluded the Court, “any benefit plaintiff might have received from the EoS-Meitus agreement would have been incidental.” Therefore, the Court affirmed the dismissal of the claim, stating that the motion court “properly determined that plaintiff failed to state a cause of action for breach as a third-party beneficiary of the agreements between EoS and Meitus.” Takeaway The determination of whether a person is a third-party beneficiary of a contract raises questions about the person’s right to enforce an agreement to which he or she was not a party. As discussed, a third party’s right to enforce a contract arises “when the third party is the only one who could recover for the breach of contract or when it is otherwise clear from the language of the contract that there was an intent to permit enforcement by the third party.” When intent is at issue, as in Powerflex , the contracting parties must clearly intend to benefit the third-party. Thus, where the contract shows that the parties intended to confer a direct benefit upon a third party, not a mere incidental one, the third party may maintain an action for breach of contract. In Powerflex , plaintiff could not make this showing. ___________________________________ 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. Investopedia, “Third-Party Beneficiary: Meaning and Rights” (June 30, 2022) ( here ). Fourth Ocean Putnam Corp. v. Interstate Wrecking Co. , 66 N.Y.2d 38, 44 (1985). Greg Beeche, Logistics, LLC v. Cross Country Constr., LLC , 210 A.D.3d 1158, 1159-1160 (3d Dept. 2022) (internal quotation marks, brackets and citations omitted), lv. denied , 40 N.Y.3d 902 (2023); Luckow v. RBG Design-Build, Inc. , 156 A.D.3d 1289, 1291 (3d Dept. 2017). Dormitory Auth. of the State of N.Y. v. Samson Constr. Co. , 30 N.Y.3d 704, 710 (2018) (internal quotation marks and citation omitted); Merlino v. Knudson , 214 A.D.3d 642, 644 (2d Dept. 2023). Alicea v. City of New York, 145 A.D.2d 315, 317 (1st Dept. 1988); LaSalle Natl. Bank v. Ernst & Young , 285 A.D.2d 101 (1st Dept. 2001). LaSalle Natl. Bank , 285 A.D.2d at 108 (citations omitted). Id. at 109 (citing Fourth Ocean Putnam , 66 N.Y.2d at 44). Slip Op. at *3. Id. at *4. Id. Id. Id. Id. Id. Id. at *4-*5. Id. at *5 (citations omitted). Dormitory Auth. , 30 N.Y.3d at 710.

By: Jonathan H. Freiberger CPLR 3213 , which is a procedural device permitting a plaintiff, under certain circumstances, to obtain summary relief at the very beginning of a lawsuit, provides, in pertinent part: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date…. This BLOG previously has addressed issues related to CPLR 3213. See < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . The First Department noted that CPLR 3213 “affords a speedy and efficient remedy to secure a judgment in certain cases where service of formal papers would be unnecessary for the expeditious resolution of the dispute between the parties.” Technical Tape, Inc. v. Spray Tuck, Inc. , 131 A.D.2d 404, 405 (1987). As evidenced by our prior articles, much litigation surrounding CPLR 3213 involves the question of what constitutes “an instrument for the payment of money only.” As previously noted, lawsuits involving promissory notes, guaranties and settlement agreements may be amenable to summary disposition pursuant to CPLR 3213, while merchant cash agreements may not. The purpose of today’s article, however, is to address a more basic aspect of CPLR 3213 -- the establishment of a return date for the motion, which is critical because a “short” return date (i.e., a return date that predates the time within which the defendant would have to appear in the action pursuant to CPLR 320 (a)) could result in the dismissal of the action. This BLOG previously discussed this issue. < Here .=">Here."> As set forth in CPLR 3213, the minimum time for the return date for a motion for summary judgment in lieu of complaint is coincident with the defendant’s time to appear as set forth in CPLR 320(a), which provides: The defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer. An appearance shall be made within twenty days after service of the summons, except that if the summons was served on the defendant by delivering it to an official of the state authorized to receive service in his behalf or if it was served pursuant to section 303, subdivision two, three, four or five of section 308, or sections 313, 314 or 315, the appearance shall be made within thirty days after service is complete. If the complaint is not served with the summons, the time to appear may be extended as provided in subdivision (b) of section 3012. A “short” return date could be consequential. In Bhanti v. Jha , 140 A.D.3d 685 (2 nd Dep’t 2016), the Court held that making the motion returnable “prior to the expiration of the time within which the defendant had to appear in the action … was a fatal jurisdictional defect.” Id . at 686 (citation omitted). In Blue Lagoon, LLC v. Reisman , 214 A.D.3d 938 (2 nd Dep’t 2023), “under the particular circumstances” presented, the Court reversed the motion court’s refusal to vacate a default judgment pursuant to CPLR 5015(a) due to “short” service of a motion for summary judgment in lieu of complaint. Id . at 942. There, inter alia , the defendants did not dispute receiving the original summons and notice of motion, admitted they were on notice of the motion by averring that “they had continuously checked the eCourts website” and were aware that the motion was adjourned on numerous occasions. Further, the plaintiff filed an amended notice of motion; service of which was not denied by the defendants. Similarly, the Third Department, in Capolino v. Goren , 155 A.D.3d 1414 (2017), based on the “peculiar circumstances” of the case and the “absence of prejudice flowing from plaintiff’s missteps”, the Court looked beyond the plaintiff’s “short” return date. In Capolino , the defendants were improperly served with process by mail, but the mailing put the defendants “on notice of the pending motion for summary judgment in lieu of complaint,” which was responded to with a cross-motion. Id . at 1415 -16. A notice of motion was subsequently served, and plaintiff advised he would consent to any requested adjournments. Id . Thus, while recognizing Bhanti ’s holding that a wholesale failure to timely serve defendant with the initiatory papers constitutes "a fatal jurisdictional defect," the defendant in Capolino was not prejudiced and “was placed on notice, then submitted a cross motion that raised various objections and included substantive opposition before being properly served.” Accordingly, the Capolino Court “was persuaded that the untimeliness of the proper service could be and rightly was overlooked.” Id . at 416. On July 23, 2024, the Supreme Court, New York County (Chan, J.), decided SD Stability SDIRA, LLC v. Maxben Holding, LLC . The simplified facts of SS Stability follow. The plaintiffs in SS Stability loaned money to the defendant, the repayment obligation for which was evidenced by promissory notes. Upon the defendant’s default, the plaintiffs commenced their action by the filing of a Summons with Notice. The plaintiffs subsequently filed an “Amended Notice of Motion for Summary Judgment In Lieu of Complaint” (the “Notice”). The Notice was filed on March 19, 2024, was dated March 20, 2024, and set a return date of April 9, 2024. The motion related papers were personally served on March 21, 2024, only 19 days prior to the April 9, 2024, return date of the Notice. The defendant argued that the motion must be denied due to “short” notice. The motion court noted that, due to the method of service, the defendants had 20 days to appear. Relying on Bhanti , the motion court held that the plaintiff’s “clear and fatal jurisdictional defect plainly warrants dismissal for lack of jurisdiction.” In so doing, the motion court rebuffed the defendant’s argument that Blue Lagoon superseded Bhanti , and, instead, distinguished Blue Lagoon’s facts from those of Bhanti (as discussed herein) . Absent the special facts of Blue Lagoon “there remains only plaintiffs’ defective notice”. The motion court also rejected the plaintiffs’ argument that the defendant appeared and, therefore, was not prejudiced because it was able to oppose the motion. The motion court found that, unlike the cases relied upon by the plaintiff, the defendant did not oppose the motion “on the merits” and, instead, limited its opposition to jurisdictional issues. Thus, the motion court stated: Here, the parties did not stipulate to nor did defendant seek any extensions or adjournments, so this not an issue that needs addressing. While it is true that defendant opposed this motion; defendant's only challenge goes to the lack of personal jurisdiction . Significantly, defendant did not oppose the motion on the merits. What remains is a defective notice of motion that did not give defendant sufficient time pursuant to CPLR 3213, which is a fatal jurisdictional defect requiring dismissal. The defective notice of the motion for summary judgment in lieu of complaint mandates dismissal of the motion. TAKEAWAY Courts deciding issues related to proper return dates on CPLR 3213 notices of motion frequently depend on fact sensitive issues when determining whether a defendant had sufficient time to appear. Practitioners should be mindful of such issues and provide sufficient time in the notice of motion to account for problems with service of process, the method of service and/or any other contingencies. When such factors are considered, and a return date is set sufficiently far in advance, query whether it may be easier to file and serve a complaint, permit the defendant to answer and promptly move for summary judgment pursuant to CPLR 3212 . 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 It is well-settled that leave to amend a pleading is to be freely granted. Leave may be denied, however, if the proposed amendment is palpably insufficient or patently devoid of merit, or if it would cause undue prejudice to a party. Amendments that seek to add a time-barred claim or party will be found to be patently devoid of merit, unless the untimeliness can be saved by application of the relation-back doctrine. The statutory basis for the relation-back doctrine is found in CPLR 203(c) and (f). CPLR 203(c) provides that “ n an action which is commenced by filing, a claim asserted in the complaint is interposed against the defendant or a co-defendant united in interest with such defendant when the action is commenced.” CPLR 203(f) provides that “a claim asserted in an amended pleading is deemed to have been interposed at the time the claims in the original pleading were interposed, unless the original pleading does not give notice of the transactions, occurrences, or series of transactions or occurrences to be proved pursuant to the amended pleading.” Built upon those provisions, the relation-back doctrine permits, under certain defined circumstances, the commencement of claims against a party that has not been timely sued, but which relates back to the original timely complaint. The doctrine also permits the addition of untimely claims against an original defendant under some of those defined conditions. The leading case on the relation-back doctrine is Buran v. Coupal . In Buran , the relation-back doctrine was defined as requiring the plaintiff to establish all three prongs of a three-part test for the addition of untimely claims or parties. The first prong is that the new claims arise out of the same conduct, transaction, or occurrence as that alleged in the original complaint. Second, if a new party is to be added, it must be united in interest with one or more of the original defendants, and by reason of that relationship can be charged with such notice of the institution of the action that he or she will not be prejudiced in defending the action on the merits. Third, if a new party is to be added, the newly added defendant must have known, or should have known, that the action would have been timely commenced against him or her but for a mistake by the plaintiff as to the identity of the proper parties. In Bisono v. Mist Enterprises, Inc. , 2024 N.Y. Slip Op. 03873 (2d Dept. July 24, 2024) ( here ), the Appellate Division, Second Department consider the application of the relation-back doctrine to a set of facts that the Court considered to be unusual. In Bisono , plaintiffs sought to interpose untimely claims against a proposed corporate defendant by relating those claims back under CPLR 203(c) and (f) to an individual defendant who had been timely sued, discontinued from the action before the statute of limitations had run, and re-added as a defendant after the applicable statute of limitations had expired for all parties. Since no party objected to, raised any contentions concerning, or appealed the granting of leave to re-add the previously discontinued individual as a party defendant, the Court held that the relation-back doctrine applied. Background Bisono arose from a motor vehicle accident in March 2016. Plaintiff was driving his motor vehicle in Brooklyn, New York. As the vehicle drove by a fixed dumpster that was situated on the street, a gust of wind blew open the dumpster’s door, causing that door to strike the vehicle as it passed. The vehicle spun and hit a parked vehicle. In 2017, plaintiffs (the driver and passenger) commenced the action to recover damages for personal injuries allegedly sustained as a result of the accident against Mist Enterprises, Inc. (hereinafter “Mist”), New York Presco, Inc. (hereinafter “Presco”), and Yakov Eisenbach. Plaintiffs alleged that their injuries were caused by defendants’ negligence in the ownership, operation, maintenance, control, and placement of the dumpster. Mist and Presco answered the complaint and asserted, inter alia , various affirmative defenses. The individual defendant’s attorney wrote to plaintiffs’ counsel, requesting that defendant be discontinued from the action. Defendant’s attorney claimed, among other things, that defendant was not personally affiliated with or involved in the operations related to plaintiffs’ alleged injuries, that at no time did defendant possess any ownership interest in the dumpster, and that at no time was defendant personally in control of the operation, maintenance, control, or use of the dumpster. In December 2017, defendant’s attorney and plaintiffs’ attorney executed a stipulation discontinuing the action against defendant, without prejudice. In 2019, plaintiffs, without leave of court, filed a supplemental summons and amended complaint, naming as party defendant Mist, Presco, Eisenbach, Jozefko Construction, Inc., and Design N Safety, Inc. (hereinafter “Design”). Also in 2019, Mist and Presco moved for summary judgment dismissing the complaint. Plaintiffs opposed the motion, contending, among other things, that the moving defendants failed to demonstrate the absence of triable issues of fact. According to plaintiffs, these triable issues of fact included whether Mist improperly inspected or positioned its container. Plaintiffs separately moved for leave to amend the complaint to add both Eisenbach and Design as party defendants. Plaintiffs claimed that discovery showed a connection between the existing defendants and Eisenbach and Design and that Eisenbach and Design knew that the incident had occurred and that the action was commenced in connection with that incident. Plaintiffs requested that under the circumstances, the motion court grant leave to amend the complaint. Design opposed Plaintiffs’ motion but submitted no opposition on behalf of Eisenbach. Design contended that it would be unduly prejudiced if named as a new defendant after the statute of limitations had expired and dispositive motions had been made. Design urged that plaintiffs sought to assert claims that were untimely because those claims related back to prior claims that were voluntarily discontinued years ago. Since the claims against Eisenbach were abandoned or discontinued, Design and Eisenbach were not codefendants for relation-back purposes. Moreover, according to Design, Eisenbach and Design were not united in interest. Eisenbach, individually, submitted no papers responsive to plaintiffs’ motion to re-add him as a party defendant via the proposed amended complaint. As such, as against Eisenbach, the motion was unopposed. In an order dated February 10, 2021, the motion court, among other things, granted the motion for summary judgment dismissing the complaint against Mist and Presco, and in effect, granted that branch of plaintiffs’ motion for leave to amend the complaint to add Eisenbach as a defendant, and, in effect, denied plaintiffs’ motion for leave to amend the complaint to add Design as a defendant. The motion court did not provide any reasoning for its grant of leave to amend as to Eisenbach and its denial of leave to amend as to Design. Plaintiffs appealed. Looking at the factors discussed above concerning the application of the relation-back doctrine, the Court held that plaintiffs had satisfied them. The Court held that “ s to the applicability of the first prong of the relation-back doctrine <– the new claims arise out of the same conduct, transaction, or occurrence as that alleged in the original complaint –> there can be no dispute.” “The claims that the plaintiffs seek to interpose against Design involve the same occurrence as that of the original complaint, where an unlatched door of a debris container swung open and struck the plaintiffs’ passing vehicle,” noted the Court. “Design was the permit holder of the container and maintained the container after Mist’s delivery of it to the site of the accident, and Eisenbach was the manager of work at that site,” said the Court. The Court held that plaintiffs satisfied the second prong of the doctrine—unity of interest. The Court reasoned that “Eisenbach was Design’s CEO and was actively managing the construction site, which included the container at issue, on the date and at the time of the occurrence. The litigation interests of Design and Eisenbach therefore united as to satisfy the second prong of the relation-back doctrine.” Finally, as to the third prong of the analysis – whether Design knew or should have known that but for a mistake by plaintiffs as to the identity of the proper parties – the Court held that the action would have been commenced against Design in the original complaint. The Court found that “there a fair reading of the record that had Eisenbach not been discontinued from the action based upon inaccurate representations, Design’s role at the construction site would have been revealed and an action timely commenced against it.” “Further,” explained the Court, “with Eisenbach named as an original defendant in the action, Design knew or should have known that but for a mistake as to the identity of the parties, it would have been named as a party defendant as well.” With relation-back, the Court concluded that the motion court “improvidently exercised its discretion in denying leave to amend the complaint as to Design.” Having decided the applicability of the relation-back doctrine, the Court addressed “another complication” raised by the appeal – whether “the untimely party to be added to action relate back to an existing party that ha been timely” sued. In other words, the Court had to determine whether the party to be added after the expiration of the applicable statute of limitations was “tethered to another party against which claims were timely interposed,” and whether “that preexisting party” was “an active defendant at the time the relation-back doctrine applied.” The Court held that the claims against Eisenbach and Design were tethered to those against an existing party, though it did so for procedural reasons, such as under the law of the case doctrine: Here, however, Eisenbach—the preexisting party—had been discontinued from the action by the plaintiffs, though under false or mistaken pretenses that were not discovered until later. Technically, therefore, when the plaintiffs sought leave to amend the complaint to add Eisenbach and Design as party defendants, the statute of limitations had already expired as to both of them; Eisenbach was no longer an existing party within the statute of limitations to which Design could be tethered. Further, for Eisenbach to be properly re-added to the action after the expiration of the statute of limitations, he would have to relate back to yet another party—a double relation-back—although no circumstances for his own relation-back are shown on this record. *** Further, and most significantly, so much of the Supreme Court’s order as granted that branch of the plaintiffs’ unopposed motion which was for leave to amend the complaint to re-add Eisenbach as a defendant in the action, whether correct or not, has not been appealed by any party; the only issues that have been appealed pertain to whether Design should have been added as a defendant in the action under the relation-back doctrine and whether summary judgment had been improperly awarded to Mist and Presco. Therefore, this appeal is postured where Eisenbach, though technically untimely, was added to the action via an amended complaint which, absent opposition and an appeal of that issue, is now the law of the case. So postured, Design may be added as a defendant to the action, beyond the statute of limitations for Design, by virtue of the relation-back to Eisenbach who has again become an existing presence in the action in a manner that is both uncontested and the law of the case. The Court sought to make it clear that it was not creating new law with regard to the relation-back doctrine – i.e. , modifying the three-pronged test when an untimely party is added to an existing action: The result here, where relation-back is applied against one party by relating back the claims to another party that is itself untimely added, should not be construed as suggesting that the three-pronged test for the relation-back doctrine is modified. It is not. Nor does it suggest that relation-back can be applied when the party to whom a claim relates is not a timely, existing party in an action. Decisional authorities require that there be a preexisting party against whom there is a timely claim. The result here, while very unusual, is instead a product of its peculiar circumstances; namely, the absence of any opposition to Eisenbach being re-added as a party defendant after the statute of limitations had expired as to him which restored him as an existing party in the action, and as a consequence, the absence of any argument that Eisenbach’s renewed presence in the case was an error by the Supreme Court. Accordingly, the Court reversed the order insofar as reviewed, and granted that branch of Plaintiffs’ motion which was for leave to amend the complaint to add Design as a defendant on the basis of the relation-back doctrine. ____________________________ 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. CPLR 3025(b); Edenwald Contr. Co. v. City of New York , 60 N.Y.2d 957, 959 (1983). See , e.g. , Watkins-Bey v. MTA Bus Co. , 174 A.D.3d 553, 554 (2d Dept. 2019). See Schwartz v. Walter , 171 A.D.3d 969, 970 (2d Dept. 2019); Roco G.C. Corp. v. Bridge View Tower, LLC , 166 A.D.3d 1031, 1033 (2d Dept. 2019) (as corrected); Grant v. Brooklyn Ctr. for Rehabilitation & Residential Health Care, LLC , 153 A.D.3d 798 (2d Dept. 2017); Jenal v. Brown , 80 A.D.3d 727 (2d Dept. 2011); Ricca v. Valenti , 24 A.D.3d 647, 648 (2d Dept. 2005). See , e.g. , Catnip, LLC v. Cammeby’s Mgt. Co., LLC , 170 A.D.3d 1103, 1106 (2d Dept. 2019); Myung Hwa Jang v. Mang , 164 A.D.3d 803, 804-805 (2d Dept. 2018); Marrone v. Miloscio , 145 A.D.3d 996, 999 (2d Dept. 2016); Rodriguez v. Paramount Dev. Assoc., LLC , 67 A.D.3d 767, 768 (2d Dept. 2009). See Matter of Red Hook/Gowanus Chamber of Commerce v. New York City Bd. of Stds. & Appeals , 5 N.Y.3d 452, 457 (2005); Ortega v. New York City Tr. Auth. , 170 A.D.3d 872, 873 (2d Dept. 2019); Martin v. City of New York , 153 A.D.3d 693, 694 (2d Dept. 2017); Moezinia v. Ashkenazi , 136 A.D.3d 990, 992 (2d Dept. 2016). 87 N.Y.2d 173 (1995). Id. at 178-179; see also Wilson v. Rye Family Realty, LLC , 218 A.D.3d 836, 838 (2d Dept. 2023); Estate of Stengel v. Good Samaritan Hosp. , 214 A.D.3d 954 (2d Dept. 2023); Sanders v. Guida , 213 A.D.3d 714, 715 (2d Dept. 2023); Marcotrigiano v. Dental Specialty Assoc., P.C. , 209 A.D.3d 850, 851-852 (2d Dept. 2022); OneWest Bank N.A. v. Muller , 189 A.D.3d 853, 855 (2d Dept. 2020). Normally, the relation-back doctrine may only be applied when the party being added relates back to another party which has already been timely sued and which is a continuing defendant in the case. Slip Op. at *2. Id. Id. Unity of interest examines the jural relationship of the parties that are said to be united, and the nature of the claims asserted against them by the complainant. Matter of 130-10 Food Corp. v. New York State Div. of Human Rights , 166 A.D.3d 962, 965 (2d Dept. 2018); Kammerzell v. Clean Burn, Inc. , 165 A.D.3d 768, 769 (2d Dept. 2018); Connell v. Hayden , 83 A.D.2d 30, 42-43 (2d Dept. 1981). Where one party is vicariously liable for the acts or omissions of another, their available defenses will be the same and the parties’ interests will be united. See Cedarwood Assoc., LLC v. County of Nassau , 211 A.D.3d 799, 800 (2d Dept. 2022); Chandler v. New York City Tr. Auth. , 209 A.D.3d 825, 826 (2d Dept. 2022); Petruzzi v Purow , 180 A.D.3d 1083, 1085 (2d Dept. 2020); Weckbecker v. Skanska USA Civ. Northeast, Inc. , 173 A.D.3d 936 (2d Dept. 2019); Connell , 83 A.D.2d at 45. Under the doctrine of respondeat superior, an employer will be vicariously liable for the torts of its employee committed within the scope of employment. See Judith M. v. Sisters of Charity Hosp. , 93 N.Y.2d 932, 933 (1999); Fernandez v. Fernandez , 216 A.D.3d 743, 745 (2d Dept. 2023); Montalvo v. Episcopal Health Servs., Inc. , 172 A.D.3d 1357, 1359 (2d Dept. 2019); Gadson v. City of New York , 156 A.D.3d 685, 686 (2d Dept. 2017). Slip Op. at *3. Id. Id. Id. Id. Id. Id. (citing, among others, Liverpool v. Arverne Houses , 67 N.Y.2d 878, 879 (1986)). Slip Op. *3-*4. Id. at *4.