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By Jonathan H. Freiberger Folks have general notions about usury.  However, there are many nuances to the application of the usury laws in New York.  This BLOG has previously written about usury.  See [< here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .]  As noted in our prior BLOG articles, usury statutes were developed centuries ago to “protect desperately poor people from the consequences of their own desperation.”  Seidel v. 18East 17 th Street Owners, Inc. , 79 N.Y.2d 735, 740 (1992) (citations and internal quotation marks omitted). “To successfully raise the defense of usury, a debtor must allege and prove by clear and convincing evidence that a loan or forbearance of money, requiring interest in violation of a usury statute, was charged by the holder or payee with the intent to take interest in excess of the legal rate.”  Blue Wolf Capital Fund II, L.P. v. American Stevedoring Inc. , 105 A.D.3d 178, 183 (1 st Dep’t 2013). Pursuant to General Obligations Law §5-501(1) , interest on a loan or forbearance “shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.”  GOL §5-501(2) prevents individuals or entities from charging interest rates exceeding those permitted pursuant to GOL §5-501(1).  Banking Law §14-a(1) provides that the “maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum.”  Because Corporations are “generally the antithesis of … desperately poor people”, they are “ordinarily barred from asserting a usury defense.”  Seidel , 79 N.Y.2d at 740 (citations, footnote and internal quotation marks omitted).  See also GOL  § 5-521(1) .  However, a corporation can assert usury as a defense to the extent that the usury is criminal under Section 190.40 of New York’s Penal law , which makes interest on a loan or forbearance that exceeds twenty-five per cent per annum a felony.  GOL § 5-521(3) .  See also Roopchand v. Mahammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017) (citation omitted).  Further, the criminal usury laws do not apply to loans in the amount of $2,500,000.00 or more.  GOL § 5-501(6)(b). When calculating interest rates on loans for less than one year, the interest will be annualized if not so stated in the note.  Thus, in Bakhash v. Winston , 134 A.D.3d 468 (1 st Dep’t 2015), the Court found a loan criminally usurious where a four-month note provided for 12% interest without indicating that such rate reflected the annual rate of interest.  The Bakhash Court noted that “ here, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%.”  Bakhash , 134 A.D.3d at 469 (citation omitted). Further, in addition to the stated interest rate on the note, other factors are used in determining the actual interest rate for usury purposes.  For example, in American E Group LLC v. Livewire Ergogenics Inc. , 2022 WL 2236947 (2 nd Cir. 2022) (applying New York law), the Court affirmed the District Court’s refusal to enforce a promissory note and the dismissal of the lender’s action to enforce the note in light of the borrower’s criminal usury defense.  While the stated interest rate on the $30,000 note was 20%, the borrower was also obligated to give the lender $50,000 in its restricted shares as “additional consideration”, which, the Court agreed, “also count as interest.”  Thus, the Court concluded, the interest rate on the $30,000 loan “far exceed the 25% threshold for criminal usury.”  See also Frost v. Collateral Partners, LLC , 219 A.D.3d 587, 588 (2 nd Dep’t 2023) (finding that since borrower was charged an insurance fee for declined insurance coverage, there was a question of fact as to whether “the purported insurance fee was, in actuality, additional interest on the loan,” precluding summary judgment.); Blue Wolf , 105 A.D.3d at 183 (“If an instrument provides that the creditor will receive additional payment in the event of a contingency beyond the borrower's control, the contingent payment constitutes interest within the meaning of the usury statutes.”) Finally, a usury defense is inapplicable “where the terms of the note impose a rate of interest in excess of the statutory maximum only after default or maturity.”  Torto Note Member, LLC v. Babad , 192 A.D.3d 843, 845 (2 nd Dep’t 2021) (citations, internal quotation marks and ellipses omitted).  See also Kraus v. Mendelsohn , 97 A.D.3d 641 (2 nd Dep’t 2012); 1077 Madison Street, LLC v. Daniels , 954 F.3d 460, 465 (2 nd Cir. 2020) (applying New York law). On March 6, 2024, the Appellate Division, Second Department, addressed some of these issues in Alleon Capital Partners, LLC v. Choudhry .  The lender in Alleon loaned in excess of $2.78 million to defendant medical practices.  The loan was secured by medical receivables.  Considering fees and escrowed funds, only $2.36 million was received by the borrowers.  The borrowers defaulted on their repayment obligations under the note and the lender commenced action.  The borrowers’ motion to dismiss the complaint on the grounds of usury was denied, as was their subsequent motion for renewal and reargument.  On appeal, the Court affirmed, holding that because of the size of the loan, the usury defense was inapplicable.  Thus, the Court stated: General Obligations Law § 5-501(2) provides that “ o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding the rate” ( Zanfini v Chandler , 197 AD3d 594, 595 ). “Under General Obligations Law § 5-521(1), the defense of usury is not available to corporations, but this bar does not preclude a corporate borrower from raising the defense of ‘criminal usury’ (i.e., interest over 25%) in a civil action” ( Adar Bays, LLC v GeneSYS ID, Inc. , 37 NY3d 320, 326). However, civil and criminal usury laws do not “apply to any loan or forbearance in the amount of <$2,500,000> or more” (General Obligations Law § 5-501<6> ). Here, the Supreme Court properly determined that usury laws do not apply to the subject loan since the parties agreed to a principal loan of more than $2,500,000 ( see Specfin Mgt. LLC v Elhadidy , 201 AD3d 31, 42; Shasho v Pruco Life Ins. Co. of N.J. , 67 AD3d 663, 665). Contrary to the appellants’ contention, the portion of the loan that was used to cover closing fees, attorney fees, and taxes did not lower the agreed-upon amount of the loan below the $2,500,000 threshold in this instance ( see Tides Edge Corp. v Central Fed. Sav . , 151 AD2d 741, 742). 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 should go without saying that people make mistakes. After all, people are human, and humans make mistakes.  When people draft a document, especially a lengthy or complex one, it is not uncommon for a mistake to be made. Lawyers who draft contracts and other written instruments are not immune from this phenomenon. Given the steps a lawyer must take to draft and finalize an agreement or other written instrument there are numerous opportunities for unintentional mistakes to be made. These unintentional mistakes are often referred to as a scrivener’s error. Examples of a scrivener’s error include incorrectly typing a number or omitting a word or words in the document. When a contract fails to conform to the agreement between the parties due to the mutual mistake of the parties, or of the mistake of one party and fraud of the other, a court will reform the contract so as to make it conform to the actual agreement between the parties. 1 The mistake or error must be material ( i.e. , it must involve a “fundamental assumption” of the contract). 2 However, it does not mean that the mistake would have caused the parties not to enter into the contract had they known of it. 3 Rather, a material mistake is one which “vitally” affects a fact or facts on the basis of which the parties contracted. 4 In circumstances of a mistake, one or more of the parties may seek to reform the agreement.  Reformation is an equitable form of relief. The purpose of reformation is not to “alleviat a hard or oppressive bargain, but rather to restate the intended terms of an agreement when the writing that memorializes that agreement is at variance with the intent of both parties.” 5 The burden is high to obtain contract reformation. The party demanding it “‘must establish his right to such relief by clear, positive and convincing evidence.’” 6 Therefore, the party seeking reformation must “show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties.” 7 Only by satisfying this burden can the party seeking reformation “overcome the heavy presumption” that the contract embodies the parties’ true intent. 8 Sometimes reformation is based upon a scrivener’s error. When a scrivener’s error is the basis for reformation, the party demanding reformation must prove “a prior agreement between parties, which when subsequently reduced to writing fails to accurately reflect the prior agreement.” 9 The parties’ course of performance under the contract, or their practical interpretation of a contract for any considerable period of time, is considered to be the most persuasive evidence of the intention of the parties. 10 A claim for reformation, including reformation based on a scrivener’s error, is governed by the six-year statute of limitations, which begins to run on the date that the mistake is made. 11 Nevertheless, a court may correct a scrivener’s error outside of a claim for reformation of a contract in “those limited instances where some absurdity has been identified or the contract would otherwise be unenforceable either in whole or in part.” 12 In other words, a court is not “constrained to adopt an absurd phrasing in the contract merely because the statute of limitations for reformation had passed, when the error is obvious and the drafters’ intention clear.” 13 Absent such an absurdity or unenforceability, “clear, complete writings should generally be enforced according to their terms” to impart “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses . . . infirmity of memory.” 14 A party seeking reformation based on a scrivener’s error, like a party claiming mutual mistake, for example, has the burden of showing an obvious error by clear and convincing evidence. 15 In NCCMI, Inc. v. Bersin Props., LLC , 2024 N.Y. Slip Op. 01161 (1st Dept. Mar. 5, 2024) ( here ), the Appellate Division, First Department addressed the law concerning the impact of a scrivener’s error on the parties to a contract or other written instrument.  NCCMI concerned a purported $44 million scrivener’s error in a guaranty that exposed Bersin Properties’ principal and co-defendant (“defendant”), an indemnitor under the guaranty, to personal liability.  Defendant Bersin Properties, LLC (“Bersin Properties”) entered into a $135 million Amended and Restated Loan Agreement dated January 29, 2007 (the “Loan Agreement”), as borrower, with Nomura Credit & Capital, Inc. (“Nomura”), plaintiff’s predecessor, as lender, for the purpose of renovating and re-leasing the Medley Centre, a shopping mall located in Monroe County, New York (the “Property”). The Loan Agreement provided that the loan would mature on February 9, 2009, but permitted Bersin Properties to extend the maturity date by up to three successive one-year periods. The Loan Agreement also provided for three loans, each of which was secured by a mortgage encumbering the Property. Although the loan was nonrecourse, which limited Nomura’s remedies for nonpayment to possession of the Property by bringing a “foreclosure action, an action for specific performance or any other appropriate action or proceeding,” the Loan Agreement provided for two carve-outs that would permit Nomura to have recourse against Bersin Properties — recourse for losses resulting from specific bad acts (loss recourse indemnity) and recourse for repayment of the entire debt upon occurrence of certain triggering events (full debt recourse liability). Defendant was designated as the guarantor in the Loan Agreement.  Defendant executed an Indemnity and Guaranty Agreement (the “Guaranty”) in connection with the loan. He was the only one to execute the Guaranty and did so as an “Indemnitor.” The Guaranty sets out Bersin Properties’ and defendant’s respective obligations upon the occurrence of certain events. Specifically, it provided that Bersin Properties, as borrower, and defendant, individually, both collectively referred to as “Indemnitor,” would, jointly and severally, guarantee payment of Bersin Properties’ recourse obligations to Nomura. Similar to the Loan Agreement, the Guaranty provided for a loss recourse indemnity and a full debt recourse liability. The loss recourse indemnity provided that “Indemnitor,” namely Bersin Properties and defendant, assumed liability for certain enumerated bad acts. As to full debt recourse liability, the Guaranty stated, in relevant part: the Debt shall be fully recourse to Borrower … if Borrower defaults hereunder in any way and Borrower or any Guarantor contests or in any way interferes with, directly or indirectly, any foreclosure action … or with any other enforcement of Lender's rights, powers or remedies under any of the Loan Documents or under any document evidencing, securing or otherwise relating to all or any portion of the Property (whether by … bringing any counterclaim, claiming any defense ….).  Nomura conveyed its right, title, and interest in the loan to plaintiff on March 25, 2008. Thereafter, plaintiff funded dozens of draw requests under the Loan Agreement, ultimately lending Bersin Properties over $44 million. The loan matured on February 9, 2009. Bersin Properties did not repay any portion of the debt, thereby defaulting under the terms of the Loan Agreement. On April 25, 2014, more than five years after the loan matured, Bersin Properties and defendant commenced an action against Nomura and plaintiff alleging, among other things, that plaintiff breached the Loan Agreement by refusing to extend the maturity date and by refusing to fund an additional $54 million draw request after that time.  Supreme Court granted Nomura summary judgment dismissing the complaint. In affirming, the First Department held that Bersin Properties had breached the Loan Agreement, which “disqualified it from both extending the loan’s maturity date and receiving further loan advances.” 16 On January 30, 2015, plaintiff commenced the action against Bersin Properties seeking to foreclose on the mortgages on the Property. On March 24, 2015, Bersin Properties answered the complaint, asserting 14 affirmative defenses. In January 2016, Bersin Properties lost title to the Property in a sheriff’s sale that was held to satisfy a junior lienholder’s judgment against it. Plaintiff elected to release its mortgages on the Property to the new owner for $4 million due to the minimal value of the Property, as a consequence of Bersin Properties’ failure to develop the Property, and the costs in maintaining it. In March 2016, plaintiff sought leave to convert its foreclosure action to a plenary action seeking recourse on the underlying promissory notes and the Guaranty for full recovery of the debt, minus the $4 million already received.  Supreme Court granted the motion, and plaintiff served a second supplemental complaint in the converted action. Bersin Properties and defendant filed a joint answer interposing 19 affirmative defenses. After several years of discovery, plaintiff and defendants moved for summary judgment. Relevant to the appeal, both parties sought summary judgment as to defendant’s personal liability under the Guaranty. In seeking to hold defendant personally liable, plaintiff contended that Bersin Properties and defendant triggered full debt recourse liability when Bersin Properties contested the foreclosure action by filing an answer and interposing affirmative defenses. Plaintiff acknowledged that the Guaranty provided that the debt would be “fully recourse to Borrower” upon the occurrence of a full debt recourse triggering event, and not “fully recourse to Indemnitor,” seemingly insulating defendant from the loan indebtedness. It further noted that the language in this recourse provision was a virtual mirror image of the provision set forth in the Loan Agreement and posited that a scrivener’s error occurred insofar as the term “Borrower” was not deleted and replaced with “Indemnitor” when the Loan Agreement’s provision was inserted into the Guaranty. It argued that the Guaranty plainly contemplated for liability to run to defendant for full debt recourse. For support, plaintiff pointed to the Guaranty’s preamble, and numerous additional terms and provisions within the Guaranty. Thus, plaintiff contended that to make only Bersin Properties liable, as opposed to defendant and Bersin Properties, as Indemnitor, would lead to an absurd result because Bersin Properties, as a single-purpose entity with no assets other than the Property, would then become its own guarantor. Defendants argued that plaintiff’s claim of scrivener’s error was time-barred under the applicable six-year statute of limitations for reformation of a contract. Defendants also contended that the literal reading of the Guaranty indicated that full debt recourse liability was available only to Bersin Properties, as “Borrower,” and not to defendant, as an “Indemnitor.” In addition to the language of the Guaranty itself, defendants relied on, among other things, defendant’s deposition testimony, wherein he testified that he never understood himself to be personally guaranteeing the full debt, and a July 2008 email from plaintiff’s president, which referred to the parties’ agreement and stated, among other things, that “the payments not guaranteed by anyone in this loan.” Finally, defendants argued that holding defendant personally liable just because Bersin Properties responded to the foreclosure action would be contrary to public policy. Supreme Court denied plaintiff’s motion to the extent it sought summary judgment on its claim for personal liability against defendant and denied defendants’ motion for partial summary judgment dismissing the claim. In doing so, the motion court found the language “fully recourse to Borrower” to be ambiguous. The motion court noted that while the literal terms appear to have exempted defendant from personal liability for Bersin Properties’ debt, there was a “clear tension” between the “fully recourse to Borrower” provision and the rest of the Guaranty. The motion court further found that extrinsic evidence did not result in a clear understanding that the inclusion of “Borrower” instead of “Indemnitor” had been intentional. Thus, the motion court declined to substitute “Borrower” for “Indemnitor,” noting that plaintiff did not meet its burden of identifying absurdity or unenforceability in the Guaranty. On appeal, the First Department modified the motion court’s order to grant plaintiff’s motion for summary judgment on its claim against defendant, and otherwise affirmed. The Court held that the record established that the Guaranty’s full debt recourse liability was triggered when Bersin Properties filed an answer, with affirmative defenses, in the foreclosure action, and when Bersin Properties and defendant jointly filed an answer, with affirmative defenses, in the plenary action.  The Court noted, however, that the question remained whether defendant, as an Indemnitor, was subject to full debt recourse liability under the Guaranty. The Court found that he was subject to full recourse liability under the Guaranty. In so holding, the Court relied on PNC Capital Recovery v. Mechanical Parking Sys. , 283 A.D.2d 268 (1st Dept. 2001), lv. dismissed , 96 N.Y.2d 937 (2001), appeal dismissed , 98 N.Y.2d 763 (2002), finding the case to be dispositive of the appeal. In PNC Capital , a corporation’s creditor commenced an action against its president, Shlomo Kadosh, individually, on a guaranty of the corporation’s debt that Kadosh signed. Kadosh argued that the presence of his title “president” immediately below his signature line on the guaranty established that he was not personally liable under the guaranty because he had signed it in his capacity as corporate president. The Court unanimously rejected the argument after reading the guaranty as a whole and in the context of the entire transaction and granted the creditor summary judgment on its claim against Kadosh. Notably, the Court held that to permit a corporation to guarantee its own indebtedness was illogical and rendered meaningless the entire guaranty:  Further, an interpretation that Kadosh signed the Guaranty solely in his capacity as president of the corporation would compel the illogical conclusion that the purpose of the Guaranty was to provide that in case of Mechanical’s default, the company would guaranty its own indebtedness, rendering the entire Guaranty meaningless. 17 The Court held that “ PNC Capital’s logic applie to this case.” 18 The Court reasoned that “ or us to accept a literal reading of the Guaranty’s full debt recourse liability to apply to the “Borrower” instead of “Indemnitor” as urged by defendants would countenance an ‘illogical’ result, namely, Bersin Properties, as a single-purpose entity with no assets other than the Property, would be guaranteeing its own debt.” 19 “That result,” said the Court, “renders the Guaranty illusory and meaningless, particularly given that the Property was encumbered at the time of the Guaranty and, notably, already lost in an unrelated foreclosure action when plaintiff sought to enforce the Guaranty.” 20 The Court rejected defendants’ argument that PNC Capital was inapplicable. In so doing, the Court rejected defendants’ attempt to compartmentalize the Guaranty into two separate and mutually exclusive components — a loss recourse indemnity versus a full debt recourse liability. 21 “Compartmentalizing the recourse obligations in this manner fails to read the Guaranty as a whole,” said the Court. 22 “The clear and unambiguous purpose of the Guaranty is to guarantee both the losses incurred under the Loan Agreement and Bersin Properties’ loan obligations under that agreement.” 23 “Further,” held the Court, “the literal application of the phrase ‘fully recourse to Borrower’ only to Bersin Properties and not to , as an Indemnitor, as persisted by defendants would render the full debt recourse liability portion of the Guaranty meaningless and illusory because Bersin Properties is not a signatory to the Guaranty and would not be bound by terms of the Guaranty. Thus, the loan indebtedness would be unguaranteed, undermining the purpose of the Guaranty.” 24 Moreover, as a matter of contract interpretation, the Court held that the “guaranty must be read in the context of the loan agreement and in a manner that accords the words their fair and reasonable meaning, and achieves a practical interpretation of the expressions of the parties.” 25 “In other words,” said the Court, “a ‘contract should not be interpreted to produce a result that is absurd, commercially unreasonable or contrary to the reasonable expectations of the parties.’” 26 Looking at the agreements, the Court noted that “ ertain provisions of the Guaranty confirm that the full debt recourse liability runs to , as an Indemnitor, rather than to ‘Borrower.’” 27 “Specifically,” said the Court, “the paragraph immediately following the full debt recourse liability provision declares that ‘ he liability of Indemnitor under this Agreement shall be direct and immediate’; that ‘Indemnitor waives any right to require that an action be brought against Borrower or any other person or to require that resort be had to any collateral for the Loan’; that ‘Indemnitor shall nevertheless be fully liable’ for the debt even if Borrower’s liability is relieved by bankruptcy or other debtor relief law; and that ‘Indemnitor shall remain liable for all remaining indebtedness and obligations guaranteed hereby’ even if the loan is partially repaid from other sources or by foreclosure.” 28 Further, explained the Court, “section 4 of the Guaranty, which provides for the waiver of defenses by the Indemnitor, would be rendered meaningless if the Indemnitor were not personally liable for repayment of the debt.” 29 “Additionally,” said the Court, “section 5(b) of the Guaranty states that ‘Lender would not make the Loan but for the unsecured personal liability undertaken by Indemnitor herein.’” 30 “If , as an Indemnitor, not, under any circumstances, personally liable for the loan, these provisions would be relegated to meaningless surplusage,” concluded the Court. 31 In sum, the Court held that the terms of the Guaranty “all provide clear and convincing intrinsic proof that the use of the phrase ‘recourse to Borrower’ instead of ‘recourse to Indemnitor’ in the Guaranty was an obvious scrivener's error.” 32 Takeaway The Court’s “reminder” at the outset of the decision sums up the takeaway of NCCMI : “proofreading is an essential, indispensable tool in the drafting of contracts.” 33 Footnotes Janowitz v. 25-30 120th St. , 75 A.D.2d 203, 214 (2d Dept. 1980). Id. (quoting 13 Williston, Contracts <3d ed> , § 1544). Id. Id. (citing 13 Williston, Contracts <3d ed> , § 1544, at 96). George Backer Mgt. Corp. v. Acme Quilting Co. , 46 N.Y.2d 211, 219 (1978). Schultz v. 400 Coop. Corp. , 292 A.D.2d 16, 19 (1st Dept. 2002) (quoting, Amend v. Hurley , 293 N.Y. 587, 595 (1944)). Id. Id. US Bank N.A. v. Lieberman , 98 A.D.3d 422, 424 (1st Dept. 2012). Gulf Ins. Co. v. Transatlantic Reins. Co. , 69 A.D.3d 71, 85 (1st Dept. 2009). CPLR § 213(6); 1414 APF, LLC v. Deer Stags, Inc. , 39 A.D.3d 329, 330 (1st Dept. 2007). Matter of Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 547-548 (1995); see also Jade Realty LLC v. Citicorp Commercial Mtge. Trust 2005-EMG , 20 N.Y.3d 881, 883-884 (2012). Slifka v. Slifka , 177 A.D.3d 418, 419 (1st Dept. 2019). W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 160, 162 (1990) (internal quotation marks omitted). Warberg Opportunistic Trading Fund, L.P. v. Georesources, Inc. , 112 A.D.3d 78, 84-85 (1st Dept. 2013). Bersin Props., LLC v. Nomura Credit & Capital, Inc. , 213 A.D.3d 431, 431 (1st Dept. 2023). Id. at 270-271. Slip Op. at *5. Id. Id. Slip Op. at *5. Id. (citing Greenwich Capital Fin. Prods., Inc. v. Negrin , 74 A.D.3d 413, 415 (1st Dept. 2010)). Id. Id. at *6. Id. (citing Greenwich Capital , 74 A.D.3d at 415) (quoting Duane Reade, Inc. v. Cardtronics, LP , 54 A.D.3d 137, 140 (1st Dept 2008) (internal quotation marks omitted)). Id. (citing ( Greenwich Capital , 74 A.D.3d at 415) (quoting Matter of Lipper Holdings v. Trident Holdings , 1 A.D.3d 170, 171 (1st Dept. 2003)). Id. Id. Id. Id. Id. (citing Greenwich Capital , 74 A.D.3d at 415 (rejecting interpretation that relies on “formalistic literalism,” ignores common sense, and could lead to absurd results)). Id. Id. at *2. 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.

By Jonathan H. Freiberger People and businesses enter into all kinds of contracts with the expectation that the other party will perform according to the respective promises of the parties.  [This BLOG has discussed the basics of contract formation and breach, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] It is well known that a party to a contract may be liable to another party to a contract for a breach.  The elements of a cause of action for breach of contract are: (1) the existence of an enforceable contract; (2) performance of the agreement by one party; (3) breach by the other party; and, (4) damages resulting from the breach. See, e.g., Nassau Operating Co., LLC v. Desimone , 206 A.D.3d 920, 926 (2d Dep’t 2022). “A material breach is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract.” Feldman v. Scepter Group, PTE. LTD , 185 A.D.3d 449, 450 (1 st Dep’t 2020) (citation and internal quotation marks omitted).  Put another way, a “breach is material if it strongly tends to defeat the object of the parties in making the contract.”  Id . (Citation, internal quotation marks and brackets omitted.)  A party can also be deemed to have breached a contract prior to the time of performance – an anticipatory breach.  “An anticipatory breach of contract by a promisor is a repudiation of a contractual duty before the time fixed in the contract for performance has arrived.”  Costea v. Vemen Mgt. Corp. , 213 A.D.3d 634, 637 (2 nd Dep’t 2023) (citations, internal quotation marks, brackets and ellipses omitted).  According to the Costea Court: An anticipatory breach of a contract—also known as an anticipatory repudiation—can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach. Under the doctrine of anticipatory repudiation, where one party repudiates its contractual obligations prior to the time designated for performance, the nonrepudiating party may immediately claim damages for total breach and be absolved from its obligations of future performance. For an anticipatory repudiation to be deemed to have occurred, the expression of intent not to perform by the repudiator must be positive and unequivocal. Id . (Citations, internal quotation marks and brackets omitted.) The party to a contract faced with a breach of a contract must elect its remedy.  Under the election of remedies doctrine “when one party breaches a bilateral contract, the other party must make an election between declaring a breach and terminating the contract or, alternatively, ignoring the breach and continuing to perform under the contract.”  Todd English Enterprises LLC v. Hudson Home Group, LLC , 206 A.D.3d 585, 587 (2022) (citation and internal quotation marks omitted).  “On learning of the breach, the other party has a reasonable time to elect its remedy.” Id . (Citation and internal quotation marks omitted).   Also relevant to today’s BLOG is the amendment of pleadings.  CPLR 3025 (b) provides in pertinent part that “ party may amend his or her pleading … at any time by leave of court or by stipulation of all parties.” Importantly, CPLR 3025(b) provides that “ eave shall be freely given.…” Thus, “unless the proposed amendment would unfairly prejudice or surprise the opposing party, or is palpably insufficient or patently devoid of merit,” the motion to for leave to amend should be granted. Cirillo v. Lang , 206 A.D.3d 611, 612 (2d Dept. 2022) (citations omitted).  See also Greene v. Esplanade Venture P’ship , 36 N.Y.3d 513, 526 (2021); Toiny, LLC v. Rahim , 214 A.D.3d 1023, 1024 (2d Dept. 2023) (citations omitted). These principles were addressed on February 28, 2024, by the Appellate Division, Second Department, in Contract Pharmacal Corp. v. Air Industries Group , a breach of contract action.  The plaintiff in Contract Pharmacal moved for leave to amend its complaint to interpose a cause of action for anticipatory breach of contract.  The motion was denied.  On the plaintiff’s motion for reargument, the motion court granted reargument and adhered to its original decision denying the motion.   On the Plaintiff’s appeal, the Second Department affirmed.  Asserting claims for breach and anticipatory breach of contract, the Court noted, is “barred”. Therefore, the Court found the proposed amendment was “patently devoid of merit.”  In so doing, the Court stated: Although leave to amend a pleading should be freely given in the absence of prejudice or surprise to the opposing party ( see CPLR 3025 ), the motion should be denied where the proposed amendment is palpably insufficient or patently devoid of merit. When one party to a contract commits an anticipatory breach, the nonbreaching party must choose one of two options: either treat the contract as terminated and seek damages, or ignore the breach and wait for the breaching party to perform. The nonbreaching party must make an election and cannot at the same time treat the contract as broken and subsisting. One course of action excludes the other. In determining which election the nonbreaching party has made, the operative factor is whether the non-breaching party has taken an action (or failed to take an action) that indicated to the breaching party that it had made an election. Once the nonbreaching party has chosen a remedy, the choice becomes binding and cannot be altered. Accordingly, asserting a cause of action alleging breach of contract precludes pleading a cause of action alleging anticipatory breach of contract. Here, the plaintiff, in the complaint, asserted a cause of action to recover damages for breach of contract. In doing so, the plaintiff elected its remedy and communicated that choice to the defendant. Inasmuch as simultaneous prosecution of causes of action alleging breach of contract and alleging anticipatory breach of contract is barred, the proposed amendment to add a cause of action alleging anticipatory breach of contract was patently devoid of merit. Accordingly, upon reargument, the Supreme Court properly adhered to the prior determination denying that branch of the plaintiff's motion which was for leave to amend the complaint to add such a cause of action. (Citations, internal quotation marks, brackets and ellipses omitted.)  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It’s been some time since this Blog has written about Regulation Best Interest (“BI”). 1 See here . 2 As a general matter, Reg BI requires a broker, dealer, or associated person to act in the best interest of a retail customer when making a recommendation of a securities transaction (the “Best Interest Obligation”).  Today, we examine an enforcement action and settlement of charges against TIAA-CREF Individual & Institutional Services LLC (“TC Services” or “Respondent”), a subsidiary of Teachers Insurance and Annuity Association of America (TIAA), for allegedly failing to comply with Reg BI in connection with recommendations to retail customers to open a TIAA Individual Retirement Account (“TIAA IRA”). As discussed below, TC Services agreed to pay more than $2.2 million to settle the charges. A Primer on Reg BI Reg BI established a standard of conduct for broker-dealers and associated persons who recommend securities transactions to retail customers. Reg BI is intended to enhance the broker-dealer standard of conduct beyond existing suitability obligations, by requiring broker-dealers to, among other things: act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker-dealer ahead of the interests of the retail customer; and address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest. There are four components to Reg BI: (1) Disclosure Obligation, (2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation. All four components must be met in order to satisfy the regulation. Under the Disclosure Obligation, before or at the time of the recommendation, a broker-dealer must disclose, in writing, all material facts about the scope and terms of its relationship with the customer. This includes a disclosure that the firm or representative is acting in a broker-dealer capacity; the material fees and costs the customer will incur; and the type and scope of the services to be provided, including any material limitations on the recommendations that could be made to the retail customer. Moreover, the broker-dealer must disclose all material facts relating to conflicts of interest associated with the recommendation that might incline a broker-dealer to make a recommendation that is not disinterested, including, for example, conflicts associated with proprietary products, payments from third parties, and compensation arrangements.  The Care Obligation requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with a recommendation of a securities transaction to a retail customer. According to the SEC, whether a broker, dealer, or associated person exercises reasonable diligence depends on, among other things, the complexity of, and risks associated with, the recommended security. The Care Obligation also requires a broker, dealer, or associated person to have a reasonable basis to believe that the recommendation is in the best interest of the particular retail customer, based on that customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation. Whether the recommendation is in the best interest of the customer depends on the facts and circumstances of the recommendation, including “matching” the recommended security to the retail customer’s investment profile. Where the “match” between the retail customer profile and the recommendation appears less reasonable, it is incumbent upon the broker to establish that it had a reasonable belief that the recommendation was in the best interest of the retail customer. In addition to “matching” the recommendation to the customer’s suitability profile, a registered representative should also exercise reasonable diligence, care, and skill to consider reasonably available alternatives. Under the Conflict of Interest Obligation, a broker-dealer must establish, maintain, and enforce reasonably designed written policies and procedures addressing conflicts of interest associated with its recommendations to retail customers. These policies and procedures must be reasonably designed to identify all such conflicts and at a minimum disclose or eliminate them. Importantly, the policies and procedures must be reasonably designed to mitigate conflicts of interests that create an incentive for an associated person of the broker-dealer to place its interests or the interest of the firm ahead of the retail customer’s interest. Moreover, when a broker-dealer places material limitations on recommendations that may be made to a retail customer ( e.g. , offering only proprietary or other limited range of products), the policies and procedures must be reasonably designed to disclose the limitations and associated conflicts and to prevent the limitations from causing the associated person or broker-dealer from placing the associated person’s or broker-dealer’s interests ahead of the customer’s interest. Finally, the policies and procedures must be reasonably designed to identify and eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time. The Compliance Obligation requires a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. According to the SEC, a broker “should consider the nature of that firm’s operations and how to design such policies and procedures to prevent violations from occurring, detect violations that have occurred, and to correct promptly any violations that have occurred.” here).=">here)."> Reg BI After the Compliance Date On April 20, 2023, the SEC released a Staff Bulletin (“Bulletin”) on the care obligation for broker-dealers and investment advisors. 3 As noted in the Bulletin, the Bulletin and other staff documents (including those cited therein) represent the views of the SEC staff. They do not carry the force of a rule, regulation, or statement of the Commission. In fact, the Commission neither approved nor disapproved of the content of the Bulletin.  According to the Staff, the Bulletin was designed to assist firms and their financial professionals with meeting their care obligations under Reg BI. Some commentators have argued that the Staff’s views appear to go beyond the requirements of Reg BI ( here ).  In addition to SEC enforcement of Reg BI, the Financial Industry Regulatory Authority (“FINRA”) has brought enforcement actions involving Reg BI. In October 2022, for example, FINRA charged a representative ( here ) with “recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest.” FINRA noted that “ o single test defines when trading is excessive, but factors such as the turnover rate, the cost-to-equity ratio, and the use of in-and-out trading in a customer’s account are relevant to determining whether a member firm or associated person has excessively traded a customer’s account in violation of Reg BI.” To settle the charges, the respondent consented to the imposition of a six-month suspension from associating with any FINRA member in all capacities, and a $5,000 fine. Customers are also bringing arbitrations that include claims that the representative violated Reg BI. In 2023, there were 408 cases on FINRA’s docket in which the claimant alleged a violation of Reg BI, up from 216 in 2022 ( here ).  In the Matter of TIAA-CREF Individual & Institutional Services, LLC On February 16, 2024, the SEC announced ( here ) that TC Services agreed to pay more than $2.2 million to settle charges that it failed to comply with Reg BI in connection with recommendations to retail customers to open a TIAA IRA. The enforcement proceedings arose out of Respondent’s alleged failure to comply with Reg BI between June 30, 2020, the compliance date for Reg BI, and approximately November 1, 2021.  During the Relevant Period, Respondent offered a variety of investment alternatives to retail brokerage customers, including the TIAA IRA, an investment strategy involving securities. The TIAA IRA enabled customers to invest in a pre-selected core menu of affiliated investments, including TIAA mutual funds, Nuveen mutual funds, and TIAA retirement annuities. 4 In the core menu, customers could opt to receive certain benefits like third-party allocation advice on core menu investments and the ability to establish automatic contributions. Affiliated funds in the core menu typically had higher expenses than the lowest-cost share classes offered by those funds and required no minimum initial investment. In addition to the core menu, the TIAA IRA also enabled customers to invest in a broader array of affiliated and non-affiliated investments through the TIAA IRA brokerage window. Specifically, through the TIAA IRA brokerage window, customers could invest in TIAA mutual funds and Nuveen mutual funds, as well as a variety of third-party mutual funds, ETFs, stocks, and bonds. The brokerage window included the lowest-cost share classes of core menu funds where available. These share classes were generally subject to investment minimums.  The SEC’s order ( here ) found that Respondent violated Reg BI by, among other things, failing to disclose both that substantially equivalent, lower-cost share classes of affiliated funds were available in the brokerage window and the conflicts that it created. In particular, according to the SEC, Respondent did not disclose to its retail customers prior to or at the time of the recommendation to open a TIAA IRA account that substantially equivalent, lower-cost share classes of select affiliated funds were available in the brokerage window. The SEC also said that Respondent did not disclose the conflicts associated therewith – that is, that Respondent allegedly earned higher fees when customers invested in more expensive share classes of core menu funds.  The SEC further alleged that Respondent failed to comply with Reg BI’s Care Obligation because Respondent and its associated persons did not exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with its recommendations to open a TIAA IRA. In particular, alleged the SEC, the firm failed to understand the costs associated with their recommendations of that product. Finally, the SEC alleged that Respondent failed to comply with the Compliance Obligation of Reg BI because it failed to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI’s Care Obligation. According to the SEC, Respondent had no policies and procedures in place to detect investment minimum waivers. In addition, said the SEC, Respondent did not enforce its written policies and procedures because the third-party tool Respondent provided to associated persons to consider costs did not consider costs associated with other share classes of core menu funds available within the TIAA IRA brokerage window. As a result of Respondent’s alleged violations of Reg BI, between June 30, 2020 and October 27, 2021, approximately 5,894 retail customer accounts allegedly purchased higher cost share classes of affiliated mutual funds without being informed by Respondent or its associated persons that substantially equivalent, lower cost offerings were also available within the TIAA IRA. In total, said the SEC, these customers paid about $936,714 more in expenses for substantially equivalent funds than they otherwise could have paid if these funds were purchased through the brokerage window. Without admitting or denying the SEC’s findings, Respondent consented to the entry of an order that requires it to cease-and-desist from violating Reg BI, censures the firm, and orders it to pay disgorgement of $936,714, together with prejudgment interest of $103,424.91, as well as a civil monetary penalty of $1,250,000. Footnotes On June 5, 2019, the Securities and Exchange Commission (“SEC” or the “Commission”) adopted “Regulation Best Interest” or “Reg BI”. The SEC set June 30, 2020, as the compliance date in order to give broker-dealers sufficient time to comply with Reg BI. On and after the compliance date, broker-dealers that provide recommendations of securities transactions or investment strategies that register with the Commission were required to comply with Reg BI. In connection with adoption of the regulation, the SEC issued a 175-page release in which it offered guidance on how the Commission interprets Reg BI. See Regulation Best Interest: The Broker-Dealer Standard of Conduct, Exchange Act Release No. 34-86031, 84 Fed. Reg. 33318 (July 12, 2019) ( here ). The case examined in the article remains ongoing.  See SEC Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations (Apr. 20, 2023) ( here ). Nuveen, LLC is a wholly owned subsidiary of TIAA.

By:  Jeffrey M. Haber In New York, “a valid release constitutes a complete bar to an action on a claim which is the subject of the release.” If “the language of a release is clear and unambiguous, the signing of a release is a ‘jural act’ binding on the parties.” For this reason, “ release should never be converted into a starting point for … litigation except under circumstances and under rules which would render any other result a grave injustice.” In New York, “a release may encompass unknown claims, including unknown fraud claims, if the parties so intend and the agreement is ‘fairly and knowingly made.’” However, if the release was obtained under duress, through illegality, fraud or mutual mistake, it may be invalidated, a burden which is borne by the party seeking to set aside the release. And the party seeking to set aside the release “may later challenge that release as fraudulently induced only if it can identity a separate fraud from the subject of the release.” To allow anything less would undermine a party’s ability to settle a fraud claim with finality. A party that releases a fraud claim may later challenge that release as fraudulently induced only if he/she can identify a separate fraud from the subject of the release. As the Court of Appeals observed, “ ere this not the case, no party could ever settle a fraud claim with any finality.” A plaintiff seeking to invalidate a release due to fraudulent inducement must “establish the basic elements of fraud, namely a representation of material fact, the falsity of that representation, knowledge by the party who made the representation that it was false when made, justifiable reliance by the plaintiff, and resulting injury.” In LMM Capital Partners, LLC v. Mill Point Capital, LLC , 2024 N.Y. Slip Op. 00806 (1st Dept. Feb. 15, 2024) ( here ), the Appellate Division, First Department addressed the foregoing principles. In early 2020, plaintiff LMM Capital Partners, LLC (“LMM”), a private equity firm, and defendant Martin Kelly (“Kelly”), the CEO and majority owner of defendant E&M Logistics, Inc. (“E&M”), a leading distributor of food and beverages, began discussing and negotiating plaintiff’s acquisition of E&M. As part of the negotiation process, plaintiff and E&M entered into a Letter of Intent (“LOI”). The LOI provided, among other things, that should E&M elect not to close the transaction for any reason, it would pay a “breakup fee” of $400,000.00 to plaintiff. During negotiations with E&M, plaintiff sought an investment partner with which it could complete the transaction. Plaintiff narrowed its search down to two other private equity firms, nonparty Tenex Capital Management (“Tenex”) and defendant Mill Point Capital LLC (“Mill Point”). During the search, Mill Point and plaintiff entered into a Non-Circumvention Agreement (“NCA”) in which Mill Point agreed to not pursue the acquisition of E&M, for a certain period of time, on its own. Ultimately, plaintiff selected Tenex and moved forward with the transaction. Less than one month later, Kelly told plaintiff’s managing partner, Elisha Aharon (“Aharon”) that Kelly would like to terminate all negotiations with plaintiff and pay the breakup fee. Kelly also informed Aharon that E&M’s two largest vendors, nonparties Nestle and Froneri, would not approve the sale of E&M to any private equity fund. Aharon attempted to dissuade Kelly and asked to speak to someone at Nestle and Froneri to assure them that LMM and Tenex were the right ones for the deal. Kelly declined to arrange such a meeting. A few days later E&M’s attorney sent a Mutual Termination Agreement and Release to Aharon. Both Aharon, on behalf of LMM, and Kelly, on behalf of E&M, executed the release which terminated the LOI and provided that E&M would pay plaintiff a total of $420,000.00. Pursuant to the agreement, plaintiff released: E&M from and against any and all manner of actions, causes of action, … , claims, demands, damages, … , costs, expenses, reasonable attorneys’ fees, … , and liabilities … of whatsoever kind and nature, whether based on tort (including, without limitation, acts of negligence), contract or any other theory of recovery, whether at law or in equity or otherwise, whether known or unknown, liquidated or unliquidated, suspected or unsuspected and whether or not concealed or hidden, which LMM … had, now has, or hereafter may have against the Company … arising out of, relating to, connected with, or incidental to, the Letter of Intent or the transaction contemplated thereby. The Termination Agreement defined “Company Released Parties” as, “(a) the Company’s past, present and future Affiliates (as defined below); (b) the Company’s and the Company’s Affiliates’ predecessors, successors, and assigns; and (c) the directors, officers, members, managers, shareholders, employee stock ownership plan, partners, financing and equity sources, trustees, supervisors, employees, agents, and representatives of each Party included within (a) and (b) immediately above.” Affiliates was defined as “with respect to a Party, an entity which, directly or indirectly, controls, is controlled by, or is under common control with such Party.” Less than two months after signing the Termination Agreement, Aharon learned that Mill Point was pursuing E&M. A mere three months later, E&M and Mill Point announced that Mill Point had acquired E&M for $80 Million, which was six million more than LMM had offered. Soon thereafter, plaintiff commenced the action, alleging breach of the NCA and tortious interference with plaintiff’s business relations against Mill Point; tortious interference with contract and constructive fraud against Kelly and E&M; and fraudulent inducement against Kelly and E&M. Plaintiff also sought a declaration that the Termination Agreement and release were unenforceable. Defendants moved to dismiss the complaint pursuant to CPLR 3211(a)(1), (5), and (7). The motion court granted defendants’ motion, with prejudice. On appeal, the First Department unanimously affirmed. As an initial matter, the Court noted that the case turned on the release in the NCA and whether plaintiff’s claim for fraudulent inducement fell outside the scope of that release. The reason being that if the release was valid, then the claims asserted by plaintiff would be rendered moot. Turning to the release, the Court held that the release was “broad” and “encompassed fraud claims, both known and unknown, suspected and unsuspected, which plaintiff had, now had or hereafter may have.” The Court noted that plaintiff’s allegations – that “E&M and Kelly knowingly falsely stated to LMM that Nestle and Froneri would never enter into a deal with a private equity firm or fund” and that they did so “with an intent to cause LMM to enter into the Termination Agreement under false pretenses and to stop pursuing the E&M deal …” – arose out of, related to, were connected with or incidental to the transaction contemplated by the LOI, and constituted claims that plaintiff explicitly released when it signed the Termination Agreement. Thus, concluded the Court, “the fraud described by plaintiff fell ‘squarely within the scope of the release’ and an attempt to convert the release into a starting point for litigation, which is impermissible.” The Court rejected plaintiff’s argument that it justifiably relied on Kelly and E&M’s misrepresentations when it entered into the Termination Agreement. The Court found that plaintiff “had hints that Kelly’s representation that Nestle and Froneri would not approve of a private equity buyer for E&M were false.” “First,” said the Court, “Kelly had previously informed plaintiff that Nestle and Froneri had approved the deal with plaintiff.” “Second,” noted the Court, “plaintiff knew that Nestle had sold a majority stake in its U.S. ice cream business to a private equity firm in 2019, so it knew that Nestle did not always disapprove of private equity buyers.” “When a party fails to make further inquiry or insert appropriate language in the agreement for its protection, it has willingly assumed the business risk that the facts may not be as represented,” explained the Court. The Court held that “ laintiff ‘should have sought to condition the settlement on the truth of the representations by that induced to enter the settlement.’” The Court also rejected plaintiff’s reliance on the special facts doctrine. The special facts doctrine “requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge of one party and that the information was not such that could have been discovered by the other party through the exercise of ordinary intelligence.” The Court held that plaintiff “fail to satisfy that test: the fact that nonparties Nestle and Froneri would actually allow a private equity fund to buy E&M was not peculiarly within the knowledge of E&M and there was nothing stopping plaintiff from contacting Nestle and Froneri directly.” The Court noted that “ laintiff’s claims on appeal that Kelly precluded it from having contact information for Nestle and Froneri and that its October 2020 call with a Nestle Vice President was not with a decision maker are not supported by the record.” “In sum,” concluded the Court, “the motion court properly dismissed the fourth through sixth causes of action, which seek to invalidate the release.” Turning to plaintiff’s “even if” arguments – i.e. , the release is valid – the Court held that the parties covered by the release included Mill Point, even if plaintiff did not intend to include it. The Court held that the language of the release was “‘unmistakenly clear’” making plaintiff’s intent as to who was being released “‘irrelevant’”. The release included “Company Affiliates”, said the Court, “which was defined as a party or entity that ‘directly or indirectly, controls, is controlled by, or is under common control with such’ Company and Company Affiliates. Upon acquiring E&M, Mill Point was covered by the release as a Company Affiliate.” Finally, the Court rejected “ laintiff'’s contention that the release did not cover conduct after its date” because “ he release covers any claims that plaintiff ‘hereafter may have.’” __________________________________________ 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. Global Minerals & Metals Corp. v. Holme , 35 A.D.3d 93, 98 (1st Dept. 2006). Booth v. 3669 Delaware, Inc. , 92 N.Y.2d 934, 935 (1998) (quoting Mangini v. McClurg , 24 N.Y.2d 556, 563 (1969)). See also Centro Empresarial Cempresa S.A. v AmÉrica MÓvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011). Centro , 17 N.Y.3d at 276 (quoting Mangini , 24 N.Y.2d at 563). Centro , 17 N.Y.3d at 276 (quoting Mangini , 24 N.Y.2d at 566-567). Id. Id. ; Silver Point Capital Fund, L.P. v. Riviera Resources, Inc. , 198 A.D.3d 432, 433 (1st Dept. 2021). Centro , 17 N.Y.3d at 276. Id. (citation omitted). Id. Id. (quoting Global Mins. , 35 A.D.3d at 98). Slip op. at *3. Id. Id. Id. “When the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.” Centro , 17 N.Y.3d at 279 (brackets and internal quotation marks omitted). Id. Id. Id. (quoting Global Mins. , 35 A.D.3d at 100). Id. at *3-*4 (quoting id. at 101). Id. at *4. Id. (quoting Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc. , 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied , 29 N.Y.3d 913 (2017) (internal quotation marks omitted). Id. Id. (citation omitted). Id. Id. Id. (quoting Matter of Schaefer , 18 N.Y.2d 314, 317 (1966)). Id. Id.

By Jonathan H. Freiberger Today we revisit CPLR 3215(c), a provision addressed several times by this Blog.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . By way of brief background, and as set forth in one of our prior Blogs, Rule 3215(c) of the New York Civil Practice Law and Rules provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed….  (Emphasis added.) Courts have noted that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”.  ( See, e.g., US Bank v. Onuoha , 162 A.D.3d 1094, 1095 (2 nd Dep’t 2018); Wells Fargo Bank v. Cafasso , 158 A.D.3d 848, 849 (2 nd Dep’t 2018). The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “‘requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’”  Cafasso , 158 A.D.3d at 849; see also Wells Fargo Bank, N.A. v. Robinson-John , 220 A.D.3d 974, 977 (2 nd Dep’t 2023).  The “reasonableness” of an excuse is within the sound discretion of the motion court. See, e.g., Onuoha , 162 A.D.3d at 1095 – 96 (citations omitted); Cafasso , 158 A.D.3d at 849 (citations omitted).  In Robinson-John , the Court found that “…the purported submission of a completed loss mitigation application by the defendant did not automatically toll the plaintiff's deadline under CPLR 3215(c) during the time when the plaintiff was reviewing the application” and that the “unsubstantiated and conclusory claims of loss mitigation from the plaintiff's counsel do not amount to a reasonable excuse.”  Robinson-John , 220 A.D.3d at 977 (citations and internal quotation marks, brackets and ellipses omitted. Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated.  See Bank of America v. Lucido , 163 A.D.3d 614, 615 (2 nd Dep’t 2018); see also Bank of America, N.A. v. Bhola , 219 A.D.3d 430, 432 (2 nd Dep’t 2023); Mort. Electronic Registration Systems, Inc. v. McVicar , 203 A.D.3d 915, 916 - 17 (2 nd Dep’t 2022).  In mortgage foreclosure actions, the preliminary step of moving for an order of reference is deemed to be a sufficient “proceeding” toward the entry of judgment to satisfy the one-year time frame of CPLR 3215(c).  See, e.g., Deutsche Bank v. Delisser , 161 A.D.3d 942, 943 (2 nd Dep’t 2018); Lucido , 163 A.D.3d at 615; Mort. Electronic Registration Systems, 203 A.D.3d at 916 - 17.   A prior BLOG discussed Citibank, N.A. v. Kerszko , 203 A.D.3d 42 (2 nd Dep’t 2022), in which the Court decided “interesting and unusual issues” including the issue addressed by the Court for the “first time” of “whether the presentment to a court of a proposed ex parte order to show cause for an order of reference, which is rejected by the court for defects inherent in the papers, qualifies as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c), so as to avoid dismissal of the complaint as abandoned under that statute.”  Kerszko , 203 A.D.3d at 43 – 44.  The Kerszko Court, in answering the question in the affirmative, provided a thoughtful analysis of, inter alia , what it means to “take proceedings” under CPLR 3215(c).  Kerszko , 203 A.D.3d at 48 – 52.  Significantly, the lender in Kerszko presented its ex parte order of reference, which the court declined to sign because the moving affidavit was “incomplete”, in November of 2009.  Kerszko , 203 A.D.3d at 44.  A new application for an order of reference was not resubmitted until 2015.  Nonetheless, the Kerszko Court found because “the plaintiff presented a proposed ex parte order of reference within the one-year statutory period the Supreme Court rejected the order of reference as defective the mere presentment of it established the plaintiff's intent to proceed toward the entry of judgment and not to abandon the action.”  Kerszko , 203 A.D.3d at 52. (citation omitted).  According to the Kerszko Court, “ hat matters is the intent manifested by the presentment of an application, not what specific form it took or how it was filed.”  Id. See also MidFirst Bank v. Morris , 221 A.D.3d 889 (2 nd Dep’t 2023). On February 14, 2024, the Second Department decided U.S. Bank N.A. v. Jerriho-Cadogan , a case addressing the “takes proceedings” language of CPLR 3215(c).  Jerriho-Cadogan involves a mortgage foreclosure action commenced in September of 2010.  The borrowers defaulted in appearing, although served with process.  In November of 2010, the lender filed a request for judicial intervention (RJI) for a mandatory foreclosure settlement conference and, as a result, two conferences were held in early 2011.  The case languished for several years whereupon the motion court “issued a conditional order dated April 29, 2014, directing dismissal of the complaint pursuant to CPLR 3216 unless the plaintiff filed a note of issue or otherwise proceeded by motion for the entry of judgment within 90 days.”  Nothing happened until November of 2015, when the lender, inter alia , moved to restore the case to the calendar, which motion was granted in March of 2016.  The lender’s subsequent motion for leave to enter a default judgment was denied without prejudice and “with leave to refile upon showing a reasonable excuse for the delay in timely moving for leave to enter a default judgment.”  The lender moved again, and the motion was not opposed by the borrowers.  In its order deciding the second motion, the court “sua sponte, directed dismissal of the complaint as abandoned pursuant to CPLR 3215(c) and directed the cancellation and discharge of the notice of pendency filed against the subject property.” On the lender’s appeal, the Second Department reversed, finding that steps were taken within a year to obtain a default against the borrowers.  In so doing, the Court explained: To avoid dismissal pursuant to CPLR 3215(c), it is not necessary for a plaintiff to actually obtain a default judgment within one year of the default.  Rather, as long as proceedings are being taken, and these proceedings manifest an intent not to abandon the case but to seek a judgment, the case should not be subject to dismissal.  Here, the demonstrated that, within one year after the default, it filed a request for judicial intervention which sought a foreclosure settlement conference within the foreclosure action as mandated by CPLR 3408 . Where, as here, a settlement conference is a necessary prerequisite to obtaining a default judgment ( see CPLR 3408 , ), a formal judicial request for such a conference in connection with an ongoing demand for the ultimate relief sought in the complaint constitutes ‘proceedings for entry of judgment’ within the meaning of CPLR 3215(c). Since the demonstrated that it initiated proceedings for the entry of a judgment of foreclosure and sale within one year after the default, it was not required to proffer a reasonable excuse or demonstrate a potentially meritorious cause of action. 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 Rosenberg v. OSG, LLC , 2024 N.Y. Slip Op. 00691 (1st Dept. Feb. 8, 2024) ( here ), the Appellate Division, First Department underscored the insufficiency of pleading a fraud claim on information and belief. In affirming the dismissal of plaintiffs’ fraudulent inducement claim, the Court held that such pleading was “per se defective.” 1 Rosenberg is a class action arising out of plaintiffs’ participation in the Odyssey Study Group (“OSG”), which is run by Defendants OSG, LLC (“OSG, LLC”), the Individual Defendants, and, during her life, Sharon Gans Horn.  Plaintiffs, Stephanie Rosenberg (“Rosenberg”) and Marjorie Hochman (“Hochman”), alleged that they were members of OSG from 2005 until April 2019 and May 2016, respectively. They claimed that they joined OSG in 2005 after being told by members and leaders “that OSG would help improve their lives economically, physically, and spiritually.” Among other things, plaintiffs maintained that they were “coerced and tricked” by defendants into performing work for OSG, though, according to the motion court, plaintiffs did not specify the means by which they were coerced ad tricked, and that defendants lied to its members about the benefits of membership and the consequences of leaving the group. Plaintiffs commenced the action on September 20, 2021, asserting seven causes of action. Relevant to this article, in their fifth cause of action, plaintiffs alleged that defendants fraudulently induced them to join OSG by misrepresenting the benefits of joining the group. Defendants moved to dismiss. The motion court granted the motion.  To state a claim for fraud in the inducement, a plaintiff must allege “a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages.” 2 In addition, the plaintiff must “state[] in detail” “the circumstances constituting the wrong.” 3 Conclusory allegations made upon information and belief are insufficient to “establish the necessary quantum of proof to sustain allegations of fraud.” 4 The motion court held that plaintiffs failed to state a cause of action for fraud in the inducement, because they did not allege with sufficient particularity the details of the material misrepresentations made by defendants as required by CPLR 3016(b). The motion court noted that neither the complaint nor plaintiffs in their opposition to the motion specified which defendants made the misrepresentations 5 and the details of the purported misrepresentations.  The motion court also held that plaintiffs failed to allege with sufficient particularity that they justifiably relied upon defendants’ alleged misrepresentations. The motion court found that the complaint “merely allege that “ s a result of Defendants’ misrepresentation, Plaintiffs were led to believe that if they were asked to leave (or quit) they would suffer psychologically and emotionally” and state , in a conclusory manner, that they justifiably relied upon Defendants’ representations.” Further, the motion court found that plaintiffs failed to “specify the existence of a ‘relationship of trust or confidence’ between themselves and any Defendant at the time the alleged representations were made, the Defendants’ level of knowledge regarding the alleged falsity of the representations, or of the level of knowledge of the Defendants who made the representations.” 6 Accordingly, the motion court dismissed plaintiffs’ fifth cause of action for fraudulent inducement. On appeal, the First Department affirmed the dismissal, holding that “Plaintiffs’ fraud in the inducement claim per se defective,” because it was alleged on information and belief. 7 The Court also held, albeit in dicta, 8 that plaintiffs failed “to sufficiently allege that they justifiably relied on any alleged misrepresentation.” 9 Takeaway We have often noted that conclusory allegations and allegations made on information and belief are insufficient to state a claim for fraud. Such allegations are considered defective because they are made without any supporting facts. As noted above, plaintiffs pleading fraud must comply with CPLR 3016(b) and state with particularity the facts and circumstances constituting the alleged fraud. Rosenberg is a good reminder, therefore, that not only is information and belief pleading insufficient but, as noted by the First Department, it is “per se defective.” 10 Footnotes Slip Op. at *1. Carlson v. American Int. Grp., Inc. , 30 N.Y.3d 288, 310 (2017) (quoting Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009) (internal quotation marks omitted)). CPLR 3016(b); see also Carlson , 30 N.Y.3d at 310. Weinberg v. Kaminsky , 166 A.D.3d 428, 429 (1st Dept. 2018) (quoting Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610,615 (1st Dept. 2015) (internal quotation marks omitted)). The Court was referring to the prohibition against group pleading. Group pleading is the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. Courts routinely dismiss a complaint that lumps together numerous defendants without differentiation on particularity grounds because each defendant is not informed of the wrongs he/she is alleged to have committed. here,=">here," and="and" >here.=">here."> Citing Epiphany Community Nursery Sch. , 171 A.D.3d at 10. Slip Op. at *1 (citing Weinberg v. Kaminsky , 166 A.D.3d 428, 429 (1st Dept. 2018), and Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015)). “Dictum is an abbreviation of the Latin phrase ‘obiter dictum.’ As a legal term, a dictum is any statement or opinion made by a judge that is not required as part of the legal reasoning to make a judgment in a case.” Cornell University, LII Legal Information Institute (2022) ( here ). Id. (citing Epiphany Community Nursery Sch. v. Levey , 171 A.D.3d 1, 9-10 (1st Dept. 2019)). Slip Op. at *1. 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.

By Jonathan H. Freiberger This BLOG has written numerous times on statutes of limitation issues in mortgage foreclosure actions.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Briefly stated, and as has been stated previously in this BLOG, an action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment or other default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). Because some lenders were employing a tactic of acceleration/deacceleration/reacceleration to extend the six-year statute of limitations to circumvent mistakes made in pending foreclosure actions, among other reasons, the Foreclosure Abuse Prevention Act (“FAPA”) was passed by the New York Legislature and signed into law by the Governor.  [Eds. Note: This BLOG addressed FAPA < here =">here"> .]  FAPA, which went into effect on December 30, 2022, became the law in New York, amends certain provisions of the CPLR and other statutes to the extent they relate to mortgage foreclosure actions.   For example, FAPA amended CPLR 213 (4), which governs the six-year statute of limitations for actions on promissory notes, to include subparagraph (a), which provides that “ n any action on an instrument described under this subdivision, if the statute of limitations is raised as a defense, and if that defense is based on a claim that the instrument at issue was accelerated prior to, or by way of commencement of a prior action, a plaintiff shall be estopped from asserting that the instrument was not validly accelerated, unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”  In Deutsche Bank Nat. Trust Co. v. Wong , 218 A.D.3d 742, 744 (2 nd Dep’t 2023), based on CPLR 213(4)(a), the lender was estopped from asserting a defense that, because the plaintiff in the earlier action lacked standing to commence same, the underlying debt was not validly accelerated by an earlier commenced action. Similarly, FAPA amended CPLR 203 by adding subdivision (h), which provides that “ nce a cause of action upon an instrument described in subdivision four of section two hundred thirteen of this article has accrued, no party may, in form or effect, unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law to commence an action and to interpose the claim, unless expressly prescribed by statute.”   Issues related to FAPA, CPLR 203(h) in particular, were decided on February 8, 2024, by the First Department in HSBC Bank USA v. Gifford .  Lender in Gifford commenced a mortgage foreclosure action in 2019 after a prior action, commenced in 2013, was dismissed based on lender’s failure to comply with the notice requirements of RPAPL 1304.  The new action was commenced six years and four months after the commencement of the prior action, which operated to accelerate the obligations evidenced by the promissory note.  Borrower moved pursuant to, inter alia , CPLR 3211(a)(5) (statute of limitations) and CPLR 213(4).  Lender opposed borrower’s motion by arguing it deaccelerated the loan by letter in June of 2018 and, therefore, its action was timely.  The motion court, finding, inter alia , that the loan was validly deaccelerated, denied borrower’s motion.  Borrower appealed. The First Department noted that following the determination of the motion to dismiss, the New York Legislature enacted FAPA, which included CPLR 203(h). The parties addressed the FAPA issues on the appeal.  The Court found that lender adequately demonstrated that the deacceleration letter was actually mailed.  In addressing the purported deacceleration and its relation to CPLR 203(h), the Court stated: However, the added subdivision (h) to CPLR 203 , provides that once a cause of action to foreclose a mortgage or for a money judgment under the note accrues, "no party may . . . unilaterally waive, postpone, cancel, toll, revive, or reset the accrual thereof, or otherwise purport to effect a unilateral extension of the limitations period prescribed by law to commence an action and to interpose the claim, unless expressly prescribed by statute." Thus, if CPLR 203(h) applies to this previously commenced action, the 2018 letter purporting to restart the running of the statute of limitations on a loan is ineffective, regardless of whether or not the letter was pretextual. The Court, however, remanded the matter for additional proceedings on constitutional issues raised by lender.  Thus, the Court stated: Plaintiff challenges the constitutionality of CPLR 203(h) contending that retroactive application of FAPA would violate the Due Process and Takings Clauses of the United States Constitution, as well as the New York State Constitution. Because of the vitality of the constitutional issues, plaintiff is directed to serve notice on the Attorney General under CPLR 1012(b)(1) and file proof of service, and the matter is remanded for further proceedings on the constitutional question. Footnotes CPLR 213(4)(b), which contains similar language to RPAPL 1501(4), was also added and estops lenders that are defendants in actions brought under RPAPL 1501(4) to cancel or discharge a mortgage from asserting the invalidity of a prior acceleration.  [Eds. Note: This BLOG addressed RPAPL 1501(4) < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . [Eds. Note: This BLOG has extensively addressed issues related to RPAPL 1304.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < 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 court in U.S. Bank Trust v. Miele , 80 Misc. 3d 839 (Sup. Ct. Westchester Co. 2023), provided a thoughtful analysis of constitutional issues regarding the retroactivity of FAPA. 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 Self-reporting violations of the federal securities laws is an important part of the Securities and Exchange Commission’s enforcement regimen. For decades, the SEC has credited cooperative behavior that assists the Commission in its mission to protect investors. As such, when businesses self-report and rectify allegedly illegal conduct, and otherwise cooperate with Commission staff, the SEC has shown a willingness to forego the imposition of civil penalties when settling enforcement actions.  What does the Commission consider to be sufficient assistance and cooperation? Actions such as self-policing, self-reporting, remediation, and cooperation, are the primary considerations. 1 Self-policing concerns an entity’s governance and compliance programs and their ability to detect potential violations before they come to light. 2 Self-reporting involves the disclosure of misconduct to the public, regulatory agencies, and self-regulatory organizations after conducting a thorough investigation into the origins, scope and consequences of the misconduct. 3 Remediation refers to actions taken by the entity to correct the violations of law, such as termination of employment, employee discipline, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and compensating those adversely affected. 4 Cooperation refers to the entity providing assistance to regulators and giving regulators access to information relevant to the alleged violations. 5 In the Matter of Cloopen Group Holding Limited , the SEC declined to impose civil penalties against the company because of its self-reporting, cooperation and remediation. Cloopen arose from an alleged accounting fraud perpetrated by the former Operating Management Director and a former Department Head at Cloopen Group Holding Limited (the “Senior Managers”). Cloopen is a Cayman Islands corporation that is headquartered in Beijing, People’s Republic of China (“China”) and operates in China through its variable interest entity, Beijing Ronglian Yitong Information Technology Co. Ltd. Cloopen provides cloud-based communications products and services to enterprises of various sizes located primarily in China. Cloopen’s American depositary shares (“ADSs”) were registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock Exchange (“NYSE”) under the symbol “RAAS.” According to the SEC, during Cloopen’s year-end audit for fiscal year 2021, its external auditor (the “External Auditor”) identified potential accounting errors. Following an internal investigation, said the SEC, Cloopen determined that, from May 2021 through February 2022, the two China-based Senior Managers, who headed the department that handled Cloopen’s strategic customers, had orchestrated a fraudulent scheme to prematurely recognize revenue on service contracts for which Cloopen had either not completed work or, in some instances, not even started work. The SEC also said that Cloopen identified additional problematic contracts in other departments that were missing or appeared to have falsified supporting documentation. As a result of the foregoing, the SEC alleged that Cloopen overstated the unaudited financial results that it announced in its filings with the SEC for the second and third quarters of 2021. Specifically, said the SEC, Cloopen’s revenue for the second quarter of 2021 was overstated by $1.8 million (RMB 11.6 million) (approximately 4% of its total revenue) and its revenue for the third quarter was overstated by $2.8 million (RMB 17.8 million) (approximately 6% of its total revenue).  In addition, noted the SEC, Cloopen’s announced revenue guidance for the fourth quarter of 2021 was significantly overstated. When Cloopen announced the investigation into potential accounting errors, the price of its ADSs declined 12.7% from the prior day’s closing price. The SEC settled its charges against Cloopen, and declined to impose civil penalties against Cloopen because the company self-reported its accounting issues, cooperated extensively with the staff’s investigation, and undertook prompt remedial measures.  In this regard, in early May 2022, Cloopen self-reported to the Commission’s staff the accounting errors uncovered by the External Auditor. Cloopen made the self-report within a few days of retaining outside counsel to conduct an internal investigation and before any significant steps had been taken as part of that investigation. Thereafter, noted the SEC, Cloopen provided substantial cooperation to the Commission’s staff throughout the staff’s investigation, including by providing detailed explanations of the customer transactions at issue and their financial impact; summarizing interviews of witnesses located in China; identifying, translating, and producing certain key documents originally written in Chinese; and providing other relevant information to the staff. The cooperation afforded by Cloopen, said the SEC, substantially advanced the efficiency of the staff’s investigation and conserved Commission resources. According to the SEC, Cloopen also undertook prompt remedial measures, including: (1) forming an independent special committee of its Board of Directors to investigate the issues raised by the External Auditor; (2) terminating the Senior Managers who orchestrated the early revenue recognition misconduct and also disciplining other employees who were involved; (3) reorganizing or removing the departments involved in the misconduct; (4) strengthening its internal accounting controls surrounding customer contracts, payments, and revenue recognition; (5) retraining company executives, department heads, and employees in the finance, accounting, internal audit, and sales departments on Cloopen’s internal accounting controls and company policies and procedures, including with respect to revenue recognition; (6) recruiting finance and accounting personnel with expertise in U.S. GAAP; and (7) clawing back $228,000 (RMB 1.64 million) of bonus compensation paid to Cloopen’s Chief Executive Officer and Chief Financial Officer for the last nine months of 2021. The SEC found that Cloopen violated the antifraud provisions of the Securities Exchange Act of 1934, as well as certain reporting, recordkeeping, and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Cloopen agreed to cease and desist from further violations of the charged securities laws. Commenting on the settlement, and in particular Cloopen’s self-help, cooperation and remediation, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated:  This enforcement action demonstrates what we have said repeatedly: there are real benefits to companies that self-report their potential securities law violations, assist during our investigations, and undertake remedial measures. As detailed in our order, Cloopen, a foreign issuer, promptly self-reported accounting errors to Commission staff, provided detailed explanations of the transactions at issue, and cooperated in other ways that substantially advanced the investigation. Cloopen also promptly undertook significant remedial measures, including terminating and disciplining employees involved in the misconduct, strengthening its internal accounting controls, and clawing back compensation from its CEO and CFO. In consideration of Cloopen’s significant cooperation, the Commission determined not to impose a civil penalty against Cloopen. The press release announcing the settlement of the charges can be found here . The SEC’s cease and desist order can be found here . Footnotes See SEC, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Exchange Act Rel. No. 44969) (Oct. 23, 2001) ( here ). See SEC Enforcement Manual (Nov. 28, 2017), at 6.12 ( here ). Id. Id. Id. 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.

By Jonathan H. Freiberger For a variety of reasons, a party asserting a claim may choose to discontinue same.  In such circumstances, CPLR 3217 , provides the mechanism to do so.  [Eds. Note: this BLOG has addressed CPLR 3217 < here =">here"> and < here =">here"> .]   CPLR 3217(a), which addresses situations where a party asserting a claim may voluntarily discontinue a claim without the need for a court order, permits the party to do so, inter alia : (1) by serving on all parties “a notice of discontinuance at any time before a responsive pleading is served or, if no responsive pleading is required, within twenty days after service of the pleading asserting the claim and filing the notice with proof of service with the clerk of the court” (CPLR 3217(a)(1)); or, (2) “by filing with the clerk of the court before the case is submitted to the court or jury, a stipulation in writing signed by the attorneys of record for all parties, provided that no party is an infant, incompetent person for whom a committee has been appointed or conservatee and no person not a party has an interest in the subject matter of the action” (CPLR 3217(a)(2)).  For the purposes of CPLR 3217(a)(1), an interesting question is whether a motion to dismiss constitutes the service of “a responsive pleading.”  The First Department in BDO USA, LLP v. Phoenix Four, Inc. , 113 A.D.3d 507, 511 (2014), found a simple notice to discontinue to be “untimely” because plaintiff served it after “defendants filed their motions to dismiss.”  The Second Department, in Pinkesz Mut. Holdings, LLC v. Pinkesz , 198 A.D.3d 692 (2021), relying on several First Department cases other than BDO , agreed with the First Department’s position on this issue.  The Fourth Department, however, came to the opposite conclusion in Harris v. Ward Greenberg Heller & Reidy LLP , 151 A.D.3d 1808, 1809 (2017).  There, after a thorough analysis of relevant legislative histories, the Harris Court concluded that because a motion to dismiss is not a responsive pleading, a notice of discontinuance is not untimely when served after the filing of motion to dismiss. In all situations other than those set forth in CPLR 3217(a), the party can only discontinue an asserted claim “upon order of the court and upon terms and conditions, as the court deems proper.”  CPLR 3217(b).  The decision of whether to grant a motion to “voluntarily discontinue an action pursuant to CPLR 3217(b) rests within the sound discretion of the court.”  Wilmington Savings Fund Society, FSB v. Moore , 220 A.D.3d 656, 656 – 57 (2 nd Dep’t 2023) (citations and internal quotation marks omitted).  Absent “special circumstances, such as prejudice to a substantial right of the defendant” the court should grant a motion for voluntarily discontinuance.  Id . at 657 (citations and internal quotation marks omitted).  Similarly, a motion to discontinue should not be granted if the discontinuance would “circumvent an order of the court, avoid the consequences of a potentially adverse determination, or produce other improper results.”  Blauvelt Mini-mall, Inc. v. Town of Orangetown , 158 A.D.3d 678, 679 (2 nd Dep’t 2018) (citations omitted); see also Marinelli v. Wimmer , 139 A.D.3d 914, 915 (2 nd Dep’t 2016) (same).  In Marinelli , for example, the Court affirmed the motion court’s denial for a motion to voluntarily discontinue because the record supported “the conclusion that the requested discontinuance was improperly sought to avoid the consequences of a potentially adverse determination with respect to the defendants' motion to change venue as well as to prejudice the defendants' ability to obtain venue in a proper county.”  Marinelli , 139 A.D.3d at 915 (citations omitted).  However, “ elay, frustration and expense in preparation of a contemplated defense do not constitute prejudice warranting denial of a motion for a voluntary discontinuance under CPLR 3217(b).”  Eugenia VI Venture Holdings, Ltd. V. Maplewood Equity Partners, L.P . , 38 A.D.3d 264, 265 (1 st Dep’t 2007) (citations omitted). On January 24, 2024, the Second Department, in U.S. Bank National Ass’n v. Narain , granted lender’s motion to voluntarily dismiss a mortgage foreclosure action pursuant to CPLR 3217(b).  narain matter by reviewing the underlying file on the court’s nyscef filing system.> narain matter by reviewing the underlying file on the court’s nyscef filing system.>  Narain was an action to foreclose a mortgage (the “Second Action”).  The lender in Narain , however, had commenced an earlier action to foreclose the same mortgage (the “First Action”).  The court in the First Action issued a status conference order in which the plaintiff was directed to take certain actions by a specific date and dismissed the lender’s complaint when it failed to comply with the order.  The lender moved, inter alia , to restore the First Action to the calendar and for summary judgment, but the motion was denied.  The lender appealed the order denying its motion to restore. While the appeal in the First Action was still pending, the lender commenced the Second Action.  In their answer in the Second Action, the borrowers asserted an affirmative defense that the action was barred by the applicable statute of limitations and interposed a counterclaim pursuant to RPAPL 1501 (4) to cancel and discharge the mortgage.  [Eds. Note: this BLOG addressed statute of limitations issues in mortgage foreclosure actions < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and RPAPL 1501(4) < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  The Court noted that lender moved pursuant to CPLR 3217(b) for leave to discontinue the Second Action “without prejudice, in order to restore to foreclose the mortgage and to proceed to judgment in that action.”  The motion court granted the motion and the borrower’s appealed. The Second Department affirmed and stated: The determination of a motion pursuant to CPLR 3217(b) for leave to discontinue an action without prejudice is within the sound discretion of the court ( see Tucker v Tucker , 55 NY2d 378, 383; Nationstar Mtge., LLC v Dalton , 201 AD3d 726 , 727). "Generally such motions should be granted unless the discontinuance would prejudice a substantial right of another party, circumvent an order of the court, avoid the consequences of a potentially adverse determination, or produce other improper results" ( Haughey v Kindschuh , 176 AD3d 785 , 786 ; see HSBC Bank USA, N.A. v Kone , 188 AD3d 836 , 838). Here, there was no showing of substantial prejudice or other improper results arising from the proposed discontinuance of the action ( see HSBC Bank USA, N.A. v Kone , 188 AD3d at 838; Chase Home Fin., LLC v Sulton , 185 AD3d 646 , 647). On the same day, the Second Department also decided the lender’s appeal on the motion court’s denial of the motion to restore the First Action to the calendar and reversed that decision.  < Here =">Here"> 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 245 E. 19 Realty LLC v. 245 E. 19th St. Parking LLC , 2024 N.Y. Slip Op. 00368 (1st Dept. Jan. 30, 2024) ( here ), the Appellate Division, First Department examined a couple of issues frequently discussed in this Blog: veil piercing/alter ego liability and fraudulent transfers.  As to the issue of fraudulent transfers, 245 E. 19 Realty provides us with the opportunity to examine a case involving the new Debtor and Creditor Law (“DCL”), which became effective on April 4, 2020. The new DCL replaced Article 10, Sections 270-281 of the DCL, the State’s almost century-old fraudulent conveyance law.  here.=">here."> Background 245 E. 19 Realty involved an alleged plan to avoid the negative implications of the Covid-19 pandemic and to increase profits by defendant HPS Investment Partners, LLC (“HPS”). Plaintiff is the owner and landlord of a parking garage located in New York City (“Landlord”). Defendant 245 E. 19th Street Parking LLC (“Tenant”) entered into a written lease agreement on January 1, 2007, with Landlord’s predecessor-in-interest for the demised space at issue.  According to Landlord, at the onset of the Covid-19 pandemic in March 2020, HPS devised a plan and scheme to help defendant Icon Parking Holdings, LLC (“Icon”), a company that HPS allegedly controlled, avoid the negative implications of the pandemic and to increase its profits. Under the plan, Icon’s affiliated garages would effectively stop paying rent. At the time, most garage operators expected an extreme downturn in their daily business. Landlord alleged that HPS, and two of its members (also defendant in the action), directed that payment on Icon affiliates’ rent obligations immediately cease. Landlord claimed that HPS caused Icon to default on its affiliates’ lease obligations at numerous garage locations. Landlord maintained that Icon’s affiliated garages funneled all or substantially all of the funds held in reserve to Icon. Landlord alleged that the transfers from Tenant’s account left it unable to pay its rent when it became due. Thereafter, Icon purportedly transferred those funds to, among others, HPS.  Landlord further alleged that Icon ceased its business operations at the premises. It claimed that: (1) Icon effectively merged into HPS; (2) HPS directed Icon to continue its business operations at the premises under the same ownership and management; and (3) HPS either managed, oversaw or directed the operation of Icon’s business at the premises. Tenant allegedly breached the lease by failing to timely pay monthly installments of fixed rent and additional rent. On March 15, 2021, Icon notified Landlord that it intended to surrender possession of the premises at the end of the month. On March 30, 2021, Icon surrendered possession of the subject premises. Landlord filed an action, asserting 10 causes of action: (1) declaratory judgment; (2) breach of contract against Tenant; (3) alter ego liability/piercing the corporate veil against all defendants; (4) de facto merger against all defendants; (5) tortious interference with the lease against all defendants; (6) piercing the corporate veil against, inter alia , HPS; (7) tortious interference with contract against all defendants; (8) unjust enrichment against all defendants; (9) fraudulent conveyance under new Debtor and Creditor Law (“DCL”) § 273 against all defendants; and (10) attorney’s fees under DCL § 276-a. Defendants moved to dismiss the complaint. The motion court granted the HPS defendants’ motion and granted in part and denied in part the Icon defendants’ motion. The Motion Court’s Decision Veil Piercing/Alter Ego Liability “To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court will intervene.” 1 Notably, piercing the corporate veil is not an independent cause of action. 2 In determining whether the corporate entity 3 is dominated and controlled, “courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity.” 4 Significantly, “ o one factor is dispositive.” 5 In determining whether the owners abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice, courts look at all the facts and circumstances. “Wrongdoing in this context does not necessarily require allegations of actual fraud. While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice.” 6 Thus, “ llegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory.” 7 Conclusory allegations of undercapitalization, intermingling of assets, and domination and control are insufficient to pierce the corporate veil. 8 “As a preliminary matter,” noted the motion court, “the HPS defendants correctly assert that the third and fourth cause of action must be dismissed because “alter-ego liability is not an independent cause of action.” The motion court granted the HPS defendants’ motion to dismiss the veil piercing allegations asserted against them. The motion court found the allegations of “domination and control with respect to these defendants” to be “conclusory and … based upon ‘information and belief,’” which is “insufficient” to withstand a motion to dismiss. The motion court explained that “ lthough Landlord relies on allegedly fraudulent liens filed against Icon’s affiliates, Landlord has not set forth facts showing ‘complete domination of the corporation … in respect to the transaction attacked’ and ‘that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.’” 9 With regard to the Icon defendants, the motion court held that “the complaint adequately alleges particularized facts to warrant piercing the corporate veil with respect to Icon.” The motion court explained that the complaint sufficiently alleged “that Icon and Tenant ignored corporate formalities and operated as a single economic entity” and that “Icon transferred funds from Tenant’s account on a daily basis, rendering Tenant insolvent at the end of the day and unable to pay rent to Landlord.” The motion court found that there were too many issues of fact making the claim to pierce the corporate veil unsuited for resolution on a pre-answer, pre-discovery motion to dismiss. Fraudulent Transfers Under The DCL In 245 E. 19th Street , Landlord asserted claims under Sections 273(a)(2) and 273(a)(1) of the new DCL. Section 273(a)(2) provides for setting aside transfers or obligations where the defendant or debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation. Section 273(a)(2) further provides that the debtor be engaged or about to be engaged in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due. DCL § 273(a)(1) requires actual intent to hinder, delay or defraud any creditor of the debtor. Under DCL § 273(a)(1), “ here is no requirement that a transaction involve common law deceit or fraudulent misrepresentation to be voidable for ‘actual intent.’ Actual intent to hinder or delay creditors suffices.” 10 Because it is difficult to prove actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on “badges of fraud” to support his/her case – that is, circumstances that are commonly associated with fraudulent transfers that their presence gives rise to an inference of intent. Section 273(b) of the DCL enumerates 11 non-exclusive “badges of fraud” that courts may consider in determining intent. These factors include whether the transfer was made to an insider, whether the transfer was concealed, whether the debtor was subject to suit, and whether the debtor absconded. The motion court found that the complaint alleged sufficient badges of fraud to support a DCL § 273(a)(1) claim against the Icon defendants. The motion court explained that the complaint alleged that: (1) Icon was an insider of Tenant; (2) the transfers were concealed from Landlord; (3) all of Tenant’s assets were swept into Icon’s account on a daily basis; (4) the transfers lacked reasonably equivalent value; and (5) the transfers left Tenant insolvent on a daily basis. Such allegations, said the motion court, sufficed to sustain the claim as against the Icon defendants. However, the motion court held that the complaint failed to allege that the transfers were made to them. “The DCL does not, ‘either explicitly or implicitly, create a creditor’s remedy for money damages against parties who … were neither transferees of the assets nor beneficiaries of the conveyance,’” said the motion court. 11 “While Landlord argues that the HPS defendants were the ultimate financial beneficiaries of the alleged wrongful scheme,” noted the motion court, “the complaint only makes conclusory allegations that the HPS defendants benefitted from the alleged fraudulent transfers.” Therefore, concluded the motion court, “the HPS defendants are entitled to dismissal of the ninth and tenth causes of action.” The First Department’s Decision and Order On appeal, the First Department modified the order to grant Tenant and Icon’s motion to dismiss as to the alter ego/veil-piercing and declaratory judgment claims against them, and otherwise affirmed the order. The Court held that the “alter ego/veil-piercing claims against the Icon defendants should have been dismissed, as there is no independent cause of action for veil-piercing.” 12 However, said the Court, veil-piercing was “appropriate as to these defendants” as Landlord “sufficiently alleged that Icon dominated Tenant with respect to the transaction attacked, disregarding corporate formalities and intermingling funds by transferring all of Tenant’s revenue to itself each day.” 13 The Court also found that Landlord “sufficiently alleged that Icon’s domination of Tenant was used to commit a wrong against it — i.e., that Icon transferred all of Tenant’s revenue to itself each day, rendering Tenant unable to pay rent and then intentionally declining to use that revenue to pay rent on Tenant’s behalf.” 14 The Court said that “ t not dispositive that centralized cash management systems commonplace or that the subject system was already in existence prior to the rent nonpayment scheme, as even if the system was not itself fraudulent, plaintiff alleged that Icon took advantage of it to perpetuate a fraud.” 15 The Court held that the “alter ego/veil-piercing claims against the HPS defendants were properly dismissed.” 16 As with the alter ego/veil-piercing claims against the Icon defendants, the Court dismissed the causes of action seeking such relief as “there is no independent cause of action for veil-piercing.” 17 Moreover, held the Court, “plaintiff’s allegations of domination and control by the HPS defendants conclusory and based on information and belief.” 18 The Court further held that the “fraudulent conveyance claim against Icon was correctly sustained.” 19 The Court found that “ laintiff sufficiently alleged that Tenant did not receive fair consideration for transferring its total revenue to Icon each day, establishing a constructive fraudulent conveyance.” 20 The Court noted that “ hile Icon was supposed to provide management and administrative services in exchange for these transfers, including paying Tenant’s bills, plaintiff alleged that Icon stopped paying Tenant’s rent.” 21 “Plaintiff also sufficiently alleged badges of fraud,” said the Court, “raising an inference of actual intent to defraud, establishing an actual fraudulent conveyance.” 22 In this regard, explained the Court, “ laintiff alleged that the transfers were made to an insider (Icon), were concealed from plaintiff, were of substantially all of Tenant’s assets, were made without receiving reasonably equivalent value in exchange, and rendered Tenant insolvent.” 23 Finally, the Court held that the fraudulent conveyance claim against the HPS defendants was correctly dismissed. 24 The Court found that “Plaintiff’s allegations that Icon was controlled by HPS and that monies collected by Icon from Tenant were subsequently transferred to the HPS defendants conclusory and entirely made upon information and belief, and contradicted by the very affidavits plaintiff relie on.” 25 The Court also found that the “liens made by HPS to Icon and Tenant (which were filed several months after the alleged fraudulent scheme began) not, in and of themselves, evidence of control or of any subsequent transfer.” 26 Footnotes Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citing ABN AMRO Bank, N.V. v. MBIA Inc. , 17 N.Y.3d 208, 229 (2011)). Id. The doctrine of piercing the corporate veil applies equally to limited liability companies. See Retropolis, Inc. v. 14th St. Dev. LLC , 17 A.D.3d 209, 210 (1st Dept. 2005). Tap Holdings , 109 A.D.3d at 174 (quoting TNS Holdings v. MKI Sec. Corp. , 243 A.D.2d 297, 300 (1st Dept. 1997), rev’d on other grounds , 92 N.Y.2d 335 (1998)). Id. Baby Phat Holding Co., LLC v. Kellwood Co. , 123 A.D.3d 405, 407-408 (1st Dept. 2014) (citations omitted); see also Grammas v. Lockwood Assoc., LLC , 95 A.D.3d 1073, 1075-1076 (2d Dept 2012). Id. See Saivest Empreendimentos Imobiliarios E. Participacoes, Ltda v. Elman Invs., Inc. , 117 A.D.3d 447, 450 (1st Dept. 2014); accord Andejo Corp. v. South St. Seaport Ltd. P’ship , 40 A.D.3d 407, 407 (1st Dept. 2007) (a plaintiff seeking to pierce the corporate veil must “allege particularized facts to warrant piercing the corporate veil”); Albstein v. Elany Contr. Corp. , 30 A.D.3d 210, 210 (1st Dept. 2006), lv. denied , 7 N.Y.3d 712 (2006) (conclusory allegations that a corporation is undercapitalized and functions as the alter ego of the owner are insufficient to pierce the corporate veil). Quoting Baby Phat Holding , 123 A.D.3d at 407. James Gadsden and Alan Kolod, Supplementary Practice Commentaries, McKinney’s Debtor and Creditor Law § 273. Quoting Federal Deposit Ins. Corp. v. Porco , 75 N.Y.2d 840, 842 (1990). Slip Op. at *1 (citing Tap Holdings , 109 A.D.3d at 174). Id. (citation omitted). Id. (citation omitted). Id. (citation omitted). Id. at *3. Id. Id. (citing 501 Fifth Ave. Co. LLC v. Alvona LLC , 110 A.D.3d 494, 494 (1st Dept. 2013)). Id. at *2. Id. (citing DCL § 273(a)(2)). Id. (citation omitted). Id. (citing (DCL § 273(a)(1), (b)). Id. (citation omitted). Id. at *3. Id. (citations omitted). Id. 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.

By: Jeffrey M. Haber In prior articles, this Blog examined CPLR § 3102, the statutory provision that permits pre-action disclosure. See here and here . We do so again in connection with our examination of the Matter of Khorassani v. Financial Industry Regulatory Authority , 2024 N.Y. Slip Op. 00354 (1st Dept. Jan. 25, 2024) ( here ). CPLR § 3102(c) provides that “ efore 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.” Pre-action disclosure can be used “to enable the plaintiff to frame a complaint,” “to preserve evidence for a forthcoming lawsuit,” and to “ascertain[ ] the identities of prospective defendants.” Pre-action disclosure may not, however, be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing. In other words, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists.” Accordingly, a petition for pre-action discovery will only be granted when the petitioner demonstrates that he/she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.  Finally, petitions for pre-action disclosure should be filed in the venue that will adjudicate the matter.  Matter of Khorassani v. Financial Industry Regulatory Authority In June 2021, Torchlight Energy Resources (“Torchlight Energy”) merged with, and became, 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 the holders of Torchlight Energy common stock 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 Energy shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter 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 the assets of Torchlight Energy 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. After four amendments, Next Bridge’s Registration Statement was approved by the SEC in November 2022. 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 by unknown and unidentified brokers to settle their short positions. As a result, Petitioner claimed that he was harmed, in addition to the Company’s other retail investors. 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 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 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 Appellate Division, First Department affirmed. Focusing on whether the discovery sought was material and necessary, the Court held that it was not since Petitioner “admit that he not able to set forth the particulars of the illegal trading by any specific broker and that he not know the times, dates and particulars of the alleged illegal trading activity.”  Moreover, said the Court, even if “the data in question” was “relevant,” Petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, Petitioner failed to state a meritorious cause of action for fraud.  Footnotes Bumpus v. New York City Transit Auth. , 66 A.D.3d 26 (2d Dept. 2009); see also Stewart v. New York City Transit Auth. , 112 A.D.2d 939 (2d Dept. 1985). Uddin v. New York City Transit Auth. , 27 A.D.3d 265 (1st Dept. 2006). See also Matter of Gleich v. Kissinger , 111 A.D.2d 130, 131 (1st Dept. 1985). Bishop v. Stevenson Commons Assocs. , 74 A.D.3d 640 (1st Dept. 2010), lv. denied , 16 N.Y.3d 702 (2011) (quoting Liberty Imports v. Bourguet , 146 A.D.2d 535 (1st Dept. 1989)). Holzman v. Manhattan & Bronx Surface Transit Operating Auth. , 271 A.D.2d 346, 347 (1st Dept. 2000); see also Thomas v. MasterCard Advisors, LLC , 74 A.D.3d 464 (1st Dept. 2010). See Perez v. NY Presbyterian Hosp. , 11 Misc. 3d 722 (Civ. Ct., N.Y. County 2006); Estate of Matter of Wallace , 239 A.D.2d 14 (3d Dept. 1998). Blue Sheets (known as Electronic Blue Sheets) are files that are maintained by FINRA. Blue Sheets contain both trading and account holder information. See Financial Industry Regulatory Authority, Electronic Blue Sheets (EBS), https://www.finra.org/filingreporting/electronic-blue-sheets-ebs. Slip Op. at *1. Id. (citing Matter of GTV Media Grp., Inc. v. Confidential Global Investigations , 205 A.D.3d 539, 539-540 (1st Dept. 2022)). 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.