By: Jeffrey M. Haber In Villaver v. Paglinawan , 2024 N.Y. Slip Op. 04159 (2d Dept. Aug. 7, 2024) ( here ), the Appellate Division, Second Department reversed the dismissal of a legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress action on collateral estoppel grounds. As discussed below, the Court found that, among other things, the claims at issue were not identical to those in the prior litigation and were not otherwise actively litigated in the earlier action. Collateral Estoppel : A Primer The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue. The doctrine applies when: “(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and decided, (3) there was a full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits.” Collateral estoppel “is a doctrine intended to reduce litigation and conserve the resources of the court and litigants and it is based upon the general notion that it is not fair to permit a party to relitigate an issue that has already been decided against it.” The doctrine is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in prior action or proceeding.” In New York, the CPLR specifically recognizes collateral estoppel as a basis for dismissal. It is also an affirmative defense under the CPLR. Villaver v. Paglinawan On December 11, 2018, plaintiff filed an action against defendants for legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress. In early February 2019, defendants moved to dismiss the complaint on the grounds that, inter alia , they were not properly served with process and that plaintiff was required to pursue her claims in arbitration. On May 21, 2019, the motion court entered an order rejecting defendants’ assertion of improper service but granted their motion to compel arbitration. Consequently, the motion court dismissed the complaint without prejudice in favor of arbitration, and ordered the parties to proceed to arbitration before an arbitrator designated by the American Arbitration Association (“AAA”). According to plaintiff, defendants did not respond to her demand for arbitration, refused to cooperate in the appointment of an arbitrator, and refused to pay one-half of the AAA’s fee for designating an arbitrator. Defendants maintained that they had not agreed to the AAA rules under which plaintiff wanted to proceed. On July 17, 2019, defendants filed a petition to stay the arbitration. The petition was later denied. Back in arbitration, the arbitrator subsequently closed the matter on the grounds that plaintiff purportedly could not afford the required fees and defendants had not responded to the arbitrator. Thereafter, the plaintiff commenced the action (the “present action”) against defendants to recover damages for legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress, and for a judgment declaring that defendants waived their right to arbitrate plaintiff’s claims , that arbitration would be prohibitively expensive, and that requiring plaintiff to pursue her claims in arbitration would violate her due process rights. Defendants moved, inter alia , to dismiss the complaint pursuant to CPLR 3211(a)(5) on the ground that the doctrine of collateral estoppel precluded plaintiff from relitigating issues against defendants that were previously dismissed by the motion court in the prior action. The motion court granted that branch of defendants’ motion. On appeal, the Second Department reversed. The Court held that “defendants failed to establish that the issue decided in the prior action was identical to the issues raised in the present action.” The Court reasoned that the “only issue decided in the prior action was whether the retainer agreement signed by the parties contained a valid agreement to arbitrate.” Notably, the Court found that “ lthough the plaintiff raised the issues of legal malpractice, breach of fiduciary duty, and intentional infliction of emotional distress in both the prior and present actions, the defendants failed to establish that these issues were ‘actually litigated, squarely addressed, and specifically decided’ in the prior action.” Further, the Court found that the “determination in the prior action not preclude the plaintiff from raising in the present action whether the defendants waived their right to arbitrate and whether the cost of arbitration was prohibitively expensive, since issues stem from events that occurred after the prior action had been dismissed.” Accordingly, the Court held that the motion court “should not have granted that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(5) to dismiss the complaint on the ground of collateral estoppel.” ___________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 17 (2015) (internal quotation marks omitted). Kaufman v. Eli Lilly & Co. , 65 N.Y.2d 449, 455 (1985) Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel. Co. , 62 N.Y.2d 494, 501 (1984). See CPLR § 3211(a)(5). See CPLR § 3018(b). Slip Op. at *2 (citation omitted). Id. Id. (quoting M. Kaminsky & M. Friedberger v. Wilson , 150 A.D.3d 1094, 1095 (2d Dept. 2017)). Id. Id.

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

By: Jonathan H. Freiberger CPLR 3213 , which is a procedural device permitting a plaintiff, under certain circumstances, to obtain summary relief at the very beginning of a lawsuit, provides, in pertinent part: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date…. This BLOG previously has addressed issues related to CPLR 3213. See < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . The First Department noted that CPLR 3213 “affords a speedy and efficient remedy to secure a judgment in certain cases where service of formal papers would be unnecessary for the expeditious resolution of the dispute between the parties.” Technical Tape, Inc. v. Spray Tuck, Inc. , 131 A.D.2d 404, 405 (1987). As evidenced by our prior articles, much litigation surrounding CPLR 3213 involves the question of what constitutes “an instrument for the payment of money only.” As previously noted, lawsuits involving promissory notes, guaranties and settlement agreements may be amenable to summary disposition pursuant to CPLR 3213, while merchant cash agreements may not. The purpose of today’s article, however, is to address a more basic aspect of CPLR 3213 -- the establishment of a return date for the motion, which is critical because a “short” return date (i.e., a return date that predates the time within which the defendant would have to appear in the action pursuant to CPLR 320 (a)) could result in the dismissal of the action. This BLOG previously discussed this issue. < Here .=">Here."> As set forth in CPLR 3213, the minimum time for the return date for a motion for summary judgment in lieu of complaint is coincident with the defendant’s time to appear as set forth in CPLR 320(a), which provides: The defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer. An appearance shall be made within twenty days after service of the summons, except that if the summons was served on the defendant by delivering it to an official of the state authorized to receive service in his behalf or if it was served pursuant to section 303, subdivision two, three, four or five of section 308, or sections 313, 314 or 315, the appearance shall be made within thirty days after service is complete. If the complaint is not served with the summons, the time to appear may be extended as provided in subdivision (b) of section 3012. A “short” return date could be consequential. In Bhanti v. Jha , 140 A.D.3d 685 (2 nd Dep’t 2016), the Court held that making the motion returnable “prior to the expiration of the time within which the defendant had to appear in the action … was a fatal jurisdictional defect.” Id . at 686 (citation omitted). In Blue Lagoon, LLC v. Reisman , 214 A.D.3d 938 (2 nd Dep’t 2023), “under the particular circumstances” presented, the Court reversed the motion court’s refusal to vacate a default judgment pursuant to CPLR 5015(a) due to “short” service of a motion for summary judgment in lieu of complaint. Id . at 942. There, inter alia , the defendants did not dispute receiving the original summons and notice of motion, admitted they were on notice of the motion by averring that “they had continuously checked the eCourts website” and were aware that the motion was adjourned on numerous occasions. Further, the plaintiff filed an amended notice of motion; service of which was not denied by the defendants. Similarly, the Third Department, in Capolino v. Goren , 155 A.D.3d 1414 (2017), based on the “peculiar circumstances” of the case and the “absence of prejudice flowing from plaintiff’s missteps”, the Court looked beyond the plaintiff’s “short” return date. In Capolino , the defendants were improperly served with process by mail, but the mailing put the defendants “on notice of the pending motion for summary judgment in lieu of complaint,” which was responded to with a cross-motion. Id . at 1415 -16. A notice of motion was subsequently served, and plaintiff advised he would consent to any requested adjournments. Id . Thus, while recognizing Bhanti ’s holding that a wholesale failure to timely serve defendant with the initiatory papers constitutes "a fatal jurisdictional defect," the defendant in Capolino was not prejudiced and “was placed on notice, then submitted a cross motion that raised various objections and included substantive opposition before being properly served.” Accordingly, the Capolino Court “was persuaded that the untimeliness of the proper service could be and rightly was overlooked.” Id . at 416. On July 23, 2024, the Supreme Court, New York County (Chan, J.), decided SD Stability SDIRA, LLC v. Maxben Holding, LLC . The simplified facts of SS Stability follow. The plaintiffs in SS Stability loaned money to the defendant, the repayment obligation for which was evidenced by promissory notes. Upon the defendant’s default, the plaintiffs commenced their action by the filing of a Summons with Notice. The plaintiffs subsequently filed an “Amended Notice of Motion for Summary Judgment In Lieu of Complaint” (the “Notice”). The Notice was filed on March 19, 2024, was dated March 20, 2024, and set a return date of April 9, 2024. The motion related papers were personally served on March 21, 2024, only 19 days prior to the April 9, 2024, return date of the Notice. The defendant argued that the motion must be denied due to “short” notice. The motion court noted that, due to the method of service, the defendants had 20 days to appear. Relying on Bhanti , the motion court held that the plaintiff’s “clear and fatal jurisdictional defect plainly warrants dismissal for lack of jurisdiction.” In so doing, the motion court rebuffed the defendant’s argument that Blue Lagoon superseded Bhanti , and, instead, distinguished Blue Lagoon’s facts from those of Bhanti (as discussed herein) . Absent the special facts of Blue Lagoon “there remains only plaintiffs’ defective notice”. The motion court also rejected the plaintiffs’ argument that the defendant appeared and, therefore, was not prejudiced because it was able to oppose the motion. The motion court found that, unlike the cases relied upon by the plaintiff, the defendant did not oppose the motion “on the merits” and, instead, limited its opposition to jurisdictional issues. Thus, the motion court stated: Here, the parties did not stipulate to nor did defendant seek any extensions or adjournments, so this not an issue that needs addressing. While it is true that defendant opposed this motion; defendant's only challenge goes to the lack of personal jurisdiction . Significantly, defendant did not oppose the motion on the merits. What remains is a defective notice of motion that did not give defendant sufficient time pursuant to CPLR 3213, which is a fatal jurisdictional defect requiring dismissal. The defective notice of the motion for summary judgment in lieu of complaint mandates dismissal of the motion. TAKEAWAY Courts deciding issues related to proper return dates on CPLR 3213 notices of motion frequently depend on fact sensitive issues when determining whether a defendant had sufficient time to appear. Practitioners should be mindful of such issues and provide sufficient time in the notice of motion to account for problems with service of process, the method of service and/or any other contingencies. When such factors are considered, and a return date is set sufficiently far in advance, query whether it may be easier to file and serve a complaint, permit the defendant to answer and promptly move for summary judgment pursuant to CPLR 3212 . Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By  Jeffrey M. Haber A confession of judgment is an agreement whereby a defendant or debtor agrees to the entry of judgment against him/her in an amount certain. It is a procedural device whereby the plaintiff or creditor can bypass the commencement of a lawsuit to obtain the amount “confessed.”  Confessions of judgment are used in a variety of circumstances. For example, parties to a litigation may use a confession of judgment as part of a settlement whereby the defendant agrees to pay the plaintiff money. In that situation, the defendant agrees to the confession of judgment until he/she satisfies the payment obligations under the settlement agreement. If the defendant fails to make the agreed-upon payment(s), then the plaintiff, who typically holds the confession of judgment in escrow, can file the confession of judgment with a county clerk without having to commence an action for breach of the settlement agreement.  Sometimes, parties to a dispute who wish to avoid the costs and burdens of litigation, will use a confession of judgment to ensure the payment(s) required by their out-of-court settlement. In New York, confessions of judgment are governed by Section 3218 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3218(a),  Except as provided in section thirty-two hundred one, a judgment by confession may be entered, without an action, either for money due or to become due, or to secure the plaintiff against a contingent liability in behalf of the defendant, or both, upon an affidavit executed by the defendant; 1. stating the sum for which judgment may be entered, authorizing the entry of judgment, stating the county where the defendant resides and, if applicable, stating that the interest rate for consumer debt pursuant to section five thousand four of this chapter applies; 2. if the judgment to be confessed is for money due or to become due, stating concisely the facts out of which the debt arose and showing that the sum confessed is justly due or to become due; and 3. if the judgment to be confessed is for the purpose of securing the plaintiff against a contingent liability, stating concisely the facts constituting the liability and showing that the sum confessed does not exceed the amount of the liability. When an amount certain is confessed, the affidavit required under CPLR § 3218(a) must state the facts from which the debt arose to demonstrate that the confessed amount is just. In doing so, the statute requires the affiant to “concisely” state “the facts out of which the debt arose and showing that the sum confessed is justly due or to become due.” This means that “there must be sufficient genuine detail to enable other creditors to investigate the claim and ascertain its validity ….” As the courts have noted, CPLR § 3218 “is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered ….” It is “not for the protection of the defendant.” Notwithstanding, defendants and debtors have tried to vacate confessions of judgment on the grounds that the judgment was procured by fraud, or the debt owed was void ab initio . Such was the case in Oakshire Props., LLC v. Argus Capital Funding, LLC , 2024 N.Y. Slip Op. 03943 (4th Dept. July 26, 2024) ( here ). Plaintiffs commenced the action seeking, inter alia , to vacate an ex parte judgment taken by confession. The action arose from an “Agreement for the Purchase and Sale of Future Receipts” (the “Agreement”) entered into between an affiliate of plaintiffs—nonparty Oakshire Mushroom Sales, LLC (“Oakshire”)—and defendant Argus Capital Funding, LLC, which purported to sell $554,850 of Oakshire’s future receipts for $411,000, less a $10,995 origination fee. Pursuant to the Agreement, Argus was entitled to automatically withdraw daily payments of $2,935.71 from Oakshire’s bank account, which it represented to be 15% of Oakshire’s average sales. The Agreement was secured by a personal guarantee from Oakshire’s principal, as well as by an affidavit in confession of judgment signed by the principal on behalf of himself, Oakshire and all of its affiliated entities. Although the Agreement contained a provision requiring monthly reconciliation of the withdrawn daily payments with the specified percentage of the future receipts, the provision also stated that defendant’s failure to reconcile the payments would not constitute a breach of the agreement and, further, that any prospective adjustment to the amount of the daily payments would be in the sole discretion of defendant. The Agreement further stated that a default on the part of Oakshire would occur where, inter alia , “two or more transactions attempted by within one calendar month are rejected by bank,” immediately accelerating the entire amount due and authorizing the ex parte filing of the confession of judgment. On December 18, 2018, Oakshire notified defendant that it had experienced a significant decrease in sales and requested a downward adjustment to the daily payment amount. Defendant did not consent to the requested reduction and, two days later, filed an ex parte action in the Ontario County Clerk’s Office for a judgment by confession against Oakshire, its principal and all of its affiliated entities, for the remaining balance of $319,993.20, plus $105,822.75 in attorney’s fees, costs and disbursements, which was granted. Shortly thereafter, Oakshire and one of its affiliated entities filed for bankruptcy protection. Plaintiffs subsequently commenced the action seeking, among other relief, to vacate the judgment by confession against them, alleging that the underlying transaction was not a sale of future receipts but, rather, a loan that contained a criminally usurious interest rate. Defendant and co-defendant Park Avenue Recovery, LLC (collectively, “defendants”) moved to dismiss the amended complaint against them pursuant to CPLR 3211 on the grounds that, inter alia , the causes of action sounding in fraudulent inducement and fraud were not pleaded with the specificity required by CPLR 3016, and documentary evidence established that the underlying transaction was not a usurious loan. The motion court granted the motion with respect to the two causes of action for usury, which it determined were barred by the one-year statute of limitations under CPLR 215(6) and denied the motion with respect to the remaining causes of action. Defendants appealed. The Appellate Division, Fourth Department affirmed. The Court held that plaintiffs sufficiently pleaded their causes of action for fraudulent inducement and fraud in connection with the underlying transaction as a sale of future receivables, and not a usurious loan. The Court also held that plaintiffs sufficiently pleaded the elements of fraud and supplied sufficient detail to satisfy the pleading requirements of CPLR 3016 (b). i.e., an agreement not subject to usury laws; (ii) represented that oakshire had defaulted on the agreement; and (iii) represented that oakshire had agreed to the payment of legal fees (as opposed to reasonable attorney’s fees). in reliance on the allegedly false and fraudulent affidavit, defendants signed the affidavit for confession of judgment, which the clerk entered, causing them to be injured in their business and property.> i.e., an agreement not subject to usury laws; (ii) represented that oakshire had defaulted on the agreement; and (iii) represented that oakshire had agreed to the payment of legal fees (as opposed to reasonable attorney’s fees). in reliance on the allegedly false and fraudulent affidavit, defendants signed the affidavit for confession of judgment, which the clerk entered, causing them to be injured in their business and property.> Additionally, with respect to all of the causes of action that were not dismissed by the motion court, the Court “conclude that the allegations in the amended complaint that the underlying transaction a usurious loan sufficient to survive a motion to dismiss.” “When determining whether a transaction is a loan, substance—not form—controls.” The transaction “must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it.” The primary question is “whether the is absolutely entitled to repayment under all circumstances nless a principal sum advanced is repayable absolutely, the transaction is not a loan.” There are three factors the courts generally consider to determine whether a repayment is absolute: “(1) whether there is a reconciliation provision in the agreement; (2) whether the agreement has a finite term; and (3) whether there is any recourse should the merchant declare bankruptcy” or go out of business.” Applying the foregoing factors, the Court held “that repayment was absolute.” In so holding, the Court provided three reasons for its conclusion: First, although there is a reconciliation provision in the greement, the provision appears illusory inasmuch as may not be subject to any consequences for failing to comply with its terms and, further, has sole discretion to adjust the amount of the daily payments. Second, it appears that there was an implied finite term in the agreement inasmuch as plaintiffs allege that the daily payment amount was set to ensure that targeted return would be met in a predetermined period of time as opposed to having been set based on the specified percentage of Oakshire’s sales. Third, it appears that had a means of recourse in the event Oakshire went out of business inasmuch as the agreement allowed , in its sole discretion, to continue making daily payment withdrawals even if the daily payment amount exceeded Oakshire’s sales, thereby providing with a means to compel an event of “default” upon which it could then immediately accelerate the entire debt and file a confession of judgment against Oakshire’s affiliated entities and personal guarantor. Consequently, the Court concluded “that the amended complaint sufficiently allege that the transaction a loan subject to usury laws.” __________________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. CPLR § 3218(a)(2). Id. Princeton Bank & Trust Co. v. Berley , 57 A.D.2d 348, 354 (2d Dep. 1977) (citations omitted). Mall Commercial Corp. v. Chrisa Rest. , 85 Misc. 2d 613, 614 (Sup. Ct., App. Term, 1st Dept. 1976). Id. A motion to vacate may be brought pursuant to CPLR 5015(a)(3), which provides that the court may vacate a judgment on grounds of “fraud, misrepresentation, or other misconduct of an adverse party.” Slip Op. at *2 (quoting Baird v. Baird , 221 A.D.3d 1465, 1467 (4th Dept. 2023)). Id. Adar Bays, LLC v. GeneSYS ID, Inc. , 37 N.Y.3d 320, 334 (2021); see Ujueta v. Euro-Quest Corp. , 29 A.D.3d 895, 895 (2d Dept. 2006). LG Funding, LLC v. United Senior Props. of Olathe, LLC , 181 A.D.3d 664, 665 (2d Dept. 2020) (internal quotation marks omitted)). Samson MCA LLC v. Joseph A. Russo M.D. P.C./IV Therapeutics PLLC (appeal No. 2) , 219 A.D.3d 1126, 1128 (4th Dept. 2023) (internal quotation marks omitted). Id. (internal quotation marks omitted); see also LG Funding, LLC , 181 A.D.3d at 666. Slip Op. at *2. Id. Id. (citations omitted).

By Jonathan H. Freiberger Today’s Blog article addresses the issue of waiver of lease rights. Frequently, litigation involves the question of whether a party waived certain of its rights; whether contractual or otherwise.  “A valid waiver requires no more that the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable.” Cavayero v. Cavayero , 184 A.D.3d 801, 802 (2 nd Dep’t 2020) (citations, internal quotation marks and brackets omitted). A “ aiver may be accomplished by express agreement or by such conduct or failure to act as to evince an intent not to claim the purported advantage.” Bono v. Cucinella , 298 A.D.2d 483, 484 (2 nd Dep’t 2002) ( quoting Hadden v. Consolidated Edison Co. of New York, Inc. , 45 N.Y.2d 466 (978). Put another way, “waiver should not be lightly presumed and must be based on a clear manifestation of intent to relinquish a contractual protection.” Van Der Velde v. New York Property Underwriting Assoc . , 205 A.D.3d 970, 972 (2 nd Dep’t 2022) (citations and internal quotation marks omitted). Conversely, a “waiver is not created by negligence, oversight, or thoughtlessness, and cannot be inferred from mere silence.” Golfo v. Kycia Assoc., Inc. , 45 A.D.3d 531, 533 (2 nd Dep’t 2007) (citation and internal quotation marks omitted). The question of whether a waiver has occurred is often litigated in landlord/tenant matters. The issue frequently arises when a landlord accepts rent payments from a tenant despite a default under the subject lease. “When rent is accepted with knowledge of particular conduct which is claimed to be a default, the acceptance of such rent constitutes a waiver by the landlord of the default.” Atkin’s Waste Materials, Inc. v. May , 34 N.Y.2d 422, 427 (1974) (citation omitted); Madison Ave. Leasehold, LLC v. Madison Bently Assoc. LLC , 30 A.D.3d 1, 6 (1 st Dep’t 2006) ( quoting Atkin’s ), aff’d , 8 N.Y.3d 59 (2006). For these reasons, many commercial leases have provisions that expressly provide that the acceptance of rent by the landlord despite a known breach, will not operate as a waiver. See, e.g. , Excel Graphics Technologies, Inc. v. CFG/AGSCB 75 Ninth Ave., L.L.C. , 1 A.D.3d 65, 68-70 (1 st Dep’t 2003); Sunoce Properties, Inc. v. Bally Total Fitness of Greater New York, Inc. , 48 N.Y.S.3d 476, 478 (2 nd Dep’t 2017); Jefpaul Garage Corp. v. Presbyterian Hosp. in City of New York , 61 N.Y.2d 442, 446 (1984). The efficacy of such provisions are generally accepted. Notwithstanding such provisions, however, courts have found that even non-waiver provisions in a contract can be waived. TSS-Seedman’s, Inc. v. Elota Realty Co. , 72 N.Y.2d 1024, 1027 (1988). The Court in TSS-Seedman stated: Finally, we reject defendant's contention that, because the leases contained "nonwaiver" clauses, acceptance of the withheld rents did not prevent it from terminating the leases. Under the circumstances present here, acceptance of the rent waived the default. Id . See also Madison Ave. , 30 A.D.3d at 6 (relying on TSS-Seedman). The issue of waiver in the context of a commercial lease was addressed by the Appellate Division, Second Department, in DVK Realty, LLC v. Cremb Realty, Inc . , a case decided on July 24, 2024. In 1977, the defendant landlord’s predecessor entered into a commercial lease with DVK Realty, Inc., as tenant. The lease was amended to, inter alia , provide for an option to extend the lease term to 2033. “In 1998, the plaintiff's manager sent the defendant's predecessor a letter stating that DVK Realty, Inc., had been converted from a corporation to a limited liability company, i.e., the plaintiff.” Thereafter, in 2000, the defendant acquired title to the subject premises and accepted monthly rent payments from the plaintiff for 20 years. The plaintiff’s attempt to exercise its option to extend the lease to 2033 was rejected by the defendant, new landlord. The landlord advised the tenant that “the plaintiff was currently occupying the premises without the benefit of a lease.” When the defendant took steps to terminate the lease, the plaintiff commenced a declaratory judgment action by which it sought a declaration that it was the tenant under the lease and that the lease extension option was properly exercised. The defendant, landlord, moved for summary judgment declaring that the plaintiff had no rights under the lease and the plaintiff cross-moved for the relief sought in its complaint. The motion court denied the landlord’s motion and granted the plaintiff’s motion. On the defendant’s appeal, the Second Department affirmed. In so doing, the Court stated: Here, the plaintiff established its prima facie entitlement to judgment as a matter of law by showing that the defendant waived its right to object to the plaintiff's tenancy under the terms of the lease agreement ( see Matter of Sea Cliff Delicatessen v Skrepek , 199 AD2d 510, 511; Brentsun Realty Corp. v D'Urso Supermarkets , 182 AD2d 604, 605). It is undisputed that the defendant accepted monthly rent checks from the plaintiff for approximately 20 years. Furthermore, the plaintiff demonstrated that the defendant was aware that the current tenant was the plaintiff, rather than DVK Realty, Inc., yet failed to challenge the plaintiff's tenancy under the lease agreement until 2019, after the plaintiff sought to exercise its options under the lease agreement to extend the lease term. The plaintiff also demonstrated that the defendant acknowledged the plaintiff as the tenant under the lease agreement. In opposition, the defendant failed to raise a triable issue of fact. 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 the world of e-commerce, a person cannot buy something online, subscribe to a service, or join a club or organization without agreeing to the provider’s “terms of service”. These terms are often lengthy and difficult to read. For these reasons, among others, most people simply click the “I agree” button or link without reading the text or thinking about what they agreed to. Many consumer advocates argue that electronic terms of service should not be binding because important terms, such as arbitration requirements or other conditions precedent to filing a claim, are often buried in legalese that consumers do not read or understand. Thus, argue these advocates, it is unfair to bind consumers to agreements that are nothing more than contracts of adhesion. Courts do not, however, share these views. Indeed, courts have held that “ here is nothing automatically offensive about such agreements, as long as the layout and language of the site give the user reasonable notice that a click will manifest assent to an agreement.” For this reason, “ ourts around the country have recognized that electronic ‘click’ can suffice to signify the acceptance of a contract.”  There are many types of electronic-wrap agreements. Each provides a different manner of assent by the user. For example, clickwrap requires users to click an “I agree” box after being presented with a list of terms and conditions of use, while browsewrap requires the user to click on a hyperlink at the bottom of the screen that takes the user to the terms and conditions on a website. Scrollwrap agreements—the subject of today’s article—require the user to scroll through the terms before the user can indicate his/her assent by clicking “I agree.” Other electronic-wrap agreements notify the user of the existence of the website’s terms of use and, instead of providing an “I agree” button, advise the user that he/she is agreeing to the terms of service when registering or signing up.  Courts routinely uphold electronic-wrap agreements for the principal reason that the user has affirmatively assented to the terms of agreement by clicking “I agree.” “Under New York law, contracts are enforced so long as the consumer is given a sufficient opportunity to read the , and assents thereto after being provided with an unambiguous method of accepting or declining the offer.” “Claims that a consumer was not aware of the agreement or did not actually read it must be disregarded where … the agreement was acknowledged and accepted by clicking on the relevant icon.”  In Berroa v. Nasimov , 2024 N.Y. Slip Op. 50931(U) (Sup. Ct., Kings County July 19, 2024) ( here ), the court dismissed a personal injury complaint against Lyft, Inc. involving a scrollwrap agreement containing an arbitration clause, finding that the plaintiff was bound by the terms and conditions in the agreement. Berroa arose from a July 20, 2020 car accident in which plaintiff allegedly sustained personal injuries (the “Accident”). At the time of the Accident, plaintiff was a passenger in the car, which was operated by the individual defendant. Plaintiff arranged for the car through the Lyft rideshare platform. In addition to bringing claims against the individual defendant, plaintiff sued Lyft for vicarious liability, which was based on defendant’s alleged negligent operation of his vehicle while active on the Lyft platform (the “Lyft Platform”). To use the Lyft Platform, a user must create an account via the Lyft App. This process requires the user to, inter alia , accept Lyft’s terms of service (“Terms of Service”), which include a conspicuous arbitration clause requiring Lyft and the user to submit all disputes between them to binding arbitration—expressly including those arising out of or related to the Lyft Platform and rideshare services arranged on the platform. Users cannot complete the account creation process or purchase rideshare services through the Lyft App unless they affirmatively accept and agree to be bound by Lyft’s Terms of Service. After creating an account, users are prompted periodically to reaffirm their acceptance of Lyft’s updated Terms of Service if they want to continue using the Lyft Platform. Plaintiff affirmatively accepted Lyft’s Terms of Service within the Lyft App on four separate occasions. Each update contained a materially identical arbitration agreement providing that Lyft and plaintiff would submit all disputes between them to binding arbitration. The arbitration agreement expressly governed “any dispute, claim or controversy … arising out of or relating to … the Lyft Platform,” “Rideshare Services” (defined as the “driving services provided by Drivers to Riders”) and “all other federal and state statutory and common law claims.” The agreement also included (1) a provision making it clear that any dispute “concerning the arbitrability of a Claim (including disputes about the scope, applicability, enforceability, revocability or validity of the Arbitration Agreement) be decided by the arbitrator” (except in a narrow set of circumstances not applicable to the court’s decision); and (2) a choice-of law provision, providing that the arbitration agreement would be “governed by the Federal Arbitration Act ….” Defendant Lyft moved to dismiss, or, in the alternative, to stay the action with respect to the claims against it, and to compel plaintiff to arbitrate the claims against Lyft pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq . The court granted the motion. First, the court held that the parties were bound by the arbitration clause in the Terms of Service. The court found that “ he unrebutted evidence reflect that Plaintiff affirmatively consented to be bound by the August 26, 2019 Terms of Service — along with the conspicuous arbitration agreement therein — when he was presented with the full text of Lyft’s Terms and Service directly on the screen in his Lyft App and clicked the button labeled ‘I Agree.’” Thus, concluded the court, “Lyft satisfied its burden of demonstrating that the parties had an explicit and unequivocal agreement to arbitrate.” Second, the court held that “ laintiff’s claims out of his use of the Lyft Platform and thus within the scope of the arbitration clause.” In so holding, the court noted that “ laintiff’s claims arose out of the motor vehicle accident that occurred while he was riding in vehicle after connecting with via the Lyft Platform … and thus fell squarely within the scope of the arbitration clause.” The court also held that even if the scope of the agreement was at dispute, the result—ordering the case to arbitration—would not be different because the arbitration clause contained a delegation provision “that explicitly reserve debate over the scope of the arbitration clause for the arbitrator.”  here.=">here."> Takeaway The courts have been clear that the “making of contracts over the internet ‘has not fundamentally changed the principles of contract.’” Accordingly, parties seeking to enforce an electronic contract must demonstrate “an offer, acceptance, consideration, mutual assent and intent to be bound.” As shown in Berroa , these elements are satisfied with respect to clickwrap and scrollwrap agreements because the terms and conditions are available for the user to review and require the user to affirmatively declare their assent to them before the user can use the app or access the website. __________________________ 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 Bron v. Fritch , 2024 N.Y. Slip Op. 32439(U) (Sup. Ct., N.Y. County July 12, 2024 ( here ), the court was asked to confirm an arbitration award, pursuant to CPLR 7510, stemming from various disputes between the owners of a company engaged in electrical contracting. As discussed below, the court confirmed the award .  The parties in Bron jointly owned E. Electric Contracting Inc. (“EEC”). Their respective duties and ownership interests were governed by an operating agreement, the most recent of which was amended in 2016 (“AOA”). According to the AOA, the defendant owned 51% of the company and had the authority to hire and fire employees, while the plaintiff owned 49% of the company and lacked the power conferred on the defendant. Among other things, the AOA required the parties to arbitrate all disputes before the American Arbitration Association (“AAA”). Eventually, the parties’ relationship deteriorated, leading the defendant to initiate arbitration against plaintiff “on a laundry list of claims”, including breach of contract; misappropriation of EEC’s supplies; fraud; kickbacks; breaches of fiduciary duty; diversion of corporate opportunity; fraudulent inducement; gross negligence; and destruction of evidence. Plaintiff filed several counterclaims against defendant, the most relevant to the action were: (1) breach of defendant’s fiduciary duty by causing EEC to overpay a construction company defendant owned (Fritch Construction Co., or “FCC”), effectively diverting funds from EEC to herself (the “Overpayment Claim”); and (2) breach of defendant’s fiduciary duty by using EEC’s funds to pay an employee to secretly investigate defendant’s personal grievances against plaintiff (the “Investigation Claim”). The Arbitrator conducted a 25-day hearing complete with witnesses, exhibits, and testimony, and accepted both pre- and post-hearing written submissions. On August 25, 2023, the Arbitrator issued a partial award (the “Partial Final Award”), which denied all of defendant’s claims, granted in part plaintiff’s two fiduciary duty claims, and denied the rest of the claims. The Arbitrator also awarded plaintiff money damages in the amount of $131,203.00 on the Overpayment Claim and $44,762.00 on the Investigation Claim, along with pre- and post-judgment interest at the statutory rate of 9% measured from August 1, 2021. In addition, the Arbitrator awarded plaintiff legal and arbitration fees and costs but deferred deciding the actual amount for later proceedings. Several months later, on January 4, 2024, the Arbitrator issued a second, final award (the “Final Award”), incorporating the Partial Final Award and awarding plaintiff $1,312,439.30 in legal fees and costs, and $98,012.00 in arbitration fees and costs. The Final Award did not expressly mention interest. Less than two weeks later, plaintiff commenced the proceeding pursuant to Article 75 of the CPLR to confirm the Awards and enter a final judgment in his favor. Defendant timely filed an opposition along with a cross petition to vacate the Awards. In both documents, defendant asked that the fiduciary duty awards be vacated for exceeding the Arbitrator’s authority; the legal/arbitration fee award be vacated as excessive; the attorney’s fees should not accrue pre- or post-judgment interest; and the Arbitrator and AAA were divested of jurisdiction. Noting that the “the scope of judicial review of an arbitration proceeding is extremely limited” and that “an award will not be vacated ‘unless it is violative of a strong public policy, or is totally irrational, or exceeds a specifically enumerated limitation on the arbitrator’s power,” the Court granted the petition to confirm the Awards. In opposing the petition, defendant argued that the Arbitrator’s ruling on the Investigation Claim effectively stripped her of the ability to hire and fire employees, effectively rewriting the contract in excess of the Arbitrator’s authority. But, noted the Court, “the ruling had nothing to do with hiring or firing: the Arbitrator found that improperly used company funds to pay an employee to “pursu grievances and investigations against ... not proper company business.”  The Court explained that the “Arbitrator based this ruling on evidence that the employee’s salary ‘doubled in January 2020’ during the same period that the employee ‘was asked to supervise different investigations of that failed to uncover any material wrongdoing.’” “Nothing about this ruling,” said the Court,” “constitutes ‘a completely irrational construction to the provisions of the parties’ agreement effectively rewrite it.’”  “Nor can show that that Arbitrator improperly ruled for on the Overpayment Claim,” said the Court. The uncontroverted testimony of EEC’s project manager, noted the Court, supported plaintiff’s allegations. As a result, and as the Arbitrator found, defendant “breached her fiduciary duty by using one of her companies to overcharge the other without informing , thereby diverting to herself funds that otherwise would have been 49% .”  The Court also rejected defendant’s argument that the fees and expenses were excessive. The Court found the argument to be “conclusory and unsupported”. Takeaway In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable. Like many jurisdictions, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. In fact, judicial review of arbitration awards is severely limited in New York. Id .  As this Blog previously noted ( here ), setting aside an arbitral award is difficult. The losing party bears a heavy burden of showing that an award should be vacated. In Bron , defendant could not meet this “heavy burden”. ____________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Iberdrola Energy Projects v. Oaktree Capital Management L.P. , 2024 N.Y. Slip Op. 03798 (1st Dept. July 11, 2024) ( here ), the Appellate Division, First Department was asked to determine the scope of a no recourse provision in a contract between two sophisticated commercial actors relating to the construction of a power plant, and, relatedly, the extent to which certain non-parties to the contract (defendants) were insulated from liability by virtue of that provision. As discussed below, the Court held (as did the motion court) that the non-recourse provision in the parties’ contract barred the majority of plaintiff’s claims against defendants, and that plaintiff’s fraud claim, which would otherwise have survived the non-recourse provision, was not sufficiently pleaded. Iberdrola dates back approximately 10 years. At that time, defendants wanted to replace a coal power plant in Salem, Massachusetts with a gas generation power plant. Defendants created a special-purpose entity, non-party Footprint Power Salem Harbor Development LP (“Footprint”), to serve as the company charged with constructing the new plant. Defendants owned, controlled, and managed Footprint, and were Footprint’s majority and controlling equity holders. Moreover, the majority of Footprint’s board of directors and officers were defendants’ employees. In December 2014, Footprint retained plaintiff to be the project’s engineering, procurement, and construction contractor. The contract between plaintiff and Footprint called for plaintiff to provide services, materials, and labor in exchange for the contract price. The contract also contemplated additional compensation for change orders. Footprint was permitted to terminate the contract for convenience or for a material breach by plaintiff. In the event of termination for the former, Footprint would incur substantial payment obligations; termination for the latter would not. Under the contract, plaintiff was required to post a standby letter of credit in the amount of 20% of the contract price (approximately $140 million) as security for plaintiff’s performance. Footprint was permitted to draw on the letter of credit only “upon any Contractor’s breach or failure to perform, when and as required, any of its material obligations under th Contract with five Business Days prior written notice to Contractor.” Relevant to the Court’s decision, the contract contained a non-recourse provision. In pertinent part, it provided that Footprint’s obligations under the agreement were intended only to be Footprint’s obligations and those of the corporation that was its sole general partner and that any claim based on those obligations were to be asserted against Footprint, there being “no recourse for any obligation of hereunder, or for any claim based thereon or otherwise in respect thereof … against any incorporator, shareholder, officer or director or Affiliate, as such, past, present or future of such corporate general partner or any other subsidiary or Affiliate of any such direct or indirect parent corporation or any incorporator, shareholder, officer or director, as such, past, present or future, of any such parent or other subsidiary or Affiliate.” The contract required plaintiff and Footprint to submit to binding arbitration any dispute between those parties arising out of, relating to, or in connection with the contract. A choice-of-law provision dictated that the contract was governed by and construed in accordance with New York law. The project began in 2015 but delays and cost overruns ensued. Among the reasons for the problems were plaintiff’s performance, and Footprint’s management approach and sharp business practices. For several months, the parties tried to resolve their disagreements and achieve completion of the project. Plaintiff would come to characterize these efforts as a ruse by defendants to keep plaintiff working on the project, while defendants maintained that they participated in the negotiations in good faith. On April 15, 2018, at a time when the project was 98% complete, Footprint gave plaintiff notice of termination for cause, citing, among other things, plaintiff’s failure to achieve substantial completion by the required date. Simultaneously, Footprint gave plaintiff notice of Footprint’s intent to draw on the letter of credit. Later, Footprint drew the $140 million afforded by the letter of credit. A replacement contractor was retained by Footprint and the remaining work was completed. Plaintiff initiated an arbitration proceeding against Footprint, claiming that Footprint breached the contract, engaged in tortious conduct, and violated the Massachusetts Unfair Trade Practice Act. Plaintiff sought $700 million in damages. Footprint appeared in the arbitration proceeding and asserted counterclaims. Following a thorough hearing, the arbitration panel determined, among other things, that Footprint lacked cause to terminate the contract and that it terminated the contract as a pretense to draw on the letter of credit. After offsetting plaintiff’s damages with those of Footprint, the panel issued a final award in plaintiff’s favor of $236,404,377. That award was confirmed by Supreme Court in January 2022. In the wake of the adverse arbitration award, Footprint filed for bankruptcy, thereby diminishing the possibility that plaintiff would realize a recovery on the award. In April 2021, during the pendency of the arbitration, plaintiff commenced the action seeking damages against defendants. In its amended complaint, plaintiff asserted causes of action for tortious interference with contract, fraud, unjust enrichment, and violations of Massachusetts’s deceptive trade practices statute . The gravamen of plaintiff’s claims is that, as plaintiff’s work on the project progressed, defendants were concerned that the projected revenues of the gas generation plant were diminishing; defendants did not want to make significant, additional investments in the project; the confluence of diminishing projected revenues and increasing completion costs caused defendants to face losses on their investment; and, to avoid that eventuality, defendants devised a scheme to force plaintiff, through the funds available under the letter of credit, to pay for completion of the work. According to plaintiff, in the months leading up to their termination of the contract, defendants lied to plaintiff to convince it to continue working on the project until it was approximately 98% complete; defendants then encouraged Footprint to pretextually terminate the contract, ostensibly for a material breach by plaintiff, to access the $140 million available under the letter of credit; and, lastly, defendants used the draw from the letter of credit to pay a third party to complete the remaining 2% of the work. Defendants moved to dismiss the complaint under, relying principally on the non-recourse provision in the agreement. Plaintiff opposed the motion and informally sought leave to replead or amend the amended complaint. The motion court granted the motion, denied (sub silencio) plaintiff leave to replead or amend, and dismissed the amended complaint with prejudice. The motion court observed that plaintiff was seeking to hold Footprint’s principals liable for its conduct because it would not be able to satisfy the arbitration award and concluded that the nonrecourse provision barred all of plaintiff’s claims except for plaintiff’s fraud claim. The motion court found, however, that plaintiff failed to adequately plead the element of justifiable reliance necessary to sustain a cause of action for fraud. After the motion court issued a supplemental order, judgment was entered dismissing the complaint with prejudice. On appeal, plaintiff argued that the non-recourse provision barred contractual causes of action, not tort claims. Pointing to the particular language of the nonrecourse provision and caselaw addressing the scope and enforceability of non-recourse provisions generally, plaintiff maintained that its tortious interference with contract, fraud, and statutory claims survived the non-recourse provision. Plaintiff noted that, by virtue of public policy, its fraud claim was not subject to the non-recourse provision. Plaintiff further maintained that the “as such” language in non-recourse provision meant that incorporators, shareholders, officers, directors and affiliates — like defendants — were insulated from status-based claims against them, not torts they commit in their individual capacities. Additionally, plaintiff contended that the no-third party-beneficiaries clause established that defendants could not enforce the non-recourse provision because they had no rights under the contract. Regarding the sufficiency of its pleading, plaintiff maintained that it adequately pleaded justifiable reliance on its fraud claim in the form of forbearance by alleging that it had the right to suspend performance and seek remedies under the contract once Footprint stopped paying it, but continued working and forbore from exercising contractual remedies because of defendants’ misrepresentations ( e.g. , defendants’ statements to plaintiff to convince it to continue working on the project notwithstanding that it was not getting paid).  Defendants argued that plaintiff’s claims for tortious interference with contract, negligent misrepresentation, and unjust enrichment, as well as those based on Massachusetts’s statutory law, were covered (and therefore barred) by the non-recourse provision, because they were “based on” or “in respect” of the contract. Defendants noted that the contract not only supplied the necessary context for the claims plaintiff had pleaded, but also the essential predicate for all of the causes of action. Defendants disagreed with plaintiff’s reading of the phrase “as such,” and maintained that those words meant that, for the nonrecourse provision to apply, defendant’s status as a director, officer, shareholder or affiliate must be relevant to the claim, i.e. , the claim must arise from actions taken in the listed role. Defendants also claimed that the no-third-party-beneficiaries clause had no bearing on the non-recourse provision because defendants were not seeking to enforce any right under the contract; rather, they were defending themselves from civil liability by observing that the contract limits plaintiff’s ability to sue them. Regarding the fraud claim, which defendants recognized was not barred by the non-recourse provision, defendants argued that it was nothing more than a repackaged contractual cause of action. Defendants also asserted that plaintiff failed to adequately allege detrimental reliance on defendants’ purported misrepresentations because plaintiff was already contractually obligated to perform the unfinished work, and plaintiff did not relinquish any rights under the contract.  The Court held that the non-recourse provision was not limited to plaintiff’s breach of contract claims. “That provision,” said the Court was “as broad as it is clear: no liability could be imposed upon various individuals and entities for ‘any claim based or otherwise in respect thereof.’” The Court noted that the definition of “claims” underscored the lack of ambiguity of the non-recourse provision: “ iving the commercial contractual language its plain meaning and effect, defendants are exculpated from any breach of contract liability and any other claims related to or in connection with the contract.” The Court explained that “ laintiff’s causes of action for tortious interference with contract, unjust enrichment, and violations of Massachusetts’s deceptive trade practices statute are all hinged or predicated on conduct taken under or in contravention of the contract.” Thus, concluded the Court, “those causes of action all relate to or are connected with the contract and are therefore barred by the non-recourse provision.” The Court rejected the notion that it could “provide rough justice to plaintiff by dint of distorting the plain meaning of the contract to relieve plaintiff of the consequences of its contractual arrangement. Indeed, noted the Court, “ ad plaintiff wanted to limit the nonrecourse provision to breach of contract claims, it should not have agreed to such a sweeping nonrecourse provision. Plaintiff could have insisted that the nonrecourse provision state expressly that it was limited to breach of contract claims, or that it did not apply to tort claims. Instead of insisting on a narrow nonrecourse provision, plaintiff assented to a broad one.” Similarly, the Court refused disturb the clear, detailed allocation-of-risk-of-economic-loss scheme agreed upon by the parties under the guise of contractual interpretation. The Court observed that plaintiff, a sophisticated commercial actor, “knew that it was entering into a significant contractual undertaking with a special-purpose entity, and the contract provided for a specific dispute-resolution mechanism — arbitration — that carried with it a risk that the special-purpose entity would not be able to satisfy an ensuing award.” “Plaintiff could have bargained for protections to avoid or mitigate losses occasioned by the conduct of a judgment-proof special-purpose entity ( e.g. , conditions on Footprint’s ability to draw on the letter of credit, a payment guaranty from one or more of defendants, a narrow nonrecourse provision),” noted the Court, “but it chose to enter into the contract as written.” “Ultimately,” said the Court, “plaintiff got the benefit of its bargain: arbitration on its cognizable claims against Footprint, which proceeding yielded a sizable award that was converted to a judgment.” The Court also rejected plaintiff’s reading of the phrase “as such” in the non-recourse provision, which plaintiff viewed as insulating incorporators, shareholders, officers, directors, and affiliates from status-based claims only, not torts they commit in their individual capacities. “In light of the otherwise broad language of the nonrecourse provision, the plain, sensible reading of ‘as such’ (and the one that gives the phrase meaningful effect) is the one proposed by defendants: that a defendant’s status as an incorporator, shareholder, officer, director, or affiliate must be relevant to the claim asserted against the defendant in order for the claim to be encompassed by the nonrecourse provision.” The Court also found that defendants’ reading of “as such” comported with the evident purpose of the non-recourse provision, which was to provide Footprint and other covered actors related to it (including defendants) expansive freedom from liability. With respect to its fraud claim, plaintiff asserted that it adequately pleaded justifiable reliance because it had the right to suspend performance and seek remedies under the contract once Footprint stopped paying it, but it continued working because of defendants’ misleading statements designed to keep plaintiff working on the project. Defendants argued that plaintiff failed to adequately allege detrimental reliance on defendants’ purported misrepresentations because plaintiff was already contractually obligated to perform the unfinished work. The Court agreed with defendants. The Court found that “ laintiff was obligated to perform all design, engineering, and construction work, and achieve substantial completion of the project by May 31, 2017. And plaintiff was required to continue to perform notwithstanding that Footprint stopped paying plaintiff disputed amounts in 2018.” The Court noted that the parties contemplated a continued obligation to perform notwithstanding any disputes between them. Moreover, noted the Court, “plaintiff did not relinquish any right it otherwise enjoyed as a result of defendants’ alleged fraudulent misrepresentations. To the contrary, plaintiff pursued the remedy afforded it by the contract: arbitration against Footprint.” “Ultimately,” concluded the Court, “the crux of the fraud claim in the amended complaint is that defendants fraudulently induced plaintiff to continue performing under the contract, and that is an insufficient basis on which to rest such a claim.” FOOTNOTES 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 Today’s article relates to renewal judgments under CPLR 5014 in the face of potentially defective service of process. This BLOG has previously addressed CPLR 5014 < here =">here"> . Issues involving service of process have been addressed numerous times in this BLOG. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . CPLR 5014 By way of brief background, and as previously discussed in this BLOG, money judgments are valid for 20 years. Money judgments recorded in a county in which the judgment debtor owns real property, however, are only liens on that real property for 10 years, CPLR § 5203(a) , although CPLR § 5014 permits a judgment creditor to extend the lien of the judgment on real property for an additional 10-year period. The historical perspective of CPLR 5104 is discussed in this BLOG’s prior article: “ Mind the Gap – Renewal Judgments Under CPLR § 5014 .” As explained, under CPLR § 5014, as it presently stands, a judgment creditor can commence an action for a renewal judgment up to one year prior to the expiration of the original judgment so as to avoid the “lien gap” that results when a renewal judgment is entered after the expiration of the original lien. During the “gap” period, other lienors, particularly mortgagees, can “slip in” and gain priority over a judgment creditor awaiting a renewal judgment after the expiration of the original judgment.  Service of Process As previously noted in our BLOG, for a court to exercise personal jurisdiction over a defendant in a litigation, among other things, the defendant must be served with process. The failure to serve process in “strict compliance” with the “statutory methods,” “leaves the court without personal jurisdiction over the defendant, and all subsequent proceedings are thereby rendered null and void.” Nationstar Mortgage, LLC v. Gayle , 191 A.D.3d 1002 (2 nd Dep’t 2021) (citations omitted).  “Service of process upon a natural person must be made in strict compliance with the methods of service set forth in CPLR 308 .” Federal Nat. Mort. Ass’n v. Smith , 219 A.D.3d 938, 941-42 (2 nd Dep’t 2023) (citations and internal quotation marks omitted, hyperlink added); see also Castillo-Florez v. Charlecius , 220 A.D.3d 1, 2 (2 nd Dep’t 2023) (citations omitted). “Typically, a defendant who is otherwise subject to a court’s jurisdiction, may seek dismissal based on the claim that service was not properly effectuated.” Keane v. Kamin , 94 N.Y.2d 263, 265 (1999) (citations omitted). One method of personal service is “affix and mail” service pursuant to CPLR 308(4) , which provides that where personal service upon a natural person “cannot be made with due diligence” under paragraphs one and two of CPLR 308, service can be made by, inter alia , affixing the summons to the door of the defendant’s “dwelling place or usual place of abode within the state”. It has been noted that the due diligence requirements of CPLR 308(4) must be “strictly observed because there is a reduced likelihood that a defendant will actually receive the summons when it is served pursuant to CPLR 308(4).” Serraro v. Staropoli , 94 A.D.3d 1083, 1084 (2 nd Dep’t 2012) (citations and internal quotation marks omitted); see also Coley v. Gonzalez , 170 A.D.3d 1107, 1108 (2 nd Dep’t 2019) (citations and internal quotation marks omitted). “What constitutes due diligence is determined on a case-by-case basis, focusing not on the quantity of the attempts at personal delivery, but on their quality.” McSorley v. Spear , 50 A.D.3d 652, 653 (2 nd Dep’t 2008) (citation omitted); see also Faruk v. Dawn , 162 A.D.3d 744, 745 (2 nd Dep’t 2018) (same). As part of the diligence process, process servers must make “genuine inquiries about the defendant’s whereabouts and places of employment.” Faruk , 162 A.D.3d at 745-46; see also Serraro , 94 A.D.3d at 1085. Finally, service will not be sustained when all attempts are made at times when the defendant will not likely be home or when working or commuting to work. See Serraro , 94 A.D.3d at 1085; McSorely , 50 A.D.3d at 653-54. A “process server’s affidavit of service gives rise to a presumption of proper service.” Deutsche Bank National Trust Co. v. Stolzberg , 165 A.D.3d 624, 625 (2 nd Dep’t 2018) (citations and internal quotation marks omitted). Further, while “ are and unsubstantiated denials are insufficient to rebut the presumption,” “a sworn denial containing a detailed and specific contradiction of the allegations in the process server’s affidavit will defeat the presumption of proper service.” Id . (citations, internal quotation marks and brackets omitted). For example, the Second Department, in Castillo-Florez , held that the defendant’s affidavit “in which he, inter alia , denied receipt of service, denied residing at the address at the time service allegedly was made, and set forth the location of his address at the time of service,” was sufficient to rebut the presumption of service. Castillo-Florez , 220 A.D.3d at 14 (citations omitted); see also Bank of America v. Lewis , 190 A.D.3d 910, 915 (2 nd Dep’t 2021) (finding the presumption rebutted where defendant averred that he did not reside at the service address and annexed to his affidavit copies of tax records indicating he lived elsewhere). Legal Servicing, LLC v. Carty On July 10, 2024, the Appellate Division, Second Department, decided Legal Servicing, LLC v. Carty , a case that addresses CPLR § 5014 and service of process. In 2006, the Legal Servicing Plaintiff obtained a clerk’s Judgment against the defendant based on the defendant's default in responding to the complaint. See CPLR § 3215(a) . In 2015, the Plaintiff commenced an action for a renewal judgment, which was granted, again, based on the defendant's failure to respond to the complaint. The defendant subsequently moved to vacate the original judgment and the renewal judgment, which motion was denied by the motion court. On the defendant’s appeal, the Second Department reversed. In reaching its decision, the Court recognized that the “failure to serve process in an action leaves the court without personal jurisdiction over the defendant, thereby rendering all subsequent proceedings null and void.” (Citation omitted.) In Legal Servicing , service of process on the defendant was made by “affix and mail” service pursuant to CPLR § 308(4) in both the original action and in the subsequent action for a renewal judgment. The Court found that although the process server’s affidavit was prima facie evidence of proper service, the defendant “raised questions of fact as to whether affix and mail service was properly made in both actions.” For example, with respect to the original action, the defendant denied receipt of process, which was affixed to one of the two entrances of a two-family residence and the affidavit of service did not specify to which entrance process was affixed.  As to service of process in the renewal action, the defendant denied receiving service and averred that he did not reside at the subject premises at the time of the alleged service. While no documentary evidence of his residency was submitted, the defendant’s wife submitted an affidavit averring that the couple was not living at the subject premises at the time of service because they moved closer to the defendant’s place of business to “ease commute to work.” The Court also rejected the plaintiff’s argument that service was made at the defendant’s address on file with the New York State DMV. Consistent with recent caselaw, the Court found that this fact alone was insufficient to sustain service where there was no deliberate attempt to avoid service and warrant an estoppel preventing a challenge to the “propriety of service at a former address.” (Citation omitted.) [Eds. Note: recent caselaw clarifying the law on service of process, updating DMV records and estoppel has been addressed in this BLOG . The Court found that the defendant successfully rebutted the presumption of proper service occasioned by the process server’s affidavit and, accordingly, concluded that “a hearing to determine the validity of service upon the defendant in the underlying action and, if necessary, in this action was warranted.” (Citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:  Jeffrey M. Haber The Currency and Foreign Transactions Reporting Act, also known as the “BSA,” enacted in 1970, established requirements for record-keeping and reporting by banks and other financial institutions. 1 The BSA is designed to, among other things, enable U.S. law enforcement and regulatory agencies to investigate potential criminal, tax, and regulatory violations (including money laundering and other financial crimes), by requiring individuals, banks, and other financial institutions to: file currency reports with the U.S. Department of Treasury; identify persons conducting transactions in currency and other monetary instruments; and maintain appropriate records of financial transactions. In 1986, Congress enacted the Money Laundering Control Act to ensure compliance with the BSA. Among other things, the act requires banks to establish and maintain procedures reasonably designed to confirm and monitor their compliance with the BSA. 2 Since 1996, persons and entities subject to the BSA have been required to file a Suspicious Activity Report (“SAR”) with U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) whenever they “detect[] a known or suspected violation of Federal Law, or a suspicious transaction related to a money laundering activity or a violation of the .” 3 A suspicious transaction or pattern of transactions concerns funds or other assets of at least $5,000 that the person or entity knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or (4) involves use of the broker-dealer to facilitate criminal activity. 4 When submitting a SAR to FinCEN, filers are required to “provide a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” in the narrative and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.” 5 To be effective, the SAR should describe “the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported.” 6 When a SAR “lack basic information regarding the Five Essential Elements … SAR s deficient as a matter of law.” 7 FinCEN has provided additional instructions regarding the obligations of financial institutions to report cyber-related events. In December 2011, for example, FinCEN issued an advisory to alert financial institutions to the increased threat of cyber account takeover activity. 8 FinCEN advised that “ ybercriminals are increasingly using sophisticated methods to obtain access to accounts” and these “attacks aim to deliberately exploit a customer’s account and, in many instances, to gain seemingly legitimate access to another customer’s account.” 9 In order to assist financial institutions with identifying and reporting account takeover activity where cybercriminals attempt intrusions into a customer’s account in order to steal the customer’s funds, FinCEN also set forth detailed instruction for reporting account takeovers that emphasizes the importance of reporting cyber-related information—including cyber-event data, such as URL address and IP addresses with timestamps, as well as email addresses and other electronic identifying information—in the event of a cyber-enabled account takeover. 10 The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, commonly known as the “USA PATRIOT Act”, required financial institutions to establish AML programs, including, at a minimum: “(A) the development of internal policies, procedures, and controls ; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test program.” 11 In addition, a financial institution’s BSA compliance program must include a customer identification program, as well as procedures for conducting ongoing customer due diligence and complying with beneficial ownership requirements for legal entity customers. 12 Compliance with the BSA is supervised by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Among other responsibilities, the Federal Reserve evaluates an institution’s BSA compliance program. 13 The Federal Reserve’s supervisory processes assess whether banks have established the appropriate policies, procedures, and processes commensurate with their individual BSA/AML risk to identify and report suspicious activity; and that they provide sufficient detail in their reports to law enforcement agencies to ensure that the reports are useful for investigating reported suspicious transactions. In general, a BSA compliance program must be tailored to the financial institiution’s size, complexity, organizational structure, and unique illicit financial activity risk profile. Thus, for example, a bank’s transaction monitoring system—used to identify, research, and report suspicious activity—should be risk-based to incorporate any necessary additional screening for higher-risk products, services, customers, and geographic locations. 14 A financial institution also must implement risk-based customer due diligence policies, procedures, and processes necessary to enable the institution to understand the nature and purpose of customer relationships—which may include understanding the types of transactions in which a customer is likely to engage. 15 These processes assist the institution in determining when transactions are potentially suspicious. BSA monitoring systems can include employee identification or referrals from law enforcement, transaction-based monitoring systems (manual), and/or surveillance monitoring systems (automated). A transaction-based monitoring system targets specific types of transactions ( e.g. , involving large amounts of cash or offshore transfers), which the financial institution compiles in a periodic report that its employees must manually review for suspicious or unusual activity. Surveillance monitoring systems typically use computer software programmed to identify individual transactions, patterns of unusual activity, or deviations from expected behavior indicative of suspicious activity. Surveillance monitoring systems include rule-based and intelligent systems. The rule-based systems typically detect transactions that are outside a set of established parameters or “rules,” while the “intelligent” systems are generally adaptive programs that can identify transactions as unusual based on patterns or context. The foregoing principles were at issue in an enforcement action brought by the Securities and Exchange Commission (“SEC”) against Silvergate Capital Corporation (“SCC” or the “Company”), its former Chief Executive Officer (“CEO”), and former Chief Risk Officer (“CRO”) ( here ). In the SEC’s complaint ( here ), the SEC charged defendants with misleading investors about the strength of the BSA/AML compliance program and the monitoring of crypto customers, including FTX, by SCC’s wholly owned subsidiary, Silvergate Bank. The SEC also charged SCC and its former Chief Financial Officer (“CFO”) with misleading investors about the Company’s losses from expected securities sales following FTX’s collapse. 16 All parties charged, except the CFO, agreed to settle the SEC’s charges . According to the SEC, from November 2022 to January 2023, SCC, the CEO and CRO misled investors in stating that SCC had an effective BSA/AML compliance program and conducted ongoing monitoring of its high-risk crypto customers, including FTX, in part to rebut public speculation that FTX had used its accounts at SCC to facilitate FTX’s misconduct. In reality, said the SEC, SCC’s automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank’s payments platform, the Silvergate Exchange Network (”SEN”). “At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that fell not only woefully, but also fraudulently, short in that regard,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement . “Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of largest banking customers, they doubled down in a way that misled investors about the soundness of the programs. In fact, because of those deficiencies, allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. stock eventually cratered, wiping out billions in market value for investors.” The SEC also alleged that SCC and the CFO misrepresented the company’s financial condition during a liquidity crisis and bank run following FTX’s collapse. The SEC alleged that SCC and the CFO, in an earnings release and earnings call, understated SCC’s losses from expected security sales and misrepresented that it remained well-capitalized as of December 31, 2022. In March 2023, SCC announced it would wind down its banking operations, and its stock eventually fell to near $0.00 per share. The SEC filed its complaint in the U.S. District Court for the Southern District of New York. The SEC charged SCC, the CEO, and CRO with negligence-based fraud and charged SCC with violating certain reporting, internal accounting controls, and books-and-records provisions. Without admitting or denying the allegations, SCC agreed to a final judgment ordering it to pay a $50 million civil penalty and imposing a permanent injunction to settle the charges. The CEO and CRO also settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer-and-director bars, and civil penalties of $1 million and $250,000 respectively. The settlements are subject to court approval. SCC’s payment may be offset by penalties paid to the Federal Reserve and/or the California Department of Financial Protection and Innovation. The SEC charged the CFO with violating certain of the antifraud and books-and-records provisions of the federal securities laws, and with aiding and abetting certain of SCC’s violations. In parallel actions, the Federal Reserve and DFPI announced the settled charges ( here and here , respectively) against SCC. Footnotes 31 U.S.C. § 5311 et seq. 12 U.S.C § 1818(s). 12 C.F.R. § 208.62. 31 C.F.R. § 1023.320(a)(2) (the “SAR Rule”). See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) ( here ). See , e.g. , FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative , at 3 (Nov. 2003) ( here ). SEC v. Alpine Sec. Corp. , 308 F. Supp. 3d 775, 800 (S.D.N.Y. 2018) < here =">here"> , aff’d , 982 F.3d 68 (2d Cir. 2020). FinCEN, Account Takeover Activity , FIN-2011-A016 (Dec. 19, 2011) ( here ). Id. See FinCEN, Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime , FIN2016-A005 (Oct. 25, 2016) ( here ); see also Frequently Asked Questions (FAQs) regarding the Reporting of Cyber-Events, Cyber-Enabled Crime, and Cyber-Related Information through Suspicious Activity Reports (SARs) (Oct. 25, 2016). 31 U.S.C. § 5318(h)(1); see also 12 C.F.R. § 208.63. 31 C.F.R. §§ 1020.210 and 1020.220. 12 U.S.C. § 1818(s). See generally 31 C.F.R. § 1020.210. Id. FTX was one of the largest crypto asset trading platforms in the world. FTX held bank accounts at SCC, as did many entities related to FTX—including Alameda Research (“Alameda”), a crypto asset hedge fund owned by Sam Bankman-Fried (“Bankman-Fried”), the Chief Executive Officer of FTX. FTX declared bankruptcy on November 11, 2022, amid public uproar questioning whether FTX and Bankman-Fried had diverted billions of dollars of FTX customers’ funds to Alameda for improper purposes. Soon after FTX’s bankruptcy, SCC customers began to remove their deposits from their SCC accounts. By November 15, 2022, SCC was in the midst of an existential bank run; its crypto asset-related deposits had fallen to under $8 billion, down from over $14 billion at the beginning of the year, and the Company was facing a liquidity crisis. 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 Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”, “even though the injured party may be ignorant of the existence of the wrong or injury.” Determining when accrual occurs is not easy and often contested. So too is the determination of when the plaintiff discovered or could have discovered the fraud. In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when it would have developed the truth, and shuts her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to her. The test as to when fraud should with reasonable diligence have been discovered is an objective one. Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” In Blizniak v. Fences By Precision, LLC , 2024 N.Y. Slip Op. 03639 (4th Dept. July 3, 2024) ( here ), the Appellate Division, Fourth Department, reversed the order of the motion court denying defendants’ motion to dismiss plaintiff’s fraud claims as time barred because plaintiff was on inquiry notice of said claims. Plaintiff commenced the action on May 19, 2023, asserting, inter alia , a fraud cause of action against defendants after the sale of certain fencing to plaintiff and the installation thereof. In December 2014, plaintiff entered into a contract with defendants, a limited liability company and its sole member, to purchase and install sections of six-foot-tall and four-foot-tall “Country Estate” brand fencing. On June 11, 2015, plaintiff entered into a second contract with defendants to purchase and install, among other products, an additional section of four-foot-tall fencing. Plaintiff alleged that “at the time entered into the econd ontract, understood that he was again purchasing ‘Country Estate’ brand fencing, of the same kind and quality as provided in the irst ontract.” On February 1, 2020, plaintiff contacted defendants after noticing that the fencing installed under the second contract was beginning to fade, while the fencing installed under the first contract was not. Plaintiff asked whether the fencing installed under the second contract was manufactured by Country Estate. On March 2, 2020, plaintiff again contacted defendants by text message, noting that the invoice for the fencing installed under the first contract reflected that it was Country Estate brand, but the invoice under the second contract did not. By February 24, 2021, plaintiff had retained counsel, who sent a letter to defendants threatening to commence an action against them absent a satisfactory resolution within 15 days. Plaintiff contacted Country Estate Fence for the first time on June 15, 2021 and, the following day, that company’s representative confirmed that they did not manufacture the fading fencing at issue. Defendants moved to dismiss the complaint, arguing that the statute of limitations for plaintiff’s fraud cause of action had run by May 19, 2023. Specifically, defendants argued that the alleged fraud accrued when the fence was installed in June 2015. Under the six-year statute of limitations for fraud, argued defendants, the claim had accrued almost two years before plaintiff filed his complaint. Defendants also argued that plaintiff’s fraud claim was untimely under the two-year discovery rule. Defendants maintained that plaintiff had ample time, evidence, and resources to discover the alleged fraud in February 2020, when plaintiff noticed the fence installed pursuant to the second contract between the parties was fading in color. In fact, said defendants, plaintiff began to investigate the issue in February 2020 and March 2020. Moreover, defendants contended that plaintiff was on notice of the alleged fraud as late as February 2021, when plaintiff retained an attorney, who threatened a lawsuit against defendants. The motion court denied the motion. Defendants appealed. The Fourth Department unanimously reversed. As an initial matter, the Court confirmed that the six-year statute of limitations had run, thereby shifting the burden to show timeliness onto plaintiff: “Here, it is undisputed that defendants established that the action was not commenced within six years. Thus, the burden shifted to plaintiff to show that the two-year discovery exception applies.” The Court held that plaintiff failed to meet his burden. Plaintiff failed to do so. The Court found that the “record established that plaintiff had knowledge of facts from which the fraud could reasonably be inferred as early as February 2020 when the four-foot fencing began to fade while the six-foot fencing did not … and, at the latest, by February 2021 when plaintiff’s counsel threatened to commence an action against defendants.” Thus, concluded the Court, “ he statute of limitations … ran, at the latest, in February 2023, and plaintiff’s complaint filed nearly three months thereafter was not timely and the remaining fraud cause of action must therefore be dismissed.” Finally, the Court rejected plaintiff’s “alternative ground for affirmance” that defendants “misled him to believe that they were pursuing a warranty claim on his behalf.” The Court “conclude that plaintiff failed ‘to establish that subsequent and specific actions by defendants somehow kept from timely bringing suit.’” Takeaway Blizniak highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of fraud. The failure to bring a lawsuit when the facts suggest fraud will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring a lawsuit when the very nature of the fraud prevents him/her from knowing that he or she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his or her rights when the facts indicate that a wrong has been done. ________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be, and should not be taken as, legal advice. CPLR § 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011). Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted). Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). Id. Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011). Id. (citation and internal quotation marks omitted). See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”). Celestin v. Simpson , 153 A.D.3d 656, 657 (2d Dept. 2017). Slip Op. at *2 (citation omitted). Id. Id. (citation omitted). Id. Id. Id. (quoting Zumpano v. Quinn , 6 N.Y.3d 666, 674 (2006)).

By: Jeffrey M. Haber As readers of this Blog know, we have frequently written about how courts enforce contracts that are clear and unambiguous. In fact, many of our articles on this subject reflect this fundamental principle of contract interpretation in their title: “ The New York Court of Appeals Reminds Litigants That Words In Contracts Have Meaning ”; “ Contracts That Say What They Mean, Mean What They Say ” and “ Contracts That Say What They Mean, Mean What They Say Redux ”.  Today, we examine Stolzman v. 210 Riverside Tenants, Inc. , 2024 N.Y. Slip Op. 03563(1st Dept. July 2, 2024) ( here ), a case involving the enforcement of a contract that was clear and unambiguous in its language. The issue in Stolzman concerned the scope of a shareholder’s right under a lease to replace an air conditioning unit on the roof of the building in which he lived. In 1991, defendant granted plaintiff’s predecessor a license to use a 20-square foot space on the roof of the building (the “Space”) “for the installation of an air conditioning unit … serving the Apartment, and for no other purpose.”  In 2002, the 1991 license agreement was amended to, among other things, remove the forgoing language and permit plaintiff’s predecessor, as lessee, “and essee’s successors and assigns” to “use the Space for an air-conditioning unit (“Air Conditioning”) serving the Apartment, and for no other purpose.”  The license required the lessee to “maintain such Air Conditioning in accordance with all applicable legal requirements” and specified that the granted rights were “deemed appurtenant to ownership of the Proprietary Lease and cooperative shares allocated to the Apartment” and were irrevocable.   In 2018, plaintiff listed the apartment for sale. Defendant refused to provide any assurances to any prospective buyers or plaintiff concerning the air conditioning unit and reserved the right to refuse consent to a replacement.  Plaintiff moved for a declaratory judgment that the 2002 license agreement gave him and his successors and assigns the right to replace the air conditioning unit; for breach of the license agreement; for breach of the proprietary lease; for tortious interference with prospective business relations; and for a permanent injunction, enjoining the cooperative from continuing its alleged breaches and tortious conduct. Following defendant’s answer denying liability and asserting several affirmative defenses, plaintiff moved for summary judgment on his remaining claim for breach of the license agreement after the motion court dismissed all other causes of action. The motion court denied plaintiff’s motion for summary judgment finding that the 2002 license agreement was ambiguous as to whether it “permits to replace the existing air-conditioning unit.” The motion court stated that “ n short, the text of the agreement may reasonably be read as permitting only use of the existing air-conditioning unit, and also as permitting both use of that unit and its replacement with a new unit.”  On appeal, the Appellate Division, First Department held that the motion court improperly denied plaintiff’s motion for summary judgment. The Court found that the “license agreement, which was irrevocable, permitted plaintiff to maintain an air conditioner on the roof of the building, and was unambiguous in permitting plaintiff the ability to install a replacement air conditioner on the roof of the building.” 1 The Court explained that “ nlike the 1991 agreement, the 2002 license,” which the Court held was the “controlling” agreement, “broadly permit the lessee and all successors to use the Space for ‘an air-conditioning unit.’” 2 “There is no qualifying language limiting the use of the Space to the existing unit as defendant contends,” said the Court. 3 “Further,” noted the Court, “while the 1991 license was limited to a 10-year term and for so long as the original lessee held title to the proprietary lease, the rights set forth in the 2002 license apply to successor owners, are appurtenant to the cooperative shares and are irrevocable, supporting the practical and eventual need to replace the existing unit.” 4 The Court rejected defendants’ interpretation of the 2002 license agreement – i.e. , that the agreement required the lessee to “maintain” the unit, without reference to its replacement. 5 “This position,” said the Court, “ignores the rest of the explicit language of paragraph 2 , which is not susceptible to more than one interpretation.…” 6 The Court also rejected “defendant’s reliance on extrinsic evidence, including the 1994 and 1995 negotiations between the parties, … because parol evidence is not admissible to create an ambiguity in a clear agreement.” 7 Takeaway “The best evidence of what the parties … intend is what they say in their writing.” 8 Thus, when the contract is clear and unambiguous ( i.e. , it says what it means) and is susceptible to only one meaning, it should be enforced according to the plain meaning of those words. 9 That was the situation in Stolzman . Footnotes Slip Op. at *1. Id. at *2. Id. Id. (citing Ellington v. EMI Music, Inc. , 24 N.Y.3d 239, 244 (2014) (“Where the terms of a contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving a practical interpretation to the language employed and reading the contract as a whole”)). Id. Id. (citation omitted). Id. (citation omitted). Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). See , e.g. , W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). 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.