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By Jonathan H. Freiberger Folks sign contracts of all types that purport to contain limitations of liability; but are they enforceable.  In many cases, the answer is “yes”.  “In the absence of a contravening public policy, exculpatory provisions in a contract, purporting to insulate one of the parties from liability resulting from the party’s own negligence, although disfavored by the law and closely scrutinized by the courts, generally are enforced, subject however to various qualifications.”  Lago v. Krollage , 78 N.Y.2d 95, 99 (1991) (citations omitted).  See also Princetel, LLC, v. Buckley , 95 A.D.3d 855 (2 nd Dep’t 2012) (quoting Lago and citing to others).  “Where the language of an exculpatory agreement expresses in ‘unequivocal terms’ the intention of the parties to relieve a defendant of liability for its own negligence, the agreement will be enforced.”  Princetel , 95 A.D.3d at 855 – 56 (quoting Lago ).  Thus, “ o be enforceable, exculpatory language must be unambiguously so: it must plainly and precisely provide that the limitation of liability extends to negligence or other fault of the party attempting to shed his ordinary responsibility courts do not necessarily require that the word ‘negligence’ be used, there must be words conveying a similar import.”  Spancake v. Aggressor Fleet Ltd. , 1995 WL 322148 (S.D.N.Y. 1995) (citations, internal quotation marks and brackets omitted). However, “ ublic policy … forbids a party’s attempt to escape liability, through a contractual clause, for damages occasioned by grossly negligent conduct.”  Colnaghi, U.S.A., Ltd. V. Jewelers Protection Services, Ltd ., 81 N.Y.2d 821, 823 (1993) (citation and internal quotation marks omitted); see also S.A. De Obras y Servicios, COPASA v. Bank of Nova Scotia , 170 A.D.3d 468, 472 (1 st Dep’t 2019).  “Gross negligence” is “conduct that evinced a reckless disregard for the rights of others or smacks of intentional wrongdoing.”  Colnaghi , 81 N.Y.2d at 823 – 24 (citation and internal quotation marks omitted); see also Diniro v. Aspen Athletic Club, LLC , 173 A.D.3d 1789, 1790 (4 th Dep’t 2019). The Appellate Division, Second Department, addressed these issues on July 5, 2023, in Seti v. Carnell Associates, Inc .   The plaintiffs in Seti were home purchasers that hired Carnell Associates, Inc., a home inspection company, to conduct a prepurchase inspection of a house.  The operative contract provided that “a Carnell employee would conduct a limited visual inspection of apparent conditions in easily accessible areas, and that no warranties or guarantees were made for any latent or concealed defects.”  The contract further provided that Carnell’s liability would be limited “to the cost of the inspection.”  Plaintiff purchased the home after Carnell issued its report.   Plaintiffs commenced action against Carnell “alleging that it was grossly negligent in its inspection in that it failed to identify, among other things, termite damage and a structural defect with the concrete slab.”  Carnell moved for summary judgment dismissing the complaint and plaintiff cross-moved for summary judgment on its complaint.  The motion court granted Carnell’s motion and denied plaintiff’s cross-motion “as academic.”  The Second Department affirmed.  After discussing the general law on the subject along the lines discussed herein, the Second Department stated: Here, the inspection contract entered into by the parties limited Carnell's liability for any deficiencies in its performance to the cost of the inspection. Notwithstanding that provision of the contract, the plaintiffs allege that they are entitled to recover from Carnell the full cost of repairing the alleged defects that Carnell failed to observe during the inspection and disclose in its report, since those omissions constituted gross negligence on its part. The evidence submitted by Carnell in support of its motion was sufficient to demonstrate, prima facie, that the inspection performed in this case was not so defective as to evince a reckless indifference to the rights of others or a failure to exercise even slight care. In opposition, the plaintiffs failed to raise a triable issue of fact as to whether Carnell's alleged omissions went beyond ordinary negligence and satisfied the gross negligence standard. 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 voluntary payment doctrine bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or material mistake of fact or law. 1 Notably, there is a presumption that payments are voluntary. 2 Thus, to rebut the presumption, the plaintiff must show that he/she protested the payment. In order for a protest to be effective, it must be in writing and made at the time of payment. 3 In addition, the written protest must indicate that the plaintiff was reserving his/her rights when the payment was made 4 and must communicate as much to the party receiving the payment. 5 Moreover, “the voluntary payment doctrine does not apply when a party makes payments under economic duress or compulsion, e.g. , when a party must make payment or face the loss of possession of its property.” 6 Significantly, “ owever, a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress. It must also appear that the threatened party could not obtain the goods from another source of supply and that the ordinary remedy of an action for breach of contract would not be adequate.” 7 here,=">here," >here,  here.=">here."> . An accord and satisfaction “requires the existence of an actual dispute, manifested by a specific demand by the alleged creditor and an express, good-faith disagreement with that demand by the debtor.” 8 The “essential element of an accord and satisfaction is a clear manifestation of intent by one tendering less than full payment of an unliquidated claim that the payment has been sent in full satisfaction of the disputed claim.” 9 Notably, as relevant to today’s article, the “payment of an admitted liability is not a payment of or in consideration for an alleged accord and satisfaction of another independently alleged liability.” 10 Moreover, the acceptance of a payment in full satisfaction of a disputed claim without a reservation of rights may operate as an accord and satisfaction. 11 Notwithstanding, even under that circumstance, “there must be a clear manifestation of intent by the parties that the payment was made, and accepted, in full satisfaction of the claim.” 12 Finally, using words such as “full and final payment” or “in “settlement of” is not dispositive of the issue. 13 Whether there is unequivocal language expressing the intent of the parties is a matter for the “trier of facts, be it court or jury.” 14 On June 29, 2023, the Appellate Division, First Department addressed the foregoing issues in Pinnacle Managing Co., LLC v. Slade Industries, Inc . ( here ). 15 Slade provided elevator maintenance and repair services to about 80 to 100 buildings managed by Pinnacle and its affiliates. The written contracts between the parties stated that Slade would “systematically and regularly examine, adjust, repair, replace and lubricate, as required, components” of the elevators. According to the complaint (as well as the briefing on appeal), Pinnacle terminated Slade in late November 2017, after determining that its prices were too high. Prior thereto, Pinnacle directed Slade to present all of its unpaid invoices for review, consideration and approval. Having done as requested, Pinnacle paid Slade $312,709.76, representing payment of all Slade’s outstanding invoices in full satisfaction of the monies owed to Slade. At the time of payment, there was no reservation of rights by plaintiff. Approximately two months after Slade was paid and terminated, Pinnacle allegedly learned that Slade had failed to lubricate some elevators on a regular basis, requiring extensive repair work in six of Pinnacle’s buildings. Pinnacle brought the action to recover the damages allegedly sustained as a result of Slade’s failure to properly service and maintain Pinnacle’s elevators in an amount not less than $135,000. In its complaint, plaintiff asserted claims for breach of contract, negligence, and unjust enrichment. The motion court dismissed the latter two claims on a pre-answer motion to dismiss.  Thereafter, Slade filed an answer in which it denied all the material allegations in the complaint and alleged that Pinnacle’s payment of $312,709.76 was “in full satisfaction of the indebtedness owing to Slade.” In addition to the foregoing, Slade asserted three affirmative defenses and two counterclaims. The first affirmative defense alleged that “the doctrine of accord and satisfaction bar plaintiffs’ claims.” The second affirmative defense stated that “Plaintiff’s claim ha been compromised or settled.” The final affirmative defense alleged that “Slade, at all times, performed for plaintiff consistent with its contractual obligations.”  In its first counterclaim, Slade alleged that “if this Court does not enforce Slade’s accord and satisfaction defense, then seek judgment against Pinnacle for the balance owing to Slade for the performance of services.” In its second counterclaim, Slade sought legal fees.  Following discovery, defendant moved for summary judgment. The motion court denied the motion, holding that defendant “neither” established “‘accord and satisfaction’ nor ‘voluntary payment’, as a matter of law.” With respect to the voluntary payment doctrine, the motion court found that plaintiff “raised an issue of fact whether it had full knowledge of the extent to which defendant performed the contracted for services at the time it rendered payment of the invoices for such services.”  As for accord and satisfaction, the motion court agreed with plaintiff that payment of an admitted liability is not payment or of in consideration for an alleged accord and satisfaction of another independently alleged liability. The motion court explained that plaintiff sought approximately $100,000 in damages for breach of contract, thus admitting that approximately $212,000 of the amount it remitted was compensation defendant earned for services performed. The motion court also found that defendant failed to establish “‘unequivocal language expressive of intent’ on the part of plaintiff that it made payment of the invoices only on condition that defendant accepted same in full satisfaction of any dispute between the parties.” The First Department unanimously affirmed. Regarding the voluntary payment doctrine, the Court found that “the record present issues of fact as to whether plaintiff rendered payment without full knowledge of the facts.” 16 The Court explained that “ laintiff presented evidence showing that it paid defendant before plaintiff obtained information indicating that defendant had breached its contractual obligations, thus raising a triable issue of fact regarding whether plaintiff had full knowledge of the facts.” 17 As to accord and satisfaction, the Court found that “the record lacked unequivocal language expressing intent that plaintiff paid in satisfaction of an ongoing dispute between the parties when it paid the invoices supplied by defendant in full.” 18 The Court explained that the “record not show any genuine controversy concerning the amount due, and defendant did not produce any records or documents evincing an express agreement between the parties that plaintiff’s payment constituted a settlement of any claims. 19 Takeaway The voluntary payment doctrine provides that a person cannot recover payments made with full knowledge of the facts, and in the absence of fraud or material mistake of fact or law. The doctrine is an affirmative defense to the repayment of money to which the defendant presumably has no legal claim. It is not an independent cause of action.  In Pinnacle , the record did not support application of the doctrine. There were issues of fact as to whether plaintiff made the payment to Slade will full knowledge of the facts. This was especially so, as noted by the First Department, given the evidence that plaintiff submitted showing that it paid Slade before it learned that Slade had allegedly breached its contractual obligations. Accord and satisfaction is an affirmative defense that must be proven by the party asserting the claim. 20 To establish the defense, the party asserting it must establish that there is a disputed unliquidated claim between the parties which they have mutually resolved through a new contract discharging all or part of their obligations under the original contract. 21 In Pinnacle , the record lacked unequivocal language expressing the parties’ intent that plaintiff paid in full satisfaction of an ongoing dispute between the parties when it paid the invoices supplied by defendant. In fact, as noted by the First Department, the record did not show any genuine controversy concerning the amount due, and lacked any evidence evincing an express agreement between the parties that plaintiff’s payment constituted a settlement of any claims.  Footnotes Dubrow v. Herman & Beinin , 157 A.D.3d 620 (1st Dept. 2018) (citation and quotation marks omitted). See 82 N.Y. Jur. 2d, Payment and Tender, § 82. See Nunner v. Newburgh City School Dist. , 92 A.D.2d 888 (2d Dept. 1983). DRMAK Realty LLC v. Progressive Credit Union , 133 A.D.3d 401, 405 (1st Dept. 2015). C.f. Walton v New York State Dept. of Correctional Servs. , 13 N.Y.3d 475, 489 (2009) (noting that “the protest requirement would have been fulfilled by a letter to MCI,” the entity levying the charge, “and DOCS,” the entity receiving commission for that charge “at the time the bills were paid”). Rocky Knoll Estates MHC, LLC v. C W Capital Asset Mgmt., LLC , 2015 WL 1632637, at *2 (W.D.N.Y. Apr. 13, 2015); see also U.S. Bank Nat. Ass’n v. PHL Variable Ins. Co. , 2014 WL 2199428, at *10 (S.D.N.Y. May 23, 2014) (voluntary payment doctrine does not apply “where payments were necessary in order to preserve property or protect his business interests”). Austin Instr. v. Loral Corp. , 29 N.Y.2d 124, 130 (1971). See also Oleet v. Pennsylvania Exch. Bank , 285 A.D. 411, 414-15 (1st Dept. 1955). Rosenthal v. Quadriga Art, Inc. , 105 A.D.3d 507, 508 (1st Dept. 2013). Complete Messenger & Trucking Corp. v. Merrill Lynch Money Markets, Inc. , 169 A.D.2d 609, 611 (1st Dept. 1991). Manley v. Pandick Press, Inc. , 72 A.D.3d 452 (1st Dept. 1980). Nationwide Registry & Security Ltd. v. B&R Consultants, Inc. , 4 A.D.3d 299, 300 (1st Dept. 2004). Id. Equitable Tower Assocs. v. Asarco Inc. , 127 A.D.2d 456, 457 (1st Dept. 1987); Rosenthal v. Quadriga Art, Inc. , 105 A.D.3d 507, 508 (1st Dept. 2013). Manley , 72 A.D.3d at 458. Pinnacle Managing Co., LLC v. Slade Indus., Inc. , 2023 N.Y. Slip Op. 03558 (1st Dept. June 29, 2023) ( here ). Slip Op. at *1 (citing, Dillon v. U-A Columbia Cablevision of Westchester , 100 N.Y.2d 525, 526 (2003); New York Eye & Ear Infirmary v. Bowne , 200 A.D.3d 467 (1st Dept. 2021)). Id. (citing, Dubrow , 171 A.D.3d at 673 ; Rite Aid of N.Y., Inc. v. Chalfonte Realty Corp. , 105 A.D.3d 470 (1st Dept. 2013)). Id. (citing, Rosenthal v. Quadriga Art, Inc. , 105 A.D.3d 507, 507-508 (1st Dept. 2013)). Id. (citing, EchoStar Satellite L.L.C. v. ESPN, Inc. , 79 A.D.3d 614, 619 (1st Dept. 2010)). 19 N.Y. Jur. 2d, Compromise, Accord, and Release, § 26. 6 Corbin, Contracts, § 1276; Restatement, Contracts 2d, § 281; Merrill Lynch Realty/Carll Burr, Inc. v Skinner , 63 N.Y.2d 590, 596 (1984). 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 the law, the perpetration of a fraud can be the great equalizer between winning and losing a case. For example, a court may relieve a party from the effects of a judgment against it upon, among other things, proof that the judgment was the result of the fraud, misrepresentation, or misconduct by an adverse party. Similarly, a court may exercise its inherent power over its judgments to relieve a party from a judgment obtained through, among other things, fraud and mistake. Additionally, a stipulation or a settlement agreement can be set aside in the face of fraudulent behavior. The examples in which fraud may relieve a party of the consequences of its pleadings and/or actions are too many to discuss here. Suffice it to say, the perpetration of a fraud can neutralize the effects of a party’s inartful pleadings and/or actions. In EPAC Tech. Ltd. v. Interforum S.A. , 2023 N.Y. Slip Op. 03543 (1st Dept. June 29, 2023) ( here ), the Appellate Division, First Department considered whether the plaintiff adequately alleged fraud to overcome the economic interest defense (which plaintiff actually pleaded in its operative complaints) in a tortious interference with contract action. As discussed below, the Court held that plaintiff satisfied its burden. In Barlow v. Skroupa , 2023 N.Y. Slip Op. 03541 (1st Dept. June 29, 2023) ( here ), the First Department examined the particularity requirement under CPLR § 3016(b). In particular, the Court examined the falsity element of the claim and whether plaintiffs’ group pleading satisfied CPLR § 3016(b). As discussed below, the Court held that plaintiffs failed to meet their burden. EPAC Tech. Ltd. v. Interforum S.A. As noted, EPAC involved a claim for tortious interference with contractual relations. It is well settled that a person “who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.” To plead a claim for tortious interference with contractual relations, “the plaintiff must show the existence of its valid contract with a third party, defendant’s knowledge of that contract, defendant’s intentional and improper procuring of a breach, and damages.” “In response to such a claim, a defendant may raise the economic interest defense—that it acted to protect its own legal or financial stake in the breaching party’s business.” However, “‘an interferer acting to protect its own direct interests, rather than its interests in the breaching party, may not raise the economic interest defense.’” The defense has been applied, for example, where defendants were significant stockholders in the breaching party’s business; where defendant and the breaching party had a parent-subsidiary relationship; where defendant was the breaching party’s creditor; and where the defendant had a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff. A plaintiff can overcome the economic interest defense by alleging that the interference was procured by malice or improper means. “For purposes of a claim of tortious interference with business relations, misrepresentation constitutes an improper means.” The court may dismiss a tortious interference claim on the basis of the economic interest defense at the pleading stage where the defense is apparent from the face of the complaint. Background EPAC arose from a Master Facility Development and Services Agreement (“the Agreement”) between Plaintiff EPAC Technologies Ltd. (“EPAC”) and Interforum S.A. (“Interforum”) and Editis S.A. (“Editis”) (collectively the “Editis Defendants”), pursuant to which EPAC agreed to provide state-of-the-art, on-demand printing services (the “Online Production” system) at a French facility. Because the development and installation of the system would take time, the parties contemplated that EPAC would produce books using a less efficient printing system (the “Micro-Inventory Production”) as an interim measure. The Agreement further provided that, once the Online Production system became operational, EPAC would be paid in accordance with a variable pricing formula tethered to EPAC’s “fixed and variable costs during applicable periods with allowed adjustments.” Due to various installation delays and other problems, the parties amended the Agreement to, among other things, extend the installation phase of the deal through July 1, 2019, and delay variable price adjustments to February 1, 2020. At the time the parties entered the Agreement, Editis and Interforum were owned by Planeta Corporacion S.R.L. On January 31, 2019, Vivendi announced that it closed on the purchase of Editis, which owns Interforum. Bolloré owns 27% of Vivendi’s shares, including 30% of its voting shares. After the acquisition, Vivendi and Bolloré took over operational control of the Agreement. According to plaintiff, once Vivendi and Bolloré took control over the Editis Defendants’ performance under the Agreement, they undermined and interfered with it. For example, they allegedly (a) demanded that Editis fabricate complaints about plaintiff’s performance and costs; (b) tried to convince EPAC to revise the Agreement by claiming that Vivendi and/or Bolloré would soon increase their portfolio in European publishing, which would provide EPAC with a massive increase in printing work in France and throughout Europe – if EPAC agreed to price concessions; and (c) tried to convince EPAC that the Editis Defendants could withhold payments under the Agreement based on French tax law. EPAC commenced the action against the Editis Defendants, alleging breach of contract. The Editis Defendants answered and counterclaimed. On July 20, 2021, EPAC filed its first amended complaint, adding claims against Vivendi and Bolloré for tortious interference with contractual relations. On September 30, 2021, Vivendi moved to dismiss the complaint for want of personal jurisdiction and failure to state a claim. Bolloré also moved on those bases. EPAC opposed both motions. Also on September 30, 2021, the Editis Defendants filed an answer to the complaint, pleading counterclaims for fraudulent inducement, breach of contract, and wrongful termination. In response, EPAC moved to dismiss the fraudulent inducement counterclaim. The motion court granted the Vivendi and Bolloré motions, finding, among other things, that given Vivendi’s and Bolloré’s ownership interests in the Editis Defendants, each had an economic interest in the Agreement such that the economic interest doctrine applied, thereby allowing Vivendi and Bolloré to protect their own legal or financial stake in the Editis Defendants’ business. The motion court rejected plaintiff’s arguments that Vivendi and Bolloré could not rely on the economic interest defense because they had acted to further their own interests, not their interests in the Editis Defendants, and because they had acted maliciously and employed fraudulent means. The motion court also dismissed the Editis Defendants’ fraudulent-inducement counterclaim for failure to satisfy the particularity requirement of CPLR § 3016(b). EPAC also had moved to dismiss the counterclaim on the grounds that: (1) the claim was duplicative of the breach of contract counterclaim; and (2) it was “barred by the Agreement’s boilerplate merger clause.” The motion court entered judgment on these claims on July 21, 2022. The First Department’s Decision On appeal, the First Department “unanimously reversed, on the law,” vacated the judgment, reinstated the tortious interference with contract claim, and “remanded for further proceedings.” The Court held that “ laintiff stated a valid claim against and Vivendi … for tortious interference with a contract.” The Court noted that “ lthough plaintiff’s own allegations established that Vivendi and Bolloré ‘acted to protect own legal or financial stake in the breaching part business,’ thereby invoking the economic interest defense …, it also alleged facts sufficient to overcome this defense.…” These facts, said the Court, included that “Vivendi and BollorÉ instructed the breaching parties to employ fraudulent or illegal renegotiation tactics — including lying about their desire to acquire additional publishers, fabricating complaints about plaintiff’s performance, and feigning concern about inapplicable French tax withholding requirements.…” The Court also found that plaintiff “demonstrated malice by instructing nonpayment of monies duly owed.” The Court further found that “ laintiff’s allegations of interference and causation with respect to BollorÉ were likewise sufficient.” Regarding the fraudulent inducement counterclaim, the Court held that the motion court properly dismissed the claim, noting that the Editis Defendants failed to satisfy the scienter element of the claim: “The fraudulent inducement counterclaim was properly dismissed for failure to sufficiently allege facts from which it may be reasonably inferred that plaintiff knew its representations regarding its projected costs were inaccurate when made.” The Court also held that the Editis Defendants failed to satisfy the justifiable reliance element of the claim: “ he Editis Defendants’ argument that these facts are peculiarly within the knowledge of plaintiff is unavailing in view of the absence of any allegations that they undertook any due diligence to verify the cost projections (or took other steps to protect themselves) — thereby negating any claim of justifiable reliance.” “In view of the foregoing,” said the Court, the Court declined to address “the parties’ arguments with respect to whether the fraudulent inducement counterclaim was duplicative of the breach of contract counterclaim and/or was barred by the agreement’s merger clause.” Barlow v. Skroupa As noted, Barlow concerned the particularity requirement of CPLR § 3016(b). In particular, it concerned pleading a false statement or omission and the practice of group pleading. To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Importantly, “ o fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Significantly, “ claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).” Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Notwithstanding, the Court of Appeals has explained that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. If “sufficient factual allegations of even a single element are lacking,” the claim must be dismissed. It follows from the foregoing that group pleading, in which the plaintiff fails to attribute false statements to a particular defendant, does not meet the requirements of CPLR § 3016(b). In fact, New York courts have dismissed complaints on particularity grounds, where a complaint lumps together numerous defendants without differentiation. Background As a general matter, Barlow involved a failure to pay plaintiffs for services rendered to defendant Inspire Summits LLC, which does business as Skytop Strategies. According to plaintiffs, defendants Skytop, Christopher Skroupa, David Katz and Paula Luff engaged in fraudulent activity in which they induced consultants and employees to work for prolonged periods and provide substantial services to Skytop without payment of contractual fees, wages, commissions, bonuses, overtime, costs of reimbursable health insurance, and reimbursable business expenses. Plaintiffs originally brought the action alleging a breach of contract by defendants Skytop and Skroupa, plus related claims. Plaintiffs amended the complaint multiple times thereafter; the operative complaint was before the First Department. In the complaint, plaintiffs added parties and causes of action, including fraud, claims under General Business Law § 350 and unspecified sections of the Labor Law, equitable claims, and intentional infliction of emotional distress, based on Skytop’s alleged failure to pay its employees and contractors, overcharging participants in its conferences, and related conduct. Defendants Katz and Luff moved to dismiss all claims pleaded against them. Plaintiffs cross-moved to amend the complaint, submitting a proposed fourth amended class action complaint. Defendants Katz and Luff opposed the cross-motion. Defendants argued that plaintiffs failed to identify any particular statement(s) that either defendant may have made. Instead, according to the moving defendants, plaintiffs generally referred to “Defendants.” Similarly, said defendants, plaintiffs failed to identify the particular plaintiff to whom such unidentified statement(s) may have been made. In fact, defendants argued that plaintiffs did not even attempt to explain how the undifferentiated group of defendants purportedly did so. The motion court granted defendants’ motion to dismiss. The motion court held that plaintiffs failed to credit Katz or Luff with any fraudulent statements. Instead, noted the motion court, “ laintiffs rest on their allegations that ‘defendants’ made material misrepresentations and fraudulent omissions to plaintiffs.” The motion court explained that “ he failure to distinguish among the various defendants regarding which misrepresentations and omissions each defendant made to each plaintiff, when, and where is ‘improper group pleading.’” “By pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to particular defendants,” said the motion court, “plaintiffs deprive defendants of the notice regarding ‘the material elements of each cause of action’ to which defendants are entitled under CPLR 3013.” Moreover, concluded the motion court, “ y referring to all defendants together, plaintiffs … fail to plead their fraud claim with the particularity required by CPLR 3016(b).” The First Department’s Decision On appeal, the First Department unanimously affirmed, holding that “Supreme Court properly dismissed that claim, as plaintiffs failed to plead fraud with particularity as required under CPLR 3016(b).” The Court explained that “ he complaint fail to identify any specific and material misrepresentation of fact by either Katz or Luff, and offered only general and conclusory allegations that they made ‘false representations’ regarding Skytop’s revenues and its ability to pay wages and benefits.” ____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See CPLR § 5015(a)(3); Oppenheimer v. Westcott , 47 N.Y.2d 595, 602-604 (1979). Matter of McKenna v. County of Nassau, Off. of County Attorney , 61 N.Y.2d 739, 742 (1984) (internal quotation marks and citation omitted). E.g. , Hallock v. State of New York , 64 N.Y.2d 224, 230 (1984); McCoy v. Feinman , 99 N.Y.2d 295, 302 (2002); Matter of Alsaede v. Kelly , 96 A.D.3d 495, 496 (1st Dept. 2012). White Plains Coat & Apron Co., Inc. v. Cintas Corp. , 8 N.Y.3d 422, 425 (2007)) (quoting, Restatement (Second) of Torts § 766). Id. at 426. Id. Hudson Bay Master Fund Ltd. v. Patriot Nat’l, Inc. , 2019 WL 1649983, at *16 (S.D.N.Y. Mar. 28, 2019) (quoting, Bausch & Lomb Inc. v. Mimetogen Pharms., Inc. , 2016 WL 2622013, at *11 (W.D.N.Y. May 5, 2016)); see also Foster v. Churchill , 87 N.Y.2d 744 (1996); UMG Recordings, Inc. v. Escape Media Grp., Inc. , 37 Misc. 3d 208, 224 (Sup. Ct., N.Y. County 2012). Felsen v. Sol Cafe Mfg. Corp. , 24 N.Y.2d 682, 687 (1969); Morrison v. Frank , 81 N.Y.S.2d 743 (1948); see also Foster , 87 N.Y.2d at 751. American Protein Corp. v. AB Volvo , 844 F.2d 56, 63 (2d Cir 1988), cert. denied , 488 U.S. 852 (1988); WMW Mach. Co. v. Koerber AG. , 240 A.D.2d 400, 401 (2d Dept. 1997); Koret, Inc. v. Christian Dior, S.A. , 161 A.D.2d 156, 157 (1st Dept. 1990), lv. denied , 76 N.Y.2d 714 (1990). Ultramar Energy v. Chase Manhattan Bank , 179 A.D.2d 592, 592-593 (1st Dept. 1992). Don King Prods., Inc. v. Smith , 47 Fed. App’x 12 (2d Cir 2002). See UMG , 37 Misc. 3d at 225; Green Star Energy Solutions, LLC v. Edison Props., LLC , 2022 U.S. Dist. LEXIS 196738, at *48-49, 2022 WL 16540835, at *16 (S.D.N.Y. Oct. 28, 2022). Id. (citing, Carvel Corp. v. Noonan , 3 N.Y.3d at 191; Krinos Foods, Inc. v. Vintage Food Corp. , 30 A.D.3d 332, 333 (1st Dept. 2006)). See , e.g. , Johnson v. Cestone , 162 A.D.3d 526, 527 (1st Dept. 2018). Slip Op. at *1. Id. Id. (quoting, White Plains , 8 N.Y.3d at 426). Id. (citations omitted). Id. Id. Id. at *2-*3 (citing, Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 71-72 (1st Dept. 2017)). Id. at *3 (citing, MMCT, LLC v. JTR Coll. Point, LLC , 122 A.D.3d 497, 498 (1st Dept. 2014); Abrahami v. UPC Constr. Co. , 224 A.D.2d 231, 234 (1st Dept. 1996)). Id. Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017). Id. ; Meiterman v. Corp. Habitat , 173 A.D.3d 593, 594 (1st Dept. 2019). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Antigenics Inc. v. U.S. Bancorp Piper Jaffray, Inc. , 2004 WL 51224, at *3 (S.D.N.Y. Jan. 9, 2004) (quoting, In re Initial Public Offering Sec. Litig. , 241 F. Supp. 2d 281, 327 (S.D.N.Y. 2003)). Pludeman , 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Id. at 492. Id. RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting, Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). Person v. PSI Sys., Inc. , 73 Misc. 3d 1220(A) (Sup. Ct., N.Y. County Npv. 16, 2021). E.g. , Principia Partners LLC v. Swap Fin. Group, LLC , 194 A.D.3d 584, 584 (1st Dept. 2021); Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co. , 84 A.D.2d 736 (1st Dept. 1981) (affirming a dismissal of a complaint where the claims were “pleaded against all defendants collectively without any specification”); Ritchie v. Carvel Corp. , 180 A.D.2d 786, 787 (2d Dept. 1992) (“allegations of fraud that refer only to the ‘defendants’ without connecting particular misrepresentations to the particular defendants are insufficient”); Excel Realty Advisers LP v. SCP Capital, Inc. , 2010 N.Y. Slip Op. 33447 (U) (Sup Ct. Nassau Co. Dec. 2, 2010), aff’d. , 101 A.D.3d 669 (2d Dept. 2012) (dismissing fraud claim “primarily based upon a series of oblique averments which . . . lump the defendants together without any specification as to the precise fraudulent conduct attributed to each….”). Principia="Principia" Partners="Partners" here.=">here."> Slip Op. at *1 (citation omitted). Id. at *1-*2 (citing, Principia Partners , 194 A.D.3d at 584).

By Jonathan H. Freiberger Because there have been a number of appellate decisions interpreting RPAPL 1304 , this Blog has written frequently on that topic.  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .   By way of background, and as previously noted in the Blog, RPAPL 1304 requires that at least ninety days before commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a “lender, assignee or mortgage loan servicer” must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that offer free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  Many cases we have treated relate to the sufficiency of proof presented to demonstrate compliance with RPAPL 1304.  See, e.g., < here =">here"> and < here =">here"> . On June 28, 2023, the Appellate Division, Second Department, decided two more RPAPL 1304 cases related to the sufficiency of proof presented by the lender. Ditech Servicing, LLC v. McFadden Borrower borrowed approximately $400,000.00 from GMAC Mortgage Corp. secured by a mortgage on real property.  Ocwen Loan Servicing, LLC, GMAC’s successor in interest, commenced a foreclosure action against borrower, who, in his answer, asserted defenses based on lender’s failure to comply with, inter alia , RPAPL 1304.   Owen Loan Servicing moved, inter alia , for summary judgment on its complaint, to strike borrower’s answer and to substitute Ditech Servicing, LLC as plaintiff.  The motion court granted the motion to the extent of substituting Ditech as plaintiff, but denied the remainder of the motion. Thereafter, lender renewed its motion for summary judgment and to strike borrower’s answer. Borrower cross-moved to dismiss the complaint for failure to, inter alia , comply with RPAPL 1304.  In support of the motion, lender: submitted an affidavit of Richard J. Schwiner, a loan analyst employed by Ocwen Financial Corporation …, "whose indirect subsidiary is the original named plaintiff in this action, ." Throughout his affidavit, Scwhiner referred to Ocwen Servicing exclusively as "Ocwen." Schwiner stated that he was familiar with the records and record-keeping practices of Ocwen Servicing, and that its records had incorporated GMAC's prior records for the subject loan.  Regarding Ocwen Servicing's compliance with RPAPL 1304 …, Schwiner stated, inter alia, that " t was the practice, policy, and procedure of Ocwen to contemporaneously enter a notation into the account notes of borrowers once the 90-Day Notice letters were sent by regular and certified mail." He stated that Ocwen Servicing's business records showed that such a contemporaneously entered notation was entered on March 14, 2013, showing that the RPAPL 1304 notice was sent to the defendant in accordance with New York State law. Schwiner attached the business records upon which he relied to his affidavit.  By Order dated March 6, 2020, the motion court granted lender’s motion for summary judgment and to strike borrower’s answer and denied borrower’s cross-motion.  On the same day, the motion court also issued another order granting the same relief and appointing a referee to compute.  Borrower appealed both orders. The Second Department modified the first order by denying lender’s motion.  In so doing, the Court agreed with borrower that lender failed to demonstrate compliance with RPAPL 1304 and stated: In support of its motion, the plaintiff submitted, among other things, a copy of a 90-day notice dated March 14, 2013, addressed to the defendant at the address of the mortgaged premises. However, the copy of the notice contains no indication that it was sent by registered or certified mail, or by first-class mail. Nor is there a copy of any United States Post Office document indicating that the notice was sent by registered or certified mail as required by the statute. Although Schwiner stated his purported familiarity with the records and record-keeping practices of Ocwen Servicing, this carried no probative value, as Schwiner never stated that he worked for that entity. Schwiner further represented that Ocwen Servicing was an "indirect subsidiary" of his employer, Ocwen Financial; however, he failed to explain why that would have made him privy to the record-keeping practices utilized by Ocwen Servicing at the time that the 90-day notice was allegedly sent, which was more than 5 ½ years before Schwiner executed his affidavit. Morever, Schwiner did not attest to having any personal knowledge of, or familiarity with, Ocwen Servicing's actual standard mailing procedures during the relevant time period, which were designed to ensure that items are properly addressed and mailed. Accordingly, Schwiner's assertion in his affidavit that the RPAPL 1304 notice was sent to the defendant on March 14, 2013, at the address of the mortgaged premises, "by registered or certified and first-class mail," was unsubstantiated and conclusory.  (Citations, internal quotation marks and brackets omitted.) The Court also determined that the motion court properly denied borrower’s cross-motion because he failed to “affirmatively demonstrate that did not comply with RPAPL 1304….”  (Citation omitted.) MTGLQ v. Cacioppo Lender commenced an action to foreclose a mortgage and moved for summary judgment on its complaint and to strike borrower’s answer.  Borrower opposed the motion, and cross-moved to dismiss the complaint, for failure to comply with RPAPL 1304.  The motion court denied lender’s motion and granted borrower’s cross-motion.  On lender’s appeal, the Second Department modified and denied lender’s motion and, in so doing, stated: Here, the plaintiff failed to establish, prima facie, that it strictly complied with RPAPL 1304. The plaintiff submitted a detailed affidavit of mailing from an assistant secretary of loan documentation at Rushmore Loan Management Services, LLC (hereinafter Rushmore), which demonstrated that the RPAPL 1304 notices had been mailed in accordance with the statute. However, this affidavit failed to demonstrate that Rushmore had the authority to service the loan at the time that it mailed the RPAPL 1304 notices to the defendant, and this record presents triable issues of fact as to whether Rushmore had this authority.  The Court also held that borrower’s cross-motion should have been denied because borrower’s “bare denial of receipt of the RPAPL 1304 notice was insufficient to establish her prima facie entitlement to judgment as a matter of law, and she did not carry her burden in moving for summary judgment by pointing to the gaps in the plaintiff's proof.  (Citations, internal quotation marks and brackets omitted.)

By: Jeffrey M. Haber On many occasions, we have written about Ponzi schemes that have been the subject of enforcement actions brought by, and/or settlements with, the Securities and Exchange Commission (“SEC” or the “Commission”). E.g ., here , here , here , and here . It never ceases to amaze us how often people try to run a Ponzi scheme and do so by exploiting the trust and friendship that exist in groups of people who have something in common, such as a religious group, an ethnic group, or an immigrant community – also known as affinity fraud. 1 here,=">here," >here.=">here."> Today, we examine two enforcement actions brought by the SEC involving Ponzi schemes , one of which also targeted the Haitian-American community. SEC v. Royal Bengal Logistics, Inc. On June 26, 2023, the SEC announced (here) that it brought charges against Sanjay Singh, a resident of Broward County, Florida, and his trucking and logistics company, Royal Bengal Logistics Inc. (“RBL”), for fraudulently raising approximately $112 million from as many as 1,500 investors through an unregistered securities offering that primarily targeted Haitian Americans. See SEC v. Royal Bengal Logistics, Inc., et al. , Case 0:23-cv-61179-AHS (S.D. Fla. 2023). According to the SEC, since at least August 2019, defendants operated a Ponzi scheme and affinity fraud, which targeted South Florida’s Haitian-American community. As explained in the SEC’s complaint (here), defendants offered high-yield investment programs that purportedly generated 12.5% to 325% of “guaranteed” returns.  The SEC claimed that defendants promised investors their money would be used to grow RBL’S operations and increase RBL’S fleet of semi-trucks and trailers. Among other things, defendants allegedly assured investors and prospective investors that their investment programs were safe, that RBL’S business did not depend on investor funds because it generated up to $1,000,000 per month, and that they had a fleet of over 200 semi-trucks. The SEC alleged that, in truth, for almost four (4) years, RBL had been operating at a loss of over $18 million. Without sufficient revenue to pay returns owed to investors, said the SEC, defendants used approximately $70 million of new investor money to pay promised returns and redemptions to existing customers. In addition, Singh allegedly misappropriated at least $14 million of investor funds for himself and others, including the relief defendants (defined below), who did not provide any legitimate services for those investor funds. Defendants also allegedly diverted over $19 million to two brokerage accounts controlled by Singh, who allegedly engaged in highly speculative equities trading on margin, ultimately losing more than $1 million of investor money. The SEC alleged that defendants did not disclose to investors and prospective investors their misappropriation of investor funds. Nor, said the SEC, did they disclose that investor funds would be used to trade hundreds of millions of dollars in equities on margin. The SEC claimed that, as of February 2023, RBL’S bank accounts had declined to approximately $2.1 million. The SEC further claimed that RBL would be be unable pay the interest and principal owed to hundreds of investors absent an influx of new investor money in perpetuation of the scheme. “As alleged in our complaint, Singh targeted many members of the Haitian-American community to raise money in a Ponzi-like scheme to enrich himself,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “We are committed to holding accountable individuals like Singh who prey on investors through lies and deceit.” The SEC filed its complaint in the United States District Court for the Southern District of Florida. The Commission charged defendants with violating the registration and anti-fraud provisions of the federal securities laws. The complaint also named Singh’s spouse and the spouse of RBL’s Vice President of Business Development as relief defendants.  The Court granted the SEC’s request for emergency relief, including preliminary injunctive relief, asset freezes, the appointment of a receiver, and an order prohibiting the destruction of documents. The SEC is also seeking an officer and director bar against Singh and permanent injunctions, civil money penalties, and disgorgement of ill-gotten gains with prejudgment interest against both of the defendants and the relief defendants. SEC v. Baston On June 23, 2023, the SEC brought charges against Wilson Baston (a/k/a Chanon Gordon) for defrauding numerous investors in a Ponzi scheme, in which he raised millions of dollars through dozens of transactions purportedly to fund real estate investments, but frequently used the money to instead pay off earlier investors and for personal expenses. See SEC. v. Baston , Case 1:23-cv-05347 (S.D.N.Y. 2023). As noted, Baston involved a Ponzi scheme. It was conducted by defendant, a convicted felon who allegedly used the alias “Chanon Gordon” to conceal his true identity and criminal history while raising millions of dollars in investments from dozens of his investors. According to the SEC, since at least 2018, Defendant solicited more than $10 million in investments based on the false representation that his purported business, the Gordon Management Group (“GMG”), would use investor funds for real estate-related transactions and repay investors, with substantial interest, using the profits from such transactions. The SEC alleged that, contrary to defendant’s representations, defendant did not use investors’ funds as promised and instead used a substantial portion of the funds to pay for unrelated expenses and to make payments to other investors in a Ponzi-like manner. The SEC said that in many instances, defendant issued promissory notes to investors that memorialized their investments in GMG. Defendant allegedly raised at least approximately $4 million through transactions involving notes. Pursuant to these notes and related documents, said the SEC, defendant often represented that he and GMG would use investors’ funds to facilitate real estate transactions through (i) the advancement of closing costs to third-party real estate purchasers or (ii) the making of a down payment to secure a sales contract on a particular property and resell it to a third-party purchaser. According to the SEC, defendant typically promised to repay investors their principal with a high rate of interest equal to up to 25% of the principal within weeks of their investments. In some instances, said the SEC, defendant also purported to pledge collateral to the investors that he either did not own or significantly overvalued. The SEC also alleged that defendant offered investment contracts in some cases, in which he agreed to pay investors a percentage of net profits (with a guaranteed minimum) on the relevant real estate transaction, in addition to a fixed rate of interest on their principal. As explained by the SEC in its complaint ( here ), to carry out his scheme, defendant used bank accounts in the name of GMG. For example, noted the SEC, defendant directed that investors transmit their funds to GMG accounts and accessed GMG accounts to use such funds for cash withdrawals, personal expenses, and repayments to other investors. The SEC further alleged that, with little cash left in GMG accounts, defendant resisted repaying investors their promised principal, interest, and/or guaranteed share of purported transaction profits. After providing various excuses for delays in repayments, said the SEC, defendant allegedly stopped responding to communications from several investors, who had lost large amounts of money as a result of defendant’s fraudulent conduct. “As we allege in our complaint, deceived investors by using an alias to conceal his criminal history and by initially making payments to create the false appearance of a successful investment strategy,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “This case is yet another example of the SEC’s constant efforts to stop those who profit from lies at the expense of investors.” The SEC filed its complaint in United States District Court for the Southern District of New York. The Commission charged defendant with violating the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. The SEC seeks permanent injunctive relief; disgorgement plus prejudgment interest; a civil penalty; a conduct-based injunction, which, among other things, would prohibit his future participation in the sale of promissory notes and investment contracts; and an officer and director bar. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against defendant ( here ). The government charged defendant with one count of wire fraud and one count of securities fraud, which, if convicted, carries a maximum sentence of 20 years in prison for each count, and one count of aggravated identity theft, which, if convicted, carries a two-year mandatory sentence in addition to any sentence imposed.  Commenting on the indictment ( here ), 2 U.S. Attorney Damian Williams said: “As alleged, used a fake name to conceal his prior convictions and to solicit more than $10 million as part of a series of brazen real estate scams against innocent New Yorkers.  Today’s arrest demonstrates this Office’s commitment to stopping recidivist fraudsters like and to seeking justice for victims of financial frauds.” FBI Assistant Director in Charge Michael J. Driscoll also comments, stating: “As alleged, the defendant ran a fraudulent scheme which used funds intended for real estate investment to repay other investors or use on lavish personal expenses.  This fraud, like many Ponzi schemes, guaranteed large returns on investment, but proved too good to be true.”  Footnotes In 2014, the SEC issued an investor alert about affinity fraud. The alert can be found here . It is important to remember that the charges in the indictment ( here ) are merely accusations, and defendant is presumed innocent unless and until proven guilty. 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 Section 10(a) of the Federal Arbitration Act (“FAA”), a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 1 Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. 2 Importantly, the doctrine does not apply to the facts. 3 Application of the doctrine is limited. 4 It is a doctrine of last resort. 5 It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. 6 The doctrine is “limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” 7 To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. 8 Essentially, the movant must show that the arbitrator “willfully flouted the governing law by refusing to apply it.” 9 The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” 10 The Appellate Division, First Department recently examined the manifest disregard doctrine in Matter of Scientific Games Corp. v. Mohawk Gaming Enterprises LLC , 2023 N.Y. Slip Op. 03423 (1st Dept. June 22, 2023) ( here ). As discussed below, the Court held that the arbitrator did not manifestly disregard the law in holding that the arbitration clause agreed upon by the parties permitted class treatment of plaintiffs’ claims. e.g., the facts and arguments) comes from the parties’ briefing on appeal.> e.g., the facts and arguments) comes from the parties’ briefing on appeal.> Scientific Games concerned the lease by plaintiffs Light & Wonder, Inc. (f/k/a Scientific Games Corporation) and LNW Gaming, Inc. (f/k/a SG Gaming, Inc.) (together, “LNW” or “plaintiffs”) of automatic card shufflers to defendant Mohawk Gaming Enterprises LLC (“Mohawk”), which used them in its casino. On November 9, 2020, Mohawk filed a class arbitration claim with the American Arbitration Association (“AAA”) alleging antitrust violations against LNW on behalf of itself and all other similarly situated consumers. Among other things, plaintiffs alleged that LNW charged consumers ( i.e. , casinos) supracompetitive prices for inferior products. Plaintiffs maintained that the agreement with Mohawk allowed their claims to be brought in arbitration as a class action. In this regard, the arbitration clause provided: “The parties agree that any and all controversies, disputes or claims of any nature arising directly or indirectly out of or in connection with this Agreement (including without limitation claims relating to the validity performance, breach, and/or termination of this Agreement) shall be submitted to binding arbitration for final resolution.” Whether plaintiffs’ claims could be decided on a class-wide basis was hotly contested. Consequently, the parties agreed to brief the issue before addressing the merits of the action.  On February 8, 2022, the Arbitrator issued a Partial, Final Clause Construction Award regarding the threshold issue of class arbitrability. (the “Award”). After examining the applicable U.S. Supreme Court jurisprudence on the matter, 11 the Arbitrator concluded that the language of the arbitration clause was “exceedingly broad” and permitted class arbitration. On February 11, 2022, LNW petitioned the court to vacate the Award. Mohawk filed a cross-motion to confirm the Award on March 11, 2022.  The motion court denied LNW’s petition and granted Mohawk’s cross-motion. First, the motion court held that the Arbitrator did not exceed his authority under the FAA because it was “clear that the parties submitted to the arbitrator the question of whether the arbitration agreement permitted class arbitration,” and “the arbitrable decision … clearly construe and applie the contract.” As such, the motion court concluded that, pursuant to the U.S. Supreme Court’s decision in Oxford Health , confirmation of the Award was required.  Second, the motion court held that the Arbitrator did not manifestly disregard the law, because the Arbitrator did not refuse to apply a governing legal principle. In that regard, the motion court found that the Arbitrator “grappled with cases, understood the principles, and, as the designated decider of the question, made a ruling.” The motion court also found that the Arbitrator provided a “robust, good faith analysis” of the issues. In short, the motion court held that merely because the Arbitrator “reached an outcome adverse to the petitioner mean that he disregarded the relevant law.”  LNW appealed. LNW argued, among other things, that the Arbitrator manifestly disregarded the law – namely, the U.S. Supreme Court’s decisions in Oxford Health and Lamps Plus . LNW claimed that the motion court addressed an issue that was not argued – i.e. , whether the U.S. Supreme Court’s decision in Lamps Plus overturned Oxford Health . In doing so, said LNW, the motion court conflated Oxford Health’s holding that “the arbitrator ha the power, based on the parties’ … agreement, to reach a certain issue ” with the standard for establishing when an Arbitrator has in fact exceeded that broad power. In Oxford Health , the Supreme Court considered whether the arbitrator “exceeded powers” under Section 10(a)(4) of the FAA. 12 The arbitrator had not, according to the Supreme Court, because he had not “strayed from his delegated task of interpreting contract”, even if that interpretation was wrong. 13 However, the Supreme Court said that an arbitral award should be set aside when the arbitrator goes beyond “perform task poorly” and instead “abandon their interpretive role”. 14 Notably, the Supreme Court did not decide whether the arbitrator manifestly disregarded his authority in reaching his conclusion about the meaning of the agreement. Instead, the Supreme Court limited its analysis to the question of whether the arbitrator exceeded his authority to construe the question of arbitrability under an agreement. In Lamps Plus , the U.S. Supreme Court considered whether an agreement that was ambiguous as to the availability of class arbitration could be read to permit class arbitration. The Supreme Court concluded that it could not. 15 The Supreme Court explained that “ lass arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration” as it “sacrifices … informality … and makes the process slower, more costly, and more likely to generate procedural morass”. 16 The Supreme Court concluded that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so.” 17 Based upon the foregoing, LNW argued that had the motion court applied the proper legal standard, it would have determined that the Arbitrator manifestly disregarded the law as set forth by Lamps Plus and held that the arbitration clause at issue did not permit class arbitration. Plaintiffs argued, among other things, that Oxford Health provided the foundation for the motion court’s decision because there, the U.S. Supreme Court addressed a situation substantially similar to the facts before the First Department: the arbitration clause covered “any dispute”; the arbitrator “focused on the text of the arbitration clause”; and, based on his analysis, the arbitrator “found that the arbitration clause unambiguously evinced an intention to allow class arbitration.” 18 Plaintiffs noted that other courts also have upheld the findings by arbitrators with respect to class arbitrability, even when the clauses at issue did not include the same “exceedingly broad language” found in Scientific Games . 19 Plaintiffs maintained that it was not necessary to “incant” the words “class arbitration” or similar words in order to affirm the Award. According to plaintiffs, multiple courts have explicitly held that the U.S. Supreme Court has never established “a bright line rule that class arbitration is allowed only under an arbitration agreement that incants ‘class arbitration’ or otherwise expressly provides for aggregate procedures.” 20 Plaintiffs further argued that Lamps Plus had no application to the case at hand. In Lamps Plus , plaintiffs said, the issue before the U.S. Supreme Court was narrow: “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” 21 In holding that “it cannot”, 22 plaintiffs explained that the U.S. Supreme Court “defer to the Ninth Circuit’s interpretation and application of state law and thus accept that the agreement should be regarded as ambiguous.” 23 Thus, plaintiffs concluded that the U.S. Supreme Court had no occasion to decide what contractual basis may support a finding that a contract is ambiguous regarding class arbitration.  The First Department agreed with plaintiffs and unanimously affirmed. The First Department held that the Arbitrator “did not manifestly disregard the applicable law in reasoning that ‘the plain meaning of the words of the arbitration clause unambiguously permitted class arbitrations.’” 24 The Court explained that, as noted by the Arbitrator, plaintiffs “intentionally broadened the standard AAA arbitration clause in five different ways—to ‘any,’ the parties added ‘any and all’; to ‘controversies, disputes or claims,’ they added, ‘of any nature’; ‘arising directly or indirectly’; ‘including without limitation’; ‘arising out of’; or ‘in connection with’—because ‘it wanted the Arbitration Clause to cover every type of dispute, controversy, or claim that could conceivably be related—directly or indirectly—to the Agreement.’” 25 The Court noted that the Arbitrator had done that which the parties bargained for – i.e. , to construe the arbitration clause. 26 As noted by the U.S. Supreme Court in Oxford Health , “ ecause the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” 27 The Court concluded that “ o review the merits of that interpretation in the face of an arbitration clause that the arbitrator found unambiguous and premised on a construction of the contract would be inconsistent with Oxford Health Plans (569 US at 569 <“so the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong”> ), and we decline to do so.” 28 Footnotes 9 U.S.C. § 10(a)(1)-(4). Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S , 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co. , 306 F.3d 1214, 1216 (2d Cir. 2002) (citing, DiRussa v. Dean Witter Reynolds Inc. , 121 F.3d 818, 821 (2d Cir. 1997)). See also Matter of Daesang Corp. v. NutraSweet , 167 A.D.3d 1, 15-16 (1st Dept. 2018) (citing, Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 480-81 (2006)), lv. denied , 32 N.Y.3d 915 (2019)). Wein , 6 N.Y.3d at 483. Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules , 867 F.2d 130, 133 (2d Cir. 1989). Duferco , 333 F.3d at 389. Id. Daesang , 167 A.D.3d 1, 15-16. Wallace v. Buttar , 378 F3d 182, 189 (2d Cir. 2004) (quoting, Banco de Seguros del Estado v. Mutual Mar. Off., Inc. , 344 F.3d 255, 263 (2d Cir 2003)). See also Wien , 6 N.Y.3d at 480-81 (footnotes omitted). Westerbeke Corp. v. Daihatsu Motor Co. , 304 F.3d 200, 217 (2d Cir. 2002). Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp. , 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010). Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. , 559 U.S. 662 (2010), Oxford Health Plans LLC v. Sutter , 569 U.S. 564 (2013), and Lamps Plus, Inc. v. Varela , 139 S. Ct. 1407 (2019). 569 U.S. at 566. Id. at 572. Id. at 571-72. 139 S. Ct. at 1412. Id. at 1416 (quoting, AT&T Mobility LLC , 563 U.S. at 348). Id. (citations omitted). Oxford Health , 569 U.S. at 566-68. E.g. , Jock v. Sterling Jewelers, Inc. , 942 F.3d 617 (2d Cir. 2019) (affirming award where arbitration clause covered “any dispute”); Wells Fargo Advisors LLC v. Tucker , 373 F. Supp. 3d 418 (S.D.N.Y. 2019) (affirming award where arbitration clause covered “any dispute”); NCR Corp. v. Goh , No. 16-cv-00127, 2017 WL 2345695 (W.D. Wash. May 30, 2017) (affirming award where arbitration clause covered “every possible claim”). Sutter v. Oxford Health Plans LLC , 675 F.3d 215, 222 (3d Cir. 2012), aff’d , Oxford Health , supra ; see also Jock , 646 F.3d at 121 (“It is equally important to note that the Court declined to hold that an arbitration agreement must expressly state that the parties agree to class arbitration.”); Vazquez v. ServiceMaster Glob. Holding, Inc. , No. 09-cv-5148, 2011 WL 2565574, at *3 n.1 (N.D. Cal. June 29, 2011) (“The Supreme Court has never held that a class arbitration clause must explicitly mention that the parties agree to class arbitration in order for a decisionmaker to conclude that the parties consented to class arbitration.”). Lamps Plus , 139 S.Ct. at 1415 (quoting, Stolt-Nielsen , 559 U.S. at 684). Id. Id. Slip Op. at *1. Id. (citing, Oxford Health , 569 U.S. at 572). Id. Id. (quoting, Oxford Health , 569 U.S. at 569) (internal quotation marks omitted). Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Today’s Blog involves motions to renew and reargue and successive motions for summary judgment. When a motion is denied, a movant has several options.  One can accept the loss and move on.  An appeal can also be pursued.  Additional options are also available under CPLR 2221 , which permits a movant to move for renewal or reargument.  A motion to renew is “properly made to the motion court (CPLR 2221) to draw its attention to material facts which, although extant at the time of the original motion, were not then known to the party seeking renewal and, consequently, were not placed before the court.”  Matter of Beiny , 132 A.D.2d 190 (1 st Dep’t 1987) (citation omitted); see also Boreanaz v. Facer-Kreidler , 2 A.D.3d 1481, 1482 (4 th Dep’t 2003).  Renewal is “granted sparingly and is not a second chance freely given to parties who have not exercised due diligence in making their first presentation.”  Acevedo v. Nurmamatov , 206 A.D.3d 488 (1 st Dep’t 2022) (citation and internal quotation marks omitted).  Accordingly, renewal motions should be denied “unless the moving party offers a reasonable excuse as to why the additional facts were not submitted on the original application.”  Cole-Hatchard v. Grand Union , 270 A.D.2d 447 (2 nd Dep’t 2000) (citation and internal quotation marks omitted); CPLR 2221(e)(3). Reargument motions, on the other hand, are not based on new evidence previously unavailable, but are made when it is believed that the underlying decision was rendered because the motion court “misapprehended … the relevant facts that were before it or misapplied … controlling principal of law.”  Boboyev v. Gomez , 304 A.D.2d 600, 601 (2 nd Dep’t 2003) (citation omitted).  The purpose of a reargument motion is “not to serve as a vehicle to permit the unsuccessful party to argue once again the very questions previously decided.”  Pro Brokerage, Inc. v. The Home Insurance Company , 99 A.D.2d 971 (1 st Dep’t 1984) (citation and internal quotation marks omitted).  Nor is reargument a vehicle by which a party may “advance arguments different from those tendered on the original application may not be employed as a device for the unsuccessful party to assume a different position inconsistent with that taken on the original motion.”  Foley v. Roche , 68 A.D.2d 558, 568 (1 st Dep’t 1979); see also Gellert & Rodner v. Gem Community Mgt., Inc. , 20 A.D.3d 388 (2 nd Dep’t 2005) (citation omitted).  When a motion for summary judgment is denied, the movant can move for renewal or reargument pursuant to CPLR 2221 if the applicable standards are met.  Courts, however, frown upon the making of successive motions for summary judgment.  It is recognized that “ uccessive motions for summary judgment should not be entertained in the absence of good cause, such as a showing of newly discovered evidence.”  P.J. 37 Food Corp. v. George Doulaveris & Son, Inc. , 189 A.D.3d 858, 859 (2 nd Dep’t 2020) (citation and internal quotation marks omitted).  Nor should such motions be made “based upon facts or arguments which could have been submitted on the original motion for summary judgment.”  Hillrich Holding Corp. v. BMSL Management, LLC , 175 A.D.3d 474, 475 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Indeed, the previously unsubmitted evidence “must be used to establish facts that were not available to the party at the time it made its initial motion for summary judgment and which could not have been established through alternative evidentiary means.”  Id . (citations and internal quotation marks omitted). A “narrow exception” to the prohibition against successive summary judgment motions permits such motions to be entertained “when it is substantively valid and the granting of the motion will further the ends of justice and eliminate an unnecessary burden on the resources of the courts.”  Aurora Loan Services, LLC v. Yogev , 194 A.D.3d 996, 997 (2 nd Dep’t 2021) (citations and internal quotation marks omitted). All of these issues were addressed by the June 21, 2023, decision of the Appellate Division, Second Department, in Wells Fargo Bank, N.A. v. Gittens , a mortgage foreclosure action.  Lender in Gittens , commenced a foreclosure action in which borrower interposed an answer asserting numerous affirmative defenses, including lender’s failure to comply with the notice provisions of the loan documents and failure to comply with the requirements of RPAPL 1304 .  [Eds. Note: this Blog has frequently written about RPAPL 1304.  See < here =">here"> and the blog articles hyperlinked therein.].  The motion court denied lender’s summary judgment motion.  Thereafter, lender “again made a motion …., certain branches of which were denominated as ones for summary judgment on the complaint insofar as asserted against the and for an order of reference.”  The motion court granted lender’s motion and borrower appealed.  The Second Department reversed. The Second Department noted that “ lthough certain branches of the second motion were denominated as ones for summary judgment on the complaint insofar as asserted against the defendants and for an order of reference, those branches were, in actuality, one for leave to renew the 's prior motion for summary judgment on the complaint insofar as asserted against the and for an order of reference” and that the “new evidence supporting the second motion could have been submitted by the in support of its prior motion.”  The Second Department found that the motion, to the extent that it was to renew, should have been denied because the lender “failed to provide any justification for its failure to present the new evidence supporting the second motion as part of its prior motion.” Even if considered a successive motion for summary, the Second Department found that lender’s motion should have been denied because such motions “should not be entertained in the absence of good cause, such as a showing of newly discovered evidence.”  (Citation and internal quotation marks omitted.) In determining that lender’s motion failed to fit within the previously discussed exception to the prohibition against successive summary judgment motions, the Court stated: The second motion also did not fit within the “narrow exception" to the successive summary judgment rule.  This narrow exception permits entertainment of a successive motion when it is substantively valid and the granting of the motion will further the ends of justice and eliminate an unnecessary burden on the resources of the courts.  Here, entertaining a second summary judgment motion involved review of multiple disputed issues, including whether the established the s' default, the 's compliance with the contractual condition precedent, and the 's compliance with RPAPL 1304. Thus, rather than eliminating a burden on the Supreme Court, the court's consideration of the second motion actually imposed an additional burden on the court.  Successive motions for the same relief burden the courts and contribute to the delay and cost of litigation. A party seeking summary judgment should anticipate having to lay bare its proof and should not expect that it will readily be granted a second or third chance. 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 “short sale” is the sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. In order to deliver the security to the purchaser, the short seller will borrow the security, typically from a broker-dealer or an institutional investor. The short seller later closes out the position by purchasing equivalent securities on the open market, or by using an equivalent security it already owned, and returning the security to the lender.  In general, short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of a long position in the same security or in a related security. Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited. In a “naked” short sale, a seller does not borrow or arrange to borrow securities in time to make delivery to the buyer within the standard settlement period. 1 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a “failure to deliver” or “fail”). Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the standard settlement period. A fail may also result from “naked” short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.  “Naked” short selling is not necessarily a violation of the federal securities laws or the rules of the Securities and Exchange Commission (“SEC” or the”Commission”). In certain circumstances, “naked” short selling contributes to market liquidity. For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time. The opposite of short selling is “long selling”. Long selling occurs when the seller owns the security being sold and has a reasonable expectation that he/she/it can deliver the security in time for settlement. The Commission promulgated regulations that govern the short selling of equity securities. 2 In that regard, as discussed below, the Commission adopted Regulation SHO to address persistent fails to deliver securities within the standard settlement period and potentially abusive “naked” short selling. The Commission was concerned that large and persistent fails to deliver could deprive shareholders of the benefits of ownership, such as voting and lending, and enable sellers that fail to deliver securities on the settlement date to use the additional freedom to engage in trading activities that could improperly depress the price of a security. Regulation SHO Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938 and to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling. The Commission amended Regulation SHO several times since 2005 to eliminate certain exceptions, strengthen certain requirements and reintroduce the price test restriction. Regulation SHO has four general requirements. Relevant to today’s article is Rule 200(g).  Under Rule 200(g), broker-dealers are required to mark all sale orders of equity securities as “long,” “short,” or “short exempt.” 3 An order can be marked “long” when, as discussed, the seller owns the security being sold and the security either is in the physical possession or control of the broker-dealer, or it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than settlement. However, if a person does not own the security, or owns the security sold but it is not reasonably expected that the security will be in the possession or control of the broker-dealer prior to settlement, the sale should be marked “short.” The sale could be marked “short exempt” if the seller is entitled to rely on an exception from the short sale price test circuit breaker. 4 The Locate Requirement Before accepting a short sale order or effecting a short sale for its own account, a broker-dealer must locate the securities being sold; i.e. , the broker-dealer must: (i) borrow the securities; (ii) enter into a bona fide arrangement to borrow the securities; or (iii) have reasonable grounds to believe that the securities can be borrowed so that they can be delivered on the date delivery is due. 5 This requirement is generally referred to as the “locate” requirement under Regulation SHO. The source of the locate must be documented. Broker-dealers usually charge customers a fee for borrowing securities. Deemed to Own An investor with a net long position in a security is “deemed to own” the security under Regulation SHO. 6 A seller may be deemed to own a security if, for example, (i) the person purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it, but has not yet received the security; or (ii) the person owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange. For purposes of order marking rules under Regulation SHO, a seller of convertible securities ( i.e. , other securities that are convertible into the underlying stock being sold) is not “deemed to own” the underlying common stock until the seller has tendered such convertible security for conversion or exchange. Long Selling Under Regulation SHO, an order to sell may be marked “long” only if two conditions are met. First, the seller must be “deemed to own” the security pursuant to Rule 200(a) through (f) of Regulation SHO. 7 Second, to mark a sale long, the broker-dealer must either: (i) have possession or control of the security to be delivered; or (ii) reasonably expect that the security will be in its physical possession or control no later than the settlement of the transaction. 8 If a seller does not deliver the security in time for settlement, a buyer may not get what it purchased in a timely manner, eroding trust and confidence in the markets, and potentially depriving market participants of the benefits of their bargain. Failure to Deliver Regulation SHO was designed, in part, to reduce “failures to deliver,” which occur when a seller fails to deliver securities that it has sold by the settlement date. According to the SEC, failures to deliver may negatively impact the market and shareholders. 9 Additionally, sellers that fail to deliver securities on the settlement date may attempt to use this additional freedom to engage in trading activities to improperly depress the price of a security. 10 Moreover, by not borrowing securities and, therefore, risking that it will not be able to make delivery within the standard settlement period, the seller benefits by not incurring the costs of borrowing shares.  E.g.,="E.g.," Investor.gov,="Investor.gov," “Short="“Short" sales”="sales”" ( here);=">here);" Investor="Investor" Bulletin:="Bulletin:" “An="“An" Introduction="Introduction" to="to" Short="Short" Sales”="Sales”" (Oct.="(Oct." 29,="29," 2015)="2015)" “Settling="“Settling" Securities="Securities" Transactions,="Transactions," T+2”="T+2”" U.S.="U.S." Exchange="Exchange" Commission,="Commission," “Key="“Key" Points="Points" About="About" Regulation="Regulation" SHO”="SHO”" >here).=">here)."> The foregoing rules were at the center of the SEC’s enforcement action against Sabby Management LLC (“Sabby”) and its principal, Hal D. Mintz (“Mintz” and together with Sabby, the “Defendants”). SEC v. Mintz, et al. , 2:23-CV-3201 (D.N.J.) ( here ). SEC v. Mintz Mintz arose from an alleged fraudulent scheme involving abusive naked short selling, order mismarking, and other violative trading practices, orchestrated by Sabby, a registered investment adviser and recidivist, 11 and Mintz. As discussed below, the alleged scheme generated more than $2 million in ill-gotten gains.  According to the SEC, from at least March 2017 through May 2019, Mintz used his knowledge and experience as a trader, to game the markets and carry out the alleged fraudulent scheme by repeatedly circumventing trading rules involving at least 10 issuers on behalf of two private funds managed by Defendants (“the Private Funds”). As alleged by the SEC, Defendants’ fraudulent scheme involved at least two forms of abusive trading.  First, Defendants allegedly mismarked sales of securities as “long” even though the sales did not qualify as long sales because the Private Funds did not own and were not deemed to own the securities being sold and did not have a net long position in the securities being sold. As a result, said the SEC, Defendants should have marked those sales as “short.” Failing to mark the sales correctly, noted the SEC, was a violation of applicable order marking rules. The SEC contended that because the sales were actually short sales that Defendants allegedly tried to disguise as long sales, and Defendants had not “located” ( i.e. , borrowed, arranged to borrow, or had reasonable grounds to believe that the securities could be borrowed) the shares that they sold, the sales failed to comply with the locate requirements of Regulation SHO ( i.e. , 17 C.F.R. § 242.200 – § 204.204).  Second, Defendants allegedly marked and sold shares “short” when they knew or recklessly disregarded that they had not borrowed or located the shares. These trades, said the SEC, also failed to comply with the locate requirements of Regulation SHO. The SEC further alleged that in each instance in which Defendants failed to make timely delivery of shares, their trading constituted “naked” short selling, which was also a violation of Regulation SHO. According to the SEC, Defendants engaged in this fraudulent trading scheme because it was more profitable than following the order marking and locate rules. As explained in the SEC’s complaint, Defendants would not have been able to carry out their short sales, and therefore could not have profited as they did, if they had followed the rules governing long and short sales. As a result of their alleged misconduct, said the SEC, Defendants obtained at least $2 million in ill-gotten trading profits for themselves and the Private Funds. The SEC also alleged that on occasion, Defendants used their improper sales to artificially deflate the price at which Defendants were able to convert their securities into stock. Through these abusive sales, said the SEC, Defendants acquired more stock at a cheaper price. According to the SEC, Defendants took multiple steps to conceal their fraudulent scheme and misconduct. Defendants allegedly made false statements to the brokers executing their trades, including falsely representing that they had locates for their short sales when, in fact, they did not. In addition, Defendants allegedly submitted fraudulent order instructions to the brokers, identifying their sales as “long” in an attempt to disguise their naked short sales and their short sales for which they had not obtained locates, when they allegedly knew that they were required to identify these orders as “short” sales. But for these misrepresentations, claimed the SEC, the brokers would not have executed these trades since the trades failed to comply with Regulation SHO. Moreover, in an attempt to hide their failure to obtain locates for their short sales and satisfy their settlement obligations, Defendants allegedly acquired the required stock after their short sales, typically by purchasing the stock from the issuer or otherwise acquiring it through conversion of other securities. The SEC claimed that Defendants knew or recklessly disregarded that these practices failed to comply with applicable trading rules that require, with very narrow exceptions not applicable in Mintz , a short seller to locate the stock prior to the short sale. While Defendants were often able to conceal from the market their fraudulent trading scheme, on some occasions, said the SEC, Defendants were unable to deliver securities in time to cover their short sales, causing “fails-to-deliver.” Each instance in which Defendants mismarked long sales and shorts sales without locates, noted the SEC, resulted in fails-to-deliver, and therefore also constituted naked short selling. The SEC’s complaint ( here ), filed in the U.S. District Court for the District of New Jersey, charged Sabby and Mintz with violations of Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-21 thereunder. 12 The SEC also charged Sabby with violations of Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2 and 206(4)-7 thereunder and charged Mintz with aiding and abetting those violations. The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties. Commenting on the complaint, Carolyn Welshhans, Associate Director of the SEC’s Division of Enforcement, stated: “The SEC alleges that Sabby and Mintz attempted to game the system and make an illegal profit. When someone uses naked shorts or other manipulative practices to cheat the market and investors, the SEC will ensure that they are held accountable.” A copy of the press release announcing the action can be found here . Footnotes The standard settlement period is two (2) business days. This settlement cycle is known as “T+2,” shorthand for “trade date plus two days.” T+2 means that when a person buys a security, payment must be received by the brokerage firm no later than two business days after the trade is executed. When a person sells a security, the person must deliver to the brokerage firm his/her/its securities certificate no later than two business days after the sale. The two-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade. See Investor.gov, “Settling Securities Transactions, T+2” ( here ). 17 C.F.R. § 242.200 – § 204.204. 17 C.F.R. § 242.200(g). Rule 201 of Regulation SHO generally requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a short sale at an impermissible price when a stock has triggered a circuit breaker by experiencing a price decline of at least 10 percent in one day. Once the circuit breaker in Rule 201 has been triggered, the price test restriction will apply to short sale orders in that security for the remainder of the day and the following day, unless an exception applies. Rule 203(b)(1) of Regulation SHO. 17 C.F.R. § 242.200(c). 17 C.F.R. § 242.200. 17 C.F.R. § 242.200(g). See Amendments to Regulation SHO, Exch. Act Rel. No. 34-60388 (July 27, 2009). See id. at 6-7. Sabby was previously sanctioned by the Commission in connection with alleged improper short sales. On October 14, 2015, the Commissioned instituted a settled cease-and-desist proceeding, finding that Sabby violated Rule 105 of Regulation M of the Securities Exchange Act of 1934 (the “Exchange Act”) on two occasions. The Commission imposed a cease-and-desist order, disgorgement of $184,747.10 plus prejudgment interest, and a civil penalty of $91,669.95 ( here ). 17 C.F.R. § 240.10b-5 and 17 C.F.R. § 240.10b-21. 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.

A couple of months ago, we examined NW Media Holdings Corp. v. IBT Media Inc. , 2023 N.Y. Slip Op. 30875(U) (Sup. Ct., N.Y. County Mar. 22, 2023) ( here ), a case in which a lower court addressed the question whether the destruction of millions of pages of data on a Google Workspace states a claim for trespass to chattels or conversion ( here ). As discussed in that article, the court concluded that the allegations concerning the destruction of such data sufficed to state a claim for conversion. NW Media is once again the subject of an article, this time in the context of board deadlock – that is, when the members of a company’s board of directors are deadlocked regarding the vote on a matter of corporate concern. NW Media Holdings Corp. v. IBT Media Inc. , 2023 N.Y. Slip Op. 03288 (1st Dept. June 15, 2023) ( here ). NW Media was one of four interrelated cases in which former friends and business associates, Johnathan Davis and Dev Pragad, vied for control over Newsweek. Pragad, as president of NW Media Holdings Corp. (“NW Media”), which owned Newsweek LLC and related entities, had caused NW Media to sue IBT Media Inc., an entity that Davis controlled. NW Media sought indemnification for alleged losses under the Membership Interest Purchase Agreement dated December 13, 2018 (“Purchase Agreement”). IBT moved to dismiss, arguing, among other things, that the lawsuit should have been brought derivatively, not as a direct action in the name of the corporation. As noted by the motion court, the outcome of the action was dependent upon the application of one of two distinct lines of cases – lines of cases that lead to opposite results. The Seeming Split in Authority Under the first line cases, decided by the Court of Appeals in 1949 , Sterling Industries Inc. v. Ball Bearing Pen Corp. , the president was held to be without authority to initiate litigation due to board deadlock. In Sterling , two groups controlled the plaintiff corporation on a 50/50 basis. 1 A pen company, whose representatives comprised one of the groups, had agreed to make the plaintiff the exclusive sales agent for the pen company’s fountain pens for one year. The president of the plaintiff called a special meeting of the board of directors to consider whether or not to sue the pen company for breach of contract. The two directors representing the plaintiff said yes, while the two directors representing the pen company voted no. Thus, the board was deadlocked. The Court of Appeals held that, where the by-laws of the corporation did not allow the president to commence litigation, but instead provided that the act of a majority of the board should constitute the act of the board, the authority of the president to commence litigation terminated “when a majority of the board of directors at the special meeting refused to sanction it.” 2 In so holding, the Court reasoned that the intention of the parties controls as reflected in the governing corporate documents: The circumstances of the organization of plaintiff corporation indicate that the parties intended that the corporation should be managed by its board of directors and that the board should take no affirmative action if not sanctioned by a majority. That is the arrangement the parties intended and there is no basis on which to hold such an arrangement illegal. Had the Legislature intended to eliminate the problem of a deadlock it could have done so by the simple expedient of requiring an odd number of directors. Instead, apparently realizing the desire for equal control in some closely held corporations, it has continued to permit the election of a board of directors with an even number of directors. The fact that a deadlock may result does not necessarily mean that the present law is inadequate and that it should be remedied by the approval of presidential power where none in fact exists thus disregarding fundamental rules of agency law.” 3 Although the Court of Appeals did not leave the plaintiff a direct remedy, it, nevertheless, noted the availability of a derivative action. 4 Subsequent to Sterling , the courts in New York held that where a company’s bylaws do not expressly give the president the right to commence litigation, and there is board or shareholder deadlock about the propriety of doing so, the president lacks the authority to bring an action directly in the name of the corporation. For example, Crane, A.G., v. 206 West 41st Street Hotel Assoc LP , involved a fight among shareholders about whether or not to defend a foreclosure action. 5 The stockholder’s agreement specified that any action of the board required unanimous approval of the directors and that any action of the stockholders themselves required unanimous approval. 6 The defendant company was owned 50/50 between two additional LLCs. Separate individuals owned these additional LLCs. The individual who owned one of the 50/50 owners of the defendant also owned the plaintiff/lender. When the lender sought to foreclose on property, the 50/50 board deadlocked on whether or not to defend the action. Relying on Sterling , the Appellate Division, First Department held that the general partner of the other LLC/president, who had wanted to defend against the foreclosure, had no authority to do so. In reaching this conclusion, the Court noted that the president could not act against the wishes of his co-owner when the agreement between the two required unanimous approval and that the president’s “actual authority to defend the foreclosure action was terminated when the stockholders refused unanimously to sanction it.” 7 As in Sterling , the First Department noted the availability of a derivative lawsuit for breach of fiduciary duty in the event the failure to defend the foreclosure was improper. 8 In Stone v. Frederick , the plaintiff, the 50% owner of the company sued the defendant, the other 50% owner, in an attempt to take over the company. In dismissing the case, the court held “where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against the other with an equal interest and degree of control over corporate affairs; the proper remedy is a stockholder’s derivative action.” 9 The second line of cases started with Paloma Frocks, Inc. v. Shamokin Sportswear Corp. , 10 a case in which the New York Court Appeals appeared to walk back the holding in Sterling . In Paloma , the issue on appeal was for a stay of arbitration. The Court held that, because the corporate president of the defendant had authority to execute the underlying contract containing an arbitration clause, the president also could initiate arbitration under that contract. 11 Years earlier, Paloma had entered a contract with Shamokin whereby Shamokin was to help Paloma manufacture dresses. Shamokin contended that Paloma owed it for services under the contract. The contract contained an arbitration clause. Paloma’s president, Harry Toffel, also owned 50% of Shamokin. Paloma, through Toffel, countered with a proceeding to stay arbitration. Bernstein, Shamokin’s president, admitted that the Shamokin directors had not acted in the matter and that a meeting of Shamokin’s board would have been an “idle gesture” because the Toffel side, which controlled 50% of Shamokin, as well as owning Paloma, would never have voted in favor of Shamokin suing Paloma. The Court of Appeals held that Bernstein, as president of Shamokin, had the presumptive authority to commence arbitration. The Court reasoned that there had been no direct prohibition from the board of directors. Moreover, the Court reasoned that, because all the directors had previously agreed to the contract containing the arbitration clause, they had already agreed in advance that “Paloma-Shamokin controversies would go to arbitrators.” 12 Bernstein was simply carrying out a previously agreed upon arrangement. 13 The Court did not address whether the arbitration should have been brought as a derivative action or whether the arbitrators could have dealt with the derivative/direct issue. One year later, the Court of Appeals decided West View Hills Inc. v. Lizau Realty Corp . 14 In West View Hills , the plaintiff sued the defendant, along with its officers and stockholders, for saddling it with certain construction costs. The officers of the parties were identical. The president, who held a minority interest, had caused the plaintiff to bring the suit. In allowing the suit to proceed, the Court of Appeals distinguished West View Hills from “the classic case requiring resort to a stockholder’s derivative action to protect minority interests.” 15 The Court distinguished Sterling , noting that the West Hills board had taken no action, while the Sterling board refused to sanction the president’s authority to bring the suit. 16 Following Sterling and Paloma , courts have tried to balance the two lines of authority by drawing a distinction between the presumptive authority of the president and a negative board vote. 17 The Motion Court’s Decision and Order Prior to bringing the lawsuit, Pragad showed Davis a draft complaint, to which Davis strenuously objected in writing. Although there was no formal vote because Pragad ignored Davis’ request for a board meeting, Davis’ objection created a deadlock as Davis and Pragad each owned 50% of the company. The motion court held that “ his case fits squarely into Sterling .” The motion court noted that the bylaws of NW Media did not confer a right on the president to commence litigation. Instead, said the motion court, the bylaws specifically stated that “the business of the corporation shall be managed by its board of directors,” and, pursuant to section 8(a) therein, required a vote of the majority of the board to act. The motion court further noted that the by-laws contained a tie-breaking mechanism for director deadlock in section 8(d): “If the Board of Directors is unable to act because they are deadlocked (an equal number of Directors have voted for and against a matter duly presented to the Board for vote), the matter shall be referred to the Shareholders of the Corporation for a vote pursuant to Article II of these By-Laws.” Thus, the motion court found that NW Media’s corporate by-laws required a vote of the majority of the board of directors or, in the event of deadlock, the shareholders.  Looking at the conduct of the parties, the motion court found that, although there was no formal vote of the board, Davis did not consent. To the contrary, as noted, he opposed the filing of the lawsuit. Thus, according to the motion court, the board was deadlocked, there being only two members. Accordingly, under Sterling and its progeny, concluded the motion court, as the president of a closely held corporation, Pragad lacked the authority to act unilaterally against Davis’ interest. The motion court rejected plaintiffs’ claim that because there was no vote, Sterling was inapplicable. The motion court explained that plaintiffs ignored section 8(a) of the by-laws, which unambiguously required a vote for the board to act. Without one, said the motion court, no lawsuit could be commenced. Additionally, the motion court observed that Davis asked for a board vote, but the request was ignored, a fact that was undisputed. The motion court also rejected plaintiffs’ attempt to “fit this case into the Paloma line of cases,” by arguing that because Davis and Pragad executed a “Unanimous Written Consent”, whereby they both as directors of NW Media authorized the other to “execute the , and any and all instruments, writings and other documents necessary to carry out the transaction contemplated under the Agreement”:  All the “Unanimous Written Consent” entailed was authorization to enter into and carry out the purchase of Newsweek. That “Unanimous Consent” cannot override contemporaneously executed by-laws that require a majority of the board of directors to act and provide for resolution of deadlock, at least in theory. The motion court noted that the transaction referred to in the consent was the purchase of Newsweek. Regardless, the motion court held that the consent could not “help NW Media escape the plain text of the corporate bylaws, that require a vote of the majority of the board of directors to act.” “To suggest otherwise elevates form over substance,” said the motion court. The motion court also noted that even with the tie-breaking provision of the bylaws, there was still deadlock as Davis and Pragad were the only shareholders of the company:  Because the by-laws in section 8(d) refer a matter to a shareholder vote in the event of deadlock, the by-laws specifically contemplated deadlock. The problem is NW Media has only two shareholders: none other than Pragad and Davis. Thus, there is no way, as a practical matter, to break the tie. What is apparent from the by-laws, though, is that Pragad and Davis bargained for equal control of NW Media and contemplated the possibility of board deadlock if they did not agree.  The motion further held that the case before it also “differ from Paloma because, in Paloma , there was no board objection prior to the president bringing suit.” “Here,” by contrast noted the motion court, “Davis vociferously objected.” Finally, the motion court noted that neither Paloma nor West Hills involved a dispute between two 50/50 shareholders. In conclusion, the motion court held that “the situation at hand fits precisely into the Sterling line of cases. Although IBT may have a separate duty to NW Media, the fact remains Davis controls IBT and Davis has objected to the institution of the suit. This leaves plaintiff, who is essentially Dev Pragad, recourse through a derivative suit only.” Accordingly, the motion court granted IBT’s motion to dismiss without prejudice to plaintiffs commencing a derivative action. The First Department’s Decision On appeal, the Appellate Division, First Department unanimously affirmed.  The Court held that the “motion court correctly granted IBT’s motion to dismiss the complaint,” pursuant to the authority set forth in Sterling . 18 The Court held that “Pragad lost his presumptive authority to initiate this action in the corporation’s name because NW Media’s board was deadlocked.” 19 “As in Sterling ,” said the Court, “NW Media’s by-laws provide that ‘the business of the Corporation shall be managed by its Board of Directors,’ and that ‘the vote of a majority of the Directors present at the time of the vote … shall be the act of the Board of Directors.’” 20 Noting that plaintiffs did not dispute the fact that Davis “expressly objected to the filing of the complaint, which left the board deadlocked,” 21 the Court concluded that “any actual or implied authority Pragad may have had to commence this action was ‘terminated when a majority of the board … refused to sanction it.” 22 “Even without a formal board meeting,” explained the Court, “which Davis requested, to no avail, his affirmative written objection constituted a ‘direct prohibition by the board’ sufficient to constitute a deadlock.” 23 The Court also rejected plaintiffs’ reliance on Paloma , noting that, in Paloma , “Paloma was objecting to something to which it had already consented in the parties’ contract: resolving disputes through arbitration” 24 :  Here, IBT’s agreement to the purchase agreement, through Davis, may have included an agreement to indemnify NW Media under certain conditions, but it did not constitute a broad agreement to Pragad’s initiation of litigation against IBT on behalf of NW Media absent board approval. By taking that action, Pragad was not “merely carrying out an existing agreement” constituting “a routine step in the performance” of the contract, as was the case in Paloma . 25 Takeaway As noted, since Sterling and Paloma were decided, New Yorks courts have tried to balance the two lines of authority by drawing a distinction between the presumptive authority of the president and a negative vote of the board of directors. NW Media illustrates this balancing act. As both the motion court and the First Department noted, “Pragad lost his presumptive authority to initiate action in the corporation’s name because NW Media’s board was deadlocked.” 26 As in Sterling , “NW Media’s by-laws provide that ‘the business of the Corporation shall be managed by its Board of Directors,’ and that ‘the vote of a majority of the Directors present at the time of the vote … shall be the act of the Board of Directors.’” 27 In NW Media , there was no dispute that Davis vehemently opposed the filing of the lawsuit, thereby leaving the board deadlocked. 28 Thus, as in Sterling , “any actual or implied authority Pragad may have had to commence this action was ‘terminated when a majority of the board … refused to sanction it.” 29 Given the importance New York courts give to an entity’s governing corporate documents, such as bylaws and operating agreements, Sterling and its progeny, of which NW Media is a part, makes sense. This is not to say that facts and circumstances may counsel in favor of a different result, as in Paloma and its progeny. But when the board of directors has resolved (whether affirmatively or through deadlock) to prohibit the president from initiating a lawsuit, the president is without authority to institute such action. Footnotes 298 N.Y. 483 (1949). 298 N.Y. at 490. Id. at 491–92; see also COR Mktg. & Sales, Inc. v. Greyhawk Corp. , 994 F. Supp. 437, 441 (W.D.N.Y. 1998). As noted by the motion court, other jurisdictions, such as Delaware (8 Del. C. 1953, § 353) and Maine (13-C M.R.S.A. § 1434), provide tie breakers by statute. New York does not. Id. at 493. 87 A.D.3d 174 (1st Dept. 2011). Crane , 87 A.D.3d at 176. Id. Id. at 179. 245 A.D.2d 742, 745 (3d Dept. 1997); see also Giaimo v. EGA Assocs. , 68 A.D.3d 523, 524 (1st Dept. 2009). 3 N.Y.2d 572 (1958). Id. at 575. Id. Id. 6 N.Y.2d 344 (1959). Id. at 347. Id. at 348. See328 56th Rest., Inc v. Polldon Rest. Inc. , 39 A.D.2d 689, 690 (1st Dept. 1972) [“‘ hile the president of a corporation has presumptive authority to prosecute suits in the name of a Corporation …, such presumption would not obtain where the Board of Directors has resolved to the contrary or failed to authorize the President to institute such action ; Fernandez v. Hencke , 93 A.D.3d 440, 441 (1st Dept. 2012) (“ here there is no direct prohibition by the board, the president of a corporation has presumptive authority, in the discharge of his duties, to defend and prosecute suits in the name of the corporation”); Family M. Foundation v. Manus , 71 A.D.3d 598, 599 (1st Dept. 2010) (“This is not a case where one 50% shareholder seeks to assert a claim on behalf of the corporation against another 50% shareholder who possesses an equal degree of control.”). Slip Op. at *1. Id. Id. Id. Id. (quoting, Sterling , 298 N.Y. at 489, and citing, Crane , 87 A.D.3d at 176)). Id. (quoting, Rothman & Schneider v. Beckerman , 2 N.Y.2d 493, 497 (1957)). Id. at *2. Id. Id. Id. Id. Id. (quoting, Sterling , 298 N.Y. at 489, and citing, Crane , 87 A.D.3d at 176)). 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 Generally speaking, “term sheets” outline the basic terms of a transaction being negotiated by the parties thereto.  This Blog has previously addressed the enforceability of “term sheets.” See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . On June 15, 2023, the Appellate Division, First Department, decided Parkmerced Investors, LLC v. WeWork Companies LLC , in which the enforceability of a term sheet was decided by the Court.  underlying=">underlying" supreme="supreme" decision="decision" which="which" quoted="quoted" extensively="extensively" complaint.="complaint.">   The plaintiff in Parkmerced was redeveloping a neighborhood in San Francisco.  The president of WeWork contacted an individual involved with the plaintiff’s redevelopment efforts and “urged for WeWork to participate in the redevelopment project.”  After numerous meetings during which the details of WeWork’s potential investment were discussed, “plaintiff and WeWork allegedly entered into an agreement that contained all the material terms for WeWork’s investment.”  However, the “term sheet” was a “‘non-binding indication of terms for a preferred equity investment … of $450 million.’”  The “‘non-binding’” “term sheet” contained a few provisions that were expressly intended to be binding.  One such provision of the “term sheet” required plaintiff to negotiate exclusively with We Work for the right to participate in the redevelopment, a provision for which WeWork paid a “$20 million nonrefundable exclusivity fee.”  Accordingly, plaintiff terminated its discussions with other potential investors.  Ultimately, WeWork “repudiated the agreement.” Plaintiff commenced an action against WeWork, alleging breach of contract, breach of the covenant of good faith and fair dealing and promissory estoppel.  As to the breach of contract cause of action, plaintiff alleged that the “term sheet” was a binding agreement that WeWork breached by failing to perform.  Relying on documentary evidence (i.e., the term sheet) WeWork moved to dismiss all three causes of action pursuant to CPLR 3211 (a)(1). Among other things, as recognized in supreme court’s underlying decision and order , WeWork argued that: the term sheet “explicitly states that it was generally not binding”; “while the exclusivity fee section was binding, it specifically states that WeWork may decline to pursue the transaction”; and, “the $20 million exclusivity fee was to serve as liquidated damages.”  Supreme court generally discussed the law regarding breach of contract and stated: The elements of a breach of contract claim are: (1) existence of a contract, (2) plaintiff’s performance pursuant to the contract, (3) defendant’s breach of contractual obligations, and (4) resulting damages.  The court will enforce a clear and complete written agreement according to the plain meaning of its terms, and not look to extrinsic evidence to create ambiguities within the four corners of the contract.  A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.  Moreover, the court considers the context of the clauses when reading the contract as a whole. Supreme court, citing Keitel v. E*Trade Fin. Corp ., 153 A.D.3d 1181, 1181 (1 st Dep’t 2017), lv. Denied, 31 N.Y.3d 903 (2018), then noted that “ term sheet is non-binding when it sets forth the general intent for the parties to engage in good faith discussions and only be bound by a future written agreement.”  Supreme court found that the term sheet “clearly provides that is non-binding, which is emphasized at the beginning and the end of the Term Sheet.”  Supreme court also found that the “exclusivity fee” was a liquidated damages provision covering the “very breach for which plaintiff seeks recovery in this action: failure to ‘proceed’ or ‘consummate’ in the Term Sheet compared to failure to negotiate or close in the complaint.”  Based on these and other issues, supreme court dismissed the breach of contract cause of action. On plaintiff’s appeal, the First Department unanimously affirmed. As to the contract cause of action, the Court stated: A term sheet that sets forth the general intent of the parties to discuss in good faith the terms and conditions of a deal and states that neither party shall be bound until the parties execute a more formal written agreement, does not constitute an enforceable contract.  Here, the inception sentence of the term sheet stated that what followed was a “non-binding indication of terms for a preferred equity investment” in plaintiff by WeWork …. The final provision, titled “non-binding,” reiterated that the parties understood and agreed that the term sheet was provided “solely for discussion purposes and is not a commitment or agreement of any kind on the part of WeWork . . . .” In addition, since the exclusivity fee, or liquidated damages provision, pertained to the very breach for which plaintiff seeks recovery, i.e., the failure to proceed or consummate the proposed transaction, actual damages are unavailable. The exclusivity fee, however, did not pertain to attorneys’ fees, which were allowed if any party commenced any action against another in connection with the term sheet and prevailed.  As to the remaining two causes of action, the Court stated: The cause of action based upon breach of the covenant of good faith and fair dealing cannot be sustained absent a contractual obligation between the parties. Nor can the claim be used as a substitute for the nonviable breach of contract claim. Furthermore, plaintiff’s vague assertions that WeWork refused to negotiate in good faith were conclusory.  The promissory estoppel claim was correctly dismissed as duplicative of the breach of contract claim.  Moreover, the claim was undercut by the absence of a sufficiently clear and unambiguous promise.  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 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. 1 Collateral estoppel is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” 2 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.” 3 The collateral estoppel doctrine applies to prior arbitration proceedings, 4 as well as prior determinations by state appellate and federal courts. 5 In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes collateral estoppel as bases for dismissal. 6 It is also an affirmative defense under the CPLR. 7 In Republic of Kazakhstan v. Chapman , 2023 N.Y. Slip Op. 03211 (1st Dept. June 13, 2023) ( here ), the Appellate Division, First Department consider the foregoing principles. The Republic of Kazakhstan arose in the aftermath of an arbitration award by the Swedish Chamber of Commerce in December 2013, under the Energy Charter Treaty, rendered against plaintiff in favor of nonparties Anatolie Stati, Gabriel Stati, Ascom Group, S.A., and Terra Raf Trans Trading Ltd. (together, the “Statis”), plaintiff’s efforts to annul that award in Sweden, the efforts of the Statis to enforce the award in several jurisdictions, and plaintiff’s efforts to defeat enforcement. 8 Plaintiff alleged that the arbitration was the result of fraud during the underlying transaction — the construction of a liquefied petroleum gas plant — and that the award itself was procured by fraud on the tribunal. Plaintiff also alleged that the Statis committed numerous other acts of fraud, which were not addressed in the arbitration award. Defendants were not alleged to have participated in any of these frauds. Defendants or their predecessors-in-interest held notes issued by a subsidiary company owned by the Statis in Kazakhstan, under which the Statis defaulted on interest payments, and they agreed to a separate agreement while the arbitration was pending to share proceeds from the arbitration in lieu of receiving the principal and interest due on the notes. Plaintiff alleged that defendants did so with knowledge of the Statis’ fraud. Plaintiff further alleged that, following the initial award, defendants funded the Statis’ litigation and assisted them with their litigation strategy. Plaintiff contended that this litigation assistance facilitated the Statis’ fraud. Plaintiff also alleged that defendants communicated with the Statis about government and media relations, that they made false statements to the public through a website and press releases, and that they made or threatened to make false statements to the U.S. Government. Plaintiff commenced the action, seeking relief for defendants’ alleged conspiracy in, and aiding and abetting of, the Statis’ various fraudulent schemes. In particular, plaintiff alleged claims of aiding and abetting fraud, conspiracy to commit fraud, and unlawful means conspiracy under English law. Defendants moved to dismiss. The motion court granted the motion, holding, inter alia , that (1) the action was “predicated on an impermissible collateral attack of a confirmed arbitration award,” and (2) the aiding and abetting claim could not stand because “there can be no action for aiding and abetting fraud without an underlying fraud.”  9 by contrast, a collateral attack occurs when a party challenges an arbitral award through some bases other than the vacatur provisions of the faa or the cplr. 10 for example, a claim that fraud permeated the arbitration is a collateral attack on an arbitral award, 11 as is an attempt to vacate an award through a plenary action. 12 in determining whether a challenge to an award is collateral, courts look at the “relationship between the alleged wrongdoing, purported harm, and arbitration award.” 13 in other words, the courts look at whether the claims would undermine the validity of the underlying arbitral proceedings or frustrate the enforcement of the resulting award.>9 by contrast, a collateral attack occurs when a party challenges an arbitral award through some bases other than the vacatur provisions of the faa or the cplr. 10 for example, a claim that fraud permeated the arbitration is a collateral attack on an arbitral award, 11 as is an attempt to vacate an award through a plenary action. 12 in determining whether a challenge to an award is collateral, courts look at the “relationship between the alleged wrongdoing, purported harm, and arbitration award.” 13 in other words, the courts look at whether the claims would undermine the validity of the underlying arbitral proceedings or frustrate the enforcement of the resulting award.>  The First Department affirmed. The Court held that the action was barred by the collateral estoppel doctrine. 14 The Court noted that “Plaintiff ha litigated the fraud alleged herein before Swedish arbitrators, the Swedish (Svea) Court of Appeal, and the District Court for the District of Columbia, which enforced the arbitral award under the Federal Arbitration Act.” 15 As such, plaintiff had a full and fair opportunity to litigate the issue. 16 The Court rejected plaintiff’s argument that there was new evidence related to the fraud – the “same fraud claim plaintiff has been pursuing for over a decade, including allegations that the Statis diverted funds, inflated construction costs, used funds that should have been sequestered as collateral, and paid their companies inflated prices for drilling services.” 17 In so holding, the Court explained that “well-settled” rules concerning “new” evidence and arbitral awards “cannot undermine the preclusive effect of the earlier decisions.” 18 There is a well-settled rule prohibiting challenges to arbitral awards on the basis of newly discovered evidence … Without such a rule, the arbitration award would be the beginning rather than the end of the controversy and the protracted litigation which arbitration is meant to avoid would be invited. 19 The Court also held that “ ven if collateral estoppel did not apply to all of plaintiff’s claims, those claims would still warrant dismissal for failure to state a cause of action” under CPLR § 3211(a)(7). “The aiding and abetting fraud and conspiracy to commit fraud claims,” said the Court, “fail[] since the complaint does not include detailed allegations of an underlying fraud.” 20 The Court explained that, in particular, the allegations in the complaint did not “support justifiable reliance on the Statis’ misrepresentations of fact or omissions …, as they ‘were undertaken in the course of adversarial proceedings and were fully controverted’ by plaintiff’s own proffered evidence.” 21 The Court also noted that plaintiff failed to allege that it suffered damages by reason of defendants’ misrepresentations to parties other than arbitrator tribunals or courts. 22 The Court further held that the conspiracy to commit fraud and the aiding and abetting fraud claims failed because the allegations of an agreement among the conspirators and the knowledge of the aider and abettor were conclusory. 23 Finally, the Court found that the claim under English law alleging unlawful means conspiracy conflicted with New York law, in that it allowed for a conspiracy claim without the commission of an underlying tort. 24 “As the conflict pertains to a conduct-regulating rule, the law of the place where the tort occurs will generally apply because that jurisdiction will almost always have the greatest interest in regulating conduct within its borders.” 25 26 an actual conflict exists if the laws in each jurisdiction “provide different substantive rules … that are relevant to the issue at hand and have a significant possible effect on the outcome of the trial.” 27 if an “actual conflict” exists, the court must apply the law of the jurisdiction with the greatest interest in the resolution of the dispute. 28 if no conflict exists, however, the court applies the law of the forum state. 29 > 26 an actual conflict exists if the laws in each jurisdiction “provide different substantive rules … that are relevant to the issue at hand and have a significant possible effect on the outcome of the trial.” 27 if an “actual conflict” exists, the court must apply the law of the jurisdiction with the greatest interest in the resolution of the dispute. 28 if no conflict exists, however, the court applies the law of the forum state. 29 >  “Here,” said the Court, “the vast conspiracy alleged concerning unlawful means did not occur in England, save for the Statis’ proceeding seeking to enforce the arbitration award there and defendants’ funding of an appeal in that proceeding.” 30 Moreover, said the Court, “insofar as the claim applies, the complaint not identify an unlawful act in England that defendants agreed to commit.” 31 Footnotes E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel. Co. , 62 N.Y.2d 494, 501 (1984). Mahler v. Campagna , 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl. , 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys. , 138 A.D.2d 575, 577 (2d Dept. 1988). Milone v. City University of New York , 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v. Broome County , 180 A.D.3d 1213 (3d Dept. 2020). See CPLR § 3211(a)(5). See CPLR § 3018(b). See Stati v. Republic of Kazakhstan , 302 F. Supp. 3d 187, 191-193 (D.DC. 2018), aff’d , 773 F. App’x 627 (2d Cir. 2019), cert. denied , 140 S.Ct 381 (2019); see also Republic of Kazakhstan v. Stati , 380 F. Supp 3d 55, 59-65 (D.DC 2019), aff’d , 801 F. App’x 780 (D.C. Cir. 2020). See CPLR § 7511; 9 U.S.C. §§ 9, 10. See , e.g. , Kramer-Wilson Co. v. Nat’l Gen. Mgmt. Corp. , 213 A.D.3d 557, 558 (1st Dept. 2023); Monterey Sportswear Corp. v. Charma Mills, Inc. , 43 A.D.2d 523, 523 (1st Dept. 1973); Oppenheimer & Co. Inc. v. Pitch , 129 A.D.3d 621, 622 (1st Dept. 2015); Pena v. Off. of the Comm’r of Baseball , 125 A.D.3d 461, 461 (1st Dept. 2015); Rutter v. Julien J. Studley, Inc. , 244 A.D.2d 239, 239 (1st Dept. 1997). E.g. , Clarke-St. John v. City of New York , 164 A.D.3d 743, 745 (2d Dept. 2018). See , e.g. , Abrams v. Macy Park Constr. Co. , 282 A.D. 922, 923 (1st Dept. 1953) (arbitration award “may not be attacked in a plenary action” because it “is a final determination as to the matters embraced in it, unless it is vacated” under the statute). Tex. Brine Co., L.L.C. v. Am. Arb. Ass’n, Inc. , 955 F.3d 482, 488 (5th Cir. 2020). Slip Op. at *1. Id. Id. ; See also Parker , 93 N.Y.2d at 349. Id. at *1-*2. Id. at *2. Id. (citations and quotation marks omitted). Id. (citing, CPLR § 3016(b); Habberstad v. Revere Sec. LLC , 183 A.D.3d 532, 533 (1st Dept. 2020); Kovkov v. Law Firm of Dayrel Sewell, PLLC , 182 A.D.3d 418, 419 (1st Dept. 2020)). Id. (citing, Sammy v. Haupel , 170 A.D.3d 1224, 1226-1227 (2d Dept. 2019); Shaffer v. Gilberg , 125 A.D.3d 632, 635 (2d Dept. 2015) (the plaintiff “always maintained that he knew” promissory notes were fake); Zappin v. Comfort , 2022 WL 6241248, at *15 (S.D.N.Y. 2022) (“In the context of an adversarial proceeding, Plaintiff is hard-pressed to assert reliance on claims that he constantly disputed.”)). Id. Id. at *2-*3. Id. at *3 (citations omitted). Id. (citations and internal quotation marks omitted). TBA Glob., LLC v. Proscenium Events, LLC , 114 A.D.3d 571, 572 (1st Dept. 2014). Id. (quoting, Elmaliach v. Bank of China Ltd. , 110 A.D.3d 192, 200 (1st Dept. 2013)). Elmaliach , 110 A.D.3d at 201. TBA Glob. , 114 A.D.3d at 572. Slip Op. at *3. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. Where both claims are asserted, more times than not, the fraud claim is dismissed under the duplication of claims doctrine – a principle of law that stands for the proposition that a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim. 2 Today, we examine Offenbach v. Ohlbaum , 2023 N.Y. Slip Op. 02979 (1st Dept. June 6, 2023) ( here ), a case in which the duplication of claims doctrine served as the basis for the dismissal of a fraud claim asserted by one plaintiff but not the fraud claim asserted by the other plaintiff. In early 2012, Plaintiff and Defendant Gary Ohlbaum (“Defendant” or “Ohlbaum”) met to discuss a film that Plaintiff was producing by the name of “Original Provisionals.” Following numerous meetings and discussions, along with the exchange of information about the film, its expected costs, etc., Defendant agreed to invest in the film.  To memorialize their agreement, the parties entered into a subscription agreement (the “Subscription Agreement”). Pursuant to the Subscription Agreement, among other things, the parties formed Plaintiff, Original Provisionals LLC (the “Company”), and Defendant received membership interests in the Company. In exchange for the membership interests, Defendant agreed to “contribute” $2,532,790.00 “to the capital of the Company.” Notably, the Subscription Agreement contained a merger clause, pursuant to which the terms therein constituted the entire agreement between the parties. The parties further agreed that funding for the project would commence when Defendant approved the cash flow projections for the film. As alleged, Defendant never delivered the subscription payment despite months and years of promises to do so. According to Plaintiffs, Defendant never intended to fund the film.  Plaintiff sued, alleging, among other things, breach of the Subscription Agreement and fraud. On summary judgment, the motion court denied Plaintiffs’ motion for summary judgment on their claims for breach of contract, fraud, and intentional infliction of emotional distress and granted Defendant’s cross-motion to dismiss the claims pursuant to CPLR §§ 3211 and 3212.  The First Department modified the motion court’s order to deny Defendant’s cross-motion as to the breach of contract claim as asserted by the Company, and to grant the Company’s motion for summary judgment as to the breach of contract claim, and otherwise affirmed. The Court held that “Defendant was entitled to dismissal of breach of contract claim … because Offenbach was not a party to the subscription agreement, which obligated defendant to provide funding to plaintiff Original Provisionals LLC (the Company) for its film project in exchange for an interest in the Company.” 3 The Court explained that “Offenbach executed the subscription agreement on behalf of Original Provisionals, and nothing indicated that Offenbach was an intended third-party beneficiary of the agreement.” 4 [Eds. Note: “ third party may sue as a beneficiary on a contract made for benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts.” 5 Thus, “ arties asserting third-party beneficiary rights under a contract must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for benefit and (3) that the benefit to is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate if the benefit is lost.” 6 “One is an intended beneficiary if one’s right to performance is appropriate to effectuate the intention of the parties to the contract and either the performance will satisfy a money debt obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.” 7 ]  The Court also held that the motion court “should not have dismissed the breach of contract claim as asserted by the Company.” 8 The Court explained that dismissal was not appropriate because the “plain terms of the subscription agreement” provided that “defendant agreed to pay $2,532,790 in exchange for membership in the Company.” 9 The Court noted that “ t undisputed that the Company performed under the subscription agreement, but defendant failed to pay the specified amount due thereunder.” 10 The Court rejected Defendant’s attempt to inject extra-contractual evidence into the interpretation of the Subscription Agreement. 11 The Court explained that defendant’s “statements that the parties’ actual agreement was different than that reflected in the contract, even if true, immaterial because the contract specifically state that it constitute the entire agreement between the parties and could only have been amended by a writing executed by the parties.” 12 Turning to the Company’s fraud claim – i.e. , that it was fraudulently induced to enter into the Subscription Agreement by Defendant’s misrepresentations that he would provide the promised financing – the Court held that it “was properly dismissed as duplicative of the breach of contract claim. 13 However, Offenbach’s fraud claim was a different story. “Because Offenbach ha no claim for breach of the subscription agreement,” said the Court, “her cause of action for fraud should not have been dismissed as duplicative of the breach of contract claim.”14 “Nevertheless,” said the Court, “Offenbach’s fraud claim should be dismissed” because she “failed to allege or show that she suffered damages separate from those recoverable by the Company under the subscription agreement.”15 The Court explained that the “fraud alleged by Offenbach individually is that defendant promised but failed to pay the subscription agreement amount to the Company and subsequently misrepresented that payment was forthcoming.”16  Takeaway In the First Department, the Court has dismissed fraud claims in which the damages sought by the fraud claim are the same as those sought by the breach of contract claim. This is so even where the plaintiff successfully demonstrates that the alleged misrepresentation is collateral to the contract at issue. 17 This Blog wrote about this scenario  here ,  here , and  here .  In Offenbach , although plaintiff’s fraud claim was not duplicative of the breach of contract claim, her fraud claim was, nevertheless, duplicative of the Company’s breach of contract claim because the damages that she sought were the same as those allegedly incurred by the Company. In addition to the Court’s examination of Plaintiffs’ fraud claims, it is important to note its holding with respect to Defendant’s attempt to inject parol evidence into the analysis.  As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended ( i.e. , parol evidence) is generally inadmissible. Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions. 18 As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses … infirmity of memory.…” 19 Notwithstanding, questions about the enforceability of promises and commitments that were made at the time of contract formation are often injected into a contract dispute. These questions are typically raised in connection with the meaning and effect of a contract, where one party advances the extra-contractual statements of the other ( e.g. , in correspondence, emails and text messages; telephone calls; or in-person meetings) to support a claim or defense. One way in which parties address such disputes before they happen is to include a “merger clause” or “integration clause,” in their contract or agreement. A merger clause provides that the contract represents the complete and final agreement between the parties.  In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. 20 Without such specificity, the courts have allowed parol evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement. 21 In Offenbach , the merger clause at issue was specific enough for the Court to prevent Defendant from using extra-contractual statements to show that “the parties’ actual agreement was different than that reflected in the .” 22 In that regard, as shown by the Court’s analysis, the subject matter of the Subscription Agreement was the investment of money in exchange for membership interests in the Company. Any other description of the parties’ agreement, whether oral or in writing, was specifically “replaced” by the terms of the Subscription Agreement. 23 Footnotes Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Slip Op. at *1. Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 181-182 (2011). Dormitory Auth. , 30 N.Y.3d at 710 (internal quotation marks omitted); Airco Alloys Div. v. Niagara Mohawk Power Corp. , 76 A.D.2d 68, 79 (4th Dept. 1980). Matter of Coalition for Cobbs Hill v. City of Rochester , 194 A.D.3d 1428, 1436 (4th Dept. 2021) (internal quotation marks omitted); Mendel v. Henry Phipps Plaza W., Inc. , 6 N.Y.3d 783, 786 (2006). Cole v. Metropolitan Life Ins. Co. , 273 A.D.2d 832, 833 (4th Dept. 2000) (internal quotation marks omitted); see generally Salzman v. Holiday Inns , 48 A.D.2d 258, 261 (4th Dept. 1975), mod. on other grounds , 40 N.Y.2d 919 (1976). Slip Op. at *1. Id. (citations omitted). Id. Id. Id. Id. (citing, Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017)). Id. at *1-*2 (citing, Richbell Info. Servs. v. Jupiter Partners , 309 A.D.2d 288, 305 (1st Dept. 2003)). Id. at *2 (citing, Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital 1 Inc. , 164 A.D.3d 1126, 1127 (1st Dept. 2018)). Id. E.g. , Salamone v. EIP Global Fund LLC , 2021 N.Y. Slip Op. 02372 (1st Dept. 2021). W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president). Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, operation”); Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by .”) (internal quotation marks and citation omitted) (alteration in original). Slip Op. at *1. The merger clause in the Subscription Agreement was not a typical, boilerplate provision. It specifically identified “ orrespondence, memoranda, and oral or written agreements that originated before the date of Agreement” as being “replaced in total by Agreement.” 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.