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By Jonathan H. Freiberger This Blog has frequently written about RPALP 1304 .  By way of background, and as previously noted in this 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.  here=">here" and="and" numerous="numerous" other="other" articles="articles" related="related" to="to" this="this" issue="issue" are="are" hyperlinked="hyperlinked" therein.="therein."> In one such article , we wrote about Wells Fargo Bank, N.A. v. Yapkowitz , 199 A.D.3d 126 (2 nd Dep’t 2021), in which the Court held that if there are more than one borrower, each one must receive a separate RPAPL 1304 notice because the “practice is insufficient to satisfy the requirements of RPAPL 1304, and that the plaintiff is required to mail a 90–day notice addressed to each borrower in separate envelopes as a condition precedent to commencing the foreclosure action.”  Yapkowitz , 199 A.D.3d at 128.  In our February 11, 2022, Blog article , we discussed U.S. Bank National Ass’n v. Gordon , 202 A.D.3d 872 (2022), in which the Second Department held that the lender did not strictly comply with the requirements of RPAPL 1304 because it failed to demonstrate that the 90-day notices it sent to the borrowers contained the requisite list of five housing counseling agencies serving the county in which the subject property is located. In another case, Bank of America, N.A. v. Kessler , 202 A.D.3d 10 (2021), rev’d , 39 N.Y.3d 317 (2023), the Second Department affirmed the supreme court’s strict construction of RPAPL 1304 and dismissed a complaint because the lender, in the same envelope as the RPAPL 1304 notice,  included “two notices pertaining to the rights of a debtor in bankruptcy and in military service.”  Kessler , 202 A.D.3d at 19.  In other cases, complaints were dismissed because lenders included notices under the Federal Fair Debt Collection Practices Act.  See, e.g., Ocwen Loan Servicing, LLC v. Sirianni , 202 A.D.3d 702, 705 (2 nd Dep’t 2022).  The Court of Appeals reversed the Kessler Second Department, holding that, inter alia , its “bright-line rule would also lead to nonsensical results.”   Kessler , 39 N.Y.3d at 325.  [Eds. Note: this Blog discussed the Court of Appeals’ decision in Kessler < here =">here"> .] On May 31, 2023, the Second Department decided HSBC Bank USA, N.A. v. Schneider .  In 2013, the lender in Schneider commenced a residential foreclosure action against the borrowers, a husband and wife.  The lender moved for summary judgement and the borrowers cross-moved for summary judgment dismissing the complaint for failure to comply with RPAPL 1304.  The borrowers appealed the denial of their cross-motion.  In reversing the supreme court, the Second Department stated: RPAPL 1304(1) provides that, “at least ninety days before a lender … commences legal action against the borrower, ... including mortgage foreclosure, such lender … shall give notice to the borrower.” “The statute further provides the required content for the notice and provides that the notice must be sent by registered or certified mail and also by first-class mail to the last known address of the borrower” ( Citibank, N.A. v. Conti–Scheurer, 172 A.D.3d 17, 20, 98 N.Y.S.3d 273; see RPAPL 1304<2> ). Strict compliance with RPAPL 1304 notice to the borrower is a condition precedent to the commencement of a foreclosure action ( see Citibank, N.A. v. Conti–Scheurer, 172 A.D.3d at 20, 98 N.Y.S.3d 273; Citimortgage, Inc. v. Banks, 155 A.D.3d 936, 936–937, 64 N.Y.S.3d 121 ). Here, the defendants established, prima facie, that the plaintiff did not comply with RPAPL 1304, since the 90–day notice was jointly addressed to both of the defendants ( see Deutsche Bank Natl. Trust Co. v. Loayza, 204 A.D.3d 753, 755, 166 N.Y.S.3d 654; Wells Fargo Bank, N.A. v. Yapkowitz, 199 A.D.3d 126, 134, 155 N.Y.S.3d 163). Moreover, while the plaintiff contends that two identical copies of the notice were included in the mailing, one for each of the defendants, the plaintiff concedes that they were mailed in the same envelope, which was also improper ( see Duetsche Bank Natl. Trust Co. v. Loayza, 204 A.D.3d at 755, 166 N.Y.S.3d 654; Wells Fargo Bank, N.A. v. Yapkowitz, 199 A.D.3d at 134, 155 N.Y.S.3d 163). In opposition, the plaintiff failed to raise a triable issue of fact. I do not recall how much it cost to mail a letter in, or prior to, 2013 when the RPAPL 1304 notices were sent in the HSBC action, but the lender probably should have sprung for a second stamp and mailed the RPAPL 1304 notices in separate envelopes.  “For want of a postage stamp, the foreclosure action was lost” after ten years of litigation.  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 internal affairs doctrine is a “conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands.” 1   Stated differently, “ nder the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation.” 2 However, the “internal affairs doctrine, although potent, has very specific applications.” 3 In particular, the doctrine only “governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders.” 4 The doctrine “does not apply to those defendants who are not current officers, directors, and shareholders” of the corporation. 5 The internal affairs doctrine has been consistently invoked by New York courts in derivative actions to apply foreign law on substantive issues, including those affecting a party’s right to sue. 6 here.=">here."> A plaintiff may sue derivatively so long as the plaintiff is a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. 7 “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. 8 Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” 9 To satisfy the requirement, the plaintiff must have “acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired” and continued to own the stock “throughout the course of the activities that constitute the primary basis of the complaint.” 10 “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” 11 For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. 12 here.=">here."> In Ezrasons, Inc. v. Rudd , 2023 N.Y. Slip Op. 02938 (1st Dept. June 1, 2023) ( here ), the Appellate Division, First Department examined these principles. As discussed below, the Court affirmed the dismissal of a derivative litigation brought on behalf of Barclays PLC due to the lack of derivative standing by the plaintiff under English law. In Ezrasons , plaintiff, a New York–registered corporation, brought a derivative action on behalf of Barclays PLC under English law against 46 individual defendants and Barclays PLC’s subsidiary BCI for allegedly breaching fiduciary duties to Barclays PLC.  BCI and certain individual defendants moved to dismiss the complaint.  The moving defendants advanced five reasons for dismissal: (1) the motion court lacked subject-matter jurisdiction under BCL § 1319; (2) plaintiff lacked standing under English substantive law — applicable under the internal affairs doctrine — because it was not a registered member of Barclays PLC; (3) plaintiff did not satisfy the ownership requirement of BCL § 626(b); (4) plaintiff did not allege facts sufficient to excuse the pre-suit demand requirement of BCL § 626(c); and (5) forum non conveniens. In support of their motion, defendants submitted an affirmation from Barclays PLC Assistant Company Secretary stating, among other things, that plaintiff did not appear “as a registered, legal owner of Barclays PLC shares as of April 30, 2021,” on the official share register maintained by Equiniti Limited and Equiniti Financial Services Limited. Defendants also submitted an affirmation from an expert on English law, who opined on the requirements of English law governing shareholder derivative actions under both the Companies Act and common law.  Following oral argument, the motion court granted defendants’ motion with prejudice. Speaking to the issue of standing and the internal affairs doctrine, the motion court held that the BCL “does not override the internal affairs doctrine on the issue of standing to bring a derivative claim because it is a mere statutory predicate to jurisdiction.” The motion court rejected plaintiff’s  argument that the First Department’s decision in Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC , 118 A.D.3d 422 (1st Dept. 2014) “dictates a different outcome,” because “ Culligan concerned regulation of conduct within New York and did not purport to alter settled New York law on the application of the internal affairs doctrine.”  Having determined that substantive English law applied, the motion court held that “the membership requirement of the United Kingdom’s Companies Act is a substantive provision that … had to be met here” and that “Plaintiff lacks standing to sue” because it “is not a registered member of Barclays.”  The motion court noted that: (1) “ here is an admission by attorneys in the course of their opposition that they could become a member which speaks plainly that they are not members”; and (2) “ here is an affidavit … searching the record of documents that would show who are or are not members.” Consequently, the motion court rejected the “conclusory statement in the complaint” that plaintiff was a “registered” member of Barclays PLC and found that plaintiff lacked standing.  On appeal, the First Department unanimously affirmed. The Court held that “ he court correctly dismissed the complaint based on plaintiff’s lack of standing to bring this shareholder derivative action.” 13 The Court explained that the motion court “correctly ruled that defendants made the showing necessary for dismissal for lack of standing under the ECA .” 14 The Court found that the “unrebutted affirmation from Barclays stating that inquiries with its registrar showed that plaintiff’s name did not appear as a registered, legal owner of Barclays PLC shares as of April 30, 2021,” to be dispositive “ espite the complaint’s verified allegations of plaintiff’s stock ownership and membership.” 15 The Court also found persuasive “plaintiff’s counsel’s clear acknowledgment in its opposition brief to defendants’ dismissal motion that plaintiff was not a member” of Barclays PLC, which it noted was “an informal judicial admission entitled to some evidentiary weight.” 16 The Court rejected plaintiff’s argument that BCL § 1319 regulates the internal affairs of foreign corporations, such that New York law applies to the substantive issues raised in the dispute. 17 In doing so, the Court adopted the rationale of the court in City of Aventura Police Officers’ Retirement Fund v. Arison , 70 Misc. 3d 234 (Sup. Ct., N.Y. County 2020), which ruled that BCL  § 1319 merely confers jurisdiction upon New York courts over derivative suits on behalf of a foreign corporation. 18 In that case, the court explained that BCL § 1319 is a jurisdictional provision and “does not require application of New York law in such suits,” and does not “override the internal affairs doctrine.” 19 As such, the court held that the ECA’s requirement that suit be brought by a “member of the company” was an applicable substantive rule in a New York derivative suit. Accordingly, in applying the internal affairs doctrine, the Arison court held that the plaintiff lacked derivative standing under the English Companies Act. 20 The Court also rejected plaintiff’s argument that Cullen silently overruled the application of the internal affairs doctrine. 21 Citing to multiple authorities, the Court stated that if it were to overrule a longstanding principle of law, it would do so explicitly. 22 In conclusion, the Court reiterated that, as it has “demonstrated in many decisions since < cullen > cullen>, the internal affairs doctrine continues to apply to derivative actions.” 23 Footnotes New Greenwich Litig. Trustee, LLC v. Citco Fund Servs. B.V. , 145 A.D.3d 16, 22 (1st Dept. 2016), lv. denied , 29 N.Y.3d 917 (2017) (quoting, Edgar v. MITE Corp. , 457 U.S. 624, 645 (1982)); see also Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC , 118 A.D.3d 422 (1st Dept. 2014). Davis v. Scottish Re Group Ltd. , 138 A.D.3d 230, 233 (1st Dept. 2016). Matter of Am. Intl. Group, Inc. , 965 A.2d 763, 817 (Del. Ch. 2009) (cited with approval, New Greenwich , 145 A.D.3d at 23). Id. at 817 (internal quotation marks omitted). Culligan , 118 A.D.3d at 422. See , e.g. , Lerner v. Prince , 119 A.D.3d 122, 127-128 (1st Dept. 2014); Hart v. General Motors Corp. , 129 A.D.2d 179, 183 (1st Dept. 1987), lv. denied , 70 N.Y.2d 608 (1987). See , e.g. , BCL § 626(b); Pessin v. Chris-Craft Indus. , 181 A.D.2d 66, 70 (1st Dept. 1992).  See also Lewis v. Anderson , 477 A.2d 1040, 1049 (Del. 1984). Lewis , 477 A.2d at 1049. Honzawa Holding Co. v. Hiro Enter. USA , 291 A.D.2d 318, 318 (1st Dept. 2002). In re Bank of New York Deriv. Litig. , 320 F.3d 291, 298 (2d Cir. 2003). Roy v. Vayntrub , 15 Misc. 3d 1127(A), 2007 NY Slip Op 50868(U), at *6 (Sup. Ct., Nassau County 2007) (citing Barr v. Wackman , 36 N.Y.2d 371 (1975)). See , e.g. , In re Computer Sciences Corp. Deriv. Litig. , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). Slip Op. at *1. Id. Id. Id. (citing, Matter of Union Indem. Ins. Co. of N.Y. , 89 N.Y.2d 94, 103-104 (1996)). Id. Id. Id. (quoting, Arison , 70 Misc. 3d at 244 (internal quotation marks omitted)). Arison , 70 Misc. 3d at 248-253. Slip Op. at *1. Id. at *1-*2 (citing, Matter of Orozco v. City of New York , 200 A.D.3d 559,562 (1st Dept. 2021) (“If we are to depart from settled principle, we should do so explicitly and not on the basis of a one-paragraph memorandum opinion that does not cite or discuss the relevant precedent let alone express an intent to overrule it”), lv. granted , 39 N.Y.3d 903 (2022); Arison , 70 Misc. 3d at 245 n.3 (“‘if the court in Culligan wanted to change the clear precedents about the internal affairs doctrine it most assuredly would have said just that, and why’”) (internal brackets omitted) (quoting, Stephen Blau MD Money Purchase Pension Plan Trust v. Dimon , 2015 N.Y. Slip Op., 32909(U), at*8 n.1 (Sup. Ct., N.Y. County 2015)). Id. at *2 (citations omitted). 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 Haber Section 3211(a)(8) of the Civil Practice Law and Rule (“CPLR”) allows a party to “move for judgment dismissing one or more causes of action asserted against him on the ground that … the court has not jurisdiction of the person of the defendant.”  Whether the court has personal jurisdiction over a non-domiciliary involves a two-part inquiry: (1) the exercise of jurisdiction must be permissible under New York’s long-arm statute; and (2) the exercise of jurisdiction must comport with due process. 1 “Due process requires that a nondomiciliary have ‘certain minimum contacts’ with the forum and ‘that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.’” 2 The minimum contacts test requires an examination of “whether a defendant’s ‘conduct and connection with the forum State’ are such that it ‘should reasonably anticipate being haled into court there.’” 3 When analyzing whether “ he prospect of defending a suit in the forum State … comport with traditional notions of ‘fair play and substantial justice,’” the court must ask what is reasonable. 4 Specifically, the court must consider “‘the burden on the defendant, the forum State’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the several States in furthering fundamental substantive social policies.’” 5 “If either the statutory or constitutional prerequisite is lacking, the action may not proceed.” 6 CPLR § 302(a)(2) provides for personal jurisdiction over a non-domiciliary who “in person or through an agent … commits a tortious act within the state.” For the purposes of conspiracy jurisdiction, “ sing a New York bank account for a fraudulent scheme constitutes a tort within New York.” 7 A co-conspirator’s actions in New York as the agent for an out-of-state co-conspirator can provide a basis for personal jurisdiction under CPLR § 302(a)(2). 8 To establish jurisdiction predicated upon a civil conspiracy theory, the plaintiff must establish a prima facie case of conspiracy and that the defendant was a member. 9 The plaintiff must also “demonstrate the commission of an overt act in New York during, and pursuant to, the conspiracy.” 10 A prima facie case of civil conspiracy requires the plaintiff to “demonstrate the primary tort, plus the following four elements: an agreement between two or more parties; an overt act in furtherance of the agreement; the parties’ intentional participation in the furtherance of a plan or purpose; and resulting damage or injury.” 11 The plaintiff must plead factual allegations sufficient to infer that a corrupt agreement exists. 12 The facts alleged must “support[] a meeting of the minds, such that defendants entered into an agreement, express or tacit, to achieve the unlawful end,” 13 or show that the defendant “took ‘common action for a common purpose by common agreement or understanding … from which common responsibility derives.’” 14 Intentional participation may be inferred from the overt acts a defendant takes in furtherance of a conspiracy. 15 “Bare, conclusory allegations of conspiracy are insufficient.” 16 Membership in a conspiracy is established by demonstrating that “(a) the defendant had an awareness of the effects in New York of its activity; (b) the activity of the co-conspirators in New York was to the benefit of the out-of-state conspirators; and (c) the co-conspirators acting in New York acted at the direction or under the control, or at the request of or on behalf of the out-of-state defendant.” 17 In Bangladesh Bank v. Rizal Commercial Banking Corp. , 2023 N.Y. Slip Op. 02844 (1st Dept. May 30, 2023) ( here ), plaintiff sought to obtain jurisdiction over certain defendants based on allegations that they were co-conspirators. In particular, Bangladesh Bank concerned whether the court could exercise personal jurisdiction over defendants Bloomberry Resorts and Hotels, Inc. (“BRHI”) d/b/a Solaire Resort & Casino and Eastern Hawaii Leisure Company, Ltd. (“EHL”) d/b/a Midas Hotel & Casino under, inter alia , CPLR § 302(a)(2). Bangladesh Bank arose from an international money laundering scheme where the participants stole more than $101 million from an account plaintiff maintained at the Federal Reserve Bank of New York (“New York Fed”). Unknown North Korean hackers allegedly infiltrated plaintiff’s computer network in Bangladesh and issued multiple unauthorized payment orders to transfer funds from plaintiff’s New York Fed account to various bank accounts in the Philippines and elsewhere. The stolen funds were then laundered through two gambling casinos in the Philippines operated by defendants BRHI and EHL. Plaintiff sued, pleading nine causes of action against defendants.  BRHI and defendant Kam Sin Wong a/k/a Kim Wong (“Wong”), the owner of EHL, moved to dismiss on, inter alia , jurisdictional grounds. We examine BRHI’s motion as it pertained to civil conspiracy jurisdiction.  BRHI argued that plaintiff failed to plead the elements of a civil conspiracy. BRHI contended that plaintiff failed to allege that BRHI was aware of the effect in New York of its actions, that the New York co-conspirators’ activity was for BRHI’s benefit, or that the New York co-conspirators’ acted at BRHI’s request, direction or control. The motion court agreed, holding that plaintiff failed to plead a conspiracy in which BRHI was a participant. First, the motion court held that plaintiff failed to allege facts sufficient to plausibly infer a common agreement. The motion court rejected plaintiff’s “information and belief” allegation that BRHI entered into an agreement to convert and launder plaintiff’s money, stating that such allegations were conclusory. Moreover, said the motion court, there were no allegations to infer that BRHI was a knowing participant in a conspiracy. Noting that circumstantial evidence could suffice to establish the existence of a conspiracy, the motion court found that plaintiff’s allegations were insufficient to do so. For example, said the motion court, the fact that BRHI and Wong enjoyed a professional relationship was not enough to conclude that BRHI agreed to participate in the scheme because “financial self-interest is not the same as furthering a conspiracy.” 18 Second, explained the motion court, plaintiff failed to plead “independent culpable behavior” linking BRHI to the conspiracy, 19 or that BRHI “‘planned and perpetrated’ the acts in concert” with the other defendants. 20 Third, the motion court found that plaintiff failed to adequately allege that BRHI knowingly or intentionally participated in the scheme by way of an overt act or acts. The motion court explained that simply because BRHI allowed gambling in its casino did not necessarily equate to its intentional participation in an illicit scheme. Given the absence of facts alleging that anyone employed by BRHI was aware that plaintiff’s stolen funds were being laundered through its casino, and BRHI’s failure to stop the conspirators from gambling after press reports, said the motion court, did alone not constitute intentional participation.  Fourth, the motion court found that plaintiff failed to connect BRHI to the New York activities of the alleged co-conspirators. The complaint, said the motion court, did not contain a specific allegation that BRHI knew of the theft of plaintiff’s funds in New York. The motion court noted that plaintiff only alleged, upon information and belief, that BRHI knew or should have known that the junkets were being used to launder stolen funds. Finally, the motion court found that the complaint did not contain an allegation that BRHI was aware its conduct would have an effect in New York. The motion court explained that plaintiff did not plead facts suggesting that the North Korean hackers or anyone else acted at the behest of or on behalf of, or under the control of BRHI.  Because the complaint provided no facts suggesting that BRHI conspired with any actor, the motion court held that plaintiff did not sustain its burden of demonstrating that CPLR § 302(a)(2) conferred jurisdiction over BRHI. The Appellate Division, First Department affirmed the dismissal of the complaint against BRHI, holding that the motion court “did not have personal jurisdiction over BRHI pursuant to CPLR 302(a)(2).”21 The Court found that “plaintiff fail to adequately allege that BRHI was aware or should have been aware that it was funds stolen from New York that were laundered at the Solaire casino, such that BRHI could be deemed to have been aware of the effects of its activities in New York.” 22 The Court also found that plaintiff “fail to allege that the conspirators’ conduct in New York was at BRHI’s direction or on its behalf.” 23 Takeaway New York recognizes a conspiracy theory as the basis for exercising personal jurisdiction over a non-domiciliary under CPLR § 302(a)(2). To meet the burden required to satisfy this theory, the party asserting jurisdiction must allege (1) a tortious act committed by any co-conspirator in New York and a prima facie showing of conspiracy, and (2) facts raising an inference that the non-domiciliary defendant is a member of the conspiracy. A prima facie showing of conspiracy requires (a) a corrupt agreement, (b) an overt act furthering the agreement, (c) the conspirators’ intentional participation furthering the plan, and (d) resulting damage.  A non-domiciliary co-conspirator is a “member[] of the alleged conspiracy” if (a) he/she knew of the effects of the New York activity, (b) the co-conspirators’ activity in New York was for the benefit of the out-of-state conspirator, and (c) the co-conspirators acted in New York at the behest of or on behalf of, or under the control of the non-domiciliary co-conspirators. Both inquiries are consider together since the same facts generally support both. Importantly, conclusory allegations will not suffice. In Bangladesh Bank the motion court held that plaintiff could not satisfy many of the elements of a conspiracy to warrant the exercise of personal jurisdiction over BRHI. As noted, the motion court found that plaintiff failed to demonstrate that, among other things, BRHI was a knowing participant in the conspiracy, BRHI had prior knowledge of the theft in New York, BRHI knew of the theft of plaintiff’s funds in New York, and BRHI was aware its conduct would have an effect in New York. Without sufficient factual evidence, whether direct or circumstantial evidence, plaintiff could not satisfy its burden of demonstrating that CPLR § 302(a)(2) conferred jurisdiction over BRHI. Looking at the record in its totality, the First Department agreed with the motion court and affirmed the dismissal of the complaint as to BHRI on jurisdictional grounds. Footnotes Williams v. Beemiller, Inc. , 33 N.Y.3d 523, 528 (2019). Id. (citations omitted). LaMarca v. Pak-More Mfg. Co. , 95 N.Y.2d 210, 216 (2000) (citations omitted). Id. at 217 (internal quotation marks and citation omitted). Rushaid v. Pictet & Cie , 28 N.Y.3d 316, 331 (2016) (citation omitted). Williams , 33 N.Y.3d at 528. FIA Leveraged Fund Ltd. v. Grant Thornton LLP , 150 A.D.3d 492, 495 (1st Dept. 2017) (citation omitted). See Wimbledon Fin. Master Fund, Ltd. v. Weston Capital Mgt. LLC , 160 A.D.3d 596, 596 (1st Dept. 2018). See Small v. Lorillard Tobacco Co. , 252 A.D.2d 1, 17 (1st Dept. 1998), aff’d , 94 N.Y.2d 43 (1999). Best Cellars, Inc. v. Grape Finds at Dupont, Inc. , 90 F. Supp. 2d 431, 446 (S.D.N.Y. 2000) (citations omitted). Cohen Bros. Realty Corp. v. Mapes , 181 A.D.3d 401, 404 (1st Dept. 2020) (citation omitted). FIA Leveraged Fund , 150 A.D.3d at 495 (citing, Abrahami v. UPC Constr. Co. , 176 A.D.2d 180, 180 (1st Dept. 1991)). Chen Gang v. Zhao Zhizhen , 799 Fed. Appx. 16, 19 (2d Cir. 2020) (quoting, Webb v. Goord , 340 F.3d 105, 110-111 (2d Cir. 2003)). IDX Capital, LLC v. Phoenix Partners Group LLC , 83 A.D.3d 569, 571 (1st Dept. 2011), aff’d , 19 N.Y.3d 850 (2012) (quoting, Goldstein v. Siegel , 19 A.D.2d 489, 493 (1st Dept. 1963)). See Cleft of the Rock Found. v. Wilson , 992 F. Supp. 574, 582 (E.D.NY. 1998). Kovkov v. Law Firm of Dayrel Sewell, PLLC , 182 A.D.3d 418, 418 (1st Dept. 2020). Lawati v. Montague Morgan Slade Ltd. , 102 A.D.3d 427, 428 (1st Dept. 2013) (quoting, Best Cellars , 90 F. Supp. 2d at 446)). Charles Schwab Corp. v. Bank of Am. , 883 F.3d 68, 87 (2d Cir. 2018); see also BHC Interim Funding, L.P. v. Bracewell & Patterson, LLP , 2003 WL 21467544, at *6, 2003 US Dist. LEXIS 10739, at *17 (S.D.N.Y. June 25, 2003). Schwartz v. Society of the N.Y. Hosp. , 199 A.D.2d 129, 130 (1st Dept. 1993). Callahan v. Gutowski , 111 A.D.2d 464, 465 (3d Dept. 1985). Slip Op. at *1. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Query: does the recipient of an assignment via a contract or a note automatically have the right to assert tort claims, including fraud claims, arising from that contract or note? In SureFire Dividend Capture, LP v. Industrial & Commercial Bank of China Financial Services LLC , 2023 N.Y. Slip Op. 02841 (1st Dept. May 25, 2023) ( here ), the Appellate Division, First Department answered the question in the negative. The reason, as one would expect, depends on the language used by the parties and their intention in making the assignment. Under New York law, the assignment of the right to assert contract claims pursuant to a contract or note does not automatically give the recipient of the assignment the right to assert tort claims arising from that contract. 1 This rule dates back to Fox v. Hirschfeld , 2 where the First Department held that the assignment of fraud claims must be explicit in the contract being assigned. Fox involved the assignment of real property from the plaintiff-assignor to his wife. The First Department held that the plaintiff had not relinquished his right to pursue any claims for rescission or fraudulent misrepresentation because there was nothing in the assignment that explicitly stated that those claims were being assigned.  Since Fox was decided, it has been construed to mean that, in the absence of an explicit assignment of a cause of action based on fraud, “only the ... assignor may rescind or sue for damages for fraud and deceit the representations were made to and alone had the right to rely upon them.” 3 Notably, no specific words are required to effect the assignment of a fraud claim. 4 Accordingly, where an assignment of fraud or other tort claims is intended in conjunction with the conveyance of a contract or note, there must be some language that evinces that intent and effectuates the transfer of such rights. 5 In Sure Fire Dividend , the agreement at issue lacked any language sufficient to evince an intent to convey the right to assert a fraud claim.  Sure Fire Dividend arose from an alleged fraud that was perpetuated by non-party Brenda Smith. Smith, the owner of CV Brokerage, controlled two separate hedge funds – TA1 and Broad Reach Capital, LP (“Broad Reach”) – that she allegedly used in connection with a Ponzi scheme to defraud people of their investments. Smith pled guilty for this fraud.  Defendant Industrial and Commercial Bank of China Financial Services LLC (“ICBC”) worked with Smith as the clearing broker for both hedge funds and was allegedly the only clearing broker that would execute Smith’s options strategy. Plaintiff, SureFire Dividend Capture, LP (“SureFire”), alleged that it was both a direct investor in Broad Reach and the successor-in-interest of non-parties Aalii Fund, LP and Alpha Capital Partners, LP (collectively, the “A Funds”), which allegedly invested tens of millions of dollars in the Broad Reach fund. The A Funds’ interest was assigned to SureFire in February 2019, pursuant to a subscription agreement (the “In-Kind Subscription Agreement”). That agreement provided that the assignors were transferring the full balance of their interests in Broad Reach to SureFire and that the purpose of the agreement was to facilitate the transfer. Plaintiff alleged that defendant ICBC aided and abetted Smith’s fraud and breach of fiduciary duty. ICBC moved to dismiss both claims pursuant to CPLR § 3211(a)(3) for lack of standing. ICBC argued that SureFire lacked standing to assert claims to recover for the A Funds’ investments because the In-Kind Subscription Agreement did not evince an intent to assign any fraud-based claims as required under New York law. ICBC based its argument on, inter alia , the language of the In-Kind Subscription Agreement, which it maintained was clear and unambiguous.  SureFire opposed, claiming that the In-Kind Subscription Agreement transferred all “rights, title and interests, including all contract, fraud and tort claims, in Broad Reach to SureFire.” That language, however, did not appear in the In-Kind Subscription Agreement.  The motion court dismissed the action with prejudice to the extent it was “based on allegations that the A Funds assigned its fraud claims to plaintiff SureFire.” Among other things, the motion court held that “the plain language of the In-Kind Subscription Agreement unambiguous and not contain language that evince any intent to assign any legal claims to SureFire.” 6 On appeal, the First Department unanimously affirmed. The Court held that “plain language” of the In-Kind Subscription Agreement “was unambiguous and did not evince an intent to assign the fraud-based claims.” 7 The Court noted that “the one-paragraph subscription agreement provided only for the transfer of the ‘full balance of interest in Broad Reach Capital LP to Sure Fire Dividend Capture SPV5 … for the purposes of facilitating an in-kind subscription to the Fund in the amount of its 2/28/19 balance.’” 8 That language, said the Court, “plainly refer to the transfer of the amount invested in the fund, with nothing more.” 9 Since the language was clear and unambiguous on its face, the Court rejected SureFire’s attempt to show intent through “extra-contractual allegations.” 10 Takeaway The rule discussed above makes sense in the context of fraud claims. In a fraud action, the party alleging fraud must demonstrate reliance on the alleged misstatement or omission. When an assignment is made, the assignee must be in a position to allege reliance. As the courts have made clear, “ ithout a valid assignment, ‘only the … assignor may rescind or sue for damages for fraud and deceit’ because ‘the representations were made to and alone ha the right to rely upon them.’” 11 Footnotes Banque Arabe et Internationale D’Investissement v. Maryland Natl. Bank , 57 F.3d 146, 152 (2d Cir. 1995). Fox v. Hirschfeld , 157 App. Div. 364, 142 N.Y.S. 261 (1st Dept. 1913). Nearpark Realty Corp. v. City Investing Co. , 112 N.Y.S.2d 816, 817 (Sup. Ct., N.Y. County 1952). Commonwealth of Pennsylvania Pub. Sch. Employees’ Retirement Sys. v. Morgan Stanley & Co., Inc. , 25 N.Y.3d 543, 550 (2015); State of Cal. Pub. Employees’ Retirement Sys. v. Shearman & Sterling , 95 N.Y.2d 427, 432 (2000); see also Banque Arabe , 57 F.3d at 151-152. E.g. , State of Cal. Pub. Employees’ Retirement Sys. , 95 N.Y.2d at 432. Citing, Commonwealth of Pennsylvania , 25 N.Y.3d at 550, and State of Cal. Pub. Employees’ Ret. Sys. , 95 N.Y.2d at 432. A copy of the motion court’s decision and order can be found here . Slip Op. at *1 (citations omitted). Id. Id. Id. (citing, Ark Bryant Park Corp. v. Bryant Park Restoration Corp. , 285 A.D.2d 143, 150 (1st Dept. 2001)). Commonwealth of Pennsylvania , 25 N.Y.3d at 550 (quoting, Nearpark Realty , 112 N.Y.S2d at 817); see also Fox , 157 App. Div. at 365-368; Banque Arabe , 57 F.3d at 151.

By: Jeffrey Haber Commercial contracts typically include a liquidated damages provision that allows for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Courts will sustain such a provision if the liquidated amount is reasonably proportionate to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is grossly disproportionate to the probable loss, then the provision amounts to nothing more than a penalty and will not be enforced.  Similar to a liquidated damages clause is a penalty provision that fixes damages in the event of a breach of the contract. Penalty provisions in a contract are essentially no different from liquidated damages clauses and, therefore, are treated the same regardless of the nomenclature used by the parties. As the New York Court of Appeals stated, “ n interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for ‘liquidated damages’ . . . or have styled it as a penalty.” 1 What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. 2 Are Liquidated Damages Clauses and Penalty Provisions Enforceable? If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. 3 Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 4 Although the party challenging the liquidated damages provision has the burden to prove that the liquidated damages are, in fact, an unenforceable penalty, 5 the party seeking to enforce the provision must have been damaged in order for the provision to apply. 6  The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. 7 New York courts often strike liquidated damage clauses when they fail to meet the foregoing. 8 In addition, a liquidated damages clause will not be enforced “if it is against public policy to do so and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority” based on the principle of just compensation for loss. 9 “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” 10 In Atlantis Management Group II LLC v. Nabe , 2023 N.Y. Slip Op. 02737 (1st Dept. May 18, 2023) ( here ), the Appellate Division, First Department examined the foregoing principles in affirming the dismissal of a breach of contract claim that was based on an enforceable penalty provision in four similar operating agreements. Atlantis Management Group II LLC v. Nabe Atlantis involved four limited liability companies (the “Companies”), each of which operated a gas station in New York City. Plaintiff was an “Investor Member” and defendants Rajan Nabe and Rahul Nabe were the “Managing Member” of the Companies.  Beginning in 2008, the Companies made monthly profit distributions to plaintiff based on monthly profit and loss statements from gasoline and merchandise sales. Defendants alleged that in 2011, the parties orally agreed (the “Oral Agreement”) that plaintiff would accept a fixed sum of $10,000 each month from the Companies and that defendants were no longer required to provide plaintiff with financial information. Plaintiff disputed whether any financial disclosure could be withheld and asserted that this payment arrangement was to continue until defendants improved their accounting methodology for the Companies. In 2016, plaintiff verbally and in writing demanded financial statements and an accounting from the Companies, urging that it was entitled to its share of profits. Defendants contended that, pursuant to the Oral Agreement, plaintiff waived its rights to a percentage of profits and to the Companies’ books and records. Plaintiff sent notices of default and notices to cure to defendants for violations of the Companies’ operating agreements (the “Notices”). The Notices further provided that if the defendants failed to cure, then plaintiff would exercise its buy-back rights pursuant to the operating agreements. Under Section 6.3 of the operating agreements, if, among other things, defendants “ reach any provision of this ”, then plaintiff had the right “to Buy-Back all of the Membership Interests of the Managing Members < i.e. , defendants> i.e., defendants> in consideration for the sum of One ($1.00) Dollar U.S ….”  In 2017, plaintiff commenced the action, asserting causes of action for (1) an accounting, (2) breach of fiduciary duty against defendants, (3) breach of contract, (4) specific performance (based on the buy-back provision), (5) declaratory judgment (as to ownership of Companies) and (6) fraud. Defendants moved for leave to amend their answer to assert additional counterclaims based on breach of fiduciary duty relating to 2020 events. Plaintiff opposed the motion and cross-moved for summary judgment on its remaining causes of action. 11 The motion court held that plaintiff was entitled to summary judgment as to liability only with regard to its claim for the failure to provide the Companies’ books and records. The motion court dismissed the breach of contract and specific performance claims as they pertained to the buy-back right under Section 6.3 of the operating agreements. The motion court held that the buy-back clauses were grossly disproportionate, unreasonable, unenforceable penalty provisions. By their terms, explained the motion court, the breach of any provision however trivial triggered “the draconian $1-buy-out consequence without regard to the magnitude of the breach or actual value of the interest surrendered.” The motion court further explained that Section 6.3 “was ‘conspicuously disproportionate to [] foreseeable losses’ because the same drastic remedy applie to an immaterial technical breach as it a material one.” 12 “By punishing any breach, however minor, with forfeiture of valuable interests in exchange for a mere dollar,” concluded the motion court, “the intent of the provision purely punitive.” “In no way was it intended to remotely correspond with the magnitude of any loss or injury,” said the motion court. Accordingly, the motion court dismissed the causes of action for breach of contract and specific performance and declared that § 6.3 of the operating agreements constituted an unenforceable penalty. The First Department unanimously affirmed. The Court held that the motion court “correctly concluded that § 6.3 of the parties’ operating agreements (OAs) … was an unenforceable penalty.” 13 The Court explained that “Section 6.3 was not a reasonable measure of the anticipated harm arising from a breach but was instead punitive in nature, serving to propel performance by the rather than to merely compensate for a loss.” 14 Moreover, the Court found that the liquidated amount not only did not bear a reasonable proportion to the probable loss, but the amount of the actual loss could be determined. 15 In fact, noted the Court, “the amount of actual damages was ascertainable, as evinced by the affidavit of plaintiff’s certified public accountant.” 16 “In addition,” said the Court, “the buyback clause in § 6.3 violated public policy, as it grossly overcompensated plaintiff for any loss it may have sustained from a breach of contract.” 17 As such, “the principle that parties have freedom of contract” could “be overridden” by such a “significant countervailing public policy.” 18 here,=">here," >here=">here" and="and" >here.=">here."> Takeaway Atlantis stands as a reminder that the courts of New York will not hesitate to strike a penalty provision or a liquidated damages clause that punishes as opposed to compensates. Atlantis is also notable in that the Court struck the penalty provision as violative of New York public policy. Although parties are free to contract, 19 they may not enter agreements that are unconscionable or contrary to public policy. 20 As noted by the First Department, liquidated damages that constitute a penalty, violate public policy and may override this countervailing policy principle. Footnotes Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 425 (1977). Id. at 424 (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting, Truck Rent-A-Ctr. , 41 N.Y.2d at 424). 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005); Parker v. Parker , 163 A.D.3d 405, 406 (1st Dept. 2018). See , e.g. , J. Weinstein & Sons, Inc. v. City of New York , 264 App. Div. 398, 400 (1st Dept.) (“The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever”), aff’d , 289 N.Y. 741 (1942). Truck Rent-A-Ctr ., 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding , 4 N.Y.3d at 380. See , e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from the time of the breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which the tenant forfeited $63,500 in deposits regardless of whether the tenant terminated agreement with several months’ notice). Truck Rent A-Ctr. , 41 N.Y.2d at 424; Beltway 7 Props., Ltd. v. Blackrock Realty Advisors, Inc ., 167 A.D.3d 100, 106-107 (1st Dept. 2018); Matter of Krodel v. Amalgamated Dwellings Inc. , 166 A.D.3d 412, 414 (1st Dept. 2018) (parties may contract for attorneys’ fees so long as they are not in the nature of a penalty or forfeiture). Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Plaintiff was awarded partial summary judgment on its accounting claim. Citing, JDM Holding Corp ., 4 N.Y.3d at 380. Slip Op. at *1. Id. Id. (citing, Trustees of Columbia Univ. in the City of N.Y. v D’Agostino Supermarkets, Inc. , 36 N.Y.3d 69, 75 (2020)). Id. Id. (citing, New England Mut. Life Ins. Co. v. Caruso , 73 N.Y.2d 74, 81 (1989)). Id. (citing, 172 Van Duzer Realty. , 24 N.Y.3d at 536). Freedom of contract is a “deeply rooted” public policy of the State of New York ( 159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 359 (2019); see also New England Mut. Life Ins. Co. v Caruso , 73 N.Y.2d 74, 81 (1989)) and a right of constitutional dimension (U.S. Const, art I, § 10(1)). New York courts have long deemed the enforcement of contracts according to the terms adopted by the parties to be a pillar of the common law. Id. Thus, “ reedom of contract prevails in an arm’s length transaction between sophisticated parties ..., and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.” Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co. , 86 N.Y.2d 685, 695 <1995> ). “By disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of … parties in ordering their own business arrangements.” 159 MP Corp. , 73 N.Y.2d at 359-360. Truck Rent-A-Ctr. , 41 N.Y.2d at 424 (citing, Mosler Safe Co. v. Maiden Lane Safe Deposit Co. , 199 N.Y. 479, 485 (1910)). 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 The question of when parties must close title on a real estate transaction is often answered by another question – has either party sent a “time of the essence” letter?  [Eds. Note: this Blog has previously addressed “time of the essence” letters < here =">here"> .] The law is settled that when “a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance.”  Revital Realty Group, LLC v. Ulano Corp . , 112 A.D.3d 902, 904 (2 nd Dep’t 2013) (citations omitted); see also Lashley v. BDL Real Estate Dev. Corp . , 212 A.D.3d 800, 800-01 (2 nd Dep’t 2023).  “A party need not state specifically that time is of the essence, as long as the notice specifies a time on which to close and warns that failure to close on that date will result in default.”  Point Holding, LLC v. Crittenden , 119 A.D.3d 918, 920 (2 nd Dep’t 2014) (citation omitted). The reasonableness of the time of performance “depends upon the facts and circumstances of the particular case.”  Ben Zev v. Merman , 73 N.Y.2d 781, 783 (1988) (citation omitted); see also Lee v. Robertson , 165 A.D.3d 639,.640 (2 nd Dep’t 2018).  Factors to be considered in making a “reasonableness” determination include “the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance.”  Id. (citations omitted).  “‘The determination of reasonableness must by its very nature be determined on a case-by-case basis.’”  Rodrigeus NBA, LLC v. Allied XV, LLC , 164 A.D.3d 1388, 1389 (2 nd Dep’t 2018) ( quoting Ben Zev , 73 N.Y.2d at 783). If a time of the essence letter does not “clearly and unambiguously set a specific date for the closing” a party to a real estate contract cannot be held in default for failing to close.  Krishna v. Jasper Old Westbury 66 LLC , 175 A.D.3d 600, 602 (2 nd Dep’t 2019) (citations omitted).  In Krishna , after purchaser failed to obtain financing within the time set forth in the contract, the seller sent a purported time of the essence letter providing that “‘a closing has been scheduled for December 19, 2016 , at 2:00 p.m.,’ and that ‘ nless this transaction is closed by the end of business day on December 15, 2016 , Purchaser will be held in default of the Contract.’”  (Emphasis in original.) Supreme court denied purchaser’s motion for summary judgment seeking the return of the down payment and granted seller’s cross-motion permitting it to retain the down payment.  The Second Department reversed; finding that purchaser could not be held in default for failing to appear at closing because the date for closing in seller’s time of the essence letter was not clear. On May 17, 2023, the Appellate Division, Second Department, decided LG723 v. Royal Dev., Inc . , a case addressing time of the essence letters.  In LG723 , seller and purchaser executed a contract for the sale/purchase of real property that set a closing date but did not make that date time of the essence.  Purchaser failed to appear at the closing date set forth in the contract.  On April 11, 2019, seller’s counsel sent a time of the essence letter scheduling a closing for May 15, 2019, and advising that buyer would be held in default if it failed to appear.  Purchaser averred (in the subsequently filed complaint) that, after receiving the time of the essence letter, purchaser’s managing member “had a telephone conversation with the 's president who assured that the would not be held in default if it failed to appear for the closing on May 15, 2019.”  Purchaser failed to appear at the closing on May 15, 2019, and, later that day, seller’s attorney sent a letter to purchaser’s attorney stating that “the closing had taken place as scheduled, the had defaulted, the 's deposit was being retained as liquidated damages, and the contract was deemed terminated.” Thereafter, purchaser commenced an action for, inter alia , specific performance of the real estate contract.  [Eds. Note: this Blog addressed specific performance of real estate contracts < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  After seller interposed an answer, but before any discovery had taken place, seller moved for summary judgment on the specific performance cause of action.  Purchaser opposed the motion by reiterating the averment in the complaint that it was told by seller’s president that purchaser would not be defaulted if it failed to appear for the May 15 closing.  Purchaser appealed supreme court’s grant of summary judgment in favor of seller. The Second Department reversed.  After discussing the general law on time of the essence letters, the Court noted that seller’s April 11, 2019, letter satisfied all of the requirements “by unequivocally setting May 15, 2019, as the closing date, expressly stating that time was of the essence, and advising the plaintiff that if it failed to appear for the closing on that date, it would be deemed in default of the contract of sale and the down payment would be retained by the defendant.”  However, the Court, relying on the “well settled” law that “oral waiver of the time for the sale of real property will be given effect,” stated: 's assertion, made under the penalties of perjury, that was assured by the 's president that the would not be held in default in the event that it failed to close the transaction on May 15, 2019, was sufficient to raise a triable issue of fact as to whether the 's president made a statement to that operated as a waiver of the 's right to enforce the May 15, 2019 deadline for the closing. Contrary to the 's contention, in order for such a waiver to occur, it was not necessary that the April 2019 letter be withdrawn in a formal communication from the 's attorney. A waiver of the right to timely performance under a contract "need not be in writing in order to be valid and enforceable" ( Kistela v Ahlers, 22 AD3d 641, 643 ). Such a waiver may occur even without an oral statement, such as the one that was allegedly made in this case, and may instead be inferred solely from a party's conduct ( see Chaves v Kornfeld, 83 AD3d 522, 523 ). Accordingly, the Court found that supreme court should have denied seller’s motion for summary judgment because there were triable issues of fact “as to whether the waived the deadline for closing the transaction, and thus whether the had a right to declare the in default and to terminate the contract.” 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 This Blog has previously written about the benefits of forming a corporation or a limited liability corporation and the perils of ignoring the corporate formalities that are attendant thereto ( see , e.g. , here , here , here , here , and here ). In today’s article, we examine the alleged use of the corporate entity to commit a wrong on another and the court’s unwillingness to pierce the corporate veil to hold the owner personally liable for that wrongful conduct. Matter of Small v. Estate of Landesman , 2023 N.Y. Slip Op. 02628 (1st Dept. May 16, 2023) ( here ). Small involved an attempt to enforce a monetary judgment entered against Platinum Management (NY) LLC (“PMNY”) following confirmation of an arbitration award in favor of petitioner, finding he was owed bonus compensation for three years in which he acted as a portfolio manager responsible for a related investment fund, Platinum Partners Value Arbitrage Fund LP (“PPVA”). PPVA was founded in 2003 by David Bodner (“Bodner”), Murray Huberfeld (“Huberfeld”) and Mark Nordlicht (“Nordlicht”). By October 2014, PPVA had over 300 investors with $801 million of assets under management invested across 10 investment strategies. Platinum Management (NY) LLC (“PMNY”) was the general partner of PPVA, with exclusive control and authority over PPVA, including the management of its assets and the hiring of employees to assist in the management of assets. Additionally, PMNY was the investment manager of PPVA pursuant to an investment management agreement. Petitioner maintained that PMNY had the exclusive authority to, among other things, cause PPVA to reimburse PMNY for its operating expenses including the compensation of its employees. In 2010, Uri Landesman (“Landesman”) 1 joined Bodner, Huberfeld and Nordlicht as a principal and 25% percent owner of PMNY. Landesman succeeded Nordlicht as the sole designated managing member of PMNY. He served as the president of PMNY, as well as president and general managing partner of PPVA. Petitioner, a professional investment manager hired by PMNY, claimed, that pursuant to an investment management agreement with PMNY (“employment agreement”), he was entitled to a salary, plus a bonus payable annually equal to a specified percentage of the net profits his investment account generated. Petitioner alleged that Landesman, the individual in control of PMNY and PPVA, failed to authorize the payment of his 2012, 2013 and 2014 bonuses. He further claimed that Landesman paid himself and his partners tens of millions of dollars while failing to establish any reserves for petitioner’s compensation. According to petitioner, PMNY was a shell corporation with insufficient assets to meet its obligations. Petitioner claimed that PMNY’s assets came from PPVA, which transferred only enough money into PMNY’s bank account to meet its monthly expenses and pay management fees to Landesman and his partners.  Petitioner filed an arbitration claim for breach of contract against PMNY. In July 2016, the arbitrator found in favor of petitioner, to wit: that PMNY owed petitioner bonus compensation. In February 2020, the court confirmed the arbitration award, and judgment was entered in favor of petitioner and against PMNY in the amount of $12,703,558.00, plus post judgment interest at nine (9%) percent per annum on the principal amount of $9,566,327.00. The judgment remains outstanding and PMNY is allegedly insolvent with no cash, securities, or income.  Petitioner filed an order to show cause, pursuant to CPLR 5225(b) and 5227, for an order piercing the corporate veil and holding respondent Landesman’s estate jointly and severally liable for the judgment against PMNY, premised on the allegation that Landesman was an alter ego of PMNY who abused its corporate form to enrich himself to the detriment of petitioner. In opposition, respondent argued that petitioner’s application should be denied because petitioner relied on nothing more than conclusory allegations of domination and control over PMNY, premised on Landesman’s position as president of the same.  Respondent also argued that the equitable doctrines of in pari delcito and unclean hands precluded petitioner from collecting the judgment against the estate because he remained under indictment in the United States District Court for the Eastern District of New York for his participation in alleged frauds executed at Platinum Partners. Additionally, petitioner was named as a defendant in an brought by the Securities and Exchange Commission , also pending in the Eastern District of New York. Since a significant portion of the judgment rested on compensation for work subject to those pending cases, respondent claimed that petitioner was seeking to recover ill-gotten gains and, thus, the application should be dismissed. Under New York law, a plaintiff who attempts to pierce the corporate veil must demonstrate that “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff's injury.” 2 “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business …, such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.” 3 Thus, “ he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.” 4 The determination whether to pierce the corporate veil is a fact-intensive one. And, because it is fact-intensive, the courts have held that it is not appropriate to make the determination “on a pre-answer, pre-discovery motion to dismiss.” 5 Significantly, because the analysis is so fact dependent, it “eschews mechanical interpretation.” 6 Accordingly, the courts consider the totality of the facts and evidence, as well as the public policy of “protect those who deal with the corporation.” 7 The motion court held that petitioner failed to meet “the very high standard required for piercing the corporate veil.” 8 The court found that petitioner failed to show that Landesman, a part owner of PMNY, exercised complete domination and control over the entity such that, as a matter of law, he was liable for its debt.  The motion court rejected petitioner’s allegations that Landesman engaged in activities that rendered PMNY insolvent and unable to satisfy its debts:  To the extent plaintiff maintains Landesman failed to establish any reserve for petitioner's unpaid bonus compensation; undercapitalized PMNY; paid himself and his partners millions of dollars in distributions rather than paying petitioner's unpaid compensation; and entered into the self-dealing Fraudulent Employee Liability Transaction to enrich himself and his partners, leaving PMNY insolvent and defrauding its creditors, there is no competent proof that Landesman actually directed and controlled the alleged transfer of funds between PMNY, PPVA and any other related entities.  The motion court noted that “petitioner’s own proof suggest that other partners, i.e., Nordlicht, exercised at least some degree of discretion with respect to compensation,” thereby “belying petitioner’s claim that Landesman exercised complete control over PMNY.” On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly found that, … , petitioner failed to present sufficient facts to raise a triable issue that warrants invoking the equitable doctrine of piercing the corporate veil to allow petitioner to recover his judgment against PMNY from respondent estate.”9 Referencing the motion court’s decision, the Court noted that “the evidence submitted by petitioner indicate that decedent by himself did not dominate and control PMNY in that, at a minimum, he consulted with others, including Nordlicht, on financial and employee matters, notwithstanding the provisions of PMNY’s operating agreement.” 10 “Notably,” observed the Court, “decedent owned only 25% of PMNY, while Nordlicht and his grantor trust owned the other 75% and had the power to remove decedent at any time.” 11 The Court also found that “ etitioner … provided scant evidence of disregard of the corporate form, overlapping officers, managers and employees with PPVA, or common offices and telephone numbers.” 12 Additionally, said the Court, “ nsufficient evidence was … presented to raise a triable issue of fact as to whether either was a sham entity …, or whether the challenged transfers from PMNY or PPVA to decedent, Nordlicht and others were part of a fraud directed at petitioner.” 13 Finally, the Court noted that “respondent’s invocation of the doctrines of in pari delicto and unclean hands, which are implicated by the broader fraud charges surrounding the Platinum entities, not persuasive, as the criminal charges against petitioner not been finally resolved.” 14 Takeaway As noted, courts will pierce the corporate veil and impose liability on the company’s owners or members when: (1) they exercise complete domination over the corporation or LLC; and (2) their domination of the corporation or LLC is used to commit a fraud or wrong that injured another. Merely tracking the elements of veil piercing is not enough to withstand a motion to dismiss. A plaintiff must do more; he/she must proffer facts. When the plaintiff fails to provide factual support for the allegations, as both courts found in Small , the veil piercing claim will fail. Footnotes Landesman died on September 14, 2018. Morris v. State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 141 (1993); see also Doe v. Bloomberg, L.P. , 178 A.D.3d 44, 50 (1st Dept. 2019). Morris , 82 N.Y.2d at 141-142. Id. at 142. See also Sutton 58 Assocs. LLC v. Pilevsky , 189 A.D.3d 726, 729 (1st Dept. 2020). BT Ams. Inc. v. ProntoCom Mktg. Inc. , 859 N.Y.S.2d 893 (Sup. Ct., N.Y. County 2008) (holding that veil piercing “is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss”). LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017) (quoting, Morris , 82 N.Y.2d at 141). Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc. , 933 F.2d 131, 139 (2d Cir. 1991). A copy of the motion court’s decision and order can be found here . Slip Op. at *1 (citing, Matter of Gonzalez v. City of New York , 127 A.D.3d 632, 633 (1st Dept. 2015)). Id. Id. Id. Id. (citations omitted). Slip Op. at *1-*2. As a general matter, the doctrine of in pari delicto prevents a plaintiff who participated in an alleged wrongdoing from recovering damages from that very same wrongdoing. The doctrine mandates that in such circumstances the courts will not intercede to resolve a dispute between two wrongdoers. Kirschner v. KPMG LLP , 15 N.Y.3d 446, 464 (2010). This Blog wrote about the in pari delicto doctrine here . 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 To plead a fraud cause of action, a plaintiff must allege: (1) a misrepresentation of material fact; (2) falsity; (3) scienter; (4) justifiable reliance; and (5) damages. 1 Each element of the claim must be satisfied for the plaintiff to prevail on the cause of action. The failure to satisfy each element will result in dismissal of the claim. In Hayes v. Martinez , 2023 N.Y. Slip Op. 02587 (1st Dept. May 11, 2023) ( here ), the Appellate Division, First Department reversed the denial of a summary judgment motion involving a fraud claim because the plaintiff failed to show the making of a misrepresentation and/or an omission on which she relied. Plaintiff, Donna Hayes, alleged that, on July 20, 2016, defendant, Tommy Montalvo (“Montalvo”), with whom she had carried on a romantic relationship, induced her to write a $48,000 check to defendant Ululy Rafael Martinez (“Martinez”), Montalvo’s first cousin, so that Martinez could buy and sell stocks on Montalvo’s behalf. Hayes further alleged that between March 20 and May 1, 2017, Montalvo induced her to give Montalvo $114,000 in cash to buy and renovate Martinez’s vacant three-family property in Waterbury, Connecticut. Plaintiff maintained that the foregoing opportunities were non-existent and intended to scam her out of $162,000. In her complaint, plaintiff asserted claims against Montalvo and Martinez for common law fraud, conversion, breach of contract, and unjust enrichment.  On May 7, 2021, Martinez moved for summary judgment and dismissal of all causes of action against him. Martinez argued that he was not involved in Montalvo’s schemes and had no knowledge of them until after plaintiff demanded repayment of the monies she had paid and threatened suit. Martinez further argued that during discovery plaintiff admitted that she had no communications with Martinez regarding either of the two allegedly false investment opportunities that Montalvo presented to her, and that she never even tried to communicate with Martinez regarding those matters. Martinez claimed that plaintiff relied exclusively on the representations Montalvo had made to her regarding the purpose of the funds he allegedly induced her to give to him. Martinez further claimed that he relied solely on his communications with Montalvo regarding the purpose of the $48,000 check that Montalvo caused plaintiff to issue in July 2016, and that he disposed of the funds exactly as Montalvo had directed. Moreover, until plaintiff threatened suit, Martinez claimed that he did not know Montalvo had allegedly induced plaintiff to give him $114,000 in cash under the false pretense of purchasing and renovating Martinez’s property.  Plaintiff opposed Martinez’s motion and cross-moved for partial summary judgment in her favor as to the unjust enrichment claim. Plaintiff argued that Martinez and Montalvo made affirmative, misrepresentations of material facts, knowing those statements to be false, with the intention that the statements be communicated by Montalvo on Martinez’s behalf, and that plaintiff relied on those statements to her detriment. The motion court denied Martinez’s motion as to plaintiff’s fraud, conversion, and unjust enrichment claims, and denied the motion in part as to plaintiff’s breach contract claim. Although there was no dispute that plaintiff and Martinez never directly communicated with each other about the allegedly non-existent investment opportunities that Montalvo presented to her, the motion court found issues of fact sufficient to preclude the grant of summary judgment on all of plaintiff’s claims. Martinez appealed. The First Department modified the motion court’s order to dismiss the causes of action for fraud and breach of contract and to dismiss the cause of action for conversion insofar as plaintiff alleged that Martinez failed to return $48,000 to her, and to dismiss the cause of action for unjust enrichment with respect to the $48,000, and otherwise affirmed. We discuss the portion of the First Department’s decision concerning plaintiff’s cause of action for fraud. The Court held that “Martinez was entitled to dismissal of the cause of action for fraud, as he established that he never communicated with Hayes regarding either the $48,000 or the $114,000, and therefore never communicated a false statement to her.” 2 In so holding, the Court noted that during discovery, “Plaintiff admitted … that her direct communications with Martinez were limited to matters unrelated to the transactions at issue here.” 3 The Court also found that there were no indirect statements – i.e. , statements made “from Montalvo that Montalvo claimed came from Martinez” – which could show the making of a misstatement of fact: “As to whether Martinez indirectly communicated a false statement to plaintiff, she identifies no statement from Montalvo that Montalvo claimed came from Martinez, nor does she even allege facts suggesting that any statements to her were made at Martinez’s request.” 4 Accordingly, the Court held that “plaintiff failed to raise an issue of fact” necessary to defeat defendant’s motion for summary judgment. 5 Takeaway As discussed at the outset of this article, a plaintiff alleging fraud must show that the defendant made a statement on which the plaintiff relied. In the typical case, the defendant makes a false or misleading statement directly to the plaintiff. In Hayes , defendant did not make any statement about the alleged non-existent transactions directly to plaintiff. In the less frequent case, the misrepresentation of fact is made to a third party that relied on the alleged fraudulent statement. In that circumstance, the question is whether the plaintiff can state a fraud cause of action, despite the absence of direct reliance by the plaintiff on the alleged misrepresentation?  In  Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817 (2016), the New York Court of Appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 6  In other words, the alleged misrepresentation or omission does not need to be made directly to the plaintiff so long as the statement was made with the intent that it be communicated to the plaintiff by a third party and the plaintiff relied on the representation or omission to his or her detriment. Hayes shows that satisfying rule the articulated in Pasternack can be difficult. As noted, a plaintiff must allege that the misrepresentation was made for the purpose of being communicated to the plaintiff in order to induce his/her reliance thereon or that the misrepresentation was relayed to the plaintiff, who then relied upon it. The failure to allege either will, as Hayes learned, result in dismissal of a fraud cause of action.This Blog examined fraud and third-party reliance  here , here . Footnotes Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016). Slip Op. at *1. Id. at *2. Id. (citing, Pasternack , 27 N.Y.3d at 828). Id. at *1-*2. 27 N.Y.3d at 828. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has previously discussed issues related to whether a binding agreement (a settlement agreement or otherwise) was formed by parties to a dispute.  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  In our prior articles we discussed, inter alia , the elements of contract formation and whether emails suffice to satisfy signing requirements. Such issues were relevant to the Appellate Division, First Department’s, May 9, 2023, decision in Go New York Tours, Inc. v. Tour Central Park Inc.   [Eds. Note: much of the information set forth herein was derived from the supreme court decision appealed from < here =">here"> available on the Court’s NYSCEF system, and from which most of the unascribed quotes are taken.]  The parties both operate bicycle rental and tour businesses in New York City’s Central Park.  Plaintiff commenced a trademark infringement action against defendant in the United States District Court for the Southern District of New York (the “Federal Action”).  The Court in the Federal Action referred the matter for mediation.  The mediation appeared successful as defendant’s counsel sent plaintiff’s counsel the following email: It is hereby agreed by the parties that subject to a formalized Settlement Agreement, subsequent to Mediation, the parties have agreed to resolve the matter styled Go New York Tours Inc. v Tour Central Park Inc., SDNY Docket No. 19- cv-09803 (VEC)(KNF) as follows: • Defendant shall not use the term “Bike Rental Central Park” in Defendant’s business capacity; • Plaintiff shall not use the term “Bike Rent NYC” in Plaintiff’s business capacity; • Both Plaintiff and Defendant may use the terms “Central Park Bike Rent” and “Central Park Rent Bike”;  • Both parties shall absolutely disavow any professional affiliation or relationship with the other; • Tour Central Park shall pay Go New York Tours Ten Thousand Dollars ($10,000.00); • Neither Plaintiff nor Defendant admits any liability or wrongdoing. The parties agree that each side participated in the subject Mediation with the assistance of and representation by counsel. The parties understand and agree to the terms of the settlement as contemplated at Mediation and consent that said terms are subject to the execution of a formal Settlement Agreement. Plaintiff’s counsel subsequently sent a confirmatory email as to the agreement’s terms.  A joint letter was submitted to the Court in the Federal Action advising of the settlement and requesting the adjournment of an upcoming status conference “‘with the expectation that the above settlement will be finalized in the interim and the action discontinued.’” Shortly thereafter, defendant sought to open the Federal Action due to its principal’s “misunderstanding” as to the meaning of a settlement term that his own attorney included in the settlement email.  Defendant’s principal claimed he did not agree that both parties “may use the terms ‘Central Park Bike Rent’ and ‘Central Park Rent Bike’”.  After an additional mediation session failed to resolve the outstanding issue, the Court in the Federal Action issued an order indicating that is did not have subject matter jurisdiction to determine whether the parties “settlement agreement” was enforceable.  Accordingly, the plaintiff in the Federal Action commenced an action in supreme court to enforce the settlement.  Defendant moved for summary judgment dismissing the action and plaintiff cross-moved for summary judgment. Essentially, defendant argued that there was no meeting of the minds because its principal, whose first language was not English, understood that defendant would retain exclusive rights to the use of the names “Central Park Bike Rent” and “Central Park Rent Bike.”  Supreme court found defendant’s position “utterly contradicted” by the settlement email language, which “cannot plausibly” be deemed ambiguous.   Defendant also contended that because the settlement email indicated that it was “subject to the execution of a formal Settlement Agreement,” no settlement agreement was reached by the parties.  Supreme court then discussed the law in this area.    The court explained that “the law distinguishes between “a preliminary agreement contingent on and not intended to be binding absent formal documentation, which is not enforceable, and a binding agreement that is nevertheless to be further documented, which is enforceable with or without the formal documentation.”  (Citations and internal quotation marks omitted.)  The former, the court noted, requires an explicit reservation that there would be no contract until the full formal document is completed and executed the mere fact that the parties intended to draft formal settlement papers is not alone enough to imply an intent not to be bound except by a fully executed document.”  (Citations and internal quotation marks omitted.) Specifically, where agreements contain “subject to a signed writing” language, supreme court stated that “it may indicate that the writing is a condition precedent that must occur before obligations under the agreement become binding” but “in other instances, ‘subject to’ language has been held to fall short of an express reservation of the right not to be bound absent an executed agreement.”  After analyzing numerous cases, supreme court concluded that: “subject to” or other similar language in an agreement is not a talisman against enforceability, as the defendant suggests. Rather, it is one factor, among several, that the court must consider in determining whether the defendant intended to be bound. In this regard, courts assess whether the parties’ conduct evidenced an intent to be bound, whether all material terms of the contract have been agreed upon, whether the agreement at issue is the type of contract usually committed to writing, and whether there has been partial performance of the contract. Supreme court went on to explain, inter alia , that defendant’s “own counsel memorialized the material terms of the parties’ settlement, including the amount to be paid by the defendant and a clear agreement as to usage of disputed terms in the parties’ respective businesses, in an email sent during the mediation, with the subject line, ‘Go New York v. Tour Central Park – Term Sheet – For review.’”  Further, plaintiff’s counsel confirmed the terms were “fine” and counsel to both parties agreed to the additional term that the “documentation be completed and payment made within 30 days.”  Additionally, no writings suggested that the agreement was “proposed,” “preliminary” or otherwise “tentative”. Finally supreme court noted that “the format of settlement agreements is governed by CPLR 2104” and the “email correspondence submitted here suffices to meet CPLR 2104’s requirements for enforceability.” Thus, supreme court denied defendant’s motion for summary judgment and granted, in part, plaintiff’s motion for summary judgment as to liability on its sole cause of action (breach of contract).  However, supreme court left plaintiff’s entitlement to specific performance and compensatory damages to be determined at trial.  On defendant’s appeal, the First Department unanimously affirmed and stated: The court properly found that the parties entered into a binding settlement agreement at the conclusion of mediation, the terms of which were embodied in an email agreement. The email correspondence is sufficient to embody a settlement agreement since it was authentic and sets forth all material terms.  The settlement agreement specifically stated that it would be "subject to a formalized Settlement Agreement." In analyzing these types of phrases, courts must determine whether the parties have merely come to a preliminary agreement to agree (which is not enforceable), or a binding agreement, by determining whether there has been an explicit reservation that there would be no contract until the full formal document is completed and executed. Here, the parties' use of the phrase "subject to," standing alone, did not amount to an express reservation of the right not to be bound or a condition precedent to the formation of a binding contract. Under these circumstances, the court properly found that the "subject to" language was indicia of the parties' expectation that they would come to a final agreement as a mere formality, not as a condition precedent to a binding settlement agreement. The parties' subsequent actions — including their correspondence with each other, their cocounsel and the court — all indicate their respective understandings that the parties had come to a final settlement agreement resolving the related action in federal court.  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 Jonathan H. Freiberger Pursuant to CPLR 3014 , inter alia , “ copy of any writing which is attached to a pleading is part thereof for all purposes.”  Where “a copy of the agreement is annexed to and made a part of the complaint, the rights and duties of the parties must be determined by the terms of the contract annexed to the complaint, and not by the plaintiff’s characterization or construction thereof in his pleading he rights of the parties thereunder must be determined by the terms of that instrument without the aid of such conclusions as the plaintiff has set up respecting its legal effect.”  Miglietta v. Kennecott Copper Corp. , 25 A.D.2d 57, 58 (1 st Dep’t 1966) (citation and internal quotation marks omitted); see also 805 Third Ave. Co. v. M.W.Realty Assoc. , 58 N.Y.2d 447, 451 (1983) (citing, inter alia, Miglietta ). The import of CPLR 3014 was an issue, among others, addressed on May 2, 2023, by the Appellate Division, First Department, in Carey v. Toy Industry Ass’n TM, Inc. , which, at its core, was a personal injury matter.    The plaintiff in Carey , a carpenter, was injured when he slipped and fell.  Carey sued Toy Industry, which, in turn, brought a third-party complaint against Freeman Expositions, Inc. (“Freeman”) in which Toy Industry sought indemnity and contribution against Freeman for Carey’s injuries.   Freeman moved for summary judgment dismissing the third-party claims.  In its motion, Freeman argued, among other things, that indemnification language from the contract between Toy industry and Freeman was inapplicable because the accident was caused by the negligence of “any other party not under Freeman’s direct control,” which was an exception to Freeman’s indemnification obligations under the contract.  The operative contracts were annexed as exhibits to the affidavit of Freeman’s counsel, and not a representative of Freeman with first-hand knowledge of the contracts. Supreme court denied Freeman’s motion in a decision and order which, in its substantive entirety as it relates to Freeman’s motion, states:  ORDERED that third-party defendant Freeman Expositions, Inc.’s motion for summary judgment is denied as the Freeman/TIA Contract and the TIA/NYCCOC License Agreement upon which it relies are not authenticated as required by CPLR 4518(a) and thus are inadmissible and cannot form the basis to grant summary judgment (Clarke v. American Truck & Trailer, 171 A.D.3d 405, 406 <1st dep’t 2019> )…. Freeman’s counsel then moved for renewal/reargument and that motion was denied. On Freeman’s appeal, the Second Department “unanimously modified, on the law, to grant that portion of Freeman’s motion for summary judgment dismissing the common-law indemnification and contribution claims asserted against it, and otherwise affirmed.”  In so doing, the Court determined, among other things, that copies of the operative contracts were annexed to the third-party complaint, and stated: The motion court should not have denied Freeman’s motion for summary judgment on the basis that its contract with third-party plaintiff Toy Industry Association, Inc. (TIA) was not in admissible form. The copy of the contract on which Freeman relied in support of its motion was annexed to TIA’s third-party complaint. The contract, therefore, was part of the complaint “for all purposes” (CPLR 3014), and facts admitted in the complaint constitute formal judicial admissions, and are conclusive of the facts admitted. Thus, TIA’s rights arise out of the contract annexed to its complaint and it is bound by the contract provisions. The contract was also admissible for the independent reason that TIA both did not object to its admissibility before the motion court (rather, plaintiff did) and relied on the same contract in support of its cross motion.  In view of the foregoing, we dismiss as academic Freeman’s appeal from the order denying its motion for leave to renew, the purpose of which was to tender the contract in admissible form to the motion court’s satisfaction.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In past articles, we have examined a motion for summary judgment in lieu of a complaint under CPLR § 3213 ( see ,  e.g. , here ,  here ,  here ,  here , and  here ). Today, we take another look at this statute by examining BBM3, LLC v. Vosotas , 2023 N.Y. Slip Op. 02279 (1st Dept.  May 2, 2023) ( here ), a case involving an unconditional guaranty of payment. CPLR § 3213 Pursuant to CPLR § 3213, “ hen an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint.” The purpose of CPLR § 3213 is “to provide quick relief on documentary claims so presumptively meritorious that a formal complaint is superfluous, and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.” 1 A promissory note 2 and an unconditional guaranty are prototypical instruments for the payment of “money only” within the meaning of CPLR § 3213. 3 To meet the prima facie burden on a summary judgment motion under CPLR § 3213, the movant must prove “the existence of the guaranty, the underlying debt and the guarantor’s failure to perform under the guaranty.” 4 Thereafter, “the burden shifts to the defendant to establish, by admissible evidence, the existence of a triable issue with respect to a bona fide defense.” 5 What is a Guaranty? A guaranty is a promise to fulfill the obligations of another party and is subject “to the ordinary principles of contract construction.” 6 Under those principles, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” 7 “Guaranties that contain language obligating the guarantor to payment without recourse to any defenses or counterclaims, i.e. , guaranties that are ‘absolute and unconditional,’ have been consistently upheld by New York courts.” 8 “Absolute and unconditional guaranties have … been found to preclude guarantors from asserting a broad range of defenses.” 9 The New York Court of Appeals has acknowledged the application of absolute guaranties even to claims of fraudulent inducement in the execution of a guaranty. In Citibank v. Plapinger , 66 N.Y.2d 90 (1985), the defendants were officers, directors and shareholders in a company which secured a line of credit from the plaintiff banks. After the company defaulted, it restructured its debt as a term loan, guaranteed by the defendants. When the company subsequently filed for bankruptcy, the banks declared the term loan and interest immediately due and sued the defendants on the guaranty. Among their defenses to the litigation, the defendants asserted fraud in the inducement, based on alleged false or recklessly made statements of the banks that they would provide the company with an additional line of credit as part of the debt restructuring. The defendants argued that but for verbal assurances that the banks would issue the credit, the defendants would not have signed the guaranty on the term loan. The Court of Appeals held that under the “absolute and unconditional” language of the guaranty, the defendants were foreclosed from asserting their fraud in the inducement defense. In reaching this conclusion, the Court rejected the need for the defendants’ specific disclaimer of reliance on the banks’ oral representations. Instead, the Court determined, quoting from the guaranty, that the defendants agreed “that the ‘absolute and unconditional’ nature of their guarantee was ‘irrespective of (i) any lack of validity … of the … Loan Agreement … or any other agreement or instrument relating thereto,’ or ‘(vii) any other circumstance which might otherwise constitute a defense’ to the guarantee.” 10 Given the substance of the guaranty, to permit the defendants to assert that the bank induced them to sign “would in effect condone defendants’ own fraud in ‘deliberately misrepresenting true intention’ when putting their signatures to their ‘absolute and unconditional’ guarantee.” 11 In other words, because the defendants had assured the banks that their guaranty to pay the loan was not subject to any defenses, they were bound to their promise. BBM3, LLC v. Vosotas BBM3 concerned the development, operation, and financing of a hotel in Miami Beach (the “Property”). The project was initially financed by a $36 million loan (the “Loan”) that the original lender made to two entities (the “Borrowers”). The Loan was evidenced by a promissory note and secured by, among other things, a first priority mortgage lien on the Property. Pursuant to the loan agreement, if the original lender reasonably determined that there was a deficiency, defined as a shortfall between the estimated cost of completion and the portion of the Loan not yet advanced and the funds in the collateral account (“Deficiency”), then the original lender could deliver written notice demanding that the Borrowers deposit sufficient collateral to cover the amount of the Deficiency (the “Deficiency Collateral”) within ten days. Failure to make such a deposit of Deficiency Collateral constituted an event of default.  Pursuant to one guaranty, the guarantors “unconditionally and absolutely” guaranteed payment and performance of the guaranteed obligations, including accrued and unpaid interest on the Loan and late payment charges. The guarantors were to make such payments “immediately upon demand” without protest or notice.  Pursuant to another guaranty, the guarantors “unconditionally and absolutely” guaranteed payment and performance of the guaranteed obligations, including the Borrower’s obligation under the Loan to deposit Deficiency Collateral with respect to the Loan. These guarantors agreed to make such payments “immediately upon demand” without protest or notice. A Deficiency Notice was sent pursuant to the loan agreement, stating that the original lender determined that there was a Deficiency of at least $3,281,759.74. When the Guaranty Notice was sent a year and a half later, the Deficiency increased to $8,750,522.57, with interest due in the amount of $1,180,446.16.  The Lender claimed that, as of March 10, 2021, the amount owed under one of the guarantees was $14,804,571.89, consisting of (i) interest on the Loan, (ii) funding due to the interest reserve for an interest shortfall arising from the guaranteed obligations, and (iii) insurance premiums. With regard to the other guaranty, the Lender sought $4,181,759.74, consisting of the Deficiency demanded in the Deficiency Notice and a settlement of a change order for a delay claim on the hotel construction.  The Lender commenced an action against the guarantor of one of the guarantees pursuant to CPLR § 3213 by summons and notice of motion dated March 26, 2021. The motion court granted the motion, holding that the Lender “established its prima facie entitlement to summary judgment”. The motion court found that the Lender presented evidence that the guarantees were valid and in effect, that it was owed $14,804,571.89 under one of the guarantees and $4,181,759.74 under the other one, and that the guarantor failed to perform under the guarantees. On appeal, the Appellate Division, First Department affirmed. The Court held that “Plaintiff satisfied its prima facie burden on its CPLR 3213 motion for summary judgment in lieu of complaint by demonstrating the existence of the guaranties and underlying debts, as well as defendant guarantor’s failure to perform under the guaranties.” 12 The Court also held that “CPLR 3213 relief was appropriate despite the completion guaranty’s provision requiring some additional performance obligations by the borrower.” 13 In so holding, the Court reasoned that “the guaranty ‘include an unconditional obligation to pay’ that ‘required no additional performance by plaintiff as a condition precedent to payment.’” 14 15> 15> Takeaway CPLR § 3213 provides for an accelerated judgment at the outset of the litigation. There are no pleadings, and there is no discovery when a movant seeks summary judgment under CPLR § 3213.  As noted, to obtain judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument.  In BBM3 , the Court found that “the guaranty ‘include an unconditional obligation to pay’ that ‘required no additional performance by plaintiff as a condition precedent to payment.’” 16 As such, the guarantee at issue did not require both payment and performance, which would have made CPLR § 3213 in applicable. 17 It was a “prototypical example of an instrument within the ambit of … < i.e. ,> i.e.,> an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.” 18 Footnotes Weissman v. Sinorm Deli , 88 N.Y.2d 437, 443 (1996) (internal quotation marks omitted). See also Cooperatieve Centrale Raiffeseisen-Boerenleenbank, B.A., “Rabobank Intl.,” N.Y. Branch v. Navarro , 25 N.Y.3d 485, 491-492 (2015). Weissman , 88 N.Y.2d at 444. Navarro , 25 N.Y.3d at 492. Davimos v. Halle , 35 A.D.3d 270, 272 (1st Dept. 2006) (citing, City of New York v. Clarose Cinema Corp. , 256 A.D.2d 69, 71 (1st Dept. 1998)). Cutter Bayview Cleaners, Inc. v. Spotless Shirts, Inc. , 57 A.D.3d 708, 710 (2d Dept. 2008) (citation and internal quotation marks omitted). E.g. , Compagnie Financiere de CIC et de L’Union Europeenne v Merrill Lynch, Pierce, Fenner & Smith Inc. , 188 F.3d 31, 34 (2d Cir. 1999) (citing, Banco Portugues do Atlantico v. Asland, S.A. , 745 F. Supp. 962, 967 (S.D.N.Y. 1990)). Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). Navarro , 25 N.Y.3d at 493 (citations omitted). Id. (citing cases). Plapinger , 66 N.Y.2d at 95. Id. Slip Op. at *1 (citation omitted). Id. Id. (quoting, iPayment, Inc. v. Silverman , 192 A.D.3d 586, 587 (1st Dept. 2021), lv. dismissed , 37 N.Y.3d 1020 (2021) (citations omitted)). Punch Fashion, LLC v. Merchant Factors Corp. , 180 A.D.3d 520, 521 (1st Dept. 2020), lv. dismissed, 35 N.Y.3d 1124 (2020). Id. (quoting, iPayment, Inc. v. Silverman , 192 A.D.3d 586, 587 (1st Dept. 2021), lv. dismissed , 37 N.Y.3d 1020 (2021) (citations omitted)). Punch Fashion , 180 A.D.3d at 521. Weissman , 88 N.Y.2d at 444. 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 New York’s Business Corporation Law (“BCL”) § 630(a) provides that “ he ten largest shareholders,” of a corporation are “personally liable”, “jointly and severally”, “for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation.” For purposes of BCL § 630(a), “wages or salaries … mean all compensation and benefits payable by an employer to or for the account of the employee for personal services rendered by such employee.” BCL § 630(b). Such compensation and benefits include, but are not limited to, “salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds; and any other moneys properly due or payable for services rendered by such employee.” Id. To avail oneself of BCL § 630(a), a laborer, servant or employee must “give notice in writing to such shareholder that he intends to hold him liable” before such laborer, servant or employee charges the shareholder for services. BCL § 630(a). BCL § 630(a) requires that “ uch notice … be given within one hundred and eighty <180> days after termination of such services,” unless the laborer, servant or employee makes a books and records demand under BCL § 624(b), in which case “such notice may be given within sixty days <60> after he has been given the opportunity to examine the record of shareholders.”  If the laborer, servant or employee files an “action to enforce such liability”, then the action must “be commenced within ninety <90> days after the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services.” 1 An action under BCL § 630(a) does not contemplate litigation of the merits of a plaintiff’s claim for wages, but contemplates litigation to determine whether an employer’s shareholder is liable for a judgment against the employer. It follows a judgment in which the employee is entitled to its wages from their employer, even though it may not possess the assets to satisfy the employee’s claim. BCL § 630(a) is the subject of today’s article and this Blog’s examination of Attarian v. Sagard Capital Partners, L.P. , 2023 N.Y. Slip Op. 31367(U) (Sup. Ct., N.Y. County Apr. 14, 2023) ( here ). Plaintiffs are former employees of nonparty IntegraMed America, Inc. Each plaintiff entered an employment contract with IntegraMed America that guaranteed bonuses and severance payments to induce plaintiffs to continue working for IntegraMed America while the corporation sought a buyer.  The corporation was never sold. Instead, it filed for bankruptcy protection in May 2020. Plaintiffs were simultaneously terminated from their employment and were not paid their earned wages, including the contractual bonuses and severance payments.  During the pendency of IntegraMed America’s bankruptcy, plaintiffs sued Sagard Capital Partners, L.P., as the largest beneficial shareholder of IntegraMed America, alleging a single claim for their wages under BCL § 630. Defendant moved to dismiss the complaint based on its failure to state a viable claim. Defendant maintained that plaintiffs failed to allege (let alone satisfy) the conditions precedent to a BCL § 630 claim and that it is not IntegraMed America’s direct shareholder. The Court granted the motion on both grounds. Regarding the prematurity argument, the Court held that there was no judgment necessary to satisfy the statute: “plaintiffs still await a determination of the merits of plaintiffs’ claims that their employer owes wages, severance payments, and benefits to plaintiffs, which will occur in their employer’s bankruptcy proceeding….” 2 The Court rejected plaintiffs’ argument that “waiting for a judgment against their former employer in the bankruptcy proceeding would be futile” and therefore, “pursing their claim there unnecessary”. 3 The Court explained that, unlike the situation in Grossman v. Sendor , 64 A.D.2d 561, 561 (1st Dept. 1978), on which plaintiffs’ relied, there was no bankruptcy plan or confirmation of such a plan in the case before the Court. Had there been a confirmed plan, which, according to the Court is the equivalent of a judgment, then plaintiffs would have satisfied BCL § 630 because plaintiffs would simply be waiting for the return of the unsatisfied execution. 4 Regarding whether defendant was a shareholder of IntegraMed America, the Court held that it was not a direct shareholder. The Court explained that plaintiffs conceded that defendant owned IntegraMed America through one of three shell companies.: Although plaintiffs allege that defendant publicly has admitted it is a shareholder owning more than a 98% interest in IntegraMed America, plaintiffs negate that allegation by repeatedly … admitting defendant actually owns three “shell” entities, one of which owns the vast majority of the shares of IntegraMed America. 5 Therefore, said the Court, it could not be a direct shareholder of the company.  The Court also explained that such allegations, and the related argument that such ownership made “defendant the holder of a ‘beneficial interest’ … in IntegraMed America and<, therefore,> a shareholder for BCL § 630’s purposes,” did “not render defendant a shareholder of IntegraMed America.” 6 The ownership, held the Court, must be direct. 7 The Court rejected plaintiffs’ argument that under a veil piercing, alter ego, or joint employer theory, defendant was a direct shareholder of IntegraMed America. 8 The Court explained that “BCL § 630 already effectively pierce the corporate veil between employers and their shareholder and create an exception to the rule that ‘a corporation exists independently of its owners, and that it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners’”. 9 Accordingly, the Court held that “ laintiffs may use the statute only once; either to connect the shell entity to the employer or to connect the defendant to the shell entity, and then may use a piercing the corporate veil theory to make the second connection.” 10 The Court rejected plaintiffs’ effort to pierce the corporate veil. Under Delaware law, which applied, the Court held that plaintiffs could not demonstrate that the shell entity was established “‘for no other purpose than as a vehicle for fraud.’” 11 In fact, noted the Court, plaintiffs did not allege that “the shell entities dominated anyone or anything”, or “that any shell entity or even defendant wielded influence over IntegraMed America to commit a fraud or wrong, let alone was established solely as a means for fraud”. 12 Similarly, said the Court, the complaint did not include any allegations that the “shell entity and the employer … had completely ignored corporate formalities and separation and had mixed their financial reporting and borrowed funds together.” 13 Finally, the Court found that plaintiffs did not allege that “defendant committed a fraud or wrong against them by offering the payments to which plaintiffs claimed they were entitled when their employer was on the brink of filing the bankruptcy petition, which would have been preferential payments in violation of 11 U.S.C. § 547(b) and thus subject to clawback by the bankruptcy estate”. 14 “More importantly,” said the Court, “plaintiffs do not show how this offer harmed plaintiffs or would have harmed them even had they accepted the offer and payments were clawed back, leaving them in the same position as they were before the offer”. 15 “In sum,” concluded the Court, “plaintiffs fail to allege facts about any of these three shell entities to support a veil piercing theory that would allow plaintiffs to reach the shell entity that owns their employer and then use BCL § 630 to reach between the shell entity and defendant”. 16 Footnotes BCL § 630(a). Slip Op. at *4. Id. at *5. Id. Id. at *6-*7. Id. at *7. Id. (citing, Local 1181-1061 v. Wayzata Opportunities Fund, LLC , 2016 WL 3646988, at *3 (Sup. Ct., N.Y. County June 30, 2016)). Id. at *8. Id. (quoting, Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC , 146 A.D.3d 1, 12 (1st Dept. 2016), aff’d , 31 N.Y.3d 1002 (2018)). Id. Id. at *9 (quoting, Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood , 752 A.2d 1175, 1184 (Del. Ch. 1999)). Id. at *9-*10. Id. at *10 (distinguishing the facts of the case with Local 2110 v. Getter , 2019 WL 2929549, at *4 (Sup. Ct., N.Y. County July 8, 2019), on which plaintiffs relied). Id. Id. at *11. 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.