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By Jonathan H. Freiberger As explained in our Blog entitled: “ Get Rid of a Stale Mortgage By Bringing an Action Under RPAPL 1501(4) ,” mortgage on real property are typically delivered as security for the repayment of an obligation evidenced by a promissory note.  A mortgage is an encumbrance on real property.  Removing the encumbrance, if given the opportunity, makes sense. In situations where a mortgage appears as a lien of record on real property, but the statute of limitations has expired for the mortgagee to commence an action to foreclose the mortgage, RPAPL 1501(4) permits the mortgagor (or any other “person having an estate or interest in the real property”) to commence an action to have the encumbrance removed of record.  RPAPL 1501(4) provides: Where the period allowed by the applicable statute of limitation for the commencement of an action to foreclose a mortgage, or to enforce a vendor’s lien, has expired, any person having an estate or interest in the real property subject to such encumbrance may maintain an action against any other person or persons, known or unknown, including one under disability as hereinafter specified, to secure the cancellation and discharge of record of such encumbrance, and to adjudge the estate or interest of the plaintiff in such real property to be free therefrom; provided, however, that no such action shall be maintainable in any case where the mortgagee, holder of the vendor’s lien, or the successor of either of them shall be in possession of the affected real property at the time of the commencement of the action. In any action brought under this section it shall be immaterial whether the debt upon which the mortgage or lien was based has, or has not, been paid; and also whether the mortgage in question was, or was not, given to secure a part of the purchase price. Thus, a mortgagor need not wait for the mortgagee to commence foreclosure proceedings, and defend by asserting a statute of limitations defense, to have the lien of the mortgage extinguished of record. “ n action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property, or any interest therein” is subject to a six-year statute of limitations.  See CPLR 213(4) .  In mortgage foreclosure actions, the statute of limitations begins to run from each unpaid installment, from the time that the mortgagee is entitled to receive full payment or the time the debt is accelerated.  See Bank of New York Mellon v. Celestin , 164 A.D.3d 733 (2 nd Dep’t 2018).  “The law is well settled that, even if a mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt… …once a mortgage debt is accelerated, the borrowers’ right and obligation to make monthly installments ceased and all sums become immediately due and payable, and the six-year Statute of Limitations begins to run on the entire mortgage debt.”   EMC Mortgage Corp. v. Patella , 279 A.d.2d 604 (2 nd Dep’t 2001) (citations, internal quotation marks and internal brackets omitted.)  As the Court of Appeals noted, “acceleration is, therefore, a significant event for statute of limitations purposes….”  Freedom Mortgage v. Engel , 37 N.Y.3d 1, 22 (2021).  [Eds. Note: this Blog has discussed Engel < here =">here"> and < here =">here"> and general concepts of acceleration < here =">here"> .]  As a corollary, the concept of deacceleration became just as significant an issue because deacceleration would stop the statute of limitations clock running on the prior acceleration.  In Engel , the Court in discussing deacceleration and in “ dopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”   Engel , 37 N.Y.3d at 19. The interplay between statute of limitations, acceleration and RPAPL 1501(4) was addressed by the Appellate Division, Second Department, on April 26, 2023, in Bush N Stuy v. Bayview Loan Servicing, LLC.  Borrower in Bush N Stuy executed a mortgage in 2006.  A foreclosure action was commenced in 2009 upon borrower’s default.    This action was abandoned upon borrower entering into a home affordable modification trial period plan agreement. Lender commenced a second foreclosure action in 2012 in which lender moved for a default judgment and borrower cross-moved to dismiss the action as abandoned pursuant to CPLR 3215(c) .  [Eds. Note: this Blog has discussed CPLR 3215(c) < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  Borrower’s cross-motion was granted. In 2016, borrower commenced an action pursuant to RPAPL 1501(4) to cancel and discharge the mortgage of record and subsequently moved for summary judgment.  Lender cross-moved for summary judgment.  Borrower’s motion was granted, lender’s cross-motion was denied and the mortgage was cancelled and discharged of record.  Lender appealed. The Second Department affirmed.  The Court explained the relevant law as follows: Pursuant to RPAPL 1501(4), a person having an estate or interest in real property subject to a mortgage may maintain an action to secure the cancellation and discharge of the encumbrance, and to adjudge the estate or interest free of it, if the applicable statute of limitations for commencing a foreclosure action has expired ( see Ditmid Holdings, LLC v JPMorgan Chase Bank, N.A. , 180 AD3d 1002 , 1003). An action to foreclose a mortgage is subject to a six-year statute of limitations ( see CPLR 213<4> ). "' ven if the mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt'" ( Bank of N.Y. Mellon Corp. v Alvarado , 189 AD3d 1149 , 1150, quoting Deutsche Bank Natl. Trust Co. v Adrian , 157 AD3d 934 , 935 ). "It is well-settled that the filing of a verified foreclosure complaint may evince an election to accelerate" ( Freedom Mtge. Corp. v Engel , 37 NY3d 1 , 25). Lenders may revoke the acceleration of full mortgage loan balances, so long as the revocation is accomplished by an affirmative act occurring within six years of the earlier acceleration ( see Deutsche Bank Natl. Trust Co. v Adrian , 157 AD3d at 935; MSMJ Realty, LLC v DLJ Mtge. Capital, Inc. , 157 AD3d 885 , 887). The Court found that borrower met the burden of demonstrating entitlement to relief under RPAPL 1501(4) and stated: Here, in support of its motion for summary judgment on the complaint, established that the filing of the complaint in the 2009 action in December 2009 accelerated the mortgage debt so as to start the running of the six-year statute of limitations period, and that the commencement of a new action to foreclose the mortgage would be time-barred ( see Persaud v U.S. Bank N.A. , 197 AD3d 1120 , 1122; 128 Skillman St. 4A, LLC v Nationstar Mtge., LLC , 193 AD3d 1025 , 1027). In opposition, failed to raise a triable issue of fact as to whether the acceleration of the debt was revoked. 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 Taxes. Everyone hates paying them.  As one might expect, taxpayers often look for any opportunity to minimize their tax obligation. When securities are involved, especially in taxable accounts, a taxpayer may look to his or her broker or investment adviser to develop strategies that will mitigate the tax impact of their investments. An investment adviser may, for example, replace a security with an unrealized loss with another security to capture the tax benefit while maintaining a similar exposure and allocation in the client’s account. Such a strategy was at the center of a settlement between the Securities and Exchange Commission (“SEC”) and Betterment LLC (“Betterment”), a New York-based investment adviser. Among other things, Betterment provides investment advice by offering portfolio strategies to clients. The portfolio strategies consist primarily of exchange traded funds (“ETFs”) that provide exposure to different asset classes. Betterment also provides automated, software-based portfolio management on a discretionary basis. Betterment offers its services to retail clients, who use Betterment through third-party investment advisers, and retirement plans and their participants.  Since 2014, Betterment has offered its tax-loss harvesting service (“TLH”) to clients that have taxable accounts. TLH is an automated, algorithm-driven process whereby individual positions in client taxable accounts are scanned to identify unrealized investment losses. If, after meeting certain conditions, an ETF is identified where a client has an unrealized loss that could potentially be used to reduce their liability, it is sold and replaced with a closely correlated ETF with similar exposure. In other words, TLH is designed to replace a security with another security to capture a potential tax benefit while maintaining a similar exposure and allocation in a client’s account.  To take advantage of TLH, a client must enable the service. Since its introduction through January 2023, over 275,000 client accounts have enabled TLH. On April 18, 2023, the SEC announced ( here ) that it charged Betterment with making material misstatements and omissions related to TLH, failing to provide clients with notice of changes to contracts, and failing to maintain certain required books and records. Betterment settled the charges, agreeing to pay a $9 million penalty and to distribute funds to affected clients. According to the SEC, from 2016 to 2019 (the “Relevant Period”), Betterment misstated or omitted several material facts concerning TLH. For example, Betterment described TLH as a service that scanned a client’s account on a daily basis for harvesting opportunities.  Due to constraints related to overall client trading volume, explained the SEC, Betterment adjusted its TLH scanning frequency in January 2016. Betterment separated clients into two groups and scanned their accounts on alternating trading days. The SEC found that Betterment did not perform any contemporaneous analysis to evaluate the potential impact of the change on clients, and clients that used TLH were not notified of the change. According to the SEC, reducing TLH’s scanning frequency can reduce the benefit of the service, depending on a number of client and market specific factors.  On April 24, 2019, Betterment determined that its trading system could revert back to daily scanning and reinstituted daily scanning for all clients with TLH enabled as of that date. During the Relevant Period, said the SEC, approximately 25,000 clients lost approximately $1.9 million in potential tax benefits as a result of the undisclosed change in scanning frequency. In addition, the SEC found that Betterment failed to disclose a programming constraint with TLH that affected certain clients.  According to the SEC, the TLH algorithm imposed certain restrictions on harvesting activities for multiple-portfolio clients. Because some third-party managers used the same ETFs in their portfolio strategies as Betterment did, there was a risk of certain negative tax implications stemming from transactions in these overlapping ETFs. Betterment designed the TLH algorithm with constraints intended to minimize these negative tax consequences.  The SEC explained that asset classes, which were eligible for TLH, were assigned up to three closely correlated ETFs (ranked as primary, secondary, and tertiary choices), which could be used as replacements in TLH transactions. In some instances, the ETFs in a particular asset class overlapped between two portfolio strategies, but were ranked differently, which created the risk of a potential negative tax consequence from a harvest. Betterment restricted TLH from harvesting in asset classes where that type of overlap existed to avoid the risk of a potential negative tax consequence. As a result, said the SEC, TLH activity, and potentially TLH results, could differ significantly for multiple-portfolio clients as compared to clients who selected a single portfolio strategy. According to the SEC, the constraints associated with overlapping securities were not described in Betterment’s client disclosures. In fact, said the SEC, one disclosure suggested that TLH would not function any differently between a single portfolio strategy and a multiple-portfolio strategy.  In January 2019, Betterment made the interaction between TLH and third-party portfolio strategies clearer when it updated a disclosure statement it provided to clients that enabled TLH. The notification, said the SEC, did not attempt to quantify whether a client was adversely affected, and offered no remediation.  According to the SEC, from September 2017 until January 2019, there were approximately 5,600 multiple-portfolio client accounts that enabled TLH. At least 3,200 client accounts lost approximately $1 million in potential tax benefits as a result of the undisclosed constraints in the design of TLH. Finally, Betterment failed to disclose two computer coding errors that prevented TLH from harvesting losses for some clients. The SEC found that beginning in April 2016, a coding error caused two Betterment client databases to cease interfacing properly for certain accounts. The result, said the SEC, was that for at least 150 accounts, TLH was disabled although clients had enabled it. Consequently, noted the SEC, Betterment did not scan these accounts or harvest any tax losses until the coding error was fixed. According to the SEC, in January 2019, Betterment learned about and fixed the coding error after an inquiry from a third-party investment adviser. Betterment attempted to notify impacted clients and remediate the issue, but those efforts were incomplete.  The SEC found that beginning in November 2015 until June 30, 2018, Betterment experienced another coding error related to over 600 client accounts that were titled as joint trust accounts. Similar to the other coding error, this error caused TLH to be disabled for clients that had enabled the service. Betterment similarly learned about the issue as a result of a client inquiry, in June 2018, and fixed the coding error shortly thereafter. However, said the SEC, Betterment did not notify any other affected client or provide remediation because it concluded that the issue did not adversely impact clients. As noted by the SEC, that was an incorrect determination. The SEC found that together, the coding errors impacted approximately 760 client accounts. At least 700 client accounts were negatively impacted and lost approximately $1.1 million in potential tax benefits during the Relevant Period. Collectively, said the SEC, the disclosure and coding issues adversely impacted more than 25,000 client accounts, resulting in those clients losing approximately $4 million in potential tax benefits. The SEC further found that Betterment failed to provide advance notice of changes to its advisory contract, which is a violation of its fiduciary duty as an investment adviser, and failed, during certain times, to maintain accurate and current books and records reflecting written agreements with certain clients. Also, the SEC found that, in connection with the failures related to TLH, Betterment failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940. Commenting of the settlement, Antonia M. Apps, Director of the SEC’s New York Regional Office, stated: “Robo-advisers have the same obligations as all investment advisers to ensure they are transparent about services they provide and upfront about any material changes to those services or issues that may negatively affect clients. Betterment did not describe its tax loss harvesting service accurately, and it wasn’t transparent about the service’s changes, constraints, and coding errors that adversely impacted thousands of clients.” Betterment consented to the entry of the SEC’s order finding that it violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and related rules. Without admitting or denying the SEC’s findings, Betterment agreed to a cease-and-desist order ( here ), a censure, and to pay a $9 million civil penalty that will be distributed to affected clients. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Lucky of 195 Madison St. Roofing & Contracting Inc. v. Creif, 109 LLC , 2023 N.Y. Slip Op. 02065 (1st Dept. Apr. 20, 2023) ( here ), the Appellate Division, First Department was asked to consider whether a legal opinion issued in connection with a mortgage transaction was fraudulent. As discussed below, the First Department affirmed the holding of the motion court, which found that the legal opinion in question was, for pleading purposes, fraudulent. A legal opinion is typically a letter issued by a lawyer that is used to facilitate a party’s due diligence process in a transaction. An opinion letter helps to validate the legality of the transaction by opining on matters such as the validity of a corporate entity, the authority of a party to enter into the transaction, the enforceability of the transaction documents, and whether the transaction complies with applicable laws, rules and regulations. A legal opinion will also identify any legal risks that should be considered by the parties. An opinion letter can be used in many types of commercial transactions. For example, an opinion letter can be used to help a lender determine whether to lend money to a potential borrower. It can also be used in connection with the purchase and sale of securities.  Legal opinions focus on the issues relevant to the transaction. Lawyers typically do not give an opinion on every aspect of the transaction and the law. Whether a legal opinion is given, and the contents to include in the opinion, is often negotiated.  Lucky of 195 Madison St. Roofing & Contr. Inc. v. Creif Beginning in October 2015, defendants Allan J. Stevo (“Stevo”) and Srun Taing (“Taing”) and certain third-party defendants entered into a fraudulent scheme whereby they falsely claimed that they were the owners, shareholders, members and/or agents of Lucky of 195 Madison St. Roofing & Contracting Inc. (“Lucky 195”) in order to take out mortgages on property that plaintiff owned.  To implement the scheme, defendants allegedly created false documents intended to convince lending institutions, including defendant and third-party plaintiff Creif 109 LLC (“Creif”), that they were the owners, shareholders, or members of Lucky 195 and were authorized to enter into loan agreements on behalf of Lucky 195. They also retained an attorney, Stephen Seung (“Seung”), to prepare and deliver a legal opinion letter, which allegedly stated that Lucky 195 had the authority to enter into the mortgages, that Stevo and Taing had the authority to execute the transaction documents on behalf of Lucky 195, and that Seung had performed the necessary due diligence to confirm these representations. The opinion letter also stated that Lucky 195 had the “right, power, and authority” to execute the loan documents. At the conclusion of the opinion letter, Seung stated that the opinion was issued “solely for benefit and the benefit of successors and assigns and any participant in the Loan, and may not be relied upon by any other party or for any other purpose without our prior written consent”. Notably, the opinion letter did not contain any carve-outs to insulate Seung from liability. According to Creif, Seung admitted that he did not “confirm that Stevo and Taing could actually act on behalf of Lucky 195” even though his opinion letter said otherwise. Creif claimed that if it had known that Seung did not make any inquiries of the borrower ( i.e. , Lucky 195), Creif would never have agreed to close the transactions. On January 29, 2021, Creif filed a third-party complaint against Seung and the other conspiring defendants, alleging negligence and fraud.  On March 7, 2021, Seung filed a motion to dismiss the fraud and negligence claims that were asserted against him. Seung argued that the fraud claim failed to satisfy the particularity requirement of CPLR § 3016(b). According to Seung, Creif merely alleged fraud in a conclusory fashion; there were no factual allegations supporting the claim. Seung also argued that there was nothing in the third-party complaint to establish or justify a claim that Seung knew that the statements contained in the opinion letter were false. Seung further argued that the allegations concerning reliance on the opinion letter were conclusory and rebutted by sworn statements made by Creif in which Creif claimed that it relied on several corporate documents in making the subject mortgage loans. On July 11, 2022, the motion court denied Seung’s motion to dismiss, holding that there were sufficient inferences of fraud at the pleading stage of the litigation.  On August 18, 2022, Seung filed a motion for reargument. Following oral argument, the motion court granted that portion of Seung’s motion for reargument to dismiss the claim for negligence but denied that portion of his motion with regard to the fraud claim. On appeal, the First Department affirmed. The Court held that Creif satisfied the particularity requirement of CPLR § 3016(b), stating that “allegations were sufficient to permit a ‘reasonable inference’ of Seung’s alleged fraudulent conduct”. 1 Under CPLR § 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” 2 To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.  The Court of Appeals has explained, however, that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 3 Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” 4 Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. 5 In holding that Creif pleaded its fraud claim with particularity, the Court rejected Seung’s reliance on Fortress Credit Corp. v. Dechert LLP , 89 A.D.3d 615 (1st Dept. 2011).  In Fortress , a lender brought suit against a law firm for professional malpractice and negligent misrepresentation. The defendant law firm had written a legal opinion for its client, a borrower, on whether relevant loan documents had been carried out with the formalities necessary to make them binding. In its written legal opinion letter, the law firm determined that the relevant loan documents had been duly executed and delivered. The lender alleged that it sustained damages by relying on the law firm’s faulty written opinion. The First Department held that the plaintiff failed to demonstrate that the opinion letter contained misrepresentations of fact. In so holding, the Court explained that the opinion letter, by its very terms, “provided only legal conclusions upon which plaintiffs could rely” and was “clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents”. 6 The opinion letter further represented that the lawyer had “made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining these facts”. 7 By contrast, the Court in Lucky held that “the opinion letter contain no such carve-outs, and in fact represent that Seung made the relevant ‘inquiries’”. 8 “The alleged fraud in this case,” said the Court, was “based on actual misstatements”. 9 10> 10> Accordingly, concluded the Court, “there remain the possibility that Seung may have known about the underlying fraud, rather than simply having failed to detect it”. 11 Footnotes Slip Op. at *1 (citing, Pludeman v. Northern Leasing Sys., Inc. ,10 N.Y.3d 486, 492 (2008)). Pludeman , 10 N.Y.3d at 491 (2008) (citation omitted). Id. (internal quotation marks and citation omitted). Id. at 492. Id. Fortress , 89 A.D.3d at 617. Id. Slip Op. at *1. Id. Connaughton v. Chipotle Mexican Grill, Inc. , 135 A.D.3d 535, 537-38 (1st Dept. 2016), aff’d , 29 N.Y.3d 137 (2017). S ee Netshoes Sec. Litig. v. XXX , 64 Misc. 3d 926, 932, (Sup. Ct., N.Y. County 2019) (citing, Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt. Corp. , 2016 WL 1261135, at *9 (S.D.N.Y. 2016)). Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger In our October 19, 2020, Blog < here =">here"> we discussed, inter alia , Administrative Order 98-20 , issued by Andrew A. Crecca, District Administrative Judge, Suffolk County. AO 98-20 established new procedures for scheduling foreclosure sales considering the COVID-19 pandemic. Briefly stated, AO 98-20 required the Court-appointed referee to schedule foreclosure sales through the Court Fiduciary Office so that only one sale would take place at a time.  In addition, AO 98-20 required the sale referee to make sure all participants at the auction followed any face covering and social distancing requirements at the time of the auction. On April 11, 2023, District Administrative Judge Crecca, issued Administrative Order 12-23 , which becomes effective May 1, 2023, and supersedes AO 98-20.  AO 12-23 provides: Pursuant to the authority vested in me as District Administrative Judge, this order supersedes Administrative Order 98-20 and is in accordance with guidance issued by the Chief Administrative Judge for the trial courts of the Unified Court System (UCS) in Administrative Order 35/22 dated January 16, 2022 which provides that auctions should continue in a manner consistent with district/county auction plans and in accordance with the Unified Court System's COVID-19 protocols. I hereby order that effective May 1, 2023, the following process will be used for scheduling and conducting foreclosure auctions in Suffolk County. All foreclosure auctions shall be conducted in accordance with the Suffolk County Foreclosure Auction Rules and Procedures in effect at the time of the auction. Suffolk County has updated its auction plan, a copy of which is posted on the Suffolk County Courts' website. In order to schedule a foreclosure sale, the requesting party must choose a date and time and submit a Notice of Sale to Suffolk County's Fiduciary Department. The Notice of Sale with all the required information must be filed via NYSCEF or, in the event of a non-efiled foreclosure matter, by email to: suffauctions@nycourts.gov. The prior approval of the date and time from the Fiduciary Department will no longer be required. The auctions will continue to take place at the Town Halls throughout Suffolk County. Upon receipt of the Notice of Sale, the Fiduciary Department will enter the auction date into the court's calendar, which will be accessible through e-courts and updated daily. Presumably, once effective, AO 12-23 will permit multiple foreclosure sales to proceed simultaneously. 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 When is a joint venture a joint venture under the law? The easy answer to this question can be found when the parties enter into an express joint-venture arrangement or an express partnership arrangement. The hard answer, however, must be found in the facts and circumstances of the dispute between the parties.  In Capstone Capital Group, LLC v. DCK Worldwide Holdings, Inc. , 2023 N.Y. Slip Op. 01953 (1st Dept. Apr. 18, 2023) ( here ), the answer to the question turned on the interplay of financial documents between the parties, and whether those documents and the parties’ conduct established an “unequivocal collective design” ( i.e. , a joint venture) that precluded any of them from pursuing independent action. 1 As discussed below, the Court found that there was no joint venture between the defendants. What is a Joint Venture? A joint venture is a special combination of two or more parties for their mutual benefit and profit in a particular transaction. 2 In the absence of a specific agreement between the parties memorializing their joint venture status, courts look to a number of factors, including: (a) acts manifesting the intent of the parties to be associated as joint venturers, (b) mutual contribution to the joint undertaking through a combination of property, financial resources, effort, skill or knowledge, (c) a measure of joint proprietorship and control over the enterprise, and (d) a provision for the sharing of profits and losses. 3 “The ultimate inquiry is whether the parties have so joined their property, interests, skills and risks that for the purpose of the particular adventure their respective contributions have become as one and the commingled property and interests of the parties have thereby been made subject to each of the associates on the trust and inducement that each would act for their joint benefit.” 4 Notably, if a joint venture exists, “plaintiff’s status as an alleged partner in a joint venture gives rise to a fiduciary relationship which allows the imposition of a constructive trust.” 5 Capstone Capital Group, LLC v. DCK Worldwide Holdings, Inc. Capstone arose from a co-lending arrangement that began in 2017 between Arena and Capstone, on the one hand, and various borrowers on the other, all of which were affiliated construction companies operating under the “DCK” brand. Together, Arena and Capstone provided millions of dollars in financing to the DCK companies (the “DCK Borrowers”) in order to fund the companies’ working capital costs and allow their construction projects to operate. Pursuant to a series of financing agreements, Arena and Capstone each provided funding to the DCK Borrowers through “purchase money advances”.  In mid-2020, the DCK Borrowers began missing their monthly debt service payments. In early 2012, after months of missed payments, the DCK Borrowers defaulted on their repayment obligations. Thereafter, Arena tried to ascertain the DCK Borrowers true financial condition but was thwarted at every turn. Fearing that Arena’s investment was at serious risk, Arena moved to secure the collateral underlying its financing. Arena initiated separate enforcement proceedings against the DCK Borrowers in February and March 2021, respectively, seeking the repayment of the amounts owed. Capstone did not join Arena in these enforcement proceedings. Instead, Capstone initiated its own action against the DCK Borrowers. In doing so, Capstone also named Arena, the individual defendants, and various principals and senior executives of the company as defendants. Capstone alleged, among other things, that the defendants created a joint venture pursuant to which they were liable. Arena moved to dismiss. The motion court found that there was no joint venture sufficient to support Capstone’s claims. Capstone appealed. The Appellate Division, First Department affirmed. The Court held that the motion court “correctly dismissed the seventeenth (breach of the implied covenant of good faith and fair dealing), eighteenth (breach of fiduciary duty), nineteenth (aiding and abetting breach of fiduciary duty), and twentieth (permanent injunction) causes of action, asserted against Arena”. 6 The Court reasoned that these claims required a fiduciary duty (via a joint venture) which Capstone failed to demonstrate: “As a necessary predicate for the claims, plaintiffs must allege that the parties entered into an agreement or engaged in conduct evincing an intent to operate as a joint venture in connection with their financing of the construction project.” 7 The Court found that “ ther than the terms of the loan guaranties …, nothing in the record gave rise to an inference of a joint venture arrangement”. 8 “Rather,” said the Court, “the record clearly establishe that the parties were merely coordinated lenders, with distinct rights to enforce payment of the debt and to secure the collateral, and without the reciprocal duties and obligations of joint venturers”. 9 In conclusion, the Court opined that:  While a joint-lender relationship may properly be construed as a joint venture where the parties’ agreements or conduct establishes an “unequivocal collective design” that precludes any lenders from pursuing independent action …, the express language of the financing agreements, the nature of the parties’ relationship, and the parties’ conduct here do not support a finding that the parties intended to act collectively.< 10 > 10>  Takeaway The Court’s conclusion, quoted above, best describes the takeaway of Capstone . To establish whether there is a joint venture arrangement, the courts should examine the parties’ agreements and the parties’ conduct to determine whether they can act independently of one another. If they can act independently, then there is no joint venture. If, however, they cannot act independently, then there is a joint venture. Footnotes See , e.g. , Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 326-332 (2007); Credit Francais Intl. v. Sociedad Fin. de Comercio , 128 Misc. 2d 564, 577-582 (Sup. Ct., N.Y. County 1985). Forman v. Lumm , 214 A.D. 579 (1st Dept. 1925). Richbell Info. Servs., Inc. v. Jupiter Partners, L.P. , 309 A.D.2d 288, 298 (1st Dept 2003). Hamlet at Willow Creek Dev. Co. v. N.E. Land Dev. Corp. , 64 A.D.3d 85, 104 (2d Dept. 2009) (quoting, Steinbeck v. Gerosa , 4 N.Y.2d 302, 317 (1958)). Plumitallo v. Hudson Atl. Land Co. , 74 AD3d 1038, 1039 (2d Dept 2010). Slip Op. at *1. Id. (citation omitted). Id. (citation omitted). Id. Id. (citing, Beal Sav. Bank , 8 N.Y.3d at 326-332; Credit Francais Intl. , 128 Misc. 2d at 577-582). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Under the doctrine of res judicata, a final judgment on the merits of a claim precludes re-litigation of that claim by a party, and those in privity with that party. 1 This means that parties cannot relitigate the claim and all claims arising out of the same transaction, or series of transactions, even if based upon different theories or if seeking different remedies. It is a “transactional analysis” that the courts of New York apply to “preclude the litigation of matters that could have or should have been raised in a prior proceeding arising from the same ‘factual grouping.’” 2 Ultimately, application of res judicata requires the claim sought to be resolved to have been “reasonably and plainly comprehended to be within the scope” of the prior dispute. 3 The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue. 4 Collateral estoppel is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” 5 The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in prior action or proceeding.” 6 To establish privity with respect to either res judicata or collateral estoppel, “the connection between the parties must be such that the interests of the nonparty can be said to have been represented in the prior proceeding”. 7 Although relationship alone is not sufficient to support preclusion, “ includes those who are successors to a property interest, those who control an action although not formal parties to it, and those whose interests are represented by a party to the action”. 8 The party asserting the conclusive effect of a prior judgment has the burden to establish it. 9 here,=">here," >here and  here.=">here."> The doctrines of res judicata and collateral estoppel apply to prior arbitration proceedings, as well as prior determinations by state appellate and federal courts. 11 In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes res judicata and collateral estoppel as bases for dismissal. 12 Both concepts are also affirmative defenses under the CPLR. 13 In Brody v. RBC Mtge. Co. , 2023 N.Y. Slip Op. 01883 (2d Dept. Apr. 12, 2023) ( here ), the Appellate Division, Second Department, had the opportunity to consider the foregoing principles. Brody involved a quiet title action pursuant to Real Property Action and Proceedings Law Article 15, wherein Brody sought a declaration that mortgages held by the Bank of New York Mellon Corporation (“BNY”) encumbering the subject property were unenforceable and invalid. Brody commenced the action in August 2019. Defendants Mortgage Electronic Registration Systems, Inc. (“MERS”), and NewRez, LLC, moved, and defendant BNY separately moved, pursuant to CPLR § 3211(a), to dismiss the complaint, asserting, among other things, that plaintiff’s claims were barred by the doctrine of res judicata. Defendants maintained that, inter alia , in April 2013, plaintiff commenced a proceeding pursuant to RPAPL 1921 against BNY and Countrywide Home Loans, Inc. (“Countrywide”) to cancel and discharge a note and mortgage securing certain real property located in Rye, N.Y. (the “prior proceeding”) on the grounds that, inter alia , it was procured by fraud. The prior proceeding centered on plaintiff’s claim that, in connection with a December 22, 2006 refinancing, a first note and mortgage on the property had been satisfied, and had not been consolidated with a second note and mortgage to form a new single debt. By order dated December 7, 2016, issued in the prior proceeding, the Supreme Court, among other things, granted BNY and Countrywide’s motion for summary judgment dismissing the prior proceeding finding that Brody had ratified the purportedly fraudulent mortgages by accepting the mortgage proceeds, signing the mortgage documents and making the mortgage payments without protest. The motion court granted the motions to dismiss. The motion court found that the issue of the validity of the mortgage, which was the basis for plaintiff’s current complaint, was litigated in the prior proceeding.  Brody’s complaint seeks a declaration that he is vested with absolute and unencumbered title to the Property which is based upon his allegation that the CEMA is, for various reasons, fraudulent and invalid. He alleges that the 2003 Mortgage is “defective on its face and unenforceable” and that the CEMA is in conflict with the 2003 Mortgage. In light of the foregoing, it is indisputable in this context that res judicata bars Brody’s claims here. The claims clearly arise from the identical transaction at issue in the prior proceeding the consolidated loan transaction, and in particular the CEMA, -- and involve the identical parties. The Court already determined that Brody ratified the Mortgages by accepting the mortgage proceeds, executing the loan documents and making payments thereon without protest and that the Mortgages are therefore enforceable and valid. Plaintiff appealed. The Second Department affirmed.  The Court held that the issues in the current action and the prior proceeding concerned the same subject matter and, therefore, were already litigated.  Here, the subject matter of the prior proceeding centered on the validity and terms of the December 2006 refinancing agreement. In the prior proceeding, the Supreme Court concluded that the plaintiff had ratified the refinancing agreement by making the new, higher payments “without protest,” and “accept the proceeds of the purportedly fraudulent loan and a written acknowledgment of the loan terms.” In this action, the plaintiff seeks an absolute and unencumbered title to the property, and alleges, among other things, fraud and unclean hands in connection with the refinancing agreement. Thus, the subject matter of both the prior proceeding and this action is the validity of that refinancing agreement. 14 Therefore, concluded the Court, “the doctrine of res judicata preclude the court’s reconsideration of that same transaction”. 15 Takeaway As discussed, the Second Department dismissed plaintiff’s claims because they were previously decided in the prior proceeding, wherein he sought to invalidate the subject mortgages on the basis of fraud. The prior proceeding was dismissed on summary judgment because plaintiff ratified the purportedly fraudulent mortgages by accepting the mortgage proceeds, signing the mortgage documents and making the mortgage payments without protest. Because the validity of the mortgages at issue in the action before the Second Department was previously established by the motion court in the prior proceeding, Brody’s claims were barred by the doctrine of res judicata. 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. References E.g. , O’Brien v. City of Syracuse , 54 N.Y.2d 353,357 (1981). Board of Managers of Windridge Condos. One v. Horn , 234 A.D.2d 249 (2d Dept. 1996). Kim v. NRT New York LLC , 198 A.D.3d 416, 416 (1st Dept. 2021). E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel Co. , 62 N.Y.2d 494, 501 (1984). Green v. Santa Fe Indus. , 70 N.Y.2d 244, 253 (1987); see also D’Arata v. New York Cent. Mut. Fire Ins. Co. , 76 N.Y.2d 659, 664 (1990). Watts v. Swiss Bank Corp. , 27 N.Y.2d 270, 277 (1970). Id. at 275. Mahler v. Campagna , 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl. , 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys. , 138 A.D.2d 575, 577 (2d Dept. 1988) Milone v City University of New York , 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v Broome County , 180 A.D.3d 1213 (3d Dept. 2020). See CPLR § 3211(a)(5). See CPLR § 3018(b). Slip Op. at *2. Id. (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 Jonathan H. Freiberger As explained in prior Blog articles, a court will grant a motion for summary judgment if, upon all the papers and evidence submitted, the cause of action or defense is established sufficiently to warrant directing judgment in favor of the moving party as a matter of law. CPLR § 3212 (b); Gilbert Frank Corp. v. Federal Ins. Co. , 70 N.Y.2d 966, 967 (1988); Zuckerman v. City of New York , 49 N.Y.2d 557, 562 (1980). The function of the court when presented with a motion for summary judgment is one of issue finding, not issue determination. Sillman v. Twentieth Century-Fox Film Corp. , 3 N.Y.2d 395 (1957); Weiner v. Ga-Ro Die Cutting, Inc. , 104 A.D.2d 331 (1st Dep’t 1985). To prevail on a motion for summary judgment, the movant must make a prima facie showing of entitlement, submitting sufficient admissible evidence, such as affidavits of persons with first-hand knowledge of the matter, documentary evidence, and testimonial evidence, to demonstrate the absence of any material issues of fact. Jacobsen v. New York City Health and Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986). The movant’s initial burden is a heavy one; on a motion for summary judgment, facts must be viewed in the light most favorable to the non-moving party. Jacobsen , 22 N.Y.3d at 833. If the moving party fails to make its prima facie showing, the court is required to deny the motion, regardless of the sufficiency of the non-movant’s papers. Winegrad v. New York Univ. Med. Center , 64 N.Y.2d 851, 853 (1985).  If the movant meets its initial burden, then the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action or advance an acceptable excuse for the failure to do so. Zuckerman , 49 N.Y.2d at 560. However, bare allegations or conclusory assertions are insufficient to create genuine, bona fide, issues of fact necessary to defeat such a motion. Rotuba Extruders, Inc. v. Ceppos , 46 N.Y.2d 223, 231 (1978). In Diesel Funding LLC v. RCI PLBG Inc. , decided by the Supreme Court of the State of New York, Kings County, on April 6, 2023, the Court denied an unopposed motion for summary judgment pursuant to CPLR 3212 due to evidentiary failures on movant’s part.  [Eds. Note: this Blog has addressed the issue of the sufficiency of evidence submitted on a motion for summary judgment in the context of mortgage foreclosure actions, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]   The plaintiff in Diesel purchased for $830,000, $1.2 million of the corporate defendants’ receivables.  The corporate defendants agreed to make daily ACH payments to plaintiff in the amount of $20k until the receivables were paid in full.  The individual defendants guaranteed the corporate defendants’ repayment obligations to plaintiff.  According to the complaint, the corporate defendants breached the parties’ agreement by “intentionally impeding and preventing from making the agreed upon ACH withdrawals from the orporate defendants’ bank account.” Plaintiff commenced action against the corporate defendants and the guarantors for, inter alia , breach of contract.  The Defendants answered the complaint by denying or denying knowledge of the material allegations in the complaint and asserting several affirmative defenses.  Within a week of the filing of the answer, plaintiff moved for summary judgment.  The defendants did not oppose the motion.  Relying on Liberty Taxi Mgt., Inc. v. Gincherman , 32 A.D.3d 276, 278 n. (1 st Dep’t 2006), the Court noted that “a summary judgment motion should not be granted merely because the party against whom judgment is sought failed to submit papers in opposition to the motion, i.e. defaulted.”  (Citations omitted.) Among the legal considerations made by a court deciding a summary judgment motion previously discussed herein, the Diesel Court also noted that “ ursuant CPLR 3212(b), a court will grant a motion for summary judgment upon a determination that the movant’s papers justify holding, as a matter of law, that there is no defense to the cause of action or that the cause of action or defense has no merit.  Furthermore, all of the evidence must be viewed in the light most favorable to the opponent of the motion.”  (Citation omitted.) The Court then noted that “ he essential elements of a cause of action to recover damages for breach of contract are the existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach of its contractual obligations, and damages resulting from the breach.”  (Citation and internal quotation marks omitted.) The Court found that plaintiff failed to meet its prima facie burden of demonstrating entitlement to summary judgment.  First the Court noted that the attorney affirmation of plaintiff’s counsel demonstrated “no personal knowledge of any of the transactional facts alleged in the complaint” and that an “attorney’s affirmation that is not based upon personal knowledge is of no probative or evidentiary significance.”  (Citations omitted.) Next, the Court addressed the affidavit of plaintiff’s CFO (“CFO”) and stated that CFO’s “affidavit is used to authenticate the Agreement which was allegedly breached by the defendants.”  In his affidavit, CFO “avers that he is the CFO of and, as such, has personal knowledge of its business practices and procedures” and “that the factual allegations proffered in support of the motion for summary judgment are derived from his review of the plaintiff’s business records.  In his affidavit, CFO refers to “the only two exhibits attached to the motion, namely, the Agreement and a document denominated as a payment history.” In addressing the shortcomings of CFO's affidavit, the Court notes that CFO “does not aver that he was a signatory to the agreement or that he participated in the execution of same.”  Further, while the operative agreement refers to a “prior balance owed by the orporate defendants to ”, neither the complaint nor any of the affidavits supporting the motion for summary judgment “mention the existence of a prior balance owed by the corporate defendants to the plaintiff, and or the plaintiff’s right to deduct that balance from the funds delivered to defendants” and that “the complaint and the motion provide no information regarding the amount of funds that were provided to the corporate defendants pursuant to the Agreement”.  Thus, the Court found that these facts were sufficient to raise “material issues of fact regarding the plaintiff’s performance under the agreement” preventing plaintiff from making a “prima facie showing of entitlement to judgment on its claim for breach of the Agreement the guarantee.” As to its rejection of CFO’s attempted reliance on the payment history, the Court stated: also refers to the payment history, annexed as exhibit B to his affidavit, as proof of the defendants’ default. A proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker's business practices and procedures. As a general rule, the mere filing of papers received from other entities, even if they are retained in the regular course of business, is insufficient to qualify the documents as business records. However, such records may be admitted into evidence if the recipient can establish personal knowledge of the maker's business practices and procedures or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business. Here, the payment history is submitted without explaining its source or its meaning.  It is neither self-explanatory nor self-admitting and there was an insufficient foundation for its admission as a business record.  <(citations omitted.)> The Court also rejected CFO’s averment that the corporate defendants “closed a bank account and ceased payment authorizations for daily ACH payments under Bank Code RO2 constituting a default under the Agreement” because CFO “proffered no business record reflecting this fact” and, instead, “merely alleged the fact without proffering any documentary support”.  (Emphasis in original.)  In this regard the Court stated that: It is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted.  Accordingly, evidence of the contents of business records is admissible only where the records themselves are introduced. Without their introduction, a witness's testimony as to the contents of the records is inadmissible hearsay. averments regarding Bank Code RO2 constitutes inadmissible hearsay. In some, has failed to make a prima facia showing of entitlement to summary judgment on any of the claims it has asserted against the defendants.  (Citations omitted; emphasis in original.) Takeaway Litigants moving for summary judgment should make every effort to meet their prima facie burden in their moving papers by the submission of evidence in admissible form.  Even when a motion for summary judgment is unopposed, the court may deny the motion based on, inter alia , the sufficiency of the evidence submitted.  It should be noted, however, that the Second Department, in Bank of New York Mellon v. Gordon , 171 A.D.3d 197, 202 (2019), stated: However, as a general matter, a court should not examine the admissibility of evidence submitted in support of a motion for summary judgment unless the nonmoving party has specifically raised that issue in its opposition to the motion, for we are not in the business of blindsiding litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made. Indeed in civil cases, inadmissible hearsay admitted without objection may be considered and given such probative value as, under the circumstances, it may possess.  (Citations, internal quotation marks and brackets omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In today’s article, we address the question: When is an attorney authorized to act on behalf of a party? As one would expect, when the client says so, a lesson learned by the parties in Gibson, Dunn & Crutcher LLP v. Koukis , 2023 N.Y. Slip Op. 01863 (1st Dept. Apr. 11, 2023) ( here ). The primary issue in Gibson Dunn was whether the default judgment entered against defendant George Koukis in July 2019 should be vacated, and the complaint dismissed as against him, on the ground that Koukis — a domiciliary of Switzerland — was not subject to the motion court’s jurisdiction.  Gibson Dunn represented Be In, Inc. (“BII”) in arbitration against Google. Apparently, BII failed to pay Gibson Dunn for its fees and expenses. Consequently, Gibson Dunn commenced an arbitration to recover those fees and expenses. Gibson Dunn prevailed and obtained a judgment confirming the arbitration award in its favor (the “judgment”). Thereafter, Gibson Dunn domesticated the judgment in New York Supreme Court.  During a postjudgment deposition, a representative of BII testified that defendants had stopped funding the company and had drained the company’s bank accounts so that the company was insolvent. According to the representative, a family member of BII had transferred his equity interest to another for no consideration, and other family members had transferred their shares to another for no consideration, leaving one family member with an 85% interest and Koukis with 15% of the remaining shares. Plaintiff commenced an action against BII’s shareholders — including Koukis — to enforce the judgment ( i.e. , to recover the unpaid fees that it earned in representing BII). Gibson Dunn asserted claims of fraudulent conveyance against BII and defendants and alter ego/misuse of the corporate form against defendants. Plaintiff alleged, among other things, that defendants had undercapitalized BII, had made fraudulent transfers with the intent to hinder Gibson Dunn’s collection efforts, and had abused the corporate form by holding no board meetings, maintaining no financial records or office space, and by conveying BII’s shares for no consideration and moving assets into personal bank accounts. Gibson Dunn effectuated service on defendants by delivering the summons and complaint to the executive director and chief financial officer of BII, and then mailing copies to the same address. Plaintiff argued, among other things, that Koukis was subject to the motion court’s jurisdiction by virtue of a December 2017 stipulation “waiv any defenses based on service of process or lack of personal jurisdiction” that was executed by Gil Santamarina, Esq., an attorney who appeared in the action claiming to represent all defendants in opposition to plaintiff’s motion for entry of a default judgment. Koukis submitted a declaration denying that he ever authorized codefendant Joseph D’Anna to retain Santamarina to represent him and further denying that he ever communicated with Santamarina at any time before December 16, 2019, when Koukis sent Santamarina an email stating, “I have not authorized you to represent me in any legal or other matters.” Koukis averred that he was not even aware of Santamarina for any significant period of time prior to his December 16, 2019 email.  The motion court granted Koukis’s motion to vacate the default judgment and dismissed the complaint on the grounds that the appearance of counsel was unauthorized, denied so much of the motion as based on lack of jurisdiction, and set the matter down for a traverse hearing to determine whether service was proper pursuant to CPLR § 308(2). The motion court also granted Koukis’s motion to quash postjudgment subpoenas and denied plaintiff’s cross motion to permit alternate service of the subpoenas as premature.  On appeal, a majority of the panel for the Appellate Division, First Department modified the motion court’s order to vacate the default judgment and dismissed the complaint based on lack of jurisdiction, and otherwise affirmed the order. The majority held that the “motion court correctly found that there was no basis to conclude that Koukis authorized Santamarina to appear and waive all jurisdictional defenses on his behalf”. 1 The majority found dispositive the email from Koukis to Santamarina wherein he specifically stated that “‘I have not authorized you to represent me in any legal or other matters.’” 2 The majority also found relevant Koukis’s averment that “he never communicated with Santamarina and that he never represented him”. 3 In fact, noted the majority, “there no indication in the record that Koukis was even aware of Santamarina for any significant time prior to his December 16, 2019 email”. 4 Speaking to the dissent, the majority explained that “ he two November 2019 emails referenced by the dissent were not from or to Santamarina and made no mention of any representation by Santamarina”. 5 However, with regard to the jurisdictional allegations that “Koukis participated in the allegedly fraudulent conveyance to hinder legitimate creditors such as plaintiff,” the majority held that such allegations were insufficient. 6 “The complaint”, said the majority, was “devoid of any specific allegations involving Koukis” and any “allegations as to which assets were transferred to Koukis and/or when they were transferred”. 7 The dissent “disagree with the majority’s assertion that there ‘no basis’ in the record for an inference that Santamarina had authority to represent Koukis in action”. 8 “The majority”, said the dissent, “overlook certain November 2019 emails that plainly raise an issue of fact in this regard” an issue, noted the dissent, that “should be resolved by a hearing pursuant to CPLR 2218”. 9 Those emails, said the dissent, “suffice to raise a triable issue of fact as to whether Koukis had given such authority, whether expressly or through knowing acquiescence in the representation as it continued through an extended period of time”. 10 Footnotes Slip Op. at *2 (citing, Amusement Sec. Corp. v. Academy Pictures Distrib. Corp. , 251 A.D. 227, 229 (1st Dept. 1937)). Id. Id. Id. Id. Id. Id. (citing, CIBC Mellon Trust Co. v. HSBC Guyerzeller Bank AG , 56 A.D.3d 307, 308-309 (1st Dept. 2008)). Id. at *3. Id. CPLR § 2218 provides that “ he court may order … an issue of fact raised on a motion” to be “separately tried by the court or a referee”. Id. at *4. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Norman Realty & Constr. Corp. v. 151 E. 170th Lender LLC , 2023 N.Y. Slip Op. 01843 (1st Dept. April 6, 2023) ( here ), the Appellate Division, First Department addressed the affirmative defense of contract unconscionability, a topic that this Blog has not addressed in quite some time (here). 1 It also addressed plaintiff’s claims for breach of contract and fraudulent inducement.  As discussed below, Norman Realty involved an action for unconscionability and fraudulent inducement. The Court affirmed the motion court’s order granting defendant’s motion for summary judgment dismissing plaintiff’s complaint, granting summary judgment on defendant’s counterclaims to foreclose on a mortgage and its security interest in the building and for a deficiency judgment against the additional counterclaim defendants, and denying plaintiffs’ cross-motion to amend the complaint and their answers to the counterclaims.   A Primer on the Applicable Law: Contract Interpretation It has long been the law in New York that absent a violation of law, or some transgression of public policy, people are free to enter into contracts, making whatever agreement they wish no matter the wisdom of doing so. 2 Consequently, when a contract dispute arises, it is the court’s role to enforce the agreement rather than to reform it. 3 To enforce the agreement, the court must construe it in accordance with the intent of the parties , the best evidence of which is the agreement itself and the terms contained therein. 4 Thus, “when the parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms”. 5 Moreover, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”. 6 Therefore, courts should refrain from interpreting agreements in a manner which implies something not specifically included by the parties, and “may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing”. 7 This rule of construction provides “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses infirmity of memory”. 8 When a writing is clear and complete, evidence outside its four corners “as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing”. 9 Whether a contract is ambiguous is a matter of law for the court to decide. 10 A contract is unambiguous if the language it uses has “definite and precise meaning, unattended by danger of misconception in purport of the itself, and concerning which there is no reasonable basis for a difference of opinion”. 11 Thus, if the contract is not reasonably susceptible to multiple meanings, it is unambiguous and the court is not free to alter it, even if such alteration reflects personal notions of fairness and equity. 12 Notably, silence, or the omission of terms within a contract, are not tantamount to ambiguity. 13 Instead, the question of whether an ambiguity exists must be determined from the face of an agreement without regard to extrinsic evidence, 14 and an unambiguous contract or a provision contained therein should be given its plain and ordinary meaning. 15 While the parol evidence rule forbids proof of extrinsic evidence to contradict or vary the terms of a written instrument, it generally has no application in a suit brought where there are claims of fraud in the execution of an agreement or to rescind a contract on the ground of fraud. 16 An exception, however, exists when the agreement between the parties expressly disclaims reliance on any oral representations in the making of the agreement. 17 In other words, when a party disclaims reliance, in writing, on any oral representations in the execution of a contract, he/she cannot assert a claim for fraudulent inducement by claiming reliance on the very statements he/she disclaimed in writing. In the absence of fraud or other wrongful act, a party who signs a written contract is presumed to know and have assented to the contents therein. 18 The Doctrine of Unconscionability To form a contract, the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent and an intent to be bound. 19 A defense to the formation of a contract is its lack of conscionability from both a procedural and substantive perspective. 20 Under UCC § 2-302(1), 21 f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. Thus, under UCC § 2-302(1), an unconscionable contract is voidable. 22 An unconscionable contract is one which “is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms”. 23 In other words, an unconscionable bargain is one that “no person in his or her senses and not under delusion would make on the one hand, and as no honest and fair person would accept on the other”. 24 The gravamen of an unconscionable contract is the “absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. 25 Whether a contract is unconscionable requires an examination of the contract formation process so as to determine the absence of meaningful choice. 26 To that end, to determine the absence of meaningful choice, courts focus on “the size and commercial setting of the transaction, whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power”. 27 UCC § 2-302(2) provides that when a party claims a contract should not be enforced because it is unconscionable, “the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.” This is because, generally, a claim of unconscionability only exists to protect the commercially illiterate, such that it does not lie in a commercial setting, where the parties dealing at arm’s length have equality of bargaining power. 28 Accordingly, where there exist no circumstances establishing that consent to the execution of a contract was not “freely and knowingly given”, 29 there is no claim for unconscionability. 30 Indeed, when a party is represented by counsel during the formation of a contract, courts have declined to uphold a claim for unconscionability. 31 Whether a party can bring an affirmative claim to void an agreement for unconscionability has been clearly answered by the case law which proscribes it. It is clear that a party cannot bring an affirmative claim sounding in unconscionability in the formation of an agreement. 32 In other words, unconscionability can only be asserted as a defense to the enforcement of a contract and not as a claim for money damages. Fraudulent Inducement To plead a cause of action for fraud, a plaintiff must allege that the defendant made a misrepresentation or omission of a material existing fact, which was false and known to be false by the defendant when made, for the purpose of inducing the plaintiff’s reliance thereon; that the plaintiff justifiably relied on such misrepresentation or omission; and that the plaintiff was injured thereby. 33 One of the more “nettlesome” elements of a fraud claim is justifiable reliance. 34 Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry. 35 As the New York Court of Appeals observed, “ o two cases are alike ….” For this reason, the courts look to whether the plaintiff had the “means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into” and whether he made “use of those means”. 36 If the plaintiff does not do so, “he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” 37 After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence. 38 Whether a plaintiff exercised diligence in ascertaining the truth should not be determined by hindsight. As the Court of Appeals explained, when “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” 39 Sophisticated parties have a heightened duty to use the means available to them to verify the truth of the information upon which they rely and to use their sophistication to conduct due diligence. 40 A sophisticated plaintiff cannot establish justifiable reliance on an alleged misrepresentation if the plaintiff failed to make use of the means of verification that were available to him. 41 Thus, to sustain a claim of fraud, sophisticated parties must have discharged their own affirmative duty to exercise ordinary intelligence and conduct an independent appraisal of the risks they are assuming. 42 With foregoing legal principles in mind, we examine Norman Realty . Norman Realty & Constr. Corp. v. 151 E. 170th Lender LLC Over the course of several years, plaintiff and defendant executed a series of agreements related to real property located in the Bronx, N.Y. (the “Property”). Pursuant to the mortgage and loan transactions governed by these agreements, plaintiff was the borrower and defendant was the lender. In its complaint, plaintiff asserted three causes of action. The first and second causes of action alleged that the foregoing agreements violated UCC § 2-302, in that the agreements were discriminating, unconscionable, one-sided and oppressive. As a result of the foregoing, plaintiff alleged that it sustained extensive damage totaling $5,000,000. The third cause of action alleged that defendant defrauded plaintiff when it executed the agreements between the parties, that defendant knowingly and willfully failed to advise plaintiff that upon executing the agreements, plaintiff would immediately be in default at an interest rate of 24 percent, and that defendant promised to provide plaintiff with an extension agreement, but then delayed the same for four months in order to charge plaintiff additional interest on the loans. As a result, plaintiff sought to void the agreements between the parties. In response, defendants filed an answer with counterclaims. The first counterclaim sought to foreclose on the mortgage because plaintiff defaulted thereunder. The second cause of action sought the sale of the property. The third cause of action sought a deficiency judgment against the guarantors of the note. Defendant moved for summary judgment, seeking dismissal of the complaint and on its counterclaims for (1) foreclosure on the mortgage and the sale of the property; and (2) a deficiency judgment against the guarantors to the extent there was a difference between the amount owed under the note and the proceeds of the sale of the property.  As noted, the motion court granted the motion. First, the motion court found that plaintiff expressly waived its right to assert any claims arising from the agreement between the parties. The motion court observed that under the note, plaintiff specifically released any and all “defenses, counterclaims, offsets, cross-complaints or demands” that it could have asserted “to reduce or eliminate all or any part of liability to repay any indebtedness to or seek affirmative relief for damages of any kind or nature from ”. Thus, concluded the motion court, “by executing the agreement, plaintiff clearly and unambiguously waived its right to bring any claims and thus, the instant action is barred”. Second, the motion court held that the causes of action for unconscionability were improperly affirmatively pleaded in the complaint and, as such, failed to state a claim upon which relief could be granted. The motion court also held that the cause of action failed because the loan documents in question “evince a transaction between sophisticated business people dealing at arm’s length, each were represented by counsel.” In fact, noted the motion court, plaintiff expressly stated and acknowledged in the restated note that it “engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of the Mortgagor or its affiliates,” and “that it is represented by competent counsel and has consulted counsel before executing the Loan Documents”. Third, the motion court held that defendant established that the claim for fraudulent inducement was barred as a matter of law. In this regard, the motion court found that the mortgage contained a disclaimer in which plaintiff expressly asserted that the agreement was entered without reliance on anything told to it by defendant. The court noted that “while allegations that … plaintiff reasonably believed that the representation made true and that plaintiff took justified action as a result thereof rise to a cause of action for fraudulent inducement,” the use of parol evidence … “to contradict or vary the terms of a written instrument” to “disclaim reliance on any oral representations in the making of the agreement” was prohibited. Thus, concluded the motion court, “none of the claims … regarding oral misrepresentations admissible … to alter the clear and unambiguous terms of the loan documents”. On appeal, the First Department affirmed. The Court held that the “claims sounding in unconscionability were properly dismissed, as the doctrine of unconscionability ‘may not be used as a basis for affirmative recovery’”. 43 “Even if plaintiff could properly assert the claims,” noted the Court, “the record not support a finding that the note and mortgage were procedurally and substantively unconscionable at the time they were executed”. 44 The Court explained that “plaintiff was represented by counsel during negotiation of the transaction,” a fact not in dispute, “and, aside from its conclusory allegations, plaintiff not shown how the contract terms were so unreasonable as to render them unenforceable”. 45 The Court also held that “plaintiff failed to state a claim for fraudulent inducement, as it did not plead justifiable reliance”. 46 The Court explained that the terms of the agreements expressly contradicted any of the alleged false statements, which plaintiff could have easily discovered: “The allegations that defendant failed to advise plaintiff that it would be in default of the original 2018 note and mortgage, and that defendant would include the amounts owed upon that default in the subject 2020 note and mortgage, were contradicted by the express terms of the 2020 loan documents”. 47 here).=">here)."> Footnotes The defense has been discussed by this Blog in the context of arbitrations and damages clauses ( e.g. , here , here , and here ). Rowe v. Great Atlantic & Pacific Tea Co., Inc. , 46 N.Y.2d 62, 67-68 (1978). Grace v. Nappa , 46 N.Y.2d 560, 565 (1979). Greenfield v. Philles Records, Inc. , 98 N.Y.2d 562, 569 (2002). Vermont Teddy Bear Co., Inc. v. 583 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004) (internal quotation marks omitted). Greenfield , 98 N.Y.2d at 569. Vermont Teddy Bear , 1 N.Y.3d at 475. Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 548 (1995) (internal quotation marks omitted). W.W.W. Assoc., Inc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. at 162; Van Wagner Adv. Corp. v. S & M Enterprises , 67 N.Y.2d 186, 191 (1986). Greenfield , 98 N.Y.2d at 569 (quoting, Breed v. Ins. Co. of N. Am. , 46 N.Y.2d 351, 355 (1978)). Id. at 569-570. Id. at 573; Reiss v. Financial Performance Corp. , 97 N.Y.2d 195, 199 (2001). Id. at 569-570. Rosalie Estates, Inc. v. RCO Int’l, Inc ., 227 A.D.2d 335, 336 (1st Dept. 1996). Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320 (1959); Sabo v. Delman , 3 N.Y.2d 155, 161 (1957); Adams v. Gillig , 199 N.Y. 314, 319 (1910); Berger-Vespa v. Rondack Bldg. Inspectors Inc. , 293 A.D.2d 838, 840 (3d Dept. 2002). Danann Realty , 5 N.Y.2d at 323. Pimpinello v. Swift & Co. , 253 N.Y. 159, 162 (1930); Metzger v. Aetna Ins. Co. , 227 N.Y. 411, 416 (1920). 22 N.Y. Jur. 2d, Contracts Section 9. Gillman , 73 N.Y.2d at 10 (“A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made….”) (citations omitted). While the doctrine of unconscionability is recognized by article 2 of the UCC, which applies to transactions for the sale of goods, it has also been applied to other contracts. King v. Fox , 7 N.Y.3d 181, 191 (2006); Gillman v. Chase Manhattan Bank, N.A. , 73 N.Y.2d 1, 10 (1988). Gillman , 73 N.Y.2d at 10. Christian v. Christian , 42 N.Y.2d 63, 71 (1977) (internal quotation marks omitted). King , 7. N.Y.3d at 191; Gillman , 73 N.Y.2d at 10. Gillman , 73. N.Y.2d at 10-11. Gillman , 73 N.Y.2d at 10-11; State v. Wolowitz , 96 A.D.2d 47, 68 (2d Dept. 1983). Gillman v. Chase Manhattan Bank, N.A. , 135 A.D.2d 488, 491 (2d Dept. 1987), aff’d , 73 N.Y.2d 1 (1988); Equit. Lbr. Corp. v. IPA Land Dev. Corp. , 38 N.Y.2d 516, 523 (1976). State v. Avco Fin. Serv. of New York Inc. , 50 N.Y.2d 383, 390 (1980). Id. at 391. FGH Contr. Co., Inc. v. Weiss , 185 A.D.2d 969, 971 (2d Dept. 1992). Super Glue Corp. v. Avis Rent A Car Sys., Inc. , 132 A.D.2d 604, 606 (2d Dept. 1987); see Fortune Limousine Serv., Inc. v Nextel Communications , 35 A.D.3d 350, 354 (2d Dept. 2006); Pearson v. Natl. Budgeting Sys., Inc. , 31 A.D.2d 792, 792 (1st Dept. 1969). Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995). DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Id. 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). Id. (internal quotation marks omitted). KNK Enters. Inc. v. Harriman Enters., Inc. , 33 A.D.3d 872 (2d Dept. 2006). DDJ Mgt. , 15 N.Y.3d at 154. McGuire Children, LLC v. Huntress , 24 Misc. 3d 1202 , at *12 (Sup. Ct., Erie County), aff’d , 83A.D.3d 1418 (4th Dept. 2011). Id. Id. Slip Op. at *1 (quoting, Avildsen v. Prystay , 171 A.D.2d 13, 16 (1st Dept. 1991), lv. dismissed , 79 N.Y.2d 841 (1992)). Id. Id. (citing, Gillman , 73 N.Y.2d at 10-12; State , 50 N.Y.2d at 390). Id. Id. (citing, A-Pix, Inc. v SGE Entertainment Corp. , 222 A.D.2d 387, 389-390 (1st Dept. 1995)). The Court disagreed with the motion court as to the application of the disclaimer, finding that it was too general to bar the fraudulent inducement claim. Id. This Blog addressed the specificity required for a disclaimer to operate as a bar to a fraud claim here and 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 Jonathan H. Freiberger This Blog has previously discussed informal appearances in an article aptly titled: “ Informal Appearances ,” from which the introductory information related to informal appearances is taken. Informal Appearances It makes sense that a “plaintiff appears in an action merely by bringing it.”  Deutsche Bank Nat. Trust Co. v. Hall , 185 N.Y.S.3d 1006, 1007 (2 nd Dep’t 2020) (citation and internal quotation marks omitted).  Once served with process, a defendant must appear in an action to avoid a default.  Section 320(a) of New York’s Civil Practice Law and Rules (the “CPLR”), which sets forth, inter alia, the way a defendant can appear in an action, provides that “ he defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer.”  An appearance pursuant to CPLR §320(a) is a formal appearance in the action.  New York courts also recognize “informal appearances.”  An appearance, whether formal or informal, can have a significant impact on litigation.  Among other things, an appearance could: preclude the entry of a default judgment by plaintiff; operate to preclude a defendant from interposing a defense of lack personal jurisdiction; and, preclude a defendant from having a complaint dismissed pursuant to CPLR 3215(c) based on a plaintiff’s failure to seek a default judgment within a year of default.  [This BLOG has addressed CPLR 3215(c) < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .]  Depending on the circumstances, a plaintiff or a defendant may argue that a defendant has “informally appeared” in an action.  To constitute an informal appearance, a defendant must have engaged in “meaningful participation in the merits of the case.”  Kurlander v. Willie , 45 A.D.3d 1006, 1007 (3 rd Dep’t 2007) (citation omitted).  See also Deutsche Bank , 185 N.Y.S.3d at 1009. Corporate Veil One of the reasons why individuals form corporations and limited liability companies is to shield themselves from personal liability as a consequence of their business dealings.  “The general rule, of course, is that a corporation exists independently of its owners, who are not personally liable for its obligations, and that individuals may incorporate for the express purpose of limiting their liability.”  Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc. , 169 A.D.3d 1084, 1085 (2 nd Dep’t 2019) (citations and internal quotation marks omitted); see also E. Hampton Union Free School Dist. v Sandpebble Builders, Inc. , 66 A.D.3d 122 (2d Dep’t 2009), aff’d, 16 N.Y.3d 775 (2011).  However, the corporate veil may be pierced in certain circumstances.  The East Hampton Court recognized the “exception to general rule, permitting, in certain circumstances, the imposition of personal liability on owners for the obligations of their corporation.”  East Hampton , 66 A.D.3d at 126 (citations omitted).  “A plaintiff seeking to pierce the corporate veil must demonstrate that a court in equity should intervene because the owners of the corporation exercised complete domination over it in the transaction at issue and, in doing so, abused the privilege of doing business in the corporate form, thereby perpetrating a wrong that resulted in injury to the plaintiff”.  Id.  [Eds. Note: this blog has addressed corporate veil piercing numerous times.  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . Travelon, Inc. v. Maekitan Against this backdrop, we can discuss Travelon, Inc. v. Maekitan , a case decided on April 5, 2023, by the Appellate Division, Second Department, and in which the Court addresses informal appearances and corporate veil issues.    Plaintiff commenced a breach of contract action against, inter alia , Individual and Corporation.  Thereafter, plaintiff moved for a default judgment (for failure to respond to the complaint) against Individual and Corporation and: support of the motion, the plaintiff[] did not submit any affidavits of service of process upon or . Instead, the plaintiff[] contended that an affidavit from <(the “affidavit”)> …, which was submitted by in opposition to the plaintiff’s prior motion for a preliminary injunction, constituted an informal appearance on behalf of both and , that and had submitted to personal jurisdiction of the Supreme Court despite not having been served with process, that their time to file an answer had passed, and therefore, the court could enter a default judgment against them. Affiliated Corporation’s counsel opposed the default judgment motion by submitting an affidavit in which he argued that he was only retained by, and appeared for, Affiliated Corporation and that “ opposes the motion for default judgments against and because the motion, based entirely upon ’s filings in this proceeding, incorrectly charges that ’s participation constitutes an informal appearance on behalf of and/or .”  Plaintiff appealed the denial of its motion for leave to enter a default judgment against and . On appeal the Second Department modified supreme court’s order granting that portion of plaintiff’s motion seeking a default judgment against Corporation.  The Court recognized that “ n a motion for leave to enter a default judgment against a defendant based on the failure to answer or appear, a plaintiff must submit proof of service of the summons and complaint , proof of the facts constituting the cause of action, and proof of the defendant’s default.”  (Citations and internal quotation marks omitted; emphasis added.)  Plaintiff, however, did not submit an affidavit of service of the summons and complaint on and , nor did or make a formal appearance in the action pursuant to CPLR 320(a). The Court then discussed informal appearances; noting that “ hen a defendant participates in a lawsuit on the merits, he or she indicates an intention to submit to the court’s jurisdiction over the action, and by appearing informally in this manner, the defendant confers in personam jurisdiction on the court.”  (Citations and internal quotation marks omitted.)  Also, “ n appearance of the defendant is equivalent to personal service of the summons…, unless an objection to jurisdiction under CPLR 3211 (a)(8) is asserted by motion or in the answer as provided in rule 3211 (CPLR 320 )”.  (Internal quotation marks and brackets omitted; hyperlink added.)  Although it is an “infrequent thing,” informal appearances may occur “even when the defendant is not served with process, where an individual defendant affirmatively states that he or she is only acting in his or her capacity as an officer of a corporate defendant, and where a party opposes a motion for a preliminary injunction.  (Citations omitted.) As to the Individual, the Court found that the Affidavit (submitted in opposition to the preliminary injunction motion) made clear that he was speaking in a representative capacity, on behalf of Corporation and Affiliated Corporation, and not in an individual one.  Recognizing the corporate veil cloaked the Individual with immunity from personal liability, the Court determined that, on the record presented, the Individual did not “participat[] on the merits in his individual capacity” by submitting the Affidavit on behalf of Corporation and Affiliated Corporation.  Accordingly, supreme court properly denied that portion of plaintiff’s motion seeking a default judgment against the Individual. Conversely, the Court determined that the Affidavit constituted an informal appearance on behalf of Corporation.  In the Affidavit, Individual indicated he was the CEO of both Corporation and Affiliated Corporation.  Further, in the Affidavit, Individual collectively defined the Corporation and Affiliated Corporation and made other averments and stated facts involving Corporation.  “Thus, even though counsel for repeatedly denied that he was ever retained to represent in this action, the Affidavit advanced contentions that might constitute either affirmative defenses or counterclaims on behalf of . Thus, as to the Corporation, the Court held: Since the ffidavit constituted an informal appearance on behalf of , and since failed to serve and file an answer within 20 days of its informal appearance ( see CPLR 320 , ) or move pursuant to CPLR 3211(a)(8) to dismiss the complaint insofar as asserted against it on the ground that the Supreme Court did not have personal jurisdiction over it ( see id. § 320 ), the court should have granted that branch of the plaintiffs’ motion which was for leave to enter a default judgment against . 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 today’s article, we examine South Shore D’Lites LLC v. First Class Prods. Grp., LLC , 2023 N.Y. Slip Op. 01769 (1st Dept. Apr. 4, 2023) ( here ), a case involving the special facts doctrine in the context of a fraud claim, in particular, the justifiable reliance element of a fraud claim.  South Shore D’Lites concerned licenses to sell ice cream. The licenses were sold to plaintiffs, South Shore D’Lites, LLC, D’Lites of West Caldwell, LLC, and HGB D’Lites of Smithtown, LLC, by Defendants, Todd Coven and Magda Coven, the co-members of defendant First Class Products Group, LLC. First Class owns a license to sell “D’Lites” ice-cream products in the tri-state area.  According to the complaint, in selling the licenses, defendants made numerous statements to certain, or each, of the plaintiffs, including, but not limited to: (a) the expected profitability of the entities, (b) the anticipated sales of the entities during the first year of operation, (c) the anticipated sales of various D’Lites products during “special occasions”, (d) the profitability of existing D’lite stores, (e) the profit margins and daily average sales of defendants’ D’Lites store in Woodbury, New York, (f) offers that defendants received to purchase their D’Lites store in Woodbury, (g) the price of supplies to be purchased by the plaintiffs from the supplier or suppliers to be designated by defendants (which was represented to be (1) the then current price available from the supplier and not a marked-up supply price that included approximately $5.00 per gallon charge of direct profit to defendants (the “Mark-Up”), and (2) the same price as defendants paid for supplies), and (h) the identity of the supplier for the supplies to be purchased by the plaintiffs (which was represented as a third-party dairy and not the defendants or an affiliate of the defendants). Plaintiffs alleged that they these and other representations were materially false and misleading. Plaintiffs claimed that in reliance on these statements, they purchased the licenses. In their complaint, plaintiffs asserted five causes of action: (1) breach of the implied covenant of duty of good faith and fair dealing; (2) breach of fiduciary duty; (3) breach of General Business Law (“GBL”) § 349; (4) fraud in the inducement; and (5) breach of the Franchise Act. Subsequently, plaintiffs agreed to withdraw their claims for breach of the implied duty of good faith and fair dealing and breach of fiduciary duty. On August 27, 2021, Plaintiffs moved for partial summary judgment seeking judgment on their claim for breach of the Franchise Act. Also on August 27, 2021, defendants moved for summary judgment dismissing the complaint in its entirety. With regard to the fraudulent inducement claim, defendants argued that plaintiffs could not satisfy the justifiable reliance element of the claim. Defendants argued that the statements identified by plaintiffs were merely forecasts or ‘expectations’ of future performance, both of which are not statements of fact. “Mere puffery, opinions of value or future expectations” do not support a fraud claim, defendants argued.  In addition, defendants argued that plaintiffs failed to undertake any meaningful due diligence before entering into the agreement. As a result, defendants claimed, plaintiffs could not have justifiably relied on any statement they made. On April 26, 2022, the motion court dismissed plaintiffs’ claims for breach of GBL § 349 and fraud in the inducement. The motion court denied plaintiffs’ claim for summary judgment on their Franchise Act claim. Plaintiffs appealed the denial of summary judgment on the Franchise Act claim and the dismissal of the fraud in the inducement claim. We examine the fraudulent inducement claim below. The Appellate Division, First Department modified the motion court’s dismissal of the fraudulent inducement claim to reinstate it. The Court held that there were “ ssues of fact” that “preclude summary judgment dismissal … based on the evidence adduced in discovery.” 1 The Court explained that these issues were “consistent with plaintiffs’ contention that defendants lied in their statements to plaintiffs concerning the past and present profitability of their D’Lites store and by failing to disclose the ice cream arkup.” 2 The Court rejected “ efendants’ contention that plaintiffs could not have reasonably relied upon the alleged misrepresentations as to defendants’ profits and costs because they did not perform the due diligence with respect to those representations,” holding that such issues were not properly resolved on summary judgment. 3 Takeaway The Court’s citation to Swersky reveals that the issue of reliance turned, in part, on the special facts doctrine 4 and whether there was a disparity in the level of information available to plaintiffs at the time they conducted due diligence. Plaintiffs argued that, in effect, defendants were concealing material information from them, thus making the special facts doctrine applicable to the facts in that case. In essence, therefore, the amount of due diligence performed was not dispositive because there existed a disparity of information between the parties that prevented plaintiffs from discovering the truth. As noted, the First Department agreed.   Footnotes Slip Op. at *1. Id. at *1-*2. Id. at *2 (citing, Swersky v. Dreyer & Traub , 219 A.D.2d 321, 328 (1st Dept. 1996)). To satisfy the special facts doctrine, a party must satisfy the following two-prong test: “that the material fact was information ‘peculiarly within knowledge’ of , and that the information was not such that could have been discovered by through the ‘exercise of ordinary intelligence.’” Jana L. v. West 129th Street Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (citing, Black v. Chittenden , 69 N.Y.2d 665, 669 (1986), quoting, Schumaker v. Mather , 133 N.Y. 590, 596 (1892)). We have examined the special facts doctrine, here , here and 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.

Market analysts study publicly traded companies and make recommendations on the securities of those companies. 1 Most analysts specialize in a particular industry or sector of the economy. 2 As noted by the Securities and Exchange Commission (“SEC” or “Commission”), analysts exert considerable influence on a company. “Analysts’ recommendations or reports can influence the price of a company’s stock—especially when the recommendations are widely disseminated through television appearances or through other electronic and print media.” 3 In fact, “ he mere mention of a company by a popular analyst can temporarily cause its stock to rise or fall—even when nothing about the company’s prospects or fundamentals has recently changed.” 4 It is no wonder, therefore, that at many publicly traded companies, “the pressure to meet or beat consensus-earnings estimates is strong.” 5 Many corporate executives believe that doing so “will reward the company over the longer term with a higher share price.” 6 If the company were to report “earnings below consensus estimates—even by a small amount— investors will penalize them with a lower share price.” 7 “As a result, executives often go to some lengths to meet or beat consensus estimates—even acting in ways that could damage the longer-term health of the business.” 8 It is not uncommon, therefore, for companies to give customers steep discounts in the final days of a reporting period to increase sales numbers, “in effect borrowing from the next quarter’s sales.” 9 As many companies have shown, corporate executives will forgo value-creating investments in favor of short-term results, or worse manage earnings inappropriately to create the illusion of growth. 10 The pressure to meet analysts’ estimates was a reason for the alleged accounting fraud charged by the SEC against three executives of Mobile, Alabama-based shipbuilder, Austal USA LLC (collectively, the “Individual Defendants”). On March 31, 2023, the SEC announced ( here ) that it charged three Austral USA executives for orchestrating a fraudulent revenue recognition scheme that allowed its parent company, Australia-based Austal Limited, to meet or exceed analyst expectations. In its complaint ( here ), the SEC alleged that, from at least January 2013 through July 2016, Austal USA’s former president, its current director of financial analysis, and former director of the Littoral Combat Ships program engaged in a scheme to artificially reduce the cost estimates to complete certain shipbuilding projects for the U.S. Navy by tens of millions of dollars. The SEC further alleged that the Individual Defendants knew that Austal USA’s shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal USA’s revenue budget and revenue projections. In addition, the SEC alleged that Austal USA’s parent company, Austal Limited, prematurely recognized revenue and, as a result, met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT), a key financial metric for the company. Commenting on the charges, Jason Burt, Regional Director of the SEC’s Denver Regional Office, stated: “We allege that Austal USA’s executives manipulated its financial results, causing harm to U.S. investors in the securities of its parent company, Austal Limited. As the complaint articulates, if the defendants had not fraudulently manipulated the cost estimates, Austal Limited would have missed, by wide margins, analyst consensus estimates for EBIT.” The SEC filed its complaint in the U.S. District Court for the Southern District of Alabama. The SEC claimed that the Individual Defendants violated the antifraud provisions of the Securities Exchange Act of 1934. The SEC seeks disgorgement plus prejudgment interest, civil money penalties, and officer and director bars. In addition to the SEC’s enforcement action, a federal grand jury returned an indictment against the Individual Defendant for orchestrating the alleged accounting fraud. 11 In the press release announcing the indictment ( here ), the DOJ explained that the Individual Defendants and their co-conspirators allegedly conspired to mislead investors about Austal USA’s financial condition. Making many of the same allegations as the SEC, the government alleged that the Individual Defendants artificially reduced and suppressed an accounting metric known as “estimate at completion” (“EAC”) in relation to multiple LCS ships that Austal USA was building for the U.S. Navy. Suppressing the EACs allegedly falsely overstated Austal Limited’s reported earnings in its public financial statements. According to court papers, the Individual Defendants and their co-conspirators allegedly manipulated the EAC figures in part by using so-called “program challenges” – ostensibly cost-savings goals – but which in reality were “plug” numbers and fraudulent devices to hide growing costs that should have been incorporated into Austal USA’s financial statements, and ultimately reflected in Austal Limited’s reported earnings. Similar to the SEC, the government claimed that the Individual Defendants allegedly committed the accounting fraud to, among other reasons, maintain and increase the share price of Austal Limited’s stock. When the higher costs were eventually disclosed to the market, the stock price was significantly negatively impacted and Austal Limited wrote down over $100 million. The Individual Defendant were each charged with one count of conspiracy to commit wire fraud and wire fraud affecting a financial institution, five counts of wire fraud, and two counts of wire fraud affecting a financial institution. If convicted, they each face a maximum penalty of 30 years in prison for the conspiracy count and each count of wire fraud affecting a financial institution, and 20 years in prison for each count of wire fraud. Footnotes Investor Publications, “Analyzing Analyst Recommendations” (SEC.gov., Aug. 30, 2010) ( here ). Id. Id. Id. Tim Koller, Rishi Raj, and Abhishek Saxena, “Avoiding the Consensus-Earnings Trap” (Mckinsey.com, Jan. 1, 2013) ( here ). Id. Id. Id. Id. Id. See also Shawn Huang, et al. , “The Dark Side of Analyst Coverage: Firms Pressured to Meet Forecasts” (AZ. State Univ., W. P. Carey News, Dec. 6, 2017) (noting, the pressure to deliver good news often causes “managers whose compensation and careers depend on meeting forecasts … to manage the financial reports accordingly and even guide analysts’ forecasts downward — in effect, making the earnings bar easier for the company to clear.”) ( here ). An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law. 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.