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By: Jeffrey M. Haber Parties to commercial transactions are no doubt familiar with “term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle”. As the parties to these documents know, they outline the fundamental terms of the transaction being negotiated. “Term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle” may constitute an enforceable agreement if the writing includes all the essential terms of an agreement. 1 This is so even if “the parties intended to negotiate a ‘fuller agreement’”. 2 Thus, if the informal writing contains the necessary elements of an enforceable contract, e.g. , an offer, acceptance, consideration, mutual assent and intent to be bound, courts will enforce the writing as if it was a formal, written agreement. 3 However, a term sheet, letter of intent or a memorandum of understanding will be rendered ineffective where material terms are left for future negotiation, or the writing expressly reserves the right not to be bound until a more formal agreement is signed. 4 In Claim Recovery Group LLC v. Markel Corp. , 2023 N.Y. Slip Op. 00371 (1st Dept. Jan. 26, 2023) ( here ), the Appellate Division, First Department held that the term sheet at issue was enforceable because it contained all the salient terms of the parties’ agreement and was specifically made binding by the very language used therein. In early 2019, defendant Markel Corporation (“Markel”), an insurance conglomerate, was facing millions of dollars in exposure as a result of two wildfires in California. Markel possessed subrogation claims against two utilities, Pacific Gas & Electric Company (“PG&E”) and Southern California Edison, but when PG&E filed for bankruptcy in January 2019, a question arose as to whether Markel would realize the full value of those subrogation claims. To remove the uncertainty and to secure the cash needed for its claims, Markel looked to sell its claims on the secondary market. Fulcrum Credit Partners LLC (“Fulcrum”), assignor and predecessor-in interest to Plaintiff, Claim Recovery Group LLC (“Plaintiff”), approached Markel in late January 2019 about purchasing Markel’s claims. After preliminary discussions and due diligence, Fulcrum decided to make an offer, and sent Markel a term sheet, setting out the terms on which it proposed to purchase certain of Markel’s subrogation claims. After negotiation, the parties reached mutually acceptable terms. The agreed-upon terms were reduced to a term sheet, which Markel signed on March 25, 2019 (“Term Sheet”). The Term Sheet included terms such as “proposed transaction,” “potential transaction,” “potential sale” and “resulting transaction”, as well as conditional and aspirational language concerning what the terms of the proposed transaction “would” or “will” be. The Term Sheet summarized the terms of a “potential” and “proposed transaction” whose consummation would be “subject to … negotiation and execution of a Proceeds Agreement.” Notwithstanding, the foregoing language, the Term Sheet expressly stated that “ he Parties intend to be legally bound to this transaction once this Term Sheet is mutually executed.”  The parties did not execute a Proceeds Agreement. The motion court granted defendant’s motion for summary judgment dismissing the complaint and denied plaintiff’s motion for summary judgment dismissing the affirmative defenses and in favor of its claim for breach of contract. The motion court held that the Term Sheet was “ambiguous” as to whether the parties intended to be bound and, therefore, was not an enforceable contract. The motion court observed that the document was “entitled Term Sheet, not contract” and emphasized that it summarized “the terms and conditions of a proposed transaction” rather than an actual transaction. The motion court also noted that the Term Sheet used prospective language regarding what the proposed transaction “will” look like. Based on the foregoing, the motion court concluded that “it is clear that the term sheet was not the vehicle to transfer the interest.” The motion court reinforced this conclusion by noting that the phrase “potential transaction” appeared in the Term Sheet, including in the standstill provision whose existence would not make sense “if the parties already had an agreement set in stone.” The motion court further noted that post-execution negotiations showed “that the parties were negotiating … in an effort to close” the Proceeds Agreement. Among other things, the motion court observed that the parties’ communications were not consistent with the conclusion that a “deal was already in place”. Instead, explained the motion court, the negotiation supported the view that “the term sheet did not create a contract.” On appeal, the First Department modified the motion court’s order to deny defendant’s motion and grant plaintiff’s motion insofar as it sought summary judgment on the issue of whether the Term Sheet constituted an enforceable agreement, and remanded the matter for further proceedings on the issues of breach and damages, including the viability of the affirmative defenses. The remainder of the motion court’s order was otherwise affirmed. The Court held that the Terms Sheet was an enforceable contract. 5 The Court found that the Term Sheet “unambiguously provide that ‘ he Parties intend to be legally bound to this transaction once this Term Sheet is mutually executed.’” 6 The Court explained that although the Term Sheet stated that it was drafted as a proposal, it “became legally binding once mutually executed and, as stated on the term sheet, ‘ ccepted and greed’”. 7 The Court further explained that the Term Sheet “included all material terms, including identification of the buyer and seller, description of the claims to be sold, and a formula for calculation of the purchase price”. 8 The Court was unpersuaded by the Term Sheet’s references to a “proposed” or “potential” transaction or “any resulting transaction”. 9 Such references did not “undermine this interpretation”, said the Court. 10 The Court, therefore, rejected Defendants’ argument that the use of the “subject to” language in the Term Sheet – that is, the transaction would be “subject to” completion of satisfactory due diligence and negotiation and execution of a purchase and sale agreement – was dispositive. 11 Further, the Court rejected the argument that the parties’ post-execution negotiation of certain terms negated the enforceability of the Term Sheet because “those terms were clearly agreed upon in the term sheet”. 12 “Nor”, said the Court, “was the term sheet rendered unenforceable ‘simply because certain nonmaterial terms were left for future negotiation’”. 13 Takeaway Claim Recovery highlights the importance of the language used in a term sheet. As discussed, a term sheet will be deemed enforceable when the term sheet includes all the salient terms of the transaction and “unambiguously provides that ‘ he Parties intend to be legally bound to transaction once Term Sheet is mutually executed’”. 14 In our discussion of McGowan v. Clarion Partners, LLC , 188 A.D.3d 497 (1st Dept. 2020), lv. denied , 37 N.Y.3d 903 (2021) ( here ), which the Court found was inapposite, we discussed ways in which parties can protect themselves from the unintended enforcement of a term sheet. Among other things, we said that “the parties should consider using language that expressly imposes a duty to negotiate a final agreement in good faith”. They should also: (a) make clear that neither subsequent communications nor a course of conduct will give rise to an enforceable agreement before they sign the contemplated definitive agreement; “(b) identify material contingencies and conditions precedent for completing the contemplated transaction, such as obtaining financing and required permits or consents, and completing of due diligence; and (c) “state that neither party is relying on, or is entitled to rely on, the term sheet or letter of intent for any purpose”. As we noted, business owners/corporate executive should proceed with caution when drafting term sheets or letters of intent and in their course of conduct surrounding the negotiation of a final agreement to ensure that they are not later bound to their non-binding term sheet or letter of intent. The foregoing was true then and, as made clear in Claim Recovery , it remains true now. Footnotes Sullivan v. Ruvoldt , 16 Civ. 583, 2017 WL 1157150 at *6 (S.D.N.Y. Mar. 27, 2017). Conopco, Inc. v. Wathne Ltd. , 190 A.D.2d 587, 588 (1st Dept. 1993) Stonehill Capital Mgt. LLC v. Bank of the W. , 28 N.Y.3d 439, 451-454 (2016). Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008); Emigrant Bank v. UBS Real Estate Sec., Inc. , 49 A.D.3d 382, 383-384 (1st Dept. 2008). Slip Op. at *1. Id. Id. (citing, Netherlands Ins. Co. v. Endurance Am. Specialty Ins. Co. , 157 A.D.3d 468, 468-469 (1st Dept. 2018); Hajdu-Nemeth v. Zachariou , 309 A.D.2d 578, 578 (1st Dept. 2003)). Id. (citing, Twenty 6 Realty Partners Inc. v. GSS N3 LLC , 192 A.D.3d 463, 464 (1st Dept. 2021); Deephaven Distressed Opportunities Tradings, Ltd. v. 3V Capital Master Fund Ltd. , 2011 N.Y. Slip Op. 34007 , *3, *9 (Sup. Ct., N.Y. County 2011], aff’d , 100 A.D.3d 505, 505-506 (1st Dept. 2012)). Id. Id. Id. (citations omitted). Id. (citing, Trolman v. Trolman, Glaser & Lichtman, P.C. , 114 A.D.3d 617, 618 (1st Dept. 2014), lv. denied , 23 N.Y.3d 905 (2014)). Id. at *1-*2 (quoting, Sustainable PTE Ltd. V. Peak Venture Partners LLC , 150 A.D.3d 554, 555 (1st Dept. 2017)). 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 Regular readers of this Blog know that we spend a good deal of time writing about mortgage foreclosure.  The anticipated conclusion of a mortgage foreclosure action is a foreclosure sale.  The judicial sale is also the hoped-for conclusion of other types of proceedings – such as mechanic’s lien foreclosures and condominium lien foreclosures. Once conducted, there are mechanisms to set aside judicial sales when warranted.  “ ven after a judicial sale to a good faith purchaser” a court can exercise its “inherent power over a sale made pursuant to its judgment or decree to ensure that it is not made the instrument of injustice.”  Altshuler Shaham Provident Funds, Ltd. v. GML Tower LLC , 129 A.D.3d 1439, 1442 (4 th Dep’t 2015) (citations and internal quotation marks omitted).  See also , Nationstar Mortgage, LLC. V. Crute , 187 A.D.3d 1028, 1029 (2 nd Dep’t 2020) (citations and internal quotation marks omitted).  However, such “power should be exercised sparingly and with great caution, a court of equity may set aside its own judicial sale upon grounds otherwise insufficient to confer an absolute legal right to a resale in order to relieve of oppressive or unfair conduct.”  Id . (citations and internal quotation marks omitted). Court’s may exercise their discretion where “fraud, mistake, exploitive overreaching, misconduct, irregularity or collusion casts suspicion on the fairness of the sale.”  Id . (citations and internal quotation marks omitted).  See also Emigrant Mortgage Co., Inc. v. Hartman , 173 A.D.3d 975, 976 (2 nd Dep’t 2019) (citations omitted); Nationstar Mortgage, 187 A.D.3d at 1030.  Courts may also exercise their inherent powers based on sufficiency of price, but only when “the price is so inadequate as to shock the conscience.”  Polish Nat. Alliance of Brooklyn, U.S.A. v. White Eagle Hall Co., Inc. , 98 A.D.2d 400, 407 (citations omitted) (“This rule rests on sound public policy criteria because in most instances the market value of the property will exceed the winning bid and to upset sales based on mere inadequacy of price would discourage bidding and unduly frustrate the rights of mortgagees to enforce their contracts.”).  See also Altshuler , 129 A.D.3d at 1442.   In addition to the court’s inherent powers, there are statutory bases for setting aside a judicial sale.  Among them are CPLR 2003 and RPAPL 231(6) .  CPLR 2003 provides that “ t any time within one year after a sale made pursuant to a judgment or order, but not thereafter, the court, upon such terms as may be just, may set the sale aside for a failure to comply with the requirements of the civil practice law and rules as to the notice, time or manner of such sale, if a substantial right of a party was prejudiced by the defect….”  Similarly, RPAPL 231(6) provides that “ t any time within one year after the sale, but not thereafter, the court, upon such terms as may be just, may set the sale aside for failure to comply with the provisions of this section as to the notice, time or manner of such sale if a substantial right of a party was prejudiced by the defect.” The Court in Board of Managers of the 442 St. Marks Avenue Condo. v. Milord , decided on January 25, 2023, addressed a challenge to a judicial sale.  The defendant, unit owner/mortgagor, borrowed a sum of money which was secured by a mortgage (the “Mortgage”) on his condominium unit.  Subsequently, plaintiff, condominium board (the “Board” or “Plaintiff”), recorded a lien for unpaid common charges and related fees.  The Board commenced an action to foreclose its lien. Supreme court entered a judgment of foreclosure and sale pursuant to which the condominium unit was sold for $490,000.  A $49,000 deposit was delivered to the referee at the sale by the high bidder (the “Buyer”).  The Buyer’s title search in anticipation of closing revealed the existence of the Mortgage.  The Buyer intervened in the action and sought the vacatur of the sale and the return of the deposit.  Buyer argued that the failure to disclose the existence of the Mortgage “violated principals of equity in addition to the Auction Rules of Kings County.”  Supreme court set aside the sale but directed that the deposit be delivered to the Board.  Buyer appealed so much of supreme court’s order as directed that the deposit be delivered to the Board.  The Second Department reversed.  The Court found that “ y setting aside the subject sale, the Supreme Court, in effect, determined that the Board's failure to disclose the senior mortgage held by cast suspicion on the fairness of the sale.”  (Citations and internal quotation marks omitted.)  Accordingly, supreme court should have directed that the deposit be returned to the Buyer.  The deposit should not have been delivered to the Board because the Buyer had a “lawful excuse for refusing to perform the contract.”  (Citations and internal quotation marks omitted.) Finally, as to the Board’s claim that the sale should not be vacated due to the Buyer’s unilateral mistake, the Court stated: The plaintiff's contention that the intervenor's belief that it had purchased the property free from the senior mortgage was the result of the intervenor's own unilateral mistake is without merit, as the record shows that the plaintiff failed to disclose the existence of the senior mortgage in the complaint, the judgment of foreclosure of sale, or the terms of sale ( see SRP 2012-4, LLC v Darkwah , 198 AD3d at 939-940). Likewise, the plaintiff's claim that the intervenor failed to exercise due diligence is without merit since, inter alia, "' he rule that a buyer must protect himself against undisclosed defects does not apply in all strictness to a purchaser at a judicial sale'" ( id. at 940, quoting Lane v Chantilly Corp. , 251 NY 435, 438). A sale of property "'in the haste and confusion of an auction room is not governed by the strict rules applicable to formal contracts made with deliberation after ample opportunity to investigate and inquire'" ( SRP 2012-4, LLC v Darkwah , 198 AD3d at 940, quoting Sohns v Beavis , 200 NY 268, 271-272). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The faithless servant doctrine 1 provides that an employee who is faithless in the performance of their duties ( i.e. , breaches their duty of loyalty to the employer) is not entitled to recover either salary or commission. 2  While the language of the rule may imply a broad application, courts generally apply the rule relatively narrowly. 3 Courts will usually hold an employee liable under the faithless servant doctrine only if the employee has usurped a corporate opportunity or actively stolen from the employer. 4  That was the scenario in Nichtberger v. Paramount Painting Group, LLC, 2023 N.Y. Slip Op. 30200(U) (Sup. Ct., N.Y. County Jan. 19, 2023) ( here ). Nichtberger involved an action to recover monies allegedly owed to Plaintiff by the Corporate Defendants for breach of contract, as well as for damages to Plaintiff by the Individual Defendants for fraudulent business practices and stealing Plaintiff’s personal property. In November 2009, L&L Painting Company, Inc. (“L&L”) and Plaintiff agreed to form Paramount Painting Group, LLC (“PPG”). Pursuant to the agreement, Plaintiff received an “advanced loan from PPG’s future profits” in the amount of $500,000. Plaintiff was also made President of PPG, with a salary of $208,000 per year. In addition to his salary, Plaintiff maintained that he had a verbal agreement with Defendants to compensate him an extra $50,000 per year, thereby bringing his guaranteed salary to approximately $250,000 per year. The parties also agreed to a bonus plan, whereby Plaintiff would receive 50% of the first $3 million in net profits that PPG achieved, and 25% of the net profits generated in excess of $4 million. In the latter part of 2012, Plaintiff claimed that PPG had not paid any bonus money or profit-share that was due to him pursuant to the 2009 agreement. In addition, although PPG continued paying Plaintiff’s $4,000 weekly salary, it allegedly stopped paying the additional $50,000 supplement after the first year in breach of the parties’ oral agreement.  According to Plaintiff, the yearly breaches of the oral and written agreements crippled his financial condition and prevented him from servicing his outstanding debts. Consequently, Plaintiff informed the Individual Defendants about his dire financial situation, and pleaded with them to honor the agreement to pay the additional $50,000 in salary and the earned bonuses. Defendants allegedly refused. Plaintiff maintained that Defendants reported false net income figures to him in order to withhold bonus payments that would have been due to him. As Plaintiff became more and more suspicious of Defendants’ alleged fraudulent accounting practices, Plaintiff began bringing to Defendants’ attention discrepancies in the profit and loss statements that the Corporate Defendants provided to him. Defendants were allegedly unwilling to correct the discrepancies. In March 2019, Plaintiff resigned from PPG. After Plaintiff’s resignation, Defendants allegedly induced Plaintiff’s customers to continue working with PPG, which Defendants were purportedly able to do from files they had taken from Plaintiff’s personal office. Plaintiff alleged that Defendants did not pay him for any of the work done for his former clients. Between 2010 to March 2019, Plaintiff had purchased and acquired numerous pieces of artwork, memorabilia and various other items, many which had a unique and personal value to Plaintiff. These “Chattel” were property of and owned by Plaintiff and were all stored and/or displayed in Plaintiff’s personal office at PPG. Plaintiff maintained that one or more of the Individual Defendants and/or their agents broke into Plaintiff’s office and stole all the Chattel. On June 23, 2021, Plaintiff pled guilty to Grand Larceny in the Second Degree in connection with the theft of approximately $1.4 million from PPG, which he obtained by diverting checks made payable to PPG into a separate checking account he controlled. Pursuant to the plea agreement, Plaintiff received no jail sentence. Instead, he received a conditional discharge and an order to pay $1,436,072.56 in restitution to PPG in the form of a $500,000 bank check and a $936,072.56 confession of judgment. Plaintiff sued Defendants, alleging breach of contract, fraud, replevin 5 and conversion. Defendants moved to dismiss. The motion court granted in part and denied in part the motion. The court granted that part of Defendants’ motion to dismiss Plaintiff’s claims for compensation in the form of salary, bonus and/or profit sharing. As noted by the court, in a prior lawsuit brought by PPG to recover the money that Plaintiff had stolen, the court held that Plaintiff was not entitled to recover any compensation under the faithless servant doctrine. The court explained that “‘ongoing and pervasive’ misconduct of a ‘wayward and unruly agent’ like that of an employee who embezzles money from his employer, forfeits all compensation after the first faithless act”. 6 Therefore, concluded the court, “ iven admission to systematically diverting checks to himself over many years, he has forfeited all compensation”. 7 Moreover, said the court, Plaintiff’s claim to $50,000 a year based upon the parties’ alleged verbal agreement violated the statute of frauds and the merger clause in the 2009 agreement, which required all modifications to be in writing. 8 Further, the court dismissed the fraud claim on the ground that it duplicated Plaintiff’s breach of contract claim. 9 Finally, the court denied the motion with regard to the replevin and conversion claims. The court held that “ egardless of whether the faithless servant doctrine applie with equal force to property purchased with the compensation, there questions of fact as to whether or not Plaintiff actually did use money stolen from Defendants or his (now forfeited) compensation to purchase the artwork etc., that plaintiff kept in his office”. 10 Takeaway The faithless servant doctrine, also known as equitable forfeiture, is based on agency principles, and has been applied to brokers, salaried employees, attorneys, arts and entertainment representatives, and executors of estates. The courts have applied the doctrine to a wide variety of misconduct, including, but not limited to, conflicts of interest, stealing money or goods, and secretly starting a competing business. Any act that can give rise to a claim for breach of fiduciary duty will trigger the doctrine.  In Nitchberger the doctrine was easily applied as Plaintiff admitted to stealing money from PPG in his plea agreement. Accordingly, under the doctrine, he was not entitled to the salary and compensation that he sought.  Footnotes This Blog examined the faithless servant doctrine  here ,  here  and  here . See Feiger v. Iral Jewelry , 41 NY2d 928, 928 (1977). See , e.g. , W. Elec. Co. v. Brenner , 41 N.Y.2d 291, 295 (1977); Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc. , 100 A.D.2d 81, 88 (1st Dept. 1984). See Visual Arts Found., Inc. v. Egnasko , 91 A.D.3d 578, 579 (1st Dept. 2012); Soam Corp. v. Trane Co. , 202 A.D.2d 162, 162 (1st Dept. 1994) (employee promoted competitor’s products over employer’s); Phansalkar v. Andersen Weinroth & Co., L.P. , 344 F.3d 184, 203 (2d Cir. 2003) (employee usurped corporate opportunity). In a replevin action, the plaintiff seeks the return of property, not money damages. Genger v. Genger , 2016 N.Y. Slip Op. 30602 (Sup. Ct., N.Y. County 2016) (“The objective of replevin is recovery of the property, and the alternative relief or remedy is ‘fixation of its value.’”) (citations omitted). A replevin action can arise in a number of situations, such as where two or more parties claim a right to possess personal property, but only one has a superior right to that property, or where the property was lawfully withheld but was not released to the person having the greater right to the property. To prevail in a replevin action, therefore, the plaintiff must establish that the defendant is in possession of property to which the plaintiff claims a superior right. Nissan Motor Acceptance Corp. v. Scialpi , 94 A.D.3d 1067 (2d Dept. 2012). This Blog wrote about replevin here . Slip Op. at *2 (quoting, Cheryl & Co v. Krueger , 536 F. Supp. 3d 182, 213 (S.D. Ohio 2021) (citationsomitted), and citing, In re Blumenthal , 32 A.D.2d 767, 768 (1st Dept. 2006)). Id. Id. Id. Under the duplication doctrine, a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim. Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Slip Op. at *3. 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 Typically, when a plaintiff claims to have been defrauded, he/she typically argues that the defendant made an affirmative misrepresentation of fact. Fraud does not, however, always concern an affirmative statement. Sometimes a person can perpetrate a fraud through the omission of a material fact.  Where fraud by omission is claimed, the plaintiff must allege that the defendant had a duty to disclose the omitted fact. A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter; 1 (2) there is a fiduciary relationship between the plaintiff and defendant; 2 or (3) the defendant possesses “special facts” about the matter not known by the plaintiff. 3 A fraud by omission claim is not sustainable where information allegedly withheld is ascertainable through publicly available sources. 4  Nor is an omission case sustainable where the omitted information could have been discovered by the plaintiff through the exercise of ordinary intelligence. 5 Both of the foregoing circumstances will negate application of the special facts doctrine. Finally, as in a fraud by misrepresentation case, the plaintiff must satisfy the other elements of the claim – namely, intent to defraud, justifiable reliance and injury. And the plaintiff must do so with particularity. 6 e.g.,  here=">here" and="and" here.=">here."> The foregoing principles were examined by the Appellate Division, First Department in HOV Servs., Inc. v. ASG Tech. Grp., Inc. , 2023 N.Y. Slip Op. 00237 (1st Dept. Jan. 19, 2023) ( here ).  HOV involved a software license dispute between two companies, Defendant ASG Technologies Group, Inc. (“ASG”) and Plaintiff HOV Services, Inc. (“HOV”). In 2005, the parties entered into a master Software License Agreement (the “2005 SLA”), which granted HOV a license to use ASG’s software to provide Application Service Provider (“ASP”) services to its customers, pursuant to the license terms set forth in the 2005 SLA and in any amendments thereto (each such amendment was designated an “Exhibit”). The parties subsequently amended the 2005 SLA in 2015 and 2018, by “Exhibit D” and “Exhibit E”, respectively. Pursuant to Exhibit D, HOV licensed the ASG software for a three-year term ( e.g. , September 30, 2015 through September 29, 2018). Pursuant to Exhibit E, HOV licensed the ASG software for a five-year term ( e.g. , September 30, 2018 through September 29, 2023). Each Exhibit included an express, ongoing contractual obligation for HOV to refrain from using ASG’s software to provide ASP services to ASG’s current customers (the parties referred to these provisions as the “Overlapping Customer Prohibitions”). Several months before the Exhibit D license term was set to expire, ASG contacted HOV to initiate discussions about entering a new software license agreement – what would later become Exhibit E. HOV did not respond to ASG. As alleged, at the time of ASG’s overtures, and unknown to ASG at the time, HOV was in the process of developing competing software and migrating off of ASG’s software, including efforts that were accelerated by HOV’s reverse-engineering of the software. HOV allegedly hoped to complete its migration before the Exhibit D license expired, which would have obviated its need to renew the licenses. In late August and early September 2018, HOV contacted ASG to discuss a renewed license agreement – as alleged, HOV did not complete its migration. Following negotiations among the parties’ executives, HOV ultimately agreed to the terms of Exhibit E. In reliance on HOV’s execution of Exhibit E and promise to both pay for and abide by the stated license rights, ASG allegedly provided HOV with license keys to enable use of the software during the Exhibit E license term. HOV allegedly used the license keys and continued using the software during the Exhibit E license term. Following litigation in the Southern District of New York, HOV filed a complaint in the Supreme Court, New York County, asserting breach of contract, breach of the implied covenant of good faith and fair dealing in connection with the negotiation of the Exhibit E renewal, fraudulent inducement, violation of New York General Business Law (GBL) § 349, and a declaratory judgment.  ASG moved to dismiss certain of HOV’s causes of actions and affirmative defenses. Thereafter, the parties each filed a motion for partial summary judgment. On January 27, 2022, the motion court granted in part and denied in part each motion. With respect to ASG’s motions, the motion court dismissed HOV’s causes of action for fraudulent inducement and violation of GBL § 349; dismissed HOV’s defense of waiver and HOV’s defense of equitable estoppel as to Exhibit D; and excluded HOV’s purported reverse-engineering expert.  The First Department affirmed the dismissal of the fraudulent inducement claim, among others. We address the fraudulent inducement claim and its dismissal. The Court held that “Plaintiff’s fraudulent inducement claim and fraud defense to enforcement of the overlapping customer restrictions were properly dismissed”. 7 The Court found that HOV failed to allege a duty to disclose the existence of overlapping customers. 8 The Court explained that “ lthough issues of fact exist regarding defendant’s knowledge of the existence of overlapping customers, plaintiff’s claim must nonetheless fail because it is premised on an alleged omission and the parties were not in a fiduciary relationship” requiring disclosure of same. 9 The Court also found that in addition to the absence of a fiduciary relationship, there was no ”contractual duty to provide a customer list” to HOV. 10 The Court also rejected HOV’s “reliance on the ‘special facts’ doctrine”, finding that “plaintiff was equally capable of discovering the existence of overlapping customers”. 11 Takeaway Where a party alleges fraud (or fraudulent inducement) based on an omission of information, rather than an affirmative misrepresentation, a special relationship ( e.g. , a fiduciary relationship) is required to state a claim. However, in the absence of a special relationship, a party may still allege fraud where there are special facts such that one party had superior knowledge of certain information, not readily available to the other party. In HOV , there no was fiduciary relationship between HOV and ASG, as the parties dealt with each other at arm’s length in a commercial transaction. The special facts doctrine was also unavailable to HOV because the information alleged to be withheld ( i.e. , the existence of overlapping customers) could be discovered by HOV with reasonable diligence. With no duty to disclose, HOV could not withstand the challenge to its fraudulent inducement claim.  Footnotes Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013). Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016). Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). “The ‘special facts’ doctrine holds that ‘absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’” Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc. , 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied , 29 N.Y.3d 913 (2017) (quoting, Pramer , 76 A.D.3d at 99). Northern Group Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc. , 135 A.D.3d 414 (1st Dept. 2016). Black v. Chittenden , 69 N.Y.2d 665, 669 (1986); Schumaker v. Mather , 133 N.Y. 590, 596 (1892). CPLR § 3016(b). Slip Op. at *2. Id. Id. (citing, Cobalt Partners, L.P. v. GSC Capital Corp. , 97 A.D.3d 35, 42 (1st Dept. 2012)). Id. Id. (citing, Silver Point Capital Fund, L.P. v. Riviera Resources, Inc. , 198 A.D.3d 432, 433 (1st Dept. 2021); Jana L. v. W. 129th St. Realty Corp. , 22 A.D.3d 274, 277-278 (1st Dept. 2005)). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:  Jeffrey M. Haber In prior articles we have examined Ponzi Schemes and affinity fraud. E.g. , here . We do so again today. Affinity fraud occurs when the promoter of the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter frequently is – or pretends to be – a member or a good friend of the group. The promoter often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests.  Affinity frauds exploit the trust and friendship that exist in a group of people who have something in common. Because of the tight-knit structure of the group, it can be difficult for regulators or law enforcement officials to detect an affinity fraud . Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the promoters have used respected community or religious leaders to convince others to join the investment. Many affinity frauds involve Ponzi schemes . In a Ponzi scheme, the operator creates an investment program in which “profits” are paid to earlier investors with money taken from later investors. The “profits” are, therefore, fictitious instead of returns on investment. Ultimately, Ponzi schemes collapse under their own weight (because the supply of new money stops), taking investors, many of whom are the later ones in the scheme, down with them. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use.  On January 17, 2023, U.S. Attorney’s Office, Eastern District of North Carolina, announced ( here ) that a 56-year-old man was arrested upon the unsealing of a 23-count indictment in connection with an investment scheme to defraud. If convicted, Defendant faces up to twenty years in prison per count and potential fines. According to the indictment, 1 Defendant, a native of India and a member of the Indian-American community in Cary, North Carolina, 2 fraudulently induced at least 12 victims or sets of victims into giving him funds under the false pretense that he would be investing their money in a legitimate real estate development in the Orange County, North Carolina area. In some instances, the money represented his victims’ life savings. Defendant allegedly used the funds from these victims to pay back earlier investors who believed that he was returning their original investment and legitimate capital gains.  As further alleged in the indictment, Defendant typically contacted the victims telephonically or in person to describe a local real-estate investment opportunity. Defendant allegedly leveraged his employment with the town of Chapel Hill to convince victims that he had insider knowledge of development plans with respect to the purported real estate. 3 The indictment alleges that  Defendant would then request a specific amount of money within a short timeframe, sometimes the same day, to facilitate closing the transaction. Defendant allegedly promised a return of the principal investment plus a profit within a few months and sometimes ask his victims not to discuss the transaction with other members of the community or reference a non-disclosure agreement. “Our investigation shows abused the trust and confidence placed in him by fellow Indian-American community members. He promised to invest their money in property.  Instead, used the funds to pay back other people he swindled as part of his scheme; now, multiple victims are left without their much-needed savings,” said Michael C. Scherck, FBI Acting Special Agent-in-Charge. “Fraud can have an immediate and direct impact on people and communities, and the FBI remains determined to bring those who commit it to justice.” Defendant was indicted on 17 counts of Wire Fraud in violation of 18 U.S.C. § 1943 and 6 counts of Conducting Transactions in Criminally Derived Property in violation of 18 U.S.C. § 1957.  The government’s papers can be found on Pacer.gov by searching for Case No. 5:22-cr-00347-BO-BM. Footnotes An indictment is merely an accusation. The defendant is presumed innocent until proven guilty. According to the News & Observer, Defendant “previously served as vice president and president of the Triangle Area Telugu Association, and as a former board member with the Hindu Society of North Carolina” ( here ). According to the News & Observer, “ who was hired in 2000 as Chapel Hill’s traffic engineer, abruptly resigned as the town’s traffic engineering manager on Nov. 1, 2021, after filing for Chapter 7 bankruptcy that October” ( here ). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The statute of frauds provides that “ contract for the . . . the sale, of any real property, or an interest therein, is void unless the contract or some note or memorandum thereof, expressing the consideration, is in writing, subscribed by the party to be charged, or by his lawful agent thereunto authorized by writing.” 1 “To satisfy the statue of frauds, a memorandum evidencing a contract and subscribed by the party to be charged must designate the parties, identify and describe the subject matter, and state all of the essential terms of a complete agreement.” 2 The memorandum may be informal – it can be a series of emails – and therefore in compliance with the statute of frauds “where it identifies the parties, describes the subject property, recites all essential terms of a complete agreement.” 3 “If the contract does not contain all the necessary terms, the law presumes that the parties have not reached an agreement as to such terms and, therefore the agreement is fatally flawed and unenforceable.” 4 In that instance, or if “it is necessary to resort to parol evidence to ascertain what was agreed to, the remedy of specific performance is not available.” 5 Notably, an agreement as to price only is insufficient to create an enforceable real estate contract. 6 Instead, the agreement must also include “those terms customarily encountered in transactions of this nature, such as … the time and terms of payment, the required financing, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, adjustments for taxes and utilities, etc.” 7 In Levinson v. 77 Perry Realty Corp. , 2023 N.Y. Slip Op. 00160 (1st Dept. Jan. 12, 2023) ( here ), the Appellate Division, First Department addressed the foregoing issues and held that the alleged agreement violated the statute of frauds. here=">here" and="and" >here.=">here."> Levinson involved a dispute between the owners of shares in a cooperative building and the board of directors (the “Board”) of the corporation (“Corporation”).  Plaintiffs owned two apartments (collectively the “Apartments”) in the cooperative apartment building owned by defendant (“Co-op”). Plaintiffs planned to combine the Apartments into a duplex and renovate the roof space above the Apartments. The roof space was valued at $ 98,000 or 104 shares of stock in the Co-op. Plaintiffs offered more than $127,000 to the Corporation for 122 shares of stock allocated to the roof space. Plaintiffs claimed that the Board accepted their offer via email through the Corporation’s managing agent.  Plaintiffs maintained that all material terms of the transaction were set forth in the e-mail exchange, including: a) price; b) allocation of shares of stock; c) plaintiffs’ agreement to obtain approval from the New York City Landmarks Preservation Commission; d) plaintiffs’ agreement to file the appropriate documents with the New York City Department of Buildings; and e) plaintiffs’ agreement to amend the certificate of occupancy for the building. After the e-mail exchange with the managing agent, defendant emailed the Corporation’s shareholders to explain the basis for its agreement to sell the roof space to plaintiffs.  In December 2013, the members of the Board who allegedly agreed to the sale of the roof space lost their bid for re-election. Shortly thereafter, the newly constituted Board refused to provide plaintiffs with a formal contract for the roof space and advised plaintiffs that defendant would not be moving forward with the sale.  Thereafter, plaintiffs commenced the action to enforce their purported contractual rights to purchase the roof space. Among other causes of action, plaintiffs alleged that the Board breached the contract that was formed by the parties’ emails. The motion court denied plaintiffs’ motion for summary judgment on their breach of contract and specific performance claims and granted defendant’s motion for summary judgment dismissing the breach of contract and specific performance claims.  On appeal, the First Department unanimously affirmed the motion court’s order. The Court held that the email exchange relied upon by plaintiffs “did not contain all material terms of the contract to satisfy the statute of frauds”. 8 Although the email exchange included the price and the “specific number of shares being issued to plaintiffs”, it did not include any other terms, such as “financing, terms of payment, or a closing date”, explained the Court. 9 “Moreover,” said the Court, the “communications that followed indicated that the parties were negotiating additional material terms concerning the sale of the roof space, including additional maintenance fees, responsibility for maintaining the roof deck, and other issues surrounding aspects of the roof structure”. 10 Finally, the Court found that “the parties’ communications show that they anticipated entering into a formal contract and that the board would not make a final decision on the sale until the annual shareholders’ meeting”. 11 The Court concluded that “ he totality of the parties’ communications thus show that the early emails relied upon by plaintiff did not constitute a binding contract”. 12 Takeaway The emails relied upon by the plaintiffs in Levinson to establish the alleged agreement to  purchase the roof space were insufficient to satisfy the statute of frauds, as they left for future negotiations essential terms of the contemplated contract, such as “financing, terms of payment, a closing date”, as well as “additional maintenance fees, responsibility for maintaining the roof deck, and other issues surrounding aspects of the roof structure”. 13 The “essential terms” that courts look for in determining whether informal writings, like email exchanges, are enforceable “include those terms customarily encountered in transactions of this nature”, 14 such as “the purchase price, the time and terms of payment, the required financing, the closing date, the quality of title to be conveyed, the risk of loss during the sale period, adjustments for taxes and utilities, etc.” 15 As noted, the email exchange in Levinson did not include any of these terms. And, since the parties in Levinson expressly anticipated the execution of a formal contract, which would include more terms of the transaction, there was no binding contract between the parties sufficient to satisfy the statute of frauds. Footnotes New York General Obligations Law § 5-703(2). Nesbitt v. Penalver , 40 A.D.3d 596, 598 (2d Dept. 2007) (citation and quotation omitted). O’Brien v. West , 199 A.D.2d 369, 370 (2d Dept. 1993). 3-32 Warren’s Weed New York Property § 32.10. Nesbitt , 40 A.D.3d at 598 (citation and internal quotation marks omitted). See , e.g. , DeMartin v. Farina , 205 A.D.2d 659, 660 (2d Dept. 1994) (quotation omitted). Nesbitt , 40 A.D.3d at 598 (citation and internal quotation marks omitted). Slip Op. at *1 (citing, Argent Acquisitions, LLC v. First Church of Religious Science , 118 A.D.3d 441, 444-445 (1st Dept 2014)). Id. Id. Id. Id. at *1-*2 (citation omitted). Id. at *1. O’Brien, 199 A.D.2d at 370. Saul v. Vidokle , 151 A.D.3d 780, 781 (2d Dept. 2017). 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 the Court of Appeals has explained it, “ ummary judgment permits a party to show, by affidavit or other evidence, that there is no material issue of fact to be tried, and that judgment may be directed as a matter of law, thereby avoiding needless litigation cost and delay. Where appropriate, summary judgment is a great benefit both to the parties and to the overburdened New York State trial courts.”  Brill v. City of New York , 2 N.Y.3d 648, 651 (2004) (citation omitted).  The same Court, recognizing the efficiency that summary judgment brings to litigation, stated that “ ince New York established its summary judgment procedure in 1921, summary judgment has proven a valuable, practical tool for resolving cases that involve only questions of law.”  Brill , 2 N.Y.3d at 650-51 (citation omitted). The “timing” of a summary judgment motion is significant because it “may resolve the entire case.”  Brill , 2 N.Y.3d at 651.  In this regard, the Brill Court noted that, originally, the only timing requirement for a summary judgment motion was that it be made prior to joinder of issue.  The “court system[] request ” a change from the New York State Legislature, however, because “the absence of an outside time limit for filing such motions became problematic, particularly when they were made on the eve of trial.  Eleventh-hour summary judgment motions, sometimes used as a dilatory tactic, left inadequate time for reply or proper court consideration, and prejudiced litigants who had already devoted substantial resources to readying themselves for trial.”  Id . Thus, the Legislature amended CPLR 3212 to provide that: (a) Time; kind of action. Any party may move for summary judgment in any action, after issue has been joined; provided however, that the court may set a date after which no such motion may be made, such date being no earlier than thirty days after the filing of the note of issue. If no such date is set by the court, such motion shall be made no later than one hundred twenty days after the filing of the note of issue, except with leave of court on good cause shown. “‘Good cause … requires a satisfactory explanation for the untimeliness-rather than simply permitting meritorious, nonprejudicial filings, however tardy.’”  Fafona v. 41 West 34 th Street, LLC , 71 A.D.3d 445, 448 (1 st Dep’t 2010) (quoting from Brill ).  “ erfunctory claim of law office failure” are insufficient to “excuse a late motion, no matter how meritorious.”  Id; compare, Panzavecchia v. County of Nassau , 2022 WL 17660482 (2 nd Dep’t December 14, 2022) (recognizing the need for good cause but finding that “ ignificant outstanding discovery may, in certain circumstances, constitute good cause for a delay in making a motion for summary judgment.”) In Miceli v. State Farm Mut. Auto. Ins. Co. , 3 N.Y.3d 725 (2004), the Court reversed supreme court’s granting of an untimely summary judgment motion and reiterated that “if the merit of the motion itself constituted good cause, the statutory deadline would be circumvented and the practice of delaying such motions until the eve of trial encouraged.”  The Miceli Court also warned litigants of the importance of meeting deadlines by reiterating that “we made clear in Brill, and underscore here, statutory time frames — like court-ordered time frames — are not options, they are requirements, to be taken seriously by the parties. Too many pages of the Reports, and hours of the courts, are taken up with deadlines that are simply ignored.”  Miceli , 3 N.Y.3d at 726 – 27 (citation omitted). On January 12, 2023, the Appellate Division, First Department, decided Miral, Inc. v. Kovac Media Group, Inc. , in which in unanimously affirming the denial of an untimely summary judgment motion, stated:   Defendants' summary judgment motions were untimely, as they were filed two months after the court-ordered deadline expired, with no explanation for the delay in filing until defendants submitted their replies. Nor did the explanations offered by counsel rise to the level of "good cause." First, the calendaring error on which counsel blames the late filing amounts to no more than law office failure, which is an insufficient basis for a finding of good cause where a party has filed a late summary judgment motion. Second, counsel asserts that he was unaware of the court-ordered 60-day deadline because of a purported glitch in the New York State Courts Electronic Filing system. However, the relevant deadline was set forth in a compliance conference order in 2018 and, as counsel concedes, the NYSCEF glitch affected only documents filed during a period of time in 2019. Defendants' counsel should at any rate have been aware that there would be an order issued after the January 16, 2019 compliance conference, and should have taken care to file the motions within the applicable deadline after that order was issued. We decline to consider defendants' arguments regarding the impact of the COVID-19 pandemic and any tolling provisions because they were raised for the first time on appeal. TAKEAWAY Court and statutory deadlines should not be ignored. This is made plain by, among other things, the denial of meritorious summary judgment motions based solely on the fact that they were not timely made. 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 We start the new year off examining Dragons 516 Ltd. v. Knights Genesis Inv. Ltd. , 2023 N.Y. Slip Op. 50020(U) (Sup. Ct., N.Y. County Jan. 6, 2023) ( here ), a case involving many of the themes we often consider in our discussion of fraud and fraudulent inducement claims. Dragons involved a dispute between a lender and a borrower. Plaintiff, Dragons 516 Limited (“Dragons”), alleged that defendants fraudulently conspired to misrepresent the ownership structure of a real estate development project (the “Project”) for the purpose of inducing it to provide financing for the Project. In the complaint, Plaintiff asserted causes of action for, inter alia , fraud and conspiracy to defraud. In early 2017, defendant, Knights Genesis Investment Limited (“Knights Genesis”), approached Dragons with an opportunity to finance the Project. At the time, Dragons declined to loan the money.  In May 2017, Knights Genesis and GDC SPV – a special purpose vehicle created by Knights Genesis’s wholly owned subsidiary, defendant Genesis Development Company LLC (“GDC”) –renewed its efforts to secure a loan from Dragons. Knights Genesis/GDC intended to use the loan to finance GDC SPV’s 8.5% preferred interests in defendant, Project Co., the owner of the Project. Other investors were to provide capital to finance the Project.  In connection with the financing, Knights Genesis/GDC allegedly represented that Dragons’ loan would be backed by pledge agreements and a ‘put right’ option, such that if the loan was not repaid when due, Dragons would stand in place of GDC SPV with respect to its preferred interests in Project Co., or alternatively, Dragons could put GDC SPV’s preferred interests to defendant SMI-USA, which would be obligated to purchase the preferred interests and pay the purchase price directly to Dragons. According to Dragons, it relied on the foregoing representations.  On June 1, 2017, the parties entered into a facility agreement (“Facility Agreement”), which was also executed by GDC and SMI-USA. In pertinent part, the Facility Agreement provided that the loan was intended solely to fund GDC SPV’s 8.5% preferred interest in Project Co. In addition, it contained several representations concerning the ownership interests of many of the defendants. Moreover, the agreement contained the “put right” provision discussed above. Dragons alleged that the “put right” provision, along with other facts and circumstances, materially enhanced the creditworthiness of the Project and provided significant reassurance to Dragons without which it would have never funded the loan. Under the Facility Agreement, Dragons was not obligated to fund the loan until the satisfaction of various conditions precedent, including the receipt of various due diligence reports. As part of this due diligence process, Knights Genesis/GDC allegedly provided Dragons with numerous documents, which Dragons claimed turned out to be fake and/or contained false information. These documents included, among others, an Amended and Restated Limited Liability Company Agreement for Project Co., dated February 28, 2017 (“February 28, 2017 LLC Agreement”), which echoed the representations in the Facility Agreement concerning the ownership interests in Project Co.  In addition, Knights Genesis/GDC allegedly provided Dragons with letters of undertaking from SMI-USA, which were intended to enhance Dragons’ confidence in the Project by emphasizing that SMI-USA was managing the project, providing liquidity support, and securing financing.  Dragons further alleged that, in response to its due diligence questions regarding the Project, Knights Genesis/GDC provided non-public information and documents, which included, among other things, financial account records for Project Co., zoning reports, contracts for interior design, architect and construction management agreements, and construction reports. Many of the documents provided were allegedly addressed to, or executed by, the Ceruzzi defendants. Finally, Dragons alleged that, when it raised issues concerning the Project with Knights Genesis/GDC, SMI-USA immediately conveyed those concerns to, and sought an explanation from, the architect and the construction manager for the Project. Dragons alleged that the dissemination of this information demonstrated that SMI-USA and Knights Genesis/GDC were acting in concert to induce Dragons to loan the money. On June 15, 2017, Dragons funded the loan. Dragons alleged that, after the loan was funded, Knights Genesis/GDC provided Dragons with additional non-public documents and information about the , such as financial statements as well as construction and design reports in connection with the Project.  In the fall of 2017, Dragons allegedly learned that, in violation of the Facility Agreement, Project Co. had taken on additional debt and undergone organizational changes that resulted in a new tier of ownership. To address Dragons’ concerns, Knights Genesis/GDC allegedly proposed that the parties enter into a guaranty agreement (“Guaranty Agreement”) under which SMI-USA would guarantee all of GDC SPV’s obligations under the Facility Agreement. The Guaranty Agreement was executed on March 6, 2018. On September 14, 2018, following various breaches of the Facility Agreement, Dragons sent a demand letter to Knights Genesis/GDC and GDC SPV, accelerating the loan. On March 21, 2019, Dragons commenced a lawsuit to enforce the Facility Agreement and the Guaranty Agreement against GDC SPV and SMI-USA (the “Contract Action”).  On February 3, 2020, the court in the Contract Action entered judgment against GDC SPV in the amount of $41,138,614.84 for breach of the Facility Agreement and ordered GDC SPV to comply with the terms and provisions of a pledge agreement (the “Pledge Agreement”).  In February 2020, Dragons learned that the $30 million loan was used by GDC SPV to invest in Project Co., and that GDC SPV was, in fact, an investor in Project Co. Dragons claimed that GDC SPV had no assets or property to satisfy the judgment entered in the Contract Action. Additionally, Dragons claimed that the collateral for the Pledge Agreement was non-existent because GDC SPV did not – and never had – any ownership interest in the Project.  In May 2021, Dragons commenced the action (on which we write). Defendants moved to dismiss the complaint.  The SMI defendants contended that the fraud claim was duplicative of the breach of contract claims in the Contract Action. In addition, they argued that the claim failed because Dragons did not allege any misrepresentation that the SMI defendants purportedly made. Rather, the SMI defendants claimed that any misrepresentations were made by Knights Genesis/GDC with whom Dragons exclusively dealt. The SMI defendants maintained that to obscure this pleading failure, Dragons improperly engaged in group pleading ( i.e. , making allegations against a broad category of defendants without differentiation), a form of pleading that does not conform to the particularity requirement of CPLR § 3016(b). 1 here=">here" and="and" >here.=">here."> In response, Dragons argued that the fraud claim was not duplicative of the contract claims in the Contract Action because the fraud claim was based on a more expansive set of facts, involving misrepresentations collateral to the Facility Agreement, and was seeking recovery from defendants who were not parties to the Facility Agreement. In addition, Dragons claimed that the damages were not duplicative of the contract damages because it sought to recover pecuniary loss only, and did not include contractual interest. Dragons further argued that the complaint alleged that the SMI defendants executed documents that contained material misrepresentations about the Project and that the SMI defendants intended for Dragons to rely on such documents.  The Court agreed with Dragons. First, the Court said that the fraud claim was not duplicative of the breach of contract claims in the Contract Action because, although SMI-USA was a party to the Facility Agreement, “the agreement did not give rise to contract claim against it”. 2 “Its obligation under the put right provision—requiring it to purchase GDC SPV’s 8.5% preferred interest in Project Co. from Dragons—could not be triggered in light of the alleged fraud.” 3 Moreover, said the Court, the fraud claim was not duplicative of the breach of the Guaranty Agreement claim in the Contract Action because “SMI-USA claim that the Guaranty Agreement a forgery”. 4 As such, said the Court, “Dragons should be permitted to assert the fraud claim in the alternative pursuant to CPLR 3014”. 5 Additionally, held the Court, “the complaint sufficiently allege the false statements that the SMI defendants allegedly made to induce Dragons to fund the loan.” 6 And, said the Court, the complaint “point to numerous documents purportedly executed by the SMI Defendants, which further reassured Dragons of the truthfulness of the previous representations”. 7 The Court rejected the SMI defendants’ claim that those documents could not “form the basis of a fraud claim against them, since it alleged that ‘Knights Genesis/GDC (through William Chen) provided Dragons with documents<, which were> intended to induce Dragons to fund the loan”. 8 The Court noted that “indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it”. 9 The Court found that statements in certain documents, which made specific reference to the Facility Agreement, were communicated to Dragons with the intention that they be communicated to, and relied on by, Dragons. E.g.,="E.g.," here.=">here."> The Court further found that Dragons satisfied the remaining elements of the fraud claim. The Ceruzzi defendants contended that their motion to dismiss should be granted, because: (1) the fraud was duplicative of the breach contract claims in the Contract Action; (2) there were no allegations the Ceruzzi defendants made any material misrepresentations; (2) there were no factual allegations from which scienter could be inferred; instead, the complaint relied on the conclusory allegation that the Ceruzzi defendants must have known of the fraud; and (3) Dragons could not demonstrate justifiable reliance, having failed to contact the Ceruzzi defendants during the due diligence process. here=">here" and="and" most="most" recently="recently" justifiable="justifiable" reliance="reliance" >here,=">here," >here.=">here."> In response, Dragons argued that the complaint contained sufficient factual allegations to permit a reasonable inference of the Ceruzzi defendants’ participation in the fraud. Regarding the reliance argument, Dragons maintained that the contention that it could have discovered the fraud by contacting the Ceruzzi defendants earlier was speculative and presumed that they did not participate in the fraud.  The Court agreed with the Ceruzzi defendants. The Court held that there were no direct communications between these defendants and Dragons. Noting, again, that indirect communication can establish a fraud claim, the Court found that Dragons failed to allege any facts showing that the Ceruzzi defendants intended to communicate any alleged false statements to Dragons. None of the documents cited by Dragons, said the Court, were “addressed to Dragons” or “acknowledge Dragons or the Facility Agreement in any way”. 10 The Court also found that because documents that referenced the Facility Agreement were executed after the loan was made, Dragons could not satisfy the reliance element of the claim. 11 Although the Court held that Dragons failed to plead a fraud claim against the Ceruzzi defendants, it nevertheless held that Dragons stated a claim against these defendants for conspiracy to commit a fraud. The Court found that “there a number of factual allegations that, combined, permit a reasonable inference that the Ceruzzi defendants conspired with the SMI defendants to defraud Dragons”. 12 Footnotes The Court rejected the group pleading argument, finding the complaint contained numerous specific allegations to place defendants on notice of the precise tortious conduct charged to each defendant”. Slip Op. at *13 (citing, Bernstein v. Kelso & Co. , 231 A.D.2d 314, 321 (1st Dept. 1997); and Pludeman v. Northern Leasing Sys., Inc. , 40 A.D.3d 366, 367-368 (1st Dept. 2007), aff’d , 10 N.Y.3d 486 (2008)). Id. at *12. Id. (record citation omitted) Id. Id. (citing, Shear Enters., LLC v. Cohen , 189 A.D.3d 423, 424 (1st Dept. 2020) (reversing the dismissal of the fraud claim as duplicative of the contract claim and permitting the plaintiff to plead it in the alternative)). Id. (identifying the specific statements). Id. Id. Id. (quoting, Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 828 (2016); and citing Securities Inv. Protection Corp. v. BDO Seidman , 95 N.Y.2d 702, 710 (2001) (noting the “the general and unremarkable principle that liability for fraud can be imposed through communication by a third party”)). Id. at *13. Id. Id. at *19. 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 promoting a scam, fraud operators expect investors will jump at the opportunity to obtain a life-changing financial reward from their investment, especially if the investment opportunity does not require a large outlay of money. For this reason, many investment frauds involve false promises of extraordinary payouts with minimal risk. Unfortunately, too many investors are lulled into believing these promises and give their hard-earned money to these fraud operators.  In today’s article, we discuss the foregoing “too good to be true” scenario with regard to CoinDeal, an investment opportunity that purportedly revolved around blockchain technology that would yield extremely high returns when defendants sold the business. On January 4, 2023, the Securities and Exchange Commission (“SEC”) announced ( here ) that it charged the creator of Coin Deal (“Creator”) and seven others for their involvement in CoinDeal – a fraudulent investment scheme that raised more than $45 million from sales of unregistered securities to tens of thousands of investors worldwide. According to the SEC’s complaint ( here ) filed in the U.S. District Court for the Eastern District of Michigan, defendants falsely claimed that investors could generate extravagant returns by investing in CoinDeal, which would be sold for trillions of dollars to a group of prominent and wealthy buyers. From at least January 2019 to 2022, Creator and four other defendants allegedly disseminated false and misleading statements to investors regarding the purported value of CoinDeal, the parties involved in the purported sale of CoinDeal, and the use of investment proceeds. According to the SEC, no sale of CoinDeal ever occurred and no distributions were made to CoinDeal investors. The SEC further alleged that defendants collectively misappropriated millions of dollars of investor funds for personal use, and that Creator used investor funds to purchase items such as cars, real estate, and a boat. “We allege the defendants falsely claimed access to valuable blockchain technology and that the imminent sale of the technology would generate investment returns of more than 500,000 times for investors,” said Daniel Gregus, Director of the SEC’s Chicago Regional Office. “As alleged in our complaint, in reality this was all just an elaborate scheme where the defendants enriched themselves while defrauding tens of thousands of retail investors.” In the complaint, the SEC alleged that defendants violated the anti-fraud and registration provisions of the Securities Exchange Act of 1934 and Securities Act of 1933. The SEC sought disgorgement plus pre-judgment interest, penalties, and permanent injunctions against all defendants; officer and director bars against Creator and four other defendants; and a conduct-based injunction against Creator. In June 2022, the U.S. Department of Justice indicted Creator in the U.S. District Court for the District of Nebraska on three counts of wire fraud and two counts of monetary transaction in unlawful proceeds for his involvement in CoinDeal ( here ).  If convicted, Creator faces up to 20 years in prison for each of the wire fraud counts and up to 10 years in prison for each count of engaging in unlawful monetary transactions. 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 Obtaining jurisdiction over a person or corporation that is domiciled outside of the state can be difficult. A plaintiff must plead and prove that the person or entity purposefully used the resources of the state for a court to exercise personal jurisdiction over the defendant. The failure to do so will result in dismissal of the action. Under CPLR § 302(a)(1), a court can exercise specific personal jurisdiction over a non-domiciliary who “transacts any business within the state.” To satisfy CPLR § 302(a)(1), a plaintiff must satisfy a two-part test. First, the defendant must have “transacted business” in New York. 1  Second, the plaintiff must demonstrate “some articulable nexus between the business transacted and the cause of action sued upon.” 2 CPLR § 302(a)(1) is a “single act statute,” whereby “proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” 3  “Purposeful activities are those with which a defendant, through volitional acts, ‘avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” 4  Whether a non-domiciliary has engaged in sufficient purposeful activity to confer jurisdiction requires an examination of the totality of the circumstances. 5  The quality of a defendant’s contacts is the “primary consideration” in establishing personal jurisdiction. 6 As to the required nexus, the courts require “a relatedness between the transaction and the legal claim such that the latter is not completely unmoored from the former, regardless of the ultimate merits of the claim.” 7  “ here at least one element arises from the New York contacts, the relationship between the business transaction and the claim asserted supports specific jurisdiction under the statute.” 8 Further, the exercise of “personal jurisdiction under the long-arm statute must comport with federal constitutional due process requirements.” 9 In this regard, the nondomiciliary must have “certain minimum contacts with such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.” 10 The “minimum contacts” test “has come to rest on whether a defendant’s conduct and connection with the forum State are such that it should reasonably anticipate being haled into court there.” 11  Such minimum contacts exist where a defendant “purposefully avails itself of the privilege of conducting activities within the forum State.” 12  Similarly, where the non-domiciliary uses the forum to “achieve the wrong complained of”, a plaintiff will satisfy “the minimum contacts component of the due process inquiry.” 13 Whether personal jurisdiction offends “notions of fair play and substantial justice” depends on a consideration of “the burden on the defendant, the forum State’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the several States in furthering fundamental substantive social policies”. 14 E.g.,="E.g.," here,=">here," and="and" >here.=">here."> With the foregoing principles in mind, we examine People v. JUUL Labs, Inc. , 2023 N.Y. Slip Op. 00040 (1st Dept. Jan. 5, 2023) ( here ). The State of New York (the “People”) sued JUUL Labs, Inc. (“JUUL”), alleging that JUUL’s marketing and sales of its electronic cigarettes constituted deceptive and illegal practices, and contributed to a statewide public health crisis. Thereafter, the People amended the complaint to add as defendants certain corporate officers of JUUL (the “Officer Defendants”). The People alleged that these defendants were involved in, and approved of, JUUL’s marketing strategies. The People asserted, inter alia , causes of action pursuant to General Business Law §§ 349 and 350, for deceptive acts and practices and for false advertising, respectively; pursuant to Executive Law § 63(12), for repeated and persistent fraud and illegal conduct in violation of General Business Law §§ 349 and 350 and section 5 of the Federal Trade Commission Act (15 U.S.C. § 45); and, for public nuisance. The Officer Defendants separately moved to dismiss the amended complaint, claiming the motion court lacked personal jurisdiction over them, and the claims were otherwise time barred.  In opposition, the People submitted internal emails and reports demonstrating, among other things, that the Officer Defendants traveled to New York City for investment meetings in December 2014 and in 2015; that the Officer Defendants personally attended JUUL’s launch party in New York City in June 2015; at around that time, JUUL also sought to arrange in-person meetings between the Officer Defendants and both “New York targets” and broadcast media organizations; and, that the Officer Defendants and JUUL considered the New York City launch to have been a success. The record also showed that the Officer Defendants were involved in marketing strategy, which included, among other things, months of events in New York; identifying New York as the target of JUUL’s northeastern U.S. marketing efforts, at and after launch; advertising on billboards in Times Square; hosting in-store product samplings at New York vape shops and social events; and escalating marketing efforts in the New York City metropolitan area post-launch. After New York proved to be a substantial market for JUUL’s product, the Officer Defendants described their efforts as “NYC takeover” and declared that New York City users should be “the focus of branding/marketing.” Based upon the foregoing evidence, the motion court denied the motion. On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court properly found that it had personal jurisdiction over the Officer Defendants. The Court found that the “evidence establishe that efendants conducted sufficient in-person activities within New York State related to the People’s claims against them in this action, and sufficiently support the exercise of specific personal jurisdiction over them pursuant to CPLR 302(a)(1)”. 15 The Court also held that “ xercising specific personal jurisdiction over efendants … comport with federal constitutional due process requirements”. 16 In this regard, the Court found that there were sufficient minimum contacts within the state, stating that the Officer Defendants’ “physical presence in New York State was ‘not simply an isolated occurrence, but from efforts … to serve<,> directly or indirectly, the market for product’ in the state”. 17 Moreover, noted the Court, the Officer Defendants “participated in a marketing strategy to inject JUUL’s products ‘into the stream of commerce with the expectation that they … be purchased by consumers’ in New York”. 18 “ ndeed,” said the Court, “the record establishe that New Yorkers’ purchase of JUUL’s product was the very goal of that marketing strategy.” 19 Further, the Court held that exercising personal jurisdiction over the Officer Defendants did not offend traditional notions of fair play and substantial justice. In this regard, the Court found that “New York State’s interests in this case, and the People’s interest in obtaining relief, outweigh the burden that exercising specific personal jurisdiction over defendants impose on them”. 20 In fact, said the Court, because the record established activities “purposefully directed … at New York State residents”, the Officer Defendants failed to present “a compelling case that some other consideration render specific personal jurisdiction unreasonable in New York”. 21 Takeaway Juul Labs is another example of a court looking at the totality of the contacts within the state to determine whether a nondomiciliary has “on his or her own initiative project himself of herself into th state to engage in a sustained and substantial transaction of business.” 22 Thus, where, as in Juul , the evidence showed that the defendants’ contacts within the state were numerous and purposeful, a court will find that the exercise of jurisdiction over a non-domiciliary is appropriate and consistent with notions of due process. Footnotes McGowan v. Smith , 52 N.Y.2d 268, 271 (1981). Id. at 272. Deutsche Bank Secs., Inc. v. Mont. Bd. of Invs. , 7 N.Y.3d 65, 71 (2006); see also Wilson v Dantas , 128 A.D.3d 176, 182-83 (1st Dept. 2015). Fischbarg v. Doucet , 9 N.Y.3d 375, 380 (2007) (quoting, McKee Elec. Co. v. Rauland–Borg Corp. , 20 N.Y.2d 377, 382 (1967)). Id. (quoting, Farkas v. Farkas , 36 A.D.3d 852, 853 (2d Dept. 2007)). Id. Licci ex rel. Licci v. Lebanese Canadian Bank, SAL , 20 N.Y.3d 327, 339 (2012). Id. at 341. Rushaid v. Pictet & Cie , 28 N.Y.3d 316, 331 (2016). Id. (citation omitted). LaMarca v. Pak-Mor Mfg. Co. , 95 N.Y.2d 210, 216 (2000). Id. Licci ex rel. Licci v Lebanese Can. Bank, SAL , 732 F.3d 161, 173 (2d Cir. 2013). Rushaid , 28 N.Y.3d at 331 (citation omitted). Slip Op. at *1 (citing, Matter of New York City Asbestos Litig. , 206 A.D.3d 442, 443-444 (1st Dept. 2022)). Id. at *2. Id. (quoting, World-Wide Volkswagen Corp. v. Woodson , 444 U.S. 286, 297 (1980)). Id. (quoting, id. at 297-298). Id. Id. (citing, LaMarca , 95 N.Y.2d at 218, quoting, Asahi Metal Indus. Co. v. Superior Ct. of Cal. , 480 U.S. 102, 113 (1987)). Id. (citing, LaMarca , 95 N.Y.2d at 217-218). Berkshire Capital Group, LLC v. Palmet Ventures, LLC , 307 Fed. App’x. 479, 481 (2d Cir. 2008) (internal quotations and citation omitted). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:   Jeffrey M. Haber “Front-running” involves trading ahead of large, nonpublic orders of market participants to benefit from the market impact of those large orders. Large orders can have an impact on the price of a security when they cause an imbalance in the supply or demand for that security, thereby causing the price of that security to increase or decrease. Front-running was the focus of an enforcement action that the Securities and Exchange Commission (“SEC”) brought on December 14, 2022. On December 14, 2022, the SEC announced ( here ) that it brought fraud charges against an employee of a major asset management firm with securities portfolios worth billions of dollars (“Associate”), and a former financial service professional (“Professional”) for perpetrating a multi-year front-running scheme that generated at least $47 million in illegal trading profits. The SEC alleged that, since at least September 2016, Associate would inform Professional of the asset management firm’s market-moving trades prior to their execution. As alleged in the complaint ( here ), on the same day, Professional would trade in the same securities prior to Associate’s employer or while multiple large orders were being placed by the employer. Professional would close his positions after the price of the security moved as expected. This alleged front-running scheme, said the SEC, resulted in proceeds of more than $47 million.  “ allegedly took advantage of his position and abused his employer’s trust by providing with proprietary information that allowed them to gain a trading advantage and pocket tens of millions of dollars in profits,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. “As today’s action shows, SEC staff will utilize data analytics tools at our disposal to find and charge those who engage in illegal trading of securities.” The SEC charged defendants with violating the antifraud provisions of the federal securities laws and seeks disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced ( here ) criminal charges against the defendants.  Commenting on the indictment, U.S. Attorney Damian Williams said: “By stealing confidential trade information from a major financial services organization, betrayed the trust and confidence of his employer and schemed with to make tens of millions of dollars of illegal profit. tried to cover their tracks by using burner phones and secret payments, but their scheme has now been laid bare.” FBI Assistant Director in Charge Michael J. Driscoll also commented on the charge, stating: “As alleged, the defendants engaged in a years-long scheme in which obtained information regarding his employer’s intent to make relatively large trades in certain stocks.  In turn, this allowed to trade in the same stocks in advance and realize substantial ill-gotten profits.  These types of insider-trading schemes satisfy the greedy ambitions of nefarious actors at the expense of average investors.  The FBI remains steadfast in our efforts to ensure our financial markets are a level playing field for all by bringing to justice those who would seek to illegally exploit them.” 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 On December 23, 2022, the Appellate Division, Fourth Department issued two decisions involving New York’s former Debtor and Creditor Law (“DCL”): Inner Harbor Phase I L.P. v. Cor Inner Harbor Co. LLC , 2022 N.Y. Slip Op. 07319 (4th Dept. Dec. 23, 2022) ( here ); and Hospitality Concepts, LLC v. Bernhardt , 2022 N.Y. Slip Op. 07349 (4th Dept. Dec. 23, 2022) ( here ). We examine both decisions below. The former DCL was replaced on April 4, 2020 by the New York Uniform Voidable Transactions Act (“NYUVTA”). Under New York’s version of the UVTA, which Governor Cuomo signed into law on December 6, 2019, the State joined the vast majority of jurisdictions to have adopted the UVTA in whole or in part. Thus, as to transfers made and obligations incurred after the effective date ( i.e. , April 4, 2020), New York law will be more aligned with the fraudulent transfer laws of most states in the country, as well as with the federal Bankruptcy Code. here).=">here)."> Both Inner Harbor and Hospitality Concepts were brought prior to the effective date of the NYUVTA.  Under the former DCL, transfers, gifts, assignments and other conveyances are considered to be fraudulent under certain circumstances. For example, DCL § 273 (conveyances by insolvent) provides that conveyances that render a debtor insolvent that are made without fair consideration, are fraudulent as to creditors regardless of intent;  DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action; DCL § 274 (conveyance to defendants in a business or transaction) provides that conveyances made without fair consideration in a business or transaction for which the capital remaining after the conveyance is unreasonably small, are fraudulent as to creditors regardless of intent; DCL § 275 (conveyance by defendants to the detriment of current and future creditors) provides that conveyances and obligations incurred without fair consideration when the debtor intends or believes that he/she will incur debts beyond his/her ability to pay as they mature, are fraudulent as to both present and future creditors; and, DCL § 276 (conveyance made with intent) provides that conveyances made with actual intent to “hinder, delay, or defraud either present or future creditors, fraudulent as to both present and future creditors.” To set aside a conveyance or obligation incurred under DCL §§ 273, 273-a, 274 and 275, the plaintiff must establish that the conveyance or obligation incurred was made without “fair consideration”. Under DCL § 272, “ air consideration … is not only a matter of whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’ … but whether the transaction made in good faith.” 1 “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” 2 A claim under DCL § 275 requires, in addition to the conveyance and unfair consideration elements discussed, an element of intent or belief that insolvency will result. 3 Unlike DCL §§ 273 and 275, DCL § 276 concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” to raise an inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” 4 Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. 5 “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” 6 A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. 7 Inner Harbor Phase I L.P. v. Cor Inner Harbor Co. LLC Inner Harbor arose from a $4,000,000 promissory note. Plaintiff, a limited partnership, loaned $4,000,000 to COR LLC for the purpose of building a hotel at the Inner Harbor in Syracuse. Plaintiff’s limited partners were 10 foreign investors who sought to obtain green cards pursuant to the EB-5 Immigrant Investor Program. 8 In furtherance of the project, COR LLC applied for and received site plan approval from the City of Syracuse (“City”), i.e. , the owner of the property upon which the hotel was to be built. Shortly thereafter, however, the City transferred title to the land to defendant COR West Kirkpatrick Street Company LLC (“COR Kirkpatrick”), which, according to plaintiff, is owned and controlled by the same parties who own and control COR LLC. Several months later, plaintiff and COR LLC executed the promissory note. Thereafter, plaintiff transferred $4,000,000 to COR LLC’s attorneys, also a defendant in the action (“Law Firm”), to be held in escrow pending transfer to COR LLC. Pursuant to the escrow agreement, the Law Firm was to disburse the funds to COR LLC. Despite that provision in the escrow agreement, the Law Firm transferred large portions of the funds to COR Kirkpatrick. According to the Court, “ t no point did plaintiff object to the transfers”. 9 Plaintiff maintained that COR LLC received no consideration for the transfers to COR Kirkpatrick and that, as a result, COR LLC was left completely devoid of assets. Although COR Kirkpatrick had no legal obligation to make payments on the promissory note, it made some payments. All payments ceased when the first addendum came due. When plaintiff sought information from COR LLC, plaintiff was informed that COR LLC was insolvent inasmuch as it had no interest in the hotel and had no tangible assets. Plaintiff commenced the action against COR LLC, COR Kirkpatrick, the Law Firm and the individual members or owners of COR LLC (“individual defendants”). In the first cause of action, plaintiff alleged that COR LLC breached the promissory note. In the second cause of action, plaintiff asserted a fraud cause of action against all defendants. In the third cause of action, plaintiff alleged that the Law Firm breached the escrow agreement by releasing funds to COR Kirkpatrick rather than to COR LLC. In the fourth and fifth causes of action, which were asserted against all defendants, plaintiff alleged that defendants engaged in fraudulent conveyances in violation of the former DCL ( e.g. , sections 273, 274 and 276).  In lieu of an answer, defendants jointly moved to dismiss all causes of action except the first one.  The motion court granted the motion as to the second cause action (for fraud) and denied the remainder of the motion. As to the fraud claim, the motion court found that the complaint was devoid of any facts to support the claim asserted: As to the first element — misrepresentation of a material fact — the entirety of plaintiff’s allegation is found in paragraph 49 of the complaint. That paragraph provides: “ efendants made representations to laintiff regarding interest in the Hotel Project and the Hotel and the distribution of Proceeds.” Wholly absent are any facts sufficiently specific as to the substance of any misrepresentation allegedly made, i.e. , the words used, when any misrepresentation was allegedly made or the identity of the person who allegedly made the misrepresentation. Under these circumstances, plaintiff fails to comply with the specificity requirements of CPLR 3016(b) and the fraud cause of action must be dismissed. 10 Since the complaint was “ evoid of essential facts concerning the alleged misrepresentation(s),” the Court was unable “to address the sufficiency with which plaintiff pled the additional elements of fraud, i.e. , scienter, justifiable reliance or injury”. Accordingly, the motion court granted defendants’ motion. As to the DCL claims (the fourth and fifth causes of action), the motion court denied the motion, holding that, although “the complaint sparse on facts”, plaintiff adequately alleged that “it is a creditor of COR LLC, defendants (excluding ) had a close relationship with common control, the transfers of funds from COR LLC to COR Kirkpatrick were made ‘to an insider’ with absent or inadequate consideration rendering COR LLC insolvent, the existence of a debt antecedent to the transfer, and the transfers were made with actual intent to hinder and delay creditors”. The motion court further found that “ s an alternative to actual knowledge, Inner Harbor allege that defendants had constructive knowledge of intent to hinder and delay.”  The motion also held that the foregoing allegations sufficed to support plaintiff’s veil piercing allegations against the individual defendants.  Defendants appealed. 11 Defendants argued that the motion court should have dismissed the fourth and fifth causes of action pursuant to CPLR § 3211 (a) (1) 12 because plaintiff ratified the transfer of assets from COR LLC to COR Kirkpatrick. 13 The Court “reject that contention”. 14 The Court “conclude that the documentary evidence not establish ratification as a matter of law”. 15 The Court explained that “ lthough the documentary evidence may establish all of the facts alleged by defendants, including the fact that plaintiff’s loan was unsecured and that plaintiff knew that COR LLC intended to transfer the funds to COR Kirkpatrick, there no evidence that plaintiff knew that COR LLC would not receive any consideration for the transfers, thus rendering COR LLC insolvent and rendering plaintiff unable to receive any of the benefits of its bargain”. 16 “Indeed,” said the Court, “there no evidence that plaintiff could have possibly anticipated that COR LLC would intentionally render itself insolvent in that manner, as the complaint alleges”. 17 The Court also rejected the individual defendants’ argument that plaintiff failed to state a claim for veil piercing. The Court found that “plaintiff raised sufficient allegations that the individual defendants ‘exercised complete domination and control over the corporation and abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice’”. 18 The Court explained that “plaintiff sufficiently alleged that ‘corporate funds were purposefully diverted to make judgment-proof,’ and such allegations were “sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory”. 19 The Court further rejected defendants’ contention that the motion court should have granted the individual defendants’ motion as to the fourth and fifth causes of action on the ground that the complaint failed to allege that the loan proceeds were transferred to the individual defendants or that the individual defendants used the proceeds for personal or improper purposes. Analyzing the argument under the former DCL, the Court concluded that “the factual allegations in the complaint sufficient to state causes of action against the individual defendants for a violation of those former sections of the Debtor and Creditor Law”. 20 Hospitality Concepts, LLC v. Bernhardt Hospitality Concepts was an action involving the payment for services that plaintiff provided to defendant Bedford Falls Enterprises, LLC (“BFE”), the owner of The Gould Hotel (“hotel”) in Seneca Falls, New York. In August 2018, BFE sold the hotel; however, neither BFE nor defendant Jay Bernhardt, BFE’s sole member, paid the amount owed to plaintiff. Subsequently, BFE transferred certain of its monetary assets to defendant JGB Properties, LLC (“JGB Properties”). Bernhardt was also the sole member of JGB Properties. Following its transfer of assets, BFE had insufficient funds with which to pay the amount owed to plaintiff.  In a prior action, plaintiff obtained a judgment against BFE for the unpaid amount and interest, but BFE had dissolved by that time.  Plaintiff commenced the action seeking, inter alia , to hold Bernhardt personally liable and to set aside the conveyances to defendants as fraudulent pursuant to former DCL §§ 273 and 276.  Thereafter, plaintiff moved for summary judgment on, inter alia , the second cause of action against defendant Bernhardt, BFE, JGB Enterprises and JGB Properties under those former sections, and on the first cause of action against Bernhardt. The motion court granted plaintiff’s motion with respect to its first and second causes of action.  The motion court found that plaintiff had met its burden of proof under DCL § 273 by showing that the transfers at issue rendered BFE insolvent and that there was no evidence that the transfers were made for fair consideration. Moreover, the motion court found that even if there was fair consideration, the conveyances lacked good faith because Bernhardt and BFE were aware of its debt to plaintiff and plaintiff’s attempts to resolve the dispute before the sale of the hotel. Further, said the motion court, BFE’s subsequent sale of the hotel and the conveyances to JGB Properties soon thereafter demonstrated a failure to deal honestly, fairly and openly. On plaintiff’s claim under former DCL § 276 claim, the motion court found indicia of fraudulent intent ( i.e. , badges of fraud), including that (1) plaintiff was a creditor of BFE; (2) Bernhardt was involved in and had a close relationship with the parties to the action; (3) consideration for the conveyances was absent or inadequate; (4) Bernhardt knew of BFE’s debt to plaintiff before the alleged conveyances; and (5) the hotel was BFE’s primary asset. Notably, the motion court found that defendants failed to offer any explanation for the 2018 conveyances, or negate with evidence in admissible form the demonstrated “badges of fraud.”  On plaintiff’s claim against Bernhardt (under the first cause of action), the motion court held that plaintiff successfully pierced the corporate veil. The motion court found that Bernhardt (1) was BFE’s sole member; (2) had sole authority to proceed with the sale of the hotel on behalf of BFE; (3) sold the hotel on behalf of BFE; and (4) knew of BFE’s past due balance owed to plaintiff prior to the sale. These facts, which defendant did not dispute, were “more than nonspecific and conclusory allegations regarding claims of fraud.” The motion court concluded that “ n the record before this Court, there sufficient evidence to find Bernhardt exercised domination over and JGB Properties and that before making the challenged conveyance to JGB Properties he knowingly sold The Hotel without first either remitting payment to Hospitality or disputing the invoices. As such, Bernhardt abused the privilege of doing business in the corporate form.…” Accordingly, the motion court granted the motion as to the first cause of action. Defendants appealed. The Fourth Department agreed with the motion court and dismissed the appeal. With regard to the DCL § 273 claim, the Court held that “plaintiff met its initial burden on the motion by establishing that BFE’s conveyance to JGB Properties rendered BFE insolvent and was made without fair consideration.…” 21 Like the motion court, the Court found that “defendants failed to raise an issue of fact in opposition” to the motion. 22 As to former DCL § 276, the Court held that the record supported the motion court’s finding as to the existence of badges of fraud. 23 Therefore, the Court concluded that “plaintiff met its initial burden of establishing fraudulent intent, and that defendants failed to raise an issue of fact in opposition”. 24 Finally, as to veil piercing claim, the Court held that “ ased upon, among other things, Bernhardt’s concessions in his answer and interrogatories regarding his involvement in BFE and JGB Properties, as well as the evidence of past financial practices between those entities, … the court properly determined that plaintiff entitled to summary judgment on its cause of action based on Bernhardt’s individual liability.” 25 Footnotes Sardis v. Frankel , 113 A.D.3d 135, 141-142 (1st Dept. 2014). Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. P’ship , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting, Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). Wall Street Assocs. v. Brodsky , 257 A.D.2d 526, 529 (1st Dept. 1999) (citation omitted). Id. (internal quotation marks and citations omitted). Id. MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). See 8 USC § 1153(b)(5)(A). Slip Op. at *2. Citations and footnote omitted. Plaintiff did not cross-appeal the dismissal of the fraud claim. “Under CPLR 3211 (a) (1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law”. Leon v. Martinez , 84 N.Y.2d 83, 88 (1994); see also Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002). In other words, the submitted documents must “utterly refute[] the allegations in the complaint and conclusively establish[ ] a defense as a matter of law”. Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 175 (2021), rearg. denied , 37 N.Y.3d 1020 (2021) (quoting, Goshen , 98 N.Y.2d at 326 (internal quotation marks omitted)). Slip Op. at *2. Id. Id. (citations omitted). “Ratification is the act of knowingly giving sanction or affirmance to an act that would otherwise be unauthorized and not binding.” Northland E., LLC v. J.R. Militello Realty, Inc. , 163 A.D.3d 1401, 1405 (4th Dept. 2018) (internal quotation marks omitted); see also Green Tree Servicing, LLC v. Feller , 159 A.D.3d 1246, 1247-1248 (3d Dept. 2018). Slip Op. at *2-*3 (citations omitted). Id. at *3. Id. (citations omitted). Id. (citations omitted). Id. (citations omitted). Slip Op at *2. Id. Id. Id. (citation omitted). Id. (citation 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.