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By: Jeffrey M. Haber “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” 1  The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” 2  “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment . ” 3 Although the privilege serves an important function – the open dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. 4  Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. 5 For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” 6 Sometimes, a party possessing the privilege can waive its protection by affirmatively making the subject matter of the privileged communication an issue in a litigation. This is called “at-issue” waiver or “subject matter waiver”. 7 Notably, the fact that privileged communications may contain information “relevant” to issues the parties are litigating will not, without more, place the contents of the privileged communication itself “at issue.” 8 Rather, “at issue” waiver occurs “when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.” 9  An example of an affirmative act that constitutes a subject matter waiver of the privilege is the affirmative defense of a party’s “reliance upon the advice of counsel.” 10 “Moreover, selective disclosure is not permitted as a party may not rely on the protection of the privilege regarding damaging communications while disclosing other self-serving communications.” 11 This Blog examined subject matter waiver  here and here . Whether the attorney-client privilege was waived by a party to a litigation was the subject of Pala Assets Holding Ltd. v. Rolta, LLC , 2022 N.Y. Slip Op. 06642 (Nov. 22, 2022) ( here ). Pala involved a post-judgment enforcement proceeding. In September 2020 and December 2020, the motion court entered two judgments against defendants (totaling more than $200 million) based on their default on certain bond debt that plaintiffs purchased post default. As part of plaintiffs’ post-judgment efforts, plaintiffs obtained, among other things, a turnover order directing defendants to turn over certain property (“Turnover Order”) and receivership orders placing certain entities under the control of a court-appointed receiver. Plaintiffs also obtained an order requiring a corporate representative to sit for a deposition. During his deposition, the corporate representative of defendant Rolta India testified that the company’s decisions with respect to the Turnover Order – e.g. , waiting to comply with the Turnover Order – were based on the advice of its Indian counsel and its need to comply with Indian law. The motion court found that the representative’s statements effectuated a waiver of the attorney-client privilege on behalf of all defendants regarding all communications concerning the Turnover Order and receivership orders.  On appeal, the Appellate Division, First Department affirmed the foregoing order. 12 Like the motion court, the Court held that the deposition testimony by the CEO and Chairman of defendants’ corporate parent, Rolta India, waived defendants’ attorney-client privilege as to communications had with various counsel representing them in New York courts and in India. 13 The Court found that “ he CEO’s testimony that defendants did not comply with post-judgment orders calling for a turnover of assets to a receiver because the turnover and receivership orders had yet to be domesticated in India in accordance with Indian law affirmatively placed the subject matter of their privileged communications in litigation.” 14 The Court noted that the “CEO testified, among other things, that defendants’ counsel in India advised noncompliance with the post-judgment orders pending domestication of such orders in India, and that defendants’ U.S. counsel would yield to the advice of its Indian counsel on the matter.” 15 Thus, concluded the Court, “invasion of the privilege was required for plaintiffs to adequately contest the validity of defendants’ defense in failing to comply with the turnover and receivership orders ( see generally Lightstone Holdings LLC , 196 AD3d at 447), particularly inasmuch as contempt proceedings had already been brought against the president of Rolta India’s primary subsidiary, and additional contempt proceedings were in the process of being commenced against other principals.” 16 The Court rejected defendants’ argument that the waiver should be restricted to communications with Rolta India’s counsel in India. The Court explained that the “dual representation and evidence of a defense strategy shared by defendants” sufficed to waive the privilege as to the company’s U.S. counsel. 17 Takeaway The testimony by the company’s CEO showed that he relied on the advice of counsel. The testimony quoted by the motion court made this point clear:  Q. So did you receive specific legal advice from your counsel, whether in India or elsewhere, stating that you did not – that Rolta India did not have to comply with orders from the New York court unless they had been domesticated in India. A. Yes, please. In fact, as noted in the motion court order, when asked why Rolta India had not complied with the Turnover Order, the CEO testified that it was based on the advice of counsel: “I … have given testimony, time and again, in these nine hours, that whatever steps were taken by us on behalf of Rolta India were taken because of the legal advice we had, and we took that and consciously based on that.” In light of such testimony, it appears to have been an easy decision for the courts to find that the CEO affirmatively placed the subject matter of the company’s privileged communication at issue in the litigation. As such, it was necessary to invade the privilege to determine the matters surrounding the alleged violation of the Turnover Order and receivership orders. Footnotes Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991). Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Ambac , 27 N.Y.3d at 624 (citing, Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Ambac , 27 N.Y.3d at 624 (quoting, Matter of Jacqueline F. , 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. Ambac , 27 N.Y.3d at 624. (quoting, Rossi v. Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Deutsche Bank Trust Co. of Ams. v. Tri- Links Inv. Trust , 43 A.D.3d 56, 64 (1st Dept. 2007) (holding, subject matter waiver of a privilege occurs when “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.”). See Long Is. Light. Co. v. Allianz Underwriters Ins. Co. , 301 A.D.2d 23, 33 (1st Dept. 2002); see also Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP , 52 A.D.3d 370, 372 (1st Dept. 2008). North Riv. Ins. Co. v. Columbia Cas. Co. , 1995 WL 5792, *6, 1995 U.S. Dist. LEXIS 53, *17 (S.D.N.Y. 1995) (citations omitted); see also Manufacturers & Traders Trust Co. v. Servotronics, Inc. , 132 A.D.2d 392, 397 (1987) (no “at issue” waiver where the party asserting privilege “does not need the privileged documents to sustain its cause of action”). Village Bd. of Vil. of Pleasantville v. Rattner , 130 A.D.2d 654, 655 (2d Dept. 1987). Id. ; see also Orco Bank v. Proteinas Del Pacifico , 179 A.D.2d 390, 390 (2d Dept. 1992) (attorney-client privilege was waived by client’s “selective disclosure” of legal advice). The Court modified other portions of the motion court’s order. Slip Op. at *1. Id. (citations omitted). Id. Id. Id. at *1-*2 (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 As a general matter, a “broker” must register with the SEC in order to transact business on behalf of another person. It is, therefore, unlawful for any person to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that person is registered with the Securities and Exchange Commission (“SEC”). 1 Whether a person is acting as a “broker” is governed by Section 3(a)(4)(A) of the Exchange Act, 15 U.S.C. §78c(a)(4)(A). Under that section, a “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others.”  Today, we examine SEC v. Gel Direct Trust, et al. , Case 1:22-cv-09803 (S.D.N.Y. Nov. 17, 2022). Gel Direct involved the sale of penny stocks by defendants Jeffrey K. Galvani (“Galvani”) and Stuart A. Jeffery (“Jeffery”) through GEL Direct, LLC, the managing trustee of GEL Direct Trust (“GEL”), an entity the individual defendants created to facilitate securities transactions for its customers. According to the SEC, the vast majority of GEL’s trading activity related to the sale of penny stocks that its customers obtained through various sources, including the acquisition of convertible promissory notes or other forms of microcap financing.  The SEC alleged that, although the individual defendants were affiliated brokers of a registered broker-dealer during the period in question, their GEL-related activities were conducted separate and apart from their affiliation with that broker-dealer. Both defendants listed their GEL-related activities as “Other Business Activities” that were separate and apart from their affiliation with that broker-dealer.  The SEC said that in February 2022, the individual defendants attempted to include their GEL-related activities with their affiliated broker-dealer – the first time they tried to do so. However, alleged the SEC, the broker-dealer did not supervise any of GEL’s trading activity before May 2022, at the earliest. According to the SEC, from 2019 through at least May 2022, the individual defendants, acting through the GEL entities, provided brokerage services to approximately 60 customers involving at least 19,000 securities trades, primarily in penny stocks. The brokerage services they allegedly provided included taking possession of customer securities, directing trades to executing brokers, facilitating trade settlements, and disbursing trading proceeds to customers.  In return for these services, defendants allegedly received at least $12 million in transaction-based and other compensation. The SEC charged defendants with operating as unregistered broker-dealers that facilitated more than $1.2 billion of securities trading. The SEC filed its complaint in the U.S. District Court for the Southern District of New York. The SEC charged defendants with violating the registration requirement of Section 15(a) of the Exchange Act and charged defendants Galvani and Jeffery as “control persons” of the GEL entities under Section 20(a) of the Exchange Act. The SEC seeks permanent injunctions, disgorgement, prejudgment interest, civil penalties, and penny stock bars against all defendants. A copy of the press release announcing the action can be found here . A copy of the complaint that the SEC filed can be found here . Footnote Section 15(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §78o(a) (“Exchange Act”). 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 Much has been written in this Blog about mortgage foreclosure actions.  In this Blog’s prior article: “Second Department Addresses Issues Regarding Proof of Value of Foreclosed Property for the Purpose of Calculating Deficiency Judgment Under RPAPL 1371” , we discussed deficiency judgments.  By way of brief background, loans are generally evidenced by a promissory note.  The borrower’s repayment obligations are frequently secured by a mortgage on real property.  In the event of a borrower default, among the choices available to a lender are an action at law, by which the lender sues on the note for monetary damages, or an action in equity to foreclose the mortgage.  [This Blog has addresses the issue of a lender’s election of remedies < here =">here"> , < here =">here"> and < here =">here"> .]  Generally, RPAPL 1301 , prohibits a lender from simultaneously proceeding down both paths.   Today’s article focusses on aspects of a lender’s efforts to obtain repayment of the borrower’s obligations under the note through foreclosure.  The desired result of a foreclosure action is the foreclosure sale – a public auction at which the subject property is sold by the appointed referee.  If the proceeds of the sale are less than the amount determined by the referee (and awarded to the lender in the judgment of foreclosure and sale) to be due and owing, the lender may be entitled to a deficiency judgment against the borrower.  The historical backdrop of deficiency judgments, and the enactment of RPAPL 1371 to remedy some of the inequity with the law prior thereto, are addressed by the Court of Appeals in Sanders v. Palmer , 68 N.Y.2d 180 (1986). Among other things, RPAPL 1371 requires that, after a foreclosure sale, when the lender moves to confirm the sale, if one is desired, it must also seek its deficiency judgment.  See RPAPL 1371(2).  A motion for a deficiency judgment, if made, must be made within ninety (90) days “of the consummation of the sale”.  RPAPL 1371(2).  If no such motion is made “the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.”  RPAPL 1371(3).   The amount of the deficiency judgment shall be “equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher.”  RPAPL 1371(2).   The calculation of a deficiency judgment was the issue decided on November 16, 2022, by the Appellate Division, Second Department, in Rhinebeck Bank v. WA 319 Main, LLC. In Rhinebeck , the borrower’s property was sold at auction for $795,001.  The amount found to be due and owing to the lender pursuant to the judgment of foreclosure and sale was approximately $1.16 million.  The lender moved for leave to enter a deficiency judgment in the approximate amount of $366,000 and supported its motion with an appraisal of the property that presented a range of values from approximately $620,000 to $1.1 million – the low end of the range being referred to as the “liquidation value”.  The lender urged the supreme court to accept the $620,000 “liquidation value” of the property as the “fair market value” for the purposes of calculating the deficiency judgment.  Because the sale price at auction (approximately $795,000) is higher than the purported fair market value (approximately $620,000) the lender requested that the sale price should be used to calculate the deficiency under RPAPL 1371(2).  Accordingly, the lender argued that the deficiency should be calculated by subtracting the sale price at the public auction ($795,000) from the amount calculated as due and owing by the referee ($1.16 million) for a difference (and deficiency judgment) of approximately $365,000.  Supreme court agreed and entered a deficiency judgment in that amount in favor of the lender.  The borrower appealed. The Appellate Division modified the supreme court’s order finding that it was error to base the deficiency judgment calculation on the “liquidation value” from the appraisal report.  Instead, the supreme court found that the upper range value of approximately $1.1 million should have been used.  In so doing the Court stated: It is the lender who bears the initial burden of demonstrating, prima facie, the property's fair market value as of the date of the auction sale.  When a lender moves to secure a deficiency judgment against a borrower, the court shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid on at auction or such nearest earlier date as there shall have been any market value thereof. Here, to the extent that the Supreme Court, in effect, determined that the estimated liquidation value of $620,000 reflected the fair and reasonable market value of the property, this was error. A property's market value is defined as the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell. “Fair market value” means neither panic value, auction value, speculative value, nor a value fixed by depressed or inflated prices. Here, the record does not support a finding that the estimated liquidation value of $620,000 constituted the fair and reasonable market value of the property at the time of the foreclosure sale. Rather, the record supports a determination that the higher estimated value of $1,060,000 presented by the plaintiff's appraiser constituted the fair and reasonable market value of the property at the time of the foreclosure sale. As this value is higher than the auction price for the property, the deficiency judgment must be calculated as the difference between the amount of the indebtedness on the mortgage and $1,060,000 ( see RPAPL 1371<1> ). Accordingly, we modify the order so as to grant that branch of the 's motion which was for leave to enter a deficiency judgment against to the extent of granting the plaintiff leave to enter a deficiency judgment against in the sum of $104,186.56.  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 As a general matter, indemnity is defined to encompass a duty to make good on any loss, damage, or liability incurred by another. Therefore, when a person agrees to indemnify another, he or she agrees to hold the other person harmless for some loss or damage.  Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.” 1 Where the right to indemnification is based upon a written agreement, the specific language of the contract controls. 2 Under the well-settled rules of contract interpretation, courts must construe contracts so as to give full meaning and effect to all their material provisions. 3 A contract should not be construed so as to render any portion of it meaningless. 4 In addition, a contract should be read as a whole and, whenever possible, interpreted to give effect to its general purpose. 5 Therefore, under the foregoing rules, the promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances. 6 The foregoing principles were examined in Cohen v. Trump Organization LLC , 2022 N.Y. Slip Op. 06421 (1st Dept. Nov. 15, 2022) ( here ). In Cohen , the issue before the Court was whether Plaintiff, Michael D. Cohen (“Plaintiff”), was entitled to indemnification from his former employer, Defendant, Trump Organization LLC (the “Trump Organization” or “Defendant”), for the legal fees and expenses he incurred in connection with the lawsuits and investigations targeting the former President’s campaign and business dealings. Plaintiff maintained that Defendant promised to cover those legal expenses but reneged after it became clear that Plaintiff would cooperate in the ongoing investigations, leaving him with “millions of dollars” in unpaid legal bills. Plaintiff’s claim for indemnification was based upon both oral and written agreements. In that regard, Plaintiff asserted a claim for breach of contract based on alleged oral commitments from the Trump Organization, as well as the Trump Organization’s written Operating Agreement. The motion court held that the alleged oral agreements were unenforceable because the operating agreement contained a “no oral modification” clause. Under New York law, “where a contract contains a ‘no oral modification’ clause, that clause will be enforceable”. 7 The motion court noted that the operating Agreement “was in effect … at all times relevant to claims for indemnification”. The only evidence of the oral agreements, said the motion court, was Plaintiff’s testimony about the alleged promises between the parties. Since “the only proof of an alleged agreement to deviate from a written contract the oral exchanges between the parties, the writing control ”. 8 Therefore, concluded the motion court, because the alleged oral agreements were unenforceable, the court had to look to the operating agreement to determine the scope of Defendant’s duty to indemnify Plaintiff. Under Section 7.2 of the operating agreement, Defendant agreed to indemnify employees of the Trump Organization under specified conditions. In pertinent part, the section provided:  ach person (an “Indemnified Person”) who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative (“Proceeding”), or any appeal in a Proceeding, or any inquiry or investigation that could lead to a Proceeding, by reason of the fact that he is the Member, or he, she or it was or is the legal representative of or a manager, director, officer, partner, venture, proprietor, trustee, employee, agent or similar functionary of the Company or of the Member, shall be indemnified by the Company against judgments, penalties (including excise and similar taxes and punitive damages), fines, settlements, and reasonable costs and expenses (including, without limitation, attorneys’ fees) actually incurred by such Indemnified Person in connection with a Proceeding …. In addition, Section 7.3 of the agreement provided that the right to indemnification under Section 7.2 would “continue as to a person who has ceased to serve in the capacity which initially entitled such person to indemnity”. As to legal expenses related to the search warrants executed as part of the criminal investigation against Plaintiff, the motion court held that Defendant had not obligation to indemnify under Section 7.2. The court found that the fees related to the search warrants were bound up in the criminal investigation against Plaintiff. The motion court held that Section 7.2 did not allow for indemnification in connection with the Mueller Investigation. The motion court found that Plaintiff did not become “involved in” the investigation “by reason of the fact that he . . . was . . . employee” of the Trump Organization. 9 Here, the tether from the Mueller Investigation to the Trump Organization – as opposed to former President Trump, the Trump campaign, or other Trump ventures – is too tenuous to support indemnification under section 7.2. Based on the record before the Court, the subject matter of the various investigations appears to relate mainly, if not entirely, to former President Trump personally, or the Trump campaign, or to the Trump Foundation. The motion court noted that Plaintiff failed to “tender evidence showing that his involvement in the Mueller Investigation relate directly to his capacity as a Trump Organization employee, rather than his role more generally in the Trump orbit.” “It is not enough to argue,” said the motion court, “that but for his employment at the Trump Organization, Plaintiff would not have known some of the information that made him a target – and, later, a cooperator – in the investigation.” The motion court found that such “reasoning sweeps too broadly, permitting corporate indemnification even where it is not tied to actions on behalf of the corporation.” Consequently, the motion court concluded that the “Operating Agreement only compels Defendant to indemnify Plaintiff with regard to the business of the Trump Organization. And Plaintiff has not tendered evidence to show this connection.” Finally, the motion court held that the “reasoning above also foreclose Plaintiff’s claim for indemnification in connection with the five Congressional Investigations.” The court observed that since Plaintiff confessed that his testimony before Congress was perjurious, Plaintiff was not entitled to the reimbursement of legal fees in connection therewith. 10 And, since Plaintiff’s involvement in these investigations was not entwined with his service to the Trump Organization, indemnification was unavailable.  On appeal, the Appellate Division, First Department unanimously modified the motion court’s holding related Plaintiff’s first cause of action for breach of the contractual indemnification provision of the operating agreement – i.e. , Plaintiff’s request for the indemnification of outstanding legal fees incurred in connection with the Special Counsel and Congressional hearings, New York State Attorney General, and Manhattan District Attorney proceedings, and the proceeding related to FBI search warrants.  The Court held that Plaintiff’s “claim for outstanding legal fees incurred in connection with the Special Counsel and Congressional hearings and New York State Attorney General and Manhattan District Attorney proceedings should not have been dismissed based on the finding that those fees were not, as a matter of law, incurred by reason of the fact that he had been an employee of defendant.” 11 The Court disagreed with the motion court’s “strict[ ] the indemnification provision and conclu that plaintiff did not become involved in the investigations by reason of the fact that he was an employee of the Trump Organization, since ‘the tether’ from those investigations to the Trump Organization, as opposed to former President Trump, the Trump campaign, or other Trump ventures, too tenuous to support indemnification under section 7.2.” 12 The Court found “that, given the record evidence showing that the proceedings at issue concern , among other things, the activities of the Trump Organization, material issues of fact exist as to whether plaintiff ha established the ‘nexus or causal connection’ between the proceedings and his corporate capacity sufficient to give rise to the section 7.2 indemnification obligation for the fees incurred”. 13 The Court further held that the motion court correctly rejected Defendant’s other arguments for dismissing the claim for indemnification under Section 7.2. “Likewise”, said the Court, “claims for legal fees incurred in connection with the proceeding related to FBI search warrants used in the April 9, 2018, raids should not have been dismissed since there issues of fact as to whether the fees were incurred in reviewing the materials for privilege and confidentiality concerns of the Trump Organization and its executives.” 14 Finally, the Court held that “ ssues of fact … preclude summary dismissal of the indemnification claim based on defendant’s alleged oral agreements.” 15 Plaintiff claimed that Defendant made oral commitments to indemnify him for fees incurred in connection with the Special Counsel and Congressional proceedings that were separate and distinct from Section 7.2 of the operating agreement. The Court agreed with Plaintiff that the oral agreements modified Section 7.2 of the operating agreement and, therefore, “would apply regardless of the applicability of section 7.2”. 16 Takeaway Contractual indemnification “requires a clear expression or implication, from the language and purpose of the agreement as well as the surrounding facts and circumstances, of an intention to indemnify.” 17 Customary rules of contract interpretation are used to determine an intent to indemnify. In Cohen , the language of the operating agreement was critical to the finding that there were issues of fact precluding dismissal of Plaintiff’s claim for indemnification. In particular, the Court focused on, among other things, the “by reason of” clause of Section 7.2 of the operating agreement. As discussed, that clause served as a precondition for indemnification – it required a nexus between the underlying proceedings and the employee acting in his or her capacity as employee before indemnification would be made.  Cohen is also instructive in its refusal to interpret a contract provision too broadly or too narrowly. In the former, the Court did not read Section 7.2 so broadly as to ensnare any promise to indemnify within its ambit. As discussed, oral promises that were separate from the written obligation could stand alone as agreements that could be breached. Similarly, the Court cautioned against reading Section 7.2 to narrowly to exclude activities that could fall within that provision’s reach.  Footnotes Mas v. Two Bridges Assocs. , 75 N.Y.2d 680, 690 (1990) (internal citations omitted). Roldan v. New York Univ. , 81 A.D.3d 625, 628 (2d Dept. 2011). Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 323 (2007). Id. Id. (citing, Matter of Westmoreland Coal Co. v. Entech, Inc. , 100 N.Y.2d 352, 358 (2003)). See Roldan , 81 A.D.3d at 628 (citing, Hooper Assoc. v. AGS Computers , 74 N.Y.2d 487, 491-492 (1989)); 905 5th Assoc., Inc. v. Weintraub , 85 A.D.3d 667, 668 (1st Dept. 2011) (indemnification provisions “must be strictly construed so as to avoid reading unintended duties into them”). Israel v. Chabra , 12 N.Y.3d 158, 163 (2009) (citing, N.Y. Gen. Obligations Law §15-301(1)). Rose v. Spa Realty Assocs. , 42 N.Y.2d 338, 343 (1977); Eujoy Realty Corp. v. Van Wagner Communications, LLC , 22 N.Y.3d 413, 425 (2013). 546-552 W. 146th St. LLC v Arfa , 99 A.D.3d 117, 122 (1st Dept 2012) (where “a party is under no legal duty to indemnify, a contract assuming that obligation must be strictly construed to avoid reading into it a duty which the parties did not intend to be assumed”). See N.Y. LLC Law §420 (prohibiting indemnification to any person “if a judgment … adverse to such … person establishes (a) that his … acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated<.> ”); see also Operating Agreement § 7.2 (requiring “such Indemnified Person acted in good faith”). Slip Op. at *1. Id. Homestore, Inc. v. Tafeen , 888 A.2d 204, 213-214 (Del. 2005); see Crossroads ABL LLC v. Canaras Capital Mgt., LLC , 105 A.D.3d 645 (1st Dept. 2013); Schlossberg v. Schwartz , 43 Misc. 3d 1224(A), 2014 N.Y. Slip Op. 50760(U), *13 (Sup. Ct., Nassau County 2014)). Slip Op. at *1-*2. Id. at *2. Id. Martins v. Little 40 Worth Assocs., Inc. , 72 A.D.3d 483, 484 (1st Dept. 2010) (quoting, Drzewinski v. Atlantic Scaffold & Ladder Co. , 70 N.Y.2d 774, 777 (1987)). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog, in “ The New York Court of Appeals Addresses the Issue of When a Mechanic’s Lien Can Be Placed on a Landlord’s Property By A Contractor Performing Work For A Tenant ,” quoting John P. Kane Co. v. Kinney , 12 Bedell 69 (1903), explained the purpose of a mechanic’s lien as follows: The object and purpose of mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest. Section 3 of New York’s Lien Law , which describes who is entitled to a lien, provides: A contractor, subcontractor, laborer, materialman who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner thereof, or of his agent, contractor or subcontractor …, shall have a lien for the principal and interest, of the value, or the agreed price, of such labor …, or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien as prescribed in this chapter…. “Lien Law § 3 should be liberally construed to secure the purpose for which it was intended, namely the protection of that class of people who perform services or supply the material for the improvement of realty….”  Claudio Perfetto, Inc., v. Waste Management of New York, LLC , 274 A.D.2d 389, 390 (2 nd Dep’t 2000) (citations omitted) (finding, however, that “mere acceptance of construction debris or waste does not constitute an “improvement” as that term is defined in Lien Law § 2(4).) Mechanic’s liens are valid only when the labor or materials supplied for the project result in permanent improvements thereto.  Section 2(4) of the Lien Law provides: The term “improvement,” when used in this chapter, includes the demolition, erection, alteration or repair of any structure upon, connected with, or beneath the surface of, any real property and any work done upon such property or materials furnished for its permanent improvement … and shall also include the reasonable rental value for the period of actual use of machinery, tools and equipment … in connection with the demolition, erection, alteration or repair of any real property…. What constitutes a “permanent improvement” to real property is an issue that is ripe for litigation. On November 3, 2022, the Appellate Division, First Department, decided Matter of W 54-7 LLC v. Intersystem S&S Corp. The respondent in W 54-7 was a subcontractor that supplied scaffolding and a sidewalk shed for “permanent repair work to the façade” of a building that was being prosecuted by the owner’s general contractor.  The subcontractor filed a mechanic’s lien when it was not paid by the contractor.  Petitioner, the building owner, successfully brought a special proceeding to vacate and discharge the mechanic’s lien and the respondent, subcontractor, appealed. The First Department affirmed the supreme court’s order discharging the mechanic’s lien finding that “the scaffold and sidewalk shed that respondent installed at the premises were temporary structures, not for the ‘permanent improvement’ of real property within the meaning of Lien Law § 2(4).”  The Court noted that the contract between the subcontractor and the contractor “expressly contemplated the eventual removal of the scaffold and sidewalk shed”. Thus, the Court held that “ lthough arguably permanent repair work to the façade of the premises necessitated the construction of the scaffold and sidewalk shed for the safety of the public ( see NY City Building Code § BC 3314.1), the structures themselves affected no permanent change to the building. The project therefore falls outside the scope of labor and materials protected under the Lien Law ( see Lien Law § 2<4> .)”  (Some citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger As discussed in prior Blog articles, property owners sometimes require access to a neighbor’s property to make repairs to their own property. Neighbors can amicably (with legal counsel or not) arrange for the requested access, which, in many cases, will involve a formal written access agreement. Neighbors are not always neighborly, however, and refuse voluntary access.  In such cases, the party requiring access can seek court ordered access pursuant to section 881 of the Real Property Actions and Proceedings Law (“RPAPL”).  here,=">here," >here=">here" and="and" >here.=">here.">   RPAPL 881 provides: When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry. Our March 4, 2022 Blog article, entitled: “ The First Department Addresses Reimbursable Fees Awardable Under RPAPL 881 ”, addressed issues relating to the reimbursement of certain costs and fees to neighbors burdened by court ordered access to their property when RPAPL 881 petitions are granted.  On October 27, 2022, however, the Appellate Division, First Department, decided Matter of 419 BR Partners LLC v. Zabar , in which the Court addressed fee shifting in cases where the respondent in a RPAPL 881 proceeding successfully opposes the petitioner’s application. The facts of 419 BR are typical.    The petitioner in 419 BR brought an RPAPL 881 proceeding after failing to obtain consensual access to a neighbor’s property “to perform renovations and expansion of the existing building.”  Petitioner moved by order to show cause to perform certain work related to the project.  In support of its motion, petitioner submitted, inter alia , an affidavit from its professional engineer indicating that the proposed plans for the project were safe and would cause “minimal intrusion” to the neighbor, respondents.  In opposition to petitioner’s application, respondents urged, inter alia , that the proposed work was unsafe in many respects and violated Building Code.  Respondents also: refuted petitioner’s claim that access was refused as the parties were engaged in negotiations and, accordingly, the proceeding was premature; that the element of necessity has not been established; and, that the failure to name a 50% owner of the respondents’ property in the proceeding required dismissal of the petition.  Respondents also counterclaimed for, inter alia , an order: declaring the rights of the parties; declaring that the proposed plans do not adequately protect respondents’ property; preliminarily restraining and enjoining petitioner from performing work that did not comply with the Building Code; and, awarding to it legal and engineering fees pursuant to RPAPL 881. Supreme court described RPAPL 881 as follows: RPAPL 881 is a statute that stands in derogation of the existing common law regarding trespass and, thus, should be read narrowly. In determining whether or not to grant a license pursuant to RPAPL 881, courts generally apply a standard of reasonableness. Moreover, courts are required to balance the interests of the parties and should issue a license when necessary, under reasonable conditions, and where the inconvenience to the adjacent property owner is relatively slight compared to the hardship of his neighbor if the license is refused.  The court then proceeded to dismiss the petition on the ground that it was procedurally improper because the proceeding was not commenced against all owners of the neighboring property. Supreme court added that had it reached the merits of the claim it would have denied the petition because: Case law is clear that before it can grant a license pursuant to RPAPL 881, it is critical that the court be apprised of the exact nature, timing and extent of the work requiring the license. Upon considering the affidavit of , this court finds persuasive that petitioner fails to establish that the plans relied upon in this proceeding adequately reflect the construction work it intends to perform on the adjoining property and that said plans address respondents' concerns regarding, among other things, the impact said construction will have on the foundation and roof of said property. Thus, this court cannot determine, based on the plans petitioner submitted, and given the subsequent changes to the same, whether the work petitioner intends to perform will result in only a slight inconvenience to respondents. Moreover, petitioner's claim that respondents have refused access is also belied by the papers in opposition to the petition, which demonstrate respondents' attempt to negotiate the terms of the agreement and seek clarification from petitioner regarding its construction plans.  In addition, respondents sought legal and engineering fees as part of their counterclaims, a claim that supreme denied.  In so doing, supreme court stated: While it is well-settled that, a property owner compelled to grant a license should not be put in a position of either having to incur the costs of a design professional to ensure petitioner's work will not endanger his property, or having to grant access without being able to conduct a meaningful review of petitioner's plans, if a respondent is successful in opposing an 881 petition and no license is granted then that respondent would not be entitled to attorneys' fees for successfully opposing the petition.  Respondents appealed to the First Department, the denial of its claim for reimbursement of engineering and attorney’s fees.  The First Department affirmed supreme court’s order.  In so doing, the Court reiterated that attorney’s fees are only recoverable by a prevailing party in litigation when “authorized by statute, agreement, or court rule” and “ o such statute, agreement, or rule exists here”.  This is the “American Rule” on recovery of legal fees.  [Eds. Note: this Blog recently discussed the recovery of attorney’s fees and the “American Rule” < here =">here"> .]   The Court also explained that there was no statutory basis for the recovery of attorney’s fees under RPAPL 881 because “the statute does not authorize an award of fees where, as here, the neighboring property owner successfully defends against the RPAPL proceeding and the court does not grant the license sought” and, accordingly, “ n the absence of any statutory authority permitting the court to grant such fees where no license has been issued, an award of legal and professional fees is not authorized.” 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 It is well settled that the scope of judicial review of an arbitration proceeding is very limited. An arbitration award will be confirmed as long as the arbitrator “offer even a barely colorable justification for the outcome reached”. 1 If any plausible basis exists for the arbitrator’s decision, a court will confirm the award. 2 Because of the significant degree of deference afforded to arbitration awards, vacatur will not be obtained when the bases for such relief are errors of law and fact committed by the arbitrator. 3 Only where the award violates a strong public policy, is totally irrational, or exceeds a specifically enumerated limitation on the arbitrator’s power will a court vacate the decision of an arbitrator. 4 On November 1, 2022, the Appellate Division, First Department decided Matter of Cavanagh v. Hayes , 2022 N.Y. Slip Op. 06081 (1st Dept. Nov. 1, 2022) ( here ). Cavanagh involved a special proceeding brought by petitioner, pursuant to CPLR § 7511(b)(1)(iii), to vacate an arbitration award that petitioner claimed was so imperfectly executed that a final and definitive award on the subject matter was not made. The dispute revolved around the ownership of F&J Realty Inc. (“F&J Realty” or the “Company”). The parties each owned fifty percent (50%) of the Company’s stock. F&J Realty’s only asset was property located in New York City. On November 7, 2010, the parties entered into a shareholder agreement (the “Agreement”) with regard to the operation of F&J Realty. The Agreement recognized that from time-to-time, it would be necessary for the parties to make capital improvements to the Property. In Section 4 of the Agreement, the parties agreed that any contributions made would be repaid before any distributions were made to the shareholders.  On May 26, 2020, petitioner commenced a plenary action against respondents, alleging, among other things, an improper partition of F&J Realty, and seeking an accounting of the Company. Respondents served an answer with counterclaims, alleging, among other things, that petitioner breached the Agreement by not contributing working capital to F&J Realty. Thereafter, respondent filed a motion to compel petitioner to make working capital contributions to F&J Realty as required under the Agreement. Petitioner cross-moved to compel arbitration pursuant to the Agreement. The motion court denied petitioner’s motion and ordered the parties to arbitrate. The demand for arbitration identified the following areas of dispute: 1) whether an accounting of F&J Realty should be awarded; 2) whether petitioner should contribute his proportionate share of the carrying costs for the Property pursuant to the Agreement; and 3) whether petitioner should contribute his proportionate share of working capital. Respondent sought $300,000.00 as reimbursement of his loans and/or contributions of working capital and/or carrying costs to F&J Realty. Prior to the arbitration, respondent submitted, among other documents, the report of Patrick A. Wrenn CPA, and a chart he prepared detailing all deposits made to F&J Realty’s bank account during the period December 7, 2018, through September 3, 2021. Based on his review of the bank statements and deposited checks, Wrenn found that respondent had deposited a substantial sum of money into F&J Realty and that petitioner had not deposited any funds during the period in question. The arbitrator held a hearing in September 2021, during which all proofs were submitted, and testimony was taken of the parties and respondent’s expert witness, Patrick A. Wrenn, CPA. Petitioner did not proffer an expert for testimony at the hearing, and did not offer any documents in rebuttal.  After having considered all evidence submitted, testimony taken, and post-hearing briefs submitted, the arbitrator issued a written opinion, whereby he awarded respondent $103,272.86, which was to be paid upon the dissolution of F&J Realty. In so ruling, the arbitrator determined that respondent had made all necessary contributions to F&J Realty in order to keep it operating and that, pursuant to Section 4 of the Agreement, he was entitled to be paid back those contributions once F&J Realty dissolved.  Petitioner sought to vacate the award, claiming that, among other things, the arbitrator exceeded his authority by disregarding the issues raised in the demand for arbitration and by basing his award on issues not that were not raised therein. The motion court confirmed the award. The motion court held that award was not irrational, imperfect or beyond the scope of the arbitrator’s authority. The motion court found that the arbitrator did what was requested in the demand for arbitration – i.e. , that he conduct an accounting by resolving the parties’ competing contentions about their net liabilities with respect to the Company. By doing so, said the motion court, the arbitrator found, based upon the evidence presented and the credibility of the parties, petitioner owed respondent $103,272.86, plus interest, with payment to be made upon dissolution of the corporation. On appeal, the First Department affirmed. The Court held that the motion court “properly confirmed the arbitration award”, finding that “it not irrational or beyond the scope of the arbitrator’s authority”. 5 The Court rejected petitioner’s argument that the arbitrator exceeded his authority by performing an accounting of the Company as such was necessary to satisfy the requirement in Section 4 of the Agreement that contributions were to be repaid before distributions: “Contrary to petitioner’s argument, the arbitrator conducted an accounting in resolving the parties’ dispute over their respective interest in respondent F & J Realty, Inc. (F & J Realty). Paragraph 4 of the shareholders agreement provides that contributions to F & J Realty made by either shareholder will be repaid before any distributions are made to the shareholders.” 6 The Court also held that the award was not irrational as it was “ ased on the shareholder agreement and an assessment of the evidence presented, including the testimony of Patrick A. Wren, a Certified Public Accountant, who reviewed the bank statements, copies of checks, and tax returns of F & J Realty, from December 7, 2018 through September 3, 2021.” 7 Takeaway Vacating an arbitration award is extremely difficult. As long as the arbitrator provides “even a barely colorable justification for the outcome reached,” the award will be confirmed. 8 The award in Cavanagh demonstrates this point. It was based upon a review of bank statements, checks, tax returns, an expert report and post-hearing briefs, as well as testimony under oath by the parties and the expert witness. The findings and the award of the arbitrator were, therefore, supported by the record and consistent with the demand for arbitration. Footnotes Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479 (2006) (quoting, Matter of Andros Cia. Maritima, S.A. (Marc Rich & Co., A.G.) , 579 F.2.d 691, 704 (2d Cir. 1978)). Brown & Williamson Tobacco Corp. v. Chesley , 7 A.D.3d 368, 372 (1st Dept. 2004). Id. Matter of McIver-Morgan, Inc. v. Dal Piaz , 108 A.D.3d 47 (1st Dept. 2013). Slip Op. at *1 (citing, Elul Diamonds Co. Ltd. v. Z Kor Diamonds, Inc. , 50 A.D.3d 293 (1st Dept. 2008); and McIver-Morgan , 108 A.D.3d at 55). Id. Id. Wien , 6 N.Y.3d at 479. 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 October 27, 2022, the New York Court of Appeals decided 34-06 73, LLC v. Seneca Ins. Co. , 2022 N.Y. Slip Op. 06029 (2022) (here), a case in which the Court determined the contours of CPLR § 203(f). In a unanimous decision, written by Judge Rivera, the Court held that plaintiffs’ initial complaint, alleging that defendant breached the insurance agreement between the parties, did not give defendant notice of a subsequently alleged reformation claim based upon mutual mistake as required under CPLR § 203(f).  Background Defendant issued plaintiffs a multi-million-dollar, written insurance policy covering several of plaintiffs’ vacant commercial properties. Among other things, the policy included a Protective Safeguards Endorsement (“PSE”) that required plaintiffs to, inter alia , maintain an automatic sprinkler device on the subject property. At the top of the page, the PSE stated: “THIS ENDORSEMENT CHANGES THE POLICY” and advised plaintiffs to “READ IT CAREFULLY”. It further stated that the PSE modified the commercial property coverage of the policy so that defendant would “not pay for loss or damage caused by or resulting from fire if, prior to the fire, the policyholder … new of any suspension or impairment in any protective safeguard … and failed to notify” defendant or otherwise “ ailed to maintain any protective safeguard … in complete working order.” Approximately one month after the policy went into effect, defendant’s agent conducted an inspection of the premises and issued a report to plaintiffs’ principal and sole owner advising him that there was no compliant sprinkler system on the premises and recommending that plaintiffs notify defendant of the system’s non-operability. A little more than four months later, there was a fire on the premises and plaintiffs requested payment under the policy for damages incurred. Defendant notified plaintiffs that it was denying the claim under the PSE because plaintiffs did not maintain a working sprinkler system. Thereafter, plaintiffs commenced the action against defendant for breach of contract, seeking over $2.4 million in damages based on defendant’s failure to cover the fire loss. In the complaint, plaintiffs made the following factual assertions: (1) defendant issued an insurance policy that provided property damage insurance on the covered property; (2) the fire on the premises “was a peril insured against under the Policy” which occurred “while the Policy was in full force and effect”; (3) plaintiffs complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy”; and (4) defendant failed to indemnify plaintiffs for the property damage. In its answer, defendant admitted that it issued the referenced policy and had not made payment thereunder. Defendant raised several affirmative defenses, including one based on the PSE, asserting that, because plaintiffs failed to maintain the sprinkler system as required by the policy, they were not covered for the fire damage. Following discovery, plaintiffs moved to dismiss the affirmative defense concerning the PSE, arguing that defendant was aware that there was no functioning sprinkler system – as specifically noted in the inspection report – and thus waived its right to disclaim coverage based on the PSE because it neither followed up to confirm whether an operational system was installed nor cancelled the policy. Defendant cross-moved for summary judgment on its PSE-based affirmative defense. The trial court denied the motions, concluding there were triable issues of fact as to waiver and there was conflicting evidence as to whether the sprinkler system was operational at the time of the fire. At trial, for the first time, plaintiffs argued that the written policy did not reflect the parties’ agreement. Plaintiffs’ owner testified that he told his insurance broker that he did not want the policy to include a protective safeguard endorsement because the properties were vacant buildings or lots, and most did not have sprinklers. However, he admitted that he did not read the insurance policy. Defendant’s Vice President of Underwriting testified that an underwriting file disclosed during discovery did not contain documents referencing the PSE or the sprinkler system, that the premiums quoted for the Policy were for a non-sprinklered building, and that the inclusion of the PSE may have been a mistake. After plaintiffs rested, they orally moved to amend the complaint to conform the pleadings to the proof by adding a claim for reformation. The trial court reserved decision on the motion. At the charge conference, defendant opposed the proposed amendment, arguing that the reformation claim was time-barred and futile. The trial court granted plaintiffs’ motion, concluding that the claim related back to the complaint because it was “part of the whole thrust of the complaint originally” and the jury should decide whether the PSE’s inclusion resulted from a mutual mistake. Thus, in addition to charging the jury on the question of whether plaintiffs maintained a sprinkler system as required by the policy, the trial court also charged the jury on reformation, waiver, and estoppel. Although the jury rejected plaintiffs’ waiver and estoppel arguments and found that plaintiffs did not prove due diligence in maintaining an automatic sprinkler system on the premises at the time of the fire, the jury returned a verdict in favor of plaintiffs on the reformation claim, finding that plaintiffs established by clear and convincing evidence that the parties’ true agreement was a policy without a PSE and it was a mutual mistake to include the PSE in the policy. Defendant moved to set aside the reformation portion of the verdict pursuant to CPLR § 4404(a) and for judgment in defendant’s favor on the grounds that the reformation claim was untimely and, although plaintiffs did not formally move to amend pursuant to CPLR § 3025, the claim did not relate back to the original complaint. Defendant maintained that the complaint alleged only nonperformance and contained no indication that the contract failed to reflect the parties’ intent. Defendant also asserted surprise and prejudice because, had plaintiffs questioned the contract’s terms earlier, defendant would have deposed plaintiffs’ insurance broker and the underwriter (before the underwriter became unavailable years into the litigation).  The trial court denied the motion, reasoning that plaintiffs had relied on the same trial evidence to support the breach of contract and reformation claims, and that “reformation was a variation on the theory of breach of contract.” The trial court also noted that defendant failed to turn over the underwriting file until nearly five years after the complaint was filed and thus had no grounds to complain. The Appellate Division, First Department affirmed the judgment in the plaintiffs’ favor, holding that the trial court providently granted plaintiffs’ application to conform the pleadings to the trial evidence to assert a claim for reformation. 1 The Court concluded that the reformation claim was not barred by the statute of limitations because it related back to the complaint and the waiver and estoppel claims. 2 The Court also concluded that the PSE was “at the heart of the litigation from the outset and the same evidence” supporting plaintiffs’ waiver argument supported reformation. 3 The Court further concluded that defendant was not prejudiced since it had the underwriting file in its possession and failed to timely produce it. 4 The Court granted defendant leave to appeal and reversed the First Department’s order. The Court’s Holding As an initial matter, the Court noted that there was no dispute that the statute of limitations on the reformation claim had expired when plaintiffs sought to amend their complaint. Therefore, the resolution of the appeal turned on whether the claim related back to the original pleading.  To decide the relation back issue, the Court explained that to determine whether the reformation “claim asserted in amended pleading deemed to have been interposed at the time the claims in the original pleading were interposed”, it would have to determine whether the original complaint gave defendant “notice of the transactions, occurrences, or series of transactions or occurrences, to be proved pursuant to the amended pleading”. 5 Thus, explained the Court, “plaintiffs” reformation claim relate back to the original complaint – and is thus not barred by the statute of limitations – only if the complaint placed defendant on ‘notice of the transactions, occurrences, or series of transactions or occurrences, to be proved’ in support of that claim.” 6 In determining the notice issue, the Court held that the lower courts are to focus solely on the four corners of the original pleading:  As a threshold matter, Supreme Court and the Appellate Division should not have looked beyond the four corners of the original pleading to determine whether defendant was on notice of transactions or occurrences underlying plaintiffs' reformation claim. Section 203 (f) requires the court to determine solely whether a plaintiff’s or a defendant’s original pleading gives notice of the transactions or occurrences underlying the proposed amendment ( see CPLR 203 ). Whether the same trial evidence supports both the breach of contract and reformation claims or whether defendant here failed to produce the underwriting file in a timely fashion are irrelevant to the notice issue. Similarly, matters unearthed during discovery have no bearing on whether an untimely claim relates back under section 203 (f). 7 The Court noted that while “discovery might alert the moving party that it could or must amend the complaint or answer to protect its litigation position or prevent extinguishment of a claim as time-barred, … such discovery does not shed light on whether the original pleading provides notice of transactions or occurrences to be proved in support of a new claim for recovery.” 8 “While some of these observations might be relevant to consideration of prejudice under CPLR 3025,” said the Court, “they do not inform the analysis under CPLR 203(f).” 9 After discussing the pleading requirements for breach of contract 10 and reformation, 11 the Court turned its attention to whether plaintiffs’ original complaint gave defendant notice of the reformation claim. It concluded that plaintiffs “failed to give notice to defendant of the transactions or occurrences on which plaintiffs base their reformation claim.” 12 The Court explained that the initial complaint only referenced a breach of contract claim, which, the Court said, was evidenced by plaintiffs’ allegation that they complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy.” 13 In their original complaint, plaintiffs reference a specific written policy which they identified as the parties’ agreement and which they allege defendant breached. The complaint further alleges that plaintiffs complied “with all of the conditions precedent and subsequent pursuant to the terms of the subject policy.” This latter allegation is fatal to plaintiffs’ assertion that the complaint provides notice of the transactions or occurrences to be proved in support of a reformation claim. In fact, if anything, it suggests the opposite because, by asserting total compliance, plaintiffs necessarily disclaimed any challenge to the policy’s terms, specifically the PSE. 14 The Court further explained that the timing of the claimed mistake did not support the reformation claim because the alleged mistake preceded the policy’s formation:  Moreover, plaintiffs based their allegation that the parties included the PSE by “mistake” on assertions at trial that Malik instructed his broker to exclude the sprinkler requirement before the parties finalized the written policy, and the lack of documentation for a PSE in the underwriting file. Therefore, the reformation claim, as advanced by plaintiffs, was based on a purported oral agreement negotiated by Malik with the broker that preceded the contract’s formation, whereas the breach of contract claim in the original complaint was based on the written policy which includes the PSE and with which plaintiffs alleged full compliance. 15 The Court concluded that “nothing in the stand-alone breach of contract claim put defendant on notice that there was a prior oral agreement that excluded the PSE and that the PSE’s inclusion in the written policy was a mistake.” 16 “Simply put,” said the Court, “‘the transactions or occurrences, or series of transactions or occurrences, to be proved pursuant to the amended pleading’ did not give notice of reformation because they are factually distinct and discordant from plaintiffs’ allegation of a breach of the written policy (CPLR 203 ).” 17 Finally, the Court cautioned the lower courts that determining the contours of CPLR 203(f) should be consistent with the Court’s liberal pleading standards: “To be clear, the transactions and occurrences underlying a breach of contract claim do not perforce give notice of the transactions or occurrences underlying a claim of reformation based on mutual mistake, and vice versa.” 18 Indeed, noted the Court, “an original pleading alleging that a party failed to perform in accordance with the written agreement might supply sufficient notice of the transactions or occurrences to be proved in support of reformation.” 19 However, said the Court, “ hat is not the case here, where plaintiffs’ complaint foreclosed a factual or inferential basis for such notice by unqualifiedly alleging that they ‘complied with all of the conditions precedent and subsequent pursuant to the terms of the subject policy,’ which the complaint referenced explicitly as the written policy.” 20 In the end, observed the Court, “ he complaint contained no alternate theory of recovery or factual allegations based on pre-formation transactions or occurrences. The complaint therefore put defendant on notice of transactions or occurrences related solely to the written policy and plaintiffs’ total compliance with that agreement’s terms, which include the PSE's sprinkler requirement.” Accordingly, the Court reversed the First Department’s order, denied plaintiffs’ motion to amend the complaint to include a reformation cause of action, and remitted the case to the trial court for entry of a judgment in accordance with its opinion. Footnotes 190 A.D.3d 628, 629 (1st Dept. 2021) (citing, CPLR § 3025(c)). Id. Id. Id. at 630. Slip Op. at *3. Id. Id. Id. Id. Id. , noting that to plead a cause of action for breach of contract, a plaintiff must allege that: (1) a contract exists ( see , e.g. , Mandarin Trading Ltd. V. Wildenstein , 16 N.Y.3d 173, 181-182 (2011); (2) plaintiff performed in accordance with the contract (see , e.g. , Pope v. Terre Haute Car & Mfg. Co. , 107 N.Y. 61, 65-66 (1887); (3) defendant breached its contractual obligations ( see Barker v. Time Warner Cable, Inc. , 83 AD3d 750, 751 (2d Dept. 2011); and (4) defendant’s breach resulted in damages ( see Biotronik A.G. v Conor Medsystems Ireland, Ltd. , 22 N.Y.3d 799, 805-806 (2014) (compensatory damages); Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 95 (1993) (nominal damages); Milan Music, Inc. v. Emmel Communications Booking, Inc. , 37 A.D.3d 206, 206 (1st Dept. 2007). Id. , noting that to plead reformation, a plaintiff must allege sufficient facts supporting a claim of mutual mistake, meaning that “the parties have reached an oral agreement and, unknown to either, the signed writing does not express that agreement”. Chimart Assoc. v. Paul , 66 N.Y.2d 570, 573 (1986). Given the “heavy presumption that a deliberately prepared and executed written instrument manifests the true intention of the parties, … he proponent of reformation must show in no uncertain terms, not only that mistake or fraud exists, but exactly what was really agreed upon between the parties”. Chimart , 66 N.Y.2d at 574 (cleaned up). Id. Id. (internal quotation marks omitted). Id. Id. Id. Id. Id. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Melville, NY October 28, 2022 – Freiberger Haber LLP is pleased to announce that co-founding partners, Jonathan H. Freiberger and Jeffrey M. Haber, have been named by Super Lawyers magazine to be among the top lawyers in the New York metropolitan area. This is Mr. Freiberger’s third, and Mr. Haber’s eleventh, consecutive year of selection. Both Messrs. Freiberger and Haber were recognized for their work in business and commercial litigation. Super Lawyers Magazine® is an affiliate of Thomson Reuters. It recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, securities, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber applies more than 60 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2022 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact Jeffrey M. Haber or Jonathan H. Freiberger Freiberger Haber LLP

By: Jeffrey M. Haber In past articles, we have examined a motion under CPLR § 3213 ( see , e.g. , here , here , here , and here ). CPLR § 3213 is a procedural mechanism that allows a party to make a motion for summary judgment before filing a complaint in actions based upon “an instrument for the payment of money only or a judgment.” The purpose of the statute “is to provide an accelerated procedure where liability for a certain sum is clearly established by the instrument itself.” 1 CPLR § 3213 is a device that “for the limited matters within its embrace, melded pleading and motion practice into one step, allowing a summary judgment motion to be made before issue was joined.” 2   The provision is “intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious … a formal complaint is superfluous and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.” 3 “The prototypical example of an instrument within the ambit of is of course a negotiable instrument for the payment of money – an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.” 4 Generally, CPLR § 3213 is used to enforce “some variety of commercial paper in which the party to be charged has formally and explicitly acknowledged an indebtedness,” so that “a prima facie case would be made out by the instrument and a failure to make the payments called for by its terms.” 5 A promissory note may qualify as such an instrument, 6 so long as the plaintiff submits proof of the existence of the note and of the defendant’s failure to make payment. 7 Such proof must be in admissible form sufficient to establish the absence of any material, triable issues of fact. 8 However, “ here the instrument requires something in addition to defendant’s explicit promise to pay a sum of money, CPLR 3213 is unavailable.” 9 A plaintiff’s prima facie proof “cannot be drawn from sources outside the agreement itself.” 10 Once the movant meets this burden, it becomes incumbent upon the party opposing the motion to come forward with proof in admissible form to raise a triable issue of fact. 11 On October 21, 2022, the Supreme Court, New York County (Lebovits, J.), decided Irwin Funding, LLC v. Dexter Young Cattle Feeding , 2022 N.Y. Slip Op. 51035(U) (Sup. Ct., N.Y. County Oct. 21, 2022) ( here ), a case involving a merchant cash advance agreement. As discussed below, the court held that the agreement did not fall within the scope of CPLR § 3213. Irwin involved an action to collect on sums allegedly owed under a merchant cash advance agreement and guarantee. Plaintiff, Irwin Funding, LLC, moved under CPLR § 3213 for summary judgment in lieu of complaint against defendants Dexter Young Cattle Feeding (“Merchant”) and Dexter Young individually (“Guarantor”). The court denied the motion, even though it was unopposed. The court held that the merchant cash advance agreement between plaintiff and Merchant was not an instrument for the payment of money only because “ t impose many performance obligations on Merchant, not merely an unconditional promise to pay money.” 12 The court found that “plaintiff’s stated basis for relief was not a failure by Merchant to pay money as promised. Rather, it was a breach of the non-monetary contractual requirement to give advance notice to plaintiff should the funds in Merchant’s account drop too low to cover plaintiff’s daily receivables withdrawals.” 13 Accordingly, said the court, “establishing plaintiff’s claim against Merchant would require proof beyond the instrument itself and simple proof of nonpayment.” 14 The court also held that “Guarantor’s guarantee not an instrument for the payment of money only.” 15 The court found that the guarantees at issue were “not unconditional, and Guarantor responsible both for payment and performance.” 16 Accordingly, said the court, “Plaintiff rely on CPLR 3213 to obtain judgment based on these guarantees.” 17 Takeaway As noted, to obtain judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument. The instrument and evidence of failure to make payments in accordance with terms of the subject instrument constitute a prima facie case for summary judgment. Only where a defendant can raise questions of fact that the agreement or guarantee is not an instrument for the payment of money, or where the instrument requires something in addition to the defendant’s explicit promise to pay a sum of money, as in Irwin , is CPLR § 3213 unavailable. Footnotes G.O.V. Jewelry, Inc. v. United Parcel Serv. , 181 A.D.2d 517, 517 (1st Dept. 1992). Weissman v. Sinorm Deli, Inc. , 88 N.Y.2d 437, 443 (1996).  Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc. , 37 N.Y.2d 151, 154 (1975) (citations and internal quotation marks omitted). Weissman , 88 N.Y.2d at 443-44 (citations, internal quotation marks and footnote omitted). Interman Indus. Prods., Ltd. , 37 N.Y.2d at 154-155 (1975). “An unconditional guaranty is an instrument for the payment of money only within the meaning of CPLR 3213.” Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A. v. Navarro , 25 N.Y.3d 485, 492 (2015). See Bonds Fin’l, Inc. v. Kestrel Techs., LLC , 48 A.D.3d 230 (1st Dept. 2008); Seaman-Andwall Corp. v. Wright Machine Corp. , 31 A.D.2d 136 (1st Dept. 1968). See CPLR § 3212(b); Jacobsen v. New York City Health & Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986); Zuckerman v. City of New York , 49 N.Y.2d 557 (1980). Weissman , 88 N.Y.2d at 444. Rhee v. Meyers , 162 A.D.2d 397, 398 (1st Dept. 1990); see Ian Woodner Family Collection, Inc. v. Abaris Brooks, Ltd. , 284 A.D.2d 163 (1st Dept. 2001). See Alvarez v Prospect Hosp. , supra ; Zuckerman , supra . Slip Op. at *1. Id. at *1-*2. Id. at *2. Id. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Tasty Minstrel Games LLC (“TMG”) is a company, located in Utah, that produces board games. 1 The best-known game released by TMG is Yokohama, a board game that takes place in the Meiji era of Japanese history.  Another game that TMG produces is “Ponzi Scheme”. In Ponzi Scheme, players try to trick each other into funding fraudulent investments with the promise of extremely high returns. Like a real Ponzi scheme, the scheme works as long as new investors keep the scheme afloat.  No doubt Ponzi Scheme, the game, is entertaining and fun to play with friends. But in real life, a Ponzi scheme is not a game. When the scheme collapses, people lose money. A Primer on a Ponzi Scheme In the early 20th century, Charles Ponzi invented the fraud that bears his name. Ponzi devised a scheme in which he convinced investors that they would receive a 40% to 50% return on their investment in International Postal Reply Coupons (IPRCs) within 90 days. Early investors received payouts as promised because Ponzi was using funds from later investors to give the promised payouts to earlier investors. The fraud continued to grow, as more and more investors, lured by stories of huge payouts, invested their money in IPRCs. Eventually, the scheme collapsed, but not before investors paid Ponzi several million dollars – which in the early 20th century was a significant amount of money.  Present day Ponzi schemes operate in essentially the same way as their namesake. Early investors, lured by promises of huge payouts in a short amount of time, invest large sums of money in the investment the perpetrator is selling. The scammer may be offering investments in real estate, natural resources ( i.e. , oil or natural gas reserves), or any other type of investment the perpetrator can dream up.  The hallmark of a successful Ponzi scheme is that early investors will receive their payouts as promised. Early investors spread their tales of success to unwittingly urge new investors to buy into the scam. Ponzi schemes may continue to grow for several months, or possibly several years, before new money dries up, and the scheme collapses.  SEC v. National Realty Investment Advisors LLC On October 13, 2022, the Securities and Exchange Commission (“SEC”) announced ( here ) that it charged New Jersey-based National Realty Investment Advisors LLC (“NRIA”) and four of its former executives with running a Ponzi-like scheme that raised approximately $600 million from about 2,000 investors, including 382 retirees. In its complaint ( here ), the SEC alleged that beginning in 2018, NRIA and its executives raised funds by promising investors their money would be used to buy and develop real estate properties, which would generate profits through a fund that NRIA set up to invest in the projects. NRIA’s executives, four of whom were named in the complaint, solicited investors in a nationwide campaign promising returns of up to 20 percent. In reality, alleged the SEC, investor money was used to pay distributions to other investors, to fund an executive’s family’s personal and luxury purchases, and to pay reputation management firms to thwart investors’ due diligence of the executives. “In classic Ponzi fashion, these defendants allegedly told investors that they would be paid distributions from profits of their fund when, in reality, payments were being made from the investors’ own funds,” said Thomas P. Smith, Jr., Associate Regional Director of Enforcement in the SEC’s New York Regional Office. “What makes this behavior even more callous is that they allegedly took advantage of 382 retirees who had contributed more than $94 million in savings.” In addition, the SEC alleged that NRIA manipulated the real estate fund’s financial statements and the financial information in marketing material distributed to investors, intentionally disguising the misuse of investor funds and creating the false appearance that NRIA and the fund were generating more revenue than they actually were and that operations were successful. However, said the SEC, NRIA had little to no revenue, and it and the fund filed for Chapter 11 bankruptcy protection on June 7, 2022.  The SEC filed its complaint in federal court in New Jersey ( here ). The SEC charged NRIA and the four former executives with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks injunctions against future violations of the antifraud provisions, disgorgement of ill-gotten gains plus prejudgment interest, penalties, and officer and director bars against the four executives, and names two additional persons as relief defendants. In June of this year, the New Jersey Bureau of Securities issued a cease and desist order to NRIA in connection with the alleged scheme ( here ). Commenting on the order, Matthew J. Platkin, Acting Attorney General, stated: “The fraudulent conduct identified by our Bureau of Securities in this case is striking. Today, we are taking action to stop their unlawful conduct and to put the public on notice. If an investment opportunity promising high guaranteed returns sounds too good to be true, it usually is.” “The conduct outlined in today’s filing is egregious. It’s the very kind of conduct that undermines public confidence in our financial institutions and – ultimately – in investing,” said Acting Bureau of Securities Director Amy G. Kopleton. “These respondents offered investors a securities opportunity that sounded too good to be true, and it was.” Takeaway If it sounds too good to be true, it probably is. Perpetrators of Ponzi schemes usually guarantee high returns in a short amount of time. Legitimate investments always involve risk, especially in a volatile economic environment, such as the one that investors are currently experiencing.  Investors should beware of promoters who do not provide clear explanations of how the investment works, or who refuse to provide detailed information about the investment in writing.  It is very important that investors understand the details of their investments and how their money will be used or invested.  Additionally, promoters will try to rush investors into investing in the scheme. If a promoter is trying to rush an investor into investing with promises of huge returns “but only if you act now,” the best thing to do is walk away. See,="See," e.g. ,="e.g.," here,=">here," >here=">here" and="and" >here.=">here."> Footnote Last summer, TMG advised people who purchased company stock that it was in “virtual bankruptcy”, leading to staff layoffs and a halt to game development. The company said that it does not expect to produce any new games for the next “two to three years”. 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 discussed previously in this Blog < here =">here"> , the first question asked by a potential client when consulting about a new litigation matter is “can we sue them for our legal fees.”  Clients are often dismayed to learn that attorney’s fees are not generally recoverable in litigation under the “American Rule,” because “ n the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.”  Alyeska Pipeline Services Co. v. Wilderness Society , 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also , Mighty Midgets, Inc. v. Centennial Ins. Co. , 47 N.Y.2d 12, 21-22 (1979).  The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.”  Mighty Midgets , 47 N.Y.2d at 22 (citations omitted).  On October 20, 2022, the New York Court of Appeals, in Sage Systems, Inc. v. Liss , reaffirmed the strength of the principles behind the “American Rule” regarding shifting of attorney’s fees in litigation.  The parties in Sage Systems were partners in a real estate matter and their partnership agreement provided, inter alia :  The Partnership and the other Partners shall be indemnified and held harmless by each Partner from and against any and all claims, demands, liabilities, costs, damages, expenses and causes of action of any nature whatsoever arising out of or incidental to any act performed by a Partner which is not performed in good faith or is not reasonably believed by such Partner to be in the best interests of the Partnership and within the scope of authority conferred upon such Partner under this Agreement, or which arises out of the fraud, bad faith, willful misconduct or negligence of such Partner. Decades after the entering into the partnership, defendant brought an unsuccessful dissolution proceeding.  Thereafter, plaintiff commenced the underlying action seeking to collect from defendant the attorney’s fees and costs expended in defending the dissolution proceeding.  Supreme court granted plaintiff’s motion for summary judgment and denied defendant's cross-motion for summary (in which defendant argued that “the partnership agreement did not provide for attorney's fees and did not apply to actions between the partners”).  In so doing, supreme court agreed with plaintiff that the broad indemnification clause in the partnership agreement covered legal fees.  Supreme court’s order was affirmed by the Appellate Division and the Court of Appeals granted leave to appeal. Plaintiff argued that “the indemnification provision's broad, unrestrictive language demonstrates the parties' clear intent to provide attorney's fees related to direct claims between them”, but the Court of Appeals disagreed.  The Court of Appeals explained: Under the American Rule, attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule. The American Rule is intended to increase free access to the courts for those who would otherwise be discouraged from seeking judicial redress of wrongs for fear of having to pay a defendant's attorney's fees. The Rule was originally derived from federal legislation passed in 1853 which recognized that losing litigants were being unfairly saddled with exorbitant fees.  While the Court recognized that the American Rule is “straightforward”, it also recognized that “in the context of private agreements to avoid the Rule, courts have had to determine the intent of vague fee-shifting language and broad indemnification provisions that do not explicitly allow for the prevailing party in an action between contracting parties to collect attorney's fees.”  (Citating cases.)  The Court, however, criticized those cases that “presume that broadly worded indemnification provisions … are intended to cover attorney’s fees” because “they deviate from this Court’s exacting standard that the agreement must contain ‘unmistakably clear’ language of the parties’ intent to encompass such actions.”  (Citing Hooper Assoc. v. AGS Computers , 74 N.Y.2d 487, 492 (1989).) The subject indemnification provision, the Court noted, makes no mention of the recoupment of attorney’s fees.  Indeed, the Court found that “nothing in the provision nor the agreement as a whole makes ‘unmistakably clear’ that the partners intended to permit recovery for attorney's fees in an action between them on the contract.” (Citing Hooper , 74 N.Y.2d at 487.)  Finally, the Court advised that: Parties must determine how best to articulate their agreement to ensure their intentions are clear. However, inclusion of clear language stating that the prevailing party is entitled to recover attorney's fees in an action between the parties would avoid potential litigation on the issue. 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.