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By: Jeffrey Haber In prior articles, we have talked about the importance of saying what you mean in a contract. ( E.g. , here and here .) When contracts are clear and unambiguous, the meaning ascribed to the words used therein will be enforced because they reflect the intent of the parties. Such was the case in Padron v. Granite Broadway Dev. LLC , 2022 N.Y. Slip Op. 05798 (1st Dept. Oct. 18, 2022). In Padron , plaintiff claimed that he sustained injuries when he slipped and fell on a watery condition on a stairwell landing while transporting steel handrails at a construction project. Defendant, Granite Broadway Development LLC (“Granite”), owned the property under construction and had retained Defendant, CNY Builders 1717 LLC’s (“CNY”), as the construction manager. Transcontinental Contracting, Inc. d/b/a Transcontinental Steel (“Transcontinental”), plaintiff’s employer, was the steelwork contractor. The watery condition was believed to be caused by a burst pipe of another contractor. Plaintiff sought damages for the injuries sustained from his fall based on Labor Law §§ 200, 240(1), and 241(6) and negligence. Following discovery, Granite and CNY moved for summary judgment, claiming that, inter alia , Transcontinental had a contractual obligation to indemnify them and summary judgment dismissing Transcontinental’s counterclaims for common-law indemnification and contribution against Granite. The motion court granted Granite’s motion for contractual indemnification against Transcontinental and summary judgment dismissing Transcontinental’s counterclaims for common-law indemnification and contribution against it and denied Transcontinental’s motion for summary judgment dismissing Granite and CNY’s contractual indemnification claims against it. On appeal, the Appellate Division, First Department modified the order to deny Granite’s motion for summary judgment on its contractual indemnification claim against Transcontinental, and otherwise affirmed. We examine the Court’s holding with regard to the contractual indemnification claim. The Court held that Granite was not entitled to summary judgment on its contractual indemnification claim against Transcontinental. 1 The contracts referred to were trade contracts that the parties signed. Those contracts provided that Transcontinental was to indemnify Granite and CNY to the fullest extent permitted by law.  In Paragraph 16.02 of the agreement, the “Trade Contractor” was required, “ o the fullest extent permitted by law” to “defend, indemnify and hold harmless, the Owner, Construction Manager and Additional Insureds from and against all claims … and/or liabilities arising out of the Trade Contractor’s Work provided that any such claim, damage, loss and/or expense is attributable to bodily injury ….”  In Paragraph 16.03 of the agreement, the “Trade Contractor” was required, “ o the fullest extent permitted by law” to “defend, indemnify and hold harmless the Owner, Construction Manager and Additional Insureds from and against all claims … and/or liabilities arising out of or in any way connected with or incidental to, the performance of the Work by Trade Contractor, its Subcontractors, suppliers, materialmen and/or vendors of any tier including anyone directly or indirectly employed by any of them and for whose acts they may be liable”. The First Department found that “ lthough plaintiff’s accident triggered the broadly worded provisions in paragraphs 16.02 and 16.03 of the agreement requiring Transcontinental to provide indemnification for all claims ‘arising out or in any way connected with or incidental to’ Transcontinental’s work, and refer to both the Construction Manager and the Owner, that provision not apply to Granite.” 2 The Court noted that the “Standard Trade Contract with Transcontinental, in Article 1, titled ‘Definitions’ subsection (k) define ‘Owner’ to ‘mean the persons or entities identified as the Owner on the cover page of th Agreement, and include any heir, legal representative, successor or assign of such specified Owner.’” 3 The Court went on to note that the “cover page of the Agreement only name ‘CNY Builders 1717 LLC’ and ‘Transcontinental Steel’”. 4 Thus, concluded the Court, “Granite not named on the cover page or otherwise identified as ‘Owner’ anywhere in the contract” and could not claim a contractual obligation to indemnify. 5 “Furthermore”, said the Court, “although Exhibit K annexed to the contract titled ‘Final Release and Waiver of Lien’ identified Granite as the ‘Owner’ and CNY as the ‘Construction Manager,’ it not identify Transcontinental as the ‘Trade Contractor’, and is unsigned and un-dated, creating an issue of fact as to whether the parties intended to be bound by its provisions.” 6 Takeaway Padron underscores the fundamental principle of contract interpretation – i.e. , contracts are to be construed pursuant to the parties’ intention. When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words. In Padron , the Court concluded that the terms of the trade agreements were clear and unambiguous. The agreements did not apply to Granite because “Granite not named on the cover page or otherwise identified as ‘Owner’ anywhere in the contract”. Since the indemnification provisions under those agreements related to the obligations of the “Owner”, Granite could not claim contractual indemnification under those agreements. Footnotes Slip Op. at *1. Id. (citing, Tonking v. Port Auth. of N.Y. & N.J. , 3 N.Y.3d 486, 490 (2004); Nicholson v. Sabey Data Ctr. Props., LLC , 160 A.D.3d 587 (1st Dept. 2018); Crimi v. Neves Assoc. , 306 A.D.2d 152, 153 (1st Dept. 2003)). Id. at *1-*2. Id. at *2. Id. Id. (citing, Dwyer v. Cenral Park Studios, Inc. , 144 A.D.3d 552, at 552-553 (1st Dept. 2016)). 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 voluntary payment doctrine bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or material mistake of fact or law. 1 Notably, there is a presumption that payments are voluntary. 2 Thus, to rebut the presumption, the plaintiff must show that he/she protested the payment. In order for a protest to be effective, it must be in writing and (with some exceptions, as discussed below) made at the time of payment. 3 The doctrine was first introduced in Lesster v. City of New York , 33 A.D. 350 (1st Dept. 1898). There, the Court recognized that “ voluntary payment of money under a claim of right cannot in general be recovered back.” “To warrant such recovery”, explained the Court, “there must be a compulsion, — actual, present, potential, — and the demand must be illegal.” Thus, “ n the absence of such compulsion a mere protest is not sufficient. The element of coercion is essential to the right.” From that discussion, the Court established the rule that forms the basis for the doctrine: “ f a party, with full knowledge of all the facts, voluntarily pays money in satisfaction of a demand made upon him, he cannot afterwards allege such payment to have been unjustly demanded, and recover back the money.” The plaintiff in Lesster was a property owner in New York City who paid real property taxes without knowing that the subject property had been condemned and acquired by the City for a street widening project. When the City refused to return the tax payment, Lesster sued and prevailed in light of the mistake. In Gimbel Brothers, Inc. v. Brook Shopping Centers, Inc. , 118 A.D.2d 532 (2d Dept. 1986), the plaintiff leased a retail store from the defendant. The lease was drafted when New York’s “Sunday Blue Laws” prohibited businesses from operating on Sunday. After the “Blue Laws” were declared unconstitutional, defendant started invoicing Gimbel Brothers $10.00 per week as a “Sunday charge”.  The charge was later increased to $825.00 and Gimbel Brothers paid a total of $19,800.00 in such charges before stopping payment. The lease did not provide for “Sunday charges”. Gimbel Brothers commenced suit against its landlord seeking, inter alia , a declaration that it could offset the previously made “Sunday charges” against future rents. Relying on the voluntary payment doctrine , the Court held that the “Sunday charges” should not be returned, stating: Indeed, we find that the weight of the evidence supports the conclusion that Gimbels was not operating under an actual mistake of law but, instead, made the subject payments voluntarily, as a matter of convenience, without having made any effort to learn what its legal obligations were….When a party intends to resort to litigation in order to resist paying an unjust demand, that party should take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.  Gimbels displayed a marked lack of diligence in determining what its contractual rights were, and is therefore not entitled to the equitable relief of restitution. In Dillon v. U-A Columbia Cablevision , 100 N.Y.2d 525 (2003), plaintiff brought a putative class action lawsuit against her cable provider alleging that a $5 late fee/administrative fee was an impermissible penalty and that she would not have made the payments “had she known the true facts”.  Agreeing with “both lower courts that the voluntary payment doctrine bar plaintiff’s complaint,” the Court of Appeals found: Here, no fraud or mistake is alleged in that, according to the complaint, plaintiff knew she would be charged a $5 late fee if she did not make timely payment.  Alleged mischaracterization of a $5 late fee as an administrative fee does not overcome application of the voluntary payment doctrine. More recently, in Overbay, LLC v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. , 185 A.D.3d 707 (2d Dept. 2020), the Appellate Division, Second Department affirmed the dismissal of a complaint under the doctrine. Overbay owned property that it intended to develop.  The defendant was a lender that held a mortgage on the property. When Overbay defaulted under its loan, defendant commenced a mortgage foreclosure proceeding. The mortgage provided that the defendant was entitled to recoup its legal fees from Overbay in the event foreclosure proceedings were commenced. While the motion court granted the defendant’s motion for a judgment of foreclosure and sale, the quantum of legal fees to which the defendant was entitled had to be determined at a hearing. Prior to the hearing, Overbay exercised its right of redemption (the right to pay off the debt prior to the foreclosure sale). Overbay demanded a pay-off letter in order to “satisfy the judgment with the proceeds of a construction loan, upon which they had to close before the date of the hearing; the loan commitments would otherwise have expired by that point in time.” Ultimately, the defendant sent a payoff letter that included $82,561.92 in legal fees. The defendant delivered a satisfaction of mortgage to Overbay after Overbay paid, “without raising a contemporaneous objection” to the full sum demanded in the pay-off letter. Thereafter, Overbay commenced litigation seeking reimbursement of the attorney’s fees it paid. The Court held, inter alia , that the voluntary payment doctrine barred recovery by Overbay of the payment of attorney’s fees because such payment had not been contemporaneously protested at the time of payment. here,=">here," >here.=">here."> Last Thursday, the First Department decided Tantallon Austin Hotel, LLC v. Wilmington Trust, N.A. , 2022 N.Y. Slip Op. 05778 (1st Dept. Oct. 13, 2022) ( here ), wherein it reinstated a breach of contract claim on the basis that, among other things, there were issues of fact as to whether the voluntary payment doctrine applied.   tantallon.> tantallon.> Tantallon involved an overpayment of money paid by a borrower to pay off a mortgage. The borrower claimed that the lender refused to return the excess portion of the payment. Plaintiff entered into a loan agreement on March 1, 2017 with Morgan Stanley Bank, N.A. to refinance the hotel it runs (“the Loan Agreement”). Plaintiff gave Morgan Stanley a Deed of Trust that was secured by the hotel (the “Mortgage”). Thereafter, ownership of the Mortgage eventually passed to a trust (the “Trust”) pursuant to a pooling and servicing agreement dated May 1, 2017 (the “Pooling and Servicing Agreement” or “PSA”). Plaintiff was not a party to the PSA.  Due to the Covid-19 pandemic, the hotel experienced material financial pressures. Plaintiff missed an interest payment for the Mortgage, triggering a “Default” under the Mortgage.  In March 2021, Plaintiff sold the hotel (the “Sale”) so it could pay off the Mortgage and loan without entering into a liquidation, bankruptcy, or insolvency proceeding.  On or about the eve of the closing for the Sale (the “Closing”), Defendant gave Plaintiff two “Preliminary Payoff Quotes” that (i) listed the “Estimated” amounts required to pay off the Mortgage and (ii) represented that “All Overages Will Be Refunded.” Plaintiff paid the amounts identified to pay off the Mortgage ($120,972,935.96). The “Estimated” payoff amount included a charge of $1,030,000 as a “Liquidation Fee”. The Mortgage Loan had not been liquidated. Plaintiff maintained that it was not apparent that the “Liquidation Fee” was a charge included in the Loan Agreement that it signed. According to Plaintiff, time was of the essence with respect to the Closing. On March 15, 2021, Plaintiff advanced the “Estimated” fee to Defendant, which included the “Liquidation Fee”. When advancing those funds, Plaintiff allegedly relied on the written representations in the Preliminary Payoff Quotes that it was entitled to a reconciliation of any overpayment.  On April 5, 2021, three weeks after the payoff, Plaintiff’s attorney wrote a letter to Defendant Midland Loan Services requesting a refund of the “Liquidation Fee” on grounds that: (i) the Loan Agreement did not authorize a payment of 1% of the principal loan amount as a liquidation fee; and (ii) there had been no liquidation, restructuring, workout, insolvency or bankruptcy proceeding associated with Plaintiff paying off the Loan. The letter stated that although Plaintiff asserted its right to a refund of the “Liquidation Fee,” Plaintiff was not challenging any other component of its March 15, 2021 payoff payment.  Defendant declined to refund the “Liquidation Fee” based on the ground that the Loan Agreement and the PSA (to which Plaintiff was not a party) allowed for the payment of liquidation fees generally. Based on that refusal, Plaintiff commenced the action to recover its overpayment.  Defendants moved to dismiss the complaint, arguing, among other things, that Plaintiff was not entitled to a return of the Liquidation Fee it had paid to Defendant. The motion court granted the motion, holding that, among other things, the voluntary payment doctrine barred any recovery of the Liquidation Fee. The motion court found that the doctrine applied because Plaintiff paid the Liquidation Fee “without any contemporaneous objections or reservation of rights.” “If plaintiff had any fee-related doubts, questions, concerns or objections,” said the motion court, “it could and should have raised them at that time.” “Instead”, observed the motion court, “plaintiff paid in full and only later, on April 5, 2021, first objected to having paid the Liquidation Fee and requested a refund.” “By then”, concluded the motion court, “it was too late….” 4 Plaintiff appealed. The First Department modified the motion court’s order, on the law, to, inter alia , reinstate Plaintiff’s breach of contract claim against the Trust and to vacate the motion court’s declaration that Plaintiff was not entitled to a return of the liquidation fee. The Court otherwise affirmed the order. First, the Court held that “Plaintiff sufficiently stated a claim for breach of contract against the trust by alleging that the trust an assignee of the loan agreement and that it breached the agreement by charging, and then failing to reimburse, a liquidation fee that was never incurred.” 5 However, said the Court “plaintiff failed to state a cause of action for breach of contract against defendant Midland Loan Services given plaintiff’s concession that it enjoy no contractual relationship with Midland, as Midland could not have breached a contract to which it was not a party.” 6 Second, the Court held that there were issues of fact surrounding application of the voluntary payment doctrine that prevented dismissal of Plaintiff’s contract claim. The Court explained that since Plaintiff was not a party to the PSA, there were issues of fact as to its awareness “of the factors triggering a ‘liquidation fee,’ a penalty that was lumped in with various other costs and fees that plaintiff was required to pay in connection with defaulting on the loan.” 7 Moreover, said the Court, “the timing and circumstances of the sale, which required the loan to be fully paid off before the sale could go through, meant that time was of the essence, and thus plaintiff, even if it was aware that it was being charged an improper ‘liquidation fee,’ had a limited time to discern the issue before closing.” 8 Further, the Court pointed to “the disclaimer in the preliminary payoff quotes”, which “stated that all overages would be subject to a refund”, as a basis to modify the motion court’s order. 9 The Court concluded, stating: “Given that there remain factual issues whether plaintiff paid the liquidation fee with ‘full knowledge of the facts’ or that it ‘perceive that an improper demand for money’ before paying the amount due, the breach of contract claim should not have been dismissed based on this doctrine.” 10 [Ed. Note: although this article is devoted to the voluntary payment doctrine, the Court also ruled on the motion court’s order dismissing Plaintiff’s unjust enrichment claims as duplicative of Plaintiff’s breach of contract claims. 11 The Court explained that “ t this early stage of the litigation, the court should not have found that the unjust enrichment claim was duplicative, as there is no contract between plaintiff and Midland … and … the particular subject matter of the enrichment claim — namely, the liquidation fee — has not been established to be encompassed by plaintiff’s loan agreement.” 12 ] Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. References Dubrow v. Herman & Beinin , 157 A.D.3d 620 (1st Dept. 2018) (citation and quotation marks omitted). See 82 N.Y. Jur. 2d, Payment and Tender, § 82. See Nunner v. Newburgh City School Dist. , 92 A.D.2d 888 (2d Dept. 1983). Citations omitted. Slip Op. at *1. Id. (citing, Harris v. Seward Park Hous. Corp. , 79 A.D.3d 425, 426 (1st Dept. 2010)). Id. Id. at *1-*2. Id. at *2 (citing, 208-234 Falls St. v. New York Cent. R.R. Co. , 21 N.Y.2d 172, 179 (1967)). Id. (citations omitted). In New York, an unjust enrichment claim will not lie when it is duplicative of an independent contract or tort claim. See , e.g. , Corsello v. Verizon New York, Inc. , 18 N.Y.3d 777, 790-91 (2012); Clark-Fitzpatrick, Inc. v. Long Island R. Co. , 70 N.Y.2d 382, 389 (1987).    Id. (citations omitted).

By Jonathan H. Freiberger Municipalities generally require home improvement contractors to be licensed to perform work.  “Where a home improvement contractor is not properly licensed in the municipality where the work is performed at the time the work is performed, the contractor forfeits the right to recover for the work performed, both under the contract and on a quantum meruit basis.”  Brightside Home Improvements, Inc. v. Northeast Home Improvement Services , 208 A.D.3d 446, 449 (2 nd Dep’t 2022) (numerous citations omitted); see also, Forman Construction, Inc. v. P.D.F. Construction , 175 A.D.3d 1491, 1492 (2 nd Dep’t 2019).  Similarly, a “home improvement contractor who fails to possess and plead possession of a valid license as required by relevant laws may not commence an action to foreclose a mechanic's lien.”  J.D. Nicotra v. Manger , 64 A.D.3d 547, 547-48 (2 nd Dep’t 2009) (numerous citations omitted). Consistent with these principals, a home improvement contractor is required to plead its licensure in an action against a consumer.  Thus, CPLR 3015(e) provides: License to do business. Where the plaintiff's cause of action against a consumer arises from the plaintiff's conduct of a business which is required by state or local law to be licensed by the department of consumer affairs of the city of New York, the Suffolk county department of consumer affairs, the county of Rockland, the county of Putnam, the county of Westchester, or the Nassau county department of consumer affairs, the complaint shall allege, as part of the cause of action, that plaintiff was duly licensed at the time of services rendered and shall contain the name and number, if any, of such license and the governmental agency which issued such license. The failure of the plaintiff to comply with this subdivision will permit the defendant to move for dismissal pursuant to paragraph seven of subdivision (a) of rule thirty-two hundred eleven of this chapter. It has been noted that “the legislative intent to protect residential homeowners places the burden unequivocally on the contractor to ensure that the license requirements are strictly complied with.”  Michael D. Canuso Const., Inc. v. Rogers , 267 A.D.2d 218, 219 (2 nd Dep’t 1999) (citations omitted). An interesting case addressing these issues is Cunningham v. Nolte , 188 A.D.3d 806 (2 nd Dep’t 2020).  The parties in Cunningham were cohabitating and involved in an intimate relationship with one another for two years.  During their period of cohabitation, plaintiff performed extensive home improvement contracting work on the defendant's residence in Rockland County … in reliance on the defendant's promise that he would be reimbursed for the work following the impending sale of the residence.”  Cunningham , 188 A.D.3d at 807.  Plaintiff was not paid and, accordingly, sought to foreclose a mechanic's lien he had filed against the residence, to recover damages for breach of contract, to recover in quantum meruit, and to impose a constructive trust over the residence.”  Id.  Supreme court denied defendant’s motion to dismiss “the causes of action to foreclose a mechanic's lien, to recover damages for breach of contract, and to recover in quantum meruit.”  Id.   The Appellate Division modified and, in so doing, rejected plaintiff’s “contention that the licensing requirement of CPLR 3015(e) did not apply herein.”  Id. at 808.  The Court found that plaintiff engaged in home improvement contracting work without a Rockland County home improvement license.  Nor did the complaint allege that plaintiff possessed the required license.  Therefore, the Court held, “the causes of action to foreclose a mechanic's lien, to recover damages for breach of contract, and to recover in quantum meruit should have been dismissed pursuant to CPLR 3211 (a) (7).”  Id .  The Court did find that the complaint adequately stated a cause of action for a constructive trust over the residence and, therefore, defendant’s motion as to that claim was properly denied by supreme court. These issues are relevant to the October 11, 2022, decision of the Appellate Division, First Department, in Alpine Custom Floors, Inc. v. Yurcisin .  The defendants in Alpine were homeowners that entered into a home improvement contract with nonparty general contractor to perform restorative work to their property.  General contractor, in turn, subcontracted with plaintiff to perform a portion of the restorative work.  The general contractor was unlicensed but the plaintiff, subcontractor, was licensed.   Plaintiff, commenced action claiming that “it performed work at defendants' home and that, although the general contractor was unlicensed, it should be able to recover from defendants for the value of the services it rendered because it is licensed and because it performed some services for the homeowners at their request.”  The First Department unanimously affirmed supreme court’s grant of summary judgment in favor of the homeowners and, in so doing, noted that the evidence demonstrated “prima facie that the general contractor was unlicensed and that they did not contract directly with plaintiff for any of the work performed or agree to undertake any obligations to plaintiff.” In addition, Plaintiff failed to submit any contrary evidence. 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 Since the early 20th century, a plaintiff alleging fraud in New York can recover only the actual pecuniary loss sustained as a result of a misrepresentation or omission, i.e. , the plaintiff’s out-of-pocket damages. 1 The damages recoverable under the out-of-pocket rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained. 2 The out-of-pocket rule was at issue in Danco Enters., LLC v. Livexlive Media, Inc. , 2022 N.Y. Slip Op. 05589 (1st Dept. Oct. 6, 2022) ( here ).  danco comes from the parties briefing on appeal.> danco comes from the parties briefing on appeal.> Danco involved the purchase of common stock of LiveXLive Media, Inc. f/k/a Loton Corp. (“LXL”), a company that live streams music festivals and events to its paid subscribers. In June 2016, Wantmcs Holdings invested $1.25 million in LXL, pursuant to two Subscription Agreements (collectively, the “Subscription Agreements”). Under the Subscription Agreements, Wantmcs Holdings received restricted shares of LXL common stock. Subsequently, pursuant to an Asset Purchase Agreement, dated May 5, 2017 (the “APA”), LXL Tickets acquired certain of Wantickets’ assets in exchange for 2,000,000 shares of LXL common stock. Plaintiffs alleged that Defendants made misrepresentations concerning LXL to fraudulently induce Plaintiffs to enter into the foregoing agreements. Following extensive discovery, Defendants moved for summary judgment to dismiss Plaintiffs’ fraud-based claims. Among other things, Defendants argued that dismissal of Plaintiffs’ fraud-based claims was warranted because they failed to submit evidence establishing their claimed damages. Defendants maintained that to determine the measure of damages, Plaintiffs were required to, among other things, demonstrate the value of the consideration they received, i.e. , shares of LXL common stock, at the time they received the consideration, i.e. , at the time of the execution of the two Subscription Agreements and/or the APA (collectively, the “Agreements”). Defendants claimed that Plaintiffs failed to come forward with any proof of the value of the consideration they received at the time the Agreements were executed. Plaintiffs argued that the value of the consideration they received ( i.e. , the LXL common stock) was the amount of money they received when they sold their LXL shares, years after the execution of the Agreements. According to Plaintiffs, because there was little market for the shares (they were restricted) when Plaintiffs received them, the value of those shares was worth far less than when Plaintiffs were able to sell them in the open market after getting the restrictions lifted. Thus, Plaintiffs maintained, the best evidence of the value of those shares at the time Plaintiffs received them was the price at which those shares were sold, discounted to present value as of the time Plaintiffs received them. The motion court denied the motion, finding that the case was not one “where damages incapable as a matter of law of calculation”.  Defendants appealed. The Appellate Division, First Department, unanimously reversed, on the law, and granted Defendants’ motion. In a pithy decision, the Court held that “Defendants entitled to summary judgment because plaintiffs failed to show the ‘out of pocket’ damages required for a fraud claim 3 and failed to submit evidence of the value of the Loton stock they received as of July 2016 (for the Subscription Agreements) and May 2017 (for the APA). 4 Although the holding was succinct, the explanation was more developed.  The Court rejected Plaintiffs’ argument that damages could be approximated. In making that argument, Plaintiffs relied on Spectra Audio Research, Inc. v. Chon , 62 A.D.3d 561, 564 (1st Dept. 2009), and Fresh Del Monte Produce N.V. v. Eastbook Caribe A.V.V. , 40 A.D.3d 415, 421 (1st Dept. 2007). In Spectra Audio , for example, the court held that while damages “may not be determined by mere speculation or guess,” evidence showing the “existence and the extent” of a plaintiff’s damages “will suffice, even though the result is only an approximation”. 5 The Court said that neither case involved the out-of-pocket rule: Spectra Audio involved negligence damages and Fresh Del Monte involved breach of contract damages. 6 The Court also rejected Plaintiffs’ argument that the out-of-pocket rule measures pecuniary loss using the difference between the value of the bargain which a plaintiff was induced by fraud to make and the amount or value of the consideration exacted as the price of the bargain. 7 The Court explained that the measure of damages sought by Plaintiffs was relevant to a holder case ( i.e. , where the plaintiff is induced to purchase and hold a security), of which Danco was not. Citing to, and quoting, Hotaling v. Leach & Co. , 247 N.Y. 84, 87 (1928), the Court said that in a holder case, “ he damages awarded must represent the loss which the plaintiff sustained through the purchase and continued ownership of the ”. here.=">here."> Moreover, noted the Court, “in Hotaling , the Court of Appeals ‘rejected a measure of damages based on the market value of the bond when the plaintiff purchased it, explaining that such value could not be determined and would have left the plaintiff without any remedy’”. 8 The Court explained that, in contrast to Hotaling , deposition testimony “implie that the value of Loton stock as of July 2016 and May 2017 could be calculated by an expert in valuation.” 9 Takeaway Danco shows that a plaintiff alleging fraud must demonstrate his/her actual pecuniary loss sustained as a result of the alleged wrongful conduct. In the context of a security, the plaintiff must come forward with a valuation showing the amount of the claimed overvaluation of the security on the day of his/her investment, not at some point in the future. The failure to come forward with such evidence, as in Danco , will result in the dismissal of the fraud claim. Footnotes Reno v. Bull , 226 N.Y. 546 (1919); see also Continental Cas. Co. v. PricewaterhouseCoopers, LLP , 15 N.Y.3d 264 (2010). See Lama Holding v. Smith Barney , 88 N.Y.2d 413, 421 (1996); Clearview Corp. v. Gherardi , 88 A.D.2d 461, 468 (2d Dept. 1982) (“the defrauded party is entitled solely to recovery of the sum necessary for restoration to the position occupied before the commission of the fraud”) (citations omitted). Slip Op. at *1 (citing, Kumiva Group, LLC v. Garda USA Inc. , 146 A.D.3d 504, 506 (1st Dept. 2017)). Id. Spectra Audio , 62 A.D.3d at 564 (quoting, Hirschfeld v. IC Sec. , 132 A.D.2d 332, 336-337 (1st Dept. 1987), lv. dismissed , 72 N.Y.2d 841 (1988), quoting Cristallina v. Christie, Manson & Woods Intl. , 117 A.D.2d 284, 295 (1st Dept. 1986)) (internal quotation marks omitted). Slip Op. at *1 (citing, Spectra Audio , 62 A.D.3d at 562, and Fresh Del Monte , 40 A.D.3d at 415). Lama , 88 N.Y.2d at 421. Slip Op. at *1 (citation omitted). Id. (citing, Continental , 15 N.Y.3d at 271 (“plaintiffs could have come forward with … valuations showing the amount of the claimed overvaluation of the portfolio on the day of their respective investments”)). 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 Section 3101 of the CPLR provides that, in general, “there should be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof” by, inter alia , a party and its representatives.  “Material and necessary” is “to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”  Allen v. Crowell-Collier Publishing Co. , 21 N.Y.2d 403, 406 (1968) (citation omitted).  The CPLR provides many mechanisms by which litigants may obtain information from parties to the litigation or third-parties.  Indeed, as recognized by the Allen Court, the exchange of “material and necessary” information is an important part of litigation. Thus, in order for the discovery process to be meaningful, and for the purposes of discovery to be furthered, individuals or entities that are involved, or anticipate being involved, in litigation have a duty preserve “material and necessary” information.  When information is not preserved when it ought to have been, it is known as “spoliation”.  [Eds. Note: the duty to preserver and spoliation have been addressed in this Blog < here =">here"> , < here =">here"> and < here =">here"> .]  Spoliation “refers to evidence which is destroyed or substantially altered.”  Gilliam v. Uni Holdings , 201 A.D.3d 83, 86 (1 st Dep’t 2021) (citation omitted).“Under the common-law doctrine of spoliation, when a party negligently loses or intentionally destroys key evidence, the responsible party may be sanctioned.”  Dagro Assoc. I, LLC v. Chevron USA , 206 A.D.3d 793, 794 (2 nd Dep’t 2022); see also, Slezak v. Nassau Country Club , 200 A.D.3d 734 (2 nd Dep’t 2021) (citations and internal quotations marks omitted). When sanctions are sought for spoliation, a party “must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that a trier of fact could find that the evidence would support that claim or defense.”  Phelps-Vachier v. Genovese Drug Stores, Inc. , 207 A.D.3d 582, 583 (2 nd Dep’t 2022) (citations and internal quotation marks omitted); Teodoro v. C.W Brown, Inc. , 200 A.D.3d 999, 1000 (2 nd Dep’t 2021).  “A culpable state of mind for purposes of a spoliation sanction includes ordinary negligence.”  Phelps-Vachier , 207 A.D.3d at 583.  However, when spoliation is based on negligence the party seeking a spoliation sanction is required to “establish that the destroyed evidence was relevant to the party’s claim or defense.”  Phelps-Vachier , 207 A.D.3d at 584 (citations and internal quotation marks omitted). Sanctions for spoliation include, but are not limited to, striking pleadings and negative inferences and “Supreme Court is empowered with broad discretion in determining the appropriate sanction”.  Phelps-Vachier , 207 A.D.3d at 584 (citations and internal quotation marks omitted). Phelps-Vachier is a slip and fall case in which plaintiff’s counsel sent a notice to preserve three hours of video surveillance footage to the defendants.  However, only thirty-five minutes, beginning twelve seconds before the accident, was preserved.  Defendants opposed plaintiff’s spoliation motion pursuant to CPLR 3126 “on the grounds that their failure to preserve the requested footage was inadvertent and the absence of such footage did not deprive the plaintiff of the ability to prove her case.”  Supreme court and the Second Department agreed, although the Appellate Division denied the motion without prejudice to renewal upon the completion of discovery. Slezak was a personal injury action in which plaintiff fell down stairs due to buckling carpeting.  On two occasions, plaintiff failed to avail herself of defendants’ offer to inspect the stairs before the carpeting was removed and replaced.  After plaintiff was advised of the removal, she made a spoliation motion, which was denied.  The Appellate Division affirmed holding that “the plaintiff failed to demonstrate that the removal of the subject carpeting was willful or contumacious, or that the loss compromised the plaintiff’s ability to prove her case.”  Slezak , 200 A.D.3d at 734 (citations omitted). While spoliation often relates to documents and inanimate objects, the Court in Gilliam was faced with a spoliation motion because the personal injury plaintiff (complaining of a back injury) had corrective spine surgery prior to her IME.  “Supreme Court denied defendant’s motion to dismiss but sanctioned plaintiff by precluding her ‘from offering any evidence regarding an injury or surgery to her L4-L5 disc or recovering any damages for said injury or surgery’”, finding that plaintiff was required to keep “body parts in an intact state available to all parties for review”.  To support its decision, supreme court relied on “other trial court decisions and held that a plaintiff who submits to non-emergency and non-life-threatening surgery prior to a court-ordered physical examination has committed spoliation of evidence.”  (Citations and internal quotation marks omitted.)  The First Department disagreed, determinig that supreme court decisions so holding same “should not be followed”, and held that “the condition of one’s body is not the type of evidence that is subject to a spoliation analysis.”  gilliam court noted that spoliation analysis has long been applied to a party’s destruction of inanimate evidence and cited to a litany of illustrative cases with the type of inanimate object that was the subject of each case.> gilliam court noted that spoliation analysis has long been applied to a party’s destruction of inanimate evidence and cited to a litany of illustrative cases with the type of inanimate object that was the subject of each case.> The Appellate Division, Second Department, addressed these issues in its October 5, 2022, decision in Matthews v. Geothermal Energy Options, LLC .  Matthews is a breach of contract case related to the installation of a geothermal HVAC system.  When plaintiff failed to release payment funds due to the souring of the parties’ relationship, the previously installed system components were removed by defendant’s employees.  Plaintiff then commenced a breach of contract action in which he moved for an order striking defendant’s pleading based on the removal of the HVAC system components.  The Appellate Division affirmed the denial of that motion, holding that: Here, the Supreme Court providently exercised its discretion in denying that branch of the plaintiff’s motion which was pursuant to CPLR 3126 to strike the defendants’ pleadings as a sanction for spoliation of evidence. The plaintiff failed to establish that the defendants possessed an obligation to preserve, in anticipation of litigation, the GHVAC component parts that had been installed on the plaintiff’s property. Moreover, although the value of the GHVAC component parts that were installed on the plaintiff’s property is potentially relevant to this litigation, the plaintiff further failed to demonstrate that examination of the particular GHVAC component parts that were installed is necessary to prosecute this action against the . Accordingly, the sanction of striking the defendants’ pleadings was not warranted in this case.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In past articles, we have noted the importance of identifying the statements claimed to be false and misleading. In this regard, we talked about the need to plead the who, what, where, when and how of the alleged fraud. In other words, the plaintiff must allege the first paragraph of any newspaper story. The reason for such pleading is to satisfy the particularity requirement of CPLR § 3016(b).  Under CPLR § 3016(b), a plaintiff alleging fraud must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. 1 In Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008), the Court of Appeals explained that the purpose of CPLR § 3016(b) is to inform a defendant of the complained-of conduct. Notwithstanding, CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud." 2 Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” 3 Thus, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. 4 When the allegation of fraud centers around an omission, the plaintiff must allege a duty to disclose, regardless of whether there is a fiduciary relationship between the parties. Such a duty may arise when the defendant’s superior knowledge of essential facts renders the transaction between the parties without disclosure inherently unfair. 5 We previously wrote about fraud by omission, or fraudulent concealment,  here . The foregoing principles were examined by the Appellate Division, First Department in Beckman Coulter, Inc. v. Jabil Circuit Inc. , 2022 N.Y. Slip Op. 05367 (1st Dept. Sept. 29, 2022) ( here ).  Beckman arose from a contractual dispute between Beckman Coulter, Inc., a producer of diagnostic equipment for medical providers, and Jabil Inc. and Nypro Inc. (collectively, “Jabil”), a manufacturer of printed circuit board assemblies (“PCBAs”) that go into Beckman’s equipment. Pursuant to the terms of a 2017 agreement, Jabil supplied nearly all of the PCBAs that Beckman used. Jabil maintained that Beckman made material misrepresentations and omissions to induce it into the contract. In particular, Jabil claimed that plaintiff misrepresented its historical PCBA volume, payments to third-party PCBA manufacturers, current demand and trends for its portfolio of electronic products, and its commitment to its business. Based upon these misrepresentations and omissions, defendant claimed that it was duped into believing that the relationship would yield a baseline revenue level of $46 million. After the agreement was executed, a number of contractual disputes developed between the parties. Following months of unsuccessful negotiations, Beckman filed a lawsuit for declaratory judgment, injunctive relief, and damages. Jabil filed an answer with counterclaims, two of which were for fraudulent inducement and fraudulent concealment. Plaintiff moved to dismiss the fraud-based counterclaims. Among other arguments, plaintiff noted that the alleged assurances that defendants relied upon ran counter to the agreement, which contained no promise, and expressly foreclosed reliance on any extracontractual representations regarding the amount of PCBAs plaintiff would order.  The motion court granted the motion. The court concluded that the extracontractual representations were barred by the agreement’s disclaimer provision and, in any event, defendants failed to allege any actionable omission or misrepresentation related to revenue projections. On appeal, the First Department modified the order of dismissal to reinstate the counterclaims to the extent they were based on allegations of fraudulent omission, and otherwise affirmed the order. The Court held that the motion court correctly dismissed the fraud counterclaims to the extent they were premised on alleged misrepresentations. Like the motion court, the Court found that Jabil failed to allege any actionable misrepresentations of material fact. 6 The Court noted that the “counterclaims do not actually allege that the historical profit/loss statements or other financial information was falsified or inaccurate.” 7 “Even if the counterclaim allegation that D&B concealed their "actual revenue figures and financials’ implie that the disclosed information was falsified or inaccurate,” said the Court, that allegation was “conclusory speculative” and did “not satisfy the fraud pleading requirement, as the other material facts alleged in the complaint … not sufficient to permit a reasonable inference that the figures disclosed were, in fact, falsified and that the true figures were kept hidden”. 8 In addition, the Court found that the “contractual disclaimers” in the agreement “preclude the fraud claims based on alleged revenue and demand misrepresentations, as Jabil expressly represented that it was entering the deal without relying on any of D&B’s pre-contractual representations with respect to those issues.” See,  e.g. ,  here.=">here." Namely,="Namely," preclude="preclude" claim="claim" when="when" (1)="(1)" is="is" specific="specific" to="to" fact="fact" alleged="alleged" be="be" misrepresented="misrepresented" or="or" omitted;="omitted;" and="and" (2)="(2)" misrepresentation="misrepresentation" omission="omission" does="does" not="not" concern="concern" facts="facts" peculiarly="peculiarly" within="within" knowledge="knowledge" of="of" non-moving="non-moving" party. 9 ="party.9"> “However,” said the Court, “the court should not have dismissed the fraud counterclaims to the extent the claims premised on allegations of a fraudulent omission.” 10 The Court held that “Jabil adequately alleged an actionable omission of material fact based on the allegations that D&B had a duty to disclose their underlying intention and the planned consequences of their acquisition of another company, as this alleged hidden plan was peculiarly within their knowledge and could not have been discovered by Jabil through the exercise of ordinary intelligence or diligence; that D&B failed to disclose this plan; and that D&B knew this plan would negatively impact Jabil’s economic interests in its contractual arrangement with them”. 11 Takeaway When a person claims fraud, he/she typically claims that the alleged wrongdoer 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. For this reason, when alleging fraud, a plaintiff may allege that the defendant made “a misrepresentation or a material omission of fact which was false and known to be false.” 12 Where fraud by omission is claimed, as in Beckman , the plaintiff must allege that the defendant “had special knowledge or information regarding” the transaction “that not ascertainable by the plaintiff[].” 13 If that is done, as in Beckman , the plaintiff will survive a motion to dismiss.  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. Footnotes Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Pludeman , 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Id. at 492. Id. 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 S.C.A. v. Abaplus Intl. Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010)). Slip Op. at *1. Id. Id. (citations omitted). Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). Slip Op. at *1. Id. (citing, Sports Tech. Applications, Inc. v. MLB Advanced Media, L.P. , 188 A.D.3d 619, 620 (1st Dept. 2020)). Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996). Williams v. Sidley Austin Brown & Wood, L.L.P. , 38 A.D.3d 219, 220 (1st Dept. 2007); Selechnik v. Law Off. of Howard R. Birnbach , 82 A.D.3d 1077, 1078-1079 (2d Dept. 2011).

By Jonathan H. Freiberger For any number of reasons, a party asserting a claim or claims in a litigation may decide that it no loner wishes to pursue them.  In such a case, CPLR 3217 outlines the manner in which claims, depending on the stage of litigation, may be discontinued.  Among others, an action can be discontinued without a court order: “by serving upon all parties to the action a notice of discontinuance at any time before a responsive pleading is served or, if no responsive pleading is required, within twenty days after service of the pleading asserting the claim and filing the notice with proof of service with the clerk of the court” (CPLR 3217(a)(1)); or, “by filing with the clerk of the court before the case has been submitted to the court or jury a stipulation in writing signed by the attorneys of record for all parties, provided that no party is an infant, incompetent person for whom a committee has been appointed or conservatee and no person not a party has an interest in the subject matter of the action” (CPLR 3217(a)(2)).  Sometimes a court order is necessary to discontinue a claim.  Thus, CPLR 3217(b) provides that “ xcept as provided in subdivision (a), an action shall not be discontinued by a party asserting a claim except upon order of the court and upon terms and conditions, as the court deems proper.  After the cause has been submitted to the court or jury to determine the facts the court may not order an action discontinued except upon the stipulation of all parties appearing in the action.”  It is this provision that is the subject of today’s Blog article. On September 28, 2022, the Appellate Division, Second Department, decided Emigrant Bank v. Solimano .  Lender in Solimano commenced a mortgage foreclosure action.  Borrower answered the complaint and asserted numerous affirmative defenses including, but not limited to, lack of standing and failure to comply with RPAPL 1304.  [Eds. Note:  this Blog has frequently addressed these defenses.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  Lender moved for summary judgment on the complaint and for an order of reference.  Borrower cross-moved to dismiss the complaint based on her affirmative defenses.  Recognizing “evidentiary errors”, lender withdrew its motion prior to the return date and made a second motion for summary judgment and for an order of reference.  The parties’ motions were denied, the court having found triable issues of fact as to borrower’s affirmative defenses.  Pursuant to CPLR 4311 and 4320 , the matter was referred to a curt attorney for trial and to report to the court. At the close of lender’s case, borrower “made an application pursuant to CPLR 4401 for judgment as a matter of law dismissing the complaint insofar as asserted against her on multiple grounds—that the plaintiff's sole witness was not authorized to testify, and that the plaintiff otherwise had failed to establish its standing and its compliance with the notice requirements of RPAPL 1304 and paragraph 22 of the mortgage.”  [Eds. Note:  this Blog has frequently addressed evidentiary issues in proving affirmative defenses in mortgage foreclosure actions.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]   The referee’s report concluded that due to lender’s evidentiary failures it did not establish its case.  On the day that lender was due to make its motion to confirm the referee’s report, it filed a consent to change counsel “and by cover letter, expressed an intention to discontinue the action.”  Borrower then sent a letter to the referee urging that the court did not have the “authority to grant the plaintiff leave to discontinue absent the consent of all of the parties, and advising that the defendant did not consent to a discontinuance.”  Shortly thereafter, lender moved to discontinue or, in the alternative, to dismiss the action without prejudice.  Borrower cross-moved to confirm the referee’s report and for the entry judgment dismissing the complaint.  Supreme court, inter alia , denied the discontinuance motion reasoning that “once the referee's report was submitted to the court for consideration, a discontinuance of the action could not be ordered by the court without the stipulated consent of the defendant, which was lacking here” and granted borrower’s motion to confirm the referee’s report and to dismiss the complaint. Lender appealed.  The Second Department affirmed and explained why the case presented a matter of first impression amongst the appellate courts of New York:   CPLR 3217(b) permits the discontinuance of an action by a party with leave of court or by a stipulation of the parties before the cause is submitted to the trier of fact for a determination of the facts; but once the cause has been submitted for a determination of the facts, a discontinuance may only be granted upon both leave of court and a stipulation of all parties appearing in the action. While the mechanics of the statute are clear when an action is tried before a judge or jury, no appellate case has yet addressed the question of when an action is considered "submitted to the court" under CPLR 3217(b) when the matter is referred to a referee to hear and report, and the report is thereafter subject to confirmation, rejection, or modification by the Supreme Court. In deciding the matter, the Court noted that once “an action or a proceeding has advanced to the point of deliberation and fact-finding, there can be no discontinuance except by leave of court upon such terms and conditions as the court deems proper and a stipulation of all parties appearing in the action.  In other words, at this juncture, the requirements imposed upon the discontinuing party are double-layered. The refusal by a defendant to consent to a discontinuance, for whatever reason, operates as a veto on the issue, as it prevents the court from even reaching its discretionary authority to consider the requested discontinuance.”  (Citations omitted.) When a matter goes to trial, the Court stated, “the submission of the case to a jury for its findings of fact, or the submission of the case to a court during a bench trial, operates as a bright line separating the discontinuance that may be sought using the pre-deliberative mechanisms of CPLR 3217(a)(2) and (b) from the mechanism of CPLR 3217(b) which attaches once the deliberative phase begins.”  However, the question of when this happens when a matter is referred to a court attorney referee appointed to “hear and report” is not so clear and has not previously been decided by appellate courts in New York.   In deciding the issue, the Court found: as a matter of first impression, that where an action is referred to a court attorney referee to hear and report, the time that is most akin to the submission of the case to the court or the jury for a determination of the facts is the return date of the motion to confirm the referee's report. Prior to that time, the conclusion of the trial before the referee is not final as the referee, while setting forth his or her findings of fact and conclusions of law, has no authority to determine the matter ( see id. § 4320). Likewise, the resulting report is not conclusive as it is subject to confirmation, rejection, or modification by the Supreme Court. The filing of a motion to confirm, reject, or modify the referee's report is subject to the due process right of each of the parties to then be heard on the motion, similar to the closing arguments that are presented prior to the commencement of the deliberative process in actions before a court or a jury. Instead, and logically, the motion's return date is the unique event that sends the referee's report and the parties' fully-submitted arguments to the court for a deliberative determination of the factual and legal issues of the case. That event requires that discontinuances be permitted only upon a stipulation signed by the parties and leave of court ( see id. § 3217 ). Where a referee is appointed to “hear and determine”, “the point at which a party may discontinue a cause of action requiring both leave of court and a stipulation signed by all parties is the conclusion of the evidentiary portion of the trial and the summation arguments of counsel, when the commencement of the deliberative phase of the case begins.” The Court decided additional issues not discussed herein. 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 In general, to “establish prima facie entitlement to judgment as a matter of law in an action to foreclose a mortgage, a plaintiff must produce the mortgage, the unpaid note, and evidence of default.”  M&T Bank v. Barter , 186 A.D.3d 698, 799 (2 nd Dep’t 2020) (citations omitted).  As readers of this Blog know, depending on the defenses raised in borrower’s answer, lender may be required to submit additional proof to meet its prima facie case.  See, e.g ., here , here and here .  For example, when lack of standing or failure to comply with RPAPL 1304 are raised as defenses, lender must demonstrate standing and compliance with RPAPL 1304.  See, e.g ., Wells Fargo Bank, N.A. v. Arias , 121 A.D.3d 973, 973-74 (2 nd Dep’t 2014) (as to standing);  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736 (2 nd Dep’t 2018) (as to RPAPL 1304).  The focus of today’s article is on the default element of a foreclosure action. To establish a payment default a lender may rely on “an admission made in response to a notice to admit ( see CPLR 3212 ; 3123 ), by an affidavit from ‘a person having personal knowledge of the facts’ (CPLR 3212 ), or by other evidence ‘in admissible form.’”  Bank of New York Mellon v. Gordon , 171 A.D.3d 197 (2 nd Dep’t 2019) ( quoting Viviane Etienne Med. Care, P.C. v Country-Wide Ins. Co . , 25 N.Y.3d 498, 507 (2015)) (brackets omitted, hyper-links added).  [Eds. Note: this Blog discussed Gordon < here =">here"> .] Proof of a payment default was one of the issues decided on September 21, 2022, by the Appellate Division, Second Department, in U.S. Bank National Association v. Zakarin .  Lender in Zakarin commenced a residential mortgage foreclosure action in 2010 and moved for summary judgment in 2018.  Borrower opposed the motion by arguing, inter alia , that lender’s submissions were insufficient to “establish, prima facie, the elements of a foreclosure action….”  Borrower appealed from supreme court’s grant on lender’s motion and the Second Department reversed.   In support of the motion lender submitted an affidavit from lender’s loan servicer, in which the affiant failed to aver personal knowledge and, instead, “relied upon her review of certain records maintained by .”  The Court reiterated that when relying on the business records exception to the hearsay rule when trying to make your prima facie case, “a proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker’s business practices and procedures.”  (Citations and internal quotation marks omitted.)  Further, “it is the business record itself, and not the foundational affidavit, that serves as proof of the matter asserted.”  (Citations and internal quotation marks omitted.)  Thus, the Court found: The plaintiff failed to demonstrate, prima facie, the defendant's default in payment under the note. In her affidavit, stated that the defendant failed to make certain payments due under the terms of the note and mortgage, but she failed to identify the records that she relied upon and did not attach those records to her affidavit ( see U.S. Bank N.A. v Ramanababu , 202 AD3d <1139,> 1141; Deutsche Bank Trust Co. Ams. v Miller , 198 AD3d 867 , 868; Wells Fargo Bank, N.A. v Sesey , 183 AD3d 780 , 782). Thus, her assertions as to the defendant's default were inadmissible hearsay ( see Deutsche Bank Trust Co. Ams. v Miller , 198 AD3d <867> at 868; Bank of N.Y. Mellon v DeLoney , 197 AD3d 548 , 550). Contrary to the plaintiff's suggestion, a review of records maintained in the normal course of business does not vest an affiant with personal knowledge ( see U.S. Bank N.A. v Ramanababu , 202 AD3d at 1142; JPMorgan Chase Bank, N.A. v Grennan , 175 AD3d 1513 , 1517). Since 's affidavit was the only evidence of default proffered in support of its motion, the plaintiff failed to establish it prima facie entitlement to judgment as a matter of law.  (Some hyper-links added.)   For the same reasons, the Zakarin Court also rejected lender’s proof of compliance with RPAPL 1304, and stated: The plaintiff failed to establish its strict compliance with RPAPL 1304. The plaintiff relied upon 's affidavit, in which she averred that the RPAPL 1304 notice was sent to the defendant by certified and first-class mail. Although averred that she had personal knowledge of 's record-keeping practices and procedures, the business records she relied upon and attached to the affidavit were created by other entities. did not aver that she had personal knowledge of those entities' business practices and procedures, or otherwise provide a proper foundation for the admission of those records. Moreover, even if the relied upon records were admissible, they failed to establish compliance with the mailing requirements of RPAPL 1304. 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.

Financial statements provide important information about a corporation’s financial health. 1 They give insight into the corporation’s operations, cash flow, and overall financial condition. 2 Investors and shareholders use financial statements to make decisions about whether to purchase the securities of a corporation and, once purchased, the performance of their investment. 3 Given the importance of accurate financial statements to the decision-making process of investors and shareholders, the Securities and Exchange Commission (“SEC” or “Commission”) has brought enforcement actions, or settled potential enforcement actions, when corporations and their officers and directors issue materially false or misleading financial statements to the public. The SEC brought and settled such an action against VMware Inc., Palo Alto, California-based technology company, for misleading investors about its order backlog management practices, which, according to the SEC, enabled the company to push revenue into future quarters by delaying product deliveries to customers, thereby concealing the company’s slowing performance relative to its projections. According to the SEC, beginning in fiscal year 2019, VMware began delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter. The SEC said that VMware shifted tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020. Although VMware publicly disclosed that its backlog was “managed based upon multiple considerations,” noted the SEC, it did not reveal to investors that it used the backlog to manage the timing of the company’s revenue recognition. “As the SEC’s order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance,” said Mark Cave, Associate Director in the Division of Enforcement. “Such conduct is incompatible with an issuer’s disclosure obligations under the federal securities laws.”   The SEC’s order found that VMware violated the antifraud provisions of the Securities Act of 1933, as well as certain reporting provisions of the federal securities laws. Without admitting or denying the SEC’s findings, VMware consented to a cease-and-desist order and agreed to pay an $8 million penalty. A copy of the SEC’s announcement can be found here . A copy of the SEC’s order can be found here . Footnotes Maverick, J.B., Why Do Shareholders Need Financial Statements? , Investopedia (May 24, 2022) ( here ). 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 Jonathan H. Freiberger A notice of pendency is a provisional remedy available to litigants seeking a judgment that affects title to real property.  5303 Realty Corp. v. O&Y Equity Corp. , 64 N.Y.2d 313 (1984).  The rules concerning notices of pendency are found in Article 65 of the CPLR.  As the name suggests, a notice of pendency puts the world on constructive notice that an action has been commenced that may affect the title to the property and, accordingly, “ person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party.”  CPLR § 6501 .   The notice of pendency is a powerful tool because “the statutory scheme permits a party to effectively retard the alienability of real property without any prior judicial review.”  5303 Realty , 64 N.Y.2d at 320.  Also, while CPLR § 6514 permits motion practice to cancel a notice of pendency, the “court’s scope of review is circumscribed” and “the likelihood of success on the merits is irrelevant to determining the validity of the notice of pendency.” Id .  “To counterbalance the ease with which a party may hinder another’s right to transfer property” the law requires “strict compliance with the statutory procedural requirements.”  Id. (citing, Israelson v. Bradley , 308 N.Y. 511 (1955)).  The ability to file a notice of pendency is deemed to be “an extraordinary privilege” and if “the terms imposed are not met, the privilege is at an end.”  Id .   Among other requirements, a notice of pendency “is effective only if, within thirty days after filing, a summons is served on the defendant.”  CPLR § 6512 ; see also , NYCTL 1999-1 Trust v. Chalom , 47 A.D.3d 779 (2nd Dep’t 2008) (finding a notice of pendency invalid when summons not served within 30 days).  Similarly, a notice of pendency is valid for three years from the date of filing and “ efore expiration of a period or extended period, the court, upon motion … for good cause shown, may grant an extension for a like additional period.”  CPLR § 6513 .  Courts have noted that the requirement that any request for an extension “must be requested prior to the expiration of the prior notice” is an “exacting rule” and a “notice of pendency that has expired without extension is a nullity.”  Matter of Sakow , 97 N.Y.2d 436, 442 (2002) (citations omitted).  Failure to follow the rules regarding notices of pendency could yield harsh results, but for good reason.  The New York Court of Appeals has held that “an expired or cancelled notice of pendency may not be refiled on the same cause of action or claim.”  Id . At 443.  In this regard, the Court stated that: Filing another notice of pendency after the previous notice has expired or been cancelled renders the time limit in CPLR 6513 useless and undercuts an important incentive for diligent practice. We prefer the certainty of the “no second chance rule,” as it preserves the delicate balance between the interests of the claimant in the preservation of the status quo against the equally legitimate interests of the property owner in the marketability of his title. Id . (citation and internal quotation marks omitted). Article l3 of the RPAPL governs mortgage foreclosure actions.  Section 1331 of the RPAPL requires that “at least twenty days before a final judgment directing a sale is rendered, shall file in the clerk's office of each county where the mortgaged property is situated a notice of the pendency of the action, which shall specify, in addition to other particulars required by law, the date of the mortgage, the parties thereto and the time and place of recording.”  Compliance with RPAPL § 1331, however, would be impossible in light of the “no second chance rule” if a notice of pendency previously filed, expired or was otherwise cancelled.  CPLR § 6516 , which was enacted in 2005 to address this issue, provides that successive notices of pendency may be filed in a mortgage foreclosure action if an earlier notice expired or otherwise became ineffective to enable a plaintiff to comply with RPAPL § 1331.  CPLR § 6516(a).  Otherwise, CPLR § 6516(c) codifies the “no second chance rule”.  It should be noted that the saving provision of CPLR § 6516 only applies to mortgage foreclosure actions and, by its specific terms, does not apply to mechanic’s lien foreclosures.  CPLR § 6516(a). On September 14, 2022, the Appellate Division, Second Department, decided U.S. Bank Trust, N.A. v. Green-Stevenson .  U.S Bank is a mortgage foreclosure action with a rather tortured history.  Suffice it to say, borrower moved to cancel a notice of pendency in the action because lender previously cancelled a notice of pendency in a prior action. Supreme court denied the motion and borrower appealed.  The Second Department affirmed on this point.  The Court noting the exception to the “no second chance rule,” stated: However, as an exception to the general rule, CPLR 6516(a) provides that, " n a foreclosure action, a successive notice of pendency may be filed to comply with , notwithstanding that a previously filed notice of pendency in such action or in a previous foreclosure action has expired pursuant to or has become ineffective because service of a summons had not been completed within the time limited by , whether or not such expiration or such ineffectiveness has been determined by the court." *   *   * Contrary to the defendants' contention, the plaintiff did not improperly file a successive notice of pendency when it filed the notice of pendency in this action, since CPLR 6516(a) specifically provides that a successive notice of pendency may be filed under the circumstances present here. Accordingly, the Supreme Court properly denied the defendants' motion to cancel the notice of pendency filed in this action.  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 a plaintiff asserting a derivative claim seeks to recover for injury to the business entity. A plaintiff asserting a direct claim seeks redress for injury to himself/herself individually. “The distinction between derivative and direct claims is grounded upon the principle that a stockholder does not have an individual cause of action that derives from harm done to the corporation but may bring a direct claim when the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation.” 1 Sometimes, the distinction between the two types of actions is not readily apparent. 2 Direct vs. Derivative Examined As noted, where the wrong complained of is directed against a corporation, the claim belongs to the entity. The shareholder does not have an individual claim, even if the shareholder loses the value of his/her shares or incurs personal liability in an attempt to keep the corporation solvent. 3 In determining whether a claim is direct or derivative, “a court must look to the nature or the wrong and to whom the relief should go.” 4 Specifically, the court should consider “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).” 5 “The pertinent inquiry is whether the thrust of the plaintiff’s action is to vindicate his personal rights as an individual and not as a stockholder on behalf of the corporation.” 6 The plaintiff must show that the duty allegedly breached was owed to the shareholder, and that he/she can prevail without showing an injury to the corporation. 7 If the individual claim of harm is “confused with or embedded” within the harm to the corporation, then it must be dismissed. 8 “The lost value of an investment in a corporation is quintessentially a derivative claim by a shareholder.” 9 distinguishing between direct and derivative claims. (e.g., here, here and here.)> distinguishing between direct and derivative claims. (e.g., here, here and here.)> In today’s article, this Blog looks at Johnson v. Cestone, 2022 N.Y. Slip Op. 33011(U) (Sup. Ct., N.Y. County Sept. 8, 20220 (here). In Johnson, the court dismissed breach of contract claims because the plaintiff failed to demonstrate that the claims belonged to her as opposed to the entities she sued. Johnson arose from payments plaintiff made to the defendant entities between 2011 and 2014. Plaintiff alleged that the defendant entities, as well as several of their officers or principals, provided her with inflated projections and made other misrepresentations, promises, and omissions to induce her to invest in the businesses. Plaintiff claimed that after investing her money, defendants grossly mismanaged the entities, such that she recouped only a fraction of the $25 million she contributed. Plaintiff also alleged that defendants breached their agreement to handle her investments with ordinary care and reasonable diligence, and that her investments in certain entities would be deployed only for financing, production or management fees after she recouped her investment, plus a 20% return. Following motion practice and discovery, defendants moved for summary judgment on, among others, plaintiff’s breach of contract claims. Defendants argued that plaintiff alleged only derivative harms that could be redressed only through a derivative litigation. The motion court agreed with defendants. The court found that plaintiff did not allege any direct harm to herself. Instead, the gravamen of her complaint, said the motion court, was that defendants did not handle her investments with ordinary care and reasonable diligence as promised – i.e., that defendants mismanaged her investment. 10 “The nature of this alleged injury,” held the court, “is derivative.” 11 The motion court rejected plaintiff’s argument that defendants failed to use the funds as promised – i.e., that defendants breached their promise not to use the funds she contributed to one of the entities for financing, production or management fees until she recouped her investment plus a 20% return. 12 In doing so, the motion court noted that even if the claim was to some extent a direct one, it was “confused with or embedded in the harm to the corporation”. 13 The court explained that “ ven assuming that defendants deployed financing, production or management fees from investment before she recouped her investment plus a 20% return (as opposed to using her investment for other, allowable purposes), any resulting injury embedded in the harm the defendants’ alleged mismanagement caused to the business entity.” 14 “In this regard,” said the court, plaintiff “allege that Worldview Inc. and Holdings LLC were paid ‘exorbitant financing, management and/or production fees in connection with nearly all of the film investments that it made – oftentimes directly from investor money,’ and that these fees were ‘contrary to industry standards’”. 15 “The harm this mismanagement caused”, concluded the court, “is inextricably intertwined with the harm claims occurred as a result of defendants misusing her funds for financing, production or management fees.” 16 Plaintiff also alleged that she entered into an agreement with defendants WEC II, Holdings LLC and Worldview Inc. pursuant to which the funds she loaned to WEC II would not be deployed until the required minimum capital raise of $30 million was reached for the fund and, that investment would be handled with, at a minimum, ordinary care and reasonable diligence. She also alleged that pursuant to the agreement, “no financing, production and and/or management fees would be paid out of funds contributed by to WEC I. Plaintiff maintained that these defendants materially breached the agreement by “causing financing, production and/or management fees to be paid to Worldview Inc. and/or Holdings” and by “deploying more than $7 million of funds loaned to WEC II despite the fact that the minimum capital raise of $30 million had never been reached.” 17 Plaintiff further alleged that these defendants failed to engage in any reasonable care in managing the funds, including transferring at least $6 million to without any agreement in place. Like the other breach of contract allegations, the motion court found the foregoing allegations to be derivative in nature. Takeaway The difference between a direct and derivative claim is not always easy to discern. For many practitioners, even those who devote most of their practice litigating derivative claims, the distinction between the two types of claims can be elusive. Nuance and subtlety often rule the day, leading to confusion and uncertainty. The consequences of such confusion can (and often will) result in dismissal of one’s claims. Footnotes Accredited Aides Plus, Inc. v. Program Risk Mgmt., Inc., 147 A.D.3d 122, 132 (3d Dept. (2017) (citation and internal quotation marks omitted). Yudell v. Gilbert, 99 A.D.3d 108, 113 (1st Dept. 2012). Abrams v. Donati, 66 N.Y.2d 951, 953 (1985); Serino v. Lipper, 123 A.D.3d 34, 40 (1st Dept. 2014). Tooley v. Donaldson Lufkin & Jenrette, Inc., 845 A.D.2d 1031, 1038 (Del. 2004). Yudell, 99 A.D.3d at 114 (internal quotation marks and citations omitted); Maldonado v. DiBre, 140 A.D.3d 1501, 1503-1504 (3d Dept. 2016). Maldonado, 140 A.D.3d at 1504 (internal quotation marks and citation omitted). Yudell, 99 A.D.3d at 114. Serino, 123 A.D.3d at 40; Patterson v. Calogero, 150 A.D.3d 1131, 1133 (2d Dept. 2017) (even where individual harm is claimed, if it is confused with or embedded in the harm to the corporation, it cannot stand separately). Serino, 123 A.D.3d at 41. Slip Op. at *5. Id. (citing, Sajust, LLC v. Mendelow, 198 A.D.3d 582, 582-583 (1st Dept. 2021); and Yudell, 99 A.D.3d at 115). Id. at *6. Id. (quoting, Serino, 123 A.D.3d at 40). Id. Id. (quoting, the second amended complaint). Id. at 6- 7. Id. at *10 (quoting, the second amended complaint). 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 One of the elements of a fraud claim that plaintiffs have difficulty satisfying is justifiable reliance. As evident from the reported decisions, the justifiable reliance element is most often used by defendants to secure dismissal of the claim against them. In LIK Hospitality LLC v. Otway , 2022 N.Y. Slip Op. 32979(U) (Sup. Ct., N.Y. County Aug. 31, 2022) ( here ), a case involving claims of, inter alia , fraudulent inducement, the justifiable reliance element was used by defendants to secure dismissal of the claim. As discussed below, their efforts were not met with success. LIK Hospitality arose from an agreement to operate a food concession within a bar at a Manhattan theater. Plaintiff claimed that it never fully operated the concession within the space. According to plaintiff, after it agreed to operate the concession, it discovered that the kitchen was not actually a functional kitchen, proper flooring was missing, and the wiring and ventilation systems required extensive repairs. Plaintiff alleged that defendants were aware of, and fraudulently concealed, the poor condition of the premises in order to induce it into entering the agreement.  Plaintiff further alleged that it incurred additional and unexpected costs to repair and renovate the premises and was nonetheless still unable to fully operate the business due to the poor condition of the premises, in addition to restrictions resulting from the COVID-19 pandemic and consequent restrictions. When renovations were finally completed, the fire department issued a safety violation for blocking an emergency exit path with a bartop, barstools and table and chairs. To cure the violation which, it alleged, defendants had known about, defendants removed all of plaintiff’s dining furniture except one small table rendering the space unusable as a food concession and then sold food directly to theatergoers using the name of Foxface without plaintiff’s permission, resulting in an additional loss of income to plaintiff. Plaintiff alleged six causes of action – (1) fraudulent inducement (against defendants Otway, the bar and the theater), (2) breach of contract (against the bar), (3) quantum meruit (against the bar), (4) unjust enrichment (against the bar), (5) trademark infringement (against the bar), and (6) conversion (against all defendants).  Defendants moved to dismiss. We discuss the motion as it related to the fraudulent inducement claim below. Defendants claimed, among other things, that plaintiff failed to satisfy the justifiable reliance element of the claim. In that regard, defendants argued that plaintiff could not claim it justifiably relied on any misstatement because it could have discovered the alleged problems with ordinary diligence.  As argued in its memorandum in opposition to the motion, plaintiff maintained that the problems were hidden such that a professional inspector could not have determined the true state of the premises. Relying on Dygert v. Leonard , 138 A.D.2d 793, 795 (3d Dept. 1988), plaintiff maintained that it was an issue of fact whether ordinary diligence could have discovered the poor condition of the premises and the obstruction of the emergency exit pathway. Dygert involved the purchase of a house. There, the plaintiff alleged that the defendants had performed extensive work on the foundation prior to the purchase. On the issue of fraud, the Court stated: “Whether representations were made to plaintiffs, whether such representations induced plaintiffs to purchase the house, what the actual condition of the house foundation was, whether defendants were aware of that condition and whether plaintiffs could have discovered such condition in the exercise of reasonable diligence, all constitute issues of fact which require resolution by trial, not motion.” 1 In LIK Hospitality , the motion court denied the motion. The court found that “the amended complaint sufficiently detailed, for pleading purposes, to support a claim for fraudulent inducement.” 2 The motion court explained that “plaintiff sufficiently allege[] that it justifiably relied on the defendants’ representations regarding the conditions and suitability of the premises for the operation of a food concession, that it would have exclusive rights to sell food at the theater, that those representations were false when made, that they were made with the purpose of inducing the plaintiff the enter the agreement, and that the plaintiff sustained damages as a consequence of such false representations.” 3 Takeaway As noted in the introduction of this article, one of the more “nettlesome” elements of a fraud claim is justifiable reliance. 4 Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry. 5 For this reason, the courts look to whether the plaintiff had the “means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into” and whether he made “use of those means”. 6 If the plaintiff does not do so, “he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” 7 After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence. 8 In LIK Hospitality , the motion court found that, for pleading purposes, plaintiff could not have discovered the truth about the condition of the premises with the exercise of ordinary diligence. While no explanation was provided by the motion court, it appears that the court was persuaded by plaintiff’s argument that even a professional inspector would not have been able to detect the problems. That argument was apparently based upon the factual allegations in the complaint. LIK Hospitality , therefore, highlights the importance of providing detailed facts in support of a fraud claim and the fact-specific nature of the court’s inquiry. Footnotes Id. at 795. Slip Op. at *3. Id. at *3-*4. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Id. 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). Id. (internal quotation marks omitted). KNK Enters. Inc. v Harriman Enters., Inc. , 33 A.D.3d 872 (2d Dept. 2006). 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.