By: Jeffrey M. Haber On many occasions, we have written about Ponzi schemes that have been the subject of enforcement actions brought by, and/or settlements with, the Securities and Exchange Commission (“SEC” or the “Commission”). E.g ., here , here , here , and here . It never ceases to amaze us how often people try to run a Ponzi scheme and do so by exploiting the trust and friendship that exist in groups of people who have something in common, such as a religious group, an ethnic group, or an immigrant community – also known as affinity fraud. 1 here,=">here," >here.=">here."> Today, we examine two enforcement actions brought by the SEC involving Ponzi schemes , one of which also targeted the Haitian-American community. SEC v. Royal Bengal Logistics, Inc. On June 26, 2023, the SEC announced (here) that it brought charges against Sanjay Singh, a resident of Broward County, Florida, and his trucking and logistics company, Royal Bengal Logistics Inc. (“RBL”), for fraudulently raising approximately $112 million from as many as 1,500 investors through an unregistered securities offering that primarily targeted Haitian Americans. See SEC v. Royal Bengal Logistics, Inc., et al. , Case 0:23-cv-61179-AHS (S.D. Fla. 2023). According to the SEC, since at least August 2019, defendants operated a Ponzi scheme and affinity fraud, which targeted South Florida’s Haitian-American community. As explained in the SEC’s complaint (here), defendants offered high-yield investment programs that purportedly generated 12.5% to 325% of “guaranteed” returns.  The SEC claimed that defendants promised investors their money would be used to grow RBL’S operations and increase RBL’S fleet of semi-trucks and trailers. Among other things, defendants allegedly assured investors and prospective investors that their investment programs were safe, that RBL’S business did not depend on investor funds because it generated up to $1,000,000 per month, and that they had a fleet of over 200 semi-trucks. The SEC alleged that, in truth, for almost four (4) years, RBL had been operating at a loss of over $18 million. Without sufficient revenue to pay returns owed to investors, said the SEC, defendants used approximately $70 million of new investor money to pay promised returns and redemptions to existing customers. In addition, Singh allegedly misappropriated at least $14 million of investor funds for himself and others, including the relief defendants (defined below), who did not provide any legitimate services for those investor funds. Defendants also allegedly diverted over $19 million to two brokerage accounts controlled by Singh, who allegedly engaged in highly speculative equities trading on margin, ultimately losing more than $1 million of investor money. The SEC alleged that defendants did not disclose to investors and prospective investors their misappropriation of investor funds. Nor, said the SEC, did they disclose that investor funds would be used to trade hundreds of millions of dollars in equities on margin. The SEC claimed that, as of February 2023, RBL’S bank accounts had declined to approximately $2.1 million. The SEC further claimed that RBL would be be unable pay the interest and principal owed to hundreds of investors absent an influx of new investor money in perpetuation of the scheme. “As alleged in our complaint, Singh targeted many members of the Haitian-American community to raise money in a Ponzi-like scheme to enrich himself,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “We are committed to holding accountable individuals like Singh who prey on investors through lies and deceit.” The SEC filed its complaint in the United States District Court for the Southern District of Florida. The Commission charged defendants with violating the registration and anti-fraud provisions of the federal securities laws. The complaint also named Singh’s spouse and the spouse of RBL’s Vice President of Business Development as relief defendants.  The Court granted the SEC’s request for emergency relief, including preliminary injunctive relief, asset freezes, the appointment of a receiver, and an order prohibiting the destruction of documents. The SEC is also seeking an officer and director bar against Singh and permanent injunctions, civil money penalties, and disgorgement of ill-gotten gains with prejudgment interest against both of the defendants and the relief defendants. SEC v. Baston On June 23, 2023, the SEC brought charges against Wilson Baston (a/k/a Chanon Gordon) for defrauding numerous investors in a Ponzi scheme, in which he raised millions of dollars through dozens of transactions purportedly to fund real estate investments, but frequently used the money to instead pay off earlier investors and for personal expenses. See SEC. v. Baston , Case 1:23-cv-05347 (S.D.N.Y. 2023). As noted, Baston involved a Ponzi scheme. It was conducted by defendant, a convicted felon who allegedly used the alias “Chanon Gordon” to conceal his true identity and criminal history while raising millions of dollars in investments from dozens of his investors. According to the SEC, since at least 2018, Defendant solicited more than $10 million in investments based on the false representation that his purported business, the Gordon Management Group (“GMG”), would use investor funds for real estate-related transactions and repay investors, with substantial interest, using the profits from such transactions. The SEC alleged that, contrary to defendant’s representations, defendant did not use investors’ funds as promised and instead used a substantial portion of the funds to pay for unrelated expenses and to make payments to other investors in a Ponzi-like manner. The SEC said that in many instances, defendant issued promissory notes to investors that memorialized their investments in GMG. Defendant allegedly raised at least approximately $4 million through transactions involving notes. Pursuant to these notes and related documents, said the SEC, defendant often represented that he and GMG would use investors’ funds to facilitate real estate transactions through (i) the advancement of closing costs to third-party real estate purchasers or (ii) the making of a down payment to secure a sales contract on a particular property and resell it to a third-party purchaser. According to the SEC, defendant typically promised to repay investors their principal with a high rate of interest equal to up to 25% of the principal within weeks of their investments. In some instances, said the SEC, defendant also purported to pledge collateral to the investors that he either did not own or significantly overvalued. The SEC also alleged that defendant offered investment contracts in some cases, in which he agreed to pay investors a percentage of net profits (with a guaranteed minimum) on the relevant real estate transaction, in addition to a fixed rate of interest on their principal. As explained by the SEC in its complaint ( here ), to carry out his scheme, defendant used bank accounts in the name of GMG. For example, noted the SEC, defendant directed that investors transmit their funds to GMG accounts and accessed GMG accounts to use such funds for cash withdrawals, personal expenses, and repayments to other investors. The SEC further alleged that, with little cash left in GMG accounts, defendant resisted repaying investors their promised principal, interest, and/or guaranteed share of purported transaction profits. After providing various excuses for delays in repayments, said the SEC, defendant allegedly stopped responding to communications from several investors, who had lost large amounts of money as a result of defendant’s fraudulent conduct. “As we allege in our complaint, deceived investors by using an alias to conceal his criminal history and by initially making payments to create the false appearance of a successful investment strategy,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “This case is yet another example of the SEC’s constant efforts to stop those who profit from lies at the expense of investors.” The SEC filed its complaint in United States District Court for the Southern District of New York. The Commission charged defendant with violating the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934. The SEC seeks permanent injunctive relief; disgorgement plus prejudgment interest; a civil penalty; a conduct-based injunction, which, among other things, would prohibit his future participation in the sale of promissory notes and investment contracts; and an officer and director bar. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York brought criminal charges against defendant ( here ). The government charged defendant with one count of wire fraud and one count of securities fraud, which, if convicted, carries a maximum sentence of 20 years in prison for each count, and one count of aggravated identity theft, which, if convicted, carries a two-year mandatory sentence in addition to any sentence imposed.  Commenting on the indictment ( here ), 2 U.S. Attorney Damian Williams said: “As alleged, used a fake name to conceal his prior convictions and to solicit more than $10 million as part of a series of brazen real estate scams against innocent New Yorkers.  Today’s arrest demonstrates this Office’s commitment to stopping recidivist fraudsters like and to seeking justice for victims of financial frauds.” FBI Assistant Director in Charge Michael J. Driscoll also comments, stating: “As alleged, the defendant ran a fraudulent scheme which used funds intended for real estate investment to repay other investors or use on lavish personal expenses.  This fraud, like many Ponzi schemes, guaranteed large returns on investment, but proved too good to be true.”  Footnotes In 2014, the SEC issued an investor alert about affinity fraud. The alert can be found here . It is important to remember that the charges in the indictment ( here ) are merely accusations, and defendant is presumed innocent unless and until proven guilty. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Under Section 10(a) of the Federal Arbitration Act (“FAA”), a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 1 Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. 2 Importantly, the doctrine does not apply to the facts. 3 Application of the doctrine is limited. 4 It is a doctrine of last resort. 5 It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. 6 The doctrine is “limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” 7 To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. 8 Essentially, the movant must show that the arbitrator “willfully flouted the governing law by refusing to apply it.” 9 The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” 10 The Appellate Division, First Department recently examined the manifest disregard doctrine in Matter of Scientific Games Corp. v. Mohawk Gaming Enterprises LLC , 2023 N.Y. Slip Op. 03423 (1st Dept. June 22, 2023) ( here ). As discussed below, the Court held that the arbitrator did not manifestly disregard the law in holding that the arbitration clause agreed upon by the parties permitted class treatment of plaintiffs’ claims. e.g., the facts and arguments) comes from the parties’ briefing on appeal.> e.g., the facts and arguments) comes from the parties’ briefing on appeal.> Scientific Games concerned the lease by plaintiffs Light & Wonder, Inc. (f/k/a Scientific Games Corporation) and LNW Gaming, Inc. (f/k/a SG Gaming, Inc.) (together, “LNW” or “plaintiffs”) of automatic card shufflers to defendant Mohawk Gaming Enterprises LLC (“Mohawk”), which used them in its casino. On November 9, 2020, Mohawk filed a class arbitration claim with the American Arbitration Association (“AAA”) alleging antitrust violations against LNW on behalf of itself and all other similarly situated consumers. Among other things, plaintiffs alleged that LNW charged consumers ( i.e. , casinos) supracompetitive prices for inferior products. Plaintiffs maintained that the agreement with Mohawk allowed their claims to be brought in arbitration as a class action. In this regard, the arbitration clause provided: “The parties agree that any and all controversies, disputes or claims of any nature arising directly or indirectly out of or in connection with this Agreement (including without limitation claims relating to the validity performance, breach, and/or termination of this Agreement) shall be submitted to binding arbitration for final resolution.” Whether plaintiffs’ claims could be decided on a class-wide basis was hotly contested. Consequently, the parties agreed to brief the issue before addressing the merits of the action.  On February 8, 2022, the Arbitrator issued a Partial, Final Clause Construction Award regarding the threshold issue of class arbitrability. (the “Award”). After examining the applicable U.S. Supreme Court jurisprudence on the matter, 11 the Arbitrator concluded that the language of the arbitration clause was “exceedingly broad” and permitted class arbitration. On February 11, 2022, LNW petitioned the court to vacate the Award. Mohawk filed a cross-motion to confirm the Award on March 11, 2022.  The motion court denied LNW’s petition and granted Mohawk’s cross-motion. First, the motion court held that the Arbitrator did not exceed his authority under the FAA because it was “clear that the parties submitted to the arbitrator the question of whether the arbitration agreement permitted class arbitration,” and “the arbitrable decision … clearly construe and applie the contract.” As such, the motion court concluded that, pursuant to the U.S. Supreme Court’s decision in Oxford Health , confirmation of the Award was required.  Second, the motion court held that the Arbitrator did not manifestly disregard the law, because the Arbitrator did not refuse to apply a governing legal principle. In that regard, the motion court found that the Arbitrator “grappled with cases, understood the principles, and, as the designated decider of the question, made a ruling.” The motion court also found that the Arbitrator provided a “robust, good faith analysis” of the issues. In short, the motion court held that merely because the Arbitrator “reached an outcome adverse to the petitioner mean that he disregarded the relevant law.”  LNW appealed. LNW argued, among other things, that the Arbitrator manifestly disregarded the law – namely, the U.S. Supreme Court’s decisions in Oxford Health and Lamps Plus . LNW claimed that the motion court addressed an issue that was not argued – i.e. , whether the U.S. Supreme Court’s decision in Lamps Plus overturned Oxford Health . In doing so, said LNW, the motion court conflated Oxford Health’s holding that “the arbitrator ha the power, based on the parties’ … agreement, to reach a certain issue ” with the standard for establishing when an Arbitrator has in fact exceeded that broad power. In Oxford Health , the Supreme Court considered whether the arbitrator “exceeded powers” under Section 10(a)(4) of the FAA. 12 The arbitrator had not, according to the Supreme Court, because he had not “strayed from his delegated task of interpreting contract”, even if that interpretation was wrong. 13 However, the Supreme Court said that an arbitral award should be set aside when the arbitrator goes beyond “perform task poorly” and instead “abandon their interpretive role”. 14 Notably, the Supreme Court did not decide whether the arbitrator manifestly disregarded his authority in reaching his conclusion about the meaning of the agreement. Instead, the Supreme Court limited its analysis to the question of whether the arbitrator exceeded his authority to construe the question of arbitrability under an agreement. In Lamps Plus , the U.S. Supreme Court considered whether an agreement that was ambiguous as to the availability of class arbitration could be read to permit class arbitration. The Supreme Court concluded that it could not. 15 The Supreme Court explained that “ lass arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration” as it “sacrifices … informality … and makes the process slower, more costly, and more likely to generate procedural morass”. 16 The Supreme Court concluded that “courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding that the party agreed to do so.” 17 Based upon the foregoing, LNW argued that had the motion court applied the proper legal standard, it would have determined that the Arbitrator manifestly disregarded the law as set forth by Lamps Plus and held that the arbitration clause at issue did not permit class arbitration. Plaintiffs argued, among other things, that Oxford Health provided the foundation for the motion court’s decision because there, the U.S. Supreme Court addressed a situation substantially similar to the facts before the First Department: the arbitration clause covered “any dispute”; the arbitrator “focused on the text of the arbitration clause”; and, based on his analysis, the arbitrator “found that the arbitration clause unambiguously evinced an intention to allow class arbitration.” 18 Plaintiffs noted that other courts also have upheld the findings by arbitrators with respect to class arbitrability, even when the clauses at issue did not include the same “exceedingly broad language” found in Scientific Games . 19 Plaintiffs maintained that it was not necessary to “incant” the words “class arbitration” or similar words in order to affirm the Award. According to plaintiffs, multiple courts have explicitly held that the U.S. Supreme Court has never established “a bright line rule that class arbitration is allowed only under an arbitration agreement that incants ‘class arbitration’ or otherwise expressly provides for aggregate procedures.” 20 Plaintiffs further argued that Lamps Plus had no application to the case at hand. In Lamps Plus , plaintiffs said, the issue before the U.S. Supreme Court was narrow: “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” 21 In holding that “it cannot”, 22 plaintiffs explained that the U.S. Supreme Court “defer to the Ninth Circuit’s interpretation and application of state law and thus accept that the agreement should be regarded as ambiguous.” 23 Thus, plaintiffs concluded that the U.S. Supreme Court had no occasion to decide what contractual basis may support a finding that a contract is ambiguous regarding class arbitration.  The First Department agreed with plaintiffs and unanimously affirmed. The First Department held that the Arbitrator “did not manifestly disregard the applicable law in reasoning that ‘the plain meaning of the words of the arbitration clause unambiguously permitted class arbitrations.’” 24 The Court explained that, as noted by the Arbitrator, plaintiffs “intentionally broadened the standard AAA arbitration clause in five different ways—to ‘any,’ the parties added ‘any and all’; to ‘controversies, disputes or claims,’ they added, ‘of any nature’; ‘arising directly or indirectly’; ‘including without limitation’; ‘arising out of’; or ‘in connection with’—because ‘it wanted the Arbitration Clause to cover every type of dispute, controversy, or claim that could conceivably be related—directly or indirectly—to the Agreement.’” 25 The Court noted that the Arbitrator had done that which the parties bargained for – i.e. , to construe the arbitration clause. 26 As noted by the U.S. Supreme Court in Oxford Health , “ ecause the parties ‘bargained for the arbitrator’s construction of their agreement,’ an arbitral decision ‘even arguably construing or applying the contract’ must stand, regardless of a court’s view of its (de)merits.” 27 The Court concluded that “ o review the merits of that interpretation in the face of an arbitration clause that the arbitrator found unambiguous and premised on a construction of the contract would be inconsistent with Oxford Health Plans (569 US at 569 <“so the sole question for us is whether the arbitrator (even arguably) interpreted the parties' contract, not whether he got its meaning right or wrong”> ), and we decline to do so.” 28 Footnotes 9 U.S.C. § 10(a)(1)-(4). Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S , 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co. , 306 F.3d 1214, 1216 (2d Cir. 2002) (citing, DiRussa v. Dean Witter Reynolds Inc. , 121 F.3d 818, 821 (2d Cir. 1997)). See also Matter of Daesang Corp. v. NutraSweet , 167 A.D.3d 1, 15-16 (1st Dept. 2018) (citing, Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 480-81 (2006)), lv. denied , 32 N.Y.3d 915 (2019)). Wein , 6 N.Y.3d at 483. Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules , 867 F.2d 130, 133 (2d Cir. 1989). Duferco , 333 F.3d at 389. Id. Daesang , 167 A.D.3d 1, 15-16. Wallace v. Buttar , 378 F3d 182, 189 (2d Cir. 2004) (quoting, Banco de Seguros del Estado v. Mutual Mar. Off., Inc. , 344 F.3d 255, 263 (2d Cir 2003)). See also Wien , 6 N.Y.3d at 480-81 (footnotes omitted). Westerbeke Corp. v. Daihatsu Motor Co. , 304 F.3d 200, 217 (2d Cir. 2002). Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp. , 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010). Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp. , 559 U.S. 662 (2010), Oxford Health Plans LLC v. Sutter , 569 U.S. 564 (2013), and Lamps Plus, Inc. v. Varela , 139 S. Ct. 1407 (2019). 569 U.S. at 566. Id. at 572. Id. at 571-72. 139 S. Ct. at 1412. Id. at 1416 (quoting, AT&T Mobility LLC , 563 U.S. at 348). Id. (citations omitted). Oxford Health , 569 U.S. at 566-68. E.g. , Jock v. Sterling Jewelers, Inc. , 942 F.3d 617 (2d Cir. 2019) (affirming award where arbitration clause covered “any dispute”); Wells Fargo Advisors LLC v. Tucker , 373 F. Supp. 3d 418 (S.D.N.Y. 2019) (affirming award where arbitration clause covered “any dispute”); NCR Corp. v. Goh , No. 16-cv-00127, 2017 WL 2345695 (W.D. Wash. May 30, 2017) (affirming award where arbitration clause covered “every possible claim”). Sutter v. Oxford Health Plans LLC , 675 F.3d 215, 222 (3d Cir. 2012), aff’d , Oxford Health , supra ; see also Jock , 646 F.3d at 121 (“It is equally important to note that the Court declined to hold that an arbitration agreement must expressly state that the parties agree to class arbitration.”); Vazquez v. ServiceMaster Glob. Holding, Inc. , No. 09-cv-5148, 2011 WL 2565574, at *3 n.1 (N.D. Cal. June 29, 2011) (“The Supreme Court has never held that a class arbitration clause must explicitly mention that the parties agree to class arbitration in order for a decisionmaker to conclude that the parties consented to class arbitration.”). Lamps Plus , 139 S.Ct. at 1415 (quoting, Stolt-Nielsen , 559 U.S. at 684). Id. Id. Slip Op. at *1. Id. (citing, Oxford Health , 569 U.S. at 572). Id. Id. (quoting, Oxford Health , 569 U.S. at 569) (internal quotation marks omitted). 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 Today’s Blog involves motions to renew and reargue and successive motions for summary judgment. When a motion is denied, a movant has several options.  One can accept the loss and move on.  An appeal can also be pursued.  Additional options are also available under CPLR 2221 , which permits a movant to move for renewal or reargument.  A motion to renew is “properly made to the motion court (CPLR 2221) to draw its attention to material facts which, although extant at the time of the original motion, were not then known to the party seeking renewal and, consequently, were not placed before the court.”  Matter of Beiny , 132 A.D.2d 190 (1 st Dep’t 1987) (citation omitted); see also Boreanaz v. Facer-Kreidler , 2 A.D.3d 1481, 1482 (4 th Dep’t 2003).  Renewal is “granted sparingly and is not a second chance freely given to parties who have not exercised due diligence in making their first presentation.”  Acevedo v. Nurmamatov , 206 A.D.3d 488 (1 st Dep’t 2022) (citation and internal quotation marks omitted).  Accordingly, renewal motions should be denied “unless the moving party offers a reasonable excuse as to why the additional facts were not submitted on the original application.”  Cole-Hatchard v. Grand Union , 270 A.D.2d 447 (2 nd Dep’t 2000) (citation and internal quotation marks omitted); CPLR 2221(e)(3). Reargument motions, on the other hand, are not based on new evidence previously unavailable, but are made when it is believed that the underlying decision was rendered because the motion court “misapprehended … the relevant facts that were before it or misapplied … controlling principal of law.”  Boboyev v. Gomez , 304 A.D.2d 600, 601 (2 nd Dep’t 2003) (citation omitted).  The purpose of a reargument motion is “not to serve as a vehicle to permit the unsuccessful party to argue once again the very questions previously decided.”  Pro Brokerage, Inc. v. The Home Insurance Company , 99 A.D.2d 971 (1 st Dep’t 1984) (citation and internal quotation marks omitted).  Nor is reargument a vehicle by which a party may “advance arguments different from those tendered on the original application may not be employed as a device for the unsuccessful party to assume a different position inconsistent with that taken on the original motion.”  Foley v. Roche , 68 A.D.2d 558, 568 (1 st Dep’t 1979); see also Gellert & Rodner v. Gem Community Mgt., Inc. , 20 A.D.3d 388 (2 nd Dep’t 2005) (citation omitted).  When a motion for summary judgment is denied, the movant can move for renewal or reargument pursuant to CPLR 2221 if the applicable standards are met.  Courts, however, frown upon the making of successive motions for summary judgment.  It is recognized that “ uccessive motions for summary judgment should not be entertained in the absence of good cause, such as a showing of newly discovered evidence.”  P.J. 37 Food Corp. v. George Doulaveris & Son, Inc. , 189 A.D.3d 858, 859 (2 nd Dep’t 2020) (citation and internal quotation marks omitted).  Nor should such motions be made “based upon facts or arguments which could have been submitted on the original motion for summary judgment.”  Hillrich Holding Corp. v. BMSL Management, LLC , 175 A.D.3d 474, 475 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Indeed, the previously unsubmitted evidence “must be used to establish facts that were not available to the party at the time it made its initial motion for summary judgment and which could not have been established through alternative evidentiary means.”  Id . (citations and internal quotation marks omitted). A “narrow exception” to the prohibition against successive summary judgment motions permits such motions to be entertained “when it is substantively valid and the granting of the motion will further the ends of justice and eliminate an unnecessary burden on the resources of the courts.”  Aurora Loan Services, LLC v. Yogev , 194 A.D.3d 996, 997 (2 nd Dep’t 2021) (citations and internal quotation marks omitted). All of these issues were addressed by the June 21, 2023, decision of the Appellate Division, Second Department, in Wells Fargo Bank, N.A. v. Gittens , a mortgage foreclosure action.  Lender in Gittens , commenced a foreclosure action in which borrower interposed an answer asserting numerous affirmative defenses, including lender’s failure to comply with the notice provisions of the loan documents and failure to comply with the requirements of RPAPL 1304 .  [Eds. Note: this Blog has frequently written about RPAPL 1304.  See < here =">here"> and the blog articles hyperlinked therein.].  The motion court denied lender’s summary judgment motion.  Thereafter, lender “again made a motion …., certain branches of which were denominated as ones for summary judgment on the complaint insofar as asserted against the and for an order of reference.”  The motion court granted lender’s motion and borrower appealed.  The Second Department reversed. The Second Department noted that “ lthough certain branches of the second motion were denominated as ones for summary judgment on the complaint insofar as asserted against the defendants and for an order of reference, those branches were, in actuality, one for leave to renew the 's prior motion for summary judgment on the complaint insofar as asserted against the and for an order of reference” and that the “new evidence supporting the second motion could have been submitted by the in support of its prior motion.”  The Second Department found that the motion, to the extent that it was to renew, should have been denied because the lender “failed to provide any justification for its failure to present the new evidence supporting the second motion as part of its prior motion.” Even if considered a successive motion for summary, the Second Department found that lender’s motion should have been denied because such motions “should not be entertained in the absence of good cause, such as a showing of newly discovered evidence.”  (Citation and internal quotation marks omitted.) In determining that lender’s motion failed to fit within the previously discussed exception to the prohibition against successive summary judgment motions, the Court stated: The second motion also did not fit within the “narrow exception" to the successive summary judgment rule.  This narrow exception permits entertainment of a successive motion when it is substantively valid and the granting of the motion will further the ends of justice and eliminate an unnecessary burden on the resources of the courts.  Here, entertaining a second summary judgment motion involved review of multiple disputed issues, including whether the established the s' default, the 's compliance with the contractual condition precedent, and the 's compliance with RPAPL 1304. Thus, rather than eliminating a burden on the Supreme Court, the court's consideration of the second motion actually imposed an additional burden on the court.  Successive motions for the same relief burden the courts and contribute to the delay and cost of litigation. A party seeking summary judgment should anticipate having to lay bare its proof and should not expect that it will readily be granted a second or third chance. 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 A “short sale” is the sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. In order to deliver the security to the purchaser, the short seller will borrow the security, typically from a broker-dealer or an institutional investor. The short seller later closes out the position by purchasing equivalent securities on the open market, or by using an equivalent security it already owned, and returning the security to the lender.  In general, short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of a long position in the same security or in a related security. Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited. In a “naked” short sale, a seller does not borrow or arrange to borrow securities in time to make delivery to the buyer within the standard settlement period. 1 As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a “failure to deliver” or “fail”). Failures to deliver may result from either a short or a long sale. There may be legitimate reasons for a failure to deliver. For example, human or mechanical errors or processing delays can result from transferring securities in physical certificate rather than book-entry form, thus causing a failure to deliver on a long sale within the standard settlement period. A fail may also result from “naked” short selling. For example, market makers who sell short thinly traded, illiquid stock in response to customer demand may encounter difficulty in obtaining securities when the time for delivery arrives.  “Naked” short selling is not necessarily a violation of the federal securities laws or the rules of the Securities and Exchange Commission (“SEC” or the”Commission”). In certain circumstances, “naked” short selling contributes to market liquidity. For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks as there may be few shares available to purchase or borrow at a given time. The opposite of short selling is “long selling”. Long selling occurs when the seller owns the security being sold and has a reasonable expectation that he/she/it can deliver the security in time for settlement. The Commission promulgated regulations that govern the short selling of equity securities. 2 In that regard, as discussed below, the Commission adopted Regulation SHO to address persistent fails to deliver securities within the standard settlement period and potentially abusive “naked” short selling. The Commission was concerned that large and persistent fails to deliver could deprive shareholders of the benefits of ownership, such as voting and lending, and enable sellers that fail to deliver securities on the settlement date to use the additional freedom to engage in trading activities that could improperly depress the price of a security. Regulation SHO Compliance with Regulation SHO began on January 3, 2005. Regulation SHO was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938 and to address concerns regarding persistent failures to deliver and potentially abusive “naked” short selling. The Commission amended Regulation SHO several times since 2005 to eliminate certain exceptions, strengthen certain requirements and reintroduce the price test restriction. Regulation SHO has four general requirements. Relevant to today’s article is Rule 200(g).  Under Rule 200(g), broker-dealers are required to mark all sale orders of equity securities as “long,” “short,” or “short exempt.” 3 An order can be marked “long” when, as discussed, the seller owns the security being sold and the security either is in the physical possession or control of the broker-dealer, or it is reasonably expected that the security will be in the physical possession or control of the broker or dealer no later than settlement. However, if a person does not own the security, or owns the security sold but it is not reasonably expected that the security will be in the possession or control of the broker-dealer prior to settlement, the sale should be marked “short.” The sale could be marked “short exempt” if the seller is entitled to rely on an exception from the short sale price test circuit breaker. 4 The Locate Requirement Before accepting a short sale order or effecting a short sale for its own account, a broker-dealer must locate the securities being sold; i.e. , the broker-dealer must: (i) borrow the securities; (ii) enter into a bona fide arrangement to borrow the securities; or (iii) have reasonable grounds to believe that the securities can be borrowed so that they can be delivered on the date delivery is due. 5 This requirement is generally referred to as the “locate” requirement under Regulation SHO. The source of the locate must be documented. Broker-dealers usually charge customers a fee for borrowing securities. Deemed to Own An investor with a net long position in a security is “deemed to own” the security under Regulation SHO. 6 A seller may be deemed to own a security if, for example, (i) the person purchased, or has entered into an unconditional contract, binding on both parties thereto, to purchase it, but has not yet received the security; or (ii) the person owns a security convertible into or exchangeable for it and has tendered such security for conversion or exchange. For purposes of order marking rules under Regulation SHO, a seller of convertible securities ( i.e. , other securities that are convertible into the underlying stock being sold) is not “deemed to own” the underlying common stock until the seller has tendered such convertible security for conversion or exchange. Long Selling Under Regulation SHO, an order to sell may be marked “long” only if two conditions are met. First, the seller must be “deemed to own” the security pursuant to Rule 200(a) through (f) of Regulation SHO. 7 Second, to mark a sale long, the broker-dealer must either: (i) have possession or control of the security to be delivered; or (ii) reasonably expect that the security will be in its physical possession or control no later than the settlement of the transaction. 8 If a seller does not deliver the security in time for settlement, a buyer may not get what it purchased in a timely manner, eroding trust and confidence in the markets, and potentially depriving market participants of the benefits of their bargain. Failure to Deliver Regulation SHO was designed, in part, to reduce “failures to deliver,” which occur when a seller fails to deliver securities that it has sold by the settlement date. According to the SEC, failures to deliver may negatively impact the market and shareholders. 9 Additionally, sellers that fail to deliver securities on the settlement date may attempt to use this additional freedom to engage in trading activities to improperly depress the price of a security. 10 Moreover, by not borrowing securities and, therefore, risking that it will not be able to make delivery within the standard settlement period, the seller benefits by not incurring the costs of borrowing shares.  E.g.,="E.g.," Investor.gov,="Investor.gov," “Short="“Short" sales”="sales”" ( here);=">here);" Investor="Investor" Bulletin:="Bulletin:" “An="“An" Introduction="Introduction" to="to" Short="Short" Sales”="Sales”" (Oct.="(Oct." 29,="29," 2015)="2015)" “Settling="“Settling" Securities="Securities" Transactions,="Transactions," T+2”="T+2”" U.S.="U.S." Exchange="Exchange" Commission,="Commission," “Key="“Key" Points="Points" About="About" Regulation="Regulation" SHO”="SHO”" >here).=">here)."> The foregoing rules were at the center of the SEC’s enforcement action against Sabby Management LLC (“Sabby”) and its principal, Hal D. Mintz (“Mintz” and together with Sabby, the “Defendants”). SEC v. Mintz, et al. , 2:23-CV-3201 (D.N.J.) ( here ). SEC v. Mintz Mintz arose from an alleged fraudulent scheme involving abusive naked short selling, order mismarking, and other violative trading practices, orchestrated by Sabby, a registered investment adviser and recidivist, 11 and Mintz. As discussed below, the alleged scheme generated more than $2 million in ill-gotten gains.  According to the SEC, from at least March 2017 through May 2019, Mintz used his knowledge and experience as a trader, to game the markets and carry out the alleged fraudulent scheme by repeatedly circumventing trading rules involving at least 10 issuers on behalf of two private funds managed by Defendants (“the Private Funds”). As alleged by the SEC, Defendants’ fraudulent scheme involved at least two forms of abusive trading.  First, Defendants allegedly mismarked sales of securities as “long” even though the sales did not qualify as long sales because the Private Funds did not own and were not deemed to own the securities being sold and did not have a net long position in the securities being sold. As a result, said the SEC, Defendants should have marked those sales as “short.” Failing to mark the sales correctly, noted the SEC, was a violation of applicable order marking rules. The SEC contended that because the sales were actually short sales that Defendants allegedly tried to disguise as long sales, and Defendants had not “located” ( i.e. , borrowed, arranged to borrow, or had reasonable grounds to believe that the securities could be borrowed) the shares that they sold, the sales failed to comply with the locate requirements of Regulation SHO ( i.e. , 17 C.F.R. § 242.200 – § 204.204).  Second, Defendants allegedly marked and sold shares “short” when they knew or recklessly disregarded that they had not borrowed or located the shares. These trades, said the SEC, also failed to comply with the locate requirements of Regulation SHO. The SEC further alleged that in each instance in which Defendants failed to make timely delivery of shares, their trading constituted “naked” short selling, which was also a violation of Regulation SHO. According to the SEC, Defendants engaged in this fraudulent trading scheme because it was more profitable than following the order marking and locate rules. As explained in the SEC’s complaint, Defendants would not have been able to carry out their short sales, and therefore could not have profited as they did, if they had followed the rules governing long and short sales. As a result of their alleged misconduct, said the SEC, Defendants obtained at least $2 million in ill-gotten trading profits for themselves and the Private Funds. The SEC also alleged that on occasion, Defendants used their improper sales to artificially deflate the price at which Defendants were able to convert their securities into stock. Through these abusive sales, said the SEC, Defendants acquired more stock at a cheaper price. According to the SEC, Defendants took multiple steps to conceal their fraudulent scheme and misconduct. Defendants allegedly made false statements to the brokers executing their trades, including falsely representing that they had locates for their short sales when, in fact, they did not. In addition, Defendants allegedly submitted fraudulent order instructions to the brokers, identifying their sales as “long” in an attempt to disguise their naked short sales and their short sales for which they had not obtained locates, when they allegedly knew that they were required to identify these orders as “short” sales. But for these misrepresentations, claimed the SEC, the brokers would not have executed these trades since the trades failed to comply with Regulation SHO. Moreover, in an attempt to hide their failure to obtain locates for their short sales and satisfy their settlement obligations, Defendants allegedly acquired the required stock after their short sales, typically by purchasing the stock from the issuer or otherwise acquiring it through conversion of other securities. The SEC claimed that Defendants knew or recklessly disregarded that these practices failed to comply with applicable trading rules that require, with very narrow exceptions not applicable in Mintz , a short seller to locate the stock prior to the short sale. While Defendants were often able to conceal from the market their fraudulent trading scheme, on some occasions, said the SEC, Defendants were unable to deliver securities in time to cover their short sales, causing “fails-to-deliver.” Each instance in which Defendants mismarked long sales and shorts sales without locates, noted the SEC, resulted in fails-to-deliver, and therefore also constituted naked short selling. The SEC’s complaint ( here ), filed in the U.S. District Court for the District of New Jersey, charged Sabby and Mintz with violations of Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-21 thereunder. 12 The SEC also charged Sabby with violations of Sections 204 and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2 and 206(4)-7 thereunder and charged Mintz with aiding and abetting those violations. The SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties. Commenting on the complaint, Carolyn Welshhans, Associate Director of the SEC’s Division of Enforcement, stated: “The SEC alleges that Sabby and Mintz attempted to game the system and make an illegal profit. When someone uses naked shorts or other manipulative practices to cheat the market and investors, the SEC will ensure that they are held accountable.” A copy of the press release announcing the action can be found here . Footnotes The standard settlement period is two (2) business days. This settlement cycle is known as “T+2,” shorthand for “trade date plus two days.” T+2 means that when a person buys a security, payment must be received by the brokerage firm no later than two business days after the trade is executed. When a person sells a security, the person must deliver to the brokerage firm his/her/its securities certificate no later than two business days after the sale. The two-day settlement date applies to most security transactions, including stocks, bonds, municipal securities, mutual funds traded through a brokerage firm, and limited partnerships that trade on an exchange. Government securities and stock options settle on the next business day following the trade. See Investor.gov, “Settling Securities Transactions, T+2” ( here ). 17 C.F.R. § 242.200 – § 204.204. 17 C.F.R. § 242.200(g). Rule 201 of Regulation SHO generally requires trading centers to establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent the execution or display of a short sale at an impermissible price when a stock has triggered a circuit breaker by experiencing a price decline of at least 10 percent in one day. Once the circuit breaker in Rule 201 has been triggered, the price test restriction will apply to short sale orders in that security for the remainder of the day and the following day, unless an exception applies. Rule 203(b)(1) of Regulation SHO. 17 C.F.R. § 242.200(c). 17 C.F.R. § 242.200. 17 C.F.R. § 242.200(g). See Amendments to Regulation SHO, Exch. Act Rel. No. 34-60388 (July 27, 2009). See id. at 6-7. Sabby was previously sanctioned by the Commission in connection with alleged improper short sales. On October 14, 2015, the Commissioned instituted a settled cease-and-desist proceeding, finding that Sabby violated Rule 105 of Regulation M of the Securities Exchange Act of 1934 (the “Exchange Act”) on two occasions. The Commission imposed a cease-and-desist order, disgorgement of $184,747.10 plus prejudgment interest, and a civil penalty of $91,669.95 ( here ). 17 C.F.R. § 240.10b-5 and 17 C.F.R. § 240.10b-21. 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.

A couple of months ago, we examined NW Media Holdings Corp. v. IBT Media Inc. , 2023 N.Y. Slip Op. 30875(U) (Sup. Ct., N.Y. County Mar. 22, 2023) ( here ), a case in which a lower court addressed the question whether the destruction of millions of pages of data on a Google Workspace states a claim for trespass to chattels or conversion ( here ). As discussed in that article, the court concluded that the allegations concerning the destruction of such data sufficed to state a claim for conversion. NW Media is once again the subject of an article, this time in the context of board deadlock – that is, when the members of a company’s board of directors are deadlocked regarding the vote on a matter of corporate concern. NW Media Holdings Corp. v. IBT Media Inc. , 2023 N.Y. Slip Op. 03288 (1st Dept. June 15, 2023) ( here ). NW Media was one of four interrelated cases in which former friends and business associates, Johnathan Davis and Dev Pragad, vied for control over Newsweek. Pragad, as president of NW Media Holdings Corp. (“NW Media”), which owned Newsweek LLC and related entities, had caused NW Media to sue IBT Media Inc., an entity that Davis controlled. NW Media sought indemnification for alleged losses under the Membership Interest Purchase Agreement dated December 13, 2018 (“Purchase Agreement”). IBT moved to dismiss, arguing, among other things, that the lawsuit should have been brought derivatively, not as a direct action in the name of the corporation. As noted by the motion court, the outcome of the action was dependent upon the application of one of two distinct lines of cases – lines of cases that lead to opposite results. The Seeming Split in Authority Under the first line cases, decided by the Court of Appeals in 1949 , Sterling Industries Inc. v. Ball Bearing Pen Corp. , the president was held to be without authority to initiate litigation due to board deadlock. In Sterling , two groups controlled the plaintiff corporation on a 50/50 basis. 1 A pen company, whose representatives comprised one of the groups, had agreed to make the plaintiff the exclusive sales agent for the pen company’s fountain pens for one year. The president of the plaintiff called a special meeting of the board of directors to consider whether or not to sue the pen company for breach of contract. The two directors representing the plaintiff said yes, while the two directors representing the pen company voted no. Thus, the board was deadlocked. The Court of Appeals held that, where the by-laws of the corporation did not allow the president to commence litigation, but instead provided that the act of a majority of the board should constitute the act of the board, the authority of the president to commence litigation terminated “when a majority of the board of directors at the special meeting refused to sanction it.” 2 In so holding, the Court reasoned that the intention of the parties controls as reflected in the governing corporate documents: The circumstances of the organization of plaintiff corporation indicate that the parties intended that the corporation should be managed by its board of directors and that the board should take no affirmative action if not sanctioned by a majority. That is the arrangement the parties intended and there is no basis on which to hold such an arrangement illegal. Had the Legislature intended to eliminate the problem of a deadlock it could have done so by the simple expedient of requiring an odd number of directors. Instead, apparently realizing the desire for equal control in some closely held corporations, it has continued to permit the election of a board of directors with an even number of directors. The fact that a deadlock may result does not necessarily mean that the present law is inadequate and that it should be remedied by the approval of presidential power where none in fact exists thus disregarding fundamental rules of agency law.” 3 Although the Court of Appeals did not leave the plaintiff a direct remedy, it, nevertheless, noted the availability of a derivative action. 4 Subsequent to Sterling , the courts in New York held that where a company’s bylaws do not expressly give the president the right to commence litigation, and there is board or shareholder deadlock about the propriety of doing so, the president lacks the authority to bring an action directly in the name of the corporation. For example, Crane, A.G., v. 206 West 41st Street Hotel Assoc LP , involved a fight among shareholders about whether or not to defend a foreclosure action. 5 The stockholder’s agreement specified that any action of the board required unanimous approval of the directors and that any action of the stockholders themselves required unanimous approval. 6 The defendant company was owned 50/50 between two additional LLCs. Separate individuals owned these additional LLCs. The individual who owned one of the 50/50 owners of the defendant also owned the plaintiff/lender. When the lender sought to foreclose on property, the 50/50 board deadlocked on whether or not to defend the action. Relying on Sterling , the Appellate Division, First Department held that the general partner of the other LLC/president, who had wanted to defend against the foreclosure, had no authority to do so. In reaching this conclusion, the Court noted that the president could not act against the wishes of his co-owner when the agreement between the two required unanimous approval and that the president’s “actual authority to defend the foreclosure action was terminated when the stockholders refused unanimously to sanction it.” 7 As in Sterling , the First Department noted the availability of a derivative lawsuit for breach of fiduciary duty in the event the failure to defend the foreclosure was improper. 8 In Stone v. Frederick , the plaintiff, the 50% owner of the company sued the defendant, the other 50% owner, in an attempt to take over the company. In dismissing the case, the court held “where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against the other with an equal interest and degree of control over corporate affairs; the proper remedy is a stockholder’s derivative action.” 9 The second line of cases started with Paloma Frocks, Inc. v. Shamokin Sportswear Corp. , 10 a case in which the New York Court Appeals appeared to walk back the holding in Sterling . In Paloma , the issue on appeal was for a stay of arbitration. The Court held that, because the corporate president of the defendant had authority to execute the underlying contract containing an arbitration clause, the president also could initiate arbitration under that contract. 11 Years earlier, Paloma had entered a contract with Shamokin whereby Shamokin was to help Paloma manufacture dresses. Shamokin contended that Paloma owed it for services under the contract. The contract contained an arbitration clause. Paloma’s president, Harry Toffel, also owned 50% of Shamokin. Paloma, through Toffel, countered with a proceeding to stay arbitration. Bernstein, Shamokin’s president, admitted that the Shamokin directors had not acted in the matter and that a meeting of Shamokin’s board would have been an “idle gesture” because the Toffel side, which controlled 50% of Shamokin, as well as owning Paloma, would never have voted in favor of Shamokin suing Paloma. The Court of Appeals held that Bernstein, as president of Shamokin, had the presumptive authority to commence arbitration. The Court reasoned that there had been no direct prohibition from the board of directors. Moreover, the Court reasoned that, because all the directors had previously agreed to the contract containing the arbitration clause, they had already agreed in advance that “Paloma-Shamokin controversies would go to arbitrators.” 12 Bernstein was simply carrying out a previously agreed upon arrangement. 13 The Court did not address whether the arbitration should have been brought as a derivative action or whether the arbitrators could have dealt with the derivative/direct issue. One year later, the Court of Appeals decided West View Hills Inc. v. Lizau Realty Corp . 14 In West View Hills , the plaintiff sued the defendant, along with its officers and stockholders, for saddling it with certain construction costs. The officers of the parties were identical. The president, who held a minority interest, had caused the plaintiff to bring the suit. In allowing the suit to proceed, the Court of Appeals distinguished West View Hills from “the classic case requiring resort to a stockholder’s derivative action to protect minority interests.” 15 The Court distinguished Sterling , noting that the West Hills board had taken no action, while the Sterling board refused to sanction the president’s authority to bring the suit. 16 Following Sterling and Paloma , courts have tried to balance the two lines of authority by drawing a distinction between the presumptive authority of the president and a negative board vote. 17 The Motion Court’s Decision and Order Prior to bringing the lawsuit, Pragad showed Davis a draft complaint, to which Davis strenuously objected in writing. Although there was no formal vote because Pragad ignored Davis’ request for a board meeting, Davis’ objection created a deadlock as Davis and Pragad each owned 50% of the company. The motion court held that “ his case fits squarely into Sterling .” The motion court noted that the bylaws of NW Media did not confer a right on the president to commence litigation. Instead, said the motion court, the bylaws specifically stated that “the business of the corporation shall be managed by its board of directors,” and, pursuant to section 8(a) therein, required a vote of the majority of the board to act. The motion court further noted that the by-laws contained a tie-breaking mechanism for director deadlock in section 8(d): “If the Board of Directors is unable to act because they are deadlocked (an equal number of Directors have voted for and against a matter duly presented to the Board for vote), the matter shall be referred to the Shareholders of the Corporation for a vote pursuant to Article II of these By-Laws.” Thus, the motion court found that NW Media’s corporate by-laws required a vote of the majority of the board of directors or, in the event of deadlock, the shareholders.  Looking at the conduct of the parties, the motion court found that, although there was no formal vote of the board, Davis did not consent. To the contrary, as noted, he opposed the filing of the lawsuit. Thus, according to the motion court, the board was deadlocked, there being only two members. Accordingly, under Sterling and its progeny, concluded the motion court, as the president of a closely held corporation, Pragad lacked the authority to act unilaterally against Davis’ interest. The motion court rejected plaintiffs’ claim that because there was no vote, Sterling was inapplicable. The motion court explained that plaintiffs ignored section 8(a) of the by-laws, which unambiguously required a vote for the board to act. Without one, said the motion court, no lawsuit could be commenced. Additionally, the motion court observed that Davis asked for a board vote, but the request was ignored, a fact that was undisputed. The motion court also rejected plaintiffs’ attempt to “fit this case into the Paloma line of cases,” by arguing that because Davis and Pragad executed a “Unanimous Written Consent”, whereby they both as directors of NW Media authorized the other to “execute the , and any and all instruments, writings and other documents necessary to carry out the transaction contemplated under the Agreement”:  All the “Unanimous Written Consent” entailed was authorization to enter into and carry out the purchase of Newsweek. That “Unanimous Consent” cannot override contemporaneously executed by-laws that require a majority of the board of directors to act and provide for resolution of deadlock, at least in theory. The motion court noted that the transaction referred to in the consent was the purchase of Newsweek. Regardless, the motion court held that the consent could not “help NW Media escape the plain text of the corporate bylaws, that require a vote of the majority of the board of directors to act.” “To suggest otherwise elevates form over substance,” said the motion court. The motion court also noted that even with the tie-breaking provision of the bylaws, there was still deadlock as Davis and Pragad were the only shareholders of the company:  Because the by-laws in section 8(d) refer a matter to a shareholder vote in the event of deadlock, the by-laws specifically contemplated deadlock. The problem is NW Media has only two shareholders: none other than Pragad and Davis. Thus, there is no way, as a practical matter, to break the tie. What is apparent from the by-laws, though, is that Pragad and Davis bargained for equal control of NW Media and contemplated the possibility of board deadlock if they did not agree.  The motion further held that the case before it also “differ from Paloma because, in Paloma , there was no board objection prior to the president bringing suit.” “Here,” by contrast noted the motion court, “Davis vociferously objected.” Finally, the motion court noted that neither Paloma nor West Hills involved a dispute between two 50/50 shareholders. In conclusion, the motion court held that “the situation at hand fits precisely into the Sterling line of cases. Although IBT may have a separate duty to NW Media, the fact remains Davis controls IBT and Davis has objected to the institution of the suit. This leaves plaintiff, who is essentially Dev Pragad, recourse through a derivative suit only.” Accordingly, the motion court granted IBT’s motion to dismiss without prejudice to plaintiffs commencing a derivative action. The First Department’s Decision On appeal, the Appellate Division, First Department unanimously affirmed.  The Court held that the “motion court correctly granted IBT’s motion to dismiss the complaint,” pursuant to the authority set forth in Sterling . 18 The Court held that “Pragad lost his presumptive authority to initiate this action in the corporation’s name because NW Media’s board was deadlocked.” 19 “As in Sterling ,” said the Court, “NW Media’s by-laws provide that ‘the business of the Corporation shall be managed by its Board of Directors,’ and that ‘the vote of a majority of the Directors present at the time of the vote … shall be the act of the Board of Directors.’” 20 Noting that plaintiffs did not dispute the fact that Davis “expressly objected to the filing of the complaint, which left the board deadlocked,” 21 the Court concluded that “any actual or implied authority Pragad may have had to commence this action was ‘terminated when a majority of the board … refused to sanction it.” 22 “Even without a formal board meeting,” explained the Court, “which Davis requested, to no avail, his affirmative written objection constituted a ‘direct prohibition by the board’ sufficient to constitute a deadlock.” 23 The Court also rejected plaintiffs’ reliance on Paloma , noting that, in Paloma , “Paloma was objecting to something to which it had already consented in the parties’ contract: resolving disputes through arbitration” 24 :  Here, IBT’s agreement to the purchase agreement, through Davis, may have included an agreement to indemnify NW Media under certain conditions, but it did not constitute a broad agreement to Pragad’s initiation of litigation against IBT on behalf of NW Media absent board approval. By taking that action, Pragad was not “merely carrying out an existing agreement” constituting “a routine step in the performance” of the contract, as was the case in Paloma . 25 Takeaway As noted, since Sterling and Paloma were decided, New Yorks courts have tried to balance the two lines of authority by drawing a distinction between the presumptive authority of the president and a negative vote of the board of directors. NW Media illustrates this balancing act. As both the motion court and the First Department noted, “Pragad lost his presumptive authority to initiate action in the corporation’s name because NW Media’s board was deadlocked.” 26 As in Sterling , “NW Media’s by-laws provide that ‘the business of the Corporation shall be managed by its Board of Directors,’ and that ‘the vote of a majority of the Directors present at the time of the vote … shall be the act of the Board of Directors.’” 27 In NW Media , there was no dispute that Davis vehemently opposed the filing of the lawsuit, thereby leaving the board deadlocked. 28 Thus, as in Sterling , “any actual or implied authority Pragad may have had to commence this action was ‘terminated when a majority of the board … refused to sanction it.” 29 Given the importance New York courts give to an entity’s governing corporate documents, such as bylaws and operating agreements, Sterling and its progeny, of which NW Media is a part, makes sense. This is not to say that facts and circumstances may counsel in favor of a different result, as in Paloma and its progeny. But when the board of directors has resolved (whether affirmatively or through deadlock) to prohibit the president from initiating a lawsuit, the president is without authority to institute such action. Footnotes 298 N.Y. 483 (1949). 298 N.Y. at 490. Id. at 491–92; see also COR Mktg. & Sales, Inc. v. Greyhawk Corp. , 994 F. Supp. 437, 441 (W.D.N.Y. 1998). As noted by the motion court, other jurisdictions, such as Delaware (8 Del. C. 1953, § 353) and Maine (13-C M.R.S.A. § 1434), provide tie breakers by statute. New York does not. Id. at 493. 87 A.D.3d 174 (1st Dept. 2011). Crane , 87 A.D.3d at 176. Id. Id. at 179. 245 A.D.2d 742, 745 (3d Dept. 1997); see also Giaimo v. EGA Assocs. , 68 A.D.3d 523, 524 (1st Dept. 2009). 3 N.Y.2d 572 (1958). Id. at 575. Id. Id. 6 N.Y.2d 344 (1959). Id. at 347. Id. at 348. See328 56th Rest., Inc v. Polldon Rest. Inc. , 39 A.D.2d 689, 690 (1st Dept. 1972) [“‘ hile the president of a corporation has presumptive authority to prosecute suits in the name of a Corporation …, such presumption would not obtain where the Board of Directors has resolved to the contrary or failed to authorize the President to institute such action ; Fernandez v. Hencke , 93 A.D.3d 440, 441 (1st Dept. 2012) (“ here there is no direct prohibition by the board, the president of a corporation has presumptive authority, in the discharge of his duties, to defend and prosecute suits in the name of the corporation”); Family M. Foundation v. Manus , 71 A.D.3d 598, 599 (1st Dept. 2010) (“This is not a case where one 50% shareholder seeks to assert a claim on behalf of the corporation against another 50% shareholder who possesses an equal degree of control.”). Slip Op. at *1. Id. Id. Id. Id. (quoting, Sterling , 298 N.Y. at 489, and citing, Crane , 87 A.D.3d at 176)). Id. (quoting, Rothman & Schneider v. Beckerman , 2 N.Y.2d 493, 497 (1957)). Id. at *2. Id. Id. Id. Id. Id. (quoting, Sterling , 298 N.Y. at 489, and citing, Crane , 87 A.D.3d at 176)). 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 Generally speaking, “term sheets” outline the basic terms of a transaction being negotiated by the parties thereto.  This Blog has previously addressed the enforceability of “term sheets.” See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . On June 15, 2023, the Appellate Division, First Department, decided Parkmerced Investors, LLC v. WeWork Companies LLC , in which the enforceability of a term sheet was decided by the Court.  underlying=">underlying" supreme="supreme" decision="decision" which="which" quoted="quoted" extensively="extensively" complaint.="complaint.">   The plaintiff in Parkmerced was redeveloping a neighborhood in San Francisco.  The president of WeWork contacted an individual involved with the plaintiff’s redevelopment efforts and “urged for WeWork to participate in the redevelopment project.”  After numerous meetings during which the details of WeWork’s potential investment were discussed, “plaintiff and WeWork allegedly entered into an agreement that contained all the material terms for WeWork’s investment.”  However, the “term sheet” was a “‘non-binding indication of terms for a preferred equity investment … of $450 million.’”  The “‘non-binding’” “term sheet” contained a few provisions that were expressly intended to be binding.  One such provision of the “term sheet” required plaintiff to negotiate exclusively with We Work for the right to participate in the redevelopment, a provision for which WeWork paid a “$20 million nonrefundable exclusivity fee.”  Accordingly, plaintiff terminated its discussions with other potential investors.  Ultimately, WeWork “repudiated the agreement.” Plaintiff commenced an action against WeWork, alleging breach of contract, breach of the covenant of good faith and fair dealing and promissory estoppel.  As to the breach of contract cause of action, plaintiff alleged that the “term sheet” was a binding agreement that WeWork breached by failing to perform.  Relying on documentary evidence (i.e., the term sheet) WeWork moved to dismiss all three causes of action pursuant to CPLR 3211 (a)(1). Among other things, as recognized in supreme court’s underlying decision and order , WeWork argued that: the term sheet “explicitly states that it was generally not binding”; “while the exclusivity fee section was binding, it specifically states that WeWork may decline to pursue the transaction”; and, “the $20 million exclusivity fee was to serve as liquidated damages.”  Supreme court generally discussed the law regarding breach of contract and stated: The elements of a breach of contract claim are: (1) existence of a contract, (2) plaintiff’s performance pursuant to the contract, (3) defendant’s breach of contractual obligations, and (4) resulting damages.  The court will enforce a clear and complete written agreement according to the plain meaning of its terms, and not look to extrinsic evidence to create ambiguities within the four corners of the contract.  A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.  Moreover, the court considers the context of the clauses when reading the contract as a whole. Supreme court, citing Keitel v. E*Trade Fin. Corp ., 153 A.D.3d 1181, 1181 (1 st Dep’t 2017), lv. Denied, 31 N.Y.3d 903 (2018), then noted that “ term sheet is non-binding when it sets forth the general intent for the parties to engage in good faith discussions and only be bound by a future written agreement.”  Supreme court found that the term sheet “clearly provides that is non-binding, which is emphasized at the beginning and the end of the Term Sheet.”  Supreme court also found that the “exclusivity fee” was a liquidated damages provision covering the “very breach for which plaintiff seeks recovery in this action: failure to ‘proceed’ or ‘consummate’ in the Term Sheet compared to failure to negotiate or close in the complaint.”  Based on these and other issues, supreme court dismissed the breach of contract cause of action. On plaintiff’s appeal, the First Department unanimously affirmed. As to the contract cause of action, the Court stated: A term sheet that sets forth the general intent of the parties to discuss in good faith the terms and conditions of a deal and states that neither party shall be bound until the parties execute a more formal written agreement, does not constitute an enforceable contract.  Here, the inception sentence of the term sheet stated that what followed was a “non-binding indication of terms for a preferred equity investment” in plaintiff by WeWork …. The final provision, titled “non-binding,” reiterated that the parties understood and agreed that the term sheet was provided “solely for discussion purposes and is not a commitment or agreement of any kind on the part of WeWork . . . .” In addition, since the exclusivity fee, or liquidated damages provision, pertained to the very breach for which plaintiff seeks recovery, i.e., the failure to proceed or consummate the proposed transaction, actual damages are unavailable. The exclusivity fee, however, did not pertain to attorneys’ fees, which were allowed if any party commenced any action against another in connection with the term sheet and prevailed.  As to the remaining two causes of action, the Court stated: The cause of action based upon breach of the covenant of good faith and fair dealing cannot be sustained absent a contractual obligation between the parties. Nor can the claim be used as a substitute for the nonviable breach of contract claim. Furthermore, plaintiff’s vague assertions that WeWork refused to negotiate in good faith were conclusory.  The promissory estoppel claim was correctly dismissed as duplicative of the breach of contract claim.  Moreover, the claim was undercut by the absence of a sufficiently clear and unambiguous promise.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue. 1 Collateral estoppel is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” 2 The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in prior action or proceeding.” 3 The collateral estoppel doctrine applies to prior arbitration proceedings, 4 as well as prior determinations by state appellate and federal courts. 5 In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes collateral estoppel as bases for dismissal. 6 It is also an affirmative defense under the CPLR. 7 In Republic of Kazakhstan v. Chapman , 2023 N.Y. Slip Op. 03211 (1st Dept. June 13, 2023) ( here ), the Appellate Division, First Department consider the foregoing principles. The Republic of Kazakhstan arose in the aftermath of an arbitration award by the Swedish Chamber of Commerce in December 2013, under the Energy Charter Treaty, rendered against plaintiff in favor of nonparties Anatolie Stati, Gabriel Stati, Ascom Group, S.A., and Terra Raf Trans Trading Ltd. (together, the “Statis”), plaintiff’s efforts to annul that award in Sweden, the efforts of the Statis to enforce the award in several jurisdictions, and plaintiff’s efforts to defeat enforcement. 8 Plaintiff alleged that the arbitration was the result of fraud during the underlying transaction — the construction of a liquefied petroleum gas plant — and that the award itself was procured by fraud on the tribunal. Plaintiff also alleged that the Statis committed numerous other acts of fraud, which were not addressed in the arbitration award. Defendants were not alleged to have participated in any of these frauds. Defendants or their predecessors-in-interest held notes issued by a subsidiary company owned by the Statis in Kazakhstan, under which the Statis defaulted on interest payments, and they agreed to a separate agreement while the arbitration was pending to share proceeds from the arbitration in lieu of receiving the principal and interest due on the notes. Plaintiff alleged that defendants did so with knowledge of the Statis’ fraud. Plaintiff further alleged that, following the initial award, defendants funded the Statis’ litigation and assisted them with their litigation strategy. Plaintiff contended that this litigation assistance facilitated the Statis’ fraud. Plaintiff also alleged that defendants communicated with the Statis about government and media relations, that they made false statements to the public through a website and press releases, and that they made or threatened to make false statements to the U.S. Government. Plaintiff commenced the action, seeking relief for defendants’ alleged conspiracy in, and aiding and abetting of, the Statis’ various fraudulent schemes. In particular, plaintiff alleged claims of aiding and abetting fraud, conspiracy to commit fraud, and unlawful means conspiracy under English law. Defendants moved to dismiss. The motion court granted the motion, holding, inter alia , that (1) the action was “predicated on an impermissible collateral attack of a confirmed arbitration award,” and (2) the aiding and abetting claim could not stand because “there can be no action for aiding and abetting fraud without an underlying fraud.”  9 by contrast, a collateral attack occurs when a party challenges an arbitral award through some bases other than the vacatur provisions of the faa or the cplr. 10 for example, a claim that fraud permeated the arbitration is a collateral attack on an arbitral award, 11 as is an attempt to vacate an award through a plenary action. 12 in determining whether a challenge to an award is collateral, courts look at the “relationship between the alleged wrongdoing, purported harm, and arbitration award.” 13 in other words, the courts look at whether the claims would undermine the validity of the underlying arbitral proceedings or frustrate the enforcement of the resulting award.>9 by contrast, a collateral attack occurs when a party challenges an arbitral award through some bases other than the vacatur provisions of the faa or the cplr. 10 for example, a claim that fraud permeated the arbitration is a collateral attack on an arbitral award, 11 as is an attempt to vacate an award through a plenary action. 12 in determining whether a challenge to an award is collateral, courts look at the “relationship between the alleged wrongdoing, purported harm, and arbitration award.” 13 in other words, the courts look at whether the claims would undermine the validity of the underlying arbitral proceedings or frustrate the enforcement of the resulting award.>  The First Department affirmed. The Court held that the action was barred by the collateral estoppel doctrine. 14 The Court noted that “Plaintiff ha litigated the fraud alleged herein before Swedish arbitrators, the Swedish (Svea) Court of Appeal, and the District Court for the District of Columbia, which enforced the arbitral award under the Federal Arbitration Act.” 15 As such, plaintiff had a full and fair opportunity to litigate the issue. 16 The Court rejected plaintiff’s argument that there was new evidence related to the fraud – the “same fraud claim plaintiff has been pursuing for over a decade, including allegations that the Statis diverted funds, inflated construction costs, used funds that should have been sequestered as collateral, and paid their companies inflated prices for drilling services.” 17 In so holding, the Court explained that “well-settled” rules concerning “new” evidence and arbitral awards “cannot undermine the preclusive effect of the earlier decisions.” 18 There is a well-settled rule prohibiting challenges to arbitral awards on the basis of newly discovered evidence … Without such a rule, the arbitration award would be the beginning rather than the end of the controversy and the protracted litigation which arbitration is meant to avoid would be invited. 19 The Court also held that “ ven if collateral estoppel did not apply to all of plaintiff’s claims, those claims would still warrant dismissal for failure to state a cause of action” under CPLR § 3211(a)(7). “The aiding and abetting fraud and conspiracy to commit fraud claims,” said the Court, “fail[] since the complaint does not include detailed allegations of an underlying fraud.” 20 The Court explained that, in particular, the allegations in the complaint did not “support justifiable reliance on the Statis’ misrepresentations of fact or omissions …, as they ‘were undertaken in the course of adversarial proceedings and were fully controverted’ by plaintiff’s own proffered evidence.” 21 The Court also noted that plaintiff failed to allege that it suffered damages by reason of defendants’ misrepresentations to parties other than arbitrator tribunals or courts. 22 The Court further held that the conspiracy to commit fraud and the aiding and abetting fraud claims failed because the allegations of an agreement among the conspirators and the knowledge of the aider and abettor were conclusory. 23 Finally, the Court found that the claim under English law alleging unlawful means conspiracy conflicted with New York law, in that it allowed for a conspiracy claim without the commission of an underlying tort. 24 “As the conflict pertains to a conduct-regulating rule, the law of the place where the tort occurs will generally apply because that jurisdiction will almost always have the greatest interest in regulating conduct within its borders.” 25 26 an actual conflict exists if the laws in each jurisdiction “provide different substantive rules … that are relevant to the issue at hand and have a significant possible effect on the outcome of the trial.” 27 if an “actual conflict” exists, the court must apply the law of the jurisdiction with the greatest interest in the resolution of the dispute. 28 if no conflict exists, however, the court applies the law of the forum state. 29 > 26 an actual conflict exists if the laws in each jurisdiction “provide different substantive rules … that are relevant to the issue at hand and have a significant possible effect on the outcome of the trial.” 27 if an “actual conflict” exists, the court must apply the law of the jurisdiction with the greatest interest in the resolution of the dispute. 28 if no conflict exists, however, the court applies the law of the forum state. 29 >  “Here,” said the Court, “the vast conspiracy alleged concerning unlawful means did not occur in England, save for the Statis’ proceeding seeking to enforce the arbitration award there and defendants’ funding of an appeal in that proceeding.” 30 Moreover, said the Court, “insofar as the claim applies, the complaint not identify an unlawful act in England that defendants agreed to commit.” 31 Footnotes E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel. Co. , 62 N.Y.2d 494, 501 (1984). Mahler v. Campagna , 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl. , 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys. , 138 A.D.2d 575, 577 (2d Dept. 1988). Milone v. City University of New York , 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v. Broome County , 180 A.D.3d 1213 (3d Dept. 2020). See CPLR § 3211(a)(5). See CPLR § 3018(b). See Stati v. Republic of Kazakhstan , 302 F. Supp. 3d 187, 191-193 (D.DC. 2018), aff’d , 773 F. App’x 627 (2d Cir. 2019), cert. denied , 140 S.Ct 381 (2019); see also Republic of Kazakhstan v. Stati , 380 F. Supp 3d 55, 59-65 (D.DC 2019), aff’d , 801 F. App’x 780 (D.C. Cir. 2020). See CPLR § 7511; 9 U.S.C. §§ 9, 10. See , e.g. , Kramer-Wilson Co. v. Nat’l Gen. Mgmt. Corp. , 213 A.D.3d 557, 558 (1st Dept. 2023); Monterey Sportswear Corp. v. Charma Mills, Inc. , 43 A.D.2d 523, 523 (1st Dept. 1973); Oppenheimer & Co. Inc. v. Pitch , 129 A.D.3d 621, 622 (1st Dept. 2015); Pena v. Off. of the Comm’r of Baseball , 125 A.D.3d 461, 461 (1st Dept. 2015); Rutter v. Julien J. Studley, Inc. , 244 A.D.2d 239, 239 (1st Dept. 1997). E.g. , Clarke-St. John v. City of New York , 164 A.D.3d 743, 745 (2d Dept. 2018). See , e.g. , Abrams v. Macy Park Constr. Co. , 282 A.D. 922, 923 (1st Dept. 1953) (arbitration award “may not be attacked in a plenary action” because it “is a final determination as to the matters embraced in it, unless it is vacated” under the statute). Tex. Brine Co., L.L.C. v. Am. Arb. Ass’n, Inc. , 955 F.3d 482, 488 (5th Cir. 2020). Slip Op. at *1. Id. Id. ; See also Parker , 93 N.Y.2d at 349. Id. at *1-*2. Id. at *2. Id. (citations and quotation marks omitted). Id. (citing, CPLR § 3016(b); Habberstad v. Revere Sec. LLC , 183 A.D.3d 532, 533 (1st Dept. 2020); Kovkov v. Law Firm of Dayrel Sewell, PLLC , 182 A.D.3d 418, 419 (1st Dept. 2020)). Id. (citing, Sammy v. Haupel , 170 A.D.3d 1224, 1226-1227 (2d Dept. 2019); Shaffer v. Gilberg , 125 A.D.3d 632, 635 (2d Dept. 2015) (the plaintiff “always maintained that he knew” promissory notes were fake); Zappin v. Comfort , 2022 WL 6241248, at *15 (S.D.N.Y. 2022) (“In the context of an adversarial proceeding, Plaintiff is hard-pressed to assert reliance on claims that he constantly disputed.”)). Id. Id. at *2-*3. Id. at *3 (citations omitted). Id. (citations and internal quotation marks omitted). TBA Glob., LLC v. Proscenium Events, LLC , 114 A.D.3d 571, 572 (1st Dept. 2014). Id. (quoting, Elmaliach v. Bank of China Ltd. , 110 A.D.3d 192, 200 (1st Dept. 2013)). Elmaliach , 110 A.D.3d at 201. TBA Glob. , 114 A.D.3d at 572. Slip Op. at *3. 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 A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. Where both claims are asserted, more times than not, the fraud claim is dismissed under the duplication of claims doctrine – a principle of law that stands for the proposition that a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim. 2 Today, we examine Offenbach v. Ohlbaum , 2023 N.Y. Slip Op. 02979 (1st Dept. June 6, 2023) ( here ), a case in which the duplication of claims doctrine served as the basis for the dismissal of a fraud claim asserted by one plaintiff but not the fraud claim asserted by the other plaintiff. In early 2012, Plaintiff and Defendant Gary Ohlbaum (“Defendant” or “Ohlbaum”) met to discuss a film that Plaintiff was producing by the name of “Original Provisionals.” Following numerous meetings and discussions, along with the exchange of information about the film, its expected costs, etc., Defendant agreed to invest in the film.  To memorialize their agreement, the parties entered into a subscription agreement (the “Subscription Agreement”). Pursuant to the Subscription Agreement, among other things, the parties formed Plaintiff, Original Provisionals LLC (the “Company”), and Defendant received membership interests in the Company. In exchange for the membership interests, Defendant agreed to “contribute” $2,532,790.00 “to the capital of the Company.” Notably, the Subscription Agreement contained a merger clause, pursuant to which the terms therein constituted the entire agreement between the parties. The parties further agreed that funding for the project would commence when Defendant approved the cash flow projections for the film. As alleged, Defendant never delivered the subscription payment despite months and years of promises to do so. According to Plaintiffs, Defendant never intended to fund the film.  Plaintiff sued, alleging, among other things, breach of the Subscription Agreement and fraud. On summary judgment, the motion court denied Plaintiffs’ motion for summary judgment on their claims for breach of contract, fraud, and intentional infliction of emotional distress and granted Defendant’s cross-motion to dismiss the claims pursuant to CPLR §§ 3211 and 3212.  The First Department modified the motion court’s order to deny Defendant’s cross-motion as to the breach of contract claim as asserted by the Company, and to grant the Company’s motion for summary judgment as to the breach of contract claim, and otherwise affirmed. The Court held that “Defendant was entitled to dismissal of breach of contract claim … because Offenbach was not a party to the subscription agreement, which obligated defendant to provide funding to plaintiff Original Provisionals LLC (the Company) for its film project in exchange for an interest in the Company.” 3 The Court explained that “Offenbach executed the subscription agreement on behalf of Original Provisionals, and nothing indicated that Offenbach was an intended third-party beneficiary of the agreement.” 4 [Eds. Note: “ third party may sue as a beneficiary on a contract made for benefit. However, an intent to benefit the third party must be shown, and, absent such intent, the third party is merely an incidental beneficiary with no right to enforce the particular contracts.” 5 Thus, “ arties asserting third-party beneficiary rights under a contract must establish (1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for benefit and (3) that the benefit to is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate if the benefit is lost.” 6 “One is an intended beneficiary if one’s right to performance is appropriate to effectuate the intention of the parties to the contract and either the performance will satisfy a money debt obligation of the promisee to the beneficiary or the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.” 7 ]  The Court also held that the motion court “should not have dismissed the breach of contract claim as asserted by the Company.” 8 The Court explained that dismissal was not appropriate because the “plain terms of the subscription agreement” provided that “defendant agreed to pay $2,532,790 in exchange for membership in the Company.” 9 The Court noted that “ t undisputed that the Company performed under the subscription agreement, but defendant failed to pay the specified amount due thereunder.” 10 The Court rejected Defendant’s attempt to inject extra-contractual evidence into the interpretation of the Subscription Agreement. 11 The Court explained that defendant’s “statements that the parties’ actual agreement was different than that reflected in the contract, even if true, immaterial because the contract specifically state that it constitute the entire agreement between the parties and could only have been amended by a writing executed by the parties.” 12 Turning to the Company’s fraud claim – i.e. , that it was fraudulently induced to enter into the Subscription Agreement by Defendant’s misrepresentations that he would provide the promised financing – the Court held that it “was properly dismissed as duplicative of the breach of contract claim. 13 However, Offenbach’s fraud claim was a different story. “Because Offenbach ha no claim for breach of the subscription agreement,” said the Court, “her cause of action for fraud should not have been dismissed as duplicative of the breach of contract claim.”14 “Nevertheless,” said the Court, “Offenbach’s fraud claim should be dismissed” because she “failed to allege or show that she suffered damages separate from those recoverable by the Company under the subscription agreement.”15 The Court explained that the “fraud alleged by Offenbach individually is that defendant promised but failed to pay the subscription agreement amount to the Company and subsequently misrepresented that payment was forthcoming.”16  Takeaway In the First Department, the Court has dismissed fraud claims in which the damages sought by the fraud claim are the same as those sought by the breach of contract claim. This is so even where the plaintiff successfully demonstrates that the alleged misrepresentation is collateral to the contract at issue. 17 This Blog wrote about this scenario  here ,  here , and  here .  In Offenbach , although plaintiff’s fraud claim was not duplicative of the breach of contract claim, her fraud claim was, nevertheless, duplicative of the Company’s breach of contract claim because the damages that she sought were the same as those allegedly incurred by the Company. In addition to the Court’s examination of Plaintiffs’ fraud claims, it is important to note its holding with respect to Defendant’s attempt to inject parol evidence into the analysis.  As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended ( i.e. , parol evidence) is generally inadmissible. Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions. 18 As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses … infirmity of memory.…” 19 Notwithstanding, questions about the enforceability of promises and commitments that were made at the time of contract formation are often injected into a contract dispute. These questions are typically raised in connection with the meaning and effect of a contract, where one party advances the extra-contractual statements of the other ( e.g. , in correspondence, emails and text messages; telephone calls; or in-person meetings) to support a claim or defense. One way in which parties address such disputes before they happen is to include a “merger clause” or “integration clause,” in their contract or agreement. A merger clause provides that the contract represents the complete and final agreement between the parties.  In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. 20 Without such specificity, the courts have allowed parol evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement. 21 In Offenbach , the merger clause at issue was specific enough for the Court to prevent Defendant from using extra-contractual statements to show that “the parties’ actual agreement was different than that reflected in the .” 22 In that regard, as shown by the Court’s analysis, the subject matter of the Subscription Agreement was the investment of money in exchange for membership interests in the Company. Any other description of the parties’ agreement, whether oral or in writing, was specifically “replaced” by the terms of the Subscription Agreement. 23 Footnotes Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Slip Op. at *1. Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 181-182 (2011). Dormitory Auth. , 30 N.Y.3d at 710 (internal quotation marks omitted); Airco Alloys Div. v. Niagara Mohawk Power Corp. , 76 A.D.2d 68, 79 (4th Dept. 1980). Matter of Coalition for Cobbs Hill v. City of Rochester , 194 A.D.3d 1428, 1436 (4th Dept. 2021) (internal quotation marks omitted); Mendel v. Henry Phipps Plaza W., Inc. , 6 N.Y.3d 783, 786 (2006). Cole v. Metropolitan Life Ins. Co. , 273 A.D.2d 832, 833 (4th Dept. 2000) (internal quotation marks omitted); see generally Salzman v. Holiday Inns , 48 A.D.2d 258, 261 (4th Dept. 1975), mod. on other grounds , 40 N.Y.2d 919 (1976). Slip Op. at *1. Id. (citations omitted). Id. Id. Id. Id. (citing, Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017)). Id. at *1-*2 (citing, Richbell Info. Servs. v. Jupiter Partners , 309 A.D.2d 288, 305 (1st Dept. 2003)). Id. at *2 (citing, Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital 1 Inc. , 164 A.D.3d 1126, 1127 (1st Dept. 2018)). Id. E.g. , Salamone v. EIP Global Fund LLC , 2021 N.Y. Slip Op. 02372 (1st Dept. 2021). W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president). Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, operation”); Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by .”) (internal quotation marks and citation omitted) (alteration in original). Slip Op. at *1. The merger clause in the Subscription Agreement was not a typical, boilerplate provision. It specifically identified “ orrespondence, memoranda, and oral or written agreements that originated before the date of Agreement” as being “replaced in total by Agreement.” Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has frequently written about RPALP 1304 .  By way of background, and as previously noted in this Blog, RPAPL 1304 requires that at least ninety days before commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a “lender, assignee or mortgage loan servicer” must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that offer free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  here=">here" and="and" numerous="numerous" other="other" articles="articles" related="related" to="to" this="this" issue="issue" are="are" hyperlinked="hyperlinked" therein.="therein."> In one such article , we wrote about Wells Fargo Bank, N.A. v. Yapkowitz , 199 A.D.3d 126 (2 nd Dep’t 2021), in which the Court held that if there are more than one borrower, each one must receive a separate RPAPL 1304 notice because the “practice is insufficient to satisfy the requirements of RPAPL 1304, and that the plaintiff is required to mail a 90–day notice addressed to each borrower in separate envelopes as a condition precedent to commencing the foreclosure action.”  Yapkowitz , 199 A.D.3d at 128.  In our February 11, 2022, Blog article , we discussed U.S. Bank National Ass’n v. Gordon , 202 A.D.3d 872 (2022), in which the Second Department held that the lender did not strictly comply with the requirements of RPAPL 1304 because it failed to demonstrate that the 90-day notices it sent to the borrowers contained the requisite list of five housing counseling agencies serving the county in which the subject property is located. In another case, Bank of America, N.A. v. Kessler , 202 A.D.3d 10 (2021), rev’d , 39 N.Y.3d 317 (2023), the Second Department affirmed the supreme court’s strict construction of RPAPL 1304 and dismissed a complaint because the lender, in the same envelope as the RPAPL 1304 notice,  included “two notices pertaining to the rights of a debtor in bankruptcy and in military service.”  Kessler , 202 A.D.3d at 19.  In other cases, complaints were dismissed because lenders included notices under the Federal Fair Debt Collection Practices Act.  See, e.g., Ocwen Loan Servicing, LLC v. Sirianni , 202 A.D.3d 702, 705 (2 nd Dep’t 2022).  The Court of Appeals reversed the Kessler Second Department, holding that, inter alia , its “bright-line rule would also lead to nonsensical results.”   Kessler , 39 N.Y.3d at 325.  [Eds. Note: this Blog discussed the Court of Appeals’ decision in Kessler < here =">here"> .] On May 31, 2023, the Second Department decided HSBC Bank USA, N.A. v. Schneider .  In 2013, the lender in Schneider commenced a residential foreclosure action against the borrowers, a husband and wife.  The lender moved for summary judgement and the borrowers cross-moved for summary judgment dismissing the complaint for failure to comply with RPAPL 1304.  The borrowers appealed the denial of their cross-motion.  In reversing the supreme court, the Second Department stated: RPAPL 1304(1) provides that, “at least ninety days before a lender … commences legal action against the borrower, ... including mortgage foreclosure, such lender … shall give notice to the borrower.” “The statute further provides the required content for the notice and provides that the notice must be sent by registered or certified mail and also by first-class mail to the last known address of the borrower” ( Citibank, N.A. v. Conti–Scheurer, 172 A.D.3d 17, 20, 98 N.Y.S.3d 273; see RPAPL 1304<2> ). Strict compliance with RPAPL 1304 notice to the borrower is a condition precedent to the commencement of a foreclosure action ( see Citibank, N.A. v. Conti–Scheurer, 172 A.D.3d at 20, 98 N.Y.S.3d 273; Citimortgage, Inc. v. Banks, 155 A.D.3d 936, 936–937, 64 N.Y.S.3d 121 ). Here, the defendants established, prima facie, that the plaintiff did not comply with RPAPL 1304, since the 90–day notice was jointly addressed to both of the defendants ( see Deutsche Bank Natl. Trust Co. v. Loayza, 204 A.D.3d 753, 755, 166 N.Y.S.3d 654; Wells Fargo Bank, N.A. v. Yapkowitz, 199 A.D.3d 126, 134, 155 N.Y.S.3d 163). Moreover, while the plaintiff contends that two identical copies of the notice were included in the mailing, one for each of the defendants, the plaintiff concedes that they were mailed in the same envelope, which was also improper ( see Duetsche Bank Natl. Trust Co. v. Loayza, 204 A.D.3d at 755, 166 N.Y.S.3d 654; Wells Fargo Bank, N.A. v. Yapkowitz, 199 A.D.3d at 134, 155 N.Y.S.3d 163). In opposition, the plaintiff failed to raise a triable issue of fact. I do not recall how much it cost to mail a letter in, or prior to, 2013 when the RPAPL 1304 notices were sent in the HSBC action, but the lender probably should have sprung for a second stamp and mailed the RPAPL 1304 notices in separate envelopes.  “For want of a postage stamp, the foreclosure action was lost” after ten years of litigation.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:  Jeffrey Haber Section 3211(a)(8) of the Civil Practice Law and Rule (“CPLR”) allows a party to “move for judgment dismissing one or more causes of action asserted against him on the ground that … the court has not jurisdiction of the person of the defendant.”  Whether the court has personal jurisdiction over a non-domiciliary involves a two-part inquiry: (1) the exercise of jurisdiction must be permissible under New York’s long-arm statute; and (2) the exercise of jurisdiction must comport with due process. 1 “Due process requires that a nondomiciliary have ‘certain minimum contacts’ with the forum and ‘that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.’” 2 The minimum contacts test requires an examination of “whether a defendant’s ‘conduct and connection with the forum State’ are such that it ‘should reasonably anticipate being haled into court there.’” 3 When analyzing whether “ he prospect of defending a suit in the forum State … comport with traditional notions of ‘fair play and substantial justice,’” the court must ask what is reasonable. 4 Specifically, the court must consider “‘the burden on the defendant, the forum State’s interest in adjudicating the dispute, the plaintiff’s interest in obtaining convenient and effective relief, the interstate judicial system’s interest in obtaining the most efficient resolution of controversies, and the shared interest of the several States in furthering fundamental substantive social policies.’” 5 “If either the statutory or constitutional prerequisite is lacking, the action may not proceed.” 6 CPLR § 302(a)(2) provides for personal jurisdiction over a non-domiciliary who “in person or through an agent … commits a tortious act within the state.” For the purposes of conspiracy jurisdiction, “ sing a New York bank account for a fraudulent scheme constitutes a tort within New York.” 7 A co-conspirator’s actions in New York as the agent for an out-of-state co-conspirator can provide a basis for personal jurisdiction under CPLR § 302(a)(2). 8 To establish jurisdiction predicated upon a civil conspiracy theory, the plaintiff must establish a prima facie case of conspiracy and that the defendant was a member. 9 The plaintiff must also “demonstrate the commission of an overt act in New York during, and pursuant to, the conspiracy.” 10 A prima facie case of civil conspiracy requires the plaintiff to “demonstrate the primary tort, plus the following four elements: an agreement between two or more parties; an overt act in furtherance of the agreement; the parties’ intentional participation in the furtherance of a plan or purpose; and resulting damage or injury.” 11 The plaintiff must plead factual allegations sufficient to infer that a corrupt agreement exists. 12 The facts alleged must “support[] a meeting of the minds, such that defendants entered into an agreement, express or tacit, to achieve the unlawful end,” 13 or show that the defendant “took ‘common action for a common purpose by common agreement or understanding … from which common responsibility derives.’” 14 Intentional participation may be inferred from the overt acts a defendant takes in furtherance of a conspiracy. 15 “Bare, conclusory allegations of conspiracy are insufficient.” 16 Membership in a conspiracy is established by demonstrating that “(a) the defendant had an awareness of the effects in New York of its activity; (b) the activity of the co-conspirators in New York was to the benefit of the out-of-state conspirators; and (c) the co-conspirators acting in New York acted at the direction or under the control, or at the request of or on behalf of the out-of-state defendant.” 17 In Bangladesh Bank v. Rizal Commercial Banking Corp. , 2023 N.Y. Slip Op. 02844 (1st Dept. May 30, 2023) ( here ), plaintiff sought to obtain jurisdiction over certain defendants based on allegations that they were co-conspirators. In particular, Bangladesh Bank concerned whether the court could exercise personal jurisdiction over defendants Bloomberry Resorts and Hotels, Inc. (“BRHI”) d/b/a Solaire Resort & Casino and Eastern Hawaii Leisure Company, Ltd. (“EHL”) d/b/a Midas Hotel & Casino under, inter alia , CPLR § 302(a)(2). Bangladesh Bank arose from an international money laundering scheme where the participants stole more than $101 million from an account plaintiff maintained at the Federal Reserve Bank of New York (“New York Fed”). Unknown North Korean hackers allegedly infiltrated plaintiff’s computer network in Bangladesh and issued multiple unauthorized payment orders to transfer funds from plaintiff’s New York Fed account to various bank accounts in the Philippines and elsewhere. The stolen funds were then laundered through two gambling casinos in the Philippines operated by defendants BRHI and EHL. Plaintiff sued, pleading nine causes of action against defendants.  BRHI and defendant Kam Sin Wong a/k/a Kim Wong (“Wong”), the owner of EHL, moved to dismiss on, inter alia , jurisdictional grounds. We examine BRHI’s motion as it pertained to civil conspiracy jurisdiction.  BRHI argued that plaintiff failed to plead the elements of a civil conspiracy. BRHI contended that plaintiff failed to allege that BRHI was aware of the effect in New York of its actions, that the New York co-conspirators’ activity was for BRHI’s benefit, or that the New York co-conspirators’ acted at BRHI’s request, direction or control. The motion court agreed, holding that plaintiff failed to plead a conspiracy in which BRHI was a participant. First, the motion court held that plaintiff failed to allege facts sufficient to plausibly infer a common agreement. The motion court rejected plaintiff’s “information and belief” allegation that BRHI entered into an agreement to convert and launder plaintiff’s money, stating that such allegations were conclusory. Moreover, said the motion court, there were no allegations to infer that BRHI was a knowing participant in a conspiracy. Noting that circumstantial evidence could suffice to establish the existence of a conspiracy, the motion court found that plaintiff’s allegations were insufficient to do so. For example, said the motion court, the fact that BRHI and Wong enjoyed a professional relationship was not enough to conclude that BRHI agreed to participate in the scheme because “financial self-interest is not the same as furthering a conspiracy.” 18 Second, explained the motion court, plaintiff failed to plead “independent culpable behavior” linking BRHI to the conspiracy, 19 or that BRHI “‘planned and perpetrated’ the acts in concert” with the other defendants. 20 Third, the motion court found that plaintiff failed to adequately allege that BRHI knowingly or intentionally participated in the scheme by way of an overt act or acts. The motion court explained that simply because BRHI allowed gambling in its casino did not necessarily equate to its intentional participation in an illicit scheme. Given the absence of facts alleging that anyone employed by BRHI was aware that plaintiff’s stolen funds were being laundered through its casino, and BRHI’s failure to stop the conspirators from gambling after press reports, said the motion court, did alone not constitute intentional participation.  Fourth, the motion court found that plaintiff failed to connect BRHI to the New York activities of the alleged co-conspirators. The complaint, said the motion court, did not contain a specific allegation that BRHI knew of the theft of plaintiff’s funds in New York. The motion court noted that plaintiff only alleged, upon information and belief, that BRHI knew or should have known that the junkets were being used to launder stolen funds. Finally, the motion court found that the complaint did not contain an allegation that BRHI was aware its conduct would have an effect in New York. The motion court explained that plaintiff did not plead facts suggesting that the North Korean hackers or anyone else acted at the behest of or on behalf of, or under the control of BRHI.  Because the complaint provided no facts suggesting that BRHI conspired with any actor, the motion court held that plaintiff did not sustain its burden of demonstrating that CPLR § 302(a)(2) conferred jurisdiction over BRHI. The Appellate Division, First Department affirmed the dismissal of the complaint against BRHI, holding that the motion court “did not have personal jurisdiction over BRHI pursuant to CPLR 302(a)(2).”21 The Court found that “plaintiff fail to adequately allege that BRHI was aware or should have been aware that it was funds stolen from New York that were laundered at the Solaire casino, such that BRHI could be deemed to have been aware of the effects of its activities in New York.” 22 The Court also found that plaintiff “fail to allege that the conspirators’ conduct in New York was at BRHI’s direction or on its behalf.” 23 Takeaway New York recognizes a conspiracy theory as the basis for exercising personal jurisdiction over a non-domiciliary under CPLR § 302(a)(2). To meet the burden required to satisfy this theory, the party asserting jurisdiction must allege (1) a tortious act committed by any co-conspirator in New York and a prima facie showing of conspiracy, and (2) facts raising an inference that the non-domiciliary defendant is a member of the conspiracy. A prima facie showing of conspiracy requires (a) a corrupt agreement, (b) an overt act furthering the agreement, (c) the conspirators’ intentional participation furthering the plan, and (d) resulting damage.  A non-domiciliary co-conspirator is a “member[] of the alleged conspiracy” if (a) he/she knew of the effects of the New York activity, (b) the co-conspirators’ activity in New York was for the benefit of the out-of-state conspirator, and (c) the co-conspirators acted in New York at the behest of or on behalf of, or under the control of the non-domiciliary co-conspirators. Both inquiries are consider together since the same facts generally support both. Importantly, conclusory allegations will not suffice. In Bangladesh Bank the motion court held that plaintiff could not satisfy many of the elements of a conspiracy to warrant the exercise of personal jurisdiction over BRHI. As noted, the motion court found that plaintiff failed to demonstrate that, among other things, BRHI was a knowing participant in the conspiracy, BRHI had prior knowledge of the theft in New York, BRHI knew of the theft of plaintiff’s funds in New York, and BRHI was aware its conduct would have an effect in New York. Without sufficient factual evidence, whether direct or circumstantial evidence, plaintiff could not satisfy its burden of demonstrating that CPLR § 302(a)(2) conferred jurisdiction over BRHI. Looking at the record in its totality, the First Department agreed with the motion court and affirmed the dismissal of the complaint as to BHRI on jurisdictional grounds. Footnotes Williams v. Beemiller, Inc. , 33 N.Y.3d 523, 528 (2019). Id. (citations omitted). LaMarca v. Pak-More Mfg. Co. , 95 N.Y.2d 210, 216 (2000) (citations omitted). Id. at 217 (internal quotation marks and citation omitted). Rushaid v. Pictet & Cie , 28 N.Y.3d 316, 331 (2016) (citation omitted). Williams , 33 N.Y.3d at 528. FIA Leveraged Fund Ltd. v. Grant Thornton LLP , 150 A.D.3d 492, 495 (1st Dept. 2017) (citation omitted). See Wimbledon Fin. Master Fund, Ltd. v. Weston Capital Mgt. LLC , 160 A.D.3d 596, 596 (1st Dept. 2018). See Small v. Lorillard Tobacco Co. , 252 A.D.2d 1, 17 (1st Dept. 1998), aff’d , 94 N.Y.2d 43 (1999). Best Cellars, Inc. v. Grape Finds at Dupont, Inc. , 90 F. Supp. 2d 431, 446 (S.D.N.Y. 2000) (citations omitted). Cohen Bros. Realty Corp. v. Mapes , 181 A.D.3d 401, 404 (1st Dept. 2020) (citation omitted). FIA Leveraged Fund , 150 A.D.3d at 495 (citing, Abrahami v. UPC Constr. Co. , 176 A.D.2d 180, 180 (1st Dept. 1991)). Chen Gang v. Zhao Zhizhen , 799 Fed. Appx. 16, 19 (2d Cir. 2020) (quoting, Webb v. Goord , 340 F.3d 105, 110-111 (2d Cir. 2003)). IDX Capital, LLC v. Phoenix Partners Group LLC , 83 A.D.3d 569, 571 (1st Dept. 2011), aff’d , 19 N.Y.3d 850 (2012) (quoting, Goldstein v. Siegel , 19 A.D.2d 489, 493 (1st Dept. 1963)). See Cleft of the Rock Found. v. Wilson , 992 F. Supp. 574, 582 (E.D.NY. 1998). Kovkov v. Law Firm of Dayrel Sewell, PLLC , 182 A.D.3d 418, 418 (1st Dept. 2020). Lawati v. Montague Morgan Slade Ltd. , 102 A.D.3d 427, 428 (1st Dept. 2013) (quoting, Best Cellars , 90 F. Supp. 2d at 446)). Charles Schwab Corp. v. Bank of Am. , 883 F.3d 68, 87 (2d Cir. 2018); see also BHC Interim Funding, L.P. v. Bracewell & Patterson, LLP , 2003 WL 21467544, at *6, 2003 US Dist. LEXIS 10739, at *17 (S.D.N.Y. June 25, 2003). Schwartz v. Society of the N.Y. Hosp. , 199 A.D.2d 129, 130 (1st Dept. 1993). Callahan v. Gutowski , 111 A.D.2d 464, 465 (3d Dept. 1985). Slip Op. at *1. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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

By: Jeffrey Haber Commercial contracts typically include a liquidated damages provision that allows for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Courts will sustain such a provision if the liquidated amount is reasonably proportionate to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is grossly disproportionate to the probable loss, then the provision amounts to nothing more than a penalty and will not be enforced.  Similar to a liquidated damages clause is a penalty provision that fixes damages in the event of a breach of the contract. Penalty provisions in a contract are essentially no different from liquidated damages clauses and, therefore, are treated the same regardless of the nomenclature used by the parties. As the New York Court of Appeals stated, “ n interpreting a provision fixing damages, it is not material whether the parties themselves have chosen to call the provision one for ‘liquidated damages’ . . . or have styled it as a penalty.” 1 What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. 2 Are Liquidated Damages Clauses and Penalty Provisions Enforceable? If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. 3 Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 4 Although the party challenging the liquidated damages provision has the burden to prove that the liquidated damages are, in fact, an unenforceable penalty, 5 the party seeking to enforce the provision must have been damaged in order for the provision to apply. 6  The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. 7 New York courts often strike liquidated damage clauses when they fail to meet the foregoing. 8 In addition, a liquidated damages clause will not be enforced “if it is against public policy to do so and public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority” based on the principle of just compensation for loss. 9 “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” 10 In Atlantis Management Group II LLC v. Nabe , 2023 N.Y. Slip Op. 02737 (1st Dept. May 18, 2023) ( here ), the Appellate Division, First Department examined the foregoing principles in affirming the dismissal of a breach of contract claim that was based on an enforceable penalty provision in four similar operating agreements. Atlantis Management Group II LLC v. Nabe Atlantis involved four limited liability companies (the “Companies”), each of which operated a gas station in New York City. Plaintiff was an “Investor Member” and defendants Rajan Nabe and Rahul Nabe were the “Managing Member” of the Companies.  Beginning in 2008, the Companies made monthly profit distributions to plaintiff based on monthly profit and loss statements from gasoline and merchandise sales. Defendants alleged that in 2011, the parties orally agreed (the “Oral Agreement”) that plaintiff would accept a fixed sum of $10,000 each month from the Companies and that defendants were no longer required to provide plaintiff with financial information. Plaintiff disputed whether any financial disclosure could be withheld and asserted that this payment arrangement was to continue until defendants improved their accounting methodology for the Companies. In 2016, plaintiff verbally and in writing demanded financial statements and an accounting from the Companies, urging that it was entitled to its share of profits. Defendants contended that, pursuant to the Oral Agreement, plaintiff waived its rights to a percentage of profits and to the Companies’ books and records. Plaintiff sent notices of default and notices to cure to defendants for violations of the Companies’ operating agreements (the “Notices”). The Notices further provided that if the defendants failed to cure, then plaintiff would exercise its buy-back rights pursuant to the operating agreements. Under Section 6.3 of the operating agreements, if, among other things, defendants “ reach any provision of this ”, then plaintiff had the right “to Buy-Back all of the Membership Interests of the Managing Members < i.e. , defendants> i.e., defendants> in consideration for the sum of One ($1.00) Dollar U.S ….”  In 2017, plaintiff commenced the action, asserting causes of action for (1) an accounting, (2) breach of fiduciary duty against defendants, (3) breach of contract, (4) specific performance (based on the buy-back provision), (5) declaratory judgment (as to ownership of Companies) and (6) fraud. Defendants moved for leave to amend their answer to assert additional counterclaims based on breach of fiduciary duty relating to 2020 events. Plaintiff opposed the motion and cross-moved for summary judgment on its remaining causes of action. 11 The motion court held that plaintiff was entitled to summary judgment as to liability only with regard to its claim for the failure to provide the Companies’ books and records. The motion court dismissed the breach of contract and specific performance claims as they pertained to the buy-back right under Section 6.3 of the operating agreements. The motion court held that the buy-back clauses were grossly disproportionate, unreasonable, unenforceable penalty provisions. By their terms, explained the motion court, the breach of any provision however trivial triggered “the draconian $1-buy-out consequence without regard to the magnitude of the breach or actual value of the interest surrendered.” The motion court further explained that Section 6.3 “was ‘conspicuously disproportionate to [] foreseeable losses’ because the same drastic remedy applie to an immaterial technical breach as it a material one.” 12 “By punishing any breach, however minor, with forfeiture of valuable interests in exchange for a mere dollar,” concluded the motion court, “the intent of the provision purely punitive.” “In no way was it intended to remotely correspond with the magnitude of any loss or injury,” said the motion court. Accordingly, the motion court dismissed the causes of action for breach of contract and specific performance and declared that § 6.3 of the operating agreements constituted an unenforceable penalty. The First Department unanimously affirmed. The Court held that the motion court “correctly concluded that § 6.3 of the parties’ operating agreements (OAs) … was an unenforceable penalty.” 13 The Court explained that “Section 6.3 was not a reasonable measure of the anticipated harm arising from a breach but was instead punitive in nature, serving to propel performance by the rather than to merely compensate for a loss.” 14 Moreover, the Court found that the liquidated amount not only did not bear a reasonable proportion to the probable loss, but the amount of the actual loss could be determined. 15 In fact, noted the Court, “the amount of actual damages was ascertainable, as evinced by the affidavit of plaintiff’s certified public accountant.” 16 “In addition,” said the Court, “the buyback clause in § 6.3 violated public policy, as it grossly overcompensated plaintiff for any loss it may have sustained from a breach of contract.” 17 As such, “the principle that parties have freedom of contract” could “be overridden” by such a “significant countervailing public policy.” 18 here,=">here," >here=">here" and="and" >here.=">here."> Takeaway Atlantis stands as a reminder that the courts of New York will not hesitate to strike a penalty provision or a liquidated damages clause that punishes as opposed to compensates. Atlantis is also notable in that the Court struck the penalty provision as violative of New York public policy. Although parties are free to contract, 19 they may not enter agreements that are unconscionable or contrary to public policy. 20 As noted by the First Department, liquidated damages that constitute a penalty, violate public policy and may override this countervailing policy principle. Footnotes Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 425 (1977). Id. at 424 (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting, Truck Rent-A-Ctr. , 41 N.Y.2d at 424). 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005); Parker v. Parker , 163 A.D.3d 405, 406 (1st Dept. 2018). See , e.g. , J. Weinstein & Sons, Inc. v. City of New York , 264 App. Div. 398, 400 (1st Dept.) (“The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever”), aff’d , 289 N.Y. 741 (1942). Truck Rent-A-Ctr ., 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding , 4 N.Y.3d at 380. See , e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from the time of the breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which the tenant forfeited $63,500 in deposits regardless of whether the tenant terminated agreement with several months’ notice). Truck Rent A-Ctr. , 41 N.Y.2d at 424; Beltway 7 Props., Ltd. v. Blackrock Realty Advisors, Inc ., 167 A.D.3d 100, 106-107 (1st Dept. 2018); Matter of Krodel v. Amalgamated Dwellings Inc. , 166 A.D.3d 412, 414 (1st Dept. 2018) (parties may contract for attorneys’ fees so long as they are not in the nature of a penalty or forfeiture). Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Plaintiff was awarded partial summary judgment on its accounting claim. Citing, JDM Holding Corp ., 4 N.Y.3d at 380. Slip Op. at *1. Id. Id. (citing, Trustees of Columbia Univ. in the City of N.Y. v D’Agostino Supermarkets, Inc. , 36 N.Y.3d 69, 75 (2020)). Id. Id. (citing, New England Mut. Life Ins. Co. v. Caruso , 73 N.Y.2d 74, 81 (1989)). Id. (citing, 172 Van Duzer Realty. , 24 N.Y.3d at 536). Freedom of contract is a “deeply rooted” public policy of the State of New York ( 159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 359 (2019); see also New England Mut. Life Ins. Co. v Caruso , 73 N.Y.2d 74, 81 (1989)) and a right of constitutional dimension (U.S. Const, art I, § 10(1)). New York courts have long deemed the enforcement of contracts according to the terms adopted by the parties to be a pillar of the common law. Id. Thus, “ reedom of contract prevails in an arm’s length transaction between sophisticated parties ..., and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain.” Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co. , 86 N.Y.2d 685, 695 <1995> ). “By disfavoring judicial upending of the balance struck at the conclusion of the parties’ negotiations, public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of … parties in ordering their own business arrangements.” 159 MP Corp. , 73 N.Y.2d at 359-360. Truck Rent-A-Ctr. , 41 N.Y.2d at 424 (citing, Mosler Safe Co. v. Maiden Lane Safe Deposit Co. , 199 N.Y. 479, 485 (1910)). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.