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By: Jeffrey M. Haber The growth of information technology and electronic communication over the past few decades has made it increasingly easy to collect, maintain, and transfer personal information. 1 With the advancement of technology, the public faces repeated threats to the integrity and privacy of their personal information. The federal government has taken steps to help protect individuals, and to help individuals protect themselves, from the risks of theft, loss, and abuse of their personal information.  The Fair Credit Reporting Act of 1970 (“FCRA”), 2 as amended in 2003, 3 required several federal agencies to issue joint rules and guidelines regarding the detection, prevention, and mitigation of identity theft for entities that are subject to their respective enforcement authorities (also known as the “identity theft red flags rules”). The FCRA did not require or authorize the Securities Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”) to issue identity theft red flags rules. Instead, the FRCA applied to entities that registered with the CFTC and SEC, such as futures commission merchants, broker-dealers, investment companies, and investment advisers. In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which, among other things, amended the FCRA to add the CFTC and SEC to the list of federal agencies that must jointly adopt and individually enforce identity theft red flags rules. In February 2012, the SEC and CFTC jointly proposed for public notice and comment identity theft red flags rules and guidelines and card issuer rules. On May 20, 2013, the SEC and CFTC jointly adopted Regulation S-ID: Identity Theft Red Flags (“Regulation S-ID” or “Reg. S-ID”). 4 The compliance date for Reg. S-ID was November 20, 2013. Regulation S-ID requires financial institutions, including broker-dealers and investment advisers registered with the Commissions that offer or maintain one or more covered accounts, to develop and implement a written identity theft prevention program “that is designed to detect, prevent, and mitigate identity theft” in connection with the opening of a covered account or any existing covered account. 5 The program “must be appropriate to the size and complexity of the financial institution … and the nature and scope of its activities.” 6 Under Regulation S-ID, an identity theft prevention program must include reasonable policies and procedures to: (i) identify relevant “red flags” for the covered accounts and incorporate them into the program; 7 (ii) detect the red flags that have been incorporated into the program; (iii) respond appropriately to any red flags that are detected pursuant to the program; and (iv) ensure that the program is updated periodically to reflect changes in risks to customers and to the safety and soundness of the firm from identity theft. 8 A written identity theft prevention program may incorporate by reference policies outside of the program in order to satisfy the requirements of Regulation S-ID, but such incorporation by reference must be explicit. 9 With respect to the identification of relevant red flags, Regulation S-ID requires firms to consider several factors specific to the firm in order to identify red flags that are relevant to the firm’s business and the nature and scope of its activities, such as the types of covered accounts it offers or maintains, methods it provides to open covered accounts, methods it provides to access covered accounts, and its previous experiences with identity theft. 10 Appendix A to Regulation S-ID, which contains guidelines intended to assist firms in the formulation and maintenance of an identity theft prevention program that satisfies the requirements of Regulation S-ID, lists categories of red flags that a firm should consider incorporating in its program “as appropriate.” 11 Supplement A to Appendix A further provides a non-comprehensive list of examples of red flags from each of these categories that the firm “may consider incorporating into its Program, whether singly or in combination … in connection with covered accounts.” 12 The firm must consider these examples of red flags and include in its identity theft prevention program those that are appropriate. 13 With respect to responding to detected red flags in order to prevent and mitigate identity theft, Regulation S-ID requires an identity theft prevention program to include policies and procedures that “provide for appropriate responses” to detected red flags “that are commensurate with the degree of risk posed.” 14 In determining an appropriate response, a firm “should consider aggravating factors that may heighten the risk of identity theft, such as a data security incident that results in unauthorized access to a customer’s account records … or notice that a customer provided account information” to someone under false pretenses. 15 With respect to periodically updating a written identity theft prevention program, Appendix A provides that firms should consider factors such as: (i) the firm’s experiences with identity theft; (ii) changes in methods of identity theft; (iii) changes in methods to detect, prevent or mitigate identity theft; (iv) changes in the types of accounts offered or maintained; and (v) changes in the firm’s structure or service provider arrangements. 16 Regulation S-ID also requires firms to provide for the continued administration of the written identity theft prevention program by training staff, as necessary, to effectively implement the program, and by exercising appropriate and effective oversight of service provider arrangements. 17 With respect to the oversight of service provider arrangements in connection with one or more covered accounts, the firm should take steps to ensure that the activity of the service provider is conducted in accordance with reasonable policies and procedures designed to detect, prevent and mitigate the risk of identity theft. 18 On July 27, 2022, the SEC announced ( here ) that it separately charged J.P. Morgan Securities LLC, UBS Financial Services Inc., and TradeStation Securities, Inc. for deficiencies in their programs to prevent customer identity theft, in violation of the Regulation S-ID. According to the SEC’s orders ( here , here and here ), from at least January 2017 to October 2019, the firms’ identity theft prevention programs did not include reasonable policies and procedures to identify relevant red flags of identity theft in connection with customer accounts or to incorporate those red flags into their programs. In addition, the SEC found that the firms’ programs did not include reasonable policies and procedures to respond appropriately to detected identity theft red flags, or to ensure that the programs were updated periodically to reflect changes in identity theft risks to customers. The JPMorgan order ( here ) also found that the firm failed to exercise appropriate and effective oversight of all service provider arrangements and failed to train staff to effectively implement one of its identify theft prevention programs in 2017.  The UBS order ( here ) also found that the firm failed to periodically review new or existing types of customer accounts to determine whether and how its identity theft prevention program should apply to them; failed to adequately involve the board of directors in the oversight, development, implementation, and administration of the program; and failed to train its employees to effectively implement the program. The TradeStation order ( here ) also found that the firm failed to adequately involve its board of directors in the oversight, development, implementation, and administration of its identity theft prevention program and failed to exercise appropriate and effective oversight of service provider arrangements. The SEC found that each firm violated Rule 201 of Regulation S-ID. Without admitting or denying the SEC’s findings, each firm agreed to cease and desist from future violations of the charged provision, to be censured, and to pay the following penalties: JPMorgan: $1.2 million, UBS: $925,000, and TradeStation: $425,000. “Regulation S-ID is designed to help protect investors from the risks of identity theft,” said Carolyn M. Welshhans, Acting Chief of the SEC Enforcement Division’s Crypto Assets and Cyber Unit. “Today’s actions are reminders that broker-dealers and investment advisers must design and operate identity theft prevention programs that are appropriately tailored to their businesses and update them in response to the increased threat and changing nature of identity theft.” Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes See , e.g. , “U.S. Government Accountability Office, Information Security: Federal Guidance Needed To Address Control Issues With Implementing Cloud Computing (May 2010), available at http://www.gao.gov/new.items/d10513.pdf ; Department of Commerce, Internet Policy Task Force, Commercial Data Privacy and Innovation In The Internet Economy: A Dynamic Policy Framework, at Section I (2010), available at http://www.ntia.doc.gov/reports/2010/iptf_privacy_greenpaper_12162010.pdf . See 15 U.S.C. 1681–1681x. See Fair and Accurate Credit Transactions Act of 2003, Pub. L. 108-159, 117 Stat. 1952 (2003). See Release Nos. 34-69359, IA-3582, IC-30456 (May 20, 2013) ( here ). 17 C.F.R. § 248.201(d)(1). The rule defines “identity theft” as a fraud committed or attempted using the identifying information of another person without authority. 17 C.F.R. § 248.201(b)(9). 17 C.F.R. § 248.201(d)(1). “Red flags” are defined as “a pattern, practice, or specific activity that indicates the possible existence of identity theft.” 17 C.F.R. § 248.201(b)(10). 17 C.F.R. § 248.201(d)(2)(i)-(iv). 17 C.F.R. § 248.201 Appendix A, Section I. 17 C.F.R. § 248.201, Appendix A, Section II(a). These categories are: (i) alerts, notifications, or warnings received from consumer reporting agencies; (ii) suspicious documents, such as documents that appear to have been altered or forged; (iii) suspicious personal identifying information, such as a suspicious address change; (iv) unusual use of, or other suspicious activity related to, a covered account; and (v) notice from customers, victims of identity theft, or law enforcement authorities. 17 C.F.R. § 248.201, Appendix A, Section II(c). 17 C.F.R. § 248.201, Appendix A, Supplement A. 17 C.F.R. § 248.201(f). 17 C.F.R. § 248.201(d)(2)(iii). 17 C.F.R. § 248.201, Appendix A, Section IV. 17 C.F.R. § 248.201, Appendix A, Section V. 17 C.F.R. § 248.201(e)(3)-(4). 17 C.F.R. § 248.201, Appendix A, Section VI(c).

By Jonathan H. Freiberger This Blog frequently covers the pre-foreclosure notice requirements of RPAPL 1304 .  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  While this stuff is interesting, it also happens to be the subject of frequent decisions from First and Second Departments.  This week numerous RPAPL 1304 cases were decided and three will be discussed today. Briefly, as noted in prior Blog articles, 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. U.S. Bank National Association v. Maioriello – decided July 26, 2022, by the Appellate Division, First Department As we have discussed in the past, for the purpose of consistency in its application, Courts are strictly interpreting RPAPL 1304.  In October of 2021, we wrote about Wells Fargo Bank, N.A. v. Yapkowitz , 199 A.D.3d 126 (2 nd Dep’t 2021), where the Court, in deciding an “issue of first impression before Court,” held that where there are two or more borrowers, mailing a jointly addressed 1304 notice is “insufficient to satisfy the requirements of RPAPL 1304.”  Each borrower must be sent a separate notice.  Relying on Yapkowitz , the First Department in Maioriello , in dismissing lender’s complaint, held that lender’s “mailing of a 90-day notice jointly addressed to both borrowers did not comply with RPAPL 1304.”  The Court also held that “ lthough failed to raise this point before the motion court, the issue of 's strict compliance with RPAPL was before the motion court and the noncompliant nature of the jointly addressed notices may be addressed on appeal, as the deficiency is apparent on the face of the record and could not have been avoided if brought to the court's attention at the proper juncture.” Pennymac Corp. v. Levy – decided July 27, 2022, by the Appellate Division, Second Department Borrowers in Levy delivered a mortgage to secure their payment obligations under a promissory note.  On borrowers’ default in 2010, lender commenced its foreclosure action in 2012.  In their answer – you guessed it –borrowers asserted as an affirmative defense the lenders failure to comply with RPAPL 1304 (among other things).  Borrowers appealed from the grant of lender’s motion for summary judgment.  The Second Department reversed. The Court recognized that a lender moving for summary judgment in a residential mortgage foreclosure action , inter alia , “must tender sufficient evidence demonstrating the absence of material issues as to its strict compliance with RPAPL 1304.”  (Citation and internal quotation marks omitted.)  The Court also noted that by requiring the sending of RPAPL 1304 notices by both regular and certified mail, “the Legislature implicitly provided the means for the to demonstrate its compliance with the statute, i.e., by proof of the requisite mailing, which can be established with proof of the actual mailings, such as affidavits of mailing or domestic return receipts with attendant signatures, or proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed, sworn to by someone with personal knowledge of the procedure.”  (Citations and internal quotation marks omitted.) Compliance with RPAPL 1304 was not demonstrated by lender in Levy .  The Court found that lender “failed to submit an affidavit of service or proof of mailing by the United States Postal Service evidencing that it properly served the defendants.”  Further, lender’s reliance on the affidavit of a representative of lender’s loan servicer was rejected.  Despite the representative’s claim of “personal knowledge,” “he did not purport to be familiar with the office procedure for mailing notices once they have been generated, and, therefore, he did not establish proof of a standard office practice and procedure designed to ensure that items are properly addressed and mailed.”  (Citations omitted.)  Finally, the Court rejected the “unsigned” certified mail receipts with no postmarks as insufficient to prove that the notices were mailed.  Lender also failed to produce evidence of regular first-class mailing. U.S. Bank v. Hussain – decided July 27, 2022, by the Appellate Division, Second Department In 2007, borrower borrowed $350,000 from Bank of America, which obligation was secured by a mortgage on borrower’s property in Queens, New York.  The note and mortgage were assigned to the plaintiff (“lender”).  Lender commenced its foreclosure action after borrower’s default.  Lender’s motion for summary judgment, and its subsequent motion for renewal and reargument, were denied. The Court found that lender failed to “establish, prima facie, that it strictly complied with the requirements of RPAPL 1304.”  The affidavit from an officer of lender’s loan servicer was insufficient to demonstrate compliance with RPAPL 1304 because “the RPAPL 1304 notices were not incorporated as exhibits to affidavit, and therefore, her description of the documents constituted inadmissible hearsay.”  (Citations omitted.)  Further, as in Levy , lender “also failed to include any United States Postal Service mail return receipts, affidavits of mailing, or other proof that the mailing actually occurred and the affidavit failed to adequately describe either personal knowledge of the mailing or the standard office mailing procedures of the loan servicer.” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Laborers and material suppliers (collectively, “Providers”) that add value to construction projects should be paid for their work by the owner, general contractor or whoever else brought them to the project in the first instance.  If Providers do not receive payment despite their own performance, several remedies are available.  For example, a simple claim for breach of contract may be brought by an unpaid Provider.  Such remedies, however, may be insufficient to insure payment.  Accordingly, Article 2 of New York’s Lien Law provides additional rights and remedies to Providers by establishing the right to file mechanics’ liens against the improved property.  Thus, “ Lien Law § 3 provides that a contractor who performs labor or furnishes materials for the improvement of real property with the consent, or at the request of, the owner ‘shall have a lien for the principal and interest, of the value, or the agreed price, of such labor ... or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien.’”  NGU, Inc. v. City of New York , 189 A.D.3d 850 (2 nd Dep’t 2020) (hyperlink added).  “It is well established that the purpose of the mechanics’ lien statute is to provide an added degree of protection to persons who provide labor or material for construction projects by providing independently enforceable security interest upon the construction property.”  Strober Brothers, Inc. v. Kitano Arms Corp. , 224 A.D.2d 351, 352 (1 st Dep’t 1996) (citations omitted).   So important are the rights afforded by the Lien Law, Section 34 of the Lien Law provides that “ otwithstanding the provisions of any other law, any contract, agreement or understanding whereby the right to file or enforce any lien created under article two is waived, shall be void as against public policy and wholly unenforceable….”  In describing the background of the adoption of Section 34, the Court of Appeals stated: Senator James H. Donovan, a sponsor of the bill which the Legislature ultimately enacted as Lien Law § 34, described the impetus behind this legislation: “Since the year 1897 the Legislature has recognized the need to afford protection to those who furnish work, labor and services or provide materials for the improvement of real property. Throughout the succeeding years changes in the law have been enacted to clarify, enlarge and perfect the right of those who improve real property to be paid. The Lien Law has been the sole vehicle through which such interests may gain a measure of protection. … The surrender of such protective rights as a prerequisite to obtaining a contract or subcontract is repugnant, against public policy and should be void”  It is evident from the foregoing that New York’s Lien Law is remedial in nature and intended to protect those who have directly expended labor and materials to improve real property at the direction of the owner or a general contractor. West-Fair Elec. Contractors v. Aetna Cas. & Sur. Co. , 87 N.Y.2d 148 (1995) (quoting Mem of Senator Donovan, L.1975, ch. 74, 1975 N.Y.Legis Ann., at 341) (ellipses omitted). While the Lien Law provides a valuable tool for Providers to secure payment, the rights afforded by the lien law can also be abused in order to, among other things, pressure an owner or general contractor into paying a Provider when, perhaps, there is a legitimate dispute as to a Provider’s entitlement to be paid.  The filing of a mechanics’ lien, for example, may be a default under a mortgage, a construction loan or the contract between an owner and its general contractor.  Accordingly, the Lien Law affords an owner or general contractor the opportunity to discharge a lien under certain circumstances.  For example, Lien Law § 19 provides that liens for private improvements can be discharged by, inter alia , failing to commence an action to foreclose the lien within one year of filing (§19(2)), neglecting to prosecute an action to foreclose a lien (§19(3)), or by executing a bond or undertaking under specified conditions “in an amount equal to one hundred ten percent of such lien conditioned for the payment of any judgment which may be rendered against the property for the enforcement of the lien” (§ 19(4)).  Lien Law §§ 20 (discharge of lien after notice of lien filed by payment of money into court), 21 (discharge of lien for public improvement) and 21-a (vacating a lien for a public improvement, by court order) also permit the vacatur or discharge of mechanics’ liens under appropriate circumstances. Another check on the ability to abuse the right to file a mechanics’ lien is that a lienor is not permitted to file a lien in which the amount of the lien is willfully exaggerated.  Thus, Lien Law § 39 provides: In any action or proceeding to enforce a mechanic's lien upon a private or public improvement or in which the validity of the lien is an issue, if the court shall find that a lienor has wilfully exaggerated the amount for which he claims a lien as stated in his notice of lien, his lien shall be declared to be void and no recovery shall be had thereon. No such lienor shall have a right to file any other or further lien for the same claim. A second or subsequent lien filed in contravention of this section may be vacated upon application to the court on two days' notice. Section 39-a of the Lien Law sets forth the penalty for willfully exaggerating a lien and provides: Where in any action or proceeding to enforce a mechanic's lien upon a private or public improvement the court shall have declared said lien to be void on account of wilful exaggeration the person filing such notice of lien shall be liable in damages to the owner or contractor. The damages which said owner or contractor shall be entitled to recover, shall include the amount of any premium for a bond given to obtain the discharge of the lien or the interest on any money deposited for the purpose of discharging the lien, reasonable attorney's fees for services in securing the discharge of the lien, and an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceeded the amount actually due or to become due thereon. Sections 39 and 39-a of the lien law “must be read in tandem, and damages may not be awarded under § 39-a unless the lien has been discharged for willful exaggeration.”  Guzman v. Estate of Fluker , 226 A.D.2d 676, 678 (2 nd Dep’t 1996) (citations omitted).  Further, because Lien Law § 39-a is penal in nature, “it must be strictly construed in favor of the person upon whom the penalty is sought to be imposed.”  Id.   Lien Law § 39-a’s remedies and damages are “available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action.”  Matrix Staten Island Dev., LLC v. BKS-NY, LLC , 204 A.D.3d 1004, 1006 (2 nd Dep’t 2022) (citation and internal quotation marks omitted).  In circumstances where a lien is discharged “for reasons unrelated to its supposed exaggeration, there remains no lien to be declared void by the court.”  Wellbilt Equip. Corp. v. Fireman , 719 N.Y.S.2d 213, 216 (1 st Dep’t 2000) (citations omitted). The Appellate Division, Second Department, determined issues regarding willful exaggeration in Adria Infrastructure, LLC v. Henick-Lane, Inc. , decided on July 20, 2022.  In Adria , Adria and Henick entered into a subcontract to perform work on a construction project.  Adria liened the project in 2013 and 2015 and commenced an action to foreclose those liens in 2015.  Henick’s answer contained a wilful exaggeration counterclaim.  After discharging the liens, Adria moved for leave to file an amended complaint eliminating the lien foreclosure claim.  Henick moved “to reinstate the 2015 lien but at a value of $0.”  Supreme Court, among other things, denied motion to the extent that it sought to remove the cause of action to foreclose the mechanic's lien dated March 31, 2015, … and granted that branch of Henick's motion which was to reinstate the mechanic's lien dated March 31, 2015, at a value of $0.”  The Second Department affirmed on Adria’s appeal. The Second Department articulated the issue to be decided as concerning “the effect of the plaintiff's discharge of the 2015 lien and whether the lien can be reinstated to preserve Henick's wilful exaggeration counterclaim.”  In reaching its conclusion, the Court noted that the “remedy in Lien Law § 39-a requires a finding that the lienor deliberately and intentionally exaggerated the lien amount, and is available only where the lien is otherwise valid.”  (Citations and internal quotation marks omitted.)  Accordingly, the Court held that: The Supreme Court correctly determined that the plaintiff's 2015 lien should be reinstated in order to allow Henick to pursue its wilful exaggeration counterclaim. Pursuant to the Lien Law, the lien filed by was required to be in existence at the time of trial in order to allow for the pursuit of a wilful exaggeration counterclaim by Henick. Thus, as determined by the Supreme Court, the reinstatement of the 2015 lien was necessary in order to permit Henick's counterclaim to continue.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It is well-settled that the arbitration provisions of the Civil Practice Law and Rules (CPLR § 7501 et seq .) evidence a legislative intent to encourage arbitration. 1 In fact, arbitration is a preferred means for the settlement of disputes between parties. 2 In light of the foregoing, (1) when parties to a contract have clearly and unambiguously agreed to arbitrate their disputes, the courts will enforce that agreement, as they would any other agreement, to give effect to the parties’ intention; (2) the courts will not substitute their judgment for that of the arbitrator(s); and (3) the courts will confirm an arbitration award, unless a movant can demonstrate that one of the grounds for vacatur set forth in the CPLR exist – a task that is often difficult to do. “Where there is no substantial question whether a valid agreement was made or complied with, and the claim sought to be arbitrated is not barred by limitation …, the court direct the parties to arbitrate.”3 Where the validity of an agreement to arbitrate is in question, the court retains the authority, in the initial instance, to assess whether the arbitration clause – independent of overall contractual validity – is valid. 4   If the court finds the arbitration clause to be valid (as in Sussman v. Bryah, LLC , 2022 N.Y. Slip Op. 32300(U) (Sup. Ct., N.Y. County July 14, 2022) ( here ), the case that we examine today), then the case must give way to the arbitrator on the question of overall contractual validity. 5 Sussman involved a dispute arising from defendant’s manufacture and installation of custom kitchen cabinets in plaintiff’s apartment. In addition to allegations concerning defendant’s workmanship and the condition of the materials used ( i.e. , the kitchen cabinets), plaintiff alleged that defendant was not licensed as a Home Improvement Contractor, pursuant to New York City Administrative Code § 20-387, 6 at the time the services were performed. The agreement pursuant to which the work was performed provided that “ ny dispute arising under this Sales Contract shall be settled by binding arbitration pursuant to the rules of the American Arbitration Association”.  Based upon the foregoing language, defendant moved to compel arbitration. Plaintiff opposed the motion, arguing that the sales agreement, as opposed to the arbitration provision, was invalid because defendant was allegedly not a licensed contractor. Plaintiff contended that by violating Administrative Code § 20-387, the entire sales contract was void. The court granted the motion. In doing so, the Court found that plaintiff only “challenge the validity of the whole agreement and not separately challenge the arbitration clause.” “Accordingly,” concluded the Court, “the issue of whether this contract was legal must, therefore, be decided by the arbitrator.” In explaining its rationale, the Court noted that plaintiff did not provide any “basis to assail the arbitration clause itself, as an expression of mutual consent to arbitrate disputes.” In the absence of such evidence, said the Court, “ his dispute must … now move forward to arbitration for disposition of any and all relevant questions, including, importantly, whether defendant possessed the capacity, as a licensed Home Improvement Contractor, to enter into the sales agreement ….” Takeaway In many of the arbitration cases this Blog examines, the issue before the court is whether the parties agreed to arbitrate their disputes – that is, whether they have a valid and binding agreement to arbitrate. Sussman bucks this trend by focusing on the agreement as a whole, which, as discussed, is an issue for the arbitrator to decide.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes E.g. , Matter of Weinrott (Carp) , 32 N.Y.2d 190, 199 (1973). Id. CPLR § 7503(a). Matter of Prinze , 38 N.Y.2d 570 (1976). Id. See also Monarch Consulting, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA , 26 N.Y.3d 659, 661 (2016). New York City Administrative Code, § 20-387, provides that “ o person shall solicit, canvass, sell, perform or obtain a home improvement contract as a contractor from an owner without a license therefor.”

By: Jeffrey M. Haber A recurring question that courts and litigants often encounter is how to apply the continuing wrong doctrine to a statute of limitations.  Statutes of limitations restrict the time within which a defendant can be held liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue for a lawyer and client to discuss. See,="See," e.g. , ="e.g., " here,=">here," and="and" >here.=">here."> In today’s article, we examine 333 E. 91st St. Owners Corp. v. 1765 First Ave. Associates, LLC , 2022 N.Y. Slip Op. 32189(U) (Sup. Ct., N.Y. County July 7, 2022) ( here ), a case involving the statute of limitations for a breach of contract cause of action and the application of the continuing wrong doctrine.   In New York, the statute of limitations for a breach of contract claim is six years. 1 It begins to run ( i.e. , accrue) from the date of the breach. The claim does not accrue from the date of discovery. 2 As the Court of Appeals explained, a contrary rule “would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules that have long governed this aspect of commercial repose.” 3 Statutes of limitation can be tolled – that is extended. One doctrine that allows for tolling is the continuing wrong doctrine. “The continuous wrong doctrine is an exception to the general rule that the statute of limitations runs from the time of the breach though no damage occurs until later.” 4 Where applicable, the doctrine “serves to toll the running of a period of limitations to the date of the commission of the last wrongful act” and “may only be predicated on continuing, unlawful acts and not on the continuing effects of earlier unlawful conduct.” 5 “The distinction is between a single wrong that has continuing effects and a series of independent, distinct wrongs.” 6 Thus, the doctrine does not apply where the subsequent wrongs are consequences of the original, time-barred wrongful act. 7 The distinction between the consequences of a wrongful act and the wrongs themselves was discussed by the Appellate Division, First Department in Henry , a case involving a plaintiff who was enrolled in two credit card programs without his consent and billed monthly for those programs. 8 The First Department held that the doctrine did not toll the limitations period for two reasons: first, the absence of a breach of a recurring duty, and second, the wrongful acts – automatic monthly credit card fee charges – “represent the consequences of those wrongful acts in the form of continuing damages, not the wrongs themselves.…” 9 The same result was rendered by the First Department in Matter of Yin Shin Leung Charitable Foundation v. Seng (Matter of Yin Shin) , 177 A.D.3d 463 (1st Dept. 2019), where the Court held that the doctrine did not toll the plaintiffs’ claim because “ he loss of corporate income was merely a continuing effect of the initial decision” from which the claim arose. 10 Recently, the First Department had the opportunity to further discuss the applicability of the doctrine. In CWCapital Cobalt VR Ltd. v. CWCapital Investment LLC (Cobalt) , 195 A.D.3d 12, 13-16 (1st Dept. 2021), the plaintiff asserted a breach of contract claim against the defendant CWCapital Investment, LLC (“CWCI”) for CWCl’s failure to manage certain commercial mortgage-backed securities (“CMBS”) based on their agreement. The agreement required CWCI to, in pertinent part, appoint a special servicer to “direct and supervise the disposition of nonperforming and underperforming loans that are held by a particular CMBS trust so as to mitigate the losses suffered by the trust.” The parties’ arrangement also required CWCI “to ensure that the value of assets is maximized.” The plaintiff alleged that CWCI breached the agreement in three distinct ways, each category of wrongdoing dealing “with the actions of the special servicer CWCI selected on behalf”. CWCI moved to dismiss the complaint in its entirety, arguing that the plaintiff’s causes of action were time-barred.  The First Department held that the continuing wrong doctrine applied to toll the statute of limitations as to the last wrongful act because “ he explicit language of the conferred on CWCI a continuing duty to manage investment.” Cobalt alleged that, “with respect to special servicers like CWCA, this responsibility included wielding the power not only to appoint and terminate, but also to ensure that all services being performed by the special servicer were done only to benefit the COO investors.” “Essentially,” noted the Court, “the allegations describe an arrangement by which CWCI acted as eyes and ears with respect to the CMBS trusts and had a responsibility to do everything in its power to prevent any activities that could possibly be to detriment.” “Thus,” concluded the Court, “while certainly a claim accrued the first time CWCI failed to act upon CWCA’s engagement in behavior that allegedly diminished the value of its investment, there no basis for the argument that each subsequent time CWCI failed to act did not constitute a separate, actionable, wrong.” 11 The First Department placed heavy emphasis on the parties’ agreement, which conferred a “contractual obligation to manage the CMBS trust assets on an ongoing basis, with ‘reasonable care and in good faith.’” 12 Therefore, the defendants’ subsequent breaches were based on new failures or omissions of the ongoing, recurring duty. In Marcal Finance SAA v. Middlegate Securities Ltd. , 203 A.D.3d 467 (1st Dept. 2022), the plaintiff contracted with defendant Middlegate Securities Ltd. to “manage inheritance for their benefit.” Plaintiffs sued defendant in October 2015 for breaching their agreement by misappropriating the funds in 2011. The First Department held that the plaintiffs sufficiently alleged a “series of unauthorized transfers” whereby the “continuing wrong doctrine tolled the running of the statute of limitations until the last such transfer was made.” 13 Similarly, in Manipal Education Americas, LLC v. Taufiq , 203 A.D.3d 662 (1st Dept. 2022), the defendant, who was the plaintiff’s former director of marketing, repeatedly contracted with the company, Exit Editorial, Inc., for video editing services. The plaintiff brought suit, asserting that the defendant “falsely represented to it that he negotiated with Exit at arm’s length and that Exit’s prices were reasonable, when in fact its prices were well above market rate, he had an ownership interest in Exit, and he received a cash finder’s fee for each contract with Exit.” The First Department found that “a separate exercise of judgment, and thus a separate wrong, was committed each time Exit was hired, thereby enabling the application of the continuing wrong doctrine.” 14 With these decisions in mind, the 333 E. 91st St. Owners court held that the continuing wrong doctrine did not toll the statute of limitations for plaintiff’s breach of contract claims . 333 E. 91st St. Owners concerned defendant’s alleged failure to transfer a residential manager unit (“RM Unit”) to plaintiff, the owner of the subject residential cooperative building, in contravention of the offering plan (“Offering Plan”). The Offering Plan required defendant to transfer ownership of the unit to plaintiff for a fixed price. The Offering Plan further required defendant to sell the unit “within three (3) months of the First Closing.” Between the three-month period of the First Closing and transfer of ownership, defendant had the right to not to sell an apartment to plaintiff for a period of up to three months following the date of the First Closing during which period defendant would rent the unit occupied by the Resident Manager to defendant. In that event, plaintiff agreed to pay defendant’s rent of $5,675 per month until the Resident Manager’s apartment was conveyed to plaintiff.  Once the three-month rental period expired, plaintiff alleged that defendant was “to apply payments received from purchasing shareholders against the balance of the Purchase Price for the RM Unit” and “had the right to make a loan whose principal and interest would be reduced as shareholders purchased and made their RM Unit Contributions, but no such loan was ever memorialized.” The plaintiff alleged that the First Closing occurred as early as May 24, 2010; however, the plaintiff did not learn of this closing until March 2020, after records were supplied to its counsel.  The plaintiff contended that the first closing was disclosed on September 8, 2010, as evidenced in the eighteenth amendment to the Offering Plan. The plaintiff claimed that the defendant was obligated to transfer ownership of the RM Unit by September 2010, three months after the May 2010 closing or at the latest, December 2010, three months following the September 2010 closing. The defendant did not transfer the RM Unit until September 2020.  Plaintiff alleged that defendant breached the Offering Plan by improperly charging plaintiff rent for the RM Unit for nearly ten years until the RM Unit was finally transferred. Plaintiff also alleged that defendant breached a proprietary lease by failing to pay maintenance due on the RM Unit for April, May, June, July, August, and September 2020. Plaintiff also sought damages for breach of the covenant of good faith and fair duty, alleging that defendant “maintained control of the Board of Directors of [] until at least June 2017,” which caused defendant’s “appointed directors to elevate interests ... over those of [] and cause[] to make unauthorized rent payments to the ,” and by its control, “prevent its appointed directs from demanding the timely transfer of the RM Unit.” Defendant sought dismissal of plaintiff’s claims as time-barred under the applicable statute of limitations. In opposition, plaintiff invoked the continuing wrong doctrine, arguing that the obligation to transfer the RM Unit was a continuing one and each overpayment of monthly rent constituted a new breach in a series of continuing wrongs. The Court agreed with defendants and dismissed the complaint. The Court found that defendant breached its obligation under the Offering Plan to timely transfer the RM Unit as early as September 2010, and as late as December 2010. “And, because, the transfer was allegedly never made on time,” noted the Court, “the alleged rent payments – over the three-month period permitted – occurred because of the initial alleged breach in 2010.” 15 “It was single failure to transfer on time that gave rise to the excessive rent payments and other contributions, and without a contractual obligation imposing a recurring duty and no breach of a recurring duty thereof, the monthly rent payments are consequences of the alleged failure to timely transfer the RM Unit”, said the Court. 16 Thus, concluded the Court, “the doctrine will not toll the statute of limitations period. The applicable limitations period accrued in December 2010 at the latest and the limitations period expired in December 2016.” 17 In denying application of the continuing wrong doctrine, the Court rejected plaintiff’s contention that “each monthly overpayment of rent constituted a new breach in a series of continuing wrongs”. 18 The Court held that the “monthly overpayment of rent more aptly analogous to the ‘consequences of wrongful acts,’ as overpayment of monthly rent, following the permissible three-month period of rent payments, flowed from the alleged breach of parties’ contractual obligation to transfer the RM Unit within the three months of the First Closing.” 19 Takeaway The continuing wrong doctrine is based on the continuation of unlawful acts; it is not based on the continuing effects of earlier unlawful conduct. The distinction, therefore, is between a single wrong that has continuing effects and a series of independent, distinct wrongs. 333 E. 91st St. Owners makes clear that plaintiffs will not be able to toll the statute of limitations when application of the doctrine is dependent upon the continuing harm incurred by a singular wrong. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes CPLR § 213(2). ACE Sec. Corp., Home Equity Loan Trust, Series 2006-SL2 v. DB Structured Prods., Inc. , 25 N.Y.3d 581, 594 (2015). Id. (citations and internal quotation marks omitted). Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017) (citation omitted). Id. Id. (internal quotation marks and citation omitted). Id. at 602. Id. Id. Id. at 464. 195 A.D.3d at 19-20. Id. at 20. 203 A.D.3d at 468. 203 A.D.3d at 663. Slip Op. at *9. Id. Id. Id. at *10. Id.

By Jonathan H. Freiberger I say it all the time and I’m going to say it again, the readers of this Blog know that we frequently discuss numerous aspects of residential mortgage litigation.  S ee, e.g., < here =">here"> and the articles linked therein.  A related subtopic that gets much attention in this Blog is the pre-foreclosure notice requirements of RPAPL 1304 .  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  You may say “enough is enough”, but this stuff is exciting (and, no I do not need to get out more).  Just when you think that every nook and cranny of this statute has been addressed, the Appellate Division decides a case that touches upon something new.  Such is the case with Deutsche Bank National Trust Company v. Pariser , decided on July 13, 2022. Before getting into Pariser , by way of brief background as noted in prior Blog articles, 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.  One purpose of RPAPL 1304 is to enable defaulted borrowers to “benefit from the information provided in the notice and the 90–day period during which the parties could attempt to work out the default without imminent threat of a foreclosure action, in an effort to further the ultimate goal of reducing the number of foreclosures”.  CIT Bank N.A. v. Schiffman , 36 N.Y.3d 550, 555 (2021) (citation and internal quotation marks omitted). The failure of the “lender, assignee or mortgage loan servicer” to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint ( see, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018)) when the issue is raised as an affirmative defense by the borrower ( see, e.g., One West Bank, FSB v. Rosenberg , 189 A.D.3d 1600, 1602-3 (2 nd Dep’t 2020) (citation omitted)).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the plaintiff must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736 (2 nd Dep’t 2018) (citations omitted). The facts of Pariser are typical.  Borrowers delivered a mortgage to lender to secure the obligation to repay a $500,000 promissory note.  (There were a series of assignments by which Deutsche Bank became the owner and holder of the subject note.  The term “lender” herein is used generically to refer to all past and present holders of the relevant paper.)  Borrowers defaulted in 2008 and, later that year, lender commenced a foreclosure action that was discontinued by stipulation in 2009. Lender commenced the subject foreclosure action in 2015.  Lender moved for summary judgment to strike borrowers’ answer and for an order of reference.  Borrowers cross-moved for summary judgment dismissing the action as time-barred.  Supreme court granted lender’s motion and denied borrowers’ cross-motion.  Supreme court subsequently granted lender’s motion to confirm the referee’s report and for a judgment of foreclosure and sale.  Borrowers appealed. The Appellate Division in Pariser decided several issues.  First, the Court, agreeing with supreme court, found that the action was not time-barred.  [Eds. Note: This Blog discussed statute of limitations issues in the context of mortgage foreclosure actions, inter alia , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] However, the Court reversed supreme court and denied lender’s motion for summary judgment for numerous failures to comply with RPAPL 1304.  Initially, as to proof of proper service of RPAPL 1304 notices, the Court stated that proof of mailing “can be established with proof of the actual mailings, such as affidavits of mailing or domestic return receipts with attendant signatures, or proof of a standard office mailing procedure designed to ensure that items are properly addressed and mailed, sworn to by someone with personal knowledge of the procedure.”  (Citations, internal quotation marks and ellipses omitted.)  [Eds. Note: This Blog discussed mailing compliance issues regarding notices required by the RPAPL, inter alia , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] In Pariser , the Court found that lender failed to establish that the notices were properly “mailed to each defendant by certified and first-class mail” because the “affidavit submitted in support of the plaintiff's motion does not contain an attestation that the affiant had personal knowledge of the purported mailings nor does the affiant attest to knowledge of the mailing practices of the Law Offices of McCabe, Weisberg, and Conway, P.C., the entity that allegedly sent the notices to the defendants on behalf of the loan servicer.”  (Citations omitted.)  Further, the Court noted lender’s failure to “submit an affidavit of service or any document from the United States Postal Service establishing that the mailing actually occurred.”  (Citations omitted.) The Court also found that lender failed to establish that the notices complied with RPAPL 1304 by including with the notice a list of the “five housing counseling agencies serving the region in which the subject property is located, i.e. , the Mid-Hudson region ( see RPAPL former 1304<2> )”.   [Eds. Note: This Blog discussed the counseling agency issue requirement < here =">here"> .]  In this regard, the Court stated that “the list of housing counseling agencies annexed to the copy of the RPAPL notice submitted in support of the plaintiff's motion included five agencies, three of which are located outside of the Mid-Hudson region. Although the list indicates that two of those three agencies serve ‘all of New York State,’ there is no evidence in the record to indicate the regions served by the third agency. Thus, the plaintiff failed to establish, prima facie, that all five of the agencies serve the Mid-Hudson region.”  (Citations omitted.) Finally, the Court discussed an issue that has not been previously addressed by this Blog.  The RPAPL 1304 notices in Pariser , were allegedly mailed not by the “lender, assignee or mortgage loan servicer” as required by statute, but by lender’s counsel.  In determining that such notices were improper because counsel was not authorized to do so when the notices were sent, the Court stated: The plaintiff further failed to establish that the RPAPL 1304 notices were sent by the "lender, assignee, or loan servicer" as required by the statute ( see RPAPL 1304<1> ). Here, the RPAPL notices were allegedly sent on August 7, 2014, by the Law Offices of McCabe, Weisberg, and Conway, P.C., on behalf of Ocwen Financial, the plaintiff's loan servicer. However, the limited power of attorney authorizing Ocwen Financial to act on behalf of the plaintiff, which was submitted by the plaintiff in support of its motion, states that it was executed on and effective as of September 17, 2014.    Prior to January 14, 2020, RPAPL 1304 provided that “ he notices required by this section shall contain a current list of at least five housing counseling agencies serving the county where the property is located from the most recent listing available from department of financial services.”  On and after January 14, 2020, RPAPL 1304 provided that “ he notices required by this section shall contain a current list of United States department of housing and urban development approved housing counseling agencies, or other housing counseling agencies serving the county where the property is located from the most recent listing available from the department of financial services.  The list shall include the counseling agencies' last known addresses and telephone numbers.  The department of financial services shall make available a listing, by county, of such agencies which the lender or mortgage loan servicer may use to meet the requirements of this section.” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Yunjie Yang v. Knights Genesis Group , 2022 N.Y. Slip Op. 32126(U) (Sup. Ct., N.Y. County July 6, 2022) ( here ), the court was asked to consider various matters associated with the particularity requirement for pleading fraud. In this regard, by the court examined the group pleading doctrine and the specificity needed to maintain a fraud claim. The motion court was also asked to consider alter ego liability and the factual bases for piercing the corporate veil.    Yang involved investors who each invested $500,000 in 1989 Investor LLC (the “Company”), an entity whose purpose was to fund a real estate development project that was being managed by the Knights Genesis Group (“Knights Genesis”). Both the Company and Knights Genesis were managed by defendant Jiangcheng Yuan (“Yuan”). According to the investors (who had intervened in the action (the “Intervenors”), Yuan guaranteed them a minimum 60% return on their investment within three years regardless of whether the project was completed. Based on this guaranteed minimum return, Intervenors invested money in the Company and executed a subscription agreement. By executing the subscription agreement, the Intervenors each received an ownership interest and preferred stock in the Company. The subscription agreements were countersigned on behalf of the Company by defendant Tina Tang (“Tang”). Intervenors alleged that, as the three-year deadline approached, defendants advised them that the Company’s real estate project had been highly profitable and encouraged Intervenors to reinvest their capital into KG Bayside, LLC (“KG Bayside”), which was another entity controlled by Knights Genesis, Yuan, and defendant Katie Chen. Defendants Yuan and Chen allegedly represented that the Intervenors would be given an ownership interest in KG Bayside and earn a guaranteed 9% return per year to be paid out within the next two years. Intervenors alleged that instead of reinvesting the money as defendants promised, defendants fraudulently transferred some of those funds without consideration to Yuan’s father-in-law, Jianfei Chen, and his company, Silver City Capital Inc. Intervenors also claimed that Yuan and Tang failed to advise them of all material developments and provide them with financial information and reporting in connection with the Company and its real estate project. Instead, defendants allegedly offered false assurances and information about the profitability of the Company’s project and the ability of the Company to make redemptions when due.  Finally, Intervenors alleged that defendants dominated and controlled the corporate entities such that the entities were their alter egos.  Intervenors asserted causes of action for, inter alia , fraudulent inducement, breach of fiduciary duty and breach of contract. All but defendant Tang answered the complaint. Tang moved to dismiss. The court denied the motion. We examine the Court’s decision with regard to the fraud claim, veil piercing and the breach of fiduciary duty claim. Tang moved to dismiss the fraud claim, arguing that, inter alia , Intervenors engaged in impermissible group pleading by asserting certain allegations against defendants generally or as the “Fraud Defendants”. Group pleading is the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. Courts routinely dismiss a complaint that lumps together numerous defendants without differentiation on particularity grounds because each defendant is not informed of the wrongs he/she is alleged to have committed. 1 here.=">here."> Both the Federal Rules of Civil Procedure and the Civil Practice Law and Rules require a plaintiff to provide sufficient notice of the claims asserted against the defendants. Rule 8(a)(2) provides that a complaint “must contain” “a short and plain statement of the claim showing that the pleader is entitled to relief.” CPLR § 3013 requires the pleader to provide the court and the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. Generally, a motion to dismiss under Fed. R. Civ. P. 12(b)(6) or CPLR § 3211(a)(7) may be granted if a court concludes that the plaintiff has failed to set forth fair notice of what the claim is and the grounds upon which it rests.   The court held that Intervenors did not run afoul of the group pleading doctrine. 2 The court explained that Intervenors were not referencing a diverse group of defendants to which entirely different acts giving rise to the action could be attributed. Instead, Intervenors were referring to three individuals who were alleged to have engaged in the same acts. 3 Tang also argued that, inter alia , Intervenors failed to plead their fraud claims with particularity. Under CPLR § 3016(b), a plaintiff alleging fraud must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. 4 Conclusory allegations will not suffice. 5 The motion court held that Intervenors satisfied the particularity requirement: The Intervenors allege that Ms. Tang, along with the other “Fraud Defendants”, represented to the Plaintiffs that they would earn 9% interest per year over two years if they invested the proceeds of their investment in the Company into KG Bayside. They also allege that Ms. Tang and the other Defendants never intended for that money to remain in KG Bayside. Instead, they always intended to transfer the money without consideration to Mr. Chen and Silver City. The Intervenors further allege that Ms. Tang acted as a manager of and exercised control over the Company and KG Bayside, and that she used this position to induce the Intervenors to make their investments. Ms. Tang also undisputedly signed the subscription agreements on behalf of the Company, which set forth the agreement that the Intervenors allege the Defendants never intended to honor. The Intervenors also allege that Ms. Tang worked with Mr. Yuan and Ms. Chen and as a manager of the Company, Knights Genesis, and KG Bayside to help perpetuate the underlying fraud. 6 The court also found that the alleged false statements were misrepresentations of fact intended to induce Intervenors to invest in the Company; they were not mere statements of future performance. 7 Because the court found that the alleged misrepresentations did not implicate defendants’ performance obligations under the agreements with Intervenors, the court rejected the argument that the fraud claims duplicated the breach of contract claims. 8 In support of her argument for dismissal of the breach of fiduciary duty claim, Tang claimed that, among other things, she did not owe Intervenors a fiduciary duty. The motion court rejected the argument. To state a claim for breach of fiduciary duty, a plaintiff must allege that a defendant owed him/her a fiduciary duty, that the defendant committed misconduct, and that the plaintiff suffered damages caused by that misconduct. 9 The motion court held that Intervenors sufficiently alleged a fiduciary relationship between themselves and defendant because of defendant’s status as a managing member and their ownership interests in the Company and KG Bayside. Under New York law, managing members of an LLC owe its members fiduciary duties. 10 Finally, the court held that Intervenors adequately pleaded alter ego liability against defendants. 11 To pierce the corporate veil, a plaintiff must demonstrate that (i) the defendants exercise complete domination of the corporation in respect to the transaction attacked, and (ii) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff’s injury. 12 At the pleading stage, a plaintiff must do more than merely allege that a defendant engaged in improper acts or acted in bad faith; plaintiff must allege facts that, if proved, indicate that the defendant exercised complete domination or control and abused the privilege of doing business in the corporate form to perpetuate a wrong or injustice. 13 The court found that defendants exercised dominion and control over Knights Genesis, KG Bayside, and the Company and that they abused the corporate form to perpetrate the alleged fraud. 14 In this regard, Intervenors alleged that the three entities (i) all share a single office, (ii) have overlapping personnel, ownership, and directors, (iii) all use Knights Genesis emails to conduct business, and (iv) comingle funds. 15 The court also found that defendants allegedly used these entities to fraudulently induce investments and then transferred them to another for their own personal use. 16 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes See , e.g. , DiVitorrio v. Equidyne Extractive Indus., Inc. , 822 F.2d. 1242, 1247 (2d Cir. 1987) (“ here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of alleged participation in the fraud.”); Regnante v. Sec & Exch. Officials , 134 F. Supp. 3d 749, 771 (S.D.N.Y. 2015) (granting motion to dismiss for failing to particularize each defendant’s misconduct) (“Rule 9(b) requires that when fraud is alleged against multiple defendants, a plaintiff must set forth separately the acts complained of by each defendant”); Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co. , 84 A.D.2d 736 (1st Dept. 1981) (affirming a dismissal of a complaint where the claims were “pleaded against all defendants collectively without any specification”); Ritchie v. Carvel Corp. , 180 A.D.2d 786, 787 (2d Dept. 1992) (“allegations of fraud that refer only to the ‘defendants’ without connecting particular misrepresentations to the particular defendants are insufficient”); Excel Realty Advisers LP v. SCP Capital, Inc. , 2010 N.Y. Slip Op. 33447 (U) (Sup Ct. Nassau Co. Dec. 2, 2010), aff’d , 101 A.D.3d 669 (2d Dept. 2012) (dismissing fraud claim “primarily based upon a series of oblique averments which . . . lump the defendants together without any specification as to the precise fraudulent conduct attributed to each….”). Slip Op. at *6. Id. (citing, Stewart Tit. Ins. Co. v. Liberty Tit. Agency, LLC , 83 A.D.3d 532, 533 (1st Dept. 2011)). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Id. Slip Op. at *8. Id. Id. Besen v. Farhadian , 195 A.D.3d 548, 549-550 (1st Dept. 2021). Pokoik v. Pokoik , 115 A.D.3d 428, 429 (1st Dept. 2014). Slip Op. at *7. Franklin v. Daily Holdings, Inc. , 135 A.D.3d 87, 95 (1st Dept. 2015). East Hampton Union Free School Dist. V. Sandpebble Builders, Inc. , 16 N.Y.3d 775, 776 (2011). Slip Op. at *7. Id. Id.

By: Jeffrey M. Haber It has been more than two years since the start of the global pandemic. In the early days of the pandemic, many states imposed emergency measures to address the health crisis – measures that had the effect of reducing business operations or shutting down the business. New York was no different. Among the measures implemented were government-mandated closures. For retailers this meant the loss of business. With business shutdown, or substantially curtailed, many retailers stopped paying rent on their leases.  As conditions eased, landlords sought their unpaid rent and have been largely successful in doing so. Indeed, as one lower court observed, “ steady drumbeat of New York cases have rejected … defenses to claims for unpaid rent, despite government restrictions that temporarily limited, or even outlawed, commercial tenants' businesses.” 1 This Blog previously examined three such cases ( here ,  here and here ). Today, we examine Arista Dev., LLC v Clearmind Holdings, LLC , 2022 N.Y. Slip Op. 04451 (4th Dept. July 8, 2022) ( here ), another case in the line of cases rejecting a tenant’s defenses for unpaid rent resulting from the temporary shutdown of operations due to the Covid-19 pandemic. Beginning in 2013, plaintiff leased commercial space to defendant, who operated a low priced electronics store under the business name “Dirt Cheap TV”. The original lease was modified by a Lease Modification Agreement in June 2019 (LMA” and together with the original lease, the “Lease”). The LMA extended the term of the original lease and revised the rate of monthly rent. With the onset of the pandemic, defendant ceased paying rent in March 2020. Defendant advised plaintiff that it was closing its doors due to the health crisis. Defendant explained that the government-mandated shutdown rendered the space unusable for the purposes set forth in the Lease. Plaintiff demanded that defendant continue to pay its rent. Defendant declined and vacated the space on or about June 12, 2020. Defendant later discontinued operating its business. Plaintiff commenced the action, alleging breach of the Lease and sought recovery of the unpaid rent. Defendant denied the allegations and asserted a counterclaim alleging that plaintiff was required to return a portion of the rent paid during March 2020 – i.e. , the period during which it was unable to operate. Defendant based its answer and counterclaim on the COVID-19 pandemic, the executive orders issued by then-Governor Cuomo that shut down the State, and the casualty clause in the Lease. Under the casualty clause, following notice “of fire or other casualty in the Rented Space”, defendant was excused from paying rent if the space was “unusable”. If, however, defendant used part of the space, it was required to “pay Rent pro rata for the usable part”. Following joinder of issue, plaintiff moved for summary judgment. In pertinent part, plaintiff argued that the COVID-19 pandemic, the legislative and executive order(s), and/or casualty clause in the Lease did not excuse or eliminate defendant’s duty to pay rent. Plaintiff argued that the Lease applied to physical events, losses or casualties, e.g. , fire, flood, etc., and that the COVID-19 pandemic and/or any executive orders did not excuse defendant’s obligation to pay rent. Defendant opposed the motion, and filed its own motion for summary judgment, arguing that the temporary shutdown caused by the pandemic and the casualty clause in the Lease excused its payment obligations. Defendant also claimed that a portion of its March 2020 rent payment should be refunded. The motion court denied plaintiff’s motion and denied defendant’s cross-motion. Plaintiff appealed. The Appellate Division, Fourth Department reversed the denial of plaintiff’s motion for summary judgment. The Court held that the motion court incorrectly determined “that there triable issues of fact whether defendant’s nonpayment of rent during the COVID-19 pandemic was permissible pursuant to the casualty clause of the lease”. 2 The Court found that “plaintiff established as a matter of law that defendant was not entitled to a rent abatement under of the ease”. 3 “‘That of the lease”, said the Court, “refers to singular incidents causing physical damage to the premises and does not contemplate loss of use due to a pandemic or resulting government lockdown.’” 4 The Court explained that “the text and structure of that section—which refers in several instances to a ‘fire or other casualty’ causing ‘damage’ occurring ‘in’ or ‘to’ the ‘ ental pace,’ … and which describes in detail the ‘repair’ obligations of the parties in the event such damage occurs—‘leave no doubt that “casualty” refers to singular incidents, like fire, which have a physical impact in or to the premises<,> and does not encompass a pandemic, occurring over a period of time, outside the property, or the government lockdowns resulting from it.’” 5 In reaching the foregoing conclusion, the Court applied well-settled principles of contract interpretation: “Interpreting a contract ‘is the process of determining from the words and other objective manifestations of the parties what must be done or forborne by the respective parties in order to conform to the terms of their agreements’” ( Tomhannock, LLC v Roustabout Resources, LLC , 33 NY3d 1080, 1082 <2019> , quoting 11 Richard A. Lord, Williston on Contracts § 30:1 <4th ed may 2019 update> ). “‘The best evidence of what parties to a written agreement intend is what they say in their writing’” ( id. , quoting Slamow v Del Col , 79 NY2d 1016, 1018 <1992> ). “Under long-standing rules of contract interpretation, ‘ here the terms of a contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving a practical interpretation to the language employed and reading the contract as a whole’” ( id. , quoting Ellington v EMI Music, Inc. , 24 NY3d 239, 244 <2014> ). Stated differently, a contract “must be read as a whole in order to determine its purpose and intent, and . . . single clauses cannot be construed by taking them out of their context and giving them an interpretation apart from the contract of which they are a part” (Eighth Ave. Coach Corp. v City of New York, 286 NY 84, 88 <1941> ). “Words considered in isolation may have many and diverse meanings. In a written document the word obtains its meaning from the sentence, the sentence from the paragraph, and the latter from the whole document, all based upon the situation and circumstances existing at its creation” ( id. at 89). “‘The words and phrases used by the parties must, as in all cases involving contract interpretation, be given their plain meaning’” ( Ellington , 24 NY3d at 244). 6 Defendant also claimed that, even if its nonpayment of rent was not permitted under the casualty clause of the Lease, the motion court did not err in denying that part of plaintiff’s motion seeking summary judgment on the breach of contract cause of action because there were questions of fact with respect to the defenses of frustration of purpose and unclean hands. 7 The Court rejected defendant’s argument. “In order to invoke the doctrine of frustration of purpose, the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.” 8 “ ontrary to defendant’s contention,” concluded the Court, “the temporary pandemic-related governmental restrictions on defendant’s business operations were insufficient to invoke the defense.” 9 The Court reasoned that the “ he doctrine of frustration of purpose does not apply as a matter of law where, as here, the tenant was not ‘completely deprived of the benefit of its bargain’”. 10 Regarding defendant’s unclean hands defense, the Court held that “there nothing immoral or unconscionable about plaintiff’s decision to seek the unpaid rent that defendant was contractually obligated to pay”. 11 “The doctrine of unclean hands applies when the complaining party shows that the offending party is guilty of immoral, unconscionable conduct and even then only when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct.” 12 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Durst Pyramid LLC v. Silver Cinemas Acquisition Co. , 2022 N.Y. Slip Op. 31958 (Sup. Ct., N.Y. County June 21, 2022). Slip Op. at *1. Id. Id. (quoting, Gap, Inc. v. 170 Broadway Retail Owner, LLC , 195 A.D.3d 575, 577 (1st Dept. 2021)). Id. (quoting, Gap Inc. v. Ponte Gadea NY LLC , 524 F. Supp. 3d 224, 232 (S.D.N.Y. 2021), and citing, Gap , 195 AD3d at 577, and A/R Retail LLC v. Hugo Boss Retail, Inc. , 72 Misc. 3d 627, 638-639 (Sup. Ct., N.Y. County 2021)). Id. at *1-*2. Id. at *2. Id. (quoting, Warner v. Kaplan , 71 A.D.3d 1, 6 (1st Dept. 2009), lv. denied , 14 N.Y.3d 706 (2010) (internal quotation marks omitted)). Id. at *2-*3. Id. at *3 (quoting, Gap , 195 A.D.3d at 577). Id. (quoting, Bank of Smithtown v. 264 W. 124 LLC , 105 A.D.3d 468, 469 (1st Dept. 2013)). Id. (quoting, National Distillers & Chem. Corp. v. Seyopp Corp. , 17 N.Y.2d 12, 15-16 (1966), quoting, Weiss v. Mayflower Doughnut Corp. , 1 N.Y.2d 310, 316 (1956) (internal quotation marks omitted)).

By Jonathan H. Freiberger This Blog has written extensively on a variety of issues related to mortgage foreclosure, including those related specifically to limitations periods ( see, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  As to the limitations period relevant to mortgage foreclosure actions, we have previously written that: An action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). On July 6, 2022, the Appellate Division, Second Department, decided Deutsch Bank Nat. Trust Co. v. Lubonty , a decision that “turns on the interplay between subsections 362(a) and (c) of the 1978 Bankruptcy Code (11 USC), and the interpretation of that statutory scheme as applied to the circumstances of this case.”  In 2007, an action was commenced to foreclose a mortgage on property located in Southampton, New York (the “Southampton Property”), owned by Lubonty (“Borrower” or “Debtor”) in which the amounts due under the subject loan were accelerated (the “2007 Foreclosure Action”).  Shortly thereafter, Borrower filed a Chapter 11 bankruptcy petition (the “2007 Bankruptcy”).  The 2007 Foreclosure Action was dismissed in June of 2009 and the 2007 Bankruptcy was dismissed in November of 2009.  Later, in 2011, Borrower filed another Chapter 11 petition, which was converted to a Chapter 7 liquidation (the “2011 Bankruptcy”).  In the context of the 2011 Bankruptcy, Debtor and the Chapter 7 trustee entered into a stipulation, dated November 26, 2013, that was “so ordered” by the bankruptcy court in which the Debtor agreed to purchase the Southampton Property, thus “resolving the bankruptcy estate’s interest[] in”, inter alia , the Southampton Property.  (Some brackets omitted.)  The required payments under the stipulation were made and, thereafter, on “November 3, 2014, the defendant received a ‘standard discharge’ in the <2011 b> ankruptcy…, which was subsequently marked "closed" on January 23, 2017.” In September of 2018, lender commenced an action to foreclose the mortgage on the Southampton Property (the “2018 Foreclosure Action”).  Borrower moved to dismiss the 2018 Foreclosure Action “as barred by the statute of limitations, since the mortgage debt had been accelerated more than six years earlier on May 22, 2007, upon the commencement of the 2007 oreclosure ction.”  Lender opposed the motion by arguing that “the statute of limitations for the commencement of this action had been tolled by the automatic bankruptcy stays in place following the defendant's filing of the <2007 b> ankruptcy… and the <2011 b> ankruptcy….”  Supreme court denied Borrower’s motion to dismiss, resulting in the subject appeal. The Second Department recognized that “ esolution of whether this action was time-barred turns upon the date on which the automatic bankruptcy stay barring commencement of a mortgage foreclosure action against the defendant with respect to the roperty, in effect following the commencement of the <2011 bankruptcy> , terminated.  Borrower argued that the automatic stay terminated on November 26, 2013, when he purchased the Southampton Property from the Debtor’s bankruptcy estate.  Lender argued that the automatic stay terminated in November of 2014 when the Debtor received his discharge in the 2011 Bankruptcy.  The Second Department agreed with Lender. The Court explained how various provisions of section 362(a) of the Bankruptcy Code create an automatic stay of certain acts against a debtor or property of the bankruptcy estate.  The Court noted that:  (1) “the filing of a petition for protection under the Bankruptcy Code imposes an automatic stay of any mortgage foreclosure actions”; (2) “ he effects of the automatic stay are wide-ranging and limit virtually all judicial action against the debtor and any codebtors”; (3) “ he automatic stay is designed to provide blanket relief from creditor action”; (4) “any exceptions from the stay are narrowly written and 'strictly construed; and, (5) “ he automatic bankruptcy stay of 11 USC § 362 is a ‘statutory prohibition’ which operates under CPLR 204(a) to stay the limitations period for commencement, or continuation, of a foreclosure action.  (Citations, internal quotation marks and brackets omitted and hyperlink added.) Finally, in analyzing section 362 of the Bankruptcy Code as related to its ruling in Deutsch Bank , the Court stated: The stay imposed by 11 USC § 362(a) is terminated upon the happening of certain events proscribed by 11 USC § 362(c). Pursuant to 11 USC § 362(c)(1), "the stay of an act against property of the bankruptcy estate under subsection (a) of 11 USC § 362 continues until such property is no longer property of the bankruptcy estate." The legislative history of 11 USC § 362(c) explains that 11 USC § 362(c)(1) "terminates a stay of an act against property of the estate when the property ceases to be property of the estate, such as by sale, abandonment, or exemption . It does not terminate the stay against property of the debtor if the property leaves the estate and goes to the debtor " (HR Rep 95-595, 95th Cong, 1st Sess at 343, reprinted in 1978 US Code Cong & Admin News at 6299 ). Where the act stayed is not one against "property of the estate," 11 USC § 362(c)(2) provides that a stay under 11 USC § 362(a) "continues until the earliest of the time the case is closed; the time the case is dismissed; or the time a discharge is granted or denied" ( id. § 362 <2> ). A bankruptcy court may also grant relief from the stay on request of a party in interest with respect to a stay of an act against property under 11 USC § 362(a) if such property is not necessary to an effective reorganization.  The Court noted, inter alia , that the “statutory text is the clearest indicator of legislative intent and courts should construe unambiguous language to give effect to its plain meaning” (citation and internal quotation marks omitted) and that the language of section 362 was clear as related to the Deutsch matter.  Accordingly, the Court found that: the defendant's purchase of the roperty from the bankruptcy estate pursuant to the November 26, 2013 order did not terminate the automatic bankruptcy stay barring commencement of the instant foreclosure action, but rather, under the circumstances of this case, the automatic bankruptcy stay terminated when the defendant received a discharge from the Bankruptcy Court on November 3, 2014. Pursuant to the plain language of 11 USC § 362(c)(1), the discharge of the roperty from the bankruptcy estate pursuant to the November 26, 2013 order terminated the stays of an act against "property of the estate," which stays are established by 11 USC § 362(a)(3) and (4). Here, however, upon the defendant's purchase of the roperty from the bankruptcy estate pursuant to November 26, 2013 order, ownership of the roperty returned to the defendant, as debtor in the bankruptcy proceeding ( see id. § 101<13> ). Consequently, the termination of the stay of an act against "property of the estate" provided for by 11 USC § 362(c)(1) has no bearing on the stays established by 11 USC § 362(a)(1) and (5), which expressly apply to acts taken against "the debtor" or "property of the debtor," and which continued in effect. To find otherwise, as the defendant wishes, would impermissibly render the statutory distinction between stays of acts against "the debtor" and "property of the debtor" under 11 USC § 362(a)(1) and (5), and stays of acts against "property of the estate" under 11 USC § 362(a)(3) and (4), meaningless.  Moreover, pursuant to the plain language of 11 USC § 362(c)(2), the stays established by 11 USC § 362(a)(1) and (5) with respect to actions against "the debtor" or "property of the debtor" continue "until the earliest of . . . the time the case is closed; . . . the time the case is dismissed; or . . . the time a discharge is granted or denied" ( id. § 362 <2> . Thus, so long as the roperty remained the property of the defendant, the debtor in the bankruptcy proceeding, the automatic bankruptcy stay barring commencement of the instant foreclosure action, and therefore the limitations toll provided by CPLR 204(a), remained in effect until the earliest of the time the second bankruptcy proceeding was closed or dismissed, or a discharge was granted or denied ( see 11 USC § 362 <2> .  The earliest of these dates is November 3, 2014, the date on which a discharge in the second bankruptcy proceeding was granted. The Court concluded that the action was timely commenced.  Even though the underlying loan was accelerated by the commencement of the 2007 Foreclosure Action and the subject action was commenced in 2018 because “the limitations period against commencement of the instant action was tolled by the automatic bankruptcy stay when the defendant commenced the <2007 b> ankruptcy roceeding on June 26, 2007, and began to run again when that proceeding was voluntarily dismissed on November 24, 2009 ( see 11 USC § 362 ). The 2007 oreclosure ction was terminated on June 25, 2009, while the limitations period was tolled. The 's evidence also established that the limitations period was thereafter again tolled by the automatic bankruptcy stay when the defendant commenced the <2011 b> ankruptcy roceeding on October 19, 2011 ( see id. ), and, as stated above, did not begin to run again until the defendant received a discharge in the <2011 b> ankruptcy roceeding on November 3, 2014 ( see id. § 362 <2> .” The period of the bankruptcy tolls were approximately 5.5 years and, accordingly, the action was timely commenced. 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.

The question above was recently answered by Justice Francois A. Rivera in Reid v. Service , 2022 N.Y. Slip Op. 32017(U) (Sup. Ct., Kings County June 9, 2022) ( here ). As discussed below, the alleged fact – a claimed misrepresentation – was only an allegation, refuted by the undisputed facts of the case. Reid involved the administration by defendant over the Estate of Edgar Reid, Sr. (the “Estate”). Defendant had been granted limited letters of administration by the Kings County Surrogate Court. Pursuant to those letters, defendant sought to collect the decedent’s assets and ultimately distribute them his beneficiates. Among the assets that defendant marshalled was an annuity contract. Plaintiffs alleged that defendant misrepresented her authority as administrator of the Estate and that she did so to receive the proceeds of the annuity along with the other beneficiaries of the Estate. 1 Plaintiffs maintained that the proceeds should have been paid directly to the Estate and not to the decedent’s children, which included defendant.  Defendant moved to dismiss, claiming that there was no fraud in the administration of the Estate and that defendant did not misrepresent her authority to the issuer of the annuity – that is, plaintiffs failed to satisfy the first element of a fraud claim. 2 The Court agreed. In granting the motion, the Court found that “an essential fact alleged in claim for fraud, namely, that misrepresented her authority, not a fact at all.” 3 The Court explained that defendant was in fact appointed by the Surrogate as “administrator of Edgar Reid Sr.’s estate.” 4 As such, defendant “had authority as the duly appointed administrator of Edgar Reid Sr.’s estate to assess and gather his assets and debts and to distribute those assets to his entitled beneficiaries under the supervision of the Surrogate.” 5 And, “pursuant to the authority granted by the letters of administration,” defendant “submitted a claim under the annuity on behalf of Edgar G. Reid, Sr., estate” to the insurance carrier, which processed and paid the amount due under the contract. 6 “Consequently,” concluded the Court, “an essential fact alleged in the claim for fraud, namely, that misrepresented her authority, is not a fact at all. Any alleged mistakes in the administration of the estate of Edgar Reid Sr. performed by was not based on a knowing misrepresentation by her.” 7 Takeaway In Reid , plaintiffs acknowledged that the annuity in question was payable to the Estate. They also acknowledged that the Surrogate granted defendant letters of limited authority, which named defendant a fiduciary of the estate and “authorize and empower ” her to “perform all acts requisite to the proper administration and disposition of the estate/trust.” With these acknowledgments, plaintiffs’ fraud claim was missing an “essential” element – a misrepresentation of fact. For this reason, the Court granted defendant’s motion to dismiss the fraud claim against her. Footnotes The insurance carrier processed two checks made payable to the estate of Edgar Reid Sr. One in the amount of $99,450.34 on February 26, 2014, and another a few days later for $1,072.34. To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR § 3016(b). Id. Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id. Slip op. at *6. Id. Id. Id. Id.

By: Jeffrey Haber As we have noted in prior articles, fraudulent schemes come in many forms. One type of fraud that has gained favor among the unscrupulous involves cryptocurrency: in particular, using cryptocurrency as an investment platform. Unbeknown to investors – at least, until it is too late –these investment opportunities are both a Ponzi scheme and a Pyramid scheme at the same time.  On May 13, 2022, the Commodity Futures Trading Commission (“CFTC”) announced ( here ) that it had filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Eddy Alexandre, and his company, EminiFX, Inc., charging them with fraudulent solicitation and misappropriation in connection with soliciting clients to trade foreign currency exchange (“forex”), commodity futures contracts, and cryptocurrencies. According to the CFTC, since at least September 2021, defendants solicited and accepted at least $59 million from hundreds of people to purportedly trade forex and cryptocurrencies, as well as futures and options, in an investment club. Defendants allegedly guaranteed customers returns of 5% per week. Specifically, Alexandre falsely represented to investors that they would double their money within five months of investing by earning a 5% weekly return on their investment using a “Robo-Advisor Assisted account” to conduct trading. In fact, said the CFTC, defendants used only approximately $9 million of customers’ funds to trade forex and cryptocurrency. Defendants lost nearly 70% of that amount —approximately $6.2 million—through unprofitable trading and fees. The CFTC also alleged that defendants misappropriated substantial amounts of the remaining customer money by sending it to accounts in Alexandre’s name, using it to pay other customers in a Ponzi-like scheme, and using it for Alexandre’s personal expenses.  In addition, defendants allegedly used a multi-level marketing (“MLM”) structure ( i.e. , a pyramid scheme) through which investors received commissions for recruiting others to join EminiFX. This MLM structure allegedly fueled the growth of EminiFX, especially online.  In a separate action, the U.S. Attorney’s Office for the Southern District of New York announced the filing of a criminal action for related conduct ( here ). On June 30, 2022, the Securities and Exchange Commission (“SEC”), the CFTC and the Department of Justice (“DOJ”) announced the filing of parallel civil and criminal actions ( here , here , and here ) against Empires Consulting Corp., its founders, Emerson Sousa Pires and Flavio Mendes Goncalves, and its head trader, Joshua David Nicholas, for perpetrating a scheme similar in concept to the one at issue in the EminiFx action.  According to the complaints, beginning in or around September 2020, Empires Consulting launched EmpiresX as a means for individuals to purportedly gain “financial independence” and “ ecome involved in financial markets such as futures, options, stock exchange and cryptocurrency.” Since that time, defendants solicited individuals to invest money with EmpiresX to trade commodity futures and options and other products on their behalf. As noted by the SEC and CFTC, defendants solicited prospective participants through the company’s website (the “EmpiresX Website”); in online videos posted on YouTube, Instagram, and other social media platforms and websites; and in telephone calls and electronic messages. Typically, defendants represented that individuals could invest funds with EmpiresX in one of two ways: either in a “private investment” pool directly managed by defendant Nicholas —described in numerous communications as EmpiresX’s “head trader” — or in a pool purportedly traded by an automated trading program known as the “EX Bot,” which defendants told participants would “trade[] the pool for you” using Nicholas’s trading as an input into its algorithm. Investors who contributed money to the EmpiresX pools received login credentials to the EmpiresX website, where they could view their account balances, activate the EX Bot, and watch the EX Bot trade on their behalf. Participants were not required to sign an investment agreement before accessing their account, and they did not receive regular account statements. Initially, defendants required participants to fund their accounts using cryptocurrencies, including Bitcoin, Ether, or Tether. Later, defendants allowed investors to fund their accounts using fiat currency. Defendants allegedly told investors that once EmpiresX received their funds, they would “start to receive their profits daily.” In videoconferences with participants and prospective participants, defendants allegedly represented that “your money will always stay under your control” and that “you can … withdraw whenever you want, and control trading, times, profits ….” At certain times, defendants reportedly said that participants would be able to instantly withdraw funds from their account via cryptocurrency. At other times, defendants allegedly represented that EX Bot profits were available “Every Friday (Payments Every Monday)”, while profits purportedly generated through the private investment pool were available “Every last day of the month (Payment On the Next Monday).” According to the SEC and CFTC, defendants also designed EmpiresX as a multi-level marketing scheme. In various video presentations, defendants allegedly promoted the “opportunity” for participants to choose between being an “Investor” or an “Affiliate.” To qualify as an Investor, a participant was required to pay $400 for an annual license to use the EX Bot, while Affiliates were required to pay $200 for an annual license to use the EX Bot. Defendants allegedly represented that Affiliates also could earn money by referring new participants to EmpiresX. Affiliates who “sold” the EX Bot could earn sales commissions ranging from 1% to 5% of the license fees. Investors and Affiliates were also promised 5% of the initial amount invested in EmpiresX by any referral, plus 0.2% (for Investors) or 0.6% (for Affiliates) of the daily profits generated by the referral’s trading. In addition, said the CFTC, Investors and Affiliates could each earn additional commissions if their referrals also brought in new participants. To assure investors of the safety of their investments, defendants allegedly told investors that EmpiresX had filed paperwork with the SEC to register as a hedge fund. That representation, said the SEC, was untrue. Defendants also allegedly touted Nicholas as a licensed trader while concealing the fact that he was suspended by the National Futures Association from trading for misappropriating customer funds.  According to regulators, when the scheme began to collapse, defendants broke earlier promises that investors could easily withdraw their money and assurances of repayment. By early 2022, defendants allegedly began winding down EmpiresX’s operations.  In total, as alleged, defendants fraudulently solicited, accepted, and pooled at least $41.6 million, including more than $14.3 million from individuals in the U.S., through commodity interest pools under the name EmpiresX. The SEC charged defendants with violating the registration and anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC seeks injunctions against future securities law violations, disgorgement of defendants’ ill-gotten gains, civil penalties, and officer and director bars against Pires and Goncalves. “The defendants allegedly engaged in an unregistered offering with a slew of fraudulent statements designed to lure investors with the prospect of steady daily profits,” said Carolyn Welshhans, Acting Chief of the SEC Enforcement Division's Crypto Assets and Cyber Unit. “The SEC’s investigation has uncovered the steps the defendants took to conceal their alleged fraud, and today’s action serves to protect investors by bringing that misconduct to light.” The CFTC charged defendants with misrepresenting EmpiresX’s registration status to pool participants. It also alleged that Empires Consulting acted as a commodity pool operator, and Pires, Goncalves, and Nicholas acted as associated persons of a commodity pool operator, without registering as required. The CFTC seeks injunctions against future violations of the Commodities Exchange Act, civil monetary penalties, and remedial ancillary relief, including restitution to defrauded clients, disgorgement, and pre- and post-judgment interest.  The DOJ charged the individual defendants with one count of conspiracy to commit wire fraud and one count of conspiracy to commit securities fraud. Pires and Goncalves also were charged with conspiracy to commit international money laundering.  The SEC’s complaint can be found here . The CFTC’s complaint can be found here . Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger In our January 14, 2022, Blog Article entitled: “ Don’t Let Undue Delay Cause You to Lose Your Interest in Interest ”, we discussed, inter alia , the court’s discretion in the calculation of the amount of interest due to a lender in a mortgage foreclosure actions.  Regarding the court’s equitable powers, we stated: CPLR 5001(a) provides, in relevant part that “in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court’s discretion.”  See also U.S. Bank, N.A. v. Peralta , 191 A.D.3d 924, 925 – 26 (2 nd Dep’t 2021).  In that regard, a “foreclosure action is equitable in nature and triggers the equitable powers of the court.”  U.S. Bank Nat. Ass’n v. Williams , 121 A.D.3d 1098, 1101–02 (2 nd Dep’t 2014) (numerous citations and internal quotation marks omitted).  “Once equity is invoked, the court’s power is as broad as equity and justice require.”  Onewest Bank, FSB v. Kaur , 172 A.D.3d 1392, 1394 (2 nd Dep’t 2019) (citation and internal quotation marks omitted).  The court, in exercising its discretion, “is governed by the particular facts in each case.”  Peralta , 191 A.D.3d at 926 (citations omitted). The Blog went on to discuss several cases in which the court addressed interest calculation reductions when faced with unexplained delays on lender’s part. On June 15, 2022, the Appellate Division, Second Department, decided GMAC Mtge., LLC v. Yun, in which the Court modified supreme court’s order to the extent of “deleting the provision thereof denying that branch of the motion of the defendant Jenny Yun which was, in effect, to toll the accrual of interest between March 29, 2009, and September 21, 2016, and substituting therefor a provision granting that branch of the motion to the extent of tolling the accrual of interest between October 9, 2009, and September 21, 2016.”  Thus, the Court reduced the amount due and owing  from the borrower to the lender by a sum equal to almost seven years of mortgage interest. The borrower in GMAC defaulted in appearing in the action.  Lender’s motion for a default judgment and order of reference was granted and the resulting order was entered on October 9, 2009.  After a judgment of foreclosure and sale was entered on December 17, 2016, borrower moved “to toll the accrual of interest between March 29, 2009, and September 21, 2016, and to stay the foreclosure sale of the property.”  Borrower’s motion was denied, and the subject appeal followed. After generally discussing a court’s discretion in exercising its equitable powers with respect to the calculation of interest in a foreclosure action, the Court stated that “… he exercise of that discretion will be governed by the particular facts in each case, including any wrongful conduct by either party, such as where the plaintiff's conduct has prejudiced the defendant a tolling and cancellation of interest may also be warranted where there is an unexplained delay in prosecution of a mortgage foreclosure action."  (Citations and internal quotation marks omitted.) In applying the facts of GMAC to the law and modifying supreme court’s order, the Court concluded:  Here, approximately seven years elapsed between the entry of the order of reference and the time the plaintiff moved for a judgment of foreclosure and sale. Contrary to the plaintiff's contention, it failed to offer any explanation for this delay or establish that the defendant caused this delay, as the record demonstrates that the defendant's motions and the stays due to the defendant's bankruptcy petitions did not occur during the period for which the defendant sought to toll the accrual of interest. Since the defendant was prejudiced by the plaintiff's unexplained delay of approximately seven years, during which time interest had been accruing, the interest on the loan should have been tolled from October 9, 2009, the date of entry of the order of reference, until September 21, 2016, when the plaintiff moved for a judgment of foreclosure and sale.  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.