By Jonathan H. Freiberger The question of when parties must close title on a real estate transaction is often answered by another question – has either party sent a “time of the essence” letter?  [Eds. Note: this Blog has previously addressed “time of the essence” letters < here =">here"> .] The law is settled that when “a contract for the sale of real property does not make time of the essence, the law permits a reasonable time in which to tender performance, regardless of whether the contract designates a specific date for performance.”  Revital Realty Group, LLC v. Ulano Corp . , 112 A.D.3d 902, 904 (2 nd Dep’t 2013) (citations omitted); see also Lashley v. BDL Real Estate Dev. Corp . , 212 A.D.3d 800, 800-01 (2 nd Dep’t 2023).  “A party need not state specifically that time is of the essence, as long as the notice specifies a time on which to close and warns that failure to close on that date will result in default.”  Point Holding, LLC v. Crittenden , 119 A.D.3d 918, 920 (2 nd Dep’t 2014) (citation omitted). The reasonableness of the time of performance “depends upon the facts and circumstances of the particular case.”  Ben Zev v. Merman , 73 N.Y.2d 781, 783 (1988) (citation omitted); see also Lee v. Robertson , 165 A.D.3d 639,.640 (2 nd Dep’t 2018).  Factors to be considered in making a “reasonableness” determination include “the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance.”  Id. (citations omitted).  “‘The determination of reasonableness must by its very nature be determined on a case-by-case basis.’”  Rodrigeus NBA, LLC v. Allied XV, LLC , 164 A.D.3d 1388, 1389 (2 nd Dep’t 2018) ( quoting Ben Zev , 73 N.Y.2d at 783). If a time of the essence letter does not “clearly and unambiguously set a specific date for the closing” a party to a real estate contract cannot be held in default for failing to close.  Krishna v. Jasper Old Westbury 66 LLC , 175 A.D.3d 600, 602 (2 nd Dep’t 2019) (citations omitted).  In Krishna , after purchaser failed to obtain financing within the time set forth in the contract, the seller sent a purported time of the essence letter providing that “‘a closing has been scheduled for December 19, 2016 , at 2:00 p.m.,’ and that ‘ nless this transaction is closed by the end of business day on December 15, 2016 , Purchaser will be held in default of the Contract.’”  (Emphasis in original.) Supreme court denied purchaser’s motion for summary judgment seeking the return of the down payment and granted seller’s cross-motion permitting it to retain the down payment.  The Second Department reversed; finding that purchaser could not be held in default for failing to appear at closing because the date for closing in seller’s time of the essence letter was not clear. On May 17, 2023, the Appellate Division, Second Department, decided LG723 v. Royal Dev., Inc . , a case addressing time of the essence letters.  In LG723 , seller and purchaser executed a contract for the sale/purchase of real property that set a closing date but did not make that date time of the essence.  Purchaser failed to appear at the closing date set forth in the contract.  On April 11, 2019, seller’s counsel sent a time of the essence letter scheduling a closing for May 15, 2019, and advising that buyer would be held in default if it failed to appear.  Purchaser averred (in the subsequently filed complaint) that, after receiving the time of the essence letter, purchaser’s managing member “had a telephone conversation with the 's president who assured that the would not be held in default if it failed to appear for the closing on May 15, 2019.”  Purchaser failed to appear at the closing on May 15, 2019, and, later that day, seller’s attorney sent a letter to purchaser’s attorney stating that “the closing had taken place as scheduled, the had defaulted, the 's deposit was being retained as liquidated damages, and the contract was deemed terminated.” Thereafter, purchaser commenced an action for, inter alia , specific performance of the real estate contract.  [Eds. Note: this Blog addressed specific performance of real estate contracts < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  After seller interposed an answer, but before any discovery had taken place, seller moved for summary judgment on the specific performance cause of action.  Purchaser opposed the motion by reiterating the averment in the complaint that it was told by seller’s president that purchaser would not be defaulted if it failed to appear for the May 15 closing.  Purchaser appealed supreme court’s grant of summary judgment in favor of seller. The Second Department reversed.  After discussing the general law on time of the essence letters, the Court noted that seller’s April 11, 2019, letter satisfied all of the requirements “by unequivocally setting May 15, 2019, as the closing date, expressly stating that time was of the essence, and advising the plaintiff that if it failed to appear for the closing on that date, it would be deemed in default of the contract of sale and the down payment would be retained by the defendant.”  However, the Court, relying on the “well settled” law that “oral waiver of the time for the sale of real property will be given effect,” stated: 's assertion, made under the penalties of perjury, that was assured by the 's president that the would not be held in default in the event that it failed to close the transaction on May 15, 2019, was sufficient to raise a triable issue of fact as to whether the 's president made a statement to that operated as a waiver of the 's right to enforce the May 15, 2019 deadline for the closing. Contrary to the 's contention, in order for such a waiver to occur, it was not necessary that the April 2019 letter be withdrawn in a formal communication from the 's attorney. A waiver of the right to timely performance under a contract "need not be in writing in order to be valid and enforceable" ( Kistela v Ahlers, 22 AD3d 641, 643 ). Such a waiver may occur even without an oral statement, such as the one that was allegedly made in this case, and may instead be inferred solely from a party's conduct ( see Chaves v Kornfeld, 83 AD3d 522, 523 ). Accordingly, the Court found that supreme court should have denied seller’s motion for summary judgment because there were triable issues of fact “as to whether the waived the deadline for closing the transaction, and thus whether the had a right to declare the in default and to terminate the contract.” 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 This Blog has previously written about the benefits of forming a corporation or a limited liability corporation and the perils of ignoring the corporate formalities that are attendant thereto ( see , e.g. , here , here , here , here , and here ). In today’s article, we examine the alleged use of the corporate entity to commit a wrong on another and the court’s unwillingness to pierce the corporate veil to hold the owner personally liable for that wrongful conduct. Matter of Small v. Estate of Landesman , 2023 N.Y. Slip Op. 02628 (1st Dept. May 16, 2023) ( here ). Small involved an attempt to enforce a monetary judgment entered against Platinum Management (NY) LLC (“PMNY”) following confirmation of an arbitration award in favor of petitioner, finding he was owed bonus compensation for three years in which he acted as a portfolio manager responsible for a related investment fund, Platinum Partners Value Arbitrage Fund LP (“PPVA”). PPVA was founded in 2003 by David Bodner (“Bodner”), Murray Huberfeld (“Huberfeld”) and Mark Nordlicht (“Nordlicht”). By October 2014, PPVA had over 300 investors with $801 million of assets under management invested across 10 investment strategies. Platinum Management (NY) LLC (“PMNY”) was the general partner of PPVA, with exclusive control and authority over PPVA, including the management of its assets and the hiring of employees to assist in the management of assets. Additionally, PMNY was the investment manager of PPVA pursuant to an investment management agreement. Petitioner maintained that PMNY had the exclusive authority to, among other things, cause PPVA to reimburse PMNY for its operating expenses including the compensation of its employees. In 2010, Uri Landesman (“Landesman”) 1 joined Bodner, Huberfeld and Nordlicht as a principal and 25% percent owner of PMNY. Landesman succeeded Nordlicht as the sole designated managing member of PMNY. He served as the president of PMNY, as well as president and general managing partner of PPVA. Petitioner, a professional investment manager hired by PMNY, claimed, that pursuant to an investment management agreement with PMNY (“employment agreement”), he was entitled to a salary, plus a bonus payable annually equal to a specified percentage of the net profits his investment account generated. Petitioner alleged that Landesman, the individual in control of PMNY and PPVA, failed to authorize the payment of his 2012, 2013 and 2014 bonuses. He further claimed that Landesman paid himself and his partners tens of millions of dollars while failing to establish any reserves for petitioner’s compensation. According to petitioner, PMNY was a shell corporation with insufficient assets to meet its obligations. Petitioner claimed that PMNY’s assets came from PPVA, which transferred only enough money into PMNY’s bank account to meet its monthly expenses and pay management fees to Landesman and his partners.  Petitioner filed an arbitration claim for breach of contract against PMNY. In July 2016, the arbitrator found in favor of petitioner, to wit: that PMNY owed petitioner bonus compensation. In February 2020, the court confirmed the arbitration award, and judgment was entered in favor of petitioner and against PMNY in the amount of $12,703,558.00, plus post judgment interest at nine (9%) percent per annum on the principal amount of $9,566,327.00. The judgment remains outstanding and PMNY is allegedly insolvent with no cash, securities, or income.  Petitioner filed an order to show cause, pursuant to CPLR 5225(b) and 5227, for an order piercing the corporate veil and holding respondent Landesman’s estate jointly and severally liable for the judgment against PMNY, premised on the allegation that Landesman was an alter ego of PMNY who abused its corporate form to enrich himself to the detriment of petitioner. In opposition, respondent argued that petitioner’s application should be denied because petitioner relied on nothing more than conclusory allegations of domination and control over PMNY, premised on Landesman’s position as president of the same.  Respondent also argued that the equitable doctrines of in pari delcito and unclean hands precluded petitioner from collecting the judgment against the estate because he remained under indictment in the United States District Court for the Eastern District of New York for his participation in alleged frauds executed at Platinum Partners. Additionally, petitioner was named as a defendant in an brought by the Securities and Exchange Commission , also pending in the Eastern District of New York. Since a significant portion of the judgment rested on compensation for work subject to those pending cases, respondent claimed that petitioner was seeking to recover ill-gotten gains and, thus, the application should be dismissed. Under New York law, a plaintiff who attempts to pierce the corporate veil must demonstrate that “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff's injury.” 2 “While complete domination of the corporation is the key to piercing the corporate veil, especially when the owners use the corporation as a mere device to further their personal rather than the corporate business …, such domination, standing alone, is not enough; some showing of a wrongful or unjust act toward plaintiff is required.” 3 Thus, “ he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.” 4 The determination whether to pierce the corporate veil is a fact-intensive one. And, because it is fact-intensive, the courts have held that it is not appropriate to make the determination “on a pre-answer, pre-discovery motion to dismiss.” 5 Significantly, because the analysis is so fact dependent, it “eschews mechanical interpretation.” 6 Accordingly, the courts consider the totality of the facts and evidence, as well as the public policy of “protect those who deal with the corporation.” 7 The motion court held that petitioner failed to meet “the very high standard required for piercing the corporate veil.” 8 The court found that petitioner failed to show that Landesman, a part owner of PMNY, exercised complete domination and control over the entity such that, as a matter of law, he was liable for its debt.  The motion court rejected petitioner’s allegations that Landesman engaged in activities that rendered PMNY insolvent and unable to satisfy its debts:  To the extent plaintiff maintains Landesman failed to establish any reserve for petitioner's unpaid bonus compensation; undercapitalized PMNY; paid himself and his partners millions of dollars in distributions rather than paying petitioner's unpaid compensation; and entered into the self-dealing Fraudulent Employee Liability Transaction to enrich himself and his partners, leaving PMNY insolvent and defrauding its creditors, there is no competent proof that Landesman actually directed and controlled the alleged transfer of funds between PMNY, PPVA and any other related entities.  The motion court noted that “petitioner’s own proof suggest that other partners, i.e., Nordlicht, exercised at least some degree of discretion with respect to compensation,” thereby “belying petitioner’s claim that Landesman exercised complete control over PMNY.” On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly found that, … , petitioner failed to present sufficient facts to raise a triable issue that warrants invoking the equitable doctrine of piercing the corporate veil to allow petitioner to recover his judgment against PMNY from respondent estate.”9 Referencing the motion court’s decision, the Court noted that “the evidence submitted by petitioner indicate that decedent by himself did not dominate and control PMNY in that, at a minimum, he consulted with others, including Nordlicht, on financial and employee matters, notwithstanding the provisions of PMNY’s operating agreement.” 10 “Notably,” observed the Court, “decedent owned only 25% of PMNY, while Nordlicht and his grantor trust owned the other 75% and had the power to remove decedent at any time.” 11 The Court also found that “ etitioner … provided scant evidence of disregard of the corporate form, overlapping officers, managers and employees with PPVA, or common offices and telephone numbers.” 12 Additionally, said the Court, “ nsufficient evidence was … presented to raise a triable issue of fact as to whether either was a sham entity …, or whether the challenged transfers from PMNY or PPVA to decedent, Nordlicht and others were part of a fraud directed at petitioner.” 13 Finally, the Court noted that “respondent’s invocation of the doctrines of in pari delicto and unclean hands, which are implicated by the broader fraud charges surrounding the Platinum entities, not persuasive, as the criminal charges against petitioner not been finally resolved.” 14 Takeaway As noted, courts will pierce the corporate veil and impose liability on the company’s owners or members when: (1) they exercise complete domination over the corporation or LLC; and (2) their domination of the corporation or LLC is used to commit a fraud or wrong that injured another. Merely tracking the elements of veil piercing is not enough to withstand a motion to dismiss. A plaintiff must do more; he/she must proffer facts. When the plaintiff fails to provide factual support for the allegations, as both courts found in Small , the veil piercing claim will fail. Footnotes Landesman died on September 14, 2018. Morris v. State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 141 (1993); see also Doe v. Bloomberg, L.P. , 178 A.D.3d 44, 50 (1st Dept. 2019). Morris , 82 N.Y.2d at 141-142. Id. at 142. See also Sutton 58 Assocs. LLC v. Pilevsky , 189 A.D.3d 726, 729 (1st Dept. 2020). BT Ams. Inc. v. ProntoCom Mktg. Inc. , 859 N.Y.S.2d 893 (Sup. Ct., N.Y. County 2008) (holding that veil piercing “is not well suited for resolution on a pre-answer, pre-discovery motion to dismiss”). LiquidX v. Brooklawn Capital, LLC , 1:16-cv-05528-WHP (S.D.N.Y. May 23, 2017) (quoting, Morris , 82 N.Y.2d at 141). Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc. , 933 F.2d 131, 139 (2d Cir. 1991). A copy of the motion court’s decision and order can be found here . Slip Op. at *1 (citing, Matter of Gonzalez v. City of New York , 127 A.D.3d 632, 633 (1st Dept. 2015)). Id. Id. Id. Id. (citations omitted). Slip Op. at *1-*2. As a general matter, the doctrine of in pari delicto prevents a plaintiff who participated in an alleged wrongdoing from recovering damages from that very same wrongdoing. The doctrine mandates that in such circumstances the courts will not intercede to resolve a dispute between two wrongdoers. Kirschner v. KPMG LLP , 15 N.Y.3d 446, 464 (2010). This Blog wrote about the in pari delicto doctrine here . Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber To plead a fraud cause of action, a plaintiff must allege: (1) a misrepresentation of material fact; (2) falsity; (3) scienter; (4) justifiable reliance; and (5) damages. 1 Each element of the claim must be satisfied for the plaintiff to prevail on the cause of action. The failure to satisfy each element will result in dismissal of the claim. In Hayes v. Martinez , 2023 N.Y. Slip Op. 02587 (1st Dept. May 11, 2023) ( here ), the Appellate Division, First Department reversed the denial of a summary judgment motion involving a fraud claim because the plaintiff failed to show the making of a misrepresentation and/or an omission on which she relied. Plaintiff, Donna Hayes, alleged that, on July 20, 2016, defendant, Tommy Montalvo (“Montalvo”), with whom she had carried on a romantic relationship, induced her to write a $48,000 check to defendant Ululy Rafael Martinez (“Martinez”), Montalvo’s first cousin, so that Martinez could buy and sell stocks on Montalvo’s behalf. Hayes further alleged that between March 20 and May 1, 2017, Montalvo induced her to give Montalvo $114,000 in cash to buy and renovate Martinez’s vacant three-family property in Waterbury, Connecticut. Plaintiff maintained that the foregoing opportunities were non-existent and intended to scam her out of $162,000. In her complaint, plaintiff asserted claims against Montalvo and Martinez for common law fraud, conversion, breach of contract, and unjust enrichment.  On May 7, 2021, Martinez moved for summary judgment and dismissal of all causes of action against him. Martinez argued that he was not involved in Montalvo’s schemes and had no knowledge of them until after plaintiff demanded repayment of the monies she had paid and threatened suit. Martinez further argued that during discovery plaintiff admitted that she had no communications with Martinez regarding either of the two allegedly false investment opportunities that Montalvo presented to her, and that she never even tried to communicate with Martinez regarding those matters. Martinez claimed that plaintiff relied exclusively on the representations Montalvo had made to her regarding the purpose of the funds he allegedly induced her to give to him. Martinez further claimed that he relied solely on his communications with Montalvo regarding the purpose of the $48,000 check that Montalvo caused plaintiff to issue in July 2016, and that he disposed of the funds exactly as Montalvo had directed. Moreover, until plaintiff threatened suit, Martinez claimed that he did not know Montalvo had allegedly induced plaintiff to give him $114,000 in cash under the false pretense of purchasing and renovating Martinez’s property.  Plaintiff opposed Martinez’s motion and cross-moved for partial summary judgment in her favor as to the unjust enrichment claim. Plaintiff argued that Martinez and Montalvo made affirmative, misrepresentations of material facts, knowing those statements to be false, with the intention that the statements be communicated by Montalvo on Martinez’s behalf, and that plaintiff relied on those statements to her detriment. The motion court denied Martinez’s motion as to plaintiff’s fraud, conversion, and unjust enrichment claims, and denied the motion in part as to plaintiff’s breach contract claim. Although there was no dispute that plaintiff and Martinez never directly communicated with each other about the allegedly non-existent investment opportunities that Montalvo presented to her, the motion court found issues of fact sufficient to preclude the grant of summary judgment on all of plaintiff’s claims. Martinez appealed. The First Department modified the motion court’s order to dismiss the causes of action for fraud and breach of contract and to dismiss the cause of action for conversion insofar as plaintiff alleged that Martinez failed to return $48,000 to her, and to dismiss the cause of action for unjust enrichment with respect to the $48,000, and otherwise affirmed. We discuss the portion of the First Department’s decision concerning plaintiff’s cause of action for fraud. The Court held that “Martinez was entitled to dismissal of the cause of action for fraud, as he established that he never communicated with Hayes regarding either the $48,000 or the $114,000, and therefore never communicated a false statement to her.” 2 In so holding, the Court noted that during discovery, “Plaintiff admitted … that her direct communications with Martinez were limited to matters unrelated to the transactions at issue here.” 3 The Court also found that there were no indirect statements – i.e. , statements made “from Montalvo that Montalvo claimed came from Martinez” – which could show the making of a misstatement of fact: “As to whether Martinez indirectly communicated a false statement to plaintiff, she identifies no statement from Montalvo that Montalvo claimed came from Martinez, nor does she even allege facts suggesting that any statements to her were made at Martinez’s request.” 4 Accordingly, the Court held that “plaintiff failed to raise an issue of fact” necessary to defeat defendant’s motion for summary judgment. 5 Takeaway As discussed at the outset of this article, a plaintiff alleging fraud must show that the defendant made a statement on which the plaintiff relied. In the typical case, the defendant makes a false or misleading statement directly to the plaintiff. In Hayes , defendant did not make any statement about the alleged non-existent transactions directly to plaintiff. In the less frequent case, the misrepresentation of fact is made to a third party that relied on the alleged fraudulent statement. In that circumstance, the question is whether the plaintiff can state a fraud cause of action, despite the absence of direct reliance by the plaintiff on the alleged misrepresentation?  In  Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817 (2016), the New York Court of Appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 6  In other words, the alleged misrepresentation or omission does not need to be made directly to the plaintiff so long as the statement was made with the intent that it be communicated to the plaintiff by a third party and the plaintiff relied on the representation or omission to his or her detriment. Hayes shows that satisfying rule the articulated in Pasternack can be difficult. As noted, a plaintiff must allege that the misrepresentation was made for the purpose of being communicated to the plaintiff in order to induce his/her reliance thereon or that the misrepresentation was relayed to the plaintiff, who then relied upon it. The failure to allege either will, as Hayes learned, result in dismissal of a fraud cause of action.This Blog examined fraud and third-party reliance  here , here . Footnotes Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016). Slip Op. at *1. Id. at *2. Id. (citing, Pasternack , 27 N.Y.3d at 828). Id. at *1-*2. 27 N.Y.3d at 828. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has previously discussed issues related to whether a binding agreement (a settlement agreement or otherwise) was formed by parties to a dispute.  See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  In our prior articles we discussed, inter alia , the elements of contract formation and whether emails suffice to satisfy signing requirements. Such issues were relevant to the Appellate Division, First Department’s, May 9, 2023, decision in Go New York Tours, Inc. v. Tour Central Park Inc.   [Eds. Note: much of the information set forth herein was derived from the supreme court decision appealed from < here =">here"> available on the Court’s NYSCEF system, and from which most of the unascribed quotes are taken.]  The parties both operate bicycle rental and tour businesses in New York City’s Central Park.  Plaintiff commenced a trademark infringement action against defendant in the United States District Court for the Southern District of New York (the “Federal Action”).  The Court in the Federal Action referred the matter for mediation.  The mediation appeared successful as defendant’s counsel sent plaintiff’s counsel the following email: It is hereby agreed by the parties that subject to a formalized Settlement Agreement, subsequent to Mediation, the parties have agreed to resolve the matter styled Go New York Tours Inc. v Tour Central Park Inc., SDNY Docket No. 19- cv-09803 (VEC)(KNF) as follows: • Defendant shall not use the term “Bike Rental Central Park” in Defendant’s business capacity; • Plaintiff shall not use the term “Bike Rent NYC” in Plaintiff’s business capacity; • Both Plaintiff and Defendant may use the terms “Central Park Bike Rent” and “Central Park Rent Bike”;  • Both parties shall absolutely disavow any professional affiliation or relationship with the other; • Tour Central Park shall pay Go New York Tours Ten Thousand Dollars ($10,000.00); • Neither Plaintiff nor Defendant admits any liability or wrongdoing. The parties agree that each side participated in the subject Mediation with the assistance of and representation by counsel. The parties understand and agree to the terms of the settlement as contemplated at Mediation and consent that said terms are subject to the execution of a formal Settlement Agreement. Plaintiff’s counsel subsequently sent a confirmatory email as to the agreement’s terms.  A joint letter was submitted to the Court in the Federal Action advising of the settlement and requesting the adjournment of an upcoming status conference “‘with the expectation that the above settlement will be finalized in the interim and the action discontinued.’” Shortly thereafter, defendant sought to open the Federal Action due to its principal’s “misunderstanding” as to the meaning of a settlement term that his own attorney included in the settlement email.  Defendant’s principal claimed he did not agree that both parties “may use the terms ‘Central Park Bike Rent’ and ‘Central Park Rent Bike’”.  After an additional mediation session failed to resolve the outstanding issue, the Court in the Federal Action issued an order indicating that is did not have subject matter jurisdiction to determine whether the parties “settlement agreement” was enforceable.  Accordingly, the plaintiff in the Federal Action commenced an action in supreme court to enforce the settlement.  Defendant moved for summary judgment dismissing the action and plaintiff cross-moved for summary judgment. Essentially, defendant argued that there was no meeting of the minds because its principal, whose first language was not English, understood that defendant would retain exclusive rights to the use of the names “Central Park Bike Rent” and “Central Park Rent Bike.”  Supreme court found defendant’s position “utterly contradicted” by the settlement email language, which “cannot plausibly” be deemed ambiguous.   Defendant also contended that because the settlement email indicated that it was “subject to the execution of a formal Settlement Agreement,” no settlement agreement was reached by the parties.  Supreme court then discussed the law in this area.    The court explained that “the law distinguishes between “a preliminary agreement contingent on and not intended to be binding absent formal documentation, which is not enforceable, and a binding agreement that is nevertheless to be further documented, which is enforceable with or without the formal documentation.”  (Citations and internal quotation marks omitted.)  The former, the court noted, requires an explicit reservation that there would be no contract until the full formal document is completed and executed the mere fact that the parties intended to draft formal settlement papers is not alone enough to imply an intent not to be bound except by a fully executed document.”  (Citations and internal quotation marks omitted.) Specifically, where agreements contain “subject to a signed writing” language, supreme court stated that “it may indicate that the writing is a condition precedent that must occur before obligations under the agreement become binding” but “in other instances, ‘subject to’ language has been held to fall short of an express reservation of the right not to be bound absent an executed agreement.”  After analyzing numerous cases, supreme court concluded that: “subject to” or other similar language in an agreement is not a talisman against enforceability, as the defendant suggests. Rather, it is one factor, among several, that the court must consider in determining whether the defendant intended to be bound. In this regard, courts assess whether the parties’ conduct evidenced an intent to be bound, whether all material terms of the contract have been agreed upon, whether the agreement at issue is the type of contract usually committed to writing, and whether there has been partial performance of the contract. Supreme court went on to explain, inter alia , that defendant’s “own counsel memorialized the material terms of the parties’ settlement, including the amount to be paid by the defendant and a clear agreement as to usage of disputed terms in the parties’ respective businesses, in an email sent during the mediation, with the subject line, ‘Go New York v. Tour Central Park – Term Sheet – For review.’”  Further, plaintiff’s counsel confirmed the terms were “fine” and counsel to both parties agreed to the additional term that the “documentation be completed and payment made within 30 days.”  Additionally, no writings suggested that the agreement was “proposed,” “preliminary” or otherwise “tentative”. Finally supreme court noted that “the format of settlement agreements is governed by CPLR 2104” and the “email correspondence submitted here suffices to meet CPLR 2104’s requirements for enforceability.” Thus, supreme court denied defendant’s motion for summary judgment and granted, in part, plaintiff’s motion for summary judgment as to liability on its sole cause of action (breach of contract).  However, supreme court left plaintiff’s entitlement to specific performance and compensatory damages to be determined at trial.  On defendant’s appeal, the First Department unanimously affirmed and stated: The court properly found that the parties entered into a binding settlement agreement at the conclusion of mediation, the terms of which were embodied in an email agreement. The email correspondence is sufficient to embody a settlement agreement since it was authentic and sets forth all material terms.  The settlement agreement specifically stated that it would be "subject to a formalized Settlement Agreement." In analyzing these types of phrases, courts must determine whether the parties have merely come to a preliminary agreement to agree (which is not enforceable), or a binding agreement, by determining whether there has been an explicit reservation that there would be no contract until the full formal document is completed and executed. Here, the parties' use of the phrase "subject to," standing alone, did not amount to an express reservation of the right not to be bound or a condition precedent to the formation of a binding contract. Under these circumstances, the court properly found that the "subject to" language was indicia of the parties' expectation that they would come to a final agreement as a mere formality, not as a condition precedent to a binding settlement agreement. The parties' subsequent actions — including their correspondence with each other, their cocounsel and the court — all indicate their respective understandings that the parties had come to a final settlement agreement resolving the related action in federal court.  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 Pursuant to CPLR 3014 , inter alia , “ copy of any writing which is attached to a pleading is part thereof for all purposes.”  Where “a copy of the agreement is annexed to and made a part of the complaint, the rights and duties of the parties must be determined by the terms of the contract annexed to the complaint, and not by the plaintiff’s characterization or construction thereof in his pleading he rights of the parties thereunder must be determined by the terms of that instrument without the aid of such conclusions as the plaintiff has set up respecting its legal effect.”  Miglietta v. Kennecott Copper Corp. , 25 A.D.2d 57, 58 (1 st Dep’t 1966) (citation and internal quotation marks omitted); see also 805 Third Ave. Co. v. M.W.Realty Assoc. , 58 N.Y.2d 447, 451 (1983) (citing, inter alia, Miglietta ). The import of CPLR 3014 was an issue, among others, addressed on May 2, 2023, by the Appellate Division, First Department, in Carey v. Toy Industry Ass’n TM, Inc. , which, at its core, was a personal injury matter.    The plaintiff in Carey , a carpenter, was injured when he slipped and fell.  Carey sued Toy Industry, which, in turn, brought a third-party complaint against Freeman Expositions, Inc. (“Freeman”) in which Toy Industry sought indemnity and contribution against Freeman for Carey’s injuries.   Freeman moved for summary judgment dismissing the third-party claims.  In its motion, Freeman argued, among other things, that indemnification language from the contract between Toy industry and Freeman was inapplicable because the accident was caused by the negligence of “any other party not under Freeman’s direct control,” which was an exception to Freeman’s indemnification obligations under the contract.  The operative contracts were annexed as exhibits to the affidavit of Freeman’s counsel, and not a representative of Freeman with first-hand knowledge of the contracts. Supreme court denied Freeman’s motion in a decision and order which, in its substantive entirety as it relates to Freeman’s motion, states:  ORDERED that third-party defendant Freeman Expositions, Inc.’s motion for summary judgment is denied as the Freeman/TIA Contract and the TIA/NYCCOC License Agreement upon which it relies are not authenticated as required by CPLR 4518(a) and thus are inadmissible and cannot form the basis to grant summary judgment (Clarke v. American Truck & Trailer, 171 A.D.3d 405, 406 <1st dep’t 2019> )…. Freeman’s counsel then moved for renewal/reargument and that motion was denied. On Freeman’s appeal, the Second Department “unanimously modified, on the law, to grant that portion of Freeman’s motion for summary judgment dismissing the common-law indemnification and contribution claims asserted against it, and otherwise affirmed.”  In so doing, the Court determined, among other things, that copies of the operative contracts were annexed to the third-party complaint, and stated: The motion court should not have denied Freeman’s motion for summary judgment on the basis that its contract with third-party plaintiff Toy Industry Association, Inc. (TIA) was not in admissible form. The copy of the contract on which Freeman relied in support of its motion was annexed to TIA’s third-party complaint. The contract, therefore, was part of the complaint “for all purposes” (CPLR 3014), and facts admitted in the complaint constitute formal judicial admissions, and are conclusive of the facts admitted. Thus, TIA’s rights arise out of the contract annexed to its complaint and it is bound by the contract provisions. The contract was also admissible for the independent reason that TIA both did not object to its admissibility before the motion court (rather, plaintiff did) and relied on the same contract in support of its cross motion.  In view of the foregoing, we dismiss as academic Freeman’s appeal from the order denying its motion for leave to renew, the purpose of which was to tender the contract in admissible form to the motion court’s satisfaction.  Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In past articles, we have examined a motion for summary judgment in lieu of a complaint under CPLR § 3213 ( see ,  e.g. , here ,  here ,  here ,  here , and  here ). Today, we take another look at this statute by examining BBM3, LLC v. Vosotas , 2023 N.Y. Slip Op. 02279 (1st Dept.  May 2, 2023) ( here ), a case involving an unconditional guaranty of payment. CPLR § 3213 Pursuant to CPLR § 3213, “ hen an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint.” The purpose of CPLR § 3213 is “to provide quick relief on documentary claims so presumptively meritorious that a formal complaint is superfluous, and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.” 1 A promissory note 2 and an unconditional guaranty are prototypical instruments for the payment of “money only” within the meaning of CPLR § 3213. 3 To meet the prima facie burden on a summary judgment motion under CPLR § 3213, the movant must prove “the existence of the guaranty, the underlying debt and the guarantor’s failure to perform under the guaranty.” 4 Thereafter, “the burden shifts to the defendant to establish, by admissible evidence, the existence of a triable issue with respect to a bona fide defense.” 5 What is a Guaranty? A guaranty is a promise to fulfill the obligations of another party and is subject “to the ordinary principles of contract construction.” 6 Under those principles, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.” 7 “Guaranties that contain language obligating the guarantor to payment without recourse to any defenses or counterclaims, i.e. , guaranties that are ‘absolute and unconditional,’ have been consistently upheld by New York courts.” 8 “Absolute and unconditional guaranties have … been found to preclude guarantors from asserting a broad range of defenses.” 9 The New York Court of Appeals has acknowledged the application of absolute guaranties even to claims of fraudulent inducement in the execution of a guaranty. In Citibank v. Plapinger , 66 N.Y.2d 90 (1985), the defendants were officers, directors and shareholders in a company which secured a line of credit from the plaintiff banks. After the company defaulted, it restructured its debt as a term loan, guaranteed by the defendants. When the company subsequently filed for bankruptcy, the banks declared the term loan and interest immediately due and sued the defendants on the guaranty. Among their defenses to the litigation, the defendants asserted fraud in the inducement, based on alleged false or recklessly made statements of the banks that they would provide the company with an additional line of credit as part of the debt restructuring. The defendants argued that but for verbal assurances that the banks would issue the credit, the defendants would not have signed the guaranty on the term loan. The Court of Appeals held that under the “absolute and unconditional” language of the guaranty, the defendants were foreclosed from asserting their fraud in the inducement defense. In reaching this conclusion, the Court rejected the need for the defendants’ specific disclaimer of reliance on the banks’ oral representations. Instead, the Court determined, quoting from the guaranty, that the defendants agreed “that the ‘absolute and unconditional’ nature of their guarantee was ‘irrespective of (i) any lack of validity … of the … Loan Agreement … or any other agreement or instrument relating thereto,’ or ‘(vii) any other circumstance which might otherwise constitute a defense’ to the guarantee.” 10 Given the substance of the guaranty, to permit the defendants to assert that the bank induced them to sign “would in effect condone defendants’ own fraud in ‘deliberately misrepresenting true intention’ when putting their signatures to their ‘absolute and unconditional’ guarantee.” 11 In other words, because the defendants had assured the banks that their guaranty to pay the loan was not subject to any defenses, they were bound to their promise. BBM3, LLC v. Vosotas BBM3 concerned the development, operation, and financing of a hotel in Miami Beach (the “Property”). The project was initially financed by a $36 million loan (the “Loan”) that the original lender made to two entities (the “Borrowers”). The Loan was evidenced by a promissory note and secured by, among other things, a first priority mortgage lien on the Property. Pursuant to the loan agreement, if the original lender reasonably determined that there was a deficiency, defined as a shortfall between the estimated cost of completion and the portion of the Loan not yet advanced and the funds in the collateral account (“Deficiency”), then the original lender could deliver written notice demanding that the Borrowers deposit sufficient collateral to cover the amount of the Deficiency (the “Deficiency Collateral”) within ten days. Failure to make such a deposit of Deficiency Collateral constituted an event of default.  Pursuant to one guaranty, the guarantors “unconditionally and absolutely” guaranteed payment and performance of the guaranteed obligations, including accrued and unpaid interest on the Loan and late payment charges. The guarantors were to make such payments “immediately upon demand” without protest or notice.  Pursuant to another guaranty, the guarantors “unconditionally and absolutely” guaranteed payment and performance of the guaranteed obligations, including the Borrower’s obligation under the Loan to deposit Deficiency Collateral with respect to the Loan. These guarantors agreed to make such payments “immediately upon demand” without protest or notice. A Deficiency Notice was sent pursuant to the loan agreement, stating that the original lender determined that there was a Deficiency of at least $3,281,759.74. When the Guaranty Notice was sent a year and a half later, the Deficiency increased to $8,750,522.57, with interest due in the amount of $1,180,446.16.  The Lender claimed that, as of March 10, 2021, the amount owed under one of the guarantees was $14,804,571.89, consisting of (i) interest on the Loan, (ii) funding due to the interest reserve for an interest shortfall arising from the guaranteed obligations, and (iii) insurance premiums. With regard to the other guaranty, the Lender sought $4,181,759.74, consisting of the Deficiency demanded in the Deficiency Notice and a settlement of a change order for a delay claim on the hotel construction.  The Lender commenced an action against the guarantor of one of the guarantees pursuant to CPLR § 3213 by summons and notice of motion dated March 26, 2021. The motion court granted the motion, holding that the Lender “established its prima facie entitlement to summary judgment”. The motion court found that the Lender presented evidence that the guarantees were valid and in effect, that it was owed $14,804,571.89 under one of the guarantees and $4,181,759.74 under the other one, and that the guarantor failed to perform under the guarantees. On appeal, the Appellate Division, First Department affirmed. The Court held that “Plaintiff satisfied its prima facie burden on its CPLR 3213 motion for summary judgment in lieu of complaint by demonstrating the existence of the guaranties and underlying debts, as well as defendant guarantor’s failure to perform under the guaranties.” 12 The Court also held that “CPLR 3213 relief was appropriate despite the completion guaranty’s provision requiring some additional performance obligations by the borrower.” 13 In so holding, the Court reasoned that “the guaranty ‘include an unconditional obligation to pay’ that ‘required no additional performance by plaintiff as a condition precedent to payment.’” 14 15> 15> Takeaway CPLR § 3213 provides for an accelerated judgment at the outset of the litigation. There are no pleadings, and there is no discovery when a movant seeks summary judgment under CPLR § 3213.  As noted, to obtain judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument.  In BBM3 , the Court found that “the guaranty ‘include an unconditional obligation to pay’ that ‘required no additional performance by plaintiff as a condition precedent to payment.’” 16 As such, the guarantee at issue did not require both payment and performance, which would have made CPLR § 3213 in applicable. 17 It was a “prototypical example of an instrument within the ambit of … < i.e. ,> i.e.,> an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.” 18 Footnotes Weissman v. Sinorm Deli , 88 N.Y.2d 437, 443 (1996) (internal quotation marks omitted). See also Cooperatieve Centrale Raiffeseisen-Boerenleenbank, B.A., “Rabobank Intl.,” N.Y. Branch v. Navarro , 25 N.Y.3d 485, 491-492 (2015). Weissman , 88 N.Y.2d at 444. Navarro , 25 N.Y.3d at 492. Davimos v. Halle , 35 A.D.3d 270, 272 (1st Dept. 2006) (citing, City of New York v. Clarose Cinema Corp. , 256 A.D.2d 69, 71 (1st Dept. 1998)). Cutter Bayview Cleaners, Inc. v. Spotless Shirts, Inc. , 57 A.D.3d 708, 710 (2d Dept. 2008) (citation and internal quotation marks omitted). E.g. , Compagnie Financiere de CIC et de L’Union Europeenne v Merrill Lynch, Pierce, Fenner & Smith Inc. , 188 F.3d 31, 34 (2d Cir. 1999) (citing, Banco Portugues do Atlantico v. Asland, S.A. , 745 F. Supp. 962, 967 (S.D.N.Y. 1990)). Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). Navarro , 25 N.Y.3d at 493 (citations omitted). Id. (citing cases). Plapinger , 66 N.Y.2d at 95. Id. Slip Op. at *1 (citation omitted). Id. Id. (quoting, iPayment, Inc. v. Silverman , 192 A.D.3d 586, 587 (1st Dept. 2021), lv. dismissed , 37 N.Y.3d 1020 (2021) (citations omitted)). Punch Fashion, LLC v. Merchant Factors Corp. , 180 A.D.3d 520, 521 (1st Dept. 2020), lv. dismissed, 35 N.Y.3d 1124 (2020). Id. (quoting, iPayment, Inc. v. Silverman , 192 A.D.3d 586, 587 (1st Dept. 2021), lv. dismissed , 37 N.Y.3d 1020 (2021) (citations omitted)). Punch Fashion , 180 A.D.3d at 521. Weissman , 88 N.Y.2d at 444. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber New York’s Business Corporation Law (“BCL”) § 630(a) provides that “ he ten largest shareholders,” of a corporation are “personally liable”, “jointly and severally”, “for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation.” For purposes of BCL § 630(a), “wages or salaries … mean all compensation and benefits payable by an employer to or for the account of the employee for personal services rendered by such employee.” BCL § 630(b). Such compensation and benefits include, but are not limited to, “salaries, overtime, vacation, holiday and severance pay; employer contributions to or payments of insurance or welfare benefits; employer contributions to pension or annuity funds; and any other moneys properly due or payable for services rendered by such employee.” Id. To avail oneself of BCL § 630(a), a laborer, servant or employee must “give notice in writing to such shareholder that he intends to hold him liable” before such laborer, servant or employee charges the shareholder for services. BCL § 630(a). BCL § 630(a) requires that “ uch notice … be given within one hundred and eighty <180> days after termination of such services,” unless the laborer, servant or employee makes a books and records demand under BCL § 624(b), in which case “such notice may be given within sixty days <60> after he has been given the opportunity to examine the record of shareholders.”  If the laborer, servant or employee files an “action to enforce such liability”, then the action must “be commenced within ninety <90> days after the return of an execution unsatisfied against the corporation upon a judgment recovered against it for such services.” 1 An action under BCL § 630(a) does not contemplate litigation of the merits of a plaintiff’s claim for wages, but contemplates litigation to determine whether an employer’s shareholder is liable for a judgment against the employer. It follows a judgment in which the employee is entitled to its wages from their employer, even though it may not possess the assets to satisfy the employee’s claim. BCL § 630(a) is the subject of today’s article and this Blog’s examination of Attarian v. Sagard Capital Partners, L.P. , 2023 N.Y. Slip Op. 31367(U) (Sup. Ct., N.Y. County Apr. 14, 2023) ( here ). Plaintiffs are former employees of nonparty IntegraMed America, Inc. Each plaintiff entered an employment contract with IntegraMed America that guaranteed bonuses and severance payments to induce plaintiffs to continue working for IntegraMed America while the corporation sought a buyer.  The corporation was never sold. Instead, it filed for bankruptcy protection in May 2020. Plaintiffs were simultaneously terminated from their employment and were not paid their earned wages, including the contractual bonuses and severance payments.  During the pendency of IntegraMed America’s bankruptcy, plaintiffs sued Sagard Capital Partners, L.P., as the largest beneficial shareholder of IntegraMed America, alleging a single claim for their wages under BCL § 630. Defendant moved to dismiss the complaint based on its failure to state a viable claim. Defendant maintained that plaintiffs failed to allege (let alone satisfy) the conditions precedent to a BCL § 630 claim and that it is not IntegraMed America’s direct shareholder. The Court granted the motion on both grounds. Regarding the prematurity argument, the Court held that there was no judgment necessary to satisfy the statute: “plaintiffs still await a determination of the merits of plaintiffs’ claims that their employer owes wages, severance payments, and benefits to plaintiffs, which will occur in their employer’s bankruptcy proceeding….” 2 The Court rejected plaintiffs’ argument that “waiting for a judgment against their former employer in the bankruptcy proceeding would be futile” and therefore, “pursing their claim there unnecessary”. 3 The Court explained that, unlike the situation in Grossman v. Sendor , 64 A.D.2d 561, 561 (1st Dept. 1978), on which plaintiffs’ relied, there was no bankruptcy plan or confirmation of such a plan in the case before the Court. Had there been a confirmed plan, which, according to the Court is the equivalent of a judgment, then plaintiffs would have satisfied BCL § 630 because plaintiffs would simply be waiting for the return of the unsatisfied execution. 4 Regarding whether defendant was a shareholder of IntegraMed America, the Court held that it was not a direct shareholder. The Court explained that plaintiffs conceded that defendant owned IntegraMed America through one of three shell companies.: Although plaintiffs allege that defendant publicly has admitted it is a shareholder owning more than a 98% interest in IntegraMed America, plaintiffs negate that allegation by repeatedly … admitting defendant actually owns three “shell” entities, one of which owns the vast majority of the shares of IntegraMed America. 5 Therefore, said the Court, it could not be a direct shareholder of the company.  The Court also explained that such allegations, and the related argument that such ownership made “defendant the holder of a ‘beneficial interest’ … in IntegraMed America and<, therefore,> a shareholder for BCL § 630’s purposes,” did “not render defendant a shareholder of IntegraMed America.” 6 The ownership, held the Court, must be direct. 7 The Court rejected plaintiffs’ argument that under a veil piercing, alter ego, or joint employer theory, defendant was a direct shareholder of IntegraMed America. 8 The Court explained that “BCL § 630 already effectively pierce the corporate veil between employers and their shareholder and create an exception to the rule that ‘a corporation exists independently of its owners, and that it is perfectly legal to incorporate for the express purpose of limiting the liability of the corporate owners’”. 9 Accordingly, the Court held that “ laintiffs may use the statute only once; either to connect the shell entity to the employer or to connect the defendant to the shell entity, and then may use a piercing the corporate veil theory to make the second connection.” 10 The Court rejected plaintiffs’ effort to pierce the corporate veil. Under Delaware law, which applied, the Court held that plaintiffs could not demonstrate that the shell entity was established “‘for no other purpose than as a vehicle for fraud.’” 11 In fact, noted the Court, plaintiffs did not allege that “the shell entities dominated anyone or anything”, or “that any shell entity or even defendant wielded influence over IntegraMed America to commit a fraud or wrong, let alone was established solely as a means for fraud”. 12 Similarly, said the Court, the complaint did not include any allegations that the “shell entity and the employer … had completely ignored corporate formalities and separation and had mixed their financial reporting and borrowed funds together.” 13 Finally, the Court found that plaintiffs did not allege that “defendant committed a fraud or wrong against them by offering the payments to which plaintiffs claimed they were entitled when their employer was on the brink of filing the bankruptcy petition, which would have been preferential payments in violation of 11 U.S.C. § 547(b) and thus subject to clawback by the bankruptcy estate”. 14 “More importantly,” said the Court, “plaintiffs do not show how this offer harmed plaintiffs or would have harmed them even had they accepted the offer and payments were clawed back, leaving them in the same position as they were before the offer”. 15 “In sum,” concluded the Court, “plaintiffs fail to allege facts about any of these three shell entities to support a veil piercing theory that would allow plaintiffs to reach the shell entity that owns their employer and then use BCL § 630 to reach between the shell entity and defendant”. 16 Footnotes BCL § 630(a). Slip Op. at *4. Id. at *5. Id. Id. at *6-*7. Id. at *7. Id. (citing, Local 1181-1061 v. Wayzata Opportunities Fund, LLC , 2016 WL 3646988, at *3 (Sup. Ct., N.Y. County June 30, 2016)). Id. at *8. Id. (quoting, Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC , 146 A.D.3d 1, 12 (1st Dept. 2016), aff’d , 31 N.Y.3d 1002 (2018)). Id. Id. at *9 (quoting, Wallace ex rel. Cencom Cable Income Partners II, Inc., L.P. v. Wood , 752 A.2d 1175, 1184 (Del. Ch. 1999)). Id. at *9-*10. Id. at *10 (distinguishing the facts of the case with Local 2110 v. Getter , 2019 WL 2929549, at *4 (Sup. Ct., N.Y. County July 8, 2019), on which plaintiffs relied). Id. Id. at *11. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Taxes. Everyone hates paying them. As one might expect, taxpayers often look for any opportunity to minimize their tax obligation. When securities are involved, especially in taxable accounts, a taxpayer may look to his or her broker or investment adviser to develop strategies that will mitigate the tax impact of their investments. An investment adviser may, for example, replace a security with an unrealized loss with another security to capture the tax benefit while maintaining a similar exposure and allocation in the client’s account. Such a strategy was at the center of a settlement between the Securities and Exchange Commission (“SEC”) and Betterment LLC (“Betterment”), a New York-based investment adviser. Among other things, Betterment provides investment advice by offering portfolio strategies to clients. The portfolio strategies consist primarily of exchange traded funds (“ETFs”) that provide exposure to different asset classes. Betterment also provides automated, software-based portfolio management on a discretionary basis. Betterment offers its services to retail clients, who use Betterment through third-party investment advisers, and retirement plans and their participants. Since 2014, Betterment has offered its tax-loss harvesting service (“TLH”) to clients that have taxable accounts. TLH is an automated, algorithm-driven process whereby individual positions in client taxable accounts are scanned to identify unrealized investment losses. If, after meeting certain conditions, an ETF is identified where a client has an unrealized loss that could potentially be used to reduce their liability, it is sold and replaced with a closely correlated ETF with similar exposure. In other words, TLH is designed to replace a security with another security to capture a potential tax benefit while maintaining a similar exposure and allocation in a client’s account. To take advantage of TLH, a client must enable the service. Since its introduction through January 2023, over 275,000 client accounts have enabled TLH. On April 18, 2023, the SEC announced (here) that it charged Betterment with making material misstatements and omissions related to TLH, failing to provide clients with notice of changes to contracts, and failing to maintain certain required books and records. Betterment settled the charges, agreeing to pay a $9 million penalty and to distribute funds to affected clients. According to the SEC, from 2016 to 2019 (the “Relevant Period”), Betterment misstated or omitted several material facts concerning TLH. For example, Betterment described TLH as a service that scanned a client’s account on a daily basis for harvesting opportunities. Due to constraints related to overall client trading volume, explained the SEC, Betterment adjusted its TLH scanning frequency in January 2016. Betterment separated clients into two groups and scanned their accounts on alternating trading days. The SEC found that Betterment did not perform any contemporaneous analysis to evaluate the potential impact of the change on clients, and clients that used TLH were not notified of the change. According to the SEC, reducing TLH’s scanning frequency can reduce the benefit of the service, depending on a number of client and market specific factors. On April 24, 2019, Betterment determined that its trading system could revert back to daily scanning and reinstituted daily scanning for all clients with TLH enabled as of that date. During the Relevant Period, said the SEC, approximately 25,000 clients lost approximately $1.9 million in potential tax benefits as a result of the undisclosed change in scanning frequency. In addition, the SEC found that Betterment failed to disclose a programming constraint with TLH that affected certain clients. According to the SEC, the TLH algorithm imposed certain restrictions on harvesting activities for multiple-portfolio clients. Because some third-party managers used the same ETFs in their portfolio strategies as Betterment did, there was a risk of certain negative tax implications stemming from transactions in these overlapping ETFs. Betterment designed the TLH algorithm with constraints intended to minimize these negative tax consequences. The SEC explained that asset classes, which were eligible for TLH, were assigned up to three closely correlated ETFs (ranked as primary, secondary, and tertiary choices), which could be used as replacements in TLH transactions. In some instances, the ETFs in a particular asset class overlapped between two portfolio strategies, but were ranked differently, which created the risk of a potential negative tax consequence from a harvest. Betterment restricted TLH from harvesting in asset classes where that type of overlap existed to avoid the risk of a potential negative tax consequence. As a result, said the SEC, TLH activity, and potentially TLH results, could differ significantly for multiple-portfolio clients as compared to clients who selected a single portfolio strategy. According to the SEC, the constraints associated with overlapping securities were not described in Betterment’s client disclosures. In fact, said the SEC, one disclosure suggested that TLH would not function any differently between a single portfolio strategy and a multiple-portfolio strategy. In January 2019, Betterment made the interaction between TLH and third-party portfolio strategies clearer when it updated a disclosure statement it provided to clients that enabled TLH. The notification, said the SEC, did not attempt to quantify whether a client was adversely affected, and offered no remediation. According to the SEC, from September 2017 until January 2019, there were approximately 5,600 multiple-portfolio client accounts that enabled TLH. At least 3,200 client accounts lost approximately $1 million in potential tax benefits as a result of the undisclosed constraints in the design of TLH. Finally, Betterment failed to disclose two computer coding errors that prevented TLH from harvesting losses for some clients. The SEC found that beginning in April 2016, a coding error caused two Betterment client databases to cease interfacing properly for certain accounts. The result, said the SEC, was that for at least 150 accounts, TLH was disabled although clients had enabled it. Consequently, noted the SEC, Betterment did not scan these accounts or harvest any tax losses until the coding error was fixed. According to the SEC, in January 2019, Betterment learned about and fixed the coding error after an inquiry from a third-party investment adviser. Betterment attempted to notify impacted clients and remediate the issue, but those efforts were incomplete. The SEC found that beginning in November 2015 until June 30, 2018, Betterment experienced another coding error related to over 600 client accounts that were titled as joint trust accounts. Similar to the other coding error, this error caused TLH to be disabled for clients that had enabled the service. Betterment similarly learned about the issue as a result of a client inquiry, in June 2018, and fixed the coding error shortly thereafter. However, said the SEC, Betterment did not notify any other affected client or provide remediation because it concluded that the issue did not adversely impact clients. As noted by the SEC, that was an incorrect determination. The SEC found that together, the coding errors impacted approximately 760 client accounts. At least 700 client accounts were negatively impacted and lost approximately $1.1 million in potential tax benefits during the Relevant Period. Collectively, said the SEC, the disclosure and coding issues adversely impacted more than 25,000 client accounts, resulting in those clients losing approximately $4 million in potential tax benefits. The SEC further found that Betterment failed to provide advance notice of changes to its advisory contract, which is a violation of its fiduciary duty as an investment adviser, and failed, during certain times, to maintain accurate and current books and records reflecting written agreements with certain clients. Also, the SEC found that, in connection with the failures related to TLH, Betterment failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940. Commenting of the settlement, Antonia M. Apps, Director of the SEC’s New York Regional Office, stated: “Robo-advisers have the same obligations as all investment advisers to ensure they are transparent about services they provide and upfront about any material changes to those services or issues that may negatively affect clients. Betterment did not describe its tax loss harvesting service accurately, and it wasn’t transparent about the service’s changes, constraints, and coding errors that adversely impacted thousands of clients.” Betterment consented to the entry of the SEC’s order finding that it violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and related rules. Without admitting or denying the SEC’s findings, Betterment agreed to a cease-and-desist order (here), a censure, and to pay a $9 million civil penalty that will be distributed to affected clients. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Lucky of 195 Madison St. Roofing & Contracting Inc. v. Creif, 109 LLC , 2023 N.Y. Slip Op. 02065 (1st Dept. Apr. 20, 2023) ( here ), the Appellate Division, First Department was asked to consider whether a legal opinion issued in connection with a mortgage transaction was fraudulent. As discussed below, the First Department affirmed the holding of the motion court, which found that the legal opinion in question was, for pleading purposes, fraudulent. A legal opinion is typically a letter issued by a lawyer that is used to facilitate a party’s due diligence process in a transaction. An opinion letter helps to validate the legality of the transaction by opining on matters such as the validity of a corporate entity, the authority of a party to enter into the transaction, the enforceability of the transaction documents, and whether the transaction complies with applicable laws, rules and regulations. A legal opinion will also identify any legal risks that should be considered by the parties. An opinion letter can be used in many types of commercial transactions. For example, an opinion letter can be used to help a lender determine whether to lend money to a potential borrower. It can also be used in connection with the purchase and sale of securities.  Legal opinions focus on the issues relevant to the transaction. Lawyers typically do not give an opinion on every aspect of the transaction and the law. Whether a legal opinion is given, and the contents to include in the opinion, is often negotiated.  Lucky of 195 Madison St. Roofing & Contr. Inc. v. Creif Beginning in October 2015, defendants Allan J. Stevo (“Stevo”) and Srun Taing (“Taing”) and certain third-party defendants entered into a fraudulent scheme whereby they falsely claimed that they were the owners, shareholders, members and/or agents of Lucky of 195 Madison St. Roofing & Contracting Inc. (“Lucky 195”) in order to take out mortgages on property that plaintiff owned.  To implement the scheme, defendants allegedly created false documents intended to convince lending institutions, including defendant and third-party plaintiff Creif 109 LLC (“Creif”), that they were the owners, shareholders, or members of Lucky 195 and were authorized to enter into loan agreements on behalf of Lucky 195. They also retained an attorney, Stephen Seung (“Seung”), to prepare and deliver a legal opinion letter, which allegedly stated that Lucky 195 had the authority to enter into the mortgages, that Stevo and Taing had the authority to execute the transaction documents on behalf of Lucky 195, and that Seung had performed the necessary due diligence to confirm these representations. The opinion letter also stated that Lucky 195 had the “right, power, and authority” to execute the loan documents. At the conclusion of the opinion letter, Seung stated that the opinion was issued “solely for benefit and the benefit of successors and assigns and any participant in the Loan, and may not be relied upon by any other party or for any other purpose without our prior written consent”. Notably, the opinion letter did not contain any carve-outs to insulate Seung from liability. According to Creif, Seung admitted that he did not “confirm that Stevo and Taing could actually act on behalf of Lucky 195” even though his opinion letter said otherwise. Creif claimed that if it had known that Seung did not make any inquiries of the borrower ( i.e. , Lucky 195), Creif would never have agreed to close the transactions. On January 29, 2021, Creif filed a third-party complaint against Seung and the other conspiring defendants, alleging negligence and fraud.  On March 7, 2021, Seung filed a motion to dismiss the fraud and negligence claims that were asserted against him. Seung argued that the fraud claim failed to satisfy the particularity requirement of CPLR § 3016(b). According to Seung, Creif merely alleged fraud in a conclusory fashion; there were no factual allegations supporting the claim. Seung also argued that there was nothing in the third-party complaint to establish or justify a claim that Seung knew that the statements contained in the opinion letter were false. Seung further argued that the allegations concerning reliance on the opinion letter were conclusory and rebutted by sworn statements made by Creif in which Creif claimed that it relied on several corporate documents in making the subject mortgage loans. On July 11, 2022, the motion court denied Seung’s motion to dismiss, holding that there were sufficient inferences of fraud at the pleading stage of the litigation.  On August 18, 2022, Seung filed a motion for reargument. Following oral argument, the motion court granted that portion of Seung’s motion for reargument to dismiss the claim for negligence but denied that portion of his motion with regard to the fraud claim. On appeal, the First Department affirmed. The Court held that Creif satisfied the particularity requirement of CPLR § 3016(b), stating that “allegations were sufficient to permit a ‘reasonable inference’ of Seung’s alleged fraudulent conduct”. 1 Under CPLR § 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” 2 To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result.  The Court of Appeals has explained, however, that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 3 Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” 4 Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. 5 In holding that Creif pleaded its fraud claim with particularity, the Court rejected Seung’s reliance on Fortress Credit Corp. v. Dechert LLP , 89 A.D.3d 615 (1st Dept. 2011).  In Fortress , a lender brought suit against a law firm for professional malpractice and negligent misrepresentation. The defendant law firm had written a legal opinion for its client, a borrower, on whether relevant loan documents had been carried out with the formalities necessary to make them binding. In its written legal opinion letter, the law firm determined that the relevant loan documents had been duly executed and delivered. The lender alleged that it sustained damages by relying on the law firm’s faulty written opinion. The First Department held that the plaintiff failed to demonstrate that the opinion letter contained misrepresentations of fact. In so holding, the Court explained that the opinion letter, by its very terms, “provided only legal conclusions upon which plaintiffs could rely” and was “clearly and unequivocally circumscribed by the qualifications that defendant assumed the genuineness of all signatures and the authenticity of the documents”. 6 The opinion letter further represented that the lawyer had “made no independent inquiry into the accuracy of the factual representations or certificates, and undertook no independent investigation in ascertaining these facts”. 7 By contrast, the Court in Lucky held that “the opinion letter contain no such carve-outs, and in fact represent that Seung made the relevant ‘inquiries’”. 8 “The alleged fraud in this case,” said the Court, was “based on actual misstatements”. 9 10> 10> Accordingly, concluded the Court, “there remain the possibility that Seung may have known about the underlying fraud, rather than simply having failed to detect it”. 11 Footnotes Slip Op. at *1 (citing, Pludeman v. Northern Leasing Sys., Inc. ,10 N.Y.3d 486, 492 (2008)). Pludeman , 10 N.Y.3d at 491 (2008) (citation omitted). Id. (internal quotation marks and citation omitted). Id. at 492. Id. Fortress , 89 A.D.3d at 617. Id. Slip Op. at *1. Id. Connaughton v. Chipotle Mexican Grill, Inc. , 135 A.D.3d 535, 537-38 (1st Dept. 2016), aff’d , 29 N.Y.3d 137 (2017). S ee Netshoes Sec. Litig. v. XXX , 64 Misc. 3d 926, 932, (Sup. Ct., N.Y. County 2019) (citing, Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt. Corp. , 2016 WL 1261135, at *9 (S.D.N.Y. 2016)). Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger In our October 19, 2020, Blog < here =">here"> we discussed, inter alia , Administrative Order 98-20 , issued by Andrew A. Crecca, District Administrative Judge, Suffolk County. AO 98-20 established new procedures for scheduling foreclosure sales considering the COVID-19 pandemic. Briefly stated, AO 98-20 required the Court-appointed referee to schedule foreclosure sales through the Court Fiduciary Office so that only one sale would take place at a time.  In addition, AO 98-20 required the sale referee to make sure all participants at the auction followed any face covering and social distancing requirements at the time of the auction. On April 11, 2023, District Administrative Judge Crecca, issued Administrative Order 12-23 , which becomes effective May 1, 2023, and supersedes AO 98-20.  AO 12-23 provides: Pursuant to the authority vested in me as District Administrative Judge, this order supersedes Administrative Order 98-20 and is in accordance with guidance issued by the Chief Administrative Judge for the trial courts of the Unified Court System (UCS) in Administrative Order 35/22 dated January 16, 2022 which provides that auctions should continue in a manner consistent with district/county auction plans and in accordance with the Unified Court System's COVID-19 protocols. I hereby order that effective May 1, 2023, the following process will be used for scheduling and conducting foreclosure auctions in Suffolk County. All foreclosure auctions shall be conducted in accordance with the Suffolk County Foreclosure Auction Rules and Procedures in effect at the time of the auction. Suffolk County has updated its auction plan, a copy of which is posted on the Suffolk County Courts' website. In order to schedule a foreclosure sale, the requesting party must choose a date and time and submit a Notice of Sale to Suffolk County's Fiduciary Department. The Notice of Sale with all the required information must be filed via NYSCEF or, in the event of a non-efiled foreclosure matter, by email to: suffauctions@nycourts.gov. The prior approval of the date and time from the Fiduciary Department will no longer be required. The auctions will continue to take place at the Town Halls throughout Suffolk County. Upon receipt of the Notice of Sale, the Fiduciary Department will enter the auction date into the court's calendar, which will be accessible through e-courts and updated daily. Presumably, once effective, AO 12-23 will permit multiple foreclosure sales to proceed simultaneously. 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 When is a joint venture a joint venture under the law? The easy answer to this question can be found when the parties enter into an express joint-venture arrangement or an express partnership arrangement. The hard answer, however, must be found in the facts and circumstances of the dispute between the parties.  In Capstone Capital Group, LLC v. DCK Worldwide Holdings, Inc. , 2023 N.Y. Slip Op. 01953 (1st Dept. Apr. 18, 2023) ( here ), the answer to the question turned on the interplay of financial documents between the parties, and whether those documents and the parties’ conduct established an “unequivocal collective design” ( i.e. , a joint venture) that precluded any of them from pursuing independent action. 1 As discussed below, the Court found that there was no joint venture between the defendants. What is a Joint Venture? A joint venture is a special combination of two or more parties for their mutual benefit and profit in a particular transaction. 2 In the absence of a specific agreement between the parties memorializing their joint venture status, courts look to a number of factors, including: (a) acts manifesting the intent of the parties to be associated as joint venturers, (b) mutual contribution to the joint undertaking through a combination of property, financial resources, effort, skill or knowledge, (c) a measure of joint proprietorship and control over the enterprise, and (d) a provision for the sharing of profits and losses. 3 “The ultimate inquiry is whether the parties have so joined their property, interests, skills and risks that for the purpose of the particular adventure their respective contributions have become as one and the commingled property and interests of the parties have thereby been made subject to each of the associates on the trust and inducement that each would act for their joint benefit.” 4 Notably, if a joint venture exists, “plaintiff’s status as an alleged partner in a joint venture gives rise to a fiduciary relationship which allows the imposition of a constructive trust.” 5 Capstone Capital Group, LLC v. DCK Worldwide Holdings, Inc. Capstone arose from a co-lending arrangement that began in 2017 between Arena and Capstone, on the one hand, and various borrowers on the other, all of which were affiliated construction companies operating under the “DCK” brand. Together, Arena and Capstone provided millions of dollars in financing to the DCK companies (the “DCK Borrowers”) in order to fund the companies’ working capital costs and allow their construction projects to operate. Pursuant to a series of financing agreements, Arena and Capstone each provided funding to the DCK Borrowers through “purchase money advances”.  In mid-2020, the DCK Borrowers began missing their monthly debt service payments. In early 2012, after months of missed payments, the DCK Borrowers defaulted on their repayment obligations. Thereafter, Arena tried to ascertain the DCK Borrowers true financial condition but was thwarted at every turn. Fearing that Arena’s investment was at serious risk, Arena moved to secure the collateral underlying its financing. Arena initiated separate enforcement proceedings against the DCK Borrowers in February and March 2021, respectively, seeking the repayment of the amounts owed. Capstone did not join Arena in these enforcement proceedings. Instead, Capstone initiated its own action against the DCK Borrowers. In doing so, Capstone also named Arena, the individual defendants, and various principals and senior executives of the company as defendants. Capstone alleged, among other things, that the defendants created a joint venture pursuant to which they were liable. Arena moved to dismiss. The motion court found that there was no joint venture sufficient to support Capstone’s claims. Capstone appealed. The Appellate Division, First Department affirmed. The Court held that the motion court “correctly dismissed the seventeenth (breach of the implied covenant of good faith and fair dealing), eighteenth (breach of fiduciary duty), nineteenth (aiding and abetting breach of fiduciary duty), and twentieth (permanent injunction) causes of action, asserted against Arena”. 6 The Court reasoned that these claims required a fiduciary duty (via a joint venture) which Capstone failed to demonstrate: “As a necessary predicate for the claims, plaintiffs must allege that the parties entered into an agreement or engaged in conduct evincing an intent to operate as a joint venture in connection with their financing of the construction project.” 7 The Court found that “ ther than the terms of the loan guaranties …, nothing in the record gave rise to an inference of a joint venture arrangement”. 8 “Rather,” said the Court, “the record clearly establishe that the parties were merely coordinated lenders, with distinct rights to enforce payment of the debt and to secure the collateral, and without the reciprocal duties and obligations of joint venturers”. 9 In conclusion, the Court opined that:  While a joint-lender relationship may properly be construed as a joint venture where the parties’ agreements or conduct establishes an “unequivocal collective design” that precludes any lenders from pursuing independent action …, the express language of the financing agreements, the nature of the parties’ relationship, and the parties’ conduct here do not support a finding that the parties intended to act collectively.< 10 > 10>  Takeaway The Court’s conclusion, quoted above, best describes the takeaway of Capstone . To establish whether there is a joint venture arrangement, the courts should examine the parties’ agreements and the parties’ conduct to determine whether they can act independently of one another. If they can act independently, then there is no joint venture. If, however, they cannot act independently, then there is a joint venture. Footnotes See , e.g. , Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 326-332 (2007); Credit Francais Intl. v. Sociedad Fin. de Comercio , 128 Misc. 2d 564, 577-582 (Sup. Ct., N.Y. County 1985). Forman v. Lumm , 214 A.D. 579 (1st Dept. 1925). Richbell Info. Servs., Inc. v. Jupiter Partners, L.P. , 309 A.D.2d 288, 298 (1st Dept 2003). Hamlet at Willow Creek Dev. Co. v. N.E. Land Dev. Corp. , 64 A.D.3d 85, 104 (2d Dept. 2009) (quoting, Steinbeck v. Gerosa , 4 N.Y.2d 302, 317 (1958)). Plumitallo v. Hudson Atl. Land Co. , 74 AD3d 1038, 1039 (2d Dept 2010). Slip Op. at *1. Id. (citation omitted). Id. (citation omitted). Id. Id. (citing, Beal Sav. Bank , 8 N.Y.3d at 326-332; Credit Francais Intl. , 128 Misc. 2d at 577-582). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Under the doctrine of res judicata, a final judgment on the merits of a claim precludes re-litigation of that claim by a party, and those in privity with that party. 1 This means that parties cannot relitigate the claim and all claims arising out of the same transaction, or series of transactions, even if based upon different theories or if seeking different remedies. It is a “transactional analysis” that the courts of New York apply to “preclude the litigation of matters that could have or should have been raised in a prior proceeding arising from the same ‘factual grouping.’” 2 Ultimately, application of res judicata requires the claim sought to be resolved to have been “reasonably and plainly comprehended to be within the scope” of the prior dispute. 3 The doctrine of collateral estoppel prevents a party from relitigating an issue that was “raised, necessarily decided and material in the first action,” provided the party had a full and fair opportunity to litigate the issue. 4 Collateral estoppel is an equitable defense “grounded in the facts and realities of a particular litigation, rather than rigid rules.” 5 The proponent of collateral estoppel has the burden of demonstrating “the identicality and decisiveness of the issue,” while the opponent has the burden of establishing “the absence of a full and fair opportunity to litigate the issue in prior action or proceeding.” 6 To establish privity with respect to either res judicata or collateral estoppel, “the connection between the parties must be such that the interests of the nonparty can be said to have been represented in the prior proceeding”. 7 Although relationship alone is not sufficient to support preclusion, “ includes those who are successors to a property interest, those who control an action although not formal parties to it, and those whose interests are represented by a party to the action”. 8 The party asserting the conclusive effect of a prior judgment has the burden to establish it. 9 here,=">here," >here and  here.=">here."> The doctrines of res judicata and collateral estoppel apply to prior arbitration proceedings, as well as prior determinations by state appellate and federal courts. 11 In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes res judicata and collateral estoppel as bases for dismissal. 12 Both concepts are also affirmative defenses under the CPLR. 13 In Brody v. RBC Mtge. Co. , 2023 N.Y. Slip Op. 01883 (2d Dept. Apr. 12, 2023) ( here ), the Appellate Division, Second Department, had the opportunity to consider the foregoing principles. Brody involved a quiet title action pursuant to Real Property Action and Proceedings Law Article 15, wherein Brody sought a declaration that mortgages held by the Bank of New York Mellon Corporation (“BNY”) encumbering the subject property were unenforceable and invalid. Brody commenced the action in August 2019. Defendants Mortgage Electronic Registration Systems, Inc. (“MERS”), and NewRez, LLC, moved, and defendant BNY separately moved, pursuant to CPLR § 3211(a), to dismiss the complaint, asserting, among other things, that plaintiff’s claims were barred by the doctrine of res judicata. Defendants maintained that, inter alia , in April 2013, plaintiff commenced a proceeding pursuant to RPAPL 1921 against BNY and Countrywide Home Loans, Inc. (“Countrywide”) to cancel and discharge a note and mortgage securing certain real property located in Rye, N.Y. (the “prior proceeding”) on the grounds that, inter alia , it was procured by fraud. The prior proceeding centered on plaintiff’s claim that, in connection with a December 22, 2006 refinancing, a first note and mortgage on the property had been satisfied, and had not been consolidated with a second note and mortgage to form a new single debt. By order dated December 7, 2016, issued in the prior proceeding, the Supreme Court, among other things, granted BNY and Countrywide’s motion for summary judgment dismissing the prior proceeding finding that Brody had ratified the purportedly fraudulent mortgages by accepting the mortgage proceeds, signing the mortgage documents and making the mortgage payments without protest. The motion court granted the motions to dismiss. The motion court found that the issue of the validity of the mortgage, which was the basis for plaintiff’s current complaint, was litigated in the prior proceeding.  Brody’s complaint seeks a declaration that he is vested with absolute and unencumbered title to the Property which is based upon his allegation that the CEMA is, for various reasons, fraudulent and invalid. He alleges that the 2003 Mortgage is “defective on its face and unenforceable” and that the CEMA is in conflict with the 2003 Mortgage. In light of the foregoing, it is indisputable in this context that res judicata bars Brody’s claims here. The claims clearly arise from the identical transaction at issue in the prior proceeding the consolidated loan transaction, and in particular the CEMA, -- and involve the identical parties. The Court already determined that Brody ratified the Mortgages by accepting the mortgage proceeds, executing the loan documents and making payments thereon without protest and that the Mortgages are therefore enforceable and valid. Plaintiff appealed. The Second Department affirmed.  The Court held that the issues in the current action and the prior proceeding concerned the same subject matter and, therefore, were already litigated.  Here, the subject matter of the prior proceeding centered on the validity and terms of the December 2006 refinancing agreement. In the prior proceeding, the Supreme Court concluded that the plaintiff had ratified the refinancing agreement by making the new, higher payments “without protest,” and “accept the proceeds of the purportedly fraudulent loan and a written acknowledgment of the loan terms.” In this action, the plaintiff seeks an absolute and unencumbered title to the property, and alleges, among other things, fraud and unclean hands in connection with the refinancing agreement. Thus, the subject matter of both the prior proceeding and this action is the validity of that refinancing agreement. 14 Therefore, concluded the Court, “the doctrine of res judicata preclude the court’s reconsideration of that same transaction”. 15 Takeaway As discussed, the Second Department dismissed plaintiff’s claims because they were previously decided in the prior proceeding, wherein he sought to invalidate the subject mortgages on the basis of fraud. The prior proceeding was dismissed on summary judgment because plaintiff ratified the purportedly fraudulent mortgages by accepting the mortgage proceeds, signing the mortgage documents and making the mortgage payments without protest. Because the validity of the mortgages at issue in the action before the Second Department was previously established by the motion court in the prior proceeding, Brody’s claims were barred by the doctrine of res judicata. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. References E.g. , O’Brien v. City of Syracuse , 54 N.Y.2d 353,357 (1981). Board of Managers of Windridge Condos. One v. Horn , 234 A.D.2d 249 (2d Dept. 1996). Kim v. NRT New York LLC , 198 A.D.3d 416, 416 (1st Dept. 2021). E.g. , Parker v. Blauvelt Volunteer Fire Co. , 93 N.Y.2d 343, 349 (1999). Buechel v. Bain , 97 N.Y.2d 295, 303 (2001). Ryan v. New York Tel Co. , 62 N.Y.2d 494, 501 (1984). Green v. Santa Fe Indus. , 70 N.Y.2d 244, 253 (1987); see also D’Arata v. New York Cent. Mut. Fire Ins. Co. , 76 N.Y.2d 659, 664 (1990). Watts v. Swiss Bank Corp. , 27 N.Y.2d 270, 277 (1970). Id. at 275. Mahler v. Campagna , 60 A.D.3d 1009 (2d Dept. 2009); see also Rembrandt Ind. v. Hodges Intl. , 38 N.Y.2d 502, 504 (1976); Lopez v. Parke Rose Mgt. Sys. , 138 A.D.2d 575, 577 (2d Dept. 1988) Milone v City University of New York , 153 A.D.3d 807, 808-809 (2d Dept. 2017); see also Emmons v Broome County , 180 A.D.3d 1213 (3d Dept. 2020). See CPLR § 3211(a)(5). See CPLR § 3018(b). Slip Op. at *2. Id. (citations omitted). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.