By Jonathan H. Freiberger As explained in prior Blog articles, a court will grant a motion for summary judgment if, upon all the papers and evidence submitted, the cause of action or defense is established sufficiently to warrant directing judgment in favor of the moving party as a matter of law. CPLR § 3212 (b); Gilbert Frank Corp. v. Federal Ins. Co. , 70 N.Y.2d 966, 967 (1988); Zuckerman v. City of New York , 49 N.Y.2d 557, 562 (1980). The function of the court when presented with a motion for summary judgment is one of issue finding, not issue determination. Sillman v. Twentieth Century-Fox Film Corp. , 3 N.Y.2d 395 (1957); Weiner v. Ga-Ro Die Cutting, Inc. , 104 A.D.2d 331 (1st Dep’t 1985). To prevail on a motion for summary judgment, the movant must make a prima facie showing of entitlement, submitting sufficient admissible evidence, such as affidavits of persons with first-hand knowledge of the matter, documentary evidence, and testimonial evidence, to demonstrate the absence of any material issues of fact. Jacobsen v. New York City Health and Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986). The movant’s initial burden is a heavy one; on a motion for summary judgment, facts must be viewed in the light most favorable to the non-moving party. Jacobsen , 22 N.Y.3d at 833. If the moving party fails to make its prima facie showing, the court is required to deny the motion, regardless of the sufficiency of the non-movant’s papers. Winegrad v. New York Univ. Med. Center , 64 N.Y.2d 851, 853 (1985).  If the movant meets its initial burden, then the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action or advance an acceptable excuse for the failure to do so. Zuckerman , 49 N.Y.2d at 560. However, bare allegations or conclusory assertions are insufficient to create genuine, bona fide, issues of fact necessary to defeat such a motion. Rotuba Extruders, Inc. v. Ceppos , 46 N.Y.2d 223, 231 (1978). In Diesel Funding LLC v. RCI PLBG Inc. , decided by the Supreme Court of the State of New York, Kings County, on April 6, 2023, the Court denied an unopposed motion for summary judgment pursuant to CPLR 3212 due to evidentiary failures on movant’s part.  [Eds. Note: this Blog has addressed the issue of the sufficiency of evidence submitted on a motion for summary judgment in the context of mortgage foreclosure actions, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]   The plaintiff in Diesel purchased for $830,000, $1.2 million of the corporate defendants’ receivables.  The corporate defendants agreed to make daily ACH payments to plaintiff in the amount of $20k until the receivables were paid in full.  The individual defendants guaranteed the corporate defendants’ repayment obligations to plaintiff.  According to the complaint, the corporate defendants breached the parties’ agreement by “intentionally impeding and preventing from making the agreed upon ACH withdrawals from the orporate defendants’ bank account.” Plaintiff commenced action against the corporate defendants and the guarantors for, inter alia , breach of contract.  The Defendants answered the complaint by denying or denying knowledge of the material allegations in the complaint and asserting several affirmative defenses.  Within a week of the filing of the answer, plaintiff moved for summary judgment.  The defendants did not oppose the motion.  Relying on Liberty Taxi Mgt., Inc. v. Gincherman , 32 A.D.3d 276, 278 n. (1 st Dep’t 2006), the Court noted that “a summary judgment motion should not be granted merely because the party against whom judgment is sought failed to submit papers in opposition to the motion, i.e. defaulted.”  (Citations omitted.) Among the legal considerations made by a court deciding a summary judgment motion previously discussed herein, the Diesel Court also noted that “ ursuant CPLR 3212(b), a court will grant a motion for summary judgment upon a determination that the movant’s papers justify holding, as a matter of law, that there is no defense to the cause of action or that the cause of action or defense has no merit.  Furthermore, all of the evidence must be viewed in the light most favorable to the opponent of the motion.”  (Citation omitted.) The Court then noted that “ he essential elements of a cause of action to recover damages for breach of contract are the existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach of its contractual obligations, and damages resulting from the breach.”  (Citation and internal quotation marks omitted.) The Court found that plaintiff failed to meet its prima facie burden of demonstrating entitlement to summary judgment.  First the Court noted that the attorney affirmation of plaintiff’s counsel demonstrated “no personal knowledge of any of the transactional facts alleged in the complaint” and that an “attorney’s affirmation that is not based upon personal knowledge is of no probative or evidentiary significance.”  (Citations omitted.) Next, the Court addressed the affidavit of plaintiff’s CFO (“CFO”) and stated that CFO’s “affidavit is used to authenticate the Agreement which was allegedly breached by the defendants.”  In his affidavit, CFO “avers that he is the CFO of and, as such, has personal knowledge of its business practices and procedures” and “that the factual allegations proffered in support of the motion for summary judgment are derived from his review of the plaintiff’s business records.  In his affidavit, CFO refers to “the only two exhibits attached to the motion, namely, the Agreement and a document denominated as a payment history.” In addressing the shortcomings of CFO's affidavit, the Court notes that CFO “does not aver that he was a signatory to the agreement or that he participated in the execution of same.”  Further, while the operative agreement refers to a “prior balance owed by the orporate defendants to ”, neither the complaint nor any of the affidavits supporting the motion for summary judgment “mention the existence of a prior balance owed by the corporate defendants to the plaintiff, and or the plaintiff’s right to deduct that balance from the funds delivered to defendants” and that “the complaint and the motion provide no information regarding the amount of funds that were provided to the corporate defendants pursuant to the Agreement”.  Thus, the Court found that these facts were sufficient to raise “material issues of fact regarding the plaintiff’s performance under the agreement” preventing plaintiff from making a “prima facie showing of entitlement to judgment on its claim for breach of the Agreement the guarantee.” As to its rejection of CFO’s attempted reliance on the payment history, the Court stated: also refers to the payment history, annexed as exhibit B to his affidavit, as proof of the defendants’ default. A proper foundation for the admission of a business record must be provided by someone with personal knowledge of the maker's business practices and procedures. As a general rule, the mere filing of papers received from other entities, even if they are retained in the regular course of business, is insufficient to qualify the documents as business records. However, such records may be admitted into evidence if the recipient can establish personal knowledge of the maker's business practices and procedures or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business. Here, the payment history is submitted without explaining its source or its meaning.  It is neither self-explanatory nor self-admitting and there was an insufficient foundation for its admission as a business record.  <(citations omitted.)> The Court also rejected CFO’s averment that the corporate defendants “closed a bank account and ceased payment authorizations for daily ACH payments under Bank Code RO2 constituting a default under the Agreement” because CFO “proffered no business record reflecting this fact” and, instead, “merely alleged the fact without proffering any documentary support”.  (Emphasis in original.)  In this regard the Court stated that: It is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted.  Accordingly, evidence of the contents of business records is admissible only where the records themselves are introduced. Without their introduction, a witness's testimony as to the contents of the records is inadmissible hearsay. averments regarding Bank Code RO2 constitutes inadmissible hearsay. In some, has failed to make a prima facia showing of entitlement to summary judgment on any of the claims it has asserted against the defendants.  (Citations omitted; emphasis in original.) Takeaway Litigants moving for summary judgment should make every effort to meet their prima facie burden in their moving papers by the submission of evidence in admissible form.  Even when a motion for summary judgment is unopposed, the court may deny the motion based on, inter alia , the sufficiency of the evidence submitted.  It should be noted, however, that the Second Department, in Bank of New York Mellon v. Gordon , 171 A.D.3d 197, 202 (2019), stated: However, as a general matter, a court should not examine the admissibility of evidence submitted in support of a motion for summary judgment unless the nonmoving party has specifically raised that issue in its opposition to the motion, for we are not in the business of blindsiding litigants, who expect us to decide their appeals on rationales advanced by the parties, not arguments their adversaries never made. Indeed in civil cases, inadmissible hearsay admitted without objection may be considered and given such probative value as, under the circumstances, it may possess.  (Citations, internal quotation marks and brackets omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In today’s article, we address the question: When is an attorney authorized to act on behalf of a party? As one would expect, when the client says so, a lesson learned by the parties in Gibson, Dunn & Crutcher LLP v. Koukis , 2023 N.Y. Slip Op. 01863 (1st Dept. Apr. 11, 2023) ( here ). The primary issue in Gibson Dunn was whether the default judgment entered against defendant George Koukis in July 2019 should be vacated, and the complaint dismissed as against him, on the ground that Koukis — a domiciliary of Switzerland — was not subject to the motion court’s jurisdiction.  Gibson Dunn represented Be In, Inc. (“BII”) in arbitration against Google. Apparently, BII failed to pay Gibson Dunn for its fees and expenses. Consequently, Gibson Dunn commenced an arbitration to recover those fees and expenses. Gibson Dunn prevailed and obtained a judgment confirming the arbitration award in its favor (the “judgment”). Thereafter, Gibson Dunn domesticated the judgment in New York Supreme Court.  During a postjudgment deposition, a representative of BII testified that defendants had stopped funding the company and had drained the company’s bank accounts so that the company was insolvent. According to the representative, a family member of BII had transferred his equity interest to another for no consideration, and other family members had transferred their shares to another for no consideration, leaving one family member with an 85% interest and Koukis with 15% of the remaining shares. Plaintiff commenced an action against BII’s shareholders — including Koukis — to enforce the judgment ( i.e. , to recover the unpaid fees that it earned in representing BII). Gibson Dunn asserted claims of fraudulent conveyance against BII and defendants and alter ego/misuse of the corporate form against defendants. Plaintiff alleged, among other things, that defendants had undercapitalized BII, had made fraudulent transfers with the intent to hinder Gibson Dunn’s collection efforts, and had abused the corporate form by holding no board meetings, maintaining no financial records or office space, and by conveying BII’s shares for no consideration and moving assets into personal bank accounts. Gibson Dunn effectuated service on defendants by delivering the summons and complaint to the executive director and chief financial officer of BII, and then mailing copies to the same address. Plaintiff argued, among other things, that Koukis was subject to the motion court’s jurisdiction by virtue of a December 2017 stipulation “waiv any defenses based on service of process or lack of personal jurisdiction” that was executed by Gil Santamarina, Esq., an attorney who appeared in the action claiming to represent all defendants in opposition to plaintiff’s motion for entry of a default judgment. Koukis submitted a declaration denying that he ever authorized codefendant Joseph D’Anna to retain Santamarina to represent him and further denying that he ever communicated with Santamarina at any time before December 16, 2019, when Koukis sent Santamarina an email stating, “I have not authorized you to represent me in any legal or other matters.” Koukis averred that he was not even aware of Santamarina for any significant period of time prior to his December 16, 2019 email.  The motion court granted Koukis’s motion to vacate the default judgment and dismissed the complaint on the grounds that the appearance of counsel was unauthorized, denied so much of the motion as based on lack of jurisdiction, and set the matter down for a traverse hearing to determine whether service was proper pursuant to CPLR § 308(2). The motion court also granted Koukis’s motion to quash postjudgment subpoenas and denied plaintiff’s cross motion to permit alternate service of the subpoenas as premature.  On appeal, a majority of the panel for the Appellate Division, First Department modified the motion court’s order to vacate the default judgment and dismissed the complaint based on lack of jurisdiction, and otherwise affirmed the order. The majority held that the “motion court correctly found that there was no basis to conclude that Koukis authorized Santamarina to appear and waive all jurisdictional defenses on his behalf”. 1 The majority found dispositive the email from Koukis to Santamarina wherein he specifically stated that “‘I have not authorized you to represent me in any legal or other matters.’” 2 The majority also found relevant Koukis’s averment that “he never communicated with Santamarina and that he never represented him”. 3 In fact, noted the majority, “there no indication in the record that Koukis was even aware of Santamarina for any significant time prior to his December 16, 2019 email”. 4 Speaking to the dissent, the majority explained that “ he two November 2019 emails referenced by the dissent were not from or to Santamarina and made no mention of any representation by Santamarina”. 5 However, with regard to the jurisdictional allegations that “Koukis participated in the allegedly fraudulent conveyance to hinder legitimate creditors such as plaintiff,” the majority held that such allegations were insufficient. 6 “The complaint”, said the majority, was “devoid of any specific allegations involving Koukis” and any “allegations as to which assets were transferred to Koukis and/or when they were transferred”. 7 The dissent “disagree with the majority’s assertion that there ‘no basis’ in the record for an inference that Santamarina had authority to represent Koukis in action”. 8 “The majority”, said the dissent, “overlook certain November 2019 emails that plainly raise an issue of fact in this regard” an issue, noted the dissent, that “should be resolved by a hearing pursuant to CPLR 2218”. 9 Those emails, said the dissent, “suffice to raise a triable issue of fact as to whether Koukis had given such authority, whether expressly or through knowing acquiescence in the representation as it continued through an extended period of time”. 10 Footnotes Slip Op. at *2 (citing, Amusement Sec. Corp. v. Academy Pictures Distrib. Corp. , 251 A.D. 227, 229 (1st Dept. 1937)). Id. Id. Id. Id. Id. Id. (citing, CIBC Mellon Trust Co. v. HSBC Guyerzeller Bank AG , 56 A.D.3d 307, 308-309 (1st Dept. 2008)). Id. at *3. Id. CPLR § 2218 provides that “ he court may order … an issue of fact raised on a motion” to be “separately tried by the court or a referee”. Id. at *4. 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 Norman Realty & Constr. Corp. v. 151 E. 170th Lender LLC , 2023 N.Y. Slip Op. 01843 (1st Dept. April 6, 2023) ( here ), the Appellate Division, First Department addressed the affirmative defense of contract unconscionability, a topic that this Blog has not addressed in quite some time (here). 1 It also addressed plaintiff’s claims for breach of contract and fraudulent inducement.  As discussed below, Norman Realty involved an action for unconscionability and fraudulent inducement. The Court affirmed the motion court’s order granting defendant’s motion for summary judgment dismissing plaintiff’s complaint, granting summary judgment on defendant’s counterclaims to foreclose on a mortgage and its security interest in the building and for a deficiency judgment against the additional counterclaim defendants, and denying plaintiffs’ cross-motion to amend the complaint and their answers to the counterclaims.   A Primer on the Applicable Law: Contract Interpretation It has long been the law in New York that absent a violation of law, or some transgression of public policy, people are free to enter into contracts, making whatever agreement they wish no matter the wisdom of doing so. 2 Consequently, when a contract dispute arises, it is the court’s role to enforce the agreement rather than to reform it. 3 To enforce the agreement, the court must construe it in accordance with the intent of the parties , the best evidence of which is the agreement itself and the terms contained therein. 4 Thus, “when the parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms”. 5 Moreover, “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”. 6 Therefore, courts should refrain from interpreting agreements in a manner which implies something not specifically included by the parties, and “may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing”. 7 This rule of construction provides “stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses infirmity of memory”. 8 When a writing is clear and complete, evidence outside its four corners “as to what was really intended but unstated or misstated is generally inadmissible to add to or vary the writing”. 9 Whether a contract is ambiguous is a matter of law for the court to decide. 10 A contract is unambiguous if the language it uses has “definite and precise meaning, unattended by danger of misconception in purport of the itself, and concerning which there is no reasonable basis for a difference of opinion”. 11 Thus, if the contract is not reasonably susceptible to multiple meanings, it is unambiguous and the court is not free to alter it, even if such alteration reflects personal notions of fairness and equity. 12 Notably, silence, or the omission of terms within a contract, are not tantamount to ambiguity. 13 Instead, the question of whether an ambiguity exists must be determined from the face of an agreement without regard to extrinsic evidence, 14 and an unambiguous contract or a provision contained therein should be given its plain and ordinary meaning. 15 While the parol evidence rule forbids proof of extrinsic evidence to contradict or vary the terms of a written instrument, it generally has no application in a suit brought where there are claims of fraud in the execution of an agreement or to rescind a contract on the ground of fraud. 16 An exception, however, exists when the agreement between the parties expressly disclaims reliance on any oral representations in the making of the agreement. 17 In other words, when a party disclaims reliance, in writing, on any oral representations in the execution of a contract, he/she cannot assert a claim for fraudulent inducement by claiming reliance on the very statements he/she disclaimed in writing. In the absence of fraud or other wrongful act, a party who signs a written contract is presumed to know and have assented to the contents therein. 18 The Doctrine of Unconscionability To form a contract, the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent and an intent to be bound. 19 A defense to the formation of a contract is its lack of conscionability from both a procedural and substantive perspective. 20 Under UCC § 2-302(1), 21 f the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. Thus, under UCC § 2-302(1), an unconscionable contract is voidable. 22 An unconscionable contract is one which “is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforceable according to its literal terms”. 23 In other words, an unconscionable bargain is one that “no person in his or her senses and not under delusion would make on the one hand, and as no honest and fair person would accept on the other”. 24 The gravamen of an unconscionable contract is the “absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party. 25 Whether a contract is unconscionable requires an examination of the contract formation process so as to determine the absence of meaningful choice. 26 To that end, to determine the absence of meaningful choice, courts focus on “the size and commercial setting of the transaction, whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power”. 27 UCC § 2-302(2) provides that when a party claims a contract should not be enforced because it is unconscionable, “the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.” This is because, generally, a claim of unconscionability only exists to protect the commercially illiterate, such that it does not lie in a commercial setting, where the parties dealing at arm’s length have equality of bargaining power. 28 Accordingly, where there exist no circumstances establishing that consent to the execution of a contract was not “freely and knowingly given”, 29 there is no claim for unconscionability. 30 Indeed, when a party is represented by counsel during the formation of a contract, courts have declined to uphold a claim for unconscionability. 31 Whether a party can bring an affirmative claim to void an agreement for unconscionability has been clearly answered by the case law which proscribes it. It is clear that a party cannot bring an affirmative claim sounding in unconscionability in the formation of an agreement. 32 In other words, unconscionability can only be asserted as a defense to the enforcement of a contract and not as a claim for money damages. Fraudulent Inducement To plead a cause of action for fraud, a plaintiff must allege that the defendant made a misrepresentation or omission of a material existing fact, which was false and known to be false by the defendant when made, for the purpose of inducing the plaintiff’s reliance thereon; that the plaintiff justifiably relied on such misrepresentation or omission; and that the plaintiff was injured thereby. 33 One of the more “nettlesome” elements of a fraud claim is justifiable reliance. 34 Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry. 35 As the New York Court of Appeals observed, “ o two cases are alike ….” For this reason, the courts look to whether the plaintiff had the “means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into” and whether he made “use of those means”. 36 If the plaintiff does not do so, “he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” 37 After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence. 38 Whether a plaintiff exercised diligence in ascertaining the truth should not be determined by hindsight. As the Court of Appeals explained, when “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” 39 Sophisticated parties have a heightened duty to use the means available to them to verify the truth of the information upon which they rely and to use their sophistication to conduct due diligence. 40 A sophisticated plaintiff cannot establish justifiable reliance on an alleged misrepresentation if the plaintiff failed to make use of the means of verification that were available to him. 41 Thus, to sustain a claim of fraud, sophisticated parties must have discharged their own affirmative duty to exercise ordinary intelligence and conduct an independent appraisal of the risks they are assuming. 42 With foregoing legal principles in mind, we examine Norman Realty . Norman Realty & Constr. Corp. v. 151 E. 170th Lender LLC Over the course of several years, plaintiff and defendant executed a series of agreements related to real property located in the Bronx, N.Y. (the “Property”). Pursuant to the mortgage and loan transactions governed by these agreements, plaintiff was the borrower and defendant was the lender. In its complaint, plaintiff asserted three causes of action. The first and second causes of action alleged that the foregoing agreements violated UCC § 2-302, in that the agreements were discriminating, unconscionable, one-sided and oppressive. As a result of the foregoing, plaintiff alleged that it sustained extensive damage totaling $5,000,000. The third cause of action alleged that defendant defrauded plaintiff when it executed the agreements between the parties, that defendant knowingly and willfully failed to advise plaintiff that upon executing the agreements, plaintiff would immediately be in default at an interest rate of 24 percent, and that defendant promised to provide plaintiff with an extension agreement, but then delayed the same for four months in order to charge plaintiff additional interest on the loans. As a result, plaintiff sought to void the agreements between the parties. In response, defendants filed an answer with counterclaims. The first counterclaim sought to foreclose on the mortgage because plaintiff defaulted thereunder. The second cause of action sought the sale of the property. The third cause of action sought a deficiency judgment against the guarantors of the note. Defendant moved for summary judgment, seeking dismissal of the complaint and on its counterclaims for (1) foreclosure on the mortgage and the sale of the property; and (2) a deficiency judgment against the guarantors to the extent there was a difference between the amount owed under the note and the proceeds of the sale of the property.  As noted, the motion court granted the motion. First, the motion court found that plaintiff expressly waived its right to assert any claims arising from the agreement between the parties. The motion court observed that under the note, plaintiff specifically released any and all “defenses, counterclaims, offsets, cross-complaints or demands” that it could have asserted “to reduce or eliminate all or any part of liability to repay any indebtedness to or seek affirmative relief for damages of any kind or nature from ”. Thus, concluded the motion court, “by executing the agreement, plaintiff clearly and unambiguously waived its right to bring any claims and thus, the instant action is barred”. Second, the motion court held that the causes of action for unconscionability were improperly affirmatively pleaded in the complaint and, as such, failed to state a claim upon which relief could be granted. The motion court also held that the cause of action failed because the loan documents in question “evince a transaction between sophisticated business people dealing at arm’s length, each were represented by counsel.” In fact, noted the motion court, plaintiff expressly stated and acknowledged in the restated note that it “engages in the business of real estate financings and other real estate transactions and investments which may be viewed as adverse to or competitive with the business of the Mortgagor or its affiliates,” and “that it is represented by competent counsel and has consulted counsel before executing the Loan Documents”. Third, the motion court held that defendant established that the claim for fraudulent inducement was barred as a matter of law. In this regard, the motion court found that the mortgage contained a disclaimer in which plaintiff expressly asserted that the agreement was entered without reliance on anything told to it by defendant. The court noted that “while allegations that … plaintiff reasonably believed that the representation made true and that plaintiff took justified action as a result thereof rise to a cause of action for fraudulent inducement,” the use of parol evidence … “to contradict or vary the terms of a written instrument” to “disclaim reliance on any oral representations in the making of the agreement” was prohibited. Thus, concluded the motion court, “none of the claims … regarding oral misrepresentations admissible … to alter the clear and unambiguous terms of the loan documents”. On appeal, the First Department affirmed. The Court held that the “claims sounding in unconscionability were properly dismissed, as the doctrine of unconscionability ‘may not be used as a basis for affirmative recovery’”. 43 “Even if plaintiff could properly assert the claims,” noted the Court, “the record not support a finding that the note and mortgage were procedurally and substantively unconscionable at the time they were executed”. 44 The Court explained that “plaintiff was represented by counsel during negotiation of the transaction,” a fact not in dispute, “and, aside from its conclusory allegations, plaintiff not shown how the contract terms were so unreasonable as to render them unenforceable”. 45 The Court also held that “plaintiff failed to state a claim for fraudulent inducement, as it did not plead justifiable reliance”. 46 The Court explained that the terms of the agreements expressly contradicted any of the alleged false statements, which plaintiff could have easily discovered: “The allegations that defendant failed to advise plaintiff that it would be in default of the original 2018 note and mortgage, and that defendant would include the amounts owed upon that default in the subject 2020 note and mortgage, were contradicted by the express terms of the 2020 loan documents”. 47 here).=">here)."> Footnotes The defense has been discussed by this Blog in the context of arbitrations and damages clauses ( e.g. , here , here , and here ). Rowe v. Great Atlantic & Pacific Tea Co., Inc. , 46 N.Y.2d 62, 67-68 (1978). Grace v. Nappa , 46 N.Y.2d 560, 565 (1979). Greenfield v. Philles Records, Inc. , 98 N.Y.2d 562, 569 (2002). Vermont Teddy Bear Co., Inc. v. 583 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004) (internal quotation marks omitted). Greenfield , 98 N.Y.2d at 569. Vermont Teddy Bear , 1 N.Y.3d at 475. Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 548 (1995) (internal quotation marks omitted). W.W.W. Assoc., Inc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. at 162; Van Wagner Adv. Corp. v. S & M Enterprises , 67 N.Y.2d 186, 191 (1986). Greenfield , 98 N.Y.2d at 569 (quoting, Breed v. Ins. Co. of N. Am. , 46 N.Y.2d 351, 355 (1978)). Id. at 569-570. Id. at 573; Reiss v. Financial Performance Corp. , 97 N.Y.2d 195, 199 (2001). Id. at 569-570. Rosalie Estates, Inc. v. RCO Int’l, Inc ., 227 A.D.2d 335, 336 (1st Dept. 1996). Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320 (1959); Sabo v. Delman , 3 N.Y.2d 155, 161 (1957); Adams v. Gillig , 199 N.Y. 314, 319 (1910); Berger-Vespa v. Rondack Bldg. Inspectors Inc. , 293 A.D.2d 838, 840 (3d Dept. 2002). Danann Realty , 5 N.Y.2d at 323. Pimpinello v. Swift & Co. , 253 N.Y. 159, 162 (1930); Metzger v. Aetna Ins. Co. , 227 N.Y. 411, 416 (1920). 22 N.Y. Jur. 2d, Contracts Section 9. Gillman , 73 N.Y.2d at 10 (“A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made….”) (citations omitted). While the doctrine of unconscionability is recognized by article 2 of the UCC, which applies to transactions for the sale of goods, it has also been applied to other contracts. King v. Fox , 7 N.Y.3d 181, 191 (2006); Gillman v. Chase Manhattan Bank, N.A. , 73 N.Y.2d 1, 10 (1988). Gillman , 73 N.Y.2d at 10. Christian v. Christian , 42 N.Y.2d 63, 71 (1977) (internal quotation marks omitted). King , 7. N.Y.3d at 191; Gillman , 73 N.Y.2d at 10. Gillman , 73. N.Y.2d at 10-11. Gillman , 73 N.Y.2d at 10-11; State v. Wolowitz , 96 A.D.2d 47, 68 (2d Dept. 1983). Gillman v. Chase Manhattan Bank, N.A. , 135 A.D.2d 488, 491 (2d Dept. 1987), aff’d , 73 N.Y.2d 1 (1988); Equit. Lbr. Corp. v. IPA Land Dev. Corp. , 38 N.Y.2d 516, 523 (1976). State v. Avco Fin. Serv. of New York Inc. , 50 N.Y.2d 383, 390 (1980). Id. at 391. FGH Contr. Co., Inc. v. Weiss , 185 A.D.2d 969, 971 (2d Dept. 1992). Super Glue Corp. v. Avis Rent A Car Sys., Inc. , 132 A.D.2d 604, 606 (2d Dept. 1987); see Fortune Limousine Serv., Inc. v Nextel Communications , 35 A.D.3d 350, 354 (2d Dept. 2006); Pearson v. Natl. Budgeting Sys., Inc. , 31 A.D.2d 792, 792 (1st Dept. 1969). Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995). DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Id. 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). Id. (internal quotation marks omitted). KNK Enters. Inc. v. Harriman Enters., Inc. , 33 A.D.3d 872 (2d Dept. 2006). DDJ Mgt. , 15 N.Y.3d at 154. McGuire Children, LLC v. Huntress , 24 Misc. 3d 1202 , at *12 (Sup. Ct., Erie County), aff’d , 83A.D.3d 1418 (4th Dept. 2011). Id. Id. Slip Op. at *1 (quoting, Avildsen v. Prystay , 171 A.D.2d 13, 16 (1st Dept. 1991), lv. dismissed , 79 N.Y.2d 841 (1992)). Id. Id. (citing, Gillman , 73 N.Y.2d at 10-12; State , 50 N.Y.2d at 390). Id. Id. (citing, A-Pix, Inc. v SGE Entertainment Corp. , 222 A.D.2d 387, 389-390 (1st Dept. 1995)). The Court disagreed with the motion court as to the application of the disclaimer, finding that it was too general to bar the fraudulent inducement claim. Id. This Blog addressed the specificity required for a disclaimer to operate as a bar to a fraud claim here and 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 In today’s article, we examine South Shore D’Lites LLC v. First Class Prods. Grp., LLC , 2023 N.Y. Slip Op. 01769 (1st Dept. Apr. 4, 2023) ( here ), a case involving the special facts doctrine in the context of a fraud claim, in particular, the justifiable reliance element of a fraud claim.  South Shore D’Lites concerned licenses to sell ice cream. The licenses were sold to plaintiffs, South Shore D’Lites, LLC, D’Lites of West Caldwell, LLC, and HGB D’Lites of Smithtown, LLC, by Defendants, Todd Coven and Magda Coven, the co-members of defendant First Class Products Group, LLC. First Class owns a license to sell “D’Lites” ice-cream products in the tri-state area.  According to the complaint, in selling the licenses, defendants made numerous statements to certain, or each, of the plaintiffs, including, but not limited to: (a) the expected profitability of the entities, (b) the anticipated sales of the entities during the first year of operation, (c) the anticipated sales of various D’Lites products during “special occasions”, (d) the profitability of existing D’lite stores, (e) the profit margins and daily average sales of defendants’ D’Lites store in Woodbury, New York, (f) offers that defendants received to purchase their D’Lites store in Woodbury, (g) the price of supplies to be purchased by the plaintiffs from the supplier or suppliers to be designated by defendants (which was represented to be (1) the then current price available from the supplier and not a marked-up supply price that included approximately $5.00 per gallon charge of direct profit to defendants (the “Mark-Up”), and (2) the same price as defendants paid for supplies), and (h) the identity of the supplier for the supplies to be purchased by the plaintiffs (which was represented as a third-party dairy and not the defendants or an affiliate of the defendants). Plaintiffs alleged that they these and other representations were materially false and misleading. Plaintiffs claimed that in reliance on these statements, they purchased the licenses. In their complaint, plaintiffs asserted five causes of action: (1) breach of the implied covenant of duty of good faith and fair dealing; (2) breach of fiduciary duty; (3) breach of General Business Law (“GBL”) § 349; (4) fraud in the inducement; and (5) breach of the Franchise Act. Subsequently, plaintiffs agreed to withdraw their claims for breach of the implied duty of good faith and fair dealing and breach of fiduciary duty. On August 27, 2021, Plaintiffs moved for partial summary judgment seeking judgment on their claim for breach of the Franchise Act. Also on August 27, 2021, defendants moved for summary judgment dismissing the complaint in its entirety. With regard to the fraudulent inducement claim, defendants argued that plaintiffs could not satisfy the justifiable reliance element of the claim. Defendants argued that the statements identified by plaintiffs were merely forecasts or ‘expectations’ of future performance, both of which are not statements of fact. “Mere puffery, opinions of value or future expectations” do not support a fraud claim, defendants argued.  In addition, defendants argued that plaintiffs failed to undertake any meaningful due diligence before entering into the agreement. As a result, defendants claimed, plaintiffs could not have justifiably relied on any statement they made. On April 26, 2022, the motion court dismissed plaintiffs’ claims for breach of GBL § 349 and fraud in the inducement. The motion court denied plaintiffs’ claim for summary judgment on their Franchise Act claim. Plaintiffs appealed the denial of summary judgment on the Franchise Act claim and the dismissal of the fraud in the inducement claim. We examine the fraudulent inducement claim below. The Appellate Division, First Department modified the motion court’s dismissal of the fraudulent inducement claim to reinstate it. The Court held that there were “ ssues of fact” that “preclude summary judgment dismissal … based on the evidence adduced in discovery.” 1 The Court explained that these issues were “consistent with plaintiffs’ contention that defendants lied in their statements to plaintiffs concerning the past and present profitability of their D’Lites store and by failing to disclose the ice cream arkup.” 2 The Court rejected “ efendants’ contention that plaintiffs could not have reasonably relied upon the alleged misrepresentations as to defendants’ profits and costs because they did not perform the due diligence with respect to those representations,” holding that such issues were not properly resolved on summary judgment. 3 Takeaway The Court’s citation to Swersky reveals that the issue of reliance turned, in part, on the special facts doctrine 4 and whether there was a disparity in the level of information available to plaintiffs at the time they conducted due diligence. Plaintiffs argued that, in effect, defendants were concealing material information from them, thus making the special facts doctrine applicable to the facts in that case. In essence, therefore, the amount of due diligence performed was not dispositive because there existed a disparity of information between the parties that prevented plaintiffs from discovering the truth. As noted, the First Department agreed.   Footnotes Slip Op. at *1. Id. at *1-*2. Id. at *2 (citing, Swersky v. Dreyer & Traub , 219 A.D.2d 321, 328 (1st Dept. 1996)). To satisfy the special facts doctrine, a party must satisfy the following two-prong test: “that the material fact was information ‘peculiarly within knowledge’ of , and that the information was not such that could have been discovered by through the ‘exercise of ordinary intelligence.’” Jana L. v. West 129th Street Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (citing, Black v. Chittenden , 69 N.Y.2d 665, 669 (1986), quoting, Schumaker v. Mather , 133 N.Y. 590, 596 (1892)). We have examined the special facts doctrine, here , here and 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.

Market analysts study publicly traded companies and make recommendations on the securities of those companies.1 Most analysts specialize in a particular industry or sector of the economy.2 As noted by the Securities and Exchange Commission (“SEC” or “Commission”), analysts exert considerable influence on a company. “Analysts’ recommendations or reports can influence the price of a company’s stock—especially when the recommendations are widely disseminated through television appearances or through other electronic and print media.”3 In fact, “he mere mention of a company by a popular analyst can temporarily cause its stock to rise or fall—even when nothing about the company’s prospects or fundamentals has recently changed.”4 It is no wonder, therefore, that at many publicly traded companies, “the pressure to meet or beat consensus-earnings estimates is strong.”5 Many corporate executives believe that doing so “will reward the company over the longer term with a higher share price.”6 If the company were to report “earnings below consensus estimates—even by a small amount— investors will penalize them with a lower share price.”7 “As a result, executives often go to some lengths to meet or beat consensus estimates—even acting in ways that could damage the longer-term health of the business.”8 It is not uncommon, therefore, for companies to give customers steep discounts in the final days of a reporting period to increase sales numbers, “in effect borrowing from the next quarter’s sales.”9 As many companies have shown, corporate executives will forgo value-creating investments in favor of short-term results, or worse manage earnings inappropriately to create the illusion of growth.10 The pressure to meet analysts’ estimates was a reason for the alleged accounting fraud charged by the SEC against three executives of Mobile, Alabama-based shipbuilder, Austal USA LLC (collectively, the “Individual Defendants”). On March 31, 2023, the SEC announced (here) that it charged three Austral USA executives for orchestrating a fraudulent revenue recognition scheme that allowed its parent company, Australia-based Austal Limited, to meet or exceed analyst expectations. In its complaint (here), the SEC alleged that, from at least January 2013 through July 2016, Austal USA’s former president, its current director of financial analysis, and former director of the Littoral Combat Ships program engaged in a scheme to artificially reduce the cost estimates to complete certain shipbuilding projects for the U.S. Navy by tens of millions of dollars. The SEC further alleged that the Individual Defendants knew that Austal USA’s shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal USA’s revenue budget and revenue projections. In addition, the SEC alleged that Austal USA’s parent company, Austal Limited, prematurely recognized revenue and, as a result, met or exceeded analyst consensus estimates for earnings before interest and tax (EBIT), a key financial metric for the company. Commenting on the charges, Jason Burt, Regional Director of the SEC’s Denver Regional Office, stated: “We allege that Austal USA’s executives manipulated its financial results, causing harm to U.S. investors in the securities of its parent company, Austal Limited. As the complaint articulates, if the defendants had not fraudulently manipulated the cost estimates, Austal Limited would have missed, by wide margins, analyst consensus estimates for EBIT.” The SEC filed its complaint in the U.S. District Court for the Southern District of Alabama. The SEC claimed that the Individual Defendants violated the antifraud provisions of the Securities Exchange Act of 1934. The SEC seeks disgorgement plus prejudgment interest, civil money penalties, and officer and director bars. In addition to the SEC’s enforcement action, a federal grand jury returned an indictment against the Individual Defendant for orchestrating the alleged accounting fraud.11 In the press release announcing the indictment (here), the DOJ explained that the Individual Defendants and their co-conspirators allegedly conspired to mislead investors about Austal USA’s financial condition. Making many of the same allegations as the SEC, the government alleged that the Individual Defendants artificially reduced and suppressed an accounting metric known as “estimate at completion” (“EAC”) in relation to multiple LCS ships that Austal USA was building for the U.S. Navy. Suppressing the EACs allegedly falsely overstated Austal Limited’s reported earnings in its public financial statements. According to court papers, the Individual Defendants and their co-conspirators allegedly manipulated the EAC figures in part by using so-called “program challenges” – ostensibly cost-savings goals – but which in reality were “plug” numbers and fraudulent devices to hide growing costs that should have been incorporated into Austal USA’s financial statements, and ultimately reflected in Austal Limited’s reported earnings. Similar to the SEC, the government claimed that the Individual Defendants allegedly committed the accounting fraud to, among other reasons, maintain and increase the share price of Austal Limited’s stock. When the higher costs were eventually disclosed to the market, the stock price was significantly negatively impacted and Austal Limited wrote down over $100 million. The Individual Defendant were each charged with one count of conspiracy to commit wire fraud and wire fraud affecting a financial institution, five counts of wire fraud, and two counts of wire fraud affecting a financial institution. If convicted, they each face a maximum penalty of 30 years in prison for the conspiracy count and each count of wire fraud affecting a financial institution, and 20 years in prison for each count of wire fraud. Footnotes Investor Publications, “Analyzing Analyst Recommendations” (SEC.gov., Aug. 30, 2010) (here). Id. Id. Id. Tim Koller, Rishi Raj, and Abhishek Saxena, “Avoiding the Consensus-Earnings Trap” (Mckinsey.com, Jan. 1, 2013) (here). Id. Id. Id. Id. Id.See also Shawn Huang, et al., “The Dark Side of Analyst Coverage: Firms Pressured to Meet Forecasts” (AZ. State Univ., W. P. Carey News, Dec. 6, 2017) (noting, the pressure to deliver good news often causes “managers whose compensation and careers depend on meeting forecasts … to manage the financial reports accordingly and even guide analysts’ forecasts downward — in effect, making the earnings bar easier for the company to clear.”) (here). An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law. 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 While this Blog has addressed numerous issues relating to residential mortgage foreclosure, it has never touched upon the requirement in RPAPL 1351 (1) that a judgment of foreclosure and sale “shall direct that the mortgaged premises, or so much thereof as may be sufficient to discharge the mortgage debt, the expenses of the sale and the costs of the action, and which may be sold separately without material injury to the parties interested, be sold by or under the direction of the sheriff of the county, or a referee within ninety days of the date of the judgment .” (Emphasis added.) In U.S. Bank, N.A. v. Peralta , 191 A.D.3d 924 (2 nd Dep’t 2021), the Court recognized that “RPAPL 1351(1) was amended, effective December 20, 2016, to provide” for the 90-day language previously quoted.  Peralta , 191 A.D.3d at 925.  In Peralta , borrower sought to have the foreclosure action dismissed “for failure to timely sell the premises” pursuant to RPAPL 1351(1).  Borrower’s efforts were rebuffed by the Court because “the judgment of foreclosure and sale was entered on January 29, 2015, 23 months before this provision came into effect, the judgment did not provide that the premises had to be sold within 90 days. Accordingly, there is no merit to Peralta's contention that the sale of the premises was required to occur within 90 days of the date of the judgment, and, therefore, we need not consider what the proper remedy would be for failure to conduct a timely sale.”  Id.  See also Wells Fargo Bank N.A. v. Graziano , 192 A.D.3d 1192, 1193 (2 nd Dep’t 2021) (“requirement that the judgment direct a sale within 90 days of the judgment is inapplicable” where it is issued “prior to the effective date of the amendment”). In order to vacate a judgment of foreclosure and sale and/or set aside a sale because a sale did not occur within 90 days pursuant to RPAPL 1351(1), a borrower would have to show that “the delay of the foreclosure sale prejudiced a substantial right.”  Wells Fargo Bank, N.A. v. Singh , 204 A.D.3d 732, 734 (2 nd Dep’t 2022).  The same is true if the statutorily required “ninety day” language is omitted from a judgment of foreclosure and sale.  Wells Fargo Bank, N.A. v. Malik , 203 A.D.3d 1110, 1112 (2 nd Dep’t 2022) (“since the defendant does not allege that any substantial right of his was prejudiced by the omission of the statutory language from the judgment of foreclosure and sale, the Supreme Court properly declined to vacate the notice of sale on that ground”). On March 29, 2023, the Appellate Division, Second Department, decided Bank of America, N.A. v. Cord , a case addressing, inter alia , RPAPL 1351(1).  The lender in Cord , commenced a mortgage foreclosure action in which a judgment of foreclosure and sale was entered.  In January of 2019, on borrower’s first appeal, the Second Department affirmed supreme court’s issuance of the judgment of foreclosure and sale.  The borrower then moved to stay the sale of the property scheduled for November of 2019, based on lender’s failure to comply with RPAPL 1351(1).  The lender “cross-moved pursuant to CPLR 2004 for an extension of time to hold the foreclosure sale of the property.”  Borrower appealed from supreme court’s denial of borrower’s motion and granting of lender’s cross-motion. The Second Department affirmed.  First, the Court noted that the judgment of foreclosure and sale failed to include the language required by RPAPL 1351(1).  However, borrower waived any objections to this omission that it may have had by neglecting to address the issue in his prior appeal from the judgment.  The Court added that “ o the extent that the plaintiff was nevertheless bound to comply with the time requirement set forth in RPAPL 1351(1), irrespective of whether the necessary language was included in the judgment of foreclosure and sale, under the circumstances, the Supreme Court providently exercised its discretion in granting the 's cross-motion pursuant to CPLR 2004 for an extension of time to hold the foreclosure sale.”  While noting that statutory deadlines are to be “taken seriously”, the Court also recognized that CPLR 2004 permits a court to extend deadlines under certain circumstances and, when exercising such discretion, “a court may consider such factors as the length of the delay, the reason or excuse for the delay, and any prejudice to the party opposing the motion”.   Similarly, the Court stated that “CPLR 5019(a) provides that ' judgment or order shall not be stayed, impaired or affected by any mistake, defect or irregularity in the papers or procedures in the action not affecting a substantial right of a party.”  (Citations and internal quotation marks omitted, hyperlink added.) Applying the facts to the law, the Court stated: Here, there was more than a two-year delay between the issuance of the judgment of foreclosure and sale and the notice of the foreclosure sale of the property. The Supreme Court determined that the delay, due to the defendant's prior appeal from the judgment of foreclosure and sale and a motion by the referee for supplemental fees, was reasonable and that the plaintiff demonstrated good cause for an extension of time in which to hold the foreclosure sale of the property. The court also found that the defendant failed to establish that the delay caused any prejudice to him. The court's findings are supported by the record, and thus, the court providently exercised its discretion in granting the plaintiff's cross-motion.  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 NW Media Holdings Corp. v. IBT Media Inc. , 2023 N.Y. Slip Op. 30875(U) (Sup. Ct., N.Y. County Mar. 22, 2023) ( here ), Justice Melissa A. Crane addressed the question whether the destruction of millions of pages of data on a Google Workspace (“Workspace”) states a claim for trespass to chattels or conversion. As discussed below, Justice Crane concluded that the allegations concerning the destruction of such data sufficed to state a claim for conversion. The Applicable Law To state a cause of action for trespass to chattels, a plaintiff must allege “(1) intent, (2) physical interference with (3) possession (4) resulting in harm”. 1 A plaintiff must show that the “condition, quality, or value” of the chattel was “diminished” as a result of the defendant’s actions or that the plaintiff was deprived of use of the chattel “for a substantial time”. 2 A cause of action for trespass to chattels “overlaps with a claim for conversion”. 3 However, the two causes of action are distinct. Allegations that the defendant “merely interfered with the plaintiff’s property” are “properly construed as an action to recover for trespass,” while allegations of “destruction or taking of the property” amount to a claim for conversion. 4 Where electronic data is involved, “trespass to chattels” often includes an interference that causes damage to computer systems or involves the sending of unsolicited content. 5 Moreover, where the alleged harm involves interference with physical devices containing data, courts have sustained a claim for trespass to chattels. 6 To state a cause of action for conversion, a plaintiff is required to allege that they had legal ownership or a “superior right of possession” and that the defendant interfered with their right of possession. 7 A plaintiff states a cause of action for conversion, rather than the related cause of action for trespass to chattels, where the plaintiff alleges that the defendant actually destroyed the property rather than just interfered with it. 8 NW Media Holdings Corp. v IBT Media Inc. NW Media was one in a series of cases between the former and current owners of the magazine and media business Newsweek. Plaintiff, NW Media Holdings Corp. (“NW Media”), claimed that after it purchased Newsweek from Defendant, IBT Media Inc. (“IBT”), the defendants conspired to destroy millions of pages of Newsweek data on the Workspace. In particular, plaintiffs alleged that following the separation of IBT and Newsweek, Newsweek continued to maintain data for both companies in the “Newsweek Google Workspace” that was “exclusively owned by Newsweek”. Plaintiffs claimed that “ t all relevant times, had a possessory right and interest in the electronic data, including all user accounts, emails, and documents stored in the Newsweek Google Workspace”. Nevertheless, said Plaintiffs, IBT’s current chief executive officer, Jonathan Davis (“Davis”), and IBT employee Younseok Choi (“defendant”) continued to have access to the Workspace following the sale of Newsweek, despite NW Media not employing them. Plaintiffs further alleged that after Newsweek issued a litigation hold in August 2020, Defendant David Jang (“Jang”) directed Defendant Etienne Uzac (“Uzac”) – the former chief executive officer of IBT – to “orchestrate the deletion of documents and information from IBT accounts located in Newsweek’s Google Workspace”. Plaintiffs maintained that after Davis first used his IBT account credentials to access and export data, the alleged “IBT conspirators” directed the deletion of documents and communications “associated with Newsweek’s former management team”. Plaintiffs alleged that 271 user accounts and their contents were deleted. Overall, defendants allegedly deleted approximately 1.8 terabytes’ worth of data. Plaintiffs subsequently filed the complaint. Defendant moved to dismiss. The court granted in part and denied in part the motion, finding that the compliant stated a cause of action for conversion but not trespass to chattels. The Court held that the allegations of the destruction of data did not suffice to state a claim for trespass to chattels. The Court explained that plaintiffs did not allege that defendant interfered with the Workspace in such a way that impinged its functioning, that defendant inserted unwanted data or that defendant deleted data directly off of Plaintiffs’ own devices. 9 Rather, said the Court, the allegations in the complaint simply stated “that deleted 1.8 terabytes’ worth of data off of the Workspace to the complete deprivation of Plaintiffs’ access”. 10 If anything, concluded the Court, “that is a cause of action for conversion, not trespass to chattels”. 11 Accordingly, the Court denied the motion with respect to the claim for conversion. The Court explained that the following allegations sufficed to state a claim for conversion: plaintiffs “had a possessory right and interest in the electronic data, including all user accounts, emails, and documents stored in the Newsweek Google Workspace”, the “data and information contained in the Newsweek Google Workspace exclusively owned by Newsweek”, “ one of the Defendants had the authority to destroy Plaintiff’s’ business records or take them for their own use”, and defendant “accessed, exercised control over, and destroyed electronic data in the Newsweek Google Workspace without permission”. 12 In sustaining the conversion cause of action, the Court rejected a number of arguments advanced by defendant. For example, the Court rejected defendant’s argument that the complaint did not allege that any of the plaintiffs actually had a possessory interest in the data on the Workspace. The Court noted that “ hile Defendant is correct that Plaintiffs do not technically include an entity called simply ‘Newsweek,’ the complaint appear in at least one place to use the term “Newsweek” to refer to Newsweek LLC, which is one of the plaintiff entities.” 13 Moreover, said the Court, “the complaint explicitly alleges that ‘Plaintiffs’ in general ‘had a possessory right and interest’ in the data stored in the Workspace”. 14 Therefore, concluded the Court, “Defendant has not established entitlement to dismissal for failure to state a claim because, even if the complaint does allege that ‘Newsweek’ had an interest, it also allege that Plaintiffs in general had an interest in the data in the Workspace”. 15 The Court also rejected defendant’s argument that plaintiffs failed to allege that they were the “exclusive” owners of the data. 16 Noting the absence of case authority supporting the argument, the Court found that “Plaintiffs only are required to allege that they had legal ownership or a ‘superior right of possession”. 17 Finally, the Court rejected defendant’s argument that he was authorized to delete the data by a 50% owner of Newsweek. The Court noted that even though Davis, who was and remained a 50% owner of NW Media, allegedly directed defendant to delete the data, it did not mean that plaintiffs did not have a superior possessory interest in the material that defendant allegedly permanently deleted. 18 The Court found that there was “no case law to support the proposition that one 50% owner has the unfettered right to permanently destroy—themselves or through an agent—data in which the other 50% owner has a possessory interest”. 19 Footnotes DeAngelis v. Corzine , 17 F. Supp. 3d 270, 283 (S.D.N.Y. 2014); Lavazza Premium Coffees Corp. v. Prime Line Distributors Inc. , 575 F. Supp. 3d 445, 474 (S.D.N.Y. 2021) (“Under New York Law, trespass to chattel occurs when a party intentionally damages or interferes with the use of property belonging to another.”) (citations and internal quotation marks omitted); School of Visual Arts v. Kuprewicz , 3 Misc. 3d 278, 281 (Sup. Ct., N.Y. County 003). Twin Sec., Inc. v. Advocate & Lichtenstein, LLP , 113 A.D.3d 565, 565 (1st Dept. 2014); School of Visual Arts , 3 Misc. 3d at 281. Lavazza , 575 F. Supp. 3d at 474. Douglas v. Abrams Children Books , 2014 WL 12909009, at *7 (S.D.N.Y. Sept 26, 2014) (granting in part motion to dismiss, finding the complaint “state a claim for conversion, not an ‘injurious trespass of Chattel’”) (citing, Sporn v. MCA Records , 58 N.Y.2d 482 (1983)); see also Manhattan Sports Rests. of Am., LLC v. Lieu , 137 A.D.3d 504, 504 (1st Dept. 2016) (finding allegations stated cause of action for trespass to chattels but not conversion since it was “not alleged that defendant exercised dominion and control” over the chattels); Fischkoff v. Iovance Biotherapeutics, Inc. , 339 F. Supp. 3d 408, 414 (S.D.N.Y. 2018) (finding that “pure copying of electronic files without more” did not state a claim for conversion). Spa World Corp. v. Lipschik , 2010 WL 11632681, at *13 (E.D.N.Y. Sept 9, 2010) (denying dismissal of trespass to chattels claim where defendants allegedly installed malicious Trojan virus on plaintiff’s website, requiring a shutdown of the computer system); School of Visual Arts , 3 Misc. 3d at 281 (denying dismissal of trespass to chattels claim where defendant caused “unsolicited e-mails” to be sent to plaintiff which “depleted hard disk space, drained processing power, and adversely affected other system resources”). Banach v. The Dedalus Foundation, Inc. , 2012 WL 251567 (Sup. Ct., N.Y. County Jan 18, 2012) (denying motion to dismiss trespass to chattel counterclaim where defendant alleged that plaintiff “intentionally deleted hard drive data on the computers it provided her to work from home”); Cohen v. Gerson Lehrman Grp., Inc. , 2011 WL 4336683, at **7-9 (S.D.N.Y. Sept 15, 2022) (denying motion for summary judgment dismissing conversion and trespass to chattels claims where the defendant allegedly “engaged in unauthorized access to his workplace computer and unlawfully deleted or modified the defendant’s files”); Advanstar Communications Inc. v. Pollard , 2014 WL 4613020, at **2-3 (Sup. Ct., N.Y. County Sept. 16, 2014) (denying dismissal of trespass to chattels claim where counterclaim defendants allegedly “remotely wiped” the counterclaim plaintiff’s iPhone). Grocery Delivery E-Servs. USA, Inc. v. Flynn , 201 A.D.3d 585, 586 (1st Dept. 2022); Abrams v. Pecile , 115 A.D.3d 565, 565-566 (1st Dept. 2014); NY Medscan, LLC v. JC-Duggan Inc. , 40 A.D.3d 536, 537 (1st Dept. 2007); Lemle v. Lemle , 92 A.D.3d 494, 497 (1st Dept. 2012). Douglas , 2014 WL 12909009, at *7 (citing, Sporn , 58 N.Y.2d at 487-488). Slip Op. at *5. Id. Id. (citing, Douglas , 2014 WL 12909009, at *7). Id. at *6. Id. at *7. Id. (quoting the complaint). Id. Id. Id. at *7-*8 (citation omitted). Id. at *8. 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 As we have noted previously, the financial exploitation of seniors is a significant problem ( e.g. ,  here ,  here ,  here ,  here , and  here ).  As the incidence of financial exploitation and abuse increases, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. ( Here .) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. The Many Forms of Financial Abuse and Exploitation of the Elderly The financial exploitation and abuse of seniors and vulnerable persons come in many forms. The most common involves, among others: (a) investment fraud ( e.g. , churning, unauthorized trading, unsuitable investing, over-concentrating an investor’s portfolio in a single type of investment or industry segment, and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions), (b) insurance fraud ( e.g. , selling unneeded or too costly insurance, the unauthorized trading of life insurance policies, and annuity fraud), (c) acts of dishonestly by trusted persons ( e.g. , fraud, misappropriating assets, falsification of records, forgery, and unauthorized check-writing), (d) email scams ( e.g. , “phishing” to induce the recipient into providing passwords and other personal and financial information), and (e) lottery fraud ( e.g. , inducing the person to transfer or pay money to collect unclaimed prizes from lottery or sweepstakes organizers). In today’s post, we discuss Salitsky v. D’Attanasio , 2023 N.Y. Slip Op. 01597 (1st Dept. Mar. 23, 2023) ( here ), a case involving allegations of undue influence by an alleged trusted person. Salitsky v. D’Attanasio Plaintiff commenced the action in November 2021, alleging that his aunt, Maria Lotto (“Decedent”), named Defendant, Karen Miller D’Attanasio, as the sole beneficiary of a transfer on death account (the “Account”) being held by co-defendant Muriel Siebert & Co., Inc. (“Siebert”), as the result of fraud, undue influence and other improper means.  According to Plaintiff, he and Decedent enjoyed a close relationship and regularly kept in touch. On November 19, 2010, Decedent designated Plaintiff as the sole beneficiary of the Account.  Defendant had been Decedent’s neighbor in their Manhattan apartment building for an unspecified period of time. Defendant and Decedent shared a “neighborly” relationship. According to Plaintiff, in or about 2017, Defendant improperly used this relationship and began to pressure Decedent about the latter’s finances and estate planning. As a result, Plaintiff claimed, on or about August 21, 2017, Decedent named Defendant as the executor of her estate, although Plaintiff had been named the executor of the estate since at least 2011. At around the same time as Decedent made the change, Decedent began to decrease her communications with Plaintiff.  In late 2019, Decedent fell and entered a rehabilitation facility, from which she was discharged in early December 2019. At that time, Defendant, who had been living in Japan since 2018, visited Decedent in New York. On or about December 23, 2019, Defendant was made the sole beneficiary of the Account, in place of Plaintiff. According to Plaintiff, Defendant forged Decedent’s signature on the beneficiary designation form or exerted undue influence on Decedent to sign the form.  Also in December 2019, Decedent wrote Defendant a $15,000 check. In early January 2020, Decedent allegedly told various third parties that she felt tricked into giving Defendant the $15,000 check, which she tried unsuccessfully to place a stop on, and that she felt taken advantage of by Defendant, who was allegedly pressuring her to change her estate plans.  On February 25, 2020, Decedent executed a new will which removed Defendant as executor.  Decedent passed away on January 1, 2021. Thereafter, Defendant executed a Renunciation and Disclaimer pursuant to EPTL § 2-1.11, in which she stated that she was the sole beneficiary of the Account. In his verified complaint, Plaintiff asserted seven causes of action: the First, for a declaratory judgment that the form designating Defendant as the Account’s beneficiary was invalid and void, and that an earlier form designating Plaintiff as the beneficiary be held as controlling the Account’s disposition; the Second, for injunctive relief preventing Seibert from distributing Account funds to Defendant; and the Third through Seventh, as to Defendant only, sounding in conversion, unjust enrichment, fraud upon Decedent, undue influence, and fraud upon Plaintiff, respectively.  Defendant moved to dismiss, pursuant to CPLR §§ 3211(a)(3) and (7), for lack of standing and for failure to state a claim upon which relief may be granted. Plaintiff opposed the motion. The motion court granted the motion. Plaintiff appealed. The Appellate Division, First Department modified the order to deny the motion as to the first (declaratory judgment), third (conversion), fourth (unjust enrichment), and sixth (undue influence) causes of action, and otherwise affirmed the order. Undue Influence “The elements of undue influence are motive, opportunity, and the actual exercise of that undue influence.” 1 As direct proof of undue influence is rare, its elements may be established by circumstantial evidence. 2  Circumstances that may be considered in determining the existence of undue influence include whether the result of the decedent’s changed directive concerning the disposition of property following his or her death is “unnatural or the result of an unexplained departure from a previously expressed intention”. 3 Other factors include who prepared the document, and the decedent’s mental and physical condition at the time of the change. 4 The Court found that there were “circumstances requiring scrutiny” as to whether Defendant exerted undue influence on Decedent. These included that “plaintiff was decedent’s closest living relative, that they had a continuing close relationship, and that he had been the designated beneficiary for 10 years, while defendant was a neighbor and relatively recent friend”. 5 Moreover, said the Court, “plaintiff sufficiently allege defendant’s financial motive (the $6 million-plus value of the account), opportunity (that his aunt and defendant were neighbors, and his aunt’s advanced age, fragile physical health, and inability to print the change of beneficiary form independently), and actual exercise of undue influence (the execution and mailing of the change of beneficiary form and the suspicious circumstances surrounding the writing of a $15,000 check to defendant weeks later).” 6 Furthermore, noted the Court, “the allegations that plaintiff’s aunt attempted to stop payment on the $15,000 check and that she complained to others that defendant had tricked her into writing the check, and changed her will to remove defendant as her executor, but did not change or revoke the beneficiary form, together support an inference that the aunt either was not aware of the form or was not aware of its effect.” 7 Accordingly, given the stage of the proceeding (pre-discovery) and the fact “that key information within defendant’s sole knowledge ( see Pludeman v Northern Leasing Sys., Inc. , 10 NY3d 486, 491-492 <2008> ),” the Court held “that plaintiff sufficiently pleaded the elements of an undue influence claim”. 8 Unjust Enrichment The basis of a claim for unjust enrichment is that the defendant obtained a benefit which in “equity and good conscience” should be paid to the plaintiff. 9 “In a broad sense, this may be true in many cases, but unjust enrichment is not a catchall cause of action to be used when others fail. It is available only in unusual situations when, though the defendant has not breached a contract nor committed a recognized tort, circumstances create an equitable obligation running from the defendant to the plaintiff. Typical cases are those in which the defendant, though guilty of no wrongdoing, has received money to which he or she is not entitled.” 10 An unjust enrichment claim is not available where it simply duplicates, or replaces, a conventional contract or tort claim. 11 The Court held that Plaintiff sufficiently alleged a cause of action for unjust enrichment. The Court found that the following facts sufficed to support the claim: his aunt was elderly; Defendant exerted undue influence on his aunt; as a consequence of the undue influence, Decedent turned over the entirety of a $6 million-plus account to Defendant, her neighbor; and Decedent entirely excluded Plaintiff, her closest living relative with whom she enjoyed a close relationship. 12 Fraud Claims As for the first fraud claim, which centered around the allegation of defendant’s “deceit upon” plaintiff’s aunt, the Court held that the alleged “deceit” was “not explained or pleaded with the requisite specificity (CPLR 3016 )”. 13 The second fraud claim, said the Court, “which seems to arise from alleged misrepresentations in a renunciation and disclaimer executed by defendant, was properly dismissed, as it not adequately allege reliance by plaintiff or others on misrepresentations in that document, or resulting damages”. 14 Footnotes Matter of Nofal , 35 A.D.3d 1132, 1134 (3d Dept. 2006) (internal quotation marks omitted). Matter of Paigo , 53 A.D.3d 836, 839-840 (3d Dept. 2008). Matter of Walther , 6 N.Y.2d 49, 55 (1959); see also Matter of Elmore , 42 A.D.2d 240, 241 (3d Dept. 1973). Matter of Walther , 6 N.Y.2d at 55; Matter of Kotick v. Shvachko , 130 A.D.3d 472, 473 (1st Dept. 2015). Slip Op. at *1 (citing, Matter of Elmore , 42 A.D.2d 240, 241 (3d Dept. 1973)). Id. (citing, ALP v. Moskowitz , 204 A.D.3d 454, 458 (1st Dept. 2022), and Matter of Kotick , 130 A.D.3d at 473). Id. at *1-*2. Id. at *2. Mandarin Trading Ltd. V. Wildenstein , 16 N.Y.3d 173, 182 (2011) (quoting, Paramount Film Distrib. Corp. v. State of New York , 30 N.Y.2d 415, 421 (1972)). See also Corsello v. Verizon N.Y., Inc. , 18 N.Y.3d 777, 790 (2012). Corsello , 18 N.Y.3d at 790 (citing, Markwica v. Davis , 64 N.Y.2d 38 (1984), and Kirby McInerney & Squire, LLP v. Hall Charne Burce & Olson, S.C. , 15 A.D.3d 233 (2005)). Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co. , 70 N.Y.2d 382, 388-389 (1987); Samiento v. World Yacht Inc. , 10 N.Y.3d 70, 81 (2008); Town of Wallkill v. Rosenstein , 40 A.D.3d 972, 974 (2d Dept. 2007). Slip Op. at *2. Id. Id. (citing, Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009)). 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 Structured settlement annuities are frequently used by courts and litigants to provide a stream of payments to, inter alia , injured parties and/or their families in personal injury and/or wrongful death cases.  Due to abuse at the hands of unscrupulous factoring companies, the New York Legislature, in 2002, enacted the Structured Settlement Protection Act (”SSPA”).  As the court in In the Matter of Petition of 321 Henderson Receivables Origination LLC , 19 Misc.3d 504 (Sup. Ct. Queens Co. 2008), stated: The Structural Settlement Protection Act (General Obligations Law § 5–1701 et seq. ) was enacted in 2002 as a result of factoring companies using “... aggressive advertising, plus the allure of quick and easy cash, to induce settlement recipients to cash out future payments, often at substantial discounts, depriving victims and their families of the long-term financial security their structured settlements were designed to provide” (N.Y.S. Legis. Memo. Ch. 537, 2002; McKinney’s 2002 Session Laws of N.Y., at 2036). Under this law, such transfers are now prohibited unless approved by a court based upon express findings required by General Obligations Law § 5–1706 (a)–(e). In the Matter of Petition of 321 Henderson , 19 Misc.3d at 505 (hyperlinks added).   The procedures for transferring an interest in a structured settlement are clearly set forth in GOL § 5-1705 .  Among other things, in order to effectuate such a transfer, a special proceeding brought on by order to show cause must be commenced.  GOL § 5-1705(a).  Further, the SSPA provides that direct or indirect transfers of structured settlement payment rights will not be effective “unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction based upon express findings by such court that,” inter alia : “the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependants ; and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable. Provided the court makes the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardship to approve the transfer of structured settlement payments under this subdivision….”  GOL § 5-1706; GOL § 5-1706(a).  Finally, as relevant here, GOL § 5-1708 (d) provides that “ o payee who proposes to make a transfer of structured settlement payment rights shall incur any penalty, forfeit any application fee or other payment, or otherwise incur any liability to the proposed transferee or any assignee based on any failure of such transfer to satisfy the conditions of this title.” The March 22, 2023, decision of the Appellate Division, Second Department, in Pinnacle Capital, LLC v. O’Bleanis , describes the SSPA and illustrates the pitfalls of failing to abide by its terms.  The defendants in Pinnacle were trustees of a trust that had an interest in structured settlement annuity payments (“SSAPs”).  The Complaint alleged that: defendants agreed to sell to Bentzen Financial, LLC, the trust’s interest in the SSAPs; Bentzen filed an order to show cause seeking court approval of the agreement; plaintiff received a copy of what it believed was a valid court order approving the agreement; and, plaintiff paid defendants $280,000 in anticipation of Bentzen receiving the structured settlement payments.  When plaintiff and defendants subsequently learned that the approval order was forged, “plaintiff sought from the defendants either a return of the $280,000 or cooperation in obtaining a valid court approval of the agreement, but the defendants refused.” Plaintiff, seeking the return of its money, sued defendants under various theories of recovery.  Alternatively, plaintiff sought a declaration that the agreement was valid and/or the defendants could retain the payment upon the issuance of a court order approving the agreement.  Defendants appealed supreme court’s denial of their motion to dismiss. On appeal, the Second Department reversed because the “plaintiff's claims are prohibited by the SSPA.”  The Court recognized that: the purpose of the SSPA, as reflected in the legislative materials, was to establish "procedural safeguards for those who sell settlements that are awarded as a result of litigation," due to a recognition that " any of the people who receive such settlements are being compensated for very serious, debilitating injuries, and have been unfairly taken advantage of in the past by the businesses that purchase their settlements" (Mem in Support, Bill Jacket, L 2002, ch 537 at 5). The Court reiterated that, pursuant to GOL § 5-1706, transfers of SSAPs are “prohibited unless approved by a court of competent jurisdiction based upon express findings, inter alia, that the transfer is in the best interest of the payee and that the discount rate, fees and expenses used to determine the net amount advanced are fair and reasonable.”  (Citations and internal quotation marks omitted.)  Additionally, as noted by the Court, “ n circumstances, such as here, where payment for a structured settlement transfer is made to the payee prior to the court's approval of the transfer, whether intentionally or due to a mistaken belief that the transfer had already been approved, a proposed transferee must seek nunc pro tunc approval of the transfer, and such approval is not guaranteed.”  (Citations omitted.) Thus, the Court concluded that supreme court “should have granted the defendants' motion pursuant to CPLR 3211(a) to dismiss the complaint, as it is barred by the provisions of General Obligations Law §§ 5-1708(d) and 5-1705.” 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 “Legal cannabis is an emerging industry, which makes it prime hunting ground for financial predators who will use every trick in the book to lure investors into their schemes,” said Cari Fais, acting director of the New Jersey Division of Consumer Affairs (here). The Securities and Exchange Commission (“SEC” or the “Commission”) recognized this problem in 2014, when it issued an investor alert about investing in cannabis companies (here), and in 2018, when it issued a second investor alert about marijuana-related investments (here). In the 2014 alert, the SEC warned investors about the risk of fraud and market manipulation when deciding whether to make an investment in a cannabis company: Fraudsters often exploit the latest innovation, technology, product, or growth industry – in this case, marijuana – to lure investors with the promise of high returns. Also, for marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances. When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors. To underscore the foregoing, the SEC noted that it issued trading suspensions against cannabis companies which allegedly provided false information to their investors. Of the companies whose trading was suspended, the SEC said that several were targeted because of concerns about the accuracy of how they described their operations, while others were targeted because of market manipulation and unlawful sales. On March 16, 2023, the SEC announced (here) that it charged American Patriot Brands Inc. (“APB”), a cannabis cultivation and distribution company, its chief executive officer (“CEO”), and five other entities and individuals for their participation in a long-running scheme in which they raised more than $30 million from more than one hundred investors across the country and took millions of those funds to enrich themselves. According to the complaint filed by the SEC in the United States District Court for the District of Puerto Rico (here), since at least mid-2016, APB, its CEO Robert Y. Lee, and current and former executives Brian L. Pallas and J. Bernard Rice made a series of false and misleading statements to investors about various aspects of the company, including its financial condition, the scope of its operations, the value of its Oregon cannabis farm, and the safety and security of investing in APB. In particular, the SEC alleged that as part of its offerings, APB urged investors to act quickly to invest before APB made its securities more widely available, an event APB claimed was imminent. In fact, said the SEC, the registration APB needed for widespread public trading was in jeopardy and was revoked in the midst of an offering. Nevertheless, alleged the SEC, APB told investors that it had multistate and worldwide operations when it had no operations outside of Oregon. Additionally, although APB produced only a small amount of sellable cannabis a year, it promoted itself as one of the largest cannabis farms in the country and provided wildly inflated financial information to support extremely high revenue projections. To make the investment appear even more attractive, APB allegedly promised that investments would be secured by a lien on APB’s cannabis farm, at times when the farm likely did not have enough equity to secure investments. The SEC alleged that all of the misrepresentations and omissions were material because they would have been important to an investor in deciding what to do with APB securities (e.g., whether to invest in the company, to convert their promissory notes (pursuant to which they loaned APB money) to APB stock, or to exercise an option to buy APB stock. The SEC further alleged that accurate information about past and projected revenues was relevant to the risk of the investment and the size of potential returns, as was information about the scope of APB’s operations, whether it owned other farms, historical harvests, and the amount of acres licensed for cultivation. As noted, according to the SEC, APB produced only a small amount of sellable cannabis a year. Moreover, said the SEC, information about competing valuations of the Oregon farm would have allowed investors to assess whether the high valuations provided by APB were accurate. Coupled with information about the liens on the Oregon farm, the competing valuations would also have allowed investors to assess whether APB had sufficient revenues to pay its operating expenses and whether a lien on the Oregon farm would fully secure promissory note investments. The SEC also said that accurate information about the status of APB’s efforts to become compliant with SEC reporting requirements would have been relevant to the competency of APB’s management, the eligibility of APB securities to continue trading on OTC Link, and the likelihood that APB securities would qualify for listing on an American exchange. Finally, the SEC alleged that the individual defendants misappropriated millions of dollars in investor proceeds to themselves and the relief defendants. Commenting on the enforcement action, Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, stated: “As the SEC complaint alleges, American Patriot Brands Inc. and some of its senior executives fabricated business profits and prospects to entice investors with falsehoods that in the end left investors with essentially worthless securities. This action reflects the SEC’s ongoing commitment to holding accountable those who seek to profit through lies and deception.” The SEC charged defendants with violating the antifraud provisions of the federal securities laws. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and officer and director bars against certain individual defendants. The SEC also seeks disgorgement with prejudgment interest from three affiliated entities (as relief defendants) that allegedly received millions in investor proceeds. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has frequently addressed the interplay between document discovery in litigation and the repercussions resulting from the spoliation of evidence.  [ See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  “Spoliation” refers to evidence that is “destroyed” “substantially altered” or “lost”.  See, e.g., Gilliam v. Uni Holdings , 201 A.D.3d 83, 86 (1 st Dep’t 2021); Dagro Assoc. I, LLC v. Chevron USA , 206 A.D.3d 793, 794 (2 nd Dep’t 2022). Briefly stated, and as summarized from prior articles, to fully prepare for trial, the CPLR permits “full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof….”  CPLR 3101 .  In order to further the goal of “full disclosure,” litigants have a duty to preserve information that may be “material and necessary” to the prosecution or defense of claims in an action.  When information that ought to have been, but was not, preserved it is known as spoliation.  “Under the common-law doctrine of spoliation, when a party negligently loses or intentionally destroys key evidence, the responsible party may be sanctioned.”  Dagro , 206 A.D.3d at 794; see also, Slezak v. Nassau Country Club , 200 A.D.3d 734 (2 nd Dep’t 2021) (citations and internal quotations marks omitted). A party seeking sanctions for the spoliation of evidence “must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.”  Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547 (2015) (citations and internal quotation marks omitted).  Where the destruction of evidence is intentional or willful, “the relevancy of the destroyed documents is presumed”.  Id . (citation omitted).  Where evidence is negligently destroyed, however, “the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.”  Id . (citation omitted).  “The nature and severity of the sanction for spoliation depends upon a number of factors, including, but not limited to, the knowledge and intent of the spoliator, the existence of proof of an explanation for the loss of evidence, and the degree of prejudice to the opposing party.”  Delmur, Inc. v. School Const’n Auth. , 174 A.D.3d 784, 786 (2 nd Dep’t 2019) (Citation, internal quotation marks and brackets omitted.)  Among others, sanctions for spoliation include striking of pleadings or adverse inference charges.  Arbor Realty Funding, LLC v. Herrick, Feinstein LLP , 140 A.D.3d 2 (1 st Dep’t 2016). On March 14, 2023, the Appellate Division, First Department, decided RCSUS Inc. v. SGM Socher, Inc. , in which the Court affirmed supreme court’s grant of plaintiff’s motion for an adverse inference due to spoliation of evidence on a cell phone. The First Department explained: After this case was commenced, and despite oral instruction from counsel to maintain relevant documents, defendant Yosef Greenwald gave his assistant his iPhone, which he had used regularly for business communications. His assistant then, by sending messages of her own, overwrote his WhatsApp communications with plaintiffs' sales representative concerning matters of central relevance to this case. The communications proved to be irretrievable. Accordingly, the motion court acted properly in granting the adverse inference precluding defendants from contesting that the payments defendants made to plaintiffs' former sales representative during the periods when WhatsApp chats had been deleted , were commission payments made for diverted sales that would have gone to plaintiffs but for defendants' actions. In light of the adverse inference, the court properly granted plaintiffs summary judgment as to liability on their unfair competition claim . Takeaway Folks rely heavily on cell phones and other electronic devices when conducting their personal and professional business.  Accordingly, a significant amount of information is stored on these electronic devices.  Exacerbating the potential for unintentional spoliation is heavy reliance on electronic storage of information simultaneously with the increasingly accepted view that paper files are a thing of the past.  Individuals and entities should consider such steps as are necessary to ensure that electronic information is retained and accessible from multiple sources so that, in the event of litigation, penalties are not assessed due to spoliation.  Obviously, storage and retention issues solutions will have no impact on intentional spoliation. 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 To establish a cause of action for fraud, a plaintiff must plead a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance and damages. 1 In Pope Investments II LLC v. Belmont Partners, LLC , Case No. 2022-02632 (1st Dept. Mar. 14, 2023) ( here ), and RCM/CMG Portfolio Holding, LLC v. Giordano , Case No. 2021-03254 (1st Dept. Mar. 14, 2020) ( here ), the Appellate Division, First Department addressed the falsity and reliance elements of a fraudulent inducement cause of action. We examine both cases below. Pope Investments II LLC v. Belmont Partners, LLC Pope Investments arose from a “Chinese reverse merger,” a complicated transaction enabling American companies to invest in companies in China through the use of offshore shell companies. One of the offshore companies involved in the transaction was controlled by Geoffrey Shao (“Shao”). Through the reverse merger at issue in the case, plaintiffs and others invested approximately $12.5 million in Shanghai Medical Technology Co., LTD. (“SMT”). Defendants received more than $1 million for facilitating the transaction. Before the reverse merger could be fully effectuated, however, the investment funds were wrongfully diverted by Shao to other nonparty entities. In April 2014, plaintiffs filed an amended complaint, asserting nine causes of action against defendant Joseph Meuse (“Meuse”), an owner of Belmont Partners, LLC (“Belmont Partners”) and Belmont Partners (collectively, the “Belmont Defendants”). In response to defendants’ motion to dismiss, plaintiffs withdrew several causes of action. After the motion court ruled on the motion, several causes of action against defendants survived, including fraudulent inducement and negligent misrepresentation. With regard to the fraudulent inducement claim, plaintiffs alleged that plaintiffs’ claims centered on defendants’ actions or inactions, which allowed Shao to embezzle the money paid in connection with the transaction. In particular, plaintiffs alleged that defendants fraudulently induced them to invest their money by misrepresenting that they had vetted Shao and/or Kamick Assets Limited (“Kamick”), a British Virgin Islands company solely owned by Shao, and by failing to disclose that Shao and Helen Lv, who allegedly embezzled the funds with Shao, had a close personal relationship with each other. Upon completion of discovery, the Belmont Defendants moved for summary judgment. To support the motion, the Belmont Defendants submitted, among other things, Meuse’s deposition testimony in which he averred that he and Belmont Partners were never asked to, nor did they provide, any due diligence with respect to the transaction, that he and Belmont Partners relied exclusively on the parties’ legal counsel to structure the transaction, and that he specifically told plaintiff that counsel had instructed him to step back and leave the structuring of the deal to the parties’ attorneys.  The Belmont Defendants also contended that plaintiffs did not satisfy the justifiable reliance element of their fraudulent inducement claim. Defendants argued that plaintiffs were sophisticated investors and hedge fund managers, who managed hundreds of millions of dollars, and who were represented by counsel throughout the transaction. As such, said defendants, plaintiffs could not exclusively rely on them to shepherd the transaction through to its conclusion. According to defendants, plaintiffs took no steps to safeguard their interests. The motion court granted in part and denied in part the Belmont Defendants’ motion for summary judgment. In denying summary judgment as to, inter alia , the fraudulent inducement and negligent misrepresentation claims, the motion court found that there were disputed issues of material fact. The First Department unanimously affirmed. The Court held that “ he motion court properly denied dismissal of plaintiffs’ claims for fraudulent inducement and negligent misrepresentation.” 2 The Court found that “ here multiple factual issues present on th record as to whether the Belmont Defendants made material misrepresentations and omissions of fact and whether plaintiffs justifiably relied on them.” 3 “Among other things,” explained the Court, “the court properly found that Meuse’s contention that he would be ‘stepping back’ from the transaction – and that he had relayed this fact to individuals at Pope Investments II LLC (Pope) – were directly refuted by the affidavits submitted by Pope representatives.” 4 For example, said the Court, the Pope representatives stated that “the Belmont Defendants had not informed Pope or any of the other investors that the Belmont Defendants would not be involved in structuring the reverse merger, and that plaintiffs conducted extensive due diligence and engaged in numerous calls and correspondence with the Belmont Defendants, who were tasked with shepherding the deal.” 5 Thus, said these representatives, “they would not have recommended entering into the reverse merger had defendants’ disclosed their noninvolvement in structuring and consummating the transaction.” 6 Such evidence, concluded the Court, was “sufficient to raise factual issues with respect to the fraudulent inducement and negligent misrepresentation claims.” 7 In affirming the motion court’s order, the Court compared the record before it to the facts in J.A.O. Acquisition Corp. v. Stavitsky , 18 A.D.3d 389, 391 (1st Dept. 2005). 8 In J.A.O. Acquisition , the plaintiff alleged that prior to its purchase of the subject company, the defendant misrepresented that certain foreign receivables were backed by letters of credit. The defendant moved for summary judgment on the ground that there was no evidence that it made such a misrepresentation. In opposition, the plaintiff submitted an affidavit in which the affiant stated that the defendant and his partner had withheld material information about foreign sales, failed to disclose that said sales were not supported by a letter of credit, and lied to the bank about the existence of letters of credit. The First Department held that the “affidavit plainly insufficient in that it contain only vague assertions, and nowhere state that told him that the foreign collectibles were supported by letters of credit or were otherwise includable in the Chase availability statement.” 9 RCM/CMG Portfolio Holding, LLC v. Giordano RCM/CMG arose from the purchase by plaintiff of a portfolio (the “Portfolio”) of legal and medical receivables (the “Receivables”) from Cambridge Management Group, LLC (“CMG”) for more than $24 million, and the subsequent servicing of collections on the Portfolio, initially by CMG and its assignee. Plaintiff asserted mostly contract-based claims against certain defendants, as well as a fraudulent misrepresentation claim against the corporate defendants’ principal, James Giordano (“Giordano”).  In connection with the fraud claim, plaintiff alleged that Giordano falsely told plaintiff’s representatives that each of the Receivables, which were individually listed on schedules the parties had exchanged during negotiations, and which plaintiff allegedly relied upon to calculate the amount it was willing to pay for the Portfolio, were viable and collectable. Giordano also allegedly told one of plaintiff’s principals that CMG’s auditor had recently examined the Portfolio and written off the Receivables that were no longer viable. Plaintiff claimed that Giordano knew at the time, that Giordano’s assurances were lies, and in reality, more than one hundred of the Receivables that Plaintiff purchased were worthless and uncollectable. After the closing of the transaction, Giordano dissolved CMG and transferred its assets through a series of successor entities. Moreover, claimed plaintiff, to conceal Giordano’s fraudulent scheme, CMG and its affiliates, which continued to service the Portfolio, submitted bi-monthly servicing reports, falsely representing that the Receivables, which were worthless and uncollectable, were still being serviced. Giordano moved to dismiss and for summary judgment dismissing plaintiff’s fraud claim against him. Giordano claimed that plaintiff failed to allege any misrepresentation of material fact. In particular, Giordano contended that the alleged misrepresentations were nothing more than a restatement of the representations and warranties in the asset purchase agreement executed in connection with the transaction. Giordano also argued that plaintiff failed to plead justifiable reliance. Noting that plaintiff is a sophisticated party, Giordano maintained that plaintiff could not simply rely on Giordano’s alleged representations. More was needed. Giordano maintained that plaintiff failed to allege that it could not have discovered the truth had it performed an adequate due diligence. In fact, claimed Giordano, plaintiff alleged that in its own post-purchase investigation, facts were revealed that could have been discovered before the closing had plaintiff engaged a third-party consultant. The motion court denied the motion. The First Department unanimously affirmed. The Court found “that issues of fact exist as to whether … Giordano made any actionable misrepresentations.” 10 The Court explained that deposition testimony (which was reiterated in affidavits) supported plaintiff’s allegation that Giordano “falsely represented … that uncollectable eceivables had recently been written off in accordance with company policy, that the subject eceivables would perform well, and that certain eceivables were valued at a certain (allegedly inflated) amount.” 11 The Court further explained that “ t least some of these represent false statements of present facts and not just ‘mere puffery, opinions of value or future expectations.’” 12 As such, dismissal was not appropriate. “To the extent, however, that plaintiff relies on its principals’ assertions in their affidavits that Giordano misrepresented to them that all of the eceivables to be purchased were ‘viable and collectable,’” such reliance, said the Court, was misplaced, especially on a motion for summary judgment:  They did not reference such a statement at their depositions, despite specific questioning, and “ ffidavit testimony that is obviously prepared in support of ongoing litigation that directly contradicts deposition testimony previously given by the same witness, without any explanation accounting for the disparity, creates only a feigned issue of fact, and isinsufficient to defeat a properly supported motion for summary judgment” ( see Telfeyan v City of NY , 40 AD3d 372, 373 <1st dept 2007> ).< 13 > 13> The Court also held that there were issues of fact “with respect to the element of justifiable reliance.” The Court rejected Giordano’s argument that merger clauses in the asset purchase agreement precluded reliance. 14 Moreover, said the Court, there was “conflicting evidence in the record regarding whether plaintiff, a sophisticated investor, took ‘reasonable steps to protect itself against deception,’ including through its conduct of due diligence and securing of written representations and warranties.” 15 The Court explained that “issues of fact exist as to whether plaintiff should have asked for case servicing notes or attributed any significance to the ‘Outstanding-Ineligible’ designation given to certain eceivables, as well as to whether plaintiff’s due diligence efforts were undermined by defendants’ own conduct in labeling cases as ‘open’ that were no longer collectable, limiting plaintiff’s access to information, and/or failing to disclose a prior arbitration.” 16 here,=">here," >here=">here" >here.=">here."> Ed. Note: In prior articles, we have discussed the impact that a disclaimer clause in a contract can have on a fraud claim.  See ,  e,g. , here and  here . As we have noted, disclaimer clauses often are worded as “no reliance” clauses. In a such a clause, the parties represent that they are not relying on any extra-contractual representations.] Footnotes Eurycleia Partners, LP v. Seward & Kissel LLP , 12 N.Y.3d 553, 559 (2009). Slip Op. at *2. Id. Id. Id. Id. Id. Id. 18 A.D.3d at 390–391. Slip op. at *2. Id. Id. (citing, Sidamonidze v. Kay , 304 A.D.2d 415 (1st Dept. 2003), and First Bank of the Ams. v. Motor Car Funding, Inc. , 257 A.D.2d 287, 292 (1st Dept. 1999)). Id. Id. (citing, Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137-138 (1st Dept. 2014)). Id. at *2-*3 (citing, DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154-155 (2010)). Id. at *3. 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.