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By Jonathan H. Freiberger “The purpose of a deed is to pass title to land; it is the appropriate method of making a voluntary transfer of real property in the lifetime of the grantor.”  43 N.Y. Jur. 2d Deeds § 1 (citation/footnote omitted).  A deed that is forged “lacks the voluntariness of conveyance.”  Faison v. Lewis , 25 N.Y.3d 220, 224 (2015) (citation omitted).  Accordingly, a deed with a forged signature “holds a unique position in the law; a legal nullity at its creation is never entitled to legal effect because void things are as no things.”  Faison , 25 N.Y.3d at 224 (citation, internal quotation marks and brackets omitted).  The Court in Faison held that since a deed with a forged signature is “void ab initio” (that is, it has no legal effect from inception), a statute of limitations defense in unavailable.  Faison , 25 N.Y.3d at 222. The facts in Faison , a case that nicely explains the law on forged deeds, are interesting (and are simplified in this article for the purpose of clarity).  Defendant Lewis legitimately came to own a one-half interest in real property located in Brooklyn, New York (the “Brooklyn Property”).  Lewis’ mother, who inherited a one-half interest in the Brooklyn Property from Lewis’ grandmother, subsequently transferred that interest to Lewis by quitclaim deed.  Lewis’ uncle inherited the other 50% interest.  Thereafter, in 2001, Lewis recorded a “deed claiming to correct the prior deed” in which the uncle’s half interest was also conveyed to Lewis.  If valid, the corrected deed would have conveyed to Lewis, the entire fee interest in the Brooklyn Property.  However, the uncle’s signature was forged.  Shortly after the corrected deed was filed, the uncle died.  In 2003, plaintiff’s prior action to declare the corrected deed void due to the forged signature was dismissed because she was not the administrator of the uncle’s estate.  In 2009, Lewis borrowed $269,000 from Bank of America and, in conjunction therewith, delivered to the bank a mortgage on the Brooklyn Property.  In 2010, after being appointed administrator, plaintiff filed another action seeking to declare the corrected deed and the BoA mortgage “null and void” based on the alleged forgery.  BoA answered the complaint, asserting a statute of limitations defense, and then moved, pursuant to CPLR 3211 (a) (5) , to dismiss the complaint as untimely under CPLR 213 (8) . The Faison Court, explaining the difference between void and voidable deeds procured by fraud, stated: A forged deed that contains a fraudulent signature is distinguished from a deed where the signature and authority for conveyance are acquired by fraudulent means. In such latter cases, the deed is voidable. The difference in the nature of the two justifies this different legal status. A deed containing the title holder's actual signature reflects the assent of the will to the use of the paper or the transfer, although it is assent induced by fraud, mistake or misplaced confidence. Unlike a forged deed, which is void initially, a voidable deed, until set aside, has the effect of transferring the title to the fraudulent grantee, and being thus clothed with all the evidences of good title, may incumber the property to a party who becomes a purchaser in good faith. Faison , 25 N.Y.3d at 224-25 (citations, internal quotation marks, ellipses and brackets omitted). A forged deed “cannot convey good title” nor can one become a “bona fide purchaser of real estate … from one who never had any title….”  Faison , 25 N.Y.3d at 224-25 (citations, internal quotation marks and brackets omitted).  See also Wu v. Wu , 288 A.D.2d 104 (1 st Dep’t 2001).  Along the same lines, “no property shall be encumbered, including by a mortgagee, in reliance on a forged deed.”  Faison , 25 N.Y.3d at 225-26 (citations omitted).  The Court of Appeals held that a forged deed is void ab initio and not subject to a statute of limitations defense because “ hat legal status cannot be changed, regardless of how long it may take for the forgery to be uncovered.”  Faison , 25 N.Y.3d at 226. In Crispino v. Greenpoint Mortgage Corp. , 304 A.D.2d 608 (2 nd Dep’t 2003), husband and wife owned property in West Islip, New York (the “WI Property”).  Husband was a principal and vice president of a mortgage bank (the “Bank”).  Husband executed and delivered a mortgage on the WI Property as security for a loan given to him by the Bank.  Prior mortgages on which wife was a co-obligor were satisfied from the proceeds of the loan.  The mortgage was subsequently assigned to Greenpoint Mortgage Corp.  A deed conveying wife’s interest in the WI Property to husband was recorded.  After husband’s death, wife commenced suit to “set aside the deed as a forgery.”  After a jury found that the deed was a forgery, supreme court “directed the cancellation of the deed and the mortgage.”  “Greenpoint then moved, inter alia , pursuant to CPLR 4404(b), to set aside the decision on the ground that the plaintiff was estopped from challenging the validity of the mortgage, and ‘for a conclusion of law to the effect that Greenpoint is entitled to be subrogated to the rights of the holders of mortgages which were satisfied out of the loan proceeds.’"  The Second Department, which affirmed the denial of Greenpoint’s motion, found that wife was not estopped from challenging the mortgage because there is no proof that she “consented to the encumbrance of her interest in the property by the mortgage,” “actively participated in the transaction or the negotiations pertaining to the subject mortgage” or that she “was aware of the forgery or ratified her husband's actions”.  Crispino , 304 A.D.2d at 609 (citations omitted). The Crispino Court also rejected Greenpoint’s argument that it should be equitably subrogated to the rights of the prior mortgagees “to prevent from being unjustly enriched by her husband’s wrongdoing,” and stated: as assignee of the mortgage, Greenpoint acquired no rights greater than those of the assignor, , and took the assignment of the mortgage subject to all defenses and counterclaims which the plaintiff had against the assignor. Since participated in the forgery of the deed through its principal, , the doctrine of unclean hands would bar from entitlement to equitable subrogation.  Hence, Greenpoint, which is subject to the same defense, is not entitled to be subrogated to the rights of the prior mortgagees.    Crispino , 304 A.D.2d at 609-10 (citations omitted). A forged satisfaction of mortgage was at issue in JP Morgan Chase Bank, Nat. Ass’n v. Aspilaire , 188 A.D.3d 850 (2 nd Dep’t 2020).  Here, Aspilaire delivered a mortgage to Bank 1 and subsequently recorded a forged satisfaction with respect to same.  Thereafter, Aspilaire sold the subject property to Brown, whose title report, due to the recorded satisfaction, uncovered no outstanding mortgages.  Brown, in turn, delivered a note and mortgage on the subject property to Bank 2.  For a while after the conveyance, Aspilaire continued to make mortgage payments to Bank 1, but stopped.  Brown defaulted on his mortgage and Bank 2 foreclosed and purchased the property at the foreclosure sale .  Thereafter, Bank 1 commenced an action against, inter alia , Bank 2 to foreclose its mortgage and to vacate the bogus satisfaction.  Banks 1 and 2 moved for summary judgment.  Supreme court determined that the satisfaction was forged.  Nonetheless, supreme court denied Bank 1’s motion for summary judgment and granted Bank 2’s cross-motion,  agreeing “with contention that it was a bona fide encumbrancer, stating that a forged satisfaction does not preclude a subsequent good faith encumbrancer for value from securing priority.”  JP Morgan , 188 A.D.3d at 852 (internal quotation marks omitted).   The Second Department reversed, holding that Bank 2 was not “protected by its status as a bona fide encumbrancer for value under Real Property Law § 266 , since the satisfaction of mortgage executed and recorded before issuance of a loan with respect to the subject property was determined to have been forged and was void, not merely voidable” because a “discharge or satisfaction of a mortgage is void at its inception when it is executed and recorded by one who has no interest in the mortgage.” JP Morgan 188 A.D.3d at 853 (citations omitted). These issues were recently discussed by the Second Department in its March 30, 2022, decision in Selene Finance, L.P. v. Jones , but in the context of a forged power of attorney.  In 2001, defendant Mentore executed a power of attorney appointing Nykian as her agent for real estate transactions.  Thereafter, Mentore and defendant Jones purchased property in Brooklyn, New York, and were given a bargain and sale deed.  On the same day, Jones and Nykian, acting as Mentore’s agent, borrowed $300,000 from Bank 1 and, in exchange, delivered a note and a mortgage on the property to Bank 1.  The note and mortgage were assigned to Bank 2 shortly thereafter.  In November of 2001, the power of attorney was recorded and in 2008 it was revoked by Mentore by delivering written notice of such revocation to Jones and Nykian.  In 2009, pursuant to a forged power of attorney (the “2009 PoA”) that purportedly expanded Nykian’s powers, Nykian “conveyed” Mentore’s one-half interest in the property to Jones.  Jones then borrowed $350,000 from Bank 2 (the “2009 Loan”) and delivered a mortgage to secure repayment of said loan (the “2009 Mortgage”).  With some of the proceeds of the 2009 Loan from Bank 2, Jones fully repaid the outstanding loan to Bank 1 and a satisfaction of that obligation was recorded. Thereafter, Jones and Nykian pleaded guilty to charges related to, inter alia , the forged 2009 PoA and the theft of Mentore’s 50% interest in the property.  After the guilty pleas, the 2009 Mortgage was assigned and, ultimately, held by Bank 3.  Jones executed a loan modification with Bank 3 by which she added $65,000 to the outstanding debt on the 2009 Loan.  Jones claims that she advised Bank 3 of the “forged signature on the power of attorney, the subsequent invalid transfer of her interest in the subject property to Jones, and the convictions of Jones and Nykian.”  Thereafter, Bank 3 assigned the loan to plaintiff, which “commenced this action against, among others, and Jones, seeking, inter alia , an equitable lien on the property with interest from February 28, 2009, and a judgment declaring that the plaintiff holds an equitable mortgage encumbering all of the defendants' interests in the property.”   Mentore answered and asserted a fraud counterclaim.  The “plaintiff moved for summary judgment striking answer and dismissing her counterclaims, or alternatively, for summary judgment declaring that its mortgage interest in at least one half of the subject property was valid and declaring that it had a priority equitable mortgage lien in the sum of $494,887.85.”  Mentore opposed the motion and cross-moved for summary judgment.   Supreme court determined that the 2009 Mortgage and deed were void and should be extinguished because they were precured by fraud.  However, because it determined that plaintiff did not perpetrate fraud in acquiring the mortgage, supreme court declared that plaintiff “had a priority equitable mortgage lien in the sum of $290,325.63, ‘such amount representing the pay-off amount of the mortgage based upon principles of equitable subrogation….’” The Second Department reversed to the extent that supreme court found in plaintiff’s favor, finding that Mentore “demonstrated her prima facie entitlement to judgment as a matter of law by submitting evidence in support of her cross motion which demonstrated that the 2009 was forged, and that the 2009 deed was obtained by false pretenses and thus, was void.”  (Citations omitted.)  Plaintiff’s opposition failed to raise a triable issue of fact because “the fact that the defendant had not properly revoked the 2001 power of attorney at the time the 2009 deed was executed is irrelevant, as the 2009 deed explicitly referenced the 2009 power of attorney ‘being recorded simultaneously herewith.’"  Finally, “the plaintiff failed to establish its prima facie entitlement to judgment as a matter of law declaring that its mortgage interest in at least one half of the subject property was valid established that the 2009 deed was obtained by false pretenses and is void the mortgage based on that deed and subsequently assigned to the plaintiff is also void.” 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 Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. However, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’” 1 As discussed below, such “delegation clauses” are enforceable where “there is ‘clea and unmistakabl ’ evidence” that the parties intended to arbitrate arbitrability issues. 2 “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . apply ordinary state-law principles that govern the formation of contracts.” 3 In Fritschler v. Draper Mgt., LLC , 2022 N.Y. Slip Op. 02087 (1st Dept. Mar. 29, 2022) ( here ), the foregoing principles were considered by the Appellate Division, First Department. Fritschler involved the purchase of seven Subway franchises by plaintiff, Charles Fritschler. Plaintiffs alleged that defendants materially breached the franchise agreements and that certain defendants breached a separate agreement for the management of the franchises.  The facts of Fritschler , which were obtained from the motion court’s decision and order and the First Department’s decision and order, are as follows. In connection with the purchase of the Subway franchises, Fritschler executed seven franchise agreements. Each agreement contained an identical arbitration provision, requiring the resolution of “ ny dispute, controversy or claim arising out of or relating to Agreement or the breach thereof” by arbitration pursuant to the rules of the American Arbitration Association or its successor (“AAA”) or the American Dispute Resolution Center or its successor (“ADRC”) “at the discretion of the party first filing a demand for arbitration.”  In addition to the arbitration clause, each franchise agreement contained a choice of law provision, which stated that “ ny disputes concerning the enforceability or scope of the arbitration clause be resolved pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (“FAA”), and … that the FAA preempt[] any state law restrictions (including the site of the arbitration) on the enforcement of the arbitration clause in Agreement.” Notably, the parties agreed “to waive any right to disclaim or contest this pre-dispute arbitration agreement.” Separately, Plaintiff EB5Overseer, LLC (“EB5”) entered into a management agreement with defendant Draper Management, LLC (“Draper”) with respect to the management of Fritschler’s Subway franchises. Neither party was a signatory to the franchise agreements.  The management agreement provided that Draper would act as the “sole and exclusive manager” for the Subway franchises. The management agreement did not have an arbitration provision. In the event of a dispute under the management agreement, the parties were required to make a good faith attempt to resolve the dispute. If that attempt was unsuccessful, a party could commence a litigation “exclusively in a court of competent jurisdiction located in New York City.” Defendants claimed the dispute should be resolved by arbitration and moved to stay the action, pending arbitration. Plaintiffs cross-moved for expedited discovery and a jury trial to resolve disputed issues of fact as to arbitrability, and for a stay of arbitration on the ground that a valid agreement was not made. The motion court granted defendants’ motions for a stay of the action pending arbitration and denied plaintiffs’ cross motions for expedited discovery and a jury trial. As a threshold matter, the motion court held that the FAA governed the franchise agreements and the pending motions. None of the parties disputed its applicability.  Turning “to critical issue of whether it is for the court or the arbitrator to determine issues of arbitrability – i.e., issues as to the scope, validity, and enforceability of the arbitration agreement,” the motion court held that it was for the arbitrator to make this determination.  Defendants argued that the franchise agreements evidenced the parties’ intent to delegate issues of arbitrability to the arbitrator. In response, plaintiffs maintained that “the majority of claims clearly outside the scope of the Arbitration Provision, the majority of parties not signatories to the Provision, and the Provision not clear, explicit and unequivocal.” Plaintiffs contended that “ he court, not an arbitrator, determine[] whether the subject in dispute within the scope of the arbitration agreement.” “Under the FAA, there is a general presumption that the issue of arbitrability should be resolved by the courts.” 4 When applying the FAA, “courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” 5 As noted, to determine whether the parties clearly and unmistakably intended to refer the question of arbitrability to the arbitrator, the courts construe the arbitration agreement under “relevant state law.” 6 In applying the FAA, the Second Circuit has held that where the “parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.” 7 New York courts applying the FAA have held, similarly, that when the parties’ agreement both specifically incorporates by reference the rules of an arbitration organization that permit the arbitrator to decide the scope of the arbitration agreement and “employs language referring all disputes to arbitration,” the issue of arbitrability will be left to the arbitrator. 8 Based upon the foregoing principles, the motion court held “that the parties’ agreements evidence a clear and unmistakable intent to delegate arbitrability questions to the arbitrator.” The court noted that the arbitration provision at issue was “unquestionably broad” and expressly incorporated the rules of the AAA, which provided that the arbitrator has “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”  In holding that issues of arbitrability were delegated to the arbitrator, the motion court rejected plaintiffs’ contention that the arbitration provision was procured by fraud. The alleged fraud, as described by plaintiffs, was based on, inter alia , a representation made during the negotiation of the management agreement that any claims against defendants would be subject to judicial determination. Plaintiffs claimed that defendants knew the falsity of their representation. Plaintiff also maintained that the franchise disclosure document (“FDD”) that was provided to them omitted material facts with respect to arbitration; namely, who determines jurisdiction and arbitrability; whether claims against DAL and/or its BDAs must be arbitrated without regard to the genesis, scope and nature of the claims; whether the parties could obtain judicial review of errors of law or fact made by the arbitrators; and whether an arbitration award was subject to only minimal judicial review.  The motion court found that plaintiffs failed to demonstrate or raise a triable issue of fact as to whether the arbitration provision was procured by fraud. The court noted that plaintiffs cited “no authority whatsoever in support of their contention that the types of omissions and misrepresentations cited by Fritschler, regarding the meaning or effect of the arbitration provision, support a claim of fraudulent inducement.” The court agreed with defendants that “Fritschler’s ‘subjective confusion about the provision’s meaning not create an issue of fact.’” “Significantly”, said the motion court, “the terms of the Franchise Agreements contradict Fritschler’s claim of lack of understanding of the arbitration provision”, as did the franchise disclosure questionnaire.  In sum, concluded the motion court, “plaintiffs fail to raise an issue of fact as to whether the arbitration provision was procured by fraud, or to make any showing that discovery may lead to relevant evidence on this issue or on any of their fraud claims. The acts alleged by plaintiffs in support of their fraud claims are patently insufficient to support the claims.” The motion court also rejected plaintiffs’ assertion that the arbitration provision was unenforceable due to lack of mutuality, lack of consideration, and unconscionability. Whether there is sufficient consideration to support the parties’ agreement to arbitrate is for the court, not the arbitrator, to decide. 10 The motion court held that plaintiffs’ contention was conclusory and unsupported by any case authority – plaintiffs contended that the arbitration provision lacked consideration “because DAL and the other Defendants nothing up in order to be bound to the Provision” or because the provision limited damages. The motion court noted that plaintiffs failed to explain “how a lack of consideration could be found given that, by means of the Franchise Agreements containing the arbitration provision, DAI afforded Fritschler licenses to use the Subway ‘System,’ including marks, to own and operate restaurants.”  The motion court also held that plaintiffs failed to cite any authority in support of their claims that the arbitration provision was unenforceable due to lack of mutuality and unconscionability. The court found their claims to be conclusory. Accordingly, the court held that plaintiffs failed to raise an issue of fact as to whether the arbitration provision was unenforceable on these grounds or to make any showing that discovery may lead to evidence relevant to support these grounds. Finally, the motion court held that the non-signatories to the franchise agreements were required to arbitrate their disputes. The non-signatory plaintiffs argued that “ he damages or benefits Plaintiffs assert derive directly from the Management Agreement and contacts with the BDAs, not from the Franchise Agreements” and, therefore, did not implicate the franchise agreements and the arbitration provisions therein. Defendants countered that the non-signatory plaintiffs were obligated to arbitrate because “ hey asserting claims arising directly from the Franchise Agreements, the franchise relationship, and the Franchises.”  Making the threshold determination as to whether the non-signatory defendants had a “sufficient relationship” with the signatory defendant, 11 the motion court held that plaintiffs agreed that they were the intended beneficiaries under the franchise agreements (noting that they constituted agents within the meaning of the relevant provision of the agreements). As a result, the motion court found “Plaintiffs’ argument that the BDA’s not third-party beneficiaries or agents within the meaning of section 10(d) unpersuasive.” The court concluded that it would be for the arbitrator to determine which of plaintiffs’ claims against the non-signatory defendants had to be arbitrated and which of the non-signatory defendants were entitled to enforce the arbitration provision. Moreover, the motion court found that the non-signatory plaintiffs asserted a direct benefit arising from the franchise agreements. 13 The court noted that while plaintiffs also asserted claims under the management agreement, which did not contain an arbitration provision, they failed to make any showing that the management agreement claims differed in any significant respect from, or that they did not substantially overlap with, the franchise agreement claims. Review of the allegations of the complaint confirms that the non-signatory plaintiffs, like signatory plaintiff Fritschler, claim a direct benefit from the Franchise Agreements, and that they have sustained loss as a result of defendants’ breaches of those Agreements.  On appeal, the First Department affirmed. The Court held that, as to the signatories to the franchise agreements, those parties clearly and unmistakably agreed that issues concerning the arbitrability of claims would be determined by the arbitrator. “Here,” said the Court, “plaintiff Fritschler and defendant Doctor’s Associates, LLC (DAL) evidenced their intent to delegate the issue of arbitrability to the arbitrator by incorporating the AAA (and/or the substantively identical ADRC) rules into the Franchise Agreements’ broad arbitration clauses.” 14 The Court rejected plaintiffs’ arguments that there was no binding agreement to arbitrate because the franchise agreements were procured by fraud, lack of mutuality, were not supported by consideration, and/or were unconscionable. The Court found plaintiffs’ arguments to be unpersuasive. Like the motion court, the Court held that “ ecause these issues implicate whether the parties formed a valid contract to arbitrate, they were properly decided by the court in the first instance.” 15 In any event, the Court found that plaintiffs’ contention that Fritschler did not enter into a binding agreement was contradicted by the allegations of the complaint. Furthermore, observed the Court, plaintiffs failed to allege “that there were any specific misrepresentations regarding the arbitration clauses themselves.” 17 Finally, “Fritschler’s supposed subjective misunderstanding of the plain terms of the agreements does not amount to fraud,” said the Court. 18 The Court also rejected plaintiffs’ “argument that the exclusive jurisdiction provision found in the Management Agreement trump the Franchise Agreements’ arbitration provisions.”  The Management Agreement was entered into by plaintiff EB5Overseer LLC and defendant Draper Management, LLC in February 2014, shortly before the Franchise Agreements were signed by Fritschler and DAL. However, nothing in the Management Agreement purported to modify or limit the scope of the later agreements that nonparties to the Management Agreement (i.e., Fritschler and DAL) might enter into, nor does it render the clear arbitration and delegation provisions found in the Franchise Agreements ambiguous. While plaintiffs may very well argue that the terms of the Management Agreement make claims asserted by or against certain parties nonarbitrable, that is a question of arbitrability for the arbitrator, not the court.  19 Finally, the Court rejected plaintiffs’ contention “that the Franchise Agreements did not clearly delegate disputes about arbitrability to the arbitrator because certain plaintiffs and the majority of the defendants were not signatories to the Franchise Agreements.” 20 Similar to the motion court, the Court found that the non-signatories “were agents of DAL and in the Franchise Agreements themselves, Fritschler promised that he would not bring any claims against DAL’s agents or affiliates outside of arbitration.” 21 Moreover, held the Court, “ he non-signatory plaintiffs also within the scope of the arbitration clauses under the direct benefits theory of estoppel.” 22 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 68-9 (2010). First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943, 944 (1995) (quoting, AT&T Technologies, Inc. v. Communications Workers , 475 U.S. 643, 649 (1986)). Id. at 944. Contec Corp. v. Remote Solution, Co., Ltd. , 398 F.3d 205, 208 (2d Cir. 2005) (citing, First Options of Chicago , 514 U.S. at 944-45). Henry Schein, Inc. v. Archer and White Sales, Inc. , ___ U.S. ___, 139 S.Ct. 524, 531 (2019) (internal quotation marks and citation omitted). Contec , 398 F.3.d at 208. Id. E.g. , Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 496 (1st Dept. 2009) (internal quotation marks and citation omitted), aff’d , 14 N.Y.3d 850 (2010), r’arg. denied , 15 N.Y.3d 769 (2010), cert. denied , 562 U.S. 962 (2010). Touloumis v. Chalem , 156 A.D.2d 230, 232 (1st Dept. 1989) (One who enters into a plain and unambiguous contract cannot avoid the obligation by merely stating that he erred in understanding its terms...”). Doctor’s Assocs., Inc. v. Alemayehu , 934 F.3.d 245, 250-52 (2d Cir. 2019) (internal quotation marks and citation omitted). Contec , 398 F.3d at 209. Citing, Dormitory Auth. of the State of N.Y. v. Samson Constr. Co. , 30 N.Y.3d 704, 710 (2018).  Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013) (internal quotation marks and citations omitted); MAG Portfolio Consultant, GmbH v. Merlin Biomed Grp. LLC , 268 F.3d 58, 61 (2d Cir. 2001).  Slip Op. at *1. Id. (citing, Doctor’s Assocs. , 934 F3d at 251-52). Id. Id. (citing, Rent-A-Center , 561 U.S. at 70-72). Id. (citation omitted). Id. (citing, Matter of WN Partner, LLC v. Baltimore Orioles L.P. , 179 A.D.3d 14, 17 (1st Dept. 2019)). Id. at *2. Id. Id. (citing, Belzberg , 21 N.Y.3d at 631).

By: Jeffrey M. Haber Today, we examine 79 Madison LLC v. Ebrahimzadeh , 2022 N.Y. Slip Op. 02052 (1st Dept. Mar. 24, 2022) ( here ), a judgment enforcement action under Article 52 of the CPLR that contains some interesting issues that this Blog has not addressed in quite some time, if at all.  The first issue we examine is the forum selection clause.  A forum selection clause is a contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g. , lease agreements (as in 79 Madison ), employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries. In short, forum selection clauses “provide certainty and predictability in the resolution of disputes.” 1 Forum selection clauses come in two forms: mandatory and permissive. In the former, the parties are “required to bring any dispute to the designated forum,” while the latter “only confers jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if jurisdiction there is otherwise appropriate.” 2 The use of the word “shall” in a forum selection clause has been interpreted as making the clause mandatory. 3 Under New York law, “parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract.” 4   Such clauses “are prima facie valid” and “are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” 5 In interpreting forum selection clauses, courts apply the principles of contract construction. The second issue we examine is the internal affairs doctrine. The internal affairs doctrine is a “conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands”. 6   Stated differently, “ nder the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation.” 7 However, the “internal affairs doctrine, although potent, has very specific applications.” 8 In particular, the doctrine only “governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders.” 9 The doctrine “does not apply to those defendants who are not current officers, directors, and shareholders” of the corporation. 10 In New York, the Limited Liability Law contains a provision that mirrors the foregoing principles with respect to foreign LLCs. In that regard, LLC Law § 801(a) provides, “the laws of the jurisdiction under which a foreign limited liability company is formed govern its organization and internal affairs and the liability of its members and managers.” The third issue we examine is the anti-suit injunction. Courts in New York have long recognized the propriety and importance of issuing anti-suit injunctions where a parallel action in a foreign court is being prosecuted in contravention of a New York forum selection clause and where such parallel action undermines the integrity of the court’s judgments. 11 In the First Department, “the use of injunctive relief to enforce a forum selection clause has been upheld as a proper exercise of discretion.” 12 In Indosuez , the First Department held that the issuance of an anti-suit injunction was proper “ n the face of the mandatory choice of law and forum selection clauses.” 13 The Court explained that “comity was not implicated because there was no possibility of treading on the legitimate prerogatives of the foreign jurisdictions to which defendant had repeatedly turned,” and that the “injunction was consonant with our policy of enforcing choice of law and forum election clauses.” 14 Moreover, the Court held that where “once there a New York judgment on the merits, the courts of this State entitled to protect it” by issuing an anti-suit injunction to prohibit “defendant’s harassing and bad faith foreign litigation.” 15 79 Madison LLC v. Ebrahimzadeh 79 Madison was commenced by plaintiff to recover a money judgment against defendant pursuant to his personal guaranty of the obligations under a lease agreement for space located in New York City. 16 The lease was assigned to, and assumed by, the judgment debtor’s company pursuant to an assignment and assumption of lease agreement.  The lease contained a broad, mandatory forum selection clause designating New York County as the place of litigation. The guaranty did not; but the parties signed it, contemporaneously with the lease. 17> 17>  Defendant defaulted on the lease and guaranty obligations. Soon thereafter, plaintiff commenced default proceedings, which culminated with the entry of judgment against defendant.  During judgment enforcement proceedings, plaintiff learned that defendant had entered into a contract to purchase real property in Bridgehampton, New York. Plaintiff also learned that defendant commenced an action in Suffolk County, Supreme Court, seeking specific performance of the contract that defendant claimed had been breached. In the complaint, defendant alleged that he had sufficient funds to close on the purchase without a mortgage, which he claimed was supported by a letter from City National Bank (“CNB”). In the letter, CNB advised that defendant was the sole owner of Corniche Capital LLC (“Corniche”), which had an account at the bank containing almost $5 million. Upon learning this information, plaintiff issued subpoenas with restraining notices seeking information relating to the Suffolk County action and the sale of the premises. In response to the subpoenas, plaintiff learned that the premises had been purchased by Brick House NY, LLC (“BHNY”). Plaintiff issued additional subpoenas with restraining notices to the parties involved in the BHNY transaction.  In response to the additional subpoenas, defendant filed an action in Supreme Court, Kings County, seeking temporary restraints as to compliance with the subsequent subpoenas and relief under CPLR § 5240. The court granted the temporary restraints.  Thereafter, plaintiff filed an order to show cause in Supreme Court, New York County seeking (a) a temporary restraining order and injunctive relief prohibiting defendant from filing or maintaining actions in other jurisdictions wherein he could seek to collaterally attack the judgment or prevent plaintiff’s enforcement of the judgment, as well as (b) the turnover of defendant’s membership interests in Corniche pursuant to CPLR § 5225(a). The court granted the request for the temporary restraints and prohibited defendant from filing any actions outside New York County or taking any steps in existing actions “collaterally attacking, or attempting to limit, modify, or prevent the enforcement of, judgment against him”.  Later, Supreme Court granted the motion in its entirety ( i.e. , it ordered the turnover of defendant’s interest in Corniche and issued an anti-suit injunction). In doing so, the court rejected defendant’s argument that the anti-suit injunction was an effort to change venue, finding that defendant was attempting to frustrate plaintiff’s efforts to litigate enforcement of the judgment in New York County, and rejected defendant’s contention that Corniche was a Wyoming entity, whose law applied instead of the law of New York as required under the forum selection clause.  The Appellate Division, First Department affirmed. The Court held that plaintiff “met its burden of proving that defendant was ‘in possession or custody of’ … a membership interest in Corniche.” 18 The Court explained that plaintiff did so by “submit a letter from City National Bank saying that defendant was Corniche’s sole owner” and the complaint in the Suffolk County action, to which a copy of the bank letter was attached as an exhibit. 19 20 shares of stock and membership interests are property that is subject to, and is not exempt from, execution. 21 > 20 shares of stock and membership interests are property that is subject to, and is not exempt from, execution. 21 >  The Court also held that Supreme Court properly rejected defendant’s argument that the court should have issued a charging order under the internal affairs doctrine. 22 Defendant argued that under Wyoming law, membership interests cannot be turned over to a judgment creditor. Instead, the sole remedy for a judgment creditor is a charging order that requires the LLC “to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.” 23 In rejecting defendant’s argument, the Court explained that the internal affairs doctrine, on which defendant’s argument was based, only applied to “relationships between a company and its directors and shareholders.” 24 It “does not apply where the rights of third parties external to the corporation are at issue.” 25 The Court noted that even under New York law, a charging order was not plaintiff’s sole remedy. 26 The Court explained that under Department authority, a court could compel a judgment debtor to turnover its interest in an LLC. 27 Moreover, said the Court, under CPLR §5201(b), “ money judgment may be enforced against any property which could be assigned or transferred … unless it is exempt from application to the satisfaction of the judgment.” 28 “An interest in an LLC,” observed the Court, “‘is clearly assignable and transferable’ … and … is not exempt under CPLR 5205.” 29 Finally, noted the Court, “ o the extent Limited Liability Company Law § 607(a) permits a judgment creditor to obtain a charging lien against a member’s interest, it does not say that this is the creditor’s exclusive remedy, nor does it purport to abolish or limit CPLR 5225(a).” 30 The Court further held that defendant was “bound by the forum selection clause in the lease that he guaranteed.” 31 The Court noted that “ egardless of whether the forum selection clause broad enough to include post judgment enforcement proceedings, Supreme Court properly exercised its discretion in enjoining defendant from prosecuting the special proceeding that he brought in Kings County against plaintiff.” 32 Since the judgment that plaintiff is trying to enforce was issued by Supreme Court, New York County, plaintiff properly issued subpoenas with restraining notices out of that court …. Anyone who wanted to vacate the restraining notices should have made a motion in that same court …. Thus, it was improper for defendant to commence a special proceeding in Kings County to quash the subpoenas. However, the Court held that the injunction was “too broad”. 34 Therefore, the Court limited the anti-suit injunction to the Kings County proceeding. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. References Boss v. American Express Fin. Advisors, Inc. , 6 N.Y.3d 242, 247 (2006) (quoting, Brooke Grp. Ltd. v. JCH Syndicate , 87 N.Y.2d 530, 534 (1996)). Phillips v. Audio Active Ltd. , 494 F.3d 378, 383, 386 (2d Cir. 2007). ASM Communications v. Allen , 656 F. Supp. 838 (S.D.N.Y. 1987). Brooke Grp. , 87 N.Y.2d at 534. Sterling Nat. Bank as Assignee of Norvergence, Inc. v. Eastern Shipping Worldwide, Inc. , 35 A.D.3d 222 (1st Dept. 2006) (citations and quotations omitted). New Greenwich Litig. Trustee, LLC v. Citco Fund Servs. B.V. , 145 A.D.3d 16, 22 (1st Dept. 2016), lv. denied , 29 N.Y.3d 917 (2017) (quoting, Edgar v. MITE Corp. , 457 U.S. 624, 645 (1982)); see also Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC , 118 A.D.3d 422 (1st Dept. 2014). Davis v. Scottish Re Group Ltd. , 138 A.D.3d 230, 233 (1st Dept. 2016). Matter of Am. Intl. Group, Inc. , 965 A.2d 763, 817 (Del. Ch. 2009) (cited with approval, New Greenwich , 145 A.D.3d at 23).  Id. at 817 (internal quotation marks omitted). Culligan , 118 A.D.3d at 422. See , e.g. , Indosuez Int’l Fin., B.V. v. Nat’l Reserve Bank , 304 A.D.2d 429 (1st Dept. 2003). Babcock & Wilcox Co. v. Control Components, Inc. , 161 Misc. 2d 636, 645 (Sup. Ct., NY County 1993) (citations omitted). 304 A.D.2d at 430 (citations omitted). Id. Id. at 430-31; see also Sebastian Holdings, Inc. v. Deutsche Bank AG , 78 AD3d 446, 453 (1st Dept 2010) (citation omitted). The facts of 79 Madison were obtained from the electronically filed briefs and record on appeal and the First Department’s decision. Brax Capital Grp., LLC v. Win Win Gaming, Inc. , 83 A.D.3d 591 (1st Dept. 2011). Slip Op. at *1. Id. Cardew v. Gialanella , 92 A.D.3d 1002 (3d Dept 2012) (citations omitted). CPLR §§ 5201, 5205; ABKCO Indus. v. Apple Films , 39 N.Y.2d 670, 674 (1976). Slip Op. at *1. Wyoming Limited Liability Company Act § 17-29-503. Plaintiff maintained that Corniche is a Delaware LLC. Slip Op. at *1. Delaware law provides the same as Wyoming law. 6 Del. C. § 18-703(d). Slip Op. at *1. Id. (citation omitted). Id. Id. (citing, Matter of Gliklad v Chernoi , 129 A.D.3d 604 (1st Dept. 2015), lv. denied , 26 N.Y.3d 918 (2016)). Id. Id. (citing, Hotel 71 Mezz Lender LLC v. Falor , 14 N.Y.3d 303, 314 (2010). Id. at *1-*2. Id. at *2. Id. (citations omitted). Id. (citations omitted). Id.

By: Jeffrey M. Haber Family business disputes tend to be ugly, destructive, and protracted. For a case in point, we examine Max v. ALP, Inc. , 2022 N.Y. Slip Op. 01969 (1st Dept. Mar 22, 2022) ( here ), a heated and contentious dispute among members of the Max family regarding control of ALP, Inc., a corporation formed by the iconic artist Peter Max to, among other things, market, license and commercialize his artwork. ALP was formed in 2000. Adam and Libra, Peter’s children, each own a 40% interest in ALP with the remaining 20% belonging to Peter. In 2012, Peter ceded his positions with, and ownership interest in, ALP to Adam.  Thereafter, according to plaintiffs, Adam and other individuals brought in by Adam began looting company assets by, among other things, generating artworks using “ghost artists” that would be signed by Peter as if they were original works, selling Peter’s artwork at fire sale prices, and collecting enormous and unwarranted fees and other payments from ALP. In 2018, Libra replaced Adam as the chair of ALP.  Plaintiffs alleged that prior to Adam assuming control of the company, ALP was in significant debt. Adam claimed that by the end of 2012, ALP had recorded a net loss of over $4,000,000. Upon assuming management and control of ALP’s daily affairs, Adam claimed that by 2014 he remedied ALP’s financial issues and returned ALP to profitability. According to Adam, Libra had never done any work for or shown any interest in ALP during those years, despite receiving a yearly salary of approximately $700,000. Notwithstanding, in 2017, purportedly due to personal conflicts between Libra, Adam and members of the Max family, Libra sought control of ALP. Adam maintained that Libra colluded with Lawrence Flynn, who had been appointed as the property guardian for Peter in December 2016, to gain a majority vote within the company and remove Adam as president of ALP. In December 2018, a special meeting of ALP’s shareholders was held during which a new board of directors was elected. The new board consisted of Libra, Adam, and Michael Anderson, who Adam claimed was an acquaintance of Libra’s and unfamiliar with ALP or ALP’s business.  On January 11, 2019, ALP’s board of directors held another meeting, wherein it resolved that Libra would be named as CEO and president, effective immediately. Adam alleged that after being elected, Libra and Anderson diminished Adam’s role in the company and terminated employees that Adam had hired. He also claimed they spent significant sums of money on legal fees to undo Adam’s prior sales of Peter’s artwork and to recover amounts Adam paid to previous ALP employees. Adam further alleged that Libra and Anderson abandoned the profitable business model Adam put in place. Adam averred that Libra and Anderson were so unskilled in conducting ALP’s business and the sale of art that they were leading ALP to financial ruin. Finally, Adam alleged that Libra improperly provided a reporter from the New York Times with false information relating to a purported scheme by Adam to use ghost artists to generate artwork that would then be signed by the ailing Peter and sold as if they were his own, damaging ALP’s business reputation. Adam brought the action both derivatively, on behalf of ALP, and directly, on behalf of himself. The amended complaint asserted claims sounding in/seeking: (1) breach of fiduciary duty, (2) appointment of a receiver pursuant to CPLR § 6401(a) and BCL § 1202(3), (3) declaratory judgment voiding the December 2018 special meeting pursuant to BCL § 619, (4) attorneys’ fees pursuant to BCL § 626, (5) removal of Libra and Anderson as directors and officers pursuant to BCL § 706(d) and BCL § 716(c), (6) an accounting, and (7) breach of the duties of diligence, care, and skill. Defendants moved to dismiss. The motion court granted the motion. Defendants argued that ALP’s certificate of incorporation barred plaintiffs from bringing the action derivatively. The motion court agreed. Under BCL § 720(a)(1), a shareholder’s right to bring a derivative action against directors for breach of duty is “ ubject to any provision of the certificate of incorporation authorized pursuant to paragraph (b) of section 402.” Section 402(b) of the BCL expressly permits shareholders to adopt provisions precluding director and shareholder liability under most circumstances.  The motion court found that ALP’s certificate of incorporation tracked the language of BCL § 402(b). Therefore, plaintiffs were barred from bringing their claims against defendants derivatively. The motion court rejected defendants’ argument that BCL § 402(b) did not apply because Libra and/or Anderson acted in bad faith or intentionally. The court explained that although plaintiffs averred that “Libra and Anderson have taken such action in bad faith and intentionally with full knowledge that their action constituted misconduct in knowing violation of the law and for the improper purpose of personally gaining financial profits and advantages to which they are not entitled,” plaintiffs pleaded no facts that would permit such inferences to be drawn. The court reasoned that Libra and Anderson’s decisions to distance ALP from Adam’s prior course of business, even if such decisions made ALP less profitable, did not constitute bad faith or intentional misconduct.  The motion court also rejected Adam’s suggestion that taking control of ALP after Libra and Anderson received “warnings” that such a takeover “would lead to disaster” constituted bad faith or intentional misconduct. The motion court found that such an argument was without basis in law or logic. The motion court also held that dismissal of Adam’s breach of fiduciary duty claims was appropriate.  To plead a cause of action for breach of fiduciary duty, a plaintiff must allege (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct. 1 “A cause of action sounding in breach of fiduciary duty must be pleaded with particularity under CPLR 3016(b).” 2 The motion court found that plaintiffs failed to allege any action by defendants that would constitute misconduct such that a cause of action for breach of fiduciary duty would lie against them. Instead, said the motion court, the amended complaint alleged that defendants engaged in a series of decisions that deviated from ALP’s previous business model ( e.g. , the board reduced Adam’s control of the company, removed employees hired by Adam, and abandoned Adam’s previous business model of creating and selling artworks on cruise ships). Under the business judgment rule, said the motion court, judicial inquiry into the actions of corporate directors, which are taken in good faith, in the exercise of honest judgment, and the legitimate furtherance of corporate purposes, is prohibited. 3 Moreover, the motion court held that plaintiffs merely alleged that Adam and his associates were displeased with the direction in which Libra and Anderson had taken ALP. Such allegations – that a course of action other than that pursued by a board of directors would have been more advantageous – said the motion court are insufficient to support a cause of action for breach of fiduciary duty. 4 To be actionable, noted the motion court, the complaint must allege that the corporate decisions of the board of directors lacked a legitimate business purpose or were tainted by a conflict of interest, bad faith, or fraud. 5 The motion dismissed plaintiffs’ remaining causes of action seeking attorneys’ fees pursuant to BCL § 626(e), removal of ALP’s directors and officers pursuant to BCL § 706(d) and BCL § 716(c), and an accounting because plaintiffs failed to allege an underlying cause of action for breach of fiduciary duty. 6 finally, a cause of action for an accounting requires a plaintiff to sufficiently allege a breach of fiduciary duty. 7 > 6 finally, a cause of action for an accounting requires a plaintiff to sufficiently allege a breach of fiduciary duty. 7 >  On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly dismissed plaintiffs’ causes of action alleging breach of fiduciary duty and negligence.” 8 First, the Court found that the business judgment rule barred the claims. 9 Second, the Court found that plaintiffs merely disagreed with the decisions of ALP’s Board of Directors. 10 The Court also held that plaintiffs’ claims against defendants in their capacity as directors of ALP were barred by the exculpation clause in ALP’s certificate of incorporation. 11 Like the motion court, the Court rejected plaintiffs’ attempts to plead around the exculpatory language. 12 Further, the Court held that plaintiffs’ collateral claims for an accounting, attorneys’ fees, and for the removal of defendants as directors and officers failed because the underlying claims ( i.e. , breach of fiduciary duty) were not viable. 13 Takeaway The exculpatory clause in a company’s certificate of incorporation can be a powerful tool for directors and shareholders to insulate themselves from liability for actions that do not rise to the level of bad faith, a knowing violation of the law, or intentional misconduct. In Max , defendants were found to be exempt from liability under the exculpatory clause set forth in ALP’s certificate of incorporation. As discussed, plaintiffs did not sufficiently allege that defendants engaged in such improper actions or omissions. The business judgment rule is also a powerful tool that can insulate directors from liability for the decisions they make. “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 14 The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.” 15 To avoid application of the rule, the complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” 16 In Max , plaintiffs were unable to overcome application of the rule – that is, plaintiffs failed to allege that defendants’ actions lacked a legitimate business purpose and/or were tainted by a conflict of interest, bad faith or fraud.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes See Burry v. Madison Park Owner LLC , 84 A.D.3d 699 (1st Dept. 2011); Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776 (2d Dept. 2010). Swartz v. Swartz , 145 A.D.3d 818, 823 (2d Dept. 2016). See Auerbach v. Bennett , 47 N.Y.2d 619 (1979); Barr v. Wackman , 36 N.Y.2d 371 (1975). See Amfesco Indus., Inc. v. Greenblatt , 172 A.D.2d 261 (1st Dept. 1991); Kamin v. Am. Exp. Co. , 86 Misc. 2d 809 (Sup. Ct., N.Y. County 1976), aff’d sub nom. , 54 A.D.2d 654 (1st Dept. 1976). Amfesco Indus. , supra . See Benedict v. Whitman Breed Abbott & Morgan , 110 A.D.3d 935 (2d Dept. 2013). See Palazzo v. Palazzo , 121 A.D.2d 261 (1st Dept. 1986). Slip Op. at *1. Id. Id. (quoting, Amfesco Indus. , 172 A.D.2d at 264).  Id. Id. at *1-*2 (citations omitted). Id. at *2. 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted). Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008) (citation omitted). Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016).

By: Jeffrey M. Haber “A boiler room is a place or operation—usually a call center—where high-pressure salespeople call lists of potential investors (‘sucker lists’) to peddle speculative, sometimes fraudulent, securities. Sucker lists identify victims of previous scams.” 1 The term “boiler room” originates from the practice of running high-pressure sales operations in the basement or boiler room of a building. 2 A broker using boiler-room tactics provides only upbeat, positive information about the issuer and discourages the potential investor from performing any research on their own. 3 As noted by the Securities and Exchange Commission (“SEC”), boiler room operators typically use aggressive sales tactics or threats to coerce the potential investor to buy the security being offered ( e.g. , threatening to file a lien against the potential investor’s property), require the potential investor to buy the security while on the call, and/or promise high returns with little or no risk. 4 As noted, a boiler room operation may peddle fraudulent securities on unsuspecting investors. One type of fraudulent scheme involves “penny” stocks. Penny stocks are securities that trade for less than $5 per share. Most penny stocks are too small for trading on the national securities exchanges and, therefore, are only quoted on “over-the-counter” (“OTC”) systems ( e.g. , by alternative trading systems, such as Delaware Board of Trade ATS, Global OTC ATS (part of NYSE Group, Inc.), and OTC Link ATS (operated by OTC Markets)), among other venues. 5 It is, therefore, often easier for fraudsters to manipulate the price of a penny stock because it is less liquid than the stock of larger companies that trade on a national securities exchange.  In a typical penny stock scam, a fraudster will accumulate a small-cap stock at a low price, and then use boiler-room tactics to find buyers for the security at an inflated price. In such a scam, victims may think that they are buying on the open market when they are effectively buying their shares directly from the operators. here.=">here."> Today, we examine SEC v. Biller, et al. , an enforcement action brought by the SEC against alleged foreign boiler room operators who perpetuated a fraud on retail investors to convince them to buy the stocks of small companies trading in the U.S. markets. According to the SEC’s complaint ( here ), defendants operated a call center in Medellin, Colombia through which they used high pressure sales tactics to fraudulently sell the stocks of numerous small United States-based public companies to United States investors. Defendants’ sales tactics allegedly included, among other things, making false or misleading statements about their roles in promoting the stock they were touting, and the companies whose stock they were promoting.  According to the SEC, defendants were hired by groups of people who controlled the stock of the issuers whose stock they were touting. These groups of people, also known as control groups, allegedly owned a significant percentage of the issuers’ stock that had been deposited with a broker-dealer and was available to be traded in the public markets ( i.e. , the float). The SEC claimed that defendants catered to control groups that controlled the float of the issuers, so that both defendants and their clients would profit to the greatest extent from the boiler room’s efforts. The SEC alleged that the control groups unlawfully concealed their control of the float, by breaking up their stock into small blocks owned by foreign nominee companies they directed and failing to file disclosures that would have revealed that all of those smaller blocks were under their common control. The SEC maintained that the control groups wanted to sell the stock they owned to make a significant profit. The control groups allegedly used defendants’ boiler room both to create demand from investors so they would have buyers for their shares, and to increase the price of the stock, thereby increasing their profits. From at least January 2016 through at least July 2018, defendants allegedly promoted the stock of at least 18 issuers, in coordination with control groups who were dumping their shares of those issuers. As a result of defendants’ efforts, alleged the SEC, the control groups were able to sell millions of shares of stock, which generated over $58 million in trading proceeds for the control groups. According to the SEC, the stock of many of these issuers was thinly traded in the market when it was not being touted in one of defendants’ promotional campaigns, so investors who purchased these shares at defendants’ urging often had difficulty finding buyers when trying to sell their shares once defendants’ promotions were over. The stocks that defendants allegedly promoted included, among others, Oroplata Resources, Inc. (“Oroplata”), Garmatex Holdings Ltd. (“Garmatex”) and PureSnax International, Inc. (“PureSnax”). To promote these stocks, said the SEC, defendants pretended to be affiliated with various non-existent financial advisory firms. Defendants purportedly made up legitimate-sounding names for these phony financial advisory firms and created legitimate-looking websites for them. According to the SEC complaint, when making telephone calls, defendants routinely used spoofed phone numbers to show area codes that made it appear as if they were calling from the United States rather than Colombia. When calling and emailing unsuspecting investors, said the SEC, defendants used false names, made false or misleading statements about the prospects of the companies whose stock they were touting, and failed to disclose that they were acting in coordination with control groups that were dumping their securities into the market. The SEC claimed that defendants aggressively touted Oroplata, Garmatex, PureSnax, and other issuers’ stock to prospective investors, including elderly retail investors who invested their retirement savings, using high-pressure sales tactics during telephone calls. Defendants allegedly made misleading statements about the issuers’ prospects as investments and about defendants’ own claimed stock-picking successes. In actuality, explained the SEC, defendants called investors to persuade them to purchase these stocks so defendants’ control group clients could sell their holdings of these stocks for a profit and so defendants could collect a share (often more than half) of the sales proceeds. Defendants also allegedly sent email and text messages that attempted to convince the investors to hold the stocks even when their prices were declining. Then, after selling several issuers’ stocks, said the SEC, defendants routinely shut down whatever financial advisory firm name they had been using, and started over with new names, phone numbers, and websites, touting a new group of issuers’ stocks to a different group of investors. Commenting on the complaint, Paul Levenson, Director of the SEC’s Boston Regional Office, said: “These scam artists went to great lengths – using bogus companies, aliases, and spoofing their phone numbers – to defraud and mislead investors into a pump-and-dump scheme.” Director Levenson “urge investors to read the investor education materials about fraud in the ‘penny stock’ market, which are available at Investor.gov.” The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, charges all defendants with violations of antifraud provisions of the securities laws and charges one of the defendants with violating market manipulation provisions of the securities laws. The SEC seeks injunctive relief, disgorgement plus prejudgment interest, civil penalties, and a prohibition on participating in any offerings of penny stocks by all defendants. The press release announcing the filing of the complaint can be found here . The complaint filed in SEC v. Biller , Case No. 1:22-cv-01406 (E.D.N.Y. Mar. 14, 2022), can be found here . Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Chen, James, Boiler Room , Investopedia (July 15, 2021) ( here ). Id. Id. See SEC, Boiler Room Schemes, Investor.gov . Id.

By Jonathan H. Freiberger It is common for contracts to require that one party procure, for its own protection and for the protection of the other party, specific types of insurance coverage and the dollar amounts of such coverage.  Insurance procurement provisions are typically found in, among others, construction contracts and real property leases.  Such insurance procurement provisions are material parts of the contracts in which they appear. On March 15, 2022, the Appellate Division, First Department, in Benedetto v. Hyatt Corp. , granted summary judgment to the defendant/third-party plaintiff on its claim for failure to procure contractually required insurance.  The facts of Benedetto , which were obtained from the electronically filed record on appeal and the First Department’s decision, are as follows.  Third-party defendant, Securitas, entered into an agreement with Hyatt pursuant to which Securitas was to, inter alia: provide security services at one of Hyatt’s properties in Manhattan; train and supervise its employees; and, obtain a comprehensive general liability insurance policy naming Hyatt as an additional insured in the minimum amount of $3,000,00.00 per occurrence.  Plaintiff, who was employed by Securitas as a fire safety director and security guard, was injured after a fire broke out in the laundry room.  Plaintiff commenced a personal injury action against Hyatt, which, in turn, brought a third-party action against Securitas for indemnification, contribution and breach of its insurance procurement obligations.  Securitas submitted evidence that it procured a general liability insurance policy in the amount of $2,000,000.00 and an umbrella policy in the amount of $1,000,000.00. Hyatt moved for summary judgment on plaintiff’s claims as well as on its third-party claims against Securitas. Supreme court denied Hyatt summary judgment dismissing plaintiff's complaint and as against Securitas on the indemnification and contribution claims.  However, supreme court granted Hyatt’s motion as against Securitas on the claim for failure to procure the requisite insurance.  The First Department unanimously affirmed supreme court’s decision. The First Department noted that a “party moving for summary judgment on its claim for failure to procure insurance meets its prima facie burden by establishing that a contract provision requiring the procurement of insurance was not complied with.”  (Citation omitted.)  Once movant meets its burden, the “burden then shifts to the opposing party, who may raise an issue of fact by tendering the procured insurance policy in opposition to the motion.”  (Citation omitted.)   The Court, in explaining why Securitas failed to meet its burden in opposing Hyatt’s motion, stated: Securitas failed to raise an issue of fact precluding summary judgment in Hyatt's favor on their third-party claim for failure to procure insurance. The parties' agreement required Securitas to procure $3 million worth of commercial general liability insurance coverage , but both the certificate of liability insurance and the policy declarations that Securitas submitted in support of its cross motion and in opposition to Hyatt's motion only indicate $2 million worth of commercial general liability insurance coverage. While the certificate of liability insurance also indicates that Securitas procured an additional $1 million in umbrella liability coverage per occurrence - for a total of $3 million of coverage - this does not raise an issue of fact as to whether Securitas procured the $3 million of commercial general liability insurance coverage it was required to procure by the parties' agreement. (Citation omitted.) Another argument made by Securitas, and rejected by the Court, was that Hyatt waived its rights under the insurance procurement provision by accepting, without objecting to, the annual insurance certificates sent by Securitas to Hyatt.  The Court noted that a “waiver, by definition, is the intentional relinquishment of a known right, it must be clear, unequivocal and deliberate.”  (Citation omitted.)  The Court concluded that the annual acceptance of the certificates of insurance “constituted mere silence or, at most, mistake, negligence, or thoughtlessness, but never amounted to any intentional act to relinquish a known right." 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 Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. 1 The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”, 2 “even though the injured party may be ignorant of the existence of the wrong or injury.” 3 Determining when accrual occurs is not easy and often contested. So too is the determination of when the plaintiff discovered or could have discovered the fraud.  In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” 4 “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. 5 “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” 6 Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that s/he has been defrauded, a duty of inquiry arises, and if s/he fails to undertake that inquiry when it would have developed the truth and shuts his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her. 7 The test as to when fraud should with reasonable diligence have been discovered is an objective one. 8 Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. 9 “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” 10 here=">here" >here.=">here."> In Mizrahi v. YMZ Realty LLC , 2022 N.Y. Slip Op. 01741 (1st Dept. Mar. 15, 2022) ( here ), the Appellate Division, First Department, dismissed plaintiff’s fraud claims as time-barred because plaintiff was on inquiry notice of said claims. Mizrahi involved the sale of property by two brothers. The brothers held an interest in Cornelia Commercial Holding Corp. (“CCHC”). Pursuant to their agreement, plaintiff would be CCHC’s sole shareholder of record, while defendant would have a 40% beneficial ownership interest in CCHC, such that in the event that CCHC was sold, the net proceeds would be divided 60% to plaintiff and 40% to defendant. Plaintiff alleged that in 2013, defendant approached plaintiff with a potential purchaser for the commercial unit owned by CCHC. The purchase price for the unit was $13 million. To effectuate the sale, and at the instruction of defendant, the parties entered into a stock purchase agreement in February 2013, whereby plaintiff transferred his 100% stock ownership interest in CCHC to defendant’s newly formed entity, defendant YMZ Realty (“YMZ”), in exchange for $6 million, 60% of plaintiff’s equity share based on the anticipated $13 million sale proceeds. CCHC’s stock was sold in April 2013 for $16.5 million. The sale was recorded on New York City’s online “Automated City Register Information System” (“ACRIS”). Plaintiff alleged that he did not know that the ultimate sale was for $3.5 million more than was contemplated by the parties’ stock purchase agreement. Plaintiff maintained that defendant defrauded him and concealed the fraud until May 2019, when plaintiff’s accountant received a notice from the New York State Department of Taxation and Finance, Income/Franchise Tax Field Audit Bureau, concerning a 2013 audit. Plaintiff commenced the action seeking damages for, inter alia , fraud. The motion court dismissed the action on the ground that it was barred by the statute of limitations. The court held that the “sale price was always a matter of public record on ACRIS.” The court noted that plaintiff “could have, in minutes from the comfort of his home, verified the sale price on the ACRIS website.” However, explained the court, plaintiff “took no measures whatsoever to verify the sale price within six years.” “The most minimal efforts would have revealed the alleged fraud,” concluded the motion court.  The motion court also noted that plaintiff failed to take any action to protect himself or ascertain the truthfulness of the represented sales price. The court explained that plaintiff never asked to see the contract of sale or the closing statement to verify the final price. “Had his brother refused to share that information,” observed the court, “surely plaintiff would have had reason to know something was amiss.” “Because plaintiff, with reasonable diligence, could have easily discovered any fraud,” the motion court dismissed his fraud claim as time barred. On appeal, the First Department agreed. The Court held that the ACRIS report showed that the property was sold on April 10, 2013, for $16.5 million, not $13 million, as represented in the stock purchase agreement. As a result, said the Court, “publicly available information was sufficient to put him on inquiry notice of possible fraud.” 11 The Court explained that plaintiff “fail to assert, and plaintiff not dispute, that the alleged fraud could have been discovered with due diligence, such that the two-year discovery rule tolling causes of action for fraud would not apply.” 12 The Court also held that the motion court correctly dismissed the remaining claims in the complaint. “Absent a fraud toll, plaintiff’s remaining claims for aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and unjust enrichment — are also time-barred,” said the Court. 13 Takeaway Mizrahi highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of a fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. This is especially true when, as in Mizrahi , the facts are publicly available, and some degree of diligence would reveal the truth. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he/she was defrauded, or when the defendant conceals those facts from the victim of fraud, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights.  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.  Footnotes CPLR § 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011). Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted). Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). Id. Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).   Id. (citation and internal quotation marks omitted). See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012).  Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). Slip Op. at *1. Id. (citation omitted). Id. (citations omitted).

By: Jeffrey M. Haber A recurring theme in fraud jurisprudence is the dismissal of fraud claims that duplicate breach of contract claims. As we have noted, a fraud claim will not survive a dismissal motion when there is “a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 There are exceptions to this rule, such as where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement”. 2 The exceptions, however, often prove difficult to demonstrate.  here,=">here," >here=">here" and="and" >here.=">here."> In Tecchia v. Bellati , 2022 N.Y. Slip Op. 01524 (1st Dept. Mar. 10, 2022) ( here ), the Appellate Division, First Department reversed the dismissal of a fraud claim on the grounds that it did not duplicate plaintiffs’ breach of contract claim.  Tecchia involved a contract between Plaintiffs, Sara Tecchia and 5N Wooster LLC, and Defendant Canova, Inc. d/b/a Minimal USA to supply custom kitchen furnishings and millwork for renovations to Tecchia’s apartment in SoHo, New York (the “Project”).  In 2012, Tecchia began the renovation process for the apartment. She visited the Minimal USA showroom in mid-2012, where she was shown numerous catalogs and products that she understood were manufactured by Minimal USA and not Minimal Cucine. Since 2012, Minimal USA has been the exclusive distributor for Minimal Cucine products in the United States pursuant to a Distribution Agreement. Tecchia believed that Minimal USA was an Italian company, Minimal Cucine, that provided custom-made home solutions and that it was represented in New York City by Minimal USA. Tecchia maintained that defendant, Bartolomeo Bellati, president of Minimal USA, told her he would provide “Minimal products” for the Project. Tecchia hired Minimal USA within a week of the initial meeting. Pursuant to the contract by and between Minimal USA and Tecchia, Minimal USA agreed to sell, among other things, to Tecchia “ ustom furniture and millwork made in Italy” (the “Contract”). In particular, the Contract concerned the design and manufacture of custom goods, including a custom-built kitchen, customized shower, custom built master beds and guest beds, closets, doors, vanity, and plumbing and bath appliances.  In September 2013, Tecchia hired a contractor to provide construction management services for the Project. During the Project, Tecchia claimed that items installed by Defendants were defective and needed replacement. Tecchia terminated the Contract with Minimal USA in or around February 2015. Plaintiffs commenced the action alleging that Defendants breached the Contract by failing to provide Minimal Cucine products, failing to properly install the products, and failing to complete the job in a timely manner. Plaintiff asserted claims for (1) breach of contract against Minimal USA, (2) breach of contract against Minimal USA, and (3) fraud. Defendants asserted counterclaims for (1) breach of contract, and (2) delay damages.  Defendants moved for summary judgment as to their first counterclaim for breach of contract and for dismissal of the complaint. Supreme Court granted the motion ( here ). Supreme Court held that Plaintiffs failed to show evidence of damages that flowed from the alleged breach of the Contract. In particular, the court found that there was no breach of the Contract because there was nothing in the Contract that required Defendants to provide Minimal Cucine products – that is, the Contract did not expressly identify or provide for such products to be used/installed in the Project. Moreover, there could be no breach because Defendants supplied products that were available to satisfy Tecchia’s custom requirements. Supreme Court also held that the fraud claim was duplicative of the breach of contract claim. The court explained that the agreement between the parties contained a future promise for the delivery of custom millwork pursuant to the express terms of the Contract. The claim that Tecchia paid for millwork by the wrong manufacturer, said the court, was both belied by the Contract, which is with Minimal USA and does not provide for Minimal Cucine products, and her deposition testimony where she indicated a lack of appreciation of the difference between Minimal USA and Minimal Cucine products. Accordingly, concluded the court, the fraud claim duplicated plaintiffs’ contract claim. On appeal, the First Department reversed the dismissal of the fraud claim. The Court held that “ he motion court should not have dismissed the cause of action for fraud as duplicative of the contract claims.” The Court explained that the Contract between Minimal USA and Tecchia did not require Minimal USA to provide Minimal Cucine products. In fact, noted the Court, “the contract ambiguous in that regard”. Therefore, defendants’ alleged misrepresentation that they would provide Minimal Cucine products was separate and apart from the Contract. Further, explained the Court, “in light of Tecchia’s deposition testimony, in which she stated that defendant Bartolomeo Bellati told her that Minimal USA would provide her with products made by Minimal Cucine, defendants have failed to sustain their burden of demonstrating that there are no issues of material facts with respect to fraud.”  Takeaway As we have noted, a fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. In Tecchia , plaintiff sufficiently demonstrated that the alleged misstatement was separate from the terms of the Contract, at least for purposes of defeating the motion for summary judgment. Thus, in contrast to many of the cases we have examined, Tecchia stands as an example of a pre-contract misstatement of material fact that does not duplicate the plaintiff’s breach of contract claim. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.  Footnotes Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Slip Op. at *2. Id. at *1. Id. at *2 (citing, Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986)).

By Jonathan H. Freiberger In general terms, venue is the place where the trial of an action will take place.  Venue issues in New York practice are governed by Article 5 of the CPLR . [Eds. Note: this BLOG has previously written about Article 5 of the CPLR < here =">here"> and < here =">here"> .]  As indicated in our prior articles, the plaintiff, as the party bringing the proceeding, generally gets to choose, in the first instance, venue.  Plaintiffs, however, do not always choose a proper venue (“Improper Venue Selection”).  In such instances, a defendant has an opportunity to change the Improper Venue Selection to a proper one.  See CPLR 510(1) .  Other times, although venue is proper, a defendant (or even a plaintiff) may seek a change based on considerations such as the convenience of witnesses and/or potential prejudice to a party should the action proceed in the venue chosen by the plaintiff (a “Discretionary Change”).  See CPLR 510(2) and (3) . According to CPLR 503(a) , “ xcept where otherwise prescribed by law, the place of trial shall be in the county in which one of the parties resided when it was commenced;  the county in which a substantial part of the events or omissions giving rise to the claim occurred;  or, if none of the parties then resided in the state, in any county designated by the plaintiff party resident in more than one county shall be deemed a resident of each such county.” 1 On March 9, 2022, the Appellate Division, Second Department, decided Fisch v. Davidson , which presented “the issue of whether sheltering in place in a seasonal home creates a sufficient degree of permanence to establish residency at that location” to satisfy the “residence” requirements of the venue provisions of the CPLR.  The plaintiff in Fisch was the husband and the defendant was the wife. An abridged version of the basic facts as summarized by the Court follow.  In the mid-1980s husband and wife moved to New Jersey after graduating law school.  In the late 1990s, the parties rented a “pied-a-terre” in Manhattan and then purchased an apartment on the Upper West Side in Manhattan.  After a while, the parties began spending more time in Manhattan and less time in New Jersey.  Their tax returns began to reflect their residence was New York City and the couple paid New York City income tax.  In the midst of expanding their Upper West Side apartment, the parties separated and husband began renting his own apartment in Manhattan.  The New Jersey house was sold in 2020.  In 2012, the parties purchased a house in Southampton that was primarily used on summer weekends.   During the COVID-19 pandemic, wife and the parties’ pregnant daughter “retreated” to the Southampton house due to the daughter’s immunocompromised status, but also continued to spend time in the New York City apartment. In 2020, the husband commenced a divorce proceeding in supreme court Suffolk County.  Thereafter, the wife moved, pursuant to CPLR 510 and 511 , to change venue to New York County, where she alleged both parties resided. Supreme court denied the wife’s motion to change venue to New York County finding that she was a resident of Suffolk County (CPLR 503(a) and 510(1)) and because the wife “failed to demonstrate that the convenience of the material witnesses and the ends of justice would be promoted by the change” (CPLR 510(3)).  The Second Department reversed.  In so doing, the Court noted that while the CPLR and its predecessor statutes base venue on where the parties “resided” at the commencement of the action, the term “resided” is not defined therein.  Accordingly, the Court recognized that courts have looked to the “common-law definition of ‘resided’” and analyzed numerous cases addressing that definition.  Among other cases, the Second Department looked at “the leading Court of Appeal case on the issue of the meaning of ‘resided,’” Yaniveth R. v. LTD Realty Co. , 27 N.Y.3d 186 (2016), and stated: In doing so, the Court of Appeals yaniveth> yaniveth> reviewed, among other things, venue cases interpreting CPLR 503(a) and its predecessor, and synthesized from them the following definition of "residence": residence means living in a particular locality, even if a person does not intend to make that place a fixed and permanent home, i.e., a domicile.  A person's “residence” entails something more than temporary or physical presence, with some degree of permanence and an intention to remain. Thus, although it is true that a person may have more than one residence, to consider a place as such, he or she must stay there for some length of time and have the bona fide intent to retain the place as a residence with at least some degree of permanence. (Citations, internal quotation marks, ellipses and brackets omitted.) After recognizing that the “case presents two issues relating to the parties' residence: (1) whether the parties' seasonal use of the Southampton house on weekends prior to March 2020 made them residents of Suffolk County; and (2) whether the defendant's retreat to the Southampton house at the outset of the COVID-19 pandemic made her a resident of Suffolk County, Second Department concluded that “neither of these things made the parties residents of Suffolk County.”  The Court stated: The clearly established that the parties primarily resided in New York County. The submitted, among other things, copies of: the parties' income tax returns, listing their address in New York County as their residence and reflecting their payment of New York City income taxes; the 's voter registration showing that she was registered to vote in New York County; the ’s driver license listing her address in New York County; motor vehicle records showing that the parties' cars were all registered in New York City or were in the process of having the registration transferred from New Jersey to New York City; an email from the to the parties' art insurance carrier stating that the parties did not have any intention of adding any art to the Southampton house; and bank statements listing the apartment and the 's Manhattan office as the parties' addresses. Thus, the Court found that the pre-pandemic primarily weekend use of the Southampton house was insufficient to establish residency in Suffolk County.  The Court further found that “contrary to the Supreme Court's conclusion, the time the defendant spent in the Southampton house in 2020 during the COVID-19 pandemic was not enough to make her a resident of Suffolk County.” As to the COVID-19 timeframe, the Court stated: Here, although the retreated to the Southampton house in March 2020, it is undisputed that the planned only to stay there temporarily to assist her immunocompromised daughter and newborn grandchild when the COVID-19 pandemic was at its zenith in New York City. Under the circumstances of this case, the did not have the bona fide intent to retain Suffolk County as a residence with at least some degree of permanency. (Citations, internal quotation marks, ellipses and brackets omitted.) Because the Court determined that supreme court should have granted the wife’s motion pursuant to CPLR 510 and 511, it did not reach the issue of whether a discretionary change of venue was warranted under CPLR 510(3). 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. Notwithstanding the general provision of CPLR 503(a), courts will enforce venue provisions in contracts.  See CPLR 501 ; Casale v. Sheepshead Nursing & Rehab. Center , 131 A.D.3d 436, 437 (2 nd Dep’t 2015).  Further, Article 5 of the CPLR contains venue provisions for specific types of cases.  S ee CPLR 504 , 505 , 506 , 507 , 508 and 509 .

By: Jeffrey M. Haber In April 2021, this Blog examined the doctrines of frustration of purpose and impossibility of performance in the context of Covid-19 ( here ). In particular, we examined 1877 Webster Ave. Inc. v. Tremont Ctr., LLC , 2021 N.Y. Slip Op. 21113 (Sup. Ct., Bronx County Mar. 29, 2021), a case involving a commercial lease for space that was to be used as a night club and “for no other purpose”. The plaintiff commenced the action seeking a declaration that the purpose of the lease had been frustrated by the COVID-19 pandemic and sought, among other things, rescission of the lease based upon impossibility of performance. The Supreme Court denied the motion to dismiss, holding that the plaintiff adequately pleaded frustration and impossibility of performance due to the pandemic and the Governor’s executive orders. The court found that the plaintiff sufficiently alleged that the Covid-19 pandemic and the Governor’s executive orders prevented it from exclusively operating the space as a night club as required by the lease. As such, the existence of the Covid pandemic and the executive orders “completely frustrated the purpose of the parties’ lease as both parties understood, and that without the ability to operate the nightclub, the lease and the guarantee ma e ‘little sense’”.  The Supreme Court further held that the plaintiff sufficiently alleged impossibility of performance. The plaintiff claimed that due to the pandemic and the Governor’s executive orders, it was impossible to perform under the lease. Since a nightclub was not an essential business under the Governor’s executive orders, the plaintiff claimed that it could not conduct its business as contemplated by the lease. The Court held that there were genuine issues of material fact concerning the foregoing: “The parties’ conflicting arguments regarding their abilities to anticipate or guard against the Covid pandemic that resulted in the Governor’s executive orders shutting down Plaintiff’s business also create a genuine issue of fact.”  Today, we examine Valentino U.S.A., Inc. v. 693 Fifth Owner LLC , 2022 N.Y. Slip Op. 01431 (1st Dept. Mar. 8, 2022) ( here ), a case that also involved a commercial lease and issues of performance due to the pandemic.  Valentino involved a 15-year lease that the parties executed in May 2013. The lease provided that the space would be used by the plaintiff to operate a luxury boutique for customers to, among other things, view and sample its merchandise. When the pandemic started, the plaintiff’s operations ceased as New York was shut down to address the health crises. Once the Covid-related restrictions imposed by the Governor were lifted, the plaintiff claimed that it was unable to generate the same type of in-boutique retail sales, or associated services, that it did before the onset of the pandemic. As a consequence, the plaintiff notified the defendant that it would be vacating and surrendering the premises by the end of the year. Defendant rejected the plaintiff’s surrender. Plaintiff commenced the action for declaratory and injunctive relief, seeking, inter alia , a declaration that the pandemic, together with resulting governmental orders and mandatory closures, had frustrated the purpose of the lease and/or made it impossible to perform thereunder. Defendant moved to dismiss. The Supreme Court granted the motion. On appeal, the Appellate Division, First Department affirmed. “As an initial matter,” the Court held that the “doctrine of frustration of purpose inapplicable” to the case at hand. 1 Under the doctrine, the purpose of the contract must be so completely frustrated – that is, “the basis of the contract …, as both parties understood, without it, the transaction would have made little sense.” 2 In other words, the purpose of the contract must be completely thwarted. 3 The Court concluded that the frustration of purpose doctrine was “not implicated by temporary governmental restrictions on in-person operations, the parties’ respective duties were to pay rent in exchange for occupying the leased premises.” 4 The Court explained that plaintiff was, in fact, “open for curbside retail services as of June 4, 2020 and services by appointment as of June 22, 2020,” thereby undermining its argument that the purpose of the lease had been frustrated. 5 The Court also held that the doctrine of impossibility was inapplicable to the case at hand. 6 Impossibility “excuses a party’s performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible”. 7 The “impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” 8 The Court held that while the pandemic was, and continued to be, “‘disruptive for many businesses,’” it “did not render plaintiff’s performance impossible, even if its ability to provide a luxury experience was rendered more difficult because the leased premises were not destroyed.” 9 Takeaway As we noted in our April 2021 article, businesses will be impacted by the pandemic for years to come. From a legal perspective, there are many issues to consider. Among them is the performance of a contract, such as a lease. In Valentino , the courts ruled that the pandemic did not frustrate the purpose of the parties’ lease agreement, nor did it make performance thereunder impossible. To be sure, the pandemic negatively affected Valentino’s business, but to the courts, it did not completely thwart the very reason for the lease. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Slip Op. at *1. Crown IT Servs., Inc. v. Koval-Olsen , 11 A.D.3d 263, 265 (1st Dept. 2004). See also Restatement (Second) of Contracts § 265 (1981). Slip Op. at *1 (citing Crown , 11 A.D.3d at 265). Id. Id. (citing Center for Specialty Care, Inc. v. CSC Acquisition I, LLC , 185 AD3d 34, 42 (1st Dept. 2020)). Id. Kel Kim Corp. v. Central Mkts. , 70 N.Y.2d 900, 902 (1987). See also Warner v. Kaplan , 71 A.D.3d 1 (1st Dept. 2009). Id. Id. (quoting 558 Seventh Ave. Corp. v. Times Sq. Photo Inc. , 194 A.D.3d 561, 562 (1st Dept.), appeal dismissed , 37 N.Y.3d 1040 (2021)).

By: Jeffrey M. Haber A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. As readers of this Blog know, where both claims are asserted, more times than not, the fraud claim is dismissed under the duplication of claims doctrine. Stated simply, the doctrine provides that a fraud claim cannot stand side-by-side with a breach of contract claim when there is “a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can be litigated with “a simple breach of contract” claim. 2 Today, we examine two cases issued from the Appellate Division, First Department, in which the duplication of claims doctrine served as a basis for the dismissal of the plaintiffs’ fraud claims. Land ‘N Sea Inc. v. Thread Counsel , 2022 N.Y. Slip Op. 01394 (1st Dept. Mar. 3, 2022) ( here ), and Inspirit Dev. & Constr., LLC v. GMF 157 LP , 2022 N.Y. Slip Op. 01390 (1st Dept. Mar. 3, 2022) ( here ). Land ‘N Sea Inc. v. Thread Counsel Land ‘N Sea involved a contract between Land ‘N Sea Inc. and Thread Counsel d/b/a Laws of Motion in connection with the manufacture of hospital gowns during the early stages of the COVID-19 pandemic. Defendant is a clothing supplier that contracted to supply a large volume of hospital gowns to New York State during the COVID-19 pandemic. Defendant hired plaintiff to manufacture the gowns using fabric supplied by defendant. The terms of the parties’ agreement were reflected in a series of purchase orders.  Plaintiff claimed that defendants, including Carly Bigi (“Officer”), the CEO of defendant Laws of Motion, misrepresented to plaintiff the protective level of the surgical gowns that Laws of Motion contracted to supply to New York State. Plaintiff claimed that defendant told New York State that Laws of Motion would provide the State with “Level 3 Surgical Gowns,” but that Laws of Motion had Land ‘N Sea manufacture “Class 1 non-surgical gowns” using the lower grade fabric provided by defendants. After the gowns were manufactured by plaintiff and ultimately rejected by New York State because the gowns were not of the protective level defendant had offered to the State, defendants failed to pay plaintiff’s invoices aggregating in excess of $1 million. Following discovery, plaintiff filed an amended complaint, alleging that both defendants had fraudulently induced plaintiff to enter the contract for the manufacture of the hospital gowns. Defendants moved to dismiss. The motion court held that the there was nothing in the allegations of the amended complaint that rose to the level of a claim of fraud against the Officer who, at all relevant times, was simply acting as a corporate officer of the corporate defendant. The motion court determined that plaintiff merely alleged corporate status without more as the basis for the fraudulent inducement claim against the Officer. 3 The motion court also held that no basis existed to assert the fraudulent inducement claim against the corporate defendant: “Plaintiff’s fraud claims are based on the same facts as its breach of contract cause of action and plaintiff seeks the same damages on its fraud and breach of contract claims.” 4 On appeal, the First Department affirmed. The Court held that the motion court correctly dismissed the fraudulent inducement claim against defendants. As to the cause of action against the Officer, the Court noted that corporate officers may be held liable for fraud only if they participated in it. However, said the Court, the facts alleged in the complaint did not support the claim that the Officer misrepresented or omitted material facts with the intent to induce plaintiff to enter into purchase orders for surgical gowns that the Officer knew would not meet the State of New York’s required standards.  As to the cause of action for fraudulent inducement against the corporate defendant, the Court held that plaintiff failed to allege any duty separate from the one asserted in the contract claim. Further, explained the Court, the damages that plaintiff sought in the fraudulent inducement cause of action were the same as the ones it sought in the breach of contract cause of action. Under such circumstances, the fraud claim duplicated the breach of contract claim. Inspirit Dev. & Constr., LLC v. GMF 157 LP Inspirit arose from plaintiff’s work as general contractor for the renovation of a luxury residential condominium apartment located in New York City. Defendant owned the apartment.  Plaintiff allegedly performed the work poorly and failed to meet, among other things, the agreed-upon budget and/or schedule, and failed to remedy the cited deficiencies with its work. In addition, plaintiff’s President allegedly made knowingly false written certifications to defendant, claiming that plaintiff incurred costs and made payments to subcontractors that in fact had not been made. As a result of the alleged issues with plaintiff and its President, defendant terminated its contract with plaintiff. Plaintiff filed suit claiming, among other things, breach of contract, quantum meruit, and unjust enrichment. Plaintiff also asserted claims against defendant’s representatives for negligence and tortious interference. Defendant filed counterclaims against plaintiff for breach of contract and a third-party claim against defendant’s president (“Officer”) for fraud. The parties each moved to dismiss all the claims except the parties’ competing breach of contract claims. The motion court granted the motion to dismiss plaintiff’s claims for quantum meruit, unjust enrichment, and negligence, denied the motion to dismiss plaintiff’s tortious interference claims and granted the individual defendant’s motion to dismiss the fraud claim against him. On appeal, the First Department held that the motion court correctly dismissed the negligence claim against defendant’s representatives on the grounds that the claim sought to enforce the contract between the parties. Quoting the Court of Appeals’ decision in Dormitory Authority of the State of N.Y. v. Samson Construction Co. , the Court noted that plaintiff failed to identify a legal duty independent of the contract that had been violated: “ simple breach of contract is not to be considered a tort unless a legal duty independent of the contract … has been violated … Merely charging a breach of a duty of due care … does not, without more, transform a … breach of contract into a tort claim”. 5 The Court explained that plaintiff’s alleged damages were the same as its contract damages; that is, plaintiff was “essentially seeking enforcement of bargain”. 6 This was especially true, noted the Court, since plaintiff’s “injury … was not personal injury or property damage; there was no abrupt, cataclysmic occurrence”. 7 Moreover, the Court held that defendant’s representatives did not owe a duty to plaintiff as non-signatories to the contract between the primary parties: “Polizzotto LLC — which contracted with — owes no duty to plaintiff, a nonparty to that contract, and plaintiff has not shown that any of the exceptions to that rule applies.” 8 As to the third-party fraud claim, the Court held that the motion correctly dismissed the complaint. The Court explained that the “the only fraud charged relate to an alleged breach of contract”. 9 In this regard, the Court noted that “ he invoices and certifications on which fraud claim based were clearly contemplated by the contract.” 10 For this reason, concluded the Court, the fraud claim did “not allege breach of a duty independent from the parties’ agreement[]”. 11 Takeaway A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. What constitutes “a legal duty independent of a contract” is not a question easily answered. 12 In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact . 13 The former will result in dismissal, while the latter will not. 14 The courts also look to the damages sought to ascertain if they are the same. 15 In Land ‘N Sea and Inspirit , the plaintiffs could not demonstrate any exception to the doctrine. In each case, the courts found that plaintiffs merely alleged a breach of contract claim dressed up in the garb of a fraud cause of action. 16 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Citing, Worthy v. New York City Hous. Auth. , 21 A.D.3d 284, 288 (1st Dept. 2005) (noting, to attach individual liability on a corporate officer, “something more than the mere status of corporate officer must exist”) (citing, Michaels v. Lispenard Holding Corp. , 11 A.D.2d 12, 14 (1st Dept. 1960)).  Citing, Cronos Grp. Ltd. v. XComIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017). Slip Op. at *2 (quoting, Dormitory Auth. of the State of N.Y. v. Samson Constr. Co. , 30 N.Y.3d 704, 711 (2018) (internal quotation marks and some emendations omitted). Id. (quoting, Sommer v. Federal Signal Corp. , 79 N.Y.2d 540, 552 (1992)). Id. (quoting, Sommer , 79 N.Y.2d at 552). Id. at *1-*2 (citing, Church v. Callanan Indus. , 99 N.Y.2d 104, 111 (2002)). Id. at *2 (quoting, Matter of Soames v. 2LS Consulting Eng’g D.P.C. , 187 A.D.3d 490, 491 (1st Dept. 2020)). Id. Id. at *3 (citations omitted). Cronos Grp. , 156 A.D.3d at 56 (referring to the question as a “recurring” one). Id. at 63. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). Mosaic Caribe, Ltd. v. AllSettled Group, Inc. , 117 AD3d 421, 422-423 (1st Dept. 2014) (a fraud claim was insufficient as “duplicative of the breach of contract claim” because it sought “the same damages as the breach of contract claim”). Songbird Jet Ltd., Inc. v. Amax Inc. , 581 F. Supp. 912, 924 (S.D.N.Y. 1984).

By Jonathan H. Freiberger As indicated in our previous articles regarding RPAPL 881, Real property owners or lessees (“Owners”) often find that their real property is in need of improvement and/or repair (the “Work”).  [Eds. Note:  this Blog has discussed RPAPL 881 < here =">here"> and < here =">here"> .]  Sometimes, the Work requires access to adjoining property (a “Neighbor”).  In many instances, a Neighbor graciously permits access to the Owner’s contractors so that the Work can be performed.  In such instances, the parties can informally reach an appropriate resolution should a problem arise. Sometimes, a Neighbor may voluntarily permit the Work to be performed, but only after a formal license/access agreement is negotiated and executed.  Access agreements can address many issues including, but not limited to: time and day restrictions for the Work; appropriate indemnification and hold harmless provisions; insurance requirements; requiring the Owner’s insurance policies to name the Neighbor as an additional insured; requiring prompt repair of damage to the Neighbor’s property, and the like. However, when neither informal nor formal cooperation is forthcoming from a Neighbor, an RPAPL 881 permits an Owner to obtain a license from the court.  RPAPL §881 provides: When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry. On February 15, 2022, the Appellate Division, First Department, decided Matter of Panasia Estates, Inc v. 29 W. 19 Condominium , in which the Court had the occasion to address license fees and reimbursable expenses in RPAPL 881 cases.  The facts of Panasia are typical.  Petitioner is a building owner that sought to add two stories of commercial office space.  Respondent 1 owns a neighboring building.  Respondent 2 is an individual unit owner in Respondent 1’s building, which unit has a 1,730 square foot terrace abutting petitioner’s building.  Respondent 3 is the owner of another neighboring building. Petitioner’s attempts to obtain voluntary access to the Respondents’ property were unsuccessful.  Petitioner commenced a proceeding under RPAPL 881 and, after a hearing, the court issued an order granting the license to conduct a pre-construction survey and install the overhead and roof protections, flashing, and outrigger and netting system, and to swing scaffolding and directing: petitioner, inter alia, to pay a monthly license fee of $3,000 to , increasing to $4,000 after 12 months and $7,000 after 24 months, for interference with the use of their terrace; a monthly license fee of $1,000 to the nonparty first-floor unit owner of , increasing to $1,250 after 12 months and $2,000 after 24 months, for interference with the use of his terrace; and a monthly license fee of $1,200 to , increasing to $1,600 after 12 months and $3,200 after 24 months, to be split among three residential tenants with roof access and the commercial tenant; to reimburse $10,000 for attorneys' fees and $3,500 for engineering fees and $15,278.36 for attorneys' fees and $40,500 for engineering fees; to post a bond in the amount of $1,000,000; and to provide proof that respondents have been added as additional insureds on "the relevant insurance policy." Petitioner appealed.   The First Department rejected Petitioner’s contention that license fees, attorney’s fees and engineering and design fees are not awardable under RPAPL 881 and do not come within the “upon such terms as justice requires” language of the statute.   The Court reiterated that “because the respondent to an 881 petition has not sought out the intrusion and does not derive any benefit from it equity requires that the owner compelled to grant access should not have to bear any costs resulting from the access."  (Citation, internal quotation marks, internal brackets and ellipses omitted.) The Court also reiterated that the assessment of license fees is appropriate "where the granted license will entail substantial interference with the use and enjoyment of the neighboring property during the license period, thus decreasing the value of the property during that time."  (Citations, internal quotation marks and internal brackets omitted.)  Similarly, compulsory licensors are also entitled to reimbursement of reasonable attorney’s fees and engineering fees because “a property owner compelled to grant a license should not be put in a position of either having to incur the costs of a design professional to ensure petitioner's work will not endanger his property or having to grant access without being able to conduct a meaningful review of petitioner's plans."  (Citations, internal quotation marks and internal brackets omitted.)   The Court also rejected Petitioner’s argument that awarding attorney’s fees is inconsistent with the “American rule” because “ here the respondent in an RPAPL 881 proceeding has not refused access but rather seeks reasonable terms for access, attorneys' fees, including those incurred in opposing the petition, are not an incident of litigation but rather part of the process of negotiating a license agreement.”  (Citation omitted.) In describing special considerations in RPAPL 881 cases, the Court stated: Unlike in other types of litigation, respondents in a special proceeding pursuant to RPAPL 881 are not accused of any wrongful conduct but are haled into court by a petitioner seeking access to their properties solely for its own benefit. That access can be extremely invasive: RPAPL 881 is designed to strike a balance between the petitioner's interest in improving its property and the harm to the adjoining property owner's enjoyment of its property. Notwithstanding the Courts view that, in principle, the Respondents are entitled to the fees awarded by the supreme court, the order below was modified.  Respondent 3 was not entitled to the $40,500 in “anticipated” engineering fees, but, like the other Respondents, are entitled to reimbursement of engineering fees “incurred”.  The same was the case for attorney’s fees.  As to the escalating license fees, the Court rejected same and stated that “ nsofar as the purpose of a license fee is to compensate for loss of enjoyment and diminution in value due to loss of use, the license fee escalations imposed on petitioner appear to be punitive and, therefore, unwarranted.”  The Court granted the license for 24 months and directed Petitioner to “timely commence the project and proceed diligently.”  Finally, the Court remanded the case so that supreme court can “specify the applicable insurance, including policy limits, that petitioner is required to procure in favor of respondents.” 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.