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By: Jeffrey M. Haber Arbitration is an alternative dispute resolution mechanism that enables parties to resolve disputes without going to court. Arbitration is similar to a trial without the formalities. It is an adversarial proceeding where the parties can call witnesses and present evidence to a neutral arbitrator or panel of arbitrators. The rules of discovery and evidence are relaxed to make it a shorter and more cost-efficient process. Often, the parties select the arbitrator or panel of arbitrators. Arbitration can be binding, in which the arbitrator renders a decision that can be enforced by the courts, or non-binding, in which the arbitrator renders an advisory opinion that the parties can accept or reject. In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable. 1 Like many jurisdictions, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” 2 Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. 3 In fact, judicial review of arbitration awards is severely limited in New York. 4 As this Blog previously noted, setting aside arbitral awards is difficult. Grounds For The Review Of Arbitral Awards Upon receiving a motion to confirm an arbitration award, New York courts must confirm the award unless the movant satisfies one of the statutory reasons for modification or vacatur provided by New York Civil Practice Law and Rules Section 7511. 5 The grounds for modification or vacatur under CPLR 7511 are limited.  These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR. 6 Only when the record demonstrates one of the foregoing will a New York court vacate or modify an award under the CPLR. In today’s article, we examine, among other things, partiality of the arbitrator and the arbitrator exceeding his/her authority. Partiality of the Arbitrator : CPLR § 7511(b)(1)(ii) permits vacatur or modification when the arbitrator was biased or maintained an undisclosed personal relationship to one of the parties, resulting in a prejudiced decision. 7 The mere inference of impartiality, however, is insufficient to warrant interference with the arbitrator’s award; the evidence must be stronger; it must be clear and convincing. 8 The Arbitrator Exceeded His Power or Imperfectly Executed It : Under CPLR § 7511(b)(1)(iii), a movant can vacate or modify an arbitral award when the arbitrator exceeded his or her authority under the arbitration agreement . To succeed under CPLR § 7511(b)(1)(iii), the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. 9 The same is true with regard to arbitration mandated by statute. Vacatur will be warranted where the arbitrator fails to follow the standards and requirements of the subject statute. 10 Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator. 11 In addition to exceeding one’s authority, an award will be vacated when the decision is irrational or is violative of a public policy. 12 In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law. 13 The foregoing issues were considered by the Appellate Division, First Department in Matter of Finkelstein v. Finkelstein , 2022 N.Y. Slip Op. 01268 (1st Dept. Mar. 1, 2022) ( here ). Matter of Finkelstein v. Finkelstein Finkelstein involved a dispute between siblings concerning, among other things, the ownership of a portfolio of properties (the “Properties”) that was owned by the parties’ deceased father. The matter was adjudicated before the Beth Din ( i.e. , a Jewish tribunal composed of three Rabbis responsible for matters of religious law and the settlement of civil disputes). The parties agreed that they would resolve any dispute concerning the father’s assets, in particular, the beneficial ownership and control of the Properties, by arbitration before the Beth Din. The parties further agreed that the Beth Din’s decision would be final and binding. On May 6, 2020, the Beth Din issued an award in which it resolved the dispute over ownership of the Properties. On January 6, 2021, the Beth Din clarified its decision, awarding the Properties to the trusts for the pro rata benefit of the parties ( e.g. , the children). Petitioners moved to confirm the award and respondents moved to vacate it. In seeking vacatur, Respondents argued, among other things: the Beth Din’s determination was invalid because it concerned the distribution of assets under testamentary instruments which the Beth Din has no authority to determine; one of the three arbitrators had an undisclosed involvement in the underlying transactions and, therefore, tainted the proceedings; the clarified award made substantive modifications to the original award and, therefore, was invalid under CPLR § 7509; and to the extent that the clarified award was based on trusts it deprived respondents of their rights under CPLR § 7506 because the trust instruments were not presented to the Beth Din. The motion court confirmed the award. First, the motion court held that the Beth Din did not exceed its authority or violate public policy. Respondents argued that under longstanding case law, the Beth Din’s award must be vacated. Respondents reasoned that the Beth Din did not have the authority to determine matters concerning the distribution of property under testamentary instruments, yet that is what it did by referring to the parents’ wills and the manner in which their property was to be distributed to the parties under those wills. Petitioners responded that the Beth Din could not have determined the distribution of the Properties under a will because the Properties were transferred inter vivos into the trusts prior to the passing of the parents and that references to the wills were merely to determine the parents’ wishes under Rabbinical law. Petitioners also claimed that the clarification made it plain that the Beth Din awarded the Properties back to the trusts for the pro rata benefit of the father’s children. The motion court noted that father’s wills were only an issue because the parties agreed to respect their parents’ wishes as reflected in their Halachic wills. This agreement, said the motion court, “present an interesting intersection of Rabbinical law and secular law”. Under Rabbinical law the distribution of assets that are not owned by an individual because they were transferred to trusts or other legal entities (pursuant to secular law) may be determined by evaluating the intent of the individual from his/her Halachic will. Moreover, the motion court noted that the Beth Din’s clarification made clear that it was awarding the Properties back to the trusts for the pro rata benefit of the parties, as reflected by the parents’ wishes in their Halachic wills. The Beth Din was not resolving the distribution of estate assets. Second, the motion court held that there was no arbitrator bias even though one of the Rabbis on the panel had previously assisted in the preparation of one of the father’s wills and that, even if there were bias, the claim was waived. The motion court found that respondents failed to submit any evidence that the Rabbi’s participation in drafting the will had any effect upon his ability to be a neutral arbitrator. Instead, said the motion court, respondents simply concluded that the Rabbi had a vested interest in seeing that the will was the pivotal document relied upon by the Beth Din in reaching its determination. Notably, the motion court held that “respondents waived any discernable objection they had in Rabbi[] … sitting on the Beth Din since by their own admission they knew he was connected to the New York Will in some manner at the outset of the arbitration process but nevertheless failed to raise their objection during the arbitration and continued to participate.” (Citations omitted.) The motion court rejected respondents’ assertion that they did not find out the extent of the Rabbi’s connection to the will until the second to last arbitration session. The motion court explained that “even if sufficient to meet their burden (and it is not since they were on notice at the outset of the process) not supported by the details of what they learned at this second to last session that has now caused them so much concern.” Thus, concluded the motion court, respondents failed to establish by clear and convincing proof bias on the part of the Rabbi “much less the entire Beth Din panel.” Third, the motion court held that the clarification in the second award did not include any new findings or grant any relief different from the initial award. The motion court explained that respondents did not identify any relief in the clarification that was not in the initial award. In fact, noted the motion court, respondents agreed in the arbitration agreement that the Beth Din was authorized to resolve disputes as to beneficial ownership and control of the properties regardless of the record owner. Moreover, “and most significantly”, said the motion court, respondents did not “deny that the properties that were in dispute and detailed in the clarification were held in the trusts created by father.” Indeed, observed the motion court, respondents signed an agreement which acknowledged that the properties were held in trusts and gave the Beth Din authority to determine the parents’ wishes based on their will made pursuant to Jewish law. In addition, noted the motion court, respondents did not object to the list of properties and trusts provided by petitioners to the Beth Din and respondents in furtherance of facilitating the clarification. “Therefore, because the clarification did not include any new findings nor did it grant any relief different from the initial award and because not dispute that the properties were held in the trusts identified in the clarification; the clarification was not a modification subject to CPLR §§ 7509 & 7511(c) and their rights under CPLR § 7506 were not violated. On appeal, the Appellate Division, First Department affirmed. On the issue of clarification versus modification, the Court agreed with the motion court that the award was clarified, not modified. Even if the first award was modified, the Court held that respondents failed to show any prejudice. 14 The Court explained that “ oth the original award and the clarified award have the same bottom-line result: instead of belonging exclusively to , certain properties are to be shared pro rata by all of the children of .” 15 Regarding arbitrator bias, the Court found that respondents waived the argument. 16 The Court explained that “‘ f a party goes forward with arbitration, having actual knowledge of the arbitrator’s bias, or of facts that reasonably should have prompted further … inquiry, may not later claim bias based upon the failure to disclose such facts.’” 17 The Court also rejected respondents’ argument that the Rabbi failed to disclose his involvement with the will. The Court noted that a witness who had no financial interest in the arbitration or the proceeding and who knew both petitioner and respondent submitted an affirmation saying that the arbitrator disclosed such involvement before the arbitration began. The Court also noted that respondents admitted that all of the parties had general knowledge that the arbitrator was involved with the parents’ estate, “which was sufficient to trigger further inquiry before the arbitration took place.” 18 Footnotes 1. Westinghouse v. New York City Tr. Auth. , 82 N.Y.2d 47, 54 (1993). 2. Id. 3. Tullett Prebon v. BGC Fin. , 111 A.D.3d 480, 482 (1st Dept. 2013). 4. Id. 5. Bernstein Family Ltd. P’ship v. Sovereign Partners , 66 A.D.3d 1, 7-8 (1st Dept. 2009). 6. CPLR 7511(b)(1)(i)-(iv). 7. Matter of J. P. Stevens & Co. (Rytex Corp.) , 34 N.Y.2d 123, 129-130 (1974). 8. Matter of Provenzano , 28 A.D.2d 528 (1st Dept. 1967), aff’d , J.D.H. Rest. Inc. v. New York State Liquor Auth. , 21 N.Y.2d 846 (1968). 9. New York City Tr. Auth. v. Transport Workers’ Union of Am. Local 100, AFL-CIO , 6 N.Y.3d 332 (2005). 10. Forest River, Inc. v. Stewart , 34 A.D.3d 474, 474 (2d Dept. 2006). 11. Rochester City Sch. Dist. v. Rochester Teachers Ass’n , 41 N.Y.2d 578, 583 (1977). 12. See Board of Education of the Dover Union Free Sch. Dist. v. Dover-Wingdale Teachers Ass’n , 61 N.Y.2d 913 (1984); Matter of City of Johnstown , 99 N.Y.2d 273, 278 (2002). 13. Matter of New York City Tr. Auth. , 6 N.Y.3d at 284. 14. Slip Op. at *1 (citing, Matter of Meisels v. Uhr , 79 N.Y.2d 526, 535 (1992)). 15. Id. 16. Id. at *1-*2 (citing, Matter of J. P. Stevens & Co. (Rytex Corp.) , 34 N.Y.2d at 129; and Matter of Namdar (Mirzoeff) , 161 A.D.2d 348, 349 (1st Dept. 1990), lv. denied , 77 N.Y.2d 802 (1991), cert. denied , 501 U.S. 1251 (1991)). 17. Id. at *2 (quoting, Matter of J. P. Stevens & Co. (Rytex Corp.) , 34 N.Y.2d at 129).   18. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

In drafting a contract, it is very common for the parties to include a choice of law provision. These provisions typically provide that a particular state’s law will apply regardless of conflict of laws principles. Questions arise as to which law to apply when a dispute takes place in a state that is different than the one in the contract.  Today we examine Morplay Management Inc. v. Castro , 2022 N.Y. Slip Op. 30467(U) (Sup. Ct., Feb. 7, 2022) ( here ), in which the Court was asked to decide whether the law of New York should apply as required in the parties’ contract or the law of Florida where the parties worked and resided and where the contract was entered. Are Choice of Law Provisions Enforceable? Generally, courts will enforce a choice-of-law provision so long as the chosen law bears a reasonable relationship to the parties or the transaction. 1 Including such a provision “demonstrates the parties’ intent that courts not conduct a conflict-of-laws analysis … unless the parties expressly indicate otherwise”. 2 An exception exists “where the chosen law violates some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal”. 3 “The party seeking to invoke the exception bears a heavy burden of proving that application of the chosen law would be offensive to a fundamental public policy of this State”. 4 “Although possess the power to set aside agreements on this basis, usual and most important function is to enforce contracts rather than invalidate them on the pretext of public policy, unless they clearly contravene public right or the public welfare”. 5 Against the foregoing legal principles, the Morplay Court held that the law of New York should apply as required in the parties’ contract. Morplay Management Inc. v. Castro The parties entered into a management agreement on September 19, 2018, pursuant to which plaintiff would “use its resources, contacts, expertise, and commercially reasonable efforts to promote, develop, enhance, and guide career … and to achieve career goals”. In exchange, defendant, a wardrobe stylist, agreed to pay plaintiff a 20% commission on any earnings derived from services”. The agreement was for an initial term of two years, automatically extended for an additional three years if defendant met certain monetary or social media goals during the initial term, and thereafter from month to month until one party gave notice that it was terminating the agreement. Further, defendant acknowledged that plaintiff was “not an employment agent, theatrical agent, or licensed artists’ manager, and that ha not promised to procure employment or engagements for ”. Although the contract was entered in Miami, Florida, the agreement provided that New York law would govern any dispute under the terms of the contract. Plaintiff alleged that during the term of the agreement it introduced defendant to at least 20 potential new clients, many of whom retained defendant to provide stylist services. Plaintiff also alleged that it provided a project manager for defendant, as well as other logistical and administrative support for her business. Plaintiff did not directly book clients for defendant. Instead, plaintiff made introductions to potential clients which defendant then engaged herself. Plaintiff contended that, because of its services, Defendant now earns over $500,000 per year.  In January 2020, defendant stopped paying commissions and, on May 7, 2020, repudiated the agreement, stating that it was unenforceable. Plaintiff contended that the agreement remains in effect and has continued promoting defendant as a wardrobe stylist. Defendant moved to dismiss, arguing, among other things, that the Court should ignore or invalidate the choice of law provision in the agreement on the grounds that plaintiff chose New York law to avoid application of Florida’s prohibition on operating an unlicensed talent agency. As an initial matter, the Court held that defendant could not ignore the law of the jurisdiction ( e.g. , New York) set forth in the agreement, noting that she “freely chose to have New York law govern this dispute.” And, as explained by the Court, “‘ reedom of contract prevails in an arm’s length transaction between sophisticated parties … and in the absence of countervailing public policy concerns there is no reason to relieve them of the consequences of their bargain’”. 6 The Court found that there were no “countervailing public policy concerns”. Indeed, noted the Court, defendant did “not identify a true conflict that would counter New York’s strong interest in enforcing the choice of law provision.” The reason, explained the Court, was because “both Florida and New York provide for statutory licensing schemes for management, talent, or employment agents … and both states either refuse to enforce contracts or void contracts ab initio with unlicensed individuals or entities under certain circumstances”. Accordingly, concluded the Court, New York law would apply as set forth in the choice of law provision of the agreement. Having determined that New York law governed the outcome of the dispute, the Court turned to plaintiff’s claims. In moving to dismiss, defendant argued that the agreement was unenforceable because it violated New York law; namely, the statutory requirement that employment agencies be licensed. The Court found that there were issues of fact that could not be determined on a motion to dismiss. The Court explained that the record did not indicate whether plaintiff ever obtained a license, or was required to obtain a license, under New York law. Defendant maintained that Plaintiff was required to do so. Plaintiff asserted that the statute did not apply to it because it is not an agency covered by the law, notwithstanding the fact that it helped procure at least 20 new clients for defendant, including some of Plaintiff’s other clients, which defendant would not otherwise have been able to procure for herself. Accordingly, the Court held that “a question of fact exists as to whether services fall within the ambit of the statute or not”. Takeaway It has long been held that absent a violation of law or some transgression of public policy people are free to enter contracts, making whatever agreement they wish no matter how unwise they may seem to others. 7 Consequently, when a contract dispute arises, it is the court’s role to enforce the agreement rather than reform it. 8 In order to enforce the agreement, the court must construe it in accordance with the intent of the parties, the best evidence of which is the very contract itself and the terms contained therein. 9 Thus, “when the parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms”. 10 In Morplay , the parties provided for a choice of law provision in their agreement. There was no dispute that the agreement reflected the parties’ intent. Since the choice of law provision did not violate public policy, under principles of contract interpretation, the Court held that it was enforceable. Footnotes Welsbach Elec. Corp. v. MasTec N. Am., Inc. , 7 N.Y.3d 624, 629 (2006). Ministers & Missionaries Benefit Bd. v. Snow , 26 N.Y.3d 466, 468 (2015), rearg. denied , 26 N.Y.3d 1136 (2016). Brown & Brown, Inc. v. Johnson , 25 N.Y.3d 364, 368 (2015) (internal citations and quotation marks omitted). Id. (internal citations and quotation marks omitted). 159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 361 (internal quotation marks and citations omitted), rearg. denied , 33 N.Y.3d 1136 (2019). Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co. , 86 N.Y.2d 685, 695 (1995). Rowe v. Great Atlantic & Pacific Tea Co., Inc. , 46 N.Y.2d 62, 67-68 (1978). Grace v. Nappa , 46 N.Y.2d 560, 565 (1979).  Greenfield v. Philles Records, Inc. , 98 N.Y.2d 562, 569 (2002). Vermont Teddy Bear Co., Inc. v. 583 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004) (internal quotation marks omitted).

By Jonathan H. Freiberger Just when you thought that there is nothing left to write about on RPAPL 1304 notices, a new case is decided with an interesting twist. Followers of this Blog know that we frequently address issues involving residential mortgage foreclosure.  Decisions involving the pre-foreclosure requirements of RPAPL 1304 are frequently rendered by the Appellate Courts in New York and, accordingly, are analyzed in this Blog’s articles.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  By way of background and as previously noted in our Blog: RPAPL 1304 requires that at least ninety days prior to commencing legal action against a borrower with respect to certain loans, a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  The failure of a lender to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint ( see, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018)) when the issue is raised as an affirmative defense by the borrower ( see, e.g., One West Bank, FSB v. Rosenberg , 189 A.D.3d 1600, 1602-3 (2 nd Dep’t 2020) (citation omitted)).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the foreclosing lender must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736 (2 nd Dep’t 2018) (citations omitted). In many cases in which a borrower challenges compliance with RPAPL 1304, an issue often decided by the court is whether the required notice was properly mailed.  [Eds. Note: this issue was addressed, inter alia , < here =">here"> .]   There is a “common law rule … that a letter properly stamped, addressed, and mailed is presumed to have been delivered.”  5421 Sylvan Ave. Associates Corp. v. New York City Conciliation and Appeals Board , 100 A.D.2d 812, 813 (1 st Dep’t 1984); see also, Trusts & Guarantee Co. v. Barnhardt , 270 N.Y. 350, 352 (1936).  “The presumption is founded upon the probability that the officers of the government will do their duty, and the usual course of business”  ( News Syndicate Co., Inc. v. Gatti Paper Stock Corp. , 256 N.Y. 211, 214 (1931) (internal quotation marks omitted)), and may “be created by either proof of actual mailing or proof of a standard office practice or procedure designed to ensure that items are properly addressed and mailed” ( Progressive Casualty Ins. Co. v. Infinite Ortho Products, Inc. , 127 A.D.3d 1050, 1051 (2 nd Dep’t 2015) (citations and internal quotation marks omitted)). “A mere allegation of non-receipt is not sufficient to rebut this presumption of receipt.”  5421 Sylvan , 100 A.D.2d at 813.  “In addition to a claim of no receipt, there must be a showing that routine office practice was not followed or was so careless that it would be unreasonable to assume that the notice was mailed.”  Nassau Ins. Co. v. Murray , 46 N.Y.2d 828, 829 - 830 (1978) (citation omitted). The Appellate Division, Second Department, rejected lender’s attempt to avail itself of the presumption of mailing in Wilmington Savings Fund Society, FSB v. Kutch , decided on February 16, 2022.  Borrower, Kutch, in Wilmington, defaulted under a $900,000 loan from lender secured by a mortgage on real property.    Lender commenced a mortgage foreclosure action in which it alleged, inter alia , that it complied with the notice requirements of RPAPL 1304.  Kutch denied this allegation and asserted a “lack of standing” defense, among others.   Thereafter, in 2013 lender’s motion for summary judgment was denied but, later that year, upon reargument, the motion was granted.  On Kutch’s related appeal, the Second Department reversed < here =">here"> and held that lender failed to prove compliance with RPAPL 1304.  The Court found that the moving affidavit from lender’s vice president, in which she averred that based upon her review of business records maintained in the ordinary course “the RPAPL 1304 notice was mailed to the borrower ‘by registered or certified and first class mail’ on December 4, 2009,” was “unsubstantiated and conclusory”.  The Court concluded, therefore, that such statements “were insufficient to establish” compliance with RPAPL 1304 and, upon reargument, supreme court should have adhered to its initial decision. Thereafter, Kutch moved for summary judgment dismissing the complaint for lender’s failure to comply with RPAPL 1304, which motion was denied.  Kutch then moved for reargument and lender cross-moved, inter alia , “for leave to renew those branches of its prior motion which were for summary judgment on the complaint insofar as asserted against the defendant, to strike her answer, and for an order of reference ….”  Supreme court denied Kutch’s motion and granted lender’s cross-motion.  Subsequently, supreme court, inter alia , issued a judgment of foreclosure and sale and directed the sale of the property.  Kutch appealed.  The Second Department found that lender failed to demonstrate that it complied with the mailing requirements of RPAPL 1304.  The Court found that the “’Affidavit of Mailing’” from lender’s “authorized signer” was inadequate because he “did not attest to personal knowledge of the actual mailings state that he had personal knowledge of a standard office mailing procedure designed to ensure that items are properly addressed and mailed.”  (Citations and internal quotation marks omitted.)  The records annexed to the affidavit demonstrated mailing by certified mail, but not regular mail.  The affidavit, which merely averred mailing by regular mail, was insufficient because “it is the business record itself, not the foundational affidavit, that serves as proof of the matter asserted.”  (Citations and internal quotation marks omitted.)  “Without business records proving the matter asserted, "unsubstantiated and conclusory" statement, by itself, was insufficient to establish that the RPAPL 1304 notice was mailed to the defendant by first-class mail.”  (Citations and internal quotation marks omitted.) The Court rejected lender’s argument regarding the presumption of mailing and stated: The plaintiff's reliance on the "long-standing common-law presumption" that "a letter or notice that is properly stamped, addressed, and mailed is presumed to be received by the addressee," is unavailing. Without proof that the letter or notice was, in fact, "properly stamped, addressed, and mailed," there can be no presumption that the mailing was received by the addressee.  In another interesting note, defendant Allison Quinn was not named as a “borrower” on the note but was named as a “borrower” on the mortgage.  Quinn, however, defaulted in appearing.  The Court found that lender was required to comply with RPAPL 1304 with respect to Quinn “because she was a borrower for purposes of RPAPL 1304”  (citation omitted), but nonetheless found that Kutch did not have standing to contest lender’s “compliance with the notice requirements of RPAPL 1304 with respect to Quinn inasmuch as that claim is personal to Quinn, and thus may be raised, if at all, only by Quinn."  (Citations and internal quotation marks and brackets omitted.)  The Court further found that, since compliance with RPAPL 1304 is not a jurisdictional defect, lender was not required to prove compliance as to Quinn because she never raised it as a defense.  Additionally, because a notice of appeal was never filed on Quinn’s behalf, she “is not a party to this appeal.”  Thus, supreme court properly denied Kutch’s motion to the extent that it sought summary judgment dismissing the complaint as to Quinn. Finally, the Court found that lender established that it had standing to bring the action. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber When someone speaks of a dispute resolution clause, lawyers most likely think the speaker is referring to an arbitration clause. But, as discussed in Innovative Concepts & Design, LLC v. AL Infinity, LLC , 2022 N.Y. Slip Op. 01122 (1st Dept. Feb. 22, 2022) ( here ), a dispute resolution clause can be something completely different. It can place dispute resolution in the hands of one of the parties to a contract. Such clauses are binding and enforced by the courts. 1 Innovative Concepts concerned a licensing dispute between plaintiff Innovative Concepts and Design, LLC and AL Infinity, LLC. Plaintiff manufactures and sells audio equipment, and defendant is the owner of the Altec Lansing brand of audio equipment and associated trademarks. In 2016, defendant entered into a licensing agreement with plaintiff that gave plaintiff the exclusive right to manufacture and sell specified products using the trademarks. The products were described as DJ Pro Audio Speakers and Turntables including, among other products, Trolley & Tailgate Speakers and Bluetooth and Wi-Fi DJ Speakers. The complaint alleged that at the time plaintiff entered into the agreement, it was aware that another company, Sakar, also had a license with defendant to sell certain types of speakers, namely small, hand-held speakers. Plaintiff’s license agreement included a dispute resolution clause, in which plaintiff acknowledged that “due to the nature of the industry, precise definition of products is sometimes not possible”; provided defendant with the “sole and absolute discretion” to resolve disputes as to whether a particular product fell within the license of one licensee or another; and further provided that defendant’s determination would be “conclusive and binding on all parties.”  According to the complaint, in 2017 and 2018, plaintiff became aware that Sakar was marketing products that plaintiff believed were covered by its exclusive license. Plaintiff raised this issue with defendant, but ultimately defendant, under its contractual authority to resolve licensing disputes, found in all instances that the products did not infringe upon plaintiff’s exclusive license. In resolving the dispute, defendant’s determination set out the minimum dimensions for licensed products permissible for plaintiff’s license and maximum dimensions permissible for the Sakar license. Plaintiff commenced the action for breach of contract and fraud, alleging that although defendant had granted it an exclusive license to sell certain speakers, it had entered into a conflicting license agreement with Sakar where it also granted Sakar many of the same exclusive rights. Defendant moved to dismiss the complaint pursuant to CPLR § 3211(a)(1) and (7), arguing that the dispute resolution provision in the parties’ agreement gave it the right to resolve the scope of the license dispute, in its absolute and sole discretion, and that the fraud claim was duplicative of the contract claim. The motion court dismissed both claims, concluding that they were barred by the dispute resolution clause, and noting that plaintiff had not alleged that defendant’s discretion was exercised in bad faith to enrich itself at the expense of plaintiff. Plaintiff moved for renewal based on purported newly discovered evidence and leave to amend the complaint to assert new causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing. That motion was denied. The Appellate Division, First Department agreed with the motion court that plaintiff’s breach of contract claim was barred by the dispute resolution clause in the parties’ licensing agreement. Notwithstanding, the Court addressed the merits of the claim – that defendant issued conflicting exclusive license agreements to plaintiff and Sakar. The Court found that the licenses were not conflicting on their face. The Court noted that the parties’ agreement specifically contemplated the possibility that the precise definition of products was not always possible. For that reason, the agreement provided defendant with the sole responsibility to resolve disputes over such definitions. Consequently, defendant could not have breached the agreement because “defendant simply exercised the authority given to it under the agreement”. 2 The Court also held that plaintiff’s fraud claim was precluded by the dispute resolution clause and otherwise duplicative of the contract claim. 3 In the complaint, plaintiff essentially alleged that defendant misrepresented that the agreement with Sakar did not compete with the agreement between the parties. Takeaway The dispute resolution clause at issue in Innovative Concepts was a bargained-for provision in the license agreement between the parties. That provision provided for an exclusive process for resolving product definition disputes between plaintiff, defendant, and other licensees of defendant. Such a provision is enforceable even when, as in Innovative Concepts , the party authorized to resolve the dispute is itself a party to the dispute. As the courts in Innovative Concepts made clear, albeit tacitly, the courts will enforce clear and unambiguous agreements according to their terms.  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. Seeking Valhalla Trust v. Deane , 182 A.D.3d 457 (1st Dept. 2020) (citation omitted). See also Yonkers Contracting Co., Inc. v. Port Auth. Trans-Hudson Corp. , 208 A.D.2d 63, 766-67 (2d Dept. 1995) (noting, “public policy is not violated by an alternate dispute resolution provision that authorizes an employee of a party to a contract dispute (even where such employee is personally involved in the dispute) to make conclusive, final, and binding decisions on all questions arising under the contract.”), aff’d , 87 N.Y.2d 927 (1996). Slip Op. at *2 (citing, Seeking Valhalla Trust , 182 A.D.3d at 458).  Id. (citations omitted).

By:  Jeffrey M. Haber Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 21F to the Securities Exchange Act of 1934 (“Exchange Act”), establishing the Securities and Exchange Commission’s whistleblower program. Among other things, Section 21 authorizes the SEC to make monetary awards to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions exceeding $1 million. Awards must be made in an amount equal to 10%-30% of the monetary sanctions collected. Since the program’s inception, the Commission has awarded more than $1.2 billion to 245 individuals whose information assisted the Commission in bringing successful enforcement actions. Under Section 21F(b) of the Exchange Act and Rule 21F-11 promulgated thereunder, a whistleblower who obtains an award based on a covered action also may be eligible for an award based on monetary sanctions that are collected in an action brought by other statutorily identified authorities, such as the IRS. The SEC is proposing two amendments to its whistleblower program rules. The first proposed amendment addresses instances when a whistleblower from the SEC’s program receives an award from another, non-SEC, whistleblower program. The second affirms the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing an award, but not to lower an award. The first proposed amendment would allow the Commission to make an award for a related action that might otherwise be covered by another whistleblower program even when the other whistleblower program has the more direct or relevant connection to the related action. Under the proposed amendment, the SEC intends to apply the following approaches: Comparability : if a claimant files a related-action award application, and the alternative award program is not comparable to the SEC’s whistleblower program, because the statutory award range is more limited, awards are subject to an award cap, or the other award program is discretionary and not mandatory, the Commission would treat the non-SEC action as “related” for purposes of the Commission’s award program, regardless of whether the alternative award program has a more direct or relevant connection to the action. The Commission also would make an award on a potential related action without regard to which program had the more direct and relevant connection to the action if the maximum award that the Commission could pay on the action would not exceed $5 million. Whistleblower Choice : a whistleblower would be given the option to decide whether to receive a related-action award from the Commission or the authority administering the other award program. The whistleblower would not be required to select which program to receive the award from until both programs had determined the award amount they would pay.  Offset Approach : The Commission would determine the award percentage it would pay on the related action but offset from the Commission’s total award payment by the dollar amount the whistleblower received for the related action from the other award program.  Topping Off Approach : The Commission would have the discretion to increase the award on the SEC covered action (up to 30 percent) if the Commission concludes that the other whistleblower program’s award for the related action was inadequate for any reason. Under the Comparability or Whistleblower Choice approach, the whistleblower would be required to make an irrevocable waiver of any claim to an award from the other whistleblower award program. The second proposed amendment would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount.  In 2020, the SEC added language to Rule 21F-6, stating that the Commission has discretion to consider the dollar amount of a potential award when making an award determination. The proposed changes would affirm the Commission’s authority to consider the dollar amount of a potential award for the limited purpose of increasing the award amount, but would eliminate the Commission’s authority to consider the dollar amount of a potential award for the purpose of decreasing an award. Commenting on the proposed amendments, SEC Chair Gary Gensler said: “These amendments, if adopted, would help ensure that whistleblowers are both incentivized and appropriately rewarded for their efforts in reporting potential violations of the law to the Commission. The first proposed rule change is designed to ensure that a whistleblower is not disadvantaged by another whistleblower program that would not give them as high an award as the SEC would offer. Under the second proposed rule change, the SEC could consider the dollar amounts of potential awards only to increase the whistleblower’s award. This would give whistleblowers additional comfort knowing that the SEC could consider the dollar amount of the award only in such cases.” The public comment period for the proposed rules will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. A copy of the announcement of the proposed amendments can be found here . A copy of the fact sheet discussing the proposed amendments can be found here . A copy of the proposing release can be found here .  here)=">here)" and="and" SEC’s="SEC’s" >here).=">here)."> Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger On February 16, 2022, the Appellate Division, Second Department, decided Bank of New York Mellon Trust Company v. Lee , a mortgage foreclosure action that was dismissed, as abandoned, pursuant to CPLR 3215(c) due to lender’s failure to take any “proceedings toward entry of a default judgment within a year after the defendant’s default.”  [Eds. Note: This Blog previously has discussed CPLR 3215(c) < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> . By way of brief background, and as set forth in one of our prior Blogs, Rule 3215(c) of the New York Civil Practice Law and Rules provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed….  (Emphasis added.) Courts have noted that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”.  ( See, e.g., US Bank v. Onuoha (2 nd Dep’t June 27, 2018); Wells Fargo Bank v. Cafasso (2 nd Dep’t February 28, 2018). The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “‘requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’”  The “reasonableness” of an excuse is within the sound discretion of the motion court. ( See, e.g., Onuoha and Cafasso .)  Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated.  ( See Bank of America v. Lucido (2 nd Dep’t July 11, 2018).)  In mortgage foreclosure actions, the preliminary step of moving for an order of reference is deemed to be a sufficient “proceeding” toward the entry of judgment to satisfy the one-year time frame of CPLR 3215(c).  ( See, e.g., Deutsche Bank v. Delisser (2 nd Dep’t May 16, 2018); Lucido .) Lender in Bank of New York commenced a mortgage foreclosure action in October of 2013 and a few days later filed a supplemental summons and amended complaint. Borrower failed to answer the amended complaint or otherwise appear in the action.  Borrower appealed supreme court’s denial of her motion to dismiss the complaint as abandoned pursuant to CPLR 3215(c).  According to the Second Department’s decision, supreme court erroneously held that borrower’s failure to move to vacate her default precluded her from seeking dismissal of the complaint pursuant to CPLR 3215(c). After concluding that there was no dispute that lender failed to take any “proceedings toward entry of a default judgment within a year after the 's default,” the Court rejected lender’s assertion that it had “a reasonable excuse for its failure to timely seek a default judgment.”  In so doing, the Court stated: In opposition to 's motion, failed to demonstrate a reasonable excuse for its failure to timely seek a default judgment. did not file a request for judicial intervention seeking a foreclosure settlement conference until December 28, 2015, approximately 22 months after 's default. Even after the matter was released from the foreclosure settlement part on March 14, 2016, took no steps toward obtaining a default judgment before moved to dismiss the complaint as abandoned in March 2018.  Contrary to 's contention, it failed to demonstrate a reasonable excuse for its delay based on its opposition to a motion to implead it in a separate action by the homeowners association for the premises to foreclose on a lien for unpaid common charges. Since that motion was made after the one-year statutory deadline had already passed, 's claim that it needed to oppose the motion before seeking a default judgment herein was legally insufficient to justify 's failure to take proceedings for entry of a default judgment within one year after ’s default. Since failed to demonstrate a reasonable excuse for its delay in seeking a default judgment, we need not consider whether it had a potentially meritorious cause of action. TAKEAWAY Bank of New York once again highlights the importance of taking prompt steps to secure a default against a defendant. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It is not uncommon for parties in commercial transactions to include in their contracts a provision that limits the types of damages recoverable in the event of a breach. Typically, these provisions include a limitation on the recovery of lost profits. An example of such a provision can be found in the agreement before the court in Rising Sun Constr. L.L.C. v. CabGram Dev. LLC , 2022 N.Y. Slip Op. 00989 (1st Dept. Feb. 15, 2022) ( here ). In New York, and elsewhere, contractual limitations on the damages recoverable for a breach of contract are routinely enforced. 1 These provisions “represent[] the parties’ Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed….” 2 However, “ imitations on a party’s liability … to be enforceable must be clearly, explicitly and unambiguously expressed in a contract are … strictly construed against the party seeking to avoid liability.” 3 There are two types of damages recoverable as lost profits: (1) lost profits that are general damages; and (2) lost profits that are consequential or special damages. As the New York Court of Appeals has noted: “The distinction between general and special contract damages is well defined but its application to specific contracts and controversies is usually more elusive.” 4 Lost profits as general damages “are the natural and probable consequence of the breach” of a contract. 5 General damages include “money that the breaching party agreed to pay under the contract.” 6 In other words, “a claim for general damages” exists where the plaintiff “seeks only what it bargained for—the amount it would have profited on the payments promised to make.” 7 Lost profits as consequential, or special damages, do not “directly flow from the breach.” 8 Where the damages were the result of a separate agreement with a nonparty, they are consequential damages. Typically, consequential damages involve a breach of contract that interferes with “the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions” such that “profits from potential collateral exchanges are ‘lost.’” 9 To recover lost profits in a breach of contract action, a plaintiff must establish that the damages were caused by the breach, that the “particular damages were fairly within the contemplation of the parties to the contract at the time it was made” and that the alleged loss is “capable of proof with reasonable certainty”. 10 As is often the case, a fraudulent inducement claim will accompany a breach of contract claim. Under New York law, “ cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” 11 “To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.” 12 One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” 13 Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract, 14 such as a misrepresentation about the ability to perform under the contract. In today’s article, we examine Rising Sun Construction L.L.C. v. CabGram Developer LLC , a case involving the foregoing principles. Rising Sun involved the construction of a residential apartment building in New York City (the “Project”). In December 2016, defendant, CabGram Developer LLC (“CabGram”), retained plaintiff, Rising Sun Construction L.L.C. (“Rising Sun”), a masonry subcontractor, to install pre-cast stone panels on the subject building. Among other provisions, the contract between the parties included a waiver clause with regard to consequential damages: “ he Contractor/Owner and Subcontractor waive claims against each other for consequential damages arising out of or relating to this Subcontract….” Following defendants’ failure to pay plaintiff for its work, plaintiff filed a mechanic’s lien on the subject property and commenced the action, seeking the foreclosure of its lien and related relief, including monetary damages. Defendants answered and asserted two counterclaims. The first counterclaim alleged fraudulent inducement in connection with a second contract the parties allegedly entered before the conclusion of the Project. Defendants maintained that plaintiff fraudulently induced it to enter into the second contract by making false and misleading statements about the work to be performed. Defendants contended that plaintiff used the pretense of entering into the new contractual arrangement to obtain hundreds of thousands of dollars from defendants. Defendants alleged that plaintiff never intended to perform the obligations promised under the second contract. The second counterclaim alleged breach of the second contract and sought the recovery of lost profits relating to the sale of apartments in the subject building. Plaintiff moved to dismiss the counterclaims. The motion court granted the motion. The motion court held that the claim for lost profits was barred by a limitation on damages clause in the 2016 contract, which waived any claims for consequential damages relating to the contract. The motion court further held that the second agreement related to the original 2016 agreement “as it concerned the same project.” Thus, the motion court rejected defendants’ attempt to sever the two agreements. The motion court also held that the fraud counterclaim was barred because it was based on a promise of future performance. Additionally, the motion court held that the claim was duplicative of the contract claim “since defendants could only recover their out-of-pocket damages, which is all that would be recoverable on their breach of contract counterclaim.” The Appellate Division, First Department affirmed. First, the Court held that the motion court “correctly dismissed the portion of the breach of contract counterclaim seeking lost profit damages.” 15 The Court explained that “ he parties’ initial subcontract unambiguously preclude the recovery of lost profits as it provide that the parties waived claims for consequential damages.” 16 The Court agreed with the motion court that the second contract related to the initial one: “The initial subcontract contains provisions regarding ‘Changes in the Work’ and provides that such changes were to be made only in the form of ‘Modifications,’ not an entirely new agreement.” 17 The Court noted that there was “no evidence that the purported second agreement somehow superseded the first subcontract.” 18 Significantly, the Court held that “ ven if the purported second agreement could be considered a fully executed contract, defendants’ counterclaim for lost profits still fail .” 19 The Court reasoned that the initial subcontract waived claims for consequential damages that “related” to the subcontract. Thus, even if there was a new agreement reached in 2018, it was “related” to the initial subcontract because it concerned the same project. 20 Moreover, noted the Court, “defendants have not sufficiently alleged that the purported second agreement specifically provided for the recovery of lost profits.” 21 Second, the Court held that the motion court “properly rejected defendants’ counterclaim for fraudulent inducement.” 22 The Court explained that since defendants’ counterclaim was “‘based upon a statement of future intention,’” defendants were required to allege “facts sufficient to show” that plaintiff “‘never intended to honor or act on statement’”. 23 “At most,” said the Court, defendants only made “‘general allegations that entered into a contract lacking the intent to perform.’” 24  Such allegations, concluded the Court, were “insufficient to sustain a claim from fraudulent inducement.” 25 Takeaway Rising Sun underscores the fundamental principle of contract interpretation – i.e. , contracts are to be construed pursuant to the parties’ intention. 26 As the Court of Appeals explained: “ he best evidence of what the parties … intend is what they say in their writing.” 27 When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words. 28 In Rising Sun , the waiver clause was clear and unambiguous. The agreement expressly provided that the parties “waived claims against each other for consequential damages arising out of or relating to this Subcontract.” Moreover, the intent of the parties as to relatedness was evident from the fact that both contracts (the 2016 and 2018 agreements) concerned the Project. As noted by the Court, there was no “evidence that the purported second agreement somehow superseded the first subcontract.” 29 Rising Sun also highlights the difficulty of alleging fraudulent inducement in the context of a contract claim for the failure to perform under the agreement. As the Court noted, general allegations that a party made a promise to perform without sufficient facts showing an undisclosed intent not to honor that promise cannot withstand a motion to dismiss. 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 1. See , e.g. , Daily News, L.P. v. Roclavell Int’l Corp. , 256 A.D.2d 13, 13 (1st Dept. 1998); Mom’s Bagels of New York, Inc. v. Sig Greenebaum, Inc. , 164 A.D.2d 820, 822 (1st Dept. 1990); see also Chaitman v. Moezinia , 178 A.D.3d 642 (1st Dept. Dec. 26, 2019). 2. Metropolitan Life Ins. Co. v. Noble Lowndes Int’l , 84 N.Y.2d 430, 435, 436 (1994). 3. Terminal Cent. v. Modell & Co. , 212 A.D.2d 213, 218-219 (1st Dept. 1995); compare Madison Hudson Assoc. LLC v. Neumann , 44 A.D.3d 473, 481 (1st Dept. 2007) (enforcing explicit and unambiguously expressed limitation on damages to return of capital contribution). 4. Biotronik A.G. v. Conor Medsys. Ireland, Ltd. , 22 N.Y.3d 799, 805-806 (2014) (internal quotation marks and citation omitted). 5. Id. (citations omitted). 6. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc. , 487 F.3d 89, 109 (2d. Cir 2007) (citation omitted). 7. Id. at 110. 8. American List Corp. v. U.S. News & World Report , 75 N.Y.2d 38, 43 (1989) 9. Tractebel , 487 F.3d at 109. 10. Kenford Co. v. County of Erie , 67 N.Y.2d 257, 261 (1986); see also Ashland Mgt. v. Janien , 82 N.Y.2d 395, 404 (1993); Awards.com, LLC v. Kinko’s, Inc. , 42 A.D.3d 178, 183 (1st Dept. 2007). 11. Krantz v. Chateau Stores of Can. Ltd. , 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted). 12. Id. (citations and quotation marks omitted). 13. WIT Holding Corp. v. Klein , 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012). 14.  WIT Holding , 282 A.D.2d at 528 (citation omitted). 15. Slip Op. at *1. 16. Id. (citation omitted). 17. Id. 18. Id. 19. Id. 20. Id. 21. Id. 22. Id. 23. Id. at *2 (citation omitted). 24. Id. (citation omitted). 25. Id. (citation omitted). 26. See , e.g. , Slatt v. Slatt , 64 N.Y.2d 966 (1985). 27. Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). 28. W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). 29. Slip Op. at *1.

By:  Jeffrey M. Haber As readers know from past articles, CPLR § 7511 (b) sets forth the statutory grounds for vacating an arbitration award. Under that section, a court may vacate an award if the rights of the movant were prejudiced by: (1) corruption, fraud or misconduct in procuring the award; (2) partiality of the arbitrator; (3) the arbitrator exceeding or imperfectly executing his/her power; or (4) the arbitrator failing to follow the procedure of Article 75.  With respect to whether an arbitrator exceeded or imperfectly executed his/her power, an award will not be overturned unless the award violates a strong public policy, is totally irrational or exceeds a specifically enumerated limitation on the arbitrator’s power. 1 In general, the grounds for vacating an arbitration award are narrowly construed. 2 It will be upheld even when the arbitrator makes errors of law and/or fact. 3 As noted by the Court of Appeals, the courts are not to assume the role of overseer of the arbitration and mold an award to its sense of justice. 4 An arbitration award violates strong public policy “only where court can conclude, without engaging in any extended fact-finding or legal analysis, that a law prohibits the particular matters to be decided by arbitration, or where the award itself violates a well-defined constitutional, statutory, or common law of this state.” 5 An award will be found to violate public policy only where such policy prohibits, in the absolute sense, particular matters being decided or certain relief being granted by the arbitrator. 6 Vacatur on public policy grounds is exercised sparingly 7 in order to preserve the parties’ choice of a nonjudicial forum to the greatest extent possible. 8 In Denson v. Trump , 180 A.D.3d 446, 450-451 (1st Dept. 2020), the Appellate Division, First Department identified a number of examples in which courts determined that public policy had been violated. These include: an award of punitive damages; violation of the State’s anti-trust laws; the liquidation of insolvent insurance companies; usury; an award that prevents an employer from fulfilling its legal obligation to protect against workplace sexual harassment; an award of child support that violates the Child Support Standards Act; and an award that violates the State’s policy of providing the public with high quality, efficient and effective hospital services. Separately, an arbitration award is subject to vacatur when the arbitrator exceeds expressly enumerated limits on his/her authority. “Enumerated limits of an arbitrator’s authority may be found in the arbitration clause of an agreement, in a statute, or in a notice or demand for arbitration.” 9 As noted by the First Department in Denson , “an arbitrator’s authority extends only to those issues that are actually presented by the parties.” 10 “Even where a claim is otherwise arbitrable, the scope of the arbitration is still limited to the specific issues presented and may not extend to those that are materially different or legally distinct.” 11 Simply stated, an arbitrator exceeds his/her authority by considering issues not raised by the parties. 12 Under CPLR § 7511(c)(2), when an arbitration award is issued in excess of the arbitrator’s authority, the court can modify the award so long as it does not affect the merits of the decision on the issues submitted. If modification is not possible, then vacatur of the entire award is required. 13 “A public policy argument may be raised for the first time on a motion to vacate, and should be considered by the court.” 14 “A claim that the arbitrator has decided issues that were not otherwise submitted can, for obvious reasons, only be raised once the award is made.” 15 In Matter of 544 Bloomrest, LLC v. Harding , 2022 N.Y. Slip Op. 00936 (1st Dept. Feb. 10, 2022) ( here ), the First Department affirmed in part and reversed in part the decision and order of the motion court, which confirmed an arbitration award. In addition to addressing the claims brought by the petitioner, the arbitrator assessed sanctions against respondent and awarded petitioner its attorneys’ fees.    Petitioner commenced the action to confirm its arbitration award against respondents. The arbitrator found that respondents had converted over $360,000.00 from petitioner through a variety of unlawful and illegal means, including, but not limited to, conversion and forgery. The arbitrator also denied respondents’ breach of contract counterclaim. In addition, the arbitrator awarded punitive damages in favor of petitioner, assessed sanctions against respondents and awarded petitioner its attorneys’ fees.  The motion court granted petitioner’s motion to confirm the award and denied respondents’ cross motion to vacate the award. As noted, the First Department modified the motion court’s order, “to vacate that part of the award awarding petitioner punitive damages, sanctions and attorneys’ fees.” The Court “otherwise affirmed” the order. As an initial matter, the Court held that the motion court properly confirmed the award as to petitioner’s conversion claim, and denied respondents’ counterclaim, notwithstanding the purported errors of law and fact made by the arbitrator. The Court explained that such errors were “not subject to judicial review.”  Moreover, the Court rejected respondents’ contention that the individual respondent, a corporate officer or director, was immune from personal liability. The Court found that there was evidence that he personally participated in the fraud or had actual knowledge of it. Significantly, the Court held that the arbitrator exceeded her power by awarding petitioner punitive damages, sanctions and attorneys’ fees, stating that such relief was not demanded. The Court noted that petitioner filed a demand for arbitration stating that its dispute with respondents concerned “ onversion by a variety of fraudulent means”. Petitioner did not advise the American Arbitration Association (“AAA”) that it was seeking other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages. Although the American Arbitration Association (AAA) preprinted form petitioner used allows a claimant to seek other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages, the only boxes that petitioner checked off were for interest and arbitration costs. It did not check the punitive damages box or attorneys’ fees box, nor indicate anywhere on its demand that it was seeking such relief. Petitioner never amended its demand for arbitration. Nor did it include a prayer for such relief in its subsequently filed post-arbitration memorandum. Citing Denson , the Court held that “ y granting unrequested relief, the arbitrator exceeded the expressly enumerated limits on her authority by deciding matters that were not before her.” As to attorneys’ fees, the Court noted that “ lthough AAA commercial rule 47(d) empowers an arbitrator to award attorneys’ fees, this is only “if all parties have requested such an award or it is authorized by law or their arbitration agreement.” The Court found that “neither party requested such an award and it not authorized by law.” The Court explained that the engagement letter that petitioner relied upon did not incorporate AAA Rule 47(d) into that agreement. “In any event,” said the Court, “even if the arbitrator has the authority to make an award , it must be demanded in the particular arbitration for the matter to be considered.” In other other words, an “arbitrator’s authority extends to only those issues that are actually presented by the parties.” 16 Consequently, held the Court, in the absence of a demand for such fees or the parties’ agreement that the prevailing party is entitled to legal fees, they could not be awarded.  With regard to punitive damages, the Court found that petitioner did not request them, even though an arbitrator is authorized to award punitive damages pursuant to AAA rule 47(a). Petitioner only requested the arbitrator award such “other relief that the AAA deems just and proper”. Such general, broad language, held the Court, did not satisfy the requirements of a demand.  However, the Court held that the award of the costs of arbitration was properly confirmed by the motion court. “Not only did petitioner request them in its demand for arbitration,” observed the Court, “AAA rule 47(c) provides that ‘the arbitrator shall assess the fees, expenses, and compensation,’ including administrative fees, expenses, and the arbitrator’s own compensation, “among the parties in such amounts as the arbitrator determines is appropriate.’” Takeaway In the big picture, 544 Bloomrest highlights circumstances in which an arbitrator can exceed his/her authority. The case also underscores the importance of following the terms of the arbitration agreement and making it clear at the outset the relief one is seeking. As the petitioner in 544 Bloomrest learned, the failure to do so, deprived it of the relief it thought it was seeking. 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 Matter of Silverman (Benmor Coats) , 61 N.Y.2d 299 (1984); Matter of Kowaleski (New York State Dept. of Correctional Servs.) , 16 N.Y.3d 85, 90 (2010); Frankel v. Sardis , 76 A.D.3d 136, 139 (1st Dept. 2010). Frankel , 76 A.D.3d at 139-140. Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479-480 (2006) (citing, Matter of Sprinzen (Nomberg) , 46 N.Y.2d 623, 629 (1979)). Wein & Malkin , 6 N.Y.3d at 480. Matter of Reddy v. Schaffer , 123 A.D.3d 935, 937 (2d Dept. 2014). Sprinzen , 46 N.Y.2d at 631. Matter of Neirs-Folkes, Inc. (Drake Ins. Co. of N.Y.) , 75 A.D.2d 787 (1st Dept. 1980). Sprinzen , 46 N.Y.2d at 630. Denson , 180 A.D.3d at 151 (citations omitted). Id. (citing, Matter of Joan Hansen & Co., Inc. v. Everlast World’s Boxing Headquarters Corp. , 13 N.Y.3d 168 (2009)). Id. (citing, Joan Hansen , 13 N.Y.3d at 173-174).  Id. (citations omitted). Matter of Slocum v. Madariaga , 123 A.D.3d 1046, 1047 (2d Dept. 2014). Denson , 180 A.D.3d at 451-452 (citations omitted). Id. at 452. Joan Hansen , 13 N.Y.3d at 173.

By Jonathan H. Freiberger Followers of this Blog know that we frequently address issues involving residential mortgage foreclosure.  Decisions involving the pre-foreclosure requirements of RPAPL 1304 are frequently rendered by the Appellate Courts in New York and, accordingly, are analyzed in this Blog’s articles.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  By way of background and as previously noted in our Blog: RPAPL 1304 requires that at least ninety days prior to commencing legal action against a borrower with respect to certain loans, a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  The failure of a lender to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint ( see, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018)) when the issue is raised as an affirmative defense by the borrower ( see, e.g., One West Bank, FSB v. Rosenberg , 189 A.D.3d 1600, 1602-3 (2 nd Dep’t 2020) (citation omitted)).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the foreclosing lender must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736 (2 nd Dep’t 2018) (citations omitted). From January 14, 2020, to the present, RPAPL 1304(2) provides: The notices required by this section shall be sent by the lender or mortgage loan servicer to the borrower, by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence which is the subject of the mortgage.  Notice is considered given as of the date it is mailed.   The notices required by this section shall contain a current list of United States department of housing and urban development approved housing counseling agencies, or other housing counseling agencies serving the county where the property is located from the most recent listing available from the department of financial services .  The list shall include the counseling agencies' last known addresses and telephone numbers.  The department of financial services shall make available a listing, by county, of such agencies which the lender or mortgage loan servicer may use to meet the requirements of this section.  (Emphasis added.) Prior to January 14, 2020 (the time period relevant to the decision that is the subject of today’s article), RPAPL 1304 provided: The notices required by this section shall be sent by such lender, assignee (including purchasing investor) or mortgage loan servicer to the borrower, by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence that is the subject of the mortgage.  The notices required by this section shall be sent by the lender, assignee or mortgage loan servicer in a separate envelope from any other mailing or notice.  Notice is considered given as of the date it is mailed.   The notices required by this section shall contain a current list of at least five housing counseling agencies serving the county where the property is located from the most recent listing available from department of financial services.  The list shall include the counseling agencies' last known addresses and telephone numbers.  The department of financial services shall make available on its websites a listing, by county, of such agencies.  The lender, assignee or mortgage loan servicer shall use such lists to meet the requirements of this section.  (Emphasis added.) On February 9, 2022, the Appellate Division, Second Department, decided U.S. Bank National Association v. Gordon , in which an interesting issue under RPAPL 1304 was raised by borrowers and analyzed by the Court.  Lender in Gordon commenced a mortgage foreclosure action in June of 2017.  After borrowers interposed their answer, lender moved for summary judgment on the complaint, to strike borrower’s answer and for an order of reference.  Borrowers cross-moved for summary judgment dismissing the complaint on the ground that lender failed to comply with RPAPL 1304(2).  While this Blog has, on numerous occasions, discussed RPAPL 1304 defenses based on, inter alia : a lender’s failure to properly mail and/or address the requisite notices; the contents of said notices; and/or, the lender’s failure to submit admissible proof as to the mailing of proper notices, the borrowers in Gordon argued something different – that not all of the five housing counseling agencies listed with the RPAPL 1304 notice “served” Queens County, where the subject property was located, as required by RPAPL 1304.  Nonetheless, supreme court granted lender’s motion and denied borrowers’ cross-motion. On borrowers’ appeal, the Second Department reversed the granting of summary judgment to lender and determined that summary judgment was properly denied to borrowers, stating that: Here, in support of its motion, the failed to establish, prima facie, its strict compliance with RPAPL 1304, as it failed to demonstrate that the 90-day notices it sent to contained the requisite list of five housing counseling agencies serving the county in which the subject property is located. In support of its motion, submitted the notices pursuant to RPAPL 1304, annexed to which was a list of five agencies. Four of the agencies were located in Queens, and one of the agencies, Hispanic Brotherhood of Rockville Centre, Inc., was located in Nassau County. Thus, failed to establish, prima facie, that all five of the agencies served Queens County. Conversely, also failed to establish that they were entitled to summary judgment dismissing the complaint insofar as asserted against them based upon 's failure to comply with RPAPL 1304.  A defendant still has to meet its burden, on a cross motion for summary judgment dismissing the complaint, of establishing that a condition precedent was not fulfilled. Here, failed to offer evidence showing that the list annexed to the RPAPL 1304 notices included fewer than five housing counseling agencies that serve the county in which the mortgaged property is located. They failed to establish as a matter of law that any of the five agencies in the list, including Hispanic Brotherhood of Rockville Centre, Inc., did not serve Queens County or that they contacted any of the agencies and were denied assistance because the property is located in Queens County. (Emphasis in original; citations, internal quotation marks and internal brackets omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber 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 While the foregoing statement of the law seems simple enough, its application is more complicated. Determining when accrual occurs is not easy and often contested. Also, hotly contested 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 she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when it would have developed the truth, and shuts her eyes to the facts which call for an investigation, knowledge of the fraud will be imputed to 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 In Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 2022 N.Y. Slip Op. 00805 (1st Dept. Feb. 8, 2022) ( here ), the Appellate Division, First Department, dismissed the plaintiff’s fraud claims as time-barred because it was on inquiry notice of said claims. Ambac was an action that Ambac Assurance Corporation (“Ambac” or “Plaintiff”) commenced in July 2015. It involved five policies issued by Ambac in 2005 to insure residential mortgage-backed securities (“RMBS”) transactions that securitized “pools” of “negative amortization” mortgage loans originated by defendant Countrywide Home Loans, Inc. (“Countrywide” or “Defendant”). Ambac alleged that, as of October 31, 2014, it had paid, accrued, or expected to pay more than $350 million in policy claims resulting from Countrywide’s alleged misrepresentations about the underlying loans in five RMBS transactions (the “Transactions”). On November 21, 2011, Ambac and Countrywide entered into a tolling agreement, which, as amended, tolled the running of the statute of limitations on unexpired claims related to the Transactions through December 31, 2014. The parties did not dispute that the action was not timely under New York’s six-year limitations period. Instead, the dispute centered on whether Ambac commenced the action within two years from the time it discovered the alleged fraud, or with reasonable diligence would have discovered it. The Court held that Countrywide demonstrated “that Ambac was on inquiry notice of its fraud claims before November 21, 2009, i.e. , two years before the parties entered the tolling agreement, based on media reports about Countrywide’s fraudulent loan practices, highly publicized litigation between 2006 and early 2009 involving substantially similar claims, and the downgrade of the certificates in the transactions from AAA to junk status by February 2009.” 11 The Court noted that Ambac was aware of Countrywide’s possible fraud as early as 2008: “Ambac does not deny that before 2009 it was aware of Countrywide’s possible fraud in connection with the transactions, as now alleged in this action.” 12 “Indeed,” explained the Court, “Ambac publicly announced in 2008 that it would investigate ‘all areas of fraudulent activity’ and attributed losses on the RMBS in its portfolio to the possibility of ‘poorly underwritten’ and ‘fraudulent loans … bundled in the transactions.’” 13 The Court found “unavailing” Ambac’s argument “that … a triable issue exist as to whether it could have sustained a viable fraud action in 2009 when it was not in possession of the relevant loan files and had not yet suffered any losses.” 14 In that regard, the Court explained: First, Ambac’s claim that it needed loan-level allegations to file a fraud action is undermined by the complaint itself, which makes scant reference to loan-level allegations and focuses primarily on Countrywide’s systemic wrongdoing, as revealed in media reports, litigation, and government investigations prior to 2009. Second, Ambac failed to show that it could not assert a fraud claim without making loan-level allegations or that the belief that loan-level allegations were required motivated its failure to timely bring an action. The record indicates that Ambac did not make any efforts to investigate possible fraud in relation to the transactions, thus casting this argument as nothing more than a post hoc rationalization. Third, there was no requirement that Ambac plead precise damages but only that it alleges sufficient damages “from which damages attributable to the defendant’s breach may be reasonably inferred.” 15 Takeaway Ambac highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. 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 or she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his or her rights when the facts indicate that a wrong has been done. 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) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”). Celestin v. Simpson , 153 A.D.3d 656, 657 (2d Dept. 2017). Slip Op. at *1 (citation omitted). Id. Id. Id. Id. at *1-*2 (citation omitted).

By: Jeffrey M. Haber In today’s article, we examine three principles of law that can spell the end of a litigation: disclaimer clauses, merger or integration clauses, and derivative standing. The Merger Clause As a general matter, when parties negotiate an agreement in a clear and unambiguous document, their writing will be enforced according to its terms. Evidence outside the four corners of the document as to what the parties really intended ( i.e. , parole evidence) is generally inadmissible. 1 Among the reasons for this rule is to give “stability to commercial transactions,” and other types of commercial interactions. 2 As the New York Court of Appeals observed, such a rule can safeguard “against fraudulent claims, perjury, death of witnesses … infirmity of memory.…” 3 Notwithstanding, questions arise about the enforceability of commitments made alongside a commercial transaction. These questions tend to play out in disagreements over the meaning and effect of a contract, where one party attempts to rely on the extra-contractual statements of the other ( e.g. , in emails, telephone calls, or meetings) to support an argument, claim or defense. One way to address such disputes before they happen is to include a “merger clause” or “integration clause,” in the contract or agreement. 4 A merger clause is a provision in a contract that declares the writing to be the complete and final agreement between the parties.  Merger clauses typically are found at the end of a contract or agreement, among the other “boilerplate” provisions, and, as such, are often neglected or ignored during negotiations. Boilerplate merger clauses are given little weight by the courts. However, when the merger clause evidences a negotiation by the parties, courts accord such clauses more weight in determining the parties’ intent. In New York, the courts have required the parties to specify the agreements and matters being merged or integrated into their agreement. Without such specificity, the courts have allowed parole evidence to be used to explain the parties’ intent, especially in cases involving claims of fraudulent inducement. 5 The Disclaimer Clause For a party to disclaim reliance on extra-contractual representations, an agreement must contain language that makes it clear that the parties are not relying on such representations. A party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. 6 “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” 7 There is, however, an exception to the enforceability of an anti-reliance provision – where the defendant has unique or peculiar knowledge of an allegedly misrepresented fact.  Under such circumstances, even a specific contractual disclaimer will not defeat a plaintiff’s contention that it reasonably relied on the misrepresentation. 8 Derivative Standing: Direct vs. Derivative A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.”9 Derivative claims against corporate officers and directors belong to the corporation itself. 10 In considering whether a claim is direct or derivative, courts look to the nature of the wrong and the person or entity to whom the relief should go. 11 Thus, for a shareholder’s injury to be direct it must be independent of any alleged injury to the corporation. The shareholder must demonstrate that the duty breached was owed to the stockholder and that he/she can prevail without showing an injury to the corporation. 12 Derivative claims that are improperly alleged as direct claims will be dismissed for lack of standing. 13 A derivative plaintiff must be a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. 14 “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. 15 Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” 16 To satisfy the requirement, the plaintiff must have “acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired” and continued to own the stock “throughout the course of the activities that constitute the primary basis of the complaint.” 17 “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” 18 For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. 19 Goldman v. Nerds Broadway Ltd. Liability Co. In Goldman v. Nerds Broadway Ltd. Liability Co. , 2022 N.Y. Slip Op. 00721 (1st Dept. Feb. 3, 2022) ( here ), the foregoing principles were examined by the Appellate Division, First Department. Goldman was brought by investors in a failed Broadway musical production provisionally entitled “Nerds” that was to be based upon “the rivalry between the late Steve Jobs of Apple and Bill Gates of Microsoft.” The musical was cancelled before production or previews began. Plaintiffs alleged that because of defendants’ mismanagement and intentional misrepresentations they lost their investment in the musical production. In or about December 2015, only about $200,000 had been raised towards the costs of staging the production even though at that time production costs were thought to be approximately $7.5 million. Plaintiffs alleged that in early January 2016, defendants decided to enter into a contract with a theatrical organization for over $600,000 despite not having raised sufficient capital to stage the production. Plaintiffs claimed they invested over $600,000 into the production from late January through early March 2016.  On March 8, 2016, defendants announced they were not moving forward with the production.  Plaintiffs alleged that “the failure of the venture was the foreseeable and inevitable result of the reckless financial commitments Defendants caused the LLC to make without adequate capitalization, contrary to Defendants’ representations of financial health.”  Plaintiffs asserted five causes of action. The first cause of action was for breach of contract against defendants Eleven LLC and Halmos LLC, alleging that they “breached the Operating Agreement by failing to render services customary and usually rendered by theatrical producers, devote as much time to the affairs of the LLC as necessary, or perform their duties in good faith and instead performed their duties in a grossly negligent manner and/or through willful misconduct.” The second cause of action against all defendants was for breach of fiduciary duty and the third cause of action was for the same relief purportedly brought on a derivative basis. The fourth cause of action sounded in fraud and misrepresentation. The fifth cause of action sought rescission of the operating agreement.  Defendants moved to dismiss the complaint. The motion court held that plaintiffs’ fraud allegations were barred because of a disclaimer clause and a merger clause in the operating agreement governing the parties. According to the motion court, the operating agreement expressly provided that “ ach Member represent , warrant , and covenant that such Member … ha not been induced to enter into th Agreement by any warranties, guarantees, promises, statements or representations, whether express or implied, except those that expressly and specifically set forth herein, and that the Managers not … bound or liable in any manner by any express or implied warranties, guarantees, promises, statements or representations pertaining hereto except as expressly and specifically set forth herein.” Because plaintiffs failed to state a fraud claim, their request for rescission was dismissed. Plaintiffs appealed. The First Department affirmed. The First Department’s Decision The Court held that the disclaimer clause in the operating agreement foreclosed plaintiffs’ request for relief:  The court, however, properly dismissed the fraud claims as barred by the disclaimers in the agreement, which included an express representation that plaintiffs’ professionals had examined the financial records of the company. Given that the fraud alleged was a misrepresentation of how much money had been raised and invested, this disclaimer requires dismissal. 20 The Court also held that plaintiffs lacked derivative standing to pursue the claims on behalf of the company: Plaintiff investors’ claims for breach of contract and fiduciary duty are based on defendants’ decision to have the company enter into a contract with the Shubert Organization. Because they allege harm only to the company, and not based on some particular injury or right of the plaintiffs, these claims are derivative. As such, they were properly dismissed for lack of standing, because the transaction complained of occurred before any were members of the company. 21 Finally, the Court held that “ ecause plaintiffs’ claims for fraud, breach of contract, and fiduciary duty were properly dismissed, their ‘claim’ for rescission, which is actually a remedy, was also properly dismissed.” 22 Takeaway The rules concerning derivative standing make sense. They are designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred. 23 Although there are exceptions to the rule (not applicable in Goldman ), the law has long required plaintiffs bringing a derivative action to have a stake in the company on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the company, then he or she has no right to vindicate the company’s rights and obtain a judgment on its behalf. In Goldman , the Court reinforced this common-sense rule. In Danann Realty , the Court of Appeals noted that “specific disclaimer destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 24 Goldman reiterates this basic principle of law. As the First Department observed, the contractual disclaimer at issue was specific to plaintiffs’ allegations and directly addressed the subject of the alleged misrepresentation. Consequently, the contract provision at issue was specific enough to preclude the fraud 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. Golden Gate Yacht Club v. Societe Nautique De Geneve , 12 N.Y.3d 248 (2009). W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). Id. See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause states “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause is insufficient to bar claim for fraudulent inducement where it fails to reference particular misrepresentations allegedly made by former president). Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320-21 (1959) (holding that fraudulent inducement claim premised upon representations as to building’s operating expenses and expected profits was barred by merger clause that specifically disclaimed plaintiff’s reliance on representations regarding building’s “physical condition, rents, leases, expenses, operation”); Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 169 (1st Dept. 2015) (holding that merger clause was mere boilerplate that was “too general to bar plaintiff’s claim since it makes no reference to the particular misrepresentations allegedly made here by .”) (internal quotation marks and citation omitted) (alteration in original). Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty , 5 N.Y.2d at 323; MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). Basis Yield , 115 A.D.3d at 137. Danann Realty , 5 N.Y.2d at 322. Marx v. Akers , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Auerbach v. Bennett , 47 N.Y.2d 619, 631 (1979). Yudell v. Gilbert , 99 A.D.3d 108, 114 (1st Dept. 2012). Tooley v. Donaldson, Lufkin & Jenrette, Inc. , 845 A2d 1031, 1039 (Del. 2004). Abrams v. Donati , 66 N.Y.2d 951, 953 (1985) (“ complaint the allegations of which confuse a shareholder’s derivative and individual rights will, therefore, be dismissed.”) (internal citations omitted). See , e.g. , BCL § 626(b); Pessin v. Chris-Craft Indus. , 181 A.D.2d 66, 70 (1st Dept. 1992).  See also Lewis v. Anderson , 477 A.2d 1040, 1049 (Del. 1984). Lewis , 477 A.2d at1049. Honzawa Holding Co. v. Hiro Enter. USA , 291 A.D.2d 318, 318 (1st Dept. 2002). In re Bank of New York Deriv. Litig. , 320 F.3d 291, 298 (2d Cir. 2003). Roy v. Vayntrub , 15 Misc. 3d 1127(A), 2007 NY Slip Op 50868(U) (Sup Ct., Nassau County 2007), at *6 (citing Barr v. Wackman , 36 N.Y.2d 371 (1975)). See , e.g. , In re Computer Sciences Corp. Deriv. Litig. , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). Slip Op. at *1 (citation omitted). Id. (citations omitted). Id. (citations omitted). See , e.g. , Independent Investor Protective League v. Time, Inc. , 50 N.Y.2d 259, 263 (1980). 5 N.Y.2d at 320-21.

By Jonathan H. Freiberger In its December 10, 2021, article entitled: “ Service of Process and Personal Jurisdiction ,” this Blog discussed the notion of a court’s personal jurisdiction over a defendant and the importance of proper service of process. In today’s article we will discuss Everbank v. Kelly , a mortgage foreclosure action decided on February 2, 2022, by the Appellate Division, Second Department, in which the Court resolved: a simple question that has not previously arisen: whether an affirmative misrepresentation by a relative of a defendant at a residential address that the address is proper, which is relied upon by a process server, may establish that service was valid, if evidence establishes that the address is not, in fact, the defendant's actual dwelling place or usual place of abode. We hold that, under the circumstances of this action, service of process upon the defendant at an address that was not actually his dwelling place or usual place of abode was defective, notwithstanding information provided to the process server at the doorstep. In 2004, James Kelly and his father-in-law, Edward Bressler, executed a promissory note, the repayment obligation for which was secured by a mortgage on certain real property (the “Property”). As is typically the case, the mortgage contained an occupancy rider by which Bressler “expressed his intention to primarily reside at the within 60 days”. After a payment default, lender commenced an action to foreclose the mortgage. The process server served the defendants at the Property pursuant to CPLR 308(2) (suitable age and discretion), by delivering copies of the summons and complaint to Crystal Kelly, Bressler’s daughter and James’ wife, who “verified” that Bressler “actually resides at this location.” The requisite follow-up mailing was sent to Bressler at the Property. Defendants defaulted in appearing and supreme court issued an order of reference. Lender moved for a judgment of foreclosure and sale and, thereafter, Bressler moved to vacate the order of reference (pursuant to CPLR 5015(a)(4) ) and to dismiss the complaint for lack of personal jurisdiction (pursuant to CPLR 3211(a)(8) ). Bressler supported his motion by: arguing that he resided elsewhere for 40 years and that the Property was not his “dwelling place or usual place of abode”; and, providing supreme court with copies of his driver’s license, numerous bills, an insurance renewal notice and other similar documents. Crystal, in her supporting affidavit, averred, inter alia , that Bressler did not reside at the Property, and that she did not tell the process server that he did. Supreme court held both motions in abeyance and ordered a hearing to “determine the validity of service of process on Bressler.” At the hearing, the process server, relying on his affidavit of service, testified that in his conversation with Crystal she “identified as her husband and Bressler as her father, and that each resided at the roperty.” Bressler testified that he lived elsewhere for 40 years and presented documentary evidence to support his testimony. Crystal attended the hearing but did not testify. Subsequently, supreme court granted lender’s motion to confirm the referee’s report and for a judgment of foreclosure and sale and denied Bressler’s motion and, in so doing, found: 's testimony credible, that Crystal … had stated to him that the recipients of process resided at the roperty. The court drew a discretionary negative inference against Bressler from the failure of Crystal … to testify at the hearing, despite the fact that she had been present for it. The court also found that process server acted reasonably in relying upon the representations of Crystal … that Bressler resided at the roperty. On Bressler’s appeal, the Court reversed the judgment of foreclosure and sale and granted Bressler’s motion to vacate the order of reference and to dismiss the complaint. The Court noted that proper service under CPLR 308(2) requires that the process be served in strict compliance with that rule. The Court noted that the process server’s testimony was consistent with his contemporaneously prepared affidavit of service. The Court deferred “to the credibility findings of the Supreme Court, and no issue with the negative inference that it chose to draw from Crystal<‘s> … failure to testify at the hearing.” (Citation omitted.) The Court also noted the “significant” evidence presented by Bressler demonstrating that he resided for 40 years at a location other than where service of process was purportedly effectuated. In framing and resolving the issue in the case, the Court stated: The question raised by this appeal, therefore, is whether representation to the process server that her father lived at the service address may override the greater quantum of evidence that he did not, in fact, live there. In other words, may a process server reasonably rely upon the representations of a family member at the service address, that the defendant actually dwells at that address, for service of process to be effectuated there? While the Supreme Court held that there can be such reasonable reliance for service of process to be effective, so as to implicitly excuse service at an incorrect address, we conclude that a representation, or misrepresentation, of a family member does not override the plain language of CPLR 308(2) that service be made at the defendant's actual "dwelling place or usual place of abode." The Court explained the language of CPLR 308(2) and that strict adherence to its requirements is important. The Court did point out several limited exceptions to “following the precise language of CPLR 308.” These exceptions include, but are not limited to, circumstances: (1) where under the concept of apparent authority, “a recipient of process represents that he or she is authorized to accept service on behalf of an entity, when in fact such authority is lacking”; (2) when a defendant is estopped from “challenging the location and propriety of service of process defendant has engaged in affirmative conduct which misleads a party into serving process at an incorrect address”; or, (3) where a defendant “resists service under CPLR 308(1) and (2)”. As to estoppel, and as relates to Everbank , the Court recognized that “ or a defendant to be estopped from raising a claim of defective service, the conduct misleading the process server must be the defendant's conduct, as distinguished from conduct of a third party.” (Citation omitted.) Specifically, the Court noted that Crystal did not misrepresent “‘who’ could accept service of process in the sense of an apparent authority exception to CPLR 308” but, “ rediting Burke's hearing testimony, … Crystal … instead made a representation, or perhaps a misrepresentation, about ‘where’ Bressler resided, which was then relied upon by the process server.” The Court stated that “ stoppel does not bar Bressler from arguing that he lived at an address other than the roperty, as the statement relied upon by the process server about where he lived was not uttered by him but by a third person.” (Citations omitted, emphasis in original.) Crystal’s statement that Bressler lived at the Property, could not overcome the significant evidence to the contrary. Thus, the Court concluded that: an acceptance of service by a person of suitable age and discretion is invalid if the service address is not, in fact, the defendant's actual place of business, dwelling place, or usual place of abode. That is exactly what occurred here. The process server must perform a proper inquiry to determine the defendant's actual place of business, dwelling place, or usual place of abode, which under CPLR 308 must be correct absent very limited exceptions not applicable here. In this case, there is a dispositive distinction between what Crystal … said at the time of the service from what Bressler's dwelling place apparently was in fact. (Emphasis in original.) Further, the reasonableness of the process server’s belief based on what Crystal told him “is not relevant to whether the service was at a qualifying location under CPLR 308(2).” Finally, the Court found that the occupancy rider or the notice provision in the underlying loan documents could not save lender. The stated purpose of the occupancy rider “was to contractually authorize a sale of the or financial adjustments to the note in the event Bressler were to reside elsewhere.” Moreover, the rider merely expressed Bressler’s future intent to reside at the Property, which is not “tantamount to proof of actually dwelling at the roperty, as intents may be changed and as the occupancy rider envisioned adjustments to the note in the event Bressler were to live elsewhere.” Similarly, the notice provision, requiring notices to be sent to the Property, “pertains to ministerial ‘notices . . . provided for in this Security Instrument,’ which is not a contractual opt-out of the service of process rules of CPLR 308.” 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.