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By: Jeffrey M. Haber On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law.  This Blog previously examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL ( here ).  Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine  Flowers v. 73rd Townhouse, LLC , 2022 N.Y. Slip Op. 00627 (1st Dept. Feb. 1, 2022) ( here ). A Primer on the Former DCL The DCL governs fraudulent conveyances.  For example, DCL § 273 (conveyances by insolvent) provides that conveyances that render a debtor insolvent that are made without fair consideration, are fraudulent as to creditors regardless of intent;  DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action; DCL § 274 (conveyance to defendants in a business or transaction) provides that conveyances made without fair consideration in a business or transaction for which the capital remaining after the conveyance is unreasonably small, are fraudulent as to creditors regardless of intent; DCL § 275 (conveyance by defendants to the detriment of current and future creditors) provides that conveyances and obligations incurred without fair consideration when the debtor intends or believes that he/she will incur debts beyond his/her ability to pay as they mature, are fraudulent as to both present and future creditors; and, DCL § 276 (conveyance made with intent) provides that conveyances made with actual intent to “hinder, delay, or defraud either present or future creditors, fraudulent as to both present and future creditors.” To set aside a conveyance or obligation incurred under DCL §§ 273, 273-a, 274 and 275, the plaintiff must establish that the conveyance or obligation incurred was made without “fair consideration”. Under DCL § 272, “ air consideration … is not only a matter of whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’ … but whether the transaction made in good faith.” 1 “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” 2 A claim under DCL § 275 requires, in addition to the conveyance and unfair consideration elements discussed, an element of intent or belief that insolvency will result. 3 DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. 4 Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” to raise an inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” 5 Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. 6 “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” 7 A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. 8 Flowers v. 73rd Townhouse, LLC here).=">here)."> Flowers involved, inter alia , alleged fraudulent conveyances that defendant 73rd Townhouse, LLC (“73rd Townhouse”), a single purpose entity created to hold title to a townhouse located on East 73rd Street in Manhattan (the “premises”), made to evade collection of a $500,000 consent judgment entered in favor of plaintiff in a prior action (the “prior action”). Pursuant to a real estate contract dated January 17, 2004, plaintiff and his then-wife agreed to purchase the premises from 73rd Townhouse. The contract provided for (i) a purchase price of $17 million and (ii) the seller to perform renovations on the premises subject to “the plaintiff’s right to make ‘reasonable adjustments and modifications’ ( i.e. , change orders)”. 9 The contract required plaintiff to close under certain circumstances even if renovations were not completed, but the contract also required 73rd Townhouse to “deposit into an escrow account 120% of the cost of completing the remaining work.” 10 The contract further required 73rd Townhouse to deposit $500,000.00 into an escrow account at closing to be held until delivery of a valid certificate of occupancy with 73rd Townhouse remaining liable for “other penalties for excessive delay.” 11 73rd Townhouse failed to complete the renovations in accordance with the change orders in time for the closing. After a dispute arose between the parties as to whether plaintiff was obligated to close, 73rd Townhouse attempted to terminate the contract. As such, the prior action ensued. Thereafter, plaintiff moved for summary judgment on the complaint. The court granted plaintiff’s motion, awarding specific performance albeit without the price abatement plaintiff sought. 73rd Townhouse was directed to turn over title to the property upon payment by plaintiff of the remaining contract price, but also directed that plaintiff deposit $575,000.00 into escrow for possible payment of change orders completed by 73rd Townhouse. Plaintiff appealed the portion of the order declining to order an abatement of the purchase price as a result of the 73rd Townhouse's failure to complete the renovations. The First Department later modified the court’s order, and remanded the case for a “hearing on the issue of the amount of price abatement to which the entitled for the cost of completing the renovation work contemplated by the contract.” 12 Pursuant to the court’s order, the closing took place on November 29, 2006. A $575,000.00 escrow was established as a construction reserve in accordance with the order. An additional $400,000.00 escrow was established pursuant to the terms of the contract.  In February 2007, the court directed the payment of approximately $475,000.00 from these escrowed amounts to 73rd Townhouse. Plaintiff appealed the court’s order.  On February 24, 2009, the parties settled the prior action by stipulation made in open court by agreeing to a $500,000.00 judgment to be entered against 73rd Townhouse. With the judgment unsatisfied, plaintiff filed suit on July 10, 2010. According to plaintiff, the settlement on the record was nothing more than a “ruse”. Plaintiff contended that defendants conducted their business dealings involving the premises without regard to corporate formalities, or appropriate documentation, or accounting controls, creating layers of “single-purpose LLCs”, by which they fraudulently stripped assets for the purpose evading creditors such as plaintiff. Plaintiff contended that the payments made and/or directed by 73rd Townhouse and received by various defendants at the closing and subsequent to the closing, including the monies released from the escrow pursuant to the court’s February 2017 order were fraudulent conveyances under the DCL. Plaintiff maintained that the transfers made by 73rd Townhouse rendered it insolvent and unable to pay the judgment, and that defendants knew of the potential liability to plaintiff at the time of the payments.  As such, plaintiff claimed that there were fraudulent conveyances under DCL §§ 273, 273-a, 274, 275, 276, 276-a, and 278. Plaintiff moved for summary judgment on each of the causes of action asserted. Defendants opposed. The motion court granted the motion. The motion court found that plaintiff established through various submissions and an expert report that 73rd Townhouse was insolvent at the time of closing. The motion court noted that the expert report, in particular, detailed how 73rd Townhouse was left with unreasonably small capital at the time of the November 2006 closing, and further transferred $5.8 million to the various owners of 73rd Townhouse or other owner-related entities, while the company was insolvent. Specifically, these submissions establish entitlement to relief under DCL § 273 to the extent (i) that 73rd Townhouse conveyed over $5.8 million to its owners or owner-related entities, (ii) that it was insolvent at the time of the transfers, or at least was rendered insolvent by the transfers, and (iii) that the transfers were not made for fair consideration inasmuch as the transfers were “preferential transfers to directors, officers, or shareholders of insolvent corporation[] in derogation of the rights of general creditors.” … To the extent that the plaintiff’s submissions further show that 73rd Townhouse was about to engage in a business or transaction, i.e. , repaying its debts, and the remaining property following the transfers to the owners or owner-related entities was insufficient to fully repay those debts, the plaintiff has also established entitlement to relief under DCL § 274. 13 However, said the motion court, plaintiff did not demonstrate, as a matter of law, “that 73rd Townhouse, after making the $5.8 million in transfers following closing, ‘intends or believes that will incur debts beyond his ability to pay as they mature.’” Thus, held the motion court, “summary judgment on the plaintiff’s claim pursuant to DCL § 275 (fourth cause of action) is denied.” The motion court further found that plaintiff’s submissions established an entitlement to summary judgment pursuant to DCL § 273-a. Specifically, the motion court held that “plaintiff’s submissions demonstrate (i) that the transfers were made without fair consideration, for the reasons previously discussed herein, (ii) that transfers took place after November 2004, when the prior action took place, and (iii) that a final judgment against 73rd Townhouse was rendered, and that it remains unsatisfied.” Finally, the motion court held that plaintiff’s submissions sufficed to establish that the conveyances were made with an actual intent to defraud plaintiff, such that plaintiff was entitled to relief pursuant to DCL § 276. According to the motion court, the expert reports showed that the owners of 73rd Townhouse withdrew approximately $800,000.00 from the company prior to closing, keeping no reserves for potential construction liabilities or contingencies, in violation of normal industry practice wherein a company keeps a reserve or ‘retainage’ of the cost of completion against unexpected costs to complete a project. Such transfers, said the motion court “were both questionable and not done in the usual course of business.” Further, explained the motion court, the expert reports and plaintiffs other submissions showed that the transfers were made for little to no consideration, while defendants were aware of the pending litigation between themselves and plaintiff, and “were made between members of a closely held LLC or other LLC’s owned by the same members, such that it was evident that defendants deliberately made 73rd Townhouse’s assets unavailable to satisfy the judgment, to which its consent was clearly insincere.” On appeal, the First Department modified the ruling with regard to, inter alia , DCL § 273-a and otherwise affirmed the motion court’s order. The Court held that the motion court incorrectly granted judgment on the DCL § 273-a claim. The Court explained that DCL § 273-a did not apply to plaintiff’s claims because plaintiff’s price abatement claim, which had been dismissed before the subject transfers were made, were different than the judgment at issue. “Debtor & Creditor Law § 273-a contemplates that the two judgments it refers to — the docketed judgment and the final judgment — shall be substantially the same” and “Plaintiff's final judgment for $500,000 bears no material relation to his earlier-docketed judgment for specific performance, which is not even a money judgment.” 14 The Court also held that plaintiff “established prima facie entitlement to summary judgment on his claims under Debtor & Creditor Law former §§ 273 and 274 by showing that <73rd townhouse> transferred sums of money to or their family limited partnership , all insiders, during a period in which it was insolvent.”15 The Court noted that the expert report, “which was based on an exhaustive analysis of the financial records produced by defendants,” showed that 73rd Townhouse “was insolvent, on a balance sheet basis, from November 29, 2006, through July 25, 2007, and that, during that period, it made a total of more than $5.7 million in transfers to or their family limited partnership.” 16 Finally, the Court held that “ he claim for intentional fraudulent conveyance under Debtor & Creditor Law former § 276 supported by ‘badges of fraud’ that include defendants’ close family relationships, the general lack of fair consideration for the transfers, and defendants’ knowledge of plaintiff’s claim and <73rd townhouse’s> inability to pay it.” 17 The Court found that “defendants appear to have siphoned out <73rd townhouse’s> assets and settled the claim only after they had drained out all the cash — when, in words, the consent judgment was ‘valueless’ because <73rd townhouse> no longer had any ‘assets with which to satisfy the judgment.’” 18 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 Sardis v. Frankel , 113 A.D.3d 135, 141-142 (1st Dept. 2014).   Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). Wall Street Assocs. v. Brodsky , 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted). Id. Id. (internal quotation marks and citations omitted). Id. MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). Flowers v. 73rd Townhouse, LLC , 52 A.D.3d 104, 107 (1st Dept. 2008). Id. Id. at 108. Id. Citation omitted. Slip Op. at *1. Id. (citations omitted). Id. Id. at *2. Id.

By Jonathan H. Freiberger A clear message that readers of this Blog are frequently left with is the importance of following the Court’s procedural rules, which often leads to the efficient flow of a litigation.  Today’s Blog will discuss the requirement in subsection (a) of CPLR 3212 that a motion for summary judgment cannot be made until after issue is joined. Summary judgment is a procedural device that, if successful, can efficiently bring a matter to resolution without the need for a trial and the related preparation, time and expense attendant thereto.  Indeed, “ ummary judgment is designed to expedite all civil cases by eliminating from the Trial Calendar claims which can properly be resolved as a matter of law ince it deprives the litigant of his day in court it is considered a drastic remedy which should only be employed when there is no doubt as to the absence of triable issues.”  Andre v. Pomeroy , 35 N.Y.2d 361, 364 (1974) (citation omitted).  If, however, there are no triable issues of fact to be determined at trial, the case should be summarily decided, and an unfounded reluctance to employ the remedy will only serve to swell the Trial Calendar and thus deny to other litigants the right to have their claims promptly adjudicated.”  Id. CPLR 3212 governs summary judgment motions and subsection (a), which provides for the timing of such motions, provides: Any party may move for summary judgment in any action, after issue has been joined ; provided however, that the court may set a date after which no such motion may be made, such date being no earlier than thirty days after the filing of the note of issue. If no such date is set by the court, such motion shall be made no later than one hundred twenty days after the filing of the note of issue, except with leave of court on good cause shown.  (Emphasis added.) A court may also grant a party summary judgment pursuant to CPLR 3211(c) , which provides, in relevant part, that: “ pon the hearing of a motion made under subdivision (a) or (b) , either party may submit any evidence that could properly be considered on a motion for summary judgment.  Whether or not issue has been joined, the court, after adequate notice to the parties, may treat the motion as a motion for summary judgment.”  Generally, in order for a motion to dismiss pursuant to CPLR 3211(a) or (b) to be converted to a motion for summary judgment, the court must notify the parties of its intention to do so.  See, e.g., Vanderbeek v. Beckerle , 116 A.D.3d 764 (2 nd Dep’t 2014).  However: here are nevertheless three circumstances under which a court’s failure to provide CPLR 3211(c) notice may be overlooked. One circumstance is when CPLR 3211(c) treatment is specifically requested not by one party, but by all of the parties or is at least requested by the same party that is aggrieved by the summary judgment determination. A second circumstance is when a dispute involves no questions of fact, but only issues of law argued by all parties, such as in the context of declaratory judgment actions involving an issue of statutory construction or the application of an unambiguous contractual provision. The third circumstance is when the respective submissions of both parties demonstrate that they are laying bare their proof and deliberately charting a summary judgment course. Hendrickson v. Philbor Motors, Inc. , 102 A.D.3d 251, 258 -59 (2 nd Dep’t 2012) (numerous citations omitted). In City of Rochester v. Chiarella , 65 N.Y.2d 92, 101 (1985), a property tax refund case, the Court made plain that “ motion for summary judgment may not be made before issue is joined (CPLR 3212 ) and the requirement is strictly adhered to.”  (Citations omitted.)  In Rochester , defendants moved for summary judgment before plaintiff replied to counterclaims.  The Appellate Division granted partial summary judgment.  The Court of Appeals reversed, and the motion was denied without prejudice to renewal after “submission of a reply” from Plaintiff.  Rochester, 65 N.Y.2d at99.   While the Rochester Court of Appeals agreed “with the holding implicit in the Appellate Division’s decision that had the authority to move for accelerated judgment,” it held that “the motion is premature because plaintiff has not replied to the counterclaims.”  Rochester, 65 N.Y.2d at99.  The Court of Appeals noted the Appellate Division’s recognition of the operative rule “but held that complaint sought a declaration that the taxes were constitutionally levied and that no refunds were due therefore … the counterclaims raised no new issue requiring a reply and it entertained motion.”  Rochester, 65 N.Y.2d at101.  The Court of Appeals disagreed and stated that “ he appropriate response to a counterclaim is a reply<, which> serves the same function with relation to a counterclaim that an answer serves to a complaint. Because had not replied to counterclaim, their 3212 motion for summary judgment preceded joinder of issue and was untimely.”  Rochester, 65 N.Y.2d at101 (citations omitted). On January 27, 2022, the First Department decided SHG Resources, LLC v. Sytr Real Estate Holdings LLC , a note and guaranty case.  In SHG , in lieu of interposing an answer to the complaint, defendants, borrower and guarantor, moved to dismiss the complaint.  shg facts were obtained from the underlying record available on nyscef.> shg facts were obtained from the underlying record available on nyscef.>  Plaintiff, lender, cross moved for summary judgment.  Supreme court denied defendants’ motion to dismiss and granted plaintiff’s cross-motion.  On appeal, the First Department affirmed the denial of defendants’ motion to dismiss.  However, the Court reversed supreme court’s order on plaintiff’s cross-motion for summary judgment so as to deny same “as premature, with leave to resubmit upon joinder of issues and, in so doing stated:  The Court of Appeals has noted that the rule barring a pre-joinder motion for summary judgment is strictly applied. While CPLR 3211(c) permits the court, on notice to the parties, to treat a motion to dismiss as a motion for summary judgment before issue is joined, that is not the case here, where moved directly for summary judgment; thus, a motion for summary judgment brought before a defendant has answered the complaint is premature and must be denied (see Valentine Tr. v Kernizan, 191 AD2d 159, 161 <1 st dept 1993> st dept 1993>). asserts that this is an exceptional case because it was one where "both sides make it unequivocally clear that they are laying bare their proof and deliberately charting a summary judgment course" (Four Seasons Hotels v Vinnik, 127 AD2d 310, 320 <1st dept 1987> ). Four Seasons, however, did not deal with a CPLR 3212 motion, as here.  (Some citations 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 To plead a cause of action for fraud or fraud in the inducement, a plaintiff must allege facts to support the claim that he or she justifiably relied on the alleged misrepresentation(s). As we have noted in prior articles, the justifiable reliance element of a fraud claim is often the most challenging one to satisfy. To demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.” 1 Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” 2 As the Court of Appeals explained more than a century ago: if the facts represented are not matters peculiarly within the knowledge, and the has the means available to of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, must make use of those means, or will not be heard to complain that was induced to enter into the transaction by misrepresentations. 3 In Sharma v. Walia , 2022 N.Y. Slip Op. 00524 (1st Dept. Jan. 27, 2022) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraudulent inducement claim because the plaintiff failed to demonstrate justifiable reliance on the alleged misrepresentation. Similar to Carmen E. Maestro Family Trust v. 449 Washington LLC , 2020 N.Y. Slip Op. 32054(U) (Sup. Ct., Kings County June 22, 2020) (which we wrote about here ), the Court found that the failure to read the operative documents, which included the information necessary to ascertain the truth, negated any claim of justifiable reliance. Sharma arose out of the purchase of a three Subway franchises in New York City. Plaintiff alleged that Defendant, a longtime family friend, increased the initial purchase prices for all three restaurants after informing her that the subleases contained options to renew, thus increasing the restaurants’ value. Based on Defendant’s representations about the sublease renewals, Plaintiff alleged that she paid an extra $575,000. Plaintiff contended that Defendant’s representations regarding the sublease renewals proved to be false, as two of the leases did not have renewal options at all and the third had a renewal option with a deadline that Plaintiff could not meet. Thus, Plaintiff maintained, although she had paid additional sums because of the purported options to renew, she was forced to vacate all three restaurants when the subleases expired. Defendants moved to dismiss. In opposition, Plaintiff claimed that Defendant had engaged in a pattern of fraud in which he would state a price for the restaurant and then demand additional monies after he discovered the sublease contained a renewal option, which allegedly made the restaurants more valuable. In an affidavit, Plaintiff explained that “While I had been given the subleases and the prime leases at the 3 closings, I had no reason to investigate whether the 3 subleases contained options to renew and whether same had actually been exercised because I trusted totally and he had represented that he knew as a matter of fact that the three subleases contained 5 year renewal options which had all been fully exercised.” Plaintiff alleged that she would not have paid the additional $575,000 (for the three transactions) if Defendant had not made the false claims. In reply, Defendant claimed, in addition to the failure to plead justifiable reliance, that his statements were promissory in nature – that is, he procured a renewal of the underlying lease agreements. The motion court granted the motion. The motion court held that Plaintiff failed to demonstrate that she justifiably relied on the alleged misrepresentation. The motion court found Plaintiff’s admission that she did not read the releases and subleases because of her trust in Defendant to be dispositive of the issue: Plaintiff’s claim is that she entered into three complicated transactions at a price of nearly half a million dollars but never sought any verification concerning the lease renewals. That does not constitute justifiable reliance. Plaintiff bizarrely admits that although she received the subleases and prime leases, she had no reason to read anything because she trusted Walia (who apparently used to be a close family friend). Blind trust in the seller that includes a failure to review the leases for the restaurants cannot support claims for fraud.   The motion court concluded that Plaintiff’s admission, as well another, “foreclose plaintiff’s fraud claims.” The motion court explained that “the issue of the leases and potential lease renewals for the restaurants was purchasing fundamental to these transactions. It simply cannot constitute justifiable reliance to believe statements about the leases, admit to receiving the relevant documents and to pay substantially more money without looking at a single document.” Consequently, the motion court rejected Plaintiff’s contention that the lease renewals “led her to pay more than what she originally agreed to pay” because “she never reviewed a single document supporting alleged statements.” Finally, the motion court held that the alleged misrepresentations were nothing more than “mere promise that could renew the leases at some point.” As such, the representations were inactionable promissory statements about what was to be done in the future. 4 On appeal, the First Department affirmed. The Court agreed with the motion court that Plaintiff’s blind faith in Defendant and failure to read the prime leases and subleases removed any notion that Plaintiff justifiably relied on Defendant’s alleged misrepresentation: Plaintiff’s fraud claims fail because she failed to allege justifiable reliance on alleged misrepresentations about the sublease renewal options. The facts regarding the subleases were not peculiarly within knowledge; on the contrary, plaintiff could have known the relevant facts had she simply read the leases, which she concedes she did not do. The Court also held that the alleged misrepresentation was not a misrepresentation at all: Furthermore, plaintiff does not allege that misrepresented the contents of the relevant documents, but rather, simply told her that it was not necessary for her to read them before she signed them at the closings. Under these circumstances, plaintiff cannot be heard to complain that she was induced by misrepresentations to enter into the transactions. 6 Takeaway As noted, to demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.” Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” In Sharma , plaintiff could not demonstrate reasonable reliance on the alleged misrepresentation because she failed to read the leases and subleases. As noted by the Court, the disclosures in the leases made it unreasonable to rely on any statement concerning renewal options. Such unreasonableness was underscored by Plaintiff’s admitted blind trust in Defendant. 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> Daly v. Kochanowicz , 67 A.D.3d 78, 91 (2d Dept. 2009). <2> Rosenblum v. Glogoff , 96 A.D.3d 514, 515 (1st Dept. 2012). <3> Schumaker v. Mather , 133 N.Y. 590, 596 (1892); see also DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). <4> Eastman Kodak Co. v. Roopak Enterprises, Ltd. , 202 A.D.2d 220, 222 (1st Dept. 1994). <5> Slip Op. at *1 (citations omitted). <6> Id. (citations omitted).

By: Jeffrey M. Haber As readers know, we write about cases involving fraud. The articles we write almost always concern the specific elements of the claim, such as scienter and justifiable reliance. Rarely have we examined defenses to a claim of fraud. Today, we do so – we examine the doctrines of ratification and estoppel. As a general matter, “ atification is the act of knowingly giving sanction or affirmance to an act that would otherwise be unauthorized and not binding.” 1 The elements of ratification are: (1) approval by act, word, or conduct; (2) with full knowledge of the facts of the earlier act, and (3) with the intention of giving validity to the earlier act. To prove intent, a party must show that the other party, after learning the facts and circumstances of the transaction or occurrence, either (1) continued to accept benefits under the transaction or occurrence or (2) conducted himself/herself so as to recognize the transaction or occurrence as binding. 3 A ratification may be shown by an express act or word or may be inferred from a party’s course of conduct. 4 Notably, an express ratification is not necessary; any act based on a recognition of the facts or occurrences as subsisting or any conduct inconsistent with an intention of avoiding them has the effect of ratification. 5 Any retention of the beneficial part of the transaction affirms the transaction or occurrence and bars an action for rescission as a matter of law. 6 Where a party affirms a contract through his actions and conduct after knowledge of the facts, the defense of waiver or ratification is established as a matter of law. 7 Estoppel, at least for these purposes, refers to conduct such as ratification, election, acquiescence, or acceptance of benefits. 8 It is a defense that prevents a party from accepting the benefit of a transaction or occurrence by asserting a right to the disadvantage of another which is inconsistent with the party’s prior position. Since the doctrine is based on equity, it applies when it would be unconscionable to allow a person to maintain a position inconsistent with one in which he/she acquiesced, or of which he accepted a benefit. 9 In other words, a party may not accept the benefits of a transaction and then later take an inconsistent position to avoid any corresponding obligations or effects. These principles were examined in JMM Consulting, LLC v. Triumph Constr. Corp. , 2022 N.Y. Slip Op. 30150(U) (Sup. Ct., N.Y. County Jan. 19, 2022) ( here ). JMM Consulting arose in connection with a consulting agreement (the “Agreement”) between the parties. Plaintiffs alleged that they entered into the Agreement, in which they acted in a consulting, advisory and employee capacity, and that Defendant wrongfully terminated the Agreement, and their employment thereunder, without cause. In addition to the Agreement, the parties executed a promissory note (the “Promissory Note”), pursuant to which the Company was required to pay Plaintiff Licata monies representing deferred portions of his bonus. The bonus was intended to compensate Licata for the sums received by the Company from utility companies in connection with the projects he oversaw. Licata claimed that he was owed $2.4 million. Defendant maintained that to maximize JMM’s fees, Licata manipulated the utility billings to inflate the amounts billed. The Company argued that Licata failed to pursue the utility billings, failed to maintain the required back up necessary to substantiate and collect on the amounts billed, and repeatedly made misrepresentations about the amounts that be collected. The Company contended that Plaintiffs’ conduct was done intentionally to avoid writing off invoices and reducing JMM’s fee. In connection with the foregoing, the Company asserted a counterclaim to rescind the Agreement and Promissory Note. The Court dismissed the Company’s counterclaim for recission. The Court noted that there was no dispute that the Company made payments to JMM through July 2016. Notably, said the Court, “ everal payments were made after the Company discovered Mr. Licata’s alleged fraud with respect to the utility billings and the alleged violation of the non-solicitation and non-compete provision of the Consulting Agreement.” “Under these circumstances,” concluded the Court, “the Company cannot now assert that it was fraudulently induced to execute the Promissory Note and that … its ratified obligations are void.” In other words, the Court found that the Company had ratified the payment obligations under the Promissory Note and could not, therefore, claim that it had been defrauded. 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 21 N.Y. Jur. 2d, Estoppel, Ratification and Waiver § 94. See generally Beutel v. Beutel , 55 N.Y.2d 957, 958 (1982). Rothschild v. Title Guarantee & Tr. Co. , 204 N.Y. 458 (1912). Id. See also Provident Bay Rd., LLC v. NYSARC, Inc ., 117 A.D.3d 1356, 1358 (3d Dept. 2014). AD v. CR , 2018 N.Y. Slip Op. 50439 (Sup. Ct., Westchester County 2018). See Chalos v. Chalos , 128 A.D.2d 498, 499 (2d Dept. 1987). Id. Markovitz v. Markovitz , 29 A.D.3d 460, 461 (1st Dept. 2006); Mahon v. Moorman , 234 A.D.2d 1, 2 (1st Dept. 1996). Id.

By: Jeffrey M. Haber Derivative actions are often brought by shareholders of a corporation (or limited liability company) to vindicate the entity’s rights. 1 Although shareholders are given the right to bring such lawsuits, they are not, however, favored because “they ask courts to second-guess the business judgment of the individuals charged with managing the company.” 2 Notwithstanding, “derivative actions serve the important purpose of protecting corporations and minority shareholders against officers and directors who, in discharging their official responsibilities, place other interests ahead of those of the corporation.” 3 The tension between the foregoing interests is tempered by the requirement that a shareholder demand with particularity that the board of directors (or majority owners) take action to address the alleged wrongdoing or explain why such demand would have been futile. 4 As explained by the Court of Appeals, “ he reason for the demand requirement rests on ‘basic principles of corporate control that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts.’” 5 “The demand requirement thus relieves courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages ‘strike suits’ commenced by shareholders for personal rather than corporate benefit.” 6 “Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit.” 7 In New York, the demand requirement is excused where a plaintiff pleads “with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.” 8 If any of these circumstances are met, the failure to file a pre-suit demand will be excused. 9 It is important to note that excusing a pre-suit demand is the exception and, therefore, “should not be permitted to swallow the rule” that a pre-litigation demand is required. 10 Thus, if a plaintiff fails to plead with particularity that service of a pre-litigation demand should be excused, the complaint must be dismissed. 11 “ director may be interested under either of two scenarios: self-interest in a transaction or loss of independence due to the control of an interested director.” 12 “The bare claim that the directors … should be viewed as interested because they are ‘substantially likely to be held liable’ for their actions is not enough” to find interestedness. 13 Indeed, simply naming each current or former director “in a lawsuit, without more, is insufficient to establish that they are conflicted and demand is futile.” 14 Likewise, the assertion that certain directors controlled the amount of compensation other directors would have received is inadequate, especially in the absence of an allegation that the compensation the directors received was excessive. 15 Although a pre-suit demand can be excused because the directors failed to exercise their business judgment in approving the transaction, demonstrating such a failure can be difficult. Indeed, “it is the ‘rare case[ ] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment.’” 16 “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.”17 The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.”18 The complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.”19 Thus, “ o long as the corporation’s directors have not breached their fiduciary obligation to the corporation, the exercise of for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” 20 The foregoing principles were recently considered by the Appellate Division, Second Department in Recine v. Recine , 2022 N.Y. Slip Op. 00324 (2d Dept. Jan. 19, 2022). Recine involved an action to recover damages for breach of fiduciary duty against defendants Luciano Recine, Salimar Christina Recine (collectively, “Recine Defendants”), and Recine Properties, LLC. Plaintiff, John Recine, and his siblings, the “Recine Defendants”, were the managing members of Defendant Recine Properties, LLC (the “Company”). The Company is a limited liability company that was formed for the purpose of acquiring, holding, and disposing of certain real property in Rockaway Beach (the “Property”).  Plaintiff commenced the action, individually and derivatively, against the Recine Defendants and the Company, among others, to recover damages for breach of fiduciary duty, misappropriation and conversion, and unjust enrichment, and for an accounting, injunctive relief, and removal of the Recine Defendants as the managing members. Plaintiff alleged that the Recine Defendants sold the Property, the Company’s sole asset, without his knowledge or consent, thereafter intended to divert or diverted a portion of the proceeds for the benefit of their separate business interests, and refused his requests for information and documentation regarding the sale and the disposition of the proceeds. Plaintiff moved, inter alia , to preliminarily enjoin the transfer and use of the sale proceeds. The Recine Defendants moved to dismiss pursuant to CPLR § 3211(a). The motion court, inter alia , (1) granted Plaintiff’s motion to preliminarily enjoin the Recine Defendants from disbursing, transferring, encumbering, or assigning the net proceeds of the sale of the property in a manner other than distribution of an equal share to each member, pursuant to the operating agreement; and (2) denied the Recine Defendants’ motion to dismiss the complaint. The Recine Defendants appealed. The Second Department reversed the motion court’s order with respect to Plaintiff’s motion and affirmed the denial of the Recine Defendants’ motion. We discuss the latter holding. The Court held that Plaintiff properly alleged demand futility. The Court found that Luciano Recine and Salimar Christina Recine constituted a majority of the managing members of the Company and were interested in the challenged transaction. As such, held the Court, “demand to initiate suit against themselves would have been futile.” 21 The Court also held that the motion court properly denied the Recine Defendants’ motion to dismiss the breach of fiduciary duty, misappropriation and conversion, unjust enrichment, and accounting causes of action. The Court found that the Plaintiff alleged (as supplemented by his affidavit) sufficient facts to support the causes of action alleged. 22 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Bansbach v. Zinn , 1 N.Y.3d 1, 8 (2003), rearg. denied , 1 N.Y.3d 593 (2004); Marx v. Akers , 88 N.Y.2d 189, 193 (1996). Bansbach , 1 N.Y.3d at 8.   Id. BCL § 626 (c) (providing that the derivative complaint “shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”). Bansbach , 1 N.Y.3d at 9 (quoting, Barr v. Wackman , 36 N.Y.2d 371, 378 (1975)) (citation omitted). Id. (citing, Marx , 88 N.Y.2d at 194). Id. Marx , 88 N.Y.2d at 198. Id. at 200-201. Matter of Omnicom Grp. Inc. S’holder Deriv. Litig. , 43 A.D.3d 766, 768 (1st Dept. 2007) (citing, Marx , 88 N.Y.2d at 200). See Retirement Plan for Gen. Empls. of the City of N. Miami Beach v. McGraw , 158 A.D.3d 494, 495 (1st Dept. 2018). Matter of Comverse Tech., Inc. Deriv. Litig. , 56 A.D.3d 49, 54 (1st Dept. 2008). Wandel v. Eisenberg , 60 A.D.3d 77, 80 (1st Dept. 2009). Lerner v. Immelt , 523 Fed. Appx 824, 827 (2d Cir. 2013) (citations omitted); accord, Bildstein v. Atwater , 222 A.D.2d 545, 546 (2d Dept. 1995). Walsh v. Wwebnet, Inc. , 116 A.D.3d 845, 848 (2d Dept. 2014). Stein v. Immelt , 472 Fed. Appx. 64, 66 (2d Cir. 2012) (quoting, Wandel , 60 A.D.3d at 82). 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted).   Comverse , 56 A.D.3d at 56 (citing, Barr , 36 N.Y.2d at 381). Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). Matter of Levandusky v. One Fifth Ave. Apt. Corp. , 75 N.Y.2d 530, 538 (1990) (internal quotation marks and citation omitted). Slip Op. at *2 (citations omitted). Id. at *3 (citations omitted).

By Jonathan H. Freiberger Article 52 of the CPLR addresses the enforcement of money judgments.  In the most simplistic terms, Article 52 addresses the property of a judgment debtor that is subject to enforcement and the various tools available to a judgment creditor to enforce a money judgment. On December 16, 2021, the New York Court of Appeals decided Plymouth Venture Partners, II, L.P. v. GTR Sources, LLC , in which the Court answered the following two questions certified to it by the Second Circuit Court of Appeals addressing the extent to which tort damages are available to a judgment debtor for violations of the enforcement procedures of Article 52 by two judgment creditors (“Judgment Creditor 1” and “Judgment Creditor 2”, respectively, and, collectively, the “Judgment Creditors”): 1. whether a judgment debtor suffers cognizable damages in tort when its property is seized pursuant to a levy by service of execution that does not comply with the procedural requirements of CPLR 5232(a), even though the seized property is applied to a valid money judgment; and, if so  2. whether the judgment debtor can, under these circumstances, bring a tort claim against either the judgment creditor or the marshal without first seeking relief under CPLR 5240."   The Court of Appeals, in answering the questions held that tort remedies were unavailable to a judgment creditor and that “an article 52 proceeding is the correct vehicle for resolving claims based on collection efforts that are alleged to violate article 52….”  (Citations omitted.) Background (with a recitation of edited and simplified facts) Judgment debtor borrowed money from Judgment Creditors, two merchant cash advance businesses, for the purpose of buying and selling future receivables.  Future receivables were to be direct deposited into an account at Comerica Bank in Michigan from which Judgment Creditors were to debit the respective loan payments due to them.  When judgment debtor blocked Judgment Creditors from the Comerica account, confessions of judgment executed by judgment debtor in conjunction with the underlying loan transactions were entered in “New York courts”.   Judgment Creditor 1 served a restraining notice on Comerica Bank in Michigan.  Upon learning of the restraining notice, judgment debtor “objected in an email to , stating that Comerica had no presence in New York, that the restraining notice was ‘tortiously interfering with the superior UCC liens of senior lenders’ and threatening to file a temporary restraining order.”  Ignoring the email, Judgment Creditor 1 then “issued an Execution with Notice to Garnishee and directed a New York City marshal… to serve Comerica with a Notice and Levy and Demand on Corporate Creations Network, Inc. <(“ccn”)> , Comerica's purported agent for service of process, in Nyack, New York, which in turn directed Comerica to turn over any of property in its control.”  Shortly after judgment debtor’s motion to vacate Judgment Creditor 1’s judgment on procedural and jurisdictional grounds was denied, the Marshal faxed a levy to Comerica, in Michigan.  Comerica complied with the levy and paid the Marshal from judgment debtor’s account. Thereafter, judgment debtor “filed a complaint against in Supreme Court… again seeking vacatur of the judgment and now also seeking restitution under CPLR 5015, breach of contract, wrongful execution, and fraud.”  A receiver was also appointed for judgment debtor after its other creditors brought an action for such relief in Michigan.  The receiver withdrew the supreme court action and its subsequent motion to vacate Judgment Creditor 1’s judgment was again denied. Thereafter, the receiver filed a tort action in the Southern District of New York alleging “wrongful restraint and execution against , wrongful execution against Marshal … individually, conversion, and trespass to chattels.”  As characterized by the Court of Appeals, the S.D.N.Y. granted Judgment Creditor 1’s motion for summary judgment: holding that the Receiver had suffered no harm and so could not recover in tort.  Specifically, held, as to the wrongful execution claim, that "there is no dispute that the funds recovered by the Marshal were used to extinguish the debtor's valid debt owed under a valid court judgment herefore, the Receiver, who stood in the shoes of the debtor, suffered no damages". For the same reason, the court held that the Receiver's claims for conversion and trespass to chattels could not survive "because the Receiver has failed to establish that the Receiver sustained any damages." (Citations omitted.) The collection efforts by Judgment Creditor 2, and judgment debtor’s response thereto, followed a similar, but not identical, course as with Judgment Creditor 1.  Judgment debtor’s action commenced in the S.D.N.Y. was dismissed by a different judge based on the “logic” set forth in the order dismissing the federal action commenced with respect to Judgment Creditor 1. Appeals from both S.D.N.Y. orders were consolidated, and certified questions were presented to the Court of Appeals because “‘neither party identifies a New York Court of Appeals opinion addressing issue ,’ and that, with respect to the issue of cognizable damages, ‘two recent New York Supreme Court decisions have reached differing results on the topic’ (citing Bam Bam Entertainment LLC v Pagnotta , 59 Misc 3d 906 and Silver Cup Funding LLC v Horizon Health Ctr., Inc. , 70 Misc 3d 1201 , 2020 NY Slip Op 51529 ….”  (Some citations omitted.) In summarizing the parties’ arguments and supporting its holding, the Court of Appeals stated: argues that "the executions and levies in these cases did not comply with the requirements of Article 52 of the CPLR, specifically CPLR 5232(a)," resulting in "'void or irregular process'" that reduced the executions and levies to "legal nullities" and thereby exposed the defendants to tort liability. seeks to recover the amount taken from the Comerica accounts that was used to satisfy the relevant judgments and "consequential" damages. counter that suffered no damages from the alleged violation of the statute and that, in any event, under these circumstances sole remedy was to seek relief under article 52. We agree with the final point. There is no need to contort traditional tort claims to accommodate a novel theory by a judgment debtor seeking to recover funds used to satisfy a valid judgment based on alleged violations of our civil procedure law. Instead, CPLR article 52, which provides a mechanism for addressing the innumerable situations that can arise that manifest abuse of the enforcement devices authorized in that statute, is the exclusive avenue for a judgment debtor seeking relief from the use of an enforcement mechanism that does not comply with article 52's requirements.  (Some citations, internal quotation marks, brackets and a footnote omitted.)  The Court of Appeals went on to discuss, inter alia , the history and provisions of Article 52 as well as the policy considerations behind its conclusion that the enforcement provisions of Article 52 were the sole remedies for the violation of the enforcement provisions of Article 52. [Eds. Note:  two Justices filed lengthy dissenting opinions. 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 The new year is days old, but that has not stopped the Securities and Exchange Commission (“SEC” or “Commission”) from awarding whistleblowers money under the Commission’s whistleblower program. During the past two weeks, the SEC announced that it awarded, in total, more than $14 million to several whistleblowers who provided information and assistance in three enforcement actions – one for “misconduct occurring overseas” and a second where the whistleblower’s assistance “helped the Commission obtain emergency relief to minimize investor losses”. Since the inception of the program in 2012, the SEC has awarded approximately $1.2 billion to 241 individuals for providing information that led to successful enforcement actions by the SEC and other agencies.  The first award of 2022 was announced on January 6, 2022 ( here ). In the announcement, the SEC said that it paid more than $13 million to a whistleblower whose information and assistance prompted the opening of an investigation and significantly contributed to the success of an SEC enforcement action. According to the SEC, “the whistleblower promptly alerted SEC staff to an ongoing fraud and provided extensive assistance to SEC staff by meeting in person and helping the staff understand the mechanics of the fraudulent scheme.” As noted above, “ he whistleblower’s information … helped the Commission obtain emergency relief to minimize investor losses.” Creola Kelly, Chief of the SEC’s Office of the Whistleblower, had the following to say about the whistleblower and the award: “Today’s whistleblower provided significant information that alerted SEC staff to ongoing fraud, which had caused and was likely to continue to cause substantial injury to the financial interests of investors. Whistleblowers who provide information swiftly can not only save SEC staff’s time and resources, but also help minimize potential investor losses.” The second and third awards were announced on January 10, 2021 ( here ). According to the SEC, it made two awards, totaling more than $4 million, to whistleblowers who provided information and assistance in two separate covered actions. In the first order, the SEC issued an award of approximately $2.6 million to one whistleblower. “The whistleblower, who reported internally before reporting to the Commission, provided significant new information during an existing investigation that alerted SEC staff to misconduct occurring overseas, which would have been difficult to detect in the absence of the whistleblower’s information.” In the second order, the SEC issued approximately $1.5 million to “joint whistleblowers who provided substantial ongoing assistance throughout the course of the investigation that led to the success of the covered action.” According to the SEC, “ he joint whistleblowers had multiple communications with SEC staff and provided information about key witnesses.” Commenting on the award, Ms. Kelly said, “These whistleblowers provided critical information and continued cooperation that helped the agency detect the securities laws violations. These awards highlight the importance of the SEC’s whistleblower program to the agency’s enforcement efforts and to its ability to maximize staff resources.” Under the whistleblower program, the SEC can pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC when the monetary sanctions exceed $1 million.  As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity. 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 A significant part of a mortgage foreclosure action is the calculation of the sums due and owing to the lender.  The task of computing the amount due is typically performed by the referee appointed by the court for that purpose.  What the referee is permitted to include in the calculations, which is generally governed by statute and the underlying loan documents, includes, among other things, outstanding principal, advances for taxes, insurance and other necessities to protect the mortgaged premises, reasonable legal fees and expenses and outstanding interest.  The focus of today’s article is the calculation of interest. CPLR 5001(a) provides, in relevant part that “in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court’s discretion.”  See also U.S. Bank, N.A. v. Peralta , 191 A.D.3d 924, 925 - 26 (2 nd Dep’t 2021).  In that regard, a “foreclosure action is equitable in nature and triggers the equitable powers of the court.”  U.S. Bank Nat. Ass’n v. Williams , 121 A.D.3d 1098, 1101 - 02 (2 nd Dep’t 2014) (numerous citations and internal quotation marks omitted).  “Once equity is invoked, the court’s power is as broad as equity and justice require.”  Onewest Bank, FSB v. Kaur , 172 A.D.3d 1392, 1394 (2 nd Dep’t 2019) (citation and internal quotation marks omitted).  The court, in exercising its discretion, “is governed by the particular facts in each case.”  Peralta , 191 A.D.3d at 926 (citations omitted). One thing that the court may consider in evaluating the interest due to a lender in a mortgage foreclosure action is any delay that may be occasioned by lender’s lack of diligence in prosecuting the action.  For example, in Peralta , lender commenced a foreclosure action in May 2008 and an order of reference was entered in November 2009.  Lender took no action until October 2013, at which time it moved to vacate the prior order of reference and for a new order of reference. The motion was granted by order dated December 13, 2013, and a judgment of foreclosure and sale was entered on November 3, 2014.  The property was to be sold at auction on May 7, 2015, but borrower’s bankruptcy filing stayed the foreclosure proceedings until the stay was lifted on October 23, 2015.  In May of 2017, lender moved for leave to file a late notice of sale and for an extension of time to sell the property.  Borrower cross-moved, inter alia , “to reduce or eliminate the amount of accrued interest due to delay in the action.  Lender’s motion was granted, and borrower’s cross-motion was denied.   On appeal, the Court found that supreme court “improvidently exercised its discretion in denying that branch of cross-motion which was to reduce the accrued interest due to the delay in the action” and held that: Here, in view of the lengthy, unexplained delays by in prosecuting this action, should recover no interest for the approximately 64–month period from May 2008, when this action was commenced, until October 3, 2013, when moved to vacate the prior order of reference and for a new order of reference. In addition, should recover no interest for the approximately 19–month period from October 23, 2015, when the bankruptcy stay was lifted until May 8, 2017, when moved for leave to file a late notice of sale and for an extension of time to sell the premises. Peralta , 191 A.D.3d at 926 (citations omitted).  Similarly, in Greenpoint Mort. Corp. v. Lamberti , 155 A.D.3d 1004 (2 nd Dep’t 2017), the Second Department reversed a judgment of foreclosure and sale and remitted the matter to supreme court to have the referee recompute the amounts due to lender.  The Court found that significant “delay by ’s predecessor in interest in prosecuting action” required a recalculation of interest.  Greenpoint , 191 A.D.3d at 1005.  Thus, the Court held that lender “should recover no interest for the roughly three-year period of time from when the action was commenced in 2005 to when filed a request for judicial intervention in 2008.”  Id . On January 12, 2022, the Second Department decided Deutsche Bank Nat. Trust Co. v. Ould-Khattri , amortgage foreclosure action addressing interest calculation issues with a bit of a twist.  The subject property in Deutsche Bank was subject to a first and second mortgage.  First lender, in March 2009, commenced an action to foreclose the first mortgage and named, inter alia , borrower and second lender as defendants.  In August 2011 supreme court denied first mortgagee’s motion for an order of reference due to its “fail to comply with an administrative order.”  In February 2013, first lender moved again for an order of reference, which motion was denied in September 2013 for failure to annex copies of the note and mortgage to its motion papers.  A third motion was filed in February 2014, the motion was granted by order of reference entered in April 2014, notice of entry of the order of reference was served in September 2015 and, in November 2017, the order was vacated due to first lender’s failure to serve one of the defendants.  In January 2018, second lender “moved to toll the accrual of interest on the first mortgage loan due to delay in attempting to obtain a judgment”. First lender argued that “the second mortgage would be extinguished if succeeded in foreclosing on the first mortgage 's motions for an order of reference inexplicably delayed the action for four years and that 's delay prejudiced it ‘by draining any possible equity that may be left in the Subject Premises.’"   In its resulting order, supreme court found that first lender’s failure to succeed on its first two motions for an order for reference was not “indicative of improper delay,” but the one-and one-half year delay in serving notice of entry of the granting of the third motion “constituted an excessive delay.”  Nonetheless, supreme court only tolled one year’s worth of interest.   Second lender appealed on the ground that the toll should have been for a longer period.  In modifying supreme court’s order, the Second Department held: Here, the Supreme Court properly found that the nearly 17-month delay in the plaintiff's service of the notice of entry of the order of reference entered April 30, 2014, was excessive. However, it improvidently exercised its discretion in tolling the accrual of interest for only one year, as it should have been tolled for the entire period from April 30, 2014, through September 9, 2015. In addition, the court should have also tolled the accrual of interest for the time periods in which the made two motions for an order of reference after its initial motion for an order of reference was denied for administrative reasons. The tolling of the accrual of interest during these time periods is not, as reasoned by the court, penalizing for losing its motions, but is instead a response to the 's unexplained delay in prosecuting the action by failing to promptly move for relief after the denial of its first and second motions. Notably, after the 's first motion for an order of reference was denied in August 2011, it failed to move again until February 2013. After the second motion was denied in September 2013, the did not make its third motion until February 2014. 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 Yesterday, the Appellate Division, First Department decided three cases involving claims for fraudulent inducement. We examine each of these cases below. Artemus USA LLC v. Leila Taghinia-Milani Inc. Artemus involved artwork that was consigned by Artemus USA LLC (“Artemus”) to defendants pursuant to a consignment agreement (“Agreement”). Plaintiffs alleged that the artwork was damaged while consigned to the Defendants.  In their opposition to plaintiffs’ summary judgment motion, defendants argued, among other claims, that they were fraudulently induced to enter into the Agreement. Defendants argued that plaintiffs: (a) failed to disclose evidence that the artwork had substantial prior damage for which conservation and repairs were performed; (b) falsely contended that the Agreement provided that defendants would accept the artwork “as is”, which they would not do because the condition of a piece of artwork is material in terms of the marketability and valuation of the piece and the handling of the artwork; (c) falsely held themselves out as the owner of the artwork at the time of contract when neither was the owner; (d) claimed the artwork was valued at nearly double what was told to defendants; (e) failed to inform defendants of the artwork’s vulnerabilities. In response, plaintiffs argued that defendants failed to offer any evidence that plaintiffs were asked about ownership, provenance, or previous repairs to the work. Plaintiffs also claimed that defendants failed to show that plaintiffs made any misleading statements or that defendants relied on any statements when entering into the Agreement. Instead, plaintiffs argued, defendants merely alleged that they would not have entered into the Agreement if they had known the truth. The motion court granted plaintiffs’ motion for summary judgment and denied defendants’ motion for summary judgment. On appeal, the First Department unanimously modified the decision of the motion court. With regard to the fraud claim, the Court held that defendants “raised issues of fact as to whether they were fraudulently induced to enter into the consignment agreement.” The Court found that the affidavits submitted by defendants showed that “plaintiff Artemus purchased the subject artwork for half of the estimated value set forth in the consignment agreement, and plaintiffs were aware that the artwork had an extensive restoration history that was not disclosed to defendants.” Consequently, the Court vacated the judgment entered by the motion court in favor of plaintiffs, denied plaintiffs’ motion, and otherwise affirmed the denial of defendants’ motion. Artemus USA LLC v. Leila Taghinia-Milani Inc. , 2022 N.Y. Slip Op. 00115 (1st Dept. Jan. 11, 2022) can be found here . Dragons 516 Ltd. v. GDC 138 E 50 LLC Dragons 516 involved a motion to amend. According to plaintiff, Dragons 516 loaned $30 million to defendant GDC 138 E 50 LLC (“GDC”) at 12% annually (with a 14% default interest rate), pursuant to an agreement dated June 1, 2017 (the “Facility Agreement”). GDC intended to use the funds to finance its investment in 50 LEX Development LLC (“Project Co.”). Defendant Shanghai Municipal Investment (Group) USA LLC (“SMI”) guaranteed the loan (the “Guarantee”). Plaintiff claimed GDC breached the Facility Agreement by incurring more than the permitted amount of debt (taking on three loans, for a total of $239 million, which did not fall into the exceptions to the prohibition in the agreement), by amending organizational documents without Dragons’ consent, and by changing Project Co.’s ownership structure without Dragons’ consent. The motion court found that each of foregoing qualified as an event of default, as defined in the Facility Agreement, making GDC liable for the $30 million balance due plus interest, costs, and fees.  Thereafter, plaintiff sought to amend its amended complaint to add a new defendant, SMI 138 E 50 ST LLC (“SMI Holdco”), which plaintiff alleged was a holding company that SMI wholly owned. Plaintiff sought the amendment because it learned during discovery that GDC was effectively judgment proof – i.e. , it would be unable to satisfy a judgment against it – and, along with SMI, and Holdco, fraudulently induced Dragons to extend the $30 million loan. Plaintiff alleged that SMI Holdco aided and abetted GDC in fraudulently inducing Dragons to loan the money to finance GDC’s investment in Project Co. SMI opposed the motion to amend, arguing the aiding abetting claim failed for lack of an underlying fraud claim, since there was no underlying fraud cause of action. SMI also argued that had one been asserted, it would be dismissed as duplicative of the breach of contract claim.  [Ed. Note: Under New York law, courts will not permit a fraud-based claim ( i.e. , fraudulent inducement) to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraud claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim. 2 ]    Plaintiff contended that it alleged an underlying fraud in the inducement claim, which could co-exist with the contract claim because the issue of whether the guaranty agreement (by which SMI allegedly guaranteed payment of GDC’s financial obligations pursuant to the Facility Agreement) was a valid and enforceable contract had not been decided.  The motion court rejected plaintiff’s argument, noting that plaintiff did not assert an underlying fraud claim related to the guaranty agreement, which would support plaintiff’s proposed aiding and abetting claim. Instead, found the motion court, plaintiff “clearly attempt to allege SMI and Holdco aided and abetted GDC’s alleged fraudulent inducement of plaintiff to enter into the Facility Agreement.” That claim, observed the motion court, was dependent upon plaintiff’s claim “against GDC for breach of the Facility Agreement,” a claim that Dragons’ obtained summary judgment with GDC’s consent. Therefore, concluded the motion court, the claim was “without merit.” On appeal, the First Department unanimously affirmed the motion court’s order. Like the motion court, the First Department noted that plaintiff’s aiding and abetting claim “hinged” on the existence of an underlying fraud claim against GDC. The Court found that there was no underlying fraudulent inducement claim because it duplicated the breach of contract claim for which plaintiff obtained a judgment against GDC.  Dragons 516 Ltd. v. GDC 138 E 50 LLC , 2022 N.Y. Slip Op. 00121 (1st Dept. Jan. 11, 2022) can be found here . Bielsa v. Gonzalez Plaintiff alleged that defendants, who are siblings, submitted conflicting tax documents regarding the assets of their deceased father, filing one set of documents with Venezuelan tax authorities and a different set with the New York State Surrogate’s Court. Plaintiff also alleged that his ex-wife, defendant Maria Alejandra Kaufman Gonzalez, renounced her inheritance from her father in exchange for other assets from defendants’ mother, disposed of those assets, and then never disclosed the fruits of that disposition to her husband, against whom she initiated divorce proceedings approximately six years later. Defendant moved to dismiss, arguing that, among other things, plaintiff failed to allege that any misrepresentation was made to plaintiff. According to defendant, misrepresentations were allegedly told to the Venezuelan authorities or to the Surrogate’s Court in New York. But those falsehoods were not told to plaintiff.  The motion court granted the motion, holding that plaintiff “failed to allege, much less with the particularity required by CPLR 3016(a), the material misrepresentations that defendants allegedly made to him which induced his reliance.”  The First Department unanimously affirmed. The Court held that any misrepresentation made to the Surrogate’s Court could not be imputed to defendants because “defendants’ mother, a nonparty, was actually the person who submitted the tax information to the Surrogate’s Court.”  Moreover, said the Court, “the alleged misrepresentations were made not to plaintiff, but to third parties, thus preventing plaintiff from claiming reliance.”  pasternack v. laboratory corp. of am. holdings, 27 n.y.3d 817 (2016), the new york court of appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 3 > pasternack v. laboratory corp. of am. holdings, 27 n.y.3d 817 (2016), the new york court of appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 3 >  “In addition,” noted the Court, “the documentary evidence conclusively establishe as a matter of law that did not have a duty to disclose her inheritance or disposition of assets to plaintiff. Plaintiff and prenuptial agreement state that defendant was entitled to keep assets acquired through inheritance or ‘any other means,’ and could dispose of those assets without obtaining plaintiff’s consent.” “As a result,” said the Court, “plaintiff’s fraud claim was properly dismissed.” Bielsa v. Gonzalez , 2022 N.Y. Slip Op. 00118 (1st Dept. Jan. 11, 2022) can be found here . Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:  Jeffrey M. Haber Last April, this Blog wrote about Sodhi v. IAC/InterActiveCorp , 2021 N.Y. Slip Op. 31220(U) (Sup. Ct., N.Y. County Apr. 8, 2021) ( here ), an action to recover money claimed to be improperly withheld by IAC/Interacticecorp (“IAC”). The primary issue in the Sodhi was whether the releases in a settlement letter covered the claims asserted in the action. The motion court held that the releases were broad and covered plaintiffs’ claim to the money alleged to be wrongfully withheld by IAC. Plaintiff appealed. The Appellate Division, First Department, unanimously affirmed. Background: A Refresher    Plaintiffs are former employees of Hatch Labs, Inc. (“Hatch”), a subsidiary of IAC. Hatch was a startup incubator company that developed applications for mobile phones. Among other applications, Hatch launched Tinder, the popular mobile dating application, in 2012. At the time they were hired, plaintiffs were granted so-called phantom equity units in Hatch (the “Units”). The Units represented the right to participate in Hatch’s “upside” through the financial equivalent of a non-ownership stock grant. In 2014, Plaintiffs cashed their Units, with each receiving $166,566.42. In accepting their payout, each plaintiff signed a settlement letter agreeing to the value of the Units, the number of vested Units to be settled, and the aggregate purchase price that IAC was to pay as consideration for settling their vested Units. The settlement letter contained a broad release in favor of IAC (the “Releases”), in which Plaintiffs “release and forever discharge IAC . . . from any and all causes of actions, suits, claims, charges, complaints, promises and contracts which may now have, or hereafter can, shall or may have against IAC … with respect to interest in the Units.…” Approximately six years after receiving the payouts for their Units, plaintiffs commenced an action against IAC, claiming that IAC grossly misrepresented the value of the Units they held in defendant’s subsidiary. The motion court dismissed plaintiffs’ claims because they were “covered by the expansive language of the subject releases they signed.” In doing so, the Court rejected plaintiff’s “narrow interpretation of the scope of releases”.  The motion court also rejected, as a matter of law, plaintiffs’ alternative argument that the Releases should be set aside as fraudulently induced . The Court found that plaintiffs failed to allege a fraud “separate from that which was the subject of the releases they signed, whether known or unknown to the plaintiffs at the time.”  The First Department’s Decision As noted, the First Department unanimously affirmed. The Court found, like the motion court, that the Releases were broad and covered the claims plaintiffs asserted in the action. As such, the Court held that the Releases “bar plaintiffs’ claims for breach of contract, breach of the implied covenant, and fraud arising from the alleged misrepresentation of the value of the units.” 1 The Court also rejected plaintiffs’ argument that the Releases should be invalidated because plaintiffs “were fraudulently induced to enter into them”. 2 The Court found that “the alleged misrepresentations made to the senior participant regarding the units’ value did not constitute a ‘separate fraud’ from the subject of the release.” 3 4> 4>  Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” 5 Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside. 6 In Sodhi , plaintiffs broadly released all claims they had against defendant. The release language was expansive and released “any and all claims” whether “known or unknown” “against IAC and and their respective directors, officers and employees with respect to interest in the Units….” Such language was broad enough to cover their claims for non-payment. In addition to the broad release language, plaintiffs could not demonstrate a fraud separate from the claim for breach of the Equity Incentive Plan. As noted by the Court, Plaintiffs could not allege a breach of any duty collateral to or independent of the parties’ agreement. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Slip Op. at *1 (citation omitted). Id. Id. (citing Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 277, 280 (2011). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1st Dept. 2006).

By Jonathan H. Freiberger On January 5, 2022, the Second Department decided Citibank, N.A. v. Kerszko .  The appeal in Citibank raised numerous “interesting and unusual issues,” but the focus of today’s article is on an issue recognized by the Second Department to be addressed by it for the first time: “whether the presentment to a court of a proposed ex parte order to show cause for an order of reference, which is rejected by the court for defects inherent in the papers, qualifies as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c) , so as to avoid dismissal of the complaint as abandoned under that statute.” [Eds. Note: This Blog has discussed CPLR 3215(c) < here =">here"> , < here =">here"> and < here =">here"> .]   The Court held that “ t does qualify” and, therefore, CPLR 3215(c) was inapplicable. 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 .) Citibank involved a mortgage foreclosure action commenced in March of 2009.  Borrower failed to appear, answer or move with respect to the complaint.  In May of 2009, a mandatory CPLR 3408 settlement conference was conducted “but was unproductive.” In November of 2009, due to borrower’s default in appearing, lender moved, ex parte , for an order of reference.  Supreme Court declined to sign the proposed order because the supporting affidavit was incomplete.  Five years later, in March of 2015, with the assistance of new counsel, lender moved for an order of reference, which motion was marked off the calendar because the “motion had been erroneously made returnable on a date when the CMP was not open.”   The motion was made again in December of 2015, and, in anticipating a CPLR 3215(c) dismissal, lender argued in its motion “any dismissal of the complaint pursuant to CPLR 3215(c) would be unwarranted, for reasons that sought to excuse the lengthy delay in bringing the motion.”  This motion, “consistent with pattern of defaults,” was unopposed.  By order dated February 10, 2016 (the “February Order”), supreme court denied lender’s motion and, sua sponte , dismissed the action as abandoned.  In so doing, supreme court “rejected the plaintiff’s ‘good cause’ argument for the lateness of its motion, but also because, in its view, the presentation to the court of the proposed ex parte order of reference in November 2009, which the court refused to sign, did not qualify as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c).”  (Emphasis added.)  Lender appealed the February Order. Lender moved to vacate the February Order, arguing that “the presentment of the proposed ex parte order of reference in November 2009, within one year after default, rendered the abandonment provision of CPLR 3215(c) inapplicable.  According to the Court, “the dismissal provisions of CPLR 3215(c) are not implicated in any action where the plaintiff ‘take proceedings’ for the entry of judgment within one year after a defendant’s default proceedings are taken within the statutory one-year period, any delays occasioned in the prosecution of the action beyond that year are irrelevant to CPLR 3215(c).” The Court, in discussing the origins of the “take proceedings” language of CPLR 3215(c), concluded that the legislature, in enacting that statute, necessarily meant something other than “filing” or “serv a motion” or “formal motion practice.”  The Court concluded that the “take proceedings” language was intended to be a broader and more encompassing concept than a more tightly defined “filing” or “service” of a motion for leave to enter a default judgment or other type of motion.  Indeed, the Court cited a litany of cases in support of the notion that CPLR 3215(c) should be construed such that “a plaintiff abandoned an action if, within one year after the defendant’s default, the plaintiff has manifested an intent not to abandon the case, but to take steps to seek a judgment.”  Obtaining a judgment within a year is not necessary, “so long as proceedings were undertaken to do so during the initial year after the defendant’s default.” According to the Second Department, “ he relevant inquiry, therefore, is not the form that an application takes when presented to the court or its result. Rather, it is the intent that can be inferred from an application presented to the court seeking to have the action ‘proceed,’ inconsistent with that of an abandonment of the plaintiff’s claims.”  (Emphasis in original.)  This, the Court noted, was consistent with the approach of the First Department.  The Court concluded that: he fact that that the Supreme Court rejected the order of reference as defective is beside the point, as the mere presentment of it established the plaintiff’s intent to proceed toward the entry of judgment and not to abandon the action.  What matters is the intent manifested by the presentment of an application, not what specific form it took or how it was filed. That being the case, the court should not have sua sponte directed dismissal of the complaint pursuant to CPLR 3215(c). That statute has no application under the facts and circumstances of this case, as the plaintiff presented an ex parte proposed order of reference within one year after ’s default. Supreme court’s order dismissing the mortgage foreclosure action was reversed and lender’s motion for an order of reference was granted. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog’s December 17, 2021, article entitled: “ Second Department Holds that Envelopes Containing Pre-Foreclosure Notices to Borrowers Pursuant to RPAPL 1304 Cannot Contain Any Other Notices Or Information ,” discussed Bank or America, N.A. v. Kessler , in which the Second Department held that RPAPL 1304 ’s mailing requirements for the statutory notices contemplated thereby are to be strictly construed.  kessler, and the blog articles hyperlinked therein, discuss numerous issues relating to rpapl 1304.> kessler, and the blog articles hyperlinked therein, discuss numerous issues relating to rpapl 1304.>  RPAPL 1304 provides that at least ninety days prior to, and a condition precedent to, the commencement of a residential foreclosure action, lender must send borrower, inter alia , a notice that the loan is in default and other specific information regarding housing counseling.  Further, RPAPL 1304(2) provides that “ he 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 .”  (Emphasis added.)  In Kessler , the Court dismissed a foreclosure action because, inter alia , lender inserted in the envelope containing the RPAPL 1304 notice, an additional notice not authorized by the RPAPL. On December 29, 2021, the Second Department, decided two cases, consistent with Kessler, in which the Court addressed issues related to strict compliance with the requirements of RPAPL 1304.  Citimortgage, Inc. v. Dente After borrowers’ default, lender commenced an action against borrowers to foreclose the mortgage securing the underlying loan.  Lender’s complaint alleged compliance with RPAPL 1304; an allegation that borrowers denied in their answer.  Supreme court granted summary judgment to lender.  Lender moved for a judgment of foreclosure and sale and borrowers cross-moved for summary judgment dismissing the complaint for failure to comply with RPAPL 1304.  The basis for borrower’s motion was that the lender’s RPAPL 1304 notices contained the following “extraneous information on the second page of the notice”: The purpose of this communication is to collect a debt and any information obtained will be used for that purpose. TO THE EXTENT YOUR OBLIGATION HAS BEEN DISCHARGED OR IS SUBJECT TO AN AUTOMATIC STAY OF A BANKRUPTCY ORDER UNDER TITLE 11 OF THE UNITED STATES CODE, THIS NOTICE IS FOR COMPLIANCE AND INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE A DEMAND FOR PAYMENT OR AN ATTEMPT TO COLLECT ANY SUCH OBLIGATION.  (Emphasis in original.) Supreme court granted lender’s motion, denied borrower’s motion and directed the sale of the property.  Borrowers appealed.  Borrowers also appealed from supreme court’s denial of Borrowers’ subsequent motion to vacate the judgment of foreclosure and sale. While the borrowers failed to oppose lender’s motion for summary judgment, the Second Department noted that "failure to comply with RPAPL 1304 is a defense that may be raised at any time prior to the entry of judgment of foreclosure and sale."  And, because the issue of compliance with RPAPL 1304 was raised before the entry of the judgment of foreclosure and sale, it was properly before supreme court. Finally, the Court held that supreme court should have dismissed lender’s complaint because the “defendants established that the plaintiff failed to strictly comply with RPAPL 1304 on the ground that additional material was sent in the same envelope as the 90-day notice required by RPAPL 1304.”  (Citation omitted.) Wells Fargo Bank, N.A. v. DeFeo Lender in Wells Fargo commenced an action to foreclose a mortgage.  After answering, borrower moved for summary judgment and lender cross-moved for summary judgment.  Supreme court denied the motion, granted the cross-motion and appointed a referee to compute.  Borrower appealed. On appeal, the Second Department held that neither the lender nor the borrower was entitled to summary judgment.  The Court reiterated that strict compliance with the notice provisions of RPAPL 1304 “is a condition precedent to the commencement of a foreclosure action” and that a “defense based on noncompliance with may be raised at any time during the action.”  (Citations and internal quotation marks omitted.)  Nonetheless, as to the requirements of RPAPL 1304, the Court found that borrower failed to meet his burden of demonstrating noncompliance by lender and lender failed to meet its burden of demonstrating compliance. As to the lender’s cross-motion, the Court stated: Nevertheless, the Supreme Court should have denied those branches of the 's cross motion which were for summary judgment on the complaint…. The "separate envelope" mandate of RPAPL 1304(2) provides that " he 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." Here, the failed to establish its prima facie entitlement to judgment as a matter of law, as it failed to show its strict compliance with RPAPL 1304(2). Among other things, the copies of the 90-day notice submitted by the in support of its cross motion included an additional notice not contemplated by RPAPL 1304(2). The acknowledged that the envelope that it sent to the , which contained the requisite RPAPL 1304 notices, also included a separate notice concerning the Home Affordable Modification Program and bankruptcy issues. This Court recently determined, in Bank of America, N.A. v Kessler … , that RPAPL 1304(2) requires that the requisite notices under its provision must be mailed in an envelope separate from any other notice. Since the failed to demonstrate that the RPAPL 1304 notice was served in an envelope that was separate from any other mailing or notice, it failed to establish its strict compliance with RPAPL 1304. Accordingly, the court should have denied the relevant branches of the plaintiff's cross motion regardless of the sufficiency of the opposing.  (Some citations and internal quotation marks omitted.) The Wells Fargo Court relied on Kessler in its decision and decided Citimortgage on the same day.  It is curious, therefore, that the Wells Fargo action was not dismissed by the Second Department.  This is particularly so considering lender’s apparent admission that it included notices not authorized by RPAPL 1304 in the same envelope in which the RPAPL 1304 notices were mailed. 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.