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This month, Freiberger Haber LLP is celebrating its four-year anniversary. To say that we are excited to celebrate this milestone is an understatement. We know the firm could not have reached this achievement without the trust and support of our clients, friends, and colleagues.  Since our founding, we have provided the sophistication and counsel of a large national law firm with the economy, flexibility, commitment, and personal attention of a small firm. As we move forward, we remain dedicated to offering this level of service to our clients – i.e. , corporations, small businesses, partnerships and individuals.  As we commemorate this milestone, we are focused on enhancing the things that have brought us to this point. One of them is our blog.  Over the past four years, our subscribership has grown, reflecting an increasing interest in the information that we post. To make the blog interactive, we are adding a “byline”. In this way, when readers come across an article of interest, they can reach out directly to the author to ask questions or discuss how the article may pertain to their circumstances. Although this change is small, we believe that it will enhance the experience our readers have with the articles that the firm posts.  As we move forward, we intend to make additional changes, both large and small, to position us for continued growth and success. We believe that implementing changes, whatever they may be, will allow us to meet the needs of our clients.  We look forward to the future. Most importantly, we look forward to bringing our dedication, hard work and values to our clients in resolving their legal, business and commercial disputes.  __________________________ About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 60 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2021 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter.

“Pumping a few squirts of vanilla hazelnut syrup into your latte—nothing wrong with that. Pumping up a coffee stock with hype and false statements? That’s illegal, and the Securities and Exchange Commission (SEC) recently announced fraud charges against alleged perpetrators of just such a scheme:” a long-running international securities fraud scheme in which the promoters and their associates allegedly sold millions of shares in multiple microcap—or “penny”—stock companies using pump-and-dump schemes, generating at least tens of millions of dollars in illicit proceeds. Wake="“Wake" Up="Up" and="and" Smell="Smell" Pump-and-Dump”,="Pump-and-Dump”," FINRA="FINRA" posted="posted" on="on" its="its" website="website" ( here).=">here)." In="In" provides="provides" important="important" information="information" how="how" investors="investors" can="can" avoid="avoid" being="being" victim="victim" of="of" a="a" pump-and-dump="pump-and-dump" scheme.="scheme."> In prior posts, we have examined “pump-and-dump” schemes ( e.g. , here and here ).  In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors.  These rumors cause many investors to purchase the stock.  Thereafter, the promoters or others working with them quickly “dump” their own shares before the hype ends.  Typically, after the promoters profit from their sales, the stock price drops, and the remaining investors lose most of their money ( here ). Notably, microcap companies are particularly vulnerable to pump-and-dump schemes because there is often limited publicly available information about the companies.  On August 9, 2021, the SEC announced ( here ) that it filed an emergency action charging nine individuals, including a public company chairman, for their participation in long-running fraudulent schemes that collectively generated hundreds of millions of dollars from unlawful stock sales and caused significant harm to retail investors in the United States and around the world. The SEC obtained emergency relief in court, including an order to freeze the defendants’ assets. According to the SEC’s complaint ( here ), Frederick L. Sharp, a Canadian resident, developed and implemented a complex scheme from 2011 to 2019 in which he and his associates, also Canadian residents, enabled control persons of microcap companies whose stock was publicly traded in the U.S. securities markets to conceal their control and ownership of huge amounts of penny stock. The SEC alleged that they surreptitiously dumped the stock into the U.S. markets in violation of federal securities laws. The services Sharp and his associates allegedly provided included furnishing networks of offshore shell companies to conceal stock ownership, arranging stock transfers and money transmittals, and providing encrypted accounting and communications systems.  According to the SEC, Sharp and his associates facilitated over a billion dollars in gross sales in hundreds of penny stock companies.  The SEC alleged that one group of control persons, comprised of Canadian residents, frequently collaborated with Sharp to dump huge stock positions while hiding their control positions and stock promotional activities from the investing public.  The complaint further alleged that a California resident, who chaired the boards of directors of four of the public companies whose stocks were fraudulently sold during the schemes, reaped millions of dollars in illicit proceeds from those illegal sales. According to the complaint, a Maryland resident worked as a promoter and allegedly touted stocks that some of the defendants simultaneously planned to sell, while concealing their roles. In a related action, the SEC charged a Mexican resident with engaging in deceptive penny stock schemes that generated more than $75 million from the fraudulent sales of multiple microcap companies’ stock.  “The SEC is committed to rooting out fraudulent attacks on our financial markets by bad actors in the United States and around the world,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Those who scheme to defraud retail investors, as we allege these defendants did, should know that they cannot hide behind sophisticated structures or international borders.”   “We charge that the defendants created a network that enabled them to engage in multiple fraudulent schemes, making millions of dollars in unlawful profits at the expense of retail investors,” said Paul Levenson, Regional Director of the SEC’s Boston Regional Office.  “Among other things, the emergency relief we have obtained will preserve assets to potentially be returned to harmed investors.” The SEC’s complaint, which was filed in federal district court in Boston, charged the defendants with violating the antifraud and registration provisions of the federal securities laws. In addition to the asset freeze and other temporary relief obtained, the SEC is seeking permanent injunctions, conduct based injunctions, disgorgement of allegedly ill-gotten gains plus interest, civil penalties, penny stock bars, and an officer and director bar against one of the defendants. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced ( here ) the filing of criminal charges against four of the promoters. “My office uses securities laws and regulations to preserve market integrity, in other words: to protect investors from getting ripped off by crooks,” said Acting United States Attorney Nathaniel R. Mendell. “Investigating and prosecuting people who illegally manipulate our markets protects all investors, particularly when the illegal activity is sophisticated and done on a large scale.” Defendants “are accused of executing a sophisticated, global con that allegedly bilked unsuspecting investors out of tens of millions of dollars. Investor confidence is essential to keeping our financial markets afloat and actions like the ones these individuals are charged with today chip away at the faith investors place in the process,” said Joseph R. Bonavolonta, Special Agent in Charge of the Federal Bureau of Investigation, Boston Division. “The FBI and our partners take securities fraud very seriously and we will do everything we can to hold accountable those who steal from American investors. We urge the public to use caution when researching investment opportunities and to contact us immediately if they become a victim of financial fraud.”

Whistleblowers play an important role in detecting and stopping securities laws violations. They do so often by risking their career and reputation. For this reason, whistleblowers may receive a monetary award for bringing to the attention of the SEC credible information about possible securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  The SEC derives its authority to reward whistleblowers from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). 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).">  Since the start of this year’s summer, the SEC has awarded, in total, approximately $17.8 million to 14 whistleblowers. In today’s article, we look at the two most recent announcements of whistleblower awards. On August 2, 2021, the SEC announced ( here ) that it awarded more than $4 million to four whistleblowers who provided information and assistance in two separate enforcement proceedings. In the first order ( here ), the SEC awarded more than $2 million to a whistleblower who provided valuable information that resulted in the SEC initiating an investigation, as well as ongoing assistance that included participating in multiple interviews and identifying key individuals and entities. The SEC also awarded more than $150,000 to another whistleblower, whose information prompted the SEC to expand its investigation into other alleged conduct at the subject company. In the second order ( here ), the SEC awarded more than $1.1 million to a whistleblower who reported misconduct internally and was the first to alert the SEC to the violations. The SEC also awarded another whistleblower more than $500,000. While the second whistleblower’s information was considered important to the Commission, the first whistleblower’s information was deemed more significant as it was broader and more timely submitted. On August 6, 2021, the SEC announced ( here ) that it awarded more than $3.5 million to three individuals who provided information about violations of the securities laws in two separate enforcement proceedings. In the first order ( here ), the SEC awarded approximately $2 million to a whistleblower whose information and assistance led to a successful SEC enforcement action.  The whistleblower alerted the SEC to an ongoing fraud, prompting the opening of an investigation.  The whistleblower also participated in multiple voluntary interviews and provided documents and additional information that saved the SEC time and resources.  In the second order ( here ), the SEC awarded one whistleblower approximately $1 million and a second whistleblower approximately $500,000.  While both whistleblowers independently provided information that assisted the SEC in an existing investigation, the whistleblower receiving the larger award provided information and cooperation that was deemed to be more impactful to the overall success of the case.  Commenting on the awards announced on August 6, 2021, Emily Pasquinelli, Acting Chief of the SEC’s Office of the Whistleblower, said the following: “Whistleblowers can provide a wealth of information and ongoing assistance that helps the SEC bring enforcement actions quicker and more efficiently. Today’s whistleblowers not only stepped forward to report suspicious conduct, but also continued to provide critical additional assistance.” These comments aptly summarize the role of whistleblowers in the enforcement of the securities laws . Since issuing its first award in 2012, the SEC has awarded approximately $950 million to 193 whistleblowers. All whistleblower awards are paid from an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. Under the program, no money is taken or withheld from investors harmed by the violations of law to pay whistleblower awards.

Frequently in litigation, a plaintiff commences an action before the identity of all defendants are known.  For example, in mortgage foreclosure actions “John Does” and/or “Jane Does” are named as defendants because there may be unknown individuals or entities in possession of, inter alia , a leasehold contract with respect to, or hold some other interest in, the subject real property.  Indeed, RPAPL 1311 provides a list of “necessary defendants” in a mortgage foreclosure action.  Typically, a process server will inquire as to, and serve, tenants at the mortgaged premises.  Thereafter, and in due course, lender moves to substitute the “John Doe” denomination for the real deendant.   This procedure is governed by CPLR 1024 , which provides: A party who is ignorant, in whole or in part, of the name or identity of a person who may properly be made a party, may proceed against such person as an unknown party by designating so much of his name and identity as is known. If the name or remainder of the name becomes known all subsequent proceedings shall be taken under the true name and all prior proceedings shall be deemed amended accordingly. The purpose of CPLR 1024 “is to permit a cause of action known to exist to be brought against a person whose name only is unknown.”  Orchard Park Central School Dist. V. Orchard Park Teachers Ass’n , 50 A.D.2d 462 (4 th Dep’t 1976) (citation omitted).  Stated differently, CPLR 1024 permits “a party who is ignorant of the name or identity of one who may properly be made a party to proceed by designating so much of his identity as is known, a summons served in a ‘John Doe’ form is jurisdictionally sufficient only if the actual defendants are adequately described and would have known, from the description in the complaint, that they were the intended defendants”.  Lebowitz v. Fieldston Travel Bureau, Inc . , 181 A.D.2d 481 (1 st Dep’t 1992) (citations and internal quotation marks omitted).  The jurisdictional sufficiency of a summons is significant because a jurisdictionally sufficient summons “may serve to toll the statute of limitations and provide the plaintiff with the 60-day extension under CPLR 203 (b) (5) (i) .”  Lebowitz , 181 A.D.2d at 482 (citation omitted). In Lebowitz , a premises liability case, a summons with notice was served the day before the expiration of the applicable statute of limitations.  The summons, which listed all defendants as “John Does,” “misidentified” the location of the incident and was “silent as to the date of the accident.”  “Within sixty days, but after the expiration of the three-year statute of limitations, defendants were served with a corrected summons which contained their names,” and the correct location and date of the accident.  Lebowitz , 181 A.D.2d at 482.  The defendant’s motion to “amend her answer and to dismiss the complaint on the ground that the original summons was insufficient to toll the statute of limitations and that the action was therefore time-barred,” was denied by supreme court.  The First Department, recognizing the mistakes in the original summons, stated: This summons was therefore jurisdictionally defective and did not serve to toll the statute of limitations and provide plaintiff with the 60 day extension under CPLR 203(b)(5)(i).  The summons thereafter served upon defendants was thus untimely served. Accordingly, we grant defendant<‘s> motion to amend her answer to include the affirmative defense of statute of limitations and, on the basis of such defense, dismiss the action as to her as time-barred. Lebowitz , 181 A.D.2d at 483 (citation omitted). Moreover, a plaintiff moving to amend the caption of an action to substitute the “John Doe” designation for an actual defendant after the expiration of the statute of limitations, must demonstrate “that he conducted a diligent inquiry into the actual identities of the intended defendants before the expiration of the statutory period.”  Goldberg v. Boatmax://, Inc. , 41 A.D.3d 255, 256 (1 st Dep’t 2007) (citation omitted).  See also, Burbano v. New York City , 172 A.D.3d 575, 576 (1 st Dep’t 2019).   Further, “ hen an originally-named defendant and an unknown ‘Jane Doe’ or ‘John Doe’ party are united in interest, i.e. employer and employee, the later-identified party may, in some instances, be added to the suit after the statute of limitations has expired pursuant to the ‘relation-back’ doctrine of CPLR 203(f), based upon postlimitations disclosure of the unknown party’s identity.”  Holmes v. City of New York , 132 A.D.3d 952 (2 nd Dep’t 2015).  In Holmes , the plaintiff was injured by police during an arrest.  He brought a civil action against the officer that arrested him but named him as “John Doe”.  Holmes was found not guilty during a criminal trial and claims that he first learned the name of the arresting officer during the criminal trial.  After the criminal trial, and after the expiration of the one-year-and-ninety-day statute of limitations applicable to the arresting officer, Holmes moved to substitute the real name of the arresting officer.  The Second Department affirmed supreme court’s denial of the motion finding that Holmes failed to demonstrate the necessary diligence in attempting to ascertain the identity of the arresting officer prior to the expiration of the statute of limitation because, inter alia , “ here is no indication in the record that the plaintiffs engaged in any pre-action disclosure or made any Freedom of Information Law requests.”  Holmes , 132 A.D.3d at 954 (citations omitted). The application of CPLR 1024 was at issue in Wilmington Trust N.A. v. Shasho , decided by the Second Department on August 4, 2021.  Wilmington was a mortgage foreclosure action commenced by lender against Elliot and Esther Shasho.  Elliot, who was named in the summons, was duly served.  Esther, who was named as “John Doe” was also served.  Proof of service on Elliot and Esther were never filed.  Neither Elliot nor Esther answered the complaint.  Lender moved to amend the caption to substitute Esther for “John Doe,” to deem the proofs of service timely filed nunc pro tunc, for a default judgment and for an order of reference.  Elliot and Esther cross-moved pursuant to CPLR 3215(c) to dismiss the complaint or, alternatively, for leave to file an answer.  [Editor’s note – this Blog has addressed CPLR 3215(c) < here =">here"> , < here =">here"> , and < here =">here"> .]  Supreme court granted lender’s motion and denied the cross-motion.  As to the application of CPLR 1024, the Court reversed and stated: In order to employ the procedural "Jane Doe" or "John Doe" mechanism made available by CPLR 1024, a plaintiff must show that he or she made timely efforts to identify the correct party before the statute of limitations expired. Yet, parties are not to resort to the “Jane Doe” procedure unless they exercise due diligence, prior to the running of the statute of limitations, to identify the defendant by name and, despite such efforts, are unable to do so. Any failure to exercise due diligence to ascertain the “Jane Doe's” name subjects the complaint to dismissal as to that party. Here, the Supreme Court should not have granted that branch of the plaintiff's motion which was for leave to amend the caption to substitute Esther for the defendant "John Doe." The court erred in applying the "John Doe" designation authorized by CPLR 1024 and the relation-back doctrine of CPLR 203(c) to bar application of the statute of limitations, because the plaintiff failed to establish that it made diligent efforts to ascertain the unknown party's identity prior to the expiration of the statute of limitations Concomitantly, the court should have denied that branch of the plaintiff's motion which was for leave to enter a default judgment against Esther.  (Citations and internal quotation marks omitted.)

On July 27, 2021, the Securities and Exchange Commission’s (the “SEC” or the “Commission”) Office of Investor Education and Advocacy (“OIEA”) issued an investor alert ( here ) with the FBI Criminal Investigative Division about fraudsters who are posing as brokers or investment advisers (the “Alert”). According to the Alert, people looking to perpetrate a fraud on unsuspecting investors are, among other things, falsely claiming to be registered with the SEC, the Financial Industry Regulatory Authority (“FINRA”) or a state securities regulator. Sometimes, the fraudsters even impersonate a real investment professional who is actually registered with one of the foregoing organizations. In this regard, noted the OIEA, “ raudsters may misappropriate the name, address, registration number, logo, photo, or website likeness of a currently or previously registered firm or investment professional.” To trick investors into believing that the scammer is legitimate, said the OIEA, the fraudster uses several tactics, including the following: “Spoofing”. Spoofing generally occurs when someone or something pretends to be something else in an attempt to gain one’s confidence, get access to one’s systems, steal data, steal money, or spread malware. Spoofing attacks come in many forms, including, but not limited to, website and/or URL spoofing. The OIEA warned that fraudsters are using website and/or URL spoofing to scam unsuspecting investors. They do so by setting up websites using URL addresses or names similar to those of actual registered firms or investment professionals to trick investors into believing that the fraudster is registered or that the fraudster is affiliated with a registered firm or investment professional. Creating Fake Profiles on Social Media. Here, the fraudster impersonates an actual person. They do so by creating a profile on a popular social media platform that mirrors a registered investment professional. Once created, the fraudster messages investors to solicit their money. Cold Calling. Cold calling is a marketing technique in which a salesperson contacts an individual who has not previously expressed interest in the offered product or service. see="see" here.=">here."> According to the OIEA, a fraudster may set up boiler rooms with teams of people cold calling investors to solicit their money while claiming to be employees of registered firms. In fact, the fraudster may use technology to make it appear they are calling from the firm’s location. See="See" discussion="discussion" here.=">here." See="See" also ="also"> Misrepresenting or Falsifying Documents. Fraudsters often recruit investors by misrepresenting that their firm was registered with the SEC, including pointing to the firm’s Form D filings to support the misrepresentation. See OIEA Investor Alert here . Fraudsters may solicit investors by impersonating a registered investment professional and generating a fake version of a public report using the professional’s name and CRD number. See FINRA Investor Alert here . In the Alert, the OIEA provides a number of ways in which investors can protect themselves from the foregoing scams.  1.  Verify the Identity of the Person Offering an Investment. Investors should not blindly rely on the website or contact information provided by the person seeking one’s money. The OIEA says that investors should be skeptical and refrain from turning over one’s money if fraud is suspected: “If you suspect someone is falsely claiming to be registered with the SEC, do not give the person any money and do not share your personal information.”  Investors can visit Investor.gov to check if someone offering an investment is currently licensed or registered. Once confirmed, investors should verify whether the person they are dealing with is the actual person by using information obtained from independent sources. For example, investors should contact the seller using a phone number or website listed in the firm’s Client Relationship Summary (Form CRS) – rather than relying on contact information the scammer provides.  Investors can also visit FINRA’s BrokerCheck ( here ), a free online tool, to obtain information on brokers, investment advisers, and registered investment firms. As with Investor.gov, investors should pay attention to any inconsistences between what the investor is told and what is displayed in BrokerCheck.  2.  Look for Red Flags.              “A red flag is a warning or indicator, suggesting that there is a potential problem or threat with a company’s stock, financial statements, or news reports. Red flags may be any undesirable characteristic that stands out to an analyst or investor.” See here . “Red flags tend to vary.” Id. However, there are several red flags that are common to investment scams. These include: Guaranteed High Investment Returns. Scammers typically promise high investment returns, “often accompanied by a guarantee of little or no risk”. As noted by the OIEA, such promises are “classic sign of fraud.” With investing, there are no guarantees; every investment has risk.  Offers that Seem “Too Good to Be True. Investments offering returns that seem “too good to be true” are often “too good to be true.” Such offers, which are typically made through cold calls, are also a tell-tale sign of fraud.  Payment Methods for Investments. Credit Cards. Most licensed and registered investment firms do not allow their customers to use credit cards to invest. Digital Asset Wallets and “Cryptocurrencies.” Licensed and registered financial firms typically do not require their customers to use digital asset wallets or digital assets, including “cryptocurrencies,” to invest. Wire Transfers and Checks. Investors who pay for an investment by wire transfer or check, should be suspicious if they are asked to send, or to make, the payment to an individual or to a different firm, the address is suspicious (for example, an online search for the address suggests it is not an office building where the firm operates), or told to note that the payment is for a purpose unrelated to the investment (for example, medical expenses or a loan to a family member). The OIEA warned that sending money overseas carries additional risk because if the investment turns out to be a scam, the investor is unlikely to “see money again.”  The OIEA issued the Alert on the same day as a similar FINRA alert ( here ) about fraudsters impersonating brokers and fake SEC or FINRA registration documents.

Depositions in real life are not the same as those depicted on television and in the movies. In Hollywood, counsel defending a deposition can say just about anything. As litigators know, the same cannot be said in real life.  Lawyers are governed by law and rules, which if not followed can result in sanctions from the court. That is what happened in Brightman v. Corizon, Inc. , 2021 N.Y. Slip Op. 50735(U) (Sup. Ct., N.Y. County July 29, 2021) (here). A Primer on the Law and Rules Governing Pretrial Depositions In New York, the conduct of counsel in a deposition is governed by CPLR § 3115 and the Uniform Rules for the Conduct of Depositions, 22 NYCRR Part 221. The Uniform Rules limit the scope of objections at a deposition. The Rules permit only those objections that would be waived under CPLR § 3115 (b)-(d) if not interposed—principally an objection to the form of a question. ( See 22 NYCRR § 221.1 (a); CPLR § 3115.) Ordinarily, therefore, it would not be proper to object to a question on the ground that the question has previously been asked and answered. Nor would it ordinarily be proper to object to a question merely to preserve the objection for the record, because the Uniform Rules themselves preserve all objections for the record except as they expressly provide otherwise. ( See Pedraza v. New York City Transit Auth. , 2016 N.Y. Slip Op. 30105(U), at *9 (Sup. Ct., N.Y. County 2016) (noting that objections that are not required to be made should not be made). Additionally, Section 221.1 provides that where an objection has been posed, “the answer shall be given<,> and the deposition shall proceed subject to the objections” and to any application for a protective order. 22 NYCRR § 221.1(a). That is, even when an objection by a deponent’s counsel is proper, the deponent may not ordinarily refuse to answer based on that objection. Section 221.2(c) similarly provides that a deponent’s counsel “shall not direct a deponent not to answer,” except as set forth in CPLR § 3115 and Section 221.2 itself. There are exceptions to the rule that the deponent must answer a question over an objection. In that regard, Section 221.2 identifies three narrowly circumscribed circumstances in which a deponent may refuse to answer or the deponent’s counsel may instruct him/her not to answer: (i) to “preserve a privilege or right of confidentiality”; (ii) to enforce a limitation set forth in a court order; and (iii) “when the question is plainly improper and would, if answered, cause significant prejudice to any person.” 22 NYCRR § 221.2 (a)-(c). Any refusal to answer or instruction not to answer must “be accompanied by a succinct and clear statement of the basis therefor.” Id. at Section 221.2 (c). The deponent’s counsel may not, therefore, direct the deponent not to answer a question yet decline to explain why pending a future discovery conference with the court. This is not to say that the deponent’s counsel is powerless to intervene against questioning that is badgering, harassing, or otherwise improper and prejudicial. Indeed, the Uniform Rules make clear that such interventions must be the exception, rather than the rule – and that a given intervention must be (i) uncommon, (ii) made only when plainly necessary, and (iii) no more than extensive than required to protect the witness against the improper line of questioning. Brightman v. Corizon, Inc. Brightman involved as claim of employment discrimination. The issue before the Court was “the conduct of plaintiff’s deposition.” Slip Op. at *1. In particular, whether plaintiff’s counsel engaged in obstructionist behavior by repeatedly interposing improper or speaking objections, directing plaintiff not to answer proper questions, and coaching plaintiff during a mid-deposition break.  Defendants sought an order (i) requiring plaintiff to answer several questions that plaintiff’s counsel instructed her not to answer during the deposition; (ii) directing the production of a note exchanged between plaintiff and her counsel during a mid-deposition break; (iii) appointing a discovery referee to oversee plaintiff’s continued deposition; and (iv) awarding defendants sanctions and attorney fees. Plaintiff opposed the motion, arguing that her counsel was simply protecting her client at the deposition from improper and harassing questions and that counsel’s conduct was appropriate, zealous advocacy. Id. The Court granted the motion in part and denied it in part. Counsel’s Objections and Instructions Not to Answer Defendants contended that plaintiff’s counsel repeatedly interposed improper objections, including lengthy speaking objections, and that counsel on multiple occasions instructed plaintiff not to answer questions that she was required to answer. The Court agreed with defendants. According to the Court, the transcripts and video recording of the depositions showed that “counsel made a large—and clearly excessive—number of objections, many of which were made on improper relevancy or asked-and-answered grounds, and many of which were speaking objections.” Slip Op. at *2. The Court said that the record also showed that “counsel repeatedly made other improper statements and interjections during the deposition, some of which included unnecessary personal commentary directed to the attorney taking the deposition.” Id. “And,” noted the Court, “several of improper speaking objections or comments … appeared—whether by intent or merely by effect—to guide the deponent’s ensuing answers.” Id. In other words, the objections appeared to coach the witness on how to answer. Id. Consequently, the Court held that “plaintiff's counsel’s objections frequently exceeded their proper bounds under the Uniform Rules.” Id. at *2. Defendants further contended that there were three instances in which plaintiff’s counsel improperly instructed her client not to answer questions. The first concerned plaintiff’s use of her son’s email address for work communications; the second addressed attempts by defendants to review plaintiff’s driver’s license while they still employed her; and the third involved questions about plaintiff’s understanding of certain staff requirements mandated by defendants’ contract with New York City. The Court held that the directions not to answer were improper and ordered plaintiff to answer the questions.  With respect to the first question, plaintiff contended that counsel’s instruction not to answer was proper because the question sought information that was both irrelevant and confidential. The Court noted that “relevancy is not a basis on which to instruct a witness not to answer.” Slip Op. at *3. Notwithstanding, the Court found that plaintiff’s stated occasional use of “her son’s email address for Corizon-related correspondence,” sufficed to make the email address relevant to the action. As to confidentiality, the Court held that the confidentiality agreement the parties had entered provided the protection allegedly need by the instruction. Id. (“Further, plaintiff does not dispute that the parties had entered into a confidentiality agreement that encompassed her deposition testimony.”). The Court rejected plaintiff’s argument that the email address was private, noting that although an email address might be “private” in the ordinary sense of the word, it did not mean that it is confidential for purposes of Section 221.2. Id. (citing Veloso v. Scaturro Bros., Inc. , 68 Misc. 3d 1024, 1028-1030) (Sup. Ct., N.Y. County 2020)). With respect to the second question, the Court held that the request was not a verbatim repeat of a prior request but, rather, a “somewhat different” one. Slip Op. at *3. “Additionally,” said the Court, “even if plaintiff’s counsel believed that defendants’ continuing to ask questions on this general topic was harassing and therefore patently improper,” the direction not answer was neither patently improper nor prejudicial: “Plaintiff has not demonstrated that she would have been prejudiced had she been required to answer the particular question at issue.” Id. at *3-*4. Indeed, observed the Court, any claim that defendants’ question had mischaracterized plaintiff’s prior testimony (as plaintiff contended), could have been corrected in plaintiff’s answer. Id. at *4. With respect to the third question, the Court found that the instruction not to answer was improperly based on “counsel’s view that the question at issue had already been asked and answered.” Id. (“An asked-and-answered objection is not a proper basis to instruct a witness not to answer.”). The Court was also of the view that “plaintiff had not yet fully answered the question at the time of the instruction not to answer; and that plaintiff's subsequent answer was difficult to understand and not responsive.” Id. The Consultation Between Plaintiff and Her Counsel During a Deposition Break In addition to the foregoing, the parties disputed whether plaintiff properly refused to turn over (or answer any questions about) a note she received from her counsel during a break in the deposition that plaintiff sought for health-related reasons with a question pending. The Court concluded that plaintiff had to answer questions about the communication. Plaintiff maintained that the communications at issue were privileged. Defendants, on the other hand, contended that the communications were not shielded by privilege because they occurred during a deposition break. See Section 221.3 of the Uniform Rules.  The Court held that Section 221.3 did not support defendants’ contention. The Court noted that Section 221.3 only prohibited an attorney from interrupting a deposition “for the purpose of communicating with the deponent,” absent circumstances set forth in the rule. Slip Op. at *4. The Court found that none of those circumstances were present in the case. Id. More importantly, noted the Court, “it is undisputed (indeed indisputable) that the communication between deponent and counsel at issue here occurred during a break taken to accommodate the deponent’s physical limitations, rather than for the purpose of communication.” Id. “In short,” concluded the Court, “defendants have not shown that the communication at issue here between plaintiff and her counsel was impermissible. Nor, for that matter, have defendants provided authority for the proposition that otherwise-privileged communications between client and attorney lose that status merely by virtue of being ‘impermissible’ under the rules governing depositions.” Slip Op. at *5. Notwithstanding defendants’ failure to show that the communication was impermissible, the Court required plaintiff to answer the questions about the communication. Id. The Court held that plaintiff failed to explain the basis for her counsel’s claim that the answers were confidential. Id. Ultimately, what occurred here was that plaintiff’s counsel instructed her client not to answer questions posed during a deposition. In the circumstances of this exchange, that instruction would be permissible only to protect a privilege or right of confidentiality. At the deposition itself, plaintiff’s counsel asserted—without elaboration—that the instruction not to answer was on the basis of “ onfidentiality.” On this motion, plaintiff’s counsel suggests in conclusory fashion that defendants’ questions sought information about a “privileged communication.” But counsel has not established that the necessary elements of the attorney-client privilege were satisfied; nor articulated what right of confidentiality shielded plaintiff from questions about their communication. Id. (footnote and citations omitted). Defendants’ Request for Sanctions In addition to moving to compel further discovery, defendants asked the Court to impose sanctions for frivolous conduct under 22 NYCRR § 130-1.1, to enjoin plaintiff’s counsel from engaging in assertedly obstructive conduct during the deposition, and to appoint a special referee to oversee discovery. Slip Op. at *5. The Court agreed with defendants that many of plaintiff’s counsel’s objections, interjections, and instructions not to answer during the second deposition were improper. Id. Notwithstanding, the Court was “not persuaded that this conduct, although inappropriate, necessarily rose (or sank) to the level of warranting sanctions under § 130-1.1.” Id. Instead, the Court held that the appropriate mechanism for relief was CPLR § 3126. Id. CPLR § 3126 allows a court to impose sanctions for discovery abuse, such as the refusal to obey an order for disclosure or the willful failure to disclose information that ought to have been disclosed. Finally, the Court denied the request to appoint a discovery referee or issue an injunction against plaintiff or her counsel.

This Blog has frequently addressed evidentiary issues faced by foreclosing lenders.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> ,< here =">here"> . On July 21, 2021, the Appellate Division, Second Department, decided Deutsche Bank National Trust Co. v. Hossain , in which the Court addressed the sufficiency of a foreclosing lender’s evidence submitted in support of an application for a default judgment.  The lender in Deutsche Bank commenced an action to foreclose a mortgage.  The defendant borrowers answered the complaint; however, their answer was subsequently stricken because they failed to comply with discovery demands.  Lender moved for a default judgment and for an order of reference.  Borrowers’ opposition was based on “the plaintiff<‘s> fail to submit an ‘affidavit made by the party’ or ‘proof of the facts constituting the claim’” as required by CPLR 3215(f).  Supreme court granted lender’s motion.  Thereafter, lender moved for a judgment of foreclosure and sale, which motion supreme court granted without opposition.  The borrowers appealed from both the default order and the judgment of foreclosure of sale. The Second Department dismissed the appeal from the default order “because the right of a direct appeal therefrom terminated with the entry of the judgment of foreclosure and sale in the action.”  (Citation omitted.)  However, while “no appeal lies from a judgment entered upon the default of an appealing party, an appeal from such a judgment brings up for review those matters which were the subject of the contest before the Supreme Court.”  (Citations and internal quotation marks omitted.)  Thus, the Court reversed the judgment of foreclosure and sale after finding that the sufficiency of the evidence submitted by lender on its motion for a default judgment failed to satisfy the requirements of CPLR 3215(f), which provides, in pertinent part: Proof. On any application for judgment by default, the applicant shall file proof of service of the summons and the complaint, or a summons and notice served pursuant to subdivision (b) of rule 305 or subdivision (a) of rule 316 of this chapter, and proof of the facts constituting the claim, the default and the amount due by affidavit made by the party…. Where a verified complaint has been served, it may be used as the affidavit of the facts constituting the claim and the amount due; in such case, an affidavit as to the default shall be made by the party or the party’s attorney…. Thus, the Court held: Where, as here, a foreclosure complaint is not verified, CPLR 3215(f) states, among other things, that upon any application for a judgment by default, proof of the facts constituting the claim, the default, and the amount due are to be set forth in an affidavit made by the party.  Here, in support of its motion, the plaintiff submitted an affidavit of merit executed by a “Document Execution Specialist” who was employed by the plaintiff’s servicing agent. The affiant asserted that she had personal knowledge of the merits of the plaintiff’s cause of action based upon her review of various business records. However, as the defendants correctly contend, since the plaintiff failed to attach the business records upon which the affiant relied in her affidavit, her factual assertions based upon those records constituted inadmissible hearsay, and her affidavit was insufficient to demonstrate “proof of the facts constituting the claim.”  Accordingly, the Supreme Court should have denied those branches of the plaintiff’s motion which were for leave to enter a default judgment against the defendants and for an order of reference. (Citations and internal quotation marks omitted.) It should be noted that, consistent with CPLR 3215(f), CPLR 105(u) provides that “ ‘verified pleading’ may be utilized as an affidavit whenever the latter is required.”

When a person releases another from claims or the threat of claims, he/she is giving up the right to sue the other in connection with the subject of the release. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”). A release effectively eliminates all claims against another that are possessed by the party giving the release. It does not matter whether the releasor knew of the claims at the time that he/she gave the release.  A release is generally ineffective as a bar against a claim that arises after the date the release is given. However, a plaintiff will not be barred from bringing a claim that falls within the scope of a release when he/she can demonstrate that the release was procured by fraud, duress or some other wrongdoing. Centro Empresarial Cempresa , 17 N.Y.3d at 276; Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). Where a party “releases a fraud claim”, he/she “may later challenge that release as fraudulently induced only if can identify a separate fraud from the subject of the release.” Centro Empresarial Cempresa , 17 N.Y.3d at 276 (citing Bellefonte Re Ins. Co. v. Argonaut Ins. Co. , 757 F.2d 523 (2d Cir. 1985)).  The foregoing principles were highlighted in Schorsch v. Luxor Capital Partners, LP , 2021 N.Y. Slip Op. 50698(U) (Sup. Ct., N.Y. County July 26, 2021) ( here ). Schorsch involved a transaction pursuant to which Apollo Global Management LLC (“Apollo”) agreed to purchase the wholesale distribution business of RCS Capital Corporation (“RCAP”) and take a majority stake in AR Capital, LLC (“AR Capital”). At the time, RCAP needed an infusion of capital to meet its obligations. It formed a special committee to address RCAP’s capital needs (the “Special Committee”). While the transaction was being negotiated, Centerbridge Capital Partners II, LP (“Centerbridge”) proposed its own transaction. That proposal involved: (i) a potential $300-$350 million investment in convertible stock; and (ii) a reworking of RCAP’s management arrangement because RCAP was managed by RCS Capital Management, LLC, which was controlled by plaintiff Nicholas S. Schorsch (“Schorsch”), and (iii) a surrender of Schorsch’s Voting B shares (the “Centerbridge Transaction”). The Centerbridge Transaction also contemplated that the Series B preferred stock issued by defendant Luxor Capital Partners, LP (“Luxor”) would be repaid and the Series C convertible preferred stock, also held by Luxor, would be converted into common stock.  At some point, the Special Committee elected to end negotiations with Apollo. However, the Special Committee continued to explore potential deals with Apollo.  Although the Special Committee was generally of the view that the deal with Centerbridge was superior, it involved the surrender of control by Schorsch, who indicated that he was not willing to relinquish such control. Schorsch also believed that the Centerbridge Transaction was dilutive to existing shareholders.  Ultimately, RCAP decided to consummate a modified transaction with Apollo — i.e. , without Apollo acquiring an interest in AR Capital. In connection with the transaction, the parties executed a number of documents ( e.g. , the agreement between Apollo and AR Capital, the agreement between Apollo and the ARC principals, and the agreement between Apollo and RCAP (the “Transaction Documents”)), which included a broad release of claims (the “Release”). Pursuant to the Release, the releasing parties agreed to release each other from all claims arising out of or related to the transactions contemplated by the Transaction Documents. Following the Apollo Transaction, RCAP went bankrupt, and the creditor trust brought a claim in Delaware against Schorsch and his affiliates alleging, among other things, claims for breach of fiduciary duty (the “Delaware Action”). The factual allegations that form the basis for the claim in the Delaware Action concerned, among other things, RCAP’s negotiation with Apollo to the exclusion of Centerbridge. Although the Delaware court did not reach the issue of whether the claims asserted therein were barred by the Release, the Motion Court concluded that “the bringing of the Delaware lawsuit state a claim for breach of the Release” because it concerned a released claim. Slip Op. at *3.  The Motion Court rejected defendants’ contention that plaintiffs waived their rights under the Release, stating that there was nothing in the record before it to support the claim of a knowing or voluntary waiver.  Similarly, the Court found that defendants did not “in any way” rely on, and were not “otherwise prejudiced by”, “any conduct of the plaintiffs with respect to the Release.” Id.   Finally, the Court found that the creditor trust did not in any way change its position or discontinue the lawsuit when the plaintiffs asserted the Release in the Delaware Action. Thus, concluded the Court, plaintiffs stated a viable claim for breach of the Release.  Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” 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). Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside. Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1st Dept. 2006). In Schorsch , the parties broadly released all claims as against the other concerning: “(i) the Transaction Documents and the transactions contemplated by the Transaction Documents, (ii) any breach, non-performance, action or failure to act under any of the Transaction Documents, (iii) the Amended Purchase Agreement and the transactions contemplated thereby, (iv) the events leading to the termination of the Transaction Agreement and the Guaranty Agreement and the execution of the Amended Purchase Agreement, (v) any deliberations or negotiations in connection with the Transaction Documents, and (vi) any SEC filings, public filings, periodic reports, press releases, proxy statements or other statements issued, made available or filed relating, directly or indirectly, to the transactions contemplated by the Transaction Documents.” The release language was expansive and released “any and all … claims” whether “known or unknown” against any of the released parties. Such language was, as the Court noted, broad enough to cover the breach of the Release claim that plaintiffs asserted.

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment .” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac , 27 N.Y.3d at 624 (citing Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac , 27 N.Y.3d at 624 (quoting Matter of Jacqueline F. , 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac , 27 N.Y.3d at 624. (quoting Rossi v. Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Sometimes, a party possessing the privilege can waive its protection by affirmatively making the subject matter of the privileged communication an issue in a litigation. This is called “at-issue” waiver or “subject matter waiver”. Deutsche Bank Trust Co. of Ams. v Tri- Links Inv. Trust , 43 A.D.3d 56, 64 (1st Dept. 2007) (holding, subject matter waiver of a privilege occurs when “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.”).  Notably, the fact that privileged communications may contain information “relevant” to issues the parties are litigating will not, without more, place the contents of the privileged communication itself “at issue.” See Long Is. Light. Co. v. Allianz Underwriters Ins. Co. , 301 A.D.2d 23, 33 (1st Dept. 2002); see also Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP , 52 A.D.3d 370, 372 (1st Dept. 2008). Rather, “at issue” waiver occurs “when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.” North Riv. Ins. Co. v. Columbia Cas. Co. , 1995 WL 5792, *6, 1995 U.S. Dist. LEXIS 53, *17 (S.D.N.Y. 1995) (citations omitted); see also Manufacturers & Traders Trust Co. v. Servotronics, Inc. , 132 A.D.2d 392, 397 (1987) (no “at issue” waiver where the party asserting privilege “does not need the privileged documents to sustain its cause of action”). An example of an affirmative act that constitutes a subject matter waiver of the privilege is the affirmative defense of a party’s “reliance upon the advice of counsel.” Village Bd. of Vil. of Pleasantville v. Rattner , 130 A.D.2d 654, 655 (2d Dept. 1987). “Moreover, selective disclosure is not permitted as a party may not rely on the protection of the privilege regarding damaging communications while disclosing other self-serving communications.” Id. ; see also Orco Bank v. Proteinas Del Pacifico , 179 A.D.2d 390, 390 (2d Dept. 1992) (attorney-client privilege was waived by client’s “selective disclosure” of legal advice).  This Blog examined subject matter waiver here . Whether the attorney-client privilege was waived by a party to a litigation was the subject of U.S. Bank Nat’l Assn. v. Lightstone Holdings LLC , 2021 N.Y. Slip Op. 04537 (1st Dept. July 22, 2021) (here). U.S. Bank arose from a $7.4 billion loan from defendant Wachovia Bank, NA (succeeded by Wells Fargo) and nonparties Bear Stearns and Bank of America (the “Original Lenders”) to affiliates of defendants Lightstone Holdings LLC (“Lightstone”) and David Lichtenstein (“Lichtenstein”), entered into for the purpose of purchasing Extended Stay Hotels (“ESH”), a real-estate investment trust that held a portfolio of over 600 hotel properties. Of the $7.4 billion, $4.1 billion consisted of a “Senior Loan,” which was secured by mortgages on the hotel chain’s properties, and the remaining $3.3 billion consisted of 10 tranched mezzanine or “Junior Loans” (the “ESH Transaction”). The Original Lenders acted as the senior and junior lenders on the aggregate loan. Lightstone and Lichtenstein (the “Guarantors”) extended a $100 million capped guaranty for payment on the loans (the “Guaranty Cap”). After the closing, the Original Lenders securitized their interests in the Senior Loan in a commercial mortgage-backed security trust, receiving in return certificates representing their interests in the Trust entity. Ultimately, the trust certificates were sold to other investors. Plaintiff was the special servicer to the Trustee, acting on behalf of the present holders of the certificates, and, therefore, acted on behalf of the current senior lender holders (the “Senior Lender”). The junior loans were sold to various entities, including, as relevant to the appeal, defendants Line Trust, Deuce, Wachovia and Ashford (the “Junior Lenders”). On June 15, 2009, the borrowers filed for bankruptcy. The senior lender recovered the gross amount of $4,149,414,854.32, and the junior lenders were essentially wiped out. The Junior Lenders sued the Guarantors, which actions were ultimately settled with the Guarantors paying the Junior Lenders certain amounts. In the action before the First Department, plaintiff (as “Senior Lender”) sought to claw back settlement payments received by the remaining Junior Lender defendants in the action, alleging it had priority over them pursuant to the Intercreditor Agreement (the “ICA”), the document governing the relationship between the lenders in their respective capacities as debtholders under the senior and junior loans. Nonparty respondent Cadwalader Wickersham & Taft, LLP (“Cadwalader”) represented the Original Lenders in the ESH Transaction and drafted the ICA. At the bench trial, the Junior Lenders relied on the testimony of the two Cadwalader attorneys who drafted the ICA, as well as Tony Fineman (“Fineman”), Wachovia’s (as one of the Original Lenders) primary contact with respect to the ESH Transaction. The witnesses testified as to the meaning and intent of certain provisions of the ICA. At that time, and at various times prior to trial, plaintiff sought the production of Cadwalader documents that were protected by the attorney-client privilege. Plaintiff contended, as it did on appeal, that the Junior Lenders’ reliance on counsel’s testimony as to the meaning and intent of the ICA resulted in a subject matter waiver, requiring the production of privileged documents on the same topic. Supreme Court denied plaintiff’s request and after the bench trial, dismissed the claims against the Junior Lenders, finding that the evidence established, by a preponderance of the evidence, that the parties intended to give priority over the Guaranty Cap to the Junior Lenders. On appeal, plaintiff asked the Court to remand the matter for a new trial on the basis that it was entitled to the privileged Cadwalader documents. The First Department declined to do so and affirmed Supreme Court’s findings. The Court held that Ashford, Line Trust, and Deuce, as Junior Lenders, were not the holders of the privilege with Cadwalader. Rather, said the Court, the Original Lenders were the holders of the privilege. Slip Op. at *2. Thus, concluded the Court, “they did not place the ‘subject matter of its own privileged communication at issue in litigation.’” Deutsche Bank Trust Co. of Ams. , 43 A.D.3d at 64. “Since they are not using their attorney-client privilege as a sword,” observed the Court, “it cannot be said that plaintiff is deprived of ‘vital information’ necessary to ‘determine the validity of a claim or defense of the party asserting the privilege.’” Id. (citing id. ). The Court also held that Wachovia, who was also a Junior Lender defendant in the action, was “the holder of the privilege since it was also an Original Lender.” Id. The Court found that Wachovia also relied on the testimony of the two Cadwalader attorneys concerning the Original Lenders’ intent with respect to the ICA. “In this regard,” said the Court, “the trial court correctly held, after the deposition testimony of Fineman was read into the record, that the privilege, as held by Wachovia ha been waived with respect to communications/documents between Fineman (acting on behalf of Wachovia) and counsel concerning the relevant provisions of the ICA.” Slip Op. at *2-*3. The Court found “unavailing” “ laintiff’s contention that Wachovia’s reliance on counsel’s testimony was enough to constitute a waiver as to all documents.” Slip Op. at *3. “Wachovia was not the only party that was represented by Cadwalader with respect to the original ESH Transaction,” said the Court. The Court noted that “Bear Stearns and Bank of America equal holders of the privilege since Cadwalader represented all the Original Lenders.” Id. In fact, said the Court, “in at least one statement on the record, Cadwalader’s counsel averred that Bank of America, a nonparty, would not consent to a waiver of any privilege.” Accordingly, the Court held that “Wachovia could not unilaterally waive any privilege on behalf of the other privilege holders.” Id. (citations omitted). In sum, the Court said: To hold otherwise threatens the sanctity of the attorney-client privilege and would permit the unauthorized waiver of such without the consent of the actual party that possesses the privilege. Plaintiff's position that the documents were necessary and relevant to the issue of the parties' intent ignores the well-protected rights afforded privileged communications. Id. (citation omitted).

Sometimes during the course of litigation, through no fault of a litigant, his, her or their attorney becomes physically, mentally or legally incapable of representing the client.  In such circumstances, being forced to proceed without the attorney could be prejudicial.  CPLR 321(c) , which addresses such circumstances, provides: Death, removal or disability of attorney.  If an attorney dies, becomes physically or mentally incapacitated, or is removed, suspended or otherwise becomes disabled at any time before judgment, no further proceeding shall be taken in the action against the party for whom he appeared, without leave of the court, until thirty days after notice to appoint another attorney has been served upon that party either personally or in such manner as the court directs. In Wells Fargo Bank, N.A. v. Kurian , decided by the Second Department on July 21, 2021, the Court, faced with a “factual posture” of first impression in the Department, found that the defendant waived the protective stay afforded by CPLR 321(c).  The facts of Wells Fargo are simple and “typical of many residential mortgage foreclosure actions in New York”.  Wells Fargo commenced a mortgage foreclosure action after defendant borrower allegedly failed to make payments on the underlying note.  Defendant appeared by counsel and interposed an answer with counterclaims.  Eight months later, however, defendant’s counsel was suspended from the practice of law.  The suspension triggered the automatic stay provisions of CPLR 321(c), although “ ccording to the plaintiff, the defendant failed to notify the parties or the Supreme Court of her attorney’s suspension from the practice of law.” One year after the suspension, and without serving a “notice to appoint another attorney” as required by CPLR 321(c), plaintiff moved for summary judgment and for an order of reference.  Six days after plaintiff made the motion, but prior to its return date, new counsel appeared for defendant, opposed the motion and cross-moved to dismiss the complaint.  Supreme court issued an order granting plaintiff’s motion and denying defendant’s cross-motion.  Defendant filed a pro se notice of appeal, but the appeal was never perfected.  About a year and a half later, a third attorney appeared for defendant.  Thereafter, the court granted plaintiff’s “unopposed motion” and issued a judgment of foreclosure and sale directing the sale of the subject property. Nine months after the judgment of foreclosure and sale: the defendant moved by order to show cause, inter alia, to stay the foreclosure sale and to vacate the order and judgment of foreclosure and sale. The defendant argued that since the automatic stay of CPLR 321(c) was in effect on the date that the plaintiff filed its initial motion, inter alia, for summary judgment and for an order of reference, the motion was invalid, and any orders predicated upon those papers were null and void.  Defendant appealed the denial of her motion. The Second Department affirmed supreme court’s order.  The Court recognized that in certain circumstances when a litigant loses counsel “CPLR 321(c) protects the client by automatically staying the action from the date of the disabling event” because the “obvious purpose of the stay is to vest the party who has lost counsel with a reasonable opportunity to obtain new counsel before further proceedings are taken and thereby avoid prejudice that might conceivably arise from the absence of counsel in the interim.”  (Citations omitted.)  Citing numerous cases, the Court noted that “ rders or judgments that are rendered in violation of the stay provisions of CPLR 321(c) must be vacated.”   As to the stay, the Court explained: The express language of CPLR 321(c) sets no particular time limit to the stay of proceedings that is automatically triggered by a qualifying event. Of course, the shield of a stay should not be used as an indefinite sword against any continuation of the action. CPLR 321(c) therefore provides any adversary party with a mechanism for lifting a stay—by serving a notice upon the nonrepresented party to obtain a new attorney. The notice is to be served personally or in such other manner as the court directs ( see CPLR 321 ). Once the notice contemplated by CPLR 321(c) is properly served, the automatic stay of the action remains in effect for another 30 days, but is then lifted upon the expiration of that period. Thus, there are actually two ways in which a CPLR 321(c) stay may be lifted. One way is if the party that lost its counsel retains new counsel at its own initiative, or otherwise communicates an intention to proceed pro se. The second way is by means of the above-described notice procedure pursuant to CPLR 321(c). (Some citations omitted.) Although the Wells Fargo plaintiff’s counsel moved for summary judgment before the automatic stay of CPLR 321(c) was lifted, defendant’s “new counsel formally appeared in the action six days after the plaintiff's summary judgment motion was filed, submitted papers in opposition to that motion, and cross-moved to dismiss the complaint insofar as asserted against the defendant, all within the original or adjusted briefing schedule he defendant's opposition papers and cross motion were considered by the Supreme Court on the merits.”  Accordingly, the protections of CPLR 321(c) were “no longer necessary or relevant” as the “appearance and activities of the defendant’s new counsel operated, in effect, as a waiver of the protections otherwise afforded to the defendant….”  (Citation omitted.)   In finding that defendant’s conduct constituted a waiver, the Court held: … that even in the absence of service of a notice to appoint new counsel upon the unrepresented party as procedurally required by CPLR 321(c), a continuing stay under the statute may be waived by the unrepresented party's affirmative conduct of retaining new counsel, effective as of the time that new counsel formally appears in an action. Here, since the defendant's waiver of the stay occurred before her opposition papers were due in response to the plaintiff's motion, inter alia, for summary judgment and for an order of reference, the fact that the plaintiff filed its motion on an earlier date, when the stay was still in effect, is of no moment. Further, in regards to the suspension of the original attorney of record, the defendant's opposition papers and cross motion did not include any argument, at that time, that the motion before the Supreme Court violated the stay provisions of CPLR 321(c), further bolstering our conclusion that any issue regarding the existence of a stay had been waived. (Citation omitted.)

In today’s installment of Enforcement News, we examine an enforcement action brought by the Securities and Exchange Commission (“SEC” or the “Commission”) in the Southern District of New York against Aron Govil, the controlling shareholder and officer of two publicy traded companies – Cemtrex Inc. (“Cemtrex”) and Telidyne Inc. (“Telidyne”). According to the SEC, Govil committed a series of fraudulent activities, including scalping and the misappropriation of investor funds. To settle the action, Govil agreed to pay in excess of $1.2 million in disgorgement and penalties. What Is Scalping? Scalping refers to the purchase and sale of securities through arbitrage trading, as well as through the manipulation of the market.  In the former scenario, traders buy and sell securities “quickly, usually within seconds, using higher levels of leverage to place larger-sized trades in the hopes of achieving greater profits from minuscule price changes.” Chen, James, Scalper , Investopedia (Updated Mar. 18, 2021) ( here ).  In the latter scenario, a person is committing a fraud. Illegal scalping occurs when a person: (i) purchases shares of a security for his/her own account prior to recommending or touting that security to others; (ii) does not disclose in the recommendation or tout the full details of his/her ownership of the shares and his/her plans to sell the security at issue; and (iii) sells his/her shares following the dissemination of the recommendation or tout, which inflates the share price and trading volume of the security. What Is Misappropriation? Misappropriation is essentially a theft of money or assets. It occurs when a person uses another person’s money without authorization. Misappropriation of funds mirrors the crime of embezzlement, which is a crime committed by a person having a relationship of trust or fiduciary duty to another person and who steals that person’s money or property for his/her own personal gain. Both the SEC and FINRA have numerous rules governing how corporate actors and financial professionals must act to safeguard and protect the handling of investor and customers monies. SEC v. Govil On July 19, 2021, the SEC announced ( here ) that it reached an agreement to settle charges against Aron Govil (“Govil”) for his violation of the federal securities in the fraud of investors of Cemtrex and Telidyne.   According to the complaint filed by the SEC ( here ), Govil misappropriated over $7 million of Cemtrex investor funds between April 2016 and January 2018 to finance his personal business ventures and to pay his personal expenses. The alleged misappropriation of funds occurred in connection with two offerings made by Cemtrex, in which Govil represented to investors that the proceeds of the offering would be used for various corporate purposes, including new product development and acquisitions, as well as repaying outstanding debt and other general corporate purposes.  The SEC also alleged that Govil engaged in scalping – secretly selling Cemtrex stock while paying stock promoters to recommend that retail investors buy the company’s stock – and insider trading.  In one instance, Govil allegedly paid a stock promoter to recommend Cemtrex stock by using the account of a defunct construction company Govil owned. The promoter only disclosed receiving a fee from that company, not Govil or Cemtrex. In another instance, Govil allegedly paid a promoter to recommend Cemtrex stock by transferring approximately 200,000 shares of Cemtrex common stock from a Govil Nominee Entity as a charitable contribution.  In total, the SEC claimed that Govil obtained proceeds of more than $360,000 in connection with his illegal trading. The SEC said that Govil did not file any of the required disclosures with the SEC in connection with his Cemtrex trading ( e.g. , the Forms 4 and 5 required by Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 16a-3 promulgated thereunder).  The SEC further alleged that Govil, while serving as Telidyne’s chief executive officer, made material misrepresentations to investors regarding the company’s products.  According to the SEC’s complaint, between at least April 2019 and May 2020, Govil falsely told investors that Telidyne, which purported to be a developer of mobile phone applications or “apps,” had developed the “Teli App,” which allowed users to transact business in cryptocurrencies from their mobile phones, and also had started work on an app to detect COVID-19. The SEC claimed that these statements were false because the Teli App did not have the stated cryptocurrency functionality and Telidyne had not started work on the COVID-19 detection app. Commenting on the charges and settlement, Richard R. Best, Director of the SEC’s New York Regional Office, stated: “Govil allegedly flooded the market with paid-for buy recommendations for Cemtrex stock and made false claims about Telidyne’s development of mobile apps that would facilitate cryptocurrency transactions and help combat the coronavirus.”  Importantly, Best reminded investors to be “wary of online recommendations from unverified sources that appear to capitalize on the latest market trends and seem too good to be true.” The SEC charged Govil with violations of the antifraud provisions of the federal securities laws, as well as violations of Section 16(a) of the Exchange Act, which requires corporate officers, directors, and major shareholders to disclose their transactions in their company’s stock.  The SEC sought injunctive relief, an officer and director bar, a penny stock bar, disgorgement plus prejudgment interest, and civil penalties.  Without admitting or denying the allegations, Govil consented to the entry of a final judgment that enjoins him from violating the charged provisions; imposes officer and director and penny stock bars; imposes, in connection with certain violations, disgorgement in the amount of $626,782, plus prejudgment interest thereon in the amount of $76,693.95; and imposes a civil penalty in the amount of $620,000.  The judgment also provides for the court to order, upon motion of the Commission, additional disgorgement with prejudgment interest and/or penalty against Govil, if deemed appropriate.  The proposed settlement is subject to court approval.

Commercial contracts often include a liquidated damages clause that provides for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Such clauses are often found in contracts for the sale of real property, commercial leases, and construction contracts. Given the consequences of liquidated damages clauses, it is important to understand when and how such a clause will be enforced. What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977) (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). here,  here,=">here," and  here.=">here."> Are Liquidated Damages Clauses Enforceable? Unconscionability Like any provision in a contract, a liquidated damages clause is unenforceable when it is unconscionable. Gillman v. Chase Manhattan Bank , 73 N.Y.2d 1, 10 (1988). An unconscionable contract is one that “‘is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms.’” Id. (quoting Mandel v. Liebman , 303 N.Y. 88, 94 (1951) (citing 1 Corbin on Contracts, § 128, p. 400)). “The doctrine, which is rooted in equitable principles, is a flexible one and the concept of unconscionability is intended to be sensitive to the realities and nuances of the bargaining process.” Id. (quoting Matter of State of New York v Avco Fin. Serv. , 50 N.Y.2d 383, 389-390 (1980)) (internal quotation marks omitted). “A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made — i.e., some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” Id. (quoting Williams v Walker-Thomas Furniture Co. , 350 F.2d 445, 449 (D.C. Cir. 1965) (internal quotation marks omitted) and citing Avco Fin. Serv. , 50 N.Y.2d at 389). “The procedural element of unconscionability requires an examination of the contract formation process and the alleged lack of meaningful choice.” Gillman , 73 N.Y.2d at 10-11. Among the factors considered by the courts are “the size and commercial setting of the transaction …, whether deceptive or high-pressured tactics were employed, the use of fine print in the contract, the experience and education of the party claiming unconscionability, and whether there was disparity in bargaining power.” Id. at 73. N.Y.2d at 11 (citations omitted). Substantively, unconscionability requires and examination of the substance of the bargain “to determine whether the terms were unreasonably favorable to the party against whom unconscionability is urged. Id. at 73. N.Y.2d at 12 (citations omitted). Typically, the terms of the contract are so outrageous as to be deemed substantively unconscionable.  Examples of substantively unreasonable contractual provisions include, but are not limited to, inflated prices, unfair termination clauses, unfair limitations on consequential damages and improper disclaimers of warranty. State v. Wolowitz , 96 A.D.2d 47, 67-68 (2d Dept. 1983). In determining the conscionability of a contract, no one factor is weighted over another; “each case must be decided on its own facts.” Id. at 68. (citing Matter of Friedman , 64 A.D.2d 70, 85 (2d Dept. 1978).  In general, “procedural and substantive unconscionability operate on a ‘sliding scale’; the more questionable the meaningfulness of choice, the less imbalance in a contract’s terms should be tolerated and vice versa.” Id. (citation omitted). “While there may be extreme cases where a contractual term is so outrageous and oppressive as to warrant a finding of unconscionability irrespective of the contract formation process …, such cases are the exception.” Id. (citation omitted). Generally, the party claiming unconscionability must show both a lack of a meaningful choice and the presence of contractual terms that unreasonably favor one party over the other. Id. (citing Avco Fin. Serv. , supra).  Notwithstanding the foregoing, courts are reminded that contracts “essentially involve[] a bargained-for exchange between the parties” and “ bsent some violation of law or transgression of a strong public policy, the parties to a contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party.” Id. (citing Rowe v. Great Atlantic & Pacific Tea Co. , 46 N.Y.2d 62, 67-68 (1978)). “The doctrine of unconscionability, with its emphasis on the contract-making process, is really an expression of, rather than an exception to, this principle. By focusing on the manner in which a contract is entered into and the status of the parties, the doctrine is designed to insure freedom of contract and not to negate it.” State , 96 A.D.2d at 68. Whether a contract or a clause therein is unconscionable is generally an issue of fact requiring a hearing and the presentation of evidence. Wilson Trading Corp. v. David Ferguson, Ltd. , 23 N.Y.2d 398, 403 (1968). Thus, if it appears from the record that unconscionability may exist, and the issue is not free from doubt, then the court must hold a hearing where the parties may present evidence with regard to the circumstances of the signing of the contract, and the disputed terms’ setting, purpose and effect. State , 96 A.D.2d at 60 (citations omitted). A Penalty If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. P.J. Carlin Constr. Co. v. City of New York , 59 A.D.2d 847 (1st Dept. 1977); Wechsler v. Hunt Health Sys. , 330 F. Supp. 2d 383, 413 (S.D.N.Y. 2004). Other than unconscionability, a liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. Truck Rent-A-Center , 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding Corp. v. Cong. Fin. Corp. , 4 N.Y.3d 373, 380 (2005). New York courts often strike liquidated damage clauses when they fail to meet the foregoing. See , e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from time of breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which tenant forfeited $63,500 in deposits regardless of whether tenant terminated agreement with several months’ notice). “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Against the foregoing legal discussion, we examine Rome Gas, Inc. v. Fastrac Props. I, LLC , 2021 N.Y. Slip Op. 04451 (4th Dept. July 16, 2021) ( here ). Rome involved a liquidated damages clause in a real estate purchase agreement (“REPA”) that was claimed to be unconscionable. Rome Gas, Inc. v. Fastrac Props. I, LLC In Rome , Plaintiff claimed that defendant breached the REPA and, as a consequence, sought specific performance and monetary damages.  The REPA contained a liquidated damages provision, which stated in part: “In the event the Agreement is not closed due to the fault of the Seller < i.e. , defendant> i.e., defendant>, the money paid in escrow shall be returned to the Purchaser < i.e. , plaintiff> i.e., plaintiff>. In such event neither party shall have any further claim against the other.” Plaintiff appealed from an order that granted defendant’s motion for summary judgment limiting damages on the first cause of action to the amount paid in escrow pursuant to the liquidated damages provision and dismissing the second and third causes of action in their entirety. Plaintiff claimed that the liquidated damages clause was unconscionable and therefore unenforceable. The Appellate Division, Fourth Department rejected plaintiff’s contention.  The Court found that the REPA was not procedurally unconscionable given that it was “entered into by sophisticated entities as part of a normal commercial transaction, there no evidence of deceptive or high-pressure tactics, agreement contain ‘fine print,’ and there was no disparity in bargaining power.” Slip Op. at *1 (internal quotation marks omitted) (quoting Mazursky Grp., Inc. v. 953 Realty Corp. , 166 A.D.3d 432, 433 (1st Dept. 2018)). The Court also rejected plaintiff’s contention that the REPA was procedurally unconscionable because plaintiff “was not initially represented by counsel.” Id. The Court noted that once plaintiff retained counsel, plaintiff “never objected to the liquidated damages provision” even though plaintiff “sought to amend various … provisions of the REPA.”  The Court also found that in “ onsidering the context, the purpose and the effect of the provision,” it was not “substantively unconscionable.” Id. (citations omitted).  Takeaway Liquidated damages clauses are frequently challenged as a penalty by one party against another. Rome shows, however, that the doctrine of unconscionability can be used as an additional basis upon which a party can challenge the enforceability of a liquidated damages clause.