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This BLOG has written extensively on issues related to residential mortgage foreclosure including, but not limited to: the notice requirements of RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> ; the acceleration and deacceleration of mortgage debt < HERE =">HERE"> and < HERE =">HERE"> ; and, Article 15 of the RPAPL < HERE =">HERE"> and < HERE =">HERE"> .  All of these issues are relevant to the Second Department’s decision in Everhome Mortgage Company v. Aber , decided on June 9, 2021. The facts in Everhome are straightforward (and some were obtained by reviewing the underlying electronically filed court records).  Defendant Aber borrowed funds from plaintiff’s assignor and secured the repayment obligation with a mortgage on residential property.  Aber defaulted in May 2008 by failing to make the mortgage payment due on May 1, 2008, and each month thereafter.  Plaintiff’s assignor assigned the underlying note and mortgage to plaintiff on April 13, 2009, and a foreclosure action was commenced by plaintiff on April 30, 2009 (“Action No. 1”).  Eight months later, “the subject property was transferred to Equity .”  In October of 2013, Action No. 1 was dismissed, without prejudice, after plaintiff failed to appear at a court conference.   A second foreclosure action against Aber and Equity was commenced on June 24, 2015 (“Action No. 2”).  In their answer to the complaint in Action No. 2, Aber and Equity, inter alia , asserted a statute of limitations defense and asserted a counterclaim seeking to discharge the mortgage pursuant to Article 15 of the RPAPL.  Supreme court granted Equity’s motion to dismiss the complaint pursuant to CPLR 3211(5) (statute of limitations) and for summary judgment on the counterclaim to discharge the mortgage and denied plaintiff’s motion for summary judgment on its complaint and to strike defendants’ answer. An action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted).  In situations where a mortgage appears as a lien of record on real property, but the statute of limitations has expired for the mortgagee to commence an action to foreclose the mortgage, RPAPL 1501(4) permits the mortgagor (or any other “person having an estate or interest in the real property”) to commence an action to have the encumbrance removed of record.   Since the mortgage debt was accelerated on April 30, 2009, when Action No 1 was commenced, and Action No 2 was commenced on June 24, 2015, more than 6 years later, the Second Department agreed that Equity established its “initial burden” that Action No. 2 was time-barred.  Accordingly, the “burden then shifted to the plaintiff to present admissible evidence to raise a question of fact as to whether the statute of limitations was tolled or otherwise inapplicable, or whether the plaintiff actually commenced this action within the applicable limitations period.”  Everhome, at 3 (citations omitted).  In an effort to meet its burden, Everhome argued, inter alia , that: RPAPL 1304 constitutes a "statutory prohibition" within the meaning of CPLR 204, and therefore, the statute of limitations was tolled by its service of 90-day notices under RPAPL 1304; and, “its commencement of the first action did not accelerate the mortgage debt because questions of fact may exist as to whether it properly accelerated the mortgage debt in accordance with paragraph 22(b) of the mortgage, and therefore, any determination on the issue of whether this action is time-barred is premature.”  Everhome, at 3.  The Court rejected plaintiff’s arguments. CPLR 204 Simply stated, RPAPL 1304 requires that, inter alia : at least ninety days prior to commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  "Strict compliance with RPAPL 1304 notice to the borrower … is a condition precedent to the commencement of a foreclosure action."  Everhome, at 3 (citations and internal quotation marks omitted, emphasis in original).  In an effort to tack an extra ninety days to the time it had to commence Action No. 2, Everhome unsuccessfully argued that the 90 day notice requirement of RPAPL 1304 is a “statutory prohibition” under CPLR 204(a) , which provides that that “ here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced.”  If plaintiff’s argument was successful, it would have had until July of 2015 to commence Action No. 2.  The Court disagreed, recognizing that a “statutory prohibition and a condition precedent are separate concepts.”  Everhome, at 3 (citations and internal quotation marks omitted).  The Court reasoned that “ he salient feature of a ‘statutory prohibition’ is the plaintiff’s lack of control” and because a “plaintiff has complete control over the acts necessary to effectuate compliance with a condition precedent, a condition precedent is not a statutory prohibition.”  Everhome, at 3 (citations and internal quotation marks omitted).  Because plaintiff had control over if and when it sent required notices under RPAPL 1304, “and could have done so at least 90 days prior to the expiration of the statute of limitations, RPAPL 1304 is not a statutory prohibition within the meaning of CPLR 204(a)” and the service of the 90-day notices “did not toll the statute of limitations”.  Everhome, at 3 (citations and internal quotation marks omitted).   Paragraph 22(b) of the Mortgage Among other things, paragraph 22 of the mortgage required lender to send borrower a notice of default and provide an opportunity to cure before the debt could be accelerated.  Plaintiff argued that questions of fact existed as to whether it complied with paragraph 22(b) of the mortgage, “which is a contractual condition precedent to a valid acceleration.”  Everhome, at 3.  Equity urged that, because Action No. 1 was dismissed due to plaintiff’s failure to appear at a conference, “plaintiff’s election to accelerate the mortgage debt in its complaint was never invalidated by the Supreme Court … and, therefore, the mortgage debt remained in an accelerated posture for more than six years, rendering time-barred.”  Everhome, at 4.  In rejecting plaintiff’s argument, the Court held that “ he requirement in paragraph 22(b) of the mortgage that the lender first send the borrower written notice of default, with at least 30 days’ notice of acceleration, is a contractual condition precedent ( see CPLR 3015 ) inserted in the contract solely for the benefit of the borrower, as it gives the borrower additional time to make installment payments before the lender may accelerate the mortgage debt” and, accordingly, “compliance with paragraph 22(b) is enforceable and waivable by the borrower.”  Everhome, at 4 (some citations omitted).  Thus, the Court refused to “condone[]” “plaintiff’s belated attempt to take advantage of its own potential breach of paragraph 22(b) to the prejudice of Equity, whose rights under RPAPL 1501(4) to discharge and cancellation of the mortgage have vested”. The Court also recognized that notwithstanding Equity’s assertion of a defense based on noncompliance with paragraph 22(b), supreme court “ultimately did not invalidate the plaintiff’s election to accelerate the mortgage on that basis since it directed dismissal of the complaint based upon plaintiff’s failure to appear at a court conference.”  Everhome, at 4 (citations omitted).  In addition, the Court also agreed with supreme court that plaintiff’s submissions were insufficient to create triable issues of fact relating to the sufficiency and timing of the required notices. It should be noted that there was a lengthy dissent in which it was concluded that the motion and cross-motion should have been denied by supreme court.

In P & HR Solutions, LLC v. Ram Capital Funding , LLC, 2021 N.Y. Slip Op. 03554 (1st Dept. June 8, 2021) ( here ), the Appellate Division, First Department was faced with the situation that is all too common in commercial litigation, plaintiffs trying to assert contract and fraud claims without differentiation. In fact, over the past few months, this Blog has written about numerous appellate cases in which the plaintiffs’ fraud claims were dismissed because they were indistinguishable from their contract claims ( e.g. , here , here , here and here ). In addition to the duplication of claims doctrine, the Court was asked to consider whether a sophisticated party took sufficient affirmative steps to protect itself from fraud. Under New York law, a sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). The Blog wrote about this aspect of the justifiable reliance element of a fraud claim here . Finally, the Court was asked to examine the causation element of Plaintiffs’ fraud claim. Under New York law, a plaintiff must plead and prove both transaction causation and loss causation to withstand a challenge from the defendant. “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). Loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). It is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002) (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). This Blog wrote about causation element of a fraud claim here . P&HR arose from two merchant cash agreements (“MCAs”) between plaintiffs, P&HR Solutions LLC (“P&HR”) and Debra Ferguson (“Ferguson”), and defendant Ram Capital Funding LLC (“Ram Capital”). Plaintiffs alleged that defendants breached the MCAs and committed fraud in connection therewith. Relevant to the appeal, plaintiffs sought to hold defendant Jonathan Braun (“Braun”) personally liable for the alleged breach of contract and fraud. The first MCA between Plaintiffs and Ram Capital was executed in August 2018. The agreement provided almost $660,000 worth of P&HR’s future receivables at a collection rate of 10% of its daily receivables, for a cash price of $440,000.00 (the “First Ram Capital Agreement”). As part of the agreement, P&HR had to pay various fees and expenses, among other charges and amounts due.  In September 2018, P&HR entered into a second agreement with Ram Capital in which it refinanced the First Ram Capital Agreement. Under the terms of the September 2018 agreement, Ram Capital purchased almost $975,000.00 worth of P&HR’s future receivables at a collection rate of 10% of P&HR’s daily receivables, for a discounted price of $350,000.00 (“Second Ram Capital Agreement”). Like the first agreement, P&HR was required to pay various fees and expenses.  Both agreements contained reconciliation provisions that required RAM to adjust its debits and credits from the account to meet the agreed upon percentage of monthly debits, while giving Plaintiffs the right to adjust their payments at Ram Capital’s sole discretion.  According to Plaintiffs, from August 6, 2018, to September 28, 2018, Ram Capital had materially underpaid P&HR a total of $239,743.00. Plaintiffs claimed that by December 2018, P&HR could not keep up with its payments. Rather than ask for a reconciliation from Ram Capital to lower the daily payments, Plaintiffs claimed they did nothing because they had discovered, through publicly available documents, that Ram Capital was actually owned by Braun, a person whom Plaintiffs alleged had made previous threats against Ferguson and her business. Plaintiffs brought suit, alleging two causes of action against Braun. In the first cause of action, Plaintiffs claimed that Braun was liable for breach of contract, claiming that he was the alter-ego of Ram Capital and defendant Richmond Capital Group, LLC (“Richmond”). Plaintiffs claimed that Braun “completely dominated such entities and corporate formalities and separateness between such entities ignored ….”   Plaintiffs alleged that the MCAs were breached because, among other things: (1) Defendants overcharged Plaintiffs in connection with the fees and expenses due under the MCAs; (2) the receivables under the agreements were not taken by P&HR, but by Richmond, with whom Plaintiffs did not have an agreement; (3) Ram Capital materially miscalculated the amount that remained due under the First Ram Capital Agreement; and (4) Ram Capital materially underpaid what it owed Plaintiffs under the Second Ram Capital Agreement. In the second cause of action, Plaintiffs sought to hold Braun liable for fraud, alleging, among other things, that he: (1) misrepresented the fees and expenses to be paid in entering the MCAs; (2) materially overstated the amount due under the First Ram Capital Agreement; (3) misrepresented the average monthly amount of receivables generated by Plaintiffs; and (4) misrepresented or concealed his affiliation with the corporate entities. Braun moved to dismiss the action as against him under CPLR §§ 3211(a)(7) and 3016(b). The motion court denied Braun’s motion, finding, among other things, that “Braun’s assertion that the fraud claims not sufficiently particularized … unpersuasive,” because “the pleadings properly allege that defendants fraudulently asserted to plaintiffs that Ram Capital was unaffiliated with Richmond.”  On appeal, the Appellate Division, First Department unanimously reversed the decision and order of the motion court. The Court held that the motion court properly dismissed the contract claims against Braun. The Court noted that the contracts at issue were between P&HR and Ram Capital. “Therefore,” said the Court, “unless veil is pierced to reach Braun, Braun be individually liable for breach of those contracts.” Slip Op. at *1 (citing Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC , 146 A.D.3d 1, 12-13 (1st Dept. 2016), aff’d , 31 N.Y.3d 1002 (2018); Andejo Corp. v. South St. Seaport Ltd. Partnership , 40 A.D.3d 407 (1st Dept. 2007); Sheridan Broadcasting Corp. v. Small , 19 A.D.3d 331, 332 (1st Dept. 2005)). As to the alter ego allegations, the Court held that they were “insufficient.” Id. The Court explained that Plaintiffs simply “set[] forth conclusory allegations merely reciting typical veil-piercing factors.” Id. (citing Skanska , 146 A.D.3d at 12). Thus, while “Plaintiffs may have alleged that Ram and defendant Richmond Capital Group, LLC (RCG) alter egos”, they did not allege “that Ram and Braun were alter egos.” Id. Directing its attention to the fraud allegations, the Court held that all but one was “duplicative of the contract claim.” Id. The exception, said the Court, concerned the allegation that Braun concealed or misrepresented his affiliation with Ram Capital. “However,” held the Court, “this fraud allegation fail to state a cause of action.” Id. First, the Court found that Plaintiffs failed to plead justifiable reliance because the information purportedly concealed was discoverable by reviewing publicly available documents. Indeed, noted the Court, “the complaint itself allege that plaintiff Debra Fergerson (P & HR’s principal) confirmed Braun’s ownership of Ram through publicly available documents and by speaking with people in the merchant cash advance industry.” Id. Thus, concluded the Court, because Plaintiffs failed to exercise any due diligence at the time of the alleged misrepresentation (which they conceded they could have performed by exercising such diligence after the fact), their fraud claim could not withstand scrutiny. Id. (citations omitted).  Second, the Court held that Plaintiffs failed to show how the alleged misrepresentation about Braun’s involvement with Ram Capital was “‘the direct and proximate cause of the claimed losses.’” Id. (quoting Friedman v. Anderson , 23 A.D.3d 163, 167 (1st Dept. 2005)). “Plaintiffs may have alleged transaction causation,” said the Court, “but they did not allege loss causation.” Id. (citing Laub , 297 A.D.2d at 31).  The Court found that “ ven if Braun had not been involved with Ram , plaintiffs would still have suffered loss due to the onerous terms of the contracts they signed.” Id. at *2. In other words, Plaintiffs could not demonstrate the causal link between the alleged misrepresentation about Braun’s involvement with Ram Capital and their losses. Takeaway Plaintiffs seeking to pierce the corporate veil carry a heavy burden. They must allege facts, not conclusion. As P&HR shows, merely parroting the elements of a veil piercing claim will not suffice. P&HR is another example of the obstacles plaintiffs encounter when trying to allege a fraud claim with a contract claim. When the former merely masquerades as the latter, as in P&HR (that is, all but one of the fraud allegations), the fraud claim will be dismissed. And, even when the two claims are sufficiently different such that the fraud claim survives application of the duplication of claims doctrine, plaintiffs must still satisfy the particularity requirements of CPLR § 3016(b) as to each element of the claim. In P&HR , Plaintiffs could not do so with respect to the justifiable reliance and causation elements of the claim.

On June 3, 2021, the New York Court of Appeals, the State’s highest court, handed down Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v Matthew Bender & Co., Inc. , 2021 N.Y. Slip Op. 03485 (June 3, 2021) ( here ), a decision involving a claim under General Business Law § 349 (“GBL § 349”), New York’s consumer fraud statute. In a decision written by Judge Jenny Rivera, a majority of the Court made two rulings that will have an impact on future claims under the statute. First, the Court made clear that GBL § 349 focuses on “the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Second, the Court confirmed that a written disclaimer may “bar a GBL § 349 claim at the pleading stage it utterly refutes plaintiff’s allegations,” and “address the alleged deceptive conduct precisely, so as to eliminate any possibility that a reasonable consumer would be misled.” The primary issue in Himmelstein was whether plaintiffs (who bought the annual edition of a legal resource manual published and sold by defendant) adequately pleaded a deceptive act or practice prohibited by GBL § 349. The claim was based on defendant’s alleged misrepresentations about the completeness of the laws reproduced in one section of the publication. Plaintiffs brought the action on behalf of themselves and a putative class of purchasers of certain annual editions of New York Landlord-Tenant Law (the “Tanbook”), a compilation of New York legal materials on landlord-tenant law, against defendant Michael Bender & Company Inc., the publisher of the Tanbook. Plaintiffs are a law firm that handles landlord-tenant actions, a non-profit corporation that assists pro se litigants in housing court matters, and a tenant advocate and organizer. The amended complaint alleged, inter alia , that defendant engaged in deceptive business practices in violation of GBL § 349 in its marketing and sale of the 2016 and prior editions of the Tanbook. Plaintiffs claimed that defendant materially misrepresented that Part III of the Tanbook contained a complete and accurate compilation of the statutes and regulations applicable to rent-controlled and rent-stabilized apartments in New York City, when, in fact, key portions were omitted or inaccurately presented. Plaintiffs contended that these omissions and inaccuracies rendered the Tanbook of no value to its users. Plaintiffs further alleged that, after receiving complaints, defendant included the omitted statutes and regulations in the 2017 edition, which, although published late in the calendar year, was sold to plaintiffs and other subscribers at full price. Defendant moved to dismiss the amended complaint under CPLR § 3211(a). Supreme Court granted defendant’s motion and dismissed the complaint in its entirety. The Appellate Division, First Department affirmed the order of dismissal, in part on different grounds. 172 A.D.3d 405 (1st Dept. 2019) ( here ). The Court of Appeals granted plaintiffs leave to appeal (34 N.Y.3d 908 (2020)) and affirmed the First Department’s decision. The Court held that the alleged misrepresentations constituted consumer-oriented conduct under the statute – that is, the misrepresentations were contained in a manual that was marketed to and available for purchase by consumers. In so holding, the Court rejected the First Department’s view of who is a “consumer” under the statute. Under Department-wide authority, which Supreme Court relied upon, consumers are defined as those “who purchase goods and services for personal, family, or household use” ( Himmelstein , 2018 WL 984850, at *5, quoting Med. Socy. V. Oxford Health Plans, Inc. , 15 A.D.3d 206, 207 (1st Dept. 2005)); they are not business purchasers of “a widely sold service that can only be used by businesses.” Id. (quoting Cruz v. NYNEX Info. Resources , 263 A.D.2d 285, 286, 290 (1st Dept. 2000)). The Court explained that “there no textual support in GBL § 349 for a limitation on the definition of ‘consumer’ based on use.” In fact, noted the Court, “any such narrowing of the term ‘consumer’ would be contrary to the legislative intent to protect the public against all forms of deceptive business practices.” (Citations omitted.) The Court made clear that the text and purpose of GBL § 349 did “not support the importation of other statutory definitions (as the First Department had done in its decisions ( see , e.g. , Cruz , 263 A.D.2d at 289)) because, unlike other provisions, section 349 broadly prohibit ‘ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.’” (Quoting GBL § 349). Significantly, the Court made clear that “the consumer-oriented element” of the statute did not “depend on the use to be made of the product, as what matters is whether the defendant’s allegedly deceptive act or practice is directed to the consuming public and the marketplace.” “In other words,” concluded the Court, “GBL § 349 is focused on the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Given the foregoing, the Court rejected defendant’s argument that its conduct was not consumer oriented because the Tanbook was marketed to legal professionals ( i.e. , lawyers, judges, and tenant advocates) rather than consumers. “The fact that persons and businesses working in the legal field purchase the Tanbook to assist in their professional endeavors,” said the Court, did “not mean that the defendant’s conduct was not consumer oriented.” Indeed, noted the Court, “ egal professionals merely a subclass of consumers and, as recently clarified, ‘consumer-oriented conduct’ need not ‘be directed to all members of the public.’” (Quoting Plavin , 35 N.Y.3d at 13). Plavin="Plavin" here.=">here."> The Court also held that the alleged misrepresentations were not actionable because no reasonable consumer would find them to be so. As such, said the Court, the amended complaint was properly dismissed. Under New York law, a defendant’s actions are materially misleading when they are “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Gaidon v. Guardian Life Ins. Co. of Am. , 94 N.Y.2d 330, 344 (1999). What is objectively reasonable depends on the facts and context of the alleged misrepresentations and “may be determined as a matter of law or fact (as individual cases require).” Oswego , 85 N.Y.2d at 26 (1995). The Court held that “defendant’s conduct could not materially mislead a consumer into believing that defendant guaranteed the accuracy or currentness of the publication” at issue. First, observed the Court, “the legal materials contained in Part III subject to legislative amendment at any time,” thereby “seriously undermining plaintiffs’ contention that yearly publication was a representation that the Tanbook was complete and accurate.” Second, the Court held that to the extent “defendant’s statements misrepresented the contents of the Tanbook, such purported misrepresentations not materially misleading.” The Court noted that the terms and conditions of the contract for purchase of the publication provided that in addition to the Tanbook, plaintiffs would automatically receive “any supplementation, releases, replacement volumes, new editions and revisions . . . made available during the annual subscription period” along with invoices for the additional cost of any updated materials. Therefore, explained the Court, “defendant expressly offered, and plaintiffs chose to receive, automatic serial mailings of the year’s Tanbook edition upon its publication, with any updates to that edition—if and when they became available—at an additional and separate cost charged by invoice and sent with the update.” In short, said the Court, it was “clear to a consumer that the Tanbook not a completely accurate compilation of the law.” Moreover, explained the Court, the written disclaimer that defendant did “NOT WARRANT THE ACCURACY, RELIABILITY OR CURRENTNESS OF THE MATERIALS CONTAINED IN THE PUBLICATIONS” was specific to the alleged deceptive practice “so as to eliminate any possibility that a reasonable consumer would be misled.” Under New York law, a disclaimer may not bar a GBL § 349 claim at the pleading stage unless it utterly refutes plaintiff’s allegations. Goshen , 98 N.Y.2d at 326; Fink v. Time Warner Cable , 714 F.3d 739, 742 (2d Cir. 2013). This means that the disclaimer must address the alleged deceptive conduct precisely, so as to eliminate any possibility that a reasonable consumer would be misled. Id. However, where the overall impression of the representations are misleading, notwithstanding the disclaimer, the disclaimer is not a defense as a matter of law. See Goshen , 98 N.Y.2d at 326; Delgado v. Ocwen Loan Servicing, LLC , 2014 WL 4773991, at *9 (E.D.N.Y. 2014). The Court rejected plaintiffs’ argument that the alleged deception was an attempt to hide the Tanbook’s lack of “completeness”, as opposed to “accuracy” or “currentness”. The Court found the words of the disclaimer – “the accuracy, reliability or currentness” – to be “equivalent to a disclaimer of completeness.” “Indeed,” said the Court, “plaintiffs’ allegation that the Tanbook incomplete turn entirely on whether the content accurate, reliable, and current.” “The fact that a purchaser might not buy the Tanbook without an accurate and complete reproduction of the statutes and regulations—because, as plaintiffs allege , that would render the Tanbook unreliable—goes to whether defendant offering an item worth buying, not whether defendant ha deceived consumers about the nature of its product”, concluded the Court. “GBL § 349 is concerned only with the latter conduct.” In sum, concluded the Court, “ he Tanbook’s susceptibility to revision at any time, coupled with the fact that the disclaimer addresse the precise deception alleged in plaintiffs’ complaint, no possibility that a reasonable consumer would have been misled about the contents of the Tanbook.” Judge Eugene M. Fahey dissented in part. Judge Fahey agreed with the majority that the conduct at issue was consumer oriented: “It is irrelevant that the Tanbook was primarily marketed to and purchased by businesses and professionals. A business may be a consumer.” However, he did not agree that the alleged misrepresentation was not actionable. Judge Fahey rejected the majority’s view that the disclaimer in the contract barred plaintiffs’ claim as a matter of law. “A disclaimer is not a per se bar to a GBL § 349 cause of action,” said Judge Fahey, “even when it is specific.” The reason, explained Judge Fahey, is to prevent “routine disclaimers” from “render the consumer protections, codified by the statute, meaningless.” According to Judge Fahey, “defendant’s disclaimer must be considered as one part of the overall analysis in determining whether the alleged deceptive conduct was ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.’” (Quoting Oswego , 85 N.Y.2d at 26). Based upon that wholistic approach, Judge Fahey found that plaintiffs “adequately pleaded that element, which not amenable to resolution at the motion to dismiss stage.” “In concluding otherwise,” said Judge Fahey, “the majority has treated defendant’s motion to dismiss as a motion for summary judgment.” Judge Fahey also addressed the First Department’s holding that plaintiffs sustained no injury. He found that the court erred in holding that an injury under GBL § 349 must be more than the cost of the goods purchased. Such an injury, said Judge Fahey, is consistent with the legislative purpose of the statute as well as common sense. “The use of deception to induce a consumer to buy a product,” concluded Judge Fahey, “is precisely the kind of conduct the legislature sought to prohibit with GBL § 349.” Takeaway Himmelstein makes clear that the consumers protected by GBL § 349 include businesses and non-businesses alike. The decision also makes clear that the focus of the courts should be on “the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Himmelstein is, therefore, a departure from decisions of the First Department. Himmelstein also makes clear that disclaimers specific to the alleged act or practice, which neutralize any deception such that no reasonable consumer would be misled, will bar a claim under GBL § 349.

It is an understatement to say that the impact of the COVID-19 pandemic on all aspects of life was far reaching.  This Blog has written numerous articles specifically addressing the impact of COVID-19 on the New York court system and its litigants.  Among others, < Here =">Here"> , < Here =">Here"> < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> and < Here =">Here"> .  Today, this BLOG will discuss Brash v. Richards , a case decided on June 2, 2021, by the Second Department.  As discussed further herein, Brash held that Governor Cuomo’s COVID-19 Executive Orders (the “Executive Orders”) “tolled” court filing deadlines as opposed to “suspending” them.  This distinction is critical for litigants. The Brash Court explained the difference between a “toll” and a “suspension” as follows: A toll suspends the running of the applicable period of limitation for a finite time period, and " he period of the toll is excluded from the calculation of the " ( Chavez v Occidental Chem. Corp. , 35 NY3d 492, 505 n 8 <2020> ; see Foy v State of New York , 71 Misc3d 605 <2021> ). "Unlike a toll, a suspension does not exclude its effective duration from the calculation of the relevant time period. Rather, it simply delays expiration of the time period until the end date of the suspension" (Foy v State of New York, 71 Misc3d at 608).   (Hyperlink and some brackets added.) The Executive Law authorizes the Governor to issue executive orders, including those like the ones issued relating to the pandemic.  Executive Law § 29-a(1) provides that “ ubject to the state constitution, the federal constitution and federal statutes and regulations, the governor may by executive order temporarily suspend specific provisions of any statute, local law, ordinance, or orders, rules or regulations, or parts thereof, of any agency during a state disaster emergency, if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster.”  Executive Law 29-a(2)(d) , which places limitations on the “suspensions pursuant to subdivision one of this section,” provides that “the order may provide for such suspension only under particular circumstances, and may provide for the alteration or modification of the requirements of such statute, local law, ordinance, order, rule or regulation suspended, and may include other terms and conditions.” On March 20, 2020, the first related Executive Order ( No. 202.8 ) was issued by the Governor, by which certain time limits were “temporarily suspended or modified” and “tolled” for 30 days.  “Governor Cuomo later issued a series of nine subsequent executive orders that extended the suspension or tolling period, eventually through November 3, 2020.”  Brash , at page 2.  Not all of the related Executive Orders, however, used the word “toll.”  Brash at p. 2.  However, they all contained identical or “nearly identical” language indicating that “the Governor ‘hereby continue the suspensions, and modifications of law, and any directives, not superseded by a subsequent directive, ‘made in the prior executive orders.’”  Brash at p. 3.  The Executive Orders issued on October 5, 2020, and November 3, 2020, which both use the term “toll,” indicate that the “toll” will no longer be in effect after November 3, 2020.  Questions abounded as to whether the Executive Orders effectuated a “toll” or a “suspension” of applicable filing deadlines.  Again, the Second Department in Brash , held that the Executive Orders effectuated “tolls” of filing deadlines. Brash involved the timeliness of the filing of a notice of appeal.  The respondent in Brash served a copy of an order with notice of entry on October 2, 2020, and appellant’s related notice of appeal was served on November 10, 2020.  Pursuant to CPLR 5513 (a), a notice of appeal must be served within 30 days of service of the judgment or order appealed from with notice of entry.  If the Executive Orders effectuated a “toll”, the appeal would be timely, as the appellant would have had 30 days from November 3, 2020, to file a notice of appeal.  If the Executive Orders, merely, effectuated a suspension, the appellant’s time to file a notice of appeal would have expired on or about November 3, 2020.  Accordingly, appellant argued in favor of “toll” and respondent argued in favor of “suspension.”  Respondent further urged that while some of the Executive Orders contained “toll” language, Executive Law § 29-a did not permit Governor Cuomo to issue “tolls” but only “suspensions”.  The Brash Court found respondent’s argument in this regard “unpersuasive,” holding that the language of Executive Law 29-a(2)(d) “authorized the Governor “to do more than just ‘suspend’ statutes during a state disaster emergency; he or she may ‘alter[]’ or ‘modif ’ the requirements of a statute, and a tolling of time limitations contained in such statute is within that authority.”  Brash , at 3 to 4 (citing to Foy ).  The Brash Court further found that even though most of the Executive Orders did not use the term “toll,” they used the term “modification” and “ ince the tolling of a time limitation contained in a statute constitutes a modification of the requirements of such statute within the meaning of Executive Law § 29-a(2)(d), these subsequent executive orders continued the toll that was put in place by Executive Order (A. Cuomo) No. 202.8 (9 NYCRR 8.202.8).” For similar reasons, the Court of Claims, in Foy, supra , held that the Executive Orders effectuated a “toll” as opposed to a “suspension”. While the Second Department made its position clear, the Court of Appeals will likely opine on this issue at some point in the future.

Conversion is a tort that “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.”  Colavito v. New York Organ Donor Network, Inc. , 8 N.Y.3d 43, 49-50 (2006) (citation omitted).  “In order to establish a cause of action to recover damages for conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff’s rights.”  Berkovitz v. Berkovitz , 190 A.D.3d 911 (2 nd Dep’t 2021) (citations, internal quotation marks and brackets omitted); see also , Colavito , 8 N.Y.3d at 50 (citations omitted) (“Two key elements of conversion are (1) plaintiff's possessory right or interest in the property and (2) defendant's dominion over the property or interference with it, in derogation of plaintiff's rights.”)  In circumstances where “the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand by the property’s rightful owner.”  Simpson & Simpson, PLLC v. Lippes Mathias Wexler Friedman LLP , 130 A.D.3d 1543, 1545 (2015) (citation and internal quotation marks omitted. While the concept of conversion is readily understandable in the context of converted things, the analysis becomes more difficult when a plaintiff brings a claim for the conversion of money.  “’It is well-settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.’”  Amity Loans, Inc. v. Sterling Nat. Bank & Trust Co. of New York , 177 A.D.2d 277, 279 (1 st Dep’t 1991) ( quoting Manufacturers Hanover Trust Co. v. Chemical Bank , 160 A.D.2d 113, 124 (1 st Dep’t 1990)).  “Money may be the subject of a cause of action for conversion only if ‘it can be identified and segregated as a chattel can be….’”  Heckl v. Walsh , 122 A.D.3d 1252, 21254-55 (4 th Dep’t 2014) (quoting Payne v. White , 101 A.D.2d 975, 976 (3 rd Dep’t 1984)). The parties in Simpson & Simpson , supra , were law firms. Defendant law firm employed a bookkeeper that resigned and commenced employment with plaintiff law firm.  Thereafter, defendant discovered that a bookkeeper embezzled over $270,000 while employed by it.  When approached by defendant, the bookkeeper admitted the theft, agreed to restitution and delivered to defendant a promissory note for the amount embezzled.  The bookkeeper then embezzled money from plaintiff law firm to pay the note to defendant.  Plaintiff discovered the embezzlement of its funds and defendant rebuffed plaintiff’s demand that the funds be returned.  Plaintiff commenced its action and, inter alia, asserted a cause of action sounding in conversion in which it sought the return of the embezzled funds.  Supreme court granted defendant’s motion for summary judgment dismissing, inter alia, the conversion claim.  The Fourth Department found that supreme court erred “in determining that the comingling of the embezzled funds in the employee’s joint checking account precluded a cause of action for conversion” because “the embezzled funds are sufficiently identifiable and traceable to sustain a cause of action for conversion.”  Simpson & Simpson , 130 A.D.3d at 1544-45.  The Simpson & Simpson Court also noted that conversion “is an unauthorized assumption and exercise of the right of ownership over personal property belonging to another to the exclusion of the owner’s rights.”  Simpson & Simpson , 130 A.D.3d at 1545.  While the defendant disavowed any knowledge of the bookkeeper’s wrongdoing that led to the funds embezzled from plaintiff coming into defendant’s hands, the Court found that questions of fact existed as to the extent of defendant’s knowledge given the “unique” facts presented because the “circumstances known to defendant[] were so obviously suspicious that no honest person (not just a reasonably prudent person) could turn a blind eye thereto, thus requiring defendant[] to investigate.”  Id. (citations and internal quotation marks omitted). These issues concerning conversion claims involving money were at the fore, in SH575 Holdings LLC v. Reliable Abstract Co. L.L.C. , a case decided by the Appellate Division, First Department, on June 1, 2021.  The plaintiff in SH575 transferred $1,000,000 into the IOLA account of a debtor’s lawyer in conjunction with a transaction pursuant to which plaintiff was going to purchase debtor’s real estate in its bankruptcy proceeding.  Plaintiff demanded the return of the funds after he cancelled the transaction.  Unfortunately, “as part of a Ponzi scheme, transferred most of plaintiff’s funds out of the IOLA account to the moving defendants prior to plaintiff’s demand upon him.”  The Court affirmed supreme court’s dismissal of the conversion claim, finding that plaintiff “failed to show that the funds at issue were ‘specifically identifiable.’”  The Court relied on the unique aspects of an IOLA account.  “An IOLA account is ‘an unsegregated interest-bearing deposit account with a banking institution for the deposit by an attorney of qualified funds” (Judiciary Law § 497; see also Lerner v Fleet Bank, N.A. , 459 F3d 273, 281 <2d cir 2006> ).  Because the account was “unsegregated”, “plaintiff’s funds, upon their transfer therein, became commingled with monies that were already in it, rendering them no longer specifically identifiable.” Additionally, the Court found that plaintiff’s claim was defective because plaintiff never “made demands for return of the funds upon the moving defendants.”

In today’s Fraud Notes, we examine Bullen v. CohnReznick, LLP (1st Dept. May 27, 2021) ( here ), and Sabourin v. Chodos , (1st Dept. May 27, 2021) ( here ), both decided by the Appellate Division, First Department. Bullen involved an alleged fraud in which CohnReznick was accused of being a participant through the issuance of audit reports that gave the entities being audited a clean bill of health – i.e. , the financial statements presented fairly, in all material respects, the financial position of the entities being audited. The primary issues addressed by the courts in Bullen concerned scienter and justifiable reliance. Sabourin involved an alleged fraud that took place more than six years ago. The primary issues addressed by the courts concerned the application of the statute of limitations and the continuing wrong doctrine. We examine both cases below. inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> Bullen v. CohnReznick, LLP Bullen was brought by a group of 49 sophisticated investors (comprised of individuals, retirement plans, trusts, limited liability companies, and corporations) who claimed they were defrauded by the managers of a high-risk hedge fund in which they collectively invested $63 million. Plaintiffs sued CohnReznick, LLP, the independent auditor of Platinum Partners Credit Opportunities Fund, L.P. (“PPCO”) and Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”) (collectively, the “Funds”), for its role in the alleged fraud. CohnReznick audited the Funds’ financials statements in the years immediately preceding the Funds’ collapse and issued unqualified audit reports (the “Audit Reports”) that the Funds’ financial statements presented fairly, in all material respects, the financial position of the Funds. Plaintiffs claimed that CohnReznick issued the Audit Reports with knowledge of missing material documentation and questionable transactions, which confirmed that PPCO’s assets were grossly overvalued. According to plaintiffs, CohnReznick knew that, for years, Platinum Management (“Platinum”) propped up the Funds with unsupported and fraudulent asset valuations, commingled investor funds, engaged in illicit related-party transactions, and booked improper inter-company loans. Plaintiffs allegedly relied on the Audit Reports to their detriment, investing over $63 million in PPCO. In their complaint, plaintiffs asserted claims of: (1) fraud; (2) aiding and abetting fraud; and (3) aiding and abetting breach of fiduciary duty. Defendant moved to dismiss. The motion court (Ostrager, J.) denied the motion ( here ). First, the motion court held that plaintiffs pleaded fraud with particularity as required under CPLR § 3016(b). The motion court found that CohnReznick disregarded numerous “red flags” that allowed a reasonable inference of the auditor’s “egregious refusal to see the obvious, or to investigate the doubtful”. Such “red flags” included: CohnReznick’s “access to a substantial amount of information.” (“ any of the suspect activities noted by plaintiffs and the eceiver directly related to documentation available to CohnReznick.”) Information in an affidavit from the court-appointed receiver in which she averred that PPCO’s assets were overvalued “by over 300%”, that there were loans between PPCO and PPVA, and that Platinum engaged in related-party transactions. Platinum’s actions to ease PPVA’s liquidity crisis and the commingling of investor funds: (“Indeed, one can reasonably infer scienter from even the single item that Platinum repeatedly effectuated improper cash transfers, booked as loans, between PPCO and PPVA that were used to ease PPVA’s liquidity crisis and were paid back, in part, with distressed debt and private equity of little to no value. These transfers were presumably reflected in PPCO’s financial statements, which CohnReznick improperly certified as presenting ‘fairly, in all material respects, the financial position of .’ The commingling of investor funds among the various Platinum Funds was another glaring red flag supporting the inference of scienter.”) In addition to the “red flag” allegations, the motion court also considered plaintiffs’ allegations that CohnReznick violated Generally Accepted Accounting Principles (“GAAP”) and Generally Accepted Auditing Standards (“GAAS”). When considered together, the motion court held that plaintiffs pleaded enough facts to raise a reasonable inference that CohnReznick acted with scienter. Second, the motion court held that plaintiffs alleged that CohnReznick had actual knowledge of Platinum’s fraud and breaches of fiduciary duty. According to plaintiffs, CohnReznick knew by early 2015 – before CohnReznick issued the 2014 Audit Reports for both PPCO and PPVA – that PPVA’s then-auditor had discovered a “material weakness” in the way Platinum valued its Level 3 assets (which comprised nearly all the Funds’ holdings). Despite such knowledge, CohnReznick implemented no additional auditing procedures for PPCO and issued a clean Audit Report for the fund. The motion court found that these allegations sufficed to allege actual knowledge of the alleged fraud. Third, the motion court held that plaintiffs sufficiently pleaded that CohnReznick substantially assisted Platinum’s fraud and breaches of fiduciary duty with the required specificity. Fourth, the motion court held that plaintiffs justifiably relied on the Audit Reports in deciding to invest in PPCO. According to the motion court, plaintiffs “were entitled to rely on the information in the Reports as being factually correct and to use those facts to make their own investment decisions.” The motion court noted that “many investors spoke with CohnReznick’s managing partner about their investments” in an effort to make informed decisions about whether to invest in the Funds. Finally, the motion court rejected CohnReznick’s argument that plaintiffs merely claimed that they were induced “to continue to hold securities”, which, under New York law, is not actionable. The motion court explained that plaintiffs invested in PPCO “in the first instance in reliance on the Audit Reports, and not merely to maintain or ‘hold’ the investment.” On appeal, the First Department unanimously affirmed. First, the Court held that the motion court correctly found that plaintiffs pleaded scienter with the requisite particularity. The Court found that “the ‘ llegations of “red flags,” when coupled with allegations of GAAP and GAAS violations, sufficient to support a strong inference of scienter.’” Slip Op. at *1 (quoting In re Bear Stearns Cos., Inc. Securities, Derivative & ERISA Litig. , 763 F. Supp. 2d 423, 511 (S.D.N.Y. 2011)). See also State St. Trust Co. v. Ernst , 278 N.Y. 104, 112 (1938). Second, the Court held that plaintiffs adequately pleaded justifiable reliance. The Court explained that plaintiffs “‘took reasonable steps to protect against deception by’ having their advisor ‘examin available financial information to ascertain the true nature of’ the investment fund’s asset valuation, including contacting defendant about the results of its audits, which were ‘matters peculiarly within the knowledge.’” Slip Op. at *2 (quoting IKB Intl. S.A. v. Morgan Stanley , 142 A.D.3d 447, 448-49 (1st Dept. 2016)). In any event, the Court noted that “‘reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.’” Id. (quoting ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)). The Court said that the “same true for the aiding and abetting fraud claim, to the extent that it may require a showing of reasonable reliance.” Id. (citing Bankers Conseco Life Ins. Co. v. KPMG LLP , 189 A.D.3d 402, 403 (1st Dept. 2020)). Third, as to the aiding and abetting fraud claim, the Court held that the “complaint sufficiently alleged ‘actual knowledge’ of the investment fund manager’s fraud, which ‘need only be pleaded generally.’” Slip Op. at *2 (quoting Oster v. Kirschner , 77 A.D.3d 51, 55 (1st Dept. 2010)). oster, 77 a.d.3d at 55.> oster, 77 a.d.3d at 55.> The Court explained that the “timing of defendant’s alleged receipt of information from the prior auditor of a related fund indicating a material weakness in the process of asset valuation, as well as defendant’s multiple years of auditing the fund’s financial statements, allow for the inference that defendant ‘willingly turned a blind eye to evidence’ that the fund’s asset valuations were fraudulent with no documentation supporting them.” Slip Op. at *2 (quoting AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446 (1st Dept. 2013)); see also Weinberg v. Mendelow , 113 A.D.3d 485, 488 (1st Dept. 2014). The Court noted that the complaint also “sufficiently alleged, inter alia , that defendant ‘ignored irregularities’ in the fund’s ‘books and records,’ which, if reviewed, would have uncovered the fraud.” Slip Op. at *2-*3 (quoting Weinberg , 113 A.D.3d at 488). As to the claim for aiding and abetting breach of fiduciary duties, the Court found that the complaint “sufficiently alleged defendant’s actual knowledge of the fund manager’s improper related-party transactions and unauthorized loans to the related fund, given defendant’s access to the fund’s financial information, as well as defendant’s ‘strong financial motive’ to aid the fund manager, given its allegedly inflated fees.” Slip Op. at *3 (citations omitted). The Court rejected defendant’s argument that it owed no duty to plaintiffs: “‘There are allegations not only that defendant fail to act when required to do so,’ but also that defendant ‘affirmatively assist ’ the fund manager to convince one investor plaintiff to invest additional capital, which obviates any need for plaintiffs to allege that ‘defendant owe a fiduciary duty directly to’ them.” Id. (quoting Kaufman v. Cohen , 307 AD2d 113, 126 (1st Dept. 2003) (citation omitted). Finally, the Court agreed with the motion court that plaintiffs did not merely allege inactionable holder claims. The Court explained that plaintiffs did “not seek ‘recovery for the loss of the value that might have been realized in a hypothetical market exchange that never took place,’ but instead assert ‘an out-of-pocket loss, specifically, the loss of their investment.’” Slip Op. at *3 (citations omitted). Sabourin v. Chodos Sabourin involved an intricate and complex fraud perpetrated by defendant Adam Chodos, an attorney, in concert with his client, William Frost, to divest plaintiffs of their media company and its value. After an arbitration held in 2013-2014, plaintiffs were awarded $56.4 million against Frost. According to plaintiffs, it was only as a result of the documents presented and testimony adduced during the arbitration that they came to learn that defendant was not merely Frost’s lawyer, but also a knowing and indispensable participant in the fraud. Consequently, in February 2015, plaintiffs commenced the action against defendant Chodos, alleging fraud, aiding and abetting fraud, unjust enrichment, aiding and abetting breach of fiduciary duty, civil conspiracy to commit conversion, and tortious interference with economic advantage. Defendant moved for summary judgment, arguing, among other things, that the claims were time-barred because the conduct complained of took place in 2008, well beyond the six-year statute of limitations applicable to the fraud claims and the three-year statute of limitations applicable to the remaining tort claims. The motion court denied defendant’s motion as to the fraud claims ( here ). On appeal, the First Department affirmed. In New York, the limitations period for fraud is the greater of six years from the date of the fraud or two years from the time when, with reasonable diligence, the plaintiff could have uncovered the fraud. CPLR § 213(8). See also Cusimano v. Schnurr , 137 A.D.3d 527, 531 (1st Dept. 2016). To prevail on a motion to dismiss on statute of limitations grounds, the defendant must show that there is no issue of fact under either of the foregoing prongs. Against these principles, the Court found that defendant “failed to show dispositively that plaintiffs were in possession of facts that would have triggered inquiry notice under CPLR § 213(8) more than two years before the action was commenced.” Slip Op. at *1 (citing Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009)). The Court rejected defendant’s reference to inconsistent deposition testimony given by plaintiff and an affidavit he submitted in opposition to the motion to dismiss. “Such inconsistencies may be fodder for cross-examination,” said the Court, “but they do not support a finding, as a matter of law, that plaintiffs were on inquiry notice more than two years before this action was commenced.” The Court also found that plaintiffs had “raised issues of fact as to whether defendant committed independent and distinct fraudulent acts in 2009 in furtherance of the fraudulent scheme” to toll the statute of limitations “pursuant to the continuous wrong doctrine.” Slip Op. at *3 (citing Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017)). The Court noted that “plaintiffs submitted documents showing that in 2009 defendant forged Ishak’s signature on a resignation letter and then used the forged letter to freeze the bank account of plaintiffs’ corporation.” Id. In addition, noted the Court, plaintiff showed that defendant prepared fraudulent K-1s and tax filings, and created a series of fake, back-dated notes purporting to evidence debt by one of the plaintiff entities to entities controlled by Frost. Id. here.=">here."> Takeaway It is generally understood that “scienter . . . is … the element most likely to be within the sole knowledge of the defendant and least amenable to direct proof.” Houbigant, Inc. v. Deloitte & Touche , 303 A.D.2d 92, 98 (1st Dept. 2003). For this reason, to plead scienter, a plaintiff need only allege “some rational basis for inferring that the alleged misrepresentation was knowingly made,” or that the defendant acted with reckless disregard of the truth. Id. “ ecklessness … involve conduct that is highly unreasonable, and must ‘in fact, approximate an actual intent to aid in the fraud being perpetrated by the audited company.’” CRT Investments, Ltd. v. Merkin , 29 Misc. 3d 1218(A) (Sup. Ct., N.Y. County 2010), aff’d sub nom. , CRT Investments, Ltd. v. BDO Seidman, LLP , 85 A.D.3d 470 (1st Dept. 2011) (internal citation omitted). When alleging fraud against an auditor, a plaintiff must “allege that the auditor’s practices were so deficient as to amount to no audit at all, that there was a refusal to see the obvious, a failure to investigate the doubtful, or the auditor’s judgments were such that no reasonable accountant would have made the same decisions if confronted with the same facts.” Id. (internal quotations omitted). The failure to do so will result in the dismissal of the claim for the failure to plead scienter with particularity. In Bullen , the courts concluded that plaintiffs satisfied the foregoing standard by providing allegations that CohnReznick disregarded numerous “red flags” and other detailed facts, such as the violation of GAAP and GAAS, related-party transfers and commingling of investor funds, which supported the strong inference that CohnReznick’s audits amounted to “no audit at all”. With regard to justifiable reliance, Bullen highlights how sophisticated parties can satisfy this element. A sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is to make an additional inquiry into the truth of the representation ( ACA Fin. , 25 N.Y.3d at 1045), as the plaintiffs had done in Bullen . As noted by the First Department, plaintiffs had their advisor “examin available financial information to ascertain the true nature of the investment fund’s asset valuation” and, as noted by both courts, they asked questions of CohnReznick’s managing partner about their investments in order to make informed decisions about whether to invest in the Funds. More fundamentally, as both courts indicated, plaintiffs could not have discovered the alleged fraud because the information was peculiarly within CohnReznick’s knowledge. Basis Yield Alpha Fund Master v. Stanley , 136 A.D.3d 136, 143 (1st Dept. 2015). Sabourin concerns the situation most often found in fraud claims – the plaintiff does not know it was the victim of a fraud until years later. Consequently, as is often the case, the plaintiff brings suit well after the statute of limitations has expired. In such situations, the plaintiff can escape dismissal by finding a basis to toll the statute of limitations. In Sabourin , plaintiffs were able to rely on the continuing wrong doctrine. Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  The wrongs, however, must be separate and independent ( id. ), not “continuing consequential damages” that arise from a single tortious act. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). As discussed, in Sabourin , plaintiffs were able to withstand summary judgment by demonstrating that defendant committed independent and distinct fraudulent acts in  in furtherance of the alleged fraudulent scheme. The motion court denied defendant’s motion as to the fraud claims ( here ).

Sometimes a fraud is so undetectable that even an expert hired to assist in due diligence activities can be the victim of fraud. That’s what happened in VXI Lux Holdco, S.A.R.L. v. SIC Holdings, LLC , 2021 N.Y. Slip Op. 03294 (1st Dept. May 25, 2021) ( here ). VXI Lux arose from plaintiff’s $112 million purchase of Symbio S.A. (“Symbio”) from defendants. Plaintiff alleged that defendants, faced with a Chinese government audit, engaged in fraud to hide the fact that they had underpaid the social insurance tax applicable to their employees in Chengdu, China. Defendants allegedly did this by falsifying documents, including by altering personnel files to make it look as though dozens of exempt employees based elsewhere were actually working in Chengdu. To complete the scheme, defendants allegedly bribed the auditing firm, by means of a $25,000 payment funneled through a sham construction contract. Plaintiff alleged that the $3 million tax underpayment, which was an unaccounted expense, had the effect of inflating Symbio’s earnings before interest, taxes, deductions, and amortization (“EBITDA”) by the same amount. Thus, when Symbio presented its books to plaintiff, they allegedly contained several misrepresentations — expenses and tax liabilities were understated, and EBITDA was overstated. The inflation of the EBITDA likewise inflated Symbio’s apparent growth rate, which in turn inflated the company’s market valuation. Even though plaintiff inspected Symbio’s financial statements and other corporate records during due diligence, plaintiff claimed, given the nature of the deception, the fraud was essentially undetectable. Thus, plaintiff alleged, even though it retained a major accounting firm, that accounting firm was also duped and issued a report which did not find the social insurance tax fraud. The social insurance tax fraud allegedly inflated Symbio’s EBITDA, from about $3 million to a projected $8.8 million. The apparent EBITDA growth inflated the company’s revenue prospects, resulting in plaintiff overpaying for Symbio. Plaintiff alleged that, had it known all the facts, it would have offered much less. Plaintiff alleged that the resulting overpayment caused it to suffer significant financial loss. Defendants moved to dismiss the fraud cause of action in plaintiff’s second amended complaint (“SAC”). The motion court granted the motion. On appeal, the Appellate Division, First Department “unanimously reversed, on the law”. The primary issue considered by the Court was whether plaintiff satisfied the justifiable reliance element of its fraud cause of action.  To satisfy the justifiable reliance element of a fraud claim, a plaintiff must demonstrate that he/she took steps to discover “the true nature of transaction he is about to enter into.” 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). In other words, a plaintiff is required to take reasonable steps to protect against deception. A sophisticated party, like the plaintiff in VXI Lux , must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the truth of the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Thus, a sophisticated party cannot “argue justifiable reliance on defendants’ misrepresentation or omission where had the means available to ascertain the status of the ” at issue and did not avail itself of those means. ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). here,  here and  here,=">here," for="for" example.="example."> In VXI Lux , the Court held that “plaintiff adequately pleaded that it justifiably relied on the documents presented by Symbio during due diligence,” by “taking diligent steps” to uncover any misstatements or omissions. Slip Op. at *1. Such steps included retaining “an accounting firm for review” of the company’s financial statements and corporate records. Slip Op. at *1-*2 (citing Basis Yield Alpha Fund Master v. Morgan Stanley , 136 A.D.3d 136, 141-43 (1st Dept 2015)). As made clear in the Court’s discussion of plaintiff’s fraudulent concealment allegations (Slip Op. at *2), “given the hidden nature of the fraud, which turned on falsified records and bribed auditors, and the practical impossibility of discovering the fraud through ordinary diligence”, it could not be said that plaintiff failed to take affirmative steps “to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154.    The Court also rejected the individual defendants’ argument that the fraud claim should be dismissed as against them because plaintiff used group pleading to assert those allegations. Slip Op. at *1. As noted in our last article on the subject ( here ), group pleading occurs when a plaintiff lumps defendants together rather than attributes specific misrepresentations or wrongdoing to a particular defendant. Such pleading violates the particularity requirement of CPLR § 3016(b), unless the fraud alleged is detailed and pervasive. AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446-447 (1st Dept. 2013). In VXI Lux , the Court held that the fraud was pervasive and pleaded “in great detail”. As such, the individual defendants’ knowledge of the fraud could be inferred. Slip Op. at *1.  The Court also rejected the argument that plaintiff’s fraud claim duplicated its contract claim. Slip Op. at *2. The Court noted that “Defendants’ alleged deception also breached numerous warranties set forth in the governing stock purchase agreement, including that Symbio’s financial statements were materially complete and correct, that its EBITDA projections were reasonable and made in good faith, that it had no material undisclosed liabilities, and that it conducted its business in compliance with applicable law.” Id. The Court explained that a breach of warranty is not the same as a breach of an obligation to perform – the former is a misrepresentation of present fact. Id. (noting, “ warranty is not a promise of performance, but a statement of present fact”) (quoting First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 292 (1st Dept. 1999)). “Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim.” First Bank of Ams. , 257 A.D.2d at 292. Accord Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439, 441 (1st Dept. 2015). Thus, concluded the Court, “the fraud claim not duplicate the contract claim.” Slip Op. at *2 (citing GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81-82 (1st Dept. 2010),  lv. dismissed , 17 N.Y.3d 782 (2011)).  Takeaway A plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as VXI Lux ) must establish that it “has taken reasonable steps to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154. Typically, this means that a plaintiff claiming to have been fraudulently induced to purchase a business, or to lend to a business, must allege that, before entering into the transaction, it availed itself of the opportunity to verify the seller’s or borrower’s representations through an examination of the entity’s books and records. In VXI Lux , plaintiff satisfied this requirement. As discussed, plaintiff retained a major accounting firm to examine Symbio’s financial statements and other corporate records during due diligence. Because of the deception alleged, plaintiff had no way of discovering the truth about Symbio’s financial condition. Under such circumstances, the justifiable reliance element of plaintiff’s fraud claim was satisfied.

As we have discussed in numerous posts, plaintiffs alleging breach of contract and fraud risk having the latter cause of action dismissed because it is duplicative of the former one. Plaintiffs can avoid this fate by alleging: a legal duty owed by the defendant that is separate and apart from the duty to perform under the contract or a duty that is collateral or extraneous to the contract; and damages that are different from the contract damages. In Principia Partners LLC v. Swap Fin. Grp., LLC , 2021 N.Y. Slip Op. 03267 (1st Dept. May 20, 2021) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud claim because it duplicated the contract cause of action alleged by plaintiff.  In addition to the duplication of claims doctrine, we have discussed the particularity requirement under CPLR § 3016(b) and the need to satisfy this requirement with respect to each element of a fraud claim. One element that is often litigated is scienter – that is, an intent to deceive. Plaintiffs run afoul of the pleading requirements for scienter by engaging in group pleading – i.e. , the practice of grouping multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. here.=">here."> In U.S. Tsubaki Holdings, Inc. v. Estes , 2021 N.Y. Slip Op. 03273 (1st Dept. May 20, 2021) ( here ),although the plaintiffs relied on the group pleading doctrine, the First Department reversed the dismissal of their fraud claims because, among other things, the plaintiffs provided sufficient particularity of the fraud, in addition to the pervasiveness of the alleged misconduct, necessary to infer scienter as to each defendant. The case also concerned the justifiable reliance element of a fraud cause of action and the duplication of claims doctrine, which the Court held did not apply to the claims asserted. We examine both decisions below. Principia Partners LLC v. Swap Financial Group, LLC Principia Partners involved a contract between plaintiff, Principia Partners LLC (“PPP”), and defendant, SWAP Financial Group, LLC (“SFG”), pursuant to which PPP agreed to provide SFG with access to PAS (a program for portfolio analysis and risk management), PPP’s proprietary software for use in valuing swaps. In return for access to PAS, SFG agreed to (i) pay both a minimum quarterly fee, a portion of qualifying revenue from its use of PAS, and interest on late payments, (ii) provide quarterly reports, certified for accuracy, of its qualifying revenue (“Quarterly Reports”), and (iii) allow PPP to audit SFG to verify the accuracy of its reports.  PPP alleged that it fully performed under the Agreement. Until the end of 2017, PPP believed that SFG was performing too. SFG submitted Quarterly Reports throughout the contractual period that it certified for accuracy, and it made regular payments to PPP. However, in 2017, PPP discovered that SFG had clients that were not being reported to PPP, as SFG’s website referred to customers that SFG had never included in its Quarterly Reports. PPP investigated the discrepancy and found evidence that SFG’s Quarterly Reports were allegedly fraudulent in that certain SFG customers who had used PAS were not included in the Quarterly Reports. PPP asserted a pattern of SFG underreporting revenue since 2005.  On February 1, 2018, PPP contacted SFG to address the inconsistencies it had found in the Quarterly Reports. In its February 22, 2018 response, SFG admitted to omitting some clients from the Quarterly Reports. However, SFG also allegedly made numerous material misstatements to PPP. For example, according to PPP, SFG falsely stated that it did not provide valuation reports to certain of its customers when, in fact, it did and SFG misrepresented the time frames in which valuation reports were actually provided to certain customers. In addition, SFG allegedly represented to PPP that it exclusively used a non-party valuation and pricing service instead of PAS for many transactions; however, that too was allegedly false. SFG also knowingly misrepresented to PPP that it “always paid its bills,” which PPP alleged was materially false.  PPP requested an audit, as provided by the Agreement. However, according to PPP, SFG delayed for months and ultimately refused to allow an audit, at which point PPP terminated the Agreement.  PPP filed the action, alleging breach of contract (Counts I and II), fraud and fraudulent inducement (Count III), unjust enrichment (Count IV), and aiding and abetting fraud (Count V). The motion court dismissed the fraud and aiding and abetting fraud causes of action ( here ). With regard to one of the defendants, the motion court found that the alleged misrepresentations were “not collateral or extraneous to the Agreement but rather directly flow from the Agreement.”  With regard to another defendant, the motion court found that PPP failed to plead scienter. The motion court explained that the inference of scienter was insufficient to support the fraud claim because the facts alleged concerned the participation of one of the defendants in the management of SFG without more: “ lthough PPP offers many facts, it fails to offer particularized facts to show that Syncora both completely dominated SFG and did so for the purpose of committing the alleged fraud.” Finally, the motion court held that the fraud claims duplicated the contract claim.  First, the motion court found that there was no duty independent of the contract: “The Quarterly Reports were a contractual requirement. It was therefore a breach of the contract for the Quarterly Reports, and thus the Quarterly Revenue Fees, to allegedly be inaccurate.” Second, the motion court found that the damages sought by the fraud cause of action were speculative and not pleaded with particularity. In that regard, PPP alleged that it “lost key market opportunities”, sustained “reputational harm because customers and competitors become aware that one of PPP’s major clients was stealing millions of dollars of earnings through a scheme” and suffered a “diminution in the esteem in which the PAS system ha been held in the industry.” Under New York law, damages are not pleaded with particularity if the plaintiff fails to allege the causal connection between the tort and the harm. Thus, the plaintiff must plead (i) the precise harm, (ii) the cause, and (iii) specifically connect the two ( Morrison v. National Broadcasting Co. , 19 N.Y.2d 453, 458 (1967), especially where reputational harm is alleged ( Rather v. CBS Corp. , 68 A.D.3d 49 (1st Dept. 2009), lv. to appeal denied , 13 N.Y.3d 715 (2010)). The motion court concluded that “PPP fail to allege one fact to support its assertion of actual damages to its reputation.” On appeal, the First Department unanimously affirmed the dismissal. The Court held that “ he fraud causes of action … were properly dismissed as duplicative of the breach of contract claim.” Slip Op. at *1 (citing Matter of Daesang Corp. v. NutraSweet Co. , 167 A.D.3d 1, 18 (1st Dept. 2018)). The Court explained that the “complaint failed to allege a legal duty to plaintiff separate and apart from the duty to perform under the contract or that a fraudulent misrepresentation was collateral or extraneous to the contract,” and that “plaintiff sought only contract damages.” Id. U.S. Tsubaki Holdings, Inc. v. Estes U.S. Tsubaki arose from the sale of Central Conveyor Company, LLC (“Central Conveyor”) to U.S. Tsubaki Holdings, Inc. (“USTH”) by Central Conveyor’s executives and NS CCC Acquisition LLC (“NSCC”), the majority shareholder of Central Conveyor, pursuant to Purchase and Sale Agreement (“PSA”).  In 2017, NS CCC and two affiliates, New State Capital Partners LLC (“New State Capital”) and New State Management LLC (“New State Management”), began the process of selling Central Conveyor via an auction. USTH participated in this auction process. In conjunction with the auction process, Defendants provided several sales presentations, and touted Central Conveyor as possessing a large, loyal client base, strong customer relations, talented employees, strong growth and high revenue projections. Plaintiffs claimed that defendants’ presentations affirmatively misrepresented the true nature of Central Conveyor’s customer relations, employees, and sales projections.  According to Plaintiffs, the presentations did not reveal that Central Conveyor’s “employees and independent contractors were being incentivized through compensation structured in ways that violated tax laws as well as union and pension obligations.” Nor did the presentations allegedly disclose that Central Conveyor’s “strong culture” was “one of corruption, including rampant expense fraud, time card fraud, schemes to avoid union and pension obligations, and other misconduct that depended on dramatically flawed, and arguably nonexistent, internal control systems and unethical leadership,” and that the historical revenue and other information in its financial statements “were predicated on widespread unlawful and unethical business practices.” Although New State allowed potential bidders to access electronic documentation via a “virtual data room” to conduct due diligence on Central Conveyor’s financial status and the nature of its operations, the documents were allegedly doctored and the information misrepresented and concealed. The true nature of Central Conveyor’s operations, Plaintiffs claimed, were peculiarly within defendants’ knowledge.  USTH extended a $140 million bid to purchase Central Conveyor, which the Sellers accepted in 2018.  In conjunction with the PSA, the Sellers provided USTH with a Disclosure Schedule “in which they purported to provide an accounting” of Central Conveyor’s material agreements, disclosure of Central Conveyor’s noncompliance with applicable laws and legal disputes or proceedings, audited historical financial statements covering fiscal years 2015 through 2017, and other financial and operational information. At closing, the Sellers delivered a Closing Certificate, which certified that their representations and warranties in the PSA remained “true and correct”. Plaintiffs claimed that Central Conveyor’s financial and operational conditions at the time of the auction and sale were different than represented by the Seller defendants. According to plaintiffs, since the closing, there was widespread misconduct within Central Conveyor that defendants allegedly concealed during the acquisition process. Such concealed information and false representations allegedly included that: (i) Central Conveyor regularly paid kickbacks to customers and their employees in exchange for customer contracts; (ii) the historical financial statements were materially affected by the widespread unethical and unlawful practices; (iii) the revenue projections provided were grossly overstated; (iv) Work-in-Progress Schedules were doctored to overstate project profitability; and (v) Central Conveyor was subject to an audit by the Canada Revenue Agency. Plaintiffs alleged “on information and belief” that defendants “knew or were reckless with regard to the fact that” Central Conveyor “had this ongoing audit and exposure to tax liability at the time of Closing”. Additionally, Plaintiffs alleged that (i) defendants caused Central Conveyor to repeatedly underreport its tax liability; (ii) Central Conveyor employees, including Kevin Estes and Jeffrey DeBrabander, regularly used company credit cards for personal use; and (iii) Central Conveyor employees, including Kevin Estes, Jeffrey DeBrabander, and Christopher Estes, engaged in widespread abuses in personal timesheet reporting.  Plaintiffs further alleged that Central Conveyor “historically engaged in certain unlawful and/or contract-breaching employment practices”, including offering an alternative payment scheme (“Cash Option”) to certain union employees which involved underreporting employee hours and compensation to the labor union to avoid union fees, in violation of collective bargaining agreements. Plaintiffs claimed “ n information and belief” that “Defendants had knowledge or else were reckless in failing to learn of the Company’s practice of offering the Cash Option”, and “were directly involved in orchestrating the use of this practice or had a managerial role over the Company that should have necessarily given rise to knowledge of this widespread practice.” “Given the foregoing activities,” Plaintiffs alleged that the Seller defendants breached various representations and warranties in the PSA.  In their amended complaint, Plaintiffs asserted 18 causes of action, with USTH asserting 11, Central Conveyor asserting six, and USTH and Central Conveyor jointly asserting one. Defendants moved to dismiss.  With regard to the fraud causes of action, the motion court granted the motion. First, said the motion court, “the amended complaint failed to meet the heightened pleading standard of CPLR 3016(b).” The court explained that the “amended complaint ‘did not attribute specific misrepresentations or wrongdoing’ to a particular defendant ‘but, rather, impermissibly lumped’ the defendants together.” (Citations omitted.) Such group pleading doomed the pleading because “ raud must be claimed with specificity ‘as to each individual defendant’ which the amended complaint fail to do.” (Citation omitted.) Second, explained the motion court, “the allegations impermissibly made on information and belief.” Such statements said the court, were “‘not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.’” (Quoting Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015)).  Third, noted the motion court, “the amended complaint fail to satisfy the pleading requirements of CPLR 3016(b) as to the elements of scienter and knowledge.” The court held that the scienter allegations were “conclusory and factually insufficient.” (Quoting Facebook Inc. , 134 A.D.3d at 615).  The motion court also found the justifiable reliance allegations to be lacking. The court rejected Plaintiffs’ argument that they satisfied this element by pleading “special facts” that were within Defendants’ knowledge. The motion court said that the “mere disparity of knowledge between sophisticated business entities not trigger a duty to disclose.” (Citations omitted.) Also, the motion court noted that Plaintiffs had “acknowledge they had access to Central Conveyors books, records and personnel and the opportunity to conduct due diligence prior to the closing.” Such access negated the “special facts” exception, ruled the motion court. The motion court also found the fraud claim against the Seller Defendants to be duplicative of the breach of contract claim. The court explained that Plaintiffs failed to allege any misrepresentation that was extraneous to the terms of the parties’ contract. (Citing HSH Norbank AG v. UBS AG , 95 A.D.3d 185 (1st Dept. 2012).  Finally, the motion court held that Plaintiffs failed to state a cause of action against New State Capital and New State Management “neither of which was a party to the alleged fraudulent representations.” “Other than generalized and conclusory allegations, alleged by category of lumped together defendants”, the motion court found that “USTH fail to allege the requisite facts so as to state causes of action in fraud against these two defendants.” The motion court explained that “there no particularized factual allegation as to a misrepresentation made by these two non-signatories of the PSA at any stage of the transaction.” Similarly, noted the motion court, “ he amended complaint … lack a particularized factual allegation as to the elements of scienter, knowledge of the alleged misconduct by other defendants, and the existence of a duty.” Further, noted the motion court, Plaintiffs failed to allege the “circumstances under which these elements be inferred.” On appeal, the First Department unanimously reversed the dismissal. As an initial matter, the Court held that Plaintiffs satisfied the particularity requirement of CPLR § 3016(b), notwithstanding the use of group pleading. Slip Op. at *1. The Court explained that the degree of detail alleged, and the pervasiveness of the alleged fraud, permitted a reasonable inference that each of the defendants named actually knew of defendants’ alleged fraud. Id. (“given the complaint’s concrete allegations, plaintiffs’ grouped allegations are largely superfluous, since knowledge of the fraud can be inferred from the detailed allegations of its pervasiveness.” (citing AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446 (1st Dept. 2013)). The Court also held that “Plaintiffs’ fraud claims not duplicative of their contract claim.” Slip Op. at *2. The Court explained that “Plaintiffs allege misrepresentation of numerous present facts, in the form of defendants’ alleged breaches of representations and warranties.” Id. These included that: the Company’s accounting was accurate; the Company was in compliance with employment laws; and the Company had disclosed all audits and material contracts. Id. “Moreover,” noted the Court, “the fraud claims asserted against a distinct set of defendants from the contract claims.” Id. In this regard, the Court was referring to the Non-Seller Defendants, who were not parties to the PSA. Because they were not signatories to the PSA, Plaintiffs did not sue them for breach of contract. Accordingly, the Court concluded that the fraud claim against them could not be duplicative of the contract claim against the other defendants. Finally, the Court noted that because “the PSA specifically gave plaintiff U.S. Tsubaki Holdings, Inc., the right to sue for fraud”, the “PSA be said to bar (as duplicative) a cause of action which the PSA itself guarantees.” Id.

Frequently, individuals and entities (principals) act through agents to conduct business.  When litigation arises from such business, the third parties with whom the agent interacted, often seek to hold the agent liable for any damages that are suffered. The law is clear that “an agent for a disclosed principal will not be personally bound unless there is clear and explicit evidence of the agent’s intention to substitute or superadd his personal liability for, or to, that of his principal.”  Savoy Record Co. v. Cardinal Export Corp. , 15 N.Y.2d 1, 4 (1964) (citations and internal quotation marks omitted); see also, Overbay v. Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. , 185 A.D.3d 707, 708-09 (2 nd Dep’t 2020) (citing Savoy Record ).  “The defense of agency in avoidance of contractual liability is an affirmative defense and the burden of establishing the disclosure of the agency relationship and the corporate existence and identity of the principal is upon he or she who asserts an agency relationship.”  Safety Environmental, Inc. v. Barberry Rose Management Co. Inc. , 94 A.D.3d 969 (2 nd Dep’t 2012) (citations, internal quotation marks and brackets omitted).  “A principal is considered to be disclosed if, at the time of a transaction conducted by an agent, the other party to the contract had notice that the agent was acting for the principal and the principal’s identity.”  Stonhard v. Blue Ridge Farms, LLC , 114 A.D.3d 757, 758 (2 nd Dep’t 2014) (citations and internal quotation marks omitted).  The test for whether a principal is “disclosed” is “actual knowledge, not suspicion.”  Safety Environmental , 94 A.D.3d at 970 (quoting Ell Dee Clothing Co. v. Marsh , 247 N.Y. 392, 397 (1928).)  For example, the plaintiff in Stonhard , was a contractor that installed flooring at a food manufacturing facility.  The Second Department, in reversing supreme court’s grant of summary judgment dismissing the individual defendant from the action and granting summary judgment to the plaintiff, stated: The plaintiff established, prima facie, its entitlement to judgment as a matter of law on the complaint insofar as asserted against the defendant Marvin Sussman with evidence that it entered into a contract with Sussman of “Blue Ridge Farms,” pursuant to which the plaintiff was to install flooring at the “Blue Ridge Farms” food manufacturing facility in Brooklyn, and Sussman failed to disclose that he was acting as an agent for the defendant Blue Ridge Foods, LLC, which owns the facility. Stonhard, 114 A.D.3d at 758 (citations omitted).  Since the agent in Stonhard was acting for a “partially disclosed principal in that the agency relationship was known, but the identity of the principal remained undisclosed,” “he became personally liable under the contract”.  Stonhard, 114 A.D.3d at 758-59 (citations and internal quotation marks omitted). The general rule that an agent will not be liable for the principal’s obligations is not without limit.  For example, “ he fact that an agent acts for a disclosed principal does not relieve the agent of liability for its own negligent acts.”  American Ref-Fuel Co of Hempstead v. Resource Recycling, Inc. , 281 A.D.2d 574, 575 (2 nd Dep’t 2001) (citation omitted).  Similarly, “ t has long been an established rule of law that the agent is not liable to third parties for non-feasance but only for affirmative acts of negligence or other wrong.”  Pelton v. 77 Park Ave. Condominium , 38 A.D.3d 1, 11 (1 st Dep’t 2006), overruled on other grounds by Fletcher v. Dakota, Inc. , 99 A.D.3d 43, 49–50, 948 N.Y.S.2d 263 (1st Dep’t 2012). It is against this backdrop that this Blog discusses Elango Medical PLLC v. Trump Place Comdominium , decided on May 18, 2021, by the Appellate Division, First Department.  The individual plaintiff in Elango is “an African-American, is a licensed physician and the sole owner of plaintiff Elango Medical PLLC.”  Corporate plaintiff attempted to lease space to open a medical office in the Trump Plaza Condominium, for which the Trump Corporation is the managing agent for the condominium and its board of managers.  According to plaintiffs, they found a listing for a unit in the subject condominium that was “identified as ‘professional space’ for physician/medical office use.”  Plaintiffs’ offer to lease the unit was accepted by the owner of the unit and the parties “entered into a lease agreement subject to approval by the board.”  The application was denied, however, “because the condominium bylaws restricted the unit to residential use.”  Plaintiffs alleged that they were never advised of any restrictions even though the listing agent and representatives of the Trump Corp. were aware of same.  It was also “undisputed that the unit had previously been used as a medical office from 1993 to mid-2017 and that two other units in the Condominium were currently being used as medical offices.”   Plaintiffs brought claims against Trump Corp. for, inter alia , “race-based discrimination in violation of the New York City and State Human rights laws.”  Trump Corp moved for summary judgment arguing, inter alia : that the application was denied for legitimate reasons (the use of the unit was restricted to residential use); that Trump Corp. was acting as an agent for the board, a disclosed principal; and, that “the Board had no idea who or what Dr. Elango was because…the Application was not reviewed or processed by the Board once it was determined, from the first page of the Lease, that the PLLC’s intended use was impermissible.”  Plaintiffs opposed the motion “arguing that the proffered reason for rejecting their application was pretextual, that issues of fact existed as to the scope of the agency relationship, and Trump Corporation could nonetheless be held liable for its own independent tortious conduct, and that issues of fact existed as to whether Trump Corporation was aware of Dr. Elango’s race.  Supreme court denied the motion. Trump Corp. argued on appeal that “it cannot be held liable because it acted as the agent of a disclosed principal, i.e., the board.”  Supreme court’s order was unanimously affirmed.  The Court, after setting forth the law on agency like that which is set forth herein, including that “an agent may still be held liable for its own affirmative wrongful acts," stated: Here, it would have been premature to grant summary judgment on this issue as document and deposition discovery have not yet begun and are clearly necessary to explore Trump Corporation’s agency status and its relationship with the Board, and whether it was aware of Dr. Elango’s race and its involvement in the decision to reject plaintiffs’ application. In the context of the agency defense and the discrimination claim, the Court was also moved by the fact that: “the evidence that a color photograph of the applicant was required to be submitted with the application was sufficient to create an issue of fact as to whether Trump Corporation was aware of Dr. Elango’s race <; that> the word “COLOR” is spelled out in capital letters for emphasis in its document<; and,> that the unit had previously been used as a medical office.

The proliferation of cyber-events and cyber-enabled crime represents a significant threat to consumers and the financial services system. See FinCEN, Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime (October 25, 2016) ( here) . With today’s technology, the accessibility of the U.S. financial system “make financial institutions attractive targets to traditional criminals, cybercriminals, terrorists, and state actors.” Id. These bad actors target the website, systems, and employees of financial institutions “to steal customer and commercial credentials and proprietary information; defraud financial institutions and their customers; or disrupt business functions.” Id. As noted in the Advisory, “financial institutions can play an important role in safeguarding customers and the financial system from these threats through timely and thorough reporting of cyber-events and cyber-related information in SARs” or suspicious activity reports. SARs are governed by the Bank Secrecy Act (“BSA”) and implementing regulations promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The law requires broker-dealers to file SARs with FinCEN to report a transaction (or pattern of transactions of which the transaction is a part) conducted or attempted by, at, or through the broker-dealer involving or aggregating funds or other assets of at least $5,000 that the broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts; or (4) involves use of the broker-dealer to facilitate criminal activity. 31 C.F.R. § 1023.320(a)(2) (the “SAR Rule”). FinCEN’s regulations require that: “A suspicious transaction shall be reported by completing a Suspicious Activity Report.” 31 C.F.R. § 1023.320(b)(1). FinCEN instructs SAR filers to “provide a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” in the narrative and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.” See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) ( here ). To be effective, the SAR should describe “the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported.” See , e.g. , FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative (Nov. 2003), at 3 ( here ). When a SAR is filed “it must include information about each of the Five Essential Elements of the suspicious activity.” See SEC v. Alpine Sec. Corp. , 308 F. Supp. 3d 775, 804 (S.D.N.Y. 2018) < here =">here"> , aff’d , 982 F.3d 68 (2d Cir. 2020). When a SAR “lack basic information regarding the Five Essential Elements … SAR s deficient as a matter of law.” Id. at 800. FinCEN has provided additional instruction regarding the obligations of financial institutions to report cyber-related events. In December 2011, for example, FinCEN issued an advisory to alert financial institutions to the increased threat of cyber account takeover activity. FinCEN, Account Takeover Activity, FIN-2011-A016 (Dec. 19, 2011) ( here ). FinCEN advised that “ ybercriminals are increasingly using sophisticated methods to obtain access to accounts” and these “attacks aim to deliberately exploit a customer’s account and, in many instances, to gain seemingly legitimate access to another customer’s account.” Id. In order to assist financial institutions with identifying and reporting account takeover activity where cybercriminals attempt intrusions into a customer’s account in order to steal the customer’s funds, FinCEN also set forth detailed instruction for reporting account takeovers that emphasizes the importance of reporting cyber-related information—including cyber-event data, such as URL address and IP addresses with timestamps, as well as email addresses and other electronic identifying information—in the event of a cyber-enabled account takeover. See FinCEN, Advisory to Financial Institutions on Cyber-Events and Cyber-Enabled Crime, FIN2016-A005 (Oct. 25, 2016) ( here ); see also Frequently Asked Questions (FAQs) regarding the Reporting of Cyber-Events, Cyber-Enabled Crime, and Cyber-Related Information through Suspicious Activity Reports (SARs) (Oct. 25, 2016). Rule 17a-8 promulgated pursuant to Section 17(a) of the Securities Exchange Act of 1934 requires broker-dealers registered with the Commission to comply with the reporting, record-keeping, and record retention requirements of the BSA. The failure to file a SAR as required by the SAR Rule—including omitting from a filed SAR “a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” or failing to “identify the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported”—is a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. See Alpine Sec. Corp. , 308 F. Supp. 3d at 798–800. In the Matter of GWFS Equities, Inc. On May 12, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it settled charges against GWFS Equities Inc. (“GWFS”), a Colorado-based registered broker-dealer and affiliate of Great-West Life & Annuity Insurance Company, for violating the federal securities laws governing the filing of Suspicious Activity Reports. GWFS provides services to employer-sponsored retirement plans. The SEC found that from September 2015 through October 2018, GWFS was aware of increasing attempts by external bad actors to hack into the retirement accounts of individual plan participants. The SEC further found that GWFS was aware that the hackers attempted or gained access by, among other things, using improperly obtained personal identifying information of the plan participants, and that the hackers frequently were in possession of electronic login information, such as usernames, email addresses, and passwords. In the SEC’s order ( here ), the Commission found that GWFS failed to file approximately 130 SARs, including in cases when it had detected hackers gaining, or attempting to gain, access to the retirement accounts of participants in the employer-sponsored retirement plans it serviced. Further, for the nearly 300 SARs that GWFS did file, the SEC found that GWFS did not include the “five essential elements” of information it knew and was required to report about the suspicious activity and suspicious actors, including cyber-related data, such as URL addresses and IP addresses. “Across the financial services industry, we have seen a large increase in attempts by outside bad actors to gain unauthorized access to client accounts,” said Kurt L. Gottschall, Director of the SEC’s Denver Regional Office. “By failing to file SARs and by omitting information it knew about the suspicious activity it did report, GWFS deprived law enforcement of critical information relating to the threat that outside bad actors pose to retirees’ accounts, particularly when the unauthorized account access has been cyber-enabled.” In agreeing to the settlement, the SEC noted that GWFS provided significant cooperation with its investigation and took subsequent efforts to address the issues identified by the Commission, which included adding dedicated anti-money laundering staff and systems, replacing key personnel, clarifying delegation of responsibility for filing SARs, and implementing new SAR-related policies, procedures, standards, and training. The SEC found that GWFS violated Section 17(a) of the Securities Exchange Act and Rule 17a-8 thereunder. Without admitting or denying the SEC’s findings, GWFS agreed to a settlement that imposes a $1.5 million penalty, a censure, and an order to cease and desist from future violations.

Readers of this Blog know that to state a cause of action for fraudulent inducement, the complaint must allege “that the defendant intentionally made a material misrepresentation of fact in order to defraud or mislead the plaintiff, and that the plaintiff reasonably relied on the misrepresentation and suffered damages as a result.” Connaughton v. Chipotle Mexican Grill, Inc. , 135 A.D.3d 535, 537 (1st Dept. 2016), aff’d , 29 N.Y.3d 137 (2017) (citations omitted). Significantly, “ claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). This means that if “sufficient factual allegations of even a single element are lacking,” the claim will be dismissed. RKA Film Fin., LLC v. Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). “To fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017) (citation omitted). “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Id. (citation omitted). See also 627 Acquisition Co., LLC v. 627 Greenwich, LLC , 85 A.D.3d 645, 647 (1st Dept. 2011); Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453-54 (1st Dept. 2008); Orix Credit All., Inc. v. R.E. Hable Co. , 256 A.D.2d 114, 115 (1st Dept. 1998). This Blog has written about the foregoing principles on numerous occasions, including here , here , and here . In 320 W. 115 Realty LLC v. All Bldg. Constr. Corp. , 2021 N.Y. Slip Op. 03107 (1st Dept. May 13, 2021) (here), the Appellate Division, First Department recently considered and rejected a fraudulent inducement claim because it was based on nothing more than a promise to perform in the future. 320 W. 115 Realty arose out of a dispute over construction renovation work that was to be performed on two adjacent buildings (the “Project”), located at 318-320 West 115th Street, New York, New York (the “Property”).  Plaintiff, the former owner and developer of the Property, and All Building Construction Corp. (“ABC”) entered into an AIA standard form document A107-2007 agreement, dated November 14, 2014, whereby ABC agreed to perform general contracting management services to renovate the Property for a stipulated sum of $3,313,933. Under the agreement, the Project was to be substantially completed “on or about July 1, 2015.” In or around May 2015, Edward Campanella (“Campanella”), ABC’s owner and principal, allegedly informed Plaintiff that Defendants could not retain the subcontractors necessary to complete the Project at the price agreed to, and allegedly persuaded Plaintiff that Defendants could substantially complete the Project “on or about November 26, 2015” (the “Substantial Completion Date”) for an additional $819,525.35 (together with the original sum, the “Contract Sum”). In June 2015, Plaintiff and ABC entered into a separate AIA standard form document A107-2007 agreement — also dated November 14, 2014 — reflecting this subsequent agreement.  Plaintiff alleged that ABC continuously breached the two agreements (collectively, the “Agreements”) by, among other things: failing to complete the Project by the Substantial Completion Date because of ABC’s defective work and unreasonable delays; deviating from approved construction plans and concealing any unauthorized work; failing to complete major construction tasks; providing defective work; and failing to pay subcontractors for work performed while falsely certifying to Plaintiff that the subcontractors were paid. Plaintiff also alleged that ABC failed to pay its subcontractors, as required by the Agreements and the New York State Lien Law (“Lien Law”), and instead used the funds for purposes unrelated to the Project, which substantially delayed the Project. In addition to alleging breach of contract, Plaintiff alleged that ABC defrauded it by, among other things: misrepresenting and certifying lien waivers that it had paid the subcontractors for their work; fraudulently inflating the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements; and threatening to stop working on the Project and withholding delivery of construction services and materials that were already paid for by Plaintiff unless Plaintiff paid additional funds in excess of the Contract Sum. ABC allegedly abandoned the Project and the Agreements on August 25, 2016. As a result, Plaintiff maintained that it was required to: retain new contractors at higher prices; secure a new permit from the New York City Department of Buildings; incur additional costs to complete the Project, including accrual of interest on its construction loan; and remediate ABC’s defective work. Plaintiff brought suit, asserting four causes of action for: (1) fraudulent inducement against Defendants; (2) breach of contract against ABC; (3) negligence against ABC; and (4) breach of the implied covenant of good faith and fair dealing against ABC. Defendants moved to dismiss the first, third, and forth causes of action. We examine the motion as it pertained to the fraudulent inducement cause of action. In support of its fraudulent inducement cause of action, Plaintiff alleged that “ABC[]’s myriad of breaches came so early and often that the only inference is that ABC[] intended to breach its Agreements from the start ….” Plaintiff also alleged that Defendants knowingly misrepresented the Contract Sum at the time of contracting and that this misrepresentation induced Plaintiff to enter into the Agreements. Moreover, at a July 25, 2016 meeting, Campanella allegedly admitted to Plaintiff that the Agreements were never a firm number contract, and that the Contract Sum was never the real number. Defendants argued that the cause of action must be dismissed, in part, because the complaint failed to allege a misrepresentation that induced Plaintiff to enter into the Agreements, it was duplicative of the breach of contract cause of action, and Campanella could not be held personally liable for acts done on behalf of ABC. The motion court agreed with Defendants and dismissed the fraudulent inducement cause of action ( here ). The motion court held that Plaintiff merely alleged that Defendants lacked the intent to perform the Agreements, which, it said, was “clearly a statement of future intent” and, therefore, “not actionable.” (Citations omitted.) The motion court rejected Plaintiff’s contention that Campanella’s alleged statement that the Contract Sum “was never the real number” showed that Defendants knowingly misrepresented the Contract Sum. The motion court explained that “a review of the Agreements” actually “support Campanella’s statement.” For example, noted the motion court, “the Agreements specifically provide for the possibility that the Contract Sum increase or change under numerous scenarios” and contained a ‘Project Budget,’ … which the heading, ‘Estimate Summary.’”  Finally, with regard to Plaintiff’s other allegations of fraud — such as, ABC fraudulently inflated the Contract Sum by certifying applications for payments that overstated completion costs and submitting false change orders for work already agreed to under the Agreements — the motion court held that they were insufficient to support Plaintiff’s fraudulent inducement claim. The motion court explained that they could not have induced Plaintiff to enter into the Agreements because the activity complained of “allegedly occurred after the parties had already entered into the Agreements.” “At bottom,” concluded the motion court, “Plaintiff has failed to state sufficient facts to turn the breach of contract cause of action into a cause of action for fraudulent inducement.” On appeal, the First Department unanimously affirmed. In a pithy opinion (involving the fraudulent inducement cause of action), the Court held that Plaintiff did not allege a “representation of present fact.” Slip Op. at *1 (quoting Deerfield Communication Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986) (internal quotation marks omitted)). Instead, Plaintiff merely alleged a representation of future intent. Id. Takeaway It has long been held that “promissory statements as to what will be done in the future are not actionable.” Adams v. Clark , 239 N.Y. 403, 410 (1925). However, when the promissory statement is “made with a preconceived and undisclosed intention of not performing it,” it becomes an actionable misrepresentation of existing fact. Sabo v. Delman , 3 N.Y.2d 155 (1957). As explained by the courts in 320 W. 115 Realty , the alleged misstatements were of the former, not the latter, variety.

This Blog frequently highlights cases analyzing the viability of fraud claims when contract claims are also made.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> .  In Michael Davis Construction, Inc. v. 129 Parsonage Lane, LLC , decided on May 12, 2021, the Second Department dismissed defendant’s negligent construction counterclaim as duplicative of its breach of contract counterclaim.   A review of the underlying complaint (available from court’s electronic file) reveals that plaintiff, a general contractor, entered into a contract for the renovation of an existing house owned by defendant.  A dispute arose between the parties and plaintiff agreed to give defendant a $400,000 credit and complete the work for $75,000.  Defendant rebuffed plaintiff’s demand for the $75,000 payment upon substantial completion of the work.  In its answer, defendant asserted, inter alia , an affirmative defense alleging breach of contract because “ laintiff failed to satisfactorily perform or complete its obligations under its agreement with and therefore the claims are barred as a result of breach of contract.”  In addition, defendant, alleging numerous deficiencies with plaintiff’s work and based thereon, asserted counterclaims sounding in breach of contract (first), negligent construction (second), breach of warranty (third), fraud in the inducement (fourth) and negligent misrepresentation (fifth).  In each counterclaim defendant sought damages “in excess of $1,500,000”, in addition to punitive damages of $2,000,000. Supreme court granted plaintiff’s motion to dismiss defendant’s second, third, fourth and fifth counterclaims and the demand for punitive damages.  On appeal, the Second Department modified supreme court’s order to the extent of denying the motion to dismiss with respect to the third counterclaim (breach of warranty) only; the remainder of the order was affirmed. In affirming the dismissal of the negligent construction counterclaim, the Court found it to be duplicative of the breach of contract counterclaim because a breach of contract counterclaim “is not to be considered a tort unless a legal duty independent of the contract itself has been violated.”  (Quoting Clark-Fitzpatrick, Inc. v. Long Is. R.R. Co. , 70 N.Y.2d 382, 389 (1987).)  The legal duty so alleged “must spring from circumstances extraneous to, and not constituting elements of, the contract, although it may be connected with and dependent upon the contract.”  Id .   The Clark-Fitzpatrick Court, in applying the facts of that case to the relevant law, stated: Here, plaintiff has not alleged the violation of a legal duty independent of the contract. In its cause of action for gross negligence, plaintiff alleges that defendant failed to exercise "due care" in designing the project, locating utility lines, acquiring necessary property rights, and informing plaintiff of problems with the project before construction began. Each of these allegations, however, is merely a restatement, albeit in slightly different language, of the "implied" contractual obligations asserted in the cause of action for breach of contract. Moreover, the damages plaintiff allegedly sustained as a consequence of defendant's violation of a "duty of due care" in designing the project were clearly within the contemplation of the written agreement, as indicated by the design change and adjusted compensation provisions of the contract. Merely charging a breach of a "duty of due care", employing language familiar to tort law, does not, without more, transform a simple breach of contract into a tort claim. Clark-Fitzpatrick, 70 N.Y.2d at 390 (citations omitted). In reaching its decision, the Michael Davis Court also relied on Board of Managers of Beacon Tower Condominium v. 85 Adams Street, LLC. , 136 A.D.3d 680 (2 nd Dep’t 2016), in which the Court stated: A legal duty independent of contractual obligations may be imposed by law as an incident to the parties' relationship, and in such instances, it is policy, not the parties' contract, that gives rise to a duty of care. The nature of the injury, the manner in which the injury occurred, and the resulting harm are all relevant factors in considering whether claims alleging breach of contract and tort may exist side by side. (Citations omitted.) Because the Michael Davis Court found that the counterclaims failed to “allege facts that would give rise to a duty owed to the defendant that is independent of the duty imposed by the parties' agreement,” defendant was essentially “seeking the contractual benefit of its bargain with plaintiff, which cannot be obtained through a counterclaim sounding in tort.” The Michael Davis Court also affirmed the dismissal of the fraud in the inducement counterclaim because “the allegations which form the basis of the counterclaim alleging fraud in the inducement are the same as those underlying the counterclaim alleging breach of contract. The defendant's allegation that the plaintiff fraudulently represented that it would install all soundproofing and thermal insulation on the project amounted only to a misrepresentation of the intent or ability to perform under the contract.  (Citations and internal quotation marks omitted.) As to the affirmance of the dismissed negligent misrepresentation counterclaim, the Michael Davis Court stated: A claim alleging negligent misrepresentation requires the party asserting the claim to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the other party to impart correct information; (2) that the information was incorrect; and (3) reasonable reliance on the information.  When both are alleged, a negligent misrepresentation claim will be found to be duplicative of a breach of contract claim where the pleading fails to allege facts that would give rise to a duty that is independent from the parties' contractual. Here, the allegations supporting the counterclaim alleging negligent misrepresentation are based solely on the contractual relationship between the parties. (Citations omitted.) Finally, the breach of warranty counterclaim was determined not to be duplicative of the contract counterclaim and was reinstated.  The express limited warranty upon which the counterclaim was based, was “an agreement that is independent of the parties’ original construction agreement” and “was executed by the plaintiff several years after the parties allegedly entered into their original construction agreement.”