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It has long been the law in New York that a party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. here=">here" and="and" >here.=">here."> On March 11, 2021, the Appellate Division, First Department affirmed the dismissal of a fraudulent inducement claim because of the existence of an integration or merger clause and a “no representations” clause in which the defendants disclaimed liability for any extra-contractual representations. D’Artagnan, LLC v. Sprinklr Inc. , 2021 N.Y. Slip Op. 01479 (1st Dept. Mar. 11, 2021) ( here ). D’Artagnan involved an action to recover the money that plaintiff paid to license an integrated software platform provided by defendant Sprinklr Inc. According to the complaint, defendant allegedly deceived plaintiff by representing that defendant’s software would allow plaintiff to directly target its marketing to specific Facebook and Instagram users. As a result, on or about June 2, 2017, the parties entered into a license, a master services agreement, and a statement of work (“SOW”) (collectively, the “Contract”). The master services agreement contained a general merger clause which provided that, “ his Agreement together with each Order Form and/or SOW is the entire agreement between the parties relating to this subject matter, and supersedes … all prior or contemporaneous understandings of the parties related thereto.” The master services agreement also contained a no representation clause, which provided that, “ o party has been induced to enter into this Agreement by, nor is any party relying on, any representation or warranty outside those expressly stated in this Agreement.” Following payment by plaintiff but prior to the use of defendant’s services or platform, plaintiff allegedly discovered that it could not target potential customers individually and directly through certain social media channels. Plaintiff then commenced the action. The first cause of action called “for a declaration that no agreement was entered into between because there was no meeting of the minds as to the material terms of the agreement.” The second cause of action for fraud alleged that defendant “misrepresented the capabilities of its platform and failed to disclose its limitations.” The third cause of action alleged a violation of the New Jersey Consumer Fraud Act. The fourth cause of action sought relief for negligent misrepresentation. The fifth cause of action alleged breach of contract, claiming that defendant’s “failure to provide plaintiff with the ability to target specific customers and direct advertisements to these particular customers on Facebook and Instagram constitute a breach of the contract.” The sixth cause of action sought relief for unjust enrichment. Defendant moved to dismiss. The motion court granted the motion ( here ). The motion court found that “defendant did not represent to plaintiff that its software could directly target Facebook and Instagram users.” “In fact,” said the motion court, “defendant made the opposite representation.” The motion court pointed to a May 9, 2017 email, sent one month before the parties executed the Contract, in which defendant “explicitly state that Facebook and Instagram’s privacy policies prevented direct targeting on Facebook and Instagram platforms.” The motion court also held that the merger clause barred the fraud and negligent misrepresentation causes of action. See="See" Hobart="Hobart" v.="v." Schuler,="Schuler," N.Y.2d="N.Y.2d" 1023,="1023," (1982). This="--> This" Blog="Blog" previously="previously" examined="examined" clauses="clauses" no="no" reliance="reliance" here.=">here."> On appeal, the Appellate Division, First Department unanimously affirmed. In a short and concise decision, the Court held that “Plaintiff’s second, third and fourth causes of action were … correctly dismissed.” Without discussion, the Court agreed with the motion court’s conclusion that the merger clause barred the tort-based claims. Slip Op. at *2. (“In addition to a general merger clause, …” plaintiff’s claims were “not viable.”). The Court specifically cited to the “No Additional Representation” clause in the Contract as a basis for barring the tort-based claims. The Court explained that the no-reliance clause specifically “disclaim liability and responsibility for any extra-contractual representation”, such as the one in which defendant allegedly represented that its software could directly target Facebook and Instagram users. Id. (citing WT Holdings Inc. v. Argonaut Group, Inc. , 127 A.D.3d 544, 544 (1st Dept. 2015); Natoli v. NYC Partnership Hous. Dev. Fund Co., Inc. , 103 A.D.3d 611, 613 (2d Dept. 2013)). The Court explained that “section 10.8 of the master services agreement” specifically provided that plaintiff “had not been ‘induced to enter into . . . nor relying on, and representation or warranty outside those expressly stated in .’” Id. “In light of this specific agreement,” concluded the Court, “plaintiff’s claims sounding in fraud and negligent misrepresentation based upon parol evidence contained in the parties’ emails not viable.” Id. Takeaway In Danann Realty , the Court of Appeals noted that “specific disclaimer destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 5 N.Y.2d at 320-21. D’Artagnan reiterates this basic principle of law. As the First Department observed, the contractual disclaimer at issue was specific to the matter at hand and directly addressed the subject of the alleged misrepresentation. Consequently, the contract provision at issue was specific enough to preclude the fraud and negligent misrepresentation claims.

Disclosure in New York State court litigation is governed by Article 31 of the Civil Practice Law and Rules .  In general, there “shall be full disclosure of all matters material and necessary in the prosecution or defense of an action, regardless of burden of proof….”  CPLR 3101.   “The words, ‘material and necessary,’ are … to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”  Allen v. Crowell-Collier Publishing Co. , 21 N.Y.2d 403, 406 (1968); see also , Vargas v. Lee , 170 A.D.3d 1073 (2 nd Dep’t 2019) (relying on , and quoting from Allen .)  CPLR 3101 “embodies the policy determination that liberal discovery encourages fair an effective resolution of disputes on the merits, minimizing the possibility for ambush and unfair surprise.”  Forman v. Henkin , 30 N.Y.3d 656, 661 (2018) (citation and internal quotation marks omitted). In light of the important role disclosure plays in the orderly progress of the litigation process, the CPLR provides remedies for the failure to comply with disclosure.  One such example is CPLR 3124 , which provides that “ f a person fails to respond to or comply with any request, notice, interrogatory, demand, question or order under this article, except a notice to admit under section 3123 , the party seeking disclosure may move to compel compliance or a response.”  (Hyperlink added.)  More significantly, however, CPLR 3126 , which permits a court to impose hefty sanctions for discovery abuses, provides: If any party, or a person who at the time a deposition is taken or an examination or inspection is made is an officer, director, member, employee or agent of a party or otherwise under a party’s control, refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed pursuant to this article, the court may make such orders with regard to the failure or refusal as are just, among them: 1. an order that the issues to which the information is relevant shall be deemed resolved for purposes of the action in accordance with the claims of the party obtaining the order; or 2. an order prohibiting the disobedient party from supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony, or from introducing any evidence of the physical, mental or blood condition sought to be determined, or from using certain witnesses; or 3. an order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party. It is recognized that the penalties listed in CPLR 3126 “were not intended to be exhaustive” and the “practice commentaries to CPLR 3126 encourage the courts to exercise their ingenuity, and to devise sanctions as narrowly tailored as possible to the circumstances of the individual case.”  DiDomenico v. C&S Aeromatik Supplies, Inc. , 252 A.D.2d 41, 49 (2 nd Dep’t 1998). On March 10, 2021, the Appellate Division, Second Department, decided Nationstar Mortgage, LLC v. Jackson , in which the Court affirmed supreme court’s order “striking … ’s counterclaims and precluding … from offering certain evidence.”  Nationstar is a mortgage foreclosure action.  While the factual history was somewhat involved, same is not germane to the subject of this article.  Suffice it to say, borrower asserted counterclaims pursuant to RPAPL 1501(4) to discharge the mortgage on statute of limitations grounds.  [This BLOG has treated RPAPL 1501(4) < HERE =">HERE"> and < HERE =">HERE"> and issues surrounding statutes of limitations in mortgage foreclosure actions < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> .] Lender moved to strike borrower’s answer and counterclaims pursuant to CPLR 3126 “for failure to provide any disclosure or, in the alternative, to compel disclosure.”  Lender also filed a note of issue and certificate of readiness.  Borrower, in turn, cross-moved for summary judgment dismissing the complaint and on its eighth counterclaim, “which was to cancel and discharge of record the mortgage pursuant to RPAPL 1501(4), based on statute of limitations.”  “Supreme Court denied the ’s cross-motion and granted the ’s motion to the extent of striking the ’s counterclaims and precluding the from offering any evidence that should have been provided in response to the discovery requests served by the .” As to the law related to CPLR 3126, the Nationstar Court stated: Pursuant to CPLR 3126, a court may impose discovery sanctions, including the striking of a pleading or preclusion of evidence, where a party ‘refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed.  The nature and degree of the penalty to be imposed pursuant to CPLR 3126 is a matter within the discretion of the. Although public policy strongly favors that actions be resolved on the merits when possible, a court may resort to the drastic remedies of striking a pleading or precluding evidence upon a clear showing that a party’s failure to comply with a disclosure order was the result of willful and contumacious conduct  The willful or contumacious character of a party’s conduct can be inferred from the party’s repeated failure to respond to demands or to comply with discovery orders, and the absence of a reasonable excuse for these failures, or by the failure to comply with court-ordered discovery over an extended period of time.  (Citations and internal quotation marks omitted.) The Nationstar Court found that borrower’s “wilful and contumacious” conduct could be inferred “from its repeated failure to comply with discovery demands for more than a year, its failure to comply with the deadlines set forth in a compliance conference order, and the absence of any excuse offered for such failures.”  (Citations omitted.)  The Court also found that lender’s filing of the note of issue and certificate of readiness, did not operate as waiver of “its objection to failure to meet its disclosure obligations … since motion seeking discovery sanctions pursuant to CPLR 3126 was pending prior to the date [lender’ filed the note of issue.” Takeaway Discovery deadlines and orders should be taken seriously by litigants lest they be on the receiving end of a significant sanction such as the striking of a pleading or a preclusion order.

In the past, this Blog has examined cases in which the plaintiff brings a breach of contract claim and fraud claim in the same proceeding. < e.g. , here,=">here," and="and" >here.=">here."> e.g.,> Those cases show that where the two claims arise from the same facts and circumstances and seek the same relief, the fraud claim will be dismissed as duplicative of the contract claim.   Indeed, as this Blog has explained previously, New York courts will not permit a fraud claim to survive a motion to dismiss when the claim arises from a breach of contract. Courts routinely dismiss a fraud claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). See also McKernin v. Fanny Farmer Candy Shops, Inc. , 176 A.D.2d 233, 234 (2d Dept. 1991). In today’s article, we examine GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC , 2021 N.Y. Slip Op. 01356 (1st Dept. Mar. 9, 2021) ( here ), a case in which the Appellate Division, First Department addressed the duplication issue, finding that the fraud claim, in part, duplicated plaintiffs’ breach of contract claim. In addition to duplication, the Court also addressed the particularity requirement of CPLR § 3016(b), finding that the complaint provided “specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements.” GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC GSCP involved a lawsuit by the equity owners of EdgeMarc Energy Holdings, LLC (“EdgeMarc”), a Pennsylvania oil-and-gas company, who invested $850 million in the company. Plaintiffs alleged that they incurred significant losses from their investments in defendant ETC Northeast Pipeline, LLC (“Energy Transfer”), a company that designs, builds and operates pipelines. Plaintiffs claimed that beginning in August 2017, Energy Transfer made representations about the progress of the pipeline system ( e.g. , that it was progressing on schedule) and its availability for commercial use ( e.g. , when it would be ready for commercial service). Based on those representation, plaintiffs alleged that they invested $50 million in EdgeMarc.  Plaintiffs also alleged that in late 2017, prior to making additional investments in EdgeMarc, Energy Transfer certified that there was no delay in the development, construction or completion of the system and that, as such, commercial service would be ready by July 1, 2018. According to plaintiffs, Energy Transfer provided three such certifications. Relying of those certifications, plaintiffs claimed that they invested $100 million more in EdgeMarc in early 2018. In September 2018, the pipeline exploded. As a result, regulators ordered a shut-down of the project. Plaintiffs maintained that the explosion exposed the truth about Energy Transfer’s prior representations concerning the project and the system. Plaintiffs alleged that at the time of each representation, Energy Transfer had knowledge and notice of material flaws in its pipeline system that would delay and prevent completion and commercial service of the pipeline system. According to plaintiffs, years before the explosion, Energy Transfer was informed of the area’s “high susceptibility to slope failure” — which is what happened in September 2018 — yet it never disclosed that information, including to the engineers responsible for approving the system’s design. Instead, alleged plaintiffs, Energy Transfer represented to them, without qualification, that the project was on track for completion and commercial service. After the explosion, the Pennsylvania Department of Environmental Protection cited Energy Transfer for legal violations and imposed a $30.6 million civil penalty on the company. Plaintiffs claimed that Energy Transfer did not disclose any of the violations and flaws with the pipeline system prior to the explosion, notwithstanding one of the contractual provisions in the funding commitments in which the company certified the absence of legal violations. Plaintiffs alleged that they funded $100 million of commitments to EdgeMarc on that provision ( i.e. , that Energy Transfer had complied with applicable law). As a result, plaintiffs filed suit, bringing claims for breach of contract (based on Energy Transfer’s contractual certifications and other breaches), fraud, unjust enrichment and negligent misrepresentation. Energy Transfer moved to dismiss the complaint.  The motion court denied the motion as to the breach of contract claim and granted it as to the fraud, unjust enrichment and negligent misrepresentation claims. Both parties appealed. The Court’s Holding The First Department modified the motion court’s order as to the fraud claim, in that it reinstated part of the claim. With regard to the $100 million investment in 2018, the Court held that the fraud claim duplicated the breach of contract claim. Slip Op. at *1 (“To the extent the fraud claim alleges that plaintiffs invested a total of $100 million in 2018 based on defendant’s false and misleading statements made on January 18, 2018, March 2, 2018, and April 16, 2018, representing there was no Project Delay, the claim is duplicative of the breach of contract claim.”) (citations omitted).  With regard to the $50 million investment in 2017, the Court held that the fraud claim did not duplicate the contract claim. Id. The Court reasoned that the fraud claim was predicated on representations that were “not alleged in the breach of contract claim and not covered by the Commitment Letters.” Id. The Court also held that the motion court erred in dismissing the fraud claim for failing to plead fraud with particularity under CPLR § 3016(b). Id. at *1-*2. The Court found that plaintiffs provided “‘specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements,’ including that the dangers and extensive violations of regulations and laws would result in delay beyond July 1, 2018.” Id. at *2 (quoting Houbigant, Inc. v Deloitte & Touche , 303 A.D.2d 92, 99 (1st Dept. 2003); other citation omitted). The Court explained that the complaint alleges that at meetings in Pennsylvania on August 23 and 24, 2017, defendant’s Director — Business Development made false, misleading, and incomplete statements to plaintiffs’ representatives that the pipeline was on track to be fully complete by January 2018 and ready for commercial service by July 1, 2018, when defendant knew it was not on track. It also includes factual allegations that allow the inference that defendant knew those representations were false, including that defendant knew since 2015 that the area near the site of the September 2018 explosion included a landslide area with “dangerous and unstable hillslope terrain,” and that the Pennsylvania DEP’s January 2020 consent order noted that as early as January 2016, defendant knew the area had a “high susceptibility to slope failure” but did not disclose that issue to its engineers or correct it.  Id. at *2. The Court held that the foregoing allegations satisfied “CPLR 3016(b)’s purpose, ‘to inform a defendant with respect to the incidents complained of.’” Id. (quoting Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008)).  In Pludeman , the New York Court of Appeals “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 10 N.Y.3d at 491. Thus, where “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” the courts should deny a dismissal motion. Id. at 491-92 (internal quotation marks and citations omitted). (citation and quotation marks omitted). In other words, a pleading satisfies CPLR § 3016(b) “when the facts are sufficient to permit a reasonable inference of the alleged conduct.” Id. at 492; accord Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); Epiphany Cmty. Nursery Sch. v. Levey , 171 A.D.3d 1, 9 (1st Dept. 2019). The First Department also held that plaintiffs were “not required to plead damages for fraud with particularity.” Slip Op. at *2 (citing Solomon Capital, LLC v. Lion Biotechnologies, Inc. , 171 A.D.3d 467, 469 (1st Dept. 2019)). Takeaway GSCP makes clear how facts and the degree of specificity with which those facts are alleged matter, both in terms of the duplication of claims doctrine and the particularity requirement under CPLR § 3016(b).  As to the former, plaintiffs were able to plead facts showing the existence of an independent tort that was not bound up in their breach of contract claim. For that reason, the First Department was able to make the distinction between the fraud claim for events both before and during 2018. As to the latter, the Court found, without explicitly saying so, that plaintiffs adequately described the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). They provided “specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements.” Slip Op. at *2. Since the complaint sufficed “to inform … defendants with respect to the incidents complained of” ( Pludeman , 10 N.Y.3d at 491), the Court found that plaintiffs satisfied the overarching purpose of CPLR § 3016(b): to give defendants notice of the alleged fraud.

“Summary judgment is a judgment entered by a court for one party and against another party without a full trial.” ( Here .) The motion is designed to avoid unnecessary trials – that is, its purpose is to avoid a trial where there are no material issues of fact to be decided by the trier of fact ( e.g. , the judge or the jury). Summary judgment motions can also simplify a trial (known as a motion for partial summary judgment) because it can dispense with issues or claims for which there are no material issues of fact. A decision on a motion a motion for summary judgment is a final judgment from which the losing party may appeal. How A Summary Judgment Motion Works In New York, summary judgment motions are governed by CPLR §§ 3212 and 3213 (discussed below).  When a party makes a summary judgment motion under CPLR § 3212, it is typically made after the close of discovery, though sometimes a party will file the motion before discovery is complete.  A court will grant a motion for summary judgment if, upon all the papers and evidence submitted, the cause of action or defense is established sufficiently to warrant directing judgment in favor of the moving party as a matter of law. CPLR § 3212(b); Gilbert Frank Corp. v. Federal Ins. Co. , 70 N.Y.2d 966, 967 (1988); Zuckerman v. City of New York , 49 N.Y.2d 557, 562 (1980). The function of the court when presented with a motion for summary judgment is one of issue finding, not issue determination. Sillman v. Twentieth Century-Fox Film Corp. , 3 N.Y.2d 395 (1957); Weiner v. Ga-Ro Die Cutting, Inc. , 104 A.D.2d331 (1st Dept. 1985). To prevail on a motion for summary judgment, the movant must make a prima facie showing of entitlement, submitting sufficient admissible evidence, such as affidavits of persons with first-hand knowledge of the matter, documentary evidence, and testimonial evidence, to demonstrate the absence of any material issues of fact. Jacobsen v. New York City Health and Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986). The movant’s initial burden is a heavy one; on a motion for summary judgment, facts must be viewed in the light most favorable to the non-moving party. Jacobsen , 22 N.Y.3d at 833. If the moving party fails to make its prima facie showing, the court is required to deny the motion, regardless of the sufficiency of the non-movant’s papers. Winegrad v. New York Univ. Med. Center , 4 N.Y.2d 851, 853 (1985).  If the movant meets its initial burden, then the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action or advance an acceptable excuse for the failure to do so. Zuckerman , 49 N.Y.2d at 560. However, bare allegations or conclusory assertions are insufficient to create genuine, bona fide issues of fact necessary to defeat such a motion. Rotuba Extruders, Inc. v. Ceppos , 46 N.Y.2d 223, 231 (1978). Summary Judgment in Lieu of Complaint CPLR § 3213 provides for accelerated judgment, just like CPLR § 3212. The difference between CPLR § 3212 and CPLR § 3213 is the latter permits a summary judgment motion at the outset of the litigation. There are no pleadings, and there is no discovery when a movant seeks summary judgment under CPLR § 3213.  To be entitled to judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument. Mirham v. Awad , 131 A.D.3d 1211 (2d Dept. 2015).  An action on a promissory note is an action for payment of money only. The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment. Only where a defendant can raise questions of fact that the note is not an instrument for the payment of money will the court deny a motion for summary judgment under CPLR § 3213. Farca v. Farca , 216 A.D.2d 520 (2d Dept. 1995). The standards for summary judgment under CPLR § 3212 apply to a motion under CPLR § 3213. Cross River Bank v. Haber cross river bank and the founding partner of freiberger haber llp.> cross river bank and the founding partner of freiberger haber llp.> In Cross River Bank v. Haber , 2021 N.Y. Slip Op 30583(U) (Sup. Ct., Kings County Feb. 25, 2021) ( here ), the Court granted a motion for summary judgment under CPLR § 3213 because the facts and evidence demonstrated that the promissory note at issue satisfied the requirements of the statute: it was an instrument for money only and defendants defaulted on their payment thereunder. Cross River Bank involved a two million loan to Fragments Holding LLC (“Fragments”) for which a promissory note (the “Note”) requiring monthly payments was issued and signed. The Note was guaranteed by Phillip Frankenberg, Claudia Frankenberg, Maurice Haber and Esther Haber. The guarantee provided that the obligations thereunder were “joint and several” as to each of them.  Fragments made payments for almost three years and then defaulted. Philip Frankenberg and Claudia Frankenberg filed for bankruptcy. Plaintiff moved for summary judgement in lieu of a complaint against defendants, asserting there were no factual issues that required resolution. Defendants opposed the motion, arguing that Fragments did not borrow the full amount available under the loan, and that, even if it did, the promissory note was not an instrument for money only because it referenced other agreements, including “a contemporaneously executed Business Loan Agreement, Security Agreement, Mortgage, and Trademark Security Agreement” (“Business Agreements”). The Court rejected both arguments. The Court held that “the evidence sufficiently demonstrate all the funds available were borrowed.” Even if that had not been the case, said the Court, there was no issue of fact as to whether Fragments “receive of the sums contained in the promissory note.” Slip Op. at *3. The Court held that defendants’ argument was based on “conclusory assertions” rather than any evidence in the record. Id. In so holding, the Court relied on Federal Deposit Insurance Corp. v. Silvers , 177 A.D.2d 266 (1st Dept. 1991), in which the First Department held that conclusory allegations of not receiving the consideration in question were insufficient to defeat a motion for summary judgment. There, like Cross River Bank , the defendant argued that “the note was unenforceable because he had never received any money or other kind of consideration for the note.” That assertion, said the First Department, was “barren of any elaboration of the circumstances under which said defendant executed the $100,000 promissory note,” and was, therefore, “a mere conclusion, insufficient to defeat plaintiff’s summary judgment motion.” Id. With regard to the Note itself, the Cross River Bank Court held that mere reference to other documents in the Note did not mean that the Note was not an instrument for money only. Id. at *3-*4. In so holding, the Court relied on three decisions that it considered to be “instructive” and on point. Id. (discussing Kim v. II Yeon Kwon , 144 A.D.3d 754 (2d Dept. 2016); Mehta v. Mehta , 168 A.D.3d 716 (2d Dept. 2019); and Margarella v. Ullian , 164 A.D.3d 898 (2d Dept. 2018)). In Kim , the defendant executed a promissory note and failed to pay pursuant to its terms. The plaintiffs commenced the action by summons and notice of motion for summary judgment in lieu of complaint to recover the money owed on the note. The defendant opposed the motion, arguing that an issue of fact arose with regard to the payment obligation because the payment obligation was dependent upon a partnership agreement that the plaintiff breached. The court rejected that argument, finding that it was an invalid defense. Specifically, the court held that the mere breach of a separate agreement without presenting any evidence challenging the validity of the agreement or without evidence of fraud in inducing the defendant to enter the transaction pursuant to which the note was issued was an insufficient basis to raise any questions of fact regarding the promissory note’s unconditional obligation to pay. 144 A.D.3d at 756.  In Mehta v. Mehta , 168 A.D.3d 716 (2d Dept. 2019), the court held that “extrinsic matters predating the execution of the note were not relevant to the issue” of liability on the note. In Margarella v. Ullian , 164 A.D.3d 898 (2d Dept. 2018), the plaintiffs entered into a “Building Loan Agreement” with Ponquogue Manor Construction, LLC (“Manor”) to loan $1.5 million toward Manor’s project to develop a condominium complex on its property in Hampton Bays. Simultaneously, the defendant, individually and on behalf of Manor as its managing member, executed a promissory note and a personal guaranty of Manor’s obligations under the note. Manor defaulted on the note, and the plaintiffs commenced the action to recover on the note and guaranty by motion for summary judgment in lieu of complaint pursuant to CPLR § 3213.  The court held that the plaintiffs “established their prima facie entitlement to judgment as a matter of law through their submission of the promissory note, which contained an unequivocal and unconditional obligation to pay, the guaranty, and evidence that the defendant failed to make payment in accordance with the terms of those instruments.” The court also held that “the promissory note was not ‘inextricably intertwined’ with certain other allegedly related agreements the parties entered into, such that any breach of the allegedly related agreements by the plaintiffs create a defense to payment on the promissory note”. Id. at 899. The court explained this was true because the obligations under the note were “absolute and unconditional”, therefore, the promissory note was enforceable regardless of any other agreements that were entered into between the parties. Id. at 899-900. Based upon the foregoing authorities, the Cross River Bank Court held that defendants “failed to present any evidence challenging the underlying debt owed.” Slip Op. at *5. Therefore, the Court granted the motion for summary judgement in lieu of a complaint. Takeaway A promissory note qualifies as an instrument for the payment of money only, so as to permit the plaintiff to file a motion for summary judgment in lieu of complaint pursuant to CPLR § 3213, where, as in Cross River Bank , the note contains “an unconditional promise by the borrower to pay the lender over a stated period of time”, and no “outside proof” is needed, “other than simple proof of nonpayment” to establish the plaintiffs’ prima facie case. Kim , 144 A.D.3d at 755 (citations and external quotation marks omitted). The breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only unless it can be shown that the contract and the instrument are “intertwined” and that the defenses alleged to exist create material issues of triable fact. See New York Community Bank v. Fessler , 88 A.D.3d 667, 668 (2d Dept. 2011) (quoting Mlcoch v. Smith , 173 A.D.2d 443, 444 (2d Dept. 1991)). In Cross River Bank , defendants failed to demonstrate with admissible evidence that the Business Agreements were “inextricably intertwined” with the Note. As such, defendants were unable to raise a triable issue of fact with respect to the payment obligations under the Note.

Many times, the applicable statute of limitations expires during the pendency of an already commenced action.  No problem – right?,  While generally speaking such an occurrence should not be a problem, issues may arise when an otherwise timely action is dismissed subsequent to the expiration of the limitations period.  Depending on the nature of the dismissal, a plaintiff may be permitted to commence a new action notwithstanding the expiration of the applicable statute of limitations by virtue of the savings provisions of CPLR 205(a) , which provides: New action by plaintiff. If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff … may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period. Where a dismissal is one for neglect to prosecute the action made pursuant to rule thirty-two hundred sixteen of this chapter or otherwise, the judge shall set forth on the record the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation.  (Hyperlink added.) CPLR 205(a) is a “remedial” statute that “has existed in New York law since at least 1788” and can race[] its roots to seventeenth century England.”  Wells Fargo Bank, N.A. v. Eitani , 148 A.D.3d 193, 199 (2 nd Dep’t 2017), appeal dismissed , 29 N.Y.3d 1023 (2017).  The purpose of CPLR 205(a) is to “ameliorate the potentially harsh effect of the Statute of Limitations in certain cases in which at least one of the fundamental purposes of the Statute of Limitations has in fact been served, and the defendant has been given timely notice of the claim being asserted by or on behalf of the injured party.”  George v. Mt. Sinai Hospital , 47 N.Y.2d 170, 177 (1979).  Thus, the statute provides “a second opportunity to the claimant who has failed the first time around because of some error pertaining neither to the claimant’s willingness to prosecute in a timely fashion nor to the merits of the underlying claim.”  George , 47 N.Y.2d at 178-79. For example, the foreclosing lender in CitiMortgage, Inc. v. Moran , 188 A.D.3d 407 (1 st Dep’t 2020), the Court found that the underlying action was “timely brought within six months after this Court dismissed plaintiff’s first foreclosure action, ‘without prejudice,’ for failure ‘to establish a presumption that it properly served defendant RPAPL 1304 notice….”  CitiMortgage , 188 A.D.3d 407 (citations omitted).  [Editor’s Note – this BLOG has analyzed RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> .] An action is generally deemed to be “terminated,” and the commencement of the six-month period for the purposes of CPLR 205(a) begins, “when all appeals as of right have been exhausted.”  Bank of New York Mellon v. Slavin , 156 A.D.3d 1073, 1074 (3 rd Dep’t 2017) (citations omitted).  In Bank of New York , the first action was dismissed based on plaintiff’s default and, therefore, was not appealable as of right.  Id .  However, plaintiff moved to vacate the default, the denial of which motion was appealable.  Once the Third Department affirmed the denial of the motion to vacate the default, the first action was deemed terminated and the six-month clock under CPLR 205(a) began to run.  Bank of New York , Id . at 1075 (citations omitted)  Consistent with the wording of the statute, plaintiffs will not be able to avail themselves of the benefits of CPLR 205(a) if the prior action was dismissed for failure to prosecute and specific findings of conduct reflecting “a general pattern of delay” are “set forth in the record.”  See CPLR 205(a); U.S. Bank Trust, N.A. v. Moomey-Stevens , 168 A.D.3d 1169, 1171 (3 rd Dep’t 2019); Wells Fargo , 148 A.D.3d at 198.  Thus, where a dismissal is based on abandonment for failure to enter a default judgment within one year pursuant to CPLR 3215(c), the exception to CPLR 205(a) is inapplicable and, therefore, a subsequent action would be permitted if commenced within six months of dismissal despite the expiration of the applicable statute of limitations in the interim.  U.S. Bank Trust , 168 A.D.3d at 1170-71.  [Editor’s Note – this BLOG has analyzed CPLR 3215(c) < HERE =">HERE"> , < HERE =">HERE"> .] On March 3, 2021, the Appellate Division, Second Department, decided Deutsche Bank National Trust Co. v. Baquero , a mortgage foreclosure action in which defendant brought counterclaims to discharge the mortgage pursuant to Article 15 of the RPAPL.  [Editor’s Note – this BLOG has analyzed the mortgage discharge provisions of RPAPL Article 15 < HERE =">HERE"> .]  The lender in Deutsche Bank , after borrower’s default, commenced its first action to foreclose defendant’s mortgage in November of 2007.  Three years later, the court granted plaintiff’s motion to voluntarily discontinue the first action.  In June of 2010, lender commenced a second action to foreclose the mortgage.  “In an order dated April 6, 2017, the Supreme Court dismissed the 2010 action “without prejudice” based on a Court Attorney Referee’s finding that the plaintiff had failed to file an order of reference, as directed by two court orders.”   In September of 2017, lender commenced a third action, in which borrower moved for summary judgment to dismiss the complaint as time barred and, on his counterclaims, to cancel and discharge the mortgage of record pursuant to RPAPL Article 15.  Lender cross-moved for summary judgment on its complaint.  Supreme court granted lender’s cross motion and denied borrower’s motion.   On borrower’s appeal, the Second Department affirmed supreme court.  Initially, the Court found that the lender’s third action was commenced more than six years after the mortgage debt was accelerated by the commencement of the second action.  “However, in opposition to the defendant’s prima facie showing and in support of its own cross motion, the plaintiff established that this action was timely commenced based upon the savings provision of CPLR 205(a)” because the third action was commenced within six months of the entry of the order dismissing the second action.  Specifically, the Court found that the action was “not dismissed for neglect to prosecute, a category of dismissal that renders CPLR 205(a) inapplicable.”  The Court explained its ruling as follows: “Where a dismissal is one for neglect to prosecute the action ..., the judge shall set forth on the record the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation” (CPLR 205 ). Here, the order dated April 6, 2017, “did not include any findings of specific conduct demonstrating ‘a general pattern of delay in proceeding’” ( Wells Fargo Bank, N.A. v Eitani , 148 AD3d 193, 198, quoting CPLR 205 ; see Sokoloff v Schor , 176 AD3d 120, 128). Moreover, by dismissing the 2010 action without prejudice, the Supreme Court “permitted the plaintiff to avail itself of CPLR 205(a) to recommence the foreclosure action” ( Wells Fargo Bank, N.A. v Eitani , 148 AD3d at 199).  It should be noted that Justice Borros authored a lengthy dissent in Deutsche Bank , in which she wrote that she would have reversed.  Among other things, Justice Borros stated: In an order dated April 6, 2017, the Supreme Court dismissed the plaintiff’s second foreclosure action, which had been pending for more than six years, on the ground that the plaintiff failed, without good cause shown, to comply with two prior court orders directing the plaintiff, inter alia, to file both an application for an order of reference and an attorney’s certificate of merit. For the reasons set forth herein, this was a dismissal for a “neglect to prosecute” within the meaning of CPLR 205(a), and therefore, the plaintiff’s third foreclosure action, which was commenced well after the expiration of the six-year limitations period, was time-barred. Justice Borros was moved by the fact that the order dismissing the second action did not refer to any technical defect that could be remedied in a new action, but rather referred to the plaintiff’s repeated violation of court orders.”

Concealment of material information and market manipulation. Both forms of improper conduct were on display in Securities and Exchange Commission v. Airborne Wireless Network , 21-cv-01772 (S.D.N.Y.) ( here ), a case we examine below.  The Importance of The Disclosure of Information Disclosure of information has long been a mission of the Securities and Exchange Commission (“SEC” or the “Commission”). As noted on the SEC’s website: “ he laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” ( Here .)  The SEC’s disclosure regime is predicated on providing investors with access to material information, so that they can make informed investment decisions. As former SEC Commissioner Daniel M. Gallagher observed: “This is not to say that the disclosure regime was meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company. Instead, the point has always been to ensure that they have access to material investment information.” ( Here .) Market Manipulation Market manipulation refers to conduct that is intended to deceive investors by controlling or artificially influencing the market for a security. Such conduct can include, among others, spreading false information to the market about a company, “spoofing” ( i.e. , an activity used by traders to outpace investors and other market participants and to manipulate markets), “pump and dump” schemes , engaging in a series of transactions to make a security appear more actively traded ( i.e. , to affect the volume of trading), and rigging quotes, prices, or trades to affect the demand for a security. When the market is manipulated, the manipulator tries to inflate or deflate the price of a security so that it differs from the true price reflected by market fundamentals.  As a general matter, market manipulation occurs with smaller companies, such as microcap and penny stock companies because market analysts and other market professionals pay little attention to these companies as they do with medium and large-cap companies. Market manipulation is fraudulent and can have significant consequences for the markets. Seconds="--> Seconds" before="before" trades="trades" price="price" order,="order," pulled="pulled" from="from" market,="market," and="and" retail="retail" investor's="investor's" After="After" spoofer="spoofer" pulls="pulls" drops,="drops," resulting="resulting" losses="losses" for="for" anyone="anyone" unfortunate="unfortunate" enough="enough" tricked="tricked" into="into" buying.”  Readers="--> Readers" can="can" find="find" “pump="“pump" dump”="dump”" schemes="schemes" other="other" useful="useful" information="information" about="about" protecting="protecting" oneself="oneself" manipulation="manipulation" here.=">here.">  SEC v. Airborne Wireless Network On March 2, 2021, the SEC announced ( here ) that it filed a complaint in the Southern District of New York against seven individuals and a technology company, alleging that they engaged in a scheme to gain control of Airborne Wireless Network (“Airborne”), promote its stock, and defraud investors. [Ed. Note: Airborne is a Nevada corporation headquartered in Simi Valley, California. It was originally incorporated in January 2011 as Ample-Tee, Inc. (“Ample-Tee”), a company that focused “on selling hard-to find ergonomic products for the physically disabled, such as chairs, workstations, back/arm/leg/wrist supports, through proposed online website.” In May 2016, the company announced that it was changing its name to Airborne. It later changed its line of business to “developing, marketing and licensing a high-speed meshed broadband airborne wireless network by linking commercial aircraft in flight.”  Airborne does not have a class of securities registered with the Commission under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”). However, Airborne did make periodic filings with the Commission between 2013 and 2019. At all times relevant to the SEC’s complaint, Airborne’s stock was a “penny stock” as defined by the Exchange Act. Airborne’s stock traded at less than $5.00 per share and met none of the exceptions to penny stock classification under Section 3(a)(51) and Rule 3a51-1 of the Exchange Act.] According to the SEC, Kalistratos “Kelly” Kabilafkas (“Kelly Kabilafkas”) orchestrated the alleged fraud. The SEC claimed ( here ) that Kelly Kabilafkas secretly purchased essentially all the outstanding shares of Ample-Tee, and then distributed millions of shares among himself and his associates, including defendants Timoleon “Tim” Kabilafkas (“Tim Kabilafkas”), Panagiotis Bolovis, Eric Scheffey, Chrysilios Chrysiliou, and Moshe Rabin (Rabin”).  Kelly Kabilafkas and his associates allegedly deceived Airborne’s transfer agent and broker dealers in order to have the shares transferred into their names, deposited into brokerage accounts, and cleared for sale to the public. The SEC claimed that Kelly Kabilafkas, through defendant Jack Edward Daniels (“Daniels”), Airborne, and other third parties, spent millions of dollars on advertisements that concealed that Airborne was a vehicle for Kabilafkas’s fraudulent scheme. Kelly Kabilafkas allegedly hid his ownership of, and control over, the company by, among other things, placing the company’s restricted shares in Daniels’ name and giving about 13.6 million of the S-1 shares to Tim Kabilafkas, his father, and other alleged associates.  The SEC further alleged that, while the promotional campaign was underway ( i.e. , while defendants were “pumping” the stock), Kelly Kabilafkas and his associates sold ( i.e. , “dumped”) approximately 11.8 million Airborne shares for proceeds of more than $22 million, much of which was kicked back to benefit the Kabilafkas family (to buy real estate and pay for luxury vehicles and home improvements).  Finally, the SEC alleged that Airborne raised another approximately $22.8 million dollars from unsuspecting investors through public and private offerings while materially false and misleading statements about the company were publicly available. In total, the SEC alleged that defendants raised nearly $45 million from their wrongful conduct. The SEC charged defendants with violations of the antifraud provisions of the federal securities laws and related rules. The SEC seeks civil penalties, disgorgement of ill-gotten gains, plus interest and injunctive relief.  Rabin agreed to settle the charges. In that regard, without admitting or denying the allegations in the complaint, Rabin consented to the entry of a final judgment ordering injunctive relief, a $125,000 civil penalty, and a penny stock bar. The proposed settlement with Rabin is subject to court approval. “As alleged in the complaint, Kelly Kabilafkas orchestrated a wide-ranging scheme to deceive gatekeepers, conceal from investors the true ownership of a public company, and then manipulate the company’s stock,” said Jennifer S. Leete, Associate Director of the SEC’s Enforcement Division. “The SEC is committed to unraveling frauds to protect investors.”  Readers can find the case, Securities and Exchange Commission v. Airborne Wireless Network , 21-cv-01772 (S.D.N.Y.) here .

“You can’t have fraud if you disclose it,” said the motion court in Ibarrondo v. Evans , 2020 N.Y. Slip Op 30051(U) (Sup. Ct., N.Y. County Jan. 6, 2020) ( here ), aff’d , 2021 N.Y. Slip Op. 01200 (1st Dept. Feb. 25, 2021) ( here ). Yet, without alleging any new facts detailing how the alleged fraud was not disclosed, the plaintiff in Ibarrondo sought to amend her complaint to reallege the cause of action. In today’s article, we examine Ibarrondo . Ibarrondo involved a dispute over the ownership of a company formed by defendants and two other venturers, so that one of the defendants could obtain an E-2 Visa. An E-2 Visa, which is good for three months to five years, allows an individual to enter and work inside of the United States based on an investment that he or she controls inside the United States.  Plaintiff Marta Ibarrondo initiated the action in 2015 against her alleged business partner, defendant Lise Evans (“Lise” or “defendant”) and her husband, defendant Michael Evans (“Michael”), alleging that they stole the business Philanthropic Bling (“Bling”), which was incorporated in October 2013 as a vehicle for Lise to obtain an E-2 visa.  Lise and two friends (nonparties to the action) sought to create a business to support her immigration application. They invited plaintiff to join them. In November 2013, the co-venturers agreed to be equal partners of a for-profit corporation. On November 26, 2014, they engaged an attorney to draft a shareholder agreement. Since Lise filed her visa application under Bling, which required her to own at least 50% of the company, the co-venturers decided to create a new entity, “CORDE,” so that they could each maintain their 25% equity.  In December, however, Lise disclaimed equal ownership among the partners in all respects. Michael proposed that plaintiff and the other co-venturers would be employees (rather than owners) of the company and would receive the compensation that Lise and Michael, as owners, would give them. Plaintiff filed suit, alleging a number of causes of action, including breach of contract and fraud. Defendants moved to dismiss (although, defendants did not move against the contract claim). The motion court dismissed the fraud claim without prejudice.  Following discovery, Plaintiff moved to amend the complaint to replead, inter alia , the fraud claim. Plaintiff’s proposed amended complaint consisted of her original allegations, plus additional details. According to plaintiff, Lise’s alleged fraud consisted of: (1) a representation about the structure and operation of Bling; and (2) a representation that she would formalize the equal equity partnership arrangement before product launch, while never actually intending to go through with that because she knew it would interfere with her visa application.  The motion court held that the amendment did not cure the deficiencies of the original complaint. While more detail was set forth in the amended pleading, the new allegations, observed the motion court, were no different than the initial allegations of fraud.  The motion court found that the “new fraud claim remain impermissibly duplicative of the contract claim.” The motion court explained that “ ll of plaintiff’s allegations flow from the same premise that promised (1) that she would give the others equal shares once her visa was issued; (2) that there would be a second holding company; and (3) that the company on her visa did not need to be the same entity that actually sold the bracelets, but defendant knew those statements to be false because she did not intend to cooperate.” At best, concluded the motion court, the only fraud alleged was an insincere promise to perform under the contract. Citing Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453 (1st Dept. 2008). Additionally, the motion court found that plaintiff failed to satisfy the elements of a fraud claim. First, plaintiff failed to allege any misrepresentations made by defendant. Apparently, said the motion court, it was not Lise who stated that the co-venturers would share equal ownership if the attorneys confirmed that the proposed structure would comport with the visa requirements.  Second, plaintiff failed to satisfy the scienter requirement – the requirement that defendants act with an intent “to deceive, manipulate, or defraud” at the time of the alleged misrepresentation or omission. Zutty v. Rye Select Broad Mkt Prime Fund, L.P. , 33 Misc. 3d 1226(A) at *11 (Sup. Ct., N.Y. County 2011). Plaintiff’s allegations of defendant’s then-present intent to defraud were generalized allegations with no specificity, noted the motion court. Moreover, two of the co-venturers submitted affidavits in which one said that she did not believe that Lise “started out trying to deceive us,” while the other denied being duped by Lise or anyone else. Third, Plaintiff could not allege reasonable reliance on Lise as to the immigration law questions. Nothing prevented plaintiff from seeking the advice of an immigration lawyer, noted the motion court. In fact, observed the motion court, they had previously done so. “Nothing stopped them from returning to that attorney or another regarding the idea of a holding company,” concluded the motion court. Citing Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “did not abuse its discretion in denying leave to amend the complaint.” Slip Op. at *1 (citations omitted). The Court agreed with the motion court that the “proposed amended complaint ‘did not lay before the court any different or additional factual basis, but merely repeated what was in the original complaint.’” Id. (quoting Guthartz v. City of New York , 84 A.D.2d 707, 708 (1st Dept. 1981), appeal dismissed , 55 N.Y.2d 975 (1982)).  Moreover, the Court held that plaintiff failed to plead fraud with particularity. Id. (citations omitted). “Among other things,” said the Court, “the proposed amended complaint fail to allege any misrepresentation by defendant Lise Evans. Rather, plaintiff and the other two co-venturers were aware of and tried to find a solution for Lise’s quandary of how to get a visa based on her 51% ownership of a company and their own desire to each own 25% of the company.” Id. The Court explained that “ ocuments showed that it was a nonparty co-venturer, not Lise, who initially sought attorney input on and proposed an ownership structure that might satisfy the immigration requirements and the co-venturer’s desire.” Id. Finally, the Court held that the motion “court correctly concluded that the complaint failed to allege scienter, or that plaintiff reasonably relied on Lise regarding the immigration question, as she could consult an immigration attorney in the same way one of the nonparty co-venturers did.” Id. Takeaway A fundamental aspect of a fraud claim is the plaintiff does not know that the statement or omission made by the defendant is false or misleading at the time it was made. In Ibarrondo , this concept was missing. As the Court (and the motion court) observed, “plaintiff and the other two co-venturers were aware of and tried to find a solution for Lise’s quandary of how to get a visa based on her 51% ownership of a company and their own desire to each own 25% of the company.” If everyone was aware of the facts (and no fact was omitted), then there cannot be a fraud. This is what the motion court said when it initially dismissed the fraud claim: “You can’t have fraud if you disclose it.”

Frequently, the first question asked by a potential client when consulting about a new litigation matter is “can we sue them for our legal fees.”  Clients are often dismayed to learn that attorney’s fees are not generally recoverable in litigation under the “American Rule,” because “ n the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.”  Alyeska Pipeline Services Co. v. Wilderness Society , 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also , Mighty Midgets, Inc. v. Centennial Ins. Co. , 47 N.Y.2d 12, 21-22 (1979).  The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.”  Mighty Midgets , 47 N.Y.2d at 22 (citations omitted).   Exceptions to the “American Rule” exist where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.”  Hooper Assoc., Ltd. v. AGS Computers, Inc. , 74 N.Y.2d 487 (1989) (citations omitted).  Indeed, contracts typically contain language permitting a party to collect its reasonable legal fees in the event of litigation. Moreover, courts can exercise their “inherent powers” in certain circumstances to assess attorneys’ fees against a litigant.  Thus, the “inherent powers” of Federal Courts has been described as follows: Indeed, there are ample grounds for recognizing that in narrowly defined circumstances federal courts have inherent power to assess attorney’s fees against counsel, even though the so-called “American Rule” prohibits fee shifting in most cases.  As we explained in Alyeska, , these exceptions fall into three categories.  The first, known as the “common fund exception,” derives not from a court’s power to control litigants, but from its historic equity jurisdiction, and allows a court to award attorney’s fees to a party whose litigation efforts directly benefit others.  Second, a court may assess attorney’s fees as a sanction for the willful disobedience of a court order.  Thus, a court’s discretion to determine the degree of punishment for contempt permits the court to impose as part of the fine attorney’s fees representing the entire cost of the litigation. Third, and most relevant here, a court may assess attorney’s fees when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons. In this regard, if a court finds that fraud has been practiced upon it, or that the very temple of justice has been defiled, it may assess attorney’s fees against the responsible party, as it may when a party shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order. Chambers , 501 U.S. at 45-46 (citations, footnotes, internal quotation marks, ellipses and brackets omitted). Further, “ n general, only a prevailing party is entitled to recover an attorney's fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.”  Village of Hempstead v. Taliercio , 8 A.D3d 476 (2 nd Dep’t 2004) (citations, internal quotation marks and brackets omitted).  “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.”  DKR Mortgage Asset Trust 1 v. Rivera , 130 A.D.3d 774 (2 nd Dep’t 2015) (citations and brackets omitted). On February 24, 2021 the Supreme Court, Second Department, decided Blinds to Go (U.S.), Inc. v. Times Plaza Development, L.P. , a case in which the issue of entitlement to attorney’s fees was decided using the principals discussed herein.  The history of Blinds to Go is tortured and tortured histories equate to significant legal fees.  Plaintiff, Blinds to Go, as tenant, entered into a lease agreement with defendant, Times Plaza, as landlord.  The lease permitted the landlord to “recapture” the property and relet it to another entity if plaintiff “closed its business on the property for a period of three months or more”.  Almost two and one-half years after executing the lease plaintiff had not yet began construction to open for business – much less actually open for business and, as a result, landlord purported to terminate the lease pursuant to the “recapture” provision of the lease.   Plaintiff commenced a lawsuit challenging landlord’s termination.  After landlord’s motion to dismiss the complaint was granted, plaintiff “surrendered the keys and possession of the premises to the defendant.  Thereafter, the court reversed its earlier decision “on the ground that, since the plaintiff never commenced any business operations at the premises, the recapture provision was inapplicable.”  (Citation omitted.)  Six years later, after a trial on both liability and damages, judgment was entered in plaintiff’s favor in an amount exceeding $4,000,00.00.  On landlord’s appeal for the damages award only (as it did not challenge the jury’s verdict that it breached the lease), the judgment was reversed and a new trial on the issue of damages was granted. The referee to whom the matter of damage calculation was referred, found that no damages for lost profit were proved and, therefore, damages were not awarded.  Thereafter, landlord sought “attorney’s fees and costs as the ‘prevailing party’ pursuant to Paragraph 35 of the lease.”  Supreme court determined that landlord was the prevailing party and, again, referred the matter to a referee to determine the quantum of legal fees to which the landlord was entitled.  Judgment on the attorney’s fees issue was ultimately entered against tenant in an amount exceeding $1.6 million and both parties appealed. The Second Department reversed.  First, the Court determined that tenant failed to “sustain its burden of demonstrating lost profits with reasonable certainty.”  (Citations omitted.)  The Court, however, disagreed “with the determination to award attorney’s fees and costs to defendant aragraph 35 of the lease stated that ‘the non-prevailing party shall pay to the prevailing party all costs, expenses and reasonable attorneys’ fees and disbursements that the prevailing party reasonably incurred in connection therewith.’”  In so holding, the Court found that: Here, considering the true scope of the dispute litigated and what was achieved within that scope, we conclude that neither party was entitled to attorney’s fees and costs as a prevailing party.  In this highly litigated and contentious action, notwithstanding numerous motions, trials, hearings, and appeals spanning more than 17 years, neither party has obtained the central relief each seeks so as to constitute a prevailing party pursuant to Paragraph 35 of the lease.

As the title of this article suggests, there are times in litigation where the facts simply do not support a claim or defense advanced by one or more of the parties. That was the case in Alston v. Golfo , 2021 N.Y. Slip Op. 30471(U) (Sup. Ct., N.Y. County Feb. 17, 2021) ( here ). Alston was commenced by a labor union welfare fund (the “Fund”) in July 2018 against one of its enrollees, Salvatore Golfo (“Salvatore”), and his former wife, defendant Denise Golfo (“Denise”), for restitution of health benefits wrongly paid by the Fund on account of Denise during the period April 2011 through January 2018. The action was predicated on the fact that Denise was not an eligible dependent of Salvatore ( i.e. , his spouse) during that time period. According to the Court, Salvatore submitted a health plan enrollment form in which Salvatore represented that Denise was his spouse. Slip Op. at *1. In truth, Denise and Salvatore had been divorced pursuant to a judgment of divorce since 2007 (“Judgment of Divorce”). Id. at *2. The Fund asserted three causes of action, all focused on Salvatore’s enrollment form: fraud, conversion, and breach of contract. After the Fund commenced the action, Salvatore filed a third-party action against Denise and her father, Joseph Mattesi (“Mattesi”), one of the Fund’s trustees, sounding in fraud and in “contribution and/or indemnification,” alleging that Mattesi acquiesced in Salvatore’s submission of the false enrollment form and that Denise had caused Salvatore to innocently believe that she was still his spouse, despite the 2007 Judgment of Divorce. The Fund moved for summary judgment against Salvatore. In March 2019, the Court granted a default judgment against Denise.  In addition, Mattesi cross-moved to dismiss the third-party claims asserted against him by Salvatore. The Court granted the motion for summary judgment because there was “absolutely no issue of fact or law which could possibly impede the conclusion that neither Salvatore or Denise were entitled to health insurance benefits benefitting Denise” because they were not married at the time Salvatore enrolled in the health plan. Slip Op. at *4. The Court explained that the governing documents expressly provided that the “ enefits under th Plan for the sole use of and eligible dependents. No one (including an employer, Union representative, supervisor or shop steward) other than the Board of Trustees ha any authority to interpret SPD or other Plan documents ….”  The plan defined “eligible dependents” as “ he spouse to whom you are legally married” or certain categories of unmarried children, and instructed members to “notify the Fund Office promptly if: you marry<,> a child is born<,> you get divorced”. The document further informed members that coverage terminated any time a member’s “dependents” “no longer the definition of ‘dependent’”. Id. at *3. The Court found that Salvatore never informed the Fund Office of his 2007 Judgment of Divorce, which severed his spousal relationship with Denise four years prior to the submission of his enrollment form. Notwithstanding, said the Court, Salvatore relied on Denise’s belief that they were still married – despite the 2007 Judgment of Divorce – and on Mattesi’s acquiescence to Salvatore’s submission of the inaccurate enrollment form. That belief, no matter its credibility, reasoned the Court, did not fall within the definition of an eligible participant: Under any reasonable reading of the Summary Plan Description, which explicitly refers to its interdependence on the union’s “collective bargaining agreements” and “official Plan documents”, a binding contract existed between Salvatore and the Fund involving Salvatore’s continued employment and his providing accurate “Eligible Dependent” information to the Fund in exchange for health insurance benefits. Nothing in that document conditions coverage on any good faith belief (however credible or incredible) regarding the spousal status of a named beneficiary. Simply put, an eligible spouse is, and only is, “ he spouse to whom you are legally married”. In this case, regardless of Salvatore’s state of belief, Denise was undoubtedly and irrefutably not Salvatore’s “spouse to whom legally married”. Therefore, there is absolutely no issue of fact or law which could possibly impede the conclusion that neither Salvatore or Denise were entitled to health insurance benefits benefitting Denise. Consequently, there is no issue of fact or law which could possibly impede the conclusion that plaintiff is entitled to restitution of its health benefit payouts on account of Denise. Slip Op. at *4. Although not specifically stated, the Court treated the fraud claim against Salvatore as duplicative of the contract claim. In this regard, the Court held that whatever Salvatore’s state of mind, “the Fund had no contractual obligation whatsoever to pay those expenses because of the indisputable fact that Denise was not Salvatore’s legally married spouse during any part of that seven-year period.” Id. at *5.  However, the success of the plaintiff’s claims does not rest solely with the cause of action sounding in fraud, or any asserted issues regarding its discovery, or, most pointedly, whether Salvatore intended to defraud the Fund in the first place. Rather, as noted above, irrespective of Salvatore’s state of mind, or state of belief, at the time he submitted his inaccurate enrollment form, or thereafter during the seven-year period he allowed the Fund to cover Denise’s expenses to the tune of $77,317.43, the Fund had no contractual obligation whatsoever to pay those expenses because of the indisputable fact that Denise was not Salvatore’s legally married spouse during any part of that seven-year period. It bore no contractual obligation to do so and, thus, is entitled to restitution. Id. The Court also found that under the “continuous duty doctrine,” Salvatore was liable for Fund payments on account of Denise for the seven-year period, thereby negating any statute of limitations defense. The Court explained that the plan documents “explicitly placed Salvatore under a continuing obligation to keep the Fund accurately informed of spousal or other dependent status, which he did not do for all of those seven years in which the Fund made payments on account of Denise.” Id. Thus, concluded the Court, “Salvatore’s continuing breach of his contractual duty to accurately inform the Fund of Denise’s spousal status, and, at a bare minimum, to inquire about it by calling ‘the Fund Office’, render’s said breach actionable with regard to all Fund payments made during a full six-year period immediately preceding the July 19, 2018, commencement date of this action.” Id. at *5-*6 (citations omitted). Turning to the motion to dismiss the third-party claims against Mattesi ( e.g. , fraud and contribution and/or indemnification), the Court held that Salvatore failed to state a claim. As to the fraud claim, the Court said that Salvatore could not satisfy the justifiable reliance element of the cause of action because Salvatore could not demonstrate “any reliance … on any alleged misrepresentation by Mattesi … concerning Salvatore’s own marital status … the Judgment of Divorce” and the contractual obligation under the Plan “to bring any questions to the attention of the ‘Fund Office’ at its designated telephone number.” Slip Op. at *6. In other words, Salvatore could not rely on a misrepresentation about a fact of which he already knew the truth ( e.g. , the Judgment of Divorce).    As for indemnification, the Court held that Salvatore could not show that any judgment against him would be due solely to Mattesi’s negligence in connection with, or nonperformance of, an act solely within Mattesi’s province. Id. at *6-*7 (citations omitted). The Court explained that as “a union member participating in, and enrolling in, the Plan that paid benefits … to Denise, Salvatore was under an independent and exclusive duty to accurately identify Denise as his legally married spouse – which he could not rightly do.” Id. at *7. “Mattesi bore no independent, let alone sole, obligation in said regard,” concluded the Court. As for contribution, the Court held that Salvatore could not show that Mattesi was “‘liable at least partially because of own negligence.’” Id. (quoting Fox v. County of Nassau , 183 A.D.2d 746, 747 (2d Dept. 1992)). The reason explained the Court, “Salvatore was under his own independent and sole duty, per the Plan, to accurately identify his dependents or, if he could not on his own, to raise the question with the Fund Office. Any possible misunderstanding on Mattesi’s part as to Denise’s spousal connection or non-connection to Salvatore – even in the face of the Judgment of Divorce – not play any role in wresting any part of Salvatore’s contractual duties as Plan participant away from Salvatore and onto Mattesi.” Id. Thus, concluded the Court, “contribution cannot lie.” Id. here,=">here," >here.=">here.">

In today’s article, we examine familiar territory: complaints alleging breach of contract and fraudulent inducement. Kleber v. 10012 Holdings Inc. , 2021 N.Y. Slip Op. 30441(U) (Sup. Ct., N.Y. County Feb. 8, 2021) ( here ). As the title of the article indicates, Kleber involved the purchase of an “Uncle Sam” screen print edition 1/5 by Andy Warhol (the “Artwork”), which was signed and numbered by the artist. In April 2019, Plaintiff Claus Kleber and Defendant Guy Hepner (“Hepner”) on behalf of his gallery, defendant 10012 Holdings Inc, (“Holdings”), bought the print for $45,000.00. The Terms and Conditions of the Sale (“Terms”) were printed on an invoice, dated April 5, 2019. Pursuant to the Terms, Kleber was required to pay one-half of the $45,000.00 purchase price upon receipt of the invoice and “the remaining due after inspection and prior to delivery.” If the print was not delivered, the seller “reserve the right to rescind the transaction and refund any monies paid to the buyer in full satisfaction of any obligation of seller to buyer with respect to the subject transaction.” The Terms also included a limitation of damages clause pursuant to which any claim for damages was limited to the purchase price. On April 12, 2019, plaintiff paid the seller $22,500.00, or one-half of the purchase price. Six days later, plaintiff’s art expert travelled to defendants’ Manhattan gallery to inspect the print that defendant “presented as the Artwork and as ‘ready to be shipped.’” However, the expert discovered that the artwork was not the agreed-upon screen print. According to plaintiff, defendants’ employee told plaintiff’s expert that the real screen print would be in the gallery soon. In his complaint, plaintiff claimed that defendants admitted that the real screen print was never in New York but was in Sweden. As a result, the parties agreed to an inspection of the screen print through the seller’s gallerist in Sweden. That inspection took place on June 10, 2019. Thereafter, the parties agreed that the transaction would go through London. According to plaintiff, defendants informed him that they had “London representation and a British VAT”, which would reduce plaintiff’s costs and allow direct shipment of the screen print from Sweden to Germany, where plaintiff lived. In connection therewith, plaintiff requested a new invoice of the full amount to be issued to him from London.  On June 14, 2019, plaintiff learned from the seller’s gallerist that defendants provided an invalid British VAT number. As a result, the seller withdrew the Artwork from the sale. According to plaintiff, from that point forward, various communications were exchanged with defendants to have the deposit returned to him without success. On November 13, 2019, plaintiff filed a summons and complaint, alleging three causes of action: breach of contract, breach of express warranty pursuant to the Arts and Cultural Affairs Law and fraudulent inducement. After defendants failed to answer, plaintiff moved for a default judgment, which was granted on February 28, 2020. In May 2020, defendants moved to vacate the default judgment and in September 2020, the parties stipulated to vacate the default judgment that had been entered. Thereafter, defendants moved, pursuant to CPLR § 321l(a)(1) and (7), to dismiss the complaint or in the alternative to strike the demand for treble damages.  The Court granted in part and denied in part the motion.  The Court denied the motion as it pertained to plaintiff’s breach of contract cause of action. The Court found that plaintiff “clearly” pleaded “‘the existence of a contract, the Plaintiff’s performance thereunder, the Defendant’s breach thereof, and resulting damages.’” Slip Op. at *3 (quoting Harris v. Seward Park Hous. Corp. , 79 A.D.3d 425, 426 (1st Dept. 2010)). With respect to the portion of the motion to limit plaintiff’s damages to the return of his deposit as set forth in the invoice, the Court held that plaintiff was entitled to pursue the damages demanded. Id. Under New York law, courts will enforce a “clear contractual provision limiting damages … absent a special relationship between the parties, a statutory prohibition or an overriding public policy.” Ryan v. IM Kapco, Inc. , 88 A.D.3d 682, 683 (2d Dept. 2011); see also Colnaghi, US.A., Ltd., v. Jewelers Protection Servs., Ltd. , 81 N.Y.2d 821, 823 (1993). “However, public policy forbids a party’s attempt to escape liability, through a contractual clause, for damages occasioned by grossly negligent conduct.” Southern Wine & Spirits of Am., Inc. v. Impact Environmental Engineering, PLLC , 104 A.D.3d 613, 614 (1st Dept. 2013). Gross negligence, when invoked to defeat an agreed-upon limitation of damages in a contract, must “‘smack[] of intentional wrongdoing’ ... conduct that evinces a reckless indifference to the rights of others.” Sommer v. Federal Signal Corp. , 79 N.Y.2d 540, 554 (1992) (internal citations omitted). In Kleber , the Court found that plaintiff met the foregoing standard by alleging “that Defendants knowingly made false statements regarding the quality of the print offered for sale and its location in Defendants’ gallery in New York.” Slip Op. at *3. The Court also found that plaintiff adequately pleaded “that Defendants falsely represented that the Swedish seller required a deposit” and that “despite the transaction being cancelled by the Swedish seller, his repeated demands for the return of his deposit were rebuffed by Defendants.” Id.   “It is undisputed that, to date, Plaintiffs deposit has not been returned,” said the Court.” The foregoing allegations, concluded the Court, sufficed to state “a claim of willful conduct to sustain a claim of gross negligence.” Id. (citing Dolphin Holdings, Ltd. v. Gander & White Shipping, Inc. , 122 A.D.3d 901 (2d Dept. 2014)). Accordingly, plaintiff was entitled to pursue his “claim for his demanded damages for the alleged breach of contract.” Id. Turning to the cause of action alleging breach of an express warranty under the Arts and Cultural Affairs Law, the Court held that plaintiff failed to state a claim. Slip Op. at *4.  Under the Arts and Cultural Affairs Law, “ henever an art merchant, in selling or exchanging a work of fine art, furnishes to a buyer of such work who is not an art merchant a certificate of authenticity or any similar written instrument it shall be presumed to be part of the basis of the bargain” and “shall create an express warranty for the material facts stated as of the date of such sale or exchange.” See Arts and Cultural Affairs Law § 13.01 (l)(a), (b).  The Arts and Cultural Affairs Law § 13:05(1) further states that “ hen an art merchant furnishes the name of the artist of a multiple, or otherwise furnishes information required by this title for any time period as to transactions including offers, sales or consignments, the provisions of section 13.01 of this article shall apply except that said section shall be deemed to include sales to art merchants.”  To prevail, a plaintiff must plead that the defendant, as an art merchant or merchant consignee, offered or sold a multiple in, into or from the state, without providing the information required for the appropriate time period, or who provided required information which was mistaken, erroneous or untrue. See Arts and Cultural Affairs Law §15.15(1). In Kleber , the Court found that plaintiff failed to satisfy the statute as the required information ( i.e. , the inspection of the Artwork) had been provided. Indeed, noted the Court, plaintiff specifically alleged that the information was provided after his expert detected the discrepancy: In his complaint, … Plaintiff pled that Defendants presented in their New York gallery “an inferior copy of the Artwork that did not match the description of the Artwork on the invoice.” However, as pled, this was immediately detected by Plaintiff’s art expert upon inspection and resulted in a second inspection. In the end, as Plaintiff alleges in his complaint, over the course of this transaction, his expert travelled to Stockholm and inspected the Artwork that was specified on the invoice.  “As such,” concluded the Court, “the required information was provided, there was no breach of the express warranty and there exists no basis for treble damages.” Id. (citations omitted). Finally, the Court held that plaintiff failed to state a claim for fraudulent inducement because he did not satisfy the justifiable reliance element of the claim. Slip Op. at *5. The Court said that plaintiff “did not detrimentally rely on any alleged misrepresentations regarding the quality of the work since he engaged an art expert who identified the discrepancy and which ultimately resulted in inspection of the artwork that comported with the description on the invoice.” Id. The Court also addressed the materiality of the alleged falsity concerning the deposit. In this regard, the Court said that “ ny misrepresentation regarding the requirement of a deposit by the Swedish seller was immaterial because the invoice required a deposit of half of the purchase price upon receipt.” Id. Takeaway In prior posts, we have examined cases in which the court dismissed a fraudulent inducement claim because the plaintiff, a person with sophistication, failed to take any affirmative steps to protect against the possibility of fraud. See , e.g. , here and here . Kleber stands in contrast to these cases because Kleber actually took affirmative steps to protect against fraud and discovered the truth about the statement in question. The lesson of Kleber is, therefore, a plaintiff cannot claim fraud and reliance thereon when he or she actually discovers the falsity of the statement alleged to be false.  The other lesson of Kleber concerns the limitation on damages clause. Kleber teaches that such a clause will not bar a claim for greater damages in a contract when the conduct at issue rises to the level of gross negligence or worse.

This BLOG has written extensively on issues related to residential mortgage foreclosure actions.  Indeed, earlier this month, in “ PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT ”, this BLOG provided an overview of the applicable statute of limitations in foreclosure, the calculation of the commencement thereof, and the acceleration and de-acceleration of mortgage debt.  The Departments of the Appellate Divisions were not in agreement on some of these related issues and, accordingly, on February 18, 2021, the Court of Appeals decided four cases ( in one decision ) “each turning on the timeliness of a mortgage foreclosure claim involve the intersection of two areas of law where the need for clarity and consistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations.”  The four cases, with links to the related Appellate Division decisions, are as follows: Freedom Mortgage Corp. v. Engel ( Appellate Division ); Ditech Financial , LLC v. Naidu ( Appellate Division ); Vargas v . Deutsche Bank National Trust Co. ( Appellate Division ); and, Wells Fargo Bank, N.A. v. Ferrato ( Appellate Division ) The relevant caselaw, as largely set forth in “PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT,” is briefly reiterated herein.  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); Deutsche Bank Nat. Trust Co. v. Blank , 189 A.D.3d 1678, 1679 (2 nd Dep’t 2020).  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).  When the provisions of a mortgage provide that “the acceleration of the maturity of a mortgage debt on default is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder's election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation.”  BONY Mellon , 171 A.D.3d at 37 (citations and internal quotation marks omitted).  This may be done by a clear and unequivocal demand or the commencement of an action.  U.S. Bank Nat. Assoc. v. Catalfamo , 189 A.D.3d 1786 (3 rd Dep’t 2020) (citations omitted).  Indeed, long ago in Albertina Realty Co. v. Rosbro Realty Corp. , 258 N.Y. 472 (1932), the Court found that an “unequivocal overt act” was necessary to effectuate an acceleration and that the filing of a “summons and verified complaint and lis pendens constituted a valid election” where “ he complaint recited that the plaintiff had elected”. Albertina , 258 N.Y. at 476.  Similarly, the Second Department noted several ways by which a lender may accelerate a mortgage debt: One way is in the form of an acceleration notice transmitted to the borrower by the creditor or the creditor’s servicer. To be effective, the acceleration notice to the borrower must be clear and unequivocal.  A second form of acceleration, which is self-executing, is the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period.  A third form of acceleration exists when a creditor commences an action to foreclose upon a note and mortgage and seeks, in the complaint, payment of the full balance due. Milone v. US Bank Nat. Assoc. , 164 A.D.3d 145, 152 (2 nd Dep’t 2018) (citations 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.”  Fed. Nat. Mort. Assoc. v. Mebane , 208 A.D.2d 892, 894 (2 nd Dep’t 1994) (citation omitted).  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). Against this backdrop, the facts in each case become important and are briefly stated as follows: FREEDOM (facts obtained from Appellate Division, Second Department, decision) In 2005 borrower borrowed $225,000 from lender, which obligation was evidenced by a note and secured by a mortgage.  Thereafter, the loan was modified.  Borrower defaulted in March of 2008 and a foreclosure action was commenced in July of 2008.  Borrower challenged the personal jurisdiction of the Court.  In 2013, the parties entered into a stipulation in order to “amicably resolve” the dispute.  As part of the stipulation, the action was discontinued, without prejudice, and the Notice of Pendency was cancelled.  Two years later, lender commenced a new action to foreclose the mortgage.  The borrower moved to dismiss the new action as time-barred because by the first action, the debt was accelerated but never de-accelerated, and the second action was commenced more than six years thereafter.  Supreme Court held that the stipulation was an affirmative act by which the lender revoked its election to accelerate the loan.  The Appellate Division reversed because “the stipulation was silent on the issue of the revocation of the election to accelerate, and did not otherwise indicate the plaintiff would accept installment payments from the defendant. DITECH (facts obtained from Appellate Division, Second Department, decision) In 2006, the borrower executed and delivered to lender a note and mortgage, which were later amended and assigned.  In 2009, an action to foreclose on the mortgage was commenced in which the lender “declared that it ‘elected to call due the entire amount secured by the mortgage.’”  (Brackets omitted.)  In 2014, the parties discontinued the action, without prejudice, pursuant to a stipulation that did not specifically revoke lender’s election to accelerate the debt.  A subsequent foreclosure action was commenced in 2016 and the borrower moved to dismiss same as time-barred.  The Appellate Division, reversing supreme court, held that the actions were time-barred.  As in Freedom , the Ditech Court found that the lender failed to raise questions as to whether it “revoked its election to accelerate the mortgage within six years from the commencement of the first action” and the stipulation was silent on this issue and otherwise did not provide for the resumption of monthly installment payments. VARGAS (facts obtained from Court of Appeals and the Appellate Division, First Department, decisions) In 2016, the borrower commenced an action pursuant to RPAPL 1501(4) to discharge the allegedly stale mortgage.  (Such actions have been treated by this BLOG < HERE =">HERE"> .)  Borrower argued that a 2008 default letter accelerated the debt and the six-year statute of limitations expired prior to the commencement of the RPAPL 1501(4) action.  As will be discussed further herein, the Court of Appeals, described the language of the default letter insufficient to have effectuated an acceleration of the debt. Supreme court initially granted lender’s motion to dismiss the complaint but, upon lender’s motion to renew, changed course and denied lender’s motion to dismiss and granted borrower’s motion for summary judgment declaring that borrower owned the subject property free and clear of all liens.  The Appellate Division, First Department, affirmed supreme court’s decision on the renewal motion, holding that” e have held that constitutes a clear and equivocal intent to accelerate the loan balance and commence the statute of limitations on the entire mortgage debt.” WELLS FARGO The facts in Wells Fargo, as recounted by the Court of Appeals, are as follows: Over ten years ago, borrower … allegedly defaulted on a $900,000 loan secured by a mortgage on her Manhattan condominium unit. Upon Wells Fargo's initiation of this foreclosure action, moved to dismiss, arguing that the debt was accelerated in September 2009 by the commencement of the second foreclosure action and the limitations period therefore expired six years later, in September 2015. Supreme Court denied 's motion, concluding that neither the second nor the third foreclosure actions—commenced in 2009 and 2011, respectively—validly accelerated the debt because, as had successfully argued in Supreme Court in those actions, the complaints reflected an attempt to foreclose upon the original note and mortgage even though the terms of that note had been modified (increasing the debt and changing the interest rate) in 2008. On 's appeal, the Appellate Division (among other things) reversed and granted her motion to dismiss, reasoning that the September 2009 complaint effected a valid acceleration of the modified loan despite the failure to reference the correct loan documents. The Appellate Division granted Wells Fargo leave to appeal to this Court and, because we agree with Wells Fargo that the modified loan debt which it now seeks to enforce could not have been accelerated by the complaints filed in the second (or, for that matter, third) foreclosure action which failed to reference the modified note, we reverse the portion of the Appellate Division order granting 's motion to dismiss the complaint in the fifth foreclosure action and deny that motion.  (Footnote omitted.) THE RESULTS In Freedom and Ditech , the Court of Appeals, in “ dopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.  Thus, in both Freedom and Ditech, the Appellate Division Orders were reversed.  Significantly, the Court of Appeals also expressly rejected the theory espoused in the “pretextual de-acceleration” theory (which was the subject of a recent BLOG article < HERE =">HERE"> ), which provided that “a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt,” concluding that “ noteholder's motivation for exercising a contractual right is generally irrelevant ( see generally Metropolitan Life Ins. Co. v Noble Lowndes Intl. , 84 NY2d 430, 435 <1994> )—but it bears noting that a noteholder has little incentive to repeatedly accelerate and then revoke its election because foreclosure is simply a vehicle to collect a debt and postponement of the claim delays recovery. In Vargas and Wells Fargo , the Court of Appeals, recognizing that “a noteholder must effect an "unequivocal overt act" to accomplish such a substantial change in the parties' contractual relationship” rejected “the argument in Vargas that the default letter in question accelerated the debt, and similarly conclude in Wells Fargo that two complaints in prior discontinued foreclosure actions that each failed to reference the pertinent modified loan likewise were not sufficient to constitute a valid acceleration”.  As will be discussed further herein, the language in the Vargas default letter was not sufficiently unequivocal to constitute a valid acceleration.  DISCUSSION In deciding these four cases, the Court generally discussed caselaw consistent with that which is set forth supra .  The Court then recognized that “in each case, the timeliness dispute turns on whether or when the noteholders exercised certain rights under the relevant contracts, impacting when each claim accrued and whether the limitations period expired, barring the noteholders' foreclosure claims.”  Adding a historical backdrop, the Court stated that: Because these cases involve the operation of the statute of limitations, we begin with some general principles. We have repeatedly recognized the important objectives of certainty and predictability served by our statutes of limitations and endorsed by our principles of contract law, particularly where the bargain struck between the parties involves real property. Statutes of limitations advance our society's interest in giving repose to human affairs. Our rules governing contract interpretation—the principle that agreements should be enforced pursuant to their clear terms—similarly promotes stability and predictability according to the expectations of the parties. This Court has emphasized the need for reliable and objective rules permitting consistent application of the statute of limitations to claims arising from commercial relationships. The timeliness of a foreclosure action requires “an understanding of the parties' respective rights and obligations under the operative contracts: the note and the mortgage. The noteholder's ability to foreclose on the property securing the debt depends on the language in these documents.”  (Citations omitted.)  The Court noted that the four cases decided are typical in terms of the underlying documentation.  Historically: residential mortgage contracts have typically provided noteholders the right to accelerate the maturity date of the loan upon the borrower's default, thereby demanding immediate repayment of the entire outstanding debt.  In these cases, the mortgages provide that the noteholder "may" require immediate payment of the outstanding debt—i.e., accelerate the maturity of the loan—upon the borrower's default. It is plain from this language that whether to exercise this contractual right is a matter within the noteholder's discretion—the noteholder is not obliged to accelerate the loan upon a default. The extended contractual relationship explains why residential mortgage agreements are generally structured in this way. Noteholders can—and often do—anticipate and tolerate defaults relating to timely payment, permitting the borrower to correct such deficiencies without a significant disturbance in the contractual relationship. Precipitous acceleration of the debt serves neither party as it works a fundamental alteration of the status quo.  (Citations and footnote omitted.) As previously stated, the right to accelerate is significant because “acceleration permits the noteholder to commence an action seeking the remedy of full foreclosure—an equitable tool permitting the noteholder to take possession of the real property securing the debt.  (Citation omitted.)  Acceleration also triggers the six-year statute of limitations on the accelerated amount of the debt.  As to the efficacy of the acceleration, notice to the borrower is not the operative consideration because: hile the act evincing the noteholder's election must be sufficient to constitute notice to all third parties of such choice," a borrower's lack of actual notice does not as a matter of law destroy the effect of the election. Put another way, the point at which a borrower has actual notice of an election to accelerate is not the operative event for purposes of determining when the statute of limitations begins to run. Indeed, in Albertina , we held that the debt was accelerated when the verified complaint and lis pendens were filed, even though the papers had not yet been served on the borrower. The determinative question is not what the noteholder intended or the borrower perceived, but whether the contractual election was effectively invoked.  (Citations, internal quotation marks and brackets omitted.) In Wells Fargo , the lender failed to attach the modified loan documents to the complaint “or otherwise acknowledge those documents, which had materially distinct terms.”  The borrower urged that the earlier foreclosure actions operated to accelerate the debt and, therefore, the new action was time-barred.  The Court disagreed and stated: Under these circumstances—where the deficiencies in the complaints were not merely technical or de minimis and rendered it unclear what debt was being accelerated—the commencement of these actions did not validly accelerate the modified loan. Because did not identify any other acceleration event occurring more than six years prior to the commencement of the fifth foreclosure action, the Appellate Division erred in granting her motion to dismiss that action as untimely.  (Citation and footnote omitted.) In Vargas , the issue was whether lender’s default letter operated to accelerate the underlying debt. The Court recognized the disagreement amongst the Appellate Division Departments as to the sufficiency of the language required to constitute an “unequivocal” “valid election to accelerate”.  Thus, the Court stated: In Deutsche Bank Natl. Trust Co. v Royal Blue Realty Holdings, Inc. (148 AD3d 529 <1st dept 2017> ), the First Department concluded that a letter stating that the noteholder "will" accelerate upon the borrower's failure to cure the default constituted clear and unequivocal notice of an acceleration that became effective upon the expiration of the cure period. But the Second Department has rejected that view ( see e.g., Milone v US Bank N.A. ,164 AD3d 145 <2d dept 2018> ; 21st Mtge. Corp. v Adames , 153 AD3d 474 <2d dept 2017> ), reasoning that comparable language did not accelerate the debt and was "merely an expression of future intent that fell short of an actual acceleration," which could "be changed in the interim" ( Milone , 164 AD3d at 152). This disagreement is at the heart of the parties' dispute in Vargas .  (Hyperlinks added.) In determining that the default letter at issue in Vargas was insufficient, the Court, in analyzing the language contained therein, stated: It is undisputed that the August 2008 default letter was sent to —the only question is whether it effectuated a clear and unequivocal acceleration of the debt, an issue of law. The default letter informed that his loan was in "serious default" because he had not made his "required payments," but that he could cure the default by paying approximately $8,000 "on or before 32 days from the date of letter." It further advised that, should he fail to cure his default, the noteholder "will accelerate mortgage with the full amount remaining accelerated and becoming due and payable in full, and foreclosure proceedings will be initiated at that time." The letter warned: " ailure to cure your default may result in the foreclosure and sale of your property." We reject 's contention that the August 2008 letter accelerated the debt and we therefore reverse the Appellate Division order, deny plaintiff's motion for summary judgment and grant Deutsche Bank's motion to dismiss. First and foremost, the letter did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event, indicating the debt was not accelerated at the time the letter was written. Nor was this letter a pledge that acceleration would immediately or automatically occur upon expiration of the 32-day cure period. Indeed, an automatic acceleration upon expiration of the cure period could be considered inconsistent with the terms of the parties' contract, which gave the noteholder an optional, discretionary right to accelerate upon a default and satisfaction of certain conditions enumerated in the agreement. Although the letter states that the debt "will accelerate " if failed to cure the default within the cure period, it subsequently makes clear that the failure to cure "may" result in the foreclosure of the property, indicating that it was far from certain that either the acceleration or foreclosure action would follow, let alone ensue immediately at the close of the 32-day period. This case demonstrates why acceleration should not be deemed to occur absent an overt, unequivocal act. Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan. Even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder's time to commence an action to foreclose on the real property, which should be a last resort. Finally, in Freedom and Ditech , “the issue not whether or when the debt was accelerated but whether a valid election to accelerate, effectuated by the commencement of a prior foreclosure action, was revoked upon the noteholder's voluntary discontinuance of that action.”  Although the Court of Appeals “has never addressed what constitutes a revocation in this context, the Appellate Division departments have consistently held that, absent a provision in the operative agreements setting forth precisely what a noteholder must do to revoke an election to accelerate, revocation can be accomplished by an "affirmative act" of the noteholder within six years of the election to accelerate.”  (Citations omitted.)  “ o clear rule has emerged with respect to the issue raised here—whether a noteholder's voluntary motion or stipulation to discontinue a mortgage foreclosure action, which does not expressly mention de-acceleration or a willingness to accept installment payments, constitutes a sufficiently ‘affirmative act.’" The Court was troubled by the emerging rule that “require courts to scrutinize the course of the parties' post-discontinuance conduct and correspondence, to the extent raised, to determine whether a noteholder meant to revoke the acceleration when it discontinued the action” because the mere withdrawal of “a foreclosure action, "in itself," is not an affirmative act of revocation of the acceleration effectuated via the complaint.”  (Citations omitted.)  The Court rejected an approach that “turns on an exploration into the bank's intent, accomplished through an exhaustive examination of post-discontinuance acts,” and stated: This approach is both analytically unsound as a matter of contract law and unworkable from a practical standpoint. As is true with respect to the invocation of other contractual rights, either the noteholder's act constituted a valid revocation or it did not; what occurred thereafter may shed some light on the parties' perception of the event but it cannot retroactively alter the character or efficacy of the prior act. Indeed, where the contract requires a pre-acceleration default notice with an opportunity to cure, a post-discontinuance letter sent by the noteholder that references the then-outstanding total debt and seeks immediate repayment of the loan is not necessarily evidence that the prior voluntary discontinuance did not revoke acceleration—it is just as likely an indication that it did and the noteholder is again electing to accelerate due to the borrower's failure to cure a default. The impetus behind the requirements that an action be unequivocal and overt in order to constitute a valid acceleration and sufficiently affirmative to effectuate a revocation is that these events significantly impact the nature of the parties' respective performance obligations. A rule that requires post-hoc evaluation of events occurring after the voluntary discontinuance—correspondence between the parties, payment practices and the like—in order to determine whether a revocation previously occurred leaves the parties without concrete contemporaneous guidance as to their current contractual obligations, resulting in confusion that is likely to lead (perhaps inadvertently) to a breach, either because the borrower does not know that the obligation to make installment payments has resumed or the noteholder is unaware that it must accept a timely installment if tendered. Indeed, if the effect of a voluntary discontinuance of a mortgage foreclosure action depended solely on the significance of noteholders' actions taking place months (if not years) later, parties might not have clarity with respect to their post-discontinuance contractual obligations until the issue was adjudicated in a subsequent foreclosure action (which is what occurred here); in both Freedom Mortgage and Ditech, the Appellate Division disagreed with Supreme Court's determinations that the prior accelerations had been revoked by the voluntary discontinuance. Not only is this approach harmful to the parties but it is incompatible with the policy underlying the statute of limitations because—under the post-hoc, case-by-case approach adopted by the Appellate Division—the timeliness of a foreclosure action cannot be ascertained with any degree of certainty, an outcome which this Court has repeatedly disfavored. Further, the Appellate Division's recent approach suggests that a noteholder can retroactively control the effect of a voluntary discontinuance through correspondence it sends to the borrower after the case is withdrawn (which injects an opportunity for gamesmanship). We decline to adopt such a rule.  (Citation omitted.) Instead, as previously stated, the Court adopted the clear and concise rule that if a loan is accelerated by the commencement of foreclosure litigation, the simple act of discontinuing that action operates to de-accelerate the loan; an approach that “comports with our precedent favoring consistent, straightforward application of the statute of limitations which serves the objectives of finality, certainty and predictability, to the benefit of both borrowers and noteholders.”  (Citations and internal quotation marks omitted.) TAKEAWAY The Court’s holding with respect to Freedom and Ditech represents a dramatic and welcomed departure from the caselaw as it evolved in the lower courts.  The simple approach espoused by the Court of Appeals removes any questions about whether a loan was de-accelerated.  Now it is clear that the discontinuance of an action that accelerated a loan operates to de-accelerate the loan.  Accordingly, statute of limitations calculations can now be made with clarity and consistency. Similarly, the Court’s decision with respect to Vargas and Wells Fargo , highlights the importance of lenders carefully choosing the language of their default/acceleration letters.

“We make premium widgets with the highest quality metals.” Assume for the moment, the widgets are made from alloys that are prone to imperfections. Also assume that the speaker sincerely believed the statement to be true, notwithstanding the instances of imperfections. Is this statement an actionable fraud? In Matter of Sundial Growers, Inc. Sec. Litig. , 2021 N.Y. Slip Op. 01014 (1st Dept.Feb. 16, 2021) ( here ), the Court considered this question and, as discussed below, held that the statements at issue (which were similar to the one above) were non-actionable expressions of corporate optimism and puffery or statements of opinion. Expressions of corporate optimism and puffery are not actionable fraudulent statements. See Netshoes Sec. Litig. v. XXX , 64 Misc. 3d 926, 932, (Sup. Ct., N.Y. County 2019) (citing Nadoff v. Duane Reade, Inc. , 107 F. Appx. 250, 252 (2d Cir. 2004)). “This is especially true where … the allegedly fraudulent statements about future performance accompanied with adequate cautionary language, and not stated as guarantees.” Nadoff at 252 (internal quotation marks and citations omitted). “Puffery encompasses statements that are too general to cause a reasonable to rely upon them, and thus cannot have misled a reasonable . They are statements that lack the sort of definite positive projections that might require later correction.” See In re Gen. Elec. Sec. Litig. , No. 19CV1013 (DLC), 2020 WL 2306434, at *7 (S.D.N.Y. May 7, 2020) (citing In re Vivendi, S.A. Sec. Litig. , 838 F.3d 223, 245 (2d Cir. 2016)). To be actionable, expressions of corporate optimism or puffery must be subject to verification. In addition to expressions of puffery and optimism, a speaker can utter a statement of opinion. As discussed below, to be actionable, a statement of opinion must be, among other things, false and not honestly believed when made. Netshoes Sec. Litg. , at 932 (citing Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt. Corp. , 2016 WL 1261135, at *9 (S.D.N.Y. 2016)). In re Sundial Growers Inc. Securities Litigation Sundial Growers involved claims under the Securities Act of 1933 (“Securities Act”) in connection with Sundial’s August 2019 initial public offering (“IPO”). Sundial is a Canada-based producer of cannabis products that commenced cannabis production in December 2018, a few months after Canada legalized adult use of cannabis at the federal level.  In connection with the IPO, Sundial filed with the SEC on Form 424B4 its final prospectus for the issuance of its common stock (the “Prospectus”). The Prospectus formed part of the Registration Statement (the Prospectus and Registration Statement are collectively referred to as the “Offering Documents”), which plaintiffs relied upon in purchasing Sundial’s common stock. Plaintiffs purchased Sundial’s common stock directly in the IPO, or “traceable” to the Registration Statement filed in connection with the IPO.  In the complaint, plaintiffs alleged that the Offering Documents presented Sundial as a producer of “high-quality” and “premium” cannabis. Plaintiffs maintained that this representation was materially misleading in light of the quality problems Sundial had encountered since 2018.  Notwithstanding these problems, plaintiffs contended that Sundial sought to distinguish itself in the market by claiming that its product was “high quality” and “premium.” Plaintiffs alleged that defendants violated Section 11, Section 12 (a)(2) and Section 15 of the Securities Act. Defendants moved to dismiss the complaint, arguing that (1) plaintiffs failed to allege a materially false or misleading statement or omission in the Offering Documents, (2) the statements that plaintiffs identified as misleading could not serve as the basis for a Securities Act claim, and (3) the statements that plaintiffs identified were offset by adequate warnings and risk disclosures. The motion court granted the motion ( here ). in re initial pub. offering sec. litig., 358 f. supp. 2d 189, 205 (s.d.n.y. 2004). section 12(a)(2) imposes liability under similar circumstances against “a person who offers or sells a security . . . by means of a prospectus or oral communication.” 15 u.s.c. § 77l(a)(2).> in re initial pub. offering sec. litig., 358 f. supp. 2d 189, 205 (s.d.n.y. 2004). section 12(a)(2) imposes liability under similar circumstances against “a person who offers or sells a security . . . by means of a prospectus or oral communication.” 15 u.s.c. § 77l(a)(2).> As an initial matter, the motion court found that plaintiffs satisfied the particularity requirement of CPLR § 3016(b). Under CPLR § 3016(b), a plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009).  Turning to the claims under Section 11 and Section 12 (a)(2) of the Securities Act, the motion court held that plaintiffs failed to state a claim upon which relief could be granted. In the complaint, plaintiffs alleged that several statements in the Offering Documents in which defendants highlighted the company’s brand and product ( i.e. , cannabis) as premium and high quality were false and misleading. Plaintiffs claimed that Sundial “was producing hundreds of kilograms of adulterated cannabis products that were of low quality, including significant batches that were not fit for human consumption or that failed to meet the Company’s contractual commitments to its most important customers” and “maintained materially deficient manufacturing and quality control processes which had led to the production and distribution of these adulterated cannabis products.” Plaintiffs also claimed that “Sundial’s grow rooms were suffering from chronic contamination including crop diseases, bugs, systematic mold infections and other quality control problems.” Plaintiffs further alleged that “an important customer of Sundial, Zenabis, had rejected 554 kilograms (more than a half-ton) of Sundial cannabis due to its materially deficient quality.” Plaintiffs maintained that “ he product had been adulterated with mold, bits of rubber gloves, and other non-cannabis materials, such as jewelry.”  The motion court held that the statements identified by plaintiff were not actionable as a matter of law. The Court found that each of the statements identified by plaintiffs were either (1) corporate puffery, too vague to be actionable, (2) a sincere statement of corporate optimism, or (3) sufficiently offset by adequate risk disclosures. In particular, the motion court held that the terms “high quality” and “premium” were “clear examples” of puffery because they were general and not subject to verification. At most, said the motion court, “high quality” and “premium” were statements of opinion, which were also not actionable. The motion court rejected plaintiffs’ argument that the statements could not be considered puffery or opinions because they “misrepresented current facts.” The reason, said the motion court, in many instances, the sentences in which the statements were made began with “we believe”, “we intend”, “will result” and other opinion-based, or forward-looking language. Statements concerning a company’s business potential, held the motion court, were inactionable as a matter of law.  The motion court also held that Offering Documents contained a “robust” 35-page risk disclosure section, which addressed “ he crux of plaintiff’s allegations about quality issues in Sundial’s product since 2018.” Additionally, noted the motion court, the Offering Documents were replete with warnings that investing in Sundial common stock “involve a high degree of risk.”  “Based on the context of the alleged misrepresentations, their general nature, and their placement amongst robust risk disclosures,” the motion court concluded that “the Prospectus itself, utterly refuted plaintiffs’ first and second causes of action for violations of Section 11 and Section 12(a)(2) of the Securities Act.” On appeal, the Appellate Division, First Department unanimously affirmed. First, the Court agreed with the motion court that the statements at issue were either non-actionable puffery or statements of opinion: The statements in the offering materials that defendant Sundial Growers, Inc. produced “high quality” and “premium” cannabis were non-actionable puffery. To the extent the statements were more than puffery, they were non-actionable opinion. Slip Op. at *1 (citations omitted). Second, the Court found that the risk disclosures “in the offering materials expressly and repeatedly warned of the risk to the company’s quality control, including fire, insects, and contamination, and noted that there had been such an incident in the past.” Id. (citations omitted). “In light of this,” concluded the Court, “the disclosures were not misleading for not identifying a single incident of returned product, that constituted 10% of the company’s sales for a single quarter.” Id. Takeaway To plead fraud, a plaintiff must allege facts showing the defendant made an untrue statement of material fact, or failed to disclose a material fact necessary to make the statements that were made not misleading. See , e.g. , 17 C.F.R. § 240.10b-5 (securities fraud). A statement or omission is material only if a reasonable person would consider it important in determining whether to act on the statement or omission. See TSC Indus., Inc. v. Northway, Inc. , 426 U.S. 438, 449 (1976).  In applying the materiality element of a fraud claim, courts have identified several categories of statements that are not considered materially misleading. Two such categories are relevant to the statements and omissions at issue in Sundial Growers : statements considered immaterial because they are only vague statements of corporate optimism or statements of opinion, and statements considered immaterial because documents available to the plaintiff contained risk disclosures about the subject matter of the alleged misstatement or omission at issue. Statements classified as corporate optimism or mere puffery are typically forward-looking statements, or are generalized statements of optimism that are not capable of objective verification. Vague, optimistic statements are not actionable because a reasonable person would not rely on them in making decisions about the subject matter at issue. The reason: speakers, such as the corporate actors in Sundial Growers , must be allowed to express hope and optimism so long as such statements are not known to be untrue at the time the statement is made. Novak v. Kasaks , 216 F.3d 300, 315 (2d Cir. 2000). As the Second Circuit explained: “People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their stewardship and the prospects of the business that they manage.” Shields v. Citytrust Bancorp, Inc. , 25 F.3d 1124, 1129-30 (2d Cir.1994). Statements containing the words “we believe”, “we think”, “we expect” or “we anticipate” are classified as opinion. Statements of opinion, as in Sundial Growers , are generally not actionable because they are inherently subjective and involve an opinion about the subject matter at issue. Fait v. Regions Fin. Corp. , 655 F.3d 105, 110 (2d Cir. 2011).  When considering the falsity of an opinion, courts have developed the following standards.  First, when a plaintiff relies on a theory of material misrepresentation, the plaintiff must allege both that “the speaker did not hold the belief she professed” and that the belief is objectively untrue.  Omnicare, Inc. v. Laborers Dist. Council Construction Indus. Pension Fund , 135 S.Ct. 1318, 1327 (2015).  Second, when a plaintiff relies on a theory that a statement of fact contained within an opinion statement is materially misleading, the plaintiff must allege that “the supporting fact supplied untrue.”  Id.  In this regard, a statement structured, “I believe that x is so because y has occurred,” contains the factual and falsifiable statement, “y has occurred.” If y has not occurred, then the statement of opinion is actionable because an embedded but complete “statement of a material fact” can be proven false. Abramson v. Newlink Genetics Corp. , 965 F. 3d 165, 175 (2d Cir. 2020).  Third, when a plaintiff relies on a theory of omission, the plaintiff must allege “facts going to the basis for the issuer’s opinion … whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”  Id.  at 1332. The Supreme Court used the statement, “We believe our conduct is lawful,” as an example. In Omnicare , the Court explained that this statement implies, if the recipient was not informed otherwise, that the speaker had so concluded after investigating the governing law. If the speaker had not investigated the governing law, and had omitted the context, the statement of opinion, although literally true (assuming the speaker believed it) and thus not actionable under the first standard, may be misleading by omission and thus actionable. Omnicare , 135 S.Ct. at 1328-1332. In Sundial Growers , the motion court and First Department applied the first standard: the opinion statement was not honestly believed when made.  Finally, both the motion court and the First Department in Sundial Growers found that defendants’ statements were surrounded by “robust” risk disclosures in the Offering Documents in which they identified the risks of the cannabis business that could adversely impact their production, including the return of their products. These disclosures also included a discussion of the quality problems that had already occurred at the time of the IPO. As such, the Sundial Growers’ courts found that the risk disclosures did not “affirmatively create an impression of a state of affairs that differ in a material way from the one that actually exist . City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc. , 65 F. Supp. 3d 840, 855 (N.D. Cal. 2014), aff’d , 856 F.3d 605 (9th Cir. 2017).