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By: Jonathan H. Freiberger On January 28, 2026, the Appellate Division, Second Department, decided Deutsche Bank National Trust Company v. Starr , a mortgage foreclosure action that addresses many of the issues raised in our prior BLOG articles. [1]  The borrower in Starr  allegedly defaulted in her repayment obligations under a promissory note secured by a mortgage on real property. In 2009, the lender commenced a mortgage foreclosure action (the “First Action”). In 2010, the First Action was discontinued by order of the Court on the lender’s motion. The Lender commenced a new foreclosure action in 2012, in which the borrower asserted numerous affirmative defenses. In 2016, the motion court granted the lender’s motion for summary judgment and denied the borrower’s cross motion to dismiss the complaint due to the lender’s failure to comply with RPAPL 1304 and 1306 . [2]  In 2019, the Second Department modified the motion court’s order by denying the lender’s motion for summary judgment and affirming the denial of the borrower’s motion for summary judgment. Here is where things get interesting. The lender, realizing that it could not prove compliance with RPAPL 1306, brought an order to show cause by which it sought an order “dismissing the instant action, without prejudice, due to [the lender’s] inability to show compliance with RPAPL 1306 and/or on equitable grounds.” [3]  Compliance with RPAPL 1306 is a condition precedent to the commencement of a foreclosure action. Tri-State III, LLC v. Litkowski , 239 A.D.3d 911, 914 (2 nd Dep’t 2025); see also  our BLOG article “ Second Department Dismisses Two Mortgage Foreclosure Actions for Failure to Comply with RPAPL 1306 .” Typically, a motion to discontinue an action would be brought under CPLR 3217(b) , [4] which provides: Except as provided in subdivision (a), an action shall not be discontinued by a party asserting a claim except upon order of the court and upon terms and conditions, as the court deems proper. After the cause has been submitted to the court or jury to determine the facts the court may not order an action discontinued except upon the stipulation of all parties appearing in the action. Unfortunately, however, a dismissal under CPLR 3217(b) would have been the death knell of the lender’s claim because the lender would have been time-barred from commencing a new action. In some cases, CPLR 205-a(a) provides a six-month grace period to commence a new action if the old action is dismissed after the statute of limitations expires. However, the six-month grace period expressly excepts from its scope, inter alia , “voluntary dismissals”. [5] Accordingly, the borrower cross-moved under CPLR 3217(b) to discontinue the action, with prejudice, because any new action would be time-barred. The motion court denied the lender’s motion, granted the borrower’s cross-motion and dismissed the action with prejudice. The motion court found that the dismissal was warranted due to the lender’s laches, an argument not raised by any party. On the lender’s appeal, the Court affirmed on alternative (statute of limitations) grounds (because laches was not raised by any of the parties). The Court explained: Contrary to the [lender]’s contention, its motion, denominated as one to dismiss the complaint without prejudice based upon its inability to comply with RPAPL 1306 and/or on equitable grounds, was, in actuality, one pursuant to CPLR 3217(b) to discontinue the action without prejudice… [W]hen an action is terminated by a voluntary discontinuance, a plaintiff is not entitled to the benefit of the six-month grace period afforded by CPLR 205-a(a)…. Here, the [lender] attempted to avoid the undesired consequences of a voluntary discontinuance by denominating its motion as one seeking dismissal of the complaint, but, as the [lender] was moving to dismiss its own action, its motion was, in actuality, one to voluntarily discontinue the action pursuant to CPLR 3217(b)….” * * * …CPLR 3217(b) permits a voluntary discontinuance of an action by court order “upon terms and conditions, as the court deems proper.” In general, absent a showing of special circumstances, including prejudice to a substantial right of the defendant or other improper consequences, a motion for a voluntary discontinuance should be granted without prejudice. The determination of whether, and upon what terms and conditions, to grant a motion to discontinue an action pursuant to CPLR 3217(b) lies within the sound discretion of the court. Here, in opposition to the [lender]’s motion and in support of her cross-motion, the borrower made the requisite showing that she would be prejudiced by a discontinuance of the action without prejudice. The [borrower] demonstrated, prima facie, that a future action would be time-barred [for the reasons previously discussed]. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]  This BLOG has written dozens of articles addressing numerous aspects of residential mortgage foreclosure. To find such articles, please see the BLOG tile on our website and search for any foreclosure, or other commercial litigation, issue that may be of interest you. [2]  This BLOG has written numerous articles addressing RPAPL 1304 and 1306. To find such articles, please see the BLOG  tile on our website and type “RPAPL 1304” and/or “RPAPL 1306” into the “search” box. Briefly, RPAPL 1304 requires a lender, ninety days before the commencement of a foreclosure action, specific notices. RPAPL 1306, among other things, requires lenders to file with the Superintendent of Financial Services, certain information about borrowers within three business days of sending RPAPL 1304 notices. [3]  Some of the facts stated herein were obtained from the appellate records available on the Court’s NYSCEF system. The quoted language is from the Lender’s order to show cause. [4]  CPLR 3217(a), in general, permits an action to be discontinued by serving a notice of discontinuance on all parties prior to the time a responsive pleading is served or by stipulation signed by all parties of record before the case “has been submitted to the court or jury”. [5]  CPLR 205-a is recently enacted pursuant to FAPA and applies to foreclosure actions. CPLR 205  is a similar statute and applies to other cases. This BLOG has written numerous articles on CPLR 205, CPLR 205-a and FAPA. To find such articles, please see the BLOG tile on our website and type “CPLR 205”, “CPLR 205-a” or “FAPA” into the “search” box.

By: Jeffrey M. Haber The common law doctrine of caveat emptor is a well-accepted rule of law in New York. Under the doctrine, the courts will not impose liability on a seller of property for failing to disclose information material to the transaction when the parties deal at arm’s length, [1]  unless there is some conduct on the part of the seller which constitutes active concealment. [2]  “If, however, some conduct ( i.e. , more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.” [3]   “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.” [4]  “Where the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him or her of knowing, by the exercise or ordinary intelligence, the truth or the real quality of the subject of the representation, he or she must make use of those means, or he or she will not be heard to complain that he or she was induced to enter into the transaction by misrepresentations.” [5] Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim under the caveat emptor doctrine. [6]  The same is true under the justifiable reliance element of a fraud claim. [7]   [Eds. Note: This Blog examined the caveat emptor doctrine here and here and the impact of publicly available information on a fraud claim, in particular on the justifiable reliance element here and here .] In 98 Gates Ave. Corp. v. Bryan , 2024 N.Y. Slip Op. 01284 (2d Dept., Mar. 13, 2024) ( here ), the Appellate Division, Second Department, examined the foregoing principles. As discussed below, 98 Gates Ave.  involved an alleged breach of a contractual representation and the fraudulent concealment of defendant’s true ownership interest in certain real property (the “Premises”). Plaintiff commenced the action in February 2020, claiming fraud and breach of contract arising out of a written agreement between plaintiff and defendant for the sale of defendant’s interest in certain real property located in Brooklyn, N.Y. that had been owned by defendant’s deceased father. Plaintiff alleged that, among other things, it purchased defendant’s purported 50% interest in the Premises based upon false representations by defendant that he was the sole heir and distributee of his father, that defendant was a 50% owner of the Premises, and that his father did not have a will. According to plaintiff, after the closing, plaintiff discovered the existence of a will of defendant’s father, which had been probated in New York County prior to plaintiff’s purchase and learned that defendant had owned only a 25% interest in the Premises. Defendant moved to dismiss the complaint pursuant to CPLR 3211(a). In an order dated March 12, 2021, the motion court granted the motion. The Second Department affirmed. The Court held that plaintiff failed to allege a misrepresentation of fact – that is, defendant’s father did not have a will. [8]  In so holding, the Court found that “evidence submitted by the defendant in support of his motion established that the will at issue was probated and a matter of public record.” [9]  As such, plaintiff could not have been misled by defendant’s representation. [10]   Moreover, the Court held that defendant’s failure to disclose the will to plaintiff did not constitute active concealment because the information that was allegedly withheld was not peculiarly within defendant’s knowledge or unlikely to be discovered by a prudent person exercising due care with respect to the subject transaction. [11]  In other words, plaintiff failed to allege that defendant’s alleged concealment of information thwarted plaintiff’s ability to conduct its own investigation into the existence of a will or that it justifiably relied on the information allegedly concealed: “Since the will, which had been probated, was a matter of public record and not exclusively within the knowledge of the defendant, any failure by the defendant to disclose the will to the plaintiff did not constitute active concealment and was thus not actionable as fraud.” [12]   Takeaway   Under the doctrine of caveat emptor, the purchaser of real property has a duty to investigate the truth or the real quality of the subject of the representation and satisfy himself/herself as to the bona fides the transaction. The same is true under the justifiable reliance element of a fraud claim. The courts in New York will not hesitate to dismiss a fraud claim by a purchaser of real property where information alleged to have been concealed could have been reasonably discovered through an inspection or another form of due diligence. Since the seller has no duty to disclose, the seller will be liable only when he/she thwarts or prevents the purchaser from discovering the truth about the transaction through the exercise of due diligence. In 98 Gates Ave. plaintiff was unable to satisfy that pleading burden. _____________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] It is important to note that the caveat emptor doctrine applies not only to concealed conditions but also to claims relating to the ownership of property and other tangible attributes of the property. E.g. , Clearmont Prop., LLC v. Eisner , 58 A.D.3d 1052, 1056 (3d Dept. 2009) (misrepresentations concerning legal ownership of the subject property); McDonald v. O’Connor , 189 A.D.3d 1208, 1211 (2d Dept. 2020) (misrepresentation concerning whether the property at issue was subject to landmark classification); Mosca v. Kiner , 277 A.D.2d 937, 938 (4th Dept. 2000) (misrepresentation concerning the existence of deeded lake rights). [2] Simone v. Homecheck Real Estate Servs., Inc. , 42 A.D.3d 518, 520 (2d Dept. 2007); Razdolskaya v. Lyubarsky , 160 A.D.3d 994, 996 (2d Dept. 2018); Radushinsky v. Itskovich , 127 A.D.3d 838, 839 (2d Dept. 2015). [3] Hecker v. Paschke , 133 A.D.3d 713, 716 (2d Dept. 2015) (internal quotation marks omitted); see also   Daly v. Kochanowicz , 67 A.D.3d 78, 92 (2d Dept. 2009). [4] Jablonski v. Rapalje , 14 A.D.3d 484, 485 (2d Dept. 2005); Razdolskaya , 160 A.D.3d at 996. [5]   Rojas v. Paine , 101 A.D.3d 843, 845 (2d Dept. 2012). [6] E.g. , Clearmont Prop. , 58 A.D.3d at 1056 (ownership records were a matter of public record); McDonald , 189 A.D.3d at 1211 (property’s landmark status was a matter of public record); Mosca , 277 A.D.2d at 938 (the existence of deeded lake rights was a matter of public record.); Eisenthal v. Wittlock , 198 A.D.2d 395, 396 (2d Dept. 1993) (misrepresentations concerning the boundaries of the premises). [7] E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). [8] Slip Op. at *2. [9] Id. [10] Id.  (citing DeMartino v. Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf, LLP , 189 A.D.3d 774, 775 (2d Dept. 2020); Glazer v. LoPreste , 278 A.D.2d 198, 199 (2d Dept. 2000)). [11] Id. [12] Id.  (citing Chapman v. Jacobs , 197 A.D.3d 851, 851-852 (4th Dept. 2021); Rojas , 101 A.D.3d at 845).

By: Jeffrey M. Haber As readers of this Blog know, one of the elements of a fraudulent inducement claim is “justifiable reliance.” The New York Court of Appeals has emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. [1] Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact intensive. [2]  Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” [3] Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. [4] The same is true with regard to documents that a party signs, such as contracts, offering plans, and private placement memoranda. “A party who signs a document without any valid excuse for not having read it is ‘conclusively bound’ by its terms.” [5] When that happens, the plaintiff’s failure to read the document prevents him/her from establishing justifiable reliance. [6] In Dille v. Zoelle LLC , 2023 N.Y. Slip Op. 04923 (1st Dept. Oct. 3, 2023) ( here ), the Appellate Division, First Department examined the foregoing principles in affirming the dismissal of a complaint alleging fraudulent inducement. Dille  involved the purchase a condominium unit. Plaintiff entered into a contract of sale to purchase the unit for $19,000,000 from Zoelle. Plaintiff alleged that she agreed to purchase the unit in reliance upon extra-contractual representations made by Zoelle that the building had a full-time doorman. As noted by the Court, “the building has a doorman physically present during the daytime hours of each day, and a virtual doorman for the remaining hours that a doorman is not physically present on site.” [7] Plaintiff alleged that a full-time doorman, who was physically present, was material to her decision to enter into the contract to purchase the unit. As a consequence of the alleged misrepresentations, plaintiff refused to close the transaction, declaring the contract null and void and seeking a return of the $1,900,000 down payment that was made under the contract of sale. Zoelle moved to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) [8] and (7). Zoelle also sought an order directing that the escrowee immediately release the contract deposit of $1.9 million. [9] Among other things, Zoelle argued that the existence of a virtual doorman could have been discovered by plaintiff by reading the condominium offering plan, which was available to plaintiff and which provided that there was a virtual doorman during certain hours of operation. The motion court granted the motion ( here ). The motion court found “that [the] condominium offering plan, which was undisputedly available to the plaintiff, establishe[d] a complete defense as to plaintiff’s fraud claims.” The motion court noted that “there [was] no requirement in the contract [of sale] that the subject premises have a doorman, let alone a full-time doorman.” As such, the motion court held that the plaintiff failed to satisfy the justifiable reliance element of her fraudulent inducement claim. On appeal, as noted, the First Department affirmed. The Court found that “[t]he documentary evidence utterly refutes plaintiff’s allegations that she justifiably relied upon defendants’ alleged misrepresentations regarding the building’s doorman services.” [10] The Court explained that “[t]he condominium’s offering plan outlined the physical doorman hours versus the virtual doorman hours, and the sale contract provides that the ‘Purchaser has examined or has waived the examination of … the offering plan, all amendments to the offering plan, the Declaration, the By-Laws and the House Rules.’” [11] The Court also noted that the contract of sale provided “that the purchaser has inspected or waived inspection of the premises, and that the seller is not bound by any representations as to the premises made by its employees or agents unless such representations were specifically made part of the contract of sale.” [12] The contract of sale “did not,” said the Court, “contain any provision addressing expected doorman services.” The Court “reject[ed] plaintiff’s claims … that defendants’ representatives concealed the existence of a virtual doorman during plaintiff’s pre-contract inspections of the premises, and that the virtual doorman service was within defendants’ peculiar knowledge.” [13] “Due diligence by plaintiff,” said the Court, “would have discovered the doorman arrangement at the building, particularly given that the information was set forth in the condominium offering plan and given that under the terms of the contract, plaintiff bore the risk of failing to review that document.” [14] Finally, the Court noted that plaintiff did not allege that she “made a specific inquiry into the doorman services during [her] inspection of the premises or at any time before entering into the contract.” [15] [This Blog examined a fact scenario similar to Dille   here .] Takeaway To demonstrate reliance, a plaintiff must demonstrate that he/she relied upon the alleged misrepresentation to his/her detriment. Such reliance must be “justifiable” and “reasonable.” [16] Thus, as noted above, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” [17] In Dille , plaintiff could not demonstrate reasonable reliance on the alleged misrepresentations about the existence of a full-time doorman because, among other things, she failed to read the offering plan. As noted by the Court, the disclosures in the offering plan, and the terms of the contract, made it unreasonable to rely on any statement concerning the existence of a full-time doorman. The law is settled that “a party will not be excused from his failure to read and understand the contents of a [relevant document].” [18] For this reason, “the signer of a written agreement is conclusively bound by its terms unless there is a showing of fraud, duress or some other wrongful act on the part of any party to the contract.” [19] In Dille , there was no evidence of such conduct. __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1] Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018). [2] DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). [3] Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). [4] E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). [5] Ferrarella v. Godt , 131 A.D.3d 563, 567-568 (2d Dept. 2015) (quoting Gillman v. Chase Manhattan Bank , 73 N.Y.2d 1, 11 (1988)); see also Sorenson v. Bridge Capital Corp. , 52 A.D.3d 265, 266 (1st Dept. 2008). [6] Stortini v. Pollis , 138 A.D.3d 977, 978 (2d Dept. 2016); Sorenson , 52 A.D.3d at 266. [7] Slip Op. at *1. [8] A motion to dismiss pursuant to CPLR § 3211(a)(1) ( i.e. , that the action is barred by documentary evidence) may be granted only where the documentary evidence utterly refutes a plaintiff’s factual allegations, and conclusively establishes a defense as a matter of law. See Goshen v. Mutual Life Ins. Co. of New York , 98 N.Y.2d 314, 327 (2002). Judicial records, as well as documents reflecting out-of-court transactions, such as mortgages, deeds, contracts, and any other papers, the contents of which are “essentially undeniable,” qualify as “documentary evidence” in the proper case. Fontanetta v. Doe , 73 A.D.3d 78 (2d Dept. 2010). This Blog examined CPLR § 3211(a)(1) here and here , for example. [9] The other defendants also moved to dismiss the complaint. [10] Slip Op. at *1 (citations omitted). [11] Id. [12] Id.  This Blog previously examined “no reliance” clauses and “disclaimers”, such as the one refenced above, here , here , and here . [13] Id. [14] Id.  (citations omitted). [15] Id.  at 1- 2. [16] Daly v. Kochanowicz , 67 A.D.3d 78, 91 (2d Dept. 2009). [17] Rosenblum v. Glogoff , 96 A.D.3d 514, 515 (1st Dept. 2012). [18] Johnson v. Thruway Speedways , 63 AD2d 204, 205 (3d Dept. 1978) (citation omitted). [19] Columbus Trust Co. v. Campolo , 110 A.D.2d 616, 617, aff’d , 66 N.Y.2d 701 (1985).

By: Jeffrey M. Haber As readers of this Blog know, we have often written about the justifiable reliance element of a fraud claim. Considered by the courts to be nettlesome, [1] justifiable reliance is often the most difficult element for plaintiffs to satisfy. That was the case in FPG Maiden Lane, LLC v. Bank Leumi USA , 2022 N.Y. Slip Op. 07150 (1st Dept. Dec. 15, 2022) ( here ). FPG  concerned construction loans (the “Loan”) for FPG’s unfinished residential skyscraper in lower Manhattan (the “Property”). After negotiating with various lenders, FPG agreed to a debt financing arrangement in 2015 with Bank Leumi USA (“BLUSA”). On May 26, 2016, FPG’s debt financing arrangement expanded to include Harel-Maiden Lane General Partnership (together, the “Lenders”). The relevant agreements with the Lenders are a Project Loan Agreement dated May 26, 2016, as amended (the “Project Loan Agreement”) and a Building Loan Agreement dated May 26, 2016, as amended (the “Building Loan Agreement” and collectively with the Project Loan Agreement, the “2016 Loan Agreements”). The 2016 Loan Agreements provided that FPG could make requests for advances to cover the costs of construction and development of the Property (“Request for Advances”). Upon delivery of a Request for Advances, the Lenders were obligated to “fund the Request for Advance[s] within ten (10) business days,” subject to certain exceptions. One such exception was the existence of an Event of Default enumerated in Section 4.1 of the Loan Agreements. An Event of Default includes “if [FPG] fails to comply with ... the terms, covenants or conditions of” the 2016 Loan Agreements. As originally drafted, the 2016 Loan Agreements provided for a completion date for the Property of April 3, 2018. Due to problems in construction (including the original construction manager’s failure to perform), the Property was not completed on the anticipated timetable. FPG and the Lenders agreed to modify the terms of the 2016 Loan Agreements to account for the delays. In September 2018 and in June 2019, FPG invested, in total, more than $22 million in additional equity pursuant to further amendments to the 2016 Loan Agreements. The completion date for the Property was extended to April 1, 2020. By Fall 2019, it was apparent that the construction of the Property would not be completed by April 1, 2020. Plaintiff alleged that the delays were exacerbated by the Lenders’ delay of Loan draw requests. The parties agreed to engage in another renegotiation of the Loans, which culminated in the execution of the Third Amendments to the Loan Agreements on March 13, 2020. Plaintiffs alleged that in the renegotiation of the Loans, the Lenders had two material requests. First, the Lenders wanted FPG to infuse an additional $20 million in cash into the Property to cover budget overruns. Second, the Lenders demanded that FPG obtain a Temporary Certificate of Occupancy (“TCO”) by a negotiated deadline from the New York City Department of Buildings. A TCO indicates “that the property is safe for occupancy, but ... has an expiration date.” The Lenders proposed May 31, 2020, as the deadline for obtaining the TCO, with a 30-day grace period before an Event of Default could be triggered. This round of negotiations continued into 2020. Plaintiffs alleged that the Lenders continued to point to the unbalanced budget as a reason to refuse funding any Request for Advances. FPG alleged that it became increasingly concerned it would run out of funds to pay the new construction manager and that all parties understood any delay in construction would adversely affect plaintiffs’ ability to meet the May 31, 2020 TCO deadline that the Lenders were proposing. FPG alleged that it was vocal about its concerns and repeatedly raised them from January 2020 through March 2020. FPG alleged that the Lenders made numerous false promises upon which FPG reasonably relied during negotiations in early 2020. Specifically, FPG alleged that over several telephone conversations in late February and early March 2020, BLUSA told plaintiffs that the May 31, 2020 TCO deadline was merely a formality, and that the banks would be flexible on these and other deadlines in the implementation of the contracts, just as the banks had been in the past with FPG. Among other promises, BLUSA allegedly assured plaintiffs that, if FPG agreed to provide the additional $20 million in equity for the Property, the Lenders (as they had been in the past) would be flexible and would not declare a default based upon the TCO deadline. FPG agreed to the third amendments to the 2016 Loan Agreements on March 13, 2020 (the “Third Amendments”), which included the new May 31, 2020 TCO deadline. The Third Amendments extended the completion date for the Property from April 1, 2020 to November 30, 2020 and the maturity date of the Loan from April 1, 2020 to December 31, 2020. The Third Amendments also altered the way the parties would handle budget overruns. Under as-amended Section 8.4 of the 2016 Loan Agreements, the Lenders agreed to fund the cost for any line item in the Property budget even if there were cost overruns on another line item or on the budget as a whole. FPG invested an additional $20 million in the project. FPG alleged that the Lenders were then supposed to, but failed to, fund the Requests for Advances. FPG maintained that, in June 2020, the Lenders manufactured an excuse to claim that an Event of Default existed as of June 2020. As a consequence, the Lenders claimed that they did not have to fund any outstanding Requests for Advances because FPG purportedly owed the Lenders money in unpaid interest on the Loan as of June 1, 2020. FPG alleged that more than twice this amount was available to the Lenders under the loan budget to cover the unpaid interest. Nevertheless, although FPG disputed that there was any unpaid interest, FPG wired money to the Lenders, which the latter returned the next day. Finally, FPG alleged that on June 27, 2020, BLUSA admitted to plaintiffs during a telephone call that the Lenders never had any intention of funding any requests drawn from the Loan if the budget was out of balance. BLUSA allegedly further stated that the Lenders would not fund any requests drawn from the Loan unless FPG put up additional collateral and brought the budget into balance. BLUSA allegedly stated that it did not care, and never had cared, what the Third Amendments said. Plaintiffs brought suit against defendants, asserting claims for, among others, fraud, negligent misrepresentation and breach of contract. In the fraud causes of action, FPG alleged that the Lenders fraudulently induced it to enter into the Third Amendments to the 2016 Loan Agreements by misrepresenting that the Lenders would be flexible about the TCO deadline and fund Requests for Advances if the budget for the Property that FPG was constructing was out of balance. In the breach of contract causes of action, FPG alleged that it submitted Requests for Advances before June 2020, i.e. , before the TCO default, and defendants failed to honor those requests. Defendants moved to dismiss. The motion court denied the motion. Plaintiffs appealed. The Appellate Division, First Department modified the motion court’s order to reverse the denial of the motion to dismiss the fraud claims; the Court otherwise affirmed the motion court’s order. With regard to the fraud causes of action, the Court held that FPG failed state a claim upon which relief could be granted. Through case citation, the Court held that FPG could not satisfy the justifiable reliance element of a fraud claim because the alleged false promises were “flatly contradicted by section 17 of the [T]hird [A]mendments.” [2] The Court further held that “[t]o the extent the fraud claim is based on a promise that the [L]enders would fund [R]equests for [A]dvances if the budget for the building was out of balance, that promise is reflected in section 8.4 of the [T]hird [A]mendments”. [3] “Thus,” concluded the Court, “it is duplicative of the breach of contract claim”. [4] With regard to the negligent misrepresentation cause of action, the Court held that “because the borrower-lender relationship between the parties here does not constitute the special relationship required to support the claim”, the claim failed. [5] Finally, the Court held that the complaint stated claims for breach of contract. The Court explained that “the complaint alleges that FPG submitted requests for advances before June 2020, i.e. , before the TCO default.” [6] “Furthermore,” said the Court, defendants could not rely on their alleged creation of an event of default to defeat the breach of contract claim: “if an event of default was created by the [L]enders’ refusal to lend, they cannot rely on it to their benefit”. [7] Takeaway As a general matter, a sophisticated party “cannot justifiably rely on oral representations when it thereafter enters into a contract containing terms that directly contradict those oral representations.” [8] As discussed, FPG executed the Third Amendments relying on the Lenders’ alleged oral promises to refrain from exercising their contractual rights. Those promises, however, were contradicted by the terms of the amendments which FPG negotiated and agreed to. The Court in FPG  found that those written provisions prevented FPG from satisfying the justifiable reliance element of its fraud-based claims. In modifying the motion court’s order, the Court reaffirmed New York law, which prevents a party that fails to satisfy its contractual obligations from escaping the consequences of its actions by claiming the defendant promised not to enforce the terms of the agreement between them. As the FPG  Court observed, a plaintiff, especially a sophisticated one, cannot satisfy the justifiable reliance element of a fraud claim, when the oral representations claimed to be false are negated by the terms of the agreement between the parties. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]   DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). [2]  Slip Op. at *1 (citing, Perrotti v. Becker, Glynn, Melamed & Muffly LLP , 82 A.D.3d 495, 498 (1st Dept. 2011) (“[A] party … cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract executed by the allegedly defrauded party”); Glenfed Fin. Corp., Commercial Fin. Div. v. Aeronautics & Astronautics Servs. , 181 A.D.2d 575, 576 (1st Dept. 1992), lv. dismissed , 80 N.Y.2d 893 (1992)). [3]   Id. [4]   Id.  (citing, New York City Waterfront Dev. Fund II, LLC v. Pier A Battery Park Assoc., LLC , 206 A.D.3d 565, 566 (1st Dept. 2022); ESBE Holdings, Inc. v. Vanquish Acquisition Partners, LLC , 50 A.D.3d 397, 398 (1st Dept. 2008)). [5]   Id.  (citing, Korea First Bank of N.Y. v. Noah Enters., Ltd. , 12 A.D.3d 321, 323 (1st Dept. 2004), lv. denied , 4 N.Y.3d 710 (2005) ; New York City Waterfront , 206 A.D.3d at 567)). [6]   Id.  at 1- 2. [7]   Id.  at *2 (citing, VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC , 171 A.D.3d 189, 195 (1st Dept. 2019)). [8]   Perrotti , 82 A.D.3d at 498.

By Jeffrey M. Haber As readers of this Blog know, to recover damages for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” [1]  When a plaintiff contends that he or she was fraudulently induced to take some action, such as enter into a contract, the plaintiff must allege “a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” [2]   The element that most often spells failure for a plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. The cases are brimming with dismissals on this ground. In prior articles, we have discussed the impact a disclaimer clause in a contract can have on a fraud claim.  See ,  e,g. ,  here . As we have noted, disclaimer clauses often are worded as “no reliance” clauses. In a such a clause, the parties represent that they are not relying on any extra-contractual representations. Today, we examine Kim v. XP Securities, LLC , a case in which the foregoing principles were present. Kim v. XP Securities, LLC [Ed. Note: the background facts have been taken from the motion court’s decision and the briefs submitted by the parties in connection with the subject motion to dismiss.] Kim  involved an employment dispute. Plaintiff is a finance professional and veteran of the foreign exchange industry (“Forex”). Prior to joining defendant, plaintiff led the Asia Forex desk for the Americas at a global financial firm. There, he conceived of a tool, called the “Magic Box”, to facilitate Forex trading. While considering an offer to join another firm, plaintiff alleged that he was fraudulently induced to turn down that offer and instead work for defendant based on representations about the state of defendant’s technology that was necessary to develop plaintiff’s trading platform. According to plaintiff, based upon the false representations, the parties executed an employment agreement (the “Agreement”). Among other provisions, the Agreement contained a merger provision, stating generally that the agreement superseded all prior agreements, as well as a “no representations” clause, stating: “[Plaintiff] has not executed this Agreement in reliance upon any promise, representation, statement or warranty whatsoever, express or implied, which is not expressly contained in this Agreement.” Defendant moved to dismiss. The motion court granted the motion as to the fraudulent inducement claim. First, the motion court held that the “no representations” clause mandated dismissal of the fraudulent inducement claim: plaintiff’s “disclaimer of reliance on pre-contractual representations … precludes his fraud claim ( see   WT Holdings Inc. v. Argonaut Group, Inc. , 127 AD3d 544 [1st Dept 2015]).” [Ed. Note: In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. [3]  “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.” [4] ] Second, the motion court held that plaintiff failed to satisfy the justifiable reliance element of the claim. The motion court noted that plaintiff “did not attempt to verify any of the general claims made about the status of the platform.” “For instance,” said the court, “when he visited Sao Paulo, plaintiff could have stayed for another day or two to conduct due diligence rather than simply accepting the explanation that XPI’s employees were busy at the convention.” “Had plaintiff pressed for more details and insisted on actually verifying the state of the technology before entering into the Agreement, he could have discovered its true status,” said the motion court. As a sophisticated party, his “lack of due diligence render[ed] his reliance unjustifiable as a matter of law,” concluded the motion court. [Ed. Note: New York courts have found that “[w]here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ [5]  “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” [6]  “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” [7]   Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” [8]  A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation. [9] Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. [10]  As the Court of Appeals observed, “[n]o two cases are alike ….” [11] ] On appeal, the Appellate Division, First Department affirmed. Kim v. XP Sec., LLC , 2021 N.Y. Slip Op. 06764 (1st Dept. Dec. 2, 2021) ( here ).   The Court agreed with the motion court that the disclaimer (or “no representations” clause) precluded recovery for fraudulent inducement: Plaintiff’s employment agreement contained a merger provision stating generally that the agreement superseded all prior agreements, as well as a “no representations” clause stating specifically, “[Plaintiff] has not executed this Agreement in reliance upon any promise, representation, statement or warranty whatsoever, express or implied, which is not expressly contained in this Agreement.” In light of these provisions, the motion court properly dismissed the fraudulent inducement claim ….” [12] The Court also agreed with the motion court that plaintiff failed to plead justifiable reliance: “plaintiff's pleadings do not demonstrate that he exercised ordinary diligence in investigating defendant’s representations, despite their alleged importance to the employment agreement.” [13] Takeaway A plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as the plaintiff in Kim ) must establish that it “has taken reasonable steps to protect itself against deception.” [14] Typically, this means that a plaintiff claiming to have been fraudulently induced to purchase a business, or to lend to a business, must allege that, before entering into the transaction, it availed itself of the opportunity to verify the seller’s or borrower’s representations through an examination of the entity’s books and records. As shown in Kim , plaintiff failed to do so. Kim  also shows the power of the disclaimer clause. A contractual disclaimer that is clear and directly addresses the subject of the alleged misrepresentation will preclude a fraudulent inducement claim. ______________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. [1]   Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also Genger v. Genger , 152 A.D.3d 444, 445 (1st Dept. 2017). [2]   GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010). [3]   Basis Yield Alpha Fund [Master] 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). [4]   Basis Yield , 115 A.D.3d at 137. [5]   88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). [6]   DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). [7]   Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). [8]   VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). [9]   ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). [10]   DDJ , 15 N.Y.3d at 155 (internal quotation marks omitted). [11]   Id. [12]  Slip Op. at *1. [13]   Id. [14]   DDJ , 15 N.Y.3d at 154.

By: Jeffrey M. Haber On January 23, 2020, the Appellate Division, First Department, unanimously affirmed the dismissal of fraud-based claims alleged in connection with the purchase of a promissory note that memorialized a $1.5 million loan. Cestone v. Johnson , 2020 N.Y. Slip Op. 00495 (1st Dept. Jan. 23, 2020) ( here ). The decision, though short and concise, addresses a couple of principles this Blog frequently examines: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the oral representations supporting the fraudulent inducement claim. Disclaimer Clauses To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund [Master] 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. Justifiable Reliance New York courts have found that “[w]here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation . ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Cestone v. Johnson Cestone  arose from a $1.5 million loan made by defendant, Holly Bartlett Johnson (“Holly”), to nonparty Worldview Entertainment Holdings Inc. (“Worldview”). Plaintiff, Maria Cestone (“Cestone”), claimed that Holly and her sister, Sarah Johnson (“Sarah”), fraudulently induced her into purchasing the note that memorialized the loan, by failing to disclose that Sarah, a guarantor on the loan, had already repaid Holly the loan prior to the purchase. Defendants argued that Cestone’s fraudulent inducement claims should be dismissed because she agreed in clear and unambiguous terms that she was not relying on any representations other than those set forth in the note agreement. In this regard, under Paragraph 6(b) of the agreement, Celeste represented that she (1) had received and reviewed copies of the note, (2) was a sophisticated party, (3) was able to bear the economic risk associated with the purchase of the note, (4) had adequate information concerning the business and financial condition of Worldview and any other obligor or guarantor under the note necessary to make an informed decision regarding the purchase of the note, (5) had knowledge and experience so as to be aware of the risks and uncertainties inherent in the purchase of the rights and assumption of liabilities contemplated in the agreement, and (6) had independently and without reliance upon defendants, or any agent or representative of defendants, made her own analysis and decision to enter into the note agreement. The motion court granted defendants’ motion and dismissed Cestone’s fraudulent inducement claims.  The Appellate Division, First Department affirmed. The Court held that the motion court “properly dismissed the fraud-based claims based on paragraph 6(b) of the note purchase agreement,” pursuant to which Cestone “specifically disclaimed reliance on the alleged misrepresentation or omission that [she] now claims had defrauded her.” Slip Op. at *1 (citing Danaan Realty , 5 N.Y.2d at 320-321). The Court explained that “[u]nder that provision, plaintiff represented that she had ‘adequate information concerning the business and financial condition of Borrower [Worldview] and . . . guarantor under the Note’ and ‘independently and without reliance upon Seller . . . made her own analysis and decision to enter into this Agreement.’” Id . The Court noted that in addition to Paragraph 6(b), Cestone “also disclaimed reliance on ‘any documents or other information regarding the credit, affairs, financial condition or business of or any other matter concerning the Borrower or any obligor.’” Such disclaimers sufficed to preclude Cestone’s fraud-based claims. The Court also held that “the alleged misrepresentation or omission regarding Sarah’s repayment of the loan was not ‘peculiarly within’ defendants’ knowledge.” Id . (citing Loreley Fin. [Jersey] No. 3 Ltd. v. Citigroup Global Mkts. Inc. , 119 A.D.3d 136, 143 (1st Dept. 2014); Basis Yield , 115 A.D.3d at 137). The Court explained that Cestone, “who was admittedly the sole director of Worldview, as well as the chair of Worldview’s sole shareholder, Worldview Entertainment Holdings LLC, occupied a position that afforded her reasonable access to information about Worldview’s finances, including whether the loan had been repaid by Sarah as the guarantor, before plaintiff purchased the note.” As such, she could not “argue justifiable reliance on defendants’ misrepresentation or omission where she had the means available to ascertain the status of the loan.” ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). Takeaway Although brief in length, Cestone  is notable for its reiteration of the law concerning contractual disclaimers and fraudulent inducement claims. As the Court observed, contractual disclaimers will not preclude a fraudulent inducement claim unless the disclaimers specifically address the subject of the alleged misrepresentation.  In Cestone , the disclaimers relied upon by Cestone were specific enough to preclude the fraudulent inducement claims. Cestone  also reinforces the principle that the courts will not sustain a fraud claim in which the plaintiff fails to avail himself/herself/itself of the means to discover the truth or falsity of the representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation into the veracity of a representation or omission when the aggrieved party has the ability to do so, suffices to dismiss a fraud claim. This is especially so when the plaintiff is a sophisticated party. Cestone  is the most recent example coming out of the First Department to underscore these principles.

By: Jonathan H. Freiberger A basic tenet of contract interpretation is that “agreements are construed in accord with the parties’ intent.” Greenfield v. Philles Records, Inc. , 98 N.Y.2d 562, 569 (2002) (citations omitted); see also SM Owner, LLC v. Envoy Towers Co., L.P. , 245 A.D.3d 973 (2 nd  Dept. 2026). It is equally fundamental that the “best evidence of what parties to a written agreement intend is what they say in their writing.” Greenfield , 98 N.Y.2d at 569 ( quoting Slatt v. Slatt , 64 N.Y.2d 966, 967 (1985); South Shore Eye Care, LLP v. Lane , 242 A.D.3d 792, 793 (2 nd  Dept. 2025). Clear and unambiguous written agreements, therefore, “must be enforced according to the plain meaning of its terms.” South Shore , 242 A.D.3d at 794 (citations and internal quotation marks omitted); see also Greenfield , 98 N.Y.2d at 569. However, implied in every contract is a covenant of good faith and fair dealing in the course of performance. Singh v. City of New York , 40 N.Y.3d 138, 145 (2023). The covenant ensures that a party to a contract will do nothing to “destroy[] or injur[e] the right of the other party to receive the fruits of the contract.” Mahope Family Ltd. P’ship v. Avgush , 220 A.D.3d 850 (2 nd  Dept. 2023) (citations and internal quotation marks omitted). Thus, the duty of good faith and fair dealing requires “that the parties to perform under the contract in a reasonable way.” Cordero v. Transamerica Annuity Service Corp . , 39 N.Y.3d 399, 409 (2023) (citation and internal quotation marks omitted). In this regard, where “the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion.” Id . (citation and internal quotation marks omitted). Such implied obligations are “in aid and furtherance of other terms of the agreement … [and, therefore, n]o obligation can be implied … which would be inconsistent with other terms of the contractual relationship.” Murphy v. American Home Products Corp. , 58 N.Y.2d 293, 304 (1983); see also Cherry Operating LLC v. CPS Fee Co. LLC . , 216 A.D.3d 544, 545 (1st Dept. 2023). The covenant may be breached when a party “exercises a contractual right as part of a scheme to deprive the other party of the benefit of the bargain.” Gutt v. North American Partners in Anesthesia, LLP , 237 A.D.3d 1063, 2066 (2nd Dept. 2025) (citation, internal quotation marks and brackets omitted). The Gutt Court also noted that “[t]echnically complying with the terms of a contract while depriving the plaintiff of the benefit of the bargain may constitute a breach of the covenant of good faith and fair dealing.” Id . (citation and internal quotation marks omitted). For example, 6243 Jericho Realty Corp. v. Autozone, Inc. , 71 A.D.3d 983 (2 nd  Dept. 2010), involved a lease dispute between a landlord and potential tenant. Under the lease, the tenant had a period of time to obtain certain municipal approvals; absent which the tenant could unilaterally cancel the contract. Having not received the contemplated approvals, the tenant, as permitted under the lease, provided notice of cancellation to the landlord. After trial, the tenant was found to have breached the covenant by failing to make a good faith effort to obtain the approvals. The ruling was affirmed by the Second Department. Against this backdrop, we discuss Zormati v. Citibank ,  a case decided on March 25, 2026, by the Appellate Division, Second Department. The plaintiff in Zormati (“Borrower”) borrowed funds from Citibank and secured the repayment obligation with a mortgage on real property. Subsequently, US Bank recorded a mortgage on the same property and, thereafter commenced an action to foreclose its mortgage and named Citibank, but not the Borrower, as a defendant (the “Foreclosure Action”). Citibank defaulted in the Foreclosure Action. The Borrower commenced the Zormati action and alleged that Citibank breached its loan agreement by failing to the Borrower notice of the Foreclosure Action or otherwise defending the priority of the Citibank mortgage. The motion court granted Citibank’s motion to dismiss the complaint. The Second Department affirmed. First the Court found that Citibank did not breach the loan agreement because it contained no requirement that Citibank notify the Borrower of the Foreclosure Action or protect the priority of its mortgage. Second, the Court found that there was no breach of the duty of good faith and fair dealing because: the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the cause of action to recover damages for breach of the implied covenant of good faith and fair dealing by submitting evidence that established that they did not withhold the benefits of, or seek to prevent the performance of, the loan agreement. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Kim v. XP Sec., LLC , 2026 N.Y. Slip Op. 01731 (1st Dept. Mar. 24, 2026), the Appellate Division, First Department affirmed the denial of summary judgment in a wrongful termination action, reiterating settled principles of contract interpretation: clear, unambiguous agreements between sophisticated, counseled parties are enforced according to their plain meaning, without recourse to extrinsic evidence. The plaintiff, a senior executive employed under a five‑year agreement permitting termination only for cause, challenged his discharge following an internal email exchange. The employer’s reliance on alleged misconduct and insubordination raised triable issues of fact, including whether workplace policies were uniformly enforced and whether the stated grounds for termination were pretextual. Because factual disputes remained as to whether the conduct satisfied the contractual definition of “cause,” summary judgment was properly denied. Under well-settled New York law, the “best evidence of what parties to a written agreement intend is what they say in their writing.” [1]  A “written agreement that is complete, clear, and unambiguous on its face must be enforced according to the plain meaning of its terms.” [2]  Moreover, when “interpreting a commercial contract negotiated by and entered into at arms length between sophisticated business people, represented by an attorney, a court must enforce the agreement according to its terms, and extrinsic and parole evidence is not admissible to create an ambiguity in a written agreement that is complete, clear, and unambiguous on its face.” [3]   With these principles in mind, we examine Kim v. XP Sec., LLC . Defendant, a broker-dealer, hired plaintiff in 2017 to be the head of its Asia Desk. At the time he was hired, plaintiff was a professional with decades of experience in the emerging markets foreign exchange (Forex) community. He had conceived a technology-based solution, to be called HUBL, designed to radically improve Forex trading, and was looking for a firm to provide the support necessary to develop it. Defendant hired plaintiff specifically for the purpose of developing, at defendant’s expense, a computerized Forex technology “stack” to more efficiently manage bid price points in the industry. Defendant represented to plaintiff that it had the technology and infrastructure necessary to accomplish this objective.  Plaintiff was hired pursuant to a five-year employment agreement (the “Agreement”), which provided that he could only be terminated for “cause.” The Agreement defined “cause” as, among other things, insubordination and “willful or gross serious misconduct” in the performance of an employee’s duties and responsibilities, including conduct in disregard of defendant’s written rules or policies. Defendant’s employee handbook, as well as its separate written ethics code, prohibited employees from engaging in offensive or disruptive behavior, including threatening employees; using abusive or vulgar language; interfering with others in the performance of their duties; engaging in acts of disloyalty to defendant, including but not limited to slandering or disparaging defendant, its officers and/or employees; and from displaying discourteous or inappropriate conduct with clients and customers.  After plaintiff joined the firm, he learned that it did not have the promised resources necessary to develop HUBL. In late January 2020, defendant’s management notified the firm’s entire New York office via email that a senior employee would be leaving and that defendant would be closing down parts of its business, including plaintiff’s division. The email also directed the entire New York office that “nothing beyond the announcement” of the employee’s departure “[was] to be discussed/commented outside of [the firm].” Plaintiff sent an email to the employees in the New York office, pointing out that they had been instructed not to discuss this change, but that the employees in the London office had not been given the same instructions. He suggested that the two offices should be given the same instructions to avoid confusion. On January 27, 2020, defendant suspended plaintiff and barred him from its offices for his “inappropriate” and “insubordinate” email. By letter dated February 27, 2020, defendant purported to terminate plaintiff “for cause,” specifically citing his “common law disloyalty” and “willful or gross serious misconduct” as referred to in certain provisions of the Agreement. The letter also made general allegations that plaintiff was “derisive” and “rude.”  Plaintiff commenced the action, which, as amended, alleged (1) defendant’s breach of contract for not dedicating any funds to HUBL; (2) defendant’s breach of the covenant of good faith and fair dealing for not dedicating any funds to HUBL; (3) fraud in the inducement against all of the defendants, because of their false representations to plaintiff that defendant had the technological tools and skills that would enable it to support plaintiff’s development of HUBL; (4) declaratory judgment against defendant that the conduct plaintiff was accused of did not amount to “common law disloyalty” or “willful or gross misconduct”; and (5) breach of contract against defendant for its “wrongful termination of [him] for ‘cause.’ ” Defendant moved for summary judgment dismissing plaintiff’s breach of contract cause of action for wrongful termination. The motion court denied the motion. The First Department affirmed, holding that the motion court properly denied the motion. [4]  The Court noted that since the Agreement was “[a]n arm’s length commercial contract executed by counselled, sophisticated parties,” it “should be enforced according to its terms.” [5]   In considering the propriety of the motion court’s decision and order, the Court framed the dispute as whether the specific conduct identified as the basis for termination – an internal email response – satisfied the contractual definition of “cause,” rather than whether plaintiff had engaged in objectionable conduct more generally. In that regard, defendant contended that plaintiff’s termination complied with the Agreement based on a history of allegedly offensive language toward colleagues and a client, conduct for which plaintiff had previously been admonished and disciplined. However, noted the Court, plaintiff was not terminated for that conduct. Rather, defendant discharged plaintiff for alleged insubordination arising from an internal email responding to a directive that the departure of a senior manager not be discussed outside defendant’s New York office. In that response, plaintiff merely suggested that the same instruction be communicated to the London office to avoid confusion. Whether this conduct, said the Court, viewed in context, “constituted insubordination or otherwise satisfied the Agreement’s contractual standard for termination ‘for cause’ present[ed] a factual question, particularly where the employer relied on prior conduct not identified as the basis for termination.” [6]   As a result, the Court held that “[o]n th[e] record [before it] there [were] triable issues of fact that preclude[d] summary judgment in [defendant]’s favor.” [7]  First, said the Court, “there [were] questions of fact as to whether the rules or policies on which [defendant] relie[d] were followed and uniformly enforced - in particular, its rules prohibiting ‘offensive or disruptive behavior, including . . . using abusive or vulgar language’ and ‘discourteous or inappropriate conduct with clients/customers.’” [8]  The Court noted that “[m]ultiple [firm] employees testified that emotional exchanges, yelling, cursing, and demeaning language, including some of the same slurs plaintiff was] alleged to have used, were common among employees at [the firm].” [9]  “This testimony,” concluded the Court, “raise[d] questions as to whether [plaintiff]’s rude behavior was in line with the prevailing culture at [the firm] and whether [defendant]’s reference to it as a reason for his termination was pretextual.” [10]    Second, held the Court, “there [were] questions of fact as to whether the financial burden associated with the promises [defendant] made to plaintiff at the time of his hiring was the reason [defendant] examined more closely plaintiff’s offensive work comments and chose termination as the discipline to impose.” [11]   Finally, said the Court, “there [were] questions of fact as to whether plaintiff’s email sent solely to the members of the New York office concerning a management change constituted an ‘insubordinate’ or ‘inappropriate’ response to an email directing employees not to discuss the matter outside the New York office.” [12]   Takeaway In New York, plain meaning and ambiguity perform distinct but complementary roles, and understanding their limits is critical to explaining how courts approach disputes like the one in Kim . As the Court noted, when a contract is complete, clear, and unambiguous on its face, courts enforce it as written, without resort to extrinsic evidence. Ambiguity is not created merely because the parties disagree about the contract’s effect or because one party wishes the language were different. Nor do courts consider outside evidence to manufacture ambiguity where the text reasonably bears only one meaning. The limit of focusing solely on plain meaning, however, lies in its application. Even where contractual language is unambiguous, disputes often arise over whether the conduct at issue falls within the scope of that language. This is not textual ambiguity but a factual dispute – a question of whether undisputed terms have been satisfied by disputed conduct. New York courts recognize that enforcing a contract according to its terms does not require accepting a party’s characterization of events. Instead, courts examine whether the conduct relied upon reflects the parties' intent as set forth in the contract. Accordingly, ambiguity is carefully confined. Courts do not relax plain‑meaning rules to accommodate after‑the‑fact explanations. But they also do not treat clear and unambiguous language as solely dispositive when the dispute between the parties concerns conduct or performance. In Kim , the Court did not find the Agreement ambiguous. To the contrary, the Court held that the Agreement – negotiated by sophisticated, counseled parties – was clear in permitting termination only for “cause.” Under New York law, that clarity foreclosed any resort to extrinsic evidence to alter or modify the contractual standard. Therefore, defendant could not rely on generalized notions of business judgment, workplace norms, or equitable considerations to justify termination outside the language of the Agreement. At the same time, the Court recognized the limit of plain meaning: while the meaning of the contract was fixed as a matter of law, whether plaintiff’s conduct satisfied that meaning was not. Defendant attempted to defend the termination by invoking a broader narrative of prior misconduct and disciplinary history. The Court rejected that framing, focusing instead on the conduct actually cited as the basis for discharge – an internal email suggesting that employees in another office receive the same instruction to avoid confusion. That focus reflects an important principle of contract interpretation: disagreement over whether conduct meets a contractual standard is not textual ambiguity, but a factual question concerning conduct and performance. Therefore, because reasonable people could differ on whether the email constituted “insubordination” or “willful or gross misconduct” within the meaning of the Agreement, the case could not be resolved on summary judgment. ___________________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions and not on matters handled by the firm. ____________________________________________ [1] Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). [2] Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). [3] Pavarini McGovern, LLC v. Tag Court Sq., LLC , 62 A.D.3d 680, 680 (2d Dept. 2009) (citing Madison Ave. Leasehold, LLC v. Madison Bentley Assoc. LLC , 8 N.Y.3d 59, 66 (2006)). [4] Slip Op. at *1. [5] Id.  (citing Madison Ave ., 8 N.Y.3d at 66). [6] Id. [7] Id. [8] Id. [9] Id. [10] Id. [11] Id. [12] Id.

On May 30, 2018, Minnesota became the most recent state to join the list of states filing lawsuits in whistleblower litigation against Arizona-based Insys Therapeutics, Inc. ("Insys") ( INSY.O ): Arizona, New Jersey, New York, and North Carolina. Previous cases have been settled by Oregon, New Hampshire, Illinois, and New Hampshire for $9.45 million. The Minnesota action, which was filed in Hennepin County District Court in Minneapolis, comes as state attorneys general are seeking to hold pharmaceutical companies responsible for the opioid epidemic sweeping the nation.   According to the U.S. Centers for Disease Control and Prevention, in 2016 opioids, including heroin and prescription painkillers, contributed to 42,249 deaths.  The Minnesota lawsuit accuses Insys of encouraging doctors to prescribe Subsys, the powerful fentanyl-based pain medication, which was approved by the FDA only for treating cancer patients who suffered from severe nerve pain. According to the complaint, internal emails showed that Insys encouraged its sales force to “camp out” in doctor’s offices to induce them into prescribing the drug. The company allegedly paid “bonuses” of up to $3,000 to increase sales and paid two physicians "speaker fees" totaling $43,000.  The complaint further alleges that the 36 speaking events at which they were paid were “shams” to bypass state laws prohibiting payments by drug companies to doctors. “I’ve see a lot of greedy conduct by pharmaceutical companies in this office,” Swanson said at a news conference. “This conduct in this case is as brazen as anything you could imagine a pharmaceutical company doing.” The Minnesota Board of Pharmacy, which joined in the Minnesota lawsuit, also commenced an administrative action seeking civil penalties. Swanson said her office is continuing to investigate other opioid manufacturers and distributors and their alleged misrepresentations about the safety of prescribing opioids to patients. “Stay tuned for that,” Swanson said. “We are knee-deep in that investigation.” On the same day that the Minnesota lawsuit was filed, Michelle Breitenbach, a former Insys sales representative, pleaded guilty in a superior court in New Jersey, to participating in a scheme to bribe physicians to prescribe Subsys.  Breitenbach faces up to five years in prison for a second-degree charge of conspiracy to commit commercial bribery. The Whistleblower Action In 2013, Maria Guzman, a former Insys sales representative, commenced a qui tam action in the United States District Court for the Central District of California (No. CV 13-5861), in which she alleged that the company was engaged in illegal sales and marketing practices of its opioid drug, Subsys.  The lawsuit was brought under the False Claims Act ("FCA"). The FCA allows private whistleblowers to sue on behalf of the government and share in any recovery. here.=">here."> Guzman contended that Insys engaged in a nationwide scheme to defraud Medicare and Medicaid by inducing doctors through kickbacks that ranged from cash to favors to sex, to prescribe large doses of Subsys for federally insured patients who never should have received the drug.  Using a mantra of “pain is pain,” Guzman alleged that Insys illegally pushed the prescription of Subsys for lesser off-label conditions, such as back pain and migraines. Guzman was fired in 2013 after objecting to the scheme to defraud. The U.S. Department of Justice ("DOJ")  subsequently intervened in Guzman's qui tam action, saying that it would take over part of the litigation, specifically the claims against Insys for kickbacks, off-label marketing, and false claims about patients’ conditions.  The Federal Charges The government intervention comes on the heels of related criminal cases against various former sales representatives, executives, and practitioners who were employed by Insys, as well as its billionaire founder, John Kapoor ("Kapoor").   Kapoor was arrested and charged with several counts of conspiracy; in particular, conspiracy to commit mail and wire fraud, RICO conspiracy, and conspiracy to violate the Anti-Kickback law. “In the midst of a nationwide opioid epidemic that has reached crisis proportions, Mr. Kapoor and his company stand accused of bribing doctors to overprescribe a potent opioid and committing fraud on insurance companies solely for profit,” acting U.S. Attorney William D. Weinreb said in a statement. “Today's arrest and charges reflect our ongoing efforts to attack the opioid crisis from all angles. We must hold the industry and its leadership accountable - just as we would the cartels or a street-level drug dealer.” The government charges stem from a superseding indictment that was unsealed by the U.S. Attorney's office in Massachusetts.  That office had arrested and charged six former company executives in December 2016 with, among other things, conspiracy to defraud health insurers.  The six former executives are: Michael Babich, Chief Executive Office; Alec Burlakoff, Vice President of Sales; Richard M. Simon, National Director of Sales; Sunrise Lee and Joseph A. Rowan, Regional Sales Directors; and Michael J. Gurry, Vice President of Managed Markets. The DOJ alleged that Kapoor and the six executives conspired to bribe doctors around the country to prescribe Subsys.  The indictment also alleged that the defendants conspired to defraud and mislead health insurance providers, who declined approval of payments when physicians prescribed Subsys for off-label conditions. “As alleged, these executives created a corporate culture at Insys that utilized deception and bribery as an acceptable business practice, deceiving patients, and conspiring with doctors and insurers,” Harold H. Shaw, special agent in charge of the Federal Bureau of Investigation, Boston field division, said in a statement. Insys is attempting to resolve the federal charges. The company, which is under new management and has claimed to have taken “necessary and appropriate steps to prevent past mistakes from happening in the future,” estimates that a resolution could cost at least $150 million. Doctors Get Swept Up In Criminal Charges Last month, a Florida doctor admitted that he received kickbacks from Insys. Dr. Michael Frey ("Frey") pleaded guilty to conspiring to receive kickbacks from a medical equipment provider and a pharmaceutical sales representative in exchange for writing prescriptions for Subsys. Frey admitted that Insys paid him kickbacks to participate in bogus speaking engagements to induce him to prescribe Subsys. "This was an alarming case of a physician who abused his position of trust for money," U.S. Attorney Chapa Lopez for the Middle District of Florida said in a statement. Frey agreed to cooperate with authorities and to pay $2.8 million as part of a related civil settlement.

In March, the IRS and two whistleblowers reached a settlement to a long-pending dispute regarding the amount of money that an IRS whistleblower is entitled to receive for successfully reporting a tax fraud or other tax underpayment. Under the IRS Whistleblower Reward Program , the IRS rewards a whistleblower who provides information to the IRS concerning the underpayment of taxes by either an individual or business that leads to the recovery of money and meets certain other conditions. The whistleblower is entitled to an award between 15-30 percent of “the proceeds collected as a result of the action.” 26 U.S.C. § 7623(b)(1).  The IRS Whistleblower Tip that Started it all The dispute began in 2013 when two whistleblowers filed a tip with the IRS that led to the question about what money counts towards the “proceeds collected as a result of the action.” Eventually, their tip led to the recovery of $20 million in restitution and $54 million in criminal fines and civil forfeiture from a Swiss Bank that helped U.S. taxpayers evade their taxes. (The court seize the assets of the bank that were deemed to be involved in the crime(s).) Although there never existed an issue concerning the whistleblowers’ entitlement to a percentage of taxes that the IRS collected as a result of their tip, the whistleblowers argued that they were also entitled to a portion of the fines and assets that the government seized (civil forfeiture). The whistleblowers argued that the "proceeds collected" should include the criminal fines and civil forfeiture in addition to the $20 million restitution. The IRS disagreed. In 2015, the United States Tax Court held that under Section 7623(b)(1) of the Internal Revenue Code ("IRC"), the two whistleblowers could continue to pursue their awards based upon a percentage of the “proceeds collected.” Thereafter, the IRS and the whistleblowers reached a settlement in which the IRS agreed to pay the whistleblowers 24 percent of the unpaid taxes that resulted from the original tip.  Notwithstanding, both whistleblowers argued that the “proceeds collected” should include proceeds -- that is, the criminal fines and civil forfeiture in addition to the $20 million restitution. Court’s Definition of “Collected Proceeds” On August 3, 2016, the Tax Court ruled that the whistleblowers could recover a portion of the criminal fines and civil forfeiture monies recovered by the government. The Tax Court concluded that there was nothing in Title 26 of the IRC to limit the scope of the definition of "proceeds collected" to only those proceeds recovered under the IRC:  “We herein hold that the phrase ‘collected proceeds’ is sweeping in scope and is not limited to amounts assessed and collected under title 26.” The Court explained that Section 7623(b)(1) was created to incentivize would-be whistleblowers to come forward and report tax underpayments and create a more robust program “in response to the ineffectiveness of the prior, discretionary whistleblower program, now codified as section 7623(a).” Expanding Upon the Scope of IRS Whistleblower Award The IRS objected to the decision and appealed to the U.S. Court of Appeals for the District of Columbia. However, before the Court was able to hear the case, the IRS and the two whistleblowers reached a settlement.  The IRS agreed to dismiss the appeal and pay the whistleblowers an additional $12.9 million (24% of the criminal fines and civil forfeiture). Because the settlement was reached before the D.C. Circuit could hear the case, the Tax Court opinion remains in effect.  As such, the Tax Court's definition of “proceeds” under Section 7623(b)(1) includes all proceeds that the government receives, including criminal fines and assets seized through civil forfeiture. Takeaway As the Tax Court observed, the expansive definition of "proceeds collected" maintains the incentive to would-be whistleblowers to come forward and report tax fraud and other tax underpayments. This case, therefore, serves as the basis upon which IRS whistleblowers can receive a larger award when criminal fines and forfeitures are recovered, in addition to unpaid taxes, as a result of their tip.

Former Tesla, Inc. ("Tesla") (NASDAQ: TSLA) employee, Martin Tripp ("Tripp"), has been sued in Nevada federal court by the car behemoth for allegedly hacking into the company’s manufacturing system and sharing trade secrets, claiming that he had tried to sabotage the company. Tripp denies wrongdoing, contending that he was trying to alert the public about alleged improper practices that the company was engaging in, including using punctured batteries in cars, making excess waste, and participating in unsustainable practices and procedures.  Tripp said that he spoke out only because he saw “some really scary things” at Tesla.  An Employee Gone Rogue? Telsa claims that Tripp intentionally tried to injure the company, stating that his actions were “willful and malicious” and “done with the deliberate intent to injure Tesla’s business.” (The complaint can be found here ). The company alleged that Tripp had hacked its Manufacturing Operating System and transferred several gigabytes worth of confidential and proprietary data, including photos and a video of Tesla’s battery module production line, to outside entities. Tesla further alleged that Tripp had tried to recruit additional sources inside the company's Gigafactory 1 battery plant to share data outside the company. Tesla has requested access to Tripp’s computers, USB drives, and cloud accounts, in order to measure the extent to which trade secrets were taken. Tesla is suing Tripp for violations of the Defend Trade Secrets Act of 2016 (18 U.S.C. § 1836, et seq.), the Nevada Uniform Trade Secrets Act, and the Nevada Computer Crimes Law, as well as breach of contract and breach of fiduciary duty. Tesla claims to have suffered “cruel and unjust hardship,” including “lost business, lost profits, and damage to its goodwill.” Tesla is seeking unspecified compensatory and punitive damages. Tripp has denied tampering with any software and contends that he did not have the ability to make the changes in questions. He claims that he was simply whistleblowing ( i.e. , telling the public that,  among other things, Tesla knowingly manufactured batteries with punctured holes and used scrap and waste material in its vehicles).   During an interview with The , Tripp confirmed that he did, in fact, serve as an anonymous source for the June 4, 2018 article in  titled “Internal Documents Reveal Tesla is Blowing Through an Insane Amount of Raw Material and Cash to make Model 3s, and Production is Still a Nightmare.” Tesla has dismissed Tripp's contentions as false, maintaining that Tripp vastly exaggerated his claims in order to hurt the company.  To Tesla, Tripp is a disgruntled former employee who is lashing out because he was passed over for a promotion due to job performance problems and a tendency to be combative and disruptive towards colleagues.  Tripp argues otherwise, claiming that he was fired for whistleblowing. “I am being singled out for being a whistleblower . I didn’t hack into the system. The data I was collecting was so severe that I had to go to the media,” he told CNNMoney.  Tripp Files A Claim With The SEC On July 6, 2018, Tripp filed a whistleblower claim with the Securities and Exchange Commission ("SEC"), alleging that Tesla misled investors and put its customers at risk. In a statement issued by Tripp's lawyer about the filing, Tripp claims that Tesla knowingly manufactured batteries with punctured holes possibly impacting hundreds of cars on the road; misled the investing public as to the number of Model 3s actually being produced each week by as much as 44 percent; and lowered vehicle specifications and systemically used scrap and waste material in vehicles, all to meet production quotas. If his tip results in a successful enforcement action, Tripp would be eligible to receive an award from the SEC for his information. Under the SEC Whistleblower Program , whistleblowers who provide the SEC with original information that leads to a successful enforcement action in which the SEC recovers more than $1 million are eligible to receive an award that ranges between 10 percent to 30 percent of the money collected. Since the inception of its whistleblower program in 2011, the SEC has awarded more than $266 million to whistleblowers.

By:  Jeffrey M. Haber This Blog has written about Ponzi schemes on numerous occasions. A Ponzi scheme is a type of investment fraud where returns to earlier investors are paid using investment capital from new or existing investors, rather than from legitimate profits earned through the enterprise’s business activities. Ponzi schemes persist by exploiting trust, promising high returns with little risk, and using money from new or existing investors to pay “profits” to earlier ones. In today’s article, we examine an enforcement action brought by the SEC against David J. Bradford (“Defendant B”) and Gerardo L. Linarducci (“Defendant L” and together with Defendant B, the “Defendants”). The SEC brought the action Defendant B, the former Chief Operating Officer of Drive Planning, LLC (“Drive Planning”), and Defendant L, the former Managing Partner of Drive Planning and head of its Indiana branch office, for their roles in an alleged $300 million Ponzi scheme related to Drive Planning’s “Real Estate Acceleration Loans” program. The SEC previously obtained a preliminary injunction, asset freeze, and other emergency relief pursuant to an emergency action against Drive Planning and its founder and CEO, Russell Todd Burkhalter, in connection with the alleged scheme. Without admitting or denying the allegations in the complaint, Defendant B consented to the entry of a final judgment, subject to court approval. According to the SEC, from 2020 through at least June 2024, Burkhalter ran a Ponzi scheme through Drive Planning, selling unregistered securities in the form of “Real Estate Acceleration Loans” (“REAL”), which Burkhalter described in promotional materials as a “bridge loan opportunity promising 10% in 3 months.”  Defendants allegedly encouraged people to tap their savings, their IRAs, and even lines of credit, to invest in REAL. According to the SEC, as of early May 2024, the alleged scheme was receiving applications for over one million dollars every day, driven by an organization of more than 100 sales agents.   According to the SEC, Defendants and the sales agents they trained falsely told REAL investors that Drive Planning pooled REAL investments and loaned that money out to property developers and/or used it to enter joint ventures with property developers, thereby earning the profits necessary to pay returns to REAL investors.   In fact, said the SEC, Drive Planning did not have a legitimate profitable enterprise capable of generating the sums necessary to pay the promised 10 percent returns every three months.  Instead, the SEC alleged that, “in classic Ponzi fashion, Burkhalter used money from new investors to pay the supposed ‘returns’ to existing investors and to maintain a luxurious lifestyle.” As of August 2024, when the SEC obtained emergency relief from the Court to stop the alleged fraud, over 2,000 investors had invested more than $300 million in the alleged scheme. According to the SEC, each Defendant played a crucial role in perpetrating the alleged Ponzi scheme. Each Defendant served as a senior executive in Drive Planning’s Indiana branch office, along with Burkhalter. In furtherance of the alleged Ponzi scheme, among other things, Defendants solicited investors in REAL; managed teams of sales agents who sold the investment; appeared in videos and social media posts promoting Drive Planning’s business; and conducted training sessions for agents to boost investments in REAL. In connection with their sales of REAL, Defendants allegedly told investors, among other things, that the promised 10% rate of return was guaranteed; investors held an interest in underlying collateral as part of their investment; Drive Planning partnered with real estate developers in profit-sharing agreements; and profits from those partnerships funded the promised return to REAL investors. According to the SEC, these representations were false. The SEC claimed that Defendants allegedly knew they were false or were, at least, severely reckless in making the statements. The SEC alleged that, in truth, Drive Planning did not generate significant profits from real estate deals. Instead, said the SEC, the company used most of the investor funds to pay fictitious returns to other investors, support Burkhalter’s extravagant lifestyle, and pay millions of dollars in compensation to Defendants and the sales agents they oversaw. According to the SEC’s complaint , each Defendant played an integral role in fueling the alleged REAL fraud. The SEC alleged that Drive Planning’s records showed that (a) Defendant B sold more than $35 million in REAL investments and his sales team sold more than $100 million, and (b) Defendant L sold more than $13 million in REAL investments and his sales team sold more than $30 million. The SEC said that Defendants received millions of dollars in compensation for selling REAL investments. Between 2020 and 2024, Drive Planning paid Defendant B approximately $26 million in total compensation. Between 2022 and 2024, Drive Planning paid Defendant L $7.5 million in total compensation. By engaging in the conduct described in the complaint , the SEC alleged that Defendants violated Sections 5(a), 5(c), 17(a)(l), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 (“Securities Act”) <15 u.s.c. §§ 77e(a), 77e(c), 77q(a)(l), 77q(a)(2), and 77q(a)(3)> ; Sections l0(b) and 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) <15 u.s.c. §§ 78j(b), 78o(a)> ; and Rules 10b-5(a), (b), and (c) thereunder <17 c.f.r. §§ 240.10b-5(a), (b), and (c)> . The SEC also alleged that Defendant L aided and abetted Burkhalter’s and Drive Planning’s alleged violations of Section 17(a) of the Securities Act <15 u.s.c. § 77q(a)> , Section l0(b) of the Exchange Act <15 u.s.c. § 78j(b)> , and Rules 10b-5(a), (b), and (c) thereunder <17 c.f.r. § 240.10b-5(a), (b), and (c)> . The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against Defendants. Without admitting or denying the allegations in the complaint, Defendant B consented to the entry of a final judgment, subject to court approval, in which he agreed to be permanently enjoined from violating the charged provisions of the federal securities law and from participating in the issuance, purchase, offer, or sale of any security, except for purchases or sales in his personal accounts, and agreed that that court will order him to pay disgorgement with prejudgment interest and a civil penalty in an amount to be determined by the court upon motion by the SEC. A copy of the litigation release announcing the filing of the complaint can be found here . _______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. To find such articles, please visit the Blog tile on our website and search for “Ponzi schemes” or any SEC enforcement action issue that may be of interest to you.