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In mid-December 2020, the Securities and Exchange Commission (“SEC” or “Commission”) issued an investor alert ( here ), warning of “Investment Scam Complaints on the Rise.” In the alert, the SEC urged investors to be on the lookout for investment scams, such as Ponzi schemes, fake CD scams, bogus stock promotions, and community-based financial scams. The SEC said that during the COVID-19 pandemic it had experienced a significant uptick in tips, complaints, and referrals involving investment scams.  Today, we examine SEC v. GPB Capital Holdings, LLC , a case involving a long-running scheme to defraud, which had Ponzi-like attributes, and violations of the whistleblower protection laws. here,=">here," and="and" >here.=">here."> SEC v. GPB Capital Holdings, LLC  As explained in the SEC’s February 4, 2021, press release ( here ), the Commission charged three individuals and their affiliated entities with running a Ponzi-like scheme, which raised over $1.7 billion from securities issued by a New York-based asset management firm and registered investment adviser, GPB Capital Holdings, LLC (“GB Capital”).  The SEC also charged GPB Capital with violating the whistleblower protection laws.  According to the SEC’s complaint ( here ), David Gentile (“Gentile”), the owner and Chief Executive Officer of GPB Capital, and Jeffry Schneider (“Schneider”), the owner of GPB Capital’s placement agent Ascendant Capital, LLC (“Ascendant Capital”), lied to investors about the source of money used to make an 8% annualized distribution payment to investors.  According to the SEC, these defendants, along with Ascendant Alternative Strategies, LLC (“Ascendant Alternative Strategies”), which marketed GPB Capital’s investments, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies.  The SEC alleged that GPB Capital used investor money to pay portions of the annualized 8% distribution payments. GPB Capital and Gentile, with the assistance of Jeffrey Lash (“Lash”), a former managing partner at GPB Capital, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital to perpetuate the deception by giving the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than was possible. The SEC further alleged that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider.  As alleged, the fraudulent scheme continued for more than four years in part because GPB Capital kept investors in the dark about the true financial condition of the limited partnerships, failing to deliver audited financial statements, and failing to register two of its funds with the SEC.  GPB Capital allegedly violated the whistleblower provisions of the securities laws by including language in termination and separation agreements that impeded individuals from coming forward to the SEC, and by retaliating against a known whistleblower. Last="--> Last" year,="year," we="we" wrote="wrote" about="about" an="an" action="action" which="which" amended="amended" its="its" complaint="complaint" add="add" because="because" defendants="defendants" sought="sought" silence="silence" potential="potential" whistleblowers="whistleblowers" from="from" coming="coming" forward="forward" with="with" information="information" their="their" alleged="alleged" wrongdoing="wrongdoing" ( here).=">here)."> “As alleged in our complaint, the defendants told investors that they would be paid distributions from profits of the portfolio companies when, in reality, many of the payments were being made from the investors’ own funds,” said Richard Best, Director of the SEC’s New York Regional Office.  “This action shows our continued pursuit of those who deceive investors and conceal their misconduct to reap profits for themselves.” Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblower protections are a cornerstone of the SEC’s whistleblower program. The charges filed today reinforce the Commission’s commitment to protecting whistleblowers from retaliation and attempts to stifle the free flow of information to the Commission about possible securities law violations.” The SEC filed its complaint in the United States District Court for the Eastern District of New York. The Commission charged Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies, and AscendReant Capital with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (“Exchange Act”), and Lash with aiding and abetting certain of those violations.  The complaint also charged GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 (“Adviser’s Act”) and charged GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules.  The SEC is seeking disgorgement of ill-gotten gains, plus prejudgment interest and penalties.

his BLOG has addressed too may issues regarding residential mortgages to mention.  A mortgage foreclosure action “is equitable in nature and triggers the equitable powers of the court … nce equity is invoked, the court’s power is as broad as equity and justice require.”  U.S. Bank Nat. Assoc. Losner , 145 A.D.3d 935, 937-38 (2 nd Dep’t 2016) (numerous citations and internal quotation marks omitted).  For example, due to the equitable nature of mortgage foreclosure actions, “the recovery of interest is within the court’s discretion<,which> will be governed by the particular facts in each case, including wrongful conduct by either party such as where the plaintiff’s conduct has prejudiced the defendant.”  People’s United Bank v. Patio Gardens III, LLC , 189 A.D.3d 1622 (2 nd Dep’t 2020) (numerous citations and internal quotation marks omitted).  Using its equitable powers, the Court in Citicorp Trust Bank, FSB v. Vidaurre , 155 A.D.3d 934 (2 nd Dep’t 2017), “toll and cancel interest that accrued” because “plaintiff failed to explain its lengthy delay in prosecuting this foreclosure action.”  Citicorp , 155 A.D.3d at 935 (citations omitted). On February 9, 2021, the Appellate Division, First Department, decided U.S. Bank, N.A. v. Cordero , a residential mortgage foreclosure action in which it used its equitable powers to prevent a lender from collecting excessive fees, charges and interest from a borrower.  Lender, in Cordero, commenced a foreclosure action, but the borrower sold the property before a referee was appointed to compute the amounts due.  In order to facilitate the July 26, 2019 closing of the sale, “defendant paid the amount sought by plaintiff in accordance with a third payoff statement dated July 25, 2019.”  Within a week of the closing, borrower filed a motion for an accounting in which he alleged “that he paid excessive legal fees, penalty interest, deferred interest, fees for a temporary modification that he never executed, and made certain payments that were never credited to the loan.”  The motion was granted, and supreme court referred the matter to a referee to compute the amounts actually due.  Lender appealed and the First Department held that supreme court “providently exercised its discretion in granting defendant’s motion for an accounting.” The Court rejected lender’s argument that equity is inapplicable because borrower defaulted and sold the premises for “$60,000 more than the payoff amount,” finding that the argument “is without merit because it ignores defendant’s argument that plaintiff received more than it was entitled to receive under the mortgage.” Further, the Court addressed and rejected lender’s arguments that the voluntary payment doctrine, equitable estoppel and waiver barred the accounting even though those arguments were “improperly raised for the first time on appeal.” This BLOG has analyzed the voluntary payment doctrine < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> , which “bars the recovery of payments that are voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law”.  (Citation and internal quotation marks omitted.)  The application of the voluntary payment doctrine was rejected because borrower made several “written protests” to lender.  The Court also found that it was not demonstrated that borrower had “full knowledge of the facts necessary to invoke the voluntary payment doctrine,” because “the bare bones July 25, 2019 payoff statement does not reflect any itemization for legal fees.” Equitable estoppel is “’imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party's words or conduct, has been misled into acting upon the belief that such enforcement would not be sought.’”  (Quoting Nassau Trust Co. v Montrose Concrete Prods.Corp . , 56 N.Y.2d 175, 184 (1982).)  Lender argued that “in reliance on defendant’s multiple requests for payoff statements it abstained from prosecuting the action, accepted the full payoff amount, and discharged the mortgage” and that it “suffered prejudice because it incurred ongoing litigation costs and fees.”  In rejecting the estoppel argument, the Court stated: Plaintiff’s estoppel argument is without merit because plaintiff’s purported reliance is not justifiable in light of defendant’s written protests. In addition, plaintiff’s reliance argument fails because plaintiff was required by law to produce a payoff statement after defendant demanded one under Real Property Law § 274-a . Moreover, plaintiff has not established that in the interest of fairness, equitable estoppel should bar a legal determination of whether the amount defendant paid was in fact due under the mortgage merely because defendant defaulted in making mortgage payments and was able to sell the property to avoid foreclosure. Waiver is “the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable.”  (Quoting Nassau Trust , 56 N.Y.2d at 184.)  Because borrower made numerous written protests, “it cannot be said that defendant voluntarily and intentionally abandoned his right to challenge the payoff amount.”

It is well settled that communications between an attorney and a client for the purpose of obtaining legal advice are privileged and not discoverable unless the privilege is deemed to have been waived by the client. Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP , 52 A.D.3d 370, 374 (1st Dept. 2008) (citing Jakobleff v. Cerrato, Sweeney & Cohn , 97 A.D.2d 834, 835 (2d Dept. 1983)).  A client who voluntarily testifies to a privileged matter, who publicly discloses such matter, or who permits his attorney to testify regarding the matter is deemed to have impliedly waived the attorney-client privilege. Veras Inv. Partners , 52 A.D.3d at 375 (citations omitted). A client is also deemed to have waived the privilege when it affirmatively places the subject matter of its privileged communication “at issue” in the litigation, “so that invasion of the privilege is required to determine the validity of the ’s claim or defense, and application of the privilege would deprive the opposing party of vital information. Id. (citing Deutsche Bank Trust Co. of Ams. v. Tri-Links Inv. Trust , 43 A.D.3d 56, 63-64 (1st Dept. 2007)).  Whether the attorney-client privilege was waived by a party to a litigation was the subject of Securitized Asset Funding 2011-2, Ltd. v. Canadian Imperial Bank of Commerce , 2021 N.Y. Slip Op. 00815 (1st Dept. Feb. 9, 2021) ( here ). Securitized Asset Funding arose out of a payment dispute between parties to a complex note transaction. During discovery, plaintiff/counterclaim-defendant Securitized Asset Funding 2011-2, Ltd. and counterclaim-defendants Securitized Asset Funding 2009-1, Ltd., Promontoria Europe Investments XXIII LDC, and CSMC 2012-8R, Ltd. (collectively “Cerberus”), moved to compel defendant Canadian Imperial Bank of Commerce (“CIBC”) to produce certain documents it withheld or redacted as privileged, and to allow examination before trial testimony on topics objected to on the basis of privilege.  Cerberus argued that CIBC waived the attorney-client privilege in response to its request for certain documents and testimony. CIBC claimed that there was a mistake as to its “business understanding” of the transaction documents such that the actual terms in the documents differed from those drafted by counsel. Cerberus maintained that, in light of this defense, any attorney-client privilege assertion relating to CIBC’s “business understanding” was waived. Therefore, because CIBC put its understanding of the subject documents “at issue” through its mistake and estoppel defenses, said Cerberus, the “at-issue” waiver “prevent from simultaneously (1) asserting a different understanding than the Contracts’ plain meaning, and (2) denying evidence that might contradict that assertion.” Plaintiff also argued that CIBC waived the privilege by selectively testifying about the subject matter of the relevant attorney-client communications. In opposition, CIBC maintained that it did not intend to rely on any of the privileged documents or communications to support its mistake defense. Rather, it intended to rely on non-privileged contemporaneous documents, witness testimony, and the parties’ course of conduct and performance. CIBC noted that plaintiff even admitted that it did not need the privileged documents and testimony to defend against CIBC’s arguments because it could rely on other documents and testimony. CIBC further contended that mistake was not its only defense in the action, and, in any event, a mistake defense could be asserted successfully without waiving the privilege. According to CIBC, advancing the defense of mistake did not automatically result in an “at-issue” waiver of the privilege.  Finally, CIBC contended that the testimony referred to by plaintiff did not disclose the content of any privileged communications with counsel or any advice from counsel. That testimony, CIBC maintained, merely demonstrated that there was communication with counsel but did not refer to any of the substance of the advice given by counsel. And, CIBC said, even if some testimony about an understanding of privileged material was mistakenly disclosed, it would not constitute a waiver of all testimony. The motion court denied the motion. The motion court held that Cerberus failed to demonstrate that the failure to waive the privilege would cause any prejudice or deprive it of access to vital information, especially since there were other available means of discovery to prove the validity of the claims asserted; namely, through discovery already provided. Credit Suisse First Boston v. Utrecht-America Fin. Co. , 27 A.D.3d 253 (1st Dept. 2006). The motion court also held that Cerberus failed to identify to any specific testimony showing that CIBC placed the subject matter of counsel’s advice at issue and made selective disclosure of that advice. On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly found that CIBC ha not waived its attorney-client privilege concerning the material and testimony Cerberus to compel by placing them at issue.” Slip Op. at *1. The Court noted that CIBC had “disavowed any intention to use privileged documents to prove the relevant defense or counterclaim” and, as such, “the invasion of the privilege not necessary to determine their validity.” Id. (citations omitted).  The Court explained that Metropolitan Bridge & Scaffolds Corp. v. New York City Hous. Auth. , 168 A.D.3d 569 (1st Dept. 2019), upon which Cerberus relied, was distinguishable even though the defendant stated that it did not intend to use privileged communications and documents in its defense, because the plaintiff was required to use them to prove its claim, which was based on the defendant’s reliance on the advice of counsel (168 A.D.3d at 571–72). Id. The Court explained that in Securitized Asset Funding , “the CIBC defense and counterclaim be fairly litigated based on other available, nonprivileged evidence including the testimony of nonlawyers.” Id. Finally, the Court found that the record supported “the motion court’s finding that CIBC did not waive its privilege to the materials … by selectively disclosing privileged communications during depositions in this action.” Takeaway  “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Nevertheless, the privilege may be waived where, as noted, “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.” Deutsche Bank , 43 A.D.3d at 63-64 (citation omitted). Notably, “ privileged communication contain information relevant to issues the parties are litigating does not, without more, place the contents of the privileged communication itself ‘at issue’ in the lawsuit.” Id. at 64. “If that were the case, a privilege would have little effect.” Id. (citations omitted). Consequently, “‘at issue’ waiver occurs ‘when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.’” Id. (citation omitted). In Securitized Asset Funding , the Court found that there was no “at-issue” waiver because CIBC was not relying on any privileged material to support its claims or defenses. In fact, as noted, it specifically disavowed use of those materials, because its defense could be litigated through other non-privileged materials.

Last month, this Blog examined Shilon v. New Upreal LLC , 2021 N.Y. Slip Op. 30146(U) (Sup. Ct., Kings County Jan. 11, 2021), a case involving a motion by a nonparty to intervene in the litigation. ( Here .) Today, we look at 1467 Bedford Holdings LLC v. Spitzer , 2021 N.Y. Slip Op. 30302(U) (Sup. Ct., Kings County Feb. 1, 2021) ( here ), a case involving intervention as of right under CPLR §1012(a)(2). Under CPLR §1012(a)(2), a party may intervene as a matter of right “when the representation of the person’s interest by the parties is or may be inadequate and the person is or may be bound by the judgment.” The Court of Appeals has explained that intervention is available only where the judgement will bind the potential intervenor “by its res judicate effect”. Vantage Petroleum v. Board of Assessment Review of the Town of Babylon , 61 N.Y.2d 695 (1984). The Court further explained that the potential intervenor should be in “privity” with the parties to the lawsuit to grant the motion to intervene. Green v. Sante Fe Indus. Inc. , 70 N.Y.2d 244 (1987). Thus, where the potential intervenor has no interest in either the real property at issue or the outcome of the litigation, then the motion to intervene should be denied. Citibank N.A. v. Plagakis , 8 A.D.3d 604 (2d Dept. 2004). 1467 Bedford Holdings involved a dispute over the management of property owned and operated by plaintiff 1467 Bedford Holdings LLC – a company owned by three entities: Gemcap Equity Corp., 50%; Mazel Equities Group LLC, 25%; and Cobblestone Equity LLC, 25%.  1467 Bedford Holdings was formed to acquire, develop and maintain property located at 1467 Bedford Avenue in Kings County.   Pursuant to the operating agreement, 1467 Bedford Holdings was managed by Judah Zelmanovitz and Sam Wieder. Notwithstanding the terms of the operating agreement, plaintiffs alleged that defendant Joel Spitzer (“Spitzer”) had (a) been acting as the manager of the property, (b) been presenting himself as the manager of the property, and (c) rented units that were already occupied. They further alleged that he trespassed and loitered at the property. Plaintiffs maintained that those activities violated the operating agreement and was harming not only the financial success of the enterprise but the physical well-being of the tenants that resided there. Plaintiffs sought an injunction preventing Spitzer from acting as the owner of the property and from having any interaction with any of the tenants. Defendants opposed the motion and cross-moved, seeking an injunction preventing plaintiffs from slandering him. The Court granted the motion and denied the cross-motion. At the time of the motions, two potential intervenors, Triboro Realty Asset Management LLC and Alpha Space LLC, both of which Spitzer own, moved to intervene in the action. Triboro had acted as managing agent of the property and claimed that money was owed. Alpha was a tenant and the subject of a landlord tenant action that had been discontinued. In ruling on the motions, the Court did not rule on the motion to intervene. Spitzer moved, pursuant to CPLR § 2221, to reargue a portion of the Court’s earlier decision – namely, the motion to intervene. The Court denied the motion. In denying the motion, the Court held that neither Triboro nor Alpha were “necessary” parties to the action. Slip Op. at *3. The Court explained that neither entity had anything to do with the allegations in the complaint as they pertained to Spitzer ( e.g. , breach of the operating agreement, trespass, tortious interference with contract, conversion, breach of fiduciary duty, declaratory judgement and a permanent injunction). Id. Triboro, said the Court, was not a necessary party to the action, even it “ha claims for offsets or payments”, because the claims “ha nothing whatsoever to do with the allegations against Spitzer.…” Id. Similarly, Alpha, which possessed claims for improvements to the unit, was not a necessary party to the litigation because those claims did “not touch upon the claims of this action.…” Id. In short, concluded the Court, “Alpha not a ‘necessary’ party to an action that essentially argue Spitzer acted improperly.” Id. Takeaway Although the courts do not always make the distinction between mandatory and permissive intervention ( Matter of HSBC Bank U.S.A. , 135 A.D.3d 534, 534 (1st Dept. 2016)), they will make such a distinction when, as in 1467 Bedford Holdings , the motion is understood to be brought under one of the intervention provisions of the CPLR. In 1467 Bedford Holdings , the Court treated the motion as being brought under CPLR §1012(a)(2) – that is, the mandatory intervention provision of the CPLR. As such, the intervenors were required to show that they would be adversely affected by a judgment in the action. The Court held that because they were not necessary to the action, they could not show that they would be adversely affected by a judgment in the action.

Freedom=">Freedom" Mortgage="Mortgage" Corp.="Corp." v.="v." Engel,="Engel," in="in" which="which" it,="it," inter="inter" alia ,="alia," expressly="expressly" rejected="rejected" “pretextual="“pretextual" de-acceleration”="de-acceleration”" theory. ="theory. " This="This" BLOG’s="BLOG’s" treatment="treatment" Freedom ="Freedom" can="can" be="be" found="found" > here .=">here."> This Blog has written extensively on issues related to residential mortgage foreclosure.  HERE,=">HERE," >HERE.=">HERE."> There is no dispute that an action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019); Deutsche Bank Nat. Trust Co. v. Blank , 189 A.D.3d 1678, 1679 (2 nd Dep’t 2020).  Much litigation, however, has centered on when the statute of limitations begins to accrue.  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).   Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  When the provisions of a mortgage provide that “the acceleration of the maturity of a mortgage debt on default is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder's election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation.”  BONY Mellon , 171 A.D.3d at 37 (citations and internal quotation marks omitted).  This may be done by a clear and unequivocal demand or the commencement of an action.  U.S. Bank Nat. Assoc. v. Catalfamo , 189 A.D.3d 1786 (3 rd Dep’t 2020) (citations omitted).  Similarly, the Second Department noted several ways by which a lender may accelerate a mortgage debt: One way is in the form of an acceleration notice transmitted to the borrower by the creditor or the creditor’s servicer. To be effective, the acceleration notice to the borrower must be clear and unequivocal.  A second form of acceleration, which is self-executing, is the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period.  A third form of acceleration exists when a creditor commences an action to foreclose upon a note and mortgage and seeks, in the complaint, payment of the full balance due. Milone v. US Bank Nat. Assoc. , 164 A.D.3d 145, 152 (2 nd Dep’t 2018) (citations omitted). Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  Fed. Nat. Mort. Assoc. v. Mebane , 208 A.D.2d 892, 894 (2 nd Dep’t 1994) (citation omitted).  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). For any number of reasons, a lender may wish to revoke its election to accelerate and de-accelerate a loan, but “it must do so by an affirmative act of revocation occurring during the six-year statute of limitations period subsequent to the initiation of the prior foreclosure action.”  NMNT Realty Corp. v. Knoxville 2012 Trust , 151 A.D.3d 1068, 1070-71 (2 nd Dep’t 2017) (citation omitted).  See also, Christiana Trust v. Barua , 184 A.D.3d 140, 145 (2 nd Dep’t 2020) (citations omitted) (revocation must be made “within six years of the earlier acceleration”).  As with an acceleration notice, “the de-acceleration of note balances must also be clear and unambiguous to convey the fact that the previous demand for full payment of the note has been affirmatively revoked.”  Christiana , 184 A.D.3d at 146 (citations omitted).  Further, the revocation notice “revives the borrower’s right to make the monthly payments that became due between the time the loan was accelerated and the time the acceleration was revoked, together with the right to make future monthly installment payments.”  Christiana , 184 A.D.3d at 148.  Accordingly, “in order to effectively rescind the acceleration, should be required to notify the borrower that the right to make monthly payments is restored and that the lender will accept the tender of such payments.”  Christiana , 184 A.D.3d at 148 (citation omitted).   On January 27, 2021, the New York Supreme Court, Kings County, decided Carter v. U.S. Bank Trust, N.A. In Carter , plaintiff mortgagor brought an action pursuant to Real Property Actions and Proceedings Law 1501(4) to discharge a mortgage of record because the “applicable statute of limitations for the commencement of an action to foreclose mortgage … has expired….”  HERE=">HERE" and="and" HERE.="HERE.">   An interesting aspect of the Court’s analysis on issues such as acceleration, de-acceleration and addressing statute of limitations calculations was the mention of pretextual de-accelerations “to avoid the onerous effect of an approaching statute of limitations.”  Carter (quoting, Milone , 164 A.D.3d at 145).  Simply stated, when faced with the possibility of missing a statute of limitations deadline of an accelerated loan, a lender may simply choose to de-accelerate rather than take the time to commence an action.  Thus, the Milone Court stated: Courts must, of course, be mindful of the circumstance where a bank may issue a de-acceleration letter as a pretext to avoid the onerous effect of an approaching statute of limitations and to defeat the property owner’s right pursuant to RPAPL 1501 to cancel and discharge a mortgage and note. Here, however, the de-acceleration letter containing a clear and unequivocal demand that the homeowner meet her prospective monthly payment obligations constitutes a de-acceleration in fact and cannot be viewed as pretextual in any way. Specifically, a de-acceleration letter is not pretextual if, as here, it contains an express demand for monthly payments on the note, or, in the absence of such express demand, it is accompanied by copies of monthly invoices transmitted to the homeowner for installment payments, or, is supported by other forms of evidence demonstrating that the lender was truly seeking to de-accelerate and not attempting to achieve another purpose under the guise of de-acceleration ( cf. Deutche Bank Natl. Trust Co. Ams. v. Bernal, 56 Misc.3d at 923–924, 59 N.Y.S.3d 267). In contrast, a “bare” and conclusory de-acceleration letter, without a demand for monthly payments toward the note, or copies of invoices, or other evidence, may raise legitimate questions about whether or not the letter was sent as a mere pretext to avoid the statute of limitations. Milone, 164 A.D.3d at 154.  Relying on Milone , the Christiana Trust Court recognized that because “the foreclosure of mortgages encumbering residential properties involves elements of equity … the declaration of a de-acceleration cannot be utilized as a mere pretext to avoid the onerous effect of the statute of limitations.”  Christiana Trust , 184 A.D.3d at 146.

We have noted previously that the “policy of to encourage arbitration.” See Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39 (1997). For this reason, “ ny doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.” State of New York v. Philip Morris Inc. , 30 A.D.3d 26, 31 (1st Dept. 2006), aff’d , 8 N.Y.3d 574 (2007)). This is especially so where the agreement to arbitrate incorporates rules that explicitly authorize the arbitrator to resolve all disputes, including those concerning “the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought.” See Offshore Expl. & Prod., LLC v. Morgan Stanley Private Bank, N.A. , 626 F. App’x 303, 305 (2d Cir. 2015). In Steamer v. Rinde , 2021 N.Y. Slip Op. 30214(U) (Sup. Ct. N.Y. County Jan. 19, 2021) ( here ), the Court granted defendants’ motion to compel arbitration because the parties’ agreement to arbitrate was broad in scope, requiring them to arbitrate “ ny claim or dispute arising out of th Agreement or the alleged breach thereof”.  Steamer involved a proposed partnership that never came to be. In August 2018, the individual plaintiffs (the “Plaintiffs”), partners in Steamer Hart LLP, agreed to join defendants as partners in CKR Law. At the time, they signed “Joinder” documents that set forth the terms of their agreement ( e.g. , equity draws, year-end distributions, performance bonuses, and other incidents of a new partnership) (the “Joinder Documents”). Although they signed the Joinder Documents and agreed to the terms of a partnership agreement (the “Partnership Agreement”), plaintiffs claimed that defendants “surreptitiously and fraudulently attached the parties’ signature pages to an earlier draft of the Joinder … to which never agreed and in fact flatly rejected.” They maintained that the earlier draft “made no provision for compensation and did not . . . reference the … Addendum.”  The Partnership Agreement expressly required binding arbitration before JAMS for “ ny claim or dispute arising out of th Agreement or the alleged breach thereof.” “ he cost of any arbitration be borne exclusively by the Partner asserting the claim,” thereby obligating that party “to advance such costs and expenses before commencing any proceedings.” The Joinder documents recognized the foregoing provisions.  Plaintiffs commenced a mediation before JAMS in October 2018. Mediation was a prerequisite to arbitrating the parties’ dispute under the Partnership Agreement. However, Plaintiffs denied mediating under the terms of the Partnership Agreement, stating that their decision to mediate was an “expedient” means of trying to resolve their dispute.  On October 25, 2018, plaintiffs’ counsel served a “Demand for Arbitration” on defendants in connection with their dispute. Nevertheless, Plaintiffs commenced the action by service of a summons with notice, seeking a declaration that they were “not and never were law partners with the defendants” and monetary relief representing the fees paid to CKR Law by plaintiffs’ clients; costs involved in plaintiffs’ move into (and, later, out of) the offices of CKR Law; and sums expended by plaintiffs for which defendant Michael James Rinde promised to reimburse them. Defendants filed a motion to stay the action and compel arbitration, arguing that the arbitration provisions in the Partnership Agreement and in the Joinder documents were broad, clear, and unambiguous. The Court granted the motion. The Court held that in light of the state policy encouraging the arbitration of disputes, the broad arbitration provisions in the Partnership Agreement and Joinder Documents, and “plaintiffs’ counsel’s express Arbitration Demand,” arbitration of the dispute was appropriate. Slip Op. at *4. The Court also held that because the arbitration provisions in the governing documents were broad, the arbitrator was the appropriate person to decide “ ll the issues and claims summarized in plaintiffs’ summons with notice filed in this action.…” Id. The Court further held that pursuant to the terms of the arbitration agreement, the parties were to mediate their dispute: “Because the Partnership Agreement requires that mediation be given a chance prior to any arbitration, this court’s grant of defendants’ motion necessarily requires that the parties first proceed to mediation which, if unsuccessful, will be followed by binding arbitration.” Id. In so ruling, the Court held that the costs of mediation would be shared by the parties, as opposed to plaintiffs, as defendants urged. Id. Plaintiffs argued that the Partnership Agreement was silent as to who would bear the costs of mediation, as opposed to arbitration. The Court agreed, finding “Plaintiffs’ point well taken.” Id. at *5. “ othing is said about the cost burden underlying the mediation, which must precede any arbitration,” observed the Court.  The Court held that “ n view of the contractual silence on th point,” it was applying “an objective standard” that “recognize the mutual benefit to both sides inherent in mediation as a means of negotiation toward the goal of consensual resolution and settlement of their dispute.” Id. See Chapman, Spira & Carson, LLC v. Helix BioPharma Corp. , 115 A.D.3d 526, 527 (1st Dept. 2014). “Viewed thusly, and objectively,” concluded the Court, the Court would supply “the missing term by adopting a construction requiring both sides to share equally in the cost of mediation.” Id. Takeaway The threshold question in assessing whether to compel arbitration is whether there is a valid and binding agreement to arbitrate. Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013). If the court finds that a valid arbitration agreement exists, the next question to consider is whether the dispute comes within the scope of that agreement. Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”). Where the parties “clearly and unmistakably” reserve the question of arbitrability for decision by the arbitrator, the dispute will be sent to arbitration. This is especially so when the parties incorporate the rules of the arbitral forum into their agreement. Zachariou , 68 A.D.3d at 539 (“ here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’”) (citations omitted)). In Steamer , the parties’ agreements contained broad arbitration provisions that provided for the arbitration of “ ny claim or dispute arising out of th Agreement or the alleged breach thereof” and incorporated by reference the JAMS rules. As such, consistent with the law in New York, and plaintiffs’ counsel’s demand for arbitration, the Court found that there was clear and unmistakable evidence that the parties intended to have an arbitrator decide their dispute.

“Boiler room” brokerage firms are investment houses in which a broker uses high-pressure sales tactics to sell speculative and risky securities. A broker using boiler-room tactics provides customers – usually persons who received a cold call from the broker – with only positive information about the company and its stock. Boiler-room brokers typically tell customers that a stock is “a sure thing” or a “can’t miss, once in a lifetime” opportunity. Boiler-room brokers pressure customers to buy a security on the spot and discourage the customer from doing any research before they buy.  Brokers using high pressure sales tactics do so to convince investors to pay more for a security than its actual worth. Sometimes, the securities are even worthless or nonexistent.  On January 27, 2021, the Securities and Exchange Commission (“SEC” or the “Commission”) announced ( here ) that it charged Vuuzle Media Corporation (“Vuuzle”), a purported online live streaming and entertainment company, and its founder Ronald Shane Flynn (a.k.a. Ronnie Shane) with fraudulently offering over $14 million in securities to investors across the United States using an aggressive boiler room sales scheme. According to the SEC’s complaint ( here ), from approximately September 2016 through at least May 2020, Vuuzle and Flynn offered and sold more than $14 million of Vuuzle common stock and warrants to investors throughout the United States. The SEC claimed that Flynn secretly diverted approximately $5 million to support his aggressive fund-raising operations and pay commissions to stock promoters. The SEC alleged that Flynn misappropriated another $5 million or so in direct transfers to his personal bank accounts overseas and by using corporate credit and debit cards for personal items, such as dating and gambling applications, gold bars, and luxury travel. Approximately $2 million in additional funds, said the SEC, was used for other expenses in furtherance of the alleged fraud, including, but not limited to, Ponzi-like payments to a limited number of investors, Fed Ex charges, rent for a New York office, and attorney fees. To raise money, Vuuzle and Flynn allegedly represented to investors that Vuuzle was a legitimate, successful, and growing company in the business of providing online live streaming and entertainment services. In fact, claimed the SEC, Vuuzle was little more than a front for a boiler room operation Flynn controlled. According to the SEC, Flynn operated primarily out of the Philippines under a series of different corporate entities. In that connection, he allegedly acted directly and through marketing teams that were engaged in aggressive and high-pressure sales campaigns. Among other tactics, said the SEC, Flynn and his boiler room employees cold-called potential investors and, through relentless and deceptive phone and email communication, convinced them to buy Vuuzle securities. In return for bringing investor funds to Vuuzle, Flynn purportedly paid substantial commissions to himself and others. The securities offered were common stock. The price per share ranged from $1.00 to $5.00, with most investors paying $5.00 per share. Many investors were also allegedly granted warrants that gave the investor the purported right to purchase additional shares for a limited time at a discounted price. The SEC said that none of the securities were registered with the Commission. The SEC alleged that Vuuzle and Flynn made materially false and misleading statements in their communications with investors, filings with the Commission, and in offering documents, including Vuuzle’s Private Placement Memoranda (“PPMs”). For example, said the SEC, Vuuzle and Flynn told investors that their funds would be used to operate and build Vuuzle’s online streaming business, which would earn millions of dollars in revenue from service fees and advertising. In fact, alleged the SEC, of the $14 million raised in investor funds, Vuuzle and Flynn used only approximately $2 million to build the streaming applications, which served as props to raise more investor funds. In addition, said the SEC, Vuuzle and Flynn falsely portrayed Vuuzle as a “pre-IPO” investment opportunity that would provide returns to investors in the form of dividends and increased post-IPO stock values. Yet, Vuuzle has never made a profit, never paid dividends to any investor, and never made a public offering on any stock exchange, alleged the Commission. From its inception in October 2016 through May 2020, Vuuzle’s U.S. bank account reflected total business revenue of less than $1,670, noted the SEC. Moreover, claimed the SEC, Vuuzle’s public filings and offering documents falsely suggested Flynn had only a peripheral relationship with the company, if any. For example, said the SEC, in the PPMs, Vuuzle described Flynn as merely a “non-voting beneficial owner” of a Vuuzle corporate shareholder. And Vuuzle’s Forms D, filed with the Commission in 2017 and 2019, did not name Flynn as a related party at all. In fact, said the SEC, Flynn exercised ultimate control over every part of Vuuzle’s business for the primary purpose of enriching himself. The SEC said that Vuuzle and Flynn were aided and abetted by Richard Marchitto (“Marchitto”), a former dentist who had lost money investing in one of Flynn’s previous business ventures. According to the complaint, Marchitto provided substantial assistance to Vuuzle and Flynn by acting as their U.S. corporate and financial presence and maintaining a U.S. bank account, corporate credit cards, and a New York office address for Vuuzle, which enhanced Vuuzle’s aura of legitimacy as a U.S.-based company. The Commission claimed that because Flynn avoided U.S. jurisdiction, Marchitto was instrumental to the fraud. “We are committed to taking action to protect investors and pursuing relief for those who have been harmed,” said Melissa Hodgman, Acting Director of the SEC’s Division of Enforcement.  “We will vigorously pursue fraudsters who enrich themselves at investors’ expense.” “The defendants allegedly raised millions of dollars from investors through aggressive and deceptive sales techniques, and misappropriated the majority of those funds for personal use and to fund the boiler room operation,” said Jennifer S. Leete, Associate Director in the SEC’s Division of Enforcement.  “Investors should be on alert for red flags of investor fraud such as unsolicited calls and high pressure sales tactics.” The SEC filed the complaint in federal court in the District of New Jersey. In the complaint, the Commission charged Vuuzle and Flynn with violating the antifraud and registration provisions of the federal securities laws, and Marchitto with aiding and abetting Vuuzle and Flynn’s violations.  The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties against each defendant.

In late December 2020, Governor Cuomo signed into law the “COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020” (the “Act”), which has an effective date of December 28, 2020.  While the Act covers certain residential eviction proceedings and tax lien foreclosures too, this BLOG will focus on the provisions of the Act that relate to residential mortgage foreclosures.  A copy of the bookmarked December 31, 2020, memorandum from Chief Administrative Judge Lawrence K. Marks (the “Memorandum”), which attaches as Exhibits a copy of the Act (Exhibit “A”), a related Administrative Order (AO/341/20) (Exhibit “B”) and the “Notice to Owner or Mortgagor and Hardship Declaration” (the “Hardship Declaration”) (to be discussed further herein) in English and Spanish (Exhibit “C”) can be found < HERE =">HERE"> . As related to residential mortgage foreclosures, the Act generally applies to “any action to foreclose a mortgage on residential real property, provided the owner or mortgagor of such property is a natural person, regardless of how title is held, and owns ten or fewer dwelling units whether directly or indirectly.”  See the Act at Part “B” Subpart “A” § 1.  Pursuant to the Act “real property” also includes “shares assigned to a unit in a residential cooperative.”  See the Act at Part “B” Subpart “A” § 1(a).   Pending residential mortgage foreclosure actions, including actions filed on or before March 7, 2020, and those commenced within thirty (30) days of the effective date of the Act, are stayed for at least sixty (60) days from the Act’s effective date.  See the Act at Part “B” Subpart “A” § 3.  As will be further discussed below, the stay could be extended to such later date as the chief administrative judge deems appropriate “to ensure that courts are prepared to conduct proceedings in compliance with this act and to give mortgagors an opportunity to submit the hardship declaration pursuant to this act.  The court in each case shall promptly issue an order directing such stay and promptly mail the mortgagor a copy of the hardship declaration in English, and, to the extent practicable, the mortgagor's primary language, if other than English.”  See the Act at Part “B” Subpart “A” § 3.   The required text for the Hardship Declaration appears in Part “B” Subpart “A” § 2 of the Act and a hard copy of the form appears at Exhibit “C” to the Memorandum.  In sum, the Notice portion of the Hardship Declaration advises a mortgagor that if the Hardship Declaration was provided by the mortgagee and is signed by the mortgagor and returned to the mortgagee, the mortgagor “cannot be foreclosed on until at least May 1, 2021.”  If foreclosure proceedings have already commenced and the mortgagor received the Hardship Declaration from the court, the mortgagor can return the executed Hardship Declaration to the court. By signing the Hardship Declaration, the mortgagor is attesting, under the penalties of perjury, that payment of the underlying mortgage in full cannot be made because, due to the COVID-19 pandemic: there was a significant loss in household income; there was an increase in necessary expenses related to COVID-19 health impacts; the need to care for children or elderly, disabled or sick family members made employment difficult or caused an increase in necessary out of pocket expenses; moving expenses or difficulty in finding alternative housing make relocation a hardship; and/or, one or more tenants have defaulted in paying rent since March 1, 2020, and the added burdens were not made up by various assistance programs.  See the Act at Part “B” Subpart “A” § 2 and Exhibit “C” to the Memo.   The Act requires that defendants in pending mortgage foreclosures receive a Hardship Declaration.  In pending residential mortgage foreclosure actions, the court is directed to mail Hardship Declarations to defendants.  See the Act at Part “B” Subpart “A” § 3.  If actions have not yet been commenced, the Hardship Declaration is to be included “with every notice provided to a mortgagor pursuant to sections 1303 and 1304 of the real property actions and proceedings law.”  See the Act at Part “B” Subpart “A” § 4.   If a Hardship Declaration is returned to the mortgagee, a mortgage foreclosure action shall not be commenced until at least May 1, 2021 and “in such event any specific time limit for the commencement of an action to foreclose a mortgage shall be tolled until May 1, 2021.”  See the Act at Part “B” Subpart “A” § 5.   New residential foreclosure actions will not be accepted for filing unless the mortgagee files an affidavit of service demonstrating that a compliant Hardship Declaration was served on the mortgagor and attesting that a Hardship Declaration was not returned by the mortgagor.  See the Act at Part “B” Subpart “A” § 6.   The stay includes actions in which “a judgment of sale has been issued prior to the effective date of this act but has not yet been executed as of the effective date of this act, including actions filed on or before March 7, 2020.  See the Act at Part “B” Subpart “A” § 8.  In such cases “the court shall stay the execution of the judgment at least until the court has held a status conference with the parties.”  See the Act at Part “B” Subpart “A” § 8.  If a hardship Declaration is returned to the mortgagee or the court “prior to the execution of the judgment, the execution shall be stayed until at least May 1, 2021.  See the Act at Part “B” Subpart “A” § 8.   Further, a “hardship declaration shall create a rebuttable presumption that the mortgagor is suffering financial hardship, in any judicial or administrative proceeding that may be brought, for the purposes of establishing a defense under an executive order of the governor or any other local or state law, order or regulation restricting actions to foreclose a mortgage against a mortgagor suffering from a financial hardship during or due to the COVID-19 pandemic provided that the absence of a hardship declaration shall not create a presumption that a financial hardship is not present.”  See the Act at Part “B” Subpart “A” § 10.   Part “B” Subpart “A” § 12 of the Act provides that the Act “shall take effect immediately and sections one, two, three, four, five, six, seven, eight, nine and eleven shall expire May 1, 2021.

DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action. Fair consideration encompasses two components: “whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’” and “whether the transaction made in good faith.” DCL § 272; Sardis v. Frankel , 113 A.D.3d 135, 141-142 (1st Dept. 2014). Good faith requires honest, fair and open dealings by the transferor and the transferee. Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). The foregoing principles were at issue in Eagle Eye Collection Corp. v. Shariff , 2021 N.Y. Slip Op. 00385 (1st Dept. Jan. 26, 2021) ( here ). Eagle Eye was brought as a collection action against a nonparty. The debtor owned a condominium unit in which defendants were tenants. At some point in 2016, the debtor’s mortgage lender commenced a foreclosure proceeding against her. In October 2016, the debtor conveyed the unit to nonparty NYC REO LLC (“REO”), for nominal consideration, giving a deed in lieu of foreclosure. Plaintiff alleged that defendants were aware both of its collection action against the debtor and that the debtor was in foreclosure. Plaintiff asserted that defendants negotiated with the mortgage lender to engineer the conveyance to REO as a straw purchaser. In April 2017, REO conveyed the unit to defendants. Plaintiff commenced the action, alleging violations of, inter alia , DCL §§ 273-a and 273. Defendants moved to dismiss. The motion court granted the motion. Plaintiff appealed. The Appellate Division, First Department affirmed. The Court held that plaintiff “failed to adequately plead a claim for fraudulent conveyance under Debtor and Creditor Law § 273-a.” “First”, noted the Court, the debtor’s conveyance of the deed in lieu of foreclosure was done to extinguish the mortgage – that is, it was a thing of value made “in payment of an antecedent debt.” Slip Op. at *1. As such, it could not constitute a fraudulent conveyance under DCL § 273-a. Id. (citing Ronga v. Chiusano , 97 A.D.2d 753, 753 (2d Dept. 1983)).  Second, the Court found plaintiff’s allegation that “the deed in lieu of foreclosure was not a ‘fair equivalent’ of the mortgage debt being satisfied” to be speculative and conclusory. Id. (citing Jaliman v. D.H. Blair & Co. Inc. , 105 A.D.3d 646, 647 (1st Dept. 2013)). Such allegations, held the Court “do not state a claim for constructive fraud under the Debtor and Creditor Law.” Id. (citing Riback v. Margulis , 43 A.D.3d 1023, 1023 (2d Dept. 2007)). Accordingly, the Court concluded that the transfer of the unit to defendants from REO was not actionable:  Because of these factors, the initial transfer from the debtor to REO is not actionable. Since the initial transfer is not actionable, the subsequent transfer to defendants, who “derived title immediately or mediately” from a good faith purchaser for value, is also not actionable (Debtor and Creditor Law § 278). Id. On the issue of good faith, the Court rejected plaintiff’s argument that defendants acted in bad faith by allegedly engineering the transaction with REO. In this regard, the Court noted that the timing of events undermined the underlying predicate of plaintiff’s argument: Moreover, plaintiff claims that defendants first learned of its collection action against the debtor when plaintiff served her with process at the unit in December 2016. Plaintiff asserts that, once they learned of plaintiff’s collection action, defendants contacted the debtor’s mortgage lender to engineer a conveyance to REO as a straw purchaser, followed by the conveyance to defendants. By December 2016, however, it is undisputed that the debtor had already transferred the unit to REO. Thus, even under plaintiff’s version of the facts, defendants learned of the collection action after the mortgage lender had already taken the deed in lieu of foreclosure in satisfaction of the antecedent mortgage. Defendants cannot have acted in bad faith to engineer a transfer to a straw purchaser two months before they even learned of the transaction they were supposedly seeking to avoid. Id. at *1-*2. With regard to plaintiff’s claim under DCL § 273, the Court held that it “suffer from the same defects as its claim under section 273-a.” Id. at *2. First, said the Court, the allegation of insolvency was conclusory and, therefore, did “not suffice to support its claim under Debtor and Creditor Law § 273.” Id. (citing Riback , 43 A.D.3d at 1023). Second, as with the DCL § 273-a claim, because the conveyance “satisfie an antecedent debt made while the debtor insolvent” it could not be fraudulent or “otherwise improper.” Id. (quoting Ultramar Energy v. Chase Manhattan Bank , 191 A.D.2d 86, 90-91 (1st Dept. 1993)). Takeaway Eagle Eye illustrates the difficulties creditors have alleging violations of the old DCL. Even when alleging constructive fraud, in which intent is not required, creditors must allege facts to support their claims. A mere belief that a defendant transferred assets without fair consideration does not suffice to demonstrate a violation of DCL §§ 273 and 273-a. As noted by the Eagle Eye Court, “‘speculative and conclusory allegations’ do not state a claim for constructive fraud under the Debtor and Creditor Law.” Slip Op. at *1 (citation omitted).   Eagle Eye also shows that a constructive fraud claim cannot survive a dismissal motion where the conveyance was made “in payment of an antecedent debt.” The reason: the antecedent debt, which is satisfied upon receipt of the property or obligation, represents a “fair equivalent” of what is conveyed. See DCL § 272.

A client calls up an attorney and describes a situation in which two parties are litigating an issue that the client maintains she has interest in. She wants to be sure that her interests are not adversely affected by the outcome of that litigation. She asks the lawyer what she can do. The answer (for purposes of today’s article): intervene in the action. Intervention is a procedure by which a nonparty may join a pending litigation. In New York, intervention is governed by CPLR §§ 1012 (a)(3) and 1013. CPLR §1012 (a)(3) provides that a nonparty may intervene as of right “when the action involves the disposition or distribution of, or the title or a claim for damages for injury to, property and the person may be affected adversely by the judgment.” CPLR § 1013 allows for permissive intervention where “the person’s claim or defense and the main action have a common question of law or fact.” The court, “ n exercising its discretion,” must “consider whether the intervention will unduly delay the determination of the action or prejudice the substantial rights of any party.” Id. Notwithstanding the distinctions between the two forms of intervention, courts “no longer sharply appl ” them. Matter of HSBC Bank U.S.A. , 135 A.D.3d 534, 534 (1st Dept. 2016) (internal quotation marks and citation omitted). The reason: “ ntervention is liberally allowed by courts.…” Yuppie Puppy Pet Prods., Inc. v. Street Smart Realty, LLC , 77 A.D.3d 197, 201 (1st Dept. 2010).  These principles were considered by Justice Peter P. Sweeney in Shilon v. New Upreal LLC , 2021 N.Y. Slip Op. 30146(U) (Sup. Ct., Kings County Jan. 11, 2021) ( here ). Shilon arose from the alleged default on a Promissory Note/Restatement Agreement/Guaranty (“the Restatement Agreement”) by defendants New Upreal LLC (“New Upreal”), 154 Lenox LLC (“154 Lenox”) and Boaz Gilad (“Gilad”).  Plaintiff, Joseph Shilon (“Shilon”), alleged that prior to execution of the Restatement Agreement, he made certain “advances” for the benefit of New Upreal and 154 Lenox and that on or about September 1, 2018, “New Upreal and 154 Lenox entered into the Restatement Agreement to “record” those advances. Pursuant to the Restatement Agreement, New Upreal promised to pay to plaintiff the principal sum of $4,414,441.00, and 154 Lenox and Gilad agreed to guarantee New Upreal’s obligations under the agreement. Plaintiff alleged that defendants defaulted under the Restatement Agreement and sought judgment for the amount allegedly owed. In their answer, New Upreal and 154 Lenox denied all of the material allegations in the complaint and raised various affirmative defenses to the effect that the Restatement Agreement was a sham. They alleged that “Plaintiff’s claims were barred because of ‘Unclean Hands’” or because Plaintiff was “in pari delicto”, that “Plaintiff’s claim was barred because the loan was procured, administered and managed by deceptive and fraudulent practices under state and federal law, including, ‘predatory lending’”, and that “Plaintiff’s actions barred because it did not lend Defendants any funds.” Guy Gissin (“Gissin”), in his capacity as Claims Trustee (“Claims Trustee”) for holders of various bonds (the “Bondholders”) or other debt instruments issued by Brookland Upreal Limited (“Brookland”), moved by order to show cause for leave to intervene in the action pursuant to CPLR §§ 1012 and 1013. Gissin alleged that during 2014 and 2015, Brookland issued bonds in the aggregate principal amount of NIS 247 million to the Bondholders pursuant to two Deeds of Trust, one dated May 26, 2014, and another dated November 29, and that the aggregate principal amount of the Bonds at the end of the second quarter of 2018 was approximately NIS 150 million. Gissin claimed that Brookland, through a number of holding companies, invested the proceeds of the bonds in various real estate development projects in and around Brooklyn, New York, including some of which are owned by New Upreal. Gissin further alleged that New Upreal engaged in misconduct including, using the bond proceeds to prefer certain investors and creditors over the interests of New Upreal’s other creditors and diverting assets that should have been repaid to Bondholders to other parties not entitled to such assets. Gissin alleged that New Upreal signed the Restatement Agreement for the benefit of Yossi Shilon, without any consideration to New Upreal for a fictitious loan that was never granted to it. Gissin maintained that New Upreal and 154 Lenox were insolvent at the time the Restatement Agreement was executed, or were rendered insolvent thereby, and that each received no value at all in exchange. In sum and substance, Gissin contended that the execution of the Restatement Agreement was a sham and that the parties to the Restatement Agreement were attempting to divert assets to the plaintiff which the Bondholders would otherwise be entitled to. The Court granted the motion. The Court found that “the answering defendants and Gissin both claim that the Restatement Agreement a sham.” Slip Op. at *3. Therefore, concluded the Court, “ he main action and the proposed Intervenor Complaint … present common questions of law and fact.” Id. Turning to the question of timeliness – i.e. , whether the delay in seeking intervention would cause a delay in resolution of the action or otherwise prejudice a party – the Court found that there was no prejudice as the case was in its nascent stages: “Since there has been no discovery in the main action, allowing Gissin to intervene in the action will not delay the action or prejudice a substantial right of any party.” Id. In fact, noted the Court, plaintiff did not object to intervention on timeliness grounds, though it did so on others. Id. Finally, and “ ost importantly,” said the Court, “Gissin ha substantial interest in the outcome of the main action. If prevails on his claim that the Restatement Agreement was a sham and unenforceable, defendants’ assets would remain available to pay New ’s obligations to the Bondholders and would not be fraudulently diverted to the plaintiff.” Id. at *3-*4.  Takeaway Intervention is a fact-sensitive analysis. Shilon shows that where the facts and law are common, there is no prejudice to any party, and the intervenor has a substantial interest in the outcome of the litigation, intervention is appropriate.

In one of our BLOGS from last week, we addressed the remedy of specific performance in breached real estate contracts < HERE =">HERE"> .  The BLOG noted that, under certain circumstances when monetary damages are insufficient to make one of the parties whole after a breach, the equitable remedy of specific performance may be available to require the breaching party to perform.  On January 20, 2021, the Appellate Division, Second Department, decided W Equities Acquisitions, LLC v. Wyckoff Heights Properties, LLC , in which interesting specific performance issues were decided.  The plaintiff in W Equities was the purchaser under a real estate contract for the purchase of real property in Brooklyn.  The defendant was the seller.  Among other things, pursuant to the contract of sale, the seller “was required to deliver the premises free of any tenancies.”  In this regard, section 13.02 of the contract provided that: If Seller shall be unable to convey title to the Premises at the Closing in accordance with the provisions of this contract . . . Purchaser, nevertheless, may elect to accept such title as Seller may be able to convey with a credit against the monies payable at the Closing equal to the reasonably estimated cost to cure the same (up to the Maximum Expense described below), but without any other credit or liability on the part of Seller. If Purchaser shall not so elect, Purchaser may terminate this contract and the sole liability of Seller shall be to refund the Down payment to Purchaser and to reimburse Purchaser for the net cost of title examination. The contract further provided that the “Maximum Expense” that the seller was required to incur to cure title defects was $75,000.  When the parties entered into the contract of sale, the property was encumbered with four leases that were subject to rent stabilization laws.  Accordingly, the four tenants could not be forced to leave and “could only be asked to vacate voluntarily.”  While two tenants agreed to vacate their respective units, two did not.  Indeed, seller presented evidence that it offered to pay each of the two tenants that refused to vacate: $75,000, all deposits, all moving expenses, rent for one year; and it offered assistance finding new apartments in the same neighborhood for similar rents.  The two holdout tenants rebuffed seller’s offers because, according to the tenants’ attorney at a meeting with seller, she was “advising her clients not to execute the surrender agreements because they would lose certain government benefits, would not be able to find comparable apartments with similar rents, and would have to pay income tax on the money being offered.”  The seller urged that the two holdout tenants “unequivocally refused to move out or entertain any offers…to surrender their tenancies.”  (Internal quotation marks omitted, ellipses in original.) Purchaser’s counsel sent a “time of the essence” closing date letter for February 10, 2016.  In response, seller advised that, despite several attempts to enter into surrender agreements with all of the tenants, it was unsuccessful.  Accordingly, seller could not deliver the premises free of all tenants.  Thus, in accordance with section 13.02 of the contract, seller offered “ the choice of either accepting such title as the was able to convey, with a credit no greater than the maximum amount specified in the contract, or terminating the contract with a refund of the down payment and reimbursement of the net cost of title examination.”  Purchaser rejected seller’s “invocation of section 13.02 and insisted on proceeding to closing.”  The parties failed to consummate the transaction on the closing date. Purchaser commenced an action for specific performance.  Seller answered and asserted a counterclaim to retain the $190,000 deposit as liquidated damages for breach of contract.  Seller moved for summary judgment dismissing the complaint and on its counterclaim and purchaser cross-moved for summary judgment on its complaint and dismissing seller’s counterclaim.  Supreme court denied purchaser’s cross-motion and granted seller’s motion to the extent that it sought to dismiss the complaint.  However, the court denied seller’s motion to the extent that it sought summary judgment on its counterclaim.  The Appellate Division affirmed the denial of purchaser’s cross-motion for summary judgment on the complaint and the grant of the seller’s motion for summary judgment dismissing the complaint.  The Court, however, reversed the denial of seller’s motion for summary judgment on its counterclaim.  The Court found that “ ecause the defendant acted within its rights pursuant to section 13.02 of the contract, it is the plaintiff—not the defendant—which breached the contract by failing to elect one of the two remedies available to it under section 13.02 since the defendant seeks only to retain the down payment as liquidated damages ( see Maxton Bldrs. v Lo Galbo , 68 NY2d 373, 378), there are no triable issues of fact to be decided.” The Court recognized that “ s a threshold matter, in light of the defendant’s obligation to deliver the premises “free of all tenancies,” the inability to obtain surrender agreements from two of the four tenants would constitute a title defect ( see Segal v Kulch , 13 AD2d 1011, 1012, affd 11 NY2d 834 ; see also S.E.S. Importers, Inc. v Pappalardo , 53 NY2d 455, 463).”  To “trigger” section 13.02 “the defendant was required to prove the existence of a situation beyond the parties’ control, coupled with proof that the defendant acted in good faith in attempting to convey title in accordance with the terms of the contract ( see SJSJ Southold Realty, LLC v Fraser , 150 AD3d 920, 921; Karl v Kessler , 47 AD3d 681, 682; see also 101123 LLC v Solis Realty LLC , 23 AD3d 107).”  The Court rejected purchaser’s assertion that seller was “required to establish impossibility of performance.”  (Citation omitted.) The Court found that the evidence of the offer made to the two holdout tenants, coupled with the evidence of what transpired at seller’s meeting with tenants’ counsel, was sufficient to satisfy seller’s burden.  This was particularly so because purchaser failed to challenge seller’s factual assertions and, instead, merely asserted that seller’s efforts resolve the title issues were “insufficient”.  Thus, the Court determined that: the established, prima facie, that it made a good faith effort to convey title in accordance with the terms of the contract ( see SJSJ Southold Realty, LLC v Fraser , 150 AD3d at 921), and that its inability to do so justified its invocation of section 13.02, thereby requiring the to elect either to cancel the contract and receive a return of its down payment, or accept the property with the remaining tenancies and a credit of up to $75,000—a choice the refused to make ( see Mehlman v 592-600 Union Ave. Corp. , 46 AD3d 338; see also M&E 73-75, LLC v 57 Fusion LLC , 189 AD3d 1 ; 101123 LLC v Solis Realty LLC , 23 AD3d 107).

On January 19, 2021, the Appellate Division, First Department issued three decisions involving claims of fraud. See United Natural Foods, Inc. v. Goldman Sachs Grp. , 2021 N.Y. Slip Op. 00276 (1st Dept. Jan. 19, 2021) ( here ); KS Trade LLC v. International Gemological Inst., Inc. , 2021 N.Y. Slip Op. 00259 (1st Dept. Jan. 19, 2021) ( here ); and Itria Ventures LLC v. Provident Bank , 2021 N.Y. Slip Op. 00257 (1st Dept. Jan. 19, 2021) ( here ). Although these cases involved different elements of a fraud cause of action, the common thread among them is the justifiable reliance element of the claim.  In today’s post, we examine two of the three cases: United Natural Foods and KS Trade . The justifiable reliance element of a fraud cause of action has been described as a “fundamental precept” ( Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018)) and a “venerable rule”. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). The requirement is one of the five elements of a fraud cause of action: (1) a misrepresentation or a material omission of fact; (2) which was false and known to be false by the defendant(s); (3) made for the purpose of inducing another person to rely upon it; (4) justifiable reliance of the other party on the misrepresentation or material omission; and (5) damages. Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (citation omitted). The determination of whether a plaintiff justifiably relied on a misrepresentation or omission is a factually “nettlesome” one ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id. For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). If the plaintiff fails to make use of the means available to discover the truth, his/her claim will be dismissed. ACA Fin. Guar. , 25 N.Y.3d at 1044. This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman v. Holland & Knight, LLP , 156 A.D.3d 429, 430 (1st Dept. 2017). “Instead, the question is one for the trier of-fact.” Id. See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). “ hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.” Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011), quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 2006), lv. denied , 8 N.Y.3d 804 (2007).  Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. Such means include obtaining a prophylactic provision in a contract or other writing or making an additional inquiry into the representation. ACA Fin. Guar. , 25 N.Y.3d at 1045; DDJ Mgt. , 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). If they fail to do the foregoing, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). United Natural Foods, Inc. v. Goldman Sachs Group United Natural Foods concerned a multi-billion-dollar financing transaction between sophisticated parties. Pursuant to the transaction, United Natural Foods, Inc. (“UNFI”) agreed to acquire SUPERVALU Enterprises, Inc. (“SUPERVALU”) for approximately $2.9 billion (the “Acquisition”). Under the terms of the transaction papers, UNFI agreed to pay approximately $1.3 billion in cash to SUPERVALU’s shareholders and the balance to SUPERVALU’s creditors to extinguish most of SUPERVALU’s debt.  To navigate the Acquisition, UNFI engaged Goldman Sachs & Co., LLC, a subsidiary of defendant Goldman Sachs Group, Inc. (“GS Group”) and an affiliate of defendants Goldman Sachs Bank USA (“GS Bank”) and Goldman Sachs Lending Partners, LLC (“GS Lending”). GS Bank agreed to fund 45% of the Acquisition with a $2.15 billion Term Loan. GS Bank and GS Lending had the option to syndicate all or a portion of their commitment to fund the Term Loan to one or more banks, financial institutions, or other institutional lenders. UNFI could veto the investors selected for syndication, though it was obligated to cooperate with defendants’ syndication efforts. Whether defendants syndicated or not, they remained responsible for funding.  During the syndication process, GS Bank passed along an investor request that UNFI add SUPERVALU as a co-borrower on the Term Loan. UNFI alleged that defendants understated the impact of adding SUPERVALU as a co-borrower, claiming that any impact was “muted”, when in reality UNFI “was subjected to Term Loan lenders with a significant incentive to force UNFI and SUPERVALU to default on the Term Loan.” UNFI alleged that GS Bank failed to provide a list of investors in the Term Loan.  UNFI also claimed that when it inquired about the purpose of adding SUPERVALU as a co-borrower, defendants falsely represented that the co-borrower provision was important to “select accounts”. According to UNFI, defendants omitted to say that those select accounts were held by “ short sellers looking to preserve their bet that SUPERVALU would default on its borrowing.”  UNFI filed suit, asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud against all defendants. Defendants moved to dismiss.  The motion court granted the motion ( here ). With regard to the fraud claim, the motion court held that UNFI failed to plead justifiable reliance. As to the first allegation of fraud – i.e. , whether adding SUPERVALU as a co-borrower would have a “muted” effect – the motion court found that UNFI “had the means available to it of knowing by the exercise of ordinary intelligence the truth or real quality of” the statement: UNFI was also in position to undertake an “independent appraisal of the risk” associated with adding UNFI’s target as a co-borrower for what UNFI describes as the “most important undertaking in history.” Yet, UNFI admits to failing to demand the list of investors before the Closing; UNFI did not learn the identities of the investors until after the closing. Nevertheless, UNFI failed to engage in a due diligence investigation or independently appraise this risk. Therefore, and in spite of UNFI’s theories of liability, these allegations of justifiable reliance are untenable. UNFI even admits in a footnote in the complaint that it had “another financial advisor on the transaction, Foros LLC” and legal counsel available to it for consultation. As to the second allegation of fraud – i.e. , that adding SUPERVALU as the co-borrower was important to “select accounts” when in reality those were “ short sellers looking to preserve their bet that SUPERVALU would default on its borrowing” – the motion court found that UNFI failed to “exercise its veto power” over the investors selected. UNFI appealed.  The First Department affirmed, holding that “ he fraud claim was properly dismissed” due to plaintiff’s failure to sufficiently plead justifiable reliance. Slip Op. at *1. The Court found that “Plaintiff could have asked follow-up questions regarding what kind of an effect making Supervalu a coborrower would have and on which ‘select accounts,’ but did not do so … failed to insist on a final list of investors prior to closing, even though it undisputed that plaintiff had the contractual right to do so to facilitate exercise of its right to veto investors.” Slip Op. *1-*2. The Court explained that the failure to insist on the list of investors prior to closing was a “red flag that triggered a need to make additional inquiries, including with respect to whether any proposed investors had adverse interests to plaintiff.” Id. at *2. KS Trade LLC v. International Gemological Inst., Inc. KS Trade involved a dispute that arose after plaintiff, KS Trade LLC (“KS”), a New York-based jewelry designer and manufacturer, was unable to satisfy a purchase order from a large retail customer for 45 pieces of jewelry because it could not obtain grading reports from New York-based defendant, International Gemological Institute, Inc. (“IGI”), a corporation that grades diamonds and precious stones, and appraises jewelry. KS alleged that defendants engaged in a scheme to create “illicit profits for itself and its accomplices at the expense of diamond dealers, jewelry manufacturers and the ultimate end-user consumers who purchase the jewelry.” KS claimed that defendants systematically over-graded diamonds at their overseas branches, and then sold these diamonds with false certificates, to U.S. based jewelry manufacturers. To be able to sell these diamonds, New York manufacturers had to obtain a New York conforming certification, which IGI would only provide if the manufacturers paid it illicit “fees.” If the fees were paid, the diamonds were then passed off to consumers as higher quality goods with fraudulent appraisals and certificates. KS alleged that it refused to pay the illicit fees and was left with diamonds with no New York grading certificates and was unable to complete sales to its customers. KS filed suit alleging, inter alia , fraud. Defendants moved to dismiss the fraud claim, arguing that KS failed to identify any misrepresentation and allege justifiable reliance. In response, KS maintained that defendant committed fraud when it issued the original certificates for diamonds that it over-graded. KS claimed that defendant “intentionally rejected the earlier gradings so that it could solicit illicit fees” from KS. The motion court sustained the fraud claim. On appeal, the First Department affirmed. First, the Court found that KS “sufficiently alleged misrepresentations of ‘accurate and objective’ gradings by the overseas IGI branches, as well as misrepresentations of ‘consistent’ gradings by IGI NY.” Slip Op. at *1-*2.  Second, the Court found that KS “pleaded justifiable reliance on such misrepresentations in purchasing diamonds with overseas IGI certificates with the expectation that IGI NY would issue consistent appraisals.” Id. at *2. The Court explained that plaintiff satisfied this element of the claim because only defendants knew of the underlying fraud: “defendants had ‘peculiar knowledge’ of the underlying fraud.” Id. (quoting Basis Yield Alpha Fund Master v. Morgan Stanley , 136 A.D.3d 136, 145 (1st Dept. 2015)). As such, said the Court, “ he disclaimers in IGI Group’s website and IGI NY’s Client Agreement” did “not negate a finding of justifiable reliance.” Id. Takeaway Justifiable reliance is an essential element of a cause of action for fraud. ACA Fin. Guar. , 25 N.Y.3d at 1044. As such, a plaintiff suing for fraud (and particularly a sophisticated plaintiff, such UNFI and KS) must establish that it “has taken reasonable steps to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154. Such steps include availing oneself of the opportunity to verify the defendant’s representations through an examination of documents, corporate books and records, and other writings; asking questions; and/or insisting on prophylactic measures, such as representations and warranties in agreements. In United Natural Foods , UNFI failed to do any of the foregoing. Where there is a disclaimer of reliance on a fact or set of facts, a fraud claim will not be dismissed unless the disclaimer is specific to the fact(s) alleged to be misrepresented or omitted. Thus, a general disclaimer will not insulate a defendant from allegations of fraud. See Dallas Aerospace, Inc. v. CIS Air Corp. , 352 F.3d 775, 785 (2d Cir 2003).  In KS Trade , the alleged disclaimers warned only that the grading and appraisal process could be imprecise – that is, “they specifically disclaimed guarantees of consistency”; they did not, however, warn against the manipulation of the grading and appraisal process – a manipulation that, as KS alleged, was intended to coerce cooperation with defendants’ scheme to defraud. Even where a disclaimer is specific, as the First Department noted, it will not be deemed effective when the facts underlying the alleged misrepresentations are peculiarly within the defendant’s knowledge. Under such circumstances, as in KS Trade , the plaintiff has no reason to inquire into the representations and cannot investigate the facts. Basis Yield , 136 A.D.3d at 145.