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To plead a claim for fraud in the inducement or fraudulent concealment, a plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations. A sophisticated party, like the plaintiff in MBF Clearing Corp. v. JPMorgan Chase Bank, N.A. , 2020 N.Y. Slip Op. 07504 (1st Dept. Dec. 15, 2020) ( here ), must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the truth of the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Thus, a sophisticated party cannot “argue justifiable reliance on defendants’ misrepresentation or omission where had the means available to ascertain the status of the ” at issue and did not avail itself of those means. ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). here=">here" and="and" >here,=">here," for="for" example.="example."> MBF Clearing involved a “self-styled ‘long-established and well-regarded’ commodities futures commission merchant” that claimed, among other things, the defendants fraudulently induced it to invest its customer segregated assets in defendant’s J.P. Morgan U.S. Government Money Market Fund (“USG Fund”).  In particular, plaintiff, MBF Clearing Corp. (“MBF”), alleged that the defendants, JPMorgan Chase Bank N.A (“JPMC Bank”), J.P. Morgan Investment Management Inc. and Kevin T. Murphy (“Murphy”), an employee of JPMC Bank, and a futures commission merchant, fraudulently induced MBF to invest its customer segregated assets by opening a new segregated customer account (“Account x2069”) and invest those assets in the USG Fund. It also alleged that defendants fraudulently changed the title of Account x2069 to remove “commodity customer segregated bank account” in violation of the Federal Commodity Exchange Act and rules and regulations of the United States Commodities Futures Trading Commission.  MBF filed its first complaint on September 16, 2014. Thereafter, MBF filed two more complaints, an amended complaint and a second amended complaint (“SAC”). In the SAC, MBF alleged claims for fraudulent inducement to invest in USG Fund and open Account x2069, fraudulent misrepresentation as to the USG Fund, fraudulent misrepresentation as to Account x2069, fraud in changing the name on Account x2069, fraudulent concealment as to Account x2069, negligent misrepresentation as the USG Fund, negligent misrepresentation as to Account x2069, aiding and abetting in fraud, deceptive conduct, and contribution and indemnity. On January 28, 2016, the motion court dismissed the SAC without prejudice. As to the fraud-based claims and negligence claims involving both Account x2069 and the USG Fund, the motion court dismissed them because MBF failed to allege justifiable reliance. The motion court found that the investment in the USG Fund ran afoul of applicable rules and that MBF did not do its due diligence in making the investment, noting that it simply relied on the documents sent in connection with opening the account (that is, “in terms of setting up the account and opening the account ... there an acknowledgement ... by ... the CFO as well as the principles of plaintiff saying they read all the prospectus related to that opening of the account”). On August 2, 2016, MBF filed a motion to amend the complaint and caption, which was denied by the motion court. MBF then filed a motion to reargue the motion court’s decision denying the amendment. The motion to reargue was granted and the Third Amended Complaint (“TAC”) was deemed served and the caption amended. The TAC omitted all claims as to the USG Fund and focused on Account x2069. As before, MBF alleged several fraud-based claims involving Account x2069, negligent misrepresentation claims involving Account x2069, aiding and abetting, and contribution and indemnity.  The motion court dismissed the TAC on law of the case grounds. “The ‘law of the case’ doctrine is a rule of practice which provides that once an issue is judicially determined, either directly or by implication, it is not to be reconsidered by Judges or courts of co-ordinate jurisdiction in the course of the same litigation.” Holloway v. Cha Cha Laundry, Inc. , 97 A.D.2d 385, 386 (1st Dept. 1983) (citations omitted). The motion court concluded that the claims brought in the TAC were virtually identical to those dismissed in the SAC.  MBF appealed.  The Appellate Division, First Department unanimously affirmed. After concluding that the motion court correctly dismissed the action under the law of the case doctrine, the Court, undertaking its own “sufficiency review” of the claims, determined that plaintiff failed to state a cause of action for which relief could be granted. Slip Op. at *1. With regard to the fraudulent inducement claims, the Court held that the claims “failed” because plaintiff did “not allege justifiable reliance on the alleged misrepresentations.” Id. (citing ACA Fin. Guar. , 25 N.Y.3d at 1045; HSH Nordbank AG , 95 A.D.3d at 194-195). The Court found that plaintiff was a sophisticated party that “could readily have determined for itself whether the representations were false by exercising reasonable due diligence.” Id. As a self-styled “long-established and well-regarded” commodities future commission merchant, required by the Commodities Futures Trading Commission (CFTC) to hold its customers’ assets in customer segregated accounts, plaintiff is presumably familiar with the requirements related to such accounts. Plaintiff could have made inquiries when defendants represented to it that there was no need for a “customer segregation acknowledgment letter” for Account x2069 because it would be linked to, and a sub-account of, plaintiff’s existing Account X0253 for which a segregation letter had been obtained. However, rather than take simple measures to ensure its compliance with CFTC regulations, plaintiff relied on the representations that the segregation letter for Account X0253 would cover Account X2069. Id. (citations omitted). Takeaway MBF Clearing is another example of a court dismissing a fraud claim because the plaintiff failed 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, as in MBF Clearing , 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, like MBF, is a sophisticated party.  After all, the rationale for requiring sophisticated parties to “show they used due diligence and took affirmative steps to protect themselves from misrepresentations” ( VisionChina Media , 109 A.D.3d at 57) comports with the public policy behind the rule: it rids the courts “of cases in which the claim of reliance is likely to be hypocritical.” Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569, 580 (2018). As Judge Read explained in her dissenting opinion in ACA Financial Guaranty : Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable is designed to make sure that the courts “reject[] the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” and “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” ACA Fin. Guar. , 25 N.Y.3d at 1051.

In New York, foreign entities – that is, corporations, limited liability companies and partnerships authorized to do business in another jurisdiction or country – are required to register to business with the Secretary of State. See BCL § 1312(a). The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. See United Envtl. Techniques, Inc. v. State Dep’t of Health , 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue). When applying BCL § 1312(a), the relevant inquiry is whether the foreign entity is “doing business” in the State. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976). Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735-36 (2d Cir. 1983). A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)).  In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original). The entity’s activities cannot be “merely casual or occasional.…” United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc. , 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit). New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Netherlands Shipmortgage , 717 F.2d at 738. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State ( Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State)); (b) the frequency and regularity of activities within the State ( G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)); and (c) the volume and nature of the activities within the State ( United Arab Shipping Company v. Al-Hashim , 176 A.D.2d 569 (1st Dept. 1991) (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue)).  Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049 (the shipment of goods into New York from a foreign country for further shipment within or without the state is considered incidental to interstate and international commerce); Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years). The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Maro Leather , 161 Misc. 2d at 923). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); see also Highfill , 50 A.D.3d at 744.  “ hether was doing business in New York” is determined by looking “at the time the action was commenced.” Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. E.g. , Showcase Limousine, Inc. v. Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). On November 25, 2020, Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Diviion issued a decision in Excelsia Leatheware Co. v. Horowitz , 2020 N.Y. Slip Op. 34048(U) (Sup. Ct., N.Y. County Nov. 25, 2020) ( here ), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that plaintiff was not doing business in New York, even though it had “maintained a systematic and continuous business relationship with in New York”. Once the Court determined that the action could go forward under BCL § 1312(a), the Court denied the branch of the motion seeking dismissal of Plaintiff’s fraud claim.  Excelsia Leatheware Co. v. Horowitz Background Excelsia arose out of Defendants’ alleged conduct in inducing Plaintiff, Excelsia Leatherware Company (“Excelsia”), a leather goods producer based in Hong Kong, China, to produce and ship goods to Defendants (Kenneth Horowitz and Bag Studio, LLC) for resale without paying for the goods. On December 20, 2016, Excelsia exported goods valued at $42,479 to Bag Studio, which Bag Studio paid for on or about February 18, 2017. Thereafter, Excelsia continued to manufacture and ship goods to Bag Studio, which promptly paid for the goods within 60 days until February 2018, when it stopped paying for goods that were shipped by Excelsia.  By November 30, 2018, Defendants owed Excelsia at least $2,761,213.55 for goods shipped by Excelsia between November 2017 and November 2018.  According to Plaintiff, to induce it to continue providing goods to Bag Studio, Defendants promised to make payment. As a result of such statements, including that they had the ability and willingness and to make the payments that were past due, Plaintiff shipped additional goods that had been manufactured to Bag Studio’s specifications. However, alleged Plaintiff, Defendants repeatedly failed to keep their word, failing to pay as promised. In addition, Plaintiff alleged that Horowitz demanded that Excelsia pay a 6% administrative fee to pay for Bag Studio’s Chinese operations. That fee, however, was, according to Plaintiff, a kickback that was designed to enrich Horowitz and defraud Excelsia. Plaintiff claimed that Horowitz hid the kickback from other Bag Studio affiliated individuals, provided receipts for the kickback, and asked Excelsia to conceal the scheme.  On June 5, 2019, Plaintiff filed the complaint. Excelsia alleged (1) fraud in the inducement, (2) fraud (against Horowitz), (3) conversion, (4) account stated, (5) breach of contract, (6) unjust enrichment and (7) prima facie tort.  Defendants moved to dismiss. Relevant to this article, Defendants sought dismissal of the complaint in its entirety because Excelsia was not authorized to conduct business in New York pursuant to BCL § 1312(a) and, specifically, the fraud claim because Excelsia failed to plead certain elements of the claim with particularity. The Court denied the motion. The Court’s Decision The Court found that although “Defendants have shown that Excelsia ha maintained a systematic and continuous business relationship with them in New York since 2016,” Defendants failed to show that their “business relationship was anything more than merely facilitating the sale and delivery of Excelsia’s merchandise into New York.” Slip Op. at *3. The Court explained that the entities with which Excelsia was alleged to have done business along with Bag Studio ( e.g. , Nine West Company LLC, Mackage Soho, and Camuto Group LLC) were “Delaware entities with offices in New York.” Id. When Excelsia did business with them, they merely acted as a conduit of the merchandise. Id. (“ laintiff only had title to the merchandise until the merchandise arrived in Shenzen, China. At that point, title would pass to Bag Studio, and Bag Studio “would thereafter be responsible for risk of loss and transportation from there to the U.S.” under NY UCC 2-401) (citation to record omitted). “Accordingly,” concluded the Court, “Defendants’ claim that plaintiff is unauthorized to maintain this action in New York fails.” Id. The Court also held that Plaintiff stated a claim for fraud. Defendants argued that both fraud claims lacked particularity as required under CPLR § 30l6(b) and did not meet the standard for alleging scienter and damages. They also claimed that the fraud claim against Horowitz should fail because the claim was pleaded “upon information and belief” and because Plaintiff lacked actual knowledge of the allegations.  The Court found that Plaintiff satisfied the falsity and reliance elements of the fraud claim against Horowitz.  Here, plaintiff asserts the 6% kickback scheme as a misrepresentation known to be false by defendant Horowitz. Plaintiff alleges Horowitz intentionally created the scheme to induce plaintiff to rely upon it and unnecessarily pay money to him. Plaintiff alleges it relied on this misrepresentation and paid him money.  Id. at *5 (citations to the record omitted). The Court also held that Plaintiff pleaded scienter with the requisite particularity, thereby rejecting Defendants’ contention that Plaintiff failed to satisfy this element because it was based “upon information and belief”: The complaint plainly states “Horowitz’s actions were wanton, willful, and malicious,” and that there was no “legitimate or business purpose for the kickbacks.” The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme. These claims do not contradict plaintiff’s allegations that it was defrauded out of money. The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.  Id. (citations to the record omitted).  Takeaway Motions to dismiss on BCL § 1312(a) grounds are fact intensive. As Excelsia shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity’s business activities are not essential to intrastate or interstate commerce, even if the entity is “doing business” in New York, as in Excelsia , can save the case from dismissal under BCL § 1312(a). Excelsia also highlights that not all allegations on information and belief will spell the end of a fraud claim. As we have note in prior articles, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Allegations based on information and belief generally do not suffice. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). The reason, without stating the basis for the information and belief, the court has no factual basis upon which to consider the allegations of fraud. Thus, where the belief is based on factual information that makes the inference of culpability plausible, or where the facts are peculiarly within the possession and control of the defendant, a complaint will withstand a motion to dismiss. Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491-92 (2008) (internal quotation marks and citations omitted).  In Excelsia , Plaintiff alleged that it used the phrase “upon information and belief” only as to whether Horowitz actually sent the kickback fees to Bag Studio, which only Defendants would know. Slip Op. at *4. Plaintiff further argued that it was “able to detail every other aspect of the kickback scheme, including how Horowitz requested that plaintiff keep the kickback scheme secret from Bag Studio.” Id. at *5. Such allegations, held the Court, satisfied both of the foregoing prongs of pleading on information and belief. Id. (“The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme.… The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.”)

The New York Court of Appeals has described as “familiar and eminently sensible,” the proposition of law “that, when parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms.”  159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 358 (2019) (citation, internal quotation marks and ellipses omitted).  The same Court has also explained the particular importance of such a rule in the context of real property transactions “‘where commercial certainty is a paramount concern and where … the instrument was negotiated between sophisticated counseled business people negotiating at arms length.’”  159 MP , 33 N.Y.3d at 359 (quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004).) Another established principle of contract interpretation is that whenever possible, “a contract should be interpreted to avoid inconsistencies and to give meaning to all of its provisions, giving a practical and reasonable interpretation to the language employed and the parties’ reasonable expectations with respect thereto.”  Zullo v. Varley , 57 A.D.3d 356 (2 nd Dep’t 2008) (citations and internal quotation marks omitted).  “Therefore, a court should not adopt an interpretation which would leave any provision without force and effect.”  Zullo , 57 A.D.3d at 357 (citation and internal quotation marks omitted). On December 9, 2020, the Appellate Division, Second Department, decided 1710 Realty, LLC v. Portabella 308 Utica, LLC , and addressed the above described principles.  The plaintiff in 1710 was a landlord that, on December 16, 2015, entered into a commercial lease with defendant Portabella, as tenant.  In explaining the relevant portions of the lease, the 1710 Court stated: Section 13.1 of the lease, titled “Landlord’s Work,” provides that the plaintiff “agrees to deliver to the Demised Premises on the Commencement Date as is,” while section 1.2 of the lease, titled “Term,” provides that the lease term shall commence on the Commencement Date. Section 2.1 of the lease, titled “Commencement of the Term,” provides: “The ‘Commencement Date’ shall mean the date which is the later to occur of the date that (i) Tenant is delivered occupancy of the Demised Premises in the Delivery Condition (hereinafter defined), (ii) Tenant has been issued permits from the Department of Buildings of New York City in connection with Tenant’s Work and (iii) January 15, 201<6> . If the Demised Premises is not delivered within 90 days of the date of this Lease, then Tenant shall have the right to terminate the Lease. The payment of Rent, including without limitation, Fixed Rent (as hereafter defined) and Additional Rent (as hereinafter defined), shall commence on the date which is two hundred and seventy days after the Commencement Date (‘Rent Commencement Date’). For purposes herein, the Delivery Condition shall mean vacant, broom clean and free of the prior tenants<’> personal property and fixtures.” The lease contains a merger clause. 1710 Realty commenced the action after tenant, Portabella, exercised “its right of termination pursuant to section 2.1 on the ground that the plaintiff had not delivered the premises in the Delivery Condition within 90 days of the date of the lease.”  Tenant moved for summary judgment arguing that the premises were “not made broom-clean within 90 days of the date of the lease” as a considerable amount of trash and debris remained from the prior tenant.  Landlord opposed the motion and cross-moved for summary judgment and: acknowledged that a portion of the premises was not broom-clean but categorized that portion as “de minimus.” asserted that, pursuant to section 13.1 of the lease, it agreed only to deliver the premises “as is” and that the parties did not intend the premises to be broom-clean because Portabella was to undertake demolition and renovation work provided for in the lease. Supreme court denied tenant’s motion and granted summary judgment to landlord, reasoning that the provision in section 2.1 requiring the plaintiff to deliver the premises broom-clean was modified by the provision in section 13.1 that the premises were to be delivered “‘as is.’” The Second Department modified and, in so doing, recognized that “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Hence, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.  In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract’s meaning.”  (Citations and internal quotation marks omitted.)  Further, the Court reiterated that “ here two seemingly conflicting contract provisions reasonably can be reconciled, a court is required to do so and to give both effect.”  (Citations omitted, emphasis in original.) The Court disagreed with the landlord’s argument and supreme court’s determination that the “as is” provision in the lease “modified and effectively eliminated, the ‘broom clean’ requirement set forth in section 2.1.”  The Court found that such an interpretation “renders the Delivery Condition provision meaningless or without force or effect by excising the requirement that the plaintiff deliver possession vacant, broom-clean, and with the prior tenant’s property removed before Portabella’s obligation to pay rent begins to run.”  (Citations omitted.)  In resolving the “two seemingly contradictory positions” and giving effect to both, the Court stated: The Delivery Condition operated as a condition precedent to the triggering of the Commencement Date. Until the Commencement Date, as defined in the subject lease, occurred, by the plain terms of section 2.1, the lease term did not commence, and Portabella’s obligation to pay rent did not begin. In order to trigger the happening of the Commencement Date, the plaintiff had to meet the specific requirements of the Delivery Condition by delivering the premises vacant, broom-clean, and free of the prior tenant’s property and fixtures. Section 13.1 is not to the contrary since it required that the premises be delivered on the Commencement Date “as is” and the Commencement Date would not arrive unless the premises were vacant, broom-clean, and free of the property of the prior tenant. Stated differently, the fallacy in the plaintiff’s position is that the “as is” condition referred to in section 13.1 is the condition of the premises on the Commencement Date, not the condition of the premises on the date of the lease. Additionally, we attach significance to the fact that section 13.1, a one-sentence paragraph, is immediately followed by section 13.2, which sets forth in some detail demolition and renovation work to be undertaken by Portabella. The term “as is” as used in section 13.1 can be given its full and intended effect by reading it, together with sections 2.1 and 13.2, as setting forth the parties’ agreement that the premises would be rendered vacant and broom-clean by the plaintiff on the Commencement Date, would be delivered “as is” on that date to Portabella, and it would be Portabella, not the plaintiff, that would be responsible for any further work required for Portabella to be able to utilize the premises as intended. Because tenant validly terminated the lease due to landlord’s failure to deliver the premises in vacant and broom-clean condition within 90 days of the lease signing, tenant was entitled to summary judgment and the return of its security deposit and the first month’s rent, with interest.

It goes without saying that the spread of the coronavirus is accelerating across the country. As noted in the lead paragraph of an article posted in yesterday’s online version of the Washington Post, titled “U.S. Surpasses 15 million Coronavirus Cases as Spread Accelerates” ( here ):  It took about 100 days for the United States to record its first 1 million coronavirus cases, and 44 more passed before the country topped 2 million. But now, in the middle of the most severe surge yet, it has taken just five days to record one million infections, and on Tuesday, the country surpassed 15 million, more than anywhere else in the world by a wide margin.  Although a vaccine is on the horizon, experts expect the virus will continue to rage during the next couple of months. In New York, COVID-19 deaths have started to climb along with an increase in hospitalizations. More than 4,800 COVID-19 patients have been hospitalized across the state, double the reported number on November 18, 2020, and the highest number of hospitalizations since May 22, 2020. As reported in the downstate news media, the growth in hospitalizations, while not yet at a critical level, “is worrisome” ( here ). Governor Cuomo has warned that shutdowns in a given region will occur if hospitals in that region reach 90 percent capacity in the next three weeks. No region is presently close to that point, though Long Island and New York City are the nearest, with data showing only 18 percent and 19 percent of hospital beds available in those regions. Governor Cuomo wants at least 30 percent free. With the foregoing in mind, on December 7, 2020, Chief Judge DiFiore advised that effective immediately, the court system was “implementing a number of steps to reduce in-court operations and limit the number of people trafficking through courthouses” to help “prevent the spread of the virus.” ( Here .) Starting on December 7th, and continuing “until further notice,” the court system was reducing its “in-person staffing … to 40% or less in courts outside New York City, and to 30% or less in courts within the City.” Importantly, the court system would be “sharply limiting the number of in-person matters allow to proceed in courts.” Chief Judge DiFiore said that “ onessential personal appearances in civil courts being temporarily suspended, and only a small number of in-person essential and emergency matters be heard in criminal, family, and housing court.” “By eliminating nonessential in-person appearances and encouraging virtual appearances whenever possible,” Chief Judge DiFiore explained, “we will be able to dramatically reduce the number of people coming into our buildings and thereby curtail the person-to-person contact that allows this horrific virus to spread.” Chief Judge DiFiore noted that the court system’s “Administrative Judges and court managers implementing these steps within a statewide framework and an established set of protocols.…” She further noted that the protocols would provide the Administrative Judges with the discretion “to make operational decisions that are tailored to the specific needs of their courts and the public health conditions demanding action in their localities.” here.=">here." These="These" become="become" effective="effective" today="today" and="and" will="will" apply="apply" to="to" all="all" court="court" operations="operations" in="in" the="the" Tenth="Tenth" Judicial="Judicial" District—Nassau="District—Nassau" County.="County."> Chief Judge DiFiore said the court system was encouraging virtual appearances whenever possible and would “continue to focus on improving and expanding virtual capacity, especially in the Family Court, where jurists and staff are already handling hundreds of matters remotely each day, including urgent filings involving child abuse and neglect, delinquency, support, custody, visitation and guardianship cases.” She noted that the court system had “distributed hundreds of laptops and other remote technology statewide, and upgrading and improving the virtual court process by, for example, installing voice recognition software to streamline the efficiency and improve the accuracy of virtual proceedings.”  “Like the Family Court, our New York City Civil Court is also making outstanding use of remote technology to conduct its business,” said Chief Judge DiFiore. She highlighted the “dozens of virtual bench trials and settling large numbers of cases each week” in that court. As a result, “the pending inventory, especially in automobile no-fault cases where medical providers seek to recover damages from insurance providers for medical services rendered to their insureds” was favorably impacted. “Because the amounts in dispute are under $25,000 and witness testimony is limited, no-fault cases are especially well-suited for virtual resolution,” observed Chief Judge DiFiore. The appellate courts have gone virtual until further notice.  In the Appellate Division, First Department, the Court said that it will hold all oral arguments remotely via Microsoft Teams. No in-person oral arguments will be conducted ( here ).  In the Second Department, oral arguments are presumed to be conducted virtually, although parties can request in-person argument, though any such request must be accompanied by an explanation as to why argument cannot be heard virtually ( here ).  In the Third Department, the Court will be hearing oral arguments by videoconference ( here ).  In the Fourth Department, oral argument in all matters in which argument had been requested for the Court’s November/December term, commencing November 30 and concluding December 10, will be held remotely via the Court’s remote argument platform ( here ). This Blog will continue to update our readers on the latest COVID-19 developments affecting the New York court system.

In prior articles, we have examined enforcement actions (and settlements thereof) brought by the Securities and Exchange Commission (“SEC” or “Commission”) involving false statements about the subject companies and COVID-19. ( E.g. , here .) Those actions involved micro-cap companies and the products they claimed to offer to address the pandemic. As we noted in those articles, there was a common thread between the actions – they involved pump and dump schemes in which the company falsely claimed that its products or services could prevent, detect or cure the coronavirus.  In today’s article, we examine a COVID-19 related enforcement action against The Cheesecake Factory Incorporated, a Delaware corporation based in Calabasas Hills, California, that operates restaurants across the United States and internationally through licensees. The action represents the first time the SEC has charged a large public company for misleading investors about the financial effects of the pandemic. On December 4, 2020, the SEC announced ( here ) that it settled charges against The Cheesecake Factory for making false and misleading statements about the impact of the COVID-19 pandemic on its business operations and financial condition in press releases attached to Forms 8-K that were filed with the SEC on March 23 and April 3, 2020, respectively. According to the Cease and Desist Order (the “Order”) ( here ), in mid-March 2020, The Cheesecake Factory faced an unprecedented challenge to its business and operations arising from the impact of the COVID-19 pandemic. The company issued several disclosures regarding the effect of, and its response to, the pandemic. As described in the Order, certain of those disclosures failed to inform investors of the extent of the pandemic’s impact on the company’s operations and financial condition in the period of late-March through mid-April 2020, when the company obtained additional financing. As explained in the Order, the company began taking steps to conserve cash and increase liquidity in the near-term. Among other things, on March 18, 2020, the company sent a letter to its landlords saying that it would not be paying April rent due to the “severe decrease in restaurant traffic ha severely decreased our cash flow and inflicted a tremendous financial blow to our business,” noting that it “hope to resume our rent payments as soon as reasonably possible.” In addition, on March 23, 2020, the company drew down the last $90 million on a revolving line of credit. As of the start of the second quarter on April 1, 2020, the company had approximately $65 million of cash and cash equivalents. By at least March 23, 2020, said the SEC, the company was actively seeking additional liquidity through either the incurrence of debt through lenders or the issuance of equity to private equity investors with the goal of raising at least $100 million. In presentations shared with lenders and potential private equity investors, noted the SEC, The Cheesecake Factory disclosed its cash position and projected that the company had cash to support approximately 16 weeks of operations under the prevailing circumstances. According to the SEC, internal documents showed that the company was experiencing a negative cash flow rate of $6 million per week. On March 23, 2020, The Cheesecake Factory filed a Form 8-K with the Commission disclosing, among other things, that it was withdrawing previously issued financial guidance due to economic conditions caused by COVID-19. The Cheesecake Factory attached, as an exhibit to the Form 8-K, a copy of a press release also dated March 23, 2020, in which it provided a business update regarding the impact of COVID-19. According to the press release, The Cheesecake Factory announced that it was transitioning to an “off-premise model” ( i.e. , to-go and delivery) that was “enabling the Company’s restaurants to operate sustainably at present under this current model.” The company also disclosed the $90 million draw down on its revolving credit facility, that it had curtailed planned unit growth, and that it was “evaluating additional measures to further preserve financial flexibility.” The SEC claimed that the March 23, 2020 Form 8-K and the attached press release did not disclose the landlord letters or the company’s negative cash flow rate. Two days later, on March 25, 2020, the media reported that The Cheesecake Factory had sent a letter to each of its restaurants’ landlords on March 18 stating that it was not going to pay its rent for April 2020, and included a copy of one of the landlord letters. On March 27, 2020, following media reports of the landlord letter, The Cheesecake Factory provided information in another Form 8-K, disclosing that it was not planning to pay rent in April and that “it was in various stages of discussions with its landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of COVID-19 related closure.” The company also disclosed that effective April 1, 2020, it had reduced compensation for executive officers, its Board of Directors, and certain employees. In addition, the company announced that it had furloughed approximately 41,000 employees but allowed them to retain their benefits and insurance until June and provided them with a daily complimentary meal from their restaurant. On April 3, 2020, The Cheesecake Factory filed a Form 8-K with the Commission that attached a copy of an April 2, 2020 press release as an exhibit. The April 2 press release provided a preliminary first quarter 2020 sales update given the impact of COVID-19. Among other things, The Cheesecake Factory disclosed that “the restaurants are operating sustainably at present under this model.” The SEC alleged that The Cheesecake Factory’s disclosures on March 23 and April 3 regarding the sustainability of its restaurant operations did not disclose that the company was excluding expenses attributable to corporate operations from its claim of sustainability; that the company was, in fact, losing approximately $6 million in cash per week; and that it had only approximately 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing. In addition, claimed the SEC, The Cheesecake Factory’s March 23, 2020 disclosure that it was “evaluating additional measures to further preserve financial flexibility” did not disclose the March 18, 2020 landlord letters stating that the company would not pay April rent. Based on the foregoing, the SEC claimed that The Cheesecake Factory’s March 23 and April 3, 2020 Forms 8-K were materially false and misleading. On April 20, 2020, The Cheesecake Factory announced that it received a $200 million investment from Roark Capital, a private equity firm, thereby enhancing the company’s liquidity position.  “During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of COVID-19 on their operations and financial condition,” said SEC Chairman Jay Clayton. “As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.” “When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately,” said Stephanie Avakian, Director of the Division of Enforcement. “The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations.” In the Order, the SEC found that The Cheesecake Factory violated reporting provisions of the federal securities laws. Without admitting the findings in the Order, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. The company cooperated in the SEC’s investigation – a factor that the Commission considered in determining to accept the settlement. On Friday, December 4, 2020, the price of the company’s shares fell 2% to $38.62 per share.

“A cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” Krantz v. Chateau Stores of Can. Ltd. , 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted).  “To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.” Id. (citations and quotation marks omitted). One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” WIT Holding Corp. v. Klein , 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012). Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract ( id. at 528 (citation omitted)), such as a misrepresentation about the ability to perform under the contract.  In today’s article, we examine Shear Enters., LLC v. Cohen , 2020 N.Y. Slip Op. 07149 (1st Dept. Dec. 1, 2020) ( here ), a case in which the plaintiff avoided the duplication of claims doctrine by alleging a misrepresentation about the ability to perform under the contract.  Shear arose from commercial transactions between plaintiff, Shear Enters., LLC, and defendant, Tres Joli Accessories, Ltd. (“TJ”). For over ten years, plaintiff and TJ did business together whereby TJ manufactured apparel for plaintiff and shipped it to plaintiff’s customers. During this period of time, the parties developed a credit line pursuant to which TJ manufactured and sold apparel to Plaintiff.  In February 2018, plaintiff placed two orders with TJ to manufacture apparel that was ordered by one of plaintiff’s customers (the “Orders”). Among other things, plaintiff told defendants the date by which the Orders had to be shipped to the customer. If the Orders were not shipped by that date, then the customer could cancel the Orders. Defendants allegedly represented that TJ had the ability to timely fill and ship the Orders as requested and that a cash down payment was necessary to secure plaintiff’s payment for the Orders. Defendants also allegedly represented that TJ was financially sound and had the ability to timely fill and ship the Orders.  Plaintiff alleged that the foregoing representations were false and made with the intent of inducing plaintiff to place the Orders – orders that defendants allegedly knew TJ would not fill – and make the down payment – a payment that they allegedly never intended to earn or return. According to plaintiff, TJ did not, for various reasons, timely fill and ship the Orders. As a result, plaintiff’s customer cancelled the Orders. Defendants did not return the down payment, saying that they would re-pay it by crediting it against future orders until the down payment was returned in full. Defendants allegedly reassured plaintiff that TJ was not in financial trouble and had the financial ability to timely ship additional orders and return the down payment. Thereafter, Plaintiff placed additional orders with TJ (the “Additional Orders”). After Plaintiff placed the Additional Orders, defendants allegedly told plaintiff that an additional payment of $110,000 was required for TJ to continue working on the Additional Orders. Among other things, defendants allegedly represented that (1) TJ had the ability to timely fill and ship further orders, (2) they were in the process of working on the Additional Orders, and (3) the Additional Orders were on schedule to be timely produced and shipped. Plaintiff claimed that it made the additional payment in reliance on defendants’ alleged false representations.  Defendants moved to dismiss, arguing, inter alia , that plaintiff’s fraud cause of action duplicated its contract cause of action. The motion court agreed. On appeal, the Appellate Division, First Department reversed. The Court held that the motion “court should not have dismissed the cause of action for fraud as duplicative of the cause of action for breach of contract.” Slip Op. at *2. The Court explained that the “gravamen of the allegations supporting the claim not, as in Cronos Group, Ltd. v XComIP, LLC (156 AD3d 54, 62 <1st dept 2017> ), that defendants ‘made a promise while harboring the concealed intent not to perform it.’” Slip Op. at * 2. “Rather,” said the Court, “plaintiff assert that defendants misrepresented their very ‘ability to perform,’ an allegation that support a non-duplicative fraudulent inducement claim.” Id. (citing Man Advisors, Inc. v. Selkoe , 174 A.D.3d 435, 435 (1st Dept. 2019)). The Court also rejected defendants’ argument that the fraud claim was duplicative because “the damages the same under either theory.” Id. The Court reasoned that “given this early procedural stage of the action, plaintiff should be permitted to plead the cause of action in the alternative pursuant to CPLR 3014.” Id. (citation omitted).  Takeaway We have noted in the past that New York courts do not allow a fraud claim to survive a motion to dismiss when the claim arises from an alleged breach of contract or failure to perform an obligation under the contract. Indeed, the New York Court of Appeals has made it clear that a fraud claim should be dismissed where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud claim can stand side-by-side with “a simple breach of contract” claim. Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Shear provides an example of the type of misrepresentation that courts consider to be collateral to the performance obligations under a contract.  Since courts routinely dismiss fraud claims as being duplicative of contract claims ( e.g. , Clark Constr. Corp. v. BLF Realty Holding Co. , 28 A.D.3d 367, 368-369 (1st Dept. 2006)), Shear is noteworthy because of the Court’s invocation of CPLR § 3014, which permits “ auses of action or defenses be stated alternatively or hypothetically.” While it may be due to the circumstances of the case ( see Slip Op. at *2 (“ e hold that, under the circumstances,…”)), the decision not to dismiss even though the relief sought was duplicative remains an interesting result.

In Trustees of Columbia Univ. in the City of N.Y. v. D’Agostino Supermarkets, Inc. , 2020 N.Y. Slip Op. 06937 (Nov. 24, 2020) ( here ), the New York Court of Appeals was asked to “consider the propriety of a liquidated damages provision in a Surrender Agreement between two New York City icons: Columbia University, one of the City’s premier universities, and D’Agostino Supermarkets, a family-owned food market chain founded in 1932.” Slip Op. at *1. D’Agostino had leased property that was owned by Columbia University. The supermarket chain breached the lease by failing to pay rent for more than seven months. Rather than litigate, the parties settled the matter by entering into a Surrender Agreement. Under the agreement, if D’Agostino made timely installment payments, totaling about $262,000, representing the rent it already owed but had failed to pay, it would be relieved of certain other obligations stemming from its breach of the lease. However, if it failed to timely make the payments, D’Agostino would not “be released and relieved from” the claims Columbia agreed to release and would have to pay liquidated damages in “the aggregate amount of all Fixed Rent, additional rent or other sums and charges due” during the remainder of the lease term (about two years). Defendant failed to timely pay the first four monthly surrender payments, despite plaintiff’s notice to cure. In November 2016, plaintiff commenced the underlying action to enforce the liquidated damages provision in the Surrender Agreement. After defendant answered, plaintiff moved for summary judgment seeking future payments under the terminated lease, i.e. , $1,020,125.15, plus interest and other taxes and costs provided for under the lease. Plaintiff rejected defendant’s December 2020 tender of $175,751.73, which represented overdue and early payments of the remaining surrender installments. Defendant cross-moved for summary judgment striking the damages provision and seeking entry of judgment against itself for $175,751.73—the outstanding amount due under the Surrender Agreement—along with accrued interest as of October 14, 2016, or, in the alternative, denying plaintiff’s motion and ordering discovery on the issue of damages and mitigation based on the new lease. The trial court denied plaintiff’s motion for summary judgment and granted defendant’s cross-motion for summary judgment for the requested amount and interest. The Appellate Division, First Department affirmed (168 A.D.3d 594 (1st Dept. 2019)). The Court granted plaintiff leave to appeal (33 N.Y.3d 904 (2019), and in a 4-3 decision written by Judge Rivera affirmed the Appellate Division’s decision. A significant issue in the action was whether the damages provision should be “measured against defendant’s breach of the Surrender Agreement” or, “against the breach of the terminated lease.” Slip Op. at *3. The majority viewed the matter under the prism of the former, while the dissent viewed the dispute under the latter. Viewed as a breach of the Surrender Agreement, the Court concluded that the liquidated damages provision was “an unenforceable penalty because it plainly disproportionate to the damages for the only contractual breach at issue in th appeal, i.e. , overdue payment of the monthly surrender installments.” Id. Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.” Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977). “A liquidated damage provision has its basis in the principle of just compensation for loss. Id. (citing Restatement of Contracts § 339, and Comment thereon). “Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable. A provision which requires damages ‘grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable.’” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc. , 24 N.Y.3d 528, 536 (2014) (citation omitted) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). here=">here" and="and" >here.=">here."> The party seeking to avoid payment of liquidated damages has the burden of establishing that the damages for a breach are disproportionate to the foreseeable losses and “in fact, a penalty”. JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005). The Court held that defendant met this burden. The Court observed that the “damages provision effectively reinstated defendant’s future rent liabilities under the terminated lease, to the tune of $1,020,125.15, plus interest and other prospective taxes and costs due under the lease, even though those damages did not flow from a breach of the Surrender Agreement.” Slip Op. at *4. “Those damages,” said the Court, “were 7½ times what plaintiff would have received, if defendant had fully complied with the Surrender Agreement.” To permit plaintiff to recover that amount, reasoned the Court, would be tantamount to the enforcement of “a non-existent lease under the guise of damages for a breach of a separate contract.” Id. (footnote omitted). To be clear, when the lease was in effect, plaintiff could have exercised its rights as the landowner and proceeded against defendant for violating the leasehold terms. Instead, plaintiff negotiated with defendant to terminate the lease in exchange for a set amount of money and surrender of the premises. That contract freed plaintiff from its lessor obligations. Critically, contrary to the dissent’s assertion that plaintiff “received nothing in exchange” (dissenting op at 5), it allowed plaintiff to immediately reenter and relet the premises without the need for litigation, which is exactly what it did. When defendant breached the Surrender Agreement, plaintiff was entitled to proceed under that contract and demand damages for the breach, including the amount past due and acceleration of the remaining installment payments.  Id. (citations omitted). However, said the Court, “plaintiff could not seek a payment grossly disproportionate to the amount past due plus interest.” Id. The Court concluded that “ y any measure the more than one million dollars plus interest demanded here is disproportionate to the $175,751.73 unpaid under the Surrender Agreement.” Id. (citations omitted). The Court posed “ simple hypothetical” to “illustrate[] the penalizing nature of the liquidated damages provision” under the Surrender Agreement. Id. at *5.  According to plaintiff’s interpretation of the Surrender Agreement, if defendant timely made all but the final monthly surrender payment of $15,977.43, defendant's breach would render it liable for $1,029,969.54 plus interest and additional costs. Defendant would be liable for the total amount remaining due under the terminated lease, and defendant would be forced to pay that amount, rather than the final installment, without having had the benefit of the premises which it had surrendered to plaintiff. There is but one way to refer to this outcome: an unenforceable penalty. Id. In finding the damages clause to be “an unenforceable penalty,” Judge Rivera relied on the Court’s decision in Van Duzer . There, like in Columbia Univ. , the defendants maintained that the landowner’s acceleration of prospective rent was disproportionate to the landowner’s actual damages. As in Columbia Univ. , the landowner terminated the lease and relet the premises after the tenant vacated. Without deciding whether the amount sought was a penalty, the Court held that the defendants were entitled to a hearing to present evidence that the undiscounted accelerated rent was disproportionate to the landowner’s actual losses, and thus constituted unenforceable liquidated damages. Van Duzer , 24 N.Y.3d at 536-537. The majority rejected the dissent’s argument that the Surrender Agreement should be examined as a settlement agreement. Slip Op. at *5 (citing the dissenting op. at 3). The reason, said Judge Rivera, “a settlement agreement, like any other agreement, cannot be enforced if it violates public policy, including our state’s rejection of penalties as damages.” Id. (citations omitted).  “Plaintiff's real argument,” observed the majority, “is that it did not receive six payments on time, but that was the risk that it accepted by entering the Surrender Agreement.” Id. Such a risk ( i.e. , the risk of default), noted Judge Rivera, “is a risk common to all contracts, without unique effect in the context of a surrender of premises. And the existence of that risk does not and cannot justify exaction of a penalty.” Id. Finally, the majority took issue with the dissent’s argument “that affirmance … would disincentivize landowners from entering surrender agreements and deprive tenants of the benefit afforded by such arrangements.” Id. “This approach,” explained Judge Rivera, “encourages surrender agreements as providing a benefit to all parties—the tenant is released from future liability and the landowner regains the premises and the opportunity to relet on its own account.” Id. “In contrast,” concluded Judge Rivera, “the dissent’s approach would disincentivize tenants from negotiating a mutually agreeable surrender because the tenant would remain on the hook for back rent, future rent and other contractual damages without the benefit of enjoyment of the premises.” Id. Writing for the dissent, Chief Judge DiFiore argued that the majority opinion interfered with the public policy favoring the freedom to contract. Slip Op. at *5. This policy, said Chief Judge DiFiore, “applie with particular force to the Surrender Agreement—which a settlement agreement crafted by the parties to resolve their dispute without litigation.” Id. “Strict enforcement of settlement agreements serves multiple important purposes, consistent with those underlying freedom of contract,” observed Chief Judge DiFiore. Id. “ hese policies, and the significant interests they protect, should guide the resolution of this dispute between two sophisticated, counseled commercial entities.” Id. Chief Judge DiFiore said the “majority cast[] these principles aside, failing to acknowledge that the Surrender Agreement constituted a settlement of the claims Columbia possessed upon D’Agostino’s breach of the lease, which included a right to collect—not only unpaid back rent—but also future rent owed until the conclusion of the lease term, even if D’Agostino vacated the premises (Columbia had no obligation under the lease to relet the property).” Id. at *5-*6. “The parties’ agreement could not be clearer,” explained Chief Judge DiFiore, “that Columbia waived certain claims it possessed arising from D’Agostino’s breach of the lease only if this condition—timely payment of the installments—was met.” Id. at *6. “Under the plain language of the agreement,” Chief Judge DiFiore noted, “upon D’Agostino’s default or failure to timely cure upon notice, two things would occur: D’Agostino would immediately be obligated to pay the future rent due under the lease (among other associated payments) and it would ‘no longer be entitled to be released and relieved from and against any Released Claims.’” Id. The dissent took issue with the majority’s conclusion “that the Surrender Agreement should be interpreted without reference to the prior breach of the lease and that D’Agostino was relieved of all obligations under the lease even if it failed to timely make the installment payments.” Id. Although the Surrender Agreement “terminated the lease,” it most certainly did not unconditionally release the tenant of all obligations flowing from its breach of that prior agreement, and the majority’s assertion that Columbia seeks to “enforce a non-existent lease under the guise of damages for a breach of a separate contract” (majority op at 8) misses the mark. Columbia does not attempt to enforce the lease—instead, it seeks to enforce the contingent remedy the parties adopted in the Surrender Agreement in the event D’Agostino failed to timely make the Surrender Payments. Id. The dissent found that the “public policy underlying our liquidated damages jurisprudence simply not implicated in circumstances where, as in this case, there is no need to estimate the damages that might result in the event of a future breach because the breach has already occurred and the parties are crafting a settlement agreement.” Id. “But even viewing the contingent remedy as a liquidated damages clause,” said Judge DiFiore, “the majority’s conclusion that the provision reinstating D’Agostino's obligation to pay future rent is an unenforceable penalty because it provides for damages ‘exponentially disproportionate’ to D’Agostino’s outstanding Surrender Payments (approximately $1 million versus $176,000) adopts an overly simplistic view of the Surrender Agreement and fail to ‘giv due consideration to the nature of the contract and the circumstances’ in which it was entered….” Id. (citing Van Duzer , 24 N.Y.3d at 536) (footnote omitted).  It is evident from the Surrender Agreement that the parties understood that D’Agostino’s liability for breach of the lease was much greater than the value of the Surrender Payments. The obligations triggered if those payments were not timely made were not included merely as compensation for breach of the Surrender Agreement but were also intended to compensate Columbia for D’Agostino’s earlier breach of the lease. Thus, an analysis of whether the damages set forth in the Surrender Agreement are grossly disproportionate to Columbia’s probable losses requires consideration not only of the value of the Surrender Payments that D’Agostino failed to make, but also of the probable damages already set in motion by D’Agostino's prior breach of the lease, viewed from the time the Surrender Agreement was executed and not the date of the breach. Id. (citation omitted). Thus, explained the dissent, “ t is irrelevant that Columbia’s actual damages … may ultimately be different than the amount D’Agostino agreed to pay in the contingent remedy provision of the Surrender Agreement.” Id. “The enforceability of a liquidated damages clause,” further explained Chief Judge DiFiore, “does not turn on whether the remedy that the parties contemplated before the breach occurred is identical to the damages actually suffered.” Id. “To impose such a requirement,” reasoned the dissent, “would obviate the entire purpose of such provisions, which is to reasonably estimate the damages that might result, permitting the parties to avoid the costs and uncertainty of litigating damages in the event of a future breach.” Id. “For this reason,” concluded Chief Judge DiFiore, “the rough relationship between the remedy in the contract and the damages flowing from a breach must be assessed based on the terms of the agreement and the information the parties possessed at the time it was executed—not with the benefit of hindsight based on post hoc proof of damages actually incurred.” Id. at *6-*7. In conclusion, the dissent said there was no competing public policy that negated the policy underlying the freedom to contract. Id. at *7. Because there was nothing unfair about the settlement crafted by these well-counseled sophisticated parties, public policy affords no basis to alter their contract. Since the back rent payments were already substantially overdue, Columbia reasonably sought assurance that D’Agostino would uphold its end of the bargain under the Surrender Agreement (something it failed to do under the lease). As reflected in the plain language of the agreement, Columbia was willing to forego pursuit of its then-existing right to collect both unpaid back rent and future rent only if D’Agostino timely made the back rent installment payments (the owner gave up its right to receive more money overall but would be assured of prompt payment of a discounted amount on a regular schedule, without the need for litigation). Of course, that is not what happened. By eliminating the element that induced the owner to give up its rights, the majority creates a distorted, one-sided settlement in which—despite its default—D’Agostino was able to enjoy the full benefit of the bargain. Id.

Hang on Sloopy was a hit song in the mid-1960s. Years later, the band that performed and recorded the song – the McCoys – claimed that they were cheated out of substantial sums of money due to fraud. That claim, however, was time-barred, held the Court in Derringer v F.G.G. Prods. Inc. , 2020 N.Y. Slip Op. 33854(U) (Sup. Ct., N.Y. County Nov. 18, 2020) ( here ). Fraud claims must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011).  The question of whether a plaintiff had inquiry notice of fraud is appropriate for determination on a motion to dismiss only if it conclusively appears on the face of the complaint that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred. Epiphany Community Nursery School v. Levey , 171 A.D.3d 1 (1st Dept. 2019). The alleged failure by a defendant to make a required payment is often sufficient to put a plaintiff on inquiry notice that a fraud has occurred. See Cusimano v. Shurr , 137 A.D.2d 527 (1st Dept. 2016) (plaintiffs were on inquiry notice of fraud when defendants did not pay them in accordance with alleged obligations to do so); Stern v. Barney , 129 A.D.3d 619 (1st Dept. 2015) (plaintiffs were on inquiry notice of investment firm’s alleged fraud that took place 10 years prior where they either received monthly account statements, or, if no such statements were received, failed to inquire).  As discussed below, plaintiffs’ silence for more than five decades in the face of defendants’ failure to pay them for the work performing Hang on Sloopy, among other recordings, was fatal to their claims because such nonpayment put them on inquiry notice of the alleged fraud. Derringer v F.G.G. Prods. Inc. Background In July 1965, plaintiffs recorded Hang on Sloopy. At the time plaintiffs recorded the song, Rick Derringer was 17, Randy Zehringer was 15, and Ronnie Brandon was 19. In early August 1965, plaintiffs and Zehringer’s parents met Gerald Goldstein for the purpose of inducing plaintiffs to sign a recording contract with FGG Productions, Inc. (“FGG”) so that FGG could release Hang on Sloopy. According to plaintiffs, at the meeting, Goldstein referred them to Julie Rifkind, who Goldstein described as “a ‘great’ lawyer” who could “represent and advise them.” At the time, Rifkind worked for Bang Records, the record label that was to promote, release, sell and distribute the sound recording of Hang on Sloopy. Bang Records maintained offices in the same office building and on the same floor as FGG’s offices. Goldstein took plaintiffs, Zehringer’s Parents, and Randy Hobbs to Rifkind’s office. Rifkind reviewed a document prepared by FGG, which Rifkind “stated … effect … was a ‘good contract’” (the “1965 Document”). Rifkind gave the 1965 Document to Zehringer’s parents and advised them to sign it. Zehringer’s parents signed the 1965 Document on behalf of Derringer and Zehringer. Brandon and Hobbs were not asked to sign the 1965 Document and did not sign it. Neither Zehringer’s parents nor any of the plaintiffs were given a copy of the 1965 Document. Instead, Rifkind told plaintiffs and Zehringer’s parents that the 1965 Document should be left in his possession for safekeeping, as he was their “attorney.” On June 26, 2018, plaintiffs learned that Rifkind was never an attorney licensed to practice in New York State. After Zehringer’s parents signed the 1965 Document, at FGG’s request, plaintiffs performed and recorded 20 additional songs (together with the sound recording for “Hang on Sloopy,” the “recordings”) as The McCoys. FGG subsequently assigned by agreement any and all rights it had in and to the recordings to Bang Records. Through a series of purchases, transfers, and corporate and business consolidations, Sony Music Entertainment currently owns whatever rights Bang Records held in the recordings. Plaintiffs alleged that defendants have continuously exploited the recordings since 1965 and have received substantial income therefrom. Plaintiffs have received no payments, statements, or documents, from defendants concerning the recordings in the 53 years prior to commencing the action. Plaintiffs claimed that they never consented to defendants’ use of their names, photographs and likenesses for any commercial purposes in connection with the recordings. On June 28, 2018, Derringer commenced the action. FGG answered the complaint on August 8, 2018. On November 18, 2018, plaintiffs filed an amended complaint. Although the amendment was procedurally improper (it was filed more than 20 days after FGG answered), none of the defendants rejected or otherwise objected to the filing.  The amended complaint asserted nine causes of action. Among the claims alleged were rescission of the 1965 Document as against all defendants based on the fraudulent misrepresentation that Rifkind was an attorney representing plaintiffs and Zehringer’s parents and fraud against the FGG defendants for the same alleged conduct. Defendants moved to dismiss the amended complaint. In seeking dismissal, defendants principally argued that plaintiffs were barred from bringing the action due to the expiration of the statutes of limitations governing their claims.  The Court agreed, granting the motion with regard to the fraud claims. The Court’s Decision The Court held that plaintiffs were on inquiry notice of the alleged fraud “long before June 28, 2016”, when they filed the action. Slip Op. at *12. The Court observed that there were “several facts alleged in the amended complaint would have raised clear red flags to a reasonable person in the plaintiffs’ position.” Id. For example, the Court noted that plaintiffs and Zehringer’s parents only met with Rifkind once “and apparently ha never communicated with again.” Id. Moreover, said the Court, Rifkind was “recommended by FGG, their contractually adverse party, and worked for the company that would distribute the plaintiffs’ recordings.” Id. “More significantly,” explained the Court, “plaintiffs allege that they ha received no payment for the exploitation of the recordings since 1965, in spite of Rifkind’s representations to them that they were signing a ‘good contract.’” Id. Even according plaintiffs the benefit of their youth and lack of sophistication in the industry at the time of the 1965 Document, they “did not remain unsophisticated teenage musicians over the five decades that have elapsed since the exploitation allegedly began,” said the Court. Id. at *13. Derringer was, for instance, an accomplished, Grammy award winning artist. Id. Thus, “ ven if the circumstances immediately surrounding the execution of the 1965 Document were not independently sufficient to put the plaintiffs on notice of any alleged fraud, over 50 consecutive years of unpaid payments and unsent statements should have prompted someone of Derringer’s sophistication to look further into the matter.” Id. The Court rejected plaintiffs’ argument that the lack of payment merely put them on notice of a breach of contract, rather than fraud or misrepresentation. Id. The Court observed that plaintiffs’ argument was “belied by the fact that the crux of their fraud-based claims, and the primary motivation for the plaintiffs’ commencing th action, their assertion that they entitled to some payment or accounting for the exploitation of the recordings beginning in 1965.” Id. “Put differently,” said the Court, “plaintiffs point to lack of payment as evidence that they were defrauded. Their contention that the same lack of payment could not or should not have put them on notice of fraud is inconsistent.” Id. The Court noted that plaintiffs did not “explain why none of them, …, questioned or inquired as to why they never received payments for recording Hang on Sloopy after it successfully climbed the pop charts. Nor they proffer any reason why they failed to make any such inquiries after they recorded 20 additional songs for FGG, which launched their music career and have been released on numerous albums since.” Id. at *14-*15. The Court found the case similar to Baiul v. William Morris Agency, LLC , 2014 WL 1804526 (S.D.N.Y. May 6, 2014). Id. at *15.  In Baiul , the court dismissed Oksana Baiul’s fraud claims pursuant to CPLR 213(8). Baiul alleged that as a 16-year-old Ukrainian-born figure skater, she was fraudulently induced into signing numerous contracts in English, a language she did not fully understand, in connection with various performances and undertakings. Baiul stated that she failed to receive any compensation for certain undertakings and was deprived of millions of dollars in royalties for her performances. The court dismissed Baiul’s fraudulent inducement and other related claims, reasoning that even in the face of Baiul’s age and language barrier, Baiul’s silence for 12 years in the face of the defendant’s failure to pay her for the numerous performances she claimed entitled her to significant compensation was fatal to her claims. In short, noted the court, nonpayment was deemed sufficient to put Baiul on inquiry notice of any potential fraud. Finally, the Court noted that “in reaching its conclusion,” it was advancing the “policy considerations underlying statutes of limitations.” Id. at *16-*17 (citations omitted). The Court noted that the “plaintiffs’ fraud-based claims raise precisely the sort of concerns against which statutes of limitations are meant to protect.” Id. at *17-*18. Takeaway In in William Shakespeare’s play Hamlet, upon learning that Claudius had plotted to kill him, Hamlet determined that the best way to respond was by letting Claudius be “Hoist with his own petard”. See Act 3, Scene 4. That idiom perhaps best describes the Court’s analysis in Derringer – plaintiffs’ claim that they did not receive any payments for their records was the reason why they were on inquiry notice of the alleged fraud.  Aside from being on inquiry notice, Derringer highlights the policy reasons for statutes of limitations: “A defendant … ought not to be called on to resist a claim where the evidence has been lost, memories have faded, and witnesses have disappeared.” Flanagan v. Mount Eden Gen. Hosp. , 66 N.Y.2d 473, 476 (1985) (citation omitted; internal quotation marks omitted). That was precisely the facts in Derringer :  Over 50 years ha passed since the events at the center of the plaintiffs’ claims transpired. Key witnesses to the events, including Rifkind and Hobbs, have passed away. Those witnesses that are still alive may understandably be unable to recall specific details about events that took place half a century ago with a high degree of accuracy.”  Slip Op. at *17-*18.

Sometimes, a case involves facts and circumstances that, on their face, lead a court to determine that a fraud was committed. Such was the case in First Franklin Fin. Corp. v. Merchant , 2020 N.Y. Slip Op. 06852 (1st Dept. Nov. 19, 2020) ( here ).  In First Franklin , a judgment debtor transferred property subject to a foreclosure sale to a company that he had formed all on the same day. Such facts and circumstances, said the lower court, represented “badges of fraud” under former Debtor & Creditor Law (“DCL”) § 276 that were indicative of an intent to hinder, delay or defraud the debtor’s creditors. The Appellate Division, First Department agreed. Background Non-party Nereid 2028, an entity created and partially owned by defendant Arnold Merchant (“Merchant”), moved to set aside a non-judicial sale of real property located in the Bronx, New York (the “Property”). Merchant had borrowed $95,000.00 from First Franklin in 2005. The debt was secured by a mortgage dated September 29, 2005.  Merchant defaulted on the note, failing to make the payment due on March 1, 2008, and each payment date thereafter. As a result, First Franklin commenced a foreclosure action. The lower court entered an order of reference in March 2010, and a Judgment of Foreclosure and Sale in January 2016. On June 18, 2018, a referee held an auction of the Property. On the same day, Merchant incorporated Nereid 2028 and transferred a 50% interest in the Property to it for $10.00. Also, on the same day, Nereid 2028 declared bankruptcy.  The bankruptcy proceeding was dismissed on July 20, 2018, due to certain deficiencies in the filing, which Nereid 2028 failed to correct. On March 20, 2019, Nereid 2028 filed an order to show cause in the foreclosure action, seeking to set aside the purchase of the Property. The motion court denied the motion.  The court held that the circumstances surrounding the transfer were fraudulent, finding that the transfer was “obviously undertaken for the sole purpose of impeding the foreclosure sale.” Here, the attendant circumstances are rife with … “badges of fraud.” These include the close relationship between the parties to the transaction, inadequate consideration for the transaction, and the retention of the benefit of the property by defendant, who maintained a 50% ownership interest. The motion court concluded that the badges of fraud indicated that the conveyance was made “with intent to defraud” and held that the transfer was “null and void.” Nereid 2028 appealed. The First Department affirmed. In a pithy decision, the Court found that “ he court correctly found” the transfer to be fraudulent and, therefore, null and void:  The court correctly found that judgment debtor defendant Arnold Merchant’s purported transfer of the property for $10, on the eve of a foreclosure sale, to a brand new entity that he created and caused to commence a Chapter 11 proceeding just a few hours before the foreclosure sale, bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff.  Slip Op. at *1 (citing 5706 Fifth Ave., LLC v. Louzieh , 108 A.D.3d 589 (2d Dept. 2013)). Takeaway An action under former DCL § 276 requires proof that the transferor actually intended to hinder, delay, or defraud his/her creditors, whether they be present or future creditors. Since “ irect evidence of fraudulent intent is often elusive … courts will consider ‘badges of fraud’ which are circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent.” Dempster v. Overview Equities , 4 A.D.3d 495, 498 (2d Dept. 2004), lv. denied , 3 N.Y.3d 612 (2004) (internal quotation marks omitted). “Badges of fraud” from which fraudulent intent may be inferred include: (1) a close relationship between the parties to the transaction, (2) secrecy and haste in making the transfer, (3) the inadequacy of consideration, (4) the transferor’s knowledge of the creditor’s claim, or a claim so likely to arise as to be certain, and the transferor’s inability to pay it, and (5) the retention of control of property by the transferor after the conveyance. Dempster , 4 A.D.3d at 498. Of the five (5) badges of fraud listed, at least four (4) of them were present in First Franklin : (1) haste in making the transfer: it was done “on the eve of a foreclosure sale”; (2) inadequate consideration: the consideration for the transfer was $10.00; (3) the transferor had knowledge of the creditor’s claim: Merchant knew of the judgment and the foreclosure sale; and (4) retention of control of the property by the transferor after the conveyance: Merchant “created” Nereid 2028 (“and caused to commence a Chapter 11 proceeding”) and, thereafter transferred a 50% interest in the Property to it, while retaining the other 50% for himself. It is not surprising that the motion court concluded that “the attendant circumstances rife with … sufficiently alleged ‘badges of fraud’” – a conclusion with which the First Department agreed (the circumstances surrounding the transfer “bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff”).

On November 4, 2020, this Blog (the “November 4 Blog”) provided an update on the New York State Court system’s preparation for the anticipated surge in COVID-19 cases. On November 18, 2020, Andrew A. Crecca, the District Administrative Judge for the 10 th Judicial District (Suffolk County), circulated a memorandum on “Suffolk County Updated Operating Protocols <“the plan”> Effective November 23, 2020” (the “Memorandum”).  As noted in the November 4 Blog, “the country has seen a surge in new coronavirus cases.”  In the Memorandum, Administrative Judge Crecca recognized that while “ oot traffic in the courthouses has been gradually increased to correspond with an improvement in the metrics measuring the spread of Coronavirus” once the Unified Court System “permitted in-person proceedings in accordance with the Governor’s un-PAUSE New York plan.”  However, Administrative Judge Crecca recognized that the recent “metrics have indicated the need to once again reduce foot traffic in the courthouses to protect the health and safety of litigants, lawyers, court staff and judges.” Administrative Judge Crecca incorporated by reference into the Memorandum, Chief Administrative Judge Lawrence Marks’ November 13, 2020 Memorandum (the “Marks Memorandum”).  (The Marks Memorandum in annexed to the Memorandum, but can also be found HERE .)  The Marks Memorandum, which became effective on November 16, 2020 and “revis certain USC statewide operational practices in the trial courts” due to “adverse trends in coronavirus transmission rates in New York State” provides that: (1) no new civil or criminal jurors will be summoned for jury duty, but pending civil and criminal trials will proceed to conclusion; (2) no new grand jurors will be summoned for grand jury duty until further notice, but pending grand juries will continue to conclusion; and, (3) all future bench trials and hearings will be virtual unless permission is otherwise granted by the “respective Deputy Chief Administrative Judge”; (4) in-person socially-distanced court conferences will continue and “all coronavirus health and safety procedures should continue to be closely followed.” According to Administrative Judge Crecca, “the Plan should be considered an update to the Return to ln-Person Operations Plan effective October 19, 2020 and to .”  While the entire Plan is set forth within the Memorandum, some of the components, not otherwise reflected in the Marks Memorandum are as follows: The calendar times for different courts (e.g., family, criminal) in the same building shall be staggered; A maximum of 50% of the courtrooms in a facility can be used at the same time; No more than 50% of judges/referees/magistrates of the same type (e.g., family, criminal) can hold in-person calendars at the same time; No more than 10 cases per part per hour shall be scheduled; Courtroom occupancy shall be limited to the lesser of 10 people or ½ the posted occupancy per code (except for ongoing jury trials and grand jury proceedings; There will be reductions in non-judicial staff reporting to the courthouse and others will work remotely; In-person matters (of the type set forth in the Memorandum) may be heard if the presiding judge finds that it is unlawful or impractical to conduct the proceeding virtually (hybrid in-person/virtual proceedings will also be considered where practical); All other matters not permitted to be heard in person (of the type described in the Memorandum, which include, but are not limited to, civil and criminal bench trials and evidentiary hearings, motion arguments, Mental Hygiene Law proceedings pertaining to a hospitalized adult, ADR where both parties are represented by counsel and counsel will be present, Part 137 attorney-client fee dispute arbitrations) MUST be heard virtually. In addition, the Memorandum also contained updated operating protocols for Suffolk County Town and Village Courts along the lines as stated above.

Brokerage firms, financial institutions and investment advisers are required to provide suitable investment recommendations and strategies to a customer that are consistent with the customer’s investment objectives, risk tolerance and financial needs. See , e.g. , here and here (FINRA Rule 2111). This requirement is based on the “know your customer” rule ( here (FINRA Rule 2090)), which requires brokerage firms, financial institutions and investment professionals to be aware of all factors that affect a customer’s financial situation. The suitability rule applies to an investment professional’s investment advice regardless of the type of recommendation ( e.g. , a buy, sell or hold), the complexity of the investment product, and the sophistication of the customer. The rule is not dependent on a particular transaction or the compensation generated from the transaction. The investment professional must understand the investment or strategy being recommended and the customer’s ability to understand and assume the risks associated with the investment or strategy. The investment professional is required to exercise reasonable diligence in gathering all information necessary to make the recommendation or strategy.  Such information includes the customer’s age, investment portfolio, employment status, tax status, investment objectives, financial situation and needs, investment experience, investment time horizon, liquidity needs, and risk tolerance. The investment professional should consider any other information disclosed by the customer in connection with the recommendation or strategy to determine the customer’s ability to understand and assume the risks associated with the investment or strategy. Investment losses resulting from unsuitable investment advice can serve as the basis for a claim in a FINRA arbitration and/or an enforcement action by the Securities and Exchange Commission (“SEC”), FINRA or other regulatory body. In today’s article, we examine five settled enforcement actions brought by the SEC involving the suitability of complex exchange-traded products for the subject firms’ retail investors. On November 13, 2020, the SEC announced ( here ) that it filed actions, all of which settled, against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations that related to unsuitable sales of complex exchange-traded products to retail investors (the “Actions”). The advisory firms and broker-dealers involved in the Actions are American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. Under the settlements, the advisory firms and broker-dealers agreed to return in total over $3 million to harmed investors. The Actions concerned the sale of volatility-linked exchange-traded products between January 2016 and April 2020. As set forth in the orders ( here , here , here , here , and here ), the firms attempted to track short-term volatility expectations in the market, which are typically measured against derivatives of the CBOE volatility index.  According to the SEC, the offering documents for the products made clear that the short-term nature of the products made investments in the products more likely to experience a decline in value when held over a longer period. The SEC found that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. E.g. , American Portfolios (“APFS registered representatives who recommended their brokerage customers buy and hold a complex exchange traded product (“ETP”) without a reasonable basis for believing the recommendation was suitable for their customers” and “did not understand the product, misrepresented its risks and recommended it for a purpose inconsistent with that described in the product’s offering materials.”); Benjamin Edwards (“ he Benjamin Edwards brokerage representatives and advisory representatives failed to make a reasonable determination that these investments were suitable for certain of the customers and clients to whom they recommended the Complex ETPs, based on those retail customers’ and clients’ investment objectives, risk tolerance, and financial condition. A number of these brokerage and advisory representatives also misled their customers and clients about the Complex ETPs’ benefits and risks.”) The SEC further found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products. “It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk,” said Stephanie Avakian, Director of the SEC’s Division of Enforcement. “We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments.”   The Actions were the first to be brought following the investigations by the Division of Enforcement’s Exchange-Traded Products Initiative, which used trading data analytics to uncover potential unsuitable sales.  “These cases demonstrate the importance of data analytics in our efforts to surveil the market and pinpoint unsuitable sales of complex financial products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to use these tools to protect retail investors.” The SEC’s orders found that each firm failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and its rules.  The order against American Portfolios found that the firm failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product. The order against Benjamin Edwards found that the firm failed reasonably to supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products. Without admitting or denying the findings, each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.

On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law.  In February of this year, this Blog examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL ( here ).  Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine two such cases: Cheek v. Brooks , 2020 N.Y. Slip Op. 06485 (2d Dept. Nov. 12, 2020) ( here ), and JDI Display Am., Inc. v. Jaco Electronics, Inc. , 2020 N.Y. Slip Op. 06507 (2d Dept. Nov. 12, 2020) ( here ). Cheek involved DCL former § 273, and JDI involved DCL former §§ 273, 275 and 276. Cheek v. Brooks Cheek involved an action pursuant to DCL § 273, in which Cheek sought to set aside the conveyance of the certain properties. The conveyances occurred in 2002, when Harold Deveaux, Jr. transferred two properties to his nephew, defendant Khareem Brooks. At the time of the transfer, plaintiff, who lived at one of the properties from her birth in 1994 through at least 1995, possessed a cause of action against Deveaux for lead poisoning. In 2008, plaintiff, by her mother, commenced an action against Deveaux and, in 2009, obtained a judgment against him. Deveaux died in 2015. In 2015, plaintiff commenced the action. Plaintiff moved for summary judgment on the cause of action seeking relief pursuant to DCL § 273. In an order dated October 4, 2018, the motion court, among other things, granted that branch of plaintiff’s motion. Brooks appealed. The Second Department affirmed. Pursuant to DCL § 273, “a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration.” Stout St. Fund I, L.P. v. Halifax Grp., LLC , 148 A.D.3d 744, 747 (2d Dept. 2017); Grace Plaza of Great Neck v. Heitzler , 2 A.D.3d 780, 781 (2d Dept. 2003). To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed. DCL § 272; Stout , 148 A.D.3d at 748; Sardis v Frankel , 113 A.D.3d 135, 141 (1st Dept. 2014). “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” 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)). “An individual is ‘insolvent’ within the meaning of the Debtor and Creditor Law when ‘the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on … existing debts as they become absolute and matured.’” Grace Plaza , 2 A.D.3d at 781 (quoting DCL § 271(1)); see also Matter of City of Syracuse Indus. Dev. Agency , 156 A.D.3d 1329, 1332 (4th Dept. 2017). Insolvency is a “‘prerequisite[ ] to a finding of constructive fraud under section 273.’” Syracuse Indus. Dev. Agency , 156 A.D.3d at 1332 (quoting Joslin v Lopez , 309 A.D.2d 837, 838 (2d Dept. 2003)). Against the foregoing, the Second Department held that the motion court correctly found that the “alleged purchase prices were not fairly equivalent and proportionate to the value of the subject properties.” Slip Op. at *1. The Court noted that the “deeds for both properties recite consideration in the sum of only $10 and neither indicate that any transfer tax was paid.” Id. The Court noted that Brooks “purchased the Greene Avenue property for $200,000 and the Adelphi Street property for $170,000, and … tendered a contract for the purchase and sale of the Greene Avenue property which stated a purchase price of $200,000.” Id. “Although ‘ t is always open to a party, where a nominal consideration is expressed, to show what the real consideration was,’” said the Court, “Brooks failed to do so.” Id. (internal citation omitted). The Court also found that Brooks failed to rebut the presumption that the transfers were made without fair consideration. Under New York law, “the burden of proving insolvency is on the party challenging the conveyance.” Id. (quoting Battlefield Freedom Wash, LLC v. Song Yan Zhuo , 148 A.D.3d 969, 971 (2d Dept. 2017)) (citation omitted) “However,” noted the Court, as in Cheek , “when a transfer is made without fair consideration, a presumption of insolvency and fraudulent transfer arises, and the burden shifts to the transferee to rebut that presumption.” Id. (quoting Battlefield , 148 A.D.3d at 971). The Court found that “Brooks’s conclusory assertions and those of his aunt that Deveaux was not rendered insolvent were insufficient to rebut that presumption.” Id. JDI Display Am., Inc. v. Jaco Electronics, Inc. JDI involved an action under DCL §§ 273, 275 and 276, in which JDI sought to set aside the transfer of corporate funds to a director and shareholder of one of the corporate defendants. Plaintiff is the developer, manufacturer, and seller of display devices and related products. From September 2014 through October 2017, defendant Jaco Electronics, Inc. was a licensed distributor of plaintiff’s products. As of July 2017, Jaco Electronics owed plaintiff approximately $550,000 for products plaintiff shipped to it.  In August 2017, defendant Jaco Display Solutions, LLC purchased Jaco Electronics’ assets. According to the complaint, as part of the deal, Jaco Electronics received an investment of more than $1 million, which it transferred to defendant Joel Girsky, one of its directors and shareholders, leaving it insolvent.  In an effort to recover damages for the outstanding amount owed to it by Jaco Electronics, plaintiff commenced the action against, among others, Jaco Electronics’ directors and shareholders, Girsky, Robert Savacchio, and Jeffrey Gash.  The first cause of action sought to set aside the alleged fraudulent conveyances between Jaco Electronics and Girsky pursuant to DCL §§ 273, 275 and 276. Defendants moved to dismiss the complaint as asserted against them. By order dated July 9, 2018, the motion court, inter alia , denied the motion to dismiss the first cause of action. Defendants appealed. The Second Department affirmed. The Court held that “the first cause of action state cognizable claims alleging a fraudulent conveyance pursuant to Debtor and Creditor Law former §§ 273, 275 and 276.” Slip Op. at *2. The Court found that “plaintiff sufficiently alleged that Jaco Electronics transferred corporate funds it had received from the sale of its assets to Girsky, one of its directors and shareholders, and that said transfer left it insolvent.” Id. Like DCL § 273, a claim under DCL § 275 must establish that the conveyance or obligation incurred was made without “fair consideration”. However, unlike DCL § 273, a claim under DCL § 275 requires an element of intent or belief that insolvency will result. Wall Street Assocs. v. Brodsky , 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted). The Court also held that “ he complaint … contained sufficient factual assertions and badges of fraud, … , to support the allegation that Jaco Electronics believed that it would not be able to pay its debts after it transferred funds to Girsky, which give rise to an inference that Jaco Electronics intended to hinder, delay, or defraud the plaintiff.” Id. at *2 (citations omitted). DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” (as noted by the JDI Court) to raise and inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” Wall Street Assocs. , 257 A.D.2d 526, 529 (internal quotation marks and citations omitted). Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. Id. “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc.2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). Since DCL § 276 concerns actual fraud, the plaintiff must plead it with particularity. Thus, the plaintiff must allege specific facts, including, among other things, the identity of the specific transactions or conveyances that the plaintiff claims were fraudulent. Syllman v. Calleo Dev. Corp. , 290 A.D.2d 209, 210 (1st Dept. 2002); see CPLR 3016 (b). In JDI , the Court held that plaintiff satisfied this requirement. Slip Op. at *2. Takeaway Prior to the enactment of the NYUVT, creditors looked to Article 10 of the Debtor and Creditor Law to recover assets that had been (or may be) transferred by debtors to another party. Whether the debtor transferred assets with intent to defraud or without fair consideration, the former DCL (and now the NYUVT) provides creditors with a number of remedies. There are significant differences between the DCL and the NYUVT ( here ). Whether the plaintiffs in Cheek and JDI would have prevailed under the NYUVT is unknown. What is certain, however, is creditors must satisfy the applicable pleading and evidentiary standards to secure the protections under both the former DCL and the NYUVT. In Cheek and JDI , the plaintiffs met their respective pleading and evidentiary requirements.