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The term “digital asset” or “digital token” generally refers to an asset that is issued and transferred using distributed ledger or blockchain technology, including “cryptocurrencies,” “coins,” and “tokens.” A blockchain or distributed ledger is a peer-to-peer database spread across a network, that records all transactions in theoretically unchangeable, digitally recorded data packages. The system relies on cryptographic techniques for secure recording of transactions. Blockchains or distributed ledgers can also record “smart contracts,” essentially computer programs designed to execute the terms of a contract when certain triggering conditions are met. Entities have offered and sold digital assets in fundraising events, called “initial coin offerings” or “ICOs,” in exchange for consideration, often other digital assets.  Generally, digital assets may entitle holders to certain rights related to a venture underlying the ICO, such as rights to profits, shares of assets, rights to use certain services provided by the issuer, and/or voting rights. These digital tokens may also be listed on online digital asset trading platforms, where they can be traded for other digital assets or fiat currency. The digital tokens are often transferable immediately upon delivery to investors. ICOs are typically announced and promoted through public online channels. The prospectus soliciting the public to acquire tokens in the ICO is usually in the form of a “white paper,” which constitutes marketing materials describing the project and the terms of the ICO. To participate, investors may transfer funds to a unique digital address set up by the issuer, and the issuer may deliver tokens to the participants’ unique digital address on a distributed ledger or blockchain. This process may be partially automated through the use of a smart contract. On July 25, 2017, the Securities and Exchange Commission (“SEC”) issued the DAO Report of Investigation (the “Report”) ( here ), advising that digital tokens or coins may be securities, and thus, subject to the federal securities laws. In particular, the Report found that tokens offered and sold by the “virtual” decentralized, autonomous organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirmed that issuers of distributed ledger or blockchain technology-based securities had to register offers and sales of such securities unless a valid exemption applied. The Report made clear that those participating in unregistered offerings could also be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities had to register unless they were exempt.  The Report stemmed from an inquiry that the SEC’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency.  On September 11, 2020, the SEC announced ( here ) that it brought charges against five Atlanta-based individuals, including film producer Ryan Felton, Clifford Harris, Jr., a well-known musician, actor, and producer, also known as T.I. or Tip, and three others who each promoted one of Felton’s two unregistered and allegedly fraudulent ICOs. The SEC also charged FLiK and CoinSpark, the two unincorporated Atlanta-based companies controlled by Felton that conducted the ICOs. Aside from Felton, all the individuals agreed to settle the charges against them. In the complaint ( here ), the SEC alleged that Felton promised to build a digital streaming platform for FLiK and a digital-asset trading platform for CoinSpark. Instead, Felton allegedly misappropriated the funds raised in the ICOs. The SEC also alleged that Felton secretly transferred FLiK tokens to himself and sold them into the market, reaping an additional $2.2 million in profits, and that he engaged in manipulative trading to inflate the price of SPARK tokens.  Felton allegedly used the funds he misappropriated and the proceeds of his manipulative trading to buy a Ferrari, a million-dollar home, diamond jewelry, and other luxury goods. In a settled administrative order ( here ), the SEC found that Harris offered and sold FLiK tokens on his social media accounts, falsely claiming to be a FLiK co-owner and encouraging his followers to invest in the FLiK ICO. Harris also asked a celebrity friend to promote the FLiK ICO on social media and provided the language for posts, referring to FLiK as T.I.’s “new venture.” The SEC’s complaint alleged that T.I.’s social media manager William Sparks, Jr. offered and sold FLiK tokens on T.I.’s social media accounts, and that two other Atlanta residents, Chance White and Owen Smith, promoted SPARK tokens without disclosing they were promised compensation in return. “The federal securities laws provide the same protections to investors in digital asset securities as they do to investors in more traditional forms of securities,” said Carolyn M. Welshhans, Associate Director in the Division of Enforcement. “As alleged in the SEC’s complaint, Felton victimized investors through material misrepresentations, misappropriation of their funds, and manipulative trading.” The SEC filed its complaint in the U.S. District Court for the Northern District of Georgia. The SEC charged Felton with violating registration, antifraud, and anti-manipulation provisions of the federal securities laws.  FLiK and CoinSpark were charged with violating registration and anti-fraud provisions. White and Smith were charged with violating registration and anti-touting provisions. Sparks was charged with violating registration provisions. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties, as well as an officer-and-director bar against Felton.  In the settled order, Sparks agreed to disgorge his ill-gotten gains plus prejudgment interest. Sparks, White, and Smith each agreed to pay a penalty of $25,000 and to conduct-based injunctions prohibiting them from participating in the issuance, purchase, offer, or sale of any digital asset security for a period of five years. Harris agreed to pay a $75,000 penalty and not participate in offerings or sales of digital-asset securities for at least five years. The proposed settlements are subject to court approval.  Three of Felton’s family members and an LLC that he established were also named as relief defendants.  The U.S. Attorney’s Office for the Northern District of Georgia brought criminal charges against Felton in a parallel action ( here ). In that proceeding, the government is seeking a forfeiture of the proceeds of Felton’s alleged schemes.

Under CPLR § 3101, New York State’s procedural rule governing disclosure of documents and information, “there shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” The rule applies to parties and non-parties alike. A question often arises as to whether the documents and information at issue are “material and necessary” (often interpreted as relevant) to the action. Courts in New York interpret the phrase liberally. As such, they require disclosure of any facts bearing on the controversy that will assist preparation for trial by sharpening the issues and reducing delay and prolixity. As the Court of Appeals explained, the test is one of usefulness and reason. Allen v. Crowell-Collier Publishing , 21 N.Y.2d 403 (1968). Notwithstanding, CPLR § 3101 establishes three categories of materials protected from disclosure. First, the statute excludes from disclosure privileged matter. Privileged matter includes, but is not limited to, self-incriminating matter, communications between an attorney and client, communications between spouses, communications between doctor and patient and secret grand jury information. This is an absolute immunity. Second, the statute excludes from attorney work product materials. Like privileged matter, this is an absolute immunity. Finally, the statute excludes from disclosure trial preparation materials. Such materials are subject to disclosure on a showing of substantial need and undue hardship. Preservation of documents and information is a key component of the disclosure regime. After all, a person or entity cannot disclose documents and information material and necessary to an action if such evidence is not preserved.  The duty to preserve evidence is a broad one. It requires preservation of materials known, or reasonably known, to be relevant to the action. And it requires preservation of documents and material that are reasonably calculated to lead to the discovery of admissible evidence, is reasonably likely to be requested during discovery, and/or is the subject of a pending discovery request.  The duty to preserve exists independent of any notification or instruction to preserve from the opposing party. It applies to corporations and individuals. Notably, attorneys have a duty to be familiar with their client’s document retention policies and protocols to ensure that all sources of relevant information are discovered. The duty to preserve documents and information arises during litigation and when a party reasonably anticipates litigation. Thus, the duty to preserve is triggered by: service of a complaint; receipt of a preservation of evidence demand letter; receipt of a discovery demand requesting particular documents and information; and written correspondence or oral communication from an opposing party or a third party or an employee indicating that litigation is anticipated.  When a party is the plaintiff, the duty to preserve is triggered when that person or entity learns of facts that make it probable that he/she/it will pursue litigation against another and has information that is relevant to any potential defense. It is important to note that the duty to preserve does not require an obligation to maintain every piece of paper and every document. Rather, the duty requires a party to act in good faith and take reasonable steps to preserve documents and information.  Relevant to today’s article, the duty to preserve includes electronically stored information (“ESI”). ESI includes: (a) materials stored on personal computers, CD-ROM’s, external hard drives, flash drives, servers, and cell phones; (b) email accounts like “Gmail” or “Yahoo”; (c) social networking sites like “Facebook” or “Linked In”; and (d) handheld devices. ESI also includes electronic communications, such as text messages, emails, recorded conversations, information stored on apps, and the like.  Where evidence, including ESI, is destroyed when it should have been preserved, a party may be guilty of spoliation. A party may seek sanctions for the spoliation of evidence by showing that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense. Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547 (2015), quoting VOOM HD Holdings LLC v. EchoStar Satellite L.L.C. , 93 A.D.3d 33, 45 (1st Dept. 2012); see also Squillacioti v. Independent Grp. Home Living Program, Inc. , 167 A.D.3d 673 (2d Dept. 2018). Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed. Pegasus , 26 N.Y.3d at 547. If, however, the evidence was destroyed negligently, the moving party bears the burden to establish that the evidence was relevant to its claims or defenses. Id. at 547-548. Trial courts may, in the exercise of discretion, impose sanctions to provide relief to the affected party, including: (a) preclusion of evidence favorable to the spoliating party, (b) awarding costs associated with obtaining replacement evidence, or (c) employing an adverse inference instruction at trial. Id. at 551, citing CPLR § 3126 (“If any party … refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed … the court may make such orders with regard to the failure or refusal as are just”). In addition, the trial court can strike the pleading of the spoliating party. Striking a pleading is a drastic sanction to impose in the absence of willful or contumacious conduct and, in order to impose such a sanction, the court “will consider the prejudice that resulted from the spoliation to determine whether such drastic relief is necessary as a matter of fundamental fairness.”  Squillacioti , 167 A.D.3d at 675 (citations omitted). However, “where the moving party has not been deprived of the ability to establish his or her case or defense, a less severe sanction is appropriate.” Id. (citations omitted). “Where evidence has been found to have been negligently destroyed, adverse inference charges have been found to be appropriate.” Id. ; see also Pegasus , 26 N.Y.3d at 554. In Carey v. Shakhnazarian , 2020 N.Y. Slip Op. 51040(U) (Sup. Ct., N.Y. County Sept. 11, 2020) ( here ), the Court addressed the foregoing principles in granting a motion for sanctions due to the spoliation of ESI evidence. Carey v. Shakhnazarian Background Plaintiff, Mariah Carey, commenced the action against defendant, Lianna Shakhnazarian, plaintiff’s former executive assistant, claiming that defendant breached a non-disclosure agreement (“NDA”) that defendant signed by, among other things, making unauthorized video recordings and disseminating confidential information to the Daily Mail. In connection with discovery proceedings, plaintiff served two requests for production of documents. In both sets of requests, plaintiff demanded the disclosure of documents from March 13, 2015 to the present. Among the materials requested were those stored on defendant’s cellphone – that is, the cellphone that she had been using since early 2018 (the “2018 Cellphone”). According to the Court, defendant did not search the 2018 Cellphone for responsive documents. At her deposition, defendant denied having ever backed up any of the documents from her 2018 Cellphone and said that she was not aware if anything was automatically saved to the iCloud. Defendant also claimed that in August 2019, she accidentally spilled water on the 2018 Cellphone, rendering it inoperable. She did not deny, noted the Court, that she failed to take any measures to recover the documents and communications on the device. Instead, defendant gave the 2018 Cellphone to her boyfriend to see if she could get any money toward a new phone by trading it in. She could not, however, recall the name or location of the store where the phone was surrendered. Relevant to the action, defendant acknowledged that she had deleted WhatsApp messages that she deemed “unnecessary,” but denied deleting any WhatsApp messages since the time when she began contemplating litigation against plaintiff. In addition, although defendant represented that no other recordings were made or disseminated, forensic imaging of her cellphone, conducted after the motion for disclosure sanctions was filed, revealed a fourth recording that had not previously been disclosed. The forensic imaging report showed that defendant sent or attempted to send this fourth recording to a third party, but that she subsequently “unsent” the video. Forensic imaging also revealed that defendant had saved copies of the exact documents, images, and videos that were leaked to the Daily Mail, including documents relating to plaintiff’s medical treatment and private photos and videos, evidence that she previously denied having in response to plaintiff’s discovery requests. Moreover, the forensic imaging revealed that, just before defendant sued plaintiff in California for unpaid overtime and other employment related claims, defendant sent herself a significant volume of confidential information, including the documents, images, and videos that were leaked to the Daily Mail. The forensic imaging further established that the 2018 Cellphone was enabled to be backed up to the iCloud. Finally, although defendant previously represented that she only had one email address, the forensic imaging established that she used two other email accounts: an iCloud account (the “iCloud Account”) and a Gmail account (the “Gmail Account”), both of which, noted the Court, she failed to search for responsive documents. The Court’s Decision The Court held that defendant had a duty to preserve the ESI on the 2018 Cellphone as early as October 16, 2017, when she sent WhatsApp messages to plaintiff’s former “managing executive,” asking for an attorney recommendation and stating that she “want to build my case,” against plaintiff, and as late as January 16, 2019, when the New York lawsuit was filed. Slip Op. at *5. As to the former, the Court explained that defendant “reasonably anticipated litigation with and therefore had a duty to preserve evidence as of that date.” Id. Thus, defendant’s “destruction of at least two video recordings on October 20, 2017 and subsequent deletion of WhatsApp messages constitute spoliation of evidence.” Id. (footnote omitted). As to the latter, the duty to preserve was triggered by the filing of the lawsuit. The Court explained that by “discard the 2018 Cellphone approximately seven months later in August 2019 without making any effort to preserve the documents and communications that the 2018 Cellphone contained,” defendant’s conduct “constitute spoliation.” Id. The Court found that “credible evidence support a finding that conduct ha been willful, intentional, and contumacious.” Id. As such, “ he relevance of the destroyed evidence therefore presumed.” Id. (citing Pegasus , 26 N.Y.3d at 547). The Court also held that plaintiff had “met her burden of establishing that the destroyed evidence was relevant to her claims.” Id. “Critically,” said the Court, “this is a dispute about alleged breach of the NDA by taking and disseminating unauthorized video and audio recordings, pictures, and communications and disclosing confidential information to various persons, including the Daily Mail.” Id. As such, “ he destroyed videos were material and necessary to establish the private and invasive nature of the recordings and were the objective record of what recorded.” Id. In addition, the Court found that the deleted WhatsApp messages were relevant because the objectivity and creditability of the persons who sent and received the messages were at issue in this case and “the deleted messages may have revealed additional information regarding recording and sharing of confidential information in violation of the NDA, including whether she shared any recordings with any other third parties.” Id. The Court concluded that defendant’s “destruction of messages and videos during the critical time when her relationship with and her staff was clearly deteriorating constitutes, at best, gross negligence …, and, at worst, willful and contumacious conduct.” Id. (citation omitted). The Court also concluded that “trading in her cellphone without taking any measures to save the videos, messages, and other data after this lawsuit was filed, when had an undeniable duty to preserve evidence, was grossly negligent, if not intentional.” Id. (citations omitted). Accordingly, the Court granted the motion for sanctions and held that it would “issue appropriate adverse inference instructions at trial.” Id. at *6 (citation omitted). The Court also ordered a forensic examination of defendant’s current cell phone “for any evidence of any violation of the NDA, any text messages or other documents which may have been backed up on the iCloud which may be used for impeachment purposes, and any further spoliation thereof.” Id. In addition, the Court order defendant “to pay the reasonable attorneys’ fees incurred in preparing this motion.” Id. (citing Zacharius v. Kensington Publ. Corp. , 154 A.D.3d 450, 451 (1st Dept. 2017) (affirming award of attorneys’ fees and costs of reviewing evidence and preparing motion as appropriate sanction for spoliation)).  Takeaway In today’s modern world, so much information is kept on our cellphones and backed up to the cloud. Yet, many people simply do not realize how much of that information is stored or backed up. The facts in Carey , as described by the Court, however, show more than a mere unawareness. To the Court, they showed an understanding that the documents and information were discoverable and retrievable. It is not surprising, therefore, that the Court granted the motion. It will be interesting to see, however, whether defendant appeals the Court’s decision and order.  Carey also serves as a warning that nothing, or almost nothing, is irretrievable. Indeed, forensic imaging can retrieve documents and information from the cloud and electronic devices often thought to be deleted and/or discarded. Thus, the deletion of ESI or the transfer of ESI from one device to another will almost always be detected by forensic imaging professionals.

Covid-19 has created numerous health, economic and other significant problems throughout the world.  Social distancing and quarantining during the pandemic is a means to address the spread of the virus.  Among the methods to permit business to continue while in quarantine is the use of video conferencing technology as a substitute for in-person meetings.  Businesses and individuals have embraced the use of virtual meetings so that necessary interactions – both business and personal – can proceed in an effort to return to normalcy.   As William E. Gladstone, a former British Statesman and Prime Minister, once said, “justice delayed is justice denied” – a quote often used by litigants and Courts to stress the importance of moving legal matters forward.  While New York’s court system, along with others throughout the world, came to a temporary halt as a result of Covid-19, judges and court administrators have quickly adapted to the crisis through, in many cases, resort to technology.  Thus, in order to keep legal proceedings moving, courts have, for example, expanded the use of electronic filings of legal papers, conducted legal proceedings using video conferencing technology and the like.  Indeed, Judiciary Law § 2-b(3) permits a court to “devise and make new process and forms of proceedings, necessary to carry into effect the powers and jurisdiction possessed by it.” By Order dated September 4, 2020, in Ciccone v. One W. 64 th St., Inc. , the court addressed the need for technology to advance the objectives of litigants in the face of an unprecedented pandemic.  Ciccone is the tortured tale of Madonna’s year’s long fight with her co-op board.  In 2016, Madonna commenced an action against her co-op to challenge certain restrictions in her proprietary lease and sought the co-op’s books and records to prove her claims.  Notwithstanding the court’s determination that Madonna’s “challenge to the co-op’s actions was time-barred, Madonna refused to “drop her distinct books-and-records claim intended to support that challenge … went so far as to move (unsuccessfully) for summary judgment on that claim in the spring of 2018.”  The court determined that Madonna “‘brought and continued to pursue her claims in this action in bad faith’ within the meaning of the co-op lease – and therefore that defendant was entitled to its reasonable attorney fees incurred in defending the action.”  Accordingly, the court appointed a referee to conduct a hearing to determine the amount of legal fees to which the defendant was entitled.  While the defendant wanted to resolve the matter on papers, Madonna argued that a 3-5-day hearing was necessary and testimony from 20 witnesses – every defense lawyer that billed time to the matter – was required. The hearing was adjourned due to settlement negotiations, which ultimately broke down.  Thereafter, Madonna sought the deposition of a former defense counsel lawyer and served subpoenas on “every current and former attorney who had worked on this action.”  In addition to testimony at the fee hearing, the subpoenas sought the production from each subpoenaed attorney all their “‘notes, time records, emails, and other correspondence or documents regarding this action,’ including ‘unredacted time records’ and ‘unredacted intra-office communications’ with other attorneys.”  Defendants moved for, and received, a full protective order. The “contentious” hearing began in February of 2020 and was scheduled to continue on March 12, 2020 but did not go forward due to COVID-19 restrictions.  While defendant was willing to continue the hearing virtually, Madonna “objected vehemently to a virtual hearing….”  The referee referred to the Court the question of whether the attorney’s fees hearing should proceed virtually.  The court explained that: The current dispute requires this court to balance weighty considerations. The judicial system traditionally prefers to conduct proceedings in person—a point that has particular force in a fact-finding hearing such as the one at issue here, for which credibility could conceivably prove relevant. The parties and the court each have vital and complementary interests in seeing actions resolved expeditiously and fairly after a proper opportunity for all sides to be heard. And, of course, in light of the COVID-19 pandemic (and the havoc it has wreaked worldwide), the New York court system owes a responsibility to avoid putting lives at risk by resuming in-person proceedings court (sic) prematurely. The court rejected Madonna’s proposal to adjourn the hearing indefinitely until in-person proceedings could safely be conducted.  The court recognized that, although the limited attorney fee hearing was “a collateral matter limited to a dispute over money,” it was not “trivial”; although “less pressing” than other more significant matters.  Nonetheless, the court was: loath to permit plaintiff to continue to drag out proceedings to avoid paying the costs of the legal work that she forced defendant and its counsel to undertake needlessly. Indeed, but for the time spent litigating and adjudicating plaintiff's repeated efforts to obtain extensive and burdensome discovery in an attorney-fee proceeding , the fee hearing would likely have been completed before COVID-19 even became an issue.  (Emphasis in original.)  While the court determined that it did not want to wait for an in-person hearing, it also deemed it necessary to determine “whether conducting the fee hearing in this case virtually is a viable alternative—i.e., whether this mode of proceeding is not only safe and expeditious but also fair to the parties, and whether this court has the authority to require the parties to participate even over objection.” In deciding the issue in favor of holding a virtual hearing, the Ciccone court agreed with the court’s finding in A.S. v. N.S. , 2020 NY Slip Op 20161 (Sup. Ct. NY Co. July 1. 2020), that “under the circumstances of the case before (a contentious custody dispute), holding a virtual hearing was feasible, fair, and preferable to further postponing trial.”  In addition, the Ciccone court was also “guided not only by the decision in A.S. v N.S. but also by rulings from federal trial courts across the country that consider how to proceed during the COVID-19 pandemic have consistently determined that given the pandemic, it is necessary, appropriate, and fair to hold bench trials entirely by videoconference.” (Footnote omitted.)  Further, the court fund that a virtual hearing was authorized by Judiciary Law § 2-b(3). The Ciccone court went on to analyze numerous federal authorities addressing whether to direct virtual trials and hearings and stated: The federal trial courts considering the issue have acknowledged that conducting a trial by videoconference is certainly not the same as conducting a trial where witnesses testify in the same room as the factfinder, and that certain features of testimony useful to evaluating credibility and persuasiveness, such as the immediacy of a living person can be lost with video technology. At the same time, these courts have found that given advances in technology, the near instantaneous transmission of video testimony permits the court to see the live witness along with his hesitation, his doubts, his variations of language, his confidence or precipitancy, and his calmness or consideration.   Federal courts have also found that given the unprecedented nature of the circumstances faced by our society at present due to the COVID-19 pandemic, compelling reasons exist to conduct trials virtually.  And given the court closures required by the pandemic, the months' long delay that has resulted, and the continuing lack of clarity about when it will be safe to resume normal in-person operations, the courts have concluded that it is 'absolutely preferable' to conduct the bench trial via such contemporaneous transmission rather than to delay the trial indefinitely.  (Citations, internal quotation marks. ellipses and brackets omitted.) The Ciccone court found the reasoning of the courts it analyzed to be “persuasive.”  The court also noted that: dditionally, current technology enables the court and litigants to participate in reliable, real-time videoconferencing with high image quality using readily available computer programs. A hearing conducted virtually by videoconference will allow for cross-examination of witnesses and for both counsel and the court to assess the witnesses' demeanor and credibility through seeing them up close on-screen.  Such a hearing may not be equivalent to hearing testimony and cross-examination in person. But it is more than adequate to ensure that both sides have a full opportunity to be heard and that Referee … can make a properly informed report and recommendation following the hearing.   Indeed, the particular context of this hearing makes it especially amenable to being conducted virtually. The issue before Referee, namely the amount of defendant's reasonable attorney fees, is discrete and straightforward. That issue will be heavily based on documentary evidence in the form of defendant's counsel's invoices and billing records, and—as this court concluded in quashing plaintiff's testimonial subpoenas—will require comparatively little testimony from live witnesses. (Footnote omitted.) The court concluded that “in the exercise of its discretion under Judiciary Law § 2-b(3), that this case presents extraordinary and compelling circumstances in which it is both necessary and appropriate to require the parties to participate in a hearing conducted by videoconference.”  The court then considered and rejected Madonna’s objections to a virtual hearing.

A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” See SEC Spotlight, “SEC Enforcement Actions Against Ponzi Schemes” ( here ). According to a February 11, 2020 article posted on CNBC.com ( here ), Ponzi schemes have hit their highest level in a decade. Over 60 Ponzi schemes were uncovered by state and federal authorities in 2019, “with a total of $3.25 billion in investor funds — the largest amount of money unearthed in scams since 2010 and more than double the amount from 2018, according to data from the website Ponzitracker.” The most notorious Ponzi scheme in history was run by Bernard Madoff. His scam, which was uncovered in 2008, cost thousands of investors over $65 billion. In 2008, in addition to the Madoff scheme, authorities uncovered “40 Ponzi schemes with a combined $23 billion of investor funds — roughly seven times the amount of funds from last year, according to Ponzitracker.”  Like many frauds, investors do not know that they are the victim of a Ponzi scheme until the market crashes and they try to redeem their investments. As noted in the CNBC article, this is what “happened during the financial crisis when clients tried redeeming their money only to realize it wasn’t there.”  According to the SEC, Ponzi schemes share many common characteristics. Among them are: High returns with little or no risk. When a person claims high returns with little or no risk, investors should “ e highly suspicious of any ‘guaranteed” investment opportunity.” Overly consistent returns. Account statements that show consistent returns should be viewed skeptically. After all, investments go up and down over time. Therefore, investors should “ e skeptical about an investment that regularly generates positive returns regardless of overall market conditions.” Unregistered investments. “Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators.” Registration provides investors with access to information about the company’s management, products, services, and finances. Unlicensed sellers. By law, both state and federal, investment professionals and firms must be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms. Secretive, complex strategies. One of the hallmarks of Madoff’s scheme was his “black box” strategy – that is, a secretive split-strike conversion strategy using proprietary quantitative techniques to minimize portfolio volatility. Investors had no idea what this meant. Investors should avoid investments in which the investment strategy is too complex to understand and the promoter refuses to provide sufficient information about the investment. Issues with paperwork. Another hallmark of the Madoff Ponzi scheme was the dissemination of error laden account statements. As noted by the SEC, “ ccount statement errors may be a sign that funds are not being invested as promised.” Difficulty receiving payments. A telltale sign of a Ponzi scheme is the difficulty getting one’s money out. “Be suspicious if you don’t receive a payment or have difficulty cashing out,” warns the SEC. “Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.” See SEC General Resources on Ponzi schemes ( here ). On August 28, 2020, the SEC announced ( here ) that it charged two Maryland companies and their principals for a Ponzi scheme that allegedly defrauded approximately 1,200 investors, many of them African immigrants, of more than $27 million. According to the SEC’s complaint ( here ), Dennis Jali (“Jali”), John Frimpong (“Frimpong”), and Arley Johnson (“Johnson”), directly and through their companies 1st Million LLC and The Smart Partners LLC, falsely told investors that their funds would be used by a team of skilled and licensed traders for foreign exchange and cryptocurrency trading, promising risk-free returns of between 6% and 42%. The complaint alleged that defendants often targeted vulnerable African immigrants and exploited their common ancestry and religious affiliations. The complaint further alleged that Jali, who claimed to be a pastor and falsely held himself out as a self-made millionaire and expert trader, rented office space to conduct in-person meetings and give the appearance of a legitimate company. According to the complaint, defendants diverted investor funds for personal use and to make Ponzi payments to prior investors.  “As alleged in our complaint, the defendants exploited religious affiliations and cultural affinities to gain investors’ trust,” said Kelly L. Gibson, Director of the SEC’s Philadelphia Regional Office. “We encourage all investors to be on high alert whenever they are offered investments promising low risk and guaranteed returns, including from members of a trusted community.” The SEC’s complaint, filed in the United States District Court for the District of Maryland, charged defendants with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief, return of allegedly ill-gotten gains with prejudgment interest, and civil penalties. The SEC also named Access2Assets as a relief defendant, seeking the return of proceeds of the alleged fraud to which it had no legitimate claim. In parallel actions, the U.S. Attorney’s Office for the District of Maryland announced ( here ) the filing of criminal charges and the U.S. Commodity Futures Trading Commission (“CFTC”) filed a civil action. In the CFTC announcement ( here ), the commission expounded upon the details of the alleged fraud. In that regard, the CFTC explained that over a three-year period, from 2017 to 2020, over 1000 participants contributed at least $28 million to the 1st Million Pool, often pursuant to so-called “secure contracts” that falsely promised participants’ funds would be held in trust or escrow, used to trade forex and bitcoin, and then returned in their entirety at the end of the pool participation term. The CFTC alleged ( here ) that defendants misappropriated at least $7 million of 1st Million Pool funds and used it to pay for expensive cars, personal travel, and living and business expenses. Defendants allegedly targeted members of church communities by portraying the 1st Million Pool as a means to obtain financial freedom and support charitable religious causes. According to the complaint, defendants lied about their backgrounds and trading experience, as well as the likelihood of profit and risk of loss. For example, defendants promised pool participants they would receive rates of return on trading of up to 30% per month and falsely represented that Jali had a proven track record of positive returns. The complaint further alleged that Jali told certain participants that he had achieved positive returns of over 1700%. Jali also allegedly proclaimed in an online promotional video that his trading had generated returns of “400% in six weeks, all live trading in real markets” and that he was so successful a “forex trader” that “my wife has never worked a day in her life.” The complaint alleged that instead of generating trading profits as promised, defendants used at least $18 million of participants’ funds to make Ponzi scheme-like payments for the purpose of creating the illusion of profitability. The complaint also charged all defendants with failing to register with the CFTC as required.   The CFTC seeks full restitution to defrauded pool participants, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and a permanent injunction against violations of the federal commodities laws, as charged. In the criminal proceeding, which provided even more detail of the alleged scheme, the government alleged that 1st Million presented itself as a wealth management and financial literacy company, with its core business offering being a 12-month guaranteed investment contract.  These investment contracts, entitled “Corporate Guarantees,” allegedly guaranteed individuals who invested money with 1st Million monthly returns ranging from 6% to 35% of the initial investment.  At the end of the investment period, the contract allegedly promised that the investor would receive the return of all of the principal invested. The government alleged that the contract represented that the client’s principal would be invested in foreign currency or cryptocurrency.  The government alleged that Jali, Frimpong, and Johnson recruited victims to invest in 1st Million by holding promotional events at upscale hotels and event spaces, attending church-sponsored events intended to target investments from churchgoers, and representing themselves as religious men more interested in the philanthropic financial freedom of others than personal financial gain.  Defendants allegedly presented themselves as “pastors,” and told prospective investors that 1st Million’s work was in furtherance of God’s mission as it helped churches and their members achieve personal wealth and financial freedom.  Affinity="--> Affinity" scams="scams" exploit="exploit" trust="trust" friendship="friendship" exist="exist" who="who" have="have" something="something" common.="common." Because="Because" tight-knit="tight-knit" structure="structure" many="many" groups,="groups," it="it" can="can" difficult="difficult" for="for" regulators="regulators" law="law" enforcement="enforcement" officials="officials" detect="detect" scam.="scam." Victims="Victims" fail="fail" notify="notify" authorities="authorities" pursue="pursue" legal="legal" remedies="remedies" instead="instead" try="try" work="work" things="things" out="out" This="This" particularly="particularly" true="true" where="where" fraudsters="fraudsters" used="used" convince="convince" others="others" join="join" investment.="investment." Blog="Blog" examined="examined" here.=">here."> To encourage individuals to invest with 1st Million, Jali, Frimpong, and Johnson are alleged to have falsely stated that: investors’ principal would be held in a trust account protected from any financial instability of 1st Million or market volatility; that 1st Million and its traders, including Jali and Frimpong were fully licensed and qualified to pursue their investment activities by all relevant federal regulators, including the SEC, and had extensive experience trading on Wall Street; that the financial condition of the company was healthy and earning astronomical profits; and that the investors’ money would be used to invest in foreign currency and cryptocurrency markets, when in fact, investors’ money was used to pay earlier investors and diverted for the personal use of Jali, Frimpong, and Johnson.  To increase the amount of money obtained from investors, defendants allegedly promised higher guaranteed rates of return to 1st Million investors who invested greater amounts of money in the investment contracts. Jali, Frimpong, and Johnson allegedly promised investors that they could increase the returns on their investments, typically by 0.5% per month, for every new investor they successfully recruited to 1st Million.  Defendants allegedly hired “agents” of 1st Million to organize recruiting events to attract more investors, in exchange for a higher return on the agents’ investments.  Jali further recruited investors by allegedly misrepresenting his own personal wealth and exhibiting a lavish lifestyle purportedly paid from his successful currency trading on his personal accounts when, according to the indictment, his lavish lifestyle was allegedly paid for with diverted investor funds.  For example, the indictment alleged that Jali spent at least $47,000 of investor money on luxury vehicles and approximately $78,000 on private jets that he used to fly on personal or semi-personal trips, including a flight from Charlotte, North Carolina to Washington, D.C. on January 9, 2019, with Jali, his wife, and his three children as the only passengers. Over the course of the fraudulent scheme, defendants allegedly persuaded or attempted to persuade investors to provide them with wire transfers, checks, and cash totaling more than $28 million, from numerous victims, under the fraudulent pretense of investing in the foreign exchange and cryptocurrency markets.  The indictment seeks a money judgment of at least $28,021,868.01, including $2,481,994.57 seized from 10 bank accounts associated with the defendants, and a 2016 Porsche SUV. If convicted, defendants face a maximum sentence of 20 years in federal prison for a wire fraud conspiracy and for each count of wire fraud; a maximum of five years in federal prison for a securities fraud conspiracy and a maximum of 20 years in federal prison for each count of securities fraud.  Jali also faces a maximum of 10 years in federal prison for each of three counts of money laundering.   “The defendants allegedly recruited investors at churches, presenting themselves as pastors concerned about the investors’ financial freedom,” said U.S. Attorney Robert K. Hur.  “The indictment alleges that instead, the defendants used new investments to further their Ponzi scheme and to fund their lavish lifestyles, including luxury vehicles and private jets.” “In a time of such financial insecurity, the defendants allegedly preyed on their victims with false hope of financial security,” said FBI Special Agent in Charge Jennifer Boone.  “They used the victims’ hard earned money for luxury cars, private jets and family vacations while the victims ended up with false promises and empty hopes.”

Alternative dispute resolution (“ADR”) is the name given for the procedures by which parties can settle their disputes without litigation, such as arbitration, mediation, or negotiation. ADR procedures are generally, though not always, less costly and more expeditious. Here.=">Here."> Although arbitration has increased in popularity over the years and is part of most business and commercial contracts and employment agreements, there remains resistance to engaging in ADR procedures. This resistance is sometimes manifested in a motion to stay arbitration – that is, a motion to stop a pending arbitration from proceeding on the grounds that, inter alia , the parties did not agree to arbitrate their disputes. In Gol v. TNJ Holdings, Inc. , 2020 N.Y. Slip Op. 50974(U) (Sup. Ct., N.Y. County Aug. 13, 2020) ( here ), the Court was asked to stay an arbitration pending before the American Arbitration Association (“AAA”). As discussed below, the Court denied the petition to stay the arbitration of claims asserted by TNJ Holdings, Inc. but granted the petition brough by Respondents Jossef and Julian Kahlon because they were not parties to any agreement mandating arbitration for dispute resolution. On May 15, 2020, Respondents Jossef Kahlon (“Jossef”) and Julian Kahlon (“Julian”), co-founders of Project Verte, Inc. (“Verte”), a closely held corporation, initiated an arbitration against Petitioners Jane Gol (“Gol”) and Amir Chaluts (“Chaluts”), Verte’s other co-founders, claiming that Gol and Chaluts abused their powers as controlling shareholders and harmed Respondents and Verte itself. Respondents alleged in arbitration that their claims arose out of, or related to, the parties’ Initial Stockholders Agreement (“ISA”) and a subsequent Share Forfeiture and Note Transfer Agreement (“SFNTA”), both of which contained mandatory arbitration provisions to which Petitioners (including Gol and Chaluts individually) were contractually bound. Accordingly, Respondents contended that AAA arbitration was the appropriate forum for their dispute. Petitioners argued that the ISA could not be a basis for mandatory arbitration against Gol and Chaluts because it was superseded by an Amended and Restated Stockholders Agreement (“ARSA”) to which Gol and Chaluts were not parties. Unlike the ISA, which Gol and Chaluts signed in their own names as initial stockholders, they signed the ARSA (which contained a mandatory arbitration provision) solely on behalf of Verte and the AJ Entities (entities through which Gol held a stake in Verte). Further, they argued that the SFNTA could not be a basis for mandatory arbitration because the claims in the arbitration did not relate to the SFNTA. Finally, they argued that even if there was an agreement permitting TNJ Holdings, Inc. (“TNJ”) (the entity through which the Kahlons held a stake in Verte) to arbitrate claims against one or more of the Petitioners, TNJ’s owners Jossef and Julian (who are not parties to the ISA or SFNTA) could not do so. Petitioners sought to stay the arbitration. For the reasons discussed below, the Court denied the petition to stay arbitration of claims asserted by TNJ. Given the Verte shareholders’ broad contractual agreements to resolve disputes through arbitration, the Court held that Petitioners did not establish grounds to stop TNJ from arbitrating its claims. Under the terms of the parties’ agreements, concluded the Court, which incorporated AAA’s Rules, it was for the arbitrator (not the Court) to decide whether TNJ’s specific claims were within or beyond the scope of the arbitration provisions. However, the Court granted the petition to stay arbitration of claims asserted by Jossef and Julian. Unlike TNJ, noted the Court, the Kahlons were not Verte shareholders and, more importantly, were not parties to the relevant agreements containing mandatory arbitration provisions. As the Court noted, the threshold question in assessing a petition to stay arbitration is whether there is a valid and binding agreement to arbitrate. Slip Op. at *4-*5 (citing CPLR § 7503(b); Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013)). If, as the Court noted, it “finds that a valid arbitration agreement exists, the next question is whether the dispute comes within the scope of that agreement.” Slip Op. at *5. Courts look to the agreement to see if the parties delegated to the arbitrator (rather than the court) the issue of arbitrability. Id. (citing Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”); see also Henry Schein, Inc. v. Archer and White Sales, Inc. , 139 S.Ct. 524, 530 (2019) (“ f a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court may not decide the arbitrability issue”)). The Court found that “ he threshold question of whether there a valid agreement mandating arbitration of disputes between TNJ and Petitioners easily answered here.” Slip Op. at *5. The reason, noted the Court, was because there were three agreements to arbitrate. Id. Each of the ISA, SFNTA and ARSA, said the Court, required the arbitration of disputes. Id.  “Collectively,” explained the Court, “those agreements bind all of the Petitioners.” Id. Even the ARSA, observed the Court, “upon which Petitioners rely to free Gol and Chaluts from arbitration,” “broadly mandate arbitration of disputes between TNJ and all Petitioners other than Gol and Chaluts.” Id. See also id. at *5-*6. Having determined that there was a valid arbitration agreement, the Court turned its attention to the next question: whether the matter in dispute came within the scope of the agreement. The Court held that the parties “clearly and unmistakably” reserved that question for decision by the arbitrator. Id. at *6-*7. This was reinforced, explained the Court, by the incorporation of the AAA rules. Id. at *7 (quoting Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“ here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’”) (citations omitted)). The ISA, SFNTA, and ARSA all expressly incorporate the AAA Rules which, in turn, provide that the arbitrator “shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.” By expressly invoking such Rules, the parties have agreed to have the AAA arbitrator determine questions such as the applicability of the ISA, SFNTA, and ARSA arbitration agreements and whether Petitioners’ claims in the arbitration arise out of or relate to one or more of those agreements. Id. at *7 (citation and footnote omitted). The Court rejected the argument that certain exceptions to dispute resolution, “such as for intellectual property disputes”, undermined the requirement to arbitrate the parties’ disputes. Id. at *8. “For the matters that are covered by the arbitration provision,” held the Court, “the parties opted for the application of AAA Rules, which include deference to the arbitrator to decide issues with respect to scope of the provision and the like.” Id. The Court also rejected “Petitioners’ reliance on Loan Agreements and related documents with forum clauses pointing to litigation.…” Id.  The Court noted that “Respondents not rely on those agreements.” Id. Instead, they relied on the ISA, SFNTA, and ARSA, all of which contained “broad, straightforward arbitration provisions that incorporate AAA Rules.” Id. “Under Zachariou , concluded the Court, “that is sufficient to indicate an intent to adopt the AAA Rule with respect to deferring certain decisions — including whether the dispute arises under these agreements — to the arbitrator.” Id. Finally, the Court held that there was no agreement to arbitrate the Kahlons’ claims – a point that Petitioners did not contest. Nevertheless, Petitioners argued that Kahlons should be forced to arbitrate because they were “the parties of interest behind TNJ, both as the sole shareholders of the corporation, and as corporate representatives and signatories.” Id. (citation to record and internal quotation marks omitted). The Court found “no legal support for that proposition.” Id. See Funk v. Golden Hands, Inc. , 168 A.D.2d 220, 221 (1st Dept. 1990) (“ party to a written arbitration agreement may not be compelled to arbitrate disputes which arise thereunder with a nonparty.”); Groval Knitted Fabrics, Inc. v. Alcott , 39 A.D.2d 524, 524 (1st Dept. 1972) (“It is axiomatic that arbitration is consequent upon an agreement to arbitrate and no one can be forced to arbitrate with one whom he has not contracted to do so”), aff’d sub nom. , Groval Knitted Fabrics v. Alcott , 31 N.Y.2d 796 (1972)). The Court rejected the Kahlons’ reliance on Hirschfeld Prods. v. Mirvish , 88 N.Y.2d 1054 (1996), which held that non-signatory corporate officers could compel arbitration of a dispute arising out of a contract between their corporate employer and the plaintiff. The Court noted that the underlying predicate for that decision was the principal-agent relationship. Slip Op. at *8 (quoting Hirschfeld , 88 N.Y.2d at 1056 (“ he Federal courts have consistently afforded agents the benefit of arbitration agreements entered into by their principals to the extent that the alleged misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation. The rule is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.”); and citing Huntsman Intl. LLC v. Albemarle Corp. , 163 A.D.3d 420, 421 (1st Dept. 2018) (affirming grant of a motion by non-signatory officer defendants to compel arbitration “because any breach of would have to be the result of an action or inaction attributable to ”), lv to appeal dismissed in part, denied in part , 32 N.Y.3d 1040 (2018)). The Court explained that neither case, as Respondents suggested, stood for the proposition that a corporate representative could vindicate the rights of the corporation through an arbitration agreement to which the corporation was a party. Id. at *8. “At most,” said the Court, Hirschfeld and Huntsman “stand for the proposition that in certain circumstances a non-signatory defendant in a civil action may be permitted to compel arbitration of a claim that is, effectively, against the signatory (acting through its non-signatory corporate officer).” Id. The Court noted that Respondents failed to cite “any cases applying that rationale in the context of a non-signatory plaintiff seeking to enforce an arbitration agreement as a sword rather than as a shield.” Id. Accordingly, concluded the Court, “ Hirschfeld and Huntsman not apply.” Id. Takeaway Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise. Where there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the rules of a dispute resolution organization, such as the AAA, in which the arbitration panel is given the power to rule on its own jurisdiction, courts will “leave the question of arbitrability to the arbitrators.” Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 496 (1st Dept. 2009), quoting Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 47 (1997)). In Gol , the parties’ agreements contained broad arbitration provisions that incorporated by reference the AAA rules. As such, consistent with the law in New York, the Court found that there was clear and unmistakable evidence that the parties ( i.e. , Petitioners and TNJ) intended to have an arbitrator decide the issue of arbitrability. However, there was no such intent with regard to the Kahlons. As the Court noted, neither were Verte shareholders nor parties to any of the relevant agreements.

Rule 3213 of the CPLR – which permits a litigant to move for summary judgment in lieu of filing a complaint – was designed to streamline litigation in situations where the statute is applicable, provides: When an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint. The summons served with such motion papers shall require the defendant to submit answering papers on the motion within the time provided in the notice of motion. The minimum time such motion shall be noticed to be heard shall be as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service. If the plaintiff sets the hearing date of the motion later than the minimum time therefor, he may require the defendant to serve a copy of his answering papers upon him within such extended period of time, not exceeding ten days, prior to such hearing date. No default judgment may be entered pursuant to subdivision (a) of section 3215 prior to the hearing date of the motion. If the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the court orders otherwise. The Court of Appeals has described CPLR 3213 as a procedural device that “for the limited matters within its embrace, melded pleading and motion practice into one step, allowing a summary judgment motion to be made before issue was joined.”  Weissman v. Sinorm Deli, Inc. , 88 N.Y.2d 437, 443 (1996) .  The provision is “intended to provide a speedy and effective means of securing a judgment on claims presumptively meritorious … a formal complaint is superfluous and even the delay incident upon waiting for an answer and then moving for summary judgment is needless.”  Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (citations and internal quotation marks omitted).   A litigant can properly utilize CPLR 3213 when an action is “based upon an instrument for the payment of money only.”  Much litigation related to CPLR 3213 is related to what constitutes an “an instrument for the payment of money.”  See, e.g. , Cooperatieve Centrale Raiffeisen-Boerenleenbank, B.A. v. Navarro, 25 N.Y.3d 485 (2015) (holding that an “unconditional and absolute” guaranty falls within the purview of CPLR 3213); Interman Indus. Products, Ltd. v. R.S.M. Electron Power, Inc ., 37 N.Y.2d 151, 154 (1975) (an account stated does not qualify).  This issue was previously addressed in this Blog < HERE =">HERE"> .   CPLR 3213 provides that the return date of a motion for summary judgment in lieu of complaint shall, at a minimum, be “as provided by subdivision (a) of rule 320 for making an appearance, depending upon the method of service.”  CPLR 320 (a) provides: Requirement of appearance. The defendant appears by serving an answer or a notice of appearance, or by making a motion which has the effect of extending the time to answer. An appearance shall be made within twenty days after service of the summons, except that if the summons was served on the defendant by delivering it to an official of the state authorized to receive service in his behalf or if it was served pursuant to section 303, subdivision two, three, four or five of section 308, or sections 313, 314 or 315, the appearance shall be made within thirty days after service is complete. If the complaint is not served with the summons, the time to appear may be extended as provided in subdivision (b) of section 3012. Thus, depending on the method of service of the notice of motion for summary judgment in lieu of complaint, defendant’s time to appear could be as little as 20 days, but could be 30 days, 40 days or more depending on when the affidavit of service is filed.  If service is made, for example, on an individual pursuant to CPLR 308 (2) or (4) or a partnership pursuant to CPLR 310(b) or (c) a defendant would have 40 days from the time the affidavit of service is filed with the court.  A plaintiff making a motion for summary judgment in lieu of complaint must be careful and conservative about choosing a return date for the motion because at the time the papers are delivered to a process server, it is not known how long service will take and what method of service will be employed by the process server.  As one court noted: CPLR 3213 is a hybrid procedure incorporating certain elements of an action and certain elements of motion practice.  As with a plenary action, jurisdiction is obtained over the Defendant by serving the Defendant with the summons, notice of motion and supporting papers in a method prescribed in CPLR Article 3.  The minimum amount of time the Plaintiff must give the Defendant to oppose the motion for summary judgment in lieu of complaint is determined by the amount of time the Defendant would have to appear in the action if the Defendant had been served with a summons and complaint or summons with notice. Goldstein v. Saltzman , 13 Misc.3d 1023 (2006) (citations omitted).  In Goldstein , the plaintiff gave the “defendant the minimum notice required by statute but demand answering papers 10 days before the return date”.  The court denied plaintiff’s summary judgment motion without prejudice and dismissed the action because: CPLR 3213 gives the plaintiff an option; that is, either make the motion returnable as soon as possible and permit the defendant to file its opposition papers on the return date or demand opposition papers in advance and give the defendant additional time in which to oppose the motion. Plaintiff cannot give defendant the minimum amount of time permitted to oppose the motion and demand opposition in advance. Because Goldstein demanded the service of answering papers 10 days prior to the return date of the motion, Saltzman was not provided with the statutorily required time in which to respond. Where plaintiff fails to provide the defendant with the statutorily required time to respond, the motion should be denied and the action dismissed. Goldstein , 13 Misc. 3d at 1028 (citations omitted). On August 20, 2020, the Supreme Court, Kings County (Silber, J.) decided Quicksilver Capital, LLC v. Tea at the Center, Inc. , in which the court denied plaintiff’s unopposed motion for summary judgment in lieu of complaint.  The plaintiff in Quicksilver had made a prior motion under CPLR 3213, which was denied due to improper service.  Plaintiff tried again.  The new motion was served on July 8, 2020 and the notice of motion made the return date July 22, 2020.  The notice of motion also demanded that opposition papers be served 10 days in advance of the return date.  “ he corporate defendant quicksilver> quicksilver> was served by delivery to a "manager", the corporation is allowed twenty (20) days to appear, and the individual defendant, served pursuant to CPLR 308(4), is allowed thirty (30) days to appear after such service is complete.”  The court determined that the motion papers were “short served” and, therefore, the motion was denied.  The court, however, stated that the “failure is not jurisdictional, and thus the action does not need to be dismissed.”  Instead, the court ordered “that the notice of motion, the summons and the papers upon which it relies are hereby converted to a summons and complaint pursuant to CPLR 3213” and gave the defendant 30 days from service of the order with notice of entry to answer or move.” The court also found that denial of the motion was appropriate on the substantive ground that the moving affidavit was not made by someone with first-hand knowledge and the supporting documents were submitted without the appropriate authentication. TAKEAWAY CPLR 3213 was designed to streamline actions that fall within its purview.  However, due to the practicalities of proper and timely service, this “benefit” is sometimes illusory.

Last week, this Blog wrote about the ramifications of failing to meet a deadline or otherwise act in a timely manner ( here ). In today’s post, we examine the ramifications of failing to meet the procedural requirements set forth in a statute. In Lincoln Sq. Synagogue, Inc. v. Lexington Strategies, LLC , 2020 N.Y. Slip Op. 32793(U) (Sup. Ct., N.Y. County Aug. 26, 2020) ( here ), the Court dismissed a turnover proceeding against a garnishee because the judgment creditor failed to follow the notice provisions set forth in CPLR §§ 5222 (d) and (e).  Article 52 of the Civil Practice Law and Rules provides the enforcement mechanisms that judgment creditors, such as the petitioner in Lincoln Square , use to collect on a money judgment. Jackson v. Bank of Am., N.A. , 149 A.D.3d 815, 818 (2d Dept. 2017). These mechanisms include, among other things, the imposition of a restraining notice against a judgment debtor or a third-party garnishee. Id. CPLR § 5225 allows a judgment creditor to initiate a special proceeding directing a person in possession of money or property in which the judgment debtor has an interest to turn the money or property over to the judgment creditor. CPLR § 5227 allows a judgment creditor to commence a special proceeding “against any person who it is shown is or will become indebted to the judgment debtor.”  CPLR § 5222 provides the procedures for serving a restraining notice on the judgment debtor and a third-party garnishee. That statute requires the service of a copy of the restraining notice and a Notice to Judgment Debtor within four days of the service of the restraining notice if not already served within one year prior to the service of the restraining notice. CPLR §§ 5222 (d) and (e). See also Weinstein v. Gitters , 119 Misc. 2d 122, 123 (Sup. Ct., Suffolk County 1983). The Notice to Judgment Debtor is “designed to inform the judgment debtor, if he be a natural person, that certain monies are exempt from application to the satisfaction of the judgment” ( Chemical Bank v. Flaherty , 121 Misc. 2d 509, 510 (Civ. Ct., Queens County 1983)), and sets forth the availability of procedures for asserting exemptions (CPLR § 5222). The judgment creditor has the burden of proving compliance with the statute. Chemical Bank , 121 Misc. 2d at 510. When a restraining notice is served on a third-party garnishee, as in Lincoln Square , the turnover proceeding may not be maintained if the judgment creditor fails to comply with CPLR §§ 5222 (d) and (e) ( i.e. , the provisions requiring notice to the judgment debtor about that restraining notice). Matter of Kitson & Kitson v. City of Yonkers , 40 A.D.3d 758 (2d Dept. 2007) (failure to serve a notice as required by CPLR  5222 § (d) on the judgment debtor rendered execution ineffective); Friedman v. Mayerhoff , 156 Misc. 2d 295, 296 (Civ. Ct., Kings County 1992) (failure to comply with CPLR § 5222 notice to debtor resulted in vacatur of the restraining notice); Weinstein , 119 Misc. 2d at 123-124 (restraining notice dismissed without prejudice for failure to serve judgment debtor in accordance with CPLR § 5222); Chemical Bank , 121 Misc. 2d at 511; Lincoln Fin. Servs., Inc. v. Miceli , 17 Misc. 3d 1109 (A), 2007 N.Y. Slip Op. 51893 (U) (Dist. Ct., Nassau County 2007) (vacating restraining order). In Lincoln Square , the Court found “no proof” in the Restraining Notice and the amended petition, or any assertion that petitioner complied with CPLR §§ 5222 (d) or (e) with respect to providing notice to the judgment debtor. Slip Op. at *2-*3. Instead of such proof, said the Court, petitioner merely submitted a copy of the Restraining Notice it served on Lexington Strategies, LLC, the third-party garnishee. Id. at *3. Accordingly, the Court dismissed the petition for failure to comply with the notice requirement of CPLR 5222 §§ (d) and (e). Takeaway As noted in our article about the ramifications of failing to meet a deadline or otherwise act in a timely manner, there are ramifications for failing to comply with deadlines and other requirements. Lincoln Square highlights the ramifications of failing to comply with statutory requirements. “The restraining notice is designed to prevent a garnishee or other person from disposing of the judgment debtor’s property pending a levy by the Sheriff or court order.” Chemical Bank , 121 Misc. 2d at 510. When a judgment creditor serves a restraining notice on a third-party garnishee, a proceeding to enforce the judgment under § CPLR 5227 against the third-party garnishee may not be maintained if the judgment creditor does not comply with CPLR § 5222 (d). When that happens, as in Lincoln Square , the proceeding must be dismissed.  As one would expect, the burden is on the judgment creditor to plead and prove compliance with CPLR §§ 5222 (d) and (e). “To hold otherwise would serve to emasculate the protection afforded to judgment debtors by the CPLR 5222 (subd ) notice.” Id. at 510-511. One other point needs to be made about Lincoln Square and CPLR §§ 5222 (d) and (e). The notice requirement reflects “a legislative attempt to comply with constitutional due process requirements vis-à-vis the enforcement of judgments.” Friedman , 156 Misc. 2d at 298 (citations omitted). “Thus the failure to meet these notice requirements, that is to advise a judgment debtor that his property may be exempt from application to a judgment, involves a fundamental due process right to which the presence or absence of prejudice would seem to be irrelevant.” Id. For this reason, “the failure to comply with CPLR 5222 and 5232 necessitates vacating restraining notice and/or execution” upon a third-party garnishee possessing assets or property of a judgment debtor. Id.

Conducting business with family, friends, or neighbors can be a rewarding endeavor. But, like any relationship, it can also be painful, both emotionally and economically. When the latter occurs, lawsuits can follow. The same is true with romantic relationships, especially when the health and well-being of a party to the relationship is at issue. In today’s Fraud Notes, we examine two “relationship” cases. In Salimi v. Raffaelle , 2020 N.Y. Slip Op. 32749(U) (Sup. Ct., N.Y. County Aug. 21, 2020) ( here ), the relationship at issue concerned neighbors who had invested in Coffeed Corporation (“Coffeed”). Plaintiff alleged that to induce him into investing money in the company, defendant misrepresented his position with Coffeed and the assets that Coffeed owned. Plaintiff sued defendant for, among other things, fraudulent inducement. Defendant moved to dismiss the claim on, inter alia , particularity grounds. The Court denied the motion. In Guilllen v. Bober , 2020 N.Y. Slip Op. 32761(U) (Sup. Ct., N.Y. County Aug. 13, 2020 ( here ), the relationship at issue was an “on-again, off-again” romantic relationship that spanned more than 10 years. Plaintiff alleged that during their last affair, defendant misrepresented whether he had any sexually transmitted diseases/infections. Plaintiff sued defendant for, among other things, fraud. Defendant moved to dismiss the claim. The Court granted the motion. Salimi v. Raffaelle Plaintiff and defendant are neighbors in a residential building in New York City. Both were investors and officers in Coffeed. Their relationship, while initially friendly, deteriorated after plaintiff made two investments in Coffeed in 2018: the first for $50,000.00 and the second for $300,000.00. Plaintiff alleged that defendant misrepresented his position with Coffeed and the assets that Coffeed owned, to induce plaintiff to make these investments. In particular, plaintiff “allege that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6. Defendant moved to dismiss the complaint. In connection with the fraud claim, defendant argued that plaintiff failed to plead the elements of fraud with particularity.  To state a cause of action for fraud, a plaintiff must allege “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); Braddock v. Braddock , 60 A.D.3d 86 (1st Dept.), appeal withdrawn , 12 N.Y.3d 780 (2009). Such a claim must be pleaded with particularity. CPLR § 3016(b); Eurycleia , 12 N.Y.3d at 559. This means that the plaintiff must provide the details of the alleged fraud. Scott v. Fields , 92 A.D.3d 666, 668 (2d Dept. 2012), citing Moore v. Liberty Power Corp., LLC , 72 A.D.3d 660, 661 (2d Dept. 2010). In situations where those details are peculiarly within the knowledge of an adverse party, “the heightened pleading requirements of CPLR § 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in the fraudulent scheme.” JP Morgan Chase Bank, N.A. v. Hall , 122 A.D.3d 576, 580 (2d Dept. 2014), quoting High Tides LLC v. DeMichele , 88 A.D.3d 954, 957 (2d Dept. 2011).  Notably, “actual knowledge need only be pleaded generally, , particularly at the prediscovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant’s state of mind.” Oster v. Kirschner , 77 A.D.3d 51, 55-56 (1st Dept. 2010). After all, as the Oster Court noted, “Participants in a fraud do not affirmatively declare to the world that they are engaged in the perpetration of a fraud”; rather, “intent to commit fraud is to be divined from surrounding circumstances.” Id. at 77 A.D.3d at 55-56. In short, CPLR § 3016(b) is satisfied when the alleged facts permit a “reasonable inference” of the claimed misconduct. Epiphany Community Nursery Sch. v. Levey , 171 A.D.3d 1, 9 (1st Dept. 2019). When the facts of the alleged fraud are not plainly observable, they may be supplemented by the surrounding circumstances. The test is whether the plaintiff’s allegations inform the defendant of the conduct about which he/she complains. Id. In seeking dismissal of the fraud claim, defendant contended that plaintiff failed to identify the false and misleading statements that defendant allegedly made and failed to demonstrate justifiable reliance on any alleged misstatements.  The Court denied the motion, holding that plaintiff satisfied the particularity requirement of CPLR § 3016(b). The Court found that plaintiff “specifie each alleged misrepresentation by defendant and the monetary damages that plaintiff incurred from his two investments in Coffeed Corporation.” Slip Op. at *4-*5. In this regard, noted the Court, plaintiff “allege that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6. In other words, said the Court, plaintiff identified the who, what, where, how and why of the alleged fraud: he complaint alleges that defendant misrepresented a corporation’s revenue and assets to induce plaintiff to contract with the corporation and purchase corporate stock. The complaint supplies all the details. It names the corporation; identifies the times, places, parties to, and nature of the alleged deception; defendant’s alleged motive; and the amount of damages that the deception caused plaintiff to incur. Id. at *6. In denying the motion, the Court noted that defendant failed to identify the factual details that were “absent/or confusing” in the complaint. Instead, said the Court, defendant “impermissibly relie on facts outside the complaint.…” Id. (citations omitted).  The Court also rejected defendant’s argument that plaintiff failed to allege justifiable reliance on the alleged misrepresentations. Noting that the argument was predicated on alleged facts outside the complaint ( e.g. , “that plaintiff was offered unfettered access to Coffeed Corporation’s records before he invested in the corporation…”), the Court declined to consider them. To do so, said the Court “would require a factual inquiry into plaintiff’s access to the corporate records and his diligence in reviewing them.”  Id. at *7.  “Even if the court accepted defendants alleged offer of unfettered access to the corporation’s records,” said the Court, “defendant cite no support for the proposition that such an offer would negate plaintiff’s allegations of justifiable reliance.” Id. [Ed. Note: The Court granted defendant’s motion to dismiss the breach of fiduciary duty claim. Slip Op. at *9. Plaintiff claimed that a fiduciary duty existed between the parties by reason of their friendship. Id. at *8 (describing the relationship as a “close personal friendship”). The Court held that plaintiff merely alleged a friendship with defendant, not any “‘special circumstances that might give rise to a fiduciary relationship.’” Id. , quoting Benzies v. Take-Two Interactive Software. Inc. , 159 A.D.3d 629, 630-31 (1st Dept. 2018). Guilllen v. Bober Plaintiff alleged that she and defendant had an over decade-long affair, during which defendant physically and emotionally abused her and caused her to develop stress-related alopecia. She alleged that defendant had a history of having unprotected sex with prostitutes. In 2017, after a hiatus, plaintiff and defendant resumed their relationship. During this time, plaintiff asked defendant whether he had any sexually transmitted diseases/infections to which defendant told her that she had “nothing to worry about.” Slip Op. at *2. The parties engaged in unprotected sexual intercourse. Plaintiff claimed that she found Herpes Simplex medication in defendant’s medicine cabinet. Soon thereafter, plaintiff was diagnosed with Herpes Simplex 2 (HSV-2). In 2018, plaintiff ended the relationship.  Defendant denied the allegations, claiming, inter alia , that when he met plaintiff in August of 2006, she was a “call girl”, who advertised her services on Craigslist. Id. Defendant claimed that during their relationship, he “loaned” plaintiff tens of thousands of dollars and supported plaintiff, plaintiff’s family, and plaintiff’s various business ventures. Id. Plaintiff asserted causes of actions for, inter alia , fraudulent misrepresentation. Defendant moved to dismiss, claiming that plaintiff failed to plead scienter – that is the state of mind characterized by an intent to deceive, manipulate, or defraud. The Court agreed. The Court held that “there no facts to suggest that defendant intended to defraud the plaintiff.”  Slip Op. at *2. The Court found that defendant’s response to plaintiff’s question concerning exposure to sexually transmitted diseases – that she had “nothing to worry about” – without more was “insufficient to establish intent, as some carriers of the herpes virus are asymptomatic and consequently, would not know or have reason to know of their status.” Id. (footnote omitted). The Court also rejected plaintiff’s contention that the bottle of medication she claimed to have seen demonstrated fraud. Id. The Court said that it was “unclear how plaintiff knew the medication was herpes medication or why plaintiff did not confront the defendant contemporaneously concerning her discovery.” Id. Additionally, noted the Court, defendant’s alleged history of engaging in unprotected sex with prostitutes, as well as his manipulative and abusive conduct, “suggest that plaintiff’s reliance on defendant’s purported statement that she had ‘nothing to worry about’ was unreasonable.” Id. at *3. “Thus,” concluded the Court, “plaintiff failed to establish a prima facie claim of fraudulent representation.…” Id.

Every now and then a litigant or counsel fails to meet a deadline or otherwise acts in an untimely manner.  Sometimes there is a reasonable excuse and sometimes there is not.  Several “saving” provisions in the CPLR are available to assist a litigant or counsel when deadlines are missed.  Some such provisions are as follows: CPLR 2005 provides that “ pon an application satisfying the requirements of subdivision (d) of section 3012 or subdivision (a) of rule 5015, the court shall not, as a matter of law, be precluded from exercising its discretion in the interests of justice to excuse delay or default resulting from law office failure.” CPLR 3012(d) provides that “ pon the application of a party, the court may extend the time to appear or plead, or compel the acceptance of a pleading untimely served, upon such terms as may be just and upon a showing of reasonable excuse for delay or default.” CPLR 5015(a) provides that the “court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of: (1) excusable default, if such motion is made within one year after service of a copy of the judgment or order with written notice of its entry upon the moving party, or, if the moving party has entered the judgment or order, within one year after such entry….”  The key to availing one’s self of such provisions is the reasonableness of the excuse for the delay or default.  Indeed, there are many cases that analyze what constitutes “reasonable excuse” and/or excusable “law office failure.”  While in an article such as this, this BLOG would typically survey such cases, it will not do so today in order to illustrate the importance of avoiding forced reliance on the CPLR’s “savings” provisions. Instead, this BLOG will summarize the August 26, 2020 decision of the Appellate Division, Second Department, styled: SRP 2015-1, LLC v. Thomas , in which the Court affirmed the motion court’s denial of defendants’ motion for leave to serve a late answer after plaintiff rejected their untimely answer.   SRP 2015-1 was a mortgage foreclosure action commenced by the lender to foreclose on property owned by Thomas.  Apparently, after being served, Thomas contacted plaintiff’s counsel and entered into a stipulation pursuant to which Thomas’ time to answer the complaint was extended until May 20, 2016.  At the time, Thomas did not have an attorney.  Thomas retained an attorney on May 20, 2016, but counsel failed to serve Thomas’ answer until June 3, 2016, which plaintiff’s counsel rejected as untimely.  Thereafter, Thomas’ counsel moved for leave to serve a late answer and to compel plaintiff’s acceptance of same.  The motion was denied, and a judgment of foreclosure and sale was subsequently issued by the motion court. In affirming the motion court’s order, the Second Department in SRP 2015-1 first recited the general law on “reasonable excuse” and stated: To extend the time to answer the complaint and to compel the plaintiff to accept an untimely answer as timely, a defendant must provide a reasonable excuse for the delay and demonstrate a potentially meritorious defense to the action. The determination of what constitutes a reasonable excuse lies within the sound discretion of the Supreme Court. Law office failure may constitute a reasonable excuse ( see CPLR 2005). However, conclusory and unsubstantiated allegations of law office failure are not sufficient, and mere neglect is not a reasonable excuse.  (Some citations, internal quotation marks and brackets omitted.) The SRP 2015-1 Court then found that there was no reasonable excuse for missing the stipulated May 20, 2020 deadline (even though the answer was only served two weeks late).  The Court found that Thomas and counsel were guilty of “mere neglect” which was insufficient to rise to the level of a “reasonable excuse.”  (Citations and brackets omitted).  Specifically, the Court found that: the defendants neglected the case by failing, for unexplained reasons, to retain their attorney until the day their answer was due under the extension that the plaintiff had granted. Their attorney then neglected their case by failing to answer for another two weeks. Counsel failed to provide a detailed or substantiated explanation as to why he could not have arranged for the answer to be prepared and served on or immediately after May 20, 2016.  (Citations omitted.) The Court never decided the issue of whether Thomas had a meritorious defense because of its ruling on the issue of “reasonable excuse.” TAKEAWAY Litigants and counsel should not take for granted that adversaries and/or the court will always grant courtesies or extensions of time to file papers.

In our last post ( here ), we examined the Statute of Frauds – General Obligations Law § 5-701 through § 5-705 – in the context of employment at-will contracts. We noted that such contracts are capable of performance within one year – a requirement under GOL§ 5-701(a)(1). Cron v. Hargro Fabrics , 91 N.Y.2d 362, 367 (1998). As the Court of Appeals has explained, because an at-will employment relationship may be “freely terminated by either party at any time for any reason or even for no reason” ( Murphy v. American Home Prods. Corp. , 58 N.Y.2d 293, 300 (1983)), such a relationship “may usually be completed within a year and ordinarily would not require performance to extend beyond that time” ( Cron , 91. N.Y.2d at 367). For this reason, the Court of Appeals has held that employment at-will agreements “are without the proscription of the Statute of Frauds concerning one-year performance.” Cron , 91 N.Y.2d at 367 (citations omitted). What if the at-will employment agreement is breached? In that case, the courts consider the agreement to be “terminable within one year only breach by one of the parties.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 456 (1984). As the Court of Appeals noted, “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). The foregoing rules also apply to an oral agreement that forms a partnership or joint venture. F.S. Intertrade Off. Prods. V. Babina , 199 A.D.2d 95, 96 (1st Dept. 1993), lv denied , 83 N.Y.2d 757 (1994); Prince v O’Brien , 234 A.D.2d 12 (1st Dept. 1996); Rella v. McMahon , 169 A.D.2d 555 (1st Dept. 1991)). Like the oral employment agreement, an oral agreement to form a partnership or joint venture without a definite duration creates an at-will partnership or joint venture. As such, it may be dissolved, without liability for breach of contract, on a “moment’s notice”. Shandell v Katz , 95 A.D.2d 742, 743 (1st Dept. 1983); Alnwick v. European Micro Holdings, Inc. , 281 F. Supp. 2d 629, 644 (E.D.N.Y. 2003) (“Where ... there is no definite term of duration for the joint venture, it may be terminated at will”)). With the foregoing principles in mind, we examine Eiji Ichimura v. Elkon , 2020 N.Y. Slip Op. 32722(U) (Sup. Ct., N.Y. County Aug. 21, 2020) ( here ), a case involving, among other things, an oral at-will joint venture agreement. Eiji Ichimura is a world-renowned sushi chef. Ichimura alleged that he entered into an oral at-will employment relationship with defendants whereby he agreed to serve as the sushi chef at a restaurant to be operated by defendants in Manhattan. According to plaintiff, he gave defendants oral permission to use his name for the restaurant while he was working there. About four months later, Ichimura terminated his relationship with defendants. Thereafter, plaintiff brought suit.  In their answer, defendants denied the allegations and advanced five counterclaims: unjust enrichment, breach of employee loyalty, conversion, breach of contract, and defamation and disparagement of goods, based on alternative theories that plaintiff breached a joint venture agreement he had made with defendant Idan Elkon to open the restaurant, or that he breached his duty as an employee, and that in any event, he unjustly enriched himself by benefiting therefrom. Plaintiff moved for summary judgment, claiming, inter alia , that the Statute of Frauds barred the breach of contract counterclaim.  Defendants argued that the joint venture agreement could be performed within one year. They contended that the agreement was partly performed, thereby making the Statute of Frauds inapplicable to the parties’ agreement. Defendants claimed that plaintiff breached the oral agreement by failing to fully perform.  In reply, plaintiff maintained that the Statute of Frauds was applicable to their relationship. Plaintiff claimed, among other things, that the alleged oral joint venture agreement was not capable of being performed within one year because, according to Elkon’s sworn interrogatory responses, plaintiff had committed to run the kitchen and sushi bar and serve as head chef “for years to come ....” Plaintiff also maintained that the parties did not partially perform the agreement nor were their actions unequivocally referable to the agreement. Rather, plaintiff claimed, the execution of the lease and building out of space were preparatory for the operation of the restaurant.  The Court held that plaintiff “satisfie his burden of demonstrating that the counterclaim for breach of contract ha no factual or legal basis.…” Slip Op. at *5. The Court noted that the agreement had no definite term. “Thus,” reasoned the Court, “to the extent that the parties entered into a joint venture, it was at will, and plaintiff cannot be held liable for breaching it.” Id. “And,” said the Court, “even if the venture was not at will, the statute of frauds would bar a cause of action for breach of contract.” Id. (citing Massey v. Byrne , 112 A.D.3d 532, 533 (1st Dept. 2013) (absent evidence that parties’ oral agreement constituted joint venture or partnership, breach of contract claim barred by statute of frauds)).

Like most states in the country, New York is an “employment at will” state.  This means that if there is no written agreement between the employer and employee governing when the employer can fire the employee, the employer has the right to fire the employee at any time for any reason. Smalley v. Dreyfus Corp. , 10 N.Y.3d 55, 58 (2008). The Court of Appeals has “repeatedly refused to recognize exceptions to, or pathways around, these principles.” Id.   Thus, when an employee at will is fired, the employee has no legal recourse even when the termination is arbitrary, unfair or unreasonable. While the employee-at-will has no recourse with regard to his/her termination, he/she may have recourse to recover compensation that is fixed and earned but not paid prior to termination. This was the issue before the Appellate Division, Fourth Department in Bermel v. Vital Tech Dental Labs, Inc. , 2020 N.Y. Slip Op. 04666 (4th Dept. Aug. 20, 2020) ( here ).  In Bermel , plaintiff, an employee-at-will, sought, inter alia , payment of commissions that he allegedly earned from sales that occurred during the course of his employment with defendant. Plaintiff claimed that he was owed commission income for past sales, as well as sales “generated by on a future and ongoing basis including post-termination of employment.” Plaintiff alleged that defendant had promised to pay him those commissions pursuant to an oral employment agreement. Because Plaintiff alleged that he and Defendant had an oral employment agreement, the Court had to consider whether the Statute of Frauds barred the relief that Plaintiff sought. In New York, the Statute of Frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally. The Statute of Frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons , 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 454 (1984). See also JNG Constr., Ltd. v. Roussopoulos , 135 A.D.3d 709, 710 (2d Dept. 2016) (quoting D & N Boening , 63 N.Y.2d at 454)). The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  Id. at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id. However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id. at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id. at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id. If an alleged agreement is found to fall within the scope of GOL § 5-701(a)(1) (or any other subsection of GOL § 5-701(a)), it is void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent. …” There is sufficient tangible evidence that a contract has been made if, inter alia : (i) there is admissible “electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval) … sufficient to indicate that in such communication a contract was made between the parties”; (ii) “ he party against whom enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made”; or (iii) “ here is a note, memorandum or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.” Id. Email communications can satisfy the “writing” requirement. See Sassoon v. CDx Diagnostics , 172 A.D.3d 617 (1st Dept. May 28, 2019); Naldi v. Grunberg , 80 A.D.3d 1, 13 (1st Dept. 2010). The “writing” need not be a communication between the parties to the contract. It can be an internal communication by the party against whom enforcement is sought. See Int’l Trading & Sales, Inc. v. Philipp Bros. , 99 A.D.2d 983, 984 (1st Dept. 1984) (“If defendant has such a note or memorandum even though it be internal, that could satisfy the Statute of Frauds.”); Scura Partners Sec. LLC v Universal Stainless & Alloy Prods., Inc. , No. 653308/11, 2013 WL 1127733, at *6 (Sup. Ct. N.Y. Cty. Mar. 6, 2013) (permitting discovery to satisfy Statute of Frauds because the defendant “may have internal emails and memorandums which would confirm the existence of the agreement, and these documents are ‘peculiarly within the knowledge’ of .”). With these general principles in mind, the Bermel Court considered defendant’s contention that, even assuming arguendo that there was an oral employment agreement between plaintiff and defendant, such an oral agreement was void pursuant to General Obligations Law § 5-701(a). The Court rejected Defenant’s contention. In doing so, the Court held that “an at-will employment . . . is capable of being performed within one year despite the fact that compensation remains to be calculated beyond the one-year period.” Slip Op. at *1 (quoting Harrison v. Harrison , 57 A.D.3d 1406, 1408 (4th Dept. 2008) (internal quotation marks omitted)); see Hubbell v. T.J. Madden Constr. Co., Inc. , 32 A.D3d 1306, 1306 (4th Dept. 2006); American Credit Servs. v. Robinson Chrysler/Plymouth , 206 A.D.2d 918, 919 (4th Dept 1994). As such, the Court held that the motion court did not err in denying Defendant’s motion with respect to Plaintiff’s “claim for payment of commissions fixed and earned during the course of plaintiff’s employment with defendant.” Slip Op. at *1. However, the Court agreed with Defendant that the motion court erred in denying its motion with respect to Plaintiff’s claim for “‘commissions on sales to any accounts generated by on a future and ongoing basis including post-termination of employment,’ i.e. , the claim for commissions that would accrue subsequent to the termination of plaintiff’s employment.” Id. at *2. The Court noted that “ lthough ‘ n oral agreement that is terminable at will is capable of performance within one year and, therefore, does not come within the Statute of Frauds . . . <,> General Obligations Law § 5-701 (a) (1) bars enforcement of a promise to pay commissions that extends indefinitely, dependent solely on the acts of a third party and beyond the control of the defendant.’” Id. (quoting Murphy v. CNY Fire Emergency Servs. , 225 AD2d 1034, 1035 (4th Dept. 1996) (internal quotation marks omitted)). Thus, concluded the Court, the motion “court erred in denying defendant’s motion with respect to plaintiff’s claim for commissions accruing subsequent to the termination of plaintiff’s employment.…” Id. (citing Zupan v. Blumberg , 2 N.Y.2d 547, 550 (1957); Tamara Brokerage, Inc. v. Andreoli , 24 A.D.3d 536, 537 (2d Dept. 2005); Murphy , 225 A.D.2d at 1035). Takeaway The Statute of Frauds applies to void an oral agreement that by its terms cannot be performed within one year. An at-will employment is capable of being performed within one year despite the fact that compensation remains to be calculated beyond the one-year period. When the employment relationship is terminable within one year and the measure of compensation has become fixed and earned during that period, the sole obligation to calculate such compensation does not bring the agreement within the one-year proscription of the Statute of Frauds.  In Bermel , plaintiff alleged entitlement to commission income for sales that occurred during the course of plaintiff’s employment with defendant, as well as commissions that would accrue subsequent to the termination of plaintiff’s employment. Under prevailing New York law, only those commission that were fixed and earned during plaintiff’s employment were recoverable. As the Court observed, the Statute of Frauds is inapplicable to an employment at-will agreement in which compensation is fixed and earned.

On August 19, 2020, District Administrative Judge, Hon. Andrew A. Crecca, issued a Memorandum regarding the “Return to In-Person Operations in the 10 th Judicial District, Suffolk County – Phase 4.1” (the “Memo”) < HERE =">HERE"> .  According to the Memo, Phase 4.1 “builds upon our reopening efforts to date by providing for enhanced in-person operations in all courts throughout the District, the continued use of virtual technology where we have found it to be appropriate and preferred, and the commencement of civil and criminal jury trials.” Consistent with the prior Phase, Phase 4.1 “no more than 50% of the courtrooms in a courthouse will be used for in person proceedings at the same time, and occupancy of every courtroom in the District will be kept at or below 25% of its maximum capacity.”  Staffing levels in court buildings will not exceed 80%.  Social distancing will be maintained. Although the presiding Judge will have the final word on how matters will be heard, matters that are presumptively “in-person”, include: Supreme Court 1 : -- trials, evidentiary hearings, inquests, essential matters and appearances and conferences with one or more self-represented parties. County Court (Superior Criminal) —trials, evidentiary hearings, non-custodial arraignments, Waivers of indictment, pleas and sentences for defendants not in custody, motion arguments, treatment court and judicial diversion cases where the Judge determines that an appearance is necessary to protect the health and safety of a defendant, grand jury proceedings, instances where the defendant can not be located or communicated with and essential matters Family Court – evidentiary hearings, child support proceedings, permanency hearings, FCA Article 10 consents, admissions and surrenders and essential matters.  Surrogate’s Court – citations and orders to show cause, bench trials, evidentiary hearings, essential matters and appearances and conferences with one or more self-represented parties District Court Civil – bench trials, evidentiary hearings, small claims matters, out of custody arraignments on Town Code violations and essential matters. District Court Criminal – trials preliminary hearings, evidentiary hearings, appearance ticket arraignments, vehicle and traffic appearances, pleas and sentences for defendants at liberty, motion arguments, arraignments of defendants accused of violations of Article 31 of the Vehicle and Traffic law, treatment court where the Judge determines that an appearance is necessary to protect the health and safety of a defendant and essential matters. While the Memo lists specific matters that presumptively will be held virtually, anything not listed above presumptively will be held virtually. In addition, civil and criminal jury trials will commence on a pilot basis on September 8, 2020.  Operational considerations will be put in place to protect the health and safety of those in the courthouse, including those called for jury duty.  These protocols will include, but not be limited to, social distancing, the required wearing of face masks, enhanced cleaning services and access to sanitizing stations.  A push to resolve matters through settlement (civil) and pleas (criminal) will be made prior to scheduling a case for trial and again before jury selection. As to default judgments the Memo provides that: Please also be advised that continuing in Phase 4.1, default judgments shall not be granted where, pursuant to CPLR § 3215, the default occurred after March 16, 2020. Furthermore, no default judgment requiring the defendant's notice pursuant to CPLR § 3215(g) shall be granted, unless the application was heard prior to March 17, 2020 and, proper notice was given (10th Judicial District, Suffolk County's AO 45-20 < HERE =">HERE"> ). 1  This Blog has been advised by the Office of the Administrative Judge, that the reference to “Superior Civil” Court means Supreme Court and the reference to “Superior Criminal” court means County Courts.