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On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court. This Blog wrote about the decision here .  Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in state and federal court.  Following Cyan , researchers at Stanford Securities Litigation Analytics performed at study, at the request of the Professional Liability Underwriting Society, that tracked the number of parallel state court actions filed under the 1933 Act. According to the report, titled “State Section 11 Litigation in the Post-Cyan Environment” ( here ), “ n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id. In the three years prior to Cyan, defendants only faced parallel litigation in 16% of the cases. Id. The New York Experience On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) ( here ). here.=">here."> Hoffman involved a motion, under CPLR § 2201, to stay a securities class action filed in state court, alleging claims under the 1933 Act, in favor of a parallel class action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan . Shortly after we published our article examining Hoffman , Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Grp. Sec. Litig. , 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) ( here ).  Like the Court in Hoffman , Justice Scarpulla, who cited to Hoffman , denied the motion.  However, unlike the Hoffman court, Justice Scarulla applied CPLR § 2201 in making her decision. Recently, Justice Andrea Masley of the Supreme Court, New York County, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act. Convery v. Jumia Tech. AG , 2020 N.Y. Slip Op. 32639(U) (Sup. Ct., N.Y. County Aug. 7, 2020) ( here ). Like Justice Scarpulla, Justice Masley, who cited to and relied upon, inter alia , Matter of PPDAI Group , applied CPLR § 2201 in making her decision to deny the motion. Convery v Jumia Tech. AG Background Convery was filed as a putative class action under the 1933 Act, brought on behalf of the purchasers of American Depository Shares (“ADS”) of Jumia Technologies AG (“Jumia”) pursuant or traceable to the Registration Statement issued in connection with Jumia’s April 2019 initial public offering (“IPO”) of 15.525 million ADS (including the exercise of an over-allotment option) at $14.50 per share.  In a parallel securities class action, filed in the United States District Court for the Southern District of New York ( In re Jumia Technologies AG Securities Litigation , No. 19-cv-4397 (S.D.N.Y.) (Castel, J.)), a different plaintiff, Steven Strugala, asserted claims under the Exchange Act and the rules promulgated thereunder. Strugala alleged that Jumia’s share price fell 28% on May 10, 2019 from $33.11 per ADS to $24.50 per ADS, the day after Citron Research issued a report (the “Citron Report”) asserting that “Jumia is a Fraud” that “deserves immediate SEC attention”. In addition to Jumia, Struglia named as defendants Jumia’s Co-Chief Executive Officers and Chief Financial Officer (the “Management Board Defendants”). The state court action was filed on October 15, 2019, and amended on January 27, 2020. The federal court action was filed on May 14, 2010, and amended twice, on December 30, 2019 and March 13, 2020. In the state court complaint, Plaintiff asserted claims under Sections 11 & 15 of the 1933 Act. Like the original federal complaint, the state court complaint was brought against Jumia and the Management Board Defendants and relied upon the Citron Report for its allegations. However, besides naming a different class representative, Plaintiff added the seven underwriters participating in the IPO, as defendants (the “Underwriter Defendants”). The federal complaint was amended following consolidation and contested motions for appointment of lead plaintiffs and lead counsel. The amended complaint, brought by different plaintiffs, set forth the same allegations as those in the initial complaint, but enlarged the class period. Importantly, the plaintiffs asserted new claims under Sections 11 and 15 of the 1933 Act and named the Underwriter Defendants and eight members of Jumia’s supervisory board (the “Supervisory Board Defendants”), as parties.  In the amended state court complaint, Plaintiff added a claim under Section 12(a)(2) of the 1933 Act, added the Supervisory Board Defendants, Donald J. Puglisi (“Puglisi”), Jumia’s U.S. representative who signed the company’s allegedly false and misleading Registration Statement, and Ernst & Young, the accounting firm who issued an audit report alleged to be materially misleading in violation of international accounting standards, as defendants. Thereafter, the plaintiffs in the federal action filed a second amended complaint. The second amended complaint set forth the same allegations and claims as the amended federal complaint, but added Puglisi as a defendant. On April 3, 2020, the defendants in the federal action filed a pre-motion letter explaining the grounds for their proposed motion to dismiss the second amended complaint. Pursuant to an April 10, 2020 scheduling order, the district court judge permitted defendants to file the motion on June 1, 2020, with the briefing to be completed on August 21, 2020. Discovery was stayed pending further order of the court. Defendants moved, pursuant to CPLR § 2201, to stay all proceedings pending adjudication of the federal action. The Court’s Decision The Court analyzed the motion to stay the action through the lens of CPLR § 2201. Under CPLR § 2201, “ xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Dietz v. Linde Gas N. Am., LLC , 178 A.D.3d 469, 470 (1st Dept. 2019); Mook v. Homesafe Am., Inc. , 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs. , 307 A.D.2d 211, 211-212 (1st Dept.), lv. dismissed , 98 N.Y.2d 728 (2003). Applying the foregoing factors, the Court denied the motion to stay the state court action. The Court held that the first and fourth factors weighed in favor of Plaintiffs. Slip Op. at *5. The Court explained that “ lthough there is substantial overlap between the claims and the defendants, neither action completely dispose of all of the issues relating to the IPO.” Id.   The reason, noted the Court, was because the federal court had exclusive jurisdiction over the Exchange Act claims, but shared jurisdiction over the 1933 Act claims with the state court. Id. (“While both courts have jurisdiction over the 1933 Act claims, the federal court has exclusive jurisdiction over the claim brought under the 1934 Act, so it can only be disposed of there.”) (citing Cyan , 138 S.Ct. at 1078). The Court also noted that the state court action contained different parties and claims in that it “include claims against the accounting firm, and a claim under section 12(a)(2) of the 1933 Act for which rescission is available.” Id. (citation omitted). The Court concluded that “the difference in the relief sought militate against a stay.” Id. (citing Uni-Rty Corp. v. New York Guangdong Fin., Inc. , 117 A.D.3d 427, 429 (1st Dept. 2014)). The Court also found dispositive the different standard of review for the Exchange Act claims, noting that “the fraud claims in the federal action may be subject to heightened scrutiny.” Id. The Court held that the second factor weighed against a stay. Similar to the courts in Hoffman and PPDAI Grp. , the Court held that the federal court had no greater expertise in adjudicating the claims asserted in the state action, “including federal law as it pertains to securities cases.” Id. at *6 (quoting Labourers’ Pension Fund of Cent. and Eastern Canada v. CVS Health Corp. , 2020 WL 2857654, at *6 (Sup. Ct., N.Y. County June 1, 2020), and citing In re PPDAI Grp. Sec. Litig. , 2019 WL 2751278, at *5 (Sup Ct., N.Y. County 2019) (“the Commercial Division is a longstanding, specialized business court which deals exclusively with complex commercial litigation”); and Hoffman v. AT&T Inc. , 2019 WL 2578360, at *2 (Sup. Ct., N.Y. County 2019) (“ he liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week”)). The Court found the third factor to weigh against the grant of a stay. Slip Op. at *6. “Although the federal action was commenced first,” observed the Court, “it was not ‘first in time’ with respect to claims under the 1933 Act, which were first interposed in action – over two months before being added to the federal complaint by way of amendment.” Id. “Indeed,” said the Court, “it appears that at the time federal action was filed, plaintiff could not have sought 1933 Act damages because the ADSs price was still above the IPO offering price.” Id. (citations to the record omitted).  Moreover, said the Court, because discovery had been stayed in each case, the “first to file” factor was “not dispositive” and “not particularly meaningful.” Id. (citing Labourers’ Pension Fund , 2020 WL 2857654, at *7).  Further, noted the Court, “nothing of significance happened in the five months between the original filing of the federal action and , because the parties in the federal action were litigating over the appointment of lead plaintiffs and lead counsel.” Id. “And,” explained the Court, “although the federal action ha progressed slightly further with the partial briefing of a motion to dismiss, action would likely have been at a more advanced stage had defendants not disrupted the previously stipulated litigation schedule by filing this stay motion.” Id. The fifth factor, held the Court, weighed against a stay. The Court explained that because the two actions involved differing claims, “‘ he possibility or actuality of two trials of no importance.’” Id. at *7 (quoting Mt. McKinley Ins. Co. v. Coming, Inc. , 33 A.D.3d 51, 59 (1st Dept. 2006), and citing PPDAI Grp. , 2019 WL 2751278, at *6)). Further, said the Court, “‘ uplication of efforts or waste also not a concern because the parties and courts can cooperate as they do in so many other sophisticated securities cases.’” Id. (quoting Labourers’ Pension Fund , 2020 WL 2857654, at *3 (citation omitted)).  Finally, the Court found that “due to the differences between the parties named, remedies sought and standards of review, the plaintiff and the class might be prejudiced by a stay in pursuing action.” Id. Takeaway In this Blog’s takeaway of PPDAI Group , we said that the decision “may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.”  With the decisions in Labourers’ Pension Fund and Convery , the Commercial Division judges continue to deny motions to stay 1933 Act actions in favor of parallel federal court actions alleging claims under 1933 Act and the Exchange Act. Regardless of the reasons – such as parity with their federal court colleagues in handling complex securities matter or the dictates of the cases decided under CPLR § 2201 – the judges in the Commercial Division are increasingly denying motions to stay parallel securities actions. While these decisions do not constitute a tidal wave, they do constitute a trend that cannot be ignored.

Judicial protection of confidential information is often sought to shield highly sensitive information, trade secrets and financial information from the public. One way to achieve this objective is to obtain an order that seals the record from public view. In New York, the issue is governed by Section 4 of the Judiciary Law and Section 216.1(a) of the Uniform Rules for Trial Courts.  Section 4 of the Judiciary law provides that judicial proceedings “shall be public, and every citizen may freely attend the same.” There are exceptions, of course, such as those involving divorce, rape and criminal sexual acts. Id. But the presumption in favor of public access to court proceedings, both as a matter of constitutional law ( Richmond Newspapers v. Virginia , 448 U.S. 555 (1980) and “statutory imperative” ( Anonymous v. Anonymous , 158 A.D.2d 296, 297 (1st Dept. 1990)) is broad. Danco Lab, Ltd. v. Chemical Works of Gedeon Richter, Ltd. , 274 A.D.2d 1, 7 (1st Dept. 2000). After all, “the public needs to know that all who seek the court’s protection will be treated evenhandedly” ( Baidzar Arkun v. Farman-Farma , 2006 N.Y. Slip Op. 30724(U), at *2 (Sup. Ct., NY County 2006) (citation omitted)) and that judicial proceedings “are conducted efficiently, honestly and fairly.” Danco Lab , 274 A.D.2d at 7 (citations omitted).  Pursuant to the foregoing policy objectives, New York promulgated Section 216.1(a) of the Uniform Rules for Trial Courts (22 N.Y.C.R.R.). This section provides that “ xcept where otherwise provided by statute or rule, a court shall not enter an order in any action … sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.” 22 N.Y.C.R.R. § 216.1 (a). Although the rule does not define “good cause,” “‘a standard that is difficult to define in absolute terms,’ a sealing order should rest on a ‘sound basis or legitimate need to take judicial action.’” Danco Lab , 274 A.D.2d at 8 (quoting Coopersmith v. Gold , 156 Misc. 2d 594, 606 (Sup. Ct., Rockland County 1992) (quoting In re Alexander Grant & Co. , 820 F.2d 352, 356 (11th Cir. 1987)). For this reason, the burden of proof is on the party seeking to seal the record. Mosallem v. Berenson , 76 A.D.3d 345, 348-349 (1st Dept. 2010) (citations omitted). Since the public’s right of access is not absolute ( Anonymous v. Anonymous , 263 A.D.2d 341, 297 (1st Dept. 2000); Danco Lab , 274 A.D.2d at 8), the determination of whether to seal the record “is best left to the sound discretion of the trial court, a discretion to be exercised in light of the relevant facts and circumstances of the particular case.” Matter of Crain Communications, Inc. v. Hughes , 135 A.D.2d 351, 351 (1st Dept. 1987) (citing Nixon v. Warner Communications, Inc. , 435 U.S. 589, 598-599 (1978)).  Notably, “ erely because some of the documents marked ‘confidential’ or ‘private’ ‘is not controlling on the court’s determination whether there is good cause to seal the record.’” Mosallem , 76 A.D.3d at 350 (quoting Eusini v. Pioneer Elecs. (USA), Inc. , 29 A.D.3d 623, 626 (2d Dept. 2006)). In the business context, courts have sealed records where trade secrets are involved or where the disclosure of documents “could threaten a business’s competitive advantage.” Mosallem , 76 A.D.3d at 350-351 (citations omitted). Additionally, courts have permitted the sealing of records where there is no articulable public interest in the documents and materials. See , e.g. , Dawson v. White & Case , 184 A.D.2d 246, 247 (1st Dept. 1992).  Applying the foregoing principles, Justice Andrea Masley of the New York Supreme Court, Commercial Division, granted numerous motions to seal and redact various sensitive, financial documents from the public record. North Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC , 2020 N.Y. Slip Op. 32584(U) (Sup. Ct., N.Y. County Aug. 4, 2020) ( here ). Although the motions were unopposed, the Court weighed the competing interests of the movants and the public and held that disclosure of the information “could threaten competitive advantage in the market going forward.” Slip Op. at *2.

Litigation can be a long and drawn out process.  As a result, parties sometimes die during the pendency of a lawsuit.  In such a case, CPLR § 1015 – Substitution Upon Death – is instructive and provides: (a) Generally.  If a party dies and the claim for or against him is not thereby extinguished the court shall order substitution of the proper parties. (b) Devolution of rights or liabilities on other parties.  Upon the death of one or more of the plaintiffs or defendants in an action in which the right sought to be enforced survives only to the surviving plaintiffs or against the surviving defendants, the action does not abate.  The death shall be noted on the record and the action shall proceed. The procedure for the substitution of a party, whether due to death or otherwise, is set forth in CPLR § 1021 and the extensions of time necessary to tend to the procedural steps involved with the substitution of a party are governed by CPLR § 1022 . Generally, “ he death of a party divests the court of jurisdiction to conduct proceedings in an action, the action is stayed as to him or her pending substitution of a legal representative, and any determination rendered without such a substitution is deemed a nullity.”  Stancu v. Hyang-Oh , 74 A.D.3d 1322, 1322 – 23 (2 nd Dep’t 2010) (citations omitted).  For example, in Danzig Fishman & Decea v. Morgan , 123 A.D.3d 968 (2 nd Dep’t 2014), plaintiff law firm sued a former client for unpaid legal fees.  Plaintiff’s unopposed motion for summary judgment was granted by the motion court after defendant’s death.  Once a representative of defendant’s estate was appointed, a motion to vacate the judgment was granted and, on plaintiff’s appeal, the Second Department affirmed.  Relying on, inter alia , Stancu , the Danzig Court found that the motion court’s grant of summary judgment to plaintiff “was a nullity, as it was after death and before the substitution of a legal representative.”  Danzig , 123 A.D.3d at 969. Sometimes, however, “where a party’s demise does not affect the merits of a case, there is no need for strict adherence to the requirement that the proceedings be stayed pending substitution.”  U.S. Bank National Assoc. v. Esses , 132 A.D.3d 847, 847 (citations omitted).  In Esses , property was owned by a grandfather and grandson as joint tenants with rights of survivorship.  When the grandfather, who was the obligor on the note and mortgage, defaulted, the lender commenced a foreclosure action.  Shortly thereafter, the grandfather died and the trial court stayed all proceedings.  The lender appealed.  The Second Department affirmed. The Court in Esses recognized that “ n the context of a mortgage foreclosure action, where a deceased made an absolute conveyance of all his or her interest in the mortgaged premises to another defendant, including his or her equity of redemption, and the plaintiff either discontinued the action as against the deceased defendant or elected not to seek a deficiency judgment against the deceased defendant’s estate, then the deceased defendant is not a necessary party to the action.”  Esses , 132 A.D.3d at 848 (citations omitted).  However, while the grandson, “as the surviving joint tenant, automatically inherited the subject property from , the plaintiff has neither moved to substitute a representative for estate as a defendant ( see CPLR 1021), discontinued the action insofar as asserted against , nor represented that it would not seek a deficiency judgment against estate.  Esses , 132 A.D.3d at 848 (some citations omitted).  Accordingly, the motion court‘s stay was affirmed. On August 12, 2020, the Second Department decided Nationstar Mortgage, LLC v. Azcona .  The lender in Azcona commenced a mortgage foreclosure action and the defendants were served with process in 2012 but failed to answer the complaint or appear in the action.  One of the defendants died in 2015 and, in 2016, the court entered a default judgment of foreclosure and sale.  In 2017, the remaining defendants moved pursuant to CPLR § 5015(a)(4) to vacate the default judgment because “ had died prior to its entry and, as such, the court was divested of jurisdiction until a legal representative was substituted for .”  The Second Department affirmed the denial of the motion.  In so doing, the Court recognized the general rule that the death of a party divests the court of jurisdiction and proceedings are stayed pending the appointment of a representative of the estate.  The court also noted that a stay is unnecessary when a party’s death “does not affect the merits of the case”.   The Azcona Court affirmed the denial of the vacatur motion.  The Court found that defendants, including the decedent, were properly served with process and defaulted three years prior to decedent’s death. Accordingly, ince defaulted in answering or appearing three years before his death, neither he nor any successor in interest was entitled to notice of the judgment of foreclosure or of the ensuing sale of the subject property.”  (Citations omitted.)  Therefore, the Court “agreed with the Supreme Court that Azcona’s death did not affect the merits of this action, and that there was no need to strictly adhere to the requirement for a stay pending substitution.” (Citations omitted.)

On August 10, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced ( here ) that Interactive Brokers LLC (“Interactive Brokers”) agreed to pay $11.5 million to settle charges it repeatedly failed to file Suspicious Activity Reports (“SARs”) for U.S. microcap securities trades it executed on behalf of its customers. In parallel actions, the Financial Industry Regulatory Authority (“FINRA”) and the Commodity Futures Trading Commission (“CFTC”) also announced settlements with Interactive Brokers ( here and here ) related to anti-money laundering (“AML”) failures in which the registered broker-dealer agreed to pay penalties of $15 million and $11.5 million, respectively, for a total of $38 million in penalties paid to the three agencies. Broker-dealers are required to file SARs for transactions suspected to involve fraud or a lack of an apparent lawful business purpose. In that regard, under Section 17(a) of the Securities Exchange Act and Rule 17a-8 promulgated thereunder, a registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act (“BSA”), or (4) have no business or apparent lawful purpose. According to the SEC’s order ( here ), over a one-year period, Interactive Brokers failed to file more than 150 SARs to flag potential manipulation of microcap securities in its customers’ account, some of the trading accounting for a significant portion of the daily volume in certain of the microcap issuers. The SEC found that Interactive Brokers failed to recognize red flags concerning these transactions, failed to properly investigate suspicious activity as required by its written supervisory procedures, and failed to file SARs in a timely fashion even when suspicious transactions were flagged by compliance personnel.  The SEC further found that Interactive Brokers violated the financial recordkeeping and reporting provisions of the federal securities laws and a related SEC rule.  “SAR filings are an essential tool in assisting regulators and law enforcement to detect potential violations of the securities laws, particularly in the microcap space,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their SAR reporting obligations and maintaining appropriate anti-money laundering controls.” The CFTC found that Interactive Brokers failed to ensure that its employees followed established policies and procedures with respect to supervision of customer accounts. The agency said that the firm also lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. According to the CFTC order (here), these failings contributed to the firm’s inability to maintain an adequate AML program. As a result, alleged the CFTC, Interactive Brokers employees failed to adequately investigate and identify signs of suspicious activity in accounts that, according to the firm’s own compliance procedures, should have prompted the filing of SARs with appropriate authorities. “Our regulatory regime requires certain intermediaries to monitor and report suspicious activity. These suspicious activity reports – or SARs – serve as key tools that we, together with our regulatory partners, use to identify fraud, manipulation, and other wrongdoing in our markets – often at the earliest stages,” said CFTC Director of Enforcement James McDonald. “This case marks the first time the CFTC has charged a violation of Regulation 42.2 and shows our commitment to ensuring these requirements are met.” FINRA found that Interactive Brokers failed to dedicate the resources necessary to meet its AML obligations. In particular, according to the Letter of Acceptance, Waiver and Consent ( here ), FINRA determined that Interactive Brokers failed to meet its AML obligations because of various shortcomings, such as: not reasonably surveilling customers’ wire transfers for money laundering concerns, including deposits into customers’ accounts from countries recognized as “high risk” by U.S. and international AML agencies; not reasonably investigating suspicious activity when it found it because it lacked sufficient personnel and a reasonably designed case management system; and failing to establish and implement policies, procedures, and internal controls reasonably designed to cause the reporting of suspicious transactions as required by the BSA.  Jessica Hopper, FINRA Executive Vice President and Head of Enforcement, said, “Today’s action is a reminder that member firms must tailor their AML programs to the firms’ business model and customer base, and also dedicate resources to programs commensurate with their growth and business lines. FINRA will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.” Without admitting or denying the SEC’s findings, Interactive Brokers agreed to be censured, to cease and desist, and to pay an $11.5 million penalty. In its settlements with FINRA and the CFTC, Interactive Brokers agreed to retain an independent compliance consultant and to disgorge certain profits in addition to the penalties assessed by those agencies.

In the past, we have written about many aspects of arbitration. Our articles have covered issues such as the duty to arbitrate, as well as the bases upon which to confirm or vacate an arbitral award. Rarely, if ever, have we examined a motion to stay a court proceeding pending the outcome of an arbitration. Today, in discussing CMBSW Grp., LLC v. Inverness Counsel, LLC, 2020 N.Y. Slip Op. 32525(U) (Sup. Ct., N.Y. County July 31, 2020) (here), we do so. Typically, a party will move to stay an arbitration because there is no valid agreement to arbitrate. CPLR § 7503(b). Courts will not require a party “to arbitrate unless has clearly consented to do so.” Matter of Chemoleum Corp. , 22 A.D.2d 865, 865 (1st Dept. 1964). The intention to arbitrate “must be clear and direct”. Matter of Marlene Indus. Corp. , 45 N.Y.2d 327, 334 (1978). “An agreement to arbitrate must be express, direct and unequivocal as to the issues or disputes to be submitted to arbitration.” Robert Stigwood Organization, Ltd. v. Atlantic Recording Corp., 83 A.D.2d 123, 126 (1st Dept. 1981) (citations omitted). Sometimes, as in CMBSW Grp., a party moves to stay a court proceeding pending the outcome of an arbitration to avoid the “risk of inconsistent adjudications, application of proof and potential waste of judicial resources.” Zonghetti v. Jeromack, 150 A.D.2d 561, 563 (2d Dept. 1989). Such risks occur because the issues in the arbitration are “inextricably interwoven” with the issues in the lawsuit (e.g., Berg v. Dimson, 151 A.D.2d 362, 363 (1st Dept. 1989); NAMA Holdings. LLC v. Greenberg Traurig, LLP, 62 A.D.3d 578, 579 (1st Dept. 2009)) or “there is such a commonality of parties and issues that the resolution of one proceeding will substantially determine the others.” C.B. Strain & Son, Inc. v. J. Baranello & Sons, 90 A.D.2d 924, 925 (3d Dept. 1982) (stay granted in interest of judicial economy because of overlapping issues and common questions of fact). CMBSW Grp. arose from a dispute between plaintiffs CMBSW Group, LLC (f/k/a the Solaris Group LLC), CMBSW Asset Management LLC (f/k/a Solaris Asset Management LLC), and CMBSW Advisors, LLC (f/k/a Solaris Advisors LLC) (collectively, “Plaintiffs”) and its former employee, Timothy Ghriskey (“Ghriskey”). The gravamen of the dispute concerned an allegation that Ghirskey secretly diverted Plaintiffs’ clients immediately before joining Inverness Counsel, LLC in January 2018. Pursuant to Ghriskey’s employment agreement, on August 7, 2019, Plaintiffs filed a statement of claim and demand for arbitration with the American Arbitration Association against Ghriskey (the “Arbitration”). In the Arbitration, Plaintiffs asserted four claims against Ghriskey: (i) breach of contract; (ii) breach of fiduciary duty; (iii) breach of the duty of loyalty; and (iv) unjust enrichment. Subsequently, on January 27, 2020, Plaintiffs commenced a court proceeding against Defendants alleging: (i) aiding and abetting the breach of fiduciary duty; (ii) tortious interference with contract; (iii) tortious interference with existing and prospective business relationships; and (iv) unfair competition . Defendants moved to stay the court proceeding pending completion of the Arbitration. Defendants argued that a stay was appropriate because (i) the same conduct formed the basis of the claims asserted in the Arbitration as in the court proceeding, (ii) Defendants’ liability in the court proceeding could not be established without proving claims in the Arbitration, namely, whether Ghriskey breached any contractual or fiduciary obligations to Plaintiffs, and (iii) Plaintiffs should be estopped from relitigating Ghriskey’s breach of contract and/or fiduciary duty in the court action. Plaintiffs opposed, arguing that the Arbitration would not resolve the claims in the court action against Defendants and the Arbitration and the lawsuit did not have a complete identity of parties, claims, and damages. The Court granted the motion, finding Plaintiffs’ argument to be “unavailing”. Slip Op. at *3. Finding support in Oxbow Calcining USA Inc. v. American Indus. Partners, 96 A.D.3d 646 (1st Dept. 2012), the Court held that “notwithstanding the lack of total identity of the parties, the rbitration could … dispose of or limit the issues to resolve in the action.” Id. at *4. In Oxbox, the Appellate Division, First Department held that a stay of the lawsuit pending arbitration was appropriate because the arbitration statement of claim and complaint contained overlapping factual allegations and sought the same damages. Oxbox, 96 A.D.3d at 652. The Court explained that, similar to Oxbox, “ he statement of claim in the Arbitration and the Complaint contain nearly identical factual allegations and the same damages – i.e., $10,000,000” and had “overlapping issues of law and common questions of fact.” Slip Op. at *4. In that regard, the Court noted that the underlying elements of Ghriskey’s breach of contract and breach of fiduciary duty claims in the Arbitration were the same as Plaintiffs’ claims for aiding and abetting the breach of fiduciary duty and tortious interference with contract against the Defendants. Id. “Further,” said the Court, “while Mr. Ghriskey’s purported breach of contract and/or breach of fiduciary duty are not dispositive elements of the Plaintiffs’ claims for tortious interference or unfair competition, the Plaintiffs acknowledge that the underlying factual findings are nonetheless relevant to the resolution of these claims.” Id. at *4-*5. “Thus,” concluded the Court, “the resolution of the Arbitration is likely to either limit or dispose of the issues in the present action.” Id. at *5. The Court also found “a significant risk of inconsistent findings of fact with respect to Mr. Ghriskey’s conduct should the Arbitration and action proceed concurrently.” Id. at *5. The Court reasoned that both the Arbitration and the lawsuit alleged “that Mr. Ghriskey conspired with the Defendants to steal the Plaintiffs’ clients and to commit various wrongful acts.…” Id. Finally, the Court rejected Plaintiff’s concerns about the application of collateral estoppel. Id. at *5. Plaintiffs argued “that any award in the Arbitration may have limited estoppel effects against the Defendants” because Plaintiffs would not have “a full and fair opportunity to litigate the issues determined in the arbitration proceeding.” Id. The Court held that “ hile a finding of wrongdoing by Mr. Ghriskey may not be preclusive as to all issues against the Defendants, ‘ ecause mutuality of parties is not required, a defendant may preclude a plaintiff from relitigating an issue resolved against that plaintiff in an earlier arbitration with a different defendant.’” Id. (quoting Bernard v. Proskauer Rose, LLP, 87 A.D.3d 412 (1st Dept. 2011) (explaining that arbitration awards may be given preclusive effect in a judicial action)). Takeaway CPLR § 2201 allows the court to grant a stay of proceedings “upon such terms as may be just.” Parties may invoke CPLR § 2201 based on another pending action or proceeding. As with motions to dismiss under CPLR § 3211(a)(4), the court has broad discretion when making this determination. In order to stay a proceeding, “it is necessary that there be sufficient identity as to both the parties and the causes of action asserted in the respective actions.” White Light v. On The Scene, 231 A.D.2d 90, 93 (1st Dept. 1997). Complete identity is not required; substantial identity will do. See Syncora Guar. Inc. v. J.P. Morgan Sec. LLC, 110 A.D.3d 87, 96 (1st Dept. 2013); White Light, 231 A.D.2d at 94 (“With respect to the subject of the actions, the relief sought must be the same or substantially the same.”) (citations and internal quotation marks omitted). But see Lessard Architectural Grp., Inc. P.C. v. X & Y Dev. Grp., LLC, 88 A.D.3d 768 (2d Dept. 2011) (noting that a stay “should not be granted … unless the other action presents complete identity of parties, causes of action, and relief sought”). Thus, as in CMBSW Grp., where the two proceedings involve substantially similar parties and overlapping subject matter and seek the same damages for substantially the same alleged injuries, a court may properly find that the actions are substantially similar for purposes of CPLR § 2201.

Generally, when a loan is made by a lender that is secured by real property, two of the documents delivered to the Lender by the borrower are a promissory note (which evidences the obligation to repay the borrowed sums) and a mortgage (which secures the obligation to repay the note by giving the lender a security interest in real property).  If a loan secured by a mortgage goes into default and the lender decides to protect its rights through litigation, a choice must be made whether to sue on the note and attempt to collect money damages, or foreclose on the mortgage and have the property sold at foreclosure to fully or partially satisfy the underlying obligation.  See, e.g., Wells Fargo Bank, N.A. v. Goans , 136 A.D.3d 709 (2 nd Dep’t 2016) (“Where a creditor holds both a debt instrument and a mortgage which is given to secure the debt, the creditor may elect either to sue at law to recover on the debt, or to sue in equity to foreclose on the mortgage”).  This choice, called an election of remedies, is mandated by section 1301 of the Real Property Actions and Proceedings Law (“RPAPL”), which provides: 1. Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff of the county where he resides, if he resides within the state, or if he resides without the state, to the sheriff of the county where the judgment-roll is filed; and has been returned wholly or partly unsatisfied. 2. The complaint shall state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected. 3. While the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought. This Blog has previously addressed RPAPL § 1301 < HERE =">HERE"> and < HERE =">HERE"> . The purpose of RPAPL § 1301 is to “shield the mortgagor from the expense and annoyance of two independent actions at the same time with reference to the same debt” and, “consistent with the legislative purpose of the statute to avoid inappropriate duplicative and vexatious litigation by the same party.”  Central Trust Co. v. Dann , 85 N.Y.2d 767, 772 (1995) (citations, internal quotation marks and emphasis omitted).  Because RPAPL § 1301 “is in derogation of a plaintiff’s common-law right to pursue the alternate remedies of foreclosure and recovery of the debt at the same time,” there is a judicial recognition that the statute “should be strictly construed.”  Old Republic Nat. Title Ins. Co. v. Conlin , 129 A.D.3d 804 (2 nd Dep’t 2015) (citations and internal quotation marks omitted).  In Old Republic , however, the Court permitted an action on a note to proceed despite the pendency of a foreclosure action because while the “foreclosure action was not formally discontinued, the effective abandonment of that action is a de facto discontinuance” which militates against dismissal of the present action pursuant to RPAPL 1301(3).”  Old Republic , 129 A.D.3d at 805 (citations omitted).  The Old Republic Court found that “ llowing the plaintiff to pursue this action on the note, which was commenced more than four years after the foreclosure action was effectively abandoned, is not inconsistent with the purpose of RPAPL 1301(3) ….” Id. In Stone Mountain Holdings, LLC v. Spitzer , decided by the Appellate Division, Second Department, on August 5, 2020 (“Stone Mountain II”), the Court affirmed the grant of leave to a lender pursuant to RPAPL § 1303 to commence an action on the underlying promissory note after a judgment of foreclosure and sale was issued in a prior foreclosure action.  While the facts relative to RPAPL § 1303 are set forth herein, the more convoluted and interesting facts of that case are set forth in an earlier opinion of the Second Department.  Stone Mountain Holdings, LLC v. Spitzer , 119 A.D.3d 548 (2014) (“Stone Mountain I”).  The Stone Mountain borrowers borrowed $3,000,000 on behalf of their company.  The loan was evidenced by a promissory note and was secured by unconditional personal guaranties from the owners of the company.  As additional security, one of the owners and his wife delivered to the lender a mortgage on their residence.   The borrowers defaulted on the loan in 2008, lender commenced a mortgage foreclosure action in 2009 and obtained a judgment of foreclosure and sale in the amount of $4,320,000 in 2010.  “However, rather than proceeding with the foreclosure sale of the … residence, the plaintiff agreed to forgo its right to foreclose on the residential mortgage in exchange for a partial payment of $100,000 against the judgment.”  Stone Mountain II at *1 (citation omitted).  “In the course of its attempts to collect the $4.22 million still owed, the plaintiff discovered that the judgment in its favor authorized only the foreclosure sale and did not authorize it to collect sums due but not satisfied by the sale of the mortgaged property.” Id .  Accordingly, lender sought leave to commence a new action against borrowers to collect the remaining debt because “after final judgment in its favor, a plaintiff may not commence another action to recover a mortgage debt without leave of court.”  Stone Mountain II at *2 (citing to RPAPL § 1303(3) and other cases). In granting leave to lender to pursue the remainder of the debt in excess of $4,000,000, the Court prevented the borrowers from obtaining a windfall and stated: Here, as we noted in our prior decision in this matter < stone mountain i > stone mountain i>, to prevent the plaintiff from seeking to collect the $4.22 million still owed to it would "create a windfall for the defendants by allowing them to obtain satisfaction of the judgment by paying roughly 3.3% of the principal sum borrowed and less than 2.4% of the judgment" (Stone Mtn. Holdings, LLC v Spitzer, 119 AD3d at 550). Accordingly, the Supreme Court providently exercised its discretion in granting the plaintiff's motion for leave to commence a new action to collect the remainder of the debt (see TD Bank, N.A. v 250 Jackson Ave., LLC, 137 AD3d 1006, 1007; see generally Valley Sav. Bank v Rose, 228 AD2d 666, 667). Stone Mountain II at *2

The elements of a cause of action for breach of contract are: (1) the existence of a contract between plaintiff and defendant; (2) performance by one party; (3) the other party’s failure to perform; and (4) damages resulting from such failure to perform. JP Morgan Chase v. J.H. Elec. of New York. Inc. , 69 A.D.3d 802, 803 (2d Dept. 2010). When a party breaches a contract, that breach may excuse the non-breaching party from further performance if the breach is so substantial that it defeats the parties’ objective in making the contract. Robert Cohn Assocs. Inc. v. Kosich , 63 A.D.3d 1388, 1389 (3d Dept. 2009). In such a case, the non-breaching party is discharged from performing any further obligations under the contract and may elect to terminate the contract and sue for damages. Casita. LP v. Maplewood Equity Partners (Offshore) Ltd. , 17 Misc. 3d 1137(A) (Sup. Ct., N.Y. County 2007). Sometimes, each party claims that the other breached the agreement first. Courts characterize this situation as the “battle of the breaches”. Boston Concessions Grp. v. Criterion Ctr. Corp. , 200 A.D.2d 543, 545 (1st Dept. 1994).  The battle of the breaches is typically inappropriate for summary determination because each party to the contract submits “conflicting affidavits and documentary evidence which cast the other party in the role of the primary contract offender.” Boston Concessions Grp. , 200 A.D.2d at 545. A material question of fact is, therefore, presented regarding the nature and extent of the breaches alleged, which cannot be determined in advance of trial.  In 20 St. Marks, LLC v. St. Marks NY LLC , 2020 N.Y Slip Op. 32512(U) (Sup. Ct., N.Y. County July 28, 2020) ( here ), the Court denied a motion for summary judgment because the record was laden with contested issues of fact that were better left for resolution at trial.   Marks involved a commercial lease dispute.  Plaintiff, a bar owner, entered into a commercial lease with defendants on December 26, 2017. Upon signing the lease, plaintiff tendered $154,000.00 to defendants, representing the first month’s rent (at $22,000 per month), and six months’ rent as security deposit (totaling $132,000 in security). Structural defects prevented the premises from opening to the public as planned by plaintiff. On February 20, 2019, plaintiff terminated the lease. Plaintiff contended that defendants breached the lease by failing to deliver possession of the premises by May 1, 2018, as required under the lease. Pursuant to the lease, plaintiff could, at its “sole option, elect to terminate th Lease” “if for any reason, Landlord unable to give possession to Tenant by May 1, 2018.” Slip Op. at *3. Upon termination, defendants were required to “promptly refund any pre-paid rent together with ’s Security Deposit.” Id. According to plaintiff, in an affidavit executed by one of its members, 14 months after signing the lease, defendants had yet to deliver possession of the premises. Defendants contended, through the affidavit of the premises’ property manager, that they gave plaintiff the keys to the premises immediately after signing the lease. According to defendants, plaintiff changed the locks, and in March 2018, had its engineer perform exploratory probing into the flooring. Id. at *5 (citing Pacific Coast Silks, LLC v. 247 Realty, LLC , 76 A.D.3d 167, 175 (1st Dept. 2010) (holding that the commercial tenant had been given possession of the premises when the keys had been delivered and accepted, and the tenant “actively cooperated in the process of readying the place for contemplated future business operations”)). In addition, and relevant to today’s article, defendants interposed a counterclaim, alleging that plaintiff breached the lease by failing to pay rent and abandoning the premises. Plaintiff responded by arguing that the keys were provided so that it could monitor “ efendants’ progress and so that laintiff could access the space with its own contractors and professionals so that laintiff could begin its construction immediately after efendants’ work was completed.” Id. (citation to the record omitted). Plaintiff maintained that it did not take possession of the premises by taking the keys; instead it was “a mere accommodation.…” Id. The Court found that based upon the record before it, “either party could be the primary contract offender.” Slip Op. at *6. As such, said the Court, “questions as to which party breached first … preclude summary disposition.” Id. (citation omitted). “Therefore,” concluded the Court, “plaintiff’s motion for summary judgment on its claims, and for dismissal of defendants’ counterclaim, sounding in breach of contract, must be denied.” Id. Plaintiff also asserted a claim for unjust enrichment. The Court held that the claim was barred because there was “a valid contract governing the subject matter” of the action and, therefore, “preclude recovery in quasi contract for event arising out of the same subject matter” as the contract. Id. at *6-*7 (citing Adelaide Prods., Inc. v. BKN Intl. AG , 38 A.D.3d 221, 225-226 (1st Dept. 2007) (internal quotation marks and citations omitted). “As such,” the Court denied “plaintiff’s motion for summary judgment on the cause of action, dismissed the cause of action pursuant to CPLR 3212(b). Id. at *7 (citing Abramovitz v. Paragon Sporting Goods Co., Inc. , 202 A.D.2d 206, 208 (1st Dept. 1994)). Takeaway Each party in Marks cast the other in the role of the offender. Thus, a material question of fact existed as to which party breached first. Since the Court’s role on summary judgment is not to determine the credibility of the affiants, summary judgment was denied.

Statutes of limitations limit the duration of a defendant’s liability for all types of alleged wrongdoing. Plaintiffs who do not prosecute their claims within the limitation period will find the courthouse doors closed to their causes of action. The United States Supreme Court has explained that the reason for such statutes is to free a defendant from stale claims. Statutes of limitation, like the equitable doctrine of laches, in their conclusive effects are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. The theory is that even if one has a just claim it is unjust not to put the adversary on notice to defend within the period of limitation and that the right to be free of stale claims in time comes to prevail over the right to prosecute them. Railroad Telegraphers v. Railway Express Agency , 321 U. S. 342, 348-49 (1944). In New York, the statute of limitations for a claim based on fraud is the greater of (a) six years from the date when the cause of action accrued or (b) two years from the time plaintiff discovered the fraud or could with reasonable diligence have discovered the fraud. CPLR § 213(8). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). The two-year discovery rule requires an inquiry into “whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred.” Kaufman v. Cohen , 307 A.D.2d 113, 123 (1st Dept. 2003) (internal quotation marks and citation omitted); see also Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Eberle , 3 N.Y.2d at 326. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that he/she has been defrauded, a duty of inquiry arises, and if he/she fails to undertake that inquiry when he/she would have developed the truth, and shut his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her. Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).  The test as to when fraud should with reasonable diligence have been discovered is an objective one. Id. (citation and internal quotation marks omitted). Thus, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012). “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). In Sabourin v. Chodos , 2020 N.Y. Slip Op. 20186 (Sup. Ct., N.Y. County July 30, 2020) ( here ), the foregoing principles were considered by Justice Andrew Borrok in denying defendants’ motion to dismiss plaintiffs’ fraud claim. Background Sabourin concerned a lawyer’s alleged involvement in a complex fraud perpetrated by William Jack Frost (“Frost”), an investor in a fashion and lifestyle magazine known as Z!NK (founded in 2002), on its founders, Isabelle Sabourin (“Sabourin”) and Sheriff Ishak (“Ishak” and with Sabourin, “Z!NK’s Founders”). Although the alleged fraud dates back to 2008, the facts surrounding the lawyer’s involvement are claimed to have been unknown until discovery in an arbitration conducted in 2013-2014 (the “2013-14 Arbitration”).  In 2007, Frost agreed to invest $8 million in Z!NK Magazine in exchange for a 25% equity stake in a new joint venture known as I.T. Global Media, LLC (“ITGM”), which took ownership over Z!NK Magazine and its intellectual property rights. Up until the 2013-14 Arbitration, Z!NK’s Founders understood defendant, Adam Chodos (“Chodos”), to be Frost’s legal representative in the negotiations leading up to the transaction and later ITGM’s legal representative. Frost immediately defaulted on his initial funding obligation, causing Ishak to terminate the deal and remove him as a manager of the company. When Frost later came up with the initial payment, Ishak agreed to revive the deal. That payment was made by one of Frost’s companies, F4 Capital Management, LLC (“F4”). According to plaintiffs, Chodos obtained a portion of the payment from an undisclosed source and transferred that money into F4’s accounts from an account that he controlled. The source of the funds and Chodos’ involvement in the transfer were allegedly not disclosed to Z!NK’s Founders. In June 2008, Frost provided Z!NK’s Founders with a $6 million check drawn on an account in Frost’s father’s name. Frost claimed that his father was a majority equity holder and Chairman of the Board of Synovus Bank in Florida, and that ITGM could earn 1.5% more in interest with Synovus Bank than at any other bank. Z!NK’s Founders agreed to deposit the $6 million check into an account at Synovus Bank. Frost indicated that he would take care of opening the account and depositing the check. Frost allegedly later presented Ishak with forged account statements showing a balance of $6 million. In August 2008, when Sabourin sought to transfer funds from the Synovus Bank account to ITGM’s Commerce Bank account to cover operating expenses, Frost intervened, transferring $230,000 to ITGM’s Commerce Bank account. According to plaintiffs, they did not know that Frost did not transfer the money out of the account at Synovus Bank. Instead, Frost allegedly transferred the money out of his then wife’s account. In September 2008, when Ishak attempted to withdraw money from the Commerce Bank account for payroll, he allegedly learned that there were insufficient funds in the account and that he had been removed as an authorized person on the account. He then allegedly tried to access ITGM’s account at Synovus Bank only to learn that the Synovus Bank account did not exist. Z!NK’s Founders alleged that the foregoing was part of a scheme engineered by Frost and Chodos to wrest control of the Z!NK business and loot its assets. They alleged that, between 2008 and 2010, Frost, with substantial assistance from Chodos, engaged in a campaign of misrepresentations and forgeries in an attempt to take over Z!NK Magazine. On January 27, 2010, Z!NK’s Founders commenced a lawsuit against Frost and others. The complaint was amended on March 18, 2011. Before the commencement of discovery on August 19, 2011, the complaint was dismissed as to certain individuals. On September 13, 2012, the matter was referred to arbitration. Document production in the 2013-14 Arbitration occurred in August 2013 and testimony was taken in September 2013. Through the evidence and testimony adduced in the 2013-14 Arbitration, Z!NK’s Founders alleged that they learned, for the first time, the facts underlying what had transpired. They filed their summons and notice on February 26, 2015, less than two years after the testimony in September 2013. On April 1, 2014, the arbitrator awarded Z!NK’s Founders $56,400,000.00 against Frost. On February 23, 2015, Z!NK’s Founders entered judgment against Frost in the amount of $62,380,605.50. But by the time the judgment was entered, Frost had allegedly disappeared. According to plaintiffs, the documents and testimony adduced during the 2013-14 Arbitration revealed that Chodos had an undisclosed and unknown involvement in the fraud. Z!NK’s Founders alleged that the documentary and testimonial evidence was not known or otherwise available to Z!NK’s Founders concerning Chodos’ alleged participation in the fraud. With the information learned during the 2013-14 Arbitration, Z!NK’s Founders filed suit against Chodos, asserting causes of action for fraud, aiding and abetting fraud, unjust enrichment, aiding and abetting breach of fiduciary duty, civil conspiracy to commit conversion, and tortious interference with economic advantage. Plaintiffs sought damages of not less than $5 million. Chodos moved for summary judgment, arguing that the complaint should be dismissed because (i) the statute of limitations had run, (ii) he should not be held liable for his clients’ actions, and (iii) the damages were not ascertainable. The Court denied the motion in its entirety. The Court’s Decision The Court held that the Z!NK’s Founders did not know or have reason to know that Chodos was allegedly involved in the fraud prior to the 2013-14 Arbitration. Slip Op. at *7. The Court said that “Chodos fail to meet his burden of coming forward with evidence establishing ‘what the Z!NK Founders knew’ and ‘when they knew it,’ or that they could have, with reasonable diligence, discovered any such facts necessary to satisfy CPLR § 3016(b) to have brought an action against him previously.” Id. at *7-*8 (paraphrasing Howard Baker’s oft-quoted question: “What did the President know and when did he know it?”). “In fact,” continued the Court, “the evidence adduced in this case establishe that Z!NK’s Founders were cut-off from records that may have revealed Mr. Chodos’ involvement in the fraud because Mr. Frost literally purloined Z!NK’s business records which theft, based on testimony, was perhaps at the direction and upon advice from Mr. Chodos himself, making it impossible for them to have known the nature and extent of Mr. Chodos’ active participation in the scheme.” Id. at *8. Thus, explained the Court, “Z!NK’s Founders did not know, because they could not have known, about the … conduct by Mr. Chodos until it was disclosed either at the earliest during the document production in August 2013 or when Mr. Chodos and testified on September 18, 2013 during the 2013-14 Arbitration ( i.e. , in either case, well within the 2 year discovery rule as this action was commenced on February 26, 2015).…” Id. “In addition,” said the Court, “Mr. Frost’s former employee … testified that she worked for Mr. Frost as his executive assistant and office manager in 2007 and 2008, during which time she communicated with Mr. Chodos on a weekly and sometimes daily basis and that Mr. Frost took all of his direction from Mr. Chodos and never made any decisions without consulting with him.” Id. As she explained, “Mr. Frost ‘didn’t do anything without calling Adam ’ and, Mr. Chodos ‘was the right-hand man with everything. Whether it was money, business advice, anything, he was his guy.’” Id. at *8-*9. “Significantly,” explained the Court, “at some point in Mr. Frost’s absence, Mr. Chodos even took over the company.” Id. at *9. The Court concluded that “without any of this information learned during the 2013-14 Arbitration, the Z!NK Founders could not have known the detailed facts about Mr. Chodos’ involvement in Mr. Frost’s scheme.” Id. “Accordingly,” the Court held that “there issues of fact precluding summary judgment relating, among other things, to (i) the relationship of Messrs. Chodos and Frost; (ii) the likelihood that Mr. Chodos knew, should have known, or maybe played a role in assisting Mr. Frost in forging the documents or stealing all the business records; (iii) the reasons for the delay in the 2013-14 Arbitration and whether it really took Z!NK’s Founders until the 2013-14 Arbitration to have the facts to satisfy CPLR § 3016(b); and (iv) how Mr. Chodos’ alleged ethical breaches may have further altered Z!NK’s Founders’ ability to learn the facts.” Slip Op. at *9. Under such circumstances, the Court denied the motion for summary judgment. Takeaway Inquiry notice is an important component of the statute of limitations analysis. Courts look to whether the facts suggest to a person of ordinary intelligence the probability that he/she has been defrauded. If they do, a duty of inquiry arises. If the plaintiff fails to undertake that inquiry when he/she could have developed the truth and shut his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to the plaintiff.  In Sabourin , the Court found that the facts were concealed from plaintiffs. As explained, plaintiffs “did not know, because they could not have known,” about defendant’s alleged conduct “until it was disclosed either at the earliest during the document production in August 2013 or when Mr. Chodos and testified on September 18, 2013 during the 2013-14 Arbitration.” Without such evidence, plaintiffs could not have been on inquiry notice of the alleged fraud. Since plaintiffs filed suit within two years of 2013-14 Arbitration, plaintiffs timely commenced their lawsuit.

It makes sense that a “plaintiff appears merely by bringing it.”  Deutsche Bank Nat. Trust Co. v. Hall , ____ N.Y.S.3d ___, 2020 WL 4342753 (July 29, 2020) (citation and internal quotation marks omitted).  Once served with process, a defendant must appear in an action to avoid a default.  Section 320(a) of New York’s Civil Practice Law and Rules (the “CPLR”), which sets forth, inter alia, the manner in which a defendant can appear in an action provides that “ he 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 pursuant to CPLR §320(a) is a formal appearance in the action.  As will be discussed herein, New York courts also recognize “informal appearances.”  An appearance, whether formal or informal, can have a significant impact on litigation.  Among other things, an appearance could: preclude the entry of a default judgment by plaintiff; operate to preclude a defendant from interposing a defense of lack personal jurisdiction; and, preclude a defendant from having a complaint dismissed pursuant to CPLR 3215(c) based on a plaintiff’s failure to seek a default judgment within a year of default.  [This BLOG has addressed CPLR 3215(c) < HERE =">HERE"> .]  Depending on the circumstances, a plaintiff or a defendant may argue that a defendant has “informally appeared” in an action. To constitute an informal appearance, a defendant must have engaged in “meaningful participation in the merits of the case.”  Kurlander v. Willie , 45 A.D.3d 1006, 1007 (3 rd Dep’t 2007) (citation omitted).   The plaintiff in Kurlander commenced a mortgage foreclosure action and served defendant with process.  In response, defendant visited the office of plaintiff’s counsel, paid the principal balance due on the loan and received a receipt marked “paid in full.”  Thereafter, counsel wrote several letters to defendant advising that interest was still due and, if not paid, the foreclosure action would proceed.  An answer was never filed and a judgment of foreclosure and sale was obtained on default.  The denial of defendant’s motion to vacate the default was affirmed.  The Third Department was “unpersuaded” by defendant’s argument that the “payment of the unpaid principal balance constituted an ‘informal appearance’ in the action such that he was entitled to notice of all subsequent proceedings.”  Kurlander , 45 A.D.3d at 1007.   In Wells Fargo Bank, N.A. v. Martinez , 181 A.D.3d 470 (1 st Dep’t 2020), also a foreclosure action, defendant sought dismissal of the complaint as abandoned pursuant to CPLR 3215(c) because plaintiff failed to move for a default judgment within a year of defendant’s default.  In opposition to defendant’s motion, plaintiff unsuccessfully argued that defendant waived his right to a CPLR 3215(c) dismissal to the extent that defendant’s participation in a foreclosure settlement conference constituted an informal appearance in the litigation.  The Court held that “ lthough a party may waive it rights under CPLR 3215(c) by serving an answer or taking any other steps which may be viewed as a formal or informal appearance, defendant’s participation in settlement conferences did not constitute either a formal or an informal appearance since he did not actively litigate the action before the Supreme Court or participate in the action on the merits.”  Martinez , 181 A.D.3d at 470 (citations, internal quotation marks and brackets omitted).  See also, HSBC Bank USA, Nat. Assoc. v. Grella , 145 A.D.3d 669, 671 (2 nd Dep’t 2016) (holding that a motion for leave to serve an untimely answer pursuant to CPLR 3012(d) does not constitute an informal appearance.) Similarly, the Second Department in Whiteside v. Manfredi , 132 A.D.3d 851 (2015), rebuffed plaintiff’s attempt to argue that defendant’s motion to dismiss pursuant to CPLR 3215(c) should be denied due to defendant’s “informal appearance” in the action.  The plaintiff in Whiteside commenced a wrongful death action in 2006.  Defendant hospital’s counsel wrote to plaintiff’s counsel shortly thereafter forwarding a “Notice of Bankruptcy” and advising that the hospital was in bankruptcy and that an automatic stay was in effect.  The hospital emerged from bankruptcy in 2007 and two years later moved to dismiss the action as against it pursuant to CPLR 3215(c).  The motion court denied the motion.  In reversing the motion court, the Second Department held that “ ontrary to the Supreme Court’s determination, the letter and the accompanying notice of bankruptcy did not constitute an informal appearance by the hospital.”  Whiteside , 132 A.D.3d at 852. The motion court in  HSBC Bank USA, Nat. Assoc. v. Assouline , 177 A.D.3d 603 (2 nd Dep’t 2019), denied defendant’s motion to vacate a judgment of foreclosure and sale based on lack of personal jurisdiction due to improper service of process.  The Second Department reversed. In Assouline , the defendant was able to rebut the presumption of proper service raised by the process server’s affidavit.  The Court rejected plaintiff’s attempt to argue that the defendant waived the personal jurisdiction defense by making an informal appearance to the extent that: defendant communicated with plaintiff’s attorney to discuss a loan modification; and, defendant’s attorney contacted plaintiff’s servicer to discuss a settlement “prior to litigation” – suggesting that defendant’s counsel was unaware of the pending litigation.  The matter was remitted to supreme court to determine, inter alia , whether defendant was properly served. The Second Department in City of Newburgh v. 96 Broadway LLC , 72 A.D.3d 632 (2010), reversed the trial court’s grant of plaintiff’s motion for a default judgment because subsequent to the commencement of the action “the defendants twice appeared in court, filed a petition to remove the action to federal district court, entered into a stipulation with the plaintiff, and opposed the plaintiff’s motion to hold them in contempt acts, the defendants appeared in the action and, thus, should not have been deemed in default.”  Newburgh , 72 A.D.3d at 632 (citations omitted). Hall was a mortgage foreclosure action in which the motion court granted plaintiff’s motion for a default judgment and denied defendant’s cross-motion to dismiss the complaint on numerous grounds.  The Second Department affirmed and found that in its motion for a default judgment against defendant, plaintiff demonstrated that defendant was properly served with process, failed to appear or answer and it was entitled to foreclose on the subject mortgage.  Hall at *2.  The Court concluded that defendant informally appeared in the action but found unavailing, his argument that his “informal appearance” precluded a default finding and that “even if an ‘informal appearance’ is made after the expiration of the time to answer or move specified in CPLR 320(a) judgment by default is precluded.”  Hall at *2 (some internal quotation marks, brackets and ellipses omitted).  Addressing the issue of “informal appearances,” the Hall Court stated: It is true that “ n addition to the formal appearances listed in CPLR 320(a), the law continues to recognize the so-called ‘informal’ appearance” (Siegel & Connors, N.Y. Prac § 112). “It comes about when the defendant, although not having taken any of the steps that would officially constitute an appearance under CPLR 320(a), nevertheless participates in the case in some way relating to the merits” ( id. ). Although “an informal’ appearance can prevent a finding that the defendant is in default, thereby precluding entry of a default judgment” (Vincent C. Alexander, Practice Commentaries, McKinney’s Cons Laws of NY, CPLR C320:4), this is only true when the participation constituting the informal’ appearance occurred within the time limitations imposed for making a formal appearance. Indeed, even service of a formal “notice of appearance will not protect the defendant from entry of a default judgment if, after service of the complaint, the defendant does not timely make a CPLR 3211 motion or serve an answer” (Vincent C. Alexander, Practice Commentaries, McKinney’s Cons Laws of NY, CPLR C320:1). Accordingly, an informal’ appearance, without more, does not somehow absolve a defendant from complying with the time restrictions imposed by CPLR 320(a) which govern the service of an answer or the making of a motion pursuant to CPLR 3211. Contrary to Hall’s contention, this Court has never held otherwise; to do so would effectively eliminate any need for compliance with the time limitations imposed by CPLR 320(a), and render those statutory provisions meaningless for all practical purposes. Hall at *2-3 (some citations omitted). Because the Hall defendant’s informal appearance was made after the expiration of his time to appear or answer, he was found to be in default.  Accordingly, defendant’s substantive defenses were deemed waived.  As to the waiver of the defense of lack of personal jurisdiction, the Hall Court stated that: Hall himself argues … he engaged in significant activity after his statutory time to answer had expired, which amounted to an informal appearance. This activity was sufficient to warrant a finding that Hall had acknowledged the jurisdiction of the court without preserving his objection based on improper service.   Hall at *3 (citations omitted).  Similarly, the Court found defendant to have waived the defenses of lack of standing, lack of compliance with RPAPL §1304 and res judicata because “where the plaintiff has demonstrated, prima facie, that a defendant is in default because he or she “failed to appear” within the meaning of CPLR 3215(a), that defendant is generally precluded from raising any nonjurisdictional defense without first rebutting the prima facie showing of default.”  Hall at *3 (citations omitted, emphasis in original).  [Note: this Blog has addressed issues related to RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> and standing in mortgage foreclosure actions < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> .]

Our country’s teachers are everyday heroes whose hard work and dedication are vital to cultivating our future leaders and ensuring America’s continued strength.  Jay Clayton, Chairman, Securities and Exchange Commission. In June 2019, the Securities and Exchange Commission (“Commission” or “SEC”) launched the Teachers’ Initiative and the Military Service Members’ Initiative. The primary purpose of these initiatives is to ensure that public school educators, veterans, and active duty military understand the financial services they are getting, the costs associated with those financial services, and the steps to take when they are offered an investment product that sounds too good to be true. here)=">here)" and="and" commitment="commitment" serving="serving" active="active" military="military" veterans="veterans" through="through" investor="investor" advocacy="advocacy" outreach="outreach" >here).=">here)."> Commenting on the initiatives, Chairman Clayton said the following: Teachers, active duty military, and veterans provide tremendous service to our country, often at great personal and financial sacrifice to themselves and their families, yet far too often are targeted and fall victim to securities fraud and other misconduct. These new initiatives reflect the Commission’s dedication to fighting fraud and to educating retail investors.  “The Enforcement Division is committed to fighting for our country’s educators, service members, and veterans, who may be vulnerable to fraud in the securities markets,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “Teachers and members of the military community have already made tremendous financial sacrifices for our country and can quickly face financial ruin as the result of securities fraud,” added Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “Education is the cornerstone of investor protection, and we have no more important constituents than our teachers and members of the military,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “We look forward to working together to help these important groups make the best investment decisions right for them – and protect themselves from fraud.” “State securities regulators have long recognized the importance of protecting those who serve our communities and our nation from financial exploitation. These public servants dedicate their professional lives to helping others and they deserve to know that their state and federal governments are working together to provide them the tools and resources necessary to protect their financial future,” said Michael S. Pieciak, President of the North American Securities Administrators Association and Commissioner of the Vermont Department of Financial Regulation. here.=">here." Teachers="Teachers" find="find" a="a" number="number" of="of" resources="resources" on="on" SEC’s="SEC’s" website="website" through="through" Commission’s="Commission’s" Office="Office" Investor="Investor" Education="Education" and="and" Advocacy="Advocacy" ( e.g. ,="(e.g.," >here,=">here," >here).=">here)."> The SEC’s commitment to the protection of educators was highlighted by the recent settlement of charges against an investment advisor for failing to disclose millions of dollars in payments to promote services to Florida K-12 teachers.  In the Matter of VALIC Financial Advisors, Inc. On July 28, 2020, the SEC announced ( here ) that it charged Houston-based VALIC Financial Advisors Inc. (“VFA”) in a pair of enforcement actions for failing to disclose to teachers and other investors practices that generated millions of dollars in fees and other financial benefits for VFA.  In the first action, the SEC found that VFA failed to disclose that its parent company, Variable Annuity Life Insurance Company (“VALIC”), paid a for-profit entity owned by Florida K-12 teachers’ unions, described by the SEC as the “Teachers Union Entity”, to promote VFA and its parent company services to teachers.  In the second action, the SEC found that VFA failed to disclose conflicts of interest regarding its receipt of millions of dollars of financial benefits that directly resulted from advisory client mutual fund investments that were generally more expensive for clients than other mutual fund investment options available to clients. VFA agreed to pay approximately $40 million to settle the charges in both actions.     VFA Failed to Disclose Payments Made in Exchange for Referral of Teachers VFA is a financial services vendor in nearly every school district in Florida.  According to the SEC’s order ( here ), for 13 years, VALIC made payments to the Teachers Union Entity in exchange for that entity’s exclusive endorsement of VFA as its preferred financial services partner and the entity’s agreement not to promote or endorse VFA’s competitors. VALIC also provided the entity three full-time employees to serve as “member benefit coordinators.”  These coordinators – who, according to the SEC, deceptively presented themselves as employees of the Teachers Union Entity – promoted VALIC and VFA to Florida K-12 teachers, including at benefits, fairs and financial planning seminars, and referred teachers to VFA for investment recommendations.  The SEC found that the member benefit coordinators increased VFA’s access to K-12 teachers in Florida, and that VFA did not disclose that the Teachers Union Entity was paid to make VFA its preferred financial services provider. VFA (together with VALIC) earned more than $30 million on the products it sold to Florida K-12 teachers during the period covered by the SEC’s order. “Teachers need and deserve our attention, and we are dedicated to ensuring they receive all of the information they are entitled to when making decisions about their financial futures,” said Chairman Jay Clayton.  “Too often educators are targeted with misconduct related to their investments.  Our nation’s educators, and our Main Street investors more generally, are entitled to full and accurate information about the incentives and conflicts affecting their financial advisors.” “By failing to disclose to teachers that it was making payments to and providing employees for the union-owned entity in exchange for that entity referring teachers to VFA, VFA took advantage of the trust teachers placed in that entity,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “Like all investors, teachers need full and fair disclosure.” “Financial relationships and affiliations in the K-12 teachers’ retirement sector can impact teachers’ financial interests,” added Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “It is critical that teachers get the information they need to make informed decisions about their retirement options.” VFA Failed to Disclose Conflicts Related to the Receipt of Millions of Dollars from Client Investment in Certain Mutual Funds The SEC separately charged VFA for making false and misleading statements about, and otherwise failing to disclose, conflicts related to its receipt of millions of dollars of financial benefits from client mutual fund investments.  According to the SEC’s order ( here ), VFA’s wrap agreements with its clients provided that the advisory fee the client paid to VFA included the costs to execute securities transactions.  The SEC found that VFA either directly invested or instructed its primary sub-adviser to select new mutual fund investments for clients that were part of VFA’s clearing broker’s no-transaction fee program (“NTF Program”), and thus would not incur a transaction fee VFA would be responsible for paying.  The NTF Program mutual funds were generally more expensive than other mutual funds available to VFA clients, including instances when a less expensive mutual fund share class for the same fund was available outside the NTF Program.  The SEC further found that VFA’s participation in the NTF Program generated three important financial benefits to VFA, and that VFA not only failed to provide disclosures regarding these conflicts, but also provided false and misleading disclosures concerning the conflicts.  According to the SEC, VFA received both 12b-1 fees and revenue sharing from the clearing broker for client investment in mutual funds within the NTF Program.  In addition, said the SEC, for clients with wrap agreements in which VFA was responsible for client execution costs, VFA financially benefited by not having to pay any transaction fees for mutual funds in the NTF Program.  Despite being eligible to do so, VFA did not self-report its receipt of undisclosed 12b-1 fees as part of the Division of Enforcement’s Share Class Selection Disclosure Initiative announced in February 2018 ( here ). “Investment advisers must disclose conflicts between their financial interests and those of their clients,” said Mr. Peikin.  “Here, VFA for years reaped million in benefits at its clients’ expenses while not only failing to disclose the conflicts, but while providing false and misleading information.” “VFA misled clients by telling them that their advisory fee would cover execution costs without also telling them that VFA would put them in more expensive mutual fund share classes and thus avoid paying those costs.” Ms. Avakian added.  “By not disclosing these practices as well as the other financial benefits VFA received, the firm deprived its clients of essential information about their relationship with their adviser and violated core fiduciary obligations.” Summary of Settlement Terms In the order concerning Florida K-12 teachers, the SEC found that VFA violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-3 and 206(4)-7 promulgated thereunder.  Without admitting or denying the SEC’s findings, VFA consented to a cease-and desist order, a censure, and a civil penalty of $20 million.  VFA also agreed to set advisory fees for all Florida K-12 teachers who currently participate in its advisory product in Florida’s 403(b) and 457(b) retirement programs, or who currently or may within the next five years own certain other VALIC Financial Advisors products, at its most favorable rates in the Florida K-12 market. In the order concerning VFA’s mutual fund fee disclosure practices, the SEC found that VFA violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-7 promulgated thereunder.  Without admitting or denying the SEC’s findings, VFA consented to a cease-and desist order, a censure, disgorgement and prejudgment interest of over $15.4 million, and a civil penalty of $4.5 million.  The foregoing monetary relief is being placed into a fund for distribution to investors affected by the alleged conduct.

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id. Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id. at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). For this reason, “a party will not be compelled to arbitrate and, thereby, to surrender the right to resort to the courts, absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes. The agreement must be clear, explicit and unequivocal and must not depend upon implication or subtlety.” Waldron v. Goddess , 61 N.Y.2d 181, 183-84 (1984). If there is a binding agreement to arbitrate and the parties have arbitrated their dispute, any award issued by the arbitrator can be confirmed or vacated by a court of competent jurisdiction.  An arbitration award will be confirmed even when the award does not conform to a court’s sense of justice so long as the arbitrator “offer even a barely colorable justification for the outcome reached.” Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479-80 (2006) (internal quotations omitted); Matter of Daesang Corp. v. NutraSweet , 167 A.D.3d 1, 15 (1st Dept. 2018), lv. denied , 32 N.Y.3d 915 (2019). Thus, an arbitral award will not be subject to vacatur for ordinary errors, even if an arbitrator’s legal and procedural rulings might reasonably be criticized on the merits. Id. As the United States Supreme Court observed: “The potential for . . . mistakes is the price for agreeing to arbitration.” Oxford Health Plans LLC v. Sutter , 569 U.S. 564, 572-573 (2013). See also Wilkins v. Allen , 169 N.Y. 494, 497 (1902) (noting that “however disappointing may be,” parties that have bargained for arbitration “must abide by it”). Under Section 10(a) of the Federal Arbitration Act, a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4).  Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. Duferco Intl. Steel Trading v. T. Klaveness Shipping A/S , 333 F.3d 383, 388 (2d Cir. 2003); Goldman v. Architectural Iron Co. , 306 F.3d 1214, 1216 (2d Cir. 2002) (citing DiRussa v. Dean Witter Reynolds Inc. , 121 F.3d 818, 821 (2d Cir. 1997)). See also Matter of Daesang , 167 A.D.3d at 15-16 (citing Wein , 6 N.Y.3d at 480-81). Importantly, the doctrine does not apply to the facts. Wein , 6 N.Y.3d at 483. Application of the doctrine is limited. Matter of Arbitration No. AAA13-161-0511-85 Under Grain Arbitration Rules , 867 F.2d 130, 133 (2d Cir. 1989). It is a doctrine of last resort. Duferco , 333 F.3d at 389. It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. Id. The doctrine is “limited to the rare occurrences of apparent egregious impropriety on the part of the arbitrators.” Daesang , 167 A.D.3d 1, 15-16. To modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. Wallace v. Buttar , 378 F3d 182, 189 (2d Cir. 2004) (quoting Banco de Seguros del Estado v. Mutual Mar. Off., Inc. , 344 F.3d 255, 263 (2d Cir 2003)). See also Wien , 6 N.Y.3d at 480-81 (footnotes omitted). The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” Goldman Sachs Execution & Clearing, L.P. v. Official Unsecured Creditors’ Comm. of Bayou Grp. , 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010). The grounds for modification or vacatur under CPLR § 7511 are limited.  These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; and (4) failure to follow the procedures of Article 75 of the CPLR. CPLR § 7511(b)(1)(i)-(iv).  Only when the record demonstrates one of the foregoing will a New York court vacate or modify an award under the CPLR. Matter of New York City Tr. Auth. v. Transport Workers Union of Am., Local 100, AFL-CIO , 6 N.Y.3d 332, 336 (2005). here=">here" and="and" >here.=">here."> Relevant to today’s article is CPLR § 7511 (b) (1) (iii) – vacatur on the basis that the arbitrator exceeded his/her power or so imperfectly executed it. Under that section, vacatur is appropriate “only where the [] award violates a strong public policy, is irrational or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Matter of New York City Tr. Auth. , at 336; accord Matter of Falzone v. New York Cent. Mut. Fire Ins. Co. , 15 N.Y.3d 530, 534 (2010). “Even where an arbitrator has made an error of law or fact, courts generally may not disturb the arbitrator’s decision.” Falzone , 15 N.Y.3d at 534. A court must “give deference to the decision of the arbitrator … even if the arbitrator misapplied the substantive law in the area of the contract.” New York City Tr. Auth. , 6 N.Y.3d at 336 (internal quotation marks and citations omitted); accord Falzone , 15 N.Y.3d at 534. “‘That reasonable minds might disagree over what the proper penalty should have been does not provide a basis for vacating the arbitral award or refashioning the penalty.’” Matter of Shenendehowa Cent. Sch. Dist. Bd. of Educ. v. Civil Serv. Empls. Assn., Inc., Local 1000, AFSCME, AFL-CIO, Local 864 , 20 N.Y.3d 1026, 1028 (2013), quoting City School Dist. of the City of N.Y. v. McGraham , 17 N.Y.3d 917, 920 (2011). In today’s article, we examine three cases in which the foregoing issues were considered. Kothari v. Brink’s U.S. , 2020 N.Y. Slip Op. 32378(U) (Sup. Ct., N.Y. County July 17, 2020) ( here ); Dora’s Naturals, Inc. v. Guayaki Sustainable Rainforest Prods., Inc. , 2020 N.Y. Slip Op. 32379(U) (Sup. Ct., N.Y. County July 20, 2020) ( here ); and Vitra, Inc. v. Ninety-Five Madison Co., L.P. , 2020 N.Y. Slip Op. 32389(U) (Sup. Ct., N.Y. County July 21, 2020) ( here ). Kothari v. Brink’s U.S.  Kothari involved a dispute over the failure to pay for goods previously delivered and the consequent refusal to deliver a new order of goods until such payment was made. More specifically, Plaintiffs brought suit to recover damages due to defendants’ failure to ship cut and polished diamonds from Mumbai. Defendants claimed that they withheld the shipment because there was an outstanding balance owed to them. Defendants declined to complete delivery until the debt was satisfied. Defendants maintained that the shipments were governed by a contract with a nonparty. Defendants contended that any disputes about the shipments had to be resolved in mandatory arbitration under the governing contract.  Plaintiffs opposed the motion, maintaining that although they were an intended beneficiary of the contract containing the arbitration clause, they were not a party to it and could not be compelled to arbitrate. Plaintiffs contended that they were a consignee rather than a shipper and, therefore, were not a party to the subject shipping contract. Plaintiffs insisted that the unsigned, undated, contract could not compel arbitration.  The Court agreed with Defendants. First, the Court found that Defendants had presented “specific and direct evidence that Mr. Kothari signed the terms and conditions (which indisputably contain an arbitration clause) without specific denials of that evidence.” Slip Op. at *3. Second, the Court found that even if the affidavit evidence was not dispositive, Plaintiffs’ argument was contradicted by its own allegations. Id. In this regard, the Court observed that “plaintiffs suing based on the very contract they claim they never signed.… Plaintiffs cannot have it both ways; they cannot simultaneously seek recovery based on a breach of contract and then claim they are not bound by the provisions of the contract that they don’t like.” Id. Accordingly, the Court granted Defendants’ motion to compel arbitration. Id. at *4. Dora’s Naturals, Inc. v. Guayaki Sustainable Rainforest Prods., Inc. Dora’s Naturals involved a 20-year distribution agreement between Dora’s Naturals, Inc. (“Dora’s”), a distributor of food products, and Guayaki Sustainable Rainforest Products, Inc. (“Guayaki”), a manufacturer of organic beverages (“Distribution Agreement”). Under the Distribution Agreement, Dora’s was appointed the exclusive authorized distributor of all Guayaki products in the New York metropolitan area (with limited specified exceptions).  In 2018, Guayaki terminated the Distribution Agreement, without stating any reasons for the termination, but stating that Dora’s was not entitled to payment from Guayaki because the contract precluded recovery for consequential damages, including lost profits.  The termination of the Distribution Agreement gave rise to the arbitration, at which the primary issue was Dora’s entitlement to damages. As noted by the arbitrators, and not disputed in the court proceeding, Guayaki breached the Distribution Agreement by terminating the Agreement before its expiration without grounds. After an eight-day evidentiary hearing and extensive briefing, the arbitrators awarded Dora’s damages for lost profits in the amount of $4,998,000 (“Final Award”). In support of this holding, the arbitrators reasoned that “whether analyzed under the case law relating to general damages or the case law relating to consequential damages, on the facts presented , lost profits are recoverable.” The arbitrators further held that “any lost profits from a breach would be the ‘natural and probable consequence of the breach,’ as required for general damages.” In the alternative, the arbitrators held that the lost profits claimed by Dora’s would be recoverable if viewed as consequential damages rather than general damages.  In seeking to modify the Final Award to vacate the award of damages, Guayaki argued that the arbitrators’ holdings on damages were based on “manifest disregard of the law.” The Court denied the motion to vacate the Final Award, holding that, “under either standard < i.e. , arbitrator irrationality or manifest disregard of the law> i.e., arbitrator irrationality or manifest disregard of the law>, grounds do not exist for the vacatur of the damages awarded by the arbitrators.” Slip Op. at *4. The Court said that “ n concluding that Dora’s was entitled to an award of lost profits, the arbitrators carefully considered, and rejected, Guayaki’s argument that the lost profits were consequential damages, recovery for which was barred by the terms of the Distribution Agreement.” Id. The Court explained that the arbitrators did not disregard the law; instead, they followed it. Id. at *5 (citing Biotronik A.G. v. Conor Medsystems Ireland, Ltd. , 22 N.Y.3d 799 (2014)). The Court found that “the arbitrators considered the terms of the Distribution Agreement and the nature of the relationship between Dora’s and Guayaki, as reflected in that Agreement” and “concluded that ‘the arrangement between Dora’s and Guayaki mirror in many ways the relationship between the manufacturer and distributor in Biotronik .’” Slip Op. at *5. The Court also found that the arbitrators’ reasoning comported with Biotronik , noting that, “‘as in Biotronik , the arrangement between Dora’s and Guayaki was not simply one between the seller and a buyer who was in the business of reselling’; that the Distribution Agreement clearly contemplated that Dora’s would resell Guayaki’s product; and that “‘any lost profits from a breach would be the natural and probable consequence of the breach, as required for general damages.’” Id. , quoting Final Award, at 14 (internal quotation marks and citation omitted). [Ed. Note: In Biotronik , the Court of Appeals explained that “ ost profits may be either general or consequential damages, depending on whether the non-breaching party bargained for such profits and they are ‘the direct and immediate fruits of the contract.’ Otherwise, where the damages reflect a ‘loss of profits on collateral business arrangements,’ they are only recoverable when ‘(1) it is demonstrated with certainty that the damages have been caused by the breach, (2) the extent of the loss is capable of proof with reasonable certainty, and (3) it is established that the damages were fairly within the contemplation of the parties.’” Biotronik , 22 N.Y.3d at 805-806 (internal citations omitted).]  The Court further found that the arbitrators comported with the law by finding, “in the alternative, that if viewed as consequential damages, the lost profits claimed by Dora’s would be recoverable.” Id. at *6.  The Court explained that the arbitrators properly based their finding on the language of the Distribution Agreement. Id. Section 13 (C) of the Distribution Agreement, on which Guayaki relied, provided that: “Notwithstanding any other provisions of this Agreement, in no event shall either Party be liable to the other for incidental, special or consequential damages, or punitive damages.” Section 13 (C) appeared in the Indemnification Section of the Distribution Agreement. Id. By contrast, noted the Court, the Termination Section of the Agreement also contained a general provision on damages. Id. That section (Section 10 (A)) provided that: “A decision by either party to terminate this Agreement pursuant to this paragraph will not affect either party’s right to seek damages against the other for a breach of the terms of this Agreement.… Nothing contained herein shall be deemed to limit either Party’s right to obtain damages or equitable relief if either Party shall breach its obligations under this Agreement. All remedies shall be cumulative and are intended to be, and shall be non-exclusive.” Id. The arbitrators concluded that Section 10 (A) was dispositive “‘because the limitation on damages nestled in the provisions relating to indemnification and because there is contrary and similarly phrased language relating to damages in Section Ten of the Distribution Agreement relating to termination the language in the specific provision relating to termination, which expressly provide for no limitation on rights to damages, governs.’” Id. , quoting Final Award, at 18 (internal quotation marks omitted).  The Court concluded that regardless of whether the arbitrators were correct in their application of the caselaw or assessment of the evidence, “ he arbitrators unquestionably considered the applicable law and rendered a well-reasoned opinion that not manifestly disregard the law.” Id. at *7. Additionally, the Court held that the Final Award was not “irrational”. Id. Vitra, Inc. v. Ninety-Five Madison Co., L.P. Vitra, Inc. (“Vitra”) manufactures and sells furniture in showrooms and retail stores throughout the United States. Ninety-Five Madison Co., L.P. (“Ninety-Five Madison”) owns property in New York City (“Premises”). On June 18, 2016, the parties entered a lease (“Lease”) pursuant to which Ninety-Five Madison leased to Vitra certain space at the Premises for use as a retail store and showroom. The parties agreed that Ninety-Five Madison would undertake certain construction work before Vitra occupied the Premises. Vitra alleged that Ninety-Five Madison failed to perform its construction work by the agreed-upon date and, as a result, Vitra commenced an action. On December 7, 2017, the parties entered into a Settlement Agreement of the action, which was so ordered by the court. Pursuant to the Settlement Agreement, all disputes arising out of or relating to the interpretation and enforcement of the Settlement Agreement would be decided through arbitration under the auspices of JAMS. The arbitrator rendered a series of awards, which Ninety-Five Madison moved to vacate: (1) the Third Interim Award dated March 10, 2019 (“Third Interim Award”) and the subsequent Order on Respondent’s Motion for Reconsideration of Third Interim Award dated September 18, 2019 (the “September 2019 Order”); and (2) the Arbitrator’s Order on Claimant’s Application for Directions to Respondent dated August 29, 2019 (“August 2019 Order”) and the Arbitrator’s Second Partial Final Award dated January 7, 2020 (“Second Partial Award”). Vitra cross-moved to confirm: (1) the Third Interim Award and for an order directing the Clerk of the Court to enter a money judgment in Vitra’s favor and against Ninety-Five Madison in the sum of $596,291.90, plus interest, as provided for in the Third Interim Award; and (2) the Second Partial Award and for an order directing the Clerk of the Court to enter a money judgment in favor of Vitra and against Ninety-Five Madison in the sum of $525,000.00, plus interest as provided for in the Second Partial Award. The Court confirmed the awards.  The Court held that the Third Interim Award and the September 2019 Order were “rationally based.” Slip Op. at *6. The Court found that the “Arbitrator adequately supported his conclusions, citing the language of the Lease and Settlement Agreement and the supplemental affidavit” of the person who negotiated the Lease on behalf of Vitra. Id. In confirming the award, the Court noted that “Ninety-Five Madison failed to provide its own affidavit from the individual who negotiated the lease on Ninety-Five Madison’s behalf.” Id. at *5. The Court held that “the Arbitrator did not exceed his authority in issuing the Second Partial Final Award.” Id. at *8. The Court noted that prior to the issuance of the Second Partial Final Award, “the parties disagreed about the filing of an online permit application on the Department of Buildings (“DOB”) website for a sidewalk shed.” Id. at *9. Vitra maintained that Ninety-Five Madison was required to file this application in order for Vitra to proceed with its renovations. After Ninety-Five Madison failed to file the application, Vitra applied to the Arbitrator to require Ninety-Five Madison to file the application by a date certain or face monetary sanctions. In response, the Arbitrator issued the August 2019 Order, directing Ninety-Five Madison to file the application by September 3, 2019 or face a monetary sanction of $25,000 per day. Ninety-Five Madison did not file the application until September 24, 2019, twenty-one days after the deadline. Pursuant to the August 2019 Order, Vitra moved for a monetary award against Ninety-Five Madison for the delay and Ninety-Five Madison filed its own motion to reconsider the August 2019 Order. On January 7, 2020, the Arbitrator issued the Second Partial Final Award, granting Vitra’s application for monetary sanctions of $525,000 and denied Ninety-Five Madison’s application to reconsider the August 2019 Order. The Court held that “the Arbitrator’s proffered reasons for the decision to award monetary sanctions ha a sound basis.” Id. at *9. The Court explained that the “Arbitrator considered all the arguments presented by Ninety-Five Madison as to why sanctions should be denied” and “thoroughly explained his decision” to award monetary sanctions. Id. Accordingly, the Court found “the Second Partial Final Award and the August 2019 Order reasonable and rational.” Id. Takeaway The cases discussed in today’s article illustrate three points about arbitration. First, it is a “creature of contract” and the decision whether an agreement to arbitrate exists will be governed by the rules of contract interpretation. Second, courts accord deferential treatment to the decisions made by arbitrators. Finally, the grounds under which vacatur or modification is permitted under CPLR § 7511 are narrow and difficult to overcome.

In our prior Blog “ ’Love Thy Neighbor’ Is Not Always the Case ,” which should be reviewed in conjunction with the instant Blog, section 881 of New York’s Real Property Actions and Proceedings Law (the “RPAPL”) was explored.  Briefly stated, access to a neighboring property is sometimes necessary to improve or repair one’s own property (the “Work”).  In many cases neighbors can amicably resolve such access issues.  This can be done informally or through a formal access agreement.  When formal or informal voluntary access to a neighboring property is denied, §881 of the RPAPL, which provides a mechanism for court ordered access, can be relied upon to carry out the necessary Work.  RPAPL §881 provides: When an owner or lessee seeks to make improvements or repairs to real property so situated that such improvements or repairs cannot be made by the owner or lessee without entering the premises of an adjoining owner or his lessee, and permission so to enter has been refused, the owner or lessee seeking to make such improvements or repairs may commence a special proceeding for a license so to enter pursuant to article four of the civil practice law and rules. The petition and affidavits, if any, shall state the facts making such entry necessary and the date or dates on which entry is sought. Such license shall be granted by the court in an appropriate case upon such terms as justice requires. The licensee shall be liable to the adjoining owner or his lessee for actual damages occurring as a result of the entry. On July 23, 2020, the Appellate Division, First Department, rendered a decision in In re Meopta Properties II, LLC v. Pacheco , a case decided under RPAPL §881.  A simplified summary of the facts in Meopta based on a review of the e-filed documents in the underlying action follows.  Petitioner, Meopta, a developer, owned a townhouse sharing a party wall with respondent, Pacheco’s, townhouse.  Meopta commenced renovations of its property and, in conjunction therewith, constructed a stair bulkhead on the party wall.  The bulkhead encroached on respondent’s property.  After Pacheco commenced her own plenary action related to the work being performed by Meopta, Meopta obtained a building permit to remove and relocate the stair bulkhead.  In order to perform such work, and in order to provide NYC Building Code required protections and safeguards to Pacheco’s property, Meopta required access to Pacheco’s property but Pacheco refused.  Thus, petitioner commenced a special proceeding pursuant to RPAPL §881.   The motion court’s order, as reviewed on the e-courts website, granted petitioner a license: for 60 days in order to erect and maintain the necessary protections to respondent’s building while petitioner removes and relocates the roof stair bulkhead which currently is partially on the party wall and thereafter restore the party wall to the original height and install weatherproofing, etc. to petitioner’s easterly wall and install capstones.  Proper insurance to be acquired.  The First Department affirmed the order of the motion court.  In so doing, the Court weighed the interests of the parties and found that “granting petitioner a 60-day license to access a limited exterior portion of respondent’s property for the purpose of performing remedial and protective construction work is reasonable and that any inconvenience to respondent will be slight compared to the hardship to both parties if the license is refused.  (Citations omitted.)  Interestingly, the Court also held that: lthough no license fee was granted, the court ordered petitioner to obtain and maintain insurance to protect respondent’s property interests.  RPAPL 881 merely makes the licensee “liable … for actual damages occurring as a result of the entry.”  If respondent incurs actual damages, she will have a cause of action against petitioner under the statute. (Citations omitted, ellipses in original.)  Finally, the Court held that the motion court did not abuse its discretion in “declining to award attorneys’ and expert’s fees” to respondent “under the circumstances of this case.”