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In Pizzarotti, LLC v. Phipps & Co. , 2020 N.Y. Slip Op. 50696(U) (Sup. Ct., N.Y. County June 17, 2020) ( here ), Justice Gerald Lebovits of the Supreme Court, New York County, recently addressed a number of issues that we often examine, among them, a motion to dismiss on the basis of documentary evidence, breach of contract and common-law indemnification. We examine these issues and Pizzarotti below.  Dismissal on the Basis of Documentary Evidence Under CPLR § 3211(a), a party may make a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.” For this reason, courts have described the phrase as “fuzzy” because “what is documentary evidence for one purpose, might not be documentary evidence for another.” Fontanetta v. Doe , 73 A.D.3d 78, 84 (2d Dept. 2010). To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. Materials that clearly qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta , 73 A.D.3d at 84-85 (citation omitted).  Under CPLR § 3211(a)(1), dismissal is warranted only if the documentary evidence submitted “utterly refutes plaintiff’s factual allegations” ( Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002)), and “conclusively establishes a defense to the asserted claims as a matter of law.” Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc. , 10 A.D.3d 267, 270-71 (1st Dept. 2004). (internal quotation marks omitted). In other words, the documents relied upon must “definitely dispose of plaintiff’s claim.” Blonder & Co. v. Citibank, N.A. , 28 A.D.3d 180, 182 (1st Dept. 2006).  Breach of Contract The elements of a cause of action for breach of contract are (1) the formation of an agreement, (2) performance of the agreement by one party, (3) breach by the other party, and (4) damages. E.g. , Stonehill Capital Mgt., LLC v. Bank of the West , 28 N.Y.3d 439, 448 (2016); Morris v. 702 E. Fifth St. HDFC , 46 A.D.3d 478, 479 (1st Dept. 2007). All the elements must be pleaded to avoid dismissal. See Bonamii v. Straight Arrow Publs. , 133 A.D.2d 585 (1st Dept. 1987). With regard to the first element of a breach of contract claim ( i.e. , the formation of a contract), the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent and an intent to be bound. 22 N.Y. Jur. 2d, Contracts Section 9. “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” Restatement (Second) of Contracts § 24. Acceptance of an offer is effective if it clearly, unambiguously and unequivocally complies with the terms of the offer. King v King , 208 A.D.2d 1143, 1143-1144 (3d Dept. 1994) (citing 21 N.Y. Jur. 2d, Contracts § 53 at 470 (1982), and 2 Williston on Contracts § 6:10 at 68 (4th ed. 1990)). “ o constitute consideration, a performance or a return promise must be bargained for.” See Restatement (Second) of Contracts §71. Thus, the plaintiff must demonstrate some performance or a return promise that was bargained for by the defendant’s promise to fulfill the terms of the agreement. Kolchins v. Evolution Markets, Inc. , 128 A.D.3d 47, 59-60 (1st Dept. 2015). Mutual assent requires an agreement as to the essential terms and conditions of the agreement, and intent to be bound requires that such assent be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. Joseph Martin, Jr., Delicatessen v. Schumacher , 52 N.Y.2d 105, 109 (1981); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp. , 93 N.Y.2d 584, 589 (1999). A “mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” Joseph Martin, Jr., Delicatessen , 52 N.Y.2d at 109. If the alleged contract “is not reasonably certain in its material terms, there can be no legally enforceable contract.” Edelman v. Poster , 72 A.D.3d 182, 184 (1st Dept. 2010). In addition, under the doctrine of definiteness, the court must be able to determine what, in fact, the parties agreed to in order to enforce a contract. Matter of 166 Mamaroneck Ave. Corp. v. 151 E. Post Rd. Corp. , 78 N.Y.2d 88, 91 (1991); Korff v. Corbett , 18 A.D.3d 248, 250 (1st Dept. 2005) (agreement language indicated meeting of minds, refers to consideration, specifies amount clearly agreed to). Common-Law Indemnification In the “classic indemnification case,” the one seeking indemnification “had committed no wrong, but by virtue of some relationship with the tort-feasor or obligation imposed by law, was nevertheless held liable to the injured party.” D’Ambrosio v. City of New York , 55 N.Y.2d 454, 461 (1982); Trustees of Columbia Univ. in City of N.Y. v. Mitchell/Giurgola Assoc. , 109 A.D.2d 449, 451 (1st Dept. 1985). Thus, “where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent.” D’Ambrosio , 55 N.Y.2d at 462. Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.” Mas v. Two Bridges Assocs. , 75 N.Y.2d 680, 690 (1990) (internal citations omitted). “ he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that forms the basis for the liability arises from the principle that everyone is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.” Raquet v. Braun , 90 N.Y.2d 177, 183 (1997) (internal quotation marks, citations, and ellipsis omitted.) Pizzarotti, LLC v. Phipps & Co. Background Pizzarotti arose from a dispute relating to an April 2018 construction contract between plaintiff, Pizzarotti LLC (“Pizzarotti”), as construction manager and defendant, Phipps & Co. (“Phipps”), as contractor.  Plaintiff contracted with Phipps to perform stone and tile work for the One Seaport Project in Manhattan. The total contract price was $2,142,417.54. Under the contract, Pizzarotti agreed to provide Phipps with an advance payment to cover the costs of purchasing materials, as long as Phipps provided a letter of credit to assure Pizzarotti that Phipps had the assets to repay the advance. Phipps could not provide that assurance and requested that Pizzarotti accept a letter of credit from defendant, SG Blocks, Inc. (“SG Blocks”). Plaintiff agreed. At the contract signing, Phipps further requested that the material-supply portion of the contract be assigned to SG Blocks. Plaintiff again agreed but requested that the assignment be reduced to writing. On May 30, 2018, the parties executed an assignment agreement. Under the agreement, SG Blocks agreed to supply the materials needed for the project and to provide a letter of credit to secure an advance payment from plaintiff. Phipps agreed to remain jointly and severally liable with SG Blocks for the performance of the contract’s supply obligations. Those obligations comprised $1,385,000 – nearly two-thirds of the contract’s total value. Plaintiff agreed to make payments through two-party checks made out to both Phipps and SG Blocks.  Plaintiff alleged that on June 5, it received assurances that SG Blocks’ bank would release a letter of credit, and therefore transferred an advance payment of $500,000 to SG Blocks and Phipps. In the weeks that followed, however, plaintiff repeatedly, but unsuccessfully, attempted to contact SG Blocks and Phipps to obtain the promised letter of credit and urged the parties to begin working on the project (or obtain proof that they had done so).  On June 22, Phipps informed Pizzarotti’s general counsel that “ s far as SG Blocks, it is unlikely we will be able to execute this contract together.” SG Blocks agreed and requested to be removed from future communications between the parties. In response, plaintiff continued to request that Phipps and SG Blocks fulfill the contract. On July 6, however, Phipps sent an email arguing that the contract was never in effect. On July 24, plaintiff sent Phipps and SG Blocks a notice to cure, giving them three business days to begin work and provide a letter of credit. Phipps and SG Blocks declined to do so. Plaintiff ultimately terminated the contract and assignment for cause on August 23, 2018.  In August 2018, Pizzarotti sued Phipps and SG Blocks for failing to perform under the contract. Phipps later cross-claimed against SG Blocks.  As against SG Blocks, plaintiff asserted a claim for breach of contract (for failing to perform its obligations under the assignment agreement) and a claim for trust diversion (for using the $500,000 advance payment for purposes other than performing work under the contract). Phipps counter-claimed against plaintiff. Phipps also cross-claimed against SG Blocks for (i) indemnity; (ii) common law contribution; (iii) fraud; (iv) negligence; (v) negligent misrepresentation, and (vi) breach of contract.  SG Blocks moved to dismiss both plaintiff’s amended complaint and Phipps’ cross-claims under CPLR § 3211 (a) (1) and CPLR § 3211 (a) (7).  The Court denied SG Blocks’ motion to dismiss plaintiff’s complaint but granted in part and denied in part the motion seeking dismissal of the cross-claims. The Court’s Decision A. Dismissal under CPLR § 3211 (a) (1) SG Blocks argued that the assignment agreement refuted plaintiff’s claims. SG Blocks asserted that the agreement did not identify consideration for SG Blocks’ alleged obligations under the agreement, thereby rendering the contract a nullity. In particular, SG Blocks argued that plaintiff and Phipps did not promise to pay SG Blocks for its obligation to provide supplies for the project, and therefore the assignment agreement lacked a mutuality of obligation. The court disagreed. The Court noted that the assignment agreement provided that all payments for the materials and supplies were to be made by two-party checks payable both to Phipps and SG Blocks. Slip Op. at *2. The Court further noted that, “consistent with the agreement,” “plaintiff issued a check for $500,000,” naming “both Phipps and SG Blocks as joint payees.” Id. The Court held that “ his exchange of something of value support the existence of adequate consideration.” Id. (citing Apfel v. Prudential-Bache Sec., Inc. , 81 N.Y.2d 470, 476 (1993). The Court rejected SG Blocks contention “that for consideration to exist, plaintiff would have had to take additional steps to ‘ensure[] that a certain portion of the monies due under the Pizzarotti-Phipps Contract would be owed and payable to SG Blocks.’” Id. The Court found that SG Blocks failed to provide any “authority supporting this proposition.” Id. The Court said that “even absent additional action by plaintiff, SG Blocks would have enforceable legal rights in checks issued by plaintiff under the contract to both Phipps and SG Blocks as joint payees – such as, for example, the $500,000 advance payment.” Id. at *2-*3. “Most pertinently,” explained the Court, “since a check is a negotiable instrument, SG Blocks’s endorsement would be required before a check from plaintiff to Phipps and SG Blocks jointly could be deposited with a bank.” Id. at *3 (citing Kryten Iron Works, Inc. v. Ultra-Tech Fabricators, Inc. , 228 A.D.2d 416, 416 (2d Dept. 1996). Thus, concluded the Court, “Phipps would have no legal right to make off with the check and take the full amount for itself.” Id. “Moreover,” observed the Court, “SG Blocks’s conduct before the execution of the assignment agreement indicate that SG Blocks understood that plaintiff would have an obligation to pay for the work that SG Blocks undertook – including preparing financial documents premised on SG Blocks making a profit on the supply portion of the contract.” Id. “At a minimum,” concluded the Court, “the assignment agreement standing alone not definitively refute plaintiff’s claims against SG Blocks, as required for dismissal under CPLR 3211 (a) (1).” Id. B. SG Blocks’ Motion to Dismiss Plaintiff’s Contract Claim The Court held that the complaint, taken as true, stated a cause of action for breach of contract. First, as discussed above, the Court found that the assignment agreement identified the consideration for SG Blocks’ obligations to provide materials for the project. Id. Second, the Court held that the complaint stated a cause of action to recover damages for trust diversion. Id. The Court explained that since the assignment agreement incorporated the terms of the contract (which provided in pertinent part that all funds paid to Phipps constituted trust funds to be used for purposes outlined in the contract), SG Blocks was “bound to use the advance payment of $500,000 for contractual purposes.” Id. Given plaintiff’s allegation that the $500,000 was not used for this intended purpose, plaintiff stated a claim for trust-diversion. Id. C. SG Blocks’ Motion to Dismiss Phipps’ Cross-Claims The Court held that Phipps’ cross-claim for common-law indemnification did not state a cause of action. Slip Op. at *4. Phipps argued that by executing the assignment agreement, SG Blocks agreed to indemnify them for “the full amount of culpability of any judgment that might be rendered against Phipps in the original action.” Id. However, “ ince the predicate of common-law indemnity is vicarious liability without actual fault on the part of the proposed indemnitee, it follow that a party who has itself actually participated to some degree in the wrongdoing cannot receive the benefit of the doctrine.” Id. (quoting Trustees of Columbia Univ. v. Mitchell/Giurgola Assoc. , 109 A.D.2d 449, 453 (1st Dept. 1985). Phipps’ liability in the main action, said the Court, would be primary not secondary. Id. Its liability “would flow instead from Phipps’s alleged failure to perform its own contractual obligations under the contract and the assignment agreement.” Id. Therefore, Phipps could “not receive the benefit of common-law indemnity.” Id. The Court held that Phipps’ cross-claim for common-law contribution also failed. Id. “Contribution is not available where the liability upon which the contribution claim is based derives solely from breach of contract.” Id. (citing Bd. of Educ. of Hudson City Sch. Dist. v. Sargent, Webster, Crenshaw & Folley , 71 NY2d 21, 28 <1987> .) “Here,” said the Court, “the potential liability of both Phipps and SG Blocks to plaintiff is for economic loss resulting from an alleged breach of contract. Common-law contribution is not available.” Takeaway CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, where the document is clear, unambiguous, and undeniable, and “utterly refutes” the claims asserted, dismissal is appropriate. In Pizzarotti , the assignment agreement did not “utterly refute” plaintiff’s breach of contract claim. In claiming a breach of contract ( i.e. , enforcing or attempting to enforce a contract), a plaintiff must plead the existence of a valid contract. In that regard, the plaintiff must demonstrate that the parties created a contract. Pizzarotti highlights this issue. The principle of common law, or implied, indemnification permits one who has been compelled to pay for the wrong of another to recover from the wrongdoer the damages it paid to the injured party. The party seeking indemnification must have delegated exclusive responsibility for the duties giving rise to the loss to the party from whom indemnification is sought and must not have committed actual wrongdoing itself. In Pizzarotti , the Court found that the doctrine did not apply because Phipps was alleged to be the actual wrongdoer.

Just recently, we wrote about the importance of pleading fraud with particularity ( here ).  As readers of this Blog know, when fraud is alleged, the plaintiff must plead the claim with particularity. Under CPLR § 3016 (b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Notwithstanding, the Court of Appeals has explained that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman , 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Id. at 492. Thus, as noted, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. Id. Seems easy enough. But, the cases show (including those that we have examined in this Blog ( e.g. , here , here , and here )), plaintiffs often have their fraud claim dismissed because they failed to plead sufficient facts to permit a “reasonable inference” that the fraud took place. As today’s discussion shows, conclusory statements, dressed up as facts, will not suffice to satisfy CPLR § 3016(b). Patel v. Patel , 2020 N.Y. Slip Op. 31864(U) (Sup. Ct., N.Y. County June 15, 2020) ( here ) (dismissing fraudulent inducement claim because, inter alia , plaintiff failed to plead fraud with particularity). Patel v. Patel Patel involved a dispute over whether plaintiff, Mayuriben Patel, was entitled to a share of the profits generated by the sale and wind-down of M&D Pharmacy, LLC (“M&D”). According to defendant, Paresh Patel, who was alleged to be the managing member of M&D, plaintiff was not a member of the LLC and was, therefore, ineligible to receive any such distribution or to access information about the company’s books and records. M&D operated a pharmacy, known as Harlem Pharmacy, in New York City. Plaintiff, who claimed to be a member of M&D, alleged that defendant improperly reduced her profit share from 20% to 15%, and misappropriated her share of the proceeds generated from the sale of M&D’s assets in January 2018. Plaintiff said she was entitled to 20% of the profits from that sale, but had not received anything despite repeated demands, because defendant did not consider her to be a member of M&D eligible to receive any such distribution. According to Plaintiff, she became a member of M&D, with a 20% ownership interest in the company, following a December 17, 2012 transaction. Defendant initially held a 40% ownership interest, but acquired a third member’s interest around January 2015, giving him a total of 80% interest. No formal operating agreement was created for M&D. However, M&D’s Board of Directors and Shareholders allegedly passed resolutions, in January 2015, noting both defendant’s 80% stake and plaintiffs 20% share. As the controlling member of M&D, defendant had the power to direct and implement corporate decisions, including the payment of distributions to members. Beginning around 2016, defendant allegedly cut plaintiff’s share of the company’s dividends and profits from 20% to 15%, while increasing his own share. Plaintiff claims that she never consented to this reduction, nor did she receive any consideration for it. Between 2016 and 2018, defendant allegedly withheld about $60,000 of distributions from plaintiff. In December 2017, plaintiff and defendant, as the members of M&D, entered into a purchase agreement with Rite Aid of New York, Inc. (“Rite Aid”) to sell most of M&D’s assets to Rite Aid. The purchase agreement identified plaintiff and defendant as the sole members of M&D. Under the purchase agreement, Rite Aid agreed to pay M&D $483,000.00 for M&D’s files, records, and data. In addition, Rite Aid paid plaintiff and defendant $191,000.00 in exchange for a restrictive covenant barring them from operating a pharmacy within three miles of M&D’s Harlem location for another seven years. Rite Aid also agreed to pay an additional $1,000.00 for M&D’s “fixed assets”, and $94,762.87 for M&D’s “saleable inventory”. The sale was executed on January 16, 2018, at the M&D pharmacy. Defendant, as controlling member, took possession of all proceeds from the Rite Aid transaction, and allegedly promised plaintiff that he would pay her 20% of the profit. Plaintiff alleged, however, that, ever since the transaction closed, defendant had shut her out of M&D’s affairs. According to plaintiff, the sale proceeds were not deposited into M&D’s operating bank account, and plaintiff had not been allowed to inspect M&D’s financial records or have a say in the management of M&D. Plaintiff maintained that defendant repeatedly refused to give her a share of the proceeds from the sale or the wind-down of M&D and refused to provide an accounting of the proceeds.  Plaintiff filed suit on October 26, 2018, asserting a mix of individual and derivative claims against defendant: (1) accounting, (2) breach of fiduciary duty (derivative claim), (3) breach of fiduciary duty (individual claim), (4) conversion, (5) fraudulent inducement, and (6) judicial dissolution. Defendant sought dismissal of all claims on various grounds. Plaintiff opposed, and cross-moved for leave to file an amended complaint. The Court addressed plaintiff’s claims for an accounting, fraudulent inducement, and judicial dissolution. We examine the latter two claims. The Court’s Decision To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. denied , 17 N.Y.3d 782 (2011); Lama Holding Co. v Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). And, as noted above, under CPLR § 3016 (b), the allegations must be stated with particularity. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009).  The Court found that the allegations in the complaint failed to set forth “the basic facts to establish the elements of a fraudulent inducement claim.” Slip Op. at *9. The Court noted that plaintiff failed to allege any specificity with regard to her claim that “Defendant represented to that M&D was going to distribute all of the proceeds from the sale of M&D’s assets.” In particular, the Court said that plaintiff failed “to specify, among other things, (i) when Defendant made this representation (whether it was made before or after the sale to Rite Aid, for example), (ii) how Defendant made it, (iii) whether the representation included a promise to distribute to Plaintiff a particular share of the profits, and (iv) how Plaintiff detrimentally relied upon the representation (the Complaint alleges only that the statement was made ‘with the intention of inducing reliance’).” Id. *9-*10. In other words, the Court found that plaintiff failed to provide the who, what where, and how of the fraud. The Court also held that plaintiff failed to “establish[] that , at the time of making the promissory representation,” did not intend “to honor the promise.” Id. at *10. “General allegations of lack of intent to perform are insufficient”, said the Court. Id. (quoting Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017) (internal quotation marks omitted)); Meiterman v Corp. Habitat , 173 A.D.3d 593, 594 (1st Dept. 2019). The Court concluded that “statements of future intent, without more, are not actionable as fraud claims.” Id. (citing Lincoln Place LLC v. RVP Consulting, Inc. , 16 A.D.3d 123, 124 (1st Dept. 2005); Cronos Grp. Ltd. v. XCOMIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017). With regard to the judicial dissolution claim, the Court dismissed it for particularity reasons, as well.  In the absence of an operating agreement, the rights, duties and obligations of an LLC member are governed by the default provisions of New York’s Limited Liability Company Law (“LLCL”). See , e.g. , Matter of Eight of Swords, LLC , 96 A.D.3d 839 (2d Dept. 2012); Matter of 1545 Ocean Ave., LLC , 72 A.D.3d 121 (2d Dept. 2010). Under Section 702 of the LLCL, a court may dissolve a company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” When there are no articles or operating agreement, as in Patel , courts look to the stated purposes for which the LLC was formed to determine if they are being achieved and whether the company’s finances remain feasible. E.g. , Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). The Court found that systematic exclusion “from the operation and affairs of the company by defendant” was “insufficient to establish that it no longer ‘reasonably practicable’ for the company to carry on its business, as required” by LLCL § 702. Slip Op. at *10-*11 (quoting Doyle v. Icon, LLC , 103 A.D.3d 440, 440 (1st Dept. 2013) (internal quotion marks omitted)). Moreover, said the Court, plaintiff’s “conclusory allegations … that the sale of M&D’s assets to Rite Aid compel judicial dissolution” were insufficient to satisfy LLCL § 702. Id. (citation omitted). Takeaway In a prior post, we quoted Stephen King as saying “the truth is in the details. No matter how you see the world …, the truth is in the details.” ( Here .) We said that the “quote fairly sums up the pleading requirement that all plaintiffs must satisfy when alleging a fraud.” The reason: courts require plaintiffs to provide sufficient details of the alleged misconduct to support a reasonable inference that the allegations of fraud are true. For this reason, conclusory allegations will not suffice. Eurycleia Partners , 12 N.Y.3d at 558. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015). Plaintiffs must describe the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). In the absence of such detail, as in Patel , even under the reasonable inference standard of the CPLR, a plaintiff cannot maintain a fraud claim.

As noted on numerous occasions in this BLOG, the New York State Legislature has responded to the residential foreclosure crisis by promulgating a series of rules designed to protect residential homeowners.  These rules, however, place additional burdens on foreclosing lenders and courts throughout New York State have demonstrated little sympathy for foreclosing lenders that fail to follow these rules. For example, RPAPL 1304 requires that at least ninety days prior to commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  This BLOG has addressed issues related to RPAPL 1304 on numerous occasions.  < HERE ,=">HERE," HERE=">HERE"> RPAPL 1303 , requires that the plaintiff in a residential mortgage foreclosure action provide certain borrowers (and tenants in dwelling units subject to foreclosure) with specific written notices of the foreclosure process.  The specific text of the RPAPL 1303 notice is set forth in the statute.  See RPAPL 1303(3) (for mortgagors) and 1303(5) (for tenants).   In addition, RPAPL 1303(2), which provides for the delivery and appearance of the notice to mortgagors, provides: The notice to any mortgagor required by paragraph (a) of subdivision one of this section shall be delivered with the summons and complaint.  Such notice shall be in bold, fourteen-point type and shall be printed on colored paper that is other than the color of the summons and complaint, and the title of the notice shall be in bold, twenty-point type.  The notice shall be on its own page. ( See RPAPL 1303(4) for the requirements for delivery and appearance of notices to tenants.) Proper service of the RPAPL 1303 notice is critical because it “is a condition precedent to the commencement of a foreclosure action, and noncompliance mandates dismissal of the complaint.”  Onewest Bank, N.A. v. Mahoney , 154 A.D.3d 770, 771 (2 nd Dep’t 2017) (citations omitted).  Further, it is the lender’s burden to demonstrate compliance with RPAPL 1303.  U.S. Bank National Assoc. v. Ahmed , 174 A.D.3d 661, 664 (2 nd Dep’t 2019) (citations omitted).   In Onewest, the Court found that the “plaintiff further established its prima facie entitlement to judgment as a matter of law by … affidavits of service attesting to the proper service of notices that complied with RPAPL 1303.”  Onewest , 154 A.D.3d at 772.  The Court found unavailing, the Onewest mortgagor’s “bare and unsubstantiated denial of receipt of the RPAPL 1303 notice was insufficient to rebut the presumption of proper service created by the process server’s affidavits of service.  Onewest , 154 A.D.3d at 772 (citation omitted). A similar issue was decided in LNV Corp. v. Sofer , 171 A.D.3d 1033 (2 nd Dep’t 2019).  While the LNV Court denied summary judgment to the lender for different reasons, compliance with RPAPL 1303 was found to be proper.  In that regard, the LNV Court stated: Further, contrary to the defendant’s contention, the plaintiff established, prima facie, that it provided notice in compliance with RPAPL 1303 by submitting the process server’s affidavit of service on the defendant, in which the process server stated that he served the summons and complaint, together with a “1303 NOTICE–Help for Homeowners in Foreclosure in bold fourteen-point type and printed on colored paper, and the title to the notice printed in twenty-point type in compliance with RPAPL Sect 1303”. The statement in the affidavit of service that the notice was on colored paper was sufficient to comply with the language in the statute stating that the notice shall “be printed on colored paper that is other than the color of the summons and complaint”. Moreover, the defendant’s bare and unsubstantiated denial of receipt of the RPAPL 1303 notice, without more, was insufficient to rebut the presumption of service created by the process server’s affidavit. LNV Corp. , 171 A.D.3d at 1036 (citations omitted). In Flagstar Bank, FSB v. Hart , decided by the Second Department on June 10, 2020, the Court reversed the grant of summary judgment to the foreclosing lender.  After setting forth the requirements of RPAPL 1303, the Court determined that the lender failed to demonstrate compliance and stated: Here, in support of its motion, the plaintiff submitted the process server’s affidavit indicating that a notice was served with the summons and complaint. However, the plaintiff did not submit a copy of the RPAPL 1303 notice allegedly served, and the process server made no averments that the notice served complied with the requirements of RPAPL 1303 concerning content and form. The plaintiff, therefore, failed to demonstrate, prima facie, that it complied with RPAPL 1303 .

In today’s post we examine, SHIR Capital, LLC v. Fortress Credit Advisors LLC , 2020 N.Y. Slip Op. 31825(U) (Sup. Ct., N.Y. County June 11, 2020) ( here ), a case involving an alleged fraud, breach of fiduciary duty, and misappropriation of trade secrets.  We chose to SHIR Capital because of its common theme – pleading with particularity. As discussed below, pleading fraud, breach of fiduciary duty and the misappropriation of trade secrets requires particularity or specificity. The failure to provide the requisite particularity or specificity will, as in SHIR Capital , result in the dismissal of the claim. SHIR Capital, LLC v. Fortress Credit Advisors LLC  Background SHIR Capital arose from an aborted joint venture to purchase an apartment building in Austin, Texas. Plaintiff, SHIR Capital, LLC (“SHIR Capital”), initially explored the potential transaction and entered into a contract with the seller but needed a co-investor to close the deal. To that end, SHIR Capital was introduced to defendant, Fortress Credit Advisors LLC (“Fortress”), by an intermediary, defendant, CBRE Capital Markets, Inc. (“CBRE”). SHIR Capital and Fortress then entered into a letter agreement, which set out the framework for further discussions of a joint venture. But the joint venture never materialized. SHIR Capital decided to terminate its contract with the seller – the basis for the letter agreement – rather than pay an additional fee and lose its deposit. A few weeks later, SHIR Capital learned that Fortress, with the aid of CBRE, had purchased the property for itself. SHIR Capital claimed that Fortress never intended to partner with it, but feigned interest in order to steal SHIR Capital’s business strategy and close the deal for itself. And CBRE, while purporting to act in SHIR Capital’s interest as “broker”, allegedly concealed its connections to Fortress and helped orchestrate the fraud against SHIR Capital.  SHIR Capital alleged six causes of action, including fraud, breach of fiduciary duty, and misappropriation of trade secrets. Fortress (with CREF3 Copper Creek Owner LLC (“CREF3”), the entity that Fortress allegedly created for purposes of the acquisition) and CBRE moved to dismiss the complaint in its entirety. The Court granted the motions. We examine the decision with regard to the fraud, breach of fiduciary duty and misappropriation of trade secrets causes of action. A. Claims Against CREF3 The Court dismissed all claims against CREF3 because the complaint contained no specific allegations of wrongdoing by CREF3. Instead, plaintiff “impermissibly lumped” CREF3 together with Fortress. RKA Film Fin., LLC v. Kavanaugh , 171 A.D.3d 678, 678 (1st Dept. 2019). Since plaintiff failed to allege that CREF3 made any misrepresentations, was a party to “any contract … that could give rise to breach of the duty of good faith and fair dealing,” or misappropriated any confidential information, the Court held that the complaint was deficient as against CREF3. Slip Op. at *6. here).=">here)."> B. Fraud 1 . Fraud Claim Against Fortress To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). Importantly, “ o fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017). “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Id. ; Meiterman v. Corp. Habitat , 173 A.D.3d 593, 594 (1st Dept. 2019). Significantly, “ claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). If “sufficient factual allegations of even a single element are lacking,” the claim must be dismissed. RKA Film Fin., LLC v Kavanaugh , 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1st Dept. 1998)). The Court held that SHIR Capital failed to allege, with the requisite particularity, any actionable misrepresentations of fact attributable to Fortress. The Court noted that the “fraud claim against Fortress hinge on Fortress’s alleged misrepresentation that it ‘was interested in partnering with SHIR Capital.’” Slip Op. at *7. The Court explained that SHIR Capital merely “surmise ” that “Fortress must have been misleading SHIR” “because Fortress ultimately did not partner with it, and promptly purchased the Property without it.” The Court concluded that “ his line of reasoning, premised on a ‘conclusory statement of intent’, was insufficient to support a fraud claim as a matter of law.” Id. at *7-*8 (citing Zanett Lombardier, Ltd. v Maslow , 29 A.D.3d 495 (1st Dept 2006).  Fortress’s interest in partnering with SHIR Capital was memorialized in the Letter Agreement, and Fortress is not alleged to have breached any of the terms in that Agreement. When SHIR Capital terminated the PSA, moreover, Fortress was free to pursue its own transaction with Seller. The speed with which it exercised that right, without more, does not evince “a present intent to deceive.” Id. at *8 (citation omitted).  The Court rejected SHIR Capital’s argument that other alleged misrepresentations were statements of present fact, stating that they “reflect vague promises about future intentions.” Id. (citations omitted).  “In addition,” explained the Court, “the fraud claim include distinct allegations of fraudulent concealment, which center on CBRE’s failure to disclose a prior relationship with Fortress.” Id. at *9. “Those allegations fail to state a cause of action against Fortress,” concluded the Court, “because SHIR Capital not allege any duty on Fortress’s part to disclose that information. Id. (citing P.T Bank Cent. Asia v. ABN AMRO Bank NV , 301A.D.2d 373, 376 (1st Dept. 2003); Sebastian Holdings, Inc. v. Deutsche Bank AG , 78 A.D.3d 446, 447 (1st Dept. 2010) (“lack of a fiduciary relationship between the parties is fatal to plaintiffs claim[] for ... fraudulent concealment”). 2. Fraud Claim Against CBRE The Court dismissed the fraud claim against CBRE “ or similar reasons” – “the alleged misrepresentations ascribed to CBRE consist of statements about future intent and events outside the control of the Defendants ….” Id. at *9. The Court also held that the fraud claim against CBRE was “duplicative of the breach of fiduciary duty claim asserted against it.” Id. at *10. (citing Interventure 77 Hudson LLC v. Falcon Real Estate Inv. Co., LP , 172 A.D.3d 481, 481-82 (1st Dept. 2019); Pai v. Blue Man Grp. Pub., LLC , 151 A.D.3d 456 (1st Dept. 2017). “Both claims arise from the same factual allegations and seek the same damages,” said the Court. Id. (citations omitted). C. Breach of Fiduciary Duty Against CBRE To plead a breach of fiduciary duty claim, “a plaintiff must allege that the defendant owed him a fiduciary duty, that the defendant committed misconduct, and that the plaintiff suffered damages caused by that misconduct.” NRT NY, L.L.C. v. Morin , 147 A.D.3d 589, 589 (1st Dept. 2017). The Court held that SHIR Capital failed to state a cause of action for breach of fiduciary duty against CBRE. The Court explained that the Complaint failed to establish that CBRE owed a fiduciary duty to SHIR Capital. The Court noted that CBRE was brought in “to identify potential investors in return (ultimately) for a fee if the transaction were successful.” Id. at *11. “That is the prototypical role of a ‘finder,’” said the Court, “which generally does not create a ‘relationship of higher trust.’” Id. The complaint, concluded the Court, was devoid of any allegations that SHIR Capital “retained CBRE to act as a broker or to provide expert knowledge or advice in negotiating the joint venture.” Id.   “Placing the label ‘broker’ on CBRE’s alleged functions,” said the Court, “does not change the result.” Id. at *12. C. Trade Secret Misappropriation Against Fortress “To prevail on a claim for misappropriation of trade secrets, a plaintiff must demonstrate: (1) that it possessed a trade secret, and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship or duty, or as a result of discovery by improper means.” Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 27 (1st Dept. 2015). The Court held that “ or at least two reasons, SHIR Capital fail to allege a cause of action for misappropriation of trade secrets. First,” said the Court, “SHIR Capital failed to identify the trade secrets with sufficient specificity.” Slip Op. at *14 (citations omitted). The Court found that plaintiff merely alleged vague ideas and strategies concerning due diligence. Id. “Absent from the pleadings a description of any specific concept or strategy that elevate these routine due diligence materials to the status of trade secrets.” Id. (citations omitted). Second, SHIR Capital failed “to allege the requisite novelty or originality that would qualify for trade secret protection.” Id. at *15. “A trade secret is any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.” Schroeder , 133 A.D.3d at 27 (citation omitted). The Court held that “the work performed by SHIR Capital may have been laborious, but it was not novel.” Id. Consequently, the Court dismissed SHIR Capital’s claim for misappropriation of trade secrets.

What law should apply? In most cases, answering the question is more art than science.  In contract cases, especially in complex commercial matters, the agreement at issue often (though not always) contains a choice of law provision. In that circumstance, the agreement will provide that any disputes related to the contract and/or its performance will be litigated under the laws of the jurisdiction identified in the contract. When there is no choice of law provision, a more complicated analysis is employed by the court – one that is beyond the scope of this article. In tort cases, such as the one examined below, the choice of law requires a complex analysis that, under New York law, focuses on the interests of the competing jurisdictions in the outcome of the litigation.  Padula v. Lilarn Props. Corp. , 84 N.Y.2d 519, 521 (1994). The jurisdiction with the greater interest “is determined by an evaluation of the ‘facts or contacts which … relate to the purpose of the particular law in conflict.’” Id. (quoting Schultz v. Boy Scouts , 65 N.Y.2d 189, 197 (1985)). “Two separate inquiries are thereby required to determine the greater interest: (1) what are the significant contacts and in which jurisdiction are they located; and, (2) whether the purpose of the law is to regulate conduct or allocate loss.” Id. (citing Schultz , 84 N.Y.2d at 198). In considering these inquiries, the New York Court of Appeals explained: hen the conflicting rules involve the appropriate standards of conduct, rules of the road, for example, the law of the place of the tort “will usually have a predominant, if not exclusive, concern” … because the locus jurisdiction’s interests in protecting the reasonable expectations of the parties who relied on it to govern their primary conduct and in the admonitory effect that applying its law will have on similar conduct in the future assume critical importance and outweigh any interests of the common-domicile jurisdiction.  Id. (citing Schultz , 65 N.Y.2d at 198; see also Cooney v Osgood Mach. , 81 N.Y.2d 66, 72). Therefore, “ f conflicting conduct-regulating laws are at issue, the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders.” Id. at 522 (citing Cooney , 81 N.Y.2d at 72). When the jurisdictions’ conflicting rules relate to allocating losses that result from tortious conduct, “rules such as those limiting damages in wrongful death actions, vicarious liability rules, or immunities from suit, considerations of the State’s admonitory interest and party reliance are less important.” Schultz , 65 N.Y.2d at 198.  “Under those circumstances, the locus jurisdiction has at best a minimal interest in determining the right of recovery or the extent of the remedy in an action by a foreign domiciliary for injuries resulting from the conduct of a codomiciliary that was tortious under the laws of both jurisdictions.” Id. (citations omitted). Fraudulent conveyance laws are conduct regulating. Atsco Ltd. v. Swanson , 29 A.D.3d 465, 466 (1st Dept. 2006). See also GFL Advantage Fund, Ltd. v. Colkitt , 2003 WL 21459716, at *3 (S.D.N.Y. 2003). As such, “the law of the jurisdiction where the tort occurred will generally apply.…” Padula , 84 N.Y.2d at 522. See also Schultz , 65 N.Y.2d at 198 (citations omitted).  Moreover, since “the purpose of fraudulent conveyance laws is to aid creditors who have been defrauded by the transfer of property,” consideration of the residency of the parties, particularly the creditors, is also required to determine their reasonable expectations. Atsco , 29 A.D.3d at 466; see also Padula , 84 N.Y.2d at 521. Recently, the Appellate Division, First Department considered the foregoing principles in Matter of Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, Ltd. , 2020 N.Y. Slip Op. 03279 (1st Dept. June 11, 2020) ( here ). Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, Ltd. Background Petitioner, The Wimbledon Fund, SPC (“Class TT”), sought an order, pursuant to CPLR § 5225 and § 5227, directing Weston Capital Partners Master Fund II, Ltd. (“Weston”) and Wimbledon Financing Master Fund, Ltd. (“WFMF”) (together, “Respondents”) to turn over property and money equal to $3,525,675, plus applicable interest, in partial satisfaction of a $23,051,971.31 judgment petitioner obtained against Swartz IP Services Group Inc. a/k/a Advisory IP Services Inc. (“SIP”). Petitioner, a segregated portfolio in The Wimbledon Fund, SPC, alleged that it was the victim of a fraudulent scheme that caused its investors to lose more than $17 million. Albert Hallac (“Hallac”), Jeffrey Hallac (“Jeffrey”), and Keith Wellner (“Wellner”) managed Class TT through Weston Capital Asset Management, LLC and its related affiliate Weston Capital Management LLC. According to the petition, Class TT’s investment managers, including Hallac and Wellner, caused Class TT to transfer $17.7 million to SIP pursuant to a Note Purchase Agreement (the “NPA”), dated November 14, 2011, “which ostensibly allowed Class TT to purchase so-called ‘reference notes’ issued by SIP.” However, Class TT’s monies were not invested in accordance with the NPA. Once Class TT’s funds were received, Hallac, Wellner and David Bergstein (“Bergstein”) (SIP’s president, secretary and 25-50% shareholder) authorized a series of transfers to third parties, allegedly without any consideration to SIP or Class TT. These transfers resulted in the depletion of SIP’s bank accounts shortly after it received Class TT’s funds, rendering it either insolvent or with an unreasonably minimal amount of capital. Petitioner alleged that this scheme benefitted Partners II, WFMF’s predecessor in interest and a fund managed by Hallac, because it received $3,525,675 of Class TT’s funds through three fraudulent transfers from SIP. Bank records showed that the money was wired to Partners II. SIP did not owe any debts to Partners II and no consideration was received in exchange for the funds. Instead, the funds were transferred to Partners II to repay a loan that Partners II had made to Arius Libra with SIP acting as the conduit for the effectuation of the alleged fraudulent transfers. Arius Libra was allegedly a sham entity in which SIP had no interest. Hallac, Jeffrey, and Wellner served as directors of Arius Libra, along with Bergstein and Kia Jam. Based on this scheme, the Securities and Exchange Commission (“SEC”) filed complaints against Bergstein, Hallac, and Wellner and the United Stated Attorney for the Southern District of New York brought criminal charges against them. Bergstein was found guilty after a jury trial and was sentenced to 8 years. Hallac and Wellner both pleaded guilty to criminal fraud. During his plea allocution, Hallac admitted to participating in “a scheme to defraud Weston investors” by, among other things, failing to disclose to investors the transfer of moneys from one investment fund to benefit the investors of another fund. Moreover, Hallac specifically admitted to using Class TT’s $17.7 million investment to repay part of the Partners II loan. Weston moved, pursuant to CPLR §§ 3211 (a)(1), (2), (3), (5) and (7), to dismiss the petition. The Court denied the motion in its entirety. The First Department reversed. The Court’s Decision Below, we examine a portion of the motion court’s decision ( i.e. , the portions of the decision addressing champerty, unclean hands and choice of law) and the First Department’s consideration and review of the decision. Champerty Weston argued that the settlement agreement in a related action rendered Bergstein an “undisclosed petitioner” in the action due to his contribution of settlement proceeds to be used to finance actions such as the one before the motion court and, therefore, the action must be dismissed based on champerty.  In opposition, Class TT contended that it is the only petitioner in the action; Bergstein was not a party to the action nor did he have any control over the litigation. Judiciary Law § 489, New York’s champerty statute, provides, in relevant part: No person ... shall solicit, buy or take assignment of, or be in any manner interested in buying or taking an assignment of bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon ... The purpose of the champerty doctrine is “to prevent or curtail the commercialization of or trading in litigation.” Trust for Certificate Holders of Merrill Lynch Mtge. Invs., Inc. v. Love Funding Corp. , 13 N.Y.3d 190, 198 (2009) (quotation marks and citation omitted). “ hile has been willing to find that an action is not champertous as a matter of law ... it has been hesitant to find that an action is champertous as a matter of law.” Bluebird Partners, L.P. v. First Fidelity Bank, N.A. , 94 N.Y.2d 726, 734-35 (2000) (emphasis in original) (internal citations omitted).  To establish champerty, the plaintiff must demonstrate “that the acquisition made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding.” Id. at 736. The motion court held that Bergstein was not an undisclosed petitioner and, therefore, the proceeding was not champertous. The motion court observed that “ f Bergstein was assigned the claim and commenced th action in his own name, then dismissal for champerty would have been appropriate.” However, concluded the motion court, Class TT was the petitioner, not Bergstein. See Gowen v. Helly Nahmad Gallery, Inc. , 60 Misc. 3d 963, 996-998 (Sup. Ct., N.Y. County 2018).  The First Department agreed with the motion court. Slip Op. at *1. Unclean Hands Weston contended that petitioner was “an association-in-fact consisting of TT and Bergstein.” As such, Bergstein could not maintain the action because he had unclean hands. The motion court disagreed, reiterating the fact that Bergstein was not the petitioner in the action. The motion court noted that even if Bergstein were the petitioner, unclean hands did not furnish a ground for dismissal. Unclean hands is equivalent to in pari delicto and such an argument “is not a defense to a fraudulent conveyance suit.” Wimbledon Financing Master Fund, Ltd. v. Wimbledon Fund , 162 A.D.3d 433, 434 (1st Dept. 2018) (quoting FIA Leveraged Fund Ltd. v. Grant Thronton LLP , 150 A.D.3d 492, 497 (1st Dept. 2017)).  The First Department agreed with the motion court. Slip Op. at *1. Choice of Law-Fraudulent Conveyance Although the First Department agreed with the motion court on the foregoing issues, it nevertheless reversed on the choice of law issue.  Weston argued that Cayman law applied to the fraudulent conveyance claim because both Class TT and Partners II were domiciled in the Cayman Islands. Weston further argued that the claims must be dismissed because the elements of fraudulent conveyance under Cayman law cannot be satisfied. In Weston’s amended motion to dismiss, however, Weston stated that although the parties disagreed about the applicable law, New York law should apply because they were the same.  In opposition, Class TT argued that fraudulent conveyance is a conduct-regulating tort and that for such torts, the court must apply the law of the jurisdiction where the tort occurred. Class TT also claimed that Weston’s amended motion, which relied on New York law, should be deemed a waiver of its argument that Cayman law applied. In light of Weston’s concession that “New York and Cayman law are the same”, the motion court held that it was unnecessary to employ a choice of law analysis.  The First Department disagreed. The Court found that “ ontrary to the motion court’s finding, Weston did not concede that Cayman and New York law were the same with respect to fraudulent conveyance claims.” Slip Op. at *1. “Indeed,” said the Court, “on appeal, it is not disputed that Cayman Islands and New York law differ.” Id. at *1-*2.  The Court explained that using a traditional conflict of laws analysis ( Padula , 84 N.Y.2d at 521, and Atsco Ltd. v. Swanson , 29 A.D.3d 465, 466 (1st Dept. 2006), citing Cooney v. Osgood Mach. , 81 N.Y.2d 66, 72 (1993)), Cayman law applied to the fraudulent conveyance claim: Applying these principles, the law of the Cayman Islands applies to petitioner’s fraudulent conveyance claim. Petitioner, who is the creditor allegedly injured by the fraudulent transfer of the funds at issue, is a Cayman Islands domiciliary. Moreover, petitioner is seeking the return of funds which were allegedly fraudulently transferred to Weston, also a Cayman Islands domiciliary. Additionally, the Cayman Islands has the greatest interest in protecting the reasonable expectations of its residents, both petitioner and respondent Weston, who relied on Cayman Islands law to govern their conduct. Although SIP, the transferor of the funds, is domiciled in Texas, and the bank account into which the funds were transferred is located in New York, it is the Cayman Islands that has the most significant contacts with the matter in dispute. Thus, Cayman Islands law should apply. Slip Op. at *2. “Upon application of Cayman Islands law,” the Court held that “petitioner’s fraudulent conveyance claim should have been dismissed on the ground that it was not sufficiently alleged in the petition.” The Court explained that “to make out a cause of action under the Cayman Islands’ Fraudulent Dispositions Law, petitioner must establish, inter alia , that SIP disposed of property with an intent to defraud and at an undervalue.” Under Cayman law, “intent to defraud means an intention of a transferor wilfully to defeat an obligation owed to a creditor.” Id.   The Court found that the “petition fail to allege that SIP transferred money to Weston with the requisite intent to defraud petitioner.” Id. Takeaway In today’s global economy, litigation among its participants raises a host of complex issues. Among them, “What law should apply”?  Every case concerns a unique set of facts and circumstances that make it difficult to answer the question. Indeed, as the title of this article indicates, deciding the law to apply can be a thorny endeavor. In New York, litigants and the courts must examine the issue through an interest analysis test – that is, a test in which the court determines the jurisdiction with the greater interest in protecting the expectations of the parties who relied on the jurisdiction’s laws and the admonitory effect that applying such law will have on similar conduct in the future. In doing so, the court must consider: “(1) what are the significant contacts and in which jurisdiction are they located; and, (2) whether the purpose of the law is to regulate conduct or allocate loss.” Padula , 84 N.Y.2d at 521. In Wimbledon Fund , the analysis favored application of Cayman Islands law.

In prior posts, we examined Securities and Exchange Commission (“SEC” or “Commission”)   enforcement actions brought against those who seek to personally benefit from the COVID-19 health crisis affecting the country ( here and here ). These actions had a common thread between them – they involved pump and dump schemes. In a “pump-and-dump” scheme, promoters “pump” up, or increase, the stock price of a company by spreading positive, but often false, rumors.  These rumors cause many investors to purchase the stock.  Then the promoters or others working with them quickly “dump” their own shares before the hype ends.  Typically, after the promoters’ profit from their sales, the stock price drops, and the remaining investors lose most of their money. Since February of this year, the SEC has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency ( here ). In these warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump-and-dump schemes. On June 9, 2020, the SEC announced ( here ) that it brought charges against Jason C. Nielsen (“Nielsen”), a penny stock trader in Santa Cruz, California, for conducting a pump-and-dump scheme involving the stock of Arrayit Corporation (“arrayit”), a biotechnology company headquartered in Sunnyvale, California that purports to focus on the discovery, development, and manufacture of proprietary life science technologies.  According to the SEC, Nielsen made hundreds of misleading statements in an online investment forum, including a false assertion that the company had developed an “approved” COVID-19 blood test. According to the SEC, in March and April 2020, Nielsen posted numerous messages on Investors Hub that promoted Arrayit stock claiming that Arrayit had a COVID-19 test; that Arrayit’s COVID-19 test was pending Emergency Use Authorization from the FDA; and that Arrayit had received approval for its COVID-19 test. As readers of this Blog know, during this period, the news cycle was saturated with reports and commentary about the COVID-19 virus, the need for accurate and rapid COVID-19 tests, and the need for increased COVID-19 testing. At the time Nielsen began posting the messages, he held 114,803,532 shares of Arrayit common stock, which represented 10.19% of Arrayit’s total outstanding shares. At that time, the total market value of Nielsen’s holdings in Arrayit was $1,998,051.26. According to his brokerage account’s opening documents, no one other than Nielsen was authorized to trade in the account.  According to the SEC, Nielsen made the statements regarding a purported Arrayit COVID-19 test to generate interest in Arrayit stock. Nielsen’s use of those posts, alleged the SEC, was deceptive and misleading because he failed to disclose the extent of his financial stake in the company and the fact that he was actively selling off his shares. The SEC said that Nielsen’s trading records showed that he was dumping his shares close in time to when he was posting messages touting Arrayit’s stock.  Moreover, according to the SEC, Nielsen’s statements that Arrayit’s COVID-19 test was pending Emergency Use Authorization and that the test was “approved” were false. Arrayit did not submit an application for Emergency Use Authorization to the FDA until on or about April 13, 2020, said the SEC. In fact, noted the SEC, as of the filing of its complaint, Arrayit did not have a COVID-19 test that was approved by the FDA or any other entity. Nielsen also allegedly created the false impression of high demand for Arrayit stock by placing and subsequently canceling several large orders to purchase shares in a tactic known as “spoofing.”  As explained in the SEC’s complaint, Nielsen allegedly placed large orders for Arrayit stock, subsequently cancelled the orders before they were filled, and then posted messages on Investors Hub falsely attributing these large orders to someone else (often a fictitious investor). The purpose of this spoofing was to create the false impression of a high demand for the company’s securities. According to the SEC, between March 2, 2020 and April 13, 2020, Nielsen realized a profit of approximately $137,000, as a result of his “pump and dump” scheme . On April 13, 2020, the Commission temporarily suspended trading in Arrayit stock ( here ), for the period April 14, 2020 through April 27, 2020, due to “questions regarding the accuracy and adequacy of publicly-available information concerning Arrayit Corporation, including: (a) its financial condition and its operations, if any, in light of the absence of any public disclosure by the Company since 2015, and (b) information in the marketplace since at least March 2, 2020, claiming the Company developed an approved COVID-19 blood test.” “We allege that Nielsen engaged in multiple forms of deception to exploit investors amidst the COVID-19 pandemic,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office.  “Investors should be aware of the potential for stock manipulation, including through claims regarding products or services related to COVID-19.” The SEC’s complaint ( here ), filed in the United States District Court for the Northern District of California, charged Nielsen with violating the antifraud provisions of the federal securities laws, and seeks permanent injunctions, civil money penalties, a penny stock bar, and disgorgement with prejudgment interest.

Pleading fraud with particularity is not easy. Sometimes the information needed to satisfy the requirement is peculiarly within the knowledge of the defendant. Other times, the information needed is found in lawsuits, publicly available information and media. Regardless of where the information can be found, the plaintiff must nevertheless provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true.  Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009).  In  Bullen v. Sterling Valuation Grp., Inc. , 2020 N.Y. Slip Op. 50653(U) (Sup. Ct., N.Y. County June 5, 2020) ( here ), Justice Barry Ostrager of the Supreme Court, New York County, Commercial Division, considered the particularity requirement in a case involving an alleged fraudulent inducement to investment money in a now defunct hedge fund. As discussed below, Justice Ostrager held that plaintiffs satisfied the particularity requirement by identifying specific information alleged to be peculiarly within the knowledge of the defendant, as well as detailed information obtained from related federal proceedings.   Bullen v. Sterling Valuation Group, Inc. Background Bullen  arose out of an alleged fraudulent scheme to induce plaintiffs to invest over $63 million in Platinum Partners Credit Opportunities Fund (“PPCO” or the “Fund”) – an alleged $500 million dollar hedge fund that is in receivership.   Plaintiffs contended that Platinum Management (NY), LLC (“Platinum”) provided them with reports created by defendant Sterling Valuation Group, Inc. (“Sterling”), a small seven-person valuation consulting firm that provided valuation and consulting services to Platinum and issued quarterly reports opining on the value of the assets held by PPCO (the “Sterling Reports” or the “Reports”).  Plaintiffs alleged that, in deciding to invest, they relied on the Sterling Reports, only to later learn via proceedings in an action brought by the Securities and Exchange Commission (“SEC”) (the “SEC Action”) and elsewhere that PPCO had inflated its valuations, and that Sterling failed to carefully scrutinize the valuations or challenge the improper valuations in any meaningful way. Plaintiffs alleged that Sterling corroborated the valuations while in possession of questionable confidential information obtained, in part, through its participation in Platinum’s internal valuation meetings and while knowing that the auditors of PPCO’s sister fund, the Platinum Partners Value Arbitrage Fund, had identified a “material weakness” in the fund’s investment valuation.   see sec v. platinum management (ny), llc, no. 1:16-cv-6848 (e.d.n.y. dec. 19, 2016);  united states v. nordlicht , no. 16-640 (e.d.n.y. dec. 14, 2016).> see sec v. platinum management (ny), llc, no. 1:16-cv-6848 (e.d.n.y. dec. 19, 2016);  united states v. nordlicht , no. 16-640 (e.d.n.y. dec. 14, 2016).>  Plaintiffs asserted three causes of action against Sterling: (1) fraud; (2) aiding and abetting fraud; and (3) aiding and abetting breach of fiduciary duty. Sterling moved to dismiss. The Court granted the motion but allowed plaintiffs leave to replead. Thereafter, plaintiffs filed an amended complaint, asserting the same causes of action. Defendant moved to dismiss. The Court denied the motion.  The Court’s Decision With regard to the first cause of action, Sterling claimed that plaintiffs failed to plead fraud with particularity.  e.g.,  here,  here, and  here).=">here).">  Defendant contended that plaintiffs simply alleged fraud in a conclusory fashion and in hindsight, arguing that plaintiffs merely alleged that Sterling “rubber stamped” certain valuations of the Fund’s assets. Slip Op. at *2. The Court rejected the argument.  The Court found that plaintiffs included information in the Amended Complaint that was peculiarly within Sterling’s knowledge –  i.e. , knowledge that should have alerted Sterling that the information it was receiving from PPCO, including the information in its Valuation Reports, was false and unsupported.  Id.  The Court explained that the Amended Complaint specifically pleaded that Sterling attended monthly, quarterly, and annual meetings where asset valuations and valuation methodologies were discussed with Platinum, and that Sterling was given access to a large quantity of non-public documents and confidential material for consideration as part of its valuation work.  Id.  The Court found that the Receiver appointed in the SEC Action corroborated the allegations by identifying significant evidence of overvaluations by Platinum that plaintiffs contended could not reasonably have escaped Sterling’s attention in the course of its work. According to the Court, the Receiver conducted an analysis of PPCO’s holdings and business dealings, which included a review of Platinum documents and communications, and found a dearth of evidence to support Platinum’s valuations as corroborated by Sterling.  Id.  at *2-*3.   The Court also found that the magnitude of the overvaluations supported plaintiffs’ allegations. In this regard, the Court noted that, as pleaded, “the overvaluations were so extensive and so extreme that Sterling must have known about the misrepresentations, and that Sterling made these and similar misrepresentations itself in its own Valuation Reports instead of alerting investors to the problems.”  Id. The Court rejected Sterling’s argument that disclaimers in the Reports negated any reliance on the information therein. The Court found that the disclaimers were “untrue” and, in any event, were “questionable in light of Sterling’s attendance at PPCO meetings, its access to confidential information, and its primary duty of providing valuation reports.”  Id. Moreover, said the Court, the disclaimers were too “general in nature and include facts peculiarly within Sterling’s knowledge.”  Id.  (citing  Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc. , 115 AD3d 128, 137 (1st Dept. 2014)). “Thus, Sterling   rely on the disclaimer to defeat plaintiffs’ fraud claim.”  Id. The Court also rejected Sterling’s argument that plaintiffs failed to allege that Sterling intended to induce plaintiffs’ reliance on the Valuation Reports and that plaintiffs’ reliance was justifiable.  Id.  at *3-*4. The Court explained that “ lthough the Reports caution  that the opinions stated should not be construed as investment advice, plaintiffs were entitled to rely on the information in the Valuation Reports as being factually correct and then use those facts to make their own investment decisions.…”.  Id.  at *4.  Finally, the Court held that plaintiffs’ sophistication did not preclude their “claim of justifiable reliance as a matter of law.”  Id.  “At a minimum,” said the Court, “issues of fact exist  to defeat the motion to dismiss in light of Sterling’s superior access to PPCO’s confidential information, which plaintiffs themselves could not access.”  Id.  (citing  ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)).   With regard to the second cause of action, aiding and abetting Platinum’s fraud, the Court held that plaintiffs stated a claim.   “To plead a claim of aiding and abetting fraud, the complaint must allege: ‘(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud.’”  Id.  (quoting  Stanfield Offshore Leveraged Assets, Ltd. v. Metro. Life Ins. Co. , 64 A.D.3d 472, 476 (1st Dept. 2009)). Although actual knowledge of the fraud may be averred generally, to plead “substantial assistance”, plaintiffs must allege that the defendant (1) affirmatively assisted, helped conceal, or by virtue of failing to act when required to do so enabled the fraud to proceed, and (2) the defendant’s actions as an aider/abettor proximately caused the harm on which the primary liability is predicated.  Stanfield , 64 A.D.3d at 476.Knowledge can be averred through circumstantial evidence.  Houbigant, Inc. v. Deloitte & Touche , 303 A.D.2d 92, 98- 99 (1st Dept. 2003).  See also DaPuzzo v. Reznick Fedder & Silverman , 14 A.D.3d 302, 303 (1st Dept. 2005).  Applying the foregoing standards, the Court held that plaintiffs “adequately pleaded the requisite ‘substantial assistance’ by Sterling in achieving Platinum’s fraud….”  Id.  at *4. “Specifically,” said the Court, “by adopting Platinum’s improper valuations, Sterling allegedly helped conceal Platinum’s fraud.”  Id.  Plaintiffs also pleaded substantial assistance, noted the Court, by alleging that Sterling failed “to challenge Platinum’s improper valuations when required to do so and that failure to act helped enable the fraud to proceed.”  Id.  at *4-*5.  Takeaway The purpose of the particularity requirement is to place the defendant on notice of the events complained of, not prevent otherwise valid causes of action where it may be impossible to state in detail the circumstances constituting the fraud.  Daly v. Kochanowicz , 67 A.D.3d 78, 90 (2d Dept. 2009). In such situations, specifically where those circumstances are peculiarly within the knowledge of the defendant, as in  Bullen , “the heightened pleading requirements of CPLR § 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in the fraudulent scheme.”  JP Morgan Chase Bank, N.A. v Hall , 122 A.D.3d 576, 580 (2d Dept. 2014) (quoting  High Tides LLC v. DeMichele , 88 A.D.3d 954, 957 (2d Dept. 2011)).

As readers of this Blog know, one of the elements of a fraud claim is reliance. In the typical case, the defendant makes a false or misleading statement directly to the plaintiff, which the plaintiff claims to rely on. In the less frequent case, the misrepresentation of fact is made to a third party that relied on the alleged fraudulent statement. The question is whether, in that circumstance, a plaintiff can state a fraud cause of action, despite the absence of direct reliance by the plaintiff on the alleged misrepresentation? In 2016, the New York Court of Appeals addressed the question.  In Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817 (2016), the New York Court of Appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” Id. at 828. Prior to Pasternack , federal courts applying New York law and the Appellate Division Departments had reached varying conclusions as to whether a plaintiff could state a fraud claim, “despite the absence of reliance by the plaintiff on the alleged misrepresentations, where a non-plaintiff third party is alleged to have relied on the misrepresentations in a manner that caused injury to the plaintiff.” Id. at 827.  In today’s article, this Blog examines Gui Qin Chen v. Li Zhu Chen , 2020 N.Y. Slip Op. 31691(U) (Sup. Ct., Queens County Apr. 27, 2020) ( here ), a case involving reliance on an alleged misrepresentation that was made to a third party. Gui Qin Chen v. Li Zhu Chen Background Plaintiff commenced the action to recover damages for an alleged conspiracy “to displace her as beneficiary” of the proceeds of a $300,000.00 life insurance policy held by the decedent, Chit Hing Chau. The original policy was issued by Metropolitan Life Insurance Company (“MetLife”) to Chau in 1998, with his wife, Sau Wan Cheung, as the primary beneficiary, and their daughter, defendant Hong Yung Chau, as the sole contingent beneficiary. In 2012, Chau designated plaintiff, Gui Qin Chen, his girlfriend, as the only beneficiary under the life insurance policy and changed the address for the policy from his marital residence in Queens to an address in Manhattan. Thereafter, Chau moved to China, where he died on May 8, 2017, never having returned to the United States. Plaintiff alleged that on August 10, 2016, Chau executed a Change in Beneficiary Designation form, again designating his wife as beneficiary, and his daughter, Hong Yung Chau, as the contingent beneficiary, and changed the address of the policy back to his marital residence in Queens. Defendant, Li Zhu Chen, a former insurance agent for MetLife, claimed to have submitted the 2016 Change in Beneficiary form on behalf of decedent to MetLife. At the time the Change in Beneficiary form was executed, the decedent was residing in China. Li Zhu Chen allegedly brought to him, and witnessed the decedent’s signature on, the Change in Beneficiary form while both were in China, and subsequently filed it with MetLife when she returned to the United States. Plaintiff alleged that the signature on the 2016 Change in Beneficiary form was forged by defendant, Hong Yung Chau, and that defendant, Li Zhu Chen, conspired with the daughter, Chau, to submit the “forged” Change in Beneficiary form to deprive plaintiff of the proceeds of the insurance policy. Plaintiff commenced the action in August 2019, alleging fraud, aiding and abetting fraud, and conspiracy to commit fraud against defendant, Li Zhu Chen. Defendant, Chen, moved to dismiss plaintiff’s complaint for, inter alia , failing to state a cause of action pursuant to CPLR § 3211 (a) (7). Plaintiff opposed. The Court’s Decision The Court granted the motion, holding that plaintiff failed to satisfy the reliance element of her fraud claim. The Court found that the complaint only alleged that “Defendant, LI ZHU CHEN, committed fraud by making material misrepresentations of fact to MetLife.” Slip Op. at *3. It did not allege that MetLife “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to detriment.” Id. (quoting Pasternack , 27 N.Y.3d at 828). As such, held the Court, plaintiff failed to satisfy the reliance element of her fraud claim. Id. Because the fraud claim did not survive defendant’s challenge, the Court dismissed plaintiff’s aiding and abetting claim. Id. (stating, “the complaint did not meet the specificity requirements to sufficiently plead the existence of an underlying fraud, and, as a result, the cause of action for aiding and abetting cannot survive.…”).  Finally, the Court dismissed the conspiracy to commit fraud claim because “New York does not recognize an independent tort cause of action for civil conspiracy.” Id. (citations omitted). Takeaway We have often written about the difficulty plaintiffs encounter trying to satisfy the reliance element of a fraud claim. ( E.g. , here and here .)  Gui Qin Chen shows that this requirement can be even more difficult when the alleged misrepresentation is not made directly to the plaintiff. In that circumstance, the plaintiff must allege that the misrepresentation was made for the purpose of being communicated to the plaintiff in order to induce his/her reliance thereon or that the misrepresentation was relayed to the plaintiff, who then relied upon them. The failure to allege either will, as the plaintiff in Gui Qin Chen learned, result in dismissal of the fraud cause of action.

On December 31, 2018, this Blog posted an article, titled “Court Dismisses Complaint Charging Misappropriation of Intellectual Property on Summary Judgment.” ( Here .) The case that we examined in that article, Hyperlync Techs., Inc. v. Verizon Sourcing LLC , 2018 N.Y. Slip Op. 33123(U) (Sup. Ct., N.Y. County Dec. 5, 2018) (here), involved allegations that the defendant, Verizon Sourcing, LLC (“Verizon”), disclosed confidential information to Synchronoss Technologies, Inc. (“Synchronoss”), a competitor of the plaintiff, Hyperlync Multimedia Israel, Ltd. (“Hyperlync”), for use in its own competing product. As discussed in the article, the motion court dismissed the claims for, inter alia , the misappropriation of confidential information and ideas. That decision was appealed. In today’s article, we examine the affirmance of the motion court’s decision by the Appellate Division, First Department. Background In 2013, Hyperlync developed the Phone Cloner (“Phone Cloner”), a peer-to-peer phone provisioning app. In March of that year, Hyperlync presented the Phone Cloner concept to Verizon. Having expressed interest in the app, Hyperlync gave Verizon functioning versions of the Phone Cloner, as well as technical information for testing. Hyperlync alleged that it disclosed such information to Verizon pursuant to a non-disclosure agreement (“NDA”) the parties signed on October 12, 2012. In August 2013, Verizon demonstrated the Phone Cloner app at a Verizon “innovation fair” in Walnut Creek, California. The fair was attended by Verizon employees and a Verizon vendor. Following the fair, the vendor sent an email to two Synchronoss employees informing them that a “content transfer” app was demonstrated at the meeting. The email did not reference Hyperlync or the Phone Cloner. Deposition testimony showed that the vendor neither received materials and information from Verizon regarding the Phone Cloner or any peer-to-peer provisioning technology nor worked on any phone provisioning app. In October 2013, Verizon declined Hyperlync’s terms for continued development of the Phone Cloner. Hyperlync alleged that after Verizon disclosed Hyperlync’s trade secret information to Synchronoss in breach of the NDA, Synchronoss then released its own phone provisioning app, named MCT, based on the misappropriated Hyperlync information. Hyperlync maintained that the MCT app had the same functionality, look and feel as the Phone Cloner. Justice Saliann Scarpulla, granted Verizon’s motion for summary judgment, dismissing Hyperlync’s misappropriation of trade secrets, misappropriation of ideas, and breach of contract causes of action as against it.  The Motion Court held that Hyperlync failed to identify a trade secret that had been misappropriated, notwithstanding the “voluminous papers and exhibits,” submitted to the Court. The Motion Court explained that Hyperlync failed to provide any specificity concerning the alleged trade secret, concluding that Hyperlync’s “explanation of its trade secret nebulous at best….”  The Motion Court also held that Hyperlync failed to demonstrate a misappropriation as a consequence of Verizon’s alleged violation of the NDA. The Motion Court found that Hyperlync failed to submit “any documents or testimony to raise an issue of fact” demonstrating that “the ‘how to’ of the Phone Cloner app was passed to Verizon.” This finding was underscored by Hyperlync’s admission that one of its employees could not clearly state “what information he gave to Verizon about the Phone Cloner,” and the employee’s testimony “that Hyperlync did not disseminate any source code associated with .” Finally, the Motion Court held that Hyperlync failed to demonstrate that the Phone Cloner app was novel – i.e. , it “was unlike other products on the market.” “In fact,” the Court noted, deposition testimony “confirmed that the idea for data transfer between two phones via Wi-Fi was already in the public domain at the time of the Phone Cloner app,” and documentary “evidence” presented by Verizon showed that there were a number of “applications for Wi-Fi data transfer” that “pre-dated Phone Cloner.…” Plaintiff appealed.  The First Department’s Decision The First Department found that, “ ontrary to Verizon’s arguments” and the Motion Court’s holding, plaintiff described the allegedly misappropriated ideas with sufficient specificity. Slip Op. at *1 (citation omitted). Notwithstanding, the Court said that “the ideas were not sufficiently novel to merit protection.” Id. (citation omitted). The Court explained that the “concepts behind plaintiffs’ app were not new, were readily available in the public domain, and were used by a number of other apps on the market at the time.” Id. The Court rejected plaintiffs’ argument that the app was an improvement in speed and functionality over the apps that existed in 2013, holding that “a smart adaptation of existing knowledge is not considered novel.” Id. (citations omitted). The Court also found that the ideas for the app were not confidential. Id. (citation omitted). The Court noted that the ideas were in the public domain “before the alleged misappropriation”. Id. The Court explained that “plaintiffs posted the app’s demo videos on YouTube and repeatedly shared those videos with companies with which it did not have nondisclosure agreements.” Id. The Court rejected plaintiffs’ argument that the materials were promotional and did not contain any confidential information. Id. Such an argument said the Court was “belied by own emails, in which they requested assurances of confidentiality.” Id. “Plaintiffs’ subjective understanding that there was an assurance of confidentiality does not create third-party obligations of confidentiality,” concluded the Court. Id. (citation omitted).  The Court further found that Plaintiffs “failed to establish that Verizon actually conveyed its ideas to Synchronoss.” Id. First, noted the Court, “plaintiffs did not share the app’s source code.” Id. In fact, observed the Court, plaintiffs “encrypted its builds, making the source code unaccessible to Verizon.” Id. Second, said the Court, there was nothing in the record showing “the form in which the misappropriated information was transferred, such as technical specifications, prototypes, or PowerPoint decks, or the person or persons who did the alleged transferring.” Id. The Court did not find plaintiffs’ expert’s opinion that the competing apps functioned similarly sufficient to raise an issue of fact. This was especially so since the opinion was not based on the expert’s review of the source code. Id. The fact that “both apps accomplish the same task in a manner that might seem similar to an end user does not prove misappropriation,” concluded the Court. Id.

It has been a long time since this Blog examined a request for a pre-judgment order of attachment. ( See here .) Today, we take another look at this provisional remedy. What is Prejudgment Attachment?  Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against the defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action. The Law in New York Article 62 of the Civil Practice Law & Rules (“CPLR”) governs prejudgment attachment orders. Sections 6201(1) through 6201(5) provide the grounds upon which a plaintiff can obtain such relief. Under these sections, a plaintiff can obtain a prejudgment order of attachment when: the defendant is a foreign corporation not qualified to do business in New York (CPLR § 6201(1)); the defendant resides in New York but cannot be served with process despite diligent efforts to do so (CPLR § 6201(2)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR § 6201(3)); the action is brought by a crime victim and is brought against the person or legal representative of the person convicted of the crime and seeks to recover damages sustained as a result of crime (CPLR § 6201(4)); or the cause of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York (CPLR § 6201(5)). Prejudgment attachment is a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR § 6212(a).  Notably, the plaintiff’s moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought.  Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp. , 118 A.D.2d 769, 773 (2d Dept. 1986). The evidence must be established by an affidavit made by a person with actual knowledge. Rosenthal v. Rochester Button Co., Inc. , 148 A.D.2d 375 (1st Dept. 1989). Applications supported solely by an affidavit of an attorney who lacks personal knowledge of the facts surrounding the transaction giving rise to the action are insufficient.  Where fraud is alleged, under CPLR § 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff’.” VNB NY, LLC v. Rapaport , 2016 N.Y. Slip. Op. 50099 (Sup. Ct., Kings County Jan. 29, 2016) (citations omitted). “ ere removal, assignment or other disposition of property is not grounds for attachment.” Computer Strategies v. Commodore Bus. Machs. , 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id.   Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc. , 2016 N.Y. Slip Op. 32405 (Sup. Ct., N.Y. County Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id. (citation and internal quotation marks omitted). Even when the plaintiff satisfies the statutory grounds for an order of attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp. , 2017 N.Y. Slip Op. 30813 (Sup. Ct., N.Y. County Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 60 (1st Dept. 2013)).  The risk “should be real.” VisionChina , 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position ( i.e. , whether the defendant is in “serious financial distress” ( Elton Leather Corp. v. First Gen. Resources Co. , 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina , 109 A.D.3d at 60. In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR § 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g. , Von Bock v Metropolitan Life Ins. Co. , 223 A.D.2d 700 (2d Dept. 1996). Erensel v. Abitbol On May 29, 2020, in Erensel v. Abitbol , 2020 N.Y. Slip Op. 31587(U) ( here ), Justice Arlene P. Bluth of the New York Supreme Court, New York County, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR § 6201(3) due to a lack of evidence of fraudulent intent. Background Erensel concerned the business relationship between plaintiff, Brent Erensel, and defendants, Yair Abitbol (“Abitbol”) and Zurich Funding NA Inc. (“Zurich”). Plaintiff alleged that Abitbol ran a fraudulent scheme to induce plaintiff into investing $75,000 in Zurich – an initial deposit of $25,000 and an additional investment of $50,000 – to acquire an ownership interest in the company. Plaintiff contended that Zurich was a fraudulent company and that Abitbol deliberately chose the name and the company logo to mimic the well-known Zurich Insurance Company. Plaintiff asserted that Zurich had few assets and that the address provided for the business was fake. Plaintiff successfully obtained an order preliminarily restraining defendants from transferring any assets to the extent of the amount claimed by plaintiff, including a specific bank account at TD Bank and any other bank account in either defendants’ name at TD Bank. Plaintiff moved for a prejudgment order of attachment. Defendants opposed the motion, claiming the dispute between the parties was merely a disagreement over plaintiff’s desire to leave the partnership. Defendants denied that there was any fraud, noting that there could be no fraud since plaintiff received payments from Zurich – between November 2017 through May 2018, plaintiff received a little over $16,000 from his partnership interest in Zurich.  The Court’s Decision The Court denied the motion and vacated the order restraining defendants from transferring any assets. The Court held that plaintiff failed to meet his burden for a prejudgment order of attachment. In particular, the Court found no proof of fraud: “Critically, plaintiff admits that he received monthly payments from Zurich from November 2017 through May 2018 before the payments ceased. While these payments do not prove the absence of fraud, they severely undercut the high burden a plaintiff must meet in order to get an attachment.” Slip Op. at *3 (orig’l emphasis).  The Court also held that plaintiff failed to prove that defendants concealed or were about to conceal assets in order to evade the recovery of a judgment. Id. This was especially so since the parties disputed the events in question. Id. (noting, “defendants have appeared and offer a very different account of what took place”).  Put another way, an attachment is not appropriate where two parties disagree over the terms of an investor’s departure from a partnership. It may be that plaintiff is in fact entitled to the over $70,000 he seeks. But plaintiff’s eventual recovery is not a reason to grant the provisional remedy sought here, where plaintiff has made no showing that defendants have taken any steps to be “judgment proof.” This Court declines to grant an attachment under these circumstances Id. at *3-*4. In short, explained the Court, “ his is not a situation where plaintiff has proof that defendants transferred money from its accounts, attempted to shut down the business or have disappeared.” Id. at *3. Takeaway The purpose of a prejudgment order of attachment “is not merely to ensure a plaintiff can recover the amount sought if he or she prevails in a case.” Slip Op. at *3. “Otherwise,” as Justice Bluth observed, “a plaintiff would be entitled to an attachment in nearly every case.” Id. The remedy is reserved for a specific set of circumstances. Proof of those circumstances is required. Since New York courts strictly construe CPLR § 6201 “in favor of those against whom it may be employed” ( Hume v. 1 Prospect Park ALF, LLC , 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. In Erensel , plaintiff could not meet this burden.

It is an accepted principal of contract interpretation that “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.”  Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470 475 (2004) (quoting W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990)) (ellipses omitted).  Such a rule “imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses<,> infirmity of memory and the fear that the jury will improperly evaluate the extrinsic evidence.”  W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990) (ellipses and brackets omitted).  This “stability” is of critical importance in real estate transactions where commercial certainty is a paramount concern….”  Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 548 (1995) (citation and internal quotation marks omitted).  Adherence to typical rules of contract construction is mandated when the underlying transactions involve “sophisticated, counseled parties dealing at arm’s length.”  Chimart Assoc. v. Paul , 66 N.Y.2d 570, 574 (1986). Personal guaranties are frequently utilized in commercial transactions.  Lenders often require that principals of a corporate borrower execute guaranties to help secure payment in the event that the borrower defaults.  Guaranties also ensure that the guarantors have “skin in the game,” which may keep them mindful of the business decisions that they make.  For the same reasons, commercial landlords frequently require that, inter alia , the financial obligations of a lease are guaranteed by a principal of a corporate tenant. “A guaranty is a promise to fulfill the obligations of another party, and is subject to the ordinary principles of contract construction.”  Cooperative Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank Int’l,” New York Branch v. Navarro , 25 N.Y.3d 485, 493 (2015) (citations and internal quotation marks omitted).  Accordingly, a guaranty, like any other “written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”  Rabobank , 25 N.Y.3d at 493 (citation and internal quotation marks omitted). A guaranty that provides that the guarantor waives defenses is enforceable.  As the Court stated in Citibank, N.A. v. Plapinger , 66 N.Y.2d 90, 92 (1985), “ raud in the inducement of a guarantee by corporate officers of the corporation’s indebtedness is not a defense to an action on the guarantee when the guarantee recites that it is absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, or any other circumstance which might otherwise constitute a defense available to a guarantor in respect of the guarantee, those recitals being inconsistent with the guarantors’ claim of reliance upon an oral representation that the lending banks were committed to extend to the corporation an additional line of credit.”  Citibank , 66 N.Y.2d at 92.  “Relying on Citibank , New York courts have consistently upheld broadly worded waiver language of this type to preclude the assertion of defenses to a guaranty.”  Red Tulip, LLC. v. Neiva , 44 A.D.3d 204, 209 (1 st Dep’t 2007) (citations and internal quotation marks omitted). In 2402 East 69 th Street, LLC v. Corbel Installations, Inc. , decided by the Appellate Division, Second Department, on May 27, 2020, the Court was called upon to determine whether the guarantors of a commercial lease were liable under the guaranties they signed.  The plaintiff in 2402 East 69 was the owner of commercial property in Brooklyn (the “Premises”).  Defendant Corbel, as tenant, entered into a three-year commercial lease with 2402 East 69 th Street, LLC, as landlord.  Two principals of tenant executed personal guaranties.  Tenant defaulted in its obligations under the lease and landlord sought to enforce its rights against guarantors.  Apparently, the form lease used misnamed the landlord and the address of the Premises.  An e-mail, which was deemed to be an amendment to the Lease and corrected the two referenced errors, was signed by representatives of the landlord and tenant.  The guaranties provided that the guarantors “would become guarantors of the prompt and faithful payment and performance of Corbel under the lease, and that no modifications or amendments to the lease would relieve the guarantors’ obligations.” In 2402 East, the First Department, inter alia , affirmed the motion court’s grant of summary judgment in favor of landlord finding that it met its prima facie burden by proving “an absolute and unconditional guaranty, the underlying debt, and the guarantor’s failure to perform under the guaranty.”  (Citations omitted.)  The “plaintiff established, prima facie, that were liable for breach of the lease he guaranty provided, inter alia , that no amendments of the lease would relieve the guarantors or the guarantors’ obligations, and that notice to or consent by the guarantors was not required for amendments respecting the lease.”  (Citations omitted.)  The Court rejected the guarantors’ contention that the signed e-mail was not an amendment to the lease because “ guarantor is not relieved of his or her obligations where, as here, the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of these changes.”  (Citations, internal quotation marks and brackets omitted.)

In prior posts ( e.g. , here and here ), we have discussed the importance of pleading loss causation in fraud and fraud-related actions. Where causation is an issue, the cases show that plaintiffs often have difficulty demonstrating the components necessary to withstand a motion to dismiss ( e.g. , here ). There are two components to the causation element: transaction causation and loss causation. “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir. 1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). It is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002) (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). Both transaction causation and loss causation must be pleaded and proved to withstand a challenge from a defendant. Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Notwithstanding, as noted, the cases show that plaintiffs often find their fraud and fraud-based causes of action dismissed because of the failure to plead and/or prove causation, and in particular loss causation. In today’s article, we examine Minzer v. Barga , 2020 N.Y. Slip Op. 31458(U) (Sup. Ct. May 22, 2020) ( here ), a case involving claims sounding in, among others, fraud, negligent misrepresentation and consumer-oriented deceptive practices. Minzer v. Barga Background Plaintiff, Daniel Minzer (Minzer”), alleged he was struck in the face by defendant, Angelo Barga (“Barga”), who was allegedly acting as a driver employed by defendants, Zwolf-NY, LLC (“Zwolf-NY”) and Uber Technologies (collectively, “Uber”), at the time of the incident. Plaintiff asserted that Uber’s online representations led him to believe that his safety was assured. The incident occurred on February 24, 2018, when plaintiff allegedly requested a ride on the Uber application with a friend. Plaintiff’s friend wore a brace due to a knee injury. The Uber application assigned Barga as plaintiff’s driver. Once inside the vehicle, plaintiff asked Barga to make two stops. Barga allegedly became agitated and refused. After making a statement to the effect of “do you want to have a broken leg like your friend,” Barga exited the vehicle, walked to the back, and allegedly punched plaintiff on the right side of his face before driving away. Plaintiff was charged $10.40 for a ride that neither he nor his friend participated in. Plaintiff filed suit. In his amended complaint, plaintiff set forth nine causes of action: (1) assault, (2) battery, (3) respondeat superior liability, (4) apparent authority liability, (5) negligent hiring, supervision, and retention, (6) fraudulent misrepresentation, (7) negligent misrepresentation, (8) breach of contract, and (9) violations of New York’s Deceptive Trade Practices Act, New York General Business Law (“GBL”) § 349. Defendants moved to dismiss. The Court granted the motion. We look at the motion with respect to plaintiff’s sixth, seventh and ninth causes of action. The Court’s Decision The Court held that plaintiff did “not set forth … a reasonable basis … to determine that Uber’s alleged misrepresentations caused plaintiff’s loss or injury.” Slip Op. at *5.  The Court noted that Minzer sufficiently pleaded “transaction causation as he claim he would not have chosen the service but for Uber’s safety promises.” Id. However, the Court found that there was nothing in the complaint to suggest that Uber’s representations about safety caused his injuries as opposed to the attack allegedly undertaken by Barga: “ othing in the pleading … suggests loss causation— i.e. , that Uber’s alleged misrepresentations of safety, rather than Barga’s attack, directly caused plaintiff’s loss. Id. at *5-*6 (citing Greentech Research, LLC v. Wissman , 104 A.D.3d 540, 540 (1st Dept. 2013) and Laub , supra .). In addition, the Court held that Minzer failed to plead his fraud and fraud-based claims with particularity. Slip Op. at *6.  The Court found that Minzer merely pleaded “that he was aware of Uber’s alleged safety promises.” Id.   He did not allege, said the Court, “how or when came to possess this information, thereby failing the particularity requirement.” Id. Under CPLR § 3016(b), a plaintiff alleging fraud must state “‘the circumstances constituting the wrong’ with ‘specific facts with respect to the time, place, or manner of the defendant’s purported misrepresentations,’ as well as the specific words used by the defendant.” Id. (quoting CPLR § 3016(b) and Lanzi v. Brooks , 43 N.Y.2d 778, 780 (1977), and citing Brown v. Wolf Group Integrated Communications, Ltd. , 23 A.D.3d 239 (1st Dept. 2005); Riverbay Corp. v. Thyssenkrupp N. Elevator Corp. , 116 A.D.3d 487, 488 (1st Dept. 2014)).  The Court found that Minzer’s GBL § 349 claim “suffer similar defects as the claims.” Slip Op. at *6. In this regard, the Court found, relying on Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc. , 3 N.Y.3d 200, 207 (2004), that “Barga’s assault the only direct cause of plaintiff’s injury.” Id. In Blue Cross , the Court of Appeals deemed causation too derivative when the plaintiff insurers’ losses resulted directly from smoking-related illnesses of their subscribers, rather than from the defendant tobacco companies’ products. 3 N.Y.3d at 207.   Moreover, “ ven if plaintiff would not have suffered the injury but for Uber’s promises,” Minzer’s claim would still fail because “but for” causation is insufficient to “‘to state a claim for relief under §349(h).’” Id. (quoting City of New York v. Smokes-Spirits.Com, Inc. , 12 N.Y.3d 616, 623 (2009)). Takeaway Plaintiffs alleging fraud must do so with particularity. This pleading requirement applies to each element of the fraud claim.  Minzer is a good reminder that a plaintiff can get to the finish line but not cross it because of a failure to satisfy one of the elements of his/her fraud claim. In Minzer , that element was causation.  Although the causation element is inherently factual, it does not mean that courts will not dismiss a fraud claim because of the failure to plead and/or prove causation. In fact, as shown in Minzer , where the plaintiff fails to allege facts sufficient to support a reasonable inference that the causation allegations are true ( Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009)), a fraud cause of action will be dismissed. For this reason, litigants alleging fraud should be mindful of the particularity requirements attendant to each element of the claim. As relevant in Minzer , this means providing allegations that show “the misrepresentations directly caused the loss about which plaintiff complains.” Laub , 297 A.D.2d at 31.