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On October 30, 2019, we posted an article, titled “How Short Is Too Short?” ( here ). The article examined the enforceability of a contractual provision that shortened the statute of limitations in a non-payment litigation. In today’s article, we revisit the issue with our examination of Murphy v. Williams , 2020 N.Y. Slip Op. 31009(U) (Sup. Ct., N.Y. County April. 23, 2020) ( here ), a case involving a breach of contract claim.  The Law It is well settled that parties are free to contractually shorten a limitations period as long as their intent to do so is clearly stated and the time period is reasonable. Whitney Lane Holdings, LLC v. Don Realty, LLC , 159 A.D.3d 1163, 1165 (3d Dept. Mar. 8, 2018); John J. Kassner & Co. v. City of New York , 46 N.Y.2d 544, 550-551 (1979); see also CPLR § 201, CPLR § 213. But what is reasonable? The answer to the foregoing question depends upon the facts and circumstances of each case. And, in that regard, it is “ he circumstances, not the time, the determining factor.” Executive Plaza, LLC v. Peerless Ins. Co. , 22 N.Y.3d 511, 519 (2014) (internal quotation marks and citation omitted). Often, the issue of reasonableness turns on the accrual date for the cause of action. For this reason, “an otherwise reasonable limitation period may be rendered unreasonable by an inappropriate accrual date.” Executive Plaza , 22 N.Y.3d at 519. Indeed, the enforceability of a contractual accrual date depends upon “whether the plaintiff had a reasonable opportunity to commence its action within the period of limitation.” Id. (internal quotation marks and citation omitted). As the Court of Appeals noted, “ ‘limitation period’ that expires before suit can be brought is not really a limitation period at all, but simply a nullification of the claim.” Id. at 518. Murphy v. Williams Background On February 2, 2015, plaintiffs, Jeffrey Murphy (“Murphy”) and Katherine Dillon (“Dillon”), purchased real property in New York City (the “property”) from defendant, Michael Williams (“Williams”). At the closing, Williams was required to sign and file a real property transfer tax return (“RPT”) with the City of New York (the “City”) to report the sale of the property and to pay the appropriate New York City transfer tax (“transfer tax”) pursuant to New York City Administrative Code § 11-2102. Williams informed plaintiffs that the transfer tax owed was $46,312.50, and that no further amounts would be due to the City.  The parties executed a hold harmless agreement (the “agreement”), pursuant to which Williams promised to indemnify and hold harmless plaintiffs from any liability or claims made against them in connection with the transfer tax, and any amount underpaid by Williams pursuant to the RPT, including interest, penalties and reasonable attorneys’ fees. On June 16, 2017, due to an alleged tax classification discrepancy, the City issued a further assessment with interest and penalties against the property in the amount of $46,980.04. Although the notification was sent to Dillon at an address where she no longer resided, plaintiffs later learned about the additional assessment on June 1, 2018 and, upon being so apprised, notified Williams to provide the payment. Williams refused. As a result, plaintiffs paid the additional assessment, as well as the related accrued penalties and interest, totaling $57,193.20.  On July 30, 2019, plaintiffs commenced the action by filing a summons with notice, alleging, inter alia , that Williams breached the agreement and that they were therefore entitled to recover $57,193.20. Plaintiffs subsequently filed a complaint on September 4, 2019. Williams filed a motion to dismiss on October 18, 2019, arguing that, inter alia , the action was untimely having been commenced on July 30, 2019, more than 17 months after the parties’ contractually agreed-upon statute of limitations expired ( i.e. , February 2, 2018). The provision to which Williams relied, provided that the right to indemnification would “survive Closing until the sooner of the statutory limit by New York City or the transfer of title by Purchaser.” Slip Op. at *3. Williams claimed that the “statutory limit” referenced in the agreement was defined by Section 11-2116 (b) of the New York City Administrative Code, which provides, in relevant part, that “no assessment of additional tax shall be made after the expiration of more than three years from the date of the filing of a return.” Id. Williams maintained that under this provision, plaintiffs should have commenced the action on or before February 2, 2018, the date the original RPT was filed.  In opposition, plaintiffs argued, inter alia , that it was unclear from the agreement whether Section 11-2116 (b) of the New York City Administrative Code applied. In light of this ambiguity, plaintiffs maintained that their claims were governed by the six-year statute of limitations under CPLR § 213 (2). Moreover, plaintiffs contended that, under Williams’ interpretation of the agreement, if the City had waited three years to issue the additional assessment, the statute of limitations would have expired on that same day, which “flies in the face of a contractually agreed upon statute of limitations being upheld if it is deemed reasonable as drafted.” Slip op. at *3. Even if Administrative Code § 11-2116 (b) applied, argued plaintiffs, the statute of limitations should begin to run from the date that the City issued the notice on June 16, 2017, because it was only then that they possessed a legal right to demand payment. The Court’s Decision The Court denied the motion, finding that Williams failed to meet his prima facie burden of demonstrating that the action was time-barred. On a motion to dismiss under CPLR § 3211 (a) (5) ( i.e. , that the claim is barred by the statute of limitations), the movant bears the initial burden of establishing, prima facie, that the time in which to sue has expired. Benn v. Benn , 82 A.D.3d 548, 548 (1st Dept. 2011) (internal quotation marks and citations omitted); see also Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 158 (1st Dept. 2017). If the initial burden is met, “ he burden then shifts to the to raise a question of fact as to whether the statute of limitations is inapplicable or whether the action was commenced within the statutory period.” MTGLQ Invs., LP v. Wozencraft , 172 A.D.3d 644, 645 (1st Dept. 2019) (citation omitted). In explaining its holding, the Court observed that the agreement never mentioned Section 11-2116 (b) of the New York City Administrative Code. Slip Op. at *5. It was, therefore, “unclear whether the reference to ‘the statutory limit by New York City’ in the agreement implicate the statute.” Id. “Given this ambiguity,” concluded the Court, “Williams prevail on a motion based on CPLR 3211 (a) (5).” Id. (citations omitted). Finally, although the Court held that there was an issue of fact as to whether Section 11-2116 (b) of the Administrative Code applied, the Court nonetheless tipped its hand on how it might rule, stating that the Administrative Code did not apply: “Importantly, New York City Administrative Code § 11-2116 (b) precludes the City from making an assessment of additional tax after three years from the filing of a return. It does not, as Williams suggests, impose a three-year statute of limitations for actions based on an additional tax assessment.” Id. at *6 (orig’l emphasis). Takeaway Parties may contractually shorten a limitations period as long as their intent to do so is clearly stated and the time period is reasonable. Intent must be determined from the writing itself. Indeed, “ he best evidence of what parties to a written agreement intend is what they say in their writing” Riverside South Planning Corp. v. CRP/Extell Riverside LP , 60 A.D.3d 61, 66 (1st Dept. 2008), aff’d, 13 N.Y.3d 398 (2009) (internal quotation marks omitted). Thus, if the agreement is clear and unambiguous on its face, the court must enforce it according to the terms of the writing. Id. Extrinsic evidence of the parties’ intent may be considered, as in Murphy , “only if the agreement is ambiguous.”

In past articles, this Blog has written about qui tam actions under the federal False Claims Act (“FCA”). Typically, the whistleblower (known as the “relator”) adds a claim under the state analogue to the FCA. In today’s article, this Blog examines a claim under New York’s qui tam statute. State of N.Y. ex rel. Edelweiss Fund, LLC v. JPMorgan Chase & Co. , 2020 N.Y. Slip Op. 50380(U) (Sup. Ct., N.Y. County (Mar. 27, 2020) ( here ). Background Edelweiss involved a claim under the New York False Claims Act (“NYFCA”) by Edelweiss Fund, LLC (“Relator”) on behalf of the State of New York. Relator alleged that defendants — financial institutions and their subsidiaries — collectively engaged in a decade’s-long fraudulent scheme to reset interest rates for certain municipal bonds, known as Variable Rate Demand Obligations (“VRDOs”). New York issues VRDOs to raise money to fund various long-term projects and infrastructure, such as airport, port, transportation, and affordable housing facilities. New York engaged defendants as remarketing agents (“RMAs”) to market and price the VRDOs at the lowest possible interest rates and paid them fees to perform said services. Defendants allegedly represented that they would (i) reset interest rates for VRDOs at the lowest possible rate, and (ii) do so “actively and individually” based on an assessment of each bond’s unique “characteristics.” According to Relator, however, defendants did not perform the services as promised and instead engaged in “robo-resetting” the interest rates by using an “algorithm or some other mechanical basis” to reset the rates by placing the bonds with different characteristics in the same buckets and applying the algorithm without considering the individual bond characteristics, the associated market conditions, or investor demand, and, thus, breached their obligations to set the rate at the lowest possible rate to trade at par. Relator further alleged that defendants “robo-reset” these rates in the manner they did in order to keep the bonds in the hands of their holders and therefore alleviate the need for defendants to remarket the bonds so as to collect tens of millions of dollars in annual remarketing fees without providing the remarketing services for which New York allegedly paid them. In addition, Relator alleged that defendants failed to set the rates at the lowest possible interest rates, as their agreements with the State of New York allegedly required, and instead employed the “robo-resetting” algorithm to collectively impose artificially high interest rates on the VRDOs, which was the opposite of what New York hired them to do. Relator claimed that defendants benefited from keeping the VRDO interest rates artificially high because it caused VRDO investors — who are typically tax-exempt money market funds, which defendants in many instances own or manage — to hold the bonds rather than redeem them at face value plus interest. This “put” option is one of the defining features of a VRDO, and it is the responsibility of the remarketing agent to find another investor when the “put” option has been exercised. If the remarketing agent is unable to find another investor, a liquidity provider (who is often the remarketing agent itself) must step in and purchase the VRDO from the redeeming investor. Thus, Relator alleged, by setting the rates for VRDOs artificially high, defendants assured that the holders of the bond would not exercise the “put” option and defendants would not have to find other investors to purchase the bonds or buy the bond themselves.  The Complaint asserted a single claim against all defendants for violation of the NYFCA (NYSFL § 187 et seq.), alleging that defendants (i) “knowingly present , or cause to be presented a false or fraudulent claim for payment” to a government entity, (ii) knowingly , use , or cause to be made or used, a false record or statement material to a false or fraudulent claims,” and (iii) conspire to commit a violation” (NYSFL §§ 189<1> - ). Defendants jointly moved to dismiss, arguing that the Complaint (1) failed to allege the elements of a NYFCA claim with the requisite particularity, (2) should be dismissed pursuant to the public disclosure bar, and (3) with respect to the conduit bonds, should be dismissed because the State had no payment obligations.  With respect to the public disclosure bar, the NYFCA permits the State of New York to oppose a dismissal on public disclosure grounds (NYSFL § 190<9> ). The Attorney General of the State of New York notified the Court that pursuant to NYSFL § 190 (9)(b), and as required in part by 13 NYCRR § 440.5(b), the State of New York would be exercising its right to object to dismissal of the Complaint on the basis of the public disclosure bar. As a consequence, the Court declined to rule on this aspect of the motion with defendants reserving their rights with respect thereto. M & T also separately moved to dismiss, arguing that it did not submit a “false claim” because virtually all of its VRDOs are conduit bonds in which the costs were paid by private-equity borrowers, and, therefore, no government funds were at risk in these transactions. The Court’s Decision As an initial matter, the Court considered whether Relator satisfied the particularity pleading requirement for a claim under the NYFCA and concluded that Relator met this standard. A claim under the NYFCA ( i.e. , New York State Finance Law §§ 189 (a)-(c)) sounds in fraud and therefore is subject to a heightened pleading standard under CPLR § 3016(b). State of New York ex rel. Seiden v. Utica First Ins. Co. , 96 A.D.3d 67, 72 (1st Dept. 2012). However, in contrast to traditional fraud claims, to satisfy CPLR § 3016(b), a qui tam plaintiff: shall not be required to identify specific claims that result from an alleged source of misconduct, or any specific records or statements used, if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication that one of more violations of <§ 189> are likely to have occurred, and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct to permit the state or local government effectively to investigate and defendants fairly to defend the allegations made. NYSFL § 192(1-a). In other words, a heightened pleading standard applies to a relator’s claims, but as modified by NYSFL § 192(1)(a). As the court in Total Asset Recovery Servs., LLC v. Metlife, Inc. explained, “§ 192 (1-a) does not relieve a qui tam plaintiff of an obligation to plead facts with particularity it only relieves the plaintiff of an obligation to ‘identify specific claims that result from an alleged course of misconduct.’” 2019 WL 1470203, *9 (Sup. Ct., N.Y. County Apr. 3, 2019) (citation omitted).  Turning to the failure to state a claim argument, the Court denied the motions. To state a claim under NYSFL §§ 189 (1)(a)-(c), the relator must allege that each defendant (1) made a statement or claim to the State, (2) which was fraudulent, (3) with knowledge of its falsity, (4) that was material to the State’s payment decision, and (5) that each defendant knew was material. New York ex rel. Khurana v. Spherion Corp. , 246 F. Supp. 3d 995, 998 (S.D.N.Y. 2017).  As discussed above, Relator’s claims were primarily based on its allegations that defendants (i) agreed to set the lowest possible interest rate for the VRDOs, and (ii) misrepresented that they would be doing so individually for each VRDO. The Court held that “the Complaint sufficiently allege that the defendants bucketed VRDOs that had different characteristics and applied the algorithm without taking into account the differences between the VRDOs in the buckets. And, as a a result, the defendants violated their obligations by (i) misrepresenting that they were setting the lowest possible interest rate in remarketing agreements and other documents and by (ii) misrepresenting the performance of their remarketing and letter of credit services.” Slip Op. at *8. The Court rejected defendants’ contention that Relator did not sufficiently allege the falsity of their representations to individually price each VRDO at the lowest possible rate. The Court concluded that “Relator’s forensic analysis of VRDO rates and market data sufficient at this point to withstand a motion to dismiss.” Id. As noted above, Relator compared VRDO rates to interest rates for 7-day AA non-financial commercial paper, a security that it contends is closely analogous to VRDOs. Whereas historically VRDO rates have been significantly lower than commercial paper rates because VRDOs are tax-exempt and commercial paper is not (and, thus, investors expected a lower yield in return for the stability and tax exempt status of VRDOs), Relator’s analysis found that, during the time period examined, average VRDO rates climbed statistically higher than commercial paper rates. Inasmuch as the defendants argue that Relator “cherry-picked” the time period for its analysis and that all rates were informed by the 2008 financial crisis, this is an analysis that is better suited for a motion for summary judgment, following discovery, not a motion to dismiss. Id. “Assuming these allegations to be true,” said the court, “this is sufficient to allege a claim under the NYFCA as, if proven, such allegations would show that the defendants failed to set the lowest possible rates for at least some of these VRDOs.” Id. With regard to the conspiracy claim, the Court held that Relator adequately plead one.  To state a conspiracy claim under the NYFCA, a relator must allege that (1) the defendants conspired with each other to get a false or fraudulent claim allowed or paid by the government, and (2) that one or more of the conspirators performed any act to effect the object of the conspiracy. United States ex rel. Grubea v. Rosicki, Rosicki & Assocs., P.C. , 318 F. Supp. 3d 680, 705 (S.D.N.Y. 2018). The Court found that Relator satisfied these elements: Here, Relator adequately alleges conspiracy on the part of the defendants by pleading that (i) interest rates for hundreds of different VRDOs managed by multiple different defendants all moved in lockstep, (ii) the defendants had a joint response to certain key events such as a sudden VRDO interest rate move following a December 15, 2015 Federal Reserve rate hike, (iii) overlap by defendants in coordinating same (e.g., where one defendant serves as RMA for a VRDO where another defendant is the LOC provider or a significant investor), and (iv) that the defendants used third-party pricing services such as the J.J. Kenny Index to coordinate their rate-setting activity.  Id. at *8-*9. “In addition,” explained the Court, “the Complaint alleges that a ‘senior’ Bank of America employee confirmed that the defendants had met and coordinated their response to an April 2012 Bank of America credit downgrade by agreeing to keep buying Bank of America backed bonds so as to protect Bank of America from an investor run on those bonds which would result in Bank of America having to draw down the letter of credit it committed to supposed the bond.” Id. at *9. The Court concluded that “taken as a whole and assumed as true for purposes of this motion to dismiss,” these allegations were “sufficient to allege that the defendants conspired to artificially create a market for municipal bonds with a higher rate than would otherwise exist.” Id. Finally, the Court held that Relator stated a claim against M & T.  M & T claimed that substantially all its VRDOs were conduit bonds. Conduit bonds are a “subset of municipal bonds used to finance projects by private entities.” E.g. , Department of Revenue of KY v. Davis , 553 U.S. 328, 333, n.2 (2008). While the government is the issuer of the bonds, the actual borrower is a private entity. Thus, it is the conduit borrower that is liable for making debt service payments on the bonds, not the government issuer. The same holds for related fees and interest, which are also generally paid by the private entity borrower. M & T argued that it did not submit a “false claim” because “virtually” all of its VRDOs were conduit bonds in which costs were paid by private-entity borrowers, and not the government. The Court held that “ his argument misses the point.” In the case of conduit VRDOs, New York issues bonds to conduit borrowers (i.e., non governmental entities who advance certain key state interests) to develop various critical infrastructure using tax-exempt financing. Conduit borrowers typically agree to repay the government issuer who pays the interest and principal on the bonds. Importantly, conduit VRDO borrowers obtain funds from New York, and thus, necessarily, some portion of New York’s funds is included in the payments conduit VRDO borrowers made to M & T. Conduit borrowers made payments in response to demands for payment that M & T submitted, which, according to the Complaint, were tainted by false claims and statements. Moreover, under the NYFCA, M & T may be liable for making false claims or statements to an “agent of the state,” which M & T may have done when it submitted invoices for RMA and LOC services to the bond trustees and/or paying agents (see NYSFL §188<1> ). Id. The Court explained that “Relator allege that New York provided the funds to the conduit VRDO borrower and therefore at least some portion of New York’s funds was necessarily included in the payments that the conduit VRDO borrowers made to M & T in response to the allegedly false claims for payment that M & T submitted.” Id. at *10. The Court reasoned that the “purpose of the False Claims Act supports such a ‘broad interpretation.’” Id. (citation omitted). “The fact that, here, New York’s money passed to M & T through private VRDO borrower entities,” said the Court, “does not make the government any less its source.” Id. (internal quotation marks and citation omitted). The Court also denied M & T’s motion to dismiss the conspiracy claim on the same grounds as it did with respect to the other defendants. Additionally, the Court addressed M & T’s argument that there could be no conspiracy because M & T did not actually receive the funds, holding that receipt of the money was “simply irrelevant to the analysis if M & T ha conspired with the other defendants to commit a violation of either NYSFL §§ 189 (1)(a) or (1)(b).” Id. The Court explained that “ ayment by New York to M & T not necessary if M & T colluded with the other defendants to defraud New York by automatically resetting the VRDO rates without regard to their individual characteristics at rates higher than the lowest possible rate and by acting in concert to prop up Bank of America VRDOs, as the Complaint alleges.” Id. (citing Allison Engine Co., Inc. v. United States ex rel. Sanders , 563 U.S. 662 (2008)).  Takeaway Edelweiss shows that “what” and “how” a plaintiff pleads his/her cause of action makes the difference as to whether the court will sustain the complaint. The Edelweiss Fund has filed multiple lawsuits around the country under state false claims acts analogous to the NYFCA, each containing nearly identical allegations to the complaint before Justice Andrew Borrok of the Supreme Court, New York County Commercial Division. As Justice Borrok noted, these courts reached differing conclusions as to the sustainability of its claims.  Edelweiss is notable because of the difference in application of the particularity pleading requirement. As readers of this Blog know, in a fraud action, CPLR § 3016(b) requires the plaintiff to allege 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 the context of a claim under the NYFCA, the standard is modified by relieving the plaintiff of the obligation to “identify specific claims that result from an alleged course of misconduct.” Total Asset Recovery Servs., 2019 WL 1470203, at *9; NYSFL § 192(1)(a).

In an April 20, 2020 on-line video message appearing on the New York Court System website ( https://www.nycourts.gov/ ), Chief Judge DiFiore explained the court system’s efforts to “not only to keep our courts up and running but to gradually and safely expand access to justice for litigants and lawyers across the state.” Judge Fiore reported that as of Monday April 13, 2020, the scope of temporary virtual courts was expanded beyond “essential” and “emergency” matters to enable “judges and staff to get back to work on their pending caseloads of tort, commercial, matrimonial, trusts and estates, criminal, family and other important cases.”  Thus, Judges and staff are scheduling and conferencing cases by skype or telephone and, by so doing, are “resolving outstanding issues, addressing discovery disputes and facilitating a significant number of settlements.”  Impressively, in the first week of expanded virtual operations, Judges and professional staff have: Conferenced and heard nearly 8,000 matters;  Settled or disposed of over 2,600 cases, a third of all matters heard; and  Issued over 1,400 written decisions on motions and other undecided matters, taking advantage of this period to clear our existing backlog of undecided motions.  The Chief Judge has committed to “continue to evaluate and make necessary adjustments to our virtual court model” to “carefully expand virtual access, keeping in mind the special challenges faced by the self-represented and those lacking the technology to participate in a virtual forum.”  The long-term goal, however, is to return to normal operations when “possible and appropriate.” It was noted that the State’s appellate courts “have gone virtual,” and that the Second Department has already presided over virtual arguments.  The other Departments and the Court of Appeals are scheduling or planning such arguments in upcoming sessions. In addition, Court of Appeals Judge Michael Garcia was appointed to lead a “working group” to address the administration of the September bar examination and/or to address contingencies in the event that a bar examination is not feasible.  Such contingencies may include providing “temporary authorization for qualified candidates to engage in the limited practice of law.”  The working group “is also considering possible dispensations with regard to law school instructional requirements and the bar admissions process.”  All such proposals will be considered by the Court of Appeals in the near future and details will be announced. The Court of Appeals is taking such steps as are necessary to keep the administration of justice moving in a forward direction.  This Blog will continue to monitor and report on the New York Court System’s response to the issues created by the Coronavirus Pandemic.

It is well settled, and understood, that “the business and affairs of every corporation are managed by a board of directors.” Stone ex. re. AmSouth Bancorp. v. Ritter , 911 A2d 362 (Del. 2006). By its very nature a derivative litigation “impinges on the managerial freedom” of the corporation’s directors. Id. “Therefore, the right of a stockholder to prosecute a derivative suit is limited to situations where either the stockholder has demanded the directors pursue a corporate claim and the directors have wrongfully refused to do so, or where demand is excused because the directors are incapable of making an impartial decision regarding whether to institute such litigation.” Id. Accordingly, the shareholder plaintiff must “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” Id. Under Delaware law, the factors to be examined in determining whether demand is excused depends on whether the plaintiffs’ complaint concerns affirmative board actions and transactions or a board’s alleged failure to act. Where the plaintiff seeks to challenge affirmative board action, Delaware courts apply the two-prong test set forth in Aronson v. Lewis , 473 A.2d 805, 814 (Del. Ch. 1984), overruled in part on other grounds , Brehm v. Eisner , 746 A.2d 244 (Del. 2000), to assess the futility of a demand. Under this test, demand is excused when there is a reasonable doubt that: (1) the directors are disinterested and independent; or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. Id. Since the test is in the disjunctive, if either prong is satisfied, pre-suit demand is excused. Where the plaintiff alleges board inaction, demand futility can be established by particularized facts creating a reasonable doubt that at the time the complaint was filed, the board could not have properly exercised its independent and disinterested business judgment in responding to the demand. Rales v. Blasband , 634 A.2d 927 (Del. 1993). In Barrientos v. Salmirs , 2020 N.Y. Slip Op. 30942(U) (Sup. Ct., N.Y. County Apr. 13, 2020) ( here ), the Court dismissed a shareholder complaint because Plaintiffs failed to make the required demand on the board of directors and failed to allege facts to show that demand was excused. In doing so, the Court determined that board inaction was at play, despite plaintiffs’ allegation that the Individual Defendants ( i.e. , certain current and former members of ABM’s Board of Directors) made a “conscious” decision not to act, which, Plaintiffs claimed, was “akin to affirmative board action for purposes of determining which standard < i.e. , the aronson test or the rales test> i.e., the aronson test or the rales test> to use.” Slip Op. at *7. Background Nominal defendant ABM Industries, Inc. (“ABM”) is a Delaware corporation with its principal place of business in New York City. ABM provides “janitorial, facilities engineering, parking, and specialized mechanical and electrical technical solutions.” Id. at *2.  ABM allegedly collects and stores highly sensitive private information (“PI”) about its employees, including its former employees. On or about August 1, 2017, ABM discovered that it had incurred a data breach. A phishing attack was successfully executed, resulting in the theft of PI. Plaintiffs alleged that ABM did not notify its employees of the data breach until the week of March 5, 2018, more than seven months later.  ABM suffered another attack in 2018. On or around June 14, 2018, ABM was alerted to suspicious activity related to certain employee email accounts. ABM determined that an unknown actor gained access to certain ABM employee email accounts through another phishing attack. Following an investigation, ABM determined that the unauthorized access occurred between January 8, 2018 and August 7, 2018. Plaintiffs claimed that the 2018 data breach affected approximately 60,000 current and former ABM employees. Plaintiffs commenced the action in September 2018, alleging: (1) breach of fiduciary duty against ABM’s current and former directors (first cause of action); (2) breach of fiduciary duty against ABM’s CEO (second cause of action); and breach of fiduciary duty against ABM’s non-director officers (third cause of action). In particular, in their amended verified complaint, Plaintiffs alleged that the Individual Defendants breached their fiduciary duties to ABM by: (i) failing to implement and enforce a system of effective internal controls and procedures to protect employees’ PI; (ii) failing to exercise their oversight duties by not monitoring ABM’s compliance with internal procedures and federal and state regulations; (iii) storing the PI of employees, former employees and vendors; (iv) failing to have proper cybersecurity safeguards to adequately secure the PI; (v) failing to have a sufficient incident response plan to immediately respond to a data breach; (vi) failing to ensure that ABM notified all potentially affected individuals and entities in a timely manner upon discovering the data breaches; (vii) failing to make adequate public disclosure of the data breaches and related Employees’ Class Action; and (viii) allowing ABM to violate state and federal laws and regulations concerning data privacy. Plaintiffs claimed that, because of the Individual Defendants’ breach of their fiduciary duties, ABM had and will in the future be required to expend significant amounts of money, and that ABM had lost “credibility, reputation and goodwill.” Plaintiffs did not make a demand on the Board to investigate their allegations before commencing the action and did not make a demand before serving the amended verified complaint. Plaintiffs alleged that “demand would be a futile and useless act because the Individual Defendants incapable of making an independent and disinterested decision to institute and vigorously prosecute th action.” Slip Op. at *4-*5. Defendants moved to dismiss on the ground that Plaintiffs lacked standing because they did not make the required demand on the Board and failed to allege facts to show that demand was excused. The Court granted the motion. The Court’s Decision In dismissing the complaint, the Court held that the Rales Test was the appropriate test to apply to determine whether demand was excused. The Court reasoned that even though the Board formed a subcommittee and appointed a Chief Information Officer (“CIO”) to address (among other things) cybersecurity issues, neither were, as Plaintiffs alleged, “adequately prepared for, or responded to, the data breaches.” Such an allegation, observed the Court, “plainly support application of the Rales demand futility standard.” Slip Op. at *8. So too did Plaintiffs’ allegation that the Board failed to ensure adequate and full disclosure of the data breaches in ABM’s public filings. Id. (citing Deckter on Behalf of Bristol–Myers Squibb Co. v. Adreotti , 170 A.D.3d 486, 487 (1st Dept. 2019), quoting Steinberg v. Bearden , 2018 WL 2434558, *8 (Del. Ch. 2018)). Having decided which test to apply, the Court held that Plaintiffs failed to satisfy the Rales Test. Under this test, as noted, where, a plaintiff’s claims are based upon failure of a board of directors to exercise its oversight duties, “ nly a sustained or systematic failure of the board to exercise oversight – such as an utter failure to attempt to assure a reasonable information and reporting system exists – will establish the lack of good faith that is a necessary condition to liability.” In re Caremark Int’l Inc. Derv. Litig , 698 A.2d 959, 971 (Del. Ch. 1996). “ he mere threat of personal liability ... is insufficient to challenge either the independence or disinterestedness of directors.” Deckter , 170 A.D.3d at 487, quoting Rales , 634 A.2d at 934-36. The threat of personal liability must be substantial. Madison Sullivan Partners LLC v. PMG Sullivan Street LLC , 173 A.D.3d 437, 438 (1st Dept. 2019) (plaintiffs must set forth “particularized facts establishing that defendants faced a ‘substantial likelihood’ of personal liability.”).  The Court held that Plaintiffs failed to plead facts showing a “sustained or systematic failure of the board to exercise oversight” with the requisite specificity. Slip Op. at *10. “At most,” said the Court, “they plead facts showing that the Board did not act quickly enough to disclose the data breaches, did not disclose enough about the data breaches, and did not do enough to protect against past and future data breaches.” Id. Such allegations, concluded the Court, did “not amount to the ‘utter failure’ of the Board to respond to the challenges of cybersecurity.” Id. In addition, the Court found the board to be insulated from monetary liability for the breach of the fiduciary duty claims under an exculpation provision in ABM’s restated certificate of incorporation. Id. (citing, among others, 8 Del. C. § 102(b)(7)). Under Delaware law, to survive a motion to dismiss on demand futility grounds made by an independent director protected by an exculpation clause, the plaintiff must plead “facts supporting a rational inference that director harbored self-interest adverse to the stockholders’ interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith.” Id. at *10-*11 (quoting In re Cornerstone Therapeutics, Inc. Stockholder Litig. , 115 A.3d 1173, 1179-80 (Del. 2015) (internal quotation marks and orig’l footnote omitted)). The Court held that “Plaintiffs generically claim that the Board advanced their own self-interest above that of the ABM shareholders because they paid themselves ‘lavishly.’” Id. at *11. They failed, however, “to state specific facts showing that the Board members’ alleged lavish compensation caused them to fail properly to oversee ABM’s cybersecurity.” Id. The Court noted that Plaintiffs did not even “allege that any of the Individual Defendants personally profited from the Board’s alleged failure to oversee ABM’s cybersecurity.” Id. The Court also held that Plaintiffs failed to plead facts sufficient to show that the Board acted with bad faith. Id. The Court explained that Plaintiffs did “not plead any underlying facts showing that the Board took any specific action to misreport or underreport the data breaches. Instead, Plaintiffs broadly allege that ABM’s public statements and disclosures were insufficient or too general, and therefore false and misleading.” Id. at *11-*12. Such allegations lacked the required specificity to withstand a motion to dismiss. Id. at *12. “Likewise,” noted the Court, “Plaintiffs’ allegation that the Board, in bad faith, caused ABM to violate federal securities regulations on disclosure, as well as state privacy laws, impermissibly broad.” Id. The Court explained that Plaintiffs failed to make any “particularized allegations as to what type of violation occurred, or as to which Board Member caused the alleged violations.” Id. The Court concluded that Plaintiffs provided “no particularized facts to support the assertion that a security law violation even occurred, let alone which Board Member acted to cause the violation.” Id. Accordingly, the Court dismissed the complaint with prejudice. Takeaway Barrientos demonstrates that a board’s failure to act is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Asbestos Workers Phila. Pension Fund Asbestos Workers v. Bell , 137 A.D.3d 680, 684 (1st Dept. 2016). One reason for such difficulty is the demand requirement. The cases show that the demand requirement is rigorous. Factual particularity is necessary. As the Court found in Barrientos , Plaintiffs could not meet those requirements.

It has been some time since this Blog examined claims for indemnification and contribution ( See , e.g. , here and here ). In today’s post, we get the opportunity to examine these principles once more through our examination of Allergan Fin., LLC v. Pfizer Inc. , 2020 N.Y. Slip Op. 50422(U) (Sup. Ct. Apr. 13, 2020) ( here ). Allergan involved a claim for indemnification and other related claims arising out of an Asset Purchase Agreement (the “APA”), dated December 17, 2008, by and between Actavis Elizabeth, LLC (“Actavis”) and King Pharmaceuticals, Inc. n/k/a King Pharmaceuticals LLC (“King”), pursuant to which Actavis acquired from King the prescription opioid Kadian®.  A Quick Primer on The Law Generally speaking, indemnity and contribution sort out the degree of culpability of multiple defendants and their responsibility for the payment of damages to the plaintiff. 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). 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.” Id. 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). Where the right to indemnification is based upon a written agreement, the specific language of the contract is paramount to the court’s decision. Roldan v. New York Univ. , 81 A.D.3d 625, 628 (2d Dept. 2011).  Under the well-settled rules of contract interpretation, courts must construe contracts so as to give full meaning and effect to all their material provisions. Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 323 (2007). A contract should not be construed so as to render any portion of it meaningless. Id.   In addition, a contract should be read as a whole and, whenever possible, interpreted to give effect to its general purpose. Id. (citing Matter of Westmoreland Coal Co. v. Entech, Inc. , 100 N.Y.2d 352, 358 (2003)). Therefore, under the foregoing rules, the promise to indemnify should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances. See Roldan , 81 A.D.3d at 628 (citing Hooper Assoc. v. AGS Computers , 74 N.Y.2d 487, 491-492 (1989); 905 5th Assoc., Inc. v. Weintraub , 85 A.D.3d 667, 668 (1st Dept. 2011) (indemnification provisions “must be strictly construed so as to avoid reading unintended duties into them”). The principle of equitable indemnification, also known as common law indemnification, allows a non-culpable party who has been compelled to make a payment to shift the entire burden of loss to the liable party and obtain from that party full reimbursement for its loss. Live Invest, Inc. v. Morgan , 57 Misc. 3d 762 (Sup. Ct., Suffolk County Sept. 7, 2017). “ 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 every one 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.) “ here a party is held liable at least partially because of its own negligence, contribution against other culpable tort-feasors is the only available remedy.” Glaser v. Fortunoff , 71 N.Y.2d 643, 646 (1988).  “ n contribution, the tort-feasors responsible for plaintiffs loss share liability for it …. heir common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss.” Mas , 75 N.Y.2d at 689-690 (internal citation omitted). See also Godoy v. Abamaster of Miami , 302 A.D.2d 57, 61 (2d Dept. 2003) (Contribution is available where two or more tortfeasors combine to cause injury and is determined in accordance with the relative culpability of each party). Under Article 14 of the Civil Practice Law and Rules, “ he ‘critical requirement’ for apportionment by contribution … is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.” Raquet , 90 N.Y.2d at 183 (citations omitted). A claim for contribution generally does not arise until the prime obligation to pay has been established. However, in appropriate circumstances, courts have allowed claims for contribution to go forward on the basis of liability. See Mars Assoc., Inc. v. N.Y. City Educ. Constr. Fund , 126 A.D.2d 178, 192 (1st Dept. 1987); Gorton v. Marmon , 2012 WL 1463416 (Sup. Ct., N.Y. County Apr. 16, 2012). Allergan Finance, LLC v. Pfizer Inc. Background As noted, Allergan concerned a claim for indemnification pursuant to the terms of the APA.  Allergan Finance, LLC (“Allergan”), the successor to Actavis’s rights and obligations under the APA, had been sued in a multidistrict litigation in connection with its marketing of Kadian®. See In re: Natl. Prescription Opiate Litig. , No. 1:17-MD-2804, ECF No. 1201, at *1 (N.D. OH. Dec. 17, 2018) (the “Opioid Lawsuits”).  The primary basis for the allegations against Allergan was the allegedly improper marketing and sale of Kadian®, including in the months and years before Actavis acquired Kadian® in December 2008.  Allergan sought indemnification from Defendants. Under the APA, King agreed to indemnify Actavis and its successors, for, among other things, “the use by or its Affiliates of the Marketing Materials prior to the Closing” and for any third party claims “incurred in connection with, arising out of, or resulting from the ownership and operation of the Purchased Assets or the conduct of the Business prior to the Closing.” Slip Op. at *1-*2.  King also agreed to reimburse Actavis “on a quarterly basis” for the “reasonable and verifiable costs and expenses, including fees and disbursements of counsel” incurred “in connection with any claim,” with a right of refund in the event that King was found not to be obligated to indemnify Actavis.  Defendants rejected any obligation to indemnify Allergan and have not reimbursed Allergan for any of its defense costs, denying that the Opioid Lawsuits involve any pre-2009 conduct (as required under the APA). Consequently, Allergan filed claims against Pfizer, Inc. (“Pfizer”), the successor to King’s obligations, alleging: (1) breach of contract, (2) contractual indemnification, (3) declaratory judgment ( i.e. , that Allergan is entitled to indemnification and reimbursement), (4) equitable indemnification, and (5) contribution. Defendants argued that Allergan’s claims were premature because Allergan had not yet been held to be liable for any pre- or post-closing conduct and, therefore, “it entirely speculative whether Allergen ever be held liable and, if so, what the basis of that liability would be.” Slip Op. at *2. Defendants said that, to date, all Allergan had paid in connection with the Opioid Lawsuits were the costs and legal fees for its defense.  The Court’s Decision The Court held that Defendants were contractually obligated to pay Allergan’s defense costs and to indemnify Allergan for any liability assessed against it in the Opioid Lawsuits. As an initial matter, the Court found that the “Opioid Lawsuits do not concern pre-2008 conduct (the ‘Pre-Closing Conduct’).…” Slip Op. at *4-*5. Although the Opioid Lawsuits alleged that Allergan engaged in deceptive marketing techniques as far back as the 1990s, including through the circulation of Kadian® patient brochures starting in 2003, publications in medical journals regarding Kadian® in or about 2005, and through representations made by sales representatives concerning Kadian® between 2006 and 2008, the Court observed that Allergan and its predecessors did not and could not have committed any of those actions because Actavis did not acquire Kadian® from King until December of 2008. Id. at *5. “Sales and marketing of Kadian® prior to December 2008 was conducted by Pfizer, King and its predecessors and the APA makes clear that they ‘remain solely responsible for’ such Pre-Closing Conduct.” Id. The Court determined that Defendants’ reading of the APA was “limited”. Id.   The Court explained that Defendants’ reading of the APA ( i.e. , that Allergan was not entitled to its costs and expenses unless and until its liability was “adjudicated in the underlying opioid cases”), was “plainly at odds with the other provisions of that contract. To wit, …, the term ‘Indemnified Party’ is defined as ‘ he Person entitled to indemnification under this Agreement.’” Id. The Court further explained that “the provision not require an adverse determination as a precondition to the right to receive indemnification. And, significantly, Section 12.02(e) entitle Allergan to receive reimbursement on a quarterly basis — i.e., now— and, provides that defendants may obtain a refund ‘in the event’ that the Defendants are ‘ultimately held not to be obligated to indemnify’ Allergan.” Id. (orig’l emphasis). “The provision simply makes no sense,” observed the Court, “if the Defendants are not obligated to provide defense costs until liability is adjudicated.” Id. (orig’l emphasis). Therefore, “ o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Id. “Put another way,” concluded the Court, “Section 12.02(e) contemplates this exact situation where there is a dispute as to whether indemnification will ultimately be required and provides for reimbursement of costs and expenses on a quarterly basis in the interim, with the possibility of a refund at a future time .” Id. (orig’l emphasis). As a result, said the Court, “a party is not required to wait until its liability is established in an underlying action before it can bring a declaratory action under New York law.” Id. at *6. (citing Hudson Ins. Co. v. AK Const., LLC , 92 AD3d 521 <1st dept 2012> ). This was especially true in Allergan , where “a live and justiciable controversy exists as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id. Further, the Court held that the foregoing analysis was “true for other provisions of the APA, such as Section 12.02(d)(i), which allow Defendants to ‘assume the defense of any Third Party Claim.’” Id.   (orig’l emphasis). Outside of the insurance context, where the duty to defend is exceedingly broad and distinct from the duty to indemnify, contractual defense obligations are generally treated like any other contractual provision. See Viacom Inc. v. Philips Electronics N. Am. Corp. , 16 A.D.3d 215 (1st Dept. 2005); Mercolla v. Manmall, LLC , 2008 WL 4699066 (Sup. Ct., N.Y. County Oct. 14, 2008) (“Although, as often proclaimed, the duty to defend is broader than the duty to indemnify, this rule is generally applicable to insurers”). The Court concluded that, as with the analysis of the APA for indemnification purposes, this provision “would also be rendered superfluous by the Defendants’ narrow reading of the term ‘Indemnified Party’” Id. The Court dismissed Allergan’s claim for equitable indemnification because the obligations that Defendants undertook with respect to Kadian® were expressly defined in the APA. Id. Under New York law, a valid and enforceable contract generally precludes recovery in quasi contract for losses arising from the same subject matter. Id. (citing Clark-Fitzpatrick, Inc. v. Long Island R. Co., 70 N.Y.2d 382 (1987). The Court concluded that “Allergan cannot circumvent the APA by proceeding under an equitable theory of indemnification to recover more than it would otherwise be entitled to under the APA.” Id. (citing CSC Scientific Co., Inc. v. Manorcare Health Serv., Inc. , 867 F. Supp. 2d 368 (S.D.N.Y. 2011)). Nevertheless, the Court gave Allergan 30 days to replead the claim if it could do so on a non-contractual basis. Id. Finally, the Court denied the motion to dismiss the contribution claim. Defendants argued that the claim was premature because no finding of responsibility had been made in the Opioid Lawsuits. Although contribution generally does not arise until the prime obligation to pay has been established, in appropriate circumstances, such as in Allergan , “courts have allowed claims for contribution to go forward on the basis of liability.” Id. (citations omitted). “This is particularly compelling here,” observed the Court, “because it is not at all clear that this action is wholly independent from the Opioid Lawsuits. In fact, there are likely to be significant issues of fact development and liability that may well be determined in the Opioid Lawsuits that might effect the Defendants’ obligations in this action.” Id. Takeaway Contractual indemnification “requires a clear expression or implication, from the language and purpose of the agreement as well as the surrounding facts and circumstances, of an intention to indemnify.” Martins v. Little 40 Worth Assocs., Inc. , 72 A.D.3d 483, 484 (1st Dept. 2010) (quoting Drzewinski v. Atlantic Scaffold & Ladder Co. , 70 N.Y.2d 774, 777 (1987)). Customary rules of contract interpretation are used to determine an intent to indemnify. In Allergan , the Court found that the language of the APA, when read as a whole, embodied such an expression of intent. As the Court noted, “ o interpret the APA as narrowly as the Defendants urge would render all of these heavily negotiated and carefully constructed provisions superfluous and read them out of the APA.” Slip Op. at *5.  Allergan is also notable for its holding concerning the ripeness of a declaratory judgment claim for contractual indemnification. In a typical case, it is premature to assert such a claim until there is a finding of liability. In these cases, liability is contingent upon “future events that may not occur as anticipated, or indeed may not occur at all.” Dresser-Rand Co. v. Ingersoll Rand Co. , 2015 WL 4254033 (S.D.N.Y. July 14, 2015). In Allergan , however, the issue of indemnification for defense costs was not contingent on any future event. In fact, as the Court noted, the APA provided “for a refund of advanced defense costs to the Indemnifying Party in the event that indemnification ultimately not found to be required.” Slip Op. at *5. Thus, there was “a live and justiciable controversy … as to whether the Defendants must provide Allergan with its defense costs in the Opioid Lawsuits.” Id. at *6.

As baseball fans know, Major League Baseball (“MLB”) was rocked by the sign-stealing scandal involving the Houston Astros and, to a somewhat lesser extent, the Boston Red Sox. Not only did opposing players feel cheated by the Astros’ conduct – just ask any player on the Yankees how he feels about losing to the Astros in the playoffs, but so did the fans. Indeed, during spring training (before the league shutdown because of the COVID-19 pandemic), fans could be heard booing and jeering certain Astros for no reason other than their participation in the scandal. Some fans found a different outlet for their anger – the courts. These fans, also participants in daily fantasy baseball contests hosted by DraftKings Inc. (“DraftKings”), sued Major League Baseball, MLB Advanced Media, L.P. (MLB’s marketing entity), the Houston Astros, LLC, and the Boston Red Sox Baseball Club, L.P., in connection their efforts to conceal the sign-stealing scandal from sports bettors who wagered on fantasy baseball. See Olson v. Major League Baseball et al. , Case No. 20-cv-632 (JSR) (S.D.N.Y.) ( here ). mlb officially determined and announced in a january 2020 press release by mlb commissioner robert manfred (“manfred”) that the astros engaged in such electronic sign stealing in the 2017 and 2018 seasons.> mlb officially determined and announced in a january 2020 press release by mlb commissioner robert manfred (“manfred”) that the astros engaged in such electronic sign stealing in the 2017 and 2018 seasons.> In Olson , plaintiffs alleged that defendants knew of the sign-stealing scheme but did nothing to stop it in order to protect their financial interest and investment in DraftKings. Plaintiffs further alleged that defendants made various false statements and omissions designed to conceal the fact of the sign stealing in order to deceive plaintiffs into believing that DraftKings’s daily fantasy sports baseball (“MLB DFS”) competitions were a game of skill based on fair and legitimate player performance statistics. Such deception, plaintiffs claimed, was intended to induce them and other DraftKings players to play MLB DFS, which they would not have done had they “known that the honesty of the player performance statistics on which wagers were based and the results of wagers were determined was compromised by MLB teams’ and players’ electronic sign stealing.” Plaintiffs brought a nationwide class action alleging fraud, negligence, and unjust enrichment, well as violations of state consumer protection statutes. In a 32-page decision by Judge Jed Rakoff, the Court rejected plaintiffs’ claims that the league had committed fraud in addition to other torts. Judge Rakoff found that most of the allegedly false statements were not in fact false. And, as to the statements that might have been false or misleading, which, according to the Court, were close calls, Judge Rakoff found that plaintiffs failed to adequately allege that they relied on those statements when deciding to participate in the fantasy baseball competitions.  A Closer Look at The Court’s Decision As readers of this Blog know, to state a claim for common law fraud, a plaintiff must allege (1) a material misrepresentation or omission of fact; (2) that the defendant knew to be false; (3) that the defendant made with the intent to defraud; (4) upon which the plaintiff reasonably relied; and (5) that caused injury to the plaintiff. The failure to allege any of the foregoing elements will result in dismissal. With regard to the falsity element, plaintiffs based their claims on defendants’ affirmative misrepresentations ( i.e. , misrepresentations about fantasy baseball and maintaining the integrity and honesty of the game), as well as defendants’ omissions ( i.e. , failing to disclose the existence of the sign-stealing schemes). Slip Op. at 16. Affirmative Misrepresentations Plaintiffs alleged that defendants, through public statements by MLB Commissioner Manfred, repeatedly misrepresented that defendants were committed to “making sure that appropriate safeguards were in place to insure that fantasy baseball wagering competitions were fair.” Id. at 11. “But these are the words of the complaint, not of Commisioner Manfred,” observed the Court. Id. at 9. The Court found that “plaintiffs fail to allege actual statements by Manfred that plausibly support the existence of such a misrepresentation.” Id. In fact, noted the Court, “the actual statements by Manfred particularized in the complaint directed to his commitment to preventing gambling from impacting the integrity of live action baseball games and his concerns about whether fantasy organizations were properly self-regulating.” Id. at 9-10. “None of these statements,” concluded the Court, “plausibly indicate defendants’ commitment to safeguarding fantasy baseball from MLB rules violations.” Id. at 10. The Court rejected plaintiffs’ attempt to cure the foregoing deficiency by pointing to a statement defendants allegedly made that fantasy baseball is a “game of skill”. Id. “Even drawing all inferences in plaintiffs’ favor,” the Court held that “this statement cannot support claim that the defendants repeatedly ‘promoted and induced participation in contests as games of skill.’” Id. (citation omitted). “Taken in context,” explained the Court, “the statement simply addresse Manfred’s lay opinion that fantasy baseball contests qualify as “games of skill” under existing federal law relating to gambling.” Id. Thus, concluded the Court, “Plaintiffs have … failed to allege that the defendants made any misrepresentations about fantasy baseball contests themselves.” Id. at 10-11. Plaintiffs also alleged that Manfred, on behalf of all defendants, falsely represented “that maintaining the integrity and honesty of the game of baseball was MLB’s most important priority.” Id. at 11. However, said the Court, plaintiffs failed “to plausibly allege that these statements were false.” Id. The Court explained that plaintiffs undermined the strength of their assertion by identifying various investigations undertaken by MLB. Id. “More importantly,” noted the Court, “even accepting as true plaintiffs’ contention that defendants inadequately investigated player misconduct, such a fact is not inconsistent with a ‘commitment’ to integrity.” Id. at 11-12. The Court noted that plaintiffs did allege “a few particularized statements” that each defendant made “that are plausibly false.” Id. at 12. These misrepresentations included statements by (a) Astros President of Baseball Operations and General Manager, Jeff Luhnow, and Astros Field Manager A.J. Hinch denying that the Astros were involved in any sign stealing, even though, both allegedly knew of the sign stealing at the time they made the statements; (b) Manfred claiming to have performed a “thorough investigation” of reports that the Astros had sent an individual to take pictures of an opponent’s dugout for purposes of sign stealing, when it later became clear they were guilty of wrongdoing; and (c) the Red Sox and the Astros stating that they would adhere to MLB’s rules and regulations when they agreed to the Major League Baseball Constitution. Id. at 12-13.  Though plaintiffs pleaded some falsity, albeit some of which Judge Rakoff considered to be “a bit of a stretch,” those misrepresentations could not support plaintiffs’ fraud claims because plaintiffs failed to adequately allege reasonable reliance on those statements. Id. at 14 (citing Ramiro Aviles v. S & P Glob., Inc. , 380 F. Supp. 3d 221, 291 (S.D.N.Y. 2019) (plaintiff “must allege with particularity that it actually relied upon the supposed misstatements”) (quoting In re Bear Stearns Companies, Inc. Sec., Derivative & ERISA Litig. , 995 F. Supp. 2d 291, 312 (S.D.N.Y. 2014)). See also Fed. R. Civ. P. 9(b) (providing that “a party must state with particularity the circumstances constituting fraud”). The complaint did not “even allege that the plaintiffs ‘saw, read, or otherwise noticed’ any of the few actionable misrepresentations noted above, and thus completely fail to meet this standard,” said the Court. Id. at 15 (quoting In re Fyre Festival Litig. , 399 F. Supp. 3d 203, 217 (S.D.N.Y. 2019) (finding that such a failure does not meet even the general pleading requirements of Fed. R. Civ. P. 8(a)). Apart from the heightened pleading requirements, the Court found the “complaint’s generalized allegations of reliance” to be insufficient to support plaintiffs’ fraud claims. Slip Op. at 15-16. Plaintiffs claimed that they would not have entered DraftKings’ MLB DFS contests but for defendants’ representations that fantasy baseball contests were games of skill, the integrity of which defendants would ensure by protecting the integrity of major league baseball. The Court held this theory of reliance was divorced from the allegations in the complaint, noting that “no such specific representations concerning fantasy baseball actually set forth in the complaint.” Id. at 16.  “Absent such a misrepresentation,” concluded the Court, “plaintiffs’ generalized theory of reliance must fall.” Id. Misrepresentation by Omission Under this theory, which plaintiffs asserted as an alternative to their theory of affirmative misrepresentations, plaintiffs claimed that they were deceived by defendants because they failed to disclose the existence of the sign-stealing scheme, thereby making “the statistics on which the MLB DFS contests were based … illegitimate and unreliable.” Id. at 16. The problem with this theory, said the Court, was plaintiffs’ failure to allege a duty to disclose the true facts. Id. at 16-17 (citing, inter alia , Adams v. Nissan N. Am., Inc. , 395 F. Supp. 16 3d 838, 849 (S.D. Tex. 2018)).  The Court rejected plaintiffs’ attempt to “manufacture such a theory”. Id. at 17. The Court explained that Section 551 of the Restatement of Torts, on which the theory was based, was inapplicable “on its face” because “it applie only between “ ne party to a business transaction” and “the other.” Id. (noting “ he plain language of Section 551 thus appears to contemplate imposing a duty to disclose only in the context of a business transaction”) (citing In re Rumsey Land Co., LLC , 944 F.3d 1259, 1273 (10th Cir. 2019) (“The disclosure duties described in § 551(2)(a)-(e) apply only to ‘part to a business transaction.’”)). “Because plaintiffs have not alleged the existence of any transaction -- or any other comparable business relationship -- between themselves and the defendants,” concluded the Court, “the Restatement does not support imposing a duty to disclose here.” Id. at 18. Aside from the foregoing, the Court found that there were no facts on which to base a finding that the relationship between the parties was so close as to warrant imposing a duty on defendants. Defendants did not make misrepresentations “specifically designed for the plaintiffs’ use in deciding whether to” participate in the DraftKings’ MLB DFS contests, instead, noted Judge Rakoff, “defendants made representations to the public at large unrelated to the fantasy baseball transaction plaintiffs entered.”  Id. at 18-19. The Court also rejected plaintiffs’ attempt to demonstrate the existence of a duty through a purported joint venture between DraftKings (with whom plaintiffs had a relationship) and MLB. Id. Aside from not being pleaded, the theory failed because the essential elements of a joint venture were lacking. Id. at 18-19. In sum, the Court held that plaintiffs failed to offer any “basis for imposing a duty to disclose on any of the defendants.” Id. at 21.  “As such,” continued the Court, “they have failed to plead any actionable omission by the defendants that could give rise to a fraudulent misrepresentation claim.” Id. “Because plaintiffs’ affirmative misrepresentation claims also fail,” concluded the Court, “plaintiffs’ common law fraud claims against all defendants must be dismissed.” Id. Takeaway As this Blog has noted in previous posts, every element of a fraud claim must be satisfied to withstand a motion to dismiss. While many of our posts have focused on the reliance element of a fraud claim, Olson shows that plaintiffs can get tripped up on the falsity element as well. In Olson , this meant both affirmative misrepresentations and misrepresentations by omission. And, as to the latter, the Court’s decision illustrates the difficulty a plaintiff encounters in trying to establish a duty to disclose in the absence of statements by the defendant speaking directly to the plaintiff on the subject, a fiduciary relationship between the plaintiff and defendant, and “special facts” about the matter known to the defendant but not the plaintiff. here.=">here."> Because the Olson plaintiffs failed to state a claim upon which relief could be granted, the Court dismissed the complaint with prejudice, even though Judge Rakoff noted that a few of the identified “deficiencies might conceivably be cured by giving plaintiffs another chance to amend their already amended complaint.” It will be interesting to see if plaintiffs appeal the decision to the Second Circuit. As baseball fans, and students of fraud actions, this Blog will continue to monitor the action.

Regulators and enforcement authorities have often expressed concerns about the revenue recognition practices of corporate entities and those who implement them. Indeed, improper revenue recognition is one of the most common accounting errors pursued by the Securities and Exchange Commission (“SEC” or “Commission”).  To properly recognize revenue, the revenue must be realized and earned. Under generally accepted accounting principles, revenue may be recognized when all the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of the product has occurred or services have been rendered, (3) the seller’s fee or price is fixed or determinable, and (4) collectibility is reasonably assured. See SEC Staff Accounting Bulletin No. 104, 17 C.F.R. Part 211 (2003) (originally issued in 1999) ( here ). Improper revenue recognition practices come in many shapes and sizes. Some of the more representative forms of improper revenue recognition include: (1) reporting fictitious sales through, among other mechanisms, the use of false sales documents, side agreements, and senior management overrides and adjustments; (2) reporting revenue from “round trip” transactions ( i.e. , a series of transactions between companies that increase the revenue of the companies involved but, in the end, do not provide any economic benefit to either company), barter arrangements ( i.e. , the exchange of goods or services between companies) or swaps; (3) “channel stuffing” by using price discounts, extended payment terms or other concessions reflected in undisclosed oral or written side agreements that induce customers to purchase goods they have an unconditional right to return at a later date; (4) “bill and hold” transactions wherein revenue is recognized from a sales transaction that is billed but the goods are not shipped; (5) recognizing revenue for transactions in which there are material contingencies associated with the transaction that are not resolved by the close of the reporting period; and (6) recognizing revenue when the goods or services have not been delivered, or where delivery is not complete, or where delivery has not been accepted by the customer. See Recent Enforcement Actions Involving Revenue Recognition Fraud , PLI Current: The Journal of PLI Press, Vol. 4, No. 1, 2020 ( here ) (citing Fictitious Revenues, Revenue-Related Financial Statement Fraud (2014-2015 AICPA), slideshare ( here ), and Understanding Fraud and Our Responsibilities , presented by Jason Lundell ( here )).  On April 8, 2020, the SEC announced that it charged three former executives of Ironclad Performance Wear Corp. (“Ironclad”) with fraud for allegedly inflating the company’s revenues through a series of manipulative and deceptive accounting gimmicks. Ironclad’s former Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) agreed to settle the Commission’s claims. Based in Farmers Branch, Texas, Ironclad manufactured high-performance gloves for construction, manufacturing, oil, gas, and automotive work. In February 2014, Ironclad hired Jeffrey D. Cordes (“Cordes”) to serve as its CEO. By mid-2014, Cordes brought in William M. Aisenberg (“Aisenberg”) to serve as CFO and Thomas J. Felton (“Felton”) to serve as Senior Vice President of Supply Chain.  According to the SEC’s complaint ( here ), prior to joining Ironclad, the individual defendants worked together at a private company that sold sporting apparel. Cordes, Aisenberg, and Felton served as Chief Operating Officer, Chief Financial Officer, and Chief Administrative Officer, respectively. That company was acquired and, in August 2014, the acquiring company filed a civil lawsuit against Cordes, Aisenberg, and other associated people and entities, alleging that, among other things, they orchestrated a scheme to inflate the value of certain inventory by staging sham sales and re-purchasing the products at inflated prices. The parties settled the case in 2015. From at least December 2015 through June 2017 (the “Relevant Period”), alleged the SEC, Cordes, Aisenberg, and Felton falsely inflated Ironclad’s revenues by, among other things, (i) recognizing revenue in the quarter before it was earned and (ii) recognizing revenue that was never earned because the products: (a) were never shipped to, or paid for, by a customer; (b) were exchanged for old products; (c) were cancelled or refused by customers; and/or (d) were never ordered by a customer, including booking nearly $1 million in revenues from a single client for gloves the client never bought, and that Ironclad never shipped. The SEC further alleged that these defendants took affirmative steps to hide their conduct by, among other things, moving products to a warehouse across the street, delaying moving returned product back into inventory, shipping product to different clients, and altering documents, which inflated the quarterly revenues Ironclad publicly reported during the Relevant Period by as much as 24 percent. The alleged improper revenue recognition was reported to the company by an anonymous source during the second quarter of 2017. In response, Ironclad’s audit committee engaged the company’s outside counsel to review the allegations, and a committee of independent directors later retained an independent law firm to oversee an internal investigation into accounting irregularities. On July 6, 2017, Ironclad announced in a Form 8-K that investors should no longer rely on the company’s financial statements as of and for the fiscal years ended December 31, 2016 and 2015, and as of fiscal quarters ended March 31, 2017 and March 31, 2016, June 30, 2016, and September 30, 2016. The company also announced that Cordes and Aisenberg resigned from their positions with the company. Felton was terminated the following week by Ironclad’s new management. On September 8, 2017, Ironclad and Ironclad Performance Wear Corp. California (“ICPW California”), a wholly owned subsidiary of Ironclad and the entity through which all Ironclad-related operations were conducted, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Later that month, Ironclad’s auditor resigned effective September 22, 2017, noting material weaknesses in Ironclad’s tone at the top, entity-level controls, and revenue recognition. On November 14, 2017, Ironclad and ICPW California completed a sale of substantially all of their assets. The companies also filed a plan of liquidation, which was approved by the United States Bankruptcy Court for the Central District of California and became effective on February 28, 2018.  The SEC filed its complaint in the U.S. District Court for the Northern District of Texas. The Commission alleged that Cordes, Aisenberg, and Felton violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5(a) and 10b-5(c) promulgated thereunder, or in the alternative that Felton aided and abetted these violations by Cordes and Aisenberg. The complaint further alleged that Cordes and Aisenberg violated Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. The complaint also charged Cordes, Aisenberg, and Felton with violating the reporting, books and records, and internal accounting control provisions of Sections 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder, and Cordes and Aisenberg with violating Section 13(b)(2)(B) of the Exchange Act and Rule 13a-14 thereunder. Without admitting or denying the allegations, Cordes and Aisenberg consented to the entry of final judgments that imposed permanent injunctions and officer and director bars and required each to pay a $173,437 civil penalty. The settlements are subject to court approval. The SEC’s litigation against Felton remains ongoing. See Lit. Rel. No. 24792 (April 8, 2020) ( here ).

Too often, a plaintiff claiming breach of contract fails to identify the provision(s) of the contract alleged to have been breached, let alone that the fact that a contract was formed in the first place. While this seems elementary, the law reporters are brimming with cases where the plaintiff failed to do the foregoing. Indeed, this Blog recently wrote about case in which the plaintiff failed to identify the provision of the contract alleged to have been breached. ( Here .) In today’s post, we examine two breach of contract cases involving contract formation ( Drone USA, Inc. v. Antonelos , 2020 N.Y. Slip Op. 30907(U) (Sup. Ct., N.Y. County Apr. 5, 2020) ( here ) and the failure to identify the provision(s) of the contract alleged to have been breached ( Icon DE Holdings, LLC v. Mondani Handbags & Accessories, Inc. , 2020 N.Y. Slip Op. 30904(U) (Sup. Ct., N.Y. County Apr. 2, 2020) ( here ). Applicable Principles of Law 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. , Furia v. Furia , 116 A.D.2d 694 (2d Dept. 1986). All the elements must be pleaded in order to avoid dismissal. See Bonamii v. Straight Arrow Publs. , 133 A.D.2d 585 (1st Dept. 1987). A cause of action for breach of contract will be dismissed if it fails to allege the breach of a specific contractual provision. E.g. , Kraus v. Visa Intl. Serv. Assn. , 304 A.D.2d 408 (1st Dept. 2003); Lebow v. Kakalios , 156 A.D.2d 301 (1st Dept. 1989).  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).  Drone USA, Inc. v. Antonelos Drone involved the enforcement of a settlement agreement. On July 10, 2016, plaintiff, Drone USA, Inc. (“Drone”), and Paulo Ferro (“Ferro”) entered into an Employment Agreement (the “Agreement”), pursuant to which Drone hired Ferro as its Chief Strategy Officer. Under the Agreement, Ferro was to serve on Drone’s board of directors and receive an annual base salary of $400,000, in addition to a $100,000 signing bonus, and stocks. The Agreement provided for a three-year term of employment. Prior to the execution of the Agreement, but around the same time, defendant, Dennis Antonelos (“Antonelos”), Drone’s former Chief Financial Officer and director, received the option to purchase 10 million additional shares of Drone stock. After exercising that option, Antonelos contacted plaintiff, Michael Bannon (“Bannon”), Drone’s President and Chief Executive Officer, and told him to hire Ferro. To induce Ferro to accept the offer, Antonelos and Bannon personally guaranteed Drone’s payment and performance obligations to Ferro for two years. In pertinent part, the “Corporate Guarantee” that Antonelos and Bannon executed stated that they “personally and unconditionally guarantee and promise to pay or perform any and all obligations listed above for two full years” and that they “will share the personal guarantee 50-50.” Drone unconditionally guaranteed and promised “to pay or perform any and all obligation listed above for the remaining 3rd year.” When Ferro cashed in his stock, the personal guarantees would be reduced “dollar for dollar.” On July 7, 2017, Drone terminated Ferro’s employment “for cause.” Drone claimed that Ferro refused to disclose the identities of the customers he had worked with during his employment. Ferro said that the identities and details of those customers belonged to him, and not to Drone.  On July 10, 2017, Antonelos resigned from the board of directors. On July 12, 2017, Drone, Bannon, and TCA Global Credit Master Fund, LP (“TCA”), a hedge fund that provided Drone with financing, sued Ferro in California District Court (the “California Action”). On July 31, 2017, Ferro filed an answer and counterclaims. Ferro denied working against Drone’s interests. He said that the Company did not terminate him “for cause.” Instead, Ferro argued that Drone terminated him because he had refused to take a pay cut on Bannon’s insistence after Bannon failed to obtain outside investments, and, alternatively, had to take out interest loans from TCA. Ferro asserted counterclaims for breach of contract and intentional interference of the Agreement. On November 27, 2018, Drone, Bannon, and Ferro settled the California Action for $600,000.00. Bannon paid Ferro $299,999.99. The balance of the sum was owed in monthly installments, through December 2019. Despite demands for payment, Antonelos refused to pay any portion of the settlement amount under the personal guarantee. On February 11, 2019, Drone and Bannon brought action in New York Supreme Court for breach of contract against Antonelos for $300,000.00 – the remaining portion of the California Action settlement sum.  On March 28, 2019, Antonelos filed a motion to dismiss the complaint. On April 10, 2019, plaintiffs filed an amended complaint, rendering that motion moot. On April 29, 2019, Antonelos filed a motion to dismiss the first amended complaint. He argued that the “Corporate Guarantee” failed to specify consideration, or the nature of Antonelos’s obligations in writing, and was, therefore, unenforceable. The Court rejected defendant’s argument, holding that it “misses the mark.” Slip Op. at *3. The Court explained that the guarantee, which “plaintiff and defendant both signed” and which required Antonelos and Bannon to “share the personal guarantee 50-50,” constituted “a contract in which defendant must split the costs paid under the guarantee.” Id. The Court rejected the notion that the Agreement lacked any consideration, holding that the “consideration lies in many things, including the benefits of Ferro’s work or avoiding a lawsuit.” Id. Icon DE Holdings, LLC v. Mondani Handbags & Accessories, Inc. Icon arose out of a contractual relationship between Icon DE Holdings, LLC (“plaintiff” or “Icon DE Holdings”) and Mondani Handbags and Accessories Inc. (“defendant” or “Mondani”). Around August 2007, Icon DE Holdings’ affiliate, IP Holdings LLC (“IP Holdings”), entered into a Handbag Agreement with Mondani (the “Agreement”). Pursuant to the Agreement, IP Holdings, which owned all right, title and interest in and to the trademark London Fog and Tower Design and certain variations thereof (the “Licensed Mark”), exclusively licensed the Licensed Mark to Mondani for use in connection with the design, manufacture, sale, marketing distribution, advertising and promotion of Handbags and Small Leather Goods in a specified geographic area for a specified period of time. The Agreement was subsequently amended in December 2010 (“First Amendment”), December 2016 (“Second Amendment”), and May 2018 (“Third Amendment”). Following the execution of the Third Amendment, effective June 1, 2018, IP Holdings assigned the Agreement, as amended, and all rights and remedies thereunder, including the exclusive right to enforce the Agreement and its terms against Mondani, to Icon DE Holdings. Plaintiff brought a breach of contract action against Mondani, alleging that Mondani was, and is, required to pay to Icon DE Holdings certain royalties under the Agreement. Plaintiff notified Mondani of its alleged default on March 6, 2019 and terminated the Agreement on June 24, 2019. Plaintiff sought $474,000 in damages, plus costs related to the prosecution of the action.  On October 28, 2019, defendant Mondani filed its answer and counterclaim. Plaintiff moved to dismiss defendant’s counterclaim. The Court granted plaintiff’s motion because the counterclaim as “currently stated … lack specificity.” Slip Op. at *2. The Court explained that dismissal was appropriate because “ he Counterclaim not indicate which specific provisions of the Agreement and/or Amendments plaintiff purportedly violated, nor it provide dates of the alleged conduct.” Id. However, because defendant attempted “to supplement its pleadings with an affidavit based on personal knowledge,” the Court granted defendant leave to replead for “clarity” purposes, directing defendant to “identify[ ] specific provisions of the Agreement and/or Amendments plaintiff allegedly breached with dates and details such that the Court make a determination on the merits.” Id. at *3. Takeaway In claiming a breach of contract ( i.e. , enforcing or attempting to enforce a contract), the first step for a plaintiff is to plead the existence of a valid contract. In that regard, the plaintiff must demonstrate that the parties created a contract. Drone highlights this issue and shows that each element of contract formation must be pleaded. The next step for the plaintiff is to identify the specific terms of the contract that the defendant is alleged to have breached. As Icon DE Holdings shows, general allegations that the contract has been breached will not suffice. Kraus v. Visa Int’l Serv. Assoc. , 304 A.D.2d 408 (1st Dept. 2003).

In today’s Fraud Notes, we examine two cases decided by the Appellate Division, First Department: Knox, LLC v. Lakian , 2020 N.Y. Slip Op. 02255 (1st Dept. Apr. 9, 2020) ( here ), and WCapital Invs. LLC v CWCapital Cobalt VR Ltd. , 2020 N.Y. Slip Op. 02240 (1st Dept. Apr. 9, 2020) ( here ). Knox concerned the justifiable reliance element of a fraud claim and WCapital Invs. concerned the damages element of a fraud claim.  Hints of Falsity New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations made during business acquisitions by investigating the details of the transactions and the businesses they are acquiring. See , e.g. , Abrahami v. UPC Constr. Co. , 224 A.D.2d 231, 234 (1st Dept. 1996) (sophisticated businessmen had a duty to exercise ordinary diligence and conduct an independent appraisal of the risk they were assuming). When the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. Banque Franco-Hellenique de Commerce Intl. et Mar., S.A. v. Christophides , 106 F.3d 22, 27 (2d Cir. 1997). It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy. Keywell Corp. v. Weinstein , 33 F.3d 159, 164 (2d Cir. 1994). When a party fails to make further inquiry or insert appropriate language in the agreement for its protection, it has willingly assumed the business risk that the facts may not be as represented. Rodas v. Manitaras , 159 A.D.2d 341, 343 (1st Dept. 1990). Under those circumstances, a claim for fraudulent inducement will be dismissed. In Knox, LLC v. Lakian , 2020 N.Y. Slip Op. 02255 (1st Dept. Apr. 9, 2020) ( here ), the Appellate Division, First Department affirmed the entry judgment against the defendants on the grounds that, inter alia , the plaintiffs justifiably relied on the defendants’ misrepresentations.  Plaintiffs sought to recover the investments they made in nonparty Capital L Group, LLC (“Capital L”), which were diverted to personal bank accounts held by Capital L’s chief executive officer, defendant John R. Lakian (“Lakian”). Plaintiffs claimed that they were fraudulently induced into making the investments and sought summary judgment on that cause of action. Defendants contended that an issue of fact existed as to whether plaintiffs’ reliance on the statements made to them by Lakian was justified. In that regard, Defendants argued that nonparty, Donald J. Whelley (“Whelley”), the sole manager and member of plaintiff, DJW Advisors, LLC, expressed concerns about Capital L’s accounting systems and back-office operations, but ignored those “red flags” in deciding to make the investments. Therefore, Defendants said, plaintiffs were responsible for that risk. The Court rejected this argument, finding that “Whelley’s concerns were unrelated to the eventual fraudulent diversion of the funds.” Slip Op. at *1. As such, Defendants “failed to demonstrate that Whelley ‘ha hints of falsity’ and therefore had a duty to probe further.” Id . (citation omitted). The Court rejected Defendants’ contention that Whelley should have inspected a full set of financial documents because “they failed to show that if he had done so he would have been alerted to the potential fraudulent diversion of funds.” Id . (citing UST Private Equity Invs. Fund v. Salomon Smith Barney , 288 A.D.2d 87, 88 (1st Dept. 2001). The Court concluded that Defendants’ “references to the ‘tangled accounts’ and ‘problematic transactions’ that Whelley would have seen had he reviewed unspecified documents too vague to raise an issue of fact.” Id . The Court also rejected Defendants’ contention that Whelley’s expressed concerns about Capital L’s accounting systems and back-office operations “were in fact concerns about where Capital L’s money was going.” Id .  The Court observed that Whelley was certain that Capital L’s record keeping and back-office problems had been solved by its acquisition of Capital Guardian Holding LLC. Id . “If Whelley had been concerned about a potential fraudulent diversion of funds,” reasoned the Court, “his concern would not have been alleviated by the acquisition of a new company.” Id . Finally, the Court rejected Defendants’ contention that Whelley should have insisted on language in the subscription agreement to ensure that the investment would be used solely to acquire registered investment advisors.” Id . The Court explained that “the fraudulent inducement claim based not on defendants’ use of plaintiffs’ funds for general business operations instead of the acquisition of registered investment advisors but on the diversion of their funds for personal purposes.” Id . at *1-*2. The Failure to Plead Damages To allege a cause of action based on 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 , 88 N.Y.2d 413, 421 (1996) (citations omitted). Each element of the claim must be pleaded in order to withstand a challenge to the cause of action. In WCapital Invs. LLC v CWCapital Cobalt VR Ltd. , 2020 N.Y. Slip Op. 02240 (1st Dept. Apr. 9, 2020) ( here ), the Appellate Division, First Department reversed the denial of defendants’ motion to dismiss the fraudulent inducement claims because plaintiffs failed to allege damages. WCapital Invs. involved a 2007 collateralized debt obligation (“CDO”) in which various classes of notes were issued by defendant, CWCapital Cobalt VR Ltd. (“Cobalt”). The transaction was governed by an indenture and a collateral management agreement (“CMA”). Under the CMA, plaintiff, CWCapital Investments LLC (“CWCI”), was named as collateral manager and appointed as Cobalt’s “exclusive agent” to provide Cobalt with certain services, including exercising the right to appoint or act as the controlling class representative or directing holder (together the “CCR”). CWCI exercised that right by appointing itself as the CCR. It served in that role since the inception of the CDO in 2007. During the course of the CDO, the notes were transferred several times. In August 2016, pursuant to five separate sale agreements, former defendant Merrill Lynch, Pierce, Fenner and Smith Incorporated sold certain notes to defendants, OZ Master Fund, Ltd., OZ Enhanced Master Fund, Ltd., OZ Credit Opportunities Master Fund, Ltd., OZ GC Opportunities Master Fund, Ltd. and OZSC, L.P. (collectively, the “OZ Funds”). Among other things, the OZ Funds promised not to aid in the removal of the collateral manager. Plaintiff Galaxy Acquisition LLC (“Galaxy”), CWCI’s parent, which purportedly had the power to veto any transfer of the notes, approved the sales. Shortly thereafter, the OZ Funds transferred the notes to defendant, Carbolic, LLC (“Carbolic”). In connection with that transaction, Carbolic wrote five letters to Galaxy (the “letter agreements”) in which it made the same promises that the OZ Funds had made in the sale agreements. In April 2018, Cobalt sent notice letters designating Carbolic as the new CCR. Thereafter, CWCI and Galaxy commenced the action alleging that in replacing CWCI with Cobalt as the CCR, the various defendants breached the indenture, the CMA, the sale agreements and the letter agreements, and engaged in tortious conduct. They also alleged breach of contract and fraud in connection with the sale of the notes to the OZ Funds. By separate motions, Cobalt and Carbolic, and the OZ Funds and the OZ Management defendants, moved to dismiss the amended complaint. In January 2019, after the motions were briefed but before the motion court’s decision, Cobalt withdrew its appointment of Carbolic as the CCR. Carbolic never took over as the CCR; CWCI has always retained that role. After supplemental briefing, the motion court denied the motions. Defendants appealed. The Court held that the fraud claims (in addition to the other claims) should have been dismissed because plaintiffs failed to allege damages. “Although a plaintiff is not obligated to show, on a motion to dismiss, that it actually sustained damages,” noted the Court, “it must plead ‘allegations from which damages attributable to might be reasonably inferred.’” Slip Op. at *4 (quoting InKine Pharm. Co. v. Coleman , 305 A.D.2d 151, 152 (1st Dept. 2003) (internal quotation marks omitted). The Court held that plaintiffs failed to do so. The Court found that plaintiffs failed to “explain how they sustained damages as a result of Cobalt’s designation of Carbolic as the new CCR.” Id . Indeed, noted the Court, “the notice letters appointing Carbolic as the CCR were never given effect, the appointment of Carbolic was withdrawn, and CWCI continued operating as the CCR.” Id .  “Because cognizable damages cannot be reasonably inferred,” the Court concluded that the fraud causes of action “should be dismissed.”  Id . (citing Arts4All, Ltd. v. Hancock , 5 A.D.3d 106, 110 (1st Dept. 2004). The Court also rejected plaintiffs’ argument that it incurred damages because “they were allegedly forced to engage in ‘costly litigation.’” Slip Op. at *4. Under settled law, held the Court, “attorneys’ fees . . . are not recoverable unless authorized by statute, court rule, or written agreement of the parties” and plaintiffs failed to allege any of the foregoing. Id . (quoting Reif v. Nagy , 175 A.D.3d 107, 131 (1st Dept 2019) (internal quotation marks omitted)).  Takeaway A claim for fraudulent inducement requires a plaintiff to establish a misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and which plaintiff justifiably relied on, resulting in damages. Ventur Group, LLC v. Finnerty , 68 A.D.3d 638, 639 (1st Dept. 2009) (internal quotation marks and citation omitted). As this Blog has often noted, the justifiable reliance element is typically the most difficult to satisfy. This is especially so when the plaintiff is sophisticated, such as in Knox . When there are hints of falsity, the obligation to root out the fraud is heightened. For this reason, plaintiffs often fail to satisfy the justifiable reliance element.  In Knox , the alleged fraud – i.e. , the diversion of funds – could not have been discovered with reasonable, indeed heightened, diligence. As noted by the Court, review of the financial records and concerns about accounting systems and back-office operations were not themselves sufficient to put plaintiffs on notice that funds had been diverted for personal use. In fact, as the Court observed, the red flags identified by defendants “were unrelated to the … fraudulent diversion of funds.” Slip Op. at *1.  WCapital Invs. reminds us of the importance of pleading recoverable damages resulting from the misrepresentation or omission. As noted, although a plaintiff is not required to demonstrate, on a motion to dismiss, that it actually sustained damages, he/she must plead facts from which damages are reasonably inferred. The failure to do so will, as in WCapital Invs. , result in dismissal.

The New York State Court System On April 7, 2020, Chief Administrative Judge Lawrence K. Marks issued a memorandum to all trial court justices and judges advising them that, starting on Monday, April 13, 2020, the courts will begin to open their doors, albeit remotely, “for non-essential pending cases” – i.e. , “tort (including medical practice and asbestos), commercial, matrimonial, trusts and estates, and other categories of cases.” ( Here .) To this end, judges are being asked to “review their case inventories to identify cases in which court conferences can be helpful in advancing the progress of the case, including achieving a resolution of the case.” Judges are encouraged to schedule conferences at the request of the attorneys and be available during normal court hours to address discovery disputes and other ad hoc concerns. Such conferences, said Chief Administrative Judge Marks, are to be “conducted remotely, by Skype or by telephone.” Judges’ personal staff will be able to assist judges remotely, as needed.  Courts that have high-volume calendar parts, such as compliance and trial assignment parts (primarily Supreme Court in New York City and the large downstate suburban counties) are to review their existing calendars and identify cases that can be assigned to judges to conduct remote conferences. “ he goal,” said Chief Administrative Marks, “is for judges to help advance the progress of the cases and facilitate their resolution.”  Additionally, judges are being asked “to decide fully submitted motions” and “resolve … other matters in their case inventories.”  Remote Witnessing On April 7, 2020, Governor Andrew Cuomo issued a new executive order that addresses, among other things, remote witnessing. here.=">here."> The order provides clarification regarding the requirements needed to conduct remote signings of documents, such as deeds, wills, powers of attorney forms and healthcare proxies. Under the order, the act of remote witnessing ( i.e. , using audio-video technology) is permissible provided the following conditions are met: The person requesting that their signature be witnessed, if not personally known to the witness(es), must present valid photo ID to the witness(es) during the video conference, not merely transmit it prior to or after; The video conference must allow for direct interaction between the person and the witness(es), and the supervising attorney, if applicable (e.g. no pre-recorded videos of the person signing); The witnesses must receive a legible copy of the signature page(s), which may be transmitted via fax or electronic means, on the same date that the pages are signed by the person; The witness(es) may sign the transmitted copy of the signature page(s) and transmit the same back to the person; and The witness(es) may repeat the witnessing of the original signature page(s) as of the date of execution provided the witness(es) receive such original signature pages together with the electronically witnessed copies within thirty days after the date of execution.

It is not often that the Court of Appeals issues an opinion about the same statute within a short period of time. But, in the span of nine days, the Court issued two opinions addressing General Business Law § 349.  On March 24, 2020, the Court of Appeals decided Plavin v. Group Health Inc. , 2020 N.Y. Slip Op. 02025 (Mar. 24, 2020) ( here ), a case in which the Court was asked to decide whether an insurance company’s alleged misstatements and omissions about its insurance plan satisfied the consumer-oriented element of a claim under General Business Law §§ 349 and 350. Less than 10 days later, on April 2, 2020, the Court decided Collazo v. Netherland Prop. Assets LLC , 2020 N.Y. Slip Op. 02128 ( here ), a case in which the Court was asked to decide whether a defendant violates GBL § 349 in the absence of affirmative conduct that tends to deceive consumers. As discussed below, the Court held that there is no violation of the statute under those circumstances. Plavin="Plavin" here.=">here."> In Collazo , plaintiffs sought a declaration that their apartments were subject to rent stabilization laws, and recovery for overcharges, treble damages and attorney’s fees, as well as damages pursuant to GBL § 349.  Plaintiffs are 30 current or former tenants of 18 apartments in a building currently owned and operated by defendants. The building is subject to the Rent Stabilization Law. From 1990-2016, defendants and their predecessors received J-51 tax benefits pursuant to Administrative Code of City of NY § 11-24. Nevertheless, 15 of the apartments at issue were registered as permanently exempt, high rent vacancies – i.e. , were deregulated – during that time period ( see Rent Stabilization Law of 1969 (Administrative Code of City of NY) former § 26-504.2 (a)). Following guidance issued by the New York State Division of Housing and Community Renewal in 2016, defendants reregistered the 15 apartments as rent stabilized. Plaintiffs alleged that, following the issuance of the Court’s decision in Roberts v. Tishman Speyer Props., L.P. , 13 N.Y.3d 270 (2009), defendants knew, or should have known, that high rent vacancy deregulation was not available with respect to apartments in buildings for which a landlord was receiving J-51 benefits. Plaintiffs also alleged that defendants violated GBL § 349 by engaging in deceptive, consumer-oriented acts – namely, representing to the public at large that the apartments in question were exempt from rent regulation. In Roberts , the Court held that apartments in buildings receiving benefits under New York City’s J-51 tax incentive program remained subject to rent stabilization for at least as long as the building continued to enjoy J-51 benefits. Defendants moved to dismiss the complaint, claiming, among other things, that the GBL cause of action failed to state a claim upon which relief. Supreme Court granted defendants’ motion, and the Appellate Division, First Department affirmed. 155 A.D.3d 538 (1st Dept 2017). The Court affirmed the dismissal of the GBL claim. Relying on Schlessinger v. Valspar Corp. , 21 N.Y.3d 166, 172 (2013), the Court held that plaintiffs failed to allege “any affirmative conduct that would tend to deceive consumers.” Slip Op. at *1.  In Schlessinger , furniture buyers brought a putative class action against a provider of furniture protection plans for breach of contract and violation of GBL § 349 based upon the defendant’s violation of GBL § 395-a, which generally prohibits providers of maintenance agreements from terminating the agreement during the contract term. Under the terms of the plan, the defendant would try to repair or replace any damaged furniture if the damage occurred during the contract period. However, if the furniture store where the plaintiff purchased the furniture closed, the defendant would instead issue a refund of the plan price. The plaintiffs argued that the store closure provision was voided by GBL § 395-a. As a result, said the plaintiffs, the defendant breached the contracts by denying their claims under the plan and “engaged in ‘deceptive practices’ . . . by selling maintenance agreements which contain the purportedly illicit store closure provision.” The Court understood the plaintiffs to be arguing that the defendant’s “violation of section 395-a is perforce a violation of section 349(a) because, by inserting an unlawful provision in the contract, Valspar impliedly represented that this provision was valid and thereby engaged in a deceptive act or practice.” Id. at 172. However, this reasoning was “too attenuated to be plausible,” said the Court, because “ ection 349 does not grant a private remedy for every improper or illegal business practice, but only for conduct that tends to deceive consumers.” Id . It could not “fairly be understood to mean that everyone who acts unlawfully, and does not admit the transgression, is being ‘deceptive,’” as “ uch an interpretation would stretch the statute beyond its natural bounds to cover virtually all misconduct by businesses that deal with consumers.” Id. ; see also Fuchs v. Wachovia Mortg. Corp. , 9 Misc.3d 1129(A), 2005 N.Y. Slip Op. 51852(U), at *2-3 (Sup. Ct., Nassau County Nov. 15, 2005) (dismissing GBL § 349 claim based upon defendant charging an allegedly illicit document preparation fee because defendant represented that it would charge such a fee and did not have a duty to advise plaintiffs that the charge violated the law or to disclose the relevant provisions of the law). Against the foregoing analysis, the Collazo Court found that plaintiffs only alleged “that defendants failed to admit that they violated the Rent Stabilization Law in deregulating plaintiffs’ apartments – three of which were, in fact, never deregulated.” Slip Op. at *1. They did not allege “any affirmative conduct that would tend to deceive consumers.” Id. In a brief dissent, Judge Rivera concluded that the conduct at issue satisfied the element of consumer-oriented deception under GBL § 349. Slip Op. at *2. In that regard, Judge Rivera explained that, in the landlord-tenant context, “nothing prevents a plaintiff from asserting a claim based on a misrepresentation that an apartment was exempt from rent regulation following deregulation in violation of the Rent Stabilization Law.” Id. The reason, Judge Rivera said, is because “section 349 contemplates that a cause of action under that section may overlap with other statutory prohibitions and remedies.” Id. (citing GBL § 349 (g) (“This section shall apply to all deceptive acts or practices declared to be unlawful, whether or not subject to any other law of this state”)). Takeaway GBL § 349 provides a remedy to consumers who have been subject to deceptive or misleading acts or business practices. Oswego Laborers Local 214 Pension Fund v. Marine Midland Bank, N.A. , 85 N.Y.2d 20 (1985). A deceptive act or practice, for the purposes of GBL §349, is one which is likely to mislead a reasonably prudent consumer. Karlin v. IVF America, Inc. , 93 N.Y.2d 282 (1999). Collazo shows that a plaintiff cannot show a deceptive business practice when the alleged deception is based upon a failure to admit the violation of a contract or statute. More is needed – as in an affirmative act of consumer-oriented deception.   The dissenting opinion is notable because it considered the failure to admit the violation of a contract or statute to be an act of consumer-oriented deception. In many ways, this reasoning is similar to the United States Supreme Court’s adoption of the implied false certification theory of liability under the False Claims Act (“FCA”). Universal Health Services, Inc. v. United States ex rel. Escobar , 136 S. Ct. 1989 (2016). Under the “implied false certification” theory, a defendant may violate the FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement. In other words, “misrepresentations by omission can give rise to liability.”  Escobar="Escobar" here.=">here."> It will be interesting to see whether Judge Rivera’s dissent will one day find its way to the majority of the Court. In the meantime, under New York law, a plaintiff will not satisfy GBL § 349 without alleging affirmative conduct that tends to deceive consumers – i.e. , the plaintiff alleges more than a failure to admit a violation of law or contract.

Once an action is commenced, litigants have numerous discovery devices at their fingertips to help flesh-out facts to prove, or defend against, asserted claims.  Sometimes, however, a potential litigant believes that a viable claim exists but, for one or more reasons, has insufficient information to bring a claim.  The answer is provided by CPLR 3102 (c) , which permits disclosure “before an action is commenced, … to aid in bringing an action, to preserve information or to aid in arbitration…but only by court order.”  This Blog previously addressed CPLR 3102 (c) < HERE =">HERE"> . Pre-action disclosure in aid of bringing a claim is appropriate “only where a petitioner demonstrates that it has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.”  Sandals Resorts Int’l Ltd. v. Google, Inc. , 86 A.D.3d 32, 38 (1 st Dep’t 2011) (citation, internal quotation marks and brackets omitted).  CPLR 3102 (c) cannot be used by a potential plaintiff to assist in determining whether a cause of action exists.  Ero v. Graystone Materials, Inc. , 252 A.D.2d 812, 814 (3 rd Dep’t 1998) (citation omitted).  Where a petitioner already possesses sufficient information to frame a complaint but brought a proceeding under CPLR 3102 (c) to “explore alternative theories of liability” the granting of its petition would be improper.  Western Inv. LLC v. Georgeson Shareholder Securities Corp. , 43 A.D. 3d 333 (1 st Dep’t 2007) (citation omitted).   New York courts have explained that limitations on the use of pre-action disclosure are “designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.” Matter of Stewart v. New York City Transit Auth. , 112 A.D.2d 939, 940 (2d Dept. 1985) (citation and internal quotation marks omitted). However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” Id . (citation and internal quotation marks omitted). Pre-action disclosure is also available to ascertain the identity of potential defendant.  Thus, in Alexander v. Spanierman Gallery, LLC , 33 A.D.3d 411 (1 st Dep’t 2006), the Court permitted disclosure of the purchaser of stolen artwork so that plaintiff could commence a replevin action.  The procedure may also be used to preserve evidence.  Holtzman v. Manhattan and Bronx Surface Transit Operating Authority , 271 A.D.2d 346, 347 (1 st Dep’t 2000).  For example, a court may order a pre-action deposition where it is necessary to “preserve testimony” due to the ill-health of a potential claimant/plaintiff ( Matter of Davis , 178 Misc. 2d 65, 66 (N.Y. Ct. Claims 1998)), or to prevent “a potential defendant or other person from disposing of physical evidence” ( Lemon Juice v. Twitter, Inc. , 44 Misc. 3d 1225(A) at *5). The First Department addressed these issues in Delgrange v. The RealReal, Inc. (April 2, 2020).  The petitioner in Delgrange was a collector of rare and unique clothing – much of which was from the collections of designer Marc Jacobs.  Respondent runs an on-line consignment website.  Petitioner frequently monitored respondent’s website looking to find additional Marc Jacobs clothing and noticed that numerous items similar to those already owned by her were being posted for sale.  This caused petitioner concern, which, in turn, caused her to inventory her collection.  This inventory revealed that numerous missing items from her collection appeared to be offered for sale on respondent’s website.  Petitioner purchased some of the suspicious items and, thereby, confirmed that some of the items being offered for sale on respondent’s website were hers.  All told, petitioner confirmed that 153 items offered for sale were stolen from her collection.   Petitioner wanted to bring a conversion claim against the unknown that stole clothing from her collection.  Accordingly, petitioner brought a petition pursuant to CPLR 3102 (c) against respondent to ascertain the identity of the individual that consigned the stolen clothing.  In granting the relief sought by the petition, the Court determined that petitioner “demonstrated a meritorious cause of action for conversion” and that the discovery sought from respondent, “the identity of the people who posted – is material and necessary to the prosecution of her posited cause of action.” The Court also noted that the “Supreme Court providently exercised in shaping and executing the confidentiality order governing disclosure by ” so as to address respondent’s concerns about the manner in which petitioner could contact respondent’s customers.