Search Results

In New York, arbitration, like other alternative dispute resolution mechanisms, is valid and enforceable. Westinghouse v. New York City Tr. Auth. , 82 N.Y.2d 47, 54 (1993) (“Considerable authority thus supports the validity and enforceability of alternative dispute resolution mechanisms.”). Like many jurisdictions, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.” Id . Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards. Tullett Prebon v. BGC Fin. , 111 A.D.3d 480, 482 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”). In fact, judicial review of arbitration awards is severely limited in New York. Id .  As this Blog previously noted ( here ), setting aside arbitral awards are difficult. Grounds for The Review of Arbitral Awards Upon receiving a motion to confirm an arbitration award, New York courts must confirm the award unless the movant satisfies one of the statutory reasons for modification or vacatur provided by New York Civil Practice Law and Rules Section 7511. See CPLR § 7510; see also Bernstein Family Ltd. P’ship v. Sovereign Partners , 66 A.D.3d 1, 7-8 (1st Dept. 2009) (confirmation is mandatory in the absence of grounds for vacatur). The grounds for modification or vacatur under CPLR § 7511 are limited.  These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR. CPLR § 7511(b)(1)(i)-(iv).  Only when the record demonstrates one of the foregoing will a New York court vacate or modify an award under the CPLR. (This Blog previously wrote about the importance of a record in the context of vacating an award, here and here .) In today’s post, this Blog examines Matter of Arbitration Between Buffalo Teachers Fedn., Inc. (Board of Educ. of the Buffalo Pub. Schs.) , 2020 N.Y. Slip Op. 00794 (4th Dept. Jan. 31, 2020) ( here ), a case involving vacatur because the arbitrator exceeded his/her authority. Under CPLR § 7511(b)(1)(iii), a movant can vacate or modify an arbitral award when the arbitrator exceeded his or her authority under the arbitration agreement. To succeed under CPLR 7511(b)(1)(iii), the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. New York City Tr. Auth. v. Transport Workers’ Union of Am. Local 100, AFL-CIO , 6 N.Y.3d 332 (2005). The same is true with regard to arbitration mandated by statute.  Vacatur will be warranted where the arbitrator fails to follow the standards and requirements of the subject statute. Forest River, Inc. v. Stewart , 34 A.D.3d 474, 474 (2d Dept. 2006). Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator. Rochester City Sch. Dist. v. Rochester Teachers Ass’n , 41 N.Y.2d 578, 583 (1977). Matter of Arbitration Between Buffalo Teachers Fedn., Inc. (Board of Educ. of the Buffalo Pub. Schs.) After hiring 16 teachers’ aides in compliance with a prior arbitration award, the Board of Education announced its intention to eliminate 5½ teaching positions for the 2017-2018 school year in order to offset the cost of hiring the teachers’ aides. The Buffalo Teachers Federation filed a grievance seeking, inter alia , to prevent the elimination of the teaching positions on the ground that the Board’s intended conduct was retaliatory. A temporary restraining order was issued preventing the elimination of the positions while the dispute was pending. After the 2017-2018 school year ended, an arbitrator issued an opinion and award that set forth the arbitration award in the last five paragraphs thereof, only two of which were at issue on the appeal. The Teachers Federation moved to confirm the award, and the Board filed a cross-motion to vacate the award. The motion court granted the petition to confirm, denied the cross-petition to vacate, and confirmed the award. The appeal ensued. The Board maintained that the arbitrator exceeded his authority under the governing collective bargaining agreement (“CBA”) by requiring it to make the elimination of teaching positions in accordance with the “School Based Development Guide” (“Guide”) rather than the CBA. The Fourth Department agreed, holding that “‘in effect, made a new contract for the parties in contravention of explicit provision of arbitration agreement which denied arbitrator power to alter, add to or detract from’ the collective bargaining agreement.” Slip Op at *2 (quoting Schiferle v. Capital Fence Co., Inc. , 155 A.D.3d 122, 126 (4th Dept. 2017) (internal quotation marks omitted). The Court concluded, therefore, “ ecause the CBA does not require respondent to make its staffing or budgetary decisions in accordance with the Guide, the arbitrator contravened an express provision in the CBA that denied him the ‘authority to modify or amend it.’” Id . Takeaway Under CPLR § 7511(b)(1)(iii), the party seeking vacatur of arbitral award must demonstrate that the agreement to arbitrate limited the arbitrator’s authority to act and the arbitrator subsequently violated that limitation. In Matter of Buffalo Teachers Federation, the Board was able to meet this standard.

Investment scams come in many forms. Affinity fraud is one type of investment scam. In this form of fraud, the person committing the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter of an affinity fraud frequently is – or pretends to be – a member or a good friend of the group. The fraudster often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests. Many times, those leaders become unwitting victims of the fraudster’s con. Affinity scams exploit the trust and friendship that exist in group of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment. Many affinity scams involve Ponzi schemes or pyramid schemes, where new investor money is used to make payments to earlier investors to give the illusion that the investment is successful. New investors are induced to invest in the scheme and existing investors are lulled into believing their investments are profitable. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use. Both types of schemes depend on an unending supply of new investors – when the inevitable occurs, and the supply of new money stops, the scheme collapses, and investors lose most or all of their money. On Wednesday, January 29, 2020, the Securities and Exchange Commission (“SEC”) announced ( here ) that it charged a Pennsylvania accountant with perpetrating an affinity fraud on the Amish and Mennonite community by making materially false and misleading statements about investments he was selling, including, but not limited to, the use of their funds and the guaranteed return on their investments. According to the SEC’s complaint ( here ), Philip E. Riehl (“Riehl”), provided tax and accounting services to Amish and Mennonite communities. Riehl developed his own investment program, in which he pooled money that he raised by selling promissory notes to community members. Riehl was a co-religionist in the Mennonite religious community. Riehl allegedly raised approximately $60 million over nearly a decade and promised to invest the funds in business and real estate loans to others in the religious community. Riehl typically made loans to farmers and other types of commercial businesses, such as barn builders, trucking companies, and construction companies, who were unable to, or chose not to, obtain loans from traditional banks. These loans were documented by simple promissory notes to Riehl, signed by the borrowers. According to the complaint, Riehl knew that members of his religious community had a high level of trust and respect for one another, and he allegedly relied on this trust to secure investments. The SEC alleged that Riehl provided each investor with a promissory note, signed by him, and personally promised to repay the investors with interest. In or about 2015, the SEC began an investigation of Riehl and his investment program. Riehl purportedly told the SEC staff he was not accepting new investments, was in the process of winding down his investment program, and always required two co-signers for loans made from his investment program. The SEC claimed that those statements were false. The SEC further alleged that Riehl also sold investors promissory notes issued by Trickling Springs Creamery (“TSC”), a dairy business that he owned, without informing the investors about the company’s financial difficulties and mounting debt (“TSC Notes”). The complaint alleged that in late 2018 when TSC was in dire straits, Riehl diverted money to it from at least one investor, against the investor’s wishes. For many of the TSC Notes that Riehl sold, alleged the SEC, Riehl merely issued new TSC Notes to his existing investors, replacing himself with TSC as the note’s payor. The SEC claimed that this action effectively eliminated his personal guarantee to repay the investors. In so doing, said the SEC, Riehl burdened TSC with millions of dollars of additional debt without any corresponding infusion of capital. Significantly, observed the SEC, TSC was insolvent for all or most of the time that Riehl sold TSC Notes. According to the SEC, Riehl did not disclose to the TSC Note investors that he was imposing this debt burden on TSC while eliminating his personal guarantee to previous Riehl Note investors. The SEC also said that Riehl did not disclose to TSC Note investors that TSC had existing bank debt to which the TSC Notes were subordinate, and failed to tell investors that if TSC defaulted they would not be repaid until TSC’s bank lenders were repaid first. Notably, alleged the SEC, Riehl did not require that TSC have two co-signers to repay its debts, contrary to his promise that he would require two co-signers for any loan issued using investor money. From at least 2015 to December 2018, Riehl offered and sold to approximately 110 investors at least 175 TSC Notes worth approximately $7.8 million. According to the SEC complaint, Riehl received his last investment of $150,000 in later 2018. Riehl allegedly told this investor that he would repay him in a few days. The SEC claimed that Riehl knew that this investor did not want to invest in TSC – TSC continued to struggle financially and needed an immediate infusion of cash for operations. Against the investor’s instruction, said the SEC, Riehl transferred the $150,000 to TSC. The SEC claimed that Riehl never repaid the investor. In a 2019 letter to investors, Riehl allegedly apologized for his dishonesty, including repeatedly stating that he required two co-signers on each loan, which gave a “false sense of security, in that such a considerable percentage of the funds were channeled into my personal projects.” TSC ultimately failed, filing for bankruptcy in December 2019, and Riehl was unable to pay back investors. Commenting on the SEC’s complaint, Kelly L. Gibson, Associate Regional Director of the SEC’s Philadelphia Regional Office, said “Promises of guaranteed returns or investments without risk are classic warning signs of fraud. It is important to learn as much as possible about your investments, even if it means questioning someone you know and trust, including someone within your own faith-based community.” The SEC charged Riehl with violating the antifraud provisions of the federal securities laws. Riehl agreed to settle the charges against him. The settlement, which is subject to court approval, provides for injunctive relief and return of allegedly ill-gotten gains plus prejudgment interest. In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced criminal charges against Riehl ( here ). Commenting on the charges, U.S. Attorney McSwain said: “These investors were looking for honesty and integrity when deciding where and with whom to invest their money. According to the Information, Riehl presented himself as a trusted member of their religious community, only to betray that trust and swindle them out of tens of millions of dollars. It is only natural for members of a tightly knit community to want to take care of one another, but Riehl did not care about anyone but himself. Fraudsters must be held accountable under the law – no matter what community they belong to – for justice to prevail.” Michael T. Harpster, Special Agent in Charge of the FBI’s Philadelphia Division, added: “So long as there are people with money to invest, there will be swindlers ready to take their money under false pretenses. But it is particularly loathsome when these criminals exploit trusting members of their own church or community. According to the Information, Philip Riehl repeatedly misrepresented what he was doing with his investors’ money – people who took him at his word. The FBI will continue to investigate and hold accountable those who engage in such financial fraud.”

In this Blog’s post entitled: “ Real Property Owners and Contractors should be Aware of the Trust Fund Provisions of New York’s Lien Law ,” the trust fund provisions of New York’s lien law were discussed.  A brief recap of this Blog’s prior post as it relates to this post may be informative.  Lien Law §71 recognizes two types of trusts – (1) the owner trust and (2) the contractor/subcontractor trust.  The assets of the owner trust “shall be held and applied to the cost of improvement.”  (Lien Law §71(1).)   Claimants under an Owner’s Trust include contractors, subcontractors, architects, engineers, surveyors, laborers and materialmen.  (Lien Law §71(3)(a).)  The types of assets that form an owner trust are set forth in Lien Law § 70(5) , and include, inter alia, proceeds of building loans and insurance proceeds resulting from the destruction of the improvement. The assets of the contractor/subcontractor trust must be used for the payment of certain obligations resulting from the improvement of real property such as: the claims of subcontractors, architects, engineers, surveyors, laborers and materialmen; payroll taxes; sales taxes; unemployment insurance; benefits and wage supplements; surety bond premiums and insurance premiums related to the project. (Lien Law § 71(2).)  Most frequently, trust assets in this category consist of the payments received by the contractor from the owner (in the case of a contractor trust) or received by a subcontractor from a contractor (in the case of a subcontractor trust) pursuant to the subject construction contract. ( Lien Law § 70(6) .)  Trust fund assets can only be disbursed to appropriate trust fund beneficiaries.  A typical scenario illustrating the need for the protections afforded by the trust fund provisions of the Lien Law occurs when a contractor is paid by an owner on a present project but uses the payment to pay a subcontractor on a prior project.  Such diversionary payments could result in the inability to pay trust fund beneficiaries on the present project.  Despite happening routinely, such payments are prohibited under the Lien Law and could result in the inability of the contractor to pay all trust fund beneficiaries working on the current project.  On January 28, 2020, the New York Supreme Court, Richmond County, decided Gilbane Building Co. v. New York Wheel Mezz, LLC , in which the court was tasked with determining whether an owner could also be deemed a contractor for Lien Law trust fund purposes. The facts of Gilbane are straight forward.  The City of New York owned property on Staten Island that was being redeveloped for a variety of purposes.  One aspect of the development was the construction of a 630-foot tall Ferris wheel (the “Project”).  Defendant New York City Wheel (“Wheel”), as tenant, entered into a lease with the City, as landlord, for a piece of land on which Wheel was going to develop the Project.  The lease required Wheel to “perform (or cause to be performed)” certain construction on the Project.  Plaintiff, Gilbane Building Company, “undertook a Construction Management Agreement ("CMA") in the initial sum of $197,345,036.00, under which Gilbane, as assignee, would provide construction services in connection with the Project.”  Gilbane, who performed construction services and claimed to be owed $7,000,000.00, commenced action for Lien Law trust fund diversions after Wheel failed to pay it for some of its work.  According to Gilbane, it should have been paid from numerous sources of Owner and contractor trust fund monies that came into Wheel’s possession but were used for non-trust fund purposes.  The Defendants, including Wheel, moved to dismiss the complaint arguing that some of the allegedly diverted trust funds were from the contractor trust and that Wheel was an owner – not a contractor.  Wheel argued that it could not be both an owner and a contractor.  If Wheel was not a contractor, it could not have diverted funds from a contractor trust.  Since, inter alia , the trustee of the trust would also be liable for the diversions, a finding that Wheel was not a contractor would also be beneficial to any other individual that would be responsible for diversions The Gilbane court then reviewed the purpose and history of the trust fund provisions of the Lien Law.  Quoting Mount Vernon City School Dist. V. Nova Cas. Co. , 19 N.Y.3d 28 (2012), the Gilbane court stated that “once a trust comes into existence its funds may not be diverted for non-trust purposes and use of trust assets for any purpose other than the expenditures authorized by statute constitutes an improper diversion of trust assets, regardless of the propriety of the trustee's intentions."  Gilbane (internal quotation marks and brackets omitted).  Focusing on the critical point at issue, the Gilbane court analyzed several cases that addressed the question of who is a “contractor” under the Lien Law.  Quoting McNulty Bros. v Offerman , 221 N.Y. 98, 105 (1917), the Gilbane court stated whether an individual or entity is a contractor under the Lien Law, would be viewed no differently than “one who would be so characterized in the common speech of men.”  “He is one who, in the usual course of trade, has undertaken to improve the property of another. If he happens to have some interest in the land himself his interest is an accident, and not the source and origin and occasion of his tenancy, either at his own expense or with contributions from the landlord, has covenanted for betterments.”  Gilbane (quoting McNulty , 221 NY at 105).  See also , Canron v. City of New York , 214 A.D.2d 115, 123 (1 st Dep’t 1995), aff’d , 89 N.Y.2d 147 (1996); Burns v. Electric Co. Inc. v. Walton St. Assoc. , 136 A.D.2d 291, 295, aff’d, 73 N.Y.2d 738 (1988).  In OTG JFK T5 Venture v. IBEX Const. , LLC, 24 Misc. 3d 1244(A) , another case relied upon by the Gilbane court, “the trial court found that the petitioner, OTG, was both an ‘owner’ and a ‘contractor’ under its sublease and that all of the facts demonstrated it had ‘the same type of oversight responsibilities as had been undertaken by the contractors in Burns and Canron .’”  OTG JFK . After reviewing the relevant cases, the Gilbane court found that Wheel was both an owner and a contractor under the Lien Law.  The court found, inter alia , that Wheel: had many oversight responsibilities “that rendered it a ‘contractor’”; frequently had maintenance and supervisory personnel on sight; attended regular meetings; was responsible for approving requisition proposals; was responsible for approving subcontractors hired by Gilbane; reviewed trade contractors’ work and directed corrective measures. Based on its findings, the Gilbane court denied the defendants’ motion to dismiss.  In addition, the court found the “remainder of Defendants’ motion is premature and Defendants have not eliminated all issues of material fact under CPLR §3211 regarding whether the identified funds are trust assets under Lien Law 3-A and whether, and to what extent, if any, trust funds may have been diverted.”  Gilbane (citation omitted). TAKEAWAY Under the trust fund provisions of the Lien Law, owners and contractors have specific duties and responsibilities, which, if not performed could result in liability.  Gilbane highlights the importance of knowing your specific role(s) on a construction project.  In Gilbane , Wheels may have violated its duties as a contractor with respect to contractor trusts without realizing that it held that role and had the related responsibilities.

Commercial transactions by their nature involve contracts. Sometimes, the parties involved in such transactions will dispute the meaning of their agreement. It may be that the language used is ambiguous; or the language is reasonably clear but is susceptible to different meanings; or although the language is clear, taken literally, it might not reflect the parties’ intent; or, as is often the case, an event has occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for it. Needless to say, disputes over the terms and meaning of a contract can be frustrating and costly. When parties enter into a contract, each assumes that their agreement accurately memorializes their intentions and understandings. For this reason, when a contract dispute arises, the courts look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id . at 7. See also Am. Express Bank v. Uniroyal, Inc. , 164 A.D.2d 275, 277 (1st Dept. 1990). When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Ashwood Capital , 99 A.D.3d at 7-8.  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources.” Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and give the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth. , 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id . at 163. This rule is especially applicable where the parties are commercially sophisticated, and their contract contains a merger clause. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Finally, since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Id . (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id . In Castaldi v. Castle Restoration LLC , 2020 N.Y. Slip Op. 50086(U) (Sup. Ct., Suffolk County Jan. 22, 2020) ( here ), Justice Elizabeth H. Emerson of the Suffolk County Supreme Court, Commercial Division, addressed the foregoing principles in breach of contract case involving the purchase and sale of a company’s assets. Castaldi v. Castle Restoration LLC Background The plaintiff, Robert Castaldi (“Castaldi”), was the president of Castle Restoration & Construction, Inc. (“Castle Inc.”). On March 15, 2012, Castle Inc. entered into an asset-sale agreement with defendant, Castle Restoration LLC (“Castle LLC,” the “LLC,” or the “Company”), which was owned by defendant Anthony Colao (“Colao”). Castle LLC agreed to purchase the majority of Castle Inc.’s assets, including its customer list and equipment, for $1.2 million. Simultaneously therewith, Castle LLC entered into a consulting agreement with Castaldi. Under the consulting agreement, Castaldi agreed to perform consulting services on a part-time basis. Among other things, Castaldi agreed to solicit business opportunities for the Company and assist in the preparation of formal bids, quotations, and proposals. The term of the agreement was one year from March 16, 2012, through March 15, 2013, and it could be extended for an additional six months at the LLC’s option. If neither party terminated the agreement at the end of the term or extended term, it would automatically be extended on a month-to-month basis until either party elected to terminate it upon 30 days’ written notice to the other party. The agreement provided for Castaldi’s compensation as follows: (a) under Section 5.1, Castaldi would receive commissions of 7½% of the gross amount of all contracts and purchase orders entered into by the Company as a result of Castaldi’s efforts (“Commission”); (b) under Section 5.2, Castaldi would receive Commissions with respect to contracts or purchase orders with clients as a result of Calstaldi’s efforts prior to the transaction (“Prior Dealings”); and (c) under Section 5.3, Castaldi would receive Commissions for any additional, repeat, or new work for which contracts or purchase orders were entered into with the same client(s) during the term of the agreement, regardless of whether Castaldi had any involvement in the procurement or negotiation of such repeat, additional or new business. Pursuant to Section 5.5(c) of the agreement, Castle LLC agreed to furnish Castaldi with a monthly report of all payments and other items credited to his account. Castaldi never received any monthly reports, nor was he ever paid a commission. Consequently, he commenced the action, alleging breach of the consulting agreement. The complaint contained two causes of action against Castle LLC for breach of contract and an accounting, respectively. The third cause of action sounded in fraudulent conveyance and alleged that defendants, Sato Construction Co., Inc. (“Sato”), Flag Waterproofing and Restoration, LLC, and Colao rendered Castle LLC insolvent and unable to satisfy Castaldi’s claims. Following discovery, both sides moved for summary judgment. Defendants contended that they were entitled to dismissal of the complaint because Castaldi did not earn any Commissions under the consulting agreement. Castaldi contended that he was entitled to partial summary judgment on the first cause of action for breach of contract for Commissions earned in the amount of $1,139,098.30. Alternatively, he sought summary judgment on the issue of liability on the first cause of action. The Court’s Decision The Court granted Castaldi’s motion with regard to Section 5.2 of the consulting agreement but denied the motion as to Section 5.1. The Court rejected Defendants’ contention that Castaldi terminated the consulting agreement in a text message that he sent to Calao in May of 2013 in which he stated, “ am finished.” Slip Op. at *2. The Court held that the text message was not authenticated and without evidentiary value: The excerpt of the text message submitted by the defendants is undated and fails to identify either the sender or the recipient. The full text-message exchange submitted by the plaintiff is also undated and fails to identify the parties to the conversation, which is about setting up a meeting. Nothing therein refers to the parties' consulting agreement or even identifies who said, “ am finished.” Accordingly, the unauthenticated text message is without evidentiary value. It is, therefore, insufficient to establish that the consulting agreement was terminated by Castaldi. Id . (citing, among other cases, In the Matter of R.D. , 58 Misc. 3d 780, 786-787 (Family Ct., N.Y. County Dec. 12, 2017) (discussing authentication of text messages)). With regard to Castaldi’s claim for Commissions under Section 5.1 of the consulting agreement, the Court agreed with Defendants that Castaldi failed to perform any consulting services for the Company. Slip Op. at *2. The Court found that Defendants’ argument was supported by Castaldi’s deposition testimony. Id . With regard to Commissions under Section 5.2 of the agreement, the Court held that Castaldi was entitled to receive $50,260.87. In reaching this conclusion, the Court noted that the meaning of Section 5.2 was disputed by the parties. Id . Castaldi claimed that he was entitled to a Commission under Section 5.2 as long as Castle LLC or a related entity entered into a contract or purchase order with someone on the Prior Dealings list. Defendants countered that Castaldi was entitled to a Commission under Section 5.2 only if someone on the Prior Dealings list entered into a contract or purchase order with Castle LLC (not any related entities) and Castaldi was personally involved in the negotiation or procurement thereof before he left the Company. Id . Applying the rules of contract interpretation, the Court found that Section 5.2 applied only “to contracts or purchase orders on the Prior Dealing list entered into by Castle LLC.” Section 5.2 provides that Castaldi shall be paid a commission if the Company enters into a contract or purchase order with a prospective client as a result of Castaldi’s Prior Dealings. The consulting agreement defines the “Company” as “Castle Restoration LLC,” and the words “or any of its affiliates, subsidiaries or related entities,” which are found in § 5.1, are not found in § 5.2. Under accepted canons of contract construction, when certain language is omitted from a provision, but placed in other provisions, it must be assumed that the omission was intentional. Accordingly, the court finds that § 5.2 only applies to contracts or purchase orders on the Prior Dealing list entered into by Castle LLC. Id . at **2-3 (citations omitted). The Court rejected Defendants’ contention that Castaldi had to demonstrate that he was personally involved in the negotiation or procurement of contracts or purchase orders on the Prior Dealings list in order to receive a commission. Id . at *3. “Section 5.2,” said the Court, “explicitly provides that ‘Prior Dealings’ are ‘proposals issued, bids submitted and discussions with prospective clients for which no contracts or purchase orders had been issued by such prospective clients while he was associated with Castle Restoration and Construction Inc.’” Id . “Thus, any contracts or purchase orders that Castle LLC entered into that are on the Prior Dealings list are presumptively the result of Castaldi’s Prior Dealings for which he is entitled to a commission.” Id . Accordingly, concluded the Court, Castaldi “need only show that a contract or purchase order that Castle LLC entered into was on the Prior Dealings list in order to receive a commission therefor.” The Court held that Castaldi was entitled to a commission in the amount of $50,260.87 for two contracts under § 5.2 of the consulting agreement. Castaldi contended that, after execution of the consulting agreement, Castle LLC and Sato entered into numerous contracts or purchase order with entities on the Prior Dealings list for which he was not paid any Commissions. Castaldi submitted a list of 15 contracts and purchase orders for which he claimed Commissions in the amount of $1,139,098.30. The Court found that the record supported the payment of Commissions in connection with two of the 15 projects – only those projects involved contracts entered into by Castle LLC. Id . Defendants did not dispute that Castle LLC entered into the two contracts or that they were on the Prior Dealings list. Id . Accordingly, the Court held that Castaldi was entitled to $50,260.87 in Commissions for both contracts under § 5.2 of the consulting agreement. Id . Takeaway This Blog has often discussed the probative value of emails, in particular in connection with a motion to dismiss under CPLR § 3211(a)(1) – dismissal due to documentary evidence. ( E.g. , here and here .) Castaldi highlights the authenticity concerns courts have with text messages – the electronic cousin of emails. Castaldi also highlights the process courts use to apply the rules of contract interpretation where, as in that case, the parties dispute the meaning of their agreement.The Court rejected Defendants’

Statutes of limitations limit the duration of a defendant’s liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitation period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run can be an important topic of discussion between a lawyer and her client. The statute of limitations for a fraudulent inducement claim is the greater of (a) six years from the date when the cause of action accrued or (b) two years from the time plaintiff discovered the fraud or could with reasonable diligence have discovered the fraud. CPLR § 213(8). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). The two-year discovery rule requires an inquiry into “whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred.” Kaufman v. Cohen , 307 A.D.2d 113, 123 (1st Dept. 2003) (internal quotation marks and citation omitted); see also Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Eberle , 3 N.Y.2d at 326. “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when she would have developed the truth, and shut her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to her. Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).  The test as to when fraud should with reasonable diligence have been discovered is an objective one. Id . (citation and internal quotation marks omitted). Thus, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012). “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). The same rules apply to a claim for negligent misrepresentation. 14 Bruckner LLC v. 14 Bruckner Blvd. Realty Corp. , 78 A.D.3d 431 (1st Dept. 2010). The statute of limitations for a breach of contract clam is six years. CPLR 213(2). The “statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury.” ACE Sec. Corp. v. DB Structured Prods., Inc. , 25 N.Y.3d 581, 594 (2015). There are exceptions to the foregoing rules. One exception is the continuing wrong doctrine. Under the doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id . (internal quotation marks and citation omitted). The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id . It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id . (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). In contract actions, the doctrine is applied to extend the statute of limitations when the contract imposes a continuing duty on the breaching party. Bulova Watch Co. v. Celotex Corp. , 46 N.Y.2d 606, 611 (1979); King v. 870 Riverside Dr. Hous. Dev. Fund Corp. , 74 A.D.3d 494, 496 (1st Dept. 2010). Thus, where a plaintiff asserts a single breach – with damages increasing as the breach continues – the continuing wrong theory does not apply. Henry , 147 A.D.3d at 601-02. In National Health Care Assoc., Inc. v Liberty Mut. Ins. Co. , 2020 N.Y. Slip Op. 30149(U) (Sup. Ct., N.Y. County Jan. 6, 2020) ( here ), a case involving an alleged widespread and “elaborate” fraudulent insurance scheme (Slip Op. at *1), Justice Andrea Masley of the New York County Supreme Court, Commercial Division, dismissed plaintiffs’ fraud, negligent misrepresentation and breach of contract claims on statute of limitations grounds, holding that the claims were time barred and could not be saved by the discovery rule or any theory of tolling, such as the continuing wrong doctrine. National Health Care Associates, Inc. v. Liberty Mutual Insurance Co. Background Plaintiffs, National Health Care Associates, Inc. (“NHA”), a health care management company, and its 26 corporate nursing home affiliates, brought suit against Liberty Mutual Insurance Company (“Liberty”), Arch Insurance Company (“Arch”), Prism Consultants, LLC (“Prism”), Asher Schoor and Ettie Schoor (“Schoors”; principals of “Prism”), Arlington Insurance Company, Ltd. (“Arlington”), Woodbury CC, LLC (“Woodbury”), Comp Control Insurance Company SPC (“CCIC”) and Comp Control, LLC (“Comp Control”), alleging that the defendants “orchestrated an elaborate, unlawful and fraudulent insurance scheme against” them. Slip Op. at *1. Plaintiffs alleged that defendants engaged in a willful scheme to subvert the insurance laws of New York, Connecticut, Vermont and New Jersey by requiring them to enter into unapproved agreements and letters of credit that substantially altered the rates in plaintiffs’ regulator- approved insurance policies. Plaintiffs alleged that “defendants sold to plaintiffs unapproved workers’ compensation insurance policies masquerading as approved guaranteed cost policies” (“GC Policies”). Id . The Particulars of the Alleged Wrongdoing In 2003, plaintiffs engaged Prism to assist them with their search for workers’ compensation insurance. According to plaintiffs, the Schoors informed them about programs that “utilized a potentially beneficial captive reinsurance structure” (“Programs”), saving plaintiffs money as plaintiffs “would acquire profit-sharing interests in the captive and its underlying segregated cells.” Plaintiffs informed the Schoors that they “would only be interested in the Programs if Plaintiffs were the only insured policyholders, so that Plaintiffs would not be paying for losses at facilities they did not own or manage.” Id . [Ed. Note: As explained by the Court in a footnote (Slip Op. at *3 n.3), “a captive reinsurance structure ‘allows a business to participate in the reinsurance of its liability insurance, thereby sharing in underwriting profits or losses. This structure may involve the creation of a reinsurance company or of a cell in an existing reinsurer ... in which the insured business has an ownership interest.’” “A captive cell, often referred to as a ‘segregated cell’ or ‘segregated account,’ agrees to ‘reinsure a portion of the liability assumed by the business’ insurance. If the insurance is profitable, the business shares in those profits. If not, the business shares in the losses.’” “‘ he assets and liabilities of the captive cell are legally separated from those in the reinsurer’s general account and other cells.’”] In November 2004, the Schoors presented NHA with Liberty’s Programs, which included Liberty’s GC Policies and the captive reinsurance program. The proposal described Liberty’s Programs which included the establishment of Comp Control, purportedly to be owned solely by NHA’s affiliates, to serve as the participant in a segregated cell in Arlington, a captive offshore reinsurer. Relying on the Schoors representations, plaintiffs alleged that they agreed to enter into the Liberty Programs. That same month, Liberty issued GC Policies to plaintiffs under which they paid at least $18 million in premiums to Liberty (2004 to 2008) and at least $59 million in premiums to Arch (2008 to 2015). Liberty conditioned the sale of the GC Policies upon plaintiffs’ entry into the Programs whereby a portion of the risks and premiums were ceded to offshore reinsurers, defendants Arlington (Bermuda) and CCIC (Cayman Island), to write insurance policies without being subject to regulatory review and approval. In turn, Woodbury and Comp Control, the participants of segregated cells in Arlington and CCIC, would become responsible to pay workers’ compensation claims up to the final aggregate premium. To ensure that Woodbury and Comp Control would have enough funds to pay such claims, Liberty required plaintiffs to (1) sign extrinsic documents (“Liberty Extrinsic Agreements”) by which they agreed to Arlington and CCIC reinsuring Liberty’s liabilities, and (2) provide letters of credit (“Liberty LOC”) as collateral for the liabilities of Arlington and CCIC. Plaintiffs posted at least $2.5 million in the Liberty LOC. Starting in 2016, at least $1.09 million had been drawn from the Liberty LOC. On November 24, 2004, the Schoors sent plaintiffs a draft operating and collateral agreement for Comp Control (“Comp Control Operating Agreement”) and represented that plaintiffs would be the sole members in the final agreement. The Schoors also created Woodbury and Comp Control to serve as participants of the segregated cells in Arlington and CCIC, respectively, and executed reinsurance agreements with Liberty on behalf of Comp Control, CCIC, Arlington or Woodbury. However, plaintiffs claimed, the Schoors never implemented plaintiffs’ membership in these entities, and never provided plaintiffs with a fully executed copy of the Comp Control Operating Agreement. In late 2008, the Schoors presented the Arch’s Programs to plaintiffs and stated that the Arch Programs would mirror the Liberty Programs, including the “reinsurance structure, ownership interests and profitability”. Like Liberty, Arch conditioned the sale of the GC Policies upon plaintiffs’ entry into the Programs, whereby a portion of the risks and premiums were ceded to Arlington and CCIC to write insurance policies without being subject to regulatory review and approval. Woodbury and Comp Control would become responsible to pay workers’ compensation claims up to the final aggregate premium. Again, to ensure that Woodbury and Comp Control would have enough funds to pay such claims, Arch required plaintiffs to enter into (1) terms and conditions documents (“Arch TC Agreements”), (2) provide letters of credit (“Arch LOC”), and (3) corporate guarantees (“Arch Guarantees”). Plaintiffs posted at least $7.4 million in the Arch LOC. Starting in 2017, Arch had drawn at least $3.09 million from the Arch LOC. On behalf of Arch, the Schoors presented the Arch TC Agreements to plaintiffs, which set forth the details and requirements of the Arch Programs, including the Arch LOC and Arch Guarantees. Plaintiffs claimed that based on the Schoors’ representations, they entered into the Arch Programs, and the Schoors executed reinsurance agreements with Arch on behalf of Comp Control and CCIC. The Liberty LOC and the Arch LOC were automatically renewed and extended each year, by increasing the face value, though no draws on the LOCs were made at that point. However, plaintiffs said, in October 2015, on behalf of Liberty and Comp Control, Prism demanded additional monies from plaintiffs to pay for losses under the Liberty Programs and threatened to draw on the Liberty LOC, which led plaintiffs to make additional payments to prevent drawing on the Liberty LOC. In November 2015, plaintiffs obtained “loss runs,” which suggested that the Liberty LOC might be used to pay claims at unaffiliated facilities, and when the Schoors were inquired about such loss runs, Asher Schoor denied that Prism billed plaintiffs to pay claims by unaffiliated facilities and told plaintiffs that “National is paying for their own claims.” On March 15, 2016, plaintiffs alleged that they were informed “for the first time” that they neither held any equity/right to receive any net profits in Woodbury and Comp Control, nor in Arlington and CCIC. The Liberty LOC and Arch LOC had been drawn down, and Arch had threatened that it would demand payment under the Arch Guarantees, despite that plaintiffs were “never made participants of the relevant segregated cells of the reinsurance captives.” On April 27, 2018, plaintiffs filed a complaint seeking recovery from defendants based upon their alleged breach of contract, fraudulent representations and violations of state insurance and consumer fraud statutes. Defendants moved to dismiss the claims against them on various grounds, including that the claims were time-barred under applicable statute of limitations. The Court agreed with defendants. The Court’s Decision With regard to the Liberty/ Arlington transactions and related issues, the Court held that plaintiffs were on notice of their claims at least as early as November 2015. The Court explained that such notice was evident from the complaint itself and an affidavit that NHA’s president in a related federal action. First, the Complaint specifically states that, in November 2015, the loss runs showed that, “as of August 2015, Comp Control had paid at least $766,000 related to more than $1,278,000 of incurred losses related to inquires in 2007 and 2008 of 18 employees at three facilities not affiliated with Plaintiffs ....”  Thus, by November 2015, plaintiffs possessed definitive and sufficient knowledge of the fraud or misrepresentation, which constituted more than a “mere suspicion.” Further, in the Federal Action, … NHA’s president, submitted an affidavit which states, in relevant part, “ fter NHA confronted Prism and the Schoors with the LMIC loss runs on November 23, 2015, Asher Schoor continued to incorrectly insist - in spite of this glaring evidence to the contrary- that ‘National is paying for their own claims.’ This statement contradicts plaintiffs' current assertions. Slip Op. at **9-10. The Court rejected plaintiffs’ attempt “to bring their claims within in the applicable limitations period” by arguing that “the fraud and misrepresentation claims did not accrue until the last extension prior to when plaintiffs learned of the fraud because the irrevocable Liberty LOCs deemed to be automatically extended each year unless the issuing bank not to renew.” Id . at *10. Stated differently, the Court rejected plaintiffs’ argument that their fraud and negligence claims were timely under the continuing wrong doctrine (the claims accrued “each time” the Schoors repeated the misrepresentations in each of their annual meetings with plaintiffs, and when additional premiums were paid in the form of Liberty LOC drawdowns as recently as August 2018). Id . The Court held that the automatic renewals and the drawdowns were not a continuing unlawful act; rather the consequence of the alleged fraud or misrepresentation committed in 2004-2008. Id . at **10-11. For the same reasons as the Liberty/Arlington transactions, the Court dismissed the fraud and negligent misrepresentation claims with regard to the Arch transactions and related issues and the Prism group transactions and related issues. Id . at **12-13. With regard to the breach of contract claims, the Court applied the same analysis and found the claims to be time-barred. Id . at **14-16. Plaintiffs maintained that their breach of contract claims were not time barred because (1) a new breach accrued when the Liberty LOCs were automatically extended; and (2) Liberty’s continuing wrong delayed the accrual of the claim until their final wrong in August 2018 (the recent drawdown on the Liberty LOCs). The Court noted that the automatic renewal/extension of the Liberty LOCs and their drawdowns in 2015-2018 did not renew the running of the statute of limitations because neither the extension/renewal nor the subsequent drawdowns constituted new or independent wrongs that would restart the running of the statute. Id . at *15. The Court explained that this finding was consistent with the holding of the Court of Appeals in which the Court held that the discovery rule does not apply to the statutes of limitations in contract actions. Id . (quoting ACE Sec. Corp. v. DB Structured Prods., Inc. , 25 N.Y.3d 581, 594 (2015)). Takeaway The continuing wrong doctrine is based on the continuation of unlawful acts; it is not based on the continuing effects of earlier unlawful conduct. The distinction, therefore, is between a single wrong that has continuing effects and a series of independent, distinct wrongs. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017) (citation and internal quotation marks omitted). National Health Care makes clear that plaintiffs will not be able to toll the statute of limitations when application of the doctrine is dependent upon the continuing harm incurred by the alleged wrongdoing.

“The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac , 27 N.Y.3d at 624 (citing Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac , 27 N.Y.3d at 624 (quoting Matter of Jacqueline F. , 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac , 27 N.Y.3d at 624. (quoting Rossi v Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Where the communications are made in the presence of third parties, whose presence is known to the client, the communications are not privileged from disclosure because they are no longer deemed to be confidential. Ambac , 27 N.Y.3d at 624 (citations omitted). Similarly, communications lose their protection where a communication is made in confidence but subsequently revealed to a third party. Id . As the Court of Appeals has held: “A lack of confidentiality and subsequent disclosure also destroy the privilege as a matter of fairness: ‘when conduct touches a certain point of disclosure, fairness requires that the privilege shall cease whether he intended that result or not.’” Id . Attorney-Client Privilege and Corporations “Corporations, as other clients, may avail themselves of the attorney-client privilege for confidential communications with attorneys relating to their legal matters,” whether that attorney is in-house or outside counsel. Rossi , 73 N.Y.2d at 592. The privilege thus applies to communications “between a corporation’s employees and the corporation’s in-house” or outside counsel “for the purpose of providing legal advice to the corporation.” Stock v. Schnader Harrison Segal & Lewis LLP , 142 A.D.3d 210, 216 (1st Dept. 2016). In Frank v. Morgans Hotel Grp. Mgt. LLC , 2020 NY Slip Op 20010 (Sup. Ct., N.Y. County Jan. 13, 2020) ( here ), Justice Gerald Lebovits addressed the question whether the privilege applies to communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis. As discussed below, Justice Lebovits held that it does. The Functional-Equivalent Doctrine Under the functional-equivalent doctrine, the attorney-client privilege will shield otherwise-qualifying communications between a corporation’s counsel and an individual providing services to the corporation on a contract basis, where the individual is acting as a corporate employee rather than a fully independent contractor. See Pecile v. Titan Capital Grp. , 119 A.D.3d 446, 447 (1st Dept. 2014), citing Matter of Copper Mkt. Antitrust Litig. , 200 F.R.D 213, 219-219 (S.D.N.Y. 2001). Since the functional-equivalent doctrine expands the scope of the privilege, courts narrowly apply it. In applying the doctrine, the courts consider whether a consultant or other contractor has in practice “assum the functions and duties of full-time employee” and has been “so thoroughly integrated” into the corporation’s structure that he or she “is a de facto employee of the company.” Export-Import Bank of the U.S. v. Asia Pulp & Paper Co. , 232 F.R.D. 103, 113 (S.D.N.Y. 2005); Matter of Copper Mkt. Antitrust Litig. , 200 F.R.D. 213, 219 (S.D.N.Y. 2001) (holding that a contractor should be treated as the functional equivalent of a division of the client corporation because the contractor “was, essentially, incorporated into to perform a corporate function that was necessary in the context” of the corporation’s affairs at the relevant time). In determining whether to apply the doctrine, courts look at “whether the consultant had primary responsibility for a key corporate job” and could make decisions on the corporation’s behalf, whether the consultant enjoyed “a continuous and close working relationship” with “the company’s principals on matters critical to the company’s position in litigation,” and whether “the consultant is likely to possess information possessed by no one else at the company.” Asia Pulp & Paper , 232 F.R.D. at 113. Frank v. Morgans Hotel Group Management LLC Background Frank concerned a discovery dispute in a personal injury action in which the plaintiff, Ilana Frank (“Frank”), alleged that while a patron of the bar at a hotel owned and operated by the defendants (collectively, “Morgans”), she fell and seriously injured her foot due to unsafe conditions on the premises. In discovery, Morgans produced non-party Steven Benjamin (“Benjamin”) for deposition as a person with knowledge of the circumstances of the accident. At the time of Frank’s fall in 2015, Morgans employed Benjamin as its director of risk management. Benjamin left Morgans and thereafter functioned as Morgans’ director of risk management on a contract basis. During Benjamin’s deposition, Frank’s counsel sought to question him about, among other things, (i) communications between Benjamin and Morgans’ outside counsel, and (ii) a conversation that Benjamin had with another Morgans employee, Schantel Mansfield (“Mansfield”), in a three-way conference call among Benjamin, Mansfield, and outside counsel. In each instance, counsel for Morgans objected and directed Benjamin not to answer the questions, asserting that Benjamin was shielded by the attorney-client privilege as the functional equivalent of a Morgans employee. Frank requested a judicial determination as to the validity of Morgans’ assertion of the attorney-client privilege over the disputed conversations involving Benjamin. Morgans did not object to Frank’s request for a privilege determination; it merely argued that its counsel’s assertions of privilege were proper. The Court’s Decision Justice Lebovits concluded that Benjamin qualified as the functional equivalent of a Morgans employee. Slip Op. at *2. The Court noted that the overlap between Benjamin’s duties and responsibilities as an employee and as a consultant of Morgans were material and supportive of its conclusion. Benjamin was previously employed by Morgans as its director of risk management from 2007 to 2018; after his position with the corporation was eliminated, he was immediately retained as a consultant to perform many of the same duties, retaining the title of director of risk management. Benjamin has a Morgans email address, a Morgans phone number, and access to a Morgans file server. In his current capacity as a consultant serving as director of risk management for Morgans, Benjamin retains responsibility for performing significant corporate functions: among other things, managing Morgans’ insurance programs nationwide (including negotiating the terms and conditions of Morgans’ various insurance policies), and working with Morgans’ financial staff regarding insurance-related budget and loss-forecasting issues. Benjamin is the only individual performing the duties and functions of the director of risk management role for Morgans, and is the only individual at Morgans with the requisite knowledge and experience of its insurance programs and the overall landscape of claims and litigation brought against it. Benjamin also continues to have decision-making authority on corporate matters: With respect to suits brought against Morgans, Benjamin is responsible for assigning defense counsel to represent Morgans, and has authority to make settlement offers within certain insurance policy limits. Benjamin reports directly to a corporate principal, namely Morgans’ general counsel; and he has a direct line of communication with Morgans’ chief operating officer. Id . (footnotes and citations to the record omitted). Against these facts, the Court found that, even though Benjamin was formally “serving as a corporate consultant rather than an employee, in practice he performing ‘the functions and duties of full-time employee’ while being ‘thoroughly integrated’ into the corporation’s structure and staff.” Id ., citing Asia Pulp & Paper , 232 F.R.D. at 113. Consequently, “to treat Benjamin as equivalent to an independent third party for privilege purposes, rather than as the functional equivalent of a corporate employee, would exalt form over substance,” said the Court. Id . The Court therefore held that the conversations between Benjamin and counsel for Morgans were “shielded by Morgans’ attorney-client privilege.” Id . The Court rejected Frank’s argument that Benjamin was not the functional equivalent of an employee because, as a consultant, he was likely to possess information that no one else at the company would be privy to. Id . Justice Lebovits noted that under those circumstances, the consultant would be “more likely to be integrated within the corporation’s structure and acting on behalf of the corporation rather than as an ‘outsider.’” Id . (citation omitted). Notwithstanding, the Court noted that in the case before it, there were other individuals besides Benjamin who would be likely to have knowledge of the details of an accident irrespective of whether Benjamin was acting as an independent third party or as a de facto Morgans employee. Id .  “That fact, without more,” said the Court, “says little about whether Benjamin is sufficiently integrated into Morgans’ corporate structure to be the functional equivalent of a Morgans employee.” Id . The Court also addressed whether Benjamin’s assertion of privilege over the details of what he discussed with Mansfield during their conference call with Morgans’ counsel was privileged. After noting the difference between asking for facts and asking about discussions with counsel, the Court found that “counsel for Morgans expressly represented at the deposition that the call ‘was a legal conversation regarding the preparation for this case wherein we discussed legal theory, strategy, et cetera, of the sort that is protected by attorney-client privilege.’” Id . at *3. The Court further noted that “Frank provide no basis … to reject that characterization, or to believe that Benjamin and Mansfield merely engaged in a conversation about the factual background of the case with counsel for Morgans silently on the line.” Id . (citations omitted). Therefore, held the Court, “ he call among Benjamin, Mansfield, and their counsel is … shielded by the attorney-client privilege, and counsel for Morgans properly directed Benjamin not to answer questions about what he had discussed with Mansfield during that call.” Id . Finally, the Court considered whether the attorney-client privilege shielded Benjamin’s conversation with his counsel during Benjamin’s deposition. The discussion occurred in connection with a photograph that Frank’s counsel produced during Benjamin’s deposition. Frank’s counsel asked Benjamin several questions about the substance of what Benjamin and his attorney had discussed during the deposition break—including whether the attorney had coached Benjamin about how to answer those very questions. Id . In response to the questions, Benjamin testified that his attorney had not asked him any questions about the photograph or coached him; but instead that he did not “know what this a picture of for sure,” and that he “ not comment on anything” relating to the photograph. Id . Morgans’ counsel also represented on the record that “the majority” of the break was spent by Benjamin conducting a private call unrelated to the action rather than “conferencing . . . regarding the photograph you produced.” Id . The Court held that “Frank provide no basis … to reject either Benjamin’s testimony about the deposition break or counsel for Morgans’ representations.” Id . Thus, the Court concluded “that Frank ha not established a basis to question Benjamin further on this topic.” Id . Takeaway The functional equivalent doctrine – an exception to the attorney-client privilege – originated in In re Bieter Co. , 16 F.3d 929, 933-34, 939-40 (8th Cir. 1994), where the Eighth Circuit held that an individual who aided a two-person company’s development of a parcel of land was functionally equivalent to a company employee where he assisted with the project from its inception and for several years thereafter; worked out of the company’s office; was the company’s sole representative at meetings with potential tenants and local officials; appeared at public hearings on the company’s behalf; and often spoke with the company’s counsel alone. See also United States v. Graf , 610 F.3d 1148, 1158-59 (9th Cir. 2010). Although several district courts within the Second Circuit have recognized the functional-equivalent doctrine as an exception to the protection of the attorney-client privilege, not all courts within the Circuit have embraced its application. Some district courts in the Circuit have questioned whether the Court of Appeals would adopt the doctrine given that it “has recognized very limited exceptions to privilege waiver.” Church & Dwight Co. v. SPD Swiss Precision Diagnostics, GmbH , 2014 WL 7238354, at *2 (S.D.N.Y. Dec. 19, 2014); In Re Restasis Antitrust Litig. , 352 F. Supp. 3d 207, 213 (E.D.N.Y. Jan. 17, 2019); Homeward Residential, Inc. v. Sand Canyon Corp. , 2017 WL 4676806, at *14 n.21 (S.D.N.Y. Oct. 17, 2017). In contrast, courts outside of the Second Circuit have embraced the doctrine, stating that the approach by the courts in the Second Circuit was too restrictive. E.g. , In re Flonase Antitrust Litig. , 879 F. Supp. 2d 454, 459-60 (E.D. Pa. 2012); Fed. Trade Comm’n v. GlaxoSmithKline , 294 F.3d 141, 148 (D.C. Cir. 2002). As a result, these courts have endorsed “a broad practical approach” to account for the realities of “‘today’s marketplace, where businesses frequently hire contractors and still expect to be able to seek legal advice.’” Flonase , 879 F. Supp. 2d at 459-60 (quoting US. ex rel. Fry v. Health All. of Greater Cincinnati , 2009 WL 5033940, at *4 n.1 (S.D. Ohio Dec. 11, 2009)). Regardless of the foregoing debate, as Frank shows, in New York State courts, the doctrine remains a viable exception to the waiver rules relating to the attorney-client privilege.

Ponzi schemes remain a familiar and unfortunate risk for investors. Because Ponzi schemes purport to offer high returns with little or no risk, and rely on inflated credentials of a financial professional, investors are attracted to the investment products these scammers offer. The most notorious Ponzi scheme in recent years was perpetrated by Bernie Madoff. In 2016, there were 59 Ponzi schemes uncovered in the United States, with losses totaling $2.4 billion, according to the Financial Times. See “Investors beware: the Ponzi scheme is thriving,” March 30, 2017 ( here ). In today’s post, this Blog looks at a Ponzi-like scheme in which the promoter, Kenneth D. Courtright, III (“Courtright”), the founder, co-owner, and Chairman of Todays Growth Consultant Inc. (“TGC”), allegedly promised more than 500 investors a minimum guaranteed rate of return, in perpetuity, on revenues generated by websites that TGC acquired or built for the investors and then developed, maintained, and hosted. On January 14, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it filed an emergency enforcement action and obtained a temporary restraining order and asset freeze against Courtright and TGC in connection with an alleged Ponzi-like scheme that raised at least $75 million from more than 500 investors throughout the United States and abroad. According to the SEC, from at least 2017 through at least October 2019, TGC, which also operated under the name “The Income Store,” and Courtright, promised investors an “endless minimum guaranteed rate of return on revenues generated by websites.” In exchange for an investor’s “upfront fee,” TGC claimed that it would either buy or build a website for the investor, and develop, market, and maintain the website. As alleged, TGC falsely promised that it would use investors’ funds exclusively for expenses related to the investor’s website. In reality, the SEC alleged, the sales were conducted through unregistered securities offerings (through Consulting Performance Agreements advertised via websites and radio ads), and TGC used new investors’ funds to pay investor returns, in Ponzi-like fashion, and to pay Courtright’s personal expenses, including his mortgage and private school tuitions for his family. In particular, according to the SEC complaint ( here ), TGC promised investors the larger of either 50% of their website revenues or a minimum annual guaranteed return (typically ranging from 13% to 20% of the initial investment amount) to be paid monthly, even if the investor’s website revenue was insufficient to pay that return. TGC allegedly backed its guarantee with various representations, including that it was in “‘satisfactory financial condition, solvent, able to pay its bills when due and financially able to perform its contractual duties’ and that it ‘debt-free ... with no accounts payable or loans outstanding.’” The SEC maintained, however, that TGC was not a successful business, was not in satisfactory financial condition, and was not able to perform its contractual duties under Consulting Performance Agreements. According to the Commission, from at least January 2017 through the present, investor websites generated materially less revenue than the guaranteed amounts specified in TGC’s Consulting Performance Agreements. From January 1, 2017 through at least October 31, 2019, alleged the SEC, investor websites generated approximately $9 million in advertising and product sales revenue. During the same period, TGC paid investors at least $30 million. The SEC contended that “TGC’s financial statements and bank records show that, in classic Ponzi-like fashion, from at least January 2017 into at least May 2019, TGC funded the gap between website revenues and its guaranteed investor payouts primarily through the offer and sale of Consulting Performance Agreements to new or repeat investors.” The SEC said that “ n December 13, 2019, TGC informed investors that it was putting a temporary moratorium on investor payouts due to cash flow problems.” Commenting on the SEC’s action, Antonia Chion, Associate Director in the SEC’s Division of Enforcement, said: “TGC and Courtright’s alleged fraud promised a guaranteed return when the company’s business model and financial condition could not possibly support it. To avoid further harm to investors and preserve the misused assets that have not already been dissipated, we have sought and obtained emergency relief.” The SEC filed its complaint in U.S. District Court for the Northern District of Illinois on December 27, 2019. The complaint was unsealed on January 14, 2020. The Commission charged Courtright and TGC with violating the antifraud and registration provisions of the federal securities laws and sought certain emergency relief as well as the imposition of permanent injunctions, return of ill-gotten gains with prejudgment interest, and civil penalties. On December 30, 2019, the Court issued a temporary restraining order, ordered an asset freeze and other emergency relief, and appointed a receiver for TGC ( here ). The Court case is captioned: SEC v. Todays Growth Consultant Inc., et al. , Civil Action No. 19-cv-08454 (N.D. Ill.).

On January 16, 2020, the Appellate Division, First Department recalled and vacated its September 17, 2019 decision in Ambac Assur. Corp. v Countrywide Home Loans Inc. , 175 A.D.3d 1156 (1st Dept. 2019), for the primary purpose of deciding whether the motion court properly denied Countrywide’s motion to strike Ambac’s jury demand on its fraudulent inducement cause of action. In its decision replacing the recalled and vacated decision (2020 N.Y. Slip Op. 00367 ( here )), the First Department affirmed the denial. In doing so, the Court left intact (with some minor edits) the ruling with regard to Ambac’s fraudulent inducement claim and whether it was duplicative of its contract claim. This Blog examined the Court’s September 2019 decision in the article, titled “ First Department Declines to Dismiss Fraudulent Inducement Claim as Duplicative of Contract Claim Based On Expert Analysis .” The Court’s revised decision was issued in response to Defendants’ motion to reargue and, in the alternative, leave to appeal to the Court of Appeals the issue whether, among others, “the Court should clarify that it did not decide whether Countrywide’s motion to strike Ambac’s jury demand should be granted, where that issue was not addressed in the Court’s opinion ….” In the September 17, 2019 Decision and Order, the Court affirmed, without discussion, the motion court’s order denying Countrywide’s motion to strike Ambac’s jury demand on the fraudulent inducement claim. [Ed. Note: On the issue this Blog examined – whether the damages sought by the fraudulent inducement claim were duplicative of the contract claim, thereby necessitating dismissal of the fraudulent inducement claim – the Court held that the motion court “correctly denied the Countrywide defendants’ motion” to dismiss the claim. This Court reasoned that “the Countrywide defendants not establish[ ], as a matter of law, that the damages sought in connection with the fraud claim the same as those sought in connection with the contract claims.” The Court noted that “at oral argument before the Court of Appeals,” Countrywide’s attorney recognized that “there was a different measure of damages for the fraud and contract claims” and that the “Court of Appeals itself” recognized that the measures of damages for the fraudulent inducement claim and the contract claims were separate and distinct. The Court further noted that Ambac’s damages expert, who was not challenged by the Countrywide defendants, “explain that the damages for the fraud and contract claims ‘qualitatively and quantitatively distinct.’” In this regard, the expert explained that “whereas the contract damages are calculated based on the terms of the contractual repurchase protocol, the fraud damages are determined based on the portion of Ambac’s claims payments that flow from nonconforming loans.” Thus, in light of the “expert affidavit already submitted,” and the motion to supplement that affidavit filed by Ambac, the Court held that “it premature to dismiss the fraud claim as duplicative.”] Since this Blog did not address the jury waiver issue in our examination of the case ( here ), a little context is provided below. Before the motion court, Countrywide contended that the agreements at issue each contained a jury waiver provision and, therefore, Ambac’s jury demand for its fraudulent inducement claim should be stricken. Countrywide argued that under established law contractual jury waivers are broad enough to cover fraud claims, including claims for fraudulent inducement, associated with the contract that contains the jury waiver. As noted by the motion court, this argument was rejected by the First Department in Ambac Assur. Corp. v. DLJ Mtge. Capital, Inc ., 102 A.D.3d 487 (1 st Dept 2013), which it noted was “strikingly similar to the instant action.” In DLJ Mtge. , the First Department held that the jury waiver provision in a contract Ambac entered into in connection with its insurance of an RMBS transaction did not deprive Ambac of its right to a jury trial on its fraudulent inducement claim related to the same RMBS transaction. The motion court observed that Ambac brought virtually identical claims against DLJ as it did against Countrywide and that the same arguments in support of the motion to strike Ambac’s jury demand were made in both cases. In DLJ , Ambac alleged that it was fraudulently induced by defendants to enter into an insurance agreement and provide financial guaranty insurance on certain RMBS transactions, and, in the alternative, that the defendants had breached representations and warranties in the parties’ insurance agreement. Ambac requested a jury trial on its fraudulent inducement claim, but not on its breach of contract claims. The defendants moved to strike Ambac’s jury demand, and the trial court granted that motion. Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc ., 33 Misc. 3d 1208(A) *14-15 (Sup. Ct., N.Y. County 2011). On appeal, the First Department reversed, holding that “the complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim. Thus, the provision of the agreement that waives the right to trial by jury does not apply.” Ambac Assur. Corp. v. DLJ Mortg. Capital, Inc. , 102 A.D.3d at 487-88. Under New York law, a jury waiver clause does not apply where the party alleging fraudulent inducement challenges the validity of the contract. See , e.g. , Zahar CDO 2003-1 Ltd v. Xinhua Sports & Entertainment Ltd ., 158 A.D.3d 594, 594 (1st Dept 2018) (“a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission, may, under certain circumstances, still challenge the validity of the underlying agreement in a way that renders the contractual jury waiver provision in that agreement inapplicable to the fraudulent inducement cause of action”); China Dev. Indus. Bank v. Morgan Stanley & Co. Inc. , 86 A.D.3d 435, 436-43 7 (1st Dept. 2011) (holding that a challenge to the validity of the contract as a whole also invalidates the jury waiver clause in the contract). The motion court found that “as in DLJ , Ambac’s claim for fraudulent inducement challenges the validity of the parties’ I&I Agreements.” Therefore, the motion court concluded, “Ambac is entitled to a jury trial on its fraudulent inducement claim because that claim challenges the validity of the I&I Agreements that contain the jury waiver provision that Countrywide invokes.” In its revised decision and order, the First Department affirmed. Like the motion court, the First Department found that Ambac “repeatedly allege that the insurance agreements were obtained through various types of fraudulent conduct.” Slip Op. at *2. Thus, explained the Court, “because it is clear that Ambac’s primary claim is fraudulent inducement, the agreements’ provisions waiving the right to a jury trial do not apply.” Id . (citing MBIA Ins. Corp. v Credit Suisse Sec. (USA), LLC , 102 A.D.3d 488, 488 (1st Dept. 2013); and Ambac Assur. Corp. v DLJ Mtge. Capital , 102 A.D.3d at 487-488). Takeaway Under New York law, where a plaintiff challenges the validity of an agreement because of fraud, a provision waiving the right to a jury trial arising out of that agreement does not apply. See , e.g. , China Dev. Indus. Bank v. Morgan Stanley & Co. Inc. , 86 A.D.3d 435, 436-437 (1st Dept. 2011); Wells Fargo Bank, N.A. v. Stargate Films, Inc. , 18 A.D.3d 264 (1st Dept. 2005). Where fraudulent inducement is the plaintiff’s primary claim, “ t is of no consequence that the complaint does not contain the word ‘rescission’ or expressly state that it challenges the validity of the ... agreement.” Ambac Assur. Corp. v. DLJ Mtge. Capital , 102 A.D.3d at 488). Since Ambac’s primary claim was fraudulent inducement, the Ambac Court found that the jury waiver clause was no bar to a jury trial.

Commercial contracts typically include a liquidated damages provision that allows for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Courts will sustain such a provision if the liquidated amount is reasonably proportionate to the probable loss and the amount of actual loss is incapable or difficult of precise estimation. If, however, the amount fixed is grossly disproportionate to the probable loss, then the provision amounts to nothing more than a penalty and will not be enforced. Given the consequences of a liquidated damages clause, it is important to understand when and how such a clause will be enforced. A Primer on Liquidated Damages What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977) (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). Are Liquidated Damages Clauses Enforceable? If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). Although the party challenging the liquidated damages provision has the burden to prove that the liquidated damages are, in fact, an unenforceable penalty ( see JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005); Parker v. Parker , 163 A.D.3d 405, 406 (1st Dept. 2018)), the party seeking to enforce the provision must have been damaged in order for the provision to apply ( see , e.g. , J. Weinstein & Sons, Inc. v. City of New York , 264 App. Div. 398, 400 (1st Dept.) (“The proof establishes that no claims were made against defendant and that defendant suffered no financial damage whatsoever.”), aff’d , 289 N.Y. 741 (1942)). The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. Truck Rent-A-Center , 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding , 4 N.Y.3d at 380. New York courts often strike liquidated damage clauses when they fail to meet the foregoing. See, e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from the time of the breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which the tenant forfeited $63,500 in deposits regardless of whether the tenant terminated agreement with several months’ notice). “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Rubin v. Napoli Bern Ripka Shkolnik, LLP On January 14, 2020, the Appellate Division, First Department addressed the enforceability of a liquidated damages clause in an employment agreement, holding that the defendants did not make a prima facie showing of entitlement to those damages. Rubin v. Napoli Bern Ripka Shkolnik, LLP , 2020 N.Y. Slip. Op. 00250 (1st Dept. Jan. 14, 2020) ( here ). Background Rubin involved claims brought by plaintiff, Denise A. Rubin (“Rubin”), for, among other things, employment discrimination and breach of contract against her former employers, defendants Napoli Bern Ripka Shkolnik, LLP, Worby Groner Edelman & Napoli Bern, LLP, and Napoli Bern & Associates, LLP (collectively, the “Law Firm Defendants” or the, “Law Firms”), and one of the Law Firms’ partners, defendant Paul J. Napoli (“Napoli”). Rubin was employed by one or more of the Law Firm Defendants, as an associate attorney and general counsel, from 2003 until September 2014. Rubin entered into a written employment agreement with the Law Firm Defendants in 2004 and again in 2007 (the “Employment Agreement”). The Employment Agreement remained in effect until her employment was terminated in September 2014. Rubin alleged that during her tenure at the Law Firms, she was paid less in base salary and bonuses than several less experienced and less skilled male attorneys, was denied a promotion to partner when less experienced and less skilled male attorneys were promoted, and was fired without cause when male attorneys with performance issues remained employed. Rubin also claimed that defendants agreed to but did not pay her a guaranteed bonus for matters on which she performed work. She further alleged that after Napoli fired her, she continued to work on the Law Firms’ matters, at the direction of another partner at the Law Firms, but was not paid for the work she performed from October 14, 2014 until early December 2014. Rubin commenced the action on April 24, 2015 (the “First Action”). The original complaint alleged four causes of action against all defendants: sex-based employment discrimination in violation of the New York City Human Rights Law (“NYCHRL”) (first); breach of contract for failure to pay a promised bonus (second); breach of contract for failure to pay salary or benefits from October 14, 2014 until early November 2014 (third); and quantum meruit, for work performed from October 14, 2014 until early December 2014 (fourth). The Law Firm Defendants answered the complaint in August 2015. Napoli filed a pre-answer motion to dismiss as against him in June 2015, and Rubin cross-moved for sanctions. Napoli’s motion was granted, and Rubin’s cross motion was denied on September 2, 2015. In October 2015, plaintiff commenced a new action against Napoli (“Second Action”), asserting one cause of action under the NYCHRL for employment discrimination. Napoli moved to dismiss the complaint on res judicata grounds. The court denied Napoli’s motion in February 2016 and consolidated the Second Action with the First Action. Between March 2016 and July 2016, the parties engaged in motion practice related to, among other things, Napoli’s filing of counterclaims. On September 29, 2016, the court permitted Napoli to amend his answer solely to the extent of permitting him to assert a counterclaim for tortious interference with contractual relations. Napoli appealed the denial of his motion to amend his answer with respect to his other counterclaims. The First Department affirmed the motion court’s decision on June 20, 2017. In May 2016, Napoli moved to seal documents submitted by Rubin with her papers in support of her motion to dismiss Napoli’s counterclaims. The motion was resolved by stipulation of the parties dated May 17, 2016. One week later, the Law Firm Defendants moved to compel Rubin to return all documents in her possession to which she had access during her employment with the Law Firms, including documents containing confidential, privileged, proprietary or sensitive information related to the Law Firms’ matters and clients. The parties resolved the motion pursuant to a stipulation on June 14, 2016. On August 18, 2016, the Law Firm Defendants moved for leave to amend their answer to include a counterclaim for breach of contract, alleging that Rubin breached the Employment Agreement by disclosing privileged and confidential information related to the Law Firms’ business and clients, in documents submitted to the court in support of her motion to dismiss Napoli’s counterclaims, and claiming they were entitled to liquidated damages under the contract. The motion court granted the motion on December 5, 2016. Rubin sought to amend her complaint to add a cause of action for retaliation against all defendants, based on their conduct during the litigations, and to add an additional cause of action for breach of contract against the Law Firm Defendants for failing to provide “tail” insurance. The Law Firm Defendants moved for summary judgment dismissing the second cause of action for breach of contract based on allegations that they failed to pay a non-discretionary bonus to Rubin; and granting judgment in their favor on their breach of contract counterclaim in the amount of $100,000 as liquidated damages. The motion court denied the Law Firm Defendants’ motion for summary judgment on their counterclaim for liquidated damages. Defendants claimed that Rubin violated the confidentiality provision of the Employment Agreement by filing four documents with the court during earlier motion practice in the case, and contended that they were entitled to $100,000 in liquidated damages, or $25,000 for each violation, under the agreement. Rubin claimed that she did not believe she was breaching the confidentiality provision of the Employment Agreement when she submitted the documents in question to the court. “Assuming, without deciding, that the four documents at issue, or any one of them, contained confidential ‘business information, trade secrets and other proprietary information and data’ subject to … the Employment Agreement,” the motion court held that it could not determine on the record before it that the disclosure of the information was done “knowingly, intentionally or willfully.”  Moreover, the motion court held that defendants failed to demonstrate what, if any, injury or loss they sustained as a result of the disclosure of the four documents at issue. The First Department’s Decision The First Department affirmed the denial of the Law Firm’s Defendants’ motion for liquidated damages. The Court held that although defendants demonstrated that Rubin triggered the liquidated damages provision of the Employment Agreement when she “knowingly, intentionally or willfully” filed the four documents in question, they “did not make a prima facie showing of entitlement to those damages.” The law firm defendants established as a matter of law that plaintiff violated the confidentiality provision of her employment agreement when she filed four confidential documents - three email chains discussing client and law firm business issues and a written audit report of the firms' policies and procedures prepared by another law firm - on NYSCEF (New York State Courts Electronic Filing), making them publicly available. At the time of the filing, plaintiff was an attorney licensed in New York and was represented by counsel. Accordingly, under the circumstances, her actions qualified as “knowing[], intentional[] or willful[]” and triggered the liquidated damages provision of her employment agreement. However, on this record, defendants did not make a prima facie showing of entitlement to those damages. Slip Op. at *1. The Court explained that “defendants did not identify … any damages that they sustained as a result of plaintiff’s breach of the agreement.” Id . at **1-2. Takeaway Liquidated damages clauses can be found in a wide array of commercial contracts, such as contracts for the sale of real property, commercial leases, employment contracts, and construction contracts. While such provisions are generally enforceable under New York law, Rubin shows that a necessary element of the claim for such damages is injury or damages. Without such proof, the claim for liquidated damages will be denied.

John loans Jane money to help Jane grow her company. Unfortunately, Jane fails to repay John as promised. John demands that the Jane repay him. In front of a group of people known to both John and Jane, John calls Jane a “scammer”, a “thief” and a “con artist.” John sues Jane for breach of contract and fraud. Jane counterclaims, alleging that John defamed her in front of their friends. The foregoing fact pattern is not uncommon. Prospective clients often tell lawyers of such incidents. Sometimes the alleged defamation is found in social media. Again, it is not uncommon for a person to post a negative comment about a business, claiming that he/she was scammed or taken by the business owner. The question for the lawyer is whether such name calling is actionable for purposes of a defamation claim? In Levy v. Nissani , 2020 N.Y. Slip Op. 00113 (2d Dept. Jan. 8, 2020) ( here ), the Court held that such statements were actionable as they were capable of being proven false. Defamation and the Difference Between a Statement of Fact and An Expression of Opinion The elements of a cause of action sounding in defamation are: (1) a false statement that tends to expose a person to public contempt, hatred, ridicule, aversion, or disgrace; (2) published without privilege or authorization to a third party; (3) amounting to fault as judged by, at a minimum, a negligence standard; and (4) either causing special harm or constituting defamation per se. See Kasavana v. Vela , 172 A.D.3d 1042, 1044 (2d Dept. May 15, 2019); Stone v. Bloomberg L.P. , 163 A.D.3d 1028, 1029 (2d Dept. 2018); Greenberg v. Spitzer , 155 A.D.3d 27, 41 (2d Dept. 2017). A statement is defamatory per se if it (1) charges the plaintiff with a serious crime; (2) tends to injure the plaintiff in her or his trade, business or profession; (3) imputes to the plaintiff a loathsome disease; or (4) imputes unchastity to a woman. Liberman v. Gelstein , 80 N.Y.2d 429, 435 (1992). Where the plaintiff is a public figure, the plaintiff is required to prove, by clear and convincing evidence, that the defamatory statements were published with actual malice . Mahoney v. Adirondack Publ. Co. , 71 N.Y.2d 31, 39 (1987). “Truth is an absolute defense to an action based on defamation.” Heins v. Board of Trustees of Inc. Vil. of Greenport , 237 A.D.2d 570, 571 (2d Dept. 1997); Goldberg v. Levine , 97 A.D.3d 725, 726 (2d Dept. 2012). Therefore, to satisfy the falsity element of a defamation claim, a plaintiff must allege that the complained of statement is “substantially false.” “If an allegedly defamatory statement is ‘substantially true,’ a claim of libel is ‘legally insufficient and … should dismissed.’” Biro v. Condé Nast , 883 F. Supp. 2d 441, 458 (S.D.N.Y. 2012) (ellipsis and alteration in original), quoting Guccione v. Hustler Mag., Inc. , 800 F.2d 298, 301 (2d Cir. 1986) (applying New York law). The test to determine whether a statement is substantially true “is whether as published would have a different effect on the mind of the reader from that which the pleaded truth would have produced.” Fleckenstein v. Friedman , 266 N.Y. 19, 23 (1934); Franklin v. Daily Holdings, Inc. , 135 A.D.3d 87, 94 (1st Dept. 2015). It is well settled “that an alleged libel is not actionable if the published statement could have produced no worse an effect on the mind of a reader than the truth pertinent to the allegation.” Guccione , 800 F.2d at 302, citing Fleckenstein , 266 N.Y. at 23. See also Fulani v. New York Times Co. , 260 A.D.2d 215 (1st Dept. 1999). “Since falsity is a necessary element of a defamation cause of action and only facts are capable of being proven false,” then “only statements alleging facts can properly be the subject of a defamation action.” Gross v. New York Times Co. , 82 N.Y.2d 146, 152-153 (1993), quoting 600 W. 115th St. Corp. v. Von Gutfeld , 80 N.Y.2d 130, 139 (2014). Thus, “ n expression of pure opinion is not actionable …, no matter how vituperative or unreasonable it may be.” Steinhilber v. Alphonse , 68 N.Y.2d 283, 289 (1986). “A pure opinion may take one of two forms. It may be a statement of opinion which is accompanied by a recitation of the facts upon which it is based, or it may be n opinion not accompanied by such a factual recitation so long as it does not imply that it is based upon undisclosed facts.” Davis v. Boeheim , 24 NY3d 262, 269 (2014) (internal quotation marks omitted). Conversely, “an opinion that implies that it is based upon facts which justify the opinion but are unknown to those reading or hearing it, is a mixed opinion and is actionable.” Id . (alterations and internal quotation marks omitted). The latter is actionable “not because they convey false opinions ‘but rather because a reasonable listener or reader would infer that the speaker knows certain facts, unknown to audience, which support opinion and are detrimental to the person whom .’” Gross , 82 N.Y.2d at 153-154, quoting Steinhilber , 68 N.Y.2d at 290. In distinguishing between facts and opinion, the court considers the following factors: (1) whether the specific language has a precise meaning that is readily understood, (2) whether the statements are capable of being proven true or false, and (3) whether the context in which the statement appears signals to readers or listeners that the statement is likely to be opinion, not fact. Silverman v. Daily News, L.P. , 129 A.D.3d 1054, 1055 (2d Dept. 2015); see also Thomas H. v. Paul B. , 18 N.Y.3d 580, 584 (2012); Mann , 10 N.Y.3d at 276; Steinhilber , 68 N.Y.2d at 292. “The essential task is to decide whether the words complained of, considered in the context of the entire communication and of the circumstances in which they were spoken or written, may be reasonably understood as implying the assertion of undisclosed facts justifying the opinion.” Steinhilber , 68 N.Y.2d at 290. “Whether a particular statement constitutes an opinion or an objective fact is a question of law.” Mann v. Abel , 10 N.Y.3d 271, 276 (2008). See also Kamchi v. Weissman , 125 A.D.3d 142, 157 (2d Dept. 2014); Abakporo v. Daily News , 102 A.D.3d 815, 816 (2d Dept. 2013). Levy v. Nissani Levy involved an action for breach of contract and fraud. The individual defendants counterclaimed, alleging causes of action sounding in defamation. The individual defendants, Ronen Nissani and David S. Nissani (together, the “Nissanis”), had a close social relationship with the plaintiff, Haim Levy (“levy”), for many years. The Nissanis own defendant, Davron Corp. (“Davron”), a jewelry business. From February 2015 through September 2015, Levy allegedly loaned the Nissanis large sums of money for the purpose of acquiring, enhancing, and reselling rare and valuable gems for a profit. When the Nissanis failed to repay Levy the full amount of the loans, plus his share of the profits within the timeframe promised, Levy began demanding that defendants repay him. On July 15, 2017, during a religious service, Levy allegedly called the Nissanis “scammers” or “con artists”, and warned those in attendance not to do business with them. Following services, Levy allegedly repeated the charge that the Nissanis were “thieves.”  As Ronen Nissani began to walk home from the service, Levy allegedly threatened him in the presence of others that he was “going to be on your ass until I get my money! I’m not going to leave you alone! You will see! You are thieves!” On July 20, 2017, Levy commenced the action to, inter alia , recover damages for breach of contract and fraud. In their answer, defendants asserted counterclaims for, inter alia , defamation per se. In the order appealed from, the motion court, inter alia , denied those branches of Levy’s motion which were for summary judgment dismissing the first and second counterclaims, concluding that the challenged statements constituted false assertions of fact rather than mere nonactionable expressions of opinion, and were defamatory per se because they tended to injure the Nissanis in their profession. Levy appealed. The Second Department’s Ruling The Court affirmed the motion court’s order. The Court held that Levy “failed to establish, prima facie, that these statements < i.e ., the nissanis were “scammers” or “con artists” and “thieves”> i.e., the nissanis were “scammers” or “con artists” and “thieves”> did not constitute false assertions of fact.” Slip Op. at *2. (citation omitted). Viewing the statements “in the context in which the allegedly defamatory statements were made,” the Court found that “a reasonable listener would likely understand those statements to imply that the Nissanis swindled the plaintiff out of money in connection with their business.” Id . (citation omitted). The Court explained that the “statements readily be proven true or false and, given the tone and overall context in which the statements were made, signaled to the average listener that the plaintiff was conveying facts about the Nissanis.” Id . (citations omitted). Notably, the Court held that “ ven if the challenged statements had not conveyed assertations of fact, they would nonetheless be actionable as mixed opinion, since a reasonable listener would have inferred that the plaintiff had knowledge of facts, unknown to the audience, which supported the assertions he made.” Id . (citation omitted). Finally, the Court held that Levy “failed to establish, prima facie, that the challenged statements were not defamatory per se, since they charged the Nissanis with the commission of a serious crime and would tend to injure the Nissanis in their business by imputing ‘fraud, dishonesty, misconduct, or unfitness in conducting profession.’” Id . (quoting Greenberg , 155 A.D.3d at 47 (internal quotation marks omitted). Accordingly, the Second Department affirmed the motion court’s “determination denying those branches of the plaintiff’s motion which were for summary judgment dismissing the first and second counterclaims….” Id . (citation omitted). Takeaway Although the alleged defamation in Levy occurred in a group setting, Levy teaches that the risks of defamation can extend beyond in-person meetings and gatherings. For example, in today’s digital world, people post reviews about a company’s products or services. It is fair to say that some posters do not think about the legal ramifications of their review. Indeed, there are many times when the review goes beyond a bad experience or a non-working product. Levy highlights the exposure one has when “name calling” becomes part of the review.

This Blog has addressed many issues related to mortgage foreclosure. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> ,  < HERE =">HERE"> , < HERE =">HERE"> and .  As to the issues relating to the standing of a lender to commence a foreclosure action, this Blog has noted that, in  general, a foreclosing mortgagee makes out its prima facie case by producing the “mortgage, the unpaid note, and evidence of default.”  Deutsche Bank Nat. Trust Co. v. Abdan , 131 A.D.3d 1001, 1002 (2 nd Dep’t 2015).  When standing is raised as a defense, plaintiff must also prove its standing to obtain relief from the court.  Nationstar Mortgage, LLC v. LaPorte , 162 A.D.3d 784, 785 (2 nd Dep’t 2018).  A plaintiff in a mortgage foreclosure action establishes its standing by demonstrating that it “is the holder or assignee of the underlying note at the time the action is commenced.”  Nationstar , 162 A.D.3d at 785.  A “holder” is “the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.”  N.Y.U.C.C 1-201 <21> ; Deutsche Bank Nat. Trust Co. v. Brewton , 142 A.D.3d at 684 (2 nd Dep’t 2016).  A written assignment of the note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation.  Brewton , 142 A.D.3d at 684 (citation omitted).  The mortgage, because it is merely security for the maker’s obligation to repay the underlying debt, passes with the debt as an inseparable incident when the note is assigned.  Brewton, 142 A.D.3d at 684 (citation omitted) .   Where, however, a note is “neither indorsed in blank nor specifically indorsed” to the person in physical possession of the note, that person cannot be “the lawful holder thereof for purposes of enforcing it.”  McCormack v. Maloney , 160 A.D.3d 1098, 1100 (3 rd Dep’t 2018) (citations omitted).  Therefore, such a person would not, inter alia , have standing to commence a mortgage foreclosure action.  McCormack , 160 A.D.3d at 1100 (citations omitted). Section 3-202 of New York’s Uniform Commercial Code governs the “negotiation” of a negotiable instrument, which is the “transfer of an instrument in such form that the transferee becomes the holder.”  UCC § 3-202(1) .  “If the instrument is payable to order it is negotiated by delivery with any necessary indorsement; if payable to bearer it is negotiated by delivery.” UCC § 3-202(1) .    "Holder status is established where the plaintiff possesses a note that, on its face or by allonge, contains an indorsement in blank or bears a special indorsement payable to the order of the plaintiff.”  Wells Fargo Bank, NA v. Ostiguy , 127 A.D.3d 1375, 1376 (3 rd Dep’t 2015) (citations omitted).  An allonge is an additional piece of paper “so firmly affixed as to become a part thereof.”  NY UCC § 3-202(2) ; U.S. Bank National Assoc. v. Moulton (2 nd Dep’t January 8, 2020).  An allonge may be needed where “there is insufficient space on the itself for the endorsements; as long as the allonge remains firmly affixed to the note, it becomes part of the note.”  Id. (citation omitted). The Moulton Court analyzed the importance of complying with the UCC’s rules concerning allonges.  The plaintiff in Moulton commenced a mortgage foreclosure action after defendants’ default on the underlying obligation.  In their answer, defendants, inter alia , raised plaintiff’s lack of standing to commence the action.  The motion court granted plaintiff’s motion for summary judgment, struck defendants’ answer and appointed a referee to compute the amounts due to plaintiff and denied the defendants’ cross-motion for summary judgment dismissing the complaint. On appeal, the Second Department reversed holding that plaintiff “failed to establish, prima facie, its status as a holder of the note at the time the action was commenced.”  Moulton , at page 2.  In so doing, the Moulton Court found that “plaintiff failed to show that the note was properly endorsed and thus validly transferred to it.”  Moulton , at page 3 (citations omitted).  The note in question was made payable to “Chevy Chase Bank, F.S.B.” and not plaintiff.  The Court in strictly interpreting the UCC’s requirements relating to allonges, found that plaintiff’s “proof” of its standing was inadequate and stated: In the record on appeal, the piece of paper immediately following the copy of the note contains only a purported endorsement specially endorsed to the plaintiff by Chevy Chase Bank, F.S.B. This page is not referred to at all in the affidavit of servicer for the plaintiff (hereinafter the loan servicer), or any other evidence submitted in support of the plaintiff's motion.  Although the affirmation of the plaintiff's counsel refers to the document as an endorsement, and states that the note is specially endorsed to the plaintiff, the document does not meet the Uniform Commercial Code requirements necessary to constitute an allonge containing an endorsement, since no evidence was submitted to indicate that the paper containing the purported endorsement was so firmly affixed to the note so as to become a part thereof, as required under UCC 3-202(2). The last page of the note indicates that it is page 5 of 5 and has sufficient white space on the page to fit an endorsement; the purported allonge, which is undated, contains no pagination or writing in any way to demonstrate its connection to the note or that it was firmly affixed thereto. The affidavits of the plaintiff's counsel and the plaintiff's loan servicer, submitted in support of the plaintiff's motion, also fail to indicate that the purported allonge is connected to the note or that it was firmly affixed thereto. Thus, this so-called allonge fails to meet the legal requirements of an allonge (see UCC 3-202<2> ), and is not connected to the note by any admissible evidence, and cannot serve as an evidentiary basis for summary. Since the plaintiff failed to establish, prima facie, its standing, summary judgment should have been denied. Moulton , at pages 3-4 (some citations omitted).

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s). Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv. dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming , 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104(a): (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution without a hearing. BCL § 1111(a). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. (2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). “In determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists. Matter of Kaufmann , 225 A.D.2d 775 (2d Dept. 1996). “ he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman v. Lovett , 200 A.D.2d 670, 670-71 (2d Dept. 1994). Even if dissension and/or deadlock exists, allegations that a petitioner acted in bad faith by creating the underlying disputes to justify dissolution “constitute a defense to a dissolution proceeding,” and therefore require a hearing to determine the issue. Myers v. Gold , 77 A.D.2d 652, 653 (2d Dept. 1980) (internal citations omitted); Matter of Rappaport , 110 A.D.2d 639, 641 (2d Dept. 1985). But see Matter of Eklund Farm Machinery, Inc. , 40 A.D.3d 1325, 1326-27 (3d Dept. 2007) (summarily granting dissolution despite allegations that petitioner acted in bad faith by “creat dissension to obtain dissolution” where the record clearly established that the petitioner was completely excluded from control and operation of the corporation by respondent). In Doshi v. Besen , 2019 N.Y. Slip Op. 33771(U) (Sup. Ct., N.Y. County Dec. 30, 2019) ( here ), the Court granted the motion of a 50% shareholder to dissolve the corporation on the grounds that the internal dissension between the two shareholders was so severe that dissolution was “inevitable” and beneficial to them. Doshi was a special proceeding brought pursuant to BCL §1104(a), in which Petitioner, Amit Doshi (“Doshi”), sought the judicial dissolution and an accounting of Besen & Associates, Inc. (“B&A” or the “Company”), a New York Corporation in which Doshi and Michael Besen (“Besen”) each owned fifty percent of the Company’s outstanding shares. The Company was formed in 1988 for the primary purpose of operating a commercial real property sales brokerage business. Doshi and Bensen worked together in the Company for almost thirty years and are the Company’s only two shareholders. Together, Doshi and Bensen were B&A’s only officers and directors until July 20, 2018, when Doshi resigned his positions as an officer, director and employee of B&A, “due to the severe dissension between the parties and Petitioner’s complete distrust of Respondent.” According to Doshi, the dissention began in 2017. Doshi maintained that “ here was such severe disagreement and dissention between us about the direction and operation of B&A<,> and the use of its funds that we were, in fact, in a deadlock and could not continue.” Doshi opposed the way in which Besen operated B&A and accused Besen of using B&A assets for his personal enjoyment. As a result, Doshi and Bensen discussed separating their joint interest in B&A and other jointly held businesses. Besen blamed Doshi for abandoning B&A and joining Meridian Capital, a competitor of B&A. Besen accused Doshi of misconduct and breaches of his fiduciary duty, including: converting millions of dollars from B&A; misappropriating B&A funds to participate in deals not involving B&A; loaning money to clients of B&A through his own entity, without earning fees or commissions for B&A; and interfering with the payment of commissions to B&A. Besen repeatedly alleged that “the differences between are irreconcilable”, and that any attempt to settle their differences “will continue to be fruitless.” Based upon the dissention between the parties, and their tolerance of such at the expense of B&A (Slip Op. at *4), the Court held that “B&A escape the fallout of the admitted collapse in the relationship between Doshi and Besen.” For this reason, explained the Court, “ he parties need not come to blows to satisfy BCL §1104 (a).” Id . at *6. The Court reasoned that “ egardless of whether Doshi, Besen, or both, are responsible for the demise of B&A, it is apparent to this court that these parties are so divided that they can accomplish nothing but destroy the successful company they created together.” Id . at *7. For that reason, concluded the Court, there was no purpose in “delay the inevitable” because to do so would inflict “even more harm to the corporation.” Id . Because “it is clear that there is ‘internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders’” ( id . at *7), the Court granted the motion to dissolve B&A and conduct an accounting after the dissolution. Id . at *8. Takeaway Internal dissension, reflected by an intense personal hostility, often poses an irreconcilable barrier to the continued functioning and prosperity of a corporation. Where a deadlock exists to the extent that dissension becomes the norm, the impasse may effectively destroy the loyalty and good faith required of shareholders in their dealings with each other. The inevitable result is the destruction of the business. In such a case, dissolution affords the court a remedy to direct what is obvious to all, that the deadlock and dissension effectively destroyed the orderly functioning of the corporation. As a consequence, when the shareholders of a company who are actively conducting the business of the corporation cannot agree, it becomes in the best interests of those shareholders for a court to order a dissolution. Such was the situation in Doshi . The animosity and hostility between these parties had created a hopeless situation in which they were “so divided that they accomplish nothing but destroy the successful company they created together.” Contact a business litigation lawyer in NYC about your case.