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Under New York’s rules of contract interpretation, “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.” Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 403 (2009); W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). The courts are “extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include.” Rowe v. Great Atl. & Pac. Tea Co. , 46 N.Y.2d 62, 72 (1978). Consequently, courts will not “by construction 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.” Reiss v. Financial Performance Corp. , 97 N.Y.2d 195, 199 (2001) (internal quotation marks and citation omitted). When the parties to a contract dispute its meaning, resolution of the dispute often turns on the meaning of a term or terms in the agreement. Such was the case in Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp. , 2019 N.Y. Slip Op. 29402 (Sup. Ct., N.Y. County Dec. 23, 2019) ( here ), an action involving the meaning of a term in the proprietary lease of a co-op apartment building and the rights attendant to the “unsold shares” status of the shares corresponding to an apartment in the building. It is well settled that “ he relationship between the shareholder/lessees of a cooperative corporation and the corporation is determined by the certificate of incorporation, the corporation’s bylaws and the proprietary lease.” Fe Bland v. Two Trees Mgt. Co. , 66 N.Y.2d 556, 563 (1985). Whether a particular shareholder is a holder of unsold shares is determined by the cooperative documents, such as the offering plan and propriety lease. 210-220-230 Owners Corp. v. Arancio , 24 Misc. 3d 1228(A), 899 N.Y.S.2d 63, 2009 WL 2356893 (City Ct., City of New Rochelle 2009). Accordingly, the qualification for being deemed a holder of unsold shares may vary depending upon the corporate document provisions of a given cooperative. Id . To enjoy the status of a holder of unsold shares, a shareholder or his or her direct predecessor in interest must have obtained shares in an apartment that was occupied at the time of cooperative conversion, never occupied it himself or herself, and the original purchaser of the occupied apartment’s shares must have been either “produced” by the sponsor at the cooperative’s closing as a purchaser/holder of unsold shares, or, after such cooperative’s closing, “designated by” the cooperative’s sponsor as a holder of unsold shares. 210-220-230 Owners Corp. , supra . See also Sassi-Lehner v. Charton Tenants Corp. , 55 A.D.3d 74 (1st Dept. 2008); LJ Kings, LLC v. Woodstock Owners Corp. , 46 A.D.3d 321 (1st Dept. 2007). A holder of “unsold shares” is not subject to many of the cooperative’s rules and regulations that bind other shareholders. 210-220-230 Owners Corp. , supra . Among other things, a holder of unsold shares who has not occupied his or her apartment need not obtain the permission of the cooperative’s board to sublet his or her apartment or sell his or her shares to a particular individual. Id . See also Kralik v. 239 E. 79th Street Avenue Corp ., 5 N.Y.3d 54 (2005); Craig v. Riverview East Owners Inc. , 156 A.D.2d 157 (1st Dept. 1989). Given the benefits attendant to unsold shares, it is not surprising that the status of such shares is often litigated. Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp. Background Bellstell concerned the legal status of unsold shares in a cooperative apartment building located on Park Avenue in New York County (the “Building”). Plaintiff, Bellstell 7 Park Avenue, L.L.C. (“Belstell”), held all the unsold shares in the Building. Bellstell is a New York limited-liability company. Its sole member is Beni Internazionali (U.S.A.) Inc. (“Beni”), a New York corporation. Beni’s sole shareholder is Edilverde e Beni Internazionali S.p.A. (“Edilverde”), an Italian corporation. Bellstell sought a declaration that defendant, Seven Park Avenue Corp., impermissibly determined that Bellstell had lost its unsold-shareholder rights with respect to one of the apartments that Bellstell owned in the building. The Building was converted into a cooperative building by its then-owner, Seven Park Associates, beginning in 1982. Most of the shares in the cooperative were subscribed before the closing date of the conversion offering plan. The offering plan treats the shares that remained unsubscribed as of the closing date as “unsold shares.” Relevant to the dispute, under the proprietary lease, once sold by the co-op sponsor ( i.e. , Seven Park Associates) to one or more individuals under certain requirements of the offering plan, a block of unsold shares “retain their character as such (regardless of transfer) until . . . the holder of such shares (or a member of his family) becomes a bona fide occupant of the apartment” to which the shares are allocated. In 1987, Seven Park Associates sold all the unsold shares to Alvin Rosenthal in accordance with the terms of the offering plan. In 1998, Rosenthal sold all his unsold shares to Bellstell. Bellstell executed leases for all the apartments to which the unsold shares were allocated. The cooperative offering plan was amended to reflect that Bellstell was the holder of the outstanding unsold shares (and had leased the corresponding apartments). In November 2015, with the approval of Seven Park Avenue’s managing agent, Bellstell sublet one of its leased apartments to Ciro Campagnoli (“Campagnoli”). Campagnoli and his sister each hold a 50% contingent remainder interest in Edilverde (with their father holding a 100% interest during his lifetime). Campagnoli occupied the apartment on and off until January 2017. In April 2017, Seven Park Avenue’s counsel wrote to Bellstell, informing it that Campagnoli qualified as a family member of Bellstell for purposes of the proprietary lease and, therefore, the shares corresponding to the apartment that Campagnoli had occupied would no longer be treated as unsold shares. After Bellstell’s objections to this conclusion proved unavailing, Bellstell brought the action, seeking a declaratory judgment that Campagnoli was not – and could not be – a family member of Bellstell and, therefore, the apartment’s shares retained their unsold shares status. Bellstell moved for summary judgment on its claims. Seven Park Avenue also moved for summary judgment, seeking dismissal of Bellstell’s claims and a declaration that the apartment’s shares were no longer unsold within the meaning of the proprietary lease and the offering plan. The Court’s Decision As an initial matter, the Court noted that “ he parties’ respective summary-judgment motions , in substance, a motion and cross-motion addressing the same issue – whether the shares corresponding to the apartment occupied by Campagnoli still ‘unsold shares.’” Slip Op. at **2-3. This issue, observed the Court, “appear … to be one of first impression.” The Court noted that although issues relating to unsold share status had been litigated many times since the Court of Appeals decided Kralik v. 239 E. 79th St. Owners Corp. , 5 N.Y.3d 54 (2005), the issue of “entity holders of unsold shares . . . avoid their obligations” under “proprietary leases” had never arisen before. Slip Op. at *4 n.4. Having framed the issue, the Court determined that its resolution depended not on a ruling concerning a material issue of disputed fact, but rather on an issue of law. Slip Op. at *3 (“There is no material dispute of fact in this case, however. The question is, instead, whether this court may determine the status of the disputed shares as a matter of law.”). “To resolve th question,” the Court applied “ordinary contract principles to interpret the relevant terms of the controlling cooperative documents, which the parties considered to be the proprietary lease. See Kralik , 5 N.Y.3d at 59. In Kralik , the Court of Appeals held that whether a shareholder is a holder of unsold shares turns on the documents central to the formation of the cooperative corporation and its relationship to its shareholders, i.e. , the cooperative’s certificate of incorporation, offering plan, and proprietary lease. In particular, the Court held that it would “apply[ ] ordinary contract principles” to the interpretation of those documents: We conclude that whether plaintiffs are holders of unsold shares should be determined solely by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. . . In short, the terms of the controlling documents ... determine whether plaintiffs are holders of unsold shares. Plaintiffs status must be decided by applying the usual rules of contract interpretation to those documents. Id . at 59. Against this analytical framework, the Court looked at the proprietary lease, which provided that unsold shares retained their status until “the holder of such shares (or a member of his family) a bona fide occupant of the apartment.” The Court concluded that “as a matter of law, the only reasonable reading of ‘member of his family’ in 38 (b) of the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Slip Op. at *5. In so holding the Court avoided the question of whether a limited liability company can be a person for purposes of the lease: Bellstell contends first that “member of his family” appears most naturally to refer only to individual, natural persons and that there is no basis to extend its scope to apply to artificial persons like limited-liability companies, which cannot be said in ordinary usage to have “family members.” On the other hand, as Seven Park Avenue rightly points out in response, this very language, read literally for all it is worth, might indicate that artificial persons like limited-liability companies cannot hold unsold shares in the first place, precisely because they do not have families. That interpretive issue, to be sure, is not properly before this court now, and the court therefore does not reach it or how the court’s resolution of the status of an LLC’s contested shares in a particular case might be affected by principles of waiver or estoppel. At a minimum, though, the fundamental interpretive tension here inclines this court against giving significant weight to the argument that because LLCs by definition do not have family members, LLCs cannot be subject to the bona-fide-occupant restriction on unsold shares. Slip Op. at **3-4. The Court next addressed the definition of “family members”. In particular, the Court considered whether the proprietary lease extended “to individuals who have some connection to an LLC (or corporation)” and, if so, “how close the connection must be for an individual to be considered a member of the LLC’s “family.” Id . at *4. Answers to those questions created difficulties too, noted the Court, “both ‘vertically’ (when the individual in question has a share of the LLC’s control only through multiple levels of corporate ownership) and ‘horizontally’ (when the individual is only one of a number of members or officers of the LLC, or shareholders of the corporation that is a member of the LLC).” Id . Given the definitional difficulties, the Court held that it saw “no principled or practical means of defining when an individual’s ties to an LLC should suffice to make them a ‘family member’ of the LLC for purposes of determining when the individual’s occupancy of an apartment strips the apartment’s shares of unsold-share status under the lease.…” Id . (Orig’l emphasis.) Accordingly, the Court concluded that “the only reasonable reading of “member of his family” in … the lease is that this language does not encompass individuals connected to LLCs or corporations that hold unsold shares.” Id . The Court rejected Seven Park Avenue’s assertion that Campagnoli qualified as a family member of Bellstell because he was a “legal representative” of the company under the lease. Seven Park Avenue claimed that Campagnoli is a manager of Bellstell, that he has the authority as a manager to bind his principal through his actions, and that this authority makes him a “legal representative” of Bellstell, such that in occupying the apartment at issue he stood in Bellstell’s shoes for purposes of the proprietary lease. Id . at *5. The Court said that it was “not persuaded” by the argument. Id . The Court reasoned that the term “legal representative” had narrow a meaning: “A legal representative . . . in the ordinary sense is one who manages the legal affairs of another because of incapacity or death – not merely an agent, but a principal who has been assigned the rights and obligations of the party itself.” Id . (citations and internal quotation marks omitted). The Court saw no “reason why should disregard the ordinary, limited scope of the term ‘legal representative.’” Id . “Indeed,” said the Court, “the language of 40 itself confirms that this term is being used in the conventional sense.” Id . In that regard, observed the Court, the term appeared in a list of parties formally “assigned the rights and duties” of the lessee, whether through a written instrument or a court filing “associated with Surrogate’s Court practice.” Id . “Each term,” concluded the Court, “denoted a party that ha taken on the legal rights and responsibilities of the party itself in some form, not merely one who is serving as a high-level agent of the party.” Id . Accordingly, the Court held that “Campagnoli was not a ‘legal representative’ of Bellstell within the meaning of 40 of the co-op lease” and that his occupancy of the apartment “did not affect the ‘unsold share’ status of the apartment’s corresponding co-op shares.” Id . Takeaway Whether a plaintiff is a holder of unsold shares is determined by applying ordinary contract principles to interpret the terms of the documents defining their contractual relationship with the cooperative corporation. Kralik , 5 N.Y.3d at 59. Under this standard, the Bellstell court determined that the character of the unsold shares at issue had not changed. Bellstell remained the holder of the shares within the meaning of the proprietary lease, and the shares never lost their character as unsold because Campagnoli occupied the apartment.

As discussed in previous Blog posts, business owners and entrepreneurs wishing to insulate themselves from personal liability for the acts taken in the name of their business can generally do so by forming a corporation ( e.g. , C-Corp. or an S-Corp.) or limited liability company (“LLC”). Such protection, however, is not absolute; there are exceptions to the rule. For instance, a creditor or other third party can “pierce the corporate veil” – i.e. , go behind the corporate form to hold an officer, director, or shareholder liable when he/she fails to follow corporate formalities, comingles corporate funds with personal funds, or perpetrates a fraud or other wrongdoing on a third party. TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 340 (1998) (the corporate veil may be pierced to impose liability for corporate wrongs upon persons who have “misused the corporate form for personal ends.”); Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 142 (1993) (the corporate veil may be pierced where the owners have “abused the privilege of doing business in the corporate form” by “perpetrat a wrong or injustice . . . such that a court in equity will intervene.”). Additionally, an officer, director, member or shareholder can be sued individually when the corporation is accused of committing a tort in which the individual personally participated. Hamlet at Willow Cr. Dev. Co., LLC v. Northeast Land Dev. Corp. , 64 A.D.3d 85, 116 (2d Dept. 2009) (“A corporate officer may be liable for torts committed by or for the benefit of the corporation if the officer participated in their commission.”). Notably, tort liability applies regardless of whether the third party can pierce the corporate veil. There are three general categories of torts: intentional; negligent; and strict liability. Intentional torts are wrongs that the defendant knew or should have known would result through his/her actions or omissions (such as fraud). Negligent torts occur when the defendant’s actions were taken without reasonable care. Strict liability torts focus on whether a particular result or harm manifested from the actions taken by the defendant. In the business context, there are numerous types of torts, including, but not limited to, fraudulent misrepresentation, misappropriation, conversion, interference with contractual or business relations, breach of fiduciary duty, negligence, and defamation. In addition to the foregoing, an officer, director, member or shareholder can be sued individually under the responsible corporate officer doctrine (a/k/a the “Park doctrine,” referring to the 1975 case decided by the U.S. Supreme Court in which the doctrine was articulated) – that is, when the corporation is accused of violating laws that implicate public health and safety. United States v. Park , 421 U.S. 658, 672 (1975). The doctrine permits the imposition of liability against corporate officers for the violations of law that implicate the health and safety of the public when they are in a “position of authority” and fail to prevent or remedy the situation. In New York, the doctrine has been applied to violations of, inter alia , state environmental laws. See , e.g. , Matter of Carney’s Rest., Inc. v. State of New York , 89 A.D.3d 1250, 1253-1254 (3d Dept. 2011); Lake George Park Commn. v. Salvador , 72 A.D.3d 1245, 1247-1248 (3d Dept. 2010); State of New York v. Markowitz , 273 A.D.2d 637, 641 (3d Dept. 2000); Matter of Jackson’s Marina v. Jorling , 193 A.D.2d 863, 866 (3d Dept. 1993). In Matter of Carney’s Restaurant , for example, the Appellate Division, Third Department upheld a finding of personal liability against the sole officer and shareholders of a corporate entity for violations of the State Pollutant Discharge Elimination System (“SPDES”) involving a restaurant’s sewage disposal system. 89 A.D.3d at 1253-1254. The court held that liability should be imposed because the individual owner knew about the system failures and, despite repeated requests by the New York State Department of Environmental Conservation (“DEC”), failed to take timely steps to remedy the situation. Id . In State of New York v. C & J Enters., LLC , 2020 N.Y. Slip Op. 00024 (3d Dept. Jan. 2, 2020) ( here ), the Appellate Division, Third Department affirmed the judgment of the Supreme Court, holding the managing member of an LLC liable for DEC violations under the responsible corporate officer doctrine. State of New York v. C and J Enterprises, LLC Background From 1996 until 2015, defendant, C and J Enterprises, LLC (“C & J”), owned and operated Deerfield Estates Mobile Home Park (the “Park”) in Fulton County, New York. C & J had two members, defendant, James P. Burr (“Burr”) and Charles A. Glessing (“Glessing”), each of whom had an equal ownership interest in the company. C & J’s operating agreement named Burr as the company’s managing member. In June 1998, Burr applied for and subsequently obtained an SPDES permit from DEC, a plaintiff in the action, to operate a sewage treatment system at the Park, which included approximately 43 residential sites. The permit expired on January 1, 2004 and was never renewed by DEC. After DEC investigated and discerned numerous sewage surface discharges in violation of the SPDES permit and ECL 17-0803, DEC and C & J entered into an order on consent in October 2003, which was signed by Glessing. The order imposed a civil penalty and required C & J to correct the wastewater treatment system. An order on consent modification between DEC and C & J was executed in November 2003 by Burr. By December 2003, C & J installed an interim sand filter system, but problems persisted. In early October 2008, C & J and DEC entered into a second order on consent that superseded the 2003 order. Burr signed the second order as C & J’s “managing agent.” The order included a schedule of compliance requiring C & J to complete a new wastewater treatment system by April 1, 2009. The order further specified that, effective October 7, 2008, if the interim system failed to meet the required interim discharge limits, C & J was required to “immediately cease all discharges from the wastewater treatment and collection system” and utilize a “hold and haul” system, by which the wastewater would have to be trucked off site. Notably, the order included a schedule of stipulated per diem penalties in the event that C & J failed “to strictly and timely comply with any provision of th rder.” The stipulated penalties were to be imposed on a graduated schedule, starting at $100 a day for 10 days, increasing to $250 a day for the next 20 days and thereafter imposed at a rate of $1,000 a day. The violations continued and defendants did not complete construction of a new sewage treatment system until June 2010. In particular, by notice dated November 6, 2008, DEC informed defendants that a site inspection revealed surface discharges in violation of the 2008 order. As a result, DEC directed defendants to operate “a ‘hold and haul’ system until further notice.” Defendants failed to do so, only utilizing the required “hold and haul” system during a brief period in June 2009. Plaintiffs commenced the action in April 2010, asserting that defendants failed to comply with the 2008 consent order and seeking stipulated penalties as against defendants on a joint and several basis. Issue was joined and, in 2015, the Park was sold. A year later, Glessing passed away. Thereafter, Supreme Court granted plaintiffs’ motion for partial summary judgment, finding, as relevant to the appeal, that both Burr and C & J were jointly and severally liable for violations of the 2008 consent order, and imposed a stipulated penalty as calculated pursuant to the order. For the delay in completing the system, the court imposed a penalty measured from the April 1, 2009 completion deadline to the commencement of the action on April 23, 2010. For the failure to implement a “hold and haul” system, the penalty was measured from the November 6, 2008 notice date through the commencement of the action. Together, a total penalty of $858,650 was imposed. Defendants appealed. The Third Department’s Decision The Court affirmed. The Court held that, under the responsible corporate officer doctrine, it was proper to impose personal liability on Burr for the violations of the 2008 order – an order that Burr signed on C & J’s behalf. The Court explained that imposition of liability on Burr was appropriate because he knew about the violations and, despite the requirements of the consent order, Burr failed to implement any of the options available to the company under the consent order: There can be little dispute that Burr was well aware of the ongoing sewage violations at the park, and, as managing member, he held a position of authority to address the problem. In particular, the 2008 consent order, which Burr signed on C & J’s behalf, expressly provided for stipulated penalties in the event that C & J “fail to strictly and timely comply.” The order further specified that it was binding on C & J and its officers. In the event that C & J was unable to meet the requirements of the order, the governing schedule directed C & J to surrender its SPDES permit and operate only a “hold and haul” system. Upon doing so, C & J was required to “immediately notify, in writing, the tenants and of its intention to close .” By its terms, the consent order outlined the various options available to Burr — timely remediate the system, convert to a “hold and haul” system or close the park. Although Burr maintains that he lacked the financial means to timely implement the first two options, closure of the park remained an available, acknowledged option. Slip Op. at *1 The Court also held that the penalty, though substantial, was not unreasonable. The Court explained that “it is particularly egregious that defendants disregarded DEC’s November 6, 2008 directive to immediately implement a “hold and haul” system to alleviate ongoing surface sewer discharge.” Id . “Given the extended history of violations and the many opportunities that DEC accorded defendants to remedy the violations,” the Court said that “the penalty imposed” did not “constitute[] an abuse of discretion. Id . (citing Matter of Carney’s Rest. , 89 A.D.3d at 1254-1255). Takeaway Under Park and its progeny, corporate officers can be criminally prosecuted for their company’s violation of federal law, such as the Federal Food, Drug and Cosmetic Act, without showing intent, negligence, knowledge of the violation or participation in the violation of law. To impose liability, the government need only prove that the officer held a position of authority in the corporation, had the ability to prevent the violation and failed to prevent or remedy it. A conviction under the doctrine can result in imprisonment, criminal fines and/or restitution. C & J Enterprises shows that the doctrine can be, and has been, applied in the state law context.

An interesting question sometimes arises in the tort arena in which a third-party to a transaction claims to have been injured by one of the parties. Do the parties to the transaction owe a duty to the third party? The answer depends on whether the third party can show privity or near privity with the alleged tortfeasor. In this regard, the third party must demonstrate that the parties were aware that their report, agreement or transaction documentation would be used by the third party for a particular purpose, the parties intended the third party to rely on such documents, and the parties took action linking them to the third party thereby evincing their understanding of the third party’s reliance on their documents. In Artemus USA LLC v. Paul Kasmin Gallery, Inc. , 2019 N.Y. Slip Op. 09391 (1st Dept. Dec. 26, 2019) ( here ), the Appellate Division, First Department addressed this issue. As discussed below, Artemus involved the purchase and sale of an artwork named La Scienza de la Fiacca (“La Scienza”) by Frank Stella. The plaintiff, Artemus USA LLC (“Artemus”), alleged that defendant, Paul Kasmin Gallery, Inc. (“PKG”), an art gallery, created materially false, back-dated invoices at the request of non-party Anatole Shagalov (“Shagalov”), for retransmission to Artemus. Plaintiff alleged that those invoices falsely represented that Shagalov purchased La Scienza for $430,000. According to plaintiff, Shagalov had, in fact, purchased only a 60% interest of La Scienza at the stated price, and owed a substantial balance. In reliance on those fraudulent invoices, Artemus maintained that it agreed to purchase La Scienza and entered into a multimillion-dollar transaction with Shagalov, which it would not have done had it known the truth. The motion court (Justice Eileen Bransten) upheld the complaint, finding that Artemus stated a claim for fraud. The First Department affirmed. The Privity or Near Privity Doctrine In dealing with liability for the tortious acts of persons not in privity with the alleged tortfeasor (typically a professional, such as an accountant, lawyer, and architect), New York courts apply a special analysis that was first established by Chief Judge Cardozo in Ultramares Corp. v. Touche , 255 N.Y. 170, 174 (1931). In Ultramares , the New York Court of Appeals was asked to consider whether an accounting firm could be held liable for negligently preparing a balance sheet that its client subsequently furnished to the plaintiff. Although the accountants knew that their client would show the balance sheet to various persons as a basis for financial dealings ( e.g. , “banks, creditors, stockholders, purchasers or sellers, according to the needs of the occasion”), no mention was made of the plaintiff or of any other specific party to whom the sheet would be furnished, or of any particular transaction in which it would be used. In that regard, the Court emphasized the following: Nothing was said as to the persons to whom these would be shown or the extent or number of the transactions in which they would be used. In particular there was no mention of the plaintiff, a corporation doing business chiefly as a factor, which till then had never made advances to the , though it had sold merchandise in small amounts. The range of the transactions in which a certificate of audit might be expected to play a part was as indefinite and wide as the possibilities of the business that was mirrored in the summary. Id. at 174. After reviewing legal developments permitting recovery by non-privity plaintiffs for harm resulting from the release of “a physical force” (255 N.Y. at 181), the Court raised the question of whether liability should attach for injury caused by “the circulation of a thought or a release of the explosive power resident in words.” Id . Noting that there existed no practical way to predict or limit the number or character of persons who might learn about and rely upon any written or oral statement, the Court concluded that creating an unlimited duty would impermissibly lead to “liability in an indeterminate amount for an indeterminate time to an indeterminate class.” Id . at 179. The Ultramares court distinguished its approach from Glanzer v. Shepard , 233 N.Y. 236 (1922), a case decided in an opinion also written by Cardozo nine years earlier. In Glanzer , a public weigher had been held liable in negligence to a purchaser who had not been in privity with it, where the seller had requested the weigher to certify the official weight sheets and furnish a copy to the buyer. In such circumstances, the Ultramares court explained, “ he bond was so close as to approach that of privity,” and did not expose the defendant to indeterminate liability because “the transmission of the certificate to another was not merely one possibility among many, but the ‘end and aim of the transaction.’” Id . 255 N.Y. at 182. The Court went on to observe that in Glanzer , the services rendered by the weigher had been “primarily for the information of a third person ... and only incidentally for that of the formal promisee.” Id . In reaching its decision, and the imposition of a non-contractual duty of care to the third party, the Glanzer explained: We think the law imposes a duty toward buyer as well as seller in the situation here disclosed. The use of the certificates was not an indirect or collateral consequence of the action of the weighers. It was a consequence which, to the weighers’ knowledge, was the end and aim of the transaction. ordered, but to use. The defendants held themselves out to the public as skilled and careful in their calling. They knew that the beans had been sold, and that on the faith of their certificate payment would be made. They sent a copy to the for the very purpose of inducing action. All this they admit. In such circumstances, assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed. We do not need to state the duty in terms of contract or of privity. Growing out of a contract, it has none the less an origin not exclusively contractual. Given the contract and the relation, the duty is imposed by law.” Id . at 238-239. The Court of Appeal’s restatement of Glanzer in Ultramares established the principle that liability for misstatements or omissions to a third party not in contractual privity may attach where the representation is made for the principal purpose of having it relied upon by such person, and where its benefit to the party authorizing the representation stems precisely from such reliance by the third party. Vereins-Und Westbank, AG v. Carter , 691 F. Supp. 704, 709 (S.D.N.Y.1988). This principle came to be known as the “Ultramares doctrine.” Following the issuance of Ultramares , the Court of Appeals reiterated the requirement of a “contractual relationship or its equivalent” in State St. Trust Co. v. Ernst , 278 N.Y. 104, 111 (1938), White v. Guarente , 43 N.Y.2d 356 (1977), Credit Alliance Corp. v. Arthur Andersen & Co. , 65 N.Y.2d 536 (1985), and William Iselin & Co. v. Mann Judd Landau , 71 N.Y.2d 420 (1988). In White , the accountants had contracted with a limited partnership to perform an audit and prepare the partnership’s tax returns. The nature and purpose of the contract, to satisfy the requirement in the partnership agreement for an audit, made it clear that the accountants’ services were obtained to benefit the members of the partnership who, like the plaintiff, a limited partner, were necessarily dependent upon the audit to prepare their own tax returns. After outlining the principles articulated in Ultramares and Glanzer , the Court observed that: “ his plaintiff seeks redress, not as a mere member of the public, but as one of a settled and particularized class among the members of which the report would be circulated for the specific purpose of fulfilling the limited partnership agreed upon arrangement.” 43 N.Y.2d, at 363. Because the accountants knew that a limited partner would have to rely upon the audit and tax returns of the partnership, and because such awareness fell within the contemplation of the parties under the retainer agreement ( Vereins-Und Westbank , 691 F. Supp. 709), the Court held that, “at least on the facts here, an accountant’s liability may be so imposed.” Id. at 358. The resulting relationship between the accountants and the limited partner was one “approach that of privity, if not completely one with it.” Id . (citing Ultramares , 255 N.Y. at 183). In Credit Alliance , the Court revisited and elaborated upon the Ultramares doctrine. After reviewing the applicable authorities – both within and outside of New York – the Court reaffirmed and restated the Ultramares rule as follows: Before accountants may be held liable in negligence to noncontractual parties who rely to their detriment on inaccurate financial reports, certain prerequisites must be satisfied: (1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants' understanding of that party or parties’ reliance. 65 N.Y.2d at 551. The Court went on to observe that while “these criteria permit some flexibility in the doctrine” they were “intended to preserve the wisdom of the policy set forth” in Ultramares and Glanzer . Id . Finally, in William Iselin & Co. , the Court applied the Ultramares doctrine to affirm the grant of summary judgment to the defendant accountant. There, the plaintiff (Iselin) was seeking to charge an accountant (Mann) (with whom it had no privity) with liability for a misstatement in a report that Mann had prepared for a client (Suits) who subsequently obtained credit from Iselin. In explaining why summary judgment had been properly granted to the defendant, the Court made the following summary of the facts which the plaintiff would have been required to establish in order to prevail under the Ultramares doctrine: Iselin was obligated to submit evidence of Mann’s awareness that Suits, intending that Iselin would rely on the Reports, would use them for the purpose of procuring credit from Iselin. Beyond that, Iselin was required to show a nexus with Mann from which Mann’s understanding of Iselin’s reliance could be drawn. 71 N.Y.2d at 426. In Artemus , one of the issues before the First Department was whether PKG intended Artemus to rely on the allegedly fraudulent invoices. Artemus USA LLC v. Paul Kasmin Gallery, Inc. Background As noted, Artemus involved a claim for fraud based on defendant’s alleged materially false representations in certain invoices. Artemus alleged that PKG sold a 60% interest in La Scienza to Shagalov for $430,000, and that, two years later, when Artemus was conducting due diligence in connection with purchasing La Scienza and three other artworks from Shagalov, PKG provided Shagalov with a backdated invoice that indicated that Shagalov would acquire full title to La Scienza upon payment of the $430,000. Plaintiff alleged that Shagalov made PKG aware that the invoice was either for itself or for a potential purchaser. Thereafter, at Shagalov’s request, PKG provided a second backdated invoice, which included a previously omitted resale certificate number and showed the purchaser as Shagalov’s company, rather than Shagalov personally. After completing due diligence, Artemus and Shagalov entered into a transaction that Artemus characterized as a “sale-leaseback,” wherein Artemus purchased four artworks, including La Scienza, for $3.4 million, and leased those artworks back to Shagalov, with a repurchase option for Shagalov. Thereafter, PKG filed a UCC-1 financing statement on La Scienza, and Shagalov commenced an action alleging, inter alia , that Artemus violated his rights under article 9 of the UCC by trying to dispose of the artwork. In an appeal in the Shagalov action, the First Department affirmed the grant of a preliminary injunction enjoining Artemus from selling, transferring or disposing of, inter alia , La Scienza. See Shagalov v. Edelman , 161 A.D.3d 455, 456 (1st Dept. 2018). PKG moved to dismiss the complaint pursuant to CPLR §§ 3211(a)(1) and (7). PKG argued that the complaint failed to plead with particularity (as required by CPLR § 3016(b)) that (1) PKG intended to defraud Artemus or another in its position, and (2) there were facts from which anyone could infer that PKG was the proximate cause of any damages incurred by Artemus. Justice Bransten denied the motion on the record, ruling in part that Artemus “sufficiently pleaded that the Defendant misrepresented the ownership interest the non-party was acquiring on the invoice for La Scienza, that the Defendant knew that the invoice falsely reflected the conveyance of full title, and that the invoice was intended for the purpose of resale of the painting, which the Plaintiff relied upon.” PKG appealed. The First Department unanimously affirmed. The First Department’s Decision The Court held that Artemus sufficiently pleaded the requisite intent under the Ultramares doctrine, stating: “Plaintiff’s allegations are sufficient to permit the inference that defendant intended that the fraudulent invoices would be provided to potential purchasers or lessors.” Slip Op. at *1. The Court rejected PKG’s argument that the inference was based on information and belief without any factual support: “While the allegations concerning Shagalov’s direct statements to defendant about the necessity of the invoices were made ‘upon information and belief,’ additional alleged facts, such as the timing of defendant’s furnishing of the invoice and its accommodation to Shagalov’s requests for revisions, support the inference that defendant knew the purpose and the recipient of the invoices.” Id . (citing Aozora Bank, Ltd. v. J.P. Morgan Sec. LLC , 144 A.D.3d 440, 441 (1st Dept. 2016). The Court also rejected PKG’s causation arguments. There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). See also Basis PAC-Rim Opportunity Fund (Master) v. TCW Asset Mgmt. Co. , 149 A.D.3d 146, 149 (1st Dept. 2017) (“Transaction causation is akin to reliance” and requires the plaintiff to allege that “but for the claimed misrepresentation or omissions, the plaintiff would not have entered into the detrimental … transaction.”) (internal quotation and citation omitted). The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir.2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co. , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact-intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). The Court held that Artemus satisfied the (transaction and loss) causation requirement, noting that “ he complaint also adequately alleges that defendant’s misrepresentations induced plaintiff to enter into the ‘sale-leaseback’ transaction with Shagalov and that they directly caused plaintiff’s loss. Slip Op. at *1 (citing Basis PAC-Rim , 149 A.D.3d. at 149). The Court explained that “Plaintiff allege that it would not have entered into the transaction had it known that defendant’s invoices falsely represented Shagalov’s ownership of La Scienza” – the transaction causation requirement of the claim. The Court went on to say that the complaint “further allege that the misrepresentation of Shagalov’s 100% ownership interest directly caused to pay more than it would have paid for a 60% interest, and that it incurred costs in uncovering the truth after defendant filed its UCC-1” – the loss causation requirement. Id . Accepting these allegations as true on the motion, the Court found them to be “sufficient to sustain plaintiff’s claim that it may be entitled to recover some of its litigation costs in the Shagalov action as damages because it would not have incurred those costs had it not been for defendant’s alleged fraud.” Id . at *2. Takeaway In Ultramares , the Court of Appeals held that a misrepresentation or omission by a defendant can give rise to an action for fraud by a third party not in privity with the defendant if the statement was “made with the intent to be communicated to the persons or class of persons who act upon it to their prejudice.” 255 N.Y. at 187. Not all jurisdictions agree with the Ultramares approach. As the Court of Appeals noted, “ ome courts continue to insist that a strict application of the privity requirement governs the law of liability except, perhaps, where special circumstances compel a different result …. an increasing number of courts have adopted what they deem to be a more flexible approach than that permitted under this court’s past decisions.” Credit Alliance , 65 N.Y.2d at 551. Regardless of the divide, in New York, liability will attach where the third party falls within the class of persons the defendant intended to, or had reason to expect would, rely on its misrepresentations – i.e. , to wit: “(1) the must have been aware that the … reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the linking them to that party or parties, which evinces the understanding of that party or parties’ reliance.” Id .

Clients often ask if their oral agreement is enforceable. To support their claim, they point to emails and text messages as evidence of such an agreement. As this Blog has noted in the past, whether an oral agreement is enforceable and whether emails and text messages are sufficient documentary evidence to demonstrate the existence of such an agreement are dependent upon whether the evidence is admissible and irrefutable. See , e.g. , here , here , and here . In today’s post, this Blog examines Ripka v. Stenzler , 2019 N.Y. Slip Op. 33688(U) (Sup. Ct., N.Y. County Dec. 19, 2019) ( here ), a case in which the Court determined that emails and text messages did not conclusively show the absence of an oral agreement. Dismissal Due to Documentary Evidence Under Section 3211(a) of the Civil Practice Law and Rules (“CPLR”), a party can file a motion, before a responsive pleading, to dismiss one or more causes of action alleged against that party. For purposes of a motion under CPLR § 3211(a), a “cause of action” includes counterclaims, crossclaims, and third-party claims. There are several grounds under CPLR § 3211(a) on which a party may move to dismiss.  These include: (1) documentary evidence; (2) lack of subject matter jurisdiction; (3) lack of capacity; (4) another action pending between the same parties for the same cause of action in another court; (5) disposition in a prior proceeding; (6) improper counterclaim; (7) failure to state a cause of action; (8) lack of personal jurisdiction; (9) improper extra-jurisdictional service; (10) failure to join necessary party; and (11) immunity for voluntary non-profit officers. In most cases, the moving party will invoke more than one of the foregoing bases for his/her motion. However, the movant may choose to base his/her motion solely upon the existence of documentary evidence. CPLR § 3211(a)(1) provides that basis. Under CPLR § 3211(a), a party may move to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.” For this reason, courts described the phrase as “fuzzy” because “what is documentary evidence for one purpose, might not be documentary evidence for another.” Fontanetta v. Doe , 73 A.D.3d 78, 84 (2d Dept. 2010). To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. See also VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC , 171 A.D.3d 189 (1st Dept. 2019) (“A paper will qualify as ‘documentary evidence’ only if it satisfies the following criteria: (1) it is ‘unambiguous’; (2) it is of ‘undisputed authenticity’; and (3) its contents are ‘essentially undeniable.’”) (quoting Fontanetta , 73 A.D.3d at 86, 87 (citation omitted). Materials that unquestionably qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta , 73 A.D.3d at 84-85 (citation omitted). The Standard of Review For a Motion to Dismiss On a motion to dismiss, the court must accept as true the facts alleged in the complaint and all reasonable inferences that may be gleaned from those facts. Amaro v. Gani Realty Corp. , 60 A.D.3d 491 (1st Dept. 2009). The court is not permitted to assess the merits of the complaint or any of its factual allegations, but may only determine if, assuming the truth of the facts alleged and the inferences that can be drawn from them, the complaint states the elements of a legally cognizable cause of action. Skillgames, LLC v. Brody , 1 A.D.3d 247, 250 (1st Dept. 2003), citing Guggenheimer v. Ginzburg , 43 N.Y.2d 268, 275 (1977). If the defendant seeks dismissal of the complaint based upon documentary evidence, then, as noted, dismissal under CPLR § 3211(a)(1) is warranted only when the documentary evidence “utterly refutes plaintiff’s factual allegations” ( Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002)), and “conclusively establishes a defense to the asserted claims as a matter of law.” Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc. , 10 A.D.3d 267, 270-71 (1st Dept. 2004) (internal quotation marks omitted). In other words, the documents relied upon must “definitely dispose of plaintiff’s claim.” Blonder & Co. v. Citibank, N.A. , 28 A.D.3d 180, 182 (1st Dept. 2006). Are Emails Documentary Evidence for Purposes of CPLR § 3211(a)(1)? In the Second Department, affidavits, emails, and letters, are not considered documentary evidence “within the intendment of CPLR 3211(a)(1).” Phoenix Grantor Trust v. Exclusive Hospitality, LLC , 2019 N.Y. Slip Op. 3635 (2d Dept. May 8, 2019), quoting Nero v. Fiore , 165 A.D.3d 823, 826 (2d Dept. 2018). In the First Department, like the Second Department, affidavits are not documentary evidence within the meaning of CPLR § 3211(a)(1). Tsimerman v. Janoff , 40 A.D.3d 242 (1st Dept. 2007). However, unlike in the Second Department, the First Department will consider correspondence and emails “under appropriate circumstances” to qualify as documentary evidence, so long as they meet “the essentially undeniable test.” Amsterdam Hospitality Grp. , 120 A.D.3d at 432; Langer v. Dadabhoy , 44 A.D.3d 425, 426 (1st Dept. 2007). Accord Art & Fashion Grp. Corp. v. Cyclops Prod., Inc. , 120 A.D.3d 436, 438 (1st Dept. 2014) (“ mail correspondence can, in a proper case, suffice as documentary evidence for purposes of CPLR 3211(a)(l)”); Tozzi v. Mack , 169 A.D.3d 547, 548 (1st Dept. 2019) (affirming dismissal of complaint under CPLR § 3211(a)(1) where options agreement and emails utterly refuted plaintiffs’ claim and conclusively established a defense as a matter of law); MCAP Robeson Apartments Ltd. P’ship v. Munimae TE Bond Subsidiary, LLC , 136 A.D.3d 602, 603 (1st Dept. 2016) (affirming dismissal of complaint where email correspondence demonstrated that plaintiff understood, at the time, that such emails constituted notice of termination of the parties’ agreement). Enforceability of Oral Agreements To sustain a breach of contract cause of action, a plaintiff must show: (1) an agreement; (2) plaintiff’s performance; (3) defendant’s breach of that agreement; and (4) damages. See , e.g. , Furia v. Furia , 116 A.D.2d 694, 695 (2d Dept. 1986). “The fundamental rule of contract interpretation is that agreements are construed in accord with the parties’ intent . . . and ‘ he best evidence of what parties to a written agreement intend is what they say in their writing’ …. Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain terms, and extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous.” Riverside South Planning Corp. v. CRP/Extell Riverside LP , 60 A.D.3d 61, 66 (1st Dept. 2008), aff’d , 13 N.Y.3d 398 (2009). Whether a contract is ambiguous presents a question of law for resolution by the courts. Id . at 67. When, however, there is no writing between the parties, the plaintiff must show the elements of a binding contract, e.g. , an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms.  In other words, an oral agreement will not be enforced unless there is “a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.” Kelly v. Bensen , 151 A.D.3d 1312, 1313 (3d Dept. 2017). See also Schwartz v. Greenberg , 304 N.Y. 250, 254 (1952); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp. , 93 N.Y.2d 584, 589 (1999); Towne v. Kingsley , 121 A.D.3d 1381, 1382 (3d Dept. 2014). “In making the determination, the court looks not to the parties’ after-the-fact professed subjective intent, but rather at their objective intent as manifested by their expressed words and conduct at the time of the agreement.” Kelly , 151 A.D.3d at 1313 (internal quotation marks and citation omitted). In the First Department, this is where correspondence, emails and text messages can play a material role. Ripka v. Stenzler Background Ripka involved a breach of contract claim (though other causes of action were alleged) in which the plaintiff, Brian Ripka (“Ripka”), the founder and CEO of a fitness company called Ripped Fitness (“Ripped”), claimed to have an oral agreement for an interest in Rumble Fitness LLC (“Rumble”), a boxing-based fitness company established by the defendant, Andrew Stenzler (“Stenzler”). According to Plaintiff, Stenzler solicited him to participate in Rumble in February 2016. Plaintiff alleged that Stenzler orally agreed to provide him with a 10% stake in Rumble in exchange for Plaintiff’s services in assisting Stenzler with the company’s early development. Plaintiff claimed that Stenzler orally reaffirmed this agreement on multiple occasions. In consideration for the 10% equity grant, Plaintiff claimed he performed his end of the bargain by providing Stenzler with proprietary information about Ripped’s operations and the names of its vendors and that he performed various services to benefit Rumble, such as analyzing traffic at competing businesses to scout for optimal locations. Plaintiff alleged that Stenzler reneged on their agreement after bringing in two additional partners, defendants Eugene Remm (“Remm”) and Anthony DiMarco (“DiMarco”), who purportedly told Stenzler that Plaintiff should not be given such a large equity stake. After Ripka insisted that their alleged oral agreement be reduced to writing, Stenzler allegedly refused. Instead, Stenzler offered Plaintiff a 3% stake in Rumble in exchange for a 3% stake in Ripped. According to Plaintiff, he has not been issued a membership interest in Rumble. Plaintiff filed his original complaint on June 18, 2019, asserting claims for (1) a declaratory judgment that he owned a 10% stake in Rumble; (2) breach of the alleged oral agreement; and (3) unjust enrichment. On July 8, 2019, defendants moved to dismiss, principally arguing that the parties’ emails and text messages only reflected the 3% offer and did not reflect the alleged oral agreement to provide 10% equity. Defendants also sought to strike unrelated allegations of wrongdoing. On September 4, 2019, Plaintiff cross-moved for leave to file a second amended complaint, which included additional causes of action seeking recovery for breach of fiduciary duty, common law tort and fraud. The Court’s Ruling The Court granted the motion to dismiss the three claims in the original complaint to the extent of dismissing the breach of contract and unjust enrichment claims asserted against Remm and DiMarco and the breach of contract claim asserted against Rumble. The Court held that the emails and text messages did not “definitively prove that Stenzler never made the 10% equity promise.” Slip Op. at **3-4. The Court reasoned that since Defendants cherry-picked the communications that purportedly supported their defense, they could not utterly refute plaintiff’s allegations. Id . at *4. The Court explained that Defendants’ failure to cite “a single case where a complaint was dismissed with such a showing”, i.e. , that less than all the possible documentary evidence sufficed to dismiss a complaint under CPLR § 3211(a)(1), further supported its ruling. Indeed, noted the Court, “had one of the emails contained an admission by plaintiff that he never reached an agreement for a 10% stake, that would be another matter.…” Id . However, said the Court, “defendants simply ask this court to infer that plaintiff’s claims are not plausible based on their cherry-picked submissions.” Id . The Court rejected Defendants’ request to shift the burden to Plaintiff to refute their evidentiary showing with other emails in his possession, stating that Plaintiff “has no obligation to do so.” Id .  “On the contrary,” said the Court, “defendants bear the entire burden of proving that ‘the documentary evidence utterly refutes plaintiff’s factual allegations, conclusively establishing a defense as a matter of law.’” Id . (quoting Goshen , 98 N.Y.2d at 326). The Court explained that “ his is not summary judgment; there is no burden shifting on a motion to dismiss.” Id . (citation omitted). Finally, the Court rejected Defendants’ attempt to procure dismissal of the alleged oral agreement “by proving that such agreement is not reflected in writing.” Id . at *5. That “there may not be any dispositive documentary evidence” to prove the existence of an agreement is “an inherent[ ] … feature of many alleged oral agreements.” Id . at *4. For this reason, held the Court, “ hether documentary evidence ultimately suggests the existence of an oral agreement is a question of fact” not ripe for determination on a motion to dismiss. Id . As to Remm and DiMarco, the Court said that they were not parties to the alleged oral agreement between Ripka and Stenzler. Id . at * 5. Thus, neither party could be held liable for a breach of that agreement. Id . (citing Leonard v. Gateway IL LLC , 68 A.D.3d 408 (1st Dept. 2009)). Takeaway CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, Ripka demonstrates the need to present the court with documents that utterly refute the cause of action. As in Ripka , cherry-picked emails will not suffice. Thus, in the absence of documents that utterly refute a plaintiff’s claim, dismissal will be inappropriate.

In November of 2018, this Blog wrote about Unique Goals International, Ltd. v. Finskiy ( here ), a case involving a fraud cause of action that was dismissed because the plaintiff failed to satisfy the justifiable reliance element of the claim. On December 26, 2019, the Appellate Division, First Department unanimously affirmed the dismissal of the fraud claim. Unique Goals Intl., Ltd. v. Finskiy , 2019 N.Y. Slip Op. 09381 (1st Dept. Dec. 26, 2019) ( here ). Background Plaintiffs, three entities controlled by nonparty Sergey Yanchukov (“Yanchukov”), a wealthy Russian businessman, were allegedly induced by defendants, Maxim Finskiy (“Finskiy”), also a wealthy Russian businessman, and several entities under his control or otherwise affiliated with him, to purchase defendants’ controlling interest in White Tiger Gold, Ltd. (“White Tiger”), a gold-mining company. Plaintiffs alleged that defendants misled them about White Tiger’s financial condition and the gold reserves of its mines, principally by means of (1) Finskiy’s oral statements to his personal friend Yanchukov; (2) a false report publicly filed pursuant to the securities laws of Canada (where White Tiger was listed on the Toronto Stock Exchange); and (3) false information provided to a consulting firm engaged by plaintiffs to prepare a report for them on White Tiger. Relevant to the appeal (as well as the decision before the motion court), plaintiffs did not undertake an independent due diligence inquiry to verify defendants’ claims about White Tiger. Specifically, before closing the transaction, plaintiffs conducted neither their own review of White Tiger’s books and records nor their own geological survey of White Tiger’s mining properties. Rather, the complaint merely alleged that “plaintiffs were deceived into taking immediate action . . . to buy defendants out of White Tiger” by Finskiy’s representation that there existed an imminent prospect of the seizure of White Tiger’s assets by a major creditor, which creditor, Finskiy claimed, “had withheld funding to create an exigency.” After the deal closed, an audit commissioned by plaintiffs revealed that $30 million of White Tiger’s cash, which had been reported as having been used to pay for drilling, had been misappropriated. The audit further revealed that White Tiger’s management had paid itself excessive bonuses. In addition, a post-closing geological survey of White Tiger’s only operating gold mine commissioned by plaintiffs revealed that the previous management had substantially overstated both the amount of ore stored at the mine and the mine’s provable gold reserves. Plaintiffs learned that the mine’s remaining “life” was only four years, which was insufficient to generate enough ore to pay off White Tiger’s major creditor. here) discussing=">here) discussing" motion="motion" court’s="court’s" decision.="decision."> The First Department’s Decision The motion court found that Yanchukov, who controlled the plaintiffs, “plainly, a sophisticated businessperson with access to plentiful resources to protect himself and his investments, to obtain the requisite inspections and perform the necessary due diligence.” Though Yanchukov “may have lacked experience in the mining industry,” noted the motion court, “he clearly had the resources necessary to obtain expert advice or, indeed, do an investigation.”  Since Yanchukov failed to utilize those resources and conduct any due diligence, he could not claim that he was defrauded, held the motion court. The First Department agreed with the motion court, affirming the dismissal of the fraud claim on justifiable reliance grounds. Under New York law, sophisticated parties must show that they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing the means of verification available to them at the time. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015) (if a plaintiff has failed to make use of “the means available to it of knowing, by the exercise of ordinary intelligence, the truth or real quality of the subject of the representation,” that plaintiff “will not be heard to complain that it was induced to enter into the transaction by misrepresentations”) (internal quotation marks and brackets omitted); DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154-155 (2010) (a sophisticated investor claiming to have been defrauded must allege that it took reasonable steps to protect itself against deception); VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (“ ophisticated investors must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time”). In Unique Goals , the Court agreed with the motion court that plaintiffs were “financially sophisticated investors.” Slip op. at *2. As such, they had an obligation to conduct due diligence “to verify defendants’ representations about White Tiger’s financial condition and gold reserves.” Id . Like the motion court, the First Department found that plaintiffs failed to conduct such due diligence, “or even sought to do so, even though they were aware that White Tiger was experiencing financial difficulties.” Id .  Accordingly, the Court concluded, “the complaint fail to state a legally sufficient cause of action for fraud.” Takeaway In our prior “takeaway” of the case, this Blog said that the motion court’s decision reflected adherence to the message conveyed by the Court of Appeals about assessing the sufficiency of a justifiable reliance allegation: where sophisticated parties are involved, they must verify and investigate the truthfulness of the assurances and representations on which they rely. With the First Department’s unanimous affirmance, that message is reaffirmed – to wit: “where a person or entity, especially a sophisticated one, does not verify and investigate the truthfulness of assurances and representations, or is lax in doing so, the claim should be dismissed for failing to satisfy the justifiable reliance element.”

From time to time, this Blog writes about procedural issues that arise during the course of a litigation. Today, we write about the note of issue and certificate of readiness. A note of issue is a form that is filed and served on all parties confirming that the case is ready for trial. CPLR § 3402(a). Although any party may file the note of issue after issue is joined, it is usually the plaintiff who files the form. In addition to the note of issue, the party making the filing must also file a certificate of readiness. 22 NYCRR § 202.21. A certificate of readiness provides a certification that, among other things, all pretrial discovery has been completed, there are no outstanding requests for discovery, there has been a reasonable opportunity to complete all discovery proceedings, and the case is ready for trial. “The purpose of a note of issue and certificate of readiness is to assure that cases which appear on the court’s trial calendar are, in fact, ready for trial.” Tirado v. Miller , 75 A.D.3d 153 (2d Dept. 2010). Sometimes, the parties are not in agreement that the case is ready for trial. When that happens, a motion to vacate the note of issue typically follows. Such was the case in Cioffi v. S.M. Foods, Inc. , 2019 N.Y. Slip Op. 09250 (2d Dept. Dec. 24, 2019) ( here ). Pursuant to the Uniform Rules for Trial Courts, “ ithin 20 days after service of a note of issue and certificate of readiness, any party to the action or special proceeding may move to vacate the note of issue, upon affidavit showing in what respects the case is not ready for trial, and the court may vacate the note of issue if it appears that a material fact in the certificate of readiness is incorrect.” 22 NYCRR § 202.21(e). A statement in a certificate of readiness to the effect that all pretrial discovery has been completed is a material fact, and where that statement is incorrect, the note of issue should be vacated. Barrett v. New York City Health & Hosps. Corp. , 150 A.D.3d 949, 951-952 (2d Dept. 2017).  Thus, “ here a party timely moves to vacate a note of issue …, it need show only that a material fact in the certificate of readiness is incorrect, or that the certificate of readiness fails to comply with the requirements of ... section <202.21> in some material respect.” Vargas v. Villa Josefa Realty Corp. , 28 A.D.3d 389, 390 ([1st Dept. 2006); 22 NYCRR § 202.21(e). The movant is not required to establish that additional discovery was necessary because unusual or unanticipated circumstances had developed subsequent to the filing of the note of issue. Jacobs v. Johnston , 97 A.D.3d 538, 538 (2d Dept. 2012); 22 NYCRR § 202.21(d)(e). Where the movant fails to timely seek vacatur of the note of issue and certificate of readiness, however, he or she must demonstrate “good cause” for vacatur. 22 NYCRR § 202.21(e). To satisfy the “good cause” requirement, the party seeking vacatur must “demonstrate that unusual or unanticipated circumstances developed subsequent to the filing of the note of issue and certificate of readiness requiring additional pretrial proceedings to prevent substantial prejudice.” Ferraro v. North Babylon Union Free School Dist. , 69 A.D.3d 559, 561 (2d Dept. 2010 (quoting White v. Mazella-White , 60 A.D.3d 1047, 1049 (2d Dept. 2009) (internal quotation marks omitted)). Further, where the court has directed the completion of discovery by a certain date or where the party seeking vacatur has failed to timely comply with court orders and discovery demands, denial of a motion to vacate is proper. Encarnacion v. Monier , 81 A.D.3d 875 (2d Dept. 2011); Rampersant v. Nationwide Mut. Fire Ins. Co. , 71 A.D.3d 972, 973 (2d Dept. 2010); Savin v. Brooklyn Mar. Park Dev. Corp. , 61 A.D.3d 954, 955 (2d Dept. 2009). Whether to grant the motion to vacate a note of issue and certificate of readiness rests within the sound discretion of the court. Rampersant , 71 A.D.3d at 973. Cioffi v. S.M. Foods, Inc. Cioffi involved an action to recover damages for, among other things, personal injuries. The plaintiffs appealed from an order of the Supreme Court, Westchester County (Joan B. Lefkowitz, J.), dated December 2, 2015, which, inter alia , denied their motion to strike the note of issue and certificate of readiness and to direct further discovery. The Appellate Division, Second Department affirmed. The Second Department agreed with the motion court that plaintiffs had ample opportunity to conduct the discovery plaintiffs claimed was needed. Thus, even though the plaintiffs timely filed the note of issue and certificate of readiness as ordered by the motion court, the Second Department found no basis to disturb that order: Here, the Supreme Court issued a trial readiness order on August 27, 2015, which, inter alia , directed the plaintiffs to serve and file a note of issue within 20 days. At that time, it had been 6½ years since the injured plaintiff’s accident, 6 years since the original summons and complaint were filed, and 4 years since the present action was commenced. In that time, the plaintiffs had served more than 50 discovery demands and moved more than 36 times to compel various disclosure. On September 21, 2015, the plaintiffs filed their note of issue as directed, but the following day moved to strike the note of issue and certificate of readiness due to a need for further discovery and to direct certain disclosure. The court found that the plaintiffs had been given “every opportunity to conduct discovery” and had done so “extensively,” and that vacatur of the note of issue and certificate of trial readiness was not warranted. Under these circumstances, we agree with the court’s denial of the plaintiff’s motion. Slip op. at *2. Takeaway The court may vacate a note of issue where a material fact set forth therein, i.e. , the representation that discovery is complete, is incorrect. Cioffi shows that the court’s discretion in determining the correctness of that fact is broad.

Whether to permit discovery of insurance coverage decisions is often hotly contested. The issue typically arises in cases in which the carrier performs an investigation into the facts and circumstances of a potential or actual claim. The fruits of such an investigation can be very illuminating. For this reason, plaintiffs request the disclosure of all documents concerning such investigations. Defendants and insurers often resist producing these materials on privilege and work product grounds. To obtain such protection, these parties must demonstrate that the investigative materials were prepared solely in anticipation of litigation. Sounds easy. But, as is often the case, it is not. Attorney-Client Privilege and Mixed Purpose Reports The starting point for the analysis begins with Section 3101 of the Civil Practice Law and Rules (“CPLR”). Under CPLR § 3101, “all matter material and necessary to the prosecution or defense of an action” is to be disclosed. Reid v. Soults , 138 A.D.3d 1091, 1092 (2d Dept. 2016) (citing Allen v. Crowell-Collier Pub. Co. , 21 N.Y.2d 403, 406-07 (1968)). Courts are to determine whether documents and information are “material and necessary” liberally so that there will be disclosure of “any facts bearing on the controversy will assist preparation for trial” and “sharpen[ ] the issues and reduc delay and prolixity.” Yoshida v. Hsueh-Chih Chin , 111 A.D.3d 704, 705 (2d Dept. 2013). Stated differently, the documents and information must be relevant. Id . at 705-06. CPLR § 3101 also “establishes three categories” of materials that are protected from production: “privileged matter, absolutely immune from discovery (CPLR 3101 ); attorney’s work product, also absolutely immune (CPLR 3101 ); and trial preparation materials , which are subject to disclosure only on a showing of substantial need and undue hardship.” Forman v. Henkin , 30 N.Y.3d 656, 661-662 (2018). Because withholding documents based on one of the foregoing privileges obstructs the truth-finding process ( Spectrum Sys. Int’l Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)), “ he burden of establishing a right to protection under these provisions is with the party asserting it – the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity.” Id . at 662; see Rickard v. New York Cent. Mut. Fire Ins. Co. , 164 A.D.3d 1590, 1591-1592 (4th Dept 2018). “ court is not required to accept a party’s characterization of material as privileged or confidential.” Rickard , 164 A.D.3d at 1592 (internal quotation marks omitted). “Ultimately, resolution of the issue whether a particular document is . . . protected is necessarily a fact-specific determination . . . , most often requiring in camera review.” Id . (internal quotation marks omitted). See also Spectrum , 78 N.Y.2d at 378 (citation omitted). To fall within the conditional privilege of CPLR 3101(d)(2), the material sought must be prepared solely in anticipation of litigation. Hawley v. Travelers Ind. Co. , 90 AD2d 684, 684 (4th Dept. 1982); New England Seafoods of Amherst v. Travelers Cos. , 84 AD2d 676, 677 (4th Dept. 1981). Whether material is prepared solely in anticipation of litigation is determined by looking at the facts objectively, rather than subjectively, “because litigation can be anticipated at the time almost any incident occurs.” For this reason, there must be “a substantial and significant threat of litigation” before a party’s anticipation of litigation is considered ‘reasonable.’” See , e.g. , Royal Indem. Co. v. Salomon Smith Barney , Index. No. 125889/99 (Sup. Ct., N.Y. County July 8, 2004) ( here ) (quoting Harper v. Auto-Owners Ins. Co. , 138 F.R.D. 655, 659 (S.D. Ind. 1991)). In the context of insurance coverage disputes, “ ocuments prepared in the ordinary course of an insurance company’s investigation to determine whether to accept or reject coverage and to evaluate the extent of a claimant’s loss are not privileged and are, therefore, discoverable.” Brooklyn Union Gas Co. v. American Home Assur. Co. , 23 A.D.3d 190, 191 (1st Dept. 2005). Importantly, such documents do not become privileged “merely because an investigation was conducted by an attorney.” Id . (quoting Spectrum Sys. , 78 N.Y.2d at 379). Attorney-Client Privilege and Third Parties Under CPLR § 3101(b), attorney-client communications are immune from discovery. “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 reason for such immunity: the privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum , 78 N.Y.2d at 377. As the Court of Appeals observed: “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). 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 and Blue Shield of Greater New York , 73 N.Y.2d 558, 593-594 (1989)). Communications made in the presence of third parties ordinarily are not subject to the attorney-client privilege. Ambac , 27 N.Y.3d at 624. Where, however, the third party is an agent of the attorney or the client, and his or her presence is deemed necessary to enable the attorney-client communications and the client has a reasonable expectation of confidentiality, the attorney-client privilege is not waived. Id . See also Sevenson Envtl. Servs., Inc. v Sirius Am. Ins. Co. , 64 A.D.3d 1234, 1236 (4th Dept. 2009), lv. dismissed , 13 N.Y.3d 893 (2009). Likewise, the attorney work product privilege “extends to experts retained as consultants to assist in analyzing or preparing the case.” Beach v. Touradji Capital Mgt., LP , 99 A.D.3d 167, 170 (1st Dept. 2012). In John Mezzalingua Assoc., LLC v. Travelers Indem. Co. , 2019 N.Y. Slip Op. 09157 (Dec. 20, 2019) ( here ), the Appellate Division, Fourth Department addressed the foregoing principles, reversing much of the motion court’s decision shielding documents and information on work product and privilege grounds. John Mezzalingua Associates, LLC v. Travelers Indemnity Co. Background Plaintiff, John Mezzalingua Associates, LLC (“JMA”), the owner of an engineering and manufacturing facility, commenced the action after rainfall entered and caused damage to the facility in October 2016. JMA asserted a negligence cause of action against defendant, Campany Roofing Company, Inc. (“Company”), stemming from certain roofing work that Campany performed at the facility and asserted a breach of contract cause of action against defendants, the Travelers Indemnity Company and the Phoenix Insurance Company (collectively, “Travelers Defendants”), based upon the Travelers Defendants’ disclaimer of coverage for the loss. JMA had filed a claim with the Travelers Defendants for the loss and, on October 24, 2016, the Travelers Defendants sent Plaintiff a letter reserving their rights under the insurance contract and noting an exclusion in the policy for rain damage. Consequently, JMA hired litigation counsel and other consultants. On January 5, 2017, the Travelers Defendants disclaimed coverage. During discovery, a dispute arose over allegedly privileged documents that JMA withheld or redacted. In its privilege logs, JMA asserted that many of the documents were protected from disclosure on three grounds, i.e. , that they were material prepared in anticipation of litigation ( see CPLR §3101(d)(2)), attorney work product ( see CPLR § 3101(c)), or protected by the attorney-client privilege ( see CPLR § 4503(1)). JMA asserted that a few documents were not discoverable on the sole basis that they were materials prepared in anticipation of litigation. Campany and the Travelers Defendants separately moved to, inter alia , compel JMA’s disclosure of various documents or, in the alternative, for an in camera review of the documents. JMA moved for, among other things, a protective order, contending that all communications involving attorneys or litigation experts on and after October 24, 2016, were presumptively privileged because the Travelers Defendants and JMA contemplated litigation at that time. The motion court denied the Travelers Defendants’ motion, denied in part Campany’s motion, and granted JMA’s motion by, as relevant to the appeal, ordering that all documents that JMA created on and after October 24, 2016, were not discoverable because they were material prepared in anticipation of litigation. Campany and the Travelers Defendants appealed. The Fourth Department’s Decision The Court modified the motion court’s order by denying that part of JMA’s motion seeking a protective order with respect to documents created on or after October 24, 2016, which JMA alleged to be immune from discovery under CPLR § 3101(d)(2). Slip Op. at *3. The Court found that these communications ( e.g. , communications involving attorneys or litigation experts) were not privileged because the Travelers Defendants and JMA did not solely contemplate litigation at the time. The Court explained the materials were “mixed purpose reports” and, therefore, were not “prepared solely in anticipation of litigation.” Id . at *2 (citations omitted). “Because plaintiff ‘did not establish that the requested material was protected by the qualified immunity privilege set forth in CPLR 3101 (d) for material prepared exclusively in anticipation of litigation,’” concluded the Court, “‘the burden did not shift to to establish that they had substantial need’ for the material and could not obtain it without undue hardship.” Id . (quoting Peralta v. New York City Hous. Auth. , 169 A.D.3d 1071, 1074-1075 (2d Dept. 2019)). “With respect to documents that contend were attorney work product or protected by the attorney-client privilege,” said the Court, “many of the documents were shared with or prepared by third parties.” Slip Op. at *3. However, because it was unclear whether the third parties were agents of the attorney or the client, and whether their presence was necessary to enable the attorney-client communications for which the client had a reasonable expectation of confidentiality, the Court remanded to the motion court for an in camera review “to determine if the privileges were actually applicable.” Id . (citations omitted). Takeaway It is well settled that the trial court is given broad discretion to supervise disclosure. See Those Certain Underwriters at Lloyds, London v. Occidental Gems, Inc. , 41 AD3d 362, 364 <2007> , aff’d , 11 N.Y.3d 843 (2008). Under CPLR § 3101, such disclosure is “generous, broad, and is to be construed liberally.” Mann v. Cooper Tire Co. , 33 AD3d 24, 29 (1st Dept. 2006); Allen , 21 N.Y.2d at 406. Consequently, a party is entitled to “full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” CPLR § 3101.   The party claiming immunity from disclosure has the initial burden of showing that the materials being sought were prepared solely and exclusively for litigation purposes. 148 Magnolia, LLC v. Merrimack Mut. Fire Ins. Co. , 62 A.D.3d 486, 487 (1st Dept. 2009). “ his burden cannot be satisfied with wholly conclusory allegations.” Claverack Cooperative Ins. Co. v. Nielsen , 296 AD 2d 789, 789 (3d Dept. 2002). The reason: every request for disclosure must be considered in the context of each case in which it is sought and in light of the evidence presented to the court. Andon v. 302-304 Mott St. Assoc. , 94 N.Y.2d 740, 747 (2000). Consequently, as shown in John Mezzalingua Assocs. , the “resolution of the issue whether a particular document is . . . protected …, most often require in camera review.” Rickard , 164 A.D.3d at 1592 (internal quotation marks omitted). John Mezzalingua Assocs. also highlights the difficulties litigants have satisfying their burden of demonstrating that an investigative report was prepared “solely” in anticipation of litigation. Too often, the claim of privilege is supported by attorney affidavits rather than affidavits from persons with first-hand knowledge. E.g. , Claverack Coop. Ins. Co. v Nielsen , 296 AD2d 789, 789 (3d Dept. 2001). Even reference to emails and letters can come up short if they do not conclusively show that the disputed materials were related solely to future litigation and “not also used to evaluate claim or that retention of an independent investigator was other than ordinary course of business practice.…” Carden v. Allstate Ins. Co. , 105 A.D.2d 1048, 1049 (3d Dept. 1984). Thus, John Mezzalingua Assocs. serves as a reminder to litigants that because immunity from disclosure is a fact-intensive analysis, litigants should come to court with facts and evidence, not conclusory statements, demonstrating that investigative reports were prepared solely in anticipation of litigation.

Recording a mortgage puts the world on notice of the mortgagee’s interest in the real property that is the subject of the mortgage.  “New York has a ‘race-notice’ recording statutory scheme whereby the mortgage recorded first by a mortgagee without notice of any other mortgages will maintain priority over such other mortgages.”  Alliance Funding Co. v. Taboada , 39 A.D.3d 784 (2 nd Dept. 2007).  Section 291 of New York’s Real Property Law , which governs the recording of conveyances in real property, provides: A conveyance of real property, within the state, on being duly acknowledged ... may be recorded in the office of the clerk of the county where such real property is situated, and such county clerk shall, upon the request of any party, on tender of the lawful fees therefor, record the same in his said office. Every such conveyance not so recorded is void as against any person who subsequently purchases or acquires by exchange or contracts to purchase or acquire by exchange, the same real property or any portion thereof, or acquires by assignment the rent to accrue therefrom as provided in section two hundred ninety-four-a of the real property law, in good faith and for a valuable consideration, from the same vendor or assignor, his distributees or devisees, and whose conveyance, contract or assignment is first duly recorded, and is void as against the lien upon the same real property or any portion thereof arising from payments made upon the execution of or pursuant to the terms of a contract with the same vendor, his distributees or devisees, if such contract is made in good faith and is first duly recorded. Notwithstanding the foregoing, any increase in the principal balance of a mortgage lien by virtue of the addition thereto of unpaid interest in accordance with the terms of the mortgage shall retain the priority of the original mortgage lien as so increased provided that any such mortgage instrument sets forth its terms of repayment. The preferred status of a good faith purchaser for value “cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such.”  Chen v. Geranium Development Corp ., 243 A.D.2d 708, 709 (2 nd Dep’t 1997) (citations omitted).  In Chen , plaintiff contracted with the owner to purchase real property.  Plaintiff’s deposit was returned and the contract was cancelled after a dispute arose between the parties.  Thereafter, plaintiff, Chen, commenced an action to foreclose its contract-vendee’s lien in which the court entered a judgment of foreclosure and sale (the “Judgment”) directing the sale of the subject property.  The property was purchased by Fandy Corp., who moved to intervene in the action to vacate the Judgment that permitted the sale of the property now owned by it.  Fandy’s deeds were recorded prior to any recorded interest by Chen.  In denying Fandy the relief it sought, the Court found that Fandy had “actual knowledge of the prior contracts” that Chen entered into with the owner of the property but Fandy “merely accepted, without any proof or inquiry, independent or otherwise, a bare representation prior to their closing that the contracts had been cancelled.”  Chen , 243 A.D.2d at 709.  Thus, the court found that Fandy was not a good faith purchaser for value and its recording of its deed did not prime Chen’s interest in the property. In Emigrant Bank v. Drimmer , 171 A.D.3d 1132 (2 nd Dep’t 2019), the Court also determined whether a party was a good faith purchaser.  In 1999, Drimmer purchased property and obtained a mortgage from lender, which, for some reason, was not recorded until 2006.  However, in 2002 Drimmer sold the property to Sternberg, whose title report did not reveal lender’s yet unrecorded mortgage.  Following the sale to Sternberg, Drimmer continued to make monthly mortgage payments to lender, which included real estate tax escrows.  In 2007, lender learned of Drimmer’s sale to Sternberg and, as a result, accelerated the debt and stopped accepting Drimmer’s monthly payments.  Lender commenced action to “impose its mortgage on the premises, to foreclose the mortgage, and for a judgment declaring that its mortgage is a valid lien against the premises.”  The motion court granted Sternberg’s motion for summary judgment; finding that he was a “good faith purchaser for value … and took the property free of the subject mortgage.” The Second Department reversed.  The Emigrant Court explained what is necessary to be deemed a good faith purchaser as follows: The status of good faith purchaser for value cannot be maintained by a purchaser with either notice or knowledge of a prior interest or equity in the property, or one with knowledge of facts that would lead a reasonably prudent purchaser to make inquiries concerning such  The intended purchaser must be presumed to have investigated the title, and to have examined every deed or instrument properly recorded, and to have known every fact disclosed or to which an inquiry suggested by the record would have led.  If the purchaser fails to use due diligence in examining the title, he or she is chargeable, as a matter of law, with notice of the facts which a proper inquiry would have disclosed" Emigrant , 171 A.D.3d at 1134 (citations and internal quotation marks omitted).  The Court found that Sternberg established his prima facie entitlement to judgment by submitting evidence that he purchased the property “for valuable consideration, without prior notice of mortgage, and without knowledge of facts that would lead a reasonably prudent purchaser to make such an inquiry, and that he recorded his deed prior to the recording of mortgage.”  Emigrant , 171 A.D.3d at 1134 (citations omitted).  Nonetheless, the Court found triable issues of fact precluding summary judgment based on evidence that lender paid real estate taxes on the property before and after Sternberg’s purchase, which might have provided Sternberg with “actual knowledge of the mortgage prior to his purchase and whether due diligence in examining the tax records for the property would have placed him on inquiry notice of the mortgage prior to his purchase.”  Emigrant , 171 A.D.3d at 1134 (citations omitted). Related issues were recently addressed in Bank of America v. Giwa (Sup. Ct. New York Co. December 13, 2019).  The defendant in Giwa was one of the first individuals to purchase a new unit in a recently converted condominium.  Prior to the conversion, the entire building had a single tax lot designation.  “However, because a condominium is real property, each unit gets its own block and lot designation when the new condos are created. In the condominium declaration, the individual units were assigned individual lots and defendant's condominium was designated Block 2041 Lot 1307.”  At the time defendant purchased his unit, he obtained a mortgage from lender and, thereafter, obtained a loan modification from lender increasing the principal balance of the loan.  The original mortgage and the documents relating to the subsequent loan modification were mistakenly recorded against the prior lot number relating to the entire building before conversion, instead of the lot number related to defendant’s individual, post-conversion, unit. Giwa defaulted on the loan and lender commenced foreclosure proceedings.  The record was clear that lender realized its mistake but took no steps to correct them with the County Clerk; as it would have been permitted to do under New York County Law § 919(j).  In the meantime, Giwa failed to pay his condominium charges and his unit was sold at a Sheriff’s sale (the “Sale”) to pay the judgment.  The purchaser at the Sale (the “Purchaser”) recorded the deed against the correct parcel. The Giwa Court found that Purchaser was a “bona fide purchaser for value and it takes title to the property free and clear of lender’s mortgage because of improper recording.”  The Court was not moved by lender’s argument that at the time the mortgage was executed “the new condo lots had been designated but had not yet been formed by the city.”  Lender was not “absolved” of its “responsibility to ensure its mortgage was recorded against the correct lot in the intervening time since the mortgage was executed.”  The Court found that lender had numerous opportunities, but failed, to correct its mistake over a rather long period of time.  Thus, the Court found that “ he simple fact is that plaintiff had many chances to correct its mistake in the past twelve years but did nothing to put anyone on notice that it claimed an interest in this condominium unit.  Had plaintiff taken any action, this situation could have been avoided.”  The Court determined that Purchaser was entitled to rely on its title search, which failed to disclose the existence of lender’s mortgage recorded improperly on the wrong unit.  The Court also found that Purchaser was not “on inquiry notice that there was a possible mortgage recorded on the property because the deed was not recorded on tax lot.” In denying lender’s motion for summary judgment and granting Purchaser’s motion for summary judgment, the Court expressed its concerns with lender’s position and stated: An extremely cautious purchaser might have considered looking at the Base Lot. But that type of purchaser might also do searches on the neighbors' condo units or on the surrounding buildings. The fact is that attempts to blame for not discovering < lender's > lender's> mistake. Apparently, did not realize this mistake for nearly a decade. and yet it claims should have somehow realized it.  (Emphasis in original.)

In August of this year, this Blog wrote about Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 32470(U) (Sup. Ct., N.Y. County Aug. 20, 2019) ( here ), a case involving several elements of a fraud claim. ( Here .) As we noted at the time, Norddeutsche was a good example of why the courts refrain from dismissing fraud claims – there are issues of fact that are best left to the trier-of-fact to decide. Shortly after this decision, Defendants appealed the motion court’s order. On December 17, 2019, the Appellate Division, First Department unanimously affirmed the decision. Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 08965 (1st Dept. Dec. 17, 2019) ( here ). To give context to the First Department’s decision, a brief discussion of the facts of the case follows. The case arose in 2005 with the investment by Norddeutsche Landesbank Girozentrale, a German financial institution, and Hannover Funding Company, a Delaware LLC and a commercial paper conduit administered by Norddeutsche (together “Plaintiffs”), in one of the two funds managed by Defendant Patriarch Partners (“Patriarch”). The funds at issue, Zohar II and Zohar III (the “Funds”), were created in January 2005 and April 2007, and had maturity dates of January 20, 2017, and April 15, 2019, respectively. Zohar II and Zohar III each issued over $1 billion in notes that were rated at issuance either AAA/Aaa or AA/Aal by S&P and Moody’s, respectively (the “Notes”). Before purchasing the Notes, Plaintiffs received transaction documents, marketing materials, indentures, and collateral management agreements relating to each fund, as well as an offering memorandum for the Zohar III Fund. In January 2005, Plaintiffs purchased $75 million of Notes in Zohar II. In April 2007, Plaintiffs purchased $60 million of Notes in Zohar III. The Funds performed poorly. Plaintiffs claimed that Defendants withheld fund performance and related information from them by furnishing fraudulent reports that concealed the actual performance of the underlying loans in the Funds. Plaintiffs sold their Notes for a loss of approximately $45 million in April 2012, before the maturity date of either fund. Plaintiffs claimed that they sold the Notes due to their poor performance, multiple ratings downgrades (of which they were aware), and the increasing capital requirements generated by the investment. Defendants claimed that Plaintiffs sold the Notes for independent business reasons. Plaintiffs also alleged that instead of running the Funds as represented, Defendants Lynn Tilton (“Tilton”) and Patriarch ran the Funds as private equity funds. Plaintiffs maintained that Defendants used the money from the Funds to purchase equity in distressed assets, contrary to Defendants’ representations. Plaintiffs further alleged that Defendants collected management fees, dividends, preferred share buyouts, and income distributions from the companies that were owed to the Funds. Additionally, Plaintiffs alleged they were told that Tilton and the Patriarch entities were supposed to pay for and own the underlying equity in the portfolio companies, while the Funds would make loans to the companies. Plaintiffs alleged that they understood the Funds would be entitled to an equity kicker in some cases (to participate in the upside if Defendants were successful in turning the companies around) but would not be exposed to the downside risk of holding equity positions. Defendants moved for summary judgment on, inter alia , the following grounds: 1) Plaintiffs’ claims were time-barred; 2) Plaintiffs did not justifiably rely on any alleged misrepresentation by Defendants; and 3) Plaintiffs could not prove loss causation. The motion court denied the motion. Before the motion court, Defendants claimed that Plaintiffs could not prove that their losses were proximately caused by Defendants’ alleged misrepresentations and omissions. According to Defendants, Plaintiffs conceded during discovery that there was an independent reason for their losses – namely, the “heavy capital usage” imposed by the investment. The motion court rejected this contention: A finder of fact could determine that the decision to sell was causally linked to the alleged fraud, which Plaintiff contends led it to assume a certain level of performance, credit rating, and capital requirements, which in tum impacted whether to hold or sell the notes. A finder of fact could also reasonably conclude that had Plaintiffs known about the actual Fund structure, they would never have entered into the transaction in the first place. While Mr. Weber’s testimony might be fodder for cross-examination, it is insufficient to establish a loss causation defense as a matter of law. Like the motion court, the First Department held that there were issues of fact “as to whether plaintiffs’ losses were proximately caused by defendants’ alleged fraud.” Slip Op. at *1. Turning its attention to the justifiable reliance element, the Court said that the case before it was not “the rare circumstance in which the issue of reasonable reliance be resolved at the summary judgment stage of a fraud case.” Id . (citation omitted). The reason, explained the Court, was found in its prior decision in the case in which it held that “much of the information and disclosures that defendants contend triggered a duty of inquiry beyond the inquiry that plaintiffs undertook ‘ be interpreted in a myriad of ways and not facially clash with plaintiffs’ position that, even having some knowledge that the Funds had an equity component to them, they could not have known before the SEC proceeding the extent to which defendants used plaintiffs’ investment to acquire and control the Portfolio Companies, or otherwise had an obligation, based on that evidence, to further investigate.’” Id . (quoting Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 161-162 (1st Dept. 2017). Nothing “surfaced” after “discovery that would warrant a different conclusion,” noted the Court. Id . Finally, the Court agreed with the motion court that the fraud claims were not barred by the statute of limitations. Before the motion court, Defendants argued that Plaintiffs were aware of the truth about the structure of the funds from the marketing materials distributed to them in 2004 and 2006. In particular, Defendants maintained that statements in these materials sufficed to inform Plaintiffs that the Funds would hold equity and thus be at risk of suffering a loss. As such, Defendants contended that the claims were time-barred because Plaintiffs knew or should have known of the alleged fraud before 2005 and 2007, when they made their investments in the respective Funds. The motion court rejected this argument. The First Department agreed, holding that “the evidence adduced in discovery as to plaintiffs’ knowledge that the Zohar Funds included equity interests in distressed companies not eliminate issues of fact as to whether the information plaintiffs had was sufficient to place them on inquiry notice of the alleged fraud before May 2013, and therefore not permit a conclusion as a matter of law that the fraud claim barred by the statute of limitations.” Id . (citation omitted). Takeaway This Blog has written about numerous cases, both on the appellate and trial court level, in which the courts have dismissed fraud claims on justifiable reliance grounds. Perhaps, the stage of the proceedings plays a significant role in those decisions. After all, in Norddeutsche, the First Department made a point of noting that the case before it came at the summary judgment stage of the proceedings. If the issue of whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted)), then it stands to reason that the same should hold true at the motion to dismiss stage. Yet, as noted in this Blog’s August 2019 post about the case, “ he law reporters (not to mention the pages of this Blog) are brimming with cases in which the courts have dismissed fraud actions due to pleading and proof deficiencies.” It therefore remains to be seen whether those aggrieved by fraudulent misconduct will survive motions to dismiss, let alone motions for summary judgment because issues of fact prevail.

A common fact pattern for accounting fraud involves a public company recognizing revenues before they are realized or realizable and earned. Senior executives who engage in such fraud often do so to meet or beat analysts’ revenue and earnings estimates. Case after case shows that the pressure to satisfy Wall Street (that is, meet or beat analysts’ estimates) is strong. When a public company and its senior executives issue materially false and misleading statements about the company’s accounting practices and procedures, it usually draws the attention of the Securities and Exchange Commission (the “SEC”) and investors and shareholders, who file class action lawsuits to recover the damages caused from the decline in the price of the company’s stock resulting from the revelation of the truth about the company’s accounting practices. Sometimes, the conduct is egregious enough that criminal proceedings commence against the company and/or the responsible senior executives. Litigation involving Iconix Brand Group, Inc., the clothing and fashion brand-management company, and certain of its former senior executives, is a recent example of the foregoing. On June 23, 2015, shareholders filed class action complaints against Iconix Brand Group, Inc. (“Iconix” or the “Company”) and, among others, Neil Cole (“Cole”), the Company’s former Chief Executive Officer, Seth Horowitz (“Horowitz”), the Company’s former Chief Operating Officer, and Warren Clamen (“Clamen”), the Company’s former Chief Financial Officer. Following the appointment of Lead Plaintiffs, and motion practice directed to the sufficiency of the allegations in the complaint, Lead Plaintiffs filed a second amended complaint alleging that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) by issuing materially false and misleading statements regarding the Company’s accounting treatment for, inter alia , overseas joint ventures Iconix entered into to conceal its deteriorating financial condition. Specifically, Lead Plaintiffs alleged that Iconix formed overseas joint ventures, “sold” a 50% stake to local partners for millions of dollars, then immediately booked the entire purchase price – of which the joint venture partners paid only a fraction at closing, with the majority due in installments over a number of years – as profits for Iconix. Lead Plaintiffs alleged that, throughout the class period, defendants repeatedly assured the SEC and investors that the joint venture partners were obligated to pay their installments in full; that these partners were “well-capitalized” and “predetermined” to pay; and that if they did not pay, Iconix had “full recourse” and would sue to collect. Lead Plaintiffs alleged that these statements, made in direct response to an SEC inquiry into Iconix’s joint venture accounting that began in December of 2014 (the “SEC Inquiry”), were false. In July 2019, the class action lawsuit was settled as to the Iconix defendants for $6 million.  On September 23, 2019, the court preliminarily approved the proposed settlement. Notice was disseminated and a final approval hearing date was scheduled for January 23, 2020. here.=">here."> On December 5, 2019, the SEC announced ( here ) that it charged Iconix, Cole, Horowitz and Clamen with fraud. As discussed below, Horowtiz and Clamen agreed to settle the claims. Cole did not. Consequently, the SEC’s litigation against him remains ongoing. See="See" Candie’s="Candie’s" Inc. ,="Inc.," Securities="Securities" Release No.="Release No." (Apr.="(Apr." 30,="30," 2003),="2003)," available="available" at="at" https://www-test.sec.gov/litigation/admin/33-8228.htm. In=">https://www-test.sec.gov/litigation/admin/33-8228.htm. In" 1996,="1996," Candie’s="Candie’s" Securities Act="Securities Act" (the="(the" “Securities="“Securities" Act”)="Act”)" in="in" connection="connection" scheme="scheme" to="to" evade="evade" the registration="the registration" requirements="requirements" respect="respect" four="four" offerings.="offerings." See="See" Inc. , Securities="Inc., Securities" Release="Release" No.="No." (Feb.="(Feb." 21,="21," 1996),="1996)," >https://www.sec.gov/litigation/admin/3436865.txt.=">https://www.sec.gov/litigation/admin/3436865.txt."> In its complaint against Cole and Horowitz ( here ), the SEC alleged that these senior executives devised a fraudulent scheme to create fictitious revenue, allowing Iconix to meet or beat Wall Street analysts’ consensus estimates in the second and third quarters of 2014. According to the SEC, Cole and Horowitz realized substantial profits on Iconix stock sales as a result of the alleged fraud. In order to conceal the fraud, Cole and Horowitz allegedly deleted emails and caused Iconix to make false and misleading statements in response to the SEC Inquiry. In its complaint against Iconix ( here ), the SEC charged the Company with fraud for recognizing false revenue and manipulating its reported earnings in 2014, entering into transactions to conceal distressed finances at two licensees who could not meet licensing royalty payments owed to Iconix, and failing to recognize over $239 million in impairment charges for three brands over a multi-year period.  Additionally, alleged the SEC, Iconix and Clamen failed to recognize losses from Iconix’s failing licensees, disclose that Iconix entered into transactions to secretly and temporarily bolster its licensees’ finances, and properly test for impairments.  As a result of these alleged accounting improprieties, Iconix overstated net income by hundreds of millions of dollars between 2013 and the third quarter of 2015. “As the Commission alleges, Iconix and its top executives deceived investors by manipulating revenue and a key earnings metric, schemed to hide the lackluster results of its top brands and concealed growing losses,” said Anita B. Bandy, Associate Director of the SEC’s Division of Enforcement. “Today’s actions reflect our efforts to hold companies and executives accountable and obtain meaningful relief for investors.” Without admitting or denying the allegations, Iconix agreed to injunctive relief and to pay a $5.5 million penalty, an amount that reflected the Company’s cooperation and remediation efforts, said the SEC. Horowitz consented to injunctive relief and a permanent officer and director bar, and agreed to disgorgement and prejudgment interest of over $147,000, and a penalty in an amount to be determined at a later date. The settlements are subject to court approval. Clamen, without admitting or denying the SEC’s findings, agreed to cease and desist from future violations of the securities laws and pay disgorgement and prejudgment interest of nearly $50,000 and a $150,000 penalty. According to the SEC order ( here ), Clamen is suspended from appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after three years.  In its litigation against Cole, the SEC is seeking monetary and injunctive relief, including a permanent officer and director bar, and reimbursement to Iconix of certain incentive-based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act.  In parallel actions, the U.S. Attorney’s Office for the Southern District of New York also announced on December 5, 2019, the filing of criminal charges against Cole and Horowitz ( here ). Horowitz pled guilty to the charges and is cooperating with the Government.   Commenting on the charges, United States Attorney Geoffrey S. Berman said: “As alleged, Neil Cole entered into illegal secret agreements with joint venture partners to artificially inflate the value to his company.  Further, as alleged, Cole lied to outside auditors and to the SEC, and took steps to destroy evidence.  Now Neil Cole is in custody and facing serious criminal charges for his alleged conduct.  This is the third accounting fraud case brought by our Office in the last four months, which illustrates both the pervasiveness of this crime and my Office’s commitment to policing it.” FBI Assistant Director William F. Sweeney Jr. added: “As alleged, Cole and Horowitz falsely represented the financial standing of Iconix’s revenue at the expense of its shareholders and the investing public.  To aggravate matters further, they allegedly destroyed and concealed evidence from the SEC during their inquiry into the company’s joint ventures.  This is not a crime to be taken lightly, and as our charges today prove, this type of alleged dishonorable behavior will not go unpunished.”

This Blog, in “ The New York Court of Appeals Addresses the Issue of When a Mechanic’s Lien Can Be Placed on a Landlord’s Property By A Contractor Performing Work For A Tenant ,” quoting John P. Kane Co. v. Kinney , 12 Bedell 69 (1903), explained the purpose of a mechanic’s lien as follows: The object and purpose of mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest. Section 3 of New York’s Lien Law provides, in pertinent part: A contractor, subcontractor, laborer, materialman , who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor … or materials upon the real property improved or to be improved and upon such improvement, from the time of filing a notice of such lien as prescribed in this chapter. Thus, a mechanic’s lien is a powerful tool as it becomes an incumbrance on the real property that was purportedly improved by the work of the lienor.  This Blog has also addressed mechanisms to discharge a mechanic’s lien, which may present a problem for an owner ( here ). Due to the leverage that a mechanic’s lien provides to a lienor, the Lien law permits a lienor to be “punished” if the filed lien is “willfully exaggerated”.  Howdy Jones Const. Co., Inc. v. Parklaw Realty, Inc. , 76 A.D.2d 1018 (3 rd Dep’t 1980), affirmed , 53 N.Y.2d 718 (1981).  Lien Law § 39 declares that willfully exaggerated liens are void.  Lien Law § 39-a , which sets forth the penalties that can be assessed against a lienor when a lien is found to be “willfully exaggerated,” provides: Where in any action or proceeding to enforce a mechanic's lien upon a private or public improvement the court shall have declared said lien to be void on account of wilful exaggeration the person filing such notice of lien shall be liable in damages to the owner or contractor.   The damages which said owner or contractor shall be entitled to recover, shall include the amount of any premium for a bond given to obtain the discharge of the lien or the interest on any money deposited for the purpose of discharging the lien, reasonable attorney's fees for services in securing the discharge of the lien, and an amount equal to the difference by which the amount claimed to be due or to become due as stated in the notice of lien exceeded the amount actually due or to become due thereon. Numerous courts have noted that the “wilful exaggeration” provisions of the lien law were “intended to punish wilful exaggeration and not honest differences in contract interpretation.   Howdy Jones , 76 A.D.2d at 1018 (citations omitted).  If the amount of a lien is both inflated due to a wilful exaggeration and an honest mistake, “the damages are limited to the amount by which the lien is wilfully exaggerated.”  Goodman v. Del-Sa-Co Foods, Inc. , 15 N.Y.2d 191 (1965) (citations and internal quotation marks omitted).  The Goodman Court noted that: As has been true more than once of statutory language — even of opinions of courts — the language may not perfectly fit the thought, but the intention of the Legislature is plain. The draftsman of the statute was thinking of the simple situation where the entire amount of the exaggeration is willful. The purpose was manifestly to allow the recovery of a civil penalty by the owner, to recompense him for the extra trouble and expense to which he has been put by the filing against his property of a deliberately exaggerated mechanic's lien, in the amount by which the lien was thus exaggerated. There is no suggestion of an idea that the owner is entitled to recover anything on account of an honest mistake. Goodman , 15 N.Y.2d at 195 - 96. In Goodman , it was clear that the lien was exaggerated by a combination of honest mistakes and willfulness, but the lower court failed to make findings as to the extent of each.  Therefore, the Court remanded the case to make the necessary findings on which the penalties of Lien law 39-a could be based.  Goodman , 15 N.Y.2d at 199. “In interpreting the Lien Law, our courts have held that damages under section 39-a may not be awarded unless the lien has been declared void for wilful exaggeration after a trial in an action to foreclose the lien.”  Wellbilt Equipment Corp. v. Fireman , 275 A.D.2d 162, 166 (citations omitted).  Accordingly, if the mechanic’s lien is discharged prior to trial and, therefore, the “action is … merely one in contract” and is “no longer one seeking to enforce a mechanic’s lien,” there “remains no lien to be declared void by the court” and a “wilful exaggeration claim is precluded.”  Wellbilt , 275 A.D.2d at 166 – 67 (citations omitted). On December 11, 2019, the Appellate Division, Second Department, decided Degraw Const. Group, Inc. v. McGowen Builders, Inc. In Degraw , the plaintiff subcontracted with the defendant general contractor on several projects.  The subcontracts were terminated pursuant to a settlement agreement pursuant to which “the parties would release each other from all potential claims arising from the projects except, inter alia, for claims arising from latent defects in workmanship.”  The agreement also provided that “if either party breached the agreement, the other party’s sole remedy would be to seek enforcement of the terms of the agreement.”   The general contractor made $100,000 of the $150,000 in installment payments that were due to the subcontractor under the settlement agreement, but stopped “because latent defects had been discovered in the plaintiff’s work.” Notwithstanding the terms of the settlement agreement, however, the plaintiff subcontractor filed mechanic’s liens against the subject properties and commenced action to foreclose same.  The defendant general contractor and its surety that posted bonds to discharge the liens served “answers interposing counterclaims alleging, inter alia, that the mechanic’s liens were barred by the settlement agreement and therefore were willfully exaggerated.”  On the motion for summary judgment of the general contractor and its surety, the motion court awarded the general contractor “damages in the sum of $25,645, representing the sum paid in premiums for the bonds given to obtain discharge of the liens.  On appeal, the general contractor and its surety argued that “they were entitled to additional damages and attorney’s fees under Lien Law § 39-a based on the plaintiff’s alleged willful exaggeration of the mechanic’s liens.” In affirming the motion court “insofar as appealed from,” the Second Department determined that remedies under Lien Law § 39-a were unavailable to the general contractor and its surety.  In so doing, the Degraw Court stated: However, the Legislature intended the remedy in Lien Law § 39-a to be available only where the lien was valid in all other respects and was declared void by reason of willful exaggeration after a trial of the foreclosure action. Moreover, the remedy in Lien Law § 39-a requires a finding that the lienor deliberately and intentionally exaggerated the lien amount, and is available only where the lien is otherwise valid.  (Citations, internal quotation marks and brackets omitted.) Because the general contractor and its surety “contended in their motion for summary judgment, and the Supreme Court determined, that both of the plaintiff's mechanic's liens were invalid in their entirety because the plaintiff was precluded by the settlement agreement from asserting them, and was instead relegated to seeking enforcement of the agreement as its sole remedy for 's alleged breach of the agreement's terms” “damages under Lien Law § 39-a for willful exaggeration of the liens were unavailable, as the liens were not otherwise valid.

It is not uncommon for parties settling an action to negotiate a confidentiality provision that prohibits them from disclosing the terms of their agreement. While there may be reasons for requiring non-disclosure (a topic for another day), courts often grapple with the circumstances under which disclosure is warranted. In Appleyard v. Tigges , 2019 N.Y. Slip Op. 29373 (Sup. Ct., Bronx County Dec. 6, 2019) ( here ), the Court declined to order the disclosure of a confidential settlement between the plaintiff and one of the defendants because the request was made for purely tactical reasons, rather than for determining the underlying issue of fault and damages. Courts Favor Settlement Courts favor negotiated settlements because a resolution of a dispute avoids costly, time-consuming litigation and conserves the resources of the judicial system. Hallock v. State of N.Y. , 64 N.Y.2d 224 (1984); Denburg v. Parker , 82 N.Y.2d 375 (1993). In addition, there is a societal benefit in recognizing the autonomy of parties to shape their own solution to a controversy rather than having one judicially imposed upon them. Denburg , 82 N.Y.2d 375. Under certain circumstances, it is necessary to maintain the confidentiality of a settlement in order to protect the litigants and/or encourage a fair resolution. In re NY County Data Entry v. A.B. Dick Co. , 162 Misc. 2d 263 (Sup. Ct., N.Y. County 1994), aff’d , 222 A.D.2d 381 (1st Dept. 1995). When that happens, the courts must weigh the agreed upon provision for confidentiality against the rights of those who are not privy to the settlement agreement. When a plaintiff settles with one of the defendants, the non-settling defendant(s) may be entitled to discovery of the confidential settlement if the terms of the settlement are material and necessary to the prosecution and/or defense of an action. CPLR § 3101(a); Allen v. Crowell-Collier , 21 N.Y.2d 403 (1968). This does not mean that the non-settling defendant(s) can obtain the terms of the settlement by merely invoking the term “material and necessary”. Rather, the stated need for the information must be relevant to the prosecution and/or defense of the action. Trial strategy is not sufficient to meet this standard. In In re N.Y. County Data Entry Worker Prod. Liab. Litig. , 222 A.D.2d 381 (1st Dept. 1995), the First Department held that the desire to use the terms of a settlement to assess a defendant’s maximum exposure, or to determine whether to settle or continue the litigation, was not material and necessary to the defense of the action to warrant usurping the confidentiality of the agreement. In Osowski v. AMEC , 69 A.D.3d 99 (1st Dept. 2009), the defendant, AMEC, commenced a third-party action against its subcontractor, DCM. Sometime during the litigation, the plaintiff and AMEC settled and entered into a confidential settlement agreement. The First Department determined that DCM was entitled to disclosure of the confidential settlement agreement because the “settlement of the main action directly the underlying issue of fault and damages.” The court reasoned that “since the third-party action was one for indemnification and was necessarily predicated on the fact that AMEC/NYTB was ‘out-of-pocket’ for a loss which should have been borne by DCM,” the “the question of who funded the settlement of the main action was critical to whether AMEC/NYTB could continue to maintain the third-party action.” 69 A.D.3d at 106. In reaching its decision, the court rejected AMEC/NYTB’s reliance on Matter of New York County Data Entry Worker Prod. Liab. Litig. , because “the terms of agreement were not material to the resolution of the issues involved in the case.” Id . at 107. “Specifically,” said the court, “we concluded that other than the amount of settlement, a confidential settlement between the plaintiffs and the codefendants had no relevance to a possible postverdict apportionment under General Obligations Law § 15-108.” Id . GOL § 15-108(a) provides that when a plaintiff settles with one of the defendants, the plaintiff’s recovery against the remaining defendants is reduced by the greater of the amount paid in the settlement or the settling defendant’s equitable share of fault as apportioned by the jury. The statute requires the disclosure of the confidential agreement’s settlement amount, but only after a verdict is rendered against the non-settling defendants to determine post-verdict apportionment. Matter of Steam Pipe Explosion , 128 A.D.3d 493 (1st Dept. 2015). In Mahoney v. Turner , 61 A.D.3d 101 (2009), a confidential settlement agreement was entered into between the plaintiff and two of the defendants, Turner (general contractor) and FDA (site owner). Earlier in the litigation, these defendants commenced a third-party action against the defendant, Williams, a sub-contractor. Williams sought disclosure of the confidential settlement agreement out of concern that Turner and FDA were improperly colluding. Williams contended, and Turner and FDA did not dispute, that these two defendants were planning to continue participating in the underlying trial between the plaintiff and Williams. The First Department was concerned with the uncertainty about whether Turner and FDA planned to participate in the trial, and if they did, the reason for their continued participation, and whether this could result in prejudice to Williams. To address these concerns, the First Department limited the disclosure to an in-camera inspection of the confidential settlement agreement by the Supreme Court. Against these principles, the Appleyard Court held that the non-settling defendants were not entitled to the terms of the confidential settlement. Background Appleyard arose in August 2012, when defendants administered the antibiotic, Vancomycin, to treat an MRSA infection that developed in plaintiff’s left knee following arthroscopy surgery. Plaintiff claimed that the procedure was performed negligently. In February 2017, plaintiff settled with and discontinued the action against defendant, Vassar Brothers Hospital. Defendants, Russel G. Tigges and Orthopedic Associates of Dutchess County, P.C. (“Orthopedic Associates”), moved to compel plaintiff or Vassar Brothers Hospital to disclose the terms of the settlement agreement. In opposition, plaintiff argued that the settling parties agreed to keep the terms of the settlement agreement confidential, and that they were only obligated to disclose the settlement amount after a verdict was rendered against Tigges and/or Orthopedic Associates. According to the non-settling defendants, the terms of the settlement were necessary “to determine what evidence to submit during the trial of the case, in particular whether to put in a case against the hospital and the infectious disease consult, Dr. Feinstein.” They went on to argue that “ f the settlement seems small given the plaintiff’s injuries, then in light of the provisions of Gen. Oblig. Law 15-108(a), the non-settling defendants will want to introduce evidence of Dr. Feinstein’s negligence . . . f the settlement appears close to the full value of the case, it will be enough for the non-settling defendants to fend off the claims against them, and challenge the severity of the injuries claimed.” The Court’s Decision The Court held that the terms of the settlement were not material and necessary to the defense of the action. In particular, the Court said that the non-settling defendants were seeking the information for trial strategy and not to defend the action: It appears that in making this argument, Mr. Tigges and Orthopedic Associates are of the opinion that Vassar Brothers Hospital’s fault or the severity of plaintiff’s injury can somehow be determined by the settlement amount. This is pure speculation and amounts to nothing more than trial strategy, and is insufficient to qualify as material and necessary to the defense of the action to warrant disclosure of the instant settlement agreement. Slip Op. at *3 (citing Matter of New York County Data Entry Worker Prod. Liab. Litig. , 222 A.D.2d 381.) Accordingly, the Court denied the motion to compel. Takeaway Appleyard shows that whether a confidential settlement should be disclosed is determined by the standard New York courts employ to determine questions about the disclosure of documents and information – i.e. , whether the information sought is material and necessary to the prosecution and/or defense of the action. In Appleyard , the Court found that the settlement was not material and necessary because of the speculative grounds upon which the settlement terms were sought and because the settlement was not relevant to the resolution of the action.