Search Results

Judgments from sister states are enforceable in New York (and other sister states as well) by virtue of the “Full Faith and Credit” clause (article IV, section 1) of the Unites States Constitution (the “Clause”), which provides: Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof. In Matter of Farmland Dairies v. Barber , 65 N.Y.2d 51 (1985), the New York Court of Appeals was called on to determine, inter alia , whether Farmland Dairies’ required license to sell milk in New York should be revoked because of a New Jersey price rigging conviction.  Normally, “ nder New York Law, the New Jersey judgment would be admissible in the New York proceedings, it would be conclusive proof of the underlying facts and it would, without more, warrant the denial of application.”  Farmland , 65 N.Y.2d at 52 (citation omitted).  New Jersey’s criminal procedure rules, however, permitted that a final criminal judgment of conviction include language indicating that a guilty plea “not be evidential in any civil proceeding.”  Rule 3:9-2 of the Rules Governing the Courts of the State of New Jersey. At a hearing in New York on the renewal of Farmland’s license, the hearing officer received into evidence a certified copy of Farmland’s New Jersey conviction, but ultimately recommended that Farmland’s license not be revoked and that its extension application be granted.  The respondent Commissioner of the of the Department of Agriculture and Markets rejected the recommendation and denied Farmland’s application based on the New Jersey conviction admitted into evidence.  On Farmland’s appeal, the Court answered in the affirmative, the question of “whether the full faith and credit clause in the Federal Constitution mandates recognition of th condition to bar use of the New Jersey judgment in the New York administrative proceeding.”  In explaining the purpose of the Clause, the Farmland Court stated: Under our Federal structure, each State has its own judicial system capable of adjudicating the rights and responsibilities of the parties brought before it. Given this structure, there is always a risk that two or more States will exercise their power over the same case or controversy with the uncertainty, confusion, and delay that necessarily accompany relitigation of the same issue. The purpose of the full faith and credit clause was to avoid such conflicts and weld the independent States into a Nation.  Its provisions require that the public acts, records and judicial proceedings of each State shall be given full faith and credit in every other State (US Const, art IV, § 1). The doctrine does not make a foreign State judgment a judgment in the forum State. Before that occurs and a locus remedy may be obtained, an action must be brought and a judgment entered on the foreign judgment in the forum State. The doctrine establishes a rule of evidence, however, which requires recognition of the foreign judgment as proof of the prior-out-of-State litigation and gives it res judicata effect, thus avoiding relitigation of issues in one State which have already been decided in another. Farmland , 65 N.Y.2d at 55 (some citations omitted). The Farmland Court noted that generally criminal judgments are not entitled to full faith and credit because “no State is bound to enforce the penal laws of another State or to punish a person for a wrong committed against it.  Farmland , 65 N.Y.2d at 56 (citation omitted).  That general rule, the Farmland Court found, had no application in that case because “New York is not being asked by the State of New Jersey to enforce its penal laws” but, instead, “respondent wishes to recognize the New Jersey judgment as evidence of the misconduct underlying it.”  Farmland , 65 N.Y.2d at 57.  Under the plain language of the judgment as dictated by New Jersey law, however, such recognition is improper because the Court does “not perceive any overriding interest in the State of New York which would permit its agencies to rely on the New Jersey judgment to prove the misconduct but disregard the condition in it which induced the plea on which the judgment is based This State is bound by the bargain just as New Jersey is and must give the judgment the same effect as New Jersey courts give it.”  Farmland , 65 N.Y.2d at 58 (citation omitted). The law is also clear that review by the forum state of a judgment issued by the court of a sister state is limited to “whether the rendering court had jurisdiction, an inquiry which includes due process considerations.”  Fiore v. Oakwood Plaza Shopping Ctr. , 78 N.Y.2d 572, 577 (1991) (citations omitted).  Accordingly, “inquiry into the merits of the underlying dispute is foreclosed….”  Fiore , 78 N.Y.2d at 577 (citation omitted). The Second Department had occasion to discuss these issues in Balboa Capital Corp. v. Plaza Auto Care, Inc. (December 4, 2019).  The plaintiff in Balboa obtained a money judgment from a California court and subsequently commenced an action in New York to enforce same.  After supreme court denied its motion for summary judgment, plaintiff appealed.  The Second Department in Balboa , briefly reviewed the purpose of the Clause and noted that “ bsent a challenge to the jurisdiction of the issuing court, New York is required to give the same preclusive effect to a judgment from another state as it would have in the issuing state.”  The Court then found that reversal was appropriate because: the defendants did not challenge the jurisdiction of the California court, but instead, sought to relitigate the merits underlying that court's determination. The Supreme Court should not have considered the defendants' attack on the merits of the California determination. Since the defendants failed to raise a triable issue of fact in opposition to the plaintiff's prima facie showing, the court should have granted the plaintiff's motion for summary judgment….

In Benjamin v. Yeroushalmi , 2019 N.Y. Slip Op. 08647 (2d Dept. Dec. 4, 2019) ( here ), the Appellate Division, Second Department considered an appeal involving an action to recover damages for breach of contract, breach of fiduciary duty and fraudulent inducement. The action involved the acquisition and development of real properly located in Mineola and Brooklyn, New York. Beginning in 2007, the plaintiffs, Jim Benjamin (“Jim”), a real estate developer and investor, and his brother Behrouz Benyaminpour (“Bruce”), Jim’s brother and investment partner, entered into a joint venture agreement with the defendants, Moussa Yeroushalmi (“Moussa”) and his wife, Farzaneh Yeroushalmi (together, the “Yeroushalmi Defendants”), the purpose of which was to, among other things, purchase and develop properties in Mineola and Brooklyn, New York. According to plaintiffs, in April 2007, the parties entered into a written joint venture agreement in connection with the acquisition and development of certain real properly located in Mineola, New York (the “Mineola Property”). The property was owned by the Metropolitan Transportation Authority (the “MTA”), which was selling the Mineola Property through a closed bid procedure. The MTA ultimately awarded the right to purchase the Mineola Property to the plaintiffs and the Yeroushalmi Defendants, with the parties agreeing to assign their rights to a third party. The difference between the purchase price of $12,222,000 and the assignment price of $13,500,000 was, according to plaintiffs, to be distributed as profits, with Jim to receive 30% of those profits. Plaintiffs alleged that the Yeroushalmi Defendants failed to distribute plaintiffs’ share of the profits pursuant to the Mineola Property joint venture agreement. Plaintiffs further alleged that in April 2007, Moussa and Jim entered into a joint venture agreement for the purchase and development of certain real property located in Brooklyn, New York (the “Albemarle Property”). This transaction involved an entity owned by Moussa known as A1 Universal Construction Realty, LLC (“A1 Universal”), which entered into a contract of sale to purchase the Albemarle Property for $1,200,000. A1 Universal immediately flipped the purchase contract to a third party who agreed to purchase the Albemarle Property for $2,000,000. According to plaintiffs, they contributed $30,000 toward the down payment, and, pursuant to the joint venture agreement, the joint venture was entitled to 50% of any profits and the return of its closing costs upon a subsequent sale of the Albemerle Property. Plaintiffs claimed, inter alia , that Moussa failed to distribute the proceeds of a subsequent sale of the Albemerle Property. In addition, Plaintiffs alleged that in July 2008, Moussa solicited them to invest funds in a beverage company called Hip Pop Beverages, LLC (“HPB”). According to Plaintiffs, Moussa made specific oral misrepresentations of material fact to induce them to invest $75,000 in HPB, which he allegedly knew to be false at the time he made them. Plaintiffs commenced the action asserting, inter alia , a cause of action alleging breach of contract with regard to the Mineola Property joint venture agreement (first cause of action), a cause of action alleging fraud in the inducement with respect to the HPB transaction (fourth cause of action), a cause of action alleging fraud with regard to the sale of the Albemarle Property (fifth cause of action), a cause of action alleging conversion of Bruce’s membership interest in a limited liability company that owned an interest in the Albemarle Property (“Albemarle LLC”) (sixth cause of action), causes of action alleging breach of fiduciary duty (seventh and twelfth causes of action), and a cause of action for a declaratory judgment as to Bruce’s membership interest in the Albemarle LLC (tenth cause of action). In April 2015, the Yeroushalmi Defendants moved to dismiss the first, fourth, sixth, seventh, tenth, and twelfth causes of action, and the fifth cause of action insofar as asserted against them. The motion court granted the motion as to the first, fourth, seventh, and twelfth causes of action and denied the motion as to the fifth cause of action insofar as asserted against the Yeroushalmi Defendants and the sixth and tenth causes of action. Plaintiffs appealed, and the Yeroushalmi Defendants cross appealed. The Appellate Division, Second Department affirmed the decision and order of the motion court. Breach of the Mineola Property Joint Venture Agreement The Court agreed with the motion court’s determination that the first cause of action, alleging breach of the 2007 Mineola Property joint venture agreement, should have been dismissed. The reason, said the Court, was due to a subsequent agreement dated July 2, 2008 (“2008 Agreement”), which the Yeroushalmi Defendants submitted, and which superseded and constituted a novation of the Mineola Property joint venture agreement. Slip Op. at *2. Under New York law, a novation occurs “where the parties have clearly expressed or manifested their intention that a subsequent agreement supersede or substitute for an old agreement.” Northville Indus. Corp. v. Fort Neck Oil Terms. Corp. , 100 A.D.2d 865, 867 (2d Dept. 1984), aff’d , 64 N.Y.2d 930 (1985). When that happens, “the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement.” Id .; Citigifts, Inc. v. Pechnik , 112 A.D.2d 832, 834 (1st Dept. 1985), aff’d , 67 N.Y.2d 774 (1986). Consequently, since the Court found a novation of the Mineola Property joint venture agreement, it concluded that “the cause of action alleging breach of the Mineola roperty joint venture agreement be maintained. Slip Op. at *2 (citations omitted). Breach of Fiduciary Duty The Court agreed with the motion court’s determination to dismiss the seventh and twelfth causes of action alleging breach of fiduciary duty. “A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” but generally does not arise “between those involved in arm’s length business transactions.” EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005) (citations and quotation marks omitted). “If the parties … do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Id . at 20. To plead a cause of action for a breach of fiduciary duty, a plaintiff must demonstrate: “(1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant's misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC , 83 A.D.3d 804, 807 (2d Dept. 2011) (quoting Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2d Dept. 2010)). A cause of action to recover damages for breach of fiduciary duty must be pleaded with the particularity required under CPLR § 3016(b). Litvinoff v. Wright , 150 A.D.3d 714, 715 (2d Dept. 2017). The Court affirmed the dismissal of these claims because plaintiffs failed to provide any detail upon which to find a breach of fiduciary duty. In this regard, the Court explained that the complaint “contained only bare and conclusory allegations, without any supporting detail.” Slip Op. at *2 (citations omitted). Fraudulent Inducement The Court agreed with the motion court to dismiss the fourth cause of action, alleging fraud in the inducement with respect to the HPB transaction. A cause of action alleging fraud requires the plaintiff to plead: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance, and (5) damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). As this Blog has noted previously, one of the more challenging elements of the claim to satisfy is justifiable reliance. In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). 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). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). The Court held that plaintiffs failed to satisfy the justifiable reliance element of their claim. The reason, found the Court, was because “Jim relied solely upon Moussa’s alleged misrepresentations without conducting any investigation into the factual basis for that information or into the viability of HPB as a business opportunity.” Slip Op. at *2. As such, plaintiffs “failed to adequately allege justifiable reliance,” thereby making “the cause of action alleging fraud in the inducement … subject to dismissal.” Id . Takeaway Benjamin stands as a good reminder of the pleading hurdles a plaintiff must overcome when alleging a breach of fiduciary duty and fraudulent inducement. As Benjamin shows, particularity is crucial, even in the more relaxed pleading environment of New York state court. See this Blog’s discussion of the differences between federal and state court with respect to pleading a claim with particularity ( here and here ). Benjamin is also important for its application of the novation doctrine. Although novation typically occurs in the context of the original parties and a third party, Benjamin is an example of the doctrine’s application to the original parties only – the original parties sign a new agreement that supersedes the former one. The critical point here is the signed writing. An agreement that amends or modifies the terms of the original obligation ( i.e. , agreement) is valid only if it agreed to and signed by all parties.   Note that novation differs from an assignment. An assignment only transfers a party’s obligations and does not require the consent of the third party, unless the contract specifically provides otherwise. An assignment does not terminate the obligations set forth in the original contract, while novation does.

Decision day in the Appellate Division, First Department involved several cases in which the Court addressed allegations of fraud or fraudulent inducement. Many of the cases focused on the elements of the claim, while others focused on the absence of particularity and the duplication of claims doctrine.  We look at some of those cases in today’s post. Lerner v. Newmark & Co. Real Estate, Inc. In Lerner v. Newmark & Co. Real Estate, Inc. , 2019 N.Y. Slip Op. 08611 (1st Dept. Dec. 3, 2019) ( here ), the Court considered, among others causes of action, a fraud claim in the context of an action to recover commissions alleged to be due and owing under two related employment agreements. Plaintiff, Justin Lerner (“Lerner”), is a licensed real estate broker. Lerner alleged that, in November 2014, he and defendant, Newmark & Company Real Estate, Inc. (“Newmark”), entered into an agreement, for a two-year term, pursuant to which Lerner was to be paid commissions as set forth in the appended Schedule 1 (the “Engagement Agreement”). The Engagement Agreement provided that most of its terms, including Schedule 1, would survive its termination or expiration. Lerner alleged that the parties mutually agreed to his departure before the expiration of the two-year term. Lerner departed on or about March 14, 2016. Lerner claimed that, under Schedule 1, he was entitled to be paid his share of any commissions received for pending transactions within a specified time after his departure. Lerner submitted a list of pending transactions by April 11, 2016, within 30 days of the termination date as provided for in Schedule 1. According to Lerner, defendants refused to pay him his share of the commissions. In addition to the Engagement Agreement, defendants drafted a Termination Agreement, dated June 16, 2016, which did little more than confirm the Engagement Agreement’s post-termination provisions, including maintenance of confidentiality by Lerner and non-solicitation of defendants’ clients, and payment of commissions per the “pending list” mechanism of Schedule 1. Lerner alleged that he complied with his obligations thereunder, including submission of his list of pending transactions as of the date of his departure. Lerner alleged that defendants accepted his resignation, drafted the Termination Agreement to lay out a framework for payment of commissions on transactions that he brokered but that closed only after his departure and then quibbled over the terms of payment, drawing out indefinitely the matter of payment, while controlling all information about which transactions had closed. Lerner further alleged that defendants’ goal was to obstruct and refuse to pay commissions that he had earned by virtue of brokering the transactions. The Court held that Lerner stated a claim for breach of the Engagement Agreement and Termination Agreement. In addition to the contract claims, Lerner contended that defendants induced him to enter into the Termination Agreement, knowing that they had no intention of carrying out their end of the bargain. The Court held, without specifically stating it, that Lerner’s fraudulent inducement claim duplicated his contract claims and was otherwise not particularized to state a claim. New York courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement. Thus, the courts will dismiss such a claim as “redundant of the contract claim.” See Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 62-63 (1st Dept. 2017) (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011)). Moreover, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). In Lerner , the Court noted that Lerner sought the same measure of damages in both his fraud and contract claims and made no detailed factual allegations to support the claim of fraud. Slip Op. at *1. Instead, said the Court, Lerner simply inferred a fraud “from the fact that negotiations were drawn out, and ended up with non-payment, that the entire Termination Agreement was conceived of as a plot to withhold commissions that he had earned.” Id . Consequently, the Court held that Lerner “failed to state a cause of action for fraud.” Id . Pritsker v. Oppenheimer Acquisition Corp. In Pritsker v. Oppenheimer Acquisition Corp. , 2019 N.Y. Slip Op. 08621 (1st Dept. Dec. 3, 2019) ( here ), the First Department considered a fraud claim in the context of an action for conversion involving an investment in a Madoff feeder fund. pritsker action are taken from the decision of the motion court.> pritsker action are taken from the decision of the motion court.> Plaintiff, Robert L. Pritsker (“Pritsker”), filed the action to recover damages related to an investment (the “Investment”) of $586,000 in limited partnerships in which the general partner was defendant, Tremont International Insurance Fund, L.P. (“Tremont International”), a former Madoff feeder fund based in Rye, New York. The Investment comprised a portion of the excess cash value of Pritsker’s variable life annuity (the “Annuity”), which was underwritten by non-party American General Insurance Co. (“American General”). Pritsker alleged that by August 2012, the Annuity had received restitution, of all but $102,788 (the “Remaining Balance”), after Tremont International’s settlement with the Madoff trustee (the “Settlement”). Pritsker claimed that it was improper for Tremont International not to return the Remaining Balance because the Investment was made after December 31, 2007, the deadline for the clawback by the Madoff trustee. In March 2009, Tremont International set aside a reserve of $11,740 from Pritsker’s account for the purpose of the trustee’s clawback efforts. In November 2009, Pritsker received communications from American General advising him that the Madoff trustee had asked that all Tremont funds of funds with Madoff exposure having assets that remained for distribution to not make any further distribution pending the completion of the trustee’s review and analysis. Pritsker claimed that these communications led him to believe that he had Madoff exposure beyond the $11,740 initial reserve, when, in fact, he did not have such exposure. According to the motion court, documentary evidence showed that at no time after the Investment did Tremont International have any investments in limited partnerships with Madoff exposure. Tremont International stopped making distributions to Pritsker after June 30, 2009. Pritsker claimed that Tremont International either improperly applied the Remaining Balance to the clawback or converted the funds. Pritsker stated that he first learned that he did not have Madoff exposure when his claim was denied by the Madoff Victim Fund. Pritsker alleged that he was informed by the Madoff Victim Fund on December 13, 2016, that he was not entitled to restitution as an indirect investor in Maddoff investments, because any restitution had to come from funds assembled by the Madoff trustee as a result of setting aside fraudulent transfers, and that, because American General made the investment after December 31, 2007, the funds invested by American General on behalf of Pritsker could not be reached by the trustee as part of the clawback. The complaint contained three causes of action: fraud, constructive fraud, and fraudulent conversion. In the fraud cause of action, Pritsker alleged that defendants knew the date of Pritsker’s investment and knew that his funds were not subject to clawback. He further alleged that defendants misled him into believing that he had Madoff exposure and that some of his balances would have to be diverted to the Settlement. The motion court dismissed the fraud claim, finding that it was “insufficiently pleaded.” The motion court held that Pritsker failed to plead causation (which the First Department would describe as reliance). The reason, said the motion court, was because of the timing of the alleged misrepresentations – they occurred after the loss allegedly occurred. Pritsker’s claim was based on an alleged conversion of money on March 31, 2009, when $11,740 was reserved for the Madoff clawback and the misrepresentations were alleged to occur later in 2009. The motion court also found that the complaint failed to adequately plead scienter – that is, Pritsker failed to allege facts that a misrepresentation of fact was knowingly made by any defendant to Pritsker, with knowledge of its falsity, and intent to deceive. The First Department affirmed, holding that the complaint failed “to allege scienter and reliance.…” Slip Op. at *1. Both elements, said the Court, “are essential elements of fraud.” Id . (citing Lama Holdings Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); Meyercord v. Curry , 38 A.D.3d 315, 316 (1st Dept. 2007). meyercord is notable. in that case, the first department appeared to describe the causation and reliance elements interchangeably, holding that the plaintiff could not establish detrimental reliance ( i.e. , causation) “since he could not have changed his position or suffered a loss based on the alleged misrepresentations.” 38 a.d.3d at 316.> meyercord is notable. in that case, the first department appeared to describe the causation and reliance elements interchangeably, holding that the plaintiff could not establish detrimental reliance ( i.e. , causation) “since he could not have changed his position or suffered a loss based on the alleged misrepresentations.” 38 a.d.3d at 316.> Moore Charitable Found. v. PJT Partners, Inc. In Moore Charitable Found. v. PJT Partners, Inc. , 2019 N.Y. Slip Op. 08627 (1st Dept. Dec. 3, 2019) (here), the First Department dismissed fraud claims based upon the theories of respondeat superior and agency. moore are taken from the complaint and the motion court’s decision.> moore are taken from the complaint and the motion court’s decision.> Moore arose from an alleged fraud in which Andrew W.W. Caspersen (“Caspersen”), a senior executive of defendant, PJT Partners (“PJT”), an investment bank and advisory services firm, convinced The Moore Charitable Foundation ("The Foundation”), a nonprofit foundation with a mission to preserve and protect natural resources, to invest nearly $25 million of its endowed funds in a deal that PJT was sponsoring. To make the opportunity appear legitimate, Caspersen allegedly made use of PJT’s name, reputation, resources, and personnel. The Foundation transferred its money according to the wire instructions that Caspersen provided. However, the money went to an account that Caspersen controlled, rather than a PJT-controlled account. He took more than $8 million of the money that had been wired and gave it to PJT; the remainder he took for himself. After the Foundation detected and reported the alleged wrongdoing, federal authorities, including the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Southern District of New York, and the Securities and Exchange Commission, caught Caspersen trying to perpetrate a further fraud. He confessed to his role in defrauding the Foundation, entered a plea of guilty, and is currently serving a four-year sentence in federal prison. PJT returned $8.6 million to the Foundation – money that was sitting in PJT’s own bank account – but only after PJT’s insurance carrier promised to make PJT whole for the amount. PJT’s insurer did not, however, promise to cover the millions of dollars that the Foundation lost. The Foundation asserted causes of action for fraud against PJT and defendant, Park Hill Group, LLC (“Park Hill”), a division of PJT that provides asset advisory and fundraising services. The Foundation claimed that PJT and Park Hill were liable for Caspersen’s fraud under a theory of apparent authority and under a theory of respondeat superior. Defendants moved to dismiss the claims.  The motion court granted defendants’ motion to dismiss the cause of action for fraud based on respondeat superior and denied the motion as to the cause of action for fraud based on apparent authority. The First Department reversed the dismissal of the fraud claim based on apparent authority, and otherwise affirmed the dismissal on respondeat superior grounds. In New York, an employer may be vicariously liable for its employees’ tortious acts on a theory of respondeat superior only if they were committed in furtherance of the employer’s business and within the scope of employment. Riviello v. Waldron , 47 N.Y.2d 297, 303 (1979); see also Bowman v. State of New York , 10 A.D.3d 315, 316 (1st Dept. 2004). The tortious conduct must be generally foreseeable and a natural incident of the employment.” Judith M. v. Sisters of Charity Hosp. , 93 N.Y.2d 932, 933 (1999). “If, however, an employee ‘for purposes of his own departs from the line of his duty so that for the time being his acts constitute an abandonment of his service, the master is not liable.’” Id . Based upon the foregoing principles, the Court found that the corporate defendants were not liable for Caspersen’s fraud as Caspersen “orchestrated a fraudulent scheme through a fictitious transaction solely for personal gain.” Slip Op. at *1. “Thus,” held the Court, “defendants are not liable for that fraud under the doctrine of respondeat superior.” Id . The Court held that the cause of action for fraud based on apparent authority should have been dismissed because the complaint failed to identify any words or conduct by the defendants that would give rise to a reasonable belief on plaintiffs’ part that Caspersen had the authority to enter into the transaction. Id . (citing Hallock v. State of New York , 64 N.Y.2d 224, 231 (1984)). To show that an agent possesses apparent authority, the principal must communicate to a third party, through words or conduct, that the agent possesses the authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Hallock , 64 N.Y.2d at 231. “Rather, the existence of ‘apparent authority’ depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.” Ford v. Unity Hosp. , 32 N.Y.2d 464, 473 (1972); see also Restatement, Agency 2d, § 27. Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable. Hallock , 64 N.Y.2d at 231 (citations omitted). In Moore , the Court observed that “ t most, the allegations establish that defendants had imbued with actual authority with respect to a somewhat related but different type of transaction.” Slip Op. at *1 (citing Standard Funding Corp. v. Lewitt , 89 N.Y.2d 546, 551 (1997).

It is not uncommon for a nonparty to a litigation to ask their attorney whether they must comply with a subpoena duly served upon them. As the court in Manswell v. Baptiste , 2019 N.Y. Slip Op. 29360 (Civ. Ct., Kings County, Nov. 20, 2019) ( here ), made clear, non-compliance is not an option. A subpoena is a document that commands a person to testify at a trial or deposition and/or to produce documents specifically demanded. A subpoena duces tecum differs from a subpoena ad testificandum in that the former “requires production of books, papers and other things,” whereas the latter “requires the attendance of a person to give testimony.” CPLR § 2301; see also N.Y. Crim. Proc. Law § 610.10(3). It is served in the same manner as a summons and complaint, except under certain circumstances enumerated in the CPLR. A proper subpoena will include a provision that explicitly states that the failure to comply with the commands therein is punishable as a contempt of court, making the recipient of the subpoena liable to the person on whose behalf the subpoena was issued for a penalty not to exceed one hundred fifty dollars and all damages sustained by reason of the failure to comply. See CPLR §§ 2308(a) (“Failure to comply with a subpoena issued by a judge, clerk or officer of the court shall be punishable as a contempt of court”) and 5251 (“Refusal or willful neglect of any person to obey a subpoena shall each be punishable as a contempt of court.”). In addition, refusal to comply with the subpoena may subject the contemnor to a sentence of imprisonment. CPLR § 2308(a). Contempt is a drastic enforcement tool, which derives from statute, and is available to courts to punish parties for their failure to adhere and comply with the court’s mandates and to preserve the court’s authority over the conduct of litigation. Because of the possible consequences, including incarceration, contempt punishment is not readily granted. After all, “ ontempt punishment is a crime in and of itself and therefore is punished within the penal system just as any other crime, which carries with it the imposition of a sentence of incarceration to the contemnor.” Slip Op. at *3. Since courts are reluctant to impose contempt punishment, whether by fine or the more drastic form of punishment, incarceration, particularly in civil matters, contempt punishment will not be granted “without the utmost of fastidious due diligence and due deliberation.…” Id . This is even more so when, as in Manswell , the matter before the court is the enforcement of a money judgment. As the Court noted, “ t is quite evident why the more drastic sentence of incarceration is so much more problematic to the courts in such an instance” – the avoidance of a de-facto “resurgence of the Debtors Prisons of old.…” Slip Op. at *3 and n.5. In Manswell , the Court found that the defendants had engaged in “a blatant unabashed pattern of defiance” sufficient “to sustain an imposition of contempt punishment.” Slip Op. at *5. As businessmen and service providers, the Court deemed “their willful refusals to adhere to the mandates of the branch … even more untenable” as “ t belies public policy and consumer protection to allow businesses to merely flout all judicial protocols procedures to the detriment of public consumers” without consequence. Id . Both Defendants have flouted all judicial protocols and procedures from the very beginning of the case, in failure to respond to the jurisdiction of the court, evidencing a trivialization of the inherent power of the civil court’s authority over their persons as operators of business marketed to the public. Id . See also Home Heating Oil Corp. v. Parris , 2019 N.Y. Slip Op. 51663 (Civ. Ct., Kings County, Oct. 21, 2019) ( here ). Speaking to the conduct at hand, the Court addressed the “pattern defiance” the defendants showed to the processes and rules of the Court: Defendants failed to interpose an answer pursuant to summons and complaint duly served. Defendants never appeared to challenge default judgment filed and duly served. Defendants willfully refused to appear as well as to respond in any way shape or form to the duly served subpoena with its boldfaced warning as to the penal consequences of failure to comply. Defendants’ continued willful disregard of the orders and authority of court is ever so evident in their utter disregard of this instant matter to punish them, where it clearly states, again, in bold large font the consequence of non-compliance of the duly served subpoena can be imprisonment. Still, threat of incarceration was of no moment to these recalcitrant Defendants. Id . The Court concluded by summing up defendants’ conduct and the circumstances in which the conduct occurred ( e.g. , operating businesses that provide services to the public). In doing so, the Court made it clear that contempt punishment for failing to submit to a post-judgment examination and production of documents for the enforcement of a money of judgment would not be countenanced. Defendants’ obvious disregard of all the court mandates from inception of this civil case up to and including failure to comply with the subpoena, a judicial mandate of the civil court, demonstrates refusal and willful neglect to obey this subpoena and rejection of the inherent power and authority of the civil court. Both judgment debtors D. Baptiste and K. Baptiste were duly served with post-judgment subpoenas by Plaintiff- judgment creditor for both testimony and document production “on all matters relevant to the satisfaction of such judgment.” The Second Department Appellate Division has long affirmed the holding of civil contempt punishment against judgment debtors for failing to submit to a post-judgment examination and production of documents for the enforcement of money judgments pursuant to CPLR Article 52. With emphasis: since these contemnor Defendants hold themselves out as engaging in business marketed to the public consumer, their willful refusal to comply with the post-judgment subpoena is even more so contemptible. Id . at **5-6. Consequently, the Court held the defendants in contempt, fining each of them $160.  However, the Court did not incarcerate the defendants. Takeaway “A party seeking disclosure from a nonparty witness need not move for a court order, but may proceed by serving a subpoena and notice.” McNulty v. McNulty , 81 A.D.2d 581, 581 (2d Dept. 1981) (citing, inter alia , CPLR §§ 3101(a)(4), 3106(b) and 3107). The nonparty witness or adversary may then apply for a protective order ( id . (citing CPLR § 3103(a)) and/or move to quash the subpoena (CPLR § 2304) if he/she chooses to resist the examination or production. But, as demonstrated in Manswell , non-compliance with the subpoena is not an option.

Statutes of limitations, which are a critical part of litigation, are designed to prevent litigants from sitting on their rights.  A brief primer on New York’s Statute of Limitations, is contained within this Blog’s post, “ Second Department Finds No Issue of Fact as to Whether Defendant Should be Estopped From Asserting a Statute of Limitations Defense. ”  Article 2 of New York’s CPLR addresses Statute of Limitations issues. The CPLR contains several provisions that toll or otherwise extend applicable limitations periods.  For example, CPLR 205 provides that, under certain circumstances, when an action is timely commenced but is subsequently terminated, a new action may be commenced within six months of the termination despite the running of the applicable statute of limitations.  CPLR 208 , 209 and 210 provide tolls in the event of infancy or insanity, war and death of a claimant or a person liable, respectively.  The subject of today’s post, however, is CPLR 204(a) , which tolls the applicable statute of limitations, and provides: here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced .  In Lubonty v. U.S. Bank National Association , (November 25, 2019), the New York Court of Appeals was tasked to determine “whether the bankruptcy stay 11=">11" U.S.C.="U.S.C." §="§" 362(a)="362(a)"> qualifies as a ‘statutory prohibition’ under CPLR 204(a), and if so, whether a party may later avail itself of the toll where, at the time the stay was imposed, that party had a pending action asserting the same claim.”  The Lubonty Court, in affirming the decision of the Second Department, answered both questions affirmatively. The plaintiff in Lubonty , borrowed $2.5 million secured by real property in Southampton, New York, and subsequently defaulted in his payments.  On June 11, 2007, the lender accelerated the debt and commenced a foreclosure action (the “First Foreclosure Action”), which triggerd the six year statute of limitations imposed by CPLR 213(4) .  Prior to interposing his answer in the First Foreclosure Action, Lubonty filed a bankruptcy petition, which “invoke the automatic stay and barr continuation of the irst oreclosure ction.”  Approximately 882 days after filing, Lubonty voluntarily dismissed the pending bankruptcy action and the automatic stay was lifted.  Thereafter, lender moved for a default judgment in the First Foreclosure Action and, subsequently, the trial court granted Lubonty’s ex-parte application to dismiss the First Foreclosure Action as abandoned pursuant to CPLR 3215(c) , because a default judgment was not taken within a year of Lubonty’s default.  (This Blog has analyzed CPLR 3215(c) < here =">here"> .)  The Lubonty Court noted that in dismissing the First Foreclosure Action, the trial court did not mention Lubonty’s bankruptcy filing, and, therefore, the automatic stay imposed thereby. The original lender’s assignee commenced a second foreclosure action (the “Second Foreclosure Action”), which Lubonty moved to dismiss for improper service.  Prior to the return date of that motion, Lubonty filed a second bankruptcy petition, which imposed a second automatic stay.  The automatic stay of the second bankruptcy was lifted after 769 days and, thereafter, on October 21, 2014, the trial court granted Lubonty’s motion to dismiss the Second Foreclosure Action for improper service of process. Two weeks after the dismissal of the Second Foreclosure Action, Lubonty commenced an action pursuant to RPAPL § 1501(4) to “discharge the mortgage, asserting that the statute of limitations on lender’s foreclosure claim had expired.  (This Blog has analyzed RPAPL § 1501(4) < here =">here"> .)  The trial court dismissed the action because the statute of limitations was tolled for the period of time that the automatic stay imposed by the bankruptcy code.  “The Appellate Division unanimously affirmed, concluding that ‘plaintiff’s contention that CPLR 204 (a) does not apply here because the earlier foreclosure actions had already been commenced when the petitions in bankruptcy were filed is without merit.’”  (Emphasis supplied.)  The Court of Appeals granted Lubonty leave to appeal. The Lubonty Court quickly resolved the “issue of first impression” of “whether the automatic bankruptcy stay constitutes a ‘statutory prohibition’ under CPLR 204 (a)” by determining that it was.  The Court then moved onto the next question of “whether the toll provided in CPLR 204 (a) is available to a claimant who, when the bankruptcy stay was imposed, had already commenced an action against the debtor – later dismissed – on the claim now asserted.”  (Emphasis supplied.) In his action to discharge the mortgage, Lubonty made the “cramped” argument that CPLR 204(a) could not apply because the bankruptcy stay could not have prevented lender from “ commencing ” a foreclosure action because at the time that the respective automatic stays were imposed, the foreclosure actions were already commenced .  (Emphasis supplied.)  The Court of Appeals, like the trial court and the Second Department, flatly rejected Lubonty’s literal reading of CPLR 204 (a).  Indeed, the Court noted that “ laintiff’s brand of literalism quickly loses sight of the forest for the trees, producing an outcome antagonistic to the purpose and design of the tolling provision.”  (Citation omitted.) The Court recognized that in ruling on Lubonty’s RPAPL 1501 claim to determine if the mortgage should be discharged, it “must look to whether the ‘applicable statute of limitations for the commencement of an action to foreclose’ had expired.”  In reaching its conclusion that the statute of limitations had not expired, the Court determined that: Because the two bankruptcy stays prevented defendant from commencing a foreclosure action for at least 1651 days, that time is not part of the time within which such an action must be commenced . Put another way, in determining whether the statute of limitations on a foreclosure action had expired when plaintiff filed this RPAPL action, the duration of any bankruptcy stay must be excluded, regardless of whether an earlier action on the same claim had been initiated or was pending when the stay was imposed. This interpretation of “ commencement ” promotes the purpose of CPLR 204 (a) and, unlike plaintiff’s proposed rule, is reconcilable with both the bankruptcy stay’s effect, and the policies underlying the enforcement of limitations periods.  (Footnote omitted; emphasis supplied.) The historical roots of New York’s tolling statutes springs from the “equitable principle that plaintiffs should not be penalized for failing to assert their rights when a court or statute prevents them from doing so.”  The bankruptcy stay’s effect on litigation is far-reaching “and limit virtually all judicial action against the debtor and any co-debtors … not only prevents an action from being continued, but also from being discontinued and recommenced.”  (Citations omitted.)  Moreover, the commencement of the automatic stay is controlled by the debtor and “brings any potential and ongoing litigation to a standstill at a debtor’s behest.”  Thus, the Court found that lender was “prevented from asserting its rights as a direct result of the actions of Lubonty” in filing his bankruptcy petitions.  In finally concluding that Lubonty’s action pursuant to RPAPL 1501 should be dismissed, the Court stated: Applying the above rule to the instant action, defendant’s claims were not time-barred when Supreme Court granted defendant’s motion to dismiss.  The statute of limitations for a foreclosure claim is six years (CPLR 213 <4> ). Here, the limitations period began to run on June 11, 2007, upon AHMA’s acceleration of plaintiff’s mortgage. The property was subject to bankruptcy stays for at least 1651 days, during which defendant was statutorily prohibited from commencing any action concerning the property. Adding the duration of the stay to the six-year statute of limitations period, defendant had until on or about December 18, 2017 to commence the foreclosure action. Dismissal of plaintiff’s action to discharge the mortgage was thus proper.  In his lengthy dissent, Judge Stein shared Lubotny’s view that CPLR 204(a) is unambiguous and only applies when a stay prevents the “ commencement ” of an action – which is not the case in the subject action.  Therefore, the majority’s view is not consistent with the legislature’s intent.  The dissent’s position is bolstered, Judge Stein argues, by, inter alia , the existence of CPLR 205(a), which provides a remedy “where an action is timely commenced, but subsequently terminated after the statute of limitations expires.”

Allegations of fraudulent inducement come in many contexts. Today, this Blog looks at a fraudulent inducement claim in the context of a merger. Kainz v. Bernstein , No. 19 Civ. 2499 (LLS) (S.D. N.Y. Nov. 13, 2019) ( here ). As this Blog has noted, one of the more challenging elements of a fraudulent inducement cause of action for a plaintiff to satisfy is the justifiable reliance element. To satisfy this element, a plaintiff must demonstrate that he/she exercised the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality, of the subject of the representation being challenged. See Schlaifer Nance & Co. v. Estate of Warhol , 119 F.3d 91, 98 (2d Cir. 1997). If the plaintiff fails to “make use of those means,” he/she “will not be heard to complain that was induced to enter into the transaction by misrepresentations.” Id . (citation and internal quotation marks omitted). However, when the truth of the representations at issue are “peculiarly within defendant’s knowledge,” the plaintiff may rely on the representations “without prosecuting an investigation,” because he/she “would have ‘no independent means of ascertaining the truth.’” Ward v. TheLadders.com, Inc. , 3 F. Supp. 3d 151, 166 (S.D.N.Y. 2014) (quoting Crigger v. Fahnestock & Co. , 443 F.3d 230, 234 (2d Cir. 2006)). The foregoing principles were at issue in Kainz . As discussed below, the Court found that Kainz could not have justifiably relied on any representation alleged to be false because the information that undergirded the representation was publicly available. Kainz v. Bernstein Background Plaintiff, Roman Kainz (“Kainz”), alleged violations of the federal securities laws, breach of contract, and fraud in the inducement in connection with the merger of XpresSpa Holdings, LLC and XpresSpa Group, Inc. (the “Merger”). XpresSpa Holdings, LLC (“XpresSpa Holdings”) was an airport spa business in which Kainz held an equity interest of less than five percent. On August 8, 2016, XpresSpa Holdings executed an agreement (the “Merger Agreement”) with defendant, XpresSpa Group, Inc. (“XpresSpa Group”). Under the Merger Agreement, unitholders representing 95 percent of XpresSpa Holdings units were required to join the Merger Agreement by signing a joinder agreement (the “Joinder Agreement”). On December 23, 2016, the Merger closed. As a result, Kainz’s interest in XpresSpa Holdings was exchanged for XpresSpa Group shares. Kainz alleged that defendants made numerous misrepresentations and omissions concerning the Merger that induced him to sign the Joinder Agreement and become a party to the Merger Agreement. In particular, Kainz alleged that defendant, Bruce T. Bernstein (“Bernstein”), falsely represented in an email on December 27, 2016, that “ ithout signing the Joinder Agreement, you will not be able to receive the new securities in Form that will be given in exchange for the Xspa shares.” In reliance on defendants’ misrepresentation and omissions, including the December 27, 2016 email, Kainz executed the Joinder Agreement. Kainz claimed that he was purportedly damaged when XpresSpa Group’s stock price fell after the Merger when the truth about the company was revealed ( i.e. , that the XpresSpa Group was essentially a shell with no genuine, ongoing business or capital and subject to onerous loan covenants and a self-interested, conflicted board of directors). Defendants moved to dismiss the complaint for failure to state a claim upon which relief could be granted.  The Court granted the motion. The Court’s Decision The Court found that Kainz’s fraud claims were deficient for two reasons: he failed to plead loss causation and he failed to demonstrate justifiable reliance. The Court observed that Kainz’s failure to specify the date on which he signed the Joinder Agreement was fatal to his claim that the December 27, 2016 email induced him to sign the agreement and become a party to the Merger Agreement. If Kainz “signed the Joinder Agreement before the merger closed ,” said the Court, “he could not have relied on Mr. Bernstein’s statement, which did not occur until four days later.” On the other hand, the Court explained, if “Kainz signed the Joinder Agreement after Mr. Bernstein’s email and after the merger had already closed , his interest in XpresSpa Holdings would by then have been exchanged for XpresSpa Group shares regardless of whether or not he signed it.” Thus, concluded the Court, “Bernstein’s statement could not have been the cause of the decreased value of Mr. Kainz’s XpresSpa Group shares.” Moreover, noted the Court, Kainz could not demonstrate justifiable reliance. As noted, Kainz alleged that in the December 27, 2016 email, Bernstein misrepresented the fact that Kainz would not receive shares of XpresSpa Group in exchange for his equity interest in XpresSpa Holding unless he signed the Joinder Agreement. The Court explained that the truth of the representation was available to Kainz had he looked because it was “disclosed in both the Merger Agreement and XpresSpa Group’s Form S-4 that was publicly filed with the SEC.” “Thus,” concluded the Court,” “Kainz had the independent means to know that he did not need to sign the Joinder Agreement, and reliance on Mr. Bernstein’s statement was unreasonable.” Takeaway Kainz reinforces the principle that a party claiming to be the victim of fraud has an obligation to learn the truth about the statements and representations upon which he/she relied. Courts show little patience for parties that have the means to conduct such an investigation and fail to do so. This is especially so for sophisticated parties. And, as shown in Kainz , courts will not find justifiable reliance on alleged false statements when the truth can be learned through publicly available information.

Economic duress, like duress, generally, provides an injured party with grounds to void a contract. Proof of the existence of economic duress requires a showing that one party to a contract has threatened to breach the agreement by withholding performance unless the other party agrees to some further demand. A party cannot be guilty of economic duress, however, for refusing to do that which it is not legally required to do or for threatening to do that which it is legally authorized to do. Thus, a plaintiff is not entitled to rescind a contract on the ground of economic duress where the harm alleged by the plaintiffs is the exercise of a legal right. A party seeking to void a contract on the basis of economic duress must show that he/she was compelled to agree to it because of a wrongful threat precluding the exercise of his/her free will. Austin Instrument v. Loral Corp. , 29 N.Y.2d 124, 130 (1971). See also 16 N.Y. Jur. 2d Cancellation of Instruments § 22 (“Economic duress is also not present where one party offers the other a business arrangement that the offeree is free to accept or reject”). An aggrieved party can demonstrate the existence of economic duress by proving that the other party(ies) to the contract “has threatened to breach the agreement by withholding performance unless the party agrees to some further demand.” 805 Third Ave. Co. v. M.W. Realty Assoc. , 58 N.Y.2d 447, 451 (1983) (citation omitted). Importantly, a mere threat to breach a contract does not constitute economic duress if the party who has been threatened can obtain performance of the contract from another source and pursue normal legal remedies for a breach of contract. Austin Instrument , 29 N.Y.2d at 130-131. The party relying on economic duress has the burden of proving that the agreement could not have been performed by another party. In CRG at Arnot Mall, Inc. v. Feehan , 2019 N.Y. Slip Op. 08467 (3d Dept. Nov. 21, 2019) ( here ), the Appellate Division, Third Department, addressed the economic duress doctrine in a dispute over the purchase and sale of four McDonald’s restaurants, holding that the doctrine did not apply. CRG at Arnot Mall, Inc. v. Feehan Background In March 2014, plaintiffs, CRG at Arnot Mall, Inc., CRG at Main Street, CRG at Southport, Inc. and CRG at Horseheads, Inc. (collectively, “CRG”), and Coastal Restaurant Group, Inc., the parent of CRG, and defendant, Courtney Feehan (“Feehan”), entered into a purchase and sale agreement whereby Feehan would purchase four McDonald’s restaurants that were owned and operated by CRG. According to the agreement, the closing would take place on May 6, 2014, and $300,000 would be held in escrow as security for CRG’s obligations. The agreement also provided that the purchase price would be $4.2 million, plus the value of the inventory at the time of the sale. Feehan, however, would be entitled to a credit for required reinvestments, the amount of which would be determined following an inspection under McDonald’s Capital National Restaurant Business and Equipment Standards program (in which a McDonald’s representative would inspect and identify any capital improvements needed to meet franchise standards) and by items put on a punch list by the parties. The amount of the reinvestment credit was anticipated to be approximately $200,000. In April 2014, McDonald’s inspected the four restaurants and determined that the reinvestment amount was approximately $725,000 for all of them. On May 5, 2014, the day before the scheduled closing, a final walk through of the restaurants was conducted and a punch list was created. The required repairs under the punch list was estimated to cost approximately $120,000. That same day, CRG and Feehan entered into an amendment to the agreement that, as relevant to the appeal, changed the purchase price from $4.2 million to $3.85 million and eliminated the reinvestment credit available to Feehan. Feehan thereafter assigned her rights under the agreement and the amendment to defendants Cayuga Arnot Mall LLC, Cayuga Grand Central LLC, Cayuga N. Main LLC and Cayuga Southport, LLC (wholly owned subsidiaries of Cayuga Restaurant Group, a management company of which Michael Feehan, Feehan’s spouse, is the president). In August 2014, plaintiffs commenced the action seeking, among other things, the release of the $300,000 held in escrow, in addition to an inventory payment of $65,868.13 as required under the agreement. Defendants answered and sought, as its fourth counterclaim, to have the amendment to the agreement declared void. Thereafter, plaintiffs moved for summary judgment, arguing that they were entitled to the $300,000 held in escrow and the inventory payment and that defendants’ counterclaims should be dismissed. Defendants opposed and cross-moved for, among other things, summary judgment on their fourth counterclaim. In October 2018, the motion court, among other things, granted defendants’ cross motion for summary judgment on its fourth counterclaim. In finding the amendment void, the court awarded defendants $172,775 of the $300,000 placed in escrow – an amount representing what defendants overpaid as a consequence of the amendment. The court also granted other parts of defendants’ cross motion seeking summary judgment on their counterclaims and awarded them $20,455.98 from the escrow funds. As to plaintiffs’ motion, the court granted it to the extent of awarding them the remaining balance of the escrow funds. Finally, the court did not award counsel fees in favor of any party. Plaintiffs appealed. The Third Department’s Decision The Court modified the motion court’s order by reversing the portion that (1) denied plaintiffs’ motion for summary judgment (a) on its claim for the $65,868.13 inventory payment and (b) dismissing defendants’ fourth counterclaim, and (2) granted defendants’ cross motion for summary judgment on its fourth counterclaim. In reversing the dismissal of defendant’s fourth counterclaim, the Court rejected defendants’ contention that they were economically forced to close the transaction. Defendants maintained that CRG wrongfully threatened not to go forward with the closing unless Feehan agreed to amend the agreement. In this regard, Feehan testified that she was “extorted.” Plaintiffs countered, arguing that the amendment was the product of a sophisticated negotiation between the parties. The Court agreed with plaintiffs, finding that the agreements at issue were the product of extensive discussions among the parties. Slip Op. at *1. Thus, held the Court, defendants were not under economic duress at the time they agreed to the amendment, as the motion court found. Id . The Court explained that “although the documentary evidence demonstrate that defendants would have lost their financing if the closing did not take place on May 6, 2014,” that fact was not conveyed to CRG’s counsel until May 5, 2014. Slip Op. at *1. The Court observed that there was nothing in the record to show that CRG “leveraged this fact in order to secure the amendment. Nor the record indicate that put defendants in the position of losing their financing by a particular date.” Id ., citing Edison Stone Corp. v. 42nd St. Dev. Corp. , 145 A.D.2d 249, 256 (1st Dept. 1989). The Court also held that the record failed “to establish that other legal remedies were not available to defendants.” Slip Op. at *1. The Court pointed to testimony by Michael Feehan that he and Feehan had explored their options before agreeing to the amendment, i.e. , “whether to take possession of the restaurants and then sue to have the original agreement enforced or not to take possession and then sue plaintiffs for specific performance.” Id . The Court explained that “ ecause defendants could resort to legal recourse, they claim economic duress.” Id . (citations omitted). Takeaway The doctrine of economic duress requires the party asserting it to demonstrate that the duress involved a wrongful act and that he/she had no reasonable alternative. If the party asserting the defense has a reasonable alternative, the doctrine is unavailable to him/her. As noted, according to the CRG Court, the record showed that Feehan not only had alternatives but weighed them before deciding on a course of action.

Referees are frequently appointed by New York courts.  The fees to which an appointed referee is entitled are generally governed by Rule 8003 of the New York Civil Practice Law and Rules (“CPLR”). CPLR 8003(a) presently provides that: A referee is entitled, for each day spent in the business of the reference, to three hundred fifty dollars unless a different compensation is fixed by the court or by the consent in writing of all parties not in default for failure to appear or plead. Referees can be appointed for a variety of different reasons.  As one court noted in describing the types of references to which CPLR 8003(a) applies: This section is applicable to all kinds of references in which an attorney is enlisted by the court to resolve a limited issue upon evidence submitted, including proceedings involving, e.g., the assessed value of property ( O'Dwyer v. Robson , 103 AD2d 1036 (4th Dep't, 1984)), the determination of counsel fees ( Albano v. Albano , 2003 WL 21911128), an accounting upon the dissolution of a business relationship ( Pittoni v. Boland , 278 AD2d 396 (2d Dep't, 2000), as well as the sale of real property in foreclosure actions. NYCTL 1998-2 Trust v. Kahan , 9 Misc.3d 1119(A), 862 N.Y.S.2d 809, at *1 (Sup. Ct. Kings Co. 2005). In mortgage foreclosure actions (a frequent topic of this Blog (< here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> ), referees are typically appointed to: (1) calculate the amounts due to a lender; and, (2) sell the foreclosed property.  In Wells Fargo Bank, N.A. v. Brown , (Sup. Ct. Suffolk Co. October 28, 2019), the court was called upon to decide the quantum of fees to which a referee was entitled.  The referee in Wells Fargo (the “Referee”) was appointed to “compute the amount due and owing under the mortgage and execute the sale of the Property.”  Wells Fargo , at *2.  While acting in his appointed capacity, the Referee was sued numerous times by the defaulted borrower.  As a result, the Referee, who was the managing partner of a law firm, was forced to defend himself, and prevailed, in the actions – all of which were determined to be frivolous.  In so doing, the Referee incurred significant legal fees and expenses. The court decided the Referee’s motion for an “Award of Referee’s Fees and Reimbursement of Legal Fees” by setting the matter down for an evidentiary hearing, at which the Referee presented “credible” evidence of the amounts claimed by him to be due. Wells Fargo , at *2.  The next question for the court was “how much compensation the Referee should be entitled to regarding such fees relating to the mortgage foreclosure and the defense of the aforementioned litigation proceedings.”  Wells Fargo , at *2.  The court stated that “the issue at bar is to determine what is considered ‘reasonable’” based on CPLR 4321(1), which provides that “ n order or a stipulation for a reference shall determine the basis and method of computing the Referee’s fees and provide for their payment.  The court may make an appropriate order for the payment of the reasonable expenses of the referee….”  Wells Fargo , at *2. The court then set forth the following seven factors to consider when determining the reasonableness of legal fees: “(1) complexity of the matter; (2) time and labor required; (3) attorney’s experience and reputation; (4) amount in controversy; (5) normally charged attorney’s fees for similar work; (6) results of the attorney’s actions; and (7) attorney’s responsibility.”   Wells Fargo , at *2 – 3.  The court also noted that the “Loadstar-the product of a reasonable hourly rate and the reasonable number of hours required-creates a presumptively reasonable fee.”  Wells Fargo , at *2 - 3 (citations and internal quotation marks omitted).  According to the “forum rule,” which the court noted it must “adhere” to, a reasonable hourly rate must take into consideration, the “prevailing in the community.”  Wells Fargo , at *3 (citation omitted). Using the Loadstar approach, the court found that the Referee’s claim for legal fees and expenses in the approximate amount of $139,000.00 was fair and reasonable because he had to, inter alia , defend three frivolous lawsuits.  After all, “ t has long been established that frivolous lawsuits typically warrant the awarding of Attorney’s fees as damages to the innocent party as compensation for having to defend themselves over such a matter.”  (Citation omitted.) Notwithstanding the court’s finding of reasonableness of the requested legal fees and the decided frivolity of the litigations brought against the Referee that he was forced to defend, the court found that there “is, however, a statutory impediment to award which overrides the general principles enunciated in the case law .”  Wells Fargo , at *7.   The court, in ultimately determining that absent an order authorizing enhanced fees in advance, compensation was limited to the statutory fee, stated: The Plaintiff argues that the Referee cannot receive an enhanced fee because it was not authorized in the Order of Reference, citing to CPLR 8003 and Matter of Charles F., 242 AD2d 297, 660 N.Y.S.2d 594 <2 nd dept.1997> nd dept.1997>. The Court therein held: "...since the record does not contain any agreement concerning the Referee's compensation which was made prior to the Referee's performance of his duties, the Referee's fee must be limited to the statutory per diem fee of $50 (see, CPLR 8003 ; Majewski v Majewski, 221 AD2d 420; Neuman v Syosset Hosp. Anesthesia Group, 112 AD2d 1029)." (Id. at 298). In the case of NYCTL 1998-2 Tr. v. Kahan, 9 Misc. 3d 1119(A), 862 N.Y.S.2d 809 (Sup. Ct. Kings Co. 2005), Justice Demarest described, with great eloquence, the public policy dangers in allowing Referees to remain under compensated. Despite these concerns, however, she ultimately held that CPLR 8003 constrained the Court to find that it was impermissible to award "...payment in excess of $50.00 per day...without written agreement or prior court authorization." (Id.). This rule cannot be circumvented by authorizing enhanced compensation nunc pro tunc. (Id.). As noted in Scher v. Apt, 100 A.D.2d 582, 583, 473 N.Y.S.2d 521 (2 nd Dept. 1984) "...the statutory per diem rate should apply under ordinary circumstances unless a different rate has been fixed at some preliminary point in the proceeding." ( Id. at 583). Wells Fargo , at *7 – 8. Thus, the court found that “a fair reading of the Order of Reference appointing confirms the lack of authorization for a fee in excess of the $50.00 per diem provided in CPLR 8003.” Wells Fargo , at *8.  The court also noted that the statutory fee set forth in CPLR 8003(a) has been increased to $350 since the Referee’s appointment in Wells Fargo , but there is no indication in the statute or legislative history that the higher fee was to be applied retroactively.  Wells Fargo , at *8 . In calculating the Referee’s compensation, the court stated: The $50.00.00 (sic) compensation can be awarded, not just for the date of sale, but "...for each day spent in the business of the reference..." (CPLR 8003 ). We agree with the Kahan Court that this applies to each day that devoted himself to perform "some aspect" of his "duties as Referee to sell" (NYCTL 1998-2 Tr. v. Kahan, supra). This Court finds that appearing in Federal and State Court to defend his actions as a Referee clearly come within the scope of duties for which he is eligible to be compensated. Wells Fargo , at *8.  Based on this analysis, the court found that the $50.00 per diem rate should be applied to the Referee’s 156 days of work, for a total of $7,800.00.  The court also awarded the Referee reimbursement of $2,449.51 in expenses that were “separate and distinct from the fees addressed in CPLR 8003 and can also be awarded.” In noting the great disparity between the fees the Referee sought and the amount he was awarded, the court stated: The Court is mindful that this sum is but a fraction of the amount requested by the Referee and what the Court found to be a reasonable reflection of his considerable legal services in this case. The operative Statute, however, is absolute and so learned Counsel must be consoled with the truth found in the words of the immortal poet Katherine Philips: "So honour is its own reward and end." Wells Fargo , at *8.  Thus, while the Referee lost out on a $139,000.00 fee, he did get $7,800 and “honour.”  So, to quote Bill Murray’s character from Caddyshack , “at least the Referee has that going for him – which is nice.”

Referees are frequently appointed by New York courts.  The fees to which an appointed referee is entitled are generally governed by Rule 8003 of the New York Civil Practice Law and Rules (“CPLR”). CPLR 8003(a) presently provides that: A referee is entitled, for each day spent in the business of the reference, to three hundred fifty dollars unless a different compensation is fixed by the court or by the consent in writing of all parties not in default for failure to appear or plead. Referees can be appointed for a variety of different reasons.  As one court noted in describing the types of references to which CPLR 8003(a) applies: This section is applicable to all kinds of references in which an attorney is enlisted by the court to resolve a limited issue upon evidence submitted, including proceedings involving, e.g., the assessed value of property ( O'Dwyer v. Robson , 103 AD2d 1036 (4th Dep't, 1984)), the determination of counsel fees ( Albano v. Albano , 2003 WL 21911128), an accounting upon the dissolution of a business relationship ( Pittoni v. Boland , 278 AD2d 396 (2d Dep't, 2000), as well as the sale of real property in foreclosure actions. NYCTL 1998-2 Trust v. Kahan , 9 Misc.3d 1119(A), 862 N.Y.S.2d 809, at *1 (Sup. Ct. Kings Co. 2005). In mortgage foreclosure actions (a frequent topic of this Blog (< here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> < here =">here"> ), referees are typically appointed to: (1) calculate the amounts due to a lender; and, (2) sell the foreclosed property.  In Wells Fargo Bank, N.A. v. Brown , (Sup. Ct. Suffolk Co. October 28, 2019), the court was called upon to decide the quantum of fees to which a referee was entitled. The referee in Wells Fargo (the “Referee”) was appointed to “compute the amount due and owing under the mortgage and execute the sale of the Property.”  Wells Fargo , at *2.  While acting in his appointed capacity, the Referee was sued numerous times by the defaulted borrower.  As a result, the Referee, who was the managing partner of a law firm, was forced to defend himself, and prevailed, in the actions – all of which were determined to be frivolous.  In so doing, the Referee incurred significant legal fees and expenses. The court decided the Referee’s motion for an “Award of Referee’s Fees and Reimbursement of Legal Fees” by setting the matter down for an evidentiary hearing, at which the Referee presented “credible” evidence of the amounts claimed by him to be due. Wells Fargo , at *2.  The next question for the court was “how much compensation the Referee should be entitled to regarding such fees relating to the mortgage foreclosure and the defense of the aforementioned litigation proceedings.”  Wells Fargo , at *2.  The court stated that “the issue at bar is to determine what is considered ‘reasonable’” based on CPLR 4321(1), which provides that “ n order or a stipulation for a reference shall determine the basis and method of computing the Referee’s fees and provide for their payment.  The court may make an appropriate order for the payment of the reasonable expenses of the referee….”  Wells Fargo , at *2. The court then set forth the following seven factors to consider when determining the reasonableness of legal fees: “(1) complexity of the matter; (2) time and labor required; (3) attorney’s experience and reputation; (4) amount in controversy; (5) normally charged attorney’s fees for similar work; (6) results of the attorney’s actions; and (7) attorney’s responsibility.”   Wells Fargo , at *2 – 3.  The court also noted that the “Loadstar-the product of a reasonable hourly rate and the reasonable number of hours required-creates a presumptively reasonable fee.”  Wells Fargo , at *2 - 3 (citations and internal quotation marks omitted).  According to the “forum rule,” which the court noted it must “adhere” to, a reasonable hourly rate must take into consideration, the “prevailing in the community.”  Wells Fargo , at *3 (citation omitted). Using the Loadstar approach, the court found that the Referee’s claim for legal fees and expenses in the approximate amount of $139,000.00 was fair and reasonable because he had to, inter alia , defend three frivolous lawsuits.  After all, “ t has long been established that frivolous lawsuits typically warrant the awarding of Attorney’s fees as damages to the innocent party as compensation for having to defend themselves over such a matter.”  (Citation omitted.) Notwithstanding the court’s finding of reasonableness of the requested legal fees and the decided frivolity of the litigations brought against the Referee that he was forced to defend, the court found that there “is, however, a statutory impediment to award which overrides the general principles enunciated in the case law .”  Wells Fargo , at *7.   The court, in ultimately determining that absent an order authorizing enhanced fees in advance, compensation was limited to the statutory fee, stated: The Plaintiff argues that the Referee cannot receive an enhanced fee because it was not authorized in the Order of Reference, citing to CPLR 8003 and Matter of Charles F., 242 AD2d 297, 660 N.Y.S.2d 594 <2 nd dept.1997> nd dept.1997>. The Court therein held: "...since the record does not contain any agreement concerning the Referee's compensation which was made prior to the Referee's performance of his duties, the Referee's fee must be limited to the statutory per diem fee of $50 (see, CPLR 8003 ; Majewski v Majewski, 221 AD2d 420; Neuman v Syosset Hosp. Anesthesia Group, 112 AD2d 1029)." (Id. at 298). In the case of NYCTL 1998-2 Tr. v. Kahan, 9 Misc. 3d 1119(A), 862 N.Y.S.2d 809 (Sup. Ct. Kings Co. 2005), Justice Demarest described, with great eloquence, the public policy dangers in allowing Referees to remain under compensated. Despite these concerns, however, she ultimately held that CPLR 8003 constrained the Court to find that it was impermissible to award "...payment in excess of $50.00 per day...without written agreement or prior court authorization." (Id.). This rule cannot be circumvented by authorizing enhanced compensation nunc pro tunc. (Id.). As noted in Scher v. Apt, 100 A.D.2d 582, 583, 473 N.Y.S.2d 521 (2 nd Dept. 1984) "...the statutory per diem rate should apply under ordinary circumstances unless a different rate has been fixed at some preliminary point in the proceeding." ( Id. at 583). Wells Fargo , at *7 – 8. Thus, the court found that “a fair reading of the Order of Reference appointing confirms the lack of authorization for a fee in excess of the $50.00 per diem provided in CPLR 8003.” Wells Fargo , at *8.  The court also noted that the statutory fee set forth in CPLR 8003(a) has been increased to $350 since the Referee’s appointment in Wells Fargo , but there is no indication in the statute or legislative history that the higher fee was to be applied retroactively.  Wells Fargo , at *8 . In calculating the Referee’s compensation, the court stated: The $50.00.00 (sic) compensation can be awarded, not just for the date of sale, but "...for each day spent in the business of the reference..." (CPLR 8003 ). We agree with the Kahan Court that this applies to each day that devoted himself to perform "some aspect" of his "duties as Referee to sell" (NYCTL 1998-2 Tr. v. Kahan , supra). This Court finds that appearing in Federal and State Court to defend his actions as a Referee clearly come within the scope of duties for which he is eligible to be compensated. Wells Fargo , at *8.  Based on this analysis, the court found that the $50.00 per diem rate should be applied to the Referee’s 156 days of work, for a total of $7,800.00.  The court also awarded the Referee reimbursement of $2,449.51 in expenses that were “separate and distinct from the fees addressed in CPLR 8003 and can also be awarded.” In noting the great disparity between the fees the Referee sought and the amount he was awarded, the court stated: The Court is mindful that this sum is but a fraction of the amount requested by the Referee and what the Court found to be a reasonable reflection of his considerable legal services in this case. The operative Statute, however, is absolute and so learned Counsel must be consoled with the truth found in the words of the immortal poet Katherine Philips: "So honour is its own reward and end." Wells Fargo , at *8.  Thus, while the Referee lost out on a $139,000.00 fee, he did get $7,800 and “honour.”  So, to quote Bill Murray’s character from Caddyshack , “at least the Referee has that going for him – which is nice.”

A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Partnership Law § 10(1). Typically, a partnership is memorialized in some type of writing, such as a partnership agreement. When, as in Giffuni v. Towler , 2019 N.Y. Slip Op. 51824(U) (Sup. Ct., Suffolk County Nov. 15, 2019) ( here ), there is no written partnership agreement between the parties, the court must determine whether a partnership-in-fact existed from the conduct, intention, and relationship between the parties. Brodsky v. Stadlen , 138 A.D.2d 662, 663 (2d Dept. 1988). In analyzing whether a partnership-in-fact exists, courts consider a number of factors, including, but not limited to: the sharing of profits and losses, the ownership of partnership assets, joint management and control, joint liability to creditors, the intention of the parties, compensation, the contribution of capital, and loans to the organization. Id . Significantly, no one characteristic of a business relationship is determinative in finding the existence of a partnership-in-fact. Id . Giffuni v. Towler Giffuni involved an alleged agreement to pursue the acquisition of two related companies – Avery Biomedical Devices, Inc. (“Avery”) and Pinnacle Bionics, Inc. (“Pinnacle”) – as equal partners. Plaintiff maintained that the arrangement constituted a partnership, while defendants contended that none of the factors discussed above support the formation of a partnership-in-fact. Background Plaintiff, Christopher Giffuni (“Giffuni”), is a certified public accountant. Avery, which designed and manufactured medical devices, was one of his clients. Avery was owned by Claire Dobelle until her death in 2015. After Claire Dobelle died, ownership of Avery passed to her children, the defendants Martin, Miriam, and Molly Dobelle (the “Dobelle Defendants”). Martin Dobelle also owned a controlling interest in Pinnacle. Defendant Anthony Martins (“Martins”) was a long-time employee of Avery and a minority shareholder of Pinnacle.. Defendant Dilys Marion Gore (“Gore”) was another long-time employee of Avery. In 2014, Martin Dobelle approached Plaintiff about selling Avery and Pinnacle. Plaintiff then approached defendant Linda Towler (“Towler”), Avery’s Chief Financial Officer, about buying Avery and Pinnacle together. To that end, they drafted a non-binding letter of intent, dated April 29, 2014, which they sent to Claire and Martin Dobelle. In it, Plaintiff and Towler (or an entity formed by them) proposed to acquire substantially all of the stock of Avery and Pinnacle “for $5 to $8 million dollars in total to be further determined, negotiated, and allocated<.> ” The letter of intent indicated that, except for certain specified provisions, it did not constitute a legally binding or enforceable agreement and that a binding commitment would only result if and when the parties entered into a definitive agreement. The Dobelles made a counterproposal that was unacceptable to Towler, who no longer wished to proceed. However, in a subsequent letter of intent dated May 8, 2014, Plaintiff and Towler proposed an alternative arrangement in which they would become partners with Claire Dobelle and “raise the necessary working capital for the continuation and success of Avery<.> ” Under this arrangement, Plaintiff, Towler, and Claire Dobelle would become full partners, with Claire Dobelle contributing Avery’s assets and Plaintiff and Towler contributing their expertise, know-how, and financing. Like the previous letter of intent, it was not legally binding, except for certain specified provisions, and it contemplated the preparation of a formal, definitive agreement once the due diligence was completed. On or about May 22, 2014, Towler again decided that she did not wish to proceed. The Dobelles subsequently tried to sell Avery and Pinnacle to a third party. Those negotiations continued into early 2015 and were discontinued when Claire Dobelle died in March of that year. Afterwards, Plaintiff and Towler renewed their proposal to purchase Avery and Pinnacle together. To that end, they retained an attorney to represent them. Counsel drafted a letter of intent dated April 24, 2015, that was sent to Martin Dobelle. In it, he outlined the preliminary terms and conditions under which Plaintiff and Towler, or an entity to be formed by them, proposed to acquire all of the assets of Avery and 51% of the capital stock of Pinnacle. The letter of intent, like the previous ones, was not binding, except for certain specified provisions, unless and until the execution and delivery of “a purchase agreement in form and substance mutually acceptable to each party and their counsel” and completion of the buyers’ due diligence. The purchase price was $3 million ($2.5 million for the Avery assets and $500,000 for the Pinnacle stock), $500,000 of which was to be paid in cash at the closing. The balance was to be paid pursuant to two promissory notes that would be personally guaranteed by Plaintiff and Towler, jointly and severally. The letter of intent was signed by Plaintiff and Towler individually and by Martin Dobelle in both his individual and corporate capacities. By the end of May 2015, Towler had changed her mind about working with Plaintiff. She no longer wished to move forward with the deal because she did not think they could work together anymore. She so advised Plaintiff on May 26, 2015. Thereafter, Plaintiff and Towler agreed that Plaintiff would pursue the transaction alone (assuming he could obtain financing), Towler would serve as CFO of the company, and Plaintiff would give Towler a 5% interest in the company. On June 1, 2015, Plaintiff and Towler sent an email to Martin Dobelle in which they advised him of the arrangement. On June 11, 2015, counsel prepared and emailed a draft employment agreement to Plaintiff and Towler. Towler refused to sign it because it contained too many onerous restrictions. In addition to not allowing her to write checks or enter into contracts over $10,000, the agreement did not provide for raises; it limited her authority; it did not provide for standard perqs, such as a cell phone; it took away her benefits after a year, and it contained a 5-year restrictive covenant, among other things. In an email to Towler the next day, Plaintiff claimed that counsel had accidentally removed the 5% ownership interest from the draft, and he sent Towler the language that purportedly had been left out. Towler responded that Plaintiff had failed to address the agreement’s other deficiencies. She concluded, “There is absolutely no upside to me signing this contract.” The closing, which was scheduled for June 15, 2015, did not take place. In an email dated June 17, 2015, Martin Dobelle advised Plaintiff that Gore had approached Towler about an employee takeover “some time ago.” He also advised Plaintiff that, when he and Towler came to the conclusion that they could not work together, Towler spoke to Gore and Defendant Anthony Martins about an employee takeover. Dobelle went on to say that he worked out a deal with Gore, Towler and Martins, which he was going to pursue instead of the one he had with Plaintiff. Towler, Gore, and Martins ultimately formed GMT Holdings, Inc., to purchase Avery and Pinnacle as 100% shareholders. The sale closed on July 1, 2015. The action ensued. Plaintiff sued Towler for breach of fiduciary duty and fraud, and the other defendants for aiding and abetting Towler’s breach of fiduciary duty and fraud, and all defendants for an accounting, unjust enrichment, a declaratory judgment and a constructive trust. Following discovery, Towler, Gore, and Martins moved for summary judgment. The Court granted the motion. The Court’s Decision Since most of the causes of action were predicated on the existence of a partnership ( i.e. , a fiduciary relationship), the Court addressed that issue first. Looking at the factors identified above, the Court held that there was no partnership between Giffuni and Towler. Profits and Losses The Court found that contrary to Plaintiff’s contention, Giffuni and Towler were not 50/50 partners in any acquisition of Avery and Pinnacle and did not agree to share the profits and losses of the businesses equally. In this regard, the Court noted that the proposed employment agreement given to Towler provided that she would “receive only 5% of the profits”; it did not contain any “provision for the sharing of losses.” Slip Op. at *3.  This was significant because “ n employer-employee relationship providing for the division of profits not give rise to a fiduciary relationship (in this case, a partnership) absent an agreement to also share losses.” Id ., citing Vitale v. Steinberg , 307 A.D.2d 107, 108 (1st Dept. 2003). The Court noted that “ n agreement that an employee shall share in the profits of the business as entire or partial compensation for her services is a contract of mere hiring, providing for compensation in a particular manner in order to induce greater energy and faithfulness on the part of the employee.” Id ., citing Vitale at 109-110. “When an employee is not required to make good on negative amounts,” explained the Court, “losses are shared in only the broadest sense. Such an expansive interpretation of losses renders meaningless the distinction between ‘sharing profits’ and ‘sharing losses,’ and no trust or fiduciary relation is created.” Id ., citing Vitale at 109-110. “Accordingly,” held the Court, “this factor weigh in favor of the defendants.” Id . Ownership of Partnership Assets The Court noted that the record “reflect that the purported partnership never acquired any assets. While the plaintiff and Towler sought to acquire Avery’s assets and Pinnacle’s stock, … the acquisition was never completed.” Slip Op. at *3. In fact, said the Court, relying on the nonbinding letters of intent, Plaintiff and Towler “never even had a contractual right to acquire Avery’s assets and Pinnacle’s stock.” Id . “Accordingly,” concluded the Court, “this factor weigh in favor of the defendants.” Joint Management and Control The Court found that the record supported joint efforts by Plaintiff and Towler with respect to the acquisition, noting that Plaintiff and Towler “worked on various aspects of the proposed acquisition together and that the plaintiff even participated in the management of Avery and Pinnacle, including hiring personnel and taking charge of research and development, among other things.” Id . “Accordingly,” held the Court, “this factor weigh in favor of the plaintiff.” Id . Joint Liability to Creditors and Loans to the Organization The Court found that, under the circumstances, there were no loans made to the alleged partnership, nor was there any joint liability to creditors. Slip Op. at *4. Only Plaintiff secured a loan to finance the acquisition of Avery. The loan was not made to any partnership with Towler. In any event, no loan agreement or promissory note was ever executed, and there was no evidence in the record that Towler agreed to be jointly liable with Plaintiff on the loan. Slip Op. at **3-4. “Accordingly,” held the Court, “these factors weigh in favor of the defendants.” Slip Op. at *4. Contribution of Capital Since the record did not reflect any contributions of capital to the alleged partnership by either Giffuni or Towler, the Court found the factor to weigh “in favor of the defendants.” Compensation While the parties disputed the reasons why Avery compensated Giffuni, they did not dispute that it was paid by Avery and not by the purported partnership. The Court noted that “ he purpose of the purported partnership between the plaintiff and Towler was not to carry on a business for profit, but to acquire a profit-making business. It, therefore, did not generate any profits from which to pay either the plaintiff or Towler. Both were paid by Avery, the business that the plaintiff and Towler sought to acquire.” Slip Op. at *4. Thus, “ n the absence of any compensation from the alleged partnership itself, the court that this factor weigh in favor of the defendants.” Id . Intention of the Parties The Court observed that “ hile the plaintiff and Towler expressed an intent to form an entity to acquire Avery and Pinnacle at some time in the future, they never came to a meeting of the minds on the issue.” Id . All three letters of intent, said the Court, clearly indicated that, except for certain specified provisions, they were not legally binding and contemplated the preparation and execution of a more definitive agreement. Nothing in the letters “indicated that the plaintiff and Towler were already partners.” Id . In fact, noted the Court, “ wo of the three letters referred to an entity to be formed by them, indicating that no such entity had yet been formed” and “no certificate of doing business as partners was filed in connection with the purported partnership, as required” by General Business Law § 130(1)(a). Id . The Court rejected Giffuni’s argument that he and Towler held themselves out as partners – in effect, making a partnership-by-estoppel argument. Id . Accordingly, the Court found “this factor weigh in favor of the defendant.” “In sum,” concluded the Court, “the record reflects that, although the plaintiff and Towler jointly sought to acquire Avery and Pinnacle, their efforts did not rise to the level of a partnership. That the parties worked together on the proposed acquisition and participated in the management of Avery and Pinnacle, without more, is insufficient to create a partnership.” Id . Takeaway As noted by the Court, “ he ultimate inquiry is whether the parties have so joined their property, interests, skills, and risks that, for the purpose of the particular adventure, their respective contributions have become as one and the commingled property and interests of the parties have thereby been made subject to each of the associates on the trust and inducement that each would act for their joint benefit.” Id . (citation omitted). In Giffuni , the Court found that the case did “not reveal such an amalgam of property interests.” Id . Instead, the record showed that Giffuni and Towler merely had a community of interest and a common economic objective, both of which created nothing more than a contractual obligation. Slip Op. at **4-5. The Court held that such attributes alone were insufficient to create the existence of a partnership-in-fact.

On November 15, 2019, the Appellate Division, Fourth Department, issued a decision involving the impact, if any, of a bankruptcy discharge on a subsequent foreclosure proceeding – an issue, the Court observed, it had not previously addressed. In Wilmington Sav. Fund Socy., FSB v. Fernandez , 2019 N.Y. Slip Op. 08290 (4th Dept. Nov. 15, 2019) ( here ), the Court held that, absent terms in the mortgage to the contrary, a discharge in bankruptcy does not automatically accelerate the debt owed by the mortgagor and that the terms of the mortgage survive the bankruptcy. Background On August 17, 2007, defendant, Julian M. Fernandez (“Fernandez”), executed a note in favor of a lender in the amount of $94,400, plus interest, payable in successive monthly installments with the final payment to be made on January 4, 2031. Defendant secured payment of the note with a mortgage encumbering certain real property. On December 8, 2009, Fernandez filed a petition for Chapter 7 bankruptcy protection. Approximately three months later, on March 15, 2010, Fernandez received a discharge in bankruptcy. On April 1, 2010, Fernandez obtained a final bankruptcy decree. On May 26, 2017, plaintiff, the successor to the lender, sent Fernandez notice that he was in default and that Fernandez had 90 days to cure the default. After receiving no payment during the following 90 days, plaintiff accelerated the remaining balance due under the note and, on November 1, 2017, plaintiff commenced an action seeking to foreclose on the mortgage. In his answer, Fernandez raised, inter alia , the statute of limitations as an affirmative defense. Thereafter, defendant moved to dismiss the complaint pursuant to CPLR § 213(4) and CPLR § 3211(a)(5). The motion court granted defendant’s motion, reasoning that defendant’s March 15, 2010 discharge in bankruptcy triggered the six-year statute of limitations ( see CPLR § 213(4)), and that plaintiff failed to commence its foreclosure action within that period. Plaintiff then moved for leave to reargue, and defendant cross-moved to quiet title. The motion court granted plaintiff’s motion for leave to reargue, and ultimately held that defendant’s discharge in bankruptcy did not extinguish plaintiff’s right to commence an in rem foreclosure proceeding against defendant, that the statute of limitations began to run from the date each unpaid installment became due unless plaintiff accelerated the debt, and that plaintiff’s action was therefore timely because the debt had not been accelerated prior to 2017. Thus, on reargument, the motion court reversed its prior determination, denied defendant’s motion to dismiss the complaint, reinstated the complaint, and denied defendant’s cross motion to quiet title. The Fourth Department affirmed. The Court’s Decision As an initial matter, the Court discussed the rules governing the statute of limitations involving a mortgage payable in installments: “With respect to a mortgage payable in installments, separate causes of action accrue[] for each installment that is not paid, and the statute of limitations begins to run, on the date each installment becomes due” ( Wells Fargo Bank, N.A. v Burke , 94 AD3d 980, 982 <2d dept 2012> ; see Ditech Fin., LLC v Corbett , 166 AD3d 1568, 1568 <4th dept 2018> ). Nevertheless, “even if a mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt” ( EMC Mtge. Corp. v Patella , 279 AD2d 604, 605 <2d dept 2001> ; see Ditech Fin., LLC , 166 AD3d at 1568). “Where the acceleration . . . is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder’s election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation” ( Wells Fargo Bank, N.A. , 94 AD3d at 982-983). Slip Op. at **1-2. Applying these principles, the Court held that the statute of limitations had not run because “the mortgage provided plaintiff the option to accelerate the debt under certain circumstances, did not state that the debt would be automatically accelerated if defendant obtained a discharge in bankruptcy.” Id . at *2. The Court “reject defendant’s contention that the discharge in bankruptcy automatically accelerated the debt and thus triggered the statute of limitations with respect to the entire debt.” Id . The Court did so based on the distinction between an in personam action against the debtor’s assets and an in rem action seeking foreclosure of the real property that secured the creditor’s right to repayment. Id . This distinction is significant in the bankruptcy context, said the Court. In the event of a default, a creditor in an action for a mortgage foreclosure is entitled to pursue both an action against a debtor for in personam liability against the debtor’s assets, or for in rem liability seeking foreclosure of the specific real property that secured the creditor's right to repayment. Thus, a “defaulting debtor can protect himself from personal liability by obtaining a discharge in a Chapter 7 liquidation”, but “a creditor’s right to foreclose on the mortgage survives or passes through the bankruptcy.” Id . (citations omitted). “In other words,” said the Court, a bankruptcy discharge under Chapter 7 of the Bankruptcy Code removes the “mode of enforc ” against the debtor in personam , but the obligation otherwise remains intact and does not impact an action in rem . Id ., quoting Johnson v. Home State Bank , 501 U.S. 78, 84 (1991). Thus, “‘even after the debtor’s personal obligations have been extinguished , the mortgage holder still retains a right to payment in the form of its right to the proceeds from the sale of the debtor’s property,’ and a bankruptcy proceeding does not ‘impair right to commence an action against in rem to seek payment from the proceeds of a foreclosure sale.’” Id ., quoting Deutsche Bank Trust Co. Ams. v. Vitellas , 131 A.D.3d 52, 63 (2d Dept. 2015) (internal quotation marks omitted). Noting that the issue had not been “previously addressed” by the Department, the Court concluded that “absent terms in the mortgage to the contrary, a discharge in bankruptcy does not automatically accelerate the debt and that the terms of the mortgage survive bankruptcy.” Slip Op. at *2. “Because the terms of the mortgage survive , causes of action would thus continue to accrue with respect to each installment payment as the payments become due, although a note holder would only be able to commence an action in rem .” Id . Thus, held the Court, defendant’s “discharge in bankruptcy did not automatically accelerate the debt” and “plaintiff’s complaint not time-barred because separate causes of action accrued for each installment payment that was not made.…” Id . Takeaway As this Blog has noted in many of the articles we post, the terms of the document at issue are often dispositive of the outcome of the issue before the court. Wilmington Sav. Fund is no different. Wilmington Sav. Fund is notable because of the potential impact of a bankruptcy filing and subsequent discharge on a lender’s ability to initiate foreclosure proceedings. In that scenario, as the Court concluded, the lender may pursue such relief in an in rem action because the terms of the mortgage survive. And, because the mortgage at issue in Wilmington Sav. Fund provided for separate causes of action for each missed installment payment, the statute of limitations did not bar the foreclosure action.

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id . Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). Not surprisingly, whether the parties are bound by an arbitration agreement and whether they agreed to submit their dispute to arbitration are hotly contested questions. The person(s) who will resolve these questions is dependent upon the agreement at issue. As a general matter, questions of arbitrability are decided by a court. However, the parties to an arbitration agreement can agree to delegate questions of arbitrability to an arbitrator. MetLife v. Buscek , 919 F.3d 184, 189 (2d Cir. 2019) (“In general, what is determinative for deciding whether the arbitrability of a dispute is to be resolved by the court or by the arbitrator is the arbitration agreement”).  When the parties agree to delegate the question of arbitrability to an arbitrator, the parties must clearly and unmistakably express their intent to do so. Howsam v. Dean Witter Reynolds, Inc. , 537 U.S. 79, 83 (2002). In the absence of such a clear and unmistakable expression of intent, the presumption favors the courts deciding arbitrability. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938 (1995). Recently, the United States Supreme Court held that, when the parties have agreed to submit the question of the arbitrability to an arbitrator, the courts must respect and enforce that contractual agreement. Henry Schein Inc. v. Archer & White Sales, Inc. , 139 S.Ct. 524 (2019). Consistent with this holding, the Second Circuit observed that “parties are free to enter into a binding contract by which either party can compel the other to have every aspect of a future dispute between them, including its arbitrability, determined by arbitrators.”  MetLife , 919 F.3d at 190, citing Rent-A-Ctr. , , 561 U.S. at 66, 69 (finding that an arbitration agreement giving the arbitrators “exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this contract” empowered the arbitrators to resolve arbitrability of an unconscionability claim). The foregoing rules were intended to guard against “the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Howsam , 537 U.S. at 83-84. “Were the courts to cede to arbitrators resolution of the arbitrability of the dispute (absent the clear and unmistakable agreement of the parties to that effect), this would incur an unacceptable risk that parties might be compelled to surrender their right to court adjudication, without their having consented.” MetLife , 919 F.3d at 190, citing First Options , 514 U.S. at 945. Accordingly, in the absence of an arbitration agreement that clearly and unmistakably provides for the issue of arbitrability to be decided by the arbitrator, the question of whether the dispute is subject to an arbitration agreement “is typically an issue for judicial determination.” Id. , quoting Granite Rock Co. v. Int’l Bhd. of Teamsters , 561 U.S. 287, 296 (2010) (internal citation and quotation marks omitted). Last week, the Appellate Division, First Department, addressed the foregoing principles, reversing an order granting a permanent stay of arbitration, without prejudice, so that the issue of arbitrability could be decided by the arbitrator in arbitration. Matter of 215-219 W. 28th St. Mazal Owner LLC v. Citiscape Bldrs. Group Inc. , 2019 N.Y. Slip Op. 08281 (1st Dept. Nov. 14, 2019) ( here ). Background In the fall of 2013, an affiliate of HAP Investments LLC and HAP Development LLC (collectively “HAP”) acquired properties located at 215-219 West 28th Street in New York City as part of a project to construct a twenty-story condominium tower (the “Project”). To assist with the Project, 215-219 West 28th Street Mazal Manager LLC (“Mazal”), a subsidiary of HAP, engaged various third-party professionals, including Respondent Citiscape Builders Group, Inc. (“Citiscape”). In August 2015, Mazal retained Citiscape to serve as its representative for the Project, providing various pre-construction, planning, and construction services. Citiscape’s compensation depended, in part, on its reaching certain milestone events and cost-savings for the Project. Mazal and Citiscape memorialized the terms of their arrangement in an agreement, titled the Owner’s Representative Agreement (“Owner’s Representative Agreement” or “Agreement”). Relevant to the appeal, the Agreement contained an arbitration clause that provided: “Any dispute hereunder shall be exclusively governed and resolved by expedited binding arbitration in accordance with the American Arbitration Association located in the City of New .” After Mazal and Citiscape executed the Agreement, HAP continued acquiring properties at West 28th Street through Mazal and other entities that it owned and/or managed. Between December 2015 and February 2017, HAP acquired five additional properties on West 28th Street. As HAP’s portfolio grew, so did the scope of the Project. HAP planned to develop and build a second twenty-story tower, which required an expanded role for Citiscape. As a result, Mazal and Citiscape amended the Agreement on two occasions. The First Amendment was executed in July 2016 by Citiscape and by four entities owned and/or managed by HAP – Petitioners Mazal, 213 West 28 LLC, 223 West 28 LLC, and 225-227 West 28 LLC (together, the “Signatory Petitioners”). The First Amendment ratified and confirmed the Owner’s Representative Agreement. The Second Amendment was executed in January 2017 and altered Citiscape’s compensation to keep up with the changes to the Project. After the Owner’s Representative Agreement and First Amendment were executed, non-parties West 28th CCMF Investment LLC, 8 Partners LLC, and 8 Manager LLC established 213-227 West 28th Street LLC (a petitioner in the proceeding) as a joint venture for the purpose of commercializing the Project. Subsequently, several of the properties on West 28th Street were conveyed to 215-219 West 28th Street Mazal Owner LLC, 213-227 West 28th Street LLC, 215 West 28th Street Property Owner LLC, and 225 West 28th Street Property Owner LLC (“Nonsignatory Petitioners”) – entities that HAP directly or indirectly owned and/or managed. The Nonsignatory Petitioners did not sign the Owner’s Representative Agreement or its amendments. At some point, Mazal became dissatisfied with Citiscape’s services and, consequently, terminated the Owner’s Representative Agreement for cause in February 2019. Citiscape responded by filing a demand for arbitration. Citiscape named both the Signatory Petitioners and the Nonsignatory Petitioners as respondents in the arbitration. Petitioners initiated a special proceeding pursuant to CPLR § 7503(b) to, among other things, secure a permanent stay of arbitration. The Nonsignatory Petitioners argued that they could not be compelled to arbitrate with Citiscape because they had no contractual privity with Citiscape and no other basis existed for enforcing the arbitration agreement against them. Citiscape asserted, however, that the Nonsignatory Petitioners were required to arbitrate because they were the “successors” or “assigns” of the Signatory Petitioners, and thus required to arbitrate by virtue of the First Amendment. Alternatively, Citiscape maintained that the Nonsignatory Petitioners could be compelled to arbitrate because they were the “alter-egos” of the Signatory Petitioners, and, thus, effectively signatories to the arbitration agreement. Finally, Citiscape argued that the Nonsignatory Petitioners should be estopped from resisting arbitration because they “benefitted” from the Owner’s Representative Agreement. The motion court denied the application to permanently stay the arbitration, though it permitted a temporary stay provided an appeal of the decision was perfected by July 12, 2019. Petitioners promptly appealed the decision and order. The First Department’s Decision In a pithy decision, the First Department unanimously reversed the motion court’s order. The Court held that the motion court should have determined whether the matter was arbitrable as to the Nonsignatory Petitioners, stating that “the issue of whether a party is bound by an arbitration provision in an agreement it did not execute is a threshold issue for the court, not the arbitrator, to decide.” Slip Op. at *1 (internal quotation marks and citation omitted). The Court declined, however, to address the issue of whether the Nonsignatory Petitioners should be bound by the agreement to arbitrate because the motion “court did not come to a definitive ruling” on the issue. Id . “Instead,” said the Court, the motion court “denied the petition without prejudice so that it could be decided by the arbitrator.” Id . at *2.  Since there was no ruling on the threshold question, “the only question to be addressed … is whether the IAS court properly declined to do so,” a question the Court resolved on the appeal. Id . at *2. Accordingly, the Court reversed the motion court’s order denying the petition for a permanent stay of arbitration and remanded the proceeding to the motion court for a hearing to determine the threshold issue of whether the Nonsignatory Petitioners were bound by the arbitration agreement. Takeaway On motions to stay or to compel arbitration there are three threshold questions to be resolved by the courts: (1) whether the parties made a valid and enforceable agreement to arbitrate, (2) whether, if such an agreement was made, it had been complied with, and (3) whether the claim sought to be arbitrated would be barred by some type of limitation, such as the statute of limitations. As to the first question, the Court of Appeals long ago stated, “The parties are entitled first to a judicial determination whether there was a valid agreement to arbitrate.” Matter of County of Rockland , 51 N.Y.2d 1, 7 (1980). “If the court determines that the parties had not made an agreement to arbitrate, that concludes the matter and a stay of arbitration will be granted or the application to compel arbitration will be denied.” Id . (citations omitted). “Similarly, if the court concludes that, while the parties may have made a valid agreement to arbitrate, the particular agreement that they made was of limited or restricted scope and the particular claim sought to be arbitrated is outside that scope, there will likewise be a stay of arbitration or a denial of the motion to compel arbitration.” Id . (citations omitted). If, however, the agreement to arbitrate brings the dispute within the scope of the arbitration agreement, then the court must determine whether the parties complied with their agreement – that is, the court must determine whether there is any preliminary requirement or condition precedent to arbitration to be complied with and, if so, whether the parties complied with that requirement or condition precedent.  “If the court concludes that the parties made a valid agreement to arbitrate, that the dispute sought to be arbitrated falls within its scope, and that there has been compliance with any agreed on conditions precedent to arbitration, judicial inquiry is at an end (absent any issue as to bar by limitation of time) and the parties … to proceed to arbitration.” Id . at 8. Matter of 215-219 W. 28th St. Mazal Owner LLC illustrates the foregoing principles. As the First Department noted, since the parties disputed whether there was an agreement to arbitrate in the first place, that threshold issue should have been decided by the motion court. By failing to address the issue, the Could found that the motion court erred.