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A temporary receivership, which is one of the provisional remedies available during litigation, is governed by Article 64 of the CPLR.  CPLR 6401 addresses the “appointment and powers” of a temporary receiver and provides, in pertinent part: (a) Appointment of temporary receiver; joinder of moving party. Upon motion of a person having an apparent interest in property which is the subject of an action in the supreme or a county court, a temporary receiver of the property may be appointed, before or after service of summons and at any time prior to judgment, or during the pendency of an appeal, where there is danger that the property will be removed from the state, or lost, materially injured or destroyed. A motion made by a person not already a party to the action constitutes an appearance in the action and the person shall be joined as a party. (b) Powers of temporary receiver. The court appointing a receiver may authorize him to take and hold real and personal property, and sue for, collect and sell debts or claims, upon such conditions and for such purposes as the court shall direct. A receiver shall have no power to employ counsel unless expressly so authorized by order of the court. Upon motion of the receiver or a party, powers granted to a temporary receiver may be extended or limited or the receivership may be extended to another action involving the property. A temporary receiver’s powers are limited to those “granted pursuant to statute (CPLR 6401 ), as delimited by court order.”  Jacynicz v. 73 Seaman Assoc ., 270 A.D.2d 83 (1 st Dep’t 2000) (some citations omitted).  Further, a temporary receiver is “an officer of the court and not an agent of .”  Jacynicz , 270 A.D.2d at 85 (citations and internal quotation marks omitted).  The temporary receiver’s duty is to “preserve and operate the property, within the confines of the order of appointment and any subsequent authorization granted to him by the court.”  Jacynicz , 270 A.D.2d at 85 (citations and internal quotation marks omitted). Suissa v. Baron , 107 A.D.3d 689 (2 nd Dep’t 2013), was a partition action in which plaintiff moved to appoint a receiver “to, among other things, maintain the real property and ensure that all items contained within the property remain therein, and authorized the receiver to collect the reasonable value of use and occupancy of the property from any and all occupants of said property.”  Suissa , 107 A.D.3d at 689.  The Suissa Court noted that the appointment of a temporary receiver is “an extreme remedy” because it results “in the taking and withholding of possession of property from a party without an adjudication on the merits.”  Suissa , 107 A.D.3d at 689 (citations and quotation marks omitted).  Accordingly, a motion for a temporary receiver should only be granted “where the moving party has made a clear evidentiary showing of the necessity for the conservation of the property at issue and the need to protect the moving party’s interests.  Suissa , 107 A.D.3d at 689 (citations and quotation marks omitted).  Finding that the plaintiff met its burden of establishing the need for a receiver, the Suissa Court affirmed supreme court’s appointment of a receiver. The Court in, in Schachner v. Sikowitz , 94 A.D.2d 709 (2 nd Dep’t 1983), an action for specific performance of a contract, reversed supreme court’s appointment of a temporary receiver because the “general accusations set forth by the plaintiffs have not sufficiently established by clear and convincing evidence the need for such a drastic remedy.”  Schachner , 94 A.D.2d at 709. Similarly, the Second Department, in Board of Managers of Nob Hill Condominium Section II v. Board of Managers of Nob Hill Condominium Section I , 100 A.D.3d 673 (2012), reversed supreme court’s appointment of a temporary receiver to “operate and maintain certain recreational facilities.”  The Court noted that a “party moving for the appointment of a temporary receiver must submit clear and convincing evidence of irreparable loss or waste to the subject property and that a temporary receiver is needed to protect their interests.”  Board of Managers , 100 A.D.3d at 673 (citations and internal quotation marks omitted).  The Board of Managers Court, however, found that “plaintiff failed to offer any nonspeculative allegations or evidence indicating that the defendants were committing waste or that there was a danger that the subject recreational facilities would be dissipated or lost absent the appointment of a temporary receiver.”  Board of Managers , 100 A.D.3d at 673. On September 18, 2019, the Court in Manning-Kranes v. Manning-Franzman , reversed an order granting plaintiff’s motion for the appointment of a temporary receiver in an action for the partition and sale of real property.  The Manning-Kranes Court found that plaintiff failed to meet her burden because her “speculative and conclusory assertions about certain expenditures the defendants made of rental income derived from the property were insufficient to demonstrate that the defendants were using that income for their own personal benefit.”  Further, the Court found that plaintiff failed to demonstrate that expenditures made for renovations to the subject property were “unnecessary or wasteful” and that other challenged expenditures “were not so significant as to present an imminent danger of irreparable loss or waste” (citation and internal quotation marks omitted). It should be noted that there are other types of receiverships, but those addressed herein relate to temporary receiverships under Article 64 of the CPLR, which do “not continue after final judgment unless otherwise directed by the court.”  CPLR 6401(c).

The elements of a common law fraud claim in New York are well known to readers of this Blog: “a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (internal citations and quotation marks omitted). To prevail on a claim of fraud, the plaintiff must plead and prove each element. But as plaintiffs often find that is not so easy. In addition, where the plaintiff alleges a breach of contract, he/she must demonstrate that the fraud claim is not duplicative of the contract claim. One way to do so is to show that the fraud damages are not recoverable under a contract measure of damages. As with the elements of a fraud claim, demonstrating the absence of an overlap in the measure of damages often proves to be a difficult endeavor. On September 17, 2019, the Appellate Division, First Department, had the opportunity to address the duplication of damages doctrine, holding that plaintiff demonstrated it had sustained more than contract damages sufficient to sustain its fraudulent inducement claim against defendants. Ambac Assur. Corp. v. Countrywide Home Loans, Inc ., 2019 N.Y. Slip Op. 06570 (1st Dept. Sept. 17, 2019) ( here ). Background Ambac has a long history. Approximately nine years ago, Ambac Assurance Corporation (“Ambac”), a financial-guaranty insurer, filed a complaint in New York Supreme Court against Countrywide Home Loans, Inc. and certain affiliates and Bank of America Corp. (collectively, “Countrywide”). Ambac alleged that Countrywide fraudulently induced it to insure payments on residential mortgage-backed securities from 2004 through 2006. Ambac claimed that Bank of America, which acquired Countrywide in 2008, was liable for Countrywide’s conduct as its successor-in-interest. Between 2004 and 2006, Ambac provided financial guaranty insurance to Countrywide with respect to 17 residential mortgage-backed securitizations issued to investors. The securitizations were backed by more than 300,000 individual mortgage loans, which Countrywide had originated or acquired and then sold into securitization trusts. In exchange for substantial premiums, Ambac issued unconditional, irrevocable insurance policies (an important fact to the Court), agreeing to insure certain payments to investors if the underlying mortgage holders failed to make payments. Pursuant to the insurance agreements with Ambac (“Insurance Agreements”), and to effect each of the securitization transactions, Countrywide provided over 60 representations and warranties covering a range of issues, including each underlying loan’s compliance with underwriting guidelines, compliance with federal regulations, appraisal issues, and the accuracy of the information in the loan schedules. In other sections of the Insurance Agreements, Countrywide represented and warranted that there were no material untrue statements in the securitization documents or in the information provided to Ambac regarding the loans and Countrywide’s operations and financial condition. The Insurance Agreements provided that the sole remedy for a breach of the representations and warranties, as well as any defective mortgage loan, was to require Countrywide to either repurchase, cure, or substitute non-conforming loans. By 2007, with the housing market in decline, mortgage default and delinquency rates increased. As a result, Ambac had to pay out far more claims than anticipated. Ambac began to review the origination files of defaulting loans and found that approximately 7,900 out of 8,800 that were reviewed contained material breaches of the representations and warranties in the Insurance Agreements. Pursuant to the Insurance Agreements, Ambac initiated the repurchase protocol by submitting notices of breach to Countrywide – that is, Ambac requested that Countrywide repurchase or cure the defaulting mortgages or substitute new ones. In 2010, Ambac filed suit against Countrywide, asserting claims for: (i) breach of the Insurance Agreements, the representations and warranties in the Insurance Agreements, and the repurchase protocol; (ii) fraudulent inducement; and (iii) indemnification and reimbursement of attorney fees and expenses. Ambac also included a claim of successor and vicarious liability against Bank of America. Both parties moved for partial summary judgment. The motion court held, relying on Insurance Law § 3105, that Ambac did not need to demonstrate justifiable reliance and loss causation to succeed on its fraudulent inducement claim. Section 3105 provides, in relevant part, that “ o misrepresentation shall avoid any contract of insurance or defeat any recovery thereunder unless such misrepresentation was material” and “no misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract.” With respect to Ambac’s claims alleging breaches of the representations and warranties, the court found that the sole remedy provision did not apply “beyond Section 2.01 (l),” of one of the agreements, so “to the extent that Ambac can prove breaches of other sections of the I Agreements, it is not limited to the sole remedy of repurchase.” However, the court determined that, “to the extent that Ambac is entitled to receive an award of damages unrelated to the repurchase protocol,” Ambac was not entitled to recover all payments made to investors pursuant to the Insurance Agreements as compensatory damages because that would be “effectively equivalent to rescissory damages,” and that any damages calculation “must be calculated in reference to claims payments made due to loans breaching” representations and warranties. Finally, the court found that Ambac was not entitled to recover attorneys’ fees. The Appellate Division, First Department, modified the motion court’s decision. Ambac Assurance Corp. v Countrywide Home Loans , 151 A.D.3d 83 (1st Dept. 2017) ( here ).  The First Department held that justifiable reliance and loss causation are required elements of a fraudulent inducement claim and that Insurance Law § 3105 is not applicable to a common law fraud claim for money damages. The First Department rejected the motion court’s holding that the repurchase protocol was not the sole remedy for Ambac’s claims for breach of representations and warranties, holding instead that “Ambac cannot avoid the consequences of the sole remedy provision by relying on what it terms ‘transaction-level’ representations, because the heart of Ambac’s lawsuit is that it was injured due to a large number of defective loans.” The First Department affirmed the motion court’s method of damages calculation for any claims not subject to the repurchase protocol, holding that Ambac was not entitled to compensatory damages “amounting to all claims payments it made or will make under the policies, regardless of whether they arise from a breach or misrepresentation.” Finally, the First Department affirmed the motion court’s holding that Ambac was not entitled to attorneys’ fees. The New York Court of Appeals affirmed. Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018) ( here ). The Court of Appeals held that “Insurance Law § 3105 play no role” in the case, reasoning that “Section 3105 does not provide an affirmative, freestanding, fraud-based cause of action through which an insurer may seek to recover money damages” and does not “‘inform’ a court’s assessment of the longstanding common law elements of fraudulent inducement.” 31 N.Y.3d at 580. The Court noted that “ y its terms, section 3105 is only relevant when an insurer seeks rescission of an insurance contract or is defending against claims for payment under an insurance contract, relief that Ambac cannot, and does not, seek.” Id . The Court further noted that Section 3105 was enacted to benefit policyholders by requiring insurers who were seeking to nullify their contracts to prove material misstatements; the statute did not relax the elements required to show fraud in an “insurer-only” exception. Id . As a consequence, the Court held that Section 3105 “does not remove required elements for a showing of common law fraudulent inducement.…” Id . The Court next turned to two elements of a fraudulent inducement claim relevant to the appeal: justifiable reliance and loss causation. First, the Court underscored the importance of proving justifiable reliance, noting that the element is critical to pleading (and proving) a fraudulent inducement claim: “to plead a claim for fraud in the inducement or fraudulent concealment, plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” Id . at 579 (citation and internal quotations omitted). Second, the Court declined to eliminate the loss causation element of a fraudulent inducement claim. The Court noted that loss causation is a “well-established requirement of a common law fraudulent inducement claim for damages.” Id . Noting that the Court “recently affirmed this requirement,” the Court reiterated that a false representation must result in an injury to give rise to a cause of action for fraud: “if the fraud causes no loss, then the plaintiff has suffered no damages.” Id . at 581. Accordingly, the Court held that “Ambac’s request for compensatory damages in the form of all claims payments made to investors must be rejected.” Id .  In other words, Ambac could not recover damages based on losses suffered on all defaulting loans without establishing that the losses resulted from a breach. To hold otherwise, explained the Court, would give Ambac the equivalent of rescissory damages, which it was unable to seek on its unconditional, irrevocable policies. In holding that loss causation remained a required element of a fraudulent inducement claim, the Court specifically distinguished between the damages recoverable for fraud and breach of contract: The Appellate Division correctly determined that justifiable reliance and loss causation are required elements of a fraudulent inducement claim; that Ambac may only recover damages on its fraudulent inducement claim that flow from nonconforming loans; that the remedy for Ambac’s contract claims is limited to the repurchase protocol provided for in the contract’s sole remedy provision, and that Ambac is not entitled to attorneys’ fees. Id . at 584-585. Thus, the Court expressly differentiated the remedies available for the two claims, referring to its fraud ruling as “the method of damages calculation for any claims not subject to the repurchase protocol.” Id . at 581. Following, inter alia , expert proceedings, Defendants moved for, among other things, summary judgment dismissing Plaintiff’s fraudulent inducement claim as being duplicative of the contract claim due to an overlap in the measure of damages for the contract and fraud claims. The motion court denied the motion, recognizing that Ambac sought fraud damages distinct from those arising out of the contract claims. ( Here .) As the motion court observed: “When appearing before the Court of Appeals, Countrywide decided to distinguish Ambac’s fraudulent inducement cause of action from its contract cause of action. Countrywide’s goal was to have the Court of Appeals declare that Ambac can only use the repurchase protocol to measure the damages in the contract cases. Countrywide prevailed.” On appeal, the First Department affirmed. The First Department’s Decision The Court held that the Countrywide defendants did not establish, as a matter of law, “that the damages sought in connection with the fraud claim are the same as those sought in connection with the contract claims.” Slip Op. at **1-2. The Court noted that Ambac had “submitted an affidavit from its expert,” explaining that “the damages for the fraud and contract claims ‘qualitatively and quantitatively distinct.’” Id . at *2. The expert explains that whereas the contract damages are calculated based on the terms of the contractual repurchase protocol, the fraud damages are determined based on the portion of Ambac’s claims payments that flow from nonconforming loans. Thus, according to the expert, the calculation of the fraud damages does not rely in any way on the contractual repurchase price that governs the contract damages calculation. Id . The Court further noted that, according to the expert, “the fraud damages differ from the contract damages because they include additional expenses incurred by Ambac that are not recoverable in contract.” Id . Notably, Ambac’s expert report went “unchallenged by the Countrywide defendants.” Id . Finally, the Court noted that Ambac’s expert intended to submit a supplemental report in which he would include revised damages calculations. Ambac filed a motion to permit such a report, which the Court presumed would contain “a more detailed explanation of the differences between the contract and fraud damages.” Id . In light of that motion, and the “expert affidavit already submitted,” the Court held that “it premature to dismiss the fraud claim as duplicative.” Id . “Thus,” concluded the Court, “denial of the motion to dismiss the fraud claim, without prejudice to renewal after the conclusion of the proceedings below related to the expert affidavit is appropriate.” Id . The Court rejected Defendants’ contention that MBIA Ins. Corp. v. Credit Suisse Sec . (USA) LLC , 165 A.D.3d 108 (1st Dept. 2018) and Financial Guar. Ins. Co. v. Morgan Stanley ABS Capital I Inc ., 164 A.D.3d 1126 (1st Dept. 2018), commanded a different result: “ either MBIA nor Financial Guar . stands for the sweeping proposition that, in all residential mortgage-backed security cases, a fraudulent inducement claim brought by a monoline insurer is, as a matter of law, duplicative of contract claims based on the same nonconforming loans.” Slip Op. at *2. MBIA Ins. Corp. v Credit Suisse Sec . LLC (165 AD3d 108 <1st dept 2018> ) and Financial Guar. Ins. Co. v Morgan Stanley ABS Capital I Inc . (164 AD3d 1126 <1st dept 2018> ) do not require a different result. In MBIA, the court concluded that fraud damages in the form of all claims payments made were not recoverable, and that “repurchase damages” were duplicative of contract damages (165 AD3d at 113-114). Here, Ambac does not seek to recover all claims payments made, nor does it seek repurchase damages under its fraud claim. Instead, it only seeks fraud damages based on claims payments flowing from nonconforming loans, the precise measure sanctioned by the Court of Appeals ( see Ambac , 31 NY3d at 581 ). In Financial Guar ., the court merely found, on the specific facts alleged, that the fraud damages duplicated the contract damages (164 AD3d 1126). There was no indication that the plaintiff in that case submitted an expert affidavit explaining any differences between the measures of damages sought by the fraud and contract claims. Id . Takeaway As readers of this Blog know, most of the cases we discuss involving the duplication of claims doctrine occur at the motion to dismiss stage of the proceeding. Ambac goes beyond that stage into summary judgment proceedings. In that stage of the proceedings, the issue of damages often comes into sharper focus. This is especially so, as in Ambac , with expert disclosure and reports. Perhaps, then, a lesson to be gleaned from Ambac is the desirability of retaining a damages consultant at the pleading stage of the action. This can be important since plaintiffs often have a difficult time articulating the difference between contract damages and fraud damages. Of course, not every case warrants such a retention. But, where appropriate, a damages consultant can help a plaintiff withstand a challenge to a fraud claim on the grounds that the alleged fraud damages are not separate and distinct from the alleged contract damages.

This Blog has often written about contract issues; in particular, the enforceability of a contract whether it be oral or written. In today’s post, we examine an implied contract – that is, an agreement arising from the conduct of the parties. In K2 Intelligence, LLC v. Frydman , 2019 N.Y. Slip Op. 32684(U) (Sup. Ct., N.Y. County Sept. 9, 2019) ( here ), the Court denied a motion to dismiss an implied contract action, holding that there was an issue of material fact as to whether the circumstances alleged in the complaint supported the existence of an implied contract, let alone a written contract. K2 involved an action to recover $114,133.40 from the defendants for breach of an implied contract in connection with the performance of investigative, compliance, corporate intelligence, and cyber defense services. What is an Implied Contract? An implied contract is a “not really a contract at all, but rather a legal obligation imposed to prevent a party’s unjust enrichment.” Universal Constr. Resources, Inc. v. New York City Hous. Auth. , 2018 N.Y. Slip Op. 32846 (U) (Sup. Ct., N.Y. County 2018), citing Parsa v. State of New York , 64 N.Y.2d 143, 148 (1984). It is an agreement created by the conduct of the parties and the circumstances surrounding their relationship: “A contract implied in fact may result as an inference from the facts and circumstances of the case, although not formally stated in words, and is derived from the ‘presumed’ intention of the parties as indicated by their conduct.” Jemzura v. Jemzura , 36 N.Y.2d 496, 503-504 (1975) (internal citations omitted). The elements of an implied-in-fact contract are the same as those of an express contract: “consideration, mutual assent, legal capacity and legal subject matter.” Maas v. Cornell Univ. , 94 N.Y.2d 87, 93-94 (1999). Like an express contract, an implied-in-fact contract requires a showing that there was a meeting of the minds. I.G. Second Generation Partners, L.P. v Duane Reade , 17 A.D.3d 206, 208 (1st Dept. 2005). A contract implied-in-fact “is just as binding as an express contract … since in the law there is no distinction between agreements made by words and those made by conduct.” Id . A cause of action for breach of an implied contract is not viable where this is an express contract covering the same subject matter, as “the theories of express contract and of contract implied in fact ... are mutually exclusive.” Bowne of New York, Inc. v International 800 Telecom Corp. , 178 A.D.2d 138, 138 (1st Dept. 1991). K2 Intelligence, LLC v. Frydman Background Plaintiff, K2 Intelligence, LLC (“K2”), provides investigative, compliance, and cyber defense services to its clients. On October 17, 2016, Herrick Feinstein LLP (“Herrick”) contacted K2 about providing expert advisory services to Jacob Frydman (“Frydman”) in connection with a lawsuit in which Frydman was a named party. According to Plaintiff, it was agreed that in connection with K2’s retention, Frydman would be solely responsible for the payment of K2’s fees and expenses and Herrick, as Frydman’s attorneys, would be K2’s agent and point of contact for any communications with Frydman. As a result, Plaintiff sent its written engagement letter to Herrick for Frydman sign. Plaintiff alleged that after it signed and delivered the Agreement to Herrick, Frydman, without K2’s knowledge, consent, or permission, altered the signature page from “Jacob Frydman” to “United Realty Partners, LLC, Jacob Frydman, Manager.” Plaintiff maintained that it never consented to the alteration or change of the signature page. K2 claimed that Frydman made the change to obligate URP, a company without little or no assets, to pay for Plaintiff’s services instead of Frydman in his individual capacity. Plaintiff commenced the action, alleging breach of an implied contract and account stated. Defendants moved to dismiss, claiming that the retainer letter was a binding contract between the parties and conclusively showed that any payment obligations were between K2 and URP, the actual signatory to the agreement. The Court’s Decision The Court denied the motion, holding that “ he conflicting submissions of the parties raise a triable issue of fact as to whether the purported contract exhibited by defendants is actually a contract, at all; let alone whether one or both of the defendants is a party, or are parties, thereto.” Slip Op. at *2. The Court found that the language in the letter agreement was devoid of any reference to URP and indicated that there was no meeting of the minds between Plaintiff and URP: “ t would seem that, as far as plaintiff was concerned, it was contracting with defendant Frydman.” Id . The Court noted that the signature page supported Plaintiff’s position that the retention letter had been altered by Frydman: “Nowhere does that portion of the document identify an anticipated signatory as being United Realty Partners, LLC. Remarkably, though – or perhaps not – the document contains a handwritten modification of the Frydman signatory section, identifying him as the “Manager” of “United Realty Partners, LLC.” Id . at *3. Notwithstanding, the Court found issues of fact, especially since Frydman contended that “he executed the K2 engagement agreement as Manager of' United Realty Partners, LLC, implying that such was his understanding of the contracting parties.” Id . (internal quotation marks omitted). As a result, the Court denied the motion: In view of the foregoing patent issue of material fact - to wit, whether there was a contract, and with whom, regarding the foundational predicate for the claims in this lawsuit – it is simply impossible at this time for the court to render summary adjudication on the merit of plaintiff’s claims, which is what defendants are now prematurely asking this court to do. Therefore, the motion to dismiss is denied. Takeaway K2 is a good example of the tension between a contract manifested in writing and a contract manifested by the conduct of the parties. The determination of the type of contract at issue is determined on a case-by-case basis. Where, as alleged in K2 , the parties’ conduct evinces an intent to be bound by an agreement between them, in the absence of a written agreement, the parties can find themselves in a binding contract.

It is well settled that when an agreement is clear and unambiguous, the parties’ rights are to be governed exclusively by that agreement and the courts are to give the words of that agreement their plain, ordinary, and usual meaning. It is equally well-settled law that parties engaged in an arm's-length business transaction are not fiduciaries, especially when the parties are sophisticated businesspeople. Despite the clarity of these principles, they are, nevertheless, tested in litigation. Such was the case in Saltini v. North Sea Dev. LLC , 2019 N.Y. Slip Op. 51456(U) (Sup. Ct., Suffolk County Sept. 9, 2019) ( here ). Saltini concerned three properties located in the Town of Southampton, New York (sometimes referred to as Lots 1, 2, and 3, and collectively the “Properties”). In 2015, Saltini and defendant, Coast Development Group LLC (“Coast”), formed defendant, North Sea Development LLC (“North Sea”), to construct high-end homes on the Properties (the “Project”). Coast owns 51% of North Sea and Saltini owns the remaining 49% of the company. Coast has three members – the individual defendants (Richard J. Gheradi, Richard F. Gherardi, and Glenn Callahan) – each of whom has a one-third interest in the company. In order to obtain financing for the Project, Saltini conveyed title to the lots to three separate LLCs (one for each parcel) in which North Sea had a 100% membership interest (the “Property LLCs”). The Property LLCs then obtained financing from defendants Acres Capital, LLC (“Acres”) and Reliance Standard Life Insurance Co. (“Reliance” and collectively with Acres, the “Lender”). On February 5, 2016, the Property LLCs borrowed a total of $11,580,000 from the Lender (the “Senior Loan”): $4,212,439 as an acquisition loan, $5,048,300 as a building loan, and $2,319,261 as a project loan. Each of the three loans was evidenced by a promissory note and secured by a mortgage on the three parcels, among other things. Also, on February 5, 2016, Saltini sold the three parcels to North Sea for $8,090,000. At the closing, Saltini was paid $3,829,806, and North Sea executed a promissory note in his favor for the balance, $4,260,194 (the “Mezzanine Note” or “Mezzanine Loan”). The Mezzanine Loan was secured by a pledge agreement executed by Coast granting Saltini a security interest in Coast’s membership interest in North Sea. The Mezzanine Note contained two repayment options: (1) at such time and in such amount as provided in North Sea’s operating agreement, or (2) $784,634 at the closing of the sale of Lot 1, $1,105,860 at the closing of Lot 2, and the balance (unpaid principal and interest) on the sale of Lot 3 or November 1, 2019, whichever was sooner. The relationship between the Lender and Saltini (the “Mezzanine Lender”) was governed by an Intercreditor Agreement dated February 5, 2016. Among other things, the Mezzanine Lender agreed to subordinate and make junior the Mezzanine Loan, the Mezzanine Loan Documents and the liens and security interests to the Senior Loan and the Senior Loan Documents. Thus, the Mezzanine Lender’s rights to payment of the Mezzanine Loan and the obligations evidenced by the Mezzanine Loan Documents were subordinated to the Senior Lender’s right to payment of the Senior Loan. The Senior Loan was set to mature on August 5, 2017. In September 2017, the Property LLCs were in default, and the parties to the Senior Loan executed the first modification, which gave the Property LLCs up to three extensions of the maturity date for a period of three months each, provided they met certain conditions. The first modification also increased the release amounts for Lots 1 and 2 from $4,303,500 to $6,000,000, respectively. The Property LLCs received two extensions, but they were unable to meet the conditions for the third extension. The Senior Loan matured on February 5, 2018, and the parties agreed to a second modification, which extended the maturity date to June 5, 2018. A third modification extended the maturity date to August 23, 2019, and increased the principal amount of the loan from $11,850,000 to $13,385,000. The third modification also reduced the release amounts to $5,000,000 each for Lots 1 and 2. The homes on Lots 1 and 2 are near completion and are being marketed for sale at listing prices of $6,495,000 and $6,995,000, respectively. Plaintiff commenced the action on March 5, 2018, alleging that Coast and the individual defendants (collectively the “Coast Defendants”) assumed full and complete control over all aspects of the Project and made substantial errors in the design and construction of the homes, which caused extensive and unnecessary delays. Plaintiff also alleged that the Coast Defendants misused and converted funds that were to be used for construction of the homes. Plaintiff claimed that, as a result, the homes would be sold at prices well below those anticipated for the Project and that North Sea would be unable to pay him the amounts due under the Mezzanine Loan. Plaintiff further alleged that the Lender aided and abetted the Coast Defendants. Acres and Reliance moved to dismiss the complaint. The Court granted the motion. Plaintiff contended that a fiduciary duty existed between the Lender and him. Saltini alleged that such a duty existed by reason of his reliance on promises that the Lender purportedly made which caused him to relinquish his position of security and control over the Project in order to become a mezzanine lender. These promises, maintained Saltini, required the Lender to perform its duties such that there would be sufficient funds from the sale of the homes to pay both the Lender and him. The Court held that there was no fiduciary duty. The Court found that the relationship was simply contractual “whereby one creditor agree to subordinate its claim against a debtor in favor of the claim of another.” Slip Op. at *4. This finding, noted the Court, was supported by the plain language of the Intercreditor Agreement, which specifically disclaimed any fiduciary relationship between the parties: The Intercreditor Agreement, which is the only contractual agreement between the plaintiff and the Lender, provides, “Mezzanine Lender agrees that Senior Lender owes no fiduciary duty to Mezzanine Lender in connection with the administration of the Senior Loan and the Senior Loan Documents and Mezzanine Lender agrees not to assert any such claim.” Acceptance of the plaintiff’s version of the transaction would require the improper consideration of parol evidence, contradicting the clear terms of the Intercreditor Agreement, which contains a merger clause, precluding any extrinsic proof to add or vary its terms. Id . (citations omitted). “In any event,” said the Court, the “parties engaged in an arms’ length business transaction” and as sophisticated businesspeople, they “are not fiduciaries”. Id . (citations omitted). The Court rejected Plaintiff’s attempt to impute “to the Lender duties to supervise and manage the project that not found in the record.” Id . “The documentary evidence,” said the Court, “establishe that the Lender’s obligation was merely to provide financing. Other defendants, specifically North Sea and the Coast defendants, were responsible for construction of the homes.” Id . The Court, therefore, refused to accept Saltini’s attempt to allege “special circumstances” that would transform “the business relationship between the plaintiff and the Lender into a fiduciary relationship, such as control by one party of the other for the good of the other or creation of an agency relationship.” Id . The Court concluded by observing the following: The plaintiff, an experienced architect, was not under the control of the Lender. That he was under financial pressure and had to give up certain things in order to obtain financing for the project does not create a fiduciary relationship. Accordingly, the ninth cause of action is dismissed. Id . at **4-5. Takeaway There are two types of fiduciary relationships: 1) those created by law ( e.g. , statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue. While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship ( e.g. , the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty (e.g., the second type of fiduciary relationship). Id . In Saltini , as discussed, the Court looked at the contract to determine the relationship between the parties and determined that the language of the agreement was clear and unambiguous such that there was no fiduciary relationship between them.

In today’s post, this Blog looks at enforcements actions brought by the Securities and Exchange Commission (“SEC”) that involve fraudulent misconduct and the failure to comply with the registration requirements for the offering of securities. Securities and Exchange Commission v. Toon Goggles Inc. On September 6, 2019, the SEC announced ( here ) that it charged Toon Goggles Inc. (“Toon Goggles”), a Los Angeles-based company that offers on-demand entertainment content for children, and its founder, Ira Warkol (“Warkol”), for conducting a $19 million illegal securities offering. The SEC also charged Warkol for acting as an unregistered broker-dealer in connection with the offering. In the complaint filed in the U.S. District Court for the Central District of California ( here ), the SEC alleged that from at least August 2012 through late 2016, Toon Goggles and Warkol raised over $19 million from approximately 400 retail investors. According to the SEC, Warkol, acting as an unregistered broker, set up boiler rooms inside Toon Goggles’ offices and hired sales agents to cold-call investors. Warkol allegedly provided the sales agents with scripts to induce investors into purchasing the offered securities. According to the complaint, Toon Goggles also failed to maintain accurate and complete records of its investors, the number of shares sold to each investor, and the amount of money raised from each investor. The SEC charged Toon Goggles and Warkol with violating the securities registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and Warkol with violating the broker-dealer registration provisions of Section 15(a) of the Securities Exchange Act of 1934. Without admitting or denying the allegations in the complaint, Warkol consented to the entry of a final judgment permanently enjoining him from violating the charged provisions, ordering disgorgement plus prejudgment interest of $2 million, and imposing an $189,427 penalty. The settlement is subject to court approval. The SEC’s litigation against Toon Goggles will proceed, with the SEC seeking a permanent injunction, disgorgement plus prejudgment interest, and a civil penalty. In a separate administrative proceeding, the SEC also charged Toon Goggles’ director of operations, Brendan Pollitz, for facilitating broker-dealer registration violations. Pollitz consented to the entry of a cease-and-desist order ( here ), and agreed to pay disgorgement plus prejudgment interest of $34,117, and civil penalties of $9,472. Securities and Exchange Commission v. John F. Thomas On September 4, 2019, the SEC announced ( here ) that it brought charges against two individuals and six entities relating to an ongoing, Nevada-based $29 million sports betting investment scheme impacting over 600 investors from more than 40 states, as well as other charges against three individuals and a company who sold the investments. In the complaint ( here ), the SEC alleged that John F. Thomas and Thomas Becker, both whom are convicted felons, and several entities controlled by them, promised investors 250% to 600% returns from pooled investments in sports betting, using what they claimed was a proprietary handicapping system. According to the SEC, however, the defendants used the majority of investor money to fund their lifestyles, pay commissions to brokers and agents, or make Ponzi-like payments to other investors. The SEC further alleged that the defendants misrepresented to investors the investment performance of the funds that were actually invested in sports betting. The SEC also alleged that Douglas Martin, Paul Hanson, Damian Ostertag, and a company owned by Martin sold unregistered securities without being registered as brokers or associated with a registered broker. The complaint, which was filed in the United States District Court for the District of Nevada on August 30, 2019, charged Thomas, Becker, Einstein Sports Advisory, LLC, QSA, LLC, Vegas Basketball Club, LLC, Vegas Football Club, LLC, Wellington Sports Club, LLC, and Welscorp, Inc. with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and the registration provisions of Section 5(a) and 5(c) of the Securities Act. The complaint also charged Martin, Hanson, Ostertag, and Executive Financial Services, Inc. with violating the broker-dealer registration provisions of 15(a) of the Securities Act and the registration provisions of Section 5(a) and 5(c) of the Securities Act. Securities and Exchange Commission v. E. Herbert Hafen On September 4, 2019, the SEC announced ( here ) that it charged E. Herbert Hafen (“Hafen”) with defrauding multiple retail clients by misappropriating approximately $1.6 million of client assets. According to the SEC’s complaint ( here ), from 2011 through 2018, Hafen, while employed as a New York City-based registered representative and investment adviser at large financial institutions, engaged in a scheme to defraud his retail clients. The SEC alleged that Hafen convinced his clients that he had access to an investment opportunity separate from those offered by the financial institution at which he worked, and this opportunity would pay an annual six percent return. According to the complaint, Hafen instructed his clients to withdraw their money from the financial institution, including liquidating stock holdings and personal retirement accounts; deposit that money into their personal bank accounts; and then transfer or wire the money to Hafen’s personal bank account. The SEC further alleged that, once Hafen received his clients’ money, he did not invest it as promised, but instead used it for his own personal purposes, including paying house, car, and credit card expenses for himself and family members. The SEC alleged that Hafen violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The SEC is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Hafen ( here ). Commenting on the charges, U.S. Attorney Geoffrey S. Berman said: “Elias Hafen promised his investment clients significant returns in a ‘special’ fund.  With fake statements and guaranteed returns, Hafen was every investor’s worst nightmare.  He never invested his clients’ money and instead used it to fund his own lavish lifestyle.  Today, Hafen admitted his crimes and he will soon likely spend time in prison for his misdeeds.”

Attorneys are often asked whether an oral agreement is enforceable. Most will say that the answer depends on the law and the facts surrounding the agreement. As an initial matter, to be enforceable, an oral agreement must contain the elements of a binding contract, e.g. , an offer, acceptance, consideration, mutual assent, an intent to be bound, and agreement on all essential terms. Even if these elements are present, the agreement must still satisfy the Statute of Frauds. In New York, the statute of frauds is found in General Obligations Law § 5-701 through 5-705. These provisions require a signed writing for certain types of agreements, including, but not limited to: (1) agreements that by their terms are “not to be performed within one year from the making thereof”; (2) the conveyance of real property; (3) contracts for the payment of finder’s fees; (4) agreements for “goods sold at public auction”; (5) contracts to pay compensation for services rendered in negotiating a business opportunity; and (6) modifications to written agreements which state that they cannot be changed orally. The Statute of Frauds neither applies to an agreement that “appears by its terms to be capable of performance within the year; nor to cases in which the performance of the agreement depends upon a contingency which may or may not happen within the year.” North Shore Bottling Co. v. Schmidt & Sons , 22 N.Y.2d 171, 176 (1968) (citation omitted). Instead, it applies to “those contracts only which by their very terms have absolutely no possibility in fact and law of full performance within one year.” D&N Boening v. Kirsch Beverages , 63 N.Y.2d 449, 454 (1984). The Court of Appeals has repeatedly held that the courts should “analyze oral agreements to determine if … there might be any possible means of performance within one year.”  Id . at 455. Thus, wherever an agreement is susceptible of fulfillment within one year, “in whatever manner and however impractical,” the courts should find “the Statute to be inapplicable, a writing unnecessary, and the agreement not barred.” Id . In D&N Boening , the Court of Appeals provided examples of oral agreements that fell outside the Statute of Frauds despite questions surrounding the possibility of performance within one year.  These included agreements: where either party had the option to terminate the agreement on seven months’ notice ( Blake v Voigt , 134 N.Y. 69); where the agreement merely set the terms of anticipated prospective purchases but did not bind either party to any particular transaction ( Nat Nal Serv. Stas. v Wolf , 304 N.Y. 332); where defendant had the option to discontinue at any time the activities upon which the agreement was conditioned ( North Shore Bottling Co. v Schmidt & Sons , 22 N.Y.2d 171); where defendant had the option of selling at any time the property on lease to plaintiff for four years ( Coinmach Inds. Corp. v Domnitch , 37 N.Y.2d 889); where no provision in the agreement directly or indirectly regulated the time for performance despite the extreme unlikelihood of its completion within one year ( Freedman v Chemical Constr. Co. , 43 N.Y.2d 260, 265); where employment was terminable for any just and sufficient cause wherever dismissal was deemed necessary for the welfare of the company ( Weiner v McGraw-Hill, Inc. , 57 N.Y.2d 458, 462). Id . at 455-56. However, oral agreements that are “terminable within one year only upon a breach by one of the parties” are unenforceable. Id . at 456. The reason: “termination is not performance, but rather the destruction of the contract where there is no provision authorizing either of the parties to terminate as a matter of right.” Id . at 456-57; see also Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957) (“The possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.”). By contrast, “where one or both parties have … an explicit option to terminate their agreement within one year, that agreement is, by its own terms, capable of completion within that period and is not governed by the Statute.” Id . If an alleged agreement is found to fall within the scope of GOL § 5-701(a)(1) (or any other subsection of GOL § 5-701(a)), it is void “unless it or some note or memorandum thereof be in writing, and subscribed by the party to be charged therewith, or by his lawful agent. ...” There is sufficient tangible evidence that a contract has been made if, inter alia : (i) there is admissible “electronic communication (including, without limitation, the recording of a telephone call or the tangible written text produced by computer retrieval) ... sufficient to indicate that in such communication a contract was made between the parties”; (ii) “ he party against whom enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made”; or (iii) “ here is a note, memorandum or other writing sufficient to indicate that a contract has been made, signed by the party against whom enforcement is sought or by its authorized agent or broker.” Id . GOL § 5-701(b)(3). Email communications can satisfy the “writing” requirement. See Sassoon v. CDx Diagnostics , 172 A.D.3d 617 (1st Dept. May 28, 2019); Naldi v. Grunberg , 80 A.D.3d 1, 13 (1st Dept. 2010). The “writing” need not be a communication between the parties to the contract. It can be an internal communication by the party against whom enforcement is sought. See Int’l Trading & Sales, Inc. v. Philipp Bros. , 99 A.D.2d 983, 984 (1st Dept. 1984) (“If defendant has such a note or memorandum even though it be internal, that could satisfy the Statute of Frauds.”); Scura Partners Sec. LLC v Universal Stainless & Alloy Prods., Inc. , No. 653308/11, 2013 WL 1127733, at *6 (Sup. Ct. N.Y. Cty. Mar. 6, 2013) (permitting discovery to satisfy Statute of Frauds because the defendant “may have internal emails and memorandums which would confirm the existence of the agreement, and these documents are ‘peculiarly within the knowledge’ of .”). With these standards in mind, we look at Cohen v. Trump Organization LLC , 2019 N.Y. Slip Op. 32565(U) (Sup. Ct., N.Y. County Aug. 28, 2019) ( here ), a case involving an alleged oral agreement by the defendant to pay the legal fees and expenses of the plaintiff in pending and future matters. Background Michael Cohen (“Plaintiff” or “Cohen”) claimed he had an oral agreement with the Trump Organization LLC (“Defendant” or “Trump Organization”) to pay his legal expenses for civil, criminal, and investigatory matters arising out of his employment and his “ill-defined role” as Donald J. Trump’s “fixer.” Slip Op. at *1. Cohen claimed the Trump Organization paid his legal fees for a time under the agreement but then stopped when Cohen agreed to cooperate in ongoing investigations into his work for the Trump Organization and its principals, directors, and officers. Id . Cohen began his employment with the Trump Organization in 2006 as Executive Vice President and Special Counsel. His duties and responsibilities for the Defendant continued through the campaign and election. On January 20, 2017, Cohen resigned from the Trump Organization to serve full time as the President’s personal attorney. A week before the inauguration and continuing through May 2017, a number of investigations into the President, the Trump Campaign and the Trump Organization were opened by the federal government. By the end of May 2017, Cohen had emerged as a person of interest in the foregoing investigations and received a subpoena from the House Intelligence Committee as part of its investigation. Cohen retained McDermott Will & Emery LLP (“McDermott”) to represent him in connection with the investigations on the recommendation of an attorney for President Trump. According to Cohen, President Trump and members of the Trump Organization supported such retention and “encouraged to cooperate with the Investigations.” Id . at *4. In July 2017, faced with these ongoing investigations, and in consideration of Cohen’s cooperation in a joint defense, Cohen and the Trump Organization allegedly reached an oral agreement “under which the Organization agreed to indemnify and, separately, to pay for all of attorneys’ fees and costs in connection with representation and defense in the Investigations and other matters arising from work with and on behalf of the Organization and its principals, directors, and officers” (the “Agreement”). Id . (internal definitions omitted). On July 24, 2017, Cohen’s counsel at McDermott sent Alan Garten (“Garten”), Defendant’s Executive Vice President and Chief Legal Officer, an email in which the former wrote: “Pursuant to our oral agreement that your client will indemnify my client for this matter, please find enclosed our firm’s statement for services rendered on behalf of Mr. Michael D. Cohen regarding a congressional investigation.” Id .  A few months later, on October 25, Garten informed Cohen’s counsel that “ wire was sent to your firms account for $136,460.99 this afternoon (representing ½ the current outstanding balance that has been billed),” and noting that “ he other ½ will be wired in the next few days.” Id . at *4. Garten’s correspondence did not confirm or reference the Agreement. Id . In December 2017, the Trump Organization confirmed that it would continue to indemnify Cohen and pay his attorneys’ fees and expenses in connection with the Investigations, including the outstanding amounts owed to McDermott. As late as June 2018, Cohen claims that he received continued assurances from the Trump Organization that it would continue to indemnify him and pay his legal expenses in connection with the Investigations. Notably, Cohen did not plead these confirmations and assurances as separate agreements with separate consideration. Id . at *5. By June 2018, Cohen was the subject of additional investigations and lawsuits relating to his work for the Trump Organization. The various legal actions that proliferated around him fell into three distinct categories, some of which existed at the time the parties allegedly formed the Agreement (“Pending Matters”), and some which did not (“Future Matters”): (1) Investigations: defined to include congressional investigations and the special counsel investigation; (2) Matters: defined as eleven civil and criminal matters and investigations that commenced after the Agreement was allegedly formed in July 2017; (3) Other Matters: defined to include the specific Matters in category two and any other “potential related matters, related to Cohen’s services on behalf of President Trump and the Trump Organization. Id . at **5-6. In or around June 2018, Cohen’s relationship with the Trump Organization broke down. That month, Cohen began to consider cooperating with the Special Counsel and federal prosecutors in connection with a separate investigation in the Southern District of New York and President Trump began distancing himself from Cohen. The Trump Organization allegedly ceased to pay the invoices of Cohen’s counsel without notice or justification. Consequently, Cohen’s attorney withdrew as counsel, leaving $1,037,868.87 in unpaid fees allegedly owed by Defendant. Cohen subsequently retained additional counsel to represent him in the Investigations and other matters covered by the Agreement. On August 21, 2018, Cohen pleaded guilty to eight criminal charges, including campaign finance violations, tax evasion, and bank fraud, in the Southern District of New York. Additionally, on November 29, Cohen pleaded guilty to lying to Congress. Cohen was sentenced to prison on December 12, 2018 and ordered to pay fines and other amounts. In January 2019, Cohen wrote to the Trump Organization requesting reimbursement pursuant to the Agreement. The Trump Organization did not respond to that request and did not pay any of the amounts requested. Cohen commenced the action on March 7, 2019. Cohen asserted claims for (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) a declaratory judgment setting forth the scope of his rights under the “indemnification agreement,” and (4) promissory estoppel. In response, the Trump Organization moved to dismiss the complaint on the grounds that the Agreement was not properly pleaded and was barred by the Statute of Frauds, and that the remaining claims failed to state any legally viable claims for relief. As discussed below, the Court granted in part and denied in part the Trump Organization’s motion to dismiss the claim for breach of contract. The Court held that the Agreement was enforceable to the extent it covered legal proceedings and investigations that were pending in July 2017, when the Agreement allegedly was made. The Agreement was not enforceable, however, with respect to legal proceedings and investigations that began after the Agreement was reached. This Blog looks at the Court’s ruling with regard to the Statute of Frauds. The Court’s Decision As an initial matter, the Court found that Cohen sufficiently pleaded the existence of a viable contract, by setting “forth the parameters of the deal he allegedly struck with the Trump Organization.” Slip Op. at *9.  In this regard, the Court found that Cohen described “what type of agreement being alleged, when it was entered into, with whom it was entered, and the agreement’s terms and scope.” Id .  “These and other alleged facts contained in the Complaint and Affidavit,” said the Court, gave Defendant “sufficient notice as to the facts on which Cohen’s claim founded, and the material elements of the claim.” Id . “That is all that is required at this stage of the case,” concluded the Court. Id . Next the Court turned to the issue of enforceability under the Statute of Frauds. Specifically, the Court addressed whether the Agreement was capable of performance within one year of the Agreement being reached. Id . Pending Matters The Court agreed with Cohen that the Agreement could be performed within one year. Slip Op. at *13. The Court rejected Defendant’s argument that the Agreement could not be performed within one year because it was a contract of indefinite duration. Id . at *14.  Such an argument, said the Court, “goes too far.” Id . “If the terms of the contract ... include[ ] an event which might end the contractual relationship of the parties within a year, defendant’s possible liability beyond that time would not bring the contract within the statute.” Id ., quoting Martocci v. Greater New York Brewery , 301 N.Y. 57, 62 (1950) (internal quotation marks omitted). The Court found that the House and Senate Intelligence Committee investigations were capable of concluding within one year since they “could have ended in a matter of weeks or months” of the Agreement. Id . at *13 (quoting Cohen’s memorandum of law and noting that the analysis was “correct with respect to Pending Matters that were underway in July 2017”). Future Matters As to Future Matters, the Court agreed with the Trump Organization. The Agreement as to Future Matters is void under the Statute of Frauds because it could not by its terms be performed within one year. Indeed, it could not ever be fully performed because the Trump Organization’s obligations under such an agreement would be triggered by any new action or investigation occurring at any time in the future. The only way to terminate this open-ended obligation within one year would be to breach it. But “ he possibility of such wrongful termination is not, of course, the same as the possibility of performance within the statutory period.” Zupan v. Blumberg , 2 N.Y.2d 547, 552 (1957). Slip Op. at *15. In finding for the Trump Organization, the Court found “cases involving open-ended agreements to pay sales commissions” to be “instructive.” Id .  In those cases, the employer and employee agreed that the latter would obtain a share of the future sales generated by customers who the employee procured. The courts have held that such agreements must be in writing because they “impermissibly ‘extend[] indefinitely” the agreement, are “dependent solely on the acts of a third party and beyond the control of the defendant.…’” Id ., quoting Apostolos v. R.D.T Brokerage Corp. , 159 A.D.2d 62, 64-65 (1st Dept. 1990). The same is true with regard to “open-ended distributorship agreements,” which the Court found to “further illustrate the point.” Id . at *16. In those cases, noted the Court, the courts did not apply the Statute of Frauds to oral agreements because the oral agreements could be terminated within one year without a breach thereof. Id ., citing North Shore Bottling , 22 N.Y.2d at 176-177. The Court further reasoned that by definition Future Matters could not be capable of performance within one year because the parties “did not know about at the time” the Agreement was reached. Slip Op. at *17. Accordingly, “ ecause the Agreement covers both Pending and Future Matters,” said the Court, “it cannot by its terms be performed within one year and is unenforceable unless it is supported by tangible evidence of the type required by the Statute of Frauds.” Id . Was There a Writing? Having determined that the Agreement had to be in writing, the Court considered whether the correspondence between Cohen’s lawyer and the Trump Organization sufficed “to create an enforceable written agreement under the Statute of Frauds; if not, whether the Trump Organization’s payment of Cohen’s initial legal bills sufficient to create an enforceable agreement to pay his remaining bills; and if not, whether the Agreement be severed so that Cohen’s claims limited to the portion of the Agreement relating to indemnification for Pending Matters.” Id . (Orig’l emphasis.) The Court held that the email sent by Cohen’s counsel referencing the Agreement, in and of itself, could not constitute the written “note or memorandum” required under the Statute of Frauds because it was “not signed or otherwise endorsed by … the Trump Organization.” Id . at *18. The email from the Trump Organization likewise failed to satisfy the writing requirement of the Statute of Frauds. Id . The Court held that the responding email “did not acknowledge … any agreement to pay Cohen’s legal bills, let alone one broad enough to extend beyond ‘this matter’ to an unlimited number of civil, criminal, investigatory, and ‘other’ matters that arose after the agreement supposedly was made.” Id . at **18-19. The Trump Organization’s Partial Performance Did Not Satisfy the Statute of Frauds The Court rejected Cohen’s argument that the Trump Organization’s payment of some of the invoices “at the outset” satisfied the Statute of Frauds. Id . at *19. The Court held that “ lthough ‘partial performance’ can satisfy the Statute of Frauds for certain types of real estate-related agreements under N.Y. Gen. Oblig. L. § 5-703, it not apply to N.Y. Gen. Oblig. L. § 5-701(a)(1), which is the only provision upon which Defendant relies.” Id ., citing Castellotti v. Free , 138 A.D.3d 198 (1st Dept. 2016). The Agreement Can Be Severed So That It Can Be Enforced In Part The Court held that “it is appropriate to sever the Agreement so as to permit enforcement of the alleged oral agreement to pay Cohen’s legal fees and costs for the Pending Matters.” Slip Op. at *21. The Court noted that “ hroughout Cohen’s pleadings and filings, the Investigations consistently demarcated from the ‘other matters’” and the pending Investigations “specifically … spurred the parties to form the agreement in the first place.” Id . Thus, “ ar from ‘doing violence’ to the terms of the agreement,” concluded the Court, “severance reflect the delineation evident in Cohen’s allegations - allegations which, in turn, indicate that the two portions of the agreement ‘separate and distinct.’” Id . Takeaway In a perfect world, all agreements would be reduced to a writing signed by all parties, so that in the event of a dispute a court could determine the rights and obligations of the parties thereto. Cohen illustrates the difficulties a party must overcome to demonstrate the existence of an oral agreement. Cohen is also notable because of the Court’s decision to sever the Agreement to permit enforcement as to Pending Matters.

On August 29, 2018, the Securities and Exchange Commission (”SEC”) announced ( here ) that it charged a Tallahassee-based investment advisory firm and its two former principals with defrauding investors, most of whom were retired NFL players who had joined the class-action lawsuit against the National Football League (“NFL”) claiming they suffered brain injuries as a result of concussions. The SEC charged Cambridge Capital Group Advisors, LLC (f/k/a Cambridge Capital Advisors, LLC); Cambridge’s president Phillip Timothy Howard (“Howard”), a Florida attorney who represented the retired players in the class action lawsuit; and Don Warner Reinhard (“Reinhard”), a former registered investment adviser previously barred by the SEC, with defrauding 20 investors in two proprietary hedge funds operating out of Howard’s law offices.  According to the SEC’s complaint ( here ), the defendants represented that the Funds would invest in a variety of instruments, when, in fact, they invested monies almost exclusively in settlement advance loans to more than 70 of Howard’s NFL class-action clients. As alleged, from no later than October 5, 2015 until at least March 31, 2017, the defendants raised approximately $4.1 million from about 20 investors (about half of whom rolled over their NFL 401(k) accounts to make the investments) through the offer and sale of securities in the form of limited partnership interests in two private investment funds for which Cambridge was the general partner and investment manager – namely, Cambridge Capital Partners LP (“Cambridge Partners”) and Cambridge Capital Group Equity Option Opportunities LP (“Cambridge Opportunities”) (collectively, the “Funds”). According to the SEC, the defendants distributed offering documents in which they made materially false and misleading statements about the Funds’ investment focus, the ways in which the Funds would use investor money, and Reinhard’s background and experience in the securities industry. More specifically, the defendants falsely told investors that the Funds were invested in a diverse range of securities with a secondary focus on litigation settlement advances. In truth, the Funds primarily paid settlement advances to former NFL players – including 18 of the 20 investors – in connection with the class action lawsuit. Moreover, the defendants allegedly represented that Reinhard was an “extremely successful investment manager,” but failed to disclose that he had served jail time for bankruptcy and tax fraud and had been barred by the SEC from working for any investment adviser firm.  The SEC further alleged that Howard defrauded investors by borrowing $612,000 in undisclosed personal mortgage loans from the Funds, which he never repaid, and that Howard and Reinhard used investor funds to pay themselves fabricated “broker fees” on settlement advance loans to Howard’s legal clients.  Additionally, in 2015 and 2016, Howard filed disclosure statements with the SEC on behalf of Cambridge in which Cambridge represented that in the past ten years no affiliate had pleaded guilty to a felony or been enjoined by a domestic court in connection with any investment-related activity. According to the SEC, these statements were false. As alleged, at the time of the filings, Reinhard was or had been an affiliate of Cambridge and in 2009 had pleaded guilty to a felony. In 2008, a court permanently enjoined Reinhard from violating the anti-fraud provisions of the federal securities laws in a civil enforcement action the SEC filed against him for securities fraud for misleading clients regarding investments. In 2011, as noted above, the SEC barred Reinhard from being affiliated with an investment adviser. “We allege that Cambridge, Howard and Reinhard defrauded these particularly vulnerable investors, many of whom invested their retirement savings,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Instead of investing all of the funds’ assets as promised, Howard and Reinhard used a significant portion of investor money to line their own pockets.” The SEC’s complaint filed in federal district court in the Northern District of Florida charges Howard, Reinhard, and Cambridge with violating the anti-fraud provisions of the federal securities laws, and seeks permanent injunctions, disgorgement of allegedly ill-gotten gains, prejudgment interest, and financial penalties.

Unscrupulous bookkeepers or other employees have great potential to embezzle money using forged or other types of bogus checks.  In such instances, Article 4 of New York’s Uniform Commercial Code (“Bank Deposits and Collections”) is implicated.  “Articles 3 and 4 of the UCC envisions a series of shifting burdens of risk with respect to forged checks.”  Putnam Rolling Ladder Co. v. Manufacturers Hanover Trust Co. , 74 N.Y.2d 340, 345 (1989).  Under Article 3 of the UCC, a check containing a forged signature is “wholly inoperative as that of the person whose name is signed.” New York UCC 3-404 (1). According to New York’s UCC, the bank’s liability is not without bounds, for: The UCC, however, imposes certain reciprocal duties on the customer. Failure to comply with those duties shifts the burden of loss from bank to customer. UCC 4-406 imposes upon a customer the duty to inspect its statement and canceled checks with reasonable care and promptness. Failure to do so results in preclusion of any claim against the bank for repeated forgeries by the same wrongdoer after the first such forged check and statement reflecting it are made available to the customer.  This rule reflects the fact that the customer is generally in a better position than the bank to prevent repetition of forgery. A skillful forgery may not be detected by even a careful bank inspector, but the customer to whom the canceled check and statement are returned should know whether or not it actually intended to authorize payment of its funds to the named payee ( see , UCC 4-406, comment 3). Thus, the shifting burden of loss is intended as well to encourage the parties to use reasonable care in situations where, from a systemic point of view, that is the efficient loss-avoidance mechanism. Finally, UCC 4-406 (3) shifts the loss of even repeated forgeries back to the bank when the customer, although in breach of its own duty to inspect its canceled checks and statements, is able to establish that the bank lacked ordinary care in paying the forged checks…. By reallocating the burden of loss to the bank the Code thus encourages proper business practices on the part of banks as well as their customers. Putnam , 74 N.Y.2d at 345 - 46 (footnote omitted). In Putnam , the defendant bank paid 37 checks written by Putnam’s bookkeeper containing forged signatures of Putnam’s officers. Ultimately, the Putnam Court found that because “plaintiff adduced sufficient evidence of the bank’s lack of ordinary care in paying the 37 forged checks (thereby avoiding preclusion under UCC 4-406 <2> for its own negligence), and the bank offered no evidence whatever of general rules or usage, judgment should have been awarded to plaintiff in the undisputed amount of its loss. The Appellate Division, Second Department addressed these issues in Redgrave Electrical Maintenance, Inc. v. Capital One, N.A. , 161 A.D.3d 801 (2018).  Plaintiff’s bookkeeper in Redgrave , forged 20 checks over a six-month period that were honored by defendant bank.  The Second Department affirmed supreme court’s denial of bank’s motion for summary judgment seeking to dismiss plaintiff’s causes of action for negligence and negligent misappropriation in its payment of the forged checks.  In its decision the Redgrave Court followed the Court of Appeals’ blame shifting analysis in Putnam .  Among other things, the Redgrave Court recognized that “the loss of repeated forgeries may be shifted back to the bank in the circumstance where the bank failed to use ordinary care in paying forged checks.”  Redgrave , 161 A.D.3d at 802 (citations omitted).  As to what constitutes “ordinary care,” the Redgrave Court stated: With regard to the issue of ordinary care, UCC 4–103 (3) provides that “in the absence of special instructions, action or nonaction consistent with clearing house rules and the like or with a general banking usage not disapproved by this Article, prima facie constitutes the exercise of ordinary care.” Thus, under this “safe harbor” provision, a bank can ensure that its conduct at least prima facie meets an ordinary care standard, by showing that it acted in accordance with general banking rules or practices ( see UCC 4–103<3> ). However, it is the bank, as the party that benefits from the “safe harbor” provision, that bears the burden of proving general clearing house rules or general banking usage in order to establish ordinary care. Redgrave , 161 A.D.3d at 802 (some citations omitted).  While the Redgrave Court found that the bank established that Redgrave “failed to exercise reasonable care and promptness to examine its bank statements and to timely notify the bank of the checks allegedly forged by ,” it “did not meet its burden of showing that it acted in accordance with general banking rules or general clearing house rules, and, therefore, it failed to demonstrate prima facie that it exercised ordinary care in paying the forged checks.”  Redgrave , 161 A.D.3d at 802 – 803 (citations omitted). On September 3, 2019, the Appellate Division, First Department, decided Weiser v. Citigroup, Inc. , in which plaintiffs alleged that “their long-time bookkeeper … perpetrated a fraud against them over a period of seven years, presenting checks drawn on their checking account with Citibank to plaintiff Dr. Weiser for signature, representing that the checks were for payment of business expenses, and later altering the checks to add her own personal credit card account number, and using the checks to pay her own credit card bills.”  Among other things, the First Department affirmed the dismissal of certain claims against Citibank because they were “barred by plaintiffs’ failure to satisfy a condition precedent to suit created by UCC 4-406(4) and Citibank’s checking account rules and regulations as set forth in its CitiBusiness Client Manual” under both of which discrepancies had to be timely reported. Further, in rejecting Plaintiffs’ contention that Citibank’s knowledge of the bookkeeper’s fraud should act as an estoppel to its raising UCC 4-406 as a bar to plaintiffs’ suit, “the record demonstrate that, far from concealing the fraud, Citibank gave plaintiffs all the documentation they needed to discover it.”  In that regard, the Court found that the account statements and cancelled checks forwarded by Citibank to plaintiffs were sufficient for that purpose.  Indeed, the cancelled checks “showed personal credit card number written on the ‘re:’ line.”

The title of this post captures the recent observation of Justice Joel M. Cohen of the Supreme Court, New York County, Commercial Division. In , 2019 N.Y. Slip Op. 32487(U) (Sup. Ct., N.Y. County Aug. 22, 2019) (here), Justice Cohen stated the following: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement. This is not one of those cases.” Slip Op. at *1, citing , 559 U.S. 662 (2010). 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. In recent years, arbitration has increased in popularity and is part of most business and commercial contracts and employment agreements. This increase in popularity reflects the federal and state policy that arbitration is a favored means of resolving disputes. , , , 460 U.S. 1, 24 (1983) (stating that the FAA evinces a “liberal federal policy favoring arbitration”); , 138 S. Ct. 1612, 1621 (2018); , 82 A.D. 2d 87, 91-93 (1st Dept.), , 56 N.Y.2d 627 (1981) (“ his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties. . . .”). In 1925, Congress enacted the United States Arbitration Act, now known as the Federal Arbitration Act (“FAA”), for the express purpose of making “valid and enforceable written provisions or agreements for arbitration of disputes arising out of contracts, maritime transactions, or commerce among the States or Territories or with foreign nations.” Its primary purpose is to ensure that “private agreements to arbitrate are enforced according to their terms.” , 489 U.S. 468, 479 (1989). Whether enforcing an agreement to arbitrate or construing an arbitration clause, courts and arbitrators must “give effect to the contractual rights and expectations of the parties.” , 489 U.S. at 479. “ s with any other contract, the parties’ intentions control.” , 473 U.S. 614, 626 (1985). This is because an arbitrator derives his/her powers from the parties’ agreement to forgo the legal process and submit their disputes to private dispute resolution. , 475 U.S. 643, 648-649 (1986). Underscoring the consensual nature of private dispute resolution, parties are “generally free to structure their arbitration agreements as they see fit.” , 475 U.S. at 648-649. And, they may specify with whom they choose to arbitrate their disputes. , , 460 U.S. at 20. It therefore falls to courts and arbitrators to give effect to contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties. , 489 U.S. at 479. The Court’s role in reviewing an arbitration award is limited. An arbitration award will be upheld even when the award does not conform to a court’s sense of justice so long as the arbitrator “offer even a barely colorable justification for the outcome reached.” , 6 N.Y.3d at 479-80 (internal quotations omitted). Thus, an arbitral award will not be subject to vacatur for ordinary errors, even if an arbitrator’s legal and procedural rulings might reasonably be criticized on the merits. As the United States Supreme Court observed: “The potential for . . . mistakes is the price for agreeing to arbitration.” , 569 U.S. 564, 572-573 (2013). , 169 N.Y. 494, 497 (1902) (noting that “however disappointing may be,” parties that have bargained for arbitration “must abide by it”). Under Section 10(a) of the FAA, a court will vacate an arbitral award for the following reasons: (1) the award was procured by corruption, fraud, or undue means; (2) there was evident partiality or corruption in the arbitrators . . . ; (3) the arbitrators were guilty of misconduct in refusing to postpone the hearing, or in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; or (4) the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). Apart from Section 10(a) of the FAA, courts have vacated arbitral awards when an arbitrator manifestly disregards the law. , 333 F.3d 383, 388 (2d Cir. 2003); , 306 F.3d 1214, 1216 (2d Cir. 2002) (citing , 121 F.3d 818, 821 (2d Cir 1997)). Importantly, the doctrine does not apply to the facts. , 6 N.Y.3d at 483. Application of the doctrine is limited. , 867 F.2d 130, 133 (2d Cir. 1989). It is a doctrine of last resort. , 333 F.3d at 389. It requires more than a simple error in law or a failure by the arbitrators to understand or apply it; and, it is more than an erroneous interpretation of the law. . Thus, to modify or vacate an award on the ground of manifest disregard of the law, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit, and clearly applicable to the case. , 378 F3d 182, 189 (2d Cir. 2004) (quoting , 344 F.3d 255, 263 (2d Cir 2003)). also , 6 N.Y.3d at 480-481 (footnotes omitted). The petitioner bears a heavy burden when invoking the doctrine. As one district court observed, the manifest disregard standard is so difficult to satisfy that it “will be of little solace to those parties who, having willingly chosen to submit to inarticulated arbitration, are mystified by the result; for a party seeking vacatur on the basis of manifest disregard of the law ‘must clear a high hurdle.’” , 758 F. Supp. 2d 222, 225 (S.D.N.Y. 2010). In 2008, the United States Supreme Court addressed the doctrine. In , 552 U.S. 576, 584–85 (2008), the Court held that the grounds for judicial review of an arbitral award under Sections 10 and 11 of the FAA are exclusive but declined to state how its ruling affected the continued viability of the manifest disregard doctrine. In recognizing the potential implications of its ruling for the doctrine, the Court expressed doubt as to whether “the term ‘manifest disregard’ was meant to name a new ground for review, it merely referred to the § 10 grounds collectively, rather than adding to them.” . at 585. Alternatively, the Court recognized that “as some courts have thought, ‘manifest disregard’ may have been shorthand for § 10(a)(3) or § 10(a)(4), the paragraphs authorizing vacatur when the arbitrators were ‘guilty of misconduct’ or ‘exceeded their powers.’” . Following , the Circuit Courts of Appeal have split over whether the doctrine remains viable. On one side of the split are the Seventh, Eighth, and Eleventh Circuits, which have determined that the doctrine is no longer a valid basis for vacatur ( , , 660 F.3d 281, 284–85 (7th Cir. 2011); , 614 F.3d 485, 489 (8th Cir. 2010); , 604 F.3d 1313, 1323–24 (11th Cir. 2010)), while on the other side are the Second, Fourth, Sixth, and Ninth Circuits, which have held that arbitrators who manifestly disregard the law have “exceeded their powers” under Section 10(a)(4) of the FAA. , , , 551 F. App’x 814, 819 n.1 (6th Cir. 2014); , 671 F.3d 472, 480 (4th Cir. 2012); , 553 F.3d 1277, 1290 (9th Cir. 2009); , 548 F.3d 85, 95 (2d Cir. 2008), , 559 U.S. 662 (2010). In the , vacatur was sought on two grounds: evident partiality in the arbitrators and arbitrator misconduct in refusing to postpone the hearing. Sections 10(a)(2) and (3). An arbitration award may be vacated “where there was evident partiality or corruption in the arbitrators, or either of them.” 9 U.S.C. § 10(a)(2). “To vacate an award because of evident partiality under the FAA (9 U.S.C. § 10(a)(2)), the movant bears the burden of showing that a reasonable person, considering all the circumstances, would have to conclude that an arbitrator was partial to one party to the arbitration .... Although this requires ‘something more than the mere appearance of bias,’ ‘ roof of actual bias is not required.’ Rather, a finding of partiality can be inferred ‘from objective facts inconsistent with impartiality.’” , 153 A.D.3d 140, 150-51 (1st Dept. 2017). Speculation, however, will not suffice to show evident partiality. , 57 Misc. 3d 391, 401 (Sup. Ct., Albany County 2017) (citation omitted). An arbitral award may be vacated the ground that the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Courts have interpreted this section to mean that the arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” , 120 F.3d 16, 20 (2d Cir. 1997). An arbitral award may be vacated where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made. 9 U.S.C. § 10(a)(1)-(4). The inquiry is whether the arbitrators had the authority under the parties’ agreement to consider an issue, not whether they correctly decided the issue. , 2005 WL 857352, at **4-5 (S.D.N.Y. Apr. 12, 2005). Section 10(a)(4) imposes a heavy burden on the movant. Thus, “ t is not enough ... to show that the committed an error – or even a serious error.… he sole question … is whether the arbitrator (even arguably) interpreted the parties’ contract, not whether he got its meaning right or wrong.” , 569 U.S. at 569-571. TCR Sports Broadcasting Holding, LLP v. WN Partner LLC The case involved a dispute between the Washington Nationals Baseball Club (the “Nationals”) and the Baltimore Orioles Baseball Club (the “Orioles”) and related entities regarding the division of television revenues and profits through their jointly owned television network MASN. As required by their contract, the teams submitted the dispute for resolution by Major League Baseball’s Revenue Sharing Definitions Committee (“RSDC”) in January 2012. The RSDC issued its decision two years later. It was promptly challenged in court by the Orioles. After three years of litigation, the arbitration award was vacated on the ground that the law firm representing the Nationals concurrently represented Major League Baseball (“MLB”) and the three arbitrators’ teams in other matters, resulting in “evident partiality.” A second arbitration was conducted with a different RSDC panel. That panel rendered an award that was nearly identical in dollar terms to the first one five years earlier. The Nationals moved to confirm the award. In response, the Orioles moved to vacate the award on the ground of MLB and RSDC bias and remand for a third arbitration before a non-MLB arbitration panel. The Court granted the Nationals’ motion, confirmed the RSDC’s award, and terminated the proceeding. In 2005, the Montreal Expos (then owned by MLB) were relocated to Washington, D.C. and renamed the Nationals. The move aggrieved the Orioles, whose fan base and exclusive television viewing rights extended to Washington D.C. and its surrounding area. To address the Orioles’ concerns, MLB, the Orioles, and the Nationals entered into an agreement dated March 28, 2005 (“2005 Agreement”). Pursuant to the 2005 Agreement, the parties agreed that a jointly-owned regional sports network (MidAtlantic Sports Network or “MASN”) would have exclusive broadcast rights to all available Orioles and Nationals games to viewers in Maryland, Virginia, Delaware and the District of Columbia, and certain counties in West Virginia, Central Pennsylvania and Eastern North Carolina. The agreement gave the Orioles supermajority ownership and management control of MASN. The Nationals received a minority equity stake in MASN, starting at 10% and growing by 1 % per year after 2010 to a maximum of 33%. The 2005 Agreement provided a fixed schedule of annual fees that MASN would pay the Nationals from 2005 through 2011 for the right to broadcast Nationals games. Beginning with the 2012 season, MASN had to pay rights fees to the Nationals at “fair market value,” to be determined for each five-year period beginning with 2012-2016. The 2005 Agreement provided for a three-step mechanism to resolve disputes between the Nationals and MASN over the fair market value of the rights fees: first negotiation, then mediation, and finally arbitration before the RSDC, which is a standing committee composed of MLB club owners and executives that regularly determines the market value of broadcast rights fees for purposes of MLB’s revenue-sharing plan. In determining the fair market value of the Nationals’ rights fees, the RSDC is to apply “the RSDC’s established methodology for evaluating all other related party telecast agreements in the industry.” The parties were unable to agree upon a fair market value for the Nationals’ telecast rights for the years 2012-2016. They jointly waived the mediation portion of the dispute resolution process and proceeded directly to arbitration before the RSDC in January 2012. At the time, the RSDC was made up of executives of the Tampa Bay Rays, Pittsburgh Pirates, and New York Mets. The Nationals were represented in the proceedings by Proskauer Rose LLP (“Proskauer”). Concurrently, Proskauer represented MLB and the RSDC arbitrators’ teams (and other teams) in unrelated matters. The Orioles complained about the perceived partiality, “to no avail.” Slip Op. at *5. In the arbitration, the Orioles asserted that the average annual fair market value of the Nationals’ broadcast rights for 2012-2016 was “roughly $34 million.” The Nationals asserted that the annual average was “roughly $109 million.” The RSDC decided that neither approach was appropriate and opted instead to apply its established methodology. The RSDC reached a decision in mid-2012 but withheld issuing the final award while the parties engaged in settlement discussions, which proved unsuccessful. To facilitate settlement discussions, MLB and the Nationals entered into an agreement whereby MLB would advance the Nationals approximately $25 million as “make whole” payments with respect to 2012 and 2013 rights fees, to be repaid from the anticipated RSDC award or a potential sale of MASN to Comcast. In the end, the RSDC determined that each side had overstated its position. Its final award, issued on June 30, 2014, valued the Nationals’ rights at an average of approximately $59.6 million per year over the 2012-2016 period (the “First Award”). On July 2, 2014, MASN and the Orioles moved for an order pursuant to CPLR § 7511 and Section 10 of the FAA to vacate the First Award. The Court rejected most of the grounds raised by the Orioles. The Court found that: (i) the RSDC’s explanation for applying its methodology in valuing the Nationals’ broadcast rights more than sufficed to uphold the result on its merits; (ii) MLB did not improperly control or influence the arbitration process or usurp the RSDC’s decision making role; and (iii) MLB’s $25 million loan to the Nationals did not give it an improper financial stake in the outcome of the arbitration or otherwise indicate it was biased in favor of the Nationals. However, the Court found that the First Award should be vacated because Proskauer’s concurrent representation of the Nationals, MLB, and the arbitrators’ teams created “evident partiality.” On appeal, the First Department unanimously affirmed the Court’s decision that the First Award should be vacated. The Court did not address whether the Orioles’ other asserted grounds for relief warranted vacating the award. The Court splintered on other issues in which the justices issued their own decisions. The Nationals were represented in the second arbitration by different counsel and the RSDC panel was made up of executives of three different teams (the Milwaukee Brewers, Seattle Mariners, and Toronto Blue Jays). On February 9, 2018, prior to the commencement of the arbitration, MLB and the Nationals reached an agreement under which the Nationals agreed to repay in full (with interest) the $25 million advance that MLB had provided to the Nationals in connection with the first arbitration (the “Loan Prepayment Agreement”). The agreement provided that the lump sum payment would be made no less than ten business days before the RSDC commenced a hearing and would be held in escrow until commencement of the hearing. The Loan Prepayment Agreement further provided that if the arbitration hearing did not commence within 14 days of its scheduled commencement, the lump sum payment would be returned to the Nationals. The agreement did not by its terms amend the original loan agreement between MLB and the Nationals or otherwise provide that the return of the lump sum payment, if it occurred, would relieve the Nationals of its obligation to repay the loan per its original terms. The RSDC issued its written decision (the “Second Award”) on April 15, 2019. The RSDC determined that the “fair market value” of the telecast rights was approximately $59.4 million. The Orioles claimed that the similarity between Second Award (average of $59.4 million) and the First Award ($59.6 million) was evidence that the second arbitration was infected by the same “evident partiality” as the first. Slip Op. at *11. On April 15, 2019, the same day the Second Award was issued, the Nationals moved to confirm the arbitration award. The Orioles opposed the motion and asked the Court to vacate the Second Award and remand the parties for a third arbitration in a non-MLB forum. The Orioles advanced five arguments in support of vacatur: (i) the Loan Prepayment Agreement, which they maintained was secret, improperly gave MLB a financial stake in the arbitration, created “evident partiality” and rendered the arbitration fundamentally unfair; (ii) the RSDC acted with evident partiality by failing to disclose MLB’s role in the arbitration or RSDC’s communications with MLB; (iii) MLB and the RSDC denied them the right to present their case by refusing to disclose post-2005 Agreement communications but then relying on such communications in the award, and by refusing to disclose all of their evaluations of related-party telecast agreements for the 2012-2016 period; and (iv) the RSDC exceeded its powers under the 2005 Agreement by failing to properly follow Maryland law with respect to the interpretation of a contract. The Court rejected the notion that the agreement was secret or somehow concealed from the Orioles: “The Orioles were told about the Loan Prepayment Agreement one month after it was signed, and eight months before the arbitration hearing took place.” Slip Op. at *16. Such notice, observed the Court, was far different than the situation with Proskauer, where “the full extent of Proskauer’s conflicting relationships in the first arbitration did not come to light until discovery took place on the motion to vacate the First Award.” . More importantly, noted the Court, “the Loan Prepayment Agreement … alleviated the substantive concerns expressed by the Orioles in connection with the First Award – , that the loan purportedly gave MLB a financial stake in the outcome of the arbitration.” . Indeed, explained the Court, “ nder the agreement, MLB would be fully repaid before the second arbitration, removing any lingering concerns that MLB might have a financial interest in the outcome.” . Finally, the Court found that the Loan Prepayment Agreement did not create a conflict of interest because of the “threatened financial forfeiture” resulting from the scheduling of the arbitration. . at *18. “Even if the agreement led to a precipitous scheduling of the arbitration, which it clearly did not (indeed it was delayed for months at the Orioles’ request and over the Nationals’ objection, without triggering the prepayment provision),” said the Court, “there is nothing in the Loan Prepayment Agreement to suggest that MLB could “lose $25 million” if the RSDC decided to recuse itself from the arbitration.” . “At most,” explained the Court, “MLB would lose the benefit of receiving a lump sum payment rather than being repaid under the original terms of the loan.” . Moreover, noted the Court, “the impact of any such loss on the RSDC members, who represent only three of thirty MLB teams, is highly diluted.” . The Court found persuasive the Nationals’ argument that there was a legitimate business reason for providing that the lump sum payment would have to be returned if the RSDC hearing was delayed substantially: “Without some right to recall the cash in the event of a substantial delay in commencing the scheduled arbitration, the Nationals would be out of pocket the entire amount of the repayment for an indefinite period of time.” . “Such an arrangement,” reasoned the Court, “would have undermined the very purpose of the loan, which was to facilitate negotiations by advancing funds to tide the Nationals over while the dispute was resolved.” . The Orioles claimed that there was evident partiality because the RSDC “fail to disclose either MLB’s role in the second arbitration or MLB’s communications with the RSDC about the arbitration’s subject matter, which it claimed would show that MLB “has clearly and publicly prejudged the merits of this dispute.” The Court rejected this argument: “The 2005 Agreement expressly mandates that disputes regarding telecast rights would be resolved by the RSDC, which all parties understood is composed of MLB-chosen executives from other MLB teams …. MLB’s role should not have been a surprise in the first arbitration and certainly was not in the second one.” . at *19. The Court rejected the Orioles’ argument that public statements made by MLB during the arbitration showed evident partiality, corruption, or fundamental unfairness that would require vacating the RSDC’s award. The Court held that “although it would certainly be prudent for MLB to be more circumspect in commenting on pending disputes that are the subject of MLB sponsored arbitration, the stray public statements referenced by the Orioles are not sufficient to meet the Orioles’ heavy burden of showing evident partiality ….” . at *21. The Court explained that the “RSDC made the final decisions, with the assistance of experienced counsel and based on an exhaustive analysis of an extensive record. The Court does not believe that public statements such as those referenced by the Orioles are sufficient to throw into doubt the fairness of a process that was handled and resolved by the RSDC with obvious thoroughness and care.” . The Court found that the Orioles were not denied the opportunity to present its case. The Court explained that the real objection pertained to the RSDC’s alleged failure to permit more discovery into certain issues during the course of the arbitration. . at *22. That objection was without foundation in the 2005 Agreement: he 2005 Agreement did not provide a right to any discovery in a dispute regarding rights fees. If the parties wanted to provide for civil litigation-type discovery in connection with such disputes, they could have done so in the agreement. They did not. The record shows that the RSDC considered the Orioles’ various discovery requests and rejected them in a formal, reasoned order on the ground that they did not relate to the merits of the dispute, but instead they were intended to explore the impartiality of the RSDC. . at *23. The Court concluded that “ he record not reveal any legitimate concern that the panel intentionally hobbled or interfered with the Orioles’ ability to vigorously present or state its case, which it most certainly did.” . Finally, the Court rejected the Orioles’ argument that “the RSDC exceeded its powers by failing to correctly apply Maryland law in assessing the parties’ respective positions under the contract.” . Finding that the argument was “meritless”, the Court explained that “the RSDC obviously had the authority to consider the interpretation of relevant language in the agreement and the application of the facts to that language.” . To the extent the argument was a disguised challenge to the award on manifest disregard grounds, the Court held that “ he Orioles’ arguments with respect to the RSDC’s misapplication of Maryland law do not come close to the required showing that the RSDC exceeded its powers or showed manifest disregard for the law.” . at *24. Takeaway As Justice Cohen observed: “In many cases, arbitration is a quick and efficient way to resolve disputes with little or no court involvement.” Slip Op. at *1 (citation omitted). Sometimes, the stakes are so high that it is difficult to achieve the efficiencies and benefits of arbitration. is a good example of this phenomenon.  Given the past intensity with which the parties have arbitrated and litigated their dispute, this Blog would not be surprised if the Court’s decision is appealed. We will continue to watch the docket for any updates.

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s). Dissolution Under the BCL Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv. dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming , 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104: (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. BCL § l 104(a). Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution. BCL § 1111(a); Matter of Kemp & Beatley , 64 N.Y.2d 63, 73 (1984). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. 2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). “In determining what is beneficial to the stockholders, the court must take into consideration the type of corporation dealing with in case.” Matter of Pivot v. Punch & Die Corp. , 15 Misc. 2d 713, 715 (Sup. Ct., Erie County 1959). Courts recognize that “in the case of a close corporation, the relationship between the shareholders is akin to that of partners.” Greer v. Greer , 124 A.D.2d 707, 708 (2d Dept. 1986). When the relationship deteriorates and “the record demonstrates sufficient differences and animosity between the shareholders,” dissolution is often granted. Patti v. Fusco , 809 N.Y.S.2d 482 (Sup. Ct., Nassau County 2005). Notably, dissolution should not be denied because the corporation has been conducted at a profit ( see BCL § 1111(b)(3)) or because the dissension has not impacted the profitability of the corporation. The cases make clear that profitability is simply not the issue. E.g. , Application of Bankhalter , 128 N.Y.S.2d 81, 83 (Sup. Ct., N.Y. County 1953). Moreover, “ n determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists.” Matter of Kaufmann , 225 A.D.2d 775 (2d Dept. 1996). “ he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman v. Lovett , 200 A.D.2d 670, 670-71 (2d Dept. 1994). In the Matter of Cellino v. Cellino & Barnes, P.C. , 2019 N.Y. Slip Op. 06365 (4th Dept. Aug. 22, 2019) ( here ), the Court addressed the question of the corporation’s profitability and its impact, if any, on the decision whether to grant dissolution. In doing so, the Court held that “dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit ( see § 1111 <3> ) or because the dissension has not yet had an appreciable impact on the profitability of the corporation ( see Molod v Berkowitz , 233 AD2d 149, 150 <1st dept 1996> , lv dismissed 89 NY2d 1029 <1997> ).” Slip Op. at *2. Matter of Cellino v. Cellino & Barnes, P.C. Background Cellino & Barnes, P.C. (the “PC”) was for formed in 1998 by Petitioner, Ross Cellino (“Cellino”), and Respondent, Stephen Barnes (“Barnes”). The PC began as a regional law firm with offices in Buffalo and Rochester, New York. In 2008, the PC expanded into the downstate market. In 2013, Barnes approached Cellino about opening an office in California. Cellino declined but, according to Cellino, by that time Barnes and the chief operating officer (“COO”) of the PC had already made preparations to open an office in Los Angeles. Barnes thereafter formed Cellino & Barnes, L.C. (the “LC”), a California corporation that was separate from the PC and in which Barnes had a 99.9% interest. Cellino became a minority owner with a .1% ownership in the LC. In 2017, Cellino filed an initial petition for dissolution of the PC and also withdrew from and divested himself of his interest in the LC. Petitioner subsequently filed an amended petition for dissolution, pursuant to BCL § 1104 (a) (1) and (3), alleging, among other things, that there had been a breakdown in communication between himself and Barnes with respect to the management and direction of the PC. In particular, Cellino alleged that Barnes had favored the LC to the detriment of the PC by allowing the LC to utilize the PC’s computer network, telephone number, and employees without adequate compensation. Cellino further alleged, inter alia , that Barnes had directed to the LC mass tort cases solicited by the PC in the Northeast; paid a bonus to the PC’s COO from the PC’s account for work that the COO did on behalf of the LC; refused Petitioner’s request to terminate the COO as a PC employee and hire him as an LC employee; and rejected Petitioner’s request to restrict the COO’s access to the PC’s bank account. Respondents moved, inter alia , for summary judgment dismissing the amended petition, and Petitioner cross-moved for the appointment of a temporary receiver pursuant to BCL § 1202(a)(1). The supreme court granted in part Petitioner’s cross-motion for the appointment of a temporary receiver and denied Respondents’ motion insofar as it sought summary judgment dismissing the amended petition. The Appellate Division, Fourth Department, affirmed both orders. The Court’s Decision Respondents argued that the supreme court erred in denying their motion insofar as it sought dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC had continued to function effectively and prosperously. The Court rejected the argument, holding that corporate profitability is not the proper focus; rather, it is “the benefit to the shareholders of a dissolution” that “is of paramount importance” in making the determination. BCL § 1111(b)(2). Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit or because the dissension has not yet had an appreciable impact on the profitability of the corporation. Slip Op. at *2 (citations omitted). The Court explained that “the record contain ample evidence of dissension and deadlock between petitioner and Barnes,” sufficient to raise “issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders.” Id . To underscore the point, the Court noted that the proper focus should be on the relationship of the shareholders. Id . In a close corporation like the PC, “the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation ( Greer v Greer , 124 AD2d 707, 708 <2d dept 1986> , appeal dismissed 69 NY2d 947 <1987> ). When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders ( see Matter of Gordon & Weiss , 32 AD2d 279, 281 <1st dept 1969> ).… Id . Accordingly, the Court affirmed the denial of summary judgment, holding “that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.” Id . (citations omitted). Addressing the appointment of a temporary receiver, the Court affirmed the supreme court’s decision, holding that the court “did not abuse its discretion in appointing a temporary receiver … for the limited purposes of ‘oversee the separation of the LC and the PC; . . . assess the appropriate amounts due and owing from the LC to the PC, if any; and . . . oversee the separation of clients between the two entities.’” Id ., citing Greer , 124 A.D.2d at 708; Nelson v. Nelson , 99 A.D.2d 917, 918 (3d Dept. 1984). The Court found that the supreme court properly exercised discretion “to ‘make all such orders as it may deem proper in connection with preserving the property and carrying on the business of the corporation, including the appointment . . . of a receiver under article 12 (Receivership).’” Id. , quoting BCL § 1113. See also BCL § 1202(a)(1). In particular, the Court noted that Petitioner adequately supported his application by demonstrating “the entanglement of the PC and the LC” and the “danger of irreparable loss” for which a receivership was “necessary for the protection of the interests of the parties.” Id . Specifically, the affidavits of petitioner, a licensed certified public accountant (CPA) and certified valuation analyst retained by petitioner, a former CPA for the PC, and an office manager for the PC supported petitioner’s allegations of economic improprieties in the form of inadequate reimbursement by the LC to the PC for cross-charges. Those affidavits also raised issues of fact whether the LC was taking mass tort cases that otherwise would have been handled by the PC and whether it was using web addresses owned by the PC to redirect clients to the LC’s new website. Inasmuch as it likely will be difficult to quantify what, if any, economic harm the PC has suffered as a result of clients being shepherded from the PC to the LC and inasmuch as respondents have refused to allow petitioner’s CPA to speak with the COO of the PC, we conclude that the court did not abuse its discretion in appointing a temporary receiver to determine what if any amount the LC owes the PC, rather than ordering an accounting. Id . (citation omitted). Takeaway Cellino addresses the question whether past and/or current profitability means that the corporation can continue to function effectively and prosperously. Though not articulated explicitly, the Fourth Department answered the question that it does not. As noted, the key question is whether the dissention or deadlock impedes the daily functioning of the corporation. This makes sense given the determination is based on the continued functioning of the corporation. Thus, as in Cellino , the courts examine whether the deadlock or dissention will, on a going forward basis, “preclude the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman , 200 A.D.2d at 670-71. If it does, then dissolution is appropriate, regardless of past and/or current profitability.

As readers of this Blog know, pleading and proving fraud is not easy. The law reporters (not to mention the pages of this Blog) are brimming with cases in which the courts have dismissed fraud actions due to pleading and proof deficiencies. Norddeutsche Landesbank Girozentrale v. Tilton , 2019 N.Y. Slip Op. 32470(U) (Sup. Ct., N.Y. County Aug. 20, 2019) ( here ), is a recent example of this phenomenon. In Norddeutsche , Plaintiffs contended that they were defrauded into investing in two high-risk private equity funds that Defendants claimed were relatively safe “collateralized loan obligation” funds. Defendants moved for summary judgment on the grounds that: Plaintiffs’ claims were time-barred; Plaintiffs did not rely on Defendants’ representations (which, Defendants claimed were, in any event, truthful); Plaintiffs caused their own losses by selling the notes prematurely; and Plaintiffs’ claims were precluded by a judgment rejecting a nearly identical claim brought by the Securities Exchange Commission (“SEC”). As discussed below, the Court denied the motion, finding that there were disputed issues of fact that were material to Plaintiffs’ claims. A Fraud Refresher Fraud and the Statute of Limitations In New York, an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). The defendant ( i.e. , the party most frequently making the motion) has the initial burden of establishing “that the time in which to commence the action has expired.” Zaborowski v. Local 74, Serv. Empls. Intl. Union, AFL-CIO , 91 A.D.3d 768, 768 (2d Dept. 2012). If the defendant meets that burden, the burden then shifts to the plaintiff to “aver evidentiary facts establishing that the action was timely or to raise a question of fact as to whether the action was timely.” Lessoff v. 26 Ct. St. Assoc., LLC , 58 A.D.3d 610, 611 (2d Dept. 2009). Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “ he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis , 44 A.D.3d 1033, 1034 (2d Dept. 2007); Lefkowitz v. Appelbaum , 258 A.D.2d 563 (2d Dept. 1999) (“The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.”). Accord Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman , 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). 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). Causation There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Transaction Causation “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir. 1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss Causation The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact-intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Norddeutsche Landesbank Girozentrale v. Tilton Background The action arose in 2005 with the investment by Norddeutsche Landesbank Girozentrale, a German financial institution, and Hannover Funding Company, a Delaware LLC and a commercial paper conduit administered by Norddeutsche (together “Plaintiffs”), in one of the two funds managed by Defendant Patriarch Partners (“Patriarch”). The funds at issue, Zohar II and Zohar III (the “Funds”), were created in January 2005 and April 2007, and had maturity dates of January 20, 2017, and April 15, 2019, respectively. Zohar II and Zohar III each issued over $1 billion in notes that were rated at issuance either AAA/Aaa or AA/Aal by S&P and Moody’s, respectively (the “Notes”). Before purchasing the Notes, Plaintiffs received transaction documents, marketing materials, indentures, and collateral management agreements relating to each fund, as well as an offering memorandum for the Zohar III Fund. In January 2005, Plaintiffs purchased $75 million of Notes in Zohar II. In April 2007, Plaintiffs purchased $60 million of Notes in Zohar III. The Zohar II Notes were “wrapped” by insurance from MBIA Insurance Corp. (“MBIA”). MBIA guaranteed full repayment of the Notes upon maturity if the Funds could not afford to do so. The Funds performed poorly. Plaintiffs claimed that Defendants withheld fund performance and related information from them by furnishing fraudulent reports that concealed the actual performance of the underlying loans in the Funds. Plaintiffs sold their Notes for a loss of approximately $45 million in April 2012, before the maturity date of either fund. Plaintiffs claimed that they sold the Notes due to their poor performance, multiple ratings downgrades (of which they were aware), and the increasing capital requirements generated by the investment. Defendants claimed that Plaintiffs sold the Notes for independent business reasons. Plaintiffs also alleged that instead of running the Funds as represented, Defendants Lynn Tilton (“Tilton”) and Patriarch ran the Funds as private equity funds. Plaintiffs maintained that Defendants used the money from the Funds to purchase equity in distressed assets, contrary to Defendants’ representations. Plaintiffs further alleged that Defendants collected management fees, dividends, preferred share buyouts, and income distributions from the companies that were owed to the Funds. Additionally, Plaintiffs alleged they were told that Tilton and the Patriarch entities were supposed to pay for and own the underlying equity in the portfolio companies, while the Funds would make loans to the companies. Plaintiffs alleged that they understood the Funds would be entitled to an equity kicker in some cases (to participate in the upside if Defendants were successful in turning the companies around) but would not be exposed to the downside risk of holding equity positions. On March 31, 2015, the SEC issued an order commencing an administrative proceeding against Defendants. According to Plaintiffs, the SEC investigation uncovered fraudulent behavior by Defendants, including that Defendants used the Funds to obtain control over portfolio companies, and that Defendants concealed their fraudulent behavior from investors such as Plaintiffs. The administrative proceeding was ultimately dismissed in September 2017 (the “SEC Decision”). Defendants moved for summary judgment on four grounds: 1) Plaintiffs’ claims were time-barred; 2) Plaintiffs did not justifiably rely on any alleged misrepresentation by Defendants; 3) Plaintiffs could not prove loss causation; and 4) the SEC Decision collaterally estopped Plaintiffs’ claims. The Court denied the motion in its entirety. The Court’s Decision Statute of Limitations Defendants argued that Plaintiffs were aware of the truth about the structure of the funds from the marketing materials distributed to them in 2004 and 2006. In particular, Defendants maintained that statements in these materials ( e.g. , the “equity upside” and “equity participation” of the Funds) sufficed to inform Plaintiffs that the Funds would hold equity and thus be at risk of suffering a loss. As such, Defendants contended that the claims were time-barred because Plaintiffs knew or should have known of the alleged fraud before 2005 and 2007, when they made their investments in the respective Funds. The Court rejected this argument. The Court found that Defendants failed to “put forward incontrovertible evidence that the marketing materials and disclosures presented to Plaintiffs were sufficient to inform Plaintiffs of the alleged fraud.” Slip Op. at *6.  The Court explained that Defendants’ evidence could be interpreted in myriad ways and, therefore, did not disprove Plaintiff’s position that having some knowledge that the Funds had an equity component to them did not put them on notice of the alleged fraud prior to the SEC proceeding. Id. , citing Norddeutsche Landesbank Girozentrale v. Tilton , 149 A.D.3d 152, 161-162 (1st Dept. 2017). The Court also found that there were issues of fact as to whether Plaintiffs should have discovered the alleged fraud in 2012 when the SEC began its investigation into Defendants and/or through investor calls held in December 2011. Id . at *7. Justifiable Reliance Defendants argued that they made robust disclosures about the strategy of the Funds and that as sophisticated investors, Plaintiffs could have and should have done more to learn how the Funds operated. Thus, Defendants claimed, Plaintiffs could not have justifiably relied on the alleged fraudulent statements to induce them into investing in the Funds. Id . at *8. The Court rejected Defendants’ argument. The Court held that Defendants did not conclusively show that Plaintiffs failed to make use of the means of verification that were available to them or did not put forth evidence showing conclusively that Plaintiffs failed to make any effort to verify the representations. Id . Loss Causation Defendants claimed that Plaintiffs could not prove that their losses were proximately caused by Defendants’ alleged misrepresentations and omissions. According to Defendants, Plaintiffs conceded during discovery that there was an independent reason for their losses – namely, the “heavy capital usage” imposed by the investment. Id . at *9. The Court rejected this contention: A finder of fact could determine that the decision to sell was causally linked to the alleged fraud, which Plaintiff contends led it to assume a certain level of performance, credit rating, and capital requirements, which in tum impacted whether to hold or sell the notes. A finder of fact could also reasonably conclude that had Plaintiffs known about the actual Fund structure, they would never have entered into the transaction in the first place. While Mr. Weber’s testimony might be fodder for cross-examination, it is insufficient to establish a loss causation defense as a matter of law. Id . The Court also rejected Defendants’ contention that Plaintiffs could not demonstrate loss causation because the funds were insured by MBIA and Plaintiffs would have recovered their investment had they held the notes to maturity. Id . The Court explained that “a finder of fact could determine that Plaintiffs made their decisions based on facts traceable to the alleged fraud and in part on concerns about MBIA’s financial condition.” Id . at *10. “Defendants’ reasoning,” said the Court, “would preclude a finding of loss causation with respect to the sale of virtually any insured note.” Id . “That is not the law,” concluded the Court. Id . Takeaway Many elements of a fraud claim are inherently factual. For example, proving justifiable reliance is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt. , 15 N.Y.3d at 155 (2010) (internal quotation marks omitted). The same is true with regard to whether the plaintiff can satisfy the scienter and loss causation elements. For these reasons, proving fraud is not easy. And, as Norddeutsche shows, whether a fraud has been committed is often left for the trier of fact.

It is the end of summer. With Labor Day around the corner, people will be taking vacations or visiting family. Many will be traveling by airplane, train or cruise ship. To do so, they will need a ticket. Many travelers do not realize that their ticket is an important legal document. It not only allows the person to board the means of transportation, but often includes limitations and restrictions, affecting such matters as the forum for dispute resolution, choice of law, and liability. In Jieming Liang v. NCL (Bahamas) Ltd. , 2019 N.Y. Slip Op. 51345(U) (Sup. Ct., Queens County Aug. 20, 2019) ( here ), a passenger on the Norwegian Breakaway cruise ship had her personal injury case dismissed because of the enforceability of a forum selection clause printed on the back her ticket. Liang arose from a cruise taken by plaintiff and her family in January 2018. Plaintiff booked the trip on December 26, 2017. After Plaintiff paid for the trip, NCL sent Plaintiff an e-mail notification (the “e-Docs letter”) with a link to the cruise tickets and travel documents (the “e-Docs”). On December 27, 2017, the day after the booking, the e-Docs were “READY” to be “PRINTED”. To print the documents, however, plaintiff had to acknowledge and accept the terms and conditions of the “Guest Ticket Contract”. Plaintiff did so on December 28, 2017, one week before the start of the cruise. Thereafter, on December 28, 2017, and again on January 4, 2018, a day before the cruise, Plaintiff printed the cruise tickets and travel documents. The Guest Ticket Contract, in addition to being available for inspection during the check-in and ticket-printing process on December 28, 2017, was also available for viewing on-line both before and after the cruise was booked on NCL’s website. In addition to the acknowledgment and acceptance of the Guest Ticket Contract during check-in, according to NCL, plaintiff and her family again accepted the terms and conditions of the Guest Ticket Contract by boarding the ship and taking the cruise. In order to gain entry onto the ship on January 5, 2018, plaintiff had to present to NCL’s boarding agents the single page in the travel documents entitled “GUEST TICKET TO BE PRESENTED FOR PASSAGE”. The “GUEST TICKET TO BE PRESENTED FOR PASSAGE” contained notices near the bottom that “specifically directed to the Terms and Conditions of th contract which you have accepted during the online registration process” that “affect important legal rights” and the passenger is “advised to read them carefully”. The “Guest Ticket Contract” consists of clauses that are printed in black lettering against a clear white background and can be easily read. Before those clauses, an “IMPORTANT NOTICE” appears in clear black ink against a white background, advising guests “to carefully read the terms and conditions of the Guest Ticket Contract” because they “affect your legal rights and are binding.” Guests were specifically directed to read “Paragraphs 10 and 14 of the Terms and Conditions of the Guest Ticket Contract,” the latter of which contained a forum selection clause. Under that clause, any disputes were to be brought “before the United States District Court for the Southern District of Florida in Miami, Florida, U.S.A., or as to those lawsuits for which the United States District Court for the Southern District of Florida lacks subject matter jurisdiction, before a court of competent jurisdiction in Miami-Dade County, Florida, U.S.A., to the exclusion of the Courts of any other country, state, city or county where suit might otherwise be brought.” Guests were further advised that the “ cceptance or use of this Contract shall constitute the agreement of Guest to these Terms and Conditions.” Defendant, NCL (Bahamas) Ltd. (“NCL”) moved for summary judgment to dismiss the action based upon a forum selection clause in the Guest Ticket Contract. The Court granted the motion. Noting that the “validity of the terms of a contract for a cruise turn on federal principles of maritime law” (Slip Op. at **3-4) (citations omitted), the Court held that pursuant to such principles, so long as the forum selection clause at issue “was reasonably communicated” to the plaintiff, it was enforceable. Id . at *4 (citations omitted). The Court explained that with such communication, forum selection clauses “do not violate notions of ‘fundamental fairness,’ either because the passenger’s assent was the result of fraud or overreaching or the forum restriction is inconvenient.” Id . (citations omitted). With the foregoing principles in mind, the Court found that plaintiff failed to meet her “heavy burden” of demonstrating why enforcement of the clause was unreasonable. Id . (citations omitted). The Court rejected plaintiff’s argument that they were not reasonably notified of the forum selection clause because of a language barrier. “Failure to read a ticket will not relieve a passenger of the contractual limitation,” said the Court. Id . The Court also rejected plaintiff’s claim that the forum selection clause was unenforceable because she paid for the cruise before receiving the ticket. The Court explained that “the reasonable communication of the ticket, that is, the ability to become informed, and not the timing of its purchase or receipt, controls the issue of whether the forum selection clause, or any other clause for that matter, was reasonably communicated to the passenger.” Id . at **4-5 (citations omitted). Thus, the Court found, based upon the record before it, that the forum selection clause was reasonably communicated to plaintiff, and she was informed of it prior to embarking on the cruise. Id . at *5. Accordingly, the Court granted NCL’s motion and dismissed the action pursuant to the forum selection clause. Takeaway As shown in Liang , binding contracts can come in many forms. For the traveler, such agreements are often found on the back of a ticket or in pre-travel documentation. Since these agreements are generally enforceable, it is important to read them before traveling. Failure to do so will not render the terms and conditions of the agreement unenforceable. Reading them will, however, inform the traveler of his/her rights. And, as the plaintiff in Liang learned, those terms can include a forum selection clause that could divest the court of jurisdiction over his/her action.