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The location of the place of trial ( or venue) of a legal proceeding in New York State is the location where the action is brought.  The plaintiff, as the party bringing the proceeding, generally gets to choose, in the first instance, venue.  Plaintiffs, however, do not always choose a proper venue (“Improper Venue Selection”).  In such instances, a defendant has an opportunity to change the Improper Venue Selection to a proper one.  See CPLR 510 (1) .  Other times, although venue is proper, a defendant (or even a plaintiff) may seek a change based on considerations such as the convenience of witnesses and/or potential prejudice to a party should the action proceed in the venue chosen by the plaintiff (a “Discretionary Change”).  See CPLR 510 (2) and (3) . There are specific procedures that must be employed to, and certain circumstances under which a party may, change venue.  The purpose of this post is to briefly outline some of those basic procedures. CPLR 503 (a) provides that: Except where otherwise prescribed by law, the place of trial shall be in the county in which one of the parties resided when it was commenced;  the county in which a substantial part of the events or omissions giving rise to the claim occurred;  or, if none of the parties then resided in the state, in any county designated by the plaintiff.  A party resident in more than one county shall be deemed a resident of each such county. Notwithstanding the general provisions of CPLR 503(a), the CPLR specifies proper venues for particular types of actions.   See CPLR 504 , 505 , 506 , 507 , 508 and 509 . For example, the proper venue for an action affecting title to real property is in the County where “any part of the subject of the action is situated.”  CPLR 507.  Similarly, courts will enforce contractual venue provisions.  See CPLR 501 ; Casale v. Sheepshead Nursing & Rehab. Center , 131 A.D.3d 436, 437 (2 nd Dep’t 2015) (“A contractual forum selection clause is prima facie valid and enforceable unless it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court" (citations and quotation marks omitted).) The procedure to follow when a plaintiff makes an Improper Venue Selection is set forth in CPLR 511 .  Pursuant to CPLR 511, a defendant that believes a plaintiff selected an improper venue must serve a written demand (a “Demand”) to change the place of trial to a county deemed proper by the defendant.  CPLR 511(a) and (b).  The Demand must be served “with the answer or before the answer is served.”  CPLR 511(a).     If, within 5 days of defendant’s service of a Demand the Plaintiff does not serve written consent to change venue to the place specified in the Demand, the Defendant has 15 days from service of the Demand to move to change the place of trial to the venue set forth in the Demand. In Coluck Inc. v. SEM Sec. Sys,. Inc. , decided by the Appellate Division, Second Department on August 21, 2019, the Court reversed the grant of a motion to change venue based on an Improper Venue Selection as “untimely since no demand to change venue was served with the answer or before the answer was served,” although the Court did note that under “certain limited circumstances” an untimely motion to change venue can be granted by a court in the “exercise its discretion.”  Coluck at *1 (citations omitted).  The Coluck Court cited to Philogene v. Fuller Auto Leasing , 167 A.D.2d 178 (1 st Dep’t 1990), for the proposition that in “limited circumstances” a court might grant an untimely Improper Venue Selection motion.  In reversing the trial court’s denial of the Philogene defendant’s motion on timeliness grounds, the First Department stated: Thus, since neither defendant is a New York County resident and plaintiff at all relevant times has resided in Staten Island, Richmond is the proper county for venue. A change of venue sought as of right on the ground that the county selected is an improper one must be sought by service of a demand (CPLR 511 ) followed by a motion, if the demand is not acceded to, within 15 days after service thereof (CPLR 511 ). Noncompliance with the statutory time requirements should not act as a bar where, as here, a plaintiff's willful omissions and misleading statements regarding his residence are the cause of such noncompliance and the defendant moves promptly after ascertaining the true state of affairs. Here, defendants' motion for a change of venue — made the day after they ascertained plaintiff's residence — could not have been made more promptly. Philogene , 167 A.D.2d at 178 – 79. The Court in Deas v. Ahmed , 120 A.D.3d 750 (2 nd Dep’t 2014), in deciding a motion under CPLR 510(1), stated: In order to prevail on a motion pursuant to CPLR 510(1) to change venue, a defendant must show that the plaintiff's choice of venue is improper, and also that the defendant's choice of venue is proper. To succeed on his motion here, the defendant was obligated to demonstrate that, on the date that this action was commenced, neither of the parties resided in Kings County. Only if the defendant made such a showing would the plaintiff have been required to establish, in opposition, that the venue that he selected was proper. Deas , 120 A.D.3d at 750-51 (citations omitted).  In denying the Deas defendant’s motion, the Court  found that the requisite burden was not met because defendant relied on plaintiff’s residence as set forth in a police report of the subject accident, which “failed to demonstrate that the plaintiff did not maintain a residence in Kings County at the time the action was commenced, more than two years after the accident.”  Deas , 120 A.D.3d at 751 (citations omitted). The most typical scenario for a Discretionary Change is based on the convenience of witnesses. A party moving for a discretionary change of venue pursuant to CPLR 510(3) has the burden of demonstrating that the convenience of material witnesses and the ends of justice will be promoted by the change. In so doing, the moving party must set forth (1) the names, addresses, and occupations of the prospective witnesses, (2) the facts to which the witnesses will testify at trial, so that the court may judge whether the proposed evidence is necessary and material, (3) a statement that the witnesses are willing to testify, and (4) a statement that the witnesses would be greatly inconvenienced if the venue of the action was not changed. Coluck at *2 (citations and internal quotation marks omitted). In Jansen v. Bernhang , 149 A.D.2d 468 (2 nd Dep’t 1989), the Court reversed the denial of a Discretionary Change motion.  After setting forth a list of criteria similar to that of the Coluck Court, the Jansen Court stated: Here, the movants' papers suffice to demonstrate that at least three prospective witnesses live in New York County whose testimony is material and necessary with respect to the issue of whether or not the plaintiffs performed their contractual duty to make periodic inspections during the alterations to the defendants' apartment in New York County to see that the work generally conformed to the construction documents. Moreover, it is apparent from the record that the majority of triable issues pertain to the parties' respective claims which arose from the contract made in New York County and providing for its performance in New York County. Absent cogent reasons to direct otherwise, venue should be in the county where the cause of action arose. Jansen , 149 A.D.2d at 469 (citations omitted). In Walsh v. Mystic Tank Lines Corp. , 51 A.D.3d 908 (2 nd Dep’t 2008), the Court affirmed the denial of a motion for a Discretionary Change due to the inadequacy of defendant’s moving papers, and, in so doing, stated: Here, the defendants identified seven potential nonparty witnesses, contending that their convenience would be served by a change of venue from Queens County to Suffolk County. Each witness submitted an affidavit which contained his or her name, address, occupation, and county of employment (where applicable). Then, in identical language, each affiant stated that he or she (1) had "personal knowledge of the facts and circumstances" concerning the motor vehicle accident, (2) was willing to testify, and (3) would be "great inconvenience " if venue remained in Queens County. The defendants' motion papers were not sufficient to justify a discretionary change in venue. The affidavits by the potential nonparty witnesses failed to disclose the nature of their anticipated testimony. In other words, the affidavits did not contain the basic detail necessary to ascertain whether the affiants would be material witnesses. Walsh , 51 A.D.3d at 908-09. TAKEAWAY There are many reasons why a party may seek to challenge a plaintiff’s venue selection.  If the proper procedures are not followed, or if a party’s motion does not set forth all of the necessary information, courts have no qualms about denying such motions.

There is a broad presumption that the public is entitled to access to judicial proceedings and court records. Mosallem v. Berenson , 76 A.D.3d 345, 348 (1st Dept. 2010); Mancheski v. Gabelli Grp. Capital Partners , 39 A.D.3d 499, 501 (2d Dept. 2007); Gryphon Dom. VI, LLC v. APP Intl. Fin. Co., B.V. , 28 A.D.3d 322, 324 (1st Dept. 2006); Danco Labs. v. Chemical Works of Gedeon Richter , 274 A.D.2d 1, 6 (1st Dept. 2000). New York has “long recognized that civil actions and proceedings should be open to the public in order to ensure that they are conducted efficiently, honestly, and fairly.” Matter of Brownstone , 191 A.D.2d 167, 168 (1st Dept. 1993). For this reason, Section 4 of the Judiciary Law requires that, with certain exceptions, “ he sittings of every court within this state shall be public, and every citizen may freely attend the same.” Likewise, Sections 255 and 255-b of the Judiciary Law mandate that court records and docket books be available to the public. Mosallem , 76 A.D.3d at 348. “The right of access to court proceedings and records also is firmly grounded in the common law.” Mosallem , 76 A.D.3d at 348, quoting Gryphon Dom. , 28 A.D.3d at 324 (internal quotation marks and citations omitted). This right of access also derives from the constitutional “presumption, arising from the First and Sixth Amendments, as applied to the states by the Fourteenth Amendment, that both the public and the press are generally entitled to have access to court proceedings.” Id . at 348-49 (citations omitted). Despite the broad presumption of public access, the courts have made it clear that the right to such access is not absolute.   Mosallem , 76 A.D.3d at 349, citing Danco Labs. , 274 A.D.2d at 6. Indeed, public inspection of court records has been limited by numerous statutes, e.g. , Family Court records (Family Ct. Act § 166), records in matrimonial actions (Domestic Relations Law § 235), sealed records in criminal cases (CPL 160.50), adoption proceeding records (Domestic Relations Law § 114) and proceedings seeking disclosure of HIV-related information (Public Health Law § 2785(3)). In addition to the statutory exceptions to public access, a court is empowered to seal court records pursuant to Section 216.1(a) of the Uniform Rules for Trial Courts (22 N.Y.C.R.R. 216.1 (a)). That rule states that xcept where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Although the rule does not define the term “good cause”, “a sealing order should clearly be predicated upon a sound basis or legitimate need to take judicial action.” Gryphon Dom. , 28 A.D.3d at 325. “A finding of ‘good cause’ presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant.” Mancheski , 39 A.D.3d at 502. However, since there is no “absolute” definition, good cause, in essence, “boils down to” the Court’s discretion ( id ., quoting Coopersmith v. Gold , 156 Misc. 2d 594, 606 (Sup. Ct., Rockland County 1992)), which is to be exercised on “a case-by-case” basis. Id ., citing Matter of Twentieth Century Fox Film Corp. , 190 A.D.2d 483, 485-486 (1st Dept. 1993). Notably, merely because the parties mark documents “confidential” or “private” does not make them so. Eusini v. Pioneer Elecs. (USA), Inc. , 29 A.D.3d 623, 626 (2d Dept. 2006). In fact, courts routinely hold that an agreement by the parties to seal is not a substitute for establishing “good cause.” MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 2012 N.Y. Slip Op. 33147(U), at * 9 (Sup. Ct., N.Y. County 2012. For this reason, the moving party must demonstrate good cause for a confidentiality request. Grande Prairie Energy LLC v. Alstom Power, Inc. , 2004 N.Y. Slip Op. 51156 , at *2 (Sup. Ct., N.Y. County 2004). And, because “ onfidentiality is … the exception, not the rule” ( Matter of Hofmann , 284 A.D.2d at 93-94), courts are reluctant to seal court records ( Mosallem , 76 A.D.3d at 349), even where both sides to the litigation have asked for such relief. Gryphon Dom. , 28 A.D.3d at 324. So, what constitutes good cause? Protection of a company’s business advantage, trade secrets and other forms of confidential information are often cited as reasons that satisfy the “good cause” standard. “Sealing, however, is not appropriate merely to protect the advantage that one side might have over the other in negotiating an agreement in a commercial dispute between sophisticated business entities.” Gryphon Dom. , 28 A.D.3d at 326. Recently, Justice Andrea Masley of the Supreme Court, New York County, Commercial Division, addressed the foregoing principles in Prager Metis CPAS, LLC v. Castellanos , 2019 N.Y. Slip Op. 32417(U) (Sup. Ct., N.Y. County Aug. 12, 2019) ( here ), wherein she denied a motion to seal judicial records because the public’s right to know outweighed any claim of confidentiality. Prager Metis CPAS, LLC v. Castellanos Background In 2015, plaintiff, Prager Metis CPAS, LLC (“Prager” or the “Firm”), sued Alicea Castellanos, a former employee of the firm, and International Wealth Tax Advisors, LLC (“IWTA”), the accounting firm that she formed upon her departure from Prager. The Firm claimed that Castellanos breached her employment agreement, her fiduciary duty, and misappropriated confidential information, among other things, when she left Prager. On May 9, 2018, the parties discontinued the action. Although the complaint and answer had been open to the public’s view for the last four years, Castellanos and IWTA moved to redact the pleadings because they allegedly contained “scandalous” information. According to defendants, these public filings “unfairly tarnish the reputation.” Slip Op. at *2. Prager took no position on the motion “despite asserting that all factual allegations in pleadings were made in good faith under New York law.” Id . At oral argument, the Court provided defendants with an opportunity to submit redactions for the Court’s consideration. Id . The Court’s Decision The Court denied the motion, declining to permit the redactions to the pleadings proposed by the defendants. The Court found that defendants failed to demonstrate “compelling circumstances to justify restricting the public’s access to pleadings.” Slip Op. at *3. Justice Masley explained that the strength of the argument to seal the subject pleadings was undermined by the delay in seeking such relief: “Defendants waited approximately four years to redact this public information, calling into question whether there is truly ‘a sound basis or legitimate need to take judicial action.’” Id ., quoting Danco Labs ., 274 A.D.2d at 9. The Court also rejected the alleged harm to reputation as a basis upon which to grant the motion, noting that “‘neither the potential for embarrassment or damage to reputation ... constitutes good cause to seal court records.’”  Id ., quoting Mosallem , 76 A.D.3d at 351. “Indeed,” said the Court, “the portions sought to be redacted are nothing more than dramatically phrased allegations.” Id . at *4. Finally, the Court rejected the notion that the subject pleadings were “tantamount to the kind of threat to a business’s competitive advantage that warrants judicial action.” Id . “Indeed,” concluded the Court, “the pleadings do not reveal trade secrets, financial arrangements, or other information of that sort.” Id . Takeaway Prager Metis underscores the heavy burden the movant seeking to seal information from the public bears. To be sure, the four-year delay in seeking the relief did not help. But Prager Metis shows that damage to reputation, embarrassment, or the general desire for privacy are insufficient reasons to conceal judicial pleadings and papers from public view. More is needed, such as a threat to a business’s competitive advantage or the revelation of trade secrets, financial information and/or similar forms of confidential information. None of the foregoing bases were present in Prager Metis .

Statutes of limitations are statutory mechanisms that limit the duration of a defendant’s liability for all types of alleged wrongdoing. Depending upon the circumstances, the statute of limitations can be an important topic of discussion between lawyer and client. As many practitioners know, there are exceptions to the general rule that the statute of limitations runs from the time of the tort or breach though no damage occurs until a later time. One exception that practitioners often try to invoke is the continuing wrong doctrine. Under the doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id . (internal quotation marks and citation omitted). The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id . It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id . (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). In contract actions, the doctrine is applied to extend the statute of limitations when the contract imposes a continuing duty on the breaching party. Bulova Watch Co. v. Celotex Corp. , 46 N.Y.2d 606, 611 (1979); King v. 870 Riverside Dr. Hous. Dev. Fund Corp. , 74 A.D.3d 494, 496 (1st Dept. 2010). Thus, where a plaintiff asserts a single breach – with damages increasing as the breach continues – the continuing wrong theory does not apply. Henry , 147 A.D.3d at 601-02. Earlier this month, in Newman v. HSBC Bank USA, N.A. , 2019 N.Y. Slip Op. 32398(U) (Sup. Ct., N.Y. County Aug. 9, 2019) ( here ), Justice Robert D. Kalish of the Supreme Court, New York County, dismissed an action on statute of limitations grounds, holding that the continuous wrong doctrine did not save the claims from dismissal. Newman v. HSBC Bank USA, N.A. Background Newman arose out of a banking relationship between Defendant, HSBC Bank USA, N.A. (“HSBC”), and Plaintiffs, Michael and Linda Newman (collectively, the “Newmans”). Between 1980 and 2001, the Newmans owned and operated Card Rack, Inc. (“Card Rack”). In connection with a commercial lease, the Newmans obtained from Republic National Bank (“Republic”) a $25,000 letter of credit and a $300,000 line of credit and deposited approximately $500,000 worth of stock certificates into an account as collateral for the line of credit and letter of credit. In 1999, HSBC acquired Republic and converted the collateral account into a brokerage account (the “Securities Account”). As the Card Rack business wound down in 2001, the Newmans attempted to cancel the letter of credit. HSBC did not agree to their request. In 2003, the Newmans made a second attempt to cancel the letter of credit. Again, HSBC did not agree to cancel the letter of credit. In December 2006, after closing the line of credit, HSBC agreed to release the contents of the Securities Account on the condition that the Newmans deposit $25,000.00 into an HSBC savings account (the “Bank Account”) as collateral for the letter of credit. The Newmans complied and deposited the funds into a savings account, whereupon the contents of the Securities Account were transferred to the Newmans’ brokerage account at Charles Schwab Co. On September 26, 2006, the Newmans made another attempt to terminate the letter of credit and to obtain the funds in the Bank Account that were being held as collateral for the letter of credit. Again, HSBC did not agree to the request, prompting Michael Newman to commence an action against HSBC in December 2011, which was ultimately abandoned for failure to serve a complaint. On March 2, 2016, the Newmans commenced the action. In their amended complaint, the Newmans asserted causes of action for conversion, breach of contract, unjust enrichment, attorney’s fees, and punitive damages arising from the alleged improper restraint of the Securities Account and the Bank Account after discovering that all the funds in the Bank Account were notated as a “pending miscellaneous debit.” On May 10, 2016, and October 26, 2017, HSBC notified the Newmans that there were no restrictions on the Bank Account and that the funds were readily accessible. Since that time, the Newmans obtained access to the funds, made withdrawals, and continued to use the Bank Account. HSBC moved for summary judgment dismissing the amended complaint. HSBC argued that the causes of action were time barred and that the causes of action were moot because (1) the Securities Account had been closed as of 2006, and (2) the funds in the Bank Account were released to the Newmans in May 2016. The Court’s Decision The Court granted the motion, holding that the causes of action for conversion, breach of contract, and unjust enrichment were time barred under the relevant statutes of limitations. Under New York law, a cause of action for conversion is subject to a three-year statute of limitations. Vigilant Ins. Co. of Am. V. Housing Auth. of City of El Paso, Tex. , 87 N.Y.2d 36, 44 (1995). A breach of contract action is subject “to a six-year statute of limitations.” Chase Scientific Research. V. NIA Grp. , 96 N.Y.2d 20, 25 (2001) (citation omitted). Although New York does not identify a “statute of limitations period within which to bring a claim for unjust enrichment,” where the “unjust enrichment and breach of contract claims are based upon the same facts and pleaded in the alternative, a six-year statute of limitations applies.” Maya NY, LLC v. Hagler , 106 A.D.3d 583, 585 (1st Dept. 2013) (citation omitted). The Court held that “to the extent any of the Newmans’ claims arise from the Securities Account and the Bank Account, those claims accrued in 2006 upon HSBC’s first failure to comply with the Newmans’ demands to release its contents and cancel the letter of credit.” Slip Op. at *3. Since the Newmans initiated the action in 2016, observed the Court, “the causes of action were over 10 years old and already barred by the statute of limitations.” Id . Turning to the issue of tolling, the Court held that the continuous wrong doctrine did not apply to the Newmans’ claims because the alleged continuing wrong was not a continuing wrong. Id . Rather, said the Court, “the Newmans were subject to continuing effects of HSBC’s wrongful act in 2006.” Id . at *4. Such effects, held the Court “do[ ] not equate to a continuing series of wrongs … that would render the continuing wrong doctrine applicable and toll the statute of limitations.” Id . Takeaway The continuing wrong doctrine is predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct. The cases, such as Newman , make clear that the distinction is between a single wrongful act that has continuing effects and a series of independent, distinct wrongs. It is, therefore, inapplicable where, as in Newman , there is one tortious act and continuing consequential damages that result therefrom.

It has been some time since this Blog has written an article about whistleblowers and qui tam actions. Those articles typically involved lawsuits arising under the Federal False Claims Act (“Federal False Claims Act”). In today’s post, this Blog looks at City of New York v. Siemens Elec., LLC , 2019 N.Y. Slip Op. 29251 (Sup. Ct., N.Y. County Aug. 7, 2019) ( here ), a qui tam action brought under the New York False Claims Act (“NYFCA”) ( here ) against, among others, Siemens Electrical, LLC (“Siemens Electrical”) for misrepresentations about defendants’ compliance with two statutes that defendants were required to comply with pursuant to contracts with the City of New York Department of Environmental Protection (“DEP”).  Since this Blog has not written about the NYFCA, we provide an overview of the NYFCA and the differences between the NYFCA and the Federal FCA below. The NYFCA On April 1, 2007, the New York State Legislature passed the NYFCA.  The purpose of the NYFCA, like the legislation on which it was modeled, the Federal FCA, is to assist local governments in recovering payments made to individuals or corporations by reason of fraud or related misconduct. The NYFCA applies to false claims made to the state or any municipality, school district, or public benefit corporation within the state, or to any contractor whose funding derives, in whole or in part, from the state or a local government. The NYFCA gives the New York Attorney General (“NYAG”), a local government or a private citizen the right to litigate lawsuits under the act.  When the party bringing the action is a private citizen, the NYFCA provides for an award to the individual if the action is successful and results in a payment to the government. If the NYAG supersedes in the qui tam action ( i.e. , converts the civil qui tam action into an enforcement action), then the whistleblower who filed the action (also known as a “relator”) is entitled to receive 15% to 25% of the proceeds recovered in the action or settlement thereof. If the NYAG does not supersede in the action, and the relator continues to litigate the case and successfully concludes the action, then he/she can recover between 25% to 30% of the proceeds recovered. The court determines the percentage payable to the whistleblower by considering a number of factors, including, but not limited to, the extent to which the relator contributed to the prosecution of the action. In August 2010, the New York State Legislature amended the NYFCA, following amendments to the Federal FCA in 2009 and 2010. Although the two statutes remain largely the same, there are some important differences. The Differences Between the NYFCA and the Federal FCA As noted, there are differences between the Federal FCA and the NYFCA that are important to discuss.  First, the NYFCA allows for three times the damages (two times the damages for self-reporting the fraud) and civil penalties of $6,000 to $12,000 per violation, plus “the costs, including attorneys’ fees, of a civil action brought to recover any such penalty or damages.” N.Y. State Fin. L. § 189(1)(h). The Federal FCA allows for $5,500 to $11,000 per violation. 31 U.S.C. § 3729(a)(1)(g). Second, the NYFCA allows a relator to bring a qui tam action alleging tax fraud, which the Federal FCA does not permit. N.Y. State Fin. L. § 189(4). To bring a tax fraud claim, the relator must plead that the defendant has “net income or sales” exceeding $1 million and damages exceeding $350,000.  Third, the NYFCA provides for a statute of limitations of 10 years – that is, an action must be commenced no later than 10 years after the date on which the violation of the act is committed. N.Y. State Fin. L. § 192(1). The Federal FCA has a statute of limitations of six years. U.S.C. § 3731(b).  Fourth, if the government declines to intervene in the qui tam action while the case is under seal, the NYFCA allows the relator to withdraw his/her case without public knowledge. Under the Federal FCA, once the government declines intervention and the case is unsealed, the relator cannot withdraw his/her action under seal. Fifth, the NYFCA does not require allegations of fraud to be stated with the same particularity required by the CPLR. Rather, a qui tam complaint should survive a motion to dismiss “if the facts alleged in the complaint, if ultimately proven true, would provide a reasonable indication of one or more violations … and if the allegations in the pleading provide adequate notice of the specific nature of the alleged misconduct.” N.Y. State Fin. L. § 192(1-a). Qui tam complaints alleging fraud under the Federal FCA must meet the heightened pleading requirements under Rule 9(b) of the Federal Rules of Civil Procedure. Finally, the NYFCA anti-retaliation protections are broader than those under the Federal FCA. For example, the person against whom retaliatory action is taken does not have to file a qui tam action to be protected. In this regard, the NYFCA covers “ ny current or former employee, contractor, or agent of any private or public employer who is discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against in the terms and conditions of employment, or otherwise harmed or penalized by an employer, or a prospective employer, because of lawful acts done by the employee, contractor, agent, or associated others in furtherance of an action brought under or other efforts to stop one or more violations of” the NYFCA.  Also, the definition of “lawful act” covers a wide of array of conduct, including the investigation, the potential filing, or actual filing of a qui tam action, and a broad scope of materials that can be obtained or transmitted in connection with such activity “even though such act may violate a contract, employment term, or duty owed to the employer or contractor, so long as the possession and transmission of such are for the sole purpose of furthering efforts to stop one or more violations of” the NYFCA. If an employee seeks protection under the anti-retaliatory provisions of the NYFCA, he/she may recover, among other forms of relief: “(a) an injunction to restrain continued discrimination; (ii) hiring, contracting or reinstatement to the position such person would have had but for the discrimination or to an equivalent position; (c) reinstatement of full fringe benefits and seniority rights; (d) payment of two times back pay, plus interest; and (e) compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys’ fees.” N.Y. State Fin. L. § 191(1). New York City False Claims Act Like the State of New York, the City of New York (the “City”) has a false claims act (“NYCFCA”) that is modeled after the Federal FCA. Signed into law on May 19, 2005, the NYCFCA allows private citizens to bring qui tam actions to recover treble damages for fraudulent claims submitted to the City. The NYCFCA was amended in 2012 to bring the NYCFCA into closer conformance with the NYFCA by clarifying that the City may waive the “public disclosure bar” and increasing the minimum awards from proceeds to which private citizens are entitled. City of New York v. Siemens Electrical, LLC Background Siemens arose from five contracts between the DEP and Siemens Electrical in connection with the upgrade and construction of water treatment facilities in Manhattan, the Bronx and Brooklyn. The total value of the contracts was $234,415,844. In 2012, a whistleblower (the “Relator”), a former vice president of one of the defendants who served on Siemens Electricals’ board of managers, filed a qui tam complaint under seal, alleging that between 2005 and 2012 Siemens Electrical violated the NYFCA by misrepresenting its compliance with two statutes that Siemens Electrical was required to comply with under each of the DEP contracts.  First, Relator alleged that Siemens Electrical submitted claims for payment overstating the work performed by Minority Business Enterprises (“MBE”) and that Siemens Electrical schemed to evade MBE subcontracting requirements by fabricating a relationship with a contractor to fulfill the requirement that certain contracts be given to MBEs for all five contracts it had with the DEP, when in fact, the equipment was installed by a non-MBE firm. Second, Relator alleged that Siemens Electrical fraudulently represented itself as a business with a licensed Master Electrician as an officer of the company, in violation of New York City Administrative Code § 27-3017(a)(1), in order to win its bid on the five contracts with the DEP, and in violation of Siemens Electrical’s contracts. In 2015, the City and the Siemens defendants engaged in settlement discussions before a mediator. No agreement was reached. Soon thereafter, the City, with authorization from the State pursuant to State Finance Law § 190(2)(c)(iii), filed its superseding complaint substituting the original plaintiff in this action and converting the qui tam civil action into a civil enforcement action by the City. N.Y. State Fin. L. § 190(2)(c)(i). The superseding complaint alleged claims under N.Y. State Fin. L. §§ 189(1)(a), (b), and (c) and the NYCFCA (N.Y.C. Admin. Code §§ 7-803(a)(1), (2), and (3)). The City’s superseding complaint differed from Relator’s qui tam complaint to the extent that it elaborated on the factual allegations of the Master Electrician and MBE related claims against the Siemens defendants. Soon thereafter, the Siemens defendants moved for summary judgement on the basis of the United States Supreme Court’s decision in Universal Health Servs., Inc. v. United States ex rel. Escobar , 136 S Ct. 1989 (2016). In Escobar , the Supreme Court held that the “implied false certification” theory “can be a basis for liability.” Under the implied false certification theory, a defendant may violate the Federal FCA by failing to disclose noncompliance with a relevant statutory, regulatory, or contractual requirement.   This Blog wrote about Escobar , here . The Court denied the Siemens defendants’ motion. After resuming discovery, the parties again engaged in settlement discussions. This time, the City and the Siemens defendants reached an agreement and settled the claims for $1.5 million. The settlement of the City’s claims was negotiated and executed contemporaneously with the agreement to settle three separate actions by the Siemens defendants against the City (the “commercial settlement”). The City and the Siemens defendants agreed that the proposed settlement amount is to be paid by a setoff against the commercial settlement amount. The amount of the proposed settlement was reviewed and authorized by the Office of the New York City Comptroller. The City moved pursuant to N.Y. State Fin. L. § 190 (5)(b)(ii) for a determination that the proposed settlement between the City and Siemens defendants is fair, adequate, and reasonable. The Relator opposed the proposed settlement. The Siemens defendants supported the motion. The Court granted the City’s motion and denied the Relator’s request for an evidentiary hearing to supersede the City in the action, and for the Court to calculate his qui tam award. The Court’s Decision Under the NYFCA, N.Y. State Fin. L. § 190(5)(b)(ii), “ he state or a local government may settle the action with the defendant notwithstanding the objections of the person initiating the action if the court determines, after an opportunity to be heard, that the proposed settlement is fair, adequate, and reasonable with respect to all parties under all the circumstances.” The NYFCA does not, however, provide the standard to determine whether a “proposed settlement is fair, adequate, and reasonable with respect to all parties under all the circumstances.” Given the absence of New York authority, the Court looked to federal jurisprudence for the standard. See State ex rel. Seiden v. Utica First Ins. Co. , 96 A.D.3d 67, 71 (1st Dept. 2012). Noting that the federal courts are split on the standard to apply, the Court found the approach adopted by the Eleventh Circuit to be the most appropriate one. In United States v. Everglades Coll., Inc. , 855 F.3d 1279 (11th Cir. 2017), the panel determined that the court must “ask whether the government has advanced a reasonable basis for concluding the settlement is in the best interests of the United States, and whether the settlement unfairly reduces the Relator’s potential qui tam recovery.” Id . at 1289. In Everglades , the panel held that “ n the FCA context there must be considerable deference to the settlement rationale offered by the government” because of the “loose similarity between government-obtained FCA settlements and decisions by the government not to prosecute or enforce an administrative remedy, which are presumptively unreviewable.” Id. (citation omitted). The Court found that the approach in Everglades was consistent with the language of the NYFCA and the legislative intent behind the NYFCA. Slip Op. at **5-6.  Against the Everglades standard, the Court held that “ he City ha demonstrated a reasonable basis to determine that the proposed settlement in the best interest of the City and not unfairly reduce the Relator’s potential qui tam recovery.” Id . at *6.  The proposed settlement imposes a civil penalty for each of the alleged regulatory violations . According to the City, the $1.5 million settlement “reflects the civil penalties that would be available if Defendants’ defenses were rejected wholesale and liability were imposed for every one of the approximately 260 payment requisitions at issue.” While the civil penalty amount is on the low end of the penalty scheme, the negotiation of a settlement wherein each regulatory violation was accounted for clearly benefits the City and carries out the intent of the FCA. In fact, Relator admits that the settlement was “beneficial to the City,” and suggests that the settlement amount was favorable. Id . at **6-7 (citations omitted). The Court also found that the settlement conserved the City’s limited resources, avoided the complexity, expense, and duration of ongoing litigation, and considered the precedential impact of a potentially adverse decision. Id . at *7. The Court noted that “an adverse decision in this matter limit the City’s enforcement efforts” and “further conserved the City’s resources.…” Id .  The Court further held that the City demonstrated that the proposed settlement represented a fair outcome considering the risk of litigation. Id . The Court agreed with the City that the uncertainty surrounding proof of materiality under Escobar weighed in favor of settlement: The record includes evidence demonstrating, and the parties do not dispute, that the City continued paying Siemens Electrical despite knowing of their regulatory non-compliance. Accordingly, an issue of fact may exist as to whether Siemens Electrical’s alleged implied and express false certifications of compliance with the MBE and Master Electrician requirements were material to the City’s payment decisions. Id . The Court rejected Relator’s contention that the proposed settlement was unfair because the City may have been “entitled to disgorgement damages in excess of $750 million if the damages trebled” – i.e. , that the settlement unfairly reduced his award. Id .  Noting that the there was a dispute as to whether the City was entitled to any damages, the Court observed that “the City may be unsuccessful in showing that it incurred damages because of Siemens Electrical’s false statements regarding the credits improperly claimed for work performed by MBEs, since the City received the benefit of the supply and installation of the equipment.” Id . The Court explained that “ his litigation risk further compounded by the unique nature of the City’s claims: the City’s bargained-for-benefit involved both tangible and intangible benefits. Considering the real risk that the City may not recover on its claims, it cannot be said that Relator’s potential award was unfairly reduced.” Id . Having determined that the settlement was fair and reasonable to the City, the Court next addressed whether Relator was entitled to an evidentiary hearing and additional discovery on the issue.  Noting that the issue was a “novel” one ( id . at *8), the Court denied the request.  “Initially, the court that Relator not entitled to an evidentiary hearing as of right.” Id . Under the NYFCA, noted the Court, it could approve a proposed settlement notwithstanding the objections of the relator “after an opportunity to be heard.” Id ., citing N.Y. State Fin. L. § 190(5)(b)(ii). The Court found that “Relator was given notice of the City’s motion to confirm the proposed settlement and an opportunity to be heard on the motion.” Id . Relator availed himself of this opportunity, said the Court, when he submitted a brief in opposition to the motion to approve the settlement and presented oral argument on the motion. Id . Moreover, said the Court, “Relator fail to establish grounds for an evidentiary hearing and additional discovery.” Id .  Relator contends that the difference between the proposed settlement amount and the purported value of the case, and the fact that the settlement amount is to be paid as a setoff against the City in the commercial settlement demonstrates the unreasonableness and impropriety of the settlement. Relator's contention is addressed in the preceding section—the City has adequately explained its rationale behind the proposed settlement. Relator next argues that his exclusion from the settlement negotiations between the City and Siemens defendants demonstrates collusion. This argument is speculative, and the City apprised Relator of its settlement negotiations with the Siemens defendants. In any event, the City was substituted as plaintiff in this action and was entitled to conduct settlement negotiations without informing the Relator (State Finance Law § 190<5> ). Id . Since Relator failed to “‘ ome forward with a colorable and non-speculative claim that the government’s settlement rationale improper and that further disclosures needed,’ his requests for an evidentiary hearing and discovery denied.” Id . at **8-9, quoting Everglades , 855 F.3d at 1291. The Court rejected Relator’s request that he be permitted to “take over the litigation” from the City. Id . at *9. The Court held that “Relator fail to cite to any basis to support his request.” Id . The Court explained that the request ran counter to the legislative direction that “‘the local government shall have primary responsibility for investigating and prosecuting the action.’” Id. , quoting N.Y. State Fin. L. § 190(5)(a). Accordingly, the Court denied Relator’s request that he be permitted to supersede the City in the action.Finally, the Court rejected Relator’s request to have the Court calculate his qui tam award (State Fin. L. § 190(6)(a)), holding that the request was premature since the City did not address the amount of the award to which Relator was entitled and Relator did not cross-move for the court to calculate his award. Id .

On July 15, 2019, New York Surrogate Nora Anderson denied, in part, a motion to dismiss the petition filed by Radio Drama Network, Inc. (“Radio Drama” or “Petitioner”), in which Radio Drama sought to invalidate testamentary instruments that deprived it of a $100 million bequest from Himan Brown (“Brown”), the creator of “Dick Tracy” and “Inner Sanctum Mysteries,” and founder of the Himan Brown Revocable Trust (the “Revocable Trust”). Radio Drama Network, Inc. v. Kay , File No. 2010-2056 A (Sur. Ct., N.Y. County July 15, 2019) ( here ). In the petition, Radio Drama claimed that Brown’s long-time lawyer, Richard L. Kay (“Respondent”), defrauded Radio Drama out of $100 million when he allegedly deceived Brown into substituting a charitable trust that he controlled as the beneficiary of his estate. Petitioner claimed that Brown, who at the time was 94 years old, intended to bequest the money to Radio Drama, but instead left the money to another trust that Respondent controlled. Brown died six years later in June 2010, at the age of 99. Petitioner claimed that Respondent exploited his position as a trusted adviser for his own benefit.  Background On June 4, 2010, Brown died, leaving an estate valued at approximately $850,000. During the decade before his death, Brown had transferred property worth millions of dollars to the Revocable Trust, of which he was the sole trustee and primary beneficiary, under an instrument dated November 20, 2002. Under the terms of the Revocable Trust instrument as originally stated, at Brown’s death, the majority of the trust remainder (after relatively modest provisions for family and friends) was to be distributed to Radio Drama, which Brown established to “create, produce, market and distribute radio dramas.” On July 8, 2003, Brown amended the trust instrument (the “First Restatement”) to provide that his successor trustee would be entitled to commissions “in an amount equal to the commission payable to an executor of estate, the total principal of which equals the trust principal.” According to Radio Drama, this provision (the “Commissions Provision”) resulted in an additional $1.7 million in trustee commissions that Respondent received. The First Restatement did not alter Radio Drama’s share of the trust remainder. However, on October 20, 2004, Brown eliminated Radio Drama’s designation as the remainder beneficiary, created a new trust (the “Charitable Trust”), and named the latter as remainder beneficiary in Radio Drama’s place (the “Second Restatement”). The primary purpose of the Charitable Trust, as identified in the Second Restatement, was to advance “language and the spoken word.” On the same day, Brown executed a new will in which he left his by-then relatively modest estate to Radio Drama. As noted by the Court, Respondent or another lawyer at Respondent’s law firm drafted the trust and testamentary instruments discussed above. Respondent is the executor of Brown’s estate and is the sole trustee of both the Revocable Trust and the Charitable Trust. He is also one of four directors of Radio Drama; Brown’s two granddaughters, Melina and Barri, are two of the three other directors. Radio Drama alleged that, through the foregoing revisions, Respondent carried out a fraudulent scheme to divert virtually all of Brown’s assets from Radio Drama to the Charitable Trust, over which Respondent, as trustee, had complete control, and to Respondent individually, through steeply increased commissions. According to Radio Drama, Respondent misled and confused Brown, who was elderly ( e.g. , 94 years old) and hearing-impaired, into changing the provisions of the Revocable Trust relating to the computation of commissions and to the disposition of the Revocable Trust remainder. Radio Drama filed a petition in Surrogate’s Court on December 14, 2015, requesting the following relief: (1) invalidation of specific provisions of the instruments amending the Revocable Trust and the consequent reinstatement of Radio Drama as the remainder beneficiary of the Revocable Trust; (2) imposition of a constructive trust for Petitioner’s benefit on the assets of the Charitable Trust; (3) removal of Respondent from his position as a director of Radio Drama; (4) declarations that Respondent defrauded both Brown and Petitioner, unduly influenced Brown, breached his fiduciary duty to Petitioner, and violated Judiciary Law § 487; and (5) an award of compensatory, punitive, exemplary and treble damages consistent with such declarations. In connection with the foregoing, Radio Drama asserted the following six causes of action: (1) fraud; (2) fraudulent concealment; (3) undue influence; (4) breach of fiduciary duty; (5) violation of Judiciary Law § 487; and (6) unjust enrichment (asserted against Respondent both individually and as trustee of the Charitable Trust). Respondent moved to dismiss the Petition for failure to state a claim. Additionally, Respondent sought dismissal of the first, second, third, fourth and sixth causes of action as time-barred. Finally, Respondent moved to dismiss Petitioner’s request to remove Respondent from its board of directors, on the ground that the Court lacked subject matter jurisdiction over such a claim for relief. This Blog will discuss the Court’s ruling with regard to the fraud/fraudulent concealment, undue influence, and unjust enrichment causes of action and the application of the statute of limitations. The Court’s Decision Fraud and Fraudulent Concealment To withstand a motion to dismiss a fraud claim, a plaintiff must allege a misrepresentation or omission of a material fact, made with knowledge of its falsity, and an intent to induce reliance thereon; justifiable reliance thereon; and injury resulting from such reliance. See , e.g. , Lama Holding Co. v. Smith Barney, Inc. , 88 N.Y.2d 413, 421 (1996). To state a claim for fraudulent concealment, in addition to pleading the foregoing elements, a plaintiff must allege that a defendant had a duty to disclose the information to him and failed to do so. Mandarin v. Wildenstein , 16 N.Y.3d 173, 179 (2011) (citation omitted). Both claims must be pleaded with particularity. They cannot be grounded in speculation and supposition. Radio Drama based its fraud claim, in part, on Respondent’s actions in connection with the 2003 and 2004 restatements of the Revocable Trust. Radio Drama alleged that Respondent inserted “misleading revisions” into the restatements in order to deceive Brown into significantly increasing the commissions to which he would be entitled and changing the remainder beneficiary from Radio Drama to the Charitable Trust over which he was the sole trustee, thereby giving him more control over Brown’s assets. Radio Drama contended that Respondent’s alleged failure to disclose the impact of such revisions constituted a material omission by which Respondent induced Brown to execute the restatements and that Radio Drama was thereby damaged when assets allegedly intended for its benefit were diverted to the Charitable Trust. The Court held that these allegations sufficed to state a claim for fraud and fraudulent concealment. However, the Court granted the motion with regard to Petitioner’s other fraud-based claims because the damages sought were too speculative. Connaughton v. Chipotle Mexican Grill, Inc. , 29 N.Y.3d 137, 142 (2017) (noting that a plaintiff cannot be compensated under a fraud cause of action “for what might have gained”). Radio Drama argued that Respondent’s alleged failure to disclose the testamentary changes to Radio Drama’s other directors prior to Brown’s death constituted fraud and/or fraudulent concealment since the other directors would have tried to convince Brown to undo the revisions had they been made aware of them. The Court found the possibility that the directors would have reversed the changes to be “too speculative to constitute a stated injury.” “For the same reason,” said the Court, “Radio Drama’s allegation that respondent did not provide notice of the probate proceeding to Radio Drama’s three other directors, thereby depriving Radio Drama of an ‘opportunity to participate actively in the ... objections, or ... to explore its rights and potential claims,’ not state a claim for fraudulent concealment.” At its core, the Court held that this allegation was too speculative because “Radio Drama demonstrate any injury resulting from its nonparticipation in the probate proceeding.” Undue Influence The Court held that “Radio Drama … stated a viable claim for rescission on the ground of undue influence.”  To state such a claim, a plaintiff must allege that the defendant had both the motive and the opportunity to exercise undue influence over the grantor and that the defendant actually exercised such influence. Matter of Walther , 6 N.Y.2d 49, 55 (1959). The Court held that Petitioner “clearly state a claim for undue influence, finding that it alleged “that: (i) respondent was motivated by the prospect of increased commissions and control over trust assets; (ii) as grantor’s lawyer, respondent had ample opportunity to influence grantor; and (iii) he actually exercised such influence.” Unjust Enrichment and Imposition of a Constructive Trust To state a claim for unjust enrichment, a petitioner must show that the respondent was enriched at the petitioner’s expense and that “it is against equity and good conscience to permit to retain what is sought to be recovered.” Mandarin , 16 N.Y.3d at 182. Radio Drama alleged that Respondent and the Charitable Trust were enriched at Radio Drama’s expense when Brown executed the 2003 and 2004 restatements to the Revocable Trust. Specifically, Petitioner claimed that Respondent benefited from the First Restatement by the insertion of a new provision in the trust instrument increasing Respondent’s trustee commissions, and both the Charitable Trust and Respondent (as its sole trustee) benefited from the Second Restatement by the substitution of the Charitable Trust in place of Radio Drama as the remainder beneficiary of the Revocable Trust. The Court held that the foregoing “stated a claim for unjust enrichment for which the imposition of a constructive trust may be an appropriate remedy.” Beatty v. Guggenheim Exploration Co. , 225 N.Y. 380, 386 (1919). Statute of Limitations Under CPLR § 213(8), claims based on fraud and/or fraudulent concealment must be brought within either six years from the date on which the claims accrued or two years from the time the fraud was, or should have been, discovered, whichever is later. Radio Drama filed the petition in December 2015, about five and a half years after Brown’s death, and more than ten years after Respondent alleged to have committed the fraud and/or exercised undue influence over Brown. The parties disagreed over the date on which the fraud-based claims accrued. Respondent argued that the limitations period began to run on the respective dates on which the restatements were executed, while Radio Drama contended that the claims did not accrue until Brown’s death in 2010, because prior to that point it had no vested interest in the Revocable Trust and thus would have lacked standing to challenge the restatements. The Court agreed with Petitioner, holding that the date of accrual was at the time of death. Thus, since Radio Drama filed its petition within six years of Brown’s death, its fraud, fraudulent concealment, undue influence, and unjust enrichment claims were timely. In so holding, the Court found the analysis in Matter of Tisdale , 171 Misc. 2d 716 (Sur. Ct., N.Y. County 1997), and Matter of Heumann , 2006 WL 6897055 (Sur. Ct., Westchester County 2006), to be persuasive. In Heumann , which relied on Tisdale , the settlor had executed a revocable trust instrument in 1996 which provided that, at her death, the trust remainder was to be distributed among her six children. The settlor amended the trust instrument in 1997 to remove one of her children (the petitioner) as a beneficiary. The settlor died in 2004, and the petitioner commenced a proceeding in 2005 challenging the validity of the 1997 amendment on the ground of undue influence. The successor trustees moved to dismiss the proceeding as time-barred, noting that more than six years had passed between the execution of the amendment execution and the filing of the petition and that the petitioner knew, or should have known, of the amendment in 2002, more than two years prior to filing his petition. The court denied the motion, holding that, because the petitioner could not have commenced the proceeding until after the settlor had died, the six-year limitations period did not begin to run until the date of the settlor’s death. The Court found further support in Matter of Dalton, N.Y.L.J., Feb. 2, 2009, at 47, col 4 (Sur. Ct., Suffolk County 2009), which cited to both Tisdale and Heumann with approval, and which held that proceedings challenging revocable trusts can be instituted only after the settlor’s death, and therefore “the running of the statute of limitations regarding the underlying trust instrument not commence until the death of the grantor.” Id . Based upon the foregoing authorities, the Court held that “Radio Drama could not demonstrate any injury to a cognizable interest in the Revocable Trust until death had given it standing to claim such an injury.” “Accordingly, since Radio Drama filed its petition within six years of death, its fraud, fraudulent concealment, undue influence and unjust enrichment claims are timely, and the motion to dismiss these claims is denied.” Takeaway Radio Drama is notable for a few reasons. First, with regard to the fraud-based claims, Radio Drama not only illustrates the degree of specificity needed to withstand a motion to dismiss but also highlights the importance of seeking relief that is quantifiable and not speculative.    Second, Radio Drama makes an important distinction over the date on which a fraud claim accrues when dealing with a revocable trust. In a typical fraud case, the cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011) (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). But cases involving a revocable trust instrument are not typical in so far as the underlying instrument is ambulatory subject to change or revocation at any time prior to the settlor’s death. Proceedings challenging revocable trusts can be instituted only after the settlor’s death because the plaintiff has no vested interest in the trust prior thereto. Therefore, as the Radio Drama Court found, the statute of limitations involving the underlying trust instrument could not commence until the death of the grantor. Third, in New York, there is a question over whether the courts should recognize undue influence as an independent cause of action. Some courts have held that undue influence is not a cause of action or a claim in its own right, but rather a ground for the rescission of an instrument or transaction. E.g. , Spinella v. Costantino , 33 Misc. 3d 1232(A) (Sup. Ct., Kings County 2011); Weinberg v. Kaminsky , 2017 N.Y. Slip Op. 31628(U) (Sup. Ct., N.Y. County 2017). Other courts treat undue influence as an independent claim, subject to dismissal if not adequately pleaded or supported by the evidence. See , e.g. , Matter of Nealon , 57 A.D.3d 1325 (3d Dept. 2008); Kelly v. Overbaugh , 2008 N.Y. Slip Op. 32124 (Sup. Ct., Greene County 2008). Rather than wade through the differing views, the Court took a pragmatic approach to the issue, holding that “ egardless of how the claim is characterized, Radio Drama has stated a viable claim for rescission on the ground of undue influence.” Finally, though not discussed herein, Radio Drama explores the boundaries of the Surrogate Court’s subject matter jurisdiction – a discussion that many readers might find interesting.

In New York, Section 3211(a) of the Civil Practice Law and Rules (“CPLR”) provides the primary mechanism by which a party can make a motion, before a responsive pleading, to dismiss one or more causes of action alleged against that party. A “cause of action” subject to dismissal under CPLR § 3211(a), includes counterclaims, cross-claims, and third-party claims. There are several grounds under CPLR § 3211(a) on which a party may move to dismiss.  These include (but are not limited to) the following: (1) documentary evidence; (2) lack of subject matter jurisdiction; (3) lack of capacity; (4) another action pending between the same parties for the same cause of action in another court; (5) disposition in a prior proceeding; (6) improper counterclaim; (7) failure to state a cause of action; (8) lack of personal jurisdiction; (9) improper extra-jurisdictional service; (10) failure to join necessary party; and (11) immunity for voluntary non-profit officers. Although in most cases, the moving party invokes more than one of the foregoing bases for his/her motion, the movant may base his/her motion solely upon the existence of documentary evidence. Dismissal under CPLR § 3211(a)(1) is a unique feature of New York motion practice.  Under CPLR § 3211(a), a party may make a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” The CPLR does not, however, define the phrase “documentary evidence.” For this reason, courts described the phrase as “fuzzy” because “what is documentary evidence for one purpose, might not be documentary evidence for another.” Fontanetta v. Doe , 73 A.D.3d 78, 84 (2d Dept. 2010). To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. Materials that clearly qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta , 73 A.D.3d at 84-85 (citation omitted). Relevant to today’s post, a valid lease may qualify as “documentary evidence” within the meaning of CPLR § 3211(a)(1). Sunset Cafe, Inc. v. Mett’s Surf & Sports Corp. , 103 A.D.3d 707, 709 (2d. Dept. 2013). Thus, in order for evidence to qualify as “documentary,” it must be unambiguous, authentic and undeniable.” Granada Condominium III Assn. v. Palomino , 78 A.D.3d 996, 996-997 (2d Dept. 2010). In the Second Department, affidavits, emails, and letters, are not considered documentary evidence “within the intendment of CPLR 3211(a)(1).” Phoenix Grantor Trust v. Exclusive Hospitality, LLC , 2019 N.Y. Slip Op. 3635 (2d Dept. May 8, 2019), quoting Nero v. Fiore , 165 A.D.3d 823, 826 (2d Dept. 2018). In the First Department, like the Second Department, affidavits are not documentary evidence within the meaning of CPLR § 3211(a)(1). Tsimerman v. Janoff , 40 A.D.3d 242 (1st Dept. 2007). However, unlike in the Second Department, the First Department will consider correspondence and emails “under appropriate circumstances” to qualify as documentary evidence, so long as they meet “the essentially undeniable test.” Amsterdam Hospitality Grp. , 120 A.D.3d at 432; Langer v Dadabhoy , 44 A.D.3d 425 (1st Dept. 2007). A motion to dismiss under CPLR § 3211(a)(1) requires the court “to accept the complaint’s factual allegations as true, according to plaintiff the benefit of every possible favorable inference, and determining only whether the facts as alleged fit within any cognizable legal theory.” Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc. , 10 A.D.3d 267, 270 (1st Dept. 2004). Dismissal is warranted only if the documentary evidence submitted “utterly refutes plaintiff’s factual allegations” ( Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 326 (2002)), and “conclusively establishes a defense to the asserted claims as a matter of law.” Weil, Gotshal , 10 A.D.3d at 270-271 (internal quotation marks omitted). In other words, the documents relied upon must “definitely dispose of plaintiff's claim.” Blonder & Co. v. Citibank, N.A. , 28 A.D.3d 180, 182 (1st Dept. 2006). On August 5, 2019, Justice Robert Reed of the Supreme Court, New York County, dismissed a damages action brought by a commercial tenant against its landlord on the basis of documentary evidence. Abigael’s on Broadway Inc. v. Shorenstein Realty Servs., LP. , 2019 N.Y. Slip Op. 32357(U) (Sup. Ct., N.Y. County Aug. 5, 2019) ( here ). As discussed below, Justice Reed held that the plain and unambiguous terms of the lease between the parties mandated dismissal of the action. Plaintiff, Abigael’s on Broadway, Inc., a commercial tenant, commenced the action against Defendant, SRI Eleven 1407 Broadway Operator, LLC (“SRI”), its landlord, for, inter alia , damages allegedly caused by Defendant’s renovation and remodeling of the subject building.  In or about April 2016, Defendant began a capital improvement project to update and modernize the building (the “Project”). The Project included the renovation of the tenants’ spaces, including the portion of the building leased by Plaintiff, and the building’s lobby and exterior facade.  On October 18, 2017, Plaintiff filed the action, asserting six causes of action against SRI, the first two of which were for breach of contract and lost profits and business.  Defendant moved to dismiss under CPLR §§ 3211(a)(1) and 3211(a)(7), claiming that Plaintiff’s first and second causes of action for lost business and profits should be dismissed as contradicted by the express terms of the lease between the parties. The Court granted the motion. Under the lease, noted the Court, the landlord is specifically exculpated from liability “arising from the making of any repairs, alterations, additions or improvements in or to any portion of the building or the premises ….” Slip Op. at *2. The Court explained: The first and second causes of action are expressly barred by paragraphs 7 and 19 of the lease. In this court’s reading, the language of paragraph 7 is unambiguous: “there shall be no liability on part of Landlord by reason of ... injury to ... business arising from the making of any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises” (emphasis added). The rider to paragraph 7 does not contradict the paragraph’s essential point. Consequently, the Court held that “Plaintiffs first and second causes of action … must be dismissed.” Id . at *3. Takeaway As shown in Abigael’s on Broadway , CPLR § 3211(a)(1) can be a powerful tool to secure dismissal of a complaint. While not every document will demonstrate the absence of a cause of action, Abigael’s on Broadway demonstrates that where the document is clear, unambiguous, and undeniable, and “utterly refutes” the claims asserted, dismissal is appropriate.

On August 6, 2017, Justice Andrew Borrok of the Supreme Court, New York County, Commercial Division, decided In re Everquote, Inc. Securities Litigation , 2019 N.Y. Slip Op. 29242 (Sup. Ct., N.Y. County Aug. 6, 2019) ( here ), in which he held that the automatic stay of discovery required by the Private Securities Litigation Reform Act of 1995 (the “Reform Act” or “PSLRA”), 15 U.S.C. § 77z-1(b)(1), applies in state court as well as in federal court. In doing so, Justice Borrok split with Justice Saliann Scarpulla of the Commercial Division who twice held to the contrary. See In re PPDAI Group Securities Litigation , 2019 WL 2751278 (Sup. Ct., N.Y. County, July 1, 2019), and In re Dentsply Sirona, Inc. Shareholders Litigation , 2019 N.Y. Slip Op. 32297(U), 2019 WL 3526142 (Sup. Ct., N.Y. County, Aug. 2, 2019) ( here ). In PPDAI , Justice Scarpulla held that “ pplication of the federal PSLRA automatic discovery stay would undermine Cyan’s holding that ‘33 Act cases may be heard in state courts.”   PPDAI , 2019 WL 2751278, at *7, citing Cyan, Inc. v. Beaver County Empl. Retirement Fund , 138 S.Ct. 1061, 1078 (2018). “Accordingly,” said Justice Scarpulla, “I am persuaded that the PSLRA automatic stay is not applicable to an action brought in New York State court.” Id . This Blog wrote about PPDAI here . ppdai filed a notice of appeal of justice scarpulla’s decision.> ppdai filed a notice of appeal of justice scarpulla’s decision.> In Dentsply Sirona , Justice Scarpulla denied a motion to stay a parallel litigation under the Securities Act of 1933 (“Securities Act” or “1933 Act”), holding that the PSLRA did not apply to state court actions. Slip Op. at *14 (“As I recently held (on a motion to stay based on the PSLRA), to hold that the PSLRA automatic stay applies to state court actions would undermine Cyan’s holding that ‘33 Act cases can proceed in state courts. Thus, the PSLRA’s automatic discovery stay is not applicable to state court actions.”) (footnote and citation omitted). Background EverQuote arose in connection with the company’s June 28, 2018 initial public offering (“IPO”) of its common stock. On February 15, 2019 and February 26, 2019, plaintiffs filed lawsuits in Supreme Court, New York County, under the Securities Act, claiming that defendants made false and misleading statements in the registration statement and prospectus filed in connection with the IPO. Following the consolidation of the actions in May 2019, and the filing of an amended complaint in June 2019, plaintiffs commenced discovery proceedings. Defendants objected to the demands, arguing that discovery was stayed pursuant to the PSLRA. By order to show cause, defendants moved, pursuant to the PSLRA’s automatic stay of discovery provision, to stay discovery pending adjudication of their motion to dismiss. The Court’s Decision After discussing the origin and outcome of Cyan , Justice Borrok concluded that “ he heart of the issue before this court not center around 15 USC § 77v (a) and 15 USC § 77p (b) or otherwise involve the jurisdictional question addressed” by the United States Supreme Court. Slip Op. at *5. “ Cyan therefore does not control the outcome of the issue presented by the instant motion.” Id . Cyan,="Cyan," in="in" which="which" it="it" unanimously="unanimously" held="held" that="that" Securities="Securities" Litigation="Litigation" Uniform="Uniform" Standards="Standards" Act="Act" of="of" (“SLUSA”)="(“SLUSA”)" does="does" not="not" strip="strip" state="state" courts="courts" subject-matter="subject-matter" jurisdiction="jurisdiction" over="over" class="class" actions="actions" involving="involving" claims="claims" exclusively="exclusively" brought="brought" under="under" Act,="Act," and="and" allow="allow" for="for" removal="removal" those="those" cases="cases" to="to" federal="federal" court.="court." This="This" Blog="Blog" wrote="wrote" about="about" Cyan ="Cyan" decision="decision" here.=">here."> Cyan was, nevertheless, helpful, explained the Court, “in that it further underscore the most basic and fundamental rule in statutory interpretation—the court must start with the express language of the statute and presume that it means what it says.” Id . at **5-6. Looking at the automatic stay provision of the PSLRA, the Court held that “ he simple, plain, and unambiguous language expressly provides that discovery is stayed during a pending motion to dismiss ‘ n any private action arising under this subchapter.’” Slip Op. at *6 (orig’l emphasis). The Court noted that “ owhere in 15 USC § 77z-1 (b) (1) does the statute indicate that it applies only to actions brought in federal court.” Id . at **6-7.  To underscore the point, the Court explained that “ he statute simply does not say that the automatic stay is limited to claims brought pursuant to the 1933 Act in federal court. Put another way, as the Cyan Court held, ‘ he statute says what it says—or perhaps better put here, does not say what it does not say.’” Id . at *7, quoting Cyan , 138 S.Ct. at 1069. The Court rejected plaintiffs’ argument that 15 U.S.C § 77z-1 (b) (1) and 15 U.S.C § 77z-1 (b) (2), when read together, indicate that the stay applies only to federal court actions because it incorporates the Federal Rules of Civil Procedure, which do not apply in state court: 15 USC § 77z-1(a)(1) provides that “ he provisions of this subsection shall apply to each private action arising under this subchapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure” — i.e. , in federal court. By contrast, as discussed above, 15 USC § 77z-1 (b) does not provide that this subchapter applies only to private actions brought as a plaintiff class action pursuant to the FRCP. 15 USC § 77z-1 (b) (2) as written creates a uniform approach to document preservation. Any party with notice of the allegations must treat documents “as if” they were the subject of a continuing document request for production under the FRCP— i.e. , without regard to each individual and potentially different jurisdiction’s rules regarding document preservation and spoliation. The “as if” highlights how Congress made clear that Federal Rule principles apply both to state and federal proceedings where document perseveration was concerned during the pendency of the discovery stay. Slip Op. at *7. In addition, the Court rejected plaintiffs’ argument that because 15 USC § 77z-1 (c), titled Sanction For Abusive Litigation, requires the court to determine at the conclusion of the litigation if sanctions are warranted under Rule 11 of the Federal Rules of Civil Procedure, 15 USC § 77z-1 (c) necessarily means that the automatic discovery stay provision of the PSLRA applies only in federal court. Id . Most significantly, however, although Congress did provide for sanctions for violations of the Reform Act’s automatic discovery stay and corresponding requirement for the preservation of evidence, 15 USC § 77z-1 (c) is not the applicable statutory provision, subsection (3) of 15 USC § 77z-1(b) ( i.e. , 15 USC § 77z-1 <3> ) is. And, as set forth above, 15 USC § 77z-1 (b) (3) Sanction for Willful Violation provides that “ party aggrieved by the willful failure of an opposing party to comply with paragraph (2) may apply to the court for an order awarding appropriate sanctions (emphasis added).” Significantly, the language of the relevant sanctions provision, 15 USC § 77z-1 (b) (3), on its face does not refer to FRCP 37 (e) or sanctions generally under the FRCP. Rather, providing that an aggrieved party of a violation of the Reform Act’s discovery stay and corresponding preservation of evidence requirement may apply for “appropriate sanctions” without reference to the FRCP, further underscores that Congress made clear that 15 USC § 77z-1 (b) applies both to state and federal proceedings. Id . at **7-8. Moreover, the Court rejected plaintiffs’ argument that the PSLRA interferes with a state court’s docket management. This argument, said the Court, “is wholly without merit.” Id . at *8. First, the Court noted that the automatic stay applies only during the pendency of a motion to dismiss, “not in advance of one.” Id .  Second, observed the Court, “state court proceedings are often stayed for a host of other reasons.” Id . Third, said the Court, “the critical issue is not how a stay of discovery squares in the abstract with either Commercial Division Rule 11 or CPLR 3214 or case assignment. Rather, the controlling issue is how this court implements the congressional mandate regarding how it is to manage 1933 Act claims that find their way into state courts.” Id .  “That mandate,” held the Court, “requires a stay, and is not, in any event, inconsistent with rules relating only to a ‘presumption’ as to discovery generally with respect to dispositive motions of all kinds.” Id . at **8-9. Finally, the Court held that its ruling advanced the policy underlying the PLSRA. Id . at *9. In this regard, the Court noted that not only is application of the automatic stay in state court supported “by the text of the statute,” but a contrary finding “would … run afoul of the well-recognized purpose of the Reform Act and SLUSA” – to provide defrauded investors a mechanism “to recover their losses,” while at the same time curtailing perceived abuses in litigating securities class actions, including the filing of lawsuits and making discovery requests in otherwise meritless lawsuits in the hope of securing a settlement. Id . In conclusion, Justice Borrok cautioned that a contrary ruling would “create the undesirable … and absurd incentive for lawsuits brought under the 1933 Act to be brought in state court as opposed to federal court to avoid the very protection supporting the enactment of the and necessarily confounding Congress’ acknowledged intention that the lion’s share of securities litigation would occur in the federal courts.” Id. , citing Cyan , 138 S.Ct. at 1073 (“SLUSA ensured that federal courts would play the principal role in adjudicating securities class actions.”). Takeaway EverQuote is one of several recent putative class actions filed in New York state court alleging violations of the Securities Act. As noted in a prior post, following the U.S. Supreme Court’s decision in Cyan , plaintiffs have been filing Securities Act cases in state court with more frequency. And, defendants, who are also the subject of parallel litigation in federal court have been filing motions to stay with similar frequency. EverQuote is notable because of its focus on the PSLRA’s automatic stay of discovery provision, rather than on CPLR § 2201, and its rejection of the contextual interpretation of the statute. While Cyan explained that Securities Act claims can be brought in state court, it did not decide whether the automatic stay of discovery under the PSLRA applies in a state court action. The absence of such a ruling has left a vacuum for the lower courts to fill. A number of courts outside of New York have reached the same conclusion as Justice Scarpulla (albeit many prior to Cyan ) and found that the automatic stay does not apply in state court. These courts have concluded that the PSLRA discovery stay does not apply in state court because the text, structure, and reference to the Federal Rules of Civil Procedure demonstrate that Congress intended the statute to apply in federal court only. But see City of Livonia Retiree Health & Disability Benefits Plan v. Pitney Bowes Inc. , 2019 WL 2293924 (Conn. Super. Ct. May 15, 2019) (applying the stay pursuant to the plain mean of the statutory text). Cyan supports this view, say plaintiffs, when it held that the PSLRA’s “substantive” provisions “appl even when a 1933 Act suit s brought in state court,” unlike the PSLRA’s procedural provisions, which do not. 138 S.Ct. at 1066-67. EverQuote joins the Livonia court in applying the “plain meaning rule” of statutory interpretation. As discussed, under this rule, the court is to presume that the statute means what it says. Since PPDAI is on appeal, it remains to be seen whether this approach will prevail over the one applied by Justice Scarpulla.

Forum non conveniens is a common law doctrine in which a court may dismiss an action where another forum would be better suited to adjudicate the matter. In New York, the doctrine is codified in CPLR §327(a). Under this section, a court may stay or dismiss an action if it finds “that in the interest of substantial justice the action should be heard in another forum.” CPLR § 327(a). The party seeking dismissal bears a heavy burden of establishing that New York is not the proper forum for the action. In considering a forum non conveniens motion, New York courts consider a number of factors, including the burden on New York courts, the potential hardship to the defendant, the unavailability of an alternative forum, whether both parties are nonresidents, whether the transaction out of which the cause of action arose occurred primarily in a foreign jurisdiction, the location of potential witnesses and documents, and the potential applicability of foreign law. No one factor is controlling. In New York, the seminal case discussing the doctrine is Islamic Republic of Iran v. Pahlavi , 62 N.Y.2d 474 (1984), cert. denied , 469 U.S. 1108 (1985). In Pahlavi , the plaintiffs alleged that the Shah of Iran and his wife misappropriated, embezzled or converted $35 billion dollars in Iranian funds. Id . at 477. The plaintiff alleged that New York was the proper forum for the action because the funds were deposited into New York banks and there was no alternate forum to litigate the claims. The defendants moved to dismiss the complaint alleging that it raised nonjusticiable political questions, that the court lacked personal jurisdiction due to defective service of process on them and that the complaint should be dismissed on forum non conveniens grounds. Special Term granted defendants’ motion based on forum non conveniens , concluding that the parties had no connection with New York other than a claim that the Shah had deposited funds in New York banks, a claim which it found insufficient under the circumstances to justify the court in retaining jurisdiction. A divided Appellate Division, First Department, affirmed. In dissent, Justice Fein argued that jurisdiction should be assumed because no other forum was available to plaintiff. The Court of Appeals affirmed the dismissal, holding that the plaintiff failed to establish “a substantial nexus between this State and plaintiff's cause of the action.” Id . at 483. In so holding, the Court set forth a non-exhaustive list of factors (discussed above) that the lower courts could consider when confronted with a motion to dismiss on forum non conveniens . Id . at 479. In applying the factors, the Court said that the ruling should rest on justice, fairness and convenience. Id .  Notably, however, the availability of an alternative forum, though a pertinent factor, is not a precondition to dismissal. Id . at 481. On August 6, 2019, the Appellate Division, First Department, issued two decisions involving the forum non conveniens doctrine: Primus Pac. Partners 1, L.P. v. Goldman Sachs Grp., Inc ., 2019 N.Y. Slip Op. 06052 (1st Dept. Aug. 6, 2019) ( here ); and Kainer v. UBS AG. , 2019 N.Y. Slip Op. 06053 (1st Dept. Aug. 6, 2019) ( here ). In both cases, the Court unanimously affirmed the dismissal of the actions. Primus Pacific Partners 1, L.P. v. Goldman Sachs Group., Inc. Background In Primus Pacific , the plaintiff, Primus Pacific Partners 1, LP (“Primus”), a private equity firm organized under the laws of the Cayman Islands and based in Hong Kong, sued the defendants, Goldman Sachs Group, Inc. (“GS Group”), a global investment banking, securities and investment management firm incorporated in Delaware and headquartered in New York, Goldman Sachs (Singapore) PTE (“GSS”), a wholly owned subsidiary of GS Group, organized under the laws of Singapore with its principal place of business in Singapore, and Tim Leissner (“Leissner”), co-President and Managing Director of GSS, for fraud and breach of fiduciary duty in connection with financial advice that GSS gave to a Malaysian company of which Primus was a shareholder. In December 2009, Hong Leong Bank (“HLB”), a Malaysian bank, made an unsolicited bid to acquire EON Capital (“EON”), which owned EON Bank Berhard (“EON Bank”), another large Malaysian bank. Primus was the largest shareholder of EON, controlling approximately 20 percent of the shares, and had a designee on EON’s Board of Directors (“Board”). In January 2010, GSS was retained, together with non-party Ethos & Company (“Ethos”), as a financial advisor to EON, to, among other things, evaluate and negotiate HLB’s offer. Thereafter, HLB made a second, slightly improved offer for EON. In April 2010, based on the advice of GSS, the Board accepted the revised offer. EON’s shareholders approved HLB’s second offer in September 2010, and the cash proceeds of the sale subsequently were distributed to the shareholders. In June 2010, Primus brought a petition in the High Court of Malaysia challenging and seeking to set aside the sale of EON’s assets to HLB. The petition alleged that the submission of the offer to shareholders for approval was rushed at the behest of certain shareholders seeking to divest their shares, and the actions of certain shareholders and Board members were illegal or in breach of their fiduciary duties. The petition was dismissed by the High Court and affirmed in 2011. Plaintiff commenced the action in July 2016, prompted by press reports in March 2016 that Leissner and GSS were being investigated for misconduct in connection with their dealings with the Malaysian Prime Minister and the Malaysian state investment fund, 1 Malaysia Development Bhd. (“1 MBD”), established by the Malaysian Prime Minister. Plaintiff alleged that GSS, at the time it was retained by EON, was an adviser to l MBD and had a close relationship with the Malaysian Prime Minister, who had close family and business ties to 1 MBD and an interest in the success of HLB’s hid to acquire EON. Plaintiff claimed that GSS, by concealing its relationship and dealings with the Prime Minister, fraudulently induced EON to retain it. Plaintiff also claimed that GSS’s advice to EON was influenced by its relationship with the Malaysian Prime Minister; that GSS used confidential information obtained from the EON Board to advantage HLB in its takeover bid; and that GSS sought to “curry favor” with the Malaysian Prime Minister by recommending that EON accept HLB’s second offer, knowing it was not a fair offer. Plaintiff further contended that EON would not have retained GSS if it had been aware of GSS’s conflicts of interest, and that it would not have accepted HLB’s revised offer if GSS had not recommended that EON accept it. Plaintiff sought compensatory damages of $170 million and at least $340 million in punitive damages. Defendants moved to dismiss the complaint pursuant to CPLR § 3211(a) and CPLR § 327(a), based on lack of personal jurisdiction and forum non conveniens . Among other things, the motion court held that New York was not a convenient forum for the action. The motion court found that “most, if not all, of the events giving rise to the alleged misconduct occurred in Malaysia.” The court explained that “ one of the events that allegedly gave rise to plaintiff’s fraud and breach of fiduciary claims occurred in New York, and plaintiff not allege that it, or EON, had any dealings with GS Group or its employees in New York in connection with the HLB transaction.” The court rejected plaintiff’s argument that New York was a convenient forum because the DOJ and the GS Group were investigating GSS’s dealings with the Malaysian Prime Minister and 1 MBD and the advice given by GSS in connection with EON’s acceptance of the HLB offer: “Plaintiff presents no evidence that any of the activities surrounding the EON sale occurred in New York, and its claims that subsequent investigations occurred in New York do not demonstrate a substantial nexus.” The motion court also found that “the majority of witnesses reside outside of New York,” e.g. , Hong Kong and Singapore, and that Malaysia had “a greater interest than New York in transactions involving the sale of its banks and in regulating its banking system.” Significantly, the court noted that plaintiff had already filed a case in Malaysia in which it challenged the sale of EON to HLB. Finally, the court found that “the law of Malaysia, or possibly Singapore, likely apply,” a finding that was not contested by the parties. The First Department’s Decision The Court unanimously affirmed the dismissal “given … the balance of the forum non conveniens considerations.” Slip Op. at *1. The Court found that there was no nexus between New York and plaintiff’s causes of action for fraud and breach of fiduciary; plaintiff was not resident in New York, it was a Cayman Islands partnership; and Malaysia had “a greater interest than New York in whether one Malaysian bank (nonparty Hong Leong Bank) corruptly took over another Malaysian bank (EON).” Id . (citations omitted). In addition, the Court rejected plaintiff’s contention that there was no alternative forum to hear the dispute. Id . (“Contrary to plaintiff’s contention, New York law does not require an alternative forum to be available”) (citations omitted). Kainer v. UBS AG Background Kainer involved a dispute among purported heirs to Margaret Kainer’s estate over ownership rights to a Degas painting, “Danseuses,” which the Nazis illegally confiscated from Kainer, who died without a will or children in 1968, and which, many years later, was sold in New York at a Christie’s auction. Plaintiffs consist of Kainer’s estate and 11 heirs to the estate, according to French certificates of inheritance identifying them as such. Defendants UBS AG, UBS Global Asset Management (Americas), Inc. (together, “UBS”), Norbert Stiftung f/k/a Norbert Levy Stiftung (the “Foundation”) and Edgar Kircher moved to dismiss the complaint against them on various grounds, including on forum non conveniens grounds. The motion court dismissed the complaint. The First Department affirmed the dismissal. The First Department’s Decision As an initial matter, the Court observed that none of the parties were New York residents. The Foundation, another purported heir to Kainer's estate and thus to the painting, was founded under Swiss law and is domiciled in Switzerland. UBS AG is a Swiss bank that maintains offices in New York. Its subsidiary, UBS Global Asset Management, is a Delaware corporation. UBS managed the assets of the Kainer family and allegedly created the Foundation. Edgar Kircher, a Swiss citizen and resident and UBS employee, served on the board of trustees of the Foundation, and allegedly directed all acts of the Foundation. Christie’s, a New York auction house, was incorporated in New York and has a principal place of business in New York City. Slip Op. at *1. In examining the factors identified in Pahlavi , the First Department held that defendants “clearly demonstrate that New York an inconvenient forum.” First, the Court found that since “Plaintiffs’ rights as heirs to the painting arose in Germany and France,” the burden on New York courts weighed in favor of dismissal. Id . In fact, said the Court, that burden was “significant”. Id . (“The burden on the New York court in applying Swiss and French estate law to determine the underlying issue of the lawful heirs to Kainer’s estate is significant”). Indeed, observed the First Department, “the parties ‘not only dispute the applicable foreign law, but discuss the substance of the law . . . in a manner that is, at best, opaque.’” Id . (quoting the motion court). Thus, the “applicability of foreign law,” which the Court said was “an important consideration in determining a forum non conveniens motion . . . weigh in favor of dismissal.’” Id . (citations omitted). Second, the Court found that the hardship of litigating the case in New York outweighed any alternative forum. The potential hardships to the defendants of litigating in New York are clear. Kircher lives in Switzerland, the Foundation was created and is domiciled in Switzerland, UBS AG is incorporated and headquartered there, and UBS Global Asset Management has consented to jurisdiction there. Although UBS has a New York office and resources to litigate the case here, many relevant nonparty witnesses and documents are located in Switzerland and Germany, and UBS would be powerless to compel their attendance in New York. Id . at *2 Third, the Court held that in addition to France and Germany, “Switzerland appear to be an available alternative forum” for adjudication of the action. Id .  The Court based its holding on the fact that plaintiffs had asked a Swiss court to determine the heirs of the Kainer estate, “declare the Swiss certificates of inheritance null and void, and order that all assets — not just the painting at issue — originating from Kainer’s estate be returned to plaintiffs.” Id . at **2-3. The Court reasoned that the underlying merits of the action could not “be determined without reference to the underlying issue of ownership — the very issue that is already being litigated abroad.” Id . at *3, quoting Citigroup Global Mkts., Inc. v. Metals Holding Corp. , 45 A.D.3d 361, 362 (1st Dept. 2007). The availability of an alternative forum and the risk of conflicting rulings, concluded the Court, favored dismissal. Id . at *3. Finally, the Court rejected plaintiffs’ argument that Switzerland was not an alternative forum because the lawsuit could be dismissed. Id . In doing so, the Court explained “while the existence of a suitable alternative forum is an important factor, its absence does not require a New York court to retain jurisdiction.” Id ., citing Pahlavi , 62 N.Y.2d at 481. Takeaway The forum non conveniens doctrine, codified in CPLR § 327, permits a court to dismiss an action when, “in the interest of substantial justice the action should be heard in another forum.” CPLR § 327(a). It is based upon “justice, fairness and convenience” ( Pahlavi , 62 N.Y.2d at 479), in which the party challenging the forum bears the burden of demonstrating that the action would be best adjudicated elsewhere. It is a flexible doctrine that a court should apply in its sound discretion based upon the facts and circumstances of the case. Only “when it plainly appears that New York is an inconvenient forum and that another is available which will best serve the ends of justice and the convenience of the parties” should a case be dismissed on forum non conveniens grounds. Silver v. Great Am. Ins. Co. , 29 N.Y.2d 356, 361 (1972). As shown in Primus Pacific and Kainer , the defendants were able to satisfy the burden reflected in the foregoing principles.

There is almost nothing more frustrating, or potentially costlier, to a business than a dispute over the meaning of a contract. Such disputes can take many forms. It may be that the language used is ambiguous; or the language is reasonably clear but is susceptible to different meanings; or although the language is clear, taken literally, it might not reflect the parties’ intent; or, as is often the case, an event has occurred that was not contemplated by the parties at the time of drafting, so the contract does not specifically provide for it. When parties enter into a contract, each assumes that the language in their agreement accurately memorializes their understandings and intentions. For this reason, when a dispute arises, the courts in New York look to the intent of the parties as expressed by the language they chose to put into their writing. Ashwood Capital, Inc. v. OTG Mgt., Inc. , 99 A.D.3d 1 (1st Dept. 2012). A clear, complete document will be enforced according to its terms. Id . at 7. When the parties have a dispute over the meaning of their contract, the court first asks if the contract contains any ambiguity. Id .  Since New York is a textual jurisdiction (where the courts look to the agreement itself to determine the meaning of the agreement), whether there is ambiguity “is determined by looking within the four corners of the document, not to outside sources.” Kass v. Kass , 91 N.Y.2d 554, 566 (1998). Thus, courts will examine the parties’ intentions as set forth in the agreement and give the language an interpretation that is sensible, practical, fair, and reasonable. Riverside S. Planning Corp. v. CRP/Extell Riverside, L.P. , 13 N.Y.3d 398, 404 (2009); Abiele Contr. v. New York City School Constr. Auth. , 91 N.Y.2d 1, 9-10 (1997); Brown Bros. Elec. Contr. v. Beam Constr. Corp. , 41 N.Y.2d 397, 400 (1977). A contract is not ambiguous if, on its face, it is definite and precise and reasonably susceptible to only one meaning. White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). The “parties cannot create ambiguity from whole cloth where none exists, because provisions are not ambiguous merely because the parties interpret them differently.” Universal Am. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 (2015) (citation and internal quotation marks omitted). “Whether or not a writing is ambiguous is a question of law to be resolved by the courts.” WWW Assocs., Inc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). “ xtrinsic and parol evidence is not admissible to create an ambiguity in a written agreement which is complete and clear and unambiguous upon its face.” Id . at 163. This rule is especially applicable where the parties are commercially sophisticated, and their contract contains a merger clause. Schron v. Troutman Sanders LLP , 20 N.Y.3d 430, 436 (2013) (“where a contract contains a merger clause, a court is obliged to require full application of the parol evidence rule in order to bar the introduction of extrinsic evidence to vary or contradict the terms of the writing.”) (citation and quotation marks omitted). Finally, since a “contractual provision that is clear on its face must be enforced according to the plain meaning of its terms,” Bank of N.Y. Mellon v. WMC Mortg., LLC , 136 A.D.3d 1, 6 (1st Dept. 2015) (citation omitted), courts may not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.” Id . (citations omitted). This is especially so “in commercial contracts negotiated at arm’s length by sophisticated, counseled business people.” Id . Sometimes, a contract dispute gives rise to other claims, such as fraud and breach of fiduciary duty. In each instance, the plaintiff must allege “a legal duty independent of the contract” or a misrepresentation or breach that is “collateral or extraneous to the terms of the parties’ agreement” to withstand a dismissal motion for being duplicative of the contract claim. Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, addressed the foregoing issues in Barnett v. Seth Berkowitz Serve U Brands Inc. , 2019 N.Y. Slip Op. 32257(U) (Sup. Ct., N.Y. County July 29, 2019) ( here ). Barnett v. Seth Berkowitz Serve U Brands Inc. Background Barnett arose from the sale of an equity interest in a cookie business that would soon become a successful enterprise and the subject of an acquisition by Krispy Kreme. In 2003, Plaintiff, Jared Barnett (“Barnett”), and Defendant, Seth Berkowitz (“Berkowitz”), co-founded Insomnia Cookies, LLC (“Insomnia”), a company engaged in the business of baking and delivering cookies, especially late at night. By March 2006, Barnett and Berkowitz owned 29.332% and 44.000%, respectively, in the company. In 2006, Barnett and Berkowitz agreed that Barnett would sell his equity interest in Insomnia to Berkowitz. Barnett alleged that Berkowitz confirmed the terms of the sale in an attachment to a May 4, 2006 email (the “May 2006 Email”). Among other things, the email provided that Barnett would receive “all economic benefits of a 5% member in Insomnia Cookies, LLC.” About one month later, on June 8, 2006, Barnett and Berkowitz signed a buy-out agreement (the “Buy-Out Agreement”), pursuant to which: (a) Barnett resigned as Insomnia’s manager; and (b) Berkowitz acquired Barnett’s equity interest in Insomnia in exchange for (1) payments to Barnett aggregating $90,000, and (2) Barnett retaining a seller benefit (the “Retained Seller Benefit”) of 6.8% non-voting interest in the proceeds received by Berkowitz as a result of any Insomnia “Liquidation Event.” The Buy-Out Agreement defined a Liquidation Event to mean, inter alia , any transaction that resulted in the transfer of Berkowitz’s equity interests in Insomnia to a third-party, and a restructuring, financing, recapitalization or other structuring transaction that diluted Berkowitz’s interest in Insomnia. On September 17, 2018, Krispy Kreme acquired Insomnia (the “Krispy Kreme Transaction”). According to Barnett, Berkowitz received more than $29 million in connection with the Krispy Kreme Transaction. Barnett alleged that the transaction constituted a Liquidation Event under the Buy-Out Agreement pursuant to which he was entitled to receive money. Barnett claimed that he did not receive any money from the transaction. In his Amended Complaint, Barnett pleaded nine causes of action for: (i) breach of contract; (ii) breach of the implied covenant of good faith and fair dealing; (iii) interference with contractual relations; (iv) contractual indemnification; (v) declaratory judgment; (vi) injunctive relief; (vii) breach of fiduciary duty; (viii) fraud and misrepresentation; and (ix) accounting. Defendants moved to dismiss the Amended Complaint, arguing that Barnett failed to state a claim and that documentary evidence disproved his claims as a matter of law. The Court granted in part and denied in part the motion. The Court’s Decision Breach of Contract Causes of Action Defendants argued that Barnett’s breach of contract claims, which were based on Berkowitz’s alleged failure to give Barnett a 5% economic benefit in the Krispy Kreme Transaction, must be dismissed because the language in the Buy-Out Agreement explicitly contradicted Barnett’s allegations. In response, Barnett maintained that the operative and enforceable agreement between the parties included both the Buy-Out Agreement and the May 2006 Email and that only by reference to the May 2006 Email could the full agreement of the parties and their intentions be determined. Barnett further maintained that both documents were part of an integrated transaction and should therefore be interpreted together. Justice Scarpulla found that “the Buy-Out Agreement a complete, unambiguous agreement, … which clearly set[] out the terms agreed upon by both Barnett and Berkowitz.” Slip Op. at *4. Having determined the foregoing, the Court held that, at the pre-answer stage of the proceeding, Barnett stated a claim for breach of contract. The Court explained: Barnett alleges that, after execution of the Buy-Out Agreement, Berkowitz owned 73.332% of the equity interest in Insomnia, and Barnett owned a 6.8% non-voting interest in the proceeds received by Berkowitz as a result of any Insomnia “Liquidation Event.” Barnett further alleges that a Liquidation Event occurred when Holdings acquired Insomnia, and Berkowitz has failed to pay Barnett for his interest in the proceeds of that Liquidation Event. At this pre-answer motion to dismiss stage, Barnett has sufficiently pled that there is an underlying contract (the Buy-Out Agreement), which entitles Barnett to 6.8% interest in Berkowitz's equity interest and that Barnett was not paid any such benefit after a Liquidation Event (including the Krispy Kreme Transaction). Id . at **4-5 (footnote omitted). Breach of Fiduciary Duty Causes of Action To plead a breach of fiduciary duty, a plaintiff must plead “the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party’s misconduct.” Pokoik v. Pokoik , 115 A.D.3d 428, 429 (1st Dept. 2014) (citation omitted). “A fiduciary relationship exists between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation” but generally does not arise “between those involved in arm’s length business transactions.” EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005) (citations and quotation marks omitted). “If the parties ... do not create their own relationship of higher trust, courts should not ordinarily transport them to the higher realm of relationship and fashion the stricter duty for them.” Id . at 20. Defendants argued that the Buy-Out Agreement was an arm’s-length business transaction in which no fiduciary duty attached. Defendants maintained that Barnett held no interest in Insomnia after the Buy-Out Agreement and any dilution of Berkowitz’s equity interest, even if undertaken by Berkowitz directly, would not have constituted a breach of fiduciary duty. In response, Barnett argued that the Buy-Out Agreement made it clear that a relationship of trust was created thereunder. According to Barnett, he was the beneficiary of the But-Out Agreement; Berkowitz was the trustee; and the 6.8% of Berkowitz’s interest in Insomnia along with distributions or interests that Barnett would thereafter acquire on account of his equity interest in Insomnia was trust property and upon closing of the transaction under the Buy-Out Agreement, there was actual delivery or legal assignment of trust property to Berkowitz. The Court agreed with Defendants, holding that Barnett failed to plead the existence of a fiduciary relationship. The Court explained that “ part from Berkowitz’s contractual obligation to pay Barnett in the event of a Liquidation Event, Barnett did not retain any other right or benefit under the Buy-Out Agreement and the Buy-Out Agreement did not put Berkowitz under a duty to act for the benefit of Barnett.” Slip Op. at *11. “Because the essential element of a breach of fiduciary duty cause of action – the existence of a fiduciary duty – has not been adequately pled,” the Court dismissed “this cause of action.” Id . Fraud Cause of Action To plead a cause of action for fraud, the plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Genger v. Genger , 152 A.D.3d 444, 445 (1st Dept. 2017) (citation and quotation marks omitted). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Defendants argued that Barnett’s fraud claim should be dismissed because it was time barred due to the fact that all alleged misrepresentations occurred in 2006 and otherwise insufficiently particular to withstand a motion under CPLR § 3016(b). “ fraud-based action must be commenced within six years of the fraud or within two years from the time the plaintiff discovered the fraud or could with reasonable diligence have discovered it.” Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009) (citations and quotation marks omitted). “Where a plaintiff relies upon the two-year discovery exception to the six-year limitations period, the 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.” Cannariato v. Cannariato , 136 A.D.3d 627, 627 (2d Dept. 2016) (citations and quotation marks omitted); accord Endervelt v. Slade , 214 A.D.2d 456, 457 (1st Dept. 1995). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011)  (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). In response, Barnett argued that Berkowitz’s fraudulent conduct first came to his attention in August 2018, when the Court ordered Berkowitz to provide information about Berkowitz’s equity interest, and information respecting Insomnia and its business. Therefore, contended Barnett, the statute of limitations on his fraud cause of action began to run after August 2018. The Court rejected Barnett’s argument, holding that the fraud claim was time-barred: Under the plain terms of the Buy-Out Agreement, Berkowitz was under no obligation to disclose to Barnett any information regarding the sale of Berkowitz’s equity interests in Insomnia. And Barnett made no effort to get any information about his Retained Seller Benefit from Berkowitz between execution of the Buyout Agreement in 2006 and the commencement of this action in 2018. As Barnett has not alleged facts to show that he sought to obtain information about his Retained Seller Benefit for more than ten years before commencing this action, Barnett has not met his burden of showing that Berkowitz’s alleged fraud could not have been discovered, even with the benefit of the discovery rule, prior to expiration of the statute of limitations Slip Op. at *13 (citation omitted). Takeaway Contracts are often at the heart of business and commercial disputes. Not all contract disputes result in litigation. A well-drafted contract can often prevent or resolve a dispute before the parties run to court. But, as Barnett shows, when the parties cannot resolve their differences, and resort to litigation, it is important to understand the rules governing the breach of contract claim. Barnett also shows the importance of demonstrating the existence of a duty separate from the contractual one. Conduct amounting to breach of a contractual obligation may also constitute the breach of a duty arising out of the relationship created by contract which is independent of that contract. In Barnett , Justice Scarpulla found that there was no relationship independent of the contractual one. Finally, Barnett reminds litigants to pursue the prosecution of their claims as soon as they are known. Although determining when accrual occurs, and when the claim should have been discovered, is not easy and often contested, New York law is clear that “where 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). In Barnett , as noted, the Court found that Plaintiff did not undertake such an inquiry.

Insurance policies typically provide that the insurer will “defend” its insured in the event of a lawsuit and “indemnify” its insured against liability resulting therefrom.  The insurer’s duty to defend, however, is broader than its duty to indemnify.  Seaboard Surety Co. v. Gillette Co. , 64 N.Y.2d 304 (1984).  Simply stated, an insurer may be obligated to provide a defense to a lawsuit even though it may be relieved of the obligation to indemnify its insured from any judgment rendered in that lawsuit. In Seaboard , the insurer brought an action against its insured seeking a declaratory judgment that it had no duty to defend or indemnify with respect to an action brought against the insured.  In describing the distinction between the duty to defend and the duty to indemnify, the Seaboard Court stated that: Where an insurance policy includes the insurer's promise to defend the insured against specified claims as well as to indemnify for actual liability, the insurer's duty to furnish a defense is broader than its obligation to indemnify. The duty to defend arises whenever the allegations in a complaint against the insured fall within the scope of the risks undertaken by the insurer, regardless of how false or groundless those allegations might be. The duty is not contingent on the insurer's ultimate duty to indemnify should the insured be found liable, nor is it material that the complaint against the insured asserts additional claims which fall outside the policy's general coverage or within its exclusory provisions. Rather, the duty of the insurer to defend the insured rests solely on whether the complaint alleges any facts or grounds which bring the action within the protection purchased.  Though policy coverage is often denominated as “liability insurance", where the insurer has made promises to defend it is clear that the coverage is, in fact, litigation insurance as well.  As such, so long as the claims asserted against the insured may rationally be said to fall within policy coverage, whatever may later prove to be the limits of the insurer's responsibility to pay, there is no doubt that it is obligated to defend. Seaboard , 64 N.Y.2d 310 -11 (citations, some quotation marks and brackets omitted).  The Seaboard Court found that summary judgment in favor of the insurer relieving it of its duty to defend was not established because “ declaration that there is no obligation to defend could now properly be made only if it could be concluded as a matter of law that there is no possible factual or legal basis on which the insurer might eventually be held to be obligated to indemnify the insured under any provision of the insurance policy.”  Seaboard , 64 N.Y.2d 312 (citations, quotation marks and some brackets omitted). On July 31, 2019, the Appellate Division, Fourth Department, addressed these issues in Pixley Dev. Corp. v. Erie Ins. Co.  The plaintiff in Pixley, a landlord that was named as an additional insured on a tenant’s insurance policy, brought an action in which it sought a declaratory judgment that Erie was obligated to defend and indemnify it in a personal injury suit commenced by a delivery person that slipped on ice on a “delivery driveway” while delivering supplies to Pixley’s tenant.  Pixley moved for summary judgment and the insurer cross-moved for summary judgment dismissing Pixley’s complaint.  Supreme court denied Pixley’s motion and granted the insurer’s cross-motion.  The Fourth Department modified by “denying the cross-motion in part and reinstating the complaint against ” and declaring that the insurer “is obligated to defend plaintiff in the underlying personal injury action.” Under the operative lease, tenant’s premises “was defined as ‘a ground floor store … together with … the right to use the driveway designated for delivery purposes in common with other tenants.’”  Tenant was also required to pay common area maintenance charges and was “obligated to provide ‘for the benefit of Pixley, a comprehensive liability policy of insurance protecting Pixley against any liability whatsoever, occasioned by accident, on or about the Premises, or any appurtenances thereto.’”  (Emphasis in original, brackets omitted.) Tenant obtained the required policy.  The additional insured endorsement, however, only named Pixley as an additional insured “only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to and shown in the Schedule.’" On supplemental declarations, the policy “identified the leased premises only by its address.” The Court found that Pixley established that “the use of the delivery driveway was included in the scope of the demised premises, and there are triable issues of fact whether assumed some responsibility for maintenance of that area, including snow removal.”  (Citations, internal quotation marks and brackets omitted.)  The delivery driveway was necessary for ingress and egress and, therefore, was part of the license provided by the lease.  Finally, the Court thought it relevant to its determination that the “claims arguably arise out of that part of the premises leased to are that the lease required to procure insurance against any liabilities on or about the demised premises or any appurtenances thereto and required to pay its proportional share of the common area costs' incurred in operating and maintaining the subject property.”  (Emphasis in original, citations and internal quotation marks omitted.) Because the Fourth Department found that “the allegations of the personal injury complaint and the terms of the policy create a reasonable possibility that the tort plaintiff’s claims are covered under the terms of the policy,” it was established that the insurer had a duty to defend Pixley in the personal injury lawsuit. The Court, however, found that Pixley failed to establish as a matter of law that that it would “ultimately be entitled to indemnification from .”  Therefore, supreme court properly denied such relief to Pixley.

Distinguishing between direct and derivative claims is not easy. Sometimes, the difficulty arises because of the entity involved. For example, in the LLC context, there are fiduciary relationships ( e.g. , managing member and non-managing member) that will support a direct action in circumstances that might otherwise require a derivative action. E.g. , Pokoik v. Pokoik , 115 A.D.3d 428 (1st Dept. 2014); Salm v. Feldstein , 20 A.D.3d 469, 470 (2d Dept. 2005). Other times, the difficulty rests with the wrong sought to be redressed and the harm incurred ( e.g. , the diversion of assets by officers or directors of a company for their own benefit and the resulting diminution in the value of the shareholder’s stock).    Being able to tell the difference between the two types of claims is both procedurally and substantively important. For example, as this Blog has noted in previous posts ( e.g. , here ), in a derivative action, the plaintiff must satisfy the demand requirement, or demonstrate with particularity why demand should be excused, before being permitted to proceed with litigation. There is no comparable pleading requirement in a direct action.  In today’s post, this Blog looks at Huldisch v. Mermelstein , 2019 N.Y. Slip Op. 32216(U) (Sup. Ct., N.Y. County, July 24, 2019) ( here ). In Huldisch , the Court dismissed a breach of fiduciary duty counterclaim because the defendants failed to demonstrate that the claim belonged to them and not the company. A Brief Primer on The Applicable Rules Where the wrong is directed against a corporation, the claim belongs to the entity. The shareholder does not have an individual claim, even if the shareholder loses the value of his/her shares or incurs personal liability in an attempt to keep the corporation solvent. Abrams v. Donati , 66 N.Y.2d 951, 953 (1985); Serino v.  Lipper , 123 A.D.3d 34, 40 (1st Dept. 2014). “The distinction between derivative and direct claims is grounded upon the principle that a stockholder does not have an individual cause of action that derives from harm done to the corporation but may bring a direct claim when the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation.” Accredited Aides Plus, Inc. v. Program Risk Mgmt., Inc. , 147 A.D.3d 122, 132 (3d Dept. 2017) (citation and internal quotation marks omitted). In determining whether a claim is direct or derivative, “a court must look to the nature of the wrong and to whom the relief should go.” Tooley v. Donaldson Lufkin & Jenrette, Inc. , 845 A.D.2d 1031, 1038 (Del. 2004). Specifically, the court should consider “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).” Yudell v. Gilbert , 99 A.D.3d 108, 114 (1st Dept. 2012) (internal quotation marks and citations omitted); Maldonado v. DiBre , 140 A.D.3d 1501, 1503-1504 (3d Dept. 2016). “The pertinent inquiry is whether the thrust of the plaintiff’s action is to vindicate his personal rights as an individual and not as a stockholder on behalf of the corporation.” Maldonado , 140 A.D.3d at 1504 (internal quotation marks and citation omitted). The plaintiff must show that the duty allegedly breached was owed to the shareholder, and that he/she can prevail without showing an injury to the corporation. Yudell , 99 A.D.3d at 114. If the individual claim of harm is “confused with or embedded” within the harm to the corporation, then it must be dismissed. Serino , 123 A.D.3d at 40; Patterson v. Calogero , 150 A.D.3d 1131, 1133 (2d Dept. 2017) (even where individual harm is claimed, if it is confused with or embedded in the harm to corporation, it cannot stand separately). Huldisch v. Mermelstein Background Huldisch arose from a dispute over the investment in, and management of, the Jeffrey Stein Salon NYC East 78 Inc. (the “Salon”). Plaintiffs’ Claims Plaintiffs invested money in the Salon in 2016. At the time, the Salon was financially struggling, owing tens of thousands of dollars in rent arrears. Defendants purportedly needed Plaintiffs’ investment to pay the back rent. Plaintiffs alleged that to induce them to make the investment, Defendants made numerous misrepresentations and omissions concerning the financial condition of the Salon, actions that Defendants allegedly had taken regarding the renewal of the Salon’s lease, which was set to expire on April 30, 2018, and their commitment to servicing clients at the Salon in the future. Plaintiffs claimed that Defendants concealed material information about the Salon which Plaintiffs had expressly requested as part of their due diligence prior to making their investment including, among other things, that Defendants were taking cash from the company without reporting it on its books and records, purchasing product through the Salon that was used in other Stein salons (“Other Stein Salons”), and improperly running personal expenses through the Salon. After Plaintiffs made their initial investment in the Salon, Defendants allegedly mismanaged the Salon and wasted its assets. Among other things, Defendants purportedly diverted clients from the Salon to the Other Stein Salons by, inter alia , falsely telling them (and employees) that the Salon was closing. In May 2018, the Salon closed its doors. Defendants’ Counterclaims According to Defendants, Plaintiffs promised that they had the skill, experience and contacts to support the Salon and that they had additional staffing who had significant new clientele that would be brought into the business. Based upon these promises, among others, Defendants sold their shares in the Salon to Plaintiffs rather than to a third party that had made a higher offer for the shares. Defendants maintained that Plaintiffs knew that those promises were false, and that Defendants were being misled by Plaintiffs. Defendants claimed that despite the promises, and their reliance on those promises, Plaintiffs never hired any stylists with clients. Moreover, Plaintiffs allegedly failed and refused to pay the full amount of the purchase price for the shares of stock in the business. Plaintiffs were supposed to pay an additional $70,000, which was needed for renovations and upgrades. Defendants alleged that Plaintiffs failed to pay the $70,000 balance due. Finally, Defendants argued that Plaintiffs mismanaged the business for Plaintiffs’ benefit. On September 7, 2018, Plaintiffs filed their complaint. On April 18, 2019, Defendants filed an answer and counterclaims. In their answer, Defendants sought relief for: (l) breach of contract (first counterclaim), (2) indemnification (second counterclaim),  (3) contribution (third counterclaim), (4) breach of contract (fourth counterclaim), (5) breach of fiduciary duty (fifth counterclaim), fraud (sixth counterclaim), and an accounting and judicial dissolution (seventh counterclaim). Plaintiffs moved to dismiss all but the seventh counterclaim. The Court granted Plaintiff’s motion. The Court’s Decision In dismissing the breach of fiduciary duty counterclaim, the Court held that the counterclaim asserted derivative, not direct, claims. Defendants alleged that Plaintiffs mismanaged the Salon by, among other things, changing bank accounts, failing to pay Salon staff, failing to pay contractors, refusing to communicate with Defendants, causing checks to bounce, and hiring relatives that were incompetent. Without reaching the issue whether Plaintiffs breached their fiduciary duties, the Court held that the counterclaim should be dismissed because Defendants did not assert the claims derivatively. Slip Op. at *6. In dismissing the fraud counterclaim, the Court held that Defendants failed to plead fraud with particularity under CPLR § 3016(b) and a misrepresentation of present fact that did not relate to future performance. Defendants alleged that Plaintiffs made two misrepresentations: that Plaintiffs had the “skill, experience, and contacts to support the Salon”; and that Plaintiffs would bring in new staff with clients in the future. To plead a cause of action for fraud, the plaintiff must allege that (1) the defendant made a material false representation, (2) which the defendant knew was false (3) the defendant intended to defraud the plaintiff thereby, (4) the plaintiff reasonably relied upon the representation, and (5) the plaintiff suffered damage as a result of such reliance. See Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). A fraud claim cannot be based on statements that are promissory in nature and that relate to future performance. Elghanian v. Harvey , 249 A.D.2d 206, 206-07 (1st Dept. 1998). To be actionable, a fraud claim based upon a statement of future intention must allege facts that show the defendant, at the time the promise was made, never intended to honor or act on his/her statement. Lanzi v. Brooks , 54 A.D.2d 1057, 1058 (3d Dept. 1976). If the plaintiff can show that the promise was actually made with a preconceived and undisclosed intention of not performing it, the promise constitutes a misrepresentation of a material existing fact upon which an action for rescission may be predicated. White v. Davidson , 150 A.D.3d 610, 611 (1st Dept. 2017); see also Sabo v. Delman , 3 N.Y.2d 155, 160 (1957); Laduzinski v. Alvarez & Marsal Tax and LLC , 132 A.D.3d 164, 168-169 (1st Dept. 2015). Such misrepresentations are collateral to the agreement and can form the basis of a fraudulent inducement claim. White , 150 A.D.3d at 612; Laduzinski , 132 A.D.3d at 169. With these principles in mind, the Court held that “Defendants fail to identify any statements made by the Plaintiffs that would constitute a material misrepresentation.” Slip Op. at * 7. In particular, the Court found the representation that Plaintiff had the “skill, experience, and contacts to support the Salon” to be insufficiently vague “to meet the heightened pleading standard for fraud.” Id .  The Court also found the representation that Plaintiffs would bring new staff and clientele to the Salon to be promissory in nature and, therefore, an insufficient basis for alleging fraud. Id . citing Tribune Print Co. v. 263 Ninth Ave. Realty, Inc. , 88 A.D.2d 877, 879 (1st Dept. 1982). Takeaway Mismanagement or diversion of corporate assets is a wrong to the corporation. Abrams , 66 N.Y.2d at 952. As such, a lawsuit seeking to redress such harm must be brought derivatively. This is so even if the plaintiff has a direct claim that is embedded in the derivative claim. Yudell , 99 A.D.3d at 115. In Huldisch , the Court found that the wrongs complained of – mismanagement and diversion of assets – impacted the Salon, not Defendants in their individual capacities. Consequently, the Court dismissed the fiduciary duty counterclaim because it should have been asserted derivatively, not directly. Huldisch also serves as a reminder that fraud must be pleaded with particularity and that a promise alleged to be false must be shown to have been made with a preconceived and undisclosed intention of not performing it. In the absence of such a showing, the promise will be deemed to be an inactionable promise of future performance, instead of a misrepresentation of a material existing fact upon which an action for fraud may be predicated.

Last week was a rough one for Facebook, Inc. (FB-NASDAQ). On July 24, 2019, the social network giant, agreed to pay a $100 million fine to the Securities and Exchange Commission (“SEC”) ( here ) to settle claims related to the Cambridge Analytica scandal and a $5 billion penalty to the Federal Trade Commission (“FTC”) to settle claims concerning misleading disclosures related to the company’s privacy practices ( here ). The settlements are the culmination of investigations by the SEC, FTC and other federal agencies that started about a year ago (July 2018) following Facebook’s disclosures in March 2018 that Cambridge Analytica, the British political data-analysis firm that has been connected to the 2016 presidential campaign, improperly accessed the personal information of approximately 87 million Facebook users. ( Here .) The SEC fine – $100 million – represents the “highest penalty the SEC has ever assessed for this kind of disclosure failure,” said Stephanie Avakian (“Avakian”), the SEC’s deputy director of enforcement. The FTC penalty – $5 billion – is “the largest ever imposed on any company for violating consumers’ privacy and almost 20 times greater than the largest privacy or data security penalty ever imposed worldwide,” said the FTC in its announcement. “It is one of the largest penalties ever assessed by the U.S. government for any violation.” SEC v. Facebook, Inc. The SEC brought charges against Facebook for making misleading disclosures about the risk that user data could be misused ( here ).  According to the SEC, for more than two years, Facebook’s public disclosures presented the risk of misuse of user data as merely hypothetical when, in fact, Facebook knew that a third-party developer ( i.e. , Cambridge Analytica) had misused the social network giant’s user data.  According to the SEC’s complaint ( here ), in 2014 and 2015, Cambridge Analytica, the now-defunct British advertising and data analytics company, paid an academic researcher, through a company he controlled, to collect and transfer data from Facebook to create personality scores for approximately 30 million Americans.  In addition to the personality scores, the researcher, in violation of Facebook’s policies, also transferred to Cambridge Analytica the underlying Facebook user data, including names, genders, locations, birthdays, and “page likes.”  Cambridge Analytica used this information in connection with its political advertising activities. In the complaint, the SEC alleged that Facebook discovered the misuse of its users’ information in 2015 but did not correct its existing disclosure for more than two years.  Instead, Facebook continued to tell investors that “our users’ data may be improperly accessed, used or disclosed.” According to the SEC, Facebook reinforced this false impression when it told news reporters who were investigating Cambridge Analytica’s use of Facebook user data that it had discovered no evidence of wrongdoing.  Facebook did not disclose that a researcher had improperly transferred data for millions of Facebook users to Cambridge Analytica until March 16, 2018, when the company publicly acknowledged on its website that it had learned of the violation of its policy in 2015. The complaint further alleged that during the referenced two-year period, Facebook had no specific policies or procedures in place to assess the results of its investigation for the purpose of making accurate disclosures in the company’s public filings. “Public companies must accurately describe the material risks to their business,” said Avakian.  “As alleged in our complaint, Facebook presented the risk of misuse of user data as hypothetical when they knew user data had in fact been misused.  Public companies must have procedures in place to make accurate disclosures about material business risks.” “We allege that Facebook exacerbated its disclosure failures when it misled reporters who asked the company about its investigation into Cambridge Analytica,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office. “This gave further weight to Facebook’s misleading statements in its public filings.” Without admitting or denying the SEC’s allegations, Facebook agreed to the entry of a final judgment ordering a $100 million penalty and an injunction that permanently enjoins it from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 13(a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a) thereunder. United States of America v. Facebook, Inc. The FTC brought charges against Facebook ( here ), alleging that the company violated a 2012 FTC order (the “2012 FTC Order”) by deceiving users about their ability to control the privacy of their personal information. To settle the claims, Facebook agreed to pay a $5 billion penalty and submit to new restrictions and a modified corporate structure that is intended to hold the company accountable for the decisions it makes about its users’ privacy. (The FTC’s announcement can be found here and the settlement fact sheet can be found here .) According to the FTC, Facebook repeatedly used deceptive disclosures and settings to undermine users’ privacy preferences in violation of the 2012 FTC Order. Under the order, Facebook was prohibited from making misrepresentations about the privacy or security of consumers’ personal information, and the extent to which it shared personal information, such as names and dates of birth, with third parties. It also required Facebook to maintain a reasonable privacy program that safeguarded the privacy and confidentiality of user information. The FTC alleged that Facebook violated the 2012 order by deceiving its users when the company shared the data of users’ Facebook friends with third-party app developers, even when those friends had set more restrictive privacy settings. According to the agency, Facebook allowed users’ personal information to be shared with third-party apps that were downloaded by the user’s Facebook “friends.” The FTC claimed that many users were unaware that Facebook was sharing such information, and therefore did not take the steps needed to opt-out of sharing. “Despite repeated promises to its billions of users worldwide that they could control how their personal information is shared, Facebook undermined consumers’ choices,” said FTC Chairman Joe Simons. “The magnitude of the $5 billion penalty and sweeping conduct relief are unprecedented in the history of the FTC. The relief is designed not only to punish future violations but, more importantly, to change Facebook’s entire privacy culture to decrease the likelihood of continued violations. The Commission takes consumer privacy seriously, and will enforce FTC orders to the fullest extent of the law.” “The Department of Justice is committed to protecting consumer data privacy and ensuring that social media companies like Facebook do not mislead individuals about the use of their personal information,” said Assistant Attorney General Jody Hunt for the Department of Justice’s Civil Division. “This settlement’s historic penalty and compliance terms will benefit American consumers, and the Department expects Facebook to treat its privacy obligations with the utmost seriousness.” The Terms of the New Settlement In addition to the record-breaking $5 billion penalty levied by the FTC, the settlement also imposes new restrictions on Facebook’s business operations and creates multiple levels of governance and compliance. The order requires Facebook to restructure its approach to privacy from the corporate board-level down and establishes new mechanisms to ensure that Facebook executives are accountable for the decisions they make about privacy, and that those decisions are subject to meaningful oversight. Under the settlement order, the board of directors is required to establish an independent privacy committee, which is designed to remove control over user privacy by Facebook’s Chief Executive Officer (“CEO”), Mark Zuckerberg. Members of the privacy committee must be independent and will be appointed by an independent nominating committee. Members can be fired only by a supermajority of the board of directors. The settlement also requires Facebook to designate compliance officers who will be responsible for Facebook’s privacy program. These compliance officers will be subject to the approval of the new privacy committee and can be removed only by that committee, not by Facebook’s CEO or Facebook employees. Importantly, Mark Zuckerberg and designated compliance officers must independently submit to the FTC quarterly certifications that the company is in compliance with the privacy program mandated by the order, as well as an annual certification that the company is in overall compliance with the order. Any false certification will subject them to individual civil and criminal penalties. Moreover, the settlement is intended to strengthen external oversight by requiring an independent third-party to assess the effectiveness of Facebook’s privacy program and identify any gaps. The assessor’s biennial evaluations of Facebook’s privacy program must be based on the assessor’s independent fact-gathering, sampling, and testing, and must not rely primarily on assertions or attestations by Facebook management. The order prohibits the company from making any misrepresentations to the assessor, who can be approved or removed by the FTC. Importantly, the assessor is required to report directly to the new privacy board committee on a quarterly basis. The order also authorizes the FTC to use the discovery tools provided by the Federal Rules of Civil Procedure to monitor Facebook’s compliance with the order. The settlement not only applies to Facebook and its other social media offerings, WhatsApp and Instagram, but also to every new or modified product, service, or practice before it is implemented, and document its decisions about user privacy. The designated compliance officers must generate a quarterly privacy review report, which they must share with the CEO and the independent assessor, as well as with the FTC upon request by the agency. The order also requires Facebook to document incidents when data of 500 or more users has been compromised and its efforts to address such an incident and deliver this documentation to the FTC and the assessor within 30 days of the company’s discovery of the incident. Additionally, the order imposes significant new privacy requirements, such as greater oversight over third-party apps; prohibiting the use of telephone numbers to enable a security feature ( e.g. , two-factor authentication) for advertising; providing clear and conspicuous notice of its use of facial recognition technology, and obtaining affirmative express user consent prior to any use that materially exceeds its prior disclosures to users; encrypting user passwords and regularly scanning such encryptions to detect whether any passwords are stored in plaintext; and prohibiting the request for email passwords to other services when consumers sign up for Facebook services. The FTC Commissioners The FTC voted 3-2 to refer the complaint and stipulated final order to the Department of Justice. “The Order imposes a privacy regime that includes a new corporate governance structure, with corporate and individual accountability and more rigorous compliance monitoring,” said the three Commissioners voting for the settlement in a statement ( here ). “This approach dramatically increases the likelihood that Facebook will be compliant with the Order; if there are any deviations, they likely will be detected and remedied quickly.” The dissenting Commissioners said the $5 billion penalty, though substantial, was insufficient and the privacy governance changes insufficient to change Facebook’s practices with regard to gathering and leveraging users’ data. “The settlement imposes no meaningful changes to the company’s structure or financial incentives, which led to these violations,” Commissioner Rohit Chopra said in a statement ( here ). “Nor does it include any restrictions on the company’s mass surveillance or advertising tactics.” “The settlement imposes no meaningful changes to the company’s structure or financial incentives,” Chopra continued, “nor does it include any restrictions on the company’s mass surveillance or advertising tactics. Instead, the order allows Facebook to decide for itself how much information it can harvest from users and what it can do with that information, as long as it creates a paper trail.” “Even though this settlement is historic, in order to support it I would have to be confident that its combined terms would effectively deter Facebook from engaging in future law violations and send the message that order violations are not worth the risk,” Commissioner Rebecca Kelly Slaughter said in a statement ( here ). “When executives at large companies exercise control over decisions, including decisions to break the law,” Slaughter continued, “they should be held accountable the same way executives at smaller companies are.” The company issued a statement in a Facebook blog post ( here ), explaining that the settlement “will mark a sharper turn toward privacy, on a different scale than anything we’ve done in the past.” Mark Zuckerberg also issued a statement about the settlement ( here ), stating “We have a responsibility to protect people’s privacy. We already work hard to live up to this responsibility, but now we’re going to set a completely new standard for our industry.”