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On July 18, 2019, Justice Joel M. Cohen of the Supreme Court, New York County, Commercial Division, decided Shyer v. Shyer , 2019 N.Y. Slip Op. 32138(U) (Sup. Ct., N.Y. County July 18, 2019) ( here ), a third-party action involving allegations of fraudulent concealment relating to the failure to disclose material information about the deteriorating health of a company executive for the purpose of securing about $150,000 in annual benefits. The company, Zyloware Corp. (“Zyloware”), sued Catherine Shyer (“Catherine”), the wife of Robert Shyer (“Robert”), a company executive and director, for fraudulently inducing Zyloware to continue employing Robert when his claim for long term disability raised questions about his employability. Under an agreement with the company, Robert was to receive a lifetime salary and premium health benefits even if he was no longer employed by the company; however, if Robert were to cease his employment, Catherine would lose some or most of the benefits that she would receive – approximately $150,000 annually. This fact, claimed Zyloware, caused Catherine to conceal Robert’s dementia diagnosis so that he would continue his employment with the company. Catherine moved to dismiss the complaint, claiming, inter alia , that she had no duty to disclose Robert’s health condition to the company. As discussed below, the Court agreed with Catherine and dismissed the complaint.    Shyer v. Shyer Background Zyloware is a family-owned and operated optical frame supplier. It was founded by Joseph Shyer (“Joseph”). For several decades, it was run by Joseph’s sons, Robert and Henry Shyer (“Henry”). Eventually, Robert and Henry’s sons, Christopher Shyer (“Christopher”) and James Shyer (“James”), respectively, joined Zyloware and assumed significant executive responsibilities within the company. In March 2010, Robert, Henry, Christopher, and James entered into a Shareholders Agreement and a Master Executive Employment Agreement (the “Employment Agreement”) to formalize the succession of leadership in Zyloware. The Shareholders Agreement outlined the rights, responsibilities, and ownership interests between and among the four Shyers. Under the agreement, each would hold a 25% interest in the company. Christopher and James were designated co-chief executive officers of Zyloware, while Robert and Henry remained employed as executives and directors. The Shareholders Agreement also set forth procedures for Zyloware to buy back Robert and Henry’s company stock upon their deaths. The Employment Agreement included two features relevant to the action. First, the agreement provided that Robert (and Henry) “receive substantial annual salaries/benefits for life,” but “would lose certain of these benefits if no longer employed.” These benefits included Zyloware’s group health insurance coverage, and perks, such as the use of a corporate credit card and vehicle. Second, the Employment Agreement allowed Zyloware to terminate Robert’s employment if he suffered a “disability” within the meaning of the agreement. A “Disability” was defined as the “inability of an Executive to perform his functions as a shareholder, officer and/or director of the Corporation … , or the duties that he is required to perform ... because of a physical, mental or emotional condition which persists for an aggregate of 120 days (which need not be consecutive) during any period of 360 consecutive days, as determined by a medical doctor selected by the Board, to whom each Executive hereby consents to present himself promptly for examination upon the Board’s request.” On July 9, 2014, Robert signed a New York Short Form Power-of-Attorney in which he gave Catherine powers over his affairs and which became effective upon Catherine’s acceptance. That same day, Robert executed a Last Will and Testament, which, among other things, named Catherine as sole executor of Robert’s estate. Catherine accepted the power-of-attorney several months later, on November 6, 2014. Zyloware alleged that in 2015 Catherine persuaded Zyloware to continue employing Robert despite his declining health. At the time, Catherine had applied for a year’s worth of long-term disability for Robert. While Robert was assured a certain level of salary and benefits for life regardless of his employment status, his beneficiaries were not. If Robert were terminated under the disability provision of the Employment Agreement, Catherine and other beneficiaries would have lost the premium health benefits and would have lost other benefits, worth about $150,000 annually. Therefore, Zyloware alleged, “ o avoid losing her benefits, Catherine concealed from own son and other Zyloware shareholders the fact that Robert, who was in obvious physical decline, had been diagnosed with dementia or symptoms consistent with dementia.” Zyloware eventually retired Robert on November 30, 2017. Three weeks later, on December 19, 2017, Robert passed away. Thereafter, Catherine was named the preliminary executrix of his estate (the “Estate”). Procedural History In March 2018, Catherine, in her capacity as preliminary executrix of the Estate, sued Zyloware, Christopher, James, and Henry in part, because of the defendants’ purported violation of the Shareholders Agreement. In the complaint, Catherine alleged four causes of action: declaratory judgment, breach of contract, breach of fiduciary duty, and injunctive relief. The defendants moved to dismiss. In a Decision and Order dated July 19, 2018, the Court dismissed the breach of contract claim against the individual defendants, dismissed the injunctive relief claim against all defendants, and otherwise denied the motion. On November 14, 2018, Zyloware filed a third-party complaint against Catherine, individually (rather than in her capacity as the preliminary executrix of the Estate), alleging two causes of action: (1) wrongful interference with contract, on the basis that Catherine induced the Estate to breach the Shareholders Agreement; and (2) fraud, based on Catherine’s alleged failure to disclose to Zyloware the truth about Robert’s illness. Catherine moved to dismiss the third-party complaint under CPLR § 3211(a)(7) for failure to state a cause of action. The Court granted the motion. The Court’s Decision Zyloware alleged that Catherine defrauded it by concealing the truth about Robert’s health, i.e. , by failing to inform Zyloware that Robert had been diagnosed with dementia in order to preserve Robert’s employment status and Catherine’s access to certain benefits. The Court held that the claim failed because “Zyloware not allege facts establishing that Catherine had or breached a legal duty to disclose her husband’s medical information to the company.” Slip Op. at *15. To plead fraud concealment, a plaintiff must allege that the defendant made a material misrepresentation of fact, that the misrepresentation was made intentionally in order to defraud or mislead the plaintiff, that the plaintiff reasonably relied on the misrepresentation, and that the plaintiff suffered damage as a result of its reliance on the defendant’s misrepresentation. Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011). In addition to the foregoing elements, a plaintiff must allege that the defendant had a duty to disclose material information and that it failed to do so. P. T. Bank Cent. Asia v. ABN AMRO Bank N.V. , 301 A.D.2d 373, 376 (1st Dept. 2003); Mobil Oil Corp. v. Joshi , 202 A.D.2d 318 (1st Dept. 1994). And, with all complaints alleging fraud, the plaintiff must plead the claim with particularity. CPLR § 3016(b). No Affirmative Misrepresentation The Court found that Zyloware did not allege an affirmative misrepresentation. Slip Op. at *15 (“The closest Zyloware comes to alleging an affirmative misrepresentation is the allegation that, when Catherine learned that Henry had visited Robert in a rehabilitation facility and ‘observed that was in the dementia unit, told Henry that had been placed in the wrong unit’”). The Court rejected Zyloware’s assertion that “Catherine’s statement was ‘yet another lie.’” Id . More details were needed, said the Court. Id . The Court also noted that Zyloware failed to explain how this alleged misrepresentation could have “‘fraudulently induced Zyloware not to terminate ’s employment.’” Id . This was so given the fact that Zyloware had the right to order Robert to undergo a medical examination and to terminate Robert’s employment if the examination revealed that Robert was suffering a disability within the meaning of the Employment Agreement. “By the time Catherine made her alleged misstatement,” explained the Court, “Zyloware had already ‘sought to arrange for to be examined by a physician,’ knew that Robert ‘had suffered a stroke,’ knew that Robert ‘was admitted to a rehabilitation facility,’ and knew that Robert had ‘not reported to the office for about one year.’” Therefore, the Court concluded that Zyloware could not have been defrauded because it was on notice of the foregoing facts – facts that contradicted the alleged misrepresentation. Id . No Duty to Disclose Next, the Court turned its attention to whether Catherine had a duty to disclose information about the extent of Robert’s deteriorating health. This issue, said the Court, was “ he crux of Zyloware’s fraud claim” as its success “hinge ” on actionable “acts of omission.” Slip Op. at *16, citing Elghanian v. Harvey , 249 A.D.2d 206 (1st Dept. 1998). A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter ( see Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013)); (2) there is a fiduciary relationship between the plaintiff and defendant ( see Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016)); or (3) the defendant possesses “special facts” about the matter not known by the plaintiff ( Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). The Court found that none of the foregoing circumstances were present in the case. First, the Court found that Zyloware failed to identify “any relevant, specific instance of Catherine making a ‘misleading partial disclosure’ about her husband’s health.” Slip Op. at *17 n.5. Second, the Court found there was no existing fiduciary relationship between Catherine and the company. Such a relationship, observed the Court, “must exist prior to the transaction complained of and not as a result of it.” Balanced Return , 138 A.D.3d at 542; see also Elghanian , 249 A.D.2d at 206-207. The Court held that no such relationship existed. The Court rejected Zyloware’s argument that as a spouse, Catherine had a duty “on pain of a claim for fraud” “to affirmatively disclose otherwise confidential information about the specific nature of her husband’s medical condition.” Slip Op. at *17. The Court observed that the strength of the argument was undermined by the fact that Zyloware was “aware that a serious health issue present and the contractual right to conduct its own medical examination.” Id . The Court also rejected Zyloware’s argument that Catherine became a fiduciary of the company when she accepted the power of attorney. “ power of attorney … is … given with the intent that the attorney-in-fact will utilize that power for the benefit of the principal.” In re Estate of Ferrara , 7 N.Y.3d 244, 254 (2006). In other words, any fiduciary duty existed between Catherine and Robert, not between Catherine and the company. Slip Op. at *18. As the Court explained: “Zyloware cites no authority for the proposition that the attorney-in-fact undertakes an independent fiduciary duty to third parties, including her principal’s principals, exposing herself to individual liability to such parties.” Id . Third, the Court held that the “special facts doctrine” did not apply. Id . Under the doctrine, there is a duty to disclose information in the absence of a fiduciary relationship “when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). The doctrine does not apply, however, if the information could have been discovered through due diligence, i.e. , the “exercise of ordinary intelligence.” Jana L. v. W. 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (quoting Schumaker v. Mather , 133 N.Y. 590, 596 (1892)). And “ f nothing else, the ‘exercise of ordinary intelligence’ imposes, “at the very least, a duty to inquire.” Jana L. , 22 A.D.3d at 278. In rejecting the application of the doctrine, the Court found that Zyloware “had both the means and the opportunity to discover the nature of Robert’s obvious health problems notwithstanding Catherine’s alleged silence on the matter.” Slip Op. at *19. The Court explained that under the Employment Agreement, Zyloware could have requested, at any time, Robert to present himself for a medical examination before a doctor selected by Zyloware who could determine “whether Robert suffered a ‘disability’ within the meaning of the Employment Agreement.” Id . Significantly, noted the Court, “Zyloware did not exercise this contractual right to inquire until June 2017, which “ y that point, Robert ‘had not reported to the office for about one year,’ was experiencing an ‘obvious physical decline,’ and ‘Zyloware had become concerned that ... it should retire him as an employee.’” Id . “Because Zyloware ‘could have, but chose not to, inquire about’ Robert’s health,” the Court concluded that, “‘ he special facts doctrine not applicable.’” Id. , quoting Johnson v. Levin , 165 A.D.3d 497 (1st Dept. 2018). Finally, in rejecting the application of the doctrine, the Court addressed Zyloware’s “protests” concerning the company’s lack of diligence in ascertaining the true nature of Robert’s health: Zyloware protests that it “was in the optical eyewear frame business, not in the business of making neurological medical diagnoses.” That is true, and presumably that is why Zyloware contracted for the right to order a medical examination. The company did not need to “mak neurological medical diagnoses,”' or any kind of diagnoses. Rather, Zyloware could have ordered Robert to undergo a medical examination at any time, and certainly once it suspected that he suffered a “physical, mental or emotional condition” that would interfere with his enumerated duties. For the same reason, Zyloware’s argument that “discerning a condition such as dementia surely involves more than the exercise of “ordinary intelligence” also misses the mark. The question here is not whether “ordinary intelligence” required Zyloware to discover the condition, but whether “ordinary intelligence” required Zyloware to at least inquire about it. Under the circumstances, Zyloware did have a duty to inquire. In those circumstances, Catherine had no duty to volunteer the truth about Robert’s health. Slip Op. at **19-20 (citations and footnote omitted). Takeaway Under New York law, to recover damages for fraud, a “plaintiff must prove 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.” Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996). When the fraud involves an omission of material fact, it is actionable “only if the non-disclosing party has a duty to disclose.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V. , 68 F.3d 1478, 1483 (2d Cir. 1995). As noted above, a duty to disclose arises if: (1) “one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party,” id . (internal quotation marks omitted); (2) a special relationship exists between the plaintiff and defendant, such as a fiduciary relationship ( Mandarin Trading , 16 N.Y.3d at 178); or (3) the “special facts” doctrine applies ( P.T. Bank , 301 A.D.2d at 373). In Shyer , the Court found that none of the foregoing circumstances were present.

Following the stock market crash in 1929, Congress enacted the Securities Act of 1933 (the “1933 Act”) and the Securities and Exchange Act of 1934 (the “1934 Act”). Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund , 138 S. Ct. 1061, 1066 (2018). The 1933 Act has two primary objectives: (1) to provide transparency in financial statements so investors can make informed decisions about securities being offered for public sale; and (2) to address misstatements and omissions in the securities markets. To accomplish these goals, Congress required the disclosure of material information through the registration process. Thus, under the 1933 Act, companies that issue securities must file with the SEC a statement (known as a registration statement) that contains the following information: a description of the company’s business, the securities offered to the public, the company’s corporate management structure, and recent audited financial statements. In addition to the registration statement, registrants are required to file a prospectus. A prospectus is used to market securities to potential investors. The prospectus is included as part of the registration statement. Registration statements are subject to SEC examination for compliance with disclosure requirements. A registrant cannot make false statements in, or omit material facts from, a registration statement or prospectus. In fact, when a fact is disclosed, the registrant must disclose all information required to make that fact not misleading. Section 11 of the 1933 Act provides securities purchasers a private right of action if any part of a registration statement, when it became effective, “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statement therein not misleading.” 15 U.S.C. § 77k(a). A plaintiff bringing an action under Section 11 must establish one of the following bases of liability: “(1) a material misrepresentation; (2) a material omission in contravention of an affirmative legal disclosure obligation; or (3) a material omission of information that is necessary to prevent existing disclosures from being misleading.” Hutchison v. Deutsche Bank Sec. Inc. , 647 F.3d 479, 484 (2d Cir. 2011). Section 11 “‘imposes strict liability on issuers and signatories, and negligence liability on underwriters,’ for material misstatements or omissions in a registration statement.” Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am., Inc. , 873 F.3d 85, 99 (2d Cir. 2017) (quoting NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co. , 693 F.3d 145, 156 (2d Cir. 2012)). To be actionable under Section 11, any misrepresentation or omission must be material. Materiality is an “inherently fact-specific finding.” Basic Inc. v. Levinson , 485 U.S. 224, 236 (1988). A plaintiff demonstrates materiality when there is a “substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Ganino v. Citizens Utils. Co. , 228 F.3d 154, 162 (2d Cir. 2000) (quoting Basic , 485 U.S. at 231-32). Unlike a securities fraud, plaintiff proceeding under Section 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), a Section 11 plaintiff need not demonstrate “scienter, reliance, or loss causation.” In re Morgan Stanley Info. Fund Sec. Litig. , 592 F.3d 347, 359 (2d Cir. 2010). Nevertheless, a defendant in a Section 11 action will not be liable if it can prove “negative loss causation” – that is, if it can demonstrate that the alleged misstatement or omission did not lead to a decline in the company’s stock price. See 15 U.S.C. § 77k(e) (“ f the defendant proves that any portion or all of such damages represents other than the depreciation in value of such security resulting from , such portion of or all such damages shall not be recoverable.”). To sustain this defense, a defendant must establish that “the risk that caused the losses was not within the zone of risk concealed by the misrepresentations and omissions,” or that “the subject of the misstatements and omissions was not the cause of the actual loss suffered.” Fed. Hous. Fin. Agency , 873 F.3d at 154 (alterations and internal quotation marks omitted). Because Section 11 “allocate the risk of uncertainty to the defendants,” courts have described rebutting loss causation as a “heavy burden.” Akerman v. Oryx Commc’ns, Inc. , 810 F.2d 336, 341 (2d Cir. 1987). “Section 12(a)(2) provides similar redress where the securities at issue were sold using prospectuses or oral communications that contain material misstatements or omissions.” Morgan Stanley , 592 F.3d at 359 (citing 15 U.S.C. § 77l(a)(2).) Claims under Section 12(a)(2) may be brought against a “statutory seller,” which includes those who successfully solicited the purchase of the security in service of their own financial interests. Id . “ he elements of a prima facie claim under section 12(a)(2) are: (1) the defendant is a ‘statutory seller’; (2) the sale was effectuated ‘by means of a prospectus or oral communication’; and (3) the prospectus or oral communication ‘include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading.’” Id . (quoting 15 U.S.C. § 77l(a)(2)). Courts have characterized Sections 11(a) and 12(a)(2) as “Securities Act siblings with roughly parallel elements....” Id . Section 11 imposes “‘virtually absolute’ liability” as to issuers, while other defendants under Sections 11 and 12(a)(2) “may be held liable for mere negligence.” Id . On July 11, 2019, Justice Andrew Borrok of the Supreme Court, County of New York, Commercial Division, dismissed a putative securities class action against a Brazilian sports and lifestyle online retailer in Latin America (the “Company” or “Netshoes”), certain of its executives and directors, and its underwriters in connection with the Company’s initial public offering (“IPO”).  In In re Netshoes Sec. Litig. , 2019 N.Y. Slip Op. 29219 (Sup. Ct., N.Y. County July 16, 2019) ( here ), plaintiffs brought claims under Sections 11, 12(a)(2), and 15 of the 1933 Act, alleging that, in connection with the IPO, defendants made materially false and misleading statements in the registration statement and prospectus they filed with the SEC.  The Court dismissed the claims without prejudice, holding that the challenged statements were inactionable opinions, protected under the bespeaks caution doctrine, and inactionable expressions of corporate optimism and/or puffery. Matter of Netshoes Securities Litigation Background Netshoes was brought in the Supreme Court, Commercial Division after the U.S. Supreme Court decided Cyan . In Cyan , the U.S. Supreme Court unanimously held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the 1933 Act, and does not allow for the removal of those cases to federal court. here.=">here."> Plaintiffs alleged that the Company’s registration statement and prospectus (collectively, the “Offering Documents”) issued in connection with its IPO, contained materially false and misleading information about the Company’s business. In particular, plaintiffs alleged that defendants overstated the Company’s competitive market position, misrepresented the performance of the Company’s business-to-business supplements and vitamins distribution business (“B2B Business”), misrepresented its future growth prospects, and inaccurately reported information in the Company’s financial statements. Plaintiffs alleged that although the Offering Documents touted Netshoes’ competitive position, “high margin” business strategy, and B2B Business, the Company’s core sports and lifestyle eCommerce business was under intense pressure to significantly increase its marketing spend and provide further and deeper discounts to customers, so as to preserve its market share at the expense of its supposedly “high margin” business model. In addition, plaintiffs alleged, the B2B Business was receiving substantial returns of product sales that had been improperly recognized as revenue in earlier periods. Indeed, maintained plaintiffs, information made public since the IPO indicated that Netshoes’ financial statements for the year ended December 2016 (the “2016 Financial Statements”), which were included in the Offering Documents, misstated revenues, assets, and losses and were not prepared in accordance with International Financial Reporting Standards, contrary to the representation contained in the Offering Documents. Plaintiffs alleged that as a result of the foregoing, Netshoes’ stock collapsed from its $18 per share IPO price on April 12, 2017, to $2.87 per share on May 15, 2018. Defendants moved to dismiss the complaint with prejudice, pursuant to CPLR § 3211(a)(1), (a)(5), and (a)(7) – i.e. , based on documentary evidence, statute of limitations, and failure to state a claim. Plaintiffs moved for alternative service as it relates to certain unserved defendants. The Court granted defendants’ motion. In doing so, the Court addressed several principles, that prior to Cyan , were most often seen in federal court decisions. We discuss these issues below. The Court’s Decision Statements of Opinion Plaintiffs alleged that unbeknown to investors, Netshoes faced competition from MercadoLibre, an eCommerce retailer active across all of Latin America, and from Amazon, which was active in Mexico, at the time of the IPO. Notwithstanding, plaintiffs alleged that defendants made a number of statements in the Offering Documents that falsely conveyed the impression that the Company was a leader in the industry without any competition – e.g. , “we do not believe we have a relevant direct competitor in eCommerce sports category in the region,” and “we believe we have become a clear contender for the market leader in Brazil.” The Court considered the challenged statements to be statements of opinion and, therefore, inactionable under Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund , 135 S.Ct. 1318, 1326-27 (2015). Slip Op. at *4. In Omnicare , the U.S. Supreme Court held that a statement of opinion is not actionable under the securities laws, even if the opinion is ultimately wrong, if it was sincerely believed at the time it was made. 135 S.Ct. at 1327 (“ sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong”). Thus, to be actionable, a statement of opinion must be (1) false, and (2) not honestly believed when made. Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt Corp. , 2016 WL 1261135, at *9 (S.D.N.Y. 2016). In addition, the Court found that certain risk disclosures in the Prospectus negated any falsity because they spoke to the competitive nature of the online retail industry. Slip Op. at **4-5. The Court also rejected plaintiffs’ argument that the Company’s financial statements were false at the time of the IPO because there were subsequent increases in allowances for “doubtful accounts” related to the B2B Business, finding that the adjustments involved subjective determinations that were honestly held at the time of the IPO. As explained by the Court: “‘ aluations and write-downs are subjective statements of opinion’ that are ‘actionable only if they are (1) subjectively disbelieved, i.e. , not “honestly held”; or (2) omit[] material facts about the issuer’s inquiry into or knowledge concerning statement if those facts conflict with what a reasonable investor would take from the statement itself.’” Slip Op. at *5, quoting In re Barclays Bank PLC Sec. Litig. , 2017 WL 4082305, *8 (S.D.N.Y. Sept. 13, 2017), aff’d , 2018 WL 6040846 (2d Cir 2018) (dismissing securities claims based on allegations defendant misvalued certain assets in its financial statements). The Bespeaks Caution Doctrine The Court found that alleged misstatements about the role of the B2B Business on the Company’s long-term growth, the projected growth of the Company’s customer base, the growth of the market, and the overall growth prospects of the Company were protected forward-looking statements under the bespeaks caution doctrine because they were accompanied by meaningful cautionary language that warned investors actual results could differ from the challenged statements. Under the bespeaks caution doctrine, “‘alleged misrepresentations in a stock offering are immaterial as a matter of law it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering.’” Id. , quoting Halperin v. eBanker USA.com, Inc. , 295 F.3d 352, 357 (2d Cir. 2002). See also Rombach v. Chang , 355 F.3d 164, 174 (2d Cir 2004). When such cautionary language is included, courts analyze “the allegedly fraudulent materials in their entirety to determine whether a reasonable investor would have been misled.” Id . at *7, quoting Halperin , 295 F.3d at 173. Notwithstanding, cautionary language about future risk does not insulate a defendant from liability under the doctrine when the defendant fails to disclose that the risk has already transpired. Halperin , 295 F.3d at 173.  As one court explained, the bespeaks caution “provides no protection to someone who warns his hiking companion to walk slowly because there might be a ditch ahead when he knows with near certainty that the Grand Canyon lies one foot away.” In re Prudential Sec. Inc. Partnerships Litig. , 930 F. Supp. 2d 68, 72 (S.D.N.Y. 1996). Corporate Optimism and Puffery The Court held that plaintiffs’ allegations concerning the Company’s position in an expanding market, the Company’s leadership in the Brazilian sports eCommerce market, the recognition of Netshoes’ Zattini website by its customers, and the Company’s customer loyalty and their “high” repeat purchasing were inactionable expressions of puffery and optimism. Slip Op. at *8, citing In re Duane Reade Inc. Sec. Litig. , 2003 WL 22801416, at *5 (S.D.N.Y. 2003). Item 303 Under Item 303 of SEC Regulation S-K, 17 C.F.R. § 229.303 (“Item 303”), the registrant is required to “ escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” 17 C.F.R. § 229.303(a)(3)(ii). Disclosure under Item 303 is required where a trend or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations. Litwin v. Blackstone Grp., L.P. , 634 F.3d 706, 716 (2d Cir. 2011). To be a required disclosure under Item 303, the information must be material, i.e. , “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Litwin , 634 F.3d at 717 (internal quotation and citation omitted). Courts have “consistently rejected a formulaic approach to assessing the materiality of an alleged misrepresentation.” Id . Although bright-line numerical tests for materiality are inappropriate and have been rejected, courts do not entirely exclude analysis based on quantative considerations. Id. ; Ganino , 228 F.3d 154 (2d Cir. 2000). As the court in Litwin explained, a court must consider “both ‘quantitative’ and ‘qualitative’ factors in assessing an item’s materiality,” SAB No. 99, 64 Fed Reg at 45,151, and that consideration should be undertaken in an integrative manner. Id .; Ganino , 228 F3d at 163. Based upon the foregoing, the Court found that defendants did not violate Item 303. Here, the B2B business constituted 4.3% of Netshoes’ net sales. Just as importantly, the Offering Documents disclosed Netshoes’ actual financial metrics for years 2014 through 2016, including that, from 2015 to 2016, its gross margins had decreased and its annual net sales growth had halved; its customer “credit risk” from overdue B2B accounts receivable had nearly quadrupled; and that its allowance for doubtful accounts had more than tripled. Thus, under either a quantative or a qualitative analysis, Netshoes did not violate Item 303. Slip Op. at *9. Having determined that plaintiffs failed to allege any actionable misstatements of fact, the Court dismissed plaintiffs’ Section 11 and 12(a)(2) claims, though it did so without prejudice. And, because the Court dismissed plaintiffs’ claims under Section 11 and 12(a)(2) of the 1933 Act ( i.e. , the primary violations of the 1933 Act), the Court dismissed plaintiffs’ secondary liability claims under Section 15 of the 1933 Act against the individual officers and directors, also without prejudice.

Derivative actions are brought by current shareholders of a company to redress the harm (monetary or equitable) incurred by the company as the result of officer/director self-dealing, breaches of fiduciary duty, and/or other wrongdoing; to restore shareholder value caused by mismanagement and the waste of corporate assets; and to enhance and strengthen internal controls and the company’s governance policies and procedures. Very often, shareholder derivative actions are filed in the wake of an investigation initiated by a regulatory agency, such as the Securities and Exchange Commission (“SEC”), or the filing of a securities class action alleging violations of the federal securities laws by a company and/or its officers and directors. Gammel v. Immelt , 2019 N.Y. Slip Op. 32005(U) (Sup. Ct., N. Y. County June 28, 2019) ( here ), recently decided by Justice Andrea Masley of the New York Supreme Court, Commercial Division, is an example of the foregoing. There, shareholders of the General Electric Company (“GE” or the “Company”) commenced a derivative action against the officers and directors of the Company following the filing of a securities class action lawsuit pending in the United States District Court for the Southern District of New York, Hachem v. Immelt , 17-cv-08457, and the initiation of an investigation by the SEC, concerning the Company’s insurance reserves and accounting for long-term service agreements. This Blog takes a look at Gammel in today’s post. In particular, we take a look at the Court’s ruling concerning the “demand” requirement set forth in New York Business Corporation Law (“BCL”) § 626(c). A Brief Primer on Derivative Litigation It is well-settled that a plaintiff asserting a derivative claim seeks to recover for injury to the business entity. Marx v Akers , 88 N.Y.2d 189, 193 (1996). A plaintiff asserting a direct claim seeks redress for injury to himself/herself individually. Sometimes, the distinction between the two types of actions is not readily apparent. Yudell v. Gilbert , 99 A.D.3d 108, 113 (1st Dept. 2012). In considering whether a claim is direct or derivative, courts look to the nature of the wrong and the person or entity to whom the relief should go. Tooley v. Donaldson, Lufkin & Jenrette, Inc. , 845 A2d 1031, 1039 (Del. 2004). See also Yudell , 99 A.D.3d at 114; Higgins v. New York Stock Exch. , Inc., 10 Misc. 3d 257, 264 (Sup. Ct., N.Y. County 2005) (citation omitted). Thus, for a shareholder’s injury to be direct it must be independent of any alleged injury to the corporation. The shareholder must demonstrate that the duty breached was owed to the stockholder and that he/she can prevail without showing an injury to the corporation. Tooley , 845 A.2d at 1039. Derivative actions are often brought by shareholders of a corporation (or limited liability company) to vindicate the entity’s rights. Bansbach v. Zinn , 1 N.Y.3d 1, 8 (2003), rearg denied , 1 N.Y.3d 593 (2004); Marx , 88 N.Y.2d at 193. Although shareholders are given the right to bring such lawsuits, they are not, however, favored because “they ask courts to second-guess the business judgment of the individuals charged with managing the company.” Bansbach , 1 N.Y.3d at 8.  Notwithstanding, “derivative actions serve the important purpose of protecting corporations and minority shareholders against officers and directors who, in discharging their official responsibilities, place other interests ahead of those of the corporation.” Id . The tension between the foregoing interests is tempered by the requirement that a shareholder demand with particularity that the board of directors takes action to address the alleged wrongdoing or explain why such demand would have been futile. BCL § 626 (c) (providing that the derivative complaint “shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”). As explained by the Court of Appeals, “ he reason for the demand requirement rests on ‘basic principles of corporate control that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts.’” Bansbach , 1 N.Y.3d at 9, quoting Barr v. Wackman , 36 N.Y.2d 371, 378 (1975) (citation omitted). “The demand requirement thus relieves courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages ‘strike suits’ commenced by shareholders for personal rather than corporate benefit.” Id. , citing Marx , 88 N.Y.2d at 194. “Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit.” Bansbach , 1 N.Y.3d at 9. In New York, the demand requirement is excused where a plaintiff pleads “with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.” Marx , 88 N.Y.2d at 198. If any of these circumstances are met, the failure to file a pre-suit demand will be excused. Id . at 200-201. It is important to note that excusing a pre-suit demand is the exception and, therefore, “should not be permitted to swallow the rule” that a pre-litigation demand is required. Matter of Omnicom Grp. Inc. S’holder Deriv. Litig. , 43 A.D.3d 766, 768 (1st Dept. 2007), citing Marx , 88 N.Y.2d at 200. Thus, if a plaintiff fails to plead with particularity that service of a pre-litigation demand should be excused, the complaint must be dismissed. See Retirement Plan for Gen. Empls. of the City of N. Miami Beach v. McGraw , 158 A.D.3d 494, 495 (1st Dept. 2018). “ director may be interested under either of two scenarios: self-interest in a transaction or loss of independence due to the control of an interested director.” Matter of Comverse Tech., Inc. Deriv. Litig. , 56 A.D.3d 49, 54 (1st Dept. 2008). “The bare claim that the directors … should be viewed as interested because they are ‘substantially likely to be held liable’ for their actions is not enough” to find interestedness. Wandel v. Eisenberg , 60 A.D.3d 77, 80 (1st Dept. 2009). Indeed, simply naming each current or former director “in a lawsuit, without more, is insufficient to establish that they are conflicted and demand is futile.” Lerner v. Immelt , 523 Fed. Appx 824, 827 (2d Cir. 2013) (citations omitted); accord , Bildstein v. Atwater , 222 A.D.2d 545, 546 (2d Dept. 1995).  Likewise, the assertion that certain directors controlled the amount of compensation other directors would have received is inadequate, especially in the absence of an allegation that the compensation the directors received was excessive. Walsh v. Wwebnet, Inc. , 116 A.D.3d 845, 848 (2d Dept. 2014). Although a pre-suit demand can be excused because the directors failed to exercise their business judgment in approving the transaction, demonstrating such a failure can be difficult. Indeed, “it is the ‘rare case[ ] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment.’” Stein v. Immelt , 472 Fed. Appx. 64, 66 (2d Cir. 2012), quoting Wandel , 60 A.D.3d at 82). “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted).  The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.” Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008), citing Barr , 36 N.Y.2d at 381. The complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). Thus, “ o long as the corporation’s directors have not breached their fiduciary obligation to the corporation, the exercise of for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” Matter of Levandusky v. One Fifth Ave. Apt. Corp. , 75 N.Y.2d 530, 538 (1990) (internal quotation marks and citation omitted). Gammel v. Immelt Background Gammel arose out of the alleged acts and omissions of the current and former members of the GE Board of Directors (the “Board,” or “Director Defendants”) in connection with GE’s alleged lack of internal controls and the Director Defendants’ alleged failure to oversee the administration and management of the Company, including being uninformed about material aspects of several segments of the Company, including its Long Term Care (“LTC”) insurance business and the GE Power segment’s Long Term Services (“LTS”) Agreements (“LTSAs”). Plaintiffs brought the action derivatively on behalf of GE, the nominal defendant, against 19 GE officers and directors, alleging breaches of their fiduciary duty to the Company and its shareholders. GE is a global company engaged in a variety of different industries, such as insurance, through GE Capital, and energy, through GE Power. In 2004, GE spun off its LTC business into Genworth, Inc. (“Genworth”), although GE retained significant exposure as a reinsurer for Genworth’s LTC policies. According to plaintiffs, GE was required to maintain adequate cash reserves in order to pay claims on LTC insurance policies, but GE failed to increase their insurance reserves until late 2017. As alleged, Genworth was taking significant charges to reserves due to exposure to liabilities for LTCs. Given Genworth’s disclosures, as well as information that was publicly available, plaintiffs maintained that the Board should have addressed the reasons for such charges. Indeed, plaintiffs alleged that the entire LTC industry recorded massive charges to earnings and sought premium increases as high as 90%, all in connection with long-term care policies. Despite obvious red flags, plaintiffs contended that the Director Defendants failed to reassess GE’s LTC actuarial assumptions and make meaningful adjustments to the Company’s insurance reserves. A portion of GE Power’s business involved the service and maintenance of energy equipment for third parties pursuant to contracts known as Long Term Services Agreements. Plaintiffs alleged that flawed revenue projections from GE Power’s LTSAs negatively impacted the Company’s earnings. Despite negative trends in the power industry, plaintiffs maintained that GE Power improperly increased revenue estimates from the LTSAs until 2017, when GE Power announced an $850 million charge to earnings to account for project cost overruns. GE allegedly engaged in complex, aggressive accounting practices to conceal the extent of the problems with GE Power while simultaneously releasing false or misleading statements praising GE Power’s financial health. Plaintiffs alleged that the SEC had charged GE with accounting fraud previously in relation to these improper accounting practices, which GE had also used to increase its reported earnings. In addition to the foregoing, plaintiffs alleged that the Director Defendants wasted the Company’s assets by allowing Jeffrey Immelt to routinely use a “chase plane” when flying to foreign destinations – that is, a second aircraft that was completely empty to fly behind Immelt’s aircraft. Plaintiffs maintained that the use of such an aircraft was roundly criticized as wasteful and an improper use of corporate funds. Plaintiffs alleged that the truth was disclosed when GE announced: (1) in October 2017, a reduction in earnings guidance from $1.60-$1.70 per share to $1.05-$1.10 per share for 2017 due to “recently observed elevated claims experience” in the Company’s long-term care insurance business and “underperformance in its GE Power segment”; (2) in November 2017, a 50% reduction in GE’s dividend; and (3) in January 2018, a $6.2 billion after-tax charge and the setting aside of $15 billion over seven years to increase long-term care reserves and an investigation by the SEC concerning “the process that led to the insurance reserve increase and the fourth-quarter charge.” As noted, GE is the subject of a shareholders’ class action pending in Southern District of New York for violations of the federal securities laws, and the subject of an SEC investigation into GE’s LTC business and its revenue accounting practices related to GE Power. Plaintiffs commenced the action seeking damages for breach of fiduciary duty, unjust enrichment, waste of corporate assets, abuse of control, and gross mismanagement. Defendants moved to dismiss, contending that plaintiffs failed to plead demand futility with particularity. Plaintiffs opposed the motion, arguing that such a demand would have been futile. Plaintiffs argued that a majority of the Board was interested in the wrongs complained of and, therefore, incapable of arriving at an independent decision. They claimed that the Board ignored the “red flags” described in numerous published reports and articles, excerpts of which were contained in the complaint, warning of the downward trends in the LTC and energy industries, yet chose to rubber-stamp the decisions of GE’s executives whose actions they were charged with overseeing and monitoring. The Court’s Decision The Court granted the motion. The Court held that the complaint failed to plead any particularized facts that the Director Defendants were interested parties who received a personal financial benefit from the transactions alleged in the complaint. Slip Op. at *2, citing Marx , 88 N.Y.2d at 202; Walsh , 116 A.D.3d at 848. Likewise, the Court found that plaintiffs failed to allege any particularized facts demonstrating that any one of the Director Defendants controlled or dominated the other directors. Id. , citing Voluto Ventures, LLC v. Jenkins & Gilchrist Parker Chapin LLP , 46 A.D.3d 354, 356 (1st Dept. 2007). Moreover, the Court found that plaintiffs failed to allege any particularized facts showing that the Director Defendants were conflicted because, inter alia , they would have been held liable for their actions. Id . In this regard, the Court noted, citing Wandel , 60 A.D.3d at 80, that merely alleging that “the Director Defendants would have declined to initiate the litigation because they would have been subject to personal liability is insufficient.” Slip Op. at *7. Simply naming each current or former director as a defendant without more, said the Court, was “insufficient to establish that they are conflicted and demand is futile.” Id . at *9 (citations and internal quotation marks omitted). This was especially so since 17 of the Director Defendants were outside directors elected by the Company’s shareholders. Id . Finally, the Court rejected the allegation that because certain directors controlled the amount of compensation other directors would have received sufficed to show that those directors were beholden to the other directors. Id . at *8. Such allegations, held the Court, “especially in the absence of an allegation that the compensation the Director Defendants received was excessive,” were insufficient. Id. , citing Walsh , 116 A.D.3d at 848). Addressing the second prong of the Marx test, whether the Director Defendants were fully informed with regard to the transactions at issue, the Court held that plaintiffs failed to plead any particularized facts showing that they were not so informed. The Court noted that plaintiffs failed to refute the fact that “the Board, and its committees, met regularly” during the relevant time period. Id .   There were no allegations, said the Court, beyond merely “describe the duties of each committee” that “causally relat those duties to the purported acts, or omissions, at issue to each of the Director Defendants.” Id .  The Court also took issue with plaintiffs’ allegation that the Director Defendants knew, or were aware, of the purported red flags found in the publicly available documents cited in the complaint. Id . he complaint does not allege that the Board had been presented with red flags warning of the general health of the LTC and energy industries, or the specific health of GE Capital and GE Power, and that the Director Defendants consciously chose to overlook or ignore them. Plaintiffs do not allege that Genworth’s filings with the SEC had been presented to the Board, nor does it allege that it was GE’s policy to raise and discuss Genworth’s public disclosures at Board or committee meetings Notably, the complaint refers to three Genworth filings with the SEC on November 5, 2014, March 2, 2015 and November 8, 2016. These three filings hardly constitute a sustained pattern of red flags or warnings that should have caught the attention of the Director Defendants. In addition, there is no allegation that “any member of the Board actually read or learned the contents of” the published news articles, from 2017 and 2018, identified in the complaint. The complaint does not identify what actions the Director Defendants should have taken had they been aware of the red flags. Hence, merely identifying news articles discussing general, downward trends in the LTC and energy industries is “insufficient to alert corporate directors to internal wrongdoing.” Id . at **9-11 (citations and internal quotation marks omitted). The Court further held that plaintiffs failed to plead particularized facts showing that that use of the “chase plane” – the second corporate jet that trailed Immelt when he traveled for business, and which GE executive allegedly used for personal reasons – was so egregious on its face that it could not have been the product of sound business judgment of the directors. The Court found that the complaint was devoid of any facts showing “that the Director Defendants personally benefited from the practice” or identifying the specific, fraudulent conduct by the Director Defendants regarding their actions related to the chase plane, or their alleged failure to act. Id . at *14. This was especially notable since plaintiffs “admit that GE’s March 12, 2018 DEF 14A filing indicated that GE’s executives repaid the corporation for their personal use of corporate aircraft.” Id . In short, plaintiffs failed to allege any facts from which the Court could infer that the Director Defendants acted in bad faith or that “that they were acting for a purpose unaligned with the best interest of the corporation.” Id . at *15, citing Foley v. D’Agostino , 21 A.D.2d 60, 66 (1st Dept. 1964).     Having failed to satisfy the tests set forth in Marx , the Court dismissed the complaint for failure to plead demand futility with the requisite particularity.

McGuckin v. Privilege Underwriters Reciprocal Exch. was decided by the Appellate Division, Second Department, on July 17, 2019.  The facts of McGuckin , at least from the Second Department’s decision, seem rather straight forward.  The plaintiff, who was a passenger in a vehicle owned by Carol Giambrone and driven by Douglas Giambrone, was injured when the vehicle was in an accident.  The vehicle was insured by defendant Privilege under a policy that provided at the time of the accident, inter alia , personal injury coverage of up to $250,000 per person and $500,000 per occurrence. The Giambrones were sued by McGuckin for the personal injuries sustained in the accident.  A few months later the Giambrones entered into an agreement with Privilege to reform the insurance policy to reduce the bodily injury coverage from $250,000 to a single $80,000 limit (the “Reduction”) and McGuckin was so notified of the reduced coverage.  Ultimately, McGuckin obtained a $300,000 judgment against the Giambrones in the underlying personal injury action.  In this regard, a review of the court file in the underlying personal injury action reveals that McGuckin and the Giambrones entered into a stipulation and confession of judgment in which, inter alia : 1. McGuckin acknowledged the Reduction; 2. McGuckin asserted that he did not consent to the Reduction; 3. Giambrones assigned to McGuckin their right to challenge the reduction; and, 4. McGuckin waived his right to have the judgment satisfied out of the personal assets of the Giambrones and would limit its recovery to such sums as recovered in his contemplated declaratory judgment litigation against Privilege. McGuckin commenced a declaratory judgment action against Privilege in which he sought an order declaring, among other things, “that the purported reformation of the subject insurance policy was invalid and unenforceable that the defendant is bound by the full bodily injury coverage limits stated in the original policy….”  McGuckin moved for summary judgment and Privilege cross-moved for summary judgment.   In denying McGuckin’s motion and granting Privilege’s motion, supreme court held: Plaintiff offers no basis for his claim .  The Gambrones were legally permitted to reach an agreement with respect to their own rights to defense and indemnification by Privilege….  There is no allegation of collusion between the Giambrones and their insurer, and whatever deal they struck in 2012 with their insurer cannot be set aside in favor of a subsequent agreement in 2015 between the Giambrones and the Plaintiff here.  The settlement between the Giambrones and the Plaintiff expressly provides that the insurance policy had a reduced single limit of $80,000. In reversing supreme court, the Second Department held that an “insurer may not retroactively reform a policy to reduce the stated bodily injury coverage limits after a loss caused by its insured occurs, even if the reduced limits still meet or exceed the statutory minimum.”  (Citation omitted.)  According to the Second Department, McGuckin made his prime facie case by “demonstrating that the policy in effect at the time of the accident provided for a bodily injury coverage limit of $250,000 per person, and submitting the $300,000 judgment he obtained against insureds in the underlying personal injury action….”  The Court also held that McGuckin was entitled to a judgment “as a matter of law declaring that is obligated to satisfy the first $250,000 of the judgment he obtained against the Giambrones.

Readers of this Blog know that, as a general matter, New York courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraudulent inducement claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). See also McKernin v. Fanny Farmer Candy Shops, Inc. , 176 A.D.2d 233, 234 (2d Dept. 1991). What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id . at 63. See also Demetre v. HMS Holdings Corp. , 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). In Did-it.com, LLC v. Halo Group, Inc. , 2019 N.Y. Slip Op. 05644 (July 17, 2019) ( here ), the Appellate Division, Second Department, reversed the dismissal of a fraudulent inducement claim, holding that the claim contained “misrepresentations of present fact that were collateral to the” contract before it and, therefore, “was not duplicative of the breach of contract cause of action.” Slip Op. at *1 and *2.   Did-it.com arose from the sale of the Halo Group, Inc.’s (“Halo”) assets to Did-it.com, LLC (“Did-it”). In May 2017, Did-it and Halo entered into an asset purchase agreement (the, “APA”), pursuant to which plaintiff agreed to purchase all of Halo’s assets. The APA contained a number of representations and warranties, including that: 1) the 2016 financial statements provided by Halo to Did-it were accurate and complete; and 2) there were no adverse changes or events subsequent to the preparation of Halo’s 2016 financial statements that would result in, inter alia , a loss of customers or a reduction in revenues. Did-it claimed that these, and other representations, induced it to pay $1.5 million to purchase Halo’s assets. According to the complaint, following the closing of the transaction (“Closing”), Did-it learned that the assets (“Assets”) it had purchased from Halo were worth significantly less than what was represented, bargained for, and otherwise agreed upon. The client accounts purchased from Halo generated approximately $5,000 in revenues for Did-it during the first month after the Closing, although Halo’s 2016 financials reflected average monthly revenues in excess of $300,000. Did-it also learned after the Closing that all but one of Halo’s customers listed in defendants’ disclosures had ceased doing business with the company. Defendants also failed to turn over all of the Assets to Did-it as required under the APA. In June 2017, plaintiff commenced the action. In an amended complaint, plaintiff asserted six causes of action, including the first cause of action, alleging fraudulent inducement, and the third cause of action, alleging breach of contract. Prior to answering, defendants moved pursuant to CPLR 3211(a) to dismiss the amended complaint. The Supreme Court, inter alia , granted that branch of the motion which was to dismiss the first cause of action. Plaintiff appealed. In seeking dismissal, defendants argued, among other things, that Did-it failed to allege any facts to support its claim that defendants misrepresented the company’s finances, and failed to allege any facts that the financial statements were false and exaggerated or that a material adverse change occurred that Halo failed to disclose. Defendants maintained that Did-it merely made conclusory allegations that were contradicted by the actual facts and the express terms of the APA. Defendants also contended that Did-it’s fraud claim was duplicative of its breach of contract claim because it was based on representations in the APA; namely, that the 2016 financial statements were accurate and complete and there were no adverse changes or events subsequent to the preparation of the financial statements that would result in, inter alia , a loss of customers or a reduction of revenues. Thus, the false statements alleged in the amended complaint were not, and could not be, collateral or extraneous to the parties’ agreement. Plaintiff opposed the motion arguing, inter alia , that it stated a viable claim for fraudulent inducement by alleging that defendants made misrepresentations pursuant to the APA by providing 2016 financial statements that reflected a healthy business, providing a warranty that the financial statements were accurate and not misleading, and providing a warranty that no adverse changes had occurred since the financials were prepared. Plaintiff argued that these allegations constituted misrepresentations of present fact that were collateral to the APA. As noted, the Supreme Court dismissed the first cause of action, finding that the fraudulent inducement claim was duplicative of the breach of contract claim. The court held that the representations cited by plaintiff were “material terms of the APA” and, therefore, “duplicative of express representations made in the APA” that plaintiff claimed defendants had breached. On appeal, the Second Department reversed. In so holding, the Court found that plaintiff “allege misrepresentations of present fact that were collateral to the APA” and that those “misrepresentations induced the plaintiff to enter into the APA.” Slip Op. at *2. Consequently, said the Court, the Supreme Court “should have denied that branch of the defendants’ motion which was to dismiss the first cause of action.” Id . Takeaway Unfortunately, the Court did not provide an explanation for its holding. The absence of such an explanation leaves one trying to determine why the fraudulent inducement claim differed from the breach of the contract claim. In the fraud scenario, plaintiff must prove that the financial statements were not accurate. In the contract scenario, plaintiff must prove that the representation and warranty concerning the financial statements were breached – that is, that the financial statements were not accurate. Under either claim, therefore, the accuracy of the financial statements is at issue. Perhaps the foundational underpinning of the Court’s ruling is based on the principle that “ warranty is not a promise of performance, but a statement of present fact.” First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 292 (1st Dept. 1999). If so, then it stands to reason that defendants’ representation and warranty concerning the financial statements was collateral to the APA. Regardless of the reason for the decision, Did-it.com stands for the proposition that a fraudulent inducement claim and a breach of contract claim can stand side-by-side when the alleged false statement is collateral to the contract at issue and induces the plaintiff to enter into the agreement.

The disclosure of material information is the foundation of the Securities and Exchange Commission’s (“SEC”) mission. For this reason, the SEC considers itself to be “a disclosure agency.” See “The Importance of the SEC Disclosure Regime” by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission (July 16, 2013) ( here ). One need only look at the SEC’s website to confirm this point: “ he laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” ( Here .) To further underscore the point, Commissioner Gallagher said the following in his post: The federal corporate disclosure regime was established by Congress and serves as a cornerstone of the Commission’s tripartite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The underlying premise of the Commission’s disclosure regime is that if investors have the appropriate information, they can make rational and informed investment decisions. This is not to say that the disclosure regime was meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company. Instead, the point has always been to ensure that they have access to material investment information. The foregoing themes were recently highlighted in a speech given by William H. Hinman, Director of the Division of Corporation Finance, at the 18th Annual Institute on Securities Regulation in Europe on March 15, 2019: As you know, our disclosure requirements are intended to provide investors with the material information they need about companies and their securities offerings to make informed investment and voting decisions. Robust disclosure decreases information asymmetries and is the foundation of reliable price discovery. When investors have confidence that they are receiving full and transparent disclosure, markets operate more efficiently and the cost of capital is reduced. With the foregoing in mind, this Blog looks at three enforcement proceedings brought by the SEC against individuals and entities that failed to disclose material information to their investors, customers, and/or shareholders. In the Matter of Fieldstone Financial Management Group, LLC et al. On July 1, 2019, the SEC announced ( here ) that it charged Fieldstone Financial Management Group LLC (“Fieldstone”) and its principal, Kristofor R. Behn (“Behn”), both of Foxboro, Massachusetts, with defrauding retail investment advisory clients by failing to disclose conflicts of interest related to their recommendations to invest in securities issued by affiliates of Oregon-based Aequitas Management LLC (“Aequitas”).  The SEC also accused Behn of misusing an investor’s funds to pay personal expenses. According to the SEC ( here ), from 2014 to early 2016, approximately 40 retail clients of Behn and Fieldstone invested more than $7 million in Aequitas securities, which were the subject of a previous Commission enforcement action.  The SEC found that Behn and Fieldstone failed to disclose to their clients that Aequitas had provided Fieldstone with a $1.5 million loan and access to a $2 million line of credit, both of which had terms that created a significant financial incentive for Behn and Fieldstone to recommend Aequitas securities to their clients.  The SEC further found that Behn and Fieldstone made material misstatements and omissions in reports filed with the Commission, including false representations that the repayment terms of the loan from Aequitas were not contingent on Fieldstone clients investing in Aequitas. In addition, the SEC found that Behn and Fieldstone fraudulently induced a client to invest $1 million in Fieldstone.  Within days of Fieldstone receiving the $1 million, Behn used approximately $500,000 to pay his personal taxes and make other payments to himself or for his personal benefit. “Behn flagrantly disregarded his most basic duties as an investment adviser by concealing the significant financial incentives he and his firm would receive by recommending investments in Aequitas,” said Erin E. Schneider, Director of the SEC’s San Francisco Regional Office.  “The Commission is committed to rooting out breaches of fiduciary duty to retail investors.” i.e.,="(i.e.," candor,="candor," loyalty="loyalty" and="and" due="due" care)="care)" here.=">here."> Without admitting or denying the SEC’s findings, Fieldstone and Behn consented to the issuance of the order, which found that they violated the antifraud provisions of the federal securities laws, censured Fieldstone, ordered them to cease and desist from future violations, and ordered them to pay, on a joint-and-several basis, disgorgement and prejudgment interest of $1,047,971 and a penalty of $275,000, all of which is to be distributed to investors harmed by the alleged wrongdoing.  Behn will also be permanently barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. In the Matter of Nomura Securities International, Inc. On July 15, 2019, the SEC announced that it had instituted two related enforcement actions against Nomura Securities International, Inc. (“Nomura”), which agreed to repay approximately $25 million to customers for its failure to adequately supervise traders in mortgage-backed securities. In its orders ( here and here ), the SEC found that Nomura bond traders made false and misleading statements to customers while negotiating sales of commercial and residential mortgage-backed securities (“CMBS” and “RMBS”).  According to the SEC, several Nomura traders misled customers about the prices at which Nomura had bought securities, the amount of profit Nomura would receive on the customers’ potential trades, and who currently owned the securities, with traders often pretending that they were still negotiating with a third-party seller when Nomura had, in fact, already bought a security.  The SEC further found that Nomura lacked compliance and surveillance procedures that were reasonably designed to prevent and detect this alleged misconduct, which inflated the firm’s profits on CMBS and RMBS transactions at its customers’ expense.  The SEC previously filed charges against two CMBS and three RMBS traders at Nomura, whose misrepresentations were described in the SEC’s orders. “Firms acting as dealers in opaque markets like those for CMBS and RMBS must take steps to prevent misleading communications with their customers,” said Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “These orders underscore that firms must have adequate supervisory procedures, particularly surrounding the sale of complex instruments,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Weak procedures, such as those found here, may enable employee misconduct to go undetected.” To settle the charges that it failed to reasonably supervise its traders, Nomura agreed in the two orders to be censured and to reimburse customers the full amount of firm profits earned on any RMBS or CMBS trades in which a misrepresentation was identified, paying over $20.7 million to RMBS customers and over $4.2 million to CMBS customers.  Nomura also agreed to pay a $1 million penalty in the RMBS-related case and a $500,000 penalty in the CMBS-related case.  Both orders noted that the penalty amounts reflected substantial cooperation by Nomura during the SEC’s investigation, including remedial efforts by the firm to improve its surveillance procedures and other internal controls. SEC v. AR Capital, LLC On July 16, 2019, the SEC announced ( here ) that it had charged AR Capital LLC (“AR Capital”), its founder Nicholas S. Schorsch (“Schorsch”), and its former Chief Financial Officer, Brian Block (“Block”), with wrongfully obtaining millions of dollars in connection with two separate mergers between real estate investment trusts (“REITs”) that were sponsored and externally managed by AR Capital. The defendants agreed to settle the matter by, among other things, agreeing to over $60 million in disgorgement, prejudgment interest and civil penalties. According to the SEC’s complaint ( here ), between late 2012 and early 2014, AR Capital arranged for American Realty Capital Properties Inc. (“ARCP”), a publicly-traded REIT, to merge with two publicly-held, non-traded REITs. The SEC alleged that AR Capital, Schorsch, and Block, acting in breach of the relevant proxy disclosures, inflated an incentive fee in both mergers. As alleged, this improper calculation allowed them to obtain approximately 2.92 million additional ARCP operating partnership units as part of their incentive-based compensation. In addition, the SEC alleged that the defendants wrongfully obtained at least $7.27 million in unsupported charges from asset purchase and sale agreements entered into in connection with the mergers. “REIT managers and their professionals have an obligation to tell the truth when making disclosures to shareholders about their compensation,” said Marc P. Berger, Director of the SEC's New York Regional Office. “As we allege in our complaint, AR Capital and its partners Schorsch and Block failed to do so and benefitted themselves greatly at the expense of shareholders.” The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charged AR Capital and Block with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b) promulgated thereunder, and falsifying books and records of ARCP. The complaint charged Schorsch with negligently violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933, as well as books and records violations. Without admitting or denying the allegations in the complaint, AR Capital, Schorsch, and Block consented to entry of a final judgment that imposed permanent injunctions from violations of the charged provisions; ordered combined disgorgement and prejudgment interest on a joint-and-several basis of over $39 million, which included cash and the return of the wrongfully obtained ARCP operating partnership units; and imposed civil penalties of $14 million against AR Capital, $7 million against Schorsch, and $750,000 against Block. The settlements are subject to court approval.

Working with friends can be both rewarding and challenging. The comfort that brings friends together often is replaced by the stress and rigors of running a business. Because friends have a history together, professional disagreements often become heated, especially when there are pent up issues or grudges that one holds about the other. Similarly, the character traits that created the friendship are often replaced by a professional (and, some would say, ugly) demeanor that was not seen until the partnership was formed. For this reason, many partnerships formed in friendship find that the relationship among the founders is too toxic for the partnership to continue as originally formed, if at all. Such was the case in Delibasic v. Manojlovic , 2019 N.Y. Slip Op. 05613 (3d Dept. July 11, 2019) ( here ). Delibasic involved a dispute among friends who became business partners in connection with four (4) parcels of real estate located in Lake Placid, New York. The parties formed an oral partnership for the purpose of acquiring and improving real property and operating a vacation rental business through VRBO, Air B N B and the like. The plan was for the Delibasics to provide the initial money and for the Manojlovics to provide the knowledge and know-how and to later invest their funds. According to plaintiffs, defendants mismanaged the rental properties, misrepresented the amount of money they contributed to the partnership and tried to steal one of the properties. Plaintiffs commenced the action alleging, inter alia , claims for breach of fiduciary duty and fraud. Following joinder of issue, plaintiffs moved for summary judgment on their claims for breach of fiduciary duty and fraud. In March 2018, the motion court denied the motion. Plaintiffs appealed. Background here), the=">here), the" facts="facts" of="of" which,="which," incorporated="incorporated" into="into" its="its" summary="summary" judgment decision.="judgment decision."> Plaintiffs Samir Delibasic and Snjezana Delibasic (“plaintiffs” or “Delibasic”) are married and reside in Mississauga, Ontario, Canada. Defendants Neven Manojlovic and Edvina Uzunovic (“defendants”) are married and reside in Stamford, Connecticut. In early 2010 – after plaintiffs visited defendants’ vacation home in Lake Placid – the parties decided to go into business together for the purpose of owning and renting properties in the Lake Placid area. An oral partnership was then formed whereby each of the four partners was to receive a 25% ownership interest in the business. The partners were to contribute equal amounts to the business and share equally in all profits and losses. In May 2010, the partnership purchased certain unimproved property on Planty Way in Lake Placid. The property was later subdivided into two separate parcels – 8 Planty Way and 10 Planty Way, respectively – and a log home was built on each. In August 2010, the partnership purchased vacant property on Cascade Road in Lake Placid. The property – located adjacent to Planty Way – enabled the parties and renters to access the Planty Way properties without crossing an easement over neighboring property. The deeds to both the Planty Way and Cascade Road properties were placed in all four of the partners’ names. Later, in December 2011, the partnership purchased certain unimproved property on Seneca Trail in Lake Placid. In March 2012, the partnership created Srajevo Place LLC (the “LLC”) with the assistance of a law firm in Lake Placid. The firm also assisted the partnership in transferring both Planty Way properties to the LLC, with the Cascade Road and Seneca Trail properties remaining as partnership assets. At the commencement of the partnership, plaintiffs contributed $410,000.00, which the parties used to purchase the properties on Planty Way and Cascade Road. A portion of the $410,000.00 was also used to build the home at 8 Planty Way, as well as the foundation at 10 Planty Way. Defendants, who did not contribute any capital at the commencement of the partnership, financed the remainder of the construction at 10 Planty Way. The former owner of the Seneca Road property agreed to hold the mortgage on that property. The note called for the partnership to make 36 monthly payments of $711.11, with payments to begin on January 9, 2012. On January 1, 2012, plaintiffs took over management of rentals for the Planty Way properties. Plaintiffs apparently noticed some discrepancies in the amounts defendants claimed to pay for the construction of 10 Planty Way and the amounts actually charged by the builder. As a result, plaintiffs requested a full accounting from defendants and the LLC in early 2013. The relationship between the parties subsequently deteriorated and, on December 31, 2013, defendants took over the management of 8 Planty Way without plaintiffs’ consent, changing the locks so as to prevent plaintiffs from entering the property. Plaintiffs contended that defendants refused to honor any of the rental contracts on 8 Planty Way, which resulted in lost revenue for the partnership. Plaintiffs further contended that defendants declined to pay their portion of the monthly mortgage on the Seneca Road property, as the result of which the partnership missed the February, March and April 2014 mortgage payments. Finally, plaintiffs contended that, unbeknownst to them, defendants paid off the mortgage on the Seneca Road property in April 2014 and assigned it to their company, defendant Lake Placid Properties, LLC (“Lake Placid Properties”). On April 11, 2014, Lake Placid Properties sent correspondence to all four of the partners declaring “the full amount of the debt to be due and owing” and further advising that the “ ailure to remit sum by May 12, 2013 may cause the commencement of foreclosure proceedings.” According to plaintiffs, they did not discover that Lake Placid Properties was owned by defendants until after receiving the correspondence. Plaintiffs commenced the action on May 27, 2014, seeking, inter alia , dissolution of the partnership and the LLC and damages for breach of fiduciary duty and fraud. Plaintiffs moved for summary judgment on, inter alia , their breach of fiduciary duty and fraud claims. The motion court denied the motion. In denying the motion, the motion court held that there were: material issues of fact … with respect to: the terms of the partnership agreement between the parties, including the management of the partnership, whether the parties contributed to the partnership account, the commingling of personal and partnership funds and whether the parties agreed or consented to the same, whether defendants refused to honor rental agreements plaintiffs had in place; the mortgage related to the Seneca Trail property, including the circumstances surrounding the assignment of the same and why payments on the same were not timely made by plaintiffs; preparation of the Kenny invoices for work related to the construction of 8 Planty Way and 10 Planty Way; whether defendants made any material misrepresentations of fact with respect to the amount of utility bills defendants claim to have paid and the creation and/or amount of a number of construction related invoices defendants claim to have paid and/or with respect defendant’s investment in, and capital contribution to, the partnership, and defendants’ intent. The motion court also held that “material issues of fact exist with respect to whether defendants engaged in misconduct and whether plaintiffs sustained damages that were directly caused by defendants’ misconduct.” Finally, addressing plaintiff’s fraud claim, the motion court concluded that material issues of fact existed concerning each element of plaintiffs’ fraud claim – that is, there were issues of fact concerning “whether defendants made any material misrepresentation, with knowledge of its falsity, for the purpose of inducing plaintiffs to rely upon it, and, if so, whether plaintiffs justifiably relied on the misrepresentation and sustained injury as a result.” As noted, plaintiffs appealed. The Appellate Division, Third Department, affirmed. The Third Department’s Decision To succeed on a claim for breach of fiduciary duty, a plaintiff must establish the existence of a fiduciary relationship, misconduct by the defendant and damages directly caused by the defendant’s misconduct. Loch Sheldrake Beach & Tennis Inc. v. Akulich , 141 A.D.3d 809, 811 (2016), lv. dismissed , 28 N.Y.3d 1104 (2016); Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776, 777 (2010). In New York, “ artners … and particularly managing partners, owe a fiduciary duty to the other partners.” Birnbaum v. Birnbaum , 73 N.Y.2d 461, 465 (1989) (citations omitted). Among the duties owed is the duty of loyalty – that is, a duty that not only bars “blatant self-dealing, but also avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.” Id . at 466 (citations omitted). The Court found that the motion court correctly found issues of fact regarding whether defendants engaged in misconduct that caused plaintiffs’ damages: As part of this cause of action, plaintiffs submitted documentary proof establishing that partnership funds were used by defendants to pay off expenses on their personal credit cards. The record, however, also reflects that some of the charges on defendants' personal credit cards were partnership expenses and that, in order to refinance one of the properties owned by the partnership, the bank required that the credit cards be fully paid off. To the extent that plaintiffs contend that defendants improperly commingled personal and partnership funds or used their personal bank account to hold partnership funds, the record discloses a triable issue of fact as to whether plaintiffs acquiesced to such practice. Slip Op. at **1-2. The Court also concurred with the motion court in finding issues of fact concerning plaintiffs’ claims that defendants mismanaged the rental properties. Id . at *2 (“In addition, to the extent that plaintiffs argue that defendants breached a fiduciary duty by mismanaging the rental properties, the parties offer conflicting testimony on this issue.”) Finally, the Court held that the motion court did not err in finding issues of fact surrounding plaintiffs’ claim “that defendants surreptitiously tried to usurp the Seneca Trail property.” Id . at *2.  The Court rejected plaintiffs’ contention that assignment of the mortgage for the Seneca Trail property to the LLC was improper and entitled them to summary judgment on the fiduciary duty claim. The record, however, indicates that mortgage payments for the Seneca Trail property had not been paid and that the original mortgagee had threatened legal action with respect to this property. Manojlovic testified in his deposition that he consulted with an attorney to determine what action should be taken with respect to the Seneca Trail property and was advised to have a third party assume the mortgage. Upon this advice, the mortgage for the Seneca Trail property was ultimately assigned to the limited liability company. Furthermore, according to Manojlovic, neither he nor Uzunovic had any ownership interest in this limited liability company and that he merely managed it. Id . To plead a fraud claim, plaintiffs must demonstrate that “defendants knowingly misrepresented a material fact with the intent to deceive and, after having justifiably relied upon such misrepresentation, experienced pecuniary loss.” State of New York v. Industrial Site Servs., Inc. , 52 A.D.3d 1153, 1157 (2008); see also Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016). Plaintiffs alleged that defendants: (1) attempted to steal the Seneca Trail property by failing to contribute to the mortgage payments for the property, then surreptitiously procuring an assignment of the mortgage by one of their other companies, and threatening to foreclose on the property; with the net effect being that plaintiffs would lose their investment in the property and defendants would hold it free and clear; (2) misrepresented and overstated the amounts allegedly paid for utilities on the properties in an effort to artificially increase the amount of their partnership contribution; and (3) created false invoices concerning expenses to be paid to the contractor on the Planty Way properties that inflated the amount contributed by defendants as capital contributions. The Court agreed with the motion court that there were triable issues of fact that prevented the grant of summary judgment on the fraud claim. Plaintiffs point to defendants’ actions regarding the Seneca Trail property as one basis for the fraud claim but, as discussed, a question of fact exists concerning the propriety of those actions. Plaintiffs also claim that defendants overstated the amount they had paid for utility expenses in connection with some of the subject properties. In his affidavit, Manojlovic did not dispute that there was an overstatement, but further stated that any overstatement was an accounting error and that any errors were fixed prior to the commencement of this action. Plaintiffs also claim that defendants created false invoices concerning expenses to be paid to a contractor that inflated the amount contributed by defendants as capital contributions. Other than speculation, however, plaintiffs failed to substantiate their claim of forgery. Furthermore, Manojlovic explained that he created invoices because the contractor’s record keeping was inadequate and that such invoices reflected what had already been paid to the contractor. The contractor also testified at his deposition that he assisted Manojlovic in typing the invoices and creating their format. Finally, the record discloses a triable issue of fact as to what defendants contributed to the partnership as capital contributions. Id . at *2. “In view of the foregoing,” the Court found “that plaintiffs were not entitled to summary judgment on their fraud cause of action.” Id . (citation omitted). Takeaway It has been said that “ business partnership is like a marriage.” ( Here .) Like any marriage, “trust, communication, honesty, respect and the ability to compromise” are key traits in a successful relationship. Id . Just as good marriages grow over time, so too do business relationships. Having said that, however, “not all friendships can evolve into business partnerships, so carefully choosing who you work with is essential.” Id . As Delibasic shows, the relationship between the parties devolved, not evolved, with one set of friends accusing the other of misconduct and fraud.   From a legal perspective, Delibasic shows the difficulties a party encounters trying to obtain summary judgment. Because “ ummary judgment is a drastic remedy,” courts grant it “only where the moving party has ‘tender sufficient evidence to demonstrate the absence of any material issues of fact.’” Alvarez v. Prospect Hosp. , 68 N.Y.2d 320, 324 (1986). Thus, if the moving party fails to make the requisite showing, “it is not entitled to summary judgment.” Maines Paper & Food Serv., Inc. v. Restaurant Mgmt. by D.C. Corp. , 229 A.D.2d 748, 750 (3d Dept. 1996). Mere conclusions, speculation, unsubstantiated allegations or expressions of hope are insufficient to defeat a summary judgment motion. Zuckerman v. City of N.Y. , 49 N.Y.2d 557, 562 (1980). As the Third Department noted, some of Delibasic’s allegations fell into that category. Slip Op. at *2 (“Other than speculation, however, plaintiffs failed to substantiate their claim of forgery”). Other allegations were simply disputed – that is, Delibasic could not “demonstrate the absence of any material issues of fact.” Alvarez , 68 N.Y.2d at 324. As noted, Delibasic highlights the challenges the proponent of a summary judgment motion must overcome to obtain such relief. These challenges can be considerable. Indeed, a study of cases in three federal district courts ( here ) found that only about 10% of contract and tort cases succeeded in obtaining summary disposition. (“Contract and tort cases have reasonably uniform low summary judgment rates, with results across our districts and time periods that are all consistent with rates being less than 10%.”) No doubt, the reason for such a low percentage of success has to do with the fact that it is easier to find material issues of disputed fact when trying to resolve issues of scienter (or state of mind), causation, or breach of a duty (such as negligence). As the Third Department noted in Delibasic , “the record disclose … triable issue of fact” with regard to many of the elements of Delibasic’s breach of fiduciary duty and fraud claims. Does this mean that parties should not move for summary judgment? Delibasic (as well as the studies) show that the answer is dependent upon the facts and evidence of the case. To be sure, questions of law, issues that can be proven through documentary evidence, and the inability to support a claim or an element of a claim with evidence may militate in favor of making a motion for summary judgment. But, as Delibasic illustrates, obtaining summary judgment on issues that are inherently factual ( e.g. , scienter, breach of duty and causation) may prove to be too challenging.

Frequently, important terms of a contract are intended to be incorporated by reference into other documents.  Litigation frequently arises when one party disputes whether the terms of extrinsic documents were indeed made part of the executed agreement. The parties in Movado Group, Inc. v. Mozaffarian , 92 A.D.3d 431 (1 st Dep’t 2012), entered into a credit agreement in which defendants “expressly acknowledged receipt of, and agreed to be bound by, terms and conditions contained in an extrinsic document, which defendants neither read nor requested a copy to read.”  Subsequent to credit approval, the defendants first saw the “terms and conditions,” which contained a New York forum selection clause.  The Movado plaintiff sued defendant in New York under the credit agreement.  Supreme court denied plaintiff’s motion for a default judgment and granted defendants’ motion to dismiss for lack of personal jurisdiction. The First Department unanimously reversed supreme court and remanded the matter for a determination on the merits, holding: Plaintiff proved by a preponderance of the evidence that the terms and conditions of the extrinsic document were incorporated into the credit agreement, and that defendants' acknowledged receipt and agreed to be bound by the same. The credit agreement, which identified the terms and conditions as those contained on each invoice, was sufficient to put defendants on notice that there was an additional document of legal import to the contract they were executing. Defendants' decision not to inquire as to the terms and conditions is one by which they are bound. Movado , 92 A.D.3d at 431 – 32 (citations omitted). One of the authorities on which the Movado Court relied in reaching its result was Shark Information Services Corp. v. Crum and Forster Commercial Ins. , 222 A.D.2d 251 (1 st Dep’t 1995).  The plaintiff in Shark made a claim under an insurance policy after its business was interrupted due to a storm.  Defendant insurer indicated that it would disclaim coverage under the policy despite the fact that the “policy as delivered to plaintiff plainly covered the claimed loss and contained no applicable exclusion….”  Shark , 222 A.D.2d at 251.  The insurer argued that the exclusion on which they otherwise would have relied to disclaim coverage “was inadvertently omitted from the policy and that its reliance upon the exclusion should not be precluded by the inadvertent error.”  Shark , 222 A.D.2d at 251.  Plaintiff sued the insurer for, inter alia , breach of the insurance contract.  In deciding summary judgment motions from both sides, supreme court “was apparently of the view that although the endorsement containing the claimed exclusion was concededly absent from the policy as issued, there was some factual question as to whether the exclusion might be viewed as incorporated in the policy by reference.”  Shark , 222 A.D.2d at 252. The First Department in Shark , rejected the insurer’s “incorporation by reference” argument and stated: In our view, defendants' reliance upon the doctrine of incorporation by reference must, as a matter of law, be held ineffective to bring the claimed exclusion within the terms of subject policy. Incorporation by reference, of course, is appropriate only where the document to be incorporated is referred to and described in the instrument as issued so as to identify the referenced document beyond all reasonable doubt.  It is clear that none of the instant policy's oblique references to an otherwise unidentified “Coverage Form” meet this exacting standard. Indeed, the policy as issued gives every appearance of being a complete statement of the terms, conditions, and limitations of coverage and makes no obvious reference to any unincluded endorsement, much less one containing so critically important an exclusion from coverage. Shark , 222 A.D.2d at 252 (citations and quotation marks omitted). On July 9, 2019, the Appellate Division, First Department, addressed the “incorporated by reference” issue in Eshaghpour v. Zespa Industries, Inc.   The parties in Eshaghpour entered into a contract pursuant to which defendant was to supply architectural woodwork in an apartment owned by plaintiff’s wife.  Plaintiff signed the front page of the agreement which stated that the “prices, specifications and conditions above and on the back of this proposal were satisfactory” (brackets omitted).  A dispute arose and plaintiff sued defendant in New York.  Relying on the North Carolina forum selection clause appearing as one of the “terms and conditions” purportedly printed on the reverse side of the proposal page, defendant moved to dismiss the New York action. The First Department affirmed supreme court’s denial of defendant’s motion.  In so doing, the Court found that the “terms and conditions” section never appeared in the agreement that plaintiff reviewed and signed, and that plaintiff never saw the subject page.  Significantly, the lengthy contract “was paginated consecutively and signed on each page by both parties contrary to defendants’ suggestions, plaintiff had no reason to ask for any other documents.”  The Court further explained: Although documents may be incorporated by reference as part of an executed agreement, the doctrine of incorporation by reference is grounded on the premise that the material to be incorporated is so well known to the contracting parties that a mere reference to it is sufficient.  The referenced material must be described in the contract such that it is identifiable beyond all reasonable doubt. Here the agreement's oblique reference to an otherwise unidentified Terms and Conditions page, which was never provided to plaintiff, is insufficient to meet this exacting standard. (Citations and internal quotation marks omitted.) TAKEAWAY While it sounds silly to say, it is critically important to carefully read the agreements that you sign.  Further, if there is any mention of documents that are to be incorporated by reference, make sure that those documents are thoroughly reviewed attached to the final signed contract.  By proceeding in this manner there should be no confusion as to all of the terms and conditions of the parties’ agreement.

On July 9, 2019, the Appellate Division, First Department, issued three decisions involving claims of fraud and/or fraudulent inducement that piqued this Blog’s interest.  One case involved whether a fraudulent inducement claim duplicated a contract claim ( Man Advisors, Inc. v. Selkoe , 2019 N.Y. Slip Op. 05483 (1st Dept. July 9, 2019) ( here ), while the other two involved the justifiable reliance element of a fraud cause of action ( Mann v. Thomas-Senior , 2019 N.Y. Slip Op. 05496 (1st Dept. July 9, 2019) ( here ), and OmniVere, LLC v. Friedman , 2019 N.Y. Slip Op. 05494 (1st Dept. July 9, 2019) ( here )). We look at each case below. Man Advisors, Inc. v. Selkoe In Man Advisors , the Court unanimously reversed the dismissal of a fraudulent inducement claim, holding that the plaintiff “state a claim for fraudulent inducement, which is not duplicative of claim for breach of the guarantee.” Slip Op. at *1. Plaintiff entered into a $2,040,00 million secured promissory note agreement with Karmaloop, Inc. (“Karmaloop”), that defendants Gregory Selkoe (“Gregory”) and Dina Selkoe (collectively, “Selkoe”) guaranteed. After Karmaloop was unable to meet its obligations under the note and declared bankruptcy (13 months after the initial deal), plaintiff sued defendants for breach of contract, claiming that they were personally responsible for the balance remaining on the note ($1,615,000) plus fees and interest. Plaintiff also sued Gregory for fraudulently inducing it to enter the note by making false statements about Karmaloop’s past defaults, its financial condition, and Gregory’s own history of personal guarantees. Plaintiff sought an additional $1,615,000.00 against Gregory pursuant to that claim. The motion court held that the fraudulent inducement claim duplicated the contract claim. In order to state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). In the context of a case alleging both contract and tort claims, the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of a breach of contract claim. Id . Moreover, the misrepresentations of present fact must be “collateral to the contract and induced the allegedly defrauded party to enter into the contract.” Orix Credit Alliance v. Hable Co. , 256 A.D.2d 114, 115 (1st Dept. 1998). Therefore, “ s a general rule, to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract.” Non-Linear Trading Co. v. Braddis Assoc. , 243 A.D.2d 107, 118 (1st Dept. 1998) (internal quotation marks omitted). Against the foregoing, the motion court held that “the alleged fraudulent statements made by Mr. Selkoe substantially related to the contract and under the same facts as the breach of contract.” In so holding, the court found that plaintiff had “failed to establish a duty that distinct from, or in addition to, the defendant’s contractual obligations.” Therefore,” held the motion court, “the fraud cause of action duplicative of the breach of contract action.” Plaintiff appealed. As noted, the First Department unanimously reversed. The Court held that plaintiff adequately stated a claim for fraudulent inducement because Gregory made two representations that were false: Gregory “had previously given only one other personal guarantee, and that Karmaloop had never defaulted on any loan payment.” Slip Op. at *1. The Court noted that, in fact (as alleged), “ had previously guaranteed a loan issued to another Karmaloop executive, and Karmaloop had defaulted on that loan.” Id . The Court also held that these allegations did not duplicate the guarantee claim, finding that “Plaintiff not allege that misrepresented the intent to perform on the guarantee and underlying promissory note, which would render the fraud claim duplicative, but rather allege that misrepresented his and Karmaloop’s ability to perform.” Id . Notably, the Court departed from its customary rulings with regard to alleged duplication, holding that it was premature to make that determination at such an early stage of the proceedings: “At this early juncture, we find that plaintiff should be ‘permitted to plead in the alternative ( see CPLR 3014),’ and its claim ‘for fraud, should not be dismissed as duplicative of the breach-of-contract cause of action.’” Id. , quoting Citi Mgt. Group, Ltd. v. Highbridge House Ogden, LLC , 45 A.D.3d 487, 487 (1st Dept. 2007). Mann v. Thomas-Senior In Mann , the First Department addressed the reasonable reliance element of a fraud claim, holding that the failure to exercise adequate due diligence in ascertaining the truth of a representation was fatal to plaintiff’s fraud claim. The justifiable reliance requirement is one of the five elements of a fraud cause of action: (1) a misrepresentation or a material omission of fact; (2) which was false and known to be false by the defendant(s); (3) made for the purpose of inducing another person to rely upon it; (4) justifiable reliance of the other party on the misrepresentation or material omission; and (5) damages. Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (citation omitted). Because the determination of whether a plaintiff justifiably relied on a misrepresentation or omission is a factually “nettlesome” one ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010)), “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). If the plaintiff fails to make use of the means available to discover the truth, his/her claim will be dismissed. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). Mann arose from plaintiffs’ purchase of a luxury condominium apartment in the Schaefer Landing North Condominium complex (the “Complex”) during the spring 2017. The Complex is located at the eastern edge of the East River in Williamsburg. The unit is located in a Northwest corner of the Complex, with windows facing west to Manhattan, as well as windows facing north to the Williamsburg Bridge and a new building that was under construction at the time of purchase. Plaintiffs purchased the unit for $1,900,000. According to plaintiffs, defendants falsely represented the extent to which the building under construction would obstruct the views from the north side of the building. Defendants moved to dismiss, claiming, inter alia , that plaintiffs could not demonstrate that they justifiably relied on any alleged misrepresentation. Among other things, defendants contended that plaintiffs explicitly acknowledged in the contract of sale that they did not rely on any representations, and that defendants did not make any representations, other than those specifically identified in the contract documents. Defendants also argued that plaintiffs saw and were aware of the pending construction project to the north of the Complex during their visit(s) to the building and were not precluded from investigating, and did not investigate, the construction plans and the height of the anticipated building. In this regard, defendants noted that there were various publicly available documents from real estate publications and government offices that described the project and contained various depictions of it. The motion court agreed with defendants and dismissed the complaint. Plaintiffs appealed. The First Department “unanimously affirmed,” holding that plaintiffs failed to demonstrate that they justifiably relied on “defendants’ representations concerning the view from the apartment that they were purchasing.” Slip Op. at *1 (citation omitted).  In fact, noted the Court, “ he complaint devoid of any allegations that plaintiffs exercised adequate due diligence in ascertaining the extent to which the adjacent building would impact the view.” Id. , citing Jee Foo Realty Corp. v. Lemle , 259 A.D.2d 401, 402 (1st Dept. 1999). OmniVere, LLC v. Friedman In OmniVere , the First Department unanimously affirmed the dismissal of fraud claims in a counterclaim and third-party complaint because, inter alia , plaintiff failed to satisfy the justifiable reliance element of the cause of action. In February 2014, Intelligent Discovery Management, LLC (“IDM”) and Balint Brown & Basri, LLC (“B3” and with IDM, “IDMB”) and OmniVere LLC, OmniVere Holding Company LLC and Eric S. Post (“Post”) (collectively, “Omnivere”) commenced negotiations in which OmniVere would acquire IDMB. After weeks of due diligence and negotiations, the parties reached an agreement on the terms of a deal, which they memorialized in an Asset Purchase Agreement (“APA”). Under their agreement, OmniVere, LLC would acquire substantially all IDMB’s assets for $9.9 million in cash and $2 million in preferred equity in OmniVere Holding, LLC in the form of 1,153,846 Class B Units (“Units”) pursuant to a simultaneously executed Operating Agreement of OmniVere Holding, LLC. IDMB alleged that Post told IDMB that Omnivere expected to have a combined $40 million in annual sales and earnings of at least $10 million a year by closing. IDMB claimed that this was a misrepresentation because actual annual sales at the time of closing were only projected to be $33 million. IDMB also alleged that OmniVere falsely claimed to have a $10 million war chest to make additional acquisitions and had secured a $3 million revolving line of credit. OmniVere moved to dismiss, claiming, among other things, that IDMB failed to plead that it justifiably relied on the alleged misrepresentations. The motion court agreed, stating that IDMB made no effort to determine whether the information claimed to be false was, in fact, false: “IDMB, however, does not explain how these projections were calculated or where the numbers came from, other than in informal emails” and “admitted that it conducted no projections of its own.” The court explained that “IDMB not demonstrate how its reliance on any representation could be reasonable when it could have obtained background information about the anticipated state of Omnivere on its own through legal and financial advisors” but failed to do so. The First Department agreed with the motion court, holding that “IDMB failed to sufficiently allege justifiable reliance on the alleged misrepresentations regarding Omnivere’s financial projections and financing since IDMB had the means to discover the true nature of the transaction by the exercise of ordinary diligence but failed to make use of those means.” Slip Op. at *1, citing Ventus Grp. LLC v. Finnerty , 68 A.D.3d 638, 639 (1st Dept. 2009). Takeaway As readers of this Blog know, courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from a breach of contract. In fact, courts routinely dismiss a fraudulent inducement claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Grp. Ltd. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. The former will result in dismissal, while the latter will not. Gosmile , supra . In Gosmile , the First Department explained: “that a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract, is collateral to the contract, even though it may have induced the plaintiff to sign it, and therefore involves a separate breach of duty.” 81 A.D.3d at 81 (citations omitted). Thus, a fraud claim that is premised on a misrepresentation of a prior or existing fact will not be dismissed “as an insincere promise of future performance” and, therefore, as duplicative of a breach of contract claim. First Bank v. Motor Car Funding, Inc. , 257 A.D.2d 287, 292 (1st Dept. 1999) (citations omitted). Man Advisors reiterates the foregoing principles. It is notable, however, because the First Department (albeit in dicta ) permitted plaintiff to plead its fraud claim in the alternative (Slip Op. at *1 (citing CPLR § 3014)), an approach that some trial court level judges employ. Readers of this Blog also know that courts will not sustain a fraud claim in which the plaintiff fails to avail himself/herself/itself of the means to discover the truth or falsity of representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation into the veracity of a representation or omission when the aggrieved party has the ability to do so, or ignoring facts that are in plain sight ( i.e. , facts that are publicly available), are reasons to dismiss a fraud claim. Mann and OmniVere are the most recent examples coming out of the First Department to underscore these principles.

Sometimes state appellate courts affirm or modify lower court decisions without providing much in the way of analysis. With overburdened dockets and substantially similar issues being decided, it is no surprise these courts issue short decisions that have more value to the parties than to the bar. Such is the case in BML Properties Ltd. v. China Construction America Inc. , 2019 N.Y. Slip Op. 05339 (1st Dept. July 2, 2019) ( here ).   Overview and the First Department’s Decision In late 2017, BML Properties Ltd. (“BML” or “Plaintiff”) filed an action against China Construction America Inc. (“CCA”), an indirect subsidiary of China State Construction Engineering Co. Ltd., claiming that CCA falsely represented and assured BML that the multi-billion dollar Baha Mar resort complex in Nassau, Bahamas, would be opened on time and within budget. CCA argued that the dispute belonged in arbitration under an amendment to the construction contract that was originally signed by its local unit, CCA Bahamas Ltd. (“CCA Bahamas”), and Baha Mar Ltd. (“Bar Mar”), an entity owned by BML that had been created to develop the resort. The motion court (Scarpulla, J.) rejected BML’s argument, noting that the claims actually arose under a different contract signed by CCA, its affiliates and BML when the latter made an $830 million investment in the development of the project. here ).=">here)."> According to the motion court, CCA Bahamas and a non-party to the lawsuit signed the agreement to which the parties agreed to arbitrate disputes arising under their contract. The Appellate Division, First Department, unanimously affirmed the motion court’s decision, holding that the motion “court correctly denied the branch of defendants’ motion seeking to compel arbitration because plaintiff was not a party to the agreement containing the arbitration clause and the claims at issue were, by separate agreement, required to be litigated in New York.” Slip op. at *1, citing Matter of Cammarata v. InfoExchange, Inc. , 122 A.D.3d 459, 460 (1st Dept. 2014), and Oxbow Calcining USA Inc. v. American Indus. Partners , 96 A.D.3d 646, 649-650 (1st Dept 2012). Defendants also argued that BML’s fraud claims should be dismissed because it failed to allege that it justifiably relied on any claimed misstatement and omission cited in the complaint.  In the complaint, BML alleged that CCA orchestrated a “massive fraudulent scheme” by creating the false and misleading impression that it was meeting on-time and on-budget schedules necessary to open the resort in December 2014, when in fact, Defendants were concealing massive delays that, inter alia , increased the costs of construction to the detriment of BML. Justice Scarpulla disagreed, denying the motion to dismiss. The First Department affirmed, holding that “Plaintiff adequately stated a claim for fraud, by asserting justifiable reliance upon assurances, alleged to have been false when made, regarding the project’s status, and the workforce and resources available to meet the deadline for completion of the project, which were collateral to, and not duplicative of plaintiff’s claims for breach of contract.” Id. , citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011); and GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). Background On March 9, 2009, Baha Mar and CCA Bahamas entered into an agreement (known as the “Main Construction Contract” or the “MCC”) regarding the development of the multi-billion-dollar Baha Mar resort complex in Nassau, Bahamas (the “Project”). Among other things, the MCC contained a dispute resolution provision that required any claims arising under the agreement to “be initially decided by a three-person Dispute Resolution Board <“drb”> as a condition precedent to commencement of any legal proceedings.” On January 13, 2011, BML and Defendants entered into an Amended and Restated Investors Agreement (the “Investors Agreement”), pursuant to which BML made an $830 million equity investment in the development of the Project. Under the Investors Agreement, BML was responsible for Baha Mar’s day-to-day management, subject to the direction of the Board ( i.e. , a five member panel consisting of three members, a chairman nominated by BML, and one member nominated by CSCEC (Bahamas), Ltd. a/k/a “China State”). On February 14, 2011, Baha Mar issued a Notice to Proceed to CCA Bahamas, pursuant to the MCC, effective May 1, 2011, with a contractual construction completion schedule of 44 months (which expired on November 20, 2014). Progress on the Project was slow. To resolve disputes arising from the delays, on May 17, 2013, Baha Mar and CCA entered into a Memorandum of Understanding (“MOU”). In the MOU, CCA represented that it would provide Baha Mar with access on or before March 31, 2014 to, at a minimum, the key ballrooms and meeting rooms of the Convention Center. Further, the MOU required CCA to expedite labor mobilization in exchange for BML’s agreement to award the Convention Center MEPF (mechanical, electrical, plumbing and fire protection) package to CCA. Defendants did not meet the October and December 2013 milestone dates. To address the delays, the parties engaged in several “summits” in December 2013 and January 2014, during which CCA agreed to address its missed milestones. In May 2014, Baha Mar demanded, pursuant to the MCC, that the DRB convene to address the Convention Center delays and, among other things, establish that CCA had breached the MCC and not adequately staffed the Convention Center or the entire Project. In July 2014, the DRB convened, reviewed the parties’ written submissions, and held two days of testimony. The DRB ruled, on August 13, 2014, that “the weight of the evidence show that CCA ha proceeded in breach of the Contract by failing to proceed expeditiously with adequate forces sufficient to comply with the Contract.” Slip Op. at *7. In addition, the DRB ordered CCA, among other things, “to continue to maintain at least that level of labor and resources on the Convention Center, in good faith, as permitted by law, until further order of the DRB, at CCA’s own expense, sufficient to maintain maximum progress on the Convention Center, while not adversely impacting the Substantial Completion date for the Project as a whole” and to “provide to BML . . . an accurate, complete and realistic Construction Schedule that strictly meets all requirements of the Contract.” Id . Notwithstanding the DRB ruling, none of the milestones to which CCA “committed” were achieved. Id . In another effort to resolve Project disputes pertaining to finances and scheduling, a series of meetings were held by China Exim Bank, CCA and Baha Mar in November 2014, which resulted in signed minutes (the “November 2014 Meeting Minutes”). Under the November 2014 Meeting Minutes, CCA received a $54 million advance on disputed “change orders” and in exchange promised an increased workforce, refocused and increased efforts of senior management, and accelerated work to achieve an opening date of March 27, 2015. The March 27, 2015, deadline was not met. Consequently, Defendants produced revised schedules, which they also did not meet. Id. at *9. Bankruptcy and Receivership On June 29, 2015, Baha Mar filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Delaware and took measures to secure the Project site and all the on-site offices, including those occupied by CCA. On July 16, 2015, the Attorney General of the GOB filed a “winding up” action against Baha Mar and affiliates, including BML. The Supreme Court of the GOB (the trial level court) dismissed the winding up petition against BML (and other Baha Mar affiliates) on September 4, 2015. On October 30, 2015, China Exim Bank commenced proceedings in The Bahamas to appoint a receiver to marshal the assets of Baha Mar and its subsidiaries, pursuant to a Credit Facility Agreement (“CFA”) between Baha Mar and China Exim Bank, and exercised its rights under the Pledge Agreements dated January 2011 (in which BML pledged its shares in Baha Mar as collateral for the loan proceeds provided under the CFA), and thereby took control over the entirety of the BML’s common shares in Baha Mar. The Bahamian receivership proceedings resulted in an agreement for the sale of Baha Mar’s assets to Perfect Luck Assets Ltd. (“Perfect Luck”), an entity owned by China Exim Bank, on or about September 27, 2016, pursuant to an undisclosed agreement followed by a conditional agreement of merger of Perfect Luck into an entity known as Chow Tai Fook Enterprises Limited (“CTFE”). Consequently, BML lost its investment in Baha Mar, or approximately $845 million, as well as its expected future profits from the resort. On August 30, 2016, Perfect Luck (as owner) and CCA Bahamas (as construction manager) entered into an agreement (“Amendment No. 9”), which amended the MCC. Amendment No. 9 set out conditions for the completion of the Project, including the scope of the work and payment amounts. Amendment No. 9 also deleted the DRB dispute resolution clause and the forum selection clause of the MCC and inserted a new section which stated that any dispute would be referred to and finally resolved by arbitration under the Rules of the International Chamber of Commerce. The Complaint and Motion Proceedings On December 26, 2017, BML filed a 259-page complaint, alleging causes of action for fraud and breach of contract. BML alleged that CCA, acting as China State, failed to advise the Board of its findings and concerns regarding the Project’s construction as required by both the Investors Agreement and the MCC. In that regard, BML alleged that Defendants failed to report accurately, or at all, the true state of its scheduling, deadline compliance, the amount or experience of its workforce and status of its procurement. Moreover, BML stated that from 2012 to 2013 and beyond, CCA failed to deliver the documentation required by the MCC and Investors Agreement preventing it from effectively monitoring the Project’s progress and governing its finances. BML contended that the accuracy of Defendants’ reporting directly affected its ability to predict and protect against risks to its equity investment. BML also alleged that Defendants made false representations regarding the progress and status of the Project. Defendants moved to compel mediation and arbitration or, alternatively, to dismiss BML’s complaint based on, inter alia , the failure to state a cause of action for fraud. The Court’s Decision: Motion to Compel Arbitration Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State of New York. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). See also Holick v. Cellular Sales of New York, LLC , 802 F.3d 391, 395 (2d Cir. 2015) (because arbitration is contractual, “a party cannot be required to submit to arbitration any dispute which has not agreed so to submit.”) (citation and internal quotation marks omitted); Brookfield Clothes, Inc. v. Tandler Textiles, Inc. , 78 A.D.2d 841, 841 (1st Dept. 1980) (holding that “ nly persons who expressly agree to arbitrate can be compelled to do so”). Against these principles, Justice Scarpulla denied the motion to compel arbitration, holding that BML was not a signatory to any arbitration agreement, including Amendment No. 9, which “clearly define the parties bound to the agreement as Perfect Luck and CCA Bahamas.” Slip Op. at *13. The Court rejected Defendants’ argument that BML’ claims were subject to arbitration “despite that BML Properties did not execute Amendment No. 9 (containing the agreement to arbitrate).…” Id . Defendants claimed that even if BML was not a signatory to Amendment No. 9, New York courts “‘frequently’ impute the intent to arbitrate to a non-signatory.” Id . In rejecting the argument, the Court explained that “the Court of Appeals has held that only in ‘certain limited circumstances’ should courts impute the intent to arbitrate to a non-signatory.” Id ., quoting TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 339 (1998). Those circumstances arise, said the Court, when the non-signatory “either acted in a way that evinced an intent to be bound or received a direct benefit from a contract containing an arbitration clause which precluded them from disavowing the arbitration clause.” Id . In BML , neither circumstance was present. First, Defendants failed to allege any facts to show that BML intended to be bound by the arbitration clause in Amendment No. 9. This was especially so, said the Court, because “Amendment No. 9 post-date the events at issue here and was not discovered by BML Properties until it was produced in th litigation.” Id . at **13-14. Second, Defendants failed to demonstrate that BML’s reliance on the MCC in the complaint “tether the claims to the arbitration clause.” Id . at *14. In fact, noted the Court, Defendants’ reliance on the MCC was misplaced because “BML Properties’ claims … do not stem from the MCC.” Id .  They arise, said the Court, “pursuant to the Investors Agreement,” in which “Defendants were obligated accurately to relay findings and concerns regarding the construction work to BML Properties.” Id . The construction work was governed by the MCC and Defendants allegedly repeatedly failed to meet the MCC’s obligations. BML Properties contends that Defendants’ alleged repeated failures under the MCC rendered its statements to BML Properties false and therefore violated its Investors Agreement obligation to accurately report to BML. While referring to Defendants’ obligations under the MCC, BML’s claims arise under the Investor Agreement. Id . Thus, because “Defendants failed to produce evidence of BML Properties’ intent to be bound by the arbitration clause or furnish a basis for imputing such intention to it,” the Court denied the motion to compel arbitration. Id . at *15. The Court’s Decision: Motion to Dismiss Fraud Claim To plead a fraud claim, a plaintiff must plead with particularity each of the following elements: “a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); CPLR § 3016(b) (requiring fraud to be pleaded with particularity). In BML , Defendants argued that Plaintiff failed to plead that it justifiably relied on “any alleged misrepresentation,” because BML was “‘responsible for the day-to-day management of the Company’ and that this role prevent BML Properties from claiming ignorance about Defendants’ alleged misrepresentations.” Slip Op. at *21. The Court rejected this argument finding that “the complaint describe numerous meetings, discussions and emails in which BML Properties sought (and received) alleged false assurances from Defendants about their existing workforce, available resources and ability to complete the Project.” Id . At the pre-discovery phase of the litigation, noted the Court, such allegations sufficed. Id. , citing ACA Fin. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015) (noting, the issue of justifiable reliance “is not generally a question to be resolved as a matter of law on a motion to dismiss”). Defendants also argued that BML’s fraud claims duplicated its contract claims. The Court rejected the argument. First, “neither of BML Properties’ claims for breach of contract” were “based on obligations created by the MCC” – they were based on the Investors Agreement, the MOU and the November 2014 Meeting Minutes. Id . at *21. Second, noted the Court, the fraud claims were based on misrepresentations concerning workforce numbers and Project status “and allege misrepresentations of then-present facts collateral to the Investors Agreement.” Id. at **21-22, citing GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010) (finding that under New York law, plaintiffs may plead a fraud claim, as well as a contract claim, if the fraud claim alleges “a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract....”). Finally, the Court found that the damages sought by BML under the fraud claim were not identical to those under its contract claim. The former sought damages “for the loss of mitigation expenses and further investment efforts,” while the latter sought “damages for the value of the Project if it was timely completed on budget.” Id . at *22.

On July 1, 2019, this Blog wrote about Hoffman v. AT&T Inc. , 2019 N.Y. Slip Op. 31811(U) (Sup. Ct. N.Y. County, June 21, 2019) ( here ). Hoffman involved a motion, under CPLR § 2201, to stay an action filed in state court, alleging claims under the Securities Act of 1933 (the “1933 Act”), in favor of a parallel action filed in federal court, alleging claims under the 1933 Act and the Securities Exchange Act of 1934 (the “Exchange Act”). As discussed in the article, the Hoffman court denied the motion, holding that a stay would be inimical to the first-filed rule, the establishment of the Commercial Division, and the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund , 138 S. Ct. 1061 (2018). Less than one week after the article was published, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, decided a motion, under CPLR § 2201, to stay a securities class action alleging claims under the 1933 Act in favor of a parallel securities class action filed in federal court alleging claims under the 1933 Act and the Exchange Act. Matter of PPDAI Group Sec. Litig. , 2019 N.Y. Slip Op. 51075(U) (Sup. Ct., N.Y. County July 1, 2019) ( here ).  Like Justice Ostrager in Hoffman , Justice Scarpulla, who cited to Hoffman , denied the motion.  However, unlike Justice Ostrager, Justice Scarulla applied CPLR § 2201 in making her decision. Matter of PPDAI Group Securities Litigation Background PPDAI involved alleged violations of the 1933 Act in connection with an initial public offering (“IPO”) in November 2017 of American Depository Shares (“ADS”) by PPDAI Group, Inc. (“PPDAI” or the “Company”), a Cayman Islands corporation with primary operations in China. The offering materials (“Offering Materials”) issued by Defendants included a prospectus (“Prospectus”) and Forms F-1 and F-5 registration statements (the “Registration Statement”). The Securities and Exchange Commission (“SEC”) declared the Registration Statement effective on November 9, 2017 and, on November 13, 2017, Defendants priced the ADSs at $13 per share and filed the final Prospectus for the IPO. PPDAI was co-founded by defendants Jun Zhang (“Zhang”), Tiezheng Li (“T. Li”), Honghui Hu (“Hu”) and Shaofeng Gu (“Gu”) in 2007. The Company is an online consumer finance marketplace that connects borrowers and investors “whose needs have not been met by traditional financial institutions.” PPDAI, through its full-service peer-to-peer (“P2P”) lending platform, generates revenue “primarily from fees charged to borrowers for services in matching them with investors and for other services provide over the loan lifecycle.” Other revenue-generating services include loan facilitation service fees, post-facilitation service fees, collection fees and management fees. To raise additional capital, PPDAI engaged in the IPO. Credit Suisse Securities (USA) LLC (“Credit Suisse”), Citigroup Global Markets Inc. (“Citigroup”), and Keefe, Bruyette & Woods (“KBW”) served as underwriters for the IPO. Plaintiffs alleged that the underwriters generated $221 million in proceeds before underwriting discounts and commissions. According to the complaint, plaintiffs Yizhong Huang (“Huang”) and Ravindra Vora (“Vora”) (together, “Plaintiffs”) acquired PPDAI’s ADSs in connection with the IPO “pursuant and/or traceable to” the Offering Materials. Plaintiffs alleged that, by the effective date of the Offering Materials, China had increased its scrutiny and regulation of the P2P lending industry due to widespread complaints about lending and collection improprieties. Plaintiffs also alleged that PPDAI engaged in the type of lending and collection misconduct, such as usurious loan rates and abusive collection practices, that was the subject of China’s scrutiny. Plaintiffs further alleged that investors to whom Defendants solicited to purchase ADSs in the IPO, and investors who purchased ADSs pursuant and/or traceable to the Offering Materials, were not aware of the scope of the threat to PPDAI’s business that was posed by China’s existing and prospective regulations. Based on the foregoing, Huang filed a complaint on September 10, 2018, alleging violations of Sections 11, 12(a)(2) and 15 of the 1933 Act in connection with the alleged materially misleading statements and omissions in the Offering Materials. Vora filed a similar complaint on September 27, 2018. The two actions were consolidated by a stipulation that the Court so ordered on October 16, 2018. On November 26, 2018, about two weeks after the parties met for a preliminary conference, Weichen Lai filed an action in the United States District Court for the Eastern District of New York, alleging violations of the 1933 Act (“EDNY Action”). Lai asserted virtually the same allegations contained in the earlier-filed Huang and Vora complaints. On December 17, 2018, Plaintiffs filed a consolidated class action complaint (“CAC”), which amplified the factual allegations and added Law Debenture Corporate Services Inc. (“Law Debenture”), PPDAI’s agent for the service of process in the United States, as a defendant. On January 8, 2019, plaintiff in the EDNY Action filed an amended complaint, prior to the appointment of a lead plaintiff, and added a fraud claim under the Exchange Act. Defendants moved to stay the state court action by order to show cause. That motion was later withdrawn without prejudice. Defendants refiled the motion for a stay, pursuant to CPLR § 2201, on notice. Defendants also requested an order staying discovery until the resolution of any motions to dismiss. The Court denied the motion. The Court’s Decision: Motion to Stay Proceedings The Court analyzed the motion to stay the action through the lens of CPLR § 2201. Under CPLR § 2201, “ xcept where otherwise prescribed by law, the court … may grant a stay of proceedings …, upon such terms as may be just.” A motion pursuant to CPLR § 2201 to stay an action pending in favor of another action is directed to the sound discretion of the trial court. Mook v. Homesafe Am., Inc. , 144 A.D.3d 1116, 1117 (2d Dept. 2016). In making the determination, a court may consider a number of factors, including: 1) which forum will offer a more complete disposition of the issues; 2) which forum has greater expertise in the type of matter; 3) which action was commenced first and the stage of the litigations; 4) whether there is substantial overlap between the issues raised in each court; 5) whether a stay will avert “duplication of effort and waste of judicial resources;” and 6) whether plaintiffs have demonstrated that they would be prejudiced by a stay. Asher v. Abbott Labs. , 307 A.D.2d 211, 211-212 (1st Dept. 2003); see also Reaves v. Kessler , No. 654485/2015, 2017 WL 2482948 (Sup. Ct., N.Y. County June 8, 2017). Identity of Parties, Substantial Overlap of Issues and Complete Disposition The Court found that there was not complete identity of parties between the state and federal action: there were four defendants in the state action that were not named in the EDNY Action. In that regard, the Court rejected Defendants’ argument “that a ‘majority of the Defendants are named in both actions.’” Slip Op. at *4. The Court also found that the issues did not substantially overlap and that the EDNY Action would not provide a complete disposition of the state court action. This was especially so, if, as Plaintiffs contended, the 1933 Act claims in the EDNY Action were time-barred by the one-year statute of limitations. Id . at *5. In that case, the Court would be “the only forum that resolve the ‘33 Act claims.” Id .  In fact, noted the Court, “if only the ‘34 Act claims survive in federal court, overlapping of issues will be reduced.” Id . Thus, concluded the Court, “consideration of party identity, substantial overlap of issues and complete disposition not support imposition of a stay in action.” Id . First to File Rule “Although it is not dispositive on a motion to stay, the ‘general rule in New York is that the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.’” Id ., quoting In re Topps Co., Inc. S’holder Litig. , No. 600715/07, 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007) (citation omitted). “The first to file rule, however, should not be applied mechanically irrespective of other considerations.” Id. , citing AIG Fin. Prods. Corp. v. Penncara Energy, LLC , 89 A.D.3d 495, 496 (1st Dept. 2011). The Court held that “ lthough it is not dispositive, being first to file is still “significant.” Id. , citing Certain Underwriters at Lloyds, London v. Millennium Holdings LLC , No. 600626/06, 2006 WL 2546202, at *7 (Sup. Ct., N.Y. County Aug. 8, 2006). After Cyan , this was especially so. Indeed, citing to Cyan and Hoffman , Justice Scarpulla observed that if the first file rule were abandoned, it would render meaningless the jurisdiction conferred upon state courts to adjudicate 1933 Act cases: If the first-to-file rule is uniformly abandoned whenever later filed federal court actions assert other federal claims along with ‘33 Act claims, New York state courts would never exercise their jurisdiction to resolve first-filed ‘33 Act claims. This result would render Cyan meaningless.” Id . at *6. Thus, concluded the Court, “ he fact that Plaintiffs commenced action before the EDNY Action … significantly favor litigation of Plaintiffs’ ‘33 Act claims in court.” Id . Expertise Justice Scarpulla rejected Defendants’ argument that because federal courts have “‘greater experience and familiarity’ with federal claims,” the state action should be stayed.” Id . Similar to Justice Ostrager, Justice Scarpulla found pre- Cyan cases advancing this argument to be “irrelevant” to a post- Cyan world: “However, these cases are irrelevant, as the Supreme Court expressly held in Cyan that state courts have jurisdiction to ‘adjudicate class actions alleging only 1933 Act violations.’” Id. , quoting Cyan , 138 S.Ct. at 1078. Moreover, Justice Scarpulla found that the Commercial Division’s “long-standing” existence as a “specialized business court which deals exclusively with complex commercial litigation ” to be a factor that “weigh in favor of keeping th action in the Commercial Division.” Id .  In so finding, the Court found support in Justice Ostrager’s observation that “liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week.” Id. , citing Hoffman , 2019 WL 2578360 at *2. Duplication of Effort Finally, the Court rejected Defendants’ assertion that absent a stay, “they will have to duplicate efforts to litigate the same claims in two courts.” Id . The Court agreed with Plaintiffs “that this concern is tempered by the alleged untimeliness of the ‘33 Act claims in the EDNY Action.” Id . The Court concluded by noting that “ he possibility that at some point there might be two trials is not an appropriate basis for granting a stay.” Id. , citing Mt. McKinley Ins. Co. v. Corning Inc. , 33 A.D.3d 51, 59 (1st Dept. 2006) (citation omitted). The Court’s Decision: Motion to Stay Discovery Defendants sought to stay discovery in the state court action pursuant to the automatic stay of discovery provision in the Private Securities Law Reform Act of 1995 (“PSLRA”).  In this regard, Defendants argued that “Plaintiffs should not be permitted to ‘skirt the PSLRA’s mandatory stay of discovery, which automatically stays all discovery until any motions to dismiss have been resolved.’” Slip Op. at *7. To Defendants, “if Congress intended the stay to only apply to federal court actions, it would have said so.” Id . The Court rejected the argument. First the Court held that although Cyan was silent on the issue, applying the “automatic discovery stay would undermine Cyan’s holding that ‘33 Act cases may be heard in state courts.” Id . Second, applying the stay would conflict with the rules of the Commercial Division in which “discovery generally continues during motion practice.” Id . Takeaway In this Blog’s takeaway about Hoffman , we noted that motions to stay 1933 Act claims under New York law had been met with mixed results, even after Cyan . Compare Hoffman with In re Qudian Sec. Litig. , 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan , staying 1933 Act class action pending resolution of federal securities action). Although the parties in PPDAI mentioned Qudian in their briefing, the Court did address its analysis or holding. In fact, the Court stated that Defendants did not cite to any post- Cyan authority to support their arguments in favor of staying the action. Id . at **6-7. Based upon its holding, it is apparent that the Court was referring to appellate court decisions. Id . at *7 (“Indeed, there are no decisions by the New York appellate courts addressing a motion to stay a ‘33 Act claim in favor of a later filed federal court action in a post- Cyan universe.”). Nevertheless, with the Hoffman decision, the PPDAI decision may portend things to come in New York. While two decisions do not make a tidal wave of authority, they do indicate the current thinking of Commercial Division judges who will have to decide motions to stay 1933 Act claims under CPLR § 2201. And, that thinking points to the denial of motions to stay state court actions alleging claims under the 1933 Act in favor of parallel actions filed in federal court alleging claims under the 1933 Act and the Exchange Act.

In mortgage foreclosure actions, and other actions in which a party is suing on a promissory note (or other negotiable instruments) ( a “Note”), a plaintiff must allege that it is in possession of the underlying Note in order to establish that it has standing to prosecute the action.  As this Blog has previously noted in the Blog < The=">The" Second="Second" Department="Department" Denies="Denies" Summary="Summary" Judgment="Judgment" to="to" Another="Another" Foreclosing="Foreclosing" Mortgagee="Mortgagee" Due="Due" the="the" Insufficiency="Insufficiency" of="of" Evidence="Evidence" Presented="Presented" on="on" Motion ="Motion"> : …a foreclosing mortgagee makes its prima facie case by the production of the note, the mortgage and evidence of default. The Court did note, however, that “when a defendant places standing in issue, the plaintiff must prove its standing in order to be entitled to relief.” (Citations omitted.) The Brody Court further recognized that standing is conferred on a plaintiff in a mortgage foreclosure action “when it is the holder or assignee of the underlying note at the time the action is commenced.” A “holder,” according to the Brody Court, “is the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.  (Quoting, U.S. Bank National Assoc. v. Brody, 156 A.D.3d 839 (2 nd Dep’t 2017)) (citations and internal quotation marks omitted).) Because possession of a Note is a critical component of a mortgage foreclosure action (or actions involving other negotiable instruments) one may wonder whether a potential plaintiff is out of luck if a Note, for some reason, cannot be produced or otherwise is not in the potential plaintiff’s possession.  If the Note was lost, destroyed or stolen, the answer is provided by section 3-804 of New York’s Uniform Commercial Code, which provides that “ he owner of an instrument which is lost, whether by destruction, theft or otherwise, may maintain an action in his own name and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms….” UCC section 3-804 was recently discussed in Bank of New York Mellon v. Hardt (2 nd Dep’t June 26, 2019).  The plaintiff in Hardt was a lender foreclosing on a mortgage delivered by borrower Hardt.  Plaintiff’s summons and complaint contained a lost note affidavit and a copy of the original note. Hardt defaulted in answering the complaint and supreme court granted plaintiff’s motion for the appointment of a referee to compute the amounts due to the lender under the mortgage.  Thereafter, Hardt moved pursuant to CPLR 317 to vacate her default and for leave to file an answer.  In order to obtain relief pursuant to CPLR 317, a defendant must demonstrate that “he or she did not personally receive notice of the summons in time to defend the action and that he or she has a potentially meritorious defense.”  Deutsche Bank Natl. Trust Co. v. Russo , 170 A.D.3d 953 (2 nd Dep’t 2019). Presumably, in support of her motion to vacate her default, Hardt called plaintiff’s standing into question, which, if demonstrated, would provide a meritorious defense.  (This blog has previously addressed the issue of a foreclosing lender’s standing to bring a foreclosure action < here ,=">here," here=">here" and="and"> .)  In response, supreme court appointed a special referee to “hear and determine” the issue of plaintiff’s standing and, in conjunction with the hearing, the parties stipulated that the only issue that needed to be determined was “whether, in the absence of physical possession of the original note or valid assignment thereof, the plaintiff, as a matter of law, lacks standing.”  After reviewing the facts, the special referee concluded that the lender had standing to pursue the foreclosure action.  Supreme court agreed. On Hardt’s appeal, the Appellate Division, Second Department, found that in denying Hardt’s motion to vacate her default, supreme court “in effect, … found that the defendant lacked a meritorious defense…”.  The Second Department agreed with the referee and rejected Hardt’s contention that “a mortgagee cannot, as a matter of law, establish standing where, as here, the original note was lost and there is no valid assignment of the note to the plaintiff.”  In so doing, the Court recognized that UCC 3-804 is an appropriate vehicle to prove ownership of a lost, destroyed or stolen note if the “holder” “prove ownership of the notes, the circumstances of the loss and their terms”  (quoting, Marazzo v. Piccolo , 163 A.D.2d 369, 370 (2 nd Dep’t 1990).  The Court also noted that it recently applied UCC 3-804 to a foreclosure action “reiterating that ‘ ursuant to UCC 3-804, the owner of a lost note may maintain an action upon due proof of <1> jhis ownership, <2> the facts which prevent his production of the instrument and <3> its terms’” (quoting U.S. Bank N.A. v. Cope , 167 A.D.3d 965, 967 (2 nd Dep’t 2018) (brackets in original). By way of contrast, the Second Department, in Deutsche Bank Nat. Trust Co. v. Anderson , 161 A.D.3d 1043 (2018), did not find lost note affidavits persuasive and denied summary judgment to the foreclosing lender.  While the Anderson Court found that the copy of the note produced by lender was “sufficient evidence of its terms,” it also found that the lost note affidavits submitted by the lender were “inconsistent with each other and contain vague and conclusory statements.”  Anderson , 161 A.D.3d at 1044.  Thus, t was not clear when the loan servicer or its agent acquired possession of the note, or whether the loan servicer or an agent of the loan servicer acquired the note. Moreover, Matz's affidavit fails to provide sufficient facts as to when the search for the note occurred, who conducted the search, the steps taken in the search for the note, or when or how the note was lost.  Thus, the affidavits failed to sufficiently establish the plaintiff's ownership of the note. Anderson , 161 A.D.3d at 1044 – 45 (citations omitted).