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It has been a little over one year since President Trump signed into law the Senior Safe Act of 2018 (“Act”) ( here ). Enacted as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Act is designed to “enlist[] financial institutions as allies in the fight against financial abuse of older adults by allowing banks, credit unions, investment advisers and brokers to report suspected fraud to law enforcement without fear of being sued, as long as they have trained their employees in how to detect suspicious activity.” See Victoria Sackett, “New Law Targets Elder Financial Abuse.” (AARP May 24, 2018 ( here ).) To mark the one-year anniversary of the Act, the Securities and Exchange Commission (“SEC”), the North American Securities Administrators Association (“NASAA”), and the Financial Industry Regulatory Authority (“FINRA”) have issued a fact sheet to increase awareness “among broker-dealers, investment advisers, and transfer agents of the Act and how the Act’s immunity provisions work.” (The SEC’s announcement can be found here .) The fact sheet provides information on the immunity and training provisions of the Act, as well as additional resources from the SEC, NASAA, and FINRA. The Act was modeled after a Maine statute with a similar name, the Senior$afe Program. That program was the result of a joint effort between regulators and the financial and legal communities to help financial and banking advisors identify and prevent the financial abuse and exploitation of seniors and vulnerable adults. Like the Senior$afe Program, the Act was intended to “empower and encourage our financial service representatives to identify warning signs of common scams and help prevent seniors from becoming victims.” See statement by Sen. Susan Collins (R-Maine), co-author of the Senate version of the Act ( here ). It gives “financial professionals—those on the front lines who can best spot fraud and abuse—the tools they need to safely and securely take steps to protect seniors and their life savings.” Id . (quoting Sen. Claire McCaskill (D-Missouri), co-author of the Act).   According to AARP, “ ne in 5 older Americans are victims of financial exploitation each year.” ( Here .) These “victims lose $3 billion annually, or more than $120,000 apiece, ‘the amount a typical 50-plus household has in retirement savings.’” See 2016 report by the AARP Public Policy Institute ( here ).   The Act provides immunity under bank privacy laws to banking and financial institutions ( i.e. , a “covered institution”) for reporting suspected financial abuse and exploitation of seniors and vulnerable adults to a “covered agency” ( i.e. , a state regulatory agency, the SEC, “a State or local agency responsible for administering adult protective service laws,” and a law enforcement agency). Notably, the Act neither requires reporting financial abuse and exploitation nor the implementation of educational and training programs to detect and stop such activity. Thus, to encourage the training necessary to identify and report suspected abuse and exploitation, the Act conditions the grant of immunity on the provision of educational and training programs by the participating financial and banking institutions. Under Section 303(b)(2)(A)(ii)-(iv) of the Act, the training must: (1) instruct “how to identify and report the suspected exploitation of a senior citizen internally and, as appropriate, to government officials or law enforcement authorities, including common signs that indicate the financial exploitation of a senior citizen”; (2) “discuss the need to protect the privacy and respect the integrity of each individual customer of the covered financial institution,” and (3) “be appropriate to the job responsibilities of the individual attending the training.” Training for current employees should be conducted “as soon as reasonably practical.” Section 303(b)(2)(B)(i). For an “individual who begins employment, or becomes affiliated or associated, with a covered financial institution after the date of enactment of th Act”, training should be conducted “not later than 1 year after the date on which the individual becomes employed by, or affiliated or associated with, the covered financial institution.” Section 303(b)(2)(B)(ii). The Act also requires the covered institution to maintain records showing the individuals who completed the training and the content of the training provided. Section 303(b)(2)(C). Commenting on the one-year anniversary of the Act and the issuance of the fact sheet, SEC Chairman, Jay Clayton, stated: “Financial professionals can provide a critical frontline role in identifying and reporting senior financial exploitation. The SEC strongly encourages broker-dealers and investment advisers to train their personnel in accordance with the Senior Safe Act. We also encourage all investors, including our most vulnerable, to ensure they are dealing with a registered investment professional.” Michael S. Pieciak, NASAA President and Vermont Commissioner of Financial Regulation, also commented on the anniversary of the Act and the issuance of the fact sheet, stating: “In reminding broker-dealers and investment advisers of the Senior Safe Act’s important immunity provisions, we hope to encourage firms to train their employees on how to detect and report suspected senior financial exploitation. Early detection and reporting are critical to help prevent elder financial abuse and the devastating financial and emotional impacts that ensue.” Finally, FINRA President and CEO Robert Cook marked the anniversary of the Act and the issuance of the fact sheet by saying: “Protecting senior investors has long been a top priority for FINRA. The Senior Safe Act seeks to empower financial professionals to detect and report cases of suspected abuse of senior investors and we believe it is important to broaden awareness and understanding of the Act throughout the securities industry.” here).=">here).">

In 1975, the New York Legislature adopted Article 9 of the Civil Practice Law and Rules (“CPLR”) to replace the State’s prior class action mechanism. City of New York v. Maul , 14 N.Y.3d 499, 508 (2010). The Legislature did so because Section 1005, which remained virtually unchanged for more than a century, “had been judicially restricted over the years and was subject to inconsistent results.” Id . at 508-509, citing Sperry v. Crompton Corp. , 8 N.Y.3d 204, 210 (2007). By adopting Article 9, the Legislature intended “to set up a flexible, functional scheme whereby class actions could qualify without … undesirable and socially detrimental restrictions.” Id . at 509 (citation omitted). Given this intended flexibility, courts have broadly construed the requirements of CPLR § 901(a), “not only because of the general command for liberal construction of all CPLR sections ( see CPLR 104), but also because it is apparent that the Legislature intended article 9 to be a liberal substitute for the narrow class action legislation which preceded it.” Id . at 509, quoting Friar v. Vanguard Holding Corp. , 78 A.D.2d 83, 91 (2d Dept. 1980). In applying Article 9, New York courts not only look to New York case authority for guidance, but also “ ederal jurisprudence” ( Friar v. Vanguard Holding , 78 A.D.2d 83, 96 (2d Dept. 1980), because Article 9 “has much in common with Federal rule 23.” Matter of Colt Indus. Shareholder Litig. , 77 N.Y.2d 185, 194 (1991). Indeed, “ he prerequisites to the filing of a New York class action are virtually identical to those contained in rule 23 ( compare , CPLR 901 and Fed Rules Civ Pro, rule 23 ).” Id . at 194. For example, (a) the class must be “so numerous that joinder of all members, whether otherwise required or permitted, is impracticable”, (b) common questions of law or fact must predominate over individual claims, (c) the claims of the representative parties must be typical of those of the class, (d) the representatives must fairly and adequately represent the class, and (e) the class action must be superior to other methods of settling the controversy. Id. , citing Weinberg v. Hertz Corp. , 116 A.D.2d 1 (1st Dept. 1986), aff’d , 69 N.Y.2d 979; Friar , 78 A.D.2d at 96-100. On a motion for class certification, the plaintiff bears the burden of demonstrating the prerequisites for class certification. Williams v. Air Serv. Corp. , 121 A.D.3d 441, 441 (1st Dept. 2014). Whether an action qualifies as a class action under CPLR §§ 901(a) and 902 is within the court’s discretion. Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 52 (1999); see also Kudinov v. Kel-Tech Const. Inc. , 65 A.D.3d 481, 481 (1st Dept. 2009). Conclusory allegations in pleadings and affidavits are insufficient to meet the plaintiff’s burden. Rallis v. City of New York , 3 A.D.3d 525, 526 (2d Dept. 2004). The court should neither decide substantive issues concerning the merits of the underlying claims nor determine credibility. Genxiang Zhang v. Hiro Sushi at Ollie’s Inc. , 2019 WL 699179, at *6 (S.D.N.Y. Feb. 5, 2019) (internal quotation marks and citations omitted). Against this background, this Blog looks at Henix v. LiveOnNY, Inc. , 2019 N.Y. Slip Op. 31444(U) (Sup. Ct., N.Y. County May 23, 2019) ( here ). Henix v. LiveOnNY, Inc. Background Plaintiffs were formerly employed by defendant, LiveOnNY, Inc. (“LiveOnNY”), as tissue recovery specialists (“TRSs”). As TRSs, plaintiffs traveled to hospitals, recovered tissue, facilitated the recovery of tissue for transplant, completed paperwork, and otherwise communicated with other members of the recovery team. Until May 15, 2016, TRSs were misclassified as exempt employees and paid a flat fee per tissue recovery case. On May 15, 2016, the TRSs were re-classified as non-exempt hourly workers. Plaintiffs brought suit, on behalf of themselves and those similarly situated, claiming violations of, among other things, New York Labor Law § 190(3). Plaintiffs moved for class certification under CPLR §§ 901(a) and 902, seeking to certify a class consisting of: “All current and former TRSs who worked for Defendant in the State of New York during the Class Period and who (a) were not compensated for all time spent traveling to jobs and between jobs; (b) were not compensated for all time spent on-call; (c) were not paid at their straight or agreed upon rate for all hours worked under forty (40) hours in a week; (d) were not paid overtime of time and one-half their regular rate of pay for all hours worked over forty ( 40) in a week; (e) were not paid spread of hours pay and/or (f) were not provided accurate wage statements.” Slip Op. at *2. As discussed below, the Court granted the motion with a modification to the class definition. The Court’s Decision Numerosity Plaintiffs maintained that there were approximately 38 members of the proposed class: 28 putative class members identified by Defendant, and an additional 10 identified by Plaintiffs. Defendants argued that plaintiffs’ proposed class consisted of 28 members, too few to satisfy the numerosity requirement, and that the additional class members identified by Plaintiffs should not be considered because they were not “per diem TRSs like plaintiffs,” and, therefore, were not similarly situated with Plaintiffs and the other members of the class. The Court agreed with Plaintiffs. In doing so, the Court observed that “ here is no mechanical test to determine whether the requirement of numerosity has been met” ( Globe Surgical Supply v. GEICO Ins. Co. , 59 A.D.3d 129, 137 (2d Dept. 2008) (citations omitted), and that classes of 40 members or fewer “have been deemed sufficient for class certification.” Slip Op. at *4, citing Stecko v. Three Generations Contracting Inc. , 2013 N.Y. Slip Op. 31524(U) (Sup. Ct., N.Y. County 2013), aff’d , 121 A.D.3d 542 (1st Dept. 2014); Galdamez v. Biordi Const. Corp. , 13 Misc. 3d 1224(A) (Sup. Ct., N.Y. County 2006), aff’d , 50 A.D.3d 357 (1st Dept. 2008) (class consisting of between 30 and 70 members sufficiently numerous); Caesar v. Chem. Bank , 118 Misc. 2d 118, 120 (Sup. Ct., N.Y. County 1983), aff’d , 106 A.D.2d 353 [1st Dept. 1984), mod. , 66 N.Y.2d 698 (1985) (class of 38 members sufficiently numerous). In finding numerosity, the Court held that “Defendant’s assertion that the additional ten proposed class members should not be considered because they not similarly situated with the plaintiffs a question of commonality and typicality, not numerosity.” Slip Op. at *5. Commonality Whether common issues predominate over individual issues requires the court to examine the conduct alleged to be wrongful. In that regard, the proposed class must have been subjected to the same, or substantially the same, alleged unlawful conduct of the defendant. Weinstein v. Jenny Craig Operations, Inc. , 138 A.D.3d 546, 547 (1st Dept. 2016). Consideration of the proposed class members’ damages is not part of the analysis. Id . Plaintiffs argued that common questions existed among the proposed class members, including “whether they were misclassified as exempt, whether they were unlawfully denied pay for travel time, on-call time, and straight time, and whether they owed overtime pay.” Slip Op. at *5. Plaintiffs further argued that these issues “predominate over individual issues because they concern whether defendant instituted an unlawful wage policy or practice.” Id . Defendants contended that common issues did not predominate over individual ones “because there were: (1) different starting points for each job assignment; (2) different job locations; (3) different job durations; (4) different ending points for each job assignment; (5) different compensation structures depending on level of TRS; (6) different job titles; (7) different times when employees were on-call; (8) different times where employees accepted a job while on-call; (9) different times where employees declined a job while on-call; and, (10) different employment statutes.” Id . at **5-6. The Court held that “common issues predominate over individual issues because each proposed class member was subject to the same allegedly unlawful wage policy.…” Id . at *6. The Court rejected Defendant’s argument, finding that “the issues highlighted by defendant reflect differences in the damages alleged by the class members.” Id . “Thus,” concluded the Court, “the assessment of liability is identical for each class member, and certification is not precluded.”   Id . (citations omitted). Typicality Plaintiffs contended that their claims were typical of the proposed class because Defendant’s wage policies and practices affected all class members in the same manner: they were not adequately paid for travel time and/or on-call time. Slip Op. at *7. Defendant argued that Plaintiffs’ claims were different than those of the proposed class because they asserted claims based only travel time and failure to compensate on-call time, whereas the proposed class possessed claims based on minimum wage, overtime, spread-of-hours compensation, and accurate wage statements. Thus, Plaintiffs’ claims were not typical of the proposed class. The Court agreed with Plaintiffs. “Claims are typical when the named plaintiffs’ claims ‘derive[] from the same practice or course of conduct that gave rise to the remaining claims of other class members and based upon the same legal theory.’” Slip Op. at *7, quoting Friar , 78 A.D.2d at 99. The Court found that Plaintiffs’ claims were “premised on the same allegedly unlawful wage policy.” Id .  The Court rejected Defendant’s argument that because “some class members may not advance all the claims asserted by the named plaintiffs,” the claims were not typical. Id . Adequacy “When assessing the adequacy of the representative parties, the court considers the ‘potential conflicts of interest between the representative and the class members, personal characteristics of the proposed class representative ( e.g. familiarity with the lawsuit and his or her financial resources), and the quality of the class counsel.’” Slip Op. at *8, quoting Globe Surgical Supply , 59 A.D.3d at 144, citing Ackerman v. Price Waterhouse , 252 A.D.2d 179 (1st Dept. 1998). The Court held that Plaintiffs were adequate representatives of the proposed class. First, the Court found that there were no conflicts of interest between the proposed class and Plaintiffs; the claims asserted by Plaintiffs were “identical to those of the proposed class.…” Slip Op. at *9. Second, the Court found that Plaintiffs understood “the nature of the case and the claims asserted therein.” Id . (citation omitted). Finally, the Court found that counsel was more than qualified to serve as class counsel, having “practiced employment law and litigation for 30 years, and successfully handled numerous wage and hour class actions, some as lead or co-lead class counsel.” Id . Superiority The Court held that a class action was “a superior method of adjudication” because there was a large enough “number of proposed class members with similar claims and a relatively small potential recovery for each member.” Slip Op. at *10 (citation omitted). Moreover, the Court noted that class certification was well-suited for wage and hour actions, even where an administrative remedy was available. Id . citing Weinstein , 138 A.D.3d at 547 (“Class action is an appropriate method of adjudicating wage claims arising from an employer’s alleged practice of underpaying employees”); Dabrowski v. Abax Inc. , 84 A.D.3d 633, 635 (1st Dept. 2011) (“class action is superior to the prosecution of individualized claims in an administrative proceeding in view of the difference in litigation costs, the laborers’ likely insubstantial means, and the modest damages to be recovered by each individual laborer, if anything”); Nawrocki v. Proto Const. & Dev. Corp. , 82 A.D.3d 534, 536 (1st Dept. 2011) (class action vehicle superior to administrative remedies under Labor Law). CPLR § 902 In addition to satisfying the requirements of CPLR § 901(a), the proposed class representative must meet the requirements of CPLR § 902. In determining whether to certify a class, the court must consider: (1) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (2) the impracticability or inefficiency of prosecuting or defending separate actions; (3) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; ( 4) the desirability or undesirability of concentrating the litigation of the claim in the particular forum; and (5) the difficulties likely to be encountered in the management of a class action. Slip Op. at **10-11, citing Jiannaras v. Alfant , 124 A.D.3d 582, 584 (2d Dept. 2015), aff’d , 27 N.Y.3d 349 (2016). The Court held that Plaintiffs satisfied the requirements of CPLR § 902. It is uncontested that there are no pending actions by proposed class members concerning the claims advanced here, and given the relatively small individual potential recovery, there is little incentive for a class member to forego certification in favor of prosecuting individual claims. Id. at *11 (citation omitted). Moreover, the Court found that “ he availability of administrative remedies not render this forum inappropriate.” Id . Class Definition Finally, the Court redefined the proposed class because it was a fail-safe class. Slip Op. at **12-13. A fail-safe class is one “whose membership can only be ascertained by a determination of the merits of the case because the class is defined in terms of the ultimate question of liability.” Hicks v. T.L. Cannon Corp. , 35 F. Supp. 3d 329, 356 (W.D.N.Y 2014), quoting In re Rodriguez , 695 F.3d 360, 369-370 (5th Cir. 2012). A fail-safe class is impermissible because it “shields the putative class members from receiving an adverse judgment.” Hardgers-Powell v. Angels in Your Home LLC , 2019 WL 409276, at *6 (W.D.N.Y. 2019), quoting Hicks , 35 F. Supp. 3d at 356. The Court held that “Plaintiffs’ proposed class definition constitute an impermissible fail-safe class as it presume liability.” Slip Op. at *13. Plaintiffs defined the proposed class “as TRSs who were not provided accurate wage statements. If it were ultimately determined that the wage statements provided were accurate, class members other than plaintiffs would not be bound by the adverse judgment because there would be no class.” Id .  Since Plaintiffs sought to represent all TRSs employed by LiveOnNY within the class period, the Court redefined the class as follows: “All current and former tissue recover specialists who worked for LIVEONNY, INC. in the State of New York from September 29, 2010 to the present.” Hardgers-Powell , 2019 WL 409276, at *8 (the court “retains the discretion to redefine a faulty class definition”); B&R Supermarket, Inc. v. MasterCard Int’l Inc. , 2018 WL 1335355, at *10 n.17 (E.D.N.Y. 2018) (same).

It has long been the law in New York that a party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. On May 28, 2019, the Appellate Division, First Department, affirmed the dismissal of a fraudulent inducement claim because of the existence of an integration or merger clause and a “no representations” clause in which the defendants disclaimed liability for any extra-contractual representations.   DuBow v. Century Realty, Inc. ,  2019 N.Y. Slip Op. 04116 (1st Dept. May 28, 2019) ( here ). here.=">here."> DuBow v. Century Realty, Inc. Background Plaintiff, Kenneth DuBow (“DuBow”), worked for defendant, Century Realty, Inc. (“Century”), from 1990 until his termination in 2013. In August 2007, DuBow entered into a one-page agreement with Century, whereby he would be entitled to a $10,000 bonus for each building he successfully redeveloped, as well as $150,000 in the event of the sale or exchange of the developed property (“2007 Agreement”).  The 2007 Agreement also stated that in the event DuBow was voluntarily terminated or if he retired, he would be entitled to receive up to $150,000 per building made payable over the course of eight years.  In the event Century terminated DuBow for cause, however, DuBow would receive no payments. In 2012, Century decided to sell two of its properties. DuBow tried to purchase the properties using his accrued bonuses from the developed properties (approximately $2.7 million) as collateral to obtain a mortgage commitment necessary to purchase the buildings. According to DuBow, on August 20, 2013, he was informed that he had been terminated for cause for allegedly stealing electricity in the Century-owned building where he resided. Plaintiff was presented with a termination agreement and severance agreement, which he did not sign. After a series of negotiations, DuBow signed a severance agreement which provided that Century would sell the two buildings to him, allow him to stay in his Century apartment for six months’ rent free, pay him $50,000, and forgive the balance of a $1,214,000 loan made by Century to him (the “Settlement Agreement”). In exchange, DuBow signed a release of claims arising under New York’s employment laws, as well as claims arising out of the 2007 Agreement. Plaintiff alleged that he never received the $2.7 million earned under the 2007 Agreement. Plaintiff also stated that he did not receive the payments provided for in the Settlement Agreement. DuBow filed an action claiming breach of the 2007 Agreement, failure to pay wages under the New York Labor Law, fraudulent inducement into the Settlement Agreement, and breach of the implied covenant of good faith and fair dealing. Defendants moved to dismiss the complaint. On March 6, 2018, the motion court granted defendants’ motion under the Labor Law for failure to pay wages and denied it with regard to the breach of contract, fraudulent inducement and breach of the implied covenant of good faith and fair dealing claims. Defendants moved for reconsideration, arguing that the Settlement Agreement precluded plaintiff’s fraudulent inducement claim because of the merger clause and no additional representations clause therein. Specifically, defendants argued that the Settlement Agreement contained a mutual representation by the parties (under the heading “Entire Agreement”) that the agreement before them was the entire agreement and that no prior written or oral modifications or understandings could be relied upon. The motion court agreed with defendants. The court noted that the “Entire Agreement” section of the Settlement Agreement provided that the agreement constituted the complete understanding of the parties and superseded any and all agreements, understandings, and discussions, whether written or oral, between them with respect to the subject matter of the agreement. The section further provided that the parties were not relying on any promises or representations not contained therein. The final clause of the “Entire Agreement” section, included an express representation by the parties that they were solely relying on the document before them. The motion court held that reliance on extra-contractual representations and omissions was, therefore, improper given the express, specific language of the Entire Agreement section of the Settlement Agreement. The motion court also found the no additional representations clause in the “Entire Agreement” section to be dispositive. That clause provided that “no other promises or agreements shall be binding unless in writing and signed by the parties after the date of the agreement.” Thus, held the motion court, “nothing relied upon previously could have been given effect unless there was a writing signed by both parties made after the Settlement date.” Accordingly, on reconsideration, the motion granted defendants’ motion to dismiss the fraudulent inducement claim. The First Department’s Decision On appeal, the First Department “unanimously affirmed” the motion court’s dismissal of the complaint. Slip Op. at *1. The Court agreed with the motion court that the integration clause and no representations clause in the Settlement Agreement precluded plaintiff’s fraudulent inducement claim: Given the “no representations” clause and the other language of the integration clause in a settlement agreement negotiated by the parties (Settlement Agreement), the court correctly dismissed the fraudulent inducement claim, which was based on an alleged promise that defendants would pay the tax liability for the loan to plaintiff they were forgiving. Id. , citing Pate v. BNY Mellon-Alcentra Mezzanine III, LP , 163 A.D.3d 429, 430 (1st Dept. 2018); WT Holdings Inc. v. Argonaut Group, Inc. , 127 A.D.3d 544 (1st Dept. 2015). Takeaway DuBow underscores the cumulative effect of a merger clause and a no additional representations clause. While the merger clause at issue seems to be too general to be enforceable ( i.e. , it did not identify the specific representations and communications being integrated into the Settlement Agreement), the no additional representations clause underscored the parties’ agreement to be bound only by the terms of the Settlement Agreement.

Financial exploitation of seniors and vulnerable adults is all too common in today’s day and age. According to a MetLife study, titled “ Broken Trust: Elders, Family & Finances ,” about one million seniors lose an estimated $2.6 billion annually from financial exploitation. In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. Financial exploitation occurs when individuals misappropriate the financial assets and property of elderly and vulnerable adults for profit or personal gain, often without the knowledge of their victim. According to a 2016 study by the New York State Office of Children and Family Services, titled “The New York State Cost of Financial Exploitation Study,” approximately five million seniors and vulnerable Americans are financially exploited each year.” ( Here .) The financial exploitation of senior and vulnerable adults takes many forms. The most common forms include: churning; unauthorized trading; unsuitable investing; over-concentrating an investor’s portfolio in a single type of investment or industry segment; and misrepresenting the risk or potential returns of an investment product for the purpose of generating high commissions. In prior posts, this Blog has written about the financial exploitation of the country’s senior population. ( Here , here , here , here , and here .) As noted in these posts, unscrupulous professionals (such as stockbrokers, financial advisors, and insurance brokers) often exploit the lack of financial sophistication that many elder and vulnerable adults possess, as well as the trust they place in professionals having a position of authority. They capitalize on the fact that seniors and vulnerable adults are often hesitant to admit they do not understand what is being presented to them. In today’s post, this Blog looks at Jackson v. Ffriend , 2019 N.Y. Slip Op. 31386(U) (Sup. Ct. N.Y. County May 16, 2019) ( here ), a case involving the sale of a $1 million “life only” annuity by insurance agents with the knowledge that the buyer was eighty years old, in poor physical and mental health, and a resident in an assisted living facility. Jackson v. Ffriend Background In August 2016, defendants sold Phyllis Harrison-Ross, M.D. (“Harrison-Ross”) a $1 million single premium immediate life annuity (the “Annuity”) from defendant, Security Mutual Life Insurance Company of New York (“Security Mutual”). Defendants, Ivanhoe V. Ffriend (“Ffriend”) and Ffriend Enterprises, Ltd. (“Ffriend Enterprises”), acted as the producing agents for Security Mutual on the transaction. The annuity contract obligated Security Mutual to pay Harrison-Ross $8,637.87 per month for the remainder of her life. Upon Harrison-Ross’ death, Security Mutual’s payment obligation would end. On September 24, 2016, the Annuity went into effect and Harrison-Ross began receiving the monthly payments. On January 16, 2017, Harrison-Ross, at the age of 80, died of lung cancer and Security Mutual ceased the annuity monthly payments. Security Mutual had made four payments to Harrison-Ross, before its payment obligation ended. Plaintiffs, Jane Jackson, Susane K. Berg (“Berg”), and Lewis E. Duckett (“Duckett”), as co-executors of the Estate of Phyllis Harrison-Ross (the “Estate”), demanded payment to the Estate of the unpaid balance under the Annuity. Security Mutual refused to make the demanded payment. Plaintiffs commenced the action to recover the unpaid funds. Plaintiffs alleged that Defendants fraudulently induced Harrison-Ross to purchase the Annuity and breached their fiduciary duty to her by inducing her to purchase a financial product that was unsuitable and unreasonable given her age, inability to handle her personal financial affairs, state of health, reduced life expectancy, and financial circumstances, and that other investment strategies would have better suited her needs. Plaintiffs asserted causes of action for fraud, fraudulent inducement, rescission, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unjust enrichment, negligence, and violations of the Insurance Law, Insurance Regulations, Title 11, Part 224 and General Business Law § 349. Defendants moved to dismiss the complaint, contending that Harrison-Ross was fully aware of, and understood, the terms of the Annuity and their consequences, when she executed the Annuity contract. In opposition, plaintiffs contended that the motion should be denied as premature and plaintiffs should be permitted to conduct discovery regarding Harrison-Ross’ state of mind, comprehension of the Annuity terms, and ability to handle her financial affairs in 2016. The Court’s Decision The granted the motion in part and denied it in part. No Fraud As readers of this Blog know, to plead a claim for fraud, a plaintiff must allege “a representation of a material existing fact, falsity, scienter, deception and injury.” New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995) (internal quotation marks omitted); Nicosia v. Bd. of Mgrs. of Weber House Condominium , 77 A.D.3d 455, 456 (1st Dept. 2010). Similarly, to plead a claim for fraudulent inducement, a plaintiff must allege facts demonstrating “the misrepresentation of a material fact, which was known by the defendant to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury.” Braddock v. Braddock , 60 A.D.3d 84, 86 (1st Dept. 2009). Under either claim, a plaintiff must comply with CPLR § 3016(b), that is, plead fraud with particularity. The reason for the requirement is “to give adequate notice to the court and to the parties of the transactions and occurrences intended to be proved.” Accurate Copy Serv. of Am., Inc. v. Fisk Bldg. Assoc. L.L.C. , 72 A.D.3d 456, 456 (1st Dept. 2010). Conclusory allegations are insufficient to state a fraud claim. Daly v. Kochanowicz , 67 A.D.3d 78 (2d Dept. 2009). Against the foregoing standards, the Court found that plaintiffs “fail to plead any actionable misrepresentation or material omission of fact by defendants.” Slip Op. at *5. The Court explained that Plaintiffs did “not identify any sales presentations, materials, or marketing techniques” that were purportedly false. Id . Nor did plaintiffs “specify the substance of the alleged misrepresentations,” or identify “when, where, and by whom, other than Ffriend, the alleged misrepresentations were made.”   Id . Further, “Plaintiffs not specify what other annuities or investment strategies were available and better suited to Harrison-Ross’ needs.” Id . Instead, plaintiffs merely alleged in conclusory fashion that Defendants “falsely and fraudulently represented to Phyllis Harrison-Ross that the subject annuity would serve her financial interests given her health, life expectancy and financial needs.” Id ., quoting the complaint (internal quotation mark omitted). Moreover, plaintiffs failed to demonstrate that Harrison-Ross was deceived by anything that Defendants said to her. Id . In fact, the record showed that she understood the terms of the Annuity, i.e. , that the payments would cease upon her death. Id . at **6-7. The Court found support for its holding in Muller-Paisner v. TIAA , 289 Fed. Appx. 461 (2d Cir. 2008), and 528 Fed. Appx. 37 (2d Cir. 2013). There, a 70-year-old professor, in ill health, purchased a fixed annuity from the defendants for more than $1 million, which represented the bulk of her accumulated assets. To recover the purchase price, the professor needed to live about twelve years after the purchase date. Like in Jackson , the annuity paid the professor $8,000 per month for life, which would terminate at her death. The professor wrote letters to the defendants acknowledging the terms of the annuity. The professor died six months after purchasing the annuity, having collected only $48,000; the remainder of the payments inured to the benefit of the defendants. The professor’s estate sued, alleging, in part, fraud and breach of fiduciary duty. The Second Circuit affirmed the dismissal of the fraud claims. Significantly, the court found that there was no misrepresentation as the professor acknowledged that all payments would cease after her death and the annuity contained language that provided for no inclusion of beneficiaries and a guarantee period. Accordingly, the Court dismissed the fraud and fraudulent inducement claims, concluding that “Harrison-Ross’ own words and the terms of the annuity demonstrate the unsustainability of the fraud claims.” Slip Op. at *8. Breach of Fiduciary Duty The Court granted the motion to dismiss the breach of fiduciary duty claim against Security Mutual. Slip Op. at *9. Under “long established” New York law, there is no fiduciary relationship “between an insurance company and the insured.” Id. , citing Rabouin v. Metropolitan Life Ins. Co. , 182 Misc. 2d 632, 634 (Sup. Ct. N.Y. County 1999), aff’d , 282 A.D.2d 381 (1st Dept. 2001) (citation omitted). The reason being “‘ xcept as required by statute, insurance companies deal with insureds at arm’s length. No relation involving trust or confidence is present.’” Id. , quoting New York Hotel Trades Council & Assn. Ins. Fund v. Prudential Ins. Co. of Am. , 1 Misc. 2d 245, 250 (Sup. Ct. N.Y. County 1955), aff’d , 1 A.D.2d 952 (1st Dept. 1956). Thus, held the Court, “the branch of the claim asserted against Security Mutual is fatally defective as a matter of law.” Slip Op. at *9. However, as to Ffriend and Ffriend Enterprises, the Court held that plaintiffs sufficiently stated a cause of action for breach of fiduciary duty, necessitating discovery “to glean additional information from defendants” about the nature of the relationship between them and Harrison-Ross. Id . The Court noted that there is no fiduciary duty between an insurance agent or broker “ n the absence of a special relationship.” Cathy Daniels, Ltd. v. Weingast , 91 A.D.3d 431, 433 (1st Dept. 2012). This is especially so, “when an insurance broker or financial advisor … does not have discretionary authority over client’s assets or investments.” Slip Op. at *10, citing Barrett v. Grenda , 154 A.D.3d 1275, 1278 (4th Dept. 2017). Notwithstanding, “where the insured can ‘establish the existence of a legally cognizable special relationship with their insurance agent ’, a duty may arise in the insurance context upon the showing of the requisite trust and confidence.” Id. , quoting Murphy v. Kuhn , 90 N.Y.2d 266, 272 (1997). Courts have found a special relationship under circumstances in which an insurance broker maintains a long-time relationship with the client and sells that client an annuity, or other insurance product, knowing that the client is elderly and in poor physical and/or metal health. Muller-Paisner v. TIAA , 528 Fed. Appx. 37, 42 (2d Cir. 2013) (insurance broker sold 70-year-old investor in ill health an annuity knowing it was “against ‘normal logic.’”). The Court found that the over two decade long relationship between Ffriend and Harrison-Ross, as well as the fact that Ffriend or Ffriend Enterprises “may have had discretionary authority over Harrison-Ross’ financial accounts or investments,” sufficed to establish a special relationship akin to a fiduciary one. Slip Op. at **10-11. “Indeed,” said the Court, “defendants admit the existence of that relationship. Id . at *10.  “The relationship between Ffriend and Harrison-Ross,” observed the Court, “reached beyond the typical professional procurement of insurance products to even extending a personal loan to her as well as Ffriend’s wife acting as Harrison-Ross’ attorney for estate planning purposes.” Id . at **10-11. Thus, “ ccepting the … facts as true, plaintiffs have alleged the requisite trust and confidence to create a special relationship between Ffriend and Harrison-Ross.” Id . at *11. “For those reasons,” held the Court, “the branch of the motion to dismiss the fourth cause of action for breach of fiduciary duty is granted as to defendant Security Mutual only, and is otherwise denied.” Id . Takeaway An annuity is a complex financial product. It is an investment contract between the buyer (often a retiree, or a soon-to-be-retired person) and an insurance company in which the buyer makes an upfront payment or a series of payments in return for periodic disbursements (typically, monthly) beginning either immediately or at some point in the future.  The purpose of an annuity is to provide the investor with a steady stream of income during retirement. Insurance brokers and agents often receive substantial commissions for selling an insurance company’s annuities. Over the past few years, the sale of annuities, and other insurance products, to America’s seniors has been seen as a “way to take advantage of the U.S. senior population.” See Investment News , “Elder Financial Abuse Grows More Prevalent In Annuity, Life Insurance Products” (Feb. 11, 2016) ( here ); see also Pittsburgh Post-Gazette , “As Annuity Sales Soar, Fraud Claims Have Increased” (Dec. 10, 2018) ( here ). According to regulators, annuities can be unsuitable for seniors, especially those in ill health and/or having a shorter life expectancy (as in Jackson and Muller ). See NYS, Dept. of Fin. Servs., “Elder Financial Exploitation” (noting that seniors “most vulnerable” to exploitation “tend to be between the ages of 80 and 89”) ( here ). Among the reasons, reduced liquidity and the inability to receive the benefit of the initial investment. This is not to say that all annuity products are per se unsuitable. Financial products, such as annuities, are often developed specifically for seniors because they offer benefits that are created for their circumstances. Whether such products are suitable requires a fact-intensive inquiry. And, as Jackson demonstrates, the inquiry must include the existence of a fiduciary or special relationship.

In today’s post, this Blog looks at two cases decided by the Appellate Division, Second Department, involving the first element of a common law fraud and insurance fraud cause of action: the making of a misrepresentation of material fact. In Tsinias Enters. Ltd. v. Taza Grocery, Inc. , 2019 N.Y. Slip Op. 04020 (2d Dept. May 22, 2019) ( here ), the Court affirmed the dismissal of a fraud and fraudulent inducement action because the plaintiff failed to plead a misrepresentation of fact, and in 2900 Stillwell Ave., LLC v. U.S. Underwriters Ins. Co. , 2019 N.Y. Slip Op. 03939 (2d Dept. May 22, 2019) ( here ), the Court affirmed the dismissal of an insurance action and rescission of an insurance policy because the defendant established that the plaintiff made a material misrepresentation on its insurance application. Tsinias Enterprises Ltd. v. Taza Grocery, Inc. Tsinias arose out of a landlord-tenant relationship at a commercial building located on Park Avenue South in New York City. The parties entered into four separate agreements related to that relationship: a ten-year lease and three extensions of the lease. Plaintiff filed the action to rescind the three amendments on the ground that they were procured by fraud. In essence, plaintiff claimed that defendants made misrepresentations of material fact about the terms of the amendments ( i.e. , the rent) by concealing the amendments in a stack of documents that Nicholas Tsinias (“Nicholas”), plaintiff’s former general partner, signed but did not read. Specifically, plaintiff claimed that defendant, Jamil Yabroudi (“Yabroudi”), president of defendant Taza Grocery, Inc. (“Taza”), befriended Nicholas and began assisting Nicholas with the management of the building. Plaintiff contended that Yabroudi placed the first amendment (which extended his business’ lease at the building) in a stack of other documents for Nicholas to sign. Plaintiff claimed that Nicholas did not read this amendment or any of the other amendments extending Taza’s lease, although plaintiff conceded that Nicholas signed the documents. Plaintiff complained that Nicholas and Yabroudi never had any negotiations about the lease extensions. Defendants moved to dismiss the complaint on the ground that plaintiff failed to plead fraud with the requisite particularity. Defendants contended that simply not reading documents before signing them, even if true, could not support a claim that Nicholas was misled. Defendants also claimed that plaintiff was bound by the terms of the agreements Nicholas signed. Moreover, defendants argued that the complaint failed to identify any false statements made by Yabroudi to Nicholas about the amendments and failed provide enough details to state a claim for fraud. The motion court (Justice Arlene P. Bluth) granted the motion. After noting the elements of a fraudulent inducement cause of action ( e.g. , “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”), Justice Bluth held that plaintiff failed to identify any misrepresentation fact. The court noted that “ here is nothing on the face of these agreements that evidences a misrepresentation or an intent to deceive. Nor is there anything suspicious about them ….” “In fact,” noted the court, “each of these lease extensions include rent increases for each year through 2035.” Justice Bluth rejected the argument that each amendment was procured by fraud simply because the rent under each amendment was below market: “The fact that plaintiff’s new general partner might have tried to bargain for a better deal for the third amendment does not establish that Yabroudi made a material misrepresentation.” Buyer’s remorse is not the basis for a fraud claim reasoned the court: “Just because plaintiff now regrets entering into these agreements does not mean they were procured by fraud.” The court also rejected the argument that “Nicholas was deceived because he did not read” the agreements. “Nicholas, as a signatory to these documents, ‘is presumed to know the contents of the instrument signed and to have assented to such terms.’” (Citation omitted.) On appeal, the Second Department affirmed. The Court held that “the complaint not contain any specific allegations setting forth the misrepresentations allegedly made by the defendants.” Slip Op. at *1. The Court also rejected the argument, like Justice Bluth, that Nicholas’ failure to read the agreements supported a fraud cause of action: “To the extent that the plaintiff alleged that Nicholas did not read the lease extensions, ‘ party who signs a document without any valid excuse for having failed to read it is conclusively bound by its term.’” Id . (citations omitted). Accordingly, the Court affirmed the dismissal of the fraudulent inducement and fraud claims. 2900 Stillwell Avenue, LLC v. U.S. Underwriters Insurance Co. In 2900 Stillwell Avenue , plaintiff sought to recover the proceeds of a commercial insurance policy. Before the Second Department was an appeal of an order granting defendant summary judgment and rescission of the insurance policy in question. Although the Court did not provide a discussion of the factual background, the decision provides a good discussion of the law pertaining to the rescission of an insurance policy in the context of an alleged fraudulent insurance application. “To establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when securing the policy.” Slip Op. at *1. Under insurance law, “ representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” Id ., citing Insurance Law § 3105(a); Piller v. Otsego Mut. Fire Ins. Co. , 164 A.D.3d 534 (2d Dept. Aug. 1, 2018); Joseph v. Interboro Ins. Co. , 144 A.D.3d 1105 (2d Dept. 2016). “A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.” Id ., citing Insurance Law § 3105(b). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application.” Id . (citations omitted). However, “ onclusory statements by insurance company employees, unsupported by documentary evidence, are insufficient to establish materiality as a matter of law.” Schirmer v. Penkert , 41 A.D.3d 688, 691 (2d Dept. 2007). Based upon these legal principles, the Court held that defendants met their burden of proving a material misrepresentation of fact at the time plaintiff secured the subject policy. The defendants established their prima facie entitlement to judgment as a matter of law through evidence demonstrating that the plaintiff made a material misrepresentation on its application. That evidence included the affidavit of a senior vice president of corporate underwriting and a copy of the underwriting guidelines, which established that the plaintiff’s misrepresentation induced the defendants to issue a policy it otherwise would not have issued. The plaintiff failed to raise a triable issue of fact in opposition. Slip Op. at *1 (citations omitted). Accordingly, the Court affirmed the motion court’s grant of summary judgment and rescission of the insurance policy.

This Blog has written about the justifiable reliance element of a fraud cause of action on many occasions. We have noted that whether a plaintiff justifiably relied on the misrepresentations and omissions of a defendant is a fact-intensive inquiry. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 NY3d 147, 155 (2010). In today’s post, we look at Buechel v. Sovereignty, LLC , 2019 N.Y. Slip Op. 31372(U) (Sup. Ct. Tompkins County May 16, 2019) ( here ), a case in which the issue was decided at trial. What is The Justifiable Reliance Element? The justifiable reliance element of a fraud causation of action has been described as a “fundamental precept” ( Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here )) and a “venerable rule”. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). The 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. , 15 N.Y.3d at 155), “ 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. , 25 N.Y.3d at 1044. “ hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.” Centro Empresarial Cempresa S.A. v. Am érica M óvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011), quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 2006), lv. denied , 8 N.Y.3d 804 (2007). Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). With the foregoing principles in mind, the Court in Buechel found that the defendants failed to satisfy their burden of proving by clear and convincing evidence ( Simcuski v. Saeli , 44 N.Y.2d 442 (1978)) that they justifiably relied on the plaintiff’s alleged misrepresentations. Buechel v. Sovereignty, LLC Background Buechel arose from the sale of IP Custom Plastics, Inc. (“IP”) to Zachary Shulman (“Shulman”) and his business entity, Sovereignty, LLC (“Sovereignty” and together with Shulman, the “Defendants”). IP was wholly owned by Richard E. Buechel and Sharon Buechel (collectively, the “Buechels” or “Plaintiffs”). The terms of the sale were memorialized in an agreement dated January 5, 2016. The transaction closed on March 1, 2016. Pursuant to the agreement, Shulman agreed to purchase the assets of IP, but not its property, which was retained by the Buechals and leased to Defendants. Shulman financed the transaction through, among other things, a mortgage on his home for $226,000, the proceeds of which were paid to the Buechels at the closing. Shulman and Sovereignty gave the Buechals three promissory notes for the remainder of the purchase price: $120,000, $80,000 and $56,600. The $120,000 note was payable at 4% interest in monthly payments of $1,214.94 for a term of 10 years with payments to commence on April 1, 2016. The $80,000 note was payable at 4% interest in monthly payments of $809.96 for a term of 10 years with payments to commence on April 1, 2016. The $56,000 note was payable at $2,830 per month from July 1, 2016 to February 1, 2018 at which time the entire principal balance was due. Defendants defaulted on the installment payments that came due on July 1, 2016. The Buechels accelerated the maturity of the notes. Thereafter, on October 12, 2016, the Buechels commenced the action. Plaintiffs asserted three causes of action for payment of the three notes at 4% interest. The fourth cause of action was for a breach of a training agreement wherein Richard Buechel agreed to provide instruction and training at $30.00 per hour and claimed $300.00 in unpaid fees. The Fifth Cause of action was effectively mooted by the eviction of Defendants from the subject property and subsequent sale. Issue was joined by the filing and service of a verified answer with counterclaims and third-party claims against IP on November 2, 2016. Sovereignty ceased doing business in December of 2016. The counterclaims and third-party claims sounded in fraud, negligent misrepresentation, breach of warranty and indemnification. Defendants sought rescission of the purchase agreement and monetary damages. The parties did not dispute the authenticity of the notes that Shulman signed. Rather, Defendants argued that they were not payable due to fraud and misrepresentation. After a bench trial and post-trial briefing, the Court ruled that Defendants failed to satisfy their burden of proving that they justifiably relied on Plaintiff’s alleged misrepresentations. The Court’s Decision and Analysis Pursuant to the asset purchase agreement, the parties agreed that the Buechels would make available various documents including tax returns, payable and receivable receipts and internal balance sheets related to statements of income. Defendants claimed that the last category of documents contained materially false information. Specifically, Defendants alleged that Plaintiffs withheld statements pertaining to sales for 2015, which showed a 20% drop in gross revenue. Defendants claimed that had they known the truth, they would have “either renegotiate the agreement or withdraw the purchase offer.” Slip Op. at *4. The Court found that Defendants were on notice of the decline in gross revenue from the documents and evidence that were made available to them. For example, Defendants were made aware that “there was a clear trend line of decreased sales to Hi-Speed which was readily apparent to Shulman.” Id . at *5. In response, in late December of 2015, Moore advised him that Hi-Speed business was down from $349,000 in 2014 to $261,000 in 2015… Moore further advised sales revenue had also declined from 2013 to 2014… In other words, Defendants were made aware of a decrease in sales to Hi-Speed of $159,000 from 2013 thru 2015… In 2013, Hi-Speed accounted for approximately 67% of the gross sales of the business, and in 2014 approximately 66% of gross sales. Between 2014 and 2015, overall gross sales for IP fell by approximately $101,000, $88,000 of which was attributable to the decline in sales to Hi-Speed of which Shulman was advised. Id . The Court also found that although Defendants were not given printed reports concerning 2015 sales, they were given access to the sales figures by the Buechels. Id . at *6. Regarding the 2015 sales figures, Sharon Buechel testified that they were not available at, or before, Romer’s financial review on January 21, 2016. She did not print a report of 2015 sales. However, she did testify that her QuickBooks program was open and made available to Romer. She was unsure whether he reviewed it. Id . Finally, the Court found that Defendants’ decision to proceed with the transaction despite knowing that sales to IP’s most significant customer were trending downward between 2014 and 2015, and without investigating further ( i.e. , insisting on the 2015 sales reports), negated any argument that Defendants justifiably relied on the alleged misrepresentations. Defendants chose to proceed notwithstanding their knowledge of the significant decrease in sales to IP’s biggest customer between 2014 and 2015. This single customer decrease ultimately accounted for 89% of lP’s gross sales reduction. Moreover, Defendants proceeded without insisting on the production of 2015 sales figures prior to closing.                                            *          *          * Shulman, with the assistance of counsel and an accountant, knowingly proceeded to close despite not having 2015 gross sales figures. Defendants failed to exercise due diligence in the time leading to the closing. It might be suggested that Shulman accepted the risk of not knowing what the sales figures were for 2015. However, in reality, he was fully aware of the drop in sales to Hi-Speed which accounted for the vast majority of the 2015 shortfall.  Id . at **6-7. Accordingly, “the Court that Defendants failed to establish, by clear and convincing evidence …, that Plaintiffs fraudulently induced them purchase IP. Id . at *7. Takeaway Plaintiffs that have a hint of falsity have an obligation to investigate the matter further. As shown in Buechel , such hints of falsity come in many forms. They can be manifest in documents and discussions with others. And, hints of falsity can arise in the course of due diligence performed by professionals. Buechel makes clear that proceeding with a transaction in the wake of information suggesting falsity, and the failure to investigate such information, negates any reliance, justifiable or otherwise, on the representations of the alleged wrongdoer.

Obtaining jurisdiction over a corporation that is incorporated and headquartered outside of the state can be difficult. A plaintiff must plead and prove that the corporation purposefully availed itself of the resources of the state for a court to exercise personal jurisdiction over the defendants. The failure to do so, as in Poms v. Dominion Diamond Corp. , Index No. 655733/2017, 2019 NY Slip Op 31364(U) (Sup. Ct. N.Y. County May 15, 2019) ( here ), will result in dismissal of the action. Poms v. Dominion Diamond Corp. Background Poms was a putative class action brought by Nadav Poms (“POMS”), on his own behalf and on behalf of the common stock holders of Dominion Diamond Corporation (“Dominion” or the “Company”), for negligent misrepresentation, breach of fiduciary duty and quasi-appraisal in connection with the proposed acquisition of Dominion by the Washington Companies (the “Proposed Transaction”). On July 15, 2017, Dominion’s Board of Directors approved a definitive arrangement agreement (the “Arrangement Agreement”) with Northwest Acquisitions ULC, an affiliate of the Washington Companies, pursuant to which each share of Dominion’s common stock would be converted into the right to receive $14.25 per share in cash. To enable Dominion’s stockholders to vote in favor of the Proposed Transaction, Dominion’s Board authorized the filing of an Information Circular (the “Circular”) with the Securities and Exchange Commission. The Circular was also mailed to Dominion’s shareholders. Poms alleged that the Circular violated New York and Canadian law because it contained incomplete and materially misleading information regarding: (i) the process leading to the Proposed Transaction; (ii) the financial analyses conducted by Dominion’s financial advisors, TD Securities Inc. (“TD Securities”) and Morgan Stanley Canada Limited (“Morgan Stanley”), in connection with the Proposed Transaction; and (iii) the projections relied upon by TD Securities and Morgan Stanley in performing their valuation analyses. Defendants argued that because Dominion is a “foreign private issuer’ under the U.S. Securities laws, it was exempt from complying with Section 14(a) of the Securities Exchange Act of 1934, which concerns an issuer’s obligations to file a proxy statement in connection with a proposed merger or acquisition and the contents thereof. Defendants further maintained that Dominion was required to follow the specific proxy rules applicable under the Canada Business Corporations Act (“CBCA”) and the applicable Canadian Securities law. According to Defendants, Dominion provided all required information required by the applicable Canadian law about the Proposed Transaction. Pursuant to the CBCA, a hearing was held before the Ontario Superior Court of Justice (the “Ontario Court”) regarding the merger. Poms did not raise any objection or oppose the merger in Canada, but instead commenced the New York action. The Dominion shareholders voted in favor of the transaction and the Ontario Court entered a final order approving the transaction as “fair and reasonable.” At the final hearing on September 22, 2017, the Ontario Court noted that “no Dominion shareholders have delivered responding materials to indicate an intention to oppose court approval of the arrangement, as permitted by paragraphs 26 and 27 of the interim order” and that “Mr. Poms has, through counsel advised that he does not oppose the order sought, but he intends to pursue the litigation that he commenced in the State of New York for damages, and if the State of New York is later found to be forum non-convenien , that he intends to pursue his claim for damages in Ontario. Mr. Poms has not exercised rights as a dissenting shareholder.” After the Ontario Court issued its final order, Poms amended his complaint in the New York action. Defendants moved to dismiss the amended compliant on several grounds: (i) the Court lacked either general or specific personal jurisdiction over either Dominion or the Director Defendants; (ii) Plaintiff’s claims concerning the Circular described a Canadian transaction with no connection to New York and should be dismissed on the grounds of forum non-conveniens; (iii) international comity, res judicata or collateral estoppel applied because the Ontario Court had already ruled that the transaction was “fair and reasonable”; (iv) the Securities Litigation Uniform Standards Act of 1998 precluded state law claims seeking damages on behalf of a class that alleged misrepresentations or omissions of material facts in connection with the purchase or sale of securities listed on a national exchange; (v) Plaintiff’s claim for negligent misrepresentation failed to state a claim; and (vi) Plaintiff’s claim for ‘quasi appraisal’ failed because quasi-appraisal is a remedy rather than a cause of action and Poms failed to advance any underlying cause of action that provided a basis for a quasi-appraisal remedy. The Court granted the motion. The Court’s Decision In granting the motion, the Court addressed the first basis for dismissal – the court lacked general and specific personal jurisdiction. As to general jurisdiction, the Court held that it did not possess jurisdiction over the Defendants because they were not at home in the state. In this regard, the Court observed: “Dominion is a Canadian corporation with its head and principal place of business in Calgary, Canada. Its registered office is located in Toronto, Canada and it does not conduct any business in New York. The Directors Defendants reside in Canada and/or the United Kingdom and have no connection to New York.” Slip Op. at *5, n.3. Moreover, Poms did “not assert any basis for New York to exercise general jurisdiction over Defendants….” Id . Regarding specific jurisdiction, the Court held that it did not have such jurisdiction. Specifically, the Court held that under CPLR 302(a)(l), there was no transaction within the state and no relationship between the transaction at issue and the claims asserted sufficient to exercise jurisdiction over the Defendants. Coast to Coast Energy, Inc. v. Gasarch , 149 A.D.3d 485, 486 (1st Dept. 2017) (internal citation and quotation marks omitted). The Court rejected Poms’ argument that it had jurisdiction over the Defendants because Dominion’s common stock was traded on the New York Stock Exchange and each of the Director Defendants had sufficient contacts with New York as a director/officer of a company whose common stock was traded on the New York Stock Exchange. Slip Op. at *5. The Court held that the mere listing of shares on the New York Stock Exchange does not confer jurisdiction over out-of-state defendants with no other contacts within the state: “However, it has been long held that a corporation is not doing business in New York for the purposes of conferring jurisdiction merely because its shares are listed on a New York Stock Exchange.” Id . at *6 (citations omitted). Next, the Court rejected Poms’ argument that the Court possessed jurisdiction over the Defendants because the Arrangement Agreement selected New York as the forum in which to litigate claims relating to the debt financing of the Proposed Transaction. Id . The Court explained that Poms overstated the reach of the forum selection clause in the agreement. In fact, noted the Court, under the agreement, “ only related to debt-financing source and nothing more” could be litigated in New York. (Orig’l emphasis.) Thus, “ ecause debt financing is not at all related to the causes of action alleged by Poms – which concern the sufficiency and accuracy of disclosures made in connection with the Proposed Transaction, Poms ha not shown a substantial relationship between the debt financing and the cause of action pled to confer jurisdiction over the Defendants pursuant to the forum selection clause.” Id . at **6-7. The Court also rejected Poms’ argument that the Court had jurisdiction over the Defendants because the proxy solicitation firm (Kingsdale Advisors, a Canadian proxy solicitation agent) hired to solicit proxies had an office in New York. Id . at *7. “The fact that Defendants retained a Canadian proxy solicitation agent, which has an office in New York is not sufficient, in and of itself, to show that Defendants have subjected themselves to jurisdiction here.” Id . The Court explained that “Poms fail to plead facts sufficient to demonstrate that simply by appointing Kingsdale Advisors as the proxy solicitation agents, Defendants transacted business in New York.” Id . “In addition,” said the Court, “Poms ha failed to plead facts to show that his claims arose out of the appointment of a proxy solicitation agent.” Id . Finally, the Court rejected Poms’ argument “that New York courts may exercise specific jurisdiction because the Defendants purposefully availed themselves of the resources of New York by retaining Paul Weiss, a law firm headquartered in New York, as their legal counsel in connection with the Proposed Transaction.” In doing so, the Court explained that “Defendants here concluded the Arrangement Agreement in Canada with no connection to New York. Although the Defendants consulted Paul Weiss’s Toronto and New York offices, including some New York based attorneys, the center of gravity for the Proposed Transaction was in Canada with a very remote, if any, contact in New York.” Id . at **8-9. “Moreover,” observed the Court, “a foreign entity hiring a law firm, which has a presence in New York, but without a substantial connection between the law firm’s engagement and the subject matter of the litigation, has been held an insufficient basis to confer New York jurisdiction over the foreign entity.” Id . at *9 (citations omitted). The Court found confirmation in Bristol-Meyers Squibb Co. v. Supreior Court of California , 137 S.Ct. 1773 (2017), in which the Supreme Court held that “ n order for a court to exercise specific jurisdiction over a claim, there must be an affiliation between the forum and the underlying controversy, principally, an activity or an occurrence that takes place in the forum State.” Id . at 1781 (internal quotation marks and brackets in original omitted), citing Goodyear Dunlop Tires Operations, S.A. v. Brown , 131 S.Ct. 2846 (2011). “When there is no such connection, specific jurisdiction is lacking regardless of the extent of a defendant's unconnected activities in the State.” Id . at 1781. In light of the foregoing, the Court held that “the fact that Defendants consulted attorneys who have an office in New York about a Canadian Proposed Transaction (and some New York based attorneys may have even been consulted about the Canadian Proposed Transaction) without more, does not supply the required link between Defendants New York presence and the subject matter of the litigation.” Slip Op. at *10. In sum, the Court found that Poms did nothing more than try to “manufacture specific jurisdiction” through “a few, detached connections between Defendants and New York.” Id . Instead Poms lists a few, detached connections between Defendants and New York in an attempt to manufacture specific jurisdiction. These connections, however, are not substantially related to his claim – that disclosures concerning the proposed acquisition in Canada of a Canadian company by an affiliate of a Montana company were inadequate and/or misleading. Poms list of unconnected relationships between New York and his claims concerning the Proposed Transaction in Canada are at best tangential and insufficient to show the required “affiliation between the forum and the underlying controversy” for New York to exert specific jurisdiction over this proposed class action litigation. Id ., citing Bristol-Meyers Squibb , 137 S.Ct. at 1781. Takeaway Poms is a good example of a court looking at the totality of the contacts with the state to determine whether a defendant has “on his or her own initiative project himself of herself into th state to engage in a sustained and substantial transaction of business.” Berkshire Capital Group, LLC v. Palmet Ventures, LLC , 307 Fed. App’x. 479, 481 (2d Cir.2008) (Internal quotations and citation omitted)). Thus, where, as in Poms , the transaction occurred “entirely outside of New York” “ he mere fact that engaged in some contact with a New York does not mean that transacted business in New York.” Id .

In today’s post, this Blog takes a look at fraud allegations in foreclosure action involving two commercial mortgages that secured more than $24 million in indebtedness. Orchard Hotel LLC v. D.A.B. Group LLC , 2019 N.Y. Slip Op. 03893 (1st Dept. May 16, 2019) ( here ). Relevant to today’s article is the motion court’s denial of a motion to dismiss fraud-based cross-claims and the First Department’s affirmance of that decision. Orchard Hotel LLC v. D.A.B. Group LLC Background In 2007, Defendant, Brooklyn Federal Savings Bank (“BFSB”), granted a loan for property located on Orchard Street in New York (the “Property”) to Defendant, D.A.B. Group LLC (“DAB”), secured by a mortgage (the “Project Loan Mortgage”) in the approximate amount of $5,500,000 (“Project Loan”). In 2008, BFSB granted a building loan to DAB for construction work on the Property, secured by a mortgage (the “Building Loan Mortgage”) in the amount of $19,050,000 (“Building Loan”). The Building Loan Promissory Note (the “Note”) stated that the Building Loan’s initial maturity date was September 1, 2009. After this date, BFSB had the option to extend the Building Loan for an additional six-month period ending on March 1, 2010 (the “First Extension Date”), provided that all the conditions stated in the Note were fulfilled. After the First Extension Date, BFSB had the option to extend the Building Loan a second time to September 1, 2010 (the “Second Extension Date”), again provided that all the conditions stated in the Note were fulfilled. After the Second Extension Maturity Date, provided that the conditions set forth in the Note were fulfilled, BFSB had the option to extend the Building Loan for a third time to March 1, 2011. BFSB exercised all three options to extend the Building Loan. Therefore, March 1, 2011 became the deadline after which the Note matured (the “Expiration Date”). In or about June and July 2008, Flintlock Construction Services LLC (“Flintlock”) bid on the construction project of a hotel on the Property (the “Project”). Flintlock’s bid was not selected, and DAB gave the job to Cava Construction & Development, Inc. (“Cava”). Because Cava ceased working on the project, DAB asked Flintlock to complete it. DAB advised Flintlock that it was in the process of securing consent from BFSB for Flintlock to be approved to start construction. On or about March 30, 2010, Flintlock entered into a contract with DAB (the “Contract”), wherein Flintlock agreed to provide labor, equipment and materials for the Project for $13 million. Flintlock was given 430 calendar days to complete the work. Thereafter, BFSB contacted Flintlock and represented to Flintlock that its consent was required so that loan monies could be advanced to DAB to pay Flintlock in accordance with the Project Loan Agreement and the Building Loan Agreement. DAB requested that Flintlock cooperate with it to obtain BFSB’s consent. Flintlock started working in early August in anticipation of BFSB’s approval of the Contract. On or about August 20, 2010, BFSB emailed Flintlock various documents that were needed in connection with BFSB’s approval of Flintlock. Within those documents was a document, titled “Affidavit and Estoppel Certificate” (the “Estoppel Certificate”), which BFSB prepared and which Flintlock needed to sign as a condition of the Contract. DAB and BFSB were copied on the email. BFSB was the beneficiary of the Estoppel Certificate and did not sign it. Flintlock signed the Estoppel Certificate on August 26, 2010. The Estoppel Certificate represented, in pertinent part that: “ he sum of $12,040,000 is available to which sum may be increased by the amount, if any, by which the Cava Construction mechanic’s lien is resolved, to the satisfaction of for a sum less than $960,000, provided that no assurances are made as to the availability of any such additional funds.” On August 27, 2010, BFSB emailed Flintlock confirming that BFSB could start processing requisitions for Flintlock’s construction work paid from the Building Loan. Section 1.23 of the Building Loan Agreement defined a requisition as “a written certification and request for an Advance.” In a letter dated March 23, 2011, BFSB informed DAB that the Building Loan had matured on March 1, 2011, that BFSB did not consent to any further extension, and that the notes were payable in full as of March 23, 2011. At that point, payments by DAB to Flintlock stopped. Consequently, Flintlock terminated the Contract effective June 7, 2011. On June 17, 2011, BFSB assigned the Loans and related mortgages to Plaintiff, Orchard Hotel, LLC (“Orchard”). On July 1, 2011, Orchard filed a complaint against DAB, Flintlock, BFSB and other defendants having or claiming to have some interest or lien upon the Property, with Orchard seeking foreclosure of the Project Loan Mortgage and the Building Loan Mortgage. On August 8, 2013, Flintlock filed an answer, asserting affirmative defenses and counterclaims against Orchard for mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, trust fund diversion, and conversion; cross-claims against DAB for breach of contract, quantum merit, account stated, mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, and trust fund diversion; and cross-claims against BFSB for mechanic’s lien foreclosure, fraud, constructive fraud, negligent misrepresentation, trust fund diversion, promissory estoppel and conversion. BFSB and State Bank of Texas moved to dismiss Flintlock’s cross-claims. On May 21, 2018, the motion court granted the motion, except with respect to Flintlock’s fraud and fraudulent concealment cross-claims. An appeal followed. The First Department’s Decision To state a claim for fraud, a plaintiff must allege: “(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). See also Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011). A plaintiff alleging fraud must meet each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to meet any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). To plead a cause of action for fraudulent concealment, a plaintiff must satisfy the elements of a fraud claim, as well as demonstrate that the defendant was under a duty to disclose truthful information. Mandarin Trading , 16 N.Y.3d at 179 (citation omitted). A duty to disclose information arises when there is a fiduciary relationship between the parties, or when the special facts doctrine applies. Jana L. v. West 129th Street Realty Corp. , 22 A.D.3d 274, 277 (1st Dept. 2005). A misleading partial disclosure or half-truth also gives rise to a duty to disclose. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 135 (1st Dept. 2014). “Under the ‘special facts doctrine,’ a duty to disclose arises where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky v. Dreyer & Traub , 219 A.D.2d 321, 327 (1st Dept. 1996) (internal citation omitted). The special facts doctrine requires the satisfaction of a two-prong test: the material fact omitted was “peculiarly within the knowledge” of the omitting party, and the information could not have been discovered by “the exercise of ordinary intelligence.” Jana L. , 22 A.D.3d at 278, citing Black v. Chittenden , 69 N.Y.2d 665, 669 (1986). If a party has means of learning the information, then that party must use those means, or its complaint for fraud will not be heard. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015). Against this legal background, the First Department held that “Flintlock adequately allege all of the elements of its fraud and fraudulent concealment claims.” Slip Op. at *1. The Court found that Flintlock properly alleged an actionable half-truth. Slip Op. at *1 (citation omitted). In reaching this conclusion, the Court explained that BFSB, though “not a signatory to the Estoppel Certificate” was, for pleading purposes, responsible for the representations in the Estoppel Certificate, especially since BFSB advised Flintlock that execution of the Estoppel Certification was a condition of being hired. Slip Op. at *1. As such, “BFSB knew that Flintlock understood representation to apply to the entire contract term and knew that the promised funds would not be available during this whole time.…” Thus, even though the funds “were indisputably available when the subject statement was made,” they were not available during the duration of the Project, thereby making the statement a half-truth. Id .  The Court noted that although the Estoppel Certificate provided that “BFSB had ‘no obligation to provide any Advances . . . except as provided for in the Building Loan Agreement,’” that “caveat” was “not sufficient to ‘save’ the statement of fund availability.” Id . at **1-2. The Court explained that “ lthough the loan agreement would have revealed the expiration date of the loans, Flintlock allege that BFSB intentionally prevented it from gaining access to this document by wrongfully withholding it and insisting upon execution of the Certificate in a compressed time period so that Flintlock would not be able to independently obtain or review it.” Id . at *2. Such “allegations sufficient to permit an inference that BFSB wrongfully prevented Flintlock from verifying whether anything in the loan documents affected its rights.”  Whether Flintlock was required to insist upon copies of the loan documents or on more time for investigation could not be decided as a matter of law pre-discovery. Id . at *2. The foregoing allegations, said the Court, were also sufficient “to permit an inference that Flintlock justifiably relied on the Estoppel Certificate, notwithstanding its failure to read the referenced loan documents, especially in view of Flintlock’s allegations that it sought assurances from BFSB regarding the sufficiency of loan funds during the contract term and understood the statement in the Estoppel Certificate to be a confirmation that the funds were sufficient.” Id ., citing ACA Fin. , 25 N.Y.3d at 1045. See also DDJ Mgt., LLC v. Rhone Group LLC , 15 N.Y.3d 147, 154 (2010) (holding that, where plaintiffs had obtained warranties that financial statements were not misleading, whether they were justified in relying on the warranties was a question of fact); Phoenix Light SF Ltd. v. Credit Suisse AG , 144 A.D.3d 537, 538 (1st Dept. 2016) (holding that the plaintiff could reasonably rely on the offering documentation concerning the purchase of residential mortgage backed securities, and was not required to request actual loan files). Since Defendants did not identify any hints of a misrepresentation, Flintlock was not required to make “additional inquiry” in the sufficiency of the loan funds. Id ., citing Loreley Fin. No. 3, Ltd. v. Morgan Stanley & Co. Inc. , 146 A.D.3d 683, 684 (1st Dept. 2017) (internal quotation marks omitted). Finally, the Court held that the misrepresentations and half-truths alleged by Flintlock were “sufficient to permit an inference that BFSB had a duty to disclose information to Flintlock. Slip Op. at *2. These representations created “an inference that BFSB was aware that Flintlock was operating under the mistaken assumption that the funds were available throughout the contractual term.…” Id . Consequently, the special facts doctrine applied. Id . Takeaway Like many fraud cases discussed by this Blog, Orchard Hotel involves the justifiable reliance element of a fraud cause of action. The case is notable on this point because Flintlock obtained a written representation in the Estoppel Certificate that the funds were available. As such, much like a plaintiff who can rely on a written warranty, Flintlock could rely on the written statement in the Estoppel Certificate. As the motion court observed, courts rarely find that a plaintiff could not justifiably rely on a written representation unless the plaintiff actually knew the representation to be false. Orchard Hotel is also notable for its treatment of half-truths and the duty to disclose the full truth that arises therefrom. While the statement in the Estoppel Certificate was “the truth so far as it goes” (Restatement, Torts, § 529), the Court found that BFSB knew that the sum would not be available after the Expiration Date. Thus, the statement in the Estoppel Certificate that $12,040,000 was available to Flintlock without disclosing the Expiration Date was a half-truth, and, therefore, a misrepresentation. As the New York Court of Appeals observed: “Silence may … constitute fraud where one of two parties to a contract has notice that the other … is acting upon a mistaken belief as to a material fact. Bank v. Board of Educ. of City of N.Y. , 305 N.Y. 119, 133-134 (1953).

On April 25, 2018, this Blog wrote about INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 2018 N.Y. Slip Op. 30646(U) (Sup. Ct., N.Y. County, Apr. 9, 2018) ( here .) The case involved a motion for summary judgment involving claims that Defendant, Corrib Oil Co. Ltd. (“Corrib”), owed the plaintiff, INTL FCStone Markets, LLC (“FCStone”), nearly $3.5 million in connection with investment in more than 800 derivatives transactions over a four-year period. In granting the motion, Justice Shirley Werner Kornreich had some harsh words about the strength of the defenses proffered in opposition to the motion. She described the defenses as “border on the frivolous.” On May 9, 2019, the Appellate Division, First Department, unanimously affirmed, with costs, Justice Kornreich’s decision. INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 2019 N.Y. Slip Op. 03682 (1st Dept. May 9, 2019) ( here ). Background The action arose from the investment by Corrib in hundreds of derivatives transactions with FCStone, which Corrib made as a hedge on its exposure to oil price fluctuations. The trades were governed by an ISDA Master Agreement, Schedule, and Credit Support Annex, along with trade confirmations (“Confirmations”) governing each of the transactions. Until 2014, Corrib made money on the transactions because the price of oil increased. But in June 2014, the oil market crashed, and so too did Corrib’s positions on the trades. Margin calls followed. Corrib initially satisfied FCStone’s margin calls but, eventually, as Corrib’s positions went even more into the red, Corrib stopped making payments. Corrib first defaulted on a margin call in September 2015. It then defaulted on FCStone’s subsequent margin calls and payment demands. On December 11, 2015, FCStone declared an event of default under the Master Agreement and, on December 29, 2015, FCStone noticed an early termination. At that time, Corrib owed FCStone approximately $3.4 million on 59 trades. FCStone again demanded payment in May 2016, but Corrib did not pay. On June 24, 2016, FCStone commenced the action by filing a summons and motion for summary judgment in lieu of complaint. By order dated February 23, 2017, the Court denied the motion because FCStone failed to submit the Confirmations governing the trades. On March 15, 2017, Corrib filed an answer with counterclaims. At a preliminary conference conducted shortly thereafter, problems with the counterclaims were discussed. On April 17, 2017, Corrib filed an amended answer in which it asserted various counterclaims, including, but not limited to: breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; and fraudulent inducement. At a compliance conference a few weeks later, the court stayed discovery because it became “apparent that Corrib’s defenses and counterclaims bordered on the frivolous.…” Corrib admitted that after production of the trade Confirmations, “it never objected to them,” it never had any written investment advisory agreement with FCStone, and, more importantly, Corrib had “no defense to nonpayment.” On August 7, 2017, FCStone filed a motion for summary judgment. Corrib opposed the motion on the strength of the “supposed merits of its counterclaims.” Those counterclaims, however, “have no merit,” said the Justice Kornreich in a decision issued on April 9, 2018. Consequently, the court held that “ here is no question of fact regarding Corrib’s liability to FCStone.” Corrib appealed. The First Department’s Decision In granting summary judgment and rejecting Corrib’s fraud-based counterclaims, Justice Kornreich held that Corrib could not show justifiable reliance on any purported misstatement. Noting that these defenses were based on alleged misrepresentations about the terms of the trades and FCStone’s promise not to serve as a counterparty, the Court found that the “terms of the trades set forth in the Confirmations, which clearly disclose that FCStone was the counterparty.” As such, Corrib could not claim any fraud or fraudulent inducement – Corrib could not claim “to have justifiably relied on a representation when that very representation negated by the terms of a contract.” Citations omitted. The First Department agreed. The Court held that “ he fraud counterclaims barred by the express terms of the ISDA master agreement, which contain directly contrary representations, and by the trade onfirmations, which contain the very information as to which defendant claims to have been deceived.” Slip Op. at *1 (citations omitted). Justice Kornreich also found that Corrib could not claim justifiable reliance on the alleged misrepresentations because it failed “to review and challenge terms of a Confirmation.” “Having failed to do so,” Corrib could not “claim it was justified in not noticing that terms in the Confirmations conflicted with oral assurances allegedly provided by FCStone.” On appeal, Corrib maintained that it could not rely on the Confirmations because it did not understand them. The First Department rejected this argument, finding that Corrib was a sophisticated investor that should understand the contents of a trade confirmation: “Defendant is a sophisticated business doing millions of dollars’ worth of trades. Its claim that it did not understand the trade onfirmations is unavailing.” Id . (citations omitted). The Court also held that Corrib failed to plead fraud with particularity. To plead fraud with particularity, a plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). This means that the plaintiff should describe the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). Conclusory allegations will not suffice. Eurycleia Partners , 12 N.Y.3d at 559-60. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). In FCStone , the Court held that, “with minimal exceptions,” Corrib failed “to identify who made the misrepresentations, when the misrepresentations were made, and the substance of the misrepresentations.” Slip Op. at *1, citing E1 Entertainment U.S. LP v. Real Talk Entertainment, Inc. , 85 A.D.3d 561, 562 (1st Dept. 2011). Finally, the Court held that Corrib failed to plead scienter. To satisfy the scienter element, a plaintiff is required to allege facts “from which it is possible to infer defendant knowledge of the falsity of statements” when they were made. MP Cool Invs. Ltd. v. Forkosh , 142 A.D.3d 286, 292 (1st Dept. 2016) (citation omitted). In FCStone , the Court rejected Corrib’s argument that FCStone had a financial motive to commit fraud – i.e. , “to increase its commissions revenue.” Under New York law, as well as under Federal law, “the motive to earn a fee, without more, cannot be used to infer scienter.” Celtixconnect Equity Invs. LLC v. Sea Fibre Network Ltd , 52 Misc. 3d 1210(A), 2016 N.Y. Slip Op. 51103(U), at *8-9 & n.7 (Sup. Ct. N.Y. County 2016). See also In re Tower Grp. Int’l, Ltd. Sec. Lit. , 2015 WL 5813393, at *6 (S.D.N.Y. 2015) (collecting cases); Saltz v. First Frontier, L.P. , 485 F. App’x 461, 464 (2d Cir. 2012) (noting that Second Circuit has “consistently rejected” the notion that pleading “generic motive” to earn fees may be used to infer scienter). Takeaway FCStone serves as a good reminder of the hurdles that a plaintiff pleading fraud must overcome. Aside from pleading each element of the claim, a fraud plaintiff must satisfy the particularity requirement of CPLR § 3016(b). As this Blog has noted in previous posts, the failure to satisfy the foregoing will result in dismissal of the action. The hurdles become even higher when, as in FCStone , the facts undermine the claim.

Arbitration is an alternative form of dispute resolution. Most often, parties will voluntarily agree to arbitrate their disputes, instead of allowing a judge or jury in a court of law to do so. 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. 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). Sometimes, however, arbitration can be compulsory. In those instances, the obligation to arbitrate arises not through voluntary agreement, but through statutory mandate. MVAIC v. Aetna Cas. & Sur. Co. , 89 N.Y.2d 214, 223 (1996), citing Insurance Law § 5105(b); § 5221(b)(6). The distinction between voluntary and compulsory arbitration is important when one party seeks to vacate an arbitral award under CPLR § 7511. here).=">here)."> An arbitration award may be vacated on three narrow grounds: “it violates a strong public policy, is irrational, or clearly exceeds a specifically enumerated limitation on the arbitrator’s power.” Matter of United Fed. of Teachers, Local 2, AFT, AFL-CIO v. Bd. of Educ. of City School Dist. of City of N.Y. , 1 N.Y.3d 72, 79 (2003) (citations omitted). Where arbitration is pursued by the parties’ voluntary agreement, the arbitrator’s factual and legal determinations are conclusive and not subject to judicial review in the absence of fraud, corruption, or other misconduct. MVAIC , 89 N.Y.2d at 223. Errors of fact or law committed by the arbitrator, or his/her misconstruing evidence or arguments, are insufficient grounds for setting aside or disregarding a voluntary arbitration award. 23A Carmody-Wait 2d § 141:273 (2019); Merrill Lynch, Pierce, Fenner & Smith, Inc. v Graef , 34 A.D.3d 220 (1st Dept. 2006) (holding that it is “well settled” that arbitration award may not be vacated for arbitrator’s errors of law or fact). Where arbitration is compulsory, the courts impose closer judicial scrutiny of the arbitrator’s determination under CPLR 7511(b). MVAIC , 89 N.Y.2d at 223 (citations omitted). To be upheld, an award in a compulsory arbitration proceeding must have evidentiary support and cannot be arbitrary and capricious. Id . (citations omitted). In National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc. , 2019 N.Y. Slip Op. 31262(U) (Sup. Ct. N.Y. County May 6, 2019) ( here ), the Court addressed the foregoing issues in confirming an arbitral award pursuant to CPLR § 7510. National Union Fire Ins. Co. of Pittsburgh, Pa. v. TransCanada Energy USA, Inc. Background National Union , and a companion action, involved insurance claims made by TransCanada Energy USA, Inc. and TC Ravenswood Services Corp. (collectively, “TransCanada”) to ACE INA Insurance (“ACE”), Arch Insurance Company (“Arch”), and other insurance companies for damages arising from an incident at TransCanada’s Ravenswood, New York power plant. In National Union , the insurance companies sought a judgment declaring that they were not obligated to pay the claims, while in the companion case, the claimants sought a declaration of coverage and damages. On March 2, 2016, the Court granted TransCanada’s motions for partial summary judgment in both actions, and awarded it a judgment declaring that the insurance policy at issue covered the incident and a claim for loss of capacity sales; the Court denied the insurance companies’ motion for partial summary judgment seeking a declaration that the lost sales were not covered by the policy. On September 19, 2017, the decision was affirmed by the Appellate Division, First Department. See 153 A.D.3d 1153. As a result of the First Department’s ruling, by the end of 2017, the only remaining insurance company defendants were Ace and Arch (collectively, “ACE/Arch”). On March 2, 2018, TransCanada and ACE/Arch stipulated to certain damages (the “March 2018 Stipulation”). The parties did not, however, agree as to: (1) the amount of the time element deductible; (2) the amount of TransCanada’s capacity revenue losses; or (3) the date on which prejudgment interest started to accrue on a portion of TransCanada’s claim. On March 29, 2018, counsel for TransCanada advised the Court that the parties had agreed to proceed to binding arbitration in lieu of a jury trial and to reduce the arbitrator’s ruling to a final judgment for entry in the action. While the parties had agreed to binding arbitration, the arbitrator, nonetheless, inquired whether the parties had a formal written agreement to arbitrate. In response, TransCanada’s counsel advised that the final award would be included in the damages calculations to be submitted to the Court for inclusion in a final judgment. On September 10, 2018, the parties stipulated to the prejudgment interest, and reserved the other two issues for the arbitration, which was scheduled to proceed on September 2018. The same day, ACE/Arch submitted to the arbitrator their proposed form of award, which incorporated the figures for the ancillary revenue and energy revenue losses stipulated to in the March 2018 stipulation. During the arbitration, in connection with the proposed final award, counsel advised the arbitrator that the damages numbers were undisputed and that they had stipulated to the ancillary loss and energy loss. In the proposed award that submitted to the arbitrator, the energy loss was incorrectly stated to be $609,683 and the ancillary loss was incorrectly stated to be $1,429,833. The parties stipulated that those were the claim amounts, not the loss amounts. On September 21, 2018, the arbitrator issued an award. On October 3, 2018, TransCanada argued that the arbitrator made erroneous findings as a result of incorrect amounts presented by ACE/Arch for TransCanada’s business interruption losses. TransCanada asked that ACE/Arch correct the error in the award. By letter dated October 5, 2018, ACE/Arch denied any error. The parties wrote to the arbitrator about the alleged error, and by email dated October 30, 2018, the arbitrator denied TransCanada’s request to modify or correct the award. By order to show case, ACE/Arch moved, pursuant to CPLR 7510, for an order confirming the arbitration award, among other relief. TransCanada opposed the motion. ACE/Arch argued that the award should be confirmed absent a basis for vacating or modifying it pursuant to CPLR 7511(b)(1) or (c), which limits a court’s ability to vacate an arbitrator’s award to certain narrow grounds. TransCanada asserted that CPLR §§ 7511 and 7510 did not apply because the parties had not agreed to their application. Rather, TransCanada claimed that the applicable standard of review was akin to that employed in reviewing the decision of a judicial hearing officer, thus warranting vacatur of the award as irrational and reflective of the wrong amounts for the revenue losses. Consequently, TransCanada’s actual insurance claims or losses applied. The Court’s Decision The Court confirmed the award. In confirming the award, the Court considered whether the award resulted from fraud, corruption, or other misconduct. Slip Op. at *6. In reviewing the record, the Court found that award was free of such wrongdoing. In fact, noted the Court, TransCanada neither “allege nor establishe that the award resulted” from such misconduct. “Thus,” concluded the Court, “even had the arbitrator erred in calculating the award and/or applied the amounts of TransCanada’s losses, the award must be confirmed.” Id ., citing Henvill v. Metro. Transp. Auth. , 148 A.D.3d 460 (1st Dept. 2017) (argument that award irrational and required vacatur rejected as court in considering award arising from voluntary arbitration may not review arbitrator’s findings of fact); Adolphe v. New York City Bd. of Educ. , 89 A.D.3d 532 (1st Dept. 2011), lv. denied , 19 N.Y.3d 808 (2012) (mistakes of law or disregard of evidence do not constitute grounds for vacating award). The Court also found that TransCanada failed “to show that the arbitrator’s calculations were irrational or erroneous, given the parties’ March 2018 stipulation, providing that the amounts set forth for ancillary and revenue losses were inclusive of ‘all’ such ‘claimed’ losses, and the undisputed representation made at the hearing that those were the correct amounts for those damages.” Id . “Thus,” concluded the Court, “even if the standard of review is whether the award is irrational, the arbitrator’s findings are supported by the record.” Slip Op. at *7, citing Matter of Hanover Ins. Co. v. Vasquez , 143 A.D.3d 612 (1st Dept. 2016) (whether arbitration voluntary or compulsory was irrelevant, as even under compulsory standard of review, award rationally supported by record). Takeaway As noted, New York has a strong public policy that favors arbitration. In fact, arbitration is not only favored, but encouraged “as an effective and expeditious means of resolving disputes between willing parties desirous of avoiding the expense and delay frequently attendant to the judicial process.”  Westinghouse v. New York City Tr. Auth. , 82 N.Y.2d 47, 54 (1993). Because of the strong public policy favoring arbitration, courts give considerable deference to arbitrators and their awards.  Tullett Prebon v. BGC Fin. , 111 A.D.3d 480, 482 (1st Dept. 2013) (“awards are subject to very limited review in order to avoid undermining the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation”). In fact, judicial review of arbitration awards is severely limited in New York.  Id . As long as an arbitral award is rationally based and free of fraud, corruption or other misconduct, it will be confirmed. National Union is a good example of that principle.

On May 7, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it had settled an insider trading action against Brian Fettner (“Fettner”), a Nevada resident who obtained confidential, inside information about a potential corporate merger from a lifelong friend and used it to generate more than $250,000 in illicit trading profits. The action involved unlawful trading in the securities of G&K Services, Inc. (“G&K”) prior to an August 16, 2016 announcement that Cintas Corporation (“Cintas”) had reached an agreement with G&K to purchase all of G&K’s outstanding common stock for a substantial premium over the stock’s then publicly-traded price. While the acquisition was being negotiated, and before it had been publicly announced, Fettner obtained non-public information about the transaction in breach of a duty of trust and confidence to his friend, and purchased G&K stock in a brokerage account of his ex-wife, Relief Defendant Liselotte Sandberg, and in a brokerage account of a former girlfriend, Relief Defendant Kathy M. Micali. Fettner also persuaded others to purchase shares of G&K common stock before the public announcement of the transaction. In December 2015, officers of Cintas approached G&K about a possible business combination. Talks broke off in January 2016, but resumed in May 2016 when Cintas submitted a revised offer to G&K. Only a few Cintas senior officers were aware of and participated in the negotiations with G&K. One such officer was the Senior Vice President, Secretary, and General Counsel of Cintas (the “General Counsel”). In mid-June 2016, G&K provided the General Counsel with a draft non-disclosure and standstill agreement (“Non-Disclosure Agreement” or “Agreement”) for his review. The General Counsel took home a folder that included the Agreement and a few other merger-related documents. The folder was labeled with the code name for the prospective merger and was kept on the desk in the General Counsel’s home in a room that served as the General Counsel’s home office and den. On Monday, June 20, 2016, the General Counsel executed the Non-Disclosure Agreement on behalf of Cintas. Fettner was a long-time friend of the General Counsel. Whenever Fettner visited Cincinnati, he stayed at his friend’s home, even when visiting family. Cintas is headquartered in Cincinnati. On June 14, 2016, Fettner stayed at the General Counsel’s home for several days while he played golf at a charity outing. According to the SEC’s complaint ( here ), on June 15, 2016, while Fettner was a guest in the General Counsel’s home, he surreptiously viewed documents contemplating the acquisition of G&K by Cintas, including the draft Non-Disclosure Agreement.  Fettner did not tell the General Counsel that he had seen the merger documents. Based on that information and without telling his friend, Fettner purchased G&K stock in the brokerage accounts of his ex-wife and a former girlfriend and persuaded his father and another girlfriend to purchase G&K shares.  Fettner did not purchase G&K stock in any account of his own. He did not receive proceeds from any of the G&K trades he placed or from any of the G&K trades he persuaded others to place. On August 16, 2016, prior to the opening of the U.S. financial markets, G&K and Cintas announced that the companies had entered into an Agreement and Plan of Merger, pursuant to which Cintas would acquire G&K for $97.50 in cash per share of G&K common stock. On the day of the announcement, G&K common stock closed at $96.70 per share, up approximately 17.7% from a closing price of $82.30 the previous day, resulting in illicit profits from Fettner’s alleged misconduct of more than $250,000. The SEC filed its complaint in the U.S. District Court for the Southern District of Florida. SEC v. Fettner , Case 9:19-cv-80613 (May 7, 2019). The SEC alleged that Fettner violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder.  Without admitting or denying the allegations in the complaint, Fettner consented to the entry of a final judgment permanently enjoining him from violating the charged provisions of the federal securities laws and imposing a penalty of $252,995. The Relief Defendants also consented to the entry of a final judgment agreeing to disgorge their profits with prejudgment interest.  The settlement is subject to court approval. “Those who illegally use confidential information to financially benefit others will be held liable for their misconduct,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement.  “The penalty in this action takes such improper trading profits into account.” The SEC press release can be found here . The SEC Complaint can be found here .

FOLLOW-UP – THE NEW YORK COURT OF APPEALS AFFIRMS THE APPELLATE DIVISION, SECOND DEPARTMENT’S, ENFORCEMENT OF WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION APPLICATION Our February 9, 2018, Blog post, entitled: “ APPELLATE DIVISION, SECOND DEPARTMENT, ENFORCES WAIVER OF DECLARATORY RELIEF IN COMMERCIAL LEASE RESULTING IN THE DENIAL OF TENANT’S YELLOWSTONE INJUNCTION ,” addressed the decision in 159 MP Corp. v. Redbridge Bedford, LLC , in which the Appellate Division, Second Department, recognized that the “appeal raises an issue of first impression in the appellate courts of New York…” to the extent that it “address the question of whether written leases negotiated at arm’s length by commercial tenants may include a waiver of the right to declarative relief that is enforceable at law or, alternatively, whether such a waiver is void and unenforceable as a matter of public policy.”  Our earlier Blog discusses the underlying facts of 159 MP and the Second Department’s basis for its holding. On May 7, 2019, the New York Court of Appeals affirmed < HERE =">HERE"> , over a lengthy dissent, “that, under the circumstances of this case, the waiver clause 159 mp> 159 mp> is enforceable, requiring dismissal of the complaint.”  At its core, the Court of Appeals’ decision is based on the principle that a written agreement, when “clear complete…, should be enforced according to its terms.”  (Quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470 (2004) (ellipses omitted).)  The Court of Appeals found that the lease provision at issue in 159 MP “could not be clearer.”  According to the Court, “this unambiguous waiver clause reflects the parties' intent that plaintiffs be precluded from commencing precisely the type of suit they initiated here and, as such, this action was foreclosed by the plain language of the leases.” The Court rejected the 159 MP plaintiff’s argument that the waiver provision at issue violated “a public policy strong enough to warrant a departure from the bedrock principle of freedom of contract.”  The Court reiterated that “ reedom of contract is a ‘deeply rooted’ public policy of this state ( New England Mut. Life Ins. Co. v Caruso , 73 NY2d 74, 81 <1989> ) and a right of constitutional dimension ( U.S. Const. art. I, § 10<1> ).”  Further, the Court reasoned that the “enforcement of commercial contracts according to the terms adopted by the parties a pillar of the common law” because of “New York's status as the preeminent commercial center in the United States, if not the world.” Thus, y disfavoring judicial upending of the balance struck at the conclusion of the parties' negotiations, our public policy in favor of freedom of contract both promotes certainty and predictability and respects the autonomy of commercial parties in ordering their own business arrangements.” While the Court noted that unconscionable contracts and those entered unknowingly or under duress or coercion may not be enforced, the 159 MP plaintiff raised no such defenses.  Plaintiff’s sole challenge to the waiver provision in question – “that the right to bring a declaratory judgment action is so central and critical to the public policy of this state that it cannot be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant” – was found to be “unpersua ” by the Court. The Court described the interplay between the enforcement of contracts and public policy considerations as follows: We have deemed a contractual provision to be unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy. But, because freedom of contract is itself a strong public policy interest in New York, we may void an agreement only after "balancing" the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although we possess the power to set aside agreements on this basis, our usual and most important function is to enforce contracts rather than invalidate them "on the pretext of public policy, unless they clearly . . . contravene public right or the public welfare. (Citations, internal quotation marks, footnotes and ellipses omitted.) After indicating numerous instances where the Court had previously held that certain contractual provisions were void as against public policy, the Court stated that “ ere, the declaratory judgment waiver is clear and unambiguous, was adopted by sophisticated parties negotiating at arm's length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract.”  Specifically, as related to the public policy considerations raised by the 159 MP plaintiff, the Court stated that: there is simply nothing in our contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions or, more generally, to a full suite of litigation options without limitation, is so weighty and fundamental that it cannot be waived by sophisticated, counseled parties in a commercial lease. CPLR 3001 enables Supreme Court to grant declaratory judgments in the context of justiciable controversies but in no way indicates that sophisticated parties may not voluntarily waive the right to seek such relief. A declaratory judgment is a useful tool for providing clarity as to parties' obligations and may, in some circumstances, enable parties to perform under a contract they might otherwise have breached. Access to declaratory relief benefits the parties as well as society in quieting disputes. However, a declaratory judgment is merely one form of relief available to litigants in enforcing a contract. In codifying the right to seek declaratory relief, the Legislature neither expressly nor impliedly made access to such a claim nonwaivable with respect to any party, much less sophisticated commercial tenants. The Court after analyzing the history and utility of declaratory relief, found significant that the subject waiver provision did not preclude the plaintiff from access to courts because plaintiff could raise its defenses in such summary proceedings brought by the defendant landlord. The Court also found that the declaratory judgment waiver was not rendered unenforceable because, “under the circumstances presented here, it resulted in an inability to obtain Yellowstone relief.  Because the Civil Court cannot issue injunctive relief, requests for Yellowstone injunctions must be made in supreme court.  In describing why Yellowstone relief was not available to the 157 MP plaintiff, the Court stated: Yellowstone relief is not an end in itself but merely a means of maintaining the status quo by tolling a contractual cure period during a pending action, permitting a tenant who loses on the merits of the lease dispute to cure the defect and retain the tenancy. Here, because plaintiffs' declaratory judgment action was barred by the lease waiver, there was no pending action in which to adjudicate the parties' rights and to support interim relief in the form of a Yellowstone injunction. Indeed, the request was rendered academic by the dismissal of the complaint. The Court reiterated that the inability to obtain Yellowstone relief would not leave plaintiff without remedy because it could raise such defenses as appropriate in summary proceedings. In his lengthy dissent, Judge Wilson, among other things, expressed his view that there was a strong public policy in favor of declaratory relief and Yellowstone injunctions.  Justice Wilson feared that “ he majority’s decision today will result in the elimination of the “Yellowstone injunction”, and, therefore, “enable to terminate the leases based on a tenant's technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations.” TAKEAWAY The majority’s decision reinforces the primacy of freedom of contract in New York.  However, as the dissent argues, the result could be devastating to commercial tenants.  Undoubtedly, most new commercial leases will contain waivers such as those that appear in the leases that are the subject of 159 MP .  The dissent’s argument that the majority’s view will create uncertainty in contract for tenants is prescient.  It will be interesting to see how this ruling plays out.