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On April 10, 2019, the Appellate Division, Second Department, reversed the denial of motions to dismiss fraud claims alleged in connection with the purchase and sale of a $6.2 million home in Harrison, New York. Comora v. Franklin , 2019 N.Y. Slip Op. 02671 (2d Dept. Apr. 10, 2019) ( here ). The decision addresses whether contractual disclaimers can preclude a fraudulent concealment claim. As readers of this Blog know, we recently addressed this issue here and here . Under New York law, to recover damages for fraud, a “plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996); see also Hecker v. Paschke , 133 A.D.3d 713, 716 (2d Dept. 2015).  When the fraud involves an omission of material fact, it is actionable “only if the non-disclosing party has a duty to disclose.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V. , 68 F.3d 1478, 1483 (2d Cir. 1995). A duty to disclose arises if “one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party.” Id . (internal quotation marks omitted).  The existence of a special relationship between the plaintiff and defendant, such as a fiduciary relationship, also gives rise to a duty to disclose.  Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011).  In addition, the “special facts” doctrine can trigger a duty to disclose.  Under this doctrine, a duty to disclose arises “‘where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair’ …” See P.T. Bank Central Asia v. ABN AMRO Bank N.V. , 301 A.D.2d 373 (1st Dept. 2003). In the context of real estate transactions, “New York adheres to the doctrine of caveat emptor and imposes no duty on the seller or the seller’s agent to disclose any information concerning the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent which constitutes active concealment.” Hecker , 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski v. Rapalje , 14 A.D.3d 484, 485 (2d Dept. 2005). “If however, some conduct ( i.e. , more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.” Hecker , 133 A.D.3d at 716 (internal quotation marks omitted); see also Jablonski , 14 A.D.3d at 485. “To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor.” Jablonski , 14 A.D.3d at 485. Apart from the foregoing, a fraud claim will be dismissed where: (1) a party’s disclaimer of reliance 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). In the context of a real estate transaction, a specific disclaimer of reliance on representations as to the condition of real property will generally bar related fraud-based claims. Danann Realty , supra . “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. Comora v. Franklin Background Comora arose from the plaintiffs’ purchase of a $6.2 million home in Harrison, New York from defendant Martin Franklin (“Franklin”), on November 27, 2013. Franklin’s sister, defendant Caroline Freidfertig (“Freidfertig” and, together with Franklin, the “Individual Defendnats”), was his real estate agent in the transaction and the alleged caretaker of the home prior to the sale; no one had been living at the home immediately prior to the sale. Freidfertig is employed by defendants JBF 2, LLC, doing business as Julia B. Fee Sotheby’s International Realty, and for JBF Holdings, LLC, doing business as Julia B. Fee Sotheby’s International Realty (“Sotheby’s”). The home featured an indoor pool wing that included a large swimming pool and hot tub and was described in the real estate listing prepared by Sotheby’s as being “humidity controlled.” In March 2013, before the property was listed for sale, non-party Belfor Property Restoration (“Belfor”) had been hired to perform a mold remediation project in the indoor pool wing at a cost of more than $1 million. The project included replacing the ceiling and attic area as a result of it being compromised by significant mold growth. As part of the work, Belfor agreed to monitor the humidity alarm located in the pool area that would trigger when the humidity was too high. On April 18, 2013, after Belfor completed the mold remediation, Franklin hired non-party Bohlander Home Inspection, Inc. (“Bohlander”) to inspect the remediation work and conduct mold clearance testing. Bohlander issued a letter/report, on April 18, 2013, in which it confirmed that the remediation was successful. However, Bohlander expressly warned that the mold growth could return if certain specified steps and conditions were not followed. Thereafter, on May 20, 2013, Freidfertig listed the home for sale. Freidfertig did not include any reference to the mold remediation project in the listing. In September 2013, plaintiffs met with Freidfertig to view the home. Soon thereafter, the parties reached an agreement with regard to the sale of the home. Prior to entering into the contract of sale, plaintiffs hired non-party ENCO Home Inspection, LLC d/b/a Housemaster (“Housemaster”) to inspect the premises, including the indoor pool wing. On October 7, 2013, Housemaster inspected the pool house wing, the HVAC system and “other related systems in the pool area.” Housemaster reported “no visual evidence of or musty odors associated with fungi during the inspection, and there were no elevated moisture levels to indicate fungal proliferation.” On October 11, 2013, the parties signed the contract of sale. Plaintiffs ordered a title report but it did not reflect the mold remediation work. Plaintiffs purchased the property on November 23, 2013, and shortly after closing, plaintiffs turned on the swimming pool and the humidity alarm sounded. Plaintiffs immediately called Franklin about the alarm; Franklin told them to contact Belfor. Belfor visited the property several times attempting to resolve the humidity issue. It was during this time that plaintiffs allegedly learned for the first time about the prior mold problem, and the remediation project. In January 2014, mold began appearing on the surfaces of the pool wing. Plaintiffs hired Housemaster, on January 13, 2014, for a limited inspection of the pool area. Housemaster found that the attic area above the pool area was “saturated with moisture” and that the humidistat and the air registers associated with the humidity system were incorrectly placed, causing skewed humidity percentages and excessive moisture. Plaintiffs sought a second opinion, which confirmed Housemaster’s conclusion. In Spring 2014, plaintiffs hired non-party Five Boro Mold Removal to remove the mold that spread throughout the pool house wing. Ultimately, plaintiffs elected to redo the indoor pool area at a cost of approximately $1,114,000.00. Plaintiffs commenced the action, alleging nine causes of action based in fraud against all defendants with the exception of the first cause of action which was alleged only against Franklin. Plaintiffs alleged that defendants were liable for fraud because they had particular knowledge of the humidity and mold problems in the indoor pool wing and never informed plaintiffs of same. Instead, plaintiffs asserted that Franklin and Freidfertig actively concealed these issues from plaintiffs until months after plaintiffs had purchased the home. Plaintiffs further alleged that Sotheby’s was liable on the basis of respondeat superior/vicarious liability given the agency/employment relationship with Freidfertig. Defendants moved to dismiss the complaint. The motion court denied the Individual Defendants’ motion with regard to the first cause of action and the second and fourth through ninth causes of action. The motion court denied Freidfertig’s motion to dismiss, or in the alternative for summary judgment, the second and fourth through ninth causes of action insofar as asserted against her individually. Defendants appealed. The Second Department’s Decision The Second Department reversed the motion court’s denial of the motions. The Court held that the motions should have been granted because plaintiffs could not satisfy the reliance element of their fraud-based claims due to the presence of specific disclaimers in the contract for sale. These disclaimers, noted the Court, provided that plaintiffs were “‘fully aware of the physical condition and state of repair of the Premises’” because of “‘ own inspection and investigation thereof’” and that they entered into the contract “‘solely upon such inspection and investigation and not upon any information . . . or representations . . . given or made by Seller or its representatives.’” Slip Op. at *2. Citing to Danann Realty , the Court held that these specific disclaimers as to the condition of the home barred plaintiffs’ fraud-based claims. Id . “Accordingly,” concluded the Court, the motion court “should have granted that branch of the individual defendants’ motion which was pursuant to CPLR 3211(a) to dismiss the first cause of action, which was asserted against Franklin only, and those branches of the defendants’ separate motions which were pursuant to CPLR 3211(a) to dismiss the second and fourth through ninth causes of action insofar as asserted against each of them.” Id . at **2-3. Takeaway As noted, in a real estate transaction, the law does not impose a duty on the seller or the seller’s agent to disclose information about the premises when the parties deal at arm’s length, unless the seller or the seller’s agent actively conceal material information. Instead, the buyer has a duty to satisfy himself/herself as to the quality of his/her bargain. See London v. Courduff , 141 A.D.2d 803, 804 (2d Dept. 1988). In Comora , the Court did not address whether the caveat emptor doctrine barred the plaintiffs’ fraud claims because they could not avoid the consequences of their disclaimers. These disclaimers were specific and addressed their knowledge of the physical condition and state of repair of the home. As the Court of Appeals observed in Danann Realty : “Such … specific disclaimer destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 5 N.Y.2d at 320-21.

In 1970, the New York Legislature enacted General Business Law (“GBL”) § 349, New York’s deceptive trade practices act. As enacted, Section 349 empowered the Attorney General to bring an action to enjoin “ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in th state.” In 1980, the Legislature amended the statute to add Section 349(h), which provides a private right action to consumers seeking to recover damages caused by deceptive trade practices. “The typical violation contemplated by the statute involves an individual consumer who falls victim to misrepresentations made by a seller of consumer goods usually by way of false and misleading advertising.” Genesco Entm’t v. Koch , 593 F. Supp. 743 (S.D.N.Y 1984). The deception, however, must be of a recurring nature and have ramifications for the public at large. Id . at 750-52. Private transactions not of a recurring nature or without public ramifications are not actionable under the statute. Id . A Plaintiff alleging a violation of GBL § 349 must prove three elements: the challenged act or practice was consumer-oriented; it was misleading in a material way; and the plaintiff suffered injury as a result of the deceptive act. Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A. , 85 N.Y.2d 20, 25 (1995). “Whether a representation or an omission, the deceptive practice must be ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.”   Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000). Courts consider whether an act is deceptive objectively. Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003). Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” Id. , citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999). In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” Gaidon , 94 N.Y.2d at 343. For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Stuntman , 95 N.Y.2d at 29; Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). In addition, a plaintiff must prove “actual” injury to recover under the statute, though not necessarily pecuniary harm. Stuntman , 95 N.Y.2d at 29; Oswego Laborers’ , 85 N.Y.2d at 26. And, the plaintiff must prove the deceptive act caused the injury. Id. ; Oswego Laborers’ , 85 N.Y.2d at 26. Although a GBL § 349 claim does not rise to the level of a fraud claim, it is nonetheless susceptible, like its fraud companion, to dismissal for being duplicative of a contract claim. Thus, a GBL § 349 loss must be distinct from the loss incurred by reason of a breach of contract. See Spagnola v. Chubb , 574 F.3d 64, 66-73 (2d Cir. 2009) (“ lthough a monetary loss is a sufficient injury to satisfy the requirement under § 349, that loss must be independent of the loss caused by the alleged breach of contract.”).    In Hobish v. AXA Equitable Life Insurance Company , 2019 N.Y. Slip Op. 02653 (1st Dept. Apr. 9, 2019) ( here ), the Appellate Division, First Department, considered these issues in affirming the denial of a motion to dismiss a GBL § 349(h) claim. As discussed below, the Court found that, for pleading purposes, the conduct at issue was deceptive and the losses sustained distinct from those incurred by reason of the alleged breach of contract. Hobish v. AXA Equitable Life Insurance Company Background here).=">here)."> Hobish involved a $2 million universal life insurance policy, known as the Athena Equitable Flexible Premium Universal Life II Policy (the “Policy” or “Athena Policy”), of which Toby Hobish (“Hobish”) was the insured person. The Policy was issued by AXA Equitable Life Insurance Company (“AXA”) to the Hobish Irrevocable Trust (“Trust”) in 2007. Plaintiffs alleged that AXA improperly changed Hobish’s classification as the insured person, resulting in the increase of cost of insurance (“COI”) rates and the premium payments required to maintain the Policy. Plaintiffs alleged that they were forced to surrender the Policy due to the inequitable imposition of increased COI rates. According to plaintiffs, an AXA agent presented Hobish with life insurance policy options from various insurance carriers in 2007 and misrepresented that the Athena Policy contained more favorable terms than the policy that they previously purchased (the “Lincoln Policy”). Plaintiffs alleged that, in reliance on the agent’s misrepresentations, the Lincoln Policy was surrendered, and the Athena Policy was purchased with the proceeds of the cash surrender. They also asserted that Hobish made additional payments totaling $249,468, for a total amount of $913,804. The court noted that the Trust and not Hobish owned and surrendered the Lincoln policy in 2007, purchased the Athena Policy with the proceeds, and made the initial premium payment. The court further noted that the payments were made variously by the Trust and its beneficiaries, not by Hobish personally. AXA notified the Trust by letter dated October 5, 2015, that a COI rate increase would be implemented, effective in March 2016. As a result of that increase, the Trust’s annual premiums would be increased to “more than $164,300” in order to maintain the Policy. According to Plaintiffs, the Trust surrendered the Policy “under protest” in July 2016 because they determined that “paying the increased annual premiums . . . made no financial sense, as the value of the Policy would be quickly approached by the new premium.” While plaintiffs had paid $913,804 to maintain the Policy through the surrender date in July 2016, the surrender value was only $448,274.50, less charges of $35,586.49; thus, the Trust received $412,688.01. AXA moved to dismiss the complaint pursuant to CPLR 3211 (a) (1), (a) (3), and (a) (7) on the grounds that, among other things, plaintiffs failed to plead the elements of either a breach of contract claim or a GBL § 349 claim. The motion court granted the motion in part and denied it in part. The Motion Court’s Decision As an initial matter, the motion court (Justice Andrea Masley of the Supreme Court, New York County, Commercial Division) determined that Hobish could not assert a contract claim because she did not purchase, own, or surrender the Policy. The court rejected plaintiffs’ argument that Hobish was a third-party beneficiary under the Policy because the Policy facilitated her estate planning. The court noted that there was no case authority supporting the proposition that an insured person who did not purchase, own, or expect a contractual benefit from an insurance policy had standing to sue as a third-party beneficiary. The motion court denied the motion with respect to the Trust’s claim for breach of contract, finding issues of fact concerning the provision in the Policy permitting AXA to raise COI rates for persons of a “given class”. The court observed, among other things, that the Policy was silent on the meaning of the term “given class” and, therefore, could not be resolved on a motion to dismiss. Turning to the GBL § 349 claim, the motion court denied the motion to dismiss. In doing so, the court rejected AXA’s argument that plaintiffs did not adequately plead the requisite elements of deception, injury, or consumer-oriented conduct. The court also rejected AXA’s contention that Hobish lacked standing to assert the GBL claim because she suffered no injury arising from the alleged deceptive practices. Consumer-oriented conduct AXA argued that the alleged misconduct conduct was not consumer-oriented because it pertained to “a unique interaction specific to the Hobish Family,” and did not affect the public at large. The motion court disagreed, finding that the alleged deceptive practices not only affected the Hobish family but also AXA’s elderly insureds having insurance policies with face values of $1 million or more. The motion court explained: laintiffs have adequately pleaded consumer-oriented conduct in that they allege that defendant engaged in a nation-wide scheme which targeted and raised the COI rates and premiums for the policies insuring 1,700 elderly persons, including Ms. Hobish, in contravention of identical form policy agreements. laintiffs have adequately pleaded consumer-oriented conduct in that they allege that defendant engaged in a nation-wide scheme which targeted and raised the COI rates and premiums for the policies insuring 1,700 elderly persons, including Ms. Hobish, in contravention of identical form policy agreements. This finding, held the court, was buttressed by the fact there were “numerous ongoing matters against defendant AXA, including a putative class-action in federal court, involving the same or similar facts, form policy, and rate increases that are at issue in this case.” Deceptive practices AXA argued that plaintiffs could not establish that they were deceived by any acts or practices because the possibility that COI rates would be increased was disclosed in the Policy and the sales illustrations signed by Hobish and the then-trustee of the Trust. Plaintiffs did not contest whether AXA disclosed the possibility of rate increases; rather, they contended that AXA failed to disclose that it would reclassify Hobish (and the other insureds over age 70 with policies of $1 million or more), then inequitably increase that new group’s COI rates. The motion court declined to rule on the issue, holding that there were issues of fact not ripe for resolution on the motion. GBL § 349 Injury and Standing AXA contended that Hobish could not have been deceived and injured because she did not purchase or own the Policy, or suffer any economic injury from its surrender and, therefore, lacked standing to assert a GBL § 349 claim. The motion rejected the argument. First, the court noted that there was “no doubt” that the Trust had “adequately pleaded an injury that directly resulted from the claimed deceptive practices in that it allege that it suffered pecuniary harm and was forced to surrender the Policy.” Second, the court noted that although Hobish did not own the Policy, she nevertheless adequately pleaded an injury from the alleged deceptive acts. The court explained: The court agrees with plaintiffs that Ms. Hobish alleges a sufficiently direct injury resulting from the purported deceptive practices in that her right and ability, as a consumer, to plan and maintain her estate were harmed. Apart from the pecuniary loss of premium payments she alleges, Ms. Hobish claims that she was deceived by defendant throughout her participation in the sales transactions and the maintenance of the Policy, and that she sustained injuries to her estate planning interests as a result. Plaintiffs allege that “AXA’s deceptive acts and practices . . . were designed to mislead elderly consumers into believing that they would not be targeted for premium increases that would be both substantial and not applied generally and equitably to all members of a designated class.” Citations to the complaint omitted. Duplication of Damages Finally, the Court addressed the argument that plaintiffs’ GBL § 349 claim was duplicative of their contract claims. In particular, AXA maintained that the damages alleged for both claims were the same. Plaintiffs responded by claiming that they alleged distinct losses in two ways: they paid increased premiums as a result of the breach of contract, and they surrendered the Policy due to defendant’s “deceptive practices that targeted its elderly insured.” With respect to Hobish, plaintiffs maintained that her ability to plan her estate was harmed by the alleged deceptive practices. The motion court agreed with plaintiffs. In doing so, the court held that “plaintiffs assert two distinct injuries: (1) the payment of inequitably increased premiums in violation of the Policy (the contract injury), and (2) the surrender of the Policy under protest caused by the alleged deceptive practices.” The court also held that the injuries allegedly sustained by Hobish “represent harms distinct from those pertaining strictly to the breach of the Policy itself.” AXA appealed the denial of its motion to dismiss the GBL § 349 claim. The First Department’s Decision The First Department “unanimously affirmed.” On the issue of standing, the Court agreed with the motion court. The Court held that the injury sustained by Hobish – the impairment of estate planning and the forced surrender of the Policy – was “distinct from injuries sustained by her trust, and thus sufficient to confer standing upon her to assert a General Business Law § 349 claim.” Slip Op. at *1 (citation omitted). The Court also agreed with the motion court that the “General Business Law claim not duplicative of plaintiffs’ breach of contract claim.” The Court explained that plaintiff adequately alleged “both a monetary loss stemming from defendant’s deceptive practices and an independent loss derived from defendant’s failure to deliver contracted for services.” Such a distinction sufficed to affirm the motion court’s holding. Finally, the Court held that the complaint sufficiently alleged deception: It contends that the policy at issue does not define the term “a given class,” the group for which defendant is contractually permitted to raise insurance rates. It also assert that the policy does not address whether, when, or how an insured person can be reclassified. Finally, it assert that defendant targeted elderly individuals and raised their premiums to a degree that they were forced to surrender their insurance. Such collective conduct meets the standard for deception, because the insurer’s acts were “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Id ., quoting Oswego Laborers’ , 85 N.Y.2d at 26. Takeaway GBL § 349 is broad in scope and prohibits deceptive and misleading business practices. To state a cognizable claim under Section 349(h), a plaintiff must identify consumer-oriented misconduct, which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages. In many cases, the plaintiff fails to satisfy one or more of these elements because the conduct is not deceptive or not recurring. In Hobish , however, the claim at issue had all the attributes of a GBL § 349 cause of action: it had deceptive conduct, which was consumer oriented, and which had public implications – much of the facts and circumstances alleged in Hobish were the subject of a federal class action. Hobish is also notable because of the argument that the GBL § 349 claim duplicated the plaintiffs’ contract claim. As shown by both decisions, the analysis under GBL § 349 is similar to that involving other tort claims, i.e. , whether the damages are distinct from those sought by a contract claim. Thus, practitioners should take note that a motion to dismiss on duplication grounds may ensue when a GBL § 349(h) claim is asserted along with a breach of contract claim.

As a general rule, a corporation that acquires the assets of another company is not liable for the liabilities of its predecessor. Schumacher v. Richards Shear Co. , 59 N.Y.2d 239, 245(1983). As with many rules, there is an exception. In this instance, the de facto merger doctrine. Under the doctrine, “ corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor’s tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.” Id . Courts apply the de facto merger doctrine “when the acquiring corporation has not purchased another corporation merely for the purpose of holding it as a subsidiary, but rather has effectively merged with the acquired corporation.” Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573, 574 (1st Dept. 2001).  Courts look for certain “hallmarks” of a de facto merger to determine whether the doctrine applies.  These include: “continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and, continuity of management, personnel, physical location, assets and general business operation.” Id . See also Sweatland v. Park Corp. , 181 A.D.2d 243, 245-246 (4th Dept. 1992). Notably, “ ot all of these elements are necessary to find a de facto merger.” Fitzgerald , 286 A.D.2d at 574-75.  Courts will look to the substance of the transaction to determine “whether the acquiring corporation was seeking to obtain for itself intangible assets such as good will, trademarks, patents, customer lists and the right to use the acquired corporation’s name.” Id . at 575. See also Wensing v. Paris Indus. , 158 A.D.2d 164 (3d Dept. 1990). The concept upon which the doctrine is based is “that a successor that effectively takes over a company in its entirety should carry the predecessor’s liabilities as a concomitant to the benefits it derives from the good will purchased.” Grant-Howard Assocs. v. General Housewares Corp. , 63 N.Y.2d 291, 296 (1984). In Atkins v. Ovation Risk Planners, Inc. , 2019 N.Y. Slip Op. 30815(U) (Sup. Ct. N.Y. County Mar. 27, 2019) ( here ), Justice Arlene P. Bluth of the Supreme Court, New York County, considered these rules in denying a motion to dismiss and granting a motion to amend a complaint. Atkins v. Ovation Risk Planners, Inc. Background Plaintiffs Arthur Atkins (“Arthur”) and Stefanii Ruta-Atkins (collectively, “Atkins”) are the successor trustees of a trust established by Arthur’s mother (the “Trust”). The Trust is comprised of two adjacent properties; one is located at 1038 Eastern Parkway, Brooklyn and the other is at 1040 Eastern Parkway, Brooklyn. Atkins maintained homeowner’s insurance on the properties through Castlepoint Insurance Company. The policy had been purchased by Arthur’s mother prior to her death in 2012. John W. Dolan Jr.’s insurance company (“Dolan”) brokered the policy for Arthur’s mother. Upon the death of Arthur’s mother, plaintiffs became successor trustees and renewed the insurance policies Arthur’s mother had purchased through Dolan. Plaintiffs alleged that they contacted Dolan to request that the polices be changed to indicate that plaintiff “Arthur Atkins as Successor Trustee” be named as an insured. Plaintiffs claimed that Dolan incorrectly listed the named insured as Arthur Atkins in his individual capacity as opposed to his capacity as successor trustee. Additionally, plaintiffs claimed that Dolan failed to indicate on the insurance policy that plaintiffs lived at the 1040 Eastern Parkway property, not the 1038 Eastern Parkway property. In 2014, M&R Insurance Company (“M&R”) bought Dolan’s book of business, thereby becoming plaintiffs’ insurance broker. M&R did not correct the deficiencies Dolan purportedly made to plaintiffs’ insurance policy. Also in 2014, Atkins was sued for the personal injuries that occurred on the 1038 Eastern Parkway property. Atkins put in a claim with Castlepoint, which denied coverage, claiming that plaintiffs were not named in the 2014 policy as “insureds,” Castlepoint did not insure properties owned by trusts, and at the time of the incident, 1038 Eastern Parkway was not plaintiffs’ “residence premises.” As a result, plaintiffs lacked insurance coverage. In 2017, M&R entered into a Business Transition Installment Purchase Agreement with defendant Ovation Risk Planners, Inc. (“Ovation”). In the agreement, Ovation agreed to purchase M&R’s book of business, thereby taking over M&R’s clients. The agreement obligated M&R to transfer all of its records related to customers over to Ovation. Pursuant to the agreement, Ovation has the “exclusive right to solicit and offer customers insurance products.” Plaintiffs commenced the action against M&R and Ovation in connection with the alleged mistakes made by M&R in failing to make the necessary changes to plaintiffs’ insurance policy. Plaintiffs alleged that Ovation should be held responsible for M&R’s negligence through the theory of successor liability. Ovation moved to dismiss the complaint, claiming that it could not be liable for any negligence committed by M&R because Ovation is a corporation unrelated to M&R. According to Ovation, the only dealing between the two companies was the 2017 transaction in which Ovation bought a client list from M&R. The Court’s Decision The Court denied the motion to dismiss. The Court held that there were issues of fact as to whether the de facto merger doctrine applied. The Court found that by the transaction “Ovation purchased almost all of M&R’s assets including those necessary for the uninterrupted continuation of M&R’s business.” Slip Op. at *4.  The Court observed that the Business Transition Installment Purchase Agreement confirmed “that Ovation purchased the entirety of M&R’s client list” as well as “the good will of the business as a going concern, which included but not limited to any and all transferable rights to all intellectual property ....” Id . According to the agreement, M&R’s intellectual property included “M&R’s phone numbers, email addresses, and website.” Id . As further evidence of a de facto merger, noted the Court, “the agreement explicitly state this was done ‘In an effort to maximize retention of renewing policies and maintain continuity for existing client base.’” Id . at **4-5. The Court further observed that Ovation’s homepage advised visitors that Ovation was formerly known as M&R Insurance. Id . at *5. “Thus,” the Court concluded, “the evidence suggests that Ovation could have been set up to be a continuation of M&R, which can constitute a de facto merger.” Such evidence, the Court held, was “enough to defeat the motion to dismiss.” Id . In denying the motion, the Court rejected Ovation’s evidence that there was no de facto merger. That evidence – an email sent by plaintiffs to Mary Montemarano, one of the individuals who signed the Transition Agreement between Ovation and M&R, and whose email signature said “M&R Insurance Agency” after execution of the agreement – was “not enough to grant the motion to dismiss.” Id . In light of the reasoning used to deny the motion to dismiss, the Court granted the cross-motion to amend. Takeaway Practitioners are taught that they should not elevate form over substance. Atkins is an example of this teaching. As discussed above, the Atkins Court looked at the various “hallmarks” of a de facto merger and concluded that many of them were present. Thus, rather than rely on the form, the Court looked to the substance of the deal to conclude that the transaction was “set up” for Ovation “to be a continuation of M&R.” Although the Court denied the motion to dismiss, its analysis of the evidence shows the importance of examining the substance of transactions. After all, the point of the de facto merger doctrine is to elevate substance over form.

One of the issues that courts have to address when deciding fraud claims is whether a statement contains hyperbole or concrete facts. The former, which are not actionable, includes puffery, optimism, future expectations, and opinion, while the latter, which are actionable, includes statements of present or historical fact. Sometimes, the line between these types of statements is blurred or non-existent. Other times, the line is easy to discern.  While determining the difference is difficult enough, the task becomes more complicated when the representations at issue contain present or historical facts and hyperbole.  In Solomon Capital, LLC v. Lion Biotechnologies, Inc. , 2019 N.Y. Slip Op. 02621 (1st Dept. Apr. 4, 2019) ( here ), the First Department held that such mixed statements satisfy the falsity element of a fraud claim. What is the Difference Between Puffery and a Concrete Statement of Fact? To assert a fraud claim, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v Smith Barney , 88 N.Y.2d 413, 421 (1996). Often, plaintiffs complain that statements couched in terms of “belief” or “expectation” are false and should be actionable. Not surprisingly, however, courts have declined to find such statements actionable. The reason: they are “mere puff” or statements of opinion or exaggeration that no reasonable person would take seriously. In contrast to puffery and expressions of opinion, a misrepresentation is a false statement of present or historical fact. Oregon Public Employees Retirement Fund v. Apollo Group Inc. , 774 F.3d 598, 606 (9th Cir. 2014). Misrepresentations of fact are actionable because they are capable of objective verification. E.g. , White v. Davidson , 150 A.D.3d 610, 611 (1st Dept. 2017). See also SEC v. Todd , 642 F.3d 1207, 1216-17 (9th Cir. 2011). Sometimes, as in Solomon Capital , the statement at issue is a mix of hyperbole and verifiable fact. Depending on the facts and circumstances, such statements may be actionable. Solomon Capital, LLC v. Lion Biotechnologies, Inc. Solomon Capital involved two Israeli businessmen (plaintiffs Solomon Sharbat (“Sharbat”) and Shelhav Raff (“Raff”)) who were retained by defendant Lion Biotechnologies, Inc. (“Lion”) to raise capital to fund the biotech’s growth and research efforts. In June 2012, Sharbat and Raff were introduced to Lion’s chief financial officer who told them that Lion needed to raise $30 million to fund research and development. During a conference call with Lion representatives, Sharbat made a number of representations that the plaintiffs alleged to be false. These included that: (1) Sharbat had formerly run a U.S. public company and, therefore, was aware of the obligations of public companies; (2) Sharbat had previously raised “hundreds of millions of dollars” for biotech companies such as Lion; (3) Sharbat and Raff had “massive investors” who were prepared to invest in Lion, (4) the investments were a “done deal”; (5) Sharbat was personally acquainted with at least one major investor who would make a sizable investment in Lion of at least $500,000; and (6) Sharbat and Raff would make substantial investments in Lion themselves. Thereafter, Sharbat claimed that (1) “he could obtain financing for Lion, especially in Israel,” (2) he and Raff “could obtain investments” from Sheba Medical Center, a hospital in Israel, and (3) he and Raff “had obtained high-value investors for Lion in Israel.” Lion asserted that these statements were also false. In addition to the foregoing alleged misrepresentations, the plaintiffs claimed that Sharbat failed to disclose that he had been the target of investigations by the Financial Industry Regulatory Authority, Inc.  (“FINRA”). In July 2012, FINRA filed a complaint against Sharbat for illegally inducing clients to participate in a restricted securities transaction, which resulted in a default judgment entered against him in November 2012. Sharbat also allegedly failed to disclose that he had been involved in litigations over his business practices. Lion, which was then-based in California and had no contacts in New York, did not conduct a litigation search on the plaintiffs and did not discover this information until sometime later. Thereafter, Lion engaged the plaintiffs to obtain investors in the United States and in Israel. The plaintiffs, however, were unable to do so. In connection with their efforts, the plaintiffs sought reimbursement of $135,000 in expenses. Lion refused to pay, claiming that the plaintiffs induced it to offer them a promissory note in the amount of $135,000, one-half (½) of a share of Lion common stock for each dollar invested (67,500 shares), and the right to convert in the next financing of Lion on the same terms offered to the investors they brought to the company. Proceedings Before the Motion Court In April 2016, the plaintiffs brought an action for breach of contract and unjust enrichment, seeking recovery of their expenses, and investment in Lion. On June 3, 2016, Lion filed its original counterclaims. On January 11, 2017, the motion court, inter alia , dismissed without prejudice the counterclaims for fraud and breach of fiduciary duty with leave to replead. Lion then filed amended counterclaims, asserting claims for fraudulent misrepresentation, fraudulent concealment, breach of fiduciary duty, negligent misrepresentation (the first through fourth counterclaims), and breach of implied-in-fact contract (fifth counterclaim). The plaintiffs moved to dismiss the first through fourth counterclaims, and the 11th affirmative defense for fraudulent inducement, which sought rescission of the parties’ agreement. The plaintiffs contended, among other things, that the fraud counterclaims and the fraud affirmative defense should be dismissed because the alleged misrepresentations were puffery or involved expectations of future conduct. The motion court agreed with the plaintiffs and granted the motion to dismiss. The motion court found that the alleged misrepresentations could not form the basis of a fraud claim because they were “mere puffery” and “ pinions of value or future expectations.” The motion court also found that “ he statements alleged in the counterclaims” were “representations of future conduct” that were “not actionable statements of fact.” These statements included: “plaintiffs had investors who ‘were prepared to invest,’ a major investor who ‘would make a sizable investment,’ Sharbat and Raff ‘would make substantial investments,’ Sharbat ‘could obtain financing,’ and ‘could obtain investments from representatives and affiliates’ of a hospital in Israel.” In addition, the motion court found that statements in which Sharbat said that he and his “colleagues had ‘massive investors,’ the investments ‘were a done deal’, raised ‘hundreds of millions of dollars’ for biotech companies like defendant, and he had obtained ‘high-value investors’ in Israel” were mere puffery or expectation. Similarly, noted the motion court, “a broad assertion that Sharbat raised a lot of money in his career, clearly is puffery.” Finally, the statement that Sharart and Raff “would invest their own money” was held to be “non-actionable opinion or future expectations.” The First Department’s Decision On appeal, the First Department “unanimously reversed, on the law.” Slip Op. at *1. The Court found that “that the eleventh affirmative defense and first through fourth counterclaims adequately pleaded.” Id . Although the Court reinstated the affirmative defense and counterclaims, the Court found that one of the statements was “mere puffery”: In support of the eleventh affirmative defense and first counterclaim alleging fraudulent inducement, defendant alleges, as relevant herein, that, during a conference call with its CEO and CFO, plaintiff Solomon Sharbat, who was at the time a registered broker dealer with the Financial Industry Regulatory Authority (FINRA), represented, on behalf of himself and the other plaintiffs, that he had previously run a publicly traded U.S. company, that he had raised hundreds of millions of dollars for other biotech companies, that he had “massive investors” who were prepared to invest in defendant, and that these investments were “a done deal.” Sharbat allegedly later asserted that he “had obtained high-value investors for in Israel.” The statement that investments were “a done deal” is mere puffery; it has no fixed meaning. Id . (citation omitted). Regarding the mixed statements of hyperbole and verifiable fact, the Court stated as follows: However, Sharbat’s statements that he had “massive investors” who were prepared to invest in defendant and that he “had obtained high-value investors for in Israel,” while partially hyperbolic, make concrete factual representations that go beyond mere puffery. Simply stated, Sharbat asserted that he had investors lined up and ready to go, when in fact he had none. Since plaintiffs were retained by defendant to bring investors in, these statements constitute misrepresentations of material facts for purposes of the fraudulent inducement counterclaim. Finally, the Court held that the statements concerning Sharbat’s experience – i.e. , that Sharbat had previously run a publicly traded U.S. company and that he had raised hundreds of millions of dollars for other biotech companies – were “concrete and measurable misrepresentations.” Id . (citations omitted). Takeaway A fraud plaintiff must allege that a statement would be misleading to a reasonable person given the information available to him or her. Within this mix of information are expressions of puffery, opinion, and optimism that do not give rise to a claim sounding in fraud. The reason is that puffery, opinion, and statements of expectation are too general to cause a reasonable person to rely upon them. As Judge Learned Hand explained over 100 years ago: “ here are some kinds of talk which no sensible man takes seriously, and if he does he suffers from his credulity. If we were all scrupulously honest, it would not be so; but, as it is, neither party usually believes what the seller says about his own opinions, and each knows it.” Vulcan Metals Co. v. Simmons Mfg. Co. , 248 F. 853, 857 (2d Cir. 1918). Solomon Capital is an example of a case in which general statements of opinion, which are not actionable, are considered in context such that they are examined for their objective falsity. By doing so, Solomon Capital teaches that mixed statements of hyperbole and verifiable fact may form a basis for a fraud claim when those statements address circumstances that the speaker knows to be false and can be objectively verified as such.

This Blog has featured numerous treatments of the procedural, substantive and evidentiary law in residential mortgage foreclosure actions. < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , and < HERE =">HERE"> .  The Supreme Court of the State of New York, Appellate Division, Second Department, recently issued a decision in Bank of New York Mellon v. Gordon (March 27, 2019) , addressing and clarifying numerous issues frequently litigated in mortgage foreclosure actions – many of which are applicable to every litigation.  The Court believed that a primer addressing such issues was necessary because the “challenges presented by dramatic increase in litigation have been compounded by poor record-keeping practices, a changing regulatory environment, inordinate delays, and inadequate legal representation.”  As a result of the “consistent and repeated confusion about some of the most fundamental aspects of the procedural, substantive, and evidentiary, law … routinely applied in a foreclosure context,” the Court thought it “appropriate to collect and reiterate some of these foundational principles in the hope that such clarity will eliminate many of the disputes that make up an ever-increasing proportion of the trial-level dockets.” In Gordon , lender commenced a mortgage foreclosure action and borrower, Gordon,  answered and, inter alia, asserted 55 affirmative defenses and 5 counterclaims against lender (“MERS”).  Supreme Court granted lender’s motion for summary judgment, appointed a referee to compute and dismissed borrower’s defenses and counterclaims and, inter alia , denied borrower’s cross-motion to dismiss the complaint and to compel disclosure.  On Gordon’s appeal, the Court modified Supreme Court’s order. The Court began by analyzing the general standards for the granting of summary judgment motions.  In the context of that discussion, the Court addressed certain evidentiary issues.  Thus, the Court stated that “a motion for summary judgment will not be granted if it depends on proof that would be inadmissible at the trial under some exclusionary rule of evidence.”  (Citations, internal quotation marks and brackets omitted.)  The Court continued by noting that “ ut-of-court statements offered for the truth of the matters they assert are hearsay and may be received in evidence only if they fall within one of the recognized exceptions to the hearsay rule, and then only if the proponent demonstrates that the evidence is reliable.”  (Citations and internal quotation marks omitted.)   Finally, the Court cautioned that the admissibility of evidence should only be examined if “the nonmoving party has specifically raised that issue in its opposition to the motion” … because “inadmissible hearsay admitted without objection may be considered and given such probative value as, under the circumstances, it may possess.”  (Citations and internal quotation marks omitted.) An issue that frequently is raised in mortgage foreclosure actions is whether the plaintiff has standing.  The Appellate Court in Gordon affirmed Supreme Court’s finding that BONY had standing to bring the foreclosure action.  The Court explained that when “standing is not an essential element of the cause of action, under CPLR 3018(b) a defendant must affirmatively plead lack of standing as an affirmative defense in the answer in order to properly raise the issue in its responsive pleading.”  (Citations and quotation marks omitted.)   When standing is raised by a defendant in a mortgage foreclosure action, as was the case in Gordon , “a plaintiff must prove its standing in order to be entitled to relief against the defendant.”  (Citations omitted.)   Because BONY demonstrated that it was “in physical possession of the note, which had been endorsed in blank, at the time the action was commenced,” standing was established. Standing was established through business records annexed to the affidavit of an employee of BONY’s law firm.  The Court rejected Gordon’s assertion that the employee’s affidavit failed to lay a proper foundation for the admissibility of the records. Without a proper foundation, “ ecords made in the regular course of business are hearsay when offered for the truth of their contents.”  (Citations omitted.)  CPLR 4518(a) , the statutory business records rule, provides that a business record “shall be admissible in evidence in proof of the act, transaction, occurrence or event, if the judge finds that it was made in the regular course of any business and that it was the regular course of such business to make it, at the time of the act, transaction, occurrence or event, or within a reasonable time thereafter.”  Notwithstanding the statutory requirements of CPLR 4518(a), “the Court of Appeals has held that unless some other hearsay exception is available, admission may only be granted where it is demonstrated that the informant has personal knowledge of the act, event or condition and he or she is under a business duty to report it to the entrant.”  (Citations, internal quotation marks and brackets omitted.)  The Court also noted that it is the business record itself, and not the foundational affidavit by which same is submitted, that “serves as proof of the matter asserted.”  Thus, the underlying records must be introduced before “evidence of the contents of the records is admissible.”  (Citations, internal quotation marks and brackets omitted.)  Put another way, without the introduction of the underlying business records, “a witness’s testimony as to the contents of the records is inadmissible hearsay.”  (Citations and internal quotation marks omitted.)  Against this backdrop, the Court found that the affidavit of the law-firm’s employee sufficed to establish standing. While Gordon argued that the employee’s affidavit was insufficient because it failed to demonstrate familiarity with the record keeping practices of the prior assignors along the way, the Court did not agree that that such knowledge was relevant on the standing issue.  The employee, the Gordon Court found, sufficiently laid a foundation “for a business record maintained by her employer.”  Thus, in her affidavit the employee explained, among other things, that her group is responsible, in the ordinary course of business, for receiving and electronically cataloguing original loan documents and that it was “the normal course of business to store as computer entries.”  The copies of the records attached to the motion were compared to the original and were, according to the employee, “true and accurate.” The Court, however, determined that the Supreme Court should not have granted summary judgment to BONY because it failed to meet its “burden of demonstrating that defaulted in the repayment of the subject note.”  The Court reiterated that a lender in a foreclosure action meets its prima facie burden by producing a copy of the mortgage, the unpaid note, and evidence of default and that “ plaintiff may establish a payment default by an admission made in response to a notice to admit, by an affidavit from a person having personal knowledge of the facts, or by other evidence in admissible form.”  (Citations, internal quotation marks and brackets omitted.) BONY attempted to lay a foundation for the business records purporting to demonstrate Gordon’s payment default through the affidavit of an employee of the lender’s loan servicer.  However, the affidavit merely indicated the affiant’s familiarity with the servicer’s business practices and summarized the business records allegedly reviewed.  None of the servicer’s business records were attached to the affidavit.  In determining that BONY’s submission was insufficient to establish Gordon’s payment default, the Court stated, “to the extent that purported knowledge of Gordon’s default was based upon her review of unidentified business records created and maintained by , her affidavit constituted inadmissible hearsay and lacked probative value.”  Further, the only document annexed to the servicer’s employee to “prove” Gordon’s default was created by the original lender and the employee’s affidavit does not indicate that she is familiar with the original lender’s record keeping practices.  Because the employee did not have “personal knowledge of the maker’s business practices and procedures,” a proper foundation for the admissibility of the record was not laid.  (Citation omitted, emphasis in original.)  That a business record created by the original lender does not mean that the loan servicer’s employee was incompetent to lay a proper foundation to the document’s admissibility.  “… uch records may be admitted into evidence if the recipient can establish personal knowledge of the maker’s business practices and procedures, or establish that the records provided by the maker were incorporated into the recipient’s own records and routinely relied upon by the recipient in its own business.”  The Gordon Court found that the affidavit of the servicer’s employee was inadequate.

In June of 2018, this Blog wrote about the United States Supreme Court’s decision to grant certiorari in a case concerning the scope of investor protection laws. ( Here .) In Lorenzo v. SEC , No. 17-1077 (certiorari granted on June 18, 2018), the Court agreed to consider whether an individual who passed along false statements about a company’s financial condition could be found liable for engaging in securities fraud under the scheme liability provisions of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder. On March 27, 2019, in a decision written by Justice Breyer, a 6-2 majority of the Court ruled that a person who disseminates the false and misleading statements of another, even though he/she did not make the statement, can be held liable under the scheme liability provisions of Section 10(b) of the Exchange Act. ( Here .) Background Francis Lorenzo (“Lorenzo”), the petitioner, was the director of investment banking at Charles Vista, LLC (“Charles Vista”), a registered broker-dealer in Staten Island, New York. Lorenzo’s only investment banking client at the time relevant to the action was Waste2Energy Holdings, Inc. (“Waste2Energy”), a company developing technology to convert “solid waste” into “clean renewable energy.” In a June 2009 public filing, Waste2Energy stated that its total assets were worth about $14 million. This figure included intangible assets, namely, intellectual property, valued at more than $10 million. Lorenzo was skeptical of the valuation, later testifying that the intangibles were a “dead asset” because the technology “didn’t really work.” During the summer and early fall of 2009, Waste2Energy hired Charles Vista to sell $15 million worth of debentures to investors. In early October 2009, Waste2Energy publicly disclosed, and Lorenzo was told, that its intellectual property was worthless, that it had written off all of its intangible assets. As a result, Waste2Energy reported total assets (as of March 31, 2009) of $370,552. Shortly thereafter, on October 14, 2009, Lorenzo sent two e-mails to prospective investors describing the debenture offering. According to Lorenzo, he sent the e-mails at the direction of his boss, who supplied the content and “approved” the messages. The e-mails described the investment in Waste2Energy as having “3 layers of protection,” including $10 million in “confirmed assets.” The e-mails did not reveal the fact that Waste2Energy had publicly stated that its assets were in fact worth less than $400,000. Lorenzo signed the e-mails with his own name, he identified himself as “Vice President-Investment Banking,” and he invited the recipients to “call with any questions.” In 2013, the Securities and Exchange Commission (“SEC” or “Commission”) instituted proceedings against Lorenzo (along with his boss, Gregg Lorenzo (the owner of Charles Vista), and Charles Vista). The Commission alleged that Lorenzo violated Rule 10b-5, Section 10(b) of the Exchange Act, and Section 17(a)(1) of the Securities Act of 1933 (the “Securities Act”). Ultimately, the Commission found that Lorenzo had violated these provisions by sending false and misleading statements to investors with the intent to defraud. As a sanction, the Commission fined Lorenzo $15,000, ordered him to cease and desist from violating the securities laws, and barred him from working in the securities industry for life. Lorenzo appealed, arguing primarily that in sending the e-mails he lacked the intent required to establish a violation of Rule 10b-5, Section 10(b), and Section 17(a)(1). With one judge dissenting (then-Judge Kavanaugh), the Court of Appeals for the D.C. Circuit rejected Lorenzo’s lack-of intent argument. Lorenzo v. SEC , 872 F. 3d 578, 583 (D.C. Cir. 2017). Lorenzo did not challenge the panel’s scienter finding. Lorenzo also argued that, in light of Janus Capital Group, Inc. v. First Derivate Traders , 564 U.S. 135 (2011), he could not be held liable under subsection (b) of Rule 10b-5. Id . at 586-87. The panel agreed. Because his boss “asked Lorenzo to send the emails, supplied the central content, and approved the messages for distribution” ( id. at 588), it was the boss that had “ultimate authority” over the content of the statement “and whether and how to communicate it,” Janus , 563 U. S. at 142. Nevertheless, the Court of Appeals sustained the Commission’s finding that, by knowingly disseminating false information to prospective investors, Lorenzo had violated Rule 10b-5(a) and (c), as well as Section 10(b) and Section 17(a)(1) of the Securities Act. Lorenzo then filed a petition for certiorari in the Court. The Court granted review to resolve disagreement about whether someone who is not a “maker” of a misstatement under Janus could be found to have violated the other subsections of Rule 10b-5 and related provisions of the securities laws, when the only conduct involved concerned a misstatement. The Court’s Decision “After examining the relevant language, precedent, and purpose” of Section 10(b) and Rule 10b-5, the Court concluded that “dissemination of false or misleading statements with intent to defraud” can be actionable under the federal securities laws, “even if the disseminator did not “make” the statements. Slip Op. at 5. Justice Breyer noted that Lorenzo understood that the emails he sent contained material untruths. After all, said the Court, “Lorenzo not challenge the appeals court’s scienter finding,” that he sent the emails with the “intent to deceive, manipulate, or defraud” the recipients of the emails. Slip Op. at 6. Under those facts, Justice Breyer concluded that it was “difficult to see how actions could escape the reach” of Rule 10b-5(a) and (c). Id . Recognizing the potential wide reach of its holding, the Court cautioned that its ruling should not be interpreted to reach every scenario, underscoring the factual nature of each case: “These provisions capture a wide range of conduct. Applying them may present difficult problems of scope in borderline cases. Purpose, precedent, and circumstance could lead to narrowing their reach in other contexts.” Id . at 6-7.  To emphasize the point, the Court distinguished the conduct of a peripheral actor, such as a mailroom clerk, and someone like Lorenzo who was directly involved in the dissemination of the false information: But we see nothing borderline about this case, where the relevant conduct (as found by the Commission) consists of disseminating false or misleading information to prospective investors with the intent to defraud. And while one can readily imagine other actors tangentially involved in dissemination – say, a mailroom clerk – for whom liability would typically be inappropriate, the petitioner in this case sent false statements directly to investors, invited them to follow up with questions, and did so in his capacity as vice president of an investment banking company. Id . at 7. The Court rejected Lorenzo’s argument, also shared by Justice Thomas, writing for the dissent (in which Justice Gorsuch joined), that each section of Rule 10b-5 “should be read as governing different, mutually exclusive, spheres of conduct.” Id . The Court noted that the underlying premise of the argument was inconsistent with the recognition by the Court and the Commission of the “considerable overlap among the subsections of the Rule and related provisions of the securities laws.” Id . (citations omitted). Given such overlap and the Court’s repeated rejection of attempts to narrow the reach of the proscriptions of Rule 10b-5, the Court concluded that it “should not hesitate to hold that Lorenzo’s conduct ran afoul of subsections (a) and (c), as well as the related statutory provisions.” Id . at 9. The Court also observed that if Lorenzo’s reading of Rule 10b-5 was correct, “behavior that, though plainly fraudulent, might otherwise fall outside the scope of the Rule.” Id .  It would mean that “those who disseminate false statements with the intent to cheat investors might escape liability under the Rule altogether.” Id .  Such a result, said Justice Breyer, was inimical to the “basic purpose behind” the Rule –  “to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry” – and the enforcement of the securities laws: “We do not know why Congress or the Commission would have wanted to disarm enforcement in this way.” Id . Justice Breyer addressed other arguments raised by Lorenzo and the dissent, rejecting each one as inconsistent with the securities laws and Congress’ intent in enacting them. For example, both Lorenzo and the dissent claimed that the majority’s decision rendered Janus “a dead letter,” Id . at 10 and Dissent at 9. Justice Breyer noted that the Janus Court did not address the application of Rule 10b-5 “to the dissemination of false or misleading information.” Id .  Instead, the focus in Janus was on the “maker” of the statement – that is, “the “person or entity with ultimate authority over the statement.” Id . (quoting Janus , 564 U. S. at 142). Thus, the Court concluded that “ Janus would remain relevant (and preclude liability) where an individual neither makes nor disseminates false information.” Id .

On March 27, 2019, the Appellate Division, Second Department, issued a decision involving charges of fraud and fraud on the court. In Sammy v. Haupel , 2019 N.Y. Slip Op. 02372 (2d Dept. Mar. 27, 2019) ( here ), the Court was asked to consider the dismissal of claims arising under, inter alia , Judiciary Law § 487 and common law fraud. As discussed below, the Court affirmed the dismissal of both claims. Sammy arose from a transaction to purchase real property located in Queens, New York. In connection with the transaction, Plaintiff hired Expedient Title, Inc. (“Expedient”) to perform “title closing” services, including issuing title insurance. Expedient was an authorized agent of First American Title Insurance Company (“First American”). Through Expedient, First American issued a title insurance policy to Plaintiff. On May 31, 2007, the transaction closed, though, according to Plaintiff, Expedient failed to file the deed immediately thereafter. This made a difference because the seller subsequently re-sold the property to South Ozone Park Realty (“South Ozone”). Before Plaintiff could file her deed, South Ozone filed its deed. Thereafter, South Ozone commenced an action against Plaintiff to quiet title of the subject premises. As a result of the foregoing, Plaintiff made a claim under the title insurance policy she had with First American. First American disclaimed coverage partially because Plaintiff had executed a general release in favor of Expedient, First American and their agents. Plaintiff alleged, however, that the general release was fraudulent and did not provide a basis to disclaim coverage. Plaintiff commenced an action in the Supreme Court, Queens County, against First American, Expedient, and Robert Tambini (“Tambini”), who was the vice-president of Expedient in connection with the denial of her claim (the “claim denial action”). Tambini and Expedient retained Wilson Elser Moskowitz Edelman & Dicker, LLP to serve as counsel in the action. First American retained DelBello Donnellan Weingarten Wise & Wiederkehr, LLP to do the same. Plaintiff alleged that the defendants knew that Plaintiff had been defrauded in the sale of the property and that their reliance on the general release (as an affirmative defense) was improper because the release was itself fraudulent. In the action before the Second Department, Plaintiff sued the lawyers and the law firms at which they were employed on the grounds that, in connection with the claim denial action, they knew she had been defrauded and that the affirmative defense they asserted relating to the general release was based on a fraud. Plaintiff maintained that the continued assertion of the affirmative defense constituted a pattern of deceitful conduct that was intended to thwart and/or delay the resolution of the claim and line the pockets of the Defendants with legal fees. Plaintiff asserted causes of action against Defendants for violation of Judiciary Law § 487, fraud, filing of a false instrument, tortious interference, and offering a false instrument for filing in the first degree. Defendants moved to dismiss the Judiciary Law, fraud and tortious interference causes of action. The motion court granted the motion and the Second Department affirmed. Judiciary Law § 487 Judiciary Law § 487 imposes civil and criminal liability on any attorney who “(1) s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party; or, (2) ilfully delays his client’s suit with a view to his own gain.” Judiciary Law § 487; see Gumarova v. Law Offs. of Paul A. Boronow, P.C. , 129 A.D.3d 911 (2d Dept. 2015); Betz v. Blatt , 160 A.D.3d 696, 698 (2d Dept. 2018). A plaintiff pleading a cause of action alleging a violation of Judiciary Law § 487 must do so with specificity. Betz , 160 A.D.3d at 698; Putnam County Temple & Jewish Ctr., Inc. v. Rhinebeck Sav. Bank , 87 A.D.3d 1118, 1120 (2d Dept. 2011). Judiciary Law § 487 “focuses on the attorney’s intent to deceive, not the deceit’s success.” Amalfitano v. Rosenberg , 12 N.Y.3d 8, 14 (2009). Accordingly, although injury to the plaintiff is an essential element of a Judiciary Law § 487 cause of action seeking civil damages ( see Klein v. Rieff , 135 A.D.3d 910, 913 (2d Dept. 2016)), “recovery of treble damages under Judiciary Law § 487 does not depend upon the court’s belief in a material misrepresentation of fact in a complaint.” Amalfitano , 12 N.Y.3d at 15. A party’s legal expenses in defending the lawsuit may be treated as the proximate result of the misrepresentation. Id . Against the foregoing, the motion court dismissed the claim.  The Second Department affirmed, finding that Plaintiff “failed to set forth ‘with specificity,’ either in her complaint or in her papers opposing the motions, how the defendants knew or should have known that she did not sign the release upon which they relied in asserting affirmative defenses on behalf of their clients in the claim denial action.” Slip Op. at *2 (citation omitted). The Court noted that “ ven if the plaintiff had sufficiently pleaded th allegation,” she nevertheless “‘failed to allege sufficient facts to establish that the [ ] defendants intended to deceive the court’ or the plaintiff.” Id . (citations omitted). The Court concluded that Plaintiff’s allegations of attorney intent were conclusory and “not sufficient to state a cause of action alleging a violation of Judiciary Law § 487.” Id . Fraud As readers of this Blog know, to state a claim for fraud, “the plaintiff must prove a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996). In addition, the plaintiff must plead the elements of the claim with particularity. Nabatkhorian v. Nabatkhorian , 127 A.D.3d 1043, 1044 (2d Dept. 2015). Relevant to the Court’s decision was the element of reliance. While this Blog has often written about the element of reliance in the context of whether it was justifiable, in Sammy , the focus was also on the issue of whether such reliance was induced by the acts or omissions of the defendants. Thus, the Court’s focus was on whether Sammy “demonstrated that was induced to act or refrain from acting to detriment by virtue of the alleged misrepresentation or omission.” Shea v. Hambros PLC , 244 A.D.2d 39, 46 (1998) (internal quotation marks and brackets omitted). In affirming the dismissal of the fraud claim, the Second Department found that Plaintiff “failed to allege facts that would support an inference that asserting affirmative defenses based on the plaintiff’s purported release constituted knowing ‘misrepresentation or a material omission of fact which was false.’” Slip Op. at *2 (citations omitted). The Court also found that Plaintiff “failed to allege facts that would support the element of justifiable reliance.” Id . The Court reasoned that “ iven that the plaintiff alleged that she did not sign the release, she could not also claim to have believed that the affirmative defense of release was true, nor could she claim to have ‘change position in reliance on that belief.” Id . at **2-3, citing Nabatkhorian , 127 A.D.3d at 1044. “Moreover,” noted the Court, “the alleged statements – the assertion of an affirmative defense – ‘were undertaken in the course of adversarial proceedings and were fully controverted,’ further undermining any claim of reliance by the plaintiff.” (citation omitted). Takeaway As the Court of Appeals observed in Amalfitano , Section 487 “is not a codification of a common-law cause of action for fraud.” 12 N.Y.3d at 14.  Notwithstanding, application of the statute shares an important similarity with a fraud claim – the requirement to plead attorney intent with particularity. As noted above, to recover for fraud, a plaintiff must plead each element of the claim with particularity. In Sammy , the plaintiff was unable to meet this pleading requirement for her Judiciary Law and fraud claims.

In McKissack Group, Inc. v. MacFarland , 2019 N.Y. Slip Op. 30694(U) (Sup. Ct. N.Y. County Mar. 18, 2019) ( here ), Justice Kathryn E. Freed of the Supreme Court, New York County, recently upheld a challenge to a claim for fraudulent inducement, finding that the plaintiff satisfied the elements of the claim and did so with the particularity required under CPLR § 3016(b). A Quick Primer on Pleading A Fraudulent Inducement Claim To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraud must satisfy 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 satisfy any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). In addition, the allegations must be stated with particularity to satisfy CPLR § 3016(b). Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016(b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). McKissack Group, Inc. v. MacFarland Background McKissack stemmed from a consulting agreement between Plaintiff, The McKissack Group, Inc. (“Plaintiff” or “McKissack”), and Defendant Rance Macfarland (“MacFarland”). The agreement came about because of McKissack’s need for an experienced business leader to become its president. In furtherance thereof, McKissack conducted an executive search in March of 2017 pursuant to which MacFarland was referred to Plaintiff as a candidate for the position. Plaintiff’s Chief Executive Officer, Cheryl McKissack Daniel (“Daniel”), interviewed MacFarland for the position. During the interview, Daniel allegedly advised MacFarland that, as a condition of employment, MacFarland had to be free from any activities and engagements that would jeopardize her confidence in his ability to perform the duties of the position consistent with “the standard of integrity and fiscal responsibility expected of and inherent in the position of President.” Slip Op. at *2 (internal quotations omitted). Plaintiff alleged that MacFarland fraudulently induced it to hire him by “purposefully and intentionally” concealing substantial money judgments issued against him and “by giving ... false and fraudulent assurances that his past business activities reflected a proven record of integrity and fiscal responsibility and were fully consistent with the professional and ethical standards required” by Daniel. Id . (internal quotations omitted). Plaintiff argued that MacFarland created Defendant MSK Business Solutions, LLC to coverup the judgments (issued in the Supreme Court, New York County in actions in which he was a named defendant) that were awarded against a different corporate entity named IBC Business Groups, LLC. On or about March 8, 2017, Plaintiff entered into a Consultant Agreement with MSK pursuant to which MacFarland was hired as President. The Agreement was executed by MacFarland as a member of MSK. Plaintiff alleged that MacFarland and Defendant Melissa Kearns (“Kearns”), also a member of MSK, were parties to, and helped facilitate, MacFarland’s fraudulent misrepresentations. During the fall of 2017, McKissack became aware of Defendants’ alleged misrepresentations when it received Marshal’s Notices, Garnishments, and Levies against MacFarland’s salary. On December 1, 2017, Plaintiff commenced the action, asserting three causes of action for fraud in the inducement against MacFarland, Kearns, and MSK, respectively. Plaintiff claimed that it never would have hired MacFarland had it been aware of the judgments against him. Plaintiff alleged that as a result of the misrepresentations, it was damaged in the amount of at least $220,000.00. On February 15, 2018, Defendants filed a pre-answer motion, pursuant to CPLR § 321l(a)(7), seeking to dismiss the complaint for failure to state a cause of action. Defendants maintained that (1) Plaintiff failed to plead fraud with particularity, (2) Plaintiff failed to plead any duty owed by Defendants to it, and (3) Plaintiff failed to plead justifiable reliance on any representations. On March 18, 2019, the Court denied the motion as to MacFarland. The Court’s Decision The Court held that Plaintiff satisfied the elements of a claim for fraudulent inducement and did so with the requisite particularity required by CPLR § 3016(b). In so holding, the Court found that: Mac arland met with plaintiff’s CEO and intentionally failed to disclose to her material information regarding his background and finances; that his actions were calculated to defraud or mislead plaintiff; that plaintiff reasonably relied on MacFarland’s omission; and that plaintiff sustained damages as a result. Slip Op. at *5. The Court dismissed the claims against MSK and Kearns because Plaintiff failed to plead facts from which “a reasonable inference that MSK and Kearns committed fraud, or aided and abetted MacFarland in committing a fraud.” Id .  In the absence of such facts, the Court held that Plaintiff’s allegation that “Kearns and MSK were parties to and facilitated the fraudulent misrepresentations made by McFarland in an effort to fraudulently induce to hire Macfarland ....” was merely conclusory. Id . Takeaway McKissack serves as a reminder that courts will sustain a fraud complaint when the plaintiff pleads sufficient facts to support a reasonable inference that the allegations of fraud are true. When this happens, it means that the plaintiff, as in McKissack , satisfied each element of a fraud claim. Of course, McKissack also shows what happens when a plaintiff bases his/her fraud complaint on conclusions, as opposed to facts. The complaint will be dismissed, as was the case against MSK and Kearns.

A common issue for litigators concerns the computation of time for statute of limitations purposes, answers to pleadings, and responses to motions and discovery requests. In particular, what to do when the last day for filing falls on a weekend or holiday. Under Rule 6(a)(1)(C) of the Federal Rules of Civil Procedure, when the last day to file falls on a weekend or holiday, the filing date is carried over to the next business day. See also Rule 26(a)(1)(C).   Under the New York Civil Practice Law and Rules (“CPLR”), however, there is no provision that addresses the effect of a due date falling on a weekend or holiday. Given the absence of such a provision, New York practitioners have looked to New York General Construction Law (“GCL”) § 25-a for guidance. Like its federal counterparts, this provision provides that when a filing date lands on a weekend or holiday, the filing date is carried over to “the next succeeding business day.” GCL § 25-a (“When any period of time, computed from a certain day, within which or after which or before which an act is authorized or required to be done, ends on a Saturday, Sunday or a public holiday, such act may be done on the next succeeding business day”). See also Wilson v. Exigence of Team Health , 151 A.D.3d 1849 (4th Dept. 2017); Richey v. Hamm , 78 A.D.3d 1600, 1601 (4th Dept. 2010) (finding that the filing of a summons and complaint on the next business day following the expiration of the statute of limitations, which fell on a Saturday, was timely under GCL § 25a-(1)); Way v. NIHAR Corp. , 2010 N.Y. Slip Op. 33816 (Sup. Ct. N.Y. County 2010); Butchers’ Mut. Casualty Co. v. City of New York , 182 Misc. 809 (Sup. Ct. N.Y. County 1944) (finding that the action was timely filed where the period within which the plaintiffs could sue expired on January 1, a public holiday, and January 2 fell on Sunday). On March 12, 2019, Justice Adam Silvera of the New York Supreme Court, New York County, addressed this issue in the context of the statute of limitations, holding that, under GCL § 25-a, the plaintiffs timely commenced their action even though the last day to file their complaint fell on a Sunday. Moran v. Delacruz-Espinal , 2019 N.Y. Slip Op. 30616(U) (Sup. Ct. N.Y. County Mar. 12, 2019) ( here ). Moran v. Delacruz-Espinal Moran arose from a motor vehicle accident occurring on February 5, 2014, at a gas station near an intersection in lower Manhattan. Plaintiffs, Holger Moran and Mariel Guaman (“Guaman”), alleged that they were seriously injured as the result of a collision between the motor vehicle in which they were passengers and a vehicle owned by defendant Goddard Riverside Community Center and driven by defendant Shemir Donaldson Prentiss. Plaintiffs filed the action on February 6, 2017, three years and one day after the accident at issue. Defendants moved to dismiss on the following grounds: (1) the statute of limitations as set forth in CPLR § 214(5) expired prior to the filing of the action; and (2) Plaintiffs did not effectuate service of the summons and complaint, and file the corresponding affidavits of service, in compliance with CPLR § 306-b. The Law Applicable to the Dispute Under CPLR § 214(5), the statute of limitations for a negligence cause of action is three years. Once the complaint is filed, pursuant to CPLR § 306-b, the plaintiff has one hundred twenty (120) days to effectuate service on the defendant(s). Estate of Jervis v. Teachers Ins. & Annuity Ass’n , 279 A.D.2d 367 (1st Dept. 2001) (finding that a plaintiff who timely filed a summons and complaint but failed to properly effectuate service on the defendant within the one hundred twenty- day period was not entitled to an extension). CPLR § 306-b provides that “ f service is not made upon a defendant within the <120-day period> provided in this section, the court, upon motion shall dismiss the action without prejudice as to the defendant or upon good cause shown or in the interest of justice, extend time of service.” Under CPLR § 201, “an action ... must be commenced within the time specified in this article ... No court shall extend the time limited by law for the commencement of an action.” Under GCL § 25-a: “When any period of time, computed from a certain day, within which or after which or before which an act is authorized or required to be done, ends on a Saturday, Sunday or a public holiday, such act may be done on the next succeeding business day.” “Public holidays” are defined in GCL § 24. The Court’s Initial Ruling The Court held that Plaintiffs “failed to file suit within the three-year Statute of Limitations.”  The Court also held that Plaintiffs “did not effectuate service within the one hundred twenty-day time limit<,> ” though Plaintiffs’ counsel did provide “good cause for the failure to effectuate service ….” However, since Plaintiffs failed “to timely commence suit, the court use its discretion under CPLR § 306-b to extend the time of service.” Consequently, the Court granted the motion to dismiss, holding that Plaintiffs violated CPLR § 201 and CPLR § 214, and, therefore, were not entitled to an extension under CPLR § 306-b. The Motion to Renew Thereafter, Plaintiffs filed a motion to renew. Plaintiffs argued that the Court misapprehended both the law and the facts, as the action was timely commenced within the statute of limitations. Plaintiffs contended that the Court misapprehended the date in which the statute of limitations ran, as such date fell on a weekend. Plaintiffs further contended that the Court overlooked the law regarding filing papers when a deadline falls on a weekend. Slip Op. at **1-2. Although much of the Court’s decision focused on whether the motion was one to reargue or to renew, the Court addressed the timeliness issue, finding that it had overlooked the application of GCL § 25-a in holding that the action was brought after the statute of limitations had run. Id . at *4. As such, since the last day to file the complaint fell on a Sunday, the filing of the summons and complaint on the succeeding Monday was timely. Id . Takeaway When it comes to filing dates, the old idiom, “better safe than sorry”, serves as good advice. Thus, it is best to avoid situations in which there is a question as to whether a filing would be deemed timely filed, especially in the context of the statute of limitations.  If, however, the circumstances do not permit such caution, Moran shows that GCL § 25-a may be available to save the day.

Statute of limitations issues frequently arise in residential mortgage foreclosure actions.  Mortgage foreclosure actions are governed by a six-year statute of limitations.  See CPLR 213(4) .  Generally, the statute of limitations for each missed payment runs from the date of the missed payment.  Bank of New York Mellon v. Celestin , 164 A.D.3d 733 (2 nd Dep’t 2018).  In order to avoid having to sue on each missed payment or groups of missed payments, mortgages usually contain language permitting a mortgagee to accelerate the entire mortgage debt upon the occurrence of certain defaults, including, but not limited to, payment defaults.  “ nce a mortgage debt is accelerated, the borrowers’ right and obligation to make monthly installments cease and all sums become immediately due and payable, and the six-year Statute of Limitations begins to run on the entire mortgage debt.”  EMC Mortgage Corp. v. Patella , 279 A.D.2d 604, 605 (2 nd Dep’t 2001) (citations, internal quotation marks and brackets omitted). The New York State Appellate Division, Second Department, addressed, inter alia , residential mortgage statute of limitations issue in MLB Sub I, LLC v. Grimes (March 20, 2019).  The facts of Grimes are convoluted.  In 2006, Grimes borrowed $464,000 from BNC Mortgage and delivered to it, a note and mortgage in that amount.  Within a year, Grimes defaulted in his payment obligations. In March of 2017, U.S. Bank National Association (“US Bank”) commenced an action to foreclose the Grimes mortgage (the “First Foreclosure Action”), although the Grimes mortgage was assigned to US Bank by assignment dated April of 2017.  In January of 2018, a default judgment was entered against Grimes.  Thereafter, Grimes moved to vacate the default because US Bank had no standing to bring the First Foreclosure Action at the time it was commenced.  In his motion, Grimes argued that the assignment of the underlying loan documents did not occur until one month after the action was commenced.  “A plaintiff has standing in a mortgage foreclosure action when it is the holder or assignee of the underlying note, either by physical delivery or execution of a physical assignment prior to the commencement of the action with the filing of the complaint.”  U.S. Bank National Assoc. v. Clement (2 nd Dep’t 2018) (citation omitted).  Grimes’ motion was granted and the First Foreclosure Action was dismissed. In March of 2009, US Bank commenced another foreclosure action (the “Second Foreclosure Action”).  In September of 2013, MLB Sub I, LLC obtained physical possession of the original Grimes note and, by assignment of mortgage dated March of 2014, the Grimes mortgage was assigned to MLB.  US Bank moved to discontinue the Second Foreclosure Action on September 17, 2014, which motion was granted on November 19, 2014. On October 3, 2014, MLB commenced a foreclosure action against Perfect Home Repairs, Inc. (“Perfect”) (an entity that acquired ownership to the subject property in January of 2014) (the “Third Foreclosure Action”).  Thereafter, MLB moved for summary judgment and for an order of reference.  Perfect opposed MLB’s summary judgment motion and cross-moved to dismiss the complaint pursuant to CPLR 3211(a)(5) on statute of limitations grounds and pursuant to CPLR 3211(a)(4) and RPAPL 1301(3) due to the pendency of the Second Foreclosure Action at the time the Third Foreclosure Action was commenced.  The motion court granted MLB’s motion and denied Perfect’s cross-motion. The Second Department affirmed.  The Court recognized that while the “ ommencement of a foreclosure action may be sufficient to put the borrower on notice that the option to accelerate the debt has been exercised,” such is not the case where the plaintiff “does not have the authority to accelerate the debt or to sue to foreclose at that time (citations and internal quotation marks omitted).  Thus, the Court found that the commencement of the Second Foreclosure Action did not cause the statute of limitations to run on the underlying debt because it was determined that US Bank did not have standing to prosecute that action.  Therefore, the service of the complaint in that Action was not a valid exercise of the option to accelerate the debt triggering the statute of limitations countdown. The Court also affirmed the rejection of Perfect’s argued that the complaint should have been dismissed pursuant to CPLR 3211(a)(4) and RPAPL 1301(3) .  CPLR 3211(a)(4) provides that an action may be dismissed if “there is another action pending between the same parties for the same cause of action in a court of any state or the United States; the court need not dismiss upon this ground but may make such order as justice requires.”  RPAPL 1301(3) provides that “ hile the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought.” Perfect argued that at the time that the Third Foreclosure Action was commenced, the Second Foreclosure was still pending (although US Bank had moved to discontinue, but the motion had not yet been granted) and, therefore, the commencement of the Third Foreclosure Action violated RPAPL 1301(3).  In rejecting Perfect’s argument, the Court held that “where a prior foreclosure action is not formally discontinued, the effective abandonment of that action is a de facto discontinuance which militates against dismissal of the present action pursuant to RPAPL 1301(3).”  (Citations and internal quotation marks omitted.)  In Grimes , the Second Foreclosure Action was not dismissed prior to the commencement of the Third Foreclosure Action, the Court found that the Second Foreclosure Action “was effectively abandoned” when the motion to dismiss that Action was filed several weeks earlier when the motion to dismiss that action was filed.

On March 19, 2019, the Appellate Division, First Department, issued two decisions involving a number of issues related to the assertion of a fraudulent inducement claim – i.e. , whether (a) the claim was duplicative of a contract claim, (b) the plaintiff justifiably relied on the alleged misrepresentations, and (c) disclaimer and merger clauses operated to render reliance on the alleged misstatements unreasonable – and a fraud claim – i.e. , whether there was falsity. Ohm NYC LLC v. Times Sq. Assoc. LLC , 2019 N.Y. Slip Op. 02034 (1st Dept. Mar. 19, 2019) ( here ), and SFR Holdings Ltd. v Rice , 2019 N.Y. Slip Op. 02032 (1st Dept. Mar. 19, 2019) ( here ). In Ohm , the Court unanimously reversed the dismissal of a fraudulent inducement claim on the grounds that it did not duplicate the breach of contract claim – i.e. , the alleged misrepresentations “were not promises of future performance, but misrepresentations of a then present fact” – and the disclaimers and merger clause did not render reliance on the alleged misrepresentation improper because the facts related to those clauses were “peculiarly within defendants’ knowledge.” Slip Op. at *1 In SFR , the Court unanimously affirmed the denial of motions for summary judgment (except as to one plaintiff) related to a fraud claim on the grounds that there were issues of fact concerning the falsity of defendants’ statements. A Primer on The Law Contract Claim and Fraud Claim Together in One Action To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011). When a fraudulent inducement claim is asserted in the context of a contract case, “the pleadings must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim that is not duplicative of a breach of contract claim.” Wyle , 130 A.D.3d at 439.  Thus, to maintain a fraudulent inducement claim under New York law, a plaintiff must allege (i) that the fraud was “collateral or extraneous to the contract” or (ii) “a breach of duty separate from a breach of the contract” or (iii) special damages “not recoverable under a contract measure of damages.” Coppola v. Applied Elec. Corp. , 288 A.D.2d 41, 42 (1st Dept. 2001). here.=">here."> Disclaimer Clauses In New York, a party’s disclaimer of reliance cannot 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. Justifiable Reliance New York courts have found that “ here a party has means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into, ‘he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”’ 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). “Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). “In a fraud action, whether a party could have ascertained the facts with reasonable diligence so as to negate justifiable reliance is a factual question.” Country World, Inc. v. Imperial Frozen Foods Co. , 186 A.D.2d 781, 782 (2d Dept. 1992). Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). here=">here" and="and" >here.=">here."> Ohm NYC LLC v. Times Square Associates LLC Ohm involved leased commercial space by the plaintiff, Ohm NYC LLC (“Ohm”). According to the complaint, Ohm entered into a lease agreement for commercial space on the ground floor of a building located on West 43rd Street in New York City (the “Building”). Ohm planned to use the space for “an upscale food hall” in which a number of upscale brands/vendors would offer their food and services. Ohm alleged that defendants breached the lease by advising it, after the lease had been executed, that a non-exclusive public corridor, known as the “Bridge” area (the “Bridge”), leading from a common, public entrance on West 44th Street in Times Square to the leased space, was not part of the leased space and that the space was, therefore, smaller than the space actually leased. Ohm sued for, among other things, breach of the lease, fraudulent inducement, and rescission. Defendants moved to dismiss the fraudulent inducement and rescission claims. Defendants argued that the “No Representations” and “Merger” clauses in the lease negated any reliance on the alleged fraudulent statements. Defendants maintained that, by these clauses, Ohm was not induced to sign the lease by any “warranties, representations, statements or promises” regarding the rentable and usable areas of the space, or suitability of the space for any particular purpose. Defendants also argued that the fraudulent inducement cause of action was duplicative of Ohm’s breach of contract cause of because it was based upon the same facts underlying Ohm’s breach of contract cause of action. Finally, Defendants argued that Ohm failed to plead justifiable reliance on the alleged misrepresentations, claiming that the representations did not pertain to facts, but mere expressions of opinion, enthusiasm or future expectation. The motion court granted the motion, finding that the alleged misrepresentations related to the performance of the contract ( i.e. , the lease). On appeal, the First Department reversed. The Court found that Ohm had alleged “multiple instances” in which defendants misrepresented “that the Bridge, … , would be included in the leased premises.” As such, those “misrepresentations, which the complaint allege were made to induce plaintiff into entering into the lease, were not promises of future performance, but misrepresentations of a then present fact.” Accordingly, the Court held that the fraudulent inducement claim was “not duplicative of the breach of contract claim.” The Court also rejected defendants’ argument that the disclaimer and merger clauses in the lease precluded Ohm’s fraudulent inducement claim, holding that “ here nothing in the record to suggest that plaintiff knew or should have known that the Bridge would not be included in the leased premises, as was originally represented.” Finally, the Court rejected defendants’ justifiable reliance challenge, holding that “ here nothing in the record to suggest that plaintiff could have discovered the terms of the lease of the adjacent premises or any promises about the Bridge that defendants may have made to the tenants of the adjacent premises, which would be facts peculiarly within defendants’ knowledge.” SFR Holdings Ltd. v. Rice Plaintiffs alleged that defendants fraudulently induced them to invest in certain partnerships by misrepresenting their investment strategy as based on only asset-based lending (ABL), trade finance, and factoring. Plaintiffs further alleged that defendants assured them that they would not invest plaintiffs’ funds in real estate ventures. Despite those assurances, defendants allegedly invested more than $150 million of plaintiffs’ funds in subordinated loans to real estate development ventures that were illiquid and high risk. Plaintiffs added that, without their knowledge or consent, defendants funded nonparty Capstone Realty Investment Partnership (“CRIP”) with loans from Capstone Business Credit that were funded by the Capstone Partnerships’ investments. Plaintiffs alleged that defendants fraudulently concealed those unauthorized investments for almost one year after they made the investments and continued to misrepresent to plaintiffs the true magnitude of those investments, even after plaintiffs submitted redemption requests. Plaintiffs further asserted that defendants delayed complying with those requests until no funds were left with which to repay plaintiffs. In July 2012, plaintiffs commenced the action to recover monetary damages and legal fees on claims for fraudulent inducement, fraud, breach of fiduciary duty, unjust enrichment, actual and constructive fraudulent conveyance, and breach of contract.  Plaintiff also sought a declaratory judgment. Defendants moved to dismiss the complaint. By decision and order dated November 24, 2014 and entered December 3, 2014, the motion court granted the motion in part and dismissed all claims asserted in the complaint except for the fraudulent inducement claim asserted against Capstone Capital Management, Capstone Cayman Special Purpose Fund, and Capstone Special Purpose Fund (Capstone entities), John Rice (Rice) and Joseph Ingrassia (Ingrassia) ( here ). The Appellate Division, First Department, modified, and otherwise affirmed, the November 2014 order to deny the branches of the motion seeking dismissal of the cause of action for fraud asserted against Rice, Ingrassia, and the Capstone entities. SFR Holdings Ltd. v Rice , 132 A.D.3d 424 (1st Dept. 2015) ( here ). Following the completion of discovery, defendants moved for summary judgment on the fraudulent inducement, contract and fraud causes of action. Plaintiffs moved for summary judgment on the fraud claim. The motion court granted the motion with regard to the fraudulent inducement claim and denied the parties’ respective motions with regard to the fraud claim. ( SFR Holdings Ltd. v. Rice , 2017 N.Y. Slip Op. 31974 (Sup. Ct. N.Y. County 2017) ( here ). Regarding the fraud claim, the motion court held that: “There were genuine triable issues of material fact regarding whether, after execution of the Subscription Agreements, defendants expressly stated that they would follow an ABL investment strategy and refrain from investing plaintiffs’ funds in real estate ventures, yet invested plaintiffs’ funds in such ventures, without plaintiffs’ knowledge and consent and hid the fact of such improper investments from plaintiffs for a period of, perhaps, 11 months.” On appeal, the First Department affirmed the motion court’s order with regard to the fraud claim, except as to one plaintiff. The Court rejected defendants’ argument, advanced before the motion court, that plaintiffs’ “had every piece of information necessary to withdraw from the investments, yet chose not to act until the beginning of February 2008” and, therefore, there could be no falsity. The Court found that the fraud “claim supported by monthly progress reports that failed to reveal the nature and extent of the real estate investments, and testimony and sworn statements about a meeting at which defendants significantly understated the amount of money used to fund real estate deals and about defendants’ assurances that 90% of the improper investments would be transferred to another fund.” Slip Op. at *1.

Stephen King is quoted as saying that “the truth is in the details. No matter how you see the world …, the truth is in the details.” This quote fairly sums up the pleading requirement that all plaintiffs must satisfy when alleging a fraud. They must provide sufficient details of the alleged misconduct to support a reasonable inference that the allegations of fraud are true. In Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC , 2019 N.Y. Slip Op. 30603(U) (Sup. Ct., N.Y. County Mar. 12, 2019) ( here ), Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, dismissed a fraudulent inducement claim because the plaintiff, Q Semiconductor Inc. (“Q”), failed to provide the details necessary to support a reasonable inference that a fraud occurred. In other words, Q failed to plead fraud with particularity as required by CPLR § 3016(b). Pleading Fraud with Particularity To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id . Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id . at 559-60. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Q Semiconductor Inc. v. GlobalFoundries U.S. 2 LLC Background Q designed a semiconductor chip which, it believed, could be manufactured in a more cost-effective process than those in use. To bring its design to market, Q sought a manufacturer with the capability to fabricate the chip as intended.  One manufacturer that was interested in working with Q was Defendant, GlobalFoundries US 2 LLC (“GF2”). GF2 represented it had a mature, “qualified”, “130 nm RF SOI EDMOS” manufacturing process on 300mm wafers that was in use for other large customers (the “EDMOS Process”) and was capable of meeting Q’s manufacturing needs in the specified time frame. GF2 also represented that it did not receive any complaints from its other customers about the EDMOS Process. Q entered into an agreement with GF2 on October 31, 2016, for the manufacture of Q’s chips (the “Agreement”). The Agreement was later amended on November 15, 2016 (the “Amendment”). As it turned out, the EDMOS Process was not capable of manufacturing the chips. As a result, GF2 had to continually tweak the process to resolve the problems. At the same time, however, GF2 allegedly attempted to create a new manufacturing process. As alleged, GF2 failed to disclose the foregoing. Slip Op. at **1-2. Notwithstanding, Q alleged that throughout the relationship, Defendants represented that the EDMOS Process was qualified and tested. Id . at *2. However, alleged Q, “ t was not.” Id . Q placed an order and sent payment to defendant, GlobalFoundries Singapore PTE LTD (“GFS”), which was responsible for doing the actual manufacturing. GF2 shipped the chips on March 30, 2017. However, because the chips had to be cut, Q did not immediately test the chips. According to the complaint, when Q did test the chips, “ one of the chips worked.” Id . at *2. On April 9, 2017, GF2 allegedly admitted that it learned the chips did not work. Plaintiff contended that GF2 knew earlier. On April 26, 2017, GF2 informed Q that the chips would not work, “admitting it had skipped a step in the testing process which would have revealed the problem.” Id . In September 2017, GF2 announced a new manufacturing process. The announcement indicated that the EDMOS Process used for the Q chips had not been qualified and caused Q to believe that GF2 had used the Agreement with Q to improve its new process, so it could get bigger jobs from Q’s competitors. Id . As a result of the failure of the manufacturing process, Q allegedly missed the window to sell itself for millions of dollars, “instead having to have a fire sale of its Intellectual Property.” Id . As Q was unable to fill its orders with the non-working chips, it was unable to close a pending M&A deal or obtain more investment funding. Id . Q brought suit, asserting three causes of action: fraud, breach of contract and breach of express warranty. Id . Defendants moved to dismiss the complaint. With regard to the fraud claim, GF2 argued, among other things, that Q failed to allege facts supporting the claim with the specificity required under the CPLR. To that end, GF2 argued that Q failed to allege with particularity the “date, time or place, or” the identity of the speaker of the alleged false statements. Id . at *7. The Court’s Decision The Court agreed with Defendants and dismissed the fraudulent inducement claim for failure to plead fraud with particularity. The Court held that the allegations concerning the EDMOS Process were vague, noting that Q failed to identify the specific statements alleged to be false and the speaker of those representations: Plaintiff states only generally that the representations about the maturity of the manufacturing process were made in August of 2016 by GF2. While plaintiff names two individuals with whom it had discussions about the process to be used for manufacturing, it does not claim either of those individuals made representations as to the EDMOS Process’s maturity. Id . at *9. The Court went on to say that: The person making the representation, where, how, and when are not alleged, only that GF2 made representations about the maturity of the Process. It is not specifically alleged that the representations were made in August of 2016, but instead that Q approached GF2 and began discussions at about that time. The fact that Q does business in California does not make an allegation that the representation was made in any particular place, and the fact that the Agreement was signed in Laguna Hills, CA, is irrelevant to the details of when and how the misrepresentations were made. Id . at *10. Accordingly, the Court dismissed the fraud claim “for failure to state a claim with sufficient specificity, as required by CPLR 3016.” Id . Takeaway As noted above, “the truth is in the details.” In Q Semiconductor , the Court made it clear that the details of an alleged fraud matter. Although the particularity standard is not as rigorous under the CPLR as it is under the Federal Rules of Civil Procedure, a plaintiff pleading fraud must, nevertheless, provide sufficient details of the alleged misconduct to support a reasonable inference that a fraud occurred. here.=">here."> 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). In the absence of such detail, as in Q Semiconductor , even under the reasonable inference standard of the CPLR, a plaintiff cannot maintain a fraud claim.