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On January 4, 2019, the United States Supreme Court granted the petition for a writ of certiorari ( here ) filed by, among others, Emulex Corporation (“Emulex”), a Delaware corporation, that merged with Avago Technologies Wireless (USA) Manufacturing Inc. (“Avago”) (“Petitioners”). Emulex Corp. v. Varjabedian , 18-459. The question presented by the petition concerned whether “Section 14(e) of the Securities Exchange Act of 1934 <“exchange act”> supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer.” The case comes to the U.S. Supreme Court because of a split among the circuits over the appropriate standard of conduct to apply to a claim under Section 14(e). On April 20, 2018, the U.S. Court of Appeals for the Ninth Circuit held that a plaintiff bringing an action under Section 14(e) of the Exchange Act need only plead and prove negligence, rather than scienter, or an intent to deceive. Varjabedian v. Emulex Corp. , 888 F.3d 339 (9th Cir. 2018) ( here ). That decision admittedly “part ways” with the decisions of the Second, Third, Fifth, Sixth and Eleventh Circuits, which have held that Section 14(e), like Section 10(b) of the Exchange Act and Rule 10b-5, promulgated thereunder, requires a showing of an intent to deceive or scienter.  Petitioners sought review “to establish a uniform, national rule” governing the standard of conduct to apply in a Section 14(e) tender offer litigation. The Facts and Procedural History seepet. br. at 6-11.> seepet. br. at 6-11.> Emulex arose from the 2015 merger of Emulex and Avago. On February 25, 2015, Emulex and Avago announced that they had agreed to merge pursuant to a tender offer. On April 7, 2015, Emerald Merger Sub, Inc., a subsidiary of Avago, offered to pay $8.00 for every share of outstanding Emulex stock. The $8.00 offering price reflected a 26.4% premium on Emulex’s stock price the day before the merger was announced. On the same day that the tender offer was initiated, Emulex filed with the SEC, on Schedule 14D-9, a statement recommending the merger of the two companies (the “Recommendation Statement”). The Recommendation Statement identified nine reasons for approving the merger, including that Emulex shareholders would receive a premium for their shares. The Recommendation Statement also provided a five-page summary of a “fairness opinion” that Emulex had received from its financial advisor, Goldman Sachs, which found that the $8.00 offering price was fair to Emulex shareholders. The day after Emulex filed its Recommendation Statement with the SEC, Gary Varjabedian (“Varjabedian”), an Emulex shareholder, filed a putative securities class action in the U.S. District Court for the Central District of California on behalf of himself and all others similarly situated, seeking to enjoin the merger. The district court later appointed Jerry Mutza (“Mutza”) lead plaintiff of the action pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”) (collectively, Mutza and Varjabedian are referred to as “Respondents”). Thereafter, Emulex voluntarily provided Respondents with a core set of documents, including the so-called “Board Book,” that Goldman Sachs had compiled in reaching its fairness opinion. The last page of the Board Book contained a chart, entitled “Selected Semiconductor Transactions,” which listed the premiums received in 17 transactions over a four-year period involving semiconductor companies. The chart, also known as the “Premium Analysis,” did not contain an assessment of the transactions listed and did not compare the transactions with Avago’s tender offer. According to Petitioners, it simply showed that the 26.4% premium Emulex shareholders would receive in the tender offer was within the range of premiums identified in those listed transactions. After receiving the information (and failing to enjoin the merger), Respondents amended the complaint to allege that, by failing to include the Selected Semiconductor Transactions chart in the Recommendation Statement, Petitioners violated Section 14(e) of the Exchange Act. According to Respondents, the omission of the chart “create the materially misleading impression that the premium Emulex’s shareholders received was significant, or at the very least in line with premiums obtained in similar transactions.” Respondents sought damages as well as an order rescinding the transaction. The district court “dismissed” Respondents’ “claims … with prejudice.” Varjabedian v. Emulex Corp. , 152 F. Supp. 3d 1226, 1243 (C.D. Cal. 2016) ( here ). The court rejected Respondents’ argument that “only negligence” is required, finding instead that Section 14(e) requires a showing of scienter. Id . at 1233. The court explained that “no federal court has held that § 14(e) requires only a showing of negligence,” and that “the better view is that the similarities between Rule 10b-5 and § 14(e) require a plaintiff bringing a cause of action under § 14(e) to allege scienter,” i.e. , that “‘defendants made false or misleading statements either intentionally or with deliberate recklessness.’” Id . (citation omitted). The Ninth Circuit reversed. The court focused on the language of Section 14(e), framing the question as whether the statute requires “proof of scienter, as the district court held, or mere negligence.” Id . at 404. In doing so, the court found that “ plain reading of Section 14(e) readily divides the section into two clauses, each proscribing different conduct: It shall be unlawful for any person <1> to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or <2> to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer.... 15 U.S.C. § 78n(e) (emphasis added).” The court reasoned that “ he use of the word ‘or’ separating the two clauses in Section 14(e) shows that there are two different offenses that the statute proscribes; to construe the statute otherwise would render it ‘hopelessly redundant’ and would mean ‘one or the other phrase is surplusage.’” Id . at 404 (citing Hart v. McLucas , 535 F.2d 516, 519 (9th Cir. 1976)). Based upon the foregoing, the court chose to “part[] ways from colleagues in five other circuits” that have required plaintiffs to plead and prove scienter ( id . at 409) and held that Section 14(e) requires a showing of “only negligence….” Id . at 408. The court concluded that the other circuits incorrectly focused on the “the shared text found in both Rule 10b-5 and Section 14(e)” ( id . at 405), text which focuses on fraud. As such, the Ninth Circuit remanded the matter for the district court to “reconsider Defendant’s motion to dismiss under a negligence standard.” Id . at 410. On October 11, 2018, Petitioners filed the petition for certiorari. The Parties’ Briefs Petitioners Petitioners argued that the Ninth Circuit’s decision should be reversed because it “upsets the statutory scheme enacted by Congress.” Pet. Br. at 15. In this regard, Petitioners claimed that the Ninth Circuit improperly considered the constituent components of Section 14(e) individually instead of as a whole, a reading that it argued was inconsistent with the Supreme Court’s prior rulings. Pet. Br. at 17 (citing United States v. Morton , 467 U.S 822, 828 (1984) (“Indeed, as this Court has repeatedly explained, courts should not ‘construe statutory phrases in isolation,’ but rather must ‘read statutes as a whole.’”). By properly reading the first sentence of the statute – which pertains to “fraudulent,” “deceptive,” and “manipulative” conduct – together with the second sentence of the statute – which “authorized the SEC to promulgate rules and regulations ‘reasonably designed to prevent[] such acts and practices as are fraudulent, deceptive, or manipulative’” – the only conclusion to be drawn, said Petitioners, is that “Section 14(e) is concerned with purposeful misrepresentations and omissions, not merely negligent ones.” Id . at 17-18. This reasoning, explained Petitioners, is consistent with the courts that have “inferred a private right of action under Section 14(e) for intentional violations.” Pet. Br. at 20. Noting that the Supreme Court had not “previously recognized a private right of action under Section 14(e),” Petitioners argued that the “lower courts have created one by inference,” recognized that they “have a special responsibility to consider the consequences of their rulings and to mold liability fairly to reflect the circumstances of the parties.” Id . at 18 (quoting Adams v. Standard Knitting Mills, Inc. , 623 F.2d 422, 428 (6th Cir. 1980)). Petitioners concluded that “ ntil the Ninth Circuit’s decision in this case, every court to exercise that ‘special responsibility’ had refused to extend the inferred private right of action to negligent conduct.” Id . at 19. Notably, Petitioners argued that the Supreme Court could decide the matter without re-examining whether there is a private right of action under Section 14(e). It did so “on the assumption that the lower courts have properly inferred a private right of action under Section 14(e) for intentional violations.” Pet. at 20. However, Petitioners invited the high court to “reexamine” whether there is a private right of action if “it believes that any inferred cause of action that exists under Section 14(e) may be applied to negligent behavior as well ….” Id . From a policy standpoint, Petitioners argued that the Court should reverse the Ninth Circuit decision to address, what it considered to be inevitable, forum shopping for a more favorable venue to litigate Section 14(e) claims: This Court has frequently intervened to resolve conflicts over the meaning of the federal securities laws, in part because the flexible venue rules applicable to such suits mean that the outlier position of one circuit can become a de facto national standard simply through forum shopping. Plaintiffs’ lawyers already file a disproportionately large number of securities class actions in the Ninth Circuit, and the Ninth Circuit’s creation here of a negligence-based claim for damages and other remedies that had been rejected in other circuits for decades will only make it more of a magnet for such actions. After all, given the choice, why would a plaintiff desiring to assert a private claim under Section 14(e)—along with, as here, a demand for damages—ever file anywhere else? Pet. Br. at 3; see also id . at 22-26. Respondents Respondents opposed the grant of certiorari ( here ). Respondents argued that “the Ninth Circuit’s decision not implicate any direct circuit conflict.” Resp. Br. at 2. They maintained that Petitioners could not “identify a single appellate decision that squarely rejects the Ninth Circuit’s logic, much less in the relevant context (construing Section 14(e)’s first clause, not its second) and after this Court’s intervening guidance.” None of the cases grapple with the Ninth Circuit’s rationale. Those cases rest on scant reasoning (or worse); some address the question in dicta (and thus held nothing); and at least one “decided” the issue when it was uncontested by both sides, leaving nothing to decide. Aside from a few errant statements and some superficial disagreement, there is no legitimate split. Further review is unwarranted. Resp. Br. at 7. Respondents concluded that “ nce the circuit decisions are reviewed in their proper context …, the circuit conflict is illusory.” Resp. Br. at 2. Respondents contended that the Ninth Circuit’s analysis was correct making “Petitioners’ contrary view … incompatible with Section 14(e)’s plain text, statutory purpose, and legislative history.…” Resp. Br. at 14. Indeed, to Respondents, Petitioners’ reading of Section 14(e) was “irreconcilable with Court’s interpretation of indistinguishable language in related securities provisions.” Id . Respondents argued that the plain meaning of Section 14(e) controlled the Court’s analysis: “the Ninth Circuit correctly read Section 14(e)’s plain language to mean what it says.” Resp. Br. at 2. In this regard, Respondents argued that the two clauses “are set up as separate, independent bans on distinct wrongdoing.” Id .  Consequently, Petitioners’ contention that the Court must read the two clauses together was wrong and contrary to prior Supreme Court jurisprudence: Petitioners insist that Section 14(e)’s separate clauses must be read together to impose a unitary scienter requirement. But this Court already rejected that proposition in Aaron , holding that no “uniform” treatment was required. It explained that provisions like this are properly read as targeting separate categories, each with their own independent requirements. This is confirmed by “the use of an infinitive to introduce each of subsections, and the use of the conjunction ‘or’ at the end of the first two.” Had Congress wanted identical coverage under each clause, it would have used the same wording in each section. Instead, Congress outlined “distinct categor of misconduct” because “ ach succeeding prohibition is meant to cover additional kinds of illegalities—not to narrow the reach of the prior sections.” Resp. Br. at 18-19 (citations omitted). In addition, Respondents maintained that Petitioners’ reading of Section 14(e) would frustrate the objectives of the statute: disclosure of material information in a tender offer. Resp. Br. at 22. Respondents reasoned that “Congress expected corporate statements to be correct—which is why it declared it ‘unlawful’ to ‘make any untrue statement’ or ‘omi ’” in a tender offer. Id . at 23. “Requiring scienter,” urged Respondents, “undercuts Congress’s disclosure mandate.” Finally, addressing the “flood gates” argument proffered by Petitioners, Respondents claimed that the “case lack … broader significance” and any concerns about a supposed “rash of reckless securities litigation … unfounded.” Resp. Br. at 2. Respondents claimed that the heightened pleading requirements of the PSLRA mitigated any concerns about the flood gates opening if the Court denied the writ. Resp. Br. at 25 (“Plaintiffs must cross multiple thresholds to survive a motion to dismiss, including the PSLRA’s other heightened-pleading requirements. 15 U.S.C. 78u-4(b)(1)(A)- (B). That Section 14(e)’s first clause does not require scienter does not mean weak claims get a free pass.”). Similarly, the many considerations that motivate venue decisions, said Respondents, protect against the forum shopping about which Petitioners expressed concern.  Resp. Br. at 25. Plaintiffs consider many factors in choosing where to file a case. Consequently, Respondents argued, “ t is the rare case where a plaintiff feels he can satisfy everything except scienter and sues in an unnatural location for that reason alone.”   Id . The Amici Briefs The Securities Industry and Financial Markets Association (“SIFMA”) SIFMA filed an amicus brief ( here ) in which it argued that it was important for the Supreme Court to grant certiorari to address the increase in “merger objection” litigation in the wake of the Delaware Chancery Court’s decision in In re Trulia, Inc. Stockholder Litig. , 129 A.3d 885 (Del. Ch. 2016). SIFMA Br. at 4. In Trulia , the court “severely limited the ability of stockholders” to bring “merger objection” litigation by objecting to disclosure only settlements. Id . Trulia here.=">here."> To SIFMA, “‘ erger objection’ litigation has become a federal court and federal law problem that likely will be exacerbated by the Ninth Circuit’s decision allowing stockholder plaintiffs to bring § 14(e) claims on a showing of mere negligence.” Id . SIFMA also argued that left unreviewed, the Ninth Circuit’s “decision risks establishing a de facto national standard in § 14(e) cases.” Such a standard, argued SIFMA, would encourage forum shopping, a problem that is exacerbated by the fact that “most public companies transact business and conduct tender offers across all 50 states.” SIFMA Br. at 4. The risk of “over-disclosure” was also cited as a reason for urging the Court to grant the petition. Id . In particular, SIFMA contended that “merger participants will err on the side of even more voluminous disclosure, making it more difficult for stockholders to make well-informed investment decisions,” “ f participants in multi-billion dollar merger transactions can be held liable for damages under § 14(e) for inadvertently failing to include some disclosure item that a court determines in hindsight to be material.…” SIFMA Br. at 5. Finally, like Petitioners, SIFMA argued that the “the Ninth Circuit’s decision wrong on the merits.” SIFMA Br. at 5. The Chamber of Commerce of the United States of America (“Chamber”) The Chamber also filed an amicus brief ( here ) in which it primarily argued that the Supreme Court should consider whether there is a private right of action to bring a claim under Section 14(e) of the Exchange Act. Chamber Br. at 3 (“Subsumed within that question < i.e. , “what state of mind is required to plead and prove a private claim for damages under section 14(e)”> i.e., “what state of mind is required to plead and prove a private claim for damages under section 14(e)”>, however, is an even more fundamental issue that the Court should grant certiorari to address: whether a private right of action under Section 14(e) even exists at all .”) (Orig’l emphasis.) Under the Court’s prior “precedents,” said the Chamber, “recognition of a private right under Section 14(e)” should be “foreclose .” Chamber Br. at 3. Takeaway The issue before the Court – i.e. , the state of mind required to plead and prove a violation of Section 14(e) of the Exchange Act – is a limited one. The policy considerations that may have driven the petition – i.e. , forum shopping, the increase in “merger objection” litigation in the federal courts, and the over-disclosure of information – while important, are secondary to the required state of mind necessary to withstand a challenge by defendants. The broader issue, however, alluded to by Petitioners and advanced by the Chamber, is whether there is a private right of action under Section 14(e) at all . Chamber Br. at 3 (orig’l emphasis). As the Chamber notes, this issue is a “threshold” one. Chamber Br. at 16. While it is always difficult to know which way the Court will rule, if the Court takes up the Chamber’s argument and rules that there is no private right of action, plaintiffs will have to find other avenues to challenge tender offers, such as Section 10(b) and Section 14(a) of the Exchange Act – avenues that are already available to them.

The elements of a common law fraud claim are well known to readers of this Blog: to wit, a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553 (2009). While the justifiable reliance and intent to deceive elements are frequently the focus of a defendant’s challenge, the falsity element can be front and center too, especially where, as in CC Pay Operations Ltd. v. Alokush , 2019 N.Y. Slip Op. 30048(U) (Sup. Ct. N.Y. Cnty. Jan. 2, 2019) ( here ), the alleged misstatements are claimed to be nothing more than mere expressions of opinion. Statements of Opinion Are Inactionable Under New York Law To allege a viable claim of fraudulent inducement, a plaintiff must allege misrepresentations of present facts, rather than expressions of opinion or promises of future conduct. “Statements that ‘express expectations about the future rather than presently existing, objective facts’ are [ ] statements of opinion.” In re Aratana Therapeutics Inc. Sec. Litig. , No. 17 CIV. 880 (PAE), 2018 WL 2943743, at *15 (S.D.N.Y. June 11, 2018) (quoting Fialkov v. Alcobra Ltd. , No. 14 CIV. 09906 (GBD), 2016 WL 1276455, at *6 (S.D.N.Y. Mar. 30, 2016)). Statements of opinion are not sufficient to support a fraud claim. See Renaissance Equity Holdings v. Al-An Elevator Maint. Corp. , 121 A.D.3d 661, 664 (2d Dept. 2014); Yablon v. Stern , 161 A.D.3d 594, 594-95 (1st Dept. 2018) (plaintiffs cause of action alleging fraud in the inducement was properly dismissed, as it was founded upon “non-actionable promises of future conduct or events, rather than present fact, and non-actionable opinion of defendant as to his entity’s resources and capability of undertaking the luxury renovation sought by plaintiffs.”); Lax v. Design Quest, N.Y., Ltd. , 101 A.D.3d 431, 431 (1st Dept. 2012) (noting that “Plaintiffs’ fraud in the inducement claim was based on the alleged misrepresentation by defendants of their expertise and licensing.”). CC Pay Operations Ltd. v. Alokush Background In February 2018, Plaintiff, CC Pay Operations Ltd. (“CC Pay”) and Defendants, Ahmad Alokush (“Alokush”) and Ahmadeus LLC (“Ahmadeus”), entered a Software Development and Maintenance Agreement (the “Agreement”), pursuant to which Ahmadeus was to develop a web platform for CC Pay that would permit individuals to purchase “CafeCoin,” a cryptocurrency. According to Plaintiff, Defendants represented that they were “skilled and competent and capable of designing a professional website.” Slip op. at *2. CC Pay alleged that, contrary to those representations, Defendants “had no proficiency in website design.” Id . Had it “known that Ahmadeus could not design a website,” CC Pay said that “it would not have retained Ahmadeus.” Id . CC Pay commenced the action against Defendants, alleging breach of contract, fraudulent inducement, conversion and unjust enrichment. Defendants moved to dismiss Plaintiff’s cause of action for fraudulent inducement. The Court granted the motion. The Court’s Decision As an initial matter, the Court found that CC Pay’s allegations were insufficiently particular to state a claim for fraudulent inducement: “CC Pay’s generalized allegations regarding Defendants’ representations as to their skill and ability to perform under the Agreement are not sufficient to state a cause of action for fraudulent inducement.” Slip op. at *3. Turning to the falsity element of the claim, the Court found that the challenged statements ( e.g. , representations about an individual’s “ability to perform a task”) were “not misrepresentations of verifiable objective facts but rather statements concerning their ability or intent to perform ….” Slip op. at *3 (orig’l emphasis). Such statements, held the Court, “are not sufficient support a fraud claim.” Id . (citing MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 292 (1st Dept. 2011)). Finally, the Court noted that to the extent the fraudulent inducement claim was based on false assurances of performance, such allegations “sounds in contract, not in fraud” and, therefore, were duplicative of CC Pay’s breach of contract claim: “If CC Pay can establish that Ahmadeus failed to satisfy its obligations under the Agreement, its claim sounds in contract, not in fraud.” Slip op. at *4 (citing Cronos Grp. Ltd v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (“We hold that the cause of action for fraud, to the extent it is based on allegations that the defendants gave false assurances that they would perform a contractual obligation, should have been dismissed on the ground that it is duplicative of the contract claim and is not supported by allegations of specific facts giving rise to an inference that defendants did not intend to honor their assurances when they were made.”)). Takeaway A plaintiff alleging fraud must do so with particularity. See CPLR 3016(b); Eurycleia Partners , 12 N.Y.3d at 559. This means that each element of the claim must be plead with particularity. Id . A plaintiff will meet this burden when the facts in the complaint “permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008). As shown in CC Pay , Plaintiff failed to satisfy its burden of demonstrating falsity. CC Pay is instructive because it highlights the differences between misstatements of fact and expressions of opinion. As noted, Plaintiff alleged that Defendants made misstatements about “their skill and ability to perform under the Agreement….” Slip op. at *3. Since “an individual’s opinion about … her or his ability to perform a task is not an actionable fraud” ( id .), the Court suggested that there might have been another route Plaintiff could have taken. In this regard, the Court noted that CC Pay “reference specific factual representations contained on the Ahmadeus website indicating that it performed work for other specified ‘prestigious’ companies such as Goldman Sachs.” Id . at **3-4. The implication being that such statements were verifiably objective. While the Court’s suggestion raises a question about the actionability of those statements, the lesson of CC Pay rests on the distinction raised by the Court – that is, misstatements of present or historical fact are actionable, while expressions of opinion are not.

In commercial and business litigation, it is common for plaintiffs to assert claims against a corporation ( e.g. , C-Corp. or an S-Corp.) or limited liability company (“LLC”) for wrongs committed by the entity. Often, plaintiffs will try to “pierce the corporate veil,” or get behind the corporate form, to hold the entity’s officers or members liable for the alleged wrongdoing.  Since a plaintiff must show that an officer or member used his/her control over the entity to commit a fraud or other wrong against the plaintiff, it is not unusual for a plaintiff to try to pierce the corporate veil in a fraud cause of action. Such was the case in Coast to Coast Energy, Inc. v. Gasarch , 2018 N.Y. Slip Op. 33350(U) (Sup. Ct. N.Y. Cnty. Dec. 18, 2018) ( here ), where Justice Eileen Bransten of the Supreme Court, New York County, granted a defendant’s motion for summary judgment because the plaintiffs were unable to pierce the corporate veil. Piercing the Corporate Veil in New York As a general matter, New York law allows business owners the ability to protect themselves from personal liability for the acts taken in the name of their business by forming a corporation or LLC. However, an officer or member will lose that protection ( i.e. , be subject to veil piercing) when he/she abuses the corporate form to perpetrate a fraud or other wrongdoing on a third party. TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 340 (1998) (the corporate veil may be pierced to impose liability for corporate wrongs upon persons who have “misused the corporate form for personal ends .”); Matter of Morris v. New York State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 142 (1993) (the corporate veil may be pierced where the owners have “abused the privilege of doing business in the corporate form” by “perpetrat a wrong or injustice . . . such that a court in equity will intervene.”); Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citation omitted). Importantly, domination and control of the corporate entity by its officers or members is not by itself sufficient to pierce the corporate veil. Matter of Morris , 82 N.Y.2d at 141-142; TNS Holdings , 92 N.Y.2d at 339. The plaintiff must show that the officer or member is operating the corporation or LLC for his/her personal benefit and the corporation or LLC is nothing more than an “alter ego” or instrumentality of the officer or member. TNS Holdings , 92 N.Y.2d at 339. Conclusory allegations of domination and control are insufficient. The plaintiff must demonstrate that there was a unity of interest and control between the defendant and the entity such that they are indistinguishable. While application of the doctrine depends on the facts and circumstances of each case ( Ledy v. Wilson , 38 A.D.3d 214, 214 (1st Dept. 2007)), several factors have emerged in determining whether the plaintiff has made the requisite showing. These factors include, among others: (1) the failure to adhere to corporate formalities; (2) inadequate capitalization (that is, the corporation or LLC does not have sufficient funds to operate); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the corporation or LLC; and (5) use of corporate funds for personal benefit. Shisgal v. Brown , 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted). No one factor controls the consideration. Tap Holdings , 109 A.D.3d at 174 (citation omitted). Courts recognize, however, “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting Wm. Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir. 1989) (applying New York law)). Accord , Leslie, Semple & Garrison, Inc. v. Gavit & Co., Inc. , 81 A.D.2d 950, 951 (3d Dept. 1981) (recognizing that it is often difficult and impractical for small closely-held corporations to comport with the typical corporate formalities). See also Bahar v. Schwartzreich , 204 A.D.2d 441, 443 (2d Dept. 1994); Bullard v. Bullard , 185 A.D.2d 411, 413 (3d Dept. 1992). In addition to the foregoing factors, a plaintiff must establish a causal connection between the domination and control of the corporate entity and the injury complained of. Matter of Morris , 82 N.Y.2d at 141; Guptill Holding Corp. v. State of NY , 33 A.D.2d 362, 365 (3d Dept. 1970) (noting that an element of veil piercing is “an injury proximately caused by said wrong”) (citation omitted); East Hampton Union Free School Dist. v. Sandpepple Builders, Inc. , 66 A.D.3d 122, 132 (2d Dept. 2009) (noting that the plaintiff must articulate conduct by the individual that creates a nexus between it and the “transactions or occurrences” alleged in the complaint), aff’d , 16 N.Y.3d 775 (2011). Coast to Coast Energy, Inc. v. Gasarch Background Coast to Coast arose from an alleged fraudulent scheme by the defendants – Mark Gasarch (“Gasarch”), Walter Cuka Vic, and Petro Suisse Limited (“PSNY”) – to solicit investors to invest in various partnerships related to oil exploration and drilling in Trinidad. According to plaintiffs, in 2003, defendants Gasarch and Wampler fraudulently solicited investments in limited partnerships for oil exploration in Trinidad from certain investors, including the plaintiffs. Gasarch and Wampler allegedly disseminated 54 private placement memoranda for the purpose of offering interests in twelve limited partnerships, which purportedly were formed to fund the building, drilling, and production of individual oil wells, and which would distribute to investors the revenues associated with each of the oil wells. The partnerships were divided into two categories: oil-exploration and oil equipment. Each partnership had a general partner that was controlled by Gasarch and/or Wampler. Defendant PSNY was the general partner of approximately 50 limited partnerships. Plaintiffs invested in one or more of the limited partnerships. Plaintiffs alleged that Gasarch and Wampler never intended to follow through on the representations made to investors. Instead, they allegedly collected money from the investors and lied about the building of wells and the production of oil from such wells. They allegedly fabricated production reports to induce new investments, using some of that money to make distributions to earlier investors, before eventually ceasing any payments to investors. Plaintiffs also alleged that defendants wrongfully transferred assets out of the partnerships and sold them to third parties for defendants’ own profit. Plaintiffs Lawrence J. Doherty (“Doherty”) and William Spence (“Spence”) separately alleged that Gasarch fraudulently induced them (and other individuals and entities) to invest in one or more of the limited partnerships. These Plaintiffs maintained that Gasarch fraudulently induced them to invest in the limited partnerships by misrepresenting the number of wells drilled and the profits generated therefrom. Doherty and Spence claimed that Gasarch never intended to build the wells, and, instead, operated a Ponzi scheme, wherein he falsified documents to induce new investors to invest in his companies, and used the new funds as distributions to older investors. Ultimately, payments to all investors ceased, and the assets of the limited partnerships were transferred to other companies and sold, with the proceeds allegedly going to Gasarch. Doherty and Spence moved, pursuant to CPLR 3212, for partial summary judgment as to liability on their fraud claims against Gasarch. For his part, Gasarch moved for summary judgment to dismiss the complaint as against him on the grounds that, among other things, he was not personally liable because Plaintiffs could not pierce PSNY’s corporate veil. The Court’s Decision The Court granted Gasarch’s motion and denied plaintiffs’ motion. The Court found that “Gasarch ha established … prima facie entitlement to summary judgment dismissing the fraud claim against him,” because plaintiffs had failed to demonstrate that “he ‘abused the privilege of doing business in the corporate form’ with respect to PSNY.” Slip Op. at *13 (quoting Matter of Morris , 82 N.Y.2d at 142). In granting Gasarch’s motion, the Court analyzed many of the factors discussed above to determine whether an officer or member abused the corporate form.  Those factors are discussed below. Failure to Adhere to Corporate Formalities Plaintiffs contended that Gasarch failed to adhere to corporate formalities as an officer and sole shareholder of PSNY. Among other documents, they relied on a complaint filed by “the former counsel for Gasarch and/or PSNY,” in which he alleged, “‘upon information and belief,’ that PSNY is an alter ego of Gasarch, and that Gasarch operated PSNY in violation of the corporate form.” Slip op. at **9-10. Justice Bransten discounted the submission as an improper “repetition or incorporation by reference of the allegations contained in pleading[] ….” Id . at *10 (quoting Indig v. Finkelstein , 23 N.Y.2d 728, 729 (1968)). In doing so, the Court concluded that “ o evidence ha been presented that Gasarch did not adhere to corporate formalities ….” Id . at *10. Instead, the evidence showed that “at a minimum Gasarch adhered to those formalities by filing separate tax returns.” Id . In fact, observed the Court, “PSNY maintained its own bank account, which was separate from personal bank account, and … filed its own tax returns,” including one in 2007. Id . at *9. These facts were temporally important, noted the Court, because the “action based on an alleged fraudulent inducement for investments occurring from 2003-2008.” Id . at *10. Inadequate Capitalization Gasarch argued that PSNY was sufficiently capitalized, having over $8 million in capital on hand at the time of the alleged fraud. Slip op. at *10. As evidence, Gasarch cited to a consent decree that PSNY entered into with the Securities and Exchange Commission. Id . Under that decree, PSNY and Gasarch were “directed” to “pay $8,370,000 in disgorgement” “or all of the proceeds that they obtained by selling partnership interests in the 21 Charged Offerings.”   Id . (internal quotation marks omitted). The decree “also provide that obligation be deemed satisfied because Defendants ha already disbursed $9.5 million to investors in the Charged Offerings.” Id . (internal quotation marks omitted). In addition, PSNY’s 2007 tax return showed “that PSNY had over $16 million in assets.” Id . at *11. The Court noted that plaintiffs did not present any evidence in opposition. As such, there was no contrary “evidence that would raise a question of fact as to whether PSNY was adequately capitalized.” Id . Commingling of Assets The Court found that “Plaintiffs have not presented any evidence that Gasarch and PSNY’s assets were commingled.” Slip op. at *12. In particular, the Court rejected plaintiffs’ argument that Gasarch maintained multiple bank accounts in which he commingled PSNY’s assets with his own, noting that plaintiffs failed to proffer any evidence in support. Id . Without supporting evidence, plaintiffs’ argument was nothing more than “an averment of a factual conclusion,” that “does not raise a question of fact as to whether Gasarch commingled his personal funds with PSNY.” Id . (citations omitted). Use of Corporate Funds for Personal Use The Court held that Plaintiffs failed to present evidence that Gasarch used PSNY’s corporate funds for his personal use. Slip op. at *12-13. In so holding, the Court rejected Plaintiff’s argument that Gasarch used a “Special Account” to pay himself through corporate funds. Id . at *12. In fact, according to the Court, there was “ample evidence that the Special Account was not Gasarch’s personal account,” but rather his “client escrow account, wherein he held funds that belonged to John H. Wampler, President of Petro-Suisse, and his companies.” Id . Those funds, said the Court, “were only disbursed as directed by his client John Wampler.” Id . Takeaway In TNS Holdings , the Court of Appeals held that “ hose seeking to pierce a corporate veil … bear a heavy burden of showing that the corporation was dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences.” 92 N.Y.2d at 339. Coast to Coast illustrates the factual difficulties a plaintiff must overcome to satisfy this burden, especially on summary judgment.

Statutes of limitations are an important part of litigation. A plaintiff who sits on his/her rights can be denied access to the courthouse for failing to timely assert his/her claim(s). While such a result seems unfair, the courts do not always agree. But, when the plaintiff fails to timely assert a claim because of the words or actions of the would-be defendant, the courts are more forgiving, exercising their legal and equitable powers to estop the defendant from dismissing a complaint on statute of limitations grounds. Today’s post looks at , 2018 NY Slip Op. 08669 (2d Dept. Dec. 19, 2018) ( here ), where the Second Department reversed the denial of a pre-discovery motion for summary judgment on the grounds that the action was time-barred under the applicable statute of limitations. The Court rejected the plaintiff’s argument that the defendant was equitably estopped from asserting the statute of limitations defense because the plaintiff could not have justifiably relied on the alleged misrepresentations that allegedly prevented him from timely filing the action. As discussed below, the misrepresentations were based on facts that were publicly available and could have been discovered with reasonable diligence. Since the plaintiff failed to use the means available to him to discover those facts, the Court held that “there be no reasonable reliance” on the alleged misrepresentations. New York Law Statutes of Limitation are arbitrary time limitations that bar the commencement of an action. , 55 N.Y.2d 543, 548 (1982) (citation omitted). They reflect a legislative judgment that defendants should be protected from stale claims. After all, as time passes, the defense of an action becomes more difficult. . Indeed, memories fade, witnesses become unavailable, and documents may be misplaced or lost. Thus, while application of a statute of limitations may impose a hardship on a plaintiff with a meritorious claim, courts will not deem them to be arbitrary or unreasonable solely because of the “harsh effect” felt by the plaintiff. , 6 N.Y.3d 666, 673 (2006). However, the courts of New York have equitably estopped the assertion of a statute of limitations defense “where it is the defendant’s affirmative wrongdoing . . . which produced the long delay between the accrual of the cause of action and the institution of the legal proceeding.” , 18 N.Y.2d 125, 128 (1966); , 6 N.Y.3d at 674; , 70 N.Y.2d 990, 993 (1988). Claims of fraudulent inducement, misrepresentation or deception are sufficient to invoke the equitable estoppel doctrine.   , 6 N.Y.3d at 674 (quoting , 44 N.Y.2d 442, 449 (1978)); , 7 N.Y.3d 548, 552-553 (2006). Importantly, the plaintiff must demonstrate reasonable reliance on the defendant’s misrepresentations to invoke the doctrine. , 44 N.Y.2d at 449. In this regard, the plaintiff must use “the means available to him,” by the “exercise of ordinary intelligence,” to ascertain “the truth or the real quality of the subject of the representation.” , 17 N.Y.2d 269, 268 (2011). The failure to make such a showing will result in the application of the statute of limitations. , 194 A.D.2d 764, 765 (2d Dept. 1993) (“Equitable estoppel will not toll a limitations statute, however, where a plaintiff possesses “‘timely knowledge’ sufficient to place him or her under a duty to make inquiry and ascertain all the relevant facts prior to the expiration of the applicable Statute of Limitations.”) (quoting McIvor v. Di Benedetto, 121 A.D.2d 519, 520 (2d Dept. 1986). ,=">," N.Y.3d="N.Y.3d" (2018)="(2018)" ( here ),=">)," the="the" Court="Court" of="of" Appeals="Appeals" reiterated="reiterated" importance="importance" satisfying="satisfying" justifiable="justifiable" reliance="reliance" element="element" a="a" fraud="fraud" claim.="claim." >Accord=">Accord" see=">see" also="also" id. =">" at="at" (Read,="(Read," J.,="J.," dissenting="dissenting" on="on" other="other" grounds)="grounds)" (describing="(describing" as="as" “our="“our" venerable="venerable" rule”)="rule”)" >).=">)."> Finally, when the plaintiff bases his/her claim of equitable estoppel on concealment, instead of fraud, misrepresentation or deception, “the plaintiff must demonstrate a fiduciary relationship … which gave the defendant an obligation to inform him or her of facts underlying the claim.” , 194 A.D.2d at 765. Newman v. Greystone & Co., Inc. =">" ruling,="ruling," granted="granted" defendant’s="defendant’s" second="second" ( Here.)=">Here.)" Since="Since" court’s="court’s" decision="decision" provides="provides" a="a" discussion="discussion" facts="facts" which="which" was="was" based,="based," background="background" section="section" below="below" follows="follows" recitation.="recitation."> The plaintiff, David Newman (“Newman”), commenced the action against the defendant, Greystone & Co., Inc. (“Greystone”), asserting causes of action to recover damages for breach of contract, unjust enrichment, and fraud, and to impose a constructive trust. The action arose out of two joint venture agreements pertaining to certain real estate investments entered into by the parties in 1998 and 1999. Under those agreements, the parties agreed that all net profits of the real estate investments would be split evenly upon the sale, refinancing or operations, of the properties that were the subject of the investments (the “Properties”).   Newman claimed that throughout the years, he and/or his brother, pressed Greystone for information about whether the Properties were generating a profit. According to Newman, they were told that they were not. In early 2015, Newman decided to inquire about the status of the Properties and whether they made a profit. Newman asked his attorney to investigate the matter on his behalf. That investigation revealed that the Properties had been sold approximately sixteen years before the investigation was conducted. In October 2015, Newman filed his complaint. In November 2015, Greystone filed its answer, which contained several defenses, including that Newman’s claims were barred by the statute of limitations. Shortly thereafter, and prior to any discovery taking place between the parties, Greystone moved for summary judgment and dismissal of the complaint on the grounds that Newman’s claims were barred by the statute of limitations and that the fraud claim had not be plead with the required specificity. Newman opposed the motion, arguing that Greystone was estopped from asserting a statute of limitations defense because it had made a number of misrepresentations that lulled Newman into believing that the Properties had not made any profit.   On May 4, 2016, the motion court issued a brief decision on the summary judgment motion, finding that Newman had raised triable issues of fact as to whether Greystone’s actions estopped it from asserting the statute of limitations defense. Greystone appeal. In a brief decision, the Second Department reversed the motion court’s order denying Greystone’s motion for summary judgment. The Court found that Newman did not reasonably rely on Greystone’s representations. According to the Court, the facts upon which the representations were based were “available” from “public records,” which Newman “had the means to ascertain.” Indeed, noted the Court, the evidence showed that Newman “failed to” avail himself of those means. Since Greystone “demonstrated, prima facie,” that the causes of action alleged in the complaint were “time-barred,” and that Newman “failed to raise a triable issue of fact in opposition” – namely, he was induced by fraud to delay filing the action – the Court concluded that “the Supreme Court should have granted motion for summary judgment dismissing the complaint.” Takeaway demonstrates the importance of satisfying the justifiable reliance element of the equitable estoppel doctrine. Indeed, both the Second Department and the motion court in its September 11, 2018 decision focused on this requirement. In the second summary judgment decision, the motion court explained that the information alluded to by the Second Department – property deeds – were a matter of public record. Thus, ownership of the Properties could have been ascertained at any time. The motion court explained that “there was no objective reason why Plaintiff could not have conducted the very same search or investigation that he undertook in 2015, at an earlier time when an action would not have been barred by the statute of limitations.” The Second Department underscored this point by reversing the motion court’s first order on the issue.

Often, in the pre-action investigation of a client’s claims, it becomes evident that discovery would materially aid the client in framing his/her complaint or in learning the identities of the persons against whom the complaint should be brought. Obtaining such pre-action discovery, however, is not easy. The plaintiff must demonstrate the existence of a meritorious cause of action against the proposed defendant and the materiality and necessity of obtaining the information.   Today’s post considers , 2018 N.Y. Slip Op. 33348(U) ( here ), a case in which the plaintiff, using Section 3102(c) of the Civil Practice Law and Rules (“CPLR”), successfully obtained discovery before commencing its action. The Law in New York Under Section 3102(c) of the CPLR, a plaintiff can obtain discovery “before an action is commenced … to preserve information” or “to aid in bringing an action ....” CPLR 3102(c) (“Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order.”)  However, such discovery can be secured only by court order. . Importantly, “while pre-action disclosure may be appropriate to preserve evidence or to identify potential defendants, it may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing.” , 27 A.D.3d 265, 266 (1st Dept. 2006). In other words, a would-be plaintiff cannot use Section 3102(c) to fish for a cause of action.   New York courts have explained that the foregoing “limitation” on the use of pre-action disclosure is “‘designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.’”   , 12 A.D.2d 939, 940 (2d Dept. 1985) (citation omitted). However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” . (citation and internal quotation marks omitted). Thus, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists and is only available where a petitioner demonstrates that he or she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.” , 74 A.D.3d 640, 641 (1st Dept. 2010) (citations omitted). The burden is on the petitioner to present “facts fairly indicating a cause of action against the adverse party.” , 25 A.D.2d 742, 743 (1st Dept. 1966). Lualdi Inc. v. T-Mobile USA, Inc. As discussed below, in , the Court granted an order to show cause and petition filed by Lualdi Inc. (“Lualdi”, the “Company” or “Petitioner”), pursuant to CPLR 3102(c), to obtain pre-action discovery of T-Mobile USA, Inc. (“T-Mobile” or “Respondent”). T-Mobile did not oppose the application. Lualdi sought court approval to serve a subpoena duces tecum on T-Mobile to compel the production of documents identifying the person(s) holding the accounts that Lualdi alleged were used to unlawfully obtain access to the its computer network (“Lualdi.us”). The action arose on May 2, 2018, when Lualdi became concerned that a former consultant (“Consultant”), whose agreement had been terminated several months earlier, obtained unauthorized access to the Company’s New York City password protected local area network. Lualdi contended that the Consultant was reviewing and downloading confidential information and trade secrets from the Company’s network while providing services to, or being employed by, one of Lualdi’s direct competitors. Lualdi became suspicious of the Consultant following an April 30, 2018 meeting between the Company’s business developer, Alberto Pomello (“Pomello”), and an architect. On May 2, 2018, Pomello allegedly became aware that the Consultant knew about the April 30, 2018 meeting and the project specifications the architect had provided to Pomello at the meeting. Thereafter, Pomello contacted Alberto Lualdi, the Company’s principal, and Matteo Tacchi, a member of Lualdi’s IT department, after becoming concerned that the Consultant might be improperly accessing Lualdi’s confidential information. Lualdi hired Evade Solutions, Inc. a firm specializing in computer and network security, to run a forensic examination on the lualdi.us network and ascertain whether the network had been improperly accessed. Lualdi learned that during April 2018, Pomello’s e-mail mailbox was improperly and wrongfully accessed. According to the Company, GeoIP logs showed that Pomello’s e-mail mailbox was accessed from April 17, 2018 through April 22, 2018, from various locations in the United States while Pomello was in Milan. Prior to April 17, 2018, Pomello’s e-mail mailbox had been accessed from New York (authorized) and from Chicago or Los Angeles (unauthorized) and continued until after April 22, 2018. According to Lualdi, the GeoIP logs showed that the IP addresses used to acquire unauthorized access were provided by T-Mobile to one or more of its account holders. Based upon the foregoing, Lualdi argued that the Consultant, and/or one or more persons acting on behalf of, or in concert with, the Consultant, were able to acquire unlawful and unauthorized access to its network. Lualdi filed the order to show cause and petition because it did not know the identity of the person(s) acting with, or on behalf of, the Consultant without obtaining information and documents from Respondent who could identify the individual account holder(s) corresponding to the originating IP addresses that appeared in the GeoIP logs. Based upon the foregoing background discussion, the Court held that the “Petitioner has shown the existence of a meritorious cause of action against Respondent.” Having found that Lualdi met its burden of demonstrating a meritorious claim, the Court held that “identifying the person or persons holding the accounts used to obtain unauthorized and unlawful access to the lualdi.us network,” was “material and necessary to the actionable wrong.” (Citation and internal quotation marks omitted.)  Consequently, the Court granted the petition for pre-action disclosure and ordered T-Mobile to respond to the subpoena. Takeaway As shown in , CPLR § 3102(c) can be an important device for a litigator who represents a client with a meritorious claim and who needs the identities of the responsible parties to bring the action or information to aid in framing the complaint. therefore, teaches that although CPLR § 3102(c) “may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing,” it may be used to obtain information, such as the identity of an alleged wrongdoer, that is “material and necessary” to the claimed cause of action.

Our July 3, 2018 Blog post, entitled: “ OUT OF STATE ATTORNEYS ADMITTED IN NEW YORK, CANNOT RELY ON NEW YORK VIRTUAL OFFICES IF THEY INTEND TO PRACTICE IN NEW YORK ” (the full text of which is reprinted below), addressed issues related to the need for attorneys admitted to practice law in New York, but who do not reside in New York, to have physical offices in New York.  One of the cases discussed in the Blog was , 154 A.D.3d 523 (1 st Dep’t 2017), in which the First Department dismissed the action, without prejudice, because it was commenced by a non-resident attorney without an office in New York.  In November of 2017, the plaintiff/appellant moved for leave to appeal to the Court of Appeals and in January of 2018 the requested leave was granted.  The matter has been fully briefed and the Court of Appeals has scheduled oral argument for January 9, 2019, at 2:00 P.M. In its brief, Arrowhead argues, among other things, that the “nullity” rule, which is applied in the First Department and provides that an action commenced by an attorney admitted in New York, but who failed to maintain an office as required by section 470 of New York’s Judiciary Law , must be dismissed as a nullity, should not be the law in New York State.  Instead, Arrowhead argues that the New York Court of Appeals should resolve the conflict that exists amongst the Departments by adopting the rule followed by the Second and Third Departments, which permits a party to cure a section 470 violation.   , , 33 A.D.3d 753 (2 nd Dep’t 2006); , 84 A.D.3d 778 (2 nd Dep’t 2011); , 153 A.D.3d 1053 (3d Dep’t 2017). In their brief, the defendants/respondents urge, , that adopting a “cure” rule like Second and Third Departments, would render section 470 meaningless.  Accordingly, the respondents argue that the Court of Appeals should, like the First Department, establish the “nullity” rule as the law in New York for violations of Judiciary Law section 470. however does not address the issue of virtual offices. This Blog will address the Court of Appeals’ decision when rendered by the Court. What follows is our original Blog article from July 3, 2018. Out Of State Attorneys Admitted In New York, Cannot Rely On New York Virtual Offices If They Intend To Practice In New York Virtual offices are all the rage nowadays. However, if you are admitted to practice in New York State, but reside outside of New York State, a virtual office is insufficient to satisfy the requirements of section 470 of New York’s Judiciary Law, which provides: A person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state. Section 470 requires that “non-resident attorneys must maintain an office within New York to practice in .”  ( , 25 N.Y.3d 22 (2015).)  Courts, however, have interpreted section to require a physical office. The ramifications for the failure to comply with section 470, which was initially enacted when Abraham Lincoln was president, can be significant. The history and significance of section 470 is illustrated in  The plaintiff in was a member of the New York bar, practicing and residing in New Jersey.  While taking a New York CLE course, she learned about the requirements of section 470 and commenced an action in federal district court challenging the constitutionality of section 470 as violative of the Privileges and Immunities Clause of the United States Constitution. In support of her position she argued that: (1) she could not practice in New York because she did not maintain an office in New York despite having satisfied all of her admission requirements: and, (2) no substantial state interest was served by requiring an office in New York for non-residents, when such a requirement did not apply to resident attorneys.  The federal district court sided with Schoenefeld. On appeal, however, the Second Circuit determined that “the constitutionality of the statute was dependent upon the interpretation of the law office requirement” observing that “the requirements that must be met by non-resident attorneys in order to practice law in New York reflect an important state interest and implicate significant policy issues”. Accordingly, the Second Circuit certified the following question to the New York Court of Appeals: “Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an ‘office for the transaction of law business’ within the state of New York, what are the minimum requirements necessary to satisfy that mandate.” In answering the certified question, the Court of Appeals interpreted section 470 as requiring an attorney admitted to practice in New York State, but residing out of state, “to maintain a physical law office within the State.”  The Court found that the statute presupposed a residency requirement for the practice of law in New York State,” but made an exception “by allowing nonresidents attorneys practicing in New York to maintain a physical law office here.”  The defendants urged that if the statute was interpreted to require a physical presence for the receipt of service (whether an address or an appointed agent), the “legislative purpose” of the statute could be fulfilled in a manner that would “withstand constitutional scrutiny”. The Court of Appeals recognized that while section 470 is presently silent on the issue of service, when the statute was originally enacted in 1862, it required that “an attorney who maintained an office in New York, but lived in an adjoining state, could practice in this State’s courts and that service, which could ordinarily be made upon a New York Attorney at his residence, could be made upon the nonresident attorney through mail addressed to his office.”  In 1877, the provision was codified and in 1909 it was divided into two parts: (1) a service provision (which remained in the provision codified in 1877); and, (2) a law office requirement (which ultimately became section 470). The Court of Appeals also noted that in , 48 N.Y.2d 266 (1979), it found that then CPLR 9406(2), which required that an applicant to the New York bar provide proof of residency in New York for “six months immediately preceding the submission of his application for admission to practice,” violated the Privileges and Immunities Clause of the U.S. Constitution and thereafter, numerous provisions of the Judiciary Law and the CPLR (but not section 470) were amended to conform to . Thus, it is clear that in New York a non-resident attorney admitted in New York must maintain an office in New York in order to practice in New York.  The failure to comply with section 470 could have significant ramifications for the non-compliant attorney and her client. In , 154 A.D.3d 523 (1 st Dep’t 2017), the Court affirmed the dismissal, without prejudice, of the action because it was commenced by a non-resident attorney without an office in New York and “ laintiff’s subsequent retention of co-counsel with an in-state office did not cure the violation since the commencement of the action in violation of Judiciary Law § 470 was a nullity.”  Upon reviewing the supreme court files in , it appears that the defendant’s counsel hired an investigator to investigate the office situation of plaintiff’s counsel and, thereafter, moved to dismiss the action based counsel’s failure to maintain an office in New York. Two recent cases hold that the requirement that a non-resident attorney maintain an office in New York is not satisfied if that attorney maintains a “virtual office”.  In , 60 Misc.3d 1203A (NOR) (Sup. Ct., New York Co. June 18, 2018), plaintiff moved for summary judgment in lieu of complaint based on a New Jersey default judgment.  The court refused to reach the merits of the motion and, instead, dismissed the action because plaintiff’s counsel did not maintain a physical office in New York. In rejecting counsel’s claim that his “virtual office at the New York City Bar” satisfied the requirements of Judiciary Law § 470, the court stated: By definition, a virtual office is not an actual office.  The court is not persuaded to the contrary by the affidavit the attorney provides from a person affiliated with the…organization .  That affidavit states that the organization will take telephone messages for a member and that it will forward mail to the member. It also states that meeting rooms may be made available to that member.  However, the attorney’s own papers negate any possibility that he uses the City Bar’s facilities as his office and actually demonstrate that he does not use this as an office ,=">," he="he" directs="directs" mail="mail" to="to" his="his" Philadelphia="Philadelphia" address="address" and="and" lists="lists" phone="phone" number="number" on="on" papers="papers">. Similarly, in Law Office of Angela Barker v. Broxton , ____ Misc.3d ____, 2018 Slip Op.2816 (App. Term 1 st Dep’t June 11, 2018), a case relied upon by the court, the court reversed the civil court of the City of New York and dismissed plaintiff’s complaint, and stated: Plaintiff’s counsel’s use of a “virtual office” at a specified New York City address, instead of maintaining a physical office for the practice of law within New York at the time the action was commenced, was a violation of Judiciary Law § 470, and requires dismissal of the underlying action.  The term “office” as contained in section 470 “implies more than just an address or an agent appointed to receive process… the statutory language that modifies “office” – “for the transaction of law business”—may further narrow the scope of permissible constructions”. (Quoting (some citations omitted).) TAKEAWAY Technology has caused a sharp rise in the use of virtual offices by countless and varied professions and businesses.  Attorneys admitted in New York, however, are bound by, , the Judiciary Law and may have to consider the ramifications of section 470 (such as the running of applicable statutes of limitations in light of a dismissal, addressing incurred costs and legal fees after a dismissal and the potential for disciplinary proceedings or other ramifications for violations of the Judiciary Law) before relying on a virtual office to satisfy the “office” requirement contained therein.  Similar rules exist in some states and attorneys who are considering working in states in which they are admitted, but do not reside, might consider the looking into whether “virtual offices” satisfy any in-state office requirements that may exist. Also, bear in mind that this issue can be used as leverage by opposing counsel to pressure the violating attorney into recommending a resolution or a course of action that may not in the best interest of the client.

As new technologies are developed, and the exchange of ideas proliferate, the risk that a company’s trade secrets and ideas will be misappropriated has become a part of doing business. As discussed by this Blog in a prior post (here), businesses can find protection from the misappropriation of trade secrets in the Uniform Trade Secrets Act (adopted in some form by every state other than New York) and/or the common law. In New York, when a plaintiff claims misappropriation of a trade secret, it must prove that: (1) it possessed a trade secret; and (2) the defendant used the trade secret “in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.” Integrated Cash Management Services, Inc. v. Digital Transactions, Inc. , 920 F .2d 171, 173 (2d Cir. 1990) (citation omitted); Smartix Intern. Corp. v. Mastercard Intern. LLC , 2010 N.Y. Slip. Op. 33786 (U) (Sup. Ct. New York County 2010), aff’d , 90 A.D.3d 469 (1st Dept. 2011). To determine whether a plaintiff possesses a trade secret, the courts consider several factors: “(1) the extent to which the information is known outside of business; (2) the extent to which it is known by employees and others involved in business; (3) the extent of measures taken by to guard the secrecy of the information; ( 4) the value of the information to and competitors; ( 5) the amount of effort or money expended by in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.” Ashland Mgmt. Inc. v. Janien , 82 N.Y.2d 395, 407 (1993) (quoting Restatement of Torts § 757, comment b). Moreover, a plaintiff that claims to have a trade secret must describe the alleged trade secret “with sufficient particularity, both at the time of disclosure and throughout the litigation.” Big Vision Private Ltd. v. E.I DuPont De Nemours & Co. , 1 F. Supp. 3d 224, 257 (S.D.N.Y. 2014); Next Communs, Inc.v. Viber Media, Inc. , 2016 U.S. Dist. Lexis 43525, at *9 (S.D.N.Y. 2016). “An essential prerequisite to legal protection against the misappropriation of a trade secret is the element of secrecy.” Atmospherics, Ltd. v. Hansen , 269 A.D.2d 343, 343 (2d Dept. 2000). Information that is “readily ascertainable” is not afforded trade secret protection. Id .; see also Big Vision , 1 F. Supp. 3d at 270 (internal quotation marks and citation omitted) (“It is ... well-established that information that is public knowledge or that is generally known in an industry cannot be a trade secret, including information that is available in publications”). In addition to trade secrets, New York courts recognize a cause of action for the misappropriation of ideas. To prove a claim for misappropriation of ideas, a plaintiff must establish: (1) a legal relationship between the parties in the form of a fiduciary relationship, an express contract, implied contract, or quasi contract; and (2) that it possessed an idea that was novel and concrete. See Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 23 (1st Dept. 2015). “Novelty requires a showing of true innovation, not merely that a particular idea has not been used before.” Brown v. Johnson & Johnson Consumer Prods., Inc. , 1994 WL 361444, at *3 (S.D.N.Y. 1994) (internal citation omitted), aff’d , 60 F.3d 811 (2d Cir. 1995). Thus, to be novel, an idea cannot be “a variation on a basic theme” already in the public domain. Paul v. Haley , 183 A.D.2d 44, 53 (2d Dept. 1992) (internal quotation marks and citations omitted) (“an idea which is a variation on a basic theme will not support a finding of novelty ... the mixture of known ingredients in somewhat different proportions – all the variations on a basic theme – partake more of the nature of elaboration and renovation than of innovation”); see also Ferber v. Sterndent Corp. , 51 N.Y.2d 782, 784 (1980). The plaintiff has the burden to establish “proof of novelty” and courts apply a “stringent test” in determining whether an idea qualifies as novel. See Paul , 183 A.D.2d at 53. A “ ack of novelty in an idea is fatal to any cause of action for its unlawful use.” Id . at 52 (internal quotation marks and citation omitted). On December 5, 2018, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division issued a decision in Hyperlync Technologies, Inc. v. Verizon Sourcing LLC , 2018 N.Y. Slip Op. 33123(U) ( here ), dismissing claims, on summary judgment, for misappropriation of trade secrets and ideas. Hyperlync Technologies, Inc. v. Verizon Sourcing LLC Background In 2013, Hyperlync developed a peer-to-peer phone provisioning app named the Phone Cloner (“Phone Cloner”). In March of that year, Hyperlync presented the Phone Cloner concept to Verizon. Thereafter, Joseph Berger (“Berger”), an employee of Verizon, told Hyperlync that Verizon was interested in the Phone Cloner. In response, Hyperlync gave a PowerPoint presentation and conducted additional meetings with Verizon at which Hyperlync gave functioning versions of the app as well as technical information for testing. Hyperlync alleged that it disclosed the Phone Cloner secret phone-to-phone transfer process to Verizon pursuant to a non-disclosure agreement (“NDA”) the parties signed on October 12, 2012. In August 2013, a Verizon employee, Vishal Grover (“Grover”), gave a demonstration of the Phone Cloner at a Verizon “innovation fair” in Walnut Creek, California (the “Walnut Creek Meeting”). Prior to the Walnut Creek Meeting, Grover was trained by Hyperlync on the operation of the Phone Cloner. At the meeting, Grover displayed a poster containing screen shots of the Phone Cloner’s interface. The Walnut Creek Meeting was attended by Verizon employees and an outside guest, Sanjeev Bhalla (“Bhalla”), the owner of Strumsoft, a Verizon vendor at the time. Following the Walnut Creek Meeting, Bhalla sent an email to two employees of defendant Synchronoss Technologies, Inc. (“Synchronoss”), a competitor of Hyperlync, informing them that a “content transfer” app was demonstrated at the meeting. The email did not reference Hyperlync or the Phone Cloner. Synchronoss ultimately acquired Strumsoft and Bhalla became the former’s employee. Bhalla testified that he neither received materials/information from Verizon regarding Phone Cloner or any peer-to-peer provisioning technology nor worked on any phone provisioning app while at Synchronoss. Hyperlync claimed that, in September 2013, Grover told a Hyperlync employee, Stephen Morrow (“Morrow”), that Verizon gave Hyperlync’s confidential Phone Cloner information to Synchronoss and instructed it to copy the product. According to the Court, Hyperlync’s witnesses were unable to identify the specific information that was allegedly passed to Synchronoss. Hyperlync also claimed that Grover allegedly informed Hyperlync that Verizon planned to give any peer-to-peer provisioning contract to Synchronoss instead of Hyperlync. In October 2013, Verizon declined Hyperlync’s terms for continued development of the Phone Cloner. Hyperlync contended that after Verizon disclosed Hyperlync’s trade secret information to Synchronoss in breach of the NDA, Synchronoss then released its own phone provisioning app, named MCT, based on the misappropriated Hyperlync information. Hyperlync maintained that the MCT app had the same functionality, look and feel as the Phone Cloner. Verizon moved to dismiss Hyperlync’s claims and in a decision dated February 17, 2016 (the “February 2016 Decision”), the Court granted the motion as to the claims for intentional interference with a contract, civil conspiracy, conversion and fraudulent concealment. In the February 2016 Decision, the Court also denied Verizon’s motion to dismiss as to Hyperlync’s claims for misappropriation of trade secrets, breach of contract, and misappropriation of ideas. Verizon moved, pursuant to CPLR 3212, for summary judgment on the remaining three claims alleged against it.  The Court granted the motion. The Court’s Decision The Court held that Hyperlync failed to identify a trade secret that had been misappropriated. The Court noted that notwithstanding the “voluminous papers and exhibits,” Hyperlync “failed to describe its trade secret with the requisite particularity.” Instead, Hyperlync merely described a “general interface, speed, and platform<-> to<-> platform transfer without use of the cloud.” Without a specific description indicating “why or how these facets of its model are unique, proprietary, and secret,” the Court concluded that Hyperlync’s “explanation of its trade secret nebulous at best….” The Court also held that Hyperlync failed to demonstrate a misappropriation as a consequence of Verizon’s alleged violation of the NDA. The Court found that Hyperlync failed to submit “any documents or testimony to raise an issue of fact” demonstrating that “the ‘how to’ of the Phone Cloner app was passed to Verizon.” This finding was underscored by Hyperlync’s admission that Morrow could not clearly state “what information he gave to Verizon about the Phone Cloner,” and Morrow’s testimony “that Hyperlync did not disseminate any source code associated with Phone Cloner.” Finally, the Court held that Hyperlync failed to demonstrate that “the Phone Cloner’s bundle of functionality was unlike other products on the market.” “In fact,” the Court noted, deposition testimony “confirmed that the idea for data transfer between two phones via Wi-Fi was already in the public domain at the time of the Phone Cloner app,” and documentary “evidence” presented by Verizon showed that there were a number of “applications for Wi-Fi data transfer” that “pre-dated Phone Cloner.…” In holding that Hyperlync failed to demonstrate the misappropriation of ideas, Justice Scarpulla declined to follow Nadel v. Play-By-Play Toys & Novelties, Inc. , 208 F.3d 368 (2d Cir. 2000), in which the Second Circuit held that the standard for determining novelty should be judged by the buyer, because no New York State court had adopted that standard. According to the Court, only one state court ( Lapine v. Seinfeld , 918 N.Y.S.2d 313, 321 (Sup. Ct. N.Y. County 2011)) addressed Nadel and concluded that it incorrectly interpreted Apfel v. Prudential-Bache Secs. Inc. , 81 N.Y.2d 470 (1993), decided by the New York Court of Appeals.  Thus, “ n the absence of any state court decisions supporting the “novelty to the buyer” standard, decline to follow Nadel .” Takeaway Trade secrets and ideas, because they’re intangible, are prone to misappropriation. New York courts will protect them if the plaintiff can satisfy its burden of demonstrating secrecy and novelty. As Hyperlync demonstrates, meeting this burden is not easy.

Forum selection clauses are common in commercial contracts because they “provide certainty and predictability in the resolution of disputes.” , 6 N.Y.3d 242, 247 (2006), quoting , 87 N.Y.2d 530, 534 (1996). They come in two forms: mandatory and permissive. In the former, the parties are “required to bring any dispute to the designated forum,” while the latter “only confers jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if jurisdiction there is otherwise appropriate.” , 494 F.3d 378, 383, 386 (2d Cir. 2007). Under New York law, “parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract.” , 87 N.Y.2d at 534. Such clauses “are prima facie valid” and “are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” , 35 A.D.3d 222 (1st Dept. 2006) (citations and quotations omitted). In , 134 S.Ct. 568, 583 (2013), the United States Supreme Court provided the contractual basis for the enforcement of forum selection clauses: When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations. A forum-selection clause, after all, may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain. here .=">."> On December 14, Justice Elizabeth H. Emerson of the Supreme Court, Suffolk County, Commercial Division, issued a decision concerning the enforceability of a forum selection clause. In , 2018 N.Y. Slip Op. 51845(U) ( here ), the Court held that a forum selection clause was enforceable despite claims that it was unconscionable ( , it was unreasonable and unjust to enforce it) and deprived the moving party of its day in court. Somerset Fine Home Building, Inc. v. Simplex Industries, Inc. Somerset involved an agreement to purchase a modular home between Somerset Fine Home Building, Inc. (“Somerset”), a home builder with offices in Suffolk County, New York, and Simplex Industries, Inc. (“Simplex”), a manufacturer of modular homes located in Scranton, Pennsylvania. Pursuant to the sales agreement, Somerset agreed to purchase a modular home for $886,080.00. The home was delivered to a site in Bridgehampton, New York, where it was to be erected by the plaintiff for the homeowners, William and Kaitlyn Gambrill. The sales agreement provided, in pertinent part, that any disputes arising thereunder would be determined by the law of the Commonwealth of Pennsylvania and that the exclusive forum for any action to enforce the agreement would be the Court of Common Pleas of Lackawanna County, Pennsylvania. Somerset commenced the action for breach of contract, breach of warranty, and fraud alleging, , that Simplex failed to deliver conforming, merchantable goods pursuant to the parties’ agreement. Simplex moved to dismiss the complaint pursuant to CPLR 3211(a)(2) arguing, among other things, that the court lacked subject matter jurisdiction over the action because the parties agreed to litigate their dispute in Pennsylvania. The Court granted the motion. As an initial matter, the Court rejected the contention that it lacked subject matter jurisdiction over the action because of the forum selection clause. Slip op. at *2 (“It is axiomatic that a court cannot be divested of its subject matter jurisdiction by a contract. Thus, the forum-selection clause does not affect the jurisdiction of the court.”). In , 56 A.D.3d 116 (2d Dept. 2008), relied upon by Justice Emerson, the Appellate Division, Second Department, explained the rationale behind the rule: e nevertheless conclude that the Supreme Court was incorrect in holding that enforcement of clause deprived it of subject matter jurisdiction. A court lacks subject matter jurisdiction when it lacks the competence to adjudicate a particular kind of controversy in the first place.… Rather, the defendant’s argument here is that the jurisdiction of the court has been divested by a term of the contract between the parties. That argument has been rejected, for good reason, as “hardly more than a vestigial legal fiction.” … It is axiomatic that a court cannot be divested of its subject matter jurisdiction by a contract. Thus, while the forum selection clause at issue here may be enforceable as a term of the contract between the parties, it does not affect the jurisdiction of the Supreme Court. . at 122-23 (citations omitted). Notably, the Second Department declined to follow two cases ( , 31 A.D.3d 394 (2006), and , 15 A.D.3d 535 (2005)), in which the court affirmed dismissal of the actions for lack of subject matter jurisdiction due to the enforceability of a forum selection clause. . at 122 (“These two cases should no longer be followed in that regard.”). Although the Court rejected dismissal on subject matter jurisdiction grounds under CPLR 3211(a)(2), it nonetheless held that dismissal may be appropriate under CPLR 3211(a)(1). . at 123. In light this holding, Justice Emerson “consider the defendant’s motion as having been made under CPLR 3211(a)(1).” Slip op. at *2. Addressing the merits of the motion, Justice Emerson held that the clause was not unconscionable. The Court rejected the argument that the unequal bargaining power of the parties sufficed to invalidate the clause, especially since each side was represented by counsel and the clause was not the product of high-pressure tactics: The forum-selection clause in this case is not hidden or tucked away within a complex document of inordinate length. It appears in the same size print as the rest of the agreement …, each page of which has been initialed by the plaintiff’s principal. The plaintiff does not contend that the defendant used high-pressure tactics to get it to sign the agreement. Rather, the plaintiff contends that it was in a weaker bargaining position than the defendant and that it had no choice. The fact that the parties do not possess equal bargaining power does not invalidate a contract as one of adhesion. Moreover, the parties acknowledged in the agreement that they had the opportunity to obtain the assistance of counsel in the negotiation, drafting, and execution of the agreement. Slip op. at *3 (citations omitted). The Court also rejected the contention that a distant venue and financial distress sufficed to invalidate the forum selection clause: The plaintiff contends that it is a small company that cannot travel to Lackawanna County, Pennsylvania, to redress wrongs suffered in Suffolk County, New York. Simply claiming financial distress does not warrant setting aside a valid forum-selection clause. The plaintiff has offered no evidence that the cost of commencing an action in Pennsylvania would be so financially prohibitive that, for all practical purposes, it would be deprived of its day in court. Moreover, the fact that Pennsylvania is not the plaintiff’s home venue is not determinative. The plaintiff does not contend that Pennsylvania would treat it unfairly and deny it a chance to gain a remedy. . at *3 (citations omitted). Finally, the Court noted that since the transaction involved two commercial entities, unconscionability had “little applicability” to the enforceability of the clause. The reason, explained the Court, is because the concept of unconscionability is meant “to protect the commercially illiterate consumer beguiled into a grossly unfair bargain by a deceptive vendor or finance company,” not commercial entities involved in “an arm’s-length business agreement.” . (citations omitted).   Takeaway reinforces the principles above; namely, a forum selection clause is prima facie valid and enforceable unless shown by the resisting party to be unreasonable or unjust ( , unconscionable). Somerset could not overcome its burden of demonstrating that the forum selection clause should be set aside. , 236 A.D.2d 859, 860 (4th Dept. 1997). This was especially so given the fact that the transaction at issue was negotiated and drafted by counsel at arm’s length on behalf of two commercial entities. Under those circumstances, “unconscionability ha little applicability” to the enforceability of the forum selection clause.

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s). Dissolution Under the BCL Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” , 233 A.D.2d 149, 150 (1st Dept. 1996), , 89 N.Y.2d 1029 (1997); , 29 A.D.3d 444, 444-45 (1st Dept. 2006); , 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104: (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. BCL § l 104(a). Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution. BCL § 1111(a). Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation ( , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” , 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” , 134 A.D.3d 450 (1st Dept. (2015) (quoting , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). “In determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists. , 225 A.D.2d 775 (2d Dept. 1996). “ he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” , 200 A.D.2d 670, 670-71 (2d Dept. 1994). As noted, the threshold requirement for seeking dissolution under BCL § 1104 is ownership of at least 50% of the shares entitled to vote for directors. BCL § 1104(a) (the party seeking dissolution must hold “shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors ….”). This requirement is strictly construed by the courts. Thus, where a party owns less than 50% of the voting shares, dissolution will be denied. , 297 A.D.2d 229, 230 (1st Dept. 2002) (“The IAS court properly found, however, that one share of the stock claimed by petitioner had been sold, leaving petitioner short of the 50% stock ownership required, depriving her of standing to bring this action and requiring dismissal.”). The ownership requirement (50% of the shares) has two exceptions, which are set forth in BCL §§ 1104(b) and (c). Under BCL § 1104(b), if the corporation’s certificate of incorporation requires a super-majority for board action or an election of directors, the petition may be brought by the holders of shares representing “more than one-third” of the voting shares. Notably, a super-majority requirement in a shareholders’ agreement, where such provisions are commonly found, does not fall within the exception. Under BCL § 1104(c), any holder of voting shares, regardless of percentage, can petition for dissolution “on the ground that the shareholders are so divided that they have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired or would have expired upon the election … of their successors.” Under BCL § 1104-a, the court has the power to order the dissolution of a corporation where “ he directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders” (BCL § 1104-a, subd. (a), par (1)) or where “the property or assets of the corporation are being looted, wasted or diverted for non-corporate purposes by its directors, officers or those in control.” BCL § 1104-a, subd. (a), par (2). Dissolution under this section is discretionary. , 125 Misc. 2d 45, 49 (Sup. Ct., Queens County May 30, 1984) (citing , 107 Misc. 2d 25, 28 (Sup. Ct., N.Y. County Oct. 24, 1980)). It is a “drastic” remedy, and before ordering dissolution the court must consider whether it is the only means by which the complaining shareholders can reasonably expect to receive a fair return on their investment or whether it is reasonably necessary to protect their rights and interests. . (citing BCL § 1104-a, subd. (b); , 92 A.D.2d 455 (1st Dept. 1983)). The corporation or any of its shareholders may avoid the proceeding by electing to purchase the petitioner’s shares at their fair value. . (citing BCL § 1118). , 2018 N.Y. Slip Op. 08476 (2d Dept. Dec. 12, 2018) ( here ). Recently, the Appellate Division, Second Department, affirmed the dissolution of a closely held corporation under BCL § 1104(a) because the dissension between the shareholders “posed an irreconcilable barrier to the continued functioning and prosperity of the corporation.” , 98 A.D.2d at 421. involved a petition by Arieh Yemini (“Yemini”) to dissolve ANO Inc. (“ANO”), a closely held corporation jointly owned by Yemini and Goldberg Commodities, Inc. (“Goldberg Commodities”). Each owner holds a 50% share in the corporation. Oded Goldberg (“Goldberg”) owns 100% Goldberg Commodities. ANO’s primary asset is its two-thirds ownership interest in Candlewood Holdings, Inc. (“Candlewood”). Rosalie Moore holds the remaining one third interest in Candlewood. Yemini, as a 50% shareholder of ANO, filed suit to dissolve ANO pursuant to BCL § 1104. Yemini claimed, among other things, that he and Goldberg were deadlocked over the affairs of the corporation such that their dissention constituted an irreconcilable barrier to the continued functioning and prosperity of the corporation. , 225 A.D.2d at 775. The motion court, , granted the petition for dissolution. On appeal, the Second Department affirmed the motion court’s order. The Second Department “agree with the Supreme Court’s determination” that Yemini and Goldberg were so deadlocked that dissolution was in their best interests as shareholders of the corporation. “The evidence,” concluded the Court, “demonstrated that the dissension between” Yemini and Goldberg was so severe that it “‘posed an irreconcilable barrier to the continued functioning and prosperity of the corporation.’” Quoting , 225 A.D.2d at 775. Accordingly, dissolution under BCL § 1104 was appropriate. Takeaway Irreconcilable dissention or deadlock is among the most common forms of conflict in a closely held corporation. An impasse in the decision-making process of a corporation ( , deadlock) can occur on the director and shareholder level. If the impasse cannot be consensually resolved, the corporation’s business may incur commercial and economic loss. Close corporations are particularly vulnerable to deadlock. Close corporations are typically composed of family or friends who are actively engaged in the management of the corporation. They usually have a large portion of their personal wealth invested in the business and contribute most, if not all, of their time and energy in trying to make the corporation a successful enterprise.  If dissension develops among the owners of a close corporation, participants who wish to leave or dissolve the entity may be unable to do so. Because of the potential for deadlock in close corporations, state legislatures and the courts have developed mechanisms for shareholders to obtain relief under circumstances in which continuing the corporation provides no benefit to them. In New York, the mechanisms are BCL §§ 1104 and 1104-a. Under the BCL § 1104, dissolution is generally appropriate where deadlock impedes the daily functioning of the corporation such that the corporation’s prosperity is no longer viable. In , the Court found that the dissention between shareholders irreconcilably prevented the corporation from functioning effectively and profitably.

Commercial contracts often include a liquidated damages clause that provides for the payment of a predetermined amount of damages in the event of a breach by one of the parties. Such clauses are often found in contracts for the sale of real property, commercial leases, and construction contracts. Given the consequences of liquidated damages clauses, it is important to understand when and how such a clause will be enforced. What are Liquidated Damages? A liquidated damages clause specifies a predetermined amount of damages owed by a party in breach of a contract. The amount is determined by the parties at the time they execute the agreement and is intended to be their best estimate of the damages that would be incurred in the event of a breach of the agreement. Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977) (Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.”). Are Liquidated Damages Clauses Enforceable? If the predetermined amount of damages “is manifestly disproportionate to the actual” harm suffered, courts will not enforce the provision on the grounds that it is a penalty instead of an estimate of actual damages. J.R. Stevenson Corp. v. Westchester Cty. , 113 A.D.2d 918, 920 (2d Dept. 1985) (“If the amount stipulated in the liquidated damage clause is manifestly disproportionate to the actual damage, then its purpose is not to ‘provide fair compensation but to secure performance by the compulsion of the very disproportion,’” and the clause is unenforceable) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). Whether a contractual provision is “an enforceable liquidation of damages or an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances.” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Ass’n, Inc. , 24 N.Y.3d 528, 536 (2014). The burden is on the party seeking to avoid liquidated damages to show that the stated liquidated damages are, in fact, a penalty. P.J. Carlin Constr. Co. v. City of New York , 59 A.D.2d 847 (1st Dept. 1977); Wechsler v. Hunt Health Sys. , 330 F. Supp. 2d 383, 413 (S.D.N.Y. 2004). A liquidated damages clause is unenforceable in two circumstances: (1) if the damages flowing from a breach of the contract were easily ascertainable at the time of execution; or (2) if the damages fixed were “conspicuously disproportionate” to the probable losses. Truck Rent-A-Center , 41 N.Y.2d at 425 (explaining that the “actual loss incapable or difficult of precise estimation” and the amount liquidated must bear “a reasonable proportion to the probable loss.”); JMD Holding Corp. v. Cong. Fin. Corp. , 4 N.Y.3d 373, 380 (2005). New York courts often strike liquidated damage clauses when they fail to meet the foregoing. See , e.g. , Sina Drug Corp. v. Mohyuddin , 122 A.D.3d 444, 445 (1st Dept. 2014) (holding that liquidated damages clause providing that defendants would pay $1 million if they refused to indemnify plaintiffs was an unenforceable penalty); Motichka v. Cody , 5 A.D.3d 185, 187 (1st Dept. 2004) (holding that a provision requiring payment of $1,000 per day if defendant failed to pay within 60 days was an unenforceable penalty, since damages were easily ascertainable by calculating interest accrued from time of breach); LeRoy v. Sayers , 217 A.D.2d 63, 69-70 (1st Dept. 1995) (invalidating lease term in which tenant forfeited $63,500 in deposits regardless of whether tenant terminated agreement with several months’ notice). “Where the court has sustained a liquidated damages clause the measure of damages for a breach will be the sum in the clause, no more, no less. If the clause is rejected as being a penalty, the recovery is limited to actual damages proven.” Brecher v. Laikin , 430 F. Supp. 103, 106 (S.D.N.Y. 1977) (citations omitted). Perseus Telecom, LTD. v. Indy Research Labs, LLC On November 30, 2018, Justice Bransten of the Supreme Court, New York County, Commercial Division, addressed the enforceability of a liquidated damages clause in a service agreement, holding that the clause was an unenforceable penalty. Perseus Telecom, LTD. v. Indy Research Labs, LLC , 2018 N.Y. Slip Op. 33083(U) ( here ). Background Perseus involved an agreement between Plaintiff, Perseus Telecom, Ltd (“Perseus”), a provider of colocation services, and Defendant, Indy Research Labs, LLC (“Indy”), a quantitative trading firm reliant on colocation venders to provide and manage its network and computer infrastructure. In August 2015, Indy and Perseus began negotiating a “Service Order Form” agreement, which itemized the colocation services that Perseus was to provide, and the related onetime expenses and monthly reoccurring fees. Pursuant to the terms of the Service Order Form, Perseus agreed to provide 36 months of colocation services, and Indy agreed to pay for monthly reoccurring fees for the service. Indy also agreed to pay for non-reoccurring expenses. At or about the same time, Indy and Perseus also began negotiating the terms of a “Master Service Agreement.” On August 12, 2015, Perseus sent Indy a draft Service Order Form, which referenced and incorporated the terms of the proposed Master Services Agreement. The “Approval” section of the Service Order Form stated that Indy agreed to the terms of the Master Services Agreement. However, if there was a conflict between the Service Order Form and the Master Services Agreement, the terms of the Service Order Form controlled. Indy informed Perseus that, while it could agree to the Service Order Form, it could not agree to the terms of the Master Services Agreement, as drafted, because it believed the terms of the Master Services Agreement were too favorable to Perseus. Since Indy and Perseus wanted to start work on the project, but could not come to an immediate agreement regarding the terms of the Master Services Agreement, Indy and Perseus agreed to add language to the Service Order Form that, in substance, made the Service Order Form  a “binding commitment” on Indy “to (a) pay Perseus the non-recurring charge for (i) the Servers (and any related infrastructure) to be procured by Perseus on Customer’s behalf and (ii) any Professional Services delivered by Perseus in anticipation of delivery of the Services, in each case as provided in the Service Order Form, and (b) to negotiate in good faith to expeditiously negotiate the final terms and conditions of the , related Service Schedules and Statement of Work referred to above (the “Services Documents”).” On August 31, 2015, Mitch Sonies (“Sonies”), Indy’s managing member, signed the Service Order Form on behalf of Indy, and returned the Service Order Form to Perseus. According to Sonies, during September and October 2015, it became clear that Perseus could not meet the deadline it had initially promised. Consequently, on October 30, 2015, Sonies advised Anthony Gerace, Perseus’s president of global sales, that Indy had decided not to go forward with the colocation services under discussion. On November 6, 2015, Indy confirmed its earlier advice that it was not going forward with the Service Order Form. Approximately two weeks later, on November 23, 2015, Sonies re-confirmed Indy’s decision that it was not moving forward with Perseus. Nevertheless, Sonies indicated that Indy was willing to pay Perseus for the work it performed up to that date, and for eight servers that were called for in the implementation plan, if already purchased by Perseus. On November 24, 2015, Perseus sent Indy an invoice, in the amount of $193,036.24, for work performed through November 30, 2015, and for hardware procured. Indy did not pay the invoice. On January 29, 2016, Perseus sent Indy a Notice of Breach, claiming that, pursuant to the terms of the Master Services Agreement, non-payment was considered a voluntary termination of the contract, and that as such Indy was liable for 100% of the amount due under the agreement, to wit, $1,250,650. On June 22, 2016, Perseus sued Indy seeking payment of $1,250,650. In its complaint, Perseus alleged that on August 31, 2015, Indy and Perseus entered into the Service Order Form and Master Services Agreement, which constituted a single agreement, and that Indy agreed to the terms set forth in those documents. Perseus’s first cause of action alleged that Indy breached the terms of the Service Order Form and the Master Services Agreement when it refused to pay Perseus’s invoices for the services performed. Perseus claimed that under the Master Service Agreement it was entitled to liquidated damage of $1,250,650, representing 100% of the contract fees that would have been paid over the 36-month contract term. In its second cause of action for breach of contract, Perseus alleged that Indy breached the terms of the Master Services Agreement when it failed to provide the written notice of termination required under the agreement. Therefore, under the Master Service Agreement, Perseus was entitled to $1,250,650. In its third cause of action, Perseus alleged that it remitted invoices to Indy, which Indy did not pay; therefore, Indy’s action deprived Perseus of the right to receive benefits under the Service Order Form and the Master Services Agreement. Perseus alleged that Indy breached the covenant of good faith and fair dealing, which resulted in Perseus being damaged in the amount of $167,358.22, the amount of the equipment purchased by Perseus and the third-party services it paid for in performing its obligations under the Service Order Form and Master Services Agreement. The Court’s Decision The Court found that Perseus “properly alleged two claims for breach of contract.” However, the Court declined to find a breach of the Master Service Agreement. While Perseus has properly alleged two claims for breach of contract, the documentary evidence submitted by Indy contradicts Perseus’s claims that the Service Order Form, incorporating the Master Services Agreement, became a binding agreement to purchase 36 months of colocation services. In fact, the documentary evidence conclusively establishes that the Defendant never agreed to the Master Services Agreement and that it was never incorporated into the Service Order Form. The Court explained that Perseus and Indy agreed that the provisions of the Service Order Form constituted the “only” binding commitment between the parties. The documentary evidence, reasoned the Court, conclusively established that the conditions set forth in the Service Order Form were not satisfied as Indy declined to continue to use the colocation services prior to their delivery. Thus, said the Court, absent fulfillment of this condition precedent, Indy’s obligation to purchase Perseus’s colocation services, pursuant to Perseus’s standards terms and conditions, was not triggered. The Court also held that Perseus was not entitled to liquidated damages for Indy’s alleged breach. In this regard, the Court found that “ nder the express terms of the Service Order Form, Indy is only responsible for paying the non-recurring charges for the servers (and any related infrastructure) procured by Perseus on Indy’s behalf, and for any professional services delivered by Perseus in anticipation of delivery of the Services, the amount of which is to be determined in this litigation.” Since the Service Order Form appended a fee schedule for the cost of the colocation services to be provided by Perseus, the non-recurring charges were “readily ascertainable.” For this reason, the Court concluded that the liquidated damages clause was unenforceable as a penalty. Here, the liquidated damages clause of the Master Services Agreement is unenforceable because it is a penalty. Since the cost of the colocation services to be provided by Perseus is readily ascertainable from the fee schedule attached to the Service Order Form, Perseus cannot claim that its damages were impossible to determine at the time it and Indy executed the Service Order Form. Further, the liquidated damages amount is $1,250,650, when Perseus’s actual damages are approximately $170,000. Notably, the liquidated damages amount is more than seven times that of Perseus's actual damages. Takeaway Liquidated damages clauses can be found in a wide array of commercial contracts. While such provisions are generally enforceable under New York law, New York courts will nullify them when the amount liquidated bears no relation to the non-breaching party’s actual damages ( i.e. , the damages constitute a penalty) or where the damages are readily ascertainable. Thus, parties negotiating a contract should consider whether a liquidated damages clause is reasonable and appropriate under the circumstances. As Perseus teaches, New York courts will not hesitate to strike down such provisions where the clause penalizes the party alleged to have breached the agreement.

“The object and purpose of mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest.”  John P. Kane Co. v. Kinney , 12 Bedell 69 (1903).  Thus, New York’s Lien Law § 3 , provides that: A contractor, subcontractor who performs labor or furnishes materials for the improvement of real property with the consent or at the request of the owner … or of his agent … shall have a lien for the principal and interest, of the value, or the agreed price, of such labor … from the time of filing a notice of such lien…. Because a lessee is deemed to be an “owner” under the Lien Law, a lessee’s leasehold interest in rented property (as opposed to an owner/landlord’s fee interest in the same property) can be the subject of a mechanic’s Lien.  See New York’s Lien Law § 2(3) .  If, however, the landlord consents to a tenant’s improvement, a mechanic’s lien is properly placed on the fee interest.  See New York’s Lien Law § 3 .  The question of what constitutes an owner’s consent such that the fee interest in the property is subject to a mechanic’s lien for labor or materials requested by the tenant, is often litigated and has not been answered consistently by the Appellate Courts in New York. Thankfully, on November 20, 2018, the Court of Appeals decided Ferrara v. Peaches Café LLC and clarified the law in New York on this issue.  The landlord in Ferrara leased space in which tenant was to build and operate a restaurant.  Pursuant to the lease, several requirements were imposed on tenant with respect to the construction related electrical work. Among other things, the lease provided that tenant “shall”: retain a competent electrical contractor; use only landlord approved contractors; obtain consent before making any improvements; provide landlord with detailed plans and specifications (including electrical plans); revise design drawings “according to any proposed changes by , which it retained the right to do”; and, not open for business unless the improvements are completed in accordance with the lease terms and “a certificate of completion certifying that the premises were constructed and completed in accordance with the final Design Drawings approved by Landlord” is submitted to the landlord.  (Some internal quotation marks and brackets omitted.)  The lease also provided, inter alia , that the improvements would become “part of the realty” at the end of the lease.  The lease also contained “detailed requirements for the electrical work that is the subject of the challenged lien.” The tenant contracted with the lienor, an electrical contractor, to perform the work, which was satisfactorily completed.  The restaurant was a quick failure and the tenant was evicted within a few months of opening.  The lienor, was owed in excess of $50,000, filed a lien against the leasehold and fee interests and, thereafter, commenced an action to foreclose the lien.  Supreme court granted lienor summary judgment and dismissed the action.  The Court of Appeals affirmed the Appellate Division, Fourth Department’s unanimous reversal of supreme court’s decision. Recognizing that the Lien Law should be liberally construed to provide protections to those who provide labor and services for the improvement of real property, the Court of Appeals flatly rejected landlord’s argument that “a contractor working for a tenant may not place a lien on a landlord’s property unless landlord has ‘expressly’ or ‘directly’ consented to the work.” The Court determined that “ o enforce a lien under Lien Law § 3, a contractor performing work for a tenant need not have any direct relationship with the property owner.”  Instead, citing to its decision in Rice v. Culver , 172 N.Y. 60 (1902), the Court reiterated that such owner liability could be imposed if the landlord is “an affirmative factor in procuring the improvement to be made, or having possession and control of the premises assent to the improvement in the expectation that he will reap the benefit of it.”  The Court in Rice also held that the Lien Law requires more than “passive acquiescence” on the part of the owner – who must consent or require that the improvement be made – before a lien may be properly placed on the owner’s interest in the property.   See Ferrara (quoting Rice , 172 N.Y. at 65). The Ferrara Court pointed out that, in Rice, the Court of Appeals ultimately held that the owner’s interest in the property could not be subject to a lien, because knowledge of the improvements alone was insufficient to show consent. In reviewing all of its older related cases, the Ferrara Court explained that in Jones v. Menke , 168 N.Y.61 (1901), the Court confirmed the general rule that lease provisions can establish “consent.”  In Jones , the operative provision in the lease required the tenant to convert the space to a first-class saloon within a few months and that if the conversion was not timely completed, the lease would terminate and title to the improvements would vest in the landlord. In Ferrara , the electrical work was expressly authorized by the lease and was required to open the restaurant (the purpose of the lease).  Moreover, the lease language made plain that landlord was supervising the work and was permitted to exercise some control over the work “by reviewing, commenting on, revising, and granting ultimate approval for the design drawings related to the electrical work.”  Therefore, under existing precedents, the Ferrara facts were sufficient to demonstrate necessary “consent.” The landlord in Ferrara relied on the Courts prior decision in Delany & Co. v. Duvoli , 278 N.Y. 328 (1938), and certain Appellate Division decisions erroneously interpreting Delany “as rejecting a finding of consent under Lien Law § 3 when no direct relationship between a tenant’s contractor and the property owner is present.”  The Ferrara Court rejected landlord’s argument and stated: Contrary to argument, Delany does not stand for the proposition that consent under Lien Law § 3 requires a direct relationship between the property owner and the lienor. Instead, Delany stands for the proposition that some “affirmative act” by the landowner is required to find consent for the purposes of Lien Law § 3. Our decisions make clear that that “affirmative act” can include lease terms requiring specific improvements to the property. When a lease does not require improvements, the owner’s overall course of conduct and the nature of the relationship between the owner and the lienor may demonstrate consent for purposes of Lien Law § 3…. To the extent that certain Appellate Division decisions … suggest that Lien Law § 3 requires a direct relationship between the landlord and the contractor to establish consent, they are contrary to our precedents and should not be followed.  (Citations omitted.) TAKEAWAY The Court of Appeals has clarified the law in New York regarding an owner’s liability for tenant improvements.  The Ferrara decision highlights the tension that landlords face when weighing the benefits of certain protective lease language against the potential for liability like that which was realized by the owner in Ferrara .

In the “classic indemnification case,” the one seeking indemnification “had committed no wrong, but by virtue of some relationship with the tort-feasor or obligation imposed by law, was nevertheless held liable to the injured party.” D’Ambrosio v. City of New York , 55 N.Y.2d 454, 461 (1982); Trustees of Columbia Univ. in City of N.Y. v. Mitchell/Giurgola Assoc. , 109 A.D.2d 449, 451 (1st Dept. 1985). Thus, “where one is held liable solely on account of the negligence of another, indemnification, not contribution, principles apply to shift the entire liability to the one who was negligent.” D’Ambrosio , 55 N.Y.2d at 462. Indemnification “may be based upon an express contract,” though it is “more commonly” implied “based upon the law’s notion of what is fair and proper as between the parties.” Mas v. Two Bridges Assocs. , 75 N.Y.2d 680, 690 (1990) (internal citations omitted). “ he key element of a common-law cause of action for indemnification is not a duty running from the indemnitor to the injured party, but rather is a separate duty owed the indenmitee by the indemnitor. The duty that forms the basis for the liability arises from the principle that everyone is responsible for the consequences of his own negligence, and if another person has been compelled to pay the damages which ought to have been paid by the wrongdoer, they may be recovered from him.” Raquet v. Braun , 90 N.Y.2d 177, 183 (1997) (internal quotation marks, citations, and ellipsis omitted.) here.=">here."> On November 30, 2018, Justice Sherwood of the Supreme Court, New York County, Commercial Division, dismissed a cross-claim for common-law indemnification on the grounds that the defendant was seeking a recovery for its own wrongdoing. Board of Mgrs. of the 650 Sixth Ave. Condominium v. K-W 650 Assoc. LLC , 2018 N.Y. Slip Op. 33050(U) ( here ). Board of Managers of the 650 Sixth Ave. Condominium v. K-W 650 Associates LLC Board of Managers arose from the allegedly defective design and installation of ceilings in units of a residential condominium located at 650 Sixth Avenue, New York, New York (the “Building”). Plaintiff, the Board of Managers of The 650 Sixth Avenue Condominium (the “Board”), alleged that the ceilings in the majority of the units in the Building were “insufficiently anchored to the structural ceiling slab,” which plaintiff became aware of on December 24, 2015, when a portion of the sheetrock in one unit collapsed without warning. On January 20, 2005, defendants, Goldstein Associates Consulting Engineers, PLLC and GACE Consulting Engineers, D.P.C. (collectively, “GACE”), entered into an Engineering Services Agreement with non-party 650 Partners LLC to perform engineering services in relation to the Building’s renovation (the “ESA”). In relevant part, the ESA required GACE “to indemnify and hold harmless <650 partners llc> from and against any and all liability . . . arising or in connection with the performance of the services furnished by Engineer or its consultants under this Agreement.” The ESA also included a merger clause, an amendment clause that provided for amendments “only by a written instrument expressly stated to be an amendment and signed by both <650 partners llc> and Engineer” and an assignment clause that permitted 650 Partners LLC to assign its rights under the agreement “to any other company, entity or person upon thirty (30) days written notice to Engineer.” Between January 2005 and July 2007, GACE issued several proposals for engineering services at the Building. The first of these proposals was integrated into the ESA, with the ESA’s terms governing where there was any conflict. Each of the proposals incorporated GACE’s Terms and Conditions, which included an indemnification provision. Plaintiff brought suit against both GACE and the sponsor defendants (“Sponsor”). Thereafter, plaintiff discontinued its claims against GACE. Sponsor asserted two cross-claims against GACE for contribution and contractual and/or common law indemnification. Sponsor subsequently abandoned the contribution claim, leaving only its claim for indemnification. GACE moved to dismiss the Sponsor’s cross-claims. The Court granted the motion as to the common-law indemnification claim. The Court’s Decision In dismissing the cross-claim for common-law indemnification, the Court agreed with the arguments advanced by GACE. In that regard, GACE argued that the claim should be dismissed since the direct claims did not seek to hold Sponsor vicariously liable for GACE’s wrongdoing, but rather alleged Sponsor was the actual wrongdoer. Thus, “ ince the predicate of common-law indemnity is vicarious liability without actual fault on the part of the proposed indemnitee, it follows that a party who has itself actually participated in the wrongdoing cannot receive the benefit of this doctrine.” Trump Vil. Section 3, Inc. v. New York State Hous. Fin. Agency , 307 A.D.2d 891, 895 (1st Dept. 2003). The Court also agreed with GACE that the common-law indemnification claim should be determined by the allegations in the complaint, not by later findings of fault. Chatham Towers, Inc. v. Castle Restoration & Const., Inc. , 151 A.D.3d 419, 420 (1st Dept. 2017) (affirming dismissal of a common-law indemnification claim where the plaintiff sought recovery from the defendant because of the latter’s alleged wrongdoing — breach of contract — and not vicariously because of any negligence on the part of the counter-claim defendant).  As GACE noted, under the ESA, it could not be held liable because it was “not … required to make exhaustive or continuous onsite inspections to check the quality or quantity of the work” and that it was “not responsible for the contractor’s failure to perform the work in accordance with the requirements set forth in the Construction Documents.” Takeaway The principle of common law, or implied, indemnification permits one who has been compelled to pay for the wrong of another to recover from the wrongdoer the damages it paid to the injured party. The party seeking indemnification must have delegated exclusive responsibility for the duties giving rise to the loss to the party from whom indemnification is sought and must not have committed actual wrongdoing itself. In Board of Managers , the Court found that this did not happen.