Search Results

On March 14, 2019, the Appellate Division, First Department, unanimously affirmed the denial of a summary judgment motion seeking to dismiss a fraudulent inducement claim alleged in connection with the purchase of a mixed-use property on Union Avenue in the Bronx, New York (the “Subject Property”). Union Ave. Estates, LLC v. Garsan Realty Inc. , 2019 N.Y. Slip Op. 01827 (1st Dept. Mar. 14, 2019) ( here ). The decision, though short and concise, addresses a couple of principles ripe for discussion in today’s post: whether contractual disclaimers can preclude a fraudulent inducement claim; and whether the plaintiff justifiably relied on the representations and warranties supporting the fraudulent inducement claim. Background On February 18, 2015, YMY Acquisitions LLC (“YMY”) entered into a written contract of sale to purchase the Subject Property from Defendants (the “Contract” or “Contract of Sale”). In April 2015, YMY assigned the Contract to Plaintiff. On April 27, 2015, Defendants conveyed the Property to Plaintiff by a bargain and sale deed, thereby vesting Plaintiff with title to the Property. Pursuant to various paragraphs of the rider to the Contract of Sale, Defendants provided a rent roll for the Subject Property and copies of all leases affecting the Subject Property. Defendants allegedly represented and warranted that the rent roll was true and accurate as of February 18, 2015, and correctly reflected the expiration dates of each of the leases affecting the Subject Property. According to Plaintiff, Defendants represented and warranted that the leases of two commercial tenants (the “Commercial Tenants”) had expired and, therefore, the Commercial Tenants were occupying the Subject Property on a month-to-month basis. The rider to the Contract also required Defendants to deliver all leases, files, and records affecting the Subject Property upon closing. Pursuant to the requirement, Defendants delivered leases in their possession demonstrating that the leases of the Commercial Tenants had expired in July 2014. Also, at the closing, Defendants allegedly provided Plaintiff with a rent arrears report containing further representations that the leases of the Commercial Tenants had expired in July 2014 and that the Commercial Tenants were therefore month-to-month tenants. Subsequent to the closing, Plaintiff sought to evict the Commercial Tenants from the Subject Property. Plaintiff learned, however, that the Commercial Tenants had extended their leases until 2024. As such, the Commercial Tenants were not month-to-month tenants. Plaintiff commenced the action on October 23, 2015. During discovery, Defendants moved for summary judgment. Among other things, Defendants argued that the fraudulent inducement claim was barred by a merger clause and “as is” disclaimer clauses in the Contract of Sale and related documents. The Motion Court denied the motion. Defendants appealed. The First Department’s Decision Whether Contractual Disclaimers Can Preclude A Fraudulent Inducement Claim In New York, a party’s disclaimer of reliance cannot preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. In Union Ave., the disclaimer at issue pertained to a merger clause and “as is” provisions in various documents related to the purchase of the Subject Property. The Court held that these provisions were “not sufficiently specific to preclude the claim that defendants fraudulently induced plaintiff to purchase the property by misrepresenting the status of the commercial tenants’ leases.” Slip Op. at *1. The Court explained that “ one of the provisions relied upon by defendants specifically disclaim any warranties about the status of commercial tenants’ leases, or indeed of any leases.” Id . Whether Union Ave. Justifiably Relied on the Alleged Representations and Warranties As a general matter, the term “justifiable reliance” refers to the extent to which a person can be found to have properly relied on the representations of another. As this Blog has noted on several occasions, to determine whether the plaintiff justifiably relied on a representation, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty , 5 N.Y.2d at 322; Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Determining whether a plaintiff justifiably relied on a misrepresentation, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 NY3d 147, 155 (2010) (internal quotation marks omitted). The inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily….”  Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017). “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). Moreover, where “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred. In particular, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.” DDJ Mgt., LLC , 15 N.Y.3d at 154); Lunal Realty, LLC v. DiSanto Realty, LLC , 88 A.D.3d 661, 664 (2d Dept. 2011). In Union Ave. , the Court found that it was an issue of fact “ hether plaintiff’s reliance on defendants’ alleged misrepresentations – that the commercial tenants were month-to-month tenants and that their respective leases expired on July 31, 2014 – was reasonable or whether due diligence would have revealed the truth….” Id . Takeaway Although brief in length, Union Ave. is notable for its reiteration of the law concerning contractual disclaimers and fraudulent inducement claims. As the Court observed, contractual disclaimers will not preclude a fraudulent inducement claim unless the disclaimers specifically address the subject of the alleged misrepresentation.  In Union Ave. , the disclaimers relied upon by the defendants were not specific enough to preclude the fraudulent inducement claim.

On March 11, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) announced ( here ) that it had settled charges against 79 investment advisers who agreed to return more than $125 million to their clients (the “Actions”). A a substantial majority of the funds to be returned are earmarked for retail investors. The Actions arose from the SEC’s Share Class Selection Disclosure Initiative (“SCSDI” or the “Initiative”) ( here ), which the Division of Enforcement (the “Division”) created to address the harm caused by investment advisory firms that failed to disclose to clients that they had received 12b-1 fees for selling the funds.  Under the Initiative, investment advisers can avoid financial penalties by self-reporting violations of the Investment Advisers Act of 1940 (the “Advisors Act”) resulting from undisclosed conflicts of interest, compensating investors for the harm done as a result of the conflicts of interest, and reviewing and correcting their fee disclosures. The orders issued by the SEC concerned advisers who directly or indirectly received 12b-1 fees for investments selected for their clients without adequate disclosure, including disclosures that were inconsistent with the advisers’ actual practices. The SEC found that the investment advisers failed to adequately disclose conflicts of interest related to the sale of higher-cost mutual fund share classes when a lower-cost share class was available.  Specifically, the SEC found that the investment advisers placed their clients in mutual fund share classes that charged 12b-1 fees – which are recurring fees deducted from the fund’s assets – when lower-cost share classes of the same fund were available to their clients without adequately disclosing that the higher cost share class would be selected.  According to the SEC, the 12b-1 fees were routinely paid to the investment advisers in their capacity as brokers, to their broker-dealer affiliates, or to their personnel who were also registered representatives, creating a conflict of interest with their clients, as the investment advisers stood to benefit from the clients’ paying higher fees. The SEC’s Crackdown on Share Class Selection-Related Violations of the Federal Securities Laws Investment advisers owe a fiduciary duty to their clients. See , e.g. , Securities and Exchange Commission v. Capital Gains Research Bureau, Inc. , 375 U.S. 180 (1963). This means that an investment adviser has an obligation to act in the best interests of his/her clients and to provide investment advice in his/her clients’ best interests. In this regard, investment advisers owe their clients a duty of undivided loyalty and utmost good faith. Thus, investment advisers should not engage in any activity that conflicts with the interests of their clients and should take all steps reasonably necessary to fulfill their fiduciary obligations. Additionally, investment advisers must exercise reasonable care to avoid misleading clients and provide full and fair disclosure of all material facts to their clients and prospective clients. This means that investment advisers are required to disclose any and all material conflicts of interest, including conflicts arising from financial incentives, to clients and prospective clients. Since at least 2013, the Commission has been cracking down on investment advisers who have failed to disclose conflicts of interest and failed to implement reasonably designed policies and procedures relating to mutual fund share classes in violation of the Advisers Act.  In those cases, the Commission generally required the investment advisers to pay disgorgement and penalties, and to distribute the funds to harmed clients. In 2016, share class disclosures rose to the forefront. The Commission’s Office of Compliance Inspections and Examinations issued a Risk Alert ( here ) specifically addressing share class disclosure and cautioning investment advisers to examine their policies and procedures.  FINRA has also addressed share class selection issues with brokers, imposing censures and fines on brokers that failed to provide adequate disclosures ( here ). The SCSDI In February 2018, the Division announced the creation of the Initiative to address concerns that investment advisers were not adequately disclosing, or acting consistently with the disclosure regarding, conflicts of interest related to their mutual fund share class selection practices.  These disclosure failures caused harm to investors, particularly retail investors, including being deprived of the ability to make informed investment decisions when purchasing higher-cost share classes.  The Initiative enabled investment advisory firms to avoid financial penalties if they timely self-reported undisclosed conflicts of interest, agreed to compensate harmed clients, and undertook to review and correct their relevant disclosure documents. SEC Comments About The Initiative “The federal securities laws impose a fiduciary duty on investment advisers, which means they must act in their clients’ best interest,” said Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement.  “An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments.” “The initiative leveraged the expertise of the agency in crafting an efficient approach to remedy a pervasive problem,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement.  “Most of the advisory clients harmed by the disclosure practices were retail investors, and in just a year’s time, we made tremendous headway in putting money back into their hands while significantly improving the quality of firms’ disclosures.” “Investment advisers play a vital and trusted role in our markets.  They offer a wide array of products and services to our retail investors, ranging from one-time advice on a model investment portfolio to comprehensive planning combined with continuous investment advice and other services.  Regardless of the scope and duration of the investment advisory services, investment advisers are fiduciaries and, as such, their duties of care and loyalty require them to disclose their conflicts of interest, including financial incentives,” said SEC Chairman Jay Clayton.  “I am pleased that so many investment advisers chose to participate in this initiative and, more importantly, that their clients will be reimbursed.  This initiative will have immediate and lasting benefits for Main Street investors, including through improved disclosure.  Also, I am once again proud of our Division of Enforcement for their vigorous and effective pursuit of matters that substantially benefit our long-term, retail investors.” The Settlements The SEC found that the settling investment advisers, other than the state-registered only advisers, violated the Advisers Act by: 1) failing to include adequate disclosure regarding the receipt of 12b-1 fees; and/or 2) failing to adequately disclose additional compensation received for investing clients in a fund’s 12b-1 fee paying share class when a lower-cost share class was available for the same fund. Each of the settling investment advisers consented to the entry of the cease-and-desist orders without admitting or denying the findings in their respective orders.  The firms also agreed to a censure and to disgorge the improperly disclosed fees and distribute those monies with prejudgment interest to affected advisory clients.  Each adviser also agreed to review and correct all relevant disclosure documents concerning mutual fund share class selection and 12b-1 fees and to evaluate whether existing clients should be moved to an available lower-cost share class and move clients, as necessary.  Consistent with the terms of the Initiative, the Commission has agreed not to impose penalties against the investment advisers.

As a general matter, a faithless servant is one who acts contrary to the interests of his/her employer. When an employee or agent acts faithlessly, he/she must forfeit the compensation earned (whether wages or commissions) as a result of the wrongful act. A question that sometimes arises is whether an at-will employee is subject to the faithless servant doctrine. In TMT Entertainment Group, Inc. v. Gasparro , 2019 N.Y. Slip Op. 30542(U) (Sup. Ct., N.Y. County Mar. 4, 2019) ( here ), Justice Andrew Borrok of the Supreme Court, New York County, answered the question in the affirmative. here,=">here," >here=">here" and="and" >here.=">here."> The Faithless Servant Doctrine Discussed It is well settled that, under certain circumstances, an employee owes a fiduciary duty to his/her employer during the course of the employment. Markowits v. Friedman , 144 A.D.3d 993, 996 (1st Dept. 2016) (citing Lamdin v. Broadway Surface Advertising Corp. , 272 N.Y. 133, 138-39 (1936)). This means that the employee is “‘at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.’” W. Elec. Co. v. Brenner , 41 N.Y.2d 291, 295 (1977) (quoting Lamdin , 272 N.Y. at 138). An employee who violates his/her fiduciary duty of loyalty is deemed a “faithless servant” and forfeits the right to any compensation earned during the period of disloyalty. Visual Arts Found., Inc. v. Egnasko , 91 A.D.3d 578, 579 (1st Dept. 2012). An employer states a claim under the faithless servant doctrine by alleging that a former employee, during the period of his/her employment and using company resources, acts directly against the employer’s interests such as, by embezzling money, improperly competing with the current employer, or usurping business opportunities. Veritas Capital Mgt., LLC v. Campbell , 82 A.D.3d 529, 530 (1st Dept. 2011); Pozner v. Fox Broadcasting Co. , 59 Misc. 3d 897, 900 (Sup. Ct., N.Y. County, Apr. 2, 2018); CBS Corp. v. Dumsday , 268 A.D.2d 350, 353 (1st Dept. 2000) (citing Maritime Fish Prod., Inc. v. World-Wide Fish Prods., Inc. , 100 A.D.2d 81, 88 (1st Dept. 1984)). The courts have applied the foregoing rules to at-will employees. E.g. , Veritas Capital , 82 A.D.3d at 530; Beach v. Touradji Capital Mgt., LP , 144 A.D.3d 557, 562 (1st Dept. 2016). To establish a breach of fiduciary duty claim, a plaintiff “must prove the existence of a fiduciary relationship, misconduct by the other party, and damages directly caused by that party’s misconduct.” Pokoik v. Pokoik , 115 A.D.3d 428, 429 (1st Dept. 2014); Castellotti v. Free , 138 A.D.3d 198, 209 (1st Dept. 2016). “A fiduciary relationship arises between two persons when one of them is under a duty to act for or to give advice for the benefit of another upon matters within the scope of the relation.” Roni LLC v. Arfa , 18 N.Y.3d 846, 848 (2011) (internal quotation marks and citations omitted); see also EBC I v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 19 (2005). “Such a relationship, necessarily fact-specific, is grounded in a higher level of trust than normally present in the marketplace between those involved in arm's length business transactions. EBC I , 5 N.Y.3d at 19. TMT Entertainment Group, Inc. v. Gasparro In September 2005, the plaintiff, TMT Entertainment Group, Inc. (“TMT”), hired the defendant, Michael Gasparro (“Gasparro”), as a talent manager and producer. TMT agreed to compensate Gasparro through a a base salary, benefits and a discretionary portion of the management fees he generated. However, any fees that Gasparro received in connection with his role as a producer were to be remitted to TMT. TMT sued Gasparro, among others, for, inter alia , breach of fiduciary and usurpation of corporate opportunities. In particular, TMT alleged that Gasparro: (i) surreptitiously exploited TMT’s time, resources and reputation in order to establish the defendant, Gasparro Management LLC (“GM LLC” and together with Gasparro, the “Gasparro Defendants”), while working at TMT; (ii) induced the actor defendants to breach their management agreements with TMT; (iii) misappropriated management fees due TMT to GM LLC; (iv) misappropriated producer fees from TMT to GM LLC; and (v) interfered with TMT’s existing business relations. Defendants moved to dismiss the complaint. With regard to the breach of fiduciary duty/faithless servant cause of action, the defendants argued that Gasparro did not owe TMT a fiduciary duty because he was neither a corporate officer, or director of TMT nor an employee with an employment agreement that defined the terms and conditions of his employment ( e.g. , restrictive covenants). Absent such a relationship, argued the defendants, the breach of fiduciary duty/faithless servant cause of action should be dismissed. The Court rejected the defendants’ argument. In a terse holding, the Court found that even though Gasparro did not have an employment agreement with TMT ( i.e. , he was an employee at will) and did not serve as an officer or director of the company he was, nevertheless, “under a duty to act and give advice for the benefit of on matters within the scope of their relationship.” Slip Op. at *2 (quoting EBC I , 5 N.Y.3d at 19) (internal quotation marks omitted). Thus, “ aking the allegations … in the Complaint as true,” the Court denied the defendants’ motion to dismiss the breach of fiduciary duty/faithless servant cause of action. Id . With regard to the usurpation of a corporate opportunity cause of action, which the Court considered to be related to the breach of fiduciary duty/faithless servant cause of action, the Court denied the motion to dismiss. Having found that TMT adequately alleged the breach of a fiduciary duty, the Court held that TMT stated a cause of action for the usurpation of a corporate opportunity. Slip Op. at *2. In doing so, the Court rejected the defendants’ argument that only a corporate actor could usurp a corporate opportunity: As explained above, Mr. Gasparro was in a fiduciary relationship with the plaintiff. The plaintiff asserts that Mr. Gasparro advised TMT of two projects where he would work as a producer: the “Kalief Project” and the “Trayvon Project.” The plaintiff alleges that Mr. Gasparro and other parties then entered into separate agreements to provide production services for these projects, and Mr. Gasparro would receive producer’s fees of $50,000 for the Kalief Project and $375,000 for the Trayvon Project. The plaintiff asserts that Mr. Gasparro then advised that the Kalief Project producer’s fee was only $10,000 and paid $5,000 to plaintiff. The plaintiff seeks the remaining $45,000 balance for Mr. Gasparro’s work on the Kalief Project. Regarding the Trayvon Project, the plaintiff alleges that Mr. Gasparro claimed exclusive entitlement to the associated producer’s fee on the same date that he resigned from employment with the plaintiff in July 2017. The pleaded facts sufficiently allege that the plaintiff could expect to receive producer’s fees from the two projects and that Mr. Gasparro diverted fees that should have been treated as an asset of the plaintiff’s management company. Accordingly, the Court denied the defendants’ motion to dismiss the cause of action for usurpation of a corporate opportunity against Gasparro. Takeaway TMT Entertainment shows that the faithless servant doctrine remains a potent weapon for employers faced with an employee who allegedly acts disloyal during his/her employment. Perhaps, more importantly, TMT Entertainment confirms that the doctrine will be applied to at-will employees who act faithlessly and in breach of their fiduciary duty to their employer.

On March 5, 2019, the Securities and Exchange Commission (“SEC”) announced ( here ) that BB&T Securities, LLC (“BB&T Securities”), a wholly owned brokerage subsidiary of BB&T Corp., had agreed to return more than $5 million to retail investors and pay a $500,000 penalty to settle charges that a firm it acquired, Valley Forge Asset Management, LLC (“Valley Forge”), misled its advisory clients into believing they were receiving full service brokerage services at a discount while significantly less expensive options were available externally. BB&T acquired Valley Forge from Susquehanna Bancshares Inc. in 2015 and merged with BB&T Securities in March 2016. According to the SEC, from at least 2013 to 2016 (the “Relevant Period”), Valley Forge made misleading statements in its Forms ADV Part 2A and investment advisory contracts with clients regarding the services and prices offered by its in-house broker that led numerous clients to choose Valley Forge for brokerage services over other significantly less expensive options. Valley Forge benefitted financially from these advisory clients selecting its in-house broker and failed to disclose the extent of its conflict of interest in its Forms ADV Part 2A or otherwise. In particular, the SEC claimed that Valley Forge misled clients by stating that its affiliated brokerage option provided “full service brokerage services.” Under this option, Valley Forge served as the introducing broker for another broker who was not associated with Valley Forge or its parent or affiliates. In addition, Valley Forge had a clearing agreement with the broker for those clients who chose the affiliated brokerage option. According to the SEC, the firm did not provide any services to affiliated brokerage clients that were not also provided to clients that chose the other brokerage options, which had significantly lower costs. Moreover, because Valley Forge did not disclose the services it was providing to its affiliated brokerage clients, clients could not effectively “carefully consider the services offered relative to the brokerage commission being paid” as Valley Forge stated in its Form ADV Part 2 and Exhibit 1 of the Investment Advisory Contract. In addition, the SEC alleged that Valley Forge made misleading statements regarding the costs associated with its affiliated brokerage option. While Valley Forge told clients that, “ imilar services by other brokers may be offered at higher or lower prices elsewhere,” the SEC found that Valley Forge’s rates were significantly higher than those clients would have paid under the other brokerage options offered by the firm. According to the SEC, the average commission rate paid by clients selecting the affiliated brokerage option was $.18/share, while the average commission paid by clients selecting the directed brokerage option was $.04/share, and those choosing the discretionary brokerage option, who tended to be large institutional clients, paid even less. Under the directed brokerage option, clients could designate a third-party broker-dealer to handle all aspects of the brokerage relationship and negotiate the fees and/or commissions directly with that broker-dealer.  Under the discretionary brokerage option, the client would choose where its assets would be custodied and designate a “preferred broker”. However, Valley Forge retained the discretion to select the broker-dealer for each trade on a “best price and execution basis.” The SEC contended that Valley Forge was aware that the directed brokerage option could result in clients paying roughly 4.5 times less than they would have paid under the affiliated brokerage option. The SEC further claimed that Valley Forge misled clients regarding the benefits of the affiliated brokerage option by stating that affiliated brokerage clients could negotiate a discounted rate with Valley Forge. In reality, the SEC found that nearly 92% of Valley Forge’s affiliated brokerage clients received a “discount” from the “full commission” retail rate, with the vast majority receiving a price 70% lower than the supposed retail rate. As noted, this discounted price stood significantly higher than other available options, rendering inaccurate Valley Forge’s suggestion that the pricing of the affiliated brokerage option would benefit its clients. In total, the SEC claimed that advisory clients paid Valley Forge more than $4.7 million in excess compensation. Commenting on the settlement, Kelly L. Gibson, Associate Director of Enforcement in the SEC’s Philadelphia Regional Office, said: “Valley Forge put its own interests ahead of its advisory clients, causing them to spend more money unnecessarily by portraying inaccurate costs and benefits of using its in-house brokerage. Dual registrants and advisers with affiliated broker-dealers must accurately disclose all conflicts of interest arising from their brokerage arrangements.  The SEC’s examination and enforcement programs will continue to identify these types of violations and return money to harmed retail investors as quickly as possible.” In the SEC’s cease-and-desist order, the SEC found that BB&T Securities, as the successor in interest to Valley Forge, violated Sections 206(2) and 207 of the Investment Advisers Act of 1940.  Without admitting or denying the findings, BB&T Securities consented to the order, a censure, and agreed to pay disgorgement of $4,712,366 and prejudgment interest of $497,387, which it will distribute to affected current and former clients through a Fair Fund, as well as a $500,000 penalty. According to the SEC, BB&T Securities ended Valley Forge’s existing directed brokerage program by amending its cost structure and its disclosures. A copy of the SEC’s cease-and-desist order can be found here .

In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here ), the Court of Appeals described the justifiable reliance requirement of a fraud claim as a “fundamental precept” of the cause of action. As such, the justifiable reliance requirement is considered to be a necessary tool to weed out fraud claims by plaintiffs who “are lax in protecting themselves”. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds). In assessing whether the plaintiff’s reliance was justified, the courts look to see whether the plaintiff’s reliance on the alleged misrepresentation was reasonable. Epifani v. Johnson , 65 A.D.3d 224, 230 (2d Dept. 2009). As stated by the Court of Appeals more than one hundred years ago, this means the plaintiff must exercise “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. Schumaker v. Mather , 133 N.Y. 590, 596 (1892); see also ACA Fin. Guar. , 25 N.Y.3d at 1044; DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). When the plaintiff “has hints” that the statement is false, the courts impose a “heightened degree of diligence” on the plaintiff. Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011) (quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 20016)). Under such circumstances, the courts require the plaintiff to make an “additional inquiry to determine” the “accuracy” of the statement. Id . (citation and internal quotation marks omitted). If the plaintiff fails to make such an inquiry, as in ISS Action, Inc. v. Tutor Perini Corp. , 2019 N.Y. Slip Op. 01577 (2d Dept. Mar. 6, 2019) (here), the plaintiff will not be found to have reasonably relied on the alleged misrepresentation. ISS Action, Inc. v. Tutor Perini Defendant, Tutor Perini Corporation (“Tutor Perini”), is a construction company that had a contract with the Port Authority of New York and New Jersey to make improvements to a runway at John F. Kennedy International Airport. In connection with the project, Tutor Perini hired the plaintiff, ISS Action, Inc. (“ISS”), as a subcontractor to provide security services at the job site. On July 31, 2009, ISS and Tutor Perini entered into a one-page agreement (the “2009 Agreement”) in order for ISS to begin work immediately. Under the agreement, ISS was to receive various rates of compensation in exchange for the security services it was providing. Those rates were “subject to New York State Sales Tax.” In accordance with the 2009 Agreement, ISS performed the required services and invoiced Tutor Perini for the work performed.  Tutor Perini paid the full amount of the invoice, including charges for sales tax. According to ISS, “one or more representatives” informed it that the security services ISS provided “were, as a matter of fact and law, exempt from New York State and local sales and use taxes.” Subsequent to those representations, Tutor Perini provided ISS with a New York State and Local Sales and Use Tax Contractor Exempt Purchase Certificate (the “Tax Exemption Certificate”). The Tax Exemption Certificate was signed by an employee of Tutor Perini and stated that “ he tangible personal property or service being purchased” by the defendant were “exempt from sales and use tax” and then listed a number of possible exemptions. The exemption which was marked on the Tax Exemption Certificate stated that “ he tangible personal property will be used . . . to improve real property . . . owned by an organization exempt under section 1116(a) of the Tax Law.” After receiving the completed Tax Exemption Certificate, ISS refunded the sales tax paid by Tutor Perini in connection with the first invoice and did not charge Tutor Perini any further sales tax. A more formal subcontract between the two parties was executed on February 12, 2010 (the “2010 Agreement”). The 2010 Agreement provided, among other things, that ISS would be responsible for “all payments of taxes,” including “sales and use taxes.” ISS alleged that “ n light of the representations made by . . . that the services being performed by on the runway roject were exempt from sales and use taxes,” it signed the 2010 Agreement. In March of 2013, ISS was audited by the New York State Department of Taxation and Finance, which determined that ISS owed approximately $125,000 in back taxes plus interest with respect to the work it performed for Tutor Perini. After Tutor Perini refused ISS’s demands to pay the back taxes, ISS commenced the action. ISS asserted four causes of action against Tutor Perini. The first cause of action sought a declaration that Tutor Perini was legally obligated to pay all sales tax, including interest and penalties, if any, owed as a result of ISS’s provision of services to the defendant. The second, third, and fourth causes of action sought to recover damages for breach of contract, unjust enrichment, and fraudulent misrepresentation, respectively. In the fourth cause of action, ISS sought to recover damages for fraudulent misrepresentation. ISS alleged that Tutor Perini’s misrepresentations as to the tax-exempt status of ISS’s services induced ISS to enter into the 2010 Agreement and forgo the collection of taxes from the defendant in connection with the runway project. Tutor Perini maintained that any reliance on the representations about the tax-exempt status of ISS’s services was unreasonable. ISS subsequently moved for summary judgment on the first, third, and fourth causes of action. Tutor Perini cross-moved for summary judgment dismissing the complaint. The motion court denied ISS’s motion and granted Tutor Perini’s cross motion. ISS appealed. The Appellate Division, Second Department affirmed. The Court’s Decision The Court held that Tutor Perini “established, prima facie,” that ISS’s reliance on Tutor Perini’s statements “was unreasonable as a matter of law.” Slip op. at *3. The Court noted that since ISS was “aware of the nature of the services it was providing to the defendant”, it did not “allege that the defendant was in the exclusive possession of any facts which bore upon the tax-exempt status of the plaintiff’s work.”   Id . “As such, the only representation upon which the plaintiff could have relied was the defendant’s legal opinion as to the taxable status of the plaintiff’s work.” Id . That opinion and the law on which it was based, observed the Court, was equally available to ISS. Id . (“In that regard, the plaintiff was in an equal position to discover the applicable law.”) Since the applicable law was available to ISS, the Court held that ISS could not have reasonably relied on Tutor Perini’s legal opinion. The Court also found that ISS had a “hint” of falsity from the “face” of the Tax Exemption Certificate because the certificate showed that ISS was providing services to Tutor Perini, rather than “tangible personal property.” Id . “Under such circumstances, a ‘heightened degree of diligence required’ and yet the plaintiff failed to utilize the means it had to determine the truth of the defendant’s legal representations.” Id . (citations omitted). Takeaway In Ambac , the Court of Appeals reinforced the importance of satisfying the justifiable reliance element of a fraud claim.  Thus, a plaintiff alleging fraud must exercise “ordinary intelligence” to ascertain “the truth of the subject of the alleged false representation.” The failure to do so will result in dismissal of the claim. When the plaintiff has a “hint” of the falsity, he/she must exercise a heightened degree of diligence in ascertaining “the truth of the subject of the alleged false representation.” In ISS Action , the plaintiff could not satisfy this heightened burden.

Around two centuries ago, German writer and statesman, Johann Wolfgang von Goethe, wrote that “precaution is better than cure.”  While von Goethe’s quote is applicable to a variety of situations, it seems particularly prescient in the context of Yellowstone injunctions as made plain in the recent decision of the Supreme Court of the State of New York, Appellate Division, First Department, in Bliss World LLC v. 10 West 57 th Street Realty LLC , decided on March 5, 2019. This Blog has previously addressed issues involving Yellowstone injunctions: “ Commercial Tenants Must Remain Aware Of Yellowstone Injunctions ” and “ Appellate Division, Second Department, Enforces Waiver Of Declaratory Relief In Commercial Lease Resulting In The Denial Of Tenant’s Yellowstone Injunction ,” so the history of such relief will not be recounted. By way of brief background, “ he purpose of a Yellowstone injunction is to maintain the status quo so that the tenant served with notice to cure an alleged lease violation may challenge the propriety of the landlord’s notice while protecting a valuable leasehold interest.”  Garland v. Titan West Associates , 147 A.D.2d 304 (1 st Dep’t 1989) (citing, among other cases, First Nat. Stores v. Yellowstone Shopping Center , 21 N.Y.2d 630 (1968)). “To obtain a Yellowstone injunction, the tenant must demonstrate that (1) it holds a commercial lease, (2) it received from the landlord either a notice of default, a notice to cure, or a threat of termination of the lease, (3) it requested injunctive relief prior to both the termination of the lease and the expiration of the cure period set forth in the lease and the landlord’s notice to cure, and (4) it is prepared and maintains the ability to cure the alleged default by any means short of vacating the premises.” Riesenburger Props., LLLP v. Pi Assoc., LLC , 155 A.D.3d 984 (citation and internal quotation marks omitted).) The ability and desire to cure the alleged default is critical to obtaining Yellowstone injunctive relief.  Bliss World .  A plaintiff makes such a showing “by indicating in its motion papers that it is willing to repair any defective condition found by the court and by providing proof of the substantial effort it has already made in addressing the default listed on the notice to cure.”  146 Broadway Assoc., LLC v. Bridgeview at Broadway, LLC , 164 A.D.3d 1193 (2 nd Dep’t 2018). It is axiomatic that incurable defaults are not amenable to Yellowstone injunctive relief.  In Kim v. Idylwood, N.Y., LLC , 66 A.D.3d 528 (1 st Dep’t 2009), the tenant sought a Yellowstone injunction following receipt of a default notice predicated on the failure to “previously and continuously maintain[] insurance coverage as required by their commercial lease….”  Kim , 66 A.D.3d at 529 (citations omitted).  In affirming the denial of Yellowstone relief, the Kim court noted the “incurable” nature of the “violation”  and noted that, “ laintiffs’ attempt to demonstrate their ability and readiness to cure the alleged violation by procuring, during the cure period, insurance coverage prospectively for the remaining 10 months of their lease term is unavailing, as such policy does not protect defendant against the unknown universe of any claims arising during the period of no insurance coverage.”  Kim , 66 A.D.3d at 529. Issues similar to those decided in Kim were decided in Bliss World in which the Appellate Division, First Department, reversed supreme court’s grant of tenant’s motion to extend a Yellowstone injunction.  The notice to cure in Bliss World related to, inter alia , the tenant’s failure to procure insurance.  While the Court noted that the “tenant provides various steps that it will take to cure if it is ultimately found to be in material violation of the insurance provisions of the lease<,> … proposed cures involve any retroactive change in coverage, which means that the alleged defaults raised by the landlord are not susceptible to cure.”  Bliss World (citations omitted). Simply because the commercial tenant in Bliss World was not entitled to a Yellowstone injunction does not necessarily mean that it will lose its lease because the denial of the Yellowstone injunction, does not resolve the merits of the underlying default notice.  As the Court noted “ here is still an ongoing dispute between the parties regarding whether the landlord’s claimed defaults are meritorious, either because they are not really defaults or they are not sufficiently substantial.”  Indeed, the reversal by the First Department in Bliss World “does not relieve the landlord of proving the bona fides of the claimed default or prevent the tenant from defending itself … will be resolved either in connection with the complaint and counterclaim in this action or in a subsequently commenced commercial summary holdover proceeding.” The Bliss World Court also rejected the Tenant’s claim that it was still entitled to a preliminary injunction even though it was not entitled to a Yellowstone .  Because the necessary showing to obtain a Yellowstone injunction is far less than that which is required for a preliminary injunction, the Court held that if “the Yellowstone injunction fails, the preliminary injunction does as well.”  The Court continued: n any event, no injunction is needed to preserve the status quo because the landlord cannot evict the tenant unless and until there is a determination of the merits in the landlord’s favor.  If the tenant prevails, then there will be no eviction.  The right lost by the denial of a Yellowstone injunction is the right to cure any default.   TAKEAWAY The Yellowstone injunction can be effectively employed to preserve a commercial tenant’s rights in a valuable commercial lease when faced with a default notice from a landlord.  However, “precaution is better than cure.”  It is in the tenant’s best interest to take all reasonable steps to avoid lease defaults and related Yellowstone injunction and/or other lease default litigation.  As highlighted by the Bliss World and Kim Courts, among others, it is critically important that commercial tenants avoid incurable defaults, which, if proven by the landlord, could result in the termination of a valuable lease without the right to cure.

The title of a today’s post sums up the difficulties a plaintiff encounters when trying to pierce the corporate veil to hold a corporate officer, director or shareholder responsible for the wrongs alleged to have been perpetrated on the plaintiff. This is not to say that a plaintiff can never prevail. Rather, it is a reflection of the fact that the plaintiff bears a heavy burden to do so. ABN AMRO Bank, N.V. v. MBIA Inc. , 17 N.Y.3d 208, 235 (2011). In Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc. , 2019 N.Y. Slip Op. 01443 (2d Dept. Feb. 27, 2019) ( here ), the subject of today’s post, the plaintiff met its burden and successfully withstood a motion for summary judgment on its veil piercing claims. The Law in New York It is axiomatic that a corporation acts through its officers, directors and owners. Thus, these individuals are normally not liable for the debts incurred by the corporation. However, when an officer, director or shareholder abuses the corporate form to perpetrate a wrong or injustice against a third party, courts will intervene on behalf of the third party to hold the corporate actor personally liable. 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). “Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury.” Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 18 (2015) (internal quotation marks omitted); TNS Holdings , 92 N.Y.2d at 339 (1998). Importantly, it is not enough for the plaintiff to demonstrate that the officer, director or shareholder dominated and controlled the corporate entity. 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, director or member used the corporation for his/her personal benefit and the corporation was 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. East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc. , 16 N.Y.3d 775, 776 (2011) (noting that at the pleading stage, “a plaintiff must do more than merely allege that engaged in improper acts or acted in ‘bad faith’ while representing the corporation”). 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 N.Y. , 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). Town-Line Car Wash, Inc. v. Don’s Kleen Machine Kar Wash, Inc. Town-Line involved the purchase of a car wash business (defendant, Don’s Kleen Machine Kar Wash, Inc. (“DKM”)) by the plaintiff, Town-Line Car Wash, Inc., in March 2004. Town-Line sought to pierce the corporate veil to hold Barry Brookstein (“Brookstein”), the sole shareholder of DKM, liable for DKM’s alleged obligation to Town-Line. At the time of the transaction, DKM’s business consisted of only “a car wash and automobile detailing business.” The purchase price included a down payment of $200,000, a cash payment of $1,100,000 at the time of closing, and a note in the principal amount of $1,200,000, payable by Town-Line over a period of 180 months in equal monthly installments of $10,785.94. Town-Line reserved the right to prepay the note at any time without penalty. The agreement also included an indemnity provision for any claim made within 7½ years after the closing and arising out of or in connection with, inter alia , the breach, or inaccuracy, of any of DKM’s representations or warranties. The indemnity was payable by DKM, and was not personally guaranteed by the company’s principals, the defendants Brookstein and Donald Berman (“Berman”). On December 20, 2007, more than three years after the closing, Town-Line exercised its right to prepay the installment note in full. On April 23, 2008, Brookstein caused DKM to be dissolved. On or about September 15, 2011 – nearly seven years after the closing – Town-Line notified DKM of an alleged breach of DKM’s representations and warranties under the agreement. It maintained that since DKM had since been dissolved, “Town-Line holds and jointly and severally responsible for the obligations of under the Agreement.” Town-Line commenced the action in March 2012 against DKM, Brookstein, and Berman, asserting causes of action against all defendants based on fraud, breach of contract, and unjust enrichment, and asserting a further cause of action against Brookstein and Berman predicated on piercing the corporate veil. Following discovery, Brookstein moved for summary judgment dismissing the complaint against him and Town-Line cross moved for summary judgment on the issue of liability as against Brookstein. The motion court granted Brookstein’s motion and denied the cross motion. Town-Line appealed. The Appellate Division, Second Department, reversed the grant of summary judgment in favor of Brookstein. The Majority Opinion The Court held that there was a triable issue of fact as to whether Brookstein stripped DKM of assets, leaving the corporation “without sufficient funds to pay its contractual contingent liabilities.” Slip op. at *2. The Court noted that “ t undisputed that Brookstein dissolved DKM without making any reserves for contingent liabilities, despite the existence of a provision in the contract of sale pursuant to which DKM agreed to indemnify Town-Line for any breach of warranty for a period of 7½ years after the closing of the sale.” Id . “This factor” alone, said the Court, “was sufficient to raise a triable issue of fact.” Id . The Court also held that the motion court correctly denied the cross motion for summary judgment, noting that there were triable issues of fact “as to whether Brookstein exercised complete domination of DKM in the transaction at issue and whether he abused the corporate form to commit a wrong or fraud causing injury to Town-Line.” Id . The Dissenting Opinion Justice Cheryl E. Chambers concurred in part and dissented in part. Justice Chambers agreed with the majority that the motion court properly denied Town-Line’s cross motion but disagreed with the majority as to the motion court’s order granting summary judgment to Brookstein. To the dissent, “Town-Line improperly invoking the equitable doctrine of piercing the corporate veil in order to secure a personal guarantee from Brookstein – a contractual benefit that Town-Line omitted, or was unable, to negotiate when it purchased DKM’s assets in 2004.” Id . at *3 “As a threshold matter,” the dissent observed that “by purchasing all or substantially all of DKM’s assets in 2004, DKM would be left with no source of revenue going forward – thereby presenting a very real risk that DKM might not be able to pay indemnification claims made some 7½ years later.” Id .  To manage the risk that DKM might not be able to pay on indemnification claims, Town-line “retain part of the purchase price and it gradually over a term exceeding the indemnification period.” Id . However, Town-Line forfeited that protection when it “elected to prepay the note in full,” in 2007. Thus, observed the dissent, Town-Line gave “up the only security it had for the payment by DKM of any future claim during the remainder of the indemnity period.” Justice Chambers rejected Town-Line’s theory that Brookstein abused the corporate form by causing DKM to be dissolved in 2008, after the note was repaid in full, and without making adequate reserves to cover potential indemnification claims arising during the final years of the indemnification period. That theory, concluded Justice Chambers, “lack merit.” Id . Equally important, noted the dissent, Brookstein “established, prima facie, that he had no involvement in the day-to-day operations of DKM and no personal knowledge of the operative facts underlying Town-Line’s indemnification claims against DKM.” Id . at *4. Justice Chambers rejected Town-Line’s position that it was entitled to contractual indemnification from DKM regardless of what Town-Line may or may not have known at the time of the sale through due diligence, and that Brookstein, regardless of his own state of mind, should be held liable simply because he caused the company to be dissolved before the end of the contractual indemnification period. Id . Takeaway Litigants should remain mindful that merely tracking the elements of veil piercing is not enough to withstand a dismissal challenge. Plaintiffs must do more; they must proffer facts. Town-Line is a good example of the fact-intensive nature of the veil piercing inquiry.

It is not uncommon for the owners of a business wishing to remove or buy-out one of their own, or who wish to dissolve the entity, to retain a valuation expert to perform an appraisal of the entity or the ownership interest at stake. When the parties cannot reach an agreement and choose to litigate their dispute, the question arises whether the valuation report is discoverable? Like many questions under the law, the answer depends upon the circumstances under which report was commissioned.  If the appraisal was requested for reasons that are not “of a legal character,” as in Galasso v. Cobleskill Stone Products, Inc. , 2019 N.Y. Slip Op. 01483 (3d Dept. Feb. 28, 2019) ( here ), the report is discoverable. In holding that the appraisal report was discoverable, the Galasso Court considered whether the report was relevant to the action and privileged. We consider the legal principles underlying the decision below. Generally, “ here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof.” CPLR § 3101(a). The Court of Appeals has “emphasize ” time and again that the “ he words, ‘material and necessary,’ are to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial.” Forman v. Henkin , 30 N.Y.3d 656, 661 (2018) (internal quotation marks, brackets, ellipsis and citations omitted); Andon v. 302-304 Mott St. Assoc. , 94 N.Y.2d 740, 746 (2000). In short, CPLR § 3101(a) requires the production of information that is “relevant” to the disposition of the action. Id . Importantly, “ he right to disclosure, although broad, is not unlimited.” Forman , 30 N.Y.3d at 661. “The test is one of usefulness and reason.” Allen v. Crowell-Collier Publ. Co. , 21 N.Y.2d 403, 406 (1968). In addition, privileged matter, attorney work product, and trial preparation materials are protected from disclosure unless the moving party can demonstrate a “substantial need” for the information and an “undue hardship” if the material is not disclosed. Forman , 30 N.Y.2d at 661-662; Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 376-377 (1991). The burden of establishing a right to protection under the CPLR is with the party asserting it — “the protection claimed must be narrowly construed; and its application must be consistent with the purposes underlying the immunity.” Spectrum , 78 N.Y.2d at 377. “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” NYAHSA Servs., Inc., Self-Ins. Trust v. People Care Inc. , 155 AD3d 1208, 1209-1210 (3d Dept. 2017) (internal quotation marks and citation omitted); see also Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). “The party asserting the privilege bears the burden of establishing . . . that the communication at issue was between an attorney and a client for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship that the communication was predominately of a legal character.” Ambac , 27 N.Y.3d at 624 (internal quotation marks and citation omitted). The purpose of the privilege is “to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). “Generally, communications made in the presence of third parties, whose presence is known to the client, are not privileged.” Ambac , 27 N.Y.3d at 624 (internal quotation marks and citation omitted). However, “statements made to the agents or employees of the attorney or client, or through a hired interpreter, retain their confidential (and therefore, privileged) character, where the presence of such third parties is deemed necessary to enable the attorney-client communication and the client has a reasonable expectation of confidentiality.” Id . at 624. Notably, “ he scope of the privilege is not defined by the third parties’ employment or function, however; it depends on whether the client had a reasonable expectation of confidentiality under the circumstances.” People v. Osorio , 75 N.Y.2d 80, 84 (1989). Galasso v. Cobleskill Stone Products, Inc. In December 2015, plaintiff, Mark A. Galasso (“Galasso”), a shareholder of defendant Cobleskill Stone Products, Inc. (“Cobleskill” or the “Company”), commenced the action against, among others, the Company pursuant to Business Corporation Law §§ 706(d) and 716(c) for injunctive relief and damages. Plaintiff alleged, among other things, that the defendants wasted the Company’s assets and engaged in self-dealing. In November 2017, the defendants made a discovery demand for, among other things, a valuation report that was created by Management Planning Inc. (“MPI”), a business valuation and advisory firm, for the estate of Martin Galasso (the “Decedent”). Plaintiff did not provide the defendants with the valuation report, asserting that it was not discoverable on several grounds, including that it was not material and necessary to the disposition of the action and was otherwise privileged. Defendants subsequently moved to compel discovery, which Galasso opposed. After a conference, the motion court, among other things, granted the defendants’ motion and required Galasso to produce the final valuation report. Plaintiff appealed. The Court’s Decision The Court affirmed. The Court concluded that the valuation report was material and necessary to the disposition of the action. As noted by the Court, Galasso retained MPI to appraise his ownership interest in the Company for estate tax filing purposes. According to Galasso, after conclusion of the appraisal, MPI raised “serious and substantial concerns” that prompted him to commence the action against the defendants. Based upon these facts, the Court concluded that the valuation report was relevant to the action: “ ecause played a role in the commencement of the action, … it may be probative as to why plaintiff believe that defendant is guilty of gross malfeasance.” Slip op. at *2 (citations omitted). Additionally, the Court held that the motion court “correctly determined” that “the valuation report, which values decedent’s stock in defendant, provides a benchmark ‘by which to . . . evaluate plaintiff’s damages.’” Id . The Court also rejected Galasso’s argument that the valuation report was protected by the attorney-client privilege. “Although MPI was hired by plaintiff’s counsel and the agreement between MPI and plaintiff’s counsel state that its communications would be confidential,” the Court held that “the primary purpose for which MPI was hired was to appraise plaintiff’s stocks in defendant for estate tax filing purposes.” Id . “In fact,” said the Court, “the instant action was not commenced until after MPI expressed ‘serious and substantial concerns’ upon completion of its appraisal.” Id . Therefore, concluded the Court, “the mere fact that MPI’s report now supports plaintiff’s legal action not eliminate the fact that the report was not initially done for legal purposes.” Id . Takeaway Galasso is a good example of how the courts determine whether an expert report is privileged – they look to “whether the client had a reasonable expectation of confidentiality under the circumstances.” In Galasso , the plaintiff did not have such an expectation. Indeed, as the Court noted, it did not help that Galasso “confirmed” “during a court conference… that the valuation report did not include any legal information, nor did it disclose plaintiff’s confidences.” Under those circumstances, the Court easily concluded that Galasso had no “reasonable expectation of confidentiality” in the report.

There are five elements to a fraud claim: “(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). A plaintiff alleging fraud must meet each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr. , 213 A.D.2d 167 (1st Dept. 1995). The failure to meet any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi , 120 A.D.3d 447 (1st Dept. 2014). Recently, in Shainwald v. Professionals for Non-Profits, Inc. , 2019 N.Y. Slip Op. 50209(U) (Sup. Ct. N.Y. County Feb. 25, 2019) ( here ), Justice Carmen Victoria St. George of the New York Supreme Court, New York County, dismissed a plaintiff’s fraud claim precisely because she failed to meet all the elements of her fraud claim. Sybil Shainwald (“Shainwald” or “Plaintiff”) commenced the action against defendant, Professionals for Non-Profits, Inc. (“PNP”), a temporary employment staffing agency, to recover damages for fraud and negligent hiring. Plaintiff alleged that she retained PNP to provide her with a personal assistant, primarily for administrative and organizational tasks. The assistant was to work out of Plaintiff’s New York City apartment during the summer of 2017, while she resided in her summer home on Long Island. According to the complaint, Shainwald requested that the assistant “have nothing checkered in his or her past given that would not be present in her apartment.” On or about July 13, 2017, PNP recommended Brooke Wright (“Wright”) to serve as Plaintiff’s assistant. PNP allegedly represented that it “had conducted due diligence into” Wright’s “background and confirmed that … Wright was trustworthy enough to be placed in Shainwald’s apartment for several months while Shainwald was not there.” Wright began performing administrative services for Plaintiff and continued to do so until September 22, 2017. On August 1, 2017, while Plaintiff was residing at her Long Island home, Wright allegedly stole “approximately $100,000 worth of jewelry.” Plaintiff alleged that she did not learn of the missing jewelry until approximately October 15, 2017, when she discovered a receipt from Federal Express showing that a package was shipped from her to Wright on August 1, 2017. Thereafter, plaintiff commenced the action. Among other claims, Plaintiff alleged that PNP committed a fraud in placing Wright to perform as her assistant. PNP moved to dismiss, arguing that Plaintiff’s fraud claim was not plead with the requisite particularity under CPLR § 3016(b). In that regard, PNP claimed that Plaintiff failed to satisfy the elements of her fraud claim, arguing, for example, that Plaintiff did not allege a misrepresentation of fact, justifiable reliance, and loss causation/damages. The Court granted the motion because Plaintiff failed to plead loss causation/damages. Analysis of the Court’s Decision In a fraud action, the plaintiff must plead each element with particularity. CPLR § 3016(b). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners , 12 N.Y.3d at 558. Conclusory allegations will not suffice. Id . Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). Although, CPLR § 3016 (b) provides that “the circumstances constituting the shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id . at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp. , 70 N.Y.2d 268, 285-286 (1987). Against the foregoing, the Court considered each element of Shainwald’s fraud claim. Falsity and Knowledge of Falsity At its core, a misrepresentation refers to a statement that is false or untrue. A fraud claim is pleaded with particularity under CPLR § 3016(b) when the complaint identifies “who made the misrepresentation to whom, the date the misrepresentation was made, and its content.” El Entm’t U.S. LP v. Real Talk Entm’t, Inc. , 85 A.D.3d 561, 562 (1st Dept. 2011). In Shainwald , Plaintiff alleged that PNP materially misrepresented that it “conducted a background check on Ms. Wright and thoroughly vetted her in advance to ensure that it was appropriate to place Ms. Wright in apartment while was not living there.” The Court found that this allegation sufficed to satisfy the falsity element of Plaintiff’s fraud claim. In this regard, the Court observed that Plaintiff identified the “who”, “what”, “where” and “when” of the alleged misrepresentation with sufficient detail to inform PNP of the substance of her claims: “Plaintiff not only identified Brandel as the source of the material misrepresentations, but the date and the words used by Brandel.” Slip Op. at *6. Therefore, the Court held that Plaintiff satisfied the particularity requirement of CPLR § 3016(b) in that she adequately detailed PNP’s misrepresentations in a manner that was sufficient “to inform PNP of the substance of plaintiff’s claims.” Id . The Court also held that Plaintiff sufficiently alleged that PNP knew that its representations were false and that such representations were false when made. Id . (citing Black v. Chittenden , 69 N.Y.2d 665, 668 (1986) (allegations that defendant’s statements “were false and were known by the defendant to be false when made by are sufficient to plead a defendant’s knowledge of falsity”)). Scienter or Intent to Deceive As a general matter, scienter refers to a defendant’s state of mind at the time he/she made the statement or omission. Courts look to whether the defendant possessed an intent “to deceive, manipulate, or defraud.” ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co. , 553 F.3d 187, 197 (2d Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 319 (2007)). In doing so, courts are mindful that “ raudulent intent, by its very nature, is rarely susceptible to direct proof and must be established by inference from the circumstances surrounding the allegedly fraudulent act.” Setters v. AI Props. & Devs. (USA) Corp. , 139 A.D.3d 492, 493 (1st Dept. 2016). In Shainwald , the Court held that Plaintiff adequately alleged intent, noting that PNP possessed sufficient motive to make the false statement: “Plaintiff alleges that made the above statements ‘with the intent that plaintiff would rely upon them in permitting Ms. Wright to perform services in plaintiff's apartment while plaintiff was not there, so that PNP could earn money.” Slip Op. at *6 (quoting complaint.) Justifiable Reliance In Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here ), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1044 (2015); see also id . at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id . For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). In Shainwald , the Court held that it was premature to decide the issue given the factual issues that needed to be decided: Plaintiff states that these false statements were material to her decision to allow Ms. Wright in her apartment, that she justifiably relied on them, and permitted Ms. Wright to perform services in her apartment while she was not there. Moreover, plaintiff alleges that her reliance on Brandel’s assurances were reasonable in that she “had no knowledge of the falsity of the representations and had no reason to know that the representations were false.” Regardless, the reasonableness of plaintiff’s reliance “implicates factual issues whose resolution would be inappropriate at this early stage.” As such, PNP’s argument regarding justifiable reliance comes prematurely. Id . (citation omitted). Causation and Damages There are two components of causation: transaction causation and loss causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Transaction Causation “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir.2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss Causation The loss causation requirement is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir.2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub , 297 A.D.2d at 31 (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co. , 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Damages for fraud are calculated according to the “out-of-pocket” rule and must reflect “the actual pecuniary loss sustained as a direct result of the wrong.” Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1986). Under CPLR § 3016(b), “ t is not necessary that the measure of damages be pleaded, so long as the facts are alleged from which damages may be properly inferred.” Black , 69 N.Y.2d at 668. In Shainwald , the Court found that Plaintiff failed to plead facts from which damages could be reasonably inferred. Specifically, the Court held that Plaintiff failed to allege facts demonstrating a direct causal link between PNP’s alleged misrepresentation and the alleged theft. “Put another way, even assuming Brandel made false representations regarding PNP’s vetting process, Plaintiff’s claim that Ms. Wright stole $100,000 worth of jewelry, which she claims is evidenced by a Federal Express receipt is far too attenuated for this Court to entertain.” In so holding, the Court agreed with PNP’s argument that since Plaintiff failed to allege that Wright had a criminal record or a propensity to commit a crime, PNP’s alleged failure to perform a criminal background check caused Shainwald’s damages. Consequently, the Court granted PNP’s motion to dismiss “based on plaintiff’s failure sufficiently plead loss causation….” Slip Op. at *6. Takeaway In New York, a plaintiff alleging fraud must do so with particularity. This requirement applies to each element of the claim.  Shainwald is a good reminder that a plaintiff can get to the finish line but not cross it because of a failure to satisfy one of the elements of his/her fraud claim.

As readers of this Blog know, we cover a broad range of issues that fall under the umbrella of commercial and business litigation. Two issues that often receive treatment from this Blog are the application of the statute of limitations to fraud-based claims, and the court’s ability to exercise jurisdiction over a defendant. Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, issued an opinion that involves both of these issues. Magomedov v. Lebedev , 2019 N.Y. Slip Op. 30378(U) (Sup. Ct. N.Y. County Feb. 19, 2019) ( here ). The Applicable New York Law Statute of Limitations for Fraud Under CPLR § 213(8), an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “ he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis , 44 A.D.3d 1033, 1034 (2d Dept. 2007). Accord Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman , 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). here.=">here."> Equitable Estoppel Tolling In New York, the courts will equitably estop the assertion of a statute of limitations defense when the defendant affirmatively takes action such that it creates a “long delay between the accrual of the cause of action and the institution of the legal proceeding.” General Stencils v. Chiappa , 18 N.Y.2d 125, 128 (1966); see also Zumpano v. Quinn , 6 N.Y.3d 666, 674 (2006); Matter of Steyer , 70 N.Y.2d 990, 993 (1988). Claims of fraudulent inducement, misrepresentation or deception are sufficient to invoke the equitable estoppel doctrine.  Zumpano , 6 N.Y.3d at 674 (quoting Simcuski v. Saeli , 44 N.Y.2d 442, 449 (1978)); Putter v. North Shore Univ. Hosp. , 7 N.Y.3d 548, 552-553 (2006); MBI Intern. Holdings Inc. v. Barclays Bank PLC , 151 A.D.3d 108, 116-17 (1st Dept. 2017). Importantly, the plaintiff must demonstrate reasonable reliance on the defendant’s misrepresentations to invoke the doctrine. Simcuski , 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.” Centro Empresarial Cempresa S.A. v. American Movil, S.A.B de C.V. , 17 N.Y.2d 269, 268 (2011). The failure to make such a showing will result in the application of the statute of limitations. Gleason v. Spota , 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)). 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.” Gleason , 194 A.D.2d at 765. here.=">here."> Specific Jurisdiction Under CPLR § 302(a)(1), a court can exercise specific personal jurisdiction over a non-domiciliary who “transacts any business within the state.” CPLR § 302(a)(1). To satisfy CPLR § 302(a)(1), a plaintiff must satisfy a two-part test. First, the defendant must have “transacted business” in New York. McGowan v. Smith , 52 N.Y.2d 268, 271 (1981). Second, the plaintiff must demonstrate “some articulable nexus between the business transacted and the cause of action sued upon.” Id . at 272. CPLR § 302(a)(1) is a “single act statute,” whereby “proof of one transaction in New York is sufficient to invoke jurisdiction, even though the defendant never enters New York, so long as the defendant’s activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted.” Deutsche Bank Secs., Inc. v. Mont. Bd. of Invs. , 7 N.Y.3d 65, 71 (2006). “Purposeful activities are those with which a defendant, through volitional acts, ‘avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.”’ Fischbarg v. Doucet , 9 N.Y.3d 375, 380 (2007) (quoting McKee Elec. Co. v. Rauland–Borg Corp. , 20 N.Y.2d 377, 382 (1967)). Whether a non-domiciliary has engaged in sufficient purposeful activity to confer jurisdiction requires an examination of the totality of the circumstances. Id . (quoting Farkas v. Farkas , 36 A.D.3d 852, 853 (2d Dept. 2007)). The quality of a defendant’s contacts is the “primary consideration” in establishing jurisdiction. Id . As to the required nexus, the courts require “a relatedness between the transaction and the legal claim such that the latter is not completely unmoored from the former, regardless of the ultimate merits of the claim.” Licci ex rel. Licci v. Lebanese Canadian Bank, SAL , 20 N.Y.3d 327, 339 (2012) “ here at least one element arises from the New York contacts, the relationship between the business transaction and the claim asserted supports specific jurisdiction under the statute” Id . at 341. Magomedov v. Lebedev Background Magomedov involved a dispute over an alleged joint venture between the plaintiffs, Magomed Magomedov (“Magomedov”) and Akhmed Bilalov (“Bilalov”) and the defendants, Leonard Blavatnik (“Blavatnik”) and Viktor Vekselberg (“Vekselberg”), and the sale of a Russian oil company, OJSC Tyumenskaya Neftyanaya Kompaniya (“TNK”), for more than one billion dollars. In 1997, the Russia Federation placed 40% of TNK up for public auction. Blavatnik and Vekselberg purchased that interest, but the sale was allegedly conditioned on Blavatnik and Vekselberg later obtaining a controlling interest in a Russian oil company, OJSC Nizhnevartovskneftgaz (“NNG”), which was owned by plaintiffs and defendant, Leonid Lebedev (“Lebedev”). Plaintiffs and Lebedev allegedly provided Blavatnik and Vekselberg with the majority control in NNG that they sought. According to the complaint, in connection with the transaction, plaintiffs and Lebedev agreed to act jointly in all matters related to their respective NNG shares, to share in the profits and losses of the venture, and not sell or take unilateral action regarding their respective shares in NNG without unanimous consent (“1997 Joint Venture”). Two years later, in 1999, plaintiffs sold their interest in NNG to Oleg Kim, a Russian businessman. Plaintiffs alleged that, prior to the sale of their NNG shares, Vekselberg and Blavatnik secretly approached Lebedev to sell his NNG shares to them. According to the complaint, in violation of the 1997 Joint Venture, Lebedev agreed to sell his interest in NNG in exchange for a stake in a different joint venture with Vekselberg and Blavatnik (“Defendants’ Joint Venture”). Plaintiffs further alleged that, in violation of the 1997 Joint Venture, Lebedev failed to disclose the sale of his NNG shares to Vekselberg and Blavatnik, as well as his conflict of interest in negotiating the sale of plaintiffs’ NNG shares. Blavatnik and Vekselberg eventually purchased the NNG shares that plaintiffs sold. Defendants’ Joint Venture is the subject of another action before Justice Scarpulla, Lebedev v. Blavatnik (the “Lebedev Action”). In the Lebedev Action, Lebedev alleged that he negotiated the terms of Defendants’ Joint Venture in New York in 2001. Lebedev further alleged that in October 2012, TNK was sold to a Russian state-owned conglomerate. Blavatnik and Vekselberg allegedly received $13.8 billion from that sale, and Lebedev sought $2.07 billion as part of his stake in Defendants’ Joint Venture. Plaintiffs alleged that neither knew of defendants’ misconduct until the Lebedev Action was filed in February 2014. According to plaintiffs, Lebedev met with Magomedov in 2014, at which time he disclosed his prior dealings with Blavatnik and Vekselberg. Lebedev allegedly reaffirmed the 1997 Joint Venture and discussed entering into a new agreement, whereby Lebedev would split any recovery from the Lebedev Action in exchange for Magomedov’s assistance in the Lebedev Action (“2014 Agreement”). Magomedov subsequently memorialized the 2014 Agreement and started to assist Lebedev in the Lebedev Action. However, throughout 2014, 2015, and January 2016, the parties were unable to finalize and execute a written agreement. According to the complaint, once plaintiffs realized that Lebedev had no intention of fulfilling the terms of the 2014 Agreement, they commenced the Magomedev action in February 2017. In their amended complaint, plaintiffs alleged, among other things, fraud and breach of fiduciary duty against Lebedev. Lebedev moved to dismiss on statute of limitations grounds, lack of personal jurisdiction and for failure to state a claim. The Court’s Decision Statute of Limitations In seeking dismissal of the tort-based claims ( e.g. , fraud and breach of fiduciary duty) on statute of limitations grounds, Lebedev argued that the complaint was untimely and barred by the statute of limitations. Lebedev maintained that regardless of whether a three-year or six-year statute of limitation period applied, the statute of limitations expired as to each of the claims connected to the 1997 Joint Venture. Lebedev further argued that neither the two-year discovery rule nor equitable estoppel applied to save plaintiffs’ claims against him. The Court held that the tort-based claims connected to the alleged 1997 Joint Venture had accrued decades ago, when plaintiffs sold their shares of NNG. Thus, those claims were untimely under the six-year statute of limitations. The Court held, however, that Lebedev had met his burden of showing that the two-year discovery rule did not apply, thereby shifting the burden to plaintiffs to provide an evidentiary basis to raise “a question of fact as to why Lebedev should be equitably estopped from asserting the statute of limitations.” Slip op. at *9. Based on the record before it, the Court found that plaintiffs did not diligently act to file their fraud claims within two years of the discovery of the alleged fraud and, therefore, could not avail themselves of equitable estoppel to toll the two-year period. The Court noted that plaintiffs admittedly “discovered the essential elements of their claims against Lebedev in 2014” and, therefore, “could have commenced the action at that time.” Id . Instead, “ hey voluntarily chose … to try and collaborate with Lebedev in exchange for a part of any compensation Lebedev received in the Lebedev Action.” Id . The “protracted delay in executing the 2014 Agreement”, said the Court, “ t a minimum … should have caused plaintiffs to proceed with diligence before January 2016.”   Id . at *10. The Court concluded that plaintiffs, “who are sophisticated business people and have been represented by counsel since 2014,” did not “reasonably investigate their claims. Instead, for reasons not alleged in the complaint or on th motion, plaintiffs waited another year, until February 2017, before commencing th action.” Id . Based on the foregoing, the Court found that plaintiffs failed to raise an issue of fact sufficient to withstand Lebedev’s statute of limitations challenge. Consequently, the Court dismissed the tort-based claims against Lebedev. Specific Jurisdiction Lebedev, a non-domiciliary of New York, argued that the Court lacked personal jurisdiction over him. Plaintiffs disagreed, arguing that they satisfied CPLR § 302(a)(1) and that Lebedev had waived any objection to jurisdiction by selecting a New York state court to litigate the Lebedev Action. In particular, plaintiffs maintained that Lebedev was subject to personal jurisdiction under CPLR §302(a)(1), because their claims against him arose from the 2014 agreement, which specifically reaffirmed the 1997 Joint Venture. The Court agreed with plaintiffs. The Court found that to pursue the Lebedev Action, Lebedev transacted business in New York by hiring a New York lawyer. Moreover, the Court noted that because 2014 Agreement was the subject of the lawsuit, it was directly related to Lebedev’s activities in New York and, therefore, sufficient to confer jurisdiction over him. The Court also held that Lebedev had waived any jurisdictional defense he had by selecting New York to litigate the Lebedev Action. The Court noted that a contrary result would be inequitable. See New Media Holding Co., LLC v. Kagalovsky , 118 A.D.3d 68, 77 (1st Dept. 2014) (“ waived the right to challenge personal jurisdiction by freely using the protections of the New York courts when pursuing rights related to the partnership ... filing the first lawsuit against in the Southern District of New York”). Consequently, the Court denied the jurisdictional challenge advanced by Lebedev. Takeaway Magomedeov highlights the factual nature of motions to dismiss on statute of limitations and jurisdictional grounds. It also highlights the difficulty sophisticated parties have demonstrating that they acted with diligence to protect their rights. Magomedov therefore is a good reminder of how courts will take a fact-based approach to deciding these motions.

In today’s world of e-commerce, a person cannot buy something online, subscribe to a service, or join a club or organization without agreeing to the provider’s “terms of service”. These terms are often lengthy and difficult to read ( i.e. , they are not written in plain English). For these reasons, among others, most consumers simply click the “I agree” button or link without reading the text or thinking about what they agreed to. To many consumer advocates, such electronic terms of service should not be binding. The reason, important terms, such as arbitration requirements or other conditions precedent to a claim, are buried in a sea of words that consumers do not read or understand.  Thus, argue these advocates, it is unfair to bind consumers to agreements that are nothing more than contracts of adhesion. As discussed in O’Brien v. Trooper Fitness LLC , 2019 NY Slip Op 30319(U) (Sup. Ct. N.Y. County Feb. 8, 2019) ( here ), the courts do not agree with the critics of online contracts. Indeed, courts have held that “ here is nothing automatically offensive about such agreements, as long as the layout and language of the site give the user reasonable notice that a click will manifest assent to an agreement.” Sgouros v. Trans Union Corp. , 817 F.3d 1029, 1033-34 (7th Cir. 2016). For this reason, “ ourts around the country have recognized that electronic ‘click’ can suffice to signify the acceptance of a contract.” Id . See also Meyer v. Uber Techs., Inc. , 868 F.3d 66, 75 (2d Cir. 2017). There are two common types of electronic agreements: clickwrap and browsewrap. Each provides a different manner of assent by the user. Nicosia v. Amazon.com, Inc. , 834 F.3d 220, 229 (2d Cir. 2016). The former requires users to click an “I agree” box after being presented with a list of terms and conditions of use, while the latter requires the user to click on a hyperlink at the bottom of the screen that takes the user to the terms and conditions on a website. Id . at 233; Meyer , 868 F.3d at 75; Nguyen v. Barnes & Noble Inc. , 763 F.3d 1171, 1175-76 (9th Cir. 2014). In addition to the foregoing, some online agreements require the user to scroll through the terms before the user can indicate his/her assent by clicking “I agree.” See , e.g. , Berkson v. Gogo LLC , 97 F. Supp. 3d 359, 386, 398 (E.D.N.Y. 2015) (terming such agreements “scrollwraps”); Meyer , 868 F.3d at 75. Other agreements notify the user of the existence of the website’s terms of use and, instead of providing an “I agree” button, advise the user that he/she is agreeing to the terms of service when registering or signing up. Id . at 399 (describing such agreements as “sign-in-wraps”). See also Meyer , 868 F.3d at 75-76. Courts routinely uphold clickwrap agreements for the principal reason that the user has affirmatively assented to the terms of agreement by clicking “I agree.” Meyer , 868 F.3d at 75; Fteja v. Facebook, Inc. , 841 F. Supp. 2d 829, 837 (S.D.N.Y. 2012) (collecting cases). “Under New York law, contracts are enforced so long as the consumer is given a sufficient opportunity to read the , and assents thereto after being provided with an unambiguous method of accepting or declining the offer.” People ex rel. Spitzer v. Direct Revenue, LLC , 19 Misc. 3d 1124(A), 2008 N.Y. Slip Op. 50845(U), *4 (Sup. Ct., N.Y. County 2008) ( here ). “Claims that a consumer was not aware of the agreement or did not actually read it must be disregarded where … the agreement was acknowledged and accepted by clicking on the relevant icon.” Id . (holding that the click-wrap agreement was binding and barred a claim for deceptive or unlawful conduct). Browsewrap agreements, on the other hand, do not require the user to expressly assent. Meyer , 868 F.3d at 75 (citing Juliet M. Moringiello, Signals, Assent and Internet Contracting , 57 Rutgers L. Rev. 1307, 1318 (2005) (“ rowse-wrap encompasses all terms presented by a web site that do not solicit an explicit manifestation of assent.”)). “Because no affirmative action is required by the website user to agree to the terms of a contract other than his or her use of the website, the determination of the validity of the browsewrap contract depends on whether the user has actual or constructive knowledge of a website’s terms and conditions.” Nguyen , 763 F.3d at 1176 (citation omitted). In O’Brien , the Court dismissed a personal injury complaint involving a clickwrap agreement, finding that the plaintiff was bound by the terms and conditions in the agreement. O’Brien v. Trooper Fitness LLC O’Brien arose in the context of a personal injury action. Plaintiff, Kristen O’Brien (“Plaintiff” or “O’Brien”), claimed that she was injured while exercising at a gym (the “Gym”) owned, operated, managed and maintained by defendant, Trooper Fitness LLC (“Trooper”). O’Brien claimed that she was at the Gym pursuant to a subscription she had with the defendant, Class Pass Inc. (“Class Pass”), which “provided access, via an pp, to its members and/or subscribers, to a variety of ym locations,” including the Gym. Plaintiff became a member of Class Pass, which “own and operate an e-commerce platform through which subscribed members enroll in health and fitness classes offered by independent studios, gyms, and fitness centers”, by creating an account with the company. Only members of Class Pass were permitted to sign up for classes at Trooper through the Class Pass app. Before O’Brien could join Class Pass, she was required to accept the company’s Terms of Use. Among other things, the Terms of Use provided that: “By accessing and/or using the ite, you accept and agree to be bound by , just as if you had agreed to these terms in writing. If you do not agree to these erms do not use the ite.” The Terms of Use required that all disputes between Class Pass and one of its members had to be resolved by arbitration unless the member opted out of arbitration in the manner prescribed in the agreement. Further, Class Pass members seeking to bring a claim against the company were required to provide written notice of such a claim in order to afford Class Pass an opportunity to resolve the dispute before it was litigated or arbitrated. O’Brien conceded that when she signed up for Class Pass, she did not “see any language on the website or App where agreed to waive her right to trial in favor of rbitration” and had “no specific recollection of seeing any disclaimers or waivers to that effect.” Like most consumers, O’Brien did not “specifically review during the sign up process or subsequent to the sign up process.” O’Brien commenced the action alleging, among other things, that, prior to the date of the accident, she reserved access to the Gym by means of the Class Pass app. She claimed that Trooper and Class Pass negligently caused her accident since they either created a dangerous condition at the Gym or had actual and/or constructive notice of a dangerous condition at the premises and failed to address it. Class Pass moved to dismiss the complaint based on documentary evidence (CPLR § 3211(a)(1)) or, in the alternative, to compel arbitration pursuant to CPLR § 7501. Class Pass argued that the complaint should be dismissed because O’Brien waived the right to bring personal injury claims against the company under the Terms of Use and because she failed to provide Class Pass with notice of the claim as required by the Terms of Use. Alternatively, Class Pass argued that, in the event the complaint was not dismissed, Plaintiff should be compelled to arbitrate her dispute pursuant to CPLR § 7501 and the Terms of Use. In opposition, O’Brien argued that the arbitration provisions were unenforceable as a matter of public policy because they were buried in the Terms of Use, which “require an additional click or scrolling to display.” In reply, Class Pass argued that O’Brien was bound by the Terms of Use, whether she read them or not, since she clicked on the link agreeing to accept them. The Court’s Ruling The Court agreed with Class Pass and dismissed the compliant. The Court held that the agreement was enforceable and, therefore, O’Brien was bound by the Terms of Use therein. Plaintiff admits that she was at the gym on the day of her accident through the use of her Class Pass membership. However, plaintiff could not have joined Class Pass without agreeing to its Terms and Conditions, which were accessible through a hyperlink on the sign in page and which she accepted by clicking on a box on the said page. By agreeing to the Terms and Conditions, she is now bound by them. Slip Op. at *5. Since the agreement was enforceable, the Court found that O’Brien had waived her right to bring a personal injury claim against Class Pass. Id . The Court also held that O’Brien failed to satisfy the notice requirement set forth in the Terms of Use. As such, she failed “to satisfy a condition precedent to suit” necessitating dismissal of her complaint. Id . at *6. Finally, the Court addressed the dilemma consumers often find themselves in when they use an app to buy goods or services: they must agree to lengthy terms and conditions in order to use the app or access the website. In this regard, the Court found that neither case authority nor public rendered clickwrap agreements unenforceable: She essentially opposes the motion by arguing that information such as the Terms and Conditions is “often contained in hyperlinks that generally require an additional click or scrolling to display” and that, even if a user accesses such information, it is too “onerous to actually read through from start to finish.” However, she speaks only in generalities and does not address the Terms and Conditions at issue herein. Additionally, she admits that she “never read” the Terms and Conditions and “has no specific recollection of even seeing when she signed up for Class Pass.” Thus, she does not deny that the Terms and Conditions existed or that she was able to access them. Further, plaintiff cites no legal authority whatsoever for the foregoing arguments, or for her contention that the Terms and Conditions are unenforceable as against public policy. Id . Takeaway The courts have been clear that the “making of contracts over the internet ‘has not fundamentally changed the principles of contract.’” Hines v. Overstock.com , Inc., 668 F. Supp. 2d 362, 366 (E.D.N.Y. 2009) (quoting Register.com, Inc. v. Verio, Inc. , 356 F.3d 393, 403 (2d Cir. 2004), aff’d , 380 Fed. App’x 22, 25 (2d Cir. 2010) (summary order)). Accordingly, parties seeking to enforce an electronic contract must demonstrate “an offer, acceptance, consideration, mutual assent and intent to be bound.” Register.com , 356 F.3d at 427 (internal citation and quotation marks omitted). As shown in O’Brien , these elements are satisfied with respect to clickwrap agreements because the terms and conditions are available for the user to review and require the user to affirmatively declare their assent to them before the user can use the app or access the website. Serrano v. Cablevision Sys. Corp. , 863 F. Supp. 2d 157, 164 (E.D.N.Y. 2012).

A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” Marx v. Akers , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. Auerbach v. Bennett , 47 N.Y.2d 619, 631 (1979). See also Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). In New York, as in most jurisdictions, a derivative plaintiff must be a shareholder of the company “at the time of bringing the action,” and at the time of the alleged wrongdoing. See , e.g. , BCL § 626(b); Pessin v. Chris-Craft Indus. , 181 A.D.2d 66, 70 (1st Dept. 1992).  See also Lewis v. Anderson , 477 A.2d 1040, 1049 (Del. 1984). “ plaintiff who ceases to be a shareholder, whether by reason of a merger or for any other reason, loses standing” to sue derivatively. Lewis , 477 A.2d at 1049. Accordingly, courts have focused on the plaintiff’s stock ownership during both points in time, and in particular at the time of the alleged misconduct. In New York, the contemporaneous ownership rule is “strictly enforced.” Honzawa Holding Co. v. Hiro Enter. USA , 291 A.D.2d 318, 318 (1st Dept. 2002). To satisfy the requirement, the plaintiff must have owned stock in the corporation throughout the course of the activities that constitute the primary basis of the complaint. This is not to say that a plaintiff must have owned stock in the company during the entire course of all relevant events. It does mean, however, that a proper plaintiff must have acquired his or her stock in the corporation before the core of the allegedly wrongful conduct transpired. In re Bank of New York Deriv. Litig. , 320 F.3d 291, 298 (2d Cir. 2003). “ ailure to satisfy the . . . contemporaneous ownership requirement of § 626(b) is such a fundamental lack of capacity that it results in failure to state a cause of action.” Roy v. Vayntrub , 15 Misc. 3d 1127(A), 2007 N.Y. Slip Op. 50868(U) (Sup. Ct. Nassau County 2007), at *6 (citing Barr v. Wackman , 36 N.Y.2d 371 (1975)). For this reason, courts require the plaintiff to plead contemporaneous ownership with particularity rather than through boilerplate assertions. See , e.g. , In re Computer Sciences Corp. Deriv. Litig. , 2007 WL 1321715, at *15 (C.D. Cal. Mar. 26, 2007) (“ eneral allegation insufficient to allege contemporaneous ownership during the period in which the questioned transactions occurred.”). The foregoing standing rules apply to limited liability companies (“LLCs”). Tzolis v. Wolff , 10 N.Y.3d 100, 102 (2008); Jacobs v. Cartalemi , 156 A.D.3d 605 (2d Dept. Dec. 6, 2017). Thus, a person may bring a derivative action so long as he/she is a “member” of the company. To be a member of an LLC, a person must have been admitted to the company’s membership “in accordance with the terms and provisions of the Limited Liability Company Law and the limited liability company’s operating agreement,” and possess “a membership interest” in the LLC “with the rights, obligations, preferences, and limitations specified under the Limited Liability Company Law and the operating agreement.” Limited Liability Company Law § 102(q). Under the Limited Liability Company Law, a “ embership interest” means “a member’s aggregate rights in a limited liability company, including, without limitation: (i) the member’s right to a share of the profits and losses of the limited liability company; (ii) the member’s right to receive distributions from the limited liability company; and (iii) the member’s right to vote and participate in the management of the limited liability company.” Limited Liability Company Law § 102(r). In Kaminski v. Sirera , 2019 N.Y. Slip Op. 01067 (2d Dept. Feb. 13, 2019) ( here ), the Appellate Division, Second Department addressed the standing of a derivative plaintiff seeking relief on behalf of an LLC and found that the plaintiff failed to satisfy the standing requirements for bringing a derivative action. Kaminski v. Sirera Kaminski arose in connection with the acquisition of membership units in Melange Med Spa, LLC (the “LLC”) by the plaintiff, Jill Kaminski (“Kaminski” or “Plaintiff”). Kaminski acquired the units from a prior member in or about 2009 or 2010. In 2016, Kaminski commenced the action individually and derivatively on behalf of the LLC against, among others, Christina Sirera, a managing member of the LLC, seeking, inter alia , declaratory and injunctive relief, an accounting, and damages for waste and breach of fiduciary duty. Kaminski also asserted causes of action against Allyson Avila (“Avila”) and Wilson, Elser, Moskowitz, Edelman & Dicker, LLP (“Wilson Elser”), attorneys for the LLC, alleging legal malpractice, breach of contract, breach of fiduciary duty, and aiding and abetting a breach of fiduciary duty. Avila and Wilson Elser moved to dismiss the complaint on the ground that, inter alia , Kiminski lacked standing to assert claims on behalf of the LLC. The motion court denied the motion to dismiss the derivative causes of action alleging breach of fiduciary duty (fifth and sixth causes of action), aiding and abetting breach of fiduciary duty (seventh and eighth causes of action), and entitlement to the attorneys’ fees and costs incurred in prosecuting the action (seventeenth cause of action). Avila and Wilson Elser appealed the denial of their motion to dismiss. The Second Department reversed. The Court held that Kaminski lacked standing to bring the action derivatively. The Court found that Kaminski failed to comply with the terms of the LLC’s operating agreement. In that regard, Kaminski “failed to obtain the consent of the nonselling members to be admitted as a member of the LLC when she acquired her membership interest,” a requirement in the LLC operating agreement: Here, the plaintiff does not dispute that she failed to obtain the consent of the nonselling members to be admitted as a member of the LLC when she acquired her membership interest. Paragraph 8 of the LLC’s operating agreement provides that “ ew members may be admitted only upon the unanimous consent of the Members and upon compliance with the provisions of this agreement,” and paragraph 32(e) of the operating agreement provides that “ non-member purchaser of a member’s interest cannot exercise any rights of a Member unless, by unanimous vote, the non-selling Members consent to him becoming a Member” ( see Limited Liability Company Law § 602). Slip Op. at *2. Therefore, concluded the Court, “the plaintiff, as a nonmember purchaser who had not been admitted as a member of the LLC, lack standing to pursue derivative causes of action on behalf of the LLC.” Id .  As such, the motion court “should have granted those branches of the motion of Avila and Wilson Elser which were to dismiss the fifth, sixth, seventh, and eighth causes of action and, in addition, the seventeenth cause of action insofar as asserted against them.” Id . Takeaway The derivative standing rules are designed to prevent plaintiffs from buying into a lawsuit or commencing a derivative action by simply purchasing shares after the alleged wrong has occurred. See , e.g. , Independent Investor Protective League v. Time, Inc. , 50 N.Y.2d 259, 263 (1980). Although there are exceptions to the rule, the law has long required plaintiffs bringing a derivative action to have a stake in the company on whose behalf the action is commenced.  After all, if the plaintiff is not a shareholder of the company, then he/she has no right to vindicate the company’s rights and obtain a judgment on its behalf. In Kaminski , the Second Department reinforced this rule. Kaminski also reinforces the importance of an LLC’s operating agreement. As this Blog has noted in the context of judicial dissolution, courts look to an LLC’s operating agreement to determine whether it contains provisions that govern the outcome of the dispute between the parties. In Kaminski , the operating agreement contained such provisions and, therefore, controlled the outcome of the appeal.