Search Results

It is not uncommon for practitioners to group multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. This form of pleading, commonly known as “group pleading,” generally runs afoul of the Federal Rules of Civil Procedure (“Federal Rules”) and the Civil Practice Law and Rules (“CPLR”). This is particularly so in the context of fraud. Both the Federal Rules and the CPLR require a plaintiff to provide sufficient notice of the claims asserted against the defendants. Rule 8(a)(2) provides that a complaint “must contain” “a short and plain statement of the claim showing that the pleader is entitled to relief.” CPLR 3013 requires the pleader to provide the court and the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. Generally, a motion to dismiss under Fed. R. Civ. P. 12(b)(6) or CPLR 3211(a)(7) may be granted if a court concludes that the plaintiff has failed to set forth fair notice of what the claim is and the grounds upon which it rests. When fraud is alleged, the plaintiff must plead the claim with particularity. Under Rule 9(b), the circumstances constituting fraud must be stated with particularity. The Rule’s particularity requirement demands a higher degree of notice than that required for other claims and is intended to enable the defendant to respond specifically to the allegations. To satisfy the particularity requirement of Rule 9(b), the complaint must plead such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud. Like Rule 9(b), CPLR 3016(b) requires the plaintiff to plead fraud with particularity.  But, unlike Rule 9(b), the pleading requirement is not as heightened. Thus, CPLR 3016(b) is satisfied when the facts in the complaint “permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008). In Pludeman , the Court of Appeals explained that the purpose of CPLR 3016(b) is to inform a defendant of the complained-of conduct. For that reason, CPLR 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.” 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Id . at 492. Thus, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. Id . here.=">here."> Despite the foregoing differences, in cases involving multiple defendants, particularity under the Federal Rules and the CPLR require the plaintiff to inform each defendant of the nature of his/her alleged participation in the fraud. Thus, a complaint that lumps together numerous defendants without differentiation will be dismissed on particularity grounds. See , e.g. , Rule 9(b): DiVitorrio v. Equidyne Extractive Indus., Inc. , 822 F.2d. 1242, 1247 (2d Cir. 1987) (“ here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of alleged participation in the fraud.”); Regnante v. Sec & Exch. Officials , 134 F. Supp. 3d 749, 771 (S.D.N.Y. 2015) (granting motion to dismiss for failing to particularize each defendant’s misconduct) (“Rule 9(b) requires that when fraud is alleged against multiple defendants, a plaintiff must set forth separately the acts complained of by each defendant”); CPLR 3016(b): Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co. , 84 A.D.2d 736 (1st Dept. 1981) (affirming a dismissal of a complaint where the claims were “pleaded against all defendants collectively without any specification”); Ritchie v. Carvel Corp. , 180 A.D.2d 786, 787 (2d Dept. 1992) (“allegations of fraud that refer only to the ‘defendants’ without connecting particular misrepresentations to the particular defendants are insufficient”); Excel Realty Advisers LP v. SCP Capital, Inc. , 2010 N.Y. Slip Op. 33447 (U) (Sup Ct. Nassau Co. Dec. 2, 2010), aff’d. , 101 A.D.3d 669 (2d Dept. 2012) (dismissing fraud claim “primarily based upon a series of oblique averments which . . . lump the defendants together without any specification as to the precise fraudulent conduct attributed to each….”). On December 4, 2018, the Appellate Division, First Department, reversed the denial of a motion to dismiss on particularity grounds despite the plaintiff’s alleged failure to differentiate between the acts of different defendants. 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp. , 2018 N.Y. Slip Op. 08239 (1st Dept. Dec. 4, 2018) ( here ). 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp . Background Chystie involved a stock purchase agreement between 47-53 Chrystie Holdings LLC (“Chrystie”) and the majority shareholders of defendant Thuan Tam Realty Corp (“Realty”). Under the agreement, plaintiffs were afforded a 20-day due diligence period, during which they could terminate the agreement. In connection with the due diligence, defendants were required to give plaintiffs reasonable access to Realty’s books and records and to furnish information that plaintiffs reasonably requested. The complaint alleged that plaintiffs requested Realty’s corporate documents and that the individual defendants represented, on a number of occasions, that no corporate documents existed. In that regard, according to the Court, the record contained an email from Realty’s manager to plaintiffs’ counsel stating that he had confirmed with the “different shareholders” that Realty did not have the requested corporate documents. The complaint alleged that plaintiffs relied on that representation and, based on the uncertainty concerning the existence of corporate documents, terminated the purchase agreement. The parties continued to negotiate and agreed to revive the agreement on the condition that a court of competent jurisdiction issue a declaratory judgment as to the holdout shareholder’s rights, which would address the uncertainty created by the absence of corporate documents. The individual defendants then secured a higher purchase price from plaintiffs. After the second purchase agreement was signed, defendants disclosed that corporate documents did exist. Plaintiffs brought suit, alleging, among other things, fraud against the individual defendants. The motion court granted the motion. The First Department reversed. The First Department’s Decision The Court found that “ he complaint state a cause of action for fraud against the individual defendants.” Slip op. at 1. In doing so, the Court rejected defendants’ contention that the complaint “insufficiently particularized” the conduct “as to any of the individual defendants.” Id . The Court explained that the reference to “Individual Defendants” was not to a “diverse group of defendants to whom entirely different acts giving rise to the action may be attributed<,> ” rather “it refer to the eight shareholders of the single corporate defendant, each of whom is alleged to have made the same false representation.…” Id .  Thus, “it reasonable to infer that the individual shareholders knew whether this closely held corporation maintained corporate documents and thus that they participated in the alleged wrongful conduct by representing that no documents existed.” Id . at **1-2. Takeaway Pleadings that lump together multiple defendants and plead the same allegations against them collectively rather than individually are subject to dismissal for failure to differentiate which defendant took what action. Where the alleged misconduct of each defendant is the same, Chystie teaches that the failure to differentiate between defendants, at least at the pleading stage, will not result in dismissal on particularity grounds.

Generally, a business entity must be formed in order to conduct business.  For example, “a nonexistent entity cannot acquire rights or assume liabilities, a corporation which has not yet been formed normally lacks capacity to enter into a contract.”  Rubenstein v. Mayor , 41 A.D.3d 826, 828 (2 nd Dep’t 2007).  Frequently, a new business entity is formed for the specific purpose of entering into a business transaction.  What happens, though, if the entity is not properly or timely formed at the time that the parties enter into their transaction?  The doctrine of “Corporation by Estoppel” can be used to prevent a defendant from avoiding its obligations under a contract by arguing that the entity was not formed at the time a contract was made. Such was the case in Boslow Family Ltd. Partnership v. Glickenhaus & Co. , 7 N.Y.3d 664 (2006).  In 1997, the Boslow family signed its initial certificate of limited partnership to form the plaintiff entity and delivered same to its counsel for filing, but counsel failed to do so.  Later in 1997, believing that the initial certificate had been filed, the Boslow plaintiff opened a discretionary investment account with defendant.  After three years, and after paying defendant $31,000.00 in advisory fees, plaintiff decided to close the investment account.  Thereafter, in 2002, plaintiff commenced an action against defendant for improper management of plaintiff’s account.  Almost a year later, plaintiff filed its initial certificate upon realizing that it had not previously been filed.  Defendant moved to dismiss the complaint arguing, inter alia , that plaintiff did not have the capacity to sue because the initial certificate was not filed and, therefore, lacked capacity to bring suit and enter into the underlying investment management agreement.  The motion court dismissed the complaint and the Appellate Division affirmed.  The Court of Appeals reversed. The Boslow Court of Appeals recognized that plaintiff failed to comply with §§ 121-201(b) (a limited partnership is formed at the time that the initial certificate is filed with the department of state) and 121-206 (providing that a “signed certificate of limited partnership ... shall be delivered to the department of state”) of New York’s Partnership Law.  Nonetheless, the Court, in applying the doctrine of “corporation by estoppel,” held that: Defendant is estopped from contending that plaintiff was not a limited partnership because defendant is using that sword to escape liability after it benefitted from its contract with plaintiff.  Defendant has conceded that the services it provided plaintiff were not dependent on plaintiff’s limited partnership status, or lack thereof. Boslow , 7 N.Y.3d at 668-69 (citations omitted). On December 5, 2018, the Supreme Court of the State of New York, Second Department, applied the “corporation by estoppel” doctrine in TY Builders II v. 55 Day Spa .  In 2010, the TY defendant entered into a three-year lease with “TY Builders LLC.”  The lease rider was between “TY Builders II LLC” and plaintiff and was signed by the managing member of “TY Builder LLC.”  The personal guaranty of plaintiff’s president, which guaranteed plaintiff’s payment obligations under the Lease, was given to “TY Builder II.” Shortly after the lease was signed, plaintiff advised that it was vacating the premises.  “TY Builders II, Inc.” commenced the action to recover damages for breaching the lease.  Thereafter, an amended summons and complaint were filed with the same named plaintiff but listing the names of various entities named in the lease, rider and guaranty as d/b/as.  The TY plaintiff moved for summary judgment on the amended complaint and the defendant cross-moved  for summary judgment dismissing the amended complaint “on the principal ground that the plaintiff, undisputably not a party to any of the relevant signed lease documents, lacked standing to enforce the terms of those documents, and that the entities named on those documents did not legally exist at the time the documents were signed.”  Supreme Court granted plaintiff’s motion and denied defendant’s cross-motion. Relying primarily on the Court of Appeals decision in Boslow and its own decision in Rubenstein , the TY Court recognized that “a corporation may be deemed to exist and possess the capacity to contract pursuant to the doctrine of incorporation by estoppel” and, therefore, “agree with the Supreme Court’s determination to deny the defendants’ cross motion, in effect, for summary judgment dismissing the amended complaint on ground ” and, in applying the doctrine, the TY Court stated: There is no question that the defendants, regardless of the technical status of TY Builders, LLC, or TY Builders II, LLC, at the time the lease documents were signed, agreed to enter into a lease for certain premises owned by Weiss, the principal of those later-formed entities, and were granted legal access and possession of those premises in exchange for the promise of the payment of rent. The defendants do not dispute that 55 Day Spa failed to pay rent as directed under the lease or that Peterson had personally guaranteed the monthly lease payments. The evidence demonstrates that the parties engaged in the subject business transactions and the defendants received the benefit of possession of the property. Consequently, the defendants are estopped from using the plaintiff's lack of proper incorporation to escape liability under the lease (citations omitted).

As readers of this Blog know, one of the elements of a fraud claim is “justifiable reliance.” In Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018), the New York Court of Appeals emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. Determining whether a plaintiff justifiably relied on a misrepresentation or omission, 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). Recognizing this difficulty, 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).  Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). Satisfying the foregoing rules is even more difficult where the plaintiff is a sophisticated individual or entity, as the court in Tall Tower Capital LLC v. Stonepeak Partners, LP , 2018 N.Y. Slip Op. 33024(U) ( here ), recently held. Here.=">Here."> Background Tall Tower arose from an alleged breach of a Confidentiality and Non-Circumvention Agreement between the plaintiff, Tall Tower Capital LLC, and the defendant, Stonepeak Partners, LP, pursuant to which the parties agreed “to pursue jointly potential transactions in the wireless communications industry.” The Agreement required exclusivity on potential deals that the parties were jointly pursuing and prohibited them from circumventing this exclusivity arrangement. Tall Tower alleged that between January and November 2014, while the parties were pursuing a potential transaction in which they would acquire and manage Clear Channel telecommunications assets, Stonepeak began breaching the Agreement when it partnered with Vertical Bridge to bid on and acquire the assets. Vertical Bridge won the bid in December 2014. Tall Tower brought suit against Stonepeak, alleging only one cause of action: breach of the Confidentiality and Non-Circumvention Agreement. Stonepeak answered the complaint and asserted three counterclaims, one of which was for fraudulent inducement. The counterclaims were based on the fact that two Tall Tower executives working with Stonepeak on the Clear Channel deal – Dale West, the CEO; and David Denton, the President – were enjoined by a Florida court from working in the broadcast tower industry due to restrictive covenants in contracts with their former employer (“Richland”). Denton and West resigned from Richland in January 2012. Thereafter, they formed Tall Tower. Richland sued Denton, West, and Tall Tower in a Florida state court to enforce the restrictive covenants and sought a preliminary injunction in May 2012. By order dated October 1, 2012, the Florida trial court denied the motion for preliminary injunction. Thus, when Tall Tower and Stonepeak first started working on the Clear Channel deal in early 2014, there was no legal impediment to Denton and West working on the deal. However, on March 12, 2014, a Florida appellate court reversed and remanded to the trial court to hold further proceedings to consider whether an injunction should be issued. On remand, the trial court issued an injunction on September 22, 2014, making it legally impermissible for Denton and West to continue working on the Clear Channel deal. Stonepeak claimed that Tall Tower made misrepresentations about the Florida proceedings to induce it to continue working on the Clear Channel deal. Stonepeak claimed that Tall Tower knew that Stonepeak would stop working with it if Stonepeak knew that Denton and West were legally prohibited from working on the deal. Since the proposed deal with Clear Channel was a leaseback – where Denton and West would be managing Clear Channel’s former assets after they were leased back to it – Clear Channel would balk at the deal with Tall Tower if Denton and West could not manage the assets. Stonepeak also alleged that Tall Tower’s other representations about the expertise of Tall Tower and its executives were false or misleading in light of the status of the Richland lawsuit and its effect on the ability of Denton and West to work on the Clear Channel deal. After Stonepeak became aware of the September 2014 injunction, it sought to preserve its bid with Clear Channel by working with another potential asset manager. Tall Tower moved to dismiss the counterclaims. The Court’s Decision The Court granted the motion to dismiss, finding that Stonepeak, a sophisticated entity, did not satisfy the justifiable reliance element of its fraud counterclaim. In particular, the Court noted that since the underlying predicate for Stonepeak’s fraud claim was Denton and West’s purported ability to work on the Clear Channel deal, it could have learned the truth about the representation and the status of the Florida lawsuit by checking the public docket. Thus, it could not have reasonably relied on any statement about the proceeding and Denton and West’s ability to work on the deal: The status of the Florida injunction was a matter of public record and could have been independently ascertained by Stonepeak. Stonepeak does not contend otherwise. Stonepeak does not allege that it took any steps to verify whether Denton’s questionnaire response regarding the status of the lawsuit was accurate. Hence, Stonepeak’s claim to have been fraudulently induced to continue working on the Clear Channel deal in reliance on that representation must be dismissed because such reliance is not justifiable due to Stonepeak’s own lack of due diligence. Takeaway In a prior “takeaway”, this Blog wrote the following: In Ambac , the Court of Appeals sent a strong message to sophisticated parties claiming fraud: if the person or entity has the means of knowing, by the exercise of ordinary intelligence, the truth of the subject of the alleged false representation, that person or entity must make use of those means, or he/she/it will not be heard to complain that he/she/it was the victim of fraud. Thus, where a person or entity, especially a sophisticated one, does not verify and investigate the truthfulness of assurances and representations, or is lax in doing so, the claim should be dismissed for failing to satisfy the justifiable reliance element. In Tall Tower , the Court heeded this message.

If anyone is wondering why seemingly high-cost “loans” by litigation funding companies are not considered usurious, the Appellate Division, First Department, explained why in Cash4Cases, Inc. v. Brunetti (December 6, 2018). First, however, a bit about usury.  Section 5-501 (1) of New York’s General Obligations Law , which addresses civil usury, provides that, with some exceptions, “ he rate of interest, as computed pursuant to this title, upon the loan or forbearance of any money, goods, or things in action … shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.”    Section 14-a (1) of New York’s Banking Law provides that the maximum rate of interest provided for in GOL 5-501 is 16% per annum.  GOL 5-501 (2) prohibits charging a rate of interest in excess of the rate set forth in GOL 5-501 (1).   A finding of usury by a Court is significant.  “The consequences to the lender of a usurious transaction can be harsh: the borrower is relieved of all further payment—not only interest but also outstanding principal, and any mortgages securing payment are cancelled.”  Seidel v. 18 East 17 th Street Owners, Inc. , 79 N.Y.2d 735, 740 (1992); see also, Roopchand v. Mohammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017).  Due to the harshness of such a rule, civil liability for usury “is only satisfied by clear and convincing evidence.”  Freitas V. Geddes Savings and Loan Ass’n. , 63 N.Y.2d 254, 260-61 (1984). Further, in determining whether a loan is usurious, it is not enough to simply look at the nominal interest rate.  The nature of the entire transaction must be analyzed.  As the Court noted in Freitas : Section 14-a of the Banking Law authorizes the Banking Board to establish the maximum rate of interest to be employed in certain lending arrangements, including conventional home mortgage loans. The section further provides that such rate “shall include as interest any and all amounts paid or payable, directly or indirectly, by any person, to or for the account of the lender in consideration for the making of a loan or forbearance” (Banking Law, § 14-a subd 2 ) and that the Banking Board may adopt regulations to effectuate this policy (Banking Law, § 14-a, subd 3 ). The purpose of section 14-a (subd 2, par ) of the Banking Law is to “curb the use of points and other charges which increase the lender's return” and to empower the Board “to prescribe by regulation the specific fees and charges to be included as interest on loans subject to the ceilings prescribed by the Board.” (Memorandum of New York State Banking Dept, Bill Jacket, L 1968, ch 349, p 4.) The text and legislative history of section 14-a of the Banking Law are silent as to the mode of disclosure, if any, to be undertaken by the lender in a mortgage loan transaction. Freitas , 63 N.Y.2d at 258 - 59. The Plaintiff in Cash4Cases , is a litigation funding company that purchased an interest in defendant’s personal injury action.  Pursuant to the parties’ agreement, Cash4Cases advanced defendant $77,000 “at a ‘Compound Monthly Carrying Charge’ of 3.2% and an ‘Annual Percentage Rate’ of 45.93%.”  In return, defendant agreed to repay the obligation from the proceeds of his underlying personal injury case.  Significantly, repayment of the “advance” was contingent on defendant prevailing in the underlying action. Arguing that the “advance” was usurious and unconscionable, the defendant failed to repay Cash4Cases from the proceeds of the underlying personal injury settlement.  The First Department disagreed and granted Cash4Cases’ motion for summary judgment in lieu of complaint.  In so doing, the Court reiterated that the defense of usury can only be utilized where the repayment obligation springs from a loan.  Relying on Rubenstein v. Small , 273 A.D. 102, 104 (1 st Dep’t 1947), the Cash4Cases Court held that “ o constitute a loan, the agreement must ‘provide for repayment absolutely and at all events or that the principal in some way be secured as distinguished from being put in hazard.’” The Court held that agreements such as those used by Cash4cases are not loans because the “advances” do not have to be repaid, and thus are “entirely contingent” on whether the underlying action is successful.  Accordingly, a usury defense was unavailing. For a variety of the following reasons, the Court also found that the parties’ agreement was not unconscionable: the Cash4Cases defendant did not demonstrate the absence of “meaningful choice” in entering into the agreement; the terms of the agreement were not “unreasonably favorable” to Cash4Cases; the interest rates were fully disclosed;  defendant was represented by counsel in conjunction with the transaction; and, funds were received by defendant “with no guaranteed obligation to repay, except from the proceeds, if any, recovered in his personal injury action.”  Thus, despite a high interest rate, “given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant” and, therefore, not unconscionable.

“Law of the case” is a phrase that litigators use all of the time, often without thought or explanation. But what is the law of the case doctrine? And, when does it apply? The law of the case doctrine is part of a larger group of related concepts – i.e. , res judicata (claim preclusion) and collateral estoppel (issue preclusion) – that are designed to limit the relitigation of issues. Like res judicata and collateral estoppel, the law of the case doctrine contemplates that the parties had a “full and fair” opportunity to litigate the initial determination. The law of the case doctrine is focused on the preclusive effect of judicial determinations made during the course of a litigation before final judgment. Erickson v. Cross Ready Mix, Inc. , 98 A.D.3d 717, 717 (2d Dept. 2012) (“The doctrine applies only to legal determinations that were necessarily resolved on the merits in prior decision”) (internal quotation marks and citations omitted). Res judicata and collateral estoppel address preclusion of issues and claims after judgment: res judicata precludes a party from asserting a claim that was litigated in a prior action ( see Parker v. Blauvelt Volunteer Fire Co., Inc. , 93 N.Y.2d 343, 347 (1999)), while collateral estoppel precludes relitigating an issue decided in a prior action ( see Continental Cas. Co. v. Rapid American Corp. , 80 N.Y.2d 640, 649 (1993)). In New York, the Civil Practice Law and Rules (“CPLR”) specifically recognizes res judicata and collateral estoppel as bases for dismissal. See CPLR 3211(a)(5). Both concepts are also affirmative defenses under the CPLR. See CPLR 3018(b). By contrast, the law of the case doctrine is not found in any statute. Beyond the foregoing differences, there is another difference that distinguishes the law of the case doctrine from issue preclusion and claim preclusion. The latter concepts are rigid rules of limitation, whereas the law of the case doctrine is a judicially crafted policy that “expresses the practice of courts generally to refuse to reopen what has been decided, not a limit to their power.” Messenger v. Anderson , 225 U.S. 436, 444 (1912). See also Clark v. Clark , 117 A.D.3d 668, 669 (2014) (“The doctrine of the law of the case is a rule of practice, an articulation of sound policy that, when an issue is once judicially determined, that should be the end of the matter as far as Judges and courts of co-ordinate jurisdiction are concerned”) (internal quotation marks omitted), quoting Martin v. City of Cohoes , 37 N.Y.2d 162, 165 (1975).  As such, the law of the case doctrine “directs a court’s discretion,” but does not restrict its authority. See Arizona v. California , 460 U.S. 605, 618 (1983). The doctrine does not, however, apply upon “a showing of subsequent evidence or change of law.” J-Mar Serv. Ctr., Inc. v. Mahoney, Connor & Hussey , 45 A.D.3d 809, 809 (2d Dept. 2007) (“ he law of the case operates to foreclose re-examination of question absent a showing of subsequent evidence or change of law”) (internal quotations omitted), quoting Matter of Yeampierre v. Gutman , 57 A.D.2d 898, 899 (2d Dept. 1977). Recently, the Appellate Division, First Department, was asked to decide whether the doctrine applies to an issue that was previously affirmed on appeal.  In Getty Properties Corp. v. Getty Petroleum Marketing , Inc., 2018 N.Y. Slip Op. 08076 (1st Dept. Nov. 27, 2018) ( here ), the First Department held that the doctrine barred the trial court from revisiting its earlier decision, which the Court had previously affirmed: Plaintiffs are correct that our affirmance of the prior judgment awarding prejudgment interest on attorneys’ fees constitutes the law of the case. As such, the IAS court should not have deviated from it. The Court also noted that its prior order of affirmance “foreclose any additional challenge on the issue by defendants.” Citing Brodsky v. New York City Campaign Fin. Bd. , 107 A.D.3d 544, 545-546 (1st Dept. 2013). Takeaway As noted, the law of the case doctrine operates to foreclose relitigation of an issue when the parties had a “full and fair” opportunity to do so.  When an appellate court resolves an issue in a prior appeal of the action, as in Getty Properties , that decision becomes law of the case and is binding on the Supreme Court, as well as on the appellate court. Getty Properties therefore stands as a reminder that unless a party identifies new information in discovery or a change in the law, or otherwise advances extraordinary circumstances “warranting a departure from the earlier determination on th issue” ( see Quinn v. Hillside Dev. Corp. , 21 A.D.3d 406, 407 ( 2d Dept. 2005)), he/she will have to proceed under the prior ruling.

In litigation, the prevailing party is frequently entitled to the reimbursement of statutory costs.  See, e.g., CPLR § 8101 .  What happens if a defendant is awarded costs, but the plaintiff refuses to pay?  Certainly, if the defendant is within the jurisdiction, the plaintiff can decide if it is cost effective to pursue the defendant to collect the costs.  If, however, the plaintiff is in a different jurisdiction, efforts to collect awarded costs could be more difficult.  The New York Legislature recognized this problem and enacted the “Security for Costs” provisions of the CPLR (Article 85) to ensure that New York residents sued in New York by out of state plaintiffs should not be forced to pursue out of state plaintiffs in other jurisdictions to collect awarded costs. The court in Clement v. Durban , 147 A.D.3d 39 (2nd Dep’t 2016), affirmed , ___ N.Y.3d ____ (November 14, 2018), recognized that the requirement that out of state plaintiffs post security for costs has long been a part of New York’s laws because “ ecurity for costs is a device ordinarily used against a nonresident plaintiff to make sure that if he loses the case he will not return home and leave defendant with a costs judgment that can be enforced only in plaintiff's home state” and because by “directing a nonresident to post a bond, the defendant is protected from frivolous suits and is assured that, if successful, he will be able to recover costs from the plaintiff.”  Clemente , 147 A.D.3d at 42 (citations and some quotation marks omitted). Article 85 of the CPLR governs security for costs.  CPLR § 8501(a) , which permits a defendant to be awarded security for costs as of right, provides that “ xcept where the plaintiff has been granted permission to proceed as a poor person or is the petitioner in a habeas corpus proceeding, upon motion by the defendant without notice, the court or a judge thereof shall order security for costs to be given by the plaintiffs where none of them is a domestic corporation, a foreign corporation licensed to do business in the state or a resident of the state when the motion is made.”  CPLR § 8501(b) gives the court the discretion to award a defendant security for costs in certain situations, such as where the defendant is a trustee or a receiver. Pursuant to CPLR § 8502 , if security for costs are awarded to the defendant, all proceedings are stayed (other than those that seek to review the award of security for costs) until the security is posted, and, if the security is not posted within thirty days of the order, the defendant can move to dismiss the action. Finally, pursuant to CPLR § 8503 , “ ecurity for costs shall be given by an undertaking in an amount of five hundred dollars in counties within the city of New York, and two hundred fifty dollars in all other counties, or such greater amount as shall be fixed by the court that the plaintiff shall pay all legal costs awarded to the defendant.”  While the amounts set forth in CPLR § 8503 may seem insignificant and, accordingly, moving for security for costs might not be worthwhile, courts can, and have, directed plaintiffs to post security for costs in significantly greater amounts. Thus, in Small v. Stern , 65 A.D.2d 1326, 1327 (2009), the Second Department affirmed the lower court and directed plaintiffs to post security for costs in the amount of $10,000.00 because the plaintiffs did not reside in New York and a significant bond was necessary in the “complex medical malpractice action in which defendants would incur significant expense.”   The Second Department, in Manente v. Sorecon Corp. , 22 A.D.2d 954 (1964), after finding the trial court’s order limiting security for costs to $250.00 was an “abuse of discretion,” modified the order by directing that plaintiff “file[] and serv an undertaking in the sum of $4,500.00.”  The Manente Appellate Court’s determination was based on the fact that: the “ isbursements in t action, to the present, amount to $4,062.48 for the printing of records and briefs in two prior appeals to this court from judgments in plaintiff’s favor<;> ” “ n each appeal th court reversed the judgment and granted a new trial, with costs to abide the event<;> and, “ f successful on a third trial or appeal, defendant’s statutory costs may amount to about $375.” Manente , 22 A.D.2d at 954 (citation omitted). The constitutionality of the CPLR’s security for costs provisions was challenged in Clement .  The Plaintiff in Clement , who was a New York resident when she was involved in an automobile accident with a New York City Police Department vehicle, commenced a personal injury action in Kings Supreme Court.  During the pendency of the action, Clement moved to Georgia prompting the defendant to move for security for costs in the amount of $500.00.  In opposition to the motion, Clement argued that the security for cost provisions of the CPLR violated the Privileges and Immunities Clause of the United States Constitution.  The motion court granted defendant’s motion and plaintiff appealed. The Second Department, in Clement, recognized that the appeal “raises a constitutional issue of first impression in the appellate courts.”  In unanimously affirming the motion court, the Second Department held that “the statutes, insofar as they are challenged, do not deprive nonresident plaintiffs of reasonable and adequate access to New York courts, and thus, do not violate the Privileges and Immunities Clause.  The Second Department granted permission for plaintiff to appeal to the Court of Appeals. On November 14, 2018, the Court of Appeals in Clement affirmed the Second Department and upheld the constitutionality of Article 85 of the CPLR.  In so doing the Court recognized that “ he Privileges and Immunities Clause is the preeminent constitutional directive "to constitute the citizens of the United States one people” and that “ n keeping with that goal, the Supreme Court has interpreted the clause to require the State to treat all citizens, resident and nonresident, equally and applies to only those privileges and immunities bearing upon the vitality of the Nation as a single entity." (Citations, internal quotation marks and brackets omitted.) “ ccess to the courts of the State” is one of the fundamental privileges protected by the Privileges and Immunities Clause.  While neither the United States Supreme Court nor the New York Court of Appeals “have insisted on equal treatment for nonresidents to a drily logical extreme,” the Supreme Court has explained that “the Privileges and Immunities Clause prevents a state from imposing only unreasonable burdens on nonresidents, including with respect to access to the courts of the state.”  Clement , __ N.Y.3d at __ (citations and internal quotation marks omitted).  The Court of Appeals noted that in the specific context of access to courts “the Supreme Court has held that the Privileges and Immunities Clause does not require States to erase any distinction between citizens and non-citizens that might conceivably give state citizens some detectable litigation advantage."  (Citations, internal quotation marks and brackets omitted.) The Court of Appeals set forth the two-step analysis that “governs Privileges and Immunities Clause challenges to statutes providing for disparate treatment on the basis of residency.”  First, the Court stated that it “must decide whether the burdens one of those privileges and immunities protected by the Clause" and “ hen the provision implicates access to the courts, the court must assess whether nonresidents are given access on reasonable and adequate terms for the enforcing of any rights they may have."  (Citations, internal quotation marks, brackets and ellipses omitted.)   Thus, even where nonresidents do not get exactly the same access to courts, constitutional requirements are satisfied where their access is reasonable and adequate. As to the second prong, “should the court determine that the plaintiff's exercise of a fundamental right has been impinged, the burden shifts to the defendants, who have the opportunity to prove that the challenged restriction should be upheld even though it deprives nonresidents of a protected privilege."  (Citation and internal quotation omitted.)   Restrictions should be invalidated only if it “is not closely related to the advancement of a substantial state interest.”  (Citations, internal quotation marks and brackets omitted.)  "A state may defend its position by demonstrating that (i) there is a substantial reason for the difference in treatment; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State's objective." (Citations, internal quotation marks and brackets omitted.) In applying the constitutional analysis to the Security for Costs provisions of the CPLR, the Court of Appeals first pointed out that the posting of security for costs for nonresident access to courts is “a fixture in states across the country.”  (Citations omitted.) Specifically, the Court of Appeals found that Article 85 of the CPLR does not violate the Privileges and Immunities Clause “because nonresidents are provided reasonable and adequate access to the New York courts.”  In so holding the Court stated: For these reasons, we conclude that sections 8501 (a) and 8503 do not unduly burden nonresidents' fundamental right to access the courts because they impose marginal, recoverable security for costs on only those nonresident plaintiffs who do not qualify for poor persons' status pursuant to CPLR 1101, or fit any other statutory exemption. Where these nonresident plaintiffs do not prevail in their litigation, they must pay the same costs required of non-prevailing residents, but are simply required to post the security applied to those costs at an earlier date. Conversely, should nonresident plaintiffs prevail, their security is refunded, with any accrued interest. Even if, as plaintiff contends, this provides resident litigants with some detectable litigation advantage, imposing a relatively minor hardship on a limited class of nonresident plaintiffs is not enough to constitute an impermissible burden, such that nonresident plaintiffs do not have reasonable and adequate access to the courts. (Citations and internal quotation marks omitted.)  Finally, because the plaintiff failed to meet her burden on the initial prong of the analysis the Court of Appeals did not address the second prong. TAKEAWAY The Security for Cost provisions of the CPLR can oftentimes be used by a defendant to not only ensure the recovery of awarded costs, but to test the bona fides of a plaintiff’s claim.  The Court of Appeals has made clear that these provisions are valid and Constitutional.

Plaintiffs claiming that they have been the victims of fraud must satisfy heightened pleading standards to enter the courthouse.  Under the New York Civil Practice Law and Rules, CPLR 3016(b), and the Federal Rules of Civil Procedure, Rule 9(b), the circumstances constituting the alleged fraud must be stated in detail. here).=">here).">   Proving fraud in New York becomes even more difficult for plaintiffs – they must prove fraud by “clear and convincing evidence,” a higher standard than the preponderance of the evidence standard.  Gaidon v. Guardian Life Ins. Co. of Am. , 94 N.Y.2d 330 (1999). Where the plaintiff is “sophisticated,” the task of pleading and proving fraud becomes even more challenging. Last month, a sophisticated businessman learned this lesson in Unique Goals International, Ltd. v. Finskiy , 2018 NY Slip Op. 32788(U) (Sup. Ct., N.Y. County Oct. 29, 2018) ( here ), when his companies’ fraud claim was dismissed for failure to satisfy the justifiable reliance element. The Law in New York The elements of a fraud claim are well known to readers of this Blog: 1) a misrepresentation or an omission of material fact, 2) that was known to be false by the defendant, 3) made for the purpose of inducing the other party to rely upon it, 4) justifiable reliance of the other party on the misrepresentation or omission, and 5) injury. Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011); Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016). To prevail on a claim of fraud, the plaintiff must plead and prove each element. But, as plaintiffs, especially sophisticated ones, often find that is not so easy. In Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018), the New York Court of Appeals underscored the difficulty sophisticated plaintiffs encounter in trying to satisfy the justifiable reliance element of their fraud claim. In doing so, the Court reasoned that pleading and proving justifiable reliance discourages specious claims by sophisticated parties who claim that they had “been taken in”: “Public policy reasons support the justifiable reliance requirement. Where a sophisticated business person or entity . . . claims to have been taken in, the justifiable reliance rule ‘serves to rid the court of cases in which the claim of reliance is likely to be hypocritical.” Id . at 580. (Citation and internal quotation marks omitted.)  Thus, “ xcusing a sophisticated party … from demonstrating justifiable reliance,” concluded the Court, “would not further the policy underlying this ‘venerable rule.’” Id . What constitutes justifiable reliance, 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). Sophisticated parties must show that they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). In her dissenting opinion in ACA Financial Guaranty Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015), which was endorsed by the majority in Ambac Assurance , Judge Read explained the rationale behind requiring sophisticated parties to affirmatively take steps to protect themselves: Savvy commercial and financial players and inventive lawyers abound in New York. Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable is designed to make sure that the courts “reject[] the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” and “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” This Blog discussed Ambac Assurance here . Unique Goals International, Ltd. v. Finskiy Background Unique Goals concerned a series of investments made by Plaintiffs in a publicly-traded Canadian gold mining company, White Tiger Gold, Ltd. (“White Tiger”), now known as plaintiff Mangazeya Mining Ltd. (“Mangazeya”, also sometimes referred to as “White Tiger”). In 2009, Defendant Maxim Finskiy (“Finskiy”) invested millions of dollars in White Tiger and its subsidiary, Century Mining Corporation (“Century”). By the end of 2010, Finskiy had taken control of both companies and, beginning in 2011, arranged for a series of intra-company and third-party financing. Among the financial transactions executed was a $33,000,000 Deutsche Bank Gold Forwarding Facility pursuant to which Century agreed to deliver 61,183 ounces of gold to Deutsche Bank over five years in exchange for a $33,000,000 loan, secured by virtually all of Century’s mining assets (the “Deutsche Bank Loan Agreement”). The Deutsche Bank Loan Agreement was amended twice over the course of 2011 as Century amended its estimates of resources available and its mines produced significantly less output than anticipated. Notwithstanding these amendments, Century defaulted on its obligations under the agreement in late 2011 and again in March of 2012. In May of 2012, White Tiger announced that Deutsche Bank would be taking control of Century’s mines in Peru and Quebec due to Century’s continuous default. The mines were seized by a receiver on behalf of Deutsche Bank and shut down. Following this seizure, White Tiger was left with only one operational mine in Russia: the Savkino mine. In 2011, Finskiy arranged for White Tiger and/or its subsidiaries to make and receive several loans from various entities, including those owned by his friends and business associates. Plaintiffs alleged that to secure the loans, Finskiy misrepresented the future prospects of the company knowing that White Tiger was in financial distress. In July 2011, White Tiger obtained a commitment for a loan of up to $150 million from VTB Capital PLC (“VTB”) to fund exploration, development, and production activities in Russia (the “VTB Facility”). However, pursuant to VTB’s conditions on the loan, White Tiger had to obtain feasibility studies on its Savkino and Nasedkino mines before receiving any funding. Plaintiffs alleged that Finskiy knew obtaining such studies would be problematic because a November 2010 technical report indicated that, as of September 2010, the Savkino mine had 113 thousand ounces of proved and probable gold reserves, which was insufficient to secure the VTB loan (the “Micon Report). As a result, Finskiy retained a different entity, J.S.C TOMS International (“TOMS”), a local Russian geological consulting company, to prepare an updated mineral resource and reserve study on the Savkino mine. TOMS was given little more than three weeks to prepare its entire study, which Plaintiffs claimed was an insufficient amount of time to conduct an independent investigation of a mine’s feasibility. As a result, TOMS was allegedly forced to rely on data provided by White Tiger and other third-party sources to reach its conclusions. The TOMS report (the “TOMS Report”) found that the amount of reserves was 380% higher than what was reported in the Micon Report and estimated the Savkino mine gold reserves as 438.9 thousand ounces. Plaintiffs claimed the TOMS Report was falsely presented as a technical report based on a thorough investigation and independent analysis when, in fact, it was a “Preliminary Economic Assessment” or “Scoping Study,” which is generally much less accurate. On February 2, 2012, White Tiger entered into the VTB Facility. The facility was divided into three tranches: $40 million to fund exploration, $40 million for development, and $70 million for production activities. Plaintiffs alleged, however, that Defendants never intended to use the funds as required by the terms of that loan. Rather, the money was used to prop up other entities and repay loans on behalf of Finskiy-affiliated companies, including loans that were not yet due and had lower interest rates. About $25 million of that money ended up being returned to Defendant Kirkland Intertrade Group (“Kirkland”). The second tranche of the Deutsche Bank loan was drawn down in October of 2012 and, according to Plaintiffs, used to “make payments to sham corporations and pay improper bonuses to White Tiger executives.” Simultaneously, in 2012, Finskiy started selling his White Tiger shares and Kirkland began turning its loan to White Tiger into equity, allowing it to divest. Plaintiffs claimed that Finskiy began to target Sergey Yanchukov (“Yanchukov), a Russian citizen and businessman, and friend of Finskiy, to take White Tiger off of his hands. In September of 2010, Plaintiff, Faith Union Industries, Ltd. (“Faith Union”), entered into the first of three subscription agreements to purchase shares of Century for a total of Cdn $5 million. Between November of 2010 and November of 2011, Faith Union spent an additional $3.8 million on Century shares. In April of 2011, after Finskiy allegedly talked up Century’s prospects, Faith Union purchased an additional 10.3 million shares of Century stock. Thereafter, throughout 2012, Finskiy allegedly caused Yanchukov to provide additional financial support for Century and White Tiger by, among other things, making a number of allegedly false and misleading statements about Century’s prospects and “short term liquidity cris s.” In January 2013, White Tiger announced it had not produced enough gold to satisfy the gold sales covenant of the VTB Facility. Nonetheless, Finskiy reassured Yanchukov that White Tiger had sufficient gold reserves, and the still-functioning mine would provide enough gold to fulfill the company’s obligations and provide a return on investment. That same month, Unique Goals commissioned SRK Consulting (“SRK”) to prepare a report on the mines, including the open mine, Savkino. Based on the limited data provided by Defendants, SRK reached a preliminary conclusion that it was possible to turn the economic situation at White Tiger around. This conclusion, however, was allegedly based on the false and/or inflated data provided by Defendants and the true state of the mines was, therefore, not revealed to Plaintiffs by SRK’s report. After Plaintiffs purchased Defendants’ interest in White Tiger in April 2013, they commissioned a financial audit of the company as well as a new geological study of the company’s mines. The audit revealed that $30 million was misappropriated from the company rather than being used for drilling work and that the company’s management team had received “unreasonable and unwarranted bonuses” despite the dire economic situation facing White Tiger. In August of 2013, White Tiger, now known as Mangazeya, attempted to renegotiate the terms of the VTB Facility, but was unable to do so in a way that would allow it to become profitable and was forced to buy out the VTB debt at market value ( i.e. , for $59 million). White Tiger also performed an inventory of the Savkino mine, which revealed that the ore on the site was only half of what the company had previously reported, and the mine itself would only produce for four more years, not enough to satisfy the VTB Facility and not enough for Plaintiffs to make a profit. At this point, Plaintiffs attempted to revise the terms of their purchase of Defendants’ interest in White Tiger, but Defendants refused to negotiate. Mangazeya lacked the funds to repay the loans previously extended to it by Faith Union and Unique Goals. Faith Union and Unique Goals settled their debt by purchasing shares in Mangazeya at a premium to its then current stock price in order to enhance the company’s liquidity and improve its prospects for raising additional capital. Plaintiffs filed a complaint against Defendants, alleging four causes of action: fraud, conspiracy to commit fraud, unjust enrichment and breach of fiduciary duty. Defendants moved to dismiss the complaint. The Court’s Decision As to the fraud claim, the Court granted the motion, holding that Plaintiffs failed to plead justifiable reliance. As an initial matter, the Court determined that Yanchukov, Plaintiffs’ controlling shareholder, was “a sophisticated businessperson with access to plentiful resources to protect himself and his investments.” The Court rejected the notion that because he lacked experience in the mining industry, he was not a sophisticated businessman. Although the complaint here attempts to cast Yanchukov as a newcomer to the mining business who relied on his close, personal friend Finskiy to guide him, Yanchukov, plainly, is a sophisticated businessperson with access to plentiful resources to protect himself and his investments, to obtain the requisite inspections and perform the necessary due diligence. While he may have lacked experience in the mining industry, he clearly had the resources necessary to obtain expert advice or, indeed, do an investigation. The Court held that because Yanchukov was a sophisticated businessman, he should have taken affirmative steps to protect himself from Defendants’ misrepresentations “by employing what means of verification were available at the time.” The Court found that he did not. His failure to conduct any due diligence was, therefore, fatal to Plaintiffs’ fraud claim. MAFG Art Fund, LLC v. Gagosian , 123 A.D.3d 458, 459 (1st Dept. 2014) (where a sophisticated plaintiff conducts no due diligence, he cannot demonstrate reasonable reliance as a matter of law). Takeaway In Ambac the Court of Appeals sent a strong message to sophisticated parties claiming fraud: if the person or entity has the means of knowing, by the exercise of ordinary intelligence, the truth of the subject of the alleged false representation, that person or entity must make use of those means, or he/she/it will not be heard to complain that he/she/it was the victim of fraud. Thus, where a person or entity, especially a sophisticated one, does not verify and investigate the truthfulness of assurances and representations, or is lax in doing so, the claim should be dismissed for failing to satisfy the justifiable reliance element. In Unique Goals , the Court heeded this message. Contact our business litigation lawyers in NYC about your claim.

In March of this year, this Blog wrote about the voluntary payment doctrine ( here ) and how it is alive and well in New York. On November 15, 2018, the Appellate Division, First Department, addressed the doctrine and the defense of economic duress in affirming the dismissal of a complaint under the doctrine. Beltway 7 & Props., Ltd. v. Blackrock Realty Advisers, Inc. , 2018 NY Slip Op. 07844 (1st Dept. Nov. 15, 2018) ( here ). The “voluntary payment doctrine … bars recovery of payments voluntarily made with full knowledge of the facts, in the absence of fraud or mistake of material fact or law.” Dillon v. U–A Columbia Cablevision of Westchester , 100 N.Y.2d 525, 525 (2003). Under the doctrine, “ he onus is on a party that receives what it perceives as an improper demand for money to “‘take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.’” DRMAK Realty LLC v. Progressive Credit Union , 133 A.D.3d 401, 403 (1st Dept. 2015) (citation omitted). To protest the payment to overcome the voluntary payment doctrine, the aggrieved party must do so “in writing and … at the time of payment.” Neuner v. Newburgh City Sch. Dist. , 92 A.D.2d 888 (2d Dept. 1983). The written protest must also indicate that the plaintiff was reserving his/her rights when the payment was made ( DRMAK Realty , 133 A.D.3d at 405) and must communicate as much to the party receiving the payment. C.f. Walton v New York State Dept. of Correctional Servs. , 13 N.Y.3d 475, 489 (2009) (noting that “the protest requirement would have been fulfilled by a letter to MCI,” the entity levying the charge, “and DOCS,” the entity receiving commission for that charge “at the time the bills were paid”). “ he voluntary payment doctrine does not apply when a party makes payments under economic duress or compulsion, e.g. , when a party must make payment or face the loss of possession of its property.” Rocky Knoll Estates MHC, LLC v. C W Capital Asset Mgmt., LLC , 2015 WL 1632637, at *2 (W.D.N.Y. Apr. 13, 2015); see also U.S. Bank Nat. Ass’n v. PHL Variable Ins. Co. , 2014 WL 2199428, at *10 (S.D.N.Y. May 23, 2014) (voluntary payment doctrine does not apply “where payments were necessary in order to preserve property or protect his business interests”). The rationale behind the duress defense was explained by the New York Court of Appeals in 805 Third Ave. Co. v. M.W. Realty Assoc. , 58 N.Y.2d 447, 451 (1983) as follows: The theory on which plaintiff seeks recovery permits a complaining party to void a contract and recover damages when it establishes that it was compelled to agree to the contract terms because of a wrongful threat by the other party which precluded the exercise of its free will. The existence of economic duress is demonstrated by proof that one party to a contract has threatened to breach the agreement by withholding performance unless the other party agrees to some further demand. Citations omitted. Notably, “ owever, a mere threat by one party to breach the contract by not delivering the required items, though wrongful, does not in itself constitute economic duress. It must also appear that the threatened party could not obtain the goods from another source of supply and that the ordinary remedy of an action for breach of contract would not be adequate.” Austin Instr. v. Loral Corp. , 29 N.Y.2d 124, 130 (1971). See also Oleet v. Pennsylvania Exch. Bank , 285 A.D. 411, 414-15 (1st Dept. 1955). In Beltway 7 , the First Department applied a two-prong test to determine whether the plaintiff was under economic duress when it made payments to the defendant. First, the Court looked at whether the decision to demand the payment was lawful ( e.g. , if an agreement existed, was the demand based on rights enumerated in the agreement?). Interpharm, Inc. v. Wells Fargo Bank, Nat’l Ass’n , 655 F.3d 136, 142 (2d Cir. 2011) (“The law demands threatening conduct that is ‘wrongful,’ i.e. , outside a party’s legal rights.”). Second, if the demand was not lawful, the Court looked to whether the demand placed the plaintiff in a position such that it had no other choice but to accede. This prong is necessary, said the Court, to distinguish between “a viable” claim of economic duress and “a garden variety dispute over the meaning of contractual terms.” Beltway 7 , Slip op. at 5. Thus, to satisfy the second prong, the plaintiff must establish facts showing that breach of an obligation “will result in an irreparable injury or harm.” Sosnoff v. Carter , 165 A.D.2d 486, 491 (1st Dept. 1991). The possibility, or even the fear, of litigation is insufficient to establish economic duress. Oleet , 285 A.D. at 414. Moreover, merely facing “financial pressures” and “lack equal bargaining power” is not sufficient to survive dismissal. Bethlehem Steel Corp. v. Solow , 63 A.D.2d 611, 611 (1st Dept. 1978); Stewart M. Muller Constr. Co. v. New York Tel. Co. , 50 A.D.2d 580, 581 (2d Dept. 1975) (being “financially constrained … does not constitute economic duress”). A contract procured by duress is not void, but merely voidable. Thus, if a party wants to disaffirm a contract made under duress, he/she must act promptly to repudiate it or be deemed to have ratified or affirmed it. Bethlehem Steel , 63 A.D.2d at 612. However, where, during the period of acquiescence or at the time of the alleged ratification, the disaffirming party remains under the same continuing duress, he/she has no obligation to repudiate the contract until the duress has ceased. Austin Instr. , 29 N.Y. 2d at 133). In fact, such continuing economic duress would even have the effect of tolling any period of limitations if the disaffirming party had commenced the action. Baratta v. Kozlowski , 94 A.D.2d 454, 458-459 (2d Dept. 1983). As discussed below, in Beltway 7 , the Court found issues of fact surrounding the first prong of the test. It did not squarely address the second prong of the test because the plaintiff failed to act promptly to repudiate the duress: “while there is a question whether Blackrock acted reasonably in imposing the penalty, we must also consider the consequence of plaintiff’s failure to seek recovery of the payment after the threat of foreclosure < i.e. , the economic duress> i.e., the economic duress> had passed.” Beltway 7 & Properties, Ltd. v. Blackrock Realty Advisers, Inc . Background Beltway 7 involved payments due under a $25 million mezzanine loan originally made by non-party JP Morgan to Plaintiff, Beltway 7 & Properties, Ltd. The loan was secured by Plaintiff’s interest in an affiliated entity called L Reit Ltd., which in turn owned real property in Texas. Defendants (collectively, “Blackrock”) were the assignees of the loan. Around the time that JP Morgan extended the loan to Plaintiff, it made a $26 million mortgage loan to L Reit. Pursuant to the agreement that governed the loan, Plaintiff was required to make payments on the “Payment Date,” defined as “the ninth (9th) day of each calendar month during the term of the Loan,” or the nearest previous business day if the ninth day was not a business day. The portion of those monthly payments attributable to interest was to be calculated based on interest accruing between the fifteenth day of the prior calendar month and the fourteenth day of the calendar month during which a “Payment Date” fell. The agreement provided that the maturity date for the loan would be November 9, 2014, at which time Plaintiff would be required to pay off the principal balance, including all accrued and unpaid interest. November 9, 2014 was a Sunday, so the actual maturity date pursuant to the agreement was November 7. The agreement also provided for a late payment penalty, which entitled the lender to demand, upon Plaintiff’s failure to make any required payment, “the lesser of five percent (5%) of such unpaid sum or the Maximum Legal Rate” (defined in the agreement as the maximum nonusurious interest rate under applicable law). As the maturity date approached, Plaintiff negotiated to refinance the loan and the mortgage loan with JP Morgan, and scheduled a closing for November 7, 2014, the maturity date for both loans. However, shortly before that date, Plaintiff discovered that an umbrella insurance policy it was required to maintain for the properties securing the mortgage loan had lapsed. Keybank, which JP Morgan had appointed to service the mortgage loan, was responsible for paying the insurance premiums out of Plaintiff’s monthly loan payments. However, it failed to make the $8,600 payment necessary to renew the umbrella policy. JP Morgan refused to refinance the two loans until the insurance issue was resolved, which was on November 14, when the new loans closed. Plaintiff missed the maturity date payment by one week causing Blackrock to exercise its right under the mezzanine loan agreement to impose a late charge. It calculated the charge as 5% of the unpaid indebtedness, a sum of approximately $1.2 million. Further, it sought an additional interest payment to cover the interest period running from November 15 to December 14. In contrast to Blackrock, JP Morgan did not penalize Plaintiff for settling the mortgage loan one week late. It did persuade Blackrock, however, to reduce the late charge to $500,000. Nevertheless, needing to satisfy the mezzanine loan before it could close on the refinance, and facing the imminent loss of its properties to foreclosure, Plaintiff paid the amount demanded by Blackrock – approximately $844,000. The Proceedings Before the Motion Court Approximately 1½ years later, Plaintiff commenced the action. Plaintiff asserted three causes of action: breach of contract, asserting that Blackrock misconstrued the loan agreement in charging interest; a declaratory judgment that the late charge and additional interest were unenforceable as penalties that were disproportionate to the harm suffered by Blackrock; and restitution to recover the amounts that Plaintiff claimed it was unlawfully forced to pay to Blackrock. Blackrock moved to dismiss, pursuant to CPLR sections 3211(a)(1) and (7). It argued that it properly applied all relevant contractual provisions, and that, in any event, Plaintiff’s claims were barred by the voluntary payment doctrine. In response, Plaintiff submitted an amended complaint, which added a cause of action seeking a declaratory judgment that Plaintiff made the payment under economic duress and under protest, and upon a mistake of law and fact, such that the voluntary payment doctrine did not apply. Plaintiff also submitted the affidavit of its president, Mohammad Nasr, in which he reiterated the allegations in the amended complaint, including that Plaintiff protested the charges after Blackrock announced its intention to impose them, but determined that it had no choice but to pay. Blackrock agreed to treat its motion as if directed to the amended complaint. It argued that there was no allegation of a written protest, as required, that Plaintiff’s allegations of duress were substantively insufficient and, in any event, waived by the passage of time, and that there was no cognizable mistake of law or fact. Blackrock also argued that the charges were all proper under the mezzanine loan agreement. The motion court granted the motion in its entirety and dismissed the amended complaint. It rejected Plaintiff’s allegation that it made the payment under protest, since it had stated no facts concerning the manner in which such protest was lodged. The court also rejected Plaintiff’s argument that it made the payment under a mistake of fact or law since Blackrock had explained the basis for the charges. Moreover, the court held that Plaintiff failed to allege that it made a reasonable effort to learn what its actual legal obligations to Blackrock were. Finally, the court rejected Plaintiff’s economic duress argument. Though acknowledging that a threatened loss of property could form the basis of a claim of economic duress, and intimating that Plaintiff had sufficiently alleged duress, the court found that Plaintiff sat on its rights, having waited 1½ years to commence the action. The First Department affirmed. The First Department’s Decision As noted, in affirming the motion court’s decision, the First Department applied a two-prong test to determine whether Plaintiff suffered economic duress sufficient to avoid the application of the voluntary payment doctrine. As to the first prong – “whether Blackrock’s decision to demand the late charge and extra interest payment was lawful, that is, based on rights enumerated in the agreement” – the Court found that “relevant contractual provisions ambiguous,” and “susceptible to more than one reasonable interpretation.” Slip op. at 4. The Court explained: As plaintiff notes, the 5% rate is expressly stated to apply to the “unpaid sum.” However, whether the “Maximum Legal Rate” is to be applied to the unpaid sum or something else is unclear. Plaintiff suggests that it was intended to apply to the length of time that payment was outstanding, which was seven days. Blackrock counters by, inter alia, characterizing the “Maximum Legal Rate” as a standard savings provision designed to ensure that it not be deprived of any recourse at all if payment is tardy. Each of these arguments has merit, and neither is susceptible of resolution at the pleading stage. The Court also found “uncertainty concerning whether Blackrock was justified in charging interest for the November to December period.” Finding sufficient ambiguity in the parties’ interpretation of the term “Payment Date” and Plaintiff’s obligations under the agreement, the Court declined to “determine how the provision should be properly interpreted.” Id . at 4. Similarly, the Court was “unwilling … to declare that the amount charged by Blackrock was not an unenforceable penalty.” Id . The late charge was, according to the agreement, designed “to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment.” However, we are unable to determine on the limited record before us whether such damages were incapable of calculation at the time the mezzanine loan agreement was executed, or whether there is a proportional relationship between the consequences to Blackrock of receiving late payment, and the sum plaintiff was required to pay. As to the second prong – whether Plaintiff was deprived “of meaningful choice” – the Court did not explicitly make a ruling, though it indicated that Plaintiff had sufficiently alleged, for pleading purposes, irreparable injury had it not paid “the late charges and extra interest” because it would lose the ability to refinance the mortgage loan and Blackrock would foreclose on “Plaintiff’s very valuable portfolio of properties.” Id . The Court explained that it could not ignore “the consequence of plaintiff’s failure to seek recovery of the payment after the threat of foreclosure had passed.” Id . The Court rejected Plaintiff’s argument that there was no contract ratification “because Blackrock did not procure a contract by duress, but rather a payment concomitant with an already existing contract.” Id .  In doing so, the Court said that Plaintiff’s argument was based upon “a distinction without a difference.” Id . The Court also rejected Plaintiff’s argument that the proper way to analyze ratification is through the prism of laches. Noting that there was no case authority supporting Plaintiff’s argument and that prejudice was not an element of the analysis, the Court found that the passage of time without explanation could not support a claim of duress: Plaintiff further asserts that the proper analysis where a party fails to promptly seek recovery of a payment made under duress is whether it is guilty of laches. It argues that because a showing of laches requires prejudice on the part of the party asserting the defense, it must prevail here, because Blackrock was not prejudiced. We disagree. Plaintiff has not cited any authority to support its theory that prejudice enters the analysis. Indeed, decisions by this Court declaring that a party has waived a duress claim have not even suggested that prejudice is a relevant factor. This is not to say that a lengthy wait to recover funds paid under duress bars the claim absolutely.… Here, however, plaintiff fails to allege any set of facts justifying its decision to wait nearly two years to invoke duress, and then only after defendant invoked the voluntary payment doctrine. Takeaway In the takeaway of this Blog’s prior post about the doctrine, we said the following: “A lesson to be learned from these cases is that payors should not ‘pay now and ask questions (or litigate) later,’ lest they run the risk that a court will not permit the recovery of such payments from the payee.  Known rights should be asserted promptly.” (Internal quotation marks altered.) This lessen was highlighted in Beltway 7 , wherein the First Department found that waiting 1 ½  years to invoke the economic duress defense negated any bar to the application of the voluntary payment doctrine.

On November 2, 2018, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”), Division of Enforcement (the “Division”), released its annual report for the fiscal year ended September 30, 2018 (“FY 2018”) (the “Report”) ( here ). The Report highlights the Division’s enforcement-related actions and key initiatives for the fiscal year and reveals an agency focused on pursuing cases affecting retail investors, such as investment adviser fraud, as well as actions directed at the impact of emerging technological on the securities market, such as cryptocurrencies and cybersecurity. “As this report demonstrates, the Division’s approach to enforcement is multifaceted and outcomes-oriented with the interests of our Main Street investors front of mind,” said SEC Chairman Jay Clayton.  “The Enforcement Division has been and continues to be extremely successful in its efforts to deter bad conduct and effectively remedy harms to investors.” A copy of the November 2, 2018 press release announcing the issuance of the Report can be found here . Below are some of the Report’s highlights. FY 2018 Enforcement Proceedings .  In FY 2018, the Commission brought 821 enforcement actions, of which 490 were “stand alone” actions brought in federal court or as administrative proceedings, 210 were “follow-on” proceedings seeking bars based on the outcome of Commission actions or actions by criminal authorities or other regulators, and 121 were proceedings to deregister public companies – typically microcap issuers – that were delinquent in their Commission filings. A significant number of the stand-alone cases concerned securities offerings (approximately 25%), investment advisory issues (approximately 22%), and issuer reporting/accounting and auditing (approximately 16%). In addition to the foregoing, the Commission continued to bring actions involving broker-dealer misconduct (13%), insider trading (10%), and market manipulation (7%). From a year-over-year perspective, the number of Foreign Corrupt Practices Act (“FCPA”) cases brought by the Commission remained flat compared to FY 2017. In both years, the Commission brought 13 FCPA cases. The most significant year-over-year increases came from enforcement proceedings involving investment advisers/investment companies (108 in FY 2018 compared to 82 in FY 2017) and securities offerings (121 in FY 2018 compared to 94 in FY 2017). Focus on Retail Investors . The report shows that the SEC continues to focus its attention on the protection of retail investors. Of the 490 stand-alone enforcement proceedings, one half of the actions brought in FY 2018 involved allegations or findings of wrongdoing that harmed Main Street investors. Consistent with the Commission’s focus on Main Street, the SEC returned a substantial amount of money to these investors in FY 2018. In FY 2018, the Commission continued to obtain significant monetary relief in the form of disgorgement and civil penalties. In this regard, the Commission obtained $2.506 billion in the disgorgement of ill-gotten gains, a decrease over the prior year. The Commission imposed a total of $1.439 billion in civil penalties, an increase from the prior year. A significant amount of the money ordered in FY 2018, however, came from In the Matter of Petroleo Brasileiro S.A. – Petrobras , AP File No. 3-18843, Securities Exchange Act Release No. 34-84295 (Sept. 27, 2018) (disgorgement and prejudgment interest totaling $933,473,797 and a penalty of $853,200,000). Total monetary relief increased in FY 2018 by approximately 4% from the prior year. The Report noted that the Supreme Court’s 2017 decision in Kokesh v. SEC (discussed by this Blog here ), in which the Court held that Commission claims for disgorgement are subject to a five-year statute of limitations, continues to have a significant effect on the Commission’s efforts to obtain disgorgement. With respect to matters that have already been filed, the Division estimated that the Court’s ruling in Kokesh may cause the Commission “to forego up to approximately $900 million in disgorgement, of which a substantial amount likely could have been returned to retail investors.” Holding Individuals Accountable : According to the Commission, individual accountability was critical to its enforcement program and was one of the Division’s core principles during the fiscal year. In FY 2018, of the 490 stand-alone actions, 72% involved charges against one or more individuals, approximately the same percentage as in FY 2017 (73%). Many of the individuals charged in FY 2018 include senior officers at prominent companies and other public figures, including the CEOs of Tesla Inc. (“Tesla”) (discussed by this Blog here ) and Theranos Inc. (“Theranos”), the former CEO of SeaWorld Entertainment Inc., a U.S. Congressman, the former CEOs and CFOs of Walgreens Boots Alliance Inc. and Rio Tinto p.l.c., and a professional football player (discussed by this Blog here ). The Division also sought to penalize individuals and require them to pay back ill-gotten gains. In FY 2018, the Commission obtained judgments or orders for disgorgement and/or penalties from over 500 individuals, representing an increase of 9% over FY 2017. “In FY 2018, the Commission obtained favorable verdicts in three trials against four defendants and an unfavorable verdict in one trial against one defendant. As of the close of the fiscal year, the Commission was awaiting a verdict in one completed bench trial. The number of district court trials conducted in FY 2018 (5) is similar to the number of such trials in FY 2017 (4).” In FY 2017, there were various pending constitutional challenges to the Commission’s administrative proceedings and the appointment of its administrative law judges (“ALJ”). In June 2018, the Supreme Court held in Lucia v. SEC (discussed by this Blog here ) that the appointment of the SEC’s ALJs violated the U.S. Constitution’s Appointments Clause, requiring a new hearing in front of a different fact finder. After Lucia , the Commission stayed all pending administrative proceedings. The Commission lifted the stay on August 22, 2018, and approximately 200 administrative proceedings were reassigned at that time. The SEC noted that addressing these administrative proceedings would require the expenditure of substantial litigation resources during FY 2019. Cyber-Related Misconduct : According to the Report, cyber-related misconduct continues to be a key focus area for the Commission. In FY 2018, the Division commenced 20 stand-alone actions involving Initial Coin Offerings (“ICOs”) and digital assets. According to the Report, the Division’s Cyber Unit, which was formed at the end of FY 2017, and became fully operational in FY 2018, has been instrumental in identifying and bringing an array of cases from registration violations, to unregistered broker-dealer activity, to instances in which the purported use of blockchain-related technology was a thinly veiled cover for fraudulent misconduct. The Report also stated that the Division has 225 on-going cyber-related investigations. As such, the Commission expects FY 2019 to see even more significant developments in this area. Relief Obtained . In every enforcement action, the Division seeks “appropriately tailored remedies” that further its enforcement goals. In addition to disgorgement and penalties, there is a wide range of potential remedies available. Consequently, the agency seeks remedies that are appropriate and meaningful to the case and the alleged wrongdoing. In FY 2018, the Division employed undertakings ( e.g. , actions that require a defendant/respondent to take affirmative steps, either in conjunction with entry of the order or in the future) as a tool in its enforcement actions and settlement recommendations to the Commission. The Theranos and Tesla matters are examples of the Commission’s use of this remedial tool. Enforcement actions resulted in nearly 550 bars and suspensions of wrongdoers in FY 2018. According to the Report, one of the most important actions that the Commission can take to protect investors is to remove individuals from positions where they can engage in future wrongdoing. The Commission assesses bars and suspensions to prevent wrongdoers from serving as officers or directors of public companies, dealing in penny stocks, associating with registered entities such as broker-dealers and investment advisers, or appearing or practicing before the Commission as accountants or attorneys. As noted in the Report, “ nder the federal securities laws, the Commission may suspend trading in a stock for 10 days and generally prohibit a broker-dealer from soliciting investors to buy or sell the stock again until certain reporting requirements are met.” In FY 2018, the Commission suspended trading in the securities of 280 issuers in order to combat potential market manipulation and microcap fraud threats to investors. “In FY 2018, the Commission obtained 26 court-ordered asset freezes.” Court-ordered prejudgment relief in the form of asset freezes, said the Commission, is important to its ability to protect investors. As noted in the Report, asset freezes prevent alleged wrongdoers from dissipating assets that could otherwise be marshaled for distribution to investors harmed by the alleged misconduct. Impact of Resource Constraints : The Commission continues to be impacted by the constraints imposed by an agency-wide hiring freeze that has been in place since late 2016. The Report notes that the number of positions at the Division, including the number of contractors supporting the Division’s investigations, declined 10% from FY 2016 to FY 2018. As a result, the Division “paid careful attention to case selection” in FY 2018, “attempting to open and pursue investigations that likely to have the most meaningful impact for investors and the markets.” In discussing the financial constraints on the agency, the Report provides insight into the Division’s priorities going into the new fiscal year. In this regard, the Commission observed that “additional resources would support two key priorities of the Division: protecting retail investors and combating cyber-related threats.”  The Commission also said that “with more resources” it “could focus more on individual accountability,” especially since “individuals are more likely to litigate” and, therefore, exhaust the Division’s litigation resources. Takeaway The Report reflects an emphasis on protecting the Main Street investor. This emphasis is most likely the result of a change in philosophy within the Division away from the Wall-Street centric approach championed by Chairman Clayton’s predecessors.  The Division’s rollout in FY 2018 of the Retail Strategy Task Force and the Share Class Selection Disclosure Initiative (discussed by this Blog here ) further underscores the Commission’s shift to policing conduct that targets retail investors, including “disclosures concerning fees and expenses” and “misconduct that occurs in the interactions between investment professionals and retail investors.”  Likewise, FCPA-related enforcement actions – which received significant attention during the prior Chair’s tenure – is given little attention in the Report.  The numbers support this de-emphasis. FCPA-related enforcement actions declined nearly 40 percent from FY 2016, when enforcement actions reached an all-time high. Although Avakian and Peiken believe that the Division does not “face a binary choice between protecting Main Street and policing Wall Street,” the numbers cited in the Report tell a different story. The Report also reveals the Commission’s shift from deterrence through substantial monetary penalties to a “wide range” of “investor-oriented” individualized remedies “tailored” to “the underlying charged conduct.”  The Commission’s use of undertakings in its cases against Theranos and Tesla and their CEOs demonstrate this new approach. In both cases, the Commission required the CEOs of each company to relinquish control of the companies (temporarily and permanently) and the companies to implement internal controls to monitor the social media communications of their executives.  Consistent with the Division’s stated focus on protecting Main Street investors, the Report described these undertakings, along with the monetary penalties and governance reforms, as “remediat the harm visited on shareholders by the misconduct at issue and provid shareholders with greater protection in the future.” The Report further reveals an emphasis on combating cyber-related misconduct. In FY 2018, the Commission brought a dozen “cryptocurrency”-related cases. Four of those cases were brought by the SEC’s new Cyber Unit. At the time of the unit’s launch, Avakian identified cyber-related threats as “among the greatest risks facing investors and the securities industry.” In FY 2018, the Commission brought 20 stand-alone cases related to cyber fraud and had more than 225 ongoing cyber-related investigations. Although the numbers are not yet reflective of the Commission’s emphasis on all things cyber-related, the Report makes a point of discussing the need for additional funding to “combat[ ] cyber-related threats” – one of the “two key priorities of the Division” in the upcoming fiscal year. Finally, in the Commission’s FY 2017 report, the agency articulated five core principles that would guide the Division for the upcoming fiscal year: (1) focus on the Main Street investor; (2) focus on individual accountability; (3) keep pace with technological change; (4) impose remedies that most effectively further enforcement goals; and (5) constantly assess the allocation of our resources. Those principles are reiterated in the FY 2018 Report. The numbers and initiatives discussed in this year’s Report, concluded the Division, demonstrate “a faithful adherence to these principles.”

In business divorce cases, it is often necessary for the parties’ experts to prepare valuation reports – that is, reports that value an owner’s interest in a business or venture. Sometimes, however, valuation reports are prepared by non-testifying consultants. When valuation reports are prepared by consultants, disputes often arise over whether those reports are discoverable. The answer depends on when they are prepared ( i.e. , in the ordinary course or in anticipation of litigation). In New York, CPLR 3101(c) governs whether documents or information are protected work product. CPLR 3101(c) provides that the “work product of an attorney shall not be obtainable.” The work product protection also “extends to experts retained as consultants to assist in analyzing or preparing the case, as an adjunct to the lawyer’s strategic thought processes ….” Hudson Ins. Co. v. Oppenheim , 72 A.D.3d 489, 490 (1st Dept. 2010) (citation and internal quotation omitted). See also 3A Weinstein-Korn-Miller, N.Y. Civ. Prac. ¶ 3101.52a, at 31-214 (“Accordingly, an expert who is retained as a consultant to assist in analyzing or preparing the case is beyond the scope of this provision; in fact, such experts are generally seen as an adjunct to the lawyer’s strategic thought processes, thus qualifying for complete exemption from disclosure under subdivision (c) and, now, the mental impressions …  exclusion of CPLR 3101 (d) (2) as well.”). By contrast, testifying experts do not necessarily enjoy such protection. CPLR 3101(d)(1) provides that “(i) pon request, each party shall identify each person whom the party expects to call as an expert witness at trial and shall disclose in reasonable detail the subject matter on which each expert is expected to testify, the substance of the facts and opinions on which each expert is expected to testify, the qualifications of each expert witness and a summary of the grounds for each expert’s opinion.” Breslauer v. Dan , 150 A.D.2d 324 (2d Dept. 1989). Clause (iii) permits a court to order further disclosure of a report prepared by an expert expected to testify upon a showing of special circumstances. E.g. , Beauchamp v Riverbay Corp. , 156 A.D.2d 172 (1st Dept. 1989). Over the years, courts have identified a number of consultants entitled to work-product protection, including, but not limited to, forensic accountants, engineering firms, appraisers, and, business valuation firms. See , e.g. , 915 2nd Pub Inc. v. QBE Ins. Corp. , 107 A.D.3d 601, 601 (1st Dept. 2013) (appraisal report); Hudson , 72 A.D.3d at 490 (forensic accounting analysis); Oakwood Realty Corp. v. HRH Constr. Corp. , 51 A.D.3d 747, 749 (2d Dept. 2008) (engineering report); Delta Fin. Corp. v. Morrison , 14 Misc. 3d 428, 432 (Sup. Ct., Nassau County 2006) (valuation of excess cash flow certificates). Even if a document or communication is not entitled to full protection, it may be entitled to qualified protection from discovery when it is prepared in anticipation of litigation. CPLR 3101(d)(2) restricts discovery of “materials prepared in contemplation of litigation even if by non-lawyers or lawyers acting in a non-legal capacity.” Kandel v. Tocher , 22 A.D.2d 513, 516-17 (1st Dept. 1965). This rule includes materials prepared by “a consultant to assist in analyzing or preparing the case.” Santariga v. McCann , 161 A.D.2d 320, 321 (1st Dept. 1990); see also Oakwood Realty , 51 A.D.3d at 749. On November 9, 2018, Justice Jennifer G. Schecter of the Supreme Court, New York County, Commercial Division, addressed the foregoing issues in Noven Pharms., Inc. v. Novartis Pharms. Corp. , 2018 N.Y. Slip Op. 32851(U) ( here ), and held that a valuation report prepared in connection with the break up of a joint venture was not protected work product under CPLR 3101(c) and 3101(d)(2). Noven Pharmaceuticals, Inc. v. Novartis Pharmaceuticals Corp. Background Noven concerned the break-up of the parties’ joint venture, which did business as Novogyne Pharmaceuticals (“Novogyne”) and sold different types of estrogen-patch products. The parties entered into a Termination Agreement on December 1, 2012, that provided for the disposition of Novogyne’s cash and non-cash assets including its products. Years after the joint venture ended, the parties disagreed on how the members’ capital contributions would be distributed. Plaintiff, Noven Pharmaceuticals, Inc. (“Noven”), maintained that, upon termination of the joint venture, a third-party expert valuation would determine the fair market value of the estrogen-patch products that were being allocated to the parties. Defendant, Novartis Pharmaceuticals Corp. (“Novartis”), maintained that a valuation report was not necessary or required, though it later believed that such a report would be internally useful. Consequently, Novartis requested a valuation report from Noven. Noven retained Houlihan Lokey (“HL”) to perform the valuation. On June 19, 2015, Noven sent HL’s draft valuation to Novartis and asked for feedback. On June 29, 2015, Novartis determined that it disagreed with HL’s valuation. Consequently, Novartis decided to procure its own valuation. On July 14, 2015, Novartis informed Noven that its team “thought it would be most prudent for Novartis to obtain its own 3rd party valuation” and committed to keeping Noven “updated on the status of completion of this valuation” with an eye toward meeting “sooner rather than later.” According to the Court, Novartis did not say that its initial decision to pursue a valuation was motivated in any way by anticipated litigation. On August 11, 2015, Noven asked Novartis for an update. Novartis responded the following day that it was still in the process of engaging a valuator and that it would provide an update in mid-September. By the end of August 2015, without the involvement of counsel, Novartis identified five potential valuation firms and ultimately selected Deloitte Transactions and Business Analytics (“Deloitte”) to perform a fair market value assessment of the Novogyne assets. Correspondence cited by the Court showed that Novartis intended to use and discuss Deloitte’s findings with Noven in the course of their business negotiations. On September 3, 2015, Novartis’ in-house counsel became involved in the matter for the first time. Based on his earlier participation in the winding down of the joint venture, counsel “recognized that Noven’s position was antithetical to the Termination Agreement” and “anticipated that the dispute could lead to litigation.” That day, Novartis engaged a law firm, White & Case, to represent it “in the dispute over the distribution of the Member’s Capital Contributions balance.” Novartis took steps to preserve documents for litigation and began contemplating basic litigation issues. On September 24, 2015, the parties held a conference call in which in-house counsel participated. Novartis informed Noven “that the joint venture did not need to account for the value of the distributed products . . . and that those products should not impact the joint venture’s distribution and that it was not necessary for either party to estimate the value of the distributed products.” According to the Court, there was no indication on the call (or at any time thereafter) that Novartis mentioned the valuation report it had commissioned. In October 2015, White & Case formally hired Deloitte to value the joint venture’s products even “though Novartis did not believe that the Termination Agreement required the parties” to do so. White & Case and Novartis purportedly took this step because they believed that “to assess the case, they should obtain their own estimates of products.” The engagement letter stated that Deloitte would be a “nontestifying consultant” and that because it was White & Case’s intention and position that the work for it would be covered by “the attorney work-product and other applicable privileges,” all working papers received or prepared by Deloitte would be maintained as confidential. On November 17, 2015, Deloitte provided White & Case with a first draft of its valuation. On February 25, 2016, Deloitte provided White & Case and Novartis with an updated draft, which was Deloitte’s last report. The valuation itself stated that it was “privileged and confidential” and that Deloitte “was pleased to assist White & Case ... in connection with its representation of Novartis ... with the provision of services for corporate planning purposes.” It also set forth that Deloitte was assisting “in connection with . . . litigation due diligence activities” and that its services were solely for internal “use to assist with ... litigation due diligence activities.” The report included a fair market valuation and basic facts related to Novogyne and its termination. According to the Court, the valuation did not reflect any legal assumptions or opinions (other than the fact that a valuation was performed at Novartis’ request, which had not been a secret in the case). Nor did it reveal “Novartis’ reaction to Noven’s position.” Ten days later, on March 5, 2016, White & Case sent Novartis’ counsel a legal memorandum that discussed the valuation. On March 14, 2016, Noven and Novartis met to discuss settlement of their dispute. Novartis relied on Deloitte’s valuation “in preparing for that meeting.” On September 7, 2016, Noven commenced the action, claiming that Novartis refused to disburse more than $16 million of the joint venture’s assets as required by the Termination Agreement. The Motion and the Court’s Decision On March 30, 2017, the Court heard argument on Novartis’ motion to dismiss. During the argument, the parties discussed Novartis’ valuation of the joint venture’s assets. Noven claimed the report was discoverable because, among other things, it evidenced the amount Novartis may owe Noven. Novartis opposed production, arguing that its valuation report was privileged. Believing that it was unlikely the report was privileged because it was prepared prior to litigation, the Court directed Novartis to produce the report. Notwithstanding, Novartis did not do so. The parties agreed that the bona fides of the privilege claim would be fleshed out in discovery and that motion practice would ultimately be required if Novartis refused to produce the report. The parties reached an impasse on whether the valuation report was privileged. Noven moved to compel Novartis to produce Deloitte’s valuation report. The Court granted Noven’s motion, finding that Novartis failed to meet its burden “of establishing that the valuation report privileged and, therefore, exempt from the disclosure.” (Citing 148 Magnolia, LLC v. Merrimack Mut. Fire Ins. Co. , 62 A.D.3d 486, 487 (1st Dept. 2009)). The Court concluded that Novartis could not demonstrate that “the report was created solely and exclusively in anticipation of litigation.” Thus, the Court could not rule out a mixed purpose for the report. The Court noted that “ t undisputed that a valuation by Deloitte was contemplated for business purposes before Novartis claim that it appreciated that litigation potentially lay ahead.” This fact was underscored by Novartis’ failure to demonstrate “that the nature, character or scope of the valuation” previously discussed with Deloitte had “changed in any way whatsoever or that Novartis was exclusively in litigation mode and not still desirous of arriving at a mutually agreeable business solution with Noven.” (Citing Plimpton v. Massachusetts Mut. Life Ins. Co. , 50 A.D.3d 532, 533 (1st Dept. 2008)). “Indeed,” said the Court, “there is no evidence between September 2015 – when Novartis maintain that it first contemplated potential litigation – and the commencement of this action, that Novartis ever explicitly committed to Noven that, contrary to its earlier position, it was not going forward with nor would it exchange or discuss the valuation that it had earlier committed to.” In short, concluded the Court, “Novartis has not shown any proof ( in camera or otherwise) that after its business people chose Deloitte to prepare the valuation for business purposes, the actual scope or nature of the retention changed in any material way.” The Court also rejected the notion that because “ both parties fully appreciated that litigation was a possibility before they officially commissioned their respective valuations” (orig’l emphasis), the Deloitte valuation was protected: “That does not alter the analysis nor does the involvement of attorneys or the parties’ own privilege designations (which were likely designed to afford the parties with maximum flexibility depending on the outcome of the valuation).” “In the end,” said the Court, “it is hard to believe that Novartis decided, in September 2015, that potential litigation justified an uncommunicated change in course with respect to the valuation and that, despite verily believing that a valuation was irrelevant, it continued to pursue the very same valuation that it had anticipated earlier, yet it was for a completely different purpose (and that Novartis did so, at this stage and with urgency, solely for litigation that had not even been commenced and not for use in its ongoing business negotiations).” This conclusion was reinforced by the record, which the Court observed, showed that “the parties continued in the same course of negotiations for which the Deloitte valuation had been contemplated.” Takeaway The burden of establishing the right to work-product protection is on the party asserting it. 148 Magnolia, LLC v Merrimack Mut. Fire Ins. Co. , 62 A.D.3d 486, 487 (1st Dept. 2009). Whether a particular document or communication deserves protection is a fact-specific determination. Rossi v. Blue Cross & Blue Shield , 73 N.Y.2d, 588, 592-93 (1989). Noven exemplifies these principles: under the facts and evidence before the Court, Novartis was unable to meet its burden of demonstrating that the Deloitte valuation report deserved work-product protection.

If there is one thing people like less than attorneys, it is paying attorneys’ fees.  Accordingly, great effort is made in contracts to shift to another party, the obligation for the payment of attorneys’ fees in the event of dispute. “Under the general rule attorneys’ fees and disbursements are incidents of litigation and the prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties or by statute or court rule.”  A.G. Ship Maintenance Corp. v. Lezak , 69 N.Y.2d 1, 5 (1986) (citations omitted); see also , Hooper Associates, Ltd. v. AGS Computers, Inc. , 74 N.Y.2d 487, 491 (1989).  According to the Court of Appeals, “ he rule is based upon the high priority accorded free access to the courts and a desire to avoid placing barriers in the way of those desiring judicial redress of wrongs. The preferred remedy for deterring malicious or vexatious litigation has been the use of separate, plenary actions after the challenged proceedings have concluded.”  A.G. Ship , 69 N.Y.2d at 5 (citations omitted). Notwithstanding the general rule, however, “ t is not uncommon…for parties to a contract to include a promise by one party to hold the other harmless for a particular loss or damage and counsel fees are but another form of damage which may be indemnified in this way.”  Hooper , 74 N.Y.2d at 491 (citations omitted).  “A promise assuming the obligation to pay the attorney’s fees of another should not be found unless it can be clearly implied from the language and purpose of the entire agreement and the surrounding facts and circumstances.”  214 Wall Street Associates, LLC v. Medical Arts-Huntington Realty , 99 A.D.3d 988 (2 nd Dep’t 2012) (citations and internal quotation marks omitted). The propriety of an attorneys’ fee shifting provision in a lease that provided for the reimbursement of “attorneys’ fees to a lessor even if the lessor is in default” was the subject of the First Department’s decision in Matter of Krodel v. Amalgamated Dwellings Inc. , decided on November 8, 2018.  The Krodel Court found such a provision to be “unconscionable and unenforceable as a penalty.” The tenant in Krodel owned shares in a cooperative apartment.  The operative proprietary lease contained the following attorneys’ fees provision: If the Lessor shall incur any cost, fee or expense . . . including reasonable legal fees . . . in connection with any action or proceeding brought by the Lessee against the Lessor . . . which is based on an alleged default of the Lessor hereunder or which is based on any other matter or thing relating to this lease, or to any alleged failure by the Lessor to perform any act which the Lessor is required to perform . . . or to the shares of the Lessor issued to the Lessee, or to the Lessor's Bylaws, . . . such cost or expense shall be paid by the Lessee to the Lessor, on demand, as additional rent. (the “Attorneys’ Fees Provision”) The petitioner in Krodel was the transferee of shares in her cooperative apartment.  Although she paid the transfer fees, the lessor/respondent refused to transfer the shares to her.  As a result, petitioner sued the respondent/lessor for default under the lease and for statutory violations.  The respondent counterclaimed for attorneys’ fees under the Attorneys’ Fees Provision. Thereafter, respondent moved for summary judgment on its counterclaim and petitioner cross-moved for summary judgment dismissing the counterclaim.  The motion court granted petitioner’s cross-motion and denied respondent’s motion. The First Department found that the motion court “properly declined to enforce because it is unconscionable and unenforceable as a penalty.”  In so doing, the Court recognized the accepted notion that “ arties to a lease may contract for attorneys’ fees provided they are reasonable and not in the nature of penalty or forfeiture.”  (Citation, internal quotation marks and brackets omitted.) The determination of whether a provision is “an unenforceable penalty is a question of law, giving due consideration to the nature of the contract and the circumstances” (quoting, 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc. , 24 N.Y.3d 528, 536 (2014)).  The Court, relying on Gillman v. Chase Manhattan Bank , 73 N.Y.2d 1, 10 (1988), stated that “ finding of unconscionability requires some showing of an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.”  (Internal quotation marks omitted.) After recognizing that the question decided was one of first impression in the First Department, the Court held that: In the present case, we find that an attorneys' fees provision which provides that the tenant must pay attorneys' fees if it commences an action against the landlord based upon the default of the landlord is unconscionable and unenforceable as a penalty. of the proprietary lease permits the landlord to recover attorneys' fees when the tenant brings an action against the landlord even when the landlord is in default. To enforce such a provision would produce an unjust result because it would dissuade aggrieved parties from pursuing litigation and preclude tenant-shareholders from making meaningful decisions about how to vindicate their rights in legitimate instances of landlord default. TAKEAWAY While contractual provisions for shifting attorneys’ fees are widely utilized, their import may be eviscerated by overreaching.

Dismissal of Securities Fraud Claim in Federal Court Has No Preclusive Effect on Common Law Fraud Claims Brought in State Court Securities fraud and common law fraud have much in common. The core elements required to prevail on both claims are similar. Yet, dismissal of a federal securities fraud claim is not necessarily the death knell of a common law fraud claim. Recently, Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, reached this conclusion in Brown v. Cerebus Capital Management, LP , 2018 N.Y. Slip Op. 32782 (Sup. Ct., N.Y. County Oct. 30, 2018) ( here ). Common Law Fraud vs. Securities Fraud Common Law Fraud The essential elements of a common law fraud cause of action include: a material misrepresentation or omission of fact, knowledge of its falsity, reasonable reliance upon such misrepresentation or omission, and resulting damages. See Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). Under CPLR 3016(b), each element must be pled with particularity. Id . CPLR 3016(b) is satisfied when the facts in the complaint “permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008). In Pludeman , the Court of Appeals explained that the purpose of CPLR 3016(b) is to inform a defendant of the complained-of conduct. For that reason, CPLR 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.” 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Id . at 492. Thus, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. Id . Securities Fraud To bring a claim under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 10b-5 promulgated thereunder, a plaintiff must allege sufficient facts to establish that a defendant: (1) made misstatements or omissions of material fact; (2) with scienter ( i.e. , intent to deceive); (3) in connection with the purchase or sale of securities; (4) upon which the plaintiff relied; and (5) that plaintiff’s reliance was the proximate cause of his/her injury. In re Puda Coal Sec. Inc., Litig. , 30 F. Supp. 3d 261, 265-66 (S.D.N.Y. 2014) (quoting In re IBM Corp. Sec. Litig. , 163 F.3d 102, 106 (2d Cir. 1998)). In addition, a plaintiff alleging securities fraud must also satisfy the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 USC § 78u-4, and Rule 9(b) of the Federal Rules of Civil Procedure by stating with particularity the circumstances constituting the alleged fraud. ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co. , 553 F.3d 187, 196 (2d Cir. 2009). This pleading threshold is intended to give a defendant notice of the claim, like CPLR 3016(b), but also is designed to safeguard the defendant’s reputation from “improvident” charges in strike suits. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 99 (2d Cir. 2007). Given the particularity requirement, a securities fraud complaint based on false and misleading statements “must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.” ATSI , 493 F.3d at 99. The PSLRA “expanded on the Rule 9(b) standard, requiring that securities fraud complaints specify each misleading statement; that they set forth the facts on which belief that a statement is misleading was formed; and that they state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Anschutz Corp. v. Merrill Lynch & Co. , 690 F.3d 98, 108 (2d Cir. 2012) (emphasis added). Thus, plaintiffs must “do more than say that the statements ... were false and misleading; they must demonstrate with specificity why and how that is so.” Rombach v. Chang , 355 F.3d 164, 174 (2d Cir. 2004). In short, unlike CPLR 3016(b), which only requires a “reasonable inference” of fraud, the PSLRA and Rule 9(b) require a “strong inference” that the defendant acted with the requisite state of mind. Brown v. Cerebus Capital Management, LP Background Plaintiffs, former mid-level managers of Covis Pharmaceuticals, Inc. (“CPI”), filed suit in connection with the grant of employment compensation they claimed to be part of a fraudulent scheme to deprive them of their compensation benefits. Plaintiffs were each recruited to build the distribution network for the Covis Enterprise (a collection of various CPI related entities), a pharmaceutical start-up founded in 2011 by former employees of GlaxoSmithKline PLC as a vehicle to obtain interests in the commercial rights of certain pharmaceutical products (the “Rights”), rebrand them, and sell them to other healthcare companies. With regard to compensation, Plaintiffs allegedly were told that they would be paid below-market salaries, but in exchange, would receive interests in the appreciation of the Rights, which would be worth more than tens of millions of dollars. Plaintiffs further alleged that, in reliance on this understanding, they built and managed CPI. Following their hire, Plaintiffs received an award of unvested profits interests (“Profit Interests”) through agreements with MIP I, which was created to provide profits incentives to Covis executives, directors, and managers (the “2012 Award Agreements”). The Profits Interests did not grant Plaintiffs any equity in the Covis Enterprise; instead, pursuant to contract, each received the potential to receive some of the profits of the Covis Enterprise, net of return of capital and repayment of debt. The 2012 Award Agreements allowed for 50% of the awarded Profits Interests to vest based upon continued employment over time, and the other 50% to vest if the company satisfied certain performance criteria. If and when fully vested, the Profits Interests afforded Plaintiffs a collective 1.25% stake in the Covis Enterprise’s profits. The 2012 Award Agreements made clear that continued employment was a condition of vesting, and that any unvested Profits Interests would be forfeit if employment was terminated, for any reason, whether voluntarily or involuntarily. In April 2013, the Covis Enterprise executed a corporate restructuring pursuant to a Master Restructuring Agreement. Pursuant to agreements with MIP II, which was also created to provide profits incentives to Covis executives, directors, and managers (the “2013 Award Agreements”), Plaintiffs surrendered their MIP I Profits Interests in exchange for equivalent Profits Interests in MIP II. The MIP I and MIP II Award Agreements and operating agreements are substantively identical. Plaintiffs signed the 2013 Award Agreements and received, as replacements for their interests under MIP I, Profits Interests under MIP II that granted equivalent interests in the profits of the Covis Enterprise. In the summer of 2014, two plaintiffs were terminated as employees due to a corporate restructuring, and one plaintiff voluntarily resigned. In December 2014, the employment of two plaintiffs ended as a result of CPI’s decision to eliminate its cardiovascular sales team. Pursuant to the 2013 Award Agreements, all of Plaintiffs’ unvested Profits Interests automatically forfeited back to MIP II as of their respective termination dates. At December 31, 2014, MIP II exercised its call right for Plaintiffs’ vested Profits Interests. Plaintiff’s Allegations Common to State and Federal Actions Plaintiffs alleged that the 2013 restructuring was a fraudulent scheme to wipe out their share of the Profits Interests and replace them with illusory interests in empty shell companies. Plaintiffs further alleged that Defendants made several extra-contractual false misrepresentations that they relied upon in executing the 2013 Award Agreements. In that regard, Plaintiffs alleged that Defendants falsely represented that Plaintiffs were entitled to 3.5% of the Covis Enterprise’s profits, and that any payments would be increased by 31% to account for taxes. Defendants also allegedly represented that the investment would be worth tens of millions of dollars – a representation Plaintiffs alleged was false. According to Plaintiffs, after they executed the 2013 Award Agreements, Defendants employed various schemes to “cancel” the Profits Interests, including setting impossible performance targets, and terminating Plaintiffs under false pretenses to prevent time-based vesting. Plaintiffs also claimed that Defendants failed to update certain disclosures to reveal merger negotiations that occurred in 2014, and the sale process in late 2013 that failed to receive any bids, which, if revealed, would have indicated to one Plaintiff that a sale of the Rights was imminent, and would have caused him not to resign. On March 9, 2015, the Covis Enterprise announced that it was selling substantially all of its assets to Concordia Healthcare Corporation (“Concordia”) for $1.2 billion. Plaintiffs filed suit, claiming they were entitled to greater payments based on the ultimate Concordia transaction. The Federal Litigation Plaintiffs filed their original action in the United States District Court for the Southern District of New York, asserting federal and state-law claims under the federal securities laws and the common law. Among other things, Plaintiffs alleged that: (1) Defendants violated Rule 10b-5(b) of the Exchange Act by telling Plaintiffs at the time of the 2013 restructuring that CPI’s managers were entitled to 3.5% of the Covis Enterprise’s profits, and promising that any payments would be increased by 31% to account for taxes; (2) Defendants violated Rules 10b-5(a) and (c) of the Exchange Act by terminating Plaintiffs’ employment and setting impossible performance targets, all to keep Plaintiffs’ Profits Interests from vesting; and (3) Defendants violated Rule 10b-5(b) of the Exchange Act by failing to inform one of the Plaintiffs about discussions to sell the Covis Enterprise’s assets, in order to dissuade him from resigning from his employment in August 2014. Defendants moved to dismiss the action, which Judge George B. Daniels granted with prejudice on December 12, 2016. In dismissing Plaintiffs’ federal claims, Judge Daniels declined to exercise supplemental jurisdiction over Plaintiffs’ state-law claims. In reaching that decision, Judge Daniels held that Plaintiffs failed to adequately plead scienter for their federal securities claims under the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the PSLRA. By summary order dated July 11, 2017, the United States Court of Appeals for the Second Circuit affirmed. The State Court Action and the Court’s Decision Thereafter, Plaintiffs filed suit in New York Supreme Court, asserting claims of common law fraud and violations of each Plaintiff’s state blue-sky laws, together with a variety of contract-based and quasi-contract claims. Defendants moved to dismiss. With regard to the fraud claims, Defendants argued that the claims were barred by the doctrine of collateral estoppel because they require scienter, and the federal court dismissed Plaintiffs’ federal claims for lack of scienter. The Motion Court rejected the argument. In denying the motion, the Motion Court observed that there was no preclusive effect resulting from the dismissal of Plaintiffs’ federal securities fraud claims because of the different standards for pleading scienter. After examining the elements of collateral estoppel – i.e. , (1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and decided, (3) there was a full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits – the Motion Court concluded that “Defendants demonstrate that they satisfied the elements of collateral estoppel because the federal court did not decide issues identical to those raised here.” Defendants cannot demonstrate that they have satisfied the elements of collateral estoppel because the federal court did not decide issues identical to those raised here. The federal securities claims brought in the federal action were subject to Rule 9 (b) and the PSLRA, which require a plaintiff to allege “facts giving rise to a strong inference that the defendant acted with the required state of mind” (15 USC § 78u-4). In contrast, the complaint’s fraud claims are subject to the CPLR and “3016 (b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct” ( Pludeman v North Leasing Sys., Inc. , 10 NY3d 486, 492 <2008> ). New York courts have uniformly held that the federal strong inference standard is higher than New York’s reasonable inference standard. Accordingly, because the federal court applied the strong inference standard to the federal action’s allegations of scienter, the federal dismissal is not preclusive of plaintiffs’ state law fraud claims. Citations omitted. Accordingly, the Court denied the motion to dismiss the fraud claims. Takeaway As discussed, federal securities claims are subject to the heightened pleading requirements of Rule 9(b) and the PSLRA. As such, a plaintiff must allege “facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4. By contrast, common law fraud claims brought in New York State courts are subject to CPLR 3016(b). To satisfy CPLR 3016(b), a plaintiff need only plead facts sufficient to permit “a reasonable inference of the alleged conduct.” Pludeman , 10 N.Y.3d at 491-92 (2008). Given the different pleading standards, New York State courts have routinely held that the federal standard is more exacting than New York’s standard. E.g. , Syncora Guar. Inc. v. Alinda Capital Partners, LLC , 2013 N.Y. Slip Op. 31489 , *18 (Sup. Ct., N.Y. County 2013) (CPLR 3016 (b) “is a more lenient test than the Second Circuit’s ‘strong inference of fraud’ test, in that it requires only that the complaint include ‘facts from which it is possible to infer defendant’s knowledge of the falsity of its statements.’”) (citation omitted); see also PMC Aviation 2012-1 LLC v Jet Midwest Grp., LLC , 2016 N.Y. Slip Op. 30972 , *14 (Sup. Ct., N.Y. County 2016) (“The particularity required by CPLR 3016 (b) is not as exacting as what is required under Rule 9 (b) in federal court”); NRAM PLC v. Societe Generale Corp. , 2014 N.Y. Slip Op. 32155 , *20 (Sup. Ct., N.Y. County 2014) (“The applicable New York standard requires only a ‘reasonable inference’ of scienter, while Rule 9(b) of the Federal Rules of Civil Procedure and its interpreting case law is far more demanding”). Brown adds its name to the list of cases that have recognized this difference.