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Section 470 of New York’s Judiciary Law , provides: A person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state. Section 470 requires that “non-resident attorneys must maintain an office within New York to practice in .”  ( Schoenefeld v. State , 25 N.Y.3d 22 (2015).) Our July 3, 2018, Blog post, “ Out Of State Attorneys Admitted In New York, Cannot Rely On New York Virtual Offices If They Intend To Practice In New York ,” addressed the need for an attorney admitted to practice law in New York, but who resides outside of the State, to maintain a physical office within the State in order to practice law in the State.  The Blog highlighted case-law holding that the in-state office requirement is not satisfied by maintaining a “virtual” office. In our follow-up Blog posted on January 2, 2019, we reported that one of the cases discussed in the July 3 Blog, Arrowhead Capital Finance v. Cheyne Specialty Finance Fund , 154 A.D.3d 523 (1st Dep’t 2017), was scheduled for oral argument before the New York Court of Appeals.  The Court of Appeals heard oral argument on January 9, 2019 < HERE=">HERE" FOR="FOR" THE="THE" VIDEO="VIDEO" OF="OF" ORAL="ORAL" ARGUMENT ="ARGUMENT"> .  We now report that on February 14, 2019, the Court rendered a decision . In Arrowhead , the First Department affirmed the dismissal of the underlying action, without prejudice, because it was commenced by a non-resident attorney admitted in New York, but without an office in New York.  The First Department, subscribing to the “nullity” rule, found that “Plaintiff's subsequent retention of co-counsel with an in-state office did not cure the violation, since the commencement of the action in violation of Judiciary Law § 470 was a nullity.” In its brief before the Court of Appeals, Arrowhead argued, among other things, that the First Department’s “nullity” rule should not be the law in New York State.  Instead, Arrowhead argued that the New York Court of Appeals should resolve the conflict that exists amongst the Departments by adopting the rule followed by the Second and Third Departments, which permits a party to cure a section 470 violation.   See, e.g. , Elm Mgmt. Corp. v. Sprung , 33 A.D.3d 753 (2nd Dep’t 2006); Sovereign Bank v. Calderone , 84 A.D.3d 778 (2nd Dep’t 2011); Stegemann v. Rensselaer County Sheriff’s Office , 153 A.D.3d 1053 (3d Dep’t 2017). In their brief, the Arrowhead defendants/respondents argued, inter alia , that adopting a “cure” rule as followed by the Second and Third Departments, would render section 470 meaningless.  Accordingly, the respondents argued that the Court of Appeals should, like the First Department, establish the “nullity” rule as the law in New York for violations of Judiciary Law section 470. Arrowhead argued and the Court of Appeals agreed, that the Court of Appeals’ decision in Dunn v. Eickhoff , 35 N.Y.2d 698 (1974), is dispositive of the Arrowhead appeal.   In Dunn , plaintiff’s attorney was disbarred in the middle of a personal injury trial.  Defendant’s motion for a mistrial was denied several days before the jury rendered a defense verdict.  Thereafter, and unhappy with the outcome of the trial, plaintiff moved for a mistrial.  The denial of the motion was affirmed by the Appellate Division, First Department.  The Dunn Court of Appeals affirmed, on the Appellate Division’s majority opinion and added that “ he disbarment of a lawyer creates no ‘nullities’, the person involved simply loses all license to practice law, that is, to hold himself out as a lawyer or to receive compensation for legal services.  As for the infant plaintiff, he is generally bound, with obvious limitations, by those who act in his behalf for better or worse, but mostly for his benefit.  Otherwise, as a practical matter, none would be able to deal with an infant’s affairs, to his detriment.”  (Citation omitted.)  Arrowhead, relying on the reasoning of the Second and Third Departments, argued that if the actions of a disbarred attorney were not deemed a nullity, the actions of a New York attorney, in good standing, but who does not maintain an office in New York should not be a nullity. The Court of Appeals recognized that “ hether an action, such as filing a complaint, taken by a lawyer duly admitted to the bar of this State but without the required New York office, is a ‘nullity’ is an issue of first impression for this Court.”  In reversing the First Department, the Court held that a “violation of Judiciary Law § 470 does not render the actions taken by the attorney involved a nullity nstead, the party may cure the section 470 violation with the appearance of compliant counsel or an application for admission pro hac vice by appropriate counsel.”  (Citation omitted.) The Court Reasoned that if “further relief is warranted, the trial court has discretion to consider any resulting prejudice and fashion an appropriate remedy and the individual attorney may face disciplinary action for failure to comply with the statute.”  (Citations omitted.)  Following the outlined procedure, the Court reasoned, would ensure “that violations are appropriately addressed without disproportionately punishing an unwitting client for an attorney’s failure to comply with section 470.”

It is well settled that stipulations of settlement are favored by the courts. Hallock v. State , 64 N.Y.2d 224, 230 (1984). Stipulations of settlement not only serve the interests of efficient dispute resolution but also are essential to the management of court calendars and integrity of the litigation process. Id .  For these reasons, stipulations of settlement are not lightly cast aside. Id . See also Matter of Galasso , 35 N.Y.2d 319, 321 (1972). Notwithstanding, a stipulation of settlement will be invalidated, and a party relieved from the consequences of the agreement, when there is evidence of, inter alia , fraud, collusion, mistake or accident.  Hallock , 64 N.Y.2d at 230; Matter of Frutiger , 29 N.Y.2d 143, 149-150 (1971). Recently, the Appellate Division, First Department, reversed the denial of a motion to invalidate a settlement agreement and allowed an amendment to a class action complaint on the grounds that the plaintiffs sufficiently alleged, among other things, a breach of fiduciary duty by the defendants. Cohen v. Saks, Inc. , 2019 N.Y. Slip Op. 01162 (1st Dept. Feb. 14, 2019) ( here ). Cohen v. Saks Incorporated Cohen arose from the 2013 acquisition of Saks, Inc. (“Saks”) by defendant Hudson’s Bay Company (“Hudson’s Bay”) (the “Merger”). here).=">here)."> The Merger was jointly announced by Hudson’s Bay and Saks on July 29, 2013. Pursuant to the merger agreement, Hudson’s Bay agreed to acquire all the outstanding shares of Saks for $16 per share. In connection with the Merger, Goldman Sachs & Co. (“Goldman”), the financial advisor for Saks, issued a fairness opinion dated July 28, 2013, stating that, in its opinion, the Merger was fair and reasonable to Saks’ shareholders. Shortly after the announcement, shareholders of Saks (the “Shareholders”) filed suit against Saks’ individual directors (the “Saks Parties”) for breach of fiduciary duty and against Hudson’s Bay and Harry Acquisition, Inc. for aiding and abetting the breach of fiduciary duty, alleging that they received grossly inadequate consideration in connection with the Merger. On October 22, 2013, the Shareholders and the Saks Parties executed a settlement stipulation in the action (the “Settlement Stipulation”). In the Settlement Stipulation, the parties agreed to mutual releases of any and all claims arising from the subject matter of the action. Thereafter, the Shareholders conducted discovery to confirm the fairness and reasonableness of the settlement (“Confirmatory Discovery”). During these proceedings, Goldman testified that the fairness material used in the Merger did not contain any valuation of Saks’ real estate. The Merger closed in November 2013. At that time, Saks operated 41 Saks Fifth Avenue stores, including its flagship store at 611 Fifth Avenue (the “Flagship Store”). The Flagship Store had not been appraised prior to the Merger.  Because the Saks’ board of directors (the “Board”) did not have an up-to-date appraisal of its real estate prior to the Merger, the Shareholders alleged that they breached their fiduciary duty in connection with the transaction. On February 3, 2014, approximately three months after the settlement, Goldman presented a real estate portfolio overview to Hudson’s Bay that provided an updated valuation of Saks’ real estate. In pertinent part, the presentation stated: “ anagement preliminary portfolio valuation of $7.7bn with heavy concentration in Saks Fifth Avenue, New York ((approximately) $4bn).” On November 22, 2014, more than one year after the Merger, the news media were reporting that Hudson’s Bay purchased Saks for too low a price. Subsequently, the Shareholders moved to compel the Saks Parties to produce additional discovery to examine the substance of the news reports; the motion was subsequently withdrawn. The Shareholders sought to rescind the settlement and amend the complaint to pursue additional claims against the Saks Parties and Goldman. The Shareholders argued that the Saks Parties and Goldman procured the Settlement Stipulation by providing information to the shareholders they knew or should have known to be false at the time of execution, and alleged that Goldman misrepresented the true value of the Flagship Store and misled the Board in the transaction. The Shareholders maintained that they were not aware of the fact that Saks’ real property in New York City exceeded the total price of the transaction by approximately $1 billion until the publication of the newspaper article and the newly disclosed information was inconsistent with the testimony given during the discovery prior to the execution of the Settlement Stipulation. The Shareholders contended that Goldman misled the Board to believe that Saks’ real estate was worth only between $1 and $1.2 billion because Goldman intended Hudson’s Bay to be a future client, while an appraisal revealed that the Flagship Store itself was worth $4 billion. The Trial Court Ruling The trial court denied the motion, holding that the Shareholders failed to plead fraud with particularity ( i.e. , failed to plead the elements of fraudulent inducement to enter the Settlement Stipulation). (Citing Eurycleiz Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009)). In that regard, the court found that “ he additional discovery” taken by the Shareholders did “not reveal[] any evidence that either the Saks Parties or Goldman knowingly misrepresent a material fact, nor it demonstrate that the Shareholders were induced by the alleged misrepresentation to settle the claim of inadequate consideration.” Characterizing the allegation as “ ere speculation,” the court held that simply because “Goldman may have known the value of Saks’ real property before the was consummated” to be greater than presented, was “insufficient to establish fraudulent inducement.” The court underscored the failure to satisfy the elements of fraud by noting that “ rior to consummation of the , … the Shareholders knew that the Board did not obtain an appraisal of its real estate since 2006.” Thus, the Shareholders could not claim there was a material misrepresentation or omission when they were apprised of the same information as the Board. As the court observed, “Goldman’s determination of the value of Saks’ real property only came after the was consummated and the Settlement Stipulation was executed.” “Thus,” held the court, “because the Shareholders fail to demonstrate sufficient cause to rescind the Settlement Stipulation, their proposed amended complaint fail .” An appeal followed. The First Department’s Decision The First Department reversed, holding that the Shareholders sufficiently alleged a breach of fiduciary duty against the Saks Parties “insofar as the sale price failed to account for the significant value of Saks's flagship store in Manhattan” and aiding and abetting a breach of fiduciary duty against Goldman. Slip Op. at *1 (“The majority of plaintiffs’ proposed new allegations and claims are not palpably insufficient or clearly without merit under the law of Tennessee, where Saks was incorporated, and leave to amend is granted as to those allegations and claims.”). Consequently, the Court permitted an amendment on those grounds. Although the Court declined to rule on the request to rescind the settlement, by its decision to allow the amendment, it effectively found that the Shareholders sufficiently alleged fraudulent inducement to cast aside the Settlement Stipulation. Id . at *2. The Court rejected the argument that the releases in the Settlement Stipulation barred the amendment. Id .  The Court held that because the releases, though broad enough to cover the claims in the amendment, did not become effective until final approval of the settlement, there was no impediment to the requested amendment: Although the releases in the parties' stipulation of settlement are sufficiently broad to cover the new allegations and claims, they do not pose an independent basis for denying the motion to amend, because, while class action settlements may generally be binding on the named plaintiffs even before judicial approval, the terms of the instant stipulation make clear that the releases do not become effective until after court approval, which has not yet occurred. Id . The Court also rejected the argument that the Shareholders were contractually obligated to defend the settlement and the Settlement Stipulation. In so doing, the Court held that the obligation to defend was not enforceable. Id . The Court reasoned that the Shareholders “and their counsel owe fiduciary duties to absent class members and thus cannot be required to support a settlement that is contrary to the best interests of those class members.” Id . (citing Wyly v. Milberg Weiss Bershad & Schulman, LLP , 12 N.Y.3d 400, 412 (2009); Desrosiers v. Perry Ellis Menswear, LLC , 30 N.Y.3d 488, 497 (2017)). Takeaway Cohen is an important case because it shows how an alleged breach of fiduciary duty can be used to support an allegation of fraud, in particular, an alleged omission of material fact. As noted, although not stated explicitly, the Court in Cohen essentially found that the Shareholders sufficiently alleged that they were fraudulently induced by an omission. See Eurycleia Partners , 12 N.Y.3d at 559 (“The elements of a cause of action for fraud a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”). While a duty to disclose material facts arises only under certain circumstances, such as under the ‘special facts’ doctrine where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” ( Jana L. v. W. 129th St. Realty Corp. , 22 AD3d 274, 277 (1st Dept. 2005)), the courts will require such disclosure in the context of a fiduciary relationship. SNS Bank, N.V. v Citibank, N.A. , 7 A.D.3d 352, 356 (1st Dept. 2004); Kaufman v. Cohen , 307 A.D.2d 113, 120 (1st Dept. 2003) (“where a fiduciary relationship exists, the mere failure to disclose facts which one is required to disclose may constitute actual fraud, provided the fiduciary possesses the requisite intent to deceive”) (citation and quotation marks omitted). In the corporate context, there is no question that a fiduciary relationship exists between corporate officers and directors and the corporation’s shareholders. E.g. , Agostino v. Hicks , 845 A.2d 1110, 1122 n.54 (Del. Ch. 2004) (“it is beyond dispute that an officer or director of a Delaware corporation owes fiduciary duties to both the company and its shareholders”). In light of the foregoing principles, it naturally followed that having concluded that the Shareholders adequately alleged a breach of fiduciary duty against the Saks Parties for amendment purposes, the Court would find that the Shareholders adequately alleged a claim of fraudulent inducement sufficient to cast aside the Settlement Stipulation. As such, Cohen teaches that the failure by a fiduciary to disclose material facts in breach of his/her fiduciary duty may constitute an actionable fraud (assuming the elements of the claim are satisfied) and support a motion to invalidate a settlement agreement.

Securities fraud comes in all shapes and sizes. While the substance of a fraudulent investment scheme may change depending upon the circumstances and the fraudster involved, the types of securities fraud tend to fall into one of the following (non-exclusive) categories: financial statement/accounting fraud; pyramid schemes; Ponzi schemes; pump-and-dump schemes; affinity fraud; promissory note fraud; Internet fraud; “microcap” stock fraud; and fraud concerning information about a company, its operations and future prospects. Fraudsters use techniques that are designed to persuade a target or victim into buying the security at issue. Some of these techniques include: (1) phantom riches representation – that is, the investment will yield “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk”; (2) guaranteed returns – that is, high returns and low risk are “guaranteed” or “can’t miss”; (3) source credibility or “halo” effect – the fraudster tries to build credibility by claiming to be with a reputable firm or to have a special credential or experience; (4) “I believe in the company, so should you” assurance – the fraudster tries to assure the target that the investment is a sound one because he/she also invested in the company; (5) “everyone is buying it” representation – the fraudster stresses that other people are buying the security and, therefore, so should the target or victim; and (6) the reciprocity representation – the fraudster offers to do a small favor for the target or victim in return for a big favor: “I’ll give you a break on my commission if you buy now.” e.g.,="(e.g.," here,=">here," >here).=">here)."> As FINRA notes, “ lmost anyone who invests is a potential fraud target.” FINRA, Avoiding Investment Scams , http://www.finra.org/investors/alerts/avoiding-investment-scams . The reason, says FINRA, is the psychology behind the pitch. “ raudsters are masters of persuasion, tailoring their pitches to match the psychological profiles of their targets.” Id . Because of their ability to identify the risk profile of their victims, fraudsters are adept at fleecing investors out of their money. In this regard, some of the risk factors identified by FINRA include: investing in or owning high-risk investments, such as start-up companies and penny stocks; relying on friends, family, co-workers for investment advice; attending investment seminars; failing to perform any type of check or due diligence on the fraudster; and an inability to detect that something is amiss. Id . SEC v. Alexander Recently, the SEC charged the founder and principal of an online digital sweepstakes company with conducting a $9 million securities fraud that involved some of the foregoing risk factors. On February 7, 2019, the SEC announced that it had charged Robert Alexander (“Alexander”) with fraudulently raising approximately $9 million from approximately 53 individuals by selling investments in Kizzang LLC (“Kizzang”), a purported “new media sweepstakes company” that offered digital sweepstakes entertainment on mobile devices, via social media, and on the web. (A copy of the SEC’s press release can be found here .) Shortly after Kizzang’s incorporation on January 10, 2013, Alexander allegedly solicited friends and business associates, among others, to invest in Kizzang. According to the SEC’s complaint ( here ), he did so by, among other representations, (1) telling investors how their money would be used by Kizzang and how much had been raised previously, (2) guaranteeing that Kizzang would break even within three years, (3) telling investors they would make a minimum of 10 times their investment, (4) telling investors that he had personally invested millions of dollars in Kizzang, and (5) telling investors that he had led the creation of a prominent video game. As alleged by the SEC, these and other representations were materially false and misleading. For example, rather than using investor funds for Kizzang’s business, Alexander misappropriated at least $1.3 million, including spending more than $450,000 on gambling sprees. Alexander also used investor funds to finance his daily living and other personal expenses, including credit card bills, shopping and entertainment, and expenses for his daughter, including culinary school tuition and luxury car payments. On November 13, 2017, Alexander informed shareholders that Kizzang had been inactive for five months and that the company was “hopelessly insolvent.” The SEC filed the complaint in the U.S. District Court for the Southern District of New York. The SEC charged Alexander and Kizzang with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC is seeking a permanent injunction, civil monetary penalties, and disgorgement of ill-gotten monetary gains, plus interest. Commenting on the charges, Carolyn Welshhans, Associate Director in the SEC’s Division of Enforcement, stated: “As alleged in our complaint, Alexander promoted Kizzang as an opportunity for investors to profit from the early success of a technology start-up. In reality, Alexander brazenly converted investor proceeds for his personal use, sometimes within days of receiving investor funds.” In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Alexander ( here ). The charges were based upon the same conduct alleged in the SEC complaint, to wit: “ALEXANDER solicited and maintained investments in the Company through numerous false representations, including concerning his own professional background, the Company’s financial condition, expected returns on investment, and assurances to investors that their investments would be used solely for the Company’s business purposes.” Commenting on the allegations, U.S. Attorney Geoffrey S. Berman, stated: “As alleged, Robert Alexander lied to investors in his online gaming company, fabricating information about his professional background and promising to use investor money solely to further the aims of the business.  Instead, Alexander allegedly used more than $1.3 million in investor funds on, among other things, gambling excursions, entertainment venues, and other personal expenses. As this arrest demonstrates, fraud on investors is no game, and we will continue to partner with the FBI to investigate and prosecute those who defraud investors.” FBI Assistant Director-in-Charge William F. Sweeney, Jr. also commented on the allegations, stating: “Time and time again, we come across evidence of investment funds being misappropriated to pay off personal debts or fund extravagant lifestyles. As evidenced by today’s arrest, those who allegedly use these funds for other than their intended purpose are taking a gamble – the bigger the risk does not always mean the greater the reward.” Alexander was charged with one count of securities fraud and one count of wire fraud. If convicted, the securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million or twice the gross gain or loss from the offense, and the wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $250,000 or twice the gross gain or loss from the offense. Takeaway The SEC’s stated mission “is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” See SEC website ( here ). “Crucial to the SEC’s effectiveness in each of areas is its enforcement authority.” Id .  In that regard, the SEC commences “hundreds of civil enforcement actions against individuals and companies for violation of the securities laws.” Id .  Typical violations fall within the categories of fraud identified above – e.g. , insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them. Since investor protection is one of the tripartite components of the SEC’s mission, the Commission has identified investor protection as one of its five core principles. See Division of Enforcement Annual Report for Fiscal 2018 at 6 ( here ). In furtherance of this principle, the SEC has devoted resources and initiated programs to protect retail investors. These efforts have resulted in more than half of the SEC’s stand-alone enforcement actions in FY 2018 to involve wrongdoing against retail investors. Id . Alexander is an example of the SEC’s efforts to protect Main Street investors.

It is well settled that New York has a “long and strong public policy favoring arbitration,” such that the “courts interfere as little as possible with the freedom of consenting parties to submit disputes to arbitration.” Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49-50 (1997) (internal quotation marks omitted). In light of this public policy, arbitration is encouraged “as a means of conserving the time and resources of the courts and the contracting parties” to a dispute. Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am. , 37 N.Y.2d 91, 95 (1975). In Smith Barney Shearson , the Court of Appeals observed that preventing arbitration when the parties have agreed to the forum “would curtail or divert this progressive and prudent policy favoring arbitration.” Id . at 50. The court went on to say that “ ourts should be very hesitant … to impinge upon the rights and obligations derived from commitments to integrated, relatively speedier and less costly alternative dispute resolution modalities.” Id . What if, however, the parties do not agree to arbitrate their disputes but a statute governing their conduct does require arbitration? In Dakota, Inc. v. Nicholson & Galloway, Inc. , 2019 N.Y. Slip Op. 30270(U) (Sup. Ct. N.Y. County Jan. 30, 2019) ( here ), Justice Barry Ostrager of the Commercial Division held that the statutory requirement prevails. The statute in question is the Prompt Payment Act (the “PPA”), Article 35-E of the General Business Law, sections 756-758. The PPA “governs payment procedures and remedies for private non-residential construction contracts in excess of a specified dollar threshold.” Capital Siding & Constr., LLC v. Alltek Energy Sys., Inc. , 2016 N.Y. Slip Op. 31043 (Sup. Ct. Albany County), aff’d , 138 A.D.3d 1265 (3d Dept. 2016); see GBL § 756 (1). “If efforts to resolve a dispute arising under the PPA are unsuccessful, the aggrieved party may refer the matter to expedited arbitration before the American Arbitration Association.” Id . § 756-b (3). Thus, if the parties do not have an agreement to arbitrate, the PPA provides a mechanism for them to avail themselves of the forum. “ claim alleging a violation of the PPA is subject to arbitration so long as the prerequisites of § 756-b (3) have been satisfied.” Pike Co., Inc. v. Tri-Krete Ltd. , 2018 WL 6060927, at *7 (W.D.N.Y. Nov. 20, 2018). “The prerequisites include: (1) third-party verification of delivery of written notice of the PPA violations; and (2) third-party verification of delivery of the demand, to AAA, for an expedited arbitration.” Dakota , Slip Op. at *4 (citing GBL § 756-b (3)). The PPA also addresses the situation in which the parties have an agreement to litigate rather than arbitrate their disputes. In this regard, the PPA provides that, ‘ xcept as otherwise provided in this article,’ the terms and conditions of the parties’ written agreement will supersede the PPA’s provisions.”  Capital Siding & Constr. , 138 A.D.3d at 1266 (quoting GBL § 756-a). However, if the parties’ agreement conflicts with the arbitration requirement in the PPA, the PPA governs, making the parties’ contractual provision “void and unenforceable.” GBL § 757 (3) (directing that “ provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that expedited arbitration as expressly provided for and in the manner established by is unavailable to one or both parties” is “void and unenforceable.”) See also Capital Siding & Constr. 138 A.D.3d at 1266. Dakota, Inc. v. Nicholson & Galloway, Inc. Dakota involved a dispute for payment between a residential cooperative apartment corporation, The Dakota, Inc. (“The Dakota”), and Nicholson & Galloway, Inc. (“N&G”), a general contractor hired to undertake a $28 million roof replacement and facade renovation of the cooperative building. N&G claimed that it was owed a final payment of $637,500 under a construction agreement between the parties (the “Agreement”). The Agreement provided for retainage payments of 10% of progress payments, capped at $1,250,000. The vast majority, if not all, of the construction work was allegedly completed in April 2018. Shortly thereafter, The Dakota released 50% of the retainage to N&G. The Dakota withheld the balance of the retainage after alleging that N&G caused damage to the building during renovations. Thus, The Dakota claimed offsets against the balance of the retainage due to N&G’s alleged misconduct. On November 28, 2018, N&G noticed a Demand for Arbitration on The Dakota (the “Demand”) pursuant to the expedited arbitration procedure within the PPA. N&G claimed that The Dakota violated the PPA. The Dakota sought to stay the arbitration pursuant to CPLR § 7505(b), arguing that the Agreement provided for litigation, not arbitration.  The Court denied the petition and dismissed the special proceeding. The Court held that the “PPA’s expedited arbitration procedure precluded by parties’ contractual agreement to litigate disputes.” Slip Op. at *3. The Court found that “the plain language of the PPA makes void and unenforceable the parties’ purported agreement to litigate disputes arising out of the Agreement to the extent the Agreement precludes the PPA’s expedited arbitration procedure.” Id . at *3. In reaching its holding, the Court found Capital Siding & Construction to be “particularly instructive.” Capital Siding & Construction involved a dispute between a contractor and a subcontractor where the former was alleged to have withheld certain payments from the latter. 138 A.D.3d at 1265. The subcontractor sought expedited arbitration pursuant to the PPA. The contractor resisted that effort and commenced a proceeding under CPLR § 7503 to stay the arbitration. Id . The contractor argued that the agreement at issue “expressly state that litigation, not arbitration, the parties’ chosen method of dispute resolution.” Id . The Third Department held that the contractor’s reading of the PPA was incorrect because it “ignore the existence of General Business Law§ 757(3), which … unambiguously voids and renders unenforceable any contractual provision that makes expedited arbitration unavailable to one or both parties.” Id . at 1266.  See also Pike , 2018 WL 6060927, at *7 (“However, § 757 prohibits any contractual provision that causes the PPA’s expedited arbitration remedy to become unavailable to one or both parties.”). Having determined that the expedited arbitration procedures of the PPA superseded the parties’ agreement, the Court addressed whether the alleged violations fell within the scope of the PPA. Id . at *5. The Court held that the alleged violations did. Id . First, the Court held that N&G provided written notice of a PPA violation, stating “N&G’s Demand for Arbitration plainly allege that the nature of the dispute a ‘ iolation of New York Prompt Payment Act.’” Id . The Court declined to “engage in an extensive analysis of whether the PPA ha been violated” because to do so “would necessarily render the PPA’s expedited arbitration remedy useless as a tool to avoid protracted and expensive litigation.” Id . (citing Pike , 2018 WL 6060927, at *9). Notwithstanding, the Court observed that there was a question as to whether “some, none, or all” of N&G’s claims were arbitrable. In the Demand, N&G alleged PPA violations and a breach of contract. Yet, said the Court, “‘the AAA’s authority to issue an arbitral award is limited to the alleged violation of the PPA.’” Id . (quoting Pike , 2018 WL 6060927, at *10). Consequently, the AAA could not arbitrate whether N&G had a cause of action for breach of contract. Slip Op. at *5. The Court concluded that “ ny allegations of common law breach of contract must necessarily be litigated in a court of competent jurisdiction pursuant to the Agreement’s dispute resolution provisions.…” Id . Second, the Court held that N&G satisfied the delivery requirement GBL § 756-b (3). Id . The Court noted that on October 26, 2018, N&G provided written notice of the PPA violations to The Dakota pursuant to the notice provisions of the Agreement. Id . The Dakota received the notice, as confirmed by its General Counsel on November 7, 2018. “Therefore,” the Court held, “there was third party verification of delivery of written notice of the Dakota’s purported PPA violations.” Id . (footnote omitted). As a result, the Court denied The Dakota’s motion to permanently enjoin the arbitration proceedings demanded by N&G and dismissed The Dakota’s petition to stay the Demand to Arbitrate and discontinued the special proceeding. Takeaway Typically, disputes over the arbitrability of claims arise in connection with an agreement to arbitrate. In Dakota , the opposite was true – the dispute arose in connection with an agreement not to arbitrate. Dakota is important because there are “only a limited number of” cases “interpreting the PPA, and virtually no case” authority “describing the scope of the PPA’s arbitration provision in any depth.” Pike , 2018 WL 6060927, at *5.  As such, like Capital Siding and Construction and Pike , Dakota is instructive for its consideration of the interplay between a contractual provision rejecting arbitration and a statutory provision requiring arbitration and the primacy of the latter over the former. As explained by the Legislature in enacting the PPA, the arbitration requirement was intended to promote “speedier resolutions,” reduce the “time and funds wasted in litigation,” and hasten the “payment of moneys owed.” Id . at *6 (quoting N.Y. Bill Jacket, 2009 A.B. 6493, Ch. 417). Section 757 of the PPA achieves those goals by prohibiting any contractual provision that causes the statute’s expedited arbitration remedy to become “unavailable to one or both parties.” GBL § 757(3). Dakota is another case to further these legislative purposes.

Like the iconic scene when a cruise ship is leaving the dock, the New York Supreme Court, Appellate Division, Second Department, in BAC Home Loans Servicing, LP v. Alvarado (January 30, 2019), has everyone waiving. CPLR 3018(b) requires that “ party plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading….”  Generally, affirmative defenses are waived by the defendant if not raised in the answer or made the subject of a pre-answer motion to dismiss. 23/23 Communications Corp. v. General Motors Corp. , 257 A.D. 367 (1 st Dep’t 1999); see also , CPLR 3211(e) (“Any objection or defense based upon a ground set forth in paragraph one, three, four, five and six of subdivision (a) is waived unless raised either by such motion or in the responsive pleading.”)  The defense of lack of standing is an affirmative defense that is subject to this waiver rule.    HSBC Mortgage Corp. v. Johnston , 145 A.D.3d 1240 (3 rd Dep’t 2016); see also, US Bank Nat. Assoc. v. Nelson (2 nd Dep’t June 23, 2019) (same and indicating that the “mere denial of factual allegations will not suffice for this purpose”).  It should be noted that, under appropriate circumstances, the court may grant leave to a defendant to amend an answer to assert an affirmative defense omitted from the party’s original answer.  Marks v. Macchiarola , 221 A.D.2d 217 (1 st Dep’t 1995). The issue of a foreclosing Mortgagee’s standing to bring a mortgage foreclosure action has been discussed in this Blog. See “ The Second Department Determines That A Line Of Credit Agreement Is Not A Negotiable Instrument Under The UCC When Addressing Plaintiff’s Standing To Commence A Mortgage Foreclosure Action ” and  ” The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion .”  The First Department in BAC adds a new twist to this recurring issue. As expected, the plaintiff in BAC is a mortgagee that commenced an action to foreclose a $490,000.00 mortgage.  In its complaint, BAC alleged, inter alia , that it is that holder and owner of the subject note.  The BAC defendant answered the complaint, pro se , by making general denials only.  The defendant neither asserted an affirmative defense of lack of standing nor did he make a pre-answer motion to dismiss the complaint based on lack of standing.  The plaintiff moved for summary judgment and for an order of reference.  In response, the defendant opposed the motion and cross-moved to dismiss the complaint based on plaintiff’s lack of standing.  In reply to its motion and in opposition to defendant’s cross-motion, the plaintiff addressed the standing issue on the merits by introducing evidence of its standing to commence the foreclosure action.  Significantly, however, the BAC plaintiff “never contended in the Supreme Court that the defendants had waived the issue of standing.”  The Supreme Court granted the plaintiff’s motion “and, in effect, denied the … cross-motion.” On the appeal, now with retained counsel, the defendant urged that the plaintiff’s motion for summary judgment should have been denied and the complaint should have been dismissed due to the plaintiff’s lack of standing.  In response, the plaintiff improperly argued for the first time on appeal, that defendant waived the issue of standing by not raising standing as an affirmative defense or in a pre-answer motion to dismiss and that it, nonetheless, established its standing to commence the foreclosure action. The Second Department “modified” the Supreme Court’s order by substituting the provision granting the plaintiff summary judgment and issuing an order of reference with a provision denying the motion.  In so doing, the Second Department noted that instead of arguing waiver below, the plaintiff “sought to establish that it had standing to commence the action … having litigated the standing defense on the merits in the Supreme Court – both on the original motion and in opposition to reargument – the plaintiff argues on appeal that the issue of standing is waived.”  In this regard, the Second Department held that “ aving neglected to raise that dispositive issue in the Supreme Court, the plaintiff may not raise it for the first time on this appeal.” In any event, the Second Department also found that the plaintiff failed to establish on the merits that it had standing to commence the action because of the “conclusory” nature of the loan servicer’s affidavit attempting to establish that the plaintiff “was in possession of the Note at the time of commencement of this action.” TAKEAWAY The BAC plaintiff may have been better served by arguing waiver and not addressing the merits of the standing issue.

Parties to commercial/business transactions are no doubt familiar with “term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle”. As the parties to these documents know, they outline the fundamental terms of the transaction being negotiated. Not surprisingly, disputes arise over the enforceability of these documents. In A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC , 2019 N.Y. Slip Op. 30215(U) (Sup. Ct. Kings County Jan. 28, 2019) ( here ), Justice Sylvia G. Ash considered this question in connection with Forest City’s plan to develop the Atlantic Yards (now Pacific Park), located adjacent to the Barclay’s Center and the Atlantic Terminal. As discussed below, the Court held that the letter of intent at issue (“LOI”) was a binding and enforceable agreement, finding that the document “set forth all of the material terms of the agreed-upon transaction” between the parties. When is a Letter of Intent Binding? In determining the rights and obligations of parties to a written instrument, courts will enforce the agreement according to its terms when the agreement “is complete, clear and unambiguous on its face.” Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002); RIS Assoc. v. N.Y. Job Dev. Auth. , 98 N.Y.2d 29, 32 (2002). The aim of the court when interpreting a written instrument is to arrive at a construction that gives fair meaning to all of its terms and provisions, and to reach a “practical interpretation of the expressions of the parties so that their reasonable expectations will be realized.” Pellot v. Pellot , 305 A.D.2d 478 (2d Dept. 2003). Courts do so by employing “an objective test,” which “means that the manifestation of a party’s intention rather than the actual or real intention is ordinarily controlling.” Four Seasons Hotels v. Vinnik , 127 A.D.2d 310, 317 (1st Dept. 1987); see also Conopco, Inc. v. Wathne Ltd. , 190 A.D.2d 587, 588 (1st Dept. 1993). In determining the party’s intentions, the courts look to the language and terms of the instrument at issue. Conopco , 190 A.D.2d at 588; Lake Constr. & Dev. Corp. v. City of New York , 211 A.D.2d 514, 515 (1st Dept. 1995). “If the language of the agreement is free from ambiguity, its meaning may be determined as a matter of law on the basis of the writing alone without resort to extrinsic evidence.” Salerno v. Odoardi , 41 A.D.3d 574, 575 (2d Dept. 2007). As it is a question of law whether or not a contract is ambiguous ( W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157 (1990)), a court must first determine whether the agreement at issue on its face is reasonably susceptible to more than one interpretation ( see Chimart Assoc. v. Paul , 66 N.Y.2d 570 (1986)). When a contract term or clause is ambiguous, and the determination of the parties’ intent depends on the credibility of extrinsic evidence or a choice among inferences to be drawn from extrinsic evidence, then the interpretation of such language presents a question of fact and the determination is a matter for trial. Amusement Bus. Underwriters v. American Intl. Group , 66 N.Y.2d 878,880 (1985). Any ambiguity in a contract is to be construed against the party who drafted the contract. See Guardian Life Ins. Co. of Am. v. Schaefer , 70 N.Y.2d 888 (1987). When the writing is a letter of intent or a memorandum of understanding the foregoing rules apply. And, where the letter of intent or memorandum of understanding contain all of the essential terms of the contract, “the fact that the parties intended to negotiate a ‘fuller agreement’ does not negate its legal effect.” Conopco , 190 A.D.2d at 588. Thus, a letter of intent or a memorandum of understanding is not rendered ineffective simply because certain non-material terms are left for future negotiation or because the agreement states that the parties will execute a formal agreement in the future. RES Exhibit Servs., LLC v. Genesis Vision, Inc. , 155 A.D.3d 1515, 1518 (4th Dept. 2017); Sustainable PTELtd. V. Peak Venture Partners LLC , 150 A.D.3d 554, 555 (1st Dept. 2017). The writing must expressly reserve the right not to be bound until a more formal agreement is signed. Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008); Emigrant Bank v. UBS Real Estate Sec., Inc. , 49 A.D.3d 382, 383-384 (1st Dept. 2008). In fact, the lack of an expressed reservation of the right not to be bound by the letter of intent or memorandum of understanding in the absence of further agreements strongly favors a finding of a binding agreement. Netherlands Ins. Co. v. Endurance Am. Specialty Ins. Co. , 157 A.D.3d 468, 469 (1st Dept. 2018). here,=">here," >here=">here" and="and" >here.=">here."> A.J. Richard & Sons, Inc. v. Forest City Ratner Cos., LLC Background In early 2005, the City of New York entered into a Memorandum of Understanding (“MOU”) with Forest City, authorizing the company to develop the Atlantic Yards Project. The MOU contemplated that the Empire State Development Corp. (“ESDC”) would seek approval for the acquisition by eminent domain of the ownership interests of the tenants occupying space on the site (“Site 5”). In early 2006, when the Atlantic Yards Project was in its early stages, Forest City made a proposal to A.J. Richard, whereby it would purchase the property from A.J. Richard in exchange for a replacement property in the same location after the redevelopment of Site 5 was complete (“Replacement Property”). At the time, Forest City was planning to redevelop the property as a mixed-use building and convert the building to a condominium form of ownership with retail and/or commercial spaces on the ground floor and a residential or office tower. Discussions over the proposal ensued. Between September and December 2006, the parties negotiated the terms of the LOI, and exchanged multiple drafts of the LOI with each other. On December 2, 2006, the parties executed the LOI. The LOI set forth the proposed terms of the transaction between A.J. Richard and Forest City with respect to the proposed redevelopment of the property. In that regard, the LOI contained a number of provisions relevant to the action: a) an exclusivity provision, in which Forest City agreed to be A.J. Richard’s exclusive purchaser of the property and exclusive developer for the Replacement Property and the proposed redevelopment; b) an agreement to negotiate a purchase and sale agreement related to the property on Site 5 in which certain terms and condition of sale were agreed upon and required to be included in the final agreement; c) a “Proposed Redevelopment” section, which described in detail the proposed redevelopment of a mixed use building at Site 5, and which required A.J. Richard to cease operations at the property and vacate the property on 90 days’ notice from Forest City; d) a “Development Agreement” in which Forest City agreed to, among other things, develop the Replacement Property in accordance with the terms of the development agreement to be entered into by the parties, and substantially complete the Replacement Property within 18 months of the “Go Dark Period”; e) provisions governing the duties of each of the parties; f) a section governing the payments that Forest City would make to A.J. Richard annually ($3,800,000 per year each year) during the Go Dark Period, representing A.J. Richard’s “lost profits during such Go Dark Period”; g) sections governing the purchase price for the Replacement Property, required approvals and inducements from relevant governmental entities to enable the Proposed Redevelopment; h) a confidentiality agreement; i) amendment and assignment sections; j) a compliance with laws section; and k) an agreement section that required the parties to negotiate and finalize the Purchase and Sale Agreement and Development Agreement “within a commercially reasonable period of time.” Thereafter, A.J. Richard and Forest City drafted detailed purchase and sale agreements and development agreements (the “Implementing Documents”), as provided by the LOI, in order to implement the transaction that had been agreed upon in the LOI. From February 2007 to January 2008, A.J. Richard and Forest City exchanged various drafts of the Implementing Documents and their comments concerning them. By letter dated April 11, 2008, A.J. Richard advised Forest City that it had learned of Forest City’s intention to exclude A.J. Richard as an occupant with ownership of the store at the proposed site, as contemplated in the LOI. The letter sought an assurance from Forest City that it intended to perform all of its obligations pursuant to the LOI, noting that A.J. Richard considered the LOI to be a binding contract, notwithstanding the absence of a more formal contract. The letter further stated that if A.J. Richard did not receive the requested assurance by April 18, 2008, A.J. Richard would consider the agreement set forth in the LOI to have been anticipatorily breached by Forest City and would seek appropriate remedies. By letter dated April 17, 2008, Forest City expressed disagreement with A.J. Richard’s assertion that the LOI was a binding contract. Notwithstanding, however, Forest City subsequently reached out to A.J. Richard to resume work on the Implementing Documents. By letter dated April 22, 2008, A.J. Richard advised Forest City that it disagreed with the latter’s legal characterization and effect of the LOI and reserved all rights with respect to the issue. A.J. Richard noted, however, that further debate on that issue would serve no purpose since the parties were proceeding towards finalizing the Implementing Documents. The parties exchanged additional drafts of the Implementing Documents in June 2008 and January 2009. By mid-2009, the Implementing Documents were almost finalized. By October 2009, however, Forest City informed A.J. Richard that due to economic uncertainty caused by the recession and financial crisis, it was delaying the proposed development of Site 5 and that there was a good chance Forest City would never develop the site. Forest City advised that because of the uncertainty surrounding the future of Site 5 and the Atlantic Yards Project as a whole, Forest City wanted to suspend discussions regarding the Implementing Documents and avoid expending further resources on the Implementing Documents at that time. In response, A.J. Richard advised Forest City that it viewed the LOI as a binding contract and asked whether Forest City intended to consummate the transaction. In mid-November 2015, Forest City advised A.J. Richard that it did not consider the LOI to be a binding agreement for the purchase and sale of the property. Forest City further informed A.J. Richard that it intended to proceed with the development of Site 5 without delivering the Replacement Property to A.J. Richard in exchange for A.J. Richard’s existing property at Site 5, and that A.J. Richard would no longer be permitted to operate at the property site. Forest City stated that the ESDC would imminently bring an action to take title to the property by eminent domain. The Lawsuit On December 4, 2015, A.J. Richard filed the action. A.J. Richard asserted four causes of action. The first cause of action sought a declaratory judgment that (a) the LOI was a valid and binding contract, (b) it performed under the LOI, (c) Forest City breached the LOI, (d) it would be irreparably harmed if Forest City or those working in concert with Forest City were to obtain the property other than pursuant to the terms of the LOI, and (e) it had no adequate remedy at law. The second cause of action alleged that Forest City breached its obligations under the LOI by directing the ESDC to initiate proceedings to take title to the property without Forest City purchasing the property and without conveying to it the Replacement Property, and by explicitly repudiating its obligations under the LOI. The third cause of action alleged that Forest City breached its contractual obligations under the LOI by failing to negotiate in good faith, including by, in September 2015, directing the ESDC to seize title to the property by eminent domain, and, in November 2015, explicitly repudiating its obligations under the LOI and declaring that it would not honor the LOI. In its second and third causes of action, A.J. Richard sought specific performance, and an award of incidental damages resulting from Forest City’s alleged breaches of the LOI. The fourth cause of action alleged, in the alternative, that A.J. Richard was entitled to specific performance because Forest City should be estopped from acquiring the property by a method other than that prescribed in the LOI or upon terms other than those set forth in the LOI. A.J. Richard contended that it reasonably and foreseeably relied upon Forest City’s promises in the LOI to its detriment, and that it would suffer irreparable harm if Forest City was not ordered to specifically perform its obligations under the LOI. On February 18, 2016, the Court granted a motion by A.J. Richard for a preliminary injunction restraining Forest City and all those acting in concert with it from developing the project as it pertained to A.J. Richard.  Forest City appealed the February 18, 2016 order, and later withdrew its appeal. By order dated October 13, 2016, the Court directed A.J. Richard to provide an undertaking in the amount of $500,000. Forest City moved for an order: (1) granting it partial summary judgment dismissing plaintiff’s first, second, and fourth causes of action against it; and (2) vacating the preliminary injunction issued on February 16, 2016. A.J. Richard cross-moved for an order: (1) granting it summary judgment on all causes of action set forth in its complaint; (2) declaring that: (a) the LOI was a valid and binding contract; (b) it had performed under the LOI; (c) Forest City was in breach of the LOI; (d) it would be irreparably harmed if Forest City or those working in concert with Forest City obtained its property, other than pursuant to the terms of the LOI; and (e) it had no adequate remedy at law; (3) enjoining Forest City and those working in concert with Forest City from breaching the LOI; (4) compelling Forest City to specifically perform its obligations pursuant to the LOI; and (5) setting the matter down for a hearing to award it incidental damages resulting from Forest City’s prior breaches of the LOI. The Court’s Decision The Court held that the LOI constituted a valid and binding agreement between the parties. The Court found that the “LOI set forth all of the material terms of the agreed-upon transaction, including the parties, purchase price, location, and size of the Replacement Property; mortgage arrangements; Go Dark Payments; assumption of costs; and terms of delivery.” Slip Op. at *14. In addition, the Court found that the LOI “included detailed specifications with respect to the Replacement Property, including parking spaces, loading dock requirements, and a preliminary floor plan …” and a delivery requirement in which Forest City agreed to “deliver the Replacement Property to Richard substantially complete in ‘vanilla box’ condition,” which the LOI defined to mean “specified electrical system capacity,” “air conditioning system requirements, accessibility requirements, and requirements for plumbing, sprinklers, and modes of ingress and egress.” Id . at **14-15. The Court rejected Forest City’s argument that because the LOI required the parties to negotiate the specific terms and conditions of the sale of the property in a purchase and sale agreement and a development agreement, the LOI was “a non-binding agreement to agree and unenforceable as a contract.” Id . at *15. The Court noted that the agreement was “not rendered ineffective simply because certain non-material terms left for future negotiation or because the agreement state that the parties execute” a more formal agreement. Id . at *16 (citation and internal quotation marks omitted). The Court concluded that the “matters to be negotiated non-essential terms that ‘concern fine details,’ which ‘may still be decided by the parties without effecting the viability of the contract.’” Id . (quoting Tetz v. Schlaier , 164 A.D.2d 884, 885 (2d Dept. 1990)). The Court found it dispositive that the LOI did not “contain an express reservation by either party of the right not to be bound until a more formal agreement signed. Id . See also id . at *18 (“The lack of an expressed reservation of the right not to be bound by the LOI in the absence of further agreements strongly favors a finding of a binding agreement”) (citations omitted).  As a result, the Court rejected Forest City’s assertion that the LOI was non-binding because it “did not state that the parties intended to be legally bound”: “there is no requirement in a contract that it state that the parties are bound by it. Rather, it is the fact that the language of the agreement evinces a binding contract which determines that the parties are bound.” Id . at *17 (citations omitted). The Court summarized its findings as follows: The plain language used in the LOI manifests the intention of the parties to be bound by it. The LOI contained extensive language that makes sense only in the context of a binding contractual commitment. The LOI used mandatory terms with respect to the parties’ obligations, such as “shall” and “will” throughout its provisions, indicating its binding nature. There is no explanation as to why the parties would use such mandatory language to refer to commitments if they were merely optional or precatory. Furthermore, the LOI stated that by signing, the parties “indicate ... agreement with the terms of this .” This is indicative of a binding agreement.… Forest City does not explain why a document that created no binding rights would provide for the termination of “rights hereunder,” or why a document that created no binding obligations would nonetheless provide for their “automatic[] release[].” … Forest City offers no explanation as to why the parties would provide for amendment procedures and governing law, or a liquidated damages provision for a document that it believed was of no legal effect. Thus, the LOI was replete with the terminology of a binding contract, evincing the parties’ intention to create mutually binding contractual obligations, which is incompatible with Forest City’s contention that it was free to walk away from the deal upon deciding that its interests were no longer served by it. Slip Op. at *18-19 (citations omitted). Accordingly, the Court denied Forest City’s motion, except as to the promissory estoppel claim and granted A.J. Richard’s cross-motion, to wit: (1) granting a declaratory judgment, finding that (a) the LOI was a valid and binding contract, (b) Forest City breached the LOI, (c) A.J. Richard performed under the LOI; (d) A.J. Richard would be irreparably harmed if Forest City or those working in concert with Forest City obtained the property, other than pursuant to the terms of the LOI; and (e) A.J. Richard had no adequate remedy at law; (2) granting summary judgment in favor of A.J. Richard on its second and third causes of action for breach of contract; (3) Forest City was directed to specifically perform its contractual obligations under the LOI, and, pursuant to the terms of the LOI, Forest City was directed to negotiate and finalize the Implementing Documents in good faith in order to complete the transaction; and (4) Forest City and those working in concert with Forest City were enjoined from breaching the LOI, as previously provided in the preliminary injunction, pending the completion of the transaction. Takeaway Courts have repeatedly held that agreements in principle, letters of intent and memoranda of understanding, as well as other less formal written documents, such as terms sheets and emails, can serve as an enforceable agreement. Documents containing words that evince an agreement, along with language demonstrating contract formation, will suffice to create an enforceable agreement.  A.J. Richard illustrates these points. A.J. Richard also shows that whether a less-than-formal agreement is binding is often a hotly contested issue. It is not surprising, therefore, that Forest City has already filed a notice of appeal. This Blog will continue to follow the case as it winds its way through the appellate system.

Commercial litigation practitioners know that, as a general matter, courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraudulent inducement claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Authority v. Samson Construction Co. , 30 N.Y.3d 704 (2018) (citation omitted). What constitutes “a legal duty independent of a contract” is not a question easily answered.   Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id . at 63. See also Demetre v. HMS Holdings Corp. , 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). In Gosmile , the First Department explained: “that a misrepresentation of present fact, unlike a misrepresentation of future intent to perform under the contract, is collateral to the contract, even though it may have induced the plaintiff to sign it, and therefore involves a separate breach of duty.” 81 A.D.3d at 81 (citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986); First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 291-292 (1st Dept. 1999) (concurrent causes of action for fraud and breach of contract may lie where the plaintiff alleges it was induced to enter into a contract based on defendant’s misrepresentation of material fact)). Thus, a fraud claim that is premised on a misrepresentation of a prior or existing fact will not be dismissed “as an insincere promise of future performance” and, therefore, as duplicative of a breach of contract claim. First Bank v. Motor Car Funding, Inc. , 257 A.D.2d 287, 292 (1st Dept. 1999) (citing Tompkins PLC v. Bangor Punta Consol. Corp ., 194 A.D.2d 493, 493-494 (1st Dept. 1993) (misrepresentation of specific product gives rise to fraud claim as well as breach of contract claim)). In Silverman v. Rosenbaum , 2019 N.Y. Slip Op. 30233(U) (Sup. Ct. N.Y. County Jan. 25, 2019) ( here ), the Court sustained a fraudulent inducement claim that was challenged as duplicative of the plaintiff’s breach of contract claim because the former was predicated on the breach of an independent legal duty. The case involved an agreement concerning the filming of a documentary about the construction of the World Trade Center Memorial and Museum (“Museum”). According to Plaintiff, he had shot film at the Museum construction site and filmed interviews with senior staff of the Museum in furtherance of his job as a cameraman for defendant Steven Rosenbaum (“Rosenbaum”), a well-known filmmaker, author, and journalist. In May 2010, Plaintiff and defendant Magnify Media, LLC (“Magnify”) entered into a written Deferred Payment and Profit Sharing Agreement (the “Agreement”), pursuant to which Plaintiff agreed to film the construction of the Museum in exchange for agreed-upon compensation. To induce Plaintiff to enter the Agreement, Plaintiff alleged that Rosenbaum falsely represented to him that he had exclusive access to Museum staff and people involved in the creation of the Museum, that he had negotiated exclusive rights to fully produce and distribute the film, that he planned for the film to be screened at festivals and win awards, that he would produce and deliver the film in connection with the Museum’s official public opening, and that the film would be made available for purchase in the Museum gift shop. Relying on these and other representations ( e.g. , Defendants would secure funding for, and produce the film, in exchange for Plaintiff’s continued camerawork documenting the Museum’s building and development), as well as Rosenbaum’s experience in the documentary film industry, Plaintiff entered into the Agreement. Plaintiff agreed to defer his payments until the defendants raised the funds necessary to complete the film, upon the condition that he would be the first paid from those funds. Under the Agreement, Plaintiff would be entitled to 7% of the film’s net profits. Plaintiff alleged that the defendants did not use the footage he created for the intended purpose – i.e. , making the documentary. Instead, Plaintiff claimed that the defendants used the footage in connection with an iPad application and a “TED Talk” given by Rosenbaum. Plaintiff ceased work in May 2012, when he allegedly realized that the defendants did not secure or even attempt to secure funding for the film. Plaintiff commenced the action seeking damages for breach of contract, fraudulent inducement, unjust enrichment, and promissory estoppel. The defendants moved to dismiss the complaint, asserting that Plaintiff’s first, third, fourth, and fifth causes of action sounding in fraudulent inducement, promissory estoppel, unjust enrichment, and breach of the implied covenant of good faith and fair dealing, respectively, were inadequately plead because they were duplicative of Plaintiff’s second cause of action seeking to recover for breach of contract. The Court denied the motion as to the fraudulent inducement claim. The Court found that, although some of the alleged misrepresentations concerned statements of intention, other statements alleged to be false involved statements of prior or existing fact. In that regard, the Court found that the following alleged misrepresentations to be “expressions of future intent rather than misrepresentations of present fact,” and therefore “not support a separate claim for fraudulent inducement”: (1) “Rosenbaum planned for the film to be at festivals and win awards”; (2) “Rosenbaum planned to produce and deliver the film in connection with the Museum’s public opening”; and (3) “the film would be made available for purchase in the Museum gift shop.” Slip Op. at *7. However, the statements that (1) “the defendants had exclusive access to Museum staff and people involved with the creation of the Museum<,> ” and (2) "Rosenbaum had negotiated exclusive rights to fully produce and distribute the film in exchange for his library of film content” were actionable because they were alleged to be “false when made,” and “with the purpose of inducing” Plaintiff to “the enter the Agreement….” Such allegations, the Court held, sufficed to withstand a motion to dismiss. Id . (citing Shugrue v. Stahl , 117 A.D.3d 527 (1st Dept. 2014); Gosmile , supra ). Takeaway To plead a cause of action sounding in fraud, a plaintiff must allege: a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages. The cases show that general allegations concerning a defendant who enters into an agreement with the intent not to perform are not sufficient to support a cause of action sounding in fraud. However, where the misrepresentations concern existing facts that serve as an inducement to enter into a contract, a claim for fraudulent inducement will survive a motion to dismiss.

Statutes of limitations encourage plaintiffs to pursue the prosecution of their claims as soon as they are known. As the term implies, they are statutory mechanisms that limit the duration of a defendant’s liability for all types of alleged wrongdoing, e.g. , fraud, breach of fiduciary and negligence. These statutes “promote justice by preventing surprises through revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.” Railroad Telegraphers v. Railway Express Agency, Inc. , 321 U.S. 342, 348-349 (1944); CTS Corp. v. Waldburger , 134 S. Ct. 2175, 2183 (2014). In Epiphany Community Nursery School v. Levey , 2019 N.Y. Slip Op. 00842 (Feb. 5, 2019) ( here ), the Appellate Division, First Department, was asked to consider the application of the statute of limitations to two separate claims of fraud and whether the plaintiff pleaded justifiable reliance sufficient to invoke the discovery rule ( i.e. , the exception to the six-year limitation period that is based upon the time within which the plaintiff discovered or could have discovered the fraud with reasonable diligence).  As discussed below, the Court affirmed the dismissal of the first set of claims and reversed the order as to the second set of claims, finding that Epiphany adequately alleged that it justifiably relied on the alleged misrepresentations. The Statute of Limitations Relevant to a Fraud Cause of Action in New York In New York, an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). The moving defendant has the initial burden of establishing “that the time in which to commence the action has expired.” Zaborowski v. Local 74, Serv. Empls. Intl. Union, AFL-CIO , 91 A.D.3d 768, 768 (2d Dept. 2012). If the defendant meets that burden, the burden then shifts to the plaintiff to “aver evidentiary facts establishing that the action was timely or to raise a question of fact as to whether the action was timely.” Lessoff v. 26 Ct. St. Assoc., LLC , 58 A.D.3d 610, 611 (2d Dept. 2009). Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “ he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis , 44 A.D.3d 1033, 1034 (2d Dept. 2007); Lefkowitz v. Appelbaum , 258 A.D.2d 563 (2d Dept. 1999) (“The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.”). Accord Berman v. Holland & Knight, LLP , 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689 (1st Dept. 2016). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”   Berman , 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id . See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). Epiphany Community Nursery School v. Levey Background The complaint alleged two sets of fraudulent acts discovered in a matrimonial action between Wendy Levey (“Wendy”) and Hugh Levey (“Hugh”) that was settled in October 2016. The first series of alleged fraudulent acts occurred between 2002 and 2003 when Hugh induced Epiphany, a not-for-profit corporation that operates a kindergarten and nursery school on the Upper East Side of Manhattan, to sell its extracurricular programs to nonparty Magic Management LLC (“Magic”) for an unreasonably low price. At that time, Hugh had a 100% ownership interest in defendant January Management, Inc., general partner of nonparty January Partners, L.P., which was the sole member of Magic. Pursuant to an asset purchase agreement dated February 12, 2003, Epiphany sold its extracurricular programs to Magic for $300,000, $30,000 of which was paid in cash and the remaining $270,000 was to be paid pursuant to a promissory note payable over 10 years in installments of $27,000, plus interest. Magic also agreed to pay monthly rent to use Epiphany’s facilities. Hugh claimed that although Magic occupied less than 10% of Epiphany’s space, Magic’s rent would be $481,026. Magic’s rent was represented to be more than $100,000 above Epiphany’s rent for the building. Wendy, who did not have a financial background, signed the asset purchase agreement on Epiphany’s behalf without obtaining her own appraisal or verifying whether Magic paid the school what it owed. The complaint alleged that the $300,000 purchase price was based on a fraudulent valuation commissioned by Hugh, which was “substantially inaccurate.” By applying false figures, Hugh allegedly reduced the purchase price by $1.5 million. The complaint further alleged that if the valuation had been properly calculated, the purchase price would have exceeded $1.8 million. The second set of fraudulent acts allegedly took place between 2007 and 2013. Hugh made unauthorized transfers of over $5.9 million from Epiphany’s bank accounts to himself and some of the collateral defendants by linking the bank accounts to his private banking portfolio. Hugh, with the assistance of defendant Davie Kaplan CPA, P.C. (“Davie Kaplan”), falsely recorded these transfers in Epiphany’s general ledgers as “loans.” However, there were no documents to memorialize these “loans.” Nor were any loan payments ever made. The “loans” were subsequently characterized as “other receivables.” At the end of each year, the other receivables were offset by fake charges Epiphany owed defendant Gruppo Levey & Co. (“GLC”) or Gruppo, Levey Holdings Inc. (“GLH”), GLC’s parent company, for “consulting fees” and “lease commissions.” Epiphany commenced the action on August 31, 2016, alleging 13 causes of action, including: (1) fraud by Hugh and Davie Kaplan; (2) aiding and abetting fraud by the collateral defendants and Davie Kaplan; (3) breach of fiduciary duty by Hugh; and (4) aiding and abetting breach of fiduciary duty by the collateral defendants and Davie Kaplan. Defendants moved to dismiss the complaint. The motion court granted the motion and dismissed the complaint with prejudice. The motion court held that (1) the first set of fraud claims were time-barred; (2) the second set of fraudulent acts constituted conversion and were time-barred; and (3) the nonfraud claims sounded in accounting malpractice and were time-barred as well. Epiphany appealed. The Court’s Decision With regard to the first series of allegedly fraudulent transactions, the First Department affirmed the dismissal of the claims as time-barred, finding that “ he action was commenced more than six years after th cause of action accrued.” Slip Op. at *2. The Court also held that Epiphany could not rely on the two-year discovery rule because it “could have discovered the alleged fraud when Wendy, as Epiphany’s Executive Director, signed the asset purchase agreement on Epiphany’s behalf in 2003.” Id . The Court observed that even though Wendy did not have a financial background, she signed the asset purchase agreement “without obtaining her own appraisal<,> ” did not question the disproportionally high rent, which was the basis for the undervaluation of the asset<,> ” and did not “verify whether Magic paid the rent due or made payments on the promissory note.” Id . at *2 (citing Aozora Bank, Ltd , 137 A.D.3d at 689; Gutkin , 85 A.D.3d at 688). “As for the second set of fraudulent acts relating to the unauthorized bank transfers that occurred between 2007 and 2013,” the Court found that Epiphany’s claims fell within the two-year discovery rule. Id . The Court noted that “Hugh – with assistance from Davie Kaplan’s employee, David Pitcher – devised a fraudulent scheme to intentionally falsify the financial statements and books and records of Epiphany and kept the knowledge of these transfers from the school.” Id . at **2-3. “Hugh made the alleged illicit and unauthorized transfers from Epiphany’s bank accounts and fraudulently concealed them by falsely designating the entries in Epiphany’s books and records as ‘loans’, by falsely manipulating Epiphany’s books and records to convert the purported ‘loans’ into ‘other receivables’, and offsetting the loans by falsely claiming monies owed by Epiphany for consulting services that were never provided.” Id . at *3. The Court concluded that “ ince the acts were allegedly concealed from Epiphany, defendants not establish[] a prima facie case that the school was on notice of the unauthorized transfers.” Id . The Court went on to say that “even if defendants ha established a prima facie case, it not conclusively appear that Epiphany had knowledge of the facts from which the fraud could reasonably be inferred.” Id . The dissent disagreed with this holding, arguing that Epiphany did not justifiably rely on Hugh’s misrepresentations and that Epiphany failed to comply with CPLR § 3016(b) in alleging such reliance. The majority took issue with this position, arguing that Epiphany’s allegations were neither “bare legal conclusions” nor “inherently incredible.” Id . Instead, the Court found that “the complaint state in detail Hugh’s fraudulent misconduct” and identified “the close familial relationship between Hugh and Wendy,” which impacted “Wendy’s reliance on Hugh” to “properly manag Epiphany’s finances.” Id . at *4.  The Court explained as follows: Epiphany alleges that Wendy relied on Hugh’s representations because of their familial relationship and his position as director of Epiphany. From the mid-1990s, Hugh began to involve himself in the financial matters of Epiphany. He became a member of the Board of Directors and held the position until 2013. Wendy trusted her husband. He was an experienced investment banker who had consulted on multibillion dollar transactions. She believed that Hugh would use his skills to further the financial interests of Epiphany. Wendy had no reason to believe that he would loot Epiphany’s funds, treating it as one of his businesses. Epiphany alleges that Hugh’s explanation for his conduct was that he had helped set up Epiphany and had a 50% interest in it. Id . at *3. These allegations – the existence of a relationship of trust or confidence and the superior knowledge or means of knowledge on the part of the person making the representation – said the majority, sufficed to satisfy the justifiable reliance requirement. Braddock v. Braddock , 60 A.D.3d 84, 89 (1st Dept. 2009). Here, the complaint alleges that Hugh went to great lengths to conceal the unauthorized transfers and therefore, Epiphany - and Wendy, in her capacity as Executive Director of Epiphany - could not have discovered the alleged fraud with reasonable due diligence. In particular, Hugh “caused bank statements to be diverted to the offices of Gruppo Levy and GLH” so that his fraudulent scheme would not be discovered. He also allegedly initiated these transfers at meetings with the employees of Gruppo Levy and GLH, not Epiphany. Additionally, he recorded the transfers as loans on the books and records, before offsetting them by services that were allegedly not provided so that Epiphany would not be alerted to the transfers. The complaint alleges that Hugh and Davie Kaplan’s actions prevented the public and government regulators from uncovering the fraud. Id . at *4. The dissent argued that dismissal of the fraud claim concerning the second series of transactions should have been affirmed on statute of limitations grounds, not because the claims sounded in fraud, but because they sounded in conversion: “Plaintiff’s allegations concerning Hugh’s misappropriations from its bank account state a cause of action, not for fraud, but for conversion — a claim subject to a strict three-year statute of limitations that contains no discovery provision (CPLR 214<4> ).” Id . at *6. “Accordingly,” concluded the dissent, “plaintiff’s claim is time-barred, since the three-year limitation period for conversion expired no later than June 30, 2016, two months before this action was commenced.” Id . The dissent noted that even if the claim were one for fraud, Epiphany failed to satisfy the justifiable reliance element of the cause of action. The dissent observed that “ bsent from the complaint is any well-pleaded allegation that any faithful agent of plaintiff — whether officer, director or employee — actually read or heard, much less relied upon, a false representation made by Hugh or any other defendant concerning the wrongful transfers.” Id . at *6. While Wendy “relied on Hugh personally to manage financial affairs honestly and competently,” there was “no allegation that any agent of plaintiff actually relied on Hugh’s written misrepresentations — because no such agent is alleged ever to have read those misrepresentations.” Id . Consequently, “the complaint fail to identify any particular individual acting as plaintiff’s agent who, at any point in time, read and relied on these misrepresentations.” Id . “After all,” noted the dissent, “if plaintiff cannot name any agent through whom it relied on the subject statements, how can it claim to have relied on those statements?” Id . Takeaway Epiphany highlights the factual nature of pleading justifiable reliance for statute of limitations purposes.  As this Blog observed previously applying the statute of limitations to a fraud claim is complicated. ( Here .) Determining when accrual occurs, and when the claim should have been discovered, is not easy and often contested. Epiphany highlights the fact-intensive nature of the inquiry.

Readers of this Blog know that we have addressed fiduciary duty claims in the past ( here ), most often in the context of a claim against a financial advisor, a corporate officer, or an LLC member ( e.g. , here , here , here ). There are, of course, other relationships that involve fiduciary duties, e.g. , lawyers, bankers, business partners, corporate officers and directors, managing shareholders, personal representatives (executors and administrators), and trustees. Fiduciaries, such as those listed here, have an obligation to act in a trustworthy manner, with honesty, and in the best interests of those to whom they owe such duties. When fiduciaries breach these duties and obligations, as was alleged in Cohen & Lombardo, P.C. v. Connors , 2019 N.Y. Slip Op. 00755 (4th Dept. Feb. 1, 2019) ( here ), litigation typically ensues. There are two types of fiduciary relationships: 1) those created by law ( e.g. , statute) or contract; and 2) those that arise from the circumstances underlying the relationship between the parties and the nature of the transactions at issue. While courts generally look to a statute or contractual arrangement to determine the nature of the parties’ relationship ( e.g. , the first type of fiduciary relationship), the existence of a fiduciary relationship is not dependent solely upon a statute or contractual relation. See EBC I, Inc. v. Goldman, Sachs & Co. , 5 N.Y.3d 11, 20 (2005). Rather, the actual relationship between the parties determines the existence of a fiduciary duty ( e.g. , the second type of fiduciary relationship). Id . There are three forms of fiduciary duties (often referred to as the “triad” duties): due care, loyalty, and candor. The duty of care requires a fiduciary to act as a reasonable and prudent person would in a similar circumstance. The duty of candor requires a fiduciary to act with honesty and transparency – i.e. , he/she must fully disclose information that may harm the business or individual that is owed the duty. The duty of loyalty requires fiduciaries to act in good faith and with the best interests of the business or individual in mind, putting the interests of the business or individual above their own personal interests. Examples of a breach of the duty of loyalty include: usurping a corporate or business opportunity; acting with a conflict of interest; competing with the business, partnership or corporation; and misappropriating assets of the business, partnership or corporation. The reasons for the loyalty rule are evident. A person cannot fairly act for his/her interest and the interest of others in the same transaction. Consciously or unconsciously, he/she will favor one side or the other, and where placed in this position of temptation, there is always the risk that he/she will favor the position of self-interest. Any disinterested and independent decision that is made by a fiduciary is analyzed under the business judgment rule. The business judgment rule is based on the premise that a court should not be entitled to Monday-morning quarterback decisions made by fully informed individuals who are free from conflicts of interest. Auerbach v. Bennett , 47 N.Y.2d 619 (1979). Thus, the courts will not second-guess the decisions made by fiduciaries and will not hold them personally liable even if the decision turns out to be the wrong one. If a fiduciary breaches the duty of loyalty, the business judgment rule does not apply, and the fiduciary may be held personally liable for his/her actions. Cohen & Lombardo, P.C. v. Connors Cohen & Lombardo involved a common situation faced by law firms today – partners have disagreements over the direction of their firm and decide to leave and start a new competing one. Often the departure involves clients moving with the departing partners and associates from the old firm signing on with the new one. In New York, and elsewhere, “ he members of a partnership owe each other a duty of loyalty and good faith, and ‘ s a fiduciary, a partner must consider his or her partners’ welfare, and refrain from acting for purely private gain.’” Gibbs v. Breed, Abbott & Morgan , 271 A.D.2d 180 184 (1st Dept. 2000 (quoting, Meehan v. Shaughnessy , 404 Mass. 419, 434 (1989)). “Partners are constrained by such duties throughout the life of the partnership and ‘ he manner in which partners plan for and implement withdrawals is subject to the constraints imposed on them by virtue of their status as fiduciaries.’” Id . at 184-85 (quoting Hillman, Loyalty in the Firm: A Statement of General Principles on the Duties of Partners Withdrawing from Law Firms , 55 Wash & Lee L. Rev. 997, 999 (1998)). Defendants Daniel R. Connors (“Connors”) and James J. Nash (“Nash”) were shareholders in Cohen & Lombardo, P.C. (“C&L” or the “Firm”). Both terminated their respective ownership interests in the Firm on May 2, 2016. The following day, four associates of the Firm resigned from their employment with C&L to join Conners and Nash (collectively, “Associate Defendants”). C&L commenced the action seeking damages for breach of fiduciary duty, misappropriation, and conspiracy to violate fiduciary duties. In its complaint, C&L alleged that, between August 2012 and April 29, 2016, Connors and Nash devised a plan to leave the Firm and establish a new law firm, taking with them most of C&L’s civil litigation practice; that Connors and Nash conspired with the Associate Defendants to carry out this plan; and that, shortly after defendants’ departure from C&L, several of the Firm’s long-time clients transferred their cases to the new firm established by Connors and Nash. Defendants moved to dismiss the complaint pursuant to CPLR §§ 3211 and 3016. The motion court granted defendants’ motion in part by dismissing the causes of action for conspiracy to violate fiduciary duties against each of the defendants. The court denied the motion with respect to the causes of action against Connors for breach of fiduciary duty and misappropriation and the cause of action against Nash for breach of fiduciary duty. Both parties appealed. The Appellate Division, Fourth Department, affirmed. The Court’s Decision The Court held that the Firm had met its burden of pleading a breach of fiduciary duty with particularity. Slip Op. at *1 (citing Litvinoff v. Wright , 150 A.D.3d 714, 715 (2d Dept. 2017)). In that regard, the Court found that, for pleading purposes, the Firm satisfactorily alleged the elements of the claim against Conners and Nash, to wit: the defendants owed the Firm a fiduciary duty, that the defendants committed misconduct, and that the Firm suffered damages caused by that misconduct. Id . (citing Northland E., LLC v. J.R. Militello Realty, Inc. , 163 A.D.3d 1401, 1402 (4th Dept. 2018)). The Court also held that the Firm adequately alleged a misappropriation claim against Conners. In affirming the motion court, the Fourth Department drew a distinction between stating a claim and proving a claim on a pre-answer motion to dismiss, where factual matter was submitted on the motion: “where, as here, evidentiary material is submitted and considered on a motion to dismiss a complaint pursuant to CPLR 3211 (a) (7), the question becomes whether the plaintiff has a cause of action, not whether the plaintiff has stated one, and unless it has been shown that a material fact as claimed by the plaintiff to be one is not a fact at all, and unless it can be said that no significant dispute exists regarding it, dismissal should not eventuate.” Slip op. at *2 (internal quotation marks and brackets omitted; quoting Gawrych v. Astoria Fed. Sav. & Loan , 148 A.D.3d 681, 683 (2d Dept. 2017)). Against the foregoing, the Court declined to determine whether C&L could “ultimately establish its allegations.” EBC I , 5 N.Y.3d at 19 (“Whether a plaintiff can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss”). Thus, the Court held that it was an issue of fact whether “the items allegedly taken by Connors constitute misappropriated material.…” Id . Takeaway Conners & Lombardo is as much about the fiduciary duties law partners and associates owe to the law firm at which they work as it is about the pleading standards under the CPLR in a pre-answer motion to dismiss. While the Court did not delve into the facts and the allegations in any depth, the decision illustrates the point that “on a motion to dismiss under CPLR 3211, the pleading is to be given a liberal construction, the allegations contained within it are assumed to be true and the plaintiff is to be afforded every favorable inference.” Simkin v. Blank , 19 N.Y.3d 46, 52 (2012) (citation omitted). The Court’s citation to Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491-492 (2008)) underscores this point. 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 . In Conners & Lombardo , the Court found that the Firm met this standard. Slip Op. at *2.

In New York, judicial review of arbitration awards is limited. Tullett Prebon v. BGC Fin. , 111 A.D.3d 480, 482 (1st Dept. 2013). The reason for such a limited review is to promote the settlement of disputes efficiently and avoid protracted and expensive litigation. Id . Thus, the grounds upon which an arbitral award will be modified or vacated are few. These include: (1) “corruption, fraud, or misconduct in procuring the award”; (2) partiality of the arbitrator; (3) the arbitrator exceeded his power or imperfectly executed it; (4) failure to follow the procedures of Article 75 of the CPLR. CPLR 7511(b)(1)(i)-(iv).  Only when the record demonstrates one of the foregoing will a New York court vacate or modify an arbitral award under the CPLR. In Citrin Cooperman & Co., LLP v. Skyline Risk Management, Inc. , 2019 N.Y. Slip Op. 30200(U) (Sup. Ct. N.Y. County Jan. 7, 2019) ( here ), the Court considered whether a prior contact between the arbitrator and counsel sufficed to overturn an arbitral award. As discussed below, the Court found that the contact was “minimal” and insufficient to evidence any prejudice to the parties’ rights or the integrity of the proceeding. Citrin involved a dispute between Citrin Cooperman & Co., LLP (“Citrin”) and Skyline Risk Management, Inc. (“Skyline”), which the parties agreed would be resolved through binding arbitration before the American Arbitration Association (“AAA”). After a demand for arbitration was filed, a hearing was conducted on December 4, 2017, before Barbara A. Mentz (“Mentz”). By Decision and Award dated December 21, 2017, Mentz determined that Citrin was entitled to $17,500.00, plus pre-award interest of $1,717.39, from November 19, 2016, at the rate of 9%, to the date of the award, and $13,500.00, in attorneys’ fees (the “Award”). The total amount of the Award was $32,717.39. Citrin sought to confirm the Award and to enter judgment. CPLR 7510. Skyline sought vacatur of the Award under CPLR 7511(b)(1)(ii) on the ground that Mentz had an undisclosed, prior professional relationship with Citrin’s counsel. The Court granted the petition to confirm the Award and denied the cross-petition to vacate. Under CPLR 7511(b)(1)(ii), a court will vacate or modify an arbitral award when the arbitrator was biased or maintained an undisclosed personal relationship to one of the parties, resulting in a prejudiced decision. J.P. Stevens & Co. v. Rytex , 34 N.Y.2d 123, 129-130 (1974). Peripheral, superficial and insignificant contacts or relationships will not subject an arbitral award to vacatur or modification. In the Matter of Cross Props., Inc. v. Gimbel Bros., Inc ., 15 A.D.2d 913 (1st Dept. 1962). The relationship must be material. Id . See also J.P. Stevens , 34 N.Y.2d at 129. Mere inferences of impartiality are insufficient to warrant interference with the arbitrator’s award; the evidence must be stronger; it must be clear and convincing. Matter of Provenzano , 28 A.D.2d 528 (1st Dept. 1967), aff’d , J.D.H. Rest. Inc. v. New York State Liquor Auth. , 21 N.Y.2d 846 (1968). In Citrin , the Court found that Skyline “failed to satisfy the requisite heavy burden, to warrant vacatur of the award at issue.” Slip op. at *3. Skyline claimed that Mentz failed to disclose “a prior … contact with petitioner’s counsel (who was appearing on behalf of Citrin, approximately 5 1/2 years prior to the subject arbitration)” “until the day before the originally scheduled arbitration hearing between the … parties.” Id .  That contact, said the Court, consisted of “a single conference call of approximately 15 minutes in length, for the mere purpose of issuing a case scheduling order in another arbitration.…” Id . No other contact or conversations were had between counsel and Mentz on the matter since it settled, and counsel never appeared in front of Mentz since that time. Id . at **3-4. Such contact, held the Court, was “minimal” and did “not rise to the level of ‘clear and convincing evidence that any impropriety or misconduct of the arbitrator prejudiced its rights or the integrity of the arbitration process or award,’ to warrant vacatur of the … ward.” Slip Op. at *3 (citing US. Electronics, Inc. v. Sirius Satellite Radio , 73 A.D.3d 497, 498 (1st Dept. 2010). In addition, the Court found it significant that the parties were given one week to object to Mentz’s appointment as the arbitrator. Skyline availed itself of the opportunity. After reviewing the party’s positions, the AAA “confirmed Mentz as the arbitrator, determining that her previous contact would not prejudice the parties, nor the arbitration process herein.” Slip Op. at *4. The Court concluded that “ nder the within circumstances, respondent failed to meet its heavy burden to support that there was an appearance of bias or partiality, to warrant vacatur of the subject award.” Slip op. at *4. Consequently, the Court granted the petition and denied the cross-petition to vacate. Takeaway The facts of Citrin highlight the magnitude of bias needed to overturn an arbitral award. As the Court noted, the prior contact between the arbitrator and counsel was minimal. Its insignificance was underscored by the Court’s observation that had the parties been in a court, such contact would be insufficient to secure disqualification of the judge: “The Court notes that in a judicial proceeding, such a basis, that an attorney merely previously appeared before a particular judge, would never be grounds to disqualify that judge from hearing a subsequent case with the attorney.” Moreover, the fact that Mentz assured the parties that the prior contact “would in no way affect her impartiality, or ability to be fair and unbiased and serve as an arbitrator in matter” (Slip op. at *4) and the AAA’s concurrence in that assessment only reinforced the finding of no bias and the absence of any prejudice to the parties and the integrity of the proceeding.  Under such circumstances, vacatur would have been an improvident exercise of discretion.

The desired result of litigation is a judgment fully and finally resolving the matter.   In many instances, the resolution of a lawsuit involves a money judgment.  Article 52 of the CPLR governs the enforcement of money judgments.  There are several mechanisms by which a judgment creditor can enforce a money judgment against a judgment debtor. For example, CPLR 5018 permits a judgment to be docketed against real property of the judgment creditor.  Once a judgment is docketed, it becomes a lien against the judgment debtor’s interest in real property.  See CPLR 5203 . One of the many perks of being a judgment creditor with a docketed judgment against the judgment debtor’s interest in real property is that, with some exceptions, the judgment would have to be satisfied from the proceeds of the sale of the real property to a third-party.  This is because “CPLR 5203(a) gives priority to a judgment creditor over subsequent transferees with regard to the debtor's real property in a county where the judgment has been docketed with the clerk of that county.”  Matter of Accounts Retrievable System, LLC v. Conway , 83 A.D.3d 1052, 1053 (2 nd Dep’t 2011) (citations omitted).  The value of a judgment docketed against real property should not be underestimated. The petitioner in Retrievable , was the assignee of a judgment creditor’s interest in a judgment docketed against real property owned by Conway.  Subsequent to the docketing of the judgment, Conway sold the real property, but when the “title search was performed in connection with transaction, the judgment docketed … was not discovered and was not satisfied at closing.”  Retrievable , 83 A.D.3d at 1052.  Notwithstanding the sale to a third-party, the Second Department reversed Supreme Court’s denial of the judgment creditor’s petition and “the matter remitted to Supreme Court … for the entry of a judgment directing the Sheriff of Dutchess County to sell the subject real property to enforce the money judgment.”  Retrievable , 83 A.D.3d at 1052. Another mechanism for the enforcement of money judgments is the restraining notice.  CPLR 5222.   A restraining notice “serves as an injunction prohibiting the transfer of the judgment debtor’s property.”  Distressed Holdings, LLC v. Ehrler , 113 A.D.3d 111 (2 nd Dep’t 2013) (citation omitted).  Thus, pursuant to CPLR 5222(b), “ judgment debtor or obligor served with a restraining notice is forbidden to make or suffer any sale, assignment, transfer or interference with any property in which he or she has an interest ... except upon direction of the sheriff or pursuant to an order of the court, until the judgment or order is satisfied or vacated.” To enforce money judgments, by attempting to locate assets, a judgment creditor “may compel disclosure of all matter relevant to the satisfaction of the judgment, by serving upon any person a subpoena….”  CPLR 5223 .  The procedures for the service of “information subpoenas,” which may be served on a judgment debtor or “an individual or entity other than the judgment debtor” in an effort to locate assets of the judgment debtor that may be available to satisfy the judgment, is set forth in CPLR 5224 . To fully or partially satisfy a money judgment, a judgment creditor may bring a special proceeding against a judgment creditor or, inter alia , “a person in possession or custody of money or other personal property in which the judgment debtor has an interest.”  CPLR 5225 . In re New York Community Bank v. Bank of America , decided on January 24, 2019, by the New York Supreme Court, Appellate Division, First Department, involves a judgment creditor that brought a “turnover proceeding” to compel a bank to turnover the contents of a jointly owned safe deposit box. The petitioner in Community previously obtained an $11 million judgment against Ari Chitrik (“Chitrik”).  Bank of America (“BoA”), in response to an information subpoena, advised petitioner of a safe deposit box jointly owned by Chitrik and his wife (“Wife”).  Supreme Court granted the petition and directed “the Sheriff and/or BoA to break open the safety deposit box and turn its contents over to satisfy NYCB’s judgment against .”  Chitrik appealed and the First Department affirmed. In deciding the appeal, the Community Court was required to consider “whether a presumption of joint tenancy with rights of survivorship in a safety deposit box also extends to its contents where only one of the persons who rented the box is a judgment debtor.” In Community, the Court concluded that “NYCB’s establishment of a joint tenancy in the safe deposit box account is evidence that and also ‘possess’ its contents, making the whole of the account subject to NYCB’s levy.” (Citation omitted.) In reaching its conclusion, the Court explained, inter alia , that both Chitrik and Wife signed the rental agreement and agreed to be bound by the rental agreement rules, which defined “’Renter’” to include “’each Renter or Co-renter identified in the Rental Agreement.’” (Brackets omitted.)  The rental agreement provided, inter alia , that “access to a Box rented in the names of two or more persons … shall be under the control of each of them individually … as fully as though the Box was rented in his or her name alone … and each may have access to the Box and the right to surrender the Box….” “When two or more persons open a bank account, making a deposit of cash, securities, or other property, a presumption of joint tenancy with right of survivorship arises (Banking Law § 675(b).”  Community (some citations omitted).  The Court also noted that such presumption “extends to safe deposit boxes held jointly.”  Community (citation omitted).  Quoting Viggiano v. Viggiano , 136 A.D.2d 630, 630 (2 nd Dep’t 1988), the Community Court noted that “ f the presumption is applied, each named tenant ‘is possessed of the whole of the account so as to make the account vulnerable to the levy of a money judgment by the judgment creditor of one of the joint tenants.”  The Court found that the box rental agreement made plain that Chitrik and Wife were joint tenants with rights of survivorship with respect to the safe deposit box and, accordingly, by relying on the language of the agreement, petitioner met its burden. However, the Community Court noted that the statutory presumption of joint ownership “may be rebutted by showing that the true situation as to ownership is different and that the account was established in joint names solely as a matter of convenience, not with the intention of conferring any beneficial property interest on the other individual.”  Community (citation omitted).  The presumption may only be rebutted where there is “direct proof that no joint tenancy was intended.” Community (citation omitted).  Here, the only “evidence” submitted to rebut the presumption was an affirmation of counsel, which was deemed to be insufficient.

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