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Insurance. It is an important part of life. People buy insurance for many reasons, such as for the protection of their health, auto, business and home. The expectation is that one’s insurance policy will cover enough risks to protect against financial loss.  As explained by Investopedia, an online resource “dedicated to financial education and empowerment” ( here ), “ nsurance policies are used to hedge against the risk of financial losses, both big and small, that may result from damage to the insured or her property, or from liability for damage or injury caused to a third party. ( Here .) Not surprisingly, disputes often arise over the scope coverage. Recently, the Appellate Division, Second Department, addressed a dispute over the scope of insurance coverage ( i.e. , the applicability of an exclusion) arising from losses caused by Hurricane Sandy. In Cohen & Slamowitz, LLP v. Zurich Am. Ins. Co. , 2019 N.Y. Slip Op. 00417 (2d Dept. Jan. 23, 2019) ( here ), the Court affirmed the dismissal of a breach of contract action, finding that the insurer properly declined to indemnify the insured for the claimed loss of business income caused by the hurricane. Insurance Policies are Contracts An insurance policy is a contract. Consequently, the principles of contract interpretation apply to an insurance policy. E.g. , Gilbane Bldg. Co./TDX Const. Corp. v. St. Paul Fire and Mar. Ins. Co. , 143 A.D.3d 146, 151 (1st Dept. 2016), aff’d sub nom. , Gilbane Bldg. Co./TDX Constr. Corp. v. St. Paul Fire and Mar. Ins. Co. , 31 N.Y.3d 131 (2018). In interpreting an insurance policy and the scope of coverage, the courts look to the specific language of the policy itself. Gilbane Bldg. Co./TDX Const. Corp. , 143 A.D.3d at 150-151; ABM Mgmt. Corp. v. Harleysville Worcester Ins. Co. , 112 A.D.3d 763, 764 (2d Dept. 2013); Consolidated Edison Co. of N.Y. v. Allstate Ins. Co. , 98 N.Y.2d 208, 221 (2002). Unambiguous terms are “given their plain and ordinary meaning.” Yeshiva Viznitz v. Church Mut. Ins. Co. , 132 A.D.3d 853, 854 (2d Dept. 2015); see also White v. Continental Cas. Co. , 9 N.Y.3d 264, 267 (2007). Thus, the courts will read the policy to comport with “common speech” and the expectations of the parties, and in “a manner that leaves no provision without force and effect.” ABM Mgmt. Corp. , 112 A.D.3d at 764 (internal quotation marks and citation omitted). Whether the terms are clear and unambiguous is an issue for the courts. Yeshiva Viznitz , 132 A.D.3d at 854. However, if the language in the policy is ambiguous, the court can use extrinsic evidence to determine the intent of the parties to the policy. State of New York v. Home Indemnity Co. , 66 N.Y.2d 669, 671 (1985). If the extrinsic evidence is conclusory, failing to equivocally resolve the ambiguity in a policy, interpretation of the policy remains a question of law for the court to decide; deciding any ambiguities against the insurer. Id . See also Yeshiva Viznitz , 132 A.D.3d at 854; White , 9 N.Y.3d at 267. Cohen & Slamowitz, LLP v. Zurich Am. Ins. Co. As noted, the dispute concerned the coverage of losses caused by Hurricane Sandy. The alleged losses stemmed from a disruption of the plaintiff’s telephone service due to severe flooding at its service provider’s lower Manhattan switch center during the hurricane. The defendants disclaimed coverage pursuant to the language of the insurance policy with the plaintiff. Thereafter, the plaintiff commenced the action to recover damages for breach of contract and for a judgment declaring that the defendants were obligated to indemnify the plaintiff for its claimed business income losses under the policy. The defendants moved for summary judgment dismissing the complaint and for a judgment declaring that the defendants were not obligated to indemnify the plaintiff for its claimed business income losses. The motion court granted the defendants’ motion. The plaintiff appealed. The Second Department affirmed, finding that the language of the policy was clear and unambiguous. The Court noted that the policy required the carrier to pay for the loss of business income “due to the necessary suspension of operations caused by direct physical loss or damage by a Covered Cause of Loss to dependent property at a premises not owned, leased, or operated by the plaintiff.” Slip op. at *2 (internal quotation marks omitted). The policy defined “dependent property” as “premises operated by others on whom the plaintiff depended to “ eliver materials or services to , or to others for account (not including water, communication or power supply services).” Id . Based upon the foregoing language, the Court held that since the plaintiff’s claimed business income losses “resulted from damage to a property operated by a communication service provider,” “the cause of loss was a disruption in communication services, not a ‘Covered Cause of Loss’ to ‘dependent property’ under the policy.” Id . Accordingly, the Court affirmed the dismissal of the contract claim, concluding that “the defendants not obligated to indemnify the plaintiff for its claimed business income losses pursuant to the policy.” Id . Takeaway As discussed, “ n insurance agreement is subject to principles of contract interpretation.” Universal Am. Corp. v. National Union Fire Ins. Co. of Pittsburgh, Pa. , 25 N.Y.3d 675, 680 (2015). “Any … exclusions or exceptions from policy coverage must be specific and clear in order to be enforced.” Seaboard Sur. Co. v Gillette Co. , 64 N.Y.2d 304, 311 (1984.) In Cohen & Slamowitz , the Court found that the terms of the policy were clear and unambiguous. Under those circumstances, denial of coverage was properly denied.

Arbitration is an alternative form of dispute resolution where the parties voluntarily agree that a neutral, private person will resolve any legal disputes between them, instead of a judge or jury in a court of law. Rent-A-Ctr., W, Inc. v. Jackson , 561 U.S. 63, 67 (2010) (noting that “arbitration is a matter of contract”). In business and commercial transactions, arbitration is the preferred means of resolving disputes. It is encouraged and recognized as the public policy of the State. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id . Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Since arbitration is a “creature of contract” (Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)). There are exceptions to the rule, e.g. , incorporation by reference, assumption, agency, veil-piercing/alter ego and estoppel. Merrill Lynch Inv. Managers v. Opibase, Ltd. , 337 F.3d 125, 129 (2d Cir. 2003). In Petrides & Co. LLC v. Yorktown Partners LLC , 2019 N.Y. Slip Op. 30157(U) (Sup. Ct. N.Y. County Jan. 18, 2019) ( here ), the exception at issue was the “direct benefits theory of estoppel.” Belzberg v. Verus Inv. Holdings Inc. , 21 N.Y.3d 626, 631 (2013) (adopting the doctrine from federal law and citing federal cases). Under this doctrine, “a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement.” Id . Where “the benefits are merely ‘indirect,’ a nonsignatory cannot be compelled to arbitrate a claim.” Id . “A benefit is indirect where the nonsignatory exploits the contractual relation of the parties, but not the agreement itself.” Id . (citations omitted). Petrides & Co. LLC v. Yorktown Partners LLC Background Petrides & Co. LLC (“Petrides”) moved to compel various entities managed by Yorktown Partners LLC (“Partners”) to arbitrate claims under a contract to which Yorktown was not a signatory, arguing that the direct benefits theory of estoppel subjected Yorktown to that contract’s arbitration clause. Partners, a private equity firm that specializes in energy investments, managed the entities bearing the Yorktown name (“Yorktown”). Yorktown collectively owns and controls Riley Exploration Group LLC (“Riley”), a non-party to the proceeding. Petrides and Riley were parties to a letter agreement pursuant to which Riley engaged Petrides to perform consulting services (the “Agreement”). Yorktown was not a party to the Agreement, nor did the Agreement require Petrides to provide services to Yorktown. Petrides and Riley agreed that all disputes related to the Agreement were subject to mandatory arbitration. The petition to compel arbitration issue arose from the 2002 investment by a Yorktown entity in Dernick Resources, Inc. (“'DRI”). Five years later, Yorktown increased its investment in DRI. In addition to Yorktown, other investors contributed money to DRI at that time. In 2009, via an exchange of shares with Yorktown and the minority investors in DRI, Cinco Resources, Inc. (“Cinco”), an oil and gas company formed by Yorktown in 2002, acquired approximately 85% of DRI. In connection with the exchange of shares, Cinco invested additional money in DRI through a preferred stock offering, pursuant to which the “Dernick Group” was given the right to participate to avoid dilution of their ordinary shares of DRI. Subsequently, between 2009 and 2010, at a time when Cinco required capital to invest in additional oil and gas properties at Yorktown’s direction, Cima Resources Inc. (“Cima”) was formed to purchase Cinco’s oil and gas property in Eagle Ford, South Texas. In 2011, the Dernick Group asserted a claim that Cinco, via Yorktown, had acted improperly by selling the Eagle Ford property to Cima, thereby diluting the value of the Dernick Group’s shares in Cinco, while at the same time failing to offer the Dernick Group any participation in the Cima investment. In November 2011, Cima was merged into Cinco. During February and March of 2012, the Dernick Group conducted settlement discussions with Yorktown and Cinco regarding their dilution claim. Following an unsuccessful mediation, those communications continued over several more years. In February 2015, Yorktown directed Riley to engage Petrides under the Agreement to manage settlement of the dispute with the Dernick Group. Riley had no interest or stake in the Dernick Group litigation. According to the Court, settling the dispute was important to Yorktown, and its executives, because it was taking up valuable executive time and causing Yorktown and Cinco to incur significant legal expenses. In April 2015, Petrides was able to forge a settlement between the parties. The Court noted that Petrides acted on behalf of Yorktown and its executives during the settlement negotiations with the Dernick Group, notwithstanding that the work was being performed under the Agreement. In addition to negotiating a resolution of the dilution issue, in March 2016, Petrides successfully negotiated the purchase of an oil and gas field by Riley that was owned by the Dernick Group. Petrides submitted an invoice for services rendered in connection with the Dernick Dispute. The invoice was not paid. Consequently, in April 2018, Petrides commenced an arbitration against Riley to recover the amounts owed pursuant to the success-fee provision of the Agreement. The Agreement required Riley to pay Petrides a monthly fee of $100,000.00 and success fees set forth in the Agreement. Although not a signatory to the Agreement, Petrides served an arbitration demand on Yorktown in October 2018, claiming that Yorktown was a third-party beneficiary of the Agreement and the real party in interest and, therefore, jointly liable with Riley for the fees owed to Petrides. Yorktown rejected the demand on the ground that it was not a signatory to the Agreement. In November 2018, Petrides filed a petition to compel Yorktown to arbitrate. The Court’s Decision The Court granted the motion. The Court found that “Yorktown knowingly exploited the benefits of the Agreement” and had “received the benefits of Petrides’ work under the Agreement.” Slip Op. at *8. The Court explained that “Petrides that benefits intentionally inured to Yorktown directly from Petrides’ performance under the Agreement and were not merely the byproduct of the relationship between Petrides and Yorktown.” Based upon “the undisputed facts show that the work performed by Petrides in connection with the Dernick Dispute specifically benefited Yorktown and was done … specifically under the auspices of the Agreement,” the Court granted the motion to compel arbitration against Yorktown. Id . Takeaway Although federal and state policy favors arbitration, a party cannot be required to submit to arbitration any dispute that he/she has not agreed to submit. United Steelworkers of Am. v. Warrior & Gulf Navigation Co. , 363 U.S. 574, 582 (1960). For this reason, courts are “wary of imposing a contractual obligation to arbitrate on a non-contracting party.” Smith/Enron Cogeneration Ltd. P’ship, Inc. v. Smith Cogeneration Int'l, Inc. , 198 F.3d 88, 97 (2d Cir. 1999). Notwithstanding, where a non-party knowingly exploits and directly receives a benefit from an agreement containing an arbitration clause, as in Petrides , the courts will compel the non-signatory to arbitrate any disputes flowing from the agreement.

Questions of arbitrability and waiver are often litigated by parties to a contract containing an agreement to arbitrate disputes arising thereunder. In the Matter of New Roots Charter School v. Ferreira , 2019 N.Y. Slip Op. 30137(U) (Sup. Ct. Tompkins Cnty. Jan. 16, 2019) ( here ), the Court was faced with these questions, having to decide whether the parties had agreed to arbitrate their disputes and if so whether the respondent had abandoned his right to litigate certain claims in court. Arbitrability and Waiver Arbitration is a favored means of resolving disputes. It is encouraged and recognized by the courts as the public policy of the State. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49 (1997) (citations and quotation marks omitted). Id . This is especially so in the labor context. E.g. , New York City Transit Auth. v. Transport Workers Union of Am. , 99 N.Y.2d 1, 6-7 (2002). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Id . at 49-50. (citations omitted). Nonetheless, “ ike contract rights generally, a right to arbitration may be modified, waived or abandoned.” Sherrill v. Grayco Bldrs. , 64 N.Y.2d 261, 272 (1985). Accordingly, a litigant may not compel arbitration when his/her use of the courts is “clearly inconsistent with later claim that the parties were obligated to settle their differences by arbitration.” Flores v. Lower E. Side Serv. Ctr., Inc. , 4 N.Y.3d 363, 372 (2005) (citations and internal quotation marks omitted). Similarly, where “the grounds urged for relief and remedies sought in each forum are separate and distinct, a party may vigorously pursue both avenues concurrently.” Matter of City School Dist. v. Poughkeepsie Pub. School Teachers Assn. , 35 N.Y.2d 599, 606 (1974). “Generally, when addressing waiver, courts … consider the amount of litigation that has occurred, the length of time between the start of the litigation and the arbitration request, and whether prejudice has been established.” Cusimano v. Schnurr , 26 N.Y.3d 391, 400-01 (2015). There is no bright-line rule or rigid formula “for identifying when a party has waived its right to arbitration;” rather, the courts apply the foregoing factors to the facts of the case before it.  Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce, Fenner & Smith Inc. , 626 F3d 156, 159 (2d Cir 2010). “That said,” however, “‘ he key to a waiver analysis is prejudice.’” Id . And, when examining whether there is prejudice, the courts look to see if the opposing party is procedurally and substantively harmed by arbitration and whether the opposing party will incur excessive costs and delay by going to arbitration. Id . See also Cusimano , 26 N.Y.3d at 401. here.=">here."> Matter of New Roots Charter School v. Ferreira Background New Roots Charter School involved the termination of employment of the respondent, David Ferreira (“Ferreira”), a music teacher with the School and a member of the respondent New Roots Charter School Instructional Staff Association (“NRCSISA”), the bargaining representative for the School’s employees, by the petitioner, New Roots Charter School (“NRCS” or the “School”). On March 30, 2018, Ferreira was placed on paid administrative leave while NRCS investigated allegations of misconduct. Following the investigation, on April 30, 2018, school superintendent, Tina Nilsen-Hodges (“Nilsen-Hodges”), sent Ferreira a letter terminating his employment. The superintendent found that, among other things, Ferreira sent inappropriate messages to a former student, offered alcohol to an underage former student, engaged in non-consensual physical contact with a former student, and made false representations on his resume and to school administrators. Ferreira commenced the grievance process by meeting with Nilsen-Hodges on May 7, 2018. Approximately two weeks later, Ferreira filed a grievance pursuant to the collective bargaining agreement between the School and NRCSISA. Ferreira alleged that the School violated the collective bargaining agreement by terminating him “without just cause”. On April 30, 2018, Ferreira commenced an Article 78 proceeding in Madison County Supreme Court seeking, among other things, reinstatement to his position as a music teacher. Respondent filed a verified answer and certified record on May 14, 2018. On June 22, 2018, Nilsen-Hodges issued a supplemental letter of termination to Ferreira adding, among other things, smoking marijuana with students and soliciting students to live with him upon graduation to the bases for termination. On June 22, 2018, Ferreira commenced a grievance regarding the supplemental letter of termination. On September 6, 2018, Ferreira submitted a notice of intent to arbitrate. Following argument and additional submissions, the court issued a judgment, which found, among other things, and as relevant to the action, that the School had a rational basis for terminating Ferreira. The School filed a verified petition seeking to permanently stay arbitration on September 24, 2018, arguing that Ferreira had waived his right to pursue arbitration by the commencement and amendment of an Article 78 proceeding which, at least in part, raised the same issues regarding his termination. NRCSISA asserted that the Article 78 claim of bad faith termination was separate and distinct from Ferreira’s grievance under the collective bargaining agreement and, therefore, cross-moved to compel arbitration. The Court’s Decision As an initial matter, the Court found that the issues surrounding Ferreira’s termination were governed by the arbitration provision of the collective bargaining agreement. Slip op. at *4 (“The broad arbitration clause certainly encompasses the termination of employees.”) In fact, the Court observed that “there no dispute as to the arbitrability of the issue of Ferreira’s termination.” Id . “Thus, the dispute center upon whether the Article 78 proceeding commenced and amended in Madison County preclude arbitration of Ferreira’s termination” – that is, whether Ferreira waived the arbitration of his claims concerning his termination of employment. Id . In addressing the foregoing question, the Court held that Ferreira did not waive his right to arbitrate his termination of employment. Slip op. at *5 (“There is no indication that his right to arbitration was abandoned in favor of a Court proceeding”). The Court reasoned that the relief sought in the Article 78 proceeding differed from that sought in the arbitration. As such, despite there being “some risk of different outcomes,” Ferreira did not seek “judicial review of a potential contract violation.” Id . Further, although there is some risk of different outcomes, this can largely attributed to the different standards by which the claims are assessed. In the Article 78 proceeding, the issue was whether the Petitioner’s determination was arbitrary and capricious or an abuse of discretion. In such matters, the Court need only determine whether there was a rational basis for the determination and not whether it would have reached a different conclusion. In contrast, in an arbitration under the collective bargaining agreement, the arbitrator is empowered to evaluate all evidence and make credibility determinations to reach a determination whether the contract provision was violated. Id . (citation omitted). As a result, the Court denied the School’s motion to permanently stay the arbitration and granted Respondents’ cross-motion to compel arbitration. Takeaway New Roots Charter School illustrates the fact intensive analysis required to determine whether a party’s actions are “clearly inconsistent with later claim that the parties were obligated to settle their differences by arbitration.” Flores , 4 N.Y.3d at 372. As noted by the Court in New Roots Charter School , Ferreira did not take any action in the Article 78 proceeding that was “clearly inconsistent” with his intent to challenge his termination for lack of “just cause” in arbitration. The relief requested in the litigation challenged his termination as being in “bad faith,” a separate and distinct form of relief than requested in the arbitration, where Ferreira claimed that his termination lacked “just cause” as required under the collective bargaining agreement. The separate grounds for relief that Ferreira pursued, therefore, were sufficient for the Court to determine that he had not abandoned his right to arbitration.

To plead a fraud or fraudulent inducement claim, a plaintiff must allege the following: “a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (internal citations and quotation marks omitted). Each element must be satisfied. Many plaintiffs, however, often fail to do so. Today’s post looks at Levinson v. Twiage, LLC , 2019 N.Y Slip Op. 30131(U) (Sup. Ct. N.Y. Cnty. Jan. 14, 2019) ( here ), a case involving the justifiable reliance element of a fraud claim. In Levinson , the Court denied a motion dismiss, finding that the concealment of information in documents available to the plaintiffs negated a claim that the plaintiffs could have uncovered the fraud with reasonable diligence. A Brief Primer on the Justifiable Reliance Element of a Fraud Claim In a prior post, this Blog discussed the justifiable reliance element of a fraud claim and the difficulties encountered by sophisticated plaintiffs in defeating a motion to dismiss on that ground. ( Here .) As noted in that post: Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959).  Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). Levinson v. Twiage, LLC Background Plaintiffs brought an action for breach of an investment agreement, breach of fiduciary duty, and fraudulent inducement, seeking rescission of the parties’ agreement and restitution of their investments in Twiage, LLC (“Twiage” or the “Company”), a startup tech company. Plaintiff, John Levinson (“Levinson”), invested $500,000 in Twiage, under four separate Simple Agreements for Future Equity (the “SAFE Agreements”). In connection with those investments, defendants, John Hui (“Hui”) and Gregory P. Santulli (“Santulli”), agreed to provide Levinson with a seat on Twiage’s Board of Managers (the “Board”). Plaintiffs alleged that Levinson was fraudulently induced to invest in Twiage. Plaintiffs claimed that on four occasions during 2015 and 2016, Hui and Santulli met Levinson to solicit Levinson’s investment in the Company. During one of the meetings, Plaintiffs alleged that both Hui and Santulli represented that each contributed $200,000 in cash to Twiage. Based on these representations, which Plaintiffs alleged were material to Levison’s investment decision, Levinson invested $500,000 in the Company. Plaintiffs alleged that they subsequently learned the truth from reading Twiage’s financial statements in 2017.  Those documents, Plaintiffs claimed, revealed that Hui and Santulli did not make cash contributions into the Company. In September 2017, Hui and Santulli voted to remove Levinson from the Board. Plaintiffs maintained that Defendants did so to protect themselves from charges of misconduct. The Motion to Dismiss In their motion to dismiss, Defendants argued that the fraudulent inducement claim was precluded by the SAFE Agreements. In that regard, Defendants argued that the SAFE Agreements contained all the relevant terms and conditions of the parties’ agreement. As such, Plaintiffs could not claim to have been defrauded by representations that were not included in those agreements, especially since the SAFE Agreements integrated and memorialized the parties’ discussions and understandings. They also argued that Plaintiffs’ fraud in the inducement claim was actually a breach of contract claim as it concerned the terms and performance of the SAFE Agreements. Finally, Defendants argued that Plaintiffs were sophisticated investors and, as such, could not have relied on the alleged false statements given their “access … to relevant documents and information” before the investments were made and “in the five months from the initial investment.…” Slip op. at *4. In opposition, Plaintiffs argued that Defendants’ misrepresentations were collateral to the SAFE Agreements – i.e. , the SAFE Agreements did not reference any particular statement alleged to be false – and that, as a result, Defendants’ misrepresentations were not barred by the parole evidence rule. The Court’s Decision The Court ruled that “ he complaint state a claim for fraudulent inducement against Hui and Santulli.” Slip op. at *4. On the issue of justifiable reliance, the Court rejected Defendants’ argument that Levinson, as a sophisticated investor, “could and should have performed his due diligence to determine whether Hui and Santulli’s claims of investing $200,000 were true.” Id . In doing so, the Court found that even had Levinson performed due diligence, the documents “concealed Hui and Santulli’s failure to invest $200,000 each to Twiage.” In any event, even if Levinson were a sophisticated investor, defendants would have this court determine what actions could, would, or should constitute reasonable due diligence for Levinson to uncover defendants’ alleged fraud in light of the documents provided to Levinson which concealed Hui and Santulli’s investment into the company. Id . at *5. Because the SAFE Agreements showed “that Hui and Santulli both contributed $200,000 cash to Twiage and the financial statements initially reviewed by Levinson concealed Hui and Santulli’s failure to invest $200,000 each to Twiage,” the Court concluded that in the absence of evidence showing otherwise, there was no basis to find that Levinson did not reasonably rely on Defendants’ representations. Id . Specifically, Exhibit A to the Operating Agreement showing that Hui and Santulli both contributed $200,000 cash to Twiage and the financial statements initially reviewed by Levinson concealed Hui and Santulli’s failure to invest $200,000 each to Twiage. Defendants have no evidence to show that plaintiffs had the means to discover defendants’ alleged untruthful statements. Id . (citations omitted). Finally, the Court rejected Defendants’ argument that parole evidence could not be used to support Plaintiffs’ fraudulent inducement claims. Defendants argue that parole evidence may not be used to establish that plaintiffs were fraudulently induced into entering into the contract.  However, defendants do not cite to a merger clause within the SAFE Agreement, or any language indicating that Levinson disclaimed reliance on defendants’ representations that they each contributed $200,000 in cash to Twiage. Accordingly, the SAFE Agreements do not preclude the use of parole evidence to establish that defendants fraudulently induced Levinson from entering into the agreement. Id . (citations omitted). Takeaway To prevail on the justifiable reliance element of a fraud claim, a plaintiff must demonstrate that he/she took steps “to protect against deception.” DDJ Mgt. , 15 N.Y.3d at 154. The cases are clear that the courts will not protect plaintiffs “who have been so lax in protecting themselves” from fraud. Id . However, when the plaintiff does not have the means to uncover the fraud, as alleged in Levinson , courts will not dismiss the claim.

Commercial transactions very often involve parties from different states. One party can be domiciled in New York, for example, while the other can be incorporated or headquartered in Delaware. When a dispute arises between such geographically diverse parties, questions concerning the jurisdiction of a court over the parties often gets litigated.  This becomes even more pronounced when the corporation is a multinational company, which conducts business across the county and the world. In Daimler Ag v. Bauman , the United States Supreme Court addressed the constitutional parameters of general jurisdiction and held that a court has general jurisdiction over a foreign corporation when the corporation’s “affiliations … are so continuous and systematic as to render it essentially home ” (134 S. Ct. 746, 761 (2014) (citing Goodyear Dunlop Tires Operations, SA v. Brown , 131 S. Ct. 2846 (2011)), i.e. , the state “where is incorporated or has its principal place of business.” Id . at 760. The Court rejected the notion that a court could exercise general jurisdiction “in every State in which a corporation ‘engages in a substantial, continuous, and systematic course of business,” stating that such a “formulation” was “unacceptably grasping.” Id . at 761. Although the “paradigm forum for the exercise of general jurisdiction” over an individual is his/her “domicile” and for a corporation, its “place of incorporation and principal place of business” 134 S.Ct. at 760 (citation omitted), the Court also held that in the absence of these bases, a court could exercise jurisdiction over a corporation in the place where it is “essentially at home in the forum state.” Justice Sotomayor, concurring in the judgment, explained that the phrase “at home” signifies continuous and substantial contacts by a foreign corporation within a forum state such that it is “akin to those of a local enterprise that actually is ‘at home’ in the State.” Id . at 769. (citation omitted). Such proof, however, is difficult to muster. Thus, the Court “cast significant doubt on the notion that a corporation could ever be subject to general jurisdiction in a State that is neither its State of incorporation or its principal place of business.” Amelius v. Grand Imperial LLC , 2017 N.Y. Slip Op. 27297, at *10 (Sup. Ct. N.Y. Cnty. Sept. 11, 2017). After Daimler , parties have litigated whether a particular location constitutes a corporation’s principal place of business. In Hertz Corp. v. Friend , 559 U.S. 77 (2010), the Supreme Court held that a company’s principal place of business is the place “where officers direct, control, and coordinate the corporation’s activities,” or its nerve-center. Id . at 92-93. The analysis focuses on where a corporation’s “high-level” decisions are made. St. Paul Fire and Marine Ins. Co. v. Scopia Windmill Fund, LP , 87 F. Supp. 3d 603, 605 (S.D.N.Y. 2015). See also CBRE Inc. v. Pace Gallery LLC, No. 1:17-CV-2452, 2018 WL 740994, at *2 (S.D.N.Y. Feb. 6, 2018). In Kline v. Facebook, Inc. , 2019 NY Slip Op 30103(U) (Sup. Ct. N.Y. Cnty. Jan. 10, 2019) ( here ), the foregoing issues were before Justice Kathryn E. Freed, who held that the petitioner was unable to demonstrate that the respondents (multinational corporations) were “at home” in New York. Kline was decided in the context of a special proceeding under CPLR § 3102(c), in which the petitioner, Torin Kline (“Kline”), moved for pre-action discovery from respondents, Facebook, Inc. (“Facebook”) and Google, LLC (“Google”). Kline demanded that Facebook provide the identity(ies) of the person(s) who posted and/or sent false and defamatory posts about him on the Facebook website and/or mobile application. Kline also demanded that Google provide the identity of the person who maintained and used an email address that Kline argued had been used to send false and defamatory statements about him. here).=">here)."> Although the Court did not discuss the bases upon which Facebook and Google opposed the petition, a review of the briefing shows that each corporation argued, among other things, that the Court could not exercise general jurisdiction over them. The Court agreed with Facebook and Google and dismissed the petition. In dismissing the petition, the Court held that the paradigm bases on which general jurisdiction can be found were not present as to each respondent. In that regard, the Court observed that neither Facebook nor Google were “incorporated in New York” and neither “have their principal places of business” in the State, facts that Kline admitted. Slip op. at **2-3. The Court also found that neither company was otherwise “at home” in New York, despite having “offices in New York City.” Id . at *3. The Court rejected Kline’s argument that maintaining such offices “signifie that respondents had the required ‘continuous and systematic’ affiliations with the State of New York.” Id . “Rather,” said the Court, “petitioner merely assets that respondents are ‘at home’ in New York because they have such large offices, and employ so many people, in New York.” Id . Takeaway Historically, under New York law, an out-of-state corporate defendant was subject to a court’s general jurisdiction when it was “doing business” in the State on a “continuous and systematic” basis.   Lebron v. Encarnacion , 253 F. Supp. 3d 513, 518 (E.D.N.Y. 2017) (citing Laufer v. Ostrow , 55 N.Y.2d 305, 309-10 (1982)). However, in Daimler , “the Supreme Court largely eschewed New York’s traditional ‘doing business’ standard in favor of an inquiry into whether a defendant’s affiliations with New York rendered it essentially ‘at home’ here.” Lebron , 253 F. Supp. 3d at 518. As Kline shows, after Daimler “only a limited set of affiliations with a forum will render a defendant amenable to all-purpose jurisdiction there.” Daimler , 134 S.Ct. at 760. Thus, as to foreign corporations, “ he paradigm forum for general jurisdiction” is “the place of incorporation and the principal place of business.” Sonera Holding B.V. v. Cukurova Holding A.S. , 750 F.3d 221, 225 (2d Cir. 2014). As the Supreme Court noted, a foreign corporation cannot be found to be “doing business” through agents and subsidiaries in multiple jurisdictions. Daimler , 134 S.Ct. at 762 n.20 (noting that “ corporation that operates in many places can scarcely be deemed at home in all of them.”). Kline also shows the difficulty a plaintiff has in demonstrating that a foreign corporation is otherwise “at home” in a jurisdiction. Indeed, it is “ nly on truly ‘exceptional’ occasions general jurisdiction extend over who are ‘at home’ in a state that is not otherwise their domicile.” Sonera Holding B.V. , 750 F.3d at 225 (citation omitted). As Kline learned, having an office in a particular forum is not the type of “exceptional occasion” contemplated by the Supreme Court in Daimler .

On January 15, 2019, the New York State Supreme Court, Appellate Division, First Department rendered a decision in In re: New York State Land Title Association, Inc. v. New York State Department of Financial Services , in which the Court, inter alia , upheld certain provisions of the Insurance Law and related regulations promulgated by the Department of Financial Services (“DFS”) designed to “explicitly prohibit the practice of kickbacks from insurers to title closers, attorneys, and other agents in the real estate market.”  Land Title at *1. Section 6409(d) of New York’s Insurance Law provides, in pertinent part: No title insurance corporation, title insurance agent, or any other person acting for or on behalf of the title insurance corporation or title insurance agent, shall offer or make, directly or indirectly, any rebate of any portion of the fee, premium or charge made, or pay or give to any applicant, or to any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or the prospective owner, lessee, or mortgagee of the real property or any interest therein, either directly or indirectly, any commission, any part of its fees or charges, or any other consideration or valuable thing , as an inducement for, or as compensation for, any title insurance business, nor shall any applicant, or any person, firm, or corporation acting as agent, representative, attorney, or employee of the owner, lessee, mortgagee or of the prospective owner, lessee, or mortgagee of the real property or anyone having any interest in real property knowingly receive, directly or indirectly, any such rebate or other consideration or valuable thing.  (Emphasis added.) Part of the reason for the creation of the DFS was to “promote the reduction and elimination of … unethical conduct by … insurance … institutions and their customers.”  See Financial Services Law § 102(k).  After a lengthy five-year investigation, the DFS determined that some of practices of the title insurance industry “resulted in higher premiums and closing costs for consumers violate Insurance Law § 6409(d).”  Land Title at *2.  Specifically, DFS found that title insurers were spending “excessive” amounts of money on gifts, trips, entertainment, meals and the like (“Inducements”) to attract title insurance business from those able to direct title insurance business to a particular company and that such expenses were directly impacting the amount that consumers were paying for title insurance premiums.  Land Title at *2. DFS determined that the title insurance industry’s practices violated Insurance Law § 6409(d).  Thus, “ o prevent such practices and to protect consumers from exorbitant costs, DFS promulgated Insurance Regulation 208.”  Land Title at *3; Insurance Regulation 208 (11 NYCRR 228).  In determining the necessity of Insurance Regulation 208, the DFS recognized that: Consumers of title insurance usually rely upon the advice of real estate professionals, including attorneys or real estate agents, who order the policy on their behalf.  Consumers also typically pay any invoice presented at the closing without seeking documentation or further clarification…. See 11 NYCRR 228.0(a); Land Title at *3. Insurance Regulation 208 expressly recognizes that Insurance Law § 6409(d), among other provisions, prohibits title insurers and others acting on their behalf from “mak any rebate, directly or indirectly, or pay or giv any consideration or valuable thing, to any applicant, or to any person, firm or corporation acting as an agent, representative, attorney or employee of the actual or prospective owner, lessee, mortgagee of the real property or any interest therein, as an inducement for, or as compensation for, any title insurance business, including future title insurance business, and maintaining existing title insurance business, regardless of whether provided as a quid pro quo for specific business.”  See 11 NYCRR 228.2(a); Land Title at *3.  The Regulation, which specifies permissible and impermissible practices, prohibits offering Inducements for title insurance business.  See 11 NYCRR 228.2(b); Land Title *3-4.  Regulation 208, however, does permit certain expenditures for things such as advertising, promotional items of de minimus value, marketing events open to the general public, and the like.  See 11 NYCRR 228.2(c); Land Title at *4. In 2018, the Land Title petitioners commenced an Article 78 Proceeding seeking to annul Insurance Regulation 208.  The court below granted the petition < here =">here"> finding , inter alia , that the language “ or any other consideration or valuable thing ,” in Insurance Law § 6409(d) was ambiguous. The First Department, in modifying Supreme Court’s order, held that the “other consideration” language from Insurance Law § 6409(d) is unambiguous.  Thus, the First Department found that: The plain text of Insurance Law § 6409(d) unambiguously prohibits an insurer from "offer or mak , directly or indirectly , . . . any commission, any part of its fees or charges, or any other consideration or valuable thing , as an inducement for, or as compensation for, any title insurance business" …. The statute repeatedly states that a proscribed exchange may be done "indirectly." After listing specific types of consideration such as commissions, the legislature elaborates and plainly expands the statute's parameters to " any other consideration or valuable thing , as an inducement for, or as compensation for, any title insurance business" (Insurance Law § 6409 ) …. The use of the word "any" unambiguously indicates that this legislative prohibition was intended to be broadly construed, allowing for DFS to define "any other consideration or valuable thing," provided, of course, it had a rational basis to do so. Moreover, the phrases "an inducement" and "any title insurance" need not refer to a quid pro quo concerning one specific act of doing business, but may reasonably be applied to a more longstanding arrangement in which insurers regularly spend vast sums of money on extravagant gifts for referral sources, who are tacitly expected to return the favors by providing a reliable stream of referrals. Land Title at *6, 7 (emphasis supplied). The Land Title Court found that in enacting Regulation 208 “DFS reasonably sought to put an end to” the “ethically dubious scheme” of giving “lavish gifts” in anticipation of receiving title insurance business “unbeknownst to and at the expense of consumers, who ultimately pay higher premiums as a result.”  Land Title at *7.  This, the Court found, was “impermissible” under Insurance Law § 6409(d).  Land Title at *7.  DFS’ efforts were the result of a five-year investigation of the title insurance industry, the findings of which went a long way to support the notion that there was a rational basis for DFS’ promulgation of the related regulations. It is worth noting that the Land Title Court addressed other aspects of Regulation 208 and agreed with Supreme Court that there was no rational basis for DFS to promulgate same.  Thus, the First Department agreed that “there is no rational basis for DFS to impose an absolute ban on the collection of certain fees by in-house closers while permitting independent closers to collect the same fees as long as the fees are reasonable, and the requisite notice is provided to consumers.”  Land Title at *8. Similarly, the First Department agreed that there is no rational basis for “capping fees for certain ancillary searches at 200% of the out-of-pocket costs of those searches or 200% of certain other measures in the absence of any out-of-pocket costs.”  Land Title at *8.

Laches is an equitable bar to a claim that is based on a lengthy failure to assert one’s rights that prejudices an adverse party. The doctrine is “designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.” Order of R.R. Tels. v. Ry Express Agency, Inc. , 321 U.S. 342, 348-49 (1944). As explained in Law.Com’s online dictionary, the doctrine “is often raised in the list of ‘affirmative defenses’ in answers filed by defendants, but is seldom applied by the courts” ( here ). In Stancioff v. Danielson , 2018 N.Y. Slip Op. 33412(U) (Sup. Ct. N.Y. Cnty. Dec. 31, 2018) ( here ), the court addressed a laches defense on a motion for summary judgment, finding issues of fact with regard to the elements of the defense. Laches Under New York Law As noted, laches is an equitable defense that may be “asserted where neglect in promptly asserting a claim for relief results in prejudice to a defendant.…” Slip op. at *11 (citing Moreschi v. DiPasquale , 58 A.D.3d 545, 545 (1st Dept. 2009)). To invoke the doctrine, “a party must show: (1) conduct by an offending party giving rise to the situation complained of, (2) delay by the complainant in asserting his or her claim for relief despite the opportunity to do so, (3) lack of knowledge or notice on the part of the offending party that the complainant would assert his or her claim for relief, and (4) injury or prejudice to the offending party in the event that relief is accorded the complainant.” Cohen v. Krantz , 227 A.D.2d 581, 582 (2d Dept. 1996). All four elements are necessary to invoke the doctrine. Id .; Dwyer v. Mazzola , 171 A.D.2d 726, 727 (2d Dept. 1991) (citation omitted). When that occurs, the doctrine “will operate as a bar to the relief sought.” Stancioff , Slip Op. at *11. Delay “In order for laches to apply, there must be an unreasonable and inexcusable delay.” Waldman v. 853 St. Nicholas Realty Corp. , 64 A.D.3d 585, 588 (2d Dept. 2009). There is, however, no defined length of delay that will trigger the defense. Capital Crossing Bank v. Aurora Hospitality, LLC , 45 A.D.3d 1266, 1268 (4th Dept. 2007) (“Essentially, the defense of laches consists of an unreasonable delay by the plaintiff to the prejudice of the defendant. But mere delay, however long, absent the necessary elements to create an equitable estoppel , does not preclude the granting of equitable relief.”) (citation omitted). Thus, “ ere inaction or delay in bringing a proceeding, without a showing of prejudice, not constitute laches.” ( Haberman v. Haberman , 216 A.D.2d 525, 527 (2d Dept. 1995). Prejudice To show prejudice, the defendant must demonstrate “an injury, change of position, or other disadvantage resulting from delay.” Haberman , 216 A.D.2d at 527 (citations omitted). Knowledge While delay and prejudice are important elements of the doctrine, a plaintiff who has no knowledge of the facts giving rise to the cause of action cannot be charged with laches. Stancioff , Slip op. at *12 (quoting Platt v. Platt,  13 Sickels 646, 646 (1874) (“‘ aches cannot … exist where a party is ignorant of his rights, or where though apprehensive of them, there is such an obscurity in the transaction that he must, with painstaking, gather the facts or the evidence of them upon which the successful prosecution of the action must depend.’”). However, where a plaintiff knows or has reason to know about his/her claim, he/she must act diligently to protect his/her rights. Hayward v. Eliot National Bank , 96 U.S. 611, 618 (1877) (“when a party with full knowledge of the facts, acquiesces in a transaction and sleeps upon his rights, equity will not aid him”); see also Bank of Am., N.A. v. 414 Midland Ave. Assocs., LLC , 78 A.D.3d 746, 750 (2d Dept. 2010). Issues of Fact Whether the laches defense should be applied is an issue typically reserved for the trier of fact. Solomon R. Guggenheim Found. v. Lubell , 77 N.Y.2d 311, 311 (1991); Tri-Star Pictures, Inc. v. Leisure Time Prods., B.V. , 17 F.3d 38, 44 (2d Cir. 1994) (noting that “ he equitable nature of laches necessarily requires that the resolution be based on the circumstances peculiar to each case. The inquiry is a factual one.”); United States v. Portrait of Wally, A Painting By Egon Schiele , No. 99 Civ. 9940 (MBM), 2002 WL 553532, at *22 (S.D.N.Y. April 12, 2002) (laches requires a “fact intensive inquiry into the conduct and background of both parties in order to determine the relative equities” which is “often not amenable to resolution on a motion for summary judgment”). Stancioff v. Danielson Background Plaintiffs, the living heirs and descendants of Dimitri Stancioff (“Stancioff”), a Bulgarian minister, brought suit to recover a bejeweled, nineteenth-century Russian imperial snuffbox purportedly given to Stancioff by Emperor Nicholas II at the Conference of Peace held in St. Petersburg, Russia (the “Snuffbox”). Plaintiffs claimed that the snuffbox was “stolen or otherwise misappropriated” from their family sometime during World War II or its aftermath. According to the Court, “ veryone with any first hand knowledge of the[] events is now deceased.” Slip op. at *2.  “Indeed, not much was known about the whereabouts of the snuffbox until 2014,” when defendant, the Estate of Barbara Danielson (the “Estate”), consigned the box to defendant Christie’s, Inc. (“Christie’s”) for sale at auction. Id . Barbara Danielson inherited the snuffbox from her mother, Rosemary Danielson, who died sometime in 1981. Barbara Danielson died in 2013. According to the Court, “ t is not known how Rosemary came to possess the snuffbox except that, when Christie’s received the item for auction, a document was apparently contained inside bearing the letterhead of Waldo Frank Perez de Leon, describing, in great detail, a ‘ rectangular gold presentation snuffbox’ and listing the price of $8,000.” Id . The document contained no other information, such as the buyer, the seller or the date of sale. According to Christie’s research into the matter, Perez de Leon was the proprietor of an interior design shop in Miami, Florida, active at least during the mid-to-late 1960s. Perez de Leon died in 1982. Christie’s initially appraised the snuffbox at $120,000-$180,000. However, at a May 2015 auction, the snuffbox sold for $680,000. Plaintiffs initially took no issue with the sale and provided Christie’s with photographs of Stancioff to use in its catalogue and promotional materials, allegedly believing that the item was being auctioned at the behest of a Stancioff family member. However, by email dated June 3, 2015, plaintiffs Nadejda and Alex Stancioff contacted Christie’s, asserting that the snuffbox had been stolen from their family and warning Christie’s not to disburse the proceeds of the sale. Christie’s agreed to hold back the sale until it could investigate the claim. Although Christie’s was dismissed from the action, the snuffbox remains in Christie’s possession pending the resolution of the action. Plaintiffs filed suit, asserting two causes of action against the Estate: replevin and conversion (the first and second cause of action). The Estate moved for summary judgment to dismiss the claims against it. Among the defenses asserted was laches. The Court’s Decision The Court denied the Estate’s motion. The Court held that the Estate failed to establish any prejudice resulting from the Plaintiffs’ failure to promptly assert their claims: Here, to the extent that plaintiffs may have neglected to promptly assert their claim, the Estate has not established how this resulted in prejudice to it since anyone with first hand knowledge of the underlying facts has been deceased for far longer than the Estate has been in possession of the snuff box. Slip op. at *11. In addition, the Court held that the Estate failed to establish that the Plaintiffs did not exercise reasonable diligence to locate the snuffbox, or that the Plaintiffs’ alleged inaction had prejudiced the Estate. Slip op. at *12 (citing Matter of Flamenbaum , 22 N.Y.3d 962, 965 (2013)). The Court noted that “ hile the snuffbox came into Rosemary Danielson’s possession, it was never advertised for sale and appears to have been displayed only in Danielson’s home.” Id . at *13. Thus, there was an issue of fact as to whether Plaintiffs exercised reasonable diligence in locating the snuff box. As the Court observed, it was unclear “how far back such action < i.e. , reasonable diligence to locate the snuffbox> i.e., reasonable diligence to locate the snuffbox> would have needed to be taken to enable the Estate to escape the prejudice resulting from the delay.” Id . at *12. Takeaway Determining whether to apply the laches defense requires a “fact intensive inquiry into the conduct and background of both parties in order to determine the relative equities.” Portrait of Wally , 2002 WL 553532, at *22. For this reason, resolution of the defense is “often not amenable to resolution on a motion for summary judgment.” Id . Stancioff highlights the difficulties that a defendant must overcome to demonstrate that the application of the defense is appropriate.

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

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

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

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

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