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

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

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

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

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

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

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

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

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

As readers of this Blog know, one of the elements of a fraud claim is “justifiable reliance.” In Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569 (2018), the New York Court of Appeals emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 NY3d 147, 155 (2010) (internal quotation marks omitted). Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959).  Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). Satisfying the foregoing rules is even more difficult where the plaintiff is a sophisticated individual or entity, as the court in Tall Tower Capital LLC v. Stonepeak Partners, LP , 2018 N.Y. Slip Op. 33024(U) ( here ), recently held. Here.=">Here."> Background Tall Tower arose from an alleged breach of a Confidentiality and Non-Circumvention Agreement between the plaintiff, Tall Tower Capital LLC, and the defendant, Stonepeak Partners, LP, pursuant to which the parties agreed “to pursue jointly potential transactions in the wireless communications industry.” The Agreement required exclusivity on potential deals that the parties were jointly pursuing and prohibited them from circumventing this exclusivity arrangement. Tall Tower alleged that between January and November 2014, while the parties were pursuing a potential transaction in which they would acquire and manage Clear Channel telecommunications assets, Stonepeak began breaching the Agreement when it partnered with Vertical Bridge to bid on and acquire the assets. Vertical Bridge won the bid in December 2014. Tall Tower brought suit against Stonepeak, alleging only one cause of action: breach of the Confidentiality and Non-Circumvention Agreement. Stonepeak answered the complaint and asserted three counterclaims, one of which was for fraudulent inducement. The counterclaims were based on the fact that two Tall Tower executives working with Stonepeak on the Clear Channel deal – Dale West, the CEO; and David Denton, the President – were enjoined by a Florida court from working in the broadcast tower industry due to restrictive covenants in contracts with their former employer (“Richland”). Denton and West resigned from Richland in January 2012. Thereafter, they formed Tall Tower. Richland sued Denton, West, and Tall Tower in a Florida state court to enforce the restrictive covenants and sought a preliminary injunction in May 2012. By order dated October 1, 2012, the Florida trial court denied the motion for preliminary injunction. Thus, when Tall Tower and Stonepeak first started working on the Clear Channel deal in early 2014, there was no legal impediment to Denton and West working on the deal. However, on March 12, 2014, a Florida appellate court reversed and remanded to the trial court to hold further proceedings to consider whether an injunction should be issued. On remand, the trial court issued an injunction on September 22, 2014, making it legally impermissible for Denton and West to continue working on the Clear Channel deal. Stonepeak claimed that Tall Tower made misrepresentations about the Florida proceedings to induce it to continue working on the Clear Channel deal. Stonepeak claimed that Tall Tower knew that Stonepeak would stop working with it if Stonepeak knew that Denton and West were legally prohibited from working on the deal. Since the proposed deal with Clear Channel was a leaseback – where Denton and West would be managing Clear Channel’s former assets after they were leased back to it – Clear Channel would balk at the deal with Tall Tower if Denton and West could not manage the assets. Stonepeak also alleged that Tall Tower’s other representations about the expertise of Tall Tower and its executives were false or misleading in light of the status of the Richland lawsuit and its effect on the ability of Denton and West to work on the Clear Channel deal. After Stonepeak became aware of the September 2014 injunction, it sought to preserve its bid with Clear Channel by working with another potential asset manager. Tall Tower moved to dismiss the counterclaims. The Court’s Decision The Court granted the motion to dismiss, finding that Stonepeak, a sophisticated entity, did not satisfy the justifiable reliance element of its fraud counterclaim. In particular, the Court noted that since the underlying predicate for Stonepeak’s fraud claim was Denton and West’s purported ability to work on the Clear Channel deal, it could have learned the truth about the representation and the status of the Florida lawsuit by checking the public docket. Thus, it could not have reasonably relied on any statement about the proceeding and Denton and West’s ability to work on the deal: The status of the Florida injunction was a matter of public record and could have been independently ascertained by Stonepeak. Stonepeak does not contend otherwise. Stonepeak does not allege that it took any steps to verify whether Denton’s questionnaire response regarding the status of the lawsuit was accurate. Hence, Stonepeak’s claim to have been fraudulently induced to continue working on the Clear Channel deal in reliance on that representation must be dismissed because such reliance is not justifiable due to Stonepeak’s own lack of due diligence. Takeaway In a prior “takeaway”, this Blog wrote the following: In Ambac , the Court of Appeals sent a strong message to sophisticated parties claiming fraud: if the person or entity has the means of knowing, by the exercise of ordinary intelligence, the truth of the subject of the alleged false representation, that person or entity must make use of those means, or he/she/it will not be heard to complain that he/she/it was the victim of fraud. Thus, where a person or entity, especially a sophisticated one, does not verify and investigate the truthfulness of assurances and representations, or is lax in doing so, the claim should be dismissed for failing to satisfy the justifiable reliance element. In Tall Tower , the Court heeded this message.

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

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