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During the last week in August, the Securities and Exchange Commission (“SEC” or “Commission”) filed a number of actions and administrative proceedings involving, among other things, insider trading and the use of financial models and controls. Today’s installment of SEC Enforcement News looks at two of the actions/proceedings filed by the Commission: one involving insider trading allegations against former Cleveland Browns linebacker, Mychal Kendricks (“Kendricks”), and the other involving Moody’s Investors Service, Inc. for failing to implement proper controls over a) certain financial models operated by an affiliate, and b) the use of its rating symbols. SEC v. Kendricks On August 29, 2018, the Commission announced ( here ) that it had filed a complaint against Kendricks for insider trading. According to the SEC, Kendricks and Damilare Sonoiki (“Sonoiki”), a Harvard-educated former investment banker who recently served as a staff writer for the ABC television show “Black-ish”, purchased securities in companies that were soon to be acquired and then sold those positions after the deals were publicly announced. The SEC alleged that after meeting at a party, Kendricks began receiving illegal tips from Sonoiki, a former analyst at an investment bank (later disclosed to be Goldman Sachs) who had access to confidential, non-public information about upcoming corporate mergers and acquisitions. Kendricks allegedly made $1.2 million in illegal profits by purchasing securities in companies that were about to be acquired and then selling those positions after the deals were publicly announced, in one instance generating a nearly 400 percent return on his investment in just two weeks. According to the SEC, Kendricks purchased call options in four companies that were planning to merge with another company: Compuware Corporation (“Compuware”), Move, Inc. (“Move”), Sapient Corporation (“Sapien”), and Oplink Communications, Inc. (Oplink”). When each company announced a merger or acquisition, the value of Kendricks’s options increased significantly.  For example, Kendricks purchased approximately $60,000 in Compuware call option contracts. After Compuware announced that it was being acquired by the private-equity firm, Thoma Bravo LLC in a going-private transaction, Kendricks sold those same option contracts for approximately $138,000, which was a 130% increase from the purchase price.  With respect to Move, Kendricks purchased approximately $71,000 in call options and sold those same contracts for approximately $350,000, which constituted a 393% increase from the purchase price, after it announced that News Corp. was acquiring it in an all cash tender offer. For Sapient, Kendricks purchased approximately $146,000 in call option contracts and sold them for approximately $635,000, which was a 335% increase from the purchase price, after it announced that it was being acquired by the French advertising firm Publicis Groupe PLC in a cash tender offer.  Finally, Kendricks purchased Oplink call option contracts for approximately $446,000 and sold them for approximately $798,000, which was a 79% increase from the purchase price, after it announced that it was being acquired by a subsidiary of Koch Industries, Inc. in a cash tender offer. According to the SEC, Kendricks made a profit of approximately $78,000 from his Compuware investments, approximately $279,000 from his Move investments, approximately $489,000 from his Sapient investments, and approximately $352,000 from his Oplink investments, for a total of approximately $1.2 million. The scheme ended in 2015, when Sonoiki left Goldman Sachs to work on “Black-ish.” According to the SEC’s complaint ( here ), Kendricks rewarded Sonoiki for his tips and other assistance, which included setting up an online brokerage account that both men could access, by providing cash kickbacks, free NFL tickets, and an evening on the set of a pop star’s music video in which Kendricks made a cameo appearance. “As alleged in our complaint, Kendricks paid cash and shared celebrity perks for illegal tips that enabled him to trade and profit on confidential information that the rest of the investing public didn’t have,” said Stephanie Avakian, Co-Director of the SEC Enforcement Division. Kendricks and Sonoiki are alleged to have facilitated the trading through coded text messages and FaceTime conversations. “Kendricks and Sonoiki allegedly tried to evade detection by using a variety of communication methods to hide their misconduct, but we were able to use methodical investigative work to piece together a trail of evidence and expose their insider trading scheme,” said Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit. In a statement, Kendricks admitted wrongdoing, said he fully cooperated with investigators and promised to repay the funds that he illegally gained. I apologize. Four years ago, I participated in insider trading, and I deeply regret it. I invested money with a former friend of mine who I thought I could trust and who I greatly admired. His background as a Harvard graduate and an employee of Goldman Sachs gave me a false sense of confidence. To that point, I had worked my tail off since I was 5 years old to become the football player that I am today. I was drawn in by the allure of being more than just a football player. While I didn’t fully understand all of the details of the illegal trades, I knew it was wrong, and I wholeheartedly regret my actions. Since the beginning of the investigation, I have fully cooperated with all of the authorities and will continue to do so. I accept full responsibility for my actions. Although I did not take any of the profits for myself, I am committed to repaying all of the funds gained illegally and accept the consequences of my actions. The SEC filed its complaint in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 18-cv-03695). The complaint charges Kendricks and Sonoiki with two counts of securities fraud and is seeking the return of their ill-gotten trading profits plus interest and penalties. Also, on August 29, the U.S. Attorney’s Office for the Eastern District of Pennsylvania announced parallel criminal charges against Kendricks and Sonoiki. ( Here .) If convicted, each defendant faces a maximum possible sentence of 25 years’ imprisonment, a three-year period of supervised release, $5,250,000 fine, and a $200 special assessment. Forfeiture of all proceeds from the offenses also may be ordered. In the Matter of Moody’s Investors Service, Inc. On August 28, 2018, the SEC announced ( here ) that Moody’s Investors Service Inc. (“Moody’s”), one of the nation’s largest credit ratings agencies, agreed to pay a total of $16.25 million in penalties to settle charges involving internal control failures and failing to clearly define and consistently apply credit rating symbols. (Adm. Proc. File No. 3-18688 (August 28, 2018).) According to the SEC, this was “the first time the SEC has filed an enforcement action involving rating symbol deficiencies.” Moody’s agreed to pay $15 million to settle charges of internal controls failures involving models it used in rating U.S. residential mortgage-backed securities (“RMBS”) and will retain an independent consultant to assess and improve its internal controls. Moody’s separately agreed to pay $1.25 million and to review its policies, procedures, and internal controls regarding rating symbols. Moody’s did not admit or deny the SEC’s charges. According to the SEC’s order in the internal controls proceeding ( here ), Moody’s failed to establish and document an effective internal control structure as to models that Moody’s had outsourced from a corporate affiliate (Moody’s Analytics) and used in rating RMBS from 2010 through 2013. Moreover, Moody’s failed to maintain and enforce existing internal controls that should have been applied to the models. Ultimately, Moody’s corrected more than 650 RMBS ratings with a notional value exceeding $49 billion, due, in part, to errors in the models. Also, in 54 instances, Moody’s failed to document its rationale for issuing final RMBS ratings that deviated materially from model-implied ratings. “Rating agencies play a critical role in our capital markets and need to have effective controls over their rating processes,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “As our order notes, the SEC put Moody’s on notice about its internal controls obligations yet it did not develop an effective process to ensure the accuracy of the models it relied upon when rating residential mortgage-backed securities.” In the SEC’s order relating to rating symbols ( here ), the Commission found that Moody’s assigned ratings to securities known as combo notes in a manner that was inconsistent with other types of securities that used the same rating symbols. These securities had a total notional value of about $2 billion. “Investors expect and the law requires that symbols used by rating agencies be clearly defined and consistently applied,” said Reid Muoio, Deputy Chief of the Enforcement Division’s Complex Financial Instruments Unit. “Today’s proceeding is the SEC’s first enforcing the Universal Ratings Symbol requirement and we will continue to pursue failures that render rating symbols unclear or inconsistent.”

It’s official. New York City has passed a law, 45-0 in a city council vote, which is designed to help enforce existing rules that ban short-term rentals. The new law will require that Airbnb share the names and addresses of hosts in New York City. here.=">here."> Not Everyone Agrees The law has been met with mixed feelings. While people such as Mayor Bill de Blasio support the bill, others like Chris Lehane, head of global policy at Airbnb, find the new policy to be unnecessary, potentially subjecting hosts to violations of their privacy. “This is a bill that really is designed to benefit the hotel industry,” he said in a conference call with reporters. An Airbnb host who has been financially backed by the company itself has accused city officials of retaliation after he spoke out in support of rental homes. He has filed a lawsuit against New York City. A catalyst for Gentrification or a Homeowner’s Ace? These opposing views have long existed in the City. New York housing advocates have said that short-term rentals are a major contributor to gentrification and rising rental costs, while Airbnb argues that access to short-term rentals allows homeowners to make additional income and afford their mortgages. Housing Advocacy Councilwoman, Carlina Rivera, was responsible for introducing the bill. Prior to becoming a politician, Rivera was a housing advocate, who helped tenants forced out of their apartments due to rising rents. She often heard stories of landlords hoarding apartments and running illegal hotels. She remains focused on creating a fair real estate market. “This is about preserving as much affordable housing and housing stock as possible,” she said. Rivera has not been the only vocal council member to criticize the company. Council Speaker Corey Johnson has been outspoken about his opposition to Airbnb for years, accusing it of establishing a method for property managers to make money without paying taxes or abiding by safety regulations. Even the City of New York has worked to tighten the rules surrounding Airbnb and similar sites for a while. Under Mayor de Blasio, the City has strengthened a ban on rentals lasting for less than thirty days. What Does this Mean for the Future of Airbnb in NYC? New York City has asked a judge to order Airbnb to comply with a subpoena for information, in line with the recent decision. The City claims that the company has “largely refus to cooperate,” failing to provide “any records whatsoever.” Airbnb explains that they have yet to comply because the subpoena was too broad, requesting information not relative to the investigation. The company has continued to fight for its customer’s privacy and “will not stand by silently while OSE attempts to game the legal system in order to continue to harass responsible New Yorkers who share their home,” said Airbnb spokesman, Christopher Nulty. If the decision sticks, only time will tell just how much it influences the landscape of the business . The San Francisco-based company, valued at $31 million, does not believe that this new policy will have much of an effect on its business. “Most of our revenue is really coming for a much, much larger group of cities," said Lehane, a former adviser to President Bill Clinton. “This is not going to have an impact on us from a broader business perspective.”

Jonathan H. Freiberger recently co-authored an article appearing in the August 26, 2018 edition of Hotel Executive Magazine.  The article addresses new areas of Americans with Disabilities Act (“ADA”) compliance.  Traditionally, discussions about ADA compliance have focused on physical barriers to, or within, brick-and-mortar locations.  Developing areas of the law, and advances in technology, have resulted in some changes in the way barriers to access are analyzed.  While the article specifically addresses the legal and practical issues related to access of visually impaired individuals to the world wide web, ongoing discussions about the expanded views of ADA compliance should not be so limited.  Please see the article < HERE =">HERE"> .

This Blog has previously written about the enforceability of informal agreements. ( Here , here , here , and here .) In that regard, we have noted that an exchange of term sheets, memoranda of understanding, emails or correspondence may constitute an enforceable agreement if the writings include all the essential terms of an agreement. Sullivan v. Ruvoldt , 16 Civ. 583, 2017 WL 1157150 at *6 (S.D.N.Y. Mar. 27, 2017). Thus, if the informal writings contain the necessary elements of an enforceable contract, e.g. , an offer, acceptance, consideration, mutual assent and intent to be bound, courts will enforce the writings as if they were a formal, written agreement. On August 10, 2018, Justice Richard M. Platkin of the Supreme Court, Albany County, Commercial Division enforced a letter agreement notwithstanding the fact that the parties envisioned a more formal writing in the future. Vincent Crisafulli Testamentary Trust v. AAI Acquisition, LLC , 2018 N.Y. Slip Op. 51219(U) (Sup. Ct., Albany County Aug. 10, 2018). As discussed below, the decision turned on whether there was a meeting of the minds, or mutual assent, between the parties. Background Vincent Crisafulli concerned an alleged breach of contract involving a commercial lease of warehouse and distribution space (“Premises”). In 2009, about 40,000 square feet of the Premises were leased to Auburn Armature, Inc. (“AAI”). On May 19, 2017, AAI filed for Chapter 11 bankruptcy protection. Within one week of its bankruptcy filing, AAI moved to sell all of its assets to the defendant, AAI Acquisition, LLC (“Acquisition”) and to have certain executory contracts, including AAI’s lease with the plaintiff, Vincent Crisafulli Testamentary Trust (“Trust”), assumed by, and assigned to, Acquisition (“Lease”). On June 26, 2017, the Bankruptcy Court granted the motion and entered an order approving the asset purchase agreement. Shortly thereafter, Acquisition’s principal, Gerald J. DiCunzolo (“DiCunzolo”), sought to negotiate a more permanent arrangement with respect to the assumed leases, including the Lease with the Trust. Negotiations ensued between DiCunzolo and Frank J. Crisafulli, the Trustee of the Trust (“Crisafulli”). The Trust and Acquisition entered into a letter agreement on July 11, 2017, which replaced the Lease with a new agreement (the “Letter Agreement”). The Letter Agreement, among other things, added two years to the lease term, modified the rental stream, and gave Acquisition a purchase option on the Premises. The Letter Agreement further provided that Acquisition’s lease obligations were to be “guaranteed by affiliate United Electric Power, Inc.” The Letter Agreement stated that it was intended to “set forth the binding business terms of the agreement which will be supplemented by an appropriate set of legal documents approved by counsel for both parties to be fully executed within 30 days.” The Letter Agreement was signed by Crisafulli, as trustee of the Trust, and DiCunzolo, as president of Acquisition. Acquisition then entered into possession of the Premises, and it made rent payments for July and August. However, on August 28, 2017, Acquisition advised the Trust that it intended to abandon the Premises, and it ultimately vacated the Premises in September 2017. Acquisition paid the September rent, but has not made any payments thereafter pursuant to either the Lease or the Letter Agreement. In an attempt to mitigate damages, the Trust found a replacement tenant who began paying rent effective November 1, 2017. Based on the differential in rent, however, the Trust claimed damages of $193,350 through July 2022, which is the extended lease term prescribed in the Letter Agreement. The Trust commenced the action on October 17, 2017, alleging three contractual causes of action: (1) breach of the Letter Agreement; (2) breach of the guarantee provision of the Letter Agreement; and (3) breach of the assumed Lease. Following some paper discovery, the Trust moved for summary judgment. Acquisition opposed the motion. Applicable Law Under New York law, the existence of a binding contract is not dependent on the subjective intent of the parties to the agreement. Brown Bros. Elec. Contrs. v Beam Constr. Corp. , 41 N.Y.2d 397, 399 (1977) (citations omitted). Instead, courts look to the “objective manifestations of the intent of the parties as gathered by their expressed words and deeds.” Id . (citations omitted). “In doing so, disproportionate emphasis is not to be put on any single act, phrase or other expression, but, instead, on the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain.” Id . at 399-400 (citations omitted). Courts will not enforce “a mere agreement to agree, in which a material term is left for future negotiations….” Joseph Martin, Jr., Delicatessen v. Schumacher , 52 N.Y.2d 105, 109 (1981). Moreover, courts will not enforce an agreement containing an “express reservation by either party of the right not to be bound until a more formal agreement is signed.” E.g. , Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008). Thus, to demonstrate the formation of a valid contract, a party must demonstrate, through objective evidence, the parties’ mutual assent to the alleged agreement and their intention to be bound thereby. Kowalchuck v. Stroup , 61 A.D.3d 118, 121 (1st Dept. 2009). The Court’s Holding The Court granted the Trust’s motion, finding that the Letter Agreement was a valid and binding contract that was sufficiently definite in its material terms. The Court found that “the plain language of the Letter Agreement evinces the parties’ intention that the writing sets forth ‘the binding business terms of the agreement.’” The Court noted that “ hile the parties did contemplate that these ‘binding business terms’ would ‘be supplemented by an appropriate set of legal documents approved by counsel for both parties to be fully executed within 30 days,’ there was no ‘express reservation by either party of the right not to be bound until a more formal agreement is signed.’” (Citations omitted.) Thus, the language of the Letter Agreement itself “expressed the parties’ intention to be bound thereby.” (Citation and internal quotation marks omitted.) The Court also found that the Letter Agreement contained all the material terms of an enforceable agreement: The Letter Agreement describes the demised Premises, states that the new lease would be on the same terms and conditions as the prior Lease, except as otherwise modified therein, and then sets forth the modified terms and conditions of the new lease. And while the parties contemplated supplementation of the Letter Agreement via formalized “legal documents approved by counsel”, the Letter Agreement sets forth all of the essential terms of a lease agreement, and defendants have not identified any missing terms that were material to the transaction. That the Letter Agreement “stated that a more formal contract was to be signed does not render unenforceable.” Takeaway Courts have repeatedly held that letters, faxes and other less formal written documents, such as emails and texts, can serve as an enforceable agreement. Documents containing words that evince an agreement, along with language demonstrating contract formation, will suffice to create an enforceable agreement.  Vincent Crisafulli illustrates these points.

This Blog has written about cases involving disputes between members of a limited liability company (“LLC”) in which resolution of the matter would be governed by an operating agreement if one were in place. These cases illustrate the importance of having an operating agreement that addresses the myriad issues an LLC may encounter throughout its existence. Yet, despite the fact that the New York Limited Liability Company Law (“LLCL”) requires members of an LLC to “adopt a written operating agreement” (LLCL § 417), many LLCs fail to do so, whether at the formation stage or during the life of the company. Even LLCs that have an operating agreement are often subject to the application of the LLCL because those agreements typically do not contain language addressing the issues that can affect an LLC during its lifetime. In the absence of an operating agreement, the rights, duties and obligations of an LLC member are governed by the default provisions of the LLCL. See , e.g. , Matter of Eight of Swords, LLC , 96 A.D.3d 839 (2d Dept. 2012); Matter of 1545 Ocean Ave., LLC , 72 A.D.3d 121 (2d Dept. 2010). As one would expect, the default provisions of the LLCL do not address every circumstance that might arise during the life of an LLC. For example, as discussed in a recent Blog post, the LLCL does not specifically address the removal of LLC members. ( Here .) Since the LLCL is silent on the issue, unless expressly provided in an operating agreement, there are no statutory grounds on which a member may be removed. See Man Choi Chiu v. Chiu , 71 A.D.3d 646 (2d Dept. 2010) (dismissing claim where neither the articles of organization nor the operating agreement provided for removal of a member); Matter of Goyal v. Vintage India NYC, LLC , 2018 N.Y. Slip Op. 31926(U) (Sup. Ct., N.Y. County Aug. 7, 2018) (looking to annotations to statute for guidance as to how to rule in the absence of an operating agreement) ( here ). Dissolution of the LLC is another area in which the default provisions of the LLCL do not address every circumstance that may arise. As this Blog has noted on numerous occasions, breaking up is hard to do, especially in the absence of an operating agreement.   Under Section 702 of the LLCL, a court may dissolve a company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” When there are no articles or operating agreement, courts look to the stated purposes for which the LLC was formed to determine if they are being achieved and whether the company’s finances remain feasible. E.g. , Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). It is in the court’s discretion whether to grant the request for dissolution. See Molina v. Hong (In re Extreme Wireless, LLC) , 299 A.D.2d 549 (2d Dept. 2002). As such, even if the court determines that dissolution is appropriate, it may order a buyout of the member seeking dissolution as an alternative remedy. See Matter of Superior Vending, LLC , 71 A.D.3d 1153, 1154 (2d Dept. 2010). Just as LLCL § 702 offers dissolution to a member of an LLC, Business Corporation Law (“BCL”) §§ 1104 and 1104-a offer dissolution to a shareholder of a close corporation. Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that a corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz , 233 A.D.2d 149, 150 (1st Dept. 1996), lv dismissed , 89 N.Y.2d 1029 (1997); Neville v. Martin , 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming, 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 ( see generally Hayes v. Festa , 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp. , 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.” Matter of Klein Law Group, P.C. , 134 A.D.3d 450 (1st Dept. (2015) (quoting Matter of the Dissolution of 168½ Delancey Corp. , 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)). As noted, the threshold requirement for seeking dissolution under BCL § 1104 is ownership of 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. See In re Sakow , 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.”). 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. Gimpel v. Bolstein , 125 Misc. 2d 45, 49 (Sup. Ct., Queens County May 30, 1984) (citing Matter of Topper v. Park Sheraton Pharmacy , 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. Id . (citing BCL § 1104-a, subd. (b); Muller v. Silverstein , 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. Id . (citing BCL § 1118). Recently, Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, dismissed a deadlock dissolution petition filed under BCL § 1104 because the petitioner owned only 49% of the voting shares despite having 50% control over the corporation. Balkind v. Nickel , 2018 N.Y. Slip Op. 31703(U) (Sup. Ct. N.Y. County July 16, 2018) ( here ). Balkind v. Nickel Background The petitioner, Aubrey Balkind (“Balkind”), sought to dissolve Lanson Properties, Inc. (“Corporation”) on the grounds of deadlock. The respondent, Edith Nickel (“Nickel”), opposed the petition. Balkind and Nickel entered into a shareholder agreement in November 2005 (“Shareholder Agreement”). Balkind owns 49 percent of the Corporation’s common stock, and Nickel owns the remaining 51 percent of the Corporation’s shares. The Corporation’s sole asset is property located at on East 58th Street in New York City (the “Property”). As the only two directors of the Corporation, Balkind and Nickel agreed to sell the Property in early 2016. In mid-2017, an investor offered to purchase the Property for $15 million (which was $5 million below the asking price); the Corporation rejected the offer. Since that time, both parties have been unable to agree upon a purchase price for the Property. Balkind petitioned the Court for dissolution pursuant to BCL § 1104 because the Corporation was unable to sell the Property at an agreed upon price. Balkind claimed that the parties were deadlocked, as the Shareholder Agreement effectively required unanimous agreement between the shareholders. Balkind further noted that: (1) no one manages the Property because the agreement with the previous property manager expired; and (2) the Property remains largely vacant and unable to generate income. Balkind also alleged that Nickel was preventing the Corporation from selling the Property at fair market value to pressure him into waiving reimbursements to which he is entitled. Balkind said that he loaned the Corporation $2.8 million and continued to loan the Corporation money to meet the Corporation’s monthly obligations, including its mortgage payments. Nickel opposed dissolution and separately moved to dismiss the petition, arguing that Balkind did not have standing pursuant to BCL § 1104 because Balkind owned less than 50 percent of the Corporation’s total voting stock. Nickel denied any improper conduct and instead alleged that Balkind was attempting to coerce Nickel into selling the Property below fair market value to achieve his personal goals at her expense. The Court’s Decision The Court dismissed the petition to dissolve the Corporation and granted the motion to dismiss. The Court found that Balkind did not meet the threshold requirement of 50% ownership of the shares entitled to vote for directors of the Corporation. The Court rejected Balkind’s argument that the focus of BCL § 1104 is on equal power not equal ownership and concluded that the Shareholder Agreement, which merely designated Balkind and Nickel as the Corporation’s two directors “irrespective of voting stock ownership,” was not “the same as equal voting power to elect directors in the context of BCL § 1104’s standing requirement.” Contrary to Balkind’s position, BCL § 1104 is clear — to petition for judicial dissolution, petitioners must be “the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors. . . .” Under the plain meaning of the statute, Balkind, as the holder of 49% of the voting stock, does not have standing, and New York courts strictly interpret and apply the statute. Neither does reference to the Shareholder Agreement confer standing under BCL § 1104. That agreement merely designates Aubrey Balkind and Nickel as the Corporation’s two directors irrespective of voting stock ownership, which is not the same as equal voting power to elect directors in the context of BCL § 1104’s standing requirement. Under these circumstances, Balkind is unable to invoke BCL § 1104 as a deadlock breaking device. Takeaway Balkind highlights the importance of meeting the standing requirements for deadlock dissolution under BCL § 1104. And, in that context, Balkind illustrates the difference between a shareholder seeking dissolution of a corporation and a member of an LLC seeking dissolution of his/her company. In the latter situation, an LLC member who holds co-equal management rights, but possesses a minority ownership interest, would have standing to seek judicial dissolution under the LLCL – i.e. , under the LLCL, any member of the LLC has standing to seek dissolution. As Balkind learned, the same is not true under the BCL.

In order to obtain personal jurisdiction over an individual defendant (a natural person) in a lawsuit, the plaintiff must serve the defendant with a copy of the summons.  CPLR 308 provides several different methods for service and many, but not all, methods are discussed below. One method is personal delivery to the defendant. (CPLR 308 (1).)  When such “in hand” service is made, the defendant has twenty days to appear in the action (unless the time is extended).  ( CPLR 320(a) .) Service can also be made by delivering the summons to someone of “suitable age and discretion” at the defendant’s “actual place of business, dwelling place or usual place of abode.”  (CPLR 308(2).)  Suitable age and discretion means that “ he person to whom delivery is made must objectively be of sufficient maturity, understanding, and responsibility under the circumstances so as to be reasonably likely to convey the summons to the defendant.”  ( Nationwide Mutual Ins. Co. v. Kaufman , 896 F. Supp. 104 (E.D.N.Y. 1995).)  When this method is used a copy of the summons: must also be mailed to the defendant at his or her last known residence or actual place of business; in an envelope indicatimg that the mailing is “personal and confidential;” and, the envelope cannot indicate that the mailing is from an attorney or concerns a lawsuit against the defendant.  In addition, the delivery and mailing must occur within twenty days of one another.  Proof of service must be filed with the clerk of the court in which the action is pending within twenty days of the later of the delivery or mailing.  Service is deemed complete ten days after the filing of the proof of service. If service is made pursuant to CPLR 308(2), the defendant has twenty days to appear after the completion of service (unless the time is extended). When service cannot be made “in hand” or by serving someone of “suitable age and discretion,” service can be made by “affixing” the summons to the door of the defendant’s actual place of business or usual place of abode and following mailing and filing procedures similar to those used with “suitable age and discretion” service. (CPLR 308(4).)  Service is deemed complete ten days after the filing of the proof of service. If service is made pursuant to CPLR 308(4), the defendant has twenty days to appear after the completion of service (unless the time is extended). When a defendant fails to appear or plead, plaintiff may seek a default judgment.  ( CPLR 3215 (a).)  A plaintiff making an application for a default judgment must, among other things, submit proof of: (1) service of the summons and complaint; (2) the facts constituting the claim; (3) defendant’s default; and, (4) the amount due.  (CPLR 3215(f).) These rules converged in First Federal Savings & Loan Assoc. v. Tezzi (2 nd Dep’t August 22, 2018).   First Federal was a breach of contract action. Defendant was served by “affix and mail” service pursuant to CPLR 308(4) on November 24, 2009, and the affidavit of service was filed with the Westchester County Clerk on December 17, 2009 (more than 20 days after service).  Plaintiff obtained a default judgment on April 22, 2010 after defendant failed to appear.  Defendant, arguing that the affidavit of service was not timely filed pursuant to CPLR 308(4) and 3215, moved to vacate the default judgment more than 6 years later in October of 2016.  The plaintiff opposed the motion arguing that it attempted to timely file the affidavit of service by “mailing a copy … to the Westchester County Clerk on December 7, 2009.”  Supreme Court “ sua sponte , deemed the affidavit of service timely filed, nunc pro tunc , and denied the defendant’s motion to vacate the default.” On defendant’s appeal, the Appellate Division, Second Department “modified” Supreme Court’s order “on the facts and in the exercise of discretion, by deleting the provision thereof denying the defendant’s motion to vacate the default judgment, and substituting a provision granting the motion; and as so modified, the order is affirmed…and the time for the defendant to serve and file an answer is extended until 30 days after service upon her of a copy of this decision and order.” The Second Department found that because the affidavit of service was not filed within 20 days of the later of the mailing or affixing, “service was never completed” and the “defendant’s time to answer the complaint had not yet started to run and, therefore, she could not be in default.  Because the “failure to file proof of service is a procedural irregularity, not a jurisdictional defect, that may be cured by motion or sua sponte by the court in its discretion pursuant to CPLR 2004, the Second Department agreed with Supreme Court “to deem the affidavit of service timely filed, sua sponte , pursuant to CPLR 2004.” In analyzing the equities of its decision, the Second Department stated: In granting this relief, however, the court must do so upon such terms as may be just, and only where a substantial right of a party is not prejudiced (see CPLR 2001 ). The court may not make such relief retroactive, to the prejudice of the defendant, by placing the defendant in default as of a date prior to the order, nor may a court give effect to a default judgment that, prior to the curing of the irregularity, was a nullity requiring vacatur. Rather, the defendant must be afforded an additional 30 days to appear and answer after service upon her of a copy of the decision and order.  (Some citations and internal quotation marks omitted.) TAKEAWAY Failure to follow procedural rules, even in minor ways, could lead to very interesting results.

Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court may dissolve a company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. (This Blog addressed Section 702 here , here and here .) To successfully petition for the dissolution of a limited liability company (“LLC”) under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC , 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC , 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC , 96 A.D. 3d 839, 840 (2d Dept. 2012). Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See , e.g. , Matter of Natanel v. Cohen , 43 Misc. 3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean , 72 A.D.3d at 130-132. The foregoing principles are predicated upon a dispute between members of an LLC. What happens when the matter involves, among other things, a dispute over a litigant’s membership in the LLC? Does that party have standing to pursue the dissolution? Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, recently addressed this question in Matter of Goyal v. Vintage India NYC, LLC , 2018 N.Y. Slip Op. 31926(U) (Sup. Ct., N.Y. County Aug. 7, 2018) ( here ). Matter of Goyal v. Vintage India NYC, LLC Background Like many business divorce cases, Goyal arose from the breakdown of the relationship between petitioner, Prashant Goyal (“Goyal”), a 50% member of Vintage India NYC, LLC (“Vintage India”), and respondent, Lynn Keller (“Keller”), the other 50% member of the company. Goyal sought dissolution of Vintage India pursuant to LLCL §§ 702-03. Vintage India operated a clothing/accessories store with an Indian theme. In November 2014, Goyal and Keller decided to work together. Keller invested $200,000 in the company; Goyal contributed sweat equity and his knowledge and experience in the industry. In forming the company, the parties did not execute an operating agreement. By February 2017, the relationship between Keller and Goyal deteriorated beyond repair, with Keller allegedly threatening physical harm to Goyal if he did “not give her percentage of the business.” In March 2017, Goyal claimed to have found large withdrawals from the company’s account in Keller’s name, despite the company being in arrears to its landlord. Later that month, Keller purported to hold a members meeting in which she ousted Goyal as a member of Vintage India. Keller maintained that Goyal was removed for cause. Goyal claimed that Keller was looting the company. Goyal filed suit seeking: 1) dissolution pursuant to LLCL § 702; 2) a temporary receivership to oversee the assets of Vintage India; 3) access to financial records; and 4) an injunction preventing Keller from transacting business for Vintage India. Vintage India moved to dismiss the petition. Among other things, Vintage India argued that Goyal lacked standing to sue, arguing that since Goyal was removed from the company, he no longer had a membership interest in Vintage India, as his interest did not vest. As such, Goyal was barred from the relief he sought. The company also argued that dissolution was unnecessary, as Vintage India is a going concern, and a viable entity. In response, Goyal noted that since the issue in dispute pertained to the validity of his ouster, it was premature to rule that he lacked standing to bring his petition. In particular, Goyal argued that the vote at the members meeting could not serve to take away his ownership share as it lacked a quorum and was procedurally flawed. At most, if done properly, a majority could have removed him from being a managing member, not from membership. The Court’s Decision The Court denied the motion. First, as to the purported expulsion of Goyal from the company, the Court noted that without an operating agreement, Keller had no statutory right to remove Goyal from Vintage India: Vintage India argues the Petitioner has failed to state a claim because he is not a member of Vintage India NYC, LLC. Goyal was, according to respondent, “removed for cause” at the March 2017 meeting. Keller claims Goyal was removed as a member and expelled from the LLC, and that his interest in Vintage India, which was unvested at that time, was revoked at that meeting … The Annotations to the Limited Liability Company Law, however, state that “neither the LLC nor the other members have the statutory right to expel a member from the LLC…. The right to expel a member must be expressly set forth in the operating agreement.” Citing Man Choi Chiu v. Chiu , 71 A.D.3d 646, 647 (2d Dept. 2010) (“Although Limited Liability Company Law § 701 mentions expulsion of members, there is no statutory provision authorizing the courts to impose such a remedy. Rather, the reference to expulsion of members contemplates the inclusion of such a provision in an operating agreement.”). (Other citations omitted.) Second, the Court found that Keller could not remove Goyal as the managing member of the company because the LLCL required a majority vote, which Keller “lack as Goyal owns half of the interest in Vintage India ( see LLCL § 414).” Takeaway Goyal highlights the importance of having an operating agreement. Not only is an operating agreement important for purposes of dissolution, it is important for purposes of member removal. As the parties in Goyal learned, without an operating agreement, the LLCL (at least according to the annotations to the law) does not permit the removal of a member, even if the removal is for cause.

Earlier this month, a new report by the federal government’s auditing division raised concerns regarding how the Department of Veteran Affairs handles employees and managers found to be involved in apparent acts of retaliation. Alarming Findings The report shares some very serious findings. According to the U.S. Government Accountability Office’s (GAO) report, VA whistleblowers are much more likely to face discipline or removal after reporting misconduct than are their colleagues, and that senior VA managers are at times not held responsible for substantiated misconduct. Other times, managers who have been accused of wrongdoing investigate themselves. Other surprising findings include: VA officials who are found guilty of misconduct at times received a lesser punishment than recommended or at other times, no punishment at all. A disheartening 66% of VA employees who filed formal complaints did not work for the VA the following year. Whistleblowers were 10 times more likely than their peers to receive disciplinary action within the first year of reporting the misconduct. The VA does not always maintain the required files and documents necessary for adjudication, lending itself to the possibility that employees may not have even had due process. The findings are extremely alarming, drilling into the unfortunate fact that often times when individuals have spoken up about mismanagement, they are quickly silenced in one way or another. Even more shocking is the fact that sometimes the same managers who they are blowing the whistle to investigate them. Failure to Uphold Accountability Not too surprising given the rest of the report is that senior VA officials who were found guilty of misconduct --whether it be fraud, abuse, retaliation, or gross mismanagement – were merely given reprimands, counseling, or brief suspensions. Furthermore, the report claims that the VA “did not consistently ensure that allegations of misconduct involving senior officials were reviewed according to investigative standards. Congresswoman Michelle Lujan Grisham, D-N.M. finds the GAO report to be “alarming and beyond disturbing. Speaking to NPR, Grisham discussed the issue with the GAO’s system itself, explaining that it “has failed to protect whistleblowers and hold senior VA officials accountable for misconduct, jeopardizing veteran health and well-being. It means that there is a system that cannot police itself and doesn’t appear to be interested in really focusing on improving access and quality of care, a system that won’t address its own problems.” Along with Colorado Republican Rep. Mike Coffman, who called the report “troubling to say the least,” Grisham requested the GAO investigation.  Also speaking to NPR, Coffman shared his own feelings about the VA’s “bureaucratic incompetence and corruption.” “The fact that the second-largest federal agency is unable to collect reliable information regarding employee misconduct, adhere to procedures when adjudicating claims, and have multiple <12 to be exact> siloed information systems is disturbing.” Blame Placed on Obama-era Administration VA Press Secretary, Curt Cashour, begs to differ, explaining that things are very different now than they were during the Obama-era. However, he claims that under President Trump the VA has revamped its accountability arm, which today is “ensuring adequate investigation and correction of wrongdoing throughout the VA, and protecting employees who lawfully disclose wrongdoing from retaliation.” However, the GAO’s report is not based solely on Obama-era data, but rather from 12 information systems operated from October 2009 through July 2017. Though the number of VA workers fired has actually increased under the Trump administration, the data shows that the majority was low-level food service, laundry and custodial staff. A Step in the Right Direction? The GAO now offers 16 detailed recommendations, which include that the secretary issues clear, written guidance on accountability actions for all substantiated misconduct cases and overhaul record-retention procedures. The VA has agreed with 9 of the recommendations, and partially agreed with five of them.

The simplest misstep has the potential to derail years of litigation and result in a massive financial sanction, as happened here. It is in everyone’s best interest, both the litigants’ and the courts’, to verify that diversity jurisdiction exists before proceeding with the case. Everyone involved in this case trusted that diversity jurisdiction existed, but no one verified it. Purchasing Power v. Bluestem Brands , 851 F.3d 1218, 1220 (11th Cir. 2017). Recently, the foregoing scenario played out in three cases pending before Judge Denis R. Hurley of the United States District Court for the Eastern District of New York.  As discussed below, Judge Hurley dismissed each action for the failure to plead diversity jurisdiction. What is an LLC? A limited liability company (“LLC”) is a hybrid legal structure that provides the limited liability features of a standard corporation and the tax efficiencies and operational flexibility of a sole proprietorship or partnership. Its members can include one or more individuals, corporations, partnerships or LLCs. With so many possible layers of membership, bringing a claim in federal court can be challenging, especially with respect to alleging diversity jurisdiction. (Federal question jurisdiction rarely exists in cases involving the internal affairs of an LLC – state law typically governs such disputes.) Diversity Jurisdiction Explained The federal courts are given diversity jurisdiction pursuant to the U.S. Constitution. Article III, § 2, clause 1 of the Constitution provides, in pertinent part, that “The judicial power shall extend to all cases . . . between citizens of different states.” The U.S. Supreme Court has interpreted this provision to mean that there must be complete diversity — that is, each party to a case cannot be a citizen of the same state. Strawbridge v. Curtiss , 7 U.S. (3 Cranch) 267 (1806). Since diversity jurisdiction concerns the court’s subject matter jurisdiction over the matter, it cannot be waived by the parties and can be considered by the parties and the court at any time in the litigation. Diversity is determined “upon the state of things at the time of the action brought.” Mollan v. Torrance , 22 U.S. (9 Wheat) 537, 539 (1824). Thus, a party cannot cure a diversity defect by changing his/her/its citizenship after filing the lawsuit. However, a party can cure a jurisdictional defect by dismissing a nondiverse party from the action. Grupo Dataflux v. Atlas Global Group, LP , 124 S.Ct. 1920, 1924-25 (2004). But, if that party is indispensable – that is, dismissal will unduly prejudice either the dismissed party or the remaining parties – dismissal will be deemed inappropriate. To determine a party’s state citizenship, the courts look to the party’s domicile ( i.e. , the place a person considers his/her permanent place of residence). When the party is an individual, the analysis is straightforward. The court determines the domicile of each party, and if any plaintiff shares a domicile with any defendant, the court lacks subject matter jurisdiction over the action. If that happens, “the case shall be remanded” to state court.  28 U.S.C. § 1447(c). When the party is a corporate entity, like an LLC, the analysis can become more complicated. Diversity Jurisdiction: Corporations and Limited Liability Companies When a party is a traditional corporation, 28 U.S.C. § 1332(c) governs the diversity jurisdiction analysis. Section 1332(c) provides that “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business.” There is no statutory rule governing the citizenship of an LLC.  For this reason, litigants often believe, albeit mistakenly, that the rules applicable to a corporation also apply to an LLC. The citizenship of an LLC is determined by the citizenship of each of its members. See , e.g. , Bayerische Landesbank, New York Branch v. Aladdin Capital Management LLC , 692 F.3d 42, 49 (2d Cir. 2012). “A complaint premised upon diversity of citizenship must allege the citizenship of natural persons who are members of a limited liability company and the place of incorporation and principal place of business of any corporate entities who are members of the limited liability company.” New Millennium Capital Partners, III, LLC v. Juniper Grp. Inc. , 2010 WL 1257325, at *1 (S.D.N.Y. Mar. 26, 2010) (citation omitted). The state of incorporation for the LLC itself is, therefore, irrelevant. The analysis becomes more complex when the lawsuit involves the LLC and/or its members. When the LLC itself is a litigant in a suit against any of its members, diversity jurisdiction will not exist because the parties are not diverse – the LLC has the citizenship of the adverse member. A lawsuit among LLC members can qualify for diversity jurisdiction only if the litigating members are diverse and the LLC is not an indispensable party to the lawsuit. Judge Hurley and the Trilogy of Dismissed Cases In a one-month span, Judge Hurley dismissed three cases involving an LLC on diversity jurisdiction grounds. Each case involved the nightmare scenario described above: litigating a case for months or years only to learn that the court lacks subject matter jurisdiction over the action. Sienna Ventures, LLC v. Halley Equipment Leasing On April 2, 2018, Judge Hurley dismissed Sienna Ventures, LLC v. Halley Equipment Leasing, LLC , 18-cv-201 (E.D.N.Y Apr. 2, 2018) (DRH) (GRB) ( here ). In Sierra Ventures , the plaintiff, a New York limited liability company with a single member who is a citizen and resident of the State of New York, filed suit on January 11, 2018 against Halley Equipment Leasing, LLC, “a limited liability company organized and existing under the laws of the State of Texas, with its principal place of business located Southlake, TX ….”  Sierra Ventures asserted claims for breach of an Aircraft Purchase Agreement, and alleged that the Court had jurisdiction over the matter pursuant to 28 U.S.C. § 1332. Sierra Ventures did not allege the citizenship and residency of the defendant’s members. On January 17, 2018, the Court ordered Sierra Ventures to show cause why the action should not be dismissed for lack of subject matter jurisdiction. On February 6, 2018, Sierra Ventures filed an amended Complaint, which “again failed” to address the citizenship and residency of the defendant’s members. The next day, Sierra Ventures responded to the Court’s order to show by simply stating that “subject matter jurisdiction exists in this case as Sienna Ventures, LLC [] is a New York Limited Liability Company and its sole member is a citizen and resident of New York, and Halley Equipment Leasing, LLC [] is a Texas Limited Liability Company.” The letter did not address the residency or citizenship of the defendant’s members. Judge Hurley dismissed the action. In doing so, the Court noted that “Plaintiff has had three proverbial ‘bites at the apple’ to properly allege subject matter jurisdiction; in the Complaint, the Amended Complaint, and the Response to the Order to Show Cause. Plaintiff has failed to do so on all occasions.” Courtyard Apartments Property 1, LLC, v. Rosenblum On April 3, 2018, Judge Hurley dismissed Courtyard Apartments Property 1, LLC v. Rosenblum , 17-cv-2909 (E.D.N.Y Apr. 3, 2018) (DRH) (SIL) ( here ). Like the plaintiff in Sierra Ventures , the plaintiffs in Courtyard Apartments had three “bites at the apple” to properly allege diversity jurisdiction and failed to do so. The plaintiffs, a group of Delaware LLCs, each “with its natural U.S. citizen or domestic corporation owner, with its same natural citizen sole owner” with a principal business or residential address in one of eight states, commenced their action against the defendants on May 12, 2017. One of the defendants, Harold Rosenblum, was alleged to be a “resident” of the State of Florida; his citizenship was not alleged. None of the plaintiffs claimed to be a citizen of Florida. The plaintiffs did not allege the citizenship of the other individual defendant. The remaining defendants are all companies allegedly formed by Rosenblum. The plaintiffs did not provide any allegations regarding their citizenship, instead stating only that they are “headquartered and doing business from the State of Florida.” The plaintiffs alleged that the Court had jurisdiction pursuant to 28 U.S.C. § 1332 because the parties are diverse in citizenship and the amount in controversy exceeds $75,000. On January 25, 2018, the Court ordered the plaintiffs to show cause why the action should not be dismissed for lack of subject matter jurisdiction. On February 7, 2018, the plaintiffs filed an amended complaint, “which again failed to address the citizenship of all of either Plaintiffs’ or Defendants’ members.” In the Amended Complaint, the plaintiffs alleged that “Defendant Rosenblum ‘formed, and solely owned, or controlled as Managing Member’ the corporate defendants.”  The plaintiffs made no other allegations concerning the citizenship of the defendants’ members and did not distinguish between “which of the defendant corporations Rosenblum solely owned and which he just controlled.” Also on February 7, 2018, the plaintiffs responded to the Court’s order to show cause by arguing that “‘complete diversity is now properly alleged’ because the Complaint was amended to show that the corporate owners of the Plaintiffs LLCS incorporated in Delaware do not maintain their principal place of business in Florida and the sole owner of these same Plaintiff LLCs does not maintain his/her principal residence in the State of Florida.” The Court dismissed the action, finding that the plaintiffs’ responses were “effectively nonresponsive to the Court’s order to show cause and nothing to address the myriad deficiencies regarding subject matter jurisdiction in both the Complaint and the Amended Complaint.” First, the Court rejected the blanket statement that each of the sixteen plaintiffs were limited liability companies “‘with its same natural citizen sole owner and same principal place of business and residential address [] listed as follows<.> ’” Such a conclusory statement, said the Court, was “ sufficient to allege citizenship of each of the members of the sixteen limited liability companies.” Second, the Court found that the plaintiffs failed to “allege the members, let alone the members’ citizenship, of certain of the Plaintiffs such as those of the David J. Keudell Revocable Trust.” Such a failure was “fatal to diversity jurisdiction” because a plaintiff is required to allege the citizenship of all members of an unincorporated entity, such as a trust. See Amerigold Logistics, LLC v. ConAgra Foods, Inc. , 136 S. Cit. 1012, 1016–17 (2016) (explaining that for purposes of diversity jurisdiction, a trust as an unincorporated entity “possesses the citizenship of all of its members”). Third, as to the defendants, the Court reiterated that the plaintiffs failed to plead “the citizenship of each of the Defendants’ members,” instead, choosing to “rely[] on confusing statements about Defendant Rosenblum’s involvement in the companies.”  The Court also noted that the plaintiffs failed to address the citizenship of non-defendants “who apparently have or had some stake in the Defendant companies at some point in time.” Finally, the Court declined to provide guidance to the plaintiffs with regard to properly pleading diversity jurisdiction: While Plaintiffs ask that the Court provide guidance or further directive as to its Order to Show Cause, the Court declines to do so here. Plaintiffs have had three proverbial “bites at the apple” to properly allege subject matter jurisdiction; in the Complaint, the Amended Complaint, and the Response to the Order to Show Cause. Plaintiffs have failed to do so on all occasions. It is not the Court’s responsibility to do research for Plaintiffs’ counsel on how to properly allege subject matter jurisdiction. Encompass Group, LLC v. Oceanside Institutional Industries, Inc. On May 3, 2018, Judge Hurley dismissed Encompass Group, LLC v. Oceanside Inst’l Indus., Inc. , 16-cv-2560 (E.D.N.Y May 3, 2018) (DRH) (AYS) ( here ), the third case to be dismissed on diversity jurisdiction grounds. In doing so, Judge Hurley noted that there was a problem with litigants filing cases “in this Court in which diversity jurisdiction is not properly alleged,” which necessitated the issuance of “numerous orders to show cause pointing out the deficiencies in a pleading’s jurisdictional allegations and directing that the relevant party show cause why the action should not be dismissed for lack of jurisdiction.” Encompass Group was another example of the problem. “ fter nearly two years of litigation,” Judge Hurley dismissed the action “for lack of subject matter jurisdiction.” The plaintiff, Encompass Group, LLC (“Plaintiff” or “Encompass”), commenced the action against the defendant, Oceanside Institutional Industries, Inc. (“Oceanside”), asserting claims for breach of contract and account stated arising out of Oceanside’s purchase of certain goods and services from Encompass. After the completion of discovery, which included a deposition in which Oceanside conceded that it owed Encompass $1,137,955.77, Encompass moved for summary judgment. That motion was unopposed. In reviewing the motion, the Court concluded that Encompass failed to properly allege diversity jurisdiction. As a consequence, Judge Hurley issued an order to show cause directing Encompass to “file an amended complaint, on or before May 1, 2018, setting forth the citizenship of each of its members.” Encompass failed to file an amended complaint. Given the threadbare allegation of jurisdiction in the complaint and the plaintiff’s failure to take “advantage of the opportunity afforded it to amend its complaint to correctly assert its citizenship for diversity purposes,” the Court dismissed the action. Takeaway As noted in the preface to this post, “ t is in everyone’s best interest, both the litigants’ and the courts’, to verify that diversity jurisdiction exists before proceeding with the case.” The trilogy of cases discussed in the post shows the consequence of not doing so.

Restrictive covenants are frequently found in employment contracts.  Typically, such covenants, among other things, are used to prevent employees (the “Employee”), after the termination of the employment relationship, from: competing with the former employer; soliciting the former employer’s customers; soliciting the former employer’s other employees; and, taking or using the former employer’s confidential business information. Generally, restrictive covenants contain temporal (time) and geographic (location) limitations.  Not surprisingly, restrictive covenants in employment agreements are a fertile source of litigation. In Long Island Minimally Invasive Surgery, P.C. v. St. John’s Episcopal Hospital (2 nd Dep’t August 8, 2018), the Court was called upon to determine the enforceability of a restrictive covenant in a surgeon’s employment contract.  The Plaintiff, a medical practice specializing in weight-loss and general surgery, had seven offices in the New York Metropolitan area.  Plaintiff’s doctors performed surgery in Rockville Centre at Mercy Hospital.  Defendant Javier Andrade, a weight-loss and general surgeon, was hired by Plaintiff.  The parties entered into a three-year employment agreement (the “Agreement”) containing a restrictive covenant barring “Andrade from performing any type of surgery for two years within 10 miles of any of the Plaintiff’s seven offices and affiliated hospitals <(the “restricted zone”> .”  During his employment, Andrade worked in two of Plaintiff’s Nassau County offices. Andrade was terminated by Plaintiff, without cause, beyond the three-year term of the Agreement.  Thereafter, Andrade was hired by defendant St. John’s Episcopal Hospital (“St. John’s”) as its interim chairman of the general surgery department.  While Andrade’s new office with St. John’s was not located within the Restricted Zone, St. John’s Hospital was in the Restricted Zone. Plaintiff commenced its action seeking damages and injunctive relief against, inter alia , Andrade and St. John’s for breaching the restrictive covenant.  Supreme court granted Defendants’ motion for summary judgment holding, inter alia , that the restrictive covenant was invalid. In discussing the law regarding restrictive covenants, the Second Department reiterated that “ greements restricting an individual’s right to work or compete are not favored, and thus are strictly construed” and, accordingly, “ restrictive covenant will only be subject to specific enforcement to the extent that it is reasonable in time and area, necessary to protect the employer’s legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.”  According to the three-prong test set forth by the Court, a restraint is reasonable if it “(1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public” (emphasis in original).  For the covenant to be valid, none of the three prongs can be violated. Because the covenant in question prohibited Andrade from practicing any kind of surgery for two years and within 10-miles of any of Plaintiffs’ offices or affiliated hospitals even if Andrade never worked at those locations, the Court deemed the covenant to be geographically unreasonable.  If valid, the covenant would effectively prevent Andrade from working in his chosen field of medicine throughout the entire New York Metropolitan area.  Plaintiff failed to raise a triable issue of fact as to whether the broad geographical scope of the covenant “was necessary to protect the employers’ interests. New York courts are permitted, under certain circumstances, to “blue pencil” restrictive covenants – that is cure the unreasonable aspects of the covenant without invalidating the covenant altogether.  Thus, where “the unenforceable portion is not an essential part of the agreed exchange, a court should conduct a case specific analysis, focusing on the conduct of the employer in imposing the terms of the agreement.”  ( BDO Seidman v. Hirshberg , 93 N.Y.2d 382, 394 (1999).)  In situations where the employer demonstrates that it was not, inter alia , overreaching or acting in a coercive manner, but was attempting to protect its legitimate business interests “consistent with reasonable standards of fair dealing,” the court would be justified in “blue penciling,” as opposed to invalidating, the covenant.  ( BDO Seidman , 93 N.Y.2d at 394.) In Long Island Surgery, the Court determined that “blue penciling” was not appropriate and invalidated the entire covenant.  In so doing, the Court noted that: the Plaintiff did not even argue that its motives in requiring the covenant were not anti-competitive; the clear overbreadth of the covenant was consistent with a lack of good faith; and, Plaintiff used its superior bargaining power to force Andrade to sign the non-negotiable covenant. Interestingly, the Long Island Surgery Court, relying on BDO Seidman, noted that when considering covenants not to compete with respect to professionals, greater weight is afforded to the “interests of the employer in restricting competition in the within a confined geographical area.”  The rationale for this rule is based on the fact that professionals are deemed to “provide ‘unique or extraordinary’ services.”  ( BDO Seidman , 93 N.Y.2d at 390.)

Recently, the First Department issued a terse decision in which it reversed a lower court ruling requiring the production of documents claimed to be protected by the attorney-client privilege under a common interest agreement. In 21st Century Diamond, LLC v. Allfield Trading, LLC , 2018 N.Y. Slip Op. 05732 ( here ), the Court made clear that “the common interest doctrine applies to protect otherwise privileged communications between these parties from disclosure.” Given the absence of analysis by the of the First Department and the current newsworthiness of the issue, today’s post will take a deep dive into the attorney-client privilege under a common interest agreement. The Attorney-Client Privilege “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Although the privilege serves an important function – the open and candid dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. Ambac, 27 N.Y.3d at 624 (citing Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. Ambac , 27 N.Y.3d at 624 (quoting Matter of Jacqueline F ., 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” Ambac , 27 N.Y.3d at 624. (quoting Rossi v Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Where the communications are made in the presence of third parties, whose presence is known to the client, the communications are not privileged from disclosure because they are no longer deemed to be confidential. Ambac , 27 N.Y.3d at 624 (citations omitted). Similarly, communications lose their protection where a communication is made in confidence but subsequently revealed to a third party. Id . As the Court of Appeals has held: “A lack of confidentiality and subsequent disclosure also destroy the privilege as a matter of fairness: ‘when conduct touches a certain point of disclosure, fairness requires that the privilege shall cease whether he intended that result or not.’” Id. An Exception to the Attorney-Client Privilege: Common Interest Agreements “As with any rule, there are exceptions.” Ambac , 27 N.Y.3d at 624. One such exception is the common interest exception. Under this exception, the presence of a third party will not destroy a claim of privilege where two or more clients separately retain counsel to advise them on matters of common legal interest. The doctrine originated in the context of criminal cases, where the courts “allowed the attorneys of criminal co-defendants to share confidential information about defense strategies without waiving the privilege as against third parties.” In re Teleglobe Communications Corp ., 493 F.3d 345, 364 (3d Cir. 2007). The first known case to apply the exception came from Virginia. In Chahoon v. Commonwealth , 62 Va. 822, 839-840 (1871), the court allowed criminal attorneys to coordinate the strategies of their clients, who were under joint indictment for conspiracy to defraud an estate and retain the privileged nature of their communications. The court reasoned that the parties “had the same defen e to make” and therefore “the counsel of each was in effect the counsel of all.” Id . at 841-42. In Schmitt v. Emery , 211 Minn. 547, 2 N.W.2d 413 (1942), the court extended the doctrine to civil litigation. There, a privileged document was exchanged among counsel for several co-defendants in a civil action, to prepare objections to the document’s admission into evidence. The court held that “ here an attorney furnishes a copy of a document entrusted to him by his client to an attorney who is engaged in maintaining substantially the same cause on behalf of other parties in the same litigation,” the communication is protected from disclosure by the attorney-client privilege because it was “made not for the purpose of allowing unlimited publication and use, but in confidence, for the limited and restricted purpose to assist in asserting their common claims.” Id. at Minn at 554, 2 N.W.2d at 417. The Uniform Rules of Evidence adopted this formulation of the doctrine, protecting attorney-client communications “by the client or a representative of the client or the client’s lawyer or a representative of the lawyer to a lawyer or a representative of a lawyer representing another party in a pending action and concerning a matter of common interest therein.” Uniform Rules Evid. 502(b)(3). In New York, the Court of Appeals, first recognized the common interest doctrine in People v Osorio , 75 N.Y.2d 80 (1989). In Osorio , the Court considered whether a defendant who communicated with counsel in the presence of a separately represented co-defendant in a pending criminal prosecution could prevent the co-defendant from testifying as to what he heard. The co-defendant was at the time acting as an interpreter between the defendant and his attorney. Although the Court acknowledged that the attorney-client privilege would, ordinarily, protect communications between co-defendants that are shared for the purpose of “mounting a common defense,” the Court ultimately held that it did not apply in that case because the defendant “was not planning a common defense” and, therefore, did not share a common legal interest with him. Id . at 85 (relying on United States v McPartlin , 595 F.2d 1321, 1336 (7th Cir 1979), and Hunydee v. United States , 355 F.2d 183, 185 (9th Cir 1965)). After Osorio , courts in New York applied the common interest doctrine to both criminal and civil matters, to communications of both co-plaintiffs and co-defendants, but always in the context of pending or reasonably anticipated litigation. See, e.g., Hyatt v. State of Cal. Franchise Tax Bd., 105 A.D.3d 186 (2d Dept. 2013). Although federal courts have extended the exception regardless of whether litigation is pending or threatened ( e.g., Teleglobe , 493 F.3d at 364; United States v. BDO Seidman, LLP , 492 F.3d 806, 816 (7th Cir 2007); In re Regents of Univ. of Cal ., 101 F.3d 1386, 1390-1391 (Fed. Cir. 1996)), the Court of Appeals has refused to do so. Ambac, 27 N.Y.3d at 628. In refusing to extend the doctrine, the Court noted that limiting the exception “to situations where the benefit and the necessity of shared communications are at their highest” – i.e. , during litigation or when there is the threat of litigation – reduces the risk of misuse. Ambac , 27 N.Y.3d at 628. The Court reasoned that “the common interest doctrine promotes candor that may otherwise have been inhibited” between co-litigants. Id . Otherwise, “the threat of mandatory disclosure may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy.” Id . The Court rejected the notion that there is a shared common legal interest in a commercial transaction or other common situation “outside the context of litigation” or the threat of litigation. The Court explained: The difficulty of defining “common legal interests” outside the context of litigation could result in the loss of evidence of a wide range of communications between parties who assert common legal interests but who really have only nonlegal or exclusively business interests to protect. Even advocates of a more expansive approach admit that “in a nonlitigation setting the danger is greater that the underlying communication will be for a commercial purpose rather than for securing legal advice” (James M. Fischer, The Attorney-Client Privilege Meets the Common Interest Arrangement: Protecting Confidences While Exchanging Information for Mutual Gain, 16 Rev Litig 631, 642 <1997> ). At least one commentator has also observed that “ he greatest push to expand the common interest privilege comes from corporate attorneys representing multiple clients often in an antitrust context,” and that it is in precisely this context “that the potential for abuse is greatest” (Edna S. Epstein, The Attorney-Client Privilege and the Work-Product Doctrine 277 <5th ed 2007> ). Ambac , 27 N.Y.3d at 629-30. The Court also rejected the notion that since the doctrine derives from the attorney-client privilege it is coextensive with the circumstances under which the privilege may exist: contends that we should not limit the common interest doctrine to pending or anticipated litigation when the attorney-client privilege from which the doctrine derives is not so limited. While it is true that the attorney-client privilege is not tied to the contemplation of litigation, the common interest doctrine does not need to be coextensive with the privilege because the doctrine itself is not an evidentiary privilege or an independent basis for the attorney-client privilege ( see In re Megan-Racine Assoc., Inc ., 189 BR 562, 573 n 8 ). Rather, it limits the circumstances under which attorneys and clients can disseminate their communications to third parties without waiving the privilege, which our courts have reasonably construed to extend no further than communications related to pending or reasonably anticipated litigation. Ambac , 27 N.Y.3d at 630. The Court further rejected the argument that limiting the exception to litigation “will create an anomalous result: clients who retain separate attorneys … cannot protect their shared communications absent pending litigation but the same communications made in the absence of litigation would be privileged if had simply hired a single attorney to represent them” in a non-litigation context. Id . at 630-31. The Court reasoned that “ n the joint client or co-client setting … the clients indisputably share a complete alignment of interests in order for the attorney, ethically, to represent both parties. Accordingly, there is no question that the clients share a common identity and all joint communications will be in furtherance of that joint representation.” Id. at 631(citation omitted). But, when clients retain separate attorneys to represent them on a matter of common legal interest, that is not so. “It is less likely that the positions of separately-represented clients will be aligned such that the attorney for one acts as the attorney for all, and the difficulty of determining whether separately-represented clients share a sufficiently common legal interest becomes even more obtuse outside the context of pending or anticipated litigation.” Id. “Consequently,” held the Court, “although a litigation limitation may not be necessary in a co-client setting where the fact of joint representation alone is often enough to establish a congruity of interests, it serves as a valuable safeguard against separately-represented parties who seek to shield exchanged communications from disclosure based on an alleged commonality of legal interests but who have only commercial or business interests to protect.” Id. (citations omitted). Finally, the Court rejected the argument that it should extend the common interest exception to communications in furtherance of any common legal interest, as done in the Restatement and some federal courts of appeal. Id . at 631-32 (citing Restatement (Third) of Law Governing Lawyers § 76 (1) (1997); Teleglobe , 493 F.3d at 364; BDO Seidman , 492 F.3d at 816; In re Regents of Univ. of Cal ., 101 F.3d at 1390-1391). The Court reasoned that such an expansion “has not been uniformly received” and is otherwise subject to endless application (i.e., use in contexts that are limited only by the imaginations of those asserting the exception). Id . at 632 (noting, as one commentator observed, that the doctrine “is spreading like crabgrass to areas the drafters of the Rejected Rule <503(b) (3) of the federal rules of evidence, which was proposed in 1972 but never adopted> could have hardly imagined”) (citation omitted). Takeaway The scope of the common interest privilege can differ depending on the jurisdiction. As the Ambac Court noted, “at least 11 states have statutorily restricted the common interest doctrine to communications made in furtherance of ongoing litigation,” and at least five states “have embraced the same limitation through judicial decision.” Ambac , 27 N.Y.3d at nn. 2, 3. Like these jurisdictions, New York limits application of the doctrine to pending litigation or reasonably anticipated litigation. The existence of a pending litigation or anticipated litigation by itself is often not enough to enjoy the benefits of the doctrine. Many courts will scrutinize the assertion of a common legal interest before extending the protection of the attorney-client privilege to the parties. Thus, to maintain the privilege, the parties must demonstrate the following: 1) the communications were made pursuant to a common legal interest – i.e ., the interests of the parties are, in fact, aligned; 2) the communications were made to further the goals of that legal interest; and 3) the parties are not sharing the communications beyond their group – i.e ., they are not otherwise waiving the privilege. Although most jurisdictions do not require a formal written agreement to recognize a common legal interest, parties seeking protection under the doctrine typically document the legal interest at issue, as well as the scope, duration, and parameters of their agreement. In addition, parties often document what happens if one party decides to terminate or withdraw from the agreement. A common interest agreement that simply says that parties are co-litigants (or expect to be co-litigants) and want to share information may not be enough to protect the privilege. See Ambac , 27 N.Y.3d at n.4 (holding that “the exchanged communication must relate to <“ongoing or reasonably anticipated” litigation> , in order for the common interest exception to apply”).

There are times when a party to a contract wants to be excused from the obligations set forth in their agreement. Under New York, the circumstances under which a court will excuse a party from performance are limited, namely, where there is an intervening event that was both unforeseeable and destroyed either the subject matter of the contract or the means by which the parties could perform thereunder. Since the circumstances in which a contract will be deemed impossible to perform are limited, defendants (those accused of breaching a contract) asserting the “doctrine of impossibility,” rarely succeed in defeating a motion to dismiss. The Doctrine of Impossibility “ he excuse of impossibility of performance is limited to the destruction of the means of performance by an act of God, vis major, or by law.” Kel Kim Corp. v. Central Markets , 70 N.Y.2d 900 (1987). Thus, if one party to the contract cannot perform due to an event that the parties could not have foreseen when negotiating their contract, the other party cannot recover for breach of contract. 407 E. 61st Garage v. Savoy Fifth Ave. Corp. , 23 N.Y.2d 275, 282 (1968). In Kel Kim , the defendant (Kel Kim) defaulted on a lease for a roller-skating rink it operated due to its inability to maintain adequate insurance coverage, as required by the terms of the lease. Kel Kim sought a declaratory judgment that it should be excused from the insurance obligation because performance had been rendered impossible by the then liability insurance crisis sweeping the nation. The motion court granted summary judgment against Kel Kim, and the Third Department affirmed. The Court of Appeals affirmed the Third Department’s ruling, holding that the impossibility doctrine did not excuse Kel Kim’s failure to perform. The Court explained that the doctrine is “applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.” Thus, held the Court, the defense applies “only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” The Court found that Kel Kim could not avail itself of the doctrine because its “inability to procure and maintain requisite coverage could have been foreseen and guarded against when it specifically undertook that obligation in the lease.” After Kel Kim , New York courts have considered several factors to determine whether the impossibility doctrine is a viable defense, including “the foreseeability of the event occurring, the fault of the nonperforming party in causing or not providing protection against the event occurring, the severity of harm, and other circumstances affecting the just allocation of the risk.” D & A Structural Contractors v. Unger , 25 Misc. 3d 1211(A) (Sup. Ct. Nassau Co. 2009). One factor not considered is the economic or financial hardship of the non-performing party. Thus, where the impossibility or impractability of performance is due solely to financial or economic hardship, even where such hardship results in the party’s insolvency or bankruptcy, the courts will not excuse performance of the contract. Sassower v. Blumenfeld , 24 Misc. 3d 843, 846-847 (Sup. Ct. Nassau County 2009) (performance of a contract is not excused where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy); Maple Farms Inc. v. City School Dist. , 76 Misc .2d 1080, 1083 (Sup. Ct. Chemung County 1974). On July 30, 2018, Justice Sherwood of the Supreme Court, New York County, Commercial Division rejected an impossibility defense to a breach of contract claim based on a change in the market for taxi medallions ( i.e. , a change in economic conditions). Capital One Equip. v. Deus , 2018 N.Y. Slip Op. 31819(U) ( here ). Capital One Equipment v. Deus Background In February 2013, defendants Augustin v. Deus and Adeline Deus (“Defendants”) secured a $422,000.00 loan from N.A.A. Funding Inc. (“NAA”). The loan was evidenced by a promissory note (“Note”), as well as a loan agreement and a security agreement. Upon closing the loan, NAA assigned a 100% participation interest in the Note to Plaintiff, Capital One Taxi Medallion Finance (“Plaintiff” or “COTMF”). As a result, COTMF acquired all the rights and remedies attendant to the loan. The loan was to mature in March 2016, at which time all outstanding amounts were due in full. On the maturity date, Defendants defaulted on the Note. COTMF notified Defendants in July 2017, that all amounts outstanding were immediately due. As of September 2017, Defendants had made partial post-maturity payments of $130,314.62, leaving a claimed balance of $402,343.14 in principal and interest due and owing to COTMF. Plaintiff moved for summary judgment in lieu of complaint pursuant to CPLR § 3213. (CPLR § 3213 provides that “when an action is based upon an instrument for the payment of money only or upon any judgment, the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint.”) In opposing the motion, Defendants claimed, among other things, impracticability or impossibility of performance due to the financial impact of ride sharing companies, such as Uber and Lyft, on the medallion and taxi industry and, in particular, the financial impact of those companies on Defendants’ ability to pay back the Note. The Court’s Ruling The Court granted the motion for summary judgment. In doing so, the Court agreed with the Plaintiff that “the impossibility defense … only excuses a party’s contractual performance where there was been destruction or obstruction by God, a superior force, or by law. It does not extend to situations where performance has become more difficult or expensive due to economic conditions.” In granting the motion, the Court explained: Defendants base the defense of impossibility upon the idea that, due to the economic change on the medallion and taxi industry of New York by ride sharing applications like Uber and Lyft, there is an impossible hurdle for the defendants to overcome, making the repayment of the loan impossible. Since the defendants rely upon an argument of economic impracticability of repaying the loan, the standard for impossibility is not met. Takeaway Once the parties to a contract have agreed upon the terms and conditions that govern their performance, they must perform their obligations or respond in damages for their failure to do so, even when unforeseen circumstances make performance impracticable or impossible. While defenses such as impossibility of performance have been recognized by the courts, they have, nevertheless, been applied narrowly, due in part to the recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances. Kel Kim Corp. , 70 N.Y.2d at 902. Thus, impossibility will excuse a party’s performance only where “the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible.” Id .  “The impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.” Id . Capital One Equipment is an example of the judicial reluctance to interfere with the parties’ allocation of risks, especially where the reason proffered for such reallocation is based solely on economic hardship.