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Last month, former Dewey & LeBoeuf, LLP (“Dewey”) executives agreed to a settlement with the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) to pay civil penalties in connection with their roles in a $150 million fraudulent bond offering by the now defunct international law firm. The SEC claimed that the executives used accounting tricks when the firm needed money to weather the economic recession and steep costs resulting from the merger between the predecessor firms that made up Dewey.  Fearful that declining revenue might cause its bank lenders to cut off access to the firm’s credit lines, Dewey’s executives combed through the firm’s financial statements and devised ways to artificially inflate income and distort financial performance.  Dewey then resorted to the bond markets to raise significant amounts of cash through a private offering that seized upon the phony financial statements. Former Dewey & LeBoeuf Leaders Face Civil Penalties In September, the SEC announced ( here ) that a federal district court entered judgments on consent against Francis Canellas (“Canellas”), Thomas Mullikin (“Mullikin”), and Steven H. Davis (“Davis”), former executives of the firm, in connection with their roles in the fraudulent bond offering by the now defunct law firm. In its complaint ( here ), filed in the Southern District of New York on March 6, 2014, the SEC alleged that Dewey’s 2010 bond offering fraudulently relied on the firm’s materially misstated financial results for 2008 and 2009, which were incorporated into the private placement memorandum for the offering and provided to investors. ( See also the SEC press release discussing the charges, here .) The SEC alleged that Canellas, Dewey’s then-director of finance, along with Dewey’s former chief financial officer, orchestrated a scheme to falsify Dewey’s financial statements and provide the false financial statements to investors. The Commission also alleged that they instructed Mullikin, Dewey’s then-controller, and others in the firm’s finance department, to carry out the scheme. Davis, the firm’s then-chairman, who was aware of the fraudulent adjustments, made key decisions concerning the offering, including approving the offering and signing off on the private placement memorandum. Canellas consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) and requiring him to pay $43,178.82 in disgorgement and prejudgment interest. Mullikin consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act and the Exchange Act and requiring him to pay $8,635.78 in disgorgement and prejudgment interest. Davis consented to the entry of a judgment permanently enjoining him from violating the antifraud provisions of the Securities Act and the Exchange Act, prohibiting him from acting as an officer or director of a public company, and requiring him to pay $130,000 in a civil penalty. The settlements resolve completely the cases against Canellas, Mullikin, and Davis. Jury Deadlocked on Charges of Fraud and Larceny In October 2015, a Manhattan jury found itself deadlocked on charges of fraud and larceny brought against Davis, Stephen DiCarmine (“DiCarmine”) and Joel Sanders (“Sanders”), the latter two being executive directors of the firm. The three were accused of conspiring to manipulate Dewey’s financial statements in an attempt to defraud the firm’s lenders and insurance companies during the financial crisis. Both Canellas and Mullikin had plea agreements in effect in exchange for their cooperation with the government. Government Drops Charges in Exchange for Suspension and Ban In 2016, Davis reached a deferred prosecution agreement, which included not practicing law in New York State for a period of five years as well as a lifetime ban on practicing before the Commission. In exchange for successfully completing that agreement, the government agreed to drop the charges. Retrial of DiCarmine and Sanders Leads Sanders to Appeal In 2017, DiCarmine and Sanders were retried together. Though a Manhattan jury acquitted DiCarmine, it found Sanders guilty of securities fraud, a scheme to defraud, and conspiracy. He was sentenced to 750 hours of community service and ordered to pay a fine of $1 million. According to news reports, Sanders was appealing the verdict. On April 18, 2018, a federal court entered judgments against DiCarmine and Sanders in an SEC enforcement action arising from their roles in the fraudulent bond offering discussed above. ( See SEC press release, here .) DiCarmine consented to the entry of a final judgment permanently enjoining him from violating the Securities Act and requiring him to pay a civil monetary penalty of $35,000. Sanders consented to the entry of a judgment permanently enjoining him from violating the Securities Act and the Securities Exchange Act, prohibiting him from acting as an officer or director of a public company, and requiring him pay money in disgorgement, plus prejudgment interest, and a civil penalty to be determined by the court at a later date.

In the prior Blog article GET RID OF A STALE MORTGAGE BY BRINGING AN ACTION UNDER RPAPL 1501(4) , we discussed provisions of New York’s Real Property Actions and Proceedings Law that permit a mortgagor to remove, of record, the lien of a stale mortgage on real property. New York’s Real Property Law contain a similar provision that permits the court to cancel certain recorded instruments that are clouds on title but were not recordable or were not required to be recorded.  Thus, RPL §329 provides: An owner of real property or of any undivided part thereof or interest therein or an owner of rent to accrue from a tenancy or subtenancy thereof, may maintain an action to have any recorded instrument in writing relating to such real property or interest therein, other than those required by law to be recorded, or any recorded assignment of rent to accrue from a tenancy or subtenancy of such property or interest therein declared void or invalid, or to have the same canceled of record as to said real property, or his undivided part thereof or interest therein, or as to the rent to accrue therefrom belonging to him. It is not uncommon for a County Clerk to accept for recording, an instrument that should not be recorded because “the Clerk has a statutory duty that is ministerial in nature to record a written conveyance if it is duly acknowledged and accompanied by the proper fee ccordingly, the Clerk does not have the authority to refuse to record a conveyance which satisfies the narrowly-drawn prerequisites set forth in the recording statute.”  Merscorp, Inc. v. Romaine , 24 A.D.3d 673 (2 nd Dep’t 2005) (citations omitted), affirmed , 8 N.Y.3d 90 (2006). For example, in Newpar Estates, Inc. v. Barilla , 4 A.D.2d 186 (1 st Dep’t 1957), the Court found that plaintiff’s complaint stated a cause of action under RPL §329.  The complaint in Newpar alleged that a contract containing a “right of first refusal” on the sale of real property, which, by agreement was not supposed to be recorded and was not in “recordable” form because it was not properly acknowledged, was nonetheless recorded  The Newpar defendant “procured the inclusion of the contract in the record by attaching it to an assignment and reassignment of the third mortgage and recording the assignment and reassignment.”  Newpar , 4 A.D.2d at 190.  The Newpar Court found that, by recording the contract, defendant “converted his ‘personal right’ against the plaintiff into an equity which he may assert against any subsequent purchaser.”  “Since the defendant would be entitled to specific performance of his right of first refusal as against the plaintiff, a purchaser with notice of the defendant’s rights would likewise be subject to the same equity (citations omitted).” On October 24, 2018, the Supreme Court of the State of New York, Appellate Division, Second Department, decided Silverberg v. Bank of New York Mellon , an action brought under RPL §329.  The plaintiff in Silverberg was the defendant in a mortgage foreclosure action commenced in 2008 by Bank of New York (the “Foreclosure Action”).  In 2011, the Second Department in the Foreclosure Action , held that Bank of New York did not have standing to bring the Foreclosure Action “because its purported assignor…MERS…, the nominee and mortgagee of record for the underlying mortgage instruments, was not a lawful holder or assignee of the note and, therefore, did not have the authority to assign the underlying note to the Bank of New York.” After the decision in the Foreclosure Action, the Silverbergs commenced the subject action “to cancel of record, inter alia, two 2008 assignments of mortgage from MERS to the Bank of New York and to declare them void and invalid.”  Supreme court granted defendants’ motion to dismiss the complaint pursuant to CPLR § 3211(a)(1) “determining, inter alia, that the lacked standing to challenge the validity of the assignments of mortgage because they were neither parties to the mortgage assignments nor third-party beneficiaries of the assignments.” In reversing supreme court, the Silverberg Appellate Division found that, as owners of the property subject to the assignments, the Silverbergs “have standing under Real Property Law § 329 to challenge the recorded assignments and seek to have them removed as a cloud on their title (citations omitted)”.  The Second Department found that supreme court erred in relying on principals of contract law to resolve the issue of standing when as “an owner of real property,” the Silverbergs were expressly conferred standing by RPL §329. Because the assignments in question were found to be invalid and otherwise were a cloud on the Silverbergs’ title to their property, RPL §329 permitted the assignments to be removed of record.

In today’s business environment, it is not uncommon for departing employees to sign a separation or severance agreement that includes a bar from bringing “any and all” claims related to their employment. The enforceability of such pre-filing releases has frequently been the basis for motions to dismiss by defendant companies in actions arising under the False Claims Act (“FCA”). The FCA is silent on the issue. Last month, a district court judge sitting in the United States District Court for the Eastern District of Pennsylvania addressed the issue, holding that pre-filing releases are unenforceable, as a matter of public policy, where “the Government did not have sufficient knowledge of the Relators’ allegations prior to the signing of Relators’ releases.” United States ex rel. Susan Class et al., v. Bayada Home Health Care Inc. , No. 2:16-cv-00680 (E.D. Pa. Sept. 24, 2018). The Relators, former employees of Bayada Home Health Care Inc. (“Bayada”), a home healthcare service provider, alleged that Bayada falsely billed Medicare for home health services provided to patients that it knew were not “homebound” in violation of Medicare’s home healthcare reimbursement policy. The Relators filed their original complaint under seal on February 11, 2016. After numerous extensions, the Government declined to intervene. The Relators filed an amended complaint almost five (5) months later, claiming violations 31 U.S.C. § 3729(a)(1). Bayada moved to dismiss the action, claiming, among other things, that the Relators lacked standing to bring their FCA claims because they signed valid and enforceable separation agreements that prohibited them from bringing “any and all” claims related to their employment against Bayada (“Separation Agreements”). Bayada argued that because the Relators lacked standing to bring the claims, the Court lacked subject matter jurisdiction to consider the matter. The Relators opposed the motion, arguing that they had standing to bring their claims because: (1) the Separation Agreements did not contemplate FCA claims; and (2) public policy prohibited the enforcement of the Separation Agreements. The Court denied the motion, holding that although the Separation Agreements contemplated barring FCA claims, public policy did “not favor enforcement of the agreements.” The Court noted that “ lthough the Third Circuit has not opined on the enforceability of pre-filing releases that bar subsequent qui tam claims,” there was an “emerging agreement” among the courts in other circuits ( e.g. , the First, Fourth, Ninth, and Tenth Circuits), “that such releases bar FCA claims only if: “(1) the release can fairly be interpreted to encompass qui tam claims and (2) public policy does not otherwise outweigh enforcement of that release.” On the first prong, the Court concluded that the pre-filing release language was “expansive enough to include FCA claims.”  In reaching this conclusion, the Court noted that “the Third Circuit has found that explicit mention of a statute is not a prerequisite to enforceability of a release and that broad release language is adequate.” This authority was in-line with the courts in other circuits that had found release language similar to the Separation Agreements “to incorporate FCA claims.” On the second prong, the Court concluded that public policy outweighed enforcement of the pre-filing release. The Court explained that “the public policy recognized in FCA qui tam cases is to ‘set up incentives to supplement government enforcement’ of the Act by ‘encourag insiders privy to fraud on the government to blow the whistle on the crime.’” (Citation omitted.) However, “ f the release will be enforced, a party will have no right or reason to file a qui tam claim.”  (Citation and internal quotation marks omitted). Agreeing with the Fourth, Ninth, and Tenth Circuits, the Court concluded that “where the government has knowledge of the claims before the relator files the qui tam lawsuit, public policy weighs in favor of enforcing a pre-filing release of claims.” (Orig’l emphasis.) However, where the government lacks knowledge of the relator’s claims before he/she files suit, a pre-filing release is unenforceable. Applying the second prong to the facts of the case, the Court held that the pre-filing release included in the Separation Agreements was unenforceable because the government did not have knowledge of the claims prior to the filing of the lawsuit. The Court rejected Bayada’s argument that the government knew of the qui tam allegations because the initial complaint alleged that “ rior to filing this Complaint, Relators voluntarily disclosed to the Government the information upon which this action is based.” In doing so, the Court reasoned that “receiving a draft complaint ‘shortly before’ the filing of the Complaint is starkly different from the situations , where the Government conducted significant internal investigations or audits in advance of any litigation.” The Court went to say that because the government’s knowledge arose as a consequence “of the filing of the qui tam complaint,” the case was different from those where the government “conducted its investigation” in advance “of the filing of the qui tam complaint.” In fact, observed the Court, “the Government appears to have initiated and performed its investigation only while the case has been pending before me, evidenced by the multiple extension requests that have extended the seal for approximately one year.” The Court distinguished the case before it from other cases “because the Government did not learn of Relators’ fraud claims until after they signed their Separation Agreements and released their claims.” This fact noted the Court, “places this case in contrast” to the cases “where the relators notified the Government of alleged fraud before signing the releases.” Thus, “ nlike those cases, the Government here learned of the claims when it was provided with the draft complaint, which was after the releases had been signed.” Quoting a decision from the Eastern District of Michigan, the Court said: “ hile asserts that the government need only be made aware of the allegations prior to the filing of the qui tam complaint, it is clear that the policy interests . . . would not be served if the government’s knowledge did not precede the execution of the release.” (Quoting United States ex rel. McNulty v. Reddy Ice Holdings, Inc. , 835 F. Supp. 2d 341, 360 (E.D. Mich. 2011).) Thus, concluded the Court, “ here the Government does not have knowledge of the claims that form the basis for the qui tam complaint before the relators signed the release, enforcement of the release ‘interferes with and frustrates the FCA’s goals of incentivizing individuals to reveal fraudulent conduct to the government.’” Id . A copy of the court’s opinion can be found here . Takeaway The enforceability of employment agreements containing a pre-filing release of claims in qui tam litigation has been the subject of a growing number of judicial decisions. As the Bayada court noted, there is an “emerging agreement” among a number of circuits to dispense with the automatic rejection of qui tam claims where the government has declined to intervene and the former employee, who signed a pre-filing release, decides to continue litigating the case. In rejecting the reflexive dismissal, these courts, including the Bayada court, apply a balancing test to determine whether the government has sufficient knowledge of the qui tam allegations prior to the filing of the action. These courts reason that when the government does not know of the alleged qui tam claims, public policy encourages the use of whistleblower lawsuits to supplement federal enforcement. In that circumstance, public policy favors non-enforcement of the pre-filing release. However, where the government is aware of the claims prior to the filing of the qui tam action, such that it has been conducting its own investigation, there is little to no public interest in the lawsuit, and thus public policy supports the enforcement of employment agreements and settlements with a pre-filing release. As the Bayada court observed (quoting with approval the decision of the Ninth Circuit in United States ex rel. Green v. Northrop Corp. , 59 F.3d 953 (9th Cir. 1995)), enforcement of a pre-filing release when the government is without knowledge of the qui tam allegations “would dilute significantly the incentives that Congress attempted to augment in amending the .” Such a result would “impair significantly the operation of the FCA.…” Since Congress intended to incentivize individuals to come forward with information about a potential fraud on the government, enforcing a pre-filing release “when the government has neither been informed of, nor consented to, the release would undermine this incentive, and therefore, frustrate one of the central objectives of the .”

In March, this Blog wrote ( here ) about Hyuncheol Hwang v. Mirae Asset Sec. (USA) Inc. , 2018 N.Y. Slip Op. 30368(U) ( here ). Hwang involved an employment dispute in which Hyuncheol Hwang (“Hwang”) sought to stay the arbitration of his claims on the grounds that his employment agreement with Mirae Asset Securities (USA) Inc. (“Mirae”), a broker-dealer firm registered with FINRA, contained a forum selection clause directing the parties to litigate their disputes under the agreement in a New York court, notwithstanding his later signed Form U-4, which contained a mandatory arbitration provision. The trial court granted the motion to stay arbitration, finding that the evidence presented “demonstrate that the parties intended to be bound by the forum selection clause in the employment agreement.” The court noted that “Mirae present no evidence to show that the parties intended the arbitration clause in the U4 to supplant the forum selection clause in the employment agreement.” On October 2, 2018, the Appellate Division, First Department, “unanimously reversed” the trial court’s decision, holding that because the U-4 Form “encompasses the same employment-related disputes as were addressed in the employment agreement,” the “forum selection clause” in the employment agreement “was effectively extinguished” by the U-4 Form. A copy of the decision can be found here . In so holding, the Court noted that its decision was governed by state contract law principles, even though federal law and FINRA rules permeated the questions presented on appeal. Slip Op. at *1 (stating, “This dispute is governed by state contract law principles”) (citing Credit Suisse First Boston Corp. v. Pitofsky , 4 N.Y.3d 149, 158 n.2 (2005)). Under New York law, where a “subsequent contract regarding the same matter” exists, it “will supersede the prior contract.” Id . (citing Applied Energetics, Inc. v. NewOak Capital Mkts., LLC , 645 F.3d 522, 526 (2d Cir. 2011)). Though not discussed by the First Department, the courts in New York look to the parties’ intention to determine whether a subsequent agreement involving the same subject matter supersedes their earlier agreement: “where the parties have clearly expressed or manifested their intention that a subsequent agreement supersede or substitute for an old agreement, the subsequent agreement extinguishes the old one and the remedy for any breach thereof is to sue on the superseding agreement.” Northville Indus. Corp. v. Fort Neck Oil Terms. Corp. , 100 A.D.2d 865, 867 (2d Dept. 1984), aff’d , 64 N.Y.2d 930 (1985); see also Citigifts, Inc. v. Pechnik , 67 N.Y.2d 774, 775 (1986); Madey v. Carman , 51 A.D.3d 985, 986 (2d Dept. 2008). As the First Department noted, “ he determination whether a subsequent agreement is superseding is fact-driven.” Slip Op. at *1 (citing Blumenfeld Dev. Group, Ltd v. Forest City Ratner Cos., LLC , 50 Misc. 3d 1221 , 2016 N.Y. Slip Op. 50188 , *6 (Sup. Ct., Nassau County 2016). Thus, courts consider the following factors: (1) whether there is an integration and merger clause that explicitly indicates that the prior provision is superseded; (2) whether the two provisions have the same general purpose or address the same general rights; and (3) whether the two provisions can coexist or work in tandem. Long Side Ventures, LLC v. Adarna Energy Corp. , 2014 WL 4746026, at *6 (S.D.N.Y. 2014) (internal quotation marks and citation omitted). However, “the fact that a subsequent contract contains provisions which are of the same subject matter as those in an earlier agreement is not sufficient to supersede the entire contract; rather, a subsequent agreement supersedes only those terms of the earlier contract that are of the same subject matter.” CreditSights Inc. v. Ciasullo , 2007 WL 943352, at *6 (S.D.N.Y. 2007); see also Globe Food Servs. Corp. v. Consolidated Edison Co. of N.Y. , 184 A.D.2d 278, 279 (1st Dept. 1992). Takeaway In the original takeaway about Hwang , this Blog said: “ Hwang … highlights the point that courts use state-law principles of contract interpretation to decide whether a contractual obligation to arbitrate exists.”  The First Department’s decision reinforces this point.  The First Department’s ruling also highlights the point that where the parties’ intent is clear, courts will enforce it.

Sir Walter Scott’s original line is infinitely better (“O, what a tangled web we weave when first we practise to deceive!”) than this Blog title, which, nonetheless helps to illustrate the instant topic – Courts will not assist litigants in enforcing illegal contracts. Stone v. Freeman , 298 N.Y. 268 (1948), is a case involving commissions for the sale of clothing.  The Stone plaintiff was a broker who sued for “his commissions earned in arranging a sale by defendant, who is a of clothing.”  The parties agreed that defendant vendor would pay plaintiff broker “commissions” based on broker’s agreement that those “commissions” would be divided with the purchaser’s buying agent.  Some, but not all, of the “commissions” were paid to broker, but broker failed to pay all the agreed upon sums to buying agent.  Vendor counterclaimed for the return of the portion of the commissions that, pursuant to the parties’ agreement, were to be, but were not, delivered to the purchaser’s buying agent.  The Stone trial and appellate courts both held that vendor’s counterclaims were valid, and that he was entitled to the return of that portion of broker’s commission that was to be paid to purchasing agent. The Court of Appeals in Stone reversed the two lower courts and dismissed vendor’s counterclaims, finding that the agreement between broker and vendor was a conspiracy to violate a section of the Penal Law that made it a crime to pay a “commission or bonus” to a purchasing agent.  In so doing, the Court held that “ t is the settled law of this State (and probably every other State) that a party to an illegal contract cannot ask a court of law to help him carry out his illegal object, nor can such a person plead or prove in any court a case in which he, as a basis for his claim, must show forth his illegal purpose.  For no court should be required to serve as paymaster of the wages of crime, or referee between thieves .” The plaintiff in Bonilla v. Rotter , 36 A.D.3d 534 (1 st Dep’t 2007), was a suspended lawyer and defendants were lawyers that assumed Bonilla’s cases during his suspension.  Bonilla claimed that he was owed money from defendants for his work as an “investigator,” in which role Bonilla was to receive a fee for cases referred to defendants.  The Bonilla Court found that the parties’ agreement to split fees was proscribed by Judiciary Law § 491 and, accordingly, the “agreement is illegal and plaintiff is foreclosed from seeking the assistance of the courts in enforcing it .” The Court in Valenza v. Emmelle Coutier, Inc., 288 A.D.2d 114 (1 st Dep’t 2001), dismissed plaintiff’s claim for intentional infliction of emotional distress against her former employer.  In so doing, the Court recognized that plaintiff failed to report her income to the IRS because she was being paid “off-the-books,” pursuant to an “illegal contract.”  Because plaintiff’s emotional distress claim “require proof of the illegal contract cannot be enforced.” In Parpal Restaurant, Inc. v. Robert Martin Co. , 258 A.D.2d 572 (2 nd Dep’t 1999), plaintiff, a subtenant sought a permanent injunction preventing the widening of streets abutting plaintiff’s premises.  After recognizing that “no right of action can spring out of an illegal contract,” the Second Department affirmed the dismissal of plaintiff’s complaint because the affidavit of plaintiff’s president demonstrated that “as a matter of law… sublease of the subject premises was created for the purpose of improper tax avoidance the contract was illegal, preclud any right of action arising from such an unlawful undertaking .” Consistent with the authorities discussed herein, in Linchitz Practice Management, Inc., v. Daat Medical Management, LLC (October 1 7, 2018), the Second Department affirmed the dismissal of plaintiff’s complaint and, in so doing, reaffirmed the principle that illegal contracts will not be enforced.   The plaintiff in Linchitz sold its assets and its interest in its lease to defendant.  Defendant delivered a promissory note to plaintiff for part of the purchase price. The Linchitz plaintiff commenced action to recover the balance due on the note and for costs and attorney’s fees pursuant to the terms of the note.  Supreme court denied plaintiff’s motion for summary judgment on its first and second causes of action and granted to plaintiff summary judgment dismissing defendant’s counterclaims.  However, upon “searching the record” supreme court awarded defendant summary judgment dismissing plaintiff’s first and second cause of action. The Second Department, in affirming supreme court, found, as did supreme court, that “the evidence submitted by the parties in connection with the motion for summary judgment established, prima facie, that the agreement and promissory note were a pretext for an unlawful fee-splitting arrangement in violation of the Education Law because they circumvented New York’s prohibition on physicians splitting fees with nonphysicians .” No, this is not a Shakespeare quote.

The distinction between common-law indemnification and contribution is important, though its application is often difficult to navigate. Glaser v. Fortunoff , 71 N.Y.2d 643, 646 (1988) (noting, “the distinction is … critical,” although “the proper characterization of third-party claims … often cause confusion.”). Generally speaking, indemnity and contribution sort out the degree of culpability of multiple defendants and their responsibility for the payment of damages to the plaintiff. 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). 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.” Id . 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 foms the basis for the liability arises from the principle that every one 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 a party is held liable at least partially because of its own negligence, contribution against other culpable tort-feasors is the only available remedy.” Glaser , 71 N.Y.2d at 646.  “ n contribution, the tort-feasors responsible for plaintiffs loss share liability for it …. heir common liability to plaintiff is apportioned and each tort-feasor pays his ratable part of the loss.” Mas , 75 N.Y.2d at 689-690 (internal citation omitted). Under Article 14 of the Civil Practice Law and Rules (“CPLR”), “ he ‘critical requirement’ for apportionment by contribution ... is that the breach of duty by the contributing party must have had a part in causing or augmenting the injury for which contribution is sought.” Raquet , 90 N.Y.2d at 183 (citations omitted). Contribution can be sought in a separate action or by asserting a cross-claim, counterclaim or third-party claim in a pending action. Consequently, if a defendant is found liable, he/she may seek contribution from a third party who is not a named party to the original action. General Obligations Law (“GOL”) § 15-108 governs what happens when one of several tortfeasors obtains a release from liability. A settlement, or release, by one tortfeasor does not relieve the others from liability, but it does reduce the amount that can be recovered from them “by (1) the amount stipulated by the settlement, (2) the amount of consideration paid for it, or (3) the released tortfeasor’s equitable share of the damages, whichever is greatest.” Gonzales v. Armac Indus. , 81 N.Y.2d 1, 6 (1993) (citing GOL§ 15-108 (a)). “The settling tortfeasor is relieved from liability to any other person for contribution but, in exchange, is not entitled to obtain contribution from any other tortfeasor. Id . (citing GOL § 15-108 (b), (c)). “Thus, the statute establishes a quid pro quo arrangement: the settlor limits its liability but in exchange forfeits any right to contribution.” Id . Any payment or settlement prior to judgment is a voluntary payment; however, a tortfeasor who settles after judgment is not a volunteer. Id . In addition, the bar on contribution under GOL §15-108 can be waived as a part of the settlement. See Mitchell v. New York Hosp. , 61 NY 2d 208, 216-17 (1984) (holding contribution was not barred where settlement was subject to stipulation that settling defendant preserved the right to contribution against third-party defendants). Recently, some of these principles were considered by Justice Marcy Friedman of the Supreme Court, New York County, Commercial Division, in Foremost Contr. & Bldg., LLC v Go Cat Go, LLC , 2018 N.Y. Slip Op. 32381(U) ( here ). Foremost arose out of the construction of a condominium project (the “Project”) located in New York City (the “Property”). Foremost Contracting & Building, LLC (“Foremost”), a contractor and the plaintiff in the main action, brought suit against the defendants/third-party plaintiffs Go Cat Go, LLC (“Go Cat Go”), 87 Leonard Development LLC (“87 Leonard Development”), Anthony C. Marano, and Anthony M. Marano (collectively, the “Developer Defendants”) to recover its unpaid fees for the Project. Foremost claimed unjust enrichment, breach of trust and creditor fraud against the Developer Defendants, and breach of contract against Go Cat Go and 87 Leonard Development, based upon allegations that Go Cat Go failed to pay the amounts due and owing under the agreement between them, and that 87 Leonard Development was a third-party beneficiary of the contract as the record owner of the Property. In the third-party action, the Developer Defendants sought common law indemnification and common law contribution from the third-party defendant, German American Capital Corporation (“German American Capital”), a lender of funds for the Project. German American Capital moved to dismiss the amended third-party complaint in its entirety on the grounds that the Developer Defendants’ claims were barred by res judicata and, in the alternative, failed to state a cause of action. The Court granted the motion. First, the Court rejected the claim for common-law indemnification, noting that there was no authority supporting the argument advanced by the Developer Defendants – i.e. , that a lender is obligated by statute or common law to compensate a contractor for its work after a lender forecloses on a loan made to finance a construction project. Second, the Court found that the third-party defendants failed to allege a cognizable claim for contribution because Foremost did not allege “a viable tort” against the Developer Defendants. In opposing German American Capital’s motion, the developer defendants argued that Foremost pleaded tort causes of action against them for breach of trust, defrauding creditors, and breach of fiduciary duty, in connection with the sale of the Property. As the developer defendants acknowledged at the oral argument, Foremost’s pleading was predicated on the allegation that 87 Leonard Development was the owner of the premises at the time the Property was sold. This allegation was, however, based on a mistake of fact as to the ownership, as it was German American Capital that owned and sold the Property. Significantly also, the amended third-party complaint fails to plead a viable tort against German American Capital. As noted above, the decision of the prior action against German American Capital held that the foreclosure was not wrongful. Takeaway In contribution, the loss is allocated among tortfeasors by requiring them to pay a proportionate share of the loss to one who has discharged their joint liability, while in indemnity the party held legally liable shifts the entire loss to another. Foremost makes clear that to avail oneself of either cause of action, the facts must support the claim.  While this point seems obvious, it was enough to warrant dismissal of the third-party complaint by the Foremost court.

Courts do not hesitate to dismiss fraud claims when they are merely contract claims “dressed in the garb of a fraud count.”  Songbird Jet Ltd., Inc. v. Amax Inc. , 581 F. Supp. 912, 924 (S.D.N.Y. 1984).  “It is well settled that a cause of action for fraud does not arise, where the only fraud alleged relates to a contracting party’s alleged intent to breach a contractual obligation.”  ( Caniglia v. Chicago Tribune-New York News Syndicate Inc., 204 A.D.2d 233, 34 (1 st Dep’t 1994) (citation omitted).)  “ fraud claim that arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements is subject to dismissal as redundant of the contract claim.  Thus, where a fraud claim was supported by allegations that the defendants had misrepresented…their intentions with respect to the manner in which they would perform their contractual duties, we dismissed the fraud claim as duplicative of plaintiffs’ contract claim because the fraud claim was based on the same facts that underlie the contract cause of action, was not collateral to the contract, and did not seek damages that would not be recoverable under a contract measure of damages.”  ( Cronos Group Limited v. XCOMIP, LLC , 156 A.D.3d 54, 63 (1 st Dep’t 2017) (citations, internal quotation marks and internal brackets omitted).) Justice Sherwood (New York County—Commercial Division) addressed these issues in his September 21, 2018 decision in Bryan v. Slothower .  The individual defendant (Slothower) in Bryan was plaintiff’s investment advisor at Merrill Lynch.  Slothower left Merrill and started his own firm, corporate defendant Battery Private, Inc.  Slothower forged Bryan’s name on, among other documents, an account application with a brokerage firm and an investment advisory agreement with Battery.  Bryan sent money to Slothower to invest and, in turn, Slothower reassured Bryan that his investments were doing well.  To support these reassurances, Slothower would, from time-to-time, send Bryan “dividend” payments, some of which payments came from Slothower’s own funds. At some point, Slothower was instructed to sell Bryan’s stock position in Alibaba.  Slothower responded by advising that he never purchased Alibaba stock for Bryan and, instead, purchased options “which did not pan out” and that all of Bryan’s money was gone. To resolve their dispute, Bryan and Slothower entered into a “Settlement Agreement” pursuant to which Slothower was to pay Bryan $775,000 two months later.  Slothower defaulted under the Settlement Agreement by failing to make the payment.  As a result, Bryan sued Slothower and Battery and asserted, among other causes of action against them: (1) fraudulent inducement as to the Settlement Agreement (to the extent that Slothower never intended to make the required settlement payment); (2) fraud against Slothower and Battery for “untrue statements of material fact or omissions;” and, (3) breach of contract (to the extent that Slothower failed to make the required settlement payment). Bryan sought to void the Settlement Agreement because Slothower misrepresented his intention to make the settlement payment, that he forged Bryan’s signatures and that at the time the settlement was reached, Bryan was unaware of Slothower’s misrepresentations and omissions, including that he forged Bryan’s signature on several documents. In dismissing the fraudulent inducement claim, Justice Sherwood relied on a line of authorities holding that “ n a fraudulent inducement claim, the alleged misrepresentation should be one of then-present fact, which would be extraneous to the contract and involve a duty separate from or in addition to that imposed by the contract and not merely a misrepresented intent to perform”  (citations, internal quotation marks and ellipses omitted).  In order to sustain a fraud claim, “a mere misrepresentation of an intention to perform under the contract is insufficient” and “a present intent to deceive must be alleged” (citations, internal quotation marks and brackets omitted). Bryan relied on White v. Davidson, 150 A.D.3d 610 (1 st Dep’t 2017) , to support his claim that a “preconceived intent not to perform is sufficient to sustain the fraud in the inducement claim.” white v. davidson.> white v. davidson.>  In White , the First Department found that several of the misrepresentations that defendant promised or claimed in conjunction with the parties entering into an exclusive music recording agreement (i.e., that defendant:  (1) was highly successful and previously successfully represented famous recording artists; (2) would promote White’s music to radio broadcasting venues; (3) would organize marketing events to promote plaintiff’s single; (4) would organize a radio tour; and, (5) would promote the re-release of the single around Valentine’s Day 2015) were collateral to the underlying recording contract entered into by the parties.  White , 150 A.D.3d at 611.  As to item no. 1, the White Court found that the representations were neither opinion nor puffery, but were specific misrepresentations concerning defendants’ experience in promoting performing artists.  White , 150 A.D.3d at 611.  As to the remaining four items, the White Court found that “the complaint adequately alleges that defendants made specific representations concerning the actions that they would undertake to promote plaintiff's single in order to induce him to self-fund their promotional campaign while never intending to perform, and were, in effect, engaging in a Ponzi scheme.”  White , 150 A.D.3d at 611. In Bryan , Justice Sherwood found that, unlike the situation in White , the subject representation regarding the payment of settlement funds was not collateral to the Settlement Agreement but was an actual term of the Settlement Agreement.

A shareholder’s derivative action is a lawsuit “brought in the right of a … corporation to procure a judgment in its favor, by a holder of shares or of voting trust certificates of the corporation or of a beneficial interest in such shares or certificates.” Marx v. Akers , 88 N.Y.2d 189, 193 (1996) (quoting Business Corporation Law § 626 (a)). Derivative claims against corporate officers and directors belong to the corporation itself. Auerbach v. Bennett , 47 N.Y.2d 619, 631 (1979).  As the New York Court of Appeals explained long ago: The remedy sought is for wrong done to the corporation; the primary cause of action belongs to the corporation; recovery must enure to the benefit of the corporation. The stockholder brings the action, in behalf of others similarly situated, to vindicate the corporate rights and a judgment on the merits is a binding adjudication of these rights. Isaac v. Marcus , 258 N.Y. 257, 264 (1932) (citations omitted.). See also Aronson v. Lewis , 473 A.2d 805, 811 (Del. 1984) (“The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it.”). Since a derivative action binds the corporation’s interest holders, courts require the plaintiff to demonstrate that he/she “will fairly and adequately represent the interests of the shareholders and the corporation, and that is free of adverse personal interest or animus.” Steinberg v. Steinberg , 106 Misc. 2d 720, 721 (Sup. Ct. N.Y. County 1980) (citation omitted); see also Gilbert v. Kalikow , 272 A.D.2d 63, 63 (1st Dept. 2000) (“ erivative causes of action were properly dismissed on the ground that plaintiff has failed to demonstrate that he will fairly and adequately represent the interests of the .”). This Blog previously addressed derivative standing in a post about Pokoik v. Norsel Realties , No. 5733, 2018 WL 4353859 (1st Dept. Sept. 13, 2018), a case involving the business breakup of two managing partners of a general partnership. ( Here .) In that case, the court found that there was no personal animus despite the plaintiff being very litigious and strategic about the use of litigation to gain an advantage over adversaries. Today, this Blog looks at D’Angelo v. Watner , 2018 N.Y. Slip Op. 32324(U) (Sup. Ct., N.Y. County Sept. 17, 2018) ( here ), a case involving the standing of a derivative plaintiff alleged to be an inadequate representative because of personal animus with the other member of the company. Broadly stated, D’Angelo involved the breakup of two limited liability companies (“LLCs”) that were equally owned by the plaintiff, James D’Angelo, and the defendant, Gregg Watner. Watner claimed that D’Angelo could not represent the interests of the LLCs because of the “high degree of hostility and animus between D’Angelo” and Watner. D’Angelo accused Watner of, among other things, inappropriate behavior, abandoning his duties, cutting Watner out of the business ( e.g. , locking him out of his e-mail account and preventing him from accessing the LLCs’ information), and distributing confidential information to Watner’s friends and associates, some of whom were competitors of the LLCs. According to Watner, D’Angelo’s accusations were “driven by personal animus.” The court rejected the challenge to D’Angelo’s standing. The Court noted that in the absence of extreme animus, alleged bad acts would disqualify virtually every derivative plaintiff from bringing a claim. This was especially true, said the Court, with regard to 50/50 LLC members: “To find otherwise would mean that no derivative claim could be brought on behalf of a two-member entity, except under the most civil of circumstances.” Indeed, alleging bad acts, noted the Court, “is common in a litigation.” Since Watner failed to show conduct “indicating any extreme degree of animus,” the Court found that Watner “failed to show is not an adequate member representative.” Accordingly, the Court denied Watner’s standing challenge. Takeaway As this Blog has noted previously, breaking up a business relationship is hard to do. It can be, and often is, acrimonious and/or emotional. D’Angelo shows, like the First Department’s decision in Pokoik , that the degree of acrimony alleged is important. It must be extreme. Without such conduct, no plaintiff could survive a standing challenge on personal animus grounds.

The Securities and Exchange Commission (“SEC” or “Commission”) ended the Government’s fiscal year with a flurry of proceedings and settled actions.  In addition to the settled actions against Tesla Inc. and Elon Musk, the SEC filed or settled matters against retail brokers and investment advisors for violations of the securities laws and the rules promulgated thereunder. In today’s post, this Blog looks at some of these actions. Disclosure violations : On September 29, 2018, the SEC announced ( here ) that Elon Musk (“Musk”), CEO and Chairman of Tesla Inc. (“Tesla”), and the company, agreed to settle a securities fraud charge that the SEC brought against each of them relating to Musk’s recent tweet about taking Tesla private.  The settlements, which are subject to court approval, require comprehensive corporate governance and other reforms — including Musk’s removal as Chairman of the Board — and the payment by Musk and Tesla of financial penalties. The action arose from an August 7, 2018 tweet that Musk sent to followers wherein he said that he could take Tesla private at $420 per share — a substantial premium to its trading price at the time — that funding for the transaction had been secured, and that the only remaining uncertainty was a shareholder vote. In a November 5, 2013 filing, Tesla stated that it intended to use Musk’s Twitter account as a vehicle to disseminate information about the company to the public. Since that date, Musk has repeatedly used his Twitter account to disseminate material information, such as financial guidance about the company, to the public. Over 22 million people follow Musk’s Twitter feed. The SEC alleged that, in truth, Musk knew that the potential transaction he Tweeted about was uncertain and subject to numerous contingencies.  (A copy of the SEC’s complaint can be found here .) Musk had not discussed specific deal terms, including price, with any potential financing partners, and his statements about the possible transaction lacked an adequate basis in fact.  According to the SEC, Musk’s misleading tweet caused Tesla’s stock price to increase by over six percent on August 7 and led to significant market disruption. The SEC noted that while Tesla’s Investor Relations Director responded to some inquiries about Musk’s tweet, he was not prepared to field the avalanche of questions that followed. According to the SEC, Musk “did not routinely consult with anyone at Tesla before publishing Tesla related information via his Twitter account.” In fact, the company “did not have processes in place to ensure that the information published was accurate and complete,” said the Commission. Consequently, the SEC charged Tesla with failing to maintain adequate disclosure controls and procedures. According to the SEC’s complaint against Tesla ( here ), despite notifying the market in 2013 that it intended to use Musk’s Twitter account as a means of announcing material information about Tesla and encouraging investors to review Musk’s tweets, Tesla had no disclosure controls or procedures in place to determine whether Musk’s tweets contained information required to be disclosed in Tesla’s SEC filings.  Nor did it have sufficient processes in place to ensure that Musk’s tweets were accurate or complete. Musk and Tesla agreed to settle the charges against them without admitting or denying the SEC’s allegations.  Among other relief, the settlements require: Musk to step down as Tesla’s Chairman and be replaced by an independent Chairman; Musk to be ineligible for re-election as Chairman for three years; Tesla to appoint two new independent directors to its board; Tesla to establish a new committee of independent directors and put in place additional controls and procedures to oversee Musk’s communications; and Musk and Tesla to each pay a separate $20 million penalty. The SEC will distribute the $40 million in penalties to investors harmed by the Tweet. “The total package of remedies and relief announced today are specifically designed to address the misconduct at issue by strengthening Tesla’s corporate governance and oversight in order to protect investors,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. “As a result of the settlement, Elon Musk will no longer be Chairman of Tesla, Tesla’s board will adopt important reforms —including an obligation to oversee Musk’s communications with investors—and both will pay financial penalties,” added Steven Peikin, Co-Director of the SEC’s Enforcement Division.  “The resolution is intended to prevent further market disruption and harm to Tesla’s shareholders.” < ed. note : to this blog’s knowledge, the sec action against musk marks the first enforcement action against a defendant for making false and misleading statements and omissions in a twitter account. the action sends a message to corporate officers and directors that truth, candor and accuracy of corporate communications are necessary regardless of the medium in which they are made. thus, corporate officers and directors who use social media, without the oversight, review, and scrutiny attendant to communications issued through more traditional means, risk scrutiny from the sec if their communications are alleged to be materially false and misleading. the sec’s complaint underscores this point.> ed. note: to this blog’s knowledge, the sec action against musk marks the first enforcement action against a defendant for making false and misleading statements and omissions in a twitter account. the action sends a message to corporate officers and directors that truth, candor and accuracy of corporate communications are necessary regardless of the medium in which they are made. thus, corporate officers and directors who use social media, without the oversight, review, and scrutiny attendant to communications issued through more traditional means, risk scrutiny from the sec if their communications are alleged to be materially false and misleading. the sec’s complaint underscores this point.> Trade Executions : On September 28, 2018, the SEC announced ( here ) that Credit Suisse Securities (USA) LLC (“Credit Suisse”) agreed to settle charges brought by the Commission and the New York Attorney General’s Office (“NYAG”) concerning misrepresentations and omissions made in connection with the handling of certain customer orders by the firm’s now-closed Retail Execution Services (“RES”) business.  The settlements require Credit Suisse to pay $5 million to the SEC and $5 million to the NYAG. According to the SEC ( here ), Credit Suisse created the RES desk to execute orders for other broker-dealers that handle order flow on behalf of retail investors.  Although the RES desk promoted its access to dark pool liquidity to customers, the firm executed an exceedingly minimal number of held orders – orders that must be executed immediately at the current market price – in dark pools during the period September 2011 to December 2012. The SEC found that although Credit Suisse touted “robust” and “enhanced” price improvement on orders, the RES desk’s computer code treated orders for which execution quality is required to be publicly reported differently from orders for which execution quality is not publicly reported.  From mid-2011 to March 2015, retail customers did not receive any price improvement from the RES desk on their non-reportable orders, which Credit Suisse failed to disclose.  The SEC further found that for the non-reportable orders, the RES desk disproportionately used a routing tactic that generally caused market impact and resulted in less favorable execution prices for customers, despite claiming to benefit Credit Suisse’s customers.  The use of this routing tactic provided the RES desk an opportunity to profit from its execution of the final portions of those customer orders internally. “Market makers that handle retail orders must be transparent with their customers about how orders will be executed and how the market maker will profit from their customers’ trades,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The settlement holds Credit Suisse accountable for failing to accurately disclose important information about the nature and quality of its execution of trades for retail investors.” The SEC’s order finds that Credit Suisse negligently violated Section 17(a)(2) of the Securities Act.  In addition to imposing the penalty, the SEC’s order censures Credit Suisse and requires that it cease and desist from further violations.  Credit Suisse consented to the SEC’s order without admitting or denying the findings. Suspicious Activities : On September 28, 2018, the SEC announced ( here ) that it had settled charges against clearing firm COR Clearing LLC (“COR”) for failing to report suspicious sales of penny stock shares totaling millions of dollars.  As part of the settlement, COR agreed to exit a key penny stock clearing business by significantly limiting the sale of penny stocks deposited at COR. Microcap securities, such as penny stocks, are susceptible to manipulation ( here ). Publicly-available information about microcap companies (which are typically less liquid than the larger companies) often is scarce, making it easier for fraudsters to spread false information and manipulate the price of microcap stocks. Consequently, broker-dealers are required to file Suspicious Activity Reports (“SARs”) for transactions suspected of having no lawful purpose or to involve fraud. In 2016, COR ranked second among all broker-dealers in the total dollar value of sub-$1 penny stock that it cleared, and from January 2015 to June 2016, COR cleared for sale a significant amount of penny stocks on behalf of customers of its introducing broker-dealers.  The SEC found ( here ) that approximately 193 customer accounts deposited large blocks of low-priced securities, quickly sold those securities into the market, and then withdrew the cash proceeds.  The SEC further found that in some instances the same customers engaged in this suspicious pattern with multiple securities.  According to the SEC, COR failed to file SARs with respect to a subset of the foregoing transactions and, as a result, violated the securities laws. “SAR filings by both introducing and clearing brokers, especially those who transact in the microcap space, are critically important to the regulatory and law enforcement communities,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “The penalty imposed and the limitation placed on COR’s business reflect how seriously we take the failure to file SARs in the face of numerous red flags.” Without admitting or denying the SEC’s findings, COR agreed to a settlement that requires it to not sell penny stocks deposited at COR with certain narrow exceptions and pay an $800,000 penalty.  COR also consented to a censure and to cease and desist from similar violations in the future. Fraudulent “Cherry-Picking” Scheme : On September 28, 2018, the SEC announced ( here ) that it charged Michael A. Bressman (“Bressman”), a New Jersey-based broker, with misusing his access to customers’ brokerage accounts to enrich himself and family members at the expense of his customers, many of whom entrusted him with their retirement accounts. The SEC filed fraud charges in the United States District Court for the District of Massachusetts against Bressman, alleging that he misused his access to an omnibus or “allocation” account to obtain at least $700,000 in illicit trading profits over a six-year period ending in February. In its complaint ( here ), the SEC alleged that Bressman placed trades using the allocation account and cherry-picked profitable trades, which he then transferred to his own account and the account of two family members, while placing unprofitable trades in other customers’ accounts. Cherry-picking occurs when a broker, who buys and sells securities on behalf of his brokerage customers, defrauds those customers by purchasing stock and then waiting to see whether the price of the stock goes up, or down, before allocating the trade. If the stock goes up, the broker keeps the trade for himself/herself or a set of “favored” accounts. If the stock goes down, the broker puts the trades into other, disfavored customer accounts. In other words, the broker “cherry-picks” the profitable trades for himself/herself or certain favored accounts, while giving unprofitable trades to his/her other customers. In a parallel action, the U.S. Attorney’s Office for the District of Massachusetts announced ( here ) criminal charges against Bressman. The SEC charged Bressman with violating various securities laws and rules, including Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act and Ruled 10b-5(a) and 10b-5(c) thereunder. The SEC is seeking return of allegedly ill-gotten gains, plus interest, penalties and a permanent injunction. False ADV and Website : On September 28, 2018, the SEC announced ( here ) that it filed charges against an Australia-based investment adviser Goldsky Asset Management, LLC (“Goldsky”) and its owner, Kenneth Grace (“Grace”), for making false and misleading statements about Goldsky’s business in filings with the Commission and on its website. According to the SEC, Goldsky’s Forms ADV filed with the Commission in 2016 and 2017, which Grace signed, stated that the firm’s hedge fund, Goldsky Global Alpha Fund, LP (the “Goldsky Fund”), had an auditor, a prime broker and custodian, and an administrator. In addition, in its Forms ADV and Forms ADV Part 2A, Goldsky stated that it had over $100 million in discretionary assets under management. Goldsky’s website also claimed that the Goldsky Fund earned: 19.45% compounded annual returns since inception, 70.33% compounded monthly returns since inception, and 25.30% returns for the year ended September 30, 2017. In its complaint ( here ), the SEC alleged that these statements were false and misleading because Goldsky, Grace and the Goldsky Fund had no agreements with service providers, Goldsky and Grace did not manage $100 million of assets, and the Goldsky Fund did not have any investment returns as it never had any assets. The SEC’s complaint, filed in the United States District Court for the Southern District of New York, charges Goldsky and Grace with violating the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Sections 206(4) and 207 of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, or in the alternative, that Grace aided and abetted Goldsky’s violations. The SEC is seeking a judgment ordering permanent injunctive relief and civil monetary penalties against Goldsky and Grace. Rags-to-Riches Fraud : On September 27, 2018, the SEC announced ( here ) that it charged a group of internet marketers who created and disseminated elaborate rags-to-riches videos to trick retirees and other retail investors into opening brokerage accounts and trading high-risk securities known as binary options. (A discussion of binary option fraud can be found here .) According to the SEC, investors were conned out of tens of millions of dollars through these marketing campaigns, which promised that investors would make large amounts of money by opening binary options accounts and using free or secret software systems to trade in them. In its complaints, the SEC alleged that the marketers were paid for each new brokerage account that investors opened and funded. According to the SEC, the marketers’ internet video advertisements, which were disseminated through spam emails, used actors to portray ordinary people who became millionaires by trading binary options. The videos staged fake demonstrations of supposed software users watching their account balances grow in real time. The SEC alleged that the software was simply a ruse to persuade investors to open accounts with the brokers. “As alleged in our complaints, thousands of retail investors were swindled out of tens of millions of dollars by watching elaborately produced rags-to-riches stories that falsely promised wealth at the push of a button,” said Melissa Hodgman, Associate Director of the SEC’s Enforcement Division. “Those who use phony tactics to dupe investors out of their savings will be held accountable for false and misleading statements on the internet.” “Before you provide any of your valuable personal information to anyone, make sure you do your research and know exactly who it’s going to,” said Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy.  “Be aware before you share, and protect yourself from professional fraudsters who may target you and your money for life.” The SEC’s complaints charge 10 individuals and two companies involved in the fraudulent marketing campaigns. The SEC is seeking penalties, disgorgement of ill-gotten gains, and permanent injunctions. Without admitting or denying the charges, seven of the settling defendants agreed to pay a combined total of $4.1 million in disgorgement and prejudgment interest. The Commission did not assess a penalty on the other settling parties as a result of their cooperation.

Typically, a mortgage on real property is delivered to stand as security for the repayment of an obligation evidenced by a promissory note.  A mortgage is an encumbrance on real property.  If there is an opportunity to remove such an encumbrance, it makes sense to do so.  For example, when a home mortgage is fully paid, a homeowner typically sees to it that a satisfaction of mortgage is obtained from the lender and promptly recorded. In situations where a mortgage appears as a lien of record on real property, but the statute of limitations has expired for the mortgagee to commence an action to foreclose the mortgage, RPAPL 1501(4) permits the mortgagor (or any other “person having an estate or interest in the real property”) to commence an action to have the encumbrance removed of record.  RPAPL 1501(4) provides: Where the period allowed by the applicable statute of limitation for the commencement of an action to foreclose a mortgage, or to enforce a vendor's lien, has expired, any person having an estate or interest in the real property subject to such encumbrance may maintain an action against any other person or persons, known or unknown, including one under disability as hereinafter specified, to secure the cancellation and discharge of record of such encumbrance, and to adjudge the estate or interest of the plaintiff in such real property to be free therefrom; provided, however, that no such action shall be maintainable in any case where the mortgagee, holder of the vendor's lien, or the successor of either of them shall be in possession of the affected real property at the time of the commencement of the action. In any action brought under this section it shall be immaterial whether the debt upon which the mortgage or lien was based has, or has not, been paid; and also whether the mortgage in question was, or was not, given to secure a part of the purchase price. Thus, a mortgagor need not wait for the mortgagee to commence foreclosure proceedings and defend by asserting a statute of limitations defense to have the lien of the mortgage extinguished of record. “ n action upon a bond or note, the payment of which is secured by a mortgage upon real property, or upon a bond or note and mortgage so secured, or upon a mortgage of real property, or any interest therein” is subject to a six-year statute of limitations.  See CPLR 213(4) .  In mortgage foreclosure actions, the statute of limitations begins to run from each unpaid installment, from the time that the mortgagee is entitled to receive full payment or the time the debt is accelerated.  See Bank of New York Mellon v. Celestin , 164 A.D.3d 733 (2 nd Dep’t 2018).  “The law is well settled that, even if a mortgage is payable in installments, once a mortgage debt is accelerated, the entire amount is due and the Statute of Limitations begins to run on the entire debt… …once a mortgage debt is accelerated, the borrowers' right and obligation to make monthly installments ceased and all sums become immediately due and payable, and the six-year Statute of Limitations begins to run on the entire mortgage debt.”   EMC Mortgage Corp. v. Patella , 279 A.d.2d at 604 (2 nd Dep’t 2001) (citations, internal quotation marks and internal brackets omitted.) In 21 st Mortgage Corp. v. Nweke (2 nd Dep’t October 3, 2018), the Court decided issues related to RPAPL 1501(4).  There, lender commenced an action to foreclose a mortgage obtained in 1999.  A foreclosure action was commenced in April of 2006 after defendant defaulted but was discontinued after a traverse hearing determination that defendant was not properly served with process.  A second foreclosure action commenced in 2007, was discontinued in January of 2013 by order of the court on lender’s motion.  In September of 2014, plaintiff (a subsequent assignee of the original lender) commenced an action to foreclose the mortgage.  The defendant borrower answered the complaint, asserted several affirmative defenses (including a statute of limitations defense) and counterclaims (among others, to cancel and discharge the mortgage pursuant to RPAPL 1501(4)). Thereafter, plaintiff moved for summary judgment.  In response, defendant borrower cross-moved for summary judgment dismissing the complaint on statute of limitations grounds as well on her counterclaim pursuant to RPAPL 1501(4).  Among other things, supreme court denied plaintiff’s motion for summary judgment, granted defendant borrower’s motion for summary judgment on statute of limitation grounds and, sua sponte , imposed an equitable mortgage, in plaintiff’s favor, on the subject property. In reversing supreme court, the Second Department held that defendant borrower “established her prima facie entitlement to judgment as a matter of law on her counterclaim pursuant to RPAPL 1501(4) to cancel and discharge the mortgage by demonstrating that more than six years had passed since the mortgage was accelerated and therefore this foreclosure action was time-barred.” Further, the Court vacated that portion of supreme court’s order imposing an equitable mortgage on the property because “plaintiff never requested this relief, and the defendant was not afforded any notice nor an opportunity to be heard on this issue which amounted to a denial of the defendant’s due process rights.”  Further, the Court recognized that the doctrine of equitable mortgage does not apply “where a legal written mortgage existed” and, thus, was not applicable to the case being decided.

The date on which parties to a real estate contract must close is frequently subject to litigation.  Sometimes real estate contracts provide for a closing date that is “time of the essence” and, in such cases, the parties must close on that date or risk default.  In the event that a buyer fails to close on a “time of the essence” closing date, he risks being declared in default by the seller and losing his down payment (and being a party to any related litigation that may result therefrom).  Similarly, if a seller fails to close on a time of the essence closing date she risks being declared in default by the buyer and being exposed to the possibility of litigation for specific performance of the contract and related monetary damages. If, however, there is a closing date in the contract, but it is not “time of the essence,” “either party is entitled to a reasonable adjournment” and, “ n granting the adjournment, the other party may unilaterally impose a condition that time be of the essence as to the rescheduled date.”   Miller v. Almquist , 241 A.D.2d 181, 185 (1 st Dep’t 1998) (citations omitted).   Whether the “time of the essence” condition is effective, “is contingent on the specificity of the notice and on the reasonableness of the time period. Id.  To effectively make a closing “time of the essence,” a party to a real estate contract must set a new date and give the other party “clear, distinct, and unequivocal notice to that effect giving the other party a reasonable time in which to act and by informing the other party that if he or she does not perform by that date, he or she will be considered in default.”  Cave v. Kollar , 296 A.D.2d 370, 371 (2 nd Dep’t 2002) (citations and internal quotation marks omitted).  Thus, where a letter “merely demand that fix a closing date inadequate to make time of the essence because it not clearly and distinctly set a new date and time for closing….” Id. (citations omitted).  Finally, if the party receiving the “time of the essence” letter fails to object to the chosen closing date prior thereto, that date could be deemed “reasonable as a matter of law.”  Shimuro v. Preston Taylor Products, LLC , 146 A.D.3d 729, 730 (1 st Dep’t 2017). The law related to “time of the essence” letters in real estate transactions was addressed by the Second Department in Rodrigues NBA, LLC. v. Allied XV, LLC (September 19, 2018).  The parties in Rodrigues , entered into a contract for the sale of real property in Queens County, New York and the purchaser made a $375,000 down payment.  The parties agreed to adjourn the closing date in the contract.  Thereafter, seller sent a “time of the essence letter” dated June 21, 2016 that set June 30, 2016 as the closing date.  After buyer rejected the June 30 closing date and did not appear at the closing, seller commenced an action to recover damages and sought to retain the down payment as liquidated damages pursuant to the contract.  Buyer, in turn, sought the return of the down payment, alleging that seller breached the contract as a result of ongoing administrative proceedings affecting the property. The Second Department affirmed the denial of seller’s motion for summary judgment on the complaint and dismissing purchaser’s counterclaims.  In so doing, the Court recognized that the motion court “concluded that the time of the essence letter was a nullity because it did not provide the buyer with a reasonable amount of time in which to act….”  The Court also noted that where “there is an indefinite adjournment of the closing date specified in the contract of sale, some affirmative act has to be taken by one party before it can claim the other party is in default; that is, one party has to fix a time by which the other must perform, and it must inform the other that if it does not perform by that date, it will be considered in default.”  Rodrigues (citations, brackets and internal quotation marks omitted). Reasonable time to act is critical in order to make time of the essence and: hat constitutes a reasonable time for performance depends upon the facts and circumstances of the particular case.  Included within the court’s determination of reasonableness are the nature and object of the contract, the previous conduct of the parties, the presence or absence of good faith, the experience of the parties and the possibility of prejudice or hardship to either one, as well as the specific number of days provided for performance.  The determination of reasonableness must by its very nature be determined on a case-by-case basis.  The question of what constitutes a reasonable time is usually a question of fact. Rodrigues (citations, brackets and internal quotation marks omitted). Among other things, the Second Department in Rodrigues, found that the seller failed to make a prima facie showing that the “time of the essence” letter “provided the buyer with a reasonable time within which to close.”

Goldman Sachs Group, Inc. (“Goldman Sachs” or the “Company”) is requesting that wrongful termination claims brought by a former executive alleging whistleblower retaliation by the Company should be heard in arbitration or dismissed all together. In early August, former Goldman Sachs executive, Chris Rollins (“Rollins”), brought suit against the Company, asserting that its leaders wrongfully blamed him for failures with the Company’s anti-money laundering procedures, ruined his reputation, and fired him in retaliation after 16 years of service. The case arose in connection with a series of transactions involving an unnamed financier.  Rollins is seeking $50 million in damages. Gold Claims Employee Fired for Unauthorized Trading The complaint names Jim Esposito (“Esposito”), now-co-head of Goldman’s securities division, as a defendant. It also identifies bankers Michael Daffey (“Daffey”) and John Storey (“Storey”), among other company leaders, as participants in the subject matter of the lawsuit. Daffey and Storey are among the most senior members of the Company’s equities business. According to the complaint, beginning in 2015, Daffey and Storey met with the financier for the purpose of finding ways to bring him on as a client. Rollins alleges that the financier told them that he had $1 billion to invest. Goldman Sachs maintains that Rollins was fired for executing certain trades, which involved a previously restricted party, without first obtaining authorization. However, according to the complaint, between September 2015 and August 2016, Daffey, Storey, and former-Vice Chairman Michael Sherwood, “used their influence within the firm” to arrange for the transactions, working around the firm’s compliance controls. Pressured to “Confess” After the series of issues occurred, Rollins contends that the Company began pressuring him to confess to violating compliance restrictions related to the financier, though it never identified any of the restrictions. He says that Daffey and Storey told him that they had arranged for Esposito to be the decision-maker, and the “friendly arbitrator.” Finally, the complaint alleges that Daffey told Rollins that if he “didn’t fight the charges, and was ‘contrite,’ he’d receive no more than a slap on the wrist.” Rollins maintains that he didn’t do anything wrong. A Previous Agreement to Arbitration Goldman Sachs argues that when Rollins became a managing director in January 2011, he agreed to arbitrate all disputes with the Company.  Goldman Sachs has asked U.S. District Judge Edgardo Ramos to stay the lawsuit while the parties arbitrate Rollins’ claims, or dismiss the suit completely. Goldman Sachs contends that the lawsuit is a “misplaced attempt” to involve U.S. courts in a matter based upon events outside of the country. In February 2017, after an internal investigation had found that Rollins had engaged in “misconduct warranting termination,” he was discharged. The Company went on to contend that only after an investigation of his potential misconduct (conducted in the United Kingdom) began, did he report concerns with the Company that he had been a whistleblower. Goldman spokesman, Michael DuVally, said that “the suit is without merit, and intend to vigorously contest it.” The case is ongoing. , U.S. District Court for the Southern District of New York (Manhattan)