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Family-run businesses are very common in the commercial world. In fact, according to recent studies, more than one-half of all U.S. companies are family operated.  Think of mom and pop stores and Walmart. The stress of running a family business can ruin a relationship. One need only look at Nissim Kassab (“Nissim”) and Avraham Kasab (“Avraham” and together with Nissim the “Brothers”), brothers and owners of Mall 92-30 Associates LLC (“Mall”). The Brothers have been in litigation over Mall and a related entity, Corner 160 Associates, Inc. (“Corner”), for a number of years in both the Supreme Court, Queens County and the Appellate Division, Second Department. The latest installment in their continuing litigation was filed in November 2017. Background Both Corner and Mall are real-estate holding companies. Together, the entities owned three adjacent, unimproved parcels of land in Jamaica, Queens. Corner owned Lots 79 and 130 of Block 10101, and Mall owned Lot 24 of the same block. Corner was incorporated in 1992. The Brothers jointly incorporated Corner and purchased the first property lot in Corner’s name. The Brothers subsequently bought a second plot in Corner’s name. In 2002, pursuant to an option agreement, Avraham became a 75% shareholder in Corner. Mall was formed in 2001. Mall purchased a lot adjacent to the two lots owned by Corner. Mall had an operating agreement, dated March 13, 2001, that each brother signed. The agreement lists the Brothers as the two members of Mall, along with their respective percentage of ownership (Avraham 75% and Nissim 25%). The operating agreement also provided that “the business and affairs of the Company be managed by the Members.” The Brothers operated a parking lot, as well as a flea market, on the three lots. Nissim took the primary role managing the properties on a day-to-day basis. The parking lot and the flea market are the only sources of income for Corner and Mall. The parking lot is a cash business. The parking lot is open five days a week, all year round except for snow days. The flea market operates on weekends during good weather, primarily during spring, summer and fall, and is also a cash business only. The property can accommodate 130 or 140 cars. In early 2017, Nissim charged Avraham with under-reporting the number of vehicles utilizing the parking lot, and consequently, the amount of income the lot produced. A similar charge was made with regard to the income from the flea market. In November 2017, Nissim filed a hybrid special proceeding and action seeking to, among other things, judicially dissolve Mall. Avraham moved to dismiss the petition. As to the cause of action seeking a judicial dissolution, the Court granted the motion. Matter of Kassab v. Kasab (2018 N.Y. Slip Op. 50934(U)) ( here ). The Law Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court sitting in the judicial district in which the office of the company is located may dissolve the 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 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 Court’s Decision In dismissing the claim for judicial dissolution, the court found that Nissim “failed to state a cause of action.…” First, the Court found that Avraham’s management of the corporation did not thwart the purpose of Mall: Mall’s Operating Agreement, dated March 13, 2001, and signed by both Nissim and Avraham, states that its purpose is “engaging in any lawful act or activity for which limited liabilities companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.” Nissim and Avraham did not execute a subsequent Operating Agreement.… Mall continues to hold a license to operate a parking lot.… It is undisputed that Mall is a real estate holding company and that it owns a unimproved parcel of real property (Block 10101, Lot 24). Petitioner does not allege that Mall is unable to pay its expenses related to the ownership of its real property, and, therefore, it continues to be a viable real estate holding company. Petitioner’s allegations, thus, are insufficient to demonstrate that “the management of Mall is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved” or that “continuing the entity is financially unfeasible.” Second, the Court rejected Nissim’s “allegations of oppressive conduct and efforts to exclude from the management of the LLC,” as sufficient to support judicial dissolution. In doing so, the Court found that the discord between the Brothers was not an impediment to achieving the purpose of Mall: The Court further finds that the petitioner’s allegations are insufficient to demonstrate that the discord and disputes between himself and Avraham are inimical to achieving Mall’s purpose. The fact that Avraham has excluded Nissim from participating in the operation of Mall, and that in the past they have had different views regarding business opportunities related to the real property owned by Corner and Mall, is insufficient to warrant a dissolution of the subject limited liability company. Accordingly, the Court granted Avraham’s motion to dismiss the petition as it pertained to the dissolution of Mall. Takeaway Breaking up is hard to do, especially for brothers who have been in litigation with each other for a number of years. Kassab is another example of the difficulties an LLC member faces in seeking judicial dissolution of the LLC.

Virtual offices are all the rage nowadays. However, if you are admitted to practice in New York State, but reside outside of New York State, a virtual office is insufficient to satisfy the requirements of section 470 of New York’s Judiciary Law, which provides: A person, regularly admitted to practice as an attorney and counsellor, in the courts of record of this state, whose office for the transaction of law business is within the state, may practice as such attorney or counsellor, although he resides in an adjoining state. Section 470 requires that “non-resident attorneys must maintain an office within New York to practice in .”  ( Schoenefeld v. State, 25 N.Y.3d 22 (2015).)  Courts, however, have interpreted section to require a physical office. The ramifications for the failure to comply with section 470, which was initially enacted when Abraham Lincoln was president, can be significant. The history and significance of section 470 is illustrated in Schoenefeld.   The plaintiff in Schoenefeld was a member of the New York bar, practicing and residing in New Jersey.  While taking a New York CLE course, she learned about the requirements of section 470 and commenced an action in federal district court challenging the constitutionality of section 470 as violative of the Privileges and Immunities Clause of the United States Constitution. In support of her position she argued that: (1) she could not practice in New York because she did not maintain an office in New York despite having satisfied all of her admission requirements: and, (2) no substantial state interest was served by requiring an office in New York for non-residents, when such a requirement did not apply to resident attorneys.  The federal district court sided with Schoenefeld.  On appeal, however, the Second Circuit determined that “the constitutionality of the statute was dependent upon the interpretation of the law office requirement” observing that “the requirements that must be met by non-resident attorneys in order to practice law in New York reflect an important state interest and implicate significant policy issues”.  Accordingly, the Second Circuit certified the following question to the New York Court of Appeals: “Under New York Judiciary Law § 470, which mandates that a nonresident attorney maintain an ‘office for the transaction of law business’ within the state of New York, what are the minimum requirements necessary to satisfy that mandate.” In answering the certified question, the Schoenefeld Court of Appeals interpreted section 470 as requiring an attorney admitted to practice in New York State, but residing out of state, “to maintain a physical law office within the State.”  The Court found that the statute presupposed a residency requirement for the practice of law in New York State,” but made an exception “by allowing nonresidents attorneys practicing in New York to maintain a physical law office here.”  The Schoenefeld defendants urged that if the statute was interpreted to require a physical presence for the receipt of service (whether an address or an appointed agent), the “legislative purpose” of the statute could be fulfilled in a manner that would “withstand constitutional scrutiny”. The Schoenefeld Court of Appeals recognized that while section 470 is presently silent on the issue of service, when the statute was originally enacted in 1862, it required that “an attorney who maintained an office in New York, but lived in an adjoining state, could practice in this State’s courts and that service, which could ordinarily be made upon a New York Attorney at his residence, could be made upon the nonresident attorney through mail addressed to his office.”  In 1877, the provision was codified and in 1909 it was divided into two parts: (1) a service provision (which remained in the provision codified in 1877); and, (2) a law office requirement (which ultimately became section 470).  The Court of Appeals also noted that in Matter of Gordon , 48 N.Y.2d 266 (1979), it found that then CPLR 9406(2), which required that an applicant to the New York bar provide proof of residency in New York for “six months immediately preceding the submission of his application for admission to practice,” violated the Privileges and Immunities Clause of the U.S. Constitution and thereafter, numerous provisions of the Judiciary Law and the CPLR (but not section 470) were amended to conform to Gordon . Thus, it is clear that in New York a non-resident attorney admitted in New York must maintain an office in New York in order to practice in New York.  The failure to comply with section 470 could have significant ramifications for the non-compliant attorney and her client.  In Arrowhead Capital Finance v. Cheyne Specialty Finance Fund , 154 A.D.3d 523 (1 st Dep’t 2017), the Court affirmed the dismissal, without prejudice, of the action because it was commenced by a non-resident attorney without an office in New York and “ laintiff’s subsequent retention of co-counsel with an in-state office did not cure the violation since the commencement of the action in violation of Judiciary Law § 470 was a nullity.”  Upon reviewing the supreme court files in Arrowhead , it appears that the defendant’s counsel hired an investigator to investigate the office situation of plaintiff’s counsel and, thereafter, moved to dismiss the action based counsel’s failure to maintain an office in New York. Two recent cases hold that the requirement that a non-resident attorney maintain an office in New York is not satisfied if that attorney maintains a “virtual office”.  In Marina District Dev. Co. v. Taledano , 60 Misc.3d 1203A (NOR) (Sup. Ct., New York Co. June 18, 2018), plaintiff moved for summary judgment in lieu of complaint based on a New Jersey default judgment.  The court refused to reach the merits of the motion and, instead, dismissed the action because plaintiff’s counsel did not maintain a physical office in New York.  In rejecting counsel’s claim that his “virtual office at the New York City Bar” satisfied the requirements of Judiciary Law § 470, the court stated: By definition, a virtual office is not an actual office.  The court is not persuaded to the contrary by the affidavit the attorney provides from a person affiliated with the…organization .  That affidavit states that the organization will take telephone messages for a member and that it will forward mail to the member.  It also states that meeting rooms may be made available to that member.  However, the attorney’s own papers negate any possibility that he uses the City Bar’s facilities as his office and actually demonstrate that he does not use this as an office inter alia, he directs mail to his philadelphia address and lists his philadelphia phone number on his papers> inter alia, he directs mail to his philadelphia address and lists his philadelphia phone number on his papers>. Similarly, in Law Office of Angela Barker v. Broxton, ____ Misc.3d ____, 2018 Slip Op.2816 (App. Term 1 st Dep’t June 11, 2018), a case relied upon by the Marina District court, the court reversed the civil court of the City of New York and dismissed plaintiff’s complaint, and stated: Plaintiff’s counsel’s use of a “virtual office” at a specified New York City address, instead of maintaining a physical office for the practice of law within New York at the time the action was commenced, was a violation of Judiciary Law § 470, and requires dismissal of the underlying action.  The term “office” as contained in section 470 “implies more than just an address or an agent appointed to receive process… the statutory language that modifies “office” – “for the transaction of law business”—may further narrow the scope of permissible constructions”.  (Quoting Schonefeld, supra, (some citations omitted).) TAKEAWAY Technology has caused a sharp rise in the use of virtual offices by countless and varied professions and businesses.  Attorneys admitted in New York, however, are bound by, inter alia , the Judiciary Law and may have to consider the ramifications of section 470 (such as the running of applicable statutes of limitations in light of a dismissal, addressing incurred costs and legal fees after a dismissal and the potential for disciplinary proceedings or other ramifications for violations of the Judiciary Law) before relying on a virtual office to satisfy the “office” requirement contained therein.  Similar rules exist in some states and attorneys who are considering working in states in which they are admitted, but do not reside, might consider the looking into whether “virtual offices” satisfy any in-state office requirements that may exist. Also, bear in mind that this issue can be used as leverage by opposing counsel to pressure the violating attorney into recommending a resolution or a course of action that may not in the best interest of the client.

On June 21, 2018, the United States Supreme Court resolved a split among the circuit courts over the constitutionality of administrative law judges (“ALJs”) appointed by the staff of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”). In Lucia v. U.S. Securities and Exchange Commission , the Court held that the appointment of the SEC’s ALJs by members of the Commission’s staff, rather than the Commission itself, violated the Appointments Clause of the Constitution (U.S. Const., art. II, § 2, cl. 2.). Lucia et al. v. Sec. Exch. Comm’n , No. 17-130, 585 U.S. __ (2018) ( here ). In doing so, the Court reversed the Court of Appeals for the District of Columbia (the “D.C. Circuit”), which held that the ALJs were “mere employees” rather than “Officers of the United States” within the meaning of the Appointments Clause. Raymond J. Lucia Cos., Inc. v. Sec. Exch. Comm’n , 832 F.3d 277 (D.C. Cir. 2016) ( here ). This Blog previously addressed the case here . Background The case arose from an administrative proceeding brought by the SEC against Raymond J. Lucia and his investment company (collectively, “Lucia”).  Lucia marketed a wealth-management strategy, which they called “Buckets of Money,” under which retirement savings were divided among assets of different risk levels ( e.g. , bonds, fixed annuities, and stocks) and periodically reallocated as those assets changed in value.  The Commission instituted administrative proceedings against Lucia based on allegations that they had used misleading slideshow presentations to deceive prospective clients about how the Buckets of Money strategy would have performed under historical market conditions. The Commission charged Lucia with violating the Securities Exchange Act of 1934, the Investment Advisers Act of 1940 (“IAA”), and the Investment Company Act of 1940. An ALJ conducted the initial stages of the proceeding. During a nine-day hearing, the ALJ presided over witness testimony and cross-examinations, admitted documentary evidence, and ruled on objections.  After the hearing, the ALJ issued an initial decision finding that Lucia had made fraudulent misrepresentations related to one of their investment strategies.  After the Commission directed the ALJ to make additional factual findings with respect to other alleged misrepresentations, the ALJ issued a revised initial decision finding that Lucia had willfully and materially misled investors, in violation of the IAA. The ALJ ordered a variety of sanctions to be imposed on Lucia, including revocation of his registration as an investment adviser; a permanent bar on associating with investment advisers, brokers, or dealers; a cease-and-desist injunction against future violations; and $300,000 in civil penalties. Lucia appealed. On appeal, the Commission conducted “an independent review of the record, except with respect to those findings not challenged on appeal.”  Exchange Act Release No. 73,857, at 3, 2015 WL 5172953 (SEC Sept. 3, 2015) ( here ). The Commission determined that the ALJ had correctly found that Lucia had willfully made fraudulent statements and omissions in violation of the IAA. The Commission also largely “affirm ,” with limited exceptions, “the sanctions imposed” by the ALJ. Two Commissioners dissented with respect to one aspect of the Commission’s liability determination. Lucia argued before the Commission that the proceeding against him was unlawful because the ALJ who had conducted the hearing and issued the initial decision was an “Officer[ ] of the United States” within the meaning of the Appointments Clause. Id . at 28. As such, the ALJ had not been appointed, in accordance with that provision, “by the President, the head of a department, or a court of law.” Id . at 29. The Commission rejected Lucia’s argument. In the Commission’s view, its ALJs were mere employees rather than constitutional officers because they do not exercise “significant authority independent of the supervision.” Id . Among other things, the Commission explained, its ALJs “issue ‘initial decisions’ that are … not final”; a person aggrieved by an initial decision may seek review before the Commission, which “grant virtually all petitions for review”; the Commission may review any ALJ decision sua sponte; review of an ALJ’s decision is de novo; and under the Commission’s rules, “no initial decision becomes final simply on the lapse of time by operation of law,” but instead becomes final only upon “the Commission’s issuance of a finality order.” Id . at 30 (citation and internal quotation marks omitted). The Commission also distinguished the Supreme Court’s decision in Freytag v. Commissioner , 501 U. S. 868 (1991), finding that “ Freytag inapposite here.” Id . at 32. The D.C. Circuit affirmed the Commission’s decision. The court rejected Lucia’s Appointments Clause challenge, holding that the Commission’s ALJs are mere employees rather than officers under the Constitution because they do not exercise “significant authority pursuant to the laws of the United States.” Id . at 284. In so ruling, the court relied on its prior decision in Landry v. FDIC , 204 F.3d 1125, 1133-1134 (D.C. Cir.), cert. denied , 531 U.S. 924 (2000), in which it held that the ALJs used by the Federal Deposit Insurance Corporation (“FDIC”) were not officers of the United States because they could not issue final decisions on behalf of the agency – i.e. , they could not exercise significant authority to bind third parties, or the government itself, for the public benefit. Id . at 1333; see also Lucia , 832 F.3d at 285. The D.C. Circuit determined that an SEC ALJ’s initial decision is similarly non-final, and it rejected Lucia’s attempts to distinguish Landry . Lucia , 832 F.3d at 285. The court also rejected Lucia’s argument that the SEC’s ALJs “exercise greater authority than FDIC ALJs in view of differences in the scope of review of the ALJ’s decisions.” Id . at 288. The court acknowledged that “the Commission may sometimes defer to the credibility determinations of its ALJs,” but it concluded that “the Commission’s scope of review is no more deferential than that of the FDIC Board.” Id . The court further rejected Lucia’s attempt to equate the SEC’s ALJs with the special trial judges (“STJs”) of the Tax Court who were held to be officers in Freytag . In the court’s view, the STJs were distinguishable because, as “members of an Article I court,” they “could exercise the judicial power of the United States” and “issue final decisions in at least some cases.” Id . at 284-85.  The court also found STJs to be different than SEC ALJs because “the Tax Court in Freytag was required to defer to the special trial judge’s factual and credibility findings unless they were clearly erroneous.” Id . at 288 (citation and internal quotation marks omitted). The Commission, by contrast, “is not required to adopt the credibility determinations of an ALJ.” Id . Thereafter, Lucia sought a rehearing en banc . Before the entire D.C. Circuit heard the case, the Tenth Circuit determined that SEC ALJs were officers of the United States thereby creating a split among the circuits. See Bandimere v. SEC , 844 F. 3d 1168, 1179 (2016). Significantly, the Tenth Circuit read Freytag differently than the D.C. Circuit and, thus, ruled that the ALJs performed functions similar to judges of the Tax Court. After hearing argument, an evenly divided D.C. Circuit, sitting en banc , issued a per curiam order denying Lucia’s claim. See 868 F. 3d 1021 (2017). As a result, the D.C Circuit was in conflict with the Tenth Circuit. Lucia filed a petition for certiorari with the Supreme Court for its review. Thereafter, the government changed its position from defending the Commission’s finding that its ALJs are mere employees, to asserting that SEC ALJs were officers within the meaning of the Appointment Clause. Additionally, the day after the government changed its litigation position, the Commission issued an order ratifying the prior appointment of its ALJs. The Court’s Decision Justice Kagan’s Majority Opinion Justice Kagan wrote the opinion for a fractured six-justice majority. In concluding that SEC ALJs are officers rather than mere employees, Justice Kagan noted that the decision turned on whether the ALJs “exercise significant authority pursuant to the laws of the United States.” Slip op. at 6 (citing Buckley v. Valeo , 424 U.S. 1, 126 (1976)). In framing the focus of the inquiry “on the extent of power an individual wields in carrying out his assigned functions” ( id .), Justice Kagan found that “ Freytag says everything necessary to decide this case.” Id . at 8. “To begin,” Justice Kagan observed, “the Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law.” Id . “The Commission’s ALJs exercise the same ‘significant discretion’ when carrying out the same ‘important functions’ as STJs do.” Id . And, importantly, noted Justice Kagan, SEC ALJs possess “all the authority needed to ensure fair and orderly adversarial hearings—indeed, nearly all the tools of federal trial judges” ( id .), such as they “take testimony, conduct trials, rule on the admissibility of evidence, and have the power to enforce compliance with discovery orders” and “administer oaths,” “shape the administrative record,” may punish “contemptuous conduct” and, “at the close of those proceedings, ALJs issue decisions.” Slip op. at 8-9 (citations omitted). Thus, “point for point—straight from Freytag’s list—the Commission’s ALJs have equivalent duties and powers as STJs in conducting adversarial inquiries.” Id . at 9. Justice Kagan rejected the argument advanced by an amicus that the Tax Court judges in Freytag differed because (1) “they had authority to punish contempt” (including discovery violations) through fines or imprisonment” and (2) under the Tax Court rules, their findings of fact are “presumed correct.” She found those “distinctions no difference for officer status.” Slip op. at 10. She found the contempt distinction of no moment because SEC ALJs could “enforce their will through conventional weapons” by excluding the wrongdoer (whether a party or a lawyer) from the proceedings” or, if the “offender is an attorney,” “ ummarily suspend ” him from representing his client.…” Slip op. at 10-11 (internal quotation marks and citations omitted). She also found the “ amicus’s standard-of-review distinction” to “fare[] just as badly” because the Freytag Court never suggested that the deference given to STJs’ factual findings mattered to its Appointments Clause analysis.” Indeed, said Justice Kagan, “the relevant part of Freytag did not so much as mention the subject.” Slip op. at 11. In any event, “the Commission often accords a similar deference to its ALJs, even if not by regulation.” Id . Justice Kagan also rejected Justice Sotomayor’s argument that “significant authority” requires the ability for judges to enter final decisions in at least some instances. Noting that this was only a “back-up” rationale of Freytag , Justice Kagan found that “ Freytag has two parts, and its primary analysis explicitly rejects JUSTICE SOTOMAYOR’s theory that final decisionmaking authority is a sine qua non of officer status.” Slip op. at 8 n.4. Regardless, she noted that the Commission often defers to ALJ’s factual findings. Id . at 11 (“the Commission adopts credibility finding absent overwhelming evidence to the contrary.”) (citations and internal quotation marks omitted). Having found that Lucia timely challenged the appointment of the ALJ, Justice Kagan found that the only “appropriate” remedy available was to hold a new “hearing before a properly appointed” official,” though that official could not be the ALJ who presided over Lucia’s case. Slip op. at 12. She reasoned that the original ALJ could not “be expected to consider the matter as though he had not adjudicated it before” he was improperly appointed. Id .  Justice Kagan observed that such a remedy comported with the Court’s “Appointments Clause remedies,” thereby rejecting Justice Breyer’s structural purposes argument. Slip at 12 n.5. Finally, the Court passed on two issues raised by the parties. First, the Court declined to address the issue concerning the Commission’s attempt to ratify prior ALJ appointments. Slip op. at 13 n.6. Second, the Court declined to address the constitutionality of the statutory removal protections for ALJs, noting that it was premature to do so. Id . at 4 n.1. Justice Breyer’s Concurrence Justice Breyer with whom Justice Ginsburg and Justice Sotomayor joined in part, concurring in the judgment in part and dissenting in part, would have avoided the constitutional issue and found that the ALJs were wrongfully appointed under the Administrative Procedure Act (“APA”). Opinion of Breyer, J., concurring in the judgment and dissenting in part (“Concurring Opinion”), at 1. Justice Breyer reasoned that there was a question “embedded” in the “constitutional question,” which the majority left unanswered: “the constitutionality of the statutory ‘for cause’ removal protections that Congress provided for administrative law judges.” Id . Thus, if ALJs are officers under the Appointments Clause, then the statutory protection under the APA might be unconstitutional under the Court’s prior holding in another case that officers cannot have “multilevel protection from removal” by the President. Id . at 4-5 (citing Free Enterprise Fund v. Public Company Accounting Oversight Bd. , 561 U. S. 477 (2010)). Justice Breyer expressed concern that “ If the Free Enterprise Fund Court’s holding applies equally to the administrative law judges,” then the majority’s holding “would risk transforming administrative law judges from independent adjudicators into dependent decisionmakers, serving at the pleasure of the Commission,” and “threaten[] to change the nature of our merit-based civil service as it has existed from the time of President Chester Alan Arthur.” Concurring opinion at 6 (orig’l emphasis). Justice Thomas’ Concurrence Although Justice Thomas joined the majority in its conclusion, Justice Thomas, joined by Justice Gorsuch, would have decided the case “based on the original public meaning of ‘Officers of the United States.’” Thomas, J., concurring opinion at 1. Under the Founders’ interpretation of the Appointments Clause, the definition of “Officer” “encompassed all federal civil officials with responsibility for an ongoing statutory duty.” Id . at 2 (citations omitted and internal quotation marks omitted). Thus, according to Justice Thomas, an officer would likely include individuals who “performed only ministerial duties.” Id . at 3. For that reason, and “ ecause the Court reache the same conclusion by correctly applying Freytag , join its opinion.” Justice Sotomayor’s Dissent Justice Sotomayor, joined by Justice Ginsburg, agreed with the decision of the D.C. Circuit and the Commission – namely, that SEC ALJs are not officers within the meaning of the Appointments Clause because they cannot issue final, binding decisions on behalf of the government. Dissenting opinion at 2. Notably, Justice Sotomayor read Freytag as “consistent” with her conclusion that “a prerequisite to officer status is the authority, in at least some instances, to issue final decisions that bind the Government or third parties.” Id . at 5. Takeaway In granting certiorari, the Court resolved the question it agreed to consider.  However, it left many more questions unresolved. Indeed, given the varying reasons advanced by the Justices for reaching their conclusions, the path forward for other agencies and their administrative judges, who exercise differing levels of authority than SEC ALJs, may find it difficult to determine whether their ALJs are constitutionally appointed. For example, the various decisions do not explain the minimum amount of authority needed to consider an ALJ to be an officer within the meaning of the Appointments Clause. The absence of such guidance impacts the nearly 1,930 ALJs employed by the federal government in twenty-six agencies. See Brief for Federal Administrative Law Judges Conference, as Amici Curiae Supporting Neither Party, Lucia v. SEC , 585 U.S. __ (2018) (No. 17-130) ( here ). The Court’s decision leaves the issue up in the air for these agencies and the courts that will undoubtedly hear challenges on this ground. After Lucia , the constitutionality of the removal protections for ALJs remains open to legal challenge. The Court expressly declined to address the issue, noting that it “ordinarily await thorough lower court opinions to guide analysis of the merits.”  Slip op. at 4 n.1. Thus, parties in administrative proceedings will have a viable basis upon which to challenge rulings that are issued against them. More directly, Lucia should have an immediate impact on pending and resolved SEC proceedings. Since the Commission ratified the prior appointment of all five of its ALJs, the Commission will most likely contend that it has already satisfied the constitutional mandate that it appoint its ALJs. The Court did not address the challenge to the validity of the Commission’s ratification, thereby leaving open the possibility that administrative proceedings commenced after the ratification order ( i.e. , after November 30, 2017) may continue. To remove any doubt about the validity of the prior ratification, the Commission may proceed with a formal appointment process for its ALJs in which the Commission formally votes on the ALJs, administers oaths of office, and delivers commissions.  If the Commission were to pursue such action, going forward, it should reduce the possibility of later challenges to the Commission’s ALJs. Lucia is more likely to affect pending and resolved SEC administrative proceedings. Since the majority held that the remedy for a proceeding tainted by a violation of the Appointments Clause is a new hearing before a properly appointed official, pending and resolved SEC administrative proceedings may require the Commission to reassign (and possibly open resolved) cases to a constitutionally appointed officer.  Should that occur, respondents may have statute of limitations defenses. See , e.g. , 28 U.S.C. § 2462 (imposing five-year statute of limitations from the date “when the claim first accrued” on commencement of government “enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise”). In that event, respondents could challenge subsequent administrative orders instituting enforcement proceedings on those grounds. Given the uncertainties surrounding ratification and the constitutionality of pending and resolved cases presided over by a tainted or potentially tainted ALJ, the SEC may determine to litigate contested matters in federal court, rather than in administrative proceedings. Time will tell whether the Commission turns to federal court proceedings in the wake of Lucia . The Court’s decision can be found here .

Traveling is an amazing way to see the world. New York is an amazing place in the world to see. As the global capital of fashion, art, finance, and more, it comes as no surprise that tourism has always accounted for a large amount of the state’s revenue. Individuals travel from all over the world to see the many things that New York has to offer. With all of the opportunity in New York and the amount of business conducted within the state, New York has become the second largest hub for technology in the country. That’s why a new proposed bill appears to threaten that very status as an industry leader and innovator. Recently, members of the City’s Council have proposed a bill that stands to threaten New York's economy by passing legislation that would punish and restrict technology home sharing platforms, such as Airbnb. The proposal would serve to regulate short-term rentals, with the potential to jeopardize the economic contribution of home sharing. As of now, a majority of City Council members support the bill, making it most likely to pass. The Purpose of the Bill The purpose of the bill is to crack down on illegal shadow hotels, rentals scheduled for under 30 days where the homeowner isn’t present. The concern is that these situations, if not regulated, would make housing more expensive, pushing out lower-income tenants. Abuse of the system has been experienced by certain rent-stabilized tenants, with prostitution rings and illegal sex clubs using the rentals for their own illegal purposes. The bill would require Airbnb to submit the names and addresses of its hosts or otherwise face a hefty fine. Airbnb, an app (and website) that allows for individuals to rent out the homes of others, acts to serve as a reliable source for supplemental income for the owners of those properties. These rentals also serve to help travelers and tourists save money while also immersing themselves in the city’s neighborhoods and culture, further adding to the local economy. The Downside of its Potential Passing The technology industry in New York City already accounts for more than 326,000 jobs, with the opportunity to only continue growing. However, if new legislation, such as the proposed bill, is implemented, growth within the industry is not a guarantee. Airbnb is in support of legislation that would safely regulate hosts to register with the state, limiting them to one property per state, and remitting taxes to the state. Although there is a concern that individuals may extort the opportunity to host their homes by instead of operating illegal hotels and other properties, the bill fails to differentiate between the two. What Might This Mean? Unlike New York, Connecticut, Vermont, and Pennsylvania have figured out a solution to this potential issue without compromising the ability of these housing technology companies to contribute to the economy in a safe way. These states have extended state taxes to home sharing. However, Council Speaker, Corey Johnson, contends that the bill would not be used as an abuse of power. “We’re not going to use it to go after every person. It’s to know if there are bad actors that are operating outside of the legitimate framework that’s in place.”

Given the spate of high-profile sexual harassment cases that have been reported in the media, employers must understand their rights and responsibilities under state and federal employment laws. In particular, business owners must establish policies and procedures that clarify relationships with employees. By enlisting the services of experienced attorneys, you can protect your business from civil lawsuits brought by employees -- here’s how. Employee Policies and Procedures Regardless of the size of your business, it's important to establish employee policies in a handbook that clarifies the expectations of all workers and the company’s code of conduct. In particular, policies that should be covered include: Anti-discrimination rules Equal opportunity employment guidelines Paid time off Medical and family leave procedures Social media and internet usage rules Employee Classification It is crucial to properly classify workers as exempt, non-exempt, or independent contractors. It is also necessary to establish compensation for hourly wages and overtime work in accordance with the Fair Labor Standards Act (FLSA). It is also important to consider any applicable state wage and hour laws. Protect Intellectual Property If you intend to bring new products to the market or your business holds other confidential information, it is essential to protect this valuable intellectual property. While it may be necessary to obtain patents and trademarks, employees can also be required to sign non-disclosure and non-compete agreements. A non-disclosure agreement (NDA) prevents an employee from disclosing confidential information to anyone outside of the company. In a non-compete agreement, the employee agrees not to work for a competitor for a certain period of time, within a specific geographic region, after his or her employment ends. In short, well-designed NDAs and non-compete agreements can help your business prevent the misappropriation of your IP and the resulting costly litigation. Business Insurance While you can protect your business with a general liability policy, there are different types of insurance that can protect a business from certain disputes. Directors and Officers Insurance (D&O), for example, indemnifies executives from claims that are brought against them individually in connection with business activity. Another type of insurance -- Employment Practices Liability Insurance (EPLI) -- covers legal costs that arise from employee lawsuits over claims of discrimination, harassment, retaliation and wrongful termination. Legal Representation Can Help Reduce The Risk of Litigation In the final analysis, employment-related disputes that rise to the level of civil litigation can be costly and have an adverse impact on your business’ reputation. Legal representation can help you mitigate the risk of litigation and ensure that business operations run smoothly. Contact us today for more information.

The U.S. Supreme Court has agreed to hear the appeal of an investment banker barred from the securities industry in a case concerning the scope of investor protection laws. ( Here .)  The high court will consider whether an individual who passed along false statements about a company’s financial condition can be found liable for engaging in securities fraud.  In particular, the Court  will consider whether the Securities Exchange Commission (SEC) can circumvent the requirements set forth in  Janus Capital Group, Inc. v. First Derivate Traders , 564 U.S. 135 (2011), for pleading and proving a claim under Section 10(b) of the Securities and Exchange Act of 1934 (Exchange Act) and Rule 10b-5 promulgated thereunder by recasting its claim as one for “scheme” liability. Lorenzo v. SEC , No. 17-1077 (certiorari granted June 18, 2018). The Backdrop In 2015, Francis V. Lorenzo (Lorenzo), a director of investment banking with Charles Vista, LLC (Charles Vista), was fined $15,000 and barred from the industry by an SEC Administrative Law Judge (ALJ) for participating in a scheme to defraud investors. The judge found that Lorenzo solicited investors through two emails that misrepresented the financial condition of a start-up energy company in 2009. The company, Waste2Energy Holdings Inc. (W2E), Charles Vista’s largest investment banking client, was seeking to develop technology that transformed solid waste into energy. In September 2009, W2E sought to raise about $15 million through the sale of 12% convertible debentures. Charles Vista was the exclusive placement agent. Lorenzo emailed two potential investors “several key points” about W2E’s debenture offering. The emails failed to disclose a recent devaluation of the company’s assets. Instead, the investors were told that there were “3 layers of protection.” One of the messages stated it had been sent at the request of the owner of the firm. The SEC issued an order charging Lorenzo, Gregg Lorenzo (the owner of Charles Vista) and Charles Vista with fraud in violation of Section 17(a)(1) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Exchange Act. ( Here .) Gregg Lorenzo and Charles Vista agreed to a disgorgement payment of $130,000 and prejudgment interest of $20,000. Additionally, Gregg Lorenzo and Charles Vista agreed to pay a civil penalty of $375,000 and $4,350,000, respectively, in settlement of the charges. Lorenzo did not settle. During the administrative proceedings, Lorenzo  testified that he sent the emails at the behest of his boss – he did not write them. Instead, Lorenzo cut and paste what was written. No other testimony was presented. In the Initial Decision, the ALJ found that Lorenzo did not read the text of the emails and had sent the emails “without thinking.” Importantly, the ALJ concluded that  emails were “staggering” in their falsity. As a result, the ALJ held that  Lorenzo had acted willfully with the intent to deceive, manipulate, or defraud  and had participated in a “deceptive scheme” in violation of the federal securities laws. The Commission affirmed. In its opinion, the agency concluded that Lorenzo was responsible for the emails and their content. Notably, the Commission did not accept all the findings of the ALJ. The SEC ordered Lorenzo to pay a $15,000 penalty and barred him for life from the securities industry. ( Here .) In a 2-1 decision, the D.C. Court of Appeals affirmed in part the Commission's decision; the matter was remanded for reconsideration of the sanctions. Lorenzo v. SEC , 872 F.3d 578 (D.C. Cir. 2017) ( here ). In an opinion written by Judge Srinivasan, joined by Judge Griffith, the court concluded that the Commission’s findings ( e.g. , that each e-mail was materially false and misleading, and that Lorenzo acted with scienter) were supported by the evidence.  Nevertheless, the majority concluded, citing Janus Capital , that “Lorenzo did not ‘make’ the false statements at issue for purposes of rule 10b-5(b) because Lorenzo’s boss, and not Lorenzo himself, retained ‘ultimate authority’ over the statements.” Lorenzo , 872 F.3d at 580. See also id . at 588. Consequently, Lorenzo could not be held liable for violating Rule 10b-5(b) as charged. However, the majority concluded that "Lorenzo's particular conduct . . . fits comfortably within the language of Rules 10b-5(a) and (c)"; namely, the scheme liability provisions of the law ( i.e. , Section 10b-5(a) and (c)). Lorenzo , 872 F.3d at 595. The court rejected the claim that such a holding would undermine the distinctions between primary and secondary ( i.e. , aider and abettor) liability on which Janus Capital  was based. Lorenzo , 872 F.3d at 590-91.  Since the penalty determination could have been impacted by the Commission’s determination on liability, the majority vacated the sanctions and remanded the matter to the SEC for further consideration. Id . at 595-96. Judge Kavanaugh dissented. While Judge Kavanaugh agreed with the majority's determination on Janus Capital , he nevertheless dissented, writing: “The good news is that the majority opinion vacates the lifetime suspension. The bad news is that the majority opinion – invoking a standard of deference that, as applied here, seems akin to a standard of ‘hold your nose to avoid the stink’—upholds much of the SEC’s decision on liability. I would vacate the SEC’s conclusions as to both sanctions and liability.”  Lorenzo , 872 F.3d at 597. Judge Kavanaugh based his dissent on three points. First, he questioned the "factual findings and legal conclusions" of the ALJ because they "do not square up." Lorenzo , 872 F.3d at 597. If Lorenzo did not draft the emails, did not think about their contents and sent them only at the behest of his boss, then he could not have acted "willfully".  The mens rea is missing, said the dissent. Id . ("If Lorenzo did not draft the emails, did not think about the contents of the emails, and sent the emails only at the behest of his boss, it is impossible to find that Lorenzo acted "willfully." That is Mens Rea 101.") Accordingly, Judge Kavanaugh concluded that the "administrative law judge’s decision . . . contravenes basic due process” and, therefore, made "a hash of the term 'willfully,' and of the deeply rooted principle that punishment must correspond to blameworthiness based on the defendant's mens rea." Id . at 598. Second, describing the Commission's actions as "Houdini-like," Judge Kavanaugh concluded that the Commission manufactured the facts to reach the desired conclusion: assessment of sanctions against Lorenzo: "The Commission's handiwork in this case is its own debacle. Faced with inconvenient factual findings that would make it hard to uphold the sanctions against Lorenzo, the Commission — without hearing any testimony — simply manufactured a new assessment of Lorenzo's credibility and rewrote the judge's factual findings. So much for a fair trial."  Lorenzo , 872 F.3d at 598-99. Finally, Judge Kavanaugh accused the majority of accepting the “alternative facts” used by the SEC, instead of those found by the ALJ -- the person in the best position to assess the credibility of Lorenzo, the only witness in the proceeding -- "that Lorenzo did not draft the emails, did not think about the contents of the emails, and sent the emails only at the behest of his boss." Lorenzo , 872 F.3d at 599. Judge Kavanaugh concluded that the Commission's "rewriting of the administrative law judge's findings of fact was utterly unreasonable and should not be sustained or countenanced by this Court." Id .  He found that "the SEC had no reasonable basis to run roughshod over the administrative law judge's findings of fact and credibility assessments." Therefore, he said, "the SEC's rewriting of the findings of fact deserves judicial repudiation, not judicial deference or respect." Id . at 600. Judge Kavanaugh noted that even if he was wrong, the majority nevertheless "create " an unnecessary "circuit split by holding that mere misstatements, standing alone, may constitute the basis for so-called scheme liability under the securities laws — that is, willful participation in a scheme to defraud — even if the defendant did not make the misstatements."   Lorenzo , 872 F.3d at 600.  Noting that no other circuit court had "concluded that scheme liability must be based on conduct that goes beyond a defendant's role in preparing mere misstatements or omissions made by others," Judge Kavanaugh observed that the majority opinion stood alone by allowing the SEC "to evade the important statutory distinction between primary liability and secondary (aiding and abetting) liability." Such a result, he said, is something "the SEC has tried to erase" " or decades" and the Supreme Court has "pushed back hard against" in cases such as Janus Capital .  Id . at 601. The majority opinion, he concluded, was an "end-run" around "the Supreme Court." Id . Lorenzo appealed. ( Here .) The Briefing Before the U.S. Supreme Court In his petition before the Supreme Court, Lorenzo presented the following question for review: “In J anus Capital Group, Inc. v. First Derivative Traders , 564 U.S. 135 (2011), this Court considered the elements of a fraudulent statement claim and held that only the 'maker' of a fraudulent statement may be held liable for that misstatement under Section 10(b). . . The question presented is whether a misstatement claim that does not meet the elements set forth in Janus can be repackaged and pursued as a fraudulent scheme claim.” Lorenzo answered the question in the negative. In seeking certiorari, Lorenzo relied on the fact that there was a split among the circuits, noting "The Second, Eighth and Ninth Circuits have held that a misstatement alone cannot be the basis of a fraudulent scheme claim, while the DC Circuit and the Eleventh Circuit have held that a misstatement standing alone can be the basis of a fraudulent scheme claim."  Petition at i. Lorenzo claimed that the majority view among the circuits is that "plaintiffs, including the SEC, cannot repackage Rule 10b-5(b) deceptive statement claims that fail to meet the Janus standards as fraudulent scheme claims under Section 17(a)(1) of the Securities Act or Rule 10b5(a) and (c)." Petition at 17. "The DC Circuit’s holding in this matter is contrary to th view." On the merits, Lorenzo argued that he was not the “maker” of the misstatements as defined by the Court in  Janus Capital .  Under Janus Capital , liability for a false statement can be imposed only on “the person or entity with ultimate authority on whether and how to communicate the statements . . . .” Thus, without control over the publication of the statement, Lorenzo could not be held liable. Petition at 14. The SEC opposed the petition for the writ of certiorari. (Here.) First, the agency claimed that the conduct involved fell “comfortably within” the ordinary understanding of the statutory language for Section 17(a)(1) and Section 10(b). Opp. Br. at 9. “Words and phrases like ‘fraud,’ ‘deceit,’ and ‘device, scheme or artifice’ provide a broad linguistic frame within which a large number of practices may fit,” said the Commission. Id . (internal quotation marks and citations omitted). Thus, " nowingly sending 'email messages containing false statements' about a company’s financial prospects 'directly to potential investors,' in order to induce recipients to participate in a debenture offering, is naturally described as employing a device, scheme, artifice, or act to defraud." Id . (citations omitted). Second, the SEC maintained that while the D.C. Circuit found that Lorenzo was not the “maker” of the statement and did not have “ultimate authority” over its publication, that did not mean he could not be liable. To the contrary “as the court of appeals explained, a non-maker of a statement can be liable under Section 17(a)(1) and Section 10(b), and subsections (a) and (c) of rule 10b-5 if he carries out a device, scheme, artifice, or act to defraud.” Opp. Br. at 13. "That conclusion," argued the SEC, "is compelled by the text, structure, history, and purpose of those provisions, and it is fully consistent with Janus , which did not address the scope of liability under any provision other than Rule 10b-5(b)." The Commission reasoned that “the decision below did not ‘erase[] the distinction between primary and secondary liability’” that the Court “emphasized in Janus and Central Bank of Denver ” because Lorenzo “was not found secondarily liable for aiding and abetting his boss’s making of a false statement under Rule 10b-5(b).” Opp. Br. at 14. Instead, Lorenzo “was found primarily liable for his ‘active role in producing and sending misstatements with an intent to deceive, and for thereby employing a deceptive device, act, or artifice to defraud for purposes of liability under Section 10(b), Rule 10b-5(a) and (c), and Section 17(a)(1).” Id . (internal quotation marks and citations omitted). Third, the SEC argued that there is no real circuit split. This is because “none of the decisions petitioner identifies as forming a ‘majority’ position . . . involved the kind of conduct at issue here – knowing dissemination of a false statement directly to investors with intent to induce a financial transaction. And all the cases that petitioner cites were initiated by private plaintiffs rather than by the Commission. That distinction is significant because different statutory and other standards govern private securities-fraud actions” such as the Private Securities Litigation Reform Act of 1995 (PSLRA). Opp. Br. at 17-18. Under the PSLRA, plaintiffs must meet heightened pleading standards with regard to allegedly false statements and omissions under Rule 10b-5(b). In contrast, some courts have held that those standards do not apply to subsections (a) and (c) of Rule 10b-5. Regardless, contended the Commission, there is no split of authority because " he statutory text does not distinguish between statements or omissions that are fraudulent under Rule 10b-5(b) and statements or omissions that constitute (or are used to carry out) a deceptive device, act, or artifice to defraud under Rule 10b-5(a) or (c). 15 U.S.C. 78u-4(b)(1)." Thus, " here is accordingly no need to exclude false-statement claims from Rule 10b-5(a) and (c) in order to prevent evasion of the PSLRA." Opp. Br. at 19. To underscore the point, the SEC noted that the cases relied upon by Lorenzo “rest on a concern that is wholly absent here, because the PSLRA does not apply to cases initiated by the Commission.” Opp. Br. at 19. "There is accordingly no reason to believe that any other circuit would reach a result different from the court below in an SEC enforcement proceeding. Indeed, the only other court of appeals that has addressed the question presented in a case to which the Commission was a party has reached the same conclusion as the court below." Id . (citing Big Apple Consulting , 783 F.3d at 795-796; SEC v. Monterosso, 756 F.3d 1326, 1334 (11th Cir. 2014)). *          *          * A decision is expected next term.

Dr. Grigory Rodchenkov, who was charged with libel for exposing the illegal doping scandal during the 2014 Sochi Olympics of Russian Olympic athletes, has now filed a motion to dismiss the charge, which his attorneys have portrayed as a ploy to find his whereabouts. “We have every confidence that this litigation was not started to vindicate the athlete, but to try to locate and identify Dr. Rodchenkov’s location,” said his attorney, Jim Walden. Rodchenkov has also filed a counterclaim under New York’s Anti-SLAPP (Strategic Lawsuits Against Public Participation) law. New York’s Anti-SLAPP law is designed for protecting whistleblowers who get sued for making libelous remarks. During the 2018 winter Olympics, Russia appealed 39 cases of performance-drug use, for which 28 were overturned on the insufficient evidence. Rodchenkov is accusing Mikhail Prokhorov, the Russian billionaire and majority owner of the Brooklyn Nets, who also ran Russia’s biathlon during the Sochi games of attempting to silence him through harassment and threats of violence. “With today’s filings the hunted becomes the hunter,” said Rodchenkov’s attorney, Jim Walden. “Russia and its puppets have been persistently attacking Dr. Rodchenkov for too long, most recently with this frivolous lawsuit that parrots the Kremlin’s slander.” A Doping Scandal Rodchenkov recently alleged that the laboratory, the Anti-Doping Center, was used to further a state-sponsored scheme to ply Russian athletes with performance-enhancing drugs. He admitted to his own part in the conspiracy of developing a combination of steroids and creating a system for swapping out “dirty” urine samples for that of the athletes’ prior to drug use. Russian Olympians took home 33 medals in the games. Once a German television station began to expose the scandal, Rodchenkov, afraid of taking the fall fled to the United States in 2015, before exposing the scandal himself. In November 2017, Olympics medals were stripped from three Russian biathletes: Olga Zaytseva, Yana Romanova, and Olga Vilukhina. They were also banned from performing in future games due to anti-doping violations. This past February, the three biathletes filed a joint libel suit against Rodchenkov in Manhattan Supreme Court, claiming that much of Rodchenkov’s story has been fabricated and that each is entitled to $10 million for their lifetime ban from the sport due to Rodchenkov. . Mikhail Prokhorov, who ran the Russian Biathlon Federation for the Sochi Games is helping to finance the case. So What is Next? Rodchenkov, who is currently in the witness protection program, to hide himself from Russian agents seeking retaliation, will provide any depositions remotely in order to maintain the secrecy of his location. In the months prior to publicly blowing the whistle, two high-level executives and friends of his suspiciously died unexpectedly. Rodchenkov has released a statement saying that he is “healthy, well and well-protected.” According to Sputnik news, a state-run Russian news agency, Kremlin officials have rejected Rodchenkov’s claims as lies, and would consider taking legal action. Prokhorov agrees and shared this sentiment with the media through his spokesperson. “We categorically deny the accusations in this suit, but instead of trading in rumors and baseless accusations by the media, we will await our fair hearing in the court of law where facts and evidence will their rightful place as the only means of determining the truth.”

On June 11, 2018, the United States Supreme Court held that the filing of a putative class action equitably tolls the limitations period for absent class members to file individual claims but does not toll the limitations period for the filing of a new class action involving the same or substantially the same claims. China Agritech, Inc. v. Resh , No. 17-432. ( Here .) Nearly 45 years ago, the Supreme Court decided American Pipe & Construction Co. v. Utah , 414 U.S. 538 (1974), the seminal case on equitable tolling and class action lawsuits. In American Pipe , the Court held that the filing of a class action lawsuit tolls the statute of limitations for members of the putative class. The Court held that if the trial court denied class certification, then members of the putative class could timely intervene as individual plaintiffs in the lawsuit or file new lawsuits in their individual capacities, even if the statute of limitations had run. Unless and until the trial court certified the class, the case was pending as an individual action.  Nine years later, the Court expanded American Pipe to allow putative class members to file their own lawsuits after the trial court denied class certification. Crown, Cork & Seal Co. v. Parker , 462 U.S. 345 (1983). Thus, putative class members could either intervene in the lawsuit or commence a new action in their individual capacity so long as they did so within the original limitation period extended by the tolling period under American Pipe . American Pipe did not, however, resolve the issue of whether putative class members could rely on American Pipe tolling to file a new class action that was based on the same claims as the original action. Not surprisingly, a circuit court split arose, with the Second and Fifth Circuits, among others, holding that successive class action lawsuits involving the same claims are not tolled, and the Ninth Circuit holding that the filing of successive class actions is tolled under American Pipe . The Court’s decision in China Agritech resolves this issue. Writing for an eight-justice majority in which Justice Sotomayor concurred, Justice Ginsburg held that “ American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails. But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” China Agritech , 584 U. S. ____ (2018) (Slip Op. at 2). Together with the Court’s decision in CalPERS v. ANZ Securities, Inc. (discussed by this Blog here ), in which the Court held that a putative class action does not toll the statute of repose, the Court has limited the time within which a plaintiff can file a follow-on class action lawsuit involving the same set of allegations. Background In 2011, shareholders of China Agritech filed a putative class action lawsuit under the federal securities laws against the company and certain of its officers and directors, alleging, among other things, that the defendants made materially false and misleading statements about China Agritech’s income and revenue, and that the disclosure of the truth caused the price of the company’s stock to decline. Slip op. at 2. After several months of discovery and deferral of a lead-plaintiff ruling (required under the Private Securities Litigation Reform Act of 1995 (“PSLRA”)), the district court denied class certification. The court determined that the plaintiff had failed to establish that China Agritech stock traded on an efficient market—a necessity for proving reliance on a class-wide basis. Slip op. at 3. Thereafter, in September 2012, the plaintiff settled his individual claims and the case was dismissed. See Resh v. China Agritech, Inc. , 857 F.3d 994, 998 (9th Cir. 2017). ( Here .) On October 4, 2012—within the two-year statute of limitations—a new set of shareholders filed a putative class action against many of the same defendants, alleging the identical set of facts and circumstances as the prior lawsuit but including “new efficient-market evidence.” Slip op. at 3-4. Once again, the district court denied class certification, “this time on typicality and adequacy grounds.” Id . at 4. Thereafter, the named plaintiffs settled their individual claims with the defendants and voluntarily dismissed their lawsuit. Id . On June 30, 2014, Michael Resh, who had not sought appointment as lead plaintiff in the other two actions, filed a putative class action, alleging the same allegations as the prior two complaints. The lawsuit was commenced a year and a half after the statute of limitations expired. The district court dismissed the class complaint as untimely, holding that the prior two actions did not toll the time to initiate class claims. Slip op. at 4. The Ninth Circuit reversed the district court’s dismissal, holding that American Pipe tolled all claims derivative of those asserted in the earlier actions, whether brought individually or on behalf of a putative class. Resh , 857 F.3d at 1004. In reversing the district court, the Ninth Circuit rejected the holding of its sister circuits, reasoning that allowing follow-on class actions “would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” Id .  The Ninth Circuit added that applying American Pipe to successive, follow-on class actions would not cause unfair surprise to defendants and would promote economy and efficiency of litigation by reducing incentives for filing protective class suits during the pendency of an initial certification motion. Id . The Supreme Court granted certiorari to resolve the split among the circuits “over whether otherwise-untimely successive class claims may be salvaged by American Pipe tolling.” Slip op. at 4-5. The Court’s Decision In reversing the Ninth Circuit, the Court held that tolling under American Pipe does not apply to successive, follow-on class actions, as opposed to successive individual actions. Justice Ginsburg reasoned that the rationale underlying American Pipe did not permit a plaintiff to “wait[] out the statute of limitations” and “piggyback” class claims “on an earlier, timely filed class action.” Slip op. at 6 (“We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action.”). The Court explained that the goals of “efficiency and economy of litigation” are not advanced by allowing successive, follow-on class actions beyond the applicable statute of limitations. Id . (“The ‘efficiency and economy of litigation’ that support tolling of individual claims, American Pipe , 414 U. S., at 553, do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.”). In fact, explained Justice Ginsburg, economy and efficiency of litigation are increased by the timely filing of class action claims: “ f class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel,” and “if the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated once for all would-be class representatives.” Slip op. at 7. Justice Ginsburg explained that “Rule 23 evinces a preference for preclusion of untimely successive class actions by instructing that class certification should be resolved early on.” She noted that the amendment to Rule 23(c) (which governs when the motion for class certification is to be made) confirms this point by “allow greater leeway, more time for class discovery, and additional time to ‘explore designation of class counsel’ and consider ‘additional applications rather than deny class certification,’ thus ‘afford the best possible representation for the class.’” Slip op. at 7-8 (citations omitted). Justice Ginsburg observed that the PSLRA “evinces a similar preference … for grouping class-representative filings at the outset of litigation.” Id . The Court also observed that permitting successive, follow-on class action claims, unlike later individual claims, could result in “limitless” class action filings related to the same conduct, because the statute of limitations would be continuously tolled with each subsequent filing. Slip op. at 10 (“Respondents’ proposed reading would allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation.”) (citing Ewing Indus. Corp. v. Bob Wines Nursery, Inc. , 795 F. 3d 1324, 1326 (11th Cir. 2015) (tolling for successive class actions allows plaintiffs “limitless bites at the apple”)). Although Justice Ginsburg recognized that the statute of repose applicable to federal securities claims would eventually foreclose successive, follow-on filings, she noted that statutes of repose “are not ubiquitous” and that many claims under other state or federal laws are not subject to repose in the same manner. Slip op. at 10-11. Simply stated, “Endless tolling of a statute of limitations is not a result envisioned by American Pipe .” Finally, Justice Ginsburg addressed the prospect that plaintiffs would file “protective” class action lawsuits – i.e. , class action lawsuits filed solely for the purpose of protecting a plaintiff’s ability to bring a class action at a later date if class certification is denied in the initial class action – in the wake of the Court’s decision. In doing so, she expressed little concern, noting that such actions could be easily “manage ” by the district courts, which have “ample tools at their disposal …, including the ability to stay, consolidate, or transfer proceedings.” Slip op. at 14. Justice Sotomayor separately concurred in the judgment only. Justice Sotomayor agreed that American Pipe should not be available for successive class action lawsuits brought under the PSLRA, given its unique procedures. Concurrence, Slip op. at 2 (“The PSLRA imposes significant procedural requirements on securities class actions that do not apply to individual or traditionally joined securities claims.”). But Justice Sotomayor disagreed with the majority to the extent the Court did not limit its holding to other types of class actions brought under Rule 23, particularly because Rule 23 (unlike the PSLRA) does not provide for precertification notice to putative class members or a process for district courts to appoint the most adequate lead plaintiff. Instead, Justice Sotomayor suggested that, as to non-PSLRA class actions, lower courts could exercise their “comity” power “to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs.” Alternatively, said Justice Sotomayor, the Court could, “as a matter of equity,” prohibit tolling “for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment.” Slip op. at Id . at 5. “ y contrast,” however, “tolling would remain available” where “class certification is denied because of the deficiencies of the lead plaintiff as class representative, or because of some other nonsubstantive defect.” Such an approach, said Justice Sotomayor, would “ensure that in cases where the only problem with the first suit was the identity of the named plaintiff, a new and more adequate representative could file another suit to represent the class.” Id . at 6. Takeaway In this Blog’s consideration of ANZ , we wrote: “institutional investors will no longer be able to ‘wait and see’ whether to opt out of Securities Act class actions – that is, wait to see if there is a settlement that adequately recompenses the fund and its beneficiaries. Under ANZ Securities , the decision will have to be made within the repose period, which often occurs before there is any discovery or settlement.” This analysis also applies to China Agritech . Following China Agritech , institutional investors, as well as individual investors, will no longer be able to “wait and see” whether to opt out and file an individual action or file a class action on the basis of the allegations in the initial lawsuit. Now, the decision must be made with the statute of limitations in mind, as well as the statute of repose. Time will tell whether this results in an uptick in “protective” class action filings. While plaintiffs have to make their decision early in the process, defendants will enjoy certainty about the potential for future liability if they successfully defeat a motion for class certification, for whatever reason. With China Agritech , defendants will no longer be exposed to “endless” follow-on class action lawsuits arising from the same operative facts and circumstances if class certification fails in one lawsuit and the limitations period has expired.

Not every case can be brought in the federal court system.  Supreme Court Justice Antonin Scalia, in explaining the limited nature of federal court jurisdiction, stated that “ hey possess only that power authorized by the Constitution and statute, which is not to be expanded by judicial decree.” ( Kokkonen v. Guardian Life Insurance Company of America , 114 S.Ct. 1673, 1675 (1994) (citations omitted).)   Stressing his point, Justice Scalia continued by pointing out that, “ t is to be presumed that a cause lies outside this limited jurisdiction and the burden of establishing the contrary rests upon the party asserting jurisdiction.”  ( Kokkonen, 114 S.Ct. at 1675 (citations omitted).) The plaintiff in Hussian v. U.S. Bank National Assoc. (E.D.N.Y. June 7, 2018), brought an action in federal court seeking an emergency temporary restraining  order to stop the defendants from selling his home at a foreclosure sale after a judgment of foreclosure and sale was issued in a state court foreclosure action.  Hussian, the plaintiff, appeared in the federal action, pro se --  meaning that he represented himself without the assistance of legal counsel.  It seems that Mr. Hussian’s pro se status led the court to write an easy to understand opinion addressing the basics of federal court jurisdiction. Hussian attempted to invoke the Court’s federal question jurisdiction pursuant to 28 U.S.C. §1331 and diversity jurisdiction pursuant to 28 U.S.C. §1332 .  Section 1331 provides that federal district courts “…shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States”.  Section 1332 provides that federal district courts “shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75,000…” and involves: (1) “citizens of different States;” (2) citizens of a State and citizens of a foreign state; (3) “citizens of different States and in which citizens or subjects of a foreign state are parties; and, a foreign state, as plaintiff, citizens of a State or different States.”  Jurisdiction under 28 U.S.C. 1332(1) (citizens of different States) generally requires “complete diversity between all plaintiffs and all defendants,” meaning that none of the plaintiffs can be from the same state as any of the defendants.  ( Lincoln Property Co. v. Roche , 126 S.Ct. 606, 613 (2005) (Ginsburg, J.) (citations omitted).)  State (as defined with a capital “S”) includes the fifty states, the District of Columbia, Puerto Rico and the Territories of the Unites States. In determining that diversity jurisdiction does not exist, the Hussian court found that while Hussian “alleges diversity jurisdiction … complete diversity does not exist between the parties as Hussian and RAS are residents of New York, and thus appear to be citizens of the same state.” The Hussian court also found that there was no federal question jurisdiction under 28 U.S.C. 1331.  Hussian urged that 42 U.S.C. 1983, a civil rights statute, provided the requisite “federal question” to be in federal court. The court disagreed, stating that “Section 1983 requires that the conduct complained of must have been committed by a person acting under the color of state law and the conduct complained of must have deprived a person of rights, privileges or immunities secured by the Constitution or laws of the United States.”  (Internal quotation marks omitted.)  Acts of private individuals are not covered by Section 1983 and Hussian’s complaint did not allege that any of the defendants are “state actors.” Subject matter jurisdiction is so important, that “ ack of subject matter jurisdiction cannot be waived and may be raised at any time by a party or by the court sua sponte .” (Citation omitted.)  An action brought in federal court in the absence of subject matter jurisdiction “must” be dismissed.  The Hussian court did , however, grant plaintiff leave to serve an amended complaint, recognizing that “courts should allow plaintiffs to amend complaints to drop dispensable nondiverse defendants whose presence would defeat diversity of citizenship.” (Citation and internal quotation marks omitted.) The Hussian court also determined that plaintiff’s claim for injunctive relief challenging the state court foreclosure proceedings should be dismissed under the Younger abstention doctrine. Younger prohibits federal courts from hearing cases that “would disrupt state proceedings that: (1) are pending; (2) implicate important state interests; and (3) provide the plaintiffs an adequate opportunity to litigate federal claims.” (Citations and internal quotation marks omitted.)  The scope of the Younger abstention doctrine has been limited to three types of state court proceedings including “civil proceedings that implicate a State’s interest in enforcing the orders and judgments of its courts.”  (Citations and internal quotation marks omitted.)  “The Younger requirements are more than adequately satisfied when mortgage foreclosure proceedings, which concern the disposition of real property and hence implicate important state interests, are pending in state court, and there is no reason to doubt that the state proceedings provide the would-be federal plaintiff with an adequate forum to make the arguments he seeks to raise in federal court.”  (Citations omitted.) Similarly, the Hussian court recognized that it was without jurisdiction to intervene in plaintiff’s dispute concerning the judgment of foreclosure and sale because “judgments of foreclosure are fundamentally matters of state law.  (Citations omitted.)

This Blog has previously written about the difficulties plaintiffs often have distinguishing between direct and derivative claims. ( Here and here .) In today’s post, this Blog looks at Khan v. Garg , 2018 N.Y. Slip Op. 31061(U) (Sup. Ct. N.Y. County, May 30, 2018) ( here ). In Khan , the court dismissed a fraud claim because the plaintiff failed to demonstrate whether the claim belonged to the plaintiff or his company. A Brief Primer on the Applicable Rules Where the wrong is directed against a corporation, the claim belongs to the entity. The shareholder does not have an individual claim, even if the shareholder loses the value of his/her shares or incurs personal liability in an attempt to keep the corporation solvent. Abrams v. Donati , 66 N.Y.2d 951, 953 (1985); Serino v.  Lipper , 123 A.D.3d 34, 40 (1st Dept. 2014). “The distinction between derivative and direct claims is grounded upon the principle that a stockholder does not have an individual cause of action that derives from harm done to the corporation but may bring a direct claim when the wrongdoer has breached a duty owed directly to the shareholder which is independent of any duty owing to the corporation.” Accredited Aides Plus, Inc. v. Program Risk Mgmt., Inc. , 147 A.D.3d 122, 132 (3d Dept. (2017) (citation and internal quotation marks omitted). In determining whether a claim is direct or derivative, “a court must look to the nature or the wrong and to whom the relief should go.” Tooley v. Donaldson Lufkin & Jenrette, Inc. , 845 A.D.2d 1031, 1038 (Del. 2004). Specifically, the court should consider “(1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually).” Yudell v. Gilbert , 99 A.D.3d 108, 114 (1st Dept. 2012) (internal quotation marks and citations omitted); Maldonado v. DiBre , 140 A.D.3d 1501, 1503-1504 (3d Dept. 2016). “The pertinent inquiry is whether the thrust of the plaintiff’s action is to vindicate his personal rights as an individual and not as a stockholder on behalf of the corporation.” Maldonado , 140 A.D.3d at 1504 (internal quotation marks and citation omitted). The plaintiff must show that the duty allegedly breached was owed to the shareholder, and that he/she can prevail without showing an injury to the corporation. Yudell , 99 A.D.3d at 114. If the individual claim of harm is “confused with or embedded” within the harm to the corporation, then it must be dismissed. Serino , 123 A.D.3d at 40; Patterson v. Calogero , 150 A.D.3d 1131, 1133 (2d Dept. 2017) (even where individual harm is claimed, if it is confused with or embedded in the harm to corporation, it cannot stand separately). Khan v. Garg In Khan , the Plaintiff, Raza Khan (“Plaintiff” or “Khan”), alleged that his business partner, Vishal Garg (“Defendant” or “Garg”), misappropriated funds from their business, Education Investment Finance Corporation (“EIFC”).  According to Khan, Garg did so on two occasions. First, in early 2012, Garg allegedly falsified EIFC’s records to reflect that EIFC owed Garg approximately $1.6 million for capital contributions that Garg had not made. Khan asserted that Garg then misappropriated EIFC funds and transferred those funds into Garg’s personal bank account. Second, in early May 2013, Garg allegedly withdrew $1,067,000 from EIFC accounts to satisfy his “pro-rata share of excess capital.” Khan alleged that Garg’s “pro-rata share of excess capital” was an illusion created by Garg’s manipulation of EIFC records to reflect the absence of capital contributions to EIFC by Khan. Khan brought suit “individually, in his official capacity as 50% owner of, and on behalf of ” against Garg. Khan alleged: (1) deadlock as to EIFC; (2) breach of fiduciary duty as to Garg; (3) conversion of EIFC assets by Garg; (4) fraud “by Garg” for falsifying EIFC’s financial records/tax returns to benefit Garg and entities owned/controlled by Garg; (5) tortious interference by Garg and Capital; (6) Garg’s failure to execute corporate documents on behalf of a non-party EIFC subsidiary; (7) conversion of EIFC funds by Garg to a MRU Lending (“MRU”), a company owned solely by Garg; (8) unjust enrichment against Garg as a result of EIFC payments to MRU; and (9) accounting. Garg moved, pursuant to CPLR 3211 (a) (7), to dismiss the fraud cause of action, arguing that Khan failed to plead the elements of intent, reliance, and injury. The Court granted the motion. As an initial matter, the Court observed that Khan failed to “specify whether the fraud claim is direct or derivative,” though the allegations in the complaint “indicate that intended to be direct.” In analyzing the allegations in the complaint, the Court found that Khan failed to “allege that he sustained any harm separate from that sustained by EIFC.” Here, the allegations supporting Khan’s fraud claim confuse Khan’s direct and derivative rights; therefore, the claim must be dismissed. Khan alleges that Garg intentionally induced Khan to rely on the EIFC financial records falsified by Garg, and those records made it appear that EIFC owed Garg $1.6 million. Thus, though Khan seeks to plead a direct claim for fraud, there is no individual harm alleged in the amended complaint: Khan does not allege that he sustained any harm separate from that sustained by EIFC. Derivatively, the Court found that Khan failed to satisfy the elements of a fraud claim: Construed as a purely derivative fraud claim, dismissal is still required. Khan does not adequately allege that Garg made a misrepresentation of fact (falsified EIFC’s records) with the intent of inducing EIFC’s reliance; instead, the allegations pertaining to Garg’s intent to induce reliance, and the resulting reliance on Garg’s misrepresentations, are assertions pertaining to Khan in his individual capacity. The amended complaint does not adequately plead a derivative fraud claim; indeed, Khan alleges that EIFC was the vehicle by which Garg defrauded Khan, individually, not EIFC in general. As a result, the Court dismissed the fraud claim. Takeaway The difference between a direct and derivative claim is not always easy to discern. For many practitioners, even those who devote most of their practice litigating derivative claims, the distinction between the two types of claims can be elusive. Nuance and subtlety often rule the day, leading to confusion and uncertainty. As Khan learned, the consequences of such confusion can (and often will) result in dismissal of one’s claims.

On May 8, 2018, the U.S. Government Accountability Office (GAO) issued recommendations for the purpose of increasing the effectiveness of paying whistleblowers to report illegal wildlife trafficking. Wildlife trafficking, one of the top-ranked illegal trades in the world, accounts for approximately $23 billion a year, with the United States as one of the greatest contributors. Animal Trafficking and the Push for Accountability According to the GAO report ( here ), trafficking has “pushed several endangered species to the brink of extinction,” devastating “wild populations of elephants, rhinoceroses, tigers, pangolins, turtles, exotic birds, and many other species.” The report was prepared at the request of Oregon Senator, Ron Wyden. It details the GAO’s findings of an audit of the U.S. Fish and Wildlife Service (FWS) and National Oceanic and Atmospheric Administration (NOAA) regarding their use of rewards for whistleblowers of wildlife crime, during the years 2007-2017. Both agencies have concurred with the GAO’s guidance and recommendations in letters of response. Senator Wyden believes that the agencies that have been tasked with protecting and combating the trafficking of endangered wildlife are not doing enough. He requested that the GAO look into the underuse of financial incentives as a method for encouraging whistleblowers to report such illegal conduct. In the House of Representatives, Rep. Madeleine Bordallo (D-GU) and Rep. Don Young (R-AK) recently introduced the Wildlife Conservation and Anti-Trafficking Act of 2018 (WCATA). ( Here .) The purpose of the legislation is to enhance the ability of informants worldwide to use qui tam laws to report wildlife crimes. The WCATA is a legislative fix that builds on the GAO’s findings by obligating FWS, NOAA, and many other federal agencies to augment and improve their use of financial rewards to pay wildlife trafficking whistleblowers. In her floor speech introducing the legislation, Rep. Bordallo said: “this bipartisan bill confronts the global black-market trade in illegal wildlife and seafood products driving iconic wildlife to extinction and responsible for countless human rights abuses.” If passed, the WCATA will mandate that the Department of Interior, the agency that oversees FWS, and the Department of Commerce, the agency that oversees NOAA, to create and implement wildlife whistleblower reward programs. It also mandates the establishment of Whistleblower Offices in several other agencies, and the creation of confidential and anonymous programs to report wildlife crimes. Under the WCATA, whistleblowers would receive at least 15%, and as much as 50%, of the funds recovered from successful prosecution. Anonymous Whistleblower Files Complaint Against Facebook According to a recently filed complaint by an anonymous whistleblower to the Securities and Exchange Commission regarding Facebook, the social media giant has been accused of being one of the world’s largest sources for endangered wildlife trafficking. Attorneys for the anonymous whistleblower released a statement: The amount of wildlife being traded on closed and secret groups on Facebook is horrifying. We saw multiple products: rhino horn, bear claws, tiger skins, reptiles, and tons and tons of ivory. At a time when the world is losing 30,000 elephants a year to poachers, the amount of ivory sold on Facebook is particularly shocking. Over months of working undercover, the attorneys traveled abroad to confirm that the products listed on Facebook were in fact real. Chat apps, including WhatsApp, have been used to communicate things like pricing of the illegal items. Is Facebook Compliant with Trafficking? For Stephen Kohn, the pro-bono executive director for the National Whistleblower Center, the lack of follow-through is appalling. “I’ve done whistleblowing for 33 years. Seen pretty much everything. And for criminal activity to be this open and for the United States government not to be cracking down on it aggressively, is absolutely shocking. You can go on Facbook today and you’ll see every single endangered species for sale. Some live, some dead. It’s pretty shocking. What we saw immediately was the Facebook was most likely the number one source of trafficking worldwide.” Kohn claims that Facebook had been made aware of the illegal activities occurring on its site despite Mark Zuckerberg’s denial of knowledge. He argues that Facebook is guilty of more than just housing illegal activity or failing to properly monitor itself, but that it is “aiding and abetting” the crimes. They are no longer a neutral party. They are no longer an innocent bystander. You can look at the page where the trafficker puts the item and right next to it, there are advertisements. They are profiting from that trafficking. Our belief is the moment they ran those ads on trafficker pages, they’re actually outside the immunities. The Global Wildlife Whistleblower Program continues to fight against the illegal wildlife trafficking industry. Takeaway It should prove interesting to see whether Facebook can be held liable for profiting off of the illegal activity. On the legislative front, the WCATA appears to be a step in the right direction. It would empower federal agencies responsible for the enforcement of wildlife trafficking to use whistleblowers in the fight against illegal wildlife trafficking. As this Blog has noted in prior posts, whistleblowers can be an effective tool in the fight against wrongdoing.

There are numerous situations in which the value of real estate becomes an issue in litigation – condemnation proceedings, tax certiorari proceedings and calculating deficiency judgments in foreclosure proceedings – to name a few.  Sometimes, when the value of a particular property is at issue, a recent “arm’s length” sale of that same property provides the best assessment of its value.  “Although value and price are not necessarily synonymous, the rule has evolved that the purchase price set in the course of an arm’s length transaction of recent vintage, if not explained away as abnormal in any fashion, is evidence of the ‘highest rank’ to determine the true value of the property at the time.”  ( Plaza Hotel Associates v. Wellington Associates, Inc. , 37 N.Y.2d 273 (1975).) Frequently, however, there is not a recent sale of the very property that requires valuation.  Sometimes there is a recent sale of the subject property, but the sale price is not truly reflective of market value.  This circumstance can arise where, for example, the property was sold: at a judicial sale; by a seller under pressure to sell; to a buyer with a special need for that exact piece of property. In such circumstances, courts can determine the value of real property by the reports and/or testimony of expert real estate appraisers.  “New York case law is clear that expert appraisal evidence is the method for proving the value of real property in litigation.” NexBank, SSB v. Soffer (Sup. Ct. May 18, 2018) (“ NexBank 2018 ”).  NexBank 2018 makes plain the importance of appraisal evidence in litigation involving real estate valuation, as well as the importance of timely making expert disclosure. The underlying facts and circumstances related to NexBank 2018 are long and tortured; involving litigation and appeals in numerous related actions in New York and Nevada.  Some necessary facts are set forth in the NexBank court’s Decision and Order dated October 18, 2017 (“NexBank 2017”) Simply, Turnberry/Centra Sub, LLC (“Turnberry”) borrowed $475 million to purchase a shopping center in Las Vegas.  Jeffrey and Jacquelyn Soffer are principals of Turnberry.  To secure the loan, in part, Jeffrey and Jacquelyn delivered personal guaranties to the lender (the “Guaranties”).  When the underlying loan was not repaid at maturity, the lender “began the process of foreclosing on the deed of trust, and taking title to the property.”  ( See NexBank 2017.) The property was sold for $276.5 million at a non-judicial foreclosure sale to TSLV LLC, an entity affiliated with several entities that purchased a controlling share of the underlying debt on the secondary market.  ( See NexBank 2017.) Just prior to the sale, however, Jeffrey and Turnberry commenced an action in Nevada “to enforce what he alleged to be a binding commitment by the Lenders to restructure the oan <(the “restructure action”)> .”  (See NexBank 2017)  In the context of the Restructure Action, Jeffrey recorded a lis pendens and otherwise sought specific performance remedies that affected title to the property.  ( See NexBank 2017.) In 2013, NexBank, SSB v. Soffer , was commenced in the Supreme Court, New York County, to collect on the Guaranties.  The amount of damages due under the Guaranties increased if the Guarantors voluntarily encumbered the property, and the lis pendens filed in, and some of the relief sought by, the Nevada Action were determined to have done just that (the “Encumbrances”). Accordingly, one element of damages due to the lender under the Guaranties is the difference between the $527 million unencumbered value of the property at the relevant date and the value on that date as encumbered by the Encumbrances.  The lender argued that the encumbered value of the property was the $276.5 million paid by TSLV LLC at the foreclosure sale. ( See NexBank 2017.)  The court, however, rejected the lender’s analysis and, in so doing, expressed numerous concerns about that sale being an “arm’s length” transaction.  ( See NexBank 2017.) The court set a July 20, 2016 deadline for filing expert reports and the lender filed its Note of Issue on November 11, 2016.  Prior to both of those dates, the lender failed to serve an expert report.  Instead, it made the decision to rely on the foreclosure sale price as its measure of market value on the relevant date.  However, on December 8, 2017, the lender moved by Order to Show Cause for “leave to supplement its expert disclosure.”  By NexBank 2018 , the court denied the motion. The court recognized: that it has broad powers to supervise disclosure and control its dockets; and, the importance of enforcing fact and expert discovery deadlines.  The court also noted that “Commercial Division Rule 13 requires a plaintiff who intends to call an expert at trial to submit a report after the close of fact discovery, but before the filing of a Note of Issue. See 22 NYCRR §202.70.  ‘Expert disclosure provided after without good cause will be precluded from use at trial.’ Id .”  ( See NexBank 2018 (emphasis in original).) In exercising its discretion to deny the lender’s application to file new expert reports “more than a year after the deadline”, the court noted that “this court and others in the Commercial Division have precluded expert reports served well after the court ordered deadline”; a practice approved by the Appellate Division. ( See NexBank 2018.) In finding that “good cause” was not proffered “to justify service of late expert reports,” the court stated: The facts, record evidence, and the parties’ legal theories were clearly established prior to the filing of the Note of Issue.  Plaintiff made the calculated decision to attempt to prove damages exclusively through its credit bid and the unencumbered value of the property….  “In fact, instead has argued extensively in this action that expert testimony would be unreliable and inappropriate.  instead has argued that its lay witness testimony and documentary evidence is sufficient to prove its damages and in fact is a better, more reliable method of proof than expert testimony. ( See NexBank 2018 (citations and footnote omitted).) After noting that case law and NexBank 2017 made plain that “expert testimony was required to prove the Property’s encumbered value”, the court stated: It is simply implausible to believe that plaintiff and its counsel, who are extremely sophisticated, were unaware of this rule.  Instead, for strategic reasons, they chose not to rely on expert testimony.  Now that the court has squarely rejected that approach, plaintiff seeks a second bite at the apple and proffers new expert reports.  Plaintiff cites no commercial case in which such a tactic was approved or found to constitute good cause.  This court sees no reason to permit parties to preview the court’s view of their trial strategy at summary judgment, and then abandon that strategy if the court signals that it is unlikely to prevail.  To hold otherwise would severely prejudice defendants.  Summary judgment is an exercise in issue spotting for trial.  It is not, for the unsuccessful movant, an opportunity to reformulate its case. Plaintiff’s stark pivot in its proposed proof is simply too great to permit at this late stage….To force the defendants to now counter these new expert opinions, which require further rebuttal reports and depositions, is extremely prejudicial on the eve of trial.  Under these circumstances, it is simply too late for plaintiff to deviate from the course it has charted. ( See NexBank 2018 (citations and footnote omitted).) TAKEAWAY Early on in litigation, consideration should be given to whether there is a need for expert disclosure.  Further, litigants should not assume that disclosure deadlines will routinely be extended.