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

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

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

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

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

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

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

Prosecuting a mortgage foreclosure action in New York can be an arduous and time-consuming process.  This is particularly so for residential mortgage foreclosures since the promulgation of a host of rules by the New York State Legislature stemming from the mortgage crisis of the late 2000s.  Some of the new rules have been addressed previously in this Blog (“ Appellate Division, Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE,’” “ The Second Department Denies Summary Judgment to Another Foreclosing Mortgagee Due to the Insufficiency of Evidence Presented on the Motion ” and “ The Second Department Reverses Another Grant Of Summary Judgment To A Foreclosing Lender On A Home Loan Due To The Insufficiency Of Proof Of Mailing Statutorily Required Notices To The Borrower ”). The Supreme Court of the State of New York, Suffolk County, has recently (November 27, 2017), promulgated “ Rules for Expedited Proceedings in Certain Foreclosure Actions ” to streamline the foreclosure process in eligible residential mortgage foreclosure actions (the “Program”).  (Other courts may have instituted similar programs and practitioners with cases pending in other jurisdictions should check for the availability of similar programs.)  While the Program will be discussed further herein, as an introductory matter, a very general discussion of some, but not all, of the steps necessary to maintain a foreclosure action follows. Generally, there are numerous steps that must be followed in order to prosecute a mortgage foreclosure action; some of which are discussed herein.  The action is commenced by the filing of the Summons and Complaint.  In certain residential foreclosure actions, and under certain circumstances, at or about the time the action is commenced, the attorney for the foreclosing mortgagee must file a “Certificate of Merit” certifying that, inter alia , after reviewing the facts and related documents and after speaking with representatives of the lender, there is a good faith basis to proceed with the foreclosure.  ( See CPLR § 3012-b .)  Thereafter, the defendants are served with process and are afforded time to answer.  In many instances, however, defendants in residential foreclosure actions default in appearing and/or answering. In certain residential foreclosure actions, at the time the affidavits of service are filed, the foreclosing mortgagee must file a Request for Judicial Intervention to trigger the scheduling by the court of a foreclosure settlement conference (the “Conference”).  ( See CPLR  § 3408 and the §202.12-a of the Uniform Rules of New York State Trial Courts .) At the Conference, the mortgagee and mortgagor, both with and without a referee, attempt to negotiate a resolution of the matter through loan modification or otherwise.  “A defendant who appears at the but who failed to file a timely answer…shall be presumed to have a reasonable excuse for the default and shall be permitted to serve and file an answer, without any substantive defenses deemed to have been waived within thirty days of initial appearance at the ” and “ he default shall be deemed vacated upon service and filing of an answer”.  ( See CPLR § 3408(m).) If the mortgagor defaults in appearing at the Conference, the mortgagor would not receive the benefit of the additional time to answer if they were previously in default.  (While any defendant could appear at the Conference, if an appearance is made, it is typically by the mortgagor.) After the time for all of the defendants to answer the complaint has expired (whether or not a Conference was necessary), the foreclosing mortgagee would then move, inter alia : for summary judgment (to the extent that an answer was interposed by one or more of the defendants), a default judgment (to the extent that some or all of the defendants failed to appear and/or answer) and for the appointment of a referee to compute the sums due to the mortgagee under the note and mortgage being foreclosed (collectively, the “S/J Motion”).  After the S/J Motion is submitted to the court, the parties await a decision, which, in many situations, could take between two and ten months. If the S/J Motion is denied, the parties may have to go to trial.  More typically, however, the S/J Motion is granted, and the court appoints a referee to ascertain and compute the amounts due to the mortgagee.  ( See RPAPL § 1321 .)  While the referee is supposed to conduct a hearing to determine the amounts owed to the mortgagee, the hearing is typically waived (if any of the defendants have appeared) or otherwise determined without a hearing (if the defendants defaulted).  The “Report” of the referee (the “Referee’s Report”) and the related calculations are typically prepared by the mortgagee’s counsel and submitted to the referee for review, comment and signature.  A draft copy of the Referee’s Report can be circulated to the appearing defendants for review, along with a stipulation waiving the calculation hearing.  Depending on the Judge, the Referee’s Report may also contain a calculation of attorney’s fees and expenses due to the mortgagee under the note and/or mortgage if the mortgagee is so entitled.  Sometimes, the court itself undertakes the determination of attorney’s fees and expenses through a separate hearing and/or based on the submission of papers. Once the Referee’s Report is signed by the Referee and returned to the mortgagee’s counsel, the mortgagee must then make a motion: to confirm the Referee’s Report and for a Judgment of Foreclosure and Sale (the “JF&S Motion”).  After the JF&S Motion is submitted to the court, the parties await a decision, which, again, could take between two and ten months.  Among other things, the Judgment of Foreclosure and Sale is the document that fixes the amounts due to the mortgagee, permits the subject property to be sold at public auction, and “cuts-off” any interest that subordinate lienors (named as defendants in the foreclosure action) that may previously have held in the property being foreclosed.  ( See RPAPL § 1351 .) The foreclosure sale of the property is supposed to take place within ninety days of the date of the Judgment of Foreclosure and Sale.  ( See RPAPL § 1351.)  Public advertising of the sale in a publication set forth by the court in the Judgment of Foreclosure and Sale must take place.  Depending on the manner in which the sale is advertised, the auction can take place between twenty-one and thirty-five days after the sale notice is first published.   ( See RPAPL § 231 .) There are additional proceedings that may need to take place, including, but not limited to, motion practice to: confirm the referee’ report of sale; obtain a deficiency judgment against the mortgagor (if the proceeds of the foreclosure sale are insufficient to satisfy the mortgagor’s obligations to the mortgagee); and, to distribute any surplus monies that may become available (if the proceeds of the foreclosure sale are more than sufficient to satisfy the mortgagor’s obligations to the mortgagee). THE PROGRAM A foreclosure action is eligible for the Program, where: (1) it involves residential property (but does not relate to a reverse mortgage); (2)the mortgagor failed to answer or move with respect to the complaint and, therefore, is in default; (3) the mortgagor failed to appear at the first scheduled conference in the Settlement Conference Part and the case was released to an IAS Part; (4) there is no pending loan modification application pending with the foreclosing mortgagee; (5) PLAINTIFF WAIVES THE RIGHT TO PURSUE A DEFICIENCY JUDGMENT; (6) an answer filed by any other defendant does not contain a request for relief other than protecting its position in surplus money proceedings or being notified of a sale; (7) foreclosing mortgagee “must meet all legal requirements and proof required for a default pursuant to CPLR § 3215, RPAPL § 1321 and for a judgment of foreclosure and sale pursuant to RPAPL § 1351, including but not limited to proof of service of the summons, complaint, notice of pendency and other statutory required; and the filing of any affirmation/affidavit required by statute (CPLR 3012-b) or Administrative Order”; and (8) the application to participate in the Program is made within 180 days after release from the Settlement Foreclosure Part. Participation in the Program would permit the foreclosing mortgagee to combine the S/J motion and the JF&S motion into a single (the “Combined Motion”).  Also, the need for a referee to calculate the sums due to the mortgagee would be rendered moot because, as part of the Combined Motion, the court itself, and not a referee, would ascertain and determine, inter alia , the amounts due.  Voluntary participation in the Program would eliminate one of the two main motions that must be made during a residential mortgage foreclosure proceeding and, accordingly, would result in a significant saving of time in the overall process.  One of the drawbacks is that the mortgagee, to participate in the Program, would have to waive the right to obtain a deficiency judgment against the mortgagor.  Quinlan-Expedited-Proceedings-1

Last month, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) announced that it had paid whistleblowers more than $45 million in awards.  In one case, the CFTC awarded approximately $30 million to a whistleblower ( here ), the largest amount ever awarded by the CFTC, and in the other, the CFTC awarded more than $70,000 to a whistleblower living in a foreign country, the first of its kind under the CFTC Whistleblower Program ( here ). The awards reflect the recent success of the CFTC’s Whistleblower Program. “Today’s substantial Whistleblower awards mark another significant step in what has been a transformative year for the CFTC’s Whistleblower Program and the Division of Enforcement,” said James McDonald, Director of the CFTC’s Division of Enforcement.  “Whistleblowers have added significant value to our enforcement program by enabling the Commission to swiftly identify misconduct and hold wrongdoers accountable.  I expect this trend to continue as the Commission continues to receive increasing numbers of high-quality whistleblower tips.” “The Commodity Futures Trading Commission is committed to creating a level playing field for all market participants, and the Whistleblower Program is helping us achieve this goal,” said CFTC Chairman, J. Christopher Giancarlo.  “I hope that today’s awards encourage anyone with knowledge of violations of the Commodity Exchange Act to come forward and become a whistleblower.” Previously, the highest award paid by the CFTC to a whistleblower was in March 2016.  In that case, the whistleblower received an award of more than $10 million ( here ). The CFTC did not identify the recipients of the awards or the conduct that was the subject of the awards. Media reports, however, have linked the $30 million award to an investigation conducted by the Securities and Exchange Commission (“SEC”) and the CFTC into investment products offered by JPMorgan Chase. ( Here and here .) The CFTC is generally prohibited from disclosing information that “could reasonably be expected to reveal the identity of a whistleblower.” 7 U.S.C.A. § 26(h)(2); 17 C.F.R. § 165.4.  Consistent with this confidentiality requirement, the CFTC will not disclose the name of the enforcement action in which the whistleblower provided information, the award percentage granted to the whistleblower, and the exact dollar amount of the award granted. All whistleblower awards are paid from the CFTC Customer Protection Fund established by Congress and financed entirely through monetary sanctions paid to the CFTC by violators of the Commodity Exchange Act (“CEA”).  No money is taken or withheld from harmed investors to fund the program. The CFTC Whistleblower Program The CFTC Whistleblower Program, like the SEC Whistleblower Program, was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”). Pub. L. No. 111-203, § 748, 124 Stat. 1376 (2010); 7 U.S.C. § 26.  here.=">here."> The Act directs the CFTC to pay awards to whistleblowers who voluntarily provide the CFTC with original information that leads to an enforcement action resulting in monetary sanctions exceeding $1 million. Id . Under the Whistleblower Program, relators are eligible to receive an award of between 10 percent and 30 percent of the monetary sanctions collected. 7 U.S.C. § 26(b)(1); 17 C.F.R. § 165.8. The CFTC has broad discretion in determining the amount of the award.  In exercising this discretion, the CFTC is guided by certain factors, including 1) the significance of the information provided by the whistleblower, i.e. , whether the information is reliable and complete such that it conserves the CFTC’s resources; 2) the assistance provided by the whistleblower and his/her attorney, including (i) the degree of cooperation and assistance provided to the CFTC staff; (ii) the timeliness of the whistleblower’s initial disclosure; (iii) the efforts undertaken by the whistleblower to remediate the harm caused by the alleged violation; and (iv) any unique hardships experienced by the whistleblower as a result of reporting the violations; 3) the degree to which an award enhances the CFTC’s ability to enforce the commodity laws; and 4) the extent to which the whistleblower participated in internal compliance systems, such as reporting the violations of the commodities laws internally before, or at the same time as, reporting them to the CFTC and assisting in an internal investigation or inquiry. 17 C.F.R. § 165.9.  The CFTC can pay awards not only on CFTC enforcement actions, but also related actions brought by foreign futures authorities if certain conditions are met. In the six-and-a-half years since the inception of the CFTC Whistleblower Program, the Commission has paid whistleblowers an award on only four occasions: a $240,000 award in May 2014; a $290,000 award in September 2015; the $10 million award referenced above; and a $50,000 award in July 2016.  By contrast, the SEC has issued awards in excess of $266 million to 55 whistleblowers under its Whistleblower Program. ( Here and here .) The SEC has also issued awards to seven individual whistleblowers of more than $10 million each, with the largest award totaling $50 million. Amendments to the CFTC Whistleblower Program In May 2017, the CFTC approved amendments to its Whistleblower Rules that significantly expanded whistleblower eligibility requirements and strengthened anti-retaliation provisions. ( Here .) Among other things, the CFTC or the whistleblower may now bring an action against an employer for retaliation against a whistleblower, and employers are prohibited from taking steps to impede a would-be whistleblower from communicating directly with CFTC staff about a possible violation of the CEA by using a confidentiality, pre-dispute arbitration or similar agreement. These amendments, along with the impact of the Supreme Court’s recent decision in Digital Realty Trust, Inc. v. Somers , should lead to increased whistleblower tips.  In Digital Realty , the Court held that the anti-retaliation provisions of the Act apply only to employees who report potential securities law violations directly to the SEC, and not only through internal company means. Digital="Digital" Realty="Realty" decision="decision" here.=">here.">  In 2017, the CFTC received a record number of whistleblower reports, nearly twice as many as in any other year. According to the CFTC, 2018 is on track to receive nearly twice as many tips as in 2017. ( Here .) Takeaway The awards, and the amendments to the Program, highlight the CFTC’s recent emphasis on the role of the whistleblower in fulfilling its regulatory mission. In the wake of these events, it is likely that the number of whistleblower tips will continue to rise.  For whistleblowers, these events should serve to encourage the disclosure of information about the potential violation of the commodities laws.  For companies, these awards should serve as a reminder to 1) adopt and implement policies and procedures to prevent and detect misconduct, including internal reporting mechanisms for individuals to report potential misconduct; 2) investigate allegations of wrongdoing reported by whistleblowers and remediate any misconduct found by investigators; and 3) avoid taking any retaliatory actions against whistleblowers for coming forward with information about potential misconduct.

Fraud Claim Dismissed on Statute of Limitations Grounds: Plaintiff Unable to Use The Discovery Rule to Save His Claims Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. C.P.L.R. § 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dep’t 2011). The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged” ( Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted)), “even though the injured party may be ignorant of the existence of the wrong or injury.” Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). While the foregoing statement of the law seems simple enough, its application is more complicated. Determining when accrual occurs is not easy and often contested. Also, hotly contested is the determination of when the plaintiff discovered or could have discovered the fraud. In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. Id . “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that s/he has been defrauded, a duty of inquiry arises, and if s/he fails to undertake that inquiry when it would have developed the truth, and shuts his/her eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him/her.  Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011).  The test as to when fraud should with reasonable diligence have been discovered is an objective one. Id . (citation and internal quotation marks omitted). Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”). “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” Celestin v. Simpson , 153 A.D. 3d 656, 657 (2d Dept. 2017). On July 23, 2018, Justice Platkin of the New York Supreme Court, Albany County, Commercial Division, issued a decision in Essepian v. United Group of Companies, Inc. , 2018 N.Y. Slip Op. 51153(U) ( here ), in which he dismissed fraud-based claims on the grounds that they were untimely under CPLR 213(8), even under the two-year discovery rule. The plaintiff, John P. Essepian (“Plaintiff” or Essepian”) brought suit to recover for injuries allegedly sustained as a result of investments he made in the DCG/UGOC Income Fund, LLC (“Income Fund” or “Fund”). The Income Fund was established, managed and operated to secure financing for various projects undertaken by defendant United Group of Companies, Inc. (“UGOC”). Among the initiatives undertaken by UGOC was the 2008 development of student housing projects near State University of New York (“SUNY”) campuses in Plattsburgh, Brockport and Cortland. Because of the 2008 financial crisis, UGOC had difficulty raising the necessary bank financing to build the student housing projects. UGOC eventually secured $50 million in financing from TIAA-CREF, but the loan was conditioned upon UGOC raising $18 million in equity. The United Defendants established the Income Fund in August 2008 as a vehicle to raise such funds from individual investors and issued a private placement memorandum (“PPM”) for the sale of $20 million in membership interests in the Fund. On the recommendation of his investment advisor, Edgar Page (“Page”), the chief executive of PageOne, an SEC-registered investment advisory firm, Plaintiff made two investments of $375,000 in the Income Fund in July 2010. Prior to making the recommendation, Page was aware that the United Defendants were investing the Income Fund’s assets into student housing projects that faced significant problems, rendering the investments highly risky. Various construction and occupancy issues associated with the projects, which were not disclosed to potential investors by the United Defendants in any communications associated with the Income Fund, eventually caused the projects to default and become subject to foreclosure and/or bankruptcy proceedings. In soliciting Essepian’s investment, Page represented that student housing projects “were a sound and conservative investment which would generate an internal rate of return of investment of not less than 9% annually and as much as 20-25% or more.” Page also claimed that “the United Defendants guaranteed that would generate a return on investment of not less than 9% each year.” Relying on Page’s advice, Essepian executed subscription agreements for the purchase of membership interests in the Fund. Simultaneously therewith, Essepian executed the operating agreement for the Fund and paid $750,000. By the time these transactions took place, defendant MCM refrained from “performing compliance and supervisory activity regarding sale of securities in the Income Fund.” In August 2014, the SEC initiated proceedings against Page and PageOne and issued an Order Making Findings (“SEC Order”) in March 2015. The SEC found that Page and his firm had “willfully violated” the Investment Advisers Act of 1940. The SEC Order found that Page had failed to disclose an arrangement with UGOC to clients – UGOC had agreed to purchase PageOne in exchange for Page’s commitment to buy $18.3 million worth of UGOC preferred stock using the assets of PageOne’s clients. The SEC also found that Page knew that UGOC “did not have sufficient liquidity . . . to complete the acquisition of PageOne” and was “selling personal assets to keep business going.” The SEC ultimately concluded that PageOne’s clients “invested between approximately $13 and $15 million” and that UGOC had paid Page approximately $2.7 million during the same period. Essepian commenced the action on July 12, 2016. Essepian allegeed causes of action for common law fraud, breach of fiduciary duty and/or aiding and abetting in a breach of fiduciary duty, negligent misrepresentation and unjust enrichment against the United Defendants, as well as a claim of aiding and abetting against the MCM Defendants. Essepian alleged that the United Defendants, together with Page as their agent, made factual misrepresentations in soliciting his investments. Specifically, Essepian alleged that the United Defendants falsely claimed that the Fund would invest in secured debt instruments backed by real estate assets that could quickly be converted to cash and would generate a high annual rate of return for investors, whereas the United Defendants allegedly knew that the troubled student-housing projects faced significant problems that made these returns highly unlikely and created a substantial risk of default. Plaintiff also alleged that the United Defendants misrepresented UGOC’s financial problems and its history of poor performance on similar projects.  Essepian further alleged that the United Defendants and Page failed to disclose facts that were material to his decision to invest in the Income Fund. On September 19, 2016, the United Defendants and MCM Defendants moved to dismiss the complaint for, among other things, failure to state a claim. After the motion was fully briefed, the moving defendants discovered that the complaint contained a material irregularity bearing on the timeliness of Essepian’s claims. The complaint alleged that Essepian entered into subscription agreements for the purchase of interests in the Income Fund on July 13, 2010 and July 14, 2010, respectively. However, review of the actual subscription agreements showed that Essepian signed the documents on June 18, 2010. Upon making the discovery, the moving defendants alerted Essepian’s counsel and asserted that all of his claims were time-barred. In response, Essepian’s counsel confirmed that the allegations of the complaint were incorrect and that Plaintiff had “signed the Subscription Agreements reflecting his interest in the Income Fund on June 18, 2010.” Counsel further indicated that a similar statute-of-limitations issue was pending in a virtually identical case brought by a group of Fund investors against the same defendants in the U.S. District Court for the Northern District of New York in Grasso v. United Group of Companies, Inc. , Case No. 1:16-cv-00965-GLS-CFH (N.D.N.Y.) (“Grasso”). On February 16, 2017, the parties agreed to stay the action pending a ruling on the statute-of-limitations issue in Grasso . On March 26, 2018, the court issued a decision and order in Grasso that dismissed the majority of the plaintiffs’ claims as time-barred. Grasso v. United Group of Companies, Inc. , No. 1:16-cv-965 (GLS/CFH), 2018 WL 1472579 (N.D.N.Y. Mar. 26, 2018), opinion amended and superseded , No. 1:16-cv-965 (GLS/CFH), 2018 WL 1737619 (N.D.N.Y. Apr. 9, 2018). The Court granted the moving defendants’ motion. Since the subscription agreements were signed in June 2010, a fact to which there was no dispute, the Court easily found that the six-year statute of limitations had run. There is no dispute that plaintiff executed and delivered the Subscription Agreements, and Management II accepted them, on June 18, 2010. Thus, for purposes of the six-year limitations period, the fraud-based claims accrued on June 18, 2010, at which point plaintiff became legally bound to the Income Fund in alleged reliance on the United Defendants’ fraudulent misrepresentations and concealments. As such, there can be “no serious dispute” that the fraud-based claims are untimely under the six-year limitations period. Citations omitted. Turning to the two-year discovery rule, the Court found that Essepian was on notice of the claim as early as 2012, when he received “statements, letters and other correspondence” regarding his investment, including the Fund’s 2012 and 2013 Audited Financial Statements. The Court agreed with the Grasso court “that the Fund’s 2012 and 2013 financial statements plainly ‘raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he had been defrauded.’” Quoting Grasso , 2018 WL 1737619 at *8. The Court observed that the 2013 Financial Statement, which Essepian received no later than May 30, 2014, advised investors that the student housing projects at SUNY Plattsburgh, Brockport and Cortland “continue to have occupancy issues” and informed him that “the lender commenced a foreclosure action against the project .”  The same financial statement, which included the report of the Fund’s independent auditor, also cautioned investors “in several places” that “‘the Fund is substantially invested in debt investments with an entity that is in foreclosure proceedings. The outcome of these proceedings is unknown; however, the proceedings raise substantial doubt about the Fund’s ability to continue as a going concern.’” In addition, noted the Court, the 2013 Financial Statement advised investors that “‘debt investments make up 55% of the Fund’s total assets.’” Both the 2012 and 2013 financial statements alerted investors that the Fund had invested in classes of assets that Essepian believed to have been improper and contrary to the representations made to him to induce his execution of the subscription agreements. The Court held that “ hese disclosures go to the heart of plaintiff’s fraud-based allegations regarding the struggling SUNY housing projects and the manner in which the Fund invested the capital it had raised from plaintiff and other investors.” “In fact,” said the Court, “plaintiff admits in his Complaint that the 2012 and 2013 financial statements ‘created uncertainty regarding the Income Fund’s ability to continue as a going concern . . . affected the debt instruments . . . of . . . student housing projects developed by UGOC and represented . . . as the primary investments to be financed using the assets of the .’”  Thus, concluded the Court, “‘the knowledge gleaned from the information contained within the 2012 and 2013 inancial tatements completely at odds with the representations that plaintiff[] allegedly relied upon’ in deciding to invest in the Income Fund.” Quoting Grasso , 2018 WL 1737619 at *8. The Court rejected Essepian’s argument that the financial statements were themselves materially false, and therefore “no duty of inquiry arose in 2014,” because the 2012 and 2013 Financial Statements informed investors that the Fund’s performance was improving year after year. Citing to the Court’s decision in Grasso , Justice Platkin noted that “the issue is not whether the 2012 and 2013 financial statements revealed the full and complete extent of the Moving Defendants’ alleged fraud, but rather whether the circumstances disclosed in the financial statements reasonably suggested that plaintiff may have been defrauded, so as to trigger a duty to inquire.” (Citations and quotation marks omitted).  For that reason, Essepian “misse the mark.” Quoting Grasso , 2018 WL 1737619 at *8. In light of the auditor’s warning that the Fund’s major investments were in default and/or foreclosure and that there were substantial doubts about the Fund's ability to continue as a going concern, the fact that the Fund’s management offered a vague reassurance regarding a ‘plan’ for increasing student occupancy is not the type of reassurance that would — or should — put a reasonable investor's mind at ease. In other words: o reasonable investor would look at the serious warnings set out by the auditor — warnings that the Income Fund’s future was in jeopardy — and rely on vague, unspecified hopes for a turnaround. Instead, the financial statements raised red flags that would have made a reasonable investor of ordinary intelligence aware of the probability that he had been defrauded. Citations omitted. The Court concluded that “the Financial Statements for 2012 and 2013 placed an objective investor in the Fund on notice of the substantial prospect that he or she had been defrauded.” Accordingly, the Court imputed knowledge of the fraud to Essepian as of the date the duty to investigate arose, which occurred no later than May 30, 2014, by which time plaintiff had received both the 2012 and 2013 Financial Statements. Thus, since Essepian “failed to commence th action within two years of being put on inquiry notice, fraud-based claims are not saved by application of the discovery rule. Accordingly, the fraud-based claims must be dismissed as barred by the expiration of the statute of limitations.” Takeaway Essepian highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of a fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he/she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights when the facts indicate that a wrong has be done.

Over the past year, the Centers for Disease Control and its parent agency, the Department of Health and Human Services (HHS), made several decisions that undermined the rights of whistleblowers . In December, for example, the CDC recommended that employees avoid using certain words (including “diversity” and “entitlement”) when preparing budget documents for Congress. Under Federal law, the government is prohibited from restricting the free speech of its employees without clarifying that those restrictions do not impair their right to disclose any illegal activity.  Action by an Alliance An alliance of organizations, including the Office of Special Counsel (OSC), an independent agency, which enforces the free speech rights of government employees, and the Government Accountability Project, launched an investigation into the HHS/CDC word ban and other gag orders. In a May 14 letter, the OSC reported that although this specific CDC/HHS policy did not violate any laws, it could incorrectly make employees believe that they do not have the right to voluntarily blow the whistle on wrongdoing. However, the OSC did report that since January 2017, the HHS explicitly violated the Whistleblower Protection Enhancement Act, including bans on unapproved communication with members of Congress and the media. (This Blog wrote about the Whistleblower Protection Act and the Whistleblower Protection Enhancement Act  here .) Now, the HHS and the Justice Department, which was also caught in violation of whistleblower laws, have both agreed to rewrite their gag-order policies, as well as advise their employees of their rights through an agency-wide email. An Epidemic? The HHS and the Justice Department are not the only agencies to have implemented policies that restrict employee speech. Through Freedom of Information Act requests, the OSC has found that many others,  including the Energy Department, the Department of Housing and Urban Development, the Agriculture Department, and the Drug Enforcement Administration, have also implemented policies without outlining their employees’ whistleblower protections. This is important because very few federal employees are even aware of their whistleblower rights and protections, and the policies only add to influence them to believe that exercising their legal rights violates their agency’s rules. Not only are agencies restricting whistleblower rights, but in March reported that the Department of Education was planning something that could restrict whistleblower protections during union contract negotiations.  The Department of Education tried to eliminate a guarantee against retaliation for employees who brought up grievances.  Anti-retaliation measures are an important part of whistleblower protection and a critical factor for whistleblowers who decide to come forward with information about wrongdoing or illegal activity. Despite the clear direction coming from the OSC and Congress to inform employees of their whistleblower rights, it seems as though it has not had much of an effect on the government's numerous agencies. The Benefit of Exposure The OSC has already held two major departments responsible for restricting whistleblower rights. This is an important step because stopping agencies from implementing policies that undermine whistleblower rights will encourage federal civil servants to voluntarily report wrongdoing without fear of retaliatory action. Ultimately, this exposure and open communication will benefit the public by creating a more efficient and effective government.

In the first six months of 2018, securities class action lawsuits were filed at “near record levels,” according to Cornerstone Research (“Cornerstone”).  In a July 25, 2018 report, entitled “Securities Class Action Filings – 2018 Midyear Assessment” (the “Report”), Cornerstone found that plaintiffs had “filed more than 750 federal securities class actions since midyear 2016,” the “most prolific 24-month period” since the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Report can be found here . Cornerstone’s press release announcing its findings can be found here . According to the Report, plaintiffs filed 204 securities fraud class action lawsuits during the first six months of 2018, which was twice 1997-2017, semi-annual historical average of 102 filings since the enactment of the PSLRA. Only the first half of 2017 exceeded the average with 223 filings. The 204 filings represent almost an 8 percent increase from the 189 securities fraud class action lawsuits filed in the second half of 2017. Based upon the first-half filings, Cornerstone projects a year-end total of 408 securities class action lawsuit filings – a 101% increase over the 10-year (1997-2017) annual average of 203 filings. The projected year-end total of 408 filings is slightly lower than the total number of annual filings in 2017 of 412 securities class action lawsuits – approximately a 1% decrease. The 750 federal securities class action lawsuit filings since midyear 2016 constitutes the highest number of filings in a 24-month period since Congress passed the PSLRA. “Despite the relatively stable markets, filing activity remains strong,” said Sasha Aganin, a vice president at Cornerstone Research and one of the report’s authors. “The record number of filings last year was primarily due to medium and smaller size cases, while in the first half of 2018 cases tend to be larger—we are seeing a return of mega filings and relatively fewer small cases.” Breaking Down the Numbers The Report breaks down the filings by type of lawsuits, e.g. , merger and acquisition (“M&A”), securities fraud (“Core Filings”), and state court actions under the Securities Act of 1933 (“Securities Act”). Of the 204 filings, 93 were M&A objection lawsuits and 111 were Core Filings. The 111 Core Filings during the first half of 2018 represented a 28% increase over the number of filings in the second half of 2017: 111 Core Filings in the first-half of 2018 from 87 in the second half of 2017.  The number of first-half filings in 2018, however, fell below the 127 Core Filings in the first half of 2017. Cornerstone found that “the number of federal filings involving transactions decreased” during the first half of 2018 from 102 to 93. The 93 M&A lawsuits filed during the first-six months of 2018 represent 46% of all first-half filings. As noted, Cornerstone annualized the first half data to determine the number of securities class action lawsuits filed by year end. By doing so, Cornerstone concluded that 8.5% of companies listed on “major U.S. exchanges” may become the subject of a securities class action lawsuit. “This rate is significantly above the historical average and slightly above the annual 2017 rate of 8.4 percent.” The Report notes that if the trend continues throughout the year, “2018 will be the sixth consecutive year in which the likelihood of a company being the subject of a class action increases.” The Report notes that even if M&A lawsuits were removed from the first-half totals, the number of issuers that would be subject to Core Filings in 2018 would still be higher compared to historical levels. The 2018 annualized percentage of listed companies subject to securities fraud class action lawsuits is 4.6%, slightly above the annual rate of 4.2% for such lawsuits in 2017. Notably, both rates are well above the 1997-2017 annual average rate for Core Filings of 2.9%. During the first half of 2018, Core Flings against S&P 500 companies were at their highest annualized rate since 2002. “On an annualized basis, 9.6 percent of S&P 500 companies were defendants in a class action” lawsuit in the first six months of 2018. During the period 2001 to 2017, in comparison, approximately 5.2% of S&P 500 companies were the subject of a Core Filing. First half Core Filings against non-U.S. companies (defined as companies headquartered outside the United States) declined slightly below 2017 levels, representing 22% of all Core Filings, compared to 23% in 2017. The Report noted that “ ince declining from the wave of Chinese reverse merger filings in 2011, the percentage of core filings against non-U.S. issuers steadily increased between 2013 and 2017, before falling slightly in the first half of 2018.” The Report also examined whether there were any patterns related to the filing of Securities Act cases in the aftermath of Cyan, Inc. v. Beaver County Employees Retirement Fund .  In March 2018, the U.S. Supreme Court held that state courts retain concurrent jurisdiction over Securities Act claims and that such lawsuits filed in state court may not be removed to federal court. cyan decision here.> cyan decision here.> In the second quarter of 2018 (post Cyan ), there were seven new filings under the Securities Act, four in federal court and three in California state court. Based upon the small sample size, Cornerstone concluded “no pattern was yet evident.” Cornerstone also analyzed the Disclosure Dollar Loss (“DDL”) and the Maximum Dollar Loss (“MDL”) for Core Filings. DDL measures the dollar value change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the close of the class period. MDL measures the dollar value change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the close of the class period.  According to the Report, DDL increased 166% to $157 billion in the first half of 2018, from $59 billion in the second half of 2017, the second highest semiannual amount since 1997. DDL in the first half of 2018 is 162% greater than the 1997-2017 semiannual average of $60 billion, due, in large part, to the increase in the number of mega filings (which include securities class action filings with a DDL of at least $5 billion and an MDL of at least $10 billion). The MDL index of $643 billion in the first half of 2018 increased 180% from $230 billion recorded in the second half of 2017. MDL in the first half of the year was more than double the 1997-2017 semiannual historical average of $301 billion. Finally, by Circuit, Cornerstone found that the Ninth Circuit saw the most Core Filings – 42 in the first half of 2018, up from 13 in the second half of 2017.