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In Mitsubishi Motors North America Inc. v. Grand Automotive, Inc. d/b/a Planet Mitsubishi , the United States District Court for the Eastern District of New York granted Mitsubishi Motors North America’s (“Mitsubishi”) request for a preliminary injunction pursuant to Rule 65 of the Federal Rules of Civil Procedure. Mitsubishi distributes its vehicles through a network of authorized dealerships that are authorized to “sell and provide services relating to…Mitsubishi motor vehicles, parts, and accessories pursuant to Dealer Sales and Service Agreements <“dssa”> .”  Entering into the DSSA, entitled dealers to the limited use of Mitsubishi’s trademarks and related intellectual property (“IP”) in connection with the sale of Mitsubishi vehicles.  Significantly, the license is strictly “limited to the authorized location of the dealership from which the dealer operates.” In 2016, Planet and Mitsubishi entered into a new three-year DSSA (the “Planet DSSA”), that, inter alia , authorized Planet to operate its dealership, and granted to Planet a non-exclusive license to use the IP (absent contrary prior written authority), exclusively at 265 North Franklin Street, Hempstead, New York (the “Location”). The Location was leased from the fee owner (“Landlord”).  Planet failed to timely notify the Landlord that it intended to exercise a renewal option under the lease and, accordingly, the Landlord sent notice to Planet that its lease was terminated.  At the time, Mitsubishi was not notified of this development.  Thereafter, Planet advised Mitsubishi that it was considering a new location, which, for a variety of seemingly appropriate reasons, was not approved by Mitsubishi.  Mitsubishi denied Planet’s subsequent request to relocate to a different alternative location (the “Unauthorized Location”) – again for seemingly appropriate reasons. Undaunted, despite Mitsubishi’s failure to approve same, Planet nonetheless relocated to the Unauthorized Location.  This move prompted Mitsubishi to serve a “cease and desist” letter to Planet demanding that it stop using the IP and otherwise comply with the Planet DSSA.  A “Notice of Termination” of the Planet DSSA was served as a result of Planet’s alleged failure to resolve the issues presented by the “cease and desist” letter. Mitsubishi commenced action and moved by Order to Show Cause for a Temporary Restraining Order (“TRO”) prohibiting Planet from using the IP and from operating a Mitsubishi dealership at the Unauthorized Location.  The requested TRO was granted and the Court directed briefing on whether to issue a preliminary injunction.  Upon review and analysis of the parties’ submissions, the Court issued a preliminary injunction. In order to establish entitlement to a preliminary injunction, the movant must demonstrate: 1. the likelihood of success on the merits; 2. irreparable harm absent preliminary relief; 3. that the balancing of equities tips in movant’s favor; and, 4. that injunctive relief is in the public’s interest.  The Court also noted that when “a preliminary injunction requires an affirmative act or mandates a specific course of conduct (as opposed to maintaining the status quo ), the injunctive relief is understood to be mandatory requiring the application of a ‘clear’ and ‘substantial’ likelihood of success on the merits.”  (Citations and some internal quotation marks omitted.) Irreparable Harm The Court described irreparable harm as the “single most important prerequisite” for preliminary injunctive relief, and stated that to prove same, the movant must demonstrate that “absent a preliminary injunction they will suffer an injury that is neither remote nor speculative, but actual and imminent, and one that cannot be remedied if a court waits until the end of trial to resolve the harm.  (Citations and some internal quotation marks omitted.)  The factors to consider in determining whether irreparable harm exists are: 1. the likelihood of irreparable injury absent the requested injunctive relief; 2. remedies at law – such as monetary damages – are inadequate to compensate movant; 3. the balancing of hardships favors the movant; and, 4. the public interest would not be “disserved” if the injunctive relief is granted.     (Citations and some internal quotation marks omitted.) The Court also recognized recent Second Circuit authority holding that courts “must not adopt a categorical or general rule or presume that the plaintiff will suffer irreparable harm” and, accordingly, must actually consider the consequences to the movant if the preliminary injunction is denied, but the movant prevails on the merits.  (Emphasis in original; citations and some internal quotation marks omitted.) Based on the evidence, the Court determined that irreparable injury was likely absent the requested relief based on Mitsubishi’s “loss of control over its reputation and goodwill caused by Defendant’s continued use of at the Unauthorized Location pending a final” merits determination.   Much of the Court’s analysis in this regard related to the contractual requirement that Mitsubishi approve the dealer’s location and the unsuitability of the Unauthorized Location for a Mitsubishi dealership. Mitsubishi had no adequate remedy at law because “the losses of reputation and goodwill and resulting loss of customers are not precisely quantifiable.”  As to the balancing of the equities, the Court found, among other things, that “Planet has only itself to blame for its present predicament by failing to timely exercise the lease extension option at .”  In addition, the Court presumably agreed with Mitsubishi’s position that, among other things, Planet will not be burdened because the injunction would simply prevent Planet from engaging in conduct to which it has no right to engage and its performance was so poor it consistently lost money on the sale of new Mitsubishi vehicles.  Finally, the public interest would be served by the granting of the requested injunctive relief because such would alleviate the potential for the “consuming public” to be confused as to whether Planet is an authorized Mitsubishi dealer. Likelihood of Success As previously discussed, the Court determined that a heightened standard of proof because “the relief sought here requires Planet to engage in an affirmative act or specific course of conduct ( i.e., removal of all from the Unauthorized Premises as well as Planet’s website) which would alter the status quo ante .” Applying the heightened standard, the Court found that Mitsubishi would likely succeed on its unfair competition claims because the Planet DSSA was properly terminated and, therefore, Planet’s continued use of Mitsubishi’s protectable IP is improper, unauthorized and would likely lead to confusion.  Even if the Planet DSSA was not properly terminated, the Court found that Mitsubishi would likely succeed on the merits of its unfair competition claims because the license to use the IP was contractually limited to the Location and, therefore, use of the IP at the Unauthorized Location was prohibited and might confuse the public into thinking such use was indeed permitted. Similarly, the Court found that Mitsubishi would likely succeed on the merits of its contract claims because “Planet’s unauthorized relocation and subsequent continued use of the constituted the initial breach of the parties’ agreement giving rise to damages.”

The Securities and Exchange Commission (“SEC”) has been busy so far this month. In the latest roundup, this Blog looks at three enforcement actions taken by the SEC against hedge funds and advisers involving fraud and insider trading. Hedge Fund Advisory Firm Settles Charges Related to Asset Mismarking and Insider Trading On May 8, 2018, the SEC announced ( here ) that New York-based Visium Asset Management LP (“Visium”), a hedge fund advisory firm, agreed to settle charges related to asset mismarking and insider trading by its privately managed hedge funds and portfolio managers.  Visium’s CFO also agreed to settle charges that he failed to respond appropriately to red flags that should have alerted him to the asset mismarking. According to the SEC’s cease-and-desist order (the “Order”) ( here ), Christopher Plaford (“Plaford”) and Stefan Lumiere (“Lumiere”), portfolio managers employed by Visium, falsely inflated the value of securities held by hedge funds Visium advised, causing the funds to falsely inflate returns, overstate their aggregate net asset value, and pay approximately $3.15 million in excess fees to Visium. The SEC also found that certain Visium portfolio managers traded in the securities of pharmaceutical companies in advance of two generic drug approvals by the U.S. Food and Drug Administration (“FDA”).  The trades were based on confidential information received from a former FDA official working as a paid consultant to Visium.  Trades were also made in the securities of home healthcare providers in advance of a proposed cut to certain Medicare reimbursement rates by the Centers for Medicare and Medicaid Services (“CMS”), based on confidential information received from a former CMS employee working as a paid consultant to Visium. In a separate order ( here ), the SEC found that Visium’s CFO, Steven Ku (“Ku”), failed to supervise Plaford and Lumiere by not responding appropriately to red flags that should have alerted Ku to their misconduct. The SEC previously charged Plaford and Lumiere, and the former FDA official, among others, for their misconduct, in an enforcement action filed in June 2016.  The former CMS employee was charged for other misconduct in May 2017.  Earlier this year, the SEC barred Lumiere from the securities industry based on a final judgment entered against him in the SEC’s case as well as his conviction in a parallel criminal case.  The SEC’s case against Plaford had been stayed pending the completion of a parallel criminal case. “Advisory firms must create a culture of zero tolerance when it comes to unlawful conduct, and supervisors at those firms must take reasonable measures necessary to detect and prevent securities law-related violations by their personnel,” said Marc P. Berger, Director of the SEC’s New York Regional Office.  “Here Visium’s portfolio managers engaged in illegal asset mismarking and insider trading, and Ku failed to act in the face of red flags that should have exposed the asset mismarking scheme.” In the settlement, Visium agreed to disgorge illicit profits totaling more than $4.7 million, plus interest of $720,711, and pay a penalty of more than $4.7 million.  Ku agreed to pay a $100,000 penalty and to be suspended from the securities industry for twelve months.  Visium and Ku each consented to the applicable SEC order without admitting or denying the findings. Registered Municipal Advisor and Its Owner Settle Charges Relating to Alleged Fraud in Connection with Multiple Municipal Bond Offerings On May 9, 2018, the SEC announced ( here ) that it charged a registered municipal advisor and its owner with defrauding a south Texas school district in connection with multiple municipal bond offerings. In the order instituting proceedings ( here ), the SEC found that in connection with three municipal bond offerings for a local school district in South Texas, Mario Hinojosa (“Hinojosa”) and his wholly-owned municipal advisor, Barcelona Strategies LLC (“Barcelona Strategies”), misrepresented their municipal advisory experience and failed to disclose conflicts of interests to their client.  According to the SEC, while working as a paralegal, Hinojosa set up Barcelona Strategies, registered it as an SEC municipal advisor, drafted a marketing brochure about the firm, and circulated the brochure to the school district and other municipalities.  The brochure created the misleading impression that Hinojosa and Barcelona Strategies had served as a municipal advisor on numerous municipal bond issuances and failed to disclose that Hinojosa had a financial interest in the school district’s offerings.  By virtue of their misrepresentations and omissions, Barcelona Strategies and Hinojosa improperly earned hundreds of thousands of dollars in municipal advisory fees. “Municipal advisors owe a fiduciary duty to their municipal clients, who rely on advisors to make important financial decisions,” said Shamoil T. Shipchandler, Director of the SEC’s Fort Worth Regional Office.  “Undisclosed conflicts of interest can lead to significant investment losses, and prevent municipal entities from making informed decisions in their selection of municipal advisors.  As described in today’s order, Barcelona fell well short of its obligations to this school district client.” Without admitting or denying the allegations, Barcelona Strategies and Hinojosa consented to a cease-and-desist order and agreed to jointly and severally pay $362,606 in disgorgement and $19,514 in prejudgment interest.  Barcelona Strategies was also assessed a civil penalty of $160,000, while Hinojosa was assessed a civil penalty of $20,000.  Finally, Hinojosa was barred from association with various regulated entities, including municipal advisors. Investment Adviser, Portfolio Manager, and Trader Charged with Mismarking Securities By Hundreds Of Millions of Dollars On May 9, 2018, the SEC announced ( here ) that it charged New York-based investment adviser Premium Point Investments LP (“Premium Point”) with inflating the value of private funds it advised by hundreds of millions of dollars.  The SEC also charged Premium Point’s CEO and chief investment officer Anilesh Ahuja (“Ahuja”), as well as Amin Majidi (“Majidi”), a former partner and portfolio manager at the firm, and former trader Jeremy Shor (“Shor”). According to the SEC’s complaint ( here ), the scheme ran from at least September 2015 through March 2016 and relied on a secret deal where in exchange for sending trades to a broker-dealer, Premium Point received inflated broker quotes for mortgage-backed securities (“MBS”).  In addition, the defendants allegedly used “imputed” mid-point valuations, which were applied in a manner that further inflated the value of securities. This practice allegedly boosted the value of many of Premium Point’s MBS holdings and further exaggerated returns.  The SEC alleged that the defendants overstated the funds’ value in order to conceal poor fund performance, attract and retain investors, and stave off redemptions. “Investors rely on their investment advisers to fairly and accurately value securities, and that is especially true when the securities trade in opaque markets,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “As we allege, Premium Point masked its true performance, which denied investors the opportunity to make informed investment decisions.” The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charged the defendants with fraud, with aiding and abetting fraud, or both.  The SEC seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties. The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of this matter, also announced charges against Ahuja, Majidi, and Shor ( here ).  Commenting on the charges, Audrey Strauss, the Attorney for the United States on the case, said: “Investors rely on a hedge fund’s performance numbers when deciding whom to trust with their capital.  To compete with other peer funds, Neil Ahuja, founder of an investment firm, allegedly manipulated the firm’s performance numbers, using fraudulently inflated values for the firm’s securities holdings and lying to investors about how the firm would mark its positions.  By allegedly cooking the books, Ahuja and his co-defendants made the fund appear more attractive to would-be investors and dissuaded current investors from withdrawing their investments.  We will continue to work with our law enforcement and regulatory partners to ensure that investors are provided accurate information when making important investment decisions.”

A client contacts you about a potential fraud claim. The client tells you that because of alleged false statements, she decided to hold her securities rather than sell them. She says that as result of the false statements she was deprived of the opportunity to sell at a higher price and, therefore, suffered damages when the securities declined upon the disclosure of the truth. Does she have a case? Recently, Justice Shirley Werner Kornreich of the Supreme Court, New County, Commercial Division, held, in an analogous situation ( i.e. , forbearance from taking action because of the defendant’s misrepresentations and omissions) that she does not. Q Chiuna Holdings, Ltd. v. TZG Capital Ltd. , 2018 N.Y. Slip Op. 30797 (Sup. Ct., N.Y. County, Apr. 23, 2018) ( here ) The Problems with Holder Claims In a holder claim, the plaintiff alleges that he/she had taken no action because of information provided by the defendant that was materially false or misleading. When the truth is disclosed, the plaintiff claims damages because he/she was deprived of the opportunity to secure the benefit of the transaction or event for which he/she took no action. As the above hypothetical indicates, a holder claim is often alleged as a fraud or a negligent misrepresentation cause of action. In New York, to plead and prove a cause of action for fraud, a plaintiff must demonstrate the following: a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff, and damages. E.g., Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009). To plead and prove a claim for negligent misrepresentation, the plaintiff must demonstrate: (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information. Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 180 (2011) (citations omitted). In holder claims cases, the plaintiff is often unable to demonstrate justifiable reliance and damages. Courts that have recognized holder claims have held that the holder’s forbearance from taking action ( e.g. , selling his/her securities) because of the defendant’s misrepresentations or omissions satisfies the reliance element of a common law fraud and negligent misrepresentation cause of action. They have found that the holder’s inaction ( e.g. , his/her retention of the security) is the equivalent of an action ( e.g. , the sale of a security) and, therefore, amounts to reliance on another’s misstatement or omission. In 1927, the Appellate Division, First Department, recognized the viability of a holder claim under circumstances in which the plaintiff could claim out-of-pocket damages. Continental Insurance Co. v. Mercadante , 222 A.D. 181, 183 (1st Dept. 1927). The plaintiffs in Continental Insurance alleged that, as a result of being fraudulently induced to refrain from selling their bonds, they were ultimately left with instruments that were “substantially worthless.” Id. at 182. Thus, because the bonds had virtually no value, Continental Insurance suffered an out-of-pocket loss, specifically, the loss of its investment in the bonds. More than 80 years later, the First Department called into question “the continued viability of such claims.…” Starr Found. v. Am. Int’l Grp. , 76 A.D.3d 25, (1st Dept. 2010). In Starr, the plaintiff alleged that the defendants’ misrepresentations regarding its exposure to losses in its CDS portfolio caused the plaintiff to hold its stock rather than sell it. Id. at 26-27. The plaintiff sought to recover the value it would have realized for its shares if the defendants had accurately reported the risk. Id. The court rejected the plaintiff’s fraud claim and held that the “plaintiff did not suffer any out-of-pocket loss as a result of retaining its [] stock.” Id . at 28. Since Starr , New York courts have reinforced the rule that holder claims in which only hypothetical lost profit damages are pled, with no supporting factual allegations concerning actual, out-of-pocket damages, are insufficient as a matter of law. See, e.g., Tradex Global Master Fund SPC v. Titan Capital Group III LP , 95 A.D.3d 586, 587 (1st Dept. 2012) (citing Starr, the First Department held that a holder claim based solely upon hypothetical lost profit was barred “under the out-of-pocket rule by which the true measure of damages for fraud is indemnity for the actual pecuniary loss sustained as a direct result of the wrong”); Universal Inv. Advisory SA v. Bakrie Telecom Pte, Ltd., 2016 N.Y. Slip Op. 50631 (Sup. Ct. New York County, Apr. 18, 2016). The courts reason that such claims are impermissibly speculative because it is impossible to know what the plaintiff would have received for his/her forbearance had he/she not been induced to do so. Connaughton v. Chipotle Mexican Grill, Inc ., 135 A.D,3d 535, 538 (1st Dept. 2016), aff’d, 29 NY3d 137, 142-43 (2017) 142-43 (“ his Court has consistent refus to allow damages for fraud based on the loss of a contractual bargain, the extent, and, indeed, . . . the very existence of which is completely undeterminable and speculative.”) (internal citations and quotation marks omitted). Thus, where the damages sought are based on what the plaintiff might have received had it taken action but for the fraud, the fraud claim must be dismissed because there can be no recovery for such a hypothetical injury. See Varga v. McGraw Hill Fin., Inc. , 147 A.D.3d 480, 481 (1st Dept. 2017). The other problem with holder claims cited by New York courts is the inability of the plaintiff to satisfy the justifiable reliance element of the fraud cause of action. In New York, to plead justifiable reliance, the plaintiff must demonstrate “with the required detail . . . how changed position or otherwise relied upon any purported misrepresentations or omissions to detriment.” Waggoner v. Caruso, 68 A.D.3d 1, 6 (1st Dept. 2009), aff’d, 14 N.Y.3d 874 (1st Dept. 2010). Merely alleging that forbearance is the equivalent of action does not satisfy the reliance element for a fraudulent misrepresentation claim. Q Chiuna Holdings, Ltd. v. TZG Capital Ltd. Background The Plaintiff, Q Chiuna Holdings, Ltd. (“QCH”), brought action to recover millions of dollars arising from the Defendants’ alleged unauthorized sale of a business venture in China and $5 million arising from the Defendants’ alleged fraudulent conduct to hide and misappropriate the proceeds of that sale. QCH alleged that the Defendants covertly sold 70% of Q-TZG Leasing Financial (China) Company Limited (“Leasing”) – a company the parties jointly owned, but in which the Defendant, TZG Capital Limited (“TZG Capital”), held the controlling share – to Shanghai Yu’an Investment Group Company, Limited, a Chinese state-owned enterprise (“Shanghai Yu’an”), on December 31, 2015 for the equivalent of $18,396,794, or approximately $1.10 per share (the “Sale”). QCH claimed that the sale agreement prohibited execution of the transaction without its prior written approval, and that the Defendants neither sought nor received QCH’s authorization to sell Leasing and did not report to QCH the $18 million sale price. QCH maintained that after carrying out the Sale, the Defendants hid all of the proceeds in a bank account that the Defendants opened for the sole purpose of concealing the sale proceeds from QCH. QCH alleged that, following the Sale, the Defendants began a fraudulent cover-up. On January 22, 2016, less than one month after the Defendants sold Leasing at $1.10 per share, the Defendants allegedly offered to “purchase” QCH’s stake at approximately $0.77 per share (a 30% discount to the price Shanghai Yu’an had paid the Defendants), which would have allowed the Defendants to defraud QCH of over $5 million. QCH claimed that it spent weeks attempting to negotiate better terms with the Defendants but could not convince them to pay QCH a higher price. Thereafter, according to QCH, Defendants falsely claimed that Shanghai Yu’an was an interested buyer (even though Shanghai Yu’an had already purchased Leasing months earlier). On May 13, 2016, despite explicit instructions from QCH not to sell unless a certain price was achieved, the Defendants represented that Shanghai Yu’an closed the purchase of 70% of Leasing for the equivalent of $11,276,879, on May 13, 2016 – almost 40% lower than the actual price at which Defendants had sold Leasing to Shanghai Yu’an on December 31, 2015. QCH eventually discovered that the Sale had occurred in December 2015 (through “documents filed with the Chinese government”). QCH never sold its stake in Leasing to TZG Capital. On December 7, 2016, QCH commenced the action by filing a complaint in which it asserted claims against TZG Capital, Hsiang I Ben Tsen (“Tsen”), and other individuals. On August 31, 2017, QCH filed a third amended complaint, in which it asserted causes of action for: (1) fraud; (2) breach of contract; (3) breach of fiduciary duty; and (4) fraudulent concealment. On October 2, 2017, the Defendants filed a motion to dismiss the first, third, and fourth causes of action. With regard to the fraud claims, the Defendants argued that QCH failed to plead justifiable reliance, noting that QCH did not identify any act QCH had taken, or refrained from taking, in reliance on the Defendants’ statements regarding the Sale or the alleged May 2016 buy-out of the Plaintiff’s remaining shares in Leasing. The Defendants claimed that QCH was unable to allege with particularity, how its reliance on Tsen’s communications about the timing and sale price of the Leasing transaction, or the proposed buy-out transaction, actually manifested in any of QCH’s actions, or inactions. Justice Kornreich granted the Defendants’ motion. The Court’s Ruling In granting dismissal of the fraud claim, the Court found that QCH failed to plead justifiable reliance with the requisite particularity: he alleged fraud consisted of the misrepresentations about the status of the Sale, which had actually occurred in December 2015 but which was represented to not have closed until May 2016. QCH does not allege it engaged in any action to its detriment in reliance on these untruths. To be sure, had QCH actually sold its stake in the Company based on the understanding that the Sale had not yet occurred, perhaps it might have a claim for being induced to sell based on a material misrepresentation about the value of the Company. However, QCH never sold its stake. Footnote omitted. The Court also found that QCH did not allege that it suffered any out-of-pocket damages, noting that QCH conceded at oral argument that the damages it suffered as a result of the alleged fraud was forbearance. Justice Kornreich held that such damages were “impermissibly speculative” because it was “impossible to know what” QCH “would have received” for its stake in Leasing “had it not been induced to hold onto it.” Citing, Connaughton , 29 N.Y.3d at 142-43. Given the foregoing, the Court described Q’s claim as “a quintessential ‘holder’ claim that is not permitted under New York law,” and dismissed the claims. Citing, Bank Hapoalim B.M. v. WestLB AG , 121 A.D.3d 531, 535 (1st Dept. 2014). Takeaway While the First Department has called into question the continued viability of a holder claim, cases like Q Chiuna demonstrate the difficulty in pleading and proving such a claim. Indeed, Q Chiuna shows that pleading such a fraud-based claim, can be almost insurmountable. Perhaps, then, the lesson of Starr and its progeny (such as, Q Chiuna ) is that holder claims should be viewed as typical common law fraud cases dependent upon the facts and circumstances of the matter before the court. See Universal Inv. Advisory SA (holding that “ Starr stands for the proposition that holder claims in which only hypothetical lost profit damages are pled, with no supporting factual allegations concerning actual, out-of-pocket damages, are insufficient as a matter of law,” and finding that the plaintiffs alleged “a definite, measurable, out-of-pocket loss … due to the alleged false post-offering representations.”). Viewed in that way, rather than as an ironclad rejection of such claims, the courts can examine holder claims as fraud-based causes of action dependent upon satisfaction of the elements of such a claim.

On several occasions, this Blog has treated issues related to problems faced by mortgagees foreclosing on certain residential loans.  “ Appellate Division Second Department Tells Foreclosing Residential Lender to ‘SHOW ME THE EVIDENCE’ ” addressed the sufficiency of evidence necessary for a foreclosing lender to demonstrate compliance with the requirement under RPAPL §1304 that ninety days prior to the commencement of an action to foreclose a home loan, a lender must send a letter to the borrower that, among other things, the loan is in default.  “ The Second Department Denies Summary Judgment To Another Foreclosing Mortgagee Due To The Insufficiency Of Evidence Presented On The Motion ” addressed the sufficiency of evidence necessary for a lender to demonstrate that it is the holder of the underlying note and mortgage and, thus, has standing to prosecute the foreclosure action.  Finally, “ 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 ” addressed the sufficiency of evidence required by a lender to prove that the “ninety-day” default notice required by RPAPL §1304 was properly mailed. Many of the onerous residential foreclosure rules apply only to “lenders” and, therefore, mortgagees that are not deemed “lenders” under the applicable rules need not comply with such rules.  For example, the requirements of RPAPL 1304 are applicable to “lenders”.  “Lender“ is defined in RPAPL §1304 as a “mortgage banker” as defined in Banking Law §590(1)(f) or an “exempt organization” as defined in Banking Law §590(1)(e) .  Section 590(1)(f) of the Banking Law defines “mortgage banker” as “a person or entity who or which is licensed pursuant to section five hundred ninety-one of to engage in the business of making mortgage loans in ” and §590(1)(e) of the Banking Law defines “exempt organization” as “any insurance company, banking organization, foreign banking corporation licensed by the superintendent or the comptroller of the currency to transact business in this state, national bank, federal savings bank, federal savings and loan association, federal credit union, or any bank, trust company, savings bank, savings and loan association, or credit union organized under the laws of any other state, or any instrumentality created by the United States or any state with the power to make mortgage loans .” Moreover, Banking Law §590(2)(a) provides that “ o individual, person, partnership, association, corporation or other entity shall engage in the business of making mortgage loans without first obtaining a license from the superintendent in accordance with the licensing procedure provided in this article and such regulations as may be promulgated by the superintendent.  Exempted from the licensure requirement of §590(2)(a), are, among others, “exempt organizations” and, in general, individuals, persons, partnerships, associations, corporations or other entities that do not make “more than three such loans in a calendar year, nor more than five in a two year period.” (See Banking Law §590(2)(a)(i) and (iii) .) Not all mortgagees are “lenders” as defined in the Banking Law.  Sometimes, for example, a seller of residential property will take a mortgage as part of the sale transaction if the purchaser is a relative, cannot obtain financing from a bank and/or if the seller treats the sale as a business deal and is motivated by a favorable rate of return that might be obtained as part of the transaction.  Similarly, private lenders may make mortgage loans, but not a sufficient number to require licensure under Banking Law §590(2)(a)(iii). Frequently, defendants in mortgage foreclosure actions assert defenses based on requirements imposed on “lenders” despite the fact that the foreclosing mortgagee is not a deemed “lender” under the RPAPL/Banking Law.  Such was the case in NIC Holding Corp. v. Eiseneggert (Sup. Ct. Suffolk Co. April 25, 2018) .  The plaintiff in NIC was a member of the New York Mercantile Exchange and one of its traders was relocating to Oklahoma.  In order to facilitate the sale of the trader’s home in conjunction with the move, plaintiff agreed to fund the defendant’s purchase of the home and, as security for the repayment of the loan, took back a $1,050,000 mortgage on the property. The NIC defendant defaulted and plaintiff commenced a mortgage foreclosure action.  In opposition to plaintiff’s motion for summary judgment and an order of reference to compute, defendant argued that the action should be dismissed because plaintiff failed to serve the ninety-day notice required by RPAPL §1304.  In response, plaintiff argued that it was not a “lender” and, therefore, was not required to serve such a notice. The NIC court agreed with the plaintiff and granted its motion.  The court determined that plaintiff, although it was a private lender, it was not a “lender” under RPAPL §1304 and did not have to send a ninety-day notice.  In this regard, the court credited the affidavit of plaintiff’s controller in which it was averred that “plaintiff is in the petroleum business and is not in the business of giving loans collateralized by mortgages for the purchase of residential homes.” TAKEAWAY The NIC court does not address the question of the number of mortgage loans that plaintiff may have made in the one or two-year period around the time that the subject loan was made.  ( See Banking Law §590(2)(a)(iii).)  Perhaps this issue may be argued if an appeal is filed. Individuals and entities that make a number of mortgage loans for business reasons, as accommodations to employees (as was the case in NIC ) or otherwise, should take note of Banking Law §590(2)(a)(iii) and determine whether licensure under the Banking Law is necessary.

Jonathan H. Freiberger, a member of the law firm of Freiberger Haber LLP , was selected by the Queens Economic Development Corporation (“QEDC”) to be a judge in the 2018 Queens StartUP! Competition, a signature program of the QEDC that provides Queens-based small business owners and aspiring entrepreneurs with business education, mentoring, access to capital and development of business skills. In his role as a judge, Mr. Freiberger reviewed, analyzed and provided feedback on several of the entrants’ business plan submissions.  The winners were announced at an awards presentation on April 26, 2018 at Resorts World Casino in Jamaica, New York.  Each winner took home a $10,000.00 cash prize to help grow their respective businesses. Freiberger Haber LLP congratulates the deserving winners: Victor Hunt (Paragon Real Estate Technologies) (innovation category); Movitsza Simmons (Smooth Pops) (food category); and, Rebecca Deutsch (Impact Fashion) (community category). Mr. Freiberger was proud to participate in such a meaningful event.  “In our practice, we provide business counsel and litigation services to individuals and businesses of all sizes.  It was nice to be able to give back to the community by participating in the Queens StartUP! event and assisting participating entrepreneurs in making their business ventures become a reality or otherwise furthering their business goals.  I hope to be given the opportunity to participate again next year,” said Mr. Freiberger. Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals involved in a broad range of complex business and commercial litigation matters.  The firm’s attorneys combine the sophistication and counsel of a large national law firm with the economy, flexibility, commitment and personal attention of a small firm. The QEDC’s mission is to create and retain jobs through programming that grows Queens neighborhoods, assists small businesses and promotes tourism and business development. Since 1977, QEDC has worked with scores of neighborhoods to revitalize their commercial districts by creating business organizations and establishing business improvement districts. Entrepreneurs are assisted in the preparation of business plans through individual counseling, classes and workshops. The Queens Tourism Council promotes the many cultural, recreational and retail opportunities within the borough.  Funding for the Start UP! Competition is made available from Resorts World NYC. ATTORNEY ADVERTISING. © 2018 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 105 Maxess Road, Suite S124, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact: Jonathan H. Freiberger, Esq. Freiberger Haber LLP Melville Office (Main Office) : 105 Maxess Road, Suite S124 Melville, N.Y. 11747 Tel: (631) 282-8985 (main) Tel: (631) 282-8983 (direct) New York Office : 708 Third Avenue, 5th Floor New York, N.Y. 10017 Tel: (212) 209-1005 Fax: (212) 209-7101 Email: info@fhnylaw.com

It is not uncommon for a person or entity holding money to be placed in a situation where multiple parties claim entitlement to the funds being held. Given the competing claims to the funds, the holder can wait for the parties to resolve their dispute or file an interpleader action asking the court to decide who should get the funds being held. An interpleader action “is an equitable proceeding” brought by a third party to have a court determine the ownership rights of multiple claimants to the same asset or property that is held by that third party. Truck-A-Tune, Inc. v. Re , 23 F.3d 60, 63 (2d Cir. 1994); William Penn Life Ins. Co. v. Viscuso , 569 F. Supp. 2d 355, 362 (S.D.N.Y. 2008) (“Although sanctioned by statute, interpleader is fundamentally an equitable remedy.”). The property in question is called the stake or “res”, and the third party who has custody of the stake is called the stakeholder. In the absence of an interpleader action, the stakeholder must either give the asset or property to one of the parties claiming ownership or face a lawsuit for wrongfully giving the asset or property to the other claimant. An interpleader action, therefore, enables the stakeholder to turn the dispute over to a court. It is designed to eliminate multiple lawsuits over the same stake and to protect the stakeholder from actual or potential liability. To initiate an interpleader action, the stakeholder must file a complaint alleging that it has no claim to the asset or property in dispute and does not know to which claimant the stake should be delivered. The stakeholder must also establish the possibility of multiple lawsuits. The stakeholder may be required to deposit the stake with the court and must notify the claimants that they can assert their ownership claims in court for determination. The court must then decide whether the interpleader is proper. It has discretion to allow the interpleader and may deny the relief if the stakeholder is guilty of wrongdoing. If the court grants the interpleader, the stakeholder is dismissed from the action. The claimants are given the right to litigate their claims and will be bound by the decision of the court. Under federal law, there are two forms of interpleader: rule interpleader, under Federal Rule of Civil Procedure 22; and statutory interpleader, under 28 U.S.C. § 1335. Both serve the same function of joining two or more adverse claimants to a single proceeding in order to promote efficiency and protect the stakeholder from multiple lawsuits. District Attorney of N.Y. County v. The Republic of The Philippines , No. 14 Civ. 890 (KPF) (S.D.N.Y. Mar. 29, 2018) (citing Bradley v. Kochenash , 44 F.3d 166, 168 (2d Cir. 1995)). Differences between the two forms of interpleader concern personal and subject matter jurisdiction, service of process, and venue. Id . See also 4 J. Moore et al., Moore’s Federal Practice § 22.04<1> (3d ed. 2017). The most important distinction involves the requirements for subject matter jurisdiction. For interpleader under Rule 22, subject matter jurisdiction must be based on Article III of the Constitution and the jurisdictional statutes. In other words, “a traditional basis for subject matter jurisdiction must exist.” 6247 Atlas Corp. v. Marine Ins. Co., Ltd., No. 2A/C , 155 F.R.D. 454, 465 (S.D.N.Y. 1994). Statutory interpleader, by contrast, requires only minimal diversity — “that is, diversity of citizenship between two or more claimants, without regard to the circumstance that other rival claimants may be co-citizens.” State Farm Fire & Cas. Co. v. Tashire , 386 U.S. 523, 530 (1967). In New York, interpleader is governed by CPLR § 1006. Like its federal counterparts, CPLR § 1006(a) enables a stakeholder who faces liability as a result of conflicting claims to an asset, but has no interest in that asset, to commence an interpleader action against the competing claimants, and compel them to litigate the matter among themselves. American Intern. Life Assur. Co. of N.Y. v. Ansel , 273 A.D.2d 421 (2d Dept. 2000). However, when there are adverse claims to a particular fund, but those claims do not expose the interpleader party to liability, the interpleader party is not a stakeholder within the meaning of CPLR §1006(a) and, therefore, may not proceed by way of interpleader. See Royal Bank of Canada v. Weiss , 172 A.D.2d 167 (1st Dept. 1991). Therefore, under New York law, the interpleader remedy is available only to a stakeholder. Bankers Trust Co. v. Hogan , 196 A.D.2d 469 (1st Dept. 1993). When a claimant alleges that the stakeholder is liable for an independent wrong, such party is not a mere stakeholder, notwithstanding its assertion that it has no interest in the disputed funds. The key is that the “claim[ ] for relief . . . must be based on wrongful conduct independent from the filing of an interpleader, or the retention of interpleaded assets pending direction from the court.” Bank of New York v. First Millennium, Inc. , No. 06 Civ. 13388 (CSH), 2008 WL 953619, at *7 (S.D.N.Y. Apr. 8, 2008) (internal quotation marks and citation omitted); Inovlotska v. Greenpoint Bank , 8 A.D.3d 623 (2d Dept. 2004). Under such circumstances, it is an improvident exercise of discretion for a court to discharge the stakeholder before the question of its alleged liability has been adjudicated. Inovlotska , 8 A.D.3d at 624-25; Birnbaum v. Marine Midland Bank , 96 A.D.2d 776 (1st Dept. 1983). On April 16, 2018, Justice Scarpulla of the Supreme Court, New York County, Commercial Division, addressed the foregoing principles in a decision in which the Court declined to hold a stakeholder liable for tortious interference with contract due to the filing of an interpleader action.   SPV-LS LLC v. Citron , 2018 N.Y. Slip Op. 30681(U) (Sup. Ct., N.Y. County Apr. 16, 2018) ( here ). SPV-LS LLC v. Citron Background SPV-LS arose out of a dispute over proceeds of a stranger-originated life insurance policy (the “Policy”), which insured the life of Nancy Bergman (“Nancy”) for ten million dollars. Nancy obtained the Policy from Transamerica Life Insurance Company (“Transamerica”) in October 2006. Nancy, as grantor, and Nacham Bergman (“Nacham”), as trustee, thereafter created the N. Bergman Insurance Trust (the “Trust”) to which Nancy transferred ownership of the Policy. Premium payments for the Policy were allegedly funded by a group of investors (“Investors”) in exchange for either a portion of the proceeds from the sale of the Policy or Nancy’s death benefits if she died before the Policy was sold. In November 2009, Nacham, as trustee, entered into a Life Insurance Policy Purchase and Sales Agreement (the “Sale Agreement”) with Plaintiff, Financial Life Services, LLC (“FLS”), whereby FLS agreed to purchase the Policy from the Trust for $1,350,000. Pursuant to the Sales Agreement, if any of the Trust’s representations or warranties were false, FLS could either require the Trust to repurchase the Policy or move forward with the transaction but at a reduced purchase price. In December 2009, FLS learned that the Trust failed to make a required premium payment to Transamerica, causing the Policy to enter a grace period, and that some of the Trust’s representations and warranties were false at the time of the sale. Upon learning this information, FLS attempted to exercise its remedies under the Sale Agreement ( e.g. , rescind the agreement or proceed with the purchase at a reduced price). The Trust refused to comply. As a result, in October 2010, FLS filed a lawsuit in the Eastern District of New York against the Trust seeking specific performance under the Sale Agreement. On January 9, 2012, the court issued an order directing that the sale of the Policy occur by auction on or before February 7, 2012. One day before the auction, the Trust filed a voluntary bankruptcy petition in the Eastern District of New York (“Bankruptcy Action”). Thereafter, the automatic stay in the Bankruptcy Action was lifted, and the Bankruptcy Action was dismissed. Subsequently, FLS purchased the Policy through an auction for $1,194,522. The Policy was later transferred to Plaintiff, SPV-LS LLC (“SPV”). While the foregoing proceedings were taking place, Transamerica received competing claims to the Policy proceeds. On April 22, 2014, Nachman sent Transamerica a letter in which Nachman claimed that he was the rightful Policy beneficiary, that he never transferred ownership of the Policy, and that he commenced legal proceedings to establish his ownership. In May 2014, Malka Silberman (“Malka”), the wife of one of the Investors, asserted a claim to the Policy, claiming that she was a successor trustee of the Trust. Because of the competing claims to the Policy proceeds, Transamerica refused to distribute the proceeds. On June 13, 2014, SPV initiated a breach of contract action against Transamerica to recover the Policy proceeds in the United States District Court for the District of South Dakota (“South Dakota Action”). On June 17, 2014, Transamerica answered the complaint by commencing a third-party interpleader action pursuant to 28 USC § 1335 against Plaintiffs, Nachman as the Trust’s trustee, Malka as the Trust’s successor trustee, and Nancy’s Estate. Shortly thereafter, Transamerica deposited the proceeds of the Policy into the court pursuant to 28 USC §13325(a)(2). On March 30, 2015, Transamerica’s motion to be discharged from the action was preliminarily granted “to the extent that Plaintiff SPV and all Third-Party Defendants are enjoined from instituting any action or other proceeding against Transamerica with regard to the Policy benefits at issue here.” By order dated June 14, 2016, the court discharged Transamerica from liability as Defendant and Third-Party Plaintiff and awarded it attorney fees. The court in the South Dakota Action ultimately found that Plaintiffs were entitled to the Policy proceeds. Plaintiffs commenced the action in New York Supreme Court in March 2017. Among other things, Plaintiffs alleged that Defendants tortiously interfered with the Policy by interpleading the Policy proceeds in the South Dakota Action. Defendants moved to dismiss. The Motion Court’s Decision The Court easily disposed of the tortious interference with contract claim, finding that “Transamerica did not breach its contract with SPV by interpleading the Policy proceeds.” (Citations omitted.) The reason said the Court: “a stakeholder is allowed to bring an interpleader action, rather than choosing between adverse claimants.…” Thus, even though Transamerica declined “to choose between the adverse claimants (rather than bringing interpleader action),” that decision could not “itself be a breach of a legal duty.” Citations omitted. The Court went on to note that Plaintiffs failed to allege any breach of contract based on an independent claim of liability. Instead, Plaintiffs merely alleged “a claim to the stake itself.” Citing Clearlake Shipping PTE Ltd. v. O.W. Bunker (Switzerland) SA , 2017 A.M.C. 656, 666 (S.D.N.Y. 2017) (internal citations omitted). Alleging that Transamerica “should have paid SPV the Policy proceeds ‘rather than instituting the interpleader’” held the Court, “is not an ‘independent’ claim’” upon which relief can be granted. Id . Takeaway An interpleader action protects the holder of assets (such as a bank account, brokerage account or life insurance policy proceeds) and property when there is a dispute between two or more parties claiming ownership. The stakeholder can file an interpleader action to deposit the assets into court to allow the competing claimants to litigate the ownership of the stake, thereby allowing the stakeholder to be discharged from further liabilities. Where, as in SPV-LS , the stakeholder declines to choose between the competing claimants, and files an interpleader action, the stakeholder cannot be held liable for an independent cause of action. SPV-LS illustrates that more is needed to hold the stakeholder liable – a wrong independent of the interpleader action.

A shareholder is a part owner of a company. While many people understand this very basic concept in business matters , they may not realize what kinds of rights and responsibilities come along with being a shareholder. Shareholders in private companies generally have the same rights as they would in a public company, but they may be enforced differently. A New York business lawyer can help you understand the difference and even assert your rights should you feel that you are being treated unfairly as a part owner of a private company. Your Rights in a Publicly Traded Company Your rights will be affected based on whether you own stock in a public or private company. A public company is traded on a public exchange, such as the New York Stock Exchange. When you are a shareholder, you are also called a “stockholder.” As a stockholder, you are often one of the hundreds, if not thousands, of part owners. Your major role as a stockholder is to provide funds to the company through your purchase of stock. While you can participate in the governance of the company, most public investors choose not to be involved.   Nonetheless, as a shareholder in a publicly traded company, you can: Share in the profits of the company based on your percentage of ownership (in the form of dividends or other distributions) Participate in shareholder meetings Purchase more shares or sell your shares Vote in annual or general meetings Sue for wrongful acts of the board of directors or another managing body Shareholders in a publicly traded company may not have much of a voice because their percentage of ownership in the company is relatively small. Shareholders’ Rights in Private Companies A shareholder in a private company often has much more control than those who own a portion of a publicly traded company. Private companies are more likely to be considered family companies or closely held businesses. They have far fewer shareholders or investors, but those shareholders are much more likely to assert their rights as a shareholder. To attract investors, private companies will often give shareholders more control or involvement in the company. Shareholders will often play a significant role in the management of the company. Shareholders in private companies have three major rights: Access to information Voting rights Rights related to attending and participating in meetings While these rights are similar to publicly traded companies, they are different for one significant reason: there are usually far may be fewer voices at the meetings. That means that each opinion or view is heard louder compared to publicly traded companies. Asserting Your Rights as a Shareholder In some situations, your shareholder rights may be disregarded in a private company. Depriving you of access to information is one of the most common complaints. If you feel that you are being mistreated as a shareholder, you may have legal options.   Schedule a consult with the experienced attorneys at Freiberger Haber LLP to discuss your business issues today.

E.J.Brooks Company d/b/a TydenBrooks (“TydenBrooks” or “Plaintiff”) manufactures plastic security seals (“Seals”). When TydenBrooks acquired Stoffel Seals Corp. (“Stoffel”) it came to own Stoffel’s fully automated, and confidential, process for manufacturing Seals.  Some TydenBrooks employees “defected to a rival manufacturer, Cambridge Security Seals (“CSS”), and brought with them TydenBrooks’ confidential Seal manufacturing process. TydenBrooks then commenced an action in the United States District Court for the Southern District of New York and asserted causes of action sounding in common law misappropriation of trade secrets, unfair competition , and unjust enrichment.  On the issue of damages: TydenBrooks sought to measure its injury by the costs CSS avoided as a result of its unlawful activity.  Under this “avoided costs” theory, TydenBrooks sought monetary relief in an amount equal to the difference between the costs CSS actually incurred in developing and using the TydenBrooks’ manufacturing process and the costs that CSS would have incurred had it not misappropriated TydenBrooks’ process. TydenBrooks presented CSS’ avoided costs as a measure of CSS’ benefit from the misappropriation, “which TydenBrooks asserted was its per se measure of damages.”  TydenBrooks failed to present evidence or argue that “CSS’ avoided costs could be a proxy for its own losses.”  Consistent with this position, TydenBrooks repeatedly urged that “its own financial losses were irrelevant to its “avoided costs” theory of damages.”  The Federal District Court’s jury charge was based on TydenBrooks’ theory of damages and the Court: Reminded the jury that it “may award compensatory damages only for injuries that TydenBrooks proved were proximately caused by defendants’ allegedly wrongful conduct” and “only for those injuries that TydenBrooks has actually suffered or which it is reasonably likely to suffer in the near future.” However, the court did not explain how the jury cold make the inference that CSS’ avoided costs approximated the losses that TydenBrooks “actually suffered” or was reasonably likely to suffer in the near future (emphasis in original). The jury returned a verdict in favor of TydenBrooks.  Among the post-judgment activity of the parties was a motion by CSS for various forms of relief based on “avoided cost” being an improper measure of damages.  In denying CSS’ motion, the court held that “the amount of damages recoverable in an action for misappropriation of trade secrets may be measured either by the plaintiff’s losses…or by profits unjustly received by the defendant” and that avoided costs “could either measure the defendant’s gain or, alternatively, the plaintiff’s losses.” On CSS’ appeal from the District Court’s denial of its post-judgment motion, the Second Circuit Court of Appeals , certified, among another, the following question to the New York Court of Appeals: “Whether under New York law, a plaintiff asserting claims of misappropriation of trade secret, unfair competition, and unjust enrichment can recover damages that are measured by the costs the defendant avoided due to its unlawful activity.”  In so certifying its question, the Court recognized that “neither the Second Circuit nor the New York courts appear to have approved the specific type of award in this case.” (Internal brackets omitted.) On May 3, 2018,  the Court of Appeals, in  E. J. Brooks Company v. Cambridge Security Seals , issued an opinion answering in the negative, the certified question of whether “avoided cost” analysis is the appropriate measure of damages in misappropriation of trade secret cases.  In reaching its conclusion, the Court of Appeals recognized that the “fundamental purpose of compensatory damages is to have the wrongdoer make the victim whole.”  (Citations and internal quotation marks omitted.) As to Unfair Competition The essence of TydenBrooks’ case was a misappropriation theory of unfair competition, which makes a party liable if they “exploit the skill, expenditures and labors of a competitor” (citations and internal quotation marks omitted), and was described by the Court as follows: The essence of the misappropriation theory is not just that the defendant has reaped where he has not sown, but that it has done so in an unethical way and thereby unfairly neutralized a commercial advantage that the plaintiff achieved through honest labor (citations, brackets and internal quotation marks omitted). The Court noted that the damages must be measured by plaintiff’s loss of commercial advantage, which “may not correspond to what the defendant has wrongfully gained.”  Thus, the Court recognized that while “courts may award a defendant’s unjust gains as a proxy for compensatory damages in an unfair competition case,” “the accounting for profits in such cases is not in lieu of damages but is the method of computing damages.” (Emphasis in original, citations and internal quotation marks omitted.)  Such calculations may be appropriate where plaintiff’s actual losses cannot be accurately traced, but there still must be some correlation between the defendant’s gains and the opportunities lost by the plaintiff. As to Trade Secret The Court then analyzed whether “avoided costs” may be awarded in trade secret cases, in which a plaintiff must prove that it “possessed a trade secret” and that the defendant “is using the trade secret in breach of an agreement, confidence, or duty, or as a result of discovery by improper means.” (Citations omitted.)  The Court too, concluded that “damages in trade secret actions must be measured by the losses incurred by the plaintiff, and that damages may not be based on the infringer’s avoided development costs” and that calculations tied to defendant’s gains, as opposed to plaintiff’s losses, are not “permissible measure of damages. This Blog recently addressed pleading requirements in trade secret cases < here =">here"> . As to Unjust Enrichment Nor can “avoided costs” be a measure of compensatory damages in a claim for unjust enrichment, in which a plaintiff must show that: 1. the defendant was enriched; 2. at plaintiff’s expense; and, 3. that equity and good conscience should not permit the defendant to keep that which the plaintiff seeks to recover. The Court held that “where a defendant saves, through its unlawful activities, costs and expenses that otherwise would have been payable to third parties, those avoided third-party payments do not constitute funds held by the defendant ‘at the expense of’ the plaintiff” and, accordingly, “a plaintiff bringing an unjust enrichment action may not recover as compensatory damages the costs that the defendant avoided due to its unlawful activity in lieu of the plaintiff’s own losses.” It should be noted that a lengthy dissent, in which two justices concurred, is rather critical of the majority decision, in which three justices concurred.

It is well settled that arbitration is a favored means of resolving disputes. See , e.g. , CPLR § 7501 (“A written agreement to submit any controversy . . . to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.”); Harris v. Shearson Hayden Stone, Inc. , 82 A.D. 2d 87, 91-93 (1st Dep’t), aff’d , 56 N.Y.2d 627 (1981) (“ his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties. . . .”). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Matter of Smith Barney Shearson v. Sacharow , 91 N.Y.2d 39, 49-50 (1997) (citations and quotation marks omitted). Nonetheless, “ ike contract rights generally, a right to arbitration may be modified, waived or abandoned.” Sherrill v. Grayco Bldrs. , 64 N.Y.2d 261, 272 (1985). Accordingly, a litigant may not compel arbitration when his/her use of the courts is “clearly inconsistent with later claim that the parties were obligated to settle their differences by arbitration.” Flores v. Lower E. Side Serv. Ctr., Inc. , 4 N.Y.3d 363, 372 (2005) (citations and internal quotation marks omitted). “Generally, when addressing waiver, courts … consider the amount of litigation that has occurred, the length of time between the start of the litigation and the arbitration request, and whether prejudice has been established.” Cusimano v. Schnurr , 26 N.Y.3d 391, 400-01 (2015). There is no bright-line rule or rigid formula “for identifying when a party has waived its right to arbitration;” rather, the courts apply the foregoing factors to the facts of the case before it.   Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce, Fenner & Smith Inc. , 626 F3d 156, 159 (2d Cir 2010). “That said,” however, “‘ he key to a waiver analysis is prejudice.’” Id. And, when examining whether there is prejudice, the courts look to see if the opposing party is procedurally and substantively harmed by arbitration and whether the opposing party will incur excessive costs and delay by going to arbitration. Id . See also Cusimano , 26 N.Y.3d at 401. On April 17, 2018, the Appellate Division, First Department issued a decision in Black Rhino Investments LLC v. Wilson , 2018 N.Y. Slip Op. 02582 (1st Dept. Apr. 17, 2018) ( here ), in which it held that the plaintiffs had waived their right to arbitrate their claims after the defendant moved to dismiss the complaint. Black Rhino Investments LLC v. Wilson Background Black Rhino arose from a business venture to sell wearable air purifying equipment in China. In April 2015, Plaintiff, Howard R. Levitt (“Levitt”), entered into discussions with John Wilson (“Wilson”) and non-party, Darui Jiang (“Jiang”), about launching the venture. The venture was to be known as Black Rhino (“Black Rhino,” the “Business” or the “Company”). During the early stages of their discussions, Levitt, Wilson, and Jiang agreed that Levitt would provide certain services to the Business, including assisting in raising investment funds, acting as an advisor, and acting as a Board Member of the Company, in exchange for a 2% equity stake in the Business and other identified remuneration (the “Agreement”). The Agreement contained an arbitration clause, which provided, in pertinent part, that “ ny controversy or claim arising out of or relating to this contract … shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules.” In July 2015, Levitt introduced Wilson and Jiang to Plaintiff, Jonathan Bloostein (“Bloostein”). Following the introduction, Levitt, Bloostein, and Jiang began working to get the Business operational, while Bloostein also provided the funding necessary to do so. On September 16, 2015, the parties incorporated the Company in Delaware. Thereafter, in October 2015, the parties met to discuss ownership of the Business. By the conclusion of the meeting, the parties agreed to supplement and revise the Agreement. Sometime later, Wilson allegedly reneged on the deal with the other members of the Company. Motion Court Proceedings Plaintiffs commenced the action on July 17, 2016. Two months later, Wilson moved to dismiss the complaint. On October 26, 2016, following the filing of the motion, and pursuant to the arbitration provision in the Agreement, Plaintiffs filed a Demand for Arbitration and Statement of Claim (the “Arbitration Demand”) with the AAA. Although Plaintiffs Bloostein and Black Rhino were not parties to the Agreement, Bloostein and Black Rhino each executed and submitted a form along with the Arbitration Demand submitting to AAA arbitration. Following a conference with the motion court, Plaintiffs moved to compel arbitration pursuant to CPLR § 7503(a). The motion court granted Plaintiffs’ motion. The Court rejected the argument that Plaintiffs waived their right to arbitration by filing the Arbitration Demand after Defendant filed the motion to dismiss, stating that such activity “is not sufficient” and “has never been held to be sufficient prejudice.” Instead, the motion court explained that the activity needed to constitute a waiver was greater than filing a complaint and a motion to dismiss: “Extensive discovery, extensive motion practice, hearings, trials, that is” required. Defendant appealed. The First Department’s Decision The First Department “unanimously reversed” the motion court’s order. In a terse decision, the Court found that by moving to compel arbitration after the filing of the motion to dismiss, Plaintiffs waived their right to arbitration notwithstanding the arbitration clause in the Agreement: Plaintiffs commenced this action upon an alleged oral agreement entered into in October 2015 involving the ownership of plaintiff Black Rhino and the licensing of defendant’s intellectual property. Upon defendant’s motion to dismiss the complaint, plaintiffs claimed for the first time that the controversy had to be arbitrated, pursuant to a separate agreement entered into in April 2015 involving services to be performed for Black Rhino by plaintiff Levitt. We find that plaintiffs waived their right, if any, to arbitration ( see Cusimano v Schnurr , 26 NY3d 391, 400-401 <2015> ; Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce, Fenner & Smith Inc. , 626 F3d 156, 159 <2d cir 2010> ). Although the First Department did not elaborate further, its citation to Cusimano is notable. In Cusimano , the plaintiff sought to compel arbitration after filing a complaint in Supreme Court, New York County, and after the defendant had filed a motion to dismiss under CPLR § 3211. The Court of Appeals held that such activity demonstrated a waiver of arbitration. In so holding, the Court found that the defendant had been prejudiced by the attempt to arbitrate in terms of the imposition of excessive costs and time delay, and the forum shopping engaged in by the plaintiff, which the Court viewed as an attempt to avoid a court ruling on claims that the motion court found to be “vexatious and largely time-barred.” 26 N.Y.3d at 401 (relying on Louisiana Stadium , supra ). Takeaway Prior to Cusimano , New York courts placed a lot on emphasis on the degree of participation by the parties in the action to determine whether their actions were consistent with the assertion of the right to arbitrate: The crucial question, of course, is what degree of participation by the defendant in the action will create a waiver of a right to stay the action. In the absence of unreasonable delay, so long as the defendant’s actions are consistent with an assertion of the right to arbitrate, there is no waiver. However, where the defendant’s participation in the lawsuit manifests an affirmative acceptance of the judicial forum, with whatever advantages it may offer in the particular case, his actions are then inconsistent with a later claim that only the arbitral forum is satisfactory. De Sapio v. Kohlmeyer , 35 N.Y.2d 402, 405 (1974). In Cusimano , the Court of Appeals placed the inquiry more squarely on the prejudice felt by the party opposing arbitration. As the Court noted, “waiver cannot be established in the absence of prejudice.” Consistent with Cusimano , Black Rhino underscores the importance of examining the substantive and financial prejudice incurred by the party opposing arbitration. Although the procedural posture of the case remains important, Cusimano and its progeny, like Black Rhino , make it clear that it is the prejudice incurred that should drive the analysis.

On April 24, 2018, the Securities Exchange Commission (“SEC” or “Commission”) announced that Altaba, Inc. (“Altaba”), the successor in interest to Yahoo! Inc. (“Yahoo”), agreed to pay $35 million to settle charges that it misled investors by failing to disclose that hundreds of millions of user accounts had been hacked, resulting in the theft of sensitive user personal data. ( Here .) The settlement follows the issuance of the SEC’s cybersecurity disclosure guidance for reporting companies. (The SEC’s release of the guidance can be found here .) Issued in February 2018, the guidance provides information to public companies to assist in the disclosure of cybersecurity risks and incidents ( here ).  Among other things, the guidelines identify the factors companies should consider in deciding whether and when cyber-incidents must be disclosed to investors. The guidelines emphasize the importance of maintaining adequate internal controls to ensure that company management is aware of cyber-incidents when they occur, as well as the importance for managers to maintain procedures to help guide disclosure decisions. In late 2014, Yahoo had learned of a massive breach of its user database that resulted in the theft, unauthorized access, or acquisition of hundreds of millions of its users’ personal data. As noted in the SEC’s cease-and-desist-order (the “Order”) ( here ), at that time, Yahoo’s internal information security team became aware that the company’s information technology networks and systems had suffered a severe and widespread intrusion by hackers associated with the Russian Federation. By December 2014, Yahoo’s information security team, including its Chief Information Security Officer (“CISO”), had determined that the hackers had stolen the personal data of at least 108 million users, and likely even Yahoo’s entire user database of billions of users. The personal data in the stolen files included highly sensitive information that Yahoo’s information security team referred to as Yahoo’s “crown jewels”: “Yahoo usernames, email addresses, telephone numbers, dates of birth, hashed passwords, and security questions and answers.” Yahoo’s information security team, including the CISO, also concluded that “the hackers had successfully gained access to a separate source of data: the email accounts of 26 Yahoo users specifically targeted by the hackers because of their connections to Russia.” Despite its knowledge of the 2014 data breach, Yahoo did not disclose the data breach in its public filings for nearly two years. In September 2016, Yahoo issued a press release in which it disclosed the data breach to investors; the release was attached to a Form 8-K filed in connection with the proposed sale of Yahoo’s operating business to Verizon Communications, Inc. (“Verizon”).  The day after Yahoo publicly disclosed the data breach, the price of Yahoo’s stock declined by 3%, causing the company’s market capitalization to fall by nearly $1.3 billion. As a consequence, Verizon renegotiated the stock purchase agreement to reduce the price paid for Yahoo’s operating business by $350 million, representing a 7.25% reduction in price. “We do not second-guess good faith exercises of judgment about cyber-incident disclosure.  But we have also cautioned that a company’s response to such an event could be so lacking that an enforcement action would be warranted.  This is clearly such a case,” said Steven Peikin, Co-Director of the SEC Enforcement Division. In the Order, the SEC found that Yahoo filed several quarterly and annual reports during the two-year period following the breach but failed to disclose the breach or its potential business impact and legal implications.  Instead, the company’s SEC filings stated that it faced only the risk of, and negative effects that might flow from, data breaches.  In addition, the SEC found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings.  Finally, the SEC found that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber-breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure. “Yahoo’s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach,” added Jina Choi, Director of the SEC’s San Francisco Regional Office. “Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors.” The facts and circumstances relating to the Yahoo data breach were also the subject of a securities class action lawsuit that investors brought in 2017. In March 2018, the class action lawsuit settled for $80 million. Last year, the U.S. Department of Justice announced charges against four men, including two officers in Russia’s Federal Security Service, for their roles in the theft of 500 million Yahoo accounts. ( Here .) In agreeing to the settlement, Altaba neither admitted nor denied any wrongdoing. The SEC’s investigation into the matter remains ongoing. Takeaway The Altaba settlement represents the first time the SEC has investigated and determined to commence an enforcement proceeding against a company for failing to disclose a cybersecurity breach. Combined with the recent guidance on the disclosure of cybersecurity risks and incidents, the settlement indicates that cybersecurity disclosure and internal control procedures are a priority for the Commission. Steven Peikin, co-director of the SEC’s enforcement division, confirmed this view, noting that cybersecurity disclosure and controls were a priority for the agency and that the Commission hoped companies facing issues similar to those experienced by Altaba would take note: “The message in this case and the package of remedies here I think is a pretty strong one and I hope will be viewed as a significant penalty by other issuers.” Considering the Commission’s stated priority, it seems certain that other companies with similar issues as Yahoo will be the subject of an SEC investigation and possible enforcement action. Add to this likely consequence the commencement of securities class action lawsuits over disclosure deficiencies, and it is certain that management and their companies will face liability exposure for years to come.

In Shakespeare’s Romeo and Juliet , Juliet utters the oft quoted phrase, “parting is such sweet sorrow,” when saying goodnight to Romeo.  While Juliet may have been upset that Romeo was leaving for the evening, the thought that she would see him again, and that she would be able to imagine their next meeting, made the parting “sweet”. The Decision and Order issued by the New York Supreme Court (Kornreich, J.) in Young Adult Institute, Inc., et al. v. The Corporate Source, Inc. (April 11, 2018), illustrates why, to an employer, the parting of a group of employees may not be so sweet. Very briefly stated, plaintiff Young Adult Institute, Inc. (“YAI”) is a not-for-profit organization that, through a network of agencies, provides a variety of services to developmentally and intellectually challenged individuals.  Defendant The Corporate Source, Inc. (“TCS”), one such network agency, provided management services to YAI pursuant to a five-year management agreement that, inter alia , did not contain non-compete or non-solicitation covenants.  The individual defendants are employees and independent contractors of TCS, many of whom previously worked for YAI. During the term of the management agreement, TCS sought to change some of the terms of the agreement and YAI agreed to negotiate with TCS regarding same.  “Unbeknownst to YAI…TCS—through its senior management…--had been working covertly for months with YAI employees to terminate its relationship with YAI and transfer the business to a newly formed operation.”  To that end, while still employed, and getting paid, by YAI, some of the individual defendants recruited other YAI employees, negotiated deals for TCS with YAI’s vendors, established TCS’s back-office operations, among other things.  The e-mails of many of the individual defendants make plain that they knew that what they were doing was wrong and evince an effort to hide the true nature of their actions. Ultimately, many of the individuals left YAI’s employ to work for TCS and some went so far as to lie about their future employment so as to hide the fact that they were leaving to work for TCS.  Upon leaving, one employee deleted e-mails and files on YAI’s computer system to “cover[] her tracks” and to make “it more difficult for YAI to uncover her and the other disloyal YAI employees’ wrongdoing.”  Other individual defendants copied computer files belonging to YAI and brought the files to TCS.  Many of the stolen computer files contained personal confidential information for many of YAI’s clients, which information was protected by federal and state law.  Accordingly, YAI spent significant sums of money complying with federal and state remediation and notification laws. Plaintiff filed an amended complaint, which defendants moved to dismiss.  While the court addressed several legal issues in deciding the motion, a few stuck out as particularly interesting. Plaintiff’s fifth cause of action sounded in conversion and was based on Plaintiff’s allegation that its former employee deleted numerous of YAI’s electronic files.  The court stated that conversion “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.” (Citation omitted.)  The elements of a conversion claim, as set forth by the court are: 1. “plaintiff’s possessory right or interest in the property” and 2. “defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights.”  (Citations omitted.) While normally, one thinks of conversion in conjunction with tangible property, the court noted that deleting electronic files can give rise to a conversion claim. In Young Adult , however, the court found that the complaint failed to state a claim for conversion because plaintiff failed to plead that it was deprived of access to the deleted materials.  In this regard, the court stated that “just because one ‘deletes’ electronic files does not mean they cease to exist, therefore, “the employer should have to unequivocally allege in the complaint that, as a result of the deletion, it actually lost access to the files.  If such access was not lost, the employer has suffered no deprivation and, therefore, cannot maintain a claim for conversion.”  The court noted, for example, that the recipient of the e-mails should have electronic copies of the e-mails. Thus, the conversion claims was dismissed without prejudice and with leave to replead. The court sustained Plaintiff’s first cause of action, sounding in breach of fiduciary duty of loyalty based on the faithless servant doctrine.  The court stated the “well settled” law that “employees owe a fiduciary duty of loyalty to their employer during the course of their employment.” (Citations omitted.)  “Fundamental to relationship is the proposition that an employee is to be loyal to his employer and is prohibited from acting in any manner inconsistent with his agency or trust and is at all times bound to exercise the utmost good faith and loyalty in the performance of his duties.”  (Citations and internal quotation marks omitted.) An employee that breaches this duty is deemed a “faithless servant” that “forfeits the right to any compensation earned during the period of disloyalty.” (Citation omitted.)  A claim under the faithless servant doctrine is stated by an employer alleging that “a former employee, during the period of her employment and using company resources, secretly planned and organized a competing business.”  (Citations omitted.)  This Blog previously wrote about the faithless servant doctrine ( here ) and ( here ). Plaintiff’s cause of action against TCS for aiding and abetting the fiduciary duty breaches by YAI’s former employees was also sustained.  To allege such a claim, the complaint must state: “(1) a breach by a fiduciary of obligations to another, (2) that the defendant knowingly induced or participated in the breach, and (3) the plaintiff suffered damage as a result of the breach.” (Citations and internal quotation marks omitted.)  The court rejected TCS’s argument that the second element was not present in Young Adult.  The Young Adult complaint alleges that TCS’s senior management knew that some of the individual defendants were YAI employees, who “clearly knew that those employees were acting in TCS’s interests, and against YAI’s, in secret.”  Among other things, the complaint alleges that: TCS’s management did not typically communicate using e-mail so their plan would not be uncovered; the plan could have only originated with TCS; TCS provided substantial assistance to the breach by collaborating with YAI’s former employees by teleconference and otherwise; and, TCS secretly shared its separation plans with some of the individual defendants while they were still employed by YAI.  Based on the allegations in the complaint, the court found it “implausible to believe that the Former YAI Employees acted on their own and not at the direction of TCS.”  Therefore, plaintiff met its pleading burden under CPLR 3016(b) by alleging “facts that permit a reasonable inference of the TCS Defendants’ substantial assistance  to the Former YAI Employees’ breach.”   (Citations and internal quotation marks omitted.) Also interesting is the court’s discussion surrounding the dismissal of plaintiff’s claim for misappropriation of confidential information.  The court held that such a cause of action can only be sustained where the allegedly confidential information qualifies for trade secret protection.  This Blog previously discussed related issues ( here ) and will not be reiterated. TAKEAWAY There are appropriate ways to depart from your former employment and move to a competitor (particularly where, as here, no restrictive covenants exist).  The manner in which the defendants proceeded does not seem appropriate and was not favored by the court.

On April 9, 2018, Justice Shirley Werner Kornreich of the Supreme Court, New York County, Commercial Division granted a motion for summary judgment involving claims that the defendant owed the plaintiff nearly $3.5 million in connection with investment in more than 800 derivatives transactions over a four-year period. In granting the motion, Justice Kornreich had some harsh words about the strength of the defenses proffered in opposition to the motion. INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd., 2018 N.Y. Slip Op. 30646(U) (Sup. Ct., N.Y. County, Apr. 9, 2018) ( Here. ) Background Defendant Corrib Oil Co. Ltd. (“Corrob”) owed nearly $3.5 million to INTL FCStone Markets, LLC (“FCStone”). The debt arose from the investment in more than 800 derivatives transactions with FCStone, which Corrib made as a hedge on its exposure to oil price fluctuations. The trades were governed by an ISDA Master Agreement, Schedule, and Credit Support Annex, along with confirmations (“Confirmations”) governing each of the transactions. Until 2014, Corrib made money on the transactions because the price of oil increased. But in June 2014, the oil market crashed, and so too did Corrib’s positions on the trades. Margin calls followed. Corrib initially satisfied FCStone’s margin calls but, eventually, as Corrib’s positions went even more into the red, Corrib stopped making payments. Corrib first defaulted on a margin call in September 2015. It then defaulted on FCStone’s subsequent margin calls and payment demands. On December 11, 2015, FCStone declared an event of default under the Master Agreement and, on December 29, 2015, FCStone noticed an early termination. At that time, Corrib owed FCStone approximately $3.4 million on 59 trades. FCStone again demanded payment in May 2016, but Corrib did not pay. On June 24, 2016, FCStone commenced the action by filing a summons and motion for summary judgment in lieu of complaint. By order dated February 23, 2017, the Court denied the motion because FCStone failed to submit the Confirmations governing the trades. On March 15, 2017, Corrib filed an answer with counterclaims. At a preliminary conference conducted shortly thereafter, problems with the counterclaims were discussed. On April 17, 2017, Corrib filed an amended answer in which it asserted various counterclaims, including, but not limited to: breach of contract; breach of the implied covenant of good faith and fair dealing; fraud; and fraudulent inducement. At a compliance conference a few weeks later, the court stayed discovery because it became “apparent that Corrib’s defenses and counterclaims bordered on the frivolous.…” Corrib admitted that after production of the trade Confirmations, “it never objected to them,” it never had any written investment advisory agreement with FCStone, and, more importantly, Corrib had “no defense to nonpayment.” On August 7, 2017, FCStone filed a motion for summary judgment. The Court’s Decision As an initial matter, the Court observed that Corrib sought to avoid summary judgment (and, therefore, paying the money owed) on the strength of the “supposed merits of its counterclaims.” Those counterclaims, however, “have no merit,” said the Court. Consequently, the Court held that “ here is no question of fact regarding Corrib’s liability to FCStone.” There is no question of fact regarding Corrib’s liability to FCStone. Corrib does not dispute the occurrence of the subject transactions, that the Confirmations accurately reflect their terms, that FCStone’s margin calls were valid, that it failed to meet such margin calls, that FCStone was entitled to notice an early termination as a result, or that the amount due is $3,415,320.38 plus interest. Rather, Corrib seeks to avoid paying FCStone based on the supposed merits of its counterclaims. The counterclaims have no merit. Footnote omitted. Thereafter, the Court discussed the counterclaims/defenses to underscore the strength of its finding (i.e., that they “have no merit”). For example, with regard to Corrib’s claim that FCStone breached a duty to Corrib, the Court found that FCStone was neither a fiduciary nor an investment advisor for Corrib. Under the Schedule, the parties agreed that FCStone was “‘not acting as a fiduciary for or an advisor to ’” “and that Corrib was not relying on any advice from FCStone in deciding to enter into the Transitions.” In fact, said the Court, “the parties never executed any contract in which FCStone agreed to be Corrib’s financial adviser.” Consequently, Corrib could not claim that “FCStone breached duties arising from such an agreement, that FCStone negligently performed such duties, or that FCStone’s conduct amount to a breach of fiduciary duty.” Since the parties were not in a fiduciary relationship, the Court rejected Corrib’s argument that FCStone violated the Investment Advisers Act of 1940. In this regard, the Court noted that the transactions at issue were made at “arms’ length” and that FCStone did not receive any compensation for providing investment advice to Corrib. Instead, the Court found that FCStone “merely transacted with a counterparty on a securities trade.…” The Court rejected the fraud and fraudulent inducement defenses because Corrib could not show justifiable reliance on any purported misstatement. Noting that these defenses were based on alleged misrepresentations about the terms of the trades and FCStone’s promise not to serve as a counterparty, the Court found that the “terms of the trades set forth in the Confirmations, which clearly disclose that FCStone was the counterparty.” As such, Corrib could not claim any fraud or fraudulent inducement – Corrib could not claim “to have justifiably relied on a representation when that very representation negated by the terms of a contract.” Citations omitted. The Court also found that Corrib could not claim justifiable reliance on the alleged misrepresentations because it failed “to review and challenge terms of a Confirmation.” “Having failed to do so,” Corrib could not “claim it was justified in not noticing that terms in the Confirmations conflicted with oral assurances allegedly provided by FCStone.” Accordingly, the Court granted FCStone’s motion in its entirety. Takeaway INTL FCStone reinforces well-established legal principles about what it takes to plead, among other things, fraud and breach of fiduciary duty. On a practical level, however, the case is notable because it highlights the difficulties litigating a case in which the facts and the law are not favorable, and the Court informs the parties as such.