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New York creditors often look to the Debtor and Creditor Law (the “DCL”), as well as the common law, to recover assets that have been (or may be) transferred by debtors to another party. Whether the debtor transfers assets with intent to defraud or without fair consideration, the DCL provides creditors with a number of remedies. The DCL in Brief Under Section 276 of the DCL, very conveyance made ... with actual intent ... to hinder, delay, or defraud either present or future creditors, is fraudulent.… In general, a party pleading a cause of action for fraudulent conveyance must allege specific facts, including, among other things, the identity of the specific transactions or conveyances that the plaintiff alleges were fraudulent. Syllman v. Calleo Dev. Corp., 290 A.D.2d 209, 210 (1st Dept. 2002); see CPLR 3016 (b). The burden of proving actual intent is on the party seeking to set aside the conveyance. Marine Midland Bank v. Murkoff , 120 A.D.2d 122, 126 (2d Dept. 1986); see also ACLI Gov’t Sec., Inc. Rhoades , 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987). “Actual intent” to defraud must be proven by clear and convincing evidence. ACLI Gov’t Sec. , 653 F. Supp. at 1394. Since it is rarely susceptible to direct proof, actual intent is typically established through circumstantial evidence surrounding the allegedly fraudulent act. Consequently, courts allow creditors “to rely on badges of fraud to support his case, i.e. , circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Wall St. Assoc. v. Brodsky , 257 A.D.2d 526, 529 (1st Dept. 1999) (internal quotation marks and citations omitted). “Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance.” Id. See also United Parcel Service v. Jay Norris Corp. , 102 Misc. 2d 231, 233 (Sup. Ct., Nassau Cty. 1979) (inference raised from the relationship of the parties to the transaction and the secrecy of the sale); Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. Cty. 1965) (“Inadequacy of consideration, secret or hurried transactions not in the usual mode of doing business, and the use of dummies or fictitious parties are common examples of ‘badges of fraud.’”). A conclusory allegation that the plaintiff has been defrauded is not sufficient. Syllman , 290 A.D.2d at 210. Under Section 273 of the DCL: very conveyance made … by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to actual intent if the conveyance is made … without a fair consideration. To establish a fraudulent conveyance under Section 273, the creditor must establish that: (1) the debtor made a conveyance; (2) the debtor was insolvent prior to the conveyance or rendered insolvent thereby; and (3) the conveyance was made without fair consideration. “A person is insolvent when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.” DCL § 271(1). This is a “balance sheet test.” See In re Gordon Car & Truck Rental, Inc. , 59 B.R. 956, 961 (Bankr. N.D.N.Y. 1985). A debtor who transfers property without fair consideration is presumed to be insolvent. Fair consideration is deemed to have been given when: (1) the transferee conveys property in exchange for the transfer, or the transfer discharges an antecedent debt; (2) the property exchanged by the transferee is of “fair equivalent” value to the property transferred by the debtor; and (3) the transferee makes the exchange in “good faith.” See In re Sharp Intern. Corp. , 403 F.3d 43, 53–54 (2d Cir. 2005) (citing HBE Leasing v. Frank , 61 F.3d 1054, 1058–59 (2d Cir. 1995)) (“fair consideration” requires not only that the exchange be for equivalent value, but also that the conveyance be made in good faith). The burden of proving both insolvency and the lack of fair consideration is on the party challenging the conveyance and the determination of insolvency or what constitutes fair consideration is generally one of fact to be determined under the circumstances of the particular case. Matter of Am. Inv. Bank v. Marine Midland Bank , 191 A.D. 2d 690, 692 (2d. Dept. 1993) (citations omitted). (This Blog previously addressed the pleading standards here .) Carlyle, LLC v. Quik Park 1633 Garage LLC In Carlyle, LLC v. Quik Park 1633 Garage LLC , 2018 NY Slip Op. 02436 (1st Dept. Apr. 10, 2018) ( here ), the Appellate Division, First Department dismissed claims under DCL §§ 273 and 276 because the plaintiff failed to satisfy the burdens discussed above. Background Carlyle arose from Plaintiff’s attempt to recover approximately $2.5 million in damages allegedly suffered as a result of a fraudulent scheme to transfer and dispose of assets and monies for the purpose of thwarting Plaintiff’s ability to collect debts owed to it by Defendants, including a judgment in a related action. Plaintiff, Carlyle LLC, operates The Carlyle Hotel (the “Hotel”) pursuant to a commercial lease, under which it leases most of the building comprising the hotel and a parking garage adjoining the hotel (the “Garage”). Plaintiff subleased the Garage on December 7, 2001 (the “Sublease”) to non-party Beekman Garage LLC (“Beekman Garage”), an entity allegedly controlled by Defendant Rafael Llopiz (“Llopiz”), the principal and controlling member of Defendant Quik Park 1633 Garage LLC (“Quik Park 1633”). Pursuant to a written agreement, and with Plaintiff’s consent, Beekman Garage assigned its interest in the Sublease to non-party Quik Park Beekman LLC (“Quik Park Beekman”), an entity also allegedly controlled by Llopiz. On May 1, 2009, Plaintiff and Quik Park Beekman entered into a sublease modification and extension (“Sublease Extension”), which extended the term of the Sublease through April 30, 2016. On that same date, with Plaintiff’s consent, Quik Park Beekman assigned its interest under the Sublease to Quik Park Beekman II LLC (“Quik Park Beekman II”), another entity allegedly controlled by Llopiz. Under the Sublease Extension, Quik Park Beekman II was obligated to pay monthly rent to Plaintiff through April 30, 2016. Plaintiff alleged that it was never paid any rent. At the same time, the entities operating the Garage continued to collect revenues, in excess of $100,000 for each month the rent went unpaid. On July 24, 2013, Plaintiff terminated the Sublease, as well as any tenancy or occupancy of Quik Park 1633 in the Garage. Despite the termination, the various Quik Park-related entities and/or Defendant Quik Park 1633, continued to occupy the premises without paying any rent or compensation to Plaintiff until January 31, 2014, when they vacated the Garage. On August 7, 2013, Plaintiff commenced a related action, titled The Carlyle, LLC v. Beekman Garage LLC et al. , seeking unpaid rent, late fees on unpaid rent, and attorney’s fees. On October 14, 2015, the court entered a judgment against Beekman Garage, Quik Park Beekman and Quik Park Beekman II (the “Quik Park Entities”) for a little over $1.5 million. On September 3, 2013, Plaintiff commenced a holdover proceeding in New York Civil Court, titled The Carlyle LLC v. Quick Park Beekman II LLC et al. , seeking damages for post-lease-termination use and occupancy of the premises. The court granted summary judgment in Plaintiff’s favor on its possessory claims but did not determine a monetary award. Motion Court Proceedings In December 2015, Plaintiff filed suit in New York Supreme Court against Llopiz and Quik Park 1633 for, among other things, fraud, fraudulent conveyance, unjust enrichment and conversion. Plaintiff alleged that Defendants intentionally transferred all, or substantially all, of the funds out of the various Quik Park Entities and into certain shell entities and persons controlled by Llopiz, including Quik Park 1633. Plaintiff further alleged that those conveyances were made without fair or adequate consideration and rendered the Quik Park Entities insolvent, and thus incapable of paying the debts owed to Plaintiff. Defendants moved to dismiss the complaint arguing, inter alia , that Plaintiff failed to plead its fraudulent conveyance claims with the specificity required by CPLR 3016 (b). Among other things, Defendants contended that the complaint failed to identify any specific transfers or conveyances that were fraudulent or that were not supported by adequate consideration. The motion court sustained the fraudulent conveyance claims notwithstanding the fact that Plaintiff failed to identify the transactions alleged to be fraudulent. The court found that Plaintiff had alleged “enough facts to warrant further discovery as to whether, among other things, defendants wrongfully removed assets from any of the underlying judgment debtors.” The court cited to the following facts in support of its decision: “a close relationship between Llopiz and Quik Park 1633 on the one hand, and the various nonparty Quik Park Entities on the other,” payment to Plaintiff by Llopiz and/or Quik Park 1633, occupancy of the premises by Quik Park 1633, and the absence of sufficient assets by various Quik Park Entities to satisfy the judgments. In sustaining the fraudulent conveyance claims, the court also found dispositive facts drawn from information subpoenas that Plaintiff served on Defendants: First, the Responses indicate that the various Quik Park Entities had bank accounts into which, and from which, money from the operation of the garage was transferred. According to plaintiff, and not disputed by defendants, the Responses also indicate that the monies in such accounts were periodically transferred to a bank account in Quik Park 1633's name, controlled by Llopiz. The Responses further indicate that the Quik Park Entities closed their accounts at some point, and the companies are no longer operational. Further, the Responses state that Llopiz is a member of an unidentified entity which now owns the Quik Park Entities. Defendants appealed. here .=">here."> The First Department’s Decision The Court unanimously reversed the motion court’s decision to sustain the fraudulent conveyance claims. With regard to the claim under DCL § 276, the Court found that “plaintiff failed to allege fraudulent intent with the particularity required by CPLR 3016(b).” Citations omitted. The Court noted that “ he key allegations” in the complaint “were made ‘ pon information and belief,’ without identifying the source of the information.” Citation omitted. Additionally, “the timing of the allegedly fraudulent transfers — beginning two years before the judgment debtors incurred the subject debts — undermine the claim of fraudulent intent.” Citations omitted. Combined, these pleading failures sufficed to require dismissal of the fraudulent conveyance claims under DCL § 276. With regard to the claim under DCL § 273, the Court found that Plaintiff failed to meet its pleading burden, noting that the allegations concerning the absence of fair consideration, were also made on information and belief. Citation omitted. Accordingly, the Court reversed the denial of the motion with regard to the constructive fraudulent conveyance claims. Takeaway The purpose of the DCL is to protect creditors from fraudulent transactions entered into by debtors in attempt to shelter assets from the estate. To secure the protections under the DCL, creditors must comply with applicable pleading standards. The failure to meet these standards will result in the dismissal of the claim. Carlyle illustrates the importance of this point.

One of the first things students are taught in law school is that, to be valid, a contract must be supported by consideration.  In Reddy v. Mihos (April 17, 2017), the Appellate Division, First Department, analyzed the need for a guaranty to be supported by proper consideration. The plaintiff in Reddy was an experienced real estate investor. Defendant Mihos, an attorney, represented plaintiff in numerous real estate transactions over an extended period of time.  Plaintiff availed herself of an opportunity brought to her by Mihos, to make a $200,000.00 loan (the “Loan”) to a corporate borrower owned by another client of Mihos, defendant Hodzic.  The Loan was secured by a second mortgage on certain real property owned by borrower (the “Property”).  Borrower promptly defaulted in its payment obligations to plaintiff. After the default, Mihos alleges that plaintiff demanded that he repay the money loaned to the borrower and that borrower threatened to report him to the District Attorney. Plaintiff alleges that when confronted about borrower’s defaults, Mihos, on his own and without suggestion from plaintiff, prepared and delivered to plaintiff a written guaranty of the repayment of the Loan (the “Guaranty”).  The Guaranty provides: In the event plaintiff fails to receive the principal sum of $200,000.00 from , … Hodzic or otherwise, then in such event, I Evangelos Mihos…hereby guaranty to pay the principal sum of $200,000.00 to plaintiff on, or before, May 7, 2012. (Brackets in original omitted.) Ultimately, the Property was sold at a foreclosure sale and the proceeds were insufficient to pay down any portion of the Loan. When Mihos refused to make any payments to plaintiff under the Guaranty plaintiff commenced an action in Supreme Court against Mihos and Hodzic.  In her complaint, plaintiff asserted two malpractice causes of action against Mihos, a fraud claim against Mihos and Hodzic and a claim under the guaranty against Mihos.  In his answer, Mihos asserted among other affirmative defenses, that there was no consideration for the Guaranty. Plaintiff’s initial motion for summary judgment was denied. After Mihos’ deposition, plaintiff withdrew all causes of action except the claim seeking recovery under the Guaranty. On Plaintiff’s renewed motion for summary judgment, counsel urged that it could be inferred that the consideration for the Guaranty was plaintiff’s forbearance in reporting Mihos to the “Departmental Disciplinary Committee, as well as forbearing in bringing this lawsuit.”  Mihos cross-moved for summary dismissing the complaint for want of consideration for the Guaranty.  Supreme Court granted the motion and denied the cross-motion, holding that plaintiff implicitly agreed to forbear from, inter alia , pursuing legal action against Mihos during the term of the Guaranty. On Mihos’ appeal, the First Department reversed Supreme Court and dismissed plaintiff’s claim under the Guaranty, which it concluded was delivered without consideration. The First Department recognized that the Statute of Frauds requires that “a special promise to answer for the debt, default or miscarriage of another person” must be in writing and signed by the party to be charged.  ( GOL §5-701 (a)(2).)  In the instant case, the First Department found that “while the uaranty given by Mihos to plaintiff otherwise appears to satisfy the statute, it does not express, or even imply, any consideration for Mihos’s promise, whether by way of benefit to him or detriment to plaintiff.”  In dismissing the basis for Supreme Court’s ruling in favor of plaintiff, the First Department stated: It may be that, once the uaranty was given, plaintiff was unlikely to sue Mihos before it became due, but nothing stated in the uaranty bound her to refrain for the next two years from commencing an action against him on her common-law claims (which, as previously noted, she has now withdrawn).  Nor can any such commitment to forbear from suit be fairly inferred from the language of the guaranty….In the absence of such a binding promise by plaintiff, the uaranty is unenforceable for want of consideration. (Citations omitted.) The Court also noted that “an oral promise to guarantee the debt of another may be enforced notwithstanding General Obligations Law §5-701(a)(2), if the plaintiff proves the promise is supported by new consideration moving to the promisor and beneficial to him and that the promisor has become in the intention of the parties a principal debtor primarily liable.”  (Citation, internal quotation marks and brackets omitted.)  The First Department, however, found that plaintiff failed to offer any admissible evidence that she made any promise to forbear from suing Mihos prior to the due date of the guaranty. Absent any express or implied consideration given for the Guaranty, the Guaranty was unenforceable for want of consideration. Additionally, the Court discussed General Obligations Law §5-1105 , which provides: A promise in writing and signed by the promisor or by his agent shall not be denied effect as a valid contractual obligation on the ground that consideration for the promise is past or executed, if the consideration is expressed in the writing and is proved to have been given or performed and would be a valid consideration but for the time when it was given or performed. GOL § 5-1105 was held to be inapplicable because plaintiff never argued that the consideration for the Guaranty was the making of the Loan or any other of her prior actions and because the Guaranty does not expressly set forth, in writing, any prior consideration.

Recently, this Blog wrote about the law governing the theft or misappropriation of trade secrets. ( Here .) As noted in that post, with the exception of New York and Massachusetts, the protection of trade secrets is generally governed by the Uniform Trade Secrets Act (“UTSA”). In those two states, however, the protection of trade secrets is governed by the common law. Generally, trade secret owners have recourse only against the misappropriation of a trade secret. Misappropriation is the use of a trade secret without permission “to gain an advantage over plaintiff.” CBS Corp. v. Dumsday , 268 A.D.2d 350, 353 (1st Dept. 2000). Under the UTSA, misappropriation occurs when a trade secret is acquired by “improper means” or from someone who has acquired it through “improper means.” Theft, bribery, and misrepresentation are among the acts considered to be “improper means.” In New York, there is no case law explicitly defining “improper means”.  Instead, New York courts have looked to the Restatement of Torts to define the elements of the claim. See Ashland Mgmt. Inc. v. Janien , 82 N.Y.2d 395, 407 (1993) (adopting the Restatement definition of a trade secret). Under New York law, a trade secret is misappropriated if it was obtained through corporate espionage or other improper manner. “Improper manner” usually means conduct that “fall below the generally accepted standards of commercial morality and reasonable conduct.” Restatement of Torts § 757 cmt. f (1939). New York courts consider improper manner to include, among other things, physical violence, fraud or misrepresentation, civil suits and criminal prosecutions, and some degree of economic pressure. Guard-Life Corp. v. Parker Hardware Mfg. Corp. , 50 N.Y.2d 183, 191 (1980). In addition, a person or company can be guilty of misappropriation if the information was obtained through a breach of trust, e.g. , an employee steals trade secrets from his employer, gives the information to another company, and that company uses the secrets even though it has obtained the information without permission. “Improper manner” was the subject of an April 3, 2018, decision issued by the Appellate Division, First Department in which the Court held that a theft of trade secrets claim should have been dismissed for failure to allege the use of improper means in obtaining the trade secrets. BGC Partners, Inc. v. Avison Young (Canada) Inc. , 2018 N.Y. Slip Op. 02290 (1st Dept. Apr. 3, 2018). BGC Partners, Inc. v. Avison Young (Canada) Inc. Background BGC Partners arose out of the acquisition by Plaintiffs, BGC Partners (“BGC”) and its indirect subsidiary, G&E Acquisition Company, LLC (“G&E Acquisition”), of certain assets and causes of action possessed by Grub & Ellis Company (“G&E”), one of the oldest and largest real estate brokerages in the United States. Plaintiffs alleged that Defendant, Avison Young (“AY”), one of Canada’s largest real estate brokerage firms, and its United States affiliates, embarked upon an aggressive expansion campaign in the U.S., by targeting and stealing G&E’s personnel, offices, trade secrets, and business opportunities. Defendants did so, according to Plaintiffs, through a variety of tortious and illegal means, including: (i) inducing dozens of G&E affiliates and brokers to breach their employment or independent contractor agreements; (ii) using improper means to misappropriate G&E’s trade secrets; and (iii) inducing and assisting larceny by these same brokers and affiliates by rewarding them—with full knowledge or recklessness to the consequences—for concealing and stealing trade secrets and business opportunities that belonged to G&E. In particular, Plaintiffs alleged that the improper means used by Defendants included: offering excessive incentives to G&E’s affiliates in Nevada and South Carolina to breach their Affiliate Agreements; offering excessive compensation packages to former G&E brokers – packages that were designed to incentivize brokers to conceal their in-progress deals from Plaintiffs; and providing brokers with up to 95% commission splits for transactions closed in the first few months after commencing employment with AY, as opposed to the industry standard split of about 60%. Plaintiffs alleged that Defendants induced at least 41 brokers to leave their employ with G&E. Motion Court Proceedings Defendants moved to dismiss the action in its entirety. The court granted the motion as to the claims for tortious interference, conspiracy, aiding and abetting breach of fiduciary duty and unjust enrichment, but denied it as to the claims for theft of trade secrets, aiding and abetting breach of the duty of fidelity, and injunctive relief. With regard to the claim for theft of trade secrets, the court found that Plaintiffs’ “customer list and other customer-specific data protectable as trade secrets.” The court noted that Plaintiffs acquired the customer information, which was not readily ascertainable, “through cultivation of long-standing relationships; that the customer information included not just names but specific customer data such as preferences about properties and locations; and that plaintiffs took reasonable steps to maintain its secrecy through the use of confidentiality agreements.” The court also found that Defendants used improper means to obtain the trade secrets.  They did so by inducing the affiliates and brokers to breach confidentiality agreements that protected customer lists and other information about customer preferences and histories and engaged in a scheme to deprive plaintiffs of commissions and business opportunities. “These allegations,” held the court, were “sufficient to plead improper means.” Citations omitted. In sustaining the claim, the court rejected Defendants’ argument that the type of conduct meant by improper manner is “limited to ‘industrial espionage.’” While “industrial espionage may undoubtedly support a claim for misappropriation of trade secrets <,> ” the court noted that “other tortious and wrongful acts, whether or not considered espionage, may constitute improper means.” As noted, the court found that Plaintiffs adequately pled “improper means by alleging that defendants paid the G&E brokers to induce them to violate their confidentiality agreements and to disclose plaintiffs’ trade secrets to defendants in order to divert plaintiffs’ business opportunities.” Plaintiffs appealed. The First Department’s Decision The First Department unanimously reversed the motion court’s order granting the motion to dismiss as to the theft of trade secrets, aiding and abetting breach of the duty of fidelity and injunctive relief causes of action, and otherwise affirmed the remainder of the decision. As to the claim for the misappropriation of trade secrets, the Court held that it should have been dismissed, finding that the means used to obtain the customer lists were not improper. In this regard, the Court noted that offering the brokers “competitive compensation” is not wrongful. Takeaway BGC Partners teaches that pleading an improper manner is not as easy as it seems. The plaintiff must show that the conduct used to misappropriate the trade secret was wrongful. Conduct that is considered customary or acceptable within the subject industry – such as offering lucrative compensation packages as an incentive to convince a broker to join another firm – is not wrongful or improper. More is needed.

It is not uncommon for drafters of contracts and statutes to use the word “notwithstanding” to establish precedence over other provisions in the document. Cisneros v. Alpine Ridge Group , 508 U.S. 10, 18 (1993) (The “use of . . . a ‘notwithstanding’ clause … signals the drafter’s intention that the provisions of the ‘notwithstanding’ section override conflicting provisions of any other section.”).  As such, the word “notwithstanding” is considered to be a trumping word that “controls over any contrary language.” Handlebar, Inc. v. Utica First Ins. Co. , 290 A.D.2d 633, 635 (3d Dept. 2002), lv. denied , 98 N.Y.2d 601 (2002); see also Bank of N.Y. v. First Millennium, Inc. , 607 F.3d 905, 917 (2d Cir 2010) (“This Court has recognized many times that under New York law, clauses similar to the phrase ‘(n)otwithstanding any other provision’ trump conflicting contract terms”); In re Gulf Oil/Cities Serv. Tender Offer Litig. , 725 F. Supp. 712, 729-30 (S.D.N.Y. 1989) (contract provision containing language “notwithstanding any other provision” explicitly overrides contrary provision). The effect of a “notwithstanding” clause will prevail “even if other provisions of the contract[ ] might seem to require . . . a result.” Cisneros , 508 U.S. at 18-19. On April 5, 2018, the Appellate Division, First Department, issued a decision in Veneto Hotel & Casino, S.A. v. German American Capital Corp. , 2018 NY Slip Op. 02414 ( here ), holding that a “notwithstanding” clause trumped a conflicting provision in the contract under review. Veneto Hotel & Casino, S.A. v. German American Capital Corp. Background The case arose from a 2007 loan and security agreement (the “Loan Agreement”) between the Plaintiff, Veneto Hotel & Casino, S.A. (“Veneto”), a Panamanian corporation that owns the Veneto Hotel & Casino in Panama City (the “Hotel”), and the Defendant, German American Capital Corp. (“GACC”), pursuant to which GACC loaned money to Veneto (the “Loan”). In June 2009, March 2010 and August 2012, the parties modified the Loan Agreement (the “First Amendment,” the “Second Amendment” and the “Third Amendment”) (collectively, the “Amendments”). Pursuant to the Loan Agreement and the Amendments, Veneto established an account into which the revenues from the Hotel’s operations were deposited each day (the “Holding Account”) by the account trustee, HSBC Bank (the “Account Trustee”). As long as no event of default had occurred or was continuing, the funds were to be distributed in a pre-determined order to certain other accounts. (Loan Agreement at § 3.1.7 - .) After the first four accounts were funded — i.e. , for any taxes, insurance, interest payments on the Loan, and franchise fees — funds sufficient to meet the Hotel’s operating expenses for the next month were to be deposited in Veneto’s account and any funds remaining were to go to Veneto. (Loan Agreement at § 3.1.7 - .) In the event of a default, additional accounts were to be funded before any remaining money would reach Veneto. ( Id . at 3.1.7 - .) In the Second Amendment, Section 3.1.7(a)(v) was modified such that Veneto’s operating expenses were to be included in the accounts funded from the Holding Account only after an event of default. By letter dated January 14, 2015, GACC notified Veneto that the latter had defaulted on its obligations (the “Default Notice”). Subsequently, by letter dated January 30, 2015, GACC notified Veneto that it had accelerated the Loan, and, as such, the full outstanding balance on the Loan was immediately due and payable (the “Acceleration Notice”). On January 30, 2015, GACC instructed the Account Trustee to stop providing Veneto with funds from the Holding Account. Veneto claimed that, as a result, it has been unable to pay its operating expenses, including wages and taxes, which led to the suspension of its gambling license. Motion Court Proceedings Plaintiffs commenced the action on June 1, 2015, asserting claims for: (1) a declaratory judgment that GACC was obligated to fund the Hotel’s post-default operations; (2) breach of the Loan Agreement and the Amendments; (3) rescission of the Second and Third Amendments due to mutual mistake; (4) fraud as to Veneto; (5) breach of the covenant of good faith and fair dealing implied in the Loan Agreement and Amendments; (6) breach of GACC’s fiduciary duty to Veneto; (7) permanent equitable relief ordering GACC to withdraw the Default Notice and Acceleration Notice and to perform its obligations under the Loan Agreement; (8) breach of the subordination of management agreement between Veneto and co-plaintiff, SE Leisure Management LLC; and (9) breach of the covenant of good faith and fair dealing implied in the subordination of management agreement. GACC moved to dismiss the complaint. GACC contended that Section 3.1.11(a) of the Loan Agreement gave it the discretion to direct the Account Trustee not to transfer funds to Veneto. GACC also argued that the “notwithstanding” clause in Section 3.1.11(a) trumped the obligations in Section 3.1.7(a) – i.e. ,  because the Loan Agreement defined “Obligations” as “all indebtedness, obligations and liabilities” Veneto owed GACC under the Loan Agreement, Section 3.1.11 allowed it to, upon an event of default, override the standard flow of funds prescribed in Section 3.1.7(a) and instead retain these funds for itself. Veneto claimed that, under Section 3.1.7(a)(v) of the Loan Agreement, GACC was obligated, post-default, to fund the Hotel’s operating expenses. Veneto also argued that Section 3.1.11(a)’s “notwithstanding” language did not apply to Section 3.1.7(a)(v) because that provision was modified in the Second Amendment, and the “notwithstanding” language did not apply to modifications by subsequent Amendments. The motion court found “Veneto’s arguments unavailing.” ( Here .) The court noted that the Second Amendment specifically recognized that “‘ xcept as amended by this Second Amendment, the Loan Agreement and each of the other Loan Documents shall continue to remain in full force and effect.’” Since “the Loan Agreement contemplated that GACC could alter or ignore the pre-determined waterfall distribution post-default if there were unpaid obligations, the amendment of Section 3.1.7(a)(v) to move it from one category to another not change Section 3.1.11’s dominance.” Thus, found the court, “GACC’s refusal to fund Veneto’s operating expenses post-default was an appropriate exercise of its authority under the Loan Agreement.” Veneto appealed the dismissal of two claims: the breach of Loan Agreement and the Amendments, and breach of the covenant of good faith and fair dealing implied in the Loan Agreement and Amendments. The First Department’s Decision The First Department “unanimously affirmed” the dismissal. The Court found that the breach of contract claim, which was “based on defendant’s alleged breach of section 3.1.7(a)(v) of the parties’ loan agreement<,> was properly dismissed.” According to the Court, “ fair reading of the loan agreement and amendments reveal that was not obligated to apply its security to fund … Veneto’s expenses following an ‘Event of Default.’” The Court observed that Section 3.1.7 of the Loan Agreement only required the Account Trustee to follow the directions provided by GACC to it, “both when Veneto was in default and when it was not.” When read together with Section 3.1.11(a), said the Court, “it is clear that defendant had ‘sole and absolute’ discretion regarding whether it would pay for Veneto’s operating expenses from the Holding Account following an Event of Default.” The Court concluded that “Section 3.1.7(a)(v) does not supersede section 3.1.11(a), either expressly or impliedly, as it is clear that sections 3.1.7 and 3.1.11(a) work together and do not conflict.” As to the “notwithstanding” clause, the Court found that “even if section 3.1.7(v) could be interpreted to be inconsistent with section 3.1.11(a), section 3.1.11(a) would still prevail” because of the “trumping” language found within that section. Citing Warberg Opportunistic Trading Fund, L.P. v. GeoResources, Inc. , 112 A.D.3d 78, 83 (1st Dept. 2013). Section 3.1.11 provided “that it would apply ‘notwithstanding anything to the contrary’ in the Loan Agreement.” Thus, held the Court, “Defendant acted within the authority and discretion provided to it under section 3.1.11(a).” Takeaway The principles governing contract interpretation are familiar. When parties to a contract “set down their agreement in a clear, complete document,” their intention will be determined “from the four corners of the instrument and will be enforced according to its terms.” See Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004); W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). Importantly, when interpreting a contract, courts should not render any portion of the agreement meaningless. Beal Sav. Bank v. Sommer , 8 N.Y.3d 318, 324 (2007); God’s Battalion of Prayer Pentecostal Church, Inc. v. Miele Assoc., LLP , 6 N.Y.3d 371, 374 (2006); Excess Ins. Co. , 3 N.Y.3d at 582. For this reason, courts will read a contract “as a whole,” interpreting “every part … with reference to the whole.” Matter of Westmoreland Coal Co. v. Entech, Inc. , 100 N.Y.2d 352, 358 (2003). As such, courts will enforce a trumping clause according to its terms when it comports with the intention of the parties. See Bank of N.Y. Mellon Trust Co., N.A. v. Merrill Lynch Capital Servs. Inc. , 99 A.D.3d 626, 628 (1st Dept. 2012). Veneto teaches that these fundamental principles remain well entrenched in New York law. In Veneto , the contract language was clear. And, to the extent there was a dispute over the effect of the trumping language in Section 3.1.11(a), the Court left no doubt that such language should be enforced pursuant to its terms, even where the effect of the “notwithstanding” clause contradicts other provisions of the contract and would “require ... a result.” Cisneros , 508 U.S. at 18.

Sometimes in litigation, the facts get in the way of the desired results.  Such was the case for the defendant in Age Group, Ltd. v. Martha Stewart Living Omnimedia, Inc. (April 12, 2018), in which the First Department affirmed Supreme Court’s denial of defendant’s motion for summary judgment seeking to dismiss plaintiff’s causes of action sounding in breach of contract and breach of the implied covenant of good faith and fair dealing. The facts are set forth in Supreme Court’s Decision and Order (Kornreich, J).  Briefly stated, defendant, Martha Stewart Living Omnimedia, Inc. (“MSLO”), and plaintiff, Age Group, Ltd. (“AGE”), entered into a four-year licensing agreement (the “MSLO Agreement”) to market, manufacture and sell Martha Stewart branded pet products to pre-approved distributors.  In furtherance thereof, AGE entered into a four-year agreement with PetSmart (temporally coincident with the MSLO Agreement) (the “PetSmart Agreement”), pursuant to which PetSmart was to purchase MSLO Pet Products from AGE.  If the MSLO agreement was not renewed at the end of its term, AGE would not be permitted to sell pet products to PetSmart or other distributors.  The MSLO Agreement expired by its terms on December 31, 2013 and was not extended. AGE alleged that, as a result of MSLO’s realization that it “grossly undervalued the profit potential of its et roducts”, “MSLO interfered with ability to timely produce et roducts so that PetSmart would grow frustrated with and ultimately wish to contract directly MSLO” after the PetSmart Agreement ended.  MSLO’s plan, AGE argued, would frustrate the purpose of the MSLO Agreement, which was to “maximize[] revenue in the first four years and develop[] a long term profitable relationship.” In addition, it was alleged that MSLO not only refused to approve AGE’s designs, it improperly injected itself into the design and pricing of the pet products – duties that were within AGE’s province.  MSLO allegedly designed “overpriced” and “inferior” products and then blamed AGE.  According to AGE, MSLO’s actions were intended to frustrate AGE’s performance and to make it appear that AGE “lacked the capacity to deliver quality, low price et roducts, using this outcome to convince PetSmart that it should cut out of the process before the expiration of the MSLO Agreement.” (Some brackets in original.)  In this regard, AGE claims that MSLO unilaterally promised PetSmart designs that could not be manufactured at a price acceptable to PetSmart and vetted those designs with PetSmart without participation from AGE.  MSLO also sent PetSmart disparaging e-mails about AGE. Finally, as a result of some pressure from PetSmart, it is alleged that MSLO frustrated AGE’s ability to sell pet products to any other contractually approved retailer by, inter alia , indicating that it would reject any designs for pet products that AGE intended to sell to retailers other than PetSmart. Supreme Court, for the most part, denied MSLO’s summary judgment motion.  Regarding the covenant of good faith and fair dealing claim, Supreme Court held that there were factual issues precluding summary judgment, including “whether MSLO’s statement that, despite the MSLO Agreement permitting AGE to design and sell et roducts to certain retailers other than PetSmart, MSLO breached its implied covenant of good faith and fair dealing by declaring that it would not approve Pet Products for retailers other than PetSmart.” (Citation omitted.) The First Department unanimously affirmed Supreme Court.  As to MSLO good faith, the Court stated: The court correctly found that issues of fact exist as to whether defendant breached the agreement by saying that it would not approve any new designs.  While defendant was permitted to refuse any design on subjective grounds such as personal taste and sensibilities, it was nevertheless obligated to exercise its refusal in good faith, based on dissatisfaction genuinely and honestly arrived at.  The examination of such a state of mind is for a jury. (Citations omitted.) As to damages, the First Department agreed with Supreme Court that “plaintiff may recover lost profits, since plaintiff submitted evidence supporting its claim that such damages were caused by defendant’s alleged breach of the parties’ contract, are capable of proof with reasonable certainty, and were fairly within the contemplation of the parties at the time the contract was made.” (Citations omitted.) TAKEAWAY The factual allegations in the AGE case strongly suggest that MSLO sought to frustrate AGE’s ability to realize the benefit of its bargain.  Allegations of such bad faith tactics are sufficient to preclude summary judgment in favor of the allegedly breaching party. This BLOG has previously treated the covenant of good faith and fair dealing < here =">here"> and < here =">here"> .

The Securities and Exchange Commission (“SEC”) has been busy so far this spring. In the latest roundup, this Blog looks at enforcement actions taken by the SEC against investment advisors, a medical device company and a purported cryptocurrency company. SEC Charges Medical Device Company and Founder with Fraud for Failing to Make Disclosures and Misappropriating Investor Funds On April 5, 2018, the SEC announced ( here ) that it had charged convicted felon and former NHL team owner Peter H. Pocklington (“Pocklington”), his medical device company, and others with defrauding investors by hiding Pocklington’s recidivist history and by misappropriating investor funds. In its complaint ( here ), the SEC alleged that in 2010, Pocklington pleaded guilty to a federal felony perjury charge and was later ordered to pay over $5 million as part of a settlement for unrelated state securities fraud and registration charges.  Thereafter, Pocklington founded The Eye Machine LLC (now known as Nova Oculus Partners LLC), a California-based medical device company that raised over $14 million between 2014 and 2017 from more than 260 investors in unregistered offerings. According to the SEC, Pocklington and his attorney, Lantson E. Eldred (“Eldred”), structured the ownership of The Eye Machine to conceal Pocklington’s role with the company and held Eldred out as the company’s “visual front.”  In the offerings, Pocklington, Eldred, and The Eye Machine allegedly failed to disclose Pocklington’s criminal history and involvement in the company, and misrepresented how investor funds would be spent.  Pocklington allegedly misappropriated over $600,000 of investor funds for personal use, including funding his gold mining companies and paying personal legal and credit card bills.  The SEC also alleged that The Eye Machine paid millions of dollars in undisclosed and excessive sales commissions to defendants Yolanda C. Velazquez, Vanessa Puleo, and Robert A. Vanetten, who acted as unregistered brokers for the company.  According to the complaint, Velazquez – whom the SEC previously barred from acting as a broker-dealer ( here ) – and Puleo used “boiler room” operations in Florida to “cold call” investors. “Investors should know when a recidivist plays a central role in a company’s operations and offerings,” said Michele W. Layne, Director of the SEC’s Los Angeles Regional Office.  “Investors should research the background of anyone offering an investment, but they can only do this if the offering accurately and adequately discloses the individuals involved.” The SEC filed its complaint in federal court in California. In the complaint, the SEC charged: 1) The Eye Machine, Pocklington, and Eldred with violating the antifraud and securities registration provisions of the federal securities laws; 2) The Eye Machine’s majority shareholder, AMC Holdings, LLC, and Terrence J. Walton, The Eye Machine’s in-house accountant, with securities fraud violations; 3) Velazquez, Puleo, and Vanetten with broker-dealer registration and securities registration violations; and 4) Velazquez with violating a prior SEC order barring her from associating with a broker-dealer.  The SEC seeks injunctive relief, disgorgement and interest, and penalties. SEC v. Pocklington , Case No. 5:18-cv-00701 (C.D. Cal. Apr. 5, 2018). Investment Advisers Settle Charges for Breaching Fiduciary Duties; Agree to Pay $12 Million to Injured Clients On April 6, 2018, the SEC announced that three investment advisers had settled charges for breaching their fiduciary duties to clients, which generated millions of dollars in improper fees. ( Here .) In three separate orders ( here , here and here ), the SEC claimed that PNC Investments LLC (“PNCI”), Securities America Advisors Inc. (“SAA”), and Geneos Wealth Management Inc. (“Geneos”) failed to disclose conflicts of interest and violated their duty to seek best execution by investing advisory clients in higher-cost mutual fund shares when lower-cost shares of the same funds were available. The SEC also charged Geneos for failing to identify its revised mutual fund selection disclosures as a “material change” in its 2017 disclosure brochure.  Collectively, the firms agreed to pay almost $15 million, with more than $12 million going to harmed clients. “These disclosure failures cause real harm to clients,” said C. Dabney O’Riordan, Co-Chief of the Asset Management Unit.  “We strongly encourage eligible firms to participate in the recently announced Share Class Selection Disclosure Initiative as part of an effort to stop these violations and return money to harmed investors as quickly as possible.” The Share Class Selection Disclosure Initiative (discussed by this Blog here ) gives eligible advisers until June 12, 2018, to self-report share selection misconduct and take advantage of the SEC’s willingness to recommend more favorable settlement terms, including no civil penalties against the adviser. (The SEC announcement of the SCSDI can be found here .) The SEC also found that PNCI and Geneos failed to disclose the conflict of interest associated with compensation they received from third parties for investing clients in particular mutual funds, and that PNCI improperly charged advisory fees to client accounts for periods when there was no assigned investment advisory representative. In the orders, the SEC concluded that PNCI, SAA, and Geneos each violated the Investment Advisers Act of 1940.  Without admitting or denying the findings, the advisers each consented to a cease-and-desist order and a censure.  The orders require PNCI to pay $6,407,770 in disgorgement and prejudgment interest along with a $900,000 penalty. SAA agreed to pay $5,053,448 in disgorgement and prejudgment interest along with a $775,000 penalty. Geneos agreed to pay $1,558,121 in disgorgement and prejudgment interest along with a $250,000 penalty.

Commercial litigation involving mortgage-backed securities (MBS) cases can be complex and labor-intensive. Attorneys handling MBS cases often must follow intricate and multiple transactions involving many players, including securities issuers, securities underwriters, loan originators, credit-rating agencies, due-diligence service providers, and insurers. Litigators must review the numerous factors and issues in each of the MBS disputes to determine liability and damages. Below are some of the common issues that we see arising in many of the MBS cases. What are Mortgage-Backed Securities? It helps to understand how mortgage-backed securities (MBS) are created and how they relate to real estate. MBS are bonds that are secured by real estate loans. RMBS (residential mortgage-backed securities) were a popular type of bond issued before the financial crisis in 2008. To create an MBS, a lender pools a number of loans together that have similar characteristics. That pool is then sold to a securities firm, a federal government agency, or a government-sponsored enterprise to be used as collateral for an MBS. Investors in an MBS benefit from the cash flow generated from the pooled mortgages. As mortgage holders pay their mortgage payments, investors receive payments, usually monthly payments, of interest and principal. Many industry experts viewed these securitizations as a factor in the financial crisis of 2008 as these securities failed to generate money when people stopped paying their mortgages. Therefore, this led to a sizeable number of lawsuits regarding various issues related to mortgage-backed securities. What Issues are Being Raised in MBS Cases? One of the common allegations in these cases is that the banks holding mortgages submitted documentation for an MBS that contained false or misleading information.  In some cases, it is alleged that the banks omitted key information from the documents about the mortgages within the pool. For instance, a bank would not include accurate information about its underwriting process, including how it valued property used as collateral for mortgages and determined if borrowers were actually qualified to borrow the sums being loaned to them. When a bank’s underwriting process is faulty, it can create a pool of mortgages that do not have the quality required to secure the MBS properly. These MBS cases often contain allegations of negligent misrepresentation, fraud, and unjust enrichment. Another issue in MBS cases is statute of limitations problems. Many defendants are arguing that the statute of limitations for bringing these actions have expired. Once a statute of limitations expires, the plaintiff is barred by law from pursuing the defendant for that cause of action. If the court rules in favor of defendants asserting statute of limitations problems, the plaintiffs who lost billions of dollars may not be able to hold credit-reporting agencies, banks, and mortgage lenders liable for misrepresenting the quality of pooled mortgages. Many of the MBS plaintiffs have been able to overcome this issue, but defense attorneys continue to argue statute of limitations as a defense in MBS cases. Another common allegation in MBS cases is that investment banks knew problems were developing in the MBS markets. However, the banks were more interested in the profits being generated by mortgage securities. Therefore, many banks began to ignore or failed to conduct due diligence. These banks failed to disclose these problems and risks to potential investors as they marketed MBS as investment opportunities. Instead, the banks profited on mortgages they knew were likely to fail. MBS Litigation Continues Many MBS lawsuits have settled without going to trial; however, MBS litigation continues as investors seek to recover money they lost by investing in mortgage-backed securities. Schedule a consult with the experienced commercial litigators at Freiberger Haber LLP today to discuss your legal options.

On March 29, 2018, the New York Court of Appeals decided Kolchins v. Evolution Markets, Inc. , a case that addresses several important practice issues. Plaintiff in Kolchins was a commodity trader who, in 2005, joined defendant as a commodity broker.  In 2006, and again in 2009, the parties entered into three-year employment agreements.  The 2009 agreement, which had an end date of August 31, 2012, provided for various forms of compensation including a base salary, a “sign on” bonus, a production bonus and minimum guaranteed compensation.  In June of 2012, in anticipation of the expiration of the 2009 agreement, defendant’s CEO sent plaintiff an e-mail stating that the terms of a new employment offer were the same as those under the parties’ 2009 contract, but for a minor issue that was not challenged by plaintiff.  Plaintiff replied to the CEO one month later with an e-mail that stated, “I accept, pls send contract”.  The happy CEO then responded by e-mail stating, “Mazel. Looking forward to another great run.” Thereafter, defendant’s general counsel unsuccessfully attempted to “reduce the parties’ mutual understanding to a more formal written instrument.”  On September 1, 2012, plaintiff was notified that his employment ceased upon the expiration of the 2009 agreement. Litigation ensued in which plaintiff alleged that his breach of contract claim was supported by the parties’ e-mails, which constituted a “valid and binding contract setting forth the terms of continued employment with defendant.”  Defendant, relying on the parties’ e-mails, letters and prior employment agreements, moved to dismiss the complaint pursuant to CPLR 3211(a)(1).   The Kolchins Supreme Court denied the motion to dismiss.  Among other things, Supreme Court held that e-mails are not the types of documents that can be considered “documentary evidence” under CPLR 3211(a)(1) and that, even if considered documentary evidence, such documents in this case, did not conclusively refute that the parties entered into a binding contract. Defendant appealed.  Appellate Division, First Department, found that Supreme Court properly denied defendant’s motion, while rejecting Supreme Court’s conclusion that e-mails cannot be considered documentary evidence for the purposes of a CPLR 3211(a)(1) motion.  In this regard the Kolchins Appellate Division stated: Preliminarily, we reject Supreme Court’s conclusion that correspondence such as the emails here do not suffice as documentary evidence for purposes of CPLR 3211(a)(1).  The Court has consistently held otherwise…. his Court found drafts of an agreement and correspondence sufficient for purposes of establishing a defense under the statute.  Similarly,… this Court found documentary evidence in the form of emails to be sufficient to carry the day for a defendant on a CPLR 3211(a)(1) motion.  Likewise,… this Court granted a CPLR 3211(a)(1) motion on the basis of a letter from the plaintiff’s counsel that contradicted the complaint.  Therefore, there is no blanket rule by which email is to be excluded from consideration as documentary evidence under the statute. The Kolchins Court of Appeals recognized the Appellate Division’s holding in this regard and agreed that, based on the documentary evidence supporting its motion, defendant failed to “meet its burden to conclusively refute the allegations of the complaint that the parties entered into a new contract.” The Court of Appeals noted that the first level of analysis in determining if the parties entered into a contract is whether “there is a sufficiently definite offer such that its unequivocal acceptance will give rise to an enforceable contract.”  The Court also reiterated that: when faced with determining the issue of whether the parties’ course of conduct and communications created an enforceable contract, “it is necessary to look to the objective manifestations of the intent of the parties as gathered by their expressions, words and deeds” (citations and internal quotation marks omitted);  and, that certainty as to material terms is also critical to the finding that a contract exists. Against this backdrop, the Court of Appeals concluded that a reasonable fact-finder could determine that the documentary evidence presented on the motion could support the finding that a binding contract was formed by the parties.  The CEO’s initial e-mail stated that the terms of the new contract offer were largely the same as under the prior contract.  This, the Court concluded, “could reasonably be inferred constitute[] a valid offer by defendant.”  As to the acceptance and the parties’ intent to be bound, the Court stated: In response to that email, plaintiff wrote "I accept. pls send contract," to which Ertel replied, "Mazel. Looking forward to another great run." Affording plaintiff the benefit of every favorable inference, this exchange — in essence, we "offer" and "I accept," followed by an arguably congratulatory exclamation, coupled with a forward-looking statement about the next stage of the parties' continuing relationship — sufficiently evinces an objective manifestation of an intent to be bound for purposes of surviving a motion to dismiss. TAKEAWAY As technology advances, folks tend to become increasingly more informal.  Care should be taken to ensure that one or more informal communications cannot be pieced together to create a binding agreement where none was intended. This Blog previously addressed the issue of e-mails and contract formation here and here .

JEFFREY M. HABER, CO-FOUNDING PARTNER OF FREIBERGER HABER LLP, IS AGAIN RECOGNIZED BY SUPER LAWYERS MAGAZINE New York, NY (Law Firm Newswire) April 5, 2018 – Freiberger Haber LLP is pleased to announce that co-founding partner, Jeffrey M. Haber , has been named by Super Lawyers Magazine® to be among the top lawyers in the New York metropolitan area for the seventh consecutive year. Mr. Haber was recognized for his work in business litigation . As part of his history of professional achievements, he was also recognized as a Super Lawyer in 2008-2010 and 2012-2017. Super Lawyers Magazine® is an affiliate of Thomson Reuters. The publication recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year, no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website (here). About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, securities, real estate, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 50 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. 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) 574-4454. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact: Jeffrey M. Haber Freiberger Haber LLP Melville Office (Main Office): 105 Maxess Road, Suite S124 Melville, New York 11747 Tel: (631) 574-4454 Fax: (631) 390-6944 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

What is a Trade Secret? At its core, a trade secret is information of commercial value. It can be anything, such as a formula, strategy, device, process, or recipe. It is not generally known to others and is not readily ascertainable by proper means. Since a trade secret is a thing of commercial value, it gives the owner an advantage over competitors who do not know the secret and cannot use it to compete for business.  New York Law vs. The UTSA At the state level, the protection of trade secrets is generally governed by the  Uniform Trade Secrets Act ("UTSA") . To date, 48 states, including the District of Columbia, Puerto Rico and the U.S. Virgin Islands, have adopted the UTSA in one form or another.  (There is some debate about whether Alabama or North Carolina adopted the UTSA; the  Uniform Law Commissioners maintain that Alabama has adopted it, while North Carolina has not .)  Only New York and Massachusetts have not enacted the UTSA.  New York courts define a trade secret as any “formula, pattern, device or compilation of information which is used in one’s business, and which gives an opportunity to obtain an advantage over competitors who do not know or use it.”  Ashland Mgt. v. Janien , 82 N.Y.2d 395, 407 (1993). To determine if a “trade secret” exists, New York courts examine: "'(1) the extent to which the information is known outside of business; (2) the extent to which it is known by employees and others involved in business; (3) the extent of measures taken by to guard the secrecy of the information; (4) the value of the information to and competitors; (5) the amount of effort or money expended by in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.'" Id . (quoting Restatement of Torts § 757, Comment b). The UTSA defines a trade secret as “information … that (i) derives independent economic value … from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” UTSA § 1(4). The UTSA both narrows and broadens the common-law definition of trade secret. It narrows the definition by making a) the difficulty in independently ascertaining the information, and b) reasonable efforts to maintain secrecy, prerequisites to the finding of a “trade secret.”  It broadens the definition by eliminating the factor concerning the expense or difficulty involved in developing the information. Consequently, commercial information discovered at minimal cost, or even by accident, may be considered a trade secret.  In addition to the definition of a trade secret, New York common law and the UTSA differ over what it takes to qualify as a trade secret. In New York, to qualify as a trade secret, there must be “a process or device for continuous use in the operation of the business.”  Softel, Inc. v. Dragon Med. & Scientific Commc’ns, Inc. , 118 F.3d 955, 968 (2d Cir. 1997). A single, discrete event will not do.  In contrast, the UTSA does not require a process or continuous use. The standard concerning the efforts necessary to protect a trade secret is similar under the UTSA and the common law. Under New York law, for example, if a trade secret is disclosed to an individual who is not under an obligation to protect the confidentiality of the information, the trade secret loses its protection.  See, e.g., Big Vision Private Ltd. v. E.I. DuPont De Nemours & Co. , 1 F. Supp. 3d 224, 267-69  (S.D.N.Y. 2014). Similarly, the UTSA provides that disclosure may be made only to individuals who are associated with the company and thus have a duty of loyalty not to disclose the information, or to those who have signed a confidentiality agreement and/or non-disclosure agreement. Confidentiality agreements and/or non-disclosure agreements are considered to be “reasonable precautions” for maintaining secrecy under the UTSA and New York law -- both agreements create an obligation by the third party to protect the confidentiality of the information. Misappropriation of Trade Secrets Generally, trade secret owners have recourse only against the “misappropriation” of a trade secret. Misappropriation is the use of a trade secret without permission.  Under the UTSA, misappropriation occurs when a trade secret is acquired by "improper means" or from someone who has acquired it through "improper means." Theft, bribery, and misrepresentation are among the acts considered to be "improper means." Under New York common law, a trade secret is misappropriated if it was obtained through corporate spying or other improper manner.  In addition, a person or company can be guilty of misappropriation if the information was obtained through a breach of trust, e.g. , an employee steals trade secrets from his employer, gives the information to another company, and that company uses the secrets even though it has obtained the information without permission. Remedies and Fees If a trade secret is misappropriated, the injured person may seek injunctive relief and damages. Damages include actual loss and unjust enrichment. If the misappropriation is done willfully or maliciously, the plaintiff may obtain exemplary damages -- which are limited to twice the actual damages. Seeking emergency injunctive relief plays an important role in trade secret litigation. The reason: once a trade secret has been disclosed, its value diminishes. Waiting for trial and a final judgment to prevent or stop the misappropriation rarely provides the protection needed to maintain the value of the trade secret. For this reason, plaintiffs often seek emergency injunctive relief prior to trial. The most common types of emergency relief are temporary restraining orders and preliminary injunctions. Under the UTSA, a plaintiff also may seek a “royalty injunction.” A royalty injunction provides that “ n exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited.” UTSA § 2(b). The provision allows a court to impose a royalty instead of a conduct-based injunction, typically in circumstances involving a person's reasonable reliance upon acquisition of a misappropriated trade secret in good faith and without reason to know of its prior misappropriation.  Id . §2 at cmt.¶5 Finally, under the UTSA, a court may award reasonable attorneys' fees to a prevailing party in specified circumstances as a deterrent to specious claims of misappropriation, to specious efforts by a misappropriator to terminate injunctive relief, and to willful and malicious misappropriation. Under New York law, in contrast, attorneys’ fees are unavailable in the absence of specific contractual or statutory provisions.  Levine v. Infidelity, Inc. , 2 A.D.3d 691, 692  (2d Dep't 2003). New York courts recognize a limited exception to this rule, and award attorneys' fees to prevailing parties where the plaintiff’s damages “have been proximately related to the malicious acts and the acts themselves entirely motivated by disinterested malevolence on  part.” Brook Shopping Ctrs., Inc. v. Bass , 107 A.D.2d 615 (1st Dep't 1985).  As a practical matter, in a trade secrets litigation, this exception is unlikely to arise because the defendant’s motivation is to profit from the theft, not just to harm the plaintiff. Federal Statute: Defend Trade Secrets Act On May 11, 2016, President Obama signed the Defend Trade Secrets Act ("DTSA") into law. (18 USC §§ 1836 et seq.) The DTSA creates a federal, private cause of action for trade-secret protection. Before the DTSA, in the absence of diversity jurisdiction, or an independent federal cause of action, trade secret owners seeking relief ( e.g. , damages or injunctions) for misappropriation had recourse in state court only. The DTSA provides a uniform statutory scheme to be applied in federal court; it does not pre-empt state law. In many respects, the DTSA is modeled after the UTSA. Accordingly, the substantive provisions under the DTSA are similar to state regimes modeled after the UTSA, though some material differences exist.

On March 29, 2018, the Department of Justice (“DOJ”) announced ( here ) that it had reached agreement with Barclays Capital, Inc. and several of its affiliates (together, “Barclays” or the “Bank”) to settle a civil action in which the United States sought civil penalties for alleged conduct related to Barclays’ underwriting and issuance of residential mortgage-backed securities (“RMBS”) between 2005 and 2007. Under the settlement, Barclays will pay the United States two billion dollars ($2,000,000,000) in civil penalties in exchange for dismissal of the Amended Complaint. A copy of the settlement agreement can be found here . The settlement follows a three-year investigation into allegations that Barclays caused billions of dollars in losses to investors by engaging in a fraudulent scheme to sell 36 RMBS deals, and that it misled investors about the quality of the mortgage loans backing those deals. Those allegations, violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and the predicate acts of mail fraud, wire fraud, bank fraud, and other misconduct, were set forth in the DOJ’s initial complaint, which it filed in December 2016. The lawsuit also names as defendants two former Barclays executives: Paul K. Menefee (“Menefee”), who served as Barclays’ head banker on its subprime RMBS securitizations; and John T. Carroll (“Carroll”), who served as Barclays’ head trader for subprime loan acquisitions. The DOJ also reached agreement with Menefee and Carroll. In exchange for dismissal of the claims against them, Menefee and Carroll agreed to pay the United States the combined sum of two million dollars ($2,000,000) in civil penalties. “This settlement reflects the ongoing commitment of the Department of Justice, …, to hold banks and other entities and individuals accountable for their fraudulent conduct,” stated Richard P. Donoghue, United States Attorney for the Eastern District of New York. “The substantial penalty Barclays and its executives have agreed to pay is an important step in recognizing the harm that was caused to the national economy and to investors in RMBS.” “The actions of Barclays and the two individual defendants resulted in enormous losses to the investors who purchased the Residential Mortgage-Backed Securities backed by defective loans,” stated Laura S. Wertheimer, Inspector General, of the Federal Housing Finance Agency Office of the Inspector General (“FHFA-OIG”). “Today’s settlement holds accountable those who waste, steal or abuse funds in connection with FHFA or any of the entities it regulates.” The scheme alleged in the complaint involved 36 RMBS deals in which over $31 billion worth of subprime and Alt-A mortgage loans were securitized, more than half of which loans defaulted. The complaint alleged that in publicly filed offering documents and in direct communications with investors and rating agencies, Barclays systematically and intentionally misrepresented key characteristics of the loans it included in these RMBS deals. In general, the borrowers whose loans backed these deals were significantly less creditworthy than Barclays represented, and these loans defaulted at exceptionally high rates early in the life of the deals. In addition, as alleged in the complaint, the mortgaged properties were systematically worth less than what Barclays represented to investors. In a statement, Barclays Chief Executive Officer, Jes Staley, called the settlement a “fair and proportionate settlement.” Staley said that, because of the settlement and a 2017 restructuring, Barclays was “well positioned” to ramp up profits and return a greater share of its profit to shareholders. The settlement amount is less than market analysts had expected and less than the penalties paid by other banks, such as by Goldman Sachs and JPMorgan Chase, facing similar claims involving the underwriting and issuance of residential mortgage-backed securities.

Simply stated, the “Voluntary Payment Doctrine” bars recovery of payments voluntarily made with full knowledge of the facts, and in the absence of fraud or material mistake of fact or law.  Dubrow v. Herman & Beinin , 157 A.D.3d 620 (1 st Dep’t 2018) (citation and quotation marks omitted).  The Doctrine has been around for quite some time.  In 1898, the First Department recognized that “ voluntary payment of money under a claim of right cannot in general be recovered back.  To warrant such recovery there must be a compulsion, -- actual, present, potential, -- and the demand must be illegal.  In the absence of such compulsion a mere protest is not sufficient.  The element of coercion is essential to the right.” ( Lesster v. City of New York , 33 A.D. 350.  The Lesster Court went on to reiterate the rule as follows: If a party, with full knowledge of all the facts, voluntarily pays money in satisfaction of a demand made upon him, he cannot afterwards allege such payment to have been unjustly demanded, and recover back the money. The Plaintiff in Lester was a property owner in New York City who paid real property taxes without knowing that the subject property had been condemned and acquired by the City for a street widening project.  When the City refused to return the tax payment, Lester sued and prevailed in light of the mistake. Others have not been so fortunate, as was the case in Gimbel Brothers, Inc. v. Brook Shopping Centers, Inc. , 118 A.D.2d 532.  There, plaintiff leased its retail store from defendant. The subject lease was drafted when New York’s “Sunday Blue Laws” prohibited businesses from operating on Sunday.  After the “Blue Laws” were declared unconstitutional, defendant started invoicing Gimbel Brothers for a $10.00 per week “Sunday charge”.  The charge was later increased to $825.00 and Gimbel Brothers paid a total of $19,800.00 in such charges before stopping.  The lease did not provide for “Sunday charges”. Gimbel Brothers commenced suit against its landlord seeking, inter alia , a declaration that it could offset the previously made “Sunday charges” against future rents. Relying on the “Voluntary Payment Doctrine”, the Gimbel Brothers court held that the “Sunday charges” should not be returned and, in so doing, stated: Indeed, we find that the weight of the evidence supports the conclusion that Gimbels was not operating under an actual mistake of law but, instead, made the subject payments voluntarily, as a matter of convenience, without having made any effort to learn what its legal obligations were….When a party intends to resort to litigation in order to resist paying an unjust demand, that party should take its position at the time of the demand, and litigate the issue before, rather than after, payment is made.  Gimbels displayed a marked lack of diligence in determining what its contractual rights were, and is therefore not entitled to the equitable relief of restitution.  (Citations omitted.) In Dillon v. U-A Columbia Cablevision , 100 N.Y.2d 525 (2003), plaintiff brought a purported class action lawsuit against her cable provider alleging that a $5 late fee/administrative fee was an impermissible penalty and she would not have made the payments “had she known the true facts”.  The Dillon Court of Appeals, agreeing with “both lower courts that the voluntary payment doctrine bars plaintiff’s complaint,” stated: Here, no fraud or mistake is alleged in that, according to the complaint, plaintiff knew she would be charged a $5 late fee if she did not make timely payment.  Alleged mischaracterization of a $5 late fee as an administrative fee does not overcome application of the voluntary payment doctrine. Yesterday, the First Department decided The Law Offices of Paul Chin, P.C. v. Seth A. Harris, PLLC ; presumably the most recent New York decision applying the Voluntary Payment Doctrine.  The parties in Chin are law firms.  Defendant hired plaintiff for six months, on a part-time basis, commencing in August.  The terms of the relationship were set forth in a memorandum that the defendant sent to plaintiff and, as presently germane, provided that plaintiff’s part-time work could not exceed 350 hours for the relevant time period.  Plaintiff, however, worked and was paid for 460 hours.  Plaintiff also worked past the six-month term of the relationship. The Chin plaintiff sued defendant when defendant refused to pay plaintiff for all hours billed.  The Chin defendant asserted a counterclaim to recover over $20,000 in payments made to plaintiff.  Relying on the court’s decision in Dillon , supra , the Chin court found that defendant’s counterclaim was “barred by the voluntary payment doctrine, since defendant fails to present any evidence that it made the payments while laboring under any material mistake of fact or law concerning the invoiced services or the basis for the billing. TAKEAWAY A lesson to be learned from these cases is that payors should not “pay now and ask questions (or litigate) later”, lest they run the risk that a court will not permit the recovery of such payments from the payee.  Known rights should be asserted promptly.