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If a contracting party intends for the obligations under a contract to be executed by a business entity, it is critical that the person executing the contract on behalf of the entity clearly indicate that the contract is being signed in a representative capacity.  This point was recently reiterated in James E. Cayne v. Alexandra Lebenthal , (Sup. Ct. New York Co. October 30, 2017) (the “Action”).  The Defendant in Cayne is Alexandra Lebenthal, CEO of Lebenthal Holdings, LLC f/k/a Alexandra & James LLC (“Holdings”), a wealth management firm, and the daughter of Jim Lebenthal, the former chairman of Lebenthal & Company, a municipal bond brokerage firm. The facts of the Action are simple.  As a result of financial troubles experienced by Holdings, Ms. Lebenthal reached out to an old family friend, plaintiff, James E. Cayne, the former CEO and Chairman of the Board of Bear Stearns, and asked for a $1,000,000 loan, which request Mr. Cayne obliged (the “Loan”).  The Loan proceeds were delivered to Ms. Lebenthal by way of a check made payable to “Alexandra Lebenthal” (the “Check”).  Shortly thereafter, Ms. Lebenthal executed a promissory note in the amount of $1,000,000 (the “Note”).  Underneath the signature line of the Note, was Ms. Lebenthal’s name and Holdings’ address. After numerous payments were made on the Loan by check drawn on Holdings’ account, the payments ceased.  After Mr. Cayne agreed to several requests for payment accommodations, Ms. Lebenthal stated that no further payments under the Loan were forthcoming.  Ms. Lebenthal further advised that she deemed the repayment of the Loan to be the sole obligation of financially strapped Holdings.  Shortly thereafter the Action was commenced by Mr. Cayne. Mr. Cayne moved for summary judgment, arguing that Ms. Lebenthal defaulted under the Loan.  The Court found that Mr. Cayne satisfied the burden of proof on his prima facie case, by submitting to the Court: a copy of tPhe written “Instruction to Pay” form by which Mr. Cayne requested that a $1,000,000 check made payable to “Alexandria Lebenthal” be drawn on his Bear Stearns brokerage account; a copy of an invoice for accrued interest, listing “Alexandria Lebenthal” as borrower; and, a copy of a check for quarterly interest (drawn on Holdings’ account). In opposition, Ms. Lebenthal argued, among other things, that at all times she was acting in a representative capacity as the Loan was made to Holdings as evidenced by the fact that: in her initial discussions about the Loan, Ms. Lebenthal advised Mr. Cayne that Holdings was in the need of capital; initially, when the funds were going to be wire transferred, the instructions indicated that the deposit was to be made to Holdings’ operating account (although the Loan was ultimately funded by the Check); the Check was deposited into Holdings’ bank account; the address under the signature line of the Note was that of Holdings; interest invoices were sent by Mr. Cayne to Ms. Lebenthal at Holdings’ business address; the payments that were made on the Loan were made checks drawn on Holdings’ bank account; and, Cayne sent a Loan related letter addressed to “Alexandra Lebenthal, Lebenthal Holdings, LLC” at Holdings’ new offices. In granting summary judgment to Mr. Cayne, the Cayne Court stated: To bolster claim, submits a copy of the … ote with her signature affixed to the bottom noting that the address listed on the … ote is that of .  It is notable that no part of this document indicates that is signing on behalf of the or in her capacity as the company’s CEO. In looking at the four corners of all the documentary evidence, the oan was made to and by in her personal capacity and not as … one to her business.  offers no evidence to support the position that the oan was a corporate debt rather than a personal one.  The language of all documents evidencing the oan are clear and unambiguous, and defendant’s parole evidence that parties agreed that the oan was for the company is inadmissible to vary its terms. Accordingly, the Cayne Court entered judgment against Ms. Lebenthal in the amount of $438,680.69, plus interest and costs, and set the matter down for a hearing on reasonable attorney’s fees. TAKEAWAY No one wants to be held personally liable for the obligations of a business entity, whether as an owner or employee.  It is of critical importance, therefore, that anyone entering into a contract on behalf of a business entity make clear that they are acting in a representative capacity.  This objective easily can be accomplished by including in the signature block of a contract, the entity’s name and the signatory’s title with the entity.  In many situations, a personal guaranty may be requested from a business owner.  In such circumstances, an informed decision can be made as to whether the business owner is prepared to be exposed to personal liability for the obligations of the entity.  A business owner or employee should not, however, unwittingly be exposed to personal liability through inadvertence or a lack of attention to detail (as may have been the case in Cayne) by failing to enter into a contract in a representative capacity. Similar issues were addressed in the following article previously appearing on this Blog: https://fhnylaw.com/third-parties-beware-agent-not-disclose-identity-principal/

Preliminary injunctions can be an important and potent weapon in business and commercial litigation.  In New York, “ preliminary injunction may be granted … where it appears that the defendant threatens or is about to do … an act in violation of the plaintiff’s rights” with regard to the subject matter of the action, and which “render the judgment ineffectual ….” CPLR 6301. Whether to grant a preliminary injunction lies within the sound discretion of the court.  Doe v. Axelrod , 73 N.Y.2d 748, 750 (1988); Zoller v. HSBC Mtge. Corp. (USA) , 135 A.D.3d 932, 933 (2d Dept. 2016). The movant must, therefore, show entitlement to preliminary injunctive relief by demonstrating (with clear and convincing evidence) satisfaction of the following: (1) probability of success on the merits; (2) irreparable harm absent the injunction; and (3) the balance of the equities favoring the relief sought. Zoller , 135 A.D.3d at 933; W. T. Grant Co. v. Srogi , 52 N.Y.2d 496, 517 (1981). “ bsent extraordinary circumstances, a preliminary injunction will not issue where to do so would grant the movant the ultimate relief to which he or she would be entitled in a final judgment.” SHS Baisley, LLC v. Res Land, Inc. , 18 A.D.3d 727, 728 (2d Dept. 2005); see also Board of Mgrs. of Wharfside Condominium v. Nehrich , 73 A.D.3d 822, 824 (2d Dept. 2010). Likelihood of Success on the Merits Success on the merits does not mean certainty of success. Indeed, certainty of success is not the standard; instead, the movant must establish that it is likely to succeed on the merits of the claim. In this regard, the movant must demonstrate its right to the relief, though the evidence submitted need not be conclusive. Terrell v. Terrell , 279 A.D.2d 301 (1st Dept. 2001); McLaughlin, Piven, Vogel v. Nolan & Co. , 114 A.D.2d 165, 172-173 (2d Dept.) (“ s to the likelihood of success on the merits, a prima facie showing of a right to relief is sufficient; actual proof of the case should be left to further court proceedings”), lv. denied , 67 N.Y.2d 606 (2d Dept. 1986). Notably, issues of fact are insufficient to defeat the motion. See CPLR 6312(c) (providing that issues of fact identified in opposition to the application are insufficient to defeat the motion and “shall not in itself be grounds for denial of the motion.”). But, the movant must nevertheless show a clear right to relief which is plain from the undisputed facts. Matter of Related Prop., Inc. v Town Bd. of Town/Village of Harrison , 22 A.D.3d 587 (2d Dept. 2005). Irreparable Harm Irreparable injury, for purposes of the second prong, means an injury for which money damages are insufficient. Walsh v. Design Concepts, Ltd. , 221 A.D.2d 454, 455 (2d Dept. 1995); McLaughlin , 114 A.D.2d at 174. See also Sterling Fifth Assoc. v. Carpentille Corp., Inc. , 5 A.D.3d 328, 330 (1st Dept. 2004)). The injury claimed must be direct and concrete . Rowland v. Dushin , 82 A.D.3d 738 (2d Dept, 2011) (noting that preliminary injunctive relief is not appropriate where the irreparable harm claimed is remote or speculative); Family-Friendly Media, Inc. v. Recorder Tel. Network , 74A.D.3d 738 (2d Dept. 2010). Satisfying this prong can be the most difficult of the three because most plaintiffs seek monetary damages. Consequently, courts will deny a motion for a preliminary injunction where the movant has an adequate remedy at law. E.g. , Dana Distr., Inc. v. Crown Imports, LLC , 48 A.D.3d 613 (2d Dept. 2008) (“Where, as here, a litigant can fully be recompensed by a monetary award, a preliminary injunction will not issue.”). There are two exceptions to the general rule. First, when the subject matter of the case concerns a specific fund, courts will find irreparable injury even though the plaintiff seeks monetary relief. In these cases, the courts grant the injunction because there is harm to the property, not to the value of the property. Genger v. Genger , 2010 NY Slip Op. 33929 (Sup. Ct. N.Y. County July 2, 2010); Ma v. Lien , 198 A.D.2d 186, 604 N.Y.S.2d 84 (1st Dept. 1993) (holding that if “the requested relief is not granted, a substantial amount of money may be dissipated or otherwise unavailable for recovery”). Second, courts will issue a preliminary injunction when such relief is authorized by statute and is in the public interest. People v. Empire Prop. Solutions, LLC , 2012 NY Slip Op. 30346 (Sup. Ct. Nassau County Jan. 27, 2012); Spitzer v. Lev , ___ Misc.3d. ___, 2003 WL 21649444, at *2 (Sup. Ct. N.Y. County 2003) (noting that “when the Attorney General is authorized by statute to seek injunctive relief to enjoin fraudulent or illegal acts, no showing of irreparable harm is necessary.”); State of New York v. Terry Buick Inc. , 137 Misc. 2d 290 (Sup. Ct. Dutchess County Oct. 9, 1987). As the Empire Prop . court noted, “the irreparable injury to be enjoined is an injury to the public, which need not be focused upon an individual to be actionable.” Balance of Equities To satisfy the third prong of the preliminary injunction standard, the movant must establish that the injury it would sustain is more burdensome to it than the harm that would be caused to the non-movant through the imposition of the injunction. Winter Bros. Recycling Corp. v. Jet Sanitation Serv. Corp. , 23 Misc. 3d 1115 , 2009 NY Slip Op. 50753 (Sup. Ct. Nassau County Mar. 13, 2009); Fischer v. Deitsch , 168 A.D.2d 599, 601 (2d Dept. 1990). Conclusory assertions will not suffice to satisfy this prong. A fact-based, client affidavit is critical to the success of the application. Posting an Undertaking CPLR 6312(b) requires the movant to post a bond contemporaneously with the issuance of a preliminary injunction order. The amount to be posted is a matter within the sound discretion of the court. Lelekakis v. Kamamis , 303 A.D.2d 380, 380 (2d Dept. 2003). However, the amount of the undertaking must be rationally related to the amount of the non-movant’s potential liability if the preliminary injunction later proves to be unwarranted. Id . at 381. The purpose of the undertaking therefore is to secure for the non-movant the actual losses and costs – not theoretical losses, “if it is later finally determined that the preliminary injunction was erroneously granted.” Id . at 380. Mere conclusory assertions of potential monetary loss are insufficient to justify anything more than a minimal bond. 7th Sense, Inc. v. Liu , 220 A.D.2d 215, 217 (1st Dept. 1995). JSC VTB Bank v. Mavlyanov As noted above, demonstrating irreparable injury can be the most difficult of the three prongs to satisfy. In JSC VTB Bank v. Mavlyanov , 2017 NY Slip Op. 07339 (1st Dept. Oct. 19, 2017), decided by the Appellate Division, First Department, on October 19, 2017, the plaintiff learned this lesson the hard way. JSC VTB Bank involved an alleged fraudulent conveyance by the defendant Igor Mavlyanov (“Mavlyanov”) in violation of New York Debtor and Creditor Law Article 10 (N.Y. DCL §§ 270, et seq.). The plaintiff, JSC VTB Bank (“VTB” or the “Bank”), a Russian bank, alleged that Mavlyanov transferred real and/or personal property in the United States while purportedly owing more than $30 million to the Bank. VTB sought to set aside and void the alleged fraudulent transfers between Mavlyanov and his immediate family and close associates or, alternatively, for money damages. According to the Bank, VTB had extended loans to a non-party under two facility agreements (the “Facility Agreements”). Mavlyanov personally guaranteed all principal and interest due under the Facility Agreements (the “Guarantees”). The recipient of the loans defaulted on its obligations and Mavlyanov refused, upon demand by VTB, to honor his obligations under the Guarantees. VTB commenced an action against Mavlyanov on the Guarantees in Russia. The Russian court ruled in favor of VTB and judgments on the Guarantees were issued, which awarded VTB rub. 2,245,899,146.78 (approximately $34,000,000) in damages and court costs. Thereafter, VTB filed the action in New York, alleging that Maylyanov took a number of actions to thwart collection under the Russian judgment. In this regard, the Bank alleged that unbeknownst to it, Mavlyanov transferred all of his real property located in New York and California after executing the Guarantees. Mavlyanov also transferred numerous properties located in Russia to his wife, Defendant Stella Mavlyanova, all within a four-week period just prior to the default under the Facility Agreements. According to VTB, the conveyances involved, among other things, transfers to immediate family and close associates, a lack of fair consideration, knowledge of VTB’s claims under the Guarantees, suspicious transfers not within the usual course of business, Mavlyanov’s continued retention and use of the properties, and the use of “dummy” or “sham” entities. VTB alleged that the Defendants’ conduct had placed the properties outside the reach of VTB as a creditor and a judgment creditor. As a result, VTB sought a temporary restraining order, preliminary injunction and an attachment of the property claiming that there was a significant risk that the Defendants would continue to transfer or encumber the transferred properties and that Mavlyanov or the other Defendants would divert additional assets to avoid paying on the Russian judgments or on an ultimate judgment in the New York action. The motion court, which had previously granted VTB’s motion for a temporary restraining order, granted in part the Bank’s motion for a preliminary injunction and attachment, but fixed the amount of the undertaking at $25 million, which at the time of the appeal had not been posted. The Defendants’ appealed, arguing that the motion court’s order should be reversed on the grounds that, among other things, VTB failed to establish: (1) a likelihood of success on the merits of its underlying fraudulent conveyance claims; (2) the irreparable injury required for an order granting injunctive relief or an attachment; and (3) a balance of equities in its favor. The First Department’s Ruling The First Department unanimously modified the motion court’s ruling, reversing the grant of the preliminary injunction, vacating the attachment of properties, and reducing the undertaking ordered in connection with the temporary restraining order to $1 million. With regard to the preliminary injunction, the Court held that “on the merits, the court should not have granted” it, “because the primary relief sought in this action is money damages.” The Court noted that “ ven if this were an appropriate case for an injunction, the injunction should not be granted, because the fact that plaintiff can be fully compensated by damages shows that he would not suffer irreparable injury absent the injunction.” Takeaway “Preliminary injunctive relief is a drastic remedy and will only be granted if the movant establishes a clear right to it under the law and the undisputed facts found in the moving papers.” Koultukis v. Phillips , 285 A.D.2d 433, 435 (1st Dept. 2001). Because it is “a drastic remedy” it “should be used sparingly.” Fischer v. Deitsch , 168 A.D.2d 599, 601 (2d Dept. 1990). For this reason, the showing of irreparable harm is the most difficult element to demonstrate for obtaining injunctive relief under New York law. And in this regard, the courts are clear that the harm will not be considered irreparable if it can be redressed with monetary damages. As noted above, VTB learned just how hard it is to demonstrate irreparable harm.

Parties to commercial and business disputes frequently encounter and litigate the threshold question whether their dispute must be arbitrated rather than litigated in court. But, before this question can be answered, there is an even more fundamental question that must be resolved: who decides whether a dispute is subject to arbitration – the court or the arbitrator? Courts have struggled with this question for years and continue to do so today. Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. See Primex Int’l Corp. v. Wal-Mart Stores, Inc. , 89 N.Y.2d 594, 598 (1997) (affirming trial court ruling that “whether there is a clear, unequivocal and extant agreement to arbitrate the claims, is for the court and not the arbitrator to determine . ”); Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39, 45-46 (1997) (noting “well-settled proposition that the question of arbitrability is an issue generally for judicial determination in the first instance.”) (citing cases). Notwithstanding, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’” Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 68-9 (2010). (For a discussion of Rent-A-Center, see here .) Such “delegation clauses” are enforceable where “there is ‘clea and unmistakabl ’ evidence” that the parties intended to arbitrate arbitrability issues. First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943, 944 (1995), quoting AT&T Technologies, Inc. v. Communications Workers , 475 U.S. 643, 649 (1986). “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. , 514 U.S. at 944. Courts in New York follow the foregoing principles and will not take the issue of arbitrability away from the arbitrator when the parties specifically provide as such. Matter of Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA , 26 N.Y.3d 659, 676-677 (2016); Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 495 (1st Dep’t 2009). This approach reflects the “overarching principle of law ‘that arbitration is a matter of contract’” and that “courts must rigorously enforce arbitration agreements according to their terms.” Monarch Consulting , 26 N.Y.3d at 675, quoting American Express Co. v. Italian Colors Restaurant , 133 S.Ct. 2304, 2309 (2013). Thus, where a contract contains a valid delegation to the arbitrator of the power to determine arbitrability, such a clause will be enforced absent a specific challenge to the delegation clause by the party resisting arbitration.   Monarch Consulting , 26 N.Y.3d at 675-76. This Blog previously discussed the issue here . On October 12, 2017, the New York Court of Appeals issued Garthon Bus. Inc. v. Stein , 2017 NY Slip Op. 07160 , in which it held, in a tersely written decision, that the gateway issue of arbitrability should be determined by the arbitrator where “the terms of the parties’ final agreements . . . incorporated the rules of the” arbitral forum. In Garthon , the parties incorporated into their agreement the rules of the London Court of International Arbitration (“LCIA”), which provides, in pertinent part, that “ he Arbitral Tribunal shall have the power to rule upon its own jurisdiction and authority, including any objection to the initial or continuing existence, validity, effectiveness or scope of the Arbitration Agreement.” In so holding, the Court reversed the decision of the Appellate Division, First Department, which held (with two justices dissenting) that the parties’ incorporation of the LCIA Rules was insufficient to demonstrate a “clear and unmistakable” intent to have the arbitrator determine the arbitrability of the parties’ dispute. Garthon Bus. Inc. v. Stein , 138 A.D.3d 587, 593 (1st Dept. 2016). The First Department reasoned that under the circumstances, where the “agreements containing … arbitration clauses…, directly clash with an enforceable forum selection clause in a separate agreement relevant to the parties’ dispute,” it could not be said “with any degree of certainty that the parties clearly and unmistakably intended for the chosen arbitral body to decide the particular issue presented to us.” As a consequence, the court declined to let the arbitrators decide the issue of arbitrability even though the agreement to arbitrate incorporated the arbitral body’s rules which reserved the gateway issue of arbitrability to itself. (A copy of the First Department’s decision can be found here .) Takeaway Since First Options of Chicago , arbitration associations have amended their rules to provide that the arbitrator has the power to decide whether a given dispute is arbitrable. When parties incorporate the rules of the arbitration association into their contract, they are, therefore, delegating to the arbitrator the jurisdiction to decide the issue of arbitrability of the matter. Garthon confirms that broadly worded arbitration clauses, which incorporate a set of arbitration rules and confers upon the arbitrator the power to determine his/her own jurisdiction, will be enforced according to their terms. Garthon also teaches that unless parties want to arbitrate whether a given dispute is arbitrable, they should specifically address in the arbitration clause the question of who will determine whether the dispute is arbitrable. Failure to do so can lead to expensive litigation or lead to results the parties never intended.

Mortgages on real property are typically delivered to a lender to secure loans evidenced by promissory notes.  When a default occurs under the note and/or mortgage litigation frequently follows.  If the borrower and/or guarantor are solvent, the lender may choose to sue on the note for monetary damages in an action at law.  If the property is valuable, but the borrower has insufficient funds to satisfy a money judgment the lender might decide to sue to foreclose the mortgage in an equitable action.  Generally, however, a lender who made a mortgage loan in New York cannot do both and must make an election of remedies pursuant to section 1301 of New York’s Real Property Actions and Proceedings Law .  RPAPL §1301 provides: Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff of the county where he resides, if he resides within the state, or if he resides without the state, to the sheriff of the county where the judgment-roll is filed; and has been returned wholly or partly unsatisfied. The complaint shall state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected. While the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought. The election of remedies provision of the RPAPL was one of the issues decided in Agility Funding, LLC v. Wilmington Trust National Association (Sup. Ct. Warren Co. October 11, 2017).  The plaintiff in Agility claimed to have a mortgage on the property subject to foreclosure and defendant Wilmington was the record owner of the subject property and took title from Parkside Development Partners, LLC subject to the plaintiff’s mortgage and note.  Plaintiff moved for an order, inter alia , appointing a referee to compute the amounts due to it under the note and mortgage. Wilmington, who never answered the complaint, cross-moved to: (1) vacate its default due to law office failure; (2) dismiss the complaint on a variety of grounds; and, (3) cancel the lis pendens. In opposition to Wilmington’s cross-motion, plaintiff submitted an affidavit that, for reasons not explained, set forth factual circumstances surrounding a prior action commenced by plaintiff on the underlying note in which a judgment was obtained, but that “no property executions were served because plaintiff was unable to identify any assets available for execution and, therefore, no sheriff has ever returned to plaintiff a property executed unsatisfied”. For the first time at oral argument, however, Wilmington argued that the cross-motion should be deemed amended to seek dismissal of the foreclosure complaint pursuant to the election of remedies principles set forth in RPAPL 1301.  The court permitted the parties to submit supplemental briefs on this issue. The Agility court, inter alia , dismissed the plaintiff’s complaint, with prejudice, and as to the RPAPL 1301 argument, stated: In the case at bar, in commencing the foreclosure action, plaintiff elected to pursue its remedy at law and obtain a judgment on the mortgage debt (the note) first, before it commenced this action to foreclose the mortgage securing that same note.  Plaintiff admits that it secured judgments against Parkside and the guarantors in that action to recover the mortgage debt and that no property executions were served and returned unsatisfied.  As such, this action is barred by RPAPL 1301<1> and the complaint must be dismissed . The Agility court denied, as academic, much of the remaining requests for relief in the underlying motion and cross-motion. TAKEAWAY There are numerous reasons why a lender may choose to pursue an action on the note as opposed to a mortgage foreclosure, and may include: the borrower and/or guarantors have sufficient funds to satisfy a money judgment; the real property subject to the mortgage has title issues, environmental issues, is of insufficient value to make the lender whole and/or may present other issues that make foreclosure seem impractical; the statutory requirements for foreclosures, particularly with respect to residential real property, can be onerous; it may be quicker and less expensive to bring an action at law on the note and/or guaranty. If for whatever reason, a decision is made to proceed on the note in the first instance and a judgment is obtained against the maker of the note and/or any guarantors, take such steps as may be necessary to attempt to collect on any such judgment because a subsequent foreclosure action can be dismissed as in Agility.

The Basics A contract is an agreement between two or more parties to do something ( e.g. , provide goods or services) in exchange for a benefit. When one or more parties to a contract fails to perform a term in their agreement, they are in breach of that agreement. Most breaches fall into one of two categories: actual or anticipatory. In the former, a party to the contract fails or refuses to perform his/her obligations under the agreement or performs his/her obligations incompletely. In the latter, a party to the contract declares, before performance is required, that he/she does not intend to perform the obligations under the agreement. See 10-54 Corbin on Contracts § 54.1 (2017) (“An anticipatory breach of a contract by a promisor is a repudiation of contractual duty before the time fixed in the contract for . . . performance has arrived”); 13 Williston on Contracts § 39:37 (4th ed.). A breach of contract, regardless of the form it takes, entitles the non-breaching party to bring an action for damages. When one party unconditionally refuses to perform under the contract, regardless of when performance is supposed to take place, the refusal is called a “repudiation” of the contract.  A breach may be considered a repudiation even if it is not of an essential term or a material breach of an intermediate term. (This Blog previously wrote about the types of breaches here .) Anticipatory Breach Examined There are two types of anticipatory breaches: (1) express, and (2) implied. Norcon Power Partners v. Niagara Mohawk Power Corp. , 92 N.Y.2d 458, 463 (1998) (noting that an anticipatory repudiation “can be either a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach or a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach”) (internal quotation marks omitted). In an express repudiation, a party to a contract announces, before performance is required, that he/she will not perform under the agreement. The repudiation must be clear, straightforward, and directed at the other party. Tenavision, Inc. v. Neuman , 45 N.Y.2d 145, 150 (1978) (noting that the expression of intent not to perform must be “positive and unequivocal”). The declaration cannot be qualified or ambiguous. (For example, “Unless it stops raining, I will not be able to fix the roof.”) In an implied repudiation, a party takes actions that put the performance of a contract out of his/her power to perform (such as when a contractor sells the tools required to fix his customer’s roof). If the breach can be shown to be repudiatory in nature, then the non-breaching party can terminate the contract, even though the date for performance has not yet occurred, or proceed as if the contract is valid. Strasbourger v. Leerburger , 233 NY 55, 59 (1922); see also American List Corp. v. U.S. News & World Report , 75 N.Y.2d 38, 44 (1989). Importantly, the non-repudiating party need not tender performance or prove its ability to perform the contract in the future.   American List Corp. , 75 N.Y.2d at 44. Rather, the non-repudiating party is relieved of his/her obligation of future performance and can recover the present value of his/her damages from the repudiating party’s breach of the contract. Id. The decision whether to accept that the contract has been repudiated and terminate, or wait until the date for performing the obligation passes and treat the defaulting party as being in actual breach, is not an easy one.  One commentator described the difficulty as follows: If the promisee regards the apparent repudiation as an anticipatory repudiation, terminates his or her own performance and sues for breach, the promisee is placed in jeopardy of being found to have breached if the court determines that the apparent repudiation was not sufficiently clear and unequivocal to constitute an anticipatory repudiation justifying nonperformance. If, on the other hand, the promisee continues to perform after perceiving an apparent repudiation, and it is subsequently determined that an anticipatory repudiation took place, the promisee may be denied recovery for post-repudiation expenditures because of his or her failure to avoid those expenses as part of a reasonable effort to mitigate damages after the repudiation. Crespi, The Adequate Assurances Doctrine after U.C.C. § 2-609: A Test of the Efficiency of the Common Law , 38 Vill. L. Rev. 179, 183 (1993), quoted in Norcon Power , 92 N.Y.2d at 463. Whether a party has anticipatorily breached a contract is ordinarily a question of fact reserved for a jury, but a court may decide the issue as a matter of law when the purported repudiation is embodied in an unambiguous writing. Briarwood Farms, Inc. v. Toll Bros., Inc. , 452 Fed. Appx. 59, 61 (2d Cir. 2011). Can the Breaching Party Take Back the Repudiation? A breaching party can repudiate the contract and then later retract the repudiation, as long as the non-breaching party has not made a material change in his/her position because of the repudiation. Notwithstanding, retraction cannot be done if the only contractual obligation remaining is for one party to pay money to the other. In that case, the party seeking the payment must wait until the due date for the payment has passed. The Non-Breaching Party’s Duty to Mitigate If one party repudiates the contract, most courts require the non-breaching party to avoid incurring unnecessary costs or expenses. This is referred to as “mitigating damages” and generally means that the non-breaching party cannot sit on his/her rights and let the situation get worse. Princes Point LLC v. Muss Dev. L.L.C . , 2017 NY Slip Op. 07298 (N.Y. Oct. 19, 2017). Recently, the courts of New York were called upon to decide an unsettled question concerning an anticipatory breach: is the commencement of an action, particularly one seeking rescission, itself an anticipatory breach? In Princes Point , the New York Court of Appeals answered the question in the negative. Background In 2004, Princess Point agreed to purchase a waterfront parcel on Staten Island from the defendants Allied Princes Bay Co. and Allied Princes Bay Co. #2, LP (collectively, “APB”). In relevant part, APB agreed, as a condition precedent to closing, that it would deliver certain government approvals necessary to develop the property. The agreement prescribed a closing date of 30 days after Princes Point received notice that the approvals had been obtained, but in no event later than the “Outside Closing Date,” which was defined as 18 months after the execution and delivery of the agreement. The agreement provided that if the approvals could not be obtained by the Outside Closing Date, then either party could terminate the agreement upon 30 days’ notice. In the event of such termination, Princes Point would receive a refund of its deposit and the parties would be released from the majority of their contractual obligations. In lieu of termination, Princes Point retained an option to waive the approvals and proceed to closing. In 2005, following Hurricane Katrina, the New York State Department of Environmental Conservation conducted a visual inspection of a retaining wall along the waterfront of the property, found some problems, and required APB to remedy the identified defects. As a consequence, APB was unable to obtain the requisite development approvals by the closing date set forth in the purchase agreement. In light of the additional time and cost required, APB advised Princes Point that it intended to exercise the right to terminate the agreement unless Princes Point agreed to amend it. In March 2006, the parties amended the agreement to increase the purchase price and down payment to be made with respect to the property, to require the parties to share in the costs of remediation, and to extend the “Outside Closing Date” for the sale to July 22, 2007. The Outside Closing Date later was extended to July 22, 2008, based on the ongoing nature of the remedial work required to close the sale. The amendments to the purchase agreement also contained a forbearance clause, which essentially provided that, “as a material inducement to agreement to the New Outside Closing Date,” Princes Point would “not commence any legal action against in the event that any of the Development Approvals had not been issued or the had not been completed by the New Outside Closing Date.” Approximately one month before the final New Outside Closing Date, Princes Point commenced the action alleging, among other things, fraud in the inducement of the amendments to the contract. Princes Point also sought to eliminate the increase in purchase price and the requirement that it share in the cost of repairs to the property, as embodied in the amendments. Princes Point sought specific performance of the contract absent the amendments on the ground that the amendments were executed based on the defendants’ alleged misrepresentation of their ability to complete the remedial work necessary to close the sale. In response, the defendants asserted various counterclaims, two of which were relevant to the appeal. In the first counterclaim, the defendants sought judgment declaring that, based on what by then was the expiration of the final New Outside Closing Date, either the contract had terminated, or Princes Point must immediately proceed to closing without any abatement in the purchase price. In the third counterclaim, the defendants alleged that, by failing to close the transaction in accordance with the contract, Princes Point defaulted on that agreement, thereby entitling APB to retain “the entire down payment,” as well as the payments Princes Point made in furtherance of its obligation to share in the cost of the remediation of the property. Proceedings Below The motion court dismissed all of Princes Point’s causes of action. The defendants moved for partial summary judgment on their first and third counterclaims. The defendants sought a declaration that the purchase agreement was terminated, and that Princes Point had materially breached the contract. The motion court granted the motion, adjudging that the contract had “expired by its terms” and that Princes Point had “materially breached” the agreement, entitling the defendants to, among other things, retain the down payment and the remedial payments made pursuant to the amendments to that agreement. On appeal, the Appellate Division, First Department, affirmed the judgment insofar as appealed from and determined “that, because a rescission action unequivocally evinces the plaintiff’s intent to disavow its contractual obligations, the commencement of such an action before the date of performance constitutes an anticipatory breach.” Princes Point LLC v. Muss Dev. L.L.C. , 138 A.D.3d 112, 114 (1st Dept. 2016). ( Here .) In so holding, the court found dispositive the fact that the action before it sought rescission as opposed to a declaratory judgment: This Court has held that an action seeking a declaratory judgment does not constitute an anticipatory breach. Several courts in other jurisdictions agree. The proposition is a rational one, because a declaratory judgment action merely seeks to define the rights and obligations of the parties. If a plaintiff succeeds in obtaining a declaratory judgment, he or she may then proceed to the performance of duties under the contract (as defined by the judgment). An action seeking rescission of a contract is markedly different. In contrast to a declaratory judgment, a plaintiff who succeeds in obtaining rescission can no longer perform: his or her contractual duties will have evaporated. Indeed, by bringing this action for rescission, plaintiff sought to have a court “declare the contract void from its inception and to put or restore the parties to status quo.” 138 A.D.3d at 117 (citations omitted). The First Department also concluded “that the seller < i.e. , apb,> i.e., apb,> was not required to show that it was ready, willing, and able to complete the sale because the buyer’s anticipatory breach relieved of further contractual obligations.” Id . The First Department subsequently granted Princes Point leave to appeal to the Court of Appeals. In doing so, the First Department certified for review the question whether “the order of the Supreme Court, as affirmed by properly made?” The Court of Appeals’ Decision The Court reversed the First Department’s order and answered the certified question in the negative. The Court agreed with the First Department’s observation that “the commencement of a declaratory judgment action ‘does not constitute an anticipatory breach . . . because a declaratory judgment action merely seeks to define the rights and obligations of the parties.’” Slip op. at 2 (quoting Princes Point , 138 A.D.3d at 117). But, it did not agree with the First Department’s conclusion that “‘ n action seeking rescission of a contract is markedly different’ from a declaratory judgment action.” Id . In this regard, the Court noted: “There is no material difference between action and a declaratory judgment action. At bottom, both actions seek a judicial determination as to the terms of a contract, and the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.” (Citation omitted.) Consequently, the Court concluded that the filing of the action did not constitute an anticipatory breach. In a footnote, the Court declined to reach a decision on “plaintiff’s alternative contention that, even if its commencement of this action constituted an anticipatory breach of the contract, defendants were required to show – and failed to show – that they were ready, willing, and able to perform their contractual obligations and close the subject sale at the time of the purported repudiation in order to retain the down payment and compaction payments made pursuant to the contract.” Slip op. at 3, n.4. Takeaway  New York follows the “traditional standard,” requiring an unequivocal statement or act to evidence an anticipatory breach. In Princes Point , the Court of Appeals makes clear that merely filing a lawsuit, while suggestive of a refusal to perform, is not the same as unequivocally repudiating one’s performance under an agreement. As the Court noted: “the mere act of asking for judicial approval to avoid a performance obligation is not the same as establishing that one will not perform that obligation absent such approval.” Slip op. at 3. After all, the repudiating party could always retract the repudiation, withdraw or settle the lawsuit, or in some other way perform under the contract.

Investing in the stock market can be challenging.  Understanding investment vehicles like stocks, bonds, limited partnerships, annuities, hedge funds, derivatives and mutual funds can be overwhelming for investors.  For that reason, many investors rely on stockbrokers and financial advisors to provide suitable investment advice to protect their hard-earned money. While most brokers and financial advisors act in their customer’s best interest, some do not.  When that happens, the broker or financial advisor is often in violation of the securities laws or the rules and regulations established by the Financial Industry Regulatory Authority (“FINRA”), the self-regulatory agency that oversees the securities industry. In the event the broker or financial advisor breach their duty to their customer (or acts negligently or recklessly, or fails to disclose material information about an investment that would have affected the customer’s investment decision), investors have recourse through arbitration. Securities Arbitration: 101 Arbitration is an alternative method of resolving disputes. Although arbitration has been around for over 200 years, it was not widely used as means of resolving disputes in the securities industry. That changed in 1987 when the United States Supreme Court decided Shearson/American Express, Inc. v. McMahon , 482 U.S. 220 (1987). Before McMahon , brokers and their firms relied on pre-dispute arbitration agreements to compel a customer to arbitrate future disputes between them. The pre-dispute agreement was typically contained in a customer agreement, or in a margin agreement, and was widely used by the investment community. Despite industry acceptance, pre-dispute arbitration agreements were not widely accepted by the courts. In fact, many courts refused to enforce them. However, in McMahon , the Supreme Court changed that thinking, holding that such agreements were enforceable. Recently, the propriety of mandatory arbitration agreements has come under scrutiny, especially from consumer advocates and Democrats in Congress, who have objected to arbitration agreements that prohibit consumers from joining class actions. ( Here , here , and here .) Commencing an Arbitration To start an arbitration, a party must file a statement of claim. The statement of claim must specify the details of the dispute, including, but not limited to, the relevant facts and circumstances surrounding the dispute, the date(s) relevant to the dispute, the transactions in dispute, the securities involved, and the damages sought, or the type of relief sought. In addition to the statement of claim, each party must file a submission agreement, which memorializes the parties’ agreement to arbitrate the dispute, and pay the required filing fees. After the claimant files the statement of claim and the submission agreement, FINRA serves the documents, along with instructions for the arbitration process, on the named respondent(s). Service is typically done by mail to the last known address of the respondent(s). If service cannot be completed, or the respondent(s) cannot be located, FINRA typically seeks the assistance of counsel for the claimant in effectuating service. In that event, most practitioners will serve the papers in a manner that complies with the rules of the court that has jurisdiction over the respondent(s). Answers, Counter-Claims, and Third-Party Claims After service of the statement of claim, the respondent(s) files an answer to the allegations. The answer must specify the defenses upon which the respondent(s) relies, and the facts that support those defenses. A general denial is not a sufficient answer, and according to the rules of most arbitration forums, may lead to an order precluding the respondent(s) from offering evidence at the hearing. The respondent(s) must file an answer with FINRA within 45 days of receipt of the statement of claim.  When answering a claim, the respondent(s) must serve every party with copies of the signed submission agreement and answer, as well file an original and three copies of the papers with FINRA Dispute Resolution.  (If the claim is to be decided by a single arbitrator, then the respondent(s) should file only one additional copy.)  FINRA provides copies of the papers to the arbitrator(s) selected to hear and determine the dispute. Respondents who file answers can also assert claims against the claimant (known as counterclaims), claims against other respondents (known as cross-claims) and claims against persons or entities who are not parties (known as third-party claims). Respondents who are brokerage firms must pay a fee to FINRA simply for being named in the arbitration, and any respondent who files a counter-claim must pay an additional fee, based on the dollar amount of the claim. Location of the Hearing After the filing of all claims, answers and replies, FINRA will notify the parties of the location of the hearing. FINRA’s procedural guidelines require the hearing to be held in the location where the claimant resides. Arbitrator Selection Securities arbitrations are decided by one arbitrator, or three arbitrators, depending on the dollar amount of the controversy. For investor cases involving claims of up to $100,000, the parties receive a list of 10 chair-qualified public arbitrators.  Each separately represented party may strike up to four arbitrators on the list, leaving at least six arbitrator names remaining on each party’s list. Parties may rank the remaining arbitrators on each list. In investor cases with claims in excess of $100,000, the parties receive three lists (one with 10 chair-qualified public arbitrators; one with 15 public arbitrators; and one with 10 non-public arbitrators).  Each separately represented party may strike up to four of the 10 arbitrators on the chair-qualified list, up to six of the 15 arbitrators on the public list, and up to 10 of the 10 arbitrators on the non-public list.  All parties in investor cases have the option to select an all-public panel by striking all of the arbitrators on the non-public list.  Parties may rank the remaining arbitrators on each list. For disputes that involve only industry parties, one arbitrator will decide claims involving up to $100,000. In that case, the parties receive one list of 10 chair-qualified non-public arbitrators.  Each separately represented party may strike up to four arbitrators on the list, leaving at least six arbitrator names remaining on each party's list.  The parties may rank the remaining arbitrators on the list. For claims of more than $100,000 for unspecified or non-monetary claims, the parties receive two lists (one including 10 non-public chair-qualified arbitrators, and one including 20 non-public arbitrators).  Each separately represented party may strike up to four names from the non-public chair-qualified arbitrators and up to eight arbitrators from the non-public arbitrator list.  The highest ranked arbitrator from the chair-qualified list and the two highest ranked arbitrators from the non-public list will be appointed to the panel. A full discussion of the selection process can be found here . The Discovery Process The discovery process allows the parties to obtain facts and information from other parties to the arbitration in order to support their case and prepare for the hearing.  The FINRA Codes of Arbitration Procedure require parties to cooperate with each other to the fullest extent practicable in the voluntary exchange of documents and information to expedite the arbitration process. If the parties cannot agree on their own how to resolve any discovery dispute, then the party who wants more documents or information may make a motion to compel the reluctant party to produce the requested documents.  In the motion, the requesting party should explain to the arbitrator(s) why the discovery is relevant and necessary to the case and ask the arbitrator(s) to issue an order compelling production. The arbitrator(s) may schedule a hearing before deciding the motion. The FINRA Codes of Arbitration Procedure contain rules that govern the discovery process, including making discovery requests, responding to such requests, objecting to discovery requests, and arbitrator authority to issue sanctions against parties for discovery abuses. FINRA provides a Discovery Guide which contains guidelines to help the parties and arbitrators during the discovery process. ( Here .) Hearing Procedures FINRA arbitrations are conducted like a trial in court. There are opening statements, the introduction of evidence by the claimant, the introduction of evidence by the respondent(s), rebuttal evidence, closing arguments, post-hearing submissions, and the close of the record. In the typical customer case, the claimant will call witnesses to testify on his/her behalf as to the facts within the witnesses’ personal knowledge.  In addition, a claimant can call expert witnesses who have specialized training or knowledge to testify as to their opinion on a technical matter to help the arbitrators draw conclusions and render a decision. After the claimant’s witness testifies on “direct examination,” the witness is cross-examined by the respondent’s attorney. If there is more than one respondent, the attorneys typically select one attorney to shoulder the responsibility of cross-examination as to all issues common to the respondents. Thereafter, the rest of the respondents’ attorneys will examine the witness on issues specific to their client. Cross-examination of witnesses is more lenient in arbitrations than in court proceedings. In the typical court proceeding, cross-examination is “limited to the scope of direct,” that is, the cross-examiner cannot ask the witness questions about areas or topics that were not addressed on direct examination. In arbitrations, however, cross-examinations often go beyond direct examination, as long as the area of inquiry is related to the issues in the case, or the credibility of the witness. When all of the respondents’ attorneys have cross-examined the witness, the arbitrators may ask questions of the witness. Some arbitrators may interrupt the examination of a witness to ask a question, but those are usually to clarify a witness’ answer. The extent of an arbitrator’s examination depends on the depth and scope of the attorneys’ questions and the particular arbitrator involved. Some arbitrators ask a lot of questions, others ask none, regardless of the examination by the attorneys. After the examination by the arbitrators, the claimant’s attorney has the opportunity to question the witness again. This examination is called “re-direct” and is limited to issues that were raised by answers on cross-examination, or by the arbitrators’ questions. When re-direct is complete, re-cross begins, limited again by the scope of the arbitrators’ questions, and the redirect. This process continues for all of the claimant’s witnesses. When all of the claimant’s witnesses have testified, the process starts again with the respondents’ witnesses. A summary of the foregoing hearing procedures can be found here . Rules of Evidence As a general matter, the rules of evidence are relaxed to make the arbitration a shorter and more cost-efficient proceeding. (It is often said that the rules of evidence do not apply in arbitration.) In this regard, arbitrators often use common sense, both in a legal and practical sense, to decide evidentiary questions. The Award After closing the record, the arbitrator (or panel of arbitrators, as the case may be) considers the evidence, deliberates, and decides what relief the claimant is entitled to, if any. In a three-member panel, an award is based on the vote of a majority of the arbitrators; a unanimous decision is not required. Awards must be in writing, but arbitrators are not required to write opinions or provide explanations or reasons for their decision. The panel will issue an award within 30 business days from the date the record is closed. All awards rendered are final and are not subject to review or appeal, except under limited circumstances. Once the award is signed by a majority of the arbitrators, FINRA will send copies of the signed award to each party or representative of the party.  FINRA makes all arbitration awards publicly available for free by posting them on Arbitration Awards Online ( here ). FINRA does not have an appeals process through which a party may challenge an award. Thus, any challenge to an award must be made in state or federal court. Under federal and state laws, the grounds on which a court may hear a party’s appeal on an award are limited.  Specifically, a court may vacate or overturn an arbitration award if it finds that: the award was procured by corruption, fraud, or undue means; there was evident partiality or corruption in the arbitrators; the arbitrators were guilty of misconduct … in refusing to hear evidence pertinent and material to the controversy, or of any other misbehavior by which the rights of any party have been prejudiced; the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made; the arbitrators disregarded a clearly defined law or legal principle applicable to the case before them (Manifest Disregard of the Law); or there was no factual or reasonable basis for the award (Complete Irrationality). This Blog has previously posted articles about many of these grounds. ( Here , here , here  and here .) Conclusion Initially, many investors expressed concerns that they would be treated unfairly in arbitration proceedings. Studies have shown that investors actually achieve successful outcomes in arbitrations related to securities losses, however. Additionally, those who are represented by an experienced securities arbitration attorney are more likely to recover a higher percentage of their claim. Although most brokers and investment advisors act in their client’s best interest, some fail to do so. Ultimately, if you believe broker misconduct has contributed to investment losses, you are well advised to consult with an attorney who can help you navigate the securities arbitration process.

CPLR § 306-b provides: Service of the summons and complaint, summons with notice, third-party summons and complaint, or petition with a notice of petition or order to show cause shall be made within one hundred twenty days after the commencement of the action or proceeding, provided that in an action or proceeding, except a proceeding commenced under the election law, where the applicable statute of limitations is four months or less, service shall be made not later than fifteen days after the date on which the applicable statute of limitations expires. If service is not made upon a defendant within the time provided in this section, the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service. On October 10, 2017, the Appellate Division, First Department, decided Goldstein Group Holding, Inc. v. 310 E. 4 th St. Hous. Dev. Fund Corp., 2017 NY Slip Op 07086 , an opinion that, like Aesop’s Fables, is short, but contains many valuable lessons.  The First Department in Goldstein , unanimously affirmed the Supreme Court’s dismissal of plaintiff’s complaint for lack of personal jurisdiction because “…plaintiff failed to serve defendant within 120 days after commencement of the action and failed to show that its time for service should be extended for good cause or in the interest of justice…” as is required by CPLR §306-b. The facts in Goldstein are simple, but not typical.  The plaintiff was the substituted plaintiff in a prior foreclosure that was dismissed for lack of personal jurisdiction because the person served with process on behalf of the defendant corporation, Brandstein, was no longer its president at the time of service and was otherwise not authorized to accept service of process.  Three months later, plaintiff commenced a new action, which was the subject of the First Department’s decision.  Unbelievably, plaintiff served Brandstein again, mistakenly believing, based on “rank speculation”, that, in the interim, he had become defendant’s president again.  Plaintiff seemingly learned of its mistake and served the defendant’s actual president, albeit more than 120 days after the commencement of the action. In granting the defendant’s motion to dismiss the second foreclosure action commenced by plaintiff, the First Department recognized plaintiff’s lack of prudence and stated that “ y attempting service on Brandstein, who plaintiff should have known was not authorized to receive service, and making no effort to learn the identity of the current officers, plaintiff failed to act with reasonable diligence in trying to effect service….”  Accordingly, “good cause” could not be demonstrated. In addition, plaintiff failed to formally cross-move for an extension of time to serve the complaint and, instead, simply requested the extension in its opposition papers.  The First Department did not reach the merits of the procedural issue of whether a formal cross-motion was necessary because it believed that the Supreme Court properly exercised its discretion in denying the extension request on the merits. Take Away There are several valuable lessons to be learned from Goldstein .  First, plaintiffs should be diligent in serving process promptly after the commencement of the action.  Second, if an entity is the party to be served, make sure that sufficient research is performed to determine which individuals can be served to obtain jurisdiction over the entity.  Third, make sure that all information is clearly conveyed to the process server.  (In the age of social media, it is easy to find and forward to the process server, photographs of the individuals to be served.)  If there is any question whatsoever about who to serve, simply serve the entity through the Secretary of State.  The defendant in Goldstein appears to be a New York Corporation, so it is not clear why the Goldstein plaintiff failed to serve defendant through the Secretary of State, at least, the second time around.  Third, do not rely on informal requests for relief in opposition papers.  Pay the motion fee and formally cross-move if any affirmative relief from the court is being sought.  This way you know that if your request is denied, a request for relief from an appellate court will be entertained.

On October 17, 2017, the National Whistleblower Center, a non-profit, tax-exempt, non-partisan whistleblower legal advocacy organization, Senator Charles Grassley, and the U.S. Government filed amici briefs before the U.S. Supreme Court in Digital Realty Trust v. Somers (No. 16-1276). In July of this year, this Blog posted an article about the case. ( Here .) The issue in Somers concerns the definition of “whistleblower,” and whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”) extend to individuals who have not reported alleged misconduct to the Securities and Exchange Commission (“SEC”). In enacting the Dodd-Frank Act, Congress granted the SEC the authority to define the “manner” in which an individual can provide the SEC with information and qualify as a “whistleblower” under the Act. In promulgating the final rules, the SEC included internal reporting as one of the “manners” in which an individual can qualify as a “whistleblower.” As Mary L. Shapiro, the Chair of the SEC at the time, stated: “ erhaps most significantly, the final rules would give credit to a whistleblower whose company passes the information along to the Commission, even if the whistleblower does not.” ( Here .) In Digital Realty , the Ninth Circuit joined the Second Circuit in finding that the term “whistleblower” as used in the Dodd-Frank Act did not limit the anti-retaliation protections of the Act to those who disclose information to the SEC only. Rather, the anti-retaliation provisions also protect those who were fired after making internal disclosures of alleged unlawful activity under the Sarbanes-Oxley Act of 2002 and other laws, rules, and regulations. (Discussed here .) By contrast, the Fifth Circuit, which was the first to address the issue, strictly applied the Act’s definition of “whistleblower” to apply only to those who disclose suspected wrongdoing to the SEC. Asadi v. G.E. Energy (USA), L.L.C. , 720 F.3d 620, 621 (5th Cir. 2013). In doing so, the court rejected the SEC’s regulation (17 C.F.R. § 240.21F-2), which extends the anti-retaliation protections to those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC. Id . at 630. In its brief ( here ), the National Whistleblower Center argued that the language and legislative history of the Dodd-Frank Act demonstrates that individuals who internally report violations of the securities laws are protected from retaliation under the Act. In this regard, the National Whistleblower Center argued: During the SEC’s rulemaking process, the regulated community urged the SEC to incorporate internal disclosures into the core definition of the “manner” employees could qualify as a “whistleblower.” In fact, numerous corporations argued that internal reporting should be a mandatory requirement that employees would have to meet in order to become a qualified “whistleblower.” In determining the “manner” in which an individual can qualify as a “whistleblower” under 15 U.S.C. § 78u-6(a)(6), the SEC concluded that the balance of equities encouraged internal reporting to fall within the definition. The SEC concluded that including internal reporting within the definition of whistleblower would: “ llow companies to take appropriate actions to remedy improper conduct at an early stage”; “ llow companies to self-report”; “ void undermining internal compliance programs”; “ llow the Commission to preserve its scarce resources by relying upon corporate compliance programs”; “ romote a working relationship between the Commission and companies”; and “ ncrease the quality of tips.” In his brief ( here ), Senator Grassley, the author of numerous statutes that protect whistleblowers and incentivize them to report waste, fraud, and abuse in the government and economy, argued that the Act’s anti-retaliation provision supplements and enhances existing protections by including both internal and external reporting in the definition of whistleblower. In that regard, Senator Grassley argued: The Dodd-Frank Act’s anti-retaliation provision reinforces Sarbanes-Oxley by protecting internal whistleblowers. In that regard, the language of the Act expressly protects “disclosures that are required or protected under the Sarbanes-Oxley Act of 2002.” Consequently, many disclosures are made internally to facilitate voluntary compliance with the law. However, if the anti-retaliation provision is read narrowly to apply only to those whistleblowers who report information to the SEC, then it would not provide any meaningful protection to individuals who report internally. “That incongruity is nonsensical—and it would also discourage internal reporting, e. , the very reporting Congress sought to encourage with the third prong of Dodd-Frank’s antiretaliation provision.” A narrow interpretation of the Act will encourage overreporting to the SEC. This is significant because the SEC’s resources are strained, and additional reporting will exacerbate the problem by requiring the SEC to evaluate, investigate, and where appropriate take enforcement action—when an internal report could have produced a quick course correction without any expenditure of public resources. The SEC’s interpretation encourages internal reporting and compliance, bolstering the Sarbanes-Oxley reforms. Indeed, timely use of internal procedures gives management an opportunity to correct financial information and can help produce more accurate financial statements to investors. Protection for internal whistleblowers is consistent with other whistleblower anti-retaliation programs, including the False Claims Act, the Whistleblower Protection Act, the Whistleblower Protection Enhancement Act, and the FBI Whistleblower Protection Enhancement Act. Therefore, it is “illogical” for Congress to have explicitly protected all “disclosures that are required or protected under” the Sarbanes-Oxley Act, the Exchange Act, and every other law enforced by the SEC, while denying protection to the employees who make those very reports. In its brief ( here ), the U.S. Government argued that the Ninth Circuit applied a sensible approach that was consistent with the legislative history of the Act, and preserved the specialized meaning of “whistleblower” in the award provisions of the Act, while applying its ordinary meaning to facilitate the effective implementation of the anti-retaliation provisions. In that regard, the Government argued: A narrow reading of the Act would prohibit employers from retaliating only against employees who have reported to the SEC. But employers generally do not know that an employee has reported to the SEC, which is required to keep reports confidential, so such a reading would substantially diminish the deterrent effect of the retaliation prohibition. In addition, a narrow reading would not protect an employee who reports a suspected securities-law violation to company management, in the hope of triggering internal compliance mechanisms that would make a report to the SEC unnecessary, and who is fired immediately thereafter. Excluding such persons from the Act’s protections would depart from usual understandings of the term “whistleblower” and would undermine Congress’s effort to promote more rigorous and effective internal compliance programs. There is nothing in the legislative history to indicate that Congress intended to limit the scope of the term “whistleblower” to only those individuals who report wrongdoing to the SEC. The Dodd-Frank Act is intended to strengthen protections for internal whistleblowers. Reading the anti-retaliation provision to protect only whistleblowers who report to the SEC would defeat Congress’s purpose, weaken internal corporate-compliance programs, and potentially flood the SEC with allegations that have not been vetted by the corporate insiders best situated to address them in the first instance. The Court has scheduled oral argument for November 28, 2017. A decision is expected in early 2018. Takeaway Mary Jo White, then-Chair of the SEC observed in April 2015 that the SEC whistleblower program has proven to be a “game changer.” ( Here .) Andrew Ceresney (“Ceresney”), then-Director, Division of Enforcement of the SEC, echoed that observation in a September 2016 speech, wherein he described the impact of the SEC whistleblower program as “transformative”, “both in terms of the detection of illegal conduct and in moving … investigations forward quicker and through the use of fewer resources.” (Discussed by this Blog here .) As these former officials noted, the SEC whistleblower program is working. Investors are protected and companies are investing in their compliance programs. For this reason, whistleblowers need to be encouraged, whether they report violations directly to the SEC, or work through the internal reporting procedures. The Ninth Circuit’s decision strikes the right balance in furthering the success of the program; it harmonizes internal reporting requirements set forth in the federal securities laws, with the whistleblower award and retaliation provisions in the Dodd-Frank Act. This Blog will continue to follow the case through argument and decision.

Last year was a banner year for fines levied by the Financial Industry Regulatory Authority (FINRA) regarding the sale of variable annuities. In 2016, $30.3 million in fines were assessed over 30 variable annuity cases. Now, the industry watchdog is continuing its crackdown on these financial products, with an emphasis on annuity exchanges. Annuity Exchange Abuses Recently, FINRA’s enforcement unit suspended two brokers and ordered the disgorgement of more than $185,000 in commissions for causing financial harm to investors related to Section 1035 exchanges. Under Section 1035 of the Internal Revenue Code, variable annuities can be replaced with a like investment without incurring additional tax liabilities. At the same time, these transactions generate broker commissions, which often leads to account churning of annuity products. The recent cases saw clients incur higher annuity fees and excessive surrender charges relative to the exchanges. Moreover, the brokers in question tried to cover their tracks by not categorizing the annuity replacements as 1035 exchanges, which resulted in significant tax liabilities for these investors. Although FINRA and other regulators have been focused on exchange-traded funds and derivative transactions in recent years, variable annuities were prioritized beginning in 2016, the first time since 2009. Last year, the number of variable annuity cases rose by 20 percent,  while fines increased by more than 190 percent over the prior year. In fact, FINRA levied its largest fine ever involving variable annuities against MetLife Securities Inc., to the tune of $25 million. ( Here .) The pace of enforcement has moderated this year with 12 variable annuity cases and $510,000 in fines reported through the first 6 months. FINRA is still on the case, however, as the self-regulatory organization tries to stay ahead of what some believe will be an inevitable crash in the annuity market. While FINRA has not explicitly cited variable annuities in its recent announcements of examination priorities, ongoing enhanced regulatory scrutiny on these complex products is likely given the fact that they are often marketed to retirees. Annuity exchanges are a high-value target because there is often little justification for these transactions, other than generating broker commissions. Why This Matters Today, investing in annuities has become more complex, with new products being introduced. This includes hybrid annuities - which combine the features of fixed and variable products, and “No-Load” variable annuities, which have become increasingly popular due to the Labor Department’s fiduciary rule. (Discussed here.)  As such, the potential for abuses and harm to investors is growing.

Certain provisions of New York’s Labor Law require that construction workers be provided with a safe work environment.  Contractors and owners can be held strictly liable under certain circumstances if a construction worker is injured while working on a construction project.  Such strict liability may apply to homeowners if they become too helpful or involved with construction and, therefore, render inapplicable the exceptions inserted into the Labor Law for their protection. Villafane v. Ridge Electric Corp. ( here ), decided on October 2, 2017, in New York Supreme Court, Kings County, illustrates relevant issues concerning New York’s Labor Law. The plaintiff in Villafane was injured using a grinder provided by his employer, Ridge Electric Corporation (“Ridge”), while working at a two-family home.  While it is not clear from the decision, it appears that plaintiff’s position is that the grinder that caused the injury was either being hoisted at the time of the injury or otherwise should have been secured to be used safely.  The Villafane plaintiff sued Ridge and the homeowners under, inter alia, the following provisions of the Labor Law: Labor Law § 240(1) – requires that “…contractors and owners and their agents … in the erection, demolition, repairing, altering, painting, cleaning or pointing of a building or structure shall furnish or erect, or cause to be furnished or erected for the performance of such labor scaffolding, hoists stays, ladders, slings, hangers, blocks, pulleys, braces, irons, ropes and other devices which shall be so constructed, placed and operated as to give proper protection to a person so employed….” This provision is designed to protect against injuries from elevation related risks. Labor Law 241(6) – requires that “ ll contractors and owners and their agents … when constructing or demolishing buildings or doing any excavating …” shall see to it that “ ll areas in which construction, excavation or demolition work is being performed shall be so constructed, shored, equipped, guarded, arranged, operated and conducted as to provide reasonable and adequate protection and safety to the persons employed therein or lawfully frequenting such places….” To find liability under §240(1), there must be a violation of that statute that was the proximate cause of the plaintiff’s injury.  According to the Villafane court, liability under §240(1) can occur not only when injury results from a falling object in the process of being hoisted or secured, but also where the object “was a load that required securing for the purposes of the undertaking at the time it fell.” Similarly, §241(6) requires contractors and owners to provide a safe work environment to construction workers complying with rules and regulations promulgated by the Commissioner of the Department of Labor.  According to the Villafane court, the “ o establish liability pursuant to Labor Law §241(6), plaintiff must plead and prove that a specific violation of the Industrial Code was the proximate cause of accident.”  In Villafane, the plaintiff alleged a violation of the rules regarding the use of ladders. Both Labor Law §§240 and 241 contain an exception that protects the owners of one and two-family homes from liability if they “contract for but do not direct or control the work” being performed.  According to the Villafane court, “ he homeowner’s exemption was enacted to protect owners of one and two-family dwellings who are not in a position to realize, understand, and insure against the responsibilities of strict liability imposed by Labor Law §§240(1) and 241(6)” (quoting Abdou v. Rampaul , 147 A.D.3d 1047 (2 nd Dep’t 2013)). The critical issue before the Villafane court on the decided motion, was the applicability of the homeowner exception.  The Villafane court determined that the exception was applicable and granted summary judgment to the homeowner defendants.  The homeowners demonstrated that the work was conducted in a one to two-family dwelling, thus satisfying the first prong of the statutory test. To satisfy the second prong, the Villafane homeowner defendants were required to demonstrate that they did not direct or control the work.  According to the Villafane court, “ he statutory phrase ‘direct or control’ is construed strictly and refers to situations where the owner supervises the method and manner of the work.” In Villafane , there was deposition testimony, inter alia , that: the only direction received from the homeowner was the location of the fixtures and outlets that were to be installed, to protect the floors and to keep the home neat; neither the grinder nor any other tools used to perform the work were provided by the homeowner defendants; and, the homeowner defendants did not provide instructions to the contractor or his workers on the manner, method or means to be used in performing the work.  Based on the deposition testimony, the Villafane court found that the homeowner defendants did not control or supervise the work.  Accordingly, the Villafane court found the homeowner defendants satisfied the second prong of the statutory test.  Having demonstrated the applicability of the homeowner exemption, the burden shifted to the plaintiff to raise a triable issue of fact – which he could not due.  Thus, summary judgment was granted to the homeowner defendants. TAKEAWAY Owners of one or two-family homes should be aware that, under certain circumstances, they may be held strictly liable for the injury to construction workers at their homes.  To minimize the potential for liability, a homeowner should: resist the urge to direct the contractor or its workers in the manner, means and methods of their work; make sure that any dangerous condition created by the contractor is removed promptly upon learning of same; eliminate any conditions in the home that could put workers at risk; and, refuse to permit the contractor or its workers to use the homeowner’s tools or equipment. <1> There are other provisions of Labor Law §§ 240 and 241 that were not asserted in Villafane . <2> The Villafane court also discussed Labor Law §200 , which codified the common law duty of homeowners and contractors to provide workers with a safe workplace. The court recognized that a homeowner can be found liable for a violation of Labor Law §200 if injuries to a construction worker were caused by the condition of the premises and the homeowner created or had actual knowledge of a dangerous condition created by the contractor.

On October 12, 2017, the House Financial Services Committee approved legislation that would provide legal protection for financial advisers who report the financial abuse and exploitation of senior Americans to authorities. The bill, which was unanimously approved by the committee, will go to the House floor for a vote. Like the current bill, the previous version of the Safe Act received broad bipartisan support during the last Congress. Congressman Bruce Poliquin (R-ME) and Congresswoman Kyrsten Sinema (D-AZ) reintroduced the Senior Safe Act earlier in the year. The Senior Safe Act encourages individuals and financial institutions to report suspected instances of financial fraud and abuse of elder Americans. It also incentivizes firms to train employees to identify and stop financial abuse and exploitation before it happens. The bill helps law enforcement track down financial criminals who target seniors by enabling banks, credit unions, investment advisors, broker-dealers, and other financial service providers to communicate with appropriate agencies when they suspect financial fraud and exploitation of seniors. In particular, the bill provides that: a supervisor, compliance officer, or legal advisor for a covered financial institution ( g. , a credit union; a depository institution; an investment adviser; a broker-dealer; an insurance company; an insurance agency; and a transfer agent) who receives training regarding the identification and reporting of the suspected exploitation of a senior citizen (at least 65 years old) will not be held liable for disclosing such exploitation to a covered agency ( e.g. , a state financial regulatory agency, including a state securities or law enforcement authority and a state insurance regulator; the Securities and Exchange Commission; a law enforcement agency; and a state or local agency responsible for administering adult protective service laws) if the individual made the disclosure in good faith and with reasonable care; and a covered financial institution will not be held liable for such a disclosure by such an individual if the individual was employed by the institution at the time of the disclosure and the institution had provided such training. Financial fraud and exploitation of the elderly is too common an occurrence. According to the U.S. Department of Justice, financial exploitation of senior adults is one of the most frequently reported forms of elder abuse. A recent survey from the North American Securities Administrators Association (“NASAA”) found that three in 10 state securities regulators had reported an increase in complaints from victims of financial fraud and exploitation. ( Here .) As the incidence of financial exploitation and abuse increase, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. ( Here .) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies, estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. Last October, the Financial Industry Regulatory Authority (“FINRA”) announced that it had submitted proposed rule changes to the Securities and Exchange Commission (“SEC”) to help member firms detect and prevent the abuse and financial exploitation of senior and vulnerable adult customers. (This Blog wrote about the proposed rule changes here .) On March 30, 2017, FINRA announced that the SEC approved the proposed rule changes. In connection with the announcement, FINRA issued Regulatory Notice 17-11 ( here ), and set February 5, 2018, as the effective date for the new rules. The changes approved by the SEC involve two key protections for seniors and other vulnerable investors. First, member firms will be required to make reasonable efforts to obtain the name and contact information of a trusted contact person for a customer’s account. Second, member firms will be permitted to place a temporary hold on the disbursement of funds or securities when there is a reasonable belief of financial exploitation and abuse. Earlier this year, Senators Susan Collins and Claire McCaskill introduced the Senior $afe Act in the Senate. The act derives from Maine’s Senior Safe program, a collaboration by state regulators and legal organizations to educate bank and credit union employees about elder fraud and financial exploitation. Jaye Martin, the Director of Maine’s Legal Services for the Elderly, said the program has been very successful. “Hundreds of financial institution managers and employees have been trained, and we are really seeing an increase in the number of seniors that are getting help before it’s too late,” Martin said. The Senior $afe Act attempts to address one of the biggest impediments to the reporting of financial fraud and exploitation – privacy laws. Under current law, it is difficult to report financial fraud, even if a financial advisor or institution suspects such wrongdoing. “One of the biggest problems we’ve had with financial institutions is making these reports,” said Diane Menio, executive director of the Center for Advocacy for the Rights and Interests of the Elderly, at a Senate hearing. As long as employees have been trained and reports have been made in good faith to the appropriate regulatory authorities, the Senior $afe Act would offer protection against civil lawsuits. “If we can better protect our seniors from fraudsters in some of the most vulnerable years of their lives, we should use every tool at our disposal to do so,” Senator McCaskill said. “We’ve got to give financial professionals the ability to combat fraud when they see it—while protecting the privacy of their customers.” On August 2, 2017, Senators Amy Klobuchar (D-MN) and John Cornyn (R-TX) announced that their bipartisan legislation to protect seniors from neglect and financial exploitation passed the Senate. The Court-Appointed Guardian Accountability and Senior Protection Act is intended to crack down on elder abuse by strengthening oversight and accountability of guardians and conservators. “While most court-appointed guardians and conservators are undoubtedly professional, caring, and law-abiding, there are some who use their position of power to exploit seniors,” Senator Klobuchar said. “This bipartisan legislation would strengthen oversight and accountability for those entrusted to with the well-being of seniors, and will protect those who are most vulnerable.” “This bill strengthens support for our nation’s senior citizens by ensuring they get the court-appointed care they need, while also protecting them from exploitation and fraud,” said Senator Cornyn.  “I’m proud to join Sen. Klobuchar in standing up for enhanced oversight to ensure this critical program helps, not harms, America’s senior citizens.” The Court-Appointed Guardian Accountability and Senior Protection Act makes state courts eligible to participate in an existing program designed to protect seniors. Under the program, state courts would be able to apply for funding to assess the handling of proceedings relating to guardians and conservators, and then make the necessary improvements to their practices. For example, the courts could conduct background checks on potential guardians and conservators, or implement an electronic filing system in order to better monitor and audit conservatorships and guardianships. Takeaway Financial exploitation and abuse of seniors is a problem that spans every community and social condition. It is underrecognized, underreported, and underprosecuted. Government efforts to empower financial advisors and institutions to detect, prevent and stop the financial abuse and exploitation of seniors is an important step in addressing the problem. However, government action is not enough. Vigilance by seniors and the persons charged with overseeing their assets and property is the best way to help detect and stop financial abuse and exploitation before it results in financial ruin. This Blog will continue to follow the legislation discussed in this post.

The SEC recently announced that fraud charges were being brought against the creator of two Initial Coin Offerings (“ICOs”). The complaint alleges that Maksim Zaslavskiy ("Zaslavskiy") defrauded investors with two ICOs, the REcoin Group Foundation, LLC ("REcoin") and the DRC World, Inc. (also known as the Diamond Reserve Club) ("DRC"), that were said to be backed by investments in real estate and diamonds. What is an ICO? ICOs are a way for startups to raise money by issuing their own cryptocurrencies through the use of blockchain cloud-ledger technology pioneered by Bitcoin. These entities sell “digital tokens” that are purported to be the equivalent of company shares. Currently, ICOs are under enhanced regulatory scrutiny because they are being used to raise quick cash without disclosing substantive information to investors. The Scheme to Defraud Both REcoin and DRC were pitched as real companies with staff, attorneys, and retail relationships from which investors could expect sizeable returns. However, neither company had any real operations. According to the SEC, these shell companies never made investments on behalf of token-buyers and the digital tokens they claimed to be selling did not actually exist. In other words, REcoin and DRC were not even running blockchains, and so were not bona fide ICOs. In particular, the SEC alleged that Zaslavskiy and REcoin misrepresented that ICO proceeds would be invested in real estate. They also claimed that between $2 million and $4 million had been raised from investors when the actual amount was about $300,000. The DRC scheme centered on investments in diamonds. According to the SEC, DRC purportedly invested in diamonds and obtained discounts with product retailers for individuals who purchased "memberships" in the company. Despite their representations, Zaslavskiy and DRC did not purchase any diamonds and did not engage in any business operations. Yet they continued to solicit investors and raise funds. This is the first time the SEC has brought charges related to assets pitched as an ICO. However, the securities watchdog is said to be taking a measured approach to weeding out fraud in the nascent ICO market. Some observers tout the positives of ICO technology, such as the ability to raise funds quickly on a global level, however, the infrastructure linking digital tokens to offline assets in the broader marketplace is a work in progress. The SEC’s action comes on the heels of an investor alert issued in July ( here ) that ICOs would be subject to regulatory scrutiny and that digital tokens may be deemed securities.  "Investors should be wary of companies touting ICOs as a way to generate outsized returns," said Andrew M. Calamari, Director of the SEC’s New York Regional Office. "As alleged in our complaint, Zaslavskiy lured investors with false promises of sizeable returns from novel technology." The SEC charged Zaslavskiy, REcoin, and DRC with violations of the antifraud and registration provisions of the applicable federal securities laws . The SEC is seeking permanent injunctions and disgorgement, as well as an officer and director bar for Zaslavskiy. The SEC's complaint can be found here . The Takeaway Many agree there is great potential for the application of blockchain technology in financial services, supply chain, logistics, healthcare, agriculture, real estate, biotech, data, retail and government operations. Nonetheless, this case highlights how bad actors are seeking to gain entry into the ICO sector. Ultimately protecting investors in these novel technologies will require the joint efforts of regulators and experienced securities fraud attorneys.