By:  Jeffrey M. Haber In Rabinowitz v. Clarke , 2024 N.Y. Slip Op. 04627 ( st Dept. Sept. 26, 2024) ( here ), the Appellate Division, First Department addressed legal principles and causes of action that are familiar to readers of this Blog: fraud, the particularity requirement of CPLR 3016(b), the statute of limitations applicable to fraud claims, breach of contract and the duplication doctrine. We examine Rabinowitz below. Rabinowitz arose from plaintiff providing defendant with $60,000.00 on October 5, 2016, in furtherance of a real estate investment for the benefit of both parties . However, instead of using the $60,000.00 for the agreed upon purpose, plaintiff alleged that defendant used the money for his own personal use. Plaintiff sought the return of the $60,000.00, plus interest and other related expenses as a result of defendant’s alleged breach of contract and fraud. Plaintiff filed the summons and verified complaint on June 4, 2021. Plaintiff moved for an order striking defendant’s affirmative defenses; and defendant cross-moved for an order to dismiss the complaint pursuant to CPLR 3211 (a) (5), and (a) (7), and CPLR 3016 (b). In the cross-motion, defendant argued that the complaint should be dismissed on the grounds that the applicable statute of limitations barred the action, the complaint failed to state a cause of action, the fraud claim was not pleaded with the requisite particularity, and that plaintiff’s claim for unjust enrichment was duplicative of plaintiff’s breach of contract claim. Defendant alleged that plaintiff’s breach of contract claim was conclusory and omitted the terms of the alleged agreement . Defendant maintained that the complaint was not clear as to the terms of any contract between the parties, particularly with respect to the $60,000.00 payment. Thus, without identifying the terms of the agreement between the parties, defendant maintained that there could be no claim for breach of contract. Without such a claim, said defendant, plaintiff could not take advantage of the six-year statute of limitations. Plaintiff countered by alleging that there was an agreement between the parties pursuant to which defendant provided $60,000.00, thereby establishing defendant’s performance thereunder. Plaintiff claimed that defendant breached the agreement by not using the $60,000.00 to purchase real estate and by not returning the money to plaintiff. Without much discussion, the motion court held that plaintiff stated a claim for breach of contract. As such, the motion court held that the claim was timely brought. Regarding the fraud claim, defendant argued that plaintiff failed to plead fraud with particularity as required under CPLR 3016(b). Defendant maintained that plaintiff provided no details about the nature of the alleged fraud, or how and why plaintiff was misled by it. According to defendant, plaintiff’s fraud allegations were conclusory and insufficient to support the claim . Plaintiff argued that defendant tricked him into paying $60,000.00 by misrepresenting that defendant would invest the money in real estate. Plaintiff maintained that the complaint identified the who, what, when and how of the alleged fraud. Plaintiff also alleged that he relied on the misrepresentations and gave $60,000.00 to defendant in reliance on the alleged misrepresentations. Plaintiff maintained that the complaint and the documents submitted in opposition to the motion sufficed to satisfy CPLR 3016(b ). Plaintiff further argued that since he stated a claim for fraud, the action (which was commenced in June 2021) was timely brought. The motion court agreed with plaintiff and denied the cross-motion. On appeal, the First Department unanimously affirmed the motion court’s order. The Court held that plaintiff’s fraud allegations were not conclusory “ ven if the complaint lack clarity in describing “the substance of the misrepresentations.” Plaintiff adequately alleged fraud so as to invoke the six-year limitation period under CPLR 213(8). Affording plaintiff the benefit of every possible favorable inference, the complaint alleges that, on October 5, 2016, plaintiff gave defendant $60,000 in furtherance of a real estate investment that defendant led plaintiff to believe was to be a valid transaction for the parties' mutual benefit. These allegations adequately identify, in nonconclusory fashion, “who made the misrepresentations" and “when the misrepresentations were made” …. Even if the complaint lacks clarity in describing “the substance of the misrepresentations” …, plaintiff alleges that defendant tricked into paying $60,000 by misrepresenting that defendant would invest the money in real estate. Therefore, said the Court, the foregoing allegations “sufficiently “inform ” defendant “with respect to the incidents complained of.” The Court also held that plaintiff “adequately alleged breach of contract so as to invoke the six-year limitation period under CPLR 213(2).” The Court explained that “plaintiff alleged that the parties agreed to form a partnership to purchase real estate in September 2016; that defendant was ‘given the sum of $60,000.00 on October 5, 2016,’ ‘under the guise of purchasing and renovating real property’; that plaintiff gave the money to defendant ‘in furtherance of the parties’ agreement to act as partners, to purchase and renovate real property’; and that defendant breached the agreement by using the money for himself rather than to purchase and renovate real property, causing a loss of $60,000 to plaintiff.” “These allegations,” concluded the Court, “sufficiently set forth facts constituting the basic elements of a breach of contract claim.” ______________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. In opposition to the motion, plaintiff submitted a photograph of a $60,000.00 check from plaintiff to defendant and a partnership agreement signed by the parties. Defendant did not dispute the authenticity of those documents. Therefore, said the motion court, “the complaint, as supplemented by the documents that plaintiff submitted in opposition to defendant’s contained sufficient allegations to state a cause of action” for breach of contract. The motion court also noted that the partnership agreement included an arbitration clause. Since neither party sought to enforce it, the motion court declined to sua sponte do so. P.S. Fin., LLC v. Eureka Woodworks, Inc. , 214 A.D.3d 1, 10-11 (2d Dept. 2023); Sabr Chems. Group v. Northeast Chems. , 192 A.D.3d 647, 648 (1st Dept. 2021). Because plaintiff submitted the partnership agreement in opposition to the motion, the motion court held that plaintiff’s claim of unjust enrichment was duplicative of his claim of breach of contract. See Cooper, Bamundo, Hecht & Longworth, LLP v. Kuczinski , 14 A.D.3d 644, 645 (2d Dept. 2005); Shear Enters., LLC v. Cohen , 189 A.D.3d 423, 424 (2d Dept. 2020). As such, the motion court dismissed plaintiff’s unjust enrichment claim. Under CPLR 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008) (citation omitted). Conclusory allegations will not suffice. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Slip Op. at *1 (citing INTL FCStone Mkts., LLC v. Corrib Oil Co. Ltd. , 172 A.D.3d 492, 493 (1st Dept. 2019)). Id. (citation omitted). Id. (quoting Pludeman , 10 N.Y.3d at 491). Id. Id. Id. (citing Morris v. 702 E. Fifth St. HDFC , 46 A.D.3d 478, 479 (1st Dept. 2007)).

By: Jonathan H. Freiberger Partition is “the act or proceeding by which co-owners of property cause it to be divided into as many shares as there are owners, according to their interests therein, or if that cannot be equitably done, to be sold for the best obtainable price and the proceeds distributed according to the respective interests.” Chiang v. Chang , 137 A.D.2d 371, 373 (1 st Dep’t 1988) (citation and internal quotation marks omitted). Partition actions are governed by Article 9 of the Real Property Actions and Proceedings Law (“RPAPL”). RPAPL § 901 provides, inter alia , that a “person holding and in possession of real property as joint tenant or tenant in common, in which he has an estate of inheritance, or for life, or for years, may maintain an action for the partition of the property, and for a sale if it appears that a partition cannot be made without great prejudice to the owners.” RPAPL § 901(1). Addressing partition from an historical perspective, the First Department, in Chiang , recognized that “judicial partition” statutes “have existed in this country since the time of colonial governments” and, therefore, “so ancient is the history of judicial partitions, and so favored are partitions that it is now beyond contention that, independent of any statute, a court of equity has the inherent power to issue a decree of partition or require the sale of jointly owned property.” Id . “The actual physical partition of property is statutorily authorized as the preferred method and is presumed appropriate unless one party demonstrates that physical partition would cause great prejudice to the owners, in which case the property must be sold at public auction.” Snyder Fulton Street, LLC v. Fulton Interest, LLC , 57 A.D.3d 511, 513 (2 nd Dep’t 2008) (citations omitted). The appropriateness of physical partition, as opposed to sale, is a fact question that is determined by analyzing “whether the whole property, taken together, will be greatly injured or diminished in value if separated into parts, in the hands of different persons, according to their several rights or interests in the whole: in other words, whether the aggregate value of the several parts when held by different individuals in severalty would be materially less than the whole value of the property if owned by one person.” Id. (citation, internal quotation marks and ellipses omitted). A party asserting a partition and sale cause of action, “establishe his prima facie entitlement to judgment as a matter of law by demonstrating his ownership and right to possession of the subject property and by showing that a physical partition would lead to great prejudice.”  Goldberger v. Rudnicki , 94 A.D.3d 1048, 1050 (2 nd Dep’t 2012) (citation omitted). “The right to partition is not absolute, however, and while a tenant in common has the right to maintain an action for partition pursuant to RPAPL 901, the remedy is always subject to the equities between the parties.” Id . (citations omitted); see also Tsoukas v. Tsoukas , 107 A.D.3d 879, 880 (2 nd Dep’t 2013). For example, despite the moving party on a summary judgment motion having a name on the deed, and otherwise demonstrating a prima facie case for partition, the opposing party raised triable issues of fact “as to the parties’ respective interests, rights, and shares in the property through her sworn affidavit in which she averred that, inter alia, the defendant did not make any contributions toward the purchase price or maintenance of the property and that the defendant’s name was on the deed as a matter of convenience.” Mi King Chew v. La Chea , 175 A.D.3d 675, 676 (2 nd Dep’t 2019) (citations omitted). On September 25, 2024, the Appellate Division, Second Department, decided 459 Washington Avenue, LLC v. Atkins , a case in which the Court addressed the issue of whether individual members of an LLC can partition real property owned by the LLC in which the individual parties are members. The complaint in 459 Washington alleges that the individual plaintiffs and the defendant “were the sole ‘owners’ of the plaintiff 459 Washington Avenue, LLC (hereinafter the LLC), and that , and the defendant held title to the property as tenants in common, each possessing a one-third undivided interest.” “Irreconcilable acrimony” amongst the parties precipitated the commencement of a partition action. In their motion for summary judgment, the plaintiffs submitted, inter alia , a deed to the subject property by which the property “was conveyed to the LLC, which the plaintiffs contended represented the current ownership of the property.” In response, the defendant argued that “the evidence submitted on the plaintiffs' motion established that the property was owned by the LLC and not by tenants in common or a joint tenancy, and, therefore, partition was not an available remedy.” The defendant appealed from a grant of summary judgment in favor of the plaintiffs. The Second Department reversed and, in so doing stated: The evidence submitted by the plaintiffs on their summary judgment motion established that, contrary to the allegations in the complaint, the property was owned exclusively by the LLC and not by , and the defendant as tenants in common. Essentially, the plaintiffs contended that the three individual parties held equal membership interests in the LLC, which owned the property. "A membership interest in the limited liability company is personal property. A member has no interest in specific property of the limited liability company" ( Limited Liability Company Law § 601 ). Thus, the individual parties hold no ownership interest in the property. Further, even assuming that the plaintiffs had established that the individual parties held equal membership interests in the LLC, there is no allegation or evidence that the LLC has been dissolved or that the LLC's affairs have been properly wound up ( see id . § 703 ). Accordingly, this action, inter alia, for partition and sale of the LLC's property cannot be maintained ( see Daly v Messina , 51 AD3d 856, 857 <2 nd dep’t 2008> nd dep’t 2008>; Greshin v Sloane , 138 AD2d 569, 570 <2 nd dep’t 1988> nd dep’t 1988>; see also Sealy v Clifton , LLC , 68 AD3d 846, 847 <2 nd dep’t 2009> nd dep’t 2009>). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber During the Covid pandemic, conducting discovery, especially the taking of depositions, was challenging. Parties and their counsel had to adapt to the global health crisis. One adaptation was to remotely take depositions. As the courts opened and a new normalcy came into being, many parties and attorneys nevertheless continued to avail themselves of the remote deposition. In the Commercial Division of the Supreme Court of the State of New York, the option to conduct depositions remotely was added to the rules of the court. Others, however, have refused to consent to virtual depositions, demanding that depositions be taken in person. The starting point for the analysis of where a deposition is to be taken can be found in CPLR 3110. Under CPLR 3110(1), “ deposition within the state on notice shall be taken … when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending .” (Emphasis added.) In other words, the statutory preference for the location of a deposition is, among other places, “where the action is pending.” The foregoing rule applies “to nonresidents as well as to residents of the State.” “ bsent a showing of hardship, the nonresidence of a defendant does not preclude an examination in the county where the action is pending.” Whether the deposition of a non-resident plaintiff should be conducted virtually or in person was before the court in Sumec Textile & Light Indus. Co., Ltd. v. Zee Co. Apparel Corp. , 2024 N.Y. Slip Op. 51306(U) (Sup. Ct., N.Y. County Sept. 19, 2024) ( here ). As discussed below, the motion court held that plaintiff was unable to demonstrate hardship sufficient to have the deposition conducted virtually. Plaintiff argued that good cause existed under Rule 37 of the Rules of the Commercial Division of the Supreme Court to permit its representative to be deposed virtually. Plaintiff argued that its representative resides in China and that the time and expense required for her to travel to New York for a deposition would be unduly burdensome. Plaintiff further argued that plaintiff’s representative is the principal caretaker for a young child and cares for her elderly parents, who all reside in China. Defendant argued that plaintiff advanced nothing more than an argument of “inconvenience”, which is insufficient to demonstrate “good cause for plaintiff to avoid the obligation to produce a witness for deposition in New York.” Defendant also argued that defendant had the right to conduct the deposition in person, which would provide it with an opportunity “to better assess the credibility of the witness and to present the witness with physical evidence relevant to the case, including a coat and hundreds of documents.” In addition, defendant expressed concerns “that a virtual deposition be prone to technical issues in viewing and sharing documents during the questioning of the witness.” The motion court agreed with defendant, holding that plaintiff’s representative had to be deposed in person in New York. The reasons cited by plaintiff are insufficient to overcome the presumption that a party litigating in New York should accept the costs and expenses of choosing to do so. Moreover, as plaintiff has chosen New York as the venue to present its claim, it cannot reasonably argue to be aggrieved by the accompanying obligations. Takeaway “While ‘ he preferred practice, except in cases where hardship is shown to exist, is to proceed with examinations here’, a preferred practice is not the same as an inflexible rule.” Despite the flexibility, the moving party must demonstrate hardship. While one would think that childcare responsibilities and travel across the globe would suffice, as shown in Sumec , more is needed to overcome the statutory requirement that the deposition of a party is to be taken in the forum in which the action is pending. This is especially so when the movant is the plaintiff in the action. ________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. See Rule 37 of the Rules of the Commercial Division of the Supreme Court, 22 N.Y.C.R.R. 202.70. Gazerwitz v. Adrian , 28 A.D.2d 556 (2d Dept. 1967). Id. (citations omitted). See also Gryphon Dom. VI, LLC v. APP Intl. Fin. Co., B.V. , 52 A.D.3d 219, 219 (1st Dept. 2008); Swiss Bank Corp. v. Geecee Exportaciones, Ltda. , 260 A.D.2d 254 (1st Dept. 1999); Kahn v. Rodman , 91 A.D.2d 910 (1st Dept. 1983). In determining that good cause exists, the court may consider, among enumerated and other non-enumerated factors, “the distance between the parties and the witness, including time and costs of travel by counsel and litigants and the witness to the proposed location for the deposition,” “ hether the witness is a party to the litigation,” and the “importance or significance of the testimony of the witness to the claims and defenses at issue in the litigation.” See Rule 37(b). Slip Op. at *1. Id. Id. Id. at *2. Gryphon Dom. , 52 A.D.3d at 219 (quoting Kahn , 91 A.D.2d at 911). CPLR 3110(1).

By: Jeffrey M. Haber As a general matter, “ cross trade is a practice where buy and sell orders for the same asset are offset without recording the trade on the exchange.” An adviser that arranges for a security to be purchased from or sold to a client from its own account (which can include an affiliate of the advisor) – as opposed to purchasing or selling the security in the secondary markets – is engaging in a “principal trade.” An “agency cross trade” occurs when an adviser arranges for a trade to be executed between a client and another party, and a “cross trade” occurs when an adviser effects a trade between two or more of its advisory clients’ accounts, but does not charge a fee for effecting the transaction (collectively, “cross trades”). An adviser that enters its clients into these types of transactions implicates a variety of legal obligations under the Investment Advisers Act of 1940 (“Advisers Act”), particularly its fiduciary duty. Cross trades can benefit clients because the practice enables a portfolio manager to move securities among client accounts without having to expose the security to the market thereby saving transaction and market costs that would otherwise be paid to executing broker-dealers. Conversely, cross trades can also pose substantial risks to clients due to the inherent conflict of interest for the adviser, which has a duty of loyalty and duty of care to seek best execution for each client. Cross trading involving mutual funds implicates the Investment Company Act of 1940 (“ICA”). Sections 17(a)(1) and 17(a)(2) of the ICA generally prohibit any affiliated person of a registered investment company (“RIC”) or any affiliated person of the affiliated person, acting as principal, from knowingly selling a security to or purchasing a security from the RIC unless the person first obtains an exemptive order from the Securities Exchange Commission (“Commission” or SEC”) under Section 17(b). Rule 17a-7 promulgated under the ICA exempts from these prohibitions certain cross trades where the affiliation between a RIC and its trading counterparty arises solely because the two have a common investment adviser, or investment advisers that are affiliated persons of each other, common directors, or officers, provided that the cross trades are effected in accordance with Rule 17a-7. Rule 17a-7 requires, among other things, that cross trades be executed at the “independent current market price,” which is defined in relevant part as “the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry.” If a brokerage commission, fee, or other remuneration is paid in connection with the cross trade, the cross trade is not eligible for an exemption under Rule 17a-7 and is therefore, impermissible. Section 48(a) of the ICA prohibits “any person, directly or indirectly, to cause to be done any act or thing through or by means of any other person which it would be unlawful for such person to do” under the ICA or the rules thereunder. The Commission has stated that interpositioning a dealer in cross trades does not remove the cross trades from the prohibitions of Section 17(a). On July 21, 2021, the Commission’s Division of Examinations issued a Risk Alert on cross trades and principal transactions. Among other things, the SEC Staff opined that with respect to principal trades, to comply with Section 206(3) of the Advisers Act, advisers had to make written disclosures and obtain the consent of the affected client before the transaction was completed. The Staff noted, however, that a more “robust” disclosure regimen, whereby the disclosure includes a description of the nature and significance of the advisers’ conflicts of interest relative to the impacted clients, may be required to comply with Section 206 and Rule 206(3)-2 of the Advisers Act. The Staff also provided certain “observations on ways to improve compliance,” which apply to principal transaction and cross trade situations on a broad scale). The Staff’s suggestions included: Adopt and enforce compliance policies and procedures that: (1) incorporate all applicable legal and regulatory requirements; (2) clearly articulate the activities covered by the advisers’ written compliance policies and procedures; (3) set standards that address the firms’ expectations for each of these activities; (4) include supervisory policies and procedures; and (5) establish controls to determine whether policies and procedures are being properly followed and documented in the required manner. Conduct testing for compliance with policies and procedures. Provide clients with full and fair disclosure of all material facts surrounding principal and cross trades. Provide disclosures to clients regarding principal and cross trading practices in multiple documents. In addition to written disclosures, discuss the rationale for executing principal trades during verbal conversations with clients. Cross trading, among other things, was at issue in a settled enforcement action with Macquarie Investment Management Business Trust (“MIMBT”), in which the SEC charged MIMBT with overvaluing approximately 4,900 largely illiquid collateralized mortgage obligations (“CMO”) held in 20 advisory accounts, including 11 retail mutual funds, and executing hundreds of cross trades between advisory clients that favored certain clients over others to minimize losses to those clients. According to the SEC’s order (here), from January 2017 through April 2021, MIMBT managed the Absolute Return Mortgage-Backed Securities strategy, a fixed-income investment strategy primarily invested in mortgage-backed securities, CMOs, and treasury futures. Strategy investments included thousands of smaller-sized, “odd lot” CMO positions that traded at a discount to institutional, larger-sized positions. MIMBT valued the odd lot CMOs using prices obtained from a third-party pricing service that were intended for institutional lots only. The pricing service did not provide separate valuations for odd lots. The SEC found that MIMBT had no reasonable basis to believe it could sell the odd lot CMOs at the pricing vendor’s valuations, and thousands of odd lot CMO positions were marked at inflated prices. This resulted, said the SEC, in MIMBT overstating the performance of client accounts holding the overvalued CMOs. The SEC further found that MIMBT attempted to minimize losses to redeeming investors by arranging cross trades with affiliated accounts, rather than selling the overvalued CMOs into the market. In one instance, said the SEC, MIMBT executed 465 internal cross trades between a selling account and 11 retail mutual funds above independent current market prices. The SEC noted that these trades resulted in the retail mutual funds absorbing losses that otherwise would have been borne by the selling account in a market sale. The SEC also found that MIMBT arranged for approximately 175 dealer-interposed cross trades in which MIMBT temporarily sold odd lot CMO positions to third-party broker-dealers and then repurchased those same positions for allocation to one or more affiliated client accounts, providing liquidity to redeeming investors in an otherwise illiquid market, often at above-market prices. “It is alarming that a fiduciary took advantage of retail mutual funds it advised and executed unlawful cross trades to mitigate its overvaluation of fund assets,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. “Utilizing a third-party pricing service does not negate an investment adviser’s obligation to value assets accurately.” The SEC found that MIMBT violated the antifraud and compliance provisions of the Advisers Act, and certain provisions of the ICA. Without admitting or denying the SEC’s findings, MIMBT agreed to a censure, to cease and desist from further violations of the charged provisions, and to pay a $70 million penalty and disgorgement and prejudgment interest, totaling an additional $9.8 million. MIMBT also agreed to comply with certain undertakings, including retaining a compliance consultant to conduct a comprehensive review of its policies and procedures relating to, among other things, valuation of CMOs and associated liquidity risks, and cross trading. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Chen, James, “Cross Trade”, Investopedia (Updated August 6, 2024) (here). See, e.g., Advisers Act Sections 206(1), (2), and (3) and Rules 206(3)-2 and 206(4)-7. An adviser’s obligation as a fiduciary is enforceable through Section 206 of the Advisers Act. SeeExemption of Certain Purchase or Sale Transactions Between a Registered Investment Company and Certain Affiliated Persons Thereof, Investment Company Act Release No. 11136, 1980 WL 29973, at *2 n.10 (Apr. 21, 1980). SeeRisk Alert: Observations Regarding Fixed Income Principal and Cross Trades by Investment Advisers from An Examination Initiative (July 21, 2021) (here). The Risk Alert was issued as a follow up to a 2019 alert, which focused on common cross trade and principal transaction deficiencies observed in examinations conducted over a three-year period. See Risk Alert: Investment Adviser Principal and Agency Cross Trading Compliance Issues (Sept. 4, 2019) (here). Id.

By: Jonathan H. Freiberger This BLOG has frequently addressed issues related to a party’s standing, in many different contexts, to commence litigation. In prior BLOG articles we have explained that in order to prosecute a lawsuit, the plaintiff must have standing to do so. Thus, we have noted that“ tanding involves a determination of whether the party seeking relief has a sufficiently cognizable stake in the outcome so as to cast the dispute in a form traditionally capable of judicial resolution. Graziano,v. County of Albany , 3 N.Y.3d 475, 479 (2004) (citations, internal quotation marks and brackets omitted). Put another way, “ tanding to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant's request.” Caprer v. Nussbaum , 36 A.D.3d 176, 182 (2 nd Dep’t 2006). Accordingly, the question of whether a plaintiff has standing is “is a threshold determination, resting in part on policy considerations, that a person should be allowed access to the courts to adjudicate the merits of a particular dispute that satisfies the other justiciability criteria.” Caprer , 36 A.D.3d at 182 (Citations omitted). “‘Injury-in-fact has become the touchstone’ and requires ‘an actual legal stake in the matter being adjudicated.’” Big Apple Consulting USA, Inc. v. Belmont Partners , LLC, 20 Misc. 3d 1144(A) (Sup. Ct. Nassau Co. 2008) ( quoting Soc. Of Plastics Indus. Inc. v. County of Suffolk , 77 N.Y.2d 761, 772 (1991)). The Carper Court noted that the “Court of Appeals has defined the standard by which standing is measured, explaining that a plaintiff, in order to have standing in a particular dispute, must demonstrate an injury in fact that falls within the relevant zone of interests sought to be protected by law”. Caprer , 36 A.D.3d at 183 ( citing Matter of Fritz v. Huntington Hosp. , 39 N.Y.2d 339, 346 (1976). On September 18, 2024, the Second Department decided Whitson’s Food Service, LLC v. A.R.E.B.A.-Casriel, Inc. , a case in which the defendant moved to dismiss based on standing. In 2021, Whitson’s Food Service Corp. (“Corp.”) entered into a contract with the defendant by which Corp. was to provide various food-related services. The contract provided that: This Agreement and the rights granted hereunder may not be assigned by either Party, whether by operation of law, merger, change of ownership or otherwise, without the prior written consent of the other Party, and any unauthorized assignment shall be void ab initio. Eight months after entering into the contract, Corp. merged with Whitson’s Food Services, LLC (“LLC”), the plaintiff in the action. Approximately one year later, LLC commenced an action for breach of contract and unjust enrichment based on the defendant’s failure to pay in excess of $400,000.00 due under the contract. The defendant moved to dismiss the complaint arguing, inter alia , that the plaintiff, LLC, was not a party to the contract and, therefore, lacked standing to commence the action. Similarly, the defendant argued that it had not consented to any assignment of Corp.’s contract rights to LLC. The Second Department affirmed the motion court’s denial of the defendant’s motion. The Second Department found that the defendant satisfied its burden of establishing lack of standing because “ was not a party to the contract and that the defendant did not provide express consent to any assignment of the contract.” (Citation omitted.) Nonetheless, issues of fact were determined to exist because “ raised a question of fact as to its standing, primarily through its submission of an affidavit of its chief financial officer, who attested that the merger was a mere change in corporate form that had no effect on the beneficial ownership, possession, control, or daily operations of the business.” (Citation omitted.) Thus, “ nder the circumstances, raised a question of fact as to whether the merger constituted an assignment that violated the nonassignment provision of the contract.” (Citations omitted.) The Court also addressed LLC’s unjust enrichment claim. In order to plead a claim for unjust enrichment the plaintiff must allege “that (1) the other party was enriched, (2) at that party's expense, and (3) that it is against equity and good conscience to permit the other party to retain what is sought to be recovered.” Georgia Malone & Company, Inc. v. Rieder , 19 N.Y.3d 511, 516 (2012) (citations and internal quotation marks omitted); see also Bedford-Carp Construction, Inc. v. Brooklyn Union Gas Co ., 219 A.D.3d 1293, 1295 (2 nd Dep’t 2023) The theory of unjust enrichment lies as a quasi-contract claim and contemplates an obligation imposed by equity to prevent injustice, in the absence of an actual agreement between the parties.” Id. (citations internal quotation marks and brackets omitted). Claims of unjust enrichment are “rooted in the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another.” Id. (citations and internal quotation marks omitted). The Whitson’s Court noted that a “plaintiff may allege a cause of action to recover damages for unjust enrichment as an alternative to a cause of action alleging breach of contract.” (Citations and internal quotation marks omitted.) This can happen when the existence of a contract “is in dispute”. F&R Goldfish Corp. v. Furleiter , 210 A.D.3d 643, 646 (2 nd Dep’t 2022); see also Cheung v. Dolar Shop Restaurant Group, LLC , 229 A.D.3d 738, 740 (2 nd Dep’t 2024). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Eds. Note: to find our BLOG articles related to standing, visit the “ Blog ” tile on our website and enter “standing” in the “search” box. Eds. Note: to find our BLOG articles related to unjust enrichment, visit the “ Blog ” tile on our website and enter “unjust enrichment” in the “search” box.

By: Jeffrey M. Haber In Murray v. Samsung Elecs. Am., Inc. , 2024 N.Y. Slip Op. 51257(U) (Sup. Ct. Monroe County Sept. 12, 2024) ( here ), the court was asked to consider the viability of claims for violations of General Business Law §§ 349 and 350, breach of contract, and breach of the warranty of merchantability. As discussed below, the motion court held that plaintiff failed to satisfy the elements of the claims asserted. In particular, the motion court held that plaintiff failed to allege facts showing that the statements claimed to be false were not likely to mislead a reasonable consumer acting reasonably under the circumstances as required under GBL §§ 349 or 350. The motion court also held that plaintiff’s breach of contract claim was deficient because she failed to allege contractual privity with defendant. Finally, the motion court held that plaintiff failed to allege any facts that would support a claim for the breach of implied warranty (of either fitness or merchantability). Summary of Allegations in the Complaint Plaintiff alleged that she purchased a Samsung Galaxy S22 Ultra smartphone in 2021 or 2022 from a cell phone carrier and/or consumer electronics store. She expected that the smartphone would come with a “charging block”; instead the smartphone only came with a charging cord. Plaintiff claimed that the only notice provided to consumers was a statement on the back of the smartphone's box stating: “Packaging Contains: Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.” The box in which the plaintiff’s smartphone was packaged for sale, however, also contained a disclaimer, in bolded lettering, stating: “Wall charger and headphones sold separately.…” Plaintiff alleged that without the charging block purchasers are unable to use the smartphone as intended, and the purchase of a charging block is required. Had plaintiff known that the S22 Ultra did not come with a charging block, she would not have paid the asking price or would not have purchased the smartphone. Plaintiff alleged violations of GBL §§ 349 and 350, breach of contract, and breach of implied warranty of merchantability/ fitness for a particular purpose. Defendant moved to dismiss. The motion court granted the motion. The GBL Claims To state a claim under GBL §§ 349 and 350, “a plaintiff must allege that a defendant has engaged in (1) consumer-oriented conduct, that is (2) materially misleading, and that (3) the plaintiff suffered injury as a result of the allegedly deceptive act or practice. A claim under these statutes does not lie when the plaintiff alleges only “a private contract dispute over policy coverage and the processing of a claim which is unique to the[] parties, not conduct which affects the consuming public at large.” Thus, a plaintiff claiming the benefit of either Section 349 or Section 350 “must charge conduct of the defendant that is consumer-oriented” or, stated differently, “demonstrate that the acts or practices have a broader impact on consumers at large.” Notably, the deceptive practice does not have to rise to “the level of common-law fraud to be actionable under section 349.” In fact, “ lthough General Business Law § 349 claims have been aptly characterized as similar to fraud claims, they are critically different.” For example, while reliance is an element of a fraud claim, it is not an element of a GBL § 349 claim. Nevertheless, a plaintiff must allege the existence of a materially misleading act or advertisement to state a cause of action under GBL §§ 349 and 350. The test for both a deceptive act or deceptive advertisement is whether the act or advertisement is “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Whether a particular act or advertisement is materially misleading may be made by a reviewing court as a matter of law. In addition, a plaintiff must prove “actual” injury to recover under the statutes, though not necessarily pecuniary harm. And, the plaintiff must prove the deceptive act caused the injury. The motion court concluded, “as a matter of law, that the statements contained on the packaging box for the S22 Ultra purchased by plaintiff were not likely to mislead a reasonable consumer acting reasonably under the circumstances.” First, noted the motion court, “the box clearly identified the contents, stating that it contained: ‘Samsung Galaxy S22 Ultra, S Pen, Sim Card, Ejection Pin, USB-C to USB-C Cable, Quick Start Guide/Terms & Conditions.’” “Notably absent from the list of contents,” said the motion court, was “a wall charger (‘charging block’).” From this list, concluded the motion court, “ reasonable consumer acting reasonably would thus be aware that the purchase of the smartphone did not include a wall charger.” Second, said the motion court, “the packaging box specifically stated that the wall charger was not included. Thus, Samsung specifically disclaimed the inclusion of a wall charger.” Under New York law, “ disclaimer may not bar a General Business Law § 349 claim at the pleading stage unless it utterly refutes plaintiff’s allegations, and thus establishes a defense as a matter of law.” The motion court found that the disclaimer at issue – that no wall charger was included in the packaging – “eliminate any possibility that a consumer would be misled into believing a wall charger was included.” Since defendant did more than disclaim liability generally but, rather specifically disclaimed the allegedly deceptive conduct, “so as to eliminate any possibility that a reasonable consumer would be misled,” the motion court dismissed the GBL §§ 349 and 350 causes of action. The Breach of Contract Cause of Action The motion court held that the “breach of contract cause of action must be dismissed as the plaintiff failed to plead the existence of a valid contract and contractual privity between the plaintiff and the defendant.” The motion court found that “there no facts alleged in the complaint supporting the existence of a valid contract (implied or otherwise).” The motion court explained that plaintiff failed to allege mutual assent between her and defendant: “The essence of the plaintiff’s breach of contract claim is that the terms of the contract were that Samsung agreed to provide a wall charger. However, the documentary evidence (the photograph included by plaintiff in her complaint) establishes that Samsung specifically stated a wall charger was not included in the sale of the smartphone.” Notably, the motion court found that plaintiff failed to allege contractual privity with defendant: “Plaintiff alleges she purchased the smartphone from a vendor, not from Samsung directly and thus the complaint fails to establish contractual privity between the Samsung and the plaintiff.” Accordingly, the motion court dismissed the breach of contract cause of action. The Warranty of Merchantability Claim “The implied warranty of merchantability is a guarantee by the seller that its goods are fit for the intended purpose for which they are used and that they will pass in the trade without objection.” To establish that a product is defective for purposes of a breach of implied warranty of merchantability claim, a plaintiff must show that the product was not “reasonably fit for intended purpose,” an inquiry that “focuses on the expectations for the performance of the product when used in the customary, usual and reasonably foreseeable manners.” The motion court held that plaintiff “fail to allege any facts that would support a breach of implied warranty claim (of either fitness or merchantability).” For instance, the motion court noted that plaintiff failed “to allege an inability to charge the smartphone (as the plaintiff concede the smartphone included a charging cord allowing it to be charged through other methods).” Additionally, the motion court rejected “plaintiff’s allegation that Samsung’s smartphone was ‘not fit for the ordinary purpose for which it was intended and did not conform to the promises or affirmations of fact made on the packaging, container or label, because it was marketed as if it would be sold with the essential parts to render it functional.’” That allegation, said the motion court, was “specifically rebutted by the documentary evidence showing Samsung disclaimed inclusion of a wall charger but did include a charging cord allowing it to be charged through any compatible charging port.” The motion court also held that plaintiff “failed to allege that the alternative methods to charge the phone are unavailable to the standard consumer or unreasonable.” “Although the plaintiff prefers charging the smartphone with a charging block,” explained the motion court, “that is not the exclusive method of charging the phone.” “Absent this allegation,” concluded the motion court, “the smartphone cannot be said to be not fit for the ordinary purpose it was intended.” Finally, the motion court dismissed the implied warranty claim because there was “no privity of contract between Samsung.” As noted, “ laintiff asserted in the complaint she purchased the smartphone from a third party and was claiming only economic loss.” _______________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Koch v. Acker, Merrall & Condit Co. , 18 N.Y.3d 940, 941 (2012); Goshen v. Mutual Life Ins. Co. of N.Y. , 98 N.Y.2d 314, 324 n.1 (2002). New York Univ. v Continental Ins. Co. , 87 N.Y.2d 308, 321 (1995) (internal quotation marks omitted). Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank , 85 N.Y.2d 20, 25 (1995). Boule v. Hutton , 328 F.3d 84, 94 (2d Cir. 2003) (citing Gaidon v. Guardian Life Ins. Co. , 94 N.Y.2d 330, 343 (1999)). Gaidon , 94 N.Y.2d at 343. Stutman v. Chemical Bank , 95 N.Y.2d 24, 29 (2000); Small v. Lorillard Tobacco Co. , 94 N.Y.2d 43, 55-56 (1999). See Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v. Matthew Bender & Co., Inc. , 37 N.Y.3d 169, 176 (2021); Andre Strishak & Assocs., P.C. v. Hewlett Packard Co. , 300 A.D.2d 608, 609 (2d Dept. 2002). Oswego , 85 N.Y.2d at 26. See also Andre Strishak , 300 A.D.2d at 609;  Himmelstein , 37 N.Y.3d at 178. Id. Stuntman , 95 N.Y.2d at 29; Oswego , 85 N.Y.2d at 26. Id. ; Oswego, 85 N.Y.2d at 26. Slip Op. at *2. Id. Id. Id. Id. Goshen , 98 N.Y.2d at 326;  Fink v. Time Warner Cable , 714 F.3d 739, 742 (2d Cir. 2013). Slip Op. at *2. Gaidon , 94 N.Y.2d at 345; Himmelstein , 37 N.Y.3d at 180. Slip Op. at *2. Id. at *2-*3. Id. at *3. Id. (citing Collyer v. LaVigne , 202 A.D.3d 1335 (3d Dept. 2022), lv. dismissed , 39 N.Y.3d 925 (2022)). Saratoga Spa & Bath v. Beeche Sys. Corp ., 230 A.D.2d 326, 330 (3d 1997),  lv. dismissed , 90 N.Y.2d 979 (1997) (citation omitted). Id . at 330; see U.C.C. 2—314(2)(c). Denny v. Ford Motor Co ., 87 N.Y.2d 248, 258-259 (1995). See also Wojcik v. Empire Forklift, Inc. , 14 A.D.3d 63 (3d Dept. 2004). Slip Op. at *3. Id. Id. Id. Id. Id. Id. Id. Id. (citing Ofsowitz v. Georgie Boy Mfg., Inc ., 231 A.D.2d 858, 859 (4th Dept. 1996)).

By Jonathan H. Freiberger Discovery (or disclosure) in litigation, which is governed in New York State practice by Article 31 of the CPLR , is the mechanism by which litigants obtain facts and information from other parties and non-parties to support their claims and/or defenses and otherwise prepare for trial. This BLOG has previously addressed discovery issues. See, e.g. , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and the BLOG articles hyperlinked therein. CPLR 3101 provides that “ here shall be full disclosure of all matter material and necessary in the prosecution or defense of an action.” CPLR 3101(a). The Court of Appeals has interpreted the “material and necessary” requirement liberally to “require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.” Allen v. Crowell-Collier Publ’g Co. , 21 N.Y.2d 403, 406 (1968). “The test is one of usefulness and reason.” Id. Thus, “if there is any possibility that the information is sought in good faith for possible use as evidence-in-chief or in rebuttal or for cross-examination, it should be considered evidence material . . . in the prosecution or defense and thus should be disclosed pursuant to CPLR 3101(a).” Lau v. Margaret E. Pescatore Parking, Inc. , 105 A.D.3d 594, 595 (1st Dept. 2013) ( quoting Allen , 21 N.Y.2d at 407) (internal quotation omitted). When a litigant fails to comply with discovery demands or discovery related court orders, the CPLR provides remedies. For example, CPLR 3124 provides that when a “person fails to respond to or comply with any request, notice, interrogatory, demand, question or order under this article, except a notice to admit under section 3123, the party seeking disclosure may move to compel compliance or a response.” Similarly, pursuant to CPLR 3126 , when a party or its representative refuses to obey a discovery order or “willfully” fails to produce information that the court finds “ought to have been disclosed,” the court may, inter alia , issue an order: (1) deeming issues related to the requested information resolved in favor of the party obtaining the order; (2) prohibiting the recalcitrant party from “supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony … or from using certain witnesses”; or, (3) “striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party.” “Willful failure” to comply with disclosure obligations “may be established by repeated failure to comply with court orders directing disclosure, including court orders issued at conferences.” Shah v. Oral Cancer Prevention Int’l, Inc. , 138 A.D.3d 722, 724 (2 nd Dep’t 2016) (Citations omitted); see also Nationstar Mort., LLC v. Jackson , 192 A.D.3d 813, 815 (2 nd Dep’t 2021). The extent of penalties issued under CPLR 3126 is “generally left to the court’s discretion.” Guardado v. K.B.G Commercial, Inc. , 209 A.D.3d 721, 722 (2 nd Dep’t 2022) (citations omitted). In addition, the New York Administrative Code provides guidance on the procedures to be followed prior to seeking court intervention to resolve discovery disputes. See, e.g., 22 NYCRR 202.20-f . Further, a particular judge’s individual part rules may also provide related (and important) guidance. On September 11, 2024, the Second Department, in Bayview Loan Servicing, LLC v. Evanson , a mortgage foreclosure action, addressed a motion to strike under CPLR 3126(3). There, the defendant served discovery demands on the plaintiff in a mortgage foreclosure action. The Plaintiff failed to respond. Three months later the defendant again served the demands; this time with a letter threatening to move to strike the lender’s complaint if responses were not served within ninety days. There was no indication that the defendant’s counsel made any effort to confer with the lender’s counsel to resolve the discovery dispute, nor did the defendant move to compel disclosure. Instead, the defendant moved to strike the lender’s complaint pursuant to CPLR 3126(3) because of the lender’s failure to respond to the discovery demands. The motion court denied the motion “on the ground that the defendant did not proceed ‘in conformity with’ 22 NYCRR 202.20-f.” The Second Department affirmed and, in so doing, stated: “To the maximum extent possible, discovery disputes should be resolved through informal procedures, such as conferences, as opposed to motion practice” (22 NYCRR 202.20-f ). All discovery motions must include “an affirmation that counsel has conferred with counsel for the opposing party in a good faith effort to resolve the issues raised by the motion” ( id. § 202.7 ; see Muchnik v Mendez Trucking, Inc. , 212 AD3d 640, 641 <2 nd dep’t 2023> nd dep’t 2023>). “The affirmation of the good faith effort to resolve the issues raised by the motion shall indicate the time, place and nature of the consultation and the issues discussed and any resolutions, or shall indicate good cause why no such conferral with counsel for opposing parties was held” (22 NYCRR 202.7 ; see Behar v Wiblishauser , 219 AD3d 793, 794 <2 nd dep’t 2023> nd dep’t 2023>). “Failure to provide an affirmation of good faith which substantively complies with 22 NYCRR 202.7(c) warrants denial of the motion” ( Behar v Wiblishauser , 219 AD3d at 794 ). Further, citing to 22 NYCRR 202.20-f , the Court noted that, absent “exigent circumstances,” prior to seeking the involvement of the court to resolve a discovery dispute, counsel must confer and make a good faith effort to resolve the dispute and, if no resolution is reached, any resulting discovery motion must be accompanied by an affirmation of good faith containing required specifics as to the steps taken to resolve the dispute. The Court found that the defendant failed to comply with 22 NYCRR 202.7 and 202.20-f(b) and that the defendant’s showing on the motion was wholly inadequate to warrant the extreme discovery sanction of striking the complaint.” (Citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate” On numerous occasions, we have written about the Securities and Exchange Commission’s (“SEC” or the “Commission”) whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede a person, such as an employee or former employee, from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements, employment contracts, and other types of agreements to silence and discourage people from reporting wrongdoing to the Commission. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws. The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act. To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17, which provides in relevant part: (a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications. Rule 21F-17 applies to any policy or procedure, or agreement, such as confidentiality, severance, and non-disclosure agreements, that may impede a person from providing information to the SEC about a securities law violation. Rule 21F-17 became effective on August 12, 2011. Since its adoption, the SEC has vigorously enforced Rule 21F-17. Despite being effective for more than 13 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used employment contracts, severance agreements and other types of agreements to silence and discourage people from reporting violations of the securities laws to the Commission. Recently the SEC announced that it had settled charges against numerous companies for violation of Section 21F. The first action was announced on September 4, 2024 (here). In that action, the SEC brought charges against three affiliated registrants, Commission-registered broker-dealer Nationwide Planning Associates, Inc. and investment adviser NPA Asset Management, LLC, and state-registered investment adviser Blue Point Strategic Wealth Management, LLC, for impeding brokerage customers and advisory clients from reporting securities law violations to the SEC. The firms agreed to pay combined civil penalties of $240,000 to settle the SEC’s charges. According to the SEC’s order (here), from May 2021 through February 2024, Nationwide, NPA, and Blue Point collectively asked 11 retail clients to sign confidentiality agreements in connection with payments made by the entities to the clients’ investment accounts. The payments were intended to compensate the clients for losses caused by the firms’ alleged breaches of federal or state securities laws. The SEC found that the agreements contained provisions that impeded clients from reporting potential securities law violations to the SEC by permitting communications only where the SEC first initiated an inquiry. As described in the order, some of the agreements further required the clients to represent that they had not reported the underlying dispute to the SEC or to another securities regulator and would forever refrain from such reporting. Commenting on the enforcement action, Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit, stated: “Pure and simple, investors need to be able to report complaints or evidence of wrongdoing to the SEC without impediment. We will continue to hold firms accountable for putting roadblocks between us and their investors.” The SEC claimed that Nationwide, NPA, and Blue Point each violated Rule 21F-17(a) under the Exchange Act. Without admitting or denying the SEC’s findings, Nationwide, NPA, and Blue Point each agreed to be censured and to cease and desist from violating the whistleblower protection rule. They further agreed to a combined penalty, which was apportioned according to their relative size and financial condition, with NPA agreeing to pay $160,000, Nationwide $70,000, and Blue Point $10,000. The second set of actions was announced on September 9, 2024 (here). In those actions, the SEC brought charges against seven public companies for using employment, separation, and other agreements that violated rules prohibiting actions to impede whistleblowers from reporting potential misconduct to the SEC. To settle the SEC’s charges, the companies agreed to pay more than $3 million combined in civil penalties. Each of the companies was charged with violating whistleblower protection Rule 21F-17(a). In settlement of the actions, each of the firms agreed not to violate Rule 21F in the future and has taken steps to remediate the violations, including making changes to the relevant agreements. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Creola Kelly, Chief of the SEC’s Office of the Whistleblower (here). In April 2015, the SEC brought the first enforcement action for a violation of the whistleblower protection rule based on a company’s use of a restrictive confidentiality agreement. See In the Matter of KBR, Inc., Exchange Act Release No. 74619 (Apr. 1, 2015). This Blog wrote about that enforcement action here. Since 2015, the SEC has instituted numerous enforcement actions charging violations of the rule. This Blog has examined some of those enforcement actions here, here, here, here, and here. The SEC orders can be found: here, here, here, here, here, here, and here.

By: Jeffrey M. Haber In Seitz v. Marcum LLP , 2024 N.Y. Slip Op. 51141(U) (Sup. Ct., N.Y. County Aug. 30, 2024) ( here ), Justice Robert R. Reed of the New York County Commercial Division addressed the doctrine of in pari delicto , which “bars a party that has been injured as a result of its own intentional wrongdoing from recovering for those injuries from another party whose equal or lesser fault contributed to the loss.” The doctrine is available to a defendant as an affirmative defense that can be raised in any type of action. Seitz arose from defendant’s allegedly negligent services as auditor and accountant for now-bankrupt entities City Line Behavioral Healthcare, LLC, formerly known as Liberation Behavioral Health, LLC (“LBH”), and its subsidiary, Life of Purpose-Pennsylvania, LLC, formerly known as Liberation Way, LLC (“Liberation Way”) (collectively, the “Liberation companies”). Plaintiff, as trustee of the bankruptcy estates of the Liberation companies, asserted four claims against defendant for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment. Defendant moved to dismiss the complaint pursuant to CPLR 3211 (a) (5) and (a) (7). As discussed below, Justice Reed granted the motion and dismissed the complaint. Background The Liberation companies operated three facilities in Pennsylvania that provided treatment for drug and alcohol addiction. Liberation Way was a single-member limited liability company owned and controlled by LBH, which was, in turn, managed by a five-person board of directors. From 2015, the year of its founding, the CEO, CFO, and COO and President of LBH allegedly began engaging in fraudulent schemes including: “(i) fraudulently billing patients and insurance companies for treatments that were not provided, not medically necessary or were substandard; (ii) paying for patients to fraudulently obtain high-end insurance policies and fraudulently billing the insurance companies under those policies; (iii) generating kickbacks by sending thousands of medically unnecessary urine tests from the Company’s patients to co-conspiring labs in Florida; (iv) housing clients at sober-living homes associated with the Company without an inpatient license; and (v) failing to comply with regulations and licensing requirements.” In addition, the Liberation companies allegedly “manipulated financial statements , including by overstating revenue collection figures.” In or about May 2016, the Liberation companies engaged defendant, Marcum LLP, to perform accounting and auditing services for them. In 2016, Independent Blue Cross (“IBC”), an insurance company that insured many of the Liberation companies’ patients, began conducting an audit of the Liberation companies’ claims and billing practices. Through the audit, IBC discovered the alleged fraud and other misconduct that the Liberation companies committed between July 2015 and late 2017. IBC’s audit was known to the Liberation companies’ officers, directors, and critical advisors, and legal counsel to the Liberation companies disclosed the audit to defendant by no later than March 31, 2017. In December 2016, non-party Fulcrum Equity Partners, Inc. (“Fulcrum”) offered to purchase the Liberation companies and entered into a period of negotiation and due diligence. Under the proposed transaction, certain members of LBH would sell their membership units in LBH to LBH Holdings, LLC (“LBH Holdings”), a company newly created to become the parent company for LBH, and its subsidiary, LBH Holdco Corp. (“LBH Holdco”), pursuant to a Unit Purchase and Contribution Agreement (“Purchase Agreement”), in exchange for millions of dollars and membership units in LBH Holdings. In the Purchase Agreement, the selling members of LBH represented “that the and its staff had always followed all applicable laws, that they had not engaged in activity in violation of Pennsylvania law governing rehabilitation facilities, and that they maintained all required records.” These representations and warranties induced LBH Holdings and LBH Holdco to enter into the Purchase Agreement. As a result of the transaction, LBH became a wholly owned subsidiary of LBH Holdings. In connection with this proposed transaction, defendant performed accounting services for the Liberation companies, including valuation, due diligence, and opening balance sheet corrections. However, in its April 2017 audit report and accounting work, defendant allegedly never investigated or considered the implications of the IBC audit. Fulcrum and non-party Vocap Partners ultimately acquired the Liberation companies on December 11, 2017, contributing $12 million in cash and $29.6 million in funds loaned from Oxford Finance LLC (“Oxford”) and another bank, to purchase 70% of LBH Holdings. The $29.6 million loan was secured primarily by LBH’s assets. The selling members of LBH maintained a 30% stake in LBH Holdings. After the Fulcrum transaction, Fulcrum selected new officers and directors to control and direct the Liberation companies , including a new CEO. In January 2018, defendant began its 2017 audit and accounting services for the Liberation companies. During the audit, defendant allegedly learned of a material overstatement of net accounts receivable that it had missed in its 2016 audit and accounting services for the Fulcrum transaction. In addition, in reviewing the companies’ legal bills, defendant allegedly became aware of a series of governmental investigations that placed them in jeopardy, such as an order from the Pennsylvania State Department of Drug and Alcohol Programs (“DDAP”) to cease patient intake at multiple locations due to problems discovered during its inspections, an investigation by the Pennsylvania Office of the Attorney General, and an order from the federal Drug Enforcement Agency regarding violations of federal regulations governing Narcotics Treatment Programs. Defendant also allegedly learned that the Liberation companies were in default of their Credit Agreement with Oxford, according to a notice of default received on July 6, 2018. When defendant issued its 2017 audit report on August 8, 2018, it allegedly conducted no investigation into the government subpoenas or letter inquiries and never revisited findings from the IBC audit or Oxford’s notice of default. Likewise, when defendant began its audit and accounting service for 2018 in January 2019, it allegedly did not investigate or address any of these issues. On March 25, 2019, the Pennsylvania Office of the Attorney General announced criminal charges against LBH and its former officers and directors. At or about that time, defendant informed LBH’s new CEO that the Liberation companies should no longer rely on its audited financial statements. Defendant continued to perform audit and accounting services, including in connection with the Attorney General’s investigation, until the Liberation companies declared bankruptcy on April 17, 2019. Defendant did not issue an audit report for 2018. The Liberation companies declared bankruptcy on or about April 17, 2019. Plaintiff was appointed the trustee of the bankruptcy estates of the Liberation companies. On April 16, 2021, plaintiff commenced the action by filing a summons with notice. Plaintiff filed a complaint on May 20, 2021, asserting four causes of action for accounting malpractice, breach of fiduciary duty, breach of contract, and unjust enrichment with respect to defendant’s audit and accounting services from 2016 to 2019. On June 18, 2021, defendant filed a motion to dismiss the complaint. Plaintiff opposed the motion. The Motion Court’s Ruling In its motion, defendant principally argued that the complaint should be dismissed under the in pari delicto doctrine. Relying on the Court of Appeals’ decision in Kirschner v. KPMG LLP , Justice Reed held that the doctrine barred plaintiff’s claims. The motion court found that plaintiff, as the trustee of the bankruptcy estates of the Liberation companies, stood in the shoes of the Liberation companies and had no greater rights than they would have if they had not filed for bankruptcy. This was significant since plaintiff alleged that LBH’s officers themselves engaged in fraud and other malfeasance, and those acts had to be imputed to LBH. Therefore, said the motion court, “defendant sufficiently demonstrate that, as a party in pari delicto , plaintiff barred from bringing its claims stemming from the wrongful acts of the Liberation companies’ directors and officers.” In granting defendants’ motion, the motion court rejected plaintiff’s argument that issues of fact prevented the court from applying the in pari delicto doctrine to the complaint. Noting that the Court of Appeals specifically held that “in pari delicto may be resolved on the pleadings … in an appropriate case,” the motion court found that plaintiff did “not point to any factual dispute that would preclude dismissal on the basis of th doctrine.” In fact, noted the motion court, the doctrine’s “applicability apparent on the face of pleadings.” As explained by defendant, to which the motion court agreed, “‘ here is not a single allegation in the Complaint which suggests that Marcum’s auditing services were negligent in any way other than in failing to detect the Company’s own fraud. And there is no allegation that the Company’s financial statements were inaccurate in any way other than as a result of the Company’s fraud.’” The motion court also rejected plaintiff’s argument that the “adverse interest” exception to the in pari delicto doctrine should apply, such that the wrongful actions of the company’s officers would not be imputed to LBH. Under the adverse interest exception, which is narrowly applied, “management misconduct will not be imputed to the corporation if the officer acted entirely in his own interest and adversely to the interest of the corporation.” To avail oneself of the exception, a plaintiff must show that “the agent … totally abandoned his principal’s interests and entirely for his own or another’s purposes.” “It cannot be invoked merely because he has a conflict of interest or because he is not acting primarily for his principal.” Justice Reed held that the adverse exception did not apply because plaintiff failed to allege that the LBH “officers and directors ‘totally abandoned principal’s interests and … act entirely for own or another’s purposes.’” Examining the Fulcrum transaction, which formed the basis of plaintiff’s argument, Justice Reed found that “ he transaction would have benefited the companies through the infusion of $12 million from Fulcrum and Vocap and $29.6 million in loans from Oxford. That the loan was secured by LBH’s assets alone not render the transaction in ‘adverse interest’ to the Liberation companies.” “Indeed,” said the motion court, “the transaction may, at least before discovery of the officers’ fraudulent acts, have permitted them to ‘survive,’ ‘attract investors and customers and raise funds for corporate purposes’ for the time being.” In conclusion, Justice Reed, quoting from the Court of Appeals’ decision in Kirschner, held that “the complaint must be dismissed in its entirety under the doctrine of in pari delicto”: However, as the Court of Appeals also observed in Kirschner, “ fraud that by its nature will benefit the corporation is not ‘adverse’ to the corporation’s interests, even if it was actually motivated by the agent’s desire for personal gain” ( Kirschner at 467). “So long as the corporate wrongdoer’s fraudulent conduct enables the business to survive—to attract investors and customers and raise funds for corporate purposes—this test is not met” ( id. at 468). Moreover, “any harm from the discovery of the fraud—rather than from the fraud itself—does not bear on whether the adverse interest exception applies. The disclosure of corporate fraud nearly always injures the corporation” ( id. at 469). In addition, pertinent to this case, “the mere fact that a corporation is forced to file for bankruptcy does not determine whether its agents’ conduct was, at the time it was committed, adverse to the company” ( id. at 468). Takeaway The in pari delicto doctrine serves two salutary purposes. First, the doctrine deters illegal activity by denying judicial relief to an admitted wrongdoer. Second, it conserves judicial resources because it avoids entangling courts in disputes between wrongdoers. Notwithstanding, the doctrine will not bar an action when an agent totally abandons his/her principal’s interests and acts entirely for his/her own purposes or those of another ( i.e. , the agent’s acts are “totally” adverse to the principal). In Seitz , plaintiff was unable to persuade the motion court that the officers and directors of the Liberation companies acted solely for their benefit. As such, the motion court was compelled to dismiss the complaint. __________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. This Blog previously examined the in pari delicto doctrine here . Rosenbach v Diversified Grp., Inc. , 85 A.D.3d 569, 570 (1st Dept. 2011). Kirschner v. KPMG LLP , 15 N.Y.3d 446 (2010) (malpractice); Donovan v. Rothman , 302 A.D.2d 238 (1st Dept. 2003) (breach of contract), Gitlin v. Chirinkin , 121 A.D.3d 939 (2d Dept. 2014) (breach of contract, breach of fiduciary duty, unjust enrichment). Slip Op. at *1 (quoting the complaint). Id. (quoting the complaint). Id. (quoting the complaint). Id. (citing Mediators, Inc. v. Manney (In re Mediators, Inc.) , 105 F.3d 822, 826 (2d Cir 1997)). Id. See Stokoe v. Marcum & Kleigman LLP , 135 A.D.3d 645, 645 (1st Dept. 2016). Justice Reed distinguished Stokoe by noting that in Stokoe the defendants had failed to show fraudulent activity by the plaintiffs’ agent, whereas in the case before him, “plaintiff himself … pleaded the officers’ fraudulent activity.” Slip Op. at *2. Slip Op. at *2 (citing Kirschner , 15 N.Y.3d at 459, n.3). Id. Id. (quoting defendant’s reply memorandum). Symbol Tech., Inc. v. Deloitte & Touche, LLP , 69 A.D.3d 191, 197 (2d Dept. 2009). Kirschner , 15 N.Y.3d at 466. Id. Slip Op. at *3 (quoting Kirschner , N.Y.3d at 466). Id. Id. (quoting Kirschner , 15 N.Y.3d at 468). Id. at *3-*4. Id. at *3. Kirschner , 15 N.Y.3d at 464. Id. at 466.

By: Jeffrey M. Haber In Hydraulic IP Holdings, LLC v. Tan , 2024 N.Y. Slip Op. 32930(U) (Sup. Ct., N.Y. County Aug. 16, 2024 ( here ), the court was asked to hold certain successor entities liable for the unsatisfied judgment (“Judgment”) issued by the motion court in plaintiff’s favor and against non-party Grace Apparel LLC (“Grace”). As discussed below, the motion court declined to grant summary judgment in either party’s favor, holding there were issues of fact as to whether the Successor Entities were liable under the de facto merger doctrine. The facts in Hydraulic IP Holdings are simple. Grace failed to pay the Judgment, ceased its operations as a wholesale and private-label garment manufacturer and, according to plaintiff, continued to operate the wholesale and private-label garment manufacturing business in the names of one or both of the Successor Entities, which had the same ownership, address, employees, and assets, and which assumed Grace’s liabilities. “The de facto merger doctrine creates an exception to the general principle that an acquiring corporation does not become responsible thereby for the pre-existing liabilities of the acquired corporation.” “A de facto merger occurs where one corporation is absorbed by another, but without compliance with the statutory requirements for a merger.” Courts consider the following factors to determine whether the de facto merger doctrine applies: (1) continuity of ownership; (2) cessation of ordinary business and dissolution of the acquired corporation; (3) assumption by the successor of the liabilities for the continuation of the business of the acquired corporation; and (4) continuity of management, personnel, physical location, assets, and general business operation. “Not all of these elements are necessary to find a de facto merger.” Satisfaction of as few as two factors can suffice. “The question of whether a de facto merger exists is ‘analyzed in a flexible manner that disregards mere questions of form and asks whether, in substance, ‘it was the intent of to absorb and continue the operation of .’” The de facto merger doctrine is rooted in equity and exists “to ensure that a source remains to pay for the victim’s injuries.” As noted, the motion court found that there were questions of fact regarding the application of the de facto merger doctrine. Continuity of Ownership Continuity of ownership “exists where the shareholders of the predecessor corporation become direct or indirect shareholders of the successor corporation as the result of the successor’s purchase of the predecessor’s assets.” The motion court found that there was a question of fact as to this prong of the analysis due to the continuous ownership by Grace’s owners and the defendant GBrands but only one owner, defendant Tan, as the owner of defendant CC Apparel. The motion court also found that there was an issue of fact as to whether there was a transfer of assets sufficient to trigger the de facto merger analysis. The motion court further found that the use of the same logo by Grace and GBrands also created an issue of fact. Dissolution It is well settled that for purposes of the de facto merger analysis, the predecessor company is not required to have been legally dissolved, if it “is shorn of its assets and has become, in essence, a shell.” The motion court found an issue of fact as to whether Grace had been legally dissolved – that is, “whether Grace … maintains its own corporate records and bank accounts,” has “conducted business and has vacated its leased space.” The motion court explained that the “proffered testimony inconsistent and best suited for a finder of fact.” Assumption of Liabilities for Continuation of Business The motion court found that there was a question of fact as to this prong of the de facto merger analysis, noting “ hile defendants contend that no agreements were made between Grace and the successor entities, the payment of Grace’s debt by CC creates a question of fact, notwithstanding the remaining contentions of the defendants.” Continuity of Assets, Management and/or Business Operations As to this prong of the analysis, the motion court held that there was a question of fact preventing the grant of summary judgment. The motion court explained that notwithstanding the existence of certain undisputed facts, because defendants claimed that plaintiff failed to satisfy the other prongs of the analysis, “the remaining factors insufficient to satisfy plaintiff’s burden.” ________________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. The successor entities are: GBrands Holding, LLC (“GBrands”) and CC Apparel, LLC (“CC Apparel” and collectively with GBrands, the “Successor Entities”). Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573, 574 (1st Dept. 2001). Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc. , 775 F.3d 38, 42 (2d Cir. 1985). Fitzgerald , 286 A.D.2d at 574. See also Highland Crusader Offshore Partners, L.P. v. Targeted Delivery Techs. Holdings, Ltd. , 184 A.D.3d 116, 126 (1st Dept. 2020). Id. at 574-575. See , e.g. , Beck v. Roper Whitney, Inc. , 190 F. Supp. 2d 525 (S.D.N.Y. 2001); State of N.Y. v. N. Storonske Cooperage Co., Inc. , 174 B.R. 366 (N.D.N.Y. 1994). Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 176 (1st Dept. 2013) (quoting Nettis v. Levitt , 241 F.3d 186, 194 (2d Cir. 2001), overruled on other grounds , Slayton v. American Exp. Co. , 460 F.3d 215 (2d Cir. 2006)). Matter of New York City Asbestos Litig. , 15 A.D.3d 254, 258 (1st Dept. 2005). Id. at 256. Slip Op. at *3. Id. Id. at *3-*4. Fitzgerald , 286 A.D.2d at 575. Slip Op. at *4. Id. Id. at *5. Id. at *6.

By: Jeffrey M. Haber Often, in the pre-action investigation of a client’s claims, it becomes evident that discovery would materially aid the client in framing his/her complaint or in learning the identities of the persons against whom the complaint should be brought. Obtaining pre-action discovery from the court, however, is not easy. As discussed below, the plaintiff must demonstrate the existence of a meritorious cause of action against the proposed defendant and the materiality and necessity of obtaining the information. Under Section 3102(c) of the CPLR, a plaintiff can obtain discovery “before an action is commenced … to preserve information” or “to aid in bringing an action ….” However, such discovery can be secured only by court order. Importantly, “while pre-action disclosure may be appropriate to preserve evidence or to identify potential defendants, it may not be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing.” In other words, a would-be plaintiff cannot use Section 3102(c) to fish for a cause of action.  New York courts have explained that the foregoing “limitation” on the use of pre-action disclosure is “‘designed to prevent the initiation of troublesome and expensive procedures, based upon a mere suspicion, which may annoy and intrude upon an innocent party.’”   However, where “the facts alleged state a cause of action, the protection of a party’s affairs is no longer the primary consideration and an examination to determine the identities of the parties and what form or forms the action should take is appropriate.” Thus, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists and is only available where a petitioner demonstrates that he or she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.” The burden is on the petitioner to present “facts fairly indicating a cause of action against the adverse party.” Recently, this Blog examined Khorassani v. FINRA , No. 153819/2023, 2023 WL 4029701 (Sup. Ct., N.Y. County June 15, 2023), aff’d , 223 A.D.3d 589 (1st Dept. 2024) ( here ), a case in which the Appellate Division, First Department affirmed the denial of a request for pre-action discovery. Khorassani involved alleged fraud in connection with the merger of Torchlight Energy Resources (“Torchlight”) and Meta Materials, Inc. (“Meta Materials” or “MMAT”). After the merger, Meta Materials traded on the NASDAQ under the ticker symbol “MMAT”. In connection with the merger, Meta Materials issued a special dividend in the form of Series A Preferred shares (“MMTLP”) to Torchlight stockholders before the merger. MMLTP shares were not intended to be traded on any public exchange and were only intended to be a dividend placeholder for shareholders who owned Torchlight shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter Market (“OTC Market”) with the assistance of an unidentified securities broker. Thereafter, unidentified brokers and market makers began trading shares of MMTLP on the open market. In July 2022, the company’s board of directors voted to spin off Torchlight’s assets into a new company called Next Bridge Hydrocarbons, Inc. (“Next Bridge”). In connection with the transaction, MMAT filed a Form S-1 Registration Statement (the “Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register the issuance of stock in Next Bridge. Shortly after the Registration Statement became effective, short interest in MMTLP shares grew. By early December 2022, the volume of short sales exceeded the volume of stock that was not shorted by traders. As a result, on December 9, 2022, FINRA halted trading of MMTLP shares. FINRA’s halt in trading resulted in the failure of unknown and unidentified brokers to settle their short positions. As a result, the petitioner claimed that he was harmed, in addition to the Company’s other retail investors. The petitioner sought the “Blue Sheets” maintained by FINRA to allow him to ascertain the names, addresses, and basis of liability of the unknown brokers and market makers to frame his claims, which the petitioner said he intended to bring against the unknown and unidentified brokers and market makers for spoofing, naked short selling, market manipulation, and fraud. The motion court denied the petition, holding that the petitioner (a) was using CPLR § 3102 for purposes other than ascertaining the identity of the defendants, and (b) failed to assert a meritorious cause of action for fraud. The motion court found that the allegations and arguments in the petition were speculative and conclusory and, as a result, concluded that the petition was an improper fishing expedition. On appeal, the First Department affirmed, holding that the petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, the Court found that the petitioner failed to state a meritorious cause of action for fraud. In Steamroller, LLC v. OTC Mkts. Group, Inc. , 2024 N.Y. Slip Op. 32891(U) (Sup. Ct., N.Y. County Aug. 20, 2024 ( here ), the court was faced with “virtually” the same request for “relief as petitioner” in Khorassani ( i.e. , “the pre-action disclosure of the identities of the brokers who traded in MMTLP shares”). Relying on Khorassani and finding the case to be dispositive, the motion court denied the motion. Steamroller was brought by an MMTLP shareholder. Petitioner sought the disclosure of the identities of the individuals who or the entities that submitted a Form 211 to FINRA for the MMTLP shares to be listed for trading on the OTC Market. Petitioner claimed that the relief requested was necessary so that he could name the brokers and marker makers responsible for the fraudulent information allegedly used to list MMTLP on the OTC Markets. The motion court held that the petition “suffer from the same infirmities as the petition in Khorassani .” The motion court found that “ etitioner failed to identify any material misrepresentation by the broker or brokers who listed MMTLP for trading on which petitioner justifiably relied in purchasing shares of the security.” The motion court explained that “petitioner specifically claim that it relied on public disclosures…, the shareholders of which were to receive MMTLP shares upon Torchlight’s merger with Meta Materials, Inc.” “That disclosure,” said the motion court, “stated that MMTLP ‘will not be listed or traded on any exchange’ and ‘ o market is expected to develop for in the foreseeable future and holders of may not be able to find a buyer and sell their shares if they desired to do so.’” Thus, “based on petitioner’s own allegations,” concluded the motion court, “not only did petitioner not rely on any misrepresentation by the unidentified brokers, but it could also not have justifiably relied on Torchlight’s public disclosure because it does not state that MMTLP would or could not be traded on an unsolicited basis in the over-the-counter market.” “Indeed,” noted the motion court, “by stating that it might be difficult for holders of MMTLP to find buyers for their shares should they desire to sell them, it implicitly recognized that the shares might be bought and sold.” The motion court also held that petitioner failed to plead fraud with particularity, finding that petitioner failed to provide the “how” and “why” of the claimed fraud, and failed to allege any damages resulting from a misrepresentation by the broker or brokers and petitioner’s reliance thereon. _____________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. CPLR 3102(c) (“Before an action is commenced, disclosure to aid in bringing an action, to preserve information or to aid in arbitration, may be obtained, but only by court order.”). Id. Uddin v. New York City Tr. Auth. , 27 A.D.3d 265, 266 (1st Dept. 2006). Matter of Stewart v. New York City Transit Auth. , 12 A.D.2d 939, 940 (2d Dept. 1985) (citation omitted). Id. (citation and internal quotation marks omitted). Bishop v. Stevenson Commons Assocs., L.P. , 74 A.D.3d 640, 641 (1st Dept. 2010) (citations omitted). Matter of Schenley Indus. v. Allen , 25 A.D.2d 742, 743 (1st Dept. 1966). In addition Khorassani , this Blog examined applications for pre-action discovery under CPLR 3102,  here  and  here .  Slip Op. at *1. Id. Form 211 is an application to initiate or resume quotations on an exchange of a non-exchange listed security. Rule 15c2-11(b) of the Securities Exchange Act of 1934 and FINRA Rule 6432 govern the information that must included in the Form 211. Slip Op. at *2. Id. Id. Id. (citation to court record omitted). Id. at *2-*3. Id. at *3. Id.

By: Jeffrey M. Haber In DirecTV, LLC v. Nexstar Broadcasting, Inc. , 2024 N.Y. Slip Op. 04225 (1st Dept. Aug. 15, 2024) ( here ), the Appellate Division, First Department considered the viability of a fraudulent inducement claim and whether the plaintiff satisfied the elements of the claim. As discussed below, the Court held that the motion court “should have granted summary judgment in plaintiff’s favor on” this claim. DirecTV arose out of a retransmission consent agreement (“Agreement”) between DirecTV and Nexstar Broadcasting, Inc., whereby DirecTV would retransmit television signals of numerous television broadcast stations (“Stations”) owned by Nexstar for a three-year term, with an option to renew for a fourth year, and pay fees to Nexstar to do so. The Agreement was a renewal of a previous retransmission consent agreement between DirecTV, Nexstar, and two nonparties. During the negotiations leading up to the Agreement, the parties agreed that DirecTV would pay an “Unlaunched Station Fee” for station WHAG, then an NBC affiliate. Under the Unlaunched Station Fee provision, DirecTV was not required to carry WHAG, but agreed to consider doing so in “good faith” and to pay license fees for WHAG based on a fixed number of subscribers. DirecTV maintained that it only agreed to include the Unlaunched Station Fee Provision in the Agreement because of Nexstar’s repeated assurances that WHAG was an NBC-affiliated station. On June 30, 2016, WHAG lost its NBC affiliation and was not affiliated with any Big-6 Network after that date. Discovery showed that Nexstar first learned NBC would not extend the affiliation agreement for WHAG at least one year before the term expired. NBC did not want to extend or renew WHAG’s affiliation because NBC owned its own station in the Washington, D.C. market and wanted to eliminate duplicate affiliates operating in the same market. On January 30, 2017, DirecTV exercised its option to extend the term of the Agreement to a fourth year. On July 1, 2017, Nexstar changed WHAG’s call letters to WDVM. In 2018, DirecTV was informed that WHAG had lost its NBC affiliation. On June 26, 2019, DirecTV commenced the action, asserting causes of action for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, and a judgment declaring that DirecTV had no obligation to pay the Unlaunched Station Fee after WHAG lost its Network affiliation and that Nexstar is not entitled to retain the Overpayment or continue receiving the Unlaunched Station Fee. DirecTV amended its complaint to plead a cause of action for fraudulent inducement based on Nexstar’s fraudulent misrepresentations or omissions with respect to WHAG. Nexstar alleged two counterclaims in its amended answer for breach of contract predicated on DirecTV’s failure to pay the Unlaunched Station Fees and for a judgment declaring that DirecTV has no claim to the return of the Overpayment. DirecTV moved for summary judgment on its first cause of action for fraudulent inducement , the second cause of action for breach of contract, and the fourth cause of action for a declaratory judgment. DirecTV also moved for summary judgment dismissing Nexstar’s counterclaims. Nexstar also moved for summary judgment on its counterclaims and for summary judgment dismissing the amended complaint. DIRECTV’s First Cause of Action for Fraudulent Inducement 1.  Material Misrepresentation or Omission DirecTV alleged that Nexstar failed to disclose a material fact, namely WHAG’s loss of its NBC affiliation. The motion court found that any misrepresentation or omission as to station affiliation was material based on the terms of the Agreement. In that regard, the motion court cited to Section 7 of the Agreement, which stated that the “Stations’ affiliations as identified on Exhibit A are the essence of this Agreement.” Accordingly, the motion court found that Nexstar failed to raise an issue of fact as to materiality. 2.  The Duty to Disclose DirecTV maintained that Nexstar had a duty to disclose that WHAG would lose its NBC affiliation on two grounds. First, DirecTV characterized Nexstar’s repeated flaunting of WHAG’s NBC affiliation as an actionable half-truth, and that Nexstar had a duty to disclose the full facts of that affiliation. Second, DirecTV contended that Nexstar’s possession of superior knowledge regarding WHAG’s NBC affiliation triggered a duty to disclose. Nexstar argued that it had no duty of disclosure under either the special facts doctrine or the misleading partial disclosure doctrine. The motion court found that Nexstar had a duty to disclose based on a misleading partial disclosure. The motion court found that Nexstar represented that WHAG was an NBC affiliate but withheld the fact that the affiliation with NBC would terminate on June 30, 2016, and would not be renewed. The motion court noted that despite Nexstar’s hope that NBC would reconsider its decision to end its affiliation with WHAG, the NBC Agreement definitively stated that Nexstar and NBC agreed the affiliation would not be extended, and Nexstar was aware of this fact. The motion court held that Nexstar never disclosed this fact even though it repeatedly represented that WHAG was an NBC affiliate in a top market. This representation, said the motion court, could conceivably give rise to a false impression that WHAG would remain an NBC affiliate throughout the Agreement’s term. Moreover, the motion court held that the special facts doctrine was applicable, as information about WHAG was material to the transaction, and the end date for WHAG’s affiliation was not information that was easily or readily ascertainable with reasonable diligence. The motion court found that information pertaining to the expiration date on the NBC Agreement was within Nexstar’s superior knowledge, and such information could not have been obtained from the publicly filed documents. 3.  Scienter DirecTV asserted that Nexstar intentionally omitted the fact that WHAG was losing its NBC affiliation to induce DirecTV to agree to the Unlaunched Station Fee. Nexstar argued that DirecTV could not demonstrate a fraudulent intent to deceive because the NBC Agreement contained a provision prohibiting its disclosure and because Nexstar had no notice that the duration of WHAG’s affiliation was important to DirecTV. The motion court found that DirecTV’s proof on this element fell short of the clear and convincing evidence standard. The motion court found that deposition testimony had shown that Nexstar did not feel it was required to disclose that WHAG would no longer be affiliated with NBC after June 2016. At the same time, said the motion court, Nexstar did not demonstrate its entitlement to summary judgment. The motion court pointed to Section 7 of the Agreement, which provided that the essence of the Agreement was the Stations’ affiliations – language that Nexstar had agreed to include in the Agreement. Thus, held the motion court, it could not be said that Nexstar was unaware that WHAG’s NBC affiliation was important to DirecTV. Nexstar’s failure to disclose when WHAG’s NBC affiliation would end, concluded the motion court, gave rise to a reasonable inference of an intent to defraud. 4.  Justifiable Reliance The motion court held that triable issues of fact existed as to the justifiable reliance element. First, said the motion court, it was unclear whether DIRECTV could have learned of the expiration date through the exercise of ordinary diligence. Contrary to Nexstar’s contention, said the motion court, Nexstar’s 2014 Form 10-k did not publicly disclose the identity of which of its stations would lose its affiliation with NBC in June 2016. Also, noted the motion court, Nexstar admitted that the expiration dates were redacted on the affiliation agreements filed with the FCC. The motion court explained that NBC would not have disclosed when WHAG’s affiliation with it would have ended. Nor was it clear, said the motion court, that had DIRECTV directly asked, Nexstar would have disclosed the termination date. Thus, concluded the motion court, the exercise of ordinary diligence would not have disclosed that fact. DirectTV’s Second Cause of Action and Nexstar’s First Counterclaim for Breach of Contract In its second cause of action, DirecTV alleged that Nexstar breached the Agreement by collecting the Overpayment to which it was not entitled; failing to inform DirectTV that WHAG had lost its Network affiliation and had changed its call letters to WVDM; withholding the Overpayment; and demanding additional amounts for the Unlaunched License Fee. In its first counterclaim, Nexstar alleged that DirecTV breached the Agreement by failing to pay Unlaunched Station Fees owed to Nexstar. Reading the Agreement as a whole, the motion court concluded that the parties contemplated charging license fees only for those Stations that were affiliated with a Network or with CW or MNT, and that the Unlaunched Station Fee provision did not require DirecTV to pay license fees for an unaffiliated, independent WHAG. The motion court found support in Section 7 of the Agreement, which provided that a Station that changed network affiliations would be subject to license fees based on its new network affiliation. The motion court explained that Section 7 did not call for payment of license fees for Stations that lost their network affiliations during the term of the Agreement. The motion court noted that WHAG was an NBC affiliate when the Agreement was executed, and its term as an NBC affiliate ended on June 30, 2016. As such, WHAG was not affiliated with a Network, CW or MNT as of July 1, 2016. Thus, concluded the motion court, the Agreement did not require DirecTV to pay the Unlaunched Station Fee after July 1, 2016. Accordingly, the motion court denied Nexstar’s motion for summary judgment on its counterclaims and summary judgment dismissing the complaint, granted DirecTV’s motion for summary judgment on its breach of contract cause of action and summary judgment dismissing the counterclaims, and denied DirecTV’s motion for summary judgment on its cause of action for fraudulent inducement . The First Department’s Decision On appeal, the First Department unanimously modified the motion court’s order to grant DirecTV’s motion for summary judgment on its fraudulent inducement cause of action and Nexstar’s motion for summary judgment dismissing DirecTV’s causes of action for unjust enrichment and breach of the implied covenant of good faith and fair dealing, and otherwise affirmed the order. Regarding the breach of contract claims, the Court held that the motion “properly granted summary judgment to plaintiff on its breach of contract claim and denied summary judgment to defendant on its breach of contract counterclaim based on a straightforward interpretation of the unambiguous terms of the parties’ agreement.” The Court found that the motion court “simply interpreted the contract — as it must — in accordance with the document as an integrated whole.” Regarding DirecTV’s fraudulent inducement cause of action, the Court held that the fraud claim and breach of contract claims were not duplicative, noting that the fraudulent inducement cause of action “could provide a separate basis for recovery of Unlaunched Station Fees.” The Court found that the damages sought by the fraudulent inducement claim did not overlap with the breach of contract claim: The fraudulent inducement cause of action alleges that the Unlaunched Station Fee Provision was fraudulently induced and seeks all Unlaunched Station Fees that plaintiff made to defendant throughout the entire agreement, as well as attorneys' fees and punitive damages . The breach of contract claim, by contrast, seeks only the Unlaunched Station Fee payments that plaintiff made after WHAG lost its NBC affiliation. The Court held that the motion court “should have granted summary judgment in plaintiff’s favor on its fraudulent inducement cause of action.” The Court found that DirecTv adequately alleged scienter and justifiable reliance, noting that there was “simply no issue of fact as to either defendant’s intent to defraud or plaintiff’s justifiable reliance on the material misrepresentation.” The Court found that “there was unrebutted testimony from two NBC employees who testified that NBC advised defendant that there would be no further extensions to WHAG’s NBC affiliation beyond its June 30, 2016 termination, and that NBC never suggested to defendant that it might reconsider this decision.” “Thus,” concluded the Court, “defendant knew that the termination of the NBC affiliation was a fait accompli and intentionally concealed this information from plaintiff.” Further, the Court held that DirecTV reasonably relied on Nexstar’s representations about WHAG becoming an NBC affiliate. The Court explained that defendant’s 2014 Form 10-K, while publicly filed on February 27, 2015 and available to plaintiff at the time the 2015 agreement was being negotiated, did not identify the specific stations that would lose their NBC affiliations. Rather, defendant misrepresented in these documents that defendant expected the network affiliations of its stations to be renewed. As plaintiff did not have access to the relevant information, it reasonably relied on the fraudulent representations of defendant to its detriment. ___________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Slip Op at *2. DirecTV had overpaid a non-carriage fee, which was calculated from the date that WHAG lost its Network affiliation to August 2018 (“Overpayment”). Plaintiff alleged that Nexstar represented WHAG was an NBC-affiliated Station on multiple occasions; the representations were materially incomplete or were misleading partial disclosures, as Nexstar was aware WHAG would lose its affiliation with NBC on July 1, 2016; Nexstar was aware that NBC was unwilling to renew WHAG’s affiliation; Nexstar leveraged WHAG’s affiliation with NBC to induce DirecTV to agree to the Unlaunched Station Fee provision based on a misleading or materially incomplete representation that WHAG would continue its affiliation; Nextstar was aware DirecTV was acting on the basis of these misleading statements; DirecTV justifiably relied on Nexstar’s representations, even though Nexstar knew DirecTV did not have the capacity to launch or carry that Station; and DirecTV was damaged as a result. A material fact is one that goes to the “very essence of the bargain” ( Junius Const. Corp. v. Cohen , 257 N.Y. 393, 400 (1931)), and is one that is likely to influence a plaintiff’s decision-making ( Gulf Ins. Co. v. Transatlantic Reins. Co. , 69 A.D.3d 71, 96 (1st Dept. 2009); 2 Fifth Ave. Tenants Assn. v. Abrams , 183 A.D.2d 577, 578 (1st Dept. 1992) (stating that omitted material is important if the person viewing it would have seen it as significantly altering the total mix of available facts)). “A fact may not be dismissed as immaterial unless it is ‘so obviously unimportant ... that reasonable minds could not differ on the question of importance.” Swersky v. Dreyer & Traub , 219 A.D.2d 321, 328 (1st Dept. 1996), rearg denied , 232 A.D.2d 968 (1st Dept. 1996), appeal withdrawn , 89 N.Y.2d 983 (1997) (quoting Allen v. Westpoint-Pepperell, Inc. , 945 F.2d 40, 45 (2d Cir. 1991)). Materiality is normally an issue for the jury to determine. See Brunetti v. Musallam , 11 A.D.3d 280, 281 (1st Dept. 2004). When a claim for fraud is predicated upon an act of concealment or an omission, the plaintiff must establish the same elements for fraud and also show that the defendant had a duty to disclose material information but failed to do so. Gansett One, LLC v. Husch Blackwell, LLP , 168 AD3d 579, 579 (1st Dept. 2019) (citing Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 179 (2011). An affirmative duty of disclosure arises when the parties are in a confidential or fiduciary relationship. See Dembeck v. 220 Cent. Park S., LLC , 33 A.D.3d 491, 492 (1st Dept. 2006). Therefore, “ bsent a confidential or fiduciary relationship, there is no duty to disclose, and mere silence, without identifying some act of deception, does not constitute a concealment actionable as fraud.” FNF Touring LLC v. Transform Am. Corp. , 111 A.D.3d 401, 402 (1st Dept. 2013) (internal quotation marks and citation omitted). A misleading partial disclosure gives rise to a claim for fraud when a party is dependent upon the defendant for relevant facts, and “if the withheld facts are proven to have been material.” Juman v. Louise Wise Servs. , 254 A.D.2d 72, 74 <1st dept 1998> .) Indeed, “once a party has undertaken to mention a relevant fact to the other party it cannot only give half of the truth,” particularly where only a partial or ambiguous statement has been made. Brass v. American Film Tech., Inc. , 987 F.2d 142, 150 (2d Cir. 1993) (citing Junius , 257 N.Y. at 400; see also Restatement (Second) of Torts, § 529 (“ representation stating the truth so far as it goes but which the maker knows or believes to be materially misleading because of his failure to state additional or qualifying matter is a fraudulent misrepresentation”). “Under the special facts doctrine, a duty to disclose arises where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair.” Swersky , 219 A.D.2d at 327 (internal quotation marks and citations omitted). The party invoking the doctrine must demonstrate that “the material fact was information peculiarly within knowledge of ,” and “the information was not such that could have been discovered by through the exercise of ordinary intelligence.” Jana L. v. West 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005) (internal quotation marks and citation omitted). Slip Op. at *2. Id. Id. Id. Id. Id. Id. at *2-*3. Id. at *3. Id. Id.