By:  Jeffrey M. Haber In 245 E. 19 Realty LLC v. 245 E. 19th St. Parking LLC , 2024 N.Y. Slip Op. 00368 (1st Dept. Jan. 30, 2024) ( here ), the Appellate Division, First Department examined a couple of issues frequently discussed in this Blog: veil piercing/alter ego liability and fraudulent transfers.  As to the issue of fraudulent transfers, 245 E. 19 Realty provides us with the opportunity to examine a case involving the new Debtor and Creditor Law (“DCL”), which became effective on April 4, 2020. The new DCL replaced Article 10, Sections 270-281 of the DCL, the State’s almost century-old fraudulent conveyance law.  here.=">here."> Background 245 E. 19 Realty involved an alleged plan to avoid the negative implications of the Covid-19 pandemic and to increase profits by defendant HPS Investment Partners, LLC (“HPS”). Plaintiff is the owner and landlord of a parking garage located in New York City (“Landlord”). Defendant 245 E. 19th Street Parking LLC (“Tenant”) entered into a written lease agreement on January 1, 2007, with Landlord’s predecessor-in-interest for the demised space at issue.  According to Landlord, at the onset of the Covid-19 pandemic in March 2020, HPS devised a plan and scheme to help defendant Icon Parking Holdings, LLC (“Icon”), a company that HPS allegedly controlled, avoid the negative implications of the pandemic and to increase its profits. Under the plan, Icon’s affiliated garages would effectively stop paying rent. At the time, most garage operators expected an extreme downturn in their daily business. Landlord alleged that HPS, and two of its members (also defendant in the action), directed that payment on Icon affiliates’ rent obligations immediately cease. Landlord claimed that HPS caused Icon to default on its affiliates’ lease obligations at numerous garage locations. Landlord maintained that Icon’s affiliated garages funneled all or substantially all of the funds held in reserve to Icon. Landlord alleged that the transfers from Tenant’s account left it unable to pay its rent when it became due. Thereafter, Icon purportedly transferred those funds to, among others, HPS.  Landlord further alleged that Icon ceased its business operations at the premises. It claimed that: (1) Icon effectively merged into HPS; (2) HPS directed Icon to continue its business operations at the premises under the same ownership and management; and (3) HPS either managed, oversaw or directed the operation of Icon’s business at the premises. Tenant allegedly breached the lease by failing to timely pay monthly installments of fixed rent and additional rent. On March 15, 2021, Icon notified Landlord that it intended to surrender possession of the premises at the end of the month. On March 30, 2021, Icon surrendered possession of the subject premises. Landlord filed an action, asserting 10 causes of action: (1) declaratory judgment; (2) breach of contract against Tenant; (3) alter ego liability/piercing the corporate veil against all defendants; (4) de facto merger against all defendants; (5) tortious interference with the lease against all defendants; (6) piercing the corporate veil against, inter alia , HPS; (7) tortious interference with contract against all defendants; (8) unjust enrichment against all defendants; (9) fraudulent conveyance under new Debtor and Creditor Law (“DCL”) § 273 against all defendants; and (10) attorney’s fees under DCL § 276-a. Defendants moved to dismiss the complaint. The motion court granted the HPS defendants’ motion and granted in part and denied in part the Icon defendants’ motion. The Motion Court’s Decision Veil Piercing/Alter Ego Liability “To make out a cause of action for liability on the theory of piercing the corporate veil because the corporation at issue is the defendant’s alter ego, the complaining party must, above all, establish that the owners of the entity, through their domination of it, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against the party asserting the claim such that a court will intervene.” 1 Notably, piercing the corporate veil is not an independent cause of action. 2 In determining whether the corporate entity 3 is dominated and controlled, “courts have considered factors such as the disregard of corporate formalities; inadequate capitalization; intermingling of funds; overlap in ownership, officers, directors and personnel; common office space or telephone numbers; the degree of discretion demonstrated by the alleged dominated corporation; whether the corporations are treated as independent profit centers; and the payment or guarantee of the corporation’s debts by the dominating entity.” 4 Significantly, “ o one factor is dispositive.” 5 In determining whether the owners abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice, courts look at all the facts and circumstances. “Wrongdoing in this context does not necessarily require allegations of actual fraud. While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice.” 6 Thus, “ llegations that corporate funds were purposefully diverted to make it judgment proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory.” 7 Conclusory allegations of undercapitalization, intermingling of assets, and domination and control are insufficient to pierce the corporate veil. 8 “As a preliminary matter,” noted the motion court, “the HPS defendants correctly assert that the third and fourth cause of action must be dismissed because “alter-ego liability is not an independent cause of action.” The motion court granted the HPS defendants’ motion to dismiss the veil piercing allegations asserted against them. The motion court found the allegations of “domination and control with respect to these defendants” to be “conclusory and … based upon ‘information and belief,’” which is “insufficient” to withstand a motion to dismiss. The motion court explained that “ lthough Landlord relies on allegedly fraudulent liens filed against Icon’s affiliates, Landlord has not set forth facts showing ‘complete domination of the corporation … in respect to the transaction attacked’ and ‘that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.’” 9 With regard to the Icon defendants, the motion court held that “the complaint adequately alleges particularized facts to warrant piercing the corporate veil with respect to Icon.” The motion court explained that the complaint sufficiently alleged “that Icon and Tenant ignored corporate formalities and operated as a single economic entity” and that “Icon transferred funds from Tenant’s account on a daily basis, rendering Tenant insolvent at the end of the day and unable to pay rent to Landlord.” The motion court found that there were too many issues of fact making the claim to pierce the corporate veil unsuited for resolution on a pre-answer, pre-discovery motion to dismiss. Fraudulent Transfers Under The DCL In 245 E. 19th Street , Landlord asserted claims under Sections 273(a)(2) and 273(a)(1) of the new DCL. Section 273(a)(2) provides for setting aside transfers or obligations where the defendant or debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation. Section 273(a)(2) further provides that the debtor be engaged or about to be engaged in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due. DCL § 273(a)(1) requires actual intent to hinder, delay or defraud any creditor of the debtor. Under DCL § 273(a)(1), “ here is no requirement that a transaction involve common law deceit or fraudulent misrepresentation to be voidable for ‘actual intent.’ Actual intent to hinder or delay creditors suffices.” 10 Because it is difficult to prove actual intent to hinder, delay, or defraud creditors, the pleader is allowed to rely on “badges of fraud” to support his/her case – that is, circumstances that are commonly associated with fraudulent transfers that their presence gives rise to an inference of intent. Section 273(b) of the DCL enumerates 11 non-exclusive “badges of fraud” that courts may consider in determining intent. These factors include whether the transfer was made to an insider, whether the transfer was concealed, whether the debtor was subject to suit, and whether the debtor absconded. The motion court found that the complaint alleged sufficient badges of fraud to support a DCL § 273(a)(1) claim against the Icon defendants. The motion court explained that the complaint alleged that: (1) Icon was an insider of Tenant; (2) the transfers were concealed from Landlord; (3) all of Tenant’s assets were swept into Icon’s account on a daily basis; (4) the transfers lacked reasonably equivalent value; and (5) the transfers left Tenant insolvent on a daily basis. Such allegations, said the motion court, sufficed to sustain the claim as against the Icon defendants. However, the motion court held that the complaint failed to allege that the transfers were made to them. “The DCL does not, ‘either explicitly or implicitly, create a creditor’s remedy for money damages against parties who … were neither transferees of the assets nor beneficiaries of the conveyance,’” said the motion court. 11 “While Landlord argues that the HPS defendants were the ultimate financial beneficiaries of the alleged wrongful scheme,” noted the motion court, “the complaint only makes conclusory allegations that the HPS defendants benefitted from the alleged fraudulent transfers.” Therefore, concluded the motion court, “the HPS defendants are entitled to dismissal of the ninth and tenth causes of action.” The First Department’s Decision and Order On appeal, the First Department modified the order to grant Tenant and Icon’s motion to dismiss as to the alter ego/veil-piercing and declaratory judgment claims against them, and otherwise affirmed the order. The Court held that the “alter ego/veil-piercing claims against the Icon defendants should have been dismissed, as there is no independent cause of action for veil-piercing.” 12 However, said the Court, veil-piercing was “appropriate as to these defendants” as Landlord “sufficiently alleged that Icon dominated Tenant with respect to the transaction attacked, disregarding corporate formalities and intermingling funds by transferring all of Tenant’s revenue to itself each day.” 13 The Court also found that Landlord “sufficiently alleged that Icon’s domination of Tenant was used to commit a wrong against it — i.e., that Icon transferred all of Tenant’s revenue to itself each day, rendering Tenant unable to pay rent and then intentionally declining to use that revenue to pay rent on Tenant’s behalf.” 14 The Court said that “ t not dispositive that centralized cash management systems commonplace or that the subject system was already in existence prior to the rent nonpayment scheme, as even if the system was not itself fraudulent, plaintiff alleged that Icon took advantage of it to perpetuate a fraud.” 15 The Court held that the “alter ego/veil-piercing claims against the HPS defendants were properly dismissed.” 16 As with the alter ego/veil-piercing claims against the Icon defendants, the Court dismissed the causes of action seeking such relief as “there is no independent cause of action for veil-piercing.” 17 Moreover, held the Court, “plaintiff’s allegations of domination and control by the HPS defendants conclusory and based on information and belief.” 18 The Court further held that the “fraudulent conveyance claim against Icon was correctly sustained.” 19 The Court found that “ laintiff sufficiently alleged that Tenant did not receive fair consideration for transferring its total revenue to Icon each day, establishing a constructive fraudulent conveyance.” 20 The Court noted that “ hile Icon was supposed to provide management and administrative services in exchange for these transfers, including paying Tenant’s bills, plaintiff alleged that Icon stopped paying Tenant’s rent.” 21 “Plaintiff also sufficiently alleged badges of fraud,” said the Court, “raising an inference of actual intent to defraud, establishing an actual fraudulent conveyance.” 22 In this regard, explained the Court, “ laintiff alleged that the transfers were made to an insider (Icon), were concealed from plaintiff, were of substantially all of Tenant’s assets, were made without receiving reasonably equivalent value in exchange, and rendered Tenant insolvent.” 23 Finally, the Court held that the fraudulent conveyance claim against the HPS defendants was correctly dismissed. 24 The Court found that “Plaintiff’s allegations that Icon was controlled by HPS and that monies collected by Icon from Tenant were subsequently transferred to the HPS defendants conclusory and entirely made upon information and belief, and contradicted by the very affidavits plaintiff relie on.” 25 The Court also found that the “liens made by HPS to Icon and Tenant (which were filed several months after the alleged fraudulent scheme began) not, in and of themselves, evidence of control or of any subsequent transfer.” 26 Footnotes Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013) (citing ABN AMRO Bank, N.V. v. MBIA Inc. , 17 N.Y.3d 208, 229 (2011)). Id. The doctrine of piercing the corporate veil applies equally to limited liability companies. See Retropolis, Inc. v. 14th St. Dev. LLC , 17 A.D.3d 209, 210 (1st Dept. 2005). Tap Holdings , 109 A.D.3d at 174 (quoting TNS Holdings v. MKI Sec. Corp. , 243 A.D.2d 297, 300 (1st Dept. 1997), rev’d on other grounds , 92 N.Y.2d 335 (1998)). Id. Baby Phat Holding Co., LLC v. Kellwood Co. , 123 A.D.3d 405, 407-408 (1st Dept. 2014) (citations omitted); see also Grammas v. Lockwood Assoc., LLC , 95 A.D.3d 1073, 1075-1076 (2d Dept 2012). Id. See Saivest Empreendimentos Imobiliarios E. Participacoes, Ltda v. Elman Invs., Inc. , 117 A.D.3d 447, 450 (1st Dept. 2014); accord Andejo Corp. v. South St. Seaport Ltd. P’ship , 40 A.D.3d 407, 407 (1st Dept. 2007) (a plaintiff seeking to pierce the corporate veil must “allege particularized facts to warrant piercing the corporate veil”); Albstein v. Elany Contr. Corp. , 30 A.D.3d 210, 210 (1st Dept. 2006), lv. denied , 7 N.Y.3d 712 (2006) (conclusory allegations that a corporation is undercapitalized and functions as the alter ego of the owner are insufficient to pierce the corporate veil). Quoting Baby Phat Holding , 123 A.D.3d at 407. James Gadsden and Alan Kolod, Supplementary Practice Commentaries, McKinney’s Debtor and Creditor Law § 273. Quoting Federal Deposit Ins. Corp. v. Porco , 75 N.Y.2d 840, 842 (1990). Slip Op. at *1 (citing Tap Holdings , 109 A.D.3d at 174). Id. (citation omitted). Id. (citation omitted). Id. (citation omitted). Id. at *3. Id. Id. (citing 501 Fifth Ave. Co. LLC v. Alvona LLC , 110 A.D.3d 494, 494 (1st Dept. 2013)). Id. at *2. Id. (citing DCL § 273(a)(2)). Id. (citation omitted). Id. (citing (DCL § 273(a)(1), (b)). Id. (citation omitted). Id. at *3. Id. (citations omitted). Id. 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.

By: Jeffrey M. Haber In prior articles, this Blog examined CPLR § 3102, the statutory provision that permits pre-action disclosure. See here and here . We do so again in connection with our examination of the Matter of Khorassani v. Financial Industry Regulatory Authority , 2024 N.Y. Slip Op. 00354 (1st Dept. Jan. 25, 2024) ( here ). CPLR § 3102(c) provides that “ efore 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.” Pre-action disclosure can be used “to enable the plaintiff to frame a complaint,” “to preserve evidence for a forthcoming lawsuit,” and to “ascertain[ ] the identities of prospective defendants.” Pre-action disclosure may not, however, be used to ascertain whether a prospective plaintiff has a cause of action worth pursuing. In other words, “ re-action discovery is not permissible as a fishing expedition to ascertain whether a cause of action exists.” Accordingly, a petition for pre-action discovery will only be granted when the petitioner demonstrates that he/she has a meritorious cause of action and that the information sought is material and necessary to the actionable wrong.  Finally, petitions for pre-action disclosure should be filed in the venue that will adjudicate the matter.  Matter of Khorassani v. Financial Industry Regulatory Authority In June 2021, Torchlight Energy Resources (“Torchlight Energy”) merged with, and became, 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 the holders of Torchlight Energy common stock 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 Energy shares prior to the merger. In October 2021, the MMTLP shares were listed on the Over-The-Counter 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 the assets of Torchlight Energy 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. After four amendments, Next Bridge’s Registration Statement was approved by the SEC in November 2022. 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 by unknown and unidentified brokers to settle their short positions. As a result, Petitioner claimed that he was harmed, in addition to the Company’s other retail investors. 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 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 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 Appellate Division, First Department affirmed. Focusing on whether the discovery sought was material and necessary, the Court held that it was not since Petitioner “admit that he not able to set forth the particulars of the illegal trading by any specific broker and that he not know the times, dates and particulars of the alleged illegal trading activity.”  Moreover, said the Court, even if “the data in question” was “relevant,” Petitioner’s allegations were “conclusory” and fell “far short of the showing necessary to obtain pre-action disclosure.” In other words, Petitioner failed to state a meritorious cause of action for fraud.  Footnotes Bumpus v. New York City Transit Auth. , 66 A.D.3d 26 (2d Dept. 2009); see also Stewart v. New York City Transit Auth. , 112 A.D.2d 939 (2d Dept. 1985). Uddin v. New York City Transit Auth. , 27 A.D.3d 265 (1st Dept. 2006). See also Matter of Gleich v. Kissinger , 111 A.D.2d 130, 131 (1st Dept. 1985). Bishop v. Stevenson Commons Assocs. , 74 A.D.3d 640 (1st Dept. 2010), lv. denied , 16 N.Y.3d 702 (2011) (quoting Liberty Imports v. Bourguet , 146 A.D.2d 535 (1st Dept. 1989)). Holzman v. Manhattan & Bronx Surface Transit Operating Auth. , 271 A.D.2d 346, 347 (1st Dept. 2000); see also Thomas v. MasterCard Advisors, LLC , 74 A.D.3d 464 (1st Dept. 2010). See Perez v. NY Presbyterian Hosp. , 11 Misc. 3d 722 (Civ. Ct., N.Y. County 2006); Estate of Matter of Wallace , 239 A.D.2d 14 (3d Dept. 1998). Blue Sheets (known as Electronic Blue Sheets) are files that are maintained by FINRA. Blue Sheets contain both trading and account holder information. See Financial Industry Regulatory Authority, Electronic Blue Sheets (EBS), https://www.finra.org/filingreporting/electronic-blue-sheets-ebs. Slip Op. at *1. Id. (citing Matter of GTV Media Grp., Inc. v. Confidential Global Investigations , 205 A.D.3d 539, 539-540 (1st Dept. 2022)). 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.

By Jonathan H. Freiberger In order to protect homeowners, home improvement contractors are frequently required by municipalities to be licensed.  Unlicensed home improvement contractors are precluded from collecting payments due from homeowners.  Brightside Home Improvements, Inc. v. Northeast Home Improvement Services , 208 A.D.3d 446, 449 (2 nd Dep’t 2022).  This BLOG has discussed such issues < here =">here"> and < here =">here"> .  Along these lines, CPLR § 3015(e) requires that causes of action against a consumer arising out of work performed by a plaintiff whose business requires licensure by state or local authorities for the performance of such work, must allege in its complaint that, inter alia , it “was duly licensed at the time of services rendered” or the cause of action will be subject to dismissal. The purpose of such licensing legislation was previously described in this BLOG when we noted that in Millington v. Rapoport , 98 A.D.2d 765 (2 nd Dep’t 1983), in reversing the court below and dismissing plaintiff’s complaint which sought to foreclose a mechanic’s lien, the Court stated: Since the purpose of is to protect the homeowner against abuses and fraudulent practices by persons engaged in the home improvement business, it is well established that the lack of a license bars recovery in either contract or quantum meruit . Since strict compliance with the licensing statute is required, recovery is barred regardless of whether the work was performed satisfactorily or whether the failure to obtain a license was willful. The fact that the homeowner was aware of the absence of a license or even that the homeowner planned to take advantage of its absence creates no exception to the statutory requirement . Our prior BLOG articles addressed situations where the homes being improved were owned and occupied by individuals.  On January 25, 2024, the Appellate Division, First Department, decided KSP Construction, LLC v. LV Property Two, LLC , in which the owners of the residential property being improved were LLCs.  The First Department was called on to determine whether a business entity could “avail itself of the protections of the New York City home improvement contractor's license requirement.”  To keep you off the edge of your seats, the Court answered the question in the affirmative. The facts of KSP , which are abridged for editorial purposes, go something like this.  Plaintiff/contractor commenced action to recover damages for work it performed renovating a townhouse in Manhattan owned by several LLCs.  Defendants/owners moved to dismiss the complaint because plaintiff/contractor did not have the requisite license from the New York City Department of Consumer Affairs and the motion court granted the motion.  In an amended complaint, the contractor added an allegation that it was “not required to possess a valid home improvement contractor's license at the time it performed the renovation work because the project was commercial in nature, and because defendant owners are business entities that therefore cannot reside in the townhouse.”  Both parties moved for summary judgment on the amended complaint.  To support their motion, defendants/owners submitted an affidavit from their manager in which he averred that, inter alia : the property was going to be used as his personal residence after the completion of the extensive renovations; the certificate of occupancy for the property indicates that it is “residential”; the deed for the property shows a transfer to defendants; and, the contractor was terminated for cause.  The motion court granted summary judgment to defendants/owners, concluding that the licensing requirement for home improvement contractors was applicable to business entities, and denied the motion of plaintiff/contractor. The First Department affirmed.  New York’s Administrative Code relating to home improvement contractors (the “Code”) provides that “ o person shall solicit, canvass, sell, perform or obtain a home improvement contract as a contractor from an owner without a license therefor.”  Code § 20-387(a) .  The Court noted that the articulated purpose of the licensing provisions of the Code is to “‘safeguard and protect … homeowner against abuses and fraudulent practices.’”  (Quoting Code § 20-385 .)  The Court also recognized that the licensing requirement of the Code is not a “ministerial act” and requires “strict compliance”, “with the failure to comply barring recovery regardless of whether the work performed was satisfactory, whether the failure to obtain the license was willful or, even, whether the homeowner knew of the lack of a license and planned to take advantage of its absence.”  (Citations and internal quotation marks omitted.)  The Court found that there was no dispute that plaintiff was a contractor without a license and, therefore, the only question was whether defendants were “‘owners’ within the meaning of Administrative Code § 20-387(a), and, if so, whether the agreement between the parties was a ‘home improvement contract’” as defined in Code § 20-386(6) .  The Court posited that if “the answer to both of those questions is yes, then plaintiff was required to have a home improvement contractor's license to recover for the work; if the answer to either question is no, then plaintiff did not need a license.”  (Footnote omitted.)   While it is “tempting” to assume that an “‘owner’ must be an individual,” the Court said, “the City Council expressly defined the term ‘persons’ as it is used in the Home Improvement Business subchapter to mean ‘an individual, firm, company, partnership or corporation, trade group or association (… Code § 20-386<1> ).’"  (Footnote omitted.)  The Court concluded that defendants were “persons” under the Code and “owners” under Code § 20-386(4) .  Further the Court determined that the plaintiff and defendants were parties to an oral “home improvement contract,” which is expressly permitted under the Code. Code § 20-386(6)   Finally, the Court determined that plaintiff’s work constituted a “home improvement” as defined by the Code.  Code § 20-386(2) .  Accordingly, the Court concluded that the motion court “correctly granted defendant owners’ cross-motion for summary judgment.” 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 As readers of this Blog know, we have written about the duplication doctrine on numerous occasions. E.g. , here , here , and here . Courts apply the doctrine when a plaintiff alleges a breach of contract claim and a fraud claim that arise from the same facts and circumstances. In that regard, a fraud claim will be deemed duplicative of a contract claim when the fraud claim arises from the same facts, seeks the same damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements. 1 Moreover, “ fraud-based claim duplicative of a breach of contract claim when the only fraud alleged is that the defendant was not sincere when it promised to perform under the contract.” 2 In Eastern Effects, Inc. v. 3911 Lemmon Ave. Assoc., LLC , 2024 N.Y. Slip Op. 00268 (1st Dept. Jan. 23, 2024) ( here ), the Appellate Division, First Department affirmed the dismissal of fraudulent inducement claim on the grounds that it was duplicative of the plaintiff’s breach of contract claim. Eastern Effects involved a commercial lease (“Lease”) for space in a building located in the Gowanus section of Brooklyn (“the Premises”). Eastern Effects, Inc. (“EEI”) is a film and television company that operated a soundstage under the Lease with Defendants 3911 Lemmon Avenue Associates LLC, Esbond Realty LLC, and Eponymous Gowanus LLC (collectively, the “Landlord”). Shortly after the tenancy began, the Environmental Protection Agency (“EPA”) designated the Gowanus Canal a Superfund Site. According to EEI, the Landlord believed that the designation would allow it to terminate the Premises’ below-market leases, like the one with EEI, and transform the Premises into a luxury high-rise apartment complex from which it could obtain significant profits.  The EPA gave the Landlord and other property owners a choice between (i) allowing the Gowanus Canal Environmental Remediation Trust #2 (the “Trust”) to perform the necessary remediation work, or (ii) performing the work themselves. EEI claimed that only the Landlord chose to perform the work.  EEI further claimed that the Landlord chose the second option so that it could remediate the contaminants that had eroded some of the Premises’ foundation and exploit the termination clause in the Lease that would enable it to evict EEI.  To permit the Landlord and the Trust to complete the work required by the EPA, the parties entered into a Settlement Agreement and Release, dated September 15, 2021 (the “Settlement Agreement”). Among other things, the Settlement Agreement provided that EEI would temporarily vacate the Premises and allow the Landlord to perform the work in exchange for compensation from the Trust and rent abatement from the Landlord. EEI alleged that, at the time of the negotiations, the Landlord made a series of material misrepresentations and omissions to induce it into entering the Settlement Agreement. EEI maintained that the Landlord concealed its plan to use the Settlement Agreement to orchestrate EEI’s eviction from the Premises.  According to EEI, soon after the work began, the Landlord claimed that the work had damaged the Premises and that it was terminating the Lease, causing the Trust to stop its business-interruption payments. EEI said that it incurred significant damages without a soundstage to service its film and television clients, and without the Trust’s payments. EEI filed a summons and complaint, asserting claims against the Landlord for declaratory judgment, specific performance of the Lease, specific performance of the Settlement Agreement, breach of the Lease, breach of the Settlement Agreement, unjust enrichment, and fraudulent inducement of the Settlement Agreement.  Thereafter, EEI amended its complaint. In its amended complaint, EEI asserted claims for breach of the Lease against Landlord, breach of the Settlement Agreement against the Trust (which EEI added as a defendant in the action), declaratory judgment against the Landlord based on the Landlord’s alleged breach of the Settlement Agreement, fraudulent inducement of the Settlement Agreement against the Landlord, and conversion against the Landlord.  The Landlord moved to dismiss all claims alleged in the amended complaint, except for EEI’s claim for breach of the Lease and Settlement Agreement. Soon thereafter, the Trust moved to dismiss the breach of contract claim asserted against it.  The motion court granted the Landlord’s motion to dismiss with respect to EEI’s cause of action for fraudulent inducement and its request for punitive damages against the Landlord and granted the Trust’s motion to dismiss EEI’s cause of action for breach of contract against it. On appeal, the First Department unanimously modified the motion court’s order to reinstate EEI’s breach of contract cause of action against the Trust, and otherwise affirmed the order. We examine the Court’s decision with respect to the fraudulent inducement cause of action. The First Department held that EEI’s fraudulent inducement claim was duplicative of its breach of contract claim against the Landlord. The Court explained that EEI “identifie no independent duty outside the contract to support a fraud claim.” 3 “The fraud claim,” said the Court,” was “based on alleged misrepresentations and omissions regarding the timing and performance of the work, plaintiff’s compensation for vacating the premises and lost business, landlord’s duty to make repairs, and the termination of the lease.” 4 The Court concluded that “ hese are all issues that are contemplated by the ettlement greement, the ease, or both, which can be relied upon to make plaintiff whole if it prevails on its breach of contract cause of action.” 5 Takeaway A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. What constitutes “a legal duty independent of a contract” is not a question easily answered. 6 In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. 7 The former will result in dismissal, while the latter will not. 8 The courts also look to the damages sought to ascertain if they are the same. 9 In Eastern Effects , Plaintiff could not demonstrate any difference between the duty to perform under the agreements at issue and the duty underlying the alleged misrepresentations and omissions. As a result, the Court found that Plaintiff merely alleged a breach of contract claim dressed up in the garb of a fraud cause of action. 10 Footnotes Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011). Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453 (1st Dept. 2008); see also Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 64-65 (1st Dept. 2017); HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 206 (1st Dept. 2012); Metropolitan Life Ins. Co. v. Noble Lowndes Intl. , 192 A.D.2d 83, 88 (1st Dept. 1993). Slip Op. at *1. Id. Id. Cronos Group , 156 A.D.3d at 56 (referring to the question as a “recurring” one). Id. at 63. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). Mosaic Caribe, Ltd. v. AllSettled Group, Inc. , 117 A.D.3d 421, 422-423 (1st Dept. 2014) (fraud claim was insufficient as “duplicative of the breach of contract claim” because it sought “the same damages as the breach of contract claim”). Songbird Jet Ltd., Inc. v. Amax Inc. , 581 F. Supp. 912, 924 (S.D.N.Y. 1984). 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.

By: Jeffrey M. Haber The objective of an auditor is to supervise the audit engagement, including supervising the work of engagement team members so that the work is performed as directed and supports the conclusions reached. 1 The engagement partner is responsible for the engagement and its performance. 2 Accordingly, the engagement partner is responsible for the supervision of the engagement team and for compliance with PCAOB standards, 3 including standards regarding using the work of specialists, other auditors, internal auditors, and others who are involved in testing controls. 4 The engagement partner and, as applicable, other engagement team members performing supervisory activities, should inform engagement team members of their responsibilities, including, among other things, the objectives of the procedures that they are to perform; the nature, timing, and extent of the procedures they are to perform; and matters that could affect the procedures to be performed or the evaluation of the results of those procedures, including relevant aspects of the company, its environment, and its internal control over financial reporting, and possible accounting and auditing issues. 5 Those in a supervisory role are also required to review the work of engagement team members to determine whether the work was performed and documented; the objectives of the procedures were achieved; and the results of the work support the conclusions reached. 6 In addition to supervision, an auditor is required to exercise due professional care in the planning and performance of an audit and preparation of the audit report. 7 Due professional care requires an auditor to exercise “professional skepticism,” which includes “a questioning mind and a critical assessment of audit evidence.” 8 Negligent conduct by an auditor violates the duty of due care. 9 The generally accepted method for engagement partners to document their supervision of an audit in compliance with PCAOB auditing standards, and their review of the work performed by engagement team members, is by signing and dating (or “signing off”) work papers when they perform or review work. Historically, sign offs occurred on hard copies of work papers but, in recent years, many audit firms moved to electronic sign offs. Whether a sign off occurs in hard copy or electronic form, it provides evidence of who performed or reviewed audit work and the date on which such work or review occurred. By signing off on work papers, an engagement partner documents his or her supervision of the audit. When conducting an audit, the auditor is required to provide a written record of the basis for the auditor’s conclusions. Audit documentation facilitates the planning, performance, and supervision of the audit engagement. 10 An auditor must prepare audit documentation in connection with each audit engagement conducted pursuant to PCAOB auditing standards. 11 The audit documentation should demonstrate, among other things, that the engagement complied with the standards of the PCAOB. 12 The foregoing accounting standards, among others, are the subject of an administrative and cease-and-desist proceeding brought by the Division of Enforcement of the Securities and Exchange Commission (“SEC”) against an engagement partner (“Respondent”) at a national accounting and advisory firm (the “Firm”) for allegedly violating PCAOB audit standards, including those related to supervision, audit documentation, and due professional care, in audits for which Respondent was the lead engagement partner. 13 According to the SEC’s Order ( here ), from 2012 through 2022, Respondent served as the engagement partner for at least 240 audits of public companies, including both operating companies and special purpose acquisition companies. For at least 204 of those audit engagements (or approximately 85%), Respondent allegedly failed to supervise the work of the engagement team as shown by, among other things, his purported failure to review the work of the engagement team and to document his review by the report release date. 14 Respondent also allegedly failed to assemble complete and final audit documentation within 45 days of the report release date for 126 (or approximately 53%) of the audit engagements. These failures, alleged the SEC, violated PCAOB auditing standards.  Further, in connection with the 2018 through 2020 audits of a public company, where Respondent served as the engagement partner, Respondent allegedly violated PCAOB auditing standards, including the exercise of due professional care. The SEC charged Respondent with engaging in improper professional conduct within the meaning of Section 4C(a)(2) of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the SEC’s Rules of Practice and causing the Firm’s violations of Rule 2-02(b)(1) of Regulation S-X. 15 Footnotes AS 1201.02. Id. at .03. The Public Company Accounting Oversight Board (“PCAOB”) was created as part of the Sarbanes-Oxley Act of 2002. The PCAOB oversees audits of public companies that are subject to the securities laws in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. The PCAOB established Auditing Standards for registered public accounting firms to follow in the preparation of audit reports for public companies, other issuers, and broker-dealers. AS 1201.03. Id. at .05. Id. AS 1015.01. Id. at .07. Id. at .03. AS 1215.02. AS 1215.04. Id. at .05.a. The administrative summary from which the description of the proceeding comes can be found here . The report release date is the date on which an audit firm grants permission to use its audit report in connection with the issuance of its client’s financial statements. It is important to remember that the Order is merely an allegation of wrongdoing. Nothing has been proven by the SEC and no findings have been made before a trier of fact. 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.

By Jonathan H. Freiberger Today’s BLOG article addresses the circumstances pursuant to which the buyer under a real estate sales contract is entitled to prejudgment statutory interest pursuant to CPLR 5001(a) on the return of its down payment upon seller’s breach of that contract. CPLR 5001(a) provides that “ nterest shall be recovered upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.”  The purpose of the “interest award is to compensate the wronged party for the loss of use of the money” that is the subject of the underlying claim.  CRP/EXTELL Parcel I, L.P. v. Cuomo , 124 A.D.3d 560, 561 (1 st Dep’t 2015), aff’d , 27 N.Y.3d 1034 (2016). Sometimes contracts contain “liquidated damages” provisions, which are designed to quantify, “‘the compensation which, the parties have agreed, should be paid in order to satisfy any loss or injury flowing from a breach of contract.’”  Seymour v. Hovnanian , 211 A.D.3d 549, 553 (1 st Dep’t 2022) ( quoting Truck Rent-A-Center, Inc. v. Puritan Farms 2 nd , Inc. , 41 N.Y.2d 420, 423-24 (1977).  [Eds. Note: this BLOG has addressed liquidated damages, inter alia , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  Liquidated damages provisions are ideal “‘in those situations where it would be difficult, if not actually impossible, to calculate the amount of actual damage.’”  Id . ( quoting Truck Rent ).  Such provisions will be sustained if they are not deemed to be a “penalty” ( JMD Holding Corp. v. Congress Financial Corp ., 4 N.Y.3d 373, 379 (2005)), but reflect a “reasonable estimate of actual damages” ( J.P. Morgan Securities Inc. v. Vigilant Ins. Co. , 37 N.Y.3d 552, 563 (2021)).   On January 16, 2024, the Appellate Division, First Department, decided IHG Harlem I LLC v. 406 Manhattan LLC .  IHG involved three “largely identical” real estate contracts for the purchase/sale of real property.  At the time of signing of the contracts, the plaintiff/purchaser delivered a down payment exceeding $600,000, which, pursuant to the contracts, were to be deposited in the IOLA account of seller’s attorney.  In a prior appeal, the First Department “held that ‘the contracts provided that if defendants refused or failed to convey the properties, 'shall elect as its sole and exclusive remedy' either termination of the contract and the return of its deposits or enforcement of obligation to convey the property by seeking specific performance. As has elected not to seek specific performance, its sole remedy is the return of its deposits.’”  [Eds. Note: this BLOG has addressed specific performance of real estate contracts < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] Upon the motion court’s order granting summary judgment to buyer, the parties submitted competing proposed judgments – buyer’s proposed judgment providing for prejudgment interest on the amount held in escrow and seller’s providing for no such interest.  The motion court, denying buyer’s request for interest, signed seller’s proposed judgment, which directed that “the funds being held in escrow be returned to without interest.”  Since the contracts were breached in 2015, the accrued interest on $600,000 (at 9% ( see CPLR 5004)) is significant.  The motion court, in denying interest to the buyer, relied on J. D’Addario & Co., Inc. v. Embassy Indus., Inc. , 20 N.Y.3d 113 (2012), and Sommer v. General Bronze Corp. , 28 A.D.2d 981 (1 st Dep’t 1967), aff’d, 21 N.Y.2d 775 (1968), and stated: In J. D'Addario , the Court of Appeals affirmed the First Department's decision which vacated the trial court's award of statutory interest on the return of a deposit because the parties agreed the seller would have no further rights once the down payment was paid as liquidated damages and the contract required the deposit be held in an interest-bearing account. Meanwhile, in Sommer , the First Department explicitly held that where a contract of sale limited liability to the amount of the down payment, money damages equivalent to the amount of the down payment or interests on that amount were not warranted . . . J. D'Addario and Sommer are squarely on point and since this court is bound to follow its precedent, the court will sign the judgment proposed by defendants which does not award plaintiff a money judgment. The IHG Court in modifying the motion court’s order to include prejudgment interest distinguished J. D' Addario & Co. and Sommer and agreed with buyer’s argument that the motion court “erred by employing too broad a reading” of those cases.  The IHG Court framed the issue for it to decide as “whether the parties' contract language specifying that purchaser's ‘sole remedy’ in the event of sellers' breach is the return of its downpayment constitutes a clear waiver of CPLR 5001 (a) as defined by the Court of Appeals in J. D' Addario & Co. … and requires denying the nonbreaching party statutory prejudgment interest.” In reaching its decision that buyer was entitled to interest, the First Department noted that CPLR 5001(a) provides that prejudgment interest “shall be recovered”.  This the Court concluded, demonstrates that the legislature intended the award of such interest to be a “duty, not discretion.”  (Citation and internal quotation marks omitted.)  The Court further noted that the “principle behind awarding statutory interest on amounts in escrow is not to punish the breaching party, but rather to compensate the wronged party for the loss of use of their money.”  (Citation omitted.)  The Court, however, recognized a few circumstances where the denial of an award of prejudgment interest would be appropriate – including where the parties to a contract agree to waive statutory interest in a manner that “clearly manifests their intent to do so comports with the requirements for waivers in other contexts.”  (Citations omitted.)  The IHG Court, unlike the J. D' Addario & Co. Court, found no such “clear manifestation” precluding an award of prejudgment interest to buyer.   As noted by the First Department in IHG, the Court of Appeals in J. D' Addario & Co. , based its decision to deny prejudgment interest pursuant to CPLR 5001(a) on a “cumulation of factors” that resulted in the conclusion that the parties waived the right to such prejudgment statutory interest.  J. D' Addario & Co. involved a real estate contract that was breached by the buyer.  The contract provided that the “sole remedy” upon breach involved a “liquidated sum” that, inter alia , “included compensation for the lost use of that money over time” and “explicitly waived all further rights and obligations.” The contracts in IHG designated buyer’s “sole and exclusive remedy the return of its downpayment limits damages to the liquidated sum of plaintiff's downpayment.”  However, the IHG Court noted that the mere “use of the term ‘liquidated damages’ neither precludes nor waives the application of CPLR 5001 (a).”  Where compensation for the time value of money – such as the inclusion of bank interest – is included as part of the agreed upon liquidated damages “an award of statutory interest would result in a windfall to the nonbreaching party.”  The IHG Court found that no such compensation is reflected in the parties’ contracts because the deposit was placed in an IOLA account and, therefore, the interest “that accrued on downpayment over seven years was paid to tate’s IOLA fund not to .” Thus, the Court concluded that “ n these carefully drafted agreements there are no express limitations on liability that suggest the parties here intended to vitiate CPLR 5001(a).”  Accordingly, the IHG Court’s award directed the return of the downpayment (in the amount of $626,250.00) plus “statutory prejudgment interest on its deposits at the rate of 9% from November 12, 2015 through November 16, 2022. 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 The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), enacted on July 21, 2010, amended the Securities Exchange Act by adding Section 21F-17, “Whistleblower Incentives and Protection.” The purpose of these provisions was to encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and confidentiality protections. To achieve this Congressional purpose, the Securities and Exchange Commission (the SEC” or the “Commission”) adopted Rule 21F-17, which provides in relevant part: “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.” Since its adoption, 1 the SEC has vigorously enforced Rule 21F-17. On January 16, 2024, the SEC announced ( here ) that it settled charges against J.P. Morgan Securities LLC (“JPMS”) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC. JPMS agreed to pay an $18 million civil penalty to settle the charges. According to the SEC, from 2020 through July 2023 (the “Relevant Period”), JPMS requested that certain clients sign a release (the “Release”) if the clients received a credit or settlement of over $1,000, regardless of whether JPMS admitted or denied any error or wrongdoing in connection with the credit or settlement. In addition, said the SEC, JPMS sometimes offered its clients an additional payment above and beyond the credit or payment calculated for the dispute. In at least one case, noted the SEC, this payment or credit was higher than the original credit or settlement. The SEC alleged that since 2020, at least 362 JPMS clients signed a release, receiving an amount ranging from approximately $1,000 to $165,000. Pursuant to the Release, the client released JPMS from liability and “promise not to sue or solicit others to institute any action or proceeding against arising out of events concerning the Account.” If the client breached the foregoing provision, said the SEC, then JPMS could “undertake whatever legal action deem appropriate to address the breach(s), including, but not limited to, injunctive relief, and monetary damages not to exceed the settlement amount.” According to the SEC, in a another section of the Release, the client agreed to keep the Release confidential and “not use or disclose (including but not limited to, media statements, social media, or otherwise) the allegations, facts, contentions, liability, damages, or other information relating in any way to the Account, including but not limited to, the existence or terms of this Agreement.” Notwithstanding, noted the SEC, the client and the client’s attorneys were permitted to respond “to any inquiry about settlement or its underlying facts by FINRA, the SEC, or any other government entity or self-regulatory organization, or as required by law.” Despite this statement, however, the Release prohibited clients from affirmatively reporting violations of the securities laws to the Commission, claimed the SEC. To settle the action, JPMS agreed to pay a civil penalty of $18 million. In doing so, JPMS neither admitted nor denied the findings, except as to the Commission’s jurisdiction over JPMS and the subject matter of the proceedings, which were admitted.  “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “But that’s exactly what we allege J.P. Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.” “Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference,” said Corey Schuster, Co-Chief of the Enforcement Division’s Asset Management Unit. “Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.” A copy of the cease-and-desist order can be found here . Footnote Rule 21F-17 became effective on August 12, 2011. 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.

By: Jeffrey M. Haber A common theme in commercial litigation is the assertion of a breach of contract claim and a fraudulent inducement claim. A plaintiff claiming a breach of contract must show (1) the existence of a contract; (2) the plaintiff’s performance under that agreement; (3) the defendant’s breach of its obligations; and (4) damages resulting from the breach. One of the provisions parties often include in their contract is a merger clause. A merger clause is a provision in which the parties declare their writing to be the complete and final agreement between themselves. Although it is common to find a merger clause in a contract, it is not necessary to include one for the agreement to be enforceable. A written agreement that is “complete, clear and unambiguous on its face be enforced according to the plain meaning of its terms.” To determine whether a contract without a merger clause is “complete, clear and unambiguous,” the courts look at the agreement in “light of surrounding circumstances” and determine whether other proposed oral contract terms are the type “which the parties would ordinarily be expected to embody in the writing.” If the other proposed terms are the type that would “ordinarily be expected” to have been included in the writing, their omission indicates that the writing is complete. As readers of this Blog know, where contract and fraud claims are asserted in the same complaint, more times than not, the fraud claim will be dismissed under the duplication of claims doctrine. Under this doctrine, “ cause of action to recover damages for fraud will not lie where the only fraud claimed arises from the breach of a contract.” “Mere unfulfilled promissory statements as to what will be done in the future are not actionable as fraud and the injured party’s remedy is to sue for breach of contract.” However, if the plaintiff alleges a misrepresentation of “present facts that collateral to the contract and served as an inducement to enter into the contract, a cause of action alleging fraudulent inducement is not duplicative of a breach of contract cause of action.” The foregoing principles were recently examined in Lentner v. Upstate Forestry & Development, LLC , 2023 N.Y. Slip Op. 06626 (4th Dept. Dec. 22, 2023) ( here ). Lentner involved the sale of timber rights on real property consisting of approximately 299 acres of property improved by a residence (the “Property”). The Property is owned by plaintiff, Joanne Lentner (“Lentner”). On February 24, 2015, Lentner and “Upstate Development” entered into a written Timber Sale Contract (the “Timber Sale Contract”), pursuant to which Lentner sold to Defendant, Upstate Forestry and Development LLC (“Upstate Forestry”), the rights to remove timber on the Property in exchange for an upfront cash payment of $15,500.00. The Timber Sale Contract was negotiated and signed by Defendant, David Isabell (“Isabell”), as authorized agent for Upstate Forestry, and/or Defendant, Charles Nowack (“Nowack”), a member of Upstate Forestry. During negotiations, Isabell proposed dividing the Property into three sections, each to be treated differently under the arrangement. That proposal was reflected in an aerial map that Isabell marked up to show the partition. Pursuant to the parties’ discussions, Lentner would be paid for the “lower” or southerly section of the Property. The “upper” or northern section of the Property was marked on the map by Isabell with x’s to show there was to be no logging on that parcel and would be addressed in a future contract. The “middle” section of the Property was to be logged on a per-tree basis and Plaintiff was to be paid 50% of the value of the timber set forth on sawmill tally sheets to be provided to Plaintiff. The aerial map was not annexed to the Timber Sale Contract. It was attached to another document at the time the parties entered the Timber Sale Contract. Nowak paid Plaintiffs the $15,500.00 in cash on May 27, 2015, after logging was underway. No other payments were made to Plaintiffs. Plaintiffs halted logging on the Property when they discovered the upper or northerly parcel was being logged. Plaintiffs subsequently commenced the action, claiming breach of contract in connection with the trees removed from the middle zone of the Property and not paid for, as well as the trees improperly removed from the northernmost zone. In addition to claiming breach of contract, Plaintiffs alleged that they were fraudulently induced to enter into the Timber Sale Contract. In particular, Plaintiffs alleged that Defendants falsely represented that they would not conduct any logging on the Northern most section of the Property delineated by the parties on the aerial map and that they would compensate Plaintiffs on a per log basis for any timber removed from the middle section of the Property as delineated on the aerial map annotated by the parties. Following discovery, Defendants moved for summary judgment to dismiss the complaint. The motion court denied the motion, holding that the Timber Sale Contract was not integrated and that there were “issues of fact as to the terms of the contract.” The motion court noted that the agreement “lack a sufficient description of the property to be logged,” because “ he only potential description of where logging was to occur is . . . listed as the 911 or mailing address of the seller/owner.” The motion court further noted that “ here no acreage, tax map reference, or any other identifying information” for the Property. As a result, the motion court held, that Plaintiffs’ “testimony as to the area to be logged not necessarily contradictory to the terms” of the Timber Sale Contract “which nowhere clearly states the entire … property is to be logged for $15,500, which would presumably include the area of the residence” in the northern section of the Property. Regarding the fraudulent inducement claim, the motion court held that Defendants “made a number of misrepresentations” to induce Plaintiffs to enter into the agreement, “which include promising not to log on the Northernmost section of the property and paying … on a per log basis for any timber removed from the middle section of the property.” On appeal, the Fourth Department modified and affirmed the motion court’s order. The Court held that “Defendants met their initial burden of establishing that the timber sale contract a complete written instrument,” and, as such, “plaintiffs failed to raise a triable issue of fact in opposition.” Defendants argued that the Timber Sale Contract was a complete contract that set forth the salient terms of the parties’ agreement. The Court agreed, finding that the “contract sets forth the parties, the address of the property, the contract period, the payment terms, and a description of the items sold.” Accordingly, the Court held that “ nasmuch as the contract constituted a complete, integrated agreement, plaintiffs may not rely on an alleged oral agreement to permit logging on the southernmost section of the property, permit logging on the middle section of the property only upon additional payment, and prohibit logging on the northernmost section of the property, to vary the terms of the contract.” In so concluding, the Court emphasized that “one would expect the contract to embody any such restrictions on logging, and ‘ uch a collateral agreement cannot be separately enforced.’” The Court also held that the motion court properly denied the motion with regard to the fraudulent inducement claim against Upstate Forestry. The Court “reject defendants’ contention that the fraud cause of action was merely duplicative of the cause of action for breach of contract.” The Court found that Upstate Forestry’s “representations … to secure permission to log timber on the property, i.e., representations regarding the northernmost and middle sections of the property,” were different than the breach of contract claim. “ hose representations,” said the Court, “were false and known by the agents to be false at the time they were made inasmuch as Upstate intended to log the entire property and not adequately compensate plaintiffs, and that plaintiffs relied upon those fraudulent misrepresentations to their detriment.” Takeaway In Lentner , the Court is making a distinction between the terms of the Timber Sale Contract – $15,500.00 for the right to log timber on the Property – and the partition of the Property for logging purposes that was delineated on the aerial map associated with the Timber Sale Contract. The distinction makes sense: the parties agreed that Upstate Forestry would make an upfront cash payment in exchange for the right to log timber on the Property for a defined period. The partition of the Property for logging timber was not included in the one-page agreement. If the parties intended to include the differentiated zones for logging, then they would have included it in the agreement itself. There was nothing in the Timber Sale Contract that indicated the parties intended to include the delineations outlined in the associated map. Since the delineations in the associated map were not part of the Timber Sales Contract, then the fraudulent inducement claim, which was based on those delineations, could not be duplicative of the breach of contract claim.   Davis v. Zeh , 200 A.D.3d 1275, 1278 (3d Dept. 2021). Greenfield v. Philles Records , 98 N.Y.2d 562, 569 (2002). Braten v. Bankers Trust Co. , 60 N.Y.2d 155, 162 (1983) (internal quotation marks and citation omitted); see also Manufacturers Hanover Trust Co. v. Margolis , 115 A.D.2d 406, 407 (1st Dept. 1985). Braten , 60 N.Y.2d at 162 (citing Mitchill v. Lath , 247 N.Y. 377, 380–381 (1928)). Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012); see also Selinger Enters., Inc. v. Cassuto , 50 A.D.3d 766, 768 (2d Dept. 2008); Tiffany at Westbury Condominium v. Marelli Dev. Corp. , 40 A.D.3d 1073, 1076 (2d Dept. 2007). Brown v. Lockwood , 76 A.D.2d 721, 731 (2d Dept. 1980) (citation omitted). Did-it.com, LLC v. Halo Group, Inc. , 174 A.D.3d 682, 683 (2d Dept. 2019). Slip Op. at *2 (citing Alvarez v. Prospect Hosp. , 68 N.Y.2d 320, 324 (1986)). Id. (citing Battista v. Radesi , 112 A.D.2d 42, 42 (4th Dept. 1985)). Id. Id. (quoting Braten , 60 N.Y.2d at 162). Id. Id. Id. Id. ____________________________ 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.

By Jonathan H. Freiberger Today’s Blog relates to extensions of time to serve a defendant under CPLR 306-b, a topic previously addressed by this Blog < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> .  The background discussion in today’s Blog was taken from the linked prior Blogs. Under the present “commencement by filing” system, an action (or proceeding) (collectively, an “Action”) is commenced by filing (CPLR 304(a)) the initiatory paper(s) with the “clerk of the court in the county in which the ction … is brought or any other person designated by the clerk of the court for that purpose (CPLR 304(c)).  Once an Action is commenced, the plaintiff (or petitioner) (collectively, a “Plaintiff”) must effectuate service of process pursuant to the parameters of CPLR 306-b, which provides: Service of the summons and complaint, summons with notice, third-party summons and complaint, or petition with a notice of petition or order to show cause shall be made within one hundred twenty days after the commencement of the ction, provided that in an ction ….  If service is not made upon a defendant within the time provided in this section, the court, upon motion, shall dismiss the action without prejudice as to that defendant, or upon good cause shown or in the interest of justice, extend the time for service. Among other things, CPLR 306-b provides that, in general, service of process on a defendant (or respondent) (collectively, a “Defendant”) must be effectuated within 120 days of the commencement of an Action.  The Court of Appeals in Leader v. Maroney, Ponzini & Spencer , 97 N.Y.2d 95 (2001), explained the history of CPLR 306-b.  According to Leader , “ s originally enacted in 1992, CPLR 306-b transformed New York from a commencement-by-service to a commencement-by-filing jurisdiction.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Plaintiffs were “considerabl benefit ” by “making the act of filing the point at which a claim is interposed for Statute of Limitations purposes.”  Leader , 97 N.Y.2d at 100 (citation omitted).  Under the old statute, a Plaintiff was afforded 120 days to effectuate service of process and the Action would be “deemed dismissed” if service was not timely made.  Leader , 97 N.Y.2d at 100 (citation omitted).  “The plaintiff was free to commence a new ction and serve process within a second 120-day period from the date of the automatic dismissal, even if the Statute of Limitations had expired.”  Leader , 97 N.Y.2d at 100 (citation omitted).  For a variety of reasons, the “deemed dismissed” provisions of the old statute were considered “unnecessarily harsh” and were amended to provide that if service of process is not made within the 120-day period after the commencement of the Action, an unserved Defendant can move for the dismissal, without prejudice, or the court could extend Plaintiff’s time to serve a Defendant “upon good cause shown or in the interest of justice.”  Leader , 97 N.Y.2d at 101 (citing CPLR 306-b). The Leader Court, in a trio of cases, was called upon to determine the circumstances under which a Plaintiff would be permitted to avail itself of the extension provisions of CPLR 306-b.  Importantly, the Leader Court made clear that, under CPLR 306-b, “good cause” and “the interest of justice” are “two separate standards by which to measure an application for an extension of time to serve” a Defendant if service is not made within 120 days of the commencement of an Action.    See also State of New York Mortgage Agency v. Braun , 182 A.D.3d 63, 66 (2 nd Dep’t 2020).  “Good cause” and “the interest of justice” standards are discussed < HERE =">HERE"> .  “Good cause” is established by demonstrating “reasonable diligence in attempting service.”  Wells Fargo Bank, NA v. Barrella , 166 A.D.3d 711, 713 (2 nd Dep’t 2018) (citation and internal quotation marks omitted).  Absent “good cause” the court must consider the “interest of justice” standard, which requires a careful judicial analysis of the factual settings of the case and a balancing of the competing interests presented by the parties.  Id . (citation and internal quotation marks omitted).  Under the “interest of justice” standard, as opposed to “good cause”, “diligent efforts at service” need not be established “as a threshold matter”; although it may be considered “along with any other relevant factor.”  Id . (citation and internal quotation marks omitted).  Other relevant factors may include the “expiration of the statute of limitations, the potentially meritorious nature of the cause of action, the length of delay in service, the promptness of a plaintiff's request for the extension of time, and prejudice to defendant.”  Id . (citation internal quotation marks and brackets omitted).  Relying on Leader, the Barrella Court reiterated that “ here the plaintiff's delay in serving a defendant is protracted, and the defendant has no notice of the action for a protracted period of time, an inference of substantial prejudice arises.  Id . at 714 (citations omitted). On January 11, 2024, the Appellate Division, First Department, decided 1400 Ardel Const’n & Design Group, Inc. v. VBG 990 AOA, LLC , a case addressing the “interest of justice” standard.    Plaintiff in Ardel was a construction contractor and defendant VBG is the owner of property that Ardel, pursuant to a contract, was to redevelop and renovate.  Ardel claimed that VBG breached the agreement (including failure to pay for some of Ardel’s work).  Ardel filed a mechanics’ lien, which was ultimately discharged by a “Discharge of Mechanic’s Lien Bond” issued by defendant Atlantic Specialty Insurance.  [EDS. Note: this BLOG addressed mechanic’s lien discharge bonds < HERE =">HERE"> .]  Ardel commenced action against VBG for, inter alia , breach of contract and against Atlantic to foreclose its lien on the bond.   Ardel did not effectuate service of process on Atlantic and VBG moved to dismiss the complaint.  After the motion to dismiss was decided, Ardel moved for an extension of time to serve Atlantic pursuant to, inter alia , CPLR 306-b.  The motion court denied the motion and plaintiff appealed.  The First Department reversed and stated: Plaintiff's motion for an extension of time to serve Atlantic with the summons and complaint should have been granted because plaintiff established the existence of several relevant factors weighing in favor of the extension.  The eight-month delay in service that would have resulted from the grant of the extension was not so protracted to allow for an inference that Atlantic suffered prejudice from the delay.  Moreover, although there is no record evidence that Atlantic was given actual or constructive notice of the claim, plaintiff aptly notes that any claim of prejudice is undercut by the fact that Atlantic, who posted a bond for the release of the mechanic's lien, knew there was a high likelihood of litigation involving it as defendant VBG's surety and had ample opportunity to investigate the claim.  The record further establishes the potential merits of the lien foreclosure claim, and because the statute of limitations has expired, the denial of the extension would bar plaintiff from litigating the otherwise timely filed claim against Atlantic.  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 In many of the fraud cases that we examine, the plaintiff alleges that the defendant made an affirmative misrepresentation of fact upon which he/she relied. As we have often noted, fraud does not, however, always concern an affirmative statement. Sometimes a person can perpetrate a fraud through the omission of a material fact.  Where fraud by omission is claimed, the plaintiff must allege that the defendant had a duty to disclose the omitted fact. A duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter; 1 (2) there is a fiduciary relationship between the plaintiff and defendant; 2 or (3) the defendant possesses “special facts” about the matter not known by the plaintiff. 3 A fraud by omission claim is not sustainable where information allegedly withheld is ascertainable through publicly available sources. 4  Nor is an omission case sustainable where the omitted information could have been discovered by the plaintiff through the exercise of ordinary intelligence. 5 Both of the foregoing circumstances will negate application of the special facts doctrine. Moreover, if the two-prong test is satisfied, where the party with superior knowledge of essential facts withholds or conceals such facts, the transaction at issue must be “inherently unfair” without such disclosure for the omission to be actionable. 6 Finally, as in a fraud by misrepresentation case, the plaintiff must satisfy the other elements of the claim – namely, intent to defraud, justifiable reliance and injury. And the plaintiff must do so with particularity. 7 e.g.,="e.g.," here,  here=">here" and="and" >here.=">here."> The foregoing principles were examined by the Appellate Division, First Department in Supply Co., LLC v. Hardy Way, LLC , 2024 N.Y. Slip Op. 00058 (1st Dept. Jan. 9, 2024) ( here ). Supply arose from a license agreement between Supply Co., LLC (“Supply”) and Hardy Way, LLC (“Hardy”).  The parties entered into the agreement in November 2014, pursuant to which Hardy permitted Supply to manufacture, warehouse, distribute, bill and collect payment for Ed Hardy brand products (“License Agreement”). Under the License Agreement, Supply was required to pay Hardy royalty fees amounting to 20% of its “Gross Wholesale Sales.” Supply was entitled to take certain deductions relating to markups, chargebacks, or returns of Ed Hardy products when calculating its Gross Wholesale Sales. Supply was also entitled to apply a maximum deduction of 18% of its Gross Wholesale Sales for any annual period, and Supply was required to make a minimum royalty payment of $1,500,000.00. Kevin Yap (“Yap”), Supply’s principal, guaranteed Supply’s performance under the License Agreement (the “Guarantee”). In the Guarantee, Yap agreed to pay all sums due to Hardy in the event of Supply’s default. Under the License Agreement, Supply was required to “document and accept orders” for Ed Hardy products from the list of “approved” retailers set forth in a schedule attached to the agreement. Nonparty Rainbow Apparel Distribution Center Corp. (“Rainbow”) was one of the pre-approved retailers on the Schedule. Yap testified that Iconix—the brand management company that created Hardy to manage the Ed Hardy trademarks—arranged for the sale of Ed Hardy products to Rainbow at least as early as June or July 2014. Rainbow agreed to purchase, in total, over $4.5 million worth of Ed Hardy products. Iconix—not Supply—placed the orders. Under the License Agreement, the Iconix parties were “solely responsible” for placing sales of the Ed Hardy products. From January to March 2015, Supply fulfilled Rainbow’s orders. Supply also entered into a markup agreement (“Markup Agreement”) with Rainbow in November 2014 in connection with the sale of Ed Hardy products to Rainbow. Neither Hardy nor Iconix were parties to the Markup Agreement. Under the Markup Agreement, Supply guaranteed Rainbow a minimum maintained markup percentage of 50% on sales of Ed Hardy merchandise. Supply was also required to reimburse Rainbow for Rainbow’s losses – Rainbow had the right to markdown any Ed Hardy products it received from Supply without Supply’s approval, and Supply was obligated to reimburse Rainbow “the difference of what would have needed in order to achieve the Minimum Maintained Markup percentage target.” Subsequently, Rainbow submitted a $3,300,000.00 markup reimbursement request to Supply. After Hardy and Iconix declined to reimburse Supply for Rainbow’s reimbursement request, Supply refused to pay Hardy the $1.5 million minimum royalty amount under the License Agreement. Thereafter, Supply brought suit. Supply asserted causes of action for breach of contract, fraud in the inducement, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. The motion court dismissed all of Supply’s causes of action except for its fraud in the inducement claim. With regard to that claim, Supply alleged that Hardy and Iconix fraudulently induced it to enter into the License Agreement by omitting material nonpublic information regarding the Ed Hardy trademarks’ lack of value. Hardy and Iconix answered the complaint and asserted a counterclaim for breach of the License Agreement based on Supply’s failure to tender the $1.5 million minimum royalty fee. Hardy commenced another action against Yap for breach of the Guarantee. Yap answered the complaint and asserted counterclaims for declaratory judgment based on Hardy and Iconix’s alleged “deceptive misrepresentations and/or omissions,” which were made “in order to induce Supply Co. and Yap to ... enter into the License Agreement.” Following discovery, the parties in each of the actions moved for summary judgment. The motion court granted defendants’ motions, dismissed Plaintiff’s complaint, and awarded Hardy attorneys’ fees. The motion court also granted the motion with regard to Hardy’s counterclaim for breach of contract and granted in part Hardy’s motion for attorneys' fees. On appeal, the Appellate Division, First Department unanimously affirmed. “The issue on appeal,” said the Court, was “narrow — namely, application of the special facts doctrine in connection with plaintiff’s claim that it was fraudulently induced to enter into a license agreement with Hardy.” 8 The Court held that Plaintiff met the “the threshold two-prong test for the special facts doctrine.” 9 In that regard, the Court found that defendants failed to disclose ( i.e. , omitted) “the criminal behavior of nonparties Neil Cole (the former chief executive officer of defendant Iconix Brand Group, Inc.) and Seth Horowitz (Iconix’s former chief operating and financial officer) and that such information was peculiarly within defendants’ knowledge.” 10 “ laintiff could not have discovered this information through the exercise of ordinary diligence,” said the Court. 11 “However,” concluded the Court, “plaintiff did not show that this was an essential fact, or that defendants’ superior knowledge of this fact rendered the license agreement inherently unfair.” 12 “In addition,” held the Court, “plaintiff did not establish all the elements of fraudulent inducement of contract.” 13 In this regard, the Court was referring to the causation element.  “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” 14 Transaction causation is often the easier of the two prongs to satisfy, while loss causation is typically more difficult. As noted by the First Department in Laub : “ egardless of whether plaintiff could establish that he was induced by the alleged misrepresentations to follow recommendations on purchases of equities, plaintiff’s claims must fail because he has not alleged or produced any evidence that those misrepresentations directly and proximately caused his investment losses.” 15 In Supply , the Court found that Yap’s deposition testimony showed “that plaintiff was damaged because it entered into the license agreement with Hardy and at a minimum maintained a markup agreement with nonparty Rainbow Apparel Distribution Center Corp,” and not because of an omitted fact. 16 The Court also found that Yap’s “testimony further showed … that plaintiff entered into those contracts because Yap (1) placed orders with factories before he had agreements in place and (2) allegedly relied on an oral guarantee from Iconix that he would have zero losses.” 17 Takeaway Where a party alleges fraud (or fraudulent inducement) based on an omission of information, rather than an affirmative misrepresentation, a special relationship ( e.g. , a fiduciary relationship) is required to state a claim. However, in the absence of a special relationship, a party may still allege fraud based on an omission where there are special facts such that one party had superior knowledge of certain information, not readily available to the other party. In Supply , there was no fiduciary relationship between the parties, as the parties dealt with each other at arm’s length in a commercial transaction. The special facts doctrine was, however, unavailable to Supply because it could not show that the transactions at issue were inherently unfair, or that the omitted facts were essential to the transactions. With no duty to disclose, Supply could not withstand the challenge to its fraudulent inducement claim. Supply also demonstrates the importance of satisfying all the elements of a fraudulent inducement claim. As noted, the causation element proved to be the foil. Supply was unable to prove that the omitted facts caused its loss. Footnotes Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013). Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016). Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010). “The ‘special facts’ doctrine holds that ‘absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair.’” Greenman-Pedersen, Inc. v. Berryman & Henigar, Inc. , 130 A.D.3d 514, 516 (1st Dept. 2015), lv. denied , 29 N.Y.3d 913 (2017) (quoting, Pramer , 76 A.D.3d at 99). Northern Group Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc. , 135 A.D.3d 414 (1st Dept. 2016). Black v. Chittenden , 69 N.Y.2d 665, 669 (1986); Schumaker v. Mather , 133 N.Y. 590, 596 (1892). Jana L. v. West 129th St. Realty Corp. , 22 A.D.3d 274, 278 (1st Dept. 2005). CPLR § 3016(b). Slip Op. at *1. Id. Id. Id. (citing Jana L. , 22 A.D.3d at 278); and Solomon Capital, LLC v. Lion Biotechnologies, Inc. , 171 A.D.3d 467, 469 (1st Dept. 2019)). Id. (citing Jana L. , 22 A.D.3d at 277). Id. (citing Frank Crystal & Co., Inc. v. Dillmann , 84 A.D.3d 704, 704 (1st Dept. 2011)). Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Id. Slip Op. at *1. Id. 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.

By: Jeffrey M. Haber It is often said that a fiduciary owes the duties of care, loyalty and candor to the person with whom the fiduciary has a relationship. The duty of care requires the fiduciary to act as a reasonable and prudent person would act in a similar circumstance. The duty of loyalty requires the fiduciary to act in good faith and with the best interests of the person or entity with whom the fiduciary relationship exists. This means that the fiduciary must put the interests of the person or entity above his/her own personal interests. As one court observed: The reasons for the loyalty rule are evident. A man cannot serve two masters. He cannot fairly act for his interest and the interest of others in the same transaction. Consciously or unconsciously, he will favor one side or the other, and where placed in this position of temptation, there is always the danger that he will yield to the call of self-interest. The duty of candor requires the fiduciary to act with honesty. This means that the fiduciary must fully disclose information that may harm the person or entity that is owed the duty. In other words, the fiduciary cannot perpetrate a fraud on the person or entity with whom the fiduciary has a fiduciary relationship. here.=">here."> The duty of candor was at issue in Chan v. Havemeyer Holdings LLC , 2024 N.Y. Slip Op. 00020 (1st Dept. Jan. 4, 2024) ( here ). Chan involved the investment by plaintiffs in a real estate investment limited liability company. Plaintiffs are investors and minority members of Havemeyer Holdings LLC (“Havemeyer”), a real estate investment vehicle formed in 2016 for the purpose of developing a property located in Williamsburg, Brooklyn. Each of the plaintiffs – Dai Yu, Kai Cho Vincent Chan, and Allen Fu (collectively, the “Individual Plaintiffs”) – invested in the project at various times between 2016 and 2018, and Yuca Capital Partners LP (an entity controlled by Yu) in 2020. Plaintiffs were passive investors in the project, which was run by TC Havemeyer Manager LLC (“TC Havemeyer”) and Tavros Holdings LLC (“Tavros”) of which Nicholas Silvers (“Silvers”) was a principal. On February 27, 2020, Defendants sent an email solicitation to Plaintiffs offering an opportunity for them, as members of Havemeyer, to make a further investment in the project. Among other things, Defendants stated that refinancing was in process, by which Havemeyer was de-leveraging and de-risking its investment in the project, leading to a projected “sixty percent plus” rate of return (with a worst-case return of 47%) within twelve to fifteen months. On March 2, 2020, Plaintiffs spoke to Silvers about the opportunity set forth in the email. In response to their question as to the status of the refinancing, Silvers stated it was “already done”. Based on the content of the solicitation, the representation about the status of the refinancing, and Defendants’ answers to Plaintiffs’ questions, and after consulting with industry experts and real estate investors about the investment, Plaintiffs invested a total of $3.1 million in Havemeyer.   Within two months after their checks had cleared, Plaintiffs allegedly learned that the refinancing was not “done”. As a result, Plaintiffs demanded rescission of the transactions and the return of their money. Defendants refused to satisfy the demand. Plaintiffs commenced the action, asserting that their March 2020 investments were induced by a materially false statement about the refinancing. The complaint at issue contained seven counts: Count 1 – rescission based on fraud against all defendants; Count 2 – fraud against all defendants; Counts 3 and 4 – violations of the federal securities laws, which were dismissed by agreement; Count 5 – breach of fiduciary duty against TC Havemeyer); Count 6 – negligent misrepresentation by TC Havemeyer; and Count 7 – unjust enrichment against all Defendants. Defendants moved to dismiss. Relying on a no-reliance disclaimer in the subscription agreement, which Plaintiffs signed to make their investment, the motion court dismissed the fraud, rescission and negligent misrepresentation claims, while upholding plaintiffs’ claim for breach of fiduciary duty. The Appellate Division, First Department modified the motion court’s order to deny Defendants’ motion insofar as the Individual Plaintiffs are concerned, and to strike Plaintiffs’ demands for lost profits and punitive damages, and otherwise affirmed the motion court’s order. As an initial matter, the Court held that TC Havemeyer owed plaintiffs the fiduciary duty of candor and breached that duty by failing to provide “full disclosure about the refinancing opportunity.” In this regard, the Court explained that “TC Havemeyer’s interest in enabling Havemeyer to quickly and easily obtain funds from existing investors allegedly conflicted with the Individual Plaintiffs’ efforts to obtain complete and accurate information about the refinancing opportunity.” Notably, the Court held that the no-reliance clause (which can bar a claim for fraud) in the subscription agreement did not bar the Individual Plaintiffs’ breach of fiduciary duty claim. Under New York law, a disclaimer clause in a contract cannot defeat a claim of fraud if the defendant owes the plaintiff a fiduciary duty. Under such circumstances, the contract itself –including the specific disclaimer clause – would be voidable because “a fiduciary cannot by contract relieve itself of the fiduciary obligation of full disclosure by withholding the very information the beneficiary needs in order to make a reasoned judgment whether to agree to the proposed contract.” Thus, held the Court, the motion court “properly declined to dismiss the fifth cause of action with respect to the Individual Plaintiffs, who are the only plaintiffs alleging breach of fiduciary duty against TC Havemeyer.” “By contrast,” noted the Court, “TC Havemeyer did not owe a fiduciary duty to plaintiff Yuca Capital Partners LP, which, unlike the Individual Plaintiffs, was not a preexisting investor.” Without being a pre-existing investor, Yuca entered into the transaction at arm’s length. As such, the no-reliance clause applied to bar Yuca’s fraud claim: Because the plain language of section 4 says Yuca is relying solely on the Offering Materials, as a matter of law, Yuca could not have relied on defendant Nicholas Silvers’ statement that the refinancing was “already done”. Moreover, the Court held that there were hints of falsity ( e.g. , the conflicting statements about the refinancing) that required Yuca to “have exercised a heightened degree of diligence.” Accordingly, the Court held that “Yuca’s claims for fraud and rescission based upon fraud … fail.” The Court also rejected Defendants’ arguments that Plaintiffs failed to plead the elements of their fraud claims. “With respect to justifiable reliance,” said the Court, “the beneficiaries of a fiduciary relationship, such as the Individual Plaintiffs, are entitled to rely on their fiduciary’s ‘representations and complete, undivided loyalty.’” Thus, concluded the Court, Plaintiffs were “‘not required to perform independent inquiries … to reasonably rely on their fiduciary’s representations.’” “As to whether there was a false representation of existing fact,” the Court concluded that “the statement that ‘the refinancing was “already done”’ was a factual statement about the past, not an expression of hope about the future.” Under New York law, to be actionable, the “representation relied upon must relate to a past or existing fact,” as opposed to a representation of what is “hoped or expected to occur in the future.” The Court also held that “Plaintiffs … sufficiently allege scienter,” stating that “intent to commit fraud is a question of fact which cannot be resolved on a motion to dismiss.” Finally, the Court held that Plaintiffs were not required to allege their demand for damages with particularity. Unlike cases where the complaint did not contain any facts from which it could be inferred that the plaintiff incurred damages or where the claim of damages was conclusory and without any factual support, the Court held that Plaintiffs’ demand for the return of their investment sufficed to satisfy the damages element of the claim. Takeaway Chan is notable for three reasons. First, it confirms that fiduciaries owe a duty of candor to those with whom they have a fiduciary relationship. Second, it makes clear that a defendant cannot use a no-reliance or disclaimer clause to bar a claim of fraud ( i.e. , a breach of the duty of candor claim) in the fiduciary duty context. Finally, it underscores the rule that a plaintiff pleading fraud does not have to plead damages with particularity . ______________________________ 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. Wachovia Bank & Trust Co. v. Johnston , 269 N.C. 701, 715, 153 S.E.2d 449, 459-60 (1967). See also Birnbaum v. Birnbaum , 73 N.Y.2d 461, 466 (1989) (“it is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.”) (citations omitted). The facts discussed herein come from the motion court’s decision, the First Department’s decision and the parties’ briefing on appeal. Slip Op. at *1 (citing Birnbaum , 73 N.Y.2d at 466; Shatz v. Chertok , 180 A.D.3d 609, 610-611 (1st Dept. 2020)). Id. Id. (citing Dube-Forman v. D’Agostino , 61 A.D.3d 1255, 1257 (3d Dept. 2009); Salm v. Feldstein , 20 A.D.3d 469, 470 (2d Dept. 2005)). Dube-Forman , 61 A.D.3d at 1257; Salm , 20 A.D.3d at 470; see also Dubbs v. Stribling & Assoc. , 96 N.Y.2d 337, 341 (2001). Blue Chip Emerald v. Allied Partners , 299 A.D.2d 278, 279-280 (1st Dept. 2002). Slip Op. at *1. Id. Id. (citing D’Artagnan, LLC v. Sprinklr Inc. , 192 A.D.3d 475, 476-477 (1st Dept. 2021)). Id. (citing Centro Empresarial Cempresa S.A. v. AmÉrica MÓvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011) (“When the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.”) (internal brackets and quotation marks omitted)). Id. at *2. Id. (quoting Frame v. Maynard , 83 A.D.3d 599, 602 (1st Dept. 2011) (internal quotation marks omitted)). Id. (quoting Frame , at 602 (internal quotation marks omitted)). Id. Id. (quoting Zanani v. Savad , 217 A.D.2d 696, 697 (2d Dept. 1995)). Id. (citing ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 131 A.D.3d 427, 428 (1st Dept. 2015)). Id. Id. (citations omitted).

By:  Jeffrey M. Haber Invoice fraud is a type of accounting fraud. Invoice fraud comes in many forms. For example, bill padding is a type of invoice fraud. In this type of fraud, the invoice is legitimate, but the payment request includes charges that are erroneous ( i.e. , they are inflated). Another type of invoice fraud involves duplicate charges. In this form of invoice fraud, the company will send the same invoice twice or list the same materials on more than one invoice. Still another type of invoice fraud involves the issuance of fake invoices. In this form of fraud, the company will send an invoice for non-existent orders. In today’s Enforcement News , we examine an enforcement action and settlement involving the issuance of fake invoices. On December 22, 2023, the Securities and Exchange Commission (“SEC”) announced ( here ) that it had settled charges against Brooge Energy Limited, a publicly traded energy company located in the United Arab Emirates, the company’s former CEO, Nicolaas Lammert Paardenkooper, and its former Chief Strategy Officer and Interim CEO, Lina Saheb. According to the SEC, before and after going public through a special purpose acquisition transaction, Brooge, whose securities trade on NASDAQ, misstated between 30 and 80 percent of its revenues from 2018 through early 2021 in SEC filings related to the offer and sale of up to $500 million of securities and the issuance (by an affiliate) of $200 million of 5-year senior secured bonds in the Nordic bond market (the “Nordic Bonds”). The alleged fraud was perpetrated through the creation of two sets of invoices. According to the SEC, the first set consisted of actual invoices to customers who stored oil at Brooge’s facilities in Fujairah. Customers paid these invoices in the ordinary course of business. A second set of invoices, which reflected significantly higher rates and volumes were ostensibly sent to customers who never used Brooge’s facilities. These invoices, said the SEC, were “paid” through a complicated series of unsupported transactions involving an affiliated or related party. The SEC alleged that Paardenkooper and Saheb (together “Senior Management”) knew, or were reckless in not knowing, of the accounting fraud. In addition to the foregoing, the SEC alleged that certain company personnel reporting to Senior Management provided Brooge’s outside auditors with only the second set of invoices along with falsified ledger entries and other documents designed to support the inflated rates and volumes on the false second set of invoices. As a result, claimed the SEC, Senior Management misled the company’s auditors regarding Brooge’s revenues.  Further, said the SEC, in order to avoid an event of default on the Nordic Bonds, an affiliate of the company created a third set of unsupported invoices, and certain persons at the company directed the creation of additional false documents during the pendency of the SEC’s investigation. Finally, the SEC alleged that Brooge personnel tried to conceal the accounting fraud from the Commission.  In April 2023, the company announced a restatement of its audited financial statements from 2018 through 2020. The SEC charged the company with violations of the antifraud, proxy statement, reporting, and books and records provisions of the federal securities laws. In settlement of the charges, the company agreed to pay a $5 million penalty. Paardenkooper and Saheb also agreed to settle the charges, to each pay $100,000 civil penalties, and to permanent officer and director bars. The defendants agreed to settle the charges without admitting or denying the SEC’s findings, except as to the SEC’s jurisdiction over them and the subject matter of the proceeding. On news of the charges and settlement, the price of Brooge’s stock fell $0.37 per share, or 11.08%, to close at $2.97 per share on December 26, 2023. A copy of the SEC’s Cease-and-Desist Order can be found here .  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.