By Jeffrey M. Haber The Financial Industry Regulatory Authority ("FINRA") recently announced that the new Capital Acquisition Broker ("CAB") Rules will become effective April 14, 2017. While CABs still must be registered with the Securities and Exchange Commission, they will be subjected to a reduced series of FINRA rules and compliance obligations. Capital Acquisition Brokers at a Glance Capital Acquisition Brokers are those involved in private placements and mergers and acquisitions involving institutional investors and qualified purchasers. CABs are barred from engaging in both proprietary trading and secondary sales and limited to the following activities: Advising companies on mergers and acquisitions Advising issuers on raising debt and equity capital in private placements Acting as placement agent Providing strategic and financial advisory services It is important to note that FINRA emphasized the word "solely" in its announcement, which means for all intents and purposes that a CAB may engage only in business activities related to the securities industry and not other businesses, such as insurance or real estate. Moreover, in its capacity as a placement agent, a CAB can make offerings only to institutional investors, including: Any bank, savings and loan association, insurance company or registered investment company Any governmental entity or subdivision of a governmental entity Certain employee benefit, stock bonus or profit-sharing plans Any individual or entity having total assets of at least $50 million Any “qualified purchaser” as defined under the Investment Company Act Broker-dealers that carry customer accounts, accept purchase and sale orders, hold or handle customer funds or that engage in a range of other activities specified in FINRA's rule do not meet the definition of a CAB. At the same time, CABs may engage in activities in the normal course of conducting business, such as opening bank accounts, renting or owning office space and entering into arrangements with third-party vendors. The Takeaway While the FINRA By-Laws and other core rules will still apply to CABs, certain other rules will be tailored to the specific activities, dealings and communications with institutional investors. For example, CABs will be permitted to provide forecasts and projections in offering materials and there is no requirement to file advertising or sales literature with FINRA. Lastly, CABs will have reduced supervisory requirements with respect to annual meetings and internal inspections. While the rule does not become effective until April 14, 2017, FINRA will begin accepting applications beginning January 3, 2017. If you have further questions about the CAB rules or need assistance with the application process, you should engage the services of an attorney with experience in FINRA rules and regulations. This article was written by Jeffrey M. Haber, a partner at 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 “recurring question” New York courts grapple with is whether the facts alleged in a complaint give rise to claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar[ises] from the same facts [as an accompanying contract claim], s[eeks] identical damages and d[oes] not allege a breach of any duty collateral to or independent of the parties’ agreements[,] is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group, “[t]here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases). Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC, 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC, 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA, 165 A.D.3d at 114; Mañas, 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA, 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id.; see also Salamone v. EIP Global Fund LLC, 2021 N.Y. Slip Op. 02372 (1st Dept. Apr. 20, 2021) (here); Chowaiki & Co. Fine Art Ltd. v. Lacher, 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged a breach of duty independent of the contract). [Ed Note: this Blog recently wrote about the foregoing scenario here and here.] In Salamone v. EIP Global Fund LLC, the Appellate Division, First Department recently affirmed the dismissal of a fraud claim because the damages alleged were the same of those sought by plaintiff’s breach of contract claim. Salamone concerned a loan by plaintiff Kenneth Salamone to defendants Sridhar Chityala (“Sridhar”) and EIP Global Fund, LLC (“EIP”) for $2,000,000. On October 10, 2019, Sridhar and EIP asked Salamone for an emergency loan of $5 million. Salamone offered a $2 million loan if he got certain information and assurances. Salamone made the loan on October 11, 2019, pursuant to a thirty-day demand note (the “Demand Note”), which Sridhar signed personally and on behalf of EIP. The Demand Note provided for 10% interest, with the principal to be paid back either on November 10, 2019, or on demand. The Demand Note was not paid. On November 11, 2019, Salamone made a written demand for repayment. Sridhar and EIP asked Salamone to forbear from taking further action, promising payment on November 21, 2019. Over the next weeks, payment was not tendered but promises were made about the availability of funds. On November 27, 2019, Salamone, Sridhar, and EIP entered into a Forbearance and Security Agreement (the “Forbearance Agreement”) by which Sridhar and EIP agreed to pay Salamone $2,369,918.50, plus interest on or before December 17, 2019, in exchange for Salamone agreeing to forbear exercising his rights under the Demand Note. Sridhar signed the Forbearance Agreement individually and on behalf of EIP. Salamone also received a security interest in Sridhar’s interests in EIP, Vedas Group, LLC (“Vedas”), and CKL Partners, LLC (“CKL”) (the “Membership Interests”), entities that were owned and managed by Sridhar and defendant Shreyas Chityala (“Shreyas”), pursuant to a Pledge Agreement dated November 22, 2019 (the “Pledge Agreement”). Sridhar and EIP did not pay the money required by the Forbearance Agreement on December 17, 2019. On December 18, 2019, Salamone notified Sridhar and EIP of the default and demanded payment and delivery of the Membership Interests. Neither was done. Plaintiff filed suit, asserting claims for, inter alia, breach of contract and fraudulent inducement. Pursuant to the former, plaintiff claimed that Sridhar and EIP breached the Demand Note and Forbearance Agreement by failing to repay the loan and the amount required by the Forbearance Agreement and by failing to deliver the Membership Interests, and pursuant to the latter, that Sridhar and Shreyas fraudulently induced Salamone to enter into the Demand Note and the Forbearance Agreement by making false statements about their need for the loan, the availability of funds to repay it, and their intent to do so. Defendants moved to dismiss (here). The motion court granted the motion with regard to the fraudulent inducement claim and the breach of contract claim only to the extent it sought damages for breach of the Forbearance Agreement. The Court denied the motion to dismiss the contract claim as it pertained to the Demand Note. With regard to the fraudulent inducement claim, the motion court found that it was “based on an undisclosed intent not to perform” and, therefore, was duplicative of plaintiff’s contract claim. On appeal, the First Department affirmed the motion court’s dismissal of the fraud claim, though for different reasons (i.e., modified on the law, but otherwise affirmed). Slip Op. at *1. The Court held that the fraudulent inducement claim was not based “merely on an undisclosed intention not to pay,” as the motion court found. Id. Instead, it was based “on false written statements by defendant [Sridhar] as to the imminent receipt of funds by the corporate borrower that would allow repayment of the loan.” Id. Notwithstanding the presence of a duty collateral to, or independent of, the contracts, the Court held that “the only damages plaintiff claim[ed] beyond those under the contracts [were] the opportunity costs of providing the funds to defendants for the loan.…” Id. Such damages, held the Court, “are not recoverable in fraud.” Id. (citing Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 422 (1996) (noting that in fraud, “[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong” or what is known as the “out-of-pocket” rule”) (citation and internal quotation marks omitted)). Thus, the Court concluded, “the fraud claim, which otherwise arose from the same facts as those on which the contract claim is based, is duplicative of the contract claim.” Id. (citing Halliwell v. Gordon, 61 A.D.3d 932, 934 (2d Dept. 2009).

By: Jeffrey M. Haber New York’s consumer protection statutes, General Business Law (“GBL”) §§ 349 and 350, prohibit materially deceptive business practices and false advertising directed at consumers. To state a claim under either statute, a plaintiff must allege that the challenged conduct was consumer-oriented, materially misleading to a reasonable consumer acting reasonably under the circumstances, and caused an injury. The inquiry is objective and turns on the overall context in which the representation is made. Harbour v. Acme Mkts. Inc., 2026 N.Y. Slip Op. 32223(U) (Sup. Ct. Westchester County Sept. 9, 2026), illustrates the continued importance of the reasonable-consumer standard in food-labeling litigation and the limitations of claims premised on a consumer’s subjective interpretation of product packaging. Harbour v. Acme Mkts. Inc. Harbour involved a putative class action under GBL §§ 349 and 350 in which the plaintiff alleged that defendant’s “stone ground wheat” crackers were deceptively marketed because the packaging conveyed that the product's primary wheat ingredient was whole wheat or whole grain, causing consumers to pay a price premium for the product. Plaintiff alleged that, between January 2023 and October 2025, and within the applicable limitations period, she purchased defendant’s stone ground wheat crackers. According to the Complaint, plaintiff paid a premium price, approximately $3.99 per package, because the packaging’s “stone ground wheat” claim and depiction of three light-brown, coarse-textured crackers conveyed that the product’s primary or predominant wheat ingredient was whole wheat or whole grain, rather than unbleached wheat flour. Plaintiff commenced the action on behalf of herself and a putative class consisting of New York consumers who purchased the product in New York for personal, family, or household use during the applicable limitations period. The Complaint asserted claims under GBL §§ 349 and 350, alleging that defendant engaged in deceptive business practices and false advertising in connection with the marketing and sale of the product. Defendant moved to dismiss. In support of the motion, defendant argued that any claims arising from purchases made between January 2023 and February 3, 2023 were time-barred because the action was not commenced until February 4, 2026, and is subject to a three-year statute of limitations. Defendant further contended that the Complaint failed to state a viable cause of action because the term “stone ground” describes only the method by which wheat is milled and does not represent that the product contained whole wheat, is predominantly whole grain, or includes any particular quantity of whole-grain ingredients. Defendant also contended that the facts in Harbour were similar to those in Randolph v. Mondelez Globol, LLC, 2022 WL 953301 (S.D.N.Y. Mar. 30, 2022), in which the United States District Court for the Southern District of New York dismissed a complaint containing analogous allegations regarding “stoned wheat thins.” In Randolph, the court held that because the package did not state “whole grains” or use a similar phrase, it should not be inferred that a reasonable consumer would mistake the product for being predominantly whole grain. And, even if there were any ambiguity, it would be easily remedied by reading the ingredient list. Defendant also argued that plaintiff lacked standing to bring the action because she failed to allege a cognizable injury caused by the purported deception. Although the Complaint alleged that plaintiff paid a price premium based on her belief that the product’s wheat content was entirely, predominantly, or meaningfully whole grain, defendant maintained that the Complaint did not allege that the product was worth less than the price paid. According to defendant, the Complaint’s generalized reference to comparable products was insufficient to plead an economic injury because it neither identified those products nor alleged their prices for comparison. In opposition, Plaintiff argued that the Complaint adequately alleged a material misrepresentation because a reasonable consumer could understand the term “stone ground wheat,” particularly when viewed alongside the product’s packaging, to signify that the crackers contained a substantial amount of whole-grain wheat. Plaintiff further contended that consumers reasonably expect products marketed as “stone ground wheat” to contain more whole grain, that competing definitions of the term render the label misleading, that the ingredient list does not cure the deception, and that industry naming conventions reinforce consumers’ expectation that whole-grain ingredients predominate in the product. Plaintiff also argued that the Complaint sufficiently alleged an injury-in-fact for standing purposes because it alleged that she paid a premium price for the product and would not have paid that amount, or would not have purchased the product at all, had she known the truth about its wheat content. Plaintiff further contended that New York law recognizes a lost-benefit-of-the-bargain or price-premium theory of injury, that she was not required at the pleading stage to identify specific comparable products or their prices, and that defendant’s challenge to the sufficiency of her damages allegations raised factual issues inappropriate for resolution on a motion to dismiss. In reply, defendant argued that Randolph squarely controls because it rejected materially identical allegations concerning a “stone ground wheat” label. Defendant further maintained that plaintiff’s competing definition and linguistic arguments are irrelevant to the objective reasonable consumer standard, that any ambiguity is dispelled by the ingredient list, and that plaintiff’s price-premium allegations were conclusory because the Complaint did not identify comparable products, market prices, or any actual price differential. The motion court granted the motion. Regarding standing, the motion court held that plaintiff had standing to bring the action.[1] Standing is a threshold requirement and prerequisite to filing suit.[2] “[W]hen challenged, [it] must be considered at the outset of any litigation.”[3] The burden is on the moving defendant to establish, prima facie, that the plaintiff lacks standing to bring the action as a matter of law.[4] To defeat the motion, a plaintiff must submit evidence which raises a question of fact as to its standing.[5] “General Business Law § 349(h) provides standing to any person who has been injured by reason of any violation of this section.”[6] While a plaintiff must be actually harmed by the alleged deceptive act or practice, the harm need not be pecuniary.[7] In holding that plaintiff had standing, the motion court found (though not specifically stated) that plaintiff adequately alleged a cognizable injury by claiming that she paid a price premium for the product as a result of the allegedly deceptive labeling and would not have paid that amount, or purchased the product at all, had she known the truth.[8] Regarding the statute of limitations, the motion court held that any claims falling within the limitation period were not time-barred since “Plaintiff [did] not oppose limiting any recovery to purchases occurring within the limitations period.”[9] “Accordingly,” said the motion court, “any claim premised upon a purchase that occurred before February 4, 2023, is barred by the statute of limitations and dismissed.”[10] Turning to the substantive arguments of defendant’s motion, the motion court held that plaintiff failed to state a claim. To state a cause of action under GBL §§ 349 and 350, a “[p]laintiff must allege that: (l) the defendant’s conduct was consumer-oriented; (2) the defendant’s act or practice was deceptive or misleading in a material way; and (3) the plaintiff suffered an injury as a result of the deception.”[11] The motion court focused on whether the challenged labeling was materially misleading, as defendant did not dispute that its conduct was consumer-oriented and the motion court had already found that plaintiff adequately alleged an injury.[12] In addressing that issue, the motion court observed that “[a] defendant’s actions are materially misleading when they are likely to mislead a reasonable consumer acting reasonably under the circumstances” and that “[w]hat is objectively reasonable depends on the facts and context of the misrepresentations.”[13] Against that framework, the motion court found Randolph, persuasive, concluding that there was no meaningful distinction between the “stone ground wheat crackers” at issue in Harbour and the “stoned wheat thins” considered in Randolph.[14] Relying on Randolph, the motion court explained that because the deception inquiry under GBL §§ 349 and 350 is governed by an objective reasonable-consumer standard and does not require proof of reliance, plaintiff’s subjective expectations could not establish that a reasonable consumer would be misled by the label.[15] In addition, the motion court found that the appearance of the crackers on the front of the packaging did not plausibly support an inference of deception.[16] The motion court observed that the Complaint contained no allegations explaining how the light-brown, coarse appearance of the crackers would mislead a reasonable consumer, particularly where the front label made no representation that the product contained whole wheat or whole grain.[17] The motion court further held that, even if the front label could be viewed as ambiguous, any potential ambiguity was dispelled by the ingredient list and nutritional information, which accurately disclosed the product’s contents and would not mislead a reasonable consumer.[18] Takeaway Harbour reinforces that the touchstone of liability under GBL §§ 349 and 350 is the objective reasonable-consumer standard, not a plaintiff’s subjective understanding of a product label. Even where a consumer claims to have interpreted a label in a particular manner, the relevant inquiry is whether a reasonable consumer acting reasonably under the circumstances would likely be misled. As the motion court emphasized, personal expectations and assumptions do not substitute for a plausible allegation that the challenged representation would deceive an objectively reasonable consumer. Harbour demonstrates that New York state courts will look to federal food-labeling decisions for guidance when applying the reasonable-consumer standard under GBL §§ 349 and 350. By relying on Randolph v. Mondelez Global, LLC, the motion court concluded that a reasonable consumer would not interpret the phrase “stone ground wheat” as a representation that the product is predominantly whole grain and signaled that terms describing a manufacturing or processing method will not necessarily be construed as representations about ingredient composition. Consistent with that approach, the motion court was unwilling to infer that consumers would understand a product to contain predominantly whole wheat or whole grain where the label made no such express claim. Another important takeaway is that packaging imagery, standing alone, may be insufficient to establish deception. The motion court rejected the argument that the depiction of light-brown, coarse-textured crackers plausibly conveyed that the product was predominantly whole grain, particularly where the complaint failed to explain why those visual characteristics would communicate such a message to a reasonable consumer. The decision further highlights the significance of ingredient disclosures in food-labeling litigation. Even assuming the front label could be viewed as ambiguous, the motion court concluded that the ingredient list and nutrition information dispelled any potential misunderstanding. Harbour therefore recognizes that, in appropriate circumstances, accurate ingredient disclosures may cure ambiguity created by generalized statements appearing elsewhere on the packaging. On standing, however, the motion court reaffirmed that a traditional price-premium theory remains sufficient at the pleading stage. The motion court accepted allegations that the plaintiff paid more for the product because of the challenged representation and would not have paid that amount, or purchased the product at all, had she known the truth. Thus, while plaintiff ultimately failed to state a claim, the action was not dismissed for lack of standing. Finally, Harbour illustrates the distinction between pleading injury and pleading deception. A plaintiff may adequately allege economic injury through an overpayment or lost-benefit-of-the-bargain theory, yet still fail to state a claim if the challenged representation is not materially misleading as a matter of law. In that respect, Harbour serves as a reminder that standing and the merits remain separate inquiries under GBL §§ 349 and 350, and success on the former does not guarantee success on the latter. __________________________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes only and is not intended to be, and should not be, taken as legal advice. Unless otherwise stated, Freiberger Haber LLP’s articles are based on recently decided published opinions or litigation releases and not on matters handled by the firm. __________________________________ [1] Slip Op. at *3. [2] New York State Assn. of Nurse Anesthetists v. Novello, 2 N.Y.3d 207, 211 (2004); Saratoga County Chamber of Commerce v. Pataki, l00 N.Y.2d 801, 812 (2003) [3] Society of Plastics Indus. County of Suffolk, 77 N.Y.2d 761,722 (1991). [4] U.S. Bank N.A. v. Guy, 125 A.D.3d 845, 857 (2d Dept. 2015). [5] Id. [6] UnitedHealthcare Servs., Inc. v. Asprinio, 49 Misc. 3d 985, 997 (Sup. Ct., Westchester County 2015); see also GBL 349(h). [7] Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 26 (1995) [8] Slip Op. at *3, citing Handsome v. Continental Mills, Inc., 89 Misc.3d 12l5(A), 2026 N.Y. Slip Op. 50955(U) (Sup. Ct., Kings County 2026); Raphael v. Schwan’s Consumer Brands, Inc., 87 Misc. 3d 1260(A), 2025 N.Y. Slip Op. 52089(U) (Sup. Ct., Kings County 2025). [9] Id. [10] Id. (citations omitted). [11] Himmelstein, McConnell, Gribben, Donoghu & Joseph, LLP v. Matthew Bender & Co., 37 N.Y.3d 169, 176 (2021) (internal citations omitted). [12] Slip Op. at *4. [13] Himmelstein, 37 N.Y.3d at 178 (internal quotation marks and citations omitted). [14] Slip Op. at *4. [15] Id., citing Randolph, 2022 WL 953301, at 3. [16] Id. at 4-5. [17] Id. at 5, citing Stinnie v. Aldi Inc., 2025 N.Y Slip Op. 32415(U), at 3-5 (Sup. Ct., N.Y. County 2025). [18] Id., citing id.

By: Jeffrey M. Haber On July 8, 2019, this Blog wrote an article titled, “First Department Unanimously Affirms Denial of Motion to Compel Arbitration and Motion to Dismiss Fraud Claims” (here). The article examined the decision of the Appellate Division, First Department in BML Properties Ltd. v. China Construction America Inc., 2019 N.Y. Slip Op. 05339 (1st Dept. July 2, 2019), in which the Court (as the title states) affirmed the denial of a motion to compel arbitration and a motion to dismiss (here). In the article, we provided an extensive discussion of the facts of the case, which will not be repeated here. However, we will discuss the facts relevant to the decision examined below. BML Properties arose from the breakdown of a multibillion-dollar project to build a resort complex in the Bahamas. Nonparty Baha Mar Ltd., a Bahamian entity, was the owner and developer of the project. Plaintiff BML Properties Ltd., another Bahamian entity, was the direct parent of Baha Mar, owned 100% of its voting shares, and was responsible for its day-to-day management. Defendant CSCEC Bahamas, Ltd., a Bahamian entity, was the sole minority shareholder of Baha Mar under an investors agreement (“IA”). Defendant CCA Bahamas Ltd., another Bahamian entity, was the construction manager for the project. Defendant CCA Construction, Inc. was an affiliate of the other defendants; it was not a party to any of the project agreements but was nonetheless involved and had overlapping offices and executives, including Taizhong Wu, who was an executive of CCA Construction and CCA Bahamas and was appointed to Baha Mar's board on behalf of CSCEC Bahamas. After a series of delays that ultimately prevented the resort from opening, plaintiff filed for bankruptcy. Plaintiff commenced the action in 2017, asserting causes of action for, among other things, breach of contract and fraud. Regarding the fraud claim, plaintiff alleged that defendants orchestrated a “massive fraudulent scheme” by creating the false and misleading impression that they were meeting on-time and on-budget schedules necessary to open the resort in December 2014, when in fact, defendants were concealing massive delays that, inter alia, increased the costs of construction to the detriment of BML. Plaintiff also sought to pierce the corporate veil, asserting that the defendants were alter egos of one another. In the initial appeal, the First Department affirmed the motion court’s denial of defendants’ motion to dismiss the fraud claim, holding, inter alia, that “Plaintiff adequately stated a claim for fraud, by asserting justifiable reliance upon assurances, alleged to have been false when made, regarding the project’s status, and the workforce and resources available to meet the deadline for completion of the project, which were collateral to, and not duplicative of plaintiff’s claims for breach of contract.” Id. Following discovery, the parties brought motions for summary judgment, which resulted in another appeal to the First Department. In that appeal (here), the Court modified the motion court’s order denying defendants’ motion for summary judgment dismissing the complaint and granting plaintiff’s motion for summary judgment dismissing defendants’ counterclaims for breach of the IA and the affirmative defenses that plaintiff’s claims were derivative and released, to grant defendants’ motion as to certain claims and requested relief and to deny plaintiff’s motion as to the counterclaims for breach of the IA. Relevant to the Court’s decision examined below, the Court held that the motion court properly denied summary judgment dismissing plaintiff’s fraud claims. The Court noted that “[f]act development [did] not create[] a basis to modify [the prior] legal determination.”[1] The Court found that there were [i]ssues of fact exist with respect to justifiable reliance.”[2] The Court explained that “[e]vidence was presented that plaintiff, which had day-to-day responsibility for the company, relied on defendants’ misrepresentations by taking reservations, preparing for opening, and refraining from seeking additional financing or labor.”[3] The Court further explained that “[e]vidence was also presented that, although plaintiff had some sense that defendants were not telling the truth, it lacked the ability to definitively verify their claims—especially in view of defendants' apparent concealment of information.”[4] Such evidence sufficed to create issues of fact for the trier of fact to resolve. As noted by the First Department, the parties proceeded to a nonjury trial. After more than “11 days” of trial, “with 20 witnesses and more than 1000 documentary exhibits”, the lower court entered judgment on October 31, 2024, in favor of plaintiff.[5] Defendants appealed. The First Department unanimously affirmed. Relevant to this article, defendants argued that the trial court applied the wrong standard for scienter, one of the elements of a fraud claim. According to defendants,[6] the trial court applied a scienter standard applicable only to auditors. In that regard, said defendants, the trial court found that defendants acted with “reckless disregard” of the truth by “fail[ing] to verify its ability to meet the promised deadline.” However, the “reckless disregard” standard, argued defendants, does not apply to future-intention cases, of which BML was, outside the auditor context. Rather, to show fraud based on defendants’ statements, plaintiff had to prove defendants “never intended to honor or act on [their] statement” of future intent. Plaintiff maintained that the trial court properly found that defendants represented that they could meet the represented deadline, but knew they had no internal plans to do so. Plaintiff also maintained that defendants repeatedly “reaffirmed” that commitment while internally acknowledging its representations “were just phony.” Plaintiff argued that the trial court applied the proper scienter standard, stating that the courts of New York routinely apply the “reckless disregard” of the truth standard in non-auditor cases. The First Department held that the trial court applied the proper scienter standard.[7] The Court found that “[i]nternal company communications introduced at trial showed that although CCA Bahamas told plaintiff that the project was on track for a March 27, 2015 opening date, CCA Bahamas did not, in fact, believe that it would be possible for the resort to open on that date.”[8] “Thus,” concluded the Court, “the evidence established that defendants misrepresented their ability to perform, which [was] sufficient to support a finding of fraud.”[9] [Eds. Note: To allege scienter,[10] a plaintiff must allege with particularity that the defendant had an “actual intent to deceive, manipulate, or defraud.”[11] Scienter must be plead with “sufficient detail[]”; “conclusory statement[s] of intent” are insufficient.[12] To succeed, therefore, the plaintiff must allege facts from which there is some “rational basis for inferring that the alleged misrepresentations were knowingly made.”[13] Scienter is a very difficult element to plead. In fact, the scienter element is the hardest to plead because the evidence of intent most often rests solely with the defendant. Because of this difficulty, intent is often inferred from circumstantial evidence.[14]] Takeaway Of note in BML Properties is the fact that the parties agreed to use the definition of scienter in the New York pattern jury instructions for fraud and deceit.[15] Under the pattern jury instructions, if the jury determines that the challenged statement was false, it “must next decide whether [the defendant] either knew it was false or made the statement recklessly without regard to whether it was true or false.” Notably, according to the pattern jury instructions, “[a] statement is made recklessly if it is made when the person making it does not have an honest and reasonable belief in its truth.”[16] In Shear Enterprises, to which the First Department cited in BML Properties, the Court found (for purposes of the motion) that the plaintiff alleged a non-duplicative fraud, stating that “defendants misrepresented their very ‘ability to perform”.[17] In making this finding, the Court rejected the defendants argument that the plaintiff’s allegation was that the defendants “made a promise while harboring the concealed intent not to perform it.” Thus, the alleged fraud in Shear Enterprises was analogous to one of the alleged frauds in BML Properties (e.g., defendants “defendants misrepresented their ability to perform”). As such, the scienter consideration was the same: whether the defendants had an honest and reasonable belief in the truth of their statements. ________________________________ 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. [1] 226 A.D.3d at 583. [2] Id. [3] Id. at 583-84. [4] Id. at 584. [5] Slip Op. at *1. [6] The discussion of the parties’ argument can be found in their briefs on appeal. [7] Slip Op. at *2. [8] Id. [9] Id. (citing Shear Enters., LLC v. Cohen, 189 A.D.3d 423, 424 (1st Dept. 2020)). [10] To find articles related to the scienter element of a fraud claim, visit the “Blog” tile on our website and enter “scienter” or any other related search term in the “search” box. [11] Zutty v. Rye (NOR), 33 Misc. 3d1226(A), 2011 WL 5962804 at *11 (Sup. Ct., N.Y. Co. Apr. 15, 2011). [12] Zanett Lombardier, Ltd. v. Maslow, 29 A.D.3d 495 (1st Dept. 2006) (citation omitted). [13] Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92, 93 (1st Dept. 2003). [14] Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 488 (2008). [15] See N.Y. Pattern Jury Instr. – Civil 3:20 [16] In the comments section, the authors of the pattern jury instructions cite to the following authorities: State Street Trust Co. v. Ernst, 278 N.Y. 104 (1938); Hadcock v. Osmer, 153 N.Y. 604 (1897); Curiale v. Peat, Marwick, Mitchell & Co., 214 A.D.2d 16 (1st Dept. 1995); and Terris v. Cummiskey, 11 A.D.2d 259 (3d Dept. 1960). [17] 189 A.D.3d at 424.

By: Jeffrey M. Haber It has long been the law that the business judgment rule applies to the decisions made by boards of directors of residential cooperatives and condominiums.[1] “The business judgment rule ‘bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.’”[2] “[C]ourts must defer to a board’s determination if it was taken in furtherance of the corporation’s purposes, was within the scope of the board’s authority and was taken in good faith.”[3] Stated differently, and in the context of a cooperative and condominium, judicial scrutiny into the board’s actions may only be triggered if “an aggrieved shareholder-tenant [can] make a showing that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith.”[4] In Avrahami v. 235 W. 108th St. Owners Corp., 2025 N.Y. Slip Op. 02126 (1st Dept. Apr. 10, 2025) (here), the Appellate Division, First Department examined the business judgment in connection with the cooperative board’s decision to bar plaintiffs from reinstalling their jacuzzi in their unit. Avrahami arose out of claims asserted by plaintiffs who are the lessees and stock owners of the shares allocated to an apartment located within 235 West 108th Street, New York, N.Y. (the “building”). Plaintiffs signed a proprietary lease associated with the apartment on July 25, 2007. According to plaintiffs, at the time the lease was executed, the apartment’s master bedroom included a jacuzzi. Plaintiffs alleged that prior to purchasing the shares and signing the lease, there was no documentation that addressed the use of whirlpool style tubs in the building. Plaintiffs claimed that their decision to enter the lease for the apartment was partly based on the existence of the jacuzzi within the unit. Plaintiffs alleged that they used the jacuzzi for years without any problem, complaint, or objection from anyone in the building. However, at some point in 2017, the building’s superintendent, who lived below plaintiffs, noticed that the gap between the bathtub and the wall titles above it seemed wider than usual, indicating that the jacuzzi within plaintiffs’ unit sank. Sometime in April of 2017, the superintendent notified plaintiffs that the toilet in plaintiffs’ master bedroom began to leak into her apartment.[5] To resolve the issue, plaintiffs considered numerous contractors for the repair work. After selecting a contractor, plaintiffs notified the superintendent, who emailed the building’s board of directors (the “board”) to inform them of the repair work that was going to take place, and that the superintendent would oversee the work as she did other projects in the building. According to plaintiffs, the repair work started on April 29, 2017, and included the temporary removal of the jacuzzi, which was expected to be reinstalled after other work was completed. However, on May 3, 2017, during a monthly meeting with the board, plaintiffs received an email from the superintendent, who was informed by the board that the building’s rules prohibited whirlpool tubs, and that plaintiffs were to replace their jacuzzi with a standard tub. Plaintiffs commenced the action against defendant, asserting claims for declaratory relief, breach of contract, negligent misrepresentation, breach of fiduciary duty, and unjust enrichment. Defendant denied plaintiffs’ material allegations, asserted affirmative defenses, including one based on the business judgment rule, and asserted counterclaims for declaratory judgment and attorneys’ fees. Defendant moved pursuant to CPLR 3212 for summary judgment dismissing plaintiffs’ complaint in its entirety, CPLR 3001 for a declaration that plaintiffs were not entitled to install or re-install a jacuzzi-like whirlpool tub in their unit, and for attorneys’ fees. Plaintiffs also moved for summary judgment as to liability pursuant to CPLR 3212. Defendant argued that its decision to stop plaintiffs from re-installing the jacuzzi in their unit was a good faith decision, made in the interest of the co-op, thereby entitling it to summary judgment because their decision was protected by the business judgment rule. Defendant argued that its decision to deny plaintiffs the ability to reinstall the jacuzzi was based on past practices of the board, which prohibited whirlpool tubs due to concerns regarding noise and/or vibration from the pump, which could transfer to neighboring apartments. Defendant also contended that by signing the lease and buying shares in the co-op, plaintiffs agreed to be bound by the governing powers of the board, which notified plaintiffs that whirlpools were forbidden in the building. Defendant further argued that plaintiffs entered into an alteration agreement with the co-op concerning an air conditioning unit in June of 2010, well before the renovation of plaintiffs’ bathroom and the removal of the whirlpool tub occurred, and in said alteration agreement, plaintiffs acknowledged that the board did not allow the installation of whirlpools and agreed to such via signature. Plaintiffs argued in opposition that defendant’s decision was not protected by the business judgment rule because the rule does not protect bad faith, arbitrary conduct, or capricious decisions. In particular, plaintiffs argued that the board did not have any documents that supported its decision to prevent the reinstallation of the whirlpool. Additionally, plaintiffs argued that the board was not acting for the good of the co-op when it made such a decision, that the board refused to consult with an expert to determine if the board’s concerns for damage to the property and neighboring properties within the co-op were legitimate, and that the board never considered if the tub was grandfathered in under the lease, since it was present when plaintiffs moved in the unit. The motion court held that plaintiffs failed to rebut the standard of review imposed by the business judgment rule, and the lawful and legitimate corporate purpose the board had established in support of its decision. The motion court found that the proprietary lease gave the board the power to stop conduct that was, or could be, damaging to the building: If, in the Lessor’s sole judgment, any of the Lessee’s equipment or appliances shall result in damage to the Building ... the Lessee, on notice from the Lessor, shall immediately cease using any such appliance or equipment which may be creating the objectionable condition and shall take all other steps promptly to remedy such condition. The motion court rejected plaintiffs’ argument that they used the jacuzzi for years without any problem, complaint, or objection from anyone in the building, stating that such facts were irrelevant and did not preclude the board from enforcing a specific house rule addressed to the subject of the dispute.[6] The motion court also noted that plaintiffs could not point to any writing in which the use of the jacuzzi was permitted. The absence of such a writing was significant, noted the motion court, because the proprietary lease specifically provided that the “[d]irectors may alter, amend or repeal such House Rules and adopt new House Rules” at any time. Therefore, concluded the motion court, “it cannot be reasonably argued that [plaintiffs] had somehow acquired vested rights in the continued maintenance of [the whirlpool],” or that the whirlpool was grandfathered under their lease. Finally, the motion court rejected plaintiffs’ argument that defendant singled them out or selectively enforced the rules against them because another shareholder allegedly had a jacuzzi in their unit. The motion court held that the existence of another jacuzzi in the building was insufficient by itself to raise a triable issue of fact as to the allegation that the board deliberately singled them out for harmful treatment or selective enforcement.[7] The motion court noted that 15 years before the dispute between the parties, the board denied permission for jacuzzi like whirlpool tubs to building tenants. Accordingly, the motion court dismissed plaintiffs’ breach of fiduciary duty claim. On appeal, the First Department affirmed the motion’s court order regarding application of the business judgment rule. The Court held that the “breach of fiduciary duty claim was properly dismissed under the business judgment rule.”[8] The Court found “Plaintiffs’ arguments — that they were treated differently than other shareholders who were permitted to install hot tubs in their apartments and that the board acted arbitrarily and capriciously in refusing to allow plaintiffs to reinstall theirs — [to be] unavailing.”[9] The Court explained that the “undisputed facts show[ed] that plaintiffs’ tub was damaging the building, there was no evidence that the other tubs were causing damage, and the board was acting for a business-related purpose under the terms of the proprietary lease in requiring plaintiffs to install a standard tub.”[10] Under such circumstances, concluded the Court, plaintiffs could not “overcome the cooperative’s express right under paragraphs 16(d) and 19(b) of the proprietary lease to manage the installation and removal of appliances and fixtures that are damaging the building.”[11] In addition, the Court noted that even if the business judgment rule did not apply, plaintiffs’ breach of fiduciary duty claim would still be dismissed because a cooperative corporation, which plaintiff sued, does not owe its shareholders a fiduciary duty.[12] ______________________________ 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. [1] Levandusky v. One Fifth Avenue Apartment Corp., 75 N.Y.2d 530 (1990). [2] Ull v. Royal Car Parle LLC, 179 A.D.3d 469, 470 (1st Dept. 2020) (quoting, Auerbach v. Bennett, 47 N.Y.2d 619, 629 (1979)). [3] Barbour v. Knecht, 296 A.D.2d 218, 224 (1st Dept. 2002). [4] 40 W. 67th St. v. Pullman, 100 N.Y.2d 147, 155 (2003). [5] Plaintiffs conceded that the original whirlpool tub had been sinking and separating from the bathroom wall at the same time that there was a water leak from plaintiffs’ unit into the unit below. [6] Cannon Point N., Inc, v. Abeles, 160 Misc. 2d 30, 32 (1st App. Term 1993). [7] Skouras v. Victoria Hall Condo., 73 A.D.3d 902, 904 (2d Dept. 2010). [8] Slip Op. at *2 (citing Goldstone v. Gracie Terrace Apt. Corp., 110 A.D.3d 101, 106 (1st Dept. 2013)). [9] Id. [10] Id. (citing Konrad v. 136 E. 64th St. Corp., 254 A.D.2d 110 (1st Dept. 1998), lv. dismissed, 92 N.Y.2d 1042 (1999)). [11] Id. at *1 (citations omitted). [12] Id. at *2 (citing Kleinerman v. 245 E. 87 Tenants Corp., 105 A.D.3d 492, 493 (1st Dept. 2013)).

By: Jeffrey M. Haber On April 16, 2025, the Securities and Exchange Commission (“SEC” or Commission”) announced (here) that its Office of Investor Education and Advocacy (“OIEA”) had unveiled an anti-fraud public service campaign to warn investors about the impact relationship investment scams can have on their financial future. As explained in the release, “[r]elationship investment scams typically involve a ‘long con’ in which scammers reach out online or through text messages, attempting to build trust through friendship or a romantic connection to convince someone to put money into phony investments.”[1] Relationship investment scams are often referred to romance scams, financial grooming scams, and the distasteful description, “pig butchering”,[2] scams. These scams also sometimes involve “catfishing,” where fraudsters might set up fake online identities to carry out crimes. The SEC’s public service campaign features two animated videos ‒ “Don’t Open the Door to Scammers” and “Let’s Talk About Relationship Investment Scams” ‒ and a resource page about how relationship investment scams work, what investors should look out for, and how investors can protect themselves and others. In the release, the SEC pointed to a few “[k]ey takeaways for investors”. These include: Ignore messages from anyone they don’t know and consider blocking or deleting them. Be wary of unsolicited investment opportunities, no matter how much they trust the person. If they suspect they may be caught up in a scam, stop communication with the individuals immediately, and do not give them any more money. Report the scam to the SEC. “Investor protection is a vital part of the SEC’s mission. These kinds of frauds can be devastating and cause investors to lose billions of dollars every year,” said Acting Chairman Mark Uyeda. “I encourage investors to utilize the resources on our investor education website, Investor.gov, to learn how to spot and avoid fraud to help protect their hard-earned money and life savings.” “If you receive an email or text message from a person, number, or email address you don’t know or recognize, it’s a red flag of fraud — especially if the message is vaguely worded or appears aimed at someone else,” said Lori Schock, Director of the SEC’s OIEA. “Don’t respond. Instead, ignore, block or delete these senders from your phone or messaging app.” In addition to the public service campaign videos and resources, the SEC also suggested that investors read an article by Lori Schock, Director of the OIEA, entitled “Relationship Investment Scams – Starts With ‘Hello,’ But Could End With Saying ‘Goodbye’ to Your Money. The CFTC’s Office of Customer Education and Outreach (“OCEO”) also issued an investor alert about relationship investment scams (here). In the CFTC’s alert, the OCEO explained in more detail how the scams work: Criminals and other fraudsters seek their targets in many different ways. They often initiate contact online or on social media platforms —including professional networking, dating, and messaging websites/apps. They might run advertisements or add targets to a group chat that the target didn’t seek to join. Fraudsters might text a target pretending to be an old friend or claiming to have contacted the target accidentally. They might even use an auto dialer to blast out unsolicited text messages to thousands of people—these messages are designed to mimic ones intended for some other personal or business acquaintance, seeking to prompt a response from potential targets. They might offer financial advice or express romantic interest. Sometimes, these fraudsters quickly move communications away from the initial platform to a different, sometimes unmonitored space. Concerning the “long con”, the OCEO explained that once the fraudster finds a target, the fraudster will “begin the long process of building their trust, be it through friendship, romance, or an offer to help achieve financial goals.” The OCEO said that the fraudster “might even suggest meeting in person but then come up with excuses so that this never happens.” In romance scams, the fraudster often pledges their love very quickly. Sometimes, the fraudster creates a fake identity as a financial professional with a prominent online presence, or they might impersonate—or “spoof”—legitimate investment professionals or brokerage firms. They sometimes use altered images or videos to lead their targets to believe that others have made money on their platform. The OCEO noted that “[n]ew artificial intelligence (“AI”) technologies can make these images and videos convincingly realistic.” Once fraudsters have established a relationship or friendship with their target, said the OCEO, they might offer their advice on trading or claim to know about profitable opportunities. “They might even indicate that they or someone they know is a financial advisor or is an ‘insider’ and is able to provide valuable trading recommendations.” These fraudsters often lead their targets to believe “they are doing well trading by sending fake screenshots, showing fake trading information, or manipulating the target’s online account to make it appear that the ‘investments’ and ‘earnings’ are ‘legitimate,’ all of which is intended to build trust.” Relevant to commodities, the OCEO noted that “[f]raudsters might also steer their targets towards investments involving crypto assets.” “For example, the target might think they’re buying into a crypto asset investment like an ‘Initial Coin Offering’ (“ICO”) when the target is actually sending money directly to the fraudster’s crypto asset wallets or accounts.” In addition, noted the OCEO, “[f]raudsters might direct their targets to a legitimate looking (but fake) website or to a widely used app that can be downloaded from a well-known app store.” However, said the OCEO, “just because an app is available on a well-known app store doesn’t mean that the app itself, or the activities conducted within it, are legitimate.” The OCEO also noted that “[f]raudsters might tell their targets to wire cash or obtain crypto assets—such as bitcoin, ether, or tether—at a bitcoin ATM (or kiosk) or through a crypto asset platform in order to make investment deposits.” The OCEO warned that “[a]n investment might not be legitimate if the investor is required to pay for it with crypto assets.” Like the SEC, the OCEO advised investors that if they are directed to pay for an investment by wire transfer or check, they should be suspicious if: You’re asked to pay an individual, a firm that is different than the one with which you thought you’re investing, or a business that appears unrelated to your investment (for example, a nail salon or foot massage business); The address is suspicious (for example, an online search for the address suggests it’s not an office building where the firm operates); or You’re told to note that the payment is for a purpose unrelated to the investment (for example, luxury watches, goods, or furniture). The OCEO explained (in bold and italicized writing): “If you wire money outside of the United States or use crypto assets for an investment that turns out to be a scam, you likely will never see your money again.” In the release, the OCEO noted that Fraudsters sometimes deliberately falsify information to make their targets believe they’ve profited from whatever investment “opportunity” the fraudsters presented. They might even allow a target to withdraw a portion of their “profits” to further gain their trust and falsely reassure them that the investment is legitimate. The fraudsters might provide what they claim is “real time” trading information that is, in fact, fake. They often lead targets to believe that other investors are making enormous profits too. Fraudsters might then ask their targets to invest larger sums of money. [Orig’l emphasis.] “But,” warned the OCEO, “when the target wishes to withdraw their funds, the fraudsters often come up with an excuse why that isn’t possible, say more money is required, or tell the target for the first time that they must pay more to cover fees or taxes.” In fact, said the OCEO, “the target will never recover their investment or any ‘profits,’ so paying additional funds only causes the target to lose more money.” Similarly, said the OCEO, “fraudsters might pretend to loan their targets funds for trading but require these ‘loans’ to be repaid before any purported profits or principal can be withdrawn. This, too, is a further attempt to steal more money.” The OCEO also warned that investors should beware of fake testimonials. In this regard, the OCEO explained that “[f]raudsters often use fake testimonials to convince targets that others have invested and made money. Never rely solely on testimonials in making an investment decision.” The OCEO further warned about relying on celebrity and influencer testimonials: Fraudsters sometimes pay others—for example, actors to pose as ordinary people turned millionaires, social media influencers, and celebrities—to tout an investment on social media or in a video. If you’re in a group chat, others in the group who claim to have made huge profits might be in on the fraud. Finally, the OCEO discussed how AI could be used to alter or generate photos or videos “to make it falsely look like others have profited.” “Promises of high investment returns, with little or no risk, are classic warning signs of fraud,” said the OCEO. ______________________________ 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. [1] In a parallel alert issued by the Commodities Futures Trading Commission (“CFTC”) (here), the CFTC described the scam as situations in which “fraudsters—including criminals and other bad actors—often hide their true identities, reach out to unsuspecting targets (often online or through text messages), gain their trust over time, and then defraud them through fake investments.” [2] Pig butchering is the English translation for the Chinese term sha zhu pan (杀猪盘).

By: Jeffrey M. Haber It is well settled that the parties to an agreement may freely select any forum to resolve any disputes regarding the interpretation or performance of the agreement.[1] A forum selection clause is prima facie valid “unless-it is shown by the challenging party to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching, or it is shown that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.”[2] In Pearl Beta Funding, LLC v. Elegant Trio Colors Corp., 2025 N.Y. Slip Op. 02217 (2d Dept. Apr. 16, 2025) (here), the agreement at issue (a revenue repurchase agreement) contained a forum selection clause that designated New York as the forum in which disputes would be heard. The case is of note, and the reason why we are examining the case, because the agreement at issue involved parties that were not resident or domiciled in New York. Under circumstances as those present in Pear Beta Funding (i.e., non-resident or domiciled corporate parties), questions concerning the court’s ability to hear the case (i.e., the court’s subject matter jurisdiction) must be resolved under Business Corporation Law (“BCL”) § 1314. Under BCL § 1314, a New York court has subject matter jurisdiction over actions brought by foreign corporations or non-residents against other foreign corporations only if (a) they fall into one of five specified categories (see BCL § 1314 (b)); or (ii) they fall within an exception to BCL § 1314’s limits that itself has been created by statute (see e.g. General Obligations Law (GOL) § 5-1402 (1)).[3] Under BCL § 1314(b), New York State courts have subject matter jurisdiction over actions brought by foreign corporations or non-residents against other foreign corporations: (1) “[w]here [the action] is brought to recover damages for the breach of a contract made or to be performed within this state, or relating to property situated within this state at the time of the making of the contract;” (2) “[w]here the subject matter of the litigation is situated within this state;” (3) “[w]here the cause of action arose within this state, except where the object of the action or special proceeding is to affect the title of real property situated outside this state;” (4) [w]here, in any case not included in the preceding subparagraphs, a non-domiciliary would be subject to the personal jurisdiction of the courts of this state under section 302 of the civil practice law and rules;”[4] and (5) “[w]here the Defendant is a foreign corporation doing business or authorized to do business in this state”.[5] Pearl Beta Funding, LLC v. Elegant Trio Colors Corp. In Pearl Beta Funding, plaintiff relied on BCL §§ 1314(b)(1) and (4) as the basis for subject jurisdiction over defendants. Plaintiff is a Delaware entity authorized to do business in New York State. Defendant Leila Tolentino Cristobal (“Cristobal”) is an individual residing in California. Defendant Elegant Trio Colors Corp d/b/a Jazzy France (“Elegant”) is a California entity. In December 2021, the parties entered into an agreement, whereby plaintiff agreed to purchase the rights to an agreed upon value for Elegant’s future receivables in exchange for a certain purchase price and that Elegant breached the agreement by failing to make required payments due thereunder. As noted above, the revenue purchase agreement contained a forum selection clause that made New York the agreed upon forum for the resolution of all disputes arising from, or out of, the agreement. Defendants moved to dismiss the complaint pursuant to CPLR 3211(a)(2), contending that, under BCL § 1314, the motion court lacked subject matter jurisdiction over the dispute. In an order entered on June 9, 2023, the motion court granted the motion. The motion court held that “[b]ased on a careful review of the parties’ contentions and the evidence in the record, BCL § 1314(b)(1) [did] not afford subject matter jurisdiction to this Court” over the dispute between the parties. The motion court explained that, due to conflicting affidavits submitted by the parties, there was insufficient evidence upon which to find that the Court had jurisdiction over the matter. For instance, pointing to the affidavit submitted by Cristobal, the owner and operator of Elegant, the motion court observed that “the subject contract was not made, signed, or to be performed within New York State, and that the agreement was signed in West Covina, California and transmitted by internet.” By contrast, said the motion court, Adnan Arbar, Plaintiff’s funding manager, averred in his affidavit that “he countersigned the subject agreement via DocuSign at his office located in Queens, New York on December 29, 2021” and that “some of the funds at issue were subsequently transferred through a New York bank.” Given the discrepancies between the parties, the motion court concluded that “there [was] insufficient evidence demonstrating that the contract between the parties was made or intended to be performed within New York State.” The motion court also held that it “lack[ed] subject matter jurisdiction over [the] action under BCL § 1314(b)(4).” As noted, BCL § 1314 (b)(4) provides for subject matter jurisdiction in cases against a non-domiciliary where such foreign defendant would be subject to personal jurisdiction under New York’s long arm statute, CPLR 302.[6] The motion court rejected plaintiff’s argument that long arm jurisdiction existed over defendants pursuant to CPLR 302(a)(1) because defendants transacted business in New York and/or had a contract to supply goods or services to plaintiff in New York. In so doing, the motion court found that, as discussed above, plaintiff’s submissions did not establish that a sufficient nexus exist[ed] between New York and defendants or the transaction at issue in the litigation. Moreover, the motion court held that “contrary to plaintiff’s contention, the forum selection clause contained in the parties’ contract indicating that the parties agreed to bring any actions arising out of the agreement in New York [was] insufficient to confer jurisdiction over [d]efendants.”[7] Therefore, concluded the motion court, “absent personal jurisdiction under CPLR 302, [the] Court lack[ed] subject matter jurisdiction over Defendants under BCL § 1314(b)(4).” On June 14, 2023, pursuant to the motion court’s order granting the motion, the motion court entered judgment dismissing plaintiff’s complaint. Plaintiff appealed. The Appellate Division, Second Department unanimously reversed, holding that the motion court “erred in granting the defendants’ motion pursuant to CPLR 3211(a)(2) to dismiss the complaint.”[8] The Court found that the Abrar affidavit was sufficient to satisfy plaintiff’s burden to show that the motion court had jurisdiction over the defendants: In opposition to the defendants’ motion, the plaintiff submitted an affidavit of Adnan Abrar, its funding manager. In his affidavit, Abrar averred, among other things, that he reviewed and countersigned the underlying agreement in New York, that the plaintiff performed under the agreement by delivering the purchase price and making payment from its account at BankUnited located in Melville, and that the defendants remitted purchased receivables under the agreement to the plaintiff, which were accepted by the plaintiff at its account located in New York. These averments, viewed in the light most favorable to the plaintiff, were sufficient, at this early stage of the litigation, to establish that the Supreme Court could exercise subject matter jurisdiction over this action ….[9] Accordingly, the Court ordered “that the judgment is reversed, on the law, the defendants’ motion pursuant to CPLR 3211(a)(2) to dismiss the complaint is denied, [and] the complaint is reinstated.…”[10] _________________________________ 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. [1] Brooke Group v. JCH Syndicate 488, 87 N.Y.2d 530 (1996). [2] Stravalle v. Land Cargo Inc., 39 A.D.3d 735 (2d Dept. 2007). [3] Under the General Obligations Law, New York courts will exercise subject matter jurisdiction over claims brought by a foreign corporation against a foreign corporation, when the claim is worth in excess of one million dollars and the subject agreement contains a New York choice-of-law clause. See GOL § 5-1402; DDR Real Estate Servs., Inc. v. Burnham Pacific Props., Inc., 1 Misc. 3d 802, 804–05 (Sup. Ct., Monroe County Aug. 28, 2003), aff’d, 12 A.D.3d 1182 (4th Dept. 2004). [4] Under CPLR 302(a)(1), “a court may exercise personal jurisdiction over any non-domiciliary” who “transacts any business within th[is] state or contracts anywhere to supply goods or services in the state.” [5] BCL § 1314 (b)(1)-(5). [6] See n.3, supra. [7] Citing Techo-TM, LLC v Fireaway, Inc., 123 A.D.3d 610 (1st Dept. 2014). [8] Slip Op. at *2. [9] Id. (citing BCL § 1314(b)(1), (4); cf. Techo-TM, 123 A.D.3d at 610). [10] Id. at *1.

By: Jeffrey M. Haber The elements of a claim for breach of contract are straightforward. The movant must establish: (1) the existence of a valid contract, (2) the plaintiff’s performance of the contract, (3) the defendant’s breach of the contract, and (4) damages resulting from the defendant’s breach.[1] As readers of this Blog know, “[w]hen the terms of a written contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving practical interpretation to the language employed and the parties’ reasonable expectations.”[2] Under New York law, “when a party materially breaches a contract, the non-breaching party must choose between two remedies: it can elect to terminate the contract or continue it. If it chooses the latter course, it loses its right to terminate the contract because of the default.”[3] “The election of remedies doctrine requires knowledge of the alleged breach and an affirmative action that constitutes an election to continue performance.”[4] “Typically, where courts find that a breach claim is barred by the doctrine of ‘election of remedies,’ the claimant has not only continued to perform under the contract, but received benefits under the contract.”[5] “Under New York law, when a party to a contract materially breaches that contract, it cannot then enforce that contract against a non-breaching party.”[6] Sometimes a contract requires an event or occurrence to happen before the contract becomes effective. This requirement, known as a condition precedent, is defined as “an act or event, other than a lapse of time, which, unless the condition is excused, must occur before a duty to perform a promise in the agreement arises.”[7] “Most conditions precedent describe acts or events which must occur before a party is obliged to perform a promise made pursuant to an existing contract, a situation to be distinguished conceptually from a condition precedent to the formation or existence of the contract itself.”[8] In the latter situation, no contract arises “unless and until the condition occurs”.[9] “Conditions can be express or implied. Express conditions are those agreed to and imposed by the parties themselves. Implied or constructive conditions are those ‘imposed by law to do justice.”[10] “Express conditions must be literally performed, whereas constructive conditions, which ordinarily arise from language of promise, are subject to the precept that substantial compliance is sufficient.”[11] In determining whether a particular agreement makes an event a condition, courts will interpret doubtful language as embodying a promise or constructive condition rather than an express condition.[12] “This interpretive preference is especially strong when a finding of express condition would increase the risk of forfeiture by the oblige.”[13] “Interpretation as a means of reducing the risk of forfeiture cannot be employed if ‘the occurrence of the event as a condition is expressed in unmistakable language.’”[14] Nonetheless, the nonoccurrence of the condition may yet be excused by waiver, breach or forfeiture.[15] The doctrine of substantial performance (i.e., substantial compliance) is flexible one and “stands in sharp contrast to the requirement of strict compliance that protects a party that has taken the precaution of making its duty expressly conditional.”[16] If the parties “have made an event a condition of their agreement, there is no mitigating standard of materiality or substantiality applicable to the non-occurrence of that event.”[17] Substantial performance in this context is not sufficient, “and if relief is to be had under the contract, it must be through excuse of the non-occurrence of the condition to avoid forfeiture.”[18] The substantial performance doctrine does not apply in every instance. Thus, “[t]o the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange.”[19] In other words, when the non-performance is trivial, courts will not find an actionable breach. With the foregoing principles in mind, we examine Manorhaven Capital LLC v. Marc J. Bern & Partners, LLP, 2025 N.Y. Slip Op. 02551 (1st Dept. Apr. 29, 2025) (here). In August 2021, plaintiff and defendant entered into an agreement pursuant to which defendant retained plaintiff to serve as its exclusive investment banker for procuring a debt refinancing (the “Agreement”).[20] Pursuant to one section of the Agreement (Section 3), defendant agreed to pay plaintiff, at each closing of debt refinancing, a cash fee equal to 2% of loan proceeds “actually received” by defendant (the “Fee”) with respect to any debt refinancing transaction during the term of the Agreement, from August 16, 2021 through December 31, 2021 (the “Fee Provision”). Section 5 of the Agreement (the “Fee Tail Provision”) provided that defendant’s obligation to pay the Fee extended for another year, to December 31, 2022, with respect to any debt refinancing transaction entered into by defendant with a lender or investor that had been “contacted” by plaintiff during the Term of the Agreement (the “Tail Period”), “provided that, [plaintiff] shall have kept [defendant] apprised on a contemporaneous and continuing basis with the names, key contact information and status of conversations with potential lenders for the Transaction, which information shall be set forth in Schedule 1, as amended from time to time” (the “Notice Provision”). The record established, which, according to the Court, defendant did “not dispute”,[21] that plaintiff “contacted” nonparty D.E. Shaw during the term of the Agreement, and that defendant entered into a financing transaction with D.E. Shaw less than a year after the Agreement expired. However, noted the Court, defendant had not paid plaintiff the Fee earned under the Agreement. The Court concluded that “[i]n the face of this clear contractual language and the undisputed facts, Supreme Court properly awarded summary judgment to [plaintiff].”[22] In affirming the motion court’s grant of summary judgment to plaintiff, the Court rejected defendant’s contention that plaintiff did not strictly comply with the Notice Provision of Section 5. Defendant maintained that the updates provided from plaintiff to defendant were not continuous, in writing, and in real time, and that such communications did not include “key contact information” and were not provided under the title of “Schedule 1”.[23] The Court explained that “the record firmly establishe[d] that [plaintiff] indisputably informed [defendant] of its contacts with D.E. Shaw and that D.E. Shaw had passed on the deal (such that there would be no further updates to provide).”[24] The Court concluded that “[t]his was enough to establish compliance with the Notice Provision.” The Court went on to say that “[e]ven assuming that [plaintiff] did not strictly comply with Section 5 of the Agreement, [defendant] would still be obligated to pay the Fee because the minutiae of the Notice Provision amounted to more than a ‘matter of form, not substance.’”[25] “The failure to provide any additional updates or contact information with respect to D.E. Shaw, who had already passed on the deal,” explained the Court, “would have amounted to a relatively trivial breach.”[26] Finally, the Court held that the motion court “properly awarded summary judgment to [plaintiff] with respect to damages.”[27] In doing so, the Court rejected defendant’s interpretation of the Fee Provision in which they contended that the motion court “improperly awarded damages based on the total funds that were disbursed to [defendant] under the credit facility (some $233 million), rather than the amount of funds that had been ‘actually received’ by [defendant] (some $45 million).” The Court found that the “Fee Provision’s language relating to the loans ‘actually received’ plainly mean[t] the amount of the loan facility that was actually drawn down by [defendant] ($233 million) as opposed to the total amount that had been committed under the Credit Agreement ($250 million).”[28] Given the plain meaning of the Agreement, the Court concluded that the motion court “properly found that [defendant]’s proffered interpretation — excluding from the Fee the loan proceeds that had been directed to third party creditors, because they had not been ‘actually received’ by [defendant] — as overly technical and leading to a result that [was] not supported by the record or the Fee Provision.”[29] ______________________________________ 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. [1] See, e.g., Harris v. Seward Park Housing Corp., 79 A.D.3d 425, 426 (1st Dept. 2010); Morris v. 702 E. Fifth St. HDFC, 46 A.D.3d 478, 479 (1st Dept. 2007). [2] Franklin Apt. Assoc., Inc. v. Westbrook Tenants Corp., 43 A.D.3d 860, 861 (1st Dept. 2007). [3] Awards.com v. Kinko’s, Inc., 42 A.D.3d 178, 187 (1st Dept. 2007). [4] MBIA Ins. Corp. v. Patriarch Partners VIII, LLC, 842 F. Supp. 2d 682, 710 (S.D.N.Y. 2012). [5] Hallinan v. Republic & Trust Co., 519 F. Supp. 2d 340, 352 (S.D.N.Y. 2007) (citing ARP Films, Inc. v. Marvel Entertainment Group, Inc., 952 F.2d 643, 649 (2d Cir. 1991)). [6] Nadeau v. Equity Residential Props. Mgmt. Corp., 251 F. Supp. 3d 637, 641 (S.D.N.Y. 2017). See also Gaviria v. El Tawil, 2019 WL 103724 at *5 (Sup. Ct., N.Y. County Jan. 4, 2019) (finding that the defendant could not make a breach of contract claim against the plaintiff because the defendant was in breach of the agreement). [7] Oppenheimer & Co. v. Oppenheim, 86 N.Y.2d 685, 690 (1995) (citations omitted). [8] Id. (citation omitted). [9] Id. (citation omitted). [10] Id. (citing Calamari and Perillo, Contracts § 11-8, at 444 (3d ed.)). [11] Id. [12] Id. at 691. [13] Id. (citing, Restatement (Second) of Contracts § 227 (1)). [14] Id. (citing, Restatement (Second) of Contracts § 229, comment a, at 185; and § 227, comment b (where language is clear, “[t]he policy favoring freedom of contract requires that, within broad limits, the agreement of the parties should be honored even though forfeiture results”)). [15] Id. [16] 2 Farnsworth, Contracts § 8.12, at 415 (2d ed. 1990). [17] Restatement (Second) of Contracts § 237, comment d, at 220. [18] Id. [19] Oppenheimer, 86 N.Y.2d at 691 (citation omitted). [20] Plaintiff is an investment bank. Defendant is a national law firm concentrating primarily in the areas of personal injury, mass tort, and medical malpractice. [21] Slip Op. at *1. [22] Id. [23] Id. at 1-2. [24] Id. at *2. [25] Id. (quoting PDL Biopharma, Inc. v. Wohlstadter, 2019 N.Y. Slip Op. 32693(U), 19-20 (Sup. Ct., N.Y. County 2019)). [26] Id. (citing PDL Biopharma, 2019 N.Y. Slip Op. 32693(U) at 19-20). [27] Id. [28] Id. [29] Id.

New York, NY (Law Firm Newswire) — November 22, 2016 — Freiberger Haber LLP is pleased to announce that Jeffrey M. Haber has been quoted in a two-part series appearing in the ctnews.com blog, “Getting Personal About Business.” The series, written by David Zahn, examines why business owners should retain legal counsel before a dispute arises and the methods available to resolve disputes once dissension occurs. In part one, Mr. Haber discusses how important it is for a business owner to establish a relationship with a capable attorney before disputes arise. He points out that the attorney should be skilled in strategic approaches and able to help the business owner prioritize and achieve his or her personal goals. In part two, Mr. Haber discusses the available methods of dispute resolution, including litigation and arbitration, as well as the advantages and disadvantages of each. For more on how dispute resolution provisions and arbitration play out in New York courts, see our posts on dispute resolution clauses that bar breach of contract and fraud claims and why vacating an arbitration award is an uphill battle. Jeffrey M. Haber is a partner at Freiberger Haber LLP. Attorney Advertising. Prior results do not guarantee or predict a similar outcome with respect to any future matter. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jeffrey M. Haber What are the seal provisions in a complaint? The U.S. Supreme Court is weighing the conditions under which a federal court should dismiss lawsuits brought by whistleblowers who violate the law's non-disclosure requirements. In short, a complaint must be filed and remain under seal for sixty days. During this period, the government investigates the allegations and decides whether to intervene while the plaintiff is barred from publicly disclosing the suit. In November, the Court heard argument in over the Act's seal provision. The case involves a complaint brought by plaintiffs Cori and Kerri Rigsby against State Farm. The Rigsbys, sisters and former claims adjustors for Allstate, claimed the company fraudulently mischaracterized wind damages caused by Hurricane Katrina as flood damages. Instead of Allstate being responsible for paying the damages, the cost would be covered by the government's flood insurance program. While the plaintiffs filed the lawsuit under seal, it was allegedly disclosed shortly thereafter to several news outlets by the Rigsby's prior counsel. State Farm then moved for a dismissal which was declined by the district court (which also awarded the plaintiffs 30 percent of the $758,250 award against State Farm and $2.9 million in attorney fees and costs). On appeal, the Fifth Circuit rejected the insurer's argument that a seal violation mandated dismissal and affirmed the trial judge's discretion in rejecting a "per se" dismissal rule. The court also applied a balancing test in finding that the disclosures were not revealed by the media and that the government's investigation had not been compromised. The overarching issue before the Supreme Court is whether all violations of the seal requirement should be dismissed or if a balancing test similar to that of the Fifth Circuit's should be adopted. The Court must also consider a number of other factors such as the plaintiff's intent, whether the disclosure was limited or inadvertent, and the potential harm to the defendant or to the government's investigation. Why This Matters This case amplifies the high stakes of claims brought under the False Claims Act. While it is unclear at this time how the Supreme Court will rule, claims are unlikely to be rolled back. That being said, it is crucial for parties who bring claims under the Act to be aware of the seal requirement and that a violation of this provision could lead to a case being dismissed. If you are considering bringing a claim of fraud against the government, you should consult with an experienced whistleblower attorney. For the Supreme Court's December 2016 decision in this case, see State Farm Fire & Casualty Co. v. United States ex rel. Rigsby: The Supreme Court Rules That a Violation of the FCA's Seal Provision Does Not Require Dismissal. This article was written by Jeffrey M. Haber, a partner at 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 On November 4, 2016, a judge sitting in the United States District Court for the District of Columbia upheld the Department of Labor’s (“DOL”) fiduciary duty rules that were adopted to curtail conflicts of interest by financial advisors providing investment recommendations for retirement accounts. In a 92-page ruling, Judge Randolph Moss rejected arguments that the new rules would have “catastrophic consequences” for the fixed indexed annuities industry, that the DOL exceeded its authority in promulgating the rules, and that the industry could not meet the April 2017 effective date. The rules, which took six years to craft, require financial advisors to act in the “best interest” of their client when, among other things, they provide investment recommendations for retirement accounts. (This Blog wrote about the new rules in May 2016. See here.) In National Association for Fixed Annuities v. Perez, No. CV 16-1035 (RDM) (D.D.C. Nov. 4, 2016), Judge Moss granted the DOL’s motion for summary judgment and dismissed the claims brought by the National Association for Fixed Annuities (“NAFA”). The ruling can be found here. In granting summary judgment, Judge Moss reviewed the legislative history of the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., and the DOL’s rulemaking authority. The court ruled that, among other things, the DOL’s decision to hold financial advisors who recommend retirement investments to a fiduciary standard was reasonable considering the growth of IRAs (since first introduced in 1974) and other retirement plans as a future source of income. NAFA has announced that it will appeal the decision. The Challenges and Ruling NAFA brought its action under the Administrative Procedure Act, the Regulatory Flexibility Act (“RFA”) and the Due Process Clause of the Fifth Amendment to challenge three rules promulgated by the DOL on April 8, 2016. NAFA argued that: (i) the DOL exceeded its authority by replacing an established regulation that, among other things, made a financial advisor a “fiduciary” only if she or he rendered “investment advice” for a fee “on a regular basis”; (ii) the DOL improperly applied the new rules to IRAs and other retirement plans that are not subject to Title I of the ERISA statute; (iii) the written contract requirement contained in the Best Interest Contract (“BIC”) Exemption impermissibly created a private right of action; (iv) the “reasonable compensation” condition set forth in the BIC Exemption is constitutionally vague; (v) the decision to move fixed indexed annuities (“FIAs”) to the BIC Exemption was improper; and (vi) the DOL failed to conduct a regulatory impact analysis required by the RFA. Judge Moss rejected each of the foregoing challenges. The DOL Did Not Exceed Its Authority by Replacing a 1975 Regulation with the New Rules and the Definitions Set Forth Therein The court rejected NAFA’s argument that the DOL exceeded its rule-making authority by, among other things, discarding the limitations set forth in a 1975 regulation. The regulation in question created a five-part test to determine whether an advisor “renders investment advice” to a plan or IRA. The test limited the fiduciary duty reach of ERISA to only those advisors who rendered investment advice “on a regular basis.” The new rules eliminate that limitation “in favor of a definition that encompasses, among other activity, ‘[a] recommendation as to the advisability of acquiring . . . investment property’ that is rendered ‘pursuant to [an] . . . understanding that the advice is based on the particular investment needs of the advice recipient.’” The new rules define “investment advice” to include advice even if not given “on a regular basis.” In ruling against NAFA, the court held that the DOL was entitled to deference in its interpretation of the term “investment advice” under the two-step framework established in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and that nothing in the ERISA statute foreclosed the DOL’s interpretation. In fact, the court concluded that the DOL’s interpretation hews closer to the text and purpose of ERISA than the 1975 rule. As to step one of the Chevron analysis, the court held that there is nothing in the ERISA statute that “forecloses the Department’s current interpretation.” Indeed, the court found that “[t]he statute does not define the phrase ‘investment advice,’ and the ERISA statute expressly authorizes the Secretary to adopt regulations defining ‘technical and trade terms used’ in the statute.” Those terms, which the new rules define, the court held, comport with their ordinary usage: “Indeed, if anything, it is the five-part test—and not the current rule—that is difficult to reconcile with the statutory text. Nothing in the phrase ‘renders investment advice’ suggests that the statute applies only to advice provided ‘on a regular basis.’” As to step two of the Chevron analysis, the court deferred to the DOL’s interpretation of the ERISA statute. The court found that the DOL’s interpretation was “reasonable and reasonably explained.” The new interpretation, rather than the five-part test embraced by NAFA, fit comfortably with the text and purpose of ERISA to protect the interests of retirement plan participants. The court rejected NAFA’s contention that market changes alone could justify the change in the definition of “fiduciary”, finding that the DOL did not distort the statutory meaning of “rendering investment advice” simply to achieve a regulatory end. In fact, the DOL supported the change with an extensive explanation of the relationship between advisers and investors and how that relationship has changed. Further, citing to the commentary accompanying the new rules, the court further rejected NAFA’s argument that the definition of “rendering investment advice” is too broad, sweeping up “relationships that are not appropriately regarded as fiduciary in nature and that the Department does not believe Congress intended to cover as fiduciary relationships.” (Internal quotation marks omitted.) The DOL Did Not Exceed Its Authority by Requiring Financial Advisers Who Provide Advice Regarding Investments Held in IRAs and Other Non-Title I Plans to Comply with the Duties of Loyalty and Prudence to Qualify for the BIC Exemption The court rejected NAFA’s argument that the DOL exceeded its rule making authority by extending the duties of loyalty and prudence found in Title I of ERISA to individuals who advise IRAs and other non-Title I plans. The court determined that the DOL had the authority to condition prohibited transaction exemptions on compliance with ERISA’s duties of loyalty and prudence. The court reasoned that “the mere fact that title I imposes certain duties or obligations on employee benefit plans does not, as a matter of logic or the rules of statutory interpretation, mean that Congress intended to preclude the Department from imposing a similar duty or obligation as a condition of granting an exemption under 26 U.S.C. § 4975(c)(2).” Indeed, the ERISA statute authorizes the DOL to adopt non-statutory exemptions and limitations on those transactions. Subjecting financial advisers who recommend Title II plans to ERISA duties only if they are paid commissions is the point of the exemption, since the DOL is concerned about conflicted advice resulting from commission arrangements: “Importantly, there is also a clear nexus between the risk that commission-based compensation will skew investment advice and the condition that advisers paid on a commission basis must provide advice that satisfies the duties of loyalty and prudence.” Although it “may be difficult and costly for financial institutions to move away from that model of compensation, the prospect of alternative compensation methods is not illusory. The choice may not be pleasant one, but it is real.” The Written Contract Requirement Contained in the BIC Exemption Does Not Create a Private Cause of Action The court rejected NAFA’s argument that the new rules “impermissibly creates a private right of action” for violations of the BIC Exemption. The court found that the BIC Exemption “merely dictates terms that otherwise conflicted financial institutions must include in written contracts with IRA and other non-title I owners in order to qualify for the exemption.” Enforcement of these contractual terms “would be brought under state law,” which both parties agreed during oral argument would occur. As such, the court concluded that “although the BIC Exemption dictates what must be included in the contract, the cause of action and right to recover are dictated by state law. Federal law merely requires the inclusion of specific contractual terms as a condition of the prohibited transaction exemption.” The “Reasonable Compensation” Condition in the BIC Exemption Is Not Void for Vagueness The court rejected NAFA’s argument that the “reasonable compensation” requirement of the BIC Exemption was void for vagueness under the Due Process Clause of the Constitution. “Under that condition, a financial institution must agree in writing that ‘[t]he recommended transaction will not cause [the Financial Institution], [A]dviser or their [A]ffiliates or [R]elated [E]ntities to receive, directly or indirectly, compensation for their services that is in excess of reasonable compensation within the meaning of [29 U.S.C. § 1108(b)(2)] and [26 U.S.C. §] 4975(d)(2).’” The court found that the concept of “reasonable compensation” is commonly used throughout the U.S. Code, including in the ERISA statute, and “is sufficiently clear to provide financial institutions with ‘fair warning of what the regulations require.’” (Citation omitted.) Indeed, the phrase is one that “a reasonably prudent person, familiar with the conditions the BIC Exemption is meant to address and the objectives the exemption and conditions are meant to achieve, would have fair warning of what the regulations require.” The Industry Had Ample Time to Comment on the New Rules The court rejected NAFA’s argument that the DOL failed to give it an opportunity to comment on the decision to make FIAs ineligible for PTE 84-24. PTE 84-24 created a limited exemption to the prohibited transaction rules set forth in Title I and Title II of the ERISA statute. Under PTE 84-24, it was permissible to compensate investment advisors and their employees and agents “on a commission basis for sales of variable and fixed annuity products held in ERISA employee benefit plans and IRAs, as long as either (1) the relevant investment advice was not provided ‘on a regular basis,’ or (2) the terms of the transaction were at least as favorable as those offered in arm's-length transactions and the relevant fees and commissions were reasonable.” NAFA challenged the new rules on the grounds that the decision to subject FIAs to the BIC Exemption was different than originally proposed. The court dismissed this challenge noting that the DOL “expressly requested comment on its decision to ‘continue to allow IRA transactions involving’ fixed indexed annuities ‘to occur under the conditions of PTE 84-24,’ while requiring that similar transactions involving variable annuities occur under the conditions contained in the proposed BIC Exemption.” In fact, to remove any doubt about the bankruptcy of NAFA’s argument, the court observed that “NAFA, along with other industry groups, provided comments on that very issue.” The DOL Did Not Violate the RFA The court rejected NAFA’s argument that the DOL failed to accompany the final rule with a “final regulatory flexibility analysis” required by the RFA – that is, an assessment of the impact of the new rules on small businesses. According to the court, the final regulatory flexibility analysis is only a procedural requirement, not a substantive one. In any event, the court found that DOL put forth a reasonable good-faith effort to comply with the statute, as evidenced by the DOL’s “382-page final Regulatory Impact Analysis.” Takeaway The NAFA decision is thoughtful and well-reasoned. It is not only a win for the DOL, but also a victory for investors looking for retirement investment opportunities. As such, it could influence and inform the decisions of other courts that are also considering the legality of the new rules. To date, there are six cases filed by industry professionals and state attorneys general against the DOL’s new rules. Three were consolidated into one case in the United States District Court for the Northern District of Texas. Oral argument was heard in the Texas consolidated action and in the Kansas action (one of the remaining cases). Decisions are likely in the coming months. As the NAFA action shows, whatever the results in those cases, appeals will likely follow, ultimately creating an opportunity for the Supreme Court to weigh in. Although the DOL has won round one in the courts, there is also a legislative fight that could spell the end of the new rules. The Republican-controlled Congress previously passed legislation to nullify the new rules; President Obama vetoed that legislation. It stands to reason that the newly elected Republican-controlled Congress will do the same once Donald J. Trump is inaugurated. Though there is no indication of what the new president will do, he has already expressed an interest in reducing jobs-killing regulations during the campaign and transition. (See, e.g., https://www.greatagain.gov/policy/regulatory-reform.html.) One thing is for certain: despite the win, the DOL’s new fiduciary duty rules remain in jeopardy. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

On November 14, 2016, the Securities and Exchange Commission (“SEC”) announced that it had awarded more than $20 million to a whistleblower “who promptly came forward with valuable information that enabled the SEC to move quickly and initiate an enforcement action against wrongdoers before they could squander” their ill-gotten gains. The award “is the third-highest since the SEC’s whistleblower program issued its first award in 2012.” To date, the SEC has paid “more than $130 million to whistleblowers who voluntarily provided the SEC with unique and useful information that led to a successful enforcement action.” The SEC declined to identify the whistleblower or the wrongdoers. By law, the SEC protects the confidentiality of whistleblowers and does not release information that might directly or indirectly reveal the whistleblower’s identity. Commenting on the award, Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated: “This whistleblower alerted us with a valuable tip that led to a near total recovery of investor funds. Sizeable awards like this one should encourage whistleblowers everywhere that there are real financial incentives to promptly reporting potential securities law violations to the SEC.” Under the program, whistleblowers are eligible for an award if they voluntarily provide the SEC with original information that leads to a successful enforcement action that exceeds $1 million. The award can range from 10 percent to 30 percent of the money collected. All payments come from an investor protection fund established by Congress that is financed through monetary sanctions paid to the SEC by securities law violators. No money is taken or withheld from harmed investors to pay whistleblower awards. The SEC Whistleblower Program Is Successful, Yet It May Be in Danger of Being Eliminated? The SEC’s whistleblower program is, by all accounts, a success. From the SEC’s perspective, it has: (a) provided a mechanism by which it can receive information about illegal conduct that, under most circumstances, would go undetected, particularly with regard to accounting fraud and valuation issues involving complex securities; (b) enhanced the SEC’s ability to move forward quickly against wrongdoers, thereby reducing the cost to prosecute cases; (c) increased the quality of information submitted to the agency for investigation, prompting the current SEC Chairwoman, Mary Jo White, to call the program a “game changer”; and (d) increased the deterrent effect of engaging in unlawful conduct. From the whistleblower’s perspective, it has: (a) demonstrated an unyielding effort to protect their identities; (b) shielded them from retaliation and pre-retaliation (attempts to discourage and/or prevent whistleblowing with the SEC – a topic this Blog discussed here); and rewarded them for coming forward as insurance against retaliation and other consequences they could suffer. In short, as noted by the SEC’s Director of the Division of Enforcement, Andrew Ceresney, the SEC whistleblower program has had a “transformative impact,” not only in the United States but also around the world as numerous regulatory agencies are looking to implement similar programs. (This Blog wrote about Director Ceresney’s speech here.) Despite the success of the program, its continued existence has come into question by the recent election of Donald J. Trump. During the long campaign season, as well as during the current transition period, President-elect Trump has spoken about repealing the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act” or the “Act”). Although he has attacked many aspects of the Act, he has been silent about the SEC whistleblower program. Indeed, the President-elect has stated that he intends to replace the Dodd-Frank Act with “new policies to encourage economic growth and job creation,” according to his transition website, GreatAgain.gov, citing the Consumer Financial Protection Bureau and restrictions on banks’ trading activity as targets for repeal or replacement. This position has been further reinforced by Mr. Trump in a post-election interview with The Wall Street Journal. Additionally, the transition team appointed by President-elect Trump is made up of people who do not support the Dodd-Frank Act, including the SEC whistleblower program. One member of the team, Paul Atkins, a former Securities and Exchange Commissioner under President George W. Bush, has often harshly critiqued the Dodd-Frank Act, including the structure of the whistleblower program. Testifying before the Senate banking committee in 2011, Atkins stated that the whistleblower program (a) “create[d] perverse incentives” for whistleblowers; (b) “set[] up a system that has many inherent problems,” such as “undermin[ing] internal compliance programs,” and failing to create a system that protects companies “from disclosure of confidential information”; and (c) created a boondoggle for plaintiff’s lawyers who would be “inject[ed] into the mix” and “increase[] the potential for specious claims to get traction and win a settlement, especially if the complainant is anonymous.” Against this negativity stands Senator Charles Grassley of Iowa and Representative Jeb Hensarling of Texas, two Republican lawmakers who appear to have the ear of the President-elect’s camp. Both have previously voiced support for whistleblower programs. It is difficult to know how the new administration will approach the SEC whistleblower program. It can be a long time before legislation is enacted to address the whistleblower program, especially given the new administration’s stated priorities of job growth, the repeal and replacement of the Affordable Care Act, and the establishment of a nationwide infrastructure program. Still, the hope is that the whistleblower programs established under the Dodd-Frank Act will survive, especially given the long history of bipartisan support for programs that fight government waste, fraud and abuse. This article was written by Jeffrey M. Haber, a partner at Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.