By Jonathan H. Freiberger Structured settlement annuities are frequently used by courts and litigants to provide a stream of payments to, inter alia , injured parties and/or their families in personal injury and/or wrongful death cases.  Due to abuse at the hands of unscrupulous factoring companies, the New York Legislature, in 2002, enacted the Structured Settlement Protection Act (”SSPA”).  As the court in In the Matter of Petition of 321 Henderson Receivables Origination LLC , 19 Misc.3d 504 (Sup. Ct. Queens Co. 2008), stated: The Structural Settlement Protection Act (General Obligations Law § 5–1701 et seq. ) was enacted in 2002 as a result of factoring companies using “... aggressive advertising, plus the allure of quick and easy cash, to induce settlement recipients to cash out future payments, often at substantial discounts, depriving victims and their families of the long-term financial security their structured settlements were designed to provide” (N.Y.S. Legis. Memo. Ch. 537, 2002; McKinney’s 2002 Session Laws of N.Y., at 2036). Under this law, such transfers are now prohibited unless approved by a court based upon express findings required by General Obligations Law § 5–1706 (a)–(e). In the Matter of Petition of 321 Henderson , 19 Misc.3d at 505 (hyperlinks added).   The procedures for transferring an interest in a structured settlement are clearly set forth in GOL § 5-1705 .  Among other things, in order to effectuate such a transfer, a special proceeding brought on by order to show cause must be commenced.  GOL § 5-1705(a).  Further, the SSPA provides that direct or indirect transfers of structured settlement payment rights will not be effective “unless the transfer has been authorized in advance in a final order of a court of competent jurisdiction based upon express findings by such court that,” inter alia : “the transfer is in the best interest of the payee, taking into account the welfare and support of the payee's dependants ; and whether the transaction, including the discount rate used to determine the gross advance amount and the fees and expenses used to determine the net advance amount, are fair and reasonable. Provided the court makes the findings as outlined in this subdivision, there is no requirement for the court to find that an applicant is suffering from a hardship to approve the transfer of structured settlement payments under this subdivision….”  GOL § 5-1706; GOL § 5-1706(a).  Finally, as relevant here, GOL § 5-1708 (d) provides that “ o payee who proposes to make a transfer of structured settlement payment rights shall incur any penalty, forfeit any application fee or other payment, or otherwise incur any liability to the proposed transferee or any assignee based on any failure of such transfer to satisfy the conditions of this title.” The March 22, 2023, decision of the Appellate Division, Second Department, in Pinnacle Capital, LLC v. O’Bleanis , describes the SSPA and illustrates the pitfalls of failing to abide by its terms.  The defendants in Pinnacle were trustees of a trust that had an interest in structured settlement annuity payments (“SSAPs”).  The Complaint alleged that: defendants agreed to sell to Bentzen Financial, LLC, the trust’s interest in the SSAPs; Bentzen filed an order to show cause seeking court approval of the agreement; plaintiff received a copy of what it believed was a valid court order approving the agreement; and, plaintiff paid defendants $280,000 in anticipation of Bentzen receiving the structured settlement payments.  When plaintiff and defendants subsequently learned that the approval order was forged, “plaintiff sought from the defendants either a return of the $280,000 or cooperation in obtaining a valid court approval of the agreement, but the defendants refused.” Plaintiff, seeking the return of its money, sued defendants under various theories of recovery.  Alternatively, plaintiff sought a declaration that the agreement was valid and/or the defendants could retain the payment upon the issuance of a court order approving the agreement.  Defendants appealed supreme court’s denial of their motion to dismiss. On appeal, the Second Department reversed because the “plaintiff's claims are prohibited by the SSPA.”  The Court recognized that: the purpose of the SSPA, as reflected in the legislative materials, was to establish "procedural safeguards for those who sell settlements that are awarded as a result of litigation," due to a recognition that " any of the people who receive such settlements are being compensated for very serious, debilitating injuries, and have been unfairly taken advantage of in the past by the businesses that purchase their settlements" (Mem in Support, Bill Jacket, L 2002, ch 537 at 5). The Court reiterated that, pursuant to GOL § 5-1706, transfers of SSAPs are “prohibited unless approved by a court of competent jurisdiction based upon express findings, inter alia, that the transfer is in the best interest of the payee and that the discount rate, fees and expenses used to determine the net amount advanced are fair and reasonable.”  (Citations and internal quotation marks omitted.)  Additionally, as noted by the Court, “ n circumstances, such as here, where payment for a structured settlement transfer is made to the payee prior to the court's approval of the transfer, whether intentionally or due to a mistaken belief that the transfer had already been approved, a proposed transferee must seek nunc pro tunc approval of the transfer, and such approval is not guaranteed.”  (Citations omitted.) Thus, the Court concluded that supreme court “should have granted the defendants' motion pursuant to CPLR 3211(a) to dismiss the complaint, as it is barred by the provisions of General Obligations Law §§ 5-1708(d) and 5-1705.” Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “Legal cannabis is an emerging industry, which makes it prime hunting ground for financial predators who will use every trick in the book to lure investors into their schemes,” said Cari Fais, acting director of the New Jersey Division of Consumer Affairs (here). The Securities and Exchange Commission (“SEC” or the “Commission”) recognized this problem in 2014, when it issued an investor alert about investing in cannabis companies (here), and in 2018, when it issued a second investor alert about marijuana-related investments (here). In the 2014 alert, the SEC warned investors about the risk of fraud and market manipulation when deciding whether to make an investment in a cannabis company: Fraudsters often exploit the latest innovation, technology, product, or growth industry – in this case, marijuana – to lure investors with the promise of high returns. Also, for marijuana-related companies that are not required to report with the SEC, investors may have limited information about the company’s management, products, services, and finances. When publicly-available information is scarce, fraudsters can more easily spread false information about a company, making profits for themselves while creating losses for unsuspecting investors. To underscore the foregoing, the SEC noted that it issued trading suspensions against cannabis companies which allegedly provided false information to their investors. Of the companies whose trading was suspended, the SEC said that several were targeted because of concerns about the accuracy of how they described their operations, while others were targeted because of market manipulation and unlawful sales. On March 16, 2023, the SEC announced (here) that it charged American Patriot Brands Inc. (“APB”), a cannabis cultivation and distribution company, its chief executive officer (“CEO”), and five other entities and individuals for their participation in a long-running scheme in which they raised more than $30 million from more than one hundred investors across the country and took millions of those funds to enrich themselves. According to the complaint filed by the SEC in the United States District Court for the District of Puerto Rico (here), since at least mid-2016, APB, its CEO Robert Y. Lee, and current and former executives Brian L. Pallas and J. Bernard Rice made a series of false and misleading statements to investors about various aspects of the company, including its financial condition, the scope of its operations, the value of its Oregon cannabis farm, and the safety and security of investing in APB. In particular, the SEC alleged that as part of its offerings, APB urged investors to act quickly to invest before APB made its securities more widely available, an event APB claimed was imminent. In fact, said the SEC, the registration APB needed for widespread public trading was in jeopardy and was revoked in the midst of an offering. Nevertheless, alleged the SEC, APB told investors that it had multistate and worldwide operations when it had no operations outside of Oregon. Additionally, although APB produced only a small amount of sellable cannabis a year, it promoted itself as one of the largest cannabis farms in the country and provided wildly inflated financial information to support extremely high revenue projections. To make the investment appear even more attractive, APB allegedly promised that investments would be secured by a lien on APB’s cannabis farm, at times when the farm likely did not have enough equity to secure investments. The SEC alleged that all of the misrepresentations and omissions were material because they would have been important to an investor in deciding what to do with APB securities (e.g., whether to invest in the company, to convert their promissory notes (pursuant to which they loaned APB money) to APB stock, or to exercise an option to buy APB stock. The SEC further alleged that accurate information about past and projected revenues was relevant to the risk of the investment and the size of potential returns, as was information about the scope of APB’s operations, whether it owned other farms, historical harvests, and the amount of acres licensed for cultivation. As noted, according to the SEC, APB produced only a small amount of sellable cannabis a year. Moreover, said the SEC, information about competing valuations of the Oregon farm would have allowed investors to assess whether the high valuations provided by APB were accurate. Coupled with information about the liens on the Oregon farm, the competing valuations would also have allowed investors to assess whether APB had sufficient revenues to pay its operating expenses and whether a lien on the Oregon farm would fully secure promissory note investments. The SEC also said that accurate information about the status of APB’s efforts to become compliant with SEC reporting requirements would have been relevant to the competency of APB’s management, the eligibility of APB securities to continue trading on OTC Link, and the likelihood that APB securities would qualify for listing on an American exchange. Finally, the SEC alleged that the individual defendants misappropriated millions of dollars in investor proceeds to themselves and the relief defendants. Commenting on the enforcement action, Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, stated: “As the SEC complaint alleges, American Patriot Brands Inc. and some of its senior executives fabricated business profits and prospects to entice investors with falsehoods that in the end left investors with essentially worthless securities. This action reflects the SEC’s ongoing commitment to holding accountable those who seek to profit through lies and deception.” The SEC charged defendants with violating the antifraud provisions of the federal securities laws. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, civil penalties, and officer and director bars against certain individual defendants. The SEC also seeks disgorgement with prejudgment interest from three affiliated entities (as relief defendants) that allegedly received millions in investor proceeds. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger This Blog has frequently addressed the interplay between document discovery in litigation and the repercussions resulting from the spoliation of evidence.  [ See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .]  “Spoliation” refers to evidence that is “destroyed” “substantially altered” or “lost”.  See, e.g., Gilliam v. Uni Holdings , 201 A.D.3d 83, 86 (1 st Dep’t 2021); Dagro Assoc. I, LLC v. Chevron USA , 206 A.D.3d 793, 794 (2 nd Dep’t 2022). Briefly stated, and as summarized from prior articles, to fully prepare for trial, the CPLR permits “full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof….”  CPLR 3101 .  In order to further the goal of “full disclosure,” litigants have a duty to preserve information that may be “material and necessary” to the prosecution or defense of claims in an action.  When information that ought to have been, but was not, preserved it is known as spoliation.  “Under the common-law doctrine of spoliation, when a party negligently loses or intentionally destroys key evidence, the responsible party may be sanctioned.”  Dagro , 206 A.D.3d at 794; see also, Slezak v. Nassau Country Club , 200 A.D.3d 734 (2 nd Dep’t 2021) (citations and internal quotations marks omitted). A party seeking sanctions for the spoliation of evidence “must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a culpable state of mind, and that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.”  Pegasus Aviation I, Inc. v. Varig Logistica S.A. , 26 N.Y.3d 543, 547 (2015) (citations and internal quotation marks omitted).  Where the destruction of evidence is intentional or willful, “the relevancy of the destroyed documents is presumed”.  Id . (citation omitted).  Where evidence is negligently destroyed, however, “the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.”  Id . (citation omitted).  “The nature and severity of the sanction for spoliation depends upon a number of factors, including, but not limited to, the knowledge and intent of the spoliator, the existence of proof of an explanation for the loss of evidence, and the degree of prejudice to the opposing party.”  Delmur, Inc. v. School Const’n Auth. , 174 A.D.3d 784, 786 (2 nd Dep’t 2019) (Citation, internal quotation marks and brackets omitted.)  Among others, sanctions for spoliation include striking of pleadings or adverse inference charges.  Arbor Realty Funding, LLC v. Herrick, Feinstein LLP , 140 A.D.3d 2 (1 st Dep’t 2016). On March 14, 2023, the Appellate Division, First Department, decided RCSUS Inc. v. SGM Socher, Inc. , in which the Court affirmed supreme court’s grant of plaintiff’s motion for an adverse inference due to spoliation of evidence on a cell phone. The First Department explained: After this case was commenced, and despite oral instruction from counsel to maintain relevant documents, defendant Yosef Greenwald gave his assistant his iPhone, which he had used regularly for business communications. His assistant then, by sending messages of her own, overwrote his WhatsApp communications with plaintiffs' sales representative concerning matters of central relevance to this case. The communications proved to be irretrievable. Accordingly, the motion court acted properly in granting the adverse inference precluding defendants from contesting that the payments defendants made to plaintiffs' former sales representative during the periods when WhatsApp chats had been deleted , were commission payments made for diverted sales that would have gone to plaintiffs but for defendants' actions. In light of the adverse inference, the court properly granted plaintiffs summary judgment as to liability on their unfair competition claim . Takeaway Folks rely heavily on cell phones and other electronic devices when conducting their personal and professional business.  Accordingly, a significant amount of information is stored on these electronic devices.  Exacerbating the potential for unintentional spoliation is heavy reliance on electronic storage of information simultaneously with the increasingly accepted view that paper files are a thing of the past.  Individuals and entities should consider such steps as are necessary to ensure that electronic information is retained and accessible from multiple sources so that, in the event of litigation, penalties are not assessed due to spoliation.  Obviously, storage and retention issues solutions will have no impact on intentional spoliation. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber To establish a cause of action for fraud, a plaintiff must plead a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance and damages. 1 In Pope Investments II LLC v. Belmont Partners, LLC , Case No. 2022-02632 (1st Dept. Mar. 14, 2023) ( here ), and RCM/CMG Portfolio Holding, LLC v. Giordano , Case No. 2021-03254 (1st Dept. Mar. 14, 2020) ( here ), the Appellate Division, First Department addressed the falsity and reliance elements of a fraudulent inducement cause of action. We examine both cases below. Pope Investments II LLC v. Belmont Partners, LLC Pope Investments arose from a “Chinese reverse merger,” a complicated transaction enabling American companies to invest in companies in China through the use of offshore shell companies. One of the offshore companies involved in the transaction was controlled by Geoffrey Shao (“Shao”). Through the reverse merger at issue in the case, plaintiffs and others invested approximately $12.5 million in Shanghai Medical Technology Co., LTD. (“SMT”). Defendants received more than $1 million for facilitating the transaction. Before the reverse merger could be fully effectuated, however, the investment funds were wrongfully diverted by Shao to other nonparty entities. In April 2014, plaintiffs filed an amended complaint, asserting nine causes of action against defendant Joseph Meuse (“Meuse”), an owner of Belmont Partners, LLC (“Belmont Partners”) and Belmont Partners (collectively, the “Belmont Defendants”). In response to defendants’ motion to dismiss, plaintiffs withdrew several causes of action. After the motion court ruled on the motion, several causes of action against defendants survived, including fraudulent inducement and negligent misrepresentation. With regard to the fraudulent inducement claim, plaintiffs alleged that plaintiffs’ claims centered on defendants’ actions or inactions, which allowed Shao to embezzle the money paid in connection with the transaction. In particular, plaintiffs alleged that defendants fraudulently induced them to invest their money by misrepresenting that they had vetted Shao and/or Kamick Assets Limited (“Kamick”), a British Virgin Islands company solely owned by Shao, and by failing to disclose that Shao and Helen Lv, who allegedly embezzled the funds with Shao, had a close personal relationship with each other. Upon completion of discovery, the Belmont Defendants moved for summary judgment. To support the motion, the Belmont Defendants submitted, among other things, Meuse’s deposition testimony in which he averred that he and Belmont Partners were never asked to, nor did they provide, any due diligence with respect to the transaction, that he and Belmont Partners relied exclusively on the parties’ legal counsel to structure the transaction, and that he specifically told plaintiff that counsel had instructed him to step back and leave the structuring of the deal to the parties’ attorneys.  The Belmont Defendants also contended that plaintiffs did not satisfy the justifiable reliance element of their fraudulent inducement claim. Defendants argued that plaintiffs were sophisticated investors and hedge fund managers, who managed hundreds of millions of dollars, and who were represented by counsel throughout the transaction. As such, said defendants, plaintiffs could not exclusively rely on them to shepherd the transaction through to its conclusion. According to defendants, plaintiffs took no steps to safeguard their interests. The motion court granted in part and denied in part the Belmont Defendants’ motion for summary judgment. In denying summary judgment as to, inter alia , the fraudulent inducement and negligent misrepresentation claims, the motion court found that there were disputed issues of material fact. The First Department unanimously affirmed. The Court held that “ he motion court properly denied dismissal of plaintiffs’ claims for fraudulent inducement and negligent misrepresentation.” 2 The Court found that “ here multiple factual issues present on th record as to whether the Belmont Defendants made material misrepresentations and omissions of fact and whether plaintiffs justifiably relied on them.” 3 “Among other things,” explained the Court, “the court properly found that Meuse’s contention that he would be ‘stepping back’ from the transaction – and that he had relayed this fact to individuals at Pope Investments II LLC (Pope) – were directly refuted by the affidavits submitted by Pope representatives.” 4 For example, said the Court, the Pope representatives stated that “the Belmont Defendants had not informed Pope or any of the other investors that the Belmont Defendants would not be involved in structuring the reverse merger, and that plaintiffs conducted extensive due diligence and engaged in numerous calls and correspondence with the Belmont Defendants, who were tasked with shepherding the deal.” 5 Thus, said these representatives, “they would not have recommended entering into the reverse merger had defendants’ disclosed their noninvolvement in structuring and consummating the transaction.” 6 Such evidence, concluded the Court, was “sufficient to raise factual issues with respect to the fraudulent inducement and negligent misrepresentation claims.” 7 In affirming the motion court’s order, the Court compared the record before it to the facts in J.A.O. Acquisition Corp. v. Stavitsky , 18 A.D.3d 389, 391 (1st Dept. 2005). 8 In J.A.O. Acquisition , the plaintiff alleged that prior to its purchase of the subject company, the defendant misrepresented that certain foreign receivables were backed by letters of credit. The defendant moved for summary judgment on the ground that there was no evidence that it made such a misrepresentation. In opposition, the plaintiff submitted an affidavit in which the affiant stated that the defendant and his partner had withheld material information about foreign sales, failed to disclose that said sales were not supported by a letter of credit, and lied to the bank about the existence of letters of credit. The First Department held that the “affidavit plainly insufficient in that it contain only vague assertions, and nowhere state that told him that the foreign collectibles were supported by letters of credit or were otherwise includable in the Chase availability statement.” 9 RCM/CMG Portfolio Holding, LLC v. Giordano RCM/CMG arose from the purchase by plaintiff of a portfolio (the “Portfolio”) of legal and medical receivables (the “Receivables”) from Cambridge Management Group, LLC (“CMG”) for more than $24 million, and the subsequent servicing of collections on the Portfolio, initially by CMG and its assignee. Plaintiff asserted mostly contract-based claims against certain defendants, as well as a fraudulent misrepresentation claim against the corporate defendants’ principal, James Giordano (“Giordano”).  In connection with the fraud claim, plaintiff alleged that Giordano falsely told plaintiff’s representatives that each of the Receivables, which were individually listed on schedules the parties had exchanged during negotiations, and which plaintiff allegedly relied upon to calculate the amount it was willing to pay for the Portfolio, were viable and collectable. Giordano also allegedly told one of plaintiff’s principals that CMG’s auditor had recently examined the Portfolio and written off the Receivables that were no longer viable. Plaintiff claimed that Giordano knew at the time, that Giordano’s assurances were lies, and in reality, more than one hundred of the Receivables that Plaintiff purchased were worthless and uncollectable. After the closing of the transaction, Giordano dissolved CMG and transferred its assets through a series of successor entities. Moreover, claimed plaintiff, to conceal Giordano’s fraudulent scheme, CMG and its affiliates, which continued to service the Portfolio, submitted bi-monthly servicing reports, falsely representing that the Receivables, which were worthless and uncollectable, were still being serviced. Giordano moved to dismiss and for summary judgment dismissing plaintiff’s fraud claim against him. Giordano claimed that plaintiff failed to allege any misrepresentation of material fact. In particular, Giordano contended that the alleged misrepresentations were nothing more than a restatement of the representations and warranties in the asset purchase agreement executed in connection with the transaction. Giordano also argued that plaintiff failed to plead justifiable reliance. Noting that plaintiff is a sophisticated party, Giordano maintained that plaintiff could not simply rely on Giordano’s alleged representations. More was needed. Giordano maintained that plaintiff failed to allege that it could not have discovered the truth had it performed an adequate due diligence. In fact, claimed Giordano, plaintiff alleged that in its own post-purchase investigation, facts were revealed that could have been discovered before the closing had plaintiff engaged a third-party consultant. The motion court denied the motion. The First Department unanimously affirmed. The Court found “that issues of fact exist as to whether … Giordano made any actionable misrepresentations.” 10 The Court explained that deposition testimony (which was reiterated in affidavits) supported plaintiff’s allegation that Giordano “falsely represented … that uncollectable eceivables had recently been written off in accordance with company policy, that the subject eceivables would perform well, and that certain eceivables were valued at a certain (allegedly inflated) amount.” 11 The Court further explained that “ t least some of these represent false statements of present facts and not just ‘mere puffery, opinions of value or future expectations.’” 12 As such, dismissal was not appropriate. “To the extent, however, that plaintiff relies on its principals’ assertions in their affidavits that Giordano misrepresented to them that all of the eceivables to be purchased were ‘viable and collectable,’” such reliance, said the Court, was misplaced, especially on a motion for summary judgment:  They did not reference such a statement at their depositions, despite specific questioning, and “ ffidavit testimony that is obviously prepared in support of ongoing litigation that directly contradicts deposition testimony previously given by the same witness, without any explanation accounting for the disparity, creates only a feigned issue of fact, and isinsufficient to defeat a properly supported motion for summary judgment” ( see Telfeyan v City of NY , 40 AD3d 372, 373 <1st dept 2007> ).< 13 > 13> The Court also held that there were issues of fact “with respect to the element of justifiable reliance.” The Court rejected Giordano’s argument that merger clauses in the asset purchase agreement precluded reliance. 14 Moreover, said the Court, there was “conflicting evidence in the record regarding whether plaintiff, a sophisticated investor, took ‘reasonable steps to protect itself against deception,’ including through its conduct of due diligence and securing of written representations and warranties.” 15 The Court explained that “issues of fact exist as to whether plaintiff should have asked for case servicing notes or attributed any significance to the ‘Outstanding-Ineligible’ designation given to certain eceivables, as well as to whether plaintiff’s due diligence efforts were undermined by defendants’ own conduct in labeling cases as ‘open’ that were no longer collectable, limiting plaintiff’s access to information, and/or failing to disclose a prior arbitration.” 16 here,=">here," >here=">here" >here.=">here."> Ed. Note: In prior articles, we have discussed the impact that a disclaimer clause in a contract can have on a fraud claim.  See ,  e,g. , here and  here . As we have noted, disclaimer clauses often are worded as “no reliance” clauses. In a such a clause, the parties represent that they are not relying on any extra-contractual representations.] Footnotes Eurycleia Partners, LP v. Seward & Kissel LLP , 12 N.Y.3d 553, 559 (2009). Slip Op. at *2. Id. Id. Id. Id. Id. Id. 18 A.D.3d at 390–391. Slip op. at *2. Id. Id. (citing, Sidamonidze v. Kay , 304 A.D.2d 415 (1st Dept. 2003), and First Bank of the Ams. v. Motor Car Funding, Inc. , 257 A.D.2d 287, 292 (1st Dept. 1999)). Id. Id. (citing, Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137-138 (1st Dept. 2014)). Id. at *2-*3 (citing, DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154-155 (2010)). Id. at *3. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Section 1104 of the Business Corporation Law (“BCL”) grants a court the power to order the dissolution of a corporation “when the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors,” 1 establish that “the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained”, 2 or that “there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders”. 3 The primary issues for determination under BCL § 1104 are whether a deadlock actually exists 4 and whether such deadlock poses “an irreconcilable barrier to the continued functioning and prosperity of the corporation”. 5 Notably, the underlying reason for the deadlock is irrelevant. 6 The mere failure to attend shareholder meetings or disagreements with the shareholder who exercises control over the corporation’s daily management do not amount to dissension between shareholders sufficient to warrant dissolution. 7 Conversely, where “ he disagreements which developed and the intensity of their discord so great that efficient management impossible,” dissolution pursuant to BCL § 1104 is warranted. 8 Under BCL § 1104-a, the court is authorized to dissolve a corporation on two grounds: (a) when the directors representing “twenty percent or more of the votes of all outstanding shares of a corporation … present a petition of dissolution”, 9 and (b) a court finds, inter alia , that “ he directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders … he property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation”. 10 The underlying purpose of Section 1104-a is to enable minority shareholders of closely held corporations to obtain relief, when they are either being denied participation in or excluded from corporate management, being refused employment by the corporation, or being refused payment of any dividends. 11 Accordingly, as long as the corporation’s “stock is not traded on a securities market”, 12 BCL § 1104-a – also known as the involuntary dissolution statute – “permits dissolution when a corporation’s controlling faction is found guilty of ‘oppressive action’ toward the complaining shareholders”. 13 Whether conduct is oppressive sufficient to warrant dissolution is best understood against the backdrop of the purpose of the BCL § 1104-a, which by limiting relief only to those corporations not traded on the securities’ market, is meant to apply to closely held corporations. 14 As the Court of Appeals observed: t is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of a close corporation may expect to be actively involved in its management and operation … Unlike the typical shareholder in a publicly held corporation, who may be simply an investor or a speculator and cares nothing for the responsibilities of management, the shareholder in a close corporation is a co-owner of the business and wants the privileges and powers that go with ownership. His participation in that particular corporation is often his principal or sole source of income. As a matter of fact, providing employment for himself may have been the principal reason why he participated in organizing the corporation. He may or may not anticipate an ultimate profit from the sale of his interest, but he normally draws very little from the corporation as dividends. In his capacity as an officer or employee of the corporation, he looks to his salary for the principal return on his capital investment, because earnings of a close corporation, as is well known, are distributed in major part in salaries, bonuses and retirement benefits.< 15 > 15> Accordingly, oppressive conduct falls within the scope of BCL § 1104(a)(1) if it substantially defeats the reasonable expectations held by minority shareholders upon committing their capital to the particular enterprise. 16 In determining whether expectations are reasonable, the court must determine what a respondent knew or should have known regarding the petitioner’s expectations in joining the corporation. 17 Oppressive conduct only arises if the respondent’s conduct objectively defeats those expectations. 18 In Matter of Kemp & Beatley, Inc. , the Court of Appeals held that the petitioners had demonstrated that the respondent’s conduct was oppressive, when a longstanding practice of awarding dividends to shareholders solely based on the ownership of the respondent’s stock was changed shortly after the petitioners left the company. While extra compensation to shareholders continued to be awarded, it was done so based only on the service that a shareholder provided to the respondent. The Court held that such conduct was designed to exclude the petitioners from obtaining a return on their investment and, therefore, was oppressive as a matter of law. 19 In Dissolution of Pickwick Realty Ltd. , 246 A.D.2d 863 (3d Dept. 1998), the Third Department held that dissolution was warranted on the grounds of oppressive conduct upon proof “of the shareholders’ attempt at voiding petitioner’s shares, their falsification of corporate documents and their failure to allow petitioner access to records and documents”. 20 As note, when a shareholder is denied participation in the management of a corporation, solely based on a subjective expectation, dissolution is unwarranted. 21 In Hoffman , the petitioner sought dissolution because she was not allowed to participate in the corporation’s management. In denying the petition, the Second Department held that since the petitioner never participated nor sought to be involved in the day-to-day management of the corporation for years, she had no reasonable expectation, when she became a shareholder that she would be allowed to be involved in such activities. 22 Significantly, before dissolution is ordered, it must be determined, pursuant to BCL § 1104-a, that “feasible means whereby the petitioners may reasonably expect to obtain a fair return on their investment” 23 and “liquidation of the corporation is reasonably necessary for the protection of the rights and interests of any substantial number of shareholders or of the petitioners. 24 To that end, once oppressive conduct is found, it is the burden of the parties opposing dissolution to submit evidence demonstrating an adequate alternative to dissolution and in the absence of such evidence dissolution is warranted. 25 Whether dissolution is warranted, is a determination solely within the court’s sound discretion. 26 Against the foregoing analysis of the law, the court in Matter of Ilich , 2023 N.Y. Slip Op. 50171(U) (Sup. Ct., Bronx County Mar. 8, 2023), denied respondent’s motion to dissolve two corporations under BCL § 1104 and BCL § 1104-a. Matter of Ilich Ilich concerned petitions to dissolve a number of corporations. In particular, respondent sought an order, pursuant to BCL § 411, granting a judgment of dissolution with regard to two corporations: Drive Enterprises Inc. (“Drive”) and Zuelette Realty Corp. (“Zulette”). 27 Drive is real estate management company, which owns and manages premises located at 905 Brush Avenue, Bronx, NY (“905”). Drive rents space at 905 to Unitron Products, Inc. (“Unitron”) and six other tenants. Unitron pays Drive $12,500 per month in rent and the remaining tenants collectively pay Drive $25,000 per month in rent. Drive is authorized to issue 200 shares of common stock.  On December 22, 1997, after petitioner guaranteed a loan secured by a mortgage pledging 905 as security, petitioner was issued 100 shares of Drive’s stock by respondent, petitioner’s father. As such, petitioner owns 50 percent of Drive’s stock and respondent owns the remaining 50 percent. Petitioner alleged that for at least 10 years, respondent had instructed all tenants at 905, to pay rent directly to him instead of Drive. Rather than depositing the foregoing funds into Drive’s bank account, which, inter alia , were used to pay Drive’s mortgage, respondent used the money for his personal use. Petitioner asked respondent to deposit the foregoing sums into Drive’s account, but respondent refused to do so. In addition, respondent failed to provide petitioner with dividends to which petitioner was entitled and failed to provide petitioner portions of the rental income due to Drive as an equal owner of Drive. Even though petitioner had been managing Drive for 20 years, respondent removed petitioner’s signatory authority from Drive’s accounts, refused to grant petitioner access to Drive’s books and records, refused to discuss the disposition of Drive’s rental income, and refused to speak to petitioner.  In addition, on September 2014, respondent threatened petitioner with criminal prosecution for embezzlement of Drive’s funds and requested that petitioner relinquish all shares of Drive’s stock. Attempts to resolve the issue by scheduling a shareholder’s meeting were fruitless; respondent failed to attend such meeting, which petitioner scheduled on April 1, 2015.  Based on the foregoing, respondent sought Drive’s dissolution pursuant to BCL § 1104(a)(1) and (3), arguing that the division between the directors was such that the votes required for action could not be obtained and that the internal dissension between the directors was such that dissolution would be beneficial to the shareholders. Respondent also sought Drive’s dissolution pursuant to BCL § 1104-a(1), on grounds that respondent was guilty of oppressive action toward petitioner. The petition concerning Zulette stated that Zulette is a real estate management company, which owns and manages premises located at 2811 Zulette Avenue, Bronx, NY (“2811”). Zulette initially rented 2811 to a company that manufactured rehabilitation equipment, but currently rents 2811 to the Center for Family Support, which pays $8,000 in monthly rent. Zulette is authorized to issue 200 shares of common stock.  On December 28, 1999, after petitioner guaranteed a loan secured by a mortgage pledging 2811 as security, petitioner was issued 100 shares of Zulette’s stock by respondent. As such, petitioner owns 50 percent of Zulette’s stock and respondent owns the remaining 50 percent. Even though petitioner has managed Zulette for 20 years, respondent removed petitioner’s signatory authority from Zulette’s accounts, has refused to grant petitioner access to Zulette’s books and records, refuses to discuss the disposition of Zulette’s rental income, and refuses to speak to petitioner at all.  In addition, on September 2014, respondent threatened petitioner with criminal prosecution for embezzlement of Zuelette’s funds and requested that petitioner relinquish all shares of Zulette’s stock. Attempts to resolve the issue by scheduling a shareholder’s meeting were fruitless; respondent failed to attend such meeting, which petitioner scheduled on April 13, 2015.  Based on the foregoing, respondent sought Zulette’s dissolution pursuant to BCL § 1104(a)(1) and (3), on grounds that the division between the directors was such that the votes required for action could not be obtained and that the internal dissension between the directors was such that dissolution would be beneficial to the shareholders. Respondent also sought Zulette’s dissolution pursuant to BCL § 1104-a(a)(1), on the grounds that respondent was guilty of oppressive action toward petitioner. The court denied respondent’s motion. The court found that “respondent utterly fail to proffer any arguments in support of dissolution, fail to proffer any evidence relevant thereto and indeed, fail to establish how the evidence submitted support such relief.” 28 The court found that “respondent’s papers woefully deficient’ and did not warrant the relief sought. 29 Critically, noted the court, “ ot only does respondent fail to proffer any arguments whatsoever in support of dissolution, he fails to even assert which section of the BCL warrants dissolution in this action and submits proof that viewed in the best light is utterly irrelevant for purposes of demonstrating entitlement to the relief sought”. 30 “Significantly,” said the court, “insofar as relevant to BCL § 1104, respondent’s evidence fail to establish the existence of the requisite deadlock required by law, let alone that such deadlock present ‘an irreconcilable barrier to the continued functioning and prosperity of the corporation’”. 31 The court also held that the deficiencies in proof with regard to dissolution under BCL § 1104 existed with regard to dissolution pursuant to BCL 1104-a:   Here, the only evidence presented, which could be arguably viewed as relevant to respondent’s burden is his scant affidavit, wherein he states that petitioner diverted funds from Unitron and Zulette to another corporation, US Products, for his own benefit and that petitioner has denied respondent access to Zulette’s records. Unfortunately, this vague and conclusory assertion fails as a matter of law. The wholesale failure to specify and discuss the breath of the foregoing conduct precludes this Court from concluding that the conduct was oppressive as a matter of law. More importantly, the dearth of facts leaves this Court unable to conclude that the conduct was pervasive enough to - as it must - defeat respondent’s reasonable expectations upon embarking on the instant enterprise ( Matter of Kemp & Beatley, Inc. at 71-72; ( id. at 72; Hoffman at 723; Matter of Twin Bay at 1002).< 32 > 32>  Accordingly, the court denied the motion. here,=">here," here)=">here)" 1104-a="1104-a" >here=">here" >here).=">here)."> Takeaway Deadlock is among the most common forms of conflict in a closely held corporation. An impasse in the decision-making process of a corporation can occur on both the director and shareholder level. If the impasse cannot be consensually resolved, the corporation’s business may incur commercial and economic loss. Close corporations are particularly vulnerable to deadlock. Close corporations are typically composed of family or friends who are actively engaged in the management of the corporation. They usually have a large portion of their personal wealth invested in the business and contribute most, if not all, of their time and energy in trying to make the corporation a successful business.  If dissension develops among the owners of a close corporation, participants who wish to leave or dissolve the entity may be unable to do so. Because of the potential for deadlock in close corporations, state legislatures and the courts have developed mechanisms for shareholders to obtain relief under circumstances in which continuing the corporation provides no benefit to them. In New York, the mechanisms are BCL §§ 1104 and 1104-a. Under the BCL § 1104, dissolution is generally appropriate where deadlock impedes the daily functioning of the corporation such that the corporation’s prosperity is no longer viable. In Ilich , the court found that the proof needed to support the allegation of deadlock was absent. As a result, the court found that the alleged dissention between the parties was insufficient to dissolve the companies. Business Corporation Law § 1104-a permits involuntary dissolution of a corporation when the controlling shareholders are found guilty of “oppressive action” toward the minority. Oppression arises when “those in control” of the corporation “have acted in such a manner as to defeat those expectations of the minority stockholders which formed the basis of participation in the venture.” 33 Situations where the petitioner is “frozen out” or “squeezed out” are precisely the type of oppressive situations” that BCL § 1104-a is designed to address. 34 In Ilich , respondent alleged the diversion of corporate funds for petitioner’s own benefit. As noted, however, the proof submitted in support of dissolution was insufficient to show oppression. Consequently, the court denied the motion. Footnotes BCL § 1104(a). BCL § 1104(a)(1). BCL § 1104(a)(3). In re Dream Weaver Realty, Inc. , 70 A.D.3d 941, 942 (2d Dept. 2010); Matter of Kaufmann , 225 A.D.2d 775, 775 (2d Dept. 1996); Matter of Goodman v. Lovett , 200 A.D.2d 670, 671 (2d Dept. 1994). Matter of Kaufmann , 225 A.D.2d at 775; Matter of Goodman , 200 A.D.2d at 671. Dream Weaver Realty , 70 A.D.2d at 942; Matter of Kaufmann , 225 A.D.2d at 775; Matter of Goodman , 200 A.D.2d at 671. In re Parveen , 259 A.D.2d 389, 391 (1st Dept. 1999); Nelkin v. H. J. R. Realty Corp. , 25 N.Y.2d 543, 549 (1969). Application of Sheridan Const. Corp. , 22 A.D.2d 390, 391 (4th Dept. 1965), aff’d , 16 N.Y.2d 680 (1965). BCL § 1104-a(a). BCL § 1104-a(a)(1), (2). Matter of Blake v. Blake Agency, Inc. , 107 A.D.2d 139, 144 (2d Dept. 1985). BCL § 1104-a(a). Matter of Kemp & Beatley, Inc. , 64 N.Y.2d 63, 68 (1984). Id. at 71-72 (“As the stock of closely held corporations generally is not readily salable, a minority shareholder at odds with management policies may be without either a voice in protecting his or her interests or any reasonable means of withdrawing his or her investment. This predicament may fairly be considered the legislative concern underlying the provision at issue in this case; inclusion of the criteria that the corporation’s stock not be traded on securities markets and that the complaining shareholder be subject to oppressive actions supports this conclusion.”). Id. at 71 (internal quotation marks omitted). Id. at 72; see also Hoffman v. S.T.H.M. Realty Corp. , 207 A.D.3d 722, 723 (2d Dept. 2022); Matter of Twin Bay v. Kasian , 153 A.D.3d 998, 1002 (3d Dept. 2017). Id. at 73. Id. Id. at 74-75 (“It was not unreasonable for the fact finder to have determined that this change in policy amounted to nothing less than an attempt to exclude petitioners from gaining any return on their investment through the mere recharacterization of distributions of corporate income.”). 246 A.D.2d at 866. Matter of Brach , 135 A.D.2d 711, 712 (2d Dept. 1987). Hoffman , 207 A.D.3d at 723. BCL § 1104-a(b)(1). BCL § 1104-a(b)(2); Matter of Kemp & Beatley , at 64 N.Y.2d at 73. Matter of Kemp & Beatley , 64 N.Y.2d. at 73-75 (“After the referee had found that the controlling faction of the company was, in effect, attempting to ‘squeeze-out’ petitioners by offering them no return on their investment and increasing other executive compensation, respondents, in opposing the report’s confirmation, attempted only to controvert the factual basis of the report. They suggested no feasible, alternative remedy to the forced dissolution. In light of an apparent deterioration in relations between petitioners and the governing shareholders of Kemp & Beatley, it was not unreasonable for the court to have determined that a forced buy-out of petitioners’ shares or liquidation of the corporation’s assets was the only means by which petitioners could be guaranteed a fair return on their investments.”). Id. at 73; Matter of Blake , 107 A.D.2d at 151. CPLR § 411 provides that “ he court shall direct that a judgment be entered determining the rights of the parties to the special proceeding”. Since respondent was seeking a judgment of dissolution, the court treated respondent’s application as one pursuant to BCL § 1111(a)(3), which allows a court to “make a judgment or final order dissolving the corporation … n a special proceeding brought under section 1104 (Petition in case of deadlock among directors or shareholders) or section 1104-a (Petition for judicial dissolution under special circumstances).” Slip Op. at *3. Id. at *7. Id. Id. at *7-*8 (quoting, Matter of Kaufmann , 225 A.D.2d at 775, and citing, Matter of Goodman , 200 A.D.2d at 671). Id. at *8. Matter of Kemp & Beatley , 64 N.Y.2d at 74. In re Wiedy’s Furniture Clearance Center Co. , 108 A.D.2d 81, 84 (3d Dept. 1985); In re Rambusch , 143 A.D.2d 605, 606 (1st Dept. 1988); In re Dissolution of Pickwick Realty , 246 A.D.2d 863, 866 (3d Dept. 1998) (finding that the lower court’s ordering of dissolution following its consideration of, inter alia, the “shareholders’ attempt at voiding petitioner’s shares” was “proper in the totality of these circumstances and fully necessary to protect petitioner’s interest”). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.  This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In Standlee Premium Prods, LLC v. WGST, Inc. , 2023 N.Y. Slip Op. 30625(U) (Sup. Ct., N.Y. County Mar. 2, 2023) ( here ), the court addressed three topics that we often write about: fraudulent inducement, fraudulent conveyance and GBL § 349.  As to the former, the issue before the court was whether defendants made a material misstatement of present fact – i.e. , whether defendants misrepresented their present intention to perform under the agreements knowing that WSGT was defunct and unable to perform. The court found issues of fact sufficient to defeat a motion for summary judgment. The court also found issues of fact with regard to plaintiffs’ fraudulent conveyance claim. In that regard, the court held that the record did not conclusively demonstrate whether the payments made by WGST to WGST Productions were made without fair consideration.  Finally, as to the latter issue, the court held that plaintiffs could not withstand the challenge to their GBL § 349 claim because neither plaintiff resided in New York and none of the acts claimed to violate the statute occurred in New York.    Standlee Premium Prods, LLC v. WGST, Inc. Standlee involved the sponsorship of an episode of the television show called Farmhouse Life. Plaintiff, an Idaho-based farm that cultivates various forage crops, including alfalfa and timothy grass, was allegedly contacted by defendant, Laura Hollander, in March 2019, about sponsoring an episode of Farmhouse Life. Hollander allegedly quoted the price for the sponsorship to be between $20,000 and $60,000. Standlee claimed that it declined the offer. Taking no for an answer, Hollander allegedly attempted to secure a deal for between $12,000 and $15,000. On March 28, 2019, Standlee claimed that it signed a contract with defendant, WGST, Inc. and wired $15,000 to it at or about that time. In exchange for that payment, WGST agreed to produce video segments with footage of Standlee to be aired on three television networks and also turn over all footage to Standlee. After the Standlee contract was signed in late March, a crew visited Standlee’s farm and filmed in June 20129. Standlee claimed that it was unaware that WGST had filed dissolution paperwork in Florida at the time of filming. The dissolution papers were signed (typed, not handwritten) by defendant Hollander. Standlee claimed that WGST never provided any footage to Standlee, it did not air an episode of Farmhouse Life featuring Standlee, and it did not return the $15,000 plaintiff wired to WGST. Plaintiff BSAK Ranch LLC, a ranch that produces grass-fed beef in Texas, allegedly suffered similar circumstances in terms of paying money to WGST and getting nothing for it. However, BSAK never dealt with Hollander. BSAK signed its contract and paid its $15,000 well after WGST was dissolved.  Plaintiffs brought suit, alleging, among other things, breach of contract , fraudulent inducement, fraudulent conveyance and violation of GBL § 349. Hollander moved for summary judgment. Hollander argued that she was only a salesperson, who was not responsible for WGST’s actions. As such, Hollander claimed that she should not be liable for the acts of others. Regarding the breach of contract claim, Hollander maintained that because she was not a signatory to the agreement between Standlee and WGST, plaintiffs’ breach of contract claim should be dismissed.  Regarding the fraudulent inducement claim, Hollander maintained that she did not make any misrepresentation because she never communicated with BSAK and did not know that WGST would not produce the footage at the time she was communicating with Standlee. Hollander argued that the record showed that WGST “fully intended on fulfilling the terms of the agreement at the time the was entered into”.  Regarding the fraudulent conveyance claim, Hollander argued that it should be dismissed because the cause of action was not alleged against her; rather, the cause of action was focused on WGST and WGST Productions Inc.  Regarding the GBL § 349 claim, Hollander contended that it should be dismissed because she never engaged in deceptive practices and the acts complained of amounted to no more than a private contract dispute rather than an issue with a broader impact on consumers at large. In response, plaintiffs contended that Hollander was liable for the contract breach. Plaintiffs claimed that Hollander was an officer of WGST. Despite her contentions that she was just a salesperson, plaintiffs maintained that Hollander signed her emails with “EVP” (Executive Vice President) and included this title on her LinkedIn profile and Zoominfo page. As such, plaintiffs argued that Hollander was personally liable for the breach of contract.  Plaintiffs further claimed there were significant issues of material fact regarding their claims for fraudulent inducement. Plaintiffs argued that representatives of the defendants continued to represent that filming would be completed despite the fact the company was already defunct by the time filming took place. Plaintiffs said that Hollander was personally liable for the fraud by virtue of her position as an officer who worked closely with plaintiffs to ensure plaintiffs performed their end of the contract.  Plaintiffs also maintained that Hollander was liable for violating the DCL under an alter ego theory of liability. According to plaintiffs, defendants fraudulently conveyed the assets of WGST to WGST Productions to prevent plaintiffs from collecting on the refund owed by defendants after failing to perform their end of the agreement.  Additionally, plaintiffs contended that, for purposes of their GBL § 349 claim, defendants’ actions were consumer-oriented, as evidenced by the way defendants’s employees reached out to potential partners for the television series. Plaintiffs claimed that defendants reached out numerous times to companies and decided on two small family-oriented farming businesses, making their actions recurring and consumer-oriented. Plaintiffs further asserted that Hollander was personally liable for the violation of GBL § 349 because of her status as an officer of WGST, and her active and personal involvement in the procurement of plaintiffs as clients.  In reply, Hollander contended that there was no evidence she intended to hold herself personally liable for the contracts with plaintiffs. Hollander further claimed that she was not a corporate officer, and the title “EVP” did not originate with her, as her email signature was formatted by a secretary at WGST. Moreover, Hollander argued that there was no evidence that she operated as an officer of WGST other than an email signature. Hollander further contended that plaintiffs’ alter-ego theory was unsupported. Hollander asserted that plaintiffs were unable to demonstrate there was both an abuse of the corporate form and such abuse was for the purpose of defrauding people.  The court granted in part and denied in part the motion. Breach of Contract Noting that “ orporate officers may not be held personally liable on contracts of their corporations, provided they did not purport to bind themselves individually under such contracts,” 1 the court held that there was no evidence that Hollander agreed to bind herself individually to the agreement. 2 In fact, noted the court, she “did not sign the contracts with Standlee or BSAK.” 3 Taken to its logical conclusion, the court said that “ nder plaintiff’s argument,” even if Hollander was an officer or WGST (which she denied), “Hollander and every other corporate officer would be personally liable for every contract a corporation enters into.” 4 “Obviously,” concluded the court, “that argument fails; being an officer of a corporation does not mean you are personally liable for every contract anyone enters into on behalf of the corporation.” 5 The court rejected any thought of a veil piercing claim, stating “Plaintiffs have not presented a material issue of fact to support a piercing the corporate veil to make Hollander personally liable under the contracts at issue here.” 6 Fraudulent Inducement The court held that since “Hollander had nothing to do with the BSAK contract”, she could not be “held for fraudulently inducing it”. 7 As to Standlee, the court found that there were issues of fact as to “whether Hollander fraudulently induced Standlee to enter the contract and pay the money”. 8 The court explained that although Hollander claimed that “she did not know that the company was going to take Standlee’s money and run, the timeline and Hollander’s role in the dissolution of the corporation” were issues “for the trier of fact to decide”:  Hollander’s name was on the dissolution documents which were filed less than three months after taking Standlee’s money and making promises that were not fulfilled. While Hollander testified her email signature was a “fancy” title for sales and marketing and declined knowing anything about her signature appearing on the Articles of Dissolution …, the finder of fact may or may not believe her. If the factfinder believes her, then this claim will fail. If the factfinder does not believe her, and believes instead that at the time she was making the sale to Standlee she knew the company was going to dissolve shortly, and she still induced Standlee to part with $15,000 with the knowledge that they probably would get nothing for it, then she may be found liable. 9 Consequently, as to the fraudulent inducement claim asserted by Standlee, the court denied the motion. Fraudulent Conveyance Under Debtor/Creditor Law Under Debtor and Creditor Law § 273, “ conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration”. 10 Also, under DCL § 275, conveyances made without fair consideration are fraudulent when the conveyor “intends or believes that he will incur debts beyond his ability to pay as they mature.”  The court found issues of fact as whether the payments by WGST to WGST Productions was done without fair consideration:  Where did the plaintiffs’ money go? Plaintiff is a creditor. If the factfinder does not believe that Hollander was a mere contract salesperson (as she claims) but rather believes that she was involved in the dissolution and was responsible for paying money to persons or entities without fair consideration instead of refunding plaintiffs’ money (or refunding some money and handing over the footage), then Hollander may be liable under this cause of action. 11 General Business Law § 349 General Business Law § 349(a) provides that “deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state are hereby declared unlawful”. A Plaintiff alleging a violation of GBL § 349 must prove three elements: the challenged act or practice was consumer-oriented; it was misleading in a material way; and the plaintiff suffered injury as a result of the deceptive act. 12 “Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute.” 13 Moreover, “some part of the underlying transaction must occur in New York State and the New York action of a defendant cannot merely be hatching a scheme or originating a marketing campaign in New York”. 14 In Goshen v. Mut. Life Ins. Co. , 98 N.Y.2d 314 (2002), the Court of Appeals found that to state a cause of action under GBL § 349, the plaintiff must allege that it was deceived in New York. The court found that “ either plaintiff allege that” they were deceived in New York. 15 The court explained that both plaintiffs are resident in different states and “neither presented evidence that the communications and transactions between the parties occurred in New York.” 16 “The protections of GBL do not extend to everyone in the world just because the forum selection clause in their contract lands them in New York courts”, said the court. 17 Accordingly, the court dismissed the GBL § 349. Footnotes Westminster Constr. Co. v. Sherman , 160 A.D.2d 867, 868 (2d Dept. 1990). Slip Op. at *6. Id. Id. Id. Id. at *7. Id. at *8. Id. at *9. Id. at *8-*9. CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. P’ship , 25 A.D.3d 301, 302 (1st Dept. 2006). Slip Op. at *9. Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, NA , 85 N.Y.2d 20, 25 (1995). Id. Mountz v. Global Vision Prods. , 3 Misc. 3d 171, 177 (Sup. Ct., N.Y. County, 2003) (internal citations and quotations omitted). Slip Op. at *10. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber It is not often that we examine a case involving a cause of action for champerty. The last time we did so was on April 23, 2021 ( here ). We also examined the champerty doctrine in 2020 ( here ) and 2016 ( here ). But what is champerty? Simply, champerty is the prohibited practice of purchasing claims for the purpose of commencing litigation.  New York’s prohibition against champertous transactions is codified in Section 489 of the Judiciary Law, which provides in relevant part, and with some exceptions, that No person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon…. The New York Court of Appeals has placed a heavy burden of proof on the party claiming champertous conduct, requiring a showing that the primary, if not the sole, purpose of the transaction was the collection of a claim. 1 In Trust for the Certificate Holders of Merrill Lynch Mortg. Investors v. Love Funding (Merrill Lynch Mortg.) , 13 N.Y.3d 190 (2009), the Court of Appeals held, in response to certified questions from the U.S. Court of Appeals for the Second Circuit, that a corporation or association does not violate Judiciary Law § 489(1), as a matter of law, when the “purpose in taking assignment of … rights … was to enforce its … preexisting proprietary interest in the ….” 2 The Court explained that “the critical issue” in assessing champerty is the purpose behind the acquisition of rights that allowed the plaintiff to file the lawsuit. 3 The Court made it clear that intent to enforce does not, by itself, constitute champerty. 4 Because the plaintiff had a preexisting interest in the loan and would suffer the damages of any default on the loan, the Court found that, as a matter of law, it did not violate New York law. 5 While champerty is not a frequent topic for examination by this Blog, claims involving fraud or fraudulent conduct are frequently examined by us.  To state a claim for fraud, plaintiff must allege “misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury.” 6 “ he circumstances constituting the be stated in detail.” 7 One of the elements of a fraud claim that plaintiffs have difficulty satisfying is justifiable reliance. As evident from the reported decisions, the justifiable reliance element is most often used by defendants to secure dismissal of the claim against them. In  Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018) ( here ), the Court of Appeals described the justifiable reliance requirement of a fraud claim as a “fundamental precept” of the cause of action. 8 As such, the justifiable reliance requirement is considered to be a necessary tool to weed out fraud claims by plaintiffs who “are lax in protecting themselves”. 9 In assessing whether the plaintiff’s reliance was justified, the courts look to see whether the plaintiff’s reliance on the alleged misrepresentation was reasonable. 10 As stated by the Court of Appeals, this means the plaintiff must exercise “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. 11 Whether a plaintiff exercised diligence in ascertaining the truth should not be determined by hindsight. As the Court of Appeals explained, when “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.” 12 Sophisticated parties have a heightened duty to use the means available to them to verify the truth of the information upon which they rely and to use their sophistication to conduct due diligence. 13 A sophisticated plaintiff cannot establish justifiable reliance on an alleged misrepresentation if the plaintiff failed to make use of the means of verification that were available to him. 14 Thus, to sustain a claim of fraud, sophisticated parties must have discharged their own affirmative duty to exercise ordinary intelligence and conduct an independent appraisal of the risks they are assuming. 15 Moreover, when the plaintiff “has hints” that a representation is false, the courts impose a “heightened degree of diligence” on the plaintiff. 16 Under such circumstances, the courts require the plaintiff to make an “additional inquiry to determine” the “accuracy” of the representation. 17 If the plaintiff fails to make such an inquiry, then the plaintiff will not be found to have reasonably relied on the alleged misrepresentation. The foregoing principles, among others, were examined by the court in IKB Intl. S.A. v. Morgan Stanley , 2023 N.Y. Slip Op. 30614(U) (Sup. Ct., N.Y. County Mar. 1, 2023) ( here ). Factual Background Plaintiff IKB SA was a commercial bank incorporated in Luxembourg. IKB SA purchased a number of certificates (“Certificates”) for residential mortgage-backed securities (“RMBS”) from Morgan Stanley, allegedly in reliance on misrepresentations that Morgan Stanley made in its offering documents. In particular, Morgan Stanley allegedly made misrepresentations to IKB SA’s investment managers, Standish Mellon and BlackRock, including misrepresentations regarding loan-to-value (“LTV”) and combined loan-to-value (“CL TV”) statistics, owner-occupancy status of borrowers, and adherence to the originators’ own underwriting guidelines.  The value of the Certificates collapsed during the onset of the financial crisis as the poor quality of the underlying loans and resulting increased credit risk became apparent. Ultimately, IKB SA was placed into liquidation as part of the German government’s bailout of IKB SA’s parent, IKB AG. In November 2008, IKB SA sold the Certificates to IKB AG. Two weeks later, IKB AG sold the Certificates to a newly created Irish special purpose vehicle called Rio Debt Holdings (Ireland) Limited (“Rio”). As part of the sale of Certificates to Rio, IKB AG became a junior lender to Rio and also became a portfolio administrator to Rio. IKB AG and Rio subsequently executed an assignment agreement on May 9, 2012, in which Rio assigned to IKB AG “all the rights of action and claims against any other party with respect to the Securit ies it may have obtained in connection with its purchase of the Securities from IKB Deutsche Industriebank AG ... except rights of action and claims for the receipt of interest and principal on the Securities” (“2012 Assignment”). In exchange, IKB AG agreed to provide Rio “a sum equal to the proceeds of any recovery stemming from a resolution of claims relating to the Assigned Rights, net of all agreed costs, taxes and expenses, which shall be set out and governed by a separate agreement to be executed by the Parties”. IKB AG contended that under a supplementary deed and other governing documents, the parties agreed that 80% of the net litigation proceeds would revert to IKB AG. Rio and IKB AG executed the supplementary deed on January 11, 2013 – after Plaintiffs filed the summons in the action – but gave it retroactive effect from May 9, 2012. After the 2012 Assignment, IKB AG filed the action. The complaint alleged causes of action for fraud, fraudulent concealment, aiding and abetting fraud, and negligent misrepresentation.  Defendants moved to dismiss the complaint, in part for lack of standing, arguing that the 2012 Assignment of the fraud claims to IKB AG was void as champertous. The court denied the motion, finding that Defendants had not shown that “IKB AG’s primary or sole purpose was not to enforce a legitimate claim, or that the claim was not acquired as part of a larger transaction or for leverage in other disputes between the parties”. The court determined that IKB AG’s intent in the 2012 Assignment was a factual question which required further development of the record. However, the court dismissed the causes of action for fraudulent concealment and negligent misrepresentation. Thereafter, Defendants moved for summary judgment, claiming that the action should be dismissed on the basis of champerty. Defendants additionally argued that the complaint should be dismissed because Plaintiffs failed to establish justifiable reliance on their fraud claim.  We examine the court’s decision with respect to the champerty and fraud causes of action. Champerty The court held that the 2012 Assignment was not champertous because IKB AG had a preexisting proprietary interest in the subject matter. The court explained that to finance the initial assignment of the Certificates to Rio in 2008, IKB AG and Rio entered into a loan agreement. Pursuant to the 2008 loan agreement, IKB AG, as junior lender, was entitled to 80% of the profits from the assets. Although the loan had been paid down, the court found that, unlike other champertous assignments, the 2012 Assignment did not involve a “stranger” to the transaction. Instead, it involved a party with a prior interest. The court also held that Defendants failed to establish that the sole purpose for the 2012 Assignment was to profit off of litigation, to the exclusion of all other purposes. As noted by the court, an assignment is not champertous merely because the parties enter into the assignment “for the purpose of collecting damages, by means of a lawsuit”. 18 The purpose of the assignment must be “to make money from litigating it” for it to be champertous. 19 “ cquir a right … to enforce it” is not champertous. 20 The court found that Plaintiffs provided evidence that they were still entitled to 80% of the future cash flows under the 2008 loan agreement with Rio because the loan was not paid off entirely – even though it was paid down almost in its entirety. Therefore, concluded the court, regardless of whether the 2012 Assignment’s primary purpose was litigation, Defendants failed to provide sufficient evidence to establish that the sole purpose, to the exclusion of all other purposes, was to profit off of litigation. As such, said the court, Defendants failed to establish that the 2012 Assignment was void as champertous.  Fraud Defendants additionally moved for summary judgment on the basis that Plaintiffs failed to establish actual and justifiable reliance for their fraud cause of action. The court granted in part and denied in part the motion. Plaintiff’s fraud claim was based on three purported misrepresentations: (1) LTV and CL TV statistics; (2) owner-occupancy status of borrowers; and (3) adherence to originator underwriting guidelines. The court denied Defendants’ motion as to the first two categories. With regard to the issue of actual reliance, 21 the court found that Plaintiffs raised questions of fact as to actual reliance on the purported LTV /CL TV and owner-occupancy misrepresentations. In particular, investment manager testimony and write-ups that the investment managers issued, said the court, “clearly reflect that LTV /CL TV and owner-occupancy were at least among the factors that they considered in recommending Certificates.” 22 In addition to the write-ups, noted the court, “the preliminary term sheets prepared by Morgan Stanley reflect that CL TV/LTV and owner-occupancy were clearly significant parts of due diligence.” 23 Additionally, the court held that Defendants failed to show that Plaintiffs did not justifiably rely on the LTV /CL TV and owner-occupancy representations. 24 Focusing on the question of whether there were “hints of falsity”, the court held that Defendants failed to establish that there were such facts and circumstances. 25 “The core problem underlying” the hints of falsity identified by Defendants, said the court, was “that they almost entirely relate to indications that the sub-prime housing market and the associated RMBS in general were deteriorating rather than indications that Morgan Stanley may have misrepresented particular facts relating to the securities at issue here”. 26 The failure to establish hints of falsity with respect to particular representations relating to the Certificates, concluded the court, was fatal to Defendants’ motion. 27 The court noted that “ ven if Defendants … established that Plaintiffs were on notice of a general economic downturn, Defendants not shown that the systemic concerns raised … gave any hint of falsity of particular representations relating to these Certificates.” 28 The court also held that Defendants failed to establish “that Plaintiffs’ reliance was not justifiable because of their undisputed status as sophisticated investors.” 29 Though sophisticated parties must undertake steps to protect themselves from fraud, the court held that “Plaintiffs were not required to ‘retrace’ Defendants’ steps for their reliance to have been justifiable.” 30 As to originator underlying guidelines representations, the court found that Defendants met their burden. The court agreed with Defendants that “there no evidence in the record concerning Morgan Stanley’s representations about underwriting guidelines on which the investment managers could have relied ….” Footnotes Bluebird Partners v. First Fid. Bank , 94 N.Y.2d 726, 736 (2000). Id. at 201-02. Id. at 198-99. Id. at 200 (noting that “if a party acquires a debt instrument for the purpose of enforcing it, that is not champerty simply because the party intends to do so by litigation.”). Id. at 202. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 135 (1st Dept. 2014) (internal citation omitted). CPLR § 3016(b). See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds). Id. Epifani v. Johnson , 65 A.D.3d 224, 230 (2d Dept. 2009). Schumaker v. Mather , 133 N.Y. 590, 596 (1892); see also ACA Fin. Guar. , 25 N.Y.3d at 1044; DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). DDJ Mgt. , 15 N.Y.3d at 154. McGuire Children, LLC v. Huntress , 24 Misc. 3d 1202 (A), at *12 (Sup. Ct., Erie County), aff’d , 83A.D.3d 1418 (4th Dept. 2011). Id. Id. Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011) (quoting, Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 20016)). Id. (citation and internal quotation marks omitted). Slip Op. at *8 (quoting, Universal Inv. Advisory SA v. Bakrie Telecom Pte., Ltd. , 154 A.D.3d 171, 180(1st Dept. 2017)). Id. Id. To establish actual reliance, a plaintiff must establish that the alleged fraud was a “substantial factor in inducing to act in the way that they did.” Aronoff v. Ernst and Young , 1999 WL 458779, at *3 (Sup. Ct., N.Y. County Apr. 26, 1999 (citing, Curiale v. Peat, Marwick, Mitchell & Co. , 214 A.D.2d 16 (1st Dept. 1995)); Abu Dhabi Commercial Bank v. Morgan Stanley & Co. Inc. , 888 F. Supp. 2d 431, 462 (S.D.N.Y. 2012)). Slip Op. at *12-*13. Id. at *13. Id. at *14. Id. Id. at *16. Id. (citations omitted). Id. Id. at *17. Id.

By: Jeffrey M. Haber The Securities Exchange Act of 1934 (“Exchange Act”) governs the way in which the securities markets and its brokers and dealers operate. Under the Exchange Act, most “brokers” and “dealers” must register with the Securities and Exchange Commission (“SEC” or the “Commission”) and join a “self-regulatory organization,” or SRO. Section 15(a)(1) of the Exchange Act, 15 U.S.C. §78o(a). Under Section 3(a)(4)(A) of the Exchange Act, 15 U.S.C. §78c(a)(4)(A), a broker is defined as a person or entity that regularly: (i) participates in the solicitation, negotiation, or execution of securities transactions, (ii) receives transaction-based compensation contingent on the value or success of securities transactions or (iii) handles investor funds or securities. Apart from the foregoing, individuals and businesses need to register as a broker when, among other things, they: (a) find investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries; (b) find investment banking clients for registered broker-dealers; (c) act as “placement agents” for private placements of securities; (d) provide support services to registered broker-dealers; (e) act as “independent contractors,” but are not “associated persons” of a broker-dealer; and (f) are otherwise engaged in the business of effecting or facilitating securities transactions. Unlike a broker, who acts as agent, a dealer acts as principal. Section 3(a)(5)(A) of the Exchange Act defines a “dealer” as a person or entity that (i) holds himself/herself out as being willing to buy and sell securities on a continuous basis or (ii) originates securities that they buy and sell. Individuals who buy and sell securities for themselves generally are considered traders and not dealers. The SEC considers the regulatory regime applicable to broker-dealers to be a cornerstone of the U.S. federal securities laws because it provides important safeguards to investors and market participants. Among other things, registered broker-dealers must (a) satisfy comprehensive recordkeeping, reporting, and supervisory obligations, and (b) pass inspection and examination by the SEC and SRO. In addition, broker-dealers must address conflicts of interest and implement policies and procedures that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules, including, without limitation, safeguarding customer information and preventing identity theft. On March 3, 2023, the SEC announced (here) that it charged Silver Edge Financial LLC (“Silver Edge”), Equity Acquisition Company Ltd. (“EAC”), the owners of both companies, and sales staff of Silver Edge Financial with unregistered broker-dealer activity relating to their sales of interests in shares of various pre-IPO companies. In the cease-and-desist orders (the “Orders”), the SEC found that, since January 2019, Silver Edge, its owner Daniel J. Mackle, Sr., and six salespeople sold interests in two funds that were set up as series LLCs, with each series representing an interest in shares of a single pre-IPO company. The underlying assets in these series were interests in shares of companies that were expected to undertake an initial public offering or other liquidity event within two-to-five years. The SEC alleged that Silver Edge, Mackle, and the salespeople solicited accredited investors and raised more than $65 million while failing to register as brokers with the Commission. The SEC also find that EAC and its founder, Carsten Klein, acted as unregistered dealers in connection with their business of obtaining pre-IPO shares and offering them for sale to various pre-IPO funds, including the Silver Edge funds. The SEC alleged that EAC purchased more than 14 million shares of pre-IPO companies, including a number of highly anticipated offerings, and sold more than $13.4 million in shares to various pre-IPO funds, while keeping the remaining shares in inventory. Commenting on the enforcement action, Carolyn M. Welshhans, Associate Director of the SEC’s Enforcement Division, stated: “The SEC’s registration requirements ensure that broker-dealers fulfill important responsibilities and regulatory obligations, such as submitting to regulatory inspections and maintaining appropriate books and records. Individuals and entities in the pre-IPO space, including dealers, must comply with the SEC’s registration provisions when selling securities backed by pre-IPO shares and cannot avoid essential regulatory oversight.” In the Orders, the SEC alleged that respondents violated Section 15(a) of the Securities Exchange Act of 1934. Without admitting or denying the findings, all respondents agreed to cease and desist from future violations. Silver Edge and Mackle agreed to pay disgorgement and prejudgment interest of more than $2.5 million and a civil penalty of $975,000, and they agreed to industry and penny stock bars with the right to reapply after five years. EAC and Klein agreed to pay disgorgement and prejudgment interest of more than $3.6 million and a civil penalty of $269,360. Silver Edge, Mackle, EAC, and Klein also agreed to undertakings to ensure the legal and orderly distribution of pre-IPO interests. The six salespeople agreed to pay civil penalties ranging from $61,000 to $124,320 and to industry and penny stock bars. The Orders can be found on the same page as the press release announcing the proceeding (here). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In 228 W. 72 LLC v. 228A W. 72 LLC , 2023 N.Y. Slip Op. 01057 (1st Dept. Feb. 28, 2023) ( here ), the Appellate Division, First Department dismissed a fraudulent inducement claim because the facts allegedly concealed were publicly available. We examine 228 W. 72 LLC below. 228 W. 72 involved the purchase of real property (the “Premises”) by Plaintiff, 228 W. 72 LLC (“Plaintiff”), from Defendant, 228A W. 72 LLC (“Defendant”).  Among other things, the contract of sale provided that Plaintiff was acquiring the Premises based upon “its own independent investigation and inspection of the property,” and “‘as is’ and ‘with all faults’”.   Prior to the closing of the sale, Plaintiff conducted a search of the Premises to determine the condition of the property. Upon inspection, Plaintiff did not find any evidence that the property had an elevator. It was only after the closing that Plaintiff allegedly learned that the Premises had once been an elevator building and that Defendant took affirmative steps to hide this fact from Plaintiff through sealing the elevator doors, creating false walls in front of those doors, and removing all elevator buttons and signage. According to Plaintiff, those affirmative steps made it impossible for Plaintiff to learn of the elevator prior to the closing of the transaction. Plaintiff alleged that if Defendant had not taken affirmative steps to conceal the elevator, Plaintiff would not have closed on the Premises. Instead, Plaintiff would have required Defendant to restore the elevator to a working condition or provide Plaintiff with a credit to cover the cost of restoring the elevator.  Plaintiff allegedly spent significant sums of money to restore the elevator and the elevator doors.  Thereafter, Plaintiff sued Defendant, asserting causes of action for breach of contract, fraudulent inducement, and negligence. Plaintiff claimed damages in excess of $250,000.00. Plaintiff also sued other parties involved in the transaction.  Defendant moved to dismiss the complaint. Relevant to this article, Defendant argued that it did not hide the elevator because it was purportedly open and obvious and because violations of NYC regulations concerning the elevator existed at the time of the transaction and were available for public inspection.  In opposition, Plaintiff argued that Defendant had a duty to reveal hidden or concealed conditions, a duty to be honest, forthright, and truthful, and a duty to not willfully conceal defects in the Premises. Plaintiff also claimed that Defendant proffered no documentary evidence to refute Plaintiff’s claim of active concealment of the elevator shaft. Plaintiff further argued that Defendant knew of the concealed elevator shaft, which was a material fact, and intended to induce Plaintiff to enter into the contract by not disclosing its existence.  The motion court granted Defendant’s motion. The motion court held that Plaintiff’s allegation that it was unaware that there was an elevator in the apartment building was not credible. The motion court found that Plaintiff’s assertion that the elevator shaft was covered and hidden was irrelevant because there were open violations relating to the elevator that “could have been ascertained by .” 1 Plaintiff appealed. As noted, the First Department affirmed the dismissal. With regard to the fraudulent inducement claim, the Court held that Plaintiff could not satisfy the justifiable reliance element of the claim because it conducted an inspection of the Premises and was notified of the violations relating to the elevator, which violations were publicly available:  Plaintiff cannot claim active concealment of the elevator or justifiable reliance on any false representations, as it inspected the premises prior to the closing and was notified of open and public New York City Department of Building (DOB) violations relating to the elevator.  Takeaway 228 W. 72 is interesting because of its reliance on two related concepts pertaining to concealment and fraud: caveat emptor and justifiable reliance.  Under the doctrine of caveat emptor, the buyer of real property is required to inspect the property and satisfy himself/herself as to the quality of his/her bargain. 2 This means that where a buyer has the means available to discover, by the exercise of ordinary intelligence and diligence, the true nature of the transaction into which he/she is about to enter, he/she must make use of those means ( i.e. , demonstrate justifiable reliance). The failure to do so will preclude him/her from arguing that he/she was fraudulently induced to enter into the transaction. 3 The doctrine of caveat emptor imposes no duty on the seller or the seller’s agent to disclose any information concerning the property when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent that constitutes active concealment. The mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as a fraud. 5 In 228 W. 72 , the Court held that, with respect to the breach of contract and negligence claims, Plaintiff did not allege a “duty independent of the contract for sale of the subject premises.” 6 In the absence of a duty to disclose, there was no obligation to speak on the matter. here.=">here."> The Court also highlighted the fact that Plaintiff purchased the Premises “as is” and subject to “all Violations” of state and municipal laws and ordinances. 7 Based upon these findings, under the doctrine of caveat emptor, the Court seemed to be saying that Defendant’s silence as to the existence of the elevator did amount to a concealment that is actionable as a fraud. here.=">here."> Even if there were active concealment, as alleged, the Court found that the claim would still be dismissed on justifiable reliance grounds. As we have noted in prior articles, the justifiable reliance element is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact intensive. 8 Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Where the falsity of a representation 9 could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. 10 In 228 W. 72 , the Court held that Plaintiff could not satisfy the justifiable reliance element because it inspected the Premises prior to the closing and was notified of violations of NYC regulations relating to the elevator – violations that were “open and public”. 11 here.=">here."> Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Slip Op. at *1 (citations omitted). Glazer v. LoPreste , 278 A.D.2d 198, 198-99 (2d Dept. 2000).  Ittleson v. Lombardi , 193 A.D.2d 374, 376 (1st Dept. 1993). Matos v. Crimmins , 40 A.D.3d 1053, 1055 (2d Dept. 2007).  London v. Courduff , 141 A.D.2d 803, 804 (2d Dept. 1988). Slip Op. at *1. Id. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted. Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). Slip Op. at *1.

By: Jeffrey M. Haber The law reporters are brimming with cases in which a plaintiff seeks relief from a defendant for the failure to make a payment that is due and owing. The scenarios in which this fact pattern occurs are too many to recite here. As the reader might expect, plaintiffs do not always retain the invoice or other similar writing. Nevertheless, they seek relief, claiming that alternative evidence, such as an email, suffices to demonstrate that the defendant owes the money. While such forms of evidence may ultimately prove to be dispositive, on a motion to dismiss, they often raise issues of fact rather than conclusively show that the money (in the amount sought) is owed. In Sky Virtue Ltd. V. Trend Direct Global LLC , 2023 N.Y. Slip Op. 30527(U) (Sup. Ct., N.Y. County Feb. 21, 2023) ( here ), Justice Arlene Bluth was faced with the foregoing scenario.  Plaintiff brought the action to recover under an account stated theory for goods sold and delivered to defendant. 1 Plaintiff claimed that defendant the placed orders, which was not in dispute, received the invoices and did not object to them, making defendant liable for the amount charged therein.  Plaintiff attached a series of emails in which its president informed defendant about the outstanding invoices. Plaintiff maintained that defendant did not timely object to the invoices and that, in fact, defendant made partial payments on some of the invoices. Defendant claimed that there were a few issues related to the amount sought by plaintiff. Among other things, Defendant claimed that the amount sought by plaintiff was not readily apparent from the moving papers; it pointed out that the amounts included in the emails totaled less than the amount sought in the amended complaint. Defendant said that at least two of the invoices included goods that were never delivered to defendant. Plaintiff moved for summary judgment. The motion court denied the motion. The court found that plaintiff did not prove as a matter of law that it sent bills to defendant and that defendant failed to timely object to those invoices. 2   The court explained that plaintiff failed to “include the underlying invoices upon which this case based,” opting instead to attach the email chain that cited to the invoices. 3 The court said that the charts included in the emails were of no probative value, noting that “some of charts cut off and some contain columns written in Chinese characters.” 4 lthough the email chain upon which plaintiff relies suggests that there were outstanding invoices, the Court is unable make any determinations about when these invoices were sent, how much plaintiff seeks, or how defendant responded. For instance, the Court is unable to reconcile the amount plaintiff seeks where plaintiff failed to upload supporting documentation. Moreover, it appears that defendant uploaded certain invoices (although these do not appear to encompass all the invoices for which plaintiff seeks to recover). 5 The court underscored the point that the party claiming an account stated must “clearly establish, with the requisite specificity, the invoices it claims sent to the defendant.” 6 The court found that plaintiff failed to do so. 7 Accordingly, the court denied the motion. The court denied the motion for another reason: plaintiff failed to comply with CPLR § 2101(b), which requires that supporting documentation written in another language must be accompanied by a certified translation into English. 8 The court reminded the parties that it “must be able to understand an entire document, not only the parts in English, in order to make a determination.” 9 By failing to do so, plaintiff “failed to meet its burden.” 10 Footnotes “An account stated is an agreement between parties to an account based upon prior transactions between them with respect to the correctness of the account items and balance due. An agreement may be implied where a defendant retains bills without objecting to them within a reasonable period of time, or makes partial payment on the account.” Citibank (S. Dakota), N.A. v. Brown-Serulovic , 97 A.D.3d 522, 523 (2d Dept. 2012). Slip Op. at *3. Id. Id. Id. at *4. Id. Id. Id. Id. Id. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Many times, multiple actions are pending that involve similar facts and/or legal issues.  In such instances it may be appropriate to consolidate those actions pursuant to CPLR 602(a) , which provides that “ hen actions involving a common question of law or fact are pending before a court, the court, upon motion, may order a joint trial of any or all the matters in issue, may order the actions consolidated, and may make such other orders concerning proceedings therein as may tend to avoid unnecessary costs or delay.”   A court may, in its discretion, grant consolidation to “serve[] the interest of judicial economy.”  Isa Realty Group, LLC v. EBM Development Co. , 212 A.D.3d 427 (1 st Dep’t 2023) (citations omitted).  Consolidation is appropriate to “foreclose inconsistent results” that may obtain in related actions pending independently.  Id .  Put another way, consolidation is “appropriate where it will avoid unnecessary duplication of trials, save unnecessary costs and expense, and prevent an injustice which would result from divergent decisions based on the same facts”, Best Price Jewlers.Com, Inc. v. Internet Data Storage & Systems, Inc. , 51 A.D.3d 839 (1 st Dep’t 2008) (citation omitted), or where discovery may be “streamlin ”, Scarola Zubatov Schaffzin PLLC v. Dynamic Credit Partners, LLC , 210 A.D.3d 605, 607 (1 st Dep’t 2022).  When factors favoring consolidation exist, a motion to consolidate should be granted “absent a showing of prejudice to a substantial right by the party opposing the motion.”  Calle v. 2118 Flatbush Avenue Realty, LLC , 209 A.D3d 961, 963 (2 nd Dep’t 2022) (citations and internal quotation marks omitted). On February 22, 2023, the Appellate Division, Second Department, decided HSBC Bank USA, N.A., v. Francis , a case that addressed consolidation in the context of a residential mortgage foreclosure action.  In HSBC , the Court held “as an issue of first impression … that consolidation should be denied where one of the cases to be consolidated is subject to a meritorious motion to dismiss.”  The facts of HSBC are simple, albeit a bit unusual.  In 2008, lender commenced a mortgage foreclosure action in which borrower defaulted.  While lender obtained a judgment of foreclosure and sale, it moved to vacate same in order to have a corrected judgment entered in its place.  The corrected judgment was never entered and the action was never discontinued or dismissed.  Fast forward to 2017, when lender commenced a new action to foreclose the same mortgage.  Borrower answered in the new action and moved to dismiss on statute of limitations grounds and for summary judgment “on her counterclaim pursuant to RPAPL 1501 (4), inter alia, to cancel and discharge the subject mortgage.”  [Eds. Note: this blog has discussed statute of limitations in mortgage foreclosure actions < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> and RPAPL 1501 < here =">here"> , < here =">here"> and < here =">here"> .]  In response, lender cross-moved to consolidate the earlier and later actions to foreclose the same mortgage. Supreme court granted lender’s cross-motion and denied borrower’s motion.  According to the Second Department, supreme court “reasoned that the cases arose from identical facts and circumstances, involved common questions of law and fact, and involved causes of action to foreclose on a residential mortgage onsolidation … would avoid unnecessary duplication of trials and the possibility of inconsistent verdicts since both actions arose from the same transaction or occurrence.”  Borrower appealed. On appeal, the Second Department found the later filed action time-barred.  As this Blog has previously noted: An action to foreclose a mortgage is governed by a six-year statute of limitations. CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  … Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  Fed. Nat. Mort. Assoc. v. Mebane , 208 A.D.2d 892, 894 (2 nd Dep’t 1994) (citation omitted) The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). Because borrower demonstrated, that the underlying loan was accelerated in 2008, and the later action was commenced in 2017 -- more than six years later -- the Second Department found that borrower met her burden of demonstrating the later action was untimely.  Thus, the burden shifted to lender “to raise a question of fact as to whether the statute of limitations was tolled or otherwise inapplicable, or whether the plaintiff actually commenced the action within the applicable limitations period.”  Supreme court found persuasive, lender’s argument that “the statute of limitations defense failed once the 2017 action was consolidated with the timely 2008 action.”  The Second Department disagreed. After explaining the law on consolidation, the Second Department determined that “a precondition for merging two or more actions is that each action should itself be viable, meaning that neither is confronted with a pending—and apparently meritorious—motion to dismiss.”  Lender could not meet its shifted burden on the statute of limitations issue by “merely asserting that the 2017 action will become timely once it is merged with the timely 2008 action.” In so doing, the Court stated: The purpose of consolidation under CPLR 602(a) is not to provide a party with a procedural end run around a legal defense applicable to one of the actions. In our opinion, in such instances, judicial discretion should not be used to cure the untimeliness of one action by tethering it to a related timely action. We hold, as an issue of apparent first impression that, in this case, the Supreme Court improvidently exercised its discretion in granting consolidation and that, in general, consolidation should be denied where one of the cases to be consolidated is subject to a meritorious motion to dismiss. *     *     * Moreover, we note that, leaving aside the untimeliness of the 2017 action, there is an additional procedural challenge further demonstrating that consolidation is not appropriate in this instance. The actions are at very different procedural stages, with an order of reference and a judgment of foreclosure and sale having been entered already, though the judgment was vacated on motion, in the 2008 action. Additionally, the defendant failed to appear in the 2008 action but answered in the 2017 action. Were the actions merged, would the defendant be properly viewed as having defaulted in appearing in that merged action, or would she be properly viewed as having appeared in it? These two cases should not be consolidated where the defendant has defaulted in one but appeared and answered in the other. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber Celebrities often use their fame and likeness to promote goods and services. After all, it is a way to make extra money. Sometimes, when securities are involved, the celebrity will promote an investment opportunity without making any disclosure about whether they are paid for their endorsement. Even worse, the celebrity makes materially false and misleading statements about the investment opportunity. When the investment opportunity involves a virtual token or coin, the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations has said that “ny celebrity or other individual who promotes a virtual token or coin that is a security” and who fails to “disclose the nature, scope, and amount of compensation received in exchange for the promotion” violates “the anti-touting provisions of the federal securities laws.”1 In the Matter of Paul Anthony Pierce, SEC Release No. 11157 (Feb. 17, 2023), the SEC brought charges against former NBA player Paul Pierce (“Respondent”) for touting virtual tokens on social media without disclosing the payment he received for the promotion and for making false and misleading promotional statements about the same crypto asset. As discussed in the SEC’s Order Instituting Cease-and-Desist Proceedings (here), Respondent promoted virtual tokens on his Twitter account in exchange for financial payment from the issuer. He received crypto asset securities worth approximately $244,116 for his promotions. At the time of his promotions, Respondent had in excess of approximately 4 million Twitter followers. Specifically, Respondent allegedly promoted a securities offering conducted by EthereumMax, an online company with a public website (“EthereumMax” or the “Company”), in which it offered and sold digital “Emax tokens” (“EMAX”) to the general public. The EMAX tokens promoted by Respondent were offered and sold as investment contracts. According to the SEC, as such, these investment contracts were securities within the meaning of Section 2(a)(1) of the Securities Act of 1933. Starting on or about May 14, 2021, EthereumMax made the EMAX tokens available for public trading on a so-called “decentralized” crypto asset trading platform. According to the SEC, on May 24, 2021, EthereumMax and/or its agents began transferring EMAX tokens to Respondent in exchange for his agreement to make social media posts promoting the tokens. Respondent allegedly received at least eight (8) transfers of EMAX tokens through June 18, 2021. According to the SEC, Respondent accepted the tokens as compensation for his promotional services in lieu of payments in dollars. On May 26, 2021, Respondent allegedly promoted EthereumMax’s offering on his Twitter page. The post contained a link to the EthereumMax website, where instructions were provided for potential investors to purchase EMAX tokens. The SEC said that Respondent did not disclose that he was compensated by EthereumMax for the promotion, nor did he disclose the amount and nature of the compensation. The SEC also said that the Tweet, in which Respondent compared his compensation with ESPN and the value of the crypto token was materially misleading. Two days later, Respondent posted another allegedly misleading statement on his Twitter account about the EMAX and failed to disclose the fact that the Company was compensating him for the promotion or the amount of the compensation. The SEC also claimed that Respondent failed to disclose that his own personal holdings were in fact far lower than the amount posted in the Tweet. Respondent made additional Tweets about the Company and the offering over the next several days. The SEC maintained that the information in those Tweets were materially false and misleading for substantially the same reasons. The SEC alleged that, in total, Respondent received approximately 1,622,319,996,192 EMAX tokens, worth approximately $244,116 at the time he received them, from EthereumMax and/or its agents in exchange for his promotional tweets. In the order, the SEC found that Respondent violated the anti-touting and antifraud provisions of the federal securities laws. Without admitting or denying the SEC’s findings, Respondent agreed to pay a $1,115,000 penalty, prejudgment interest of $15,449, and approximately $240,000 in disgorgement. Respondent also agreed to not promote any crypto asset securities for three years. “This case is yet another reminder to celebrities: The law requires you to disclose to the public from whom and how much you are getting paid to promote investment in securities, and you can’t lie to investors when you tout a security,” said SEC Chair Gary Gensler. “When celebrities endorse investment opportunities, including crypto asset securities, investors should be careful to research if the investments are right for them, and they should know why celebrities are making those endorsements.” “The federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Investors are entitled to know whether a promotor of a security is unbiased, and failed to disclose this information.” A copy of the press release announcing the charges and settlement can be found here. Footnote See SEC Staff Statement Urging Caution Around Celebrity Backed ICOs (Nov. 1, 2017), available at https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos. 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.