By: Jeffrey M. Haber In commercial and business litigation, it is common for plaintiffs to assert claims against a business entity for wrongs committed by the entity. Often, plaintiffs will try to “pierce the corporate veil,” or get behind the corporate form, to hold the entity’s officers or members liable for the alleged wrongdoing. Since a plaintiff must show that an officer or member used his/her control over the entity to commit a fraud or other wrong against the plaintiff, it is not unusual for a plaintiff to try to pierce the corporate veil in a case involving some form of wrongdoing. Such was the case in 134 Emmut Props. LLC v. Galaxy Light. 136, Inc. , 2022 N.Y. Slip Op. 07026 (1st Dept. Dec. 13, 2022) ( here ), where the Appellate Division, First Department granted the plaintiff’s motion to amend its complaint to add, inter alia , a veil piercing claim against the individual defendants for opening a judgment proof shell company to avoid paying rent. 134 Emmut Props . was an action to recover sums due from defendant Galaxy Lighting 136 Inc. (the “Company”) as rent under a commercial lease that was signed by defendant Yuan Sheng Situ (“Yuen”), as president of Galaxy. According to the complaint (which primarily serves as the source for the factual discussion herein), the parties signed the lease in August 2018 (“Lease”). Galaxy was listed as a tenant in the Lease. Plaintiff alleged that Yuen’s sister, defendant Su Hua Situ (“Su”) negotiated the Lease and was actively involved in the Company’s daily operations. Su allegedly was the sole person who corresponded with and dealt with plaintiff in operating the Company. In fact, according to plaintiff, Su was seen and observed by plaintiff’s representatives occupying and operating the Company’s business within the premises. According to plaintiff, upon occupying the premises, the Company immediately breached the terms of the Lease by failing to make rental payments and additional late fees. As a result, in August 2019, plaintiff filed and served a non-payment petition against defendants for default in rent arrears. Following the filing of defendants’ answers, the parties settled the proceeding, granting plaintiff a warrant of eviction to regain legal possession of the premises. The settlement severed all monetary claims that plaintiff had against defendants. The stipulation of settlement specifically reserved plaintiff’s monetary claims against defendants for unpaid rent, late fees, and incurred attorneys’ fees.  Thereafter, plaintiff filed an action in Supreme Court, New York County. The complaint asserted claims for breach of contract and attorney’s fees. The Company and Su moved to dismiss. Plaintiff opposed the motion and moved to amend the complaint to add Yuen and a claim for veil piercing against the individual defendants. The motion court denied the motion to dismiss and granted the motion to amend. On appeal, the First Department unanimously affirmed. “Generally, a plaintiff seeking to pierce the corporate veil must show that (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” 1 The first factor – domination and control over the entity – can be shown by, among other things: (1) the failure to adhere to corporate formalities (such as, making important corporate decisions without recording them in minutes of a meeting); (2) inadequate capitalization (that is, the company never had sufficient funds to operate; it was not a separate entity that could stand on its own); (3) a commingling of assets; (4) one person or a small group of closely related people were in complete control of the company; and (5) use of corporate funds for personal benefit ( e.g. , the owner or member pays his/her personal bills from the business bank account). 2 No one factor controls the consideration. 3 The second factor allows courts to pierce the corporate veil where the shareholder/owner uses the corporation “to commit fraud , or violate other legal duty, or has been used to do an act tainted by dishonesty or unjust conduct violating plaintiff’s rights or … where such fraud or wrong results in unjust loss and injury to plaintiff ….” 4 It is not necessary, however, for there to be an alleged fraud. 5 Rather, it is sufficient that the alter ego “through their domination of the corporation, ‘abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against such that a court in equity will intervene.’” 6 In fact, in Wm. Passalacqua Builders Inc. v. Resnick Developers South, Inc. , the court held that it would be error to instruct a jury “that plaintiffs were required to prove fraud” to pierce the corporate veil, stressing that the “critical question is whether the corporation is ‘shell’ being used by the to advance their own purely personal rather than corporate ends.” 7 Applying the foregoing principles, the First Department in 134 Emmut Props. held that the facts alleged in the amended complaint sufficed to state a claim for veil piercing against the individual defendants. The Court found that “ he amended complaint permit an inference of corporate abuse by the individual defendants” in so far as it alleged that the Lease, which “Su negotiated on behalf of Yuan and defendant Galaxy Lighting 136, Inc. resulted in inequitable consequences” – that is, plaintiff was harmed because “defendants failed to pay plaintiff any rent for approximately one year, from the date they occupied the premises until the time plaintiff regained possession.” 8 Notably, the Court found that the affidavits submitted by plaintiff in connection with its motion supported the allegation of control and wrongful conduct: The affidavits and supporting text messages and emails submitted as exhibits to plaintiff's motion identify Su as the person plaintiff’s agents communicated with to negotiate the lease. In addition, plaintiff’s affiants personally observed Su at Galaxy on almost a daily basis. The affidavits further allege that Su and Yuan conspired to perpetrate a wrong by opening a judgment proof shell company, Galaxy, to avoid paying rent. 9 E.g.,="E.g.," here,=">here," and="and" >here.=">here."> Takeaway Business owners and entrepreneurs wishing to insulate themselves from personal liability for the acts taken in the name of their business can generally do so by forming a corporation ( e.g. , C-Corp. or an S-Corp.) or limited liability company. Such protection, however, is not absolute; there are exceptions to the rule. For instance, a creditor or other third party can “pierce the corporate veil” – i.e. , go behind the corporate form – to hold an officer, director, or shareholder liable when he/she fails to follow corporate formalities, comingles corporate funds with personal funds, or perpetrates a fraud or other wrongdoing on a third party. In 134 Emmut Props. , plaintiff was able to pierce the corporate veil despite the absence of a fraud claim. As the First Department held almost a decade ago: “While fraud certainly satisfies the wrongdoing requirement, other claims of inequity or malfeasance will also suffice.” 10 Thus, for example, courts will disregard the corporate form where the defendant abuses it to avoid a corporate obligation. In 134 Emmut Props. , avoiding the payment of rent by forming a shell company is an example of such conduct. 11 Footnotes Conason v. Megan Holding, LLC , 25 N.Y.3d 1, 18 (2015) (internal quotation marks omitted); TNS Holdings v. MKI Sec. Corp. , 92 N.Y.2d 335, 339 (1998). Shisgal v. Brown , 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted). Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174 (1st Dept. 2013). Lowendahl v. Baltimore & Ohio R.R. Co. , 247 A.D. 144, 157 (1st Dept.), aff’d , 272 N.Y. 360 (1936); Morris v. N.Y. State Dept. of Taxation & Fin. , 82 N.Y.2d 135, 141 (1993). Gorrill v. Icelandair/Flugleidir , 761 F.2d 847, 853 (2d Cir. 1985). Although it is not necessary to allege fraud, the plaintiff must, nevertheless, allege “particularized statements detailing … corporate misconduct” by the individuals in control of the corporation. Sheridan Broadcasting Corp. v Small , 19 A.D.3d 331, 332 (1st Dept. 2005) (internal quotation marks omitted); see also TNS Holdings , 92 N.Y.2d at 339. JSC Foreign Econ. Assoc. Technostroyexport v. Int’l Dev. and Trade Servs., Inc. , 386 F. Supp. 2d 461, 465 (S.D.N.Y. 2005) (quoting, Morris, 81 N.Y.2d at 142). Wm. Passalacqua Builders Inc. v. Resnick Developers So., Inc. , 933 F.2d 131, 138 (2d Cir. 1991). Slip Op. at *1. Id. Baby Phat Holding Co., LLC v. Kellwood Co. , 123 A.D.3d 405, 407 (1st Dept. 2014) (“Allegations that corporate funds were purposefully diverted to make it judgment-proof or that a corporation was dissolved without making appropriate reserves for contingent liabilities are sufficient to satisfy the pleading requirement of wrongdoing which is necessary to pierce the corporate veil on an alter-ego theory.”). Godwin Realty Assocs. v. CATV Enters., Inc. , 275 A.D.2d 269, 270 (1st Dept. 2000); 9 East 38th St. Assocs. v. George Feher Assocs., Inc. , 226 A.D.2d 167, 168 (1st Dept. 1996) (finding alleged fraudulent conveyance of corporate assets to avoid the corporation’s obligations under a lease sufficient for veil piercing). Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by plaintiff and damages.  A claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016(b).” 1 The failure to satisfy each element will result in dismissal of the claim. When a claim for fraud is predicated on a concealment or omission, “there must first be proven a duty to disclose material information.” 2 In a landlord and tenant relationship, just like any commercial relationship, a duty to disclose is not created simply because of the relationship. ( Id .). The reason is because a lease, as well as a commercial instrument, is typically negotiated at arm’s length between the parties. As such, there is no fiduciary relationship upon which the defendant ( e.g. , the landlord) would have an affirmative duty to disclose information to the plaintiff ( e.g. , the tenant). 3 In Sehera Food Servs. Inc. v. Empire State Bldg. Co., LLC , 74 A.D.3d 542 (1st Dept. 2010), the plaintiff executed a lease with the landlord for the premises that, at the time the lease was signed, was in the path of individuals purchasing tickets to the Empire State Building’s observation deck. The plaintiff alleged that the defendant knew, at the time the lease was signed, that the defendant planned “to relocate the ticket office”. By doing so, such traffic would be diverted away from the premises. 4 The “ lease contain no provision obligating defendant to direct ticket purchasers past the premises and … during lease negotiations no guarantees were made regarding the route to be followed by such purchasers.” 5 The First Department affirmed the denial of the plaintiff’s motion for leave to assert a fraudulent inducement claim, holding that the “plaintiff’s claim … for fraudulent concealment, … … not viable, since there no duty to disclose in a non-fiduciary, arm’s length transaction between a landlord and tenant.” 6 Similarly, in Dembeck v. 220 Central Park South, LLC , the plaintiff sued her landlord for fraudulent concealment for misleading her into thinking she was renting in a “full-service building”.  In affirming the dismissal of the fraud claims on summary judgment, the First Department stated: Here, plaintiff failed to demonstrate such a relationship requiring any duty of disclosure.  A fiduciary relationship does not exist between parties engaged in an arm’s-length business transaction, which is normally the situation between landlord and tenant.  Defendant was under no obligation to volunteer any information concerning contemplated future repairs to the elevator or any other systems in the building, and plaintiff has not claimed that defendant made any affirmative misrepresentations in that regard. 7 Even if a plaintiff can demonstrate that the defendant affirmatively misrepresented a material fact, he or she must still satisfy all the elements of the claim. For example, a plaintiff must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under a contract. 8 Under New York law, “ eneral allegations of lack of intent to perform are insufficient ; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise”. 9 Similarly, a claim of fraud that is based on predictions and expectations cannot withstand scrutiny if the complaint contains “allegations that the prediction was contradicted by a concrete, existing fact that defendant either intentionally failed to disclose or negligently failed to discover”. 10 In addition, a complaint alleging fraud must satisfy the scienter element. To allege scienter, a plaintiff must allege with particularity that the defendant had an “actual intent to deceive, manipulate, or defraud.” 11 Scienter must be plead with “sufficient detail[]”; “conclusory statement of intent” are insufficient. 12 To succeed, therefore, the plaintiff must allege facts from which there is some “rational basis for inferring that the alleged misrepresentations were knowingly made.” 13 Scienter is a very difficult element to plead. In fact, the scienter element is the hardest to plead because the evidence of intent most often rests solely with the defendant. Because of this difficulty, intent is often inferred from circumstantial evidence. 14 Finally, the plaintiff must show that the misrepresentation or omission was the direct and proximate cause of the claimed losses. 15 In other words, a plaintiff must show causation. “To establish causation, plaintiff must show both that defendant’s misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation).” 16 Transaction causation is often the easier of the two prongs to satisfy, while loss causation is typically more difficult. As noted by the Appellate Division, First Department in Laub : “ egardless of whether plaintiff could establish that he was induced by the alleged misrepresentations to follow recommendations on purchases of equities, plaintiff’s claims must fail because he has not alleged or produced any evidence that those misrepresentations directly and proximately caused his investment losses.” 17 Against the foregoing, we examine 100 & 130 Biscayne, LLC v. EE NWT OM, LLC , 2022 N.Y. Slip Op. 06985 (1st Dept. Dec. 8, 2022) ( here ), and Clarke v. Fifth Ave. Dev. Co., LLC , 2022 N.Y. Slip Op. 06991 (1st Dept. Dec. 8, 2022) ( here ).  Clarke v. Fifth Ave. Development Co., LLC Clarke involved allegations that, among other things, the landlord withheld material information about the operability of the elevator in the building in which plaintiffs were renting an apartment. Plaintiffs were parties to a one-year lease in an apartment in New York City. The building consists of six stories comprising 61 residential apartments, configured into three wings, with each wing serviced by one elevator; there are no freight or service elevators. Defendants advertised the building to the public as a first-class residence, featuring, among other things, elevator service. Elevator service was important to residents for a number of reasons, including, throwing out the trash and accessing the washers and dryers in the basement. Absent elevator service, residents were obliged to use the stairs to carry up groceries or dry cleaning, walk dogs, retrieve mail or deliveries, and admit cleaning services. When plaintiffs viewed the apartment before signing the lease, the elevator on their wing was in service. They were not told that it may be taken out of service in the future. At the time they signed the lease, the COVID-19 pandemic was in its initial stage. Plaintiffs alleged, on information and belief, that defendants had planned to replace the elevator in early 2020 but delayed the work due to the pandemic. Within two months of the commencement of their lease, defendants informed plaintiffs that the elevator would be replaced and that the project was to commence within three weeks, with elevator service being suspended indefinitely. Fearing the loss of the elevator, plaintiffs vacated the apartment and moved into a one-bedroom apartment in Brooklyn, New York with other relatives.  In October 2020, plaintiffs were told that the elevator had been replaced. Thereafter, plaintiffs moved back into their apartment. Plaintiffs contended that defendants’ failure to provide a working elevator for two months created a health and safety risk, constituted a partial constructive eviction from their apartment, violated the warranty of habitability and denied them their right to quiet enjoyment. Plaintiffs maintained that defendants refused to abate their rent for the two months at issue and reported their rent default to credit reporting agencies. In their complaint, plaintiffs advanced causes of action for fraud, partial constructive eviction, breach of the warranty of habitability, and denial of quite enjoyment. They sought compensatory and punitive damages, as well as a judgment directing defendants to remove any adverse information from plaintiffs’ credit report and enjoining them from further damaging plaintiffs’ credit rating, abating their rent, and awarding them costs. Defendants denied plaintiffs’ allegations and asserted as counterclaims that plaintiffs owed five months of rent as of November 2020, and that the lease required them to pay defendants’ legal fees. Prior to the close of discovery, plaintiffs moved for summary judgment as to the issue of liability only. The motion court denied the motion. Plaintiffs appealed. The Appellate Division, First Department affirmed. The Court held that defendants did not owe plaintiffs a duty to disclose anything about the elevator and its replacement. The Court explained that as the landlord, in an arm’s-length transaction, defendants did not have an affirmative duty to tell plaintiffs anything about the repairs to the elevator: “an arm’s length transaction between a landlord and a tenant, as existed here, does not create a fiduciary relationship, and defendant landlord therefore had no affirmative duty to inform prospective tenants that repairs would take the elevator temporarily out of service.” 18 The Court went on to say that even if defendants owed such a duty and failed to disclose the planned repairs, there were issues of fact surrounding defendants’ state of mind ( i.e. , scienter) that prevented the grant of summary judgment: “Even assuming that the cause of action for fraud rests on a theory that defendants affirmatively misrepresented the elevator’s availability during the lease period by, among other things, advertising elevator service on the building website, plaintiffs still did not sustain their burden on the motion, as the record presents an issue of fact whether defendants had the intent to defraud — a necessary element of a fraud claim.” 19 100 & 130 Biscayne, LLC v. EE NWT OM, LLC 100 & 130 Biscayne arose from a joint venture to acquire and redevelop a 30-story office tower complex in Miami, Florida. Plaintiff holds an 80% membership interest in the joint venture (the “Company”). Defendant holds the other 20%. Under the joint venture agreement between the parties, defendant was charged with managing the day-to-day business operations of the Company.  In a nutshell, plaintiff alleged that its investment in the joint venture lost over $50 million in value as a result of defendants’ “gross mismanagement” of the project. Plaintiff asserted six causes of action: (1) breach of contract, (2) fraudulent inducement, (3) negligent misrepresentation, (4) breach of fiduciary duty, (5) gross negligence, and (6) declaratory relief.  Defendants moved to dismiss the complaint in its entirety for failure to state a cause of action. The motion court granted the motion. The motion court held that plaintiff’s claims for fraudulent inducement and negligent misrepresentation were deficient because they were premised on subjective, non-actionable statements about predictions, expectations, or future performance. These allegations included, among others, presenting “projections” that turned out to be “out of line” with “norms in the relevant market”.  The motion court also held that plaintiffs’ fraud allegations were deficient because they were based on the failure to disclose future performance: “Similarly, allegations that Defendants had an “undisclosed intention to not comply with” the LLC Agreement, and that they misrepresented, in general terms, their own ability to perform the contract, fail to support a viable cause of action.” The closest the complaint came to pleading misrepresentation of a material existing fact, said the motion court, was the assertion that Talpiot Management, LLC, an affiliate of defendant and the manager of the project, falsely represented its qualifications to do business in Florida. But, said the motion court, the complaint did not allege any facts to support the claim that Talpiot’s representations were false when made. The motion court also found that the complaint failed to specify how Talpiot’s alleged lack of qualifications inhibited its performance under the contract ( i.e. , caused plaintiffs to incur damages). Instead, noted the motion court, the complaint merely alleged that “upon information and belief … certain services undertaken by Talpiot … would have required Talpiot to be licensed as a real estate broker”: “the allegations fail to trace some reasonable connection between the lack of qualifications, on the one hand, and Plaintiff’s economic injury on the other.” 20 On appeal, the Appellate Division, First Department affirmed the dismissal of the fraud-based claims. The Court agreed that the complaint failed to state a claim for fraudulent inducement and negligent misrepresentation (the second and third causes of action). 21 “As drafted”, explained the Court, “those causes of action are based on predictions and expectations, which are actionable as fraud only if the complaint contains ‘allegations that the prediction was contradicted by a concrete, existing fact that defendant either intentionally failed to disclose or negligently failed to discover’”. 22 The Court found that the “complaint no such allegations”. 23 “Further,” said the Court, “both causes of action were also insufficient to the extent they failed to allege that defendants, at the time of making the promissory representation, never intended to honor their promise.” 24 The Court also held that “Plaintiff's allegations regarding Talpiot were … insufficient to support the misrepresentation claims, as plaintiff not sufficiently plead[ ] that its losses were caused by Talpiot’s lack of a real estate broker’s license” Therefore, concluded the Court, plaintiff “failed to plead loss causation — a necessary element even on a motion to dismiss — with respect to those allegations”. 26 Footnotes Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009) (citations omitted). Dembeck v. 220 Cent. Park So., LLC , 33 A.D.3d 491, 492 (1st Dept. 2006). Sehera Food Servs. Inc. v. Empire State Bldg. Co. L.L.C. , 74 A.D.3d 542, 543 (1st Dept. 2010); Dembeck , 33 A.D.3d at 492. Sehera , 74 A.D.3d at 543. Id. Id. Dembeck , 33 A.D.2d at 492 (citation omitted). Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015). Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017); see Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 71 (1st Dept. 2017). Pacnet Network Ltd. v. KDDI Corp. , 78 A.D.3d 478, 479 (1st Dept. 2010); see also International Fin. Corp. v. Carrera Holdings Inc. , 82 A.D.3d 641, 641-642 (1st Dept. 2011). Zutty v. Rye (NOR) , 33 Misc. 3d1226(A), 2011 WL 5962804 at *11 (Sup. Ct., N.Y. Co. Apr. 15, 2011). Zanett Lombardier, Ltd. v. Maslow , 29 A.D.3d 495 (1st Dept. 2006) (citation omitted). Houbigant, Inc. v. Deloitte & Touche LLP , 303 A.D.2d 92, 93 (1st Dept. 2003). Pludeman v. N. Leasing Sys., Inc. , 10 N.Y.3d 486, 488 (2008). Friedman v. Anderson , 23 A.D.3d 163, 167 (1st Dept. 2005). Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002). Id. at 31. Slip Op. at *1 (citations omitted). Id. (citing, Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996)). Citing, Laub , 297 A.D.2d at 31 (holding “there be some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered”). In so far as defendant EE Operating Member was concerned, the Court held that the misrepresentation claims were duplicative of the breach of contract claim that it found stated a cause of action. Slip Op. at *2 (citations omitted). Slip Op. at *1 (quoting, Pacnet Network Ltd. V. KDDI Corp. , 78 A.D.3d 478, 479 (1st Dept. 2010); and citing, International Fin. Corp. v. Carrera Holdings Inc. , 82 A.D.3d 641, 641-642 (1st Dept. 2011)). Id. Id. (citations omitted). Id. Vandashield Ltd v. Isaacson , 146 A.D.3d 552, 553 (1st Dept. 2017). 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 Mechanic’s liens are powerful tools that can be used by contractors, laborers and materialmen, among others, to assist in getting paid for work performed in improving real property.  Indeed: The object and purpose of mechanics’ lien law was to protect a person who, with the consent of the of the owner of real property, enhanced its value by furnishing materials or performing labor in its improvement, by giving him an interest therein to the extent of the value of such material or labor.  The filing of the notice of lien is the statutory method prescribed by which the party entitled thereto perfects his inchoate right to that interest. John P. Kane Co. v. Kinney , 174 N.Y. 69, 73 (1903).  As previously noted in this Blog, due to the leverage that a mechanic’s lien provides to a lienor, the Lien Law permits a lienor to be “punished” if the filed lien is “willfully exaggerated”.  Howdy Jones Const. Co., Inc. v. Parklaw Realty, Inc. , 76 A.D.2d 1018 (3 rd Dep’t 1980), affirmed , 53 N.Y.2d 718 (1981).  Lien Law § 39 declares that willfully exaggerated liens are void.  Lien Law § 39-a , sets forth the penalties that can be assessed against a lienor when a lien is found to be “willfully exaggerated”.  [This Blog has discussed willful exaggeration < here =">here"> and < here =">here"> .  Hyperlink to those articles for a more detailed discussion of issues surrounding willful exaggeration and the Lien Law.] On December 8, 2022, the Appellate Division, First Department, in deciding Casella Construction Corp. v. 322 East 93 rd Street LLC , unanimously affirmed the dismissal, on summary judgment, of plaintiff, contractor’s (“Contractor”) “willfully exaggerated” mechanic’s lien.  The facts in Casella are interesting.    324 E. 93 LLC (“324 Owner”) owns a building located at 324 East 93 Street in Manhattan that was destroyed by fire (the “Destroyed Building”).  Defendant 322 East 93 rd Street LLC (“322 Owner”) owns the neighboring building located at 322 East 93 rd Street in Manhattan (the “Liened Building”).  The Destroyed Building and the Liened Building shared a party wall (the “Party Wall”).   After a fire irreparably damaged the Destroyed Building, the New York City Department of Buildings issued an emergency order requiring 324 Owner to, inter alia , demolish the Destroyed Building, make certain repairs to the Liened Building because of damage to the Party Wall and otherwise protect the Liened Building from further damage during demolition and related remedial work (the “Construction”).  By virtue of the Building Department’s order, 322 Owner was also required to permit access to the Liened Building so that the Contractor could proceed apace with the Construction.  So that the Construction could procced, 324 Owner’s insurance carrier, on behalf of 324 Owner, entered into a contract with the Contractor pursuant to which the Contractor was to perform the Construction (the “Contract”).  Among other things, according to the underlying Supreme Court Order, the Contract provided that “‘the Contract Sum shall be the fixed amount of any proceeds actually paid by <324 owner’s insurance carrier (the “carrier”)> to <324 owner> under , in connection with <324 owner’s insurance policy (the “policy”)> , apportioned to the Work, as directed pursuant to for the necessitated as a result of the fire that occurred on or about October 27, 2016.  <324 owner> and the Contractor agree that the Insurance proceeds is the sole and total compensation due to the Contractor for the full performance of the Contract’”.  (Brackets added and ellipses omitted.)  In addition, the scope of work in the Contract included work that had to be performed on the Liened Building.  Contrary to Contractor’s assertions, there was no evidence to suggest that 322 Owner agreed to pay for any of the Construction performed on the Liened Building and, indeed, the evidence was to the contrary. According to the operative Contract, the Contractor was paid by 324 Owner’s Carrier the amount deemed to be due under the Policy.  Nonetheless, the Contractor sought payment from 322 Owner for some of the remedial work performed on, or for the benefit of, the Liened Building.  When payment was not made by 322 Owner, Contractor filed a mechanic’s lien in an amount in excess of $200,000 against the Liened Building and, thereafter, Contractor commenced a mechanic’s lien foreclosure action.  322 Owner answered the complaint and, inter alia , asserted a counterclaim for damages resulting from the filing of a willfully exaggerated mechanic’s lien.  After discovery, 322 Owner moved for summary judgment dismissing the Complaint and for damages because of the exaggerated lien. Supreme Court granted the motion.  In so doing, the court found that the Contractor knew that the scope of its work included the work performed at the Liened Building and that the Contractor was paid for all of the work by 324 Owner’s insurance carrier.  Therefore, the lien on the Liened Property was necessarily exaggerated because 322 Owner owed the Contractor no money.  Supreme Court granted the motion, declared the lien void and discharged under Lien Law § 39 and referred the matter to a referee to assess damages against Contractor pursuant to Lien Law § 39-a for the willfully exaggerated lien. Contractor appealed and the First Department affirmed stating, inter alia , that: While the issue of whether the amount of a lien has been willfully exaggerated is ordinarily determined at the trial of the foreclosure action, a claim under Lien Law § 39 is subject to summary disposition where, as here, the evidence that the amount of the lien was wilfully exaggerated is conclusive. Under the particular circumstance here, defendant met its burden of establishing willful exaggeration, and plaintiff failed to raise triable issues of fact. The contract between and <324 owner> clearly provided that <324 owner> 's insurance proceeds were "the sole and total compensation due" to plaintiff for its performance of the contract work. As a result, was not entitled to any additional compensation for its work on , which work was covered under the ontract.  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 We have noted previously that the “policy of to encourage arbitration.” 1 For this reason, “ ny doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.” 2 When a party wishes to compel arbitration, that party must establish “the existence of a valid agreement to arbitrate”. 3 This means that, among other things, all parties to the agreement have the power and authority to enter into the agreement. In Wolf v. Hollis Operating Co., LLC , (2d Dept. Dec. 7, 2022) ( here ), this issue – i.e. , the authority to enter into an arbitration agreement – was examined by the Appellate Division, Second Department.  Wolf was an action to recover damages for personal injuries.  In April 2017, following a heart attack and a hospital stay, plaintiff’s decedent was admitted to a skilled nursing facility (the “nursing home”) that was owned and operated by defendants. Upon admission, the nursing home’s staff noted that the decedent suffered from delirium superimposed on dementia, among other conditions. Plaintiff, who is the decedent’s son, went to the nursing home after the decedent had been admitted.  Plaintiff was allegedly provided signature pages from the facility’s standard admission agreement by the nursing home’s administrator. According to plaintiff, the administrator did not provide the full agreement. Plaintiff signed the documents provided and later received a blank copy of the full admission agreement from the administrator, including unsigned versions of the pages he had signed.  Notably, the admission agreement contained an arbitration provision with its own signature page. The signature page for the arbitration agreement was among the pages that plaintiff had executed.  On February 9, 2019, the decedent allegedly was pushed by another resident, causing him to fall and sustain injuries. The decedent died on February 15, 2019. After plaintiff was appointed administrator of the decedent’s estate, he commenced the action on behalf of the estate to recover damages for personal injuries. The complaint alleged that defendants’ negligence led to the decedent’s fall and resulting injuries. After interposing an answer, defendants moved to compel arbitration. Plaintiff opposed the motion. By order dated June 8, 2021, the motion court granted defendants’ motion. Plaintiff appealed.  The Court reversed the motion court’s order. The Court held that defendants failed to demonstrate that there was a valid arbitration agreement between the parties. The Court found that defendants failed to submit “sufficient evidence demonstrating plaintiff’s authority to bind the decedent to arbitration at the time he signed the admission agreement on the decedent’s behalf.” 4 “Most significantly,” said the Court, “defendants failed to submit the instrument through which the plaintiff allegedly derived his authority to bind the decedent to arbitration”. 5 The Court explained that the evidence plaintiff showed to defendants, which purportedly demonstrated that “he held a power of attorney when signing the admission agreement<,> was insufficient to establish that he, in fact, held such authority as a matter of law”. 6 The Court rejected plaintiff’s contention that his status as the decedent’s son 7 and his willingness to be the decedent’s “responsible party” under the terms of the admission agreement 8 had “any bearing on his authority to bind the decedent to arbitration.” 9 The Court remanded the matter to the motion court for further proceedings to “determine whether the plaintiff possessed the requisite authority to bind the decedent to arbitration”. 10 Footnotes Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39 (1997). State of New York v. Philip Morris Inc. , 30 A.D.3d 26, 31 (1st Dept. 2006), aff’d , 8 N.Y.3d 574 (2007). Matter of Cusimano v. Berita Realty, LLC , 103 A.D.3d 720, 721 (2d Dept. 2013); Whitelock v. Morgan Stanley Smith Barney, LLC , 82 A.D.3d 1212, 1212 (2d Dept. 2011). Slip Op. at *1. Id. at *2 (citing, Sunshine Care Corp. v. Warrick , 100 A.D.3d 981, 981-982 (2d Dept. 2012)). Id. (citing, Shefa Trading III, LLC v. E.N.Y. Plaza, LLC , 192 A.D.3d 937, 939 (2d Dept. Mar. 17, 2021)). Id. (citing, Gayle v. Regeis Care Ctr., LLC , 191 A.D.3d 598, 599-600 (2d Dept. Feb. 25, 2021); and Maurillo v. Park Slope U-Haul , 194 A.D.2d 142, 146 (2d Dept.1993) Id. (citing, Sunshine Care , 100 A.D.3d at 981-982). Id. Id. (citations omitted).

Freiberger Haber LLP (the “Firm”) is pleased to announce that, effective December 1, 2022, it has moved to larger space in the same building. Our new suite number is shown in the address below: 425 Broadhollow Road Suite 416 Melville, N.Y. 11747 The Firm’s telephone and fax numbers will remain the same.  “We are excited to relocate to our new office,” commented Jeffrey M. Haber, co-founder of the Firm. “We believe that, as the Firm continues to grow, this move will better accommodate our needs.” Jonathan Freiberger, co-founder of the Firm, concurred and added that “we look forward to the Firm’s continued growth and development.” About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, securities, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber applies more than 65 years of combined experience to deliver sophisticated and creative representation to its clients. The Firm’s approach is results-oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2022 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact Jeffrey M. Haber or Jonathan H. Freiberger Freiberger Haber LLP

By:  Jeffrey M. Haber A partnership is an association of two or more persons to carry on as co-owners of a business for profit. 1 The formation of a partnership requires a shared purpose and knowing mutual assent by all parties to the partnership. Indeed, “ o person can become a member of a partnership without the consent of all the partners.” 2 When there is no written partnership agreement between the parties, as was the case in Velez v. Mitchell , 2022 N.Y. Slip Op. 06877 (1st Dept. Dec. 1, 2022) ( here ), the court must determine whether a partnership in fact existed from the conduct, intention, and relationship between the parties. 3 To make this determination, the courts look at factors such as “the intent of the parties, whether the parties shared joint control in the management of the business, whether the parties shared profits and losses and the existence of capital contribution”. 4 Of these factors, it is “ he requirement that the parties have agreed to share in the profits and losses,” that is “an indispensable essential of a contract of partnership ….” 5 The party claiming the existence of an oral partnership “bears the burden of proving the indicia of such a relationship.” 6 Velez arose out of an alleged oral agreement to form a partnership.  According to plaintiff, “ n 2009, Plaintiff was approached by Defendants … to form what would become the Ultimate Rap League” (“URL”). Plaintiff alleged that on October 26, 2009, URL began its operations as a New York general partnership with each of the parties as partners. The complaint did not allege a date or specific statement, or surrounding circumstances regarding the alleged oral agreement. Plaintiff did not have a written partnership agreement with defendants. Plaintiff's role in the partnership was to acquire the talent for URL events, including, but not limited, to recruiting rappers.  The complaint alleged that Plaintiff used out of pocket funds to cover URL expenses, such as a hotel room or a flight for talent, related to an event. Importantly, plaintiff alleged that he “would share profits with Defendants, when made available, from some of the URL events, more specifically, “Born Legacy” and “Proving Grounds” events. Plaintiff allegedly received profits in cash.  In addition to not having a partnership agreement, plaintiff “never received a contract, in writing, for the … services that he was providing to the Ultimate Rap League or a written employment agreement from the Ultimate Rap League.” Nevertheless, plaintiff maintained that the parties would not only help with the production but split all profits equally.  Plaintiff alleged that “after more than ten years” of being a partner, in April 2020, URL issued a press release on various social media platforms, saying that it was dissolving its relationship with plaintiff. Thereafter, plaintiff sent a formal demand for an inspection of URL’s books and records and a demand for an accounting of URL’s financial information from 2009 to the present. Plaintiff alleged that defendants, through their counsel, denied his request. Plaintiff brought suit, alleging 16 causes of action, including misrepresentation, breach of fiduciary duty and breach of an oral partnership agreement. In essence, plaintiff alleged that he was a partner in URL and that URL ended its relationship with plaintiff without offering to buy out plaintiff’s membership interest. Plaintiff also alleged that he was cut out of a lucrative financial deal between URL and non-party Caffeine, Inc. to supply battle rap content on Caffeine’s social broadcasting platform.  Defendants moved to dismiss. The motion court held that the complaint failed to allege the existence of a partnership agreement. Addressing the requirement that the parties share in the entity’s profits and losses, the motion court found that plaintiff failed to allege that he was responsible for URL’s losses.  The Complaint alleges that Plaintiff []would share profits, when made available, from some of the URL events, more specifically, “Born Legacy” and “Proving Grounds” events and received these alleged profits in cash. The Complaint also alleges that Plaintiff and Defendants “shared losses on an equal basis” but alleges no facts or specific instances that would support this allegation. As stated above, conclusory allegations need not be taken as true. The only expenses (which are distinct from “losses”) referenced in the Complaint were reimbursed. Additionally, the Complaint does not allege that Plaintiff ever contributed capital to URL.  The motion court sustained plaintiff’s breach of fiduciary duty claim. 7 The motion court found that plaintiff “had a close relationship with the individual defendants and worked with them on what appears to be a near-daily basis for a decade.” That relationship, and the collaborative efforts between the parties “that went into planning, promoting and executing a decade’s worth of live events”, said the motion court, sufficed to state a claim. 8 The motion court found that the facts before it were “very similar to the facts” it had “analyzed in Pai v. Blue Man Group Pub. LLC , 2016 WL 5468234, aff’d , 151 A.D.3d 456 (1st Dept. 2017).” In Pai , as in Velez , explained the motion court, the plaintiff “alleged that he had made significant creative contributions to an entertainment group, only to be left in the dark regarding the group’s finances and cut out of a more lucrative financial arrangement. This Court sustained Pai’s breach of fiduciary duty claims based on the nature of the close personal and professional relationship between plaintiff and defendants, at the pleading stage, except to the extent they were barred by the statute of limitations.” “The same result”, concluded the motion court, was “appropriate here”.  Finally, the motion court dismissed plaintiff’s misrepresentation and negligent misrepresentation claims because plaintiff failed to identify any false statement allegedly made by defendants and otherwise failed to satisfy the particularity requirement of CPLR § 3016(b).  In the complaint, plaintiff alleged, inter alia , that “Defendants released false statements to third parties that Plaintiff was fired as an employee and no longer involved and doing business on behalf of the Ultimate Rap League”. Looking at the press release, however, the motion court found that the language used was not false: The statement does not use the term “fired” or “employee” and instead states only that URL had decided to “discontinue professional relationship” with Plaintiff at that time. This statement is not false. Regardless of the form of Plaintiff’s professional relationship with URL, it was not a false statement to say that it had been “discontinued” as of April 28, 2020. As to the negligent misrepresentation claim, the motion court found that plaintiff never alleged any specific statement or the surrounding circumstances giving rise to this claim. “In fact”, noted the motion court, “the only statements that Plaintiff cites using the term ‘partner’ (and it appears in the colloquial rather than legal sense) are a question by a third party and a statement by Plaintiff”. “The Complaint does not include any statements by Defendants indicating that Defendants told or otherwise represented to Plaintiff they were involved in a partnership or joint venture”, said the motion court. Shortly after the motion court issued its decision and order, plaintiff filed an amended complaint. 9 The amended complaint largely incorporated the causes of action that were previously dismissed. Defendants moved to dismiss the amended complaint. The motion court granted the motion to “the extent of dismissing the replead causes of action and the new cause of action for a constructive trust”. Plaintiff appealed. The Appellate Division, First Department unanimously affirmed the motion court’s order. The Court found that the “new allegations of an oral partnership agreement effectively the same as the ones originally pleaded, and thus not remedy the pleading deficiencies that Supreme Court identified in its March 23, 2021 order on the motion to dismiss the original complaint”. 10 The Court explained that “Plaintiff’s failure to adequately plead that he and the individual defendants, his alleged partners, shared the burden of the losses from defendant Ultimate Rap League LLC (URL) fatal to the claim of a partnership agreement, as a mutual promise to share profits and losses is an ‘indispensable’ element of that claim”. 11 The Court rejected plaintiff’s contentions that the amended complaint “adequately pleaded a partnership claim by alleging that he and defendants ‘not only agreed to share profits and losses equally, but did so,’ and by alleging ‘specific events whereby the parties shared in profits and losses’”. 12 The Court found that the paragraphs to which plaintiff cited were conclusory and fell “short” of showing an agreement to share in the entity’s profits and losses: The paragraphs of the amended complaint he cites, to the extent they mention losses, do not allege an agreement for the sharing of losses. Rather, the amended complaint merely alleges, in a manner as conclusory as in the original complaint, that the parties shared profits and losses on an equal basis. These allegations fall short. 13 The Court also held that “Defendants … established their entitlement to dismissal of the causes of action for misrepresentation (counts two and three), as plaintiff still has not pleaded with adequate specificity the statements from which those claims arise”. 14 The claims arise from defendants’ alleged misrepresentations that plaintiff was a URL partner, yet a review of the amended complaint shows that plaintiff still has not shown what the precise statements were, or when and by whom they were made, but continues to include largely conclusory allegations as to that issue. To the extent specific instances are cited, they concern usage of the word “partner” or “partners” by third parties or by plaintiff himself. 15 See,="See," e.g. ,="e.g.," here,=">here," >here=">here" >here.=">here."> Footnotes Partnership Law § 10. Partnership Law § 40(7). Fasolo v. Scarafile , 120 A.D.3d 929, 930 (4th Dept. 2014). Moses v. Savedoff , 96 A.D.3d 466, 470 (1st Dept. 2012). Kidz Cloz, Inc. v. Officially For Kids, Inc. , 320 F. Supp. 2d 164, 171 (S.D.N.Y. 2004) (quoting, Steinbeck v. Gerosa , 4 N.Y.2d 302, 317 (1958)). F & K Supply, Inc. v. Willowbrook Dev. Co., 304 A.D.2d 918, 920 (3d Dept. 2003). A claim for breach of fiduciary exists when a plaintiff alleges (1) the existence of a fiduciary duty owed, (2) a breach of that duty, and (3) resulting damages. Jones v. Voskresenskaya , 125 A.D.3d 532, 533 (4th Dept. 2015). Whether a fiduciary duty exists is a fact-dependent analysis. Citing, St. John’s Univ. v. Bolton , 757 F. Supp. 2d 144, 166 (E.D.N.Y., 2010) (“a fiduciary relationship embraces not only those the law has long adopted ... but also more informal relationships where it can be readily seen that one party reasonably trusted another”). Defendants maintained that plaintiff was required to seek leave of court in order to file the amended complaint. Slip Op. at *1. The Court made a point of noting that plaintiff did not appeal the first order. Id. (citing, Draughn v. Roker , 193 A.D.3d 565, 566 (1st Dept. 2021)). Id. (citing, Lebedev v. Blavatnik , 193 A.D.3d 175, 185-186 (1st Dept. 2021); Slabakis v. Schik , 164 A.D.3d 454, 455 (1st Dept. 2018), lv. denied , 32 N.Y.3d 912 (2018); and Moses v. Savedoff , 96 A.D.3d 466, 470 (1st Dept. 2012)). Id. Id. (citing, Slabakis , 164 A.D.3d at 455). Id. at *1-*2 (citing, CPLR § 3016(b); CIFG Assur. N. Am., Inc. v. JP Morgan Sec. LLC , 146 A.D.3d 60, 63 (1st Dept. 2016); and Manda Intl. Corp. v. Yager , 139 A.D.3d 594, 594 (1st Dept. 2016)). Id. at *2. 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 previously discussed the discovery process and its relationship to the spoliation of evidence. [ See, e.g., < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .] Briefly stated, and as summarized from prior articles, in order for litigants to fully prosecute and defend lawsuits, 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.  Thus, spoliation “refers to evidence which is destroyed or substantially altered.”  Gilliam v. Uni Holdings , 201 A.D.3d 83, 86 (1 st Dep’t 2021) (citation omitted).“Under the common-law doctrine of spoliation, when a party negligently loses or intentionally destroys key evidence, the responsible party may be sanctioned.”  Dagro Assoc. I, LLC v. Chevron USA , 206 A.D.3d 793, 794 (2 nd Dep’t 2022); 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 November 29, 2022, the Appellate Division, First Department, decided Clarke v. Povella , a case involving spoliation of evidence.  The plaintiff in Clarke was injured when struck by a motor vehicle.  clarke matter – available on the court’s nyscef system.> clarke matter – available on the court’s nyscef system.>  As a result of the accident, plaintiff alleged that she suffered from anxiety and mental anguish.  Plaintiff testified at deposition that, at her psychologist’s suggestion, she wrote about these feelings in a journal.  Defense counsel made several unsuccessful requests over a two-year period that the journal be produced.  Ultimately, plaintiff responded to the requests by indicating that the journal could no longer be located due to a recent move. Defendant moved for spoliation sanctions as a result of plaintiff’s failure to produce the relevant entries for her journal.  Supreme court denied the motion and defendant appealed.  The First Department “unanimously modified, on the law and in the exercise of discretion, to grant the motion to the extent of imposing an adverse inference charge at trial” and, in so doing, stated: Spoliation sanctions are warranted under the circumstances here. Plaintiff was under an obligation to preserve her journal once defendants made a demand for it at her deposition, and her subsequent failure to take steps to preserve it, along with her vague accounts of when and how she had lost it, supports a finding that she was grossly negligent, giving rise to an inference that the journal would have been relevant to her claim for emotional and psychological damages. Nevertheless, the extreme sanctions of dismissal of the complaint or preclusion are unwarranted, in view of the fact that plaintiff had provided authorizations for records of her psychological treatment and testified extensively to her emotional and psychological state. Rather, we find that an adverse inference charge at trial is sufficient and appropriate. 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 One of the elements of a fraud claim that plaintiffs have difficulty satisfying is justifiable reliance. For this reason, the justifiable reliance element is most often cited by defendants to secure dismissal of the claim against them. Justifiable reliance is considered by the courts to be one of the more “nettlesome” elements of a fraud claim. 1 Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry. 2 As the New York Court of Appeals observed, “ o two cases are alike ….” For this reason, the courts look to whether the plaintiff had the “means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into” and whether he made “use of those means”. 3 If the plaintiff does not do so, “he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.” 4 After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence. 5 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.” 6 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. 7 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. 8 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. 9 See,="See," e.g. ,="e.g.," here,  here,=">here," and  here.=">here."> The justifiable reliance element was at issue in Scarola Zubatov Schaffzin PLLC v. Dynamic Credit Partners, LLC , 2022 N.Y. Slip Op. 06772 (1st Dept. Nov. 29, 2022) ( here ). In November 2017, plaintiff brought an action against defendant in the Civil Court for New York County, seeking to recover $10,585.39 in unpaid legal fees. In its answer, defendant maintained that during a telephone call, plaintiff had accepted defendant’s request to discount the amount owed by 50%. In 2019, during discovery in the Civil Court action, plaintiff learned that the request to reduce its outstanding fees was based on an alleged false statement. According to plaintiff, defendants made the request because they had not been reimbursed for those fees by a counterparty in an underlying transaction; in reality, however, said plaintiff, defendant had been reimbursed in full. With the new information, plaintiff moved to amend its complaint in Civil Court to add claims for fraudulent inducement against defendant and its principal, as the latter was the one who allegedly made the misrepresentation of fact at issue. On July 3, 2019, the Civil Court denied the motion to amend. On November 22, 2019, plaintiff filed a complaint in the Supreme Court for New York County, asserting its fraud claim, as well as an unjust enrichment claim. In the complaint, plaintiff denied that it agreed to reduce its fees. Plaintiff also said that if it did agree to the reduction, then such an agreement was predicated on false representations. In their answer, defendants asserted that the parties had reached a fee reduction agreement, and predicated an affirmative defense upon that alleged agreement.  In their summary judgment motion, however, defendants claimed that plaintiff did not agree to reduce its fees. As such, defendants argued that plaintiff could not show it relied on defendants’ alleged fraudulent statements in making any fee modification agreement because there was no such agreement. Defendants also argued that plaintiff could not show reliance on any alleged false statements. In particular, defendants argued that plaintiff failed to allege that it relied on any alleged false statements, changed its legal position regarding the unpaid fees, and had agreed to reduce its fees. In response, plaintiff argued that defendant could not have it both ways. Plaintiff maintained that defendants could not insist, on the one hand, that plaintiff agreed to waive its fees, while, at the same time, claim that plaintiff did not agree to reduce its fees. Plaintiff argued that either defendants admit that they were not truthful at the outset and concede that there was no agreement or concede that the alleged agreement was predicated on a fraud. As to reliance, plaintiff argued that defendants could not use this contradiction to claim that plaintiff could not show that it justifiably relied on defendants’ statements.  The motion court agreed with defendants, holding that plaintiff could not satisfy the justifiable reliance element of a fraud claim because plaintiff was asserting “alternative accounts of facts”:  Between the Civil Court su this action, Plaintiff’s position is, in effect, that it did not agree to write off the unpaid $10,000, but if it did, that agreement was by fraud. Plaintiff may not allege alternative accounts of facts like this. Either Plaintiff wrote off the $10,000, or it didn’t. If Plaintiff didn’t write it off, its remedy is breach of contract in the Civil Court action. The fraud claim here fails for lack of reliance. The unjust enrichment claim here fails as duplicative of enforceable contract. If Plaintiff did write it off, its remedy is the fraud claim here and the unjust enrichment claim in this action. In addition, the motion court rejected defendants’ argument that the fraud cause of action should be dismissed because it was duplicative of the breach of contract claim: With respect to the Defendant’s summary judgment motion, the Court is not persuaded by the argument that claim is duplicative of the contract claim. The fraud claim based on the idea that made false statement of present fact to induce Plaintiff to write-off $10,000 of legal fees, otherwise owed under the contract<, is> separate and distinct from any failure of to pay the legal fees it had previously agreed to pay. Plaintiff appealed. On appeal, the Appellate Division, First Department modified the motion court’s order to reinstate plaintiff’s fraud claim. The Court held, without any explanation or reason, that “ ummary judgment should not have been granted to defendants” because “plaintiff could show reliance in support of its fraud cause of action”. 10 The Court also held that the motion court “properly determined that the fraud cause of action was not duplicative of the breach of contract cause of action.” 11 The Court explained that the “fraud claim was based on a misrepresentation made in violation of a duty collateral to the fee contract”. 12 As such, said the Court, “plaintiff was entitled to maintain it in the alternative to the breach of contract cause of action, regardless of whether the causes of action sought the same damages”. 13 Takeaway It is interesting that none of the traditional justifiable reliance analyses were identified in the Court’s decision. In fact, as noted, the Court did not provide any analysis as to why it held that “plaintiff could show reliance in support of its fraud cause of action”. 14 Instead, it appears the Court believed that plaintiff could not ascertain the truth of the alleged fraud with diligent efforts because of the inconsistent positions taken by defendants in the Civil Court and Supreme Court actions.  Scarola is also notable because of the distinction made with prior cases in which the First Department has held that a fraud cause of action cannot stand side-by-side with a breach of contract claim even when the plaintiff successfully pleads a duty collateral to the contract if the relief sought by both claims is the same. 15 The cases and authorities relied upon by the Court in Scarola 16 show that where a plaintiff specifically alleges the fraud claim in the alternative, then the duplication in relief sought will not result in dismissal. After all, if the breach of contract claim fails for any reason, then the fraud claim may survive without concern for duplication. Footnotes DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Id. 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). Id. (internal quotation marks omitted). KNK Enters. Inc. v Harriman Enters., Inc. , 33 A.D.3d 872 (2d Dept. 2006). 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. Slip Op. at *1. Id. Id. (citations omitted). Id. at *2 (citations omitted). Id. at *1. See , e.g. , Demurjian v. Demurjian , 190 A.D.3d 410 (1st Dept. 2021), discussed by this Blog here . See Shear Enters., LLC v. Cohen , 189 A.D.3d 423, 424 (1st Dept. 2020); Man Advisors, Inc. v. Selkoe , 174 A.D.3d 435 (1st Dept. 2019). See also CPLR § 3014. 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 should go without saying that a plaintiff claiming breach of contract should demonstrate that the parties formed a contract that has been breached. In fact, as discussed below, contract formation is the first element of a breach of contract claim.  Typically, when there is a written agreement, issues of contract formation do not arise. Instead, the issue often arises in the context of an oral agreement, the exchange of emails, letters of intent, and term sheets. In Kamel v. Ahgelian , 2022 N.Y. Slip Op. 06697 (2d Dept. Nov. 23, 2022) ( here ), the Appellate Division, Second Department examined the issue of contract formation in the context of an alleged oral joint venture agreement.  Contract Formation The elements of a cause of action for breach of contract are (1) the formation of an agreement, (2) performance of the agreement by one party, (3) breach by the other party, and (4) damages. 1 All the elements must be pleaded in order to avoid dismissal. 2 A cause of action for breach of contract will be dismissed if it fails to allege the breach of a specific contractual provision. 3 With regard to the first element of a breach of contract claim ( i.e. , the formation of a contract), the plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent and an intent to be bound. 4 “An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.” 5 Acceptance of an offer is effective if it clearly, unambiguously and unequivocally complies with the terms of the offer. 6 “ o constitute consideration, a performance or a return promise must be bargained for.” 7 Thus, the plaintiff must demonstrate some performance or a return promise that was bargained for by the defendant’s promise to fulfill the terms of the agreement. 8 Mutual assent requires an agreement as to the essential terms and conditions of the agreement, and intent to be bound requires that such assent be sufficiently definite to assure that the parties are truly in agreement with respect to all material terms. 9 A “mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” 10 If the alleged contract “is not reasonably certain in its material terms, there can be no legally enforceable contract.” 11 In addition, under the doctrine of definiteness, the court must be able to determine what, in fact, the parties agreed to in order to enforce a contract. 12 In determining whether there is a binding contract, the subjective intent of the parties is not dispositive. 13 Instead, a court must look to “the objective manifestations of the intent of the parties as gathered by their expressed words and deeds”. 14 It should not place “disproportionate emphasis” “on any single act, phrase or other expression, but should instead look to “the totality of all of these, given the attendant circumstances, the situation of the parties, and the objectives they were striving to attain”. 15 Kamel v. Ahgelian Kamel was an action for, inter alia , specific performance of an alleged oral joint venture agreement between plaintiff and defendant and/or for damages from the breach thereof. In essence, Plaintiff claimed that he and defendant agreed to purchase certain property as equal partners, with title to be taken by an LLC to be formed for that purpose, that he worked to bring the acquisition to fruition, and that defendant undercut him by purchasing the property without him, in his name, and that he then transferred it to another LLC (co-defendant 1233 Dean Street, LLC) which was solely owned and operated by defendant. Defendants moved for summary judgment dismissing the complaint on the ground that the suit was barred by the Statute of Frauds (N.Y. General Obligations Law § 5-703), as there was no written agreement between the parties. The motion court denied the motion holding that the Statute of Frauds did not apply to render void oral partnership or joint venture agreements to deal in real property. The court further noted that defendants failed to argue that there was no oral agreement in existence. Additionally, the motion court found that there were numerous issues of fact that warranted denial of the motion. Following party depositions, defendants moved for renewal of their prior motion for summary judgment. Defendants argued that, based upon evidence that was unavailable prior to the completion of discovery, it was clear that there was no oral agreement between the parties. Defendants also reiterated their previous (and alternative) legal argument that the Statute of Frauds barred plaintiff’s claims because the oral agreement plaintiff alleged they made was unenforceable. Plaintiff opposed the motion, arguing that there was an enforceable agreement between the parties. The motion court granted the motion to renew and upon renewal reaffirmed its prior ruling that there were issues of fact preventing the grant of summary judgment. The motion court held that the purported “new” evidence derived from the depositions created more factual issues than it resolved. In particular, the court noted that the parties’ conflicting versions of the events precluded the grant of summary judgment. As to the issue of contract formation, the motion court held that there were issues of fact as to whether there was a meeting a minds between the parties: These parties, who are cousins, have submitted a large number of text messages between them about this transaction, most of which the court found were inadmissible in the prior decision. But there were certainly discussions between them, and text messages, and whether they are sufficient to constitute a meeting of the minds sufficient to constitute an enforceable oral agreement is not a question for the court.  On appeal, the Appellate Division, Second Department affirmed. In a pithy (one sentence) decision, the Court affirmed, holding: “the evidence submitted by the defendants failed to eliminate triable issues of fact regarding whether there was a meeting of the minds sufficient to give rise to a binding contract.…” 16 Takeaway In claiming a breach of contract ( i.e. , enforcing or attempting to enforce a contract), the first step for a plaintiff is to plead the existence of a valid contract. In that regard, the plaintiff must demonstrate that the parties created a contract. Kamel highlights this issue and shows that sometimes it is not so easy to make that determination. Indeed, while it is the responsibility of the court to interpret written instruments, where a finding of whether a contract has been formed is dependent on myriad evidence from which differing inferences may be drawn, courts will often find a question of fact sufficient to preclude the grant of summary judgment. 17 Footnotes E.g. , Furia v. Furia , 116 A.D.2d 694 (2d Dept. 1986). See Bonamii v. Straight Arrow Publs. , 133 A.D.2d 585 (1st Dept. 1987). E.g. , Kraus v. Visa Intl. Serv. Assn. , 304 A.D.2d 408 (1st Dept. 2003); Lebow v. Kakalios , 156 A.D.2d 301 (1st Dept. 1989). 22 N.Y. Jur. 2d, Contracts Section 9. Restatement (Second) of Contracts § 24. King v. King , 208 A.D.2d 1143, 1143-1144 (3d Dept. 1994) (citing, 21 N.Y. Jur. 2d, Contracts § 53 at 470 (1982), and 2 Williston on Contracts § 6:10 at 68 (4th ed. 1990)). See Restatement (Second) of Contracts §71. Kolchins v. Evolution Markets, Inc. , 128 A.D.3d 47, 59-60 (1st Dept. 2015). Joseph Martin, Jr., Delicatessen v. Schumacher , 52 N.Y.2d 105, 109 (1981); Matter of Express Indus. & Term. Corp. v. New York State Dept. of Transp. , 93 N.Y.2d 584, 589 (1999). Joseph Martin, Jr., Delicatessen , 52 N.Y.2d at 109. Edelman v. Poster , 72 A.D.3d 182, 184 (1st Dept. 2010). Matter of 166 Mamaroneck Ave. Corp. v. 151 E. Post Rd. Corp. , 78 N.Y.2d 88, 91 (1991); Korff v. Corbett , 18 A.D.3d 248, 250 (1st Dept. 2005) (agreement language indicated meeting of minds, refers to consideration, specifies amount clearly agreed to). Brown Bros. Elec. Contrs. V. Beam Constr. Corp. , 41 NY2d 397, 399 (1977). Id. at 399-400. Id. Slip Op. at *1-*2 (citing, Agosta v. Fast Sys. Corp. , 136 A.D.3d 694, 694 (2d Dept. 2016)). Flores v. Lower E. Side Serv. Ctr., Inc. , 4 N.Y.3d at 368-369 (2005).  Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” 1  The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” 2  “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment . ” 3 Although the privilege serves an important function – the open dialogue between attorney and client – there exists an “ bvious tension” between the privilege and the policy of New York State that favors liberal discovery. 4  Because the privilege shields from disclosure “material and necessary” information “and therefore ‘constitutes an “obstacle” to the truth-finding process,’” courts narrowly construe its application. 5 For this reason, “ he party asserting the privilege bears the burden of establishing its entitlement to protection by showing that the communication at issue was between an attorney and a client ‘for the purpose of facilitating the rendition of legal advice or services, in the course of a professional relationship,’ that the communication is predominantly of a legal character, that the communication was confidential and that the privilege was not waived.” 6 Sometimes, a party possessing the privilege can waive its protection by affirmatively making the subject matter of the privileged communication an issue in a litigation. This is called “at-issue” waiver or “subject matter waiver”. 7 Notably, the fact that privileged communications may contain information “relevant” to issues the parties are litigating will not, without more, place the contents of the privileged communication itself “at issue.” 8 Rather, “at issue” waiver occurs “when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.” 9  An example of an affirmative act that constitutes a subject matter waiver of the privilege is the affirmative defense of a party’s “reliance upon the advice of counsel.” 10 “Moreover, selective disclosure is not permitted as a party may not rely on the protection of the privilege regarding damaging communications while disclosing other self-serving communications.” 11 This Blog examined subject matter waiver  here and here . Whether the attorney-client privilege was waived by a party to a litigation was the subject of Pala Assets Holding Ltd. v. Rolta, LLC , 2022 N.Y. Slip Op. 06642 (Nov. 22, 2022) ( here ). Pala involved a post-judgment enforcement proceeding. In September 2020 and December 2020, the motion court entered two judgments against defendants (totaling more than $200 million) based on their default on certain bond debt that plaintiffs purchased post default. As part of plaintiffs’ post-judgment efforts, plaintiffs obtained, among other things, a turnover order directing defendants to turn over certain property (“Turnover Order”) and receivership orders placing certain entities under the control of a court-appointed receiver. Plaintiffs also obtained an order requiring a corporate representative to sit for a deposition. During his deposition, the corporate representative of defendant Rolta India testified that the company’s decisions with respect to the Turnover Order – e.g. , waiting to comply with the Turnover Order – were based on the advice of its Indian counsel and its need to comply with Indian law. The motion court found that the representative’s statements effectuated a waiver of the attorney-client privilege on behalf of all defendants regarding all communications concerning the Turnover Order and receivership orders.  On appeal, the Appellate Division, First Department affirmed the foregoing order. 12 Like the motion court, the Court held that the deposition testimony by the CEO and Chairman of defendants’ corporate parent, Rolta India, waived defendants’ attorney-client privilege as to communications had with various counsel representing them in New York courts and in India. 13 The Court found that “ he CEO’s testimony that defendants did not comply with post-judgment orders calling for a turnover of assets to a receiver because the turnover and receivership orders had yet to be domesticated in India in accordance with Indian law affirmatively placed the subject matter of their privileged communications in litigation.” 14 The Court noted that the “CEO testified, among other things, that defendants’ counsel in India advised noncompliance with the post-judgment orders pending domestication of such orders in India, and that defendants’ U.S. counsel would yield to the advice of its Indian counsel on the matter.” 15 Thus, concluded the Court, “invasion of the privilege was required for plaintiffs to adequately contest the validity of defendants’ defense in failing to comply with the turnover and receivership orders ( see generally Lightstone Holdings LLC , 196 AD3d at 447), particularly inasmuch as contempt proceedings had already been brought against the president of Rolta India’s primary subsidiary, and additional contempt proceedings were in the process of being commenced against other principals.” 16 The Court rejected defendants’ argument that the waiver should be restricted to communications with Rolta India’s counsel in India. The Court explained that the “dual representation and evidence of a defense strategy shared by defendants” sufficed to waive the privilege as to the company’s U.S. counsel. 17 Takeaway The testimony by the company’s CEO showed that he relied on the advice of counsel. The testimony quoted by the motion court made this point clear:  Q. So did you receive specific legal advice from your counsel, whether in India or elsewhere, stating that you did not – that Rolta India did not have to comply with orders from the New York court unless they had been domesticated in India. A. Yes, please. In fact, as noted in the motion court order, when asked why Rolta India had not complied with the Turnover Order, the CEO testified that it was based on the advice of counsel: “I … have given testimony, time and again, in these nine hours, that whatever steps were taken by us on behalf of Rolta India were taken because of the legal advice we had, and we took that and consciously based on that.” In light of such testimony, it appears to have been an easy decision for the courts to find that the CEO affirmatively placed the subject matter of the company’s privileged communication at issue in the litigation. As such, it was necessary to invade the privilege to determine the matters surrounding the alleged violation of the Turnover Order and receivership orders. Footnotes Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991). Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Ambac , 27 N.Y.3d at 624 (citing, Spectrum , 78 N.Y.2d at 376-377); see also CPLR § 3101(a)(1) (requiring “full disclosure of all matter material and necessary in the prosecution or defense of an action”). Ambac , 27 N.Y.3d at 624 (quoting, Matter of Jacqueline F. , 47 N.Y.2d 215, 219 (1979)); Spectrum , 78 N.Y.2d at 377. Ambac , 27 N.Y.3d at 624. (quoting, Rossi v. Blue Cross & Blue Shield of Greater N.Y. , 73 N.Y.2d 588, 593-594 (1989)). Deutsche Bank Trust Co. of Ams. v. Tri- Links Inv. Trust , 43 A.D.3d 56, 64 (1st Dept. 2007) (holding, subject matter waiver of a privilege occurs when “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.”). See Long Is. Light. Co. v. Allianz Underwriters Ins. Co. , 301 A.D.2d 23, 33 (1st Dept. 2002); see also Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP , 52 A.D.3d 370, 372 (1st Dept. 2008). North Riv. Ins. Co. v. Columbia Cas. Co. , 1995 WL 5792, *6, 1995 U.S. Dist. LEXIS 53, *17 (S.D.N.Y. 1995) (citations omitted); see also Manufacturers & Traders Trust Co. v. Servotronics, Inc. , 132 A.D.2d 392, 397 (1987) (no “at issue” waiver where the party asserting privilege “does not need the privileged documents to sustain its cause of action”). Village Bd. of Vil. of Pleasantville v. Rattner , 130 A.D.2d 654, 655 (2d Dept. 1987). Id. ; see also Orco Bank v. Proteinas Del Pacifico , 179 A.D.2d 390, 390 (2d Dept. 1992) (attorney-client privilege was waived by client’s “selective disclosure” of legal advice). The Court modified other portions of the motion court’s order. Slip Op. at *1. Id. (citations omitted). Id. Id. Id. at *1-*2 (citation omitted). 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 As a general matter, a “broker” must register with the SEC in order to transact business on behalf of another person. It is, therefore, unlawful for any person to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that person is registered with the Securities and Exchange Commission (“SEC”).1 Whether a person is acting as a “broker” is governed by Section 3(a)(4)(A) of the Exchange Act, 15 U.S.C. §78c(a)(4)(A). Under that section, a “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others.” Today, we examine SEC v. Gel Direct Trust, et al., Case 1:22-cv-09803 (S.D.N.Y. Nov. 17, 2022). Gel Direct involved the sale of penny stocks by defendants Jeffrey K. Galvani (“Galvani”) and Stuart A. Jeffery (“Jeffery”) through GEL Direct, LLC, the managing trustee of GEL Direct Trust (“GEL”), an entity the individual defendants created to facilitate securities transactions for its customers. According to the SEC, the vast majority of GEL’s trading activity related to the sale of penny stocks that its customers obtained through various sources, including the acquisition of convertible promissory notes or other forms of microcap financing. The SEC alleged that, although the individual defendants were affiliated brokers of a registered broker-dealer during the period in question, their GEL-related activities were conducted separate and apart from their affiliation with that broker-dealer. Both defendants listed their GEL-related activities as “Other Business Activities” that were separate and apart from their affiliation with that broker-dealer. The SEC said that in February 2022, the individual defendants attempted to include their GEL-related activities with their affiliated broker-dealer – the first time they tried to do so. However, alleged the SEC, the broker-dealer did not supervise any of GEL’s trading activity before May 2022, at the earliest. According to the SEC, from 2019 through at least May 2022, the individual defendants, acting through the GEL entities, provided brokerage services to approximately 60 customers involving at least 19,000 securities trades, primarily in penny stocks. The brokerage services they allegedly provided included taking possession of customer securities, directing trades to executing brokers, facilitating trade settlements, and disbursing trading proceeds to customers. In return for these services, defendants allegedly received at least $12 million in transaction-based and other compensation. The SEC charged defendants with operating as unregistered broker-dealers that facilitated more than $1.2 billion of securities trading. The SEC filed its complaint in the U.S. District Court for the Southern District of New York. The SEC charged defendants with violating the registration requirement of Section 15(a) of the Exchange Act and charged defendants Galvani and Jeffery as “control persons” of the GEL entities under Section 20(a) of the Exchange Act. The SEC seeks permanent injunctions, disgorgement, prejudgment interest, civil penalties, and penny stock bars against all defendants. A copy of the press release announcing the action can be found here. A copy of the complaint that the SEC filed can be found here. Footnote Section 15(a)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §78o(a) (“Exchange Act”). 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 Much has been written in this Blog about mortgage foreclosure actions.  In this Blog’s prior article: “Second Department Addresses Issues Regarding Proof of Value of Foreclosed Property for the Purpose of Calculating Deficiency Judgment Under RPAPL 1371” , we discussed deficiency judgments.  By way of brief background, loans are generally evidenced by a promissory note.  The borrower’s repayment obligations are frequently secured by a mortgage on real property.  In the event of a borrower default, among the choices available to a lender are an action at law, by which the lender sues on the note for monetary damages, or an action in equity to foreclose the mortgage.  [This Blog has addresses the issue of a lender’s election of remedies < here =">here"> , < here =">here"> and < here =">here"> .]  Generally, RPAPL 1301 , prohibits a lender from simultaneously proceeding down both paths.   Today’s article focusses on aspects of a lender’s efforts to obtain repayment of the borrower’s obligations under the note through foreclosure.  The desired result of a foreclosure action is the foreclosure sale – a public auction at which the subject property is sold by the appointed referee.  If the proceeds of the sale are less than the amount determined by the referee (and awarded to the lender in the judgment of foreclosure and sale) to be due and owing, the lender may be entitled to a deficiency judgment against the borrower.  The historical backdrop of deficiency judgments, and the enactment of RPAPL 1371 to remedy some of the inequity with the law prior thereto, are addressed by the Court of Appeals in Sanders v. Palmer , 68 N.Y.2d 180 (1986). Among other things, RPAPL 1371 requires that, after a foreclosure sale, when the lender moves to confirm the sale, if one is desired, it must also seek its deficiency judgment.  See RPAPL 1371(2).  A motion for a deficiency judgment, if made, must be made within ninety (90) days “of the consummation of the sale”.  RPAPL 1371(2).  If no such motion is made “the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist.”  RPAPL 1371(3).   The amount of the deficiency judgment shall be “equal to the sum of the amount owing by the party liable as determined by the judgment with interest, plus the amount owing on all prior liens and encumbrances with interest, plus costs and disbursements of the action including the referee's fee and disbursements, less the market value as determined by the court or the sale price of the property whichever shall be the higher.”  RPAPL 1371(2).   The calculation of a deficiency judgment was the issue decided on November 16, 2022, by the Appellate Division, Second Department, in Rhinebeck Bank v. WA 319 Main, LLC. In Rhinebeck , the borrower’s property was sold at auction for $795,001.  The amount found to be due and owing to the lender pursuant to the judgment of foreclosure and sale was approximately $1.16 million.  The lender moved for leave to enter a deficiency judgment in the approximate amount of $366,000 and supported its motion with an appraisal of the property that presented a range of values from approximately $620,000 to $1.1 million – the low end of the range being referred to as the “liquidation value”.  The lender urged the supreme court to accept the $620,000 “liquidation value” of the property as the “fair market value” for the purposes of calculating the deficiency judgment.  Because the sale price at auction (approximately $795,000) is higher than the purported fair market value (approximately $620,000) the lender requested that the sale price should be used to calculate the deficiency under RPAPL 1371(2).  Accordingly, the lender argued that the deficiency should be calculated by subtracting the sale price at the public auction ($795,000) from the amount calculated as due and owing by the referee ($1.16 million) for a difference (and deficiency judgment) of approximately $365,000.  Supreme court agreed and entered a deficiency judgment in that amount in favor of the lender.  The borrower appealed. The Appellate Division modified the supreme court’s order finding that it was error to base the deficiency judgment calculation on the “liquidation value” from the appraisal report.  Instead, the supreme court found that the upper range value of approximately $1.1 million should have been used.  In so doing the Court stated: It is the lender who bears the initial burden of demonstrating, prima facie, the property's fair market value as of the date of the auction sale.  When a lender moves to secure a deficiency judgment against a borrower, the court shall determine, upon affidavit or otherwise as it shall direct, the fair and reasonable market value of the mortgaged premises as of the date such premises were bid on at auction or such nearest earlier date as there shall have been any market value thereof. Here, to the extent that the Supreme Court, in effect, determined that the estimated liquidation value of $620,000 reflected the fair and reasonable market value of the property, this was error. A property's market value is defined as the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell. “Fair market value” means neither panic value, auction value, speculative value, nor a value fixed by depressed or inflated prices. Here, the record does not support a finding that the estimated liquidation value of $620,000 constituted the fair and reasonable market value of the property at the time of the foreclosure sale. Rather, the record supports a determination that the higher estimated value of $1,060,000 presented by the plaintiff's appraiser constituted the fair and reasonable market value of the property at the time of the foreclosure sale. As this value is higher than the auction price for the property, the deficiency judgment must be calculated as the difference between the amount of the indebtedness on the mortgage and $1,060,000 ( see RPAPL 1371<1> ). Accordingly, we modify the order so as to grant that branch of the 's motion which was for leave to enter a deficiency judgment against to the extent of granting the plaintiff leave to enter a deficiency judgment against in the sum of $104,186.56.  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.