By Jonathan H. Freiberger Personal guaranties are contracts of suretyship pursuant to which “one party as surety binds himself to the second party as creditor to pay a debt contracted by a third party either immediately upon default of the third party or after attempts to effect collection from the third party have failed.”  General Phoenix Corp. v. Cabot , 300 N.Y. 87, 92 (1949).  As to when the surety’s obligation arises: hether a surety is a guarantor of payment or a guarantor of collection depends upon the intention of the parties as expressed in the surety contract. If he binds himself to pay immediately upon default of the debtor, he becomes a guarantor of payment; if he binds himself to pay only after all attempts to obtain payment from the debtor have failed, he becomes a guarantor of collection. Federal Deposit Ins. Corp. v. Schwartz , 78 A.D.2d 867 (2 nd Dep’t 1980) ( quoting General Phoenix, supra , at 92). Lenders and landlords, among others, typically request personal guarantees as a form of security in a host of commercial and personal transactions, such as bank loans and leases.  In many such instances, the guarantors are “private” or uncompensated.  For example, a loan or lease may be guaranteed by a principal of a business borrower or commercial tenant and a personal loan or residential lease may be guaranteed by a parent.   Traditionally, guarantees have been “interpreted in the strictest manner guarantor’s obligation cannot be altered without its consent; if the original note is modified without its consent, a guarantor is relieved of its obligation.”  White Rose Food v. Saleh , 99 N.Y.2d 589, 591 (2003) (citations omitted); see also Lo-Ho LLC v. Batista , 62 A.D.3d 558 (1 st Dep’t 2009) (holding same in the context of a “private guarantor” under a commercial lease).  “ Strictissimi juris, ” or the strict construction of a surety obligation, has traditionally been applied in New York, and continues as to uncompensated sureties, but is not so rigidly applied in the context of compensated sureties.  In this regard, the Court of Appeals has stated that: Though it was the early rule in New York that a surety obligation is strictissimi juris, and the surety is discharged by any alteration of the contract whether material or not, and whether it is or is not to the surety’s injury, we have declined to apply the rule to compensated sureties in the context of construction contracts (… see also 23 Lord, Williston on Contracts § 61:5 <4th ed.> <“(t)he corporate compensated surety is not favored with the solicitude shown the private, uncompensated surety”> ). In such a case, discharging the surety is inappropriate where the purported alteration cannot be said to affect the surety adversely or to have any effect whatever upon the contract or the defendant’s obligation. It is incumbent on the surety seeking to be discharged to demonstrate that an obligee’s act has so prejudiced it that its obligation is impaired. Mount Vernon City School Dist. V. Nova Cas. Co . , 19 N.Y.3d 28, 36 (2012) (some citations, internal quotation marks, ellipses and internal brackets omitted). On April 12, 2022, the Appellate Division, First Department, decided Paganini v. 40 West 127 th Street, LLC , and addressed the principles discussed herein.  The plaintiff in Paganini brought an action against her residential landlord seeking, inter alia , a declaration that the premises she occupied was subject to New York’s rent stabilization laws.    Landlord commenced a third-party action against guarantors of tenants’ obligations under the lease.  Landlord asserted that “the guaranties apply because they provided they would ‘remain and continue in full force and effect as to any renewal, change or extension of the Lease’ and the guaranties ‘will not be affected by any change in the Lease, whatsoever’ even if the guarantors were not parties to these changes.”  Supreme court granted guarantors’ motion to dismiss the third-party complaint and landlord appealed. The First Department unanimously affirmed the dismissal and stated:  … because a guaranty must be construed strictly by its terms, a guarantor's obligations under the lease, and all extensions or renewals simply means a guarantor is responsible for the tenants' obligations during the initial term of the lease or during the term of the lease as expressly extended or renewed. In this case, no express extension or renewal of the original lease ever took place. In fact, there was no option to renew or extend included in the December 2018 lease. The 2018 lease therefore effectively expired on August 31, 2019. Moreover, the subsequent two new leases gave no indication that they were "renewal" leases, and the 2020 lease added a new provision relating to early termination, under which maintains it is entitled to damages under the guaranties. Under the circumstances, interpreting the guaranties in the strictest manner, we agree with the trial court that the lease signed in 2020 was not an extension of the 2018 lease that would permit to recover from … guarantors. 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 Mandatory arbitration has been around for a long time. It is a mechanism used by, among others, businesses to require consumers to arbitrate their disputes rather than litigate their claims in a court of law. Although in theory a consumer can opt-out of the arbitration requirement, in reality to do so would mean that he or she would not obtain the product or service. For example, a person cannot buy something online, subscribe to a service, or join a club or organization without agreeing to the provider’s “terms of service” – terms that typically include mandatory arbitration requirements or other conditions precedent to a claim. here.=">here."> A mandatory arbitration clause, much like any negotiated arbitration provision, typically specifies the arbitration provider (such as, JAMS or the AAA), the location for the arbitration, and the rules that will be applied in arbitration (such as the Commercial Rules of the AAA). In addition, as seen more recently, a mandatory arbitration clause will prohibit the individual from bringing his/her claim as a class action.  The use of mandatory arbitration agreements can be traced to the U.S. Supreme Court’s endorsement of arbitration and its interpretation of the Federal Arbitration Act (“FAA”). For example, in AT&T Mobility v. Concepcion , the Court held, in a 5-4 ruling, that corporations could ban individuals from enforcing their rights through a class action even when the individual’s claims were too small and more suitable for class treatment. 1 In Epic Systems Corp. v. Lewis , a majority of the Court (again, in a 5-4 decision) held that the FAA required the courts “to enforce arbitration agreements according to their terms” and that as such employers could require employees to submit all work-related disputes to individual arbitration, as opposed to class or collective litigation. 2 In Lobel v. CCAP Auto Lease, Ltd. , a court in the commercial division of the New York Supreme Court in Westchester County dismissed a consumer class action on the grounds that the arbitration clause at issue required individual arbitration, notwithstanding the prohibition of mandatory arbitration under GBL § 399-c. Lobel v. CCAP Auto Lease, Ltd. , 2022 N.Y. Slip Op. 50256(U) (Sup. Ct., Westchester County Apr. 8, 2022) ( here ). As discussed below, both New York state and federal courts have held that the FAA preempts GBL § 399-c. The Primary Principles at Issue in Lobel Federal law strongly favors the enforcement of arbitration agreements. The U.S. Supreme Court has described the FAA as being “designed to promote arbitration,” “embod national policy favoring arbitration,” and reflecting “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” 3 As with the FAA, New York also has a “long and strong public policy” favoring the enforcement of arbitration agreements. 4 The FAA provides that agreements to arbitrate are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 5 When an agreement to arbitrate falls within the scope of the FAA, federal law, not state law, “governs issue” of arbitrability.” 6 This is critical when, as in Lobel , a state law ( e.g. , GBL § 399-c) is inconsistent with federal law. Under New York law, mandatory arbitration agreements in consumer transactions are prohibited. 7 In that regard, GBL § 399-c provides, in relevant part, that “ o written contract for the sale or purchase of consumer goods … to which a consumer is a party, shall contain a mandatory arbitration clause …. The provisions of a mandatory arbitration clause shall be null and void.” 8 Notwithstanding, both state and federal courts in New York have held that GBL § 399-c is preempted by the FAA. 9 Lobel v. CCAP Auto Lease, Ltd. Plaintiff alleged that on or about July 31, 2018, he entered into a lease agreement (the “Lease”) with Chrysler to lease a 2018 Jeep Grand Cherokee for a 36-month term ending on July 21, 2021. The Lease provided for a total monthly payment of $539.97, which included payment for plaintiff’s proportionate share of the New York State sales tax due thereunder.  On or about June 22, 2021, plaintiff executed a one-month Lease Extension Authorization, which extended the Lease to August 30, 2021. Plaintiff alleged that Chrysler improperly added to the $539.97 monthly payment a charge of $45.22 for New York State sales tax – a tax amount that he had already paid at the outset of the Lease.  On or about August 3, 2021, plaintiff executed a two-month Lease Extension Authorization by which the Lease was further extended to October 30, 2021. Plaintiff alleged that once again Chrysler added to the $539.97 monthly payment an additional monthly charge of $45.22 for New York State sales taxes that had already been paid.  Relevant to the court’s decision, the Lease contained a broad arbitration clause . In pertinent part, the clause provided that “ANY AND ALL CLAIMS BE RESOLVED BY INDIVIDUAL ARBITRATION AND NOT IN COURT” if one of the parties “REQUESTS ARBITRATION.”  The arbitration clause also provided that by signing the Lease, plaintiff would be waiving “ALL RIGHTS TO PROCEED IN A CLASS ACTION OR CLASS ARBITRATION.” Based upon the foregoing allegations, plaintiff asserted claims for unjust enrichment and for violation of GBL § 349. Plaintiff brought the action in his individual capacity and on behalf of similarly situated consumers who: (1) leased motor vehicles from Defendants; (2) “rolled” the sales tax associated with their lease transactions into the monthly lease payments that they made thereafter; (3) extended the vehicles’ lease terms at the end of their respective original terms; and (4) have been charged sales tax in connection with their lease extensions on the same portions of their monthly lease payments which already reflect prior sales tax that had been charged, such that they paid a purported “tax upon a tax”. Defendants moved to compel a non-class arbitration pursuant to CPLR § 7503(a).  Defendants argued that the FAA applied and that under the FAA the arbitration clause in the Lease was valid, irrevocable, and enforceable. Since the FAA governed the issue, defendants claimed that the FAA pre-empted any state law provision, such as GBL § 399-c, that was inconsistent with the agreement’s enforceability.  Defendants also claimed that plaintiff’s two causes of action fell within the scope of the arbitration, since the sales tax charged under the Lease arose out of or was related to the Lease. Defendants further argued that, as a matter of contract interpretation, plaintiff was prohibited from pursuing class-wide arbitration as the arbitration clause unambiguously provided that “any and all claims be resolved by individual arbitration,” and that plaintiff “waive all rights to proceed in a class action or class arbitration”.  In opposition, plaintiff argued that sales taxes, and a vendor’s duty to collect such taxes, arise out of New York State tax statutes, and not private contracts. As such, the FAA did not apply because the dispute involved intrastate commerce. And, because only intrastate activity was at issue, the FAA did not preempt New York law, and the Lease’s arbitration provision was null and void pursuant to GBL § 399-c. Plaintiff further argued that defendants’ motion should be denied because they did not meet their burden of proving a clear and unequivocal agreement to arbitrate claims for the imposition of an unauthorized “tax upon a tax”. Plaintiff maintained that defendants did not show that plaintiff’s claims fell within the scope of the Lease because they did not arise out of or relate to the “Vehicle, the Lease” or “any claim based on or arising from an alleged tort”.  The motion court granted the motion. As an initial matter, the court found that plaintiff failed to avail himself of the opt-out opportunity allowed under the Lease: “It is … undisputed that notwithstanding the provision in of the Lease that expressly stated Plaintiff’s ‘right to opt out of arbitration . . . within 30 days after execution of the Lease,’ Plaintiff never notified Defendants that he was exercising his right to opt out of arbitration, neither during the 30-day opt out period or at any time thereafter.” Turning to the question of whether federal or state law applied, the court concluded that the FAA governed the dispute. The court explained that plaintiff, a New York resident, had acknowledged in the complaint that he obtained lease financing from a Delaware corporation and that defendants actively participated in interstate commerce by providing financing for automobile dealers and consumers throughout the United States. Such allegations, concluded the court, were sufficient to show the existence of interstate commerce. Since the FAA applied, the court held that it pre-empted application of GBL § 399-c. Next, the court held that the arbitration clause in the Lease was valid and enforceable. Looking at the language of the clause, the court found it to be “unambiguous” and “broad” such that any reasonable person would understand that they agreed to binding arbitration over any claim, dispute or controversy.  The court also held that whether the dispute should be arbitrated was for the arbitrator to decide. The court explained that since the arbitration clause incorporated the rules of the AAA, it was for the arbitrator to determine issues of arbitrability. Under Rule 9 of the Consumer Arbitration Rules and Mediation Procedures of the AAA, noted the court, “ he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”   here.=">here."> The court noted that even if the parties did not incorporate the rules of the AAA, and the court was required to decide the issue of arbitrability, it would compel arbitration: “it is equally clear that the two related causes of action in the Complaint are entirely grounded in allegations concerning the sales tax charged under the Lease, and thus ‘arise out of’ the Lease.” The court rejected plaintiff’s contention that because the complaint focused on the collection of New York State sales taxes, the two causes of action did not “aris out of or relate[] to the Vehicle th Lease”. “A plain reading of the Complaint,” said the court, “reflects that its two related causes of action challenge the terms and conditions of the Lease, namely what amount of sales tax, if any, should be assessed against Plaintiff and others who have extended their respective leases, and thus those claims fall within the scope of the Lease’s broad arbitration clause.”   As a final matter, the court rejected plaintiff’s argument that the non-signatory defendants should be compelled to defend themselves in court. The court held that “ efendants are entitled to enforce of the Lease pursuant to the doctrine of equitable estoppel.” Under New York law, courts will “estop a signatory from avoiding arbitration with a nonsignatory” where “the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed”. In other words, said the court, “Plaintiff cannot have it both ways such that he cannot, on the one hand, seek to hold the nonsignatory liable pursuant to duties imposed by the agreement, which contains the arbitration provision, but, on the other hand, deny the arbitration’s applicability because the defendant is a nonsignatory’”. (Citations and internal quotation marks omitted).  here,=">here," and="and" >here.=">here."> Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. References 563 U.S. 333 (2011). 138 S. Ct. 1612 (2018). AT&T , 563 U.S. at 345-46 (citations omitted). E.g. , American Intl. Specialty Lines Ins. Co. v. Allied Capital Corp. , 35 N.Y.3d 64, 70 (2020). 9 U.S.C. § 2. Blimpie Intl., Inc. v. D’Elia , 277 A.D.2d 69, 70 (1st Dept. 2000) (quoting, Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 24 (1983)). See also N.J.R. Assoc., L.P. v. Tausend , 19 N.Y.3d 597, 601-02 (2012). GBL § 399-c. GBL § 399-c(2). See , e.g. , Marino v. Salzman , 51 Misc. 3d 131 , 2016 N.Y. Slip Op. 50410 (App. Term, 2d Dept., 9th & 10th Jud Dists. 2016); Andersen v. Walmart Stores, Inc. , 2017 WL 661188, at *8 (W.D.N.Y. 2017).

By: Jeffrey M. Haber Over the years, this Blog has examined numerous cases (indeed, too many to link to) in which the plaintiff claims to have been fraudulently induced to enter into a contract with the defendant. Most of the cases were dismissed because the plaintiff failed to allege a misrepresentation of present fact, as opposed to a misrepresentation of future intent to perform under the contract. Today, we examine, International Business Machines Corp. v. GlobalFoundries U.S. Inc. , 2022 N.Y. Slip Op. 02341 (1st Dept. Apr. 7, 2022) ( here ), a case in which the plaintiff successfully alleged a claim of fraudulent inducement in the context of a breach of contract case. From 2013 to June 2015, International Business Machines Corporation (“IBM”) and GlobalFoundries U.S. Inc. (“GlobalFoundries”) engaged in discussions concerning a collaborative venture whereby IBM would transfer its microelectronics business, including technology, engineers, and employees, to GlobalFoundries, along with $1.5 billion, and GlobalFoundries would develop and manufacture IBM’s high performance semiconductor chips (“HP chips”) used in high performance computer servers and mainframes. On July 1, 2015, IBM and GlobalFoundries entered into numerous agreements to consummate the transaction. IBM paid $750 million to GlobalFoundries in connection therewith.  Within three months, GlobalFoundries notified IBM that it did not intend to develop, manufacture, or supply one type of HP chip contemplated by the agreements. The parties continued to work together to address the issue. Notwithstanding, IBM paid GlobalFoundries the second and third monetary installments owed under the contracts in December 2016 and December 2017.  In 2018, GlobalFoundries told IBM it would no longer proceed with developing the replacement type HP chips. IBM claimed that on numerous occasions, and to induce it to enter into the contemplated transaction, GlobalFoundries told IBM that it had made a strategic decision and financial commitment to expand its presence, capacity, and investment in high performance semiconductor technology and chips. IBM alleged that those statements were false when made, and that without those assurances it would not have entered into the various contracts with GlobalFoundries. GlobalFoundries moved to dismiss the fraudulent inducement cause of action. The motion court granted the motion. The Appellate Division, First Department unanimously reversed.  The Court held that IBM stated a cause of action for fraudulent inducement “in alleging that GlobalFoundries knowingly made material misrepresentations of present fact about its business plan and financial commitment that were untrue when made, and that IBM would not have entered into the agreements with GlobalFoundries had it not been for those misrepresentations.” 1 To state a claim for fraudulent inducement, a plaintiff must allege “a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” 2 In the context of a contract case, the plaintiff must allege misrepresentations of present fact, not merely misrepresentations of future intent to perform under the contract, in order to present a viable claim. 3 Therefore, “to recover damages for tort in a contract matter, it is necessary that the plaintiff plead and prove a breach of duty distinct from, or in addition to, the breach of contract.” 4 The Court also held that the alleged misrepresentations of present fact were collateral to the agreements and induced IBM to enter into them. 5 A misrepresentation of present fact is collateral to a contract when the representation does not concern the terms of the parties’ agreement or a party’s performance obligations thereunder. 6 Since the alleged misrepresentations were collateral to the parties’ agreements, the Court held that IBM’s fraudulent inducement claim did not duplicate its breach of contract claim. 7 The Court found that “the fraud claim not based upon promised performance of an obligation of GlobalFoundries under the contracts.” 8 Moreover, the Court found that there was no duplication because IBM sought separate and distinct damages for each claim. 9 Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. 10 Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. Finally, the Court held that the merger clauses and disclaimer provisions in the parties’ agreements did not preclude the introduction of parol evidence and, therefore, bar the fraudulent inducement claim.  As to the former, the Court held that the “merger clauses general, vague, and merely omnibus statements that the written instrument embodies the whole agreement between the parties.” Boilerplate merger clauses are given little weight by the courts. Only where the parties specify the agreements and matters being merged or integrated into their agreement will the courts preclude the introduction of parol evidence and bar the fraudulent inducement claim.  As to the latter, the Court held that although the disclaimer provisions were “more specific regarding representation and warranty subject matters covered by each agreement, none of the disclaimers could reasonably be interpreted to address representations about GlobalFoundries’s business plan and strategies.” A party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.”  Takeaway International Business Machines is a good example of misrepresentations that were deemed to be collateral to the parties’ contract. As noted, the alleged misrepresentations concerned GlobalFoundries’ business plan and financial commitment to the transaction. They did not concern GlobalFoundries’ performance under the various agreements with IBM. Since the alleged misrepresentations were collateral to the various agreements, IBM’s fraud claim did not duplicate its breach of contract claim. Perhaps most interesting about International Business Machines is the Court’s ruling with regard to the merger clauses in the various agreements. In many cases, we have seen the courts apply general, boilerplate merger clauses to bar a plaintiff’s fraudulent inducement claim. The First Department in International Business Machines seems to be reminding the lower courts that New York jurisprudence requires some degree of specificity as to what is being merged into an agreement. Whether this reminder will result in a more consistent application of the specificity requirement, however, remains to be seen.      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. References Slip Op. at *1 (citing, Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 438-439 (1st Dept. 2015)). GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). Id. Non-Linear Trading Co. v. Braddis Assoc. , 243 A.D.2d 107, 118 (1st Dept. 1998) (internal quotation marks omitted). Slip Op. at *1 (citing, Deerfield Communications Corp. v. Chesebrough-Ponds, Inc. , 68 N.Y.2d 954, 956 (1986), and Laduzinski v. Alvarez & Marsal Taxand LLC , 132 A.D.3d 164, 168-169 (1st Dept. 2015)). New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 316 (1985) (citation omitted); Orix Credit Alliance v. Hable Co. , 256 A.D.2d 114, 115 (1st Dept. 1998). Slip Op. at *1. Id. Id. (citing, Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 67-68 (1st Dept. 2017)). MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC , 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC , 53 A.D.3d 451, 454 (1st Dept. 2008). MBIA , 165 A.D.3d at 114. Slip Op. at *1-*2 (citing, Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 320 (1959), and Laduzinski , 132 A.D.3d at 169). See Hobart v. Schuler , 55 N.Y.2d 1023, 1024 (1982) (deeming merger clause to be insufficient to bar parol evidence of fraudulent misrepresentation where clause stated “all representations, warranties, understandings and agreements between the parties are set forth in the agreement”); LibertyPointe Bank v. 75 E. 125th St., LLC , 95 A.D.3d 706, 706 (1st Dept. 2012) (concluding that merger clause was insufficient to bar claim for fraudulent inducement where it failed to reference particular misrepresentations allegedly made by former president). See also Danann Realty , 5 N.Y.2d at 320-21; Laduzinski , 132 A.D.3d at 169. Slip Op. at *2. Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty , 5 N.Y.2d at 323. Id .

By Jonathan H. Freiberger As noted in several of this Blog’s previous articles < here =">here"> , < here =">here"> and < here =">here"> , when an individual or entity borrows money from a lender, the repayment obligation is typically evidenced by a promissory note.  To secure the borrower’s repayment obligations, lenders generally request some form of collateral.  When the collateral is an interest in real property, the borrower generally delivers a mortgage to the lender. RPAPL 1301 , which addresses circumstances under which a lender can commence a mortgage foreclosure action, provides:  1.  Where final judgment for the plaintiff has been rendered in an action to recover any part of the mortgage debt, an action shall not be commenced or maintained to foreclose the mortgage, unless an execution against the property of the defendant has been issued upon the judgment to the sheriff of the county where he resides, if he resides within the state, or if he resides without the state, to the sheriff of the county where the judgment-roll is filed; and has been returned wholly or partly unsatisfied. 2.  The complaint shall state whether any other action has been brought to recover any part of the mortgage debt, and, if so, whether any part has been collected. 3.  While the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced or maintained to recover any part of the mortgage debt, without leave of the court in which the former action was brought. Thus, upon a borrower’s default, among the remedies available to the lender, is an action at law on the promissory note (i.e., sue the borrower for the money owed) or an action in equity to foreclose the mortgage.  A lender cannot simultaneously do both.  Accordingly, if a lender sues on the note and obtains a judgment, it must demonstrate that its efforts to execute on the judgment were unsuccessful before it can commence a foreclosure action.  RPAPL 1301(1); Sabbatini v. Galati , 14 A.D.3d 547 (2 nd Dep’t 2005) (foreclosure action dismissed where lender docketed a money judgment against borrower, but never attempted to execute on the judgment).  Nor can a lender simultaneously maintain multiple foreclosure actions.  RPAPL 1301(3).   RPAPL 1301 “is the embodiment of the equitable principle that once a remedy at law has been resorted to, it must be exercised to exhaustion before a remedy in equity, such as foreclosure, may be sought.  The purpose of RPAPL 1301 is to avoid multiple suits to recover the same mortgage debt and confine the proceedings to collect the mortgage debt to one court and one action.”  Valley Savings Bank v. Rose , 228 A.D.2d 666, 667 (2 nd Dep’t 1996) (citations and internal quotation marks omitted); see also Bank of America v. Ali , 202 A.D.3d 726 (2 nd Dep’t 2022). Courts have held that “RPAPL 1301(3) should be strictly construed since it is in derogation of a plaintiff's common-law right to pursue the alternate remedies of foreclosure and recovery of the mortgage debt at the same time.”  Bank of America , 202 A.D.3d at *3 (citation and internal quotation marks omitted).  However, this “strict” construction rule is not without limits.  For example, the First and Second Departments have held that “although the first actions were not formally discontinued, the effective abandonment of those actions was a ‘de facto discontinuance’ that militated against dismissal of the second action pursuant to RPAPL 1301(3).”  Bank of America , 202 A.D.3d at *3 (emphasis in original) (citing to U.S. Bank N.A. v. Chait , 178 A.D.3d 448 448–449 (1 st Dep’t 2019); U.S. Bank Trust, N.A. v. Humphrey , 173 A.D.3d 811, 812 (2 nd Dep’t 2019); Old Republic Natl. Tit. Ins. Co. v. Conlin , 129 A.D.3d 804, 805 (2 nd Dep’t 2015); see also this Blog < here =">here"> . On April 6, 2022, the Appellate Division, Second Department, decided two cases addressing RPAPL 1301. HSBC Bank USA v. Kading In 2003, defendant in Kading borrowed $600,000 from lender and secured his repayment obligations with a mortgage on real property in Staten Island, New York.  Borrower subsequently executed two loan modifications.  After a default, lender commenced a mortgage foreclosure action in 2010 (the “2010 Action”).  In 2014, borrower executed another loan modification, but defaulted again in January of 2015.  The 2010 Action was marked “DISPOSED – PROCEED BY MOTION.”  In September of 2015, Lender commenced a new foreclosure action in January of 2016 and, in its complaint, alleged that it “intended the 2010 ction to be discontinued.”  In April 2018, supreme court issued an order directing dismissal of the 2010 Action due to inactivity.  Lender moved for summary judgment and borrower cross-moved for summary judgment dismissing the action pursuant to RPAPL 1301(3).  Supreme court granted borrower’s cross-motion and lender’s motion was denied as academic.   On lender’s appeal, the Second Department reversed and stated: Here, the plaintiff failed to seek leave of court to commence this action while the 2010 action was still pending. However, the 2010 action had previously been marked disposed, and no further action occurred in the 2010 action until the administrative dismissal on April 9, 2018. Additionally, by the time the defendants cross-moved in this action for summary judgment dismissing the complaint insofar as asserted against them, the 2010 action had already been dismissed for nearly six months. Thus, the defendants were not prejudiced by having to defend against more than one action, and the plaintiff's failure to strictly comply with RPAPL 1301(3) should have been disregarded as a mere irregularity.  (Citations omitted.) The Kading matter was remitted to supreme court for a determination of lender’s summary judgment motion. U.S. Bank Trust, N.A. v. Biggs   Borrower defaulted in his repayment obligations under a promissory note secured by a mortgage on real property.  Accordingly, in 2016, plaintiff’s assignor (the “Assignor”) commenced an action to foreclose the mortgage.  Assignor moved for summary judgment and borrower cross-moved for summary judgment dismissing the complaint.  Thereafter, Assignor withdrew its motion and moved for leave to discontinue the action, without prejudice, and to cancel the notice of pendency.  In an August 2017 order, supreme court granted Assignor’s motion to voluntarily discontinue and in a September 2017 order supreme court discontinued the action and cancelled the notice of pendency. Both orders were affirmed on borrower’s appeals.  The loan was assigned to plaintiff (the “Assignment”). Two months prior to the order discontinuing the first action, and after the Assignment, plaintiff commenced an action to foreclose the mortgage due to a new default.  Lender moved for summary judgment and borrower cross-moved for summary judgment dismissing the complaint pursuant to RPAPL 1301(3) “arguing that the plaintiff commenced the instant action while the prior action was pending.”  Borrower appealed supreme court’s denial of his cross-motion.  The Second Department affirmed, stating that:  Here, in the order dated September 28, 2017, the Supreme Court, upon granting 's motion, inter alia, for leave to voluntarily discontinue the prior action, discontinued the prior action and cancelled the notice of pendency. Consequently, the prior action was not pending at the time the plaintiff commenced the instant action in July 2018, and thus, the commencement of the instant action was not in violation of RPAPL 1301(3). Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber In prior articles, we examined the motion for summary judgment in lieu of complaint under CPLR § 3213. See , e.g. , here and here . As explained below, summary judgment in lieu of complaint is available for an instrument for the payment of money only.  Today, we examine Sanghvi Diamonds LLC v. Agadjani , 2022 N.Y. Slip Op. 30738(U) (Sup. Ct., N.Y. County Mar. 8, 2022) ( here ), and Deutsche Bank Luxembourg S.A. v. Lehner , 2022 N.Y. Slip Op. 30739(U) (Sup. Ct., N.Y. County Mar. 8, 2022) ( here ). Both cases involved the guarantee of a debt. Only one was found to be an instrument for the payment of money only. CPLR § 3213: A Primer Under CPLR § 3213, a motion for summary judgment in lieu of complaint may be served by a plaintiff “when an action is based upon an instrument for the payment of money only.” As noted by the Court of Appeals, this requirement is a “stringent” one. 1 “CPLR 3213 is generally used to enforce ‘some variety of commercial paper in which the party to be charged has formally and explicitly acknowledged an indebtedness,’ so that a ‘prima facie case would be made out by the instrument and a failure to make the payments called for by its terms.’” 2 Accordingly, to prevail on a motion for summary judgment in lieu of complaint, the plaintiff must provide proof of a written agreement for money only, and the defendant’s failure to pay in accordance with its terms. 3 “The prototypical example of an instrument within the ambit of is of course a negotiable instrument for the payment of money – an unconditional promise to pay a sum certain, signed by the maker and due on demand or at a definite time.” 4 “An unconditional guaranty is an instrument for the payment of money only within the meaning of CPLR 3213.” 5 “CPLR 3213 is available ‘where a right to payment can be ascertained from the face of a document.’” 6 It “is not available where there are other issues and considerations presented by the writing,” for example “if the liabilities and obligations can only be ascertained by resort to evidence outside the instrument, or if more than simple proof of nonpayment or a de minimis deviation from the face of the document is involved.” 7 To demonstrate entitlement to summary judgment in lieu of complaint based on a personal guaranty, the plaintiff must show: (1) the existence of a guaranty, (2) the underlying debt, and (3) the guarantor’s failure to perform under the guaranty. 8 Once the plaintiff has done so, “the burden shifts to the defendant to establish, by admissible evidence, the existence of a triable issue with respect to a bona fide defense.” 9 Sanghvi Diamonds LLC v. Agadjani Sanghvi Diamonds involved a business arrangement with TraxNYC whereby Sanghvi Diamonds agreed to sell diamonds to TraxNYC on a periodic basis. To secure the parties’ business arrangement, the founder and president of TraxNYC executed an unconditional personal guarantee.  The parties’ arrangement was accomplished using a three-step process. The first step involved a request for a specific quantity and quality of diamonds for inspection and potential purchase. The second step involved the delivery of the requested diamonds. The delivery, inspection, and acceptance of diamonds by TraxNYC would be memorialized in a series of memoranda bearing sequence numbers that set forth the diamonds that were kept by TraxNYC and the diamonds, if any, that were returned to Sanghvi Diamonds. The third step involved invoicing the transaction.  According to Sanghvi Diamonds, TraxNYC never objected to, or otherwise contested, the invoices issued to it by Sanghvi Diamonds. Nor did TraxNYC return any of the diamonds that it received from Sanghvi Diamonds. Shortly after the parties’ business arrangement began, however, TraxNYC fell behind on its payment obligations and, eventually, stopped making payments on the invoices. As a result, Sanghvi Diamonds declined to provide any additional diamonds to TraxNYC and undertook to obtain full payment from TraxNYC for the diamonds it previously accepted and maintained.  Following multiple attempts to collect the money it was owed, Sanghvi Diamonds sent a formal payment demand to TraxNYC for the full amount of the then unpaid invoices. In response, TraxNYC made an initial installment payment. Thereafter, TraxNYC made six additional monthly installment payments. Beginning in February 2021, however, TraxNYC stopped remitting monthly installment payments.  Plaintiff moved for summary judgment in lieu of complaint under CPLR § 3213 against the guarantor. The motion court denied the motion. The motion court held that the amount of the underlying debt could not be established without resorting to evidence outside of the guaranty and the underlying documentation. 10 The court explained that “on its face” the guaranty did “not establish the amount of Defendant’s indebtedness” and did not “refer to any underlying agreement that would conclusively establish Defendant’s – or TraxNYC’s – obligations to Plaintiff.” 11 The court rejected plaintiff’s attempt “to establish the amount due under the Guaranty by submitting approximately 1,000 pages of ‘Memorandums’ and ‘Invoices’ …, along with some evidence about the parties ‘course of dealing.’” 12 The court explained that the memoranda (which it found to be consignment agreements) 13 did “not set out terms for payment, or even for sale.” 14 In short, the memoranda were “not the kind of simple, direct proof of indebtedness conducive to CPLR 3213 treatment.” 15 As to the invoices, the motion court found numerous issues of fact preventing the grant of summary judgment. For instance, there was a question of fact as to whether defendant received the invoices. 16 And, since the invoices were unsigned, there were questions as whether the invoices were enforceable under the Statute of Frauds and, if so, whether for each transaction an oral or implied contract for sale existed. 17 In short, observed the court, “this is hardly the kind of ‘de minimis’ undertaking for establishing indebtedness envisioned by CPLR 3213.” 18 Deutsche Bank Luxembourg S.A. v Lehner Plaintiff and Borrower entered into a loan agreement on April 24, 2020, which was to mature and be fully due and payable on December 31, 2020 – approximately eight-months from the execution of the loan agreement. The purpose of the loan agreement was to provide Borrower “liquidity for investment purposes with the Lender and general liquidity needs for professional activities.”  On that same date, Guarantor executed a personal guaranty in favor of plaintiff regarding Borrower’s obligations under the loan agreement. Under the guaranty, Guarantor “irrevocably and unconditionally” guaranteed Borrower’s payment and performance obligations, both present and future, and “unconditionally and expressly waive ... all defenses, counterclaims, rights of setoff, any requirement that first proceed against Borrower ....”. Defendant also agreed to pay to plaintiff all damages arising from Borrower’s default, including reasonable attorneys’ fees and disbursements. Borrower drew down the full amount of the loan facility and then defaulted on his payment obligations by failing to repay the principal amount plus interest by December 31, 2020. Plaintiff notified both Borrower and Guarantor of Borrower’s default on January 5, 2021, by sending both a default notice and payment demand letter. Ten days later, Plaintiff sent another default notice and payment demand letter to both parties. On February 2, 2021, Borrower partially satisfied his obligations under the loan agreement. Plaintiff responded by sending both Borrower and Guarantor a letter informing them that Borrower’s payment was only in partial satisfaction of Borrower’s obligations under the loan agreement, and that full payment of the outstanding balance was required. Borrower failed to make any follow-up payments necessary to satisfy the payment obligations under the loan agreement. Thereafter, plaintiff sent a fourth letter solely to Guarantor informing defendant that Borrower had failed to make full payment of the outstanding balance. Plaintiff requested payment in full pursuant to the Guaranty Agreement “without undue delay, but in any event no later than 15 April 2021.” Guarantor did not pay the amounts demanded. Plaintiff brought the action seeking summary judgment in lieu of complaint against Guarantor. In support of the motion, plaintiff submitted copies of the underlying loan agreement, the Guaranty Agreement, and the four letters notifying Guarantor of Borrower’s default and defendant’s obligations as Guarantor.  The motion court granted plaintiff’s motion. The court held that plaintiff had “established a prima facie case for summary judgment” by demonstrating “that Borrower executed and delivered the Loan Agreement, which is an instrument for the payment of money only, and that Defendant executed and delivered the Guaranty Agreement, which obligate Defendant to satisfy Borrower’s default to payment of money only.” 19 The court also found that plaintiff “demonstrated that the Loan Agreement matured no later than December 31, 2020, that Borrower defaulted on his payment obligations under the Loan Agreement, and that Defendant is now liable for Borrower’s default.”  Under the foregoing facts, as well as defendant’s non-opposition to the relief requested, the motion court granted plaintiff’s motion.  Takeaway CPLR § 3213 provides for accelerated judgment and does so at the outset of the litigation. There are no pleadings, and there is no discovery when a movant seeks summary judgment under CPLR § 3213.  As noted, to obtain judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument.  An action on a promissory note is an action for payment of money only. So too is an action on a guarantee, as in Sanghvi Diamonds and Deutsche Bank . The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment. Only where a defendant can raise questions of fact that the note or guarantee is not an instrument for the payment of money, as in Sanghvi Diamonds , will the court deny a motion for summary judgment under CPLR § 3213.  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. References Weissman v. Sinorm Deli , 88 N.Y.2d 437, 444 (1996). PDL Biopharma, Inc. v. Wohlstadter , 147 A.D.3d 494, 494 (1st Dept. 2017) (quoting, Interman Indus. Prods. v. R.S.M Electron Power , 37 N.Y.2d 151, 154-155 (1975)). SCP (Bermuda) Inc. v. Bermudatel Ltd ., 224 A.D.2d 214, 216 (1st Dept. 1996). Id. at 444. Cooperatieve Centrale Raiffeisen Boerenleenbank, B.A. v. Navarro , 25 N.Y.3d 485, 492 (2015). Boland v. Indah Kiat Fin. (IV) Mauritius Ltd. , 291 A.D.2d 342,343 (1st Dept. 2002) (quoting, Matas v. Alpargatas S.A.I.C. , 274 A.D.2d 327, 328 (1st Dept. 2000)). Kerin v. Kaufman , 296 A.D.2d 336, 337 (1st Dept. 2002) (citing, Weissman , 88 N.Y.2d at 437). See , e.g. , Davimos v. Halle , 35 A.D.3d 270, 272 (1st Dept. 2006). Cutter Bayview Cleaners, Inc. v. Spotless Shirts, Inc. , 57 A.D.3d 708, 710 (2d Dept. 2008) (internal quotations and citations omitted). Slip Op. at *2 (citing, Kerin , 296 A.D.2d at 337).   Id. at *3 (citing, Weissman , 88 N.Y.2d at 444). Id. Id. Id. Id. Id. Id. at *3-*4. Id. at *4. Slip Op. at *5.

By:  Jeffrey M. Haber The Securities and Exchange Commission (“SEC”) has frequently brought enforcement actions against those who trade upon material, non-public information. Many of these actions show that insider trading extends beyond the employees of the subject company. In those enforcement actions, an employee of the company shares material, non-public information with a third party, typically a family member or friend, who thereafter trades on the information or shares the information with another third party (again, typically a family member or friend) who traded on the information. For those who are involved in an insider trading situation, the consequences of an investigation can be devastating. The courts have made clear that non-employees can be criminally liable for using or trading on material, nonpublic information (whether as a tippee or as a trader) just as employees can be criminally liable for disseminating material, non-public information to a third party (if they expect the recipient of the information to trade on it). Thus, it is not uncommon for an employee’s loved ones to be caught up in a situation in which they not only suffer harm to their reputation and standing in the community, but incur economic loss and perhaps serve some jail time. So, what is insider trading? Insider trading generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. An insider can include officers, directors, major stockholders, and employees of an entity whose securities are publicly traded. In general, an insider must not trade for personal gain in the securities of that entity if that person possesses material, nonpublic information about the entity. In addition, an insider who is aware of material, nonpublic information must not disclose such information to family, friends, business or social acquaintances, employees, or independent contractors of the entity (unless such employees or independent contractors have a position within the entity giving them a right and need to know), and other third parties. An insider is responsible for ensuring that his or her family complies with insider trading laws. An insider may make trades in the market or discuss material information only after the material information has been made public. Nonpublic information about a company is information that is not known to the investing public. It may include, among other things, strategic plans; negotiations concerning potential mergers, acquisitions, or dispositions; material new contracts (or the loss of a material contract); financial developments, projections, or prospects; a change in control or a significant change in management; future stock splits, the payment of dividends or changes thereto; and financial results. Information about a company is considered nonpublic until it is transmitted to the public in a manner that is intended to reach the market through recognized channels of distribution and the public has a reasonable opportunity to digest the information. Recognized channels of distribution include, among others, SEC filings (such as annual or interim reports and prospectuses), press releases, and financial news publications, such as The Wall Street Journal. Nonpublic information is considered to be material if it might reasonably be expected to affect the market value of the securities and/or influence investor decisions to buy, sell or hold securities. When in doubt, one should act as though the information is material. After all, it is better to be safe than sorry. In today’s article, we examine SEC v. Sure, et al ., 3:22-cv-01967 (N.D. Cal.). Sure concerns insider trading charges against three software engineers employed at Twilio, Inc., a San Francisco-based cloud computing communications company, and four family members and friends for allegedly generating more than $1 million in collective profits by insider trading ahead of the company’s positive first quarter 2020 earnings announcement on May 6, 2020. According to the SEC’s complaint ( here ), defendants Hari Sure, Lokesh Lagudu, and Chotu Pulagam were software engineers at Twilio. All were friends who had access to various databases relevant to the company’s reporting of revenue. As alleged, around March 2020, defendants learned through the databases that Twilio’s customers had increased their usage of the company’s products and services in response to health measures taken in light of the Covid-19 pandemic and concluded in a joint chat that Twilio’s stock price would “rise for sure.” The SEC alleged that despite receiving a company policy that prohibited them from insider trading, Sure, Lagudu and Chotu Pulagam knowingly tipped off, or used the brokerage accounts of, their family and close friends – Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar, and Chetan Pulagam – to trade Twilio options and stock in advance of the company’s May 6, 2020 earnings announcement while in possession of the confidential information concerning customer usage. According to the SEC, the scheme generated more than $1 million in illegal trading profits. “We allege that this insider trading ring took advantage of valuable revenue information related to the pandemic at a San Francisco tech company,” said Monique C. Winkler, Acting Regional Director of the SEC’s San Francisco Regional Office. “We are holding these alleged tippers and tippees accountable for their roles in the scheme.” The SEC filed its complaint in the Northern District of California. Each defendant is charged with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the SEC action, the U.S. Attorney’s Office for the Northern District of California announced criminal charges against Dileep Kamujula ( here ). “The charges in this indictment relate to a scheme to profit on the confidential information of a San Francisco-based public company to gain an illegal edge in the stock market,” said U.S. Attorney Hinds. “This Office will continue to aggressively pursue this type of securities fraud because it threatens the integrity of the markets and hurts everyone who plays by the rules.” “Insider trading is not a game - it’s a federal crime,” said Acting Special Agent in Charge Stone. “This investigation should be a forceful disincentive for those tempted to commit any type of securities fraud. The FBI and our partners will take decisive action against those who seek to illegally exploit material nonpublic corporate information for their own gain.” The SEC’s press release announcing the enforcement action can be found here . _______________________ Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger “The purpose of a deed is to pass title to land; it is the appropriate method of making a voluntary transfer of real property in the lifetime of the grantor.”  43 N.Y. Jur. 2d Deeds § 1 (citation/footnote omitted).  A deed that is forged “lacks the voluntariness of conveyance.”  Faison v. Lewis , 25 N.Y.3d 220, 224 (2015) (citation omitted).  Accordingly, a deed with a forged signature “holds a unique position in the law; a legal nullity at its creation is never entitled to legal effect because void things are as no things.”  Faison , 25 N.Y.3d at 224 (citation, internal quotation marks and brackets omitted).  The Court in Faison held that since a deed with a forged signature is “void ab initio” (that is, it has no legal effect from inception), a statute of limitations defense in unavailable.  Faison , 25 N.Y.3d at 222. The facts in Faison , a case that nicely explains the law on forged deeds, are interesting (and are simplified in this article for the purpose of clarity).  Defendant Lewis legitimately came to own a one-half interest in real property located in Brooklyn, New York (the “Brooklyn Property”).  Lewis’ mother, who inherited a one-half interest in the Brooklyn Property from Lewis’ grandmother, subsequently transferred that interest to Lewis by quitclaim deed.  Lewis’ uncle inherited the other 50% interest.  Thereafter, in 2001, Lewis recorded a “deed claiming to correct the prior deed” in which the uncle’s half interest was also conveyed to Lewis.  If valid, the corrected deed would have conveyed to Lewis, the entire fee interest in the Brooklyn Property.  However, the uncle’s signature was forged.  Shortly after the corrected deed was filed, the uncle died.  In 2003, plaintiff’s prior action to declare the corrected deed void due to the forged signature was dismissed because she was not the administrator of the uncle’s estate.  In 2009, Lewis borrowed $269,000 from Bank of America and, in conjunction therewith, delivered to the bank a mortgage on the Brooklyn Property.  In 2010, after being appointed administrator, plaintiff filed another action seeking to declare the corrected deed and the BoA mortgage “null and void” based on the alleged forgery.  BoA answered the complaint, asserting a statute of limitations defense, and then moved, pursuant to CPLR 3211 (a) (5) , to dismiss the complaint as untimely under CPLR 213 (8) . The Faison Court, explaining the difference between void and voidable deeds procured by fraud, stated: A forged deed that contains a fraudulent signature is distinguished from a deed where the signature and authority for conveyance are acquired by fraudulent means. In such latter cases, the deed is voidable. The difference in the nature of the two justifies this different legal status. A deed containing the title holder's actual signature reflects the assent of the will to the use of the paper or the transfer, although it is assent induced by fraud, mistake or misplaced confidence. Unlike a forged deed, which is void initially, a voidable deed, until set aside, has the effect of transferring the title to the fraudulent grantee, and being thus clothed with all the evidences of good title, may incumber the property to a party who becomes a purchaser in good faith. Faison , 25 N.Y.3d at 224-25 (citations, internal quotation marks, ellipses and brackets omitted). A forged deed “cannot convey good title” nor can one become a “bona fide purchaser of real estate … from one who never had any title….”  Faison , 25 N.Y.3d at 224-25 (citations, internal quotation marks and brackets omitted).  See also Wu v. Wu , 288 A.D.2d 104 (1 st Dep’t 2001).  Along the same lines, “no property shall be encumbered, including by a mortgagee, in reliance on a forged deed.”  Faison , 25 N.Y.3d at 225-26 (citations omitted).  The Court of Appeals held that a forged deed is void ab initio and not subject to a statute of limitations defense because “ hat legal status cannot be changed, regardless of how long it may take for the forgery to be uncovered.”  Faison , 25 N.Y.3d at 226. In Crispino v. Greenpoint Mortgage Corp. , 304 A.D.2d 608 (2 nd Dep’t 2003), husband and wife owned property in West Islip, New York (the “WI Property”).  Husband was a principal and vice president of a mortgage bank (the “Bank”).  Husband executed and delivered a mortgage on the WI Property as security for a loan given to him by the Bank.  Prior mortgages on which wife was a co-obligor were satisfied from the proceeds of the loan.  The mortgage was subsequently assigned to Greenpoint Mortgage Corp.  A deed conveying wife’s interest in the WI Property to husband was recorded.  After husband’s death, wife commenced suit to “set aside the deed as a forgery.”  After a jury found that the deed was a forgery, supreme court “directed the cancellation of the deed and the mortgage.”  “Greenpoint then moved, inter alia , pursuant to CPLR 4404(b), to set aside the decision on the ground that the plaintiff was estopped from challenging the validity of the mortgage, and ‘for a conclusion of law to the effect that Greenpoint is entitled to be subrogated to the rights of the holders of mortgages which were satisfied out of the loan proceeds.’"  The Second Department, which affirmed the denial of Greenpoint’s motion, found that wife was not estopped from challenging the mortgage because there is no proof that she “consented to the encumbrance of her interest in the property by the mortgage,” “actively participated in the transaction or the negotiations pertaining to the subject mortgage” or that she “was aware of the forgery or ratified her husband's actions”.  Crispino , 304 A.D.2d at 609 (citations omitted). The Crispino Court also rejected Greenpoint’s argument that it should be equitably subrogated to the rights of the prior mortgagees “to prevent from being unjustly enriched by her husband’s wrongdoing,” and stated: as assignee of the mortgage, Greenpoint acquired no rights greater than those of the assignor, , and took the assignment of the mortgage subject to all defenses and counterclaims which the plaintiff had against the assignor. Since participated in the forgery of the deed through its principal, , the doctrine of unclean hands would bar from entitlement to equitable subrogation.  Hence, Greenpoint, which is subject to the same defense, is not entitled to be subrogated to the rights of the prior mortgagees.    Crispino , 304 A.D.2d at 609-10 (citations omitted). A forged satisfaction of mortgage was at issue in JP Morgan Chase Bank, Nat. Ass’n v. Aspilaire , 188 A.D.3d 850 (2 nd Dep’t 2020).  Here, Aspilaire delivered a mortgage to Bank 1 and subsequently recorded a forged satisfaction with respect to same.  Thereafter, Aspilaire sold the subject property to Brown, whose title report, due to the recorded satisfaction, uncovered no outstanding mortgages.  Brown, in turn, delivered a note and mortgage on the subject property to Bank 2.  For a while after the conveyance, Aspilaire continued to make mortgage payments to Bank 1, but stopped.  Brown defaulted on his mortgage and Bank 2 foreclosed and purchased the property at the foreclosure sale .  Thereafter, Bank 1 commenced an action against, inter alia , Bank 2 to foreclose its mortgage and to vacate the bogus satisfaction.  Banks 1 and 2 moved for summary judgment.  Supreme court determined that the satisfaction was forged.  Nonetheless, supreme court denied Bank 1’s motion for summary judgment and granted Bank 2’s cross-motion,  agreeing “with contention that it was a bona fide encumbrancer, stating that a forged satisfaction does not preclude a subsequent good faith encumbrancer for value from securing priority.”  JP Morgan , 188 A.D.3d at 852 (internal quotation marks omitted).   The Second Department reversed, holding that Bank 2 was not “protected by its status as a bona fide encumbrancer for value under Real Property Law § 266 , since the satisfaction of mortgage executed and recorded before issuance of a loan with respect to the subject property was determined to have been forged and was void, not merely voidable” because a “discharge or satisfaction of a mortgage is void at its inception when it is executed and recorded by one who has no interest in the mortgage.” JP Morgan 188 A.D.3d at 853 (citations omitted). These issues were recently discussed by the Second Department in its March 30, 2022, decision in Selene Finance, L.P. v. Jones , but in the context of a forged power of attorney.  In 2001, defendant Mentore executed a power of attorney appointing Nykian as her agent for real estate transactions.  Thereafter, Mentore and defendant Jones purchased property in Brooklyn, New York, and were given a bargain and sale deed.  On the same day, Jones and Nykian, acting as Mentore’s agent, borrowed $300,000 from Bank 1 and, in exchange, delivered a note and a mortgage on the property to Bank 1.  The note and mortgage were assigned to Bank 2 shortly thereafter.  In November of 2001, the power of attorney was recorded and in 2008 it was revoked by Mentore by delivering written notice of such revocation to Jones and Nykian.  In 2009, pursuant to a forged power of attorney (the “2009 PoA”) that purportedly expanded Nykian’s powers, Nykian “conveyed” Mentore’s one-half interest in the property to Jones.  Jones then borrowed $350,000 from Bank 2 (the “2009 Loan”) and delivered a mortgage to secure repayment of said loan (the “2009 Mortgage”).  With some of the proceeds of the 2009 Loan from Bank 2, Jones fully repaid the outstanding loan to Bank 1 and a satisfaction of that obligation was recorded. Thereafter, Jones and Nykian pleaded guilty to charges related to, inter alia , the forged 2009 PoA and the theft of Mentore’s 50% interest in the property.  After the guilty pleas, the 2009 Mortgage was assigned and, ultimately, held by Bank 3.  Jones executed a loan modification with Bank 3 by which she added $65,000 to the outstanding debt on the 2009 Loan.  Jones claims that she advised Bank 3 of the “forged signature on the power of attorney, the subsequent invalid transfer of her interest in the subject property to Jones, and the convictions of Jones and Nykian.”  Thereafter, Bank 3 assigned the loan to plaintiff, which “commenced this action against, among others, and Jones, seeking, inter alia , an equitable lien on the property with interest from February 28, 2009, and a judgment declaring that the plaintiff holds an equitable mortgage encumbering all of the defendants' interests in the property.”   Mentore answered and asserted a fraud counterclaim.  The “plaintiff moved for summary judgment striking answer and dismissing her counterclaims, or alternatively, for summary judgment declaring that its mortgage interest in at least one half of the subject property was valid and declaring that it had a priority equitable mortgage lien in the sum of $494,887.85.”  Mentore opposed the motion and cross-moved for summary judgment.   Supreme court determined that the 2009 Mortgage and deed were void and should be extinguished because they were precured by fraud.  However, because it determined that plaintiff did not perpetrate fraud in acquiring the mortgage, supreme court declared that plaintiff “had a priority equitable mortgage lien in the sum of $290,325.63, ‘such amount representing the pay-off amount of the mortgage based upon principles of equitable subrogation….’” The Second Department reversed to the extent that supreme court found in plaintiff’s favor, finding that Mentore “demonstrated her prima facie entitlement to judgment as a matter of law by submitting evidence in support of her cross motion which demonstrated that the 2009 was forged, and that the 2009 deed was obtained by false pretenses and thus, was void.”  (Citations omitted.)  Plaintiff’s opposition failed to raise a triable issue of fact because “the fact that the defendant had not properly revoked the 2001 power of attorney at the time the 2009 deed was executed is irrelevant, as the 2009 deed explicitly referenced the 2009 power of attorney ‘being recorded simultaneously herewith.’"  Finally, “the plaintiff failed to establish its prima facie entitlement to judgment as a matter of law declaring that its mortgage interest in at least one half of the subject property was valid established that the 2009 deed was obtained by false pretenses and is void the mortgage based on that deed and subsequently assigned to the plaintiff is also void.” 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 Generally, whether a claim is subject to arbitration is a decision for the court, not the arbitrator. However, the U.S. Supreme Court has held that “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability.’” 1 As discussed below, such “delegation clauses” are enforceable where “there is ‘clea and unmistakabl ’ evidence” that the parties intended to arbitrate arbitrability issues. 2 “When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally . . . apply ordinary state-law principles that govern the formation of contracts.” 3 In Fritschler v. Draper Mgt., LLC , 2022 N.Y. Slip Op. 02087 (1st Dept. Mar. 29, 2022) ( here ), the foregoing principles were considered by the Appellate Division, First Department. Fritschler involved the purchase of seven Subway franchises by plaintiff, Charles Fritschler. Plaintiffs alleged that defendants materially breached the franchise agreements and that certain defendants breached a separate agreement for the management of the franchises.  The facts of Fritschler , which were obtained from the motion court’s decision and order and the First Department’s decision and order, are as follows. In connection with the purchase of the Subway franchises, Fritschler executed seven franchise agreements. Each agreement contained an identical arbitration provision, requiring the resolution of “ ny dispute, controversy or claim arising out of or relating to Agreement or the breach thereof” by arbitration pursuant to the rules of the American Arbitration Association or its successor (“AAA”) or the American Dispute Resolution Center or its successor (“ADRC”) “at the discretion of the party first filing a demand for arbitration.”  In addition to the arbitration clause, each franchise agreement contained a choice of law provision, which stated that “ ny disputes concerning the enforceability or scope of the arbitration clause be resolved pursuant to the Federal Arbitration Act, 9 U.S.C. § 1, et seq. (“FAA”), and … that the FAA preempt[] any state law restrictions (including the site of the arbitration) on the enforcement of the arbitration clause in Agreement.” Notably, the parties agreed “to waive any right to disclaim or contest this pre-dispute arbitration agreement.” Separately, Plaintiff EB5Overseer, LLC (“EB5”) entered into a management agreement with defendant Draper Management, LLC (“Draper”) with respect to the management of Fritschler’s Subway franchises. Neither party was a signatory to the franchise agreements.  The management agreement provided that Draper would act as the “sole and exclusive manager” for the Subway franchises. The management agreement did not have an arbitration provision. In the event of a dispute under the management agreement, the parties were required to make a good faith attempt to resolve the dispute. If that attempt was unsuccessful, a party could commence a litigation “exclusively in a court of competent jurisdiction located in New York City.” Defendants claimed the dispute should be resolved by arbitration and moved to stay the action, pending arbitration. Plaintiffs cross-moved for expedited discovery and a jury trial to resolve disputed issues of fact as to arbitrability, and for a stay of arbitration on the ground that a valid agreement was not made. The motion court granted defendants’ motions for a stay of the action pending arbitration and denied plaintiffs’ cross motions for expedited discovery and a jury trial. As a threshold matter, the motion court held that the FAA governed the franchise agreements and the pending motions. None of the parties disputed its applicability.  Turning “to critical issue of whether it is for the court or the arbitrator to determine issues of arbitrability – i.e., issues as to the scope, validity, and enforceability of the arbitration agreement,” the motion court held that it was for the arbitrator to make this determination.  Defendants argued that the franchise agreements evidenced the parties’ intent to delegate issues of arbitrability to the arbitrator. In response, plaintiffs maintained that “the majority of claims clearly outside the scope of the Arbitration Provision, the majority of parties not signatories to the Provision, and the Provision not clear, explicit and unequivocal.” Plaintiffs contended that “ he court, not an arbitrator, determine[] whether the subject in dispute within the scope of the arbitration agreement.” “Under the FAA, there is a general presumption that the issue of arbitrability should be resolved by the courts.” 4 When applying the FAA, “courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.” 5 As noted, to determine whether the parties clearly and unmistakably intended to refer the question of arbitrability to the arbitrator, the courts construe the arbitration agreement under “relevant state law.” 6 In applying the FAA, the Second Circuit has held that where the “parties explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.” 7 New York courts applying the FAA have held, similarly, that when the parties’ agreement both specifically incorporates by reference the rules of an arbitration organization that permit the arbitrator to decide the scope of the arbitration agreement and “employs language referring all disputes to arbitration,” the issue of arbitrability will be left to the arbitrator. 8 Based upon the foregoing principles, the motion court held “that the parties’ agreements evidence a clear and unmistakable intent to delegate arbitrability questions to the arbitrator.” The court noted that the arbitration provision at issue was “unquestionably broad” and expressly incorporated the rules of the AAA, which provided that the arbitrator has “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”  In holding that issues of arbitrability were delegated to the arbitrator, the motion court rejected plaintiffs’ contention that the arbitration provision was procured by fraud. The alleged fraud, as described by plaintiffs, was based on, inter alia , a representation made during the negotiation of the management agreement that any claims against defendants would be subject to judicial determination. Plaintiffs claimed that defendants knew the falsity of their representation. Plaintiff also maintained that the franchise disclosure document (“FDD”) that was provided to them omitted material facts with respect to arbitration; namely, who determines jurisdiction and arbitrability; whether claims against DAL and/or its BDAs must be arbitrated without regard to the genesis, scope and nature of the claims; whether the parties could obtain judicial review of errors of law or fact made by the arbitrators; and whether an arbitration award was subject to only minimal judicial review.  The motion court found that plaintiffs failed to demonstrate or raise a triable issue of fact as to whether the arbitration provision was procured by fraud. The court noted that plaintiffs cited “no authority whatsoever in support of their contention that the types of omissions and misrepresentations cited by Fritschler, regarding the meaning or effect of the arbitration provision, support a claim of fraudulent inducement.” The court agreed with defendants that “Fritschler’s ‘subjective confusion about the provision’s meaning not create an issue of fact.’” “Significantly”, said the motion court, “the terms of the Franchise Agreements contradict Fritschler’s claim of lack of understanding of the arbitration provision”, as did the franchise disclosure questionnaire.  In sum, concluded the motion court, “plaintiffs fail to raise an issue of fact as to whether the arbitration provision was procured by fraud, or to make any showing that discovery may lead to relevant evidence on this issue or on any of their fraud claims. The acts alleged by plaintiffs in support of their fraud claims are patently insufficient to support the claims.” The motion court also rejected plaintiffs’ assertion that the arbitration provision was unenforceable due to lack of mutuality, lack of consideration, and unconscionability. Whether there is sufficient consideration to support the parties’ agreement to arbitrate is for the court, not the arbitrator, to decide. 10 The motion court held that plaintiffs’ contention was conclusory and unsupported by any case authority – plaintiffs contended that the arbitration provision lacked consideration “because DAL and the other Defendants nothing up in order to be bound to the Provision” or because the provision limited damages. The motion court noted that plaintiffs failed to explain “how a lack of consideration could be found given that, by means of the Franchise Agreements containing the arbitration provision, DAI afforded Fritschler licenses to use the Subway ‘System,’ including marks, to own and operate restaurants.”  The motion court also held that plaintiffs failed to cite any authority in support of their claims that the arbitration provision was unenforceable due to lack of mutuality and unconscionability. The court found their claims to be conclusory. Accordingly, the court held that plaintiffs failed to raise an issue of fact as to whether the arbitration provision was unenforceable on these grounds or to make any showing that discovery may lead to evidence relevant to support these grounds. Finally, the motion court held that the non-signatories to the franchise agreements were required to arbitrate their disputes. The non-signatory plaintiffs argued that “ he damages or benefits Plaintiffs assert derive directly from the Management Agreement and contacts with the BDAs, not from the Franchise Agreements” and, therefore, did not implicate the franchise agreements and the arbitration provisions therein. Defendants countered that the non-signatory plaintiffs were obligated to arbitrate because “ hey asserting claims arising directly from the Franchise Agreements, the franchise relationship, and the Franchises.”  Making the threshold determination as to whether the non-signatory defendants had a “sufficient relationship” with the signatory defendant, 11 the motion court held that plaintiffs agreed that they were the intended beneficiaries under the franchise agreements (noting that they constituted agents within the meaning of the relevant provision of the agreements). As a result, the motion court found “Plaintiffs’ argument that the BDA’s not third-party beneficiaries or agents within the meaning of section 10(d) unpersuasive.” The court concluded that it would be for the arbitrator to determine which of plaintiffs’ claims against the non-signatory defendants had to be arbitrated and which of the non-signatory defendants were entitled to enforce the arbitration provision. Moreover, the motion court found that the non-signatory plaintiffs asserted a direct benefit arising from the franchise agreements. 13 The court noted that while plaintiffs also asserted claims under the management agreement, which did not contain an arbitration provision, they failed to make any showing that the management agreement claims differed in any significant respect from, or that they did not substantially overlap with, the franchise agreement claims. Review of the allegations of the complaint confirms that the non-signatory plaintiffs, like signatory plaintiff Fritschler, claim a direct benefit from the Franchise Agreements, and that they have sustained loss as a result of defendants’ breaches of those Agreements.  On appeal, the First Department affirmed. The Court held that, as to the signatories to the franchise agreements, those parties clearly and unmistakably agreed that issues concerning the arbitrability of claims would be determined by the arbitrator. “Here,” said the Court, “plaintiff Fritschler and defendant Doctor’s Associates, LLC (DAL) evidenced their intent to delegate the issue of arbitrability to the arbitrator by incorporating the AAA (and/or the substantively identical ADRC) rules into the Franchise Agreements’ broad arbitration clauses.” 14 The Court rejected plaintiffs’ arguments that there was no binding agreement to arbitrate because the franchise agreements were procured by fraud, lack of mutuality, were not supported by consideration, and/or were unconscionable. The Court found plaintiffs’ arguments to be unpersuasive. Like the motion court, the Court held that “ ecause these issues implicate whether the parties formed a valid contract to arbitrate, they were properly decided by the court in the first instance.” 15 In any event, the Court found that plaintiffs’ contention that Fritschler did not enter into a binding agreement was contradicted by the allegations of the complaint. Furthermore, observed the Court, plaintiffs failed to allege “that there were any specific misrepresentations regarding the arbitration clauses themselves.” 17 Finally, “Fritschler’s supposed subjective misunderstanding of the plain terms of the agreements does not amount to fraud,” said the Court. 18 The Court also rejected plaintiffs’ “argument that the exclusive jurisdiction provision found in the Management Agreement trump the Franchise Agreements’ arbitration provisions.”  The Management Agreement was entered into by plaintiff EB5Overseer LLC and defendant Draper Management, LLC in February 2014, shortly before the Franchise Agreements were signed by Fritschler and DAL. However, nothing in the Management Agreement purported to modify or limit the scope of the later agreements that nonparties to the Management Agreement (i.e., Fritschler and DAL) might enter into, nor does it render the clear arbitration and delegation provisions found in the Franchise Agreements ambiguous. While plaintiffs may very well argue that the terms of the Management Agreement make claims asserted by or against certain parties nonarbitrable, that is a question of arbitrability for the arbitrator, not the court.  19 Finally, the Court rejected plaintiffs’ contention “that the Franchise Agreements did not clearly delegate disputes about arbitrability to the arbitrator because certain plaintiffs and the majority of the defendants were not signatories to the Franchise Agreements.” 20 Similar to the motion court, the Court found that the non-signatories “were agents of DAL and in the Franchise Agreements themselves, Fritschler promised that he would not bring any claims against DAL’s agents or affiliates outside of arbitration.” 21 Moreover, held the Court, “ he non-signatory plaintiffs also within the scope of the arbitration clauses under the direct benefits theory of estoppel.” 22 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. Footnotes Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 68-9 (2010). First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 943, 944 (1995) (quoting, AT&T Technologies, Inc. v. Communications Workers , 475 U.S. 643, 649 (1986)). Id. at 944. Contec Corp. v. Remote Solution, Co., Ltd. , 398 F.3d 205, 208 (2d Cir. 2005) (citing, First Options of Chicago , 514 U.S. at 944-45). Henry Schein, Inc. v. Archer and White Sales, Inc. , ___ U.S. ___, 139 S.Ct. 524, 531 (2019) (internal quotation marks and citation omitted). Contec , 398 F.3.d at 208. Id. E.g. , Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 496 (1st Dept. 2009) (internal quotation marks and citation omitted), aff’d , 14 N.Y.3d 850 (2010), r’arg. denied , 15 N.Y.3d 769 (2010), cert. denied , 562 U.S. 962 (2010). Touloumis v. Chalem , 156 A.D.2d 230, 232 (1st Dept. 1989) (One who enters into a plain and unambiguous contract cannot avoid the obligation by merely stating that he erred in understanding its terms...”). Doctor’s Assocs., Inc. v. Alemayehu , 934 F.3.d 245, 250-52 (2d Cir. 2019) (internal quotation marks and citation omitted). Contec , 398 F.3d at 209. Citing, Dormitory Auth. of the State of N.Y. v. Samson Constr. Co. , 30 N.Y.3d 704, 710 (2018).  Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013) (internal quotation marks and citations omitted); MAG Portfolio Consultant, GmbH v. Merlin Biomed Grp. LLC , 268 F.3d 58, 61 (2d Cir. 2001).  Slip Op. at *1. Id. (citing, Doctor’s Assocs. , 934 F3d at 251-52). Id. Id. (citing, Rent-A-Center , 561 U.S. at 70-72). Id. (citation omitted). Id. (citing, Matter of WN Partner, LLC v. Baltimore Orioles L.P. , 179 A.D.3d 14, 17 (1st Dept. 2019)). Id. at *2. Id. Id. (citing, Belzberg , 21 N.Y.3d at 631).

By: Jeffrey M. Haber Today, we examine 79 Madison LLC v. Ebrahimzadeh , 2022 N.Y. Slip Op. 02052 (1st Dept. Mar. 24, 2022) ( here ), a judgment enforcement action under Article 52 of the CPLR that contains some interesting issues that this Blog has not addressed in quite some time, if at all.  The first issue we examine is the forum selection clause.  A forum selection clause is a contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g. , lease agreements (as in 79 Madison ), employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries. In short, forum selection clauses “provide certainty and predictability in the resolution of disputes.” 1 Forum selection clauses come in two forms: mandatory and permissive. In the former, the parties are “required to bring any dispute to the designated forum,” while the latter “only confers jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if jurisdiction there is otherwise appropriate.” 2 The use of the word “shall” in a forum selection clause has been interpreted as making the clause mandatory. 3 Under New York law, “parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract.” 4   Such clauses “are prima facie valid” and “are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.” 5 In interpreting forum selection clauses, courts apply the principles of contract construction. The second issue we examine is the internal affairs doctrine. The internal affairs doctrine is a “conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands”. 6   Stated differently, “ nder the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation.” 7 However, the “internal affairs doctrine, although potent, has very specific applications.” 8 In particular, the doctrine only “governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders.” 9 The doctrine “does not apply to those defendants who are not current officers, directors, and shareholders” of the corporation. 10 In New York, the Limited Liability Law contains a provision that mirrors the foregoing principles with respect to foreign LLCs. In that regard, LLC Law § 801(a) provides, “the laws of the jurisdiction under which a foreign limited liability company is formed govern its organization and internal affairs and the liability of its members and managers.” The third issue we examine is the anti-suit injunction. Courts in New York have long recognized the propriety and importance of issuing anti-suit injunctions where a parallel action in a foreign court is being prosecuted in contravention of a New York forum selection clause and where such parallel action undermines the integrity of the court’s judgments. 11 In the First Department, “the use of injunctive relief to enforce a forum selection clause has been upheld as a proper exercise of discretion.” 12 In Indosuez , the First Department held that the issuance of an anti-suit injunction was proper “ n the face of the mandatory choice of law and forum selection clauses.” 13 The Court explained that “comity was not implicated because there was no possibility of treading on the legitimate prerogatives of the foreign jurisdictions to which defendant had repeatedly turned,” and that the “injunction was consonant with our policy of enforcing choice of law and forum election clauses.” 14 Moreover, the Court held that where “once there a New York judgment on the merits, the courts of this State entitled to protect it” by issuing an anti-suit injunction to prohibit “defendant’s harassing and bad faith foreign litigation.” 15 79 Madison LLC v. Ebrahimzadeh 79 Madison was commenced by plaintiff to recover a money judgment against defendant pursuant to his personal guaranty of the obligations under a lease agreement for space located in New York City. 16 The lease was assigned to, and assumed by, the judgment debtor’s company pursuant to an assignment and assumption of lease agreement.  The lease contained a broad, mandatory forum selection clause designating New York County as the place of litigation. The guaranty did not; but the parties signed it, contemporaneously with the lease. 17> 17>  Defendant defaulted on the lease and guaranty obligations. Soon thereafter, plaintiff commenced default proceedings, which culminated with the entry of judgment against defendant.  During judgment enforcement proceedings, plaintiff learned that defendant had entered into a contract to purchase real property in Bridgehampton, New York. Plaintiff also learned that defendant commenced an action in Suffolk County, Supreme Court, seeking specific performance of the contract that defendant claimed had been breached. In the complaint, defendant alleged that he had sufficient funds to close on the purchase without a mortgage, which he claimed was supported by a letter from City National Bank (“CNB”). In the letter, CNB advised that defendant was the sole owner of Corniche Capital LLC (“Corniche”), which had an account at the bank containing almost $5 million. Upon learning this information, plaintiff issued subpoenas with restraining notices seeking information relating to the Suffolk County action and the sale of the premises. In response to the subpoenas, plaintiff learned that the premises had been purchased by Brick House NY, LLC (“BHNY”). Plaintiff issued additional subpoenas with restraining notices to the parties involved in the BHNY transaction.  In response to the additional subpoenas, defendant filed an action in Supreme Court, Kings County, seeking temporary restraints as to compliance with the subsequent subpoenas and relief under CPLR § 5240. The court granted the temporary restraints.  Thereafter, plaintiff filed an order to show cause in Supreme Court, New York County seeking (a) a temporary restraining order and injunctive relief prohibiting defendant from filing or maintaining actions in other jurisdictions wherein he could seek to collaterally attack the judgment or prevent plaintiff’s enforcement of the judgment, as well as (b) the turnover of defendant’s membership interests in Corniche pursuant to CPLR § 5225(a). The court granted the request for the temporary restraints and prohibited defendant from filing any actions outside New York County or taking any steps in existing actions “collaterally attacking, or attempting to limit, modify, or prevent the enforcement of, judgment against him”.  Later, Supreme Court granted the motion in its entirety ( i.e. , it ordered the turnover of defendant’s interest in Corniche and issued an anti-suit injunction). In doing so, the court rejected defendant’s argument that the anti-suit injunction was an effort to change venue, finding that defendant was attempting to frustrate plaintiff’s efforts to litigate enforcement of the judgment in New York County, and rejected defendant’s contention that Corniche was a Wyoming entity, whose law applied instead of the law of New York as required under the forum selection clause.  The Appellate Division, First Department affirmed. The Court held that plaintiff “met its burden of proving that defendant was ‘in possession or custody of’ … a membership interest in Corniche.” 18 The Court explained that plaintiff did so by “submit a letter from City National Bank saying that defendant was Corniche’s sole owner” and the complaint in the Suffolk County action, to which a copy of the bank letter was attached as an exhibit. 19 20 shares of stock and membership interests are property that is subject to, and is not exempt from, execution. 21 > 20 shares of stock and membership interests are property that is subject to, and is not exempt from, execution. 21 >  The Court also held that Supreme Court properly rejected defendant’s argument that the court should have issued a charging order under the internal affairs doctrine. 22 Defendant argued that under Wyoming law, membership interests cannot be turned over to a judgment creditor. Instead, the sole remedy for a judgment creditor is a charging order that requires the LLC “to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.” 23 In rejecting defendant’s argument, the Court explained that the internal affairs doctrine, on which defendant’s argument was based, only applied to “relationships between a company and its directors and shareholders.” 24 It “does not apply where the rights of third parties external to the corporation are at issue.” 25 The Court noted that even under New York law, a charging order was not plaintiff’s sole remedy. 26 The Court explained that under Department authority, a court could compel a judgment debtor to turnover its interest in an LLC. 27 Moreover, said the Court, under CPLR §5201(b), “ money judgment may be enforced against any property which could be assigned or transferred … unless it is exempt from application to the satisfaction of the judgment.” 28 “An interest in an LLC,” observed the Court, “‘is clearly assignable and transferable’ … and … is not exempt under CPLR 5205.” 29 Finally, noted the Court, “ o the extent Limited Liability Company Law § 607(a) permits a judgment creditor to obtain a charging lien against a member’s interest, it does not say that this is the creditor’s exclusive remedy, nor does it purport to abolish or limit CPLR 5225(a).” 30 The Court further held that defendant was “bound by the forum selection clause in the lease that he guaranteed.” 31 The Court noted that “ egardless of whether the forum selection clause broad enough to include post judgment enforcement proceedings, Supreme Court properly exercised its discretion in enjoining defendant from prosecuting the special proceeding that he brought in Kings County against plaintiff.” 32 Since the judgment that plaintiff is trying to enforce was issued by Supreme Court, New York County, plaintiff properly issued subpoenas with restraining notices out of that court …. Anyone who wanted to vacate the restraining notices should have made a motion in that same court …. Thus, it was improper for defendant to commence a special proceeding in Kings County to quash the subpoenas. However, the Court held that the injunction was “too broad”. 34 Therefore, the Court limited the anti-suit injunction to the Kings County proceeding. 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. References Boss v. American Express Fin. Advisors, Inc. , 6 N.Y.3d 242, 247 (2006) (quoting, Brooke Grp. Ltd. v. JCH Syndicate , 87 N.Y.2d 530, 534 (1996)). Phillips v. Audio Active Ltd. , 494 F.3d 378, 383, 386 (2d Cir. 2007). ASM Communications v. Allen , 656 F. Supp. 838 (S.D.N.Y. 1987). Brooke Grp. , 87 N.Y.2d at 534. Sterling Nat. Bank as Assignee of Norvergence, Inc. v. Eastern Shipping Worldwide, Inc. , 35 A.D.3d 222 (1st Dept. 2006) (citations and quotations omitted). New Greenwich Litig. Trustee, LLC v. Citco Fund Servs. B.V. , 145 A.D.3d 16, 22 (1st Dept. 2016), lv. denied , 29 N.Y.3d 917 (2017) (quoting, Edgar v. MITE Corp. , 457 U.S. 624, 645 (1982)); see also Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC , 118 A.D.3d 422 (1st Dept. 2014). Davis v. Scottish Re Group Ltd. , 138 A.D.3d 230, 233 (1st Dept. 2016). Matter of Am. Intl. Group, Inc. , 965 A.2d 763, 817 (Del. Ch. 2009) (cited with approval, New Greenwich , 145 A.D.3d at 23).  Id. at 817 (internal quotation marks omitted). Culligan , 118 A.D.3d at 422. See , e.g. , Indosuez Int’l Fin., B.V. v. Nat’l Reserve Bank , 304 A.D.2d 429 (1st Dept. 2003). Babcock & Wilcox Co. v. Control Components, Inc. , 161 Misc. 2d 636, 645 (Sup. Ct., NY County 1993) (citations omitted). 304 A.D.2d at 430 (citations omitted). Id. Id. at 430-31; see also Sebastian Holdings, Inc. v. Deutsche Bank AG , 78 AD3d 446, 453 (1st Dept 2010) (citation omitted). The facts of 79 Madison were obtained from the electronically filed briefs and record on appeal and the First Department’s decision. Brax Capital Grp., LLC v. Win Win Gaming, Inc. , 83 A.D.3d 591 (1st Dept. 2011). Slip Op. at *1. Id. Cardew v. Gialanella , 92 A.D.3d 1002 (3d Dept 2012) (citations omitted). CPLR §§ 5201, 5205; ABKCO Indus. v. Apple Films , 39 N.Y.2d 670, 674 (1976). Slip Op. at *1. Wyoming Limited Liability Company Act § 17-29-503. Plaintiff maintained that Corniche is a Delaware LLC. Slip Op. at *1. Delaware law provides the same as Wyoming law. 6 Del. C. § 18-703(d). Slip Op. at *1. Id. (citation omitted). Id. Id. (citing, Matter of Gliklad v Chernoi , 129 A.D.3d 604 (1st Dept. 2015), lv. denied , 26 N.Y.3d 918 (2016)). Id. Id. (citing, Hotel 71 Mezz Lender LLC v. Falor , 14 N.Y.3d 303, 314 (2010). Id. at *1-*2. Id. at *2. Id. (citations omitted). Id. (citations omitted). Id.

By: Jeffrey M. Haber Family business disputes tend to be ugly, destructive, and protracted. For a case in point, we examine Max v. ALP, Inc. , 2022 N.Y. Slip Op. 01969 (1st Dept. Mar 22, 2022) ( here ), a heated and contentious dispute among members of the Max family regarding control of ALP, Inc., a corporation formed by the iconic artist Peter Max to, among other things, market, license and commercialize his artwork. ALP was formed in 2000. Adam and Libra, Peter’s children, each own a 40% interest in ALP with the remaining 20% belonging to Peter. In 2012, Peter ceded his positions with, and ownership interest in, ALP to Adam.  Thereafter, according to plaintiffs, Adam and other individuals brought in by Adam began looting company assets by, among other things, generating artworks using “ghost artists” that would be signed by Peter as if they were original works, selling Peter’s artwork at fire sale prices, and collecting enormous and unwarranted fees and other payments from ALP. In 2018, Libra replaced Adam as the chair of ALP.  Plaintiffs alleged that prior to Adam assuming control of the company, ALP was in significant debt. Adam claimed that by the end of 2012, ALP had recorded a net loss of over $4,000,000. Upon assuming management and control of ALP’s daily affairs, Adam claimed that by 2014 he remedied ALP’s financial issues and returned ALP to profitability. According to Adam, Libra had never done any work for or shown any interest in ALP during those years, despite receiving a yearly salary of approximately $700,000. Notwithstanding, in 2017, purportedly due to personal conflicts between Libra, Adam and members of the Max family, Libra sought control of ALP. Adam maintained that Libra colluded with Lawrence Flynn, who had been appointed as the property guardian for Peter in December 2016, to gain a majority vote within the company and remove Adam as president of ALP. In December 2018, a special meeting of ALP’s shareholders was held during which a new board of directors was elected. The new board consisted of Libra, Adam, and Michael Anderson, who Adam claimed was an acquaintance of Libra’s and unfamiliar with ALP or ALP’s business.  On January 11, 2019, ALP’s board of directors held another meeting, wherein it resolved that Libra would be named as CEO and president, effective immediately. Adam alleged that after being elected, Libra and Anderson diminished Adam’s role in the company and terminated employees that Adam had hired. He also claimed they spent significant sums of money on legal fees to undo Adam’s prior sales of Peter’s artwork and to recover amounts Adam paid to previous ALP employees. Adam further alleged that Libra and Anderson abandoned the profitable business model Adam put in place. Adam averred that Libra and Anderson were so unskilled in conducting ALP’s business and the sale of art that they were leading ALP to financial ruin. Finally, Adam alleged that Libra improperly provided a reporter from the New York Times with false information relating to a purported scheme by Adam to use ghost artists to generate artwork that would then be signed by the ailing Peter and sold as if they were his own, damaging ALP’s business reputation. Adam brought the action both derivatively, on behalf of ALP, and directly, on behalf of himself. The amended complaint asserted claims sounding in/seeking: (1) breach of fiduciary duty, (2) appointment of a receiver pursuant to CPLR § 6401(a) and BCL § 1202(3), (3) declaratory judgment voiding the December 2018 special meeting pursuant to BCL § 619, (4) attorneys’ fees pursuant to BCL § 626, (5) removal of Libra and Anderson as directors and officers pursuant to BCL § 706(d) and BCL § 716(c), (6) an accounting, and (7) breach of the duties of diligence, care, and skill. Defendants moved to dismiss. The motion court granted the motion. Defendants argued that ALP’s certificate of incorporation barred plaintiffs from bringing the action derivatively. The motion court agreed. Under BCL § 720(a)(1), a shareholder’s right to bring a derivative action against directors for breach of duty is “ ubject to any provision of the certificate of incorporation authorized pursuant to paragraph (b) of section 402.” Section 402(b) of the BCL expressly permits shareholders to adopt provisions precluding director and shareholder liability under most circumstances.  The motion court found that ALP’s certificate of incorporation tracked the language of BCL § 402(b). Therefore, plaintiffs were barred from bringing their claims against defendants derivatively. The motion court rejected defendants’ argument that BCL § 402(b) did not apply because Libra and/or Anderson acted in bad faith or intentionally. The court explained that although plaintiffs averred that “Libra and Anderson have taken such action in bad faith and intentionally with full knowledge that their action constituted misconduct in knowing violation of the law and for the improper purpose of personally gaining financial profits and advantages to which they are not entitled,” plaintiffs pleaded no facts that would permit such inferences to be drawn. The court reasoned that Libra and Anderson’s decisions to distance ALP from Adam’s prior course of business, even if such decisions made ALP less profitable, did not constitute bad faith or intentional misconduct.  The motion court also rejected Adam’s suggestion that taking control of ALP after Libra and Anderson received “warnings” that such a takeover “would lead to disaster” constituted bad faith or intentional misconduct. The motion court found that such an argument was without basis in law or logic. The motion court also held that dismissal of Adam’s breach of fiduciary duty claims was appropriate.  To plead a cause of action for breach of fiduciary duty, a plaintiff must allege (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct. 1 “A cause of action sounding in breach of fiduciary duty must be pleaded with particularity under CPLR 3016(b).” 2 The motion court found that plaintiffs failed to allege any action by defendants that would constitute misconduct such that a cause of action for breach of fiduciary duty would lie against them. Instead, said the motion court, the amended complaint alleged that defendants engaged in a series of decisions that deviated from ALP’s previous business model ( e.g. , the board reduced Adam’s control of the company, removed employees hired by Adam, and abandoned Adam’s previous business model of creating and selling artworks on cruise ships). Under the business judgment rule, said the motion court, judicial inquiry into the actions of corporate directors, which are taken in good faith, in the exercise of honest judgment, and the legitimate furtherance of corporate purposes, is prohibited. 3 Moreover, the motion court held that plaintiffs merely alleged that Adam and his associates were displeased with the direction in which Libra and Anderson had taken ALP. Such allegations – that a course of action other than that pursued by a board of directors would have been more advantageous – said the motion court are insufficient to support a cause of action for breach of fiduciary duty. 4 To be actionable, noted the motion court, the complaint must allege that the corporate decisions of the board of directors lacked a legitimate business purpose or were tainted by a conflict of interest, bad faith, or fraud. 5 The motion dismissed plaintiffs’ remaining causes of action seeking attorneys’ fees pursuant to BCL § 626(e), removal of ALP’s directors and officers pursuant to BCL § 706(d) and BCL § 716(c), and an accounting because plaintiffs failed to allege an underlying cause of action for breach of fiduciary duty. 6 finally, a cause of action for an accounting requires a plaintiff to sufficiently allege a breach of fiduciary duty. 7 > 6 finally, a cause of action for an accounting requires a plaintiff to sufficiently allege a breach of fiduciary duty. 7 >  On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly dismissed plaintiffs’ causes of action alleging breach of fiduciary duty and negligence.” 8 First, the Court found that the business judgment rule barred the claims. 9 Second, the Court found that plaintiffs merely disagreed with the decisions of ALP’s Board of Directors. 10 The Court also held that plaintiffs’ claims against defendants in their capacity as directors of ALP were barred by the exculpation clause in ALP’s certificate of incorporation. 11 Like the motion court, the Court rejected plaintiffs’ attempts to plead around the exculpatory language. 12 Further, the Court held that plaintiffs’ collateral claims for an accounting, attorneys’ fees, and for the removal of defendants as directors and officers failed because the underlying claims ( i.e. , breach of fiduciary duty) were not viable. 13 Takeaway The exculpatory clause in a company’s certificate of incorporation can be a powerful tool for directors and shareholders to insulate themselves from liability for actions that do not rise to the level of bad faith, a knowing violation of the law, or intentional misconduct. In Max , defendants were found to be exempt from liability under the exculpatory clause set forth in ALP’s certificate of incorporation. As discussed, plaintiffs did not sufficiently allege that defendants engaged in such improper actions or omissions. The business judgment rule is also a powerful tool that can insulate directors from liability for the decisions they make. “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 14 The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.” 15 To avoid application of the rule, the complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” 16 In Max , plaintiffs were unable to overcome application of the rule – that is, plaintiffs failed to allege that defendants’ actions lacked a legitimate business purpose and/or were tainted by a conflict of interest, bad faith or fraud.  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. Footnotes See Burry v. Madison Park Owner LLC , 84 A.D.3d 699 (1st Dept. 2011); Rut v. Young Adult Inst., Inc. , 74 A.D.3d 776 (2d Dept. 2010). Swartz v. Swartz , 145 A.D.3d 818, 823 (2d Dept. 2016). See Auerbach v. Bennett , 47 N.Y.2d 619 (1979); Barr v. Wackman , 36 N.Y.2d 371 (1975). See Amfesco Indus., Inc. v. Greenblatt , 172 A.D.2d 261 (1st Dept. 1991); Kamin v. Am. Exp. Co. , 86 Misc. 2d 809 (Sup. Ct., N.Y. County 1976), aff’d sub nom. , 54 A.D.2d 654 (1st Dept. 1976). Amfesco Indus. , supra . See Benedict v. Whitman Breed Abbott & Morgan , 110 A.D.3d 935 (2d Dept. 2013). See Palazzo v. Palazzo , 121 A.D.2d 261 (1st Dept. 1986). Slip Op. at *1. Id. Id. (quoting, Amfesco Indus. , 172 A.D.2d at 264).  Id. Id. at *1-*2 (citations omitted). Id. at *2. 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted). Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008) (citation omitted). Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016).

By: Jeffrey M. Haber “A boiler room is a place or operation—usually a call center—where high-pressure salespeople call lists of potential investors (‘sucker lists’) to peddle speculative, sometimes fraudulent, securities. Sucker lists identify victims of previous scams.”1 The term “boiler room” originates from the practice of running high-pressure sales operations in the basement or boiler room of a building.2 A broker using boiler-room tactics provides only upbeat, positive information about the issuer and discourages the potential investor from performing any research on their own.3 As noted by the Securities and Exchange Commission (“SEC”), boiler room operators typically use aggressive sales tactics or threats to coerce the potential investor to buy the security being offered (e.g., threatening to file a lien against the potential investor’s property), require the potential investor to buy the security while on the call, and/or promise high returns with little or no risk.4 As noted, a boiler room operation may peddle fraudulent securities on unsuspecting investors. One type of fraudulent scheme involves “penny” stocks. Penny stocks are securities that trade for less than $5 per share. Most penny stocks are too small for trading on the national securities exchanges and, therefore, are only quoted on “over-the-counter” (“OTC”) systems (e.g., by alternative trading systems, such as Delaware Board of Trade ATS, Global OTC ATS (part of NYSE Group, Inc.), and OTC Link ATS (operated by OTC Markets)), among other venues.5 It is, therefore, often easier for fraudsters to manipulate the price of a penny stock because it is less liquid than the stock of larger companies that trade on a national securities exchange. In a typical penny stock scam, a fraudster will accumulate a small-cap stock at a low price, and then use boiler-room tactics to find buyers for the security at an inflated price. In such a scam, victims may think that they are buying on the open market when they are effectively buying their shares directly from the operators. here.=">here."> Today, we examine SEC v. Biller, et al., an enforcement action brought by the SEC against alleged foreign boiler room operators who perpetuated a fraud on retail investors to convince them to buy the stocks of small companies trading in the U.S. markets. According to the SEC’s complaint (here), defendants operated a call center in Medellin, Colombia through which they used high pressure sales tactics to fraudulently sell the stocks of numerous small United States-based public companies to United States investors. Defendants’ sales tactics allegedly included, among other things, making false or misleading statements about their roles in promoting the stock they were touting, and the companies whose stock they were promoting. According to the SEC, defendants were hired by groups of people who controlled the stock of the issuers whose stock they were touting. These groups of people, also known as control groups, allegedly owned a significant percentage of the issuers’ stock that had been deposited with a broker-dealer and was available to be traded in the public markets (i.e., the float). The SEC claimed that defendants catered to control groups that controlled the float of the issuers, so that both defendants and their clients would profit to the greatest extent from the boiler room’s efforts. The SEC alleged that the control groups unlawfully concealed their control of the float, by breaking up their stock into small blocks owned by foreign nominee companies they directed and failing to file disclosures that would have revealed that all of those smaller blocks were under their common control. The SEC maintained that the control groups wanted to sell the stock they owned to make a significant profit. The control groups allegedly used defendants’ boiler room both to create demand from investors so they would have buyers for their shares, and to increase the price of the stock, thereby increasing their profits. From at least January 2016 through at least July 2018, defendants allegedly promoted the stock of at least 18 issuers, in coordination with control groups who were dumping their shares of those issuers. As a result of defendants’ efforts, alleged the SEC, the control groups were able to sell millions of shares of stock, which generated over $58 million in trading proceeds for the control groups. According to the SEC, the stock of many of these issuers was thinly traded in the market when it was not being touted in one of defendants’ promotional campaigns, so investors who purchased these shares at defendants’ urging often had difficulty finding buyers when trying to sell their shares once defendants’ promotions were over. The stocks that defendants allegedly promoted included, among others, Oroplata Resources, Inc. (“Oroplata”), Garmatex Holdings Ltd. (“Garmatex”) and PureSnax International, Inc. (“PureSnax”). To promote these stocks, said the SEC, defendants pretended to be affiliated with various non-existent financial advisory firms. Defendants purportedly made up legitimate-sounding names for these phony financial advisory firms and created legitimate-looking websites for them. According to the SEC complaint, when making telephone calls, defendants routinely used spoofed phone numbers to show area codes that made it appear as if they were calling from the United States rather than Colombia. When calling and emailing unsuspecting investors, said the SEC, defendants used false names, made false or misleading statements about the prospects of the companies whose stock they were touting, and failed to disclose that they were acting in coordination with control groups that were dumping their securities into the market. The SEC claimed that defendants aggressively touted Oroplata, Garmatex, PureSnax, and other issuers’ stock to prospective investors, including elderly retail investors who invested their retirement savings, using high-pressure sales tactics during telephone calls. Defendants allegedly made misleading statements about the issuers’ prospects as investments and about defendants’ own claimed stock-picking successes. In actuality, explained the SEC, defendants called investors to persuade them to purchase these stocks so defendants’ control group clients could sell their holdings of these stocks for a profit and so defendants could collect a share (often more than half) of the sales proceeds. Defendants also allegedly sent email and text messages that attempted to convince the investors to hold the stocks even when their prices were declining. Then, after selling several issuers’ stocks, said the SEC, defendants routinely shut down whatever financial advisory firm name they had been using, and started over with new names, phone numbers, and websites, touting a new group of issuers’ stocks to a different group of investors. Commenting on the complaint, Paul Levenson, Director of the SEC’s Boston Regional Office, said: “These scam artists went to great lengths – using bogus companies, aliases, and spoofing their phone numbers – to defraud and mislead investors into a pump-and-dump scheme.” Director Levenson “urge investors to read the investor education materials about fraud in the ‘penny stock’ market, which are available at Investor.gov.” The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, charges all defendants with violations of antifraud provisions of the securities laws and charges one of the defendants with violating market manipulation provisions of the securities laws. The SEC seeks injunctive relief, disgorgement plus prejudgment interest, civil penalties, and a prohibition on participating in any offerings of penny stocks by all defendants. The press release announcing the filing of the complaint can be found here. The complaint filed in SEC v. Biller, Case No. 1:22-cv-01406 (E.D.N.Y. Mar. 14, 2022), can be found here. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Chen, James, Boiler Room, Investopedia (July 15, 2021) (here). Id. Id. See SEC, Boiler Room Schemes, Investor.gov. Id.

By Jonathan H. Freiberger It is common for contracts to require that one party procure, for its own protection and for the protection of the other party, specific types of insurance coverage and the dollar amounts of such coverage.  Insurance procurement provisions are typically found in, among others, construction contracts and real property leases.  Such insurance procurement provisions are material parts of the contracts in which they appear. On March 15, 2022, the Appellate Division, First Department, in Benedetto v. Hyatt Corp. , granted summary judgment to the defendant/third-party plaintiff on its claim for failure to procure contractually required insurance.  The facts of Benedetto , which were obtained from the electronically filed record on appeal and the First Department’s decision, are as follows.  Third-party defendant, Securitas, entered into an agreement with Hyatt pursuant to which Securitas was to, inter alia: provide security services at one of Hyatt’s properties in Manhattan; train and supervise its employees; and, obtain a comprehensive general liability insurance policy naming Hyatt as an additional insured in the minimum amount of $3,000,00.00 per occurrence.  Plaintiff, who was employed by Securitas as a fire safety director and security guard, was injured after a fire broke out in the laundry room.  Plaintiff commenced a personal injury action against Hyatt, which, in turn, brought a third-party action against Securitas for indemnification, contribution and breach of its insurance procurement obligations.  Securitas submitted evidence that it procured a general liability insurance policy in the amount of $2,000,000.00 and an umbrella policy in the amount of $1,000,000.00. Hyatt moved for summary judgment on plaintiff’s claims as well as on its third-party claims against Securitas. Supreme court denied Hyatt summary judgment dismissing plaintiff's complaint and as against Securitas on the indemnification and contribution claims.  However, supreme court granted Hyatt’s motion as against Securitas on the claim for failure to procure the requisite insurance.  The First Department unanimously affirmed supreme court’s decision. The First Department noted that a “party moving for summary judgment on its claim for failure to procure insurance meets its prima facie burden by establishing that a contract provision requiring the procurement of insurance was not complied with.”  (Citation omitted.)  Once movant meets its burden, the “burden then shifts to the opposing party, who may raise an issue of fact by tendering the procured insurance policy in opposition to the motion.”  (Citation omitted.)   The Court, in explaining why Securitas failed to meet its burden in opposing Hyatt’s motion, stated: Securitas failed to raise an issue of fact precluding summary judgment in Hyatt's favor on their third-party claim for failure to procure insurance. The parties' agreement required Securitas to procure $3 million worth of commercial general liability insurance coverage , but both the certificate of liability insurance and the policy declarations that Securitas submitted in support of its cross motion and in opposition to Hyatt's motion only indicate $2 million worth of commercial general liability insurance coverage. While the certificate of liability insurance also indicates that Securitas procured an additional $1 million in umbrella liability coverage per occurrence - for a total of $3 million of coverage - this does not raise an issue of fact as to whether Securitas procured the $3 million of commercial general liability insurance coverage it was required to procure by the parties' agreement. (Citation omitted.) Another argument made by Securitas, and rejected by the Court, was that Hyatt waived its rights under the insurance procurement provision by accepting, without objecting to, the annual insurance certificates sent by Securitas to Hyatt.  The Court noted that a “waiver, by definition, is the intentional relinquishment of a known right, it must be clear, unequivocal and deliberate.”  (Citation omitted.)  The Court concluded that the annual acceptance of the certificates of insurance “constituted mere silence or, at most, mistake, negligence, or thoughtlessness, but never amounted to any intentional act to relinquish a known right." 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.