By: Jeffrey M. Haber It is not uncommon for parties in commercial transactions to include in their contracts a provision that limits the types of damages recoverable in the event of a breach. Typically, these provisions include a limitation on the recovery of lost profits. An example of such a provision can be found in the agreement before the court in Rising Sun Constr. L.L.C. v. CabGram Dev. LLC , 2022 N.Y. Slip Op. 00989 (1st Dept. Feb. 15, 2022) ( here ). In New York, and elsewhere, contractual limitations on the damages recoverable for a breach of contract are routinely enforced. 1 These provisions “represent[] the parties’ Agreement on the allocation of the risk of economic loss in the event that the contemplated transaction is not fully executed….” 2 However, “ imitations on a party’s liability … to be enforceable must be clearly, explicitly and unambiguously expressed in a contract are … strictly construed against the party seeking to avoid liability.” 3 There are two types of damages recoverable as lost profits: (1) lost profits that are general damages; and (2) lost profits that are consequential or special damages. As the New York Court of Appeals has noted: “The distinction between general and special contract damages is well defined but its application to specific contracts and controversies is usually more elusive.” 4 Lost profits as general damages “are the natural and probable consequence of the breach” of a contract. 5 General damages include “money that the breaching party agreed to pay under the contract.” 6 In other words, “a claim for general damages” exists where the plaintiff “seeks only what it bargained for—the amount it would have profited on the payments promised to make.” 7 Lost profits as consequential, or special damages, do not “directly flow from the breach.” 8 Where the damages were the result of a separate agreement with a nonparty, they are consequential damages. Typically, consequential damages involve a breach of contract that interferes with “the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions” such that “profits from potential collateral exchanges are ‘lost.’” 9 To recover lost profits in a breach of contract action, a plaintiff must establish that the damages were caused by the breach, that the “particular damages were fairly within the contemplation of the parties to the contract at the time it was made” and that the alleged loss is “capable of proof with reasonable certainty”. 10 As is often the case, a fraudulent inducement claim will accompany a breach of contract claim. Under New York law, “ cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” 11 “To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.” 12 One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” 13 Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract, 14 such as a misrepresentation about the ability to perform under the contract. In today’s article, we examine Rising Sun Construction L.L.C. v. CabGram Developer LLC , a case involving the foregoing principles. Rising Sun involved the construction of a residential apartment building in New York City (the “Project”). In December 2016, defendant, CabGram Developer LLC (“CabGram”), retained plaintiff, Rising Sun Construction L.L.C. (“Rising Sun”), a masonry subcontractor, to install pre-cast stone panels on the subject building. Among other provisions, the contract between the parties included a waiver clause with regard to consequential damages: “ he Contractor/Owner and Subcontractor waive claims against each other for consequential damages arising out of or relating to this Subcontract….” Following defendants’ failure to pay plaintiff for its work, plaintiff filed a mechanic’s lien on the subject property and commenced the action, seeking the foreclosure of its lien and related relief, including monetary damages. Defendants answered and asserted two counterclaims. The first counterclaim alleged fraudulent inducement in connection with a second contract the parties allegedly entered before the conclusion of the Project. Defendants maintained that plaintiff fraudulently induced it to enter into the second contract by making false and misleading statements about the work to be performed. Defendants contended that plaintiff used the pretense of entering into the new contractual arrangement to obtain hundreds of thousands of dollars from defendants. Defendants alleged that plaintiff never intended to perform the obligations promised under the second contract. The second counterclaim alleged breach of the second contract and sought the recovery of lost profits relating to the sale of apartments in the subject building. Plaintiff moved to dismiss the counterclaims. The motion court granted the motion. The motion court held that the claim for lost profits was barred by a limitation on damages clause in the 2016 contract, which waived any claims for consequential damages relating to the contract. The motion court further held that the second agreement related to the original 2016 agreement “as it concerned the same project.” Thus, the motion court rejected defendants’ attempt to sever the two agreements. The motion court also held that the fraud counterclaim was barred because it was based on a promise of future performance. Additionally, the motion court held that the claim was duplicative of the contract claim “since defendants could only recover their out-of-pocket damages, which is all that would be recoverable on their breach of contract counterclaim.” The Appellate Division, First Department affirmed. First, the Court held that the motion court “correctly dismissed the portion of the breach of contract counterclaim seeking lost profit damages.” 15 The Court explained that “ he parties’ initial subcontract unambiguously preclude the recovery of lost profits as it provide that the parties waived claims for consequential damages.” 16 The Court agreed with the motion court that the second contract related to the initial one: “The initial subcontract contains provisions regarding ‘Changes in the Work’ and provides that such changes were to be made only in the form of ‘Modifications,’ not an entirely new agreement.” 17 The Court noted that there was “no evidence that the purported second agreement somehow superseded the first subcontract.” 18 Significantly, the Court held that “ ven if the purported second agreement could be considered a fully executed contract, defendants’ counterclaim for lost profits still fail .” 19 The Court reasoned that the initial subcontract waived claims for consequential damages that “related” to the subcontract. Thus, even if there was a new agreement reached in 2018, it was “related” to the initial subcontract because it concerned the same project. 20 Moreover, noted the Court, “defendants have not sufficiently alleged that the purported second agreement specifically provided for the recovery of lost profits.” 21 Second, the Court held that the motion court “properly rejected defendants’ counterclaim for fraudulent inducement.” 22 The Court explained that since defendants’ counterclaim was “‘based upon a statement of future intention,’” defendants were required to allege “facts sufficient to show” that plaintiff “‘never intended to honor or act on statement’”. 23 “At most,” said the Court, defendants only made “‘general allegations that entered into a contract lacking the intent to perform.’” 24  Such allegations, concluded the Court, were “insufficient to sustain a claim from fraudulent inducement.” 25 Takeaway Rising Sun underscores the fundamental principle of contract interpretation – i.e. , contracts are to be construed pursuant to the parties’ intention. 26 As the Court of Appeals explained: “ he best evidence of what the parties … intend is what they say in their writing.” 27 When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words. 28 In Rising Sun , the waiver clause was clear and unambiguous. The agreement expressly provided that the parties “waived claims against each other for consequential damages arising out of or relating to this Subcontract.” Moreover, the intent of the parties as to relatedness was evident from the fact that both contracts (the 2016 and 2018 agreements) concerned the Project. As noted by the Court, there was no “evidence that the purported second agreement somehow superseded the first subcontract.” 29 Rising Sun also highlights the difficulty of alleging fraudulent inducement in the context of a contract claim for the failure to perform under the agreement. As the Court noted, general allegations that a party made a promise to perform without sufficient facts showing an undisclosed intent not to honor that promise cannot withstand a motion to dismiss. 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 1. See , e.g. , Daily News, L.P. v. Roclavell Int’l Corp. , 256 A.D.2d 13, 13 (1st Dept. 1998); Mom’s Bagels of New York, Inc. v. Sig Greenebaum, Inc. , 164 A.D.2d 820, 822 (1st Dept. 1990); see also Chaitman v. Moezinia , 178 A.D.3d 642 (1st Dept. Dec. 26, 2019). 2. Metropolitan Life Ins. Co. v. Noble Lowndes Int’l , 84 N.Y.2d 430, 435, 436 (1994). 3. Terminal Cent. v. Modell & Co. , 212 A.D.2d 213, 218-219 (1st Dept. 1995); compare Madison Hudson Assoc. LLC v. Neumann , 44 A.D.3d 473, 481 (1st Dept. 2007) (enforcing explicit and unambiguously expressed limitation on damages to return of capital contribution). 4. Biotronik A.G. v. Conor Medsys. Ireland, Ltd. , 22 N.Y.3d 799, 805-806 (2014) (internal quotation marks and citation omitted). 5. Id. (citations omitted). 6. Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc. , 487 F.3d 89, 109 (2d. Cir 2007) (citation omitted). 7. Id. at 110. 8. American List Corp. v. U.S. News & World Report , 75 N.Y.2d 38, 43 (1989) 9. Tractebel , 487 F.3d at 109. 10. Kenford Co. v. County of Erie , 67 N.Y.2d 257, 261 (1986); see also Ashland Mgt. v. Janien , 82 N.Y.2d 395, 404 (1993); Awards.com, LLC v. Kinko’s, Inc. , 42 A.D.3d 178, 183 (1st Dept. 2007). 11. Krantz v. Chateau Stores of Can. Ltd. , 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted). 12. Id. (citations and quotation marks omitted). 13. WIT Holding Corp. v. Klein , 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012). 14.  WIT Holding , 282 A.D.2d at 528 (citation omitted). 15. Slip Op. at *1. 16. Id. (citation omitted). 17. Id. 18. Id. 19. Id. 20. Id. 21. Id. 22. Id. 23. Id. at *2 (citation omitted). 24. Id. (citation omitted). 25. Id. (citation omitted). 26. See , e.g. , Slatt v. Slatt , 64 N.Y.2d 966 (1985). 27. Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). 28. W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990). 29. Slip Op. at *1.

By:  Jeffrey M. Haber As readers know from past articles, CPLR § 7511 (b) sets forth the statutory grounds for vacating an arbitration award. Under that section, a court may vacate an award if the rights of the movant were prejudiced by: (1) corruption, fraud or misconduct in procuring the award; (2) partiality of the arbitrator; (3) the arbitrator exceeding or imperfectly executing his/her power; or (4) the arbitrator failing to follow the procedure of Article 75.  With respect to whether an arbitrator exceeded or imperfectly executed his/her power, an award will not be overturned unless the award violates a strong public policy, is totally irrational or exceeds a specifically enumerated limitation on the arbitrator’s power. 1 In general, the grounds for vacating an arbitration award are narrowly construed. 2 It will be upheld even when the arbitrator makes errors of law and/or fact. 3 As noted by the Court of Appeals, the courts are not to assume the role of overseer of the arbitration and mold an award to its sense of justice. 4 An arbitration award violates strong public policy “only where court can conclude, without engaging in any extended fact-finding or legal analysis, that a law prohibits the particular matters to be decided by arbitration, or where the award itself violates a well-defined constitutional, statutory, or common law of this state.” 5 An award will be found to violate public policy only where such policy prohibits, in the absolute sense, particular matters being decided or certain relief being granted by the arbitrator. 6 Vacatur on public policy grounds is exercised sparingly 7 in order to preserve the parties’ choice of a nonjudicial forum to the greatest extent possible. 8 In Denson v. Trump , 180 A.D.3d 446, 450-451 (1st Dept. 2020), the Appellate Division, First Department identified a number of examples in which courts determined that public policy had been violated. These include: an award of punitive damages; violation of the State’s anti-trust laws; the liquidation of insolvent insurance companies; usury; an award that prevents an employer from fulfilling its legal obligation to protect against workplace sexual harassment; an award of child support that violates the Child Support Standards Act; and an award that violates the State’s policy of providing the public with high quality, efficient and effective hospital services. Separately, an arbitration award is subject to vacatur when the arbitrator exceeds expressly enumerated limits on his/her authority. “Enumerated limits of an arbitrator’s authority may be found in the arbitration clause of an agreement, in a statute, or in a notice or demand for arbitration.” 9 As noted by the First Department in Denson , “an arbitrator’s authority extends only to those issues that are actually presented by the parties.” 10 “Even where a claim is otherwise arbitrable, the scope of the arbitration is still limited to the specific issues presented and may not extend to those that are materially different or legally distinct.” 11 Simply stated, an arbitrator exceeds his/her authority by considering issues not raised by the parties. 12 Under CPLR § 7511(c)(2), when an arbitration award is issued in excess of the arbitrator’s authority, the court can modify the award so long as it does not affect the merits of the decision on the issues submitted. If modification is not possible, then vacatur of the entire award is required. 13 “A public policy argument may be raised for the first time on a motion to vacate, and should be considered by the court.” 14 “A claim that the arbitrator has decided issues that were not otherwise submitted can, for obvious reasons, only be raised once the award is made.” 15 In Matter of 544 Bloomrest, LLC v. Harding , 2022 N.Y. Slip Op. 00936 (1st Dept. Feb. 10, 2022) ( here ), the First Department affirmed in part and reversed in part the decision and order of the motion court, which confirmed an arbitration award. In addition to addressing the claims brought by the petitioner, the arbitrator assessed sanctions against respondent and awarded petitioner its attorneys’ fees.    Petitioner commenced the action to confirm its arbitration award against respondents. The arbitrator found that respondents had converted over $360,000.00 from petitioner through a variety of unlawful and illegal means, including, but not limited to, conversion and forgery. The arbitrator also denied respondents’ breach of contract counterclaim. In addition, the arbitrator awarded punitive damages in favor of petitioner, assessed sanctions against respondents and awarded petitioner its attorneys’ fees.  The motion court granted petitioner’s motion to confirm the award and denied respondents’ cross motion to vacate the award. As noted, the First Department modified the motion court’s order, “to vacate that part of the award awarding petitioner punitive damages, sanctions and attorneys’ fees.” The Court “otherwise affirmed” the order. As an initial matter, the Court held that the motion court properly confirmed the award as to petitioner’s conversion claim, and denied respondents’ counterclaim, notwithstanding the purported errors of law and fact made by the arbitrator. The Court explained that such errors were “not subject to judicial review.”  Moreover, the Court rejected respondents’ contention that the individual respondent, a corporate officer or director, was immune from personal liability. The Court found that there was evidence that he personally participated in the fraud or had actual knowledge of it. Significantly, the Court held that the arbitrator exceeded her power by awarding petitioner punitive damages, sanctions and attorneys’ fees, stating that such relief was not demanded. The Court noted that petitioner filed a demand for arbitration stating that its dispute with respondents concerned “ onversion by a variety of fraudulent means”. Petitioner did not advise the American Arbitration Association (“AAA”) that it was seeking other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages. Although the American Arbitration Association (AAA) preprinted form petitioner used allows a claimant to seek other relief, including attorneys’ fees, interest, arbitration costs and punitive/exemplary damages, the only boxes that petitioner checked off were for interest and arbitration costs. It did not check the punitive damages box or attorneys’ fees box, nor indicate anywhere on its demand that it was seeking such relief. Petitioner never amended its demand for arbitration. Nor did it include a prayer for such relief in its subsequently filed post-arbitration memorandum. Citing Denson , the Court held that “ y granting unrequested relief, the arbitrator exceeded the expressly enumerated limits on her authority by deciding matters that were not before her.” As to attorneys’ fees, the Court noted that “ lthough AAA commercial rule 47(d) empowers an arbitrator to award attorneys’ fees, this is only “if all parties have requested such an award or it is authorized by law or their arbitration agreement.” The Court found that “neither party requested such an award and it not authorized by law.” The Court explained that the engagement letter that petitioner relied upon did not incorporate AAA Rule 47(d) into that agreement. “In any event,” said the Court, “even if the arbitrator has the authority to make an award , it must be demanded in the particular arbitration for the matter to be considered.” In other other words, an “arbitrator’s authority extends to only those issues that are actually presented by the parties.” 16 Consequently, held the Court, in the absence of a demand for such fees or the parties’ agreement that the prevailing party is entitled to legal fees, they could not be awarded.  With regard to punitive damages, the Court found that petitioner did not request them, even though an arbitrator is authorized to award punitive damages pursuant to AAA rule 47(a). Petitioner only requested the arbitrator award such “other relief that the AAA deems just and proper”. Such general, broad language, held the Court, did not satisfy the requirements of a demand.  However, the Court held that the award of the costs of arbitration was properly confirmed by the motion court. “Not only did petitioner request them in its demand for arbitration,” observed the Court, “AAA rule 47(c) provides that ‘the arbitrator shall assess the fees, expenses, and compensation,’ including administrative fees, expenses, and the arbitrator’s own compensation, “among the parties in such amounts as the arbitrator determines is appropriate.’” Takeaway In the big picture, 544 Bloomrest highlights circumstances in which an arbitrator can exceed his/her authority. The case also underscores the importance of following the terms of the arbitration agreement and making it clear at the outset the relief one is seeking. As the petitioner in 544 Bloomrest learned, the failure to do so, deprived it of the relief it thought it was seeking. 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 Matter of Silverman (Benmor Coats) , 61 N.Y.2d 299 (1984); Matter of Kowaleski (New York State Dept. of Correctional Servs.) , 16 N.Y.3d 85, 90 (2010); Frankel v. Sardis , 76 A.D.3d 136, 139 (1st Dept. 2010). Frankel , 76 A.D.3d at 139-140. Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479-480 (2006) (citing, Matter of Sprinzen (Nomberg) , 46 N.Y.2d 623, 629 (1979)). Wein & Malkin , 6 N.Y.3d at 480. Matter of Reddy v. Schaffer , 123 A.D.3d 935, 937 (2d Dept. 2014). Sprinzen , 46 N.Y.2d at 631. Matter of Neirs-Folkes, Inc. (Drake Ins. Co. of N.Y.) , 75 A.D.2d 787 (1st Dept. 1980). Sprinzen , 46 N.Y.2d at 630. Denson , 180 A.D.3d at 151 (citations omitted). Id. (citing, Matter of Joan Hansen & Co., Inc. v. Everlast World’s Boxing Headquarters Corp. , 13 N.Y.3d 168 (2009)). Id. (citing, Joan Hansen , 13 N.Y.3d at 173-174).  Id. (citations omitted). Matter of Slocum v. Madariaga , 123 A.D.3d 1046, 1047 (2d Dept. 2014). Denson , 180 A.D.3d at 451-452 (citations omitted). Id. at 452. Joan Hansen , 13 N.Y.3d at 173.

By Jonathan H. Freiberger Followers of this Blog know that we frequently address issues involving residential mortgage foreclosure.  Decisions involving the pre-foreclosure requirements of RPAPL 1304 are frequently rendered by the Appellate Courts in New York and, accordingly, are analyzed in this Blog’s articles.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  By way of background and as previously noted in our Blog: RPAPL 1304 requires that at least ninety days prior to commencing legal action against a borrower with respect to certain loans, a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; provide a list of approved housing agencies that provide free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  The failure of a lender to comply with RPAPL 1304 will result in the dismissal of a foreclosure complaint ( see, e.g., U.S. Bank N.A. v. Beymer , 161 A.D.3d 543 (1 st Dep’t 2018)) when the issue is raised as an affirmative defense by the borrower ( see, e.g., One West Bank, FSB v. Rosenberg , 189 A.D.3d 1600, 1602-3 (2 nd Dep’t 2020) (citation omitted)).  Indeed, “proper service of the notice containing the statutorily mandated content is a condition precedent to the commencement of a foreclosure action.”  U.S. Bank N.A. v. Taormina , 187 A.D.3d 1095, 1096 (2 nd Dep’t 2020) (citations omitted).  When failure to comply with RPAPL 1304 is raised as an affirmative defense, the foreclosing lender must demonstrate its compliance with the statute as part of its prima facie case.  Bank of America, N.A. v. Wheatly , 158 A.D.3d 736 (2 nd Dep’t 2018) (citations omitted). From January 14, 2020, to the present, RPAPL 1304(2) provides: The notices required by this section shall be sent by the lender or mortgage loan servicer to the borrower, by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence which is the subject of the mortgage.  Notice is considered given as of the date it is mailed.   The notices required by this section shall contain a current list of United States department of housing and urban development approved housing counseling agencies, or other housing counseling agencies serving the county where the property is located from the most recent listing available from the department of financial services .  The list shall include the counseling agencies' last known addresses and telephone numbers.  The department of financial services shall make available a listing, by county, of such agencies which the lender or mortgage loan servicer may use to meet the requirements of this section.  (Emphasis added.) Prior to January 14, 2020 (the time period relevant to the decision that is the subject of today’s article), RPAPL 1304 provided: The notices required by this section shall be sent by such lender, assignee (including purchasing investor) or mortgage loan servicer to the borrower, by registered or certified mail and also by first-class mail to the last known address of the borrower, and to the residence that is the subject of the mortgage.  The notices required by this section shall be sent by the lender, assignee or mortgage loan servicer in a separate envelope from any other mailing or notice.  Notice is considered given as of the date it is mailed.   The notices required by this section shall contain a current list of at least five housing counseling agencies serving the county where the property is located from the most recent listing available from department of financial services.  The list shall include the counseling agencies' last known addresses and telephone numbers.  The department of financial services shall make available on its websites a listing, by county, of such agencies.  The lender, assignee or mortgage loan servicer shall use such lists to meet the requirements of this section.  (Emphasis added.) On February 9, 2022, the Appellate Division, Second Department, decided U.S. Bank National Association v. Gordon , in which an interesting issue under RPAPL 1304 was raised by borrowers and analyzed by the Court.  Lender in Gordon commenced a mortgage foreclosure action in June of 2017.  After borrowers interposed their answer, lender moved for summary judgment on the complaint, to strike borrower’s answer and for an order of reference.  Borrowers cross-moved for summary judgment dismissing the complaint on the ground that lender failed to comply with RPAPL 1304(2).  While this Blog has, on numerous occasions, discussed RPAPL 1304 defenses based on, inter alia : a lender’s failure to properly mail and/or address the requisite notices; the contents of said notices; and/or, the lender’s failure to submit admissible proof as to the mailing of proper notices, the borrowers in Gordon argued something different – that not all of the five housing counseling agencies listed with the RPAPL 1304 notice “served” Queens County, where the subject property was located, as required by RPAPL 1304.  Nonetheless, supreme court granted lender’s motion and denied borrowers’ cross-motion. On borrowers’ appeal, the Second Department reversed the granting of summary judgment to lender and determined that summary judgment was properly denied to borrowers, stating that: Here, in support of its motion, the failed to establish, prima facie, its strict compliance with RPAPL 1304, as it failed to demonstrate that the 90-day notices it sent to contained the requisite list of five housing counseling agencies serving the county in which the subject property is located. In support of its motion, submitted the notices pursuant to RPAPL 1304, annexed to which was a list of five agencies. Four of the agencies were located in Queens, and one of the agencies, Hispanic Brotherhood of Rockville Centre, Inc., was located in Nassau County. Thus, failed to establish, prima facie, that all five of the agencies served Queens County. Conversely, also failed to establish that they were entitled to summary judgment dismissing the complaint insofar as asserted against them based upon 's failure to comply with RPAPL 1304.  A defendant still has to meet its burden, on a cross motion for summary judgment dismissing the complaint, of establishing that a condition precedent was not fulfilled. Here, failed to offer evidence showing that the list annexed to the RPAPL 1304 notices included fewer than five housing counseling agencies that serve the county in which the mortgaged property is located. They failed to establish as a matter of law that any of the five agencies in the list, including Hispanic Brotherhood of Rockville Centre, Inc., did not serve Queens County or that they contacted any of the agencies and were denied assistance because the property is located in Queens County. (Emphasis in original; citations, internal quotation marks and internal brackets omitted.) 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 Under New York law, an action based upon fraud must be commenced within six years of the date the cause of action accrued, or within two years of the time, the plaintiff discovered or could have discovered the fraud with reasonable diligence, whichever is greater. 1 The cause of action accrues when “every element of the claim, including injury, can truthfully be alleged”, 2 “even though the injured party may be ignorant of the existence of the wrong or injury.” 3 While the foregoing statement of the law seems simple enough, its application is more complicated. Determining when accrual occurs is not easy and often contested. Also, hotly contested is the determination of when the plaintiff discovered or could have discovered the fraud. In New York, “plaintiffs will be held to have discovered the fraud when it is established that they were possessed of knowledge of facts from which it could be reasonably inferred, that is, inferred from facts which indicate the alleged fraud.” 4 “ ere suspicion will not constitute a sufficient substitute” for knowledge of the fraud. 5 “Where it does not conclusively appear that a plaintiff had knowledge of facts from which the fraud could reasonably be inferred, a complaint should not be dismissed on motion and the question should be left to the trier of the facts.” 6 Moreover, where the circumstances suggest to a person of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and if she fails to undertake that inquiry when it would have developed the truth, and shuts her eyes to the facts which call for an investigation, knowledge of the fraud will be imputed to her. 7 The test as to when fraud should with reasonable diligence have been discovered is an objective one. 8 Thus, while it is true that New York courts will not grant a motion to dismiss a fraud claim where the plaintiff’s knowledge is disputed, courts will dismiss a fraud claim when the alleged facts establish that a duty of inquiry existed and that an inquiry was not pursued. 9 “The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.” 10 In Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 2022 N.Y. Slip Op. 00805 (1st Dept. Feb. 8, 2022) ( here ), the Appellate Division, First Department, dismissed the plaintiff’s fraud claims as time-barred because it was on inquiry notice of said claims. Ambac was an action that Ambac Assurance Corporation (“Ambac” or “Plaintiff”) commenced in July 2015. It involved five policies issued by Ambac in 2005 to insure residential mortgage-backed securities (“RMBS”) transactions that securitized “pools” of “negative amortization” mortgage loans originated by defendant Countrywide Home Loans, Inc. (“Countrywide” or “Defendant”). Ambac alleged that, as of October 31, 2014, it had paid, accrued, or expected to pay more than $350 million in policy claims resulting from Countrywide’s alleged misrepresentations about the underlying loans in five RMBS transactions (the “Transactions”). On November 21, 2011, Ambac and Countrywide entered into a tolling agreement, which, as amended, tolled the running of the statute of limitations on unexpired claims related to the Transactions through December 31, 2014. The parties did not dispute that the action was not timely under New York’s six-year limitations period. Instead, the dispute centered on whether Ambac commenced the action within two years from the time it discovered the alleged fraud, or with reasonable diligence would have discovered it. The Court held that Countrywide demonstrated “that Ambac was on inquiry notice of its fraud claims before November 21, 2009, i.e. , two years before the parties entered the tolling agreement, based on media reports about Countrywide’s fraudulent loan practices, highly publicized litigation between 2006 and early 2009 involving substantially similar claims, and the downgrade of the certificates in the transactions from AAA to junk status by February 2009.” 11 The Court noted that Ambac was aware of Countrywide’s possible fraud as early as 2008: “Ambac does not deny that before 2009 it was aware of Countrywide’s possible fraud in connection with the transactions, as now alleged in this action.” 12 “Indeed,” explained the Court, “Ambac publicly announced in 2008 that it would investigate ‘all areas of fraudulent activity’ and attributed losses on the RMBS in its portfolio to the possibility of ‘poorly underwritten’ and ‘fraudulent loans … bundled in the transactions.’” 13 The Court found “unavailing” Ambac’s argument “that … a triable issue exist as to whether it could have sustained a viable fraud action in 2009 when it was not in possession of the relevant loan files and had not yet suffered any losses.” 14 In that regard, the Court explained: First, Ambac’s claim that it needed loan-level allegations to file a fraud action is undermined by the complaint itself, which makes scant reference to loan-level allegations and focuses primarily on Countrywide’s systemic wrongdoing, as revealed in media reports, litigation, and government investigations prior to 2009. Second, Ambac failed to show that it could not assert a fraud claim without making loan-level allegations or that the belief that loan-level allegations were required motivated its failure to timely bring an action. The record indicates that Ambac did not make any efforts to investigate possible fraud in relation to the transactions, thus casting this argument as nothing more than a post hoc rationalization. Third, there was no requirement that Ambac plead precise damages but only that it alleges sufficient damages “from which damages attributable to the defendant’s breach may be reasonably inferred.” 15 Takeaway Ambac highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of fraud. The failure to bring suit when the facts suggest fraud will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he or she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his or her rights when the facts indicate that a wrong has been done. 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 CPLR § 213(8). See also Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009); Carbon Capital Mgmt., LLC v. Am. Express Co. , 88 A.D.3d 933, 939 (2d Dept. 2011). Carbon Capital Mgmt. , 88 A.D.3d at 939 (citation and alterations omitted). Schmidt v. Merchants Despatch Transp. Co. , 270 N.Y. 287, 300 (1936). Erbe v. Lincoln Rochester Trust Co. , 3 N.Y.2d 321, 326 (1957). Id. Trepuk v. Frank , 44 N.Y.2d 723, 725 (1978). Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011). Id. (citation and internal quotation marks omitted). See Shalik v. Hewlett Assocs., L.P. , 93 A.D.3d 777, 778 (2d Dept. 2012) (“The two-year period begins to run when the circumstances reasonably would suggest to the plaintiff that he or she may have been defrauded, so as to trigger a duty to inquire on his or her part”) (citation omitted) (affirming dismissal because “the defendants established, prima facie, that the plaintiffs possessed information regarding the questionable authenticity of the decedent’s signature on the Amendment more than two years before they filed the complaint.”). Celestin v. Simpson , 153 A.D.3d 656, 657 (2d Dept. 2017). Slip Op. at *1 (citation omitted). Id. Id. Id. Id. at *1-*2 (citation omitted).

By Jonathan H. Freiberger In its December 10, 2021, article entitled: “ Service of Process and Personal Jurisdiction ,” this Blog discussed the notion of a court’s personal jurisdiction over a defendant and the importance of proper service of process. In today’s article we will discuss Everbank v. Kelly , a mortgage foreclosure action decided on February 2, 2022, by the Appellate Division, Second Department, in which the Court resolved: a simple question that has not previously arisen: whether an affirmative misrepresentation by a relative of a defendant at a residential address that the address is proper, which is relied upon by a process server, may establish that service was valid, if evidence establishes that the address is not, in fact, the defendant's actual dwelling place or usual place of abode. We hold that, under the circumstances of this action, service of process upon the defendant at an address that was not actually his dwelling place or usual place of abode was defective, notwithstanding information provided to the process server at the doorstep. In 2004, James Kelly and his father-in-law, Edward Bressler, executed a promissory note, the repayment obligation for which was secured by a mortgage on certain real property (the “Property”). As is typically the case, the mortgage contained an occupancy rider by which Bressler “expressed his intention to primarily reside at the within 60 days”. After a payment default, lender commenced an action to foreclose the mortgage. The process server served the defendants at the Property pursuant to CPLR 308(2) (suitable age and discretion), by delivering copies of the summons and complaint to Crystal Kelly, Bressler’s daughter and James’ wife, who “verified” that Bressler “actually resides at this location.” The requisite follow-up mailing was sent to Bressler at the Property. Defendants defaulted in appearing and supreme court issued an order of reference. Lender moved for a judgment of foreclosure and sale and, thereafter, Bressler moved to vacate the order of reference (pursuant to CPLR 5015(a)(4) ) and to dismiss the complaint for lack of personal jurisdiction (pursuant to CPLR 3211(a)(8) ). Bressler supported his motion by: arguing that he resided elsewhere for 40 years and that the Property was not his “dwelling place or usual place of abode”; and, providing supreme court with copies of his driver’s license, numerous bills, an insurance renewal notice and other similar documents. Crystal, in her supporting affidavit, averred, inter alia , that Bressler did not reside at the Property, and that she did not tell the process server that he did. Supreme court held both motions in abeyance and ordered a hearing to “determine the validity of service of process on Bressler.” At the hearing, the process server, relying on his affidavit of service, testified that in his conversation with Crystal she “identified as her husband and Bressler as her father, and that each resided at the roperty.” Bressler testified that he lived elsewhere for 40 years and presented documentary evidence to support his testimony. Crystal attended the hearing but did not testify. Subsequently, supreme court granted lender’s motion to confirm the referee’s report and for a judgment of foreclosure and sale and denied Bressler’s motion and, in so doing, found: 's testimony credible, that Crystal … had stated to him that the recipients of process resided at the roperty. The court drew a discretionary negative inference against Bressler from the failure of Crystal … to testify at the hearing, despite the fact that she had been present for it. The court also found that process server acted reasonably in relying upon the representations of Crystal … that Bressler resided at the roperty. On Bressler’s appeal, the Court reversed the judgment of foreclosure and sale and granted Bressler’s motion to vacate the order of reference and to dismiss the complaint. The Court noted that proper service under CPLR 308(2) requires that the process be served in strict compliance with that rule. The Court noted that the process server’s testimony was consistent with his contemporaneously prepared affidavit of service. The Court deferred “to the credibility findings of the Supreme Court, and no issue with the negative inference that it chose to draw from Crystal<‘s> … failure to testify at the hearing.” (Citation omitted.) The Court also noted the “significant” evidence presented by Bressler demonstrating that he resided for 40 years at a location other than where service of process was purportedly effectuated. In framing and resolving the issue in the case, the Court stated: The question raised by this appeal, therefore, is whether representation to the process server that her father lived at the service address may override the greater quantum of evidence that he did not, in fact, live there. In other words, may a process server reasonably rely upon the representations of a family member at the service address, that the defendant actually dwells at that address, for service of process to be effectuated there? While the Supreme Court held that there can be such reasonable reliance for service of process to be effective, so as to implicitly excuse service at an incorrect address, we conclude that a representation, or misrepresentation, of a family member does not override the plain language of CPLR 308(2) that service be made at the defendant's actual "dwelling place or usual place of abode." The Court explained the language of CPLR 308(2) and that strict adherence to its requirements is important. The Court did point out several limited exceptions to “following the precise language of CPLR 308.” These exceptions include, but are not limited to, circumstances: (1) where under the concept of apparent authority, “a recipient of process represents that he or she is authorized to accept service on behalf of an entity, when in fact such authority is lacking”; (2) when a defendant is estopped from “challenging the location and propriety of service of process defendant has engaged in affirmative conduct which misleads a party into serving process at an incorrect address”; or, (3) where a defendant “resists service under CPLR 308(1) and (2)”. As to estoppel, and as relates to Everbank , the Court recognized that “ or a defendant to be estopped from raising a claim of defective service, the conduct misleading the process server must be the defendant's conduct, as distinguished from conduct of a third party.” (Citation omitted.) Specifically, the Court noted that Crystal did not misrepresent “‘who’ could accept service of process in the sense of an apparent authority exception to CPLR 308” but, “ rediting Burke's hearing testimony, … Crystal … instead made a representation, or perhaps a misrepresentation, about ‘where’ Bressler resided, which was then relied upon by the process server.” The Court stated that “ stoppel does not bar Bressler from arguing that he lived at an address other than the roperty, as the statement relied upon by the process server about where he lived was not uttered by him but by a third person.” (Citations omitted, emphasis in original.) Crystal’s statement that Bressler lived at the Property, could not overcome the significant evidence to the contrary. Thus, the Court concluded that: an acceptance of service by a person of suitable age and discretion is invalid if the service address is not, in fact, the defendant's actual place of business, dwelling place, or usual place of abode. That is exactly what occurred here. The process server must perform a proper inquiry to determine the defendant's actual place of business, dwelling place, or usual place of abode, which under CPLR 308 must be correct absent very limited exceptions not applicable here. In this case, there is a dispositive distinction between what Crystal … said at the time of the service from what Bressler's dwelling place apparently was in fact. (Emphasis in original.) Further, the reasonableness of the process server’s belief based on what Crystal told him “is not relevant to whether the service was at a qualifying location under CPLR 308(2).” Finally, the Court found that the occupancy rider or the notice provision in the underlying loan documents could not save lender. The stated purpose of the occupancy rider “was to contractually authorize a sale of the or financial adjustments to the note in the event Bressler were to reside elsewhere.” Moreover, the rider merely expressed Bressler’s future intent to reside at the Property, which is not “tantamount to proof of actually dwelling at the roperty, as intents may be changed and as the occupancy rider envisioned adjustments to the note in the event Bressler were to live elsewhere.” Similarly, the notice provision, requiring notices to be sent to the Property, “pertains to ministerial ‘notices . . . provided for in this Security Instrument,’ which is not a contractual opt-out of the service of process rules of CPLR 308.” 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 On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law.  This Blog previously examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL ( here ).  Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine  Flowers v. 73rd Townhouse, LLC , 2022 N.Y. Slip Op. 00627 (1st Dept. Feb. 1, 2022) ( here ). A Primer on the Former DCL The DCL governs fraudulent conveyances.  For example, DCL § 273 (conveyances by insolvent) provides that conveyances that render a debtor insolvent that are made without fair consideration, are fraudulent as to creditors regardless of intent;  DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action; DCL § 274 (conveyance to defendants in a business or transaction) provides that conveyances made without fair consideration in a business or transaction for which the capital remaining after the conveyance is unreasonably small, are fraudulent as to creditors regardless of intent; DCL § 275 (conveyance by defendants to the detriment of current and future creditors) provides that conveyances and obligations incurred without fair consideration when the debtor intends or believes that he/she will incur debts beyond his/her ability to pay as they mature, are fraudulent as to both present and future creditors; and, DCL § 276 (conveyance made with intent) provides that conveyances made with actual intent to “hinder, delay, or defraud either present or future creditors, fraudulent as to both present and future creditors.” To set aside a conveyance or obligation incurred under DCL §§ 273, 273-a, 274 and 275, the plaintiff must establish that the conveyance or obligation incurred was made without “fair consideration”. Under DCL § 272, “ air consideration … is not only a matter of whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’ … but whether the transaction made in good faith.” 1 “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” 2 A claim under DCL § 275 requires, in addition to the conveyance and unfair consideration elements discussed, an element of intent or belief that insolvency will result. 3 DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. 4 Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” to raise an inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” 5 Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. 6 “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” 7 A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. 8 Flowers v. 73rd Townhouse, LLC here).=">here)."> Flowers involved, inter alia , alleged fraudulent conveyances that defendant 73rd Townhouse, LLC (“73rd Townhouse”), a single purpose entity created to hold title to a townhouse located on East 73rd Street in Manhattan (the “premises”), made to evade collection of a $500,000 consent judgment entered in favor of plaintiff in a prior action (the “prior action”). Pursuant to a real estate contract dated January 17, 2004, plaintiff and his then-wife agreed to purchase the premises from 73rd Townhouse. The contract provided for (i) a purchase price of $17 million and (ii) the seller to perform renovations on the premises subject to “the plaintiff’s right to make ‘reasonable adjustments and modifications’ ( i.e. , change orders)”. 9 The contract required plaintiff to close under certain circumstances even if renovations were not completed, but the contract also required 73rd Townhouse to “deposit into an escrow account 120% of the cost of completing the remaining work.” 10 The contract further required 73rd Townhouse to deposit $500,000.00 into an escrow account at closing to be held until delivery of a valid certificate of occupancy with 73rd Townhouse remaining liable for “other penalties for excessive delay.” 11 73rd Townhouse failed to complete the renovations in accordance with the change orders in time for the closing. After a dispute arose between the parties as to whether plaintiff was obligated to close, 73rd Townhouse attempted to terminate the contract. As such, the prior action ensued. Thereafter, plaintiff moved for summary judgment on the complaint. The court granted plaintiff’s motion, awarding specific performance albeit without the price abatement plaintiff sought. 73rd Townhouse was directed to turn over title to the property upon payment by plaintiff of the remaining contract price, but also directed that plaintiff deposit $575,000.00 into escrow for possible payment of change orders completed by 73rd Townhouse. Plaintiff appealed the portion of the order declining to order an abatement of the purchase price as a result of the 73rd Townhouse's failure to complete the renovations. The First Department later modified the court’s order, and remanded the case for a “hearing on the issue of the amount of price abatement to which the entitled for the cost of completing the renovation work contemplated by the contract.” 12 Pursuant to the court’s order, the closing took place on November 29, 2006. A $575,000.00 escrow was established as a construction reserve in accordance with the order. An additional $400,000.00 escrow was established pursuant to the terms of the contract.  In February 2007, the court directed the payment of approximately $475,000.00 from these escrowed amounts to 73rd Townhouse. Plaintiff appealed the court’s order.  On February 24, 2009, the parties settled the prior action by stipulation made in open court by agreeing to a $500,000.00 judgment to be entered against 73rd Townhouse. With the judgment unsatisfied, plaintiff filed suit on July 10, 2010. According to plaintiff, the settlement on the record was nothing more than a “ruse”. Plaintiff contended that defendants conducted their business dealings involving the premises without regard to corporate formalities, or appropriate documentation, or accounting controls, creating layers of “single-purpose LLCs”, by which they fraudulently stripped assets for the purpose evading creditors such as plaintiff. Plaintiff contended that the payments made and/or directed by 73rd Townhouse and received by various defendants at the closing and subsequent to the closing, including the monies released from the escrow pursuant to the court’s February 2017 order were fraudulent conveyances under the DCL. Plaintiff maintained that the transfers made by 73rd Townhouse rendered it insolvent and unable to pay the judgment, and that defendants knew of the potential liability to plaintiff at the time of the payments.  As such, plaintiff claimed that there were fraudulent conveyances under DCL §§ 273, 273-a, 274, 275, 276, 276-a, and 278. Plaintiff moved for summary judgment on each of the causes of action asserted. Defendants opposed. The motion court granted the motion. The motion court found that plaintiff established through various submissions and an expert report that 73rd Townhouse was insolvent at the time of closing. The motion court noted that the expert report, in particular, detailed how 73rd Townhouse was left with unreasonably small capital at the time of the November 2006 closing, and further transferred $5.8 million to the various owners of 73rd Townhouse or other owner-related entities, while the company was insolvent. Specifically, these submissions establish entitlement to relief under DCL § 273 to the extent (i) that 73rd Townhouse conveyed over $5.8 million to its owners or owner-related entities, (ii) that it was insolvent at the time of the transfers, or at least was rendered insolvent by the transfers, and (iii) that the transfers were not made for fair consideration inasmuch as the transfers were “preferential transfers to directors, officers, or shareholders of insolvent corporation[] in derogation of the rights of general creditors.” … To the extent that the plaintiff’s submissions further show that 73rd Townhouse was about to engage in a business or transaction, i.e. , repaying its debts, and the remaining property following the transfers to the owners or owner-related entities was insufficient to fully repay those debts, the plaintiff has also established entitlement to relief under DCL § 274. 13 However, said the motion court, plaintiff did not demonstrate, as a matter of law, “that 73rd Townhouse, after making the $5.8 million in transfers following closing, ‘intends or believes that will incur debts beyond his ability to pay as they mature.’” Thus, held the motion court, “summary judgment on the plaintiff’s claim pursuant to DCL § 275 (fourth cause of action) is denied.” The motion court further found that plaintiff’s submissions established an entitlement to summary judgment pursuant to DCL § 273-a. Specifically, the motion court held that “plaintiff’s submissions demonstrate (i) that the transfers were made without fair consideration, for the reasons previously discussed herein, (ii) that transfers took place after November 2004, when the prior action took place, and (iii) that a final judgment against 73rd Townhouse was rendered, and that it remains unsatisfied.” Finally, the motion court held that plaintiff’s submissions sufficed to establish that the conveyances were made with an actual intent to defraud plaintiff, such that plaintiff was entitled to relief pursuant to DCL § 276. According to the motion court, the expert reports showed that the owners of 73rd Townhouse withdrew approximately $800,000.00 from the company prior to closing, keeping no reserves for potential construction liabilities or contingencies, in violation of normal industry practice wherein a company keeps a reserve or ‘retainage’ of the cost of completion against unexpected costs to complete a project. Such transfers, said the motion court “were both questionable and not done in the usual course of business.” Further, explained the motion court, the expert reports and plaintiffs other submissions showed that the transfers were made for little to no consideration, while defendants were aware of the pending litigation between themselves and plaintiff, and “were made between members of a closely held LLC or other LLC’s owned by the same members, such that it was evident that defendants deliberately made 73rd Townhouse’s assets unavailable to satisfy the judgment, to which its consent was clearly insincere.” On appeal, the First Department modified the ruling with regard to, inter alia , DCL § 273-a and otherwise affirmed the motion court’s order. The Court held that the motion court incorrectly granted judgment on the DCL § 273-a claim. The Court explained that DCL § 273-a did not apply to plaintiff’s claims because plaintiff’s price abatement claim, which had been dismissed before the subject transfers were made, were different than the judgment at issue. “Debtor & Creditor Law § 273-a contemplates that the two judgments it refers to — the docketed judgment and the final judgment — shall be substantially the same” and “Plaintiff's final judgment for $500,000 bears no material relation to his earlier-docketed judgment for specific performance, which is not even a money judgment.” 14 The Court also held that plaintiff “established prima facie entitlement to summary judgment on his claims under Debtor & Creditor Law former §§ 273 and 274 by showing that <73rd townhouse> transferred sums of money to or their family limited partnership , all insiders, during a period in which it was insolvent.”15 The Court noted that the expert report, “which was based on an exhaustive analysis of the financial records produced by defendants,” showed that 73rd Townhouse “was insolvent, on a balance sheet basis, from November 29, 2006, through July 25, 2007, and that, during that period, it made a total of more than $5.7 million in transfers to or their family limited partnership.” 16 Finally, the Court held that “ he claim for intentional fraudulent conveyance under Debtor & Creditor Law former § 276 supported by ‘badges of fraud’ that include defendants’ close family relationships, the general lack of fair consideration for the transfers, and defendants’ knowledge of plaintiff’s claim and <73rd townhouse’s> inability to pay it.” 17 The Court found that “defendants appear to have siphoned out <73rd townhouse’s> assets and settled the claim only after they had drained out all the cash — when, in words, the consent judgment was ‘valueless’ because <73rd townhouse> no longer had any ‘assets with which to satisfy the judgment.’” 18 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 Sardis v. Frankel , 113 A.D.3d 135, 141-142 (1st Dept. 2014).   Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). Wall Street Assocs. v. Brodsky , 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted). Id. Id. (internal quotation marks and citations omitted). Id. MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc. 2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). Flowers v. 73rd Townhouse, LLC , 52 A.D.3d 104, 107 (1st Dept. 2008). Id. Id. at 108. Id. Citation omitted. Slip Op. at *1. Id. (citations omitted). Id. Id. at *2. Id.

By Jonathan H. Freiberger A clear message that readers of this Blog are frequently left with is the importance of following the Court’s procedural rules, which often leads to the efficient flow of a litigation.  Today’s Blog will discuss the requirement in subsection (a) of CPLR 3212 that a motion for summary judgment cannot be made until after issue is joined. Summary judgment is a procedural device that, if successful, can efficiently bring a matter to resolution without the need for a trial and the related preparation, time and expense attendant thereto.  Indeed, “ ummary judgment is designed to expedite all civil cases by eliminating from the Trial Calendar claims which can properly be resolved as a matter of law ince it deprives the litigant of his day in court it is considered a drastic remedy which should only be employed when there is no doubt as to the absence of triable issues.”  Andre v. Pomeroy , 35 N.Y.2d 361, 364 (1974) (citation omitted).  If, however, there are no triable issues of fact to be determined at trial, the case should be summarily decided, and an unfounded reluctance to employ the remedy will only serve to swell the Trial Calendar and thus deny to other litigants the right to have their claims promptly adjudicated.”  Id. CPLR 3212 governs summary judgment motions and subsection (a), which provides for the timing of such motions, provides: Any party may move for summary judgment in any action, after issue has been joined ; provided however, that the court may set a date after which no such motion may be made, such date being no earlier than thirty days after the filing of the note of issue. If no such date is set by the court, such motion shall be made no later than one hundred twenty days after the filing of the note of issue, except with leave of court on good cause shown.  (Emphasis added.) A court may also grant a party summary judgment pursuant to CPLR 3211(c) , which provides, in relevant part, that: “ pon the hearing of a motion made under subdivision (a) or (b) , either party may submit any evidence that could properly be considered on a motion for summary judgment.  Whether or not issue has been joined, the court, after adequate notice to the parties, may treat the motion as a motion for summary judgment.”  Generally, in order for a motion to dismiss pursuant to CPLR 3211(a) or (b) to be converted to a motion for summary judgment, the court must notify the parties of its intention to do so.  See, e.g., Vanderbeek v. Beckerle , 116 A.D.3d 764 (2 nd Dep’t 2014).  However: here are nevertheless three circumstances under which a court’s failure to provide CPLR 3211(c) notice may be overlooked. One circumstance is when CPLR 3211(c) treatment is specifically requested not by one party, but by all of the parties or is at least requested by the same party that is aggrieved by the summary judgment determination. A second circumstance is when a dispute involves no questions of fact, but only issues of law argued by all parties, such as in the context of declaratory judgment actions involving an issue of statutory construction or the application of an unambiguous contractual provision. The third circumstance is when the respective submissions of both parties demonstrate that they are laying bare their proof and deliberately charting a summary judgment course. Hendrickson v. Philbor Motors, Inc. , 102 A.D.3d 251, 258 -59 (2 nd Dep’t 2012) (numerous citations omitted). In City of Rochester v. Chiarella , 65 N.Y.2d 92, 101 (1985), a property tax refund case, the Court made plain that “ motion for summary judgment may not be made before issue is joined (CPLR 3212 ) and the requirement is strictly adhered to.”  (Citations omitted.)  In Rochester , defendants moved for summary judgment before plaintiff replied to counterclaims.  The Appellate Division granted partial summary judgment.  The Court of Appeals reversed, and the motion was denied without prejudice to renewal after “submission of a reply” from Plaintiff.  Rochester, 65 N.Y.2d at99.   While the Rochester Court of Appeals agreed “with the holding implicit in the Appellate Division’s decision that had the authority to move for accelerated judgment,” it held that “the motion is premature because plaintiff has not replied to the counterclaims.”  Rochester, 65 N.Y.2d at99.  The Court of Appeals noted the Appellate Division’s recognition of the operative rule “but held that complaint sought a declaration that the taxes were constitutionally levied and that no refunds were due therefore … the counterclaims raised no new issue requiring a reply and it entertained motion.”  Rochester, 65 N.Y.2d at101.  The Court of Appeals disagreed and stated that “ he appropriate response to a counterclaim is a reply<, which> serves the same function with relation to a counterclaim that an answer serves to a complaint. Because had not replied to counterclaim, their 3212 motion for summary judgment preceded joinder of issue and was untimely.”  Rochester, 65 N.Y.2d at101 (citations omitted). On January 27, 2022, the First Department decided SHG Resources, LLC v. Sytr Real Estate Holdings LLC , a note and guaranty case.  In SHG , in lieu of interposing an answer to the complaint, defendants, borrower and guarantor, moved to dismiss the complaint.  shg facts were obtained from the underlying record available on nyscef.> shg facts were obtained from the underlying record available on nyscef.>  Plaintiff, lender, cross moved for summary judgment.  Supreme court denied defendants’ motion to dismiss and granted plaintiff’s cross-motion.  On appeal, the First Department affirmed the denial of defendants’ motion to dismiss.  However, the Court reversed supreme court’s order on plaintiff’s cross-motion for summary judgment so as to deny same “as premature, with leave to resubmit upon joinder of issues and, in so doing stated:  The Court of Appeals has noted that the rule barring a pre-joinder motion for summary judgment is strictly applied. While CPLR 3211(c) permits the court, on notice to the parties, to treat a motion to dismiss as a motion for summary judgment before issue is joined, that is not the case here, where moved directly for summary judgment; thus, a motion for summary judgment brought before a defendant has answered the complaint is premature and must be denied (see Valentine Tr. v Kernizan, 191 AD2d 159, 161 <1 st dept 1993> st dept 1993>). asserts that this is an exceptional case because it was one where "both sides make it unequivocally clear that they are laying bare their proof and deliberately charting a summary judgment course" (Four Seasons Hotels v Vinnik, 127 AD2d 310, 320 <1st dept 1987> ). Four Seasons, however, did not deal with a CPLR 3212 motion, as here.  (Some citations omitted.) Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber To plead a cause of action for fraud or fraud in the inducement, a plaintiff must allege facts to support the claim that he or she justifiably relied on the alleged misrepresentation(s). As we have noted in prior articles, the justifiable reliance element of a fraud claim is often the most challenging one to satisfy. To demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.” 1 Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” 2 As the Court of Appeals explained more than a century ago: if the facts represented are not matters peculiarly within the knowledge, and the has the means available to of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, must make use of those means, or will not be heard to complain that was induced to enter into the transaction by misrepresentations. 3 In Sharma v. Walia , 2022 N.Y. Slip Op. 00524 (1st Dept. Jan. 27, 2022) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraudulent inducement claim because the plaintiff failed to demonstrate justifiable reliance on the alleged misrepresentation. Similar to Carmen E. Maestro Family Trust v. 449 Washington LLC , 2020 N.Y. Slip Op. 32054(U) (Sup. Ct., Kings County June 22, 2020) (which we wrote about here ), the Court found that the failure to read the operative documents, which included the information necessary to ascertain the truth, negated any claim of justifiable reliance. Sharma arose out of the purchase of a three Subway franchises in New York City. Plaintiff alleged that Defendant, a longtime family friend, increased the initial purchase prices for all three restaurants after informing her that the subleases contained options to renew, thus increasing the restaurants’ value. Based on Defendant’s representations about the sublease renewals, Plaintiff alleged that she paid an extra $575,000. Plaintiff contended that Defendant’s representations regarding the sublease renewals proved to be false, as two of the leases did not have renewal options at all and the third had a renewal option with a deadline that Plaintiff could not meet. Thus, Plaintiff maintained, although she had paid additional sums because of the purported options to renew, she was forced to vacate all three restaurants when the subleases expired. Defendants moved to dismiss. In opposition, Plaintiff claimed that Defendant had engaged in a pattern of fraud in which he would state a price for the restaurant and then demand additional monies after he discovered the sublease contained a renewal option, which allegedly made the restaurants more valuable. In an affidavit, Plaintiff explained that “While I had been given the subleases and the prime leases at the 3 closings, I had no reason to investigate whether the 3 subleases contained options to renew and whether same had actually been exercised because I trusted totally and he had represented that he knew as a matter of fact that the three subleases contained 5 year renewal options which had all been fully exercised.” Plaintiff alleged that she would not have paid the additional $575,000 (for the three transactions) if Defendant had not made the false claims. In reply, Defendant claimed, in addition to the failure to plead justifiable reliance, that his statements were promissory in nature – that is, he procured a renewal of the underlying lease agreements. The motion court granted the motion. The motion court held that Plaintiff failed to demonstrate that she justifiably relied on the alleged misrepresentation. The motion court found Plaintiff’s admission that she did not read the releases and subleases because of her trust in Defendant to be dispositive of the issue: Plaintiff’s claim is that she entered into three complicated transactions at a price of nearly half a million dollars but never sought any verification concerning the lease renewals. That does not constitute justifiable reliance. Plaintiff bizarrely admits that although she received the subleases and prime leases, she had no reason to read anything because she trusted Walia (who apparently used to be a close family friend). Blind trust in the seller that includes a failure to review the leases for the restaurants cannot support claims for fraud.   The motion court concluded that Plaintiff’s admission, as well another, “foreclose plaintiff’s fraud claims.” The motion court explained that “the issue of the leases and potential lease renewals for the restaurants was purchasing fundamental to these transactions. It simply cannot constitute justifiable reliance to believe statements about the leases, admit to receiving the relevant documents and to pay substantially more money without looking at a single document.” Consequently, the motion court rejected Plaintiff’s contention that the lease renewals “led her to pay more than what she originally agreed to pay” because “she never reviewed a single document supporting alleged statements.” Finally, the motion court held that the alleged misrepresentations were nothing more than “mere promise that could renew the leases at some point.” As such, the representations were inactionable promissory statements about what was to be done in the future. 4 On appeal, the First Department affirmed. The Court agreed with the motion court that Plaintiff’s blind faith in Defendant and failure to read the prime leases and subleases removed any notion that Plaintiff justifiably relied on Defendant’s alleged misrepresentation: Plaintiff’s fraud claims fail because she failed to allege justifiable reliance on alleged misrepresentations about the sublease renewal options. The facts regarding the subleases were not peculiarly within knowledge; on the contrary, plaintiff could have known the relevant facts had she simply read the leases, which she concedes she did not do. The Court also held that the alleged misrepresentation was not a misrepresentation at all: Furthermore, plaintiff does not allege that misrepresented the contents of the relevant documents, but rather, simply told her that it was not necessary for her to read them before she signed them at the closings. Under these circumstances, plaintiff cannot be heard to complain that she was induced by misrepresentations to enter into the transactions. 6 Takeaway As noted, to demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.” Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” In Sharma , plaintiff could not demonstrate reasonable reliance on the alleged misrepresentation because she failed to read the leases and subleases. As noted by the Court, the disclosures in the leases made it unreasonable to rely on any statement concerning renewal options. Such unreasonableness was underscored by Plaintiff’s admitted blind trust in Defendant. 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 <1> Daly v. Kochanowicz , 67 A.D.3d 78, 91 (2d Dept. 2009). <2> Rosenblum v. Glogoff , 96 A.D.3d 514, 515 (1st Dept. 2012). <3> Schumaker v. Mather , 133 N.Y. 590, 596 (1892); see also DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). <4> Eastman Kodak Co. v. Roopak Enterprises, Ltd. , 202 A.D.2d 220, 222 (1st Dept. 1994). <5> Slip Op. at *1 (citations omitted). <6> Id. (citations omitted).

By: Jeffrey M. Haber As readers know, we write about cases involving fraud. The articles we write almost always concern the specific elements of the claim, such as scienter and justifiable reliance. Rarely have we examined defenses to a claim of fraud. Today, we do so – we examine the doctrines of ratification and estoppel. As a general matter, “ atification is the act of knowingly giving sanction or affirmance to an act that would otherwise be unauthorized and not binding.” 1 The elements of ratification are: (1) approval by act, word, or conduct; (2) with full knowledge of the facts of the earlier act, and (3) with the intention of giving validity to the earlier act. To prove intent, a party must show that the other party, after learning the facts and circumstances of the transaction or occurrence, either (1) continued to accept benefits under the transaction or occurrence or (2) conducted himself/herself so as to recognize the transaction or occurrence as binding. 3 A ratification may be shown by an express act or word or may be inferred from a party’s course of conduct. 4 Notably, an express ratification is not necessary; any act based on a recognition of the facts or occurrences as subsisting or any conduct inconsistent with an intention of avoiding them has the effect of ratification. 5 Any retention of the beneficial part of the transaction affirms the transaction or occurrence and bars an action for rescission as a matter of law. 6 Where a party affirms a contract through his actions and conduct after knowledge of the facts, the defense of waiver or ratification is established as a matter of law. 7 Estoppel, at least for these purposes, refers to conduct such as ratification, election, acquiescence, or acceptance of benefits. 8 It is a defense that prevents a party from accepting the benefit of a transaction or occurrence by asserting a right to the disadvantage of another which is inconsistent with the party’s prior position. Since the doctrine is based on equity, it applies when it would be unconscionable to allow a person to maintain a position inconsistent with one in which he/she acquiesced, or of which he accepted a benefit. 9 In other words, a party may not accept the benefits of a transaction and then later take an inconsistent position to avoid any corresponding obligations or effects. These principles were examined in JMM Consulting, LLC v. Triumph Constr. Corp. , 2022 N.Y. Slip Op. 30150(U) (Sup. Ct., N.Y. County Jan. 19, 2022) ( here ). JMM Consulting arose in connection with a consulting agreement (the “Agreement”) between the parties. Plaintiffs alleged that they entered into the Agreement, in which they acted in a consulting, advisory and employee capacity, and that Defendant wrongfully terminated the Agreement, and their employment thereunder, without cause. In addition to the Agreement, the parties executed a promissory note (the “Promissory Note”), pursuant to which the Company was required to pay Plaintiff Licata monies representing deferred portions of his bonus. The bonus was intended to compensate Licata for the sums received by the Company from utility companies in connection with the projects he oversaw. Licata claimed that he was owed $2.4 million. Defendant maintained that to maximize JMM’s fees, Licata manipulated the utility billings to inflate the amounts billed. The Company argued that Licata failed to pursue the utility billings, failed to maintain the required back up necessary to substantiate and collect on the amounts billed, and repeatedly made misrepresentations about the amounts that be collected. The Company contended that Plaintiffs’ conduct was done intentionally to avoid writing off invoices and reducing JMM’s fee. In connection with the foregoing, the Company asserted a counterclaim to rescind the Agreement and Promissory Note. The Court dismissed the Company’s counterclaim for recission. The Court noted that there was no dispute that the Company made payments to JMM through July 2016. Notably, said the Court, “ everal payments were made after the Company discovered Mr. Licata’s alleged fraud with respect to the utility billings and the alleged violation of the non-solicitation and non-compete provision of the Consulting Agreement.” “Under these circumstances,” concluded the Court, “the Company cannot now assert that it was fraudulently induced to execute the Promissory Note and that … its ratified obligations are void.” In other words, the Court found that the Company had ratified the payment obligations under the Promissory Note and could not, therefore, claim that it had been defrauded. 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 21 N.Y. Jur. 2d, Estoppel, Ratification and Waiver § 94. See generally Beutel v. Beutel , 55 N.Y.2d 957, 958 (1982). Rothschild v. Title Guarantee & Tr. Co. , 204 N.Y. 458 (1912). Id. See also Provident Bay Rd., LLC v. NYSARC, Inc ., 117 A.D.3d 1356, 1358 (3d Dept. 2014). AD v. CR , 2018 N.Y. Slip Op. 50439 (Sup. Ct., Westchester County 2018). See Chalos v. Chalos , 128 A.D.2d 498, 499 (2d Dept. 1987). Id. Markovitz v. Markovitz , 29 A.D.3d 460, 461 (1st Dept. 2006); Mahon v. Moorman , 234 A.D.2d 1, 2 (1st Dept. 1996). Id.

By: Jeffrey M. Haber Derivative actions are often brought by shareholders of a corporation (or limited liability company) to vindicate the entity’s rights. 1 Although shareholders are given the right to bring such lawsuits, they are not, however, favored because “they ask courts to second-guess the business judgment of the individuals charged with managing the company.” 2 Notwithstanding, “derivative actions serve the important purpose of protecting corporations and minority shareholders against officers and directors who, in discharging their official responsibilities, place other interests ahead of those of the corporation.” 3 The tension between the foregoing interests is tempered by the requirement that a shareholder demand with particularity that the board of directors (or majority owners) take action to address the alleged wrongdoing or explain why such demand would have been futile. 4 As explained by the Court of Appeals, “ he reason for the demand requirement rests on ‘basic principles of corporate control that the management of the corporation is entrusted to its board of directors, who have primary responsibility for acting in the name of the corporation and who are often in a position to correct alleged abuses without resort to the courts.’” 5 “The demand requirement thus relieves courts of unduly intruding into matters of corporate governance by first allowing the directors themselves to address the alleged abuses. The requirement also provides boards with reasonable protection from harassment on matters clearly within their discretion, and it discourages ‘strike suits’ commenced by shareholders for personal rather than corporate benefit.” 6 “Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit.” 7 In New York, the demand requirement is excused where a plaintiff pleads “with particularity that (1) a majority of the directors are interested in the transaction, or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction, or (3) the directors failed to exercise their business judgment in approving the transaction.” 8 If any of these circumstances are met, the failure to file a pre-suit demand will be excused. 9 It is important to note that excusing a pre-suit demand is the exception and, therefore, “should not be permitted to swallow the rule” that a pre-litigation demand is required. 10 Thus, if a plaintiff fails to plead with particularity that service of a pre-litigation demand should be excused, the complaint must be dismissed. 11 “ director may be interested under either of two scenarios: self-interest in a transaction or loss of independence due to the control of an interested director.” 12 “The bare claim that the directors … should be viewed as interested because they are ‘substantially likely to be held liable’ for their actions is not enough” to find interestedness. 13 Indeed, simply naming each current or former director “in a lawsuit, without more, is insufficient to establish that they are conflicted and demand is futile.” 14 Likewise, the assertion that certain directors controlled the amount of compensation other directors would have received is inadequate, especially in the absence of an allegation that the compensation the directors received was excessive. 15 Although a pre-suit demand can be excused because the directors failed to exercise their business judgment in approving the transaction, demonstrating such a failure can be difficult. Indeed, “it is the ‘rare case[ ] a transaction may be so egregious on its face that board approval cannot meet the test of business judgment.’” 16 “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.”17 The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers.”18 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.”19 Thus, “ o long as the corporation’s directors have not breached their fiduciary obligation to the corporation, the exercise of for the common and general interests of the corporation may not be questioned, although the results show that what they did was unwise or inexpedient.” 20 The foregoing principles were recently considered by the Appellate Division, Second Department in Recine v. Recine , 2022 N.Y. Slip Op. 00324 (2d Dept. Jan. 19, 2022). Recine involved an action to recover damages for breach of fiduciary duty against defendants Luciano Recine, Salimar Christina Recine (collectively, “Recine Defendants”), and Recine Properties, LLC. Plaintiff, John Recine, and his siblings, the “Recine Defendants”, were the managing members of Defendant Recine Properties, LLC (the “Company”). The Company is a limited liability company that was formed for the purpose of acquiring, holding, and disposing of certain real property in Rockaway Beach (the “Property”).  Plaintiff commenced the action, individually and derivatively, against the Recine Defendants and the Company, among others, to recover damages for breach of fiduciary duty, misappropriation and conversion, and unjust enrichment, and for an accounting, injunctive relief, and removal of the Recine Defendants as the managing members. Plaintiff alleged that the Recine Defendants sold the Property, the Company’s sole asset, without his knowledge or consent, thereafter intended to divert or diverted a portion of the proceeds for the benefit of their separate business interests, and refused his requests for information and documentation regarding the sale and the disposition of the proceeds. Plaintiff moved, inter alia , to preliminarily enjoin the transfer and use of the sale proceeds. The Recine Defendants moved to dismiss pursuant to CPLR § 3211(a). The motion court, inter alia , (1) granted Plaintiff’s motion to preliminarily enjoin the Recine Defendants from disbursing, transferring, encumbering, or assigning the net proceeds of the sale of the property in a manner other than distribution of an equal share to each member, pursuant to the operating agreement; and (2) denied the Recine Defendants’ motion to dismiss the complaint. The Recine Defendants appealed. The Second Department reversed the motion court’s order with respect to Plaintiff’s motion and affirmed the denial of the Recine Defendants’ motion. We discuss the latter holding. The Court held that Plaintiff properly alleged demand futility. The Court found that Luciano Recine and Salimar Christina Recine constituted a majority of the managing members of the Company and were interested in the challenged transaction. As such, held the Court, “demand to initiate suit against themselves would have been futile.” 21 The Court also held that the motion court properly denied the Recine Defendants’ motion to dismiss the breach of fiduciary duty, misappropriation and conversion, unjust enrichment, and accounting causes of action. The Court found that the Plaintiff alleged (as supplemented by his affidavit) sufficient facts to support the causes of action alleged. 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 Bansbach v. Zinn , 1 N.Y.3d 1, 8 (2003), rearg. denied , 1 N.Y.3d 593 (2004); Marx v. Akers , 88 N.Y.2d 189, 193 (1996). Bansbach , 1 N.Y.3d at 8.   Id. BCL § 626 (c) (providing that the derivative complaint “shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort”). Bansbach , 1 N.Y.3d at 9 (quoting, Barr v. Wackman , 36 N.Y.2d 371, 378 (1975)) (citation omitted). Id. (citing, Marx , 88 N.Y.2d at 194). Id. Marx , 88 N.Y.2d at 198. Id. at 200-201. Matter of Omnicom Grp. Inc. S’holder Deriv. Litig. , 43 A.D.3d 766, 768 (1st Dept. 2007) (citing, Marx , 88 N.Y.2d at 200). See Retirement Plan for Gen. Empls. of the City of N. Miami Beach v. McGraw , 158 A.D.3d 494, 495 (1st Dept. 2018). Matter of Comverse Tech., Inc. Deriv. Litig. , 56 A.D.3d 49, 54 (1st Dept. 2008). Wandel v. Eisenberg , 60 A.D.3d 77, 80 (1st Dept. 2009). Lerner v. Immelt , 523 Fed. Appx 824, 827 (2d Cir. 2013) (citations omitted); accord, Bildstein v. Atwater , 222 A.D.2d 545, 546 (2d Dept. 1995). Walsh v. Wwebnet, Inc. , 116 A.D.3d 845, 848 (2d Dept. 2014). Stein v. Immelt , 472 Fed. Appx. 64, 66 (2d Cir. 2012) (quoting, Wandel , 60 A.D.3d at 82). 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted).   Comverse , 56 A.D.3d at 56 (citing, Barr , 36 N.Y.2d at 381). Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). Matter of Levandusky v. One Fifth Ave. Apt. Corp. , 75 N.Y.2d 530, 538 (1990) (internal quotation marks and citation omitted). Slip Op. at *2 (citations omitted). Id. at *3 (citations omitted).

By Jonathan H. Freiberger Article 52 of the CPLR addresses the enforcement of money judgments.  In the most simplistic terms, Article 52 addresses the property of a judgment debtor that is subject to enforcement and the various tools available to a judgment creditor to enforce a money judgment. On December 16, 2021, the New York Court of Appeals decided Plymouth Venture Partners, II, L.P. v. GTR Sources, LLC , in which the Court answered the following two questions certified to it by the Second Circuit Court of Appeals addressing the extent to which tort damages are available to a judgment debtor for violations of the enforcement procedures of Article 52 by two judgment creditors (“Judgment Creditor 1” and “Judgment Creditor 2”, respectively, and, collectively, the “Judgment Creditors”): 1. whether a judgment debtor suffers cognizable damages in tort when its property is seized pursuant to a levy by service of execution that does not comply with the procedural requirements of CPLR 5232(a), even though the seized property is applied to a valid money judgment; and, if so  2. whether the judgment debtor can, under these circumstances, bring a tort claim against either the judgment creditor or the marshal without first seeking relief under CPLR 5240."   The Court of Appeals, in answering the questions held that tort remedies were unavailable to a judgment creditor and that “an article 52 proceeding is the correct vehicle for resolving claims based on collection efforts that are alleged to violate article 52….”  (Citations omitted.) Background (with a recitation of edited and simplified facts) Judgment debtor borrowed money from Judgment Creditors, two merchant cash advance businesses, for the purpose of buying and selling future receivables.  Future receivables were to be direct deposited into an account at Comerica Bank in Michigan from which Judgment Creditors were to debit the respective loan payments due to them.  When judgment debtor blocked Judgment Creditors from the Comerica account, confessions of judgment executed by judgment debtor in conjunction with the underlying loan transactions were entered in “New York courts”.   Judgment Creditor 1 served a restraining notice on Comerica Bank in Michigan.  Upon learning of the restraining notice, judgment debtor “objected in an email to , stating that Comerica had no presence in New York, that the restraining notice was ‘tortiously interfering with the superior UCC liens of senior lenders’ and threatening to file a temporary restraining order.”  Ignoring the email, Judgment Creditor 1 then “issued an Execution with Notice to Garnishee and directed a New York City marshal… to serve Comerica with a Notice and Levy and Demand on Corporate Creations Network, Inc. <(“ccn”)> , Comerica's purported agent for service of process, in Nyack, New York, which in turn directed Comerica to turn over any of property in its control.”  Shortly after judgment debtor’s motion to vacate Judgment Creditor 1’s judgment on procedural and jurisdictional grounds was denied, the Marshal faxed a levy to Comerica, in Michigan.  Comerica complied with the levy and paid the Marshal from judgment debtor’s account. Thereafter, judgment debtor “filed a complaint against in Supreme Court… again seeking vacatur of the judgment and now also seeking restitution under CPLR 5015, breach of contract, wrongful execution, and fraud.”  A receiver was also appointed for judgment debtor after its other creditors brought an action for such relief in Michigan.  The receiver withdrew the supreme court action and its subsequent motion to vacate Judgment Creditor 1’s judgment was again denied. Thereafter, the receiver filed a tort action in the Southern District of New York alleging “wrongful restraint and execution against , wrongful execution against Marshal … individually, conversion, and trespass to chattels.”  As characterized by the Court of Appeals, the S.D.N.Y. granted Judgment Creditor 1’s motion for summary judgment: holding that the Receiver had suffered no harm and so could not recover in tort.  Specifically, held, as to the wrongful execution claim, that "there is no dispute that the funds recovered by the Marshal were used to extinguish the debtor's valid debt owed under a valid court judgment herefore, the Receiver, who stood in the shoes of the debtor, suffered no damages". For the same reason, the court held that the Receiver's claims for conversion and trespass to chattels could not survive "because the Receiver has failed to establish that the Receiver sustained any damages." (Citations omitted.) The collection efforts by Judgment Creditor 2, and judgment debtor’s response thereto, followed a similar, but not identical, course as with Judgment Creditor 1.  Judgment debtor’s action commenced in the S.D.N.Y. was dismissed by a different judge based on the “logic” set forth in the order dismissing the federal action commenced with respect to Judgment Creditor 1. Appeals from both S.D.N.Y. orders were consolidated, and certified questions were presented to the Court of Appeals because “‘neither party identifies a New York Court of Appeals opinion addressing issue ,’ and that, with respect to the issue of cognizable damages, ‘two recent New York Supreme Court decisions have reached differing results on the topic’ (citing Bam Bam Entertainment LLC v Pagnotta , 59 Misc 3d 906 and Silver Cup Funding LLC v Horizon Health Ctr., Inc. , 70 Misc 3d 1201 , 2020 NY Slip Op 51529 ….”  (Some citations omitted.) In summarizing the parties’ arguments and supporting its holding, the Court of Appeals stated: argues that "the executions and levies in these cases did not comply with the requirements of Article 52 of the CPLR, specifically CPLR 5232(a)," resulting in "'void or irregular process'" that reduced the executions and levies to "legal nullities" and thereby exposed the defendants to tort liability. seeks to recover the amount taken from the Comerica accounts that was used to satisfy the relevant judgments and "consequential" damages. counter that suffered no damages from the alleged violation of the statute and that, in any event, under these circumstances sole remedy was to seek relief under article 52. We agree with the final point. There is no need to contort traditional tort claims to accommodate a novel theory by a judgment debtor seeking to recover funds used to satisfy a valid judgment based on alleged violations of our civil procedure law. Instead, CPLR article 52, which provides a mechanism for addressing the innumerable situations that can arise that manifest abuse of the enforcement devices authorized in that statute, is the exclusive avenue for a judgment debtor seeking relief from the use of an enforcement mechanism that does not comply with article 52's requirements.  (Some citations, internal quotation marks, brackets and a footnote omitted.)  The Court of Appeals went on to discuss, inter alia , the history and provisions of Article 52 as well as the policy considerations behind its conclusion that the enforcement provisions of Article 52 were the sole remedies for the violation of the enforcement provisions of Article 52. [Eds. Note:  two Justices filed lengthy dissenting opinions. Jonathan H. Freiberger is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By: Jeffrey M. Haber The new year is days old, but that has not stopped the Securities and Exchange Commission (“SEC” or “Commission”) from awarding whistleblowers money under the Commission’s whistleblower program. During the past two weeks, the SEC announced that it awarded, in total, more than $14 million to several whistleblowers who provided information and assistance in three enforcement actions – one for “misconduct occurring overseas” and a second where the whistleblower’s assistance “helped the Commission obtain emergency relief to minimize investor losses”. Since the inception of the program in 2012, the SEC has awarded approximately $1.2 billion to 241 individuals for providing information that led to successful enforcement actions by the SEC and other agencies.  The first award of 2022 was announced on January 6, 2022 ( here ). In the announcement, the SEC said that it paid more than $13 million to a whistleblower whose information and assistance prompted the opening of an investigation and significantly contributed to the success of an SEC enforcement action. According to the SEC, “the whistleblower promptly alerted SEC staff to an ongoing fraud and provided extensive assistance to SEC staff by meeting in person and helping the staff understand the mechanics of the fraudulent scheme.” As noted above, “ he whistleblower’s information … helped the Commission obtain emergency relief to minimize investor losses.” Creola Kelly, Chief of the SEC’s Office of the Whistleblower, had the following to say about the whistleblower and the award: “Today’s whistleblower provided significant information that alerted SEC staff to ongoing fraud, which had caused and was likely to continue to cause substantial injury to the financial interests of investors. Whistleblowers who provide information swiftly can not only save SEC staff’s time and resources, but also help minimize potential investor losses.” The second and third awards were announced on January 10, 2021 ( here ). According to the SEC, it made two awards, totaling more than $4 million, to whistleblowers who provided information and assistance in two separate covered actions. In the first order, the SEC issued an award of approximately $2.6 million to one whistleblower. “The whistleblower, who reported internally before reporting to the Commission, provided significant new information during an existing investigation that alerted SEC staff to misconduct occurring overseas, which would have been difficult to detect in the absence of the whistleblower’s information.” In the second order, the SEC issued approximately $1.5 million to “joint whistleblowers who provided substantial ongoing assistance throughout the course of the investigation that led to the success of the covered action.” According to the SEC, “ he joint whistleblowers had multiple communications with SEC staff and provided information about key witnesses.” Commenting on the award, Ms. Kelly said, “These whistleblowers provided critical information and continued cooperation that helped the agency detect the securities laws violations. These awards highlight the importance of the SEC’s whistleblower program to the agency’s enforcement efforts and to its ability to maximize staff resources.” Under the whistleblower program, the SEC can pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. Both U.S. citizens and foreign nationals may file whistleblower claims and receive a reward. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis. Whistleblowers who provide “original information” that the SEC uses in furtherance of an enforcement action can recover a reward of between 10% – 30% of the total amount of money collected by the SEC when the monetary sanctions exceed $1 million.  As set forth in the Dodd-Frank Act, the SEC protects the confidentiality of whistleblowers and does not disclose information that could reveal a whistleblower’s identity. here )=">here)" and="and" SEC’s="SEC’s" >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.