By Jonathan H. Freiberger A significant part of a mortgage foreclosure action is the calculation of the sums due and owing to the lender.  The task of computing the amount due is typically performed by the referee appointed by the court for that purpose.  What the referee is permitted to include in the calculations, which is generally governed by statute and the underlying loan documents, includes, among other things, outstanding principal, advances for taxes, insurance and other necessities to protect the mortgaged premises, reasonable legal fees and expenses and outstanding interest.  The focus of today’s article is the calculation of interest. CPLR 5001(a) provides, in relevant part that “in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court’s discretion.”  See also U.S. Bank, N.A. v. Peralta , 191 A.D.3d 924, 925 - 26 (2 nd Dep’t 2021).  In that regard, a “foreclosure action is equitable in nature and triggers the equitable powers of the court.”  U.S. Bank Nat. Ass’n v. Williams , 121 A.D.3d 1098, 1101 - 02 (2 nd Dep’t 2014) (numerous citations and internal quotation marks omitted).  “Once equity is invoked, the court’s power is as broad as equity and justice require.”  Onewest Bank, FSB v. Kaur , 172 A.D.3d 1392, 1394 (2 nd Dep’t 2019) (citation and internal quotation marks omitted).  The court, in exercising its discretion, “is governed by the particular facts in each case.”  Peralta , 191 A.D.3d at 926 (citations omitted). One thing that the court may consider in evaluating the interest due to a lender in a mortgage foreclosure action is any delay that may be occasioned by lender’s lack of diligence in prosecuting the action.  For example, in Peralta , lender commenced a foreclosure action in May 2008 and an order of reference was entered in November 2009.  Lender took no action until October 2013, at which time it moved to vacate the prior order of reference and for a new order of reference. The motion was granted by order dated December 13, 2013, and a judgment of foreclosure and sale was entered on November 3, 2014.  The property was to be sold at auction on May 7, 2015, but borrower’s bankruptcy filing stayed the foreclosure proceedings until the stay was lifted on October 23, 2015.  In May of 2017, lender moved for leave to file a late notice of sale and for an extension of time to sell the property.  Borrower cross-moved, inter alia , “to reduce or eliminate the amount of accrued interest due to delay in the action.  Lender’s motion was granted, and borrower’s cross-motion was denied.   On appeal, the Court found that supreme court “improvidently exercised its discretion in denying that branch of cross-motion which was to reduce the accrued interest due to the delay in the action” and held that: Here, in view of the lengthy, unexplained delays by in prosecuting this action, should recover no interest for the approximately 64–month period from May 2008, when this action was commenced, until October 3, 2013, when moved to vacate the prior order of reference and for a new order of reference. In addition, should recover no interest for the approximately 19–month period from October 23, 2015, when the bankruptcy stay was lifted until May 8, 2017, when moved for leave to file a late notice of sale and for an extension of time to sell the premises. Peralta , 191 A.D.3d at 926 (citations omitted).  Similarly, in Greenpoint Mort. Corp. v. Lamberti , 155 A.D.3d 1004 (2 nd Dep’t 2017), the Second Department reversed a judgment of foreclosure and sale and remitted the matter to supreme court to have the referee recompute the amounts due to lender.  The Court found that significant “delay by ’s predecessor in interest in prosecuting action” required a recalculation of interest.  Greenpoint , 191 A.D.3d at 1005.  Thus, the Court held that lender “should recover no interest for the roughly three-year period of time from when the action was commenced in 2005 to when filed a request for judicial intervention in 2008.”  Id . On January 12, 2022, the Second Department decided Deutsche Bank Nat. Trust Co. v. Ould-Khattri , amortgage foreclosure action addressing interest calculation issues with a bit of a twist.  The subject property in Deutsche Bank was subject to a first and second mortgage.  First lender, in March 2009, commenced an action to foreclose the first mortgage and named, inter alia , borrower and second lender as defendants.  In August 2011 supreme court denied first mortgagee’s motion for an order of reference due to its “fail to comply with an administrative order.”  In February 2013, first lender moved again for an order of reference, which motion was denied in September 2013 for failure to annex copies of the note and mortgage to its motion papers.  A third motion was filed in February 2014, the motion was granted by order of reference entered in April 2014, notice of entry of the order of reference was served in September 2015 and, in November 2017, the order was vacated due to first lender’s failure to serve one of the defendants.  In January 2018, second lender “moved to toll the accrual of interest on the first mortgage loan due to delay in attempting to obtain a judgment”. First lender argued that “the second mortgage would be extinguished if succeeded in foreclosing on the first mortgage 's motions for an order of reference inexplicably delayed the action for four years and that 's delay prejudiced it ‘by draining any possible equity that may be left in the Subject Premises.’"   In its resulting order, supreme court found that first lender’s failure to succeed on its first two motions for an order for reference was not “indicative of improper delay,” but the one-and one-half year delay in serving notice of entry of the granting of the third motion “constituted an excessive delay.”  Nonetheless, supreme court only tolled one year’s worth of interest.   Second lender appealed on the ground that the toll should have been for a longer period.  In modifying supreme court’s order, the Second Department held: Here, the Supreme Court properly found that the nearly 17-month delay in the plaintiff's service of the notice of entry of the order of reference entered April 30, 2014, was excessive. However, it improvidently exercised its discretion in tolling the accrual of interest for only one year, as it should have been tolled for the entire period from April 30, 2014, through September 9, 2015. In addition, the court should have also tolled the accrual of interest for the time periods in which the made two motions for an order of reference after its initial motion for an order of reference was denied for administrative reasons. The tolling of the accrual of interest during these time periods is not, as reasoned by the court, penalizing for losing its motions, but is instead a response to the 's unexplained delay in prosecuting the action by failing to promptly move for relief after the denial of its first and second motions. Notably, after the 's first motion for an order of reference was denied in August 2011, it failed to move again until February 2013. After the second motion was denied in September 2013, the did not make its third motion until February 2014. 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 Yesterday, the Appellate Division, First Department decided three cases involving claims for fraudulent inducement. We examine each of these cases below. Artemus USA LLC v. Leila Taghinia-Milani Inc. Artemus involved artwork that was consigned by Artemus USA LLC (“Artemus”) to defendants pursuant to a consignment agreement (“Agreement”). Plaintiffs alleged that the artwork was damaged while consigned to the Defendants.  In their opposition to plaintiffs’ summary judgment motion, defendants argued, among other claims, that they were fraudulently induced to enter into the Agreement. Defendants argued that plaintiffs: (a) failed to disclose evidence that the artwork had substantial prior damage for which conservation and repairs were performed; (b) falsely contended that the Agreement provided that defendants would accept the artwork “as is”, which they would not do because the condition of a piece of artwork is material in terms of the marketability and valuation of the piece and the handling of the artwork; (c) falsely held themselves out as the owner of the artwork at the time of contract when neither was the owner; (d) claimed the artwork was valued at nearly double what was told to defendants; (e) failed to inform defendants of the artwork’s vulnerabilities. In response, plaintiffs argued that defendants failed to offer any evidence that plaintiffs were asked about ownership, provenance, or previous repairs to the work. Plaintiffs also claimed that defendants failed to show that plaintiffs made any misleading statements or that defendants relied on any statements when entering into the Agreement. Instead, plaintiffs argued, defendants merely alleged that they would not have entered into the Agreement if they had known the truth. The motion court granted plaintiffs’ motion for summary judgment and denied defendants’ motion for summary judgment. On appeal, the First Department unanimously modified the decision of the motion court. With regard to the fraud claim, the Court held that defendants “raised issues of fact as to whether they were fraudulently induced to enter into the consignment agreement.” The Court found that the affidavits submitted by defendants showed that “plaintiff Artemus purchased the subject artwork for half of the estimated value set forth in the consignment agreement, and plaintiffs were aware that the artwork had an extensive restoration history that was not disclosed to defendants.” Consequently, the Court vacated the judgment entered by the motion court in favor of plaintiffs, denied plaintiffs’ motion, and otherwise affirmed the denial of defendants’ motion. Artemus USA LLC v. Leila Taghinia-Milani Inc. , 2022 N.Y. Slip Op. 00115 (1st Dept. Jan. 11, 2022) can be found here . Dragons 516 Ltd. v. GDC 138 E 50 LLC Dragons 516 involved a motion to amend. According to plaintiff, Dragons 516 loaned $30 million to defendant GDC 138 E 50 LLC (“GDC”) at 12% annually (with a 14% default interest rate), pursuant to an agreement dated June 1, 2017 (the “Facility Agreement”). GDC intended to use the funds to finance its investment in 50 LEX Development LLC (“Project Co.”). Defendant Shanghai Municipal Investment (Group) USA LLC (“SMI”) guaranteed the loan (the “Guarantee”). Plaintiff claimed GDC breached the Facility Agreement by incurring more than the permitted amount of debt (taking on three loans, for a total of $239 million, which did not fall into the exceptions to the prohibition in the agreement), by amending organizational documents without Dragons’ consent, and by changing Project Co.’s ownership structure without Dragons’ consent. The motion court found that each of foregoing qualified as an event of default, as defined in the Facility Agreement, making GDC liable for the $30 million balance due plus interest, costs, and fees.  Thereafter, plaintiff sought to amend its amended complaint to add a new defendant, SMI 138 E 50 ST LLC (“SMI Holdco”), which plaintiff alleged was a holding company that SMI wholly owned. Plaintiff sought the amendment because it learned during discovery that GDC was effectively judgment proof – i.e. , it would be unable to satisfy a judgment against it – and, along with SMI, and Holdco, fraudulently induced Dragons to extend the $30 million loan. Plaintiff alleged that SMI Holdco aided and abetted GDC in fraudulently inducing Dragons to loan the money to finance GDC’s investment in Project Co. SMI opposed the motion to amend, arguing the aiding abetting claim failed for lack of an underlying fraud claim, since there was no underlying fraud cause of action. SMI also argued that had one been asserted, it would be dismissed as duplicative of the breach of contract claim.  [Ed. Note: Under New York law, courts will not permit a fraud-based claim ( i.e. , fraudulent inducement) to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraud claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. 1 However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement claim can stand side-by-side with “a simple breach of contract” claim. 2 ]    Plaintiff contended that it alleged an underlying fraud in the inducement claim, which could co-exist with the contract claim because the issue of whether the guaranty agreement (by which SMI allegedly guaranteed payment of GDC’s financial obligations pursuant to the Facility Agreement) was a valid and enforceable contract had not been decided.  The motion court rejected plaintiff’s argument, noting that plaintiff did not assert an underlying fraud claim related to the guaranty agreement, which would support plaintiff’s proposed aiding and abetting claim. Instead, found the motion court, plaintiff “clearly attempt to allege SMI and Holdco aided and abetted GDC’s alleged fraudulent inducement of plaintiff to enter into the Facility Agreement.” That claim, observed the motion court, was dependent upon plaintiff’s claim “against GDC for breach of the Facility Agreement,” a claim that Dragons’ obtained summary judgment with GDC’s consent. Therefore, concluded the motion court, the claim was “without merit.” On appeal, the First Department unanimously affirmed the motion court’s order. Like the motion court, the First Department noted that plaintiff’s aiding and abetting claim “hinged” on the existence of an underlying fraud claim against GDC. The Court found that there was no underlying fraudulent inducement claim because it duplicated the breach of contract claim for which plaintiff obtained a judgment against GDC.  Dragons 516 Ltd. v. GDC 138 E 50 LLC , 2022 N.Y. Slip Op. 00121 (1st Dept. Jan. 11, 2022) can be found here . Bielsa v. Gonzalez Plaintiff alleged that defendants, who are siblings, submitted conflicting tax documents regarding the assets of their deceased father, filing one set of documents with Venezuelan tax authorities and a different set with the New York State Surrogate’s Court. Plaintiff also alleged that his ex-wife, defendant Maria Alejandra Kaufman Gonzalez, renounced her inheritance from her father in exchange for other assets from defendants’ mother, disposed of those assets, and then never disclosed the fruits of that disposition to her husband, against whom she initiated divorce proceedings approximately six years later. Defendant moved to dismiss, arguing that, among other things, plaintiff failed to allege that any misrepresentation was made to plaintiff. According to defendant, misrepresentations were allegedly told to the Venezuelan authorities or to the Surrogate’s Court in New York. But those falsehoods were not told to plaintiff.  The motion court granted the motion, holding that plaintiff “failed to allege, much less with the particularity required by CPLR 3016(a), the material misrepresentations that defendants allegedly made to him which induced his reliance.”  The First Department unanimously affirmed. The Court held that any misrepresentation made to the Surrogate’s Court could not be imputed to defendants because “defendants’ mother, a nonparty, was actually the person who submitted the tax information to the Surrogate’s Court.”  Moreover, said the Court, “the alleged misrepresentations were made not to plaintiff, but to third parties, thus preventing plaintiff from claiming reliance.”  pasternack v. laboratory corp. of am. holdings, 27 n.y.3d 817 (2016), the new york court of appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 3 > pasternack v. laboratory corp. of am. holdings, 27 n.y.3d 817 (2016), the new york court of appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” 3 >  “In addition,” noted the Court, “the documentary evidence conclusively establishe as a matter of law that did not have a duty to disclose her inheritance or disposition of assets to plaintiff. Plaintiff and prenuptial agreement state that defendant was entitled to keep assets acquired through inheritance or ‘any other means,’ and could dispose of those assets without obtaining plaintiff’s consent.” “As a result,” said the Court, “plaintiff’s fraud claim was properly dismissed.” Bielsa v. Gonzalez , 2022 N.Y. Slip Op. 00118 (1st Dept. Jan. 11, 2022) can be found here . Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By:  Jeffrey M. Haber Last April, this Blog wrote about Sodhi v. IAC/InterActiveCorp , 2021 N.Y. Slip Op. 31220(U) (Sup. Ct., N.Y. County Apr. 8, 2021) ( here ), an action to recover money claimed to be improperly withheld by IAC/Interacticecorp (“IAC”). The primary issue in the Sodhi was whether the releases in a settlement letter covered the claims asserted in the action. The motion court held that the releases were broad and covered plaintiffs’ claim to the money alleged to be wrongfully withheld by IAC. Plaintiff appealed. The Appellate Division, First Department, unanimously affirmed. Background: A Refresher    Plaintiffs are former employees of Hatch Labs, Inc. (“Hatch”), a subsidiary of IAC. Hatch was a startup incubator company that developed applications for mobile phones. Among other applications, Hatch launched Tinder, the popular mobile dating application, in 2012. At the time they were hired, plaintiffs were granted so-called phantom equity units in Hatch (the “Units”). The Units represented the right to participate in Hatch’s “upside” through the financial equivalent of a non-ownership stock grant. In 2014, Plaintiffs cashed their Units, with each receiving $166,566.42. In accepting their payout, each plaintiff signed a settlement letter agreeing to the value of the Units, the number of vested Units to be settled, and the aggregate purchase price that IAC was to pay as consideration for settling their vested Units. The settlement letter contained a broad release in favor of IAC (the “Releases”), in which Plaintiffs “release and forever discharge IAC . . . from any and all causes of actions, suits, claims, charges, complaints, promises and contracts which may now have, or hereafter can, shall or may have against IAC … with respect to interest in the Units.…” Approximately six years after receiving the payouts for their Units, plaintiffs commenced an action against IAC, claiming that IAC grossly misrepresented the value of the Units they held in defendant’s subsidiary. The motion court dismissed plaintiffs’ claims because they were “covered by the expansive language of the subject releases they signed.” In doing so, the Court rejected plaintiff’s “narrow interpretation of the scope of releases”.  The motion court also rejected, as a matter of law, plaintiffs’ alternative argument that the Releases should be set aside as fraudulently induced . The Court found that plaintiffs failed to allege a fraud “separate from that which was the subject of the releases they signed, whether known or unknown to the plaintiffs at the time.”  The First Department’s Decision As noted, the First Department unanimously affirmed. The Court found, like the motion court, that the Releases were broad and covered the claims plaintiffs asserted in the action. As such, the Court held that the Releases “bar plaintiffs’ claims for breach of contract, breach of the implied covenant, and fraud arising from the alleged misrepresentation of the value of the units.” 1 The Court also rejected plaintiffs’ argument that the Releases should be invalidated because plaintiffs “were fraudulently induced to enter into them”. 2 The Court found that “the alleged misrepresentations made to the senior participant regarding the units’ value did not constitute a ‘separate fraud’ from the subject of the release.” 3 4> 4>  Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” 5 Therefore, in the absence of duress, illegality, fraud, or mutual mistake, a release will not be set aside. 6 In Sodhi , plaintiffs broadly released all claims they had against defendant. The release language was expansive and released “any and all claims” whether “known or unknown” “against IAC and and their respective directors, officers and employees with respect to interest in the Units….” Such language was broad enough to cover their claims for non-payment. In addition to the broad release language, plaintiffs could not demonstrate a fraud separate from the claim for breach of the Equity Incentive Plan. As noted by the Court, Plaintiffs could not allege a breach of any duty collateral to or independent of the parties’ agreement. 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 Slip Op. at *1 (citation omitted). Id. Id. (citing Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 277, 280 (2011). Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1st Dept. 2006).

By Jonathan H. Freiberger On January 5, 2022, the Second Department decided Citibank, N.A. v. Kerszko .  The appeal in Citibank raised numerous “interesting and unusual issues,” but the focus of today’s article is on an issue recognized by the Second Department to be addressed by it for the first time: “whether the presentment to a court of a proposed ex parte order to show cause for an order of reference, which is rejected by the court for defects inherent in the papers, qualifies as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c) , so as to avoid dismissal of the complaint as abandoned under that statute.” [Eds. Note: This Blog has discussed CPLR 3215(c) < here =">here"> , < here =">here"> and < here =">here"> .]   The Court held that “ t does qualify” and, therefore, CPLR 3215(c) was inapplicable. By way of brief background, and as set forth in one of our prior Blogs: Rule 3215(c) of the New York Civil Practice Law and Rules provides, in pertinent part, that: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed….  (Emphasis added.) Courts have noted that the language of CPLR 3215(c) is mandatory in the first instance unless plaintiff demonstrates “sufficient cause” for the failure to timely “take proceedings for the entry of judgment]”.  ( See, e.g., US Bank v. Onuoha (2 nd Dep’t June 27, 2018); Wells Fargo Bank v. Cafasso (2 nd Dep’t February 28, 2018). The Cafasso Court (quoting Giglio v. NTIMP, Inc. , 86 A.D.3d 301 (2 nd Dep’t 2011)), noted that “sufficient cause” “‘requir both a reasonable excuse for the delay in timely moving for a default judgment, plus a demonstration that the cause of action is potentially meritorious.’”  The “reasonableness” of an excuse is within the sound discretion of the motion court. ( See, e.g., Onuoha and Cafasso .)  Finally, a default judgment need not be obtained within one year, as long as proceedings to obtain a default judgment have been initiated.  ( See Bank of America v. Lucido (2 nd Dep’t July 11, 2018).)  In mortgage foreclosure actions, the preliminary step of moving for an order of reference is deemed to be a sufficient “proceeding” toward the entry of judgment to satisfy the one-year time frame of CPLR 3215(c).  ( See, e.g., Deutsche Bank v. Delisser (2 nd Dep’t May 16, 2018); Lucido .) Citibank involved a mortgage foreclosure action commenced in March of 2009.  Borrower failed to appear, answer or move with respect to the complaint.  In May of 2009, a mandatory CPLR 3408 settlement conference was conducted “but was unproductive.” In November of 2009, due to borrower’s default in appearing, lender moved, ex parte , for an order of reference.  Supreme Court declined to sign the proposed order because the supporting affidavit was incomplete.  Five years later, in March of 2015, with the assistance of new counsel, lender moved for an order of reference, which motion was marked off the calendar because the “motion had been erroneously made returnable on a date when the CMP was not open.”   The motion was made again in December of 2015, and, in anticipating a CPLR 3215(c) dismissal, lender argued in its motion “any dismissal of the complaint pursuant to CPLR 3215(c) would be unwarranted, for reasons that sought to excuse the lengthy delay in bringing the motion.”  This motion, “consistent with pattern of defaults,” was unopposed.  By order dated February 10, 2016 (the “February Order”), supreme court denied lender’s motion and, sua sponte , dismissed the action as abandoned.  In so doing, supreme court “rejected the plaintiff’s ‘good cause’ argument for the lateness of its motion, but also because, in its view, the presentation to the court of the proposed ex parte order of reference in November 2009, which the court refused to sign, did not qualify as a taking of proceedings for the entry of judgment pursuant to CPLR 3215(c).”  (Emphasis added.)  Lender appealed the February Order. Lender moved to vacate the February Order, arguing that “the presentment of the proposed ex parte order of reference in November 2009, within one year after default, rendered the abandonment provision of CPLR 3215(c) inapplicable.  According to the Court, “the dismissal provisions of CPLR 3215(c) are not implicated in any action where the plaintiff ‘take proceedings’ for the entry of judgment within one year after a defendant’s default proceedings are taken within the statutory one-year period, any delays occasioned in the prosecution of the action beyond that year are irrelevant to CPLR 3215(c).” The Court, in discussing the origins of the “take proceedings” language of CPLR 3215(c), concluded that the legislature, in enacting that statute, necessarily meant something other than “filing” or “serv a motion” or “formal motion practice.”  The Court concluded that the “take proceedings” language was intended to be a broader and more encompassing concept than a more tightly defined “filing” or “service” of a motion for leave to enter a default judgment or other type of motion.  Indeed, the Court cited a litany of cases in support of the notion that CPLR 3215(c) should be construed such that “a plaintiff abandoned an action if, within one year after the defendant’s default, the plaintiff has manifested an intent not to abandon the case, but to take steps to seek a judgment.”  Obtaining a judgment within a year is not necessary, “so long as proceedings were undertaken to do so during the initial year after the defendant’s default.” According to the Second Department, “ he relevant inquiry, therefore, is not the form that an application takes when presented to the court or its result. Rather, it is the intent that can be inferred from an application presented to the court seeking to have the action ‘proceed,’ inconsistent with that of an abandonment of the plaintiff’s claims.”  (Emphasis in original.)  This, the Court noted, was consistent with the approach of the First Department.  The Court concluded that: he fact that that the Supreme Court rejected the order of reference as defective is beside the point, as the mere presentment of it established the plaintiff’s intent to proceed toward the entry of judgment and not to abandon the action.  What matters is the intent manifested by the presentment of an application, not what specific form it took or how it was filed. That being the case, the court should not have sua sponte directed dismissal of the complaint pursuant to CPLR 3215(c). That statute has no application under the facts and circumstances of this case, as the plaintiff presented an ex parte proposed order of reference within one year after ’s default. Supreme court’s order dismissing the mortgage foreclosure action was reversed and lender’s motion for an order of reference was granted. 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 Jonathan H. Freiberger This Blog’s December 17, 2021, article entitled: “ Second Department Holds that Envelopes Containing Pre-Foreclosure Notices to Borrowers Pursuant to RPAPL 1304 Cannot Contain Any Other Notices Or Information ,” discussed Bank or America, N.A. v. Kessler , in which the Second Department held that RPAPL 1304 ’s mailing requirements for the statutory notices contemplated thereby are to be strictly construed.  kessler, and the blog articles hyperlinked therein, discuss numerous issues relating to rpapl 1304.> kessler, and the blog articles hyperlinked therein, discuss numerous issues relating to rpapl 1304.>  RPAPL 1304 provides that at least ninety days prior to, and a condition precedent to, the commencement of a residential foreclosure action, lender must send borrower, inter alia , a notice that the loan is in default and other specific information regarding housing counseling.  Further, RPAPL 1304(2) provides that “ he 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 .”  (Emphasis added.)  In Kessler , the Court dismissed a foreclosure action because, inter alia , lender inserted in the envelope containing the RPAPL 1304 notice, an additional notice not authorized by the RPAPL. On December 29, 2021, the Second Department, decided two cases, consistent with Kessler, in which the Court addressed issues related to strict compliance with the requirements of RPAPL 1304.  Citimortgage, Inc. v. Dente After borrowers’ default, lender commenced an action against borrowers to foreclose the mortgage securing the underlying loan.  Lender’s complaint alleged compliance with RPAPL 1304; an allegation that borrowers denied in their answer.  Supreme court granted summary judgment to lender.  Lender moved for a judgment of foreclosure and sale and borrowers cross-moved for summary judgment dismissing the complaint for failure to comply with RPAPL 1304.  The basis for borrower’s motion was that the lender’s RPAPL 1304 notices contained the following “extraneous information on the second page of the notice”: The purpose of this communication is to collect a debt and any information obtained will be used for that purpose. TO THE EXTENT YOUR OBLIGATION HAS BEEN DISCHARGED OR IS SUBJECT TO AN AUTOMATIC STAY OF A BANKRUPTCY ORDER UNDER TITLE 11 OF THE UNITED STATES CODE, THIS NOTICE IS FOR COMPLIANCE AND INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE A DEMAND FOR PAYMENT OR AN ATTEMPT TO COLLECT ANY SUCH OBLIGATION.  (Emphasis in original.) Supreme court granted lender’s motion, denied borrower’s motion and directed the sale of the property.  Borrowers appealed.  Borrowers also appealed from supreme court’s denial of Borrowers’ subsequent motion to vacate the judgment of foreclosure and sale. While the borrowers failed to oppose lender’s motion for summary judgment, the Second Department noted that "failure to comply with RPAPL 1304 is a defense that may be raised at any time prior to the entry of judgment of foreclosure and sale."  And, because the issue of compliance with RPAPL 1304 was raised before the entry of the judgment of foreclosure and sale, it was properly before supreme court. Finally, the Court held that supreme court should have dismissed lender’s complaint because the “defendants established that the plaintiff failed to strictly comply with RPAPL 1304 on the ground that additional material was sent in the same envelope as the 90-day notice required by RPAPL 1304.”  (Citation omitted.) Wells Fargo Bank, N.A. v. DeFeo Lender in Wells Fargo commenced an action to foreclose a mortgage.  After answering, borrower moved for summary judgment and lender cross-moved for summary judgment.  Supreme court denied the motion, granted the cross-motion and appointed a referee to compute.  Borrower appealed. On appeal, the Second Department held that neither the lender nor the borrower was entitled to summary judgment.  The Court reiterated that strict compliance with the notice provisions of RPAPL 1304 “is a condition precedent to the commencement of a foreclosure action” and that a “defense based on noncompliance with may be raised at any time during the action.”  (Citations and internal quotation marks omitted.)  Nonetheless, as to the requirements of RPAPL 1304, the Court found that borrower failed to meet his burden of demonstrating noncompliance by lender and lender failed to meet its burden of demonstrating compliance. As to the lender’s cross-motion, the Court stated: Nevertheless, the Supreme Court should have denied those branches of the 's cross motion which were for summary judgment on the complaint…. The "separate envelope" mandate of RPAPL 1304(2) provides that " he 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." Here, the failed to establish its prima facie entitlement to judgment as a matter of law, as it failed to show its strict compliance with RPAPL 1304(2). Among other things, the copies of the 90-day notice submitted by the in support of its cross motion included an additional notice not contemplated by RPAPL 1304(2). The acknowledged that the envelope that it sent to the , which contained the requisite RPAPL 1304 notices, also included a separate notice concerning the Home Affordable Modification Program and bankruptcy issues. This Court recently determined, in Bank of America, N.A. v Kessler … , that RPAPL 1304(2) requires that the requisite notices under its provision must be mailed in an envelope separate from any other notice. Since the failed to demonstrate that the RPAPL 1304 notice was served in an envelope that was separate from any other mailing or notice, it failed to establish its strict compliance with RPAPL 1304. Accordingly, the court should have denied the relevant branches of the plaintiff's cross motion regardless of the sufficiency of the opposing.  (Some citations and internal quotation marks omitted.) The Wells Fargo Court relied on Kessler in its decision and decided Citimortgage on the same day.  It is curious, therefore, that the Wells Fargo action was not dismissed by the Second Department.  This is particularly so considering lender’s apparent admission that it included notices not authorized by RPAPL 1304 in the same envelope in which the RPAPL 1304 notices were mailed. 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 allege a cause of action based on fraud, plaintiffs must assert “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury. 1 To withstand a motion to dismiss, plaintiffs must satisfy each element of the claim. One of the most difficult elements of the fraud claim to plead and prove is the scienter element. First, a defendant is not likely to declare to the world that he or she intended to commit a fraud. Second, knowledge of the falsity of the representation at issue is “likely to be within the sole knowledge of the defendant and least amenable to direct proof.” 2 For these reasons, plaintiffs “need only allege specific facts from which it is possible to infer defendant’s knowledge of the falsity of its statements.” 3 A defendant’s knowledge of a corporate fraud or its concealment may be deduced by his or her position and responsibilities within the organization. 4 And, while fraudulent intent may “be divined from surrounding circumstances,” 5 it is generally a question that cannot be resolved on a motion to dismiss. 6 here,=">here," >here=">here" and="and" >here.=">here."> The damages element of a fraud claim can also be difficult to satisfy. Generally, plaintiffs are allowed to recover only their out-of-pocket damages – that is, the actual pecuniary loss sustained as the direct result of the wrong. Under the out-of-pocket damages rule, plaintiffs may recover what they lost because of the fraud, not what they might have gained had there been no fraud. 7 In other words, plaintiffs cannot recover the profits which would have been realized in the absence of the fraud. For that reason, plaintiffs cannot recover damages for fraud based on the loss of a contractual bargain, “the extent, and, indeed the very existence of which is completely undeterminable and speculative.” 8 To determine whether the plaintiff sustained out-of-pocket losses, courts employ a two-part test. 9 First, the plaintiff must show the actual value of the consideration it received. 10 Second, the plaintiff must prove that the defendant’s fraudulent inducement directly caused the plaintiff to agree to deliver consideration that was greater than the value of the received consideration. 11 The difference between the value of the received consideration and the delivered consideration constitutes the plaintiff’s out-of-pocket damages. 12 here=">here" and="and" >here.=">here."> With these principles in mind, we look at Community Association of the East Harlem Triangle, Inc. v. Butts , 2021 N.Y. Slip Op. 07503 (1st Dept. Dec. 28, 2021) ( here ). The Motion Court Proceedings here).=">here)."> In March 1994, defendant, Abyssinian Development Corporation (“ADC”), and plaintiff, the Community Association of East Harlem Triangle, Inc. (“CAEHT”), formed a joint venture for the purpose of developing property in New York City as a Pathmark supermarket (“Property”). The parties formed East Harlem Abyssinian Triangle Corp. (“EHAT Corp.”) to conduct the business of the joint venture and East Harlem Abyssinian Triangle Limited Partnership (“EHAT LP”) to own and develop the Property. EHAT Corp. was the general managing partner of EHAT LP, and CAEHT and ADC each held 50% of EHAT Corp.’s stock. EHAT Corp. holds a 51% interest in EHAT LP and the New York City Economic Development Corporation holds a 49% interest in EHAT LP.  At a meeting of the EHAT Corp. board of directors (the “Board”), held in March 2013, defendant James Howard, Senior VP of ADC and a director of EHAT Corp., initiated the first of several discussions with the Board regarding the sale of the Property. Thereafter, defendants Howard and Butts (Chairman of ADC) took a lead role in managing the sale of the Property on behalf of EHAT Corp. According to plaintiff, defendant Victor Sozio of Ariel Property Advisors LLC (“Ariel”), a commercial real estate broker, and defendant Charles Simpson, a partner in the WM law firm, assisted with the sale. Beginning in October 2013, Derek Johnson of Integrated Urban Holdings, LLC (“Integrated”) started working with R. Donahue Peebles, Chairman and CEO of Peebles Corp, (“Peebles Corp.”), to submit an offer to acquire the Property. Peebles Corp. had a real estate portfolio worth approximately $5 billion. At a Board meeting held on or about November 25, 2013, Howard informed the Board that he had identified seven potential buyers of the Property, including Peebles Corp. and Extell Development Company (“Extell”). On January 15, 2014, Integrated and Peebles Corp. (together “Peebles/Integrated”) jointly submitted a written offer to purchase the Property for $40 million to Butts, and mailed copies of the offer to Sozio and Simpson. Thereafter, Sozio allegedly told Johnson that EHAT Corp. would accept an offer of $42 million, and Johnson allegedly responded that Peebles/Integrated would increase its offer to that amount. On February 12, 2014, Sozio sent Johnson a term sheet containing the terms that EHAT Corp. would agree to accept the $42 million offer. After Johnson communicated his assent, Sozio told him that the offer had been forwarded to Simpson, who would follow up with Johnson to memorialize the offer in a formal contract. However, Johnson allegedly never heard from Simpson. On March 24, 2014, the Board held a meeting to consider an offer from Extell to purchase the Property for $39 million. Simpson, Howard and Sozio attended the meeting. During the meeting, a CAEHT representative asked Howard whether there were any other offers to purchase the Property aside from that of Extell. Before Howard could answer, however, Simpson allegedly stated that Extell was the only party to show an interest in purchasing the Property. According to plaintiff, despite knowing this statement was untrue, neither Sozio nor Howard corrected Simpson at or after the meeting, or otherwise disclosed the higher Peebles/Integrated offer. Plaintiffs alleged that the Peebles/Integrated offer was deliberately concealed from them because Simpson, WM, ADC, Butts, Howard, Sozio and Ariel had previously agreed to steer the Property to Extell. In this connection, at the March 24, 2014 meeting, the Board also discovered that ADC had already received an advance payment from Extell in the amount of $2.5 million at an unspecified date prior to the meeting, which Simpson, Howard, Sozio and Butts had allegedly failed to disclose. Additionally, at that meeting, plaintiffs learned that ADC had never informed Extell of plaintiffs’ interest in the Property. In view of this new information, the meeting ended without a vote on the sale of the Property. The Board met again on April 3, 2014, to discuss the sale, at which time Howard allegedly denied that there were any other offers besides Extell’s. The Board deadlocked on the vote to approve the sale, with the four ADC-appointed directors voting in favor and the four directors appointed by CAEHT voting against the offer. However, a majority of the Board voted in favor of the sale at an April 10, 2014, meeting, including Butts, who did not attend the meeting but voted by proxy. Plaintiffs alleged that, as a direct and proximate consequence of the fraudulent concealment of the Peebles/Integrated offer, EHAT Corp. was damaged in the amount of $3 million, or the difference between the amount paid by Extell to purchase the Property and the market value of the Property. Plaintiffs asserted 58 causes of action in various permutations against different combinations of the defendants, sounding in fraud, breach of fiduciary duty, and aiding and abetting, together with a claim pursuant to Business Corporations Law (BCL) § 720 and a demand for punitive damages. Defendants moved to the dismiss the claims against them. The Motion Court’s Decision All defendants challenged the fraud claims on the ground that plaintiffs failed to allege any damages under a recognized tort theory. Specifically, defendants argued that recovery of any loss resulting from the alleged concealment of the Peebles/Integrated $42 million offer was barred by the “out-of-pocket” rule. Defendants claimed that, at most, plaintiffs asserted a claim for lost opportunity or lost profit damages ( i.e. , damages incurred by the sale of the Property at a deflated price). Under the out-of-pocket rule, defendants argued, such losses were inherently speculative and nonrecoverable as a matter of law. Relying on Bernstein v. Kelso & Co. , 231 AD2d 314 (1st Dept. 1997), the motion court rejected defendants’ contention. In Bernstein , the plaintiff alleged that the management employees of a company schemed with a potential buyer to sell the company at the lowest price that the principal and other shareholders would accept, furnishing confidential information to aid the buyer in obtaining the most favorable offer for itself. The Court found it irrelevant that the plaintiff ultimately made an overall “profit” from the transaction, noting that the plaintiff was not seeking the undeterminable future profits that might generated by the company after the sale. Rather, the plaintiff “sought to recover the difference between the price he received in the sale of the company and the price he would have received had his employees and not deceived him.” The motion court held that plaintiffs could submit nonspeculative proof demonstrating that they were induced “to deliver consideration that was greater than the value of the received consideration <$39 million> ” by proffering evidence of the market value of the Property at the time of the sale. 13 The ADC defendants argued that plaintiffs failed to allege that defendants possessed the requisite intent to defraud. In particular, they contended that there were no allegations indicating their motive for steering the sale to Extell or suggesting how they benefitted in any way from doing so. They also pointed out that the broker defendants would be working against their own interest in a commission by procuring a sale at a lower price. The motion court rejected the ADC defendants’ contention. The motion court noted that plaintiffs alleged that both Butts and Howard were aware of the Peebles/Integrated offer through their interactions with each other, their counsel and the brokers, and either falsely denied or concealed its existence. At this stage of the proceeding, noted the motion court, such allegations were sufficient to demonstrate their knowledge for the purpose of the fraud claim.  Regarding the argument that the individuals did not personally profit from the alleged fraud, the motion court observed, quoting Polonetsky v Better Homes Depot , 97 N.Y.2d 46, 55 (2001), that “corporate officers and directors may be held individually liable if they participated in or had knowledge of the fraud, even if they did not stand to gain personally.”  Finally, the motion court declined to rule on defendants’ argument that the business judgment rule protected them from liability for the alleged breaches of fiduciary duty. The motion court said that it was premature to rule on the applicability of the business judgment rule, especially given its ruling on plaintiffs’ allegation concerning the ADC defendants’ state of mind at the time of the sale. It is premature to rule on the applicability of the business judgment rule as to the ADC defendants’ conduct. Although the rule would ordinarily shield them from liability in such a routine decision concerning the sale of a corporate asset, defendants are entitled “adduce evidence of self-dealing, fraud, or other acts constituting a breach of fiduciary duty sufficient to overcome the business judgment rule” Accordingly, resolution of the issue is not appropriate at the pleading stage, as questions of fact exist “involving the condition or state of the defendants’ minds, which can be proved or judged only through evidence.” [Ed. Note: “The business judgment rule is a common-law doctrine by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.” 14 The rule does not, however, protect directors who “passively rubber-stamp[] the acts of active corporate managers." 15 The complaint must “allege facts, such as self-dealing, fraud or bad faith” to show that the subject transaction “could not have been the product of sound business judgment.” 16 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.” 17 ]  On appeal, the Appellate Division, First Department affirmed. The First Department’s Decision The Court held that plaintiffs “adequately pleaded nonspeculative damages,” such that their claims were “not barred by the out-of-pocket rule.” 18 The Court found that “Plaintiffs allege that a specific alternative offer for the property for $3 million more was made at around the same time as the Extell offer, that the higher offer was concealed from them, and that they had unknowingly passed on that offer in approving the $39 million sale.” 19 The Court explained that the “alternative Integrated/Peebles offer of $42 million and the term sheet conditions had been agreed to, and thus did not amount to mere speculative damages.” 20 “The agreement was never memorialized in a contract,” observed the Court, “because defendant Charles Simpson, EHAT Corp.’s lawyer, allegedly colluded with the other defendants to steer the sale to Extell, and never drafted and delivered a contract to Peebles's principal.” 21 The Court also held that the motion court “correctly concluded that the amended complaint sufficiently pleaded intent to defraud by the ADC defendants.” The Court noted that the “amended complaint allege that Butts and Howard, as officers and board members of EHAT Corp. and ADC, worked together on the sale of the property; that Howard personally heard Simpson mispresent at the March 24, 2014 board meeting that there were no offers other than Extell’s; that Butts was sent the Integrated/Peebles offer; and that they communicated with one another concerning the Integrated/Peebles offer.” 22 The Court rejected the ADC defendants’ argument that any fraudulent intent on their part was “nonsensical because they too stood to gain from the sale of the property”. 23 The Court stated that “at this juncture in the absence of any explanation as to why they would accept the lower offer without disclosing the Integrated/Peebles offer to the board,” the complaint stated a claim. 24 Finally, the Court held that “the motion court correctly concluded that dismissal based on the business judgment rule would be premature.” Takeaway The Court of Appeals has explained that under the out-of-pocket damages rule, damages should compensate the plaintiff “for what lost because of the fraud,” not “what might have gained.” 25 Consequently, “there can be no recovery of profits which would have been realized in the absence of fraud.” 26 The Court underscored this point by noting that it had “consistent refus to allow damages for fraud based on the loss of a contractual bargain, the extent, and, indeed, … the very existence of which is completely undeterminable and speculative.” 27 In Community Association , the Court made it clear that a plaintiff alleging fraud can recover lost opportunity damages, where such damages are not speculative and can be quantified. As discussed, the alleged damages were quantifiable at $3 million.  Aside from the damages issue, Community Association is notable for its analysis of the scienter element of a fraud claim. There, the Court found that plaintiffs alleged sufficient facts from which state of mind could be inferred – namely, that “Butts and Howard, as officers and board members of EHAT Corp. and ADC, worked together on the sale of the property; that Howard personally heard Simpson mispresent at the March 24, 2014 board meeting that there were no offers other than Extell’s; that Butts was sent the Integrated/Peebles offer; and that they communicated with one another concerning the Integrated/Peebles offer.” 28 While these defendants raised an interesting argument about the absence of motive to deceive, the Court held that such arguments are left for later proceedings. Contact our business lawyer to get started on your claim. Footnotes Lama Holding Co. v. Smith Barney , 88 N.Y.2d 413, 421 (1996) (citations omitted). Houbigant, Inc. v. Deloitte & Touche , 303 A.D.2d 92, 98 (1st Dept. 2003). Id. at 99. Pludeman v. N. Leasing Sys., Inc. , 10 N.Y.3d 486, 493 (2008). Oster v. Kirschner , 77 A.D.3d 51, 56 (1st Dept. 2010). ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 131 A.D.3d 427, 428 (1st Dept. 2015). Connaughton v. Chipotle Mexican Grill, Inc. , 29 N.Y.3d 137, 142-43 (2017) (quoting, Lama, supra ) (internal quotations omitted)). Id. Kumiva Grp., LLC v. Garda USA Inc. , 146 A.D.3d 504, 506 (1st Dept. 2017). Id. Id. Id. Citing Kumiva , 146 A.D.3d at 506. 40 W. 67th St. Corp. v. Pullman , 100 N.Y.2d 147, 153 (2003) (citation omitted). Matter of Comverse Tech, Inc. Deriv. Litig. , 56 A.D.3d 49, 56 (1st Dept. 2008) (citation omitted). Goldstein v. Bass , 138 A.D.3d 556, 557 (1st Dept. 2016). 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 *1 (citation omitted). Id. Id. Id. Id. at *1-*2. Id. Id. (citations omitted). Connaughton , 29 N.Y.3d at 142. Id. (citations omitted). Id. at 142-143 (quoting, Dress Shirt Sales v. Hotel Martinique Assoc. , 12 N.Y.2d 339, 344 (1963)). Slip Op. at *1-*2.

By Jonathan H. Freiberger Generally speaking, usury statutes prevent excessive interest from being charged on a loan. The New York Court of Appeals has noted that “ tatutes prohibiting usurious loans were enacted in the 15 th century England, became part of New York’s colonial history, and have remained since” and that “ heir purpose is to protect desperately poor people from the consequences of their own desperation.” Seidel v. 18 East 17 th Street Owners, Inc. , 79 N.Y.2d 735, 740 (1992) (citations and internal quotation marks omitted). As noted in this Blog’s December 22, 2021, article entitled: “ Agreements That Are Not Loans Are Not Subject to New York’s Usury Statutes ,” “the rudimentary element of usury is the existence of a loan or forbearance of money” and, accordingly, “where there is no loan, there can be no usury….”  (Citations, footnotes and internal quotation marks omitted.)  That article also discussed when a transaction is considered a loan for the purpose of applying New York’s usury statutes.   Pursuant to General Obligations Law §5-501(1) , interest on a loan or forbearance “shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.”  GOL §5-501(2) prevents individuals or entities from charging interest rates exceeding those permitted pursuant to GOL §5-501(1).  Banking Law §14-a(1) provides that the “maximum rate of interest provided for in section 5-501 of the general obligations law shall be sixteen per centum per annum.”  GOL §5-511 provides that usurious contracts are void.  When calculating interest rates on loans for less than one year, the interest will be annualized if not so stated in the note.  Thus, in Bakhash v. Winston , 134 A.D.3d 468 (1 st Dep’t 2015), the Court found a loan criminally usurious where a four-month note provided for 12% interest without indicating that such rate was annual.  The Bakhash Court said that “ here, as here, the loan is for less than a year, the interest rate is annualized, and thus, the annual rate on the note is 36%, well above the criminal usury rate of 25%.”  Bakhash , 134 A.D.3d at 469 (citation omitted). Failure to abide by usury laws could have significant repercussions.  “The consequences to the lender of a usurious transaction can be harsh: the borrower is relieved of all further payment—not only interest but also outstanding principal, and any mortgages securing payment are cancelled. In effect, the borrower can simply keep the borrowed funds and walk away from the agreement.”  Seidel , 79 N.Y.2d at 740.  Further, GOL § 5-513 permits the borrower to “recover any interest paid above the amounts permitted by law. Because the penalties are harsh, usury must be proven by “clear and convincing evidence.”  Roopchard , 154 A.D.3d at 988 (citation omitted). Because Corporations are “generally the antithesis of … desperately poor people”, they are “ordinarily barred from asserting a usury defense.”  Seidel , 79 N.Y.2d at 740 (citations, footnote and internal quotation marks omitted).  See also GOL  § 5-521(1) .  However, a corporation can assert usury as a defense to the extent that the usury is criminal under Section 190.40 of New York’s Penal law , which makes interest on a loan or forbearance that exceeds twenty-five per cent per annum a felony.  GOL § 5-521(3) .  See also Roopchand v. Mahammed , 154 A.D.3d 986, 988 (2 nd Dep’t 2017) (citation omitted). Some of the preceding principles were applied by the Second Department in Adler v. Marzario , a case decided on December 15, 2021.  The defendants in Adler , delivered to plaintiff a note evidencing a promise to repay $75,000 with interest at the rate of 20% per annum.  The note was secured by a mortgage on real property owned by one of the defendants.  Upon defendants’ default, plaintiff commenced a mortgage foreclosure action, which was defended on the ground of usury.  Plaintiff moved for summary judgment and defendants cross-moved for summary judgment dismissing the complaint “as asserted against them and deeming the mortgage void on the ground that the loan was usurious.”  Supreme court granted the cross-motion and plaintiff appealed. The Second Department found the loan usurious on its face and, therefore, “void … as a matter of law.”  Accordingly, the borrowers were relieved “of the obligation to repay principal and interest thereon.”  The Court also rejected plaintiff’s efforts to avoid the usury laws by attempting to characterize the underlying transaction as a “business or investment loan.”   The Court also stated that “contrary to the plaintiff’s further contention, a clause in the subject promissory note purporting to reduce the rate of interest to a non-usurious rate if the rate originally imposed was found to be usurious could not save the note from being usurious (Fred Schutzman Co. v Park Slope Advanced Med., PLLC, 128 AD3d 1007, 1008; see also Bakhash v Winston, 134 AD3d 468, 469; Simsbury Fund v New St. Louis Assoc., 204 AD2d 182).” 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 Broker-dealers are required to file suspicious activity reports (“SARs”) for transactions suspected to involve fraud or a lack of an apparent lawful business purpose. In that regard, under Section 17(a) of the Securities Exchange Act and Rule 17a-8 promulgated thereunder, a registered broker-dealer is required to file a SAR when it knows, suspects, or has reason to suspect that certain transactions (1) involve funds derived from illegal activity, (2) involve the use of the broker-dealer to facilitate criminal activity, (3) are designed to evade any requirement of the Bank Secrecy Act, or (4) have no business or apparent lawful purpose. The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) instructs SAR filers to “provide a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” in the narrative and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.” See FinCEN, FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions (October 2012) (here). To be effective, the SAR should describe “the five essential elements of information – who? what? when? where? and why? – of the suspicious activity being reported.” See, e.g., FinCEN, Guidance on Preparing a Complete & Sufficient Suspicious Activity Report Narrative (Nov. 2003), at 3 (here). When a SAR “lack basic information regarding the Five Essential Elements … SAR s deficient as a matter of law.” See SEC v. Alpine Sec. Corp., 308 F. Supp. 3d 775, 800 (S.D.N.Y. 2018) here">, aff’d, 982 F.3d 68 (2d Cir. 2020). here=">here" and="and" >here.=">here."> In The Matter of Wedbush Securities Inc. On December 15, 2021, the Securities and Exchange Commission (“SEC”) announced (here) that Wedbush Securities Inc., a California-based broker-dealer, agreed to pay more than $1.2 million to settle charges arising from the unlawful unregistered distribution of nearly 100 million shares of more than 50 different low-priced microcap companies, and from Wedbush’s failure to file SARs pertaining to those transactions. According to the SEC’s order (here), from January 2017 through September 2018, Wedbush engaged in unregistered offers and sales of large blocks of low-priced securities that were part of the unlawful, unregistered distribution of securities by Silverton SA (a/k/a Wintercap SA), a former offshore customer. The SEC found that Wedbush failed to conduct a reasonable inquiry into the facts surrounding the sales, and therefore Wedbush’s offers and sales did not qualify for the usual exemption from registration that applies to brokers’ transactions. The SEC also found that, despite the presence of numerous red flags that Wedbush had identified in its written guidance to employees, Wedbush failed to file SARs for certain suspicious transactions that it executed on behalf of Silverton while the account was active, as broker-dealers are required to do when transactions are suspected to involve fraudulent activity. Commenting on the settlement, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated: “Broker-dealers have a critical obligation to inquire into the origin of any microcap security they sell, as well as an obligation to report suspicious activity relating to transactions in the markets. It is our expectation that they will fully perform these important gatekeeping obligations, and when they fail to do so we will hold them accountable.” In the the SEC’s order, the SEC found that Wedbush violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933, and the recordkeeping requirements of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. Without admitting or denying the SEC’s findings, Wedbush agreed to cease and desist from committing or causing violations of these provisions; to be censured; to pay disgorgement and prejudgment interest of over $207,000, and a civil penalty of $1 million. The SEC also directed Wedbush to engage an independent compliance consultant, who will undertake a broad review of Wedbush’s supervisory, compliance, and other policies and procedures reasonably designed to prevent violations of the federal securities laws by the firm and its employees. Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

By Jonathan H. Freiberger Followers of this Blog know that we frequently address issues involving residential mortgage foreclosure.  Actions involving the pre-foreclosure requirements of RPAPL 1304 are frequently decided by the Appellate Courts in New York and, accordingly, are analyzed in our articles.  See, e.g., < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> , < here =">here"> and < here =">here"> .  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). In our October 1, 2021, blog we discussed Wells Fargo Bank, N.A. v. Yapkowitz , a case in which the Appellate Division, Second Department, dismissed lender’s complaint and held that a joint notice in one envelope addressed to two borrowers residing at the same address did not satisfy the requirements of RPAPL 1304. On December 15, 2021, the Appellate Division, Second Department, decided Bank of America, N.A. v. Kessler .  As in Yapkowitz , the Court in Kessler , strictly interpreted RPAPL 1304 and dismissed a Complaint because lender included additional notices in the envelope with the required 1304 notices.  Significantly, RPAPL 1304(2) provides that “ he 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 .”  (Emphasis added.)  Thus, the Kessler Court held “that inclusion of any material in the separate envelope sent to the borrower under RPAPL 1304 that is not expressly delineated in these provisions constitutes a violation of the separate envelope requirement of RPAPL 1304(2). The Kessler Court relied heavily of the Court of Appeals decision in Freedom Mortgage Corp. v. Engel , and citing to, and quoting from Engel , stated that this “strict approach precluding any additional material in the same envelope as the requisite RPAPL 1304 notices not only comports with the statutory language, it also provides clarity as a bright-line rule to plaintiff lenders and ‘promotes stability and predictability’ in foreclosure proceedings.”  [Eds. Note, this Blog has discussed Engel < here =">here"> and < here =">here"> .]   The Court noted that the language of 1304 is clear and that “ n matters of statutory interpretation, the primary consideration is to discern and give effect to the Legislature's intention” and that "the text of a provision is the clearest indicator of legislative intent and courts should construe unambiguous language to give effect to its plain meaning.”  (Citations, internal quotation marks and brackets omitted.)  The Court, after analyzing the legislative history of 1304, noted that same was consistent with its “strict interpretation” of the “‘separate envelope’” requirement. Policy considerations, as articulated in Engel , also supported the Kessler Court’s “exacting” “‘separate envelope’” requirement because clear rules “‘will be easily understood by the parties and can be consistently applied by the courts.’”  In establishing its “bright-line” rule, the Court also expressly rejected certain suggested “flexible standards” and/or prior analyses of trial courts, including: (1) evaluation of the additional materials contained in the envelope to determine if same prejudices or assists the borrower; (2) analysis of the whether the additional information “is included as a separately paginated sheet of paper or some other physical demarcation of the information exists, or whether the additional information is on the same page as the requisite notice”; and, (3) whether the inclusion of additional notices in the envelope along with the requisite RPAPL 1304 notice is a de minimis deviation from the requirements of the statute and, thus, does not constitute a failure to comply with the separate envelope requirement.”  (Citations omitted.)  The Court concluded that such approaches could: (1) “vitiate” the unequivocal requirements of RPAPL 1304; (2) “place the burden on a defendant to show a lack of prejudice or show that the information is not relevant to the notice mandated under RPAPL  1304, rather than on the plaintiff to show compliance”; and/or (3) cause courts to engage in the “judicial scrutiny” rejected by the Engel Court by having them “interpret” what the “Legislature intended, rather than what it said.” Finally, the Court noted that: Nor will our determination as to strict compliance with the dictates of RPAPL 1304(2) undermine the legislative goal of providing information about additional protections and foreclosure prevention opportunities to homeowners at risk of losing their homes ( see Senate Introducer's Mem in Support, Bill Jacket, L 2008, ch 472 at 7), as nothing in RPAPL 1304 prohibits a lender from mailing, in other envelopes, notices to a borrower—whether such notices be federally mandated or consist of any other notice or information that may assist a homeowner to avoid foreclosure. RPAPL 1304(2) simply requires that the notices required by its provisions be mailed in a separate envelope from those other notices. 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 A forum selection clause is contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract, e.g. , employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown judges and/or juries. Under New York law, “a contractual forum selection clause is documentary evidence that may provide a proper basis for dismissal pursuant to CPLR 321l (a)(l).” 1 It is “prima facie valid and enforceable” unless the challenging party can show the forum selection clause “to be unreasonable, unjust, in contravention of public policy, invalid due to fraud or overreaching,” or “that a trial in the selected forum would be so gravely difficult that the challenging party would, for all practical purposes, be deprived of its day in court.” 2 Forum selection clauses can be mandatory or permissive. The former requires the dispute to be litigated only in the designated venue, while the latter permits litigation in a particular venue but does not prohibit it in another jurisdiction. 3 In interpreting forum selection clauses, courts apply the principles of contract construction. In Westaub II LLC v. Westermann , 2021 N.Y. Slip Op. 06976 (1st Dept. Dec. 14, 2021) ( here ), the Appellate Division, First Department affirmed the dismissal of an action on the grounds that the forum selection clause in the parties’ agreement governed the dispute.  westaub derives from the decision of the motion court ( i.e. , the transcript of the hearing on the motion), and the briefs on appeal.> westaub derives from the decision of the motion court ( i.e. , the transcript of the hearing on the motion), and the briefs on appeal.> Westaub involved a joint venture between two French citizens – Francis Staub, a well-known manufacturer of cookware, and Antoine Westermann, a three-star Michelin chef who developed a poultry restaurant in Paris called Le Coq Rico. Staub (through his wholly owned company, CSI Finances SAS (“CSI Finances”)) and Westermann (for himself and his wholly owned company Envol SARL) (“Envol”)) entered into an agreement in 2014 (the “2014 Agreement”), which they amended in 2015 (the “2015 Amendment”) (together, the “Amended Contract”), for the development of additional Le Coq Rico locations outside of France, including one in New York City. Pursuant to their agreement, the parties created two wholly owned U.S. subsidiaries: Westaub, Inc. and Westaub II LLC. The Amended Contract governed the financing, ownership, operational control and other rights of each party regarding, among other things, Westaub II LLC. Relevant to the appeal, the 2015 Amendment provided that it was governed by French law, and that all disputes in connection with its performance or interpretation that could not be resolved amicably were to be brought before a specific court in France: If an amicable agreement cannot be reached, any dispute between the undersigned parties in connection with the performance or interpretation of this Agreement shall be referred to the Colmar District Court (le Tribunal de Grande Instance de Colmar).  By 2018, the relationship between Staub and Westermann soured. In June 2019, Westermann notified Staub that unless their disputes were resolved amicably, he would take all steps necessary to recover his unpaid salary and unreimbursed expenses. In response, in September 2019, plaintiffs filed the action in New York. In October 2019, Westermann filed an action in Colmar, France to recover his unpaid compensation and reimbursements, and to enforce his rights in the entities created under the Amended Contract.  Westermann moved to dismiss the New York action based on the forum selection clause in the 2015 Amendment, and alternatively under the doctrines of prior action pending and forum non conveniens. Westermann argued, inter alia , that he and Westaub II LLC and CSI Finances were parties to the Amended Contract and/or were all so closely related to each other with regard to the joint venture that it was intended and foreseeable that they would be bound by the forum selection clause.  Staub opposed the motion, contending, inter alia , that neither Westermann nor Westaub II LLC was a signatory to the 2015 Amendment, which contained the forum selection clause. The motion court granted the motion, finding that the forum selection applied, thereby warranting dismissal of the complaint. The court also held that since the 2015 Amendment expressly amended the 2014 Agreement, the forum selection clause applied to Westermann. The court further found that all parties to the action were bound by the forum selection clause because its application was foreseeable as against each of them, whether as signatories or under the “close relationship” doctrine. 4 the relationship between the non-party and the signatory in such cases must be sufficiently close so that enforcement of the clause is foreseeable by virtue of the relationship between them. 5 > 4 the relationship between the non-party and the signatory in such cases must be sufficiently close so that enforcement of the clause is foreseeable by virtue of the relationship between them. 5 > On appeal, the First Department unanimously affirmed. The Court found that “ he motion court correctly read the 2014 Agreement and 2015 Amendment together to find that the forum selection clause in the 2015 Amendment applied to this dispute and required its dismissal.” 6 The Court noted that the 2015 Amendment was titled “amendment” and that the parties intended it to “amend the 2014 Agreement, which expressly referred to at least once in the Amendment and whose validity and ongoing force and effect, to the extent not contrary to the Amendment, was reiterated in … the Amendment.” 7 Moreover, explained the Court, “the complaint describe the 2015 Amendment as having been the decision of the parties to the 2014 Agreement — defendant and plaintiff CSI Finances SAS — who, the complaint allege , amended the original agreement to reflect an additional capital contribution by CSI and a revised equity allocation, and both agreements are described as having been part and parcel of the same overall transaction, namely, the establishment, operation, and management of the restaurant at issue.” The Court also held that “the motion court properly invoked the close relationship doctrine to render the 2015 Amendment’s forum selection clause binding on nonsignatories defendant and plaintiff Westaub II LLC.” 8 The Court explained that “Defendant’s enforcement of the forum selection clause was readily foreseeable, given that his close relationship to signatory Envol was well known to plaintiffs; defendant signed the 2014 Agreement on behalf of himself and Envol, and the 2015 Amendment itself indicate that defendant the manager and sole shareholder of Envol and provide that throughout the document Envol be referred to interchangeably as ‘Envol’ and ‘AW’ (defendant’s initials).” Finally, the Court said that it was “foreseeable that plaintiff Westaub II LLC, closely involved in the matters at issue in this dispute and closely intertwined with plaintiff CSI, would also be found to be within the reach of the forum selection clause.” 9 The Court noted that in the Westaub II LLC operating agreement, Westaub II LLC “designated Francis Staub as its sole manager, and the 2014 Agreement and 2015 Amendment identif Staub as the chairman of CSI.”  The Court found that the relationship between Westaub II LLC and CSI further evinced a close relationship sufficient to invoke the doctrine: “Both Westaub II LLC and CSI are involved in funding another entity, Westaub Inc., per the 2014 Agreement, with Westaub II LLC obtaining the funds to do so from another entity, Westaub France SARL, 75% of which, the complaint alleges, is owned by CSI. The documents further reflect that all shares of Westaub II LLC are owned by Westaub France SARL, which, again, is 75% owned by CSI.” 10 Takeaway Westaub reinforces the principles above; namely, a forum selection clause is prima facie valid and enforceable unless shown by the resisting party to be unreasonable or unjust ( i.e. , unconscionable). In Westaub , plaintiffs could not overcome their burden of demonstrating that the forum selection clause should be set aside. Westaub is also notable for its application of the “close relationship” doctrine. As noted, a signatory to a contract may enforce a forum selection clause against a non-signatory if the non-signatory is “closely related” to one of the signatories such that enforcement of the forum selection clause is foreseeable by virtue of the relationship between the signatory and the party sought to be bound. 11 If the non-signatory has an ownership interest or a direct or indirect controlling interest in the signing party (as in Westaub ) or, the entities or individuals consulted with each other regarding decisions and were intimately involved in the decision-making process (as in Westaub ), then application of a forum selection clause will be proper, as it achieves the purpose behind binding closely related entities to the forum selection clause: it “promote stable and dependable trade relations.” 12 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Landmark Ventures, Inc. v. Birger , 147 A.D.3d 497, 497 (1st Dept. 2017); see also Lifetime Brands, Inc. v. Garden Ridge, L.P. , 105 A.D.3d 1011, 1012 (2d Dept. 2013). Molino v. Sagamore , 105 A.D.3d 922, 923 (2d Dept. 2013) (citation and internal quotation omitted). Phillips v. Audio Active Ltd. , 494 F.3d 378, 383, 386 (2d Cir. 2007). See ComJet Aviation Mgt. v. Aviation Investors Holdings Ltd. , 303 A.D.2d 272, 273 (1st Dept. 2003). Freeford Ltd. v. Pendleton , 53 A.D.3d 32, 38-39 (1st Dept. 2008). Slip Op. at *1. Id. Id. (citations omitted) Id. Id. at *2-*3. Tate & Lyle Ingredients Ams., Inc. v Whitefox Tech. USA, Inc. , 98 A.D.3d 401 (1st Dept. 2012). Id. (citation omitted).

By:   Jeffrey M. Haber The “policy of to encourage arbitration.” 1 For this reason, “ ny doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.” 2 This is especially so where the agreement to arbitrate incorporates rules that explicitly authorize the arbitrator to resolve all disputes, including those concerning “the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought.” 3 In Schindler v. Cellco Partnership , “ he sole issue before Court whether the issue of arbitrability was properly delegated to the arbitrator.” 4 As discussed below, the Appellate Division, First Department held “that it was.” 5 Plaintiff commenced the action against Verizon Wireless and its employees after an altercation between Plaintiff, her husband and Venzon’s employees relating to a trade-in of Plaintiff’s iPhone. Defendant moved to compel arbitration, pursuant to CPLR § 7503(a) and the Federal Arbitration Act , 9 U.S.C. Sec. 1 et. seq., as required under the Verizon Wireless Agreement (the “agreement”) that Plaintiff signed. The motion court granted the motion. Defendant argued that Plaintiff’s claims fell within the broad arbitration provision in the Agreement, which provided in bold capitalized letters that the parties agreed “to resolve disputes only by arbitration or in small claims court” including “any dispute that in any way relates to or arises out of this agreement, or from any equipment, products and services … including any disputes you have with our employees or agents ….” For claims that exceeded $10,000, the Agreement provided that the American Arbitration Association’s Consumer Arbitration Rules would apply.  The court noted that “ ursuant to the Consumer Arbitration Rules, the arbitrator has the authority to rule on his or her own jurisdiction, including any objections to the existence, scope or validity of the arbitration agreement or the arbitrability of any claim.” Therefore, held the motion court, “ y specifically incorporating the AAA rules into the arbitration clause, the parties expressly agreed to submit the issue of arbitrability to the arbitrators.”  Accordingly, the motion court granted the motion to compel arbitration. On appeal, the Appellate Division, First Department affirmed. Schindler v. Cellco Partnership , 2021 N.Y. Slip Op. 06931 (1st Dept. Dec. 9, 2021) ( here ). The Court found that since Plaintiff “voluntarily accepted the terms of the Verizon Customer Agreement and the arbitration provision contained within it”, she and Verizon “clear and unmistakabl ” intended to incorporate the AAA rules into the Agreement. 6 As such, it was for the arbitrator to decide the issue of arbitrability. 7 Takeaway When parties to a contract, like the parties in Schlinder , delegate the question of arbitrability to an arbitrator, the courts will enforce the agreement as written. This “is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” 8 Thus, “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court not decide the arbitrability issue.” 9 Courts in New York follow the foregoing principles and will not take the issue of arbitrability away from the arbitrator when the parties clearly and unmistakably provide as such. 10 This approach reflects the “overarching principle of law ‘that arbitration is a matter of contract’” and that “courts must rigorously enforce arbitration agreements according to their terms.” 11 Thus, where, as in Schlinder , a contract contains a valid delegation to the arbitrator of the power to determine arbitrability, such a clause will be enforced absent a specific challenge to the delegation clause by the party resisting arbitration. 12 Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice. Footnotes Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39 (1997). State of New York v. Philip Morris Inc. , 30 A.D.3d 26, 31 (1st Dept. 2006), aff’d , 8 N.Y.3d 574 (2007). Offshore Expl. & Prod., LLC v. Morgan Stanley Private Bank, N.A. , 626 F. App’x 303, 305 (2d Cir. 2015). See also Smith Barney , 91 N.Y.2d at 46 (noting that while there is generally a presumption that the issue of arbitrability will be determined by the courts, the arbitrator decides the issue where the parties evince a “clear and unmistakable agreement to arbitrate arbitrability as part of their alternative dispute resolution choice.”). Slip Op. at *1. Id. Id. (citations omitted). Id. Henry Schein, Inc. v Archer & White Sales, Inc. , _____ U.S. at _____, 139 S.Ct. 524, 529 (2019). Id. at 530. Life Receivables Trust v. Goshawk Syndicate 102 at Lloyd’s , 66 A.D.3d 495, 495 (1st Dept. 2009). Monarch Consulting, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA , 26 N.Y.3d 659, 675 (2016) (citation omitted). Id. at 675-76

By Jonathan H. Freiberger There are two “components and constitutional predicates of personal jurisdiction.”  Keane v. Kamin , 94 N.Y.2d 263, 265 (1999).  “One component involves service of process, which implicates due process requirements of notice and opportunity to be heard.”  Id. (citations omitted).  Even though a defendant may be subject to the jurisdiction of the Court, dismissal may be sought “based on the claim that service was not properly effectuated.”  Id. (citations omitted).  “The other component of personal jurisdiction involves the power, or reach, of a court over a party, so as to enforce judicial decrees.”    Id. (citations omitted).   This requires a “constitutionally adequate connection between the defendant, the State and the action” ( Id. (citations omitted)) and is beyond the scope of this article.  In order for a court to exercise personal jurisdiction over a defendant in a litigation, among other things, defendant must be served with process (typically a summons).  In New York, service of process is usually performed by a process server and service is made pursuant to among others, CPLR Rules: 307 (State), 308 (natural person), 309 (infant, incompetent or conservatee), 310 (partnership), 310-a (limited partnership), 311 (corporation or governmental subdivision), 311-a (limited liability company) and 312 (court, board or commission), which govern how different individuals and entities may be served.  For example, under CPLR 308, personal service on an individual may be made by delivering the legal process: directly to the defendant (CPLR 308(1)); to someone of suitable age and discretion at the defendant’s “actual place of business, dwelling place or usual place of abode” and mailing a copy of the summons to the defendant’s last known residence or actual place of business (CPLR 308(2)); to an agent designated under CPLR 318 (CPLR 308(3)); and, where notwithstanding diligent, but unsuccessful, efforts to serve pursuant to CPLR 308(1) and (2), by affixing the process to the door at the defendant’s “actual place of business, dwelling place or usual place of abode within the state” and mailing a copy of the summons to the defendant at his/her/their actual place of business or last known residence (CPLR 308(4)).  The failure to serve process in “strict compliance” with the “statutory methods,” “leaves the court without personal jurisdiction over the defendant, and all subsequent proceedings are thereby rendered null and void.”  Nationstar Mortgage, LLC v. Gayle , 191 A.D.3d 1002 (2 nd Dep’t 2021) (citations omitted).  Accordingly, proof of proper service is of the utmost importance. Once service of process is made, the process server typically prepares an affidavit of service.  CPLR 306 sets forth the information that must be provided in an affidavit of service, which includes: the papers served, the person served and the date of service (CPLR 306(a)); and,  when service is made by delivering the summons to an individual, a description of the person to whom the papers were delivered including, among other things, sex, skin color, hair color, age, weight, height and any other identifying features.  In addition, if service is made pursuant to CPLR 308(4), the dates, addresses and times of attempted service must be specified.  This is so because in order to demonstrate diligence, the process server must attempt to make service on the defendant “at different times and on different days when the defendant could reasonably be expected to be home.”  Bank of America, N.A. v. Batson , 176 A.D.3d 771 (2 nd Dep’t 2019) (citations omitted).  A defendant can contest service of process on a motion to dismiss a complaint, inter alia , pursuant to CPLR  3211(a)(8) and/or CPLR 5015(a)(4).  On December 1, 2021, the Second Department decided three mortgage foreclosure actions addressing the sufficiency of service of process. Wells Fargo Bank, N.A. v. Enitan  In Wells Fargo Bank, N.A. v. Enitan , the borrower was purportedly served by “nail and mail” service pursuant to CPLR 308(4).  The court granted lender’s motion for a default judgment and for the appointment of a referee.  When the lender moved to confirm the referee’s report and for a judgment of foreclosure and sale, the borrower opposed the motion and cross-moved, inter alia , pursuant to CPLR 5015(a), to vacate the order granting a default judgment, and pursuant to CPLR 3211(a)(8), to dismiss the complaint for lack of personal jurisdiction over him.  The court granted lender’s motion and denied the cross-motion.  On appeal, the Second Department affirmed.  After discussing the relevant legal principals along the lines set forth supra , the Court stated: A process server's affidavit of service establishes a prima facie case as to the method of service and, therefore, gives rise to a presumption of proper service.  Although a defendant's sworn denial of receipt of service generally rebuts the presumption of proper service established by the process server's affidavit and necessitates an evidentiary hearing, no hearing is required where the defendant fails to swear to specific facts to rebut the statements in the process server's affidavits.   The sworn denial of receipt of service must be a detailed and specific contradiction of the allegations in the process server's affidavit. Here, the process server's affidavit of service, in which he attested that he attempted to serve the defendant on three prior occasions, constituted prima facie evidence of proper service pursuant to CPLR 308(4). In opposition and in support of his cross motion, the defendant's unsupported averment that he did not reside at the subject property at the time of service was insufficient to rebut the presumption of proper service created by the process server's affidavit. (Citations, internal quotation marks and brackets omitted.)  Bank of New York v. Dutan In Bank of New York v. Dutan , an order of reference was entered upon borrower’s loan default.  Borrower opposed lender’s motion to confirm the referee’s report and for a default judgment of foreclosure and sale and cross-moved, inter alia , “pursuant to CPLR 5015(a)(3) and (4) to vacate the order of reference, and thereupon pursuant to CPLR 3211(a) … (8) to dismiss the complaint insofar as asserted against him for lack of … personal jurisdiction.”  Supreme court granted lender’s motion and denied borrower’s cross-motion.  On appeal, the Second Department reversed. The Court noted that “ lthough a party moving to vacate a default must normally demonstrate a reasonable excuse and a meritorious defense, the movant is relieved of that obligation when lack of personal jurisdiction is asserted as the ground for vacatur."  (Citation omitted.)  Further, while the process server’s affidavit typically “constitutes a prima facie showing of proper service, … when a defendant submits a sworn denial of receipt of service containing specific facts to refute the statements in the affidavit of the process server, the prima facie showing is rebutted and the plaintiff must establish personal jurisdiction by a preponderance of the evidence at a hearing.”  (Citations omitted.)  Reversal was warranted because: the affidavit of service reflects that the defendant was served pursuant to CPLR 308(2)….  The affidavit of service sets forth a detailed description of the person of suitable age and discretion, and states that the person of suitable age and discretion represented to the process server that the mortgaged premises was the defendant's "dwelling house." The defendant rebutted the presumption of valid service by the submission of an affidavit in which he averred that the mortgaged premises was not his dwelling house or usual place of abode, and that his residence was located at a different specified address. He further averred that he had no knowledge of anyone being served on his behalf, and that he had not received a copy of the summons and complaint. Under these circumstances, a hearing on the issue of whether the defendant was properly served was warranted. (Citation omitted.)  Green Tree Servicing, LLC v. Frantzeskakis              In Green Tree Servicing, LLC v. Frantzeskakis , supreme court, after a traverse hearing (a hearing to determine whether service of process was properly made), granted borrower’s motion to dismiss the complaint pursuant to CPLR 3211(a)(8) for lack of personal jurisdiction.  On lender’s appeal, the Second Department reversed and held that: A minor discrepancy between the appearance of the person allegedly served and the description of the person served contained in the affidavit of service is generally insufficient to raise an issue of fact warranting a hearing. Further, the discrepancies must be substantiated by something more than a claim by the parties allegedly served that the descriptions of their appearances were incorrect. Here, notwithstanding alleged physical discrepancies, the process server averred that the person who answered the door, and on whom he served process, gave her name as Marina Frantzeskakis, and acknowledged she was the wife of the . The process server's affidavit of service constituted prima facie proof of proper service on the defendant via substituted service on his wife ( see CPLR 308<2> ). The affidavits submitted by the defendant failed to rebut the presumption of due service. The discrepancies alleged by the defendant between his wife's appearance and the description of the person served contained in the process server's affidavit were either too minor or insufficiently substantiated to warrant a hearing. Accordingly, a hearing to determine the validity of service of process was not warranted under the circumstances…. 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.