In New York, contracts are to be construed in accordance with the parties’ intent. See , e.g. , Slatt v. Slatt , 64 N.Y.2d 966 (1985). “The best evidence of what parties to a written agreement intend is what they say in their writing.” Slamow v. Del Col , 79 N.Y.2d 1016, 1018 (1992). Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain meaning of its terms. See , e.g. , W.W.W. Assoc. v Giancontieri , 77 N.Y.2d 157, 162 (1990). Extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous. Id. A contract is unambiguous if “on its face is reasonably susceptible of only one meaning.” Greenfield v. Philles Records , 98 N.Y.2d 562, 570 (2002). Parol (or extrinsic) evidence cannot be used to create an ambiguity where the words of the parties’ agreement are otherwise clear and unambiguous. Innophos, Inc. v Rhodia, S.A. , 38 A.D.3d 368, 369 (1st Dept. 2007), aff’d , 10 N.Y.3d 25 (2008). Conversely, “ contract is ambiguous if the provisions in controversy are reasonably or fairly susceptible of different interpretations or may have two or more different meanings.” New York City Off-Track Betting Corp. v. Safe Factory Outlet, Inc. , 28 A.D.3d 175, 177 (1st Dept. 2006) (internal quotation marks and citation omitted). The existence of ambiguity is determined by examining the “entire contract and consider the relation of the parties and the circumstances under which it was executed,” with the wording to be considered “in the light of the obligation as a whole and the intention of the parties as manifested thereby.” Kass v. Kass , 91 N.Y.2d 554, 566 (1998), quoting Atwater & Co. v. Panama R.R. Co. , 246 N.Y. 519, 524 (1927). Whether a contract is ambiguous is a question of law for the court to decide. Kass , 91 N.Y.2d at 566. Significantly, a court may not, in the guise of interpreting a contract, add or excise terms or distort the meaning of those used to make a new contract for the parties. Teichman v. Community Hosp. of W. Suffolk , 87 N.Y.2d 514, 520 (1996); Morlee Sales Corp. v. Manufacturers Trust Co. , 9 N.Y.2d 16, 19 (1961). In transactions involving the purchase and sale of real estate, the Court of Appeals has made clear that the rule requiring a written agreement to “be enforced according to its terms” has special importance: We have … emphasized this rule’s special import in the context of real property transactions, where commercial certainty is a paramount concern, and where … the instrument was negotiated between sophisticated, counseled business people negotiating at arm’s length.  Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004), quoting Matter of Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 548 (1995). The foregoing principles were recently considered in Villager Capital Advisors, LLC v. Union Settlement Assn., Inc. , 2021 N.Y. Slip Op. 04003 (1st Dept. June 22, 2021) ( here ), a case involving the payment of a commission in connection with the sale of real property. Villager Capital arose out of a brokerage agreement between plaintiff, Villager Capital Advisors, LLC, a real-estate broker, and defendant Union Settlement Association, Inc. (“Union”). Union is the sole member of two housing development fund corporations (“HDFC”), defendants East 103rd Street Housing Development Fund Corporation and East 104th Street Housing Development Fund Company.  here.=">here."> Union owned and operated the St. Lucy’s Apartments through the two funds. Union wanted to sell its interest in the St. Lucy's Apartments. To do so, Union and the HDFCs entered into a brokerage agreement with plaintiff. Under the terms of the brokerage agreement, Union agreed to pay plaintiff “a Sale Commission equal to the sum of (i) 5% of the first $1,000,000 of gross sale price of the Project Interest, plus (ii) 3% of the portion of the gross sale price in excess of $1,000,000.” Plaintiff was to receive the commission “immediately upon the closing of the sale transaction.” Following a bidding process, Union and L&M Development Partners (L&M”) signed a purchase agreement that acknowledged plaintiff as the broker that procured the deal. L&M agreed to assume Union’s debts and to pay $5,747,574 in cash for the St. Lucy’s Apartments. The assumed debt consisted of two Housing Development Corporation-financed mortgage loans, totaling approximately $3,466,000. The assumed debt plus cash payment totaled $9,214,294. The sale was later approved by both the Attorney General and Supreme Court. ( See Not-For-Profit Corporation Law (“NPCL”) §§ 510, 511.) In the petitions submitted for such approvals, the parties represented the purchase price to $9,214,294 for the St. Lucy’s Apartments—the sum of the cash purchase price and the value of the mortgages assumed by L&M. Supreme Court, New York County (Masley, J.), approved the sale by two orders dated December 22, 2017. In those orders, Justice Masley listed the purchase price as $9,214,294.  Plaintiff submitted an invoice for its commission to Union. The commission sought was based on a purchase price of $9,214,294. The amount due, less a pre-payment of $10,000, was $286,429. Union replied that the assumed debt was not part of the consideration for plaintiff’s commission. Plaintiff responded, arguing that the gross purchase price of $9,214,294 was confirmed in Justice Masley’s orders. Union made no further mention of the commission. L&M and Union closed the transaction on January 31, 2018, without informing plaintiff that it was taking place. A week later, on February 6, 2018, plaintiff was advised that the transaction had closed. Plaintiff received payment from Union for $182,427.22 on February 26, 2018— $104,001.78 less than the amount in plaintiff’s commission invoice. Union included a cover letter explaining that the commission calculation was based only on the cash payment paid by L&M and did not include the value of assumed mortgages. Plaintiff brought the action for breach of contract and quantum meruit, seeking payment of the alleged shortfall.  Plaintiff moved for summary judgment on its breach of contract claim. Union cross moved for summary judgment, seeking to dismiss plaintiff’s claims. Plaintiff argued that “gross sale price” unambiguously referred to the entire consideration paid for the apartments, including the value of the mortgages that L&M assumed. Plaintiff contended that a commission payment based on the entire consideration paid by the buyer is the industry standard and is thus commercially reasonable. Any interpretation of “gross sale price” that did not include the assumed debt, said plaintiff, effectively excised the word “gross” from “gross sale price.” In response, Union contended that plaintiff’s interpretation was “unheard of in the real estate industry.” Union argued that, if L&M assumed the mortgages and there was no cash payment, plaintiff would still receive a commission—which would be an absurd result.  The motion court concluded that neither party had demonstrated that the party’s interpretation of “gross sale price” was the only one flowing from the text of the brokerage agreement. Instead, held the motion court, “ he agreement is … ambiguous.” The motion court explained that it was reasonable, as plaintiff asserted, for a broker who facilitated an agreement for a buyer to assume millions of dollars in mortgages to be paid a commission based on the value of those mortgages. This was particularly true because the text of the brokerage agreement reflected the parties’ understanding that the mortgages could be assigned to a buyer and that plaintiff’s services were being enlisted to help bring about that assignment. Thus, the motion court reasoned, it would be reasonable for the agreement to provide that plaintiff’s commission would be calculated based upon the value of the mortgage debts it helped get assigned from Union to L&M, as well as the cash payment by L&M. On the other hand, said the motion court, Union’s interpretation—that “gross sale price” refers only to the cash payment—was also reasonable. The mortgage debts at issue were held by a third-party lender and were not Union’s to sell. Thus, if the mortgages were not Union’s to sell, explained the motion court, but merely part of the overall structure of the agreement, then the parties could not have intended the mortgages to be part of the “gross sale price.” The motion court concluded that neither position would rule the day, holding that the term was ambiguous.  The motion court also held that the parties’ reliance on extrinsic evidence – e.g. , the two court orders and petition – underscored the ambiguity of the term in the agreement: “When parties seek to use extrinsic evidence to resolve an ambiguous term of a contract, summary judgment remains inappropriate when determining the meaning of that term would require ‘a choice among inferences to be drawn from extrinsic evidence.’” (Quoting, Amusement Bus. Underwriters v. American Intl. Grp. , 66 N.Y.2d 878, 880 (1985)). Accordingly, the motion court denied plaintiff’s motion for summary judgment on its breach of contract claim and denied defendants’ cross motion for summary judgment to the extent it sought dismissal of the claims for breach of contract and account stated ( here ). On appeal, the Appellate Division, First Department unanimously modified, on the law, to grant plaintiff’s motion, and otherwise affirmed the motion court’s order. The Court held that the term, “gross sales price” was “plain and unambiguous”; the term included the value of assumed debt, in addition to the cash payment made by the buyer in exchange for the purchase. Slip Op. at *1. “To apply a different interpretation”, reasoned the Court, “would negate the unambiguous language in the agreement.” Id. (citation omitted). Thus, concluded the Court, “Defendants simply attempting to rewrite the term ‘gross sale price.’” Id. The Court also rejected Union’s argument that the breach of contract claim should have been dismissed as against the HDFCs because they were not in privity with either party to the brokerage agreement ( i.e. , plaintiff and Union). The Court reasoned that the HDFCs were third-party beneficiaries of the brokerage agreement. Id. The Court explained that “ lthough the HDFCs did not sign the brokerage agreement, Union Settlement Association, Inc. represented in the agreement that it sought to sell all of its interest in the project, including 100% ownership of the HDFCs along with all of the interests and assets held by the HDFCs.” As such, “the HDFCs were intended third-party beneficiaries of the brokerage agreement.” Id. (citing Mendel v. Henry Phipps Plaza W., Inc. , 6 N.Y.3d 783, 786 (2006)). [Ed. Note: To assert third-party beneficiary rights under a contract, a party must establish “(1) the existence of a valid and binding contract between other parties, (2) that the contract was intended for benefit and (3) that the benefit to is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate if the benefit is lost.” Burns Jackson Miller Summit & Spitzer v. Lindner , 59 N.Y.2d 314, 336 (1983). Takeaway Village Capital underscores the fundamental principle of contract interpretation – i.e. , contracts are to be construed pursuant to the parties’ intention. As the Court of Appeals explained almost two decades ago, “ he best evidence of what the parties … intend is what they say in their writing. Slamow , 79 N.Y.2d at 1018. When the parties’ writing is clear and unambiguous on its face – that is, the terms are reasonably susceptible to only one meaning – it should be enforced according to the plain meaning of those words.  In Village Capital , the Court made clear that, in the context of the underlying transaction, the word “gross” included every payment of value. This meant the value of the assumed mortgages and the cash payment. To conclude otherwise would “negate” the clear and unambiguous meaning of the word “gross”.

Cherry picking is the process of selecting securities to invest in by mimicking the trading of other investors (both individual and institutions) who are successful over a long period of time. In other words, cherry-pickers base their trading around the techniques and strategies of other investors. Anyone can implement a cherry-picking strategy. Indeed, cherry picking is used by both professional and retail investors alike. Cherry picking can be an effective way to generate returns. It can also be helpful for novice investors – i.e., investors who are unfamiliar with the process of stock selection and investment research. Cherry picking can also be used by investment advisers in a fraudulent way. Under this scenario, an investment adviser will allocate winning trades to his/her personal account or to a favored client(s) at the expense of other clients. Typically, an investment adviser trades in securities through an omnibus trading account. An omnibus trading account allows an investment adviser to buy and sell securities on behalf of multiple clients simultaneously, without identifying to the broker in advance the specific accounts for which a trade is intended. For example, if an adviser separately purchases the same security for several clients on the same day, the adviser might obtain different prices on each transaction as a result of normal market fluctuation. Rather than placing individual orders in each client account, the adviser can place an aggregated order, or “block trade,” in the omnibus account and subsequently allocate the trade among multiple accounts using an average price. When used properly, an adviser will fairly and equitably allocate the block trade among client accounts, ensuring that no account receives preferential treatment over another. The fraudulent act of cherry picking involves an investment adviser selecting specific profitable or unprofitable trades and allocating them in a manner of their choosing. For example, the investment manager might allocate the profitable trades to his/her personal account or to certain clients in order to give them preferential treatment. Conversely, trades that incur losses might be allocated to the accounts of less preferred clients of the investment adviser. When used fraudulently, cherry picking violates the securities laws. Indeed, the Securities and Exchange Commission (“SEC” or the “Commission”) has been vigilant in cracking down on investment advisors who engage in fraudulent cherry picking. In January 2017, the SEC charged Michael J. Breton and his firm Strategic Capital Management, LLC with fraud for engaging in a cherry-picking scheme whereby Breton placed trades through a master brokerage account and then allocated profitable trades to himself and unprofitable trades to client accounts (here). According to the SEC, defendants defrauded their clients out of approximately $1.3 million. On September 6, 2019, the U.S. District Court for the District of Massachusetts entered final judgment against defendants (here). In September 2018, the SEC filed a complaint in the Western District of Louisiana against Lafayette, Louisiana-based World Tree Financial, LLC and its majority-owner and co-founder, Wesley Kyle Perkins, for operating a cherry-picking scheme that defrauded World Tree clients (here). According to the SEC, for more than four years, Perkins enjoyed substantial profits at his clients’ expense by cherry-picking trades. Perkins allegedly traded securities in World Tree’s omnibus account and delayed allocating the securities to specific client accounts until he had observed the securities’ performance over the course of the day. He then allocated profitable trades to favored accounts, like his own, while allocating unprofitable trades to two accounts with substantial assets controlled by one person. The SEC also alleged that World Tree and Perkins made false and misleading statements about their trade allocation practices – i.e., that all trades would be allocated fairly and equitably. In addition, the SEC alleged that World Tree, Perkins and Priscilla Gilmore Perkins, Perkins’ wife and the firm’s co-founder and co-owner, falsely represented that they were not trading in the same securities as World Tree's clients. On January 15, 2021, following a week-long, bench trial, the court entered final judgment in favor of the SEC against World Tree, Wesley Perkins, and Priscilla Perkins (here). The court ordered Wesley Perkins and World Tree to pay civil penalties of $160,000 and $300,000, respectively, ordered them to disgorge, $347,947, plus prejudgment interest jointly and severally, and enjoined them from future violations of the securities laws. On August 21, 2019, the District Court for the Central District of California entered a settled final judgment against Strong Investment Management (“Strong”) and its owner, Joseph B. Bronson (“Bronson”), both of whom the SEC previously charged with securities fraud for their involvement in a cherry-picking scheme (here). According to the SEC (here), which commenced the action in February 2018, for more than four years, Bronson traded securities in Strong’s omnibus account but delayed allocating the securities to specific client accounts until he had observed the securities’ performance over the course of the day. As alleged, Bronson enjoyed substantial profits at his clients’ expense by cherry picking the trades, disproportionately allocating profitable trades to himself and unprofitable trades to Strong’s clients. The SEC also alleged that Strong and Bronson misrepresented their trading and allocation practices in the firm’s Forms ADV, including by falsely stating that all trades would be allocated in accordance with pre-trade allocation statements and that the firm did not favor any account, including those of the firm’s personnel. Less than one week later, on August 26, 2019, the SEC announced (here) that Laurel Wealth Advisors, Inc., a registered investment adviser based in La Jolla, California, and its former investment adviser representative, Joseph C. Buchanan, agreed to settle charges relating to Buchanan’s multi-year cherry-picking scheme. According to the SEC, from at least March 2013 to June 2015, Buchanan disproportionately allocated profitable trades to his personal accounts, and disproportionately allocated unprofitable trades to his clients’ accounts. The SEC found that Buchanan’s allocation scheme resulted in $56,075 in net same-day profits to Buchanan and $60,821 in net same-day losses to his clients. Last week, on June 17, 2021, the SEC announced that it obtained an asset freeze and other emergency relief, and filed fraud charges, against a Miami-based investment professional and two investment firms for engaging in an alleged cherry-picking scheme in which they funneled millions of dollars in trading profits to preferred accounts (here). In the complaint filed by the SEC in the Southern District of Florida (here), the SEC alleged that defendants Ramiro Jose Sugranes (“Sugranes”), UCB Financial Advisers Inc., and UCB Financial Services Limited engaged in an approximate six-year scheme to divert profitable trades to two accounts believed to be held by Sugranes’ relatives, while at the same time saddling other clients with losing trades. Defendants allegedly used a single account to place trades without specifying the intended recipients of the securities at the time they placed the trades. As alleged, after defendants established a position, if the price of the securities increased during the trading day, defendants usually closed out the position and allocated those profitable trades to the two preferred accounts. Conversely, said the SEC, if the price of the securities decreased during the trading day, defendants usually allocated the unprofitable trades to other client accounts. According to the SEC, the preferred clients, who were named as relief defendants, received approximately $4.6 million from profitable trades, while other clients sustained more than $5 million in first-day losses. By its complaint, the SEC seeks to recover the relief defendants’ unlawful gains, plus prejudgment interest. The SEC alleged that Sugranes and the two UCB entities violated the antifraud provisions of the federal securities laws. As against Sugranes and the UCB entities, the SEC is seeking permanent injunctions, disgorgement, prejudgment interest, and civil penalties. On June 14, the court granted the SEC’s request for emergency relief, including an asset freeze, accounting, and expedited discovery.

Care should be taken when drafting contracts so that the intention of the parties is set forth in a clear and unambiguous way.  When contracts are clearly drafted, all parties should be aware of their rights, remedies and obligations thereunder.  Further, the existence of clear and unambiguous contracts could streamline litigation if a dispute arises. The law is clear that “ hen the terms of a written contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract, giving practical interpretation to the language employed and the parties’ reasonable expectations.”  Patsis v. Nicolia , 120 A.D.3d 1326, 1327 (2 nd Dep’t 2014) (citation omitted).  The Court of Appeals stated that “ e have long adhered to the sound rule in the construction of contracts, that where the language is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language” because “when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms”.  R/S Associates v. New York Job Development Authority , 98 N.Y.2d 29, 32 (2002) (citations and internal quotation marks omitted). Indeed, when a contract is “clear and unambiguous on its face,” “extrinsic and parole evidence is not admissible to create an ambiguity.”  W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 163 (1990) (citations and internal quotation marks omitted).  Whether a contract “is ambiguous is a question of law to be resolved by the courts.”  B&A Realty Management, LLC v. Gloria , 192 A.D.3d 851, 853 (2 nd Dep’t 2021) (citation omitted).  “A lease, like any other contract, is to be interpreted in light of the purposes sought to be attained by the parties.”  112 West 34 th Street Assoc. v. 112-1400 Trade Properties LLC , 95 A.D.3d 529, 531 (1 st Dep’t 2012) (citation and internal quotation marks omitted). On June 10, 2021, the Appellate Division, First Department, decided Noor Staffing Group, LLC v. 622 Third Avenue, LLC , a case that addresses the principals of contract construction discussed herein.  The facts of Noor , some of which were obtained from a review of the e-filed documents in supreme court, are summarized herein.  Plaintiff, as tenant, and defendant, as landlord, entered into a commercial lease for 20,000 square feet of space on the seventh floor of landlord’s building.  Pursuant to the lease, landlord was to build-out the space for tenant.  Landlord also intended to renovate common areas on the seventh floor, including the hallways and restrooms.  Section 2.04 of the lease set forth a “target date” for “substantial completion” of the “Landlord’s Work.” If the target date was not met, and tenant was not in default under the lease, among other things, landlord was obligated to credit tenant’s account $2,778.00 for each day of delay.   Further, Section 15.03 of the Lease provides that: Landlord shall have the right at any time without thereby creating an actual or constructive eviction or incurring any liability to Tenant therefor, to change the arrangement or location of such of the following as are not contained within the Demised Premises: … corridors, … toilets, and other like public service portions of the Building. All parts … of all walls, windows, and doors bounding the Demised Premises (including exterior Building walls, exterior core walls corridor walls, exterior doors and entrances, all space in or adjacent to the Demised Premises used for shafts, stacks, stairways, chutes, pipes, conduits, fan rooms heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Demised Premises and Landlord shall have the use thereof, as well as access thereto through the Demised Premises for the purposes of operation, maintenance, alteration and repair.  (End parentheses omitted in original.) In addition, Section 21.03 of the lease provides that: Landlord reserves the right to temporarily interrupt, curtail or suspend the services required to be furnished by Landlord under this Lease when the necessity therefor arises by reason of alterations … or for any other cause beyond the reasonable control of Landlord. Landlord shall use due diligence to complete all required repairs or other necessary work as quickly as possible so that Tenant’s inconvenience resulting therefrom may be for as short a period of time as circumstances will reasonably permit ….  Tenant shall not be entitled to nor shall Tenant make claim for any diminution or abatement of minimum rent or additional rent or other compensation, nor shall this Lease or any of the other obligations of Tenant be affected or reduced by reason of such interruption, curtailment, suspension, work or inconvenience. More than two months after Tenant moved into its space, landlord had not completed work on the common area restrooms and hallways.  Tenant was advised by landlord that the restrooms on other floors were available for use by tenant’s employees and guests during the common area renovations to the seventh floor.  Tenant commenced action against landlord for breach of contract.  In its first cause of action, tenant alleged that landlord failed to timely deliver the premises and, accordingly, was entitled to the liquidated damages set forth in Section 2.04 of the lease.  By its second cause of action tenant sought monetary damages due to the failure of landlord to complete the common area renovations by the time tenant moved into the premises.  Among other things, tenant alleged that because the seventh-floor restrooms were not complete -- forcing employees to take elevators to other floors to use a restroom -- the “productivity and morale of employees” were “significantly impacted”. Landlord moved for summary judgment dismissing the second cause of action based on the plain language of the lease.  Supreme court denied the motion, finding, inter alia , that “on the present record, the Court is not persuaded that Sections 15.03 and 23.01 even apply to the circumstances described in the Complaint” and “ t a minimum, material questions of fact exist as to whether Landlord’s Work, as defined in the Lease, includes the restrooms and the common walkways….”   Relying on Section 15.03 of the lease, the First Department unanimously reversed, finding that “ his provision of the lease precludes ’s recovery related to ’s construction work on the shared restrooms and corridors.  Thus, the First Department held: “A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms” ( Excel Graphics Tech. v CFG/AGSCB 75 Ninth Ave. , 1 AD3d 65, 69 <1st dept 2003> , lv dismissed 2 NY3d 794 <2004> ). First, it is clear from the terms of the lease that the restrooms and corridors were contained neither in the premises nor in the scope of work undertaken by the landlord pursuant to the terms of the lease. Moreover, the lease gave the landlord the right to change the arrangement or location of the restrooms and corridors without liability to the tenant. Dismissal is warranted when the documentary evidence –here, the lease –contradicts plaintiff’s pleading and conclusively establishes a defense to the asserted claim as a matter of law (id.). (Hyperlink supplied.)

On June 14, 2021, this Blog wrote about FINRA’s fight against the financial exploitation of seniors and vulnerable adults ( here ), in particular, the effort to amend FINRA’s Rule 2165 (“Financial Exploitation of Specified Adults”). Among other things, Rule 2165 permits a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring. Under the proposed amendments, member firms would be: (a) given additional time to address suspicious activity in the customer accounts of seniors and vulnerable adults, and allow adult protective services agencies, state regulators and law enforcement to conduct investigations into such activity; and (b) allowed to place a temporary hold on the disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm reported the matter to a state regulator or agency or a court of competent jurisdiction. The proposed amendments to Rule 2165 coincide (whether intentionally or not) with World Elder Abuse Awareness Day, which was commemorated on June 15, 2021. World Elder Abuse Awareness Day was launched on June 15, 2006, by the International Network for the Prevention of Elder Abuse and the World Health Organization at the United Nations. The purpose of the day is to provide an opportunity for communities around the world to promote a better understanding of abuse and neglect of older persons by raising awareness of the cultural, social, economic and demographic processes affecting elder abuse and neglect. In recognition of World Elder Abuse Awareness Day, the U.S. Securities and Exchange Commission (“SEC”), the North American Securities Administrators Association (“NASAA”), and the Financial Industry Regulatory Authority (“FINRA”) announced on June 15, 2021 ( here ) a new resource intended to assist securities firms in implementing the training requirements of the Senior Safe Act. The training program, “Addressing and Reporting Financial Exploitation of Senior and Vulnerable Adult Investors,” can be used by firms to train associated persons on how to detect, prevent, and report financial exploitation of senior and vulnerable adult investors. The presentation serves as a resource for firms implementing the requirements of the Senior Safe Act and certain state training requirements relating to senior investment protection. The Senior Safe Act was modeled after a Maine statute with a similar name, the Senior$afe Program. That program was the result of a joint effort between regulators and the financial and legal communities to help financial and banking advisors identify and prevent the financial abuse and exploitation of seniors and vulnerable adults. Like the Senior$afe Program, the Senior Safe Act was intended to “empower and encourage our financial service representatives to identify warning signs of common scams and help prevent seniors from becoming victims.” The Senior Safe Act was included as Section 303 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law on May 24, 2018. The Senior Safe Act addresses barriers financial professionals face in reporting suspected senior financial exploitation or abuse to authorities. Specifically, the Senior Safe Act protects “covered financial institutions” – which include investment advisers, broker-dealers, and transfer agents – and their eligible employees, affiliated persons, and associated persons from liability in any civil or administrative proceeding for reporting a case of potential exploitation of a senior citizen to a covered agency. The immunity established by the Senior Safe Act is provided on the condition that employees receive training on how to identify and report exploitative activity against seniors before making a report. In addition, reports of suspected exploitation must be made “in good faith” and “with reasonable care.” This immunity applies to both individuals and firms. This Blog wrote about the Senior Safe Act here and here . In particular, we wrote about the immunity established under the Senior Safe Act here . “By partnering with FINRA and NASAA to offer this training program, we can help educate financial professionals on how to identify and report financial abuse of older adults,” said SEC Chair Gary Gensler. “I encourage all investors to use the education resources on Investor.gov to ensure they are working with a registered investment professional.” “We are pleased to work collaboratively with our counterparts at the SEC and FINRA to provide this important training resource in the hope that it will promote greater and earlier detection and reporting of suspected financial exploitation of older Americans,” said Lisa A. Hopkins, NASAA President and Senior Deputy Commissioner of Securities and General Counsel with the West Virginia State Auditor’s Office. “FINRA has a longstanding commitment to protecting senior investors through various regulatory programs and initiatives,” said Robert W. Cook, FINRA President and CEO. “FINRA is pleased to collaborate with NASAA and the SEC to provide this free resource to firms as we collectively work to support implementation of the Senior Safe Act and better protect senior and vulnerable adult investors.” The training presentation can be found on:  NASAA’s website at https://www.nasaa.org/industry-resources/senior-issues ;  NASAA’s Serve Our Seniors website at http://serveourseniors.org/about/industry ;  The SEC’s website at https://www.investor.gov/additional-resources/information/seniors ; and FINRA’s website at https://www.finra.org/rules-guidance/key-topics/senior-investors .  In a separate press release about World Elder Abuse Awareness Day ( here ), NASAA focused on the obligation of “financial professionals and the public to be on the lookout for signs of elder financial abuse, including potential exploitation by guardians.” A guardian has a legal obligation to act in the best interest of a protected individual. Guardians often are granted extensive access and control of a protected individual’s assets. Financial abuse or exploitation by guardians typically occurs when the guardian improperly uses the protected individual’s funds, securities, property, or other assets. “A trusted guardian can be a wonderful resource. But sometimes guardians may take advantage of the people or assets in their care,” said Lisa A. Hopkins, NASAA President and West Virginia Senior Deputy Commissioner of Securities. “Taking the time to understand the warning signs of guardian financial abuse and the steps that can be taken to report such abuse are key to helping those who cannot help themselves.” As explained in NASAA’s press release, the association developed resources to help identify the red flags of fraud and suspected financial abuse by legal guardians. One such resource is “Guarding the Guardians”, a publication that provides examples of exploitation and information on how to report suspected elder financial abuse. Examples of suspected guardian abuse include: The guardian takes money from the protected individual’s investment portfolio for personal use. The guardian overcharges for a caregiving service. The guardian does not take the protected individual to medical appointments or purchase their necessary medication. The publication, as well as other resources to help seniors, can be found on NASAA’s Serve Our Seniors website ( www.serveourseniors.org ).

As we have noted previously, the financial exploitation of seniors is a significant problem ( e.g. ,  here ,  here ,  here ,  here , and  here ). For many regulators, it is a top priority. here.=">here."> The Financial Industry Regulatory Authority, Inc. (“FINRA”) is one such regulator. To help combat the financial exploitation of seniors and vulnerable adults, FINRA enacted Rule 2165 (“Financial Exploitation of Specified Adults”) ( here ). Among other things, the rule permits a member firm to place a temporary hold on the disbursement of funds or securities from the account of a senior or vulnerable adult customer when the member reasonably believes that financial exploitation may be, is likely to be, or is occurring. here,  here and  here.=">here."> In August 2019, FINRA launched a retrospective review to assess the effectiveness and efficiency of its rules and administrative processes that help protect seniors and vulnerable adults from financial exploitation. The retrospective review indicated that Rule 2165 had been an effective tool in the fight against financial exploitation, but supported amendments to permit member firms to: (1) extend a temporary hold on a disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm reported the matter to a state regulator or agency or a court of competent jurisdiction; and (2) place a temporary hold on a securities transaction where there was a reasonable belief of financial exploitation. Currently, Rule 2165 permits a member firm to place a temporary hold on a disbursement of funds or securities from the account of a “specified adult” customer when the firm reasonably believes that financial exploitation of that adult has occurred, is occurring, has been attempted or will be attempted. The Rule defines a “specified adult” as a natural person: (1) age 65 and older; or (2) age 18 and older who the member reasonably believes has a mental or physical impairment that renders the individual unable to protect his or her own interests. See Rule 2165(a)(1). The member firm’s reasonable belief is to be based on the facts and circumstances observed in the member firm’s business relationship with the person. Under the current version of the Rule, the temporary hold expires not later than 15 business days after the date that the member first placed the temporary hold on the disbursement of funds or securities, unless otherwise terminated or extended by a state regulator or agency of competent jurisdiction or a court of competent jurisdiction or extended pursuant to Rule 2165(b)(3), which permits an extension of the hold for up to an additional 10 business days. Importantly, a temporary hold may be placed on a particular suspicious disbursement(s) ( e.g. , a payment related to a commonly known scam, such as a lottery scam) but not on non-suspicious disbursements ( e.g. , a regular mortgage payment or assisted living facility payment). Notably, the Rule does not apply to transactions in securities. The retrospective review indicated that even if a temporary hold were placed on a disbursement out of the customer’s account, executing a related transaction could result in significant financial consequences for the customer ( e.g. , adverse tax consequences, surrender charges, the inability to regain access to a sold investment that has been closed to new investors or trading by a perpetrator in inappropriate high risk or illiquid securities). FINRA also surveyed member firms about their experience with Rule 2165. The survey revealed that member firms needed additional time to conduct investigations and resolve matters. Approximately 53% of the firms that responded to a survey on the Rule stated that they had been unable to resolve a matter within the 25-business day period. The most common reason was that the matter was under consideration by a state agency (such as APS) or a court. Other common reasons included: (1) the customer did not respond to inquiries from the firm; or (2) the customer did not believe that he or she was being financially exploited. For matters that took longer to resolve than the 25-business day period, approximately 35% of the survey respondents indicated that it took on average 26-50 days to resolve the matter and approximately 59% of survey respondents indicated that it took on average 51-100 days to resolve the matter.  With the benefit of the review, FINRA proposed the amendments to Rule 2165. By these proposed changes, FINRA seeks to provide member firms with additional time to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations, and to extend the temporary hold on the disbursement of funds or securities or a transaction in securities for an additional 30-business days if the member firm reported the matter to a state regulator or agency or a court of competent jurisdiction. According to FINRA, if enacted, the proposed amendments will create the first uniform national standard for placing holds on securities transactions related to suspected financial exploitation.  FINRA explained that the proposed amendments will promote investor protection by allowing additional time for member firms to resolve matters and for APS agencies, state regulators and law enforcement to conduct thorough investigations of suspected financial exploitation. FINRA said customers would benefit from the extension because it would provide additional time for a member firm to obtain a positive identification of financial exploitation and prevent the disbursement of funds due to suspicious activities within the account. FINRA further explained that the proposed rule changes could prevent harm to exploited customers, such as being subject to adverse tax consequences, early withdraw penalties or investments that do not align with their investor profiles.  Anyone wishing to submit comments to the proposed amendments must do so within 21 days of their publication in the Federal Register.  The proposed rule changes can be found here .

This BLOG has written extensively on issues related to residential mortgage foreclosure including, but not limited to: the notice requirements of RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> ; the acceleration and deacceleration of mortgage debt < HERE =">HERE"> and < HERE =">HERE"> ; and, Article 15 of the RPAPL < HERE =">HERE"> and < HERE =">HERE"> .  All of these issues are relevant to the Second Department’s decision in Everhome Mortgage Company v. Aber , decided on June 9, 2021. The facts in Everhome are straightforward (and some were obtained by reviewing the underlying electronically filed court records).  Defendant Aber borrowed funds from plaintiff’s assignor and secured the repayment obligation with a mortgage on residential property.  Aber defaulted in May 2008 by failing to make the mortgage payment due on May 1, 2008, and each month thereafter.  Plaintiff’s assignor assigned the underlying note and mortgage to plaintiff on April 13, 2009, and a foreclosure action was commenced by plaintiff on April 30, 2009 (“Action No. 1”).  Eight months later, “the subject property was transferred to Equity .”  In October of 2013, Action No. 1 was dismissed, without prejudice, after plaintiff failed to appear at a court conference.   A second foreclosure action against Aber and Equity was commenced on June 24, 2015 (“Action No. 2”).  In their answer to the complaint in Action No. 2, Aber and Equity, inter alia , asserted a statute of limitations defense and asserted a counterclaim seeking to discharge the mortgage pursuant to Article 15 of the RPAPL.  Supreme court granted Equity’s motion to dismiss the complaint pursuant to CPLR 3211(5) (statute of limitations) and for summary judgment on the counterclaim to discharge the mortgage and denied plaintiff’s motion for summary judgment on its complaint and to strike defendants’ answer. An action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019).  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted).  In situations where a mortgage appears as a lien of record on real property, but the statute of limitations has expired for the mortgagee to commence an action to foreclose the mortgage, RPAPL 1501(4) permits the mortgagor (or any other “person having an estate or interest in the real property”) to commence an action to have the encumbrance removed of record.   Since the mortgage debt was accelerated on April 30, 2009, when Action No 1 was commenced, and Action No 2 was commenced on June 24, 2015, more than 6 years later, the Second Department agreed that Equity established its “initial burden” that Action No. 2 was time-barred.  Accordingly, the “burden then shifted to the plaintiff to present admissible evidence to raise a question of fact as to whether the statute of limitations was tolled or otherwise inapplicable, or whether the plaintiff actually commenced this action within the applicable limitations period.”  Everhome, at 3 (citations omitted).  In an effort to meet its burden, Everhome argued, inter alia , that: RPAPL 1304 constitutes a "statutory prohibition" within the meaning of CPLR 204, and therefore, the statute of limitations was tolled by its service of 90-day notices under RPAPL 1304; and, “its commencement of the first action did not accelerate the mortgage debt because questions of fact may exist as to whether it properly accelerated the mortgage debt in accordance with paragraph 22(b) of the mortgage, and therefore, any determination on the issue of whether this action is time-barred is premature.”  Everhome, at 3.  The Court rejected plaintiff’s arguments. CPLR 204 Simply stated, RPAPL 1304 requires that, inter alia : at least ninety days prior to commencing legal action against a borrower with respect to a “home loan” (as defined in the relevant statutes), a lender must: send written notice to the borrower by certified and regular mail that the loan is in default; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  "Strict compliance with RPAPL 1304 notice to the borrower … is a condition precedent to the commencement of a foreclosure action."  Everhome, at 3 (citations and internal quotation marks omitted, emphasis in original).  In an effort to tack an extra ninety days to the time it had to commence Action No. 2, Everhome unsuccessfully argued that the 90 day notice requirement of RPAPL 1304 is a “statutory prohibition” under CPLR 204(a) , which provides that that “ here the commencement of an action has been stayed by a court or by statutory prohibition, the duration of the stay is not a part of the time within which the action must be commenced.”  If plaintiff’s argument was successful, it would have had until July of 2015 to commence Action No. 2.  The Court disagreed, recognizing that a “statutory prohibition and a condition precedent are separate concepts.”  Everhome, at 3 (citations and internal quotation marks omitted).  The Court reasoned that “ he salient feature of a ‘statutory prohibition’ is the plaintiff’s lack of control” and because a “plaintiff has complete control over the acts necessary to effectuate compliance with a condition precedent, a condition precedent is not a statutory prohibition.”  Everhome, at 3 (citations and internal quotation marks omitted).  Because plaintiff had control over if and when it sent required notices under RPAPL 1304, “and could have done so at least 90 days prior to the expiration of the statute of limitations, RPAPL 1304 is not a statutory prohibition within the meaning of CPLR 204(a)” and the service of the 90-day notices “did not toll the statute of limitations”.  Everhome, at 3 (citations and internal quotation marks omitted).   Paragraph 22(b) of the Mortgage Among other things, paragraph 22 of the mortgage required lender to send borrower a notice of default and provide an opportunity to cure before the debt could be accelerated.  Plaintiff argued that questions of fact existed as to whether it complied with paragraph 22(b) of the mortgage, “which is a contractual condition precedent to a valid acceleration.”  Everhome, at 3.  Equity urged that, because Action No. 1 was dismissed due to plaintiff’s failure to appear at a conference, “plaintiff’s election to accelerate the mortgage debt in its complaint was never invalidated by the Supreme Court … and, therefore, the mortgage debt remained in an accelerated posture for more than six years, rendering time-barred.”  Everhome, at 4.  In rejecting plaintiff’s argument, the Court held that “ he requirement in paragraph 22(b) of the mortgage that the lender first send the borrower written notice of default, with at least 30 days’ notice of acceleration, is a contractual condition precedent ( see CPLR 3015 ) inserted in the contract solely for the benefit of the borrower, as it gives the borrower additional time to make installment payments before the lender may accelerate the mortgage debt” and, accordingly, “compliance with paragraph 22(b) is enforceable and waivable by the borrower.”  Everhome, at 4 (some citations omitted).  Thus, the Court refused to “condone[]” “plaintiff’s belated attempt to take advantage of its own potential breach of paragraph 22(b) to the prejudice of Equity, whose rights under RPAPL 1501(4) to discharge and cancellation of the mortgage have vested”. The Court also recognized that notwithstanding Equity’s assertion of a defense based on noncompliance with paragraph 22(b), supreme court “ultimately did not invalidate the plaintiff’s election to accelerate the mortgage on that basis since it directed dismissal of the complaint based upon plaintiff’s failure to appear at a court conference.”  Everhome, at 4 (citations omitted).  In addition, the Court also agreed with supreme court that plaintiff’s submissions were insufficient to create triable issues of fact relating to the sufficiency and timing of the required notices. It should be noted that there was a lengthy dissent in which it was concluded that the motion and cross-motion should have been denied by supreme court.

In P & HR Solutions, LLC v. Ram Capital Funding , LLC, 2021 N.Y. Slip Op. 03554 (1st Dept. June 8, 2021) ( here ), the Appellate Division, First Department was faced with the situation that is all too common in commercial litigation, plaintiffs trying to assert contract and fraud claims without differentiation. In fact, over the past few months, this Blog has written about numerous appellate cases in which the plaintiffs’ fraud claims were dismissed because they were indistinguishable from their contract claims ( e.g. , here , here , here and here ). In addition to the duplication of claims doctrine, the Court was asked to consider whether a sophisticated party took sufficient affirmative steps to protect itself from fraud. Under New York law, a sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas , 95 A.D.3d 614 (1st Dept. 2012). The Blog wrote about this aspect of the justifiable reliance element of a fraud claim here . Finally, the Court was asked to examine the causation element of Plaintiffs’ fraud claim. Under New York law, a plaintiff must plead and prove both transaction causation and loss causation to withstand a challenge from the defendant. “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). Loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). It is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002) (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). This Blog wrote about causation element of a fraud claim here . P&HR arose from two merchant cash agreements (“MCAs”) between plaintiffs, P&HR Solutions LLC (“P&HR”) and Debra Ferguson (“Ferguson”), and defendant Ram Capital Funding LLC (“Ram Capital”). Plaintiffs alleged that defendants breached the MCAs and committed fraud in connection therewith. Relevant to the appeal, plaintiffs sought to hold defendant Jonathan Braun (“Braun”) personally liable for the alleged breach of contract and fraud. The first MCA between Plaintiffs and Ram Capital was executed in August 2018. The agreement provided almost $660,000 worth of P&HR’s future receivables at a collection rate of 10% of its daily receivables, for a cash price of $440,000.00 (the “First Ram Capital Agreement”). As part of the agreement, P&HR had to pay various fees and expenses, among other charges and amounts due.  In September 2018, P&HR entered into a second agreement with Ram Capital in which it refinanced the First Ram Capital Agreement. Under the terms of the September 2018 agreement, Ram Capital purchased almost $975,000.00 worth of P&HR’s future receivables at a collection rate of 10% of P&HR’s daily receivables, for a discounted price of $350,000.00 (“Second Ram Capital Agreement”). Like the first agreement, P&HR was required to pay various fees and expenses.  Both agreements contained reconciliation provisions that required RAM to adjust its debits and credits from the account to meet the agreed upon percentage of monthly debits, while giving Plaintiffs the right to adjust their payments at Ram Capital’s sole discretion.  According to Plaintiffs, from August 6, 2018, to September 28, 2018, Ram Capital had materially underpaid P&HR a total of $239,743.00. Plaintiffs claimed that by December 2018, P&HR could not keep up with its payments. Rather than ask for a reconciliation from Ram Capital to lower the daily payments, Plaintiffs claimed they did nothing because they had discovered, through publicly available documents, that Ram Capital was actually owned by Braun, a person whom Plaintiffs alleged had made previous threats against Ferguson and her business. Plaintiffs brought suit, alleging two causes of action against Braun. In the first cause of action, Plaintiffs claimed that Braun was liable for breach of contract, claiming that he was the alter-ego of Ram Capital and defendant Richmond Capital Group, LLC (“Richmond”). Plaintiffs claimed that Braun “completely dominated such entities and corporate formalities and separateness between such entities ignored ….”   Plaintiffs alleged that the MCAs were breached because, among other things: (1) Defendants overcharged Plaintiffs in connection with the fees and expenses due under the MCAs; (2) the receivables under the agreements were not taken by P&HR, but by Richmond, with whom Plaintiffs did not have an agreement; (3) Ram Capital materially miscalculated the amount that remained due under the First Ram Capital Agreement; and (4) Ram Capital materially underpaid what it owed Plaintiffs under the Second Ram Capital Agreement. In the second cause of action, Plaintiffs sought to hold Braun liable for fraud, alleging, among other things, that he: (1) misrepresented the fees and expenses to be paid in entering the MCAs; (2) materially overstated the amount due under the First Ram Capital Agreement; (3) misrepresented the average monthly amount of receivables generated by Plaintiffs; and (4) misrepresented or concealed his affiliation with the corporate entities. Braun moved to dismiss the action as against him under CPLR §§ 3211(a)(7) and 3016(b). The motion court denied Braun’s motion, finding, among other things, that “Braun’s assertion that the fraud claims not sufficiently particularized … unpersuasive,” because “the pleadings properly allege that defendants fraudulently asserted to plaintiffs that Ram Capital was unaffiliated with Richmond.”  On appeal, the Appellate Division, First Department unanimously reversed the decision and order of the motion court. The Court held that the motion court properly dismissed the contract claims against Braun. The Court noted that the contracts at issue were between P&HR and Ram Capital. “Therefore,” said the Court, “unless veil is pierced to reach Braun, Braun be individually liable for breach of those contracts.” Slip Op. at *1 (citing Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC , 146 A.D.3d 1, 12-13 (1st Dept. 2016), aff’d , 31 N.Y.3d 1002 (2018); Andejo Corp. v. South St. Seaport Ltd. Partnership , 40 A.D.3d 407 (1st Dept. 2007); Sheridan Broadcasting Corp. v. Small , 19 A.D.3d 331, 332 (1st Dept. 2005)). As to the alter ego allegations, the Court held that they were “insufficient.” Id. The Court explained that Plaintiffs simply “set[] forth conclusory allegations merely reciting typical veil-piercing factors.” Id. (citing Skanska , 146 A.D.3d at 12). Thus, while “Plaintiffs may have alleged that Ram and defendant Richmond Capital Group, LLC (RCG) alter egos”, they did not allege “that Ram and Braun were alter egos.” Id. Directing its attention to the fraud allegations, the Court held that all but one was “duplicative of the contract claim.” Id. The exception, said the Court, concerned the allegation that Braun concealed or misrepresented his affiliation with Ram Capital. “However,” held the Court, “this fraud allegation fail to state a cause of action.” Id. First, the Court found that Plaintiffs failed to plead justifiable reliance because the information purportedly concealed was discoverable by reviewing publicly available documents. Indeed, noted the Court, “the complaint itself allege that plaintiff Debra Fergerson (P & HR’s principal) confirmed Braun’s ownership of Ram through publicly available documents and by speaking with people in the merchant cash advance industry.” Id. Thus, concluded the Court, because Plaintiffs failed to exercise any due diligence at the time of the alleged misrepresentation (which they conceded they could have performed by exercising such diligence after the fact), their fraud claim could not withstand scrutiny. Id. (citations omitted).  Second, the Court held that Plaintiffs failed to show how the alleged misrepresentation about Braun’s involvement with Ram Capital was “‘the direct and proximate cause of the claimed losses.’” Id. (quoting Friedman v. Anderson , 23 A.D.3d 163, 167 (1st Dept. 2005)). “Plaintiffs may have alleged transaction causation,” said the Court, “but they did not allege loss causation.” Id. (citing Laub , 297 A.D.2d at 31).  The Court found that “ ven if Braun had not been involved with Ram , plaintiffs would still have suffered loss due to the onerous terms of the contracts they signed.” Id. at *2. In other words, Plaintiffs could not demonstrate the causal link between the alleged misrepresentation about Braun’s involvement with Ram Capital and their losses. Takeaway Plaintiffs seeking to pierce the corporate veil carry a heavy burden. They must allege facts, not conclusion. As P&HR shows, merely parroting the elements of a veil piercing claim will not suffice. P&HR is another example of the obstacles plaintiffs encounter when trying to allege a fraud claim with a contract claim. When the former merely masquerades as the latter, as in P&HR (that is, all but one of the fraud allegations), the fraud claim will be dismissed. And, even when the two claims are sufficiently different such that the fraud claim survives application of the duplication of claims doctrine, plaintiffs must still satisfy the particularity requirements of CPLR § 3016(b) as to each element of the claim. In P&HR , Plaintiffs could not do so with respect to the justifiable reliance and causation elements of the claim.

On June 3, 2021, the New York Court of Appeals, the State’s highest court, handed down Himmelstein, McConnell, Gribben, Donoghue & Joseph, LLP v Matthew Bender & Co., Inc. , 2021 N.Y. Slip Op. 03485 (June 3, 2021) ( here ), a decision involving a claim under General Business Law § 349 (“GBL § 349”), New York’s consumer fraud statute. In a decision written by Judge Jenny Rivera, a majority of the Court made two rulings that will have an impact on future claims under the statute. First, the Court made clear that GBL § 349 focuses on “the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Second, the Court confirmed that a written disclaimer may “bar a GBL § 349 claim at the pleading stage it utterly refutes plaintiff’s allegations,” and “address the alleged deceptive conduct precisely, so as to eliminate any possibility that a reasonable consumer would be misled.” The primary issue in Himmelstein was whether plaintiffs (who bought the annual edition of a legal resource manual published and sold by defendant) adequately pleaded a deceptive act or practice prohibited by GBL § 349. The claim was based on defendant’s alleged misrepresentations about the completeness of the laws reproduced in one section of the publication. Plaintiffs brought the action on behalf of themselves and a putative class of purchasers of certain annual editions of New York Landlord-Tenant Law (the “Tanbook”), a compilation of New York legal materials on landlord-tenant law, against defendant Michael Bender & Company Inc., the publisher of the Tanbook. Plaintiffs are a law firm that handles landlord-tenant actions, a non-profit corporation that assists pro se litigants in housing court matters, and a tenant advocate and organizer. The amended complaint alleged, inter alia , that defendant engaged in deceptive business practices in violation of GBL § 349 in its marketing and sale of the 2016 and prior editions of the Tanbook. Plaintiffs claimed that defendant materially misrepresented that Part III of the Tanbook contained a complete and accurate compilation of the statutes and regulations applicable to rent-controlled and rent-stabilized apartments in New York City, when, in fact, key portions were omitted or inaccurately presented. Plaintiffs contended that these omissions and inaccuracies rendered the Tanbook of no value to its users. Plaintiffs further alleged that, after receiving complaints, defendant included the omitted statutes and regulations in the 2017 edition, which, although published late in the calendar year, was sold to plaintiffs and other subscribers at full price. Defendant moved to dismiss the amended complaint under CPLR § 3211(a). Supreme Court granted defendant’s motion and dismissed the complaint in its entirety. The Appellate Division, First Department affirmed the order of dismissal, in part on different grounds. 172 A.D.3d 405 (1st Dept. 2019) ( here ). The Court of Appeals granted plaintiffs leave to appeal (34 N.Y.3d 908 (2020)) and affirmed the First Department’s decision. The Court held that the alleged misrepresentations constituted consumer-oriented conduct under the statute – that is, the misrepresentations were contained in a manual that was marketed to and available for purchase by consumers. In so holding, the Court rejected the First Department’s view of who is a “consumer” under the statute. Under Department-wide authority, which Supreme Court relied upon, consumers are defined as those “who purchase goods and services for personal, family, or household use” ( Himmelstein , 2018 WL 984850, at *5, quoting Med. Socy. V. Oxford Health Plans, Inc. , 15 A.D.3d 206, 207 (1st Dept. 2005)); they are not business purchasers of “a widely sold service that can only be used by businesses.” Id. (quoting Cruz v. NYNEX Info. Resources , 263 A.D.2d 285, 286, 290 (1st Dept. 2000)). The Court explained that “there no textual support in GBL § 349 for a limitation on the definition of ‘consumer’ based on use.” In fact, noted the Court, “any such narrowing of the term ‘consumer’ would be contrary to the legislative intent to protect the public against all forms of deceptive business practices.” (Citations omitted.) The Court made clear that the text and purpose of GBL § 349 did “not support the importation of other statutory definitions (as the First Department had done in its decisions ( see , e.g. , Cruz , 263 A.D.2d at 289)) because, unlike other provisions, section 349 broadly prohibit ‘ eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state.’” (Quoting GBL § 349). Significantly, the Court made clear that “the consumer-oriented element” of the statute did not “depend on the use to be made of the product, as what matters is whether the defendant’s allegedly deceptive act or practice is directed to the consuming public and the marketplace.” “In other words,” concluded the Court, “GBL § 349 is focused on the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Given the foregoing, the Court rejected defendant’s argument that its conduct was not consumer oriented because the Tanbook was marketed to legal professionals ( i.e. , lawyers, judges, and tenant advocates) rather than consumers. “The fact that persons and businesses working in the legal field purchase the Tanbook to assist in their professional endeavors,” said the Court, did “not mean that the defendant’s conduct was not consumer oriented.” Indeed, noted the Court, “ egal professionals merely a subclass of consumers and, as recently clarified, ‘consumer-oriented conduct’ need not ‘be directed to all members of the public.’” (Quoting Plavin , 35 N.Y.3d at 13). Plavin="Plavin" here.=">here."> The Court also held that the alleged misrepresentations were not actionable because no reasonable consumer would find them to be so. As such, said the Court, the amended complaint was properly dismissed. Under New York law, a defendant’s actions are materially misleading when they are “likely to mislead a reasonable consumer acting reasonably under the circumstances.” Gaidon v. Guardian Life Ins. Co. of Am. , 94 N.Y.2d 330, 344 (1999). What is objectively reasonable depends on the facts and context of the alleged misrepresentations and “may be determined as a matter of law or fact (as individual cases require).” Oswego , 85 N.Y.2d at 26 (1995). The Court held that “defendant’s conduct could not materially mislead a consumer into believing that defendant guaranteed the accuracy or currentness of the publication” at issue. First, observed the Court, “the legal materials contained in Part III subject to legislative amendment at any time,” thereby “seriously undermining plaintiffs’ contention that yearly publication was a representation that the Tanbook was complete and accurate.” Second, the Court held that to the extent “defendant’s statements misrepresented the contents of the Tanbook, such purported misrepresentations not materially misleading.” The Court noted that the terms and conditions of the contract for purchase of the publication provided that in addition to the Tanbook, plaintiffs would automatically receive “any supplementation, releases, replacement volumes, new editions and revisions . . . made available during the annual subscription period” along with invoices for the additional cost of any updated materials. Therefore, explained the Court, “defendant expressly offered, and plaintiffs chose to receive, automatic serial mailings of the year’s Tanbook edition upon its publication, with any updates to that edition—if and when they became available—at an additional and separate cost charged by invoice and sent with the update.” In short, said the Court, it was “clear to a consumer that the Tanbook not a completely accurate compilation of the law.” Moreover, explained the Court, the written disclaimer that defendant did “NOT WARRANT THE ACCURACY, RELIABILITY OR CURRENTNESS OF THE MATERIALS CONTAINED IN THE PUBLICATIONS” was specific to the alleged deceptive practice “so as to eliminate any possibility that a reasonable consumer would be misled.” Under New York law, a disclaimer may not bar a GBL § 349 claim at the pleading stage unless it utterly refutes plaintiff’s allegations. Goshen , 98 N.Y.2d at 326; Fink v. Time Warner Cable , 714 F.3d 739, 742 (2d Cir. 2013). This means that the disclaimer must address the alleged deceptive conduct precisely, so as to eliminate any possibility that a reasonable consumer would be misled. Id. However, where the overall impression of the representations are misleading, notwithstanding the disclaimer, the disclaimer is not a defense as a matter of law. See Goshen , 98 N.Y.2d at 326; Delgado v. Ocwen Loan Servicing, LLC , 2014 WL 4773991, at *9 (E.D.N.Y. 2014). The Court rejected plaintiffs’ argument that the alleged deception was an attempt to hide the Tanbook’s lack of “completeness”, as opposed to “accuracy” or “currentness”. The Court found the words of the disclaimer – “the accuracy, reliability or currentness” – to be “equivalent to a disclaimer of completeness.” “Indeed,” said the Court, “plaintiffs’ allegation that the Tanbook incomplete turn entirely on whether the content accurate, reliable, and current.” “The fact that a purchaser might not buy the Tanbook without an accurate and complete reproduction of the statutes and regulations—because, as plaintiffs allege , that would render the Tanbook unreliable—goes to whether defendant offering an item worth buying, not whether defendant ha deceived consumers about the nature of its product”, concluded the Court. “GBL § 349 is concerned only with the latter conduct.” In sum, concluded the Court, “ he Tanbook’s susceptibility to revision at any time, coupled with the fact that the disclaimer addresse the precise deception alleged in plaintiffs’ complaint, no possibility that a reasonable consumer would have been misled about the contents of the Tanbook.” Judge Eugene M. Fahey dissented in part. Judge Fahey agreed with the majority that the conduct at issue was consumer oriented: “It is irrelevant that the Tanbook was primarily marketed to and purchased by businesses and professionals. A business may be a consumer.” However, he did not agree that the alleged misrepresentation was not actionable. Judge Fahey rejected the majority’s view that the disclaimer in the contract barred plaintiffs’ claim as a matter of law. “A disclaimer is not a per se bar to a GBL § 349 cause of action,” said Judge Fahey, “even when it is specific.” The reason, explained Judge Fahey, is to prevent “routine disclaimers” from “render the consumer protections, codified by the statute, meaningless.” According to Judge Fahey, “defendant’s disclaimer must be considered as one part of the overall analysis in determining whether the alleged deceptive conduct was ‘likely to mislead a reasonable consumer acting reasonably under the circumstances.’” (Quoting Oswego , 85 N.Y.2d at 26). Based upon that wholistic approach, Judge Fahey found that plaintiffs “adequately pleaded that element, which not amenable to resolution at the motion to dismiss stage.” “In concluding otherwise,” said Judge Fahey, “the majority has treated defendant’s motion to dismiss as a motion for summary judgment.” Judge Fahey also addressed the First Department’s holding that plaintiffs sustained no injury. He found that the court erred in holding that an injury under GBL § 349 must be more than the cost of the goods purchased. Such an injury, said Judge Fahey, is consistent with the legislative purpose of the statute as well as common sense. “The use of deception to induce a consumer to buy a product,” concluded Judge Fahey, “is precisely the kind of conduct the legislature sought to prohibit with GBL § 349.” Takeaway Himmelstein makes clear that the consumers protected by GBL § 349 include businesses and non-businesses alike. The decision also makes clear that the focus of the courts should be on “the seller’s deception and its subsequent impact on consumer decision-making, not on the consumer’s ultimate use of a product.” Himmelstein is, therefore, a departure from decisions of the First Department. Himmelstein also makes clear that disclaimers specific to the alleged act or practice, which neutralize any deception such that no reasonable consumer would be misled, will bar a claim under GBL § 349.

It is an understatement to say that the impact of the COVID-19 pandemic on all aspects of life was far reaching.  This Blog has written numerous articles specifically addressing the impact of COVID-19 on the New York court system and its litigants.  Among others, < Here =">Here"> , < Here =">Here"> < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> , < Here =">Here"> and < Here =">Here"> .  Today, this BLOG will discuss Brash v. Richards , a case decided on June 2, 2021, by the Second Department.  As discussed further herein, Brash held that Governor Cuomo’s COVID-19 Executive Orders (the “Executive Orders”) “tolled” court filing deadlines as opposed to “suspending” them.  This distinction is critical for litigants. The Brash Court explained the difference between a “toll” and a “suspension” as follows: A toll suspends the running of the applicable period of limitation for a finite time period, and " he period of the toll is excluded from the calculation of the " ( Chavez v Occidental Chem. Corp. , 35 NY3d 492, 505 n 8 <2020> ; see Foy v State of New York , 71 Misc3d 605 <2021> ). "Unlike a toll, a suspension does not exclude its effective duration from the calculation of the relevant time period. Rather, it simply delays expiration of the time period until the end date of the suspension" (Foy v State of New York, 71 Misc3d at 608).   (Hyperlink and some brackets added.) The Executive Law authorizes the Governor to issue executive orders, including those like the ones issued relating to the pandemic.  Executive Law § 29-a(1) provides that “ ubject to the state constitution, the federal constitution and federal statutes and regulations, the governor may by executive order temporarily suspend specific provisions of any statute, local law, ordinance, or orders, rules or regulations, or parts thereof, of any agency during a state disaster emergency, if compliance with such provisions would prevent, hinder, or delay action necessary to cope with the disaster.”  Executive Law 29-a(2)(d) , which places limitations on the “suspensions pursuant to subdivision one of this section,” provides that “the order may provide for such suspension only under particular circumstances, and may provide for the alteration or modification of the requirements of such statute, local law, ordinance, order, rule or regulation suspended, and may include other terms and conditions.” On March 20, 2020, the first related Executive Order ( No. 202.8 ) was issued by the Governor, by which certain time limits were “temporarily suspended or modified” and “tolled” for 30 days.  “Governor Cuomo later issued a series of nine subsequent executive orders that extended the suspension or tolling period, eventually through November 3, 2020.”  Brash , at page 2.  Not all of the related Executive Orders, however, used the word “toll.”  Brash at p. 2.  However, they all contained identical or “nearly identical” language indicating that “the Governor ‘hereby continue the suspensions, and modifications of law, and any directives, not superseded by a subsequent directive, ‘made in the prior executive orders.’”  Brash at p. 3.  The Executive Orders issued on October 5, 2020, and November 3, 2020, which both use the term “toll,” indicate that the “toll” will no longer be in effect after November 3, 2020.  Questions abounded as to whether the Executive Orders effectuated a “toll” or a “suspension” of applicable filing deadlines.  Again, the Second Department in Brash , held that the Executive Orders effectuated “tolls” of filing deadlines. Brash involved the timeliness of the filing of a notice of appeal.  The respondent in Brash served a copy of an order with notice of entry on October 2, 2020, and appellant’s related notice of appeal was served on November 10, 2020.  Pursuant to CPLR 5513 (a), a notice of appeal must be served within 30 days of service of the judgment or order appealed from with notice of entry.  If the Executive Orders effectuated a “toll”, the appeal would be timely, as the appellant would have had 30 days from November 3, 2020, to file a notice of appeal.  If the Executive Orders, merely, effectuated a suspension, the appellant’s time to file a notice of appeal would have expired on or about November 3, 2020.  Accordingly, appellant argued in favor of “toll” and respondent argued in favor of “suspension.”  Respondent further urged that while some of the Executive Orders contained “toll” language, Executive Law § 29-a did not permit Governor Cuomo to issue “tolls” but only “suspensions”.  The Brash Court found respondent’s argument in this regard “unpersuasive,” holding that the language of Executive Law 29-a(2)(d) “authorized the Governor “to do more than just ‘suspend’ statutes during a state disaster emergency; he or she may ‘alter[]’ or ‘modif ’ the requirements of a statute, and a tolling of time limitations contained in such statute is within that authority.”  Brash , at 3 to 4 (citing to Foy ).  The Brash Court further found that even though most of the Executive Orders did not use the term “toll,” they used the term “modification” and “ ince the tolling of a time limitation contained in a statute constitutes a modification of the requirements of such statute within the meaning of Executive Law § 29-a(2)(d), these subsequent executive orders continued the toll that was put in place by Executive Order (A. Cuomo) No. 202.8 (9 NYCRR 8.202.8).” For similar reasons, the Court of Claims, in Foy, supra , held that the Executive Orders effectuated a “toll” as opposed to a “suspension”. While the Second Department made its position clear, the Court of Appeals will likely opine on this issue at some point in the future.

Conversion is a tort that “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.”  Colavito v. New York Organ Donor Network, Inc. , 8 N.Y.3d 43, 49-50 (2006) (citation omitted).  “In order to establish a cause of action to recover damages for conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff’s rights.”  Berkovitz v. Berkovitz , 190 A.D.3d 911 (2 nd Dep’t 2021) (citations, internal quotation marks and brackets omitted); see also , Colavito , 8 N.Y.3d at 50 (citations omitted) (“Two key elements of conversion are (1) plaintiff's possessory right or interest in the property and (2) defendant's dominion over the property or interference with it, in derogation of plaintiff's rights.”)  In circumstances where “the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand by the property’s rightful owner.”  Simpson & Simpson, PLLC v. Lippes Mathias Wexler Friedman LLP , 130 A.D.3d 1543, 1545 (2015) (citation and internal quotation marks omitted. While the concept of conversion is readily understandable in the context of converted things, the analysis becomes more difficult when a plaintiff brings a claim for the conversion of money.  “’It is well-settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.’”  Amity Loans, Inc. v. Sterling Nat. Bank & Trust Co. of New York , 177 A.D.2d 277, 279 (1 st Dep’t 1991) ( quoting Manufacturers Hanover Trust Co. v. Chemical Bank , 160 A.D.2d 113, 124 (1 st Dep’t 1990)).  “Money may be the subject of a cause of action for conversion only if ‘it can be identified and segregated as a chattel can be….’”  Heckl v. Walsh , 122 A.D.3d 1252, 21254-55 (4 th Dep’t 2014) (quoting Payne v. White , 101 A.D.2d 975, 976 (3 rd Dep’t 1984)). The parties in Simpson & Simpson , supra , were law firms. Defendant law firm employed a bookkeeper that resigned and commenced employment with plaintiff law firm.  Thereafter, defendant discovered that a bookkeeper embezzled over $270,000 while employed by it.  When approached by defendant, the bookkeeper admitted the theft, agreed to restitution and delivered to defendant a promissory note for the amount embezzled.  The bookkeeper then embezzled money from plaintiff law firm to pay the note to defendant.  Plaintiff discovered the embezzlement of its funds and defendant rebuffed plaintiff’s demand that the funds be returned.  Plaintiff commenced its action and, inter alia, asserted a cause of action sounding in conversion in which it sought the return of the embezzled funds.  Supreme court granted defendant’s motion for summary judgment dismissing, inter alia, the conversion claim.  The Fourth Department found that supreme court erred “in determining that the comingling of the embezzled funds in the employee’s joint checking account precluded a cause of action for conversion” because “the embezzled funds are sufficiently identifiable and traceable to sustain a cause of action for conversion.”  Simpson & Simpson , 130 A.D.3d at 1544-45.  The Simpson & Simpson Court also noted that conversion “is an unauthorized assumption and exercise of the right of ownership over personal property belonging to another to the exclusion of the owner’s rights.”  Simpson & Simpson , 130 A.D.3d at 1545.  While the defendant disavowed any knowledge of the bookkeeper’s wrongdoing that led to the funds embezzled from plaintiff coming into defendant’s hands, the Court found that questions of fact existed as to the extent of defendant’s knowledge given the “unique” facts presented because the “circumstances known to defendant[] were so obviously suspicious that no honest person (not just a reasonably prudent person) could turn a blind eye thereto, thus requiring defendant[] to investigate.”  Id. (citations and internal quotation marks omitted). These issues concerning conversion claims involving money were at the fore, in SH575 Holdings LLC v. Reliable Abstract Co. L.L.C. , a case decided by the Appellate Division, First Department, on June 1, 2021.  The plaintiff in SH575 transferred $1,000,000 into the IOLA account of a debtor’s lawyer in conjunction with a transaction pursuant to which plaintiff was going to purchase debtor’s real estate in its bankruptcy proceeding.  Plaintiff demanded the return of the funds after he cancelled the transaction.  Unfortunately, “as part of a Ponzi scheme, transferred most of plaintiff’s funds out of the IOLA account to the moving defendants prior to plaintiff’s demand upon him.”  The Court affirmed supreme court’s dismissal of the conversion claim, finding that plaintiff “failed to show that the funds at issue were ‘specifically identifiable.’”  The Court relied on the unique aspects of an IOLA account.  “An IOLA account is ‘an unsegregated interest-bearing deposit account with a banking institution for the deposit by an attorney of qualified funds” (Judiciary Law § 497; see also Lerner v Fleet Bank, N.A. , 459 F3d 273, 281 <2d cir 2006> ).  Because the account was “unsegregated”, “plaintiff’s funds, upon their transfer therein, became commingled with monies that were already in it, rendering them no longer specifically identifiable.” Additionally, the Court found that plaintiff’s claim was defective because plaintiff never “made demands for return of the funds upon the moving defendants.”

In today’s Fraud Notes, we examine Bullen v. CohnReznick, LLP (1st Dept. May 27, 2021) ( here ), and Sabourin v. Chodos , (1st Dept. May 27, 2021) ( here ), both decided by the Appellate Division, First Department. Bullen involved an alleged fraud in which CohnReznick was accused of being a participant through the issuance of audit reports that gave the entities being audited a clean bill of health – i.e. , the financial statements presented fairly, in all material respects, the financial position of the entities being audited. The primary issues addressed by the courts in Bullen concerned scienter and justifiable reliance. Sabourin involved an alleged fraud that took place more than six years ago. The primary issues addressed by the courts concerned the application of the statute of limitations and the continuing wrong doctrine. We examine both cases below. inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> inter alia, the motion court decision, the appellate court briefing and/or the first department's decision.> Bullen v. CohnReznick, LLP Bullen was brought by a group of 49 sophisticated investors (comprised of individuals, retirement plans, trusts, limited liability companies, and corporations) who claimed they were defrauded by the managers of a high-risk hedge fund in which they collectively invested $63 million. Plaintiffs sued CohnReznick, LLP, the independent auditor of Platinum Partners Credit Opportunities Fund, L.P. (“PPCO”) and Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”) (collectively, the “Funds”), for its role in the alleged fraud. CohnReznick audited the Funds’ financials statements in the years immediately preceding the Funds’ collapse and issued unqualified audit reports (the “Audit Reports”) that the Funds’ financial statements presented fairly, in all material respects, the financial position of the Funds. Plaintiffs claimed that CohnReznick issued the Audit Reports with knowledge of missing material documentation and questionable transactions, which confirmed that PPCO’s assets were grossly overvalued. According to plaintiffs, CohnReznick knew that, for years, Platinum Management (“Platinum”) propped up the Funds with unsupported and fraudulent asset valuations, commingled investor funds, engaged in illicit related-party transactions, and booked improper inter-company loans. Plaintiffs allegedly relied on the Audit Reports to their detriment, investing over $63 million in PPCO. In their complaint, plaintiffs asserted claims of: (1) fraud; (2) aiding and abetting fraud; and (3) aiding and abetting breach of fiduciary duty. Defendant moved to dismiss. The motion court (Ostrager, J.) denied the motion ( here ). First, the motion court held that plaintiffs pleaded fraud with particularity as required under CPLR § 3016(b). The motion court found that CohnReznick disregarded numerous “red flags” that allowed a reasonable inference of the auditor’s “egregious refusal to see the obvious, or to investigate the doubtful”. Such “red flags” included: CohnReznick’s “access to a substantial amount of information.” (“ any of the suspect activities noted by plaintiffs and the eceiver directly related to documentation available to CohnReznick.”) Information in an affidavit from the court-appointed receiver in which she averred that PPCO’s assets were overvalued “by over 300%”, that there were loans between PPCO and PPVA, and that Platinum engaged in related-party transactions. Platinum’s actions to ease PPVA’s liquidity crisis and the commingling of investor funds: (“Indeed, one can reasonably infer scienter from even the single item that Platinum repeatedly effectuated improper cash transfers, booked as loans, between PPCO and PPVA that were used to ease PPVA’s liquidity crisis and were paid back, in part, with distressed debt and private equity of little to no value. These transfers were presumably reflected in PPCO’s financial statements, which CohnReznick improperly certified as presenting ‘fairly, in all material respects, the financial position of .’ The commingling of investor funds among the various Platinum Funds was another glaring red flag supporting the inference of scienter.”) In addition to the “red flag” allegations, the motion court also considered plaintiffs’ allegations that CohnReznick violated Generally Accepted Accounting Principles (“GAAP”) and Generally Accepted Auditing Standards (“GAAS”). When considered together, the motion court held that plaintiffs pleaded enough facts to raise a reasonable inference that CohnReznick acted with scienter. Second, the motion court held that plaintiffs alleged that CohnReznick had actual knowledge of Platinum’s fraud and breaches of fiduciary duty. According to plaintiffs, CohnReznick knew by early 2015 – before CohnReznick issued the 2014 Audit Reports for both PPCO and PPVA – that PPVA’s then-auditor had discovered a “material weakness” in the way Platinum valued its Level 3 assets (which comprised nearly all the Funds’ holdings). Despite such knowledge, CohnReznick implemented no additional auditing procedures for PPCO and issued a clean Audit Report for the fund. The motion court found that these allegations sufficed to allege actual knowledge of the alleged fraud. Third, the motion court held that plaintiffs sufficiently pleaded that CohnReznick substantially assisted Platinum’s fraud and breaches of fiduciary duty with the required specificity. Fourth, the motion court held that plaintiffs justifiably relied on the Audit Reports in deciding to invest in PPCO. According to the motion court, plaintiffs “were entitled to rely on the information in the Reports as being factually correct and to use those facts to make their own investment decisions.” The motion court noted that “many investors spoke with CohnReznick’s managing partner about their investments” in an effort to make informed decisions about whether to invest in the Funds. Finally, the motion court rejected CohnReznick’s argument that plaintiffs merely claimed that they were induced “to continue to hold securities”, which, under New York law, is not actionable. The motion court explained that plaintiffs invested in PPCO “in the first instance in reliance on the Audit Reports, and not merely to maintain or ‘hold’ the investment.” On appeal, the First Department unanimously affirmed. First, the Court held that the motion court correctly found that plaintiffs pleaded scienter with the requisite particularity. The Court found that “the ‘ llegations of “red flags,” when coupled with allegations of GAAP and GAAS violations, sufficient to support a strong inference of scienter.’” Slip Op. at *1 (quoting In re Bear Stearns Cos., Inc. Securities, Derivative & ERISA Litig. , 763 F. Supp. 2d 423, 511 (S.D.N.Y. 2011)). See also State St. Trust Co. v. Ernst , 278 N.Y. 104, 112 (1938). Second, the Court held that plaintiffs adequately pleaded justifiable reliance. The Court explained that plaintiffs “‘took reasonable steps to protect against deception by’ having their advisor ‘examin available financial information to ascertain the true nature of’ the investment fund’s asset valuation, including contacting defendant about the results of its audits, which were ‘matters peculiarly within the knowledge.’” Slip Op. at *2 (quoting IKB Intl. S.A. v. Morgan Stanley , 142 A.D.3d 447, 448-49 (1st Dept. 2016)). In any event, the Court noted that “‘reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss.’” Id. (quoting ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)). The Court said that the “same true for the aiding and abetting fraud claim, to the extent that it may require a showing of reasonable reliance.” Id. (citing Bankers Conseco Life Ins. Co. v. KPMG LLP , 189 A.D.3d 402, 403 (1st Dept. 2020)). Third, as to the aiding and abetting fraud claim, the Court held that the “complaint sufficiently alleged ‘actual knowledge’ of the investment fund manager’s fraud, which ‘need only be pleaded generally.’” Slip Op. at *2 (quoting Oster v. Kirschner , 77 A.D.3d 51, 55 (1st Dept. 2010)). oster, 77 a.d.3d at 55.> oster, 77 a.d.3d at 55.> The Court explained that the “timing of defendant’s alleged receipt of information from the prior auditor of a related fund indicating a material weakness in the process of asset valuation, as well as defendant’s multiple years of auditing the fund’s financial statements, allow for the inference that defendant ‘willingly turned a blind eye to evidence’ that the fund’s asset valuations were fraudulent with no documentation supporting them.” Slip Op. at *2 (quoting AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446 (1st Dept. 2013)); see also Weinberg v. Mendelow , 113 A.D.3d 485, 488 (1st Dept. 2014). The Court noted that the complaint also “sufficiently alleged, inter alia , that defendant ‘ignored irregularities’ in the fund’s ‘books and records,’ which, if reviewed, would have uncovered the fraud.” Slip Op. at *2-*3 (quoting Weinberg , 113 A.D.3d at 488). As to the claim for aiding and abetting breach of fiduciary duties, the Court found that the complaint “sufficiently alleged defendant’s actual knowledge of the fund manager’s improper related-party transactions and unauthorized loans to the related fund, given defendant’s access to the fund’s financial information, as well as defendant’s ‘strong financial motive’ to aid the fund manager, given its allegedly inflated fees.” Slip Op. at *3 (citations omitted). The Court rejected defendant’s argument that it owed no duty to plaintiffs: “‘There are allegations not only that defendant fail to act when required to do so,’ but also that defendant ‘affirmatively assist ’ the fund manager to convince one investor plaintiff to invest additional capital, which obviates any need for plaintiffs to allege that ‘defendant owe a fiduciary duty directly to’ them.” Id. (quoting Kaufman v. Cohen , 307 AD2d 113, 126 (1st Dept. 2003) (citation omitted). Finally, the Court agreed with the motion court that plaintiffs did not merely allege inactionable holder claims. The Court explained that plaintiffs did “not seek ‘recovery for the loss of the value that might have been realized in a hypothetical market exchange that never took place,’ but instead assert ‘an out-of-pocket loss, specifically, the loss of their investment.’” Slip Op. at *3 (citations omitted). Sabourin v. Chodos Sabourin involved an intricate and complex fraud perpetrated by defendant Adam Chodos, an attorney, in concert with his client, William Frost, to divest plaintiffs of their media company and its value. After an arbitration held in 2013-2014, plaintiffs were awarded $56.4 million against Frost. According to plaintiffs, it was only as a result of the documents presented and testimony adduced during the arbitration that they came to learn that defendant was not merely Frost’s lawyer, but also a knowing and indispensable participant in the fraud. Consequently, in February 2015, plaintiffs commenced the action against defendant Chodos, alleging fraud, aiding and abetting fraud, unjust enrichment, aiding and abetting breach of fiduciary duty, civil conspiracy to commit conversion, and tortious interference with economic advantage. Defendant moved for summary judgment, arguing, among other things, that the claims were time-barred because the conduct complained of took place in 2008, well beyond the six-year statute of limitations applicable to the fraud claims and the three-year statute of limitations applicable to the remaining tort claims. The motion court denied defendant’s motion as to the fraud claims ( here ). On appeal, the First Department affirmed. In New York, the limitations period for fraud is the greater of six years from the date of the fraud or two years from the time when, with reasonable diligence, the plaintiff could have uncovered the fraud. CPLR § 213(8). See also Cusimano v. Schnurr , 137 A.D.3d 527, 531 (1st Dept. 2016). To prevail on a motion to dismiss on statute of limitations grounds, the defendant must show that there is no issue of fact under either of the foregoing prongs. Against these principles, the Court found that defendant “failed to show dispositively that plaintiffs were in possession of facts that would have triggered inquiry notice under CPLR § 213(8) more than two years before the action was commenced.” Slip Op. at *1 (citing Sargiss v. Magarelli , 12 N.Y.3d 527, 532 (2009)). The Court rejected defendant’s reference to inconsistent deposition testimony given by plaintiff and an affidavit he submitted in opposition to the motion to dismiss. “Such inconsistencies may be fodder for cross-examination,” said the Court, “but they do not support a finding, as a matter of law, that plaintiffs were on inquiry notice more than two years before this action was commenced.” The Court also found that plaintiffs had “raised issues of fact as to whether defendant committed independent and distinct fraudulent acts in 2009 in furtherance of the fraudulent scheme” to toll the statute of limitations “pursuant to the continuous wrong doctrine.” Slip Op. at *3 (citing Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017)). The Court noted that “plaintiffs submitted documents showing that in 2009 defendant forged Ishak’s signature on a resignation letter and then used the forged letter to freeze the bank account of plaintiffs’ corporation.” Id. In addition, noted the Court, plaintiff showed that defendant prepared fraudulent K-1s and tax filings, and created a series of fake, back-dated notes purporting to evidence debt by one of the plaintiff entities to entities controlled by Frost. Id. here.=">here."> Takeaway It is generally understood that “scienter . . . is … the element most likely to be within the sole knowledge of the defendant and least amenable to direct proof.” Houbigant, Inc. v. Deloitte & Touche , 303 A.D.2d 92, 98 (1st Dept. 2003). For this reason, to plead scienter, a plaintiff need only allege “some rational basis for inferring that the alleged misrepresentation was knowingly made,” or that the defendant acted with reckless disregard of the truth. Id. “ ecklessness … involve conduct that is highly unreasonable, and must ‘in fact, approximate an actual intent to aid in the fraud being perpetrated by the audited company.’” CRT Investments, Ltd. v. Merkin , 29 Misc. 3d 1218(A) (Sup. Ct., N.Y. County 2010), aff’d sub nom. , CRT Investments, Ltd. v. BDO Seidman, LLP , 85 A.D.3d 470 (1st Dept. 2011) (internal citation omitted). When alleging fraud against an auditor, a plaintiff must “allege that the auditor’s practices were so deficient as to amount to no audit at all, that there was a refusal to see the obvious, a failure to investigate the doubtful, or the auditor’s judgments were such that no reasonable accountant would have made the same decisions if confronted with the same facts.” Id. (internal quotations omitted). The failure to do so will result in the dismissal of the claim for the failure to plead scienter with particularity. In Bullen , the courts concluded that plaintiffs satisfied the foregoing standard by providing allegations that CohnReznick disregarded numerous “red flags” and other detailed facts, such as the violation of GAAP and GAAS, related-party transfers and commingling of investor funds, which supported the strong inference that CohnReznick’s audits amounted to “no audit at all”. With regard to justifiable reliance, Bullen highlights how sophisticated parties can satisfy this element. A sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is to make an additional inquiry into the truth of the representation ( ACA Fin. , 25 N.Y.3d at 1045), as the plaintiffs had done in Bullen . As noted by the First Department, plaintiffs had their advisor “examin available financial information to ascertain the true nature of the investment fund’s asset valuation” and, as noted by both courts, they asked questions of CohnReznick’s managing partner about their investments in order to make informed decisions about whether to invest in the Funds. More fundamentally, as both courts indicated, plaintiffs could not have discovered the alleged fraud because the information was peculiarly within CohnReznick’s knowledge. Basis Yield Alpha Fund Master v. Stanley , 136 A.D.3d 136, 143 (1st Dept. 2015). Sabourin concerns the situation most often found in fraud claims – the plaintiff does not know it was the victim of a fraud until years later. Consequently, as is often the case, the plaintiff brings suit well after the statute of limitations has expired. In such situations, the plaintiff can escape dismissal by finding a basis to toll the statute of limitations. In Sabourin , plaintiffs were able to rely on the continuing wrong doctrine. Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  The wrongs, however, must be separate and independent ( id. ), not “continuing consequential damages” that arise from a single tortious act. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). As discussed, in Sabourin , plaintiffs were able to withstand summary judgment by demonstrating that defendant committed independent and distinct fraudulent acts in  in furtherance of the alleged fraudulent scheme. The motion court denied defendant’s motion as to the fraud claims ( here ).

Sometimes a fraud is so undetectable that even an expert hired to assist in due diligence activities can be the victim of fraud. That’s what happened in VXI Lux Holdco, S.A.R.L. v. SIC Holdings, LLC , 2021 N.Y. Slip Op. 03294 (1st Dept. May 25, 2021) ( here ). VXI Lux arose from plaintiff’s $112 million purchase of Symbio S.A. (“Symbio”) from defendants. Plaintiff alleged that defendants, faced with a Chinese government audit, engaged in fraud to hide the fact that they had underpaid the social insurance tax applicable to their employees in Chengdu, China. Defendants allegedly did this by falsifying documents, including by altering personnel files to make it look as though dozens of exempt employees based elsewhere were actually working in Chengdu. To complete the scheme, defendants allegedly bribed the auditing firm, by means of a $25,000 payment funneled through a sham construction contract. Plaintiff alleged that the $3 million tax underpayment, which was an unaccounted expense, had the effect of inflating Symbio’s earnings before interest, taxes, deductions, and amortization (“EBITDA”) by the same amount. Thus, when Symbio presented its books to plaintiff, they allegedly contained several misrepresentations — expenses and tax liabilities were understated, and EBITDA was overstated. The inflation of the EBITDA likewise inflated Symbio’s apparent growth rate, which in turn inflated the company’s market valuation. Even though plaintiff inspected Symbio’s financial statements and other corporate records during due diligence, plaintiff claimed, given the nature of the deception, the fraud was essentially undetectable. Thus, plaintiff alleged, even though it retained a major accounting firm, that accounting firm was also duped and issued a report which did not find the social insurance tax fraud. The social insurance tax fraud allegedly inflated Symbio’s EBITDA, from about $3 million to a projected $8.8 million. The apparent EBITDA growth inflated the company’s revenue prospects, resulting in plaintiff overpaying for Symbio. Plaintiff alleged that, had it known all the facts, it would have offered much less. Plaintiff alleged that the resulting overpayment caused it to suffer significant financial loss. Defendants moved to dismiss the fraud cause of action in plaintiff’s second amended complaint (“SAC”). The motion court granted the motion. On appeal, the Appellate Division, First Department “unanimously reversed, on the law”. The primary issue considered by the Court was whether plaintiff satisfied the justifiable reliance element of its fraud cause of action.  To satisfy the justifiable reliance element of a fraud claim, a plaintiff must demonstrate that he/she took steps to discover “the true nature of transaction he is about to enter into.” 88 Blue Corp. v. Reiss Plaza Assoc. , 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted). In other words, a plaintiff is required to take reasonable steps to protect against deception. A sophisticated party, like the plaintiff in VXI Lux , must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Grp. L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the truth of the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Thus, a sophisticated party cannot “argue justifiable reliance on defendants’ misrepresentation or omission where had the means available to ascertain the status of the ” at issue and did not avail itself of those means. ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). here,  here and  here,=">here," for="for" example.="example."> In VXI Lux , the Court held that “plaintiff adequately pleaded that it justifiably relied on the documents presented by Symbio during due diligence,” by “taking diligent steps” to uncover any misstatements or omissions. Slip Op. at *1. Such steps included retaining “an accounting firm for review” of the company’s financial statements and corporate records. Slip Op. at *1-*2 (citing Basis Yield Alpha Fund Master v. Morgan Stanley , 136 A.D.3d 136, 141-43 (1st Dept 2015)). As made clear in the Court’s discussion of plaintiff’s fraudulent concealment allegations (Slip Op. at *2), “given the hidden nature of the fraud, which turned on falsified records and bribed auditors, and the practical impossibility of discovering the fraud through ordinary diligence”, it could not be said that plaintiff failed to take affirmative steps “to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154.    The Court also rejected the individual defendants’ argument that the fraud claim should be dismissed as against them because plaintiff used group pleading to assert those allegations. Slip Op. at *1. As noted in our last article on the subject ( here ), group pleading occurs when a plaintiff lumps defendants together rather than attributes specific misrepresentations or wrongdoing to a particular defendant. Such pleading violates the particularity requirement of CPLR § 3016(b), unless the fraud alleged is detailed and pervasive. AIG Fin. Prods. Corp. v. ICP Asset Mgt., LLC , 108 A.D.3d 444, 446-447 (1st Dept. 2013). In VXI Lux , the Court held that the fraud was pervasive and pleaded “in great detail”. As such, the individual defendants’ knowledge of the fraud could be inferred. Slip Op. at *1.  The Court also rejected the argument that plaintiff’s fraud claim duplicated its contract claim. Slip Op. at *2. The Court noted that “Defendants’ alleged deception also breached numerous warranties set forth in the governing stock purchase agreement, including that Symbio’s financial statements were materially complete and correct, that its EBITDA projections were reasonable and made in good faith, that it had no material undisclosed liabilities, and that it conducted its business in compliance with applicable law.” Id. The Court explained that a breach of warranty is not the same as a breach of an obligation to perform – the former is a misrepresentation of present fact. Id. (noting, “ warranty is not a promise of performance, but a statement of present fact”) (quoting First Bank of Ams. v. Motor Car Funding , 257 A.D.2d 287, 292 (1st Dept. 1999)). “Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim.” First Bank of Ams. , 257 A.D.2d at 292. Accord Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439, 441 (1st Dept. 2015). Thus, concluded the Court, “the fraud claim not duplicate the contract claim.” Slip Op. at *2 (citing GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81-82 (1st Dept. 2010),  lv. dismissed , 17 N.Y.3d 782 (2011)).  Takeaway A plaintiff suing for fraud (and particularly a sophisticated plaintiff, such as VXI Lux ) must establish that it “has taken reasonable steps to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154. Typically, this means that a plaintiff claiming to have been fraudulently induced to purchase a business, or to lend to a business, must allege that, before entering into the transaction, it availed itself of the opportunity to verify the seller’s or borrower’s representations through an examination of the entity’s books and records. In VXI Lux , plaintiff satisfied this requirement. As discussed, plaintiff retained a major accounting firm to examine Symbio’s financial statements and other corporate records during due diligence. Because of the deception alleged, plaintiff had no way of discovering the truth about Symbio’s financial condition. Under such circumstances, the justifiable reliance element of plaintiff’s fraud claim was satisfied.