In today’s installment of Enforcement News, this Blog examines, among other things, the fiduciary duties of investment advisers, in particular, the duty of loyalty. An investment adviser is a fiduciary, and as such is held to the highest standard of conduct and must act in the best interest of his/her client. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963). This means, among other things, that an investment adviser has an affirmative duty of utmost good faith and full and fair disclosure of all material facts. Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 17 (1979). In broad terms, an investment adviser owes his/her client the duty of care, loyalty and candor. The duty of care includes, among other things, the duty to provide advice that is suitable and in the best interest of the client. To meet this duty, investment advisers must (a) make a reasonable inquiry into a client’s financial situation, level of financial sophistication, investment experience, and investment objectives and (b) provide personalized advice that is suitable for and in the best interest of the client based on the client’s investment profile. The duty of loyalty requires an investment adviser to put his/her client’s interests first. An investment adviser must not favor his/her own interests over those of a client or unfairly favor one client over another. In seeking to meet this duty, an adviser must make full and fair disclosure to his/her clients of all material facts relating to the relationship. Additionally, an investment adviser must seek to avoid conflicts of interest with his/her clients, and, at a minimum, make full and fair disclosure of all material conflicts of interest that could affect the advisory relationship. The disclosure must be clear and detailed enough for a client to make a reasonably informed decision to consent to such practices, strategies or conflicts or reject them. An adviser disclosing that he/she “may” have a conflict is not adequate disclosure when the conflict actually exists. On April 23, 2021, the Securities and Exchange Commission (“SEC”) announced (here) that it charged Andrew T. Franzone (“Franzone”), the former owner of a race car team, and investment adviser FF Fund Management, LLC (“FFM”) with fraudulently raising and misappropriating tens of millions of dollars from the sale of limited partnership interests in a private fund, FF Fund I LP (the “Fund”). In the SEC’s complaint (here), the Commission alleged that Franzone, the sole owner and principal of FFM, defrauded investors by making misrepresentations regarding the Fund’s strategy and investments, failing to eliminate or disclose conflicts of interest, misappropriating fund assets, and falsely representing the Fund would be audited annually. According to the SEC, from August 2014 through September 24, 2019, Franzone told potential and existing investors that his investment strategy for the Fund was to maintain a highly liquid portfolio primarily focused on options and preferred stock trading. Franzone allegedly raised more than $38 million for the Fund from approximately 90 investors through these representations. In reality, alleged the SEC, Franzone diverted substantial Fund assets to an entity he owned and invested the Fund’s remaining assets mainly in highly illiquid private companies and real estate ventures. The SEC also alleged that Franzone’s management of the Fund was subject to numerous conflicts that he did not eliminate or disclose, and that he misused Fund assets. For example, Franzone took personal loans from the founders of at least two companies in which the Fund invested, pledged Fund assets to secure other loans for his own personal benefit, and misappropriated Fund assets for personal uses, including the purchase of a garage to store his private race car collection. Finally, the SEC alleged that Franzone and FFM removed a critical safeguard for investors by failing to have the Fund audited on an annual basis despite representations they would do so. The Fund filed for bankruptcy under Chapter 11 in the Southern District of Florida on September 24, 2019. “Investment advisers must provide honest representations to investors, disclose or eliminate conflicts of interest with clients, and not abuse client assets,” said Adam S. Aderton, Co-Chief of the Enforcement Division’s Asset Management Unit. “We allege that Franzone and FFM violated federal securities laws by breaching these fundamental obligation.” The SEC’s complaint, filed in United States District Court for the Southern District of New York, charges Franzone and FFM with violating the antifraud provisions of the federal securities laws and seeks disgorgement of ill-gotten gains, civil penalties, and permanent and conduct-based injunctive relief. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced (here) that it filed criminal charges against Franzone. According to the press release, Franzone was charged with securities fraud and wire fraud for bilking more than 100 investors out of approximately $40 million. Commenting on the indictment, U.S. Attorney Audrey Strauss said: “Andrew Franzone allegedly promised his clients access to his successful liquid trading strategy and consistent, positive trading returns. As alleged, those promises were lies. Franzone lied about his fund’s investments and performance, and he lied in promising clients that they had could readily access their invested capital. While his investors lost money, Franzone enriched himself. We will continue to work with our law enforcement partners to protect investors from these types of deceptive practices.” USPIS Inspector-in-Charge Philip R. Bartlett said: “Mr. Franzone allegedly misled investors to believe his fund was liquid and he could cover their redemption requests, in a scheme to lure them in to investing in his hedge fund. This should be a reminder that greed has no boundaries and does not care about a favorable portfolio. Postal Inspectors remind all investors to thoroughly check offers, and if they sound too good to be true, keep your money in the bank.”

Most simply stated, champerty is the prohibited practice of purchasing claims for the purpose of commencing litigation and has been described as “a venerable doctrine developed hundreds of years ago to prevent or curtail the commercialization of or trading in litigation.”  Bluebird Partners, L.P. v. First Fidelity Bank, N.A. , 94 N.Y.2d 726, 729 (2000) (describing the historical antecedents to New York’s present champerty rules).  While an ages old doctrine dating back to medieval times, most present-day lawyers view champerty more as an annoying topic covered in bar review course rather than a legal theory that might actually be litigated these days.  Champerty, however, does rear its head from time to time. New York’s prohibition against champertous transactions is codified in section 489 of the Judiciary Law , which provides in relevant part, and with some exceptions, that “ o person or co-partnership, engaged directly or indirectly in the business of collection and adjustment of claims, and no corporation or association, directly or indirectly, itself or by or through its officers, agents or employees, shall solicit, buy or take an assignment of, or be in any manner interested in buying or taking an assignment of a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon….” As the Court in Bluebird explained, “‘ hamperty,’ as a term of art, grew out of this practice to describe the medieval situation where someone bought an interest in a claim under litigation, agreeing to bear the expenses but also to share the benefits if the suit succeeded.”  Bluebird , 94 N.Y.2d at 734.  The Court explained that because, during medieval times, important litigation involved land, the purchase of lawsuits could result in a “partial interest in landed estates.”  Acquiring real property in this manner was “taint ” because “the purchase price was usually far below the value of the potential land acquisition” and, accordingly, such a transaction was “suffused with speculation related to the ‘sin’ of usury and its concomitant legal prohibitions evaded the strict prohibitive laws involving usury.”  Id. “ arly New York cases indicate that the prohibition of champerty was limited in scope and largely directed toward preventing attorneys from filing suit merely as a vehicle for obtaining costs, which, at the time, included attorneys' fees.”  Jurisprudence from the Court of Appeals: demonstrates that while this Court has been willing to find that an action is not champertous as a matter of law ( see, Fairchild Hiller Corp. v McDonnell Douglas Corp., 28 NY2d 325 ; see also, Avalon, L. L. C. v Coronet Props. Co., 248 AD2d 311 ), it has been hesitant to find that an action is champertous as a matter of law ( see, Sprung v Jaffe, 3 NY2d 539 <1957> ; see also, Moses v McDivitt, 88 NY 62 <1882> ). This prudent approach is consistent with the limited scope of the champerty doctrine as it originally appeared and developed in the Anglo-American legal system. The Bluebird Court noted that in Fairchild Hiller Corp. v McDonnell Douglas Corp. , 28 N.Y.2d 325 (1971), the Court of Appeals “first examined the actions of a nonattorney, under the champerty statute….”  Bluebird , 94 N.Y.2d at 735 - 36.  Fairchild involved claims related to the design and manufacture of the Phantom F-4 fighter-bomber (the “Bomber”).  Republic Aviation was to manufacture for McDonnell Douglas certain components of the Bomber using tools and drawings supplied by McDonnell.  Republic asserted claims against McDonnell based on defects in the supplied tools and drawings that resulted in increased production costs for Republic.  Subsequently, Fairchild Hiller Corp. acquired all of Republic’s operating assets, including Republic’s claim against McDonnell, while Farmingdale Co. acquired Republic’s non-operating assets – mostly land.  “As to , Fairchild and Farmingdale entered into a separate agreement which provided that in the event of recovery by Fairchild against McDonnell, Fairchild would turn over to Farmingdale 75% of the net proceeds received by Fairchild.”   After settlement negotiations proved unsuccessful, Fairchild commenced suit against McDonnell.  In turn, McDonnell moved for summary judgment dismissing, inter alia , the champerty claim arguing “that the assignment of the claim by Republic to Fairchild is champertous and, therefore, in violation of section 489 of the Judiciary Law.”  Supreme court dismissed the champerty claim but the Appellate Division reinstated the claim due to the existence of fact questions that required trial.  The Fairchild Court of Appeals reversed and dismissed the champerty claim and, in so doing, stated: We have consistently held that in order to fall within the statutory prohibition, the assignment must be made for the very purpose of bringing suit and this implies an exclusion of any other purpose. ( Moses v. McDivitt , 88 N.Y. 62, 65 .) More recently, in Sprung v. Jaffe (3 N Y 2d 539, 544), we stated: "the statute is violated only if the primary purpose of the purchase or taking by assignment of the thing in action is to enable the attorney to commence a suit thereon. The statute does not embrace a case where some other purpose induced the purchase, and the intent to sue was merely incidental and contingent."   Fairchild , 28 N.Y.2d at 330.  Recognizing that the “intent and purpose of the purchaser or assignee of a claim” is typically to be determined by the trier of fact, the “undisputed facts…as developed by extensive pretrial discovery, established that Fairchild did not receive the assignment …for the sole and primary purpose of bringing an action….”  Id .  Indeed: Fairchild's primary purpose, as the record indicates, was to acquire Republic's operating assets. The acquisition of the claim was simply an incidental part of a substantial commercial transaction, taken in order to induce Farmingdale to take part in the acquisition by purchasing Republic's nonoperating assets. Under such circumstances, it can by no means be said to be champertous. Consequently, we conclude that the assignment was not within the reach of section 489 of the Judiciary Law. Id. In concluding that the transactions at issue in Bluebird were not champertous, the Court of Appeals stated: We conclude that in order to constitute champertous conduct in the acquisition of rights that would then be nullified and to resolve the question at issue, the foundational intent to sue on that claim must at least have been the primary purpose for, if not the sole motivation behind, entering into the transaction. The words, "sole" and "primary," are not synonymous generally or in law. A purpose that is the sole purpose is, by necessity, the primary purpose. However, a purpose that is primary is not necessarily the sole purpose ( see, People v Lopez, 73 NY2d 214, 219 ["two primary purposes"]). Yet, the distinction is one without a legal difference when the "primary" element is present. The bottom line is that Judiciary Law § 489 requires that the acquisition be made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding ( compare, Moses v McDivitt, supra ; Sprung v Jaffe, supra ). Thus, we are satisfied that the record here does not support a finding of champerty as a matter of law for summary resolution. It cannot be determined on this record and in this procedural posture that champerty was the primary motivation, no less the sole basis, for all this strategic jockeying and financial positioning. Bluebird , 94 N.Y.2d at 736 (emphasis in original). On April 22, 2021, the Appellate Division, First Department, decided Leasing Control Inc., as Assignee of Firequench, Inc. v. 500 Fifth Avenue, Inc.   The facts of Leasing Control are simple and were obtained from the underlying record available on the e-court’s website.  Firequench, Inc. is a company that provided, inter alia , fire alarm installation and repair services to buildings in Manhattan, including a building (the “Building”) owned by defendant (“Owner”).  Firequench claimed that Owner owed it a significant sum of money for services allegedly rendered for which payment was never made.  Plaintiff was formed on November 30, 2012 and is owned by the sister of Firequench’s owner.  On March 5, 2013, Firequench delivered to plaintiff, a blanket assignment of all of Firequench’s claims against Owner.  On March 7, 2013, two days later, plaintiff commenced its collection action as the assignee of Firequench’s claims against Owner.  In seeing through the sham transaction between Firequench and Leasing Control and finding plaintiff’s claims against Owner champertous, the First Department stated: As plaintiff’s president admitted during her deposition, the primary purpose of Firequench’s assignment of its claims against defendants to plaintiff was for plaintiff to pursue litigation against defendants on the claims in exchange for a portion of the proceeds from the litigation ( Justinian Capital SPC < v westlb ag, n.y. branch > v westlb ag, n.y. branch>, 28 NY3d <160> at 164-165 <2016> ). Plaintiff and Firequench had no pre-existing relationship and plaintiff had no pre-existing interest in the claim before the assignment ( compare Trust for Certificate Holders of Merrill Lynch Mtge. Invs., Inc. Pass-Through Certificates, Series 1999-C1 v Love Funding Corp. , 13 NY3d 190, 200-201 <2009> ). Instead, plaintiff was a shell company with no real assets, corporate structure, or operations, and it commenced litigation two days after the assignment (see Justinian Capital SPC, 28 NY3d at 165).

When a person releases another from claims or the threat of claims, he/she is giving up the right to sue the other in connection with the subject of the release. Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 276 (2011) (“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release.”). A release effectively eliminates all claims against another that are possessed by the party giving the release. It does not matter whether the releasor knew of the claims at the time that he/she gave the release.  A release is generally ineffective as a bar against a claim that arises after the date the release is given. However, a plaintiff will not be barred from bringing a claim that falls within the scope of a release when he/she can demonstrate that the release was procured by fraud, duress or some other wrongdoing. Centro Empresarial Cempresa , 17 N.Y.3d at 276; Fleming v. Ponziani , 24 N.Y.2d 105, 111 (1969). Where a party “releases a fraud claim”, he/she “may later challenge that release as fraudulently induced only if can identify a separate fraud from the subject of the release.” Centro Empresarial Cempresa , 17 N.Y.3d at 276 (citing Bellefonte Re Ins. Co. v. Argonaut Ins. Co. , 757 F.2d 523 (2d Cir. 1985)).  The foregoing principles were highlighted in Sodhi v. IAC/Interactivecorp , 2021 N.Y. Slip Op. 31220(U) (Sup. Ct., N.Y. County Apr. 8, 2021). In Sodhi , plaintiffs, former employees of Hatch Labs, Inc. (“Hatch”), a subsidiary of defendant IAC/InterActiveCorp (“IAC” or “Defendant”), filed the action to recover money claimed to be improperly withheld from them by IAC.  Hatch was a startup incubator company that developed applications for mobile phones. Among other applications, Hatch launched Tinder, the popular mobile dating application, in 2012. At the time they were hired, plaintiffs were granted “phantom” equity units (the “Units”) in Hatch pursuant to an Equity Incentive Plan (the “Plan”), which was incorporated by reference into the letters outlining the plaintiffs’ terms of employment. The Plan provided for a one-time valuation (the “Appraisal Value”) and payout to plaintiffs, as participants in the Plan, for all vested Units on a date certain (the “Settlement Date”) in 2015. Dinesh Moorjani (“Moorjani”), a non-party to the action and the majority holder of the Units, was designated “Senior Participant” under the Plan and authorized to act as the representative of all Plan participants. In his capacity as Senior Participant, Moorjani was empowered to review the Appraisal Value provided by IAC, obtain an alternative appraisal of the value of the Units, communicate critical information to other Plan participants, and challenge IAC’s Appraisal Value before an arbitrator, if necessary. In his capacity as majority Unitholder, Moorjani also had the right to provide consent to amend, modify, change, suspend, or terminate the Plan on behalf of all participants. Conversely, all other Plan participants, including plaintiffs, were “deemed to have joined in the actions and agreements of the Senior Participant and waived any claim with respect thereto,” pursuant to the terms of the Plan. In March of 2014, Moorjani, in his capacity as Senior Participant and majority Unitholder, agreed with IAC to accelerate the Settlement Date. Pursuant to a written agreement submitted by defendant, Moorjani also agreed that the Appraisal Value for each Unit would be $166,566.42. Moorjani notified plaintiffs and other Plan participants of the acceleration on March 21, 2014. In accepting their payout, each of the plaintiffs signed a Settlement Letter agreeing to the Appraisal Value accepted by Moorjani, the number of vested Units to be settled, and the aggregate purchase price that IAC was to pay the participants as consideration for settling their vested Units. Each Settlement Letter further provided the plaintiffs a conditional right to an upward adjustment of the amount of their payout if, before October 15, 2014, a “Third Party Equity Financing” occurred in Tinder that implied a higher valuation of Tinder than the original Appraisal Value. Finally, each Settlement Letter included a broad, general release. Approximately six years after plaintiffs received their payouts for their Units, plaintiffs commenced the action against IAC, asserting causes of action to recover for breach of the Plan (first cause of action), breach of the implied covenant of good faith and fair dealing contained in the Plan (second cause of action), and fraud arising from IAC’s alleged misrepresentation of the value of the Units (third cause of action). Plaintiffs contended, inter alia , that IAC misled Moorjani as to the true value of Tinder, which was the principal asset underlying the value of the Units, withheld information from Moorjani with respect to Tinder’s value, and coerced Moorjani to accelerate the Settlement Date to March 2014. Defendant asserted that the complaint should be dismissed in its entirety in light of the contractual releases that plaintiffs signed. The Court agreed with Defendant. Plaintiffs alleged that the releases in the Settlement Letter did not cover the claims asserted in the action because the claims concerned their entitlement to a payout under the Plan, and not to their basic possessory interest in the Units. The Court rejected “ his narrow interpretation of the scope of the releases” as being “strained and unconvincing.” Slip Op. at 4. The Court found that the releases were broad and covered plaintiffs’ claim to the money alleged to be wrongfully withheld by IAC: he releases indicate[] the parties’ intention to bar “any and all” claims the plaintiffs “may now have, or hereinafter can, shall or may have” with respect to the plaintiffs’ interests in the Units. As the complaint makes clear, the plaintiffs’ interests in the Units are the basis for their participation in the Plan and the source of any claim they have to a payout at a certain time or in a certain amount.  Consequently, concluded the Court, “each of the plaintiffs’ claims in this action, including their fraud claims, derive from their interests in the Units and are covered by the expansive language of the subject releases they signed. Id. Moreover, explained the Court, the Settlement Letters “were meant to document the terms under which the plaintiffs would receive a payout as consideration for the Units.” Id. at *5. Thus, “the inclusion of releases covering only the plaintiffs’ ability to claim ownership of the Units would serve no purpose at that juncture, since the plaintiffs would no longer possess the Units after payment was made.” Id. Accordingly, the Court held that the releases in the Settlement Letter “cover all of the claims included in the complaint.” Id. Notwithstanding the foregoing, plaintiffs argued that the releases did not bar their claims because they were procured by fraud. In this regard, plaintiffs alleged that “‘IAC, either in conjunction with or utilizing Dinesh Moorjani, defrauded Plaintiffs by hiding the true value of Tinder (which was known to IAC at the time to be nearly $1 Billion) at the time of the settlement and accelerating that settlement to deprive Plaintiffs of settling their phantom equity one year later, as called for in the Plan, when Tinder’s value had swelled to approximately $3 Billion.’” Id. at 5 (quoting the record).  The Court found that plaintiffs failed to allege a fraud “separate from that which was the subject of the releases they signed, whether known or unknown to the plaintiffs at the time.” Id. at *7. In doing so, the Court rejected plaintiff’s argument that there was a lack of equal bargaining power and that they were “forced to accept the valuation and settlement date and were could not do anything about it.” Id. In any event, plaintiffs acknowledged that the Plan, which they were parties to, provided Moorjani in his capacity as Senior Participant with exclusive responsibility for negotiating with IAC and agreeing to the final Appraisal Value, and in his capacity as holder of the majority of Units the exclusive right to provide written consent to amend the Plan on behalf of all participants. The Court held that plaintiffs made “no factual, non-speculative allegations to suggest that Moorjani had any incentive to take a position adversarial to the plaintiffs in his representation of them in his dealings with IAC.” Id. “Rather,” said the Court, “all signs point to Moorjani’s interests being wholly aligned with the plaintiffs’ interests.” Id. For those reasons, the Court “decline to carve out an exception to the holding in Centro Empresarial in order to permit the plaintiffs to proceed on claims they duly released in 2014.” Id. Takeaway A “release is … a species of contract” that “is governed by the same principles of law applicable to other contracts.” Schuman v. Gallet, Dreyer & Berkey, L.L.P. , 180 Misc. 2d 485, 487 (N.Y. Co. 1999), aff’d , 280 A.D.2d 310 (1st Dept. 2001). Therefore, in the absence of duress, illegality, fraud, or mutual mistake, as in Sodhi , a release will not be set aside. Toledo v. W. Farms Neighborhood Hous. Dev. Fund Co., Inc. , 34 A.D.3d 228, 229 (1 st Dept. 2006). In Sodhi , plaintiffs broadly released all claims that they had against defendant. The release language was expansive and released “any and all claims” whether “known or unknown” against any of the released parties that plaintiffs may have had “against IAC and and their respective directors, officers and employees with respect to interest in the Units….” Such language was, as the Court noted, broad enough to cover their claims for non-payment.

It has been over 100 years since Charles Ponzi was indicted for the fraudulent scheme that bears his name. In a Ponzi scheme, the operator creates an investment program in which “profits” are paid to earlier investors with money taken from later investors. The “profits” are, therefore, fictitious instead of returns on investment. Ultimately, Ponzi schemes collapse under their own weight, taking investors, many of whom are the later ones in the scheme, down with them. Unfortunately, Ponzi schemes remain a familiar and unfortunate risk for investors. Because Ponzi schemes purport to offer high returns with little or no risk and rely on the celebrity of the individual or the credentials of a financial professional, investors are attracted to the investment products these scammers offer. Over the years, this Blog has written numerous articles about Ponzi schemes and the enforcement proceedings that resulted from them. See, e.g., here, here and here. Today, we examine an enforcement proceeding brought by the Securities and Exchange Commission (“SEC” or the “Commission) against Zachary Horwitz, a.k.a. Zach Avery, a Los Angeles-based actor known for low budget features such as “Trespassers” and “The White Crow”, and his company 1inMM (one in a million) Capital, LLC, for allegedly running a Ponzi scheme that raised over $690 million. In connection with the proceeding, the SEC obtained an asset freeze and other emergency relief. The SEC announced the proceeding on April 6, 2021 (here). According to the SEC’s complaint (here), Horwitz falsely claimed to have a track record of successfully selling movie rights to Netflix and HBO when, in fact, neither Horwitz nor 1inMM had ever sold any movie rights to, or done any business with, HBO or Netflix. Horwitz allegedly showed investors fabricated agreements and emails regarding the purported deals with HBO and Netflix. The SEC alleged that Horwitz and 1inMM promised investors returns in excess of 35%, and for many years paid supposed returns on earlier investments using funds from new investments. The complaint further alleged that Horwitz misappropriated investor funds for his personal use, including the purchase of his multi-million-dollar home, trips to Las Vegas, and to pay a celebrity interior designer. In late 2019, the scheme began to unravel, said the SEC, when Horwitz allegedly stopped making payments to investors with outstanding promissory notes and provided false explanations as to why the payments had stopped, such as that Netflix and HBO had failed to make promised payments. “We allege that Horwitz promised extremely high returns and made them seem plausible by invoking the names of two well-known entertainment companies and fabricating documents,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “We obtained an asset freeze on an emergency basis to secure for the benefit of investors what remains of the money raised by Horwitz.” The SEC charged Horwitz and 1inMM with violating the antifraud provisions of the federal securities laws. In addition to the asset freeze and other emergency relief granted by the Court, the SEC is seeking a permanent injunction, disgorgement, prejudgment interest, and civil penalties against Horwitz and 1inMM. The Court set a hearing for April 19, 2021, to determine if the asset freeze should remain in force for the duration of the litigation. On the same day that the SEC announced its enforcement proceeding, the Department of Justice (“DOJ”) announced (here) that it brought criminal charges against Horwitz. The DOJ alleges that Horwitz is “in default to investors on a total outstanding principal of approximately $227 million.” The criminal complaint that the DOJ filed against Horwitz charges him with wire fraud.

Generally, matters that are not covered by an agreement to arbitrate do not have to be arbitrated. After all, arbitration is a creature of contract. And, because an agreement to arbitrate is governed by the rules of contract interpretation, the courts must “give effect to the contractual rights and expectations of the parties.” Volt Info. Scis., Inc. v. Board of Trustees of Leland Stanford Junior Univ. , 489 U.S. 468, 479 (1989). In other words, “as with any other contract, the parties’ intentions control.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc. , 473 U.S. 614, 626 (1985).  Where there is a valid agreement to arbitrate, all matters that fall within the scope of that agreement are to be arbitrated. See Silverman v. Benmor Coats , 61 N.Y.2d 299, 309 (1984) (courts will not stay arbitration unless the “sole matter sought to be submitted to arbitration is clearly beyond the arbitrator’s power”). Matters that do not fall within the scope of the agreement will not be arbitrated, unless they are “inextricably interwoven” with the arbitrable ones, in which case “the proper course is to stay judicial proceedings pending completion of the arbitration, particularly where … the determination of issues in arbitration may well dispose of nonarbitrable matters.” Cohen v. Ark Asset Holdings , 268 A.D.2d 285, 286 (1st Dept. 2000); see also Lake Harbor Advisors, LLC v. Settlement Servs. Arbitration and Mediation, Inc. , 175 A.D.3d 479 (2d Dept. 2019); Monotube Pile Corp. v Pile Foundation Constr. Corp. , 269 A.D.2d 531 (2d Dept. 2000). The foregoing principles were recently applied by the Appellate Division, First Department in Protostorm, Inc. v. Foley & Lardner LLP , 2021 N.Y. Slip Op. 02227 (Apr. 8, 2021) ( here ), a legal malpractice action, in which the motion court stayed the action in favor of the arbitration of the law firm’s unpaid legal fees. As discussed, the Court reversed the stay of an arbitration on the grounds that the non-arbitrable matters were inextricably interwoven with the arbitrable ones. In Protostorm , plaintiff retained defendant to maintain a malpractice action against plaintiff’s prior counsel. Thereafter, plaintiff commenced a malpractice action against defendants and other attorneys in the United States District Court for the Eastern District of New York.  Defendants moved to dismiss the federal action based on the lack of subject matter jurisdiction. They also commenced an arbitration proceeding against plaintiff for unpaid legal fees based on the parties’ retainer agreement, which provided that “ ny dispute over fees and/or costs … be submitted to and settled exclusively by binding arbitration.”  The federal action was ultimately dismissed for lack of subject matter jurisdiction. As a result, the court did not rule on whether the arbitration should be stayed.  Plaintiff then commenced an action in New York Supreme Court, alleging the same claim of legal malpractice and moved to stay the arbitration pending resolution of the action. Defendants cross moved to stay the action and compel arbitration. The motion court granted plaintiff’s motion for a stay of arbitration and denied defendants’ cross motion to stay the action in favor of arbitration. The First Department unanimously reversed. The Court held that since there was a valid agreement between the parties to arbitrate any dispute regarding unpaid fees, it had to “compel arbitration of defendants’ claim for unpaid fees ….” Slip Op. at *1 (citing CPLR 7503(a)). And “because plaintiff’s nonarbitrable malpractice claim inextricably intertwined with the arbitrable claim for unpaid fees,” the Court held that “the proper course to stay the action pending completion of the arbitration.” Id. (citations omitted). Such a result, observed the Court, was consistent with decisional authority in the First and Second Departments, where the courts have held that “a nonarbitrable issue can be decided in an arbitration when it is inextricably intertwined with an arbitrable issue, particularly where … the determination of the arbitrable … claim may dispose of the nonarbitrable … claim.” Id. (citations omitted). In holding that the arbitrable and non-arbitrable matters should be arbitrated, the Court distinguished the facts in Protostorm with those in Laboratories Inc. v. Avon Prods. Inc. , 297 A.D.2d 505 (1st Dept. 2002), a case upon which plaintiff relied. There, the court stayed the arbitration pending resolution of the action because the parties’ agreements expressly provided that all disputes regarding the enforcement of the parties’ obligations would be decided in New York courts with the exception of one narrow category of disputes regarding royalties payable, which would be arbitrated. Id. (citing 297 A.D.2d at 506). Additionally, in Primavera , the court stayed the arbitration because numerous preliminary issues needed to be resolved in the action before the arbitration procedure could be invoked. Id. (citing id. ). Takeaway A court will not order a party to submit to arbitration absent evidence of that party’s unequivocal intent to arbitrate the dispute, and unless the dispute falls clearly within the class of claims the parties agreed to arbitrate. Since arbitration is a creature of contract, arbitration clauses must be enforced according to their terms, even if the result is bifurcated litigation. Notwithstanding, where arbitrable and non-arbitrable claims are inextricably interwoven, courts will stay the judicial proceeding pending completion of the arbitration, especially where the determination of issues in arbitration could dispose of non-arbitrable matters. That was the case in Protostorm , where the Court found that “the determination of the arbitrable unpaid fees claim dispose of the nonarbitrable malpractice claim.” Slip Op. at *2.  Thus, by arbitrating both the fee issue and the malpractice issue, the interests of judicial economy could be served and the risk of inconsistent results avoided.

Promissory notes and mortgages, like many other contracts, frequently contain provisions requiring a non-breaching party to provide the breaching party with notice of their default as a condition precedent to taking any action to enforce rights as a result of the breach.  Such action can include, but is not limited to, commencing legal action and/or accelerating the unpaid balance due under the note.  Similarly, default notice provisions may require that, in certain circumstances, the breaching party be afforded an opportunity to cure the default.  These provisions typically provide for the precise manner in which, and the address to which, the notices must be sent. Suffice it to say, notice provisions are material aspects of many contracts.  As a result, courts strictly enforce such notice provisions.  Accordingly, the failure to adhere to the provision’s requirements, and/or the failure to prove that you have adhered to the provision’s requirements, could have serious consequences. Such was the case in Deutsche Bank Nat. Trust Co. v. Bucicchia , a case decided by the Appellate Division, Second Department, on April 7, 2021.  The borrower wife in Bucicchia defaulted in her repayment obligations under a promissory note secured by a mortgage on real property owned by her and her husband.  Sections 22 and 15 of the mortgage “require service of a specified default notice as a condition precedent to the acceleration of the mortgage loan” (citation omitted) and “ ursuant to Section 15, the notice of default must be ‘mailed by first class mail or … actually delivered to notice address if sent by other means” (some brackets and ellipses in original).  As is typically the case, the mortgage in Bucicchia also provided “the notice address is the address of the mortgaged property unless the plaintiff is notified of another address by the borrower.” Lender commenced a mortgage foreclosure action.  Defendants, in their answer, asserted various affirmative defenses including, but not limited to, the failure to comply with the default notice provisions in the mortgage and failure to comply with the statutory notice provisions of RPAPL 1304.  This BLOG has written extensively on RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , and, accordingly, such issues will not be addressed in today’s article. Lender moved for summary judgment on the complaint and to dismiss defendants’ affirmative defenses and defendants cross-moved for summary dismissing the complaint.  Supreme court granted lender’s motion and dismissed defendants’ affirmative defenses except for the two defenses related to notice under the mortgage and under RPAPL 1304 and, as to those, the court scheduled a non-jury trial.  Defendants’ cross-motion was denied. After the trial, the court, inter alia , ruled in lender’s favor and struck defendants’ answer.  A referee was subsequently appointed to compute the amounts due to lender.  The referee’s report was confirmed and a judgment of foreclosure and sale was entered.   On defendants’ appeal, the Second Department, inter alia , reversed the judgment of foreclosure and sale, reinstated the affirmative defenses related to improper notice under the mortgage and RPAPL 1304, denied lender’s motion to the extent that it sought to confirm the referee’s report of sale and dismissed the complaint as against defendants.  The Court found that lender “failed to establish it complied with the notice requirements of the mortgage agreement.”  The Court explained: At the nonjury trial, the plaintiff relied upon the testimony of its sole witness, who testified as to the standard office mailing procedure of the plaintiffs prior and present loan servicer, but did not and could not attest to the practices and procedures of Walz Group, a third-party entity that was hired to undertake the requisite service of the notices on the defendants in accordance with the requirements of the mortgage agreement …. The plaintiffs witness expressly testified that she did not have familiarity with Walz Group's mailing practices "outside of their communications with" the loan servicer. In addition, the witness attested that she never mailed anything through Walz Group, was never employed by Walz Group, and was never trained by Walz Group in their procedures for mailing notices. Further, she testified that she could not say if Walz Group mailed the notices by first-class mail.  Thus, since the plaintiffs sole witness did not have "knowledge of the mailing practices of the entity which sent the notice[ s ]" (Deutsche Bank Natl. Trust Co. v Nelson, 183 AD3d 557, 558; see HSBC Bank USA, NA. v Sawh, 177 AD3d 959, 961), and the business records that were submitted in evidence failed to show that … the notices of default were actually made to the defendants or that the default notices were actually delivered to their "notice address," the plaintiff failed to establish … that the notices of default were sent in accordance with the terms of the mortgage agreement (see US Bank NA v Cope, 175 AD3d <527> at 530; LNV Corp. v Sofer, 171 AD3d <1033> at 1037).  Similarly, the Court in Deutsche Bank Nat. Trust Co. v. Crimi , 184 A.D.3d 707 (2 nd Dep’t 2020), addressing this issue, stated that “the attorney’s affirmation submitted by the plaintiff which stated that the purported 2010 notice was ‘in full compliance with the terms of the mortgage’ was unsubstantiated and conclusory either the attorney’s affirmation nor the copy of the purported 2010 notice established ‘that the required notice was mailed by first class mail or actually delivered to the notice address if sent by other means, as required by the mortgage agreement.’”  See also, U.S. Bank Nat. Assoc. v. Sabloff , 153 A.D.3d 879, 881 (2 nd Dep’t 2017). TAKEAWAY Care should be taken to follow the default notice provisions in promissory notes and mortgages (as well as other notice provisions).  Similarly, evidence of compliance should be maintained and presented to the court to demonstrate such compliance.

Under well-settled principles, summary judgment in lieu of complaint is available for an instrument for the payment of money only. In considering such a motion, the courts will look at the four corners of the instrument sued upon in determining whether the instrument qualifies as one for the payment of money only. here.=">here."> In Yang v. Dai , 2021 N.Y. Slip Op. 02125 (1st Dept. April 6, 2021) ( here ), the Appellate Division, First Department applied the foregoing principles in affirming the grant of summary judgment in lieu of a complaint on a note that was part of various business dealings between defendant and plaintiff’s spouse (a non-party). On December 28, 2018, plaintiff Jinmei Yang, as lender, and defendant Shang Dai, as borrower, executed an Amended and Restated Secured Promissory Note (the “Note”) in the sum of $1,150,000.00. The Note was guaranteed by defendant Da Wei Gongsun pursuant to a Continuing Guaranty (the “Guaranty”) executed on the same date as the Note.  Defendants defaulted on the payments, causing plaintiff to file the motion for summary judgment in lieu of a complaint. In support of the motion, plaintiff submitted an affidavit confirming that she wired $1,150,000.00 to defendant Dai, authenticating the loan documents on which she relied, confirming defendants’ default in payment on the Note, and providing the calculations supporting the amount due ($1,123,809.42). The motion court held that the affidavit and supporting documents sufficed to state a prima facie case. ( Here .) In opposition, defendant asserted that the Note was inextricably intertwined with various business dealings he had with plaintiff’s husband, nonparty Xiajie Huang, related to, among other things, a joint venture to invest in DaDong Restaurant (the “Restaurant”) via the formation of DaDong LLC. Defendant claimed that Huang offered to lend him the money represented by the Note to facilitate that investment.  The lender under the Note was plaintiff because Huang conducted business in the United States through his wife’s bank account. Defendant insisted that the terms of the original Note and all amendments were between him and Huang and that plaintiff was involved in name only. Defendant also claimed that he was fraudulently induced by Huang’s misrepresentations to borrow the money, believing the Restaurant would generate profits defendant could use to repay the loan. The venture ultimately failed, and defendant lost his entire investment. Defendant Da Wei Gongsun, the guarantor on the Note, also asserted that he was fraudulently induced to sign the Guaranty by Huang’s misrepresentations about the potential success of the Restaurant.  The motion court granted plaintiff’s motion. The motion court found that defendant “unconditionally promise ” to pay $1,150,000.00 to plaintiff pursuant to the terms of the Note. “Nowhere in the seven-page Note,” observed the motion court, was “there any reference to the Restaurant, to Huang, or to any business venture with Huang or anyone else.” “Nothing in the Note,” continued the motion court, “indicate that the Note inextricably intertwined with any related or unrelated business transaction.”  The motion court noted that, although the Note referenced an amended and restated pledge and security agreement, which the parties executed on the same day as the Note, it did “not change the fact that the Note an instrument for the payment of money only not dependent upon, or inextricably intertwined with, the success or failure of the Restaurant.” The referenced Amended and Restated Pledge and Security Agreement executed on the same date as the Note is between defendant Shang Dai as Pledgor, Dai’s company True Taste as Issuer, and plaintiff Jinmei Yang as the Secured Party. There, defendant pledged “100% of the membership interest of the Issuer , which was the managing member and the legal and beneficial owner of 10 Units or 10% of the issued and outstanding membership interests of Dadong Management LLC, a Delaware limited liability company (the “Company”), to the Secured Party ...” But the fact that defendant collateralized the Note with his or his company’s membership interest in the Restaurant’s operating company, or that he invested the loan money in the Restaurant company with the mistaken belief the Restaurant would succeed, does not change the fact that the Note is an instrument for the payment of money only not dependent upon, or inextricably intertwined with, the success or failure of the Restaurant.  The motion court also rejected defendant’s fraud in the inducement allegations, holding that they were “insufficient to negate the comprehensively detailed and carefully drafted multi-page Note for the payment of money only.” Accordingly, the motion court granted plaintiff’s motion and directed the entry of judgment in favor of plaintiff against defendants for the amount of the loan, plus interest, and attorney’s fees as provided in the Note. On appeal, the First Department affirmed. The Court held, like the motion court, that the Note was an unconditional promise to pay money, which defendant failed to pay: “The December 28, 2018 amended and restated note stated that defendant Shang Dai ‘unconditionally’ promised to pay plaintiff Jinmei Yang by the maturity date in exchange for the loan of $1,150,000 and it is undisputed that defendant Dai defaulted.” Slip Op. at *1. The Court also rejected defendant’s argument that the Note was intertwined with the joint venture, noting that “ t most, the promissory note ‘ part of an investment transaction between sophisticated, counseled parties dealing at arms-length and that the language of the notes [ ] obligated the defendant in his personal capacity.’” Id. (quoting Berlind v. Heinfling , 176 A.D.2d 452, 452 (1st Dept. 1991)). Further, the Court rejected defendant’s argument that because the Note was secured by defendant’s membership interest in a business that he owned, the Note was not an instrument for the payment of money only: That the note was secured by a membership interest in a business owned by defendant does not “alter its essential character as an instrument for the payment of money only and, accordingly, is immaterial to plaintiff’s right to relief pursuant to CPLR 3213.”  Id. (quoting Bhatara v. Futterman , 122 A.D.3d 509, 510 (1st Dept. 2014)). Finally, the Court noted that the profitability of the investment was no defense to a motion for summary judgment under CPLR § 3213: “the fact that the investment was not profitable did not constitute a defense to the note.…” Id. Takeaway As shown above, plaintiff sustained her initial burden of demonstrating entitlement to judgment as a matter of law by submitting proof of the existence of the underlying note and guaranty, the unconditional terms of repayment, and defendants’ failure to make payment. It was incumbent upon defendants to demonstrate by admissible evidence, the existence of a triable issue of fact with respect to a bona fide defense. The courts considering the facts and evidence found that they did not do so.

Corporations are legal entities distinct from their managers. As such, like any shareholder or investor, a corporation can buy shares in another corporation. When a corporation buys enough voting shares of another corporation to control that company, a parent - subsidiary relationship is created.  Specifically, when a corporation buys less than 100%, but more than 50%, of another company, the latter company becomes a regular subsidiary of the former. If the corporation acquires 100% of the voting shares of another company, then the acquired company becomes a wholly owned subsidiary of the other. The difference between a subsidiary and a wholly owned subsidiary, therefore, is the amount of voting control held by the parent company.  As a general matter, the corporate identities of the parent and its regular subsidiaries cannot be disregarded. However, the courts will look beyond the corporate form where necessary to prevent fraud or to achieve equity. Thus, for example, a parent corporation may become a party to its subsidiary’s contract if the parent’s conduct manifests an intent to be bound by the contract. Such intent will be inferred from the circumstances surrounding the transaction, including whether the parent participated in the negotiation of the contract. Indeed, a parent corporation that negotiates a contract but has its subsidiary sign it can be held liable as a party to the contract, if the subsidiary “is a dummy for the parent corporation.” A.W. Fiur Co. v. Ataka & Co. , 71 A.D.2d 370 (1st Dept. 1979). Moreover, a parent corporation may be liable on a contract signed by its subsidiary if the subsidiary is shown to be a mere shell dominated and controlled by the parent for the parent’s own purposes. In In re Sbarro Holding, Inc. , 91 A.D.2d 613 (2d Dept. 1982), a holding company sought to stay an arbitration proceeding against it and other related corporations on the ground that the agreement that called for arbitration was between a franchisee and its subsidiary. The court held that all the related corporations could be compelled to participate in the arbitration proceeding, although they were not signatories of the contract. The court explained that: The corporate veil will be pierced (1) to achieve equity, even absent fraud, where the officers and employees of a parent corporation exercise control over the daily operations of a subsidiary corporation and act as the true prime movers behind the subsidiary’s actions, and/or (2) where a parent corporation conducts business through a subsidiary which exists solely to serve the parent. Sbarro , 91 A.D.2d at 614 (citations omitted).  Additionally, where a shareholder uses a corporation for the transaction of the shareholder’s personal business, as distinct from the corporate business, the courts have held the shareholder liable for acts of the corporation. See Rapid Tr. Subway Constr. Co. v. City of N.Y. , 259 N.Y. 472 (1932). The determinative factor is whether “the corporation is a ‘dummy’ for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends.” Walkovszky v. Carlton , 18 N.Y.2d 414, 418 (1966). Apart from the foregoing rules, a parent corporation can be held liable for the actions of its subsidiary under veil piercing or alter ego liability principles.  The alter ego doctrine has been applied to pierce the veil between corporations when subsidiary corporations are used by a dominating parent corporation to engage in fraudulent or wrongful conduct. Under New York law, a corporation is considered to be a “mere alter ego when it ‘has been so dominated by . . . another corporation . . . and its separate identity so disregarded, that it primarily transacted the dominator’s business rather than its own.’” Trabucco v. Intesa Sanpaolo, S.p.A , 695 F. Supp. 2d 98, 107 (S.D.N.Y. 2010). When that occurs, “the dominating corporation will be held liable for the actions of its subsidiary ….” Id. Courts consider a wide array of factors in assessing the degree of domination and control exercised by the parent company. Such factors include: overlap in ownership, officers, directors, and personnel; common office space, address and telephone numbers of the corporate entities; whether the related corporations deal with the dominated corporation at arm’s length; and whether the corporation in question had property that was used by other of the corporations as if it were its own. Shisgal v. Brown , 21 A.D.3d 845, 848 (1st Dept. 2005) (internal citation omitted). Because the decision whether to pierce the corporate veil depends “on the attendant facts and equities” ( Matter of Morris v. N.Y. State Dep’t of Taxation & Fin. , 82 N.Y.2d 135, 141 (1993)), and because said facts can apply to an “infinite variety of situations” ( Wm. Wrigley Jr. Co. v. Waters , 890 F.2d 594, 601 (2d Cir. 1989)), no one factor controls the consideration. N.Y. Dist. Council of Carpenters Pension Fund v. Perimeter Interiors, Inc. , 657 F. Supp. 2d 410, 421 (S.D.N.Y. 2009). Courts recognize, however, “that with respect to small, privately-held corporations, ‘the trappings of sophisticated corporate life are rarely present,’” and, therefore, they “must avoid an over-rigid ‘preoccupation with questions of structure, financial and accounting sophistication or dividend policy or history.’” Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc. , 98 F.3d 13, 18 (2d Cir. 1996) (quoting Wrigley , 890 F.2d at 601). In applying these and other factors, the cases “reveal[] common characteristics” that necessitated piercing the corporate veil. Wrigley , 890 F.2d at 601. “In each case, the evidence demonstrated an abuse of that form either through on-going fraudulent activities of a principal, or a pronounced and intimate commingling of identities of the corporation and its principal or principals, which prompted the reviewing courts, driven by equity, to disregard the corporate form.” Id. In World Wide Packaging, LLC v. Cargo Cosmetics, LLC , 2021 N.Y. Slip Op. 02088 (1st Dept. Apr. 1, 2021) ( here ), the Appellate Division, First Department had the opportunity to consider the foregoing principles in reversing the order of the motion court, which allowed World Wide Packaging, LLC (“World Wide Packaging”) to amend its complaint to assert a claim of alter ego liability against defendant TPR Holdings, LLC (“TPR”). World Wide Packaging involved claims against the affiliates of TPR (“Subsidiary Defendants”) for breaching their payment obligations with regard to certain cosmetic supply transactions conducted on credit accounts.  As alleged, TPR had been conducting business with World Wide Packaging since 2012. The Subsidiary Defendants were operating subsidiaries of TPR.  In 2016, TPR requested that Plaintiff establish “separate credit accounts” for each of its subsidiaries to transact their own individual business dealings with World Wide Packaging. Plaintiff agreed. From August 2016 through June 2018, World Wide Packaging had an established a course of dealing with each of the Subsidiary Defendants whereby Plaintiff had done business with the subsidiaries of TPR on their own separate credit accounts.  In 2018, Plaintiff commenced the action against the Subsidiary Defendants, asserting contract claims against each of them for nonpayment on certain transactions conducted on their individual credit accounts. World Wide Packaging later sought leave to amend its complaint to add TPR as a defendant under, inter alia , alter ego liability/veil piercing theories of liability. The motion court granted the motion. Defendants appealed. The First Department unanimously reversed, holding that there was no evidence that TPR was the real party in interest with regard to the separate transactions at issue in the litigation or dominated and controlled the Subsidiary Defendants beyond the incident of ownership. The Court explained that “the complaint silent” as to TPR’s involvement in the negotiation of the credit accounts Plaintiff created with the Subsidiary Defendants. Slip op. at *1. Indeed, said the Court, although “ t appear that TPR Holdings initially approached plaintiff about three separate credit accounts for its three subsidiaries. … there no allegation about who negotiated the pricing or the general terms of each transaction.” Id. And, noted the Court, “Plaintiff acknowledged that the purchase orders were issued separately by the subsidiary defendants.” In short, concluded the Court, “ hile it appears that TPR Holdings’ employees were frequently, but not always, involved in the creative aspect of the transactions by approving the order designs, there is no allegation that TPR Holdings directly participated or micro-managed each transaction underlying the purchase orders or acknowledged that it was the actual party in interest.” Id. The Court also held that Plaintiff’s claim for piercing the corporate veil was insufficient. The Court noted that “ ven if TPR Holdings exercised complete domination of the subsidiary defendants, plaintiff failed to allege that the abuse of the corporate form was for the purpose of defrauding plaintiff and causing it an injury.” Id. The Court explained that “plaintiff did not allege that the subsidiary defendants were not legitimate businesses or that they were created for an improper purpose of cutting off plaintiff’s ability to collect on the contract, or that corporate funds were purposefully diverted to make any of the three companies judgment proof.” Id. (citing Tap Holdings, LLC v. Orix Fin. Corp. , 109 A.D.3d 167, 174-177 (1st Dept. 2013); Fantazia Intl. Corp. v. CPL Furs N.Y., Inc. , 67 A.D.3d 511, 512 (1st Dept. 2009)). Merely alleging that “TPR Holdings caused the subsidiary defendants to breach a contract,” concluded the Court, was “insufficient to show the requisite wrongdoing.” Id. at *1-*2 (citing Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC , 146 A.D.3d 1, 12 (1st Dept. 2016), aff’d , 31 N.Y.3d 1002 (2018)). Takeaway Under New York law (and elsewhere), a parent corporation may be held liable for its subsidiaries’ acts when the “alleged wrong can seemingly be traced to the parent through the conduit of its own personnel and management,” and the parent has interfered with the subsidiaries’ operations in a way that surpasses the control exercised by a parent as an incident of ownership. See , e.g. , United States v. Bestfoods , 524 U.S. 51, 64 (1998) (quotation omitted). As noted by the Court in World Wide Packaging , there was no allegation or evidence that TPR interfered with the actions of its subsidiaries.  Moreover, there was no allegation or evidence in World Wide Packaging to support the imposition of veil piercing or alter ego liability. As the Court in World Wide Packaging recognized, allegations of domination and control without any allegation or evidence of fraud, inequity or other misconduct is insufficient to support a claim for alter-ego/veil-piercing liability against a parent corporation.

This Blog frequently addresses issues involving mortgage foreclosures in New York.  < HERE =">HERE"> , < HERE =">HERE"> < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> ,.  More specifically, we have frequently focused on the pre-foreclosure notice requirements of RPAPL 1304 .  < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> .  As is evident from prior Blog articles, the lender’s sufficiency of proof of mailing required notices is an oft litigated issue.   On March 30, 2021, the New York Court of Appeals decided CIT Bank, N.A. v. Schiffman , in which it answered the following two questions certified to it by the Second Circuit Court of Appeals: (1) “Where a foreclosure plaintiff seeks to establish compliance with RPAPL § 1304 through proof of a standard office mailing procedure, and the defendant both denies receipt and seeks to rebut the presumption of receipt by showing that the mailing procedure was not followed, what showing must the defendant make to render inadequate the plaintiff’s proof of compliance with § 1304?” and, (2) “Where there are multiple borrowers on a single loan, does RPAPL § 1306 require that a lender’s filing include information about all borrowers, or does § 1306 require only that a lender’s filing include information about one borrower?” Briefly, RPAPL 1304 requires that 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; provide a list of approved housing agencies that offer free or low-cost counseling; and, advise that legal action may be commenced after ninety days if no action is taken to resolve the matter.  The CIT Bank Court noted that one purpose of RPAPL 1304 is to enable defaulted borrowers to “benefit from the information provided in the notice and the 90–day period during which the parties could attempt to work out the default without imminent threat of a foreclosure action, in an effort to further the ultimate goal of reducing the number of foreclosures”.  (Citation and internal quotation marks omitted.) As summarized by the CIT Bank Court, RPAPL 1306 : requires that a lender’s filing include information about all borrowers on a multi-borrower loan. RPAPL 1306 provides that as a “condition precedent” to commencing a foreclosure action, “ ach lender, assignee or mortgage loan servicer” file with the superintendent of financial services “within three business days of the mailing of the ... the information required by subdivision two” (RPAPL 1306<1> ). Subdivision two directs, in relevant part, that “ ach filing ... shall be on such form as the superintendent shall prescribe and shall include at a minimum, the name, address, last known telephone number of the borrower, and the amount claimed as due and owing on the mortgage....” (RPAPL 1306<2> ).   The primary purpose of RPAPL 1306 is to enable the Superintendent to monitor statewide foreclosure filings, to assist in the analysis of the types of loans subject to pre-foreclosure notices and to direct counseling services to borrowers at risk of foreclosure.  CPLR 1306(4). Facts of CIT Bank Defendants/borrowers, a husband and wife, borrowed $326,000 and secured the loan with a mortgage on jointly owned property.  The loan was consolidated and then assigned to CIT Bank.  After borrowers’ payment default, lender commenced an action in the United States District Court for the Eastern District of New York.  Borrowers’ answer asserted that lender failed to comply with RPAPL 1304 and 1306. Lender moved for summary judgment and argued that it met “its prima facie entitlement to a judgment of foreclosure and, as relevant here, that it had satisfied the requirements of RPAPL 1304 and 1306 in November 2015, almost a year before commencing suit, by mailing the notices and submitting the electronic filing within three days of that mailing.”  Compliance with CPLR 1304 was satisfied, Lender argued, by submitting “the affidavit of employee Rachel Hook in which she attested to her personal knowledge of ’s routine office practice relating to the generation, addressing, and mailing of 90–day notices, which she described in the affidavit opies of the notices and envelopes purportedly mailed to were attached to the motion papers.”  Additionally, “Hook’s affidavit stated that, as part of ’s routine practice, envelopes for the 90–day notices are ‘created upon default.’”   As to RPAPL 1306, lender submitted the required electronic filing statement, which listed only wife as the borrower “and stated that the filing was completed on the same day as the mailing of the 90–day notice”. Borrowers opposed the motion by denying receipt of the RPAPL 1304 notices, challenging that the Hook affidavit created “a presumption of receipt” of the required mailing and by asserting that the requirements of RPAPL 1306 were not satisfied because the required filing listed only wife and not husband as “borrower.” In deciding the motion, the District Court adopted the recommendation of the Magistrate Judge and granted summary judgment to lender, finding that the requirements of both RPAPL 1304 and 1306 were satisfied.   Borrowers appealed to the Second Circuit and argued that “it was evident from the fact that the notices were dated almost a year after default that the bank had deviated from its routine office practice of generating the envelopes for the 90–day notices “’upon default’” … that failed to comply with RPAPL 1306 because the requisite filing listed only one of their names.”  Seeking guidance from the Court of Appeals, the Second Circuit certified its two questions. The Decision of the Court of Appeals RPAPL 1304 The Court, recognizing that RPAPL 1304 does not set forth the proof necessary to demonstrate compliance with the statute’s notice requirements in foreclosure actions, explained how to establish that a notice has been sent in analogous circumstances: this Court has long recognized a party can establish that a notice or other document was sent through evidence of actual mailing ( e.g., an affidavit of mailing or service) ( see Engel v. Lichterman, 62 N.Y.2d 943, 944, 479 N.Y.S.2d 188, 468 N.E.2d 26 <1984> ) or—as relevant here—by proof of a sender’s routine business practice with respect to the creation, addressing, and mailing of documents of that nature. Evidence of “an established and regularly followed office procedure” ( Matter of Gonzalez (Ross), 47 N.Y.2d 922, 923, 419 N.Y.S.2d 488, 393 N.E.2d 482 <1979> ) may give rise to a rebuttable “presumption that such a notification was mailed to and received by ” ( Preferred Mut. Ins. Co. v. Donnelly, 22 N.Y.3d 1169, 1170, 985 N.Y.S.2d 470, 8 N.E.3d 847 <2014> ; see also Nassau Ins. Co. v. Murray, 46 N.Y.2d 828, 829, 414 N.Y.S.2d 117, 386 N.E.2d 1085 <1978> ). “In order for the presumption to arise, office practice must be geared so as to ensure the likelihood that notice ... is always properly addressed and mailed” ( Nassau Ins. Co., 46 N.Y.2d at 830, 414 N.Y.S.2d 117, 386 N.E.2d 1085). Such proof need not be supplied by the employee charged with mailing the document ( see Bossuk v. Steinberg, 58 N.Y.2d 916, 919, 460 N.Y.S.2d 509, 447 N.E.2d 56 <1983> ) but can be offered in the form of an affidavit of an employee with “personal knowledge of the practices utilized by the at the time of the alleged mailing” ( Preferred Mut. Ins. Co., 22 N.Y.3d at 1170, 985 N.Y.S.2d 470, 8 N.E.3d 847; see also Nassau Ins. Co., 46 N.Y.2d 828, 414 N.Y.S.2d 117, 386 N.E.2d 1085). For example, in Preferred Mut. Ins. Co., we deemed an affidavit describing the procedures used by an insurance company “to ensure the accuracy of addresses, as well as office procedure relating to the delivery of mail to the post office” sufficient to support the presumption, where the affidavit explained, among other things, how the notices and envelopes were generated, posted and sealed, as well as how the mail was transmitted to the postal service (22 N.Y.3d at 1170, 985 N.Y.S.2d 470, 8 N.E.3d 847, affg 111 A.D.3d 1242, 1244, 974 N.Y.S.2d 682 <4th dept. 2013> ). Having described how to establish the rebuttable presumption of mailing through “standard office mailing procedures,” the Court then addressed the requirements for rebutting that presumption.  The borrower argued that denial of receipt and a showing that “any aspect of the routine office procedure was not followed” is sufficient.  Lender did “not disagree that a denial of receipt and a showing of noncompliance can raise a fact issue but contends that this is true only if the deviation from procedure is material and related to the mailing process in a manner that would affect whether the document was mailed to the appropriate party.”  The Court agreed with lender and stated the general principal that: t is well-settled that “ enial of receipt ... standing alone, is insufficient .... In addition to a claim of no receipt, there must be a showing that routine office practice was not followed or was so careless that it would be unreasonable to assume that the notice was mailed” ( Nassau Ins. Co., 46 N.Y.2d at 829–830, 414 N.Y.S.2d 117, 386 N.E.2d 1085). In addressing the more specific question asked by the Second Circuit, the Court stated: we clarify that to rebut the presumption, there must be proof of a material deviation from an aspect of the office procedure that would call into doubt whether the notice was properly mailed, impacting the likelihood of delivery to the intended recipient. Put another way, the crux of the inquiry is whether the evidence of a defect casts doubt on the reliability of a key aspect of the process such that the inference that the notice was properly prepared and mailed is significantly undermined. Minor deviations of little consequence are insufficient. The Court also noted that “ hat is necessary to rebut the presumption that a RPAPL 1304 notice was mailed will depend, in part, on the nature of the practices detailed in the affidavit.”  “ ontextual considerations” may also become relevant.  In CIT Bank , for example, lender argued that “residential notes and mortgages are negotiable instruments that often change hands at various points during their duration, which may impact the timing of the creation and mailing of RPAPL 1304 notices—a contextual factor a court could consider in assessing whether a purported deviation from routine procedure was material.”  Here, there was a significant gap in time between the date of the notice and the default, despite the averment that the “routine office practice of generating the envelopes for the 90-day notices ‘upon default.’”  The Court also noted that the standard proposed by borrower – i.e., any deviation from established office procedure would be sufficient to rebut the presumption of mailing – would: undermine the purpose of the presumption because, in practice, it would require entities to retain actual proof of mailing for every document that could be potentially relevant in a future lawsuit. As we recognized almost a century ago, such an approach would be financially and logistically impractical given the reality that commercial entities create and process significant volumes of mail and may experience frequent employee turnover—circumstances that apply not only to banks, but many other businesses and government agencies. RPAPL 1306 Simply stated, borrower argued that lender’s RPAPL 1306 filing was insufficient because all borrowers are required to be listed thereon and lender only included wife.  The Court rejected borrower’s argument.  First, as a matter of statutory interpretation only one borrower is required because RPAPL 1306 references the “borrower” singularly.  This is in contrast to, for example, the related RPAPL 1304 which references “the ‘borrower, or borrowers.’”   The Court further noted that because the primary purpose of the statute, which has been previously described, would be furthered if just one borrower is listed on a lender’s filing, listing a single borrower is sufficient.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws.  The Dodd-Frank Act contains whistleblower provisions that authorize the Securities and Exchange Commission (“SEC” or the “Commission”) to pay substantial cash rewards to whistleblowers who voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act.  The Dodd-Frank Act enables the SEC to pay an award to any individual, or group of individuals, who provide “original information” about a violation of the federal securities laws. To be “original”, the information must be unknown to the SEC and derived from the whistleblower’s independent knowledge or analysis.  Information will be considered “original” even if the whistleblower first reports the violations internally or to another agency, so long as the whistleblower reports the same information to the SEC within 120 days of the initial tip. Under this “safe harbor” ( see Rule 21F-4(b)(7) of the Securities Exchange Act of 1934 ( here )), the SEC will treat the information as though it had been submitted to the SEC at the same time that it was submitted to the other agency ( i.e. , it will treat the information as “original information”).  The SEC first applied the safe harbor to a whistleblower tip in April 2018. As announced ( here ), the SEC awarded more than $2.2 million to a former company insider who first reported information about a violation of the securities laws to another federal agency and within 120 days thereafter provided the same information to the SEC. As explained in that press release, the whistleblower voluntarily reported information to a federal agency covered by the rule, which then referred the matter to the SEC. As a result, the SEC opened an investigation. Within 120 days of the initial report, the whistleblower provided the same information to the SEC and later provided substantial cooperation in the investigation. Although the whistleblower’s tip came after the SEC had opened its investigation, the Commission treated the submission as though it had been made when the whistleblower provided the information to the other agency. Recently, the SEC made an award to a whistleblower who availed himself/herself of the safe harbor provision. On March 29, 2021, the SEC announced ( here ) that it awarded more than $500,000 to a whistleblower who raised concerns internally before submitting a tip to the Commission. The whistleblower’s information and assistance allowed the SEC and another agency to quickly file actions that shut down an ongoing fraudulent scheme. The whistleblower’s information prompted an internal investigation by the company, which subsequently reported the conduct to an outside agency, which in turn provided the information to the SEC. Separately, the whistleblower reported the alleged misconduct to the SEC within 120 days of reporting the violations internally to the company. Under the “safe harbor” provision of the SEC’s whistleblower rules, the SEC treated the whistleblower’s information as though it had been submitted to the SEC at the same time it was internally reported because the whistleblower reported the violations to the SEC within 120 days of the internal report. Takeaway Congress created the whistleblower program to incentivize individuals possessing original, timely, and credible information about violations of the federal securities laws to report such misconduct to the SEC. The Commission will treat information reported to a covered authority ( e.g. , a federal agency, a state Attorney General or securities regulatory authority, any self-regulatory organization, the Public Company Accounting Oversight Board, or to an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law) as “original information” if the whistleblower submits the same information to the Commission within 120 days of the initial report. The safe harbor, therefore, provides the whistleblower with an additional opportunity to be rewarded for reporting a violation of the securities laws when they are uncertain as to where they should report the violation.

Although New York law does not provide for a single statute of limitations for breach of fiduciary duty or unjust enrichment claims, courts typically determine the applicable limitations period — three years under CPLR § 214 (4) or six years under CPLR § 213(1) — by analyzing the substantive remedy that the plaintiff seeks. IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009). Thus, for example, “ here the remedy sought is purely monetary in nature, courts construe the suit as alleging ‘injury to property’ within the meaning of CPLR § 214.” IDT , 12 N.Y.3d at 139; see also Ingrami v. Rovner , 45 A.D.3d 806, 808 (2d Dept. 2007) (applying three-year statute of limitations to unjust enrichment claim because plaintiff sought monetary, as opposed to equitable, relief).  A claim for breach of fiduciary duty accrues as soon as “the claim becomes enforceable — when all elements of the tort can be truthfully alleged in a complaint.” IDT , 12 N.Y.3d at 140. “Given that damage stemming from the misconduct is an essential element of a breach of fiduciary duty claim, the claim is not enforceable, and thus does not accrue until damages are sustained.” Grika v. McGraw , 55 Misc. 3d 1207(a) (Sup. Ct., N.Y. County 2016), aff’d sub nom. , L.A. Grika on behalf of McGraw , 161 A.D.3d 450 (1st Dept. 2018]) see also IDT , 12 N.Y.3d at 140 (“date of damages is measured from when the plaintiff first suffered loss”). As with many rules, there is an exception – the continuing wrong doctrine. Under the doctrine, the statute of limitations is tolled “where there is a series of independent, distinct wrongs rather than a single wrong that has continuing effects.” Ganzi v. Ganzi , 183 A.D. 3d 433 (1st Dept. May 7, 2020) (holding that, under continuous wrong doctrine, new contracts executed during limitations period gave rise to timely fiduciary duty claims based on same terms as an earlier contract executed prior to limitations period); see also Henry v. Bank of Am. , 147 A.D.3d 599, 600 (1st Dept. 2017).  When a defendant seeks dismissal under CPLR § 3211(a)(5) on statute of limitations grounds, he or she bears “the initial burden of establishing, prima facie , that the time in which to sue has expired.” Benn v. Benn , 82 A.D.3d 548, 548 (1st Dept. 2011) (internal quotation marks and citation omitted). “To meet its burden, the defendant must establish, inter alia , when the plaintiff’s cause of action accrued.” Lebedev v. Blavatnik , 144 A.D.3d 24, 28 (1st Dept. 2016) (internal quotation marks and citation omitted). If the defendant meets that burden, “then the burden shifts to the plaintiff to aver evidentiary facts establishing that the cause of action was timely or to raise a question of fact as to whether the cause of action was timely.” Lake v. New York Hosp. Med. Ctr. of Queens , 119 A.D.3d 843, 844 (2d Dept. 2014) (internal quotation marks and citation omitted). In today’s article, we examine VA Mgt., LP v. Estate of Valvani , 2021 N.Y. Slip Op. 01878 (1st Dept. Mar. 25, 2021) ( here ), a case in which the court addressed the foregoing statutes and principles. VA Management, LP v. Estate of Valvani Background VA Management involved, inter alia , an alleged breach of fiduciary duty in connection with the management of a portfolio of pharmaceutical company securities. According to the Complaint, plaintiff VA Management, LP (“VA”) hired Sanjay Valvani (“Valvani”) in 2007 to manage its portfolio of pharmaceutical company securities. Between 2007 and 2011, Valvani allegedly obtained confidential information from the Food and Drug Administration about the status of drug applications and used that information to buy and sell pharmaceutical company shares for a substantial gain. VA claimed to be unaware of Valvani’s alleged insider trading. Valvani allegedly received over $100 million in compensation during his time with VA.  In June 2016, Valvani was arrested on federal criminal insider trading charges. The Securities and Exchange Commission (“SEC”) simultaneously brought a civil enforcement action against him. Following Valvani’s death, the U.S. Attorney’s Office and SEC dropped their actions against him. VA settled related claims with the SEC in May 2018. On June 14, 2019, VA and Valvani’s estate (“Defendant”) executed a tolling agreement that tolled the statute of limitations for any claims between the parties until July 31, 2019. The agreement was amended on July 30, 2019, tolling all time limitations for any claims between the parties until August 7, 2019. On August 7, 2019, VA filed suit against Defendant, asserting claims for breach of fiduciary duty and unjust enrichment. Defendant moved to dismiss, arguing that VA’s claims were untimely and should be dismissed under the doctrine of in part delicto because, according to Defendant, Valvani’s misconduct was attributable to VA. Defendant also argued that VA’s unjust enrichment claim was duplicative. The motion court granted Defendant’s motion to dismiss ( here ). First, the motion court held that the three-year statute of limitations applied to VA’s breach of fiduciary duty and unjust enrichment claims because “the remedies sought by VA, including disgorgement of all compensation paid to Valvani from when his breach of fiduciary duty began, purely monetary.” The motion court explained that the “use of the term ‘disgorgement’ instead of other equally applicable terms such as repayment, recoupment, refund, or reimbursement,” was of no moment and “should not be permitted to distort the nature of the claim so as to expand the applicable limitations period from three years to six.” Quoting Access Point Med., LLC v. Mandell , 106 A.D.3d 40, 44 (1st Dept. 2013). See also IDT , 12 N.Y.3d at 139-40. “As a practical matter,” concluded the motion, ‘disgorgement’ of Valvani’s compensation is a claim for monetary damages, not a request for equitable relief. Therefore, the three-year limitations period in CPLR § 214 (4) applies to VA’s breach of fiduciary duty and unjust enrichment claims.” Second, the motion court held that under the tolling agreement, the three-year limitations period had run and therefore VA’s claims were time-barred. The motion court explained that although Valvani’s “‘period of disloyalty’ lasted until 2016, the conduct on which its claim based — Valvani’s insider trading — took place in 2011.” This was so, said the motion court, even though Valvani continued to receive compensation through 2016. “The fact that VA may have suffered further damages from Valvani’s insider trading in later years, in the form of continued compensation and costs of governmental and internal investigations, the ‘continuing effects of earlier conduct alleged to have been wrongful.’” Quoting Carey v. Trustees of Columbia Univ. , 113 N.Y.S. 3d 32, 34 (1st Dept. 2019); see also B. Brages Assoc. v. West 21st LLC , 2014 WL 2116093, at *6 (Sup. Ct., N.Y. County 2014) (“ he statute of limitations begins to run at the first sign of damage, even when the damage gets progressively worse”). These damages, concluded the motion court, did not “constitute a separate wrongful act extending the accrual date for VA’s claim.” Citing Murphy v. Morlitz , 751 F. App’x 28, 30 (2d Cir. 2018); New York Yacht Club v. Lehodey , 171 A.D.3d 487, 487 (1st Dept. 2019).  The motion court also reasoned that “the payment of salary in future years a continuing effect of earlier unlawful conduct, not an independent breach.” First Department’s Decision On appeal, the First Department affirmed. The Court held that VA’s claims were for monetary relief, not equitable relief. Slip Op. at *1. Like the motion court, the First Department rejected the notion that seeking “disgorgement” was something other than the repayment of monies improperly taken. Id. As such, seeking the “disgorgement” of Valvani’s compensation did not convert VA’s claim to one for equitable relief “to which the six-year statute of limitations would apply.” Id. (citations omitted). The Court also held that the motion court “correctly concluded that the breach of fiduciary claim accrued in 2011 at the latest, when Valvani completed the insider trading scheme, which resulted in large profits to the portfolio and thus, to plaintiff, and which in turn increased Valvani’s performance-based compensation.” Id. The Court found that the “three-year statute of limitations had run by June 2019, when the parties executed a tolling agreement.” Thus, concluded the Court, the motion court “properly dismissed plaintiff’s breach of fiduciary duty claim,” which it filed on August 7, 2019. Id. The Court further held that the motion court “correctly deemed the fiduciary tolling doctrine,” to be “inapplicable because does not apply to claims that are solely at law like this one.” Id. (citing Stern v. Barney , 129 A.D.3d 619 (1st Dept. 2015); see also IDT , 12 N.Y.3d at 139; Cusimano v. Schnurr , 137 A.D.3d 527, 530 (1st Dept. 2016). Finally, the Court held that VA’s breach of fiduciary duty claim did not “sound in fraud to warrant application of the six-year statute of limitations (CPLR 213<8> ).” Id. “In particular,” said the Court, “the complaint fail to allege that justifiably relied on any misrepresentation from Valvani, including his certifications of compliance with plaintiff’s policies prohibiting insider trading.” Id. (citing IDT , 12 N.Y.3d at 140). Takeaway VA Management shows that courts will not elevate form over substance when considering whether a breach of fiduciary duty claim is subject to the three-year statute of limitations or the six-year statute of limitations. The decision also highlights how the continuing wrong doctrine applies. As noted, it does not apply to a single wrong that has continuing effects; it applies only to a series of independent, distinct wrongs.

When parties enter into contracts, they generally do so with the expectation of receiving the benefits of their respective bargains.  Hopefully, these expectations are realized when all parties perform.  A party’s failure to perform under a contract frequently results in a claim for breach of contract.  “Generally, once a party to a contract has made a promise, that party must perform or respond in damages for its failure, even where unforeseen circumstances make performance burdensome; until the late nineteenth century even impossibility of performance ordinarily did not provide a defense.”  Kel Kim Corp. v. Central Markets , 70 N.Y.2d 900, 902 (1987) (citation omitted).  This BLOG has analyzed numerous issues related to contract breaches – such as remedies for contractual breaches and defenses to breach of contract actions. One defense to a breach of contract is “impossibility of performance,” which defense has been recognized for quite some time, and “ha been applied narrowly, due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.”  Kel Kim , 70 N.Y.2d at 902.)  Indeed, the defense of “impossibility of performance” is “limited to destruction of the means of performance by an act of God, Vis major, or by law.”  407 East 61 st Garage, Inc. v. Savoy Fifth Ave. Corp. , 23 N.Y.2d 275, 281 (1968) (citations omitted).  Conversely, the defense is not available “where impossibility or difficulty of performance is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy….”  407 East , 23 N.Y.2d at 281 (citations omitted).  Indeed, the Court in Urban Archaeology Ltd. v. 207 East 57 th Street LLC , 34 Misc. 3d 1222(A) (2009), affirmed , 68 A.D.3d 562 (2009), surveyed cases addressing a breaching parties’ misplaced reliance on economic considerations to support an impossibility defense, and stated: Thus, parties to a contract have not been permitted to avoid contractual obligations on the ground of impossibility where a commodity swap agreement was rendered extremely disadvantageous due to an increase in the price of cobalt ( General Elec. Co. v. Metals Resources Group Ltd. , 293 A.D.2d 417, 741 N.Y.S.2d 218 <1st dept 2002> ); financial condition of a contracting party changed due to the fraud of Bernie Madoff ( Sassower v. Blumenfeld , 24 Misc.3d 843, 878 N.Y.S.2d 602, 2009 N.Y. Slip Op. 29198 ); contracting party unable to secure financing in a form required ( Stasyszyn v. Sutton East Assocs. , <161 a.d.2d 275 (1 st dep’t 1990> st dep’t 1990>); party unable to secure the level of insurance required due to a liability insurance ( Kel Kim Corp. v. Central Markets, Inc., supra ), and a party was unable to generate sufficient cash flow due to the catastrophic economic collapse of the Asian market ( Bank of New York v. Tri Polyta Finance B.V. , 2003 WL 1960587 ). Urban Archaeology at *4 (hyperlinks added).  In Urban Archaeology, the court rejected plaintiff tenant’s attempt to avoid its obligations under a commercial lease because “the economic downturn unable to perform according to the terms of the Lease….”  Urban Archaeology at *1. On March 15, 2021, the Supreme Court of the State of New York, Kings County, decided 267 Development, LLC v. Brooklyn Babies and Toddlers, LLC , a lawsuit involving the alleged breach of a commercial lease in which the tenant raised, inter alia , the defense of the “doctrine of impossibility” in light of COVID-19 restrictions.  The plaintiff in 267 Development was a commercial landlord that rented space to defendant tenant.  The defendant’s lease obligations to landlord were guaranteed by defendant O’Neil.  Tenant was forced to close its store due to “Executive Orders § 202.3 , § 202.6 and § 202.7 closing certain businesses throughout New York State in response to the Covid-19 pandemic.”  (Hyperlinks added.)  The Court further noted that “Governor Cuomo initiated a moratorium on residential and commercial evictions and foreclosures in 2020 that has been extended through May 21, 2021.” Landlord commenced action against tenant and guarantor seeking almost $100,000.00 in rent arrears and attorney’s fees.  Landlord moved for summary judgment and tenant opposed the motion “rely in part upon New York City Administrative Code § 22-1005 ("§ 22-1005"), also referred to as Local Law 55<, p> ursuant to , commercial Landlords cannot seek monies for lease arrears from a non-tenant who personally guarantees a lease agreement on behalf of a business that meets the criteria as set forth in the provision.”  The Court noted that § 22-1005 “refers to businesses that were forced to close as a result of the Executive Orders signed by Governor Cuomo”, but only refers to “the guarantors of commercial leases and not the tenant itself.” Among other arguments, tenant asserted that landlord’s motion should be denied for “impossibility of performance,” which is a common law doctrine recognized under New York law “to excuse performance when there have been extraordinary intervening events.”  The Court denied landlord’s motion and held that “the shutdown of 's business has precluded it from performing its contractual obligations. The government shutdown was unforeseeable and could not have been built into the contract. Under the circumstances presented, this Court finds that performance under the subject lease was made impossible.”  In so doing, the Court relied on, inter alia , Kel Kim, supra .  The Court also drew an analogy to a case in which “impossibility” was successfully asserted as a result of the September 11 th attacks, and stated: The doctrine of impossibility was applied after the September 11 terrorist attacks in Bush v . Protravel International , Inc . , 192M . 2d 743 , 747-748 (Civ . Ct ., Richmond County 2002) . Telephone communications had been disrupted throughout New York City after 9/11. As a result, the Plaintiff in the aforementioned case was precluded from timely canceling travel reservations. The Civil Court found that performance of the travel contract was rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown. Id . at 747 .  (Hyperlink added.) Finding that “Plaintiff's inclusion of causes of action in their complaint against Ms. O'Neil constitutes commercial tenant harassment under the law”, the Court also granted defendants’ cross-motion for summary judgment against landlord for “attempting to enforce a personal guarantee that or reasonably should know not enforceable pursuant to § 22-1005” under New York City Administrative Code § 22-902(a) (11) and (14).  Thus, the claims asserted against the guarantor were stricken and the guarantor was awarded judgment for commercial tenant harassment.