March 2021 has been a busy month for the Enforcement Division of the Securities and Exchange Commission (“SEC” or “Commission”). Since our last Enforcement News article (here), the SEC has announced six enforcements proceedings and/or settlements involving some type of securities fraud. The type of conduct addressed by the SEC in these proceedings and/or settlements is varied and limited only by the imagination of those who perpetrated the fraud. Thus, for example, fraudsters used social media, the Dark Web, Ponzi-like techniques, and the closeness of a religious community (also known as affinity fraud) to deceive investors out tens of millions of dollars. As discussed below, the theme common to these scams is deception and personal gain at the expense of unsuspecting investors. We briefly examine these proceedings below. SEC v. Heckler On March 9, 2021, the SEC announced (here) that it charged George Heckler (“Heckler”) for operating a decade-long investment adviser fraud through two private hedge funds, Cassatt Short Term Trading Fund LP (“Cassatt”) and CV Special Opportunity Fund LP (“CV Special”), which Heckler formed to conceal massive losses incurred by Conestoga Holdings LP (“Conestoga”), another fund controlled by Heckler. According to the SEC’s complaint (here), Heckler, after forming Cassatt and CV Special, transferred Conestoga’s poorly performing assets to those funds and then misrepresented the funds’ objectives and performance to Cassatt and CV Special investors. The SEC alleged that, between 2009 and 2019, Heckler falsely told investors that their funds were being used to engage in very short-term equity trading and that the investments were consistently generating positive returns. In truth, claimed the SEC, a substantial amount of investors’ funds had not been invested at all or had been used to make Ponzi-like payments to prior investors. According to the SEC, Heckler raised at least $90 million in new investor capital through Cassatt, CV Special, and three other entities he controlled, of which over $32 million was used to repay or redeem prior investors. In addition, the SEC alleged that Heckler took over $1 million for his personal use, and Cassatt and CV Special suffered significant losses as a result of poor investments by Heckler. Heckler also allegedly concealed these losses from investors by providing them with false account statements showing fictitious gains. The SEC charged Heckler with violations of the antifraud provisions of the federal securities laws. Heckler agreed to settle the SEC’s charges by consenting to a bifurcated judgment that permanently enjoins him from future violations of the charged provisions and bars him from the securities industry, with disgorgement and penalties to be resolved at a future date. On March 9, 2021, Heckler pleaded guilty for related criminal conduct in federal court in the District of New Jersey (here). SEC v. Fassari On March 15, 2021, the SEC announced (here) fraud charges and an asset freeze and other emergency relief against Andrew L. Fassari (“Fassari”), a California-based trader who used social media to spread false information about a defunct company, while secretly profiting by selling his own holdings of the company’s stock. According to the complaint (here), Fassari, using his Twitter handle @OCMillionaire, tweeted false statements about Arcis Resources Corporation (“ARCS”), a defunct Nevada company with publicly traded securities, during December 2020. The SEC alleged that, on December 9, 2020, Fassari began purchasing over 41 million shares of ARCS stock shortly before tweeting false information about ARCS to his thousands of Twitter followers, including falsely claiming that ARCS was reviving its operations, expanding its business, and being backed by “huge” investors. The SEC further alleged that, between December 9 and 21, 2020, Fassari made approximately 120 tweets that referenced “$ARCS,” dozens of which were false and misleading. In seeking an injunction, the SEC alleged that Fassari continued to tweet about other stocks as recently as January and February 2021. The SEC further alleged that, over the next several days, ARCS’s share price skyrocketed, ultimately increasing over 4,000%. The SEC also claimed that Fassari made false statements about his own trading in ARCS. Between December 10 and 16, 2020, Fassari allegedly sold all his shares in ARCS for profits of over $929,000, while continuing to publish false and misleading information about ARCS and his trading in ARCS. here,=">here," for="for" example.="example."> The SEC charged Fassari with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, prejudgment interest, and a civil penalty from Fassari. In addition, on March 2, 2021, the SEC issued an order (here) temporarily suspending trading in the securities of ARCS. here).=">here)." As="As" we="we" noted="noted" in="in" that="that" article,="article," “truth,="“truth," candor="candor" accuracy="accuracy" corporate="corporate" communications="communications" are="are" necessary="necessary" regardless="regardless" medium="medium" which="which" they="they" made.="made." Thus,="Thus," officers="officers" directors="directors" who="who" use="use" social="social" media,="media," without="without" oversight,="oversight," review,="review," scrutiny="scrutiny" attendant="attendant" issued="issued" through="through" more="more" traditional="traditional" means,="means," risk="risk" from="from" if="if" their="their" alleged="alleged" be="be" materially="materially" false="false" misleading.”="misleading.”"> SEC v. Levine On March 18, 2021, the SEC announced (here) that it charged Seth P. Levine (“Levine”), a New Jersey resident, with defrauding investors in connection with their investments in real estate. Most of the investors were members of the Orthodox Jewish community. here=">here" and="and" >here.=">here."> In its complaint (here), the SEC alleged that Levine sold membership interests in limited liability companies that purchased and owned apartment complexes. According to the SEC, from at least February 2015 through August 2019, Levine raised millions of dollars from more than 60 investors, including family, friends, and other investors, many of whom belonged to the Orthodox Jewish community. In offering the interests, Levine allegedly used false and misleading statements that masked the underlying financial problems of Norse Holdings, LLC (“Norse Holdings”), a real estate investment and management company that Levine owned and operated, and its inability to pay promised returns without using new investor monies or proceeds from a related mortgage fraud. The SEC alleged that Levine provided investors with documents reflecting false and inaccurate information concerning the profitability of the apartment complexes; sold overlapping ownership interests to investors using false operating agreements and, at times, forged signatures; frequently commingled investor funds to prop up real estate holdings that were struggling; and paid investors with fake profits generated by the mortgage fraud Levine conducted using the same properties. The SEC charged Levine with violating the antifraud provisions of the federal securities laws. Levine agreed to settle the charges against him. The settlement, which is subject to court approval, will permanently enjoin Levine from violating the charged provisions of the federal securities laws and provides for the disgorgement of ill-gotten gains and the payment of prejudgment interest and civil penalties at a later date, as decided by the court. In a parallel action, the U.S. Attorney’s Office for the District of New Jersey announced (here) criminal charges against Levine in connection with certain of the conduct underlying the SEC’s action. SEC v. Richman et ano. On March 18, 2021, the SEC announced that it charged Jessica Richman (“Richman”) and Zachary Apte (“Apte”), co-founders of uBiome Inc. (“uBiome”), a San Francisco-based private medical testing company, with defrauding investors out of $60 million by falsely portraying uBiome as a successful start-up with a proven business model and strong prospects for future growth. In its complaint (here), the SEC claimed that Richman, uBiome’s CEO, and Apte, its Chief Scientific Officer, raised funds from investors – millions of dollars of which went to Richman and Apte – by falsely portraying uBiome as a rapidly growing company, which Richman told investors was “inventing the microbiome industry” and making “products that improve people’s lives.” According to the SEC, Richman and Apte lulled investors into believing that the company had a strong track record of receiving health insurance reimbursement for its clinical tests, which purportedly could detect microorganisms and assist in diagnosing disease. The SEC maintained that these claims were false and misleading because uBiome’s purported success in generating revenue depended on the individual defendants’ ability to convince doctors into ordering unnecessary tests and engaging in other improper practices that Richman and Apte directed, which, if discovered, would have led to insurers refusing to reimburse uBiome. According to the SEC, Richman and Apte concealed the improper practices from investors and insurers, including directing uBiome employees to provide insurers with backdated and misleading medical records to substantiate the company’s prior claims for reimbursement. Ultimately, Richman and Apte’s efforts to conceal the practices unraveled, said the SEC, which led to uBiome suspending its medical test business and declaring bankruptcy. According to the SEC, Richman and Apte were each enriched by millions of dollars through selling their own uBiome shares during the fraudulent fundraising round. The SEC charged Richman and Apte with violating the antifraud provisions of the federal securities laws. The SEC is seeking court orders, including officer and director bars, to prevent Richman and Apte from engaging in future fraud, as well as orders requiring them to disgorge their ill-gotten gains from the violations and pay civil penalties. In a parallel action, the U.S. Attorney’s Office for the Northern District of California announced (here) criminal charges against Richman and Apte. SEC v. Chatfield PCS LTD. et al. On March 18, 2021, the SEC announced (here) that it filed charges and obtained an asset freeze and other emergency relief to stop an alleged fraudulent offering and the misappropriation of investor assets by Tra Jay Scarlett (“Scarlett”), a Colorado Springs resident, using two entities under Scarlett’s control, Chatfield PCS Ltd. (“Chatfield”) and GO ECO Manufacturing, Inc. (“GO ECO”). In its complaint (here), the SEC alleged that since approximately March 2016, Scarlett, through Chatfield, raised at least $3.2 million from investors in two securities offerings by GO ECO, which was represented to be an environmentally-friendly drink bottling and manufacturing company. The SEC alleged that Scarlett and Chatfield told investors that GO ECO made or bottled “the number one protein shot beverage in the world,” that investments in GO ECO would be used to expand the company’s existing business, and that the investments were expected to generate annual returns of 20% to 25%. According to the SEC, GO ECO never manufactured or bottled any beverages, never opened a bank account, and never operated in any way at all. Instead, said the SEC, Scarlett misappropriated hundreds of thousands of dollars of investor funds to buy, among other things, jewelry and precious metals, and to make a down payment and mortgage payments on his home. The SEC also alleged that defendants made other false and misleading statements to GO ECO investors about GO ECO’s business operations, management team, and relationship with its supposed key customer. The SEC charged defendants with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement, prejudgment interest, and a civil penalty from each of them. SEC v. Jones On March 18, 2021, the SEC announced (here) that it charged James Roland Jones (“Jones”), a/k/a “MillionaireMike”, of Redondo Beach, California, with perpetrating a fraudulent scheme to sell “insider tips” on the dark web. This is the SEC’s first enforcement proceeding involving alleged securities violations on the dark web. In its complaint (here), the SEC alleged that, in late 2016 and 2017, Jones accessed various dark web marketplaces, including a website claiming to be an insider trading forum, in search of material, nonpublic information to use for his own securities trading. According to the SEC, in order to gain access to the insider trading forum, Jones lied about possessing material, nonpublic information. By doing so, Jones allegedly gained access to the insider trading forum for a short period, but was unsuccessful in obtaining valuable material, nonpublic information. Thereafter, alleged the SEC, Jones devised a scheme to sell purported insider tips to others on the dark web. The SEC alleged that, in the spring of 2017, Jones offered and sold on one of the dark web marketplaces purported “insider tips” that he falsely described as material, nonpublic information from the insider trading forum or corporate insiders. According to the SEC, several users purchased the tips and ultimately traded based on the information Jones provided. The SEC charged Jones with violating the antifraud provisions of the federal securities laws. Simultaneous with the filing, Jones agreed to a bifurcated settlement that, subject to court approval, permanently enjoins him from further violating these provisions, and reserves the determination of disgorgement and civil penalties for a later date. In a parallel action, the U.S. Attorney’s Office for the Middle District of Florida filed criminal charges against Jones (here).

Fraud in the sale of securities. Such an allegation is often governed by an arbitration clause, requiring the parties to resolve their dispute before a FINRA tribunal. Not all investment claims, however, require resolution in arbitration. Sometimes the dispute can be adjudicated in a court of law. Such was the case in Pottorff v. Centra Fin. Group, Inc. , 2021 N.Y. Slip Op. 01645 (1st Dept. Mar. 19, 2021 ( here ). Pottorff v. Centra Financial Group, Inc. Background Pottorff involved an annuity contract, which plaintiff claimed was unsuitable and inappropriate for him. Although suitability concerns are often addressed by claims of breach of fiduciary duty and/or negligence, it can also be addressed by fraud claims where, as in Pottorff , the alleged unsuitable investment is rooted in a false and misleading recommendation or omission.  In Pottorff , Plaintiff sold a business and sought the assistance of defendants for an investment vehicle that would not be subject to the fluctuations of the stock market and would provide plaintiff and his wife with a dependable income. Plaintiff claimed that he was not a sophisticated investor and placed his trust in defendants for a secure investment vehicle. Defendants were trusted advisors and fiduciaries of the plaintiff and were treated as such by the motion court. Defendants recommended a single premium immediate annuity joint and survivor life annuity, which would pay plaintiff and his wife $8,702.42 a month while they were both alive. The payment decreased to $4,351.21 upon the death of either one of them. Defendants sought to provide protection for plaintiff should one of them die. Plaintiff was given a physical examination and was found to be uninsurable for life insurance purposes. Plaintiff’s wife was insurable up to $250,000.00 for life insurance purposes. The initial policy premium that was paid on the annuity was $1,425,000.00. The amount of life insurance defendants was able to secure for plaintiff and his wife was inadequate to cover the cost of the annuity premium. Despite the inability to cover this shortfall, defendants recommended the annuity to plaintiff and his wife. Plaintiff’s operative complaint contained five causes of action: fraud in the inducement, fraud, constructive fraud, unjust enrichment and recission. Defendants moved to dismiss. Defendants argued that plaintiff merely alleged a claim for negligence, which was barred by the running of the three-year statute of limitations. Defendants maintained that, at best, plaintiff merely alleged a failure to make a suitable recommendation – a claim that does not rise to level of fraud in the absence of a special relationship, which was non-existent.  Defendants also argued that plaintiff failed to plead scienter with particularity. The only paragraphs in the complaint supporting the scienter element, said defendants, concerned defendants acting with a commercial motive. Such a motive, defendants claimed, does not satisfy the scienter requirement of the cause of action. In addition, defendants argued that plaintiff failed to plead damages. According to defendants, plaintiff did not claim that any of the defendants failed to pay the monthly annuity payments. Instead, said defendants, to the extent plaintiff was harm it was because he had to remain alive in order to earn his premium back through annuity payments. The life annuity in question, explained defendants, did not guarantee complete return of premium through annuity payments.  Further, defendants contended that plaintiff impermissibly used group pleading to allege the fraud, rather than alleging facts that distinguished between the three defendants. Defendants argued that plaintiff failed to specify which defendant committed the alleged wrongful acts and how the actions of any one defendant could be imputed to all defendants. here.=">here."> Finally, defendants maintained that the October 2017 Letter annexed to the operative complaint constituted documentary evidence sufficient to dismiss the complaint under CPLR § 3211(a)(1). Defendants maintained that the October 2017 Letter explained how plaintiff knew the effect that either annuitants’ early death would have on the income payments before he and his wife purchased the annuity and further stated how they sought to generate “maximum income without market exposure” by purchasing the annuity, along with a variable annuity, and life insurance policies to offset lost income from the early death of either annuitant.  [Ed. Note: Under CPLR § 3211(a), a party may make a motion to dismiss on the “ground that . . . a defense is founded upon documentary evidence.” To qualify as “documentary,” the content of the document must be “essentially undeniable and …, assuming the verity of and the validity of its execution, will itself support the ground on which the motion is based.” Amsterdam Hospitality Grp., LLC v. Marshall-Alan Assocs., Inc. , 120 A.D.3d 431, 432 (1st Dept. 2014), quoting David D. Siegel, Practice Commentaries, McKinney’s Cons. Laws of N.Y., Book 7B, C.P.L.R. C3211:10 at 22. Materials that clearly qualify as “documentary evidence” include judicial records, such as judgments and orders, as well as documents reflecting out of-court transactions, such as contracts, deeds, wills, and mortgages. Fontanetta v. Doe , 73 A.D.3d 78, 84-85 (2d Dept. 2010) (citation omitted). Thus, in order for evidence to qualify as “documentary,” it must be unambiguous, authentic and undeniable.” Granada Condominium III Assn. v. Palomino , 78 A.D.3d 996, 996-997 (2d Dept. 2010). In the Second and Fourth Departments, affidavits, deposition testimony, and letters are not considered documentary evidence “within the intendment of CPLR 3211(a)(1).” Nero v. Fiore , 165 A.D.3d 823, 826 (2d Dept. 2018). In the First Department, like the Second  and Fourh Departments, affidavits are not documentary evidence within the meaning of CPLR § 3211(a)(1). Tsimerman v. Janoff , 40 A.D.3d 242 (1st Dept. 2007).] In opposition, plaintiff argued that he satisfied all the elements of a fraud claim. Plaintiff maintained that he provided the who, what, where, when and how of the alleged fraud and did so with the requisite particularity. To that end, plaintiff alleged that (a) defendants represented that the purchase of the annuity, without any backside protection, including, but not limited to, commensurate insurance, was an appropriate investment; (b) defendants knew plaintiff and his wife were unsophisticated investors and would rely on them for investing and planning advice; (c) defendants knew when the annuity was issued that it was not appropriate or suitable for the Pottorffs because it lacked backing and/or protection; (d) defendants knowingly and with the intent to deceive recommended the annuity and advised plaintiff and his wife that it was a suitable and appropriate investment; (e) plaintiff and his wife relied on defendants agents and purchased the recommended annuity; (f) plaintiff’s reliance on defendants was justifiable in light of their position of trust. Plaintiff also claimed that he satisfied the scienter element of the fraud claim. Specifically, plaintiff alleged that (a) defendants knew that plaintiff and his wife were unsophisticated investors and were relying on defendants for advice and recommendations; (b) defendants knew the annuity was unsuitable because it lacked commensurate insurance or other backside protection but recommended the security anyway; and (c) defendants knew that the annuity had limitations and strictures that made the annuity inappropriate for plaintiff and his wife. The motion court denied the motion as to the fraud claims ( here ). The Appellate Division, Fourth Department unanimously affirmed. The Fourth Department’s Decision The Court held that plaintiff “sufficiently stated a claim for fraud by alleging ‘a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.’” Slip Op. at *1 (quoting Eurycleia Partners, LP v Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009), other citation omitted)). The Court found that, inter alia , “defendants’ employees and agents, with intent to induce plaintiff’s reliance, falsely represented to plaintiff that the subject annuity was a sound and appropriate investment while knowing that, ‘without the corresponding life insurance or other risk protection<, the annuity> would almost certainly result in a loss to . . . laintiff and windfall to efendants.’” Id. The Court further concluded that plaintiff sufficiently stated a claim for fraudulent inducement.  To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine , 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed , 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp. , 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc. , 87 A.D.3d 287, 294 (1st Dept. 2011).  The Court found that plaintiff “alleged detrimental reliance on a material representation known to be false,” which was alleged “with the requisite specificity” that resulted in damages. Slip Op. at *1 (citations omitted).  The Court also held that plaintiff “sufficiently stated a claim for constructive fraud.” Id. To plead a cause of action for constructive fraud, a plaintiff must allege the same elements as those to recover for actual fraud, except that a cause of action for constructive fraud does not require proof of defendant’s knowledge of the falsity of his or her representations. Brown v. Lockwood , 76 A.D. 2d 721 (2d Dept. 1980). “The scienter element is replaced by a requirement that the plaintiff prove the existence of a fiduciary or confidential relationship warranting the trusting party to repose confidence in defendants and therefore to relax the care and vigilance that would ordinarily be exercised in the circumstances.” Motion court order; see also Callahan v. Callahan , 127 A.D. 2d 298 (3d Dept. 1987); Brown v. Lockwood , supra .  Like the motion court, the Fourth Department found that plaintiff “alleged the existence of a fiduciary relationship between plaintiff and defendants.” Slip Op. at *1 (citations omitted).  Finally, the Court held that October 2017 was not documentary evidence within CPLR § 3211(a)(1). Slip Op. at *1. The Court also held that even if the letter was permissible documentary evidence, it did not “‘establish conclusively that . . . plaintiff ha no cause of action.’” Id. (quoting Jeanty v. State of New York , 175 A.D.3d 1073, 1074 (4th Dept. 2019), lv. denied , 34 N.Y.3d 912 (2020) (internal quotation marks omitted); other citation omitted). Takeaway Pottorff shows the interplay between a fiduciary relationship and the scienter element of a fraud claim. Where a fiduciary relationship exists, the fiduciary is charged with having special knowledge or information regarding the alleged fraud. In such a situation ( e.g. , where the details are peculiarly within the knowledge of the fiduciary), “the heightened pleading requirements of CPLR § 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in the fraudulent scheme.” JP Morgan Chase Bank, N.A. v. Hall , 122 A.D.3d 576, 580 (2d Dept. 2014), quoting High Tides LLC v. DeMichele , 88 A.D.3d 954, 957 (2d Dept. 2011). In Pottorff , plaintiff benefited from the foregoing principle. Pottorff also shows that group pleading will not be an impediment to the particularity requirement of CPLR § 3016(b) when the reference to “defendants” is specific to a limited group of persons acting for a corporate defendant, instead of a “diverse group of defendants to whom entirely different acts giving rise to the action may be attributed <.…> ” 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp. , 167 AD3d 405 (1st Dept. 2018). We wrote about 47-53 Chrystie Holdings here .

The nature of the equitable remedy of specific performance as related to litigation concerning real estate contracts has been explained by this BLOG < here =">here"> and also addressed, inter alia , < here =">here"> and < here =">here"> .  Suffice it to say, specific performance is an equitable remedy requiring the breaching party to perform under a contract and is frequently awarded in situations where the subject matter of a contract is unique – making an award of money damages inadequate.  Sokoloff v. Harriman Estates , 96 N.Y.2d 409 (2001).  It is generally accepted that “the equitable remedy of specific performance is routinely awarded in contract actions involving real property, on the premise that each parcel of real property is unique.”  Alba v. Kaufman , 27 A.D.3d 816, 818 (3 rd Dep’t 2006) (citations and internal quotation marks omitted). On March 17, 2021, the Second Department decided B&A Realty Management, LLC v. Gloria , a case in which the buyer sought to enforce a real estate contract.  Defendant seller owned undeveloped property in Upstate New York and, in 2014 contracted to sell same to plaintiff buyer.  Pursuant to the contract, purchaser had two years from the end of a 90-day due diligence period to obtain all necessary governmental approvals for the contemplated development project.  “Paragraph 7(b) of the agreement conferred on either party the right to cancel the agreement if all necessary approvals were not obtained .”  The Time-frame expired on October 1, 2017. While “most” governmental approvals were obtained within the Time-frame, all were not.  Accordingly, on September 28, 2017, buyer’s counsel wrote to seller’s counsel to advise that the final approvals were expected within 60 to 90 days.  However, on October 2, 2017, defendant cancelled the contract pursuant its cancellation provisions and directed his counsel to return the down payment to the plaintiff.  “In response, by letter dated October 3, 2017, declared time to be of the essence, waived the contractual contingency of obtaining all governmental approvals, and stated that it was ready, willing, and able to close.” Buyer commenced an action for specific performance and moved for a preliminary injunction.  Seller’s cross-motion to dismiss the complaint was granted by supreme court and buyer’s motion for a preliminary injunction was denied and the decision was affirmed by the Second Department. The Court found that the complaint should be dismissed pursuant to CPLR 3211(a)(1) because the contract “clearly and unambiguously provided that ‘Seller or Purchaser may terminate this Agreement’ if ‘Purchaser has not satisfied this contingency to secure the governmental approvals by the end of the as extended.’”  (Some brackets omitted some added.)  Relying on W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157 (1990), the Court noted that “the issue of whether or not a writing is ambiguous is a question of law to be resolved by the courts, and a clear and complete writing will be enforced according to its terms.”  The Court further noted that: Contract language which is clear and unambiguous must be enforced according to its terms ( see at 162). Where, as here, a condition in a real estate contract relating to government approval expressly grants to the seller the right to cancel the contract in the event that the requisite approval is not obtained, the seller may properly exercise its right to terminate the contract if such approval is not timely obtained ( see B.S.P. Dev. Corp. v Orphan Asylum Socy. of City of Brooklyn , 165 AD2d 850; Oak Bee Corp. v Blankman & Co . , 154 AD2d 3, 7). However, the seller may, orally or by its conduct, waive its contractual right to cancel the contract ( see Ehrenpreis v Klein , 260 AD2d 532 ; Dellicarri v Hirschfeld , 210 AD2d 584 ; Kaufman v Haverstraw Rd. Lands , 158 AD2d 675). As it was undisputed that purchaser failed to timely obtain all necessary governmental approvals, the Court “agree with Supreme Court that the properly cancelled the agreement on October 2, 2017, in accordance with paragraph 7(b) thereof.”  The Court further found that buyer “did not allege any words or conduct of the reflecting an intent to waive his contractual right to cancel the agreement.”   The Court also rejected buyer’s argument that it could “unilaterally waive the governmental approval contingency in the contract” because “that contingency was not inserted solely for its benefit.”  (Citations omitted.)

Today, we examine Two Rivers Entities, LLC v. Sandoval , 2021 N.Y. Slip Op. 01527 (1st Dept. Mar. 16, 2021) ( here ), a case involving breach of contract and the faithless servant doctrine.  Before we examine Two Rivers , we discuss the principles of law at issue in the case. Breach of Contract To sustain a breach of contract cause of action, a plaintiff must allege: (1) a valid agreement; (2) the plaintiff’s performance of its obligations under the agreement; (3) the defendant’s breach of that agreement; and (4) damages. Morris v. 702 E. Fifth St. HDFC , 46 A.D.3d 478, 479 (1st Dept. 2007); Furia v. Furia , 116 A.D.2d 694, 695 (2d Dept. 1986); see also Stonehill Capital Mgt., LLC v. Bank of the West , 28 N.Y.3d 439, 448 (2016).  When reviewing a contract, the court is to construe it “in accord with the parties’ intent.” Riverside South Planning Corp. v. CRP/Extell Riverside LP , 60 A.D.3d 61, 66 (1st Dept. 2008), aff’d , 13 N.Y.3d 398 (2009). “The best evidence of what parties to a written agreement intend is what they say in their writing .... Thus, a written agreement that is clear and unambiguous on its face must be enforced according to the plain terms, and extrinsic evidence of the parties’ intent may be considered only if the agreement is ambiguous. Id. (internal citations omitted). Whether a contract is ambiguous presents a question of law for the court to resolve. Id. at 67.  The Faithless Servant Doctrine The faithless servant doctrine provides that an employee who is faithless in performance of their duties ( i.e. , breaches their duty of loyalty to the employer) is not entitled to recover either salary or commission. See Feiger v. Iral Jewelry , 41 NY2d 928, 928 (1977). While the language of the rule may imply a broad application, courts generally apply the rule relatively narrowly. See , e.g. , W. Elec. Co. v. Brenner , 41 N.Y.2d 291, 295 (1977); Maritime Fish Prods., Inc. v. World-Wide Fish Prods., Inc. , 100 A.D.2d 81, 88 (1st Dept. 1984). Courts will usually hold an employee liable under the faithless servant doctrine only if the employee has usurped a corporate opportunity or actively stolen from the employer. See Visual Arts Found., Inc. v. Egnasko , 91 A.D.3d 578, 579 (1st Dept. 2012); Soam Corp. v. Trane Co. , 202 A.D.2d 162, 162 (1st Dept. 1994) (employee promoted competitor’s products over employer’s); Phansalkar v. Andersen Weinroth & Co., L.P. , 344 F.3d 184, 203 (2d Cir. 2003) (employee usurped corporate opportunity). here,=">here," >here=">here" and="and" >here.=">here."> Two Rivers Entities, LLC v. Sandoval In 2016, defendant Tacho Sandoval became a Class A member of plaintiff Two Rivers Entities, LLC (the “Company”), after investing millions of dollars in the Company. Although investing millions in the Company, Sandoval was not given any management rights. At the time of his investment, Sandoval’s rights were governed by the Company’s Amended and Restated Operating Agreement (“Operating Agreement”). Under Section 5.7 of the Operating Agreement, members were forbidden from “directly or indirectly invest in, or engag in any business which engage in Trading Instruments or in any manner compete with the business of , except for an ownership interest of less than 2% in any publicly traded Company.” Section 7.3(a)(vii) of the Operating Agreement provided that members, such as Sandoval, could have their membership terminated for cause if they materially breached the Operating Agreement. Other grounds for a for-cause termination included a member’s negligence or misconduct in the course of his/her membership or in the performance of the Member’s duties or responsibilities or “embezzlement, fraud or dishonestly committed (or attempted) by the Member, or at his direction.” In October 2019, Sandoval agreed to restructure some of the financing he had provided to the Company. This was effectuated by an Amended and Restated Promissory Note, dated November 1, 2019 (the “Note”). The Note set forth the specifics of the refinancing but did not address the Operating Agreement or Sandoval’s obligations thereunder. Prior to execution of the Note, between July 2017 and October 2018, Sandoval allegedly violated the federal securities laws by inaccurately and untimely disclosing his acquisition of more than 10% of the stock of Clean Coal Technologies, Inc. (“CCT”), a publicity traded company that focuses on the environmental impacts of coal. Sandoval’s affiliation with the Company and his alleged violations purportedly dissuaded certain prospective investors from investing in the Company. On October 16, 2019, prior to the Note’s execution, the Company asked Sandoval to correct his securities filings, but he allegedly refused to do so. The Company commenced the action in November 2019. Its amended complaint included two causes of action: (1) breach of the Operating Agreement; and (2) forfeiture of compensation under the faithless-servant doctrine. Sandoval moved to dismiss, arguing that the release in the Note barred both claims. Even if it did not, Sandoval maintained that none of his alleged actions violated any provisions of the Operating Agreement and that he was not subject to the faithless-servant doctrine. The Motion court agreed ( here ) and dismissed the  complaint. As a threshold matter, the motion court held that the release in the Note, though broad in scope, did not encompass the terms of the Operating Agreement. It did “not address the Operating Agreement’s prohibition on Sandoval investing in other companies,” said the motion court, “and ha nothing to do with the alleged securities violations.…” “Had these sophisticated parties intended for the Note’s release to cover these disputes,” observed the motion court, “they would have ensured it expressly did so.” See Fitzgerald v. Fahnestock & Co. , 48 A.D.3d 246, 247 (1st Dept. 2008). This was important because had the release applied to the claims asserted, dismissal of the contract and faithless servant causes of action would have been moot. On the breach of contract cause of action, the motion court held that Section 5.7 of the Operating Agreement did not prohibit Sandoval from investing in other companies, “even for a stake greater than 2%, unless that company ‘engage in Trading Instruments or in any manner compete with the business of the Company.’” According to the motion court, “ here no indication in the AC or otherwise that CCT ‘engages in Trading Instruments or in any manner competes with the business of the Company.’” Thus, concluded the motion court, “the Company ha not stated a claim for breach of section 5.7.” “Nor,” held the motion court, had “it stated a claim for breach of section 7.3(a).” The reason, said the motion court, was the Company had not alleged that Sandoval acted negligently or otherwise “in the course of his membership or in the performance of the duties or responsibilities” as a member of the Company. “The alleged securities violations,” explained the motion court, “ha nothing to do with Sandoval’s membership in or funding of the Company.” The motion court noted that it was “clear that this claim is focused on the erroneous contention that section 5.7 prohibits Sandoval from having a 2% stake in any publicly traded company regardless of whether that company ‘engages in Trading Instruments or in any manner competes with the business of the Company.’” “The 2% limit is clearly a safe harbor to these two prohibitions and not an independent limitation,” concluded the motion court.  Additionally, the motion court held that the Company failed to plead a violation of the faithless servant doctrine “because the Company ha not alleged any breach that would serve as a predicate for application of the faithless-servant doctrine.…”  Moreover, the motion court held that the issue was not misconduct in connection with the performance of Sandoval’s employment, but rather the repayment of a loan. “The obligation to repay a loan is purely a matter of contract that does not arise from a fiduciary relationship,” said the motion court.” The motion court explained that “ he faithless-servant doctrine cannot be raised to recoup money that the Company repaid someone to satisfy its debt.” This was especially so since the Company did not assert “a separate cause of action for breach of fiduciary duty (likely because Sandoval not a manager and the Operating Agreement not contractually establish non-default fiduciary duties for him…).” In short, concluded the motion court, “Plaintiff cites no authority for use of the faithless-servant doctrine to preclude recovery of loans. The doctrine is about equitable forfeiture of compensation for the services of a disloyal fiduciary.” (Citation omitted). The First Department’s Decision On appeal, the First Department unanimously affirmed. The Court agreed with the motion court in that defendant did not breach Section 5.7 of the Operating Agreement. Slip Op. at *1. The Court noted that the plain language of that section, “unambiguously limits the prohibition on investing to a competing business.” Id. As such, defendant’s acquisition of more than a 2% ownership interest in CCT, a publicly traded company that does not compete with the Company, could not be a breach of the Operating agreement. Id. The Court further held that even if defendant breached Section 7.3 of the Operating Agreement, “the company’s remedy under of the operating agreement for-cause termination of the member, not a claim for breach of contract.” Id. As to the Company’s second cause of action ( i.e. , breach of the faithless servant doctrine), the Court held that the doctrine did not apply to defendant. Id. Noting that the doctrine only applies to “an employee or agent who is faithless in the performance of his or her duties” (citations omitted), the Court found that defendant was “a nonmanaging member of plaintiff, was not an employee and not alleged to have acted on plaintiff’s behalf as its agent.…” Id. Additionally, there were “no allegations that funneled business away to a competitor or engaged in theft.” Id. at *1-*2. Accordingly, concluded the Court, “plaintiff’s faithless servant claim was correctly dismissed.” Id. at *2. Takeaway In claiming a breach of contract ( i.e. , enforcing or attempting to enforce a contract), a plaintiff must plead a breach of the contract by the defendant. In that regard, the plaintiff must demonstrate that the defendant failed to perform its obligations under the agreement. Two Rivers highlights this issue. Two Rivers also highlights the importance of giving the words of the parties’ contract their intended meaning. This is especially important where, as in Two Rivers , the language is clear and unambiguous on its face.  Two Rivers further highlights the importance of pleading the elements of a claim. As noted by the Court, to plead a faithless servant claim, the defendant must be an employee or agent of the employer, breach a duty of loyalty to the employer, and usurp a corporate opportunity or actively steal from the employer. Plaintiff failed to allege the foregoing.

It has long been the law in New York that a party’s disclaimer of reliance on extra-contractual representations and omissions will not preclude a fraudulent inducement claim unless: (1) the disclaimer is specific to the fact alleged to be misrepresented or omitted; and (2) the alleged misrepresentation or omission does not concern facts peculiarly within the knowledge of the non-moving party. Basis Yield Alpha Fund v. Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014). See also Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 323 (1959); MBIA Ins. Corp. v. Merrill Lynch , 81 A.D.3d 419 (1st Dept. 2011). “Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter.” Basis Yield , 115 A.D.3d at 137. here=">here" and="and" >here.=">here."> On March 11, 2021, the Appellate Division, First Department affirmed the dismissal of a fraudulent inducement claim because of the existence of an integration or merger clause and a “no representations” clause in which the defendants disclaimed liability for any extra-contractual representations. D’Artagnan, LLC v. Sprinklr Inc. , 2021 N.Y. Slip Op. 01479 (1st Dept. Mar. 11, 2021) ( here ). D’Artagnan involved an action to recover the money that plaintiff paid to license an integrated software platform provided by defendant Sprinklr Inc. According to the complaint, defendant allegedly deceived plaintiff by representing that defendant’s software would allow plaintiff to directly target its marketing to specific Facebook and Instagram users. As a result, on or about June 2, 2017, the parties entered into a license, a master services agreement, and a statement of work (“SOW”) (collectively, the “Contract”). The master services agreement contained a general merger clause which provided that, “ his Agreement together with each Order Form and/or SOW is the entire agreement between the parties relating to this subject matter, and supersedes … all prior or contemporaneous understandings of the parties related thereto.” The master services agreement also contained a no representation clause, which provided that, “ o party has been induced to enter into this Agreement by, nor is any party relying on, any representation or warranty outside those expressly stated in this Agreement.” Following payment by plaintiff but prior to the use of defendant’s services or platform, plaintiff allegedly discovered that it could not target potential customers individually and directly through certain social media channels. Plaintiff then commenced the action. The first cause of action called “for a declaration that no agreement was entered into between because there was no meeting of the minds as to the material terms of the agreement.” The second cause of action for fraud alleged that defendant “misrepresented the capabilities of its platform and failed to disclose its limitations.” The third cause of action alleged a violation of the New Jersey Consumer Fraud Act. The fourth cause of action sought relief for negligent misrepresentation. The fifth cause of action alleged breach of contract, claiming that defendant’s “failure to provide plaintiff with the ability to target specific customers and direct advertisements to these particular customers on Facebook and Instagram constitute a breach of the contract.” The sixth cause of action sought relief for unjust enrichment. Defendant moved to dismiss. The motion court granted the motion ( here ). The motion court found that “defendant did not represent to plaintiff that its software could directly target Facebook and Instagram users.” “In fact,” said the motion court, “defendant made the opposite representation.” The motion court pointed to a May 9, 2017 email, sent one month before the parties executed the Contract, in which defendant “explicitly state that Facebook and Instagram’s privacy policies prevented direct targeting on Facebook and Instagram platforms.” The motion court also held that the merger clause barred the fraud and negligent misrepresentation causes of action. See="See" Hobart="Hobart" v.="v." Schuler,="Schuler," N.Y.2d="N.Y.2d" 1023,="1023," (1982). This="--> This" Blog="Blog" previously="previously" examined="examined" clauses="clauses" no="no" reliance="reliance" here.=">here."> On appeal, the Appellate Division, First Department unanimously affirmed. In a short and concise decision, the Court held that “Plaintiff’s second, third and fourth causes of action were … correctly dismissed.” Without discussion, the Court agreed with the motion court’s conclusion that the merger clause barred the tort-based claims. Slip Op. at *2. (“In addition to a general merger clause, …” plaintiff’s claims were “not viable.”). The Court specifically cited to the “No Additional Representation” clause in the Contract as a basis for barring the tort-based claims. The Court explained that the no-reliance clause specifically “disclaim liability and responsibility for any extra-contractual representation”, such as the one in which defendant allegedly represented that its software could directly target Facebook and Instagram users. Id. (citing WT Holdings Inc. v. Argonaut Group, Inc. , 127 A.D.3d 544, 544 (1st Dept. 2015); Natoli v. NYC Partnership Hous. Dev. Fund Co., Inc. , 103 A.D.3d 611, 613 (2d Dept. 2013)). The Court explained that “section 10.8 of the master services agreement” specifically provided that plaintiff “had not been ‘induced to enter into . . . nor relying on, and representation or warranty outside those expressly stated in .’” Id. “In light of this specific agreement,” concluded the Court, “plaintiff’s claims sounding in fraud and negligent misrepresentation based upon parol evidence contained in the parties’ emails not viable.” Id. Takeaway In Danann Realty , the Court of Appeals noted that “specific disclaimer destroy[] the allegations in the complaint that the agreement was executed in reliance upon contrary oral representations.” 5 N.Y.2d at 320-21. D’Artagnan reiterates this basic principle of law. As the First Department observed, the contractual disclaimer at issue was specific to the matter at hand and directly addressed the subject of the alleged misrepresentation. Consequently, the contract provision at issue was specific enough to preclude the fraud and negligent misrepresentation claims.

Disclosure in New York State court litigation is governed by Article 31 of the Civil Practice Law and Rules .  In general, there “shall be full disclosure of all matters material and necessary in the prosecution or defense of an action, regardless of burden of proof….”  CPLR 3101.   “The words, ‘material and necessary,’ are … to be interpreted liberally to require disclosure, upon request, of any facts bearing on the controversy which will assist preparation for trial by sharpening the issues and reducing delay and prolixity.”  Allen v. Crowell-Collier Publishing Co. , 21 N.Y.2d 403, 406 (1968); see also , Vargas v. Lee , 170 A.D.3d 1073 (2 nd Dep’t 2019) (relying on , and quoting from Allen .)  CPLR 3101 “embodies the policy determination that liberal discovery encourages fair an effective resolution of disputes on the merits, minimizing the possibility for ambush and unfair surprise.”  Forman v. Henkin , 30 N.Y.3d 656, 661 (2018) (citation and internal quotation marks omitted). In light of the important role disclosure plays in the orderly progress of the litigation process, the CPLR provides remedies for the failure to comply with disclosure.  One such example is CPLR 3124 , which provides that “ f a person fails to respond to or comply with any request, notice, interrogatory, demand, question or order under this article, except a notice to admit under section 3123 , the party seeking disclosure may move to compel compliance or a response.”  (Hyperlink added.)  More significantly, however, CPLR 3126 , which permits a court to impose hefty sanctions for discovery abuses, provides: If any party, or a person who at the time a deposition is taken or an examination or inspection is made is an officer, director, member, employee or agent of a party or otherwise under a party’s control, refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed pursuant to this article, the court may make such orders with regard to the failure or refusal as are just, among them: 1. an order that the issues to which the information is relevant shall be deemed resolved for purposes of the action in accordance with the claims of the party obtaining the order; or 2. an order prohibiting the disobedient party from supporting or opposing designated claims or defenses, from producing in evidence designated things or items of testimony, or from introducing any evidence of the physical, mental or blood condition sought to be determined, or from using certain witnesses; or 3. an order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or any part thereof, or rendering a judgment by default against the disobedient party. It is recognized that the penalties listed in CPLR 3126 “were not intended to be exhaustive” and the “practice commentaries to CPLR 3126 encourage the courts to exercise their ingenuity, and to devise sanctions as narrowly tailored as possible to the circumstances of the individual case.”  DiDomenico v. C&S Aeromatik Supplies, Inc. , 252 A.D.2d 41, 49 (2 nd Dep’t 1998). On March 10, 2021, the Appellate Division, Second Department, decided Nationstar Mortgage, LLC v. Jackson , in which the Court affirmed supreme court’s order “striking … ’s counterclaims and precluding … from offering certain evidence.”  Nationstar is a mortgage foreclosure action.  While the factual history was somewhat involved, same is not germane to the subject of this article.  Suffice it to say, borrower asserted counterclaims pursuant to RPAPL 1501(4) to discharge the mortgage on statute of limitations grounds.  [This BLOG has treated RPAPL 1501(4) < HERE =">HERE"> and < HERE =">HERE"> and issues surrounding statutes of limitations in mortgage foreclosure actions < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> .] Lender moved to strike borrower’s answer and counterclaims pursuant to CPLR 3126 “for failure to provide any disclosure or, in the alternative, to compel disclosure.”  Lender also filed a note of issue and certificate of readiness.  Borrower, in turn, cross-moved for summary judgment dismissing the complaint and on its eighth counterclaim, “which was to cancel and discharge of record the mortgage pursuant to RPAPL 1501(4), based on statute of limitations.”  “Supreme Court denied the ’s cross-motion and granted the ’s motion to the extent of striking the ’s counterclaims and precluding the from offering any evidence that should have been provided in response to the discovery requests served by the .” As to the law related to CPLR 3126, the Nationstar Court stated: Pursuant to CPLR 3126, a court may impose discovery sanctions, including the striking of a pleading or preclusion of evidence, where a party ‘refuses to obey an order for disclosure or wilfully fails to disclose information which the court finds ought to have been disclosed.  The nature and degree of the penalty to be imposed pursuant to CPLR 3126 is a matter within the discretion of the. Although public policy strongly favors that actions be resolved on the merits when possible, a court may resort to the drastic remedies of striking a pleading or precluding evidence upon a clear showing that a party’s failure to comply with a disclosure order was the result of willful and contumacious conduct  The willful or contumacious character of a party’s conduct can be inferred from the party’s repeated failure to respond to demands or to comply with discovery orders, and the absence of a reasonable excuse for these failures, or by the failure to comply with court-ordered discovery over an extended period of time.  (Citations and internal quotation marks omitted.) The Nationstar Court found that borrower’s “wilful and contumacious” conduct could be inferred “from its repeated failure to comply with discovery demands for more than a year, its failure to comply with the deadlines set forth in a compliance conference order, and the absence of any excuse offered for such failures.”  (Citations omitted.)  The Court also found that lender’s filing of the note of issue and certificate of readiness, did not operate as waiver of “its objection to failure to meet its disclosure obligations … since motion seeking discovery sanctions pursuant to CPLR 3126 was pending prior to the date [lender’ filed the note of issue.” Takeaway Discovery deadlines and orders should be taken seriously by litigants lest they be on the receiving end of a significant sanction such as the striking of a pleading or a preclusion order.

In the past, this Blog has examined cases in which the plaintiff brings a breach of contract claim and fraud claim in the same proceeding. < e.g. , here,=">here," and="and" >here.=">here."> e.g.,> Those cases show that where the two claims arise from the same facts and circumstances and seek the same relief, the fraud claim will be dismissed as duplicative of the contract claim.   Indeed, as this Blog has explained previously, New York courts will not permit a fraud claim to survive a motion to dismiss when the claim arises from a breach of contract. Courts routinely dismiss a fraud claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). See also McKernin v. Fanny Farmer Candy Shops, Inc. , 176 A.D.2d 233, 234 (2d Dept. 1991). In today’s article, we examine GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC , 2021 N.Y. Slip Op. 01356 (1st Dept. Mar. 9, 2021) ( here ), a case in which the Appellate Division, First Department addressed the duplication issue, finding that the fraud claim, in part, duplicated plaintiffs’ breach of contract claim. In addition to duplication, the Court also addressed the particularity requirement of CPLR § 3016(b), finding that the complaint provided “specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements.” GSCP VI EdgeMarc Holdings, L.L.C. v. ETC Northeast Pipeline, LLC GSCP involved a lawsuit by the equity owners of EdgeMarc Energy Holdings, LLC (“EdgeMarc”), a Pennsylvania oil-and-gas company, who invested $850 million in the company. Plaintiffs alleged that they incurred significant losses from their investments in defendant ETC Northeast Pipeline, LLC (“Energy Transfer”), a company that designs, builds and operates pipelines. Plaintiffs claimed that beginning in August 2017, Energy Transfer made representations about the progress of the pipeline system ( e.g. , that it was progressing on schedule) and its availability for commercial use ( e.g. , when it would be ready for commercial service). Based on those representation, plaintiffs alleged that they invested $50 million in EdgeMarc.  Plaintiffs also alleged that in late 2017, prior to making additional investments in EdgeMarc, Energy Transfer certified that there was no delay in the development, construction or completion of the system and that, as such, commercial service would be ready by July 1, 2018. According to plaintiffs, Energy Transfer provided three such certifications. Relying of those certifications, plaintiffs claimed that they invested $100 million more in EdgeMarc in early 2018. In September 2018, the pipeline exploded. As a result, regulators ordered a shut-down of the project. Plaintiffs maintained that the explosion exposed the truth about Energy Transfer’s prior representations concerning the project and the system. Plaintiffs alleged that at the time of each representation, Energy Transfer had knowledge and notice of material flaws in its pipeline system that would delay and prevent completion and commercial service of the pipeline system. According to plaintiffs, years before the explosion, Energy Transfer was informed of the area’s “high susceptibility to slope failure” — which is what happened in September 2018 — yet it never disclosed that information, including to the engineers responsible for approving the system’s design. Instead, alleged plaintiffs, Energy Transfer represented to them, without qualification, that the project was on track for completion and commercial service. After the explosion, the Pennsylvania Department of Environmental Protection cited Energy Transfer for legal violations and imposed a $30.6 million civil penalty on the company. Plaintiffs claimed that Energy Transfer did not disclose any of the violations and flaws with the pipeline system prior to the explosion, notwithstanding one of the contractual provisions in the funding commitments in which the company certified the absence of legal violations. Plaintiffs alleged that they funded $100 million of commitments to EdgeMarc on that provision ( i.e. , that Energy Transfer had complied with applicable law). As a result, plaintiffs filed suit, bringing claims for breach of contract (based on Energy Transfer’s contractual certifications and other breaches), fraud, unjust enrichment and negligent misrepresentation. Energy Transfer moved to dismiss the complaint.  The motion court denied the motion as to the breach of contract claim and granted it as to the fraud, unjust enrichment and negligent misrepresentation claims. Both parties appealed. The Court’s Holding The First Department modified the motion court’s order as to the fraud claim, in that it reinstated part of the claim. With regard to the $100 million investment in 2018, the Court held that the fraud claim duplicated the breach of contract claim. Slip Op. at *1 (“To the extent the fraud claim alleges that plaintiffs invested a total of $100 million in 2018 based on defendant’s false and misleading statements made on January 18, 2018, March 2, 2018, and April 16, 2018, representing there was no Project Delay, the claim is duplicative of the breach of contract claim.”) (citations omitted).  With regard to the $50 million investment in 2017, the Court held that the fraud claim did not duplicate the contract claim. Id. The Court reasoned that the fraud claim was predicated on representations that were “not alleged in the breach of contract claim and not covered by the Commitment Letters.” Id. The Court also held that the motion court erred in dismissing the fraud claim for failing to plead fraud with particularity under CPLR § 3016(b). Id. at *1-*2. The Court found that plaintiffs provided “‘specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements,’ including that the dangers and extensive violations of regulations and laws would result in delay beyond July 1, 2018.” Id. at *2 (quoting Houbigant, Inc. v Deloitte & Touche , 303 A.D.2d 92, 99 (1st Dept. 2003); other citation omitted). The Court explained that the complaint alleges that at meetings in Pennsylvania on August 23 and 24, 2017, defendant’s Director — Business Development made false, misleading, and incomplete statements to plaintiffs’ representatives that the pipeline was on track to be fully complete by January 2018 and ready for commercial service by July 1, 2018, when defendant knew it was not on track. It also includes factual allegations that allow the inference that defendant knew those representations were false, including that defendant knew since 2015 that the area near the site of the September 2018 explosion included a landslide area with “dangerous and unstable hillslope terrain,” and that the Pennsylvania DEP’s January 2020 consent order noted that as early as January 2016, defendant knew the area had a “high susceptibility to slope failure” but did not disclose that issue to its engineers or correct it.  Id. at *2. The Court held that the foregoing allegations satisfied “CPLR 3016(b)’s purpose, ‘to inform a defendant with respect to the incidents complained of.’” Id. (quoting Pludeman v. Northern Leasing Sys., Inc. , 10 N.Y.3d 486, 491 (2008)).  In Pludeman , the New York Court of Appeals “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” 10 N.Y.3d at 491. Thus, where “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” the courts should deny a dismissal motion. Id. at 491-92 (internal quotation marks and citations omitted). (citation and quotation marks omitted). In other words, a pleading satisfies CPLR § 3016(b) “when the facts are sufficient to permit a reasonable inference of the alleged conduct.” Id. at 492; accord Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559 (2009); Epiphany Cmty. Nursery Sch. v. Levey , 171 A.D.3d 1, 9 (1st Dept. 2019). The First Department also held that plaintiffs were “not required to plead damages for fraud with particularity.” Slip Op. at *2 (citing Solomon Capital, LLC v. Lion Biotechnologies, Inc. , 171 A.D.3d 467, 469 (1st Dept. 2019)). Takeaway GSCP makes clear how facts and the degree of specificity with which those facts are alleged matter, both in terms of the duplication of claims doctrine and the particularity requirement under CPLR § 3016(b).  As to the former, plaintiffs were able to plead facts showing the existence of an independent tort that was not bound up in their breach of contract claim. For that reason, the First Department was able to make the distinction between the fraud claim for events both before and during 2018. As to the latter, the Court found, without explicitly saying so, that plaintiffs adequately described the “who, what, when, where, and how” of the fraud, or “the first paragraph of any newspaper story.” United States ex rel. Lubsy v. Rolls-Royce Corp. , 570 F.3d 849, 853 (7th Cir. 2009) (internal quotation marks omitted). They provided “specific facts from which it possible to infer defendant’s knowledge of the falsity of its statements.” Slip Op. at *2. Since the complaint sufficed “to inform … defendants with respect to the incidents complained of” ( Pludeman , 10 N.Y.3d at 491), the Court found that plaintiffs satisfied the overarching purpose of CPLR § 3016(b): to give defendants notice of the alleged fraud.

“Summary judgment is a judgment entered by a court for one party and against another party without a full trial.” ( Here .) The motion is designed to avoid unnecessary trials – that is, its purpose is to avoid a trial where there are no material issues of fact to be decided by the trier of fact ( e.g. , the judge or the jury). Summary judgment motions can also simplify a trial (known as a motion for partial summary judgment) because it can dispense with issues or claims for which there are no material issues of fact. A decision on a motion a motion for summary judgment is a final judgment from which the losing party may appeal. How A Summary Judgment Motion Works In New York, summary judgment motions are governed by CPLR §§ 3212 and 3213 (discussed below).  When a party makes a summary judgment motion under CPLR § 3212, it is typically made after the close of discovery, though sometimes a party will file the motion before discovery is complete.  A court will grant a motion for summary judgment if, upon all the papers and evidence submitted, the cause of action or defense is established sufficiently to warrant directing judgment in favor of the moving party as a matter of law. CPLR § 3212(b); Gilbert Frank Corp. v. Federal Ins. Co. , 70 N.Y.2d 966, 967 (1988); Zuckerman v. City of New York , 49 N.Y.2d 557, 562 (1980). The function of the court when presented with a motion for summary judgment is one of issue finding, not issue determination. Sillman v. Twentieth Century-Fox Film Corp. , 3 N.Y.2d 395 (1957); Weiner v. Ga-Ro Die Cutting, Inc. , 104 A.D.2d331 (1st Dept. 1985). To prevail on a motion for summary judgment, the movant must make a prima facie showing of entitlement, submitting sufficient admissible evidence, such as affidavits of persons with first-hand knowledge of the matter, documentary evidence, and testimonial evidence, to demonstrate the absence of any material issues of fact. Jacobsen v. New York City Health and Hosps. Corp. , 22 N.Y.3d 824 (2014); Alvarez v. Prospect Hosp. , 68 N.Y.2d 320 (1986). The movant’s initial burden is a heavy one; on a motion for summary judgment, facts must be viewed in the light most favorable to the non-moving party. Jacobsen , 22 N.Y.3d at 833. If the moving party fails to make its prima facie showing, the court is required to deny the motion, regardless of the sufficiency of the non-movant’s papers. Winegrad v. New York Univ. Med. Center , 4 N.Y.2d 851, 853 (1985).  If the movant meets its initial burden, then the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action or advance an acceptable excuse for the failure to do so. Zuckerman , 49 N.Y.2d at 560. However, bare allegations or conclusory assertions are insufficient to create genuine, bona fide issues of fact necessary to defeat such a motion. Rotuba Extruders, Inc. v. Ceppos , 46 N.Y.2d 223, 231 (1978). Summary Judgment in Lieu of Complaint CPLR § 3213 provides for accelerated judgment, just like CPLR § 3212. The difference between CPLR § 3212 and CPLR § 3213 is the latter permits a summary judgment motion at the outset of the litigation. There are no pleadings, and there is no discovery when a movant seeks summary judgment under CPLR § 3213.  To be entitled to judgement as a matter of law pursuant to CPLR § 3213, the movant must demonstrate that its “action is based upon an instrument for the payment of money only or upon any judgment.” When the former is involved, the movant must demonstrate that the other party executed an instrument that contains an unequivocal and unconditional promise to pay the party upon demand or at a definite time and the party failed to pay according to the terms of the instrument. Mirham v. Awad , 131 A.D.3d 1211 (2d Dept. 2015).  An action on a promissory note is an action for payment of money only. The instrument and evidence of failure to make payments in accordance with its terms constitute a prima facie case for summary judgment. Only where a defendant can raise questions of fact that the note is not an instrument for the payment of money will the court deny a motion for summary judgment under CPLR § 3213. Farca v. Farca , 216 A.D.2d 520 (2d Dept. 1995). The standards for summary judgment under CPLR § 3212 apply to a motion under CPLR § 3213. Cross River Bank v. Haber cross river bank and the founding partner of freiberger haber llp.> cross river bank and the founding partner of freiberger haber llp.> In Cross River Bank v. Haber , 2021 N.Y. Slip Op 30583(U) (Sup. Ct., Kings County Feb. 25, 2021) ( here ), the Court granted a motion for summary judgment under CPLR § 3213 because the facts and evidence demonstrated that the promissory note at issue satisfied the requirements of the statute: it was an instrument for money only and defendants defaulted on their payment thereunder. Cross River Bank involved a two million loan to Fragments Holding LLC (“Fragments”) for which a promissory note (the “Note”) requiring monthly payments was issued and signed. The Note was guaranteed by Phillip Frankenberg, Claudia Frankenberg, Maurice Haber and Esther Haber. The guarantee provided that the obligations thereunder were “joint and several” as to each of them.  Fragments made payments for almost three years and then defaulted. Philip Frankenberg and Claudia Frankenberg filed for bankruptcy. Plaintiff moved for summary judgement in lieu of a complaint against defendants, asserting there were no factual issues that required resolution. Defendants opposed the motion, arguing that Fragments did not borrow the full amount available under the loan, and that, even if it did, the promissory note was not an instrument for money only because it referenced other agreements, including “a contemporaneously executed Business Loan Agreement, Security Agreement, Mortgage, and Trademark Security Agreement” (“Business Agreements”). The Court rejected both arguments. The Court held that “the evidence sufficiently demonstrate all the funds available were borrowed.” Even if that had not been the case, said the Court, there was no issue of fact as to whether Fragments “receive of the sums contained in the promissory note.” Slip Op. at *3. The Court held that defendants’ argument was based on “conclusory assertions” rather than any evidence in the record. Id. In so holding, the Court relied on Federal Deposit Insurance Corp. v. Silvers , 177 A.D.2d 266 (1st Dept. 1991), in which the First Department held that conclusory allegations of not receiving the consideration in question were insufficient to defeat a motion for summary judgment. There, like Cross River Bank , the defendant argued that “the note was unenforceable because he had never received any money or other kind of consideration for the note.” That assertion, said the First Department, was “barren of any elaboration of the circumstances under which said defendant executed the $100,000 promissory note,” and was, therefore, “a mere conclusion, insufficient to defeat plaintiff’s summary judgment motion.” Id. With regard to the Note itself, the Cross River Bank Court held that mere reference to other documents in the Note did not mean that the Note was not an instrument for money only. Id. at *3-*4. In so holding, the Court relied on three decisions that it considered to be “instructive” and on point. Id. (discussing Kim v. II Yeon Kwon , 144 A.D.3d 754 (2d Dept. 2016); Mehta v. Mehta , 168 A.D.3d 716 (2d Dept. 2019); and Margarella v. Ullian , 164 A.D.3d 898 (2d Dept. 2018)). In Kim , the defendant executed a promissory note and failed to pay pursuant to its terms. The plaintiffs commenced the action by summons and notice of motion for summary judgment in lieu of complaint to recover the money owed on the note. The defendant opposed the motion, arguing that an issue of fact arose with regard to the payment obligation because the payment obligation was dependent upon a partnership agreement that the plaintiff breached. The court rejected that argument, finding that it was an invalid defense. Specifically, the court held that the mere breach of a separate agreement without presenting any evidence challenging the validity of the agreement or without evidence of fraud in inducing the defendant to enter the transaction pursuant to which the note was issued was an insufficient basis to raise any questions of fact regarding the promissory note’s unconditional obligation to pay. 144 A.D.3d at 756.  In Mehta v. Mehta , 168 A.D.3d 716 (2d Dept. 2019), the court held that “extrinsic matters predating the execution of the note were not relevant to the issue” of liability on the note. In Margarella v. Ullian , 164 A.D.3d 898 (2d Dept. 2018), the plaintiffs entered into a “Building Loan Agreement” with Ponquogue Manor Construction, LLC (“Manor”) to loan $1.5 million toward Manor’s project to develop a condominium complex on its property in Hampton Bays. Simultaneously, the defendant, individually and on behalf of Manor as its managing member, executed a promissory note and a personal guaranty of Manor’s obligations under the note. Manor defaulted on the note, and the plaintiffs commenced the action to recover on the note and guaranty by motion for summary judgment in lieu of complaint pursuant to CPLR § 3213.  The court held that the plaintiffs “established their prima facie entitlement to judgment as a matter of law through their submission of the promissory note, which contained an unequivocal and unconditional obligation to pay, the guaranty, and evidence that the defendant failed to make payment in accordance with the terms of those instruments.” The court also held that “the promissory note was not ‘inextricably intertwined’ with certain other allegedly related agreements the parties entered into, such that any breach of the allegedly related agreements by the plaintiffs create a defense to payment on the promissory note”. Id. at 899. The court explained this was true because the obligations under the note were “absolute and unconditional”, therefore, the promissory note was enforceable regardless of any other agreements that were entered into between the parties. Id. at 899-900. Based upon the foregoing authorities, the Cross River Bank Court held that defendants “failed to present any evidence challenging the underlying debt owed.” Slip Op. at *5. Therefore, the Court granted the motion for summary judgement in lieu of a complaint. Takeaway A promissory note qualifies as an instrument for the payment of money only, so as to permit the plaintiff to file a motion for summary judgment in lieu of complaint pursuant to CPLR § 3213, where, as in Cross River Bank , the note contains “an unconditional promise by the borrower to pay the lender over a stated period of time”, and no “outside proof” is needed, “other than simple proof of nonpayment” to establish the plaintiffs’ prima facie case. Kim , 144 A.D.3d at 755 (citations and external quotation marks omitted). The breach of a related contract cannot defeat a motion for summary judgment on an instrument for money only unless it can be shown that the contract and the instrument are “intertwined” and that the defenses alleged to exist create material issues of triable fact. See New York Community Bank v. Fessler , 88 A.D.3d 667, 668 (2d Dept. 2011) (quoting Mlcoch v. Smith , 173 A.D.2d 443, 444 (2d Dept. 1991)). In Cross River Bank , defendants failed to demonstrate with admissible evidence that the Business Agreements were “inextricably intertwined” with the Note. As such, defendants were unable to raise a triable issue of fact with respect to the payment obligations under the Note.

Many times, the applicable statute of limitations expires during the pendency of an already commenced action.  No problem – right?,  While generally speaking such an occurrence should not be a problem, issues may arise when an otherwise timely action is dismissed subsequent to the expiration of the limitations period.  Depending on the nature of the dismissal, a plaintiff may be permitted to commence a new action notwithstanding the expiration of the applicable statute of limitations by virtue of the savings provisions of CPLR 205(a) , which provides: New action by plaintiff. If an action is timely commenced and is terminated in any other manner than by a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, a dismissal of the complaint for neglect to prosecute the action, or a final judgment upon the merits, the plaintiff … may commence a new action upon the same transaction or occurrence or series of transactions or occurrences within six months after the termination provided that the new action would have been timely commenced at the time of commencement of the prior action and that service upon defendant is effected within such six-month period. Where a dismissal is one for neglect to prosecute the action made pursuant to rule thirty-two hundred sixteen of this chapter or otherwise, the judge shall set forth on the record the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation.  (Hyperlink added.) CPLR 205(a) is a “remedial” statute that “has existed in New York law since at least 1788” and can race[] its roots to seventeenth century England.”  Wells Fargo Bank, N.A. v. Eitani , 148 A.D.3d 193, 199 (2 nd Dep’t 2017), appeal dismissed , 29 N.Y.3d 1023 (2017).  The purpose of CPLR 205(a) is to “ameliorate the potentially harsh effect of the Statute of Limitations in certain cases in which at least one of the fundamental purposes of the Statute of Limitations has in fact been served, and the defendant has been given timely notice of the claim being asserted by or on behalf of the injured party.”  George v. Mt. Sinai Hospital , 47 N.Y.2d 170, 177 (1979).  Thus, the statute provides “a second opportunity to the claimant who has failed the first time around because of some error pertaining neither to the claimant’s willingness to prosecute in a timely fashion nor to the merits of the underlying claim.”  George , 47 N.Y.2d at 178-79. For example, the foreclosing lender in CitiMortgage, Inc. v. Moran , 188 A.D.3d 407 (1 st Dep’t 2020), the Court found that the underlying action was “timely brought within six months after this Court dismissed plaintiff’s first foreclosure action, ‘without prejudice,’ for failure ‘to establish a presumption that it properly served defendant RPAPL 1304 notice….”  CitiMortgage , 188 A.D.3d 407 (citations omitted).  [Editor’s Note – this BLOG has analyzed RPAPL 1304 < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> .] An action is generally deemed to be “terminated,” and the commencement of the six-month period for the purposes of CPLR 205(a) begins, “when all appeals as of right have been exhausted.”  Bank of New York Mellon v. Slavin , 156 A.D.3d 1073, 1074 (3 rd Dep’t 2017) (citations omitted).  In Bank of New York , the first action was dismissed based on plaintiff’s default and, therefore, was not appealable as of right.  Id .  However, plaintiff moved to vacate the default, the denial of which motion was appealable.  Once the Third Department affirmed the denial of the motion to vacate the default, the first action was deemed terminated and the six-month clock under CPLR 205(a) began to run.  Bank of New York , Id . at 1075 (citations omitted)  Consistent with the wording of the statute, plaintiffs will not be able to avail themselves of the benefits of CPLR 205(a) if the prior action was dismissed for failure to prosecute and specific findings of conduct reflecting “a general pattern of delay” are “set forth in the record.”  See CPLR 205(a); U.S. Bank Trust, N.A. v. Moomey-Stevens , 168 A.D.3d 1169, 1171 (3 rd Dep’t 2019); Wells Fargo , 148 A.D.3d at 198.  Thus, where a dismissal is based on abandonment for failure to enter a default judgment within one year pursuant to CPLR 3215(c), the exception to CPLR 205(a) is inapplicable and, therefore, a subsequent action would be permitted if commenced within six months of dismissal despite the expiration of the applicable statute of limitations in the interim.  U.S. Bank Trust , 168 A.D.3d at 1170-71.  [Editor’s Note – this BLOG has analyzed CPLR 3215(c) < HERE =">HERE"> , < HERE =">HERE"> .] On March 3, 2021, the Appellate Division, Second Department, decided Deutsche Bank National Trust Co. v. Baquero , a mortgage foreclosure action in which defendant brought counterclaims to discharge the mortgage pursuant to Article 15 of the RPAPL.  [Editor’s Note – this BLOG has analyzed the mortgage discharge provisions of RPAPL Article 15 < HERE =">HERE"> .]  The lender in Deutsche Bank , after borrower’s default, commenced its first action to foreclose defendant’s mortgage in November of 2007.  Three years later, the court granted plaintiff’s motion to voluntarily discontinue the first action.  In June of 2010, lender commenced a second action to foreclose the mortgage.  “In an order dated April 6, 2017, the Supreme Court dismissed the 2010 action “without prejudice” based on a Court Attorney Referee’s finding that the plaintiff had failed to file an order of reference, as directed by two court orders.”   In September of 2017, lender commenced a third action, in which borrower moved for summary judgment to dismiss the complaint as time barred and, on his counterclaims, to cancel and discharge the mortgage of record pursuant to RPAPL Article 15.  Lender cross-moved for summary judgment on its complaint.  Supreme court granted lender’s cross motion and denied borrower’s motion.   On borrower’s appeal, the Second Department affirmed supreme court.  Initially, the Court found that the lender’s third action was commenced more than six years after the mortgage debt was accelerated by the commencement of the second action.  “However, in opposition to the defendant’s prima facie showing and in support of its own cross motion, the plaintiff established that this action was timely commenced based upon the savings provision of CPLR 205(a)” because the third action was commenced within six months of the entry of the order dismissing the second action.  Specifically, the Court found that the action was “not dismissed for neglect to prosecute, a category of dismissal that renders CPLR 205(a) inapplicable.”  The Court explained its ruling as follows: “Where a dismissal is one for neglect to prosecute the action ..., the judge shall set forth on the record the specific conduct constituting the neglect, which conduct shall demonstrate a general pattern of delay in proceeding with the litigation” (CPLR 205 ). Here, the order dated April 6, 2017, “did not include any findings of specific conduct demonstrating ‘a general pattern of delay in proceeding’” ( Wells Fargo Bank, N.A. v Eitani , 148 AD3d 193, 198, quoting CPLR 205 ; see Sokoloff v Schor , 176 AD3d 120, 128). Moreover, by dismissing the 2010 action without prejudice, the Supreme Court “permitted the plaintiff to avail itself of CPLR 205(a) to recommence the foreclosure action” ( Wells Fargo Bank, N.A. v Eitani , 148 AD3d at 199).  It should be noted that Justice Borros authored a lengthy dissent in Deutsche Bank , in which she wrote that she would have reversed.  Among other things, Justice Borros stated: In an order dated April 6, 2017, the Supreme Court dismissed the plaintiff’s second foreclosure action, which had been pending for more than six years, on the ground that the plaintiff failed, without good cause shown, to comply with two prior court orders directing the plaintiff, inter alia, to file both an application for an order of reference and an attorney’s certificate of merit. For the reasons set forth herein, this was a dismissal for a “neglect to prosecute” within the meaning of CPLR 205(a), and therefore, the plaintiff’s third foreclosure action, which was commenced well after the expiration of the six-year limitations period, was time-barred. Justice Borros was moved by the fact that the order dismissing the second action did not refer to any technical defect that could be remedied in a new action, but rather referred to the plaintiff’s repeated violation of court orders.”

Concealment of material information and market manipulation. Both forms of improper conduct were on display in Securities and Exchange Commission v. Airborne Wireless Network, 21-cv-01772 (S.D.N.Y.) (here), a case we examine below. The Importance of The Disclosure of Information Disclosure of information has long been a mission of the Securities and Exchange Commission (“SEC” or the “Commission”). As noted on the SEC’s website: “he laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.” (Here.) The SEC’s disclosure regime is predicated on providing investors with access to material information, so that they can make informed investment decisions. As former SEC Commissioner Daniel M. Gallagher observed: “This is not to say that the disclosure regime was meant to guarantee that investors receive all information known to a public company, much less to eliminate all risk from investing in that company. Instead, the point has always been to ensure that they have access to material investment information.” (Here.) Market Manipulation Market manipulation refers to conduct that is intended to deceive investors by controlling or artificially influencing the market for a security. Such conduct can include, among others, spreading false information to the market about a company, “spoofing” (i.e., an activity used by traders to outpace investors and other market participants and to manipulate markets), “pump and dump” schemes, engaging in a series of transactions to make a security appear more actively traded (i.e., to affect the volume of trading), and rigging quotes, prices, or trades to affect the demand for a security. When the market is manipulated, the manipulator tries to inflate or deflate the price of a security so that it differs from the true price reflected by market fundamentals. As a general matter, market manipulation occurs with smaller companies, such as microcap and penny stock companies because market analysts and other market professionals pay little attention to these companies as they do with medium and large-cap companies. Market manipulation is fraudulent and can have significant consequences for the markets. Seconds="--> Seconds" before="before" trades="trades" price="price" order,="order," pulled="pulled" from="from" market,="market," and="and" retail="retail" investor's="investor's" After="After" spoofer="spoofer" pulls="pulls" drops,="drops," resulting="resulting" losses="losses" for="for" anyone="anyone" unfortunate="unfortunate" enough="enough" tricked="tricked" into="into" buying.” Readers="--> Readers" can="can" find="find" “pump="“pump" dump”="dump”" schemes="schemes" other="other" useful="useful" information="information" about="about" protecting="protecting" oneself="oneself" manipulation="manipulation" here.=">here."> SEC v. Airborne Wireless Network On March 2, 2021, the SEC announced (here) that it filed a complaint in the Southern District of New York against seven individuals and a technology company, alleging that they engaged in a scheme to gain control of Airborne Wireless Network (“Airborne”), promote its stock, and defraud investors. [Ed. Note: Airborne is a Nevada corporation headquartered in Simi Valley, California. It was originally incorporated in January 2011 as Ample-Tee, Inc. (“Ample-Tee”), a company that focused “on selling hard-to find ergonomic products for the physically disabled, such as chairs, workstations, back/arm/leg/wrist supports, through proposed online website.” In May 2016, the company announced that it was changing its name to Airborne. It later changed its line of business to “developing, marketing and licensing a high-speed meshed broadband airborne wireless network by linking commercial aircraft in flight.” Airborne does not have a class of securities registered with the Commission under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”). However, Airborne did make periodic filings with the Commission between 2013 and 2019. At all times relevant to the SEC’s complaint, Airborne’s stock was a “penny stock” as defined by the Exchange Act. Airborne’s stock traded at less than $5.00 per share and met none of the exceptions to penny stock classification under Section 3(a)(51) and Rule 3a51-1 of the Exchange Act.] According to the SEC, Kalistratos “Kelly” Kabilafkas (“Kelly Kabilafkas”) orchestrated the alleged fraud. The SEC claimed (here) that Kelly Kabilafkas secretly purchased essentially all the outstanding shares of Ample-Tee, and then distributed millions of shares among himself and his associates, including defendants Timoleon “Tim” Kabilafkas (“Tim Kabilafkas”), Panagiotis Bolovis, Eric Scheffey, Chrysilios Chrysiliou, and Moshe Rabin (Rabin”). Kelly Kabilafkas and his associates allegedly deceived Airborne’s transfer agent and broker dealers in order to have the shares transferred into their names, deposited into brokerage accounts, and cleared for sale to the public. The SEC claimed that Kelly Kabilafkas, through defendant Jack Edward Daniels (“Daniels”), Airborne, and other third parties, spent millions of dollars on advertisements that concealed that Airborne was a vehicle for Kabilafkas’s fraudulent scheme. Kelly Kabilafkas allegedly hid his ownership of, and control over, the company by, among other things, placing the company’s restricted shares in Daniels’ name and giving about 13.6 million of the S-1 shares to Tim Kabilafkas, his father, and other alleged associates. The SEC further alleged that, while the promotional campaign was underway (i.e., while defendants were “pumping” the stock), Kelly Kabilafkas and his associates sold (i.e., “dumped”) approximately 11.8 million Airborne shares for proceeds of more than $22 million, much of which was kicked back to benefit the Kabilafkas family (to buy real estate and pay for luxury vehicles and home improvements). Finally, the SEC alleged that Airborne raised another approximately $22.8 million dollars from unsuspecting investors through public and private offerings while materially false and misleading statements about the company were publicly available. In total, the SEC alleged that defendants raised nearly $45 million from their wrongful conduct. The SEC charged defendants with violations of the antifraud provisions of the federal securities laws and related rules. The SEC seeks civil penalties, disgorgement of ill-gotten gains, plus interest and injunctive relief. Rabin agreed to settle the charges. In that regard, without admitting or denying the allegations in the complaint, Rabin consented to the entry of a final judgment ordering injunctive relief, a $125,000 civil penalty, and a penny stock bar. The proposed settlement with Rabin is subject to court approval. “As alleged in the complaint, Kelly Kabilafkas orchestrated a wide-ranging scheme to deceive gatekeepers, conceal from investors the true ownership of a public company, and then manipulate the company’s stock,” said Jennifer S. Leete, Associate Director of the SEC’s Enforcement Division. “The SEC is committed to unraveling frauds to protect investors.” Readers can find the case, Securities and Exchange Commission v. Airborne Wireless Network, 21-cv-01772 (S.D.N.Y.) here.

“You can’t have fraud if you disclose it,” said the motion court in Ibarrondo v. Evans , 2020 N.Y. Slip Op 30051(U) (Sup. Ct., N.Y. County Jan. 6, 2020) ( here ), aff’d , 2021 N.Y. Slip Op. 01200 (1st Dept. Feb. 25, 2021) ( here ). Yet, without alleging any new facts detailing how the alleged fraud was not disclosed, the plaintiff in Ibarrondo sought to amend her complaint to reallege the cause of action. In today’s article, we examine Ibarrondo . Ibarrondo involved a dispute over the ownership of a company formed by defendants and two other venturers, so that one of the defendants could obtain an E-2 Visa. An E-2 Visa, which is good for three months to five years, allows an individual to enter and work inside of the United States based on an investment that he or she controls inside the United States.  Plaintiff Marta Ibarrondo initiated the action in 2015 against her alleged business partner, defendant Lise Evans (“Lise” or “defendant”) and her husband, defendant Michael Evans (“Michael”), alleging that they stole the business Philanthropic Bling (“Bling”), which was incorporated in October 2013 as a vehicle for Lise to obtain an E-2 visa.  Lise and two friends (nonparties to the action) sought to create a business to support her immigration application. They invited plaintiff to join them. In November 2013, the co-venturers agreed to be equal partners of a for-profit corporation. On November 26, 2014, they engaged an attorney to draft a shareholder agreement. Since Lise filed her visa application under Bling, which required her to own at least 50% of the company, the co-venturers decided to create a new entity, “CORDE,” so that they could each maintain their 25% equity.  In December, however, Lise disclaimed equal ownership among the partners in all respects. Michael proposed that plaintiff and the other co-venturers would be employees (rather than owners) of the company and would receive the compensation that Lise and Michael, as owners, would give them. Plaintiff filed suit, alleging a number of causes of action, including breach of contract and fraud. Defendants moved to dismiss (although, defendants did not move against the contract claim). The motion court dismissed the fraud claim without prejudice.  Following discovery, Plaintiff moved to amend the complaint to replead, inter alia , the fraud claim. Plaintiff’s proposed amended complaint consisted of her original allegations, plus additional details. According to plaintiff, Lise’s alleged fraud consisted of: (1) a representation about the structure and operation of Bling; and (2) a representation that she would formalize the equal equity partnership arrangement before product launch, while never actually intending to go through with that because she knew it would interfere with her visa application.  The motion court held that the amendment did not cure the deficiencies of the original complaint. While more detail was set forth in the amended pleading, the new allegations, observed the motion court, were no different than the initial allegations of fraud.  The motion court found that the “new fraud claim remain impermissibly duplicative of the contract claim.” The motion court explained that “ ll of plaintiff’s allegations flow from the same premise that promised (1) that she would give the others equal shares once her visa was issued; (2) that there would be a second holding company; and (3) that the company on her visa did not need to be the same entity that actually sold the bracelets, but defendant knew those statements to be false because she did not intend to cooperate.” At best, concluded the motion court, the only fraud alleged was an insincere promise to perform under the contract. Citing Manas v. VMS Assoc., LLC , 53 A.D.3d 451, 453 (1st Dept. 2008). Additionally, the motion court found that plaintiff failed to satisfy the elements of a fraud claim. First, plaintiff failed to allege any misrepresentations made by defendant. Apparently, said the motion court, it was not Lise who stated that the co-venturers would share equal ownership if the attorneys confirmed that the proposed structure would comport with the visa requirements.  Second, plaintiff failed to satisfy the scienter requirement – the requirement that defendants act with an intent “to deceive, manipulate, or defraud” at the time of the alleged misrepresentation or omission. Zutty v. Rye Select Broad Mkt Prime Fund, L.P. , 33 Misc. 3d 1226(A) at *11 (Sup. Ct., N.Y. County 2011). Plaintiff’s allegations of defendant’s then-present intent to defraud were generalized allegations with no specificity, noted the motion court. Moreover, two of the co-venturers submitted affidavits in which one said that she did not believe that Lise “started out trying to deceive us,” while the other denied being duped by Lise or anyone else. Third, Plaintiff could not allege reasonable reliance on Lise as to the immigration law questions. Nothing prevented plaintiff from seeking the advice of an immigration lawyer, noted the motion court. In fact, observed the motion court, they had previously done so. “Nothing stopped them from returning to that attorney or another regarding the idea of a holding company,” concluded the motion court. Citing Danann Realty Corp. v. Harris , 5 N.Y.2d 317, 322 (1959). On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “did not abuse its discretion in denying leave to amend the complaint.” Slip Op. at *1 (citations omitted). The Court agreed with the motion court that the “proposed amended complaint ‘did not lay before the court any different or additional factual basis, but merely repeated what was in the original complaint.’” Id. (quoting Guthartz v. City of New York , 84 A.D.2d 707, 708 (1st Dept. 1981), appeal dismissed , 55 N.Y.2d 975 (1982)).  Moreover, the Court held that plaintiff failed to plead fraud with particularity. Id. (citations omitted). “Among other things,” said the Court, “the proposed amended complaint fail to allege any misrepresentation by defendant Lise Evans. Rather, plaintiff and the other two co-venturers were aware of and tried to find a solution for Lise’s quandary of how to get a visa based on her 51% ownership of a company and their own desire to each own 25% of the company.” Id. The Court explained that “ ocuments showed that it was a nonparty co-venturer, not Lise, who initially sought attorney input on and proposed an ownership structure that might satisfy the immigration requirements and the co-venturer’s desire.” Id. Finally, the Court held that the motion “court correctly concluded that the complaint failed to allege scienter, or that plaintiff reasonably relied on Lise regarding the immigration question, as she could consult an immigration attorney in the same way one of the nonparty co-venturers did.” Id. Takeaway A fundamental aspect of a fraud claim is the plaintiff does not know that the statement or omission made by the defendant is false or misleading at the time it was made. In Ibarrondo , this concept was missing. As the Court (and the motion court) observed, “plaintiff and the other two co-venturers were aware of and tried to find a solution for Lise’s quandary of how to get a visa based on her 51% ownership of a company and their own desire to each own 25% of the company.” If everyone was aware of the facts (and no fact was omitted), then there cannot be a fraud. This is what the motion court said when it initially dismissed the fraud claim: “You can’t have fraud if you disclose it.”

Frequently, the first question asked by a potential client when consulting about a new litigation matter is “can we sue them for our legal fees.”  Clients are often dismayed to learn that attorney’s fees are not generally recoverable in litigation under the “American Rule,” because “ n the United States, the prevailing litigant is ordinarily not entitled to collect a reasonable attorney fee from the loser.”  Alyeska Pipeline Services Co. v. Wilderness Society , 421 U.S. 240, 247 (1975) (providing a historical perspective on the awarding of attorneys’ fees in Federal Court litigation); see also , Mighty Midgets, Inc. v. Centennial Ins. Co. , 47 N.Y.2d 12, 21-22 (1979).  The “American Rule” “reflects a fundamental legislative policy decision that, save for particular exceptions or when parties have entered into a special agreement, it is undesirable to discourage submission of grievances to judicial determination and that, in providing freer and more equal access to the courts, the present system promotes democratic and libertarian principles.”  Mighty Midgets , 47 N.Y.2d at 22 (citations omitted).   Exceptions to the “American Rule” exist where the recovery of attorney’s fees “is authorized by agreement between the parties, statute or court rule.”  Hooper Assoc., Ltd. v. AGS Computers, Inc. , 74 N.Y.2d 487 (1989) (citations omitted).  Indeed, contracts typically contain language permitting a party to collect its reasonable legal fees in the event of litigation. Moreover, courts can exercise their “inherent powers” in certain circumstances to assess attorneys’ fees against a litigant.  Thus, the “inherent powers” of Federal Courts has been described as follows: Indeed, there are ample grounds for recognizing that in narrowly defined circumstances federal courts have inherent power to assess attorney’s fees against counsel, even though the so-called “American Rule” prohibits fee shifting in most cases.  As we explained in Alyeska, , these exceptions fall into three categories.  The first, known as the “common fund exception,” derives not from a court’s power to control litigants, but from its historic equity jurisdiction, and allows a court to award attorney’s fees to a party whose litigation efforts directly benefit others.  Second, a court may assess attorney’s fees as a sanction for the willful disobedience of a court order.  Thus, a court’s discretion to determine the degree of punishment for contempt permits the court to impose as part of the fine attorney’s fees representing the entire cost of the litigation. Third, and most relevant here, a court may assess attorney’s fees when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons. In this regard, if a court finds that fraud has been practiced upon it, or that the very temple of justice has been defiled, it may assess attorney’s fees against the responsible party, as it may when a party shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order. Chambers , 501 U.S. at 45-46 (citations, footnotes, internal quotation marks, ellipses and brackets omitted). Further, “ n general, only a prevailing party is entitled to recover an attorney's fee and to be considered a prevailing party, a party must be successful with respect to the central relief sought.”  Village of Hempstead v. Taliercio , 8 A.D3d 476 (2 nd Dep’t 2004) (citations, internal quotation marks and brackets omitted).  “Such a determination requires an initial consideration of the true scope of the dispute litigated, followed by a comparison of what was achieved within that scope.”  DKR Mortgage Asset Trust 1 v. Rivera , 130 A.D.3d 774 (2 nd Dep’t 2015) (citations and brackets omitted). On February 24, 2021 the Supreme Court, Second Department, decided Blinds to Go (U.S.), Inc. v. Times Plaza Development, L.P. , a case in which the issue of entitlement to attorney’s fees was decided using the principals discussed herein.  The history of Blinds to Go is tortured and tortured histories equate to significant legal fees.  Plaintiff, Blinds to Go, as tenant, entered into a lease agreement with defendant, Times Plaza, as landlord.  The lease permitted the landlord to “recapture” the property and relet it to another entity if plaintiff “closed its business on the property for a period of three months or more”.  Almost two and one-half years after executing the lease plaintiff had not yet began construction to open for business – much less actually open for business and, as a result, landlord purported to terminate the lease pursuant to the “recapture” provision of the lease.   Plaintiff commenced a lawsuit challenging landlord’s termination.  After landlord’s motion to dismiss the complaint was granted, plaintiff “surrendered the keys and possession of the premises to the defendant.  Thereafter, the court reversed its earlier decision “on the ground that, since the plaintiff never commenced any business operations at the premises, the recapture provision was inapplicable.”  (Citation omitted.)  Six years later, after a trial on both liability and damages, judgment was entered in plaintiff’s favor in an amount exceeding $4,000,00.00.  On landlord’s appeal for the damages award only (as it did not challenge the jury’s verdict that it breached the lease), the judgment was reversed and a new trial on the issue of damages was granted. The referee to whom the matter of damage calculation was referred, found that no damages for lost profit were proved and, therefore, damages were not awarded.  Thereafter, landlord sought “attorney’s fees and costs as the ‘prevailing party’ pursuant to Paragraph 35 of the lease.”  Supreme court determined that landlord was the prevailing party and, again, referred the matter to a referee to determine the quantum of legal fees to which the landlord was entitled.  Judgment on the attorney’s fees issue was ultimately entered against tenant in an amount exceeding $1.6 million and both parties appealed. The Second Department reversed.  First, the Court determined that tenant failed to “sustain its burden of demonstrating lost profits with reasonable certainty.”  (Citations omitted.)  The Court, however, disagreed “with the determination to award attorney’s fees and costs to defendant aragraph 35 of the lease stated that ‘the non-prevailing party shall pay to the prevailing party all costs, expenses and reasonable attorneys’ fees and disbursements that the prevailing party reasonably incurred in connection therewith.’”  In so holding, the Court found that: Here, considering the true scope of the dispute litigated and what was achieved within that scope, we conclude that neither party was entitled to attorney’s fees and costs as a prevailing party.  In this highly litigated and contentious action, notwithstanding numerous motions, trials, hearings, and appeals spanning more than 17 years, neither party has obtained the central relief each seeks so as to constitute a prevailing party pursuant to Paragraph 35 of the lease.