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.

As the title of this article suggests, there are times in litigation where the facts simply do not support a claim or defense advanced by one or more of the parties. That was the case in Alston v. Golfo , 2021 N.Y. Slip Op. 30471(U) (Sup. Ct., N.Y. County Feb. 17, 2021) ( here ). Alston was commenced by a labor union welfare fund (the “Fund”) in July 2018 against one of its enrollees, Salvatore Golfo (“Salvatore”), and his former wife, defendant Denise Golfo (“Denise”), for restitution of health benefits wrongly paid by the Fund on account of Denise during the period April 2011 through January 2018. The action was predicated on the fact that Denise was not an eligible dependent of Salvatore ( i.e. , his spouse) during that time period. According to the Court, Salvatore submitted a health plan enrollment form in which Salvatore represented that Denise was his spouse. Slip Op. at *1. In truth, Denise and Salvatore had been divorced pursuant to a judgment of divorce since 2007 (“Judgment of Divorce”). Id. at *2. The Fund asserted three causes of action, all focused on Salvatore’s enrollment form: fraud, conversion, and breach of contract. After the Fund commenced the action, Salvatore filed a third-party action against Denise and her father, Joseph Mattesi (“Mattesi”), one of the Fund’s trustees, sounding in fraud and in “contribution and/or indemnification,” alleging that Mattesi acquiesced in Salvatore’s submission of the false enrollment form and that Denise had caused Salvatore to innocently believe that she was still his spouse, despite the 2007 Judgment of Divorce. The Fund moved for summary judgment against Salvatore. In March 2019, the Court granted a default judgment against Denise.  In addition, Mattesi cross-moved to dismiss the third-party claims asserted against him by Salvatore. The Court granted the motion for summary judgment because there was “absolutely no issue of fact or law which could possibly impede the conclusion that neither Salvatore or Denise were entitled to health insurance benefits benefitting Denise” because they were not married at the time Salvatore enrolled in the health plan. Slip Op. at *4. The Court explained that the governing documents expressly provided that the “ enefits under th Plan for the sole use of and eligible dependents. No one (including an employer, Union representative, supervisor or shop steward) other than the Board of Trustees ha any authority to interpret SPD or other Plan documents ….”  The plan defined “eligible dependents” as “ he spouse to whom you are legally married” or certain categories of unmarried children, and instructed members to “notify the Fund Office promptly if: you marry<,> a child is born<,> you get divorced”. The document further informed members that coverage terminated any time a member’s “dependents” “no longer the definition of ‘dependent’”. Id. at *3. The Court found that Salvatore never informed the Fund Office of his 2007 Judgment of Divorce, which severed his spousal relationship with Denise four years prior to the submission of his enrollment form. Notwithstanding, said the Court, Salvatore relied on Denise’s belief that they were still married – despite the 2007 Judgment of Divorce – and on Mattesi’s acquiescence to Salvatore’s submission of the inaccurate enrollment form. That belief, no matter its credibility, reasoned the Court, did not fall within the definition of an eligible participant: Under any reasonable reading of the Summary Plan Description, which explicitly refers to its interdependence on the union’s “collective bargaining agreements” and “official Plan documents”, a binding contract existed between Salvatore and the Fund involving Salvatore’s continued employment and his providing accurate “Eligible Dependent” information to the Fund in exchange for health insurance benefits. Nothing in that document conditions coverage on any good faith belief (however credible or incredible) regarding the spousal status of a named beneficiary. Simply put, an eligible spouse is, and only is, “ he spouse to whom you are legally married”. In this case, regardless of Salvatore’s state of belief, Denise was undoubtedly and irrefutably not Salvatore’s “spouse to whom legally married”. Therefore, there is absolutely no issue of fact or law which could possibly impede the conclusion that neither Salvatore or Denise were entitled to health insurance benefits benefitting Denise. Consequently, there is no issue of fact or law which could possibly impede the conclusion that plaintiff is entitled to restitution of its health benefit payouts on account of Denise. Slip Op. at *4. Although not specifically stated, the Court treated the fraud claim against Salvatore as duplicative of the contract claim. In this regard, the Court held that whatever Salvatore’s state of mind, “the Fund had no contractual obligation whatsoever to pay those expenses because of the indisputable fact that Denise was not Salvatore’s legally married spouse during any part of that seven-year period.” Id. at *5.  However, the success of the plaintiff’s claims does not rest solely with the cause of action sounding in fraud, or any asserted issues regarding its discovery, or, most pointedly, whether Salvatore intended to defraud the Fund in the first place. Rather, as noted above, irrespective of Salvatore’s state of mind, or state of belief, at the time he submitted his inaccurate enrollment form, or thereafter during the seven-year period he allowed the Fund to cover Denise’s expenses to the tune of $77,317.43, the Fund had no contractual obligation whatsoever to pay those expenses because of the indisputable fact that Denise was not Salvatore’s legally married spouse during any part of that seven-year period. It bore no contractual obligation to do so and, thus, is entitled to restitution. Id. The Court also found that under the “continuous duty doctrine,” Salvatore was liable for Fund payments on account of Denise for the seven-year period, thereby negating any statute of limitations defense. The Court explained that the plan documents “explicitly placed Salvatore under a continuing obligation to keep the Fund accurately informed of spousal or other dependent status, which he did not do for all of those seven years in which the Fund made payments on account of Denise.” Id. Thus, concluded the Court, “Salvatore’s continuing breach of his contractual duty to accurately inform the Fund of Denise’s spousal status, and, at a bare minimum, to inquire about it by calling ‘the Fund Office’, render’s said breach actionable with regard to all Fund payments made during a full six-year period immediately preceding the July 19, 2018, commencement date of this action.” Id. at *5-*6 (citations omitted). Turning to the motion to dismiss the third-party claims against Mattesi ( e.g. , fraud and contribution and/or indemnification), the Court held that Salvatore failed to state a claim. As to the fraud claim, the Court said that Salvatore could not satisfy the justifiable reliance element of the cause of action because Salvatore could not demonstrate “any reliance … on any alleged misrepresentation by Mattesi … concerning Salvatore’s own marital status … the Judgment of Divorce” and the contractual obligation under the Plan “to bring any questions to the attention of the ‘Fund Office’ at its designated telephone number.” Slip Op. at *6. In other words, Salvatore could not rely on a misrepresentation about a fact of which he already knew the truth ( e.g. , the Judgment of Divorce).    As for indemnification, the Court held that Salvatore could not show that any judgment against him would be due solely to Mattesi’s negligence in connection with, or nonperformance of, an act solely within Mattesi’s province. Id. at *6-*7 (citations omitted). The Court explained that as “a union member participating in, and enrolling in, the Plan that paid benefits … to Denise, Salvatore was under an independent and exclusive duty to accurately identify Denise as his legally married spouse – which he could not rightly do.” Id. at *7. “Mattesi bore no independent, let alone sole, obligation in said regard,” concluded the Court. As for contribution, the Court held that Salvatore could not show that Mattesi was “‘liable at least partially because of own negligence.’” Id. (quoting Fox v. County of Nassau , 183 A.D.2d 746, 747 (2d Dept. 1992)). The reason explained the Court, “Salvatore was under his own independent and sole duty, per the Plan, to accurately identify his dependents or, if he could not on his own, to raise the question with the Fund Office. Any possible misunderstanding on Mattesi’s part as to Denise’s spousal connection or non-connection to Salvatore – even in the face of the Judgment of Divorce – not play any role in wresting any part of Salvatore’s contractual duties as Plan participant away from Salvatore and onto Mattesi.” Id. Thus, concluded the Court, “contribution cannot lie.” Id. here,=">here," >here.=">here.">

In today’s article, we examine familiar territory: complaints alleging breach of contract and fraudulent inducement. Kleber v. 10012 Holdings Inc. , 2021 N.Y. Slip Op. 30441(U) (Sup. Ct., N.Y. County Feb. 8, 2021) ( here ). As the title of the article indicates, Kleber involved the purchase of an “Uncle Sam” screen print edition 1/5 by Andy Warhol (the “Artwork”), which was signed and numbered by the artist. In April 2019, Plaintiff Claus Kleber and Defendant Guy Hepner (“Hepner”) on behalf of his gallery, defendant 10012 Holdings Inc, (“Holdings”), bought the print for $45,000.00. The Terms and Conditions of the Sale (“Terms”) were printed on an invoice, dated April 5, 2019. Pursuant to the Terms, Kleber was required to pay one-half of the $45,000.00 purchase price upon receipt of the invoice and “the remaining due after inspection and prior to delivery.” If the print was not delivered, the seller “reserve the right to rescind the transaction and refund any monies paid to the buyer in full satisfaction of any obligation of seller to buyer with respect to the subject transaction.” The Terms also included a limitation of damages clause pursuant to which any claim for damages was limited to the purchase price. On April 12, 2019, plaintiff paid the seller $22,500.00, or one-half of the purchase price. Six days later, plaintiff’s art expert travelled to defendants’ Manhattan gallery to inspect the print that defendant “presented as the Artwork and as ‘ready to be shipped.’” However, the expert discovered that the artwork was not the agreed-upon screen print. According to plaintiff, defendants’ employee told plaintiff’s expert that the real screen print would be in the gallery soon. In his complaint, plaintiff claimed that defendants admitted that the real screen print was never in New York but was in Sweden. As a result, the parties agreed to an inspection of the screen print through the seller’s gallerist in Sweden. That inspection took place on June 10, 2019. Thereafter, the parties agreed that the transaction would go through London. According to plaintiff, defendants informed him that they had “London representation and a British VAT”, which would reduce plaintiff’s costs and allow direct shipment of the screen print from Sweden to Germany, where plaintiff lived. In connection therewith, plaintiff requested a new invoice of the full amount to be issued to him from London.  On June 14, 2019, plaintiff learned from the seller’s gallerist that defendants provided an invalid British VAT number. As a result, the seller withdrew the Artwork from the sale. According to plaintiff, from that point forward, various communications were exchanged with defendants to have the deposit returned to him without success. On November 13, 2019, plaintiff filed a summons and complaint, alleging three causes of action: breach of contract, breach of express warranty pursuant to the Arts and Cultural Affairs Law and fraudulent inducement. After defendants failed to answer, plaintiff moved for a default judgment, which was granted on February 28, 2020. In May 2020, defendants moved to vacate the default judgment and in September 2020, the parties stipulated to vacate the default judgment that had been entered. Thereafter, defendants moved, pursuant to CPLR § 321l(a)(1) and (7), to dismiss the complaint or in the alternative to strike the demand for treble damages.  The Court granted in part and denied in part the motion.  The Court denied the motion as it pertained to plaintiff’s breach of contract cause of action. The Court found that plaintiff “clearly” pleaded “‘the existence of a contract, the Plaintiff’s performance thereunder, the Defendant’s breach thereof, and resulting damages.’” Slip Op. at *3 (quoting Harris v. Seward Park Hous. Corp. , 79 A.D.3d 425, 426 (1st Dept. 2010)). With respect to the portion of the motion to limit plaintiff’s damages to the return of his deposit as set forth in the invoice, the Court held that plaintiff was entitled to pursue the damages demanded. Id. Under New York law, courts will enforce a “clear contractual provision limiting damages … absent a special relationship between the parties, a statutory prohibition or an overriding public policy.” Ryan v. IM Kapco, Inc. , 88 A.D.3d 682, 683 (2d Dept. 2011); see also Colnaghi, US.A., Ltd., v. Jewelers Protection Servs., Ltd. , 81 N.Y.2d 821, 823 (1993). “However, public policy forbids a party’s attempt to escape liability, through a contractual clause, for damages occasioned by grossly negligent conduct.” Southern Wine & Spirits of Am., Inc. v. Impact Environmental Engineering, PLLC , 104 A.D.3d 613, 614 (1st Dept. 2013). Gross negligence, when invoked to defeat an agreed-upon limitation of damages in a contract, must “‘smack[] of intentional wrongdoing’ ... conduct that evinces a reckless indifference to the rights of others.” Sommer v. Federal Signal Corp. , 79 N.Y.2d 540, 554 (1992) (internal citations omitted). In Kleber , the Court found that plaintiff met the foregoing standard by alleging “that Defendants knowingly made false statements regarding the quality of the print offered for sale and its location in Defendants’ gallery in New York.” Slip Op. at *3. The Court also found that plaintiff adequately pleaded “that Defendants falsely represented that the Swedish seller required a deposit” and that “despite the transaction being cancelled by the Swedish seller, his repeated demands for the return of his deposit were rebuffed by Defendants.” Id.   “It is undisputed that, to date, Plaintiffs deposit has not been returned,” said the Court.” The foregoing allegations, concluded the Court, sufficed to state “a claim of willful conduct to sustain a claim of gross negligence.” Id. (citing Dolphin Holdings, Ltd. v. Gander & White Shipping, Inc. , 122 A.D.3d 901 (2d Dept. 2014)). Accordingly, plaintiff was entitled to pursue his “claim for his demanded damages for the alleged breach of contract.” Id. Turning to the cause of action alleging breach of an express warranty under the Arts and Cultural Affairs Law, the Court held that plaintiff failed to state a claim. Slip Op. at *4.  Under the Arts and Cultural Affairs Law, “ henever an art merchant, in selling or exchanging a work of fine art, furnishes to a buyer of such work who is not an art merchant a certificate of authenticity or any similar written instrument it shall be presumed to be part of the basis of the bargain” and “shall create an express warranty for the material facts stated as of the date of such sale or exchange.” See Arts and Cultural Affairs Law § 13.01 (l)(a), (b).  The Arts and Cultural Affairs Law § 13:05(1) further states that “ hen an art merchant furnishes the name of the artist of a multiple, or otherwise furnishes information required by this title for any time period as to transactions including offers, sales or consignments, the provisions of section 13.01 of this article shall apply except that said section shall be deemed to include sales to art merchants.”  To prevail, a plaintiff must plead that the defendant, as an art merchant or merchant consignee, offered or sold a multiple in, into or from the state, without providing the information required for the appropriate time period, or who provided required information which was mistaken, erroneous or untrue. See Arts and Cultural Affairs Law §15.15(1). In Kleber , the Court found that plaintiff failed to satisfy the statute as the required information ( i.e. , the inspection of the Artwork) had been provided. Indeed, noted the Court, plaintiff specifically alleged that the information was provided after his expert detected the discrepancy: In his complaint, … Plaintiff pled that Defendants presented in their New York gallery “an inferior copy of the Artwork that did not match the description of the Artwork on the invoice.” However, as pled, this was immediately detected by Plaintiff’s art expert upon inspection and resulted in a second inspection. In the end, as Plaintiff alleges in his complaint, over the course of this transaction, his expert travelled to Stockholm and inspected the Artwork that was specified on the invoice.  “As such,” concluded the Court, “the required information was provided, there was no breach of the express warranty and there exists no basis for treble damages.” Id. (citations omitted). Finally, the Court held that plaintiff failed to state a claim for fraudulent inducement because he did not satisfy the justifiable reliance element of the claim. Slip Op. at *5. The Court said that plaintiff “did not detrimentally rely on any alleged misrepresentations regarding the quality of the work since he engaged an art expert who identified the discrepancy and which ultimately resulted in inspection of the artwork that comported with the description on the invoice.” Id. The Court also addressed the materiality of the alleged falsity concerning the deposit. In this regard, the Court said that “ ny misrepresentation regarding the requirement of a deposit by the Swedish seller was immaterial because the invoice required a deposit of half of the purchase price upon receipt.” Id. Takeaway In prior posts, we have examined cases in which the court dismissed a fraudulent inducement claim because the plaintiff, a person with sophistication, failed to take any affirmative steps to protect against the possibility of fraud. See , e.g. , here and here . Kleber stands in contrast to these cases because Kleber actually took affirmative steps to protect against fraud and discovered the truth about the statement in question. The lesson of Kleber is, therefore, a plaintiff cannot claim fraud and reliance thereon when he or she actually discovers the falsity of the statement alleged to be false.  The other lesson of Kleber concerns the limitation on damages clause. Kleber teaches that such a clause will not bar a claim for greater damages in a contract when the conduct at issue rises to the level of gross negligence or worse.

This BLOG has written extensively on issues related to residential mortgage foreclosure actions.  Indeed, earlier this month, in “ PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT ”, this BLOG provided an overview of the applicable statute of limitations in foreclosure, the calculation of the commencement thereof, and the acceleration and de-acceleration of mortgage debt.  The Departments of the Appellate Divisions were not in agreement on some of these related issues and, accordingly, on February 18, 2021, the Court of Appeals decided four cases ( in one decision ) “each turning on the timeliness of a mortgage foreclosure claim involve the intersection of two areas of law where the need for clarity and consistency are at their zenith: contracts affecting real property ownership and the application of the statute of limitations.”  The four cases, with links to the related Appellate Division decisions, are as follows: Freedom Mortgage Corp. v. Engel ( Appellate Division ); Ditech Financial , LLC v. Naidu ( Appellate Division ); Vargas v . Deutsche Bank National Trust Co. ( Appellate Division ); and, Wells Fargo Bank, N.A. v. Ferrato ( Appellate Division ) The relevant caselaw, as largely set forth in “PRETEXTUAL DE-ACCELERATION OF MORTGAGE DEBT,” is briefly reiterated herein.  An action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019); Deutsche Bank Nat. Trust Co. v. Blank , 189 A.D.3d 1678, 1679 (2 nd Dep’t 2020).  Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  When the provisions of a mortgage provide that “the acceleration of the maturity of a mortgage debt on default is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder's election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation.”  BONY Mellon , 171 A.D.3d at 37 (citations and internal quotation marks omitted).  This may be done by a clear and unequivocal demand or the commencement of an action.  U.S. Bank Nat. Assoc. v. Catalfamo , 189 A.D.3d 1786 (3 rd Dep’t 2020) (citations omitted).  Indeed, long ago in Albertina Realty Co. v. Rosbro Realty Corp. , 258 N.Y. 472 (1932), the Court found that an “unequivocal overt act” was necessary to effectuate an acceleration and that the filing of a “summons and verified complaint and lis pendens constituted a valid election” where “ he complaint recited that the plaintiff had elected”. Albertina , 258 N.Y. at 476.  Similarly, the Second Department noted several ways by which a lender may accelerate a mortgage debt: One way is in the form of an acceleration notice transmitted to the borrower by the creditor or the creditor’s servicer. To be effective, the acceleration notice to the borrower must be clear and unequivocal.  A second form of acceleration, which is self-executing, is the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period.  A third form of acceleration exists when a creditor commences an action to foreclose upon a note and mortgage and seeks, in the complaint, payment of the full balance due. Milone v. US Bank Nat. Assoc. , 164 A.D.3d 145, 152 (2 nd Dep’t 2018) (citations omitted). Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  Fed. Nat. Mort. Assoc. v. Mebane , 208 A.D.2d 892, 894 (2 nd Dep’t 1994) (citation omitted).  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). Against this backdrop, the facts in each case become important and are briefly stated as follows: FREEDOM (facts obtained from Appellate Division, Second Department, decision) In 2005 borrower borrowed $225,000 from lender, which obligation was evidenced by a note and secured by a mortgage.  Thereafter, the loan was modified.  Borrower defaulted in March of 2008 and a foreclosure action was commenced in July of 2008.  Borrower challenged the personal jurisdiction of the Court.  In 2013, the parties entered into a stipulation in order to “amicably resolve” the dispute.  As part of the stipulation, the action was discontinued, without prejudice, and the Notice of Pendency was cancelled.  Two years later, lender commenced a new action to foreclose the mortgage.  The borrower moved to dismiss the new action as time-barred because by the first action, the debt was accelerated but never de-accelerated, and the second action was commenced more than six years thereafter.  Supreme Court held that the stipulation was an affirmative act by which the lender revoked its election to accelerate the loan.  The Appellate Division reversed because “the stipulation was silent on the issue of the revocation of the election to accelerate, and did not otherwise indicate the plaintiff would accept installment payments from the defendant. DITECH (facts obtained from Appellate Division, Second Department, decision) In 2006, the borrower executed and delivered to lender a note and mortgage, which were later amended and assigned.  In 2009, an action to foreclose on the mortgage was commenced in which the lender “declared that it ‘elected to call due the entire amount secured by the mortgage.’”  (Brackets omitted.)  In 2014, the parties discontinued the action, without prejudice, pursuant to a stipulation that did not specifically revoke lender’s election to accelerate the debt.  A subsequent foreclosure action was commenced in 2016 and the borrower moved to dismiss same as time-barred.  The Appellate Division, reversing supreme court, held that the actions were time-barred.  As in Freedom , the Ditech Court found that the lender failed to raise questions as to whether it “revoked its election to accelerate the mortgage within six years from the commencement of the first action” and the stipulation was silent on this issue and otherwise did not provide for the resumption of monthly installment payments. VARGAS (facts obtained from Court of Appeals and the Appellate Division, First Department, decisions) In 2016, the borrower commenced an action pursuant to RPAPL 1501(4) to discharge the allegedly stale mortgage.  (Such actions have been treated by this BLOG < HERE =">HERE"> .)  Borrower argued that a 2008 default letter accelerated the debt and the six-year statute of limitations expired prior to the commencement of the RPAPL 1501(4) action.  As will be discussed further herein, the Court of Appeals, described the language of the default letter insufficient to have effectuated an acceleration of the debt. Supreme court initially granted lender’s motion to dismiss the complaint but, upon lender’s motion to renew, changed course and denied lender’s motion to dismiss and granted borrower’s motion for summary judgment declaring that borrower owned the subject property free and clear of all liens.  The Appellate Division, First Department, affirmed supreme court’s decision on the renewal motion, holding that” e have held that constitutes a clear and equivocal intent to accelerate the loan balance and commence the statute of limitations on the entire mortgage debt.” WELLS FARGO The facts in Wells Fargo, as recounted by the Court of Appeals, are as follows: Over ten years ago, borrower … allegedly defaulted on a $900,000 loan secured by a mortgage on her Manhattan condominium unit. Upon Wells Fargo's initiation of this foreclosure action, moved to dismiss, arguing that the debt was accelerated in September 2009 by the commencement of the second foreclosure action and the limitations period therefore expired six years later, in September 2015. Supreme Court denied 's motion, concluding that neither the second nor the third foreclosure actions—commenced in 2009 and 2011, respectively—validly accelerated the debt because, as had successfully argued in Supreme Court in those actions, the complaints reflected an attempt to foreclose upon the original note and mortgage even though the terms of that note had been modified (increasing the debt and changing the interest rate) in 2008. On 's appeal, the Appellate Division (among other things) reversed and granted her motion to dismiss, reasoning that the September 2009 complaint effected a valid acceleration of the modified loan despite the failure to reference the correct loan documents. The Appellate Division granted Wells Fargo leave to appeal to this Court and, because we agree with Wells Fargo that the modified loan debt which it now seeks to enforce could not have been accelerated by the complaints filed in the second (or, for that matter, third) foreclosure action which failed to reference the modified note, we reverse the portion of the Appellate Division order granting 's motion to dismiss the complaint in the fifth foreclosure action and deny that motion.  (Footnote omitted.) THE RESULTS In Freedom and Ditech , the Court of Appeals, in “ dopting a clear rule that will be easily understood by the parties and can be consistently applied by the courts, that where the maturity of the debt has been validly accelerated by commencement of a foreclosure action, the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.  Thus, in both Freedom and Ditech, the Appellate Division Orders were reversed.  Significantly, the Court of Appeals also expressly rejected the theory espoused in the “pretextual de-acceleration” theory (which was the subject of a recent BLOG article < HERE =">HERE"> ), which provided that “a lender should be barred from revoking acceleration if the motive of the revocation was to avoid the expiration of the statute of limitations on the accelerated debt,” concluding that “ noteholder's motivation for exercising a contractual right is generally irrelevant ( see generally Metropolitan Life Ins. Co. v Noble Lowndes Intl. , 84 NY2d 430, 435 <1994> )—but it bears noting that a noteholder has little incentive to repeatedly accelerate and then revoke its election because foreclosure is simply a vehicle to collect a debt and postponement of the claim delays recovery. In Vargas and Wells Fargo , the Court of Appeals, recognizing that “a noteholder must effect an "unequivocal overt act" to accomplish such a substantial change in the parties' contractual relationship” rejected “the argument in Vargas that the default letter in question accelerated the debt, and similarly conclude in Wells Fargo that two complaints in prior discontinued foreclosure actions that each failed to reference the pertinent modified loan likewise were not sufficient to constitute a valid acceleration”.  As will be discussed further herein, the language in the Vargas default letter was not sufficiently unequivocal to constitute a valid acceleration.  DISCUSSION In deciding these four cases, the Court generally discussed caselaw consistent with that which is set forth supra .  The Court then recognized that “in each case, the timeliness dispute turns on whether or when the noteholders exercised certain rights under the relevant contracts, impacting when each claim accrued and whether the limitations period expired, barring the noteholders' foreclosure claims.”  Adding a historical backdrop, the Court stated that: Because these cases involve the operation of the statute of limitations, we begin with some general principles. We have repeatedly recognized the important objectives of certainty and predictability served by our statutes of limitations and endorsed by our principles of contract law, particularly where the bargain struck between the parties involves real property. Statutes of limitations advance our society's interest in giving repose to human affairs. Our rules governing contract interpretation—the principle that agreements should be enforced pursuant to their clear terms—similarly promotes stability and predictability according to the expectations of the parties. This Court has emphasized the need for reliable and objective rules permitting consistent application of the statute of limitations to claims arising from commercial relationships. The timeliness of a foreclosure action requires “an understanding of the parties' respective rights and obligations under the operative contracts: the note and the mortgage. The noteholder's ability to foreclose on the property securing the debt depends on the language in these documents.”  (Citations omitted.)  The Court noted that the four cases decided are typical in terms of the underlying documentation.  Historically: residential mortgage contracts have typically provided noteholders the right to accelerate the maturity date of the loan upon the borrower's default, thereby demanding immediate repayment of the entire outstanding debt.  In these cases, the mortgages provide that the noteholder "may" require immediate payment of the outstanding debt—i.e., accelerate the maturity of the loan—upon the borrower's default. It is plain from this language that whether to exercise this contractual right is a matter within the noteholder's discretion—the noteholder is not obliged to accelerate the loan upon a default. The extended contractual relationship explains why residential mortgage agreements are generally structured in this way. Noteholders can—and often do—anticipate and tolerate defaults relating to timely payment, permitting the borrower to correct such deficiencies without a significant disturbance in the contractual relationship. Precipitous acceleration of the debt serves neither party as it works a fundamental alteration of the status quo.  (Citations and footnote omitted.) As previously stated, the right to accelerate is significant because “acceleration permits the noteholder to commence an action seeking the remedy of full foreclosure—an equitable tool permitting the noteholder to take possession of the real property securing the debt.  (Citation omitted.)  Acceleration also triggers the six-year statute of limitations on the accelerated amount of the debt.  As to the efficacy of the acceleration, notice to the borrower is not the operative consideration because: hile the act evincing the noteholder's election must be sufficient to constitute notice to all third parties of such choice," a borrower's lack of actual notice does not as a matter of law destroy the effect of the election. Put another way, the point at which a borrower has actual notice of an election to accelerate is not the operative event for purposes of determining when the statute of limitations begins to run. Indeed, in Albertina , we held that the debt was accelerated when the verified complaint and lis pendens were filed, even though the papers had not yet been served on the borrower. The determinative question is not what the noteholder intended or the borrower perceived, but whether the contractual election was effectively invoked.  (Citations, internal quotation marks and brackets omitted.) In Wells Fargo , the lender failed to attach the modified loan documents to the complaint “or otherwise acknowledge those documents, which had materially distinct terms.”  The borrower urged that the earlier foreclosure actions operated to accelerate the debt and, therefore, the new action was time-barred.  The Court disagreed and stated: Under these circumstances—where the deficiencies in the complaints were not merely technical or de minimis and rendered it unclear what debt was being accelerated—the commencement of these actions did not validly accelerate the modified loan. Because did not identify any other acceleration event occurring more than six years prior to the commencement of the fifth foreclosure action, the Appellate Division erred in granting her motion to dismiss that action as untimely.  (Citation and footnote omitted.) In Vargas , the issue was whether lender’s default letter operated to accelerate the underlying debt. The Court recognized the disagreement amongst the Appellate Division Departments as to the sufficiency of the language required to constitute an “unequivocal” “valid election to accelerate”.  Thus, the Court stated: In Deutsche Bank Natl. Trust Co. v Royal Blue Realty Holdings, Inc. (148 AD3d 529 <1st dept 2017> ), the First Department concluded that a letter stating that the noteholder "will" accelerate upon the borrower's failure to cure the default constituted clear and unequivocal notice of an acceleration that became effective upon the expiration of the cure period. But the Second Department has rejected that view ( see e.g., Milone v US Bank N.A. ,164 AD3d 145 <2d dept 2018> ; 21st Mtge. Corp. v Adames , 153 AD3d 474 <2d dept 2017> ), reasoning that comparable language did not accelerate the debt and was "merely an expression of future intent that fell short of an actual acceleration," which could "be changed in the interim" ( Milone , 164 AD3d at 152). This disagreement is at the heart of the parties' dispute in Vargas .  (Hyperlinks added.) In determining that the default letter at issue in Vargas was insufficient, the Court, in analyzing the language contained therein, stated: It is undisputed that the August 2008 default letter was sent to —the only question is whether it effectuated a clear and unequivocal acceleration of the debt, an issue of law. The default letter informed that his loan was in "serious default" because he had not made his "required payments," but that he could cure the default by paying approximately $8,000 "on or before 32 days from the date of letter." It further advised that, should he fail to cure his default, the noteholder "will accelerate mortgage with the full amount remaining accelerated and becoming due and payable in full, and foreclosure proceedings will be initiated at that time." The letter warned: " ailure to cure your default may result in the foreclosure and sale of your property." We reject 's contention that the August 2008 letter accelerated the debt and we therefore reverse the Appellate Division order, deny plaintiff's motion for summary judgment and grant Deutsche Bank's motion to dismiss. First and foremost, the letter did not seek immediate payment of the entire, outstanding loan, but referred to acceleration only as a future event, indicating the debt was not accelerated at the time the letter was written. Nor was this letter a pledge that acceleration would immediately or automatically occur upon expiration of the 32-day cure period. Indeed, an automatic acceleration upon expiration of the cure period could be considered inconsistent with the terms of the parties' contract, which gave the noteholder an optional, discretionary right to accelerate upon a default and satisfaction of certain conditions enumerated in the agreement. Although the letter states that the debt "will accelerate " if failed to cure the default within the cure period, it subsequently makes clear that the failure to cure "may" result in the foreclosure of the property, indicating that it was far from certain that either the acceleration or foreclosure action would follow, let alone ensue immediately at the close of the 32-day period. This case demonstrates why acceleration should not be deemed to occur absent an overt, unequivocal act. Noteholders should be free to accurately inform borrowers of their default, the steps required for a cure and the practical consequences if the borrower fails to act, without running the risk of being deemed to have taken the drastic step of accelerating the loan. Even in the event of a continuing default, default notices provide an opportunity for pre-acceleration negotiation—giving both parties the breathing room to discuss loan modification or otherwise devise a plan to help the borrower achieve payment currency, without diminishing the noteholder's time to commence an action to foreclose on the real property, which should be a last resort. Finally, in Freedom and Ditech , “the issue not whether or when the debt was accelerated but whether a valid election to accelerate, effectuated by the commencement of a prior foreclosure action, was revoked upon the noteholder's voluntary discontinuance of that action.”  Although the Court of Appeals “has never addressed what constitutes a revocation in this context, the Appellate Division departments have consistently held that, absent a provision in the operative agreements setting forth precisely what a noteholder must do to revoke an election to accelerate, revocation can be accomplished by an "affirmative act" of the noteholder within six years of the election to accelerate.”  (Citations omitted.)  “ o clear rule has emerged with respect to the issue raised here—whether a noteholder's voluntary motion or stipulation to discontinue a mortgage foreclosure action, which does not expressly mention de-acceleration or a willingness to accept installment payments, constitutes a sufficiently ‘affirmative act.’" The Court was troubled by the emerging rule that “require courts to scrutinize the course of the parties' post-discontinuance conduct and correspondence, to the extent raised, to determine whether a noteholder meant to revoke the acceleration when it discontinued the action” because the mere withdrawal of “a foreclosure action, "in itself," is not an affirmative act of revocation of the acceleration effectuated via the complaint.”  (Citations omitted.)  The Court rejected an approach that “turns on an exploration into the bank's intent, accomplished through an exhaustive examination of post-discontinuance acts,” and stated: This approach is both analytically unsound as a matter of contract law and unworkable from a practical standpoint. As is true with respect to the invocation of other contractual rights, either the noteholder's act constituted a valid revocation or it did not; what occurred thereafter may shed some light on the parties' perception of the event but it cannot retroactively alter the character or efficacy of the prior act. Indeed, where the contract requires a pre-acceleration default notice with an opportunity to cure, a post-discontinuance letter sent by the noteholder that references the then-outstanding total debt and seeks immediate repayment of the loan is not necessarily evidence that the prior voluntary discontinuance did not revoke acceleration—it is just as likely an indication that it did and the noteholder is again electing to accelerate due to the borrower's failure to cure a default. The impetus behind the requirements that an action be unequivocal and overt in order to constitute a valid acceleration and sufficiently affirmative to effectuate a revocation is that these events significantly impact the nature of the parties' respective performance obligations. A rule that requires post-hoc evaluation of events occurring after the voluntary discontinuance—correspondence between the parties, payment practices and the like—in order to determine whether a revocation previously occurred leaves the parties without concrete contemporaneous guidance as to their current contractual obligations, resulting in confusion that is likely to lead (perhaps inadvertently) to a breach, either because the borrower does not know that the obligation to make installment payments has resumed or the noteholder is unaware that it must accept a timely installment if tendered. Indeed, if the effect of a voluntary discontinuance of a mortgage foreclosure action depended solely on the significance of noteholders' actions taking place months (if not years) later, parties might not have clarity with respect to their post-discontinuance contractual obligations until the issue was adjudicated in a subsequent foreclosure action (which is what occurred here); in both Freedom Mortgage and Ditech, the Appellate Division disagreed with Supreme Court's determinations that the prior accelerations had been revoked by the voluntary discontinuance. Not only is this approach harmful to the parties but it is incompatible with the policy underlying the statute of limitations because—under the post-hoc, case-by-case approach adopted by the Appellate Division—the timeliness of a foreclosure action cannot be ascertained with any degree of certainty, an outcome which this Court has repeatedly disfavored. Further, the Appellate Division's recent approach suggests that a noteholder can retroactively control the effect of a voluntary discontinuance through correspondence it sends to the borrower after the case is withdrawn (which injects an opportunity for gamesmanship). We decline to adopt such a rule.  (Citation omitted.) Instead, as previously stated, the Court adopted the clear and concise rule that if a loan is accelerated by the commencement of foreclosure litigation, the simple act of discontinuing that action operates to de-accelerate the loan; an approach that “comports with our precedent favoring consistent, straightforward application of the statute of limitations which serves the objectives of finality, certainty and predictability, to the benefit of both borrowers and noteholders.”  (Citations and internal quotation marks omitted.) TAKEAWAY The Court’s holding with respect to Freedom and Ditech represents a dramatic and welcomed departure from the caselaw as it evolved in the lower courts.  The simple approach espoused by the Court of Appeals removes any questions about whether a loan was de-accelerated.  Now it is clear that the discontinuance of an action that accelerated a loan operates to de-accelerate the loan.  Accordingly, statute of limitations calculations can now be made with clarity and consistency. Similarly, the Court’s decision with respect to Vargas and Wells Fargo , highlights the importance of lenders carefully choosing the language of their default/acceleration letters.

“We make premium widgets with the highest quality metals.” Assume for the moment, the widgets are made from alloys that are prone to imperfections. Also assume that the speaker sincerely believed the statement to be true, notwithstanding the instances of imperfections. Is this statement an actionable fraud? In Matter of Sundial Growers, Inc. Sec. Litig. , 2021 N.Y. Slip Op. 01014 (1st Dept.Feb. 16, 2021) ( here ), the Court considered this question and, as discussed below, held that the statements at issue (which were similar to the one above) were non-actionable expressions of corporate optimism and puffery or statements of opinion. Expressions of corporate optimism and puffery are not actionable fraudulent statements. See Netshoes Sec. Litig. v. XXX , 64 Misc. 3d 926, 932, (Sup. Ct., N.Y. County 2019) (citing Nadoff v. Duane Reade, Inc. , 107 F. Appx. 250, 252 (2d Cir. 2004)). “This is especially true where … the allegedly fraudulent statements about future performance accompanied with adequate cautionary language, and not stated as guarantees.” Nadoff at 252 (internal quotation marks and citations omitted). “Puffery encompasses statements that are too general to cause a reasonable to rely upon them, and thus cannot have misled a reasonable . They are statements that lack the sort of definite positive projections that might require later correction.” See In re Gen. Elec. Sec. Litig. , No. 19CV1013 (DLC), 2020 WL 2306434, at *7 (S.D.N.Y. May 7, 2020) (citing In re Vivendi, S.A. Sec. Litig. , 838 F.3d 223, 245 (2d Cir. 2016)). To be actionable, expressions of corporate optimism or puffery must be subject to verification. In addition to expressions of puffery and optimism, a speaker can utter a statement of opinion. As discussed below, to be actionable, a statement of opinion must be, among other things, false and not honestly believed when made. Netshoes Sec. Litg. , at 932 (citing Waterford Twp. Police & Fire Retirement Sys. v. Regional Mgt. Corp. , 2016 WL 1261135, at *9 (S.D.N.Y. 2016)). In re Sundial Growers Inc. Securities Litigation Sundial Growers involved claims under the Securities Act of 1933 (“Securities Act”) in connection with Sundial’s August 2019 initial public offering (“IPO”). Sundial is a Canada-based producer of cannabis products that commenced cannabis production in December 2018, a few months after Canada legalized adult use of cannabis at the federal level.  In connection with the IPO, Sundial filed with the SEC on Form 424B4 its final prospectus for the issuance of its common stock (the “Prospectus”). The Prospectus formed part of the Registration Statement (the Prospectus and Registration Statement are collectively referred to as the “Offering Documents”), which plaintiffs relied upon in purchasing Sundial’s common stock. Plaintiffs purchased Sundial’s common stock directly in the IPO, or “traceable” to the Registration Statement filed in connection with the IPO.  In the complaint, plaintiffs alleged that the Offering Documents presented Sundial as a producer of “high-quality” and “premium” cannabis. Plaintiffs maintained that this representation was materially misleading in light of the quality problems Sundial had encountered since 2018.  Notwithstanding these problems, plaintiffs contended that Sundial sought to distinguish itself in the market by claiming that its product was “high quality” and “premium.” Plaintiffs alleged that defendants violated Section 11, Section 12 (a)(2) and Section 15 of the Securities Act. Defendants moved to dismiss the complaint, arguing that (1) plaintiffs failed to allege a materially false or misleading statement or omission in the Offering Documents, (2) the statements that plaintiffs identified as misleading could not serve as the basis for a Securities Act claim, and (3) the statements that plaintiffs identified were offset by adequate warnings and risk disclosures. The motion court granted the motion ( here ). in re initial pub. offering sec. litig., 358 f. supp. 2d 189, 205 (s.d.n.y. 2004). section 12(a)(2) imposes liability under similar circumstances against “a person who offers or sells a security . . . by means of a prospectus or oral communication.” 15 u.s.c. § 77l(a)(2).> in re initial pub. offering sec. litig., 358 f. supp. 2d 189, 205 (s.d.n.y. 2004). section 12(a)(2) imposes liability under similar circumstances against “a person who offers or sells a security . . . by means of a prospectus or oral communication.” 15 u.s.c. § 77l(a)(2).> As an initial matter, the motion court found that plaintiffs satisfied the particularity requirement of CPLR § 3016(b). Under CPLR § 3016(b), a plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009).  Turning to the claims under Section 11 and Section 12 (a)(2) of the Securities Act, the motion court held that plaintiffs failed to state a claim upon which relief could be granted. In the complaint, plaintiffs alleged that several statements in the Offering Documents in which defendants highlighted the company’s brand and product ( i.e. , cannabis) as premium and high quality were false and misleading. Plaintiffs claimed that Sundial “was producing hundreds of kilograms of adulterated cannabis products that were of low quality, including significant batches that were not fit for human consumption or that failed to meet the Company’s contractual commitments to its most important customers” and “maintained materially deficient manufacturing and quality control processes which had led to the production and distribution of these adulterated cannabis products.” Plaintiffs also claimed that “Sundial’s grow rooms were suffering from chronic contamination including crop diseases, bugs, systematic mold infections and other quality control problems.” Plaintiffs further alleged that “an important customer of Sundial, Zenabis, had rejected 554 kilograms (more than a half-ton) of Sundial cannabis due to its materially deficient quality.” Plaintiffs maintained that “ he product had been adulterated with mold, bits of rubber gloves, and other non-cannabis materials, such as jewelry.”  The motion court held that the statements identified by plaintiff were not actionable as a matter of law. The Court found that each of the statements identified by plaintiffs were either (1) corporate puffery, too vague to be actionable, (2) a sincere statement of corporate optimism, or (3) sufficiently offset by adequate risk disclosures. In particular, the motion court held that the terms “high quality” and “premium” were “clear examples” of puffery because they were general and not subject to verification. At most, said the motion court, “high quality” and “premium” were statements of opinion, which were also not actionable. The motion court rejected plaintiffs’ argument that the statements could not be considered puffery or opinions because they “misrepresented current facts.” The reason, said the motion court, in many instances, the sentences in which the statements were made began with “we believe”, “we intend”, “will result” and other opinion-based, or forward-looking language. Statements concerning a company’s business potential, held the motion court, were inactionable as a matter of law.  The motion court also held that Offering Documents contained a “robust” 35-page risk disclosure section, which addressed “ he crux of plaintiff’s allegations about quality issues in Sundial’s product since 2018.” Additionally, noted the motion court, the Offering Documents were replete with warnings that investing in Sundial common stock “involve a high degree of risk.”  “Based on the context of the alleged misrepresentations, their general nature, and their placement amongst robust risk disclosures,” the motion court concluded that “the Prospectus itself, utterly refuted plaintiffs’ first and second causes of action for violations of Section 11 and Section 12(a)(2) of the Securities Act.” On appeal, the Appellate Division, First Department unanimously affirmed. First, the Court agreed with the motion court that the statements at issue were either non-actionable puffery or statements of opinion: The statements in the offering materials that defendant Sundial Growers, Inc. produced “high quality” and “premium” cannabis were non-actionable puffery. To the extent the statements were more than puffery, they were non-actionable opinion. Slip Op. at *1 (citations omitted). Second, the Court found that the risk disclosures “in the offering materials expressly and repeatedly warned of the risk to the company’s quality control, including fire, insects, and contamination, and noted that there had been such an incident in the past.” Id. (citations omitted). “In light of this,” concluded the Court, “the disclosures were not misleading for not identifying a single incident of returned product, that constituted 10% of the company’s sales for a single quarter.” Id. Takeaway To plead fraud, a plaintiff must allege facts showing the defendant made an untrue statement of material fact, or failed to disclose a material fact necessary to make the statements that were made not misleading. See , e.g. , 17 C.F.R. § 240.10b-5 (securities fraud). A statement or omission is material only if a reasonable person would consider it important in determining whether to act on the statement or omission. See TSC Indus., Inc. v. Northway, Inc. , 426 U.S. 438, 449 (1976).  In applying the materiality element of a fraud claim, courts have identified several categories of statements that are not considered materially misleading. Two such categories are relevant to the statements and omissions at issue in Sundial Growers : statements considered immaterial because they are only vague statements of corporate optimism or statements of opinion, and statements considered immaterial because documents available to the plaintiff contained risk disclosures about the subject matter of the alleged misstatement or omission at issue. Statements classified as corporate optimism or mere puffery are typically forward-looking statements, or are generalized statements of optimism that are not capable of objective verification. Vague, optimistic statements are not actionable because a reasonable person would not rely on them in making decisions about the subject matter at issue. The reason: speakers, such as the corporate actors in Sundial Growers , must be allowed to express hope and optimism so long as such statements are not known to be untrue at the time the statement is made. Novak v. Kasaks , 216 F.3d 300, 315 (2d Cir. 2000). As the Second Circuit explained: “People in charge of an enterprise are not required to take a gloomy, fearful or defeatist view of the future; subject to what current data indicates, they can be expected to be confident about their stewardship and the prospects of the business that they manage.” Shields v. Citytrust Bancorp, Inc. , 25 F.3d 1124, 1129-30 (2d Cir.1994). Statements containing the words “we believe”, “we think”, “we expect” or “we anticipate” are classified as opinion. Statements of opinion, as in Sundial Growers , are generally not actionable because they are inherently subjective and involve an opinion about the subject matter at issue. Fait v. Regions Fin. Corp. , 655 F.3d 105, 110 (2d Cir. 2011).  When considering the falsity of an opinion, courts have developed the following standards.  First, when a plaintiff relies on a theory of material misrepresentation, the plaintiff must allege both that “the speaker did not hold the belief she professed” and that the belief is objectively untrue.  Omnicare, Inc. v. Laborers Dist. Council Construction Indus. Pension Fund , 135 S.Ct. 1318, 1327 (2015).  Second, when a plaintiff relies on a theory that a statement of fact contained within an opinion statement is materially misleading, the plaintiff must allege that “the supporting fact supplied untrue.”  Id.  In this regard, a statement structured, “I believe that x is so because y has occurred,” contains the factual and falsifiable statement, “y has occurred.” If y has not occurred, then the statement of opinion is actionable because an embedded but complete “statement of a material fact” can be proven false. Abramson v. Newlink Genetics Corp. , 965 F. 3d 165, 175 (2d Cir. 2020).  Third, when a plaintiff relies on a theory of omission, the plaintiff must allege “facts going to the basis for the issuer’s opinion … whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”  Id.  at 1332. The Supreme Court used the statement, “We believe our conduct is lawful,” as an example. In Omnicare , the Court explained that this statement implies, if the recipient was not informed otherwise, that the speaker had so concluded after investigating the governing law. If the speaker had not investigated the governing law, and had omitted the context, the statement of opinion, although literally true (assuming the speaker believed it) and thus not actionable under the first standard, may be misleading by omission and thus actionable. Omnicare , 135 S.Ct. at 1328-1332. In Sundial Growers , the motion court and First Department applied the first standard: the opinion statement was not honestly believed when made.  Finally, both the motion court and the First Department in Sundial Growers found that defendants’ statements were surrounded by “robust” risk disclosures in the Offering Documents in which they identified the risks of the cannabis business that could adversely impact their production, including the return of their products. These disclosures also included a discussion of the quality problems that had already occurred at the time of the IPO. As such, the Sundial Growers’ courts found that the risk disclosures did not “affirmatively create an impression of a state of affairs that differ in a material way from the one that actually exist . City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc. , 65 F. Supp. 3d 840, 855 (N.D. Cal. 2014), aff’d , 856 F.3d 605 (9th Cir. 2017).

In mid-December 2020, the Securities and Exchange Commission (“SEC” or “Commission”) issued an investor alert (here), warning of “Investment Scam Complaints on the Rise.” In the alert, the SEC urged investors to be on the lookout for investment scams, such as Ponzi schemes, fake CD scams, bogus stock promotions, and community-based financial scams. The SEC said that during the COVID-19 pandemic it had experienced a significant uptick in tips, complaints, and referrals involving investment scams. Today, we examine SEC v. GPB Capital Holdings, LLC, a case involving a long-running scheme to defraud, which had Ponzi-like attributes, and violations of the whistleblower protection laws. here,=">here," and="and" >here.=">here."> SEC v. GPB Capital Holdings, LLC As explained in the SEC’s February 4, 2021, press release (here), the Commission charged three individuals and their affiliated entities with running a Ponzi-like scheme, which raised over $1.7 billion from securities issued by a New York-based asset management firm and registered investment adviser, GPB Capital Holdings, LLC (“GB Capital”). The SEC also charged GPB Capital with violating the whistleblower protection laws. According to the SEC’s complaint (here), David Gentile (“Gentile”), the owner and Chief Executive Officer of GPB Capital, and Jeffry Schneider (“Schneider”), the owner of GPB Capital’s placement agent Ascendant Capital, LLC (“Ascendant Capital”), lied to investors about the source of money used to make an 8% annualized distribution payment to investors. According to the SEC, these defendants, along with Ascendant Alternative Strategies, LLC (“Ascendant Alternative Strategies”), which marketed GPB Capital’s investments, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies. The SEC alleged that GPB Capital used investor money to pay portions of the annualized 8% distribution payments. GPB Capital and Gentile, with the assistance of Jeffrey Lash (“Lash”), a former managing partner at GPB Capital, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital to perpetuate the deception by giving the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than was possible. The SEC further alleged that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider. As alleged, the fraudulent scheme continued for more than four years in part because GPB Capital kept investors in the dark about the true financial condition of the limited partnerships, failing to deliver audited financial statements, and failing to register two of its funds with the SEC. GPB Capital allegedly violated the whistleblower provisions of the securities laws by including language in termination and separation agreements that impeded individuals from coming forward to the SEC, and by retaliating against a known whistleblower. Last="--> Last" year,="year," we="we" wrote="wrote" about="about" an="an" action="action" which="which" amended="amended" its="its" complaint="complaint" add="add" because="because" defendants="defendants" sought="sought" silence="silence" potential="potential" whistleblowers="whistleblowers" from="from" coming="coming" forward="forward" with="with" information="information" their="their" alleged="alleged" wrongdoing="wrongdoing" (here).=">here)."> “As alleged in our complaint, the defendants told investors that they would be paid distributions from profits of the portfolio companies when, in reality, many of the payments were being made from the investors’ own funds,” said Richard Best, Director of the SEC’s New York Regional Office. “This action shows our continued pursuit of those who deceive investors and conceal their misconduct to reap profits for themselves.” Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “Whistleblower protections are a cornerstone of the SEC’s whistleblower program. The charges filed today reinforce the Commission’s commitment to protecting whistleblowers from retaliation and attempts to stifle the free flow of information to the Commission about possible securities law violations.” The SEC filed its complaint in the United States District Court for the Eastern District of New York. The Commission charged Gentile, Schneider, GPB Capital, Ascendant Alternative Strategies, and AscendReant Capital with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (“Exchange Act”), and Lash with aiding and abetting certain of those violations. The complaint also charged GPB Capital and Gentile with violating the antifraud provisions of the Investment Advisers Act of 1940 (“Adviser’s Act”) and charged GPB Capital with violating the registration and whistleblower provisions of the Exchange Act and the Advisers Act’s custody and compliance rules. The SEC is seeking disgorgement of ill-gotten gains, plus prejudgment interest and penalties.

his BLOG has addressed too may issues regarding residential mortgages to mention.  A mortgage foreclosure action “is equitable in nature and triggers the equitable powers of the court … nce equity is invoked, the court’s power is as broad as equity and justice require.”  U.S. Bank Nat. Assoc. Losner , 145 A.D.3d 935, 937-38 (2 nd Dep’t 2016) (numerous citations and internal quotation marks omitted).  For example, due to the equitable nature of mortgage foreclosure actions, “the recovery of interest is within the court’s discretion<,which> will be governed by the particular facts in each case, including wrongful conduct by either party such as where the plaintiff’s conduct has prejudiced the defendant.”  People’s United Bank v. Patio Gardens III, LLC , 189 A.D.3d 1622 (2 nd Dep’t 2020) (numerous citations and internal quotation marks omitted).  Using its equitable powers, the Court in Citicorp Trust Bank, FSB v. Vidaurre , 155 A.D.3d 934 (2 nd Dep’t 2017), “toll and cancel interest that accrued” because “plaintiff failed to explain its lengthy delay in prosecuting this foreclosure action.”  Citicorp , 155 A.D.3d at 935 (citations omitted). On February 9, 2021, the Appellate Division, First Department, decided U.S. Bank, N.A. v. Cordero , a residential mortgage foreclosure action in which it used its equitable powers to prevent a lender from collecting excessive fees, charges and interest from a borrower.  Lender, in Cordero, commenced a foreclosure action, but the borrower sold the property before a referee was appointed to compute the amounts due.  In order to facilitate the July 26, 2019 closing of the sale, “defendant paid the amount sought by plaintiff in accordance with a third payoff statement dated July 25, 2019.”  Within a week of the closing, borrower filed a motion for an accounting in which he alleged “that he paid excessive legal fees, penalty interest, deferred interest, fees for a temporary modification that he never executed, and made certain payments that were never credited to the loan.”  The motion was granted, and supreme court referred the matter to a referee to compute the amounts actually due.  Lender appealed and the First Department held that supreme court “providently exercised its discretion in granting defendant’s motion for an accounting.” The Court rejected lender’s argument that equity is inapplicable because borrower defaulted and sold the premises for “$60,000 more than the payoff amount,” finding that the argument “is without merit because it ignores defendant’s argument that plaintiff received more than it was entitled to receive under the mortgage.” Further, the Court addressed and rejected lender’s arguments that the voluntary payment doctrine, equitable estoppel and waiver barred the accounting even though those arguments were “improperly raised for the first time on appeal.” This BLOG has analyzed the voluntary payment doctrine < HERE =">HERE"> , < HERE =">HERE"> and < HERE =">HERE"> , which “bars the recovery of payments that are voluntarily made with full knowledge of the facts, and in the absence of fraud or mistake of material fact or law”.  (Citation and internal quotation marks omitted.)  The application of the voluntary payment doctrine was rejected because borrower made several “written protests” to lender.  The Court also found that it was not demonstrated that borrower had “full knowledge of the facts necessary to invoke the voluntary payment doctrine,” because “the bare bones July 25, 2019 payoff statement does not reflect any itemization for legal fees.” Equitable estoppel is “’imposed by law in the interest of fairness to prevent the enforcement of rights which would work fraud or injustice upon the person against whom enforcement is sought and who, in justifiable reliance upon the opposing party's words or conduct, has been misled into acting upon the belief that such enforcement would not be sought.’”  (Quoting Nassau Trust Co. v Montrose Concrete Prods.Corp . , 56 N.Y.2d 175, 184 (1982).)  Lender argued that “in reliance on defendant’s multiple requests for payoff statements it abstained from prosecuting the action, accepted the full payoff amount, and discharged the mortgage” and that it “suffered prejudice because it incurred ongoing litigation costs and fees.”  In rejecting the estoppel argument, the Court stated: Plaintiff’s estoppel argument is without merit because plaintiff’s purported reliance is not justifiable in light of defendant’s written protests. In addition, plaintiff’s reliance argument fails because plaintiff was required by law to produce a payoff statement after defendant demanded one under Real Property Law § 274-a . Moreover, plaintiff has not established that in the interest of fairness, equitable estoppel should bar a legal determination of whether the amount defendant paid was in fact due under the mortgage merely because defendant defaulted in making mortgage payments and was able to sell the property to avoid foreclosure. Waiver is “the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable.”  (Quoting Nassau Trust , 56 N.Y.2d at 184.)  Because borrower made numerous written protests, “it cannot be said that defendant voluntarily and intentionally abandoned his right to challenge the payoff amount.”

It is well settled that communications between an attorney and a client for the purpose of obtaining legal advice are privileged and not discoverable unless the privilege is deemed to have been waived by the client. Veras Inv. Partners, LLC v. Akin Gump Strauss Hauer & Feld LLP , 52 A.D.3d 370, 374 (1st Dept. 2008) (citing Jakobleff v. Cerrato, Sweeney & Cohn , 97 A.D.2d 834, 835 (2d Dept. 1983)).  A client who voluntarily testifies to a privileged matter, who publicly discloses such matter, or who permits his attorney to testify regarding the matter is deemed to have impliedly waived the attorney-client privilege. Veras Inv. Partners , 52 A.D.3d at 375 (citations omitted). A client is also deemed to have waived the privilege when it affirmatively places the subject matter of its privileged communication “at issue” in the litigation, “so that invasion of the privilege is required to determine the validity of the ’s claim or defense, and application of the privilege would deprive the opposing party of vital information. Id. (citing Deutsche Bank Trust Co. of Ams. v. Tri-Links Inv. Trust , 43 A.D.3d 56, 63-64 (1st Dept. 2007)).  Whether the attorney-client privilege was waived by a party to a litigation was the subject of Securitized Asset Funding 2011-2, Ltd. v. Canadian Imperial Bank of Commerce , 2021 N.Y. Slip Op. 00815 (1st Dept. Feb. 9, 2021) ( here ). Securitized Asset Funding arose out of a payment dispute between parties to a complex note transaction. During discovery, plaintiff/counterclaim-defendant Securitized Asset Funding 2011-2, Ltd. and counterclaim-defendants Securitized Asset Funding 2009-1, Ltd., Promontoria Europe Investments XXIII LDC, and CSMC 2012-8R, Ltd. (collectively “Cerberus”), moved to compel defendant Canadian Imperial Bank of Commerce (“CIBC”) to produce certain documents it withheld or redacted as privileged, and to allow examination before trial testimony on topics objected to on the basis of privilege.  Cerberus argued that CIBC waived the attorney-client privilege in response to its request for certain documents and testimony. CIBC claimed that there was a mistake as to its “business understanding” of the transaction documents such that the actual terms in the documents differed from those drafted by counsel. Cerberus maintained that, in light of this defense, any attorney-client privilege assertion relating to CIBC’s “business understanding” was waived. Therefore, because CIBC put its understanding of the subject documents “at issue” through its mistake and estoppel defenses, said Cerberus, the “at-issue” waiver “prevent from simultaneously (1) asserting a different understanding than the Contracts’ plain meaning, and (2) denying evidence that might contradict that assertion.” Plaintiff also argued that CIBC waived the privilege by selectively testifying about the subject matter of the relevant attorney-client communications. In opposition, CIBC maintained that it did not intend to rely on any of the privileged documents or communications to support its mistake defense. Rather, it intended to rely on non-privileged contemporaneous documents, witness testimony, and the parties’ course of conduct and performance. CIBC noted that plaintiff even admitted that it did not need the privileged documents and testimony to defend against CIBC’s arguments because it could rely on other documents and testimony. CIBC further contended that mistake was not its only defense in the action, and, in any event, a mistake defense could be asserted successfully without waiving the privilege. According to CIBC, advancing the defense of mistake did not automatically result in an “at-issue” waiver of the privilege.  Finally, CIBC contended that the testimony referred to by plaintiff did not disclose the content of any privileged communications with counsel or any advice from counsel. That testimony, CIBC maintained, merely demonstrated that there was communication with counsel but did not refer to any of the substance of the advice given by counsel. And, CIBC said, even if some testimony about an understanding of privileged material was mistakenly disclosed, it would not constitute a waiver of all testimony. The motion court denied the motion. The motion court held that Cerberus failed to demonstrate that the failure to waive the privilege would cause any prejudice or deprive it of access to vital information, especially since there were other available means of discovery to prove the validity of the claims asserted; namely, through discovery already provided. Credit Suisse First Boston v. Utrecht-America Fin. Co. , 27 A.D.3d 253 (1st Dept. 2006). The motion court also held that Cerberus failed to identify to any specific testimony showing that CIBC placed the subject matter of counsel’s advice at issue and made selective disclosure of that advice. On appeal, the Appellate Division, First Department affirmed. The Court held that the motion court “properly found that CIBC ha not waived its attorney-client privilege concerning the material and testimony Cerberus to compel by placing them at issue.” Slip Op. at *1. The Court noted that CIBC had “disavowed any intention to use privileged documents to prove the relevant defense or counterclaim” and, as such, “the invasion of the privilege not necessary to determine their validity.” Id. (citations omitted).  The Court explained that Metropolitan Bridge & Scaffolds Corp. v. New York City Hous. Auth. , 168 A.D.3d 569 (1st Dept. 2019), upon which Cerberus relied, was distinguishable even though the defendant stated that it did not intend to use privileged communications and documents in its defense, because the plaintiff was required to use them to prove its claim, which was based on the defendant’s reliance on the advice of counsel (168 A.D.3d at 571–72). Id. The Court explained that in Securitized Asset Funding , “the CIBC defense and counterclaim be fairly litigated based on other available, nonprivileged evidence including the testimony of nonlawyers.” Id. Finally, the Court found that the record supported “the motion court’s finding that CIBC did not waive its privilege to the materials … by selectively disclosing privileged communications during depositions in this action.” Takeaway  “The attorney-client privilege shields from disclosure any confidential communications between an attorney and his or her client made for the purpose of obtaining or facilitating legal advice in the course of a professional relationship.” Ambac Assur. Corp. v. Countrywide Home Loans, Inc. , 27 N.Y.3d 616, 623 (2016). The privilege “fosters the open dialogue between lawyer and client that is deemed essential to effective representation.” Spectrum Sys. Intl. Corp. v. Chemical Bank , 78 N.Y.2d 371, 377 (1991)). “It exists to ensure that one seeking legal advice will be able to confide fully and freely in his attorney, secure in the knowledge that his confidences will not later be exposed to public view to his embarrassment or legal detriment.” Matter of Priest v. Hennessy , 51 N.Y.2d 62, 67-68 (1980). Nevertheless, the privilege may be waived where, as noted, “a party affirmatively places the subject matter of its own privileged communication at issue in litigation, so that invasion of the privilege is required to determine the validity of a claim or defense of the party asserting the privilege, and application of the privilege would deprive the adversary of vital information.” Deutsche Bank , 43 A.D.3d at 63-64 (citation omitted). Notably, “ privileged communication contain information relevant to issues the parties are litigating does not, without more, place the contents of the privileged communication itself ‘at issue’ in the lawsuit.” Id. at 64. “If that were the case, a privilege would have little effect.” Id. (citations omitted). Consequently, “‘at issue’ waiver occurs ‘when the party has asserted a claim or defense that he intends to prove by use of the privileged materials.’” Id. (citation omitted). In Securitized Asset Funding , the Court found that there was no “at-issue” waiver because CIBC was not relying on any privileged material to support its claims or defenses. In fact, as noted, it specifically disavowed use of those materials, because its defense could be litigated through other non-privileged materials.

Last month, this Blog examined Shilon v. New Upreal LLC , 2021 N.Y. Slip Op. 30146(U) (Sup. Ct., Kings County Jan. 11, 2021), a case involving a motion by a nonparty to intervene in the litigation. ( Here .) Today, we look at 1467 Bedford Holdings LLC v. Spitzer , 2021 N.Y. Slip Op. 30302(U) (Sup. Ct., Kings County Feb. 1, 2021) ( here ), a case involving intervention as of right under CPLR §1012(a)(2). Under CPLR §1012(a)(2), a party may intervene as a matter of right “when the representation of the person’s interest by the parties is or may be inadequate and the person is or may be bound by the judgment.” The Court of Appeals has explained that intervention is available only where the judgement will bind the potential intervenor “by its res judicate effect”. Vantage Petroleum v. Board of Assessment Review of the Town of Babylon , 61 N.Y.2d 695 (1984). The Court further explained that the potential intervenor should be in “privity” with the parties to the lawsuit to grant the motion to intervene. Green v. Sante Fe Indus. Inc. , 70 N.Y.2d 244 (1987). Thus, where the potential intervenor has no interest in either the real property at issue or the outcome of the litigation, then the motion to intervene should be denied. Citibank N.A. v. Plagakis , 8 A.D.3d 604 (2d Dept. 2004). 1467 Bedford Holdings involved a dispute over the management of property owned and operated by plaintiff 1467 Bedford Holdings LLC – a company owned by three entities: Gemcap Equity Corp., 50%; Mazel Equities Group LLC, 25%; and Cobblestone Equity LLC, 25%.  1467 Bedford Holdings was formed to acquire, develop and maintain property located at 1467 Bedford Avenue in Kings County.   Pursuant to the operating agreement, 1467 Bedford Holdings was managed by Judah Zelmanovitz and Sam Wieder. Notwithstanding the terms of the operating agreement, plaintiffs alleged that defendant Joel Spitzer (“Spitzer”) had (a) been acting as the manager of the property, (b) been presenting himself as the manager of the property, and (c) rented units that were already occupied. They further alleged that he trespassed and loitered at the property. Plaintiffs maintained that those activities violated the operating agreement and was harming not only the financial success of the enterprise but the physical well-being of the tenants that resided there. Plaintiffs sought an injunction preventing Spitzer from acting as the owner of the property and from having any interaction with any of the tenants. Defendants opposed the motion and cross-moved, seeking an injunction preventing plaintiffs from slandering him. The Court granted the motion and denied the cross-motion. At the time of the motions, two potential intervenors, Triboro Realty Asset Management LLC and Alpha Space LLC, both of which Spitzer own, moved to intervene in the action. Triboro had acted as managing agent of the property and claimed that money was owed. Alpha was a tenant and the subject of a landlord tenant action that had been discontinued. In ruling on the motions, the Court did not rule on the motion to intervene. Spitzer moved, pursuant to CPLR § 2221, to reargue a portion of the Court’s earlier decision – namely, the motion to intervene. The Court denied the motion. In denying the motion, the Court held that neither Triboro nor Alpha were “necessary” parties to the action. Slip Op. at *3. The Court explained that neither entity had anything to do with the allegations in the complaint as they pertained to Spitzer ( e.g. , breach of the operating agreement, trespass, tortious interference with contract, conversion, breach of fiduciary duty, declaratory judgement and a permanent injunction). Id. Triboro, said the Court, was not a necessary party to the action, even it “ha claims for offsets or payments”, because the claims “ha nothing whatsoever to do with the allegations against Spitzer.…” Id. Similarly, Alpha, which possessed claims for improvements to the unit, was not a necessary party to the litigation because those claims did “not touch upon the claims of this action.…” Id. In short, concluded the Court, “Alpha not a ‘necessary’ party to an action that essentially argue Spitzer acted improperly.” Id. Takeaway Although the courts do not always make the distinction between mandatory and permissive intervention ( Matter of HSBC Bank U.S.A. , 135 A.D.3d 534, 534 (1st Dept. 2016)), they will make such a distinction when, as in 1467 Bedford Holdings , the motion is understood to be brought under one of the intervention provisions of the CPLR. In 1467 Bedford Holdings , the Court treated the motion as being brought under CPLR §1012(a)(2) – that is, the mandatory intervention provision of the CPLR. As such, the intervenors were required to show that they would be adversely affected by a judgment in the action. The Court held that because they were not necessary to the action, they could not show that they would be adversely affected by a judgment in the action.

Freedom=">Freedom" Mortgage="Mortgage" Corp.="Corp." v.="v." Engel,="Engel," in="in" which="which" it,="it," inter="inter" alia ,="alia," expressly="expressly" rejected="rejected" “pretextual="“pretextual" de-acceleration”="de-acceleration”" theory. ="theory. " This="This" BLOG’s="BLOG’s" treatment="treatment" Freedom ="Freedom" can="can" be="be" found="found" > here .=">here."> This Blog has written extensively on issues related to residential mortgage foreclosure.  HERE,=">HERE," >HERE.=">HERE."> There is no dispute that an action to foreclose a mortgage is governed by a six-year statute of limitations.  CPLR 213(4) .  See also , Fed. Nat. Mort. Assoc. v. Schmitt , 172 A.D.3d 1324, 1325 (2 nd Dep’t 2019); Deutsche Bank Nat. Trust Co. v. Blank , 189 A.D.3d 1678, 1679 (2 nd Dep’t 2020).  Much litigation, however, has centered on when the statute of limitations begins to accrue.  When a mortgage is payable in installments, “separate causes of action accrue for each installment that is not paid and the statute of limitations begins to run on the date each installment becomes due.”  HSBC Bank USA, N.A. v. Gold , 171 A.D.3d 1029, 1030 (2 nd Dep’t 2019).   Most mortgages, however, provide that a mortgagee may accelerate the entire debt in the event of, inter alia , a payment default by a mortgagor. Thus, “the terms of the mortgage may contain an acceleration clause that gives the lender the option to demand due the entire balance of principal and interest upon the occurrence of certain events delineated in the mortgage.”  Bank of New York Mellon v. Dieudonne , 171 A.D.3d 34, 37 (2 nd Dep’t 2019) (citations and internal quotation marks omitted).  When the provisions of a mortgage provide that “the acceleration of the maturity of a mortgage debt on default is made optional with the holder of the note and mortgage, some affirmative action must be taken evidencing the holder's election to take advantage of the accelerating provision, and until such action has been taken the provision has no operation.”  BONY Mellon , 171 A.D.3d at 37 (citations and internal quotation marks omitted).  This may be done by a clear and unequivocal demand or the commencement of an action.  U.S. Bank Nat. Assoc. v. Catalfamo , 189 A.D.3d 1786 (3 rd Dep’t 2020) (citations omitted).  Similarly, the Second Department noted several ways by which a lender may accelerate a mortgage debt: One way is in the form of an acceleration notice transmitted to the borrower by the creditor or the creditor’s servicer. To be effective, the acceleration notice to the borrower must be clear and unequivocal.  A second form of acceleration, which is self-executing, is the obligation of certain borrowers to make a balloon payment under the terms of the note at the end of the pay-back period.  A third form of acceleration exists when a creditor commences an action to foreclose upon a note and mortgage and seeks, in the complaint, payment of the full balance due. Milone v. US Bank Nat. Assoc. , 164 A.D.3d 145, 152 (2 nd Dep’t 2018) (citations omitted). Once the mortgagee’s election to accelerate is properly made, “the borrower’s right and obligation to make monthly installments ceased and all sums became immediately due and payable.”  Fed. Nat. Mort. Assoc. v. Mebane , 208 A.D.2d 892, 894 (2 nd Dep’t 1994) (citation omitted).  The statute of limitations begins to run anew on the entire debt upon acceleration.  HSBC , 171 A.D.3d at 1030 (citations omitted). For any number of reasons, a lender may wish to revoke its election to accelerate and de-accelerate a loan, but “it must do so by an affirmative act of revocation occurring during the six-year statute of limitations period subsequent to the initiation of the prior foreclosure action.”  NMNT Realty Corp. v. Knoxville 2012 Trust , 151 A.D.3d 1068, 1070-71 (2 nd Dep’t 2017) (citation omitted).  See also, Christiana Trust v. Barua , 184 A.D.3d 140, 145 (2 nd Dep’t 2020) (citations omitted) (revocation must be made “within six years of the earlier acceleration”).  As with an acceleration notice, “the de-acceleration of note balances must also be clear and unambiguous to convey the fact that the previous demand for full payment of the note has been affirmatively revoked.”  Christiana , 184 A.D.3d at 146 (citations omitted).  Further, the revocation notice “revives the borrower’s right to make the monthly payments that became due between the time the loan was accelerated and the time the acceleration was revoked, together with the right to make future monthly installment payments.”  Christiana , 184 A.D.3d at 148.  Accordingly, “in order to effectively rescind the acceleration, should be required to notify the borrower that the right to make monthly payments is restored and that the lender will accept the tender of such payments.”  Christiana , 184 A.D.3d at 148 (citation omitted).   On January 27, 2021, the New York Supreme Court, Kings County, decided Carter v. U.S. Bank Trust, N.A. In Carter , plaintiff mortgagor brought an action pursuant to Real Property Actions and Proceedings Law 1501(4) to discharge a mortgage of record because the “applicable statute of limitations for the commencement of an action to foreclose mortgage … has expired….”  HERE=">HERE" and="and" HERE.="HERE.">   An interesting aspect of the Court’s analysis on issues such as acceleration, de-acceleration and addressing statute of limitations calculations was the mention of pretextual de-accelerations “to avoid the onerous effect of an approaching statute of limitations.”  Carter (quoting, Milone , 164 A.D.3d at 145).  Simply stated, when faced with the possibility of missing a statute of limitations deadline of an accelerated loan, a lender may simply choose to de-accelerate rather than take the time to commence an action.  Thus, the Milone Court stated: Courts must, of course, be mindful of the circumstance where a bank may issue a de-acceleration letter as a pretext to avoid the onerous effect of an approaching statute of limitations and to defeat the property owner’s right pursuant to RPAPL 1501 to cancel and discharge a mortgage and note. Here, however, the de-acceleration letter containing a clear and unequivocal demand that the homeowner meet her prospective monthly payment obligations constitutes a de-acceleration in fact and cannot be viewed as pretextual in any way. Specifically, a de-acceleration letter is not pretextual if, as here, it contains an express demand for monthly payments on the note, or, in the absence of such express demand, it is accompanied by copies of monthly invoices transmitted to the homeowner for installment payments, or, is supported by other forms of evidence demonstrating that the lender was truly seeking to de-accelerate and not attempting to achieve another purpose under the guise of de-acceleration ( cf. Deutche Bank Natl. Trust Co. Ams. v. Bernal, 56 Misc.3d at 923–924, 59 N.Y.S.3d 267). In contrast, a “bare” and conclusory de-acceleration letter, without a demand for monthly payments toward the note, or copies of invoices, or other evidence, may raise legitimate questions about whether or not the letter was sent as a mere pretext to avoid the statute of limitations. Milone, 164 A.D.3d at 154.  Relying on Milone , the Christiana Trust Court recognized that because “the foreclosure of mortgages encumbering residential properties involves elements of equity … the declaration of a de-acceleration cannot be utilized as a mere pretext to avoid the onerous effect of the statute of limitations.”  Christiana Trust , 184 A.D.3d at 146.

We have noted previously that the “policy of to encourage arbitration.” See Smith Barney Shearson Inc. v. Sacharow , 91 N.Y.2d 39 (1997). For this reason, “ ny doubts as to whether an issue is arbitrable will be resolved in favor of arbitration.” State of New York v. Philip Morris Inc. , 30 A.D.3d 26, 31 (1st Dept. 2006), aff’d , 8 N.Y.3d 574 (2007)). This is especially so where the agreement to arbitrate incorporates rules that explicitly authorize the arbitrator to resolve all disputes, including those concerning “the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought.” See Offshore Expl. & Prod., LLC v. Morgan Stanley Private Bank, N.A. , 626 F. App’x 303, 305 (2d Cir. 2015). In Steamer v. Rinde , 2021 N.Y. Slip Op. 30214(U) (Sup. Ct. N.Y. County Jan. 19, 2021) ( here ), the Court granted defendants’ motion to compel arbitration because the parties’ agreement to arbitrate was broad in scope, requiring them to arbitrate “ ny claim or dispute arising out of th Agreement or the alleged breach thereof”.  Steamer involved a proposed partnership that never came to be. In August 2018, the individual plaintiffs (the “Plaintiffs”), partners in Steamer Hart LLP, agreed to join defendants as partners in CKR Law. At the time, they signed “Joinder” documents that set forth the terms of their agreement ( e.g. , equity draws, year-end distributions, performance bonuses, and other incidents of a new partnership) (the “Joinder Documents”). Although they signed the Joinder Documents and agreed to the terms of a partnership agreement (the “Partnership Agreement”), plaintiffs claimed that defendants “surreptitiously and fraudulently attached the parties’ signature pages to an earlier draft of the Joinder … to which never agreed and in fact flatly rejected.” They maintained that the earlier draft “made no provision for compensation and did not . . . reference the … Addendum.”  The Partnership Agreement expressly required binding arbitration before JAMS for “ ny claim or dispute arising out of th Agreement or the alleged breach thereof.” “ he cost of any arbitration be borne exclusively by the Partner asserting the claim,” thereby obligating that party “to advance such costs and expenses before commencing any proceedings.” The Joinder documents recognized the foregoing provisions.  Plaintiffs commenced a mediation before JAMS in October 2018. Mediation was a prerequisite to arbitrating the parties’ dispute under the Partnership Agreement. However, Plaintiffs denied mediating under the terms of the Partnership Agreement, stating that their decision to mediate was an “expedient” means of trying to resolve their dispute.  On October 25, 2018, plaintiffs’ counsel served a “Demand for Arbitration” on defendants in connection with their dispute. Nevertheless, Plaintiffs commenced the action by service of a summons with notice, seeking a declaration that they were “not and never were law partners with the defendants” and monetary relief representing the fees paid to CKR Law by plaintiffs’ clients; costs involved in plaintiffs’ move into (and, later, out of) the offices of CKR Law; and sums expended by plaintiffs for which defendant Michael James Rinde promised to reimburse them. Defendants filed a motion to stay the action and compel arbitration, arguing that the arbitration provisions in the Partnership Agreement and in the Joinder documents were broad, clear, and unambiguous. The Court granted the motion. The Court held that in light of the state policy encouraging the arbitration of disputes, the broad arbitration provisions in the Partnership Agreement and Joinder Documents, and “plaintiffs’ counsel’s express Arbitration Demand,” arbitration of the dispute was appropriate. Slip Op. at *4. The Court also held that because the arbitration provisions in the governing documents were broad, the arbitrator was the appropriate person to decide “ ll the issues and claims summarized in plaintiffs’ summons with notice filed in this action.…” Id. The Court further held that pursuant to the terms of the arbitration agreement, the parties were to mediate their dispute: “Because the Partnership Agreement requires that mediation be given a chance prior to any arbitration, this court’s grant of defendants’ motion necessarily requires that the parties first proceed to mediation which, if unsuccessful, will be followed by binding arbitration.” Id. In so ruling, the Court held that the costs of mediation would be shared by the parties, as opposed to plaintiffs, as defendants urged. Id. Plaintiffs argued that the Partnership Agreement was silent as to who would bear the costs of mediation, as opposed to arbitration. The Court agreed, finding “Plaintiffs’ point well taken.” Id. at *5. “ othing is said about the cost burden underlying the mediation, which must precede any arbitration,” observed the Court.  The Court held that “ n view of the contractual silence on th point,” it was applying “an objective standard” that “recognize the mutual benefit to both sides inherent in mediation as a means of negotiation toward the goal of consensual resolution and settlement of their dispute.” Id. See Chapman, Spira & Carson, LLC v. Helix BioPharma Corp. , 115 A.D.3d 526, 527 (1st Dept. 2014). “Viewed thusly, and objectively,” concluded the Court, the Court would supply “the missing term by adopting a construction requiring both sides to share equally in the cost of mediation.” Id. Takeaway The threshold question in assessing whether to compel arbitration is whether there is a valid and binding agreement to arbitrate. Matter of Belzberg v. Verus Invs. Holdings Inc. , 21 N.Y.3d 626, 630 (2013). If the court finds that a valid arbitration agreement exists, the next question to consider is whether the dispute comes within the scope of that agreement. Zachariou v. Manios , 68 A.D.3d 539, 539 (1st Dept. 2009) (“Whether a dispute is arbitrable is generally an issue for the court to decide unless the parties clearly and unmistakably provide otherwise.”). Where the parties “clearly and unmistakably” reserve the question of arbitrability for decision by the arbitrator, the dispute will be sent to arbitration. This is especially so when the parties incorporate the rules of the arbitral forum into their agreement. Zachariou , 68 A.D.3d at 539 (“ here there is a broad arbitration clause and the parties’ agreement specifically incorporates by reference the AAA rules providing that the arbitration panel shall have the power to rule on its own jurisdiction, courts will ‘leave the question of arbitrability to the arbitrators’”) (citations omitted)). In Steamer , the parties’ agreements contained broad arbitration provisions that provided for the arbitration of “ ny claim or dispute arising out of th Agreement or the alleged breach thereof” and incorporated by reference the JAMS rules. As such, consistent with the law in New York, and plaintiffs’ counsel’s demand for arbitration, the Court found that there was clear and unmistakable evidence that the parties intended to have an arbitrator decide their dispute.

“Boiler room” brokerage firms are investment houses in which a broker uses high-pressure sales tactics to sell speculative and risky securities. A broker using boiler-room tactics provides customers – usually persons who received a cold call from the broker – with only positive information about the company and its stock. Boiler-room brokers typically tell customers that a stock is “a sure thing” or a “can’t miss, once in a lifetime” opportunity. Boiler-room brokers pressure customers to buy a security on the spot and discourage the customer from doing any research before they buy. Brokers using high pressure sales tactics do so to convince investors to pay more for a security than its actual worth. Sometimes, the securities are even worthless or nonexistent. On January 27, 2021, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that it charged Vuuzle Media Corporation (“Vuuzle”), a purported online live streaming and entertainment company, and its founder Ronald Shane Flynn (a.k.a. Ronnie Shane) with fraudulently offering over $14 million in securities to investors across the United States using an aggressive boiler room sales scheme. According to the SEC’s complaint (here), from approximately September 2016 through at least May 2020, Vuuzle and Flynn offered and sold more than $14 million of Vuuzle common stock and warrants to investors throughout the United States. The SEC claimed that Flynn secretly diverted approximately $5 million to support his aggressive fund-raising operations and pay commissions to stock promoters. The SEC alleged that Flynn misappropriated another $5 million or so in direct transfers to his personal bank accounts overseas and by using corporate credit and debit cards for personal items, such as dating and gambling applications, gold bars, and luxury travel. Approximately $2 million in additional funds, said the SEC, was used for other expenses in furtherance of the alleged fraud, including, but not limited to, Ponzi-like payments to a limited number of investors, Fed Ex charges, rent for a New York office, and attorney fees. To raise money, Vuuzle and Flynn allegedly represented to investors that Vuuzle was a legitimate, successful, and growing company in the business of providing online live streaming and entertainment services. In fact, claimed the SEC, Vuuzle was little more than a front for a boiler room operation Flynn controlled. According to the SEC, Flynn operated primarily out of the Philippines under a series of different corporate entities. In that connection, he allegedly acted directly and through marketing teams that were engaged in aggressive and high-pressure sales campaigns. Among other tactics, said the SEC, Flynn and his boiler room employees cold-called potential investors and, through relentless and deceptive phone and email communication, convinced them to buy Vuuzle securities. In return for bringing investor funds to Vuuzle, Flynn purportedly paid substantial commissions to himself and others. The securities offered were common stock. The price per share ranged from $1.00 to $5.00, with most investors paying $5.00 per share. Many investors were also allegedly granted warrants that gave the investor the purported right to purchase additional shares for a limited time at a discounted price. The SEC said that none of the securities were registered with the Commission. The SEC alleged that Vuuzle and Flynn made materially false and misleading statements in their communications with investors, filings with the Commission, and in offering documents, including Vuuzle’s Private Placement Memoranda (“PPMs”). For example, said the SEC, Vuuzle and Flynn told investors that their funds would be used to operate and build Vuuzle’s online streaming business, which would earn millions of dollars in revenue from service fees and advertising. In fact, alleged the SEC, of the $14 million raised in investor funds, Vuuzle and Flynn used only approximately $2 million to build the streaming applications, which served as props to raise more investor funds. In addition, said the SEC, Vuuzle and Flynn falsely portrayed Vuuzle as a “pre-IPO” investment opportunity that would provide returns to investors in the form of dividends and increased post-IPO stock values. Yet, Vuuzle has never made a profit, never paid dividends to any investor, and never made a public offering on any stock exchange, alleged the Commission. From its inception in October 2016 through May 2020, Vuuzle’s U.S. bank account reflected total business revenue of less than $1,670, noted the SEC. Moreover, claimed the SEC, Vuuzle’s public filings and offering documents falsely suggested Flynn had only a peripheral relationship with the company, if any. For example, said the SEC, in the PPMs, Vuuzle described Flynn as merely a “non-voting beneficial owner” of a Vuuzle corporate shareholder. And Vuuzle’s Forms D, filed with the Commission in 2017 and 2019, did not name Flynn as a related party at all. In fact, said the SEC, Flynn exercised ultimate control over every part of Vuuzle’s business for the primary purpose of enriching himself. The SEC said that Vuuzle and Flynn were aided and abetted by Richard Marchitto (“Marchitto”), a former dentist who had lost money investing in one of Flynn’s previous business ventures. According to the complaint, Marchitto provided substantial assistance to Vuuzle and Flynn by acting as their U.S. corporate and financial presence and maintaining a U.S. bank account, corporate credit cards, and a New York office address for Vuuzle, which enhanced Vuuzle’s aura of legitimacy as a U.S.-based company. The Commission claimed that because Flynn avoided U.S. jurisdiction, Marchitto was instrumental to the fraud. “We are committed to taking action to protect investors and pursuing relief for those who have been harmed,” said Melissa Hodgman, Acting Director of the SEC’s Division of Enforcement. “We will vigorously pursue fraudsters who enrich themselves at investors’ expense.” “The defendants allegedly raised millions of dollars from investors through aggressive and deceptive sales techniques, and misappropriated the majority of those funds for personal use and to fund the boiler room operation,” said Jennifer S. Leete, Associate Director in the SEC’s Division of Enforcement. “Investors should be on alert for red flags of investor fraud such as unsolicited calls and high pressure sales tactics.” The SEC filed the complaint in federal court in the District of New Jersey. In the complaint, the Commission charged Vuuzle and Flynn with violating the antifraud and registration provisions of the federal securities laws, and Marchitto with aiding and abetting Vuuzle and Flynn’s violations. The SEC seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties against each defendant.