In late December 2020, Governor Cuomo signed into law the “COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020” (the “Act”), which has an effective date of December 28, 2020.  While the Act covers certain residential eviction proceedings and tax lien foreclosures too, this BLOG will focus on the provisions of the Act that relate to residential mortgage foreclosures.  A copy of the bookmarked December 31, 2020, memorandum from Chief Administrative Judge Lawrence K. Marks (the “Memorandum”), which attaches as Exhibits a copy of the Act (Exhibit “A”), a related Administrative Order (AO/341/20) (Exhibit “B”) and the “Notice to Owner or Mortgagor and Hardship Declaration” (the “Hardship Declaration”) (to be discussed further herein) in English and Spanish (Exhibit “C”) can be found < HERE =">HERE"> . As related to residential mortgage foreclosures, the Act generally applies to “any action to foreclose a mortgage on residential real property, provided the owner or mortgagor of such property is a natural person, regardless of how title is held, and owns ten or fewer dwelling units whether directly or indirectly.”  See the Act at Part “B” Subpart “A” § 1.  Pursuant to the Act “real property” also includes “shares assigned to a unit in a residential cooperative.”  See the Act at Part “B” Subpart “A” § 1(a).   Pending residential mortgage foreclosure actions, including actions filed on or before March 7, 2020, and those commenced within thirty (30) days of the effective date of the Act, are stayed for at least sixty (60) days from the Act’s effective date.  See the Act at Part “B” Subpart “A” § 3.  As will be further discussed below, the stay could be extended to such later date as the chief administrative judge deems appropriate “to ensure that courts are prepared to conduct proceedings in compliance with this act and to give mortgagors an opportunity to submit the hardship declaration pursuant to this act.  The court in each case shall promptly issue an order directing such stay and promptly mail the mortgagor a copy of the hardship declaration in English, and, to the extent practicable, the mortgagor's primary language, if other than English.”  See the Act at Part “B” Subpart “A” § 3.   The required text for the Hardship Declaration appears in Part “B” Subpart “A” § 2 of the Act and a hard copy of the form appears at Exhibit “C” to the Memorandum.  In sum, the Notice portion of the Hardship Declaration advises a mortgagor that if the Hardship Declaration was provided by the mortgagee and is signed by the mortgagor and returned to the mortgagee, the mortgagor “cannot be foreclosed on until at least May 1, 2021.”  If foreclosure proceedings have already commenced and the mortgagor received the Hardship Declaration from the court, the mortgagor can return the executed Hardship Declaration to the court. By signing the Hardship Declaration, the mortgagor is attesting, under the penalties of perjury, that payment of the underlying mortgage in full cannot be made because, due to the COVID-19 pandemic: there was a significant loss in household income; there was an increase in necessary expenses related to COVID-19 health impacts; the need to care for children or elderly, disabled or sick family members made employment difficult or caused an increase in necessary out of pocket expenses; moving expenses or difficulty in finding alternative housing make relocation a hardship; and/or, one or more tenants have defaulted in paying rent since March 1, 2020, and the added burdens were not made up by various assistance programs.  See the Act at Part “B” Subpart “A” § 2 and Exhibit “C” to the Memo.   The Act requires that defendants in pending mortgage foreclosures receive a Hardship Declaration.  In pending residential mortgage foreclosure actions, the court is directed to mail Hardship Declarations to defendants.  See the Act at Part “B” Subpart “A” § 3.  If actions have not yet been commenced, the Hardship Declaration is to be included “with every notice provided to a mortgagor pursuant to sections 1303 and 1304 of the real property actions and proceedings law.”  See the Act at Part “B” Subpart “A” § 4.   If a Hardship Declaration is returned to the mortgagee, a mortgage foreclosure action shall not be commenced until at least May 1, 2021 and “in such event any specific time limit for the commencement of an action to foreclose a mortgage shall be tolled until May 1, 2021.”  See the Act at Part “B” Subpart “A” § 5.   New residential foreclosure actions will not be accepted for filing unless the mortgagee files an affidavit of service demonstrating that a compliant Hardship Declaration was served on the mortgagor and attesting that a Hardship Declaration was not returned by the mortgagor.  See the Act at Part “B” Subpart “A” § 6.   The stay includes actions in which “a judgment of sale has been issued prior to the effective date of this act but has not yet been executed as of the effective date of this act, including actions filed on or before March 7, 2020.  See the Act at Part “B” Subpart “A” § 8.  In such cases “the court shall stay the execution of the judgment at least until the court has held a status conference with the parties.”  See the Act at Part “B” Subpart “A” § 8.  If a hardship Declaration is returned to the mortgagee or the court “prior to the execution of the judgment, the execution shall be stayed until at least May 1, 2021.  See the Act at Part “B” Subpart “A” § 8.   Further, a “hardship declaration shall create a rebuttable presumption that the mortgagor is suffering financial hardship, in any judicial or administrative proceeding that may be brought, for the purposes of establishing a defense under an executive order of the governor or any other local or state law, order or regulation restricting actions to foreclose a mortgage against a mortgagor suffering from a financial hardship during or due to the COVID-19 pandemic provided that the absence of a hardship declaration shall not create a presumption that a financial hardship is not present.”  See the Act at Part “B” Subpart “A” § 10.   Part “B” Subpart “A” § 12 of the Act provides that the Act “shall take effect immediately and sections one, two, three, four, five, six, seven, eight, nine and eleven shall expire May 1, 2021.

DCL § 273-a (conveyances by defendants) provides that a conveyance made without fair consideration by a defendant in an action for money damages is fraudulent as to the plaintiff in that action, regardless of intent, if the defendant fails to satisfy a resulting judgment in the action. Fair consideration encompasses two components: “whether the amount given for the transferred property was a ‘fair equivalent’ or not ‘disproportionately small’” and “whether the transaction made in good faith.” DCL § 272; Sardis v. Frankel , 113 A.D.3d 135, 141-142 (1st Dept. 2014). Good faith requires honest, fair and open dealings by the transferor and the transferee. Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). The foregoing principles were at issue in Eagle Eye Collection Corp. v. Shariff , 2021 N.Y. Slip Op. 00385 (1st Dept. Jan. 26, 2021) ( here ). Eagle Eye was brought as a collection action against a nonparty. The debtor owned a condominium unit in which defendants were tenants. At some point in 2016, the debtor’s mortgage lender commenced a foreclosure proceeding against her. In October 2016, the debtor conveyed the unit to nonparty NYC REO LLC (“REO”), for nominal consideration, giving a deed in lieu of foreclosure. Plaintiff alleged that defendants were aware both of its collection action against the debtor and that the debtor was in foreclosure. Plaintiff asserted that defendants negotiated with the mortgage lender to engineer the conveyance to REO as a straw purchaser. In April 2017, REO conveyed the unit to defendants. Plaintiff commenced the action, alleging violations of, inter alia , DCL §§ 273-a and 273. Defendants moved to dismiss. The motion court granted the motion. Plaintiff appealed. The Appellate Division, First Department affirmed. The Court held that plaintiff “failed to adequately plead a claim for fraudulent conveyance under Debtor and Creditor Law § 273-a.” “First”, noted the Court, the debtor’s conveyance of the deed in lieu of foreclosure was done to extinguish the mortgage – that is, it was a thing of value made “in payment of an antecedent debt.” Slip Op. at *1. As such, it could not constitute a fraudulent conveyance under DCL § 273-a. Id. (citing Ronga v. Chiusano , 97 A.D.2d 753, 753 (2d Dept. 1983)).  Second, the Court found plaintiff’s allegation that “the deed in lieu of foreclosure was not a ‘fair equivalent’ of the mortgage debt being satisfied” to be speculative and conclusory. Id. (citing Jaliman v. D.H. Blair & Co. Inc. , 105 A.D.3d 646, 647 (1st Dept. 2013)). Such allegations, held the Court “do not state a claim for constructive fraud under the Debtor and Creditor Law.” Id. (citing Riback v. Margulis , 43 A.D.3d 1023, 1023 (2d Dept. 2007)). Accordingly, the Court concluded that the transfer of the unit to defendants from REO was not actionable:  Because of these factors, the initial transfer from the debtor to REO is not actionable. Since the initial transfer is not actionable, the subsequent transfer to defendants, who “derived title immediately or mediately” from a good faith purchaser for value, is also not actionable (Debtor and Creditor Law § 278). Id. On the issue of good faith, the Court rejected plaintiff’s argument that defendants acted in bad faith by allegedly engineering the transaction with REO. In this regard, the Court noted that the timing of events undermined the underlying predicate of plaintiff’s argument: Moreover, plaintiff claims that defendants first learned of its collection action against the debtor when plaintiff served her with process at the unit in December 2016. Plaintiff asserts that, once they learned of plaintiff’s collection action, defendants contacted the debtor’s mortgage lender to engineer a conveyance to REO as a straw purchaser, followed by the conveyance to defendants. By December 2016, however, it is undisputed that the debtor had already transferred the unit to REO. Thus, even under plaintiff’s version of the facts, defendants learned of the collection action after the mortgage lender had already taken the deed in lieu of foreclosure in satisfaction of the antecedent mortgage. Defendants cannot have acted in bad faith to engineer a transfer to a straw purchaser two months before they even learned of the transaction they were supposedly seeking to avoid. Id. at *1-*2. With regard to plaintiff’s claim under DCL § 273, the Court held that it “suffer from the same defects as its claim under section 273-a.” Id. at *2. First, said the Court, the allegation of insolvency was conclusory and, therefore, did “not suffice to support its claim under Debtor and Creditor Law § 273.” Id. (citing Riback , 43 A.D.3d at 1023). Second, as with the DCL § 273-a claim, because the conveyance “satisfie an antecedent debt made while the debtor insolvent” it could not be fraudulent or “otherwise improper.” Id. (quoting Ultramar Energy v. Chase Manhattan Bank , 191 A.D.2d 86, 90-91 (1st Dept. 1993)). Takeaway Eagle Eye illustrates the difficulties creditors have alleging violations of the old DCL. Even when alleging constructive fraud, in which intent is not required, creditors must allege facts to support their claims. A mere belief that a defendant transferred assets without fair consideration does not suffice to demonstrate a violation of DCL §§ 273 and 273-a. As noted by the Eagle Eye Court, “‘speculative and conclusory allegations’ do not state a claim for constructive fraud under the Debtor and Creditor Law.” Slip Op. at *1 (citation omitted).   Eagle Eye also shows that a constructive fraud claim cannot survive a dismissal motion where the conveyance was made “in payment of an antecedent debt.” The reason: the antecedent debt, which is satisfied upon receipt of the property or obligation, represents a “fair equivalent” of what is conveyed. See DCL § 272.

A client calls up an attorney and describes a situation in which two parties are litigating an issue that the client maintains she has interest in. She wants to be sure that her interests are not adversely affected by the outcome of that litigation. She asks the lawyer what she can do. The answer (for purposes of today’s article): intervene in the action. Intervention is a procedure by which a nonparty may join a pending litigation. In New York, intervention is governed by CPLR §§ 1012 (a)(3) and 1013. CPLR §1012 (a)(3) provides that a nonparty may intervene as of right “when the action involves the disposition or distribution of, or the title or a claim for damages for injury to, property and the person may be affected adversely by the judgment.” CPLR § 1013 allows for permissive intervention where “the person’s claim or defense and the main action have a common question of law or fact.” The court, “ n exercising its discretion,” must “consider whether the intervention will unduly delay the determination of the action or prejudice the substantial rights of any party.” Id. Notwithstanding the distinctions between the two forms of intervention, courts “no longer sharply appl ” them. Matter of HSBC Bank U.S.A. , 135 A.D.3d 534, 534 (1st Dept. 2016) (internal quotation marks and citation omitted). The reason: “ ntervention is liberally allowed by courts.…” Yuppie Puppy Pet Prods., Inc. v. Street Smart Realty, LLC , 77 A.D.3d 197, 201 (1st Dept. 2010).  These principles were considered by Justice Peter P. Sweeney in Shilon v. New Upreal LLC , 2021 N.Y. Slip Op. 30146(U) (Sup. Ct., Kings County Jan. 11, 2021) ( here ). Shilon arose from the alleged default on a Promissory Note/Restatement Agreement/Guaranty (“the Restatement Agreement”) by defendants New Upreal LLC (“New Upreal”), 154 Lenox LLC (“154 Lenox”) and Boaz Gilad (“Gilad”).  Plaintiff, Joseph Shilon (“Shilon”), alleged that prior to execution of the Restatement Agreement, he made certain “advances” for the benefit of New Upreal and 154 Lenox and that on or about September 1, 2018, “New Upreal and 154 Lenox entered into the Restatement Agreement to “record” those advances. Pursuant to the Restatement Agreement, New Upreal promised to pay to plaintiff the principal sum of $4,414,441.00, and 154 Lenox and Gilad agreed to guarantee New Upreal’s obligations under the agreement. Plaintiff alleged that defendants defaulted under the Restatement Agreement and sought judgment for the amount allegedly owed. In their answer, New Upreal and 154 Lenox denied all of the material allegations in the complaint and raised various affirmative defenses to the effect that the Restatement Agreement was a sham. They alleged that “Plaintiff’s claims were barred because of ‘Unclean Hands’” or because Plaintiff was “in pari delicto”, that “Plaintiff’s claim was barred because the loan was procured, administered and managed by deceptive and fraudulent practices under state and federal law, including, ‘predatory lending’”, and that “Plaintiff’s actions barred because it did not lend Defendants any funds.” Guy Gissin (“Gissin”), in his capacity as Claims Trustee (“Claims Trustee”) for holders of various bonds (the “Bondholders”) or other debt instruments issued by Brookland Upreal Limited (“Brookland”), moved by order to show cause for leave to intervene in the action pursuant to CPLR §§ 1012 and 1013. Gissin alleged that during 2014 and 2015, Brookland issued bonds in the aggregate principal amount of NIS 247 million to the Bondholders pursuant to two Deeds of Trust, one dated May 26, 2014, and another dated November 29, and that the aggregate principal amount of the Bonds at the end of the second quarter of 2018 was approximately NIS 150 million. Gissin claimed that Brookland, through a number of holding companies, invested the proceeds of the bonds in various real estate development projects in and around Brooklyn, New York, including some of which are owned by New Upreal. Gissin further alleged that New Upreal engaged in misconduct including, using the bond proceeds to prefer certain investors and creditors over the interests of New Upreal’s other creditors and diverting assets that should have been repaid to Bondholders to other parties not entitled to such assets. Gissin alleged that New Upreal signed the Restatement Agreement for the benefit of Yossi Shilon, without any consideration to New Upreal for a fictitious loan that was never granted to it. Gissin maintained that New Upreal and 154 Lenox were insolvent at the time the Restatement Agreement was executed, or were rendered insolvent thereby, and that each received no value at all in exchange. In sum and substance, Gissin contended that the execution of the Restatement Agreement was a sham and that the parties to the Restatement Agreement were attempting to divert assets to the plaintiff which the Bondholders would otherwise be entitled to. The Court granted the motion. The Court found that “the answering defendants and Gissin both claim that the Restatement Agreement a sham.” Slip Op. at *3. Therefore, concluded the Court, “ he main action and the proposed Intervenor Complaint … present common questions of law and fact.” Id. Turning to the question of timeliness – i.e. , whether the delay in seeking intervention would cause a delay in resolution of the action or otherwise prejudice a party – the Court found that there was no prejudice as the case was in its nascent stages: “Since there has been no discovery in the main action, allowing Gissin to intervene in the action will not delay the action or prejudice a substantial right of any party.” Id. In fact, noted the Court, plaintiff did not object to intervention on timeliness grounds, though it did so on others. Id. Finally, and “ ost importantly,” said the Court, “Gissin ha substantial interest in the outcome of the main action. If prevails on his claim that the Restatement Agreement was a sham and unenforceable, defendants’ assets would remain available to pay New ’s obligations to the Bondholders and would not be fraudulently diverted to the plaintiff.” Id. at *3-*4.  Takeaway Intervention is a fact-sensitive analysis. Shilon shows that where the facts and law are common, there is no prejudice to any party, and the intervenor has a substantial interest in the outcome of the litigation, intervention is appropriate.

In one of our BLOGS from last week, we addressed the remedy of specific performance in breached real estate contracts < HERE =">HERE"> .  The BLOG noted that, under certain circumstances when monetary damages are insufficient to make one of the parties whole after a breach, the equitable remedy of specific performance may be available to require the breaching party to perform.  On January 20, 2021, the Appellate Division, Second Department, decided W Equities Acquisitions, LLC v. Wyckoff Heights Properties, LLC , in which interesting specific performance issues were decided.  The plaintiff in W Equities was the purchaser under a real estate contract for the purchase of real property in Brooklyn.  The defendant was the seller.  Among other things, pursuant to the contract of sale, the seller “was required to deliver the premises free of any tenancies.”  In this regard, section 13.02 of the contract provided that: If Seller shall be unable to convey title to the Premises at the Closing in accordance with the provisions of this contract . . . Purchaser, nevertheless, may elect to accept such title as Seller may be able to convey with a credit against the monies payable at the Closing equal to the reasonably estimated cost to cure the same (up to the Maximum Expense described below), but without any other credit or liability on the part of Seller. If Purchaser shall not so elect, Purchaser may terminate this contract and the sole liability of Seller shall be to refund the Down payment to Purchaser and to reimburse Purchaser for the net cost of title examination. The contract further provided that the “Maximum Expense” that the seller was required to incur to cure title defects was $75,000.  When the parties entered into the contract of sale, the property was encumbered with four leases that were subject to rent stabilization laws.  Accordingly, the four tenants could not be forced to leave and “could only be asked to vacate voluntarily.”  While two tenants agreed to vacate their respective units, two did not.  Indeed, seller presented evidence that it offered to pay each of the two tenants that refused to vacate: $75,000, all deposits, all moving expenses, rent for one year; and it offered assistance finding new apartments in the same neighborhood for similar rents.  The two holdout tenants rebuffed seller’s offers because, according to the tenants’ attorney at a meeting with seller, she was “advising her clients not to execute the surrender agreements because they would lose certain government benefits, would not be able to find comparable apartments with similar rents, and would have to pay income tax on the money being offered.”  The seller urged that the two holdout tenants “unequivocally refused to move out or entertain any offers…to surrender their tenancies.”  (Internal quotation marks omitted, ellipses in original.) Purchaser’s counsel sent a “time of the essence” closing date letter for February 10, 2016.  In response, seller advised that, despite several attempts to enter into surrender agreements with all of the tenants, it was unsuccessful.  Accordingly, seller could not deliver the premises free of all tenants.  Thus, in accordance with section 13.02 of the contract, seller offered “ the choice of either accepting such title as the was able to convey, with a credit no greater than the maximum amount specified in the contract, or terminating the contract with a refund of the down payment and reimbursement of the net cost of title examination.”  Purchaser rejected seller’s “invocation of section 13.02 and insisted on proceeding to closing.”  The parties failed to consummate the transaction on the closing date. Purchaser commenced an action for specific performance.  Seller answered and asserted a counterclaim to retain the $190,000 deposit as liquidated damages for breach of contract.  Seller moved for summary judgment dismissing the complaint and on its counterclaim and purchaser cross-moved for summary judgment on its complaint and dismissing seller’s counterclaim.  Supreme court denied purchaser’s cross-motion and granted seller’s motion to the extent that it sought to dismiss the complaint.  However, the court denied seller’s motion to the extent that it sought summary judgment on its counterclaim.  The Appellate Division affirmed the denial of purchaser’s cross-motion for summary judgment on the complaint and the grant of the seller’s motion for summary judgment dismissing the complaint.  The Court, however, reversed the denial of seller’s motion for summary judgment on its counterclaim.  The Court found that “ ecause the defendant acted within its rights pursuant to section 13.02 of the contract, it is the plaintiff—not the defendant—which breached the contract by failing to elect one of the two remedies available to it under section 13.02 since the defendant seeks only to retain the down payment as liquidated damages ( see Maxton Bldrs. v Lo Galbo , 68 NY2d 373, 378), there are no triable issues of fact to be decided.” The Court recognized that “ s a threshold matter, in light of the defendant’s obligation to deliver the premises “free of all tenancies,” the inability to obtain surrender agreements from two of the four tenants would constitute a title defect ( see Segal v Kulch , 13 AD2d 1011, 1012, affd 11 NY2d 834 ; see also S.E.S. Importers, Inc. v Pappalardo , 53 NY2d 455, 463).”  To “trigger” section 13.02 “the defendant was required to prove the existence of a situation beyond the parties’ control, coupled with proof that the defendant acted in good faith in attempting to convey title in accordance with the terms of the contract ( see SJSJ Southold Realty, LLC v Fraser , 150 AD3d 920, 921; Karl v Kessler , 47 AD3d 681, 682; see also 101123 LLC v Solis Realty LLC , 23 AD3d 107).”  The Court rejected purchaser’s assertion that seller was “required to establish impossibility of performance.”  (Citation omitted.) The Court found that the evidence of the offer made to the two holdout tenants, coupled with the evidence of what transpired at seller’s meeting with tenants’ counsel, was sufficient to satisfy seller’s burden.  This was particularly so because purchaser failed to challenge seller’s factual assertions and, instead, merely asserted that seller’s efforts resolve the title issues were “insufficient”.  Thus, the Court determined that: the established, prima facie, that it made a good faith effort to convey title in accordance with the terms of the contract ( see SJSJ Southold Realty, LLC v Fraser , 150 AD3d at 921), and that its inability to do so justified its invocation of section 13.02, thereby requiring the to elect either to cancel the contract and receive a return of its down payment, or accept the property with the remaining tenancies and a credit of up to $75,000—a choice the refused to make ( see Mehlman v 592-600 Union Ave. Corp. , 46 AD3d 338; see also M&E 73-75, LLC v 57 Fusion LLC , 189 AD3d 1 ; 101123 LLC v Solis Realty LLC , 23 AD3d 107).

On January 19, 2021, the Appellate Division, First Department issued three decisions involving claims of fraud. See United Natural Foods, Inc. v. Goldman Sachs Grp. , 2021 N.Y. Slip Op. 00276 (1st Dept. Jan. 19, 2021) ( here ); KS Trade LLC v. International Gemological Inst., Inc. , 2021 N.Y. Slip Op. 00259 (1st Dept. Jan. 19, 2021) ( here ); and Itria Ventures LLC v. Provident Bank , 2021 N.Y. Slip Op. 00257 (1st Dept. Jan. 19, 2021) ( here ). Although these cases involved different elements of a fraud cause of action, the common thread among them is the justifiable reliance element of the claim.  In today’s post, we examine two of the three cases: United Natural Foods and KS Trade . The justifiable reliance element of a fraud cause of action has been described as a “fundamental precept” ( Ambac Assur. v. Countrywide , 31 N.Y.3d 569, 579 (2018)) and a “venerable rule”. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”). The requirement is one of the five elements of a fraud cause of action: (1) a misrepresentation or a material omission of fact; (2) which was false and known to be false by the defendant(s); (3) made for the purpose of inducing another person to rely upon it; (4) justifiable reliance of the other party on the misrepresentation or material omission; and (5) damages. Pasternack v. Laboratory Corp. of Am. Holdings , 27 N.Y.3d 817, 827 (2016) (citation omitted). The determination of whether a plaintiff justifiably relied on a misrepresentation or omission is a factually “nettlesome” one ( DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id. For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). If the plaintiff fails to make use of the means available to discover the truth, his/her claim will be dismissed. ACA Fin. Guar. , 25 N.Y.3d at 1044. This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman v. Holland & Knight, LLP , 156 A.D.3d 429, 430 (1st Dept. 2017). “Instead, the question is one for the trier of-fact.” Id. See also Sargiss v Magarelli , 12 N.Y.3d 527, 532 (2009). “ hen the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.” Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V. , 17 N.Y.3d 269, 279 (2011), quoting Global Mins. & Metals Corp. v. Holme , 35 A.D.3d 93, 100 (1st Dept. 2006), lv. denied , 8 N.Y.3d 804 (2007).  Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. Such means include obtaining a prophylactic provision in a contract or other writing or making an additional inquiry into the representation. ACA Fin. Guar. , 25 N.Y.3d at 1045; DDJ Mgt. , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). If they fail to do the foregoing, their complaint will be dismissed. See , e.g. , HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). United Natural Foods, Inc. v. Goldman Sachs Group United Natural Foods concerned a multi-billion-dollar financing transaction between sophisticated parties. Pursuant to the transaction, United Natural Foods, Inc. (“UNFI”) agreed to acquire SUPERVALU Enterprises, Inc. (“SUPERVALU”) for approximately $2.9 billion (the “Acquisition”). Under the terms of the transaction papers, UNFI agreed to pay approximately $1.3 billion in cash to SUPERVALU’s shareholders and the balance to SUPERVALU’s creditors to extinguish most of SUPERVALU’s debt.  To navigate the Acquisition, UNFI engaged Goldman Sachs & Co., LLC, a subsidiary of defendant Goldman Sachs Group, Inc. (“GS Group”) and an affiliate of defendants Goldman Sachs Bank USA (“GS Bank”) and Goldman Sachs Lending Partners, LLC (“GS Lending”). GS Bank agreed to fund 45% of the Acquisition with a $2.15 billion Term Loan. GS Bank and GS Lending had the option to syndicate all or a portion of their commitment to fund the Term Loan to one or more banks, financial institutions, or other institutional lenders. UNFI could veto the investors selected for syndication, though it was obligated to cooperate with defendants’ syndication efforts. Whether defendants syndicated or not, they remained responsible for funding.  During the syndication process, GS Bank passed along an investor request that UNFI add SUPERVALU as a co-borrower on the Term Loan. UNFI alleged that defendants understated the impact of adding SUPERVALU as a co-borrower, claiming that any impact was “muted”, when in reality UNFI “was subjected to Term Loan lenders with a significant incentive to force UNFI and SUPERVALU to default on the Term Loan.” UNFI alleged that GS Bank failed to provide a list of investors in the Term Loan.  UNFI also claimed that when it inquired about the purpose of adding SUPERVALU as a co-borrower, defendants falsely represented that the co-borrower provision was important to “select accounts”. According to UNFI, defendants omitted to say that those select accounts were held by “ short sellers looking to preserve their bet that SUPERVALU would default on its borrowing.”  UNFI filed suit, asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud against all defendants. Defendants moved to dismiss.  The motion court granted the motion ( here ). With regard to the fraud claim, the motion court held that UNFI failed to plead justifiable reliance. As to the first allegation of fraud – i.e. , whether adding SUPERVALU as a co-borrower would have a “muted” effect – the motion court found that UNFI “had the means available to it of knowing by the exercise of ordinary intelligence the truth or real quality of” the statement: UNFI was also in position to undertake an “independent appraisal of the risk” associated with adding UNFI’s target as a co-borrower for what UNFI describes as the “most important undertaking in history.” Yet, UNFI admits to failing to demand the list of investors before the Closing; UNFI did not learn the identities of the investors until after the closing. Nevertheless, UNFI failed to engage in a due diligence investigation or independently appraise this risk. Therefore, and in spite of UNFI’s theories of liability, these allegations of justifiable reliance are untenable. UNFI even admits in a footnote in the complaint that it had “another financial advisor on the transaction, Foros LLC” and legal counsel available to it for consultation. As to the second allegation of fraud – i.e. , that adding SUPERVALU as the co-borrower was important to “select accounts” when in reality those were “ short sellers looking to preserve their bet that SUPERVALU would default on its borrowing” – the motion court found that UNFI failed to “exercise its veto power” over the investors selected. UNFI appealed.  The First Department affirmed, holding that “ he fraud claim was properly dismissed” due to plaintiff’s failure to sufficiently plead justifiable reliance. Slip Op. at *1. The Court found that “Plaintiff could have asked follow-up questions regarding what kind of an effect making Supervalu a coborrower would have and on which ‘select accounts,’ but did not do so … failed to insist on a final list of investors prior to closing, even though it undisputed that plaintiff had the contractual right to do so to facilitate exercise of its right to veto investors.” Slip Op. *1-*2. The Court explained that the failure to insist on the list of investors prior to closing was a “red flag that triggered a need to make additional inquiries, including with respect to whether any proposed investors had adverse interests to plaintiff.” Id. at *2. KS Trade LLC v. International Gemological Inst., Inc. KS Trade involved a dispute that arose after plaintiff, KS Trade LLC (“KS”), a New York-based jewelry designer and manufacturer, was unable to satisfy a purchase order from a large retail customer for 45 pieces of jewelry because it could not obtain grading reports from New York-based defendant, International Gemological Institute, Inc. (“IGI”), a corporation that grades diamonds and precious stones, and appraises jewelry. KS alleged that defendants engaged in a scheme to create “illicit profits for itself and its accomplices at the expense of diamond dealers, jewelry manufacturers and the ultimate end-user consumers who purchase the jewelry.” KS claimed that defendants systematically over-graded diamonds at their overseas branches, and then sold these diamonds with false certificates, to U.S. based jewelry manufacturers. To be able to sell these diamonds, New York manufacturers had to obtain a New York conforming certification, which IGI would only provide if the manufacturers paid it illicit “fees.” If the fees were paid, the diamonds were then passed off to consumers as higher quality goods with fraudulent appraisals and certificates. KS alleged that it refused to pay the illicit fees and was left with diamonds with no New York grading certificates and was unable to complete sales to its customers. KS filed suit alleging, inter alia , fraud. Defendants moved to dismiss the fraud claim, arguing that KS failed to identify any misrepresentation and allege justifiable reliance. In response, KS maintained that defendant committed fraud when it issued the original certificates for diamonds that it over-graded. KS claimed that defendant “intentionally rejected the earlier gradings so that it could solicit illicit fees” from KS. The motion court sustained the fraud claim. On appeal, the First Department affirmed. First, the Court found that KS “sufficiently alleged misrepresentations of ‘accurate and objective’ gradings by the overseas IGI branches, as well as misrepresentations of ‘consistent’ gradings by IGI NY.” Slip Op. at *1-*2.  Second, the Court found that KS “pleaded justifiable reliance on such misrepresentations in purchasing diamonds with overseas IGI certificates with the expectation that IGI NY would issue consistent appraisals.” Id. at *2. The Court explained that plaintiff satisfied this element of the claim because only defendants knew of the underlying fraud: “defendants had ‘peculiar knowledge’ of the underlying fraud.” Id. (quoting Basis Yield Alpha Fund Master v. Morgan Stanley , 136 A.D.3d 136, 145 (1st Dept. 2015)). As such, said the Court, “ he disclaimers in IGI Group’s website and IGI NY’s Client Agreement” did “not negate a finding of justifiable reliance.” Id. Takeaway Justifiable reliance is an essential element of a cause of action for fraud. ACA Fin. Guar. , 25 N.Y.3d at 1044. As such, a plaintiff suing for fraud (and particularly a sophisticated plaintiff, such UNFI and KS) must establish that it “has taken reasonable steps to protect itself against deception.” DDJ Mgt. , 15 N.Y.3d at 154. Such steps include availing oneself of the opportunity to verify the defendant’s representations through an examination of documents, corporate books and records, and other writings; asking questions; and/or insisting on prophylactic measures, such as representations and warranties in agreements. In United Natural Foods , UNFI failed to do any of the foregoing. Where there is a disclaimer of reliance on a fact or set of facts, a fraud claim will not be dismissed unless the disclaimer is specific to the fact(s) alleged to be misrepresented or omitted. Thus, a general disclaimer will not insulate a defendant from allegations of fraud. See Dallas Aerospace, Inc. v. CIS Air Corp. , 352 F.3d 775, 785 (2d Cir 2003).  In KS Trade , the alleged disclaimers warned only that the grading and appraisal process could be imprecise – that is, “they specifically disclaimed guarantees of consistency”; they did not, however, warn against the manipulation of the grading and appraisal process – a manipulation that, as KS alleged, was intended to coerce cooperation with defendants’ scheme to defraud. Even where a disclaimer is specific, as the First Department noted, it will not be deemed effective when the facts underlying the alleged misrepresentations are peculiarly within the defendant’s knowledge. Under such circumstances, as in KS Trade , the plaintiff has no reason to inquire into the representations and cannot investigate the facts. Basis Yield , 136 A.D.3d at 145.

It has long been held that “promissory statements as to what will be done in the future are not actionable.” Adams v. Clark , 239 N.Y. 403, 410 (1925). However, when the promissory statement is “made with a preconceived and undisclosed intention of not performing it,” it becomes an actionable misrepresentation of existing fact. Sabo v. Delman , 3 N.Y.2d 155 (1957). The foregoing principles have been examined by this Blog numerous times ( e.g. , here and here ). In today’s article, we revisit them. In Kastin v. GEICO Gen. Ins. Co. , 2021 N.Y. Slip Op. 00160 (2d Dept. Jan. 13, 2021) ( here ), the Appellate Division, Second Department affirmed the dismissal of plaintiff’s fraud claim on the grounds that he failed to allege a misrepresentation of existing fact. Kastin arose from an automobile accident in which plaintiff allegedly sustained personal injuries. Plaintff sued the driver of the vehicle and later settled the action for the full coverages available. Thereafter, plaintiff bought suit against defendant, GEICO General Insurance Company, for the supplementary uninsured/underinsured motorist (“SUM”) benefits provided under his policy. The complaint was filed after plaintiff sent a letter to defendant, demanding that it tender the full policy limit of $250,000 under the SUM endorsement. In a responsive letter, defendant stated that it was “willing to negotiate any claim in good faith,” and that “ pon completion of our review, we will contact you to discuss the merits of this case.” About one month later, plaintiff commenced the action. Plaintiff asserted two causes of action: the first cause of action was premised upon an alleged breach of contract on the basis that did not immediately tender the entirety of the SUM coverages available; and the second cause of action alleged that defendant fraudulently promised to pay plaintiff’s underinsurance claim and refused to do so. Defendant moved to dismiss the complaint. With regard to the fraud claim, defendant argued that plaintiff failed to establish the elements of a fraud action; in particular, defendant claimed that plaintiff failed to identify a material misrepresentation of existing fact known by defendant to be false at the time it was made. In essence, defendant argued that plaintiff merely alleged “ eneral allegations that … entered into a contract with the intent not to perform.…” New York Univ. v. Continental Ins. Co. , 87 N.Y.2d 308, 318 (1995). The motion court granted the motion. Plaintiff appealed. The Second Department affirmed, holding that “plaintiff failed to state a cause of action alleging fraud.” Slip Op. at *1. In so doing, the Court found that plaintiff merely alleged an intention not to perform: “Here, the plaintiff’s conclusory allegations that the defendant had no intention of paying the plaintiff the benefits owed under the policy are insufficient to state a cause of action alleging fraud.” Id. (citing New York Univ , 87 N.Y.2d at 318. Takeaway To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney Inc. , 88 N.Y.2d 413, 421 (1996). “To fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.” Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017). As shown in Kastin , “ eneral allegations of lack of intent to perform are insufficient.” Id. Rather, the plaintiff must allege facts establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise. Id. ; Meiterman v. Corp. Habitat , 173 A.D.3d 593, 594 (1st Dept. 2019). Kastin stands as another example of a New York court distinguishing between a “promissory statement as to what will be done in the future,” which gives only rise to a breach of contract claim, and a false “representation of present fact,” which gives rise to an independent claim of fraudulent inducement. Topps Co., Inc. v. Cadbury Stani S.A.I.C. , 380 F.Supp.2d 250, 265 (S.D.N.Y. 2005) (quoting Stewart v. Jackson & Nash , 976 F.2d 86, 89 (2d Cir.1992)).

The lyrics to the song “Money (That’s What I Want)”, written by Berry Gordy and Janie Bradford and covered by, inter alia , by The Beatles, seem shortsighted when contemplating available remedies in a breach of contract action.  Thus, according to the song “money don’t get everything, it’s true, what it don’t get, I can’t use, now give me money, that’s what I want.”  While money damages in an action at law may “afford a full and complete remedy” to make a plaintiff whole in the event of a contractual breach, such is not always the case.  Le Bel v. Donovan , 96 A.D.3d 415 (1 st Dep’t 2012) (citation and internal quotation marks omitted). Many times, remedies for the breach of a contract other than monetary damages are necessary to make a plaintiff whole.  One such remedy is specific performance BLOG =">BLOG">, which “will not be ordered where money damages would be adequate to protect the expectation interests of the injured party.”  Sokoloff v. Harriman Estates Development Corp. , 96 N.Y.2d 409, 415 (2001) (citations and internal quotation marks omitted).  Specific performance is an equitable remedy that, instead of awarding money damages to the prevailing party, requires the breaching party to perform under the contract.  “Specific performance is appropriate, however, when ‘the subject matter of the particular contract is unique and has no established market value.’”  BT Triple Crown Merger Co., Inc. v. Citigroup Global Markets Inc. , 19 Misc. 3d 1129, *8 (NOR) (Sup. Ct. N.Y. Co. 2008) (quoting Van Wagner Advert. Corp. v. S&M Enters. , 67 N.Y.2d 186, 193 (1986)).  “The point at which breach of a contract will be redressable by specific performance thus must lie not in any inherent physical uniqueness of the property but instead the uncertainty of valuing it….”  Van Wagner , 67 N.Y.2d at 193.  The Sokoloff Court also stated that: The decision whether or not to award specific performance is one that rests in the sound discretion of the trial court. In determining whether money damages would be an adequate remedy, a trial court must consider, among other factors, the difficulty of proving damages with reasonable certainty and of procuring a suitable substitute performance with a damages award ( see, Restatement of Contracts § 360). Specific performance is an appropriate remedy for a breach of contract concerning goods that “are unique in kind, quality or personal association” where suitable substitutes are unobtainable or unreasonably difficult or inconvenient to procure ( see, id., comment c ). Sokoloff , 96 N.Y.2d at 415. It is generally accepted that “the equitable remedy of specific performance is routinely awarded in contract actions involving real property, on the premise that each parcel of real property is unique.”  Alba v. Kaufman , 27 A.D.3d 816, 818 (3 rd Dep’t 2006) (citations and internal quotation marks omitted).  Supreme court denied purchaser’s motion and granted seller’s cross-motion. Ashkenazi v. Miller , a case decided by the Appellate Division, Second Department, on January 13, 2021, involved a lawsuit for specific performance of a real estate transaction.  The plaintiff, as buyer, entered into a contract with defendant, as seller, to purchase a building in Brooklyn for $2,050,000.  Among other things, the contract provided for a $200,000 down payment, a closing within 6 months (or on August 12, 2021) and no mortgage contingency.  The parties began negotiating an adjourned closing date but could not agree on a new date.  Accordingly, seller’s counsel sent a “time of the essence” letter setting a closing date for September 3, 2014. The letter provided that “if the plaintiff failed to appear at the closing, he would be in default and would forfeit all rights under the contract, including the down payment.”  When plaintiff failed to appear at the September 3 rd closing, defendant declared plaintiff to be in default and retained the down payment. The Ashkenazi buyer commenced an action in supreme court in which he sought specific performance of the real estate contract.  Seller counterclaimed for a declaratory judgment that he was entitled to retain the down payment.  Defendant seller moved for summary judgment, inter alia , dismissing the complaint and the plaintiff cross-moved for summary judgment.  Supreme court denied plaintiff’s cross-motion for summary judgment on the complaint, granted defendant’s motion for summary judgment dismissing the complaint, but denied defendant’s motion for summary on its counterclaim seeking a declaration of entitlement to retain the down payment.  Plaintiff appealed and defendant cross-appealed.  The Second Department affirmed supreme court’s decision regarding the denial of plaintiff’s motion and reversed the denial of defendant’s cross-motion. In so doing the Court recognized that “ o prevail on a cause of action for specific performance of a contract for the sale of real property, a plaintiff purchaser must establish that it substantially performed its contractual obligations and was ready, willing, and able to perform its remaining obligations, that the vendor was able to convey the property, and that there was no adequate remedy at law.”  (Citations and internal quotation marks omitted.)  As to the requirement of establishing that a purchaser was “ready, willing and able” to purchase, the Court stated: In moving for summary judgment on a complaint seeking specific performance of a contract, the plaintiff purchaser must submit evidence demonstrating financial ability to purchase the property in order to demonstrate that it was ready, willing, and able to purchase such property” ( Grunbaum v Nicole Brittany, Ltd. , 153 AD3d 1384, 1385; see Kaygreen Realty Co., LLC v IG Second Generation Partners, L.P. , 78 AD3d 1010, 1015). “When a purchaser submits no documentation or other proof to substantiate that it had the funds necessary to purchase the property, it cannot prove, as a matter of law, that it was ready, willing, and able to close” ( Fridman v Kucher , 34 AD3d 726, 728; see GLND 1945, LLC v Ballard , 172 AD3d 1330, 1331). The Court held that Ashkenazi buyer failed to demonstrate that he was a “ready, willing and able” purchaser because he submitted no evidence as to his “financial ability to purchase the property on the closing date” and admitted at his deposition that he did not have the funds to close.   As to the seller’s burden on a motion for summary judgment dismissing a cause of action for specific performance, the Ashkenazi Court stated: A defendant seller moving for summary judgment dismissing a cause of action for specific performance of a contract for the sale of real property has the burden of demonstrating the absence of a triable issue of fact regarding whether the plaintiff buyer was ready, willing, and able to close ( see Point Holding, LLC v Crittenden , 119 AD3d 918, 919; Revital Realty Group, LLC v Ulano Corp. , 112 AD3d 902, 904). Additionally, the seller must demonstrate, prima facie, that the buyer was in default ( see Point Holding, LLC v Crittenden , 119 AD3d at 919; Nehmadi v Davis , 63 AD3d 1125, 1128). The Court found that defendant’s “clear, distinct, and unequivocal” “time of the essence” letter setting the closing for September 3, 2014, obligated the parties to close on that date.  The seller was “ready, willing and able” but the buyer was not.  Also, because seller demonstrated that buyer failed to appear at the closing, buyer’s default was established.  Because “ buyer who defaults on a real estate contract without lawful excuse, cannot recover the down payment, at least where, as here, that down payment represents 10% or less of the purchase price,” the seller was entitled to a judgment declaring that he was entitled to retain the down payment.

When a person claims fraud, he/she typically claims that the alleged wrongdoer made an affirmative misrepresentation of fact. Fraud does not, however, always concern an affirmative statement. Sometimes a person can perpetrate a fraud through the omission of a material fact. For this reason, when alleging fraud, a plaintiff may allege that the defendant made “a misrepresentation or a material omission of fact which was false and known to be false.” Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 178 (2011) (internal quotation marks and citation omitted); Lama Holding Co. v Smith Barney , 88 N.Y.2d 413, 421 (1996). Where fraud by omission is claimed, the plaintiff must allege that the defendant “had special knowledge or information regarding” the transaction “that not ascertainable by the plaintiff[].” Williams v. Sidley Austin Brown & Wood, L.L.P. , 38 A.D.3d 219, 220 (1st Dept. 2007); Selechnik v. Law Off. of Howard R. Birnbach , 82 A.D.3d 1077, 1078-1079 (2d Dept. 2011). A fraud by omission claim is not sustainable where information allegedly withheld is ascertainable through publicly available sources. Northern Group Inc. v. Merrill Lynch, Pierce, Fenner & Smith Inc. , 135 A.D.3d 414 (1st Dept. 2016). Moreover, as in a fraud by misrepresentation case, the plaintiff must satisfy the other elements of the claim – namely, intent to defraud, justifiable reliance and injury.  here.=">here."> In Johnson v. Asberry , 2021 N.Y. Slip Op. 00120 (1st Dept. Jan. 12, 2021), the Appellate Division, First Department affirmed the denial of a motion to dismiss a fraud by omission claim, holding that the plaintiff adequately alleged the cause of action with the requisite specificity. Johnson v. Asberry Background Johnson involved a dispute between a minority shareholder, Melissa Johnson (“Johnson”), and Tiffany Asberry, the majority shareholder of Johnson & Asberry Communications, LLC (“J&A”). Johnson alleged that Asberry mismanaged and wasted company assets and executed a freeze-out merger with defendant, Asberry Holding Company, LLC (“AHC”), a limited liability company that Asberry solely owned, to eliminate Johnson’s minority interest. In 2011, Johnson and Asberry formed J&A to provide public relations services for government-related projects as a subcontractor to prime contractors working for city agencies. Johnson and Asberry initially made equal capital contributions to J&A and intended to jointly and co-equally manage and own the entity. However, Johnson and Asberry subsequently decided to split their membership shares, 51% to Asberry and 49% to Johnson, for the purpose of obtaining certifications from New York City as a “Minority Owned Business Enterprise”. In connection with the formation of J&A, Johnson and Asberry entered into an operating agreement (“Original Operating Agreement”) and were elected under the agreement to operate the company “as co-equal Managers.” Notwithstanding their co-equal ownership, Johnson maintained that she performed most of the client and administrative work for J&A and that Asberry failed to maintain timesheets and to devote any substantial time to J&A.  In or around July 2017, Johnson sought to buyout Asberry’s interest in J&A due to, inter alia , Asberry’s alleged use of J&A funds for personal expenses, the alleged failure to perform services, and the alleged failure to maintain timesheets. Asberry rejected the offer. On May 31, 2018, Asberry emailed Johnson a “written consent in lieu of meeting,” which Asberry signed in her sole capacity appointing herself as sole manager of J&A and substituting a New Operating Agreement, bearing the same date, which Asberry signed in her sole capacity as “Co-Founder” and “Majority in Interest Member”. The New Operating Agreement did not reference the original agreement. Johnson alleged that she did not consent to amending the Original Operating Agreement and that the New Operating Agreement altered the method of calculating J&A’s income and distributions in a manner that adversely affected her, in violation of Section 417(b) of the Limited Liability Company Law. Section 417(b) of the Limited Liability Company Law prohibits the amendment of an operating agreement that changes the manner of computing distributions of any member without the written consent of each member adversely affected. Additionally, Johnson alleged that on May 31, 2018, Asberry improperly withdrew money from J&A’s bank account without authorization and opened a new J&A account naming herself as the sole signatory. Johnson further alleged that on June 11, 2018, Asberry sent her: (1) an exchange agreement between AHC and Asberry in which Asberry transferred her interest in J&A for a 100% membership interest in AHC (without prior notice to Johnson and without offering Johnson the right to purchase such interest in violation of the Original Operating Agreement); (2) an agreement and plan of merger between defendant AHC and J&A; (3) a “notice of action in lieu of meeting,” a “notice of merger,” and a “notice of dissenters’ rights”; (4) a “written consent of the majority in interest” of J&A, authorizing the merger of AHC and J&A; and (5) an “agreement and plan of merger” between AHC and J&A. On June 27, 2018, Johnson commenced the action, asserting causes of action for: (1) injunctive relief for breach of the Original Operating Agreement and the Limited Liability Company Law; (2) declaratory judgment that the Original Operating Agreement remained in full force and effect, and the purported merger was of no effect; (3) specific performance of the Original Operating Agreement; (4) imposition of a constructive trust upon the membership interests of J&A; (5) an accounting; (6) breach of fiduciary duty, waste, mismanagement, and self-dealing; (7) fraud; and (8) conversion. Defendants moved to dismiss, claiming, inter alia , that the complaint failed to plead a cause of action for fraud.  The motion court denied the motion, holding that although plaintiff did not identify any affirmative misrepresentation, she did allege a fraud by omission. The motion court explained that, as alleged, “Asberry did not inform Johnson that she intended to appoint herself the sole manager of J&A; that she intended to and purportedly adopted a new operating agreement for J&A in violation of the law; that she transferred her entire interest in J&A to AHC; and that she executed a merger between J&A and AHC, which effectively froze Johnson out of J & A.” “These allegations,” said the motion court, “constitute material omissions by Asberry, who worked independently of Johnson and sought to conceal her activities.” Thus, concluded the motion court, plaintiff “sufficiently state a fraud cause of action through allegations which give rise to permissible inferences that Asberry had certain knowledge or information regarding the management of J&A and her activities thereunder, as co-manager, which Johnson was unable to ascertain.”  The motion court noted that the fraud claim was not based on breaches of the Operating Agreement, nor was it based on a fraudulent inducement to enter into the Operating Agreement: “Contrary to Asberry’s contentions, the fraud alleged is not that Asberry failed to perform under the Original Operating Agreement. Rather, it is based on Asberry’s material omissions as to her intent and actions to amend the operating agreement to cause a merger of J&A with her own company, and then freeze Johnson out of the business.”  Defendant appealed. The Court’s Decision The First Department affirmed the motion court’s order, holding that “plaintiff ha adequately pleaded a claim for fraud by omission”:  Asberry conceived of and executed a scheme to eliminate plaintiff’s interest in J&A. Asberry failed to disclose this scheme to plaintiff despite her fiduciary duty, as LLC manager and majority member, to inform plaintiff of her intentions. Plaintiff justifiably relied on Asberry’s silence to her detriment (in losing all of her interest in the company).  Slip Op. at *1 (citations omitted). Takeaway Where a party alleges fraud (or fraudulent inducement) based on an omission of information, rather than an affirmative misrepresentation, a special relationship ( e.g. , a fiduciary relationship) is required to state a claim. However, in the absence of a special relationship, a party may still properly allege fraud where there are special facts such that one party had superior knowledge of certain information, not readily available to the other party. See P.T. Bank Central Asia v. ABN AMRO Bank N.V. , 301 A.D.2d 373 (1st Dept. 2003) (citing cases).  In Johnson , a fiduciary relationship existed between Johnson and Asberry such that the latter “had special knowledge or information regarding” the alleged scheme to eliminate the former’s interest in J&A, which was “not ascertainable by the plaintiff[].” Williams , 38 A.D.3d at 220.

When a plaintiff initiates a lawsuit, he/she must file and serve a summons and complaint. Typically, the plaintiff will hire a process server to effect service. If the process server errs in making service (that is, service is deemed to be improper and defective), the defendant may object and assert an affirmative defense that the court lacks personal jurisdiction over him/her because service was defective. However, as discussed in today’s post, this defense can be waived if the objection is not timely made. The Applicable Law Under CPLR § 3018(b), a party must “plead all matters which if not pleaded would be likely to take the adverse party by surprise or would raise issues of fact not appearing on the face of a prior pleading….”  Generally, affirmative defenses are waived by the defendant if not raised in the answer or made the subject of a pre-answer motion to dismiss. 23/23 Communications Corp. v. General Motors Corp. , 257 A.D. 367 (1st Dept. 1999); see also CPLR § 3211(e) (“Any objection or defense based upon a ground set forth in paragraph one, three, four, five and six of subdivision (a) is waived unless raised either by such motion or in the responsive pleading.”). Lack of personal jurisdiction is one such affirmative defense. See CPLR § 3211(e) (“An objection based upon a ground specified in paragraphs eight or nine of subdivision (a) is waived if a party moves on any of the grounds set forth in subdivision (a) without raising such objection or if, having made no objection under subdivision (a), he does not raise such objection in the responsive pleading.”). When defective service is at issue, and therefore the court’s jurisdiction over the person is at issue, the defendant must assert that objection in the answer and move to dismiss the complaint on that ground within a certain period of time, lest the defense will be lost forever. Skyline v. Coppotelli, Inc. , 117 A.D.2d 135, 140 (2d Dept. 1986). See also CPLR §§ 320, 321, 3211(a)(8), and CPLR § 3211(e). Under CPLR § 3211(e), “an objection that the summons and complaint … was not properly served is waived if, having raised such an objection in a pleading, the objecting party does not move for judgment on that ground within sixty days after serving the pleading, unless the court extends the time upon the ground of undue hardship.” E.g. , Clermont v. Abdelrehim , 144 A.D.3d 572 (1st Dept. 2016); McGowan v. Hoffmeister , 15 A.D.3d 297 (1st Dept. 2015). The purpose of this portion of CPLR § 3211(e) is “to require a party with a genuine objection to service to deal with the issue promptly and at the outset of the action … ferret out unjustified objections and … provide for the prompt resolution of those that have merit.” Wade v. Byung Yang Kim , 250 A.D.2d 323, 325 (2d Dept. 1998) (quoting Senate Introducer’s Mem. in Support, Bill Jacket, L. 1996, ch. 501 at 5).  However, a defendant can remedy the omission (and, therefore, the waiver) if he/she amends the answer within the time frame for amendments as of right under CPLR § 3025(a). See Iacovangelo v. Shepherd , 5 N.Y.3d 184 (2005). In Iacovangelo , the Court of Appeals held that a defendant who fails to assert a jurisdictional objection in an answer will not be deemed to have waived the defense if the defendant corrects the omission prior to the time to amend as of right – that is, before the time to amend the answer without leave of court has expired. In doing so, the Court applied the general rule that an amendment relates back to the time of service of the original pleading. Id. at 187. The issue of whether a defendant timely moved to dismiss on jurisdictional grounds due to defective service or waived said objection was recently decided by the Appellate Division, First Department in Brafman & Assoc., P.C. v. Balkany , 2021 N.Y. Slip Op. 00083 (1st Dept. Jan. 7, 2021 ( here ). In Brafman , the Court held that there was no waiver of the jurisdictional defense because defendant amended his answer as of right, even though the defense was not raised in the original answer. On January 10, 2019, Brafman commenced the action. After filing the summons and complaint, plaintiff’s process server went to defendant’s home on three separate dates, at different times of the day, when defendant or someone of suitable age or discretion would be expected to be at home. On January 23, 2019, pursuant to CPLR § 308(4), plaintiff’s process server taped the papers to the door because no one answered the door on that occasion or on the prior two occasions when service was attempted. On January 28, 2019, plaintiff filed the affidavit of service of the summons and complaint. On January 31, 2019, defendant filed an answer to the complaint. In the answer, defendant denied the allegations in the complaint.  Less than 20 days later, on February 14, 2019, defendant filed an amended answer. In that amended pleading, defendant asserted an affirmative defense that the complaint should be dismissed on the ground that jurisdiction had not been obtained over him because the summons and complaint had not been properly served.  On April 12, 2019, more than 60 days after filing the original answer, but less than 60 days from the filing of the amended answer, defendant filed a motion to dismiss the complaint on the ground that service of the summons and complaint upon him was defective. The motion court denied the motion. Defendant appealed. The First Department affirmed the motion court’s decision, though it agreed with defendant that there was no waiver.  The Court found that defendant’s amendment as of right cured the omission of including the jurisdictional defense: “Having added it to his amended answer within the time frame for amendments as of right under CPLR 3025(a), its omission from his original response does not constitute waiver.” Slip Op. at *1 (citing Iacovangelo , supra ). The Court explained that “ he statute makes clear that defendant’s 60-day clock for a motion to dismiss on grounds of improper service began to run from the date of his amended answer, not from his original response, when the objection had not yet been raised.” Id. Turning to whether service was defective, the Court held that it was not. Id. The Court rejected defendant’s argument that plaintiff failed to satisfy the “due diligence requirement of CPLR 308(4).” Id. In so doing, the Court explained that “‘ here are no rigid standards governing the due diligence requirement for substituted service…’.” Id. (quoting Bank of America, N.A. v. Budhan , 171 A.D.3d 622, 622 (1st Dept. 2019) (citing Bank Leumi Trust Co. of N.Y. v. Katzen , 192 A.D.2d 401 (1st Dept. 1993)). Thus, said the Court, “the successive attempts to serve defendant personally at various times of the day, on different days of the week (a Monday, a Wednesday, and a Friday) satisfied the due diligence requirement so as to permit nail-and-mail service.” Id. (citing Hochhauser v. Bungeroth , 179 A.D.2d 431 (1st Dept. 1992)). The Court also rejected the notion that the time of day or place of service negated the propriety of plaintiff’s service under CPLR § 308(4).  Defendant, who does not challenge that the address used by the process server was his ‘usual place of abode,” avers plaintiff could not have reasonably expected him to be at home during the process server’s three weekday attempts. Although defendant stated, in his affidavit in support of his motion, that he was “working (and travelling) away from home at the time,” the conclusory nature of these assertions are inadequate and do not create an issue of fact to justify a traverse hearing. Defendant does not state where he was “working (and travelling),” at the time, or state other facts to show that it was unreasonable for plaintiff’s process server to expect him to be home at the three different times and different days of the week of his attempts. Contrary to defendant’s contention, plaintiff’s process server did not have an obligation to determine where defendant’s place of business might have been in order for his efforts to constitute due diligence. Id. (citations omitted). Takeaway Brafman teaches practitioners and pro se litigants a valuable lesson: a defendant can correct the omission of a waivable defense, such as personal jurisdiction, by asserting it in an amended answer in which the amendment is made as of right. As the Court of Appeals concluded in Iacovangelo : ermitting a defendant to add a jurisdictional defense to an answer by an amendment as of right is consistent with CPLR 3211 (e), and advances the purpose of CPLR 3025 (a). CPLR 3025 (a) gives a party 20 days after serving a pleading to correct it or improve upon it, and the addition of a jurisdictional defense is no less proper a correction or improvement than any other. We hold that a party who adds such a defense by an amendment as of right “raise such objection in the responsive pleading” within the meaning of CPLR 3211 (e). Iacovangelo , 5 N.Y.3d at 187.  Brafman also teaches that if such an amendment is made under CPLR § 3025(a), then, under CPLR § 3211(e), the 60-day clock begins to run from the date of the amendment, not from the date of the original pleading.

Like attending school in your underwear, missing a scheduled Court appearance is a recurring nightmare for attorneys.  If an appearance is missed, there can be several and severe consequences.  Rule 22 NYCRR 202.27 (Defaults) provides: At any scheduled call of a calendar or at any conference, if all parties do not appear and proceed or announce their readiness to proceed immediately or subject to the engagement of counsel, the judge may note the default on the record and enter an order as follows:  (a) If the plaintiff appears but the defendant does not, the judge may grant judgment by default or order an inquest.  (b) If the defendant appears but the plaintiff does not, the judge may dismiss the action and may order a severance of counterclaims or cross-claims.  (c) If no party appears, the judge may make such order as appears just. Generally, “a plaintiff seeking to vacate a default in appearing at a conference is required to demonstrate both a reasonable excuse for its default and a potentially meritorious cause of action.”  Citimortgage v. Espinal , 187 A.D.3d 1131 (2 nd Dep’t 2020) (citations and internal brackets and quotation marks omitted).  Similarly, a “defendant who seeks to vacate a default in appearing at a compliance conference is required to demonstrate both a reasonable excuse for the default and a potentially meritorious defense ( see CPLR 5015 <1> ; 22 NYCRR 202.27 ….)  Foley Inc. v. Metropolis Superstructures, Inc. , 130 A.D.3d 680 (2 nd Dep’t 2015) (some citations omitted).  In Foley , the court struck defendant’s answer for failure to appear at a compliance conference.  On appeal, the Second Department reversed because, inter alia , defendant demonstrated that it did not receive notice of “the adjourned compliance conference” and, absent actual notice of the conference date, the “failure to appear at that conference could not qualify as a failure to perform a legal duty, the very definition of a default.”  Foley , 130 A.D.3d at 681 (citations and internal quotation marks omitted).  Under such circumstances, the Second Department held that “vacatur of the default was required as a matter of law and due process, and no showing of a potentially meritorious defense was required.”  Foley , 130 A.D.3d at 681 (citations omitted).  See also Matter of 542 A Realty, LLC , 118 A.D.3d 993, 994 (2 nd Dep’t 2014). These principles were addressed on December 23, 2020 in the Second Department’s decision in U.S. Bank National Association v. Diez .   Diez was a mortgage foreclosure action in which plaintiff failed to appear at a scheduled status conference.  As a result of the default, supreme court, “sua sponte, directed dismissal of the complaint, with prejudice…” and denied plaintiff’s subsequent motion to vacate the dismissal order.  The Second Department Ordered that the “order is reversed, on the law, with costs, and the plaintiff’s motion to vacate the and restore the action to the calendar is granted.”  Thus, the Court found that: Here, in support of its motion to vacate its default, the plaintiff submitted an affirmation from its attorney establishing that the plaintiff did not receive notice of certain scheduled court appearances. In opposition, the defendant did not offer any evidence that the plaintiff received notice of the scheduled appearances. Therefore, the plaintiff's default was a nullity, and vacatur of the April 20, 2017 order directing dismissal of the complaint based upon that default is required ( see Sposito v Cutting , 165 AD3d 863, 865). Accordingly, the Supreme Court should have granted the plaintiff's motion to vacate that order and restore the action to the calendar.

A “recurring question” courts in New York grapple with is whether the facts alleged in a complaint give rise to sustainable claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar from the same facts , s identical damages and d not allege a breach of any duty collateral to or independent of the parties’ agreements<,> is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group , “ here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases). Sometimes, a plaintiff alleges a duty independent of the contract but, nevertheless, has his/her complaint dismissed because the damages sought are the same as those sought by the contract claim. The reason has to do with the purpose of the damages sought. MBIA Ins. Corp. v. Credit Suisse Sec. (USA) LLC , 165 A.D.3d 108, 114 (1st Dept. 2018); Mañas v. VMS Assoc., LLC , 53 A.D.3d 451, 454 (1st Dept. 2008). Fraud damages are meant to redress a different harm than damages for breach of contract. The latter damages are meant to restore the nonbreaching party to as good a position as it would have been in had the contract been performed; the former damages are meant to indemnify losses suffered as a result of the fraud. MBIA , 165 A.D.3d at 114; Mañas , 53 A.D.3d at 454. Thus, where all the damages are remedied through the contract claim, the fraud claim is duplicative and must be dismissed. MBIA , 165 A.D.3d at 114. This is so even where the plaintiff sufficiently alleges breach of an independent duty owed them separate and apart from the contract. Id. ; Chowaiki & Co. Fine Art Ltd. v. Lacher , 115 A.D.3d 600, 600-601 (1st Dept. 2014) (dismissing fraud claim seeking duplicative damages even where the plaintiff sufficiently alleged breach of an independent duty owed them independent of the contract). In Demurjian v. Demurjian , 2021 N.Y. Slip Op. 00008 (1st Dept. Jan. 5, 2021) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud cross-claim as duplicative of a contract cross-claim because the damages sought were the same notwithstanding the alleged independent duty owed to the cross-claim plaintiff.   Demurjian concerned the ownership of six parcels of real property (the “Subject Properties”) in Washington Heights. Defendant/Cross-Claim Plaintiff, 187 Street Mazal Manager LLC (“Mazal”) alleged that it entered into a purchase agreement, dated September 24, 2012 (the “Purchase Agreement”), whereby Mazal purchased the Subject Properties from Cross-Claim Defendant, Michael Demurjian (“Michael”), and Cross-Claim Defendant, 661 West 187 Street LLC (“661”).  In the Purchase Agreement, both Michael and 661 represented and warrantied that the Subject Properties were owned in fee simple and that they had the power and authority to convey the Subject Properties to Mazal.  David and Richard Demurjian (collectively, the “Demurjian Brothers”) sued Mazal, claiming that they did not transfer their interests in the Subject Properties to 661. In response, Mazal asserted that to the extent the Demujian Brothers’ allegations were true, and Michael and 661 did not own the Subject Properties free and clear at the time of the Purchase Agreement, Michael and 661 breached their representations and warranties to Mazal to the contrary in the Purchase Agreement. Mazal asserted cross claims for breach of contract, fraud, and indemnification/contribution against Michael and 661. Michael and 661 West moved to dismiss the fraud and indemnification/contribution cross-claims. Relevant to the title of today’s post, the motion court dismissed the fraud cross-claim, finding the fraud cross-claim to be duplicative of the breach of contract cross-claim: “the fraud claim is based upon the same alleged misrepresentation from which the breach of contract cause of action arises” and “is not collateral to the contract, since the question of Michael’s ownership was expressly incorporated into the terms of the Purchase Agreement.”  The First Department affirmed. Although the Court agreed with the motion court that the fraud cross-claim was duplicative of the breach of contract cross-claim, it based its decision on the damages sought rather than the underlying theory of the claims: “Mazal claim identical quanta and measures of damages.” Slip Op. at *1 (citing MBIA , supra ).  In doing so, the Court rejected Mazal’s argument that the damages claimed were not identical because it sought punitive damages, holding that dismissal was appropriate “even though Mazal also demand an additional category of punitive damages for the fraud claim.” Id. (citing MBIA , 165 A.D.3d at 115). Moreover, the Court found Mazal’s cross-claim for indemnification to be duplicative of its breach of contract cross-claim as it “ from the same facts and again the same damages as Mazal’s second cross claim for breach of contract.” Id. The Court explained that “if Mazal is ultimately entitled to indemnification from Michael, it can only be because Michael breached the Purchase Agreement.” Id. “Accordingly,” concluded the Court, “the indemnification cross claim should be dismissed as duplicative of the breach of contract cross claim.” Id. (citing Best v. Law Firm of Queller & Fisher , 278 A.D.2d 441, 442 (2d Dept. 2000), cert. denied , 534 U.S. 1080 (2002)). Takeaway Demurjian is notable because it shows that the determining factor as to the viability of a fraud claim may not be the theory behind the claim, but the measure of damages sought. Thus, although a plaintiff may allege a duty independent of a contract, the fraud claim may nevertheless be redundant of the breach of contract claim, if both claims seek the same damages.

When parties to a contract delegate the question of arbitrability to an arbitrator, the courts will enforce the agreement as written. They may not, without more, decide the arbitrability issue. This “is true even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless.” Henry Schein, Inc. v Archer & White Sales, Inc. , _____ U.S. at _____, 139 S.Ct. 524, 529 (2019). Thus, “if a valid agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator, a court not decide the arbitrability issue.” Id. at 139 S.Ct. at 530. This well-recognized principle of law was at issue in Revis v. Schwartz , 2020 N.Y. Slip Op. 08094 (2d Dept. Dec. 30, 2020) ( here ). In Revis , the Appellate Division, Second Department affirmed the motion court’s decision to compel arbitration and to stay the action pending completion of the arbitration on the grounds that the parties intended to arbitrate their disputes. In particular, the parties had agreed to arbitrate “gateway” questions of arbitrability. General Legal Principles A.  Federal Law Under the Federal Arbitration Act (9 U.S.C. § 1 et. seq.) (the “FAA”), agreements to arbitrate “reflect[] the overarching principle that arbitration is a matter of contract” and, therefore, are “‘rigorously enforce ’ according to their terms.” American Express Co. v. Italian Colors Rest. , 570 U.S. 228, 232 (2013) (quoting Dean Witter Reynolds Inc. v. Byrd , 470 U.S. 213, 221 (1985)); Rent-A-Center, West, Inc. v. Jackson , 561 U.S. 63, 67 (2010).  B.  New York State Law The Civil Practice Law and Rules (“CPLR”) provides that “ written agreement to submit any controversy … to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.” CPLR §7501. “A party aggrieved by the failure of another to arbitrate may apply for an order compelling arbitration.” CPLR § 7503(a). “If an issue claimed to be arbitrable is involved in an action pending in a court having jurisdiction to hear a motion to compel arbitration, the application shall be made by motion in that action.” Id. With limited exception, “ here there is no substantial question whether a valid agreement was made or complied with, … the court shall direct the parties to arbitrate.” Id. See Sutphin Retail One, LLC v. Sutphin Airtrain Realty, LLC , 143 A.D.3d 972, 973 (2d Dept. 2016). If the application for an order compelling arbitration is granted, “the order shall operate to stay a pending or subsequent action, or so much of it as is referable to arbitration.” CPLR § 7503(a)). Pursuant to the foregoing procedure, the courts are to perform the initial screening process in order to determine “whether the parties have agreed that the subject matter under dispute should be submitted to arbitration.” Matter of Nationwide Gen. Ins. Co. v. Investors Ins. Co. of Am. , 37 N.Y.2d 91, 96 (1975). “Once it appears that there is, or is not a reasonable relationship between the subject matter of the dispute and the general subject matter of the underlying contract, the court’s inquiry is ended.” Id. at 96. “Penetrating definitive analysis of the scope of the agreement must be left to the arbitrators whenever the parties have broadly agreed that any dispute involving the interpretation and meaning of the agreement should be submitted to arbitration.” Id. Accordingly, on a motion to compel or stay arbitration, a court must determine, “in the first instance … whether parties have agreed to submit their disputes to arbitration and, if so, whether the disputes generally come within the scope of their arbitration agreement.” Sisters of St. John the Baptist, Providence Rest Convent v. Geraghty Constructor , 67 N.Y.2d 997, 998 (1986). “When deciding whether the parties agreed to arbitrate a certain matter … courts generally … should apply ordinary state-law principles that govern the formation of contracts.” First Options of Chicago, Inc. v. Kaplan , 514 U.S. 938, 944 (1995). Notably, “parties can agree to arbitrate ‘gateway’ questions of ‘arbitrability,’ such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy.” Rent-A-Center , 561 U.S. at 68-69; see also First Options , 514 U.S. at 943; Monarch Consulting , 26 N.Y.3d at 666. The reason: “parties may delegate threshold arbitrability questions to the arbitrator, so long as the parties’ agreement does so by ‘clear and unmistakable’ evidence.” Henry Schein, Inc. v. Archer & White Sales, Inc. , _____ U.S. _____, _____, 139 S.Ct. 524, 530 (2019) (quoting First Options , 514 U.S. at 944). Revis v. Schwartz 1.  Factual and Procedural Background A.  Allegations in the Complaint Darelle Revis, the former football player, and his wholly owned corporate entity Shavae, LLC (“Shavae”), commenced the action to recover damages for, among other things, breach of fiduciary duty, breach of contract, and fraud.  In January 2007, Revis and defendant Neil Schwartz, a partner in defendant Schwartz & Feinsod, LLC (“S & F”), a law firm that provides legal services to professional football players, entered into a Standard Representation Agreement (the “SRA”) in accordance with the National Football League Players Association Regulations Governing Contract Advisors (the “NFLPA Regulations”). Pursuant to the SRA, “Schwartz would represent … Revis as his attorney and contract advisor” and serve as “his exclusive representative with respect to negotiating player contracts with NFL clubs.”  Revis further alleged that on some unspecified date, he and Schwartz entered into a separate oral agreement, pursuant to which “Schwartz would provide a range of legal services to … Revis in return for a 10% contingent fee from amounts received by … Revis for marketing and endorsement agreements handled by … Schwartz on … Revis’s behalf.” Revis maintained that the SRA was the only written agreement between Revis and Schwartz, and that the SRA contained the only memorialization of the terms of the alleged oral agreement. In this regard, the SRA indicated that Revis and Schwartz had entered into “separate agreements” and included, inter alia , the following description of the services covered by them: “Marketing & Endorsements - Ten (10%) Percent - Cash Only.” The complaint alleged that “ hen Shavae was formed … Schwartz provided legal services to Shavae under the terms of his oral legal engagement agreement with … Revis.” The complaint contained eight causes of action. Each of the causes of action was asserted by both Revis and Shavae, and the complaint alleged that both plaintiffs were entitled to the remedies requested for each cause of action.  B.  The Defendants’ Motion to Compel Arbitration Defendants moved, pursuant to CPLR § 7503, to compel arbitration of the matter and to stay all proceedings pending arbitration. In support of their motion, defendants submitted, inter alia , a copy of the SRA, a copy of the NFLPA Regulations, and a copy of the Labor Arbitration Rules of the American Arbitration Association (the “AAA Rules”). Defendants cited to separate arbitration provisions in the SRA and in the NFLPA Regulations, and argued, among other things, that “ he broad language of the binding arbitration provisions in the SRA and Regulations plainly cover claims here.” Defendants further argued that, by incorporating the AAA Rules into the NFLPA Regulations, the parties had agreed to delegate any threshold arbitrability questions to the arbitrator. Plaintiffs opposed the motion. Plaintiffs argued that defendants “failed to present sufficient evidence of a clear and unequivocal intent to arbitrate the claims at issue.” Plaintiffs contended that their “legal claims … wholly separate from the rights and duties created under the SRA.” Plaintiffs asserted that their “claims from … Schwartz’s separate agreement to provide other legal services to … Revis and his company, Shavae.” The motion court granted defendants’ motion. The motion court stated that “ t clear … that the parties entered into a valid arbitration agreement and that the issues stated in the Summons and Complaint are encompassed within the SRA’s broad arbitration clause.” The motion court rejected plaintiffs’ contention “that the claims in this action are wholly separate from the rights and duties created under the SRA.” Plaintiffs appealed.   In a 3-2 decision, written by Justice Miller, the Second Department affirmed. 3.  The Court’s Decision A.  The Signatories Under the SRA, and in particular the paragraph titled “Disputes,” the parties to the SRA agreed that: “Any and all disputes between Player and Contract Advisor involving the meaning, interpretation, application, or enforcement of this Agreement or the obligations of the parties under this Agreement shall be resolved exclusively through the arbitration procedures set forth in Section 5 of the NFLPA Regulations Governing Contract Advisors.” The SRA incorporated the NFLPA Regulations by reference and defined them to be a part of the parties’ agreement. Section 5 of the NFLPA Regulations contained a broadly worded arbitration clause that covered a wide variety of disputes (“ his arbitration procedure shall be the exclusive method for resolving any and all disputes that may arise from ….”) and set forth the applicable arbitration procedure (“ he hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association”).  The AAA Rules provide that “ he parties shall be deemed to have made these rules a part of their arbitration agreement whenever, in a collective bargaining agreement or submission, they have provided for arbitration by the American Arbitration Association.” The AAA Rules go on to specify, under the subdivision titled “Jurisdiction,” that “ he arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The AAA Rules also provide that “ he arbitrator shall interpret and apply these rules insofar as they relate to the arbitrator’s powers and duties.” The Court held, based upon the incorporation by reference doctrine, that the foregoing language in the SRA and the NFLPA Regulations evidenced “a clear intent by Revis and Schwartz to arbitrate the threshold issue of arbitrability.” Slip op. at *5 (citations omitted).  The Court explained that where the rules of the arbitral forum are incorporated into the parties’ agreement, the courts are to enforce the agreements. Thus, “ here the rules that were incorporated into the parties’ agreement provided that threshold arbitrability issues were to be resolved by the arbitrator,” the courts will enforce “that aspect of the parties’ agreement and compel[] the parties to submit ‘gateway’ arbitrability issues to the arbitrator.” Id. (citations omitted). The Court found that the parties intended the arbitrator to decide the gateway issue of arbitrability:  Here, it is undisputed that Revis and Schwartz entered into the SRA, thereby invoking the broad umbrella of the NFLPA regulations and the fiduciary duties created therein. Section 5 of the NFLPA Regulations, which contains a broadly worded arbitration clause, provides that “ he hearing shall be conducted in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association.” The AAA Rules, in turn, grant the arbitrator “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement.” The SRA thus makes “clear reference” to Section 5 of the NFLPA Regulations, which, in turn, makes “clear reference” to the AAA Rules in such a way that the intent of the parties to incorporate those specific documents “may be ascertained beyond doubt.”  Id. (citing 11 Richard A. Lord, Williston on Contracts § 30:25 (4th ed. 2020)). The Court noted that its decision was consistent with the holdings in state court and in federal court where the courts “similarly reviewed arbitration agreements that incorporated, by reference, virtually identical provisions of the American Arbitration Association.” Id. at *5-*6 (citing and discussing cases). The Court concluded that defendants “demonstrate that Revis and Schwartz incorporated the AAA Rules into the documents that collectively constitute their arbitration agreement,” and therefore “established ‘by “clear and unmistakable” evidence’, that Revis entered into an agreement with Schwartz pursuant to which they agreed to arbitrate ‘gateway’ questions of arbitrability.” Id. at *6. Under the circumstances, therefore, the Court held that the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Schwartz, and to stay those portions of the action pending completion of arbitration.” Id. at *7. B. The Nonsignatories Although only “a party to an arbitration agreement is bound by or may enforce the agreement” (1 Domke on Commercial Arbitration § 13:1 (2020), defendants nevertheless maintained that the nonsignatory defendants in the complaint, i.e. , the named defendants that did not sign the SRA, were entitled to compel Revis, a party to that agreement, to binding arbitration in the same manner as Schwartz. “Given the allegations in the complaint,” the majority agreed. Id. at *7. In New York, “ nonsignatory to an arbitration clause may, in certain situations, compel a signatory to the clause to arbitrate the signatory’s claims against the nonsignatory despite the fact that the signatory and nonsignatory lack an agreement to arbitrate.” Id. (citations omitted). “A non-party to an arbitration agreement may compel a party to arbitration if the relevant state contract law allows the non-party to enforce the arbitration agreement.” Id. (citations omitted). Under principles of agency, “agents are afforded the benefit of arbitration agreements that were entered into by their principals to the extent that the alleged misconduct relates to their behavior as officers or directors or in their capacities as agents of the corporation.” Hirschfeld Prods. v. Mirvish , 88 N.Y.2d 1054, 1056 (1996) (citations omitted). Such a rule, the Court of Appeals has said “is necessary not only to prevent circumvention of arbitration agreements but also to effectuate the intent of the signatory parties to protect individuals acting on behalf of the principal in furtherance of the agreement.” Id. at 1056. “Here,” said the Court, “the allegations in the complaint which were made against S & F and Feinsod relate solely to work that ‘was done on behalf of … Schwartz.’” Slip Op. at *8. “Given the allegations in the complaint,” concluded the Court, “the nonsignatory defendants identified therein—Feinsod and S & F—were entitled to enforce the arbitration provisions contained in the SRA and the NFLPA Regulations.” Id. (citations omitted). Accordingly, held the majority, “the Supreme Court properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Revis against Feinsod or S & F, and to stay those portions of the action pending completion of arbitration.” Id. Finally, the Court held that, under the direct benefits theory of estoppel, Shavae was bound by the arbitration clause in the SRA, although it was not a signatory to the SRA. Here, the complaint does not distinguish between the two plaintiffs in terms of the relief sought. In other words, Shavae seeks the same relief as Revis in each of the eight causes of action asserted in the complaint. Even assuming that Shavae is not an alter-ego of Revis, Shavae independently seeks to recover, under the fourth cause of action, damages for Schwartz’s alleged breach of the SRA. In the sixth cause of action, the complaint alleges that Shavae is entitled to recover amounts that should have gone to it pursuant to the terms of the SRA and Shavae independently seeks to rescind the SRA and recover “rescissory damages.” Given the allegations in the complaint that Shavae was entitled to certain benefits under the SRA and that it was entitled to recover various types of damages due to Schwartz’s alleged breach of that agreement, Shavae should be compelled to arbitrate in accordance with the arbitration clause contained in the SRA by application of the direct benefits theory of estoppel.  Id. (citations omitted). Accordingly, held the Court, the motion court “properly granted that branch of the defendants’ motion which was to compel arbitration of those portions of the complaint which were asserted by Shavae, and to stay those portions of the action pending completion of arbitration.” Id. In dissent, Justice Dillon, joined by Justice Cohen, would have reversed the motion court and denied the motion to compel.  The dissent argued that the majority misread the relevant documents in that there was no straight line from the SRA to the NFLPA Regulations to the AAA Rules necessary to “conclude that the separate Marketing and Endorsement contract (hereinafter the M & E) must initially go to an arbitrator in the event of a dispute between the parties over the M & E.” Id. at *9. According to Justice Dillon, the SRA did not incorporate the NFLPA Regulations for the resolution of disputes that arose outside of the SRA. Id. As such, “the terms of the AAA Rules not reached.” The dissent found that the limiting language of “Paragraph 8 of the SRA—that the NFLPA Regulations appl to the arbitration of disputes involving ‘ this Agreement ’— consistent with Paragraph 3(A) of the SRA, where the existence of the M & E disclosed but expressly described as a ‘separate agreement,’ and Paragraph 3(B) of the SRA, which provide that the SRA was signed by Revis without being conditioned upon the signing of any other agreement.” Id. (orig’l emphasis). “In other words,” said Jusitice Dillon, “the reference to the M & E in Paragraph 3 was not to include it within the SRA, but to distinguish the M & E from the SRA, with each of the two contracts separate from the other, and the existence of one not conditioned upon the other.” Id. Justice Dillon noted that, while he agreed with the majority about the right of the parties to contractually agree to delegate issues of arbitrability through a “gateway” to an arbitrator, the parties did not delegate the issue with regard to the M & E. “The gateway applies to an arbitrability dispute involving the SRA itself,” said Justice Dillon, “as the gateway’s existence relie upon the broad arbitrability provisions of the NFLPA Regulations and the AAA Rules.” Id. at *10. To the dissent, the M & E did not reach the NFLPA Regulations or the AAA Rules through the SRA. Id. “In other words,” concluded the dissent, “reliance upon the NFLPA Regulations and the AAA Rules, to support the conclusion that arbitrability is solely for the arbitrator to decide, puts the cart (the NFLPA Regulations and AAA Rules) before the horse (the M & E).” Id. The dissent observed that “the M & E, standing alone, independently subject to the broad language of the NFLPA, requiring that the unwritten M & E document subject to arbitrability.” Id.   However, because the point was not raised before the motion court, it was not properly before the Court on appeal, and could not be considered because the issue was not “one of ‘pure’ law untethered to any question of fact.” Id. (citations omitted). The reason, explained the dissent, was because it was unclear whether Schwartz was acting as Revis’ attorney or Contract Advisor in relation to the M & E. Id. Thus, even if the Court were to consider the issue on the merits, “the existence of such a question of fact, by which arbitrability is ambiguous, preclude our compelling an arbitration at this juncture and instead vest the Supreme Court with the obligation of determining whether the parties’ dispute arbitrable.” Id. at *10-*11 (citations omitted) (noting that the language of the NFLPA Regulations, which extended its provisions to “any other activity or conduct which directly bears upon the Contract Advisor’s integrity, competence or ability to properly represent individual NFL players and the NFLPA in individual contract negotiations,” did “not clearly and unmistakenly apply to disputes with individuals who may be acting as private attorneys for a player on matters unrelated to an NFL contract, such as an endorsement deal, a matrimonial litigation, a real estate transaction, or a speeding ticket.”). As to the nonsignatories, Justice Dillon said that “the absence of an unambiguous arbitration agreement between Revis and Schwartz mean that Shavae, LLC, Jonathan Feinsod, and the law firm of Schwartz & Feinsod, LLC, who were also named as defendants, not subject to arbitration over the M & E.” Slip op. at *11. Accordingly, the dissent would have reversed the order appealed from and denied defendants’ motion to compel arbitration and to stay the action pending completion of the arbitration.