Arbitration is a preferred means of dispute resolution. In fact, arbitration is the policy under the Federal Arbitration Act (“FAA”) and the Civil Practice Law and Rules (“CPLR”). For this reason, (1) when parties to a contract have clearly and unambiguously agreed to arbitrate their disputes, the courts will enforce that agreement, as they would any other agreement, to give effect to the parties’ intention; (2) the courts will not substitute their judgment for that of the arbitrator(s); and (3) the courts will confirm an arbitration award, unless a movant can demonstrate that one of the grounds for vacatur set forth in the FAA or CPLR exist – a task that is often difficult to do.  Today, we examine two cases arising under Article 75 of the CPLR involving the foregoing principles. The first action, Matter of Gibson, Dunn & Crutcher LLP v. Johnson , N.Y. 2020 Slip Op. 34212(U) (Sup. Ct., N.Y. County Dec. 17, 2020) ( here ), involved a petition to confirm an arbitration award, pursuant to CPLR §§ 7510 and 7514. The second action, Euro Pac. Capital, Inc. v. Fat Brands, Inc. , 2020 N.Y. Slip Op. 34217(U) (Sup. Ct., N.Y. County Dec. 16, 2020) ( here ), involved a motion to stay arbitration under CPLR §7503(b).  Matter of Gibson, Dunn & Crutcher LLP v. Johnson Gibson Dunn sought an order, pursuant to CPLR §§ 7510 and 7514, to (1) confirm an award that was issued in December 2019 following an arbitration between the parties (the “Award”), and (2) enter a money judgment in Gibson Dunn’s favor against respondent, Sarah Johnson, based on the Award. In the Award, the Arbitrator held that Gibson Dunn was entitled to quantum meruit damages against Johnson in the amount of $1,873,886.24 for attorney’s fees, plus prejudgment interest based on legal services that Gibson Dunn had rendered to Johnson when she was a client. Johnson opposed the petition and moved for an order, pursuant to CPLR § 7511, dismissing the petition and vacating the Award or, in the alternative, substantially reducing the amount awarded.  The Court found that Gibson Dunn had presented everything necessary to support the relief sought – i.e. , an order confirming the Award. In addition, the Court held that the Award was “thorough and extremely well-reasoned” sufficient “to support conclusion that Gibson Dunn entitled to quantum meruit damages against Ms. Johnson in the amount of $1,873,886.24 for attorney’s fees plus prejudgment interest based on legal services rendered.” Slip Op. at *2. “ evertheless”, said the Court, Johnson sought “to vacate the Award pursuant to CPLR 7511(b)(1)(iii), claiming that the Arbitrator ‘exceeded his power or so imperfectly executed it that a final and definite award upon the subject matter submitted was not made.”  Id. (citation omitted). Johnson argued that, “in awarding Gibson fees on a theory of quantum meruit, the Arbitrator violated strong New York public policy standing for the proposition that attorneys should not profit from their misconduct, especially a breach of fiduciary duty to their own clients.” Id. (internal quotation marks omitted). In essence, Johnson argued that because she learned after she discharged Gibson Dunn that the firm allegedly engaged in misconduct, Gibson Dunn was not entitled to the fees it sought because public policy prohibits a lawyer from profiting from their own misconduct: Ms. Johnson’s counsel begins by correctly noting that the law provides that an attorney discharged for “cause” based on misconduct or improprieties is not entitled to fees. However, counsel then acknowledges that Ms. Johnson did not discharge Gibson Dunn for cause. Rather, Ms. Johnson learned only after the attorney-client relationship had ended that, allegedly, “Gibson engaged in misconduct that would have justified Ms. Johnson discharging for cause.” The purported improprieties included alleged misrepresentations about the quality of the associates working on Ms. Johnson’s case and “write-downs” or fee reductions allegedly undisclosed to hide low quality work. Counsel contends the Arbitrator wrongly ignored “indisputable proof” of improprieties, as evidenced by the Arbitrator’s statement, disguised as a credibility determination, that he was “not persuaded that the relevant and credible evidence in the record plausibly establishes that Mr. Snyder ‘lied or knowingly misled’ Ms. Johnson" in connection with these issues. Counsel then points to the Arbitrator’s statement that he had not found any case law supporting the claim that a fee reduction may constitute an impropriety. Counsel attacks this statement, arguing that Gibson Dunn “cannot escape the consequences of its conduct simply because the Arbitration presented an issue of first impression.” Id. (citation to record omitted). The Court held that Johnson’s “argument strained.” Id. at *3. The Court found that the public policy ground for vacating the arbitration award did not present an “explicit conflict” with settled law or strong and well-defined policy considerations. Id. at *4 (citing Matter of City of Oswego (Oswego City Firefighters Ass’n, Local 2707) , 21 N.Y.3d 880, 882 (2013). The Court explained that “ ot only did Ms. Johnson withdraw her claim of malpractice, but the Arbitrator reviewed and entirely rejected on the merits Ms. Johnson’s claim of ‘misconduct,’ finding instead, after a thorough analysis of the evidence, that Gibson Dunn had performed its work with ‘utmost good faith’ and that a ‘very substantial amount of work’ in a ‘complex and challenging’ litigation had been provided on Ms. Johnson’s behalf.” Id. (citation to Award omitted).  The Court further explained that the Arbitrator “conclusively and directly rejected Ms. Johnson’s claim that Gibson Dunn’s efforts to reduce Ms. Johnson’s bills while the litigation was pending somehow constituted ‘unethical conduct,’ concluding the argument was ‘wholly without merit.’” Id. (citation to Award omitted).  As a result, the Court denied Johnson’s motion to vacate the Award. The Court also declined to reduce the amount of the fees awarded by the Arbitrator. Johnson argued that a $1 million reduction constituted “reasonable compensation” within the meaning of In re Freeman’s Estate , 34 N.Y.2d 1, 9 (1974), and its progeny. Under Freeman’s Estate , in considering the reasonableness of a fee, the courts are to consider the following factors: (1) the time and labor required; (2) the difficulty of the questions involved, and the skill required to handle the problems presented; (3) the lawyer’s experience, ability and reputation; (4) the amount involved and benefit resulting to the client from the services; (5) the customary fee charged by the Bar for similar services; (6) the contingency or certainty of compensation; (7) the results obtained; and (8) the responsibility involved. The Court rejected Johnson’s contention that Gibson Dunn’s fees should have been reduced under Freeman’s Estate . Id. at *4. “In sum,” said the Court, “Gibson Dunn ha established its right to confirmation of the Final Award, and the motion by Ms. Johnson to vacate the Award or substantially reduce the amount of the Award is without merit.” Id. at *5. Accordingly, the Court confirmed the Award and denied the motion to vacate, concluding that it had “‘no legal basis to ‘substitute its legal conclusions or factual findings for that of the arbitrat ’ based either on Ms. Johnson’s allegations of misconduct or the amounts the Arbitrator concluded were appropriately billed for the substantial work performed by Gibson Dunn, even if the Arbitrator had made an error of law, which he did not.” Id. at *4-*5 (citing Matter of Falzone (New York Cent. Mut. Fire Ins. Co. ), 15 N.Y.3d 530, 534–35 (2010). Euro Pac. Capital, Inc. v. Fat Brands, Inc. Petitioners moved for an order, pursuant to CPLR § 7503(b), to stay the arbitration commenced by respondent against the petitioners before the Financial Industry Regulatory Authority, Inc. (“FINRA”) (the “FINRA Arbitration”). Petitioners based their motion on an agreement that required all disputes between the parties to be heard “only in the state or federal courts located in the City of New York, State of New York.” On April 24, 2018, FAT Brands Inc. (“FAT Brands”), its affiliates, and Alliance Global Partners (“AGP”, together with Fat Brands, the “AGP Agreement Parties”) entered into a debt private placement agreement pursuant to which AGP agreed to serve as “the co-placement agent and investment banker working with Dalmore Group, LLC (“Dalmore”) in regard to an Investment Banking/Advisory Agreement executed on April 1, 2018 (the “Services”) for , on a best effort basis, in connection with the offer and placement (the “Offering”) by of up $100 million of debt securities, private notes, loans or working capital financing of (collectively, the “Securities”).”  The AGP Agreement contained a jurisdiction and governing law provision, pursuant to which “ ny disputes that under Agreement, even after the termination of Agreement, be heard only in the state or federal courts located in the City of New York, State of New York.”  Unlike the AGP Agreement, the Investment Banking/Advisory Agreement (or the “Dalmore Agreement”) between FAT Brands and Dalmore, a FINRA registered broker dealer (FAT Brands and Dalmore, collectively, the “Dalmore Agreement Parties”), which predated the AGP Agreement, contained an arbitration provision. On or about October 16, 2020, FAT Brands filed a statement of claim before FINRA against petitioners Adam Kinzer and AGP. In pursuing arbitration against AGP and Kinzer, FAT Brands claimed that the AGP Agreement was modified by two emails: (1) dated August 8, 2018, and (2) dated December 8, 2018. Neither email contained a modification of the provision of the ADP Agreement with respect to the parties’ agreement to litigate disputes arising under the Agreement.  Nevertheless, FAT Brands argued that because the Dalmore Agreement Parties agreed to arbitrate, the AGP Agreement Parties also agreed to arbitrate, even though the AGP Agreement expressly provided to the contrary. FAT Brands also argued that FINRA Rule 12200 – which provides for arbitration of disputes between FINRA members and its customers, at the customer’s request, arising in connection with the members’ business activities, unless the customer is a broker or dealer – required arbitration of the parties’ dispute. The Court rejected both arguments. The Court found that the AGP Agreement did not provide for arbitration. Slip Op. at *6. Rather, the AGP Agreement “plainly provide for New York state or federal courts as the exclusive forum for any disputes under that agreement, including ‘even after termination of Agreement.’” Id. The Court also found that even if it were to credit respondent’s argument that the Dalmore Agreement controlled, which it did not because nothing in the August and December emails addressed arbitration in any way, arbitration would still be inappropriate for AGP and Kinzer as both were “indisputably not signatories to the Dalmore Agreement and, therefore, be bound to its terms.” Id. The Court further found respondent’s “reliance on FINRA Rule 12200” to be “unavailing.” Id. “ rbitration pursuant to FINRA Rule 12220 is not mandatory where there is a written agreement between the parties that provides to the contrary,” said the Court. Id. (citing New York Bay Capital, LLC v. Cobalt Holdings, Inc. , 456 F. Supp. 3d 564 (S.D.N.Y. 2020), citing Golden, Sachs & Co. v. Golden Empire Schools Financing Auth. , 764 F.3d 210 (2d Cir. 2014)). Rather, concluded the Court, “where there is an unambiguous forum selection clause such as the one in the AGP Agreement here, the ‘forum-selection clause displaces the agreement to arbitrate in FINRA Rule 12200.’” Id. (quoting New York Bay Capital , 456 F. Supp. 3d at 571). Accordingly, the Court granted the motion to stay the arbitration. Takeaway Under CPLR § 7511(b)(1)(iii), an arbitration award will not be confirmed when the arbitrator exceeded his or her authority under the arbitration agreement. Thus, the movant must demonstrate that the arbitration agreement limited the arbitrator’s authority to act, and the arbitrator subsequently violated that limitation. The same is true with regard to arbitration mandated by statute. Absent an agreement or statute, however, as long as an arbitrator addresses the issue(s) submitted for resolution, vacatur will not be granted, unless the award is completely irrational – that is, the resulting award goes beyond the issues before the arbitrator.  In addition, an award will be vacated when the decision is irrational or is violative of a public policy. In essence, the court must conclude, without any fact-finding or legal analysis, that arbitration of the matter is prohibited by law.  We have examined cases in which a party resisting confirmation of an arbitral award claimed the arbitrator(s) exceeded their authority or the award was violative of public policy. As we have noted in many posts, it is very difficult to vacate an award on those grounds (as it is on the other grounds for vacatur set forth in the FAA and Article 75 of the CPLR). Gibson Dunn is another example of a respondent failing to convince a court that the arbitrator exceeded their authority. We have also examined cases in which a party, who was not a signatory to an arbitration agreement, sought to litigate his/her rights in court rather than in an arbitral forum ( e.g. , here ). Under CPLR § 7503(b), such non-signatories were entitled to a stay of arbitration because there was no valid agreement to arbitrate. CPLR § 7503(b). After all, because arbitration is a “creature of contract” ( Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading Inc. , 252 F.3d 218, 224 (2d Cir. 2001)), only signatories to a contract containing an arbitration agreement can be compelled to arbitrate. TBA Global, LLC v. Fidus Partners, LLC , 132 A.D.3d 195, 202 (1st Dept. 2015). Consequently, as in Euro Pac. Capital , “a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.” AT&T Techs., Inc. v. Communications Workers of Am. , 475 U.S. 643, 648 (1986) (quoting Steelworkers v. Warrior & Gulf Nav. Co. , 363 U.S. 574, 582 (1960)).  Euro Pac. Capital is also notable for its holding that a forum selection clause requiring any actions, disputes and proceedings to be brought in court supersedes an earlier agreement to arbitrate, even if that agreement is found in FINRA Rule 12200. FINRA Rule 12200 is a contract and must be interpreted in accordance with principles of contract interpretation. As such, where an agreement supersedes an earlier agreement to arbitrate, such as Rule 12200, the later agreement must be enforced according to its terms so long as it is clear and unambiguous on its face. In Euro Pac. Capital , the Court found such clarity – that is, the clear language of the forum-selection clause demonstrated that the parties intended to resolve their disputes through litigation, rather than FINRA arbitration.

Affinity fraud is a type of securities fraud. In this form of fraud, the person committing the fraud preys upon members of an identifiable group, such as a religious or ethnic community, the elderly, or a professional group. The promoter of an affinity fraud frequently is – or pretends to be – a member or a good friend of the group. The fraudster often enlists respected members of the community or religious leaders from within the group to disseminate information about the scheme by convincing them that a fraudulent investment is legitimate and in their best interests. Affinity frauds exploit the trust and friendship that exist in a group of people who have something in common. Because of the tight-knit structure of the group, it can be difficult for regulators or law enforcement officials to detect an affinity fraud. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment. Many affinity frauds involve Ponzi schemes or pyramid schemes, where new investor money is used to make payments to earlier investors to give the illusion that the investment is successful. New investors are induced to invest in the scheme and existing investors are lulled into believing their investments are profitable. Unfortunately, as is often the case, the promoter of the scheme steals the investor’s money for personal use. Both types of schemes depend on an unending supply of new investors – when the inevitable occurs, and the supply of new money stops, the scheme collapses, and investors lose most or all of their money. On December 21, 2020, the Securities and Exchange Commission (“SEC” or the “Commission”) announced (here) that it filed an emergency action against California-based real estate development company SiliconSage Builders LLC, aka Silicon Sage Builders, and its sole owner, Sanjeev Acharya, in connection with an alleged $119 million fraudulent offering. According to the SEC’s complaint (here), Silicon Sage Builders and Acharya raised money from approximately 250 retail investors, most of whom were members of the Northern California South Asian community, by falsely describing Silicon Sage Builders’ real estate business as profitable and promising investors exorbitant returns. The SEC alleged that, in reality, from 2016 to 2019, all but one of Silicon Sage Builders’ projects had significant cost overruns and did not generate enough money to pay investors the promised returns. The SEC also alleged that Acharya misled investors into believing the payments they received were derived from Silicon Sage Builders’ profits when, in fact, Silicon Sage Builders and Acharya had used new investor funds to pay earlier investors. The SEC further alleged that Acharya misled investors as to the amount of money the company was attempting to raise and falsely told investors they could redeem their investments despite there being insufficient funds to meet redemption requests. “As we allege in our complaint, wrongdoers sometimes prey on the trust of members of their communities to raise funds for their fraudulent schemes,” said Alka Patel, Associate Regional Director of the SEC’s Los Angeles Regional Office. “Affinity frauds are particularly harmful to retail investors, and this case demonstrates the SEC’s commitment to pursuing such schemes and protecting retail investors.” The SEC filed its complaint in the U.S. District Court for the Northern District of California. The SEC charged Silicon Sage Builders and Acharya with violating the antifraud provisions of the federal securities laws. In particular, the SEC charged Silicon Sage Builders and Acharya with, among other thing, misleading and deceiving Silicon Sage investors (a) about the safety and security of investors’ funds, how the funds were used, and the promised returns, including: the profitability of Silicon Sage and all of its real estate projects, the source of the interest payments paid to fund investors, the ability to redeem investments, and the amount of the offering, and (b) by making Ponzi payments and lulling existing investors to contribute new capital, roll over existing investments, and defer interest payments. The SEC seeks preliminary and permanent injunctions, the appointment of a receiver over Silicon Sage Builders, asset freezes, disgorgement with prejudgment interest, and financial penalties against the defendants, as well as an order prohibiting the destruction of documents and an accounting. Takeaway The SEC has a long history of commencing enforcement proceedings against affinity fraud promoters. Indeed, the SEC has investigated and taken quick action against affinity frauds that have targeted a wide spectrum of groups. here.=">here."> In the SEC’s Investor Publication, “Affinity Fraud: How to Avoid Investment Scams That Target Group,” the Commission provides a number of helpful tips on how to avoid an affinity fraud (here). These include: Never make an investment based solely on the recommendation of a member of an organization or religious or ethnic group to which you belong. Investors should investigate the investment thoroughly and check the truth of every statement made about the investment. Do not fall for investments that promise spectacular profits or “guaranteed” returns. If an investment seems too good to be true, then it probably is. Similarly, investors should be very hesitant to purchase a security that is said to have no risks. As noted by the SEC, the greater the potential return from an investment, the greater one’s risk of losing money. “Promises of fast and high profits, with little or no risk, are classic warning signs of fraud.” Investors should be skeptical of any investment opportunity that is not in writing. Fraudsters often avoid putting things in writing. Legitimate investments are usually in writing. If a person says that they do “not have the time to reduce to writing” the particulars about the investment, investors should be leery about the opportunity. Investors should also be suspicious if a person says to keep the investment opportunity confidential. Investors should not feel pressured or rushed into buying an investment; investors should think about - or investigate - the investment opportunity. Investors should be skeptical of investments that are pitched as “once-in-a-lifetime” opportunities, particularly when the promoter bases the recommendation on “inside” or confidential information. Investors should avoid unsolicited emails offering investment opportunities. As the Silicon Sage Builder action shows, investors should be suspicious of investment opportunities that come from members of an ethnic community or religious group. An investment opportunity should never be based on a promise of high returns and little to no risk, even if those opportunities come from trusted people within the community or group. Investors should always perform due diligence before acting on an investment opportunity by conducting their own research or consulting a securities broker or investment advisor. If an investment opportunity seems suspicious, a “can’t miss” or “too good to be true”, then investors should steer clear of the opportunity. And, in such cases, investors should report those opportunities to the SEC.

In prior posts, we examined enforcement actions brought by the Securities and Exchange Commission (“SEC” or “Commission”) against those who seek to benefit from the COVID-19 pandemic ( e.g. , here , here and here ).  Earlier this month, we wrote about an enforcement proceeding that the SEC brought against The Cheesecake Factory ( here ). As noted in that article, that proceeding was the first time the SEC had charged a large public company for misleading investors about the financial effects of the COVID-19 pandemic on the company’s business and operations.  Since February of this year, the SEC has released several warnings to investors to beware of fraud, illicit schemes and other misconduct during the coronavirus health emergency ( here ). In these warnings, the SEC has highlighted the proliferation of internet promotions, often using social media, in which the company claims that its products or services could prevent, detect or cure the virus, and that the sale of these products or service would lead to a dramatic increase in the price of those companies’ stock. Many of these scams, said the SEC, “often take the form of so-called ‘research reports’ and make predictions of a specific ‘target price.’” In reality, explained the SEC, these are pump-and-dump schemes. On December 18, 2020, the SEC announced ( here ) that it brought charges against Decision Diagnostics Corp. (“Decision Diagnostics”), a California-based biotechnology company, and its CEO, Keith Berman, with making false and misleading claims in numerous press releases that the company had developed a working, break-through technology that could accurately detect Covid-19 through a quick blood test. The SEC temporarily suspended trading in Decision Diagnostics’ securities on April 23, 2020 ( here ). In the complaint ( here ), the SEC alleged that Decision Diagnostics and Berman falsely claimed  that Decision Diagnostics had developed a finger prick blood test that could detect Covid-19 in less than a minute. According to the SEC, from March 2020 to at least June 2020, Decision Diagnostics and Berman made false and misleading statements about the existence of Decision Diagnostics’ Covid-19 device and progress towards FDA emergency use authorization. As alleged, at the time Decision Diagnostics and Berman made these claims, the company lacked a proven method for detecting the virus and had no physical testing device. Further, alleged the SEC, the company’s advisors had warned that the testing kit they were trying to manufacture would not work as Decision Diagnostics had described. The SEC further alleged that the statements created the misleading impression that the test was soon to be introduced to the market and led to surges in the price and trading volume of Decision Diagnostics’ stock. “During this unprecedented time, when the need for truthful disclosures concerning Covid-19 tests is of vital importance, Decision Diagnostics and its CEO allegedly misled investors by claiming to have made a working test device when all they had was an idea that had not materialized into a product,” said Stephanie Avakian, Director of the Division of Enforcement. “With the onset of the global pandemic, we quickly pivoted to identify potential areas of fraud. This case is another example of how the Commission will hold accountable those who exploit the pandemic to harm investors.” “In our complaint, we allege that Decision Diagnostics and Berman repeatedly made baseless representations to the investing public about market-moving events like progress in obtaining FDA approval and having breakthrough technology,” said Anita B. Bandy, Associate Director of the Division of Enforcement. “Today's filing is a credit to the dedicated SEC staff, who continued to investigate after the trading suspension and quickly uncovered the alleged fraud.” The SEC filed the complaint the U.S. District Court for the Southern District of New York. The Commission charged Decision Diagnostics and Berman with violating the antifraud provisions of the securities laws. The SEC is seeking to enjoin both Decision Diagnostics and Berman from directly or indirectly violating those provisions and ordering them to pay civil penalties. In addition, the Department of Justice’s Market Integrity and Major Frauds Unit announced ( here ) that parallel criminal charges against Berman were also filed in the U.S. District Court for the District of Columbia. In the indictment ( here ), the government alleged that, from February through December 2020, Berman falsely claimed that the company had developed a 15-second test to detect COVID-19, when in fact the test was merely an idea and not a validated method of accurately detecting COVID-19.  According to the indictment, Decision Diagnostics was in precarious financial condition prior to the pandemic, and Berman wrote in internal emails that he needed a “new story” to “raise millions.”  In addition, the government claimed that Berman falsely told investors that the Food and Drug Administration (“FDA”) was on the verge of approving the company’s request for emergency use authorization of its COVID-19 test.  In truth, alleged the government, Berman knew that the company lacked the financial resources and insurance necessary to conduct the clinical testing required by the FDA to complete the application process. The government also said that Berman sought to exert political pressure on the FDA by hiring a political consultant to lobby Members of Congress, telling them in talking points that the FDA had “moth-balled” the company’s submission and that it remained “stuck in limbo” at or around the same time that Berman was telling investors that the test was on the verge of approval.  Between early March and April 23, 2020, the company’s stock price rose by over 1,500 percent.    The indictment further alleged that, as part of the alleged scheme, Berman used an alias, “plutoniumimplosion,” to repeat false and misleading statements to investors on Internet message boards, and lull suspecting investors into inaction by refuting allegations of fraud and threatening potential whistleblowers with civil or criminal sanctions.

Venue in litigation is where the trial of an action will take place.  Venue, which is governed by Article 5 of the CPLR , is initially chosen by the plaintiff at the commencement of the action.  Sometimes an improper venue is chosen by the plaintiff and other times, while correct, a more convenient venue is available.  This BLOG has previously addressed “ Change of Venue Procedures .”  Today’s article will focus on some issues related to the discretionary change of venue pursuant to CPLR 510(3) , which provides that “ he court, upon motion, may change the place of trial of an action where … the convenience of material witnesses and the ends of justice will be promoted by the change.”   Motions pursuant to CPLR 510(3) “are addressed to the sound discretion of the trial court and, absent an improvident exercise of that discretion, the trial court’s order will not be disturbed on appeal.”  Raghavendra v. Stober , 171 A.D.3d 814, 816 (2 nd Dep’t 2018) (citations omitted). In cases where plaintiff’s initial choice of venue is proper, a discretionary change of venue based on the convenience of witnesses, pursuant to CPLR 510(3), will be granted “only after there has been a detailed evidentiary showing that the convenience of nonparty witnesses would in fact be served by the granting of such relief.”  O’Brien v. Vassar Bros. Hosp. , 207 A.D.2d 169 (2 nd Dep’t 1995).  The O’Brien Court “review … the caselaw decided with reference to CPLR 510(3) and its antecedents that there is a general consensus among appellate courts as to the existence, if not as to the absolute rigidity and inexorability, of four criteria which should be established by the movant in order to demonstrate his or her entitlement to relief pursuant to CPLR 510(3).”  O’Brien , 207 A.D.2d at 172.  The O’Brien criteria are as follows: (1) “the affidavit in support of a motion under this section must contain the names, addresses and occupations of the prospective witnesses”; (2) “a party seeking a change of venue for the convenience of witnesses is also required to disclose the facts to which the proposed witnesses will testify at the trial, so that the court may judge whether the proposed evidence of the witnesses is necessary and material”; (3) “the moving party must show that the witnesses for whose convenience a change of venue is sought are in fact willing to testify”; and (4) “there must be a showing as to how the witnesses in question would in fact be inconvenienced in the event a change of venue were not granted.”   O’Brien , 207 A.D.2d at 172 – 73 (citations, internal quotation marks and ellipses omitted).   Where a proper showing is not made, courts will not hesitate to deny a motion.  Fitzsimons v. Brennan , 128 A.D.3d 634 , 636 (2 nd Dep’t 2015) (citations omitted) (“the defendants failed to offer sufficient proof of the addresses of , the facts to which the would testify, whether the would be willing to testify, and that the would be inconvenienced if venue was not changed.  The defendants also provided the names of fire and police officers and first responders, without providing the current addresses of those individuals, or the basic details which would be the subject of their anticipated testimony.”) Interestingly, a motion to change venue pursuant to CPLR 510(3) may be made by a plaintiff.  Article 5 of the CPLR contains provisions indicating where certain types of actions shall proceed.  For example, CPLR 507 provides that actions affecting title to real property “shall be in the county in which any part of the subject of the action is situated” and CPLR 504 provides the venue for “the place of trial of all actions against counties, cities, towns, villages, school districts and district corporations or any of their officers,  boards or departments.”  Accordingly, a plaintiff may be forced, in the first instance, to bring an action in a venue designated by Article 5 of CPLR.  However, plaintiff’s initial venue may be inconvenient for witnesses.  Such was the case in Xhika v. Rocky Point Union Free School Dist. , 125 A.D.3d 646 (2 nd Dep’t 2015), where plaintiff initially commenced the action in Suffolk County Supreme Court as required by CPLR 504 (because the defendant was a school district), but moved to change venue to Kings County.  The Xhika Court noted that “despite the seemingly unforgiving language of the statute, venue may be changed to a non-mandated county upon a showing of special circumstances.”  Xhika , 125 A.D.3d at 647 (citations and internal quotation marks omitted).)  Consistent with such a finding, the Xhika Court granted the motion to change venue and held that that plaintiff made the requisite showing that treating physicians and eyewitnesses would be inconvenienced if the trial took place in Suffolk County.  Xhika , 125 A.D.3d at 647.  Conversely, the defendant failed to “assert that any of its employees witnessed the accident” and “failed to establish that any of its trial witnesses would be inconvenienced by traveling to Kings County.”  Xhika , 125 A.D.3d at 647-48. It is important to note that the convenience of “the parties, their employees, and their experts is not relevant to determination of a change of venue under CPLR 510(3).”  Leake v. Constellation Brands, Inc. , 112 A.D.3d 792 (2 nd Dep’t 2013) (citations omitted); see also, Joseph v. Agnant , 262 A.D.2d 226 (1 st Dep’t 1999). On December 15, 2020, the First Department decided Manchanda Law Office PLLC v. Marin , in which plaintiff sought a de novo review of an attorney fee dispute arbitration.  In affirming the change of venue from New York County to Albany County, the Court noted that “ efendant supported the motion with affidavits from three witnesses based in Albany County, which showed that they are available and willing to testify on behalf of the movant, the nature of their testimony and the manner in which it is material to issues raised in the case, and the manner in which they would be inconvenienced if required to travel to New York County” and that in opposition, plaintiff failed to identify “factors that would justify retention of venue in New York County, such as by showing that any, let alone the preponderance of, the material nonparty witnesses to the fee dispute are located in there.” (Citation omitted.)

To plead a claim for fraud in the inducement or fraudulent concealment, a plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations. A sophisticated party, like the plaintiff in MBF Clearing Corp. v. JPMorgan Chase Bank, N.A. , 2020 N.Y. Slip Op. 07504 (1st Dept. Dec. 15, 2020) ( here ), must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). One way to do so is by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into the truth of the representation. ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015); DDJ , 15 N.Y.3d at 154 (holding that in contract negotiations between sophisticated parties, justifiable reliance element sufficiently alleged where plaintiff “has gone to the trouble” of insisting on warranties in the written agreement that certain facts were true). Thus, a sophisticated party cannot “argue justifiable reliance on defendants’ misrepresentation or omission where had the means available to ascertain the status of the ” at issue and did not avail itself of those means. ACA Fin. Guar. , 25 N.Y.3d at 1044; HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 194-195 (1st Dept. 2012). here=">here" and="and" >here,=">here," for="for" example.="example."> MBF Clearing involved a “self-styled ‘long-established and well-regarded’ commodities futures commission merchant” that claimed, among other things, the defendants fraudulently induced it to invest its customer segregated assets in defendant’s J.P. Morgan U.S. Government Money Market Fund (“USG Fund”).  In particular, plaintiff, MBF Clearing Corp. (“MBF”), alleged that the defendants, JPMorgan Chase Bank N.A (“JPMC Bank”), J.P. Morgan Investment Management Inc. and Kevin T. Murphy (“Murphy”), an employee of JPMC Bank, and a futures commission merchant, fraudulently induced MBF to invest its customer segregated assets by opening a new segregated customer account (“Account x2069”) and invest those assets in the USG Fund. It also alleged that defendants fraudulently changed the title of Account x2069 to remove “commodity customer segregated bank account” in violation of the Federal Commodity Exchange Act and rules and regulations of the United States Commodities Futures Trading Commission.  MBF filed its first complaint on September 16, 2014. Thereafter, MBF filed two more complaints, an amended complaint and a second amended complaint (“SAC”). In the SAC, MBF alleged claims for fraudulent inducement to invest in USG Fund and open Account x2069, fraudulent misrepresentation as to the USG Fund, fraudulent misrepresentation as to Account x2069, fraud in changing the name on Account x2069, fraudulent concealment as to Account x2069, negligent misrepresentation as the USG Fund, negligent misrepresentation as to Account x2069, aiding and abetting in fraud, deceptive conduct, and contribution and indemnity. On January 28, 2016, the motion court dismissed the SAC without prejudice. As to the fraud-based claims and negligence claims involving both Account x2069 and the USG Fund, the motion court dismissed them because MBF failed to allege justifiable reliance. The motion court found that the investment in the USG Fund ran afoul of applicable rules and that MBF did not do its due diligence in making the investment, noting that it simply relied on the documents sent in connection with opening the account (that is, “in terms of setting up the account and opening the account ... there an acknowledgement ... by ... the CFO as well as the principles of plaintiff saying they read all the prospectus related to that opening of the account”). On August 2, 2016, MBF filed a motion to amend the complaint and caption, which was denied by the motion court. MBF then filed a motion to reargue the motion court’s decision denying the amendment. The motion to reargue was granted and the Third Amended Complaint (“TAC”) was deemed served and the caption amended. The TAC omitted all claims as to the USG Fund and focused on Account x2069. As before, MBF alleged several fraud-based claims involving Account x2069, negligent misrepresentation claims involving Account x2069, aiding and abetting, and contribution and indemnity.  The motion court dismissed the TAC on law of the case grounds. “The ‘law of the case’ doctrine is a rule of practice which provides that once an issue is judicially determined, either directly or by implication, it is not to be reconsidered by Judges or courts of co-ordinate jurisdiction in the course of the same litigation.” Holloway v. Cha Cha Laundry, Inc. , 97 A.D.2d 385, 386 (1st Dept. 1983) (citations omitted). The motion court concluded that the claims brought in the TAC were virtually identical to those dismissed in the SAC.  MBF appealed.  The Appellate Division, First Department unanimously affirmed. After concluding that the motion court correctly dismissed the action under the law of the case doctrine, the Court, undertaking its own “sufficiency review” of the claims, determined that plaintiff failed to state a cause of action for which relief could be granted. Slip Op. at *1. With regard to the fraudulent inducement claims, the Court held that the claims “failed” because plaintiff did “not allege justifiable reliance on the alleged misrepresentations.” Id. (citing ACA Fin. Guar. , 25 N.Y.3d at 1045; HSH Nordbank AG , 95 A.D.3d at 194-195). The Court found that plaintiff was a sophisticated party that “could readily have determined for itself whether the representations were false by exercising reasonable due diligence.” Id. As a self-styled “long-established and well-regarded” commodities future commission merchant, required by the Commodities Futures Trading Commission (CFTC) to hold its customers’ assets in customer segregated accounts, plaintiff is presumably familiar with the requirements related to such accounts. Plaintiff could have made inquiries when defendants represented to it that there was no need for a “customer segregation acknowledgment letter” for Account x2069 because it would be linked to, and a sub-account of, plaintiff’s existing Account X0253 for which a segregation letter had been obtained. However, rather than take simple measures to ensure its compliance with CFTC regulations, plaintiff relied on the representations that the segregation letter for Account X0253 would cover Account X2069. Id. (citations omitted). Takeaway MBF Clearing is another example of a court dismissing a fraud claim because the plaintiff failed to avail himself/herself/itself of the means to discover the truth or falsity of the representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, the courts are clear that failing to conduct any investigation, as in MBF Clearing , into the veracity of a representation or omission when the aggrieved party has the ability to do so, suffices to dismiss a fraud claim. This is especially so when the plaintiff, like MBF, is a sophisticated party.  After all, the rationale for requiring sophisticated parties to “show they used due diligence and took affirmative steps to protect themselves from misrepresentations” ( VisionChina Media , 109 A.D.3d at 57) comports with the public policy behind the rule: it rids the courts “of cases in which the claim of reliance is likely to be hypocritical.” Ambac Assurance Corp. v. Countrywide Home Loans, Inc. , 31 N.Y.3d 569, 580 (2018). As Judge Read explained in her dissenting opinion in ACA Financial Guaranty : Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable is designed to make sure that the courts “reject[] the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection” and “may truly be said to have willingly assumed the business risk that the facts may not be as represented.” ACA Fin. Guar. , 25 N.Y.3d at 1051.

In New York, foreign entities – that is, corporations, limited liability companies and partnerships authorized to do business in another jurisdiction or country – are required to register to business with the Secretary of State. See BCL § 1312(a). The failure to receive such authority deprives the foreign entity of the ability to affirmatively access the courts of New York and subjects any action commenced by the foreign entity to dismissal. See United Envtl. Techniques, Inc. v. State Dep’t of Health , 88 N.Y.2d 824, 825 (1996) (finding that foreign corporation was not registered to do business in New York and therefore lacked capacity to sue). When applying BCL § 1312(a), the relevant inquiry is whether the foreign entity is “doing business” in the State. Whether a company is “doing business” in New York “depends upon the particular facts of each case with inquiry into the type of business activities being conducted.” Von Arx, A.G. v. Breitenstein , 52 A.D.2d 1049, 1050 (4th Dept. 1976). Notably, “not all business activity engaged in by a foreign corporation constitutes doing business in New York.” Netherlands Shipmortgage Corp. v. Madias , 717 F.2d 731, 735-36 (2d Cir. 1983). A foreign corporation is permitted to transact “some kinds of business within the state without procuring a certificate” authorizing it to conduct business in New York. Globaltex Group, Ltd. v. Trends Sportswear, Ltd. , No. 09-CV-235, 2009 WL 1270002, at *3 (E.D.N.Y. May 6, 2009) (quoting Int’l Fuel & Iron v. Donner Steel , 242 N.Y. 224, 229 (1926)).  In order for a foreign corporation to be doing business in New York within the context of BCL § 1312, “the intrastate activity of the foreign corporation be permanent, continuous, and regular.” Manney v. Intergroove Tontrager Vertriebs GMBH , No. 10 Civ. 4493, 2011 WL 6026507, at *8 (E.D.N.Y. Nov. 30, 2011) (quoting Netherlands Shipmortgage , 717 F.2d at 736) (alteration in original). The entity’s activities cannot be “merely casual or occasional.…” United Arab Shipping Co. (S.A.G.) v. Al-Hashim , 176 A.D.2d 569, 570 (1st Dept. 1991); see also Maro Leather Co. v Aerolineas Argentinas , 161 Misc. 2d 920, 923 (Sup. Ct., App. Term 1st Dept. 1994) (“where a corporation’s activities within New York are merely incidental to its business in interstate and international commerce, BCL § 1312(a) is not applicable.”); Schwarz Supply Source v. Redi Bag USA, LLC , 64 A.D.3d 696, 696-97 (2d Dept. 2009) (same); Paper Mfrs. Co. v. Ris Paper Co., Inc. , 86 Misc. 2d 95, 98 (Civ. Ct., N.Y. Cty. 1976) (noting that if a “foreign corporation is engaged in local business on more than an isolated or accidental basis, it must comply with the statute” and obtain authorization before bringing suit). New York courts consider a number of factors, both quantitative and qualitative, when considering the entity’s activity in the State. Netherlands Shipmortgage , 717 F.2d at 738. Among the factors the courts consider are: (a) whether the entity maintains a physical presence or has employees located within the State ( Uribe v. Merchants Bank of New York , 266 A.D.2d 21, 21 (1st Dept. 1999) (Plaintiff was not doing business where it maintained no office or telephone listing, owned no real property and had no employees in the State)); (b) the frequency and regularity of activities within the State ( G.P. Exports v. Tribeca Design , 147 A.D.3d 655, 656 (1st Dept. 2017) (a single business transaction within the State did not warrant the application of BCL § 1312(a)); and (c) the volume and nature of the activities within the State ( United Arab Shipping Company v. Al-Hashim , 176 A.D.2d 569 (1st Dept. 1991) (Plaintiff was doing business within the State where its New York office employed approximately 17 full-time employees, actively solicited business, conducted sales activities, negotiated and executed contracts, and generated substantial in-state revenue)).  Merely entering into a single contract, engaging in an isolated piece of business, or engaging in an occasional undertaking will not suffice to invoke application of BCL § 1312. Netherlands Shipmortgage , 717 F.2d at 738; Von Arx , 52 A.D.2d at 1049 (the shipment of goods into New York from a foreign country for further shipment within or without the state is considered incidental to interstate and international commerce); Airline Exch., Inc. v. Bag , 266 A.D.2d 414, 415 (2d Dept. 1999) (having a bank account, occasionally using an office in the State, and engaging in three transactions in the State, did not support a finding that the business activity was so systematic and regular and essential to its corporate activities as to constitute doing business in New York); 8430985 Canada Inc. v. United Realty Advisors LP , 148 A.D.3d 428 (1st Dept. 2017) (an investment vehicle not subject to the registration requirements of BCL § 1312(a)). Similarly, “the solicitation of business and facilitation of the sale and delivery of merchandise incidental to business in interstate and/or international commerce is typically not the type of activity that constitutes doing business in the state within the contemplation of section 1312 (a).” Digital Ctr., S.L. v. Apple Indus., Inc. , 94 A.D.3d 571, 572 (1st Dept. 2012) (citation omitted). However, regularly and continuously entering the State to solicit, complete and manage sales to customers in New York may constitute doing business in the State. Highfill, Inc. v. Bruce & Iris, Inc. , 50 A.D.3d 742, 744 (2d Dept. 2008) (corporation was doing business where its regional vice president regularly sent employees to New York to manage “special sales,” and made approximately $6,600,000 in New York sales over several years). The party seeking dismissal under BCL § 1312(a) must show that the business activities within the State were so systematic and regular as to manifest continuity of activity. Maro Leather , 161 Misc. 2d at 923). Absent sufficient evidence to establish that a plaintiff is doing business in the State, “the presumption is that the plaintiff is doing business in its State of incorporation … and not in New York.” Cadle Co. v. Hoffman , 237 A.D.2d 555 (2d Dept. 1997); see also Highfill , 50 A.D.3d at 744.  “ hether was doing business in New York” is determined by looking “at the time the action was commenced.” Remsen Partners, Ltd. v. Southern Mgmt. Corp. , No. 01 Civ. 4427, 2004 WL 2210254, at *3 (S.D.N.Y. 2004) (citation and internal quotation marks omitted) (alteration in original). Finally, if the foreign business entity is found to have been continuously and regularly conducting business in the State, the courts often refrain from dismissing the action. Tri-Term. Corp. v. CITC Indus., Inc. , 78 A.D.2d 609 (1st Dept. 1980). Instead, the courts conditionally grant the dismissal motion and provide the plaintiff with a reasonable time period to cure its deficiency under BCL § 1320. E.g. , Showcase Limousine, Inc. v. Carey , 269 A.D.2d 133, 134 (1st Dept. 2000), mod in part , 273 A.D.2d 20 (1st Dept. 2000); Uribe , 266 A.D.2d at 22 (noting that the failure of the plaintiff to register with the State may be cured prior to the resolution of the action); Credit Suisse Int’l v. URBI, Desarrollos Urbanos, S.A.B. de C.V. , 41 Misc. 3d 601, 604 (Sup. Ct., N.Y. County 2013) (ordering plaintiff to comply with BCL § 1312 within 60 days or face dismissal of its complaint). On November 25, 2020, Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Diviion issued a decision in Excelsia Leatheware Co. v. Horowitz , 2020 N.Y. Slip Op. 34048(U) (Sup. Ct., N.Y. County Nov. 25, 2020) ( here ), in which the Court denied a motion to dismiss under BCL § 1312(a) on the grounds that plaintiff was not doing business in New York, even though it had “maintained a systematic and continuous business relationship with in New York”. Once the Court determined that the action could go forward under BCL § 1312(a), the Court denied the branch of the motion seeking dismissal of Plaintiff’s fraud claim.  Excelsia Leatheware Co. v. Horowitz Background Excelsia arose out of Defendants’ alleged conduct in inducing Plaintiff, Excelsia Leatherware Company (“Excelsia”), a leather goods producer based in Hong Kong, China, to produce and ship goods to Defendants (Kenneth Horowitz and Bag Studio, LLC) for resale without paying for the goods. On December 20, 2016, Excelsia exported goods valued at $42,479 to Bag Studio, which Bag Studio paid for on or about February 18, 2017. Thereafter, Excelsia continued to manufacture and ship goods to Bag Studio, which promptly paid for the goods within 60 days until February 2018, when it stopped paying for goods that were shipped by Excelsia.  By November 30, 2018, Defendants owed Excelsia at least $2,761,213.55 for goods shipped by Excelsia between November 2017 and November 2018.  According to Plaintiff, to induce it to continue providing goods to Bag Studio, Defendants promised to make payment. As a result of such statements, including that they had the ability and willingness and to make the payments that were past due, Plaintiff shipped additional goods that had been manufactured to Bag Studio’s specifications. However, alleged Plaintiff, Defendants repeatedly failed to keep their word, failing to pay as promised. In addition, Plaintiff alleged that Horowitz demanded that Excelsia pay a 6% administrative fee to pay for Bag Studio’s Chinese operations. That fee, however, was, according to Plaintiff, a kickback that was designed to enrich Horowitz and defraud Excelsia. Plaintiff claimed that Horowitz hid the kickback from other Bag Studio affiliated individuals, provided receipts for the kickback, and asked Excelsia to conceal the scheme.  On June 5, 2019, Plaintiff filed the complaint. Excelsia alleged (1) fraud in the inducement, (2) fraud (against Horowitz), (3) conversion, (4) account stated, (5) breach of contract, (6) unjust enrichment and (7) prima facie tort.  Defendants moved to dismiss. Relevant to this article, Defendants sought dismissal of the complaint in its entirety because Excelsia was not authorized to conduct business in New York pursuant to BCL § 1312(a) and, specifically, the fraud claim because Excelsia failed to plead certain elements of the claim with particularity. The Court denied the motion. The Court’s Decision The Court found that although “Defendants have shown that Excelsia ha maintained a systematic and continuous business relationship with them in New York since 2016,” Defendants failed to show that their “business relationship was anything more than merely facilitating the sale and delivery of Excelsia’s merchandise into New York.” Slip Op. at *3. The Court explained that the entities with which Excelsia was alleged to have done business along with Bag Studio ( e.g. , Nine West Company LLC, Mackage Soho, and Camuto Group LLC) were “Delaware entities with offices in New York.” Id. When Excelsia did business with them, they merely acted as a conduit of the merchandise. Id. (“ laintiff only had title to the merchandise until the merchandise arrived in Shenzen, China. At that point, title would pass to Bag Studio, and Bag Studio “would thereafter be responsible for risk of loss and transportation from there to the U.S.” under NY UCC 2-401) (citation to record omitted). “Accordingly,” concluded the Court, “Defendants’ claim that plaintiff is unauthorized to maintain this action in New York fails.” Id. The Court also held that Plaintiff stated a claim for fraud. Defendants argued that both fraud claims lacked particularity as required under CPLR § 30l6(b) and did not meet the standard for alleging scienter and damages. They also claimed that the fraud claim against Horowitz should fail because the claim was pleaded “upon information and belief” and because Plaintiff lacked actual knowledge of the allegations.  The Court found that Plaintiff satisfied the falsity and reliance elements of the fraud claim against Horowitz.  Here, plaintiff asserts the 6% kickback scheme as a misrepresentation known to be false by defendant Horowitz. Plaintiff alleges Horowitz intentionally created the scheme to induce plaintiff to rely upon it and unnecessarily pay money to him. Plaintiff alleges it relied on this misrepresentation and paid him money.  Id. at *5 (citations to the record omitted). The Court also held that Plaintiff pleaded scienter with the requisite particularity, thereby rejecting Defendants’ contention that Plaintiff failed to satisfy this element because it was based “upon information and belief”: The complaint plainly states “Horowitz’s actions were wanton, willful, and malicious,” and that there was no “legitimate or business purpose for the kickbacks.” The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme. These claims do not contradict plaintiff’s allegations that it was defrauded out of money. The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.  Id. (citations to the record omitted).  Takeaway Motions to dismiss on BCL § 1312(a) grounds are fact intensive. As Excelsia shows, courts will examine the facts and circumstances to determine whether the business activities of a foreign business entity in New York are “systematic and regular,” intrastate in nature, and essential to the plaintiff’s business. A finding that the entity’s business activities are not essential to intrastate or interstate commerce, even if the entity is “doing business” in New York, as in Excelsia , can save the case from dismissal under BCL § 1312(a). Excelsia also highlights that not all allegations on information and belief will spell the end of a fraud claim. As we have note in prior articles, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009). Allegations based on information and belief generally do not suffice. See Facebook, Inc. v. DLA Piper LLP (US) , 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”). The reason, without stating the basis for the information and belief, the court has no factual basis upon which to consider the allegations of fraud. Thus, where the belief is based on factual information that makes the inference of culpability plausible, or where the facts are peculiarly within the possession and control of the defendant, a complaint will withstand a motion to dismiss. Pludeman v. Northern Leasing, Sys., Inc. , 10 N.Y.3d 486, 491-92 (2008) (internal quotation marks and citations omitted).  In Excelsia , Plaintiff alleged that it used the phrase “upon information and belief” only as to whether Horowitz actually sent the kickback fees to Bag Studio, which only Defendants would know. Slip Op. at *4. Plaintiff further argued that it was “able to detail every other aspect of the kickback scheme, including how Horowitz requested that plaintiff keep the kickback scheme secret from Bag Studio.” Id. at *5. Such allegations, held the Court, satisfied both of the foregoing prongs of pleading on information and belief. Id. (“The parts of this fraud claim that are based on information and belief are that the kickback fee did not go to Bag Studio, that it was not needed by Bag Studio, and the purposes of the scheme.… The whereabouts of the kickback fee after payment can be considered information solely in defendants’ possession.”)

The New York Court of Appeals has described as “familiar and eminently sensible,” the proposition of law “that, when parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms.”  159 MP Corp. v. Redbridge Bedford, LLC , 33 N.Y.3d 353, 358 (2019) (citation, internal quotation marks and ellipses omitted).  The same Court has also explained the particular importance of such a rule in the context of real property transactions “‘where commercial certainty is a paramount concern and where … the instrument was negotiated between sophisticated counseled business people negotiating at arms length.’”  159 MP , 33 N.Y.3d at 359 (quoting Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470, 475 (2004).) Another established principle of contract interpretation is that whenever possible, “a contract should be interpreted to avoid inconsistencies and to give meaning to all of its provisions, giving a practical and reasonable interpretation to the language employed and the parties’ reasonable expectations with respect thereto.”  Zullo v. Varley , 57 A.D.3d 356 (2 nd Dep’t 2008) (citations and internal quotation marks omitted).  “Therefore, a court should not adopt an interpretation which would leave any provision without force and effect.”  Zullo , 57 A.D.3d at 357 (citation and internal quotation marks omitted). On December 9, 2020, the Appellate Division, Second Department, decided 1710 Realty, LLC v. Portabella 308 Utica, LLC , and addressed the above described principles.  The plaintiff in 1710 was a landlord that, on December 16, 2015, entered into a commercial lease with defendant Portabella, as tenant.  In explaining the relevant portions of the lease, the 1710 Court stated: Section 13.1 of the lease, titled “Landlord’s Work,” provides that the plaintiff “agrees to deliver to the Demised Premises on the Commencement Date as is,” while section 1.2 of the lease, titled “Term,” provides that the lease term shall commence on the Commencement Date. Section 2.1 of the lease, titled “Commencement of the Term,” provides: “The ‘Commencement Date’ shall mean the date which is the later to occur of the date that (i) Tenant is delivered occupancy of the Demised Premises in the Delivery Condition (hereinafter defined), (ii) Tenant has been issued permits from the Department of Buildings of New York City in connection with Tenant’s Work and (iii) January 15, 201<6> . If the Demised Premises is not delivered within 90 days of the date of this Lease, then Tenant shall have the right to terminate the Lease. The payment of Rent, including without limitation, Fixed Rent (as hereafter defined) and Additional Rent (as hereinafter defined), shall commence on the date which is two hundred and seventy days after the Commencement Date (‘Rent Commencement Date’). For purposes herein, the Delivery Condition shall mean vacant, broom clean and free of the prior tenants<’> personal property and fixtures.” The lease contains a merger clause. 1710 Realty commenced the action after tenant, Portabella, exercised “its right of termination pursuant to section 2.1 on the ground that the plaintiff had not delivered the premises in the Delivery Condition within 90 days of the date of the lease.”  Tenant moved for summary judgment arguing that the premises were “not made broom-clean within 90 days of the date of the lease” as a considerable amount of trash and debris remained from the prior tenant.  Landlord opposed the motion and cross-moved for summary judgment and: acknowledged that a portion of the premises was not broom-clean but categorized that portion as “de minimus.” asserted that, pursuant to section 13.1 of the lease, it agreed only to deliver the premises “as is” and that the parties did not intend the premises to be broom-clean because Portabella was to undertake demolition and renovation work provided for in the lease. Supreme court denied tenant’s motion and granted summary judgment to landlord, reasoning that the provision in section 2.1 requiring the plaintiff to deliver the premises broom-clean was modified by the provision in section 13.1 that the premises were to be delivered “‘as is.’” The Second Department modified and, in so doing, recognized that “courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Hence, courts may not by construction add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing.  In the absence of any ambiguity, we look solely to the language used by the parties to discern the contract’s meaning.”  (Citations and internal quotation marks omitted.)  Further, the Court reiterated that “ here two seemingly conflicting contract provisions reasonably can be reconciled, a court is required to do so and to give both effect.”  (Citations omitted, emphasis in original.) The Court disagreed with the landlord’s argument and supreme court’s determination that the “as is” provision in the lease “modified and effectively eliminated, the ‘broom clean’ requirement set forth in section 2.1.”  The Court found that such an interpretation “renders the Delivery Condition provision meaningless or without force or effect by excising the requirement that the plaintiff deliver possession vacant, broom-clean, and with the prior tenant’s property removed before Portabella’s obligation to pay rent begins to run.”  (Citations omitted.)  In resolving the “two seemingly contradictory positions” and giving effect to both, the Court stated: The Delivery Condition operated as a condition precedent to the triggering of the Commencement Date. Until the Commencement Date, as defined in the subject lease, occurred, by the plain terms of section 2.1, the lease term did not commence, and Portabella’s obligation to pay rent did not begin. In order to trigger the happening of the Commencement Date, the plaintiff had to meet the specific requirements of the Delivery Condition by delivering the premises vacant, broom-clean, and free of the prior tenant’s property and fixtures. Section 13.1 is not to the contrary since it required that the premises be delivered on the Commencement Date “as is” and the Commencement Date would not arrive unless the premises were vacant, broom-clean, and free of the property of the prior tenant. Stated differently, the fallacy in the plaintiff’s position is that the “as is” condition referred to in section 13.1 is the condition of the premises on the Commencement Date, not the condition of the premises on the date of the lease. Additionally, we attach significance to the fact that section 13.1, a one-sentence paragraph, is immediately followed by section 13.2, which sets forth in some detail demolition and renovation work to be undertaken by Portabella. The term “as is” as used in section 13.1 can be given its full and intended effect by reading it, together with sections 2.1 and 13.2, as setting forth the parties’ agreement that the premises would be rendered vacant and broom-clean by the plaintiff on the Commencement Date, would be delivered “as is” on that date to Portabella, and it would be Portabella, not the plaintiff, that would be responsible for any further work required for Portabella to be able to utilize the premises as intended. Because tenant validly terminated the lease due to landlord’s failure to deliver the premises in vacant and broom-clean condition within 90 days of the lease signing, tenant was entitled to summary judgment and the return of its security deposit and the first month’s rent, with interest.

It goes without saying that the spread of the coronavirus is accelerating across the country. As noted in the lead paragraph of an article posted in yesterday’s online version of the Washington Post, titled “U.S. Surpasses 15 million Coronavirus Cases as Spread Accelerates” ( here ):  It took about 100 days for the United States to record its first 1 million coronavirus cases, and 44 more passed before the country topped 2 million. But now, in the middle of the most severe surge yet, it has taken just five days to record one million infections, and on Tuesday, the country surpassed 15 million, more than anywhere else in the world by a wide margin.  Although a vaccine is on the horizon, experts expect the virus will continue to rage during the next couple of months. In New York, COVID-19 deaths have started to climb along with an increase in hospitalizations. More than 4,800 COVID-19 patients have been hospitalized across the state, double the reported number on November 18, 2020, and the highest number of hospitalizations since May 22, 2020. As reported in the downstate news media, the growth in hospitalizations, while not yet at a critical level, “is worrisome” ( here ). Governor Cuomo has warned that shutdowns in a given region will occur if hospitals in that region reach 90 percent capacity in the next three weeks. No region is presently close to that point, though Long Island and New York City are the nearest, with data showing only 18 percent and 19 percent of hospital beds available in those regions. Governor Cuomo wants at least 30 percent free. With the foregoing in mind, on December 7, 2020, Chief Judge DiFiore advised that effective immediately, the court system was “implementing a number of steps to reduce in-court operations and limit the number of people trafficking through courthouses” to help “prevent the spread of the virus.” ( Here .) Starting on December 7th, and continuing “until further notice,” the court system was reducing its “in-person staffing … to 40% or less in courts outside New York City, and to 30% or less in courts within the City.” Importantly, the court system would be “sharply limiting the number of in-person matters allow to proceed in courts.” Chief Judge DiFiore said that “ onessential personal appearances in civil courts being temporarily suspended, and only a small number of in-person essential and emergency matters be heard in criminal, family, and housing court.” “By eliminating nonessential in-person appearances and encouraging virtual appearances whenever possible,” Chief Judge DiFiore explained, “we will be able to dramatically reduce the number of people coming into our buildings and thereby curtail the person-to-person contact that allows this horrific virus to spread.” Chief Judge DiFiore noted that the court system’s “Administrative Judges and court managers implementing these steps within a statewide framework and an established set of protocols.…” She further noted that the protocols would provide the Administrative Judges with the discretion “to make operational decisions that are tailored to the specific needs of their courts and the public health conditions demanding action in their localities.” here.=">here." These="These" become="become" effective="effective" today="today" and="and" will="will" apply="apply" to="to" all="all" court="court" operations="operations" in="in" the="the" Tenth="Tenth" Judicial="Judicial" District—Nassau="District—Nassau" County.="County."> Chief Judge DiFiore said the court system was encouraging virtual appearances whenever possible and would “continue to focus on improving and expanding virtual capacity, especially in the Family Court, where jurists and staff are already handling hundreds of matters remotely each day, including urgent filings involving child abuse and neglect, delinquency, support, custody, visitation and guardianship cases.” She noted that the court system had “distributed hundreds of laptops and other remote technology statewide, and upgrading and improving the virtual court process by, for example, installing voice recognition software to streamline the efficiency and improve the accuracy of virtual proceedings.”  “Like the Family Court, our New York City Civil Court is also making outstanding use of remote technology to conduct its business,” said Chief Judge DiFiore. She highlighted the “dozens of virtual bench trials and settling large numbers of cases each week” in that court. As a result, “the pending inventory, especially in automobile no-fault cases where medical providers seek to recover damages from insurance providers for medical services rendered to their insureds” was favorably impacted. “Because the amounts in dispute are under $25,000 and witness testimony is limited, no-fault cases are especially well-suited for virtual resolution,” observed Chief Judge DiFiore. The appellate courts have gone virtual until further notice.  In the Appellate Division, First Department, the Court said that it will hold all oral arguments remotely via Microsoft Teams. No in-person oral arguments will be conducted ( here ).  In the Second Department, oral arguments are presumed to be conducted virtually, although parties can request in-person argument, though any such request must be accompanied by an explanation as to why argument cannot be heard virtually ( here ).  In the Third Department, the Court will be hearing oral arguments by videoconference ( here ).  In the Fourth Department, oral argument in all matters in which argument had been requested for the Court’s November/December term, commencing November 30 and concluding December 10, will be held remotely via the Court’s remote argument platform ( here ). This Blog will continue to update our readers on the latest COVID-19 developments affecting the New York court system.

In prior articles, we have examined enforcement actions (and settlements thereof) brought by the Securities and Exchange Commission (“SEC” or “Commission”) involving false statements about the subject companies and COVID-19. (E.g., here.) Those actions involved micro-cap companies and the products they claimed to offer to address the pandemic. As we noted in those articles, there was a common thread between the actions – they involved pump and dump schemes in which the company falsely claimed that its products or services could prevent, detect or cure the coronavirus. In today’s article, we examine a COVID-19 related enforcement action against The Cheesecake Factory Incorporated, a Delaware corporation based in Calabasas Hills, California, that operates restaurants across the United States and internationally through licensees. The action represents the first time the SEC has charged a large public company for misleading investors about the financial effects of the pandemic. On December 4, 2020, the SEC announced (here) that it settled charges against The Cheesecake Factory for making false and misleading statements about the impact of the COVID-19 pandemic on its business operations and financial condition in press releases attached to Forms 8-K that were filed with the SEC on March 23 and April 3, 2020, respectively. According to the Cease and Desist Order (the “Order”) (here), in mid-March 2020, The Cheesecake Factory faced an unprecedented challenge to its business and operations arising from the impact of the COVID-19 pandemic. The company issued several disclosures regarding the effect of, and its response to, the pandemic. As described in the Order, certain of those disclosures failed to inform investors of the extent of the pandemic’s impact on the company’s operations and financial condition in the period of late-March through mid-April 2020, when the company obtained additional financing. As explained in the Order, the company began taking steps to conserve cash and increase liquidity in the near-term. Among other things, on March 18, 2020, the company sent a letter to its landlords saying that it would not be paying April rent due to the “severe decrease in restaurant traffic ha severely decreased our cash flow and inflicted a tremendous financial blow to our business,” noting that it “hope to resume our rent payments as soon as reasonably possible.” In addition, on March 23, 2020, the company drew down the last $90 million on a revolving line of credit. As of the start of the second quarter on April 1, 2020, the company had approximately $65 million of cash and cash equivalents. By at least March 23, 2020, said the SEC, the company was actively seeking additional liquidity through either the incurrence of debt through lenders or the issuance of equity to private equity investors with the goal of raising at least $100 million. In presentations shared with lenders and potential private equity investors, noted the SEC, The Cheesecake Factory disclosed its cash position and projected that the company had cash to support approximately 16 weeks of operations under the prevailing circumstances. According to the SEC, internal documents showed that the company was experiencing a negative cash flow rate of $6 million per week. On March 23, 2020, The Cheesecake Factory filed a Form 8-K with the Commission disclosing, among other things, that it was withdrawing previously issued financial guidance due to economic conditions caused by COVID-19. The Cheesecake Factory attached, as an exhibit to the Form 8-K, a copy of a press release also dated March 23, 2020, in which it provided a business update regarding the impact of COVID-19. According to the press release, The Cheesecake Factory announced that it was transitioning to an “off-premise model” (i.e., to-go and delivery) that was “enabling the Company’s restaurants to operate sustainably at present under this current model.” The company also disclosed the $90 million draw down on its revolving credit facility, that it had curtailed planned unit growth, and that it was “evaluating additional measures to further preserve financial flexibility.” The SEC claimed that the March 23, 2020 Form 8-K and the attached press release did not disclose the landlord letters or the company’s negative cash flow rate. Two days later, on March 25, 2020, the media reported that The Cheesecake Factory had sent a letter to each of its restaurants’ landlords on March 18 stating that it was not going to pay its rent for April 2020, and included a copy of one of the landlord letters. On March 27, 2020, following media reports of the landlord letter, The Cheesecake Factory provided information in another Form 8-K, disclosing that it was not planning to pay rent in April and that “it was in various stages of discussions with its landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of COVID-19 related closure.” The company also disclosed that effective April 1, 2020, it had reduced compensation for executive officers, its Board of Directors, and certain employees. In addition, the company announced that it had furloughed approximately 41,000 employees but allowed them to retain their benefits and insurance until June and provided them with a daily complimentary meal from their restaurant. On April 3, 2020, The Cheesecake Factory filed a Form 8-K with the Commission that attached a copy of an April 2, 2020 press release as an exhibit. The April 2 press release provided a preliminary first quarter 2020 sales update given the impact of COVID-19. Among other things, The Cheesecake Factory disclosed that “the restaurants are operating sustainably at present under this model.” The SEC alleged that The Cheesecake Factory’s disclosures on March 23 and April 3 regarding the sustainability of its restaurant operations did not disclose that the company was excluding expenses attributable to corporate operations from its claim of sustainability; that the company was, in fact, losing approximately $6 million in cash per week; and that it had only approximately 16 weeks of cash remaining, even after the $90 million revolving credit facility borrowing. In addition, claimed the SEC, The Cheesecake Factory’s March 23, 2020 disclosure that it was “evaluating additional measures to further preserve financial flexibility” did not disclose the March 18, 2020 landlord letters stating that the company would not pay April rent. Based on the foregoing, the SEC claimed that The Cheesecake Factory’s March 23 and April 3, 2020 Forms 8-K were materially false and misleading. On April 20, 2020, The Cheesecake Factory announced that it received a $200 million investment from Roark Capital, a private equity firm, thereby enhancing the company’s liquidity position. “During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of COVID-19 on their operations and financial condition,” said SEC Chairman Jay Clayton. “As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.” “When public companies describe for investors the impact of COVID-19 on their business, they must speak accurately,” said Stephanie Avakian, Director of the Division of Enforcement. “The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations.” In the Order, the SEC found that The Cheesecake Factory violated reporting provisions of the federal securities laws. Without admitting the findings in the Order, The Cheesecake Factory agreed to pay a $125,000 penalty and to cease-and-desist from further violations of the charged provisions. The company cooperated in the SEC’s investigation – a factor that the Commission considered in determining to accept the settlement. On Friday, December 4, 2020, the price of the company’s shares fell 2% to $38.62 per share.

“A cause of action for fraud does not arise when the only fraud charged relates to a breach of contract.” Krantz v. Chateau Stores of Can. Ltd. , 256 A.D.2d 186, 187 (1st Dept. 1998) (citations omitted).  “To plead a viable cause of action for fraud arising out of a contractual relationship, the plaintiff must allege a breach of duty which is collateral or extraneous to the contract between the parties.” Id. (citations and quotation marks omitted). One way to satisfy this requirement is to allege a present intent to deceive. In doing so, however, the plaintiff cannot allege “a mere misrepresentation of an intention to perform under the contract.” WIT Holding Corp. v. Klein , 282 A.D.2d 527, 528 (2d Dept. 2001) (citation omitted); see also Gorman v. Fowkes , 97 A.D.3d 726, 727 (2d Dept. 2012). Another way to satisfy the requirement is to allege a misrepresentation of material fact, which is collateral to the contract ( id. at 528 (citation omitted)), such as a misrepresentation about the ability to perform under the contract.  In today’s article, we examine Shear Enters., LLC v. Cohen , 2020 N.Y. Slip Op. 07149 (1st Dept. Dec. 1, 2020) ( here ), a case in which the plaintiff avoided the duplication of claims doctrine by alleging a misrepresentation about the ability to perform under the contract.  Shear arose from commercial transactions between plaintiff, Shear Enters., LLC, and defendant, Tres Joli Accessories, Ltd. (“TJ”). For over ten years, plaintiff and TJ did business together whereby TJ manufactured apparel for plaintiff and shipped it to plaintiff’s customers. During this period of time, the parties developed a credit line pursuant to which TJ manufactured and sold apparel to Plaintiff.  In February 2018, plaintiff placed two orders with TJ to manufacture apparel that was ordered by one of plaintiff’s customers (the “Orders”). Among other things, plaintiff told defendants the date by which the Orders had to be shipped to the customer. If the Orders were not shipped by that date, then the customer could cancel the Orders. Defendants allegedly represented that TJ had the ability to timely fill and ship the Orders as requested and that a cash down payment was necessary to secure plaintiff’s payment for the Orders. Defendants also allegedly represented that TJ was financially sound and had the ability to timely fill and ship the Orders.  Plaintiff alleged that the foregoing representations were false and made with the intent of inducing plaintiff to place the Orders – orders that defendants allegedly knew TJ would not fill – and make the down payment – a payment that they allegedly never intended to earn or return. According to plaintiff, TJ did not, for various reasons, timely fill and ship the Orders. As a result, plaintiff’s customer cancelled the Orders. Defendants did not return the down payment, saying that they would re-pay it by crediting it against future orders until the down payment was returned in full. Defendants allegedly reassured plaintiff that TJ was not in financial trouble and had the financial ability to timely ship additional orders and return the down payment. Thereafter, Plaintiff placed additional orders with TJ (the “Additional Orders”). After Plaintiff placed the Additional Orders, defendants allegedly told plaintiff that an additional payment of $110,000 was required for TJ to continue working on the Additional Orders. Among other things, defendants allegedly represented that (1) TJ had the ability to timely fill and ship further orders, (2) they were in the process of working on the Additional Orders, and (3) the Additional Orders were on schedule to be timely produced and shipped. Plaintiff claimed that it made the additional payment in reliance on defendants’ alleged false representations.  Defendants moved to dismiss, arguing, inter alia , that plaintiff’s fraud cause of action duplicated its contract cause of action. The motion court agreed. On appeal, the Appellate Division, First Department reversed. The Court held that the motion “court should not have dismissed the cause of action for fraud as duplicative of the cause of action for breach of contract.” Slip Op. at *2. The Court explained that the “gravamen of the allegations supporting the claim not, as in Cronos Group, Ltd. v XComIP, LLC (156 AD3d 54, 62 <1st dept 2017> ), that defendants ‘made a promise while harboring the concealed intent not to perform it.’” Slip Op. at * 2. “Rather,” said the Court, “plaintiff assert that defendants misrepresented their very ‘ability to perform,’ an allegation that support a non-duplicative fraudulent inducement claim.” Id. (citing Man Advisors, Inc. v. Selkoe , 174 A.D.3d 435, 435 (1st Dept. 2019)). The Court also rejected defendants’ argument that the fraud claim was duplicative because “the damages the same under either theory.” Id. The Court reasoned that “given this early procedural stage of the action, plaintiff should be permitted to plead the cause of action in the alternative pursuant to CPLR 3014.” Id. (citation omitted).  Takeaway We have noted in the past that New York courts do not allow a fraud claim to survive a motion to dismiss when the claim arises from an alleged breach of contract or failure to perform an obligation under the contract. Indeed, the New York Court of Appeals has made it clear that a fraud claim should be dismissed where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud claim can stand side-by-side with “a simple breach of contract” claim. Dormitory Auth. v. Samson Constr. Co. , 30 N.Y.3d 704 (2018) (citation omitted). Shear provides an example of the type of misrepresentation that courts consider to be collateral to the performance obligations under a contract.  Since courts routinely dismiss fraud claims as being duplicative of contract claims ( e.g. , Clark Constr. Corp. v. BLF Realty Holding Co. , 28 A.D.3d 367, 368-369 (1st Dept. 2006)), Shear is noteworthy because of the Court’s invocation of CPLR § 3014, which permits “ auses of action or defenses be stated alternatively or hypothetically.” While it may be due to the circumstances of the case ( see Slip Op. at *2 (“ e hold that, under the circumstances,…”)), the decision not to dismiss even though the relief sought was duplicative remains an interesting result.

In Trustees of Columbia Univ. in the City of N.Y. v. D’Agostino Supermarkets, Inc. , 2020 N.Y. Slip Op. 06937 (Nov. 24, 2020) ( here ), the New York Court of Appeals was asked to “consider the propriety of a liquidated damages provision in a Surrender Agreement between two New York City icons: Columbia University, one of the City’s premier universities, and D’Agostino Supermarkets, a family-owned food market chain founded in 1932.” Slip Op. at *1. D’Agostino had leased property that was owned by Columbia University. The supermarket chain breached the lease by failing to pay rent for more than seven months. Rather than litigate, the parties settled the matter by entering into a Surrender Agreement. Under the agreement, if D’Agostino made timely installment payments, totaling about $262,000, representing the rent it already owed but had failed to pay, it would be relieved of certain other obligations stemming from its breach of the lease. However, if it failed to timely make the payments, D’Agostino would not “be released and relieved from” the claims Columbia agreed to release and would have to pay liquidated damages in “the aggregate amount of all Fixed Rent, additional rent or other sums and charges due” during the remainder of the lease term (about two years). Defendant failed to timely pay the first four monthly surrender payments, despite plaintiff’s notice to cure. In November 2016, plaintiff commenced the underlying action to enforce the liquidated damages provision in the Surrender Agreement. After defendant answered, plaintiff moved for summary judgment seeking future payments under the terminated lease, i.e. , $1,020,125.15, plus interest and other taxes and costs provided for under the lease. Plaintiff rejected defendant’s December 2020 tender of $175,751.73, which represented overdue and early payments of the remaining surrender installments. Defendant cross-moved for summary judgment striking the damages provision and seeking entry of judgment against itself for $175,751.73—the outstanding amount due under the Surrender Agreement—along with accrued interest as of October 14, 2016, or, in the alternative, denying plaintiff’s motion and ordering discovery on the issue of damages and mitigation based on the new lease. The trial court denied plaintiff’s motion for summary judgment and granted defendant’s cross-motion for summary judgment for the requested amount and interest. The Appellate Division, First Department affirmed (168 A.D.3d 594 (1st Dept. 2019)). The Court granted plaintiff leave to appeal (33 N.Y.3d 904 (2019), and in a 4-3 decision written by Judge Rivera affirmed the Appellate Division’s decision. A significant issue in the action was whether the damages provision should be “measured against defendant’s breach of the Surrender Agreement” or, “against the breach of the terminated lease.” Slip Op. at *3. The majority viewed the matter under the prism of the former, while the dissent viewed the dispute under the latter. Viewed as a breach of the Surrender Agreement, the Court concluded that the liquidated damages provision was “an unenforceable penalty because it plainly disproportionate to the damages for the only contractual breach at issue in th appeal, i.e. , overdue payment of the monthly surrender installments.” Id. Liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement.” Truck Rent-A-Ctr. v. Puritan Farms 2nd , 41 N.Y.2d 420, 424 (1977). “A liquidated damage provision has its basis in the principle of just compensation for loss. Id. (citing Restatement of Contracts § 339, and Comment thereon). “Liquidated damages that constitute a penalty, however, violate public policy, and are unenforceable. A provision which requires damages ‘grossly disproportionate to the amount of actual damages provides for penalty and is unenforceable.’” 172 Van Duzer Realty Corp. v. Globe Alumni Student Assistance Assn., Inc. , 24 N.Y.3d 528, 536 (2014) (citation omitted) (quoting Truck Rent-A-Ctr. , 41 N.Y.2d at 424). here=">here" and="and" >here.=">here."> The party seeking to avoid payment of liquidated damages has the burden of establishing that the damages for a breach are disproportionate to the foreseeable losses and “in fact, a penalty”. JMD Holding Corp. v. Congress Fin. Corp. , 4 N.Y.3d 373, 380 (2005). The Court held that defendant met this burden. The Court observed that the “damages provision effectively reinstated defendant’s future rent liabilities under the terminated lease, to the tune of $1,020,125.15, plus interest and other prospective taxes and costs due under the lease, even though those damages did not flow from a breach of the Surrender Agreement.” Slip Op. at *4. “Those damages,” said the Court, “were 7½ times what plaintiff would have received, if defendant had fully complied with the Surrender Agreement.” To permit plaintiff to recover that amount, reasoned the Court, would be tantamount to the enforcement of “a non-existent lease under the guise of damages for a breach of a separate contract.” Id. (footnote omitted). To be clear, when the lease was in effect, plaintiff could have exercised its rights as the landowner and proceeded against defendant for violating the leasehold terms. Instead, plaintiff negotiated with defendant to terminate the lease in exchange for a set amount of money and surrender of the premises. That contract freed plaintiff from its lessor obligations. Critically, contrary to the dissent’s assertion that plaintiff “received nothing in exchange” (dissenting op at 5), it allowed plaintiff to immediately reenter and relet the premises without the need for litigation, which is exactly what it did. When defendant breached the Surrender Agreement, plaintiff was entitled to proceed under that contract and demand damages for the breach, including the amount past due and acceleration of the remaining installment payments.  Id. (citations omitted). However, said the Court, “plaintiff could not seek a payment grossly disproportionate to the amount past due plus interest.” Id. The Court concluded that “ y any measure the more than one million dollars plus interest demanded here is disproportionate to the $175,751.73 unpaid under the Surrender Agreement.” Id. (citations omitted). The Court posed “ simple hypothetical” to “illustrate[] the penalizing nature of the liquidated damages provision” under the Surrender Agreement. Id. at *5.  According to plaintiff’s interpretation of the Surrender Agreement, if defendant timely made all but the final monthly surrender payment of $15,977.43, defendant's breach would render it liable for $1,029,969.54 plus interest and additional costs. Defendant would be liable for the total amount remaining due under the terminated lease, and defendant would be forced to pay that amount, rather than the final installment, without having had the benefit of the premises which it had surrendered to plaintiff. There is but one way to refer to this outcome: an unenforceable penalty. Id. In finding the damages clause to be “an unenforceable penalty,” Judge Rivera relied on the Court’s decision in Van Duzer . There, like in Columbia Univ. , the defendants maintained that the landowner’s acceleration of prospective rent was disproportionate to the landowner’s actual damages. As in Columbia Univ. , the landowner terminated the lease and relet the premises after the tenant vacated. Without deciding whether the amount sought was a penalty, the Court held that the defendants were entitled to a hearing to present evidence that the undiscounted accelerated rent was disproportionate to the landowner’s actual losses, and thus constituted unenforceable liquidated damages. Van Duzer , 24 N.Y.3d at 536-537. The majority rejected the dissent’s argument that the Surrender Agreement should be examined as a settlement agreement. Slip Op. at *5 (citing the dissenting op. at 3). The reason, said Judge Rivera, “a settlement agreement, like any other agreement, cannot be enforced if it violates public policy, including our state’s rejection of penalties as damages.” Id. (citations omitted).  “Plaintiff's real argument,” observed the majority, “is that it did not receive six payments on time, but that was the risk that it accepted by entering the Surrender Agreement.” Id. Such a risk ( i.e. , the risk of default), noted Judge Rivera, “is a risk common to all contracts, without unique effect in the context of a surrender of premises. And the existence of that risk does not and cannot justify exaction of a penalty.” Id. Finally, the majority took issue with the dissent’s argument “that affirmance … would disincentivize landowners from entering surrender agreements and deprive tenants of the benefit afforded by such arrangements.” Id. “This approach,” explained Judge Rivera, “encourages surrender agreements as providing a benefit to all parties—the tenant is released from future liability and the landowner regains the premises and the opportunity to relet on its own account.” Id. “In contrast,” concluded Judge Rivera, “the dissent’s approach would disincentivize tenants from negotiating a mutually agreeable surrender because the tenant would remain on the hook for back rent, future rent and other contractual damages without the benefit of enjoyment of the premises.” Id. Writing for the dissent, Chief Judge DiFiore argued that the majority opinion interfered with the public policy favoring the freedom to contract. Slip Op. at *5. This policy, said Chief Judge DiFiore, “applie with particular force to the Surrender Agreement—which a settlement agreement crafted by the parties to resolve their dispute without litigation.” Id. “Strict enforcement of settlement agreements serves multiple important purposes, consistent with those underlying freedom of contract,” observed Chief Judge DiFiore. Id. “ hese policies, and the significant interests they protect, should guide the resolution of this dispute between two sophisticated, counseled commercial entities.” Id. Chief Judge DiFiore said the “majority cast[] these principles aside, failing to acknowledge that the Surrender Agreement constituted a settlement of the claims Columbia possessed upon D’Agostino’s breach of the lease, which included a right to collect—not only unpaid back rent—but also future rent owed until the conclusion of the lease term, even if D’Agostino vacated the premises (Columbia had no obligation under the lease to relet the property).” Id. at *5-*6. “The parties’ agreement could not be clearer,” explained Chief Judge DiFiore, “that Columbia waived certain claims it possessed arising from D’Agostino’s breach of the lease only if this condition—timely payment of the installments—was met.” Id. at *6. “Under the plain language of the agreement,” Chief Judge DiFiore noted, “upon D’Agostino’s default or failure to timely cure upon notice, two things would occur: D’Agostino would immediately be obligated to pay the future rent due under the lease (among other associated payments) and it would ‘no longer be entitled to be released and relieved from and against any Released Claims.’” Id. The dissent took issue with the majority’s conclusion “that the Surrender Agreement should be interpreted without reference to the prior breach of the lease and that D’Agostino was relieved of all obligations under the lease even if it failed to timely make the installment payments.” Id. Although the Surrender Agreement “terminated the lease,” it most certainly did not unconditionally release the tenant of all obligations flowing from its breach of that prior agreement, and the majority’s assertion that Columbia seeks to “enforce a non-existent lease under the guise of damages for a breach of a separate contract” (majority op at 8) misses the mark. Columbia does not attempt to enforce the lease—instead, it seeks to enforce the contingent remedy the parties adopted in the Surrender Agreement in the event D’Agostino failed to timely make the Surrender Payments. Id. The dissent found that the “public policy underlying our liquidated damages jurisprudence simply not implicated in circumstances where, as in this case, there is no need to estimate the damages that might result in the event of a future breach because the breach has already occurred and the parties are crafting a settlement agreement.” Id. “But even viewing the contingent remedy as a liquidated damages clause,” said Judge DiFiore, “the majority’s conclusion that the provision reinstating D’Agostino's obligation to pay future rent is an unenforceable penalty because it provides for damages ‘exponentially disproportionate’ to D’Agostino’s outstanding Surrender Payments (approximately $1 million versus $176,000) adopts an overly simplistic view of the Surrender Agreement and fail to ‘giv due consideration to the nature of the contract and the circumstances’ in which it was entered….” Id. (citing Van Duzer , 24 N.Y.3d at 536) (footnote omitted).  It is evident from the Surrender Agreement that the parties understood that D’Agostino’s liability for breach of the lease was much greater than the value of the Surrender Payments. The obligations triggered if those payments were not timely made were not included merely as compensation for breach of the Surrender Agreement but were also intended to compensate Columbia for D’Agostino’s earlier breach of the lease. Thus, an analysis of whether the damages set forth in the Surrender Agreement are grossly disproportionate to Columbia’s probable losses requires consideration not only of the value of the Surrender Payments that D’Agostino failed to make, but also of the probable damages already set in motion by D’Agostino's prior breach of the lease, viewed from the time the Surrender Agreement was executed and not the date of the breach. Id. (citation omitted). Thus, explained the dissent, “ t is irrelevant that Columbia’s actual damages … may ultimately be different than the amount D’Agostino agreed to pay in the contingent remedy provision of the Surrender Agreement.” Id. “The enforceability of a liquidated damages clause,” further explained Chief Judge DiFiore, “does not turn on whether the remedy that the parties contemplated before the breach occurred is identical to the damages actually suffered.” Id. “To impose such a requirement,” reasoned the dissent, “would obviate the entire purpose of such provisions, which is to reasonably estimate the damages that might result, permitting the parties to avoid the costs and uncertainty of litigating damages in the event of a future breach.” Id. “For this reason,” concluded Chief Judge DiFiore, “the rough relationship between the remedy in the contract and the damages flowing from a breach must be assessed based on the terms of the agreement and the information the parties possessed at the time it was executed—not with the benefit of hindsight based on post hoc proof of damages actually incurred.” Id. at *6-*7. In conclusion, the dissent said there was no competing public policy that negated the policy underlying the freedom to contract. Id. at *7. Because there was nothing unfair about the settlement crafted by these well-counseled sophisticated parties, public policy affords no basis to alter their contract. Since the back rent payments were already substantially overdue, Columbia reasonably sought assurance that D’Agostino would uphold its end of the bargain under the Surrender Agreement (something it failed to do under the lease). As reflected in the plain language of the agreement, Columbia was willing to forego pursuit of its then-existing right to collect both unpaid back rent and future rent only if D’Agostino timely made the back rent installment payments (the owner gave up its right to receive more money overall but would be assured of prompt payment of a discounted amount on a regular schedule, without the need for litigation). Of course, that is not what happened. By eliminating the element that induced the owner to give up its rights, the majority creates a distorted, one-sided settlement in which—despite its default—D’Agostino was able to enjoy the full benefit of the bargain. Id.

Hang on Sloopy was a hit song in the mid-1960s. Years later, the band that performed and recorded the song – the McCoys – claimed that they were cheated out of substantial sums of money due to fraud. That claim, however, was time-barred, held the Court in Derringer v F.G.G. Prods. Inc. , 2020 N.Y. Slip Op. 33854(U) (Sup. Ct., N.Y. County Nov. 18, 2020) ( here ). Fraud claims must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8). “A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni , 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie , 41 A.D.3d 701, 705 (2d Dept. 2007)). “ here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal , 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein , 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand , 83 A.D.3d 893, 894 (2d Dept. 2011).  The question of whether a plaintiff had inquiry notice of fraud is appropriate for determination on a motion to dismiss only if it conclusively appears on the face of the complaint that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred. Epiphany Community Nursery School v. Levey , 171 A.D.3d 1 (1st Dept. 2019). The alleged failure by a defendant to make a required payment is often sufficient to put a plaintiff on inquiry notice that a fraud has occurred. See Cusimano v. Shurr , 137 A.D.2d 527 (1st Dept. 2016) (plaintiffs were on inquiry notice of fraud when defendants did not pay them in accordance with alleged obligations to do so); Stern v. Barney , 129 A.D.3d 619 (1st Dept. 2015) (plaintiffs were on inquiry notice of investment firm’s alleged fraud that took place 10 years prior where they either received monthly account statements, or, if no such statements were received, failed to inquire).  As discussed below, plaintiffs’ silence for more than five decades in the face of defendants’ failure to pay them for the work performing Hang on Sloopy, among other recordings, was fatal to their claims because such nonpayment put them on inquiry notice of the alleged fraud. Derringer v F.G.G. Prods. Inc. Background In July 1965, plaintiffs recorded Hang on Sloopy. At the time plaintiffs recorded the song, Rick Derringer was 17, Randy Zehringer was 15, and Ronnie Brandon was 19. In early August 1965, plaintiffs and Zehringer’s parents met Gerald Goldstein for the purpose of inducing plaintiffs to sign a recording contract with FGG Productions, Inc. (“FGG”) so that FGG could release Hang on Sloopy. According to plaintiffs, at the meeting, Goldstein referred them to Julie Rifkind, who Goldstein described as “a ‘great’ lawyer” who could “represent and advise them.” At the time, Rifkind worked for Bang Records, the record label that was to promote, release, sell and distribute the sound recording of Hang on Sloopy. Bang Records maintained offices in the same office building and on the same floor as FGG’s offices. Goldstein took plaintiffs, Zehringer’s Parents, and Randy Hobbs to Rifkind’s office. Rifkind reviewed a document prepared by FGG, which Rifkind “stated … effect … was a ‘good contract’” (the “1965 Document”). Rifkind gave the 1965 Document to Zehringer’s parents and advised them to sign it. Zehringer’s parents signed the 1965 Document on behalf of Derringer and Zehringer. Brandon and Hobbs were not asked to sign the 1965 Document and did not sign it. Neither Zehringer’s parents nor any of the plaintiffs were given a copy of the 1965 Document. Instead, Rifkind told plaintiffs and Zehringer’s parents that the 1965 Document should be left in his possession for safekeeping, as he was their “attorney.” On June 26, 2018, plaintiffs learned that Rifkind was never an attorney licensed to practice in New York State. After Zehringer’s parents signed the 1965 Document, at FGG’s request, plaintiffs performed and recorded 20 additional songs (together with the sound recording for “Hang on Sloopy,” the “recordings”) as The McCoys. FGG subsequently assigned by agreement any and all rights it had in and to the recordings to Bang Records. Through a series of purchases, transfers, and corporate and business consolidations, Sony Music Entertainment currently owns whatever rights Bang Records held in the recordings. Plaintiffs alleged that defendants have continuously exploited the recordings since 1965 and have received substantial income therefrom. Plaintiffs have received no payments, statements, or documents, from defendants concerning the recordings in the 53 years prior to commencing the action. Plaintiffs claimed that they never consented to defendants’ use of their names, photographs and likenesses for any commercial purposes in connection with the recordings. On June 28, 2018, Derringer commenced the action. FGG answered the complaint on August 8, 2018. On November 18, 2018, plaintiffs filed an amended complaint. Although the amendment was procedurally improper (it was filed more than 20 days after FGG answered), none of the defendants rejected or otherwise objected to the filing.  The amended complaint asserted nine causes of action. Among the claims alleged were rescission of the 1965 Document as against all defendants based on the fraudulent misrepresentation that Rifkind was an attorney representing plaintiffs and Zehringer’s parents and fraud against the FGG defendants for the same alleged conduct. Defendants moved to dismiss the amended complaint. In seeking dismissal, defendants principally argued that plaintiffs were barred from bringing the action due to the expiration of the statutes of limitations governing their claims.  The Court agreed, granting the motion with regard to the fraud claims. The Court’s Decision The Court held that plaintiffs were on inquiry notice of the alleged fraud “long before June 28, 2016”, when they filed the action. Slip Op. at *12. The Court observed that there were “several facts alleged in the amended complaint would have raised clear red flags to a reasonable person in the plaintiffs’ position.” Id. For example, the Court noted that plaintiffs and Zehringer’s parents only met with Rifkind once “and apparently ha never communicated with again.” Id. Moreover, said the Court, Rifkind was “recommended by FGG, their contractually adverse party, and worked for the company that would distribute the plaintiffs’ recordings.” Id. “More significantly,” explained the Court, “plaintiffs allege that they ha received no payment for the exploitation of the recordings since 1965, in spite of Rifkind’s representations to them that they were signing a ‘good contract.’” Id. Even according plaintiffs the benefit of their youth and lack of sophistication in the industry at the time of the 1965 Document, they “did not remain unsophisticated teenage musicians over the five decades that have elapsed since the exploitation allegedly began,” said the Court. Id. at *13. Derringer was, for instance, an accomplished, Grammy award winning artist. Id. Thus, “ ven if the circumstances immediately surrounding the execution of the 1965 Document were not independently sufficient to put the plaintiffs on notice of any alleged fraud, over 50 consecutive years of unpaid payments and unsent statements should have prompted someone of Derringer’s sophistication to look further into the matter.” Id. The Court rejected plaintiffs’ argument that the lack of payment merely put them on notice of a breach of contract, rather than fraud or misrepresentation. Id. The Court observed that plaintiffs’ argument was “belied by the fact that the crux of their fraud-based claims, and the primary motivation for the plaintiffs’ commencing th action, their assertion that they entitled to some payment or accounting for the exploitation of the recordings beginning in 1965.” Id. “Put differently,” said the Court, “plaintiffs point to lack of payment as evidence that they were defrauded. Their contention that the same lack of payment could not or should not have put them on notice of fraud is inconsistent.” Id. The Court noted that plaintiffs did not “explain why none of them, …, questioned or inquired as to why they never received payments for recording Hang on Sloopy after it successfully climbed the pop charts. Nor they proffer any reason why they failed to make any such inquiries after they recorded 20 additional songs for FGG, which launched their music career and have been released on numerous albums since.” Id. at *14-*15. The Court found the case similar to Baiul v. William Morris Agency, LLC , 2014 WL 1804526 (S.D.N.Y. May 6, 2014). Id. at *15.  In Baiul , the court dismissed Oksana Baiul’s fraud claims pursuant to CPLR 213(8). Baiul alleged that as a 16-year-old Ukrainian-born figure skater, she was fraudulently induced into signing numerous contracts in English, a language she did not fully understand, in connection with various performances and undertakings. Baiul stated that she failed to receive any compensation for certain undertakings and was deprived of millions of dollars in royalties for her performances. The court dismissed Baiul’s fraudulent inducement and other related claims, reasoning that even in the face of Baiul’s age and language barrier, Baiul’s silence for 12 years in the face of the defendant’s failure to pay her for the numerous performances she claimed entitled her to significant compensation was fatal to her claims. In short, noted the court, nonpayment was deemed sufficient to put Baiul on inquiry notice of any potential fraud. Finally, the Court noted that “in reaching its conclusion,” it was advancing the “policy considerations underlying statutes of limitations.” Id. at *16-*17 (citations omitted). The Court noted that the “plaintiffs’ fraud-based claims raise precisely the sort of concerns against which statutes of limitations are meant to protect.” Id. at *17-*18. Takeaway In in William Shakespeare’s play Hamlet, upon learning that Claudius had plotted to kill him, Hamlet determined that the best way to respond was by letting Claudius be “Hoist with his own petard”. See Act 3, Scene 4. That idiom perhaps best describes the Court’s analysis in Derringer – plaintiffs’ claim that they did not receive any payments for their records was the reason why they were on inquiry notice of the alleged fraud.  Aside from being on inquiry notice, Derringer highlights the policy reasons for statutes of limitations: “A defendant … ought not to be called on to resist a claim where the evidence has been lost, memories have faded, and witnesses have disappeared.” Flanagan v. Mount Eden Gen. Hosp. , 66 N.Y.2d 473, 476 (1985) (citation omitted; internal quotation marks omitted). That was precisely the facts in Derringer :  Over 50 years ha passed since the events at the center of the plaintiffs’ claims transpired. Key witnesses to the events, including Rifkind and Hobbs, have passed away. Those witnesses that are still alive may understandably be unable to recall specific details about events that took place half a century ago with a high degree of accuracy.”  Slip Op. at *17-*18.