Sometimes, a case involves facts and circumstances that, on their face, lead a court to determine that a fraud was committed. Such was the case in First Franklin Fin. Corp. v. Merchant , 2020 N.Y. Slip Op. 06852 (1st Dept. Nov. 19, 2020) ( here ).  In First Franklin , a judgment debtor transferred property subject to a foreclosure sale to a company that he had formed all on the same day. Such facts and circumstances, said the lower court, represented “badges of fraud” under former Debtor & Creditor Law (“DCL”) § 276 that were indicative of an intent to hinder, delay or defraud the debtor’s creditors. The Appellate Division, First Department agreed. Background Non-party Nereid 2028, an entity created and partially owned by defendant Arnold Merchant (“Merchant”), moved to set aside a non-judicial sale of real property located in the Bronx, New York (the “Property”). Merchant had borrowed $95,000.00 from First Franklin in 2005. The debt was secured by a mortgage dated September 29, 2005.  Merchant defaulted on the note, failing to make the payment due on March 1, 2008, and each payment date thereafter. As a result, First Franklin commenced a foreclosure action. The lower court entered an order of reference in March 2010, and a Judgment of Foreclosure and Sale in January 2016. On June 18, 2018, a referee held an auction of the Property. On the same day, Merchant incorporated Nereid 2028 and transferred a 50% interest in the Property to it for $10.00. Also, on the same day, Nereid 2028 declared bankruptcy.  The bankruptcy proceeding was dismissed on July 20, 2018, due to certain deficiencies in the filing, which Nereid 2028 failed to correct. On March 20, 2019, Nereid 2028 filed an order to show cause in the foreclosure action, seeking to set aside the purchase of the Property. The motion court denied the motion.  The court held that the circumstances surrounding the transfer were fraudulent, finding that the transfer was “obviously undertaken for the sole purpose of impeding the foreclosure sale.” Here, the attendant circumstances are rife with … “badges of fraud.” These include the close relationship between the parties to the transaction, inadequate consideration for the transaction, and the retention of the benefit of the property by defendant, who maintained a 50% ownership interest. The motion court concluded that the badges of fraud indicated that the conveyance was made “with intent to defraud” and held that the transfer was “null and void.” Nereid 2028 appealed. The First Department affirmed. In a pithy decision, the Court found that “ he court correctly found” the transfer to be fraudulent and, therefore, null and void:  The court correctly found that judgment debtor defendant Arnold Merchant’s purported transfer of the property for $10, on the eve of a foreclosure sale, to a brand new entity that he created and caused to commence a Chapter 11 proceeding just a few hours before the foreclosure sale, bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff.  Slip Op. at *1 (citing 5706 Fifth Ave., LLC v. Louzieh , 108 A.D.3d 589 (2d Dept. 2013)). Takeaway An action under former DCL § 276 requires proof that the transferor actually intended to hinder, delay, or defraud his/her creditors, whether they be present or future creditors. Since “ irect evidence of fraudulent intent is often elusive … courts will consider ‘badges of fraud’ which are circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent.” Dempster v. Overview Equities , 4 A.D.3d 495, 498 (2d Dept. 2004), lv. denied , 3 N.Y.3d 612 (2004) (internal quotation marks omitted). “Badges of fraud” from which fraudulent intent may be inferred include: (1) a close relationship between the parties to the transaction, (2) secrecy and haste in making the transfer, (3) the inadequacy of consideration, (4) the transferor’s knowledge of the creditor’s claim, or a claim so likely to arise as to be certain, and the transferor’s inability to pay it, and (5) the retention of control of property by the transferor after the conveyance. Dempster , 4 A.D.3d at 498. Of the five (5) badges of fraud listed, at least four (4) of them were present in First Franklin : (1) haste in making the transfer: it was done “on the eve of a foreclosure sale”; (2) inadequate consideration: the consideration for the transfer was $10.00; (3) the transferor had knowledge of the creditor’s claim: Merchant knew of the judgment and the foreclosure sale; and (4) retention of control of the property by the transferor after the conveyance: Merchant “created” Nereid 2028 (“and caused to commence a Chapter 11 proceeding”) and, thereafter transferred a 50% interest in the Property to it, while retaining the other 50% for himself. It is not surprising that the motion court concluded that “the attendant circumstances rife with … sufficiently alleged ‘badges of fraud’” – a conclusion with which the First Department agreed (the circumstances surrounding the transfer “bore all the badges of fraud necessary to conclude that the transfer was fraudulent as to plaintiff”).

On November 4, 2020, this Blog (the “November 4 Blog”) provided an update on the New York State Court system’s preparation for the anticipated surge in COVID-19 cases. On November 18, 2020, Andrew A. Crecca, the District Administrative Judge for the 10 th Judicial District (Suffolk County), circulated a memorandum on “Suffolk County Updated Operating Protocols <“the plan”> Effective November 23, 2020” (the “Memorandum”).  As noted in the November 4 Blog, “the country has seen a surge in new coronavirus cases.”  In the Memorandum, Administrative Judge Crecca recognized that while “ oot traffic in the courthouses has been gradually increased to correspond with an improvement in the metrics measuring the spread of Coronavirus” once the Unified Court System “permitted in-person proceedings in accordance with the Governor’s un-PAUSE New York plan.”  However, Administrative Judge Crecca recognized that the recent “metrics have indicated the need to once again reduce foot traffic in the courthouses to protect the health and safety of litigants, lawyers, court staff and judges.” Administrative Judge Crecca incorporated by reference into the Memorandum, Chief Administrative Judge Lawrence Marks’ November 13, 2020 Memorandum (the “Marks Memorandum”).  (The Marks Memorandum in annexed to the Memorandum, but can also be found HERE .)  The Marks Memorandum, which became effective on November 16, 2020 and “revis certain USC statewide operational practices in the trial courts” due to “adverse trends in coronavirus transmission rates in New York State” provides that: (1) no new civil or criminal jurors will be summoned for jury duty, but pending civil and criminal trials will proceed to conclusion; (2) no new grand jurors will be summoned for grand jury duty until further notice, but pending grand juries will continue to conclusion; and, (3) all future bench trials and hearings will be virtual unless permission is otherwise granted by the “respective Deputy Chief Administrative Judge”; (4) in-person socially-distanced court conferences will continue and “all coronavirus health and safety procedures should continue to be closely followed.” According to Administrative Judge Crecca, “the Plan should be considered an update to the Return to ln-Person Operations Plan effective October 19, 2020 and to .”  While the entire Plan is set forth within the Memorandum, some of the components, not otherwise reflected in the Marks Memorandum are as follows: The calendar times for different courts (e.g., family, criminal) in the same building shall be staggered; A maximum of 50% of the courtrooms in a facility can be used at the same time; No more than 50% of judges/referees/magistrates of the same type (e.g., family, criminal) can hold in-person calendars at the same time; No more than 10 cases per part per hour shall be scheduled; Courtroom occupancy shall be limited to the lesser of 10 people or ½ the posted occupancy per code (except for ongoing jury trials and grand jury proceedings; There will be reductions in non-judicial staff reporting to the courthouse and others will work remotely; In-person matters (of the type set forth in the Memorandum) may be heard if the presiding judge finds that it is unlawful or impractical to conduct the proceeding virtually (hybrid in-person/virtual proceedings will also be considered where practical); All other matters not permitted to be heard in person (of the type described in the Memorandum, which include, but are not limited to, civil and criminal bench trials and evidentiary hearings, motion arguments, Mental Hygiene Law proceedings pertaining to a hospitalized adult, ADR where both parties are represented by counsel and counsel will be present, Part 137 attorney-client fee dispute arbitrations) MUST be heard virtually. In addition, the Memorandum also contained updated operating protocols for Suffolk County Town and Village Courts along the lines as stated above.

Brokerage firms, financial institutions and investment advisers are required to provide suitable investment recommendations and strategies to a customer that are consistent with the customer’s investment objectives, risk tolerance and financial needs. See, e.g., here and here (FINRA Rule 2111). This requirement is based on the “know your customer” rule (here (FINRA Rule 2090)), which requires brokerage firms, financial institutions and investment professionals to be aware of all factors that affect a customer’s financial situation. The suitability rule applies to an investment professional’s investment advice regardless of the type of recommendation (e.g., a buy, sell or hold), the complexity of the investment product, and the sophistication of the customer. The rule is not dependent on a particular transaction or the compensation generated from the transaction. The investment professional must understand the investment or strategy being recommended and the customer’s ability to understand and assume the risks associated with the investment or strategy. The investment professional is required to exercise reasonable diligence in gathering all information necessary to make the recommendation or strategy. Such information includes the customer’s age, investment portfolio, employment status, tax status, investment objectives, financial situation and needs, investment experience, investment time horizon, liquidity needs, and risk tolerance. The investment professional should consider any other information disclosed by the customer in connection with the recommendation or strategy to determine the customer’s ability to understand and assume the risks associated with the investment or strategy. Investment losses resulting from unsuitable investment advice can serve as the basis for a claim in a FINRA arbitration and/or an enforcement action by the Securities and Exchange Commission (“SEC”), FINRA or other regulatory body. In today’s article, we examine five settled enforcement actions brought by the SEC involving the suitability of complex exchange-traded products for the subject firms’ retail investors. On November 13, 2020, the SEC announced (here) that it filed actions, all of which settled, against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations that related to unsuitable sales of complex exchange-traded products to retail investors (the “Actions”). The advisory firms and broker-dealers involved in the Actions are American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. Under the settlements, the advisory firms and broker-dealers agreed to return in total over $3 million to harmed investors. The Actions concerned the sale of volatility-linked exchange-traded products between January 2016 and April 2020. As set forth in the orders (here, here, here, here, and here), the firms attempted to track short-term volatility expectations in the market, which are typically measured against derivatives of the CBOE volatility index. According to the SEC, the offering documents for the products made clear that the short-term nature of the products made investments in the products more likely to experience a decline in value when held over a longer period. The SEC found that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. E.g., American Portfolios (“APFS registered representatives who recommended their brokerage customers buy and hold a complex exchange traded product (“ETP”) without a reasonable basis for believing the recommendation was suitable for their customers” and “did not understand the product, misrepresented its risks and recommended it for a purpose inconsistent with that described in the product’s offering materials.”); Benjamin Edwards (“he Benjamin Edwards brokerage representatives and advisory representatives failed to make a reasonable determination that these investments were suitable for certain of the customers and clients to whom they recommended the Complex ETPs, based on those retail customers’ and clients’ investment objectives, risk tolerance, and financial condition. A number of these brokerage and advisory representatives also misled their customers and clients about the Complex ETPs’ benefits and risks.”) The SEC further found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products. “It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk,” said Stephanie Avakian, Director of the SEC’s Division of Enforcement. “We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments.” The Actions were the first to be brought following the investigations by the Division of Enforcement’s Exchange-Traded Products Initiative, which used trading data analytics to uncover potential unsuitable sales. “These cases demonstrate the importance of data analytics in our efforts to surveil the market and pinpoint unsuitable sales of complex financial products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit. “We will continue to use these tools to protect retail investors.” The SEC’s orders found that each firm failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and its rules. The order against American Portfolios found that the firm failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product. The order against Benjamin Edwards found that the firm failed reasonably to supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products. Without admitting or denying the findings, each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.

On April 4, 2020, the New York Uniform Voidable Transactions Act (“NYUVTA”) became effective, replacing Article 10, Sections 270-281 of the Debtor and Creditor Law (“DCL”), the State’s almost century-old fraudulent conveyance law.  In February of this year, this Blog examined the NYUVTA, the DCL and the changes the NYUVTA made to the DCL ( here ).  Since the NYUVTA applies to cases filed on or after April 4, 2020, there remain many cases under the former DCL that are being litigated in the courts of New York. Today, we examine two such cases: Cheek v. Brooks , 2020 N.Y. Slip Op. 06485 (2d Dept. Nov. 12, 2020) ( here ), and JDI Display Am., Inc. v. Jaco Electronics, Inc. , 2020 N.Y. Slip Op. 06507 (2d Dept. Nov. 12, 2020) ( here ). Cheek involved DCL former § 273, and JDI involved DCL former §§ 273, 275 and 276. Cheek v. Brooks Cheek involved an action pursuant to DCL § 273, in which Cheek sought to set aside the conveyance of the certain properties. The conveyances occurred in 2002, when Harold Deveaux, Jr. transferred two properties to his nephew, defendant Khareem Brooks. At the time of the transfer, plaintiff, who lived at one of the properties from her birth in 1994 through at least 1995, possessed a cause of action against Deveaux for lead poisoning. In 2008, plaintiff, by her mother, commenced an action against Deveaux and, in 2009, obtained a judgment against him. Deveaux died in 2015. In 2015, plaintiff commenced the action. Plaintiff moved for summary judgment on the cause of action seeking relief pursuant to DCL § 273. In an order dated October 4, 2018, the motion court, among other things, granted that branch of plaintiff’s motion. Brooks appealed. The Second Department affirmed. Pursuant to DCL § 273, “a conveyance that renders the conveyor insolvent is fraudulent as to creditors without regard to actual intent, if the conveyance was made without fair consideration.” Stout St. Fund I, L.P. v. Halifax Grp., LLC , 148 A.D.3d 744, 747 (2d Dept. 2017); Grace Plaza of Great Neck v. Heitzler , 2 A.D.3d 780, 781 (2d Dept. 2003). To constitute fair consideration, the value given in exchange must be fairly equivalent and proportionate to the value of the property conveyed. DCL § 272; Stout , 148 A.D.3d at 748; Sardis v Frankel , 113 A.D.3d 135, 141 (1st Dept. 2014). “Good faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly.” Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. Ltd. Partnership , 25 A.D.3d 301, 303 (1st Dept. 2006) (quoting Berner Trucking v. Brown , 281 A.D.2d 924, 925 (4th Dept. 2001)). “An individual is ‘insolvent’ within the meaning of the Debtor and Creditor Law when ‘the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on … existing debts as they become absolute and matured.’” Grace Plaza , 2 A.D.3d at 781 (quoting DCL § 271(1)); see also Matter of City of Syracuse Indus. Dev. Agency , 156 A.D.3d 1329, 1332 (4th Dept. 2017). Insolvency is a “‘prerequisite[ ] to a finding of constructive fraud under section 273.’” Syracuse Indus. Dev. Agency , 156 A.D.3d at 1332 (quoting Joslin v Lopez , 309 A.D.2d 837, 838 (2d Dept. 2003)). Against the foregoing, the Second Department held that the motion court correctly found that the “alleged purchase prices were not fairly equivalent and proportionate to the value of the subject properties.” Slip Op. at *1. The Court noted that the “deeds for both properties recite consideration in the sum of only $10 and neither indicate that any transfer tax was paid.” Id. The Court noted that Brooks “purchased the Greene Avenue property for $200,000 and the Adelphi Street property for $170,000, and … tendered a contract for the purchase and sale of the Greene Avenue property which stated a purchase price of $200,000.” Id. “Although ‘ t is always open to a party, where a nominal consideration is expressed, to show what the real consideration was,’” said the Court, “Brooks failed to do so.” Id. (internal citation omitted). The Court also found that Brooks failed to rebut the presumption that the transfers were made without fair consideration. Under New York law, “the burden of proving insolvency is on the party challenging the conveyance.” Id. (quoting Battlefield Freedom Wash, LLC v. Song Yan Zhuo , 148 A.D.3d 969, 971 (2d Dept. 2017)) (citation omitted) “However,” noted the Court, as in Cheek , “when a transfer is made without fair consideration, a presumption of insolvency and fraudulent transfer arises, and the burden shifts to the transferee to rebut that presumption.” Id. (quoting Battlefield , 148 A.D.3d at 971). The Court found that “Brooks’s conclusory assertions and those of his aunt that Deveaux was not rendered insolvent were insufficient to rebut that presumption.” Id. JDI Display Am., Inc. v. Jaco Electronics, Inc. JDI involved an action under DCL §§ 273, 275 and 276, in which JDI sought to set aside the transfer of corporate funds to a director and shareholder of one of the corporate defendants. Plaintiff is the developer, manufacturer, and seller of display devices and related products. From September 2014 through October 2017, defendant Jaco Electronics, Inc. was a licensed distributor of plaintiff’s products. As of July 2017, Jaco Electronics owed plaintiff approximately $550,000 for products plaintiff shipped to it.  In August 2017, defendant Jaco Display Solutions, LLC purchased Jaco Electronics’ assets. According to the complaint, as part of the deal, Jaco Electronics received an investment of more than $1 million, which it transferred to defendant Joel Girsky, one of its directors and shareholders, leaving it insolvent.  In an effort to recover damages for the outstanding amount owed to it by Jaco Electronics, plaintiff commenced the action against, among others, Jaco Electronics’ directors and shareholders, Girsky, Robert Savacchio, and Jeffrey Gash.  The first cause of action sought to set aside the alleged fraudulent conveyances between Jaco Electronics and Girsky pursuant to DCL §§ 273, 275 and 276. Defendants moved to dismiss the complaint as asserted against them. By order dated July 9, 2018, the motion court, inter alia , denied the motion to dismiss the first cause of action. Defendants appealed. The Second Department affirmed. The Court held that “the first cause of action state cognizable claims alleging a fraudulent conveyance pursuant to Debtor and Creditor Law former §§ 273, 275 and 276.” Slip Op. at *2. The Court found that “plaintiff sufficiently alleged that Jaco Electronics transferred corporate funds it had received from the sale of its assets to Girsky, one of its directors and shareholders, and that said transfer left it insolvent.” Id. Like DCL § 273, a claim under DCL § 275 must establish that the conveyance or obligation incurred was made without “fair consideration”. However, unlike DCL § 273, a claim under DCL § 275 requires an element of intent or belief that insolvency will result. Wall Street Assocs. v. Brodsky , 257 AD 2d 526, 529 (1st Dept. 1999) (citation omitted). The Court also held that “ he complaint … contained sufficient factual assertions and badges of fraud, … , to support the allegation that Jaco Electronics believed that it would not be able to pay its debts after it transferred funds to Girsky, which give rise to an inference that Jaco Electronics intended to hinder, delay, or defraud the plaintiff.” Id. at *2 (citations omitted). DCL § 276, unlike Sections 273 and 275, concerns actual fraud, as opposed to constructive fraud, and does not require proof of unfair consideration or insolvency. Because it is difficult to prove actual intent, the plaintiff may rely on “badges of fraud” (as noted by the JDI Court) to raise and inference of fraud, i.e. , circumstances so commonly associated with fraudulent transfers “that their presence gives rise to an inference of intent.” Wall Street Assocs. , 257 A.D.2d 526, 529 (internal quotation marks and citations omitted). Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance. Id. “Depending on the context, badges of fraud will vary in significance, though the presence of multiple indicia will increase the strength of the inference.” MFS/Sun Life Trust v. Van Dusen Airport Servs. , 910 F. Supp. 913, 935 (S.D.N.Y. 1995); see also Gafco, Inc. v. H.D.S. Mercantile Corp. , 47 Misc.2d 661, 664 (Sup. Ct., N.Y. County 1965) (noting, “ lthough ‘badges of fraud’ are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case”) (internal quotation marks and citations omitted). A conveyance made with actual intent to defraud is fraudulent regardless of whether the debtor receives fair consideration. MFS/Sun Life Trust , 910 F. Supp. at 934 (citation omitted). Since DCL § 276 concerns actual fraud, the plaintiff must plead it with particularity. Thus, the plaintiff must allege specific facts, including, among other things, the identity of the specific transactions or conveyances that the plaintiff claims were fraudulent. Syllman v. Calleo Dev. Corp. , 290 A.D.2d 209, 210 (1st Dept. 2002); see CPLR 3016 (b). In JDI , the Court held that plaintiff satisfied this requirement. Slip Op. at *2. Takeaway Prior to the enactment of the NYUVT, creditors looked to Article 10 of the Debtor and Creditor Law to recover assets that had been (or may be) transferred by debtors to another party. Whether the debtor transferred assets with intent to defraud or without fair consideration, the former DCL (and now the NYUVT) provides creditors with a number of remedies. There are significant differences between the DCL and the NYUVT ( here ). Whether the plaintiffs in Cheek and JDI would have prevailed under the NYUVT is unknown. What is certain, however, is creditors must satisfy the applicable pleading and evidentiary standards to secure the protections under both the former DCL and the NYUVT. In Cheek and JDI , the plaintiffs met their respective pleading and evidentiary requirements.

This BLOG has previously addressed issues related to Statutes of Limitations. See, among many others, < HERE =">HERE"> , < HERE =">HERE"> , < HERE =">HERE"> , and  < HERE =">HERE"> .  Earlier this year, this BLOG posted “ Revive A Time-Barred Claim Using § 17-101 of New York’s General Obligations Law ”, in which, in addition tothe renewal of expired Statutes of Limitation under GOL § 17–101, the purpose and history of Statutes of Limitation was addressed.   Statutes of limitation govern the time in which a cause of action must be interposed after accrual.  “As a general principle, the statute of limitations begins to run when a cause of action accrues ( see CPLR 203 ), that is, when all of the facts necessary to the cause of action have occurred so that the party would be entitled to obtain relief in court.”  Hahn Automotive Warehouse, Inc. v. American Zurich Ins. Co., 18 N.Y.3d 765, 770 (some citations omitted).)  “Statutes of limitation, like the equitable doctrine of laches, in their conclusive effects are designed to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.”  Order of Railroad Telegraphers v. Railway Express Agency, Inc. , 321 U.S. 342, 348-349 (1944).   The policy concerns prompting the enactment of Statutes of Limitation are greatly attenuated if an otherwise “stale” claim is acknowledged by the responsible party.  As stated in prior Blog < HERE =">HERE"> : If, however, a debtor, inter alia , acknowledges a debt under certain circumstances, a “stale” claim relating to such debt may be revived.  “There are two ways in which the statute of limitations may be tolled.  One involves part payment of the debt and the other a signed acknowledgment.  Erdheim v. Gelfman , 303 A.D.2d 714, 714 - 15 (2 nd Dep’t 2003).  As to the former, the Erdheim Court, quoting Lew Morris Demolition Co. v. Board of Educ. , 40 N.Y.2d 516, 521 (1976), stated that tolling may occur if “payment of a portion of an admitted debt, made and accepted as such, accompanied by circumstances amounting to an absolute and unqualified acknowledgment by the debtor of more being due, from which a promise may be inferred to pay the remainder.”  Erdheim , 303 A.D.2d at 715.  As to the latter, the Erdheim Court, again quoting Lew Morris , stated that “ s to a written acknowledgment, pursuant to General Obligations Law § 17-101, the statute of limitations will be tolled by a signed written acknowledgment of an existing debt which contains nothing inconsistent with an intention on the part of the debtor to pay it.”  Erdheim , 303 A.D.2d at 715.   Section 17-101 of New York’s General Obligations Law permits the renewal of a Statute of Limitations when “the party to be charged” acknowledges the contractual obligation in writing.  GOL § 17-101 “applies to contract debt generally” ( see U.S. Bank National Association v. Caruna (1 st Dep’t November 12, 2020)), but, by its terms, does not apply to “action for the recovery of real property” ( see GOL § 17-101).  With respect to mortgage foreclosure actions, GOL § 17-105 applies.  GOL § 17-105(1), which requires a “promise to pay the mortgage debt” to renew a statute of limitations, provides: A waiver of the expiration of the time limited for commencement of an action to foreclose a mortgage of real property or a mortgage of a lease of real property, or a waiver of the time that has expired, or a promise not to plead the expiration of the time limited, or not to plead the time that has expired, or a promise to pay the mortgage debt, if made after the accrual of a right of action to foreclose the mortgage and made, either with or without consideration, by the express terms of a writing signed by the party to be charged is effective, subject to any conditions expressed in the writing, to make the time limited for commencement of the action run from the date of the waiver or promise.  If the waiver or promise specifies a shorter period of limitation than that otherwise applicable, the time limited shall be the period specified. In U.S. Bank, amortgage foreclosure action, the First Department affirmed the dismissal of the action due to time-bar.  An extremely abridged statement of the facts as gathered from the motion court’s decision and order (the “ Motion Court Decision ”) follow.  The defendants defaulted in the repayment of the mortgage note they executed.  A mortgage foreclosure action was commenced in 2009 and was dismissed in 2016 for failure to appear at a scheduled conference and to diligently prosecute the action.  A subsequent motion to restore was also denied.  Borrowers also filed a Chapter 7 Bankruptcy petition in May of 2011.  As to the bankruptcy, the motion court stated: In Schedule D of his bankruptcy petition, acknowledged the debt under the Note and Mortgage as a secured claim.  also executed a document entitled "Chapter 7 Debtor's Individual Statement of Intention" (Statement of Intention) wherein he declared that he intended to "retain" and "keep current" the debt.  obtained a bankruptcy discharge on September 9, 2011. An order of the bankruptcy court dated September 27, 2011 closed his bankruptcy case. Motion Court Decision at p. 3.   Borrower defaulted in making required payments under the loan in January 2012 and, thereafter, borrower and lender communicated about settlements, short sales and short payoff’s of the loan (the “Letters”).  Lender commenced another mortgage foreclosure action in May of 2017, which borrower moved to dismiss on, inter alia , Statute of Limitation grounds.  The motion court determined that the Statute of Limitations began to run when the 2009 foreclosure action was commenced and expired 6 years later (factoring in tolling occasioned by the bankruptcy filing), which time-period expired prior to the commencement of the second foreclosure action.  The lender argued, among other things, that the bankruptcy forms completed by the borrower renewed the Statute of Limitations.  According to the Motion Court Decision: contends that the "Statement of Intention" filed by under section 521(1) of the Bankruptcy Code, in conjunction with his Chapter 7 bankruptcy petition, restarted the running of the statute of limitations.  In particular, contends that because, in the Statement of Intention, " specifically referred to the Chase Home Mortgage and the Property, and expressly wrote that his intention with regard to the Loan was to 'retain and keep current' the Mortgage debt," the Statement of Intention "was an acknowledgment of the Mortgage debt under GOL § 17-101," and renewed the limitations period. Motion Court Decision at p. 9 (citations and brackets omitted, remaining brackets added).  The motion court found lender’s arguments in this regard “unpersuasive” and stated: In a Statement of Intention, a debtor must indicate whether he intends to "surrender" or "retain" property by checking off the appropriate box, and if he intends to retain property, he must then indicate whether he intends to "redeem the property," "reaffirm the debt," or "other" with an explanation. Here, checked off the "retain" box, and then explained in the "other" box that he would "retain, keep current." Significantly, he did not check off the box for "reaffirm the debt." Had he done so, his creditor (i.e. the ) and the bankruptcy court would have had to undertake the highly detailed procedures in section 524 of the Bankruptcy Code. This section sets forth specific methods to reaffirm the debt that would otherwise be dischargeable under section 727 of the Bankruptcy Code, by means of a court-approved reaffirmation agreement between the debtor and the creditor. did not enter into any reaffirmation agreement with the . Instead, the debt under the Note was eventually discharged by order of the bankruptcy court. To equate the simple act of indicating "retain, keep current" in the Statement of Intention with the elaborate provisions and procedures to "reaffirm the debt," as urges, is without merit. Motion court order at 10.  The motion court also found that the Letters “ not amount to ‘absolute and unqualified acknowledgement’ to pay the Mortgage debt” as required by GOL § 17-101.   In affirming the trial court, the First Department stated: The motion court correctly dismissed the complaint as time-barred on the ground that the statement of intention filed by in connection with his bankruptcy petition, in which he indicated, by checking a box, that the condominium would be retained and kept current, did not constitute the acknowledgment of the debt that is required to restart the expired statute of limitations under General Obligations Law (GOL) § 17-101, as plaintiff urged.   Initially, we note that, while GOL § 17-101 applies to contractual debts generally, the provision applicable to mortgage foreclosures in particular, and therefore controlling in this case, is § 17-105(1).  GOL § 17-101 requires an acknowledgment of the debt or a promise to pay it; GOL § 17-105(1) requires a promise to pay the debt. ’s bankruptcy petition did not satisfy either provision, because it merely listed the mortgage debt at issue, neither expressly acknowledging the debt nor promising to pay it. U.S. Bank at pp. 2-3 (citations omitted). The borrower in U.S. Bank filed a petition under Chapter 7 of the Bankruptcy Code.  The borrower in PSP-NC, LLC v. Raudkivi , 138 A.D.3d 709 (2 nd Dep’t 2016), filed a petition under Chapter 13.  In Raudkivi , the lender’s foreclosure action was not deemed to be time-barred because the debtor’s “bankruptcy plan, in which he acknowledged the mortgage debt and promised to repay it, renewed the limitations period.”  Raudkivi , 138 A.D.3d at 711 (citations omitted). TAKEAWAY The representations and acknowledgments made in the context of bankruptcy proceedings could have a meaningful impact on whether an expired statute of limitations will be renewed under Article 17 of the General Obligations Law.

A “recurring question” courts in New York grapple with is whether the facts alleged in a complaint give rise to sustainable claims for both breach of contract and fraudulent inducement. Cronos Grp. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017). Readers of this Blog know that a fraud claim, which “ar from the same facts , s identical damages and d not allege a breach of any duty collateral to or independent of the parties’ agreements<,> is subject to dismissal as redundant of the contract claim.” Id. at 63 (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v Citibank, N.A. , 84 A.D.3d 588, 589 (1st Dept. 2011) (internal quotation marks omitted). See also HSH Nordbank AG v. UBS AG , 95 A.D.3d 185, 206 (1st Dept. 2012). As the First Department noted in Cronos Group , “ here is no shortage of recent decisions by this Court holding to similar effect.” 156 A.D.3d at 63 & n.8 (citing cases). Readers of this Blog also know that a plaintiff claiming fraud must demonstrate that he/she justifiably relied on the representation or omission alleged to be false. Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C. , 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “ o two cases are alike ….” Id. For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans , 183 A.D.2d 742, 743) (2d Dept. 1992). Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See , e.g. , HSH Nordbank , 95 A.D.3d at 194-95. Accord , Ashland Inc. v. Morgan Stanley & Co. , 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted). Despite the factual nature of the inquiry, the reporters are brimming with cases dismissing a fraud claim because the plaintiff failed to plead justifiable reliance. In Walleye Power, LLC v. Bay Shore Power Co. , 2020 N.Y. Slip Op. 51314(U) (Sup. Ct., N.Y. County Nov. 4, 2020) ( here ), the foregoing issues were considered by the Court. As discussed below, the Court denied a motion to dismiss contract and fraud claims, finding the plaintiff had stated a claim for breach of contract and fraudulent inducement and that the causes of action were not duplicative of each other. Walleye Power involved the purchase of the Bay Shore Cogeneration Plant (the “Plant”) in Oregon, Ohio for $38.7 million. The transaction was subject to the terms, conditions and representations of an Asset Purchase Agreement (“APA”) between Walleye Power, LLC and Bay Shore Power Co. and its indirect affiliate, FirstEnergy Generation LLC (“FEG”). Walleye alleged that it performed its obligations under the APA and that Bay Shore breached its obligations thereunder by falsely representing and warranting that the Generating Facility was in “good operating condition subject to normal wear and tear” and the Plant had been maintained in accordance with Good Utility Practice. Walleye claimed that Bay Shore knew those statements to be false because, among other things, certain major components, including the limestone crusher and the CFB Boiler air heater, needed to be replaced due to causes known to Bay Shore but concealed from Walleye.  Walleye claimed that after closing it learned that Bay Shore and FEG knew “that (a) the Plant’s most valuable assets would likely fail in the near future, (b) these assets had been poorly maintained in violation of First Energy corporate policy and (c) the Records misrepresented the state of the Plant’s operations.” Walleye further alleged that “ ather than disclose what it knew during diligence and before the APA was executed or the Closing, Bay Shore made intentional misrepresentations and omitted key facts, to conceal the true condition and value of the Plant.”  The Court held that these allegations stated a cause of action for willful breach of contract. Slip Op. at *2 (citing Second Source Funding, LLC v. Yellowstone Capital, LLC , 144 A.D.3d 445, 445-446 (1st Dept. 2016). As a result, the Court denied Bay Shore’s motion to dismiss the first cause of action for breach of contract. Walleye also alleged that Bay Shore made multiple affirmative misrepresentations about the condition of the Generating Facility and the accuracy and completeness of the records provided to Walleye during due diligence, which Walleye claimed induced it to enter the APA. Among other things, Walleye claimed that Bay Shore falsely represented that the Generating Facility had been maintained with “Good Utility Practice,” despite its knowledge that it had: (i) failed to follow its Failure Analysis Report and fully inspect and repair its dissimilar metal welds (“DMWs”); (ii) failed to ensure proper water chemistry; (iii) “pad-walled” more than 300 water wall tubes in violation of FEG’s policies; (iv) caused hydrated ash to foul the air heater tubes; (v) failed to properly install and maintain the electrical field voltage transducer; and (vi) failed to install a proper control room alarm for a generator ground.  In addition, Walleye alleged that Bay Shore knew that the Generating Facility had experienced DMW failures which caused one or more outages, but failed to provide this information in the outage report despite the existence of one or more Generation Availability Data System (“GADS”) codes specifically for DMW-related failures. The Court held that these allegations sufficed to state a claim of fraudulent inducement, noting that they were “sufficiently stated with particularity to satisfy CPLR § 3016(b).…” Slip Op. at *3. The Court noted that the alleged misstatements relating to the cause of the shutdowns were also actionable as half-truths. Id. (citing Junius Constr. Corp. v. Cohen , 257 N.Y. 393, 400 (1931); Orchard Hotel LLC v. D.A.B. Group LLC , 172 A.D.3d 530, 531 (1st Dept. 2019)). A half-truth is a deceptive statement because the maker of the statement conceals material facts that makes the statement misleading. Sheridan Drive-In v. State of N.Y. , 16 A.D.2d 400, 408 (4th Dept. 1962). The Court also held that whether Walleye’s reliance on the alleged misrepresentations was reasonable could not “be decided at the motion to dismiss stage based upon the record.” Slip Op. at *4 (“Whether reliance was reasonable based on the codes used, whether the codes themselves are incomplete or incorrect as Walleye alleges, or whether they should have put Walleye on notice of a more serious issue simply cannot be decided at the motion to dismiss stage based upon the record”) (citing ACA Fin. Guar. Corp. v. Goldman, Sachs & Co. , 25 N.Y.3d 1043, 1045 (2015)). The Court further held that justifiable reliance was adequately pleaded and best left for the trier of fact because the information allegedly concealed was claimed to be “in Bay Shore’s exclusive knowledge and could not have been ascertained by Walleye in the course of reasonable due diligence without shutting down the Generating Facility for an extended period.…” Slip Op. at *4. Walleye claimed that Bay Shore concealed the information “because it would have alerted Walleye to the undisclosed problems at the plant and required FEG and Bay Shore to spend additional money.” Id. Accordingly, concluded the Court, “Walleye has adequately pled material misstatements of fact intended to deceive Walleye to induce them to enter the APA and Walleye’s justifiable reliance.” Id. (citing Basis Yield Alpha Fund (Master) v. Goldman Sachs Grp., Inc. , 115 A.D.3d 128, 135 (1st Dept. 2014)). Finally, the Court held that the duplication of claims doctrine did not bar the fraudulent inducement claim:  he fraudulent inducement cause of action is not duplicative of the breach of contract cause of action because Walleye alleges a duty separate and distinct from the alleged breach of the APA to provide accurate information and to correct any inaccurate information based on Bay Shore’s superior knowledge of the condition of the Generating Facility, and that Bay Shore made material misrepresentations of the present conditions of the Generating Facility to induce Walleye to agree to a higher purchase price and to enter into the APA in the first place. Id. (citations omitted). Moreover, said the Court, “because the APA limits indemnification claims against Bay Shore to $7.75 million, any damages in excess of that cap that Walleye seeks in connection with the fraudulent inducement claim cannot, as a matter of law, be said to be the same damages as are sought in connection with the breach of contract claim.” Id. (citing Avnet, Inc. v. Deloitte Consulting LLP , — A.D.3d — , 2019 N.Y. Slip Op. 05445 (1st Dept. 2020)). Takeaway The factual context of Walleye Power is common to many complex commercial transactions: one party is alleged to have breached the representations and warranties in the operative contract and made affirmative misrepresentations that induced the other party to enter into the transaction. Walleye Power highlights the independent duties necessary to withstand a motion to dismiss on duplication grounds. Walleye Power is also notable because the Court declined to dismiss the complaint on justifiable reliance grounds. As this Blog has noted in numerous prior posts, cases frequently get dismissed because the plaintiff fails to allege enough facts to demonstrate justifiable reliance on the alleged misstatement or omission. Too often, the plaintiff relies on conclusory statements to satisfy this element of the claim. Walleye Power bucks the trend – the claim was sustained because plaintiff provided sufficient facts to demonstrate it had used diligence and taken affirmative steps to protect itself but was, nonetheless, the victim of an alleged fraud.

Disputes between an insured and insurer occur all the time. These disputes often concern whether the policy covers a certain event. Sometimes, as in AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc. , 2020 N.Y. Slip Op. 06232 (2d Dept. Nov. 4, 2020) ( here ), the dispute concerns the alleged failure to satisfy a specific request for coverage not already provided in one’s policy. Other times, the dispute concerns alleged fraud and negligent misrepresentation ( i.e. , breach of a duty to advise), as alleged in AB Oil . And, still other times, as in AB Oil , breach of contract and fraud are alleged. In this latter scenario, where breach of contract and fraud are alleged, the duplication of claims doctrine becomes relevant. However, as in AB Oil , where there is duty to advise, courts have held that such a duty is collateral to, or independent of, coverage obligations under the policy.   As a general principle, insurance brokers “have a common-law duty to obtain requested coverage for their clients within a reasonable time or inform the client of the inability to do so; however, they have no continuing duty to advise, guide or direct a client to obtain additional coverage.” American Bldg. Supply Corp. v. Petrocelli Group, Inc. , 19 N.Y.3d 730, 735 (2012) (internal quotation marks and citation omitted). Thus, where a client “can establish that it made a particular request to the broker and the requested coverage was not procured”, will the broker be held liable to the client. Voss v. Netherlands Ins. Co. , 22 N.Y.3d 728, 734 (2014). Where a special relationship develops between the broker and client, the Court of Appeals has held that the broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage. See Hoffend & Sons, Inc. v. Rose & Kiernan, Inc. , 7 N.Y.3d 152, 158 (2006); Murphy v. Kuhn , 90 N.Y.2d 266, 272-273 (1997). In Murphy , the Court recognized that “particularized situations may arise in which insurance agents, through their conduct or by express or implied contract with customers and clients, may assume or acquire duties in addition to those fixed at common law” and that the question of whether such additional responsibilities should be “given legal effect is governed by the particular relationship between the parties and is best determined on a case-by-case basis.” Murphy , 90 N.Y.2d at 272. The Court identified three exceptional situations that may give rise to a special relationship, thereby creating an additional duty of advisement: “(1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on.” Id. (citations omitted). Where damages for breach of contract against an insurance broker are sought, “‘a plaintiff must establish that a specific request was made to the broker for the coverage that was not provided in the policy.’” Brannigan Christie Overhead v. Door , 149 A.D.3d 892, 893-894 (2d Dept. 2017) (quoting Joseph v. Interboro Ins. Co. , 144 A.D.3d 1105, 1108 (2d Dept. 2016) (internal quotation marks omitted)). However, as in any contract action, “actual damages are not an essential element” of the claim. Perry v. McMahan , 164 A.D.3d 1488, 1489 (2d Dept. 2018). A plaintiff may recover nominal damages. Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 95 (1993). AB Oil Servs., Ltd. v. TCE Ins. Servs., Inc. Background AB Oil involved an insurance policy procured through Defendant, TCE Insurance Services, Inc., and its principal, Defendant, Anthony DeFede (collectively, “defendants”). Plaintiffs alleged that defendants failed to obtain insurance they were asked to procure and failed to inform plaintiffs that they did not do so. The subject coverage was for gas main repair work plaintiffs performed for Consolidated Edison (“Con Ed”) during the period July 1, 2015, through June 30, 2016. Plaintiffs alleged that in September 2015, they became interested in performing gas main repair work for Con Ed. The proposed agreement with Con Ed required plaintiffs to maintain insurance. As a result, plaintiffs asked defendants for a quote, providing defendants with a description of the job, a copy of the draft agreement, and the insurance requirements. In October 2015, defendants informed plaintiffs that their existing insurance policy already covered the proposed gas main repair work. Defendants provided a certificate of insurance naming Con Ed as an additional insured under that existing policy. Plaintiffs thereafter entered into the agreement, as proposed, with Con Ed on October 13, 2015. According to plaintiffs, the agreement with Con Ed was, in essence, a pilot program having three consecutive one-year terms, with the option to renew vested solely with Con Ed. In June 2016, plaintiffs decided to bid for a permanent three-year contract to perform the same work. That same month, defendants presented plaintiffs with a quote for renewal of the existing insurance policy for the period July 2016 through June 2017. The new quote increased the annual premium from $380,951.70 to $397,377. At some later point in June 2016, plaintiffs submitted an irrevocable bid for the new contract with Con Ed. Plaintiffs alleged that they priced their bid, in part, based on the increased rate that defendants had quoted for the renewal of the existing insurance policy. Plaintiffs also alleged that they decided to shop for a lower insurance rate, but while doing so they discovered that the insurer had never been informed about the gas main repair work that plaintiffs were performing. The insurer subsequently disclaimed both coverage for that work under the existing policy as well as the $397,377 renewal quote. Plaintiffs alleged that they obtained substitute coverage for one quarter from a different insurer at an annual rate of $691,595, and thereafter obtained more permanent coverage “with reduced protection” for an annual rate of approximately $650,000. Defendants moved to dismiss the complaint, which the motion court granted in an amended order in December 2017. Plaintiffs moved for leave to reargue their opposition to defendants’ motion or, in the alternative, for leave to amend the complaint. In an order dated May 25, 2018, the motion court adhered to its prior determination. The motion court also denied plaintiffs’ motion for leave to amend the complaint. Plaintiffs appealed. The Court’s Decision The Court held that plaintiffs’ contract and fraud claims should have been sustained. Regarding the breach of contract claim, the motion court dismissed the claim because plaintiffs did not allege actual damages. The Court found this to be error. Slip Op. at *3 (citing Perry , 164 A.D.3d at 1489).  Regarding the fraud and negligent misrepresentation claim, the Court held that plaintiffs “sufficiently alleged the existence of a special relationship.” Slip Op. at *4. The Court explained that “plaintiffs’ allegations concerning the specific request they made to the defendants to procure coverage for gas main repair work that the plaintiffs intended to perform for Con Ed beginning in the fall of 2015 sufficient to state a viable claim under the second of the exceptional circumstances identified by the Court of Appeals” – e.g. , there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent. Id. In that regard, the Court found that plaintiffs alleged “an interaction regarding a question of coverage and that the plaintiffs supplied the defendants with a description of the job, a copy of the draft agreement, and the insurance requirements, which would have put the defendants on notice that their advice was being sought and specially relied on.” Id.   To underscore the finding, the Court noted that the “question of coverage reemerged in June 2016 when the defendants produced a quote to renew the plaintiffs’ existing insurance policy, allegedly with the knowledge of the plaintiffs’ existing commitment to perform gas repair work for Con Ed through at least October 2016.” Id. The Court rejected defendants’ contention that the claim was correctly dismissed because plaintiffs failed to plead damages. Id. The Court found that “at a minimum, claim to have suffered damages when they, on two occasions, made bids for long-term contracts to perform gas main repair work for Con Ed that were priced, in part, based on the defendants’ alleged misrepresentations as to the price of insurance coverage for that work.” Id. Finally, the Court rejected defendants’ contention that the fraud claim should have been dismissed because it was duplicative of the contract claim. The Court noted that the fraud and negligent misrepresentation claim concerned matters that were collateral to defendants’ coverage obligations under the alleged contract: “the former < i.e. , the fraud and negligent misrepresentation cause of action> i.e., the fraud and negligent misrepresentation cause of action>, concerns a duty of advisement extending above and beyond the parties’ contractual relationship.” Id. (citing Kimmell , 89 N.Y.2d at 260-266). And, with regard to defendant Anthony DeFede, the Court noted that plaintiffs sought to hold him liable for participating in the commission of a tort, not for breaching the terms of the alleged contract. Id. (citations omitted).  Takeaway AB Oil involved the issue of duties; in particular, whether an insurance agent acquires duties in addition to those fixed at common law and whether such additional responsibilities should be given legal effect.  As discussed above, the Court answered both inquiries in the affirmative.  AB Oil also involved the duplication of claims doctrine. And, as discussed, where the claims involve independent duties, contract claims and fraud claims can stand side-by-side.

CPLR 3215(c) , which encourages the prompt entry of default judgments, provides: If the plaintiff fails to take proceedings for the entry of judgment within one year after the default, the court shall not enter judgment but shall dismiss the complaint as abandoned, without costs, upon its own initiative or on motion, unless sufficient cause is shown why the complaint should not be dismissed.  A motion by the defendant under this subdivision does not constitute an appearance in the action. This BLOG has previously addressed CPLR 3125(c) < HERE =">HERE"> .  “The policy behind CPLR 3215(c) is to prevent parties who have asserted claims from unreasonably delaying the termination of actions, and to avoid inquests on stale claims.”  Giglio v. NTIMP, Inc. , 86 A.D.3d 301, 307 (2 nd Dep’t 2011) (citations omitted).   The provisions of CPLR 3125(c) are mandatory, but “may be excused if sufficient cause is shown why the complaint should  not be dismissed.”  Merilus v. Nassau Inter County Express , 130 N.Y.S.3d 395, 396 (2 nd Dep’t 2020) (citations omitted).  Sufficient cause can be demonstrated where “plaintiff … proffer a reasonable excuse for the delay in timely moving for a default judgment and demonstrate a potentially meritorious cause of action.”  Id. Further, “ t is not necessary for a plaintiff to actually obtain a default judgment within one year of the default in order to avoid dismissal pursuant to CPLR 3215(c).”  US Bank National Association v. Dorestant , 131 A.D.3d 467, 469 (2 nd Dep’t 2015) (citations omitted).  Plaintiff is not “required to specifically seek the entry of a judgment within a year … s long as ‘proceedings’ are being taken, and these proceedings manifest an intent not to abandon the case but to seek a judgment….”  Id. (citations and some internal quotation marks omitted).  In Dorestant , the court found that the plaintiff “took the preliminary step toward obtaining a default judgment of foreclosure and sale by moving, ex parte, for an order of reference, it initiated proceedings for entry of the default judgment of foreclosure and sale within one year of the defendants' default and, thus, did not abandon the action.”  Id. (citations omitted). As long as plaintiff did not intend to abandon the action, the complaint will not be dismissed even if the motion on which plaintiff relied to establish that it took proceedings to enter a default is “later withdrawn”.  Aurora Loan Services, LLC v. Bandhu , 175 A.D.3d 1470, 1471 (2 nd Dep’t 2019) (citation omitted).  Aurora Loan Services, LLC v. Gross , 139 A.D.3d 772 (2 nd Dep’t 2016), was a mortgage foreclosure action.   The Gross plaintiff filed an RJI and moved for an ex parte order of reference within one year of defendants’ default.  The motion was later withdrawn as plaintiff attempted to comply with administrative orders requiring “a plaintiff’s attorney in certain mortgage foreclosure actions to submit an affirmation confirming the accuracy of the allegations in the complaint.”  Id. at 772-73.  The supreme court in Gross “issued an order … which sua sponte directed the dismissal of the complaint pursuant to CPLR 3215 (c), for the plaintiff's failure to move for leave to enter a default judgment within one year after the defendants' default.”  Id . at 273.  In reversing supreme court, the Second Department in Gross stated: Here, the plaintiff initiated proceedings in June 2008 for the entry of a judgment of foreclosure and sale within one year of the defendants' default by filing the request for judicial intervention seeking an ex parte order of reference. There was no evidence that the plaintiff intended to abandon the action.  Rather, it appears that the plaintiff was attempting to comply with newly imposed requirements for certain mortgage foreclosure actions, which were revised while the action was pending. Under these circumstances, the Supreme Court improvidently exercised its discretion in sua sponte directing the dismissal of the complaint pursuant to CPLR 3215 (c), as no extraordinary circumstances existed to warrant dismissal. Id . at 774 (citations omitted). On November 4, 2020, the Second Department decided Deutsche Bank National Trust Co. v. Hasan , which seems to mirror Gross .  In Hasan , plaintiff lender sought to foreclose a mortgage.  Within a year of defendants’ default, lender moved for an order of reference, but “withdrew the motion due to an administrative order of the Supreme Court, Kings County.”   Three years later supreme court “sua sponte, directed dismissal of the complaint as abandoned pursuant to CPLR 3215(c)” and denied lender’s subsequent motion to vacate the dismissal order.  On appeal, the Second Department reversed supreme court.  Consistent with, and relying on, inter alia , Gross , the Hasan Court held that: Here, the plaintiff took the preliminary step toward obtaining a default judgment of foreclosure and sale by moving for an order of reference in May 2010, within one year of the defendants' default.  In such cases, the complaint should not be dismissed pursuant to CPLR 3215(c), even if, as here, the plaintiff's motion is later withdrawn.

Anyone reading the newspapers or watching television knows that in the past few weeks the country has seen a surge in new coronavirus cases. As reported in the news media ( e.g. , here ),  “ ighteen states have broken daily records for new cases in the past week and hospitalizations are up in 43 states.”  According to Johns Hopkins University, there are more than 9.2 million coronavirus cases and more than 231,000 deaths since the start of the pandemic. Recognizing the risks associated with the rise in COVID-19 cases, Governor Cuomo established new rules for travelers entering the State. ( Here .) Starting Wednesday, the State will require visitors from non-neighboring states to be tested for the virus before and after they arrive. COVID-19 Preparation With the foregoing in mind, the State’s judicial system is preparing for the possibility of a shutdown if the surge in COVID cases occurs in the State. This point was made clear by Chief Judge DiFiore in her weekly address: “Given the rising number of infections around the country, and the very real possibility of a ‘second wave’ here in New York, we are prepared to make immediate adjustments and to scale back or suspend jury trials and in-person proceedings on a moment’s notice.”  Chief Judge DiFiore sought to reassure the public that “ e will continue to make smart, responsible, nimble decisions that protect everyone’s health and safety.” “Our number one priority,” said Chief Judge DiFiore, “is the health and safety of our court family; the jurors, the lawyers and litigants who enter our courts; and the public we serve.” With “that overarching goal in mind”, Chief Judge DiFiore noted that the court system was “working around the clock to expand and enhance virtual operations.” An “essential piece of effort,” she explained, “is e-filing, which enables convenient access to our courts while avoiding the need for in-person filing of court papers.” Chief Judge DiFiore noted that on October 20, 2020, Chief Administrative Judge Larry Marks issued an Administrative Order authorizing e-filing of civil cases in the Supreme Court in seven additional counties in upstate New York, as well as in the Broome County Surrogate’s Court. As a result, by November 18, 2020, e-filing “will be available in the Supreme Court in 60 of our 62 counties, and in Surrogate’s Court in 47 counties.” She further noted that the court system is “committed to extending e-filing to all of the remaining counties in the near future.” Chief Judge DiFiore also highlighted the completion of the system’s expansion of e-filing “to all five boroughs of the New York City Housing Court” and the upcoming city-wide expansion of the system’s e-filing “program for actions transferred from the Supreme Court to the New York City Civil Court” when “Kings County comes on board next Monday, followed by Bronx and Richmond Counties on December 7th.” Jury Trial Program As noted above, during the past couple of weeks, the State began conducting jury trials in both criminal and civil court proceedings. On the civil side, for example, “after two weeks” there have been “8 cases have been tried to verdict and 7 others have been settled.” On the criminal side, Chief Judge DiFiore said that after one week of jury trials in New York City, “ our of the five scheduled trials are still in progress: two in New York County, and two in Kings County, one of which is now a bench trial after the defendant waived a trial by jury”. In Richmond County, although no trials have gone forward, she noted that “18 pleas have been taken on felony cases.” This week, criminal jury trials are expected to start up in Queens and Bronx counties. “I’m pleased to report that these trials have proceeded safely and smoothly to date,” said Chief Judge DiFiore. “We have received positive feedback regarding our preparation and safety protocols, including a note from one of the district attorneys commending the effectiveness of court operations and expressing the hope that there will be more trials in the coming weeks.”

Melville, NY (Law Firm Newswire) November 2, 2020 – Freiberger Haber LLP is pleased to announce that co-founding partners, Jonathan H. Freiberger and Jeffrey M. Haber, have been named by Super Lawyers magazine to be among the top lawyers in the New York metropolitan area. This is Mr. Freiberger’s first year and Mr. Haber’s ninth consecutive year of selection. Both Messrs. Freiberger and Haber were recognized for their work in business litigation.  “I am honored to be named to this year’s Super Lawyers list and to be recognized by my peers for my work in business litigation,” said Mr. Freiberger. “To be recognized by my peers remains a huge honor and achievement for me,” added Mr. Haber.  Super Lawyers Magazine® is an affiliate of Thomson Reuters. It recognizes attorneys who have distinguished themselves by both a high degree of professional achievement and by peer recognition. Each year, no more than 5 percent of lawyers are recognized as Super Lawyers by the magazine. The annual selection involves a survey of lawyers, independent research evaluation of candidates, and peer reviews within each practice area. The magazine publishes its lists nationwide, as well as in leading city and regional magazines and newspapers across the country. A description of the selection process can be found on the Super Lawyers website. About Freiberger Haber LLP Located in New York City and Melville, Long Island, Freiberger Haber LLP is dedicated to representing corporations, small businesses, partnerships and individuals in a broad range of complex business, construction and commercial litigation matters. Founded by Jonathan H. Freiberger and Jeffrey M. Haber, Freiberger Haber leverages more than 50 years of combined experience to deliver sophisticated and creative representation to its clients. The firm’s approach is results oriented and client-centric, providing clients with the sophisticated counsel expected from larger firms with the flexibility and agility of a small firm. ATTORNEY ADVERTISING. © 2020 Freiberger Haber LLP. The law firm responsible for this advertisement is Freiberger Haber LLP, 425 Broadhollow Road, Suite 416, Melville, New York 11747, (631) 282-8985. Prior results do not guarantee or predict a similar outcome with respect to any future matter. Contact Jeffrey M. Haber Freiberger Haber LLP

As readers of the Blog know, when it comes to fraud-based actions, we like to write about them. While many of the cases we examine fall into similar patterns, sometimes a case deviates from the norm. King Penguin Opportunity Fund III, LLC v. Spectrum Group Mgt. LLC , 2020 N.Y. Slip Op. 06230 (1st Dept. Oct. 29, 2020) ( here ), is such as case. King Penguin concerned, among other claims, a fraudulent inducement claim arising from the execution of a term sheet for a proposed loan. The Court affirmed the dismissal of plaintiff’s fraud claim because plaintiff could not demonstrate justifiable reliance on any alleged false statement made by defendant. In so holding, the Court held that because the parties did not enter into a written definitive agreement, only a term sheet that required the execution of such a writing, plaintiff could not rely upon defendants’ promises to proceed with the transaction. Slip Op. at *1. “Term sheets”, “letters of intent”, “memoranda of understanding” and “agreements in principle” outline the fundamental terms of the transaction being negotiated. They may constitute an enforceable agreement if the writings include all the essential terms of an agreement. Sullivan v. Ruvoldt , 16 Civ. 583, 2017 WL 1157150 at *6 (S.D.N.Y. Mar. 27, 2017). This is so even if “the parties intended to negotiate a ‘fuller agreement’”. Conopco, Inc. v. Wathne Ltd. , 190 A.D.2d 587, 588 (1st Dept. 1993). Thus, if the informal writings contain the necessary elements of an enforceable contract, e.g. , an offer, acceptance, consideration, mutual assent and intent to be bound, courts will enforce the writings as if they were a formal, written agreement. However, a term sheet, letter of intent or a memorandum of understanding will be rendered ineffective where material terms are left for future negotiation or the writing expressly reserves the right not to be bound until a more formal agreement is signed. Bed Bath & Beyond Inc. v. IBEX Constr., LLC , 52 A.D.3d 413, 414 (1st Dept. 2008); Emigrant Bank v. UBS Real Estate Sec., Inc. , 49 A.D.3d 382, 383-384 (1st Dept. 2008). The term sheet in King Penguin explicitly required “‘satisfactory completion of Lender’s due diligence and execution of written loan documents’ before the parties contractually bound.…” Slip Op. at *1. In particular, the term sheet provided that it was “for discussion purposes only and not constitute a binding commitment to provide credit.” Any binding commitment was “contingent upon satisfactory completion of Lender’s due diligence and execution of written loan documents.” The terms sheet also highlighted the fact that it was “not comprehensive” such that “ he written loan commitment or loan agreement contain provisions not included in th Term Sheet.” Therefore, held the Court, “it was ‘unreasonable as a matter of law’ for plaintiff to rely upon the representations in the term sheet to proceed with the transaction.” Id. (citations omitted). The Court rejected plaintiff’s contention that “the nonbinding effect of the term sheet should be ignored because the term sheet did not specifically disclaim reliance on defendant’s prior oral representations.…” Id. (citing Basis Yield Alpha Fund v Goldman Sachs Group, Inc. , 115 A.D.3d 128, 137 (1st Dept. 2014)). The Court explained that “ specific disclaimer of reliance, however, not necessary to find lack of justifiable reliance.…” Id. (relying on (StarVest Partners II, L.P. v. Emportal, Inc. , 101 A.D.3d 610 (1st Dept. 2012)). The Court concluded that plaintiff could not “logically argue that defendant’s oral misrepresentations fraudulently induced it to execute the term sheet, which was expressly nonbinding.” The Court also rejected plaintiff’s argument that it could disclaim reliance on misrepresentations of facts that were peculiarly within defendant’s knowledge. According to plaintiff, it had no way of knowing that defendant did not intend to issue a loan under the terms set forth in the term sheet. The Court found the argument “unavailing” because “defendant had made clear in the term sheet that it had no intent to issue a loan until satisfaction of due diligence and execution of written loan documents.” Slip Op at *1. Finally, the Court held that plaintiff failed to allege any misrepresentation of fact. Instead, said the Court, plaintiff merely alleged an intent not to perform “under the proposed terms in the term sheet.” Id. Under New York law, “ eneral allegations of lack of intent to perform are insufficient; , facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.” Perella Weinberg Partners LLC v. Kramer , 153 A.D.3d 443, 449 (1st Dept. 2017); see also Cronos Grp. Ltd. v. XComIP, LLC , 156 A.D.3d 54, 71 (1st Dept. 2017). Takeaway To plead a claim for fraudulent inducement, a plaintiff must allege a “misrepresentation of a material fact, which was known by the to be false and intended to be relied on when made, and that there was justifiable reliance and resulting injury.” Perella Weinberg , 153 A.D.3d at 449). As we have discussed in the past, the justifiable reliance element is often the most difficult one to satisfy. This is especially so where, as in King Penguin , sophisticated parties are involved. Sophisticated parties “must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time.” VisionChina Media, Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). A sophisticated party satisfies this requirement by obtaining a prophylactic provision in a contract or other writing or exercising due diligence to make an additional inquiry into 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). Such prophylactic measures are difficult to implement when, as in King Penguin , a non-binding term sheet or other preliminary agreement is involved. As the First Department observed in King Penguin and StarVest Partners , “ here a term sheet or other preliminary agreement explicitly requires the execution of a further written agreement before any party is contractually bound, it is unreasonable as a matter of law for a party to rely upon the other party’s promises to proceed with the transaction in the absence of that further written agreement.” King Penguin , at *1; StarVest Partners , 101 A.D.3d at 613.

Readers of this Blog know that, as a general matter, New York courts will not permit a fraud-based claim ( i.e. , fraudulent inducement) to survive a motion to dismiss when the claim arises from a breach of contract. Indeed, courts routinely dismiss a fraud claim where “ he existence of a valid and enforceable written contract govern a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is. , 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated<,> ” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraudulent inducement 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). What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Group Ltd. v. XComIP, LLC , 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id. at 63. See also Demetre v. HMS Holdings Corp. , 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine , 81 A.D.3d 77 (1st Dept. 2010). In 3P-733, LLC v. Davis , 2020 N.Y. Slip Op. 06043 (1st Dept. Oct. 27, 2020) ( here ), the Appellate Division, First Department affirmed the dismissal of a fraud claim because it was “duplicative of part of the contract claim.” Slip Op. at *1.  3p-733="3p-733" are="are" taken="taken" from="from" motion="motion" court="court" court’s="court’s" decision="decision" ( here).=">here)."> 3P-733 arose from an alleged real estate development joint venture between plaintiff Piyush Bhardwaj, through his company, plaintiff 3P-733, LLC (“3P”), and defendant Tawan Davis (“David”), through defendant CPG Invest, LLC (“CPG”), a company in which Davis is one of three ownership members. 3P, as 40% member, and CPG, as 60% member, formed a new company, non-party Carbyne Property Group (“Carbyne”), to invest in and develop real estate. According to plaintiffs, Carbyne began operating under a new name, The Steinbridge Group, LLC (“Steinbridge”) under the same terms as Carbyne’s operating agreement. Steinbridge was formed on March 31, 2016 “with the intent of causing the provisions of Operating Agreement, as written, to govern ”; however, “no actual operating agreement was ever prepared” for Steinbridge. In or about the Summer of 2017, the relationship between Bhardwaj and Davis began to deteriorate. Plaintiffs claimed that in August 2017 Davis “‘unilaterally and without notice cut off … Bhardwaj’s access to … Bhardwaj’s Steinbridge email account and to the Steinbridge shared computer drive’, and, ultimately, ‘Bhardwaj was fraudulently ejected from his forty percent … minority stake” in Steinbridge.’” Defendants moved to dismiss, among other claims, the fraud claim. Defendants argued that the fraud claim was duplicative of, inter alia , plaintiffs’ breach of contract claim. Plaintiffs opposed, arguing that the fraud claim was adequately pleaded in that Davis: (1) materially misrepresented to Bhardwaj that the Carbyne agreement would carry over to Steinbridge word-for-word; (2) caused Bhardwaj to contribute considerable labor into building Steinbridge’s real estate business; (3) ousted Bhardwaj from the joint venture under the false pretext of petty theft; and (4) reaped the benefits of Steinbridge’s transactions himself, to the exclusion of plaintiffs. The motion court held that the fraud claim was duplicative of the breach of contract claim as it was “premised on precisely the same facts and alleged the same injuries: CPG, through one of its members (Davis), made misrepresentations to Bhardwaj regarding the transition to and agreements to be utilized for Steinbridge, then falsely accused Bhardwaj of petty theft in a scheme to expel 3P from the business.” Thus, concluded the motion court, “the injury that Bhardwaj sustained was only that sustained by 3P, as plaintiffs allege that the membership interest in Carbyne/Steinbrdige was held by 3P, not by Bhardwaj individually.” The court rejected plaintiffs contention that damage to Bhardwaj’s reputation in the real estate industry sufficed to “establish an adequate extracontractual injury”: “The only glimmer of extra-contractual injury plaintiffs allege in connection with the purported fraud is injury to Bhardwaj’s reputation in the real estate business, and those injuries are the subject of various other claims ( i.e. , for defamation and tortious interference with an unrelated contract) that are distinct from the fraudulent misrepresentation here (application of the Carbyne agreement terms to Steinbridge) and do not establish an adequate extracontractual injury.” The motion court explained that “ he reputational and future business injuries plaintiffs assert are not injuries that arise from the purported reliance on the fraudulent misrepresentations: the defamation and tortious interference claims/injuries relate to articles published and one letter sent after the ouster.” “Rather,” said the motion court, “the injuries arising from misrepresentations as to the membership and operating agreement terms applicable to Steinbridge resulted in only those injuries sustained directly by 3P, not by Bhardwaj individually.” Accordingly, the motion court dismissed plaintiffs’ fraud claim. Defendants appealed. As noted, the First Department affirmed. The Court held that the “fraud claim duplicative of part of contract claim.” Slip Op. at *1 (citing, Cronos , 156 A.D.3d at 62-63). The Court explained that “ ontrary to plaintiffs’ contention on appeal that the contract claim relate solely to the written operating agreement for nonparty Carbyne Property Group, LLC” the record below demonstrated that “the contract claim also encompassed an oral agreement between plaintiff 3P-733, LLC (3P) — acting through its managing member, plaintiff Piyush Bhardwaj — and defendant CPG Invest, LLC (CPG Invest) — acting through its ultimate managing member, defendant Tawan Davis — that the CPG Operating Agreement would be ‘transposed over to’ The Steinbridge Group, the name under which CPG would allegedly later operate.” Id. Thus, concluded the Court, the fraud claim was duplicative of plaintiffs’ contract claim. Id. The Court also found that plaintiffs’ fraud claim was premised on a misrepresentation of defendants’ intentions with respect to the performance of their contractual obligations: “Davis — both individually and through CPG Invest — misrepresented to Bhardwaj — both individually and through 3P — that the CPG Operating Agreement was being transposed into an operating agreement for Steinbridge.” Slip Op. at *1. Such a claim, reasoned the Court, is appropriately dismissed as duplicative of a breach of contract claim because the alleged fraud was based on the same facts as those set forth in the contract claim, i.e. , the fraud was not collateral to the obligations imposed by the contract. Id. Finally, the Court held that “the relief sought under both causes of action — at least as pleaded in the — identical.” Id. Takeaway A fraud claim, which arises from the same facts, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement, is duplicative of a contract claim. While the principle seems clear enough, its application is not always so clear. And, because of the absence of clarity, plaintiffs often find it difficult to demonstrate a legal duty that is collateral to or independent of the contract at issue. 3P-733 highlights this difficulty.