It has been a long time since this Blog examined a request for a pre-judgment order of attachment. ( See here .) Today, we take another look at this provisional remedy. What is Prejudgment Attachment?  Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against the defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action. The Law in New York Article 62 of the Civil Practice Law & Rules (“CPLR”) governs prejudgment attachment orders. Sections 6201(1) through 6201(5) provide the grounds upon which a plaintiff can obtain such relief. Under these sections, a plaintiff can obtain a prejudgment order of attachment when: the defendant is a foreign corporation not qualified to do business in New York (CPLR § 6201(1)); the defendant resides in New York but cannot be served with process despite diligent efforts to do so (CPLR § 6201(2)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR § 6201(3)); the action is brought by a crime victim and is brought against the person or legal representative of the person convicted of the crime and seeks to recover damages sustained as a result of crime (CPLR § 6201(4)); or the cause of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York (CPLR § 6201(5)). Prejudgment attachment is a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR § 6212(a).  Notably, the plaintiff’s moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought.  Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp. , 118 A.D.2d 769, 773 (2d Dept. 1986). The evidence must be established by an affidavit made by a person with actual knowledge. Rosenthal v. Rochester Button Co., Inc. , 148 A.D.2d 375 (1st Dept. 1989). Applications supported solely by an affidavit of an attorney who lacks personal knowledge of the facts surrounding the transaction giving rise to the action are insufficient.  Where fraud is alleged, under CPLR § 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff’.” VNB NY, LLC v. Rapaport , 2016 N.Y. Slip. Op. 50099 (Sup. Ct., Kings County Jan. 29, 2016) (citations omitted). “ ere removal, assignment or other disposition of property is not grounds for attachment.” Computer Strategies v. Commodore Bus. Machs. , 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id.   Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc. , 2016 N.Y. Slip Op. 32405 (Sup. Ct., N.Y. County Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id. (citation and internal quotation marks omitted). Even when the plaintiff satisfies the statutory grounds for an order of attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp. , 2017 N.Y. Slip Op. 30813 (Sup. Ct., N.Y. County Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC , 109 A.D.3d 49, 60 (1st Dept. 2013)).  The risk “should be real.” VisionChina , 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position ( i.e. , whether the defendant is in “serious financial distress” ( Elton Leather Corp. v. First Gen. Resources Co. , 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina , 109 A.D.3d at 60. In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR § 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g. , Von Bock v Metropolitan Life Ins. Co. , 223 A.D.2d 700 (2d Dept. 1996). Erensel v. Abitbol On May 29, 2020, in Erensel v. Abitbol , 2020 N.Y. Slip Op. 31587(U) ( here ), Justice Arlene P. Bluth of the New York Supreme Court, New York County, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR § 6201(3) due to a lack of evidence of fraudulent intent. Background Erensel concerned the business relationship between plaintiff, Brent Erensel, and defendants, Yair Abitbol (“Abitbol”) and Zurich Funding NA Inc. (“Zurich”). Plaintiff alleged that Abitbol ran a fraudulent scheme to induce plaintiff into investing $75,000 in Zurich – an initial deposit of $25,000 and an additional investment of $50,000 – to acquire an ownership interest in the company. Plaintiff contended that Zurich was a fraudulent company and that Abitbol deliberately chose the name and the company logo to mimic the well-known Zurich Insurance Company. Plaintiff asserted that Zurich had few assets and that the address provided for the business was fake. Plaintiff successfully obtained an order preliminarily restraining defendants from transferring any assets to the extent of the amount claimed by plaintiff, including a specific bank account at TD Bank and any other bank account in either defendants’ name at TD Bank. Plaintiff moved for a prejudgment order of attachment. Defendants opposed the motion, claiming the dispute between the parties was merely a disagreement over plaintiff’s desire to leave the partnership. Defendants denied that there was any fraud, noting that there could be no fraud since plaintiff received payments from Zurich – between November 2017 through May 2018, plaintiff received a little over $16,000 from his partnership interest in Zurich.  The Court’s Decision The Court denied the motion and vacated the order restraining defendants from transferring any assets. The Court held that plaintiff failed to meet his burden for a prejudgment order of attachment. In particular, the Court found no proof of fraud: “Critically, plaintiff admits that he received monthly payments from Zurich from November 2017 through May 2018 before the payments ceased. While these payments do not prove the absence of fraud, they severely undercut the high burden a plaintiff must meet in order to get an attachment.” Slip Op. at *3 (orig’l emphasis).  The Court also held that plaintiff failed to prove that defendants concealed or were about to conceal assets in order to evade the recovery of a judgment. Id. This was especially so since the parties disputed the events in question. Id. (noting, “defendants have appeared and offer a very different account of what took place”).  Put another way, an attachment is not appropriate where two parties disagree over the terms of an investor’s departure from a partnership. It may be that plaintiff is in fact entitled to the over $70,000 he seeks. But plaintiff’s eventual recovery is not a reason to grant the provisional remedy sought here, where plaintiff has made no showing that defendants have taken any steps to be “judgment proof.” This Court declines to grant an attachment under these circumstances Id. at *3-*4. In short, explained the Court, “ his is not a situation where plaintiff has proof that defendants transferred money from its accounts, attempted to shut down the business or have disappeared.” Id. at *3. Takeaway The purpose of a prejudgment order of attachment “is not merely to ensure a plaintiff can recover the amount sought if he or she prevails in a case.” Slip Op. at *3. “Otherwise,” as Justice Bluth observed, “a plaintiff would be entitled to an attachment in nearly every case.” Id. The remedy is reserved for a specific set of circumstances. Proof of those circumstances is required. Since New York courts strictly construe CPLR § 6201 “in favor of those against whom it may be employed” ( Hume v. 1 Prospect Park ALF, LLC , 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. In Erensel , plaintiff could not meet this burden.

It is an accepted principal of contract interpretation that “when parties set down their agreement in a clear, complete document, their writing should be enforced according to its terms.”  Vermont Teddy Bear Co. v. 538 Madison Realty Co. , 1 N.Y.3d 470 475 (2004) (quoting W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990)) (ellipses omitted).  Such a rule “imparts stability to commercial transactions by safeguarding against fraudulent claims, perjury, death of witnesses<,> infirmity of memory and the fear that the jury will improperly evaluate the extrinsic evidence.”  W.W.W. Assoc. v. Giancontieri , 77 N.Y.2d 157, 162 (1990) (ellipses and brackets omitted).  This “stability” is of critical importance in real estate transactions where commercial certainty is a paramount concern….”  Wallace v. 600 Partners Co. , 86 N.Y.2d 543, 548 (1995) (citation and internal quotation marks omitted).  Adherence to typical rules of contract construction is mandated when the underlying transactions involve “sophisticated, counseled parties dealing at arm’s length.”  Chimart Assoc. v. Paul , 66 N.Y.2d 570, 574 (1986). Personal guaranties are frequently utilized in commercial transactions.  Lenders often require that principals of a corporate borrower execute guaranties to help secure payment in the event that the borrower defaults.  Guaranties also ensure that the guarantors have “skin in the game,” which may keep them mindful of the business decisions that they make.  For the same reasons, commercial landlords frequently require that, inter alia , the financial obligations of a lease are guaranteed by a principal of a corporate tenant. “A guaranty is a promise to fulfill the obligations of another party, and is subject to the ordinary principles of contract construction.”  Cooperative Centrale Raiffeisen-Boerenleenbank, B.A., “Rabobank Int’l,” New York Branch v. Navarro , 25 N.Y.3d 485, 493 (2015) (citations and internal quotation marks omitted).  Accordingly, a guaranty, like any other “written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”  Rabobank , 25 N.Y.3d at 493 (citation and internal quotation marks omitted). A guaranty that provides that the guarantor waives defenses is enforceable.  As the Court stated in Citibank, N.A. v. Plapinger , 66 N.Y.2d 90, 92 (1985), “ raud in the inducement of a guarantee by corporate officers of the corporation’s indebtedness is not a defense to an action on the guarantee when the guarantee recites that it is absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, or any other circumstance which might otherwise constitute a defense available to a guarantor in respect of the guarantee, those recitals being inconsistent with the guarantors’ claim of reliance upon an oral representation that the lending banks were committed to extend to the corporation an additional line of credit.”  Citibank , 66 N.Y.2d at 92.  “Relying on Citibank , New York courts have consistently upheld broadly worded waiver language of this type to preclude the assertion of defenses to a guaranty.”  Red Tulip, LLC. v. Neiva , 44 A.D.3d 204, 209 (1 st Dep’t 2007) (citations and internal quotation marks omitted). In 2402 East 69 th Street, LLC v. Corbel Installations, Inc. , decided by the Appellate Division, Second Department, on May 27, 2020, the Court was called upon to determine whether the guarantors of a commercial lease were liable under the guaranties they signed.  The plaintiff in 2402 East 69 was the owner of commercial property in Brooklyn (the “Premises”).  Defendant Corbel, as tenant, entered into a three-year commercial lease with 2402 East 69 th Street, LLC, as landlord.  Two principals of tenant executed personal guaranties.  Tenant defaulted in its obligations under the lease and landlord sought to enforce its rights against guarantors.  Apparently, the form lease used misnamed the landlord and the address of the Premises.  An e-mail, which was deemed to be an amendment to the Lease and corrected the two referenced errors, was signed by representatives of the landlord and tenant.  The guaranties provided that the guarantors “would become guarantors of the prompt and faithful payment and performance of Corbel under the lease, and that no modifications or amendments to the lease would relieve the guarantors’ obligations.” In 2402 East, the First Department, inter alia , affirmed the motion court’s grant of summary judgment in favor of landlord finding that it met its prima facie burden by proving “an absolute and unconditional guaranty, the underlying debt, and the guarantor’s failure to perform under the guaranty.”  (Citations omitted.)  The “plaintiff established, prima facie, that were liable for breach of the lease he guaranty provided, inter alia , that no amendments of the lease would relieve the guarantors or the guarantors’ obligations, and that notice to or consent by the guarantors was not required for amendments respecting the lease.”  (Citations omitted.)  The Court rejected the guarantors’ contention that the signed e-mail was not an amendment to the lease because “ guarantor is not relieved of his or her obligations where, as here, the written guaranty allows for changes in the terms of the guaranty and expressly waives notice to the guarantor of these changes.”  (Citations, internal quotation marks and brackets omitted.)

In prior posts ( e.g. , here and here ), we have discussed the importance of pleading loss causation in fraud and fraud-related actions. Where causation is an issue, the cases show that plaintiffs often have difficulty demonstrating the components necessary to withstand a motion to dismiss ( e.g. , here ). There are two components to the causation element: transaction causation and loss causation. “Transaction causation means that the violations in question caused the to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young , 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc. , 189 F.3d 165, 172 (2d Cir. 1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original). Loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co. , 783 F.3d 395, 402 (2d Cir. 2015). It is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc. , 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub v. Faessel , 297 A.D.2d 28, 31 (1st Dept. 2002) (“ oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). Both transaction causation and loss causation must be pleaded and proved to withstand a challenge from a defendant. Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley , 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc. , 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”). Notwithstanding, as noted, the cases show that plaintiffs often find their fraud and fraud-based causes of action dismissed because of the failure to plead and/or prove causation, and in particular loss causation. In today’s article, we examine Minzer v. Barga , 2020 N.Y. Slip Op. 31458(U) (Sup. Ct. May 22, 2020) ( here ), a case involving claims sounding in, among others, fraud, negligent misrepresentation and consumer-oriented deceptive practices. Minzer v. Barga Background Plaintiff, Daniel Minzer (Minzer”), alleged he was struck in the face by defendant, Angelo Barga (“Barga”), who was allegedly acting as a driver employed by defendants, Zwolf-NY, LLC (“Zwolf-NY”) and Uber Technologies (collectively, “Uber”), at the time of the incident. Plaintiff asserted that Uber’s online representations led him to believe that his safety was assured. The incident occurred on February 24, 2018, when plaintiff allegedly requested a ride on the Uber application with a friend. Plaintiff’s friend wore a brace due to a knee injury. The Uber application assigned Barga as plaintiff’s driver. Once inside the vehicle, plaintiff asked Barga to make two stops. Barga allegedly became agitated and refused. After making a statement to the effect of “do you want to have a broken leg like your friend,” Barga exited the vehicle, walked to the back, and allegedly punched plaintiff on the right side of his face before driving away. Plaintiff was charged $10.40 for a ride that neither he nor his friend participated in. Plaintiff filed suit. In his amended complaint, plaintiff set forth nine causes of action: (1) assault, (2) battery, (3) respondeat superior liability, (4) apparent authority liability, (5) negligent hiring, supervision, and retention, (6) fraudulent misrepresentation, (7) negligent misrepresentation, (8) breach of contract, and (9) violations of New York’s Deceptive Trade Practices Act, New York General Business Law (“GBL”) § 349. Defendants moved to dismiss. The Court granted the motion. We look at the motion with respect to plaintiff’s sixth, seventh and ninth causes of action. The Court’s Decision The Court held that plaintiff did “not set forth … a reasonable basis … to determine that Uber’s alleged misrepresentations caused plaintiff’s loss or injury.” Slip Op. at *5.  The Court noted that Minzer sufficiently pleaded “transaction causation as he claim he would not have chosen the service but for Uber’s safety promises.” Id. However, the Court found that there was nothing in the complaint to suggest that Uber’s representations about safety caused his injuries as opposed to the attack allegedly undertaken by Barga: “ othing in the pleading … suggests loss causation— i.e. , that Uber’s alleged misrepresentations of safety, rather than Barga’s attack, directly caused plaintiff’s loss. Id. at *5-*6 (citing Greentech Research, LLC v. Wissman , 104 A.D.3d 540, 540 (1st Dept. 2013) and Laub , supra .). In addition, the Court held that Minzer failed to plead his fraud and fraud-based claims with particularity. Slip Op. at *6.  The Court found that Minzer merely pleaded “that he was aware of Uber’s alleged safety promises.” Id.   He did not allege, said the Court, “how or when came to possess this information, thereby failing the particularity requirement.” Id. Under CPLR § 3016(b), a plaintiff alleging fraud must state “‘the circumstances constituting the wrong’ with ‘specific facts with respect to the time, place, or manner of the defendant’s purported misrepresentations,’ as well as the specific words used by the defendant.” Id. (quoting CPLR § 3016(b) and Lanzi v. Brooks , 43 N.Y.2d 778, 780 (1977), and citing Brown v. Wolf Group Integrated Communications, Ltd. , 23 A.D.3d 239 (1st Dept. 2005); Riverbay Corp. v. Thyssenkrupp N. Elevator Corp. , 116 A.D.3d 487, 488 (1st Dept. 2014)).  The Court found that Minzer’s GBL § 349 claim “suffer similar defects as the claims.” Slip Op. at *6. In this regard, the Court found, relying on Blue Cross & Blue Shield of N.J., Inc. v. Philip Morris USA Inc. , 3 N.Y.3d 200, 207 (2004), that “Barga’s assault the only direct cause of plaintiff’s injury.” Id. In Blue Cross , the Court of Appeals deemed causation too derivative when the plaintiff insurers’ losses resulted directly from smoking-related illnesses of their subscribers, rather than from the defendant tobacco companies’ products. 3 N.Y.3d at 207.   Moreover, “ ven if plaintiff would not have suffered the injury but for Uber’s promises,” Minzer’s claim would still fail because “but for” causation is insufficient to “‘to state a claim for relief under §349(h).’” Id. (quoting City of New York v. Smokes-Spirits.Com, Inc. , 12 N.Y.3d 616, 623 (2009)). Takeaway Plaintiffs alleging fraud must do so with particularity. This pleading requirement applies to each element of the fraud claim.  Minzer is a good reminder that a plaintiff can get to the finish line but not cross it because of a failure to satisfy one of the elements of his/her fraud claim. In Minzer , that element was causation.  Although the causation element is inherently factual, it does not mean that courts will not dismiss a fraud claim because of the failure to plead and/or prove causation. In fact, as shown in Minzer , where the plaintiff fails to allege facts sufficient to support a reasonable inference that the causation allegations are true ( Eurycleia Partners, LP v. Seward & Kissel, LLP , 12 N.Y.3d 553, 559-60 (2009)), a fraud cause of action will be dismissed. For this reason, litigants alleging fraud should be mindful of the particularity requirements attendant to each element of the claim. As relevant in Minzer , this means providing allegations that show “the misrepresentations directly caused the loss about which plaintiff complains.” Laub , 297 A.D.2d at 31.

Last week, the New York State court system, which is following Governor Cuomo’s plan to reopen the economy on a regional, phased-in basis, resumed in-person court operations in 40 counties in the six regions meeting the public health benchmarks for economic reopening: the Finger Lakes, Mohawk Valley, Southern Tier, North Country, Central New York and Western New York regions. As of May 26, 2020, eight additional counties in the Capital Region restored in-person court operations. By the end of the week, the Mid-Hudson and Long Island regions are expected to join the foregoing regions in restoring in-person operations – the former to resume in-person operations on May 28 and the latter to resume operations on May 29. In total, the court system has resumed in-person courthouse operations in 48 of the state’s 62 counties. Although in-person operations have resumed in these regions, Chief Judge DiFiore stressed in her weekly update video ( here ) that the resumption of operations “is not a return to business as usual.” Instead, said Chief Judge DiFiore, it is “a return to a ‘new normal’ defined by limited courthouse traffic and procedures and safety measures designed to reduce the risk of virus transmission and ensure the health and safety of judges, court staff and all court users and visitors.” Thus, the court system will continue to “rely[ ] on virtual technology to conduct as much court business as possible” and implement “safety measures” where in-person operations have been restored, “including: COVID screening; the wearing of masks by all who enter our courthouses; social distancing protocols; availability of PPE; strict cleaning and sanitizing standards; and the installation of plexiglass partitions in strategic courthouse locations.” Chief Judge DiFiore noted that the court system took “a[]nother important step in return to a new normal” on May 25, by allowing “the filing of new lawsuits and court matters previously classified as ‘nonessential.’” Thus, new lawsuits can be filed in all 62 counties of the state. In allowing new filings, Chief Judge DiFiore explained that in the “regions that have reopened, new matters must be filed electronically in those courts that use NYSCEF e-filing system, and by mail in those courts where NYSCEF is unavailable.” In the regions “that have not yet met the benchmarks for reopening, new matters may now be filed electronically in those courts that use the NYSCEF system.” Chief Judge DiFiore encouraged those looking for more information about the filing of new matters to visit the court system’s website, where visitors can review Administrative Order 114 ( here ).  Chief Judge DiFiore also noted the progress judges have made to reduce the backlog of pending, undecided motions. In courts outside New York City, all but one county has reduced the backlog to zero, and, as to that county, it “is fast approaching zero”, said Chief Judge DiFiore. In New York City, the “backlog has been reduced by more than half.” Finally, the Court of Appeals announced ( here ) that it will begin the transition to in-person courthouse operations. By May 28, 2020, the full complement of Albany-based Court staff will return to Court of Appeals Hall. During its June 2020 session, the Court will be available to hear in-person oral argument from counsel, following appropriate safety protocols. However, the courtroom will be closed to the public. The Court will webcast oral arguments in real time. Court of Appeals Hall otherwise will not be open to public visitors until further notice. Filings, including applications for stays, will not be accepted in person at the Clerk’s Office until further notice. Persons who wish to file papers in person should call the Clerk’s Office at 518-455-7700 for instructions on alternative ways to file. The Court will continue to accept submissions by mail and, as permitted by its Rules, electronically. Attorneys, litigants and the public are encouraged to check the Court’s website ( here ) for updates on Court procedures.

Elder financial exploitation is a significant problem. Everyone reading this article may be affected in some way. Family, friends, neighbors, colleagues, and/or customers can fall victim to financial exploitation. All of us are at risk of being financially abused and/or exploited as we grow older. Seniors are Particularly Vulnerable to Financial Abuse and Exploitation “Scam artists prey on seniors who are too polite and have difficulty saying ‘no’ or feel indebted to someone who has provided unsolicited investment advice.” (See SEC Guide, “Before You Invest”, here.) Research indicates that as seniors grow older, they become too trusting and fail to recognize false or misleading claims, suspicious intentions and evidence of risky behavior. One study of senior adults found that many exhibited risky behaviors, such as believing deceptive and misleading advertisements and buying falsely advertised products (here). Other researchers have found that older persons possess a “doubt deficit,” in which false and misleading claims fail to trigger doubt in the listener (here). Such persons are often unable to detect the intentions of others, including those with the intent to deceive. As a result, the inability to doubt “provide a compelling rationale why highly knowledgeable and intelligent older people are often susceptible to deception and fraud.” (Id.) The Financial Costs of Elder Financial Abuse and Exploitation As the incidence of financial exploitation and abuse increases, so do the costs to its victims. An oft-cited study by the MetLife Mature Market Institute, the National Committee for the Prevention of Elder Abuse, and the Center for Gerontology at Virginia Polytechnic Institute and State University, titled “Broken Trust: Elders, Family & Finances,” estimates that about one million seniors lose approximately $2.6 billion annually from financial exploitation and abuse. (Here.) In 2011, MetLife updated its estimate to at least $2.9 billion. Other, more recent studies estimate the losses to exceed $36 billion a year, 12 times the MetLife estimate. (Here.) Seniors and Pyramid Schemes Ponzi schemes remain a familiar and unfortunate risk for investors, especially the elderly. (Here.) Because Ponzi schemes purport to offer high returns with little or no risk, and rely on inflated credentials of a financial professional, investors are attracted to the investment products these scammers offer. “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. With little or no legitimate earnings, Ponzi schemes require a constant flow of money from new investors to continue. Ponzi schemes inevitably collapse, most often when it becomes difficult to recruit new investors or when a large number of investors ask for their funds to be returned.” Seehttps://www.sec.gov/spotlight/enf-actions-ponzi.shtml. Many Ponzi schemes share common characteristics. These include, among others: high returns with little or no risk – i.e., “guaranteed” investment opportunities; overly consistent returns – i.e., investments that consistently generate positive returns regardless of overall market conditions; unregistered investments – i.e., investments that are not registered with the SEC or with state regulators; unlicensed sellers – i.e., investment professionals and firms that are not licensed or registered with state and federal regulators; secretive, complex strategies – i.e., investment strategies that are locked away in a black box or are the scammer’s “secret sauce”; and difficulty receiving payments – i.e., difficulty cashing out or obtaining redemptions. Shutting down Ponzi schemes and holding the organizers accountable for such frauds is an important part of the SEC’s enforcement mission. Recently, the SEC announced an emergency action against a Ponzi scheme organizer allegedly responsible for bilking seniors out of millions of dollars. SEC v. Paul Horton Smith, et al. On May 22, 2020, the SEC announced (here) that it filed an emergency action and obtained a temporary restraining order and asset freeze against a California-registered investment adviser and his entities to stop an ongoing Ponzi scheme targeting senior citizens in Southern California. According to the SEC’s complaint (here), from at least January 2018 through the present, Paul Horton Smith Sr. (“Smith”) offered and sold securities in his company Northstar Communications LLC (“Northstar”), and used his investment advisory firm eGate LLC (“eGate”) and insurance and estate planning company Planning Services Inc. (“Planning Services”) to market the securities. Smith and Northstar through free workshops and other investor events allegedly promised investors guaranteed annual interest payments of between 3% and 10.5% if they invested in “private annuity contracts.” The SEC alleged that, in reality, Smith did not invest the funds raised in any securities and instead used new investor funds to pay investor returns “in a classic Ponzi scheme.” According to the SEC, Northstar raised more than $5.6 million from at least 35 investors and paid out $5.2 million to those investors as interest payments or principal returned. Smith also allegedly used investor funds to settle investor fraud lawsuits. Smith allegedly perpetrated the fraud by holding himself out as a trusted fiduciary through his position as an investment adviser with eGate and a licensed insurance agent with Planning Services. Smith allegedly touted himself to potential clients as a “veteran of the financial services industry” with years of experience, at free financial workshops and free meal seminars. Through his promotion of advisory, tax, and financial planning services, said the SEC, Smith created a trusting relationship he then used to solicit investors to purchase securities issued by Northstar. Smith allegedly told investors during a February 2020 workshop, “your pockets aren’t going to get picked, okay? . . . We are all fiduciaries.” In fact, alleged the SEC, “clients’ pockets were getting picked clean through his Ponzi scheme.” According to the SEC, Northstar’s bank records for the period January 2018 to April 2020 showed investor deposits of approximately $5.6 million into its bank account, representing approximately 95% of total deposits during that period. During the same period, said the SEC, over $5.3 million was paid to investors as interest payments or return of principal, or approximately 89% of the total disbursements from the Northstar account. “As alleged in our complaint, Paul Horton Smith Sr. raised millions of dollars by touting his purported investment expertise and guaranteeing returns,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “Investors should be wary of investments promising no risk and high returns, which are classic warning signs of investment fraud.” The SEC charged Smith, Northstar, eGate, and Planning Services with violating the antifraud provisions of the federal securities laws. The SEC seeks injunctions, the return of ill-gotten gains plus interest, and civil penalties. On May 20, 2020, in addition to granting a temporary restraining order and an asset freeze, the court ordered an accounting and appointed a temporary receiver. The court scheduled a hearing for June 3, 2020, to consider continuing the asset freeze, issuance of a preliminary injunction, and appointment of a permanent receiver. In a parallel action, the U.S. Attorney’s Office for the United States District Court for the Central District of California announced (here) on May 21, 2020 that it filed a criminal complaint against Smith. According to the DOJ, the alleged fraud occurred “from at least 2013 until the present”. Over that time, Smith allegedly bilked investors, mainly seniors, out of more than $10 million. One victim, a 70-year-old woman who had known Smith from their mutual church association in the 1990s, sold a home in Arizona in August 2016 and wrote a $175,000 check to Northstar for investment. Instead of investing the victim’s money, the DOJ claimed that Smith transferred her funds to other investors, and used her money to pay off the other investors’ tax bills with the IRS and the Franchise Tax Board. In November 2019, another victim, an 86-year-old woman who had known Smith for many years, allegedly invested approximately $169,126 in Northstar from the sale of a rental property. The following day, charged the government, Smith took $134,863 of the victim’s money to pay off another victim investor. According to the DOJ, a review of bank records showed that Smith’s victims transferred more than $10 million to Smith’s business entities since 2013.

Discovery, an important part of litigation, is designed to assist litigants in the prosecution or the defense of the claims being asserted in the action.  For the litigation process to yield fair results, it is imperative that the parties exchange necessary information. See CPLR 3101 (“There shall be full disclosure of all matter material and necessary in the prosecution or defense of an action, regardless of the burden of proof...”).  Accordingly, there is a duty to preserve evidence that may be useful during litigation and there is a consequence for failing to preserve evidence – whether the failure is willful, negligent, or anywhere in between.  This BLOG previously discussed spoliation of evidence. < HERE =">HERE"> “To obtain sanctions for spoliation, a party must establish that the non-moving party had an obligation to preserve the item in question, that the item was destroyed with a ‘culpable state of mind,’ and that the destroyed item was relevant to the party’s claim or defense.”  Rossi v. Doka USA, Ltd. , 181 A.D.3d 523, 526 (1 st Dep’t 2020) (quoting, Voom HD Holdings LLC v. EchoStar Satellite LLC , 93 A.D.3d 33, 45 (1 st Dep’t 2012).  A “culpable state of mind” for the purposes of spoliation analysis can include “ordinary negligence.”  Voom , 93 A.D.3d at 45.  Further, “ ailures which support a finding of gross negligence, when the duty to preserve electronic data has been triggered, include: (1) the failure to issue a written litigation hold, when appropriate; (2) the failure to identify all of the key players and to ensure that their electronic and other records are preserved; and (3) the failure to cease the deletion of e-mail.”  Voom , 93 A.D.3d at 36 (citations omitted). When it is determined that evidence was “intentionally or willfully” destroyed the documents will be presumed to be relevant, but in circumstances where evidence is destroyed through negligence, “the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.”  Pegasus Aviation I, Inc. v. Varig Logistica S.A . , 26 N.Y.3d 543, 547-548 (2015) (citing Zubulake , infra ); see also, Arbor Realty Funding, LLC v. Herrick Feinstein LLP , 140 A.D.3d 607, 609 (1 st Dep’t 2016).   The First Department in Voom, adopting the preservation standard set forth in Zubulake v. UBS Warburg LLC , 220 F.R.D. 212 (S.D.N.Y. 2003), stated that “’ nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a ‘litigation hold’ to ensure the preservation of relevant documents.’”  Voom , 93 A.D.3d at 36 (quoting, Zubulake , 220 F.R.D. at 218).   Often litigation holds must be put in place before litigation is commenced.  In Voom , the Court determined that while the action was commenced on January 31, 2008, defendant should have “reasonably anticipated litigation no later than June 20, 2007” ( Voom , 93 A.D.3d at 39) because on that date defendant “sent a letter to Voom demanding an audit and threatening termination of the contract based on allegations that Voom ”  ( Voom , 93 A.D.3d at 43). In Voom , the Court imposed the sanction of an adverse inference based on defendant’s destruction of evidence and its failure to timely implement a litigation hold – particularly since defendant “was well aware of its preservation obligation” because it had been sanctioned before.  Voom , 93 A.D.3d at 46.  Conversely, in Arbor , the Court reversed the motion court’s dismissal of the complaint as a sanction for spoliation.  The Arbor Court reasoned that “dismissal of the complaint is warranted only where the spoliated evidence constitutes ‘the sole means’ by which the defendant can establish its defense or where the defense was otherwise ‘fatally compromised’ or defendant is rendered ‘prejudicially bereft’ of its ability to defend as a result of the spoliation.”  Arbor , 140 A.D.3d at 609-610 (citations omitted).  Because witnesses were available to testify and because plaintiff made a “massive document production,” the Arbor Court determined that an adverse inference charge was a sufficient sanction for plaintiff’s spoliation of evidence.  Arbor , 140 A.D.3d at 610 (citations omitted).   On May 21, 2020, the First Department decided China Development Industrial Bank v. Morgan Stanley & Co., Inc.   The motion court in China, denied defendant’s motion to dismiss the complaint as a sanction for spoliation of evidence, but did sanction plaintiff for spoliation “to the extent of precluding plaintiff from introducing any e-mails or audio recordings in its or defendants’ files to support its claims at trial.”  The China Court modified the motion court’s ruling by denying sanctions.  The Court noted that while Plaintiff did not “impose a litigation hold until July 2010,” the “record does not support the court’s conclusion that plaintiff was obligated to preserve documents relevant to the transaction between the parties as early as October 2007.” There was no evidence “that plaintiff ‘reasonably anticipated’ litigating against defendants , but shows rather that a credible probability of litigation against defendants arose only significantly later.”   In light of the above, the China Court stated: Since plaintiff had no duty to preserve evidence in 2007 and reasonably implemented a litigation hold in 2010 upon notice, there is no issue regarding the destruction of records neither intentionally, willfully nor negligently.  Accordingly, a spoliation sanction is not triggered and a culpable state of mind analysis is not reached.

Successfully pleading a fraud-in-the-inducement claim in the context of an employment at will relationship is difficult, if not impossible. The reason, as is often the case in non-employment cases, has to do with pleading justifiable reliance. Employees at will are generally unable to establish reasonable reliance on a prospective employer’s representations. Recently, Justice Peter P. Sweeney of the Supreme Court, Kings County reiterated this principle by granting summary judgment to the defendants in a case in which the plaintiff sought unpaid salary and commissions. Moore v. Scherer , 2020 N.Y. Slip Op. 31357(U) (Sup. Ct., Kings County May 11, 2020) ( here ).  Applicable Law Like most states in the country, New York is an “employment at will” state.  This means that if there is no written agreement between the employer and employee (such as, a collective bargaining agreement) governing when the employer can fire the employee, the employer has the right to fire the employee at any time for any reason. Smalley v. Dreyfus Corp. , 10 N.Y.3d 55, 58 (2008) ( here ). The Court of Appeals has “repeatedly refused to recognize exceptions to, or pathways around, these principles.” Id .  Thus, when an employee at will is fired, the employee has no legal recourse even when the termination is arbitrary, unfair or unreasonable.  There are a few exceptions to an “employment-at-will” relationship.  For example, employers cannot discharge an employee in violation of any law that prohibits discrimination.  Additionally, an employer cannot discharge an employee: in violation of the company’s employee handbook; in retaliation for whistleblowing a violation of law to a supervisor or to a public agency; for participation, on his/her own time, in lawful political or recreational activities; in retaliation for filing a Workers’ Compensation or Disability Benefits claim or testifying before the Workers’ Compensation Board; and because of the employee’s absence from work to fulfill a jury duty obligation.  Under any of the foregoing circumstances, an employee at will may sue his/her employer for damages and/or reinstatement for wrongful termination. Generally, employees at will may not claim that they were induced to accept their position based on the belief that they would enjoy continued employment ( see Montchal v. Northeast Sav. Bank , 243 A.D.2d 452, 453 (2d Dept. 1997)), “even where the circumstances pertain to a plaintiff’s acceptance of an offer of a position rather than his or her termination.” Guido v. Orange Regional Med. Ctr. , 102 A.D.3d 828, 831 (2d Dept. 2013). Where a plaintiff is offered only at will employment, he/she will generally be unable to establish reasonable reliance on a prospective employer’s representations, an element necessary to the recovery of damages under a fraud-in-the-inducement theory of liability. See Epifani v. Johnson , 65 A.D.3d 224, 230 (2d Dept. 2009); Stone v. Schulz , 231 A.D.2d 707, 708 (2d Dept. 1996). Moore v. Scherer Background Moore involved an at will employment relationship between Plaintiff Musa Moore (“Moore”), a political consultant and lobbyist, and Defendants State & Broadway, Inc. (“S&B”), an Albany-based lobbying firm, and S&B’s founding member, Defendant Larry Scherer (“Scherer”). As discussed below, Moore claimed that he was fraudulently induced to enter into the employment relationship with S&B. The events giving rise to Moore’s fraudulent inducement claim arose in late 2015. In November 2015, Moore and S&B entered into an employment contract pursuant to which Moore was to commence employment with S&B at an annual salary of $80,000. The contract also entitled Moore to forty percent (40%) of all revenue received from any new clients that he brought to S&B, health benefits (which Defendants contended Moore declined), the option to join S&B’s 401(k) plan after six months, two weeks of annual vacation days, and three personal days. In pertinent part, the contract provided that Moore was an employee at will: “Employee understands that this contract constitutes employment at the will of the employer and mutual understanding between the parties” and that “ his Agreement constitutes the complete understanding between the parties, unless amended by a subsequent written instrument signed by the employer and the employee.” Defendants contended that at the time the contract was signed, Moore represented that he was a party to a consulting contract with the New York State Public Employees Federation (“PEF”). According Defendants, Moore claimed to be a government relations consultant engaged in political consulting since 2000, who represented candidates running for public office, particularly, in Kings County, New York. Moore estimated that he would generate revenues of $50,000 and could bring the PEF contract to S&B when he began working for the firm. Defendants maintained that the parties understood the employment contract was contingent upon Moore securing the PEF contract for S&B. For various reasons, Moore could not bring PEF in as an S&B client. When this became apparent, Moore agreed to accept a $50,000 decrease in his annual salary. On December 11, 2015, Jacqueline S.L. Williams, the co-founder of S&B and Scherer’s partner, advised S&B’s payroll company to reduce Moore’s salary from $80,000 to $30,000. Defendants maintained that Moore agreed to the reduction of his salary, without complaint until August 10, 2016, when he was terminated. Defendants contended that S&B terminated Moore’s employment because, on August 9, 2016, they discovered that Moore was seeking to void his contract with S&B and open his own lobbying firm, “Moore Consultancy,” and that he had already solicited S&B clients to void their contracts with S&B and re-sign with his new entity. After he was terminated, Moore commenced the action, alleging causes of action against Defendants for breach of contract and fraud in the inducement. With respect to the cause of action for breach of contract, Moore alleged that he performed all his duties under the employment contract and that Defendants breached the contract by failing to pay him his salary and his earned commission. He alleged that at the time he was terminated, he was owed $40,222.22 in salary and $39,600.00 in commissions. With respect to his cause of action for fraud in the inducement, Moore alleged that in November of 2015, S&B represented to him that once he brought in $50,000 in revenues, he would be made an equal partner and a shareholder, which would entitle him to profits exceeding the salary and commission he was entitled to under the contract. Moore alleged that these representations were false, that Defendants knew them to be false, that he reasonably relied on these representations when entering into the employment contract, that by June of 2016, his efforts generated revenues in excess of $50,000 and that when he asked to become a full partner, Defendants reneged on the bargain. On the fraud-in-the-inducement claim, Moore sought compensatory damages of approximately $102,465 and punitive damages exceeding $300,000. Defendants moved for summary judgment dismissing Moore’s complaint in its entirety. Moore cross-moved for summary judgment on both causes of action and sought judgment for unpaid salary and commissions in the amount of $110,707.71, plus interest. The Court granted Defendants’ motion with respect to Moore’s fraudulent inducement claim and denied Moore’s cross-motion for summary judgment.  We look at the Court’s decision with regard to the fraudulent inducement claim. The Court’s Decision The Court held that “as a matter of law, demonstrate that he justifiably relied upon S&B’s alleged oral representations.” Slip Op. at *4.  First, the Court noted that the alleged oral misrepresentations – i.e. , once Moore generated revenues of $50,000, he would be made an equal partner and a shareholder entitling him to profits exceeding the salary and commission he was otherwise entitled to receive under the employment contract – conflicted with an express term in the employment agreement. As such, “the conflict negate a claim of a justifiable reliance upon the oral representation.” Id . (citations omitted).  Second, because Moore was an employee at will, he could not “establish reasonable reliance” on anything Defendants represented “for purposes of establishing fraud.” Id. (citations omitted). “Since there was no familial or fiduciary relationship between the parties,” explained the Court, “there no basis to apply a different standard.” Id. (citations omitted). Accordingly, the Court granted Defendants’ motion for summary judgment dismissing Moore’s fraud-in-the-inducement cause of action. Takeaway In Murphy v. American Home Prods. Corp. , 58 N.Y.2d 293 (1983) ( here ), the Court of Appeals established the employment-at-will rule discussed above, under which an employer is legally permitted to terminate the employment relationship for any or no reason at all so long as the action is not motivated by “a constitutionally impermissible purpose,” proscribed by statute, or expressly limited by a contract of employment. In Smalley , the Court of Appeals reinforced these principles. 10 N.Y.3d at 58 (noting, “In the decades since Murphy , we have repeatedly refused to recognize exceptions to, or pathways around, these principles.”) (citations omitted) ( here ).  Based upon the employment-at-will principles, as the plaintiff in Moore learned, claims seeking recovery for alleged fraudulent inducement in connection with the offer of employment rarely succeed.  Moore is also noteworthy because it shows what happens when a plaintiff claiming fraudulent inducement relies on an oral representation that conflicts with an express term in the parties’ contract – the reasonable reliance element is negated.

Pandemic-related fraud is in vogue these days. The unscrupulous continue to disseminate false information to the public in the hope of securing a personal benefit from the fear surrounding the virus. As we previously noted (here), since February of this year, the Securities and Exchange Commission (“SEC” or “Commission”) has released several investor warnings about the prevalence of fraud, illicit schemes and other misconduct related to the coronavirus health emergency (here). In fact, the SEC has halted trading in the securities of at least 26 companies in connection with alleged false and misleading statements relating to COVID-19. Two of these companies, Applied BioSciences Corp. (“Applied BioScience”) (here) and Turbo Global Partners, Inc. (“TGP”) (here) , are the subject of today’s article. In addition, the Commission has commenced enforcement proceedings against companies that have allegedly committed securities fraud by using the COVID-19 pandemic as its backdrop (here). here.=">here."> Applied BioSciences Corp. Until the spread of the coronavirus, Applied BioScience focused its business “on the development of science-driven Cannabinoid therapeutics/biopharmaceuticals, and delivering high-quality CBD products as well as state-of-the-art testing and analytics capabilities to our customers.” As demand for products to combat COVID-19 grew, Applied BioScience announced that it was changing its focus from cannabinoid-related products to pandemic-related products. In that connection, on March 25, 2020, Applied BioScience announced that the company had “diverted manufacturing resources to build products that help battle the spread of the coronavirus (COVID-19).” The press release included a hyperlink to a company-affiliated online store that sold hand sanitizer and other products. The press release further stated that Applied BioScience had “formulated its sanitizing blends according to the CDC guidelines to make them as effective as possible in killing harmful germs and bacteria.” The SEC alleged that the March 25, 2020 press release was misleading because Applied BioScience neither diverted “manufacturing resources” nor “formulated its sanitizing blends” in connection with the hand sanitizer it sold, but rather a third-party manufactured the hand sanitizer sold by the company. About one week later, on March 31, 2020, the company issued another press release, announcing that it had “begun shipping” a line of home finger-prick testing kits for coronavirus detection. According to the company, these kits could “be used for Homes, Schools, Hospitals, Law Enforcement, Military, Public Servants or anyone wanting immediate and private results.” The SEC claimed that the March 31, 2020 press release was materially false and misleading because, among other reasons, Applied BioSciences had not begun shipping the test kits. And, according to the SEC, the company changed its story by “now claim it did not offer, sell or intend to sell the test kit for home or private use, but rather … intended to screen potential purchasers only to allow purchases in connection with use by nursing homes, schools, military, first responders, or in consultation with a medical professional.” The SEC also alleged that the press release was materially false and misleading because the company failed to disclose that the FDA had not approved or authorized the sale of any at-home test kits, despite the fact that Applied BioSciences allegedly knew that the test kits were subject to FDA review. In fact, according to the SEC, “just days earlier, the FDA announced on its website on March 20, 2020 that no home-based coronavirus tests had been approved.” Following the issuance of the March 31, 2020 press release, the price of Applied BioScience’s stock and the volume of shares traded materially increased. The press release was issued before the market opened on March 31, 2020. Once trading began, the company’s stock price increased almost 80 percent from the previous day (from $0.45 per share to $0.80 per share), and its volume increased by a factor of 85 (136,300 shares sold, versus 1600 shares sold on the previous day). From March 31, 2020 through April 7, 2020, Applied BioScience’s closing stock price ranged from $0.45 per share to $0.80 per share, with an average trading volume of 48,985 shares. In contrast, from January 2, 2020 through March 30, 2020, Applied BioScience’s closing stock price ranged from $0.24 per share to $0.69 per share, with an average trading volume of 3,635 shares. As noted, on April 13, 2020, the Commission suspended trading in Applied BioScience’s securities for ten trading days, effective April 14, 2020. The SEC’s complaint (here) against Applied BioSciences charges the company with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief and civil penalties. Turbo Global Partners, Inc. In February 2020, TGP issued two press releases announcing that it had formed a “strategic alliance” with BeMotion, Inc. (“BeMotion”), a privately held technology company. Under this alliance, TGP would purchase digital vending machines from BeMotion and install them in pharmacies with which TGP had a relationship. In March 2020, as the COVID-19 crisis escalated, BeMotion signed a contract with a company in China that manufactured thermal scanning equipment. The contract authorized BeMotion to sell the thermal scanning equipment outside of China. The equipment could be installed in retail or other establishments to scan for persons with above normal body temperatures. BeMotion began looking for possible distributors to assist with the sale of the product. During March 2020, Robert W. Singerman (“Singerman”), TGP’s chief executive officer and chairman, expressed an interest in the company becoming the exclusive distributor for the scanning equipment. BeMotion declined the offer of exclusivity. However, BeMotion advised Singerman that TGP could become a distributor of the equipment only if TGP had customers willing to buy the product. BeMotion and TGP never reached agreement on the terms of any distribution arrangement. On March 30, 2020, before the close of the market, TGP issued a press release (“the March 30 release”) drafted by Singerman, which discussed BeMotion and its thermal scanning equipment. The March 30 release stated that BeMotion was “ front facing Partner in the multi-national public-private-partnership (PPP) for this innovation which simply stated, is the only scanning technology on the planet with non-contact intelligent human temperature screening and facial recognition.” According to the SEC, the foregoing quoted statement was materially false because BeMotion was not engaged in any public-private partnership or any partnership involving a governmental entity. The SEC also alleged that the scanning equipment in question did not have facial recognition technology. The technology only had face detection ability (i.e., it could distinguish between a face and an inanimate object such as a cup of coffee). The March 30 release also stated that TGP was “the lead intermediary” and “the U.S. Coordinating agent and Intermediary” for the equipment. The SEC alleged that this was materially misleading because it falsely suggested the company was the sole selling agent in the United States for the product, when BeMotion had previously advised TGP that it would not be the sole U.S. distributor and that it could only distribute the equipment if TGP had customers willing to buy it. The March 30 release also contained quotes from the CEO of BeMotion about the technology and its deployment. According to the SEC, the CEO of BeMotion did not make or authorize the statements attributed to him in the press release. On April 3, 2020, TGP issued another press release that was drafted by Singerman. In the release, the company announced that the Governor’s offices for all 50 states and their Chiefs of Staff had been contacted regarding the availability of BeMotion’s equipment, and that each office had been provided “the Technical Documents for our technology.” Singerman also represented that he had personally contacted the CEOs of various major retail companies, such as Target, WalMart, and Costco, and “advised we are standing by to assist with expedited procurement.” The SEC alleged that the April 3 release was materially false because TGP did not have the technology it described because no agreement had been entered into regarding the technology. The SEC also alleged that TGP’s “contact” with Governors, their Chiefs of Staff and major retailers was not meaningful as such contact consisted of unsolicited emails or faxes. On March 31, the first trading day after issuance of the March 30 release, TGP’s trading volume jumped to 77.8 million shares from an average volume of 31.9 million shares per day during the 11 trading days before the March 30 release, and its the share price rose to an intraday high of $0.0068, before closing at $0.0044. During the 11 trading days preceding issuance of the March 30 release, TGP’s stock traded between $0.0016 per share and $0.0059 per share. On April 3 (when TGP issued its press release regarding contacting all 50 Governors’ offices), trading volume reached 76 million shares and the price of TGP’s stock rose to an intra-day high of $0.0194 per share, before closing at $0.0154 per share. As noted, the Commission temporarily suspended trading in TGP’s securities from April 9, 2020 to April 23, 2020. The SEC’s complaint (here) against TGP and Singerman charged them with violating the antifraud provisions of the federal securities laws and seeks permanent injunctive relief and civil penalties, and an officer and director bar against Singerman. A copy of the SEC’s press release announcing the enforcement proceedings against Applied BioScience and TGP can be found here.

In VRA Family Limited Partnership v. Salon Management USA, LLC , decided on May 6, 2020, the Appellate Division, Second Department, affirmed the motion court’s grant of summary judgment in favor of a commercial landlord as against a tenant that abandoned the subject premises and improperly assigned its rights under the subject lease. The facts of VRA are simple, plaintiff, as landlord, and Salon Management USA, LLC, as tenant, entered into a 10-year commercial lease.  At the same time, two of Salon’s members executed limited personal guaranties of the lease.  VRA commenced the action against Salon and the guarantors after Salon, inter alia , failed to pay rent, made renovations without VRA’s consent causing damage to the premises, and abandoned the premises.  Accordingly, VRA’s complaint sought to recover damages for unpaid rent, late fees, unpaid insurance premiums and for physical damage to the premises. In opposition to VRA’s motion for summary judgment, defendants argued that they had no liability under the lease because Salon “assigned the lease to nonparty Ocean Beach Spa, Inc. (hereinafter OBS), with the plaintiff’s knowledge and consent, and therefore, the defendants could not be liable for any breach of the lease agreement.”  Supreme court granted VRA’s motion as to liability and directed that “all remaining issues, including damages, would proceed to trial.”  The Second Department affirmed.  In so doing, the Court held that VRA made its prima facie case for liability against defendants by proffering “a signed copy of the lease, as well as evidence of unpaid rent, late fees, unpaid insurance premiums, and damage to the premises.”  (Citations omitted.)  The Court also found that VRA established that “the assignment of the lease without the plaintiff’s written consent was prohibited by the express terms of the lease and that the plaintiff did not provide the required consent.” Salon’s waiver argument was flatly rejected by the Court.  A waiver is “an intentional relinquishment of a known right and should not be lightly presumed.”  Gilbert Frank Corp. v. Fed. Ins. Co. , 70 N.Y.2d 966 (1988) (citation omitted).  See also, Jefpaul Garage Corp. v. Presbyterian Hosp. , 61 N.Y.2d 442, 446 (1984).  Relying on, inter alia, Jefpaul, the Court noted that while waiver can sometimes be inferred from the acceptance of rent “it may not be inferred, and certainly not as a matter of law, to frustrate the reasonable expectations of the parties embodied in a lease when they have expressly agreed otherwise" (quoting Jefpaul , 61 N.Y.2d at 446).  The subject lease, however, expressly provided that it shall not be deemed a waiver if landlord accepts rent with knowledge of a breach and that there can be no waiver of any provision of the lease unless “expressed in writing and signed by the landlord.”  In addition, the lease provided that “if the lease were assigned, or if the premises were occupied by anyone other than Salon, then the plaintiff may collect rent from the assignee, under-tenant or occupant, but ‘no such collection shall be deemed a waiver of the covenant herein against assignment and underletting or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of the tenant from the further performance by the tenant of the covenants herein contained on the part of the tenant.’"  Based on the unambiguous language of the lease, the Court found that “the plaintiff’s acceptance of rent from OBS cannot be deemed a waiver or acceptance of OBS as the assignee of the lease…” (citations omitted).   Nor was the Court moved by defendants’ argument that Plaintiff’s “direct communications with OBS indicated a clear manifestation of intent to waive the nonassignment and nonwaiver provisions of the lease.”  The Court went on to note that even if an inferred consent to the assignment was found, defendants would not be relieved of their obligations under the lease “absent an express agreement to that effect or one that can be implied from facts other than the lessor’s mere consent to the assignment and its acceptance of rent from the assignee” (citations omitted).

An appraisal is the valuation of property, such as a business, stock in a private company, real estate, collectibles, antiques, or other valuables, by an authorized (and neutral) person. Appraisals are used in many types of transactions. Business men and women typically seek an appraisal when they sell their business, they gift or transfer their ownership interest in the business or property, they make changes to the composition of their business, such as by adding partners or shareholders, they separate from the business, or they are seeking financing for the business. Sometimes an appraisal is judicially ordered, and sometimes it is contractually bargained for. In today’s article, this Blog examines the process of confirming a contractually required appraisal. Yakuel v. Gluck , 2020 N.Y. Slip Op. 31251(U) (Sup. Ct., N.Y. County May 7, 2020) ( here ). The Standard for Confirming or Vacating An Appraisal Award Under CPLR § 7601, “ special proceeding may be commenced to specifically enforce an agreement that a question of valuation, appraisal or other issue or controversy to be determined by a person named or to be selected.” Importantly, “ he court may enforce such an agreement as if it were an arbitration agreement.” Id. In that case, the proceeding is to “be conducted as if brought under article seventy-five” of the CPLR. As readers of this Blog know, Article 75 of the CPLR governs confirmation and vacatur of arbitral awards.  Under the Federal Arbitration Act (“FAA”), appraisals are also considered to be arbitration awards. See , e.g. , Milligan v. CCC Info. Servs., Inc. , 920 F.3d 146, 152 (2d Cir. 2019) (finding that a binding appraisal process “constitutes arbitration for purposes of the FAA”); Seed Holdings, Inc. v. Jiffy Int’l AS , 5 F. Supp. 3d 565, 576-78 (S.D.N.Y. 2014) (finding that binding price appraisal by accounting firm constituted an arbitration under the FAA). Since appraisal awards are to be treated as arbitration awards, there is a strong presumption in favor of confirming appraisal awards. For this reason, the court’s role in reviewing an appraisal award is limited. Indeed, like an arbitration award, an appraisal “award must be upheld when the ‘offer even a barely colorable justification for the outcome reached.’” Wien & Malkin LLP v. Helmsley-Spear, Inc. , 6 N.Y.3d 471, 479-80 (2006) (“ n arbitrator’s rulings, unlike a trial court’s, are largely unreviewable.”); see also In re Falzone (New York Cent. Mut. Fire Ins. Co.) , 15 N.Y.3d 530, 534 (2010). Thus, an appraisal award will not be vacated “for errors of law and fact committed by the .” Id. “‘A party moving to vacate an arbitration award has the burden of proof, and the showing required to avoid confirmation is very high.’” US. Elecs., Inc. v. Sirius Satellite Radio, Inc. , 17 N.Y.3d 912, 915 (2011) (quoting Ecoline, Inc. v. Local Union No. 12 of lnt’l Ass’n of Heat & Frost Insulators & Asbestos Workers, AFL-CIO , 271 F. App’x 70, 72 (2d Cir. 2008)). Under the FAA, which applies in all cases involving interstate commerce, an arbitration award may be vacated, inter alia , if the “arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy.” 9 U.S.C. § 10(a)(3). Section 10(a)(3) of the FAA has been interpreted to require that arbitrators “give each of the parties to the dispute an adequate opportunity to present its evidence and argument.” Tempo Shain Corp. v. Bertek, Inc. , 120 F3d 16, 20 (2d Cir. 1997); see also Bowles Fin. Grp., Inc. v. Stifel, Nicolaus & Co., Inc. , 22 F.3d 1010, 1013 (10th Cir. 1994) (fundamentally fair hearing requires, inter alia , an “opportunity to be heard and to present relevant and material evidence and argument before the decision makers”); Yonir Techs., Inc. v. Duration Sys. (1992) Ltd. , 244 F. Supp. 2d 195, 208-209 (S.D.N.Y. 2002) (“ rbitrators must give both parties to the dispute an opportunity to present their evidence and argument” and “ n award can be vacated if an arbitrator refuses to hear material and pertinent evidence”). New York courts agree that “ he right of a party to have appraisers receive all pertinent evidence offered is a fundamental procedural right to which plaintiff was entitled, and its denial by the umpire and the company’s appointed appraiser has been characterized as ‘misconduct, in a legal sense’ which is sufficient ... to set aside the award in equity.” Gervant v. New England Fire Ins. Co. , 306 N.Y. 393, 399-400 (1954); see also McMahan & Co. v Dunn Newfund I Ltd. , 230 A.D.2d 1, 4 (1st Dept. 1997) (“Fundamental unfairness often involves insufficient notice or refusal to receive appropriate evidence.”) (citations omitted); Olympia & York 2 Broadway Co. v. Produce Exchange Realty Tr. , 93 A.D.2d 465, 471 (1st Dept. 1983) (finding that party to an appraisal did not have a right to see its opponent’s submission, but noting that each party must have “an opportunity to submit his view to the appraiser”) (citing Matter of Delmar Box Co. , 309 N.Y. 60 (1955); Coty Inc. v. Anchor Const. Inc. , 2003 WL 139551 (Sup. Ct., N.Y. County Jan. 8, 2003) (finding party was denied a “fundamentally fair hearing” because, among other things, he was “denied the opportunity to be heard” and “the opportunity to present evidence”). Yakuel v. Gluck Background Petitioner Joseph Yakuel (“Yakuel”) and Respondent Andrew Gluck (“Gluck”) founded and jointly owned Agency Within LLC (the “Company”), which was formed pursuant to a Limited Liability Company Agreement dated February 20, 2015 (“LLC Agreement”). Yakuel owned, directly and indirectly, a 65% interest in the Company and was the managing member. Gluck owned the remaining 35%. In March 2018, the parties amended the LLC Agreement (the “Amendment”). Section 3(a) of the Amendment gave the Company (effectively, Yakuel) the option to repurchase all (but not less than all) of Gluck’s Units for a Purchase Price determined by the Fair Market Value (“FMV”) of those Units. FMV was to be determined by an Appraisal conducted by “a third party appraisal firm, whose appraisal be final and binding on all parties.” The cost of the appraisal would be borne by Gluck and the Company on a 50-50 basis. Section 3(a) further provided that the third-party appraisal firm would be one of the following accounting firms: PricewaterhouseCoopers (“PwC”), Deloitte Touche, Ernst & Young (“E&Y”), KPMG, or BDO Seidman. Yakuel and Gluck had the right to veto any one of the firms within seven (7) days after notification of the Company’s intent to exercise the option and retain an appraiser. Thereafter, with respect to the firms that had not been vetoed, the Company would engage the firm that offered to perform the appraisal at the lowest cost. Under Section 3(f) of the Amendment, upon exercising the repurchase option, Yakuel had “the right to exclude ... Gluck from participating in the affairs of the Company, including without limitation the business operations of the Company, and ... entering the business offices of the Company.” Upon such exercise, Gluck’s sole right with respect to the Company and its business operations was to receive the Purchase Price for the Units. Notably, Section 3(f) did not reference Section 3(e) or otherwise indicate that it extended to the appraisal process. Less than two months after the Amendment, on May 11, 2018, the Company gave Gluck notice that it was exercising its repurchase option. Under the terms on Section 3(e), the Company vetoed E&Y and Gluck vetoed BDO Seidman. The Company then selected PwC to be the third-party appraiser. In July 2018, Gluck brought an action in New York Supreme Court to rescind the Amendment on the grounds of fraud, want of consideration, and mutual mistake, and alleged breach of contract and fiduciary duty in connection with the appraisal process. As the appraisal drew near, Gluck moved for an injunction on the ground that he was being improperly excluded from participating in the process. The Court (Sherwood, J.) denied Gluck’s motion for a temporary restraining order. With assistance from the Court, the parties entered into a So Ordered stipulation under which Yakuel “agreed in good faith to allow to participate in the Appraisal without waiver of his rights,” and Gluck “agreed to participate in the Appraisal in good faith, without delay or obstruction.”  Yakuel contended that he held up his end of the bargain and permitted Gluck to participate in the appraisal process, including by providing information and arguments to PwC with respect to valuation. Gluck disagreed. According to Yakuel, Gluck’s “bad faith and litigious approach to the appraisal process eventually caused PwC to halt its work and threaten to quit,” and Gluck’s obstructionist behavior “forced to exercise its right under Section 3 of the Amendment to exclude him from the appraisal process.” Peace between the parties was short lived. The parties returned to court to continue litigating Gluck’s motion to preliminarily enjoin the appraisal. The Court denied that motion. In doing so, the Court found that Gluck had not demonstrated a likelihood of success because “ he parties’ contract clearly provides at Section 3(f) that upon exercise of the repurchase contract, the company shall have the right to exclude Gluck from participating in the affairs of the company, from entering into the business offices ... and above that in Section 3(e) it provides for the company obtaining an appraisal by a well-known accounting firm.” But, he found, “more important than that is the question of irreparable harm .... he issue really has to do with how much money Mr. Gluck is entitled to ... upon the buyout. That’s a claim for money. He could be ... completely satisfied by money judgment.” The Court left open the question whether Gluck might have an opportunity to seek a money judgment and made no ruling as to whether an appraisal (which had not yet occurred) would be subject to challenge. Gluck contended that Yakuel blocked him from participating meaningfully in the appraisal process. He pointed to the engagement letter between the Company ( i.e. , the client) and PwC, which provided that PwC would “perform[] Services on the basis that the information provided is accurate and complete,” and that PwC “will not audit or verify any information provided to it.” Gluck interpreted this language to prohibit PwC from accepting information from anyone other than Yakuel. Gluck further maintained that the appraisal was “rigged” because he “never had an opportunity to participate, present evidence, or object to false and inaccurate evidence provided by Mr. Yakuel.” In sum, Gluck contended that the appraisal was not “fair, neutral and balanced” and was fueled by “false and misleading information” submitted by Yakuel that resulted in undervaluing Gluck’s LLC Units by tens of millions of dollars.  Yakuel filed the action to confirm the appraisal award on August 21, 2019. Gluck crossed-moved to vacate the appraisal award.  The Court’s Decision The Court denied the petition and cross-petition. The Court observed that the case “present an unusual circumstance in which there evidence to suggest that the appraiser/arbitrator ( i.e. , PwC) wanted to hear Gluck’s side of the story, and repeatedly asked for that opportunity, but may have been hindered by Yakuel.” Slip Op. at *9. The Court rejected “Yakuel’s contention that Section 3(f) of the Amendment gave him the unfettered right to exclude Gluck from presenting evidence during the appraisal process” as “not persuasive.” Id. The Court reasoned “ hat provision limits Gluck from being involved in the business or coming to the corporate office. It not, on its face, suggest any agreed upon limitation on Gluck’s ability to tell his side of the story on the significant question of the value of his Units.” Id. Nor, said the Court, did Section 3(e), “which governs the dispute resolution process.” Id. The Court explained that the “core question is whether the facts support Gluck’s assertion that he did not have a fair opportunity to present his case.” Slip Op. at *10. The Court found that “ he record not sufficiently clear at stage to permit a decision on this question one way or the other.” Id. Consequently, the Court denied the motion to confirm and to vacate the appraisal award. Takeaway Vacating an arbitration award is often difficult. This is especially so given the strong presumption in favor arbitration awards and the limited role courts take in reviewing them. Nevertheless, when the facts are such that vacatur is appropriate, courts will not hesitate to do so. In Yakuel , however, the record was not developed enough to make a decision. But it was developed enough for the Court to seek more evidence in order to rule one way or the other.

This Blog has examined cases involving the duty to disclose information, often in the context of an alleged omission ( E.g. , here ). In today’s article, we primarily look at the duty to another in the context of negligence and negligent misrepresentation causes of action. Shavolian v. Donegan , 2020 N.Y. Slip Op. 31181(U) (Sup. Ct., N.Y. County May 5, 2020) ( here ). Negligence and Negligent Misrepresentation To establish a cause of action sounding in negligence, a plaintiff must establish the existence of a duty on the defendant’s part to the plaintiff, in addition to an actual breach of the duty and damages. See Greenberg, Trager & Herbst, LLP v. HSBC Bank USA , 17 N.Y.3d 565, 576 (2011).  “A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.” J.A.O. Acquisition Corp. v. Stavitsky , 8 N.Y.3d 144, 148 (2007); see also Mandarin Trading Ltd. v. Wildenstein , 16 N.Y.3d 173, 180 (2011). “‘ iability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.’” Fresh Direct, LLC v. Blue Martini Software, Inc. , 7 A.D.3d 487, 489 (2d Dept. 2004) (quoting Kimmell v. Schaefer , 89 N.Y.2d 257, 263 (1996). Notably, the relationship “requires a closer degree of trust than an ordinary business relationship.” Fleet Bank v. Pine Knoll Corp. , 290 A.D.2d 792, 795 (3d Dept. 2002) (internal quotation marks and citation omitted). For this reason, arm’s-length transactions between sophisticated parties do not give rise to privity. See Greenberg, Trager & Herbst , 17 N.Y.3d at 579.  The common thread between the two causes of action is the duty to another. The Duty to Another As a general matter, in the context of a fraud cause of action, a duty to disclose arises when (1) the defendant speaks on the subject, in which case he/she must speak truthfully and completely about the matter ( see Bank of Am., N.A. v. Bear Stearns Asset Mgmt. , 969 F. Supp. 2d 339, 351 (S.D.N.Y. 2013)); (2) there is a fiduciary relationship between the plaintiff and defendant ( see Balanced Return Fund Ltd. v. Royal Bank of Canada , 138 A.D.3d 542, 542 (1st Dept. 2016)); or (3) the defendant possesses “special facts” about the matter not known by the plaintiff ( Pramer S.C.A. v. Abaplus Int’l Corp. , 76 A.D.3d 89, 99 (1st Dept. 2010).  In the context of a negligent misrepresentation cause of action, the existence of a duty to another is often difficult to plead and prove. As discussed, the plaintiff must plead (and prove) a special relationship approaching privity to establish a duty to another. As the reporters show, this is often a difficult standard to satisfy. In Glanzer v. Shepard , 233 N.Y. 236 (1922) (Cardozo, J.), the Court of Appeals found that a “public weigher” of beans owed a duty of care to a plaintiff with which it had no prior relationship. The bean weigher was retained by the bean seller but knew that the result of the weighing would be relied upon by the bean buyer (who received a copy of the weighing certificate). On those facts, the buyer’s reliance was the “end and aim of the transaction,” and therefore “assumption of the task of weighing was the assumption of a duty to weigh carefully for the benefit of all whose conduct was to be governed.... Diligence was owing, not only to him who ordered, but to him also who relied.” Id. at 238-39, 242. Nine years later, in Ultramares Corp. v. Touche , 255 N.Y. 170 (1931) (Cardozo, J.), the Court of Appeals rejected a cause of action in negligence against a public accounting firm for preparing inaccurate financial statements which were relied upon by a plaintiff who had no contractual privity with the accountants. The Court distinguished Glanzer on the ground that the service rendered by the public weigher in Glanzer was “primarily for the information of a third person, in effect..., and only incidentally for that of the formal promisee.” Id. at 183. In other words, in Glanzer , the allegedly negligent party owed a duty of care to a specific party for a specific purpose, compared to Ultramares , where the defendant could not be liable for negligent misrepresentation to a broad and undefined class of persons unknown to the defendant. Id. Notably, the Court made clear that its holding “ not emancipate accountants from the consequences of fraud.” Id. at 189. In Credit All. Corp. v. Arthur Andersen & Co. , 65 N.Y.2d 536, 545-46 (1985), the Court of Appeals reaffirmed Ultramares , and set forth a three-part test for determining when an accountant may be held liable to noncontractual third parties who relied to their detriment on inaccurate financial reports: “(1) the accountants must have been aware that the financial reports were to be used for a particular purpose or purposes; (2) in the furtherance of which a known party or parties was intended to rely; and (3) there must have been some conduct on the part of the accountants linking them to that party or parties, which evinces the accountants’ understanding of that party or parties' reliance.” Id. at 551. “Although this rule first developed in the context of accountant liability, it has applied equally in cases involving other professions,” such as architects, lawyers and engineering consultants. Parrott v. Coopers & Lybrand , 95 N.Y.2d 479, 483 (2000) (citations omitted); see also North Star Contracting Corp. v. MTA Capital Const. Co. , 120 A.D.3d 1066, 1069-70 (1st Dept. 2014) (applying rule to construction manager); Sutton Apartments Corp. v. Bradhurst 100 Dev. LLC , 107 A.D.3d 646, 648-49 (1st Dept. 2013) (applying rule to architect). Consistent with the approach in Glanzer , Ultamares and their progeny, courts have applied the three-part test to appraisers. See Chemical Bank v. National Union Fire Ins. Co. of Pittsburgh , 74 A.D.2d 786, 787 (1st Dept. 1980) (“If it be shown that a real estate appraiser, retained by a property owner to make an appraisal that he knows the owner will use to obtain financing, makes it in a grossly negligent manner so as to inordinately overstate the value, we are not ... prepared to hold the appraiser exempt from liability to the damaged financing party.”), app dismissed , 53 N.Y.2d 864 (1981); Federal Home Loan Mortgage Corp. v. Portnoy , 1992 WL 320813 (S.D.N.Y. 1992) (sustaining negligence claim by federal agency that relied on defendant’s appraisal report prepared for a Florida lender); Guildhall Ins. Co., Ltd. v. Silberman , 688 F Supp. 910 (S.D.N.Y. 1988) (sustaining negligence claim by insurer that relied on defendant’s appraisal prepared for owner of certain artifacts specifically for the purpose of obtaining insurance). Against the foregoing, we examine Shavolian v. Donegan. Shavolian v. Donegan Shavolian involved an appraisal that the plaintiff, Dan Shavolian (“Shavolian”), claimed was artificially inflated to benefit the interest of non-party Ben Mokhtar (“Mokhtar”). According to the complaint, Shavolian agreed to buy out Mokhtar’ interest in an office building located in Great Neck, New York (the “Property”) pursuant to an “arbitration agreement.” Under the agreement, Shavolian and Mokhtar agreed to each retain their own appraiser to “accurately and fairly value the Property.” Per the arbitration agreement, an identified arbitrator would average the two party-tendered valuations to determine the buy-out price. Shavolian’s appraiser valued the Property at $14 million. Mokhtar retained Defendants to serve as his appraiser under the arbitration agreement. Defendants appraised the Property at $38 million (the “Appraisal”). The arbitrator averaged the two appraisals and set a valuation of the Property in excess of $28 million. Shavolian alleged that Defendants conspired with Mokhtar to appraise the Property at an inflated amount, so that Mokhtar could receive a larger buy-out price. Shavolian further alleged that Defendants were aware that Shavolian would be relying upon their Appraisal. As a result of Defendants’ allegedly deceptive Appraisal, Shavolian claimed that he suffered damages in excess of $850,000. Shavolian asserted claims against Defendants for negligence, negligent misrepresentation, and fraudulent misrepresentation. Defendants argued that the complaint should be dismissed because, inter alia , Defendants owed no duty of care to Shavolian (with whom they had no prior relationship, contractual or otherwise) when preparing their Appraisal and because the Appraisal merely reflected an “opinion.” The Court addressed the negligence and negligent misrepresentation claims first.  The Court observed that these claims did “not fit neatly within the confines of” Glanzer and Ultramares . Slip Op. at *5. “On the one hand,” said the Court, “as in Glanzer et al. , Defendants allegedly were aware that their appraisal was to be provided to Shavolian, albeit indirectly, for a narrow purpose that specifically implicated Shavolian’s interests.” Id. Thus, the action did “not present the risk of exposing Defendants to liability from a large and indeterminate group.” Id. at *5-*6. “On the other hand,” said the Court, the action differed “from the above line of cases in that Shavolian cannot be said to have ‘relied’ on Defendants’ appraisal in making a commercial decision. Instead, the appraisal was relied upon by the arbitrator.” Id. at *6. Thus, “ nlike the insurers and lenders in the appraisal cases noted above, Shavolian does not claim to have been fooled or misled by the appraisal, which on its face conflicted with the report of his own appraiser.” Id. “His only claim,” explained the Court, “is that he was harmed by the appraisal because it skewed the result of a rigid valuation process - which apparently gave the arbitrator no discretion to do anything other than blindly accept the parties’ appraisals and average them - to which he voluntarily agreed.” Id. “On balance,” the Court found that “Defendants did not undertake a duty of care to Shavolian.” Id. The Court reasoned that Defendants “were engaged by Mokhtar as part of an arbitration process. Shavolian was affected by the appraisal, but he did not rely upon it.” Id. Accordingly, the Court dismissed the negligence and negligent misrepresentation claims. Having addressed the negligence and negligent misrepresentation claims, the Court turned its attention to the fraudulent inducement claim. To state a claim for fraudulent misrepresentation, a plaintiff must allege that the defendant made material misrepresentations of fact; that the misrepresentations were made intentionally in order to defraud or mislead the plaintiff; that the plaintiff reasonably relied on the misrepresentations; and that the plaintiff suffered damages as a result of his/her reliance on the defendant’s misrepresentations. See Mandarin Trading Ltd. , 16 N.Y.3d at 177. Privity is not an element of a fraudulent misrepresentation cause of action. See John Blair Communications, Inc. v. Reliance Capital Group L.P. , 157 A.D.2d 490, 492 (1st Dept. 1990). The Court found that Shavolian “sufficiently allege facts to support his fraud claim.” Slip Op. at *6. In this regard, said the Court, “Shavolian allege that Defendants, acting in concert with Mokhtar, made misrepresentations of fact in their Appraisal, intending to overvalue the Property for the arbitrator to Shavolian’s detriment.” Id. The Court rejected Defendants’ argument that there was no false statement because the appraisal was nothing more than an opinion. “To be sure,” noted the Court, “there is case law suggesting that appraisals ordinarily cannot support a claim for fraud, because an appraisal is a form of non-actionable opinion,” but, said the Court, where the grounds supporting the opinion are alleged to be “so flimsy as to lead to the conclusion that there was no genuine belief” to back it up, a plaintiff can state a claim. Id. at 7 (quoting Ultramares Corp. , 255 N.Y. at 18). See also MBIA v. Countrywide , 87 A.D.3d 287, 294 (1st Dept. 2011); Stewardship Credit Arbitrage Fund LLC v. Charles Zucker Culture Pearl Corp. , 31Misc. 3d 1223(A), at *5 (Sup. Ct., N.Y. County 2011). That, according to the Court, was what Shavolian alleged: Here, Shavolian alleges that Defendants’ Appraisal is based on misrepresented facts and does not reflect Defendants’ honest opinion. Shavolian alleges, for example, that Defendants intentionally used an incorrect percent capitalization rate, undertook no rental comparisons, and failed to account for a wide arrange of expenses, including taxes, utilities, used water, all as part of a scheme to harm Shavolian. Accordingly, the Court denied Defendants’ motion to dismiss the fraudulent inducement cause of action. Takeaway As discussed, before a party can recover damages “as a result of another’s negligent misrepresentation<,> there must be a showing that there was either actual privity of contract between the parties or a relationship so close as to approach that of privity.” Prudential Ins. Co. of Am. V. Dewey, Ballantine, Bushby, Palmer & Wood , 80 NY2d 377, 382 (1992). Privity or a privity-like relationship requires an awareness by the defendant that his or her statement is for a particular purpose; reliance on the statement in furtherance of that purpose; and conduct linking the defendant to the relying party and evincing its understanding of that reliance. Sykes v. RFD Third Ave. 1 Associates, LLC , 67 A.D.3d 162, 167 (1st Dept. 2009). In Shavolian , the plaintiff could not establish that he relied on defendants’ conduct as opposed to the appraisal. Slip Op. at *6 (“Shavolian was affected by the appraisal, but he did not rely upon it.”).

Statutes of limitations limit the time within which a defendant can be held liability for all types of alleged wrongdoing. Plaintiffs who do not pursue their rights within the limitations period will find the courthouse doors closed to their claims. For this reason, whether the statute of limitations has run is an important issue for a lawyer and client to discuss. This Blog often examines the statute of limitations in the context of fraud and contract actions. In today’s article, we look at the statute of limitations in the context of a breach of fiduciary duty action.   New York law does not provide a single statute of limitations for breach of fiduciary duty claims. IDT Corp. v. Morgan Stanley Dean Witter & Co. , 12 N.Y.3d 132, 139 (2009). Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Loengard v. Santa Fe Indus. , 70 N.Y.2d 262, 266 (1987). Where the remedy sought is purely monetary in nature, courts construe the suit as alleging “injury to property” within the meaning of CPLR § 214 (4), which has a three-year limitations period. See, e.g., Yatter v. Morris Agency , 256 A.D.2d 260, 261 (1st Dept. 1998). Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR § 213 (1) applies. Loengard , 70 N.Y.2d at 266-267. Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts apply a six-year statute of limitations under CPLR § 213 (8). Kaufman v. Cohen , 307 A.D.2d 113, 119 (1st Dept. 2003). A breach of fiduciary duty is a tort. A tort claim accrues when “the claim becomes enforceable, i.e. , when all elements of the tort can be truthfully alleged in a complaint.” Kronos, Inc. v. AVX Corp. , 81 N.Y.2d 90, 94 (1993). As with other torts in which damage is an essential element, the claim “is not enforceable until damages are sustained.” Id . at 94. To determine timeliness, the courts consider whether the plaintiff’s complaint alleges, as a matter of law, “damages suffered so early as to render the claim time-barred.” Id. at 94-97. The statute of limitations “on claims against a fiduciary for breach of its duty is tolled until such time as the fiduciary openly repudiates the role.” AccessPoint Med. LLC v. Mandell , 106 A.D.3d 40, 45 (1st Dept. 2013). This rule exists "to protect beneficiaries in the event of breaches of duty by fiduciaries such as ... corporate officers ... in circumstances in which the beneficiaries would otherwise have no reason to know that the fiduciary was no longer acting in that capacity." Id. (emphasis added); Knobel v. Shaw , 90 A.D.3d 493, 496 (1st Dept. 2011); Golden Pac. Bancorp v. FDIC , 273 F.3d 509, 518-19 (2d Cir. 2001). This rule has been repeatedly applied to toll the limitations period on claims against corporate officers and directors. See , e.g. , Westchester Religious Inst. v. Kamerman , 262 A.D.2d 131, 132 (1st Dept. 1999) (tolling limitations period on breach of fiduciary duty claim against corporate officers until officers left their positions of trust); Steele v. Anderson , No. 03-CV-1251, 2004 WL 45527, at *1 (N.D.N.Y. Jan. 8, 2004) (tolling limitations period on claims against corporate directors and officers for breach of fiduciary duty, corporate waste, and accounting until termination of fiduciary relationship).  Under the continuing wrong doctrine, “where there is a series of continuing wrongs,” the statute of limitations will be tolled to the last date on which a wrongful act is committed. Henry v. Bank of Am. , 147 A.D.3d 599, 601 (1st Dept. 2017).  If the continuing wrong doctrine applies, it “will save all claims for recovery of damages but only to the extent of wrongs committed within the applicable statute of limitations.” Id . (internal quotation marks and citation omitted). The application of the continuing wrong doctrine must “be predicated on continuing unlawful acts and not on the continuing effects of earlier unlawful conduct.” Id. It therefore distinguishes “between a single wrong that has continuing effects and a series of independent, distinct wrongs.” Id. (internal quotation marks and citation omitted). Thus, the doctrine is inapplicable where there is one tortious act and “continuing consequential damages” that arise therefrom. Town of Oyster Bay v. Lizza Indus., Inc. , 22 N.Y.3d 1024, 1032 (2013). In Ganzi v. Ganzi , 2020 N.Y. Slip Op. 02740 (1st Dept. May 7, 2020) ( here ), the Appellate Division, First Department, affirmed the denial of a post-trial motion to dismiss breach of fiduciary duty claims on statute of limitations grounds, holding that the plaintiffs timely brought their claims. Ganzi involved allegedly improper transactions and practices by the majority shareholders of closely-held family businesses: Just One More Restaurant Corp. (“JOMR”), which owned the now-shuttered, renowned New York City establishment, the original Palm Restaurant (“Palm”); and Just One More Holding Corp. (“JOMH”), which owned real property at which the Palm was located. The actions challenged by plaintiffs Gary Ganzi (“Gary”), Claire Breen (“Claire”), and the Estate of Charles Cook (“Cook’s Estate”) occurred decades after the ownership and management of the businesses had been passed down the family trees to the defendants, Bruce Bozzi Sr. (“Bruce”) and Walter Ganzi, Jr. (“Wally”), plaintiffs’ cousin. Plaintiffs asserted derivative claims for breach of fiduciary against defendants, as the majority shareholders of JOMR. The claims fell into two general categories relating to undervaluation of JOMR’s intellectual property assets, and challenge: (1) JOMR’s issuance of below market rate license agreements to restaurants and related entities owned in whole or in part by defendants; and (2) JOMR’s issuance of a below market rate agreement granting exclusive licensing/sublicensing rights to its valuable intellectual property assets to defendants’ wholly-owned management company, the Palm Management Corporation (“PMC”), and the transactions that occurred thereunder. Plaintiffs also asserted a derivative claim that defendants, as the majority shareholders of JOMH, breached their fiduciary duties by leasing JOMH’s real property to JOMR for below market rates. Since 1972, defendants have opened new Palm restaurants around the world (“New Palms”) and have an ownership interest in numerous New Palms and their associated business entities. All of the New Palms entered license agreements with JOMR, from the 1970s to 2011, which identified JOMR as the licensor and owner of “long established, famous and valuable service marks used in connection with the operation of distinctive, high quality restaurants,” and that JOMR had “devised and developed certain confidential know-how relating to the management and operation of restaurants, including business practices, unique recipes, and formulae”; under those agreements, the New Palms agreed to pay JOMR an annual licensing fee of $6,000 “for the use of Licensed Trademark and . . . know-how.” The $6,000 annual fee was imposed for all New Palms in which defendants had an ownership interest, regardless of when those restaurants first opened. At issue were 54 license agreements, all of which included the $6,000 fee, entered between JOMR and the New Palms owned by defendants: 26 licenses in 2007, backdated to January 1, 2004 (“2007 Licenses”); and 28 licenses in 2011, backdated to January 1, 2010 (“2011 Licenses”). The parties stipulated to the validity and enforceability of the 2007 and 2011 Licenses.  In 2007, PMC and JOMR entered into a Master License Agreement (“MLA”) through which PMC acquired the “exclusive, worldwide, royalty bearing, sub-licensable license” to the Palm IP for an annual flat payment of $12,000. Under the MLA, PMC entered into sublicense agreements for the use of Palm IP with third parties for at or near market rate value, as opposed to the $6,000 flat fee paid by the New Palms. Plaintiffs alleged that defendants engaged in a decades-long pattern of exploiting the Palm IP to benefit defendants’ own businesses ( i.e. , by licensing Palm IP to the New Palms for below market rates), and by improperly entering the MLA between JOMR and PMC and using the MLA to divert substantial revenue from JOMR to PMC. Plaintiffs further alleged that defendants breached their fiduciary duties to JOMH, which owned the real estate in New York City at which the Palm and its offices were located, by leasing the space at below market level rates to JOMH’s detriment. Defendants asserted a statute of limitations defense, among others.  Following a bench trial, the Court held that plaintiffs’ breach of fiduciary duty claims were not time barred. Defendants appealed. The First Department affirmed. Defendants argued that the breach of fiduciary duty claims were time-barred because JOMR had previously executed license agreements that included the same $6,000 annual license fee provision for the use of its intellectual property. Defendants contended that the execution of the 2007 and 2011 Licenses merely renewed, updated, and reaffirmed preexisting allegedly tortious licensing arrangements, and did not constitute new, discrete acts causing new injury that restarted the applicable six-year statute of limitations. The First Department rejected the argument, holding that “ he trial court correctly rejected defendants’ statute of limitations defense to the derivative claims.” Slip Op. at *1. The Court explained that “the 2007 and 2011 licenses, even if they stated the same terms, were not mere ‘renewals’ of prior, written agreements. Rather, they were new and fully enforceable contracts entered into between JOMR and defendants’ wholly-owned restaurants within the limitations period, as they included a recital providing that ‘Licensor and Licensee have previously entered into a certain License Agreement and desire to enter into a new License Agreement under the terms and conditions as herein set forth,’ as well as a merger clause providing that ‘this Agreement contains all of the terms and conditions agreed upon by the parties hereto and no promises or representations have been made other than as herein set shall be valid unless made in writing executed by an authorized officer of the Licensee or Licensor.’” Id. at *2. The Court concluded that “ hese are formal, complete agreements that have legal effect, and any associated breach of fiduciary duty occurred upon the execution of those agreements, regardless of identical breaches that occurred in connection with prior license agreements that were in place for unspecified terms and that were superseded by the new agreements.” Thus, “ hile defendants argue that the old licenses, including the $6,000 fee term, would have remained in place indefinitely even if the agreements had not been re-papered in 2007 and 2011, such that there was no injury in 2007 and 2011, the formalizing of the licenses in 2007 and 2011 was a new, overt act that constituted an injurious breach of fiduciary duty.” Id. In reaching the decision, the Court distinguished the facts in Ganzi with Madison Squ. Garden, L.P. v National Hockey League , 2008 WL 4547518, 2008 US Dist. LEXIS 80475 (S.D.N.Y. 2008). In the latter case, the agreements at issue were not new and independent contracts that could be enforced in their own right. As the court observed: “The allegations in the Complaint … do not plausibly allege any ‘new and independent acts’ that inflicted ‘new and accumulating injury’ on MSG.” 2008 WL 4547518, at *10.  Takeaway In the post-trial memoranda, plaintiffs argued that the statute of limitations was tolled under the continuing wrong doctrine. Plaintiffs maintained that defendants repeatedly breached their fiduciary obligations every time defendants failed to distribute profits to JOMR in a fair and reasonable manner. In other words, every underpayment made within six years prior to the commencement of the action was a new self-dealing transaction that could have been remedied, altered or corrected, or reviewed. In addition, plaintiffs argued (and prevailed) on the argument that defendants committed new breaches of fiduciary duty by causing JOMR to enter into new license agreements within the limitations period.  Though mentioning the continuing wrong doctrine, the First Department focused its decision on the enforceability of the 2007 and 2011 License Agreements. And, it is that focus that makes Ganzi notable. As the Court explained, although those agreement were essentially carbon copies of existing license agreements, they were different in that they specifically provided they were new, independent agreements. That finding was reinforced by the merger clause in each of the agreements. Thus, according to the Court, whether JOMR would have continued to license the Palm IP for $6,000 per year pursuant to the preexisting licenses regardless of whether the 2004 and 2010 agreements had ever been prepared was of no moment. For statute of limitations purposes, the claims accrued when the 2007 and 2011 license agreements were entered – i.e. , “the formalizing of the licenses in 2007 and 2011”, each of which “was a new, overt act that constituted an injurious breach of fiduciary duty.”