Category: Fraud
Commercial Division Dismisses ’33 Act Claim for Lack of Contemporaneous Falsehood
Fraud Claim Dismissed Where Buyer Disclaimed Reliance on Sellers’ Representations
In Arco Acquisitions, LLC v. Tiffany Plaza LLC, Justice Elizabeth Hazlitt Emerson of the Suffolk County Commercial Division granted defendants’ motion to dismiss Arco’s lawsuit, which alleged that defendants committed fraud in the sale of commercial real estate by misrepresenting incoming rent to inflate the value of the property.[1] The Court found that the parties’ contract provided that Arco assumed all responsibility to investigate the property’s leases and tenancies, and held that the contractual disclaimer precluded Arco from claiming that it entered into the agreement due to fraudulent representations about the rent roll.
Commercial Division Holds that Reliance and Inducement are Not Required Elements of Unjust Enrichment
When the funds invested by one victim of a Ponzi scheme are used to pay the scheme’s debts to an earlier investor, can the later investor recover those funds from the earlier investor through an unjust enrichment claim? Yes, if there is a sufficient connection between the parties, according to Commercial Division Justice Andrea Masley’s recent decision in JHAC LLC v. Advance Entertainment LLC. In JHAC, Justice Masley allowed unjust enrichment claims by one Ponzi scheme victim against other victims to proceed by holding that reliance and inducement are not elements of unjust enrichment in New York. All that is required to sustain the claim is a “connection” between the victims, and Justice Masley held that JHAC adequately pled such a connection.
First Department Holds That “Sole and Absolute Discretion” Clause Does Not Preclude Breach of Fiduciary Duty Claim
In Shatz v. Chertok, the First Department affirmed in part and reversed in part a decision by Justice Jennifer G. Schechter of the Commercial Division. The key issue on appeal was whether a New York limited liability company’s operating agreement that provided the managing member “sole and absolute discretion” over investment decisions barred a derivative claim for breach of fiduciary duty. The First Department held that this contractual language did not bar a breach of fiduciary duty claim against the company’s manager.
Commercial Division Reiterates That Claims Based on Harm to All Members of LLC are Derivative
The issues related to the bringing of claims involving a cancelled LLC were addressed in the Commercial Division’s recent decision in Hopkins v. Ackerman. In November 2019, Justice Saliann Scarpulla dismissed most of Hopkins’s and his co-plaintiffs’ claims as derivative, and therefore unable to be brought on behalf of a cancelled LLC. We covered that decision here. Following that decision, Hopkins sought leave to bring additional direct claims, but Justice Scarpulla’s recent decision rejected all but one of the proposed claims—a breach of fiduciary duty claim based on allegations that Hopkins was frozen out of decision-making and membership rights. The other claims were rejected as derivative because they concerned the alleged failure to distribute the LLCs’ assets, a harm felt equally by all members. Justice Scarpulla also reaffirmed her earlier ruling that a challenge to an LLC’s cancellation status (which could re-open the door to derivative claims) must be brought in Delaware, where the entities were established and cancelled.
New York Amends Its Fraudulent Conveyance Law by Enacting the Uniform Voidable Transactions Act
Last month, New York enacted the Uniform Voidable Transactions Act (“UVTA”), which seeks to modernize the state’s fraudulent conveyance law.
Since its introduction by the Uniform Law Commission in 2014, the UVTA has now been adopted by 21 states. The UVTA was originally drafted by the Uniform Law Commission as an amendment to the 1984 Uniform Fraudulent Transfer Act (“UFTA”); New York was one of only seven states that did not adopt the original UFTA.
Commercial Division Justices Gather to Discuss Motion Practice
On Wednesday June 5, 2019, all eight of the New York County Commercial Division justices participated on a panel for the New York State Bar Association’s Commercial and Federal Litigation Section on “Motion Practice Before the Commercial Division.” Motion practice is one of the most frequently used aspects of practice in the Commercial Division. The format was an informal question and answer session on motion practice, moderated by the Section’s Past Chair, Robert Holtzman.
Commercial Division Decision Illustrates Potential Issues that May Arise in CPLR Article 52 Turnover Order Proceedings
A party seeking to enforce a judgment against an asset of a judgment debtor that is held by a third party may petition for a turnover order through a special proceeding provided for by CPLR Article 52. Justice Saliann Scarpulla’s recent decision in The Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, LTD (Wimbledon) illustrates several of the potential issues that may arise during such a proceeding.
Commercial Litigation Update: First Department Drops Down to Four-Justice Panels for Arguments
Beginning in April 2019, the First Department has changed its practice to assign panels of four justices for oral argument, as opposed to five justices as has been the traditional practice of the court. This change is the result of three ongoing vacancies on the First Department that have remained unfilled by Governor Cuomo. The Presiding Justice of the First Department, Hon. Rolando Acosta, explained that the move to four justice panels is necessary because there are not enough judges to hear all the pending appeals. Aware that four justice panels could create a two-to-two split, Presiding Justice Acosta explained that a fifth judge can be brought in to issue a decision if needed. Parties can preserve their right to reargue or submit the case to a fifth justice by making a statement on the oral argument record. This change will likely remain in place until new judges are appointed to the court.
Corporate Officer Escapes Corporate-Capacity Fraud Claims in Alleged Ponzi Scheme Case in Commercial Division
Coast-to-Coast-Energy-Inc-v-Ga.pdfIn corporate fraud suits, it is common for plaintiffs to file claims against executives in their capacity as corporate officers. However, to succeed on a corporate-capacity claim, a plaintiff must be able to show that the corporate veil should be pierced so as to hold an officer personally liable for the corporation’s legal obligations. This issue is illustrated by the Commercial Division’s recent decision in Coast to Coast Energy, Inc. v. Gasarch.
Release from the 1970s Forecloses Family’s Suit to Reclaim Art Lost During the Holocaust
So ruled Justice Andrea Masley of the Commercial Division in a recent summary judgment motion in the case Frenk v. Solomon, Index No. 650298/2013, holding that a standardized form release signed by the plaintiff’s mother in 1973 to settle a case primarily involving one piece of artwork barred the plaintiff’s present suit to recover other pieces of art that were believed lost at the time of the 1973 settlement.
The Commercial Division Reaffirms that Permissive Forum Selection Clauses Do Not Preclude Litigating in a Different Court
Attorneys drafting forum selection clauses were reminded of the distinction between permissive and mandatory forum language in Justice Andrea Masley’s recent decision, Duncan-Watt et al. v. Rockefeller et al., No. 655538/2016, 2018 BL 138448 (Sup. Ct., N.Y. Cty. Apr. 13, 2018). In Duncan-Watt, the Commercial Division ruled on Defendants’ motion to dismiss by holding that the dispute resolution clause in the parties’ licensing agreement failed to select Australian courts as the exclusive forum in which to litigate any disputes. As a result, the Court concluded that the contractual language at issue only reflected the parties’ consent to jurisdiction in Australia—not that the dispute had to be litigated there.[1]
Commercial Division Rules that U.S. Treasury Secretary’s Access to a Company’s Detailed Financial Information in His Role as a Board Member Is Insufficient to Establish Liability for Fraud
Members of a company’s board who are also investors in the company often have access to detailed information about the company’s finances and its lending facilities. But what happens when an investor-board member could, through access to the company’s financial information, potentially determine that funds from a lending facility are not being used for the purpose that the company and its agents had previously represented that they would be used for? Is the investor-board member potentially liable for fraud merely on the basis of his access to or awareness of financial information about the company? Justice Charles E. Ramos’s recent decision in RKA Film Fin., LLC v. Kavanaugh, No. 652592/2015, 2017 BL 222658, 2017 N.Y. Misc. LEXIS 2459, 2017 NY Slip Op 50846(U) (Sup. Ct. June 27, 2017), suggests that the answer may be no. According to the Commercial Division, without personal involvement in the alleged fraud itself or a special duty to disclose to the plaintiff, an investor-board member is likely not liable for fraud to a plaintiff creditor.
Commercial Division Flags Novel Issue of Reasonable Reliance In LLC Member Battle
In PMC Aviation 2012-1 LLC et al. v. Jet Midwest Group, LLC et al., No. 654047/2015, BL221447 (Sup. Ct. Jun. 21, 2017), Commercial Division Justice Shirley Kornreich denied a motion to dismiss a fraudulent inducement claim by an LLC member against its business partner. The court found that it could not find any “controlling, on-point authority” on the issue of reasonable reliance at issue in the case. The case relates to the scope of due-diligence obligations of LLC members when they rely upon the representations of business partners concerning the affairs of a jointly owned company.
If You Don’t Hold the Bond, You Can’t Sue for Fraud
Commercial Division Justice Eileen Bransten recently concluded that plaintiff bondholders lacked standing to bring fraud claims against the bond obligor and trustee after having sold their interests in the bonds. One William St. Capital Mgmt. L.P. v. U.S. Educ. Loan Tr. IV, LLC, No. 652274/2012, 2017 BL 1700030 (Sup. Ct. N.Y. Co. May 16, 2017), involved a group of investment firms that purchased $10 million in notes backed by government-guaranteed student loans from the U.S. Education Loan Trust IV (“ELT”). The notes were part of a larger $30 million package.
The Computer Fraud and Abuse Act Will Need To Wait Another Day In The Commercial Division
Justice Shirley Kornreich recently issued one of the few New York state court decisions that address the Computer Fraud and Abuse Act (“CFAA”). Spec Simple, Inc. v. Designer Pages Online LLC, No. 651860/2015, 2017 BL 160865 (N.Y. Sup. Ct. May 10, 2017). The CFAA criminalizes both accessing a computer without authorization and exceeding authorized access and thereby obtaining information from any protected computer. Id. at *3 (citing 18 U.S.C. § 1030(a)(2)(C)). The CFAA also provides a civil cause of action to any person who suffers damage or loss because of a violation of the CFAA. Id. at *4 (citing 18 U.S.C. § 1030(g)). As discussed below, the decision provides a helpful look into the interpretation of CFAA claims in the future.
When is a Working Capital Agreement a Loan? It Depends on Your Claim.
Suppose you’ve entered into a financial arrangement that resembles a lending agreement, but it is not formally designated as such, and you think you’re paying too much. Do you (a) sue for misrepresentation, on the grounds that you thought you were entering into a lending agreement and not some other kind of an agreement, or (b) sue on the theory that the agreement is a lending agreement, but it is usurious and therefore unlawful?
Fraud and Fraudulent Conveyance Claims for $686 Million Allowed To Proceed Against Hedge Fund in Long-Running Dispute over Failed Securitization
On March 13, 2017, Justice Marcy Friedman of the New York Commercial Division denied a motion for summary judgment seeking to dismiss claims of fraud, breach of the covenant of good faith and fair dealing, and fraudulent conveyance brought against a hedge fund, Highland Capital Management, and related entities. The case, UBS Securities LLC v. Highland Capital Management, No. 6500097/09, 2017 BL 98450 (Sup. Ct. Mar. 13, 2017),[1] is a long running dispute arising from a failed securitization of collateralized loan obligations (CLOs) and credit default swaps (CDS) that dates to the early days of the Great Recession. The denial of summary judgment means that the next step in this eight-year long saga will be a jury trial where $686 million in damages will be at stake.
Commercial Division Dismisses Claim Against Major Chinese Securities Firm Due to Lack of Personal Jurisdiction
In Lantau Holdings, Ltd. v. Orient Equal International Grp., No. 653920/2016, 2017 BL 77469 (Sup. Ct. Mar. 6, 2017), Judge Anil C. Singh of the New York County Commercial Division dismissed several claims by the plaintiff, Tarrytown-based lender Lantau Holdings, Ltd. (“Lantau”), against defendant Haitong International Securities Company Limited (“Haitong”), a member of the Haitong Group, one of China’s largest securities businesses.
Commercial Division allows fraudulent conveyance claims to proceed in two separate cases
In a pair of recent decisions, Justices Shirley W. Kornreich and Lawrence K. Marks of the Commercial Division ruled that creditors could proceed on their fraudulent conveyance claims seeking reversal of asset transfers made by debtors under New York’s Debtor and Creditor Law (“DCL”). The decisions highlight two basic theories of fraudulent conveyance claims permitted by the DCL: intentional fraud claims, which require a showing that the debtor made the transfer with the intent defrauding its creditor, and constructive fraud claims, which do not require a showing of fraudulent intent.
Commercial Division Rejects Collateral Promise Argument as a Basis for a Fraudulent Inducement Claim
In a recent decision, Justice Anil Singh of the Commercial Division dismissed a counterclaim asserted by Visa against Wal-Mart for fraudulent inducement. According to Justice Singh, Visa’s allegations failed to satisfy the collateral promise rule as its fraud claim did not concern misrepresentations of present material fact that were collateral to the contract. Wal-Mart Stores, Inc. v. Visa U.S.A. Inc., No. 652530/2016, 2017 BL 65006 (Sup. Ct. Feb. 27, 2017).
First Department Allows $45 Million Fraud Claim to Proceed Against Patriarch Partners
In Norddeutsche Landesbank Girozentrale v. Tilton, No. 651695/15, 2017 BL 55790 (App Div, 1st Dep’t Feb. 23, 2017), a divided panel of the Appellate Division, First Department, affirmed a Commercial Division order that denied a motion to dismiss a $45 million fraud claim against Lynn Tilton, Patriarch Partners LLC (“Patriarch”), and two Patriarch affiliates, stemming from their management of two collateralized debt obligation (“CDO”) funds. Justices Richard T. Andrias and David B. Saxe dissented in part, opining that the majority should have dismissed the fraud claim as time-barred because the plaintiffs-investors were on notice of the alleged fraud more than two years before they filed suit.
Investor’s Relocation to New York after Structuring a Financing Deal in Hong Kong Does Not Provide a Basis for Suit Against Swiss Bank UBS in New York, Holds Commercial Division
In Ace Decade Holdings Ltd. v. UBS AG, No. 653316/2015, 2016 BL 413780 (N.Y. Sup. Ct. Dec. 7, 2016), Justice Eileen Bransten of the Commercial Division dismissed a $500 million fraud suit brought by an investment holding company incorporated in the British Virgin Islands, Ace Decade Holdings Ltd. (“Ace Decade”), against the Swiss Bank UBS AG for lack of personal jurisdiction and inconvenient forum. Justice Bransten found no basis to exercise jurisdiction over UBS for alleged fraud in connection with a financing deal negotiated in Hong Kong to purchase shares of a firm listed on the Hong Kong Stock Exchange. Justice Bransten further held that, even if the court could exercise jurisdiction over UBS, the causes of action lack a substantial nexus with New York and, thus, dismissal is also warranted based upon the doctrine of forum non conveniens.
Fraud Pleading Standard: Specificity Not Required to Plead Scienter of Corporate Defendants in Alleged Corporate Fraud Conspiracy
What facts must a fraud plaintiff plead, pursuant to the heightened pleading standard under CPLR § 3016(b), to cognizably allege scienter among corporate entity defendants in the context of an alleged multi-corporation fraud conspiracy?