When a business deal goes bad, it has to be someone’s fault, right? And if it is someone’s fault then that someone should have to pay the other participants in the deal who lost money, particularly where that someone has not been completely honest about the risks involved, right? Not always, and not where the business investor who is sophisticated enough to have known better should have been asking the right questions from the beginning, but simply failed to do so because that investor was a little too greedy.

That is what a federal district court ruled in applying New York law to a case we handled where our client because of a failed business venture was counter-sued by one of the participants for fraud and damages for all of the supposed money the participant would have made but for our client’s alleged misrepresentations concerning its experience and skills. See Street-Works Development LLC v. John Richman; 13 CV 774 (VB), SDNY, decided February 4, 2015.

The particular context of the case concerned whether the defendant in his counterclaims against our client and against individual members of the client had sufficiently and adequately plead fraud under New York law. In his pleadings, the defendant specifically let the court know just how sophisticated he was by claiming that “he had been the developer on real estate projects since he left graduate school”; had “partnered with high net-worth individuals”; and “successfully orchestrated over $3 Billion of real estate projects nationwide”. Given such experience and skill, the Court held that the defendant could have investigated the experience and background of the members, but since he failed to do so he could not have plausibly relied on the representations of our clients. Continue reading

Collecting from a debtor who does not reside within New York State and who may not otherwise be subject to the “long-arm” jurisdiction of New York courts (especially after the U.S. Supreme Court’s decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014)) can be made much easier if the creditor can identify a specific asset in New York, such as a bank account. Under Article 62 of New York’s Civil Practice Law and Rules (“CPLR”), a creditor-plaintiff can simultaneously file a summons and complaint to collect from the debtor-defendant and move the court for what is known as an order of attachment, which allows the plaintiff to have a Sheriff seize the asset pending the outcome of the law suit. The attachment procedure can be a very effective tool for preserving a debtor’s asset as security throughout the law suit and to prevent the asset’s disappearance once the debtor becomes aware of the law suit. Also, under the proper circumstance, the asset itself provides a means to obtain jurisdiction over a foreign defendant, commonly referred to as in rem jurisdiction.

CPLR Section 6201 sets forth the basis upon which an order of attachment can be obtained:

An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defendants, when:
1. the defendant is a nondomiciliary residing without the state, or is a foreign corporation not qualified to do business in the state….

In order to obtain a pre-judgment order of attachment, in its moving papers, the creditor-plaintiff must establish the following elements under CPLR 6212 (a):

a. That there is a cause of action and that the action is one in which plaintiff would be entitled to a money judgment;
b. That it is probable that plaintiff will succeed on the merits;
c. That one or more of the grounds for the attachment set forth in CPLR 6201 exist; and
d. That the amount demanded from the defendant exceeds all counterclaims known to plaintiff. Continue reading

Many homeowners in New York, and elsewhere in the United States, secure lines of credit by using the excess equity in their homes as collateral. These lines of credit agreements become second mortgages on the borrower’s home and are available as and when needed by the homeowner. Unlike the loans involved with the homeowner’s first mortgage, however, equity credit lines do not require the homeowner to sign a promissory note, only what is commonly known as a credit line agreement.

As with first mortgages, banks often sell these equity line mortgages on the secondary mortgage market. When a bank sells a first mortgage it assigns the first mortgage and then as part of the assignment it is also required to indorse the promissory note to the purchaser of the first mortgage. The indorsement can be accomplished by either an allonge (a form of assignment) which must be attached to the promissory note or by affixing the indorsement language directly on the body of the promissory note. But when a bank assigns the equity credit line agreement does the bank have to indorse the agreement or attach an allonge to the equity credit line agreement? The answer to that question depends on whether the equity credit line agreement is a negotiable instrument.

Section 3-104 of New York’s Uniform Commercial Code states as follows:
(1) Any writing to be a negotiable instrument within this Article must

(a) be signed by the maker or drawer; and
(b) contain an unconditional promise or order to pay a sum certain in money and no other promise, order, obligation or power given by the maker or drawer except as authorized by this Article; and
(c) be payable on demand or at a definite time; and
(d) be payable to order or to bearer. Continue reading

Equipment lessors often face the following unfortunate scenario: the lessee defaults and stops making payment under the equipment lease, but remains in possession and uses the equipment while not paying. Under Article 71 of New York’s Civil Practice Law and Rules (“CPLR”), where an equipment lessor sues to remedy a lease payment default, the equipment lessor can make a pre-trial application to the court for the equipment to be removed from the lessee’s premises and eventually turned over to the lessor, pending the outcome of the case. The remedy is known as an Order of Seizure and is an important litigation weapon for an equipment lessor who is looking to preserve the lessor’s collateral and to prevent the insult to injury of the lessee who refuses to pay and wants to keep using the equipment.

Known in other jurisdictions as replevin, New York’s pre-trial remedy of Order of Seizure is different because its purpose is not to restore possession of the property to the person from whom it was wrongfully taken. Rather, the Order of Seizure is a means to hold and protect the property until the action is determined at trial.

Article 71 is applicable only to chattels and includes all specific personal property such as goods and equipment. It also includes certificates of stock, bonds, notes, or other securities and obligations. Continue reading

Businesses who are in need of equipment, whether it be heavy, light or even computer equipment, often seek to obtain such equipment through a lease arrangement where the vendor of the equipment sells the equipment to a lease finance company who then leases the equipment to the business. This arrangement commonly known as a finance lease provides businesses with the means to obtain needed equipment without an initial outlay of capital.

Finance leases frequently contain what has come to be known as a “hell or high water” rent obligation. The obligation requires the lessee to pay unconditionally the full rent when due even if the lessee has a legitimate claim concerning the functionality or operation of the equipment. The lease finance industry has come to rely on the clear enforceability of such provisions as an incentive for such lessors to enter and remain in the equipment lease finance market. And as a practical matter it provides finance lessors with meaningful security for the expectation to be paid rent under the lease rather than having solely to rely on equipment repossession which will ultimately return to the finance lessor equipment with a significantly reduced value.

New York has adopted Article 2A of the Uniform Commercial Code which sets forth the obligations of lessors and lessees in the equipment lease context. For the purpose of this blog post, we will assume the subject lease meets the definition of a lease under Article 2A and that the lessee is a merchant, and not a consumer. In order for an equipment lessor to garner the benefits of a hell or high water provision, the subject lease must first be a non-consumer finance lease. There are numerous conditions which must exist in order to meet the definition of a finance lease under 2A §2-A-103 (g). Some of the conditions are that the equipment lessor must not have not selected, manufactured or supplied the equipment; the lessee must have acquired the subject equipment from the vendor; and the lessee must have had possession of the lease documents before signing, and made aware of the warranties and representations of the vendor and that the lessee has the right to pursue the vendor for any warranty claims. Continue reading

Creditors, often times, those in the equipment leasing business, will enter into an equipment lease agreement with a business lessee where the agreement is signed perhaps by a manager or some other employee whose job it is to furnish and equip the debtor’s business. When the debtor’s business gets in trouble, employees are let go and the lease payments stop. The equipment lessor sends notices reminding the lessee to pay or that the lease is in default, demanding payment. Much to the surprise of the lessor, the lessee now says that while the person who signed the lease was an employee of the debtor, that person had no authority to sign the lease or bind the debtor, and therefore, the lease is not an obligation of the debtor.

Leaving aside that the debtor had the benefit of using the equipment for some period of time, can the debtor effectively disown a signed agreement by denying the authority of the debtor’s employee to sign the agreement? Clearly, the employee is an agent of the debtor, and probably represented to the lessor that he has authority to sign the lease. When is the debtor bound by the act of its agent who signs the agreement?

Under New York law an agent’s authority may be actual or apparent. Actual authority exists when an agent has the power to do an act or to conduct a transaction on behalf of the principal based upon the principal’s clear direction that the agent perform the act.  Minskoff v. American Exp. Travel Related Servs. Co., 98 F.3d 703, 708 (2d Cir.1996). Actual authority may be express or implied, and in the case of express authority is the kind of authority distinctly and plainly articulated, either orally or in writing. On the other hand, implied authority exists when verbal or other acts of the principal reasonably give the appearance of authority to the agent. Implied authority has also been defined as a kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. The general rule in New York with regard to implied authority is that an agent employed to do an act is deemed authorized to do it in the manner in which business entrusted to him is usually done. Songbird Jet Ltd., Inc. v. Amax, Inc., 581 F.Supp. 912, 919 (S.D.N.Y.1984). Continue reading

For the many small and medium sized businesses in our country, particularly those involved in retail sales, access to working capital from banks and other traditional asset lenders can be hard to access.  There are, however, companies that provide working capital to small and medium sized retail merchants by providing these merchants with a way to access working capital through the sale of anticipated future revenues.  These future revenues are most often provided through future credit card sale transactions which merchants and their customers engage in on a daily basis.  Merchants who need working capital will provide purchasers of these future credit card receivables with their history of credit card transactions.  The purchasers will then determine how much of the future credit card receivables they are willing to buy and fix a percentage of future transactions that will be allocated to the purchaser as payment for the purchase, with the balance turned over to the merchant.  Written merchant agreements are entered into which typically provide that the merchant will, in good faith, continue in the same business, continue taking customer credit cards and will use an agreed upon processor for the credit card transactions.

But as in any financial arrangement, sometimes things go wrong and sometimes a merchant stops using the designated processor or stops using credit cards altogether.  If the merchant, after notice, does not go back to the agreed upon method of doing business so as to allow the purchaser to get the purchase price paid, the purchaser has to sue.

Once in court, the merchant determined to beat the purchaser looks to raise any and all defenses, including sometimes that the merchant agreement was not really a purchase and sale, but rather, a loan.  And if the transaction was a loan, says the merchant, by comparing the amount of money going back to the purchaser to the amount of money advanced to the merchant over a specified period of time, the “loan” is usurious.  Criminal usury in New York is a loan which exceeds 25.00%.  New York Penal – Article 190 – § 190.42 Criminal Usury in the First Degree. Continue reading

New York’s post-judgment enforcement laws as set forth in Article 52 of the Civil Practice Law and Rules (“CPLR”) and a seminal decision of the New York Court of Appeals, New York’s highest court, in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009) (“Koehler”) allow a New York judgment creditor to, in effect, levy upon the bank deposits of a judgment debtor located in a bank account of a different state provided the bank in question is subject to personal jurisdiction in New York. Given the current state of electronic and internet money transfers, New York’s approach to this extra-territorial reach of enforcement remedies makes economic and practical sense in the modern world of banking.

The place to start is CPLR Section 5225 (b), New York’s enforcement statute which allows a judgment creditor to commence a proceeding to force any one holding property of the judgment debtor, and subject to personal jurisdiction in New York, to “turn-over” the property to the judgment creditor or a designated Sheriff. Section 5225 (b) specifically provides that: “where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor’s rights to the property are superior to those of the transferee, the court shall require such person to pay the money, or so much of it as is sufficient to satisfy the judgment”.

In Koehler, New York’s highest court interpreted Article 52 and stated clearly that a New York court has the authority to issue a turnover order pertaining to extraterritorial property, if it has personal jurisdiction over the person in possession of the property. While the facts in Koehler involved stock of a judgment debtor being held by the foreign parent of the bank served in New York, subsequent cases, relying on Koehler, have had no problem applying the extra-territorial reach of Article 52 to deposits of debtors technically held by out of state branches of the bank served in New York. See for example, McCarthy v. Wachovia Bank, N.A., 759 F.Supp.2d 265, 275 (E.D.N.Y. 2011), where the court explained that “because Wachovia has branches within New York—and therefore conducts business in New York—it is subject to the jurisdiction of the New York courts. Accordingly, under the Court of Appeals’ holding in Koehler, it was permissible for defendants to issue and honor the restraining notice served pursuant to New York CPLR Section 5222.4.” Continue reading

You did the easy part, you obtained a judgment against an individual. Now comes the hard part – collecting. You then do all of the usual things after you get a judgment – issue restraining notices, information subpoenas and maybe even a live examination of the judgment debtor. Unfortunately, you find the debtor has little in his own name, but he is the owner of a company. Your judgment is not against the company, however, and unless you get the stock or other equity ownership interest of the debtor in the company (a difficult task) are you going to be able to get to the assets of the company? In New York you have a shot provided your case against the debtor’s company meets the requirements of what is known as reverse veil piercing.

Traditional veil piercing in New York involves a situation where you have obtained a judgment against a corporation and you are trying to get behind the company on the belief that the debtor is using the assets of the company interchangeably with his own assets and otherwise dominates and controls the company. Standard veil piercing is an equitable concept that allows a creditor to disregard a corporation and hold the debtor as a controlling shareholder personally liable for the corporate debt. Sweeney, Cohn, Stahl & Vaccaro v. Kane, 6 A.D.3d 72, 75 (2d Dept. 2004). Generally, in order to state a claim for traditional veil piercing, two elements are required: first, that the owner exercised complete control concerning the transaction attacked; and second, that such control was used to commit a fraud or wrong against the creditor which resulted in injury to the creditor. Morris v. New York State Department of Taxation and Finance, 82 N.Y.2d 135, 141, 623 N.E.2d 1157, 603 N.Y.S.2d 807 (1993). Similarly, a claim for piercing the corporate veil exists where a corporation is shown to be a mere shell dominated and controlled by a debtor for his or her own purpose.

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