Court Upholds Breach of Duty of Care Claim Against Trustee

On August 7, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in U.S. Educational Loan Trust IV, LLC v. Bank of N.Y. Mellon, 2018 NY Slip Op. 31924(U), upholding a claim for breach of the duty of good care against a trustee, explaining:

With respect to plaintiffs’ duty of care claim, as both AG Capital and Commerce Bank demonstrate, such claims against indenture trustees should not be dismissed as duplicative to the extent they are based on basic non-discretionary ministerial tasks. Although defendant argues that the breaches alleged here do not meet this standard, they fail to provide any authority to support the claim. To the extent Commerce Bank dismissed a portion of the negligence claim as not relating to ministerial tasks, it did so on the basis that the if the act in question (that defendant failed to notify plaintiffs that other parties to the PSA had failed to perform their obligations), were a breach, defendant would have to monitor other parties. Those facts are far removed from the breaches alleged here. Additionally, although defendant contends the agreements’ negating provisions defeat these claims, the court in AG Capital specifically found that the duties described above exist, notwithstanding the Trust Indenture Act’s mandate that an indenture trustee shall not be liable except for the performance of such duties as are specifically set out in such indenture. Accordingly, that branch of defendant’s motion which seeks to dismiss count four is denied.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: litigation regarding structured finance transactions. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding litigation about financial products and services.

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Court Sanctions Litigant for Frivolous Litigation, Including Awarding Attorneys’ Fees for Defending Frivolous Claims

On August 1, 2018, Justice Ramos of the New York County Commercial Division issued a decision in Citigroup Global Markets, Inc. v. Fiorilla, 2018 NY Slip Op. 31919(U), sanctioning a litigant for frivolous litigation, including awarding attorneys’ fees for defending against the frivolous claims, explaining:

Uniform Rule 130-1.1 vests this Court with discretion to award both attorneys’ fees, costs and sanctions as a result of frivolous conduct. Conduct is frivolous if (1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law; (2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or (3) it asserts material factual statements that are false.

Courts also consider whether the conduct was continued when it became apparent, or should have been apparent, that the conduct was frivolous, or when such conduct was brought to the attention of the parties or to counsel. Simply because an argument fails to persuade the court does not necessitate a finding of frivolous conduct.

Throughout this litigation, Fiorilla has pursued a relentless campaign to circumvent this Court’s final judgment by attempting to re-litigate already decided matters. He has prolonged this litigation and compelled CGMI to expend significant resources, both in New York and in France. Both the French proceedings and the OSC were frivolous and completely without merit. Thus, the record establishes that Fiorilla’s outrageous conduct merits the imposition of sanctions, and an award of reasonable attorneys fees.

Fiorilla’s frivolous conduct included making inaccurate and incomplete factcal assertions in the French proceedings. To obtain ex parte recognition of the Award in France, Fiorilla submitted a copy of the Award, and omitted the critical fact that this Court had already vacated the Award and entered a final judgment, which was affirmed on appeal. Fiorilla even used the already vacated Award to attempt to seize CGMI’s assets in France.

Fiorilla’s subsequent OSC to vacate the Award was also frivolous. This is not a simply a circumstance where an argument failed to persuade the Court. Rather, Fiorilla and his counsel rehashed arguments in duplicative proceedings that had already been deemed to lack legal merit by this Court and on appeal. Fiorilla cited no new arguments or evidence in support that warranted
reconsideration. Mr. Fiorilla. persisted in this conduct despite repeated warnings by this Court and the First Department.

The Court wholly rejects Fiorilla’s assertion that his conduct was not in bad faith. Fiorilla’s opposition to the motion largely ignores the factual record and repeated admonishments, both by this Court and by the First Department pertaining to his conduct.

(Internal quotations and citations omitted).

Part of being a good litigator is thinking of winning arguments other lawyers miss. However, as this decision shows, courts have little patience for lawyers who cross the line from creative to making frivolous arguments. Contact Schlam Stone & Dolan partner John Lundin at if you or a client has a question regarding whether an argument has crossed the line from creative to sanctionable.

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Judge Cogan Denies Motion To Dismiss Discrimination Action, Finding That Plaintiffs’ EEOC Complaint Satisfied Exhaustion Requirements Even Where Lawsuit Expanded On Allegations

Posted by Solomon N. Klein, Litigation Partner

District Judge Brian M. Cogan denied a motion to dismiss where defendant argued that plaintiff failed to exhaust his administrative remedies before filing his lawsuit. Anderson v. Alclear, LLC, 18-cv-1525 (E.D.N.Y. Aug. 10, 2018) (BMC) (RML). (Interestingly, the Court ruled directly on defendant’s pre-motion conference letter, deeming the pre-motion conference letter to constitute the motion to dismiss.)

Defendant argued that plaintiff’s EEOC complaint – an administrative process that plaintiff was required to exhaust prior to bringing the action – omitted a number of the alleged discriminatory acts that were subsequently alleged in the federal lawsuit at issue. The Court denied the motion, noting the “loose pleading” requirements for EEOC complaints “based on the recognition that ‘EEOC charges frequently are filled out by employees without the benefit of counsel and that their primary purpose is to alert the EEOC to the discrimination that a plaintiff claims [he] is suffering. Deravin v. Kerik, 335 F.3d 195, 201 (2d Cir. 2003).’”

This is not a case in which a claimant administratively raised one basis for illegal discrimination and then sought to sue on another, e.g., race discrimination versus sex discrimination. Instead, plaintiff has pleaded three new facts demonstrating his claim of discrimination on the basis of national origin. Each one is reasonably related to the facts included in plaintiff’s EEOC charge.

First, defendant claims that the EEOC did not have adequate notice of a statement allegedly made by one of plaintiff’s supervisors that “Jamaicans are taking over.” The Court fails to see why. Plaintiff indicated in the EEOC charge that he was discriminated on the basis of his national origin, that he was Jamaican, and that he was verbally harassed “more than any other worker” during his time of employment. Plaintiff’s use of the word “worker” in this instance indicates that the individuals whom plaintiff believes verbally harassed him (and his coworkers) were his superiors. This Court is confident that the EEOC can put two and two together and would think to investigate whether members of management made inflammatory statements directed at plaintiff about his Jamaican national origin based on the details provided in plaintiff’s charge.

Second, defendant claims that the EEOC did not have adequate notice of plaintiff’s claim that defendant provided health insurance benefits to every other employee except him. Defendant’s argument for dismissal is strongest with respect to this fact, because the narrative portion of plaintiff’s charge does not state that defendant denied him health insurance. However, under the section of plaintiff’s charge entitled “Acts of alleged discrimination,” plaintiff checked a box indicating that the company denied him services. Given the “loose pleading” standard permitted in this analysis, the Court will equate “services” with “benefits” here. There is presumably a discrete number of benefits that defendant offers to all of its employees. Health insurance is one example, and this box should have signaled to the agency that plaintiff may have been denied certain benefits. All the agency had to do was look at the defendant’s limited universe of benefits and confirm whether plaintiff received them. In addition, plaintiff’s charge even describes a medical condition, which suggests that there may have been issues with his health. Here, plaintiff sufficiently directed the agency to the facts that he had medical issues and was denied services; as a result, an alleged denial of health care benefits can reasonably be expected to fall within the scope of the agency’s investigation into his claims.

Finally, defendant claims there was inadequate notice of plaintiff’s allegation that defendant did not discipline plaintiff’s Indian coworker for a policy violation. This is wrong. Plaintiff states in his charge that he was unfairly written up more than any other employee and that he knows that other employees were not disciplined for certain actions. The EEOC does not need to be told the nationality of other employees to successfully investigate whether plaintiff was subject to disparate treatment on the basis of his Jamaican heritage. The point of the administrative charge is to allow the agency to conduct a meaningful investigation; it is not for the plaintiff to conduct this investigation himself

Anderson v. Alclear, LLC, 18-cv-1525 (E.D.N.Y. Aug. 10, 2018) (BMC) (RML).

Posted by Solomon N. Klein, Litigation Partner

Court Rules That Expert Testimony in Legal Malpractice Action is Unnecessary Given Issues in Dispute

On August 1, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Red Zone LLC v. Cadwalader, Wickersham & Taft LLP, 2018 NY Slip Op. 31888(U), precluding a defendant from presenting an expert witness in a legal malpractice action on the ground that it was unnecessary given the issues in dispute, explaining:

In Motion Sequence Numbers 010-014, 016 and 018-023, plaintiff seeks to preclude Cadwalader, Wickersham & Taft LLP (“CWT”) from presenting expert testimony as to whether it departed from the standard of care required of an attorney and/or that the malpractice did not cause Red Zone LLC’s (“Red Zone”) alleged inquiry. CWT insists it is entitled to present such evidence through expert testimony. It acknowledges that both Justice Schweitzer and the Appellate Division held that expert testimony was not necessary. The Court of Appeals did not address this issue but “(v)iewing the evidence in the light most favorable to defendant as the non-movant,” that court concluded that “material triable questions of fact exist regarding whether defendant failed to exercise the ordinary reasonable skill and knowledge commonly possessed by members of the legal profession.”

At this point in the case there are only two versions of the facts concerning the events of August 16 and 17, 2005 that may have resulted in injury to Red Zone, neither of which involve matters outside the ken of the typical juror. If the jury adopts the facts as alleged by plaintiff, the failure of CWT to memorialize the parties’ agreement is prima facie proof of professional malpractice. If the jury finds that on August 17, 2005, either the parties recognized there was no meeting of the minds and negotiated the Supplement or that Snyder and UBS agreed to change the handshake agreement of August 16, 2005 and despite Block’s warning, agreed simply to clarify that the fee would be limited to $2 million if Red Zone won only three of seven Board seats, a finding of no professional malpractice should follow. Again, none of this requires specialized knowledge.

For these reasons, and consistent with the findings of Justice Schweitzer and the First Department, no expert testimony is needed.

(Internal citations omitted).

An issue that arises in almost all complex commercial litigation is the use of experts to explain evidence that is unfamiliar to a typical juror (or judge). Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding the admission of expert evidence.

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Opportunity to Comment on Proposed Changes to Commercial Division Rules

The Office of Court Administration has asked for public comment on a proposed change to the Commercial Division rules relating to the selection of mediators. The new rule would add the following sentence to Commercial Division Rule 3: “Counsel are encouraged to work together to select a mediator that is mutually acceptable, and may wish to consult any list of approved neutrals in the county where the case is pending.”

E-mail comments on this proposal to by September 28, 2018.

Stock Loan Lowdown: Third Time Through the Order

Welcome back, followers, friends and fellow antitrust fans, to this third installment of the Stock Loan Lowdown. This time around, we examine the full-blown fortress forged by our persistent plaintiffs in response to the defendants frighteningly (or frustratingly?) far-reaching motion to dismiss. If you’re new around here and wondering just what that motion said, who the parties are, or why these soporific sentences contain such frequent forays in to the fertile forests of alliteration—feel free to ferret out former posts on the first few fields by clicking here for the who, and here for the what.

Plaintiffs, understandably, had a lot of ground to cover in their opposition, and did so admirably. Their brief starts with a review of group boycotts and the Rule 8 pleading standard. Specifically, Plaintiffs posit that the antitrust claim they made is a “classic example” of a group boycott, of the type long recognized by courts as unlawful per se.” More to the point, they accuse the Prime Broker Defendants of “ignoring” the Second Circuit’s holding in Anderson News, a case which found the joint decision of a group of publishers and distributors boycott certain magazine wholesalers—each of whom has attempted to charge publishers a per-issue fee to cover the cost of collecting and disposing of unsold magazines—to be a per se violation justifying reversal of the lower court’s dismissal. Both Anderson News and their own case, Plaintiffs insist, are illustrations of the “well-recognized principal” that boycotts involving horizontal agreements among direct competitors are illegal per se.

Plaintiffs use the section on Rule 8 not only to address the general pleading standard—no heightened pleading standard exists, and while plaintiffs must plausibly allege an unlawful agreement, plausibility must be judged by reading the complaint as a whole, and may be alleged through direct or circumstantial evidence—but also to point out that “only facts that actually appear in the Complaint should be taken as true,” and, as such, extrinsic material submitted by Defendants should not be considered.

This is Plausible! The Direct and Circumstantial Evidence Alleged

The next two sections of the brief focus largely on plausibility: how the complaint alleged direct and circumstantial evidence of agreement, followed by an examination of why defendant’s arguments against plausibility fail. With respect to direct evidence, Plaintiffs point to statements, made by named executives of the Defendant organizations, quoted in the complaint, and claim that theirs is “the rare case where Plaintiffs have uncovered direct evidence of an illegal agreement.” In one such example, Plaintiffs highlight an admission by the Prime Broker Defendants, in which an executive stated that they had reached a “general agreement” that “industry advances,” as reflected by AQS, SL-x, and Data Explorers, should only “be achieved from within EquiLend.” The antitrust laws, Plaintiffs go on to say, “do not permit any group of competitors . . . to anoint themselves arbiters of whether innovation can occur in a market.”

Beyond this and other similar examples of direct evidence, Plaintiffs insist that “the Complaint also painstakingly explains how Defendants engaged in parallel and other highly probative circumstantial conduct as they lived up to their ‘general agreement.’” One element of this circumstantial evidence takes the form of individual, yet identical, demands by various Prime Broker Defendants to AQS that AQS become a “broker-only platform”: each insisted that they would not participate on the platform unless AQS barred lenders and borrowers from trading directly. Plaintiffs also push back on Defendants’ conclusion that this allegation is conclusory, despite not quoting precise language from the meetings, on the grounds that it alleges specific content of communications by specific Defendants. Plaintiffs further point to In re Credit Default Swaps Antitrust Litigation (“CDS”), a case in which dealer defendants conspired to block a trading platform from entering the CDS market, and argue that Judge Cote there found that similar “indirect” allegations to those pled here—such as communications made “under the auspices of board or committee meetings”—were sufficient to plausible support an inference of conspiracy.

To support the examples of indirect or circumstantial evidence, Plaintiffs further point to numerous “plus factors,” but take care to point out that such plus factors are only necessary “when a conspiracy claim rests solely on inferences drawn from allegations of parallel behavior”—not a situation Plaintiffs believe to apply to them, given their allegations of direct evidence. The plus factors they do cite, however, cover: (1) the high level at which the identified communications took place; (2) the common motive to conspire; and (3) an assertion that, absent the a conspiracy, it would have been against the self-interest of the individual defendants to boycott the new platforms—they would have been at risk of being left behind a market shifting in response to strong demand.

No, Really – This is Plausible! Defendants’ Implausibility Arguments Fail

In their opening brief, Defendants presented an assortment of arguments for why the group boycott alleged was, supposedly, implausible. Plaintiffs devote a portion of their brief to undercutting each of these arguments in turn. First, as regards the nine-year length of the conspiracy: Plaintiffs note Defendant’s failure to identify any case holding that conspiracies have a maximum time limit, and further drop a cite to a case finding it plausible that some of the very same defendants engaged in a “long-running conspiracy” lasting over a decade. The members of the conspiracy are similarly plausible, despite the presence in the market of, as defendant note, “dozens of other prime brokers,” because the six prime brokers named held more than three quarters of the total market share, and thus possessed not small amount of clout. Moreover, the Prime Broker Defendants together controlled a sufficient share of the industry that those other brokers alone could not provide sufficient liquidity. The Defendants had further argued that the very goals of the conspiracy were implausible, as the stock loan market was fundamentally unsuited for anonymous exchange, and that no market demand existed. In response, Plaintiffs note that, contrary to Defendant’s insistence that the identity of the lender is critical to assess the risk of a stock loan, most borrowers in the current OTC market do not demand to know the identity of lenders—nor would such information give any definite information as to the lender’s future intentions for the stock. Moreover, for those that did concern themselves with such details, anonymity on both the AQS and SL-x platforms was optional, not mandatory. More generally, Plaintiffs assert, if the market was so ill-suited to anonymous trading as Defendants contend, how did AQS attract the support of some of the largest lenders and borrowers of stock, or the oldest American venture capital fund, or one of the largest exchanges? Similarly, why was Quadriserve’s first anonymous trading offering so immediately popular with borrowers and lenders? Or why would Bank of America have initially provided so much support? Good questions, guys.

They’re a Team, but . . . [Addressing Group Pleading Contentions]

Plaintiffs counter Defendant’s allegation of impermissible group pleading first by pointing out the array of Defendant-specific detail in the Complaint—and further, by noting that the court in CDS rejected similar arguments where the complaint alleged the “conspiratorial participation of each defendant and listed the representatives attending various meetings at which the attendees were alleged to have colluded.”

With respect to Defendant’s argument that allegations against various members of the corporate families were insufficient, Plaintiffs point out that this type of pleading is “routinely allowed” at the corporate family level. This is particularly true, they claim, where the named employees have held themselves out as representing the interest of the corporate family as a whole.

Rule of Reason is not the Rule of this Road

In response to Defendant’s argument that the Court should apply the “rule of reason” to allegations concerning EquiLend, Plaintiffs again argue that per se treatment is most appropriate because the question of liability must be made by looking at the type claim as a whole, and not on individual allegations taken in isolation of one another. A per se claim, Plaintiffs, by way of the Second Circuit, explain, “does not lose that character simply because some individual allegations concern joint venture conduct.” Allegations involving Equilent, therefore, should not be taken in isolation, but considered as part of the whole.

Moreover, the Complaint does not, as Defendants suggest, center on actions taken by EquiLend, but on agreements Defendants made to restrain their actions in the stock loan market itself, outside of the joint venture. This makes the case fundamentally different, Plaintiffs explain, from Texaco, relied on the Defendants, which found that two companies which participated in a market only through a joint venture investment, and not also independently. The Prime Broker Defendants did not act as a “single firm” in the stock loan market, the way the Texaco defendants did, but instead remained horizontal competitors (or is that “competitors”?) and separate economic actors. With respect to the allegations concerning DataLend, which the Complaint alleges was created to “kill” DataExplorers by offering just enough data to undermine that entity, while preventing dissemination of real-time data in the market—a development Defendants knew would lead to pricing compression and reductions in their fees. Because each Prime Broker Defendant negotiated distribution agreements with DataLend in parallel, the actions constituted, according to Plaintiffs “plainly unlawful, naked restraint” of competition in the stock loan market.

And even if the court were to decide that the claims warranted some scrutiny beyond per se, Plaintiffs posit that such scrutiny would involve, at most, a “quick look” or truncated rule of reason analysis—a standard, Plaintiffs insist, they would easily satisfy. To that end, Plaintiffs point to an array of “truncation” cases, including one in which the deciding court took guidance from Moore to find that the rule of reason could sometimes, like the good St. Nick, “be applied in the twinkling of an eye.” (And for those of you unfamiliar with the reference, please note that those twinkling eyes were further accompanied by dimples—how merry!—and a nose like a cherry, neither of which have yet made it into an antitrust-related holding.)

Here we Stand: Plaintiffs have Antitrust Standing

Of the four “efficient enforcer” standards, Defendants argue that Plaintiffs fails to meet one criteria: speculativeness. Plaintiffs respond, however, that there is nothing speculative about the injuries suffered by borrowers and lenders in the stock loan market: they were deprived of more efficient, competitive, and transparent trading options, and that deprivation was a direct result of Defendants boycott. The goal of the conspiracy was to maintain inflated spreads, and the result—higher prices paid by borrowers and lenders—was the not just the logical and foreseeable result of Defendants actions, but, indeed, their intent. And while every antitrust lawsuit demands some degree of speculation—all plaintiffs must present an account of how the situation would have unfolded “but for” the wrongful conduct—that does not mean that those effects cannot be sufficiently estimated and measured. Indeed, Plaintiffs point out that AQS had in conducted analyses to quantify the economic benefits that borrowers and lenders would enjoy by way of its new platform.

No Time Outs Here: Plaintiff’s Claims are Timely

Plaintiffs can recover for antitrust injuries occurring prior to August 16, 2013, they argue, because the complaint readily satisfies the pleading standard for tolling. First, concealment may be pled where the wrongful behavior was of a self-concealing nature. As the CDS court has previously found, “[a] group boycott of exchange trading has the characteristics of other types of conspiracies that have been held to be self-concealing.” The next factor requires that Plaintiffs adequately plead their ignorance of the conspiracy; because key parts of Defendant’s misconduct, such as the secret meetings, were non-public facts uncovered by counsel during a thorough investigation, Plaintiffs could not have acquired knowledge sufficient to put them on notice. As for the 2009 news article cited by Defendants, Plaintiffs brush away: it contained no discussion of a boycott, nor, in almost 9000 words, more than a single passing mention of EquiLend. It provided no specific facts related to the conduct alleged by the complaint. Plaintiffs further point out that all of Defendant’s assertions regarding timeliness are highly fact specific, determination of which would require the development of an appropriate factual record.

EquiLend’s Participation

In response to the EquiLend Defendant’s motion, Plaintiffs focus on two arguments: the complaint plausibly alleged participation by EquiLend in a per se illegal conspiracy, and that specific personal jurisdiction does exist over EquiLend Europe.

Plaintiff’s assertions regarding EquiLend’s participation closely track behavior discussed in the main brief, so I’ll spend little time here on the topic. Let it suffice to say that EquiLend’s anticompetitive actions were illustrated through, among other things, the “general agreement” with the Prime Broker Defendants to accomplish all industry advances through that entity, the result of which was actions by EquiLend, like their agreement not to release valuable pricing data, that were clearly anti-competitive and thus, as per Plaintiffs, “more than sufficient to establish EquiLend’s participation in a per se illegal conspiracy.”

Shifting to the question of jurisdiction: EquiLend Europe is subject to jurisdiction under any one of three well-established doctrines: the “effects” test, the “conspiracy theory” of jurisdiction, and the “alter ego” doctrine. First, Plaintiffs note that the complaint details statements by individuals who sat on the board of EquiLend Europe—and who did not also sit on the board of the U.S. parent entity—in which those individuals invoked their involvement with EquiLend in a manner that suggests involvement in the conspiracy’s collective strategy.

Under the “effects” test, acts taking place as part of a conspiracy meet the test where those acts took place. Because EquiLend Europe’s conspiracy concerned the U.S. stock lending market, and caused harm to U.S. investors, the test has been met. The “conspiracy theory” test is met where a conspiracy existed, the defendant participated in that conspiracy, and the co-conspirator’s overt acts had sufficient contacts with the state to subject that co-conspirator to jurisdiction. Here, Plaintiffs argue, the conspiracy is well-pled, it is undeniable that acts of the co-conspirators took place in the state—for example, those executive dinners in New York—and those contacts can thus be imputed to EquiLend Europe. Third, the “alter ego” doctrine also allows for jurisdiction: EquiLend Europe has no separate website, CED, or other “C-suite” officers of it’s own, and Mr. Brian Lamb is responsible for global operations of not just EquiLend, but, to cite the EquiLend website, it’s affiliates as well. There is ample evidence, Plaintiffs argue, to pierce the corporate veil in these circumstances.


And that, my friends, concludes this installation of the Stock Loan Lowdown. You know there’s one more set of briefs out there, though, so watch this space for our review of the reply.

This post was written by Alexandra M.C. Douglas.

We welcome your feedback. If you have questions or comments about this post, please e-mail John M. Lundin, the Manipulation Monitor’s editor, at or Alexandra M.C. Douglas at or call John or Alexandra at (212) 344-5400.

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Article 77 Proceeding Excludes Beneficiaries of Trusts That Hold Interests in Trusts That are the Subject of the Proceeding

On August 7, 2018, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Wells Fargo Bank, N.A., 2018 NY Slip Op. 31883(U), holding that beneficiaries of trusts that held interests in trusts that were the subject of an Article 77 proceeding did not have standing to appear in the proceeding, explaining:

Article 77 provides, with exceptions not here relevant, that a special proceeding may be brought to determine a matter relating to any express trust. Permissible uses of Article 77 are broadly construed to cover any matter of interest to trustees, beneficiaries or adverse claimants concerning the trust. Such proceedings are used by trustees to obtain instruction as to whether a future course of conduct is proper, and by trustees (and beneficiaries) to obtain interpretations of the meaning of trust documents. Article 77 limits the parties who may properly participate to persons interested, within the meaning of the statute. CPLR 7703 thus expressly provides: The provisions as to joinder and representation of persons interested in estates as provided in the surrogate’s court procedure act shall govern joinder and representation of persons interested in express trusts. SCPA § 103(39) defines the term “Person interested” as any person entitled or allegedly entitled to share as beneficiary in the estate or the trustee in bankruptcy or receiver of such person. A creditor, shall not be deemed a person interested. SPCA § 103(8) defines Beneficiary as any person entitled to any part or all of an estate.

In determining an intent to confer a beneficial interest in a trust, a court must look to the trust agreement. It is well settled that the trust instrument is to be construed as written and the settlor’s intention determined solely from the unambiguous language of the instrument itself.

The court accordingly looks to the terms of the governing agreements of the Settlement Trusts to determine intent to confer a beneficial interest in the Trusts. As described by the challenging Respondents, the agreements that govern RMBS trusts typically provide that certificates evidence the entire beneficial ownership interest in the Trust Fund. They further typically require the Trustee to act for the benefit of the certificateholders.

The Challenged Respondents do not dispute that these terms are typical of RMBS PSAs, and they do not identify any additional terms of the governing agreements of the Settlement Trusts that contemplate beneficiaries other than certificateholders or insurers. Instead, they claim that their ownership of interests in, and rights with respect to, CDO, re-REMIC, or NIM trusts afford them beneficiary status in the Settlement Trusts. The structures through which the Challenged Respondents claim an interest differ. However, the governing agreements for each, whether a CDO, re-REMIC, or NIM trust, contain provisions, like those for the Settlement Trusts, which transfer all right, title, and interest in the underlying assets held by the structure to its Trustee.

. . .

As the Challenging Respondents correctly argue, each of the Challenged Respondents in effect urges the court to conclude that it is entitled to distributions from the Settlement Trusts because: 1) each is entitled to distributions from the structure in which it is invested; and 2) that structure is entitled to distributions from the Settlement Trust. As the Challenging Respondents also correctly argue, it is the trustees of the structures in which the Challenged Respondents are investors that hold the certificates in the Settlement Trusts and attendant rights to distributions from those Trusts, although they do so for the benefit of the investors in those structures. The rights and entitlements of the Challenged Respondents to distributions from the structures in which they are investors are accordingly separate and distinct from the rights and entitlements of the trustees of those structures to distributions from the Settlement Trusts. The Challenged Respondents’ economic interests in the Settlement Trusts are thus, at best, indirect.

A principal authority on which the Challenged Respondents rely, Matter of Cowles (22 AD2d 365, 370 [1st Dept 1965], affd no opinion 17 NY2d 567 [1966]), does not alter this conclusion. This case does not support the Challenged Respondents’ claim to beneficiary status based on their indirect interests in the Settlement Trusts, and stands merely for the proposition that contingent remaindermen with a remote and uncertain interest in a trust may be proper, although not necessary, parties to a trust proceeding. The challenged parties in Cowles had a direct-albeit, contingent-interest in the estate that was the subject of the proceeding. In the event of the occurrence of specified conditions, they would take as beneficiaries of the estate. Here, there are no conditions under which the Challenged Respondents will acquire a direct interest in the Settlement Trusts. They will only acquire funds from the Settlement Trusts indirectly, through distributions of those funds to the trustees of the separate investment structures in which the Challenged Respondents hold interests. The Challenged Respondents’ eventual receipt of funds may be more certain or likely than that of the Cowles contingent remaindermen. But their status is not analogous, as the Challenged Respondents’ interest is not direct.

(Internal quotations and citations omitted).

Schlam Stone & Dolan represents investors in RMBS actions against underwriters and trustees. If you or a client are RMBS investors and have questions regarding potential claims against a trustee; a trustee instruction proceeding, such as the Article 77 proceeding that is the subject of this decision; or how to influence the trustee’s prosecution of a put back action, contact Schlam Stone & Dolan partner John Lundin at

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Fraud Claim Dismissed as Duplicative of Contract Claim: No Separate Damages Alleged

On August 6, 2018, Justice Masley of the New York County Commercial Division issued a decision in TJ PRP LLC v. Rag & Bone Holdings LLC, 2018 NY Slip Op. 31880(U), dismissing a fraud claim as duplicative of a contract claim, explaining:

A fraud claim that arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreements is subject to dismissal as redundant of the contract claim. Where a fraud claim is supported by allegations that the defendants misrepresented their intentions with respect to the manner in which their contractual duties would be performed, it is appropriately dismissed as duplicative of the breach of contract claim because the fraud is premised on the same facts as those that compose the contract claim, the obligations allegedly breached are not collateral to those imposed by the contract, and the damages sought are identical to those recoverable under the contract cause of action.

Here, TJ PRP alleges in support of its first cause of action for breach of the Operating Agreement against RBH that RBH failed to maintain RBF’s books and records, and failed to provide TJ PRP with financial statements that comported with GAAP and the Operating Agreement’s provisions. TJ PRP further alleges that RBH engaged in inappropriate related-company transactions on unfair terms and without the requisite approval under the Operating Agreement; improperly altered RBF’s annual budget without Price’s consent, and engaged in other various business decisions in violation of the Operating Agreement.

TJ PRP alleges, in support of its fourth cause of action for fraud against RBH and RBI, that RBI violated the Management Agreement, and RBH violated the Operating Agreement, by failing to prepare financial statements for RBF in accordance with GAAP. TJ PRP further alleges that RBH and RBI fraudulently concealed their self-dealing and other misconduct, and fraudulently concealed, and intentionally led TJ PRP to believe, that the financial statements for [RBF] had been prepared in accordance with GAAP and the Operating Agreement, resulting in unspecified damages.

According to paragraph 6 of the amended complaint, RBH misappropriated, converted, and commingled millions of dollars of RBF funds, and caused RBI fraudulently to represent for many years to RBF and TJ PRP that RBF’s financial statements complied with GAAP and the Operating Agreement. TJ PRP also alleges that RBI pre-paid itself exorbitant fees.

Even if the fraud cause of action is sufficiently pleaded, the claim must be dismissed against RBH as duplicative of the claim for breach of the Operating Agreement. The factual allegations that form the breach of the Operating Agreement claim are the same as those which comprise the fraud claim; specifically, the alleged failure of RBF, through its managing member, RBH, and its management services provider, RBI, to maintain separate books of account, and to maintain financial and accounting records for RBF and minority member TJ PRP, in accordance with GAAP.

Though TJ PRP alleges that the improper accounting practices of RBI and RBH concealed RBH’s misappropriation of RBF funds, commingling of assets, self-dealing, and other assorted violations of the Operating Agreement to the detriment of TJ PRP, each of those acts, representations, and/or omissions-accepted for the purposes of this motion as true-demonstrate that RBH violated its obligations under the Operating Agreement. TJ PRP’s allegations that RBH and RBI concealed RBH’s misdeeds and breaches of the Operating Agreement by maintaining and disseminating deceptive accounting and financial records does not create a fraud claim that is distinct from the breach of contract claim; the accounting practices and financial documents were, themselves, breaches of the Operating Agreement, and TJ PRP identifies no damages that resulted from the alleged fraud that are distinct from the damages it would recover under the breach of contract claim.

A repackaged breach of contract claim does not create a sustainable cause of action sounding in fraud. TJ PRP’s arguments to the contrary are unavailing, and its reliance on Wyle Inc. v ITT Corp. (130 AD3d 438 [1st Dept 2015)) is misplaced. While a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim, Wyle concerned a plaintiffs’ claim that they were fraudulently induced to purchase a company by defendants’ failure to disclose all ongoing government audits-the existence of which would negatively impact the company’s value-in violation of a warranty in the sale agreement to disclose all audits. The allegations in this action do not involve fraudulent inducement; here, TJ PRP alleges that RBH’s malfeasance and violations of the Operating Agreement were hidden by RBH’s and RBl’s failure to maintain and prepare accounting records and financial documents in compliance with the provisions in the Operating Agreement.

Notably, TJ PRP does not allege that it sustained any extra-contractual damages as a result of the purported fraud; the damages arising from the alleged fraud are precisely those that TJ PRP would be entitled to recover if it prevails on its breach of the Operating Agreement claim. When a fraud claim would only entitle the plaintiff to the very same damages that are recoverable on its breach of contract claim, the claim should be dismissed as duplicative. Moreover, the factual allegations comprising the fraud claim are identical to those forming the breach of contract claim. Accordingly, the fraud claim against RBH is dismissed as duplicative of the breach of the Operating Agreement claim.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements such as the rule discussed here that a fraud claim cannot be based on a breach of contract. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have a question regarding a fraud-based claim.

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Court Reviews Law Governing Contract Interpretation on Summary Judgment

On August 6, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Cast Iron Co., LLC v. Cast Iron Corp., 2018 NY Slip Op. 31881(U), discussing contract interpretation on a summary judgment motion:

Contracts are construed in accord with the parties’ intent, the best evidence of which is the language of the contract itself, read as a whole. Thus: a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms. A contract is unambiguous if the language it uses has a definite and precise meaning, unattended by danger of misconception in the purport of the agreement itself, and concerning which there is no reasonable basis for a difference of opinion. Moreover, provisions in a contract are not ambiguous merely because the parties interpret them differently. Extrinsic or parol evidence-evidence outside the four corners of the document-is admissible only if a court finds an ambiguity in the contract.

As a general rule, if the court finds that a contract is ambiguous, it cannot be construed as a matter of law on a motion for summary judgment. An exception, exists, however, when the documentary evidence submitted on summary judgment resolves the ambiguity. Conversely, if the extrinsic evidence in the record is insufficient to resolve the ambiguity, the parties’ intent must be determined at trial.

(Internal quotations and citations omitted). The court went on to hold that the contract did not unambiguously support the movant’s position and denied the motion for summary judgment.

Under New York law, the starting point of contract interpretation is the words of the contract. As this decision shows, sometimes those words, without context, may be insufficient to establish what the parties intended. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Common Interest Privilege Barred Disclosure of Documents

On August 9, 2018, the First Department issued a decision in 21st Century Diamond, LLC v. Allfield Trading, LLC, 2018 NY Slip Op. 05732, holding that the common interest privileged barred disclosure of documents exchanged pursuant to a common interest agreement, explaining:

The record supports the contention of third-party defendants and Sterling that they entered into a common-interest agreement out of a reasonable concern that third-party plaintiffs might decide to add Sterling as a third-party defendant. Hence, the common-interest doctrine applies to protect otherwise privileged communications between these parties from disclosure.

(Internal quotations and citations omitted).

An issue that arises in almost all complex commercial litigation is identifying evidence that should be withheld from production in evidence because it is subject to the attorney-client or other privilege. Contact Schlam Stone & Dolan partner John Lundin at if you or a client have questions regarding the attorney-client, common interest, work product or other privileges or exemptions from production of evidence.

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