Plaintiff Digital Broadcast Corp. (DBC) brings this action against Ladenburg, Thalmann & Co., Inc. (Ladenburg), Silverman, Collura & Chernis, PC, Jonathan Intrater (Intrater) and Martin Licht for fraud, breach of fiduciary duty, breach of contract, breach of implied covenant of good faith, and aiding and abetting fraud in connection with Ladenburg's efforts to raise $20 million in investment capital for DBC through a private placement of stock. In the instant motion, defendants Ladenburg and Intrater (the Ladenburg defendants) move, pursuant to CPLR 3025, to amend their answer to include a more specific fourth affirmative defense and to assert a counterclaim, based upon DBC's alleged breaches of the agreement underlying this case.

DBC cross-moves, pursuant to CPLR 3212, for an order granting it partial summary judgment dismissing the Ladenburg defendants' proposed fourth affirmative defense and counterclaim on the ground that they are without merit.

For the reasons set forth below, the Ladenburg defendants' motion to amend is granted, and DBC's cross motion is denied.

In order to coordinate the efforts of both Ladenburg and the Company, and to maximize the possibility of consummating a Sale during the term of this Agreement, Ladenburg shall be the sole and exclusive investment bank to initiate discussions with the potential purchasers of the Securities. In the event the Company, its directors, officers, employees or shareholders receive any inquiries or conduct any discussions concerning the availability of the Securities for purchase, the Company shall notify Ladenburg of such inquiries and discussions promptly.

Agreement, ¶ IV (Aff. of Sean O'Brien, Exh B). Second, in the section entitled "Compensation for Services," DBC agreed that:

If one or more Sales are consummated during the Term or within twelve months after the end of the Term with an investor or lender introduced to the Company by Ladenburg or contacted by Ladenburg or the Company during the Term, the Company will pay or cause to be paid to Ladenburg a placement fee (the "Private Placement Fee") equal to six percent (6.0 %) of the purchase price paid by the purchaser of the Securities issued in connection with each such Sale. A Private Placement Fee shall be payable upon the closing of each Sale.

Id., ¶ IIA (emphasis added).

Thus, in the Agreement, DBC agreed to promptly disclose to Ladenburg any efforts that DBC made to raise capital during the period of the Agreement, and for 12 months following its termination. DBC also agreed to pay Ladenburg a 6% fee on any monies raised during that period, even if the money was raised through investors contacted by DBC.

Throughout this case, DBC has asserted that, during the period of the Agreement, it refrained from raising money because of these provisions, and also because defendants supposedly dissuaded them from raising money (see Amended Complaint, ¶¶ 21, 25-27, 42-43, 50, 61, 79). In support of their motion to amend, the Ladenburg defendants contend that, during discovery, they have learned that these allegations are untrue, and that, during the term of the Agreement, DBC directly raised substantial amounts of money for itself, but failed to notify Ladenburg, or pay Ladenburg 6% of the money that was raised. The Ladenburg defendants assert that the evidence shows the following:

A company called Paradise Point raised money for DBC in late 2000, and commissions were paid to Paradise Point for those efforts (see id., Exh F).

A company called Joseph Dillion raised money for DBC throughout 2000, and was paid commissions for that work (see id., Exh G).

A DBC employee named Ron Marullo was paid to assist other individuals in raising money for DBC, and was paid commissions for those efforts in late 2000 (see id., Exh I).

Investors David and Kelly Walsh invested in DBC in November 2000 (see id., Exh H).

The Ladenburg defendants assert that these matters were not disclosed to Ladenburg, and that Ladenburg was never paid a dollar in commissions for any of these sales of DBC securities. Accordingly, Ladenburg seeks to amend its answer to assert an affirmative defense that DBC breached its contract with Ladenburg based on this conduct, and also to assert a counterclaim for the 6% commission. The Ladenburg defendants also seek to include a specific defense based upon DBC's allegedly improper effort to recover damages based upon alleged harm to Aircable of Roanoke, LLC, a subsidiary of DBC that is not a party to this case.

On October 4, 2007, the Ladenburg defendants forwarded the proposed amended pleading to counsel for DBC. Aside from a few minor stylistic changes, the proposed amended answer and affirmative defenses differ from the Ladenburg defendants' existing answer in the following respects:

it contains a counterclaim for breach of contract based upon the same conduct; and

it includes an affirmative defense based upon the fact that DBC is seeking to recover damages based upon alleged harm that was suffered by, if anyone, Aircable of Roanoke LLC, a company that DBC has acknowledged is not a party to this case.

At an October 4, 2007 status conference before the court's Special Master, counsel for DBC stated that he would not consent to filing the pleading (O'Brien Aff., ¶ 13). The Special Master then gave the Ladenburg defendants consent to file the present motion (id.).

It is well settled that, pursuant to CPLR 3025 (b), leave to amend will be freely granted, absent prejudice or surprise to the opposing party (Sheets v Liberty Alliances, LLC, 37 AD3d 170 [1st Dept 2007]; Zaid Theatre Corp. v Sona Realty Co., 18 AD3d 352 [1st Dept 2005]). However, in order to conserve judicial resources, examination of the underlying merit of the [*4]proposed amendment is mandated (see Watts v Wing, 308 AD2d 391 [1st Dept 2003]; Davis & Davis, P.C. v Morson, 286 AD2d 584 [1st Dept 2001]). Leave will be denied where the proposed pleading fails to state a cause of action, or is palpably insufficient as a matter of law (Ancrum v St. Barnabas Hosp., 301 AD2d 474 [1st Dept 2003]; Davis & Davis, P.C. v Morson, 286 AD2d 584, supra). In evaluating the merits of the amended pleading, the court's purpose is not to resolve disputed factual issues, but simply to ensure that the amended allegations establish a prima facie cause of action (Tapps of Nassau Supermarkets, Inc. v Linden Blvd., L.P., 269 AD2d 306 [1st Dept 2000]).

Here, the proposed amended answer and counterclaim clearly have merit. On this motion, Ladenburg's pleading is entitled to a "heavy presumption" of validity (Otis Elevator Co. v 1166 Avenue of Americas Condominium, 166 AD2d 307, 307 [1st Dept 1990], and Ladenburg need only come forth with facts establishing a prima facie right to relief (see Daniels v Empire-Orr, Inc., 151 AD2d 370 [1st Dept 1989]; accord Caribbean Constr. Services & Assoc., Inc. v Zurich Ins. Co., 267 AD2d 81 [1st Dept 1999]). Ladenburg has easily satisfied these standards through its allegations, based on the discovery that it has conducted, that DBC breached the Agreement by secretly raising money and failing to compensate Ladenburg in accordance with the Agreement. Indeed, the very same factual issues that underlie the proposed amendments i.e., whether or to what extent DBC independently raised money during the term of the Agreement are raised by DBC's claim that it did not raise its own capital because of the conduct of the Ladenburg defendants.

In opposition to the motion, DBC does not claim that it would be prejudiced by the amendment, or that the motion to amend was untimely. Instead, DBC brings a cross motion for summary judgment seeking to preclude Ladenburg from even being permitted to prove its defense and counterclaim. DBC's cross motion is denied. "It is settled that the standard applied on a motion to amend a pleading is much less exacting than the standard applied on a motion for summary judgment" (James v R & G Hacking Corp., 39 AD3d 385, 386 [1st Dept], lv denied 9 NY3d 814 [2007]; Thompson v Cooper, 24 AD3d 203 [1st Dept 2005]; Baskin and Sears, P.C. v Lyons, 188 AD2d 307 [1st Dept 1992]; see e.g. Aetna Cas. and Sur. Co. v LFO Constr. Corp., 207 AD2d 274, 277 [1st Dept 1994] [reversing denial of motion to amend and noting that the trial court "erroneously applied a summary judgment standard rather than the lesser standard applicable to CPLR 3025 (b) amendments"]). Indeed, the function of a reviewing court in connection with a motion to amend "is predicated upon concepts of judicial economy and efficiency" and "is not meant to supplant the motion ... for summary judgment" (Hawkins v Genesee Place Corp., 139 AD2d 433, 434 [1st Dept 1988]; see also Dumesnil v Proctor and Schwartz, Inc., 199 AD2d 869, 871 [3d Dept 1993] ["a motion to amend is not a proper vehicle for the determination of the merits of an issue"]). Thus, DBC's motion for summary judgment is premature.

Moreover, it is apparent that, in utilizing the appropriate standard on this motion to amend, DBC's only claim in opposition that the "Agreement clearly did not preclude [DBC] from raising money in other financings independent of Ladenburg and, therefore, the Fourth Affirmative Defense and Counterclaim are entirely without merit" (Cross Motion, ¶ 1) completely misses the mark, and is insufficient to defeat the motion to amend. Ladenburg does not claim that DBC could not be involved in raising money during the term of the Agreement. Instead, Ladenburg's argument in this case is that: (1) DBC was obligated to promptly notify [*5]Ladenburg of its efforts to raise any money during the term of the Agreement; and (2) DBC was obligated to pay Ladenburg commissions based upon that fund raising. The language of the Agreement is clear on these points and, indeed, the purpose of these provisions is stated in the Agreement itself: "In order to coordinate the efforts of Ladenburg and [DBC], and to maximize the possibility of consummating a Sale during the terms of the Agreement" (Agreement, ¶ IV).

Indeed, DBC previously admitted that this is the correct reading of the Agreement. Specifically, in opposing Ladenburg's motion to dismiss the complaint, DBC responded to one of Ladenburg's arguments as follows:

While the June 2000 letter agreement provided that Ladenburg would be the sole and exclusive investment bank hired to raise the capital, it did not prevent DBC from seeking investors for the securities by itself, parallel to the efforts of Ladenburg and Intrater. On the contrary, the letter agreement provides that DBC should notify Ladenburg of all parallel discussions with potential investors ... The letter agreement even provides specifically that Ladenburg would be entitled to the stipulated commission in case a sale of securities was consummated with investors brought by DBC.

(O'Brien Responding Aff., ¶ 4, Exh C). This admission completely contradicts DBC's present position.

Despite this admission, DBC has now offered two affidavits seeking to support its cross motion. However, even if the court were to consider the affidavits submitted by DBC, which are clearly improper on this motion to amend, these affidavits are insufficient to defeat Ladenburg's motion. First, although Gary Nerlinger, DBC's chairman and chief executive officer, asserts that the Agreement does not say that DBC cannot independently raise money in other financings (Nerlinger Aff., ¶ 2), Mr. Nerlinger's affidavit cannot be credited here because he previously claimed to have no knowledge on the question raised by Ladenburg's motion, testifying under oath that he did "not know what the [Agreement] calls for" with respect to whether DBC was obligated to pay Ladenburg a commission based upon DBC's own efforts to raise money (O'Brien Responding Aff., ¶ 2; Exh A, at 433-435; see Papoters v 40-01 Northern Blvd. Corp., 11 AD3d 368, 369 [1st Dept 2004] [affidavit contradicting earlier deposition was "inherently suspect"]).

Similarly, although Robert J. Kropp, former Senior Vice President and Director of Investment Banking at Ladenburg, avers that "[b]ased on a literal reading of the [Agreement], DBC was not precluded from doing other financings" (Kropp Aff., ¶ 3), this affidavit is meaningless, as it is not based on personal knowledge (see id., ¶ 2 ["I did not work on the proposed private placement for (DBC)"]; see also S.J. Capelin Assocs., Inc. v Globe Mfg. Corp., 34 NY2d 338 [1974] [affidavits must be based on personal knowledge]).

Accordingly, because the allegations in the proposed amended answer and counterclaim "are sufficient for pleading purposes ... at this procedural juncture" (Thompson v Cooper, 24 AD3d at 205-206), the Ladenburg defendants' motion to amend the answer is granted. The Ladenburg defendants are also permitted to amend the answer to include affirmative defense 15, in which they make clear their intent to defend on the ground that DBC may not recover for alleged harm that was suffered by its subsidiary, Aircable of Roanoke, LLC, as DBC has offered no basis on which to oppose that aspect of Ladenburg's motion.

The court has considered the remaining claims, and finds them to be without merit. [*6]

Accordingly, it is

ORDERED defendants' motion for leave to amend the answer herein is granted, and the amended answer in the proposed form annexed to the moving papers shall be deemed served upon service of a copy of this order with notice of entry thereof; and it is further

ORDERED that plaintiffs shall serve a reply to the counterclaim contained in the amended answer within 20 days from the date of said service; and it is further

ORDERED that plaintiff's cross motion for summary judgment is denied.

Dated: April 21, 2008

ENTER:

_______________________

J.S.C.