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Elements of Causes of Action for (1) Misappropriation of (a) Trade Secrets, (b) Business Ideas, and (c) Labor, Skills and Expenditures, (2) Breach of Fiduciary Duty (Delaware Law), (3) Aiding and Abetting Breach of Fiduciary Duty (Delaware Law), (4) Unjust Enrichment, and (5) Promissory Estoppel Described in Some Detail

The First Department, in a full-fledged opinion by Justice Richter, determined the complaint stated causes of action against the Cohen defendants for essentially stealing plaintiffs’ ideas for a website. Defendant Cohen, an investor, eventually served as chairman and CEO of a company formed by plaintiffs to develop the website. The complaint alleged that Cohen caused a strain among the partners which stalled the project. Cohen circulated a liquidation agreement which was never addressed by the other partners. Then, the complaint alleged, Cohen took the plaintiffs’ ideas and website-development work to the founders of Pinterest, which, the complaint alleged, was formed based upon the ideas Cohen misappropriated from plaintiffs. The plaintiffs sued the Cohen defendants and Pinterest. All the causes of action against Pinterest were dismissed by Supreme Court. The First Department held the complaint stated causes of action against the Cohen defendants for (1) breach of fiduciary duty (under Delaware Law), (2) misappropriation of trade secrets, (3) misappropriation of ideas, (4) and misappropriation of labor, skill and expenditures. (Apparently the unjust enrichment cause of action, which Supreme Court dismissed only re: Pinterest, was not a subject of the appeal.) The First Department found that all the causes of action against Pinterest were properly dismissed.   The opinion includes detailed descriptions of the elements of breach of fiduciary duty (Delaware law), aiding and abetting breach of fiduciary duty, unjust enrichment, misappropriation of trade secrets, misappropriation of ideas, misappropriation of labor, skills and expenditures, and promissory estoppel. The discussions are too extensive to be fairly summarized here.  Schroeder v Pinterest Inc., 2015 NY Slip Op 07232. 1st Dept 10-6-15

 

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Appropriate Statutes of Limitations and Accrual Dates Explained for “Breach of Fiduciary Duty,” Civil RICO,” and “Declaratory Judgment” Causes of Action

The Second Department described the analytical criteria for determining the statutes of limitations and accrual dates for (1) breach of fiduciary duty claims where allegations of fraud are essential; (2) civil RICO claims; (3) and declaratory judgment actions seeking a constructive trust:

“New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Where the remedy sought is purely monetary in nature, courts construe the suit as alleging injury to property’ within the meaning of CPLR 214(4), which has a three-year limitations period. Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213(1) applies” … .

“[W]here an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213(8)” … . “An exception to this rule . . . is that courts will not apply the fraud Statute of Limitations if the fraud allegation is only incidental to the claim asserted; otherwise, fraud would be used as a means to litigate stale claims'” … . “Thus, where an allegation of fraud is not essential to the cause of action pleaded except as an answer to an anticipated defense of Statute of Limitations, courts look for the reality, and the essence of the action and not its mere name” … . …

CPLR 213(8) provides, in part, “the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.” “The discovery accrual rule also applies to fraud-based breach of fiduciary duty claims. An inquiry as to the time that a plaintiff could, with reasonable diligence, have discovered the fraud turns upon whether a person of ordinary intelligence possessed knowledge of facts from which the fraud could be reasonably inferred” … . …

“The statute of limitations for civil RICO claims is four years” … . “A RICO claim is deemed to have accrued when the plaintiff knew or should have known of his or her injury, regardless of when he or she discovered the underlying fraud'” … . …

“Actions for declaratory judgments are not ascribed a certain limitations period. The nature of the relief sought in a declaratory judgment action dictates the applicable limitations period. Thus, if the action for a declaratory judgment could have been brought in a different form asserting a particular cause of action, the limitations period applicable to the particular cause of action will apply” … .

The … action for a declaratory judgment could have been brought … as a cause of action to impose a constructive trust … . A constructive trust is equitable in nature and governed by a six-year statute of limitations … . DiRaimondo v Calhoun, 2015 NY Slip Op 07002, 2nd Dept 9-30-15

 

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“Special Facts Doctrine” as Applied to Fraud Allegations Explained

In an action stemming from the alleged breach of an Asset Purchase Agreement (APA), the First Department explained the applicability of the “special facts doctrine” to the related fraud allegations. There was a defense verdict. The issue was raised on appeal by the plaintiffs because the trial judge refused to instruct the jury on the special facts doctrine, an error the First Department deemed harmless. The court offered a clear description of the doctrine:

… [P]laintiffs claimed that defendants had a duty to disclose certain documents concerning alleged adverse contract information. The “special facts” doctrine holds that “absent a fiduciary relationship between parties, there is nonetheless a duty to disclose when one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair” … . As a threshold matter, the doctrine requires satisfaction of a two-prong test: that the material fact was information peculiarly within the knowledge of one party and that the information was not such that could have been discovered by the other party through the exercise of ordinary intelligence … . Greenman-Pedersen, Inc. v Berryman & Henigar, Inc., 2015 NY Slip Op 06091, 1st Dept 7-14-15

 

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Failure to Allege a “Special Relationship” Between Insurance Broker and Client Required Dismissal of the “Breach of Fiduciary Duty” Cause of Action

In determining defendants’ motion to dismiss the “breach of fiduciary duty” cause of action was properly granted, the Second Department explained that an insurance broker can be liable to a client for breach of a fiduciary duty only when a “special relationship” over and above the ordinary broker-client relationship exists.  Here the plaintiffs failed to allege the existence of a “special relationship.” The court explained the relevant law:

The common-law rule is that “an insurance broker acting as an agent of its customer has a duty of reasonable care to the customer to obtain [specifically] requested coverage within a reasonable time after the request, or to inform the customer of the agent’s inability to do so, [but] the agent owes no continuing duty to advise, guide or direct the customer insured to obtain additional coverage” … . However “[w]here a special relationship develops between the broker and client, [the] broker may be liable, even in the absence of a specific request, for failing to advise or direct the client to obtain additional coverage” … . The Court of Appeals has identified three “exceptional situations” which may give rise to such a special relationship: ” (1) the agent receives compensation for consultation apart from payment of the premiums; (2) there was some interaction regarding a question of coverage, with the insured relying on the expertise of the agent; or (3) there is a course of dealing over an extended period of time which would have put objectively reasonable insurance agents on notice that their advice was being sought and specially relied on'” … . Waters Edge @ Jude Thaddeus Landing, Inc. v B & G Group, Inc., 2015 NY Slip Op 04634, 2nd Dept 6-3-15

 

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A Party Alleging Fraudulent Inducement to Enter a Contract May Both Seek to Avoid Terms of the Contract (Here a Jury-Waiver Clause) and Rely on the Contract in Defense of Breach of Contract Allegations/Criteria for Negligent Misrepresentation Cause of Action Explained in Some Depth (Criteria Not Met Here)

The First Department, over a dissent, determined a party claiming it was fraudulently induced to enter a contract is entitled to a jury trial despite the jury-trial waiver in the contract. Because a party alleging fraudulent inducement can either seek rescission or stand on the contract and seek damages, the party may both seek to avoid terms in the contract (here the jury-waiver clause) and rely on the contract as a defense to breach of contract allegations. The court also found that the counterclaim for negligent misrepresentation was properly dismissed because the existence of a confidential or fiduciary or other special relationship (approaching privity), which would justify reliance on representations, was not demonstrated.  The criteria for negligent misrepresentation was described in some depth:

…[A]contractual jury waiver provision is inapplicable to a fraudulent inducement cause of action that challenges the validity of the underlying agreement … . …  In cases where the fraudulent inducement allegations, if proved, would void the agreement, including the jury waiver clause, the party is entitled to a jury trial on the claim … .

…”[A] defrauded party to a contract may elect to either disaffirm the contract by a prompt rescission or stand on the contract and thereafter maintain an action at law for damages attributable to the fraud” … . As a result, a party alleging fraudulent inducement that elects to bring an action for damages, as opposed to opting for rescission may, under certain circumstances, still challenge the validity of the agreement … .

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“A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information” … . In commercial cases “a duty to speak with care exists when the relationship of the parties, arising out of contract or otherwise, [is] such than in morals and good conscience the one has the right to rely upon the other for information” … . Reliance on the statements must be justifiable, and “not all representations made by a seller of goods or a provider of services will give rise to a duty to speak with care” (id.). “Rather, liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified” (id.). In order to impose tort liability in a commercial case, “there must be some identifiable source of a special duty of care” … . …[A] special duty will be found “if the record supports a relationship so close as to approach that of privity” … . Generally, however, an arm’s-length business relationship between sophisticated parties will not give rise to a confidential or fiduciary relationship that would support a cause of action for negligent misrepresentation … . J.P. Morgan Sec. Inc. v Ader, 2015 NY Slip Op 03071, 1st Dept 4-14-15

 

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Elements of Conversion, Moneys Had and Received and Breach of Fiduciary Duty Causes of Action Described/Equitable Estoppel Did Not Apply to Toll Applicable Statutes of Limitations

The Third Department explained the elements of causes of action for conversion, aiding and abetting conversion, moneys had and received, breach of fiduciary duty, and aiding and abetting breach of a fiduciary duty.  The Third Department further held that the doctrine equitable estoppel did not toll the applicable statutes of limitations and delineates what the applicable statutes of limitations are.  With respect to conversion, moneys had and received and equitable estoppel, the court wrote:

“Conversion is an unauthorized exercise of dominion and control over” someone else’s property that “interferes with and is in defiance of the superior possessory right of the owner or another person” … . A claim can exist for aiding and abetting conversion if the aider-abettor has actual knowledge that the person who directly converted the plaintiff’s property did not own that property … . Here, the complaint alleges that defendant knew of and acquiesced in Jaques’ unauthorized personal purchases from plaintiff’s accounts, that the purchased items were delivered to and used to improve defendants’ home, and that defendant accepted the benefits of these converted items. These allegations stated a cause of action against defendant for aiding and abetting conversion. * * *

Plaintiff properly stated a cause of action against defendant for moneys had and received. The elements of such a cause of action are that the defendant received money belonging to the plaintiff and benefitted from that money, and that equity and good conscience will not permit the defendant to keep the money … . The complaint alleges that money stolen from plaintiff by Jaques was used to improve and maintain defendants’ home, and that defendant consented to these actions. Accepting the allegations as true, and reasonably inferring that the use of this money provided a benefit to defendant, the third cause of action was sufficient. * * *

Supreme Court erred in concluding that the doctrine of equitable estoppel tolled the statutes of limitations as raised by defendant. Although the doctrine precludes a defendant from relying on a “statute of limitations defense when the plaintiff was prevented from commencing a timely action by reasonable reliance on the defendant’s fraud, misrepresentation or other affirmative misconduct . . ., equitable estoppel does not apply where the misrepresentation or act of concealment underlying the estoppel claim is the same act which forms the basis of [the] plaintiff’s underlying substantive cause[s] of action” … . Torrance Constr., Inc. v Jaques, 2015 NY Slip Op 02813, 3rd Dept 4-2-15

 

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Delaware Pleading Requirements Not Met in Shareholders’ Derivative Action

The Second Department determined the shareholders’ derivative action alleging breach of a fiduciary duty was properly dismissed for failure to meet the pleading requirements of the controlling Delaware law:

As the parties agree, the laws of Delaware, the State of incorporation, govern the issues raised on this appeal … . Delaware Chancery Court Rule 23.1(a) provides that every shareholders’ derivative complaint shall “allege with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.” A plaintiff’s demand on the directors pursuant to Rule 23.1(a) will be excused “if the derivative complaint pleads particularized facts creating a reasonable doubt that (1) the directors are disinterested and independent or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment” … . Demand may also be excused in certain circumstances “where particularized factual allegations create a reasonable doubt that, as of the time the complaint was filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand” … . Here, the allegations of the amended complaint were insufficient to satisfy the pleading requirements of Rule 23.1(a). Walter v FalconStor Software, Inc., 2015 NY Slip Op 02112, 2nd Dept 3-18-15

 

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Statutes of Limitations for Actions Stemming from the Alleged Fraudulent Transfer of Real Property Explained

The Second Department determined plaintiff’s actions, which stemmed from the allegation defendant had acquired a deed to his property by fraud, were timely. The court explained the statutes of limitations for actual and constructive fraud, breach of fiduciary duty, actions to quiet title, conversion by fraud, money had and received, and constructive trust. In essence, actions which have an equitable component are governed by a six-year statute of limitations:

The statute of limitations for a cause of action alleging a breach of fiduciary duty does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated … . * * *

The statute of limitations for a cause of action sounding in breach of fiduciary duty is dependent on the relief sought. The Court of Appeals ruled in IDT Corp. v Morgan Stanley Deal Witter & Co. (12 NY3d at 139):

“New York law does not provide a single statute of limitations for breach of fiduciary duty claims. Rather, the choice of the applicable limitations period depends on the substantive remedy that the plaintiff seeks. Where the remedy sought is purely monetary in nature, courts construe the suit as alleging injury to property’ within the meaning of CPLR 214(4), which has a three-year limitations period. Where, however, the relief sought is equitable in nature, the six-year limitations period of CPLR 213(1) applies. Moreover, where an allegation of fraud is essential to a breach of fiduciary duty claim, courts have applied a six-year statute of limitations under CPLR 213(8)” (citations omitted).

Since the plaintiff’s right to the subject property is in issue, awarding damages would not be adequate. Therefore, the six-year statute of limitations for causes of action sounding in equity should be applied … . Since the second and third causes of action accrued in 2006, when the defendants allegedly acted contrary to their fiduciary obligations, to the plaintiff’s detriment, those causes of action, interposed four years later in 2010, are not time-barred.

The first cause of action, to quiet title pursuant to RPAPL article 15, is not time-barred, since the plaintiff was seized or possessed of the premises within 10 years before the commencement of the action and is in essence seeking a determination that the quitclaim deed which he executed in 2003 was part of a mortgage transaction, and not a conveyance of title (see CPLR 212[a]; Real Property Law § 320…).

The fourth cause of action, alleging conversion based upon fraud, is not time-barred, since it is governed by the statute of limitations set forth in CPLR 213(8) … .

The fifth cause of action, seeking damages for money had and received …, is equitable in nature and, therefore, the applicable statute of limitations is six years … . Since the defendants’ receipt of money occurred in 2006, and the action was commenced in 2010, the cause of action is not time-barred. Similarly, the sixth cause of action, sounding in unjust enrichment, is equitable in nature, and is not time-barred … .

The seventh cause of action alleging a constructive trust is equitable in nature and governed by a six-year statute of limitations … . The elements of a cause of action to impose a constructive trust are (1) a confidential or fiduciary relationship, (2) a promise, (3) a transfer in reliance thereon, and (4) unjust enrichment … . The cause of action accrued on the date of the “wrongful transfer” of the subject property … . Loeuis v Grushin. 2015 NY Slip Op 01926, 2nd Dept 3-11-15

 

 

 

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Re: Breach of Fiduciary Duty and Fraud Causes of Action—Application of the “Repudiation Rule” and the “Discovery Rule” to the Statute of Limitations Explained

Plaintiff (a governmental agency charged with administering the workers’ compensation system) brought this action against workers’ compensation trusts alleging the trusts became insolvent because of defendants’ misconduct. Plaintiff alleged breach of fiduciary duty, fraud, breach of contract and sought common law indemnification. The bulk of the decision is devoted to determining the timeliness of the actions. The decision addressed the “repudiation rule” and the “discovery rule” in fraud actions, as well as many other issues not summarized here:

…[T]he repudiation rule, which provides that “the applicable statutory period . . . does not begin to run until the fiduciary has openly repudiated his or her obligation or the relationship has been otherwise terminated” … . The Court of Appeals has instructed that, under the repudiation rule, “the time starts running when a successor [fiduciary] is put in place” … . After the fiduciary “has yielded . . . to a successor, . . . [t]he running of the statute [of limitations] then begins, and only actual or intentional fraud will be effective to suspend it” … . * * * … [T]he repudiation rule acts as a toll of the limitations period for all misconduct committed by the fiduciary prior to repudiation of its obligation or termination of the relationship. In other words, all of the alleged misconduct prior to the severance date is included in the actionable portion of the claim. * * *

…[A] portion of plaintiff’s breach of fiduciary duty claim is grounded in its allegations that the … defendants breached their fiduciary duties to the trusts by fraudulently concealing or misrepresenting the financial condition of the trusts, the danger of operating deficits and issues associated with underwriting deficiencies, and that [defendants] did so as part of a scheme to increase membership and thereby increase its own commissions. These are fraud allegations, and they are essential to this portion of the fiduciary duty claim. That is, the relevant portion of the claim is “based on fraud” and “there would be no injury but for the fraud” … . As such, that portion of the fiduciary duty claim is subject to a six-year limitations period … . * * *

The “discovery rule” is found in CPLR 213 (8), which provides that claims based on fraud “must be commenced [within] the greater of six years from the date the cause of action accrued or two years from the time [a] plaintiff . . . discovered the fraud, or could with reasonable diligence have discovered it.” It is settled that “[t]he inquiry as to whether a plaintiff could, with reasonable diligence, have discovered the fraud turns on whether the plaintiff was possessed of knowledge of facts from which [the fraud] could be reasonably inferred” … . New York State Workers’ Compensation Bd v Consolidated Risk Servs Inc, 2015 NY Slip Op 01699, 3rd Dept 2-26-15

 

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Petitioners, Who Did Not Represent a Majority of the Elected Board of Directors, Did Not Have Standing the Seek Dissolution of the Corporation Under Business Corporation Law 1102/Criteria for Common-Law Dissolution Not Met

The Second Department determined Supreme Court correctly found that the petitioners did not have standing to seek dissolution of the corporation pursuant to Business Corporation Law 1102.  However, the Second Department found Supreme Court erred when it granted the petition under a common-law dissolution theory, a ground not raised by the parties and not applicable under the facts:

…[T]he Supreme Court properly determined that [petitioners] lacked standing to seek dissolution of Candlewood pursuant to Business Law § 1102, since they do not represent a majority of the corporation’s duly elected board of directors … . However, as the appellants correctly contend, the court should have dismissed the petition rather than grant the petition for dissolution on a ground that was not raised by the petitioners and was inapplicable to the circumstances. “[T]he remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty” … . The petitioners did not allege that a majority of shareholders, the directors, or the officers looted the corporation or breached a fiduciary duty to … a minority shareholder. Matter of Candlewood Holdings Inc …, 2015 NY Slip Op 00533, 2nd Dept 1-21-15

 

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