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PLEADING REQUIREMENTS FOR A LAUNDRY LIST OF FRAUD-RELATED CAUSES OF ACTION SUCCINCTLY ILLUSTRATED.

The Second Department, in the context of motions to dismiss, motions for injunctions, and motions for sanctions, described the pleading requirements for the following causes of action: preliminary injunction, permanent injunction, breach of fiduciary duty, fraud, aiding and abetting fraud, constructive trust, conspiracy to commit a tort, fraudulent conveyance, unjust enrichment and conversion. Swartz v Swartz, 2016 NY Slip Op 08390, 2nd Dept 12-14-16

 

CIVIL PROCEDURE (PLEADING REQUIREMENTS FOR A LAUNDRY LIST OF FRAUD-RELATED CAUSES OF ACTION SUCCINCTLY ILLUSTRATED)/FRAUD PLEADING REQUIREMENTS FOR A LAUNDRY LIST OF FRAUD-RELATED CAUSES OF ACTION SUCCINCTLY ILLUSTRATED)

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ELEMENTS OF AIDING AND ABETTING FRAUD EXPLAINED, WHEN FRAUD IN THE INDUCEMENT CAN INVALIDATE AN ARBITRATION CLAUSE EXPLAINED (NOT THE CASE HERE).

The Second Department, finding that a cause of action for aiding and abetting breach of contract does not exist, explained the elements of aiding and abetting fraud. The court further found that the arbitration clause was not invalidated by the allegations of fraud in the inducement:

There is no cause of action for aiding and abetting a breach of contract … . To recover for aiding and abetting fraud, the plaintiff must plead “the existence of an underlying fraud, knowledge of the fraud by the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the fraud” … . “Substantial assistance” requires an affirmative act on the defendant’s part … . “[T]he mere inaction of an alleged aider or abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff” … . * * *

The plaintiffs contend that the arbitration agreement is invalid because it was fraudulently induced. However, a broad arbitration provision is separable from the substantive provisions of a contract such that the agreement to arbitrate is valid even if the substantive provisions of the contract were induced by fraud … . “The issue of fraud in the inducement affects the validity of the arbitration clause only when the fraud relates to the arbitration provision itself, or was part of a grand scheme that permeated the entire contract'” … . “To demonstrate that fraud permeated the entire contract, it must be established that the agreement was not the result of an arm’s length negotiation, or the arbitration clause was inserted into the contract to accomplish a fraudulent scheme” … . Markowits v Friedman, 2016 NY Slip Op 07932, 2nd Dept 11-23-16

 

FRAUD (ELEMENTS OF AIDING AND ABETTING FRAUD EXPLAINED, WHEN FRAUD IN THE INDUCEMENT CAN INVALIDATE AN ARBITRATION CLAUSE EXPLAINED)/CONTRACT LAW (ELEMENTS OF AIDING AND ABETTING FRAUD EXPLAINED, WHEN FRAUD IN THE INDUCEMENT CAN INVALIDATE AN ARBITRATION CLAUSE EXPLAINED)/ARBITRATION (WHEN FRAUD IN THE INDUCEMENT CAN INVALIDATE AN ARBITRATION CLAUSE EXPLAINED)

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COMPLAINT STATED A CAUSE OF ACTION AGAINST BROKER INDIVIDUALLY FOR NEGLIGENT MISREPRESENTATION AND FOR BREACH OF A FIDUCIARY DUTY AGAINST THE BROKER’S CORPORATION.

The Second Department, reversing (modifying), Supreme Court determined the complaint stated a cause of against for negligent misrepresentation against an insurance broker (Weiss) individually and for breach of fiduciary duty against the broker’s corporation (JDW). It was alleged that the defendants failed to add plaintiff’s landlord as an additional insured and the broker signed a certificate which falsely indicated the landlord had been added to the policy:

Here, the Supreme Court erred in determining, upon reargument, that the complaint failed to state a cause of action sounding in negligent misrepresentation against Weiss individually. … [W]e note that the complaint, as amplified by the evidentiary materials submitted by the plaintiffs, alleged that Weiss personally signed a certificate of insurance falsely stating that the plaintiffs’ landlord had been added as an additional insured on a certain commercial general liability insurance policy, and forwarded this certificate to the plaintiffs, knowing that it was required by the plaintiffs’ landlord. This is sufficient, for purposes of CPLR 3211(a)(7), to state a cause of action against Weiss, based on his personal participation in the commission of a tort … . * * *

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'” … .

Here, contrary to the defendants’ contention, the complaint sufficiently alleged that there was a course of dealing between JDW and the plaintiffs over an extended period of time, which may have given rise to a special relationship between them … . JT Queens Carwash, Inc. v JDW & Assoc., Inc., 2016 NY Slip Op 07295, 2nd Dept 11-9-16

 

INSURANCE LAW (COMPLAINT STATED A CAUSE OF ACTION AGAINST BROKER INDIVIDUALLY FOR NEGLIGENT MISREPRESENTATION AND FOR BREACH OF A FIDUCIARY DUTY AGAINST THE BROKER’S CORPORATION)/CORPORATION LAW (INSURANCE LAW, COMPLAINT STATED A CAUSE OF ACTION AGAINST BROKER INDIVIDUALLY FOR NEGLIGENT MISREPRESENTATION AND FOR BREACH OF A FIDUCIARY DUTY AGAINST THE BROKER’S CORPORATION)/NEGLIGENT MISREPRESENTATION (INSURANCE LAW, COMPLAINT STATED A CAUSE OF ACTION AGAINST BROKER INDIVIDUALLY FOR NEGLIGENT MISREPRESENTATION AND FOR BREACH OF A FIDUCIARY DUTY AGAINST THE BROKER’S CORPORATION)/FIDUCIARY DUTY (INSURANCE LAW, COMPLAINT STATED A CAUSE OF ACTION AGAINST BROKER INDIVIDUALLY FOR NEGLIGENT MISREPRESENTATION AND FOR BREACH OF A FIDUCIARY DUTY AGAINST THE BROKER’S CORPORATION)

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COOPERATIVE BOARD’S PARKING RESTRICTION WAS A PROPER EXERCISE OF THE BUSINESS JUDGMENT RULE.

The Second Department determined the cooperative board’s parking restriction was a proper exercise of the business judgment rule (and did not constitute a breach of fiduciary duty):

“In the context of cooperative dwellings, the business judgment rule provides that a court should defer to a cooperative board’s determination [s]o long as the board acts for the purposes of the cooperative, within the scope of its authority and in good faith'”… . “[D]ecision making tainted by discriminatory considerations is not protected by the business judgment rule'” … .

Here, the defendants demonstrated their prima facie entitlement to judgment as a matter of law dismissing the complaint by establishing that the decision to enforce parking rules and prohibit parking in the grass area behind one of the cooperative buildings was protected by the business judgment rule … . In particular, the defendants demonstrated that they were acting in the best interests of the cooperative after making a number of capital improvements that added to the aesthetics and value of the property. Beach Point Partners v Beachcomber, Ltd., 2016 NY Slip Op 07284, 2nd Dept 11-9-16

COOPERATIVES (COOPERATIVE BOARD’S PARKING RESTRICTION WAS A PROPER EXERCISE OF THE BUSINESS JUDGMENT RULE)/BUSINESS JUDGMENT RULE (COOPERATIVES, COOPERATIVE BOARD’S PARKING RESTRICTION WAS A PROPER EXERCISE OF THE BUSINESS JUDGMENT RULE)

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JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE.

The First Department, in a full-fledged opinion by Justice Saxe, determined defendants’ motion to dismiss breach of contract and breach of fiduciary duty causes of action as untimely was properly denied. The facts, which concern the sale of interests in a Russian oil company, are too complex to summarize here. The court held that the complaint alleged a breach of a 2001 joint venture investment agreement based upon an alleged failure to pay plaintiff a portion of sale proceeds in 2013, making the 2014 lawsuit timely:

 

… [T]he motion court denied defendants’ motion to dismiss plaintiff’s causes of action for breach of their joint venture agreement and the 2001 Agreement, and for breach of defendants’ fiduciary duty. It held that although there was no written investment agreement signed by both defendants … plaintiff sufficiently pleaded the existence of a valid oral agreement by alleging that the parties agreed to the central terms of the unsigned investment agreement. It further held that the oral agreement was not void under the statute of frauds because it was capable of being performed within one year, and because the statute of frauds is generally inapplicable to joint ventures. It also rejected defendants’ argument that plaintiff’s breach of contract and breach of joint venture claims were time barred, reasoning that the claimed breach of the 2001 Agreement was defendants’ failure to pay plaintiff his percentage share of the 2013 … sale proceeds. * * *

This action was commenced within both limitations periods, because defendants “had a recurring obligation to pay plaintiff his . . . share of the profits generated by” the joint venture. … . A new claim accrued when the obligation to do so was allegedly breached in 2013. Lebedev v Blavatnik, 2016 NY Slip Op 06463, 1st Dept 10-4-16

 

CIVIL PROCEDURE (JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE)/CONTRACT LAW (JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE)/CORPORATION LAW (JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE)/JOINT VENTURES (JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE)/STATUTE OF FRAUDS (JOINT VENTURE AGREEMENT, ALTHOUGH UNSIGNED, WAS VALID BECAUSE IT WAS CAPABLE OF BEING PERFORMED IN ONE YEAR; CAUSE OF ACTION FOR BREACH ACCRUED IN 2013 WHEN PAYMENT REQUIRED BY THE 2001 AGREEMENT WAS NOT MADE)

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SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE.

The Second Department determined summary judgment was properly granted in the objectants’ actions against the executor (Mahler) for breach of fiduciary duty and negligence.  The executor sold the estate asset (real property) to an acquaintance for half of its value. The acquaintance sold the property for nearly double the purchase price:

A fiduciary acting on behalf of an estate is required to employ such diligence and prudence to the care and management of the estate assets and affairs as would prudent persons of discretion and intelligence in their own like affairs … . “[A] fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect” … . In performing his fiduciary duty as the executor of the decedent’s estate, Mahler was required to use good business judgment … . To the extent that the sale of the property does not meet this standard, the beneficiaries of the estate may seek to surcharge him … . “To obtain such a surcharge, it is not enough for the contestants to show that the representatives of the estate did not get the highest price obtainable; it must be shown that they acted negligently, and with an absence of diligence and prudence which an ordinary [person] would exercise in his [or her] own affairs” … . Matter of Billmyer, 2016 NY Slip Op 05994, 2nd Dept 9-14-16

TRUSTS AND ESTATES (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)/FIDUCIARY DUTY, BREACH OF (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)/EXECUTORS (SUMMARY JUDGMENT PROPERLY GRANTED IN ACTIONS AGAINST EXECUTOR FOR BREACH OF FIDUCIARY DUTY AND NEGLIGENCE)

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COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY.

The Second Department, reversing Supreme Court, determined plaintiff stated a cause of action for aiding and abetting the breach of a fiduciary duty. Plaintiff’s former partner left the partnership and joined defendant accounting firm, taking a client with him. Partners owe one another a fiduciary duty. The complaint alleged the defendant firm aided and abetted the former partner in breaching that duty. The court outlined the relevant law:

To recover damages for aiding and abetting a breach of fiduciary duty, a plaintiff must plead and prove that a fiduciary duty owed to the plaintiff was breached, that the defendant knowingly induced or participated in the breach, and that the plaintiff was damaged as a result of the breach … . Knowing participation in a breach of fiduciary duty occurs when the defendant provides substantial assistance to the primary violator … . ” Substantial assistance occurs when a defendant affirmatively assists, helps conceal or fails to act when required to do so, thereby enabling the breach to occur . . . . However, the mere inaction of an alleged aider or abettor constitutes substantial assistance only if the defendant owes a fiduciary duty directly to the plaintiff'” … . Smallberg v Raich Ende Malter & Co., LLP, 2016 NY Slip Op 04704, 2nd Dept 6-15-16

 

PARTNERSHIP LAW (COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY)/FIDUCIARY DUTY (PARTNERSHIP LAW, COMPLAINT STATED A CAUSE OF ACTION FOR AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY)

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QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW.

The Second Department determined plaintiff special guardian had raised a question of fact about whether the fiduciary tolling rule applied to this breach of fiduciary duty action brought on behalf of her mentally ill brother, thereby rendering the action timely. The court explained the rule and why the issue can be raised for the first time on appeal:

… [T]he plaintiff raised a question of fact as to whether the statute of limitations was tolled pursuant to the fiduciary tolling rule or the “repudiation rule,” under which 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” … . Although the plaintiff raises the issue for the first time on appeal, the issue of whether the fiduciary tolling rules applies to the facts as alleged may be reached, since it involves a question of law which appears on the face of the record and which could not have been avoided if raised at the proper juncture … . Franklin v Hafftka, 2016 NY Slip Op 04692, 2nd Dept 6-15-16

CIVIL PROCEDURE (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/STATUTE OF LIMITATIONS (QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/FIDUCIARY TOLLING RULE (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)FIDUCIARY DUTY, BREACH OF (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)/APPEALS (STATUTE OF LIMITATIONS, QUESTION OF FACT WHETHER FIDUCIARY TOLLING RULE EXTENDED STATUTE OF LIMITATIONS; ISSUE CAN BE ADDRESSED ON APPEAL EVEN THOUGH NOT RAISED BELOW)

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EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO SAVE A TIME-BARRED CLAIM.

The Third Department, over a two-justice dissent, determined the doctrine of equitable estoppel should not have been invoked to save a time-barred claim to real property. The real property was the subject of a 1977 will which placed the property in trust for decedent's children and named defendant executor. In 1988 the property was conveyed to the defendant, but the will was never amended. Supreme Court denied defendant's motion to dismiss, finding that defendant's executor-status and familial ties created a fiduciary relationship, requiring defendant to notify plaintiffs of the 1988 transfer. The Third Department held the appointment as executor did not create a fiduciary relationship (prior to death), and the familial relationship, as well, did not create a fiduciary relationship. Therefore, the Third Department ruled, the defendant was not barred, by equitable estoppel, from asserting the statute of limitations defense:

Supreme Court recognized that “concealment without actual misrepresentation may form the basis for invocation of the doctrine [of equitable estoppel] if 'there was a fiduciary relationship which gave [the] defendant an obligation to inform [the] plaintiff of facts underlying the claim'” … . Here, the court found that plaintiffs had sufficiently alleged that defendant owed them a fiduciary duty to disclose the conveyance when it occurred in 1988 because of her nomination as executor-trustee in the 1977 will, as well as their familial relationship.

We note, however, that the existence of a familial relationship does not equate to a fiduciary relationship for equitable estoppel purposes … . Nor does the mere fact that a will has nominated an executor, in and of itself, create a fiduciary relationship between the nominee and the will's beneficiaries. Indeed, because of the ambulatory nature of a will, a nominated executor is prohibited from acting in a fiduciary capacity until the testator dies … . Similarly, “a testamentary trust cannot become effective prior to the testator's death” … . Picard v Fish, 2016 NY Slip Op 04086, 3rd Dept 5-26-16

CIVIL PROCEDURE (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)/EQUITABLE ESTOPPEL (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)/TRUSTS AND ESTATES (EXECUTOR-STATUS (PRIOR TO DEATH) AND FAMILIAL RELATIONSHIP DO NOT CREATE A FIDUCIARY RELATIONSHIP, EQUITABLE ESTOPPEL SHOULD NOT HAVE BEEN INVOKED TO BAR A TIME-BARRED CLAIM)

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SUIT ALLEGING BREACH OF FIDUCIARY DUTY IN CONNECTION WITH THE SALE OF AN ASSET OWNED NEARLY ENTIRELY BY BANKRUPT LEHMAN BROTHERS DISMISSED.

The First Department dismissed a complaint alleging, inter alia, breach of a limited partnership agreement and breach of fiduciary duty in connection of the sale of a fund (Archstone) nearly entirely owned by bankrupt Lehman Brothers. Plaintiff, who had purchased a 1% interest in the fund for $20 million, alleged the sale will generate enough to pay only the preferred interests and will “wipe out” the minority interests (including plaintiff). Plaintiff further alleged the sale was motivated by Lehman's desire to pay creditors relating to its 2008 bankruptcy. In dismissing the breach of fiduciary duty cause of action, the court explained the analytical criteria, including an “entire fairness” analysis:

Even under the heightened entire fairness standard advocated by plaintiff, the claim is insufficient. An “entire fairness” analysis focuses on two entwined considerations: fair dealing and fair price … . Plaintiff fails to allege facts demonstrating the absence of fairness, or that it did not “receive the substantial equivalent in value of what [it] had before” … . Conclusory assertions that amounts paid were “unfair” are insufficient … . Plaintiff concedes that the $16 billion transaction price attained Archstone's current value at the time of the transaction. Plaintiff also admits that the transaction “represented a premium of approximately 15% over the implied purchase price of Lehman's combined acquisitions of the interests of the other [s]ponsor [b]anks' interests earlier in 2012.” Plaintiff identifies no alternative transactions, let alone one that would have achieved more value for the Fund. Fiduciaries are “not required to abandon [a] transaction simply because a better deal might have become available in the future” … . Cambridge Capital Real Estate Invs., LLC v Archstone Enter. LP, 2016 NY Slip Op 02017, 1st Dept 3-22-16

PARTNERSHIP LAW (BREACH OF FIDUCIARY DUTY CAUSE OF ACTION BY MINORITY INTEREST HOLDER DISMISSED)/FIDUCIARY DUTY, BREACH OF (PARTNERSHIP LAW, BREACH OF FIDUCIARY DUTY CAUSE OF ACTION BY MINORITY INTEREST HOLDER DISMISSED)

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