Fraud – New York Appellate Digest

THE COMPLAINT AGAINST ATTORNEYS STATED A CAUSE OF ACTION FOR “DECEIT AND COLLUSION” PURSUANT TO JUDICIARY LAW 487 WHICH IS NOT THE SAME AS COMMON LAW FRAUD; THERE IS NO NEED TO SHOW A PARTY WAS MISLED BY THE ATTORNEY’S INTENTIONAL FALSE STATEMENTS (FOURTH DEPT).

The Fourth Department, reversing (modifying) Supreme Court, determined the complaint stated a cause of action against an attorney (Moore) for “deceit and collusion” within the meaning of Judiciary Law 487:

Judiciary Law § 487 provides, in pertinent part, that “[a]n attorney or counselor who . . . [i]s guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party . . . [i]s guilty of a misdemeanor, and in addition to the punishment prescribed therefor by the penal law, he forfeits to the party injured treble damages, to be recovered in a civil action.” In essence, the statute “imposes liability for the making of false statements with scienter” … . However, “Judiciary Law § 487 is not a codification of common-law fraud and therefore does not require a showing of justifiable reliance” … . Stated another way, “liability under the statute does not depend on whether the court or party to whom the statement is made is actually misled by the attorney’s intentional false statement” … ; i.e., the statute “focuses on the attorney’s intent to deceive, not the deceit’s success” … .

… [P]laintiffs alleged in their amended complaint that, from the time he became the client’s attorney, Moore engaged in a pattern of conduct whereby he advocated for the validity of a fraudulent deed, and oversaw the revision of fraudulent surveys based upon that deed. Plaintiffs alleged that Moore was in possession of documents and correspondence establishing that the deed was the fraudulent product of the client and defendant Aaron I. Mullen, an attorney who had previously represented the client, and that Moore failed to disclose those items despite receiving a valid discovery demand for them. Plaintiffs also alleged that Moore instituted a CPLR article 78 proceeding based upon the allegedly fraudulent deed and that he attached the deed to the petition. Plaintiffs further alleged that Moore participated in the client’s fraud, and did so intentionally and with knowledge of the client’s fraud, to plaintiffs’ detriment of more than $100,000 in legal fees and expenses. Ostrander v Mullen, 2024 NY Slip Op 06461, Fourth Dept 12-20-24

Practice Point: A Judiciary Law 487 action against an attorney focuses on the attorney’s intent to deceive, not whether the deceit was successful.

December 20, 2024

Contract Law, Fraud

ALTHOUGH PLAINTIFF ALLEGED FRAUDULENT INDUCEMENT, THE ESSENCE OF THE LAWSUIT IS THE ALLEGED BREACH OF THE CONTRACTS; THIS IS NOT A CASE WHERE IT IS ALLEGED THE FRAUDULENT INDUCEMENT NULLIFIED THE CONTRACTS; THEREFORE THE JURY-TRIAL WAIVER PROVISIONS REMAIN ENFORCEABLE (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Kapnick, determined the “fraudulent inducement” claim in this breach of contract action was covered by the contractual waiver of a jury trial. The First Department distinguished this case, which is in essence a “breach of contract” action, from cases where fraudulent inducement is alleged to have nullified the entire agreement. The contracts here involved the manufacture of semiconductor chips by defendant GlobalFoundries for plaintiff IBM:

From 2013 to June 2015, plaintiff International Business Machines Corporation (IBM) and defendant GlobalFoundries U.S. Inc., a manufacturer of semiconductors, engaged in discussions concerning a collaborative venture whereby IBM would transfer its microelectronics business, including technology, engineers and employees, to GlobalFoundries, along with a sum of $1.5 billion, and GlobalFoundries would develop, manufacture and supply next generation 14nm and 10nm high performance semiconductor chips for IBM. * * *

… [W]here a claim of fraudulent inducement challenges the validity of the agreement, a provision waiving the right to a jury trial in litigation arising out of the agreement may not apply … . This Court has taken care to distinguish between actions where the primary claim is fraudulent inducement and the validity of the entire contract is clearly being challenged … , and actions that do not challenge the validity of the contract but rather seek to enforce the underlying contract by obtaining damages for fraudulent inducement … . The present case falls into the latter category. * * *

It is clear from IBM’s complaint that its primary claim is not fraudulent inducement but rather breach of the agreements. International Business Machs. Corp. v GlobalFoundries U.S. Inc., 2024 NY Slip Op 06425, First Dept 12-19-24

Practice Point: It is possible that fraudulent inducement can nullify an underlying contract rendering all of the contract provisions unenforceable. Here however, although fraudulent inducement was alleged, the essence of the suit is the alleged breach of the underlying contracts. Therefore, the jury-trial waiver provisions remain enforceable.

December 19, 2024

Civil Procedure, Contract Law, Evidence, Fraud

THE PARTY SEEKING TO ENFORCE A VENUE CONTRACT PROVISION HAS THE BURDEN OF DEMONSTRATING THE AUTHENTICITY OF THE SIGNATURE IN THE FACE OF AN ALLEGATION OF FORGERY; HERE DEFENDANT DEMONSTRATED THE SIGNATURE WAS AUTHENTIC AND PLAINTIFF FAILED TO RAISE A QUESTION OF FACT RE: THE FORGERY ALLEGATION (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Garcia, reversing the Appellate Division, determined the defendant demonstrated the contract which included a venue provision was signed by the decedent and the plaintiff failed to raise a triable question of fact about whether the signature was forged. The court noted that contractual choice of venue provisions are generally enforceable and provided some insight into how a forgery question-of-fact can be raised:

Forum selection clauses may designate a jurisdiction, such as the federal or state court system, or the clause may designate a venue within the State, as was done here by specifying Nassau County as the proper venue … .* * *

… [T]he party moving for a change of venue under CPLR 501 is in effect seeking to enforce a contractual provision. For that reason, … the proponent of the motion bears the initial burden to establish the authenticity of the writing for purposes of a motion to enforce a contractual venue provision … . This may be done through any of the recognized methods of authentication, including, but not limited to, the testimony of a witness who was present at the time of the signing, an admission of authenticity, proof of handwriting, and, as particularly relevant here, through circumstantial evidence … . * * *

Although an expert opinion is not required to raise an issue of fact as to forgery , the movant must nevertheless offer “[s]omething more than a bald assertion,” and in this regard conclusory or self-serving affidavits are inadequate … . Plaintiff offered only an affidavit in which he claimed to be “familiar” with decedent’s handwriting. Based on a summary of certain perceived inconsistencies in the signatures and initials on the agreements, plaintiff asserted that “whoever the person or people who signed and initialed these pages may have been, it was not my mother.” Attached to the affirmation is an undated “exemplar” of what is purportedly decedent’s signature, but no effort is made to establish that the exemplar represents decedent’s signature at the relevant time. Furthermore, the exemplar is purportedly decedent’s handwritten signature, and … electronic signatures may naturally differ from handwritten one … . Knight v New York & Presbyt. Hosp, 2024 NY Slip Op 05870, CtApp

Practice Point: Contractual provisions designating venue are enforceable.

Practice Point: To enforce a contractual venue provision, in the face of a forgery allegation, the moving party must demonstrate the signature is authentic.

Practice Point: Bald assertions of forgery unsupported by any evidence will not raise a triable question of fact on the forgery issue.

November 25, 2024

Civil Procedure, Contract Law, Evidence, Fraud

DEFENDANTS RAISED QUESTIONS OF FACT SUPPORTING A “FRAUD IN THE INDUCEMENT” DEFENSE TO THE ACTION BASED UPON AN EXECUTED PROMISSORY NOTE (THIRD DEPT).

The Third Department, reversing Supreme Court, determined defendants raised a valid “fraud in the inducement” defense to the action seeking payment on an executed promissory note. Defendants executed the note to purchase protein powder from plaintiffs. Plaintiffs described the powder as having 23 to 25 grams of protein per 33/5 grams of powder. After the purchase defendants had the powder tested which revealed the powder contained a significantly lower percentage of protein:

“When an action is based upon an instrument for the payment of money only . . . , the plaintiff may serve with the summons a notice of motion for summary judgment and the supporting papers in lieu of a complaint” (CPLR 3213). Therefore, “[t]o prevail on [their] motion for summary judgment in lieu of complaint based on a promissory note, plaintiff[s] w[ere] required to present evidence that defendant[s] executed the note and defaulted thereon” … . Plaintiffs demonstrated their prima facie burden by supplying the note at issue, signed by [defendant], and evidence of defendant’s failure to pay; therefore, the burden shifted to defendants to establish the existence of a triable issue of fact as to a bona fide defense to liability … . …

Fraud in the inducement is a defense to the enforcement of a promissory note … , and, as such, defendants were required to “allege that (1) the plaintiff made a representation or a material omission of fact which was false and the plaintiff knew to be false, (2) the misrepresentation was made for the purpose of inducing the defendant to rely upon it, (3) there was justifiable reliance on the misrepresentation or material omission, and (4) injury” … . * * *

Generally, “what constitutes reasonable reliance is always [a] nettlesome” inquiry best left to the trier of fact … . Furthermore, “[s]ummary judgment is a drastic remedy that should not be granted where there is any doubt as to the existence of triable issues of fact” … . Panessa v Lederfeind, 2024 NY Slip Op 05252, Third Dept 10-24-24

Practice Point: Fraud in the inducement is a valid defense to an action for summary judgment based upon an instrument for the payment of money only (CPLR 3213), here a promissory note.

October 24, 2024

Civil Procedure, Fiduciary Duty, Fraud

HERE ALLEGATIONS OF FRAUD WERE ESSENTIAL TO THE BREACH OF FIDUCIARY DUTY CAUSE OF ACTION; THEREFORE THE SIX-YEAR STATUTE OF LIMITATIONS FOR FRAUD APPLIED AND THE CAUSE OF ACTION WAS TIME-BARRED (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determined the six-year statute of limitations for fraud controlled the breach of a fiduciary duty cause of action (which was therefore time-barred):

… [T]he six-year statute of limitations governing actions based on fraud applies (see CPLR 213[8]). “‘[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)'” … . Here, the defendants alleged that Hollander was part owner of a limited liability company that competed directly with the defendants, that Hollander failed to disclose that alleged conflict, and that Hollander used confidential information obtained from the defendants to directly compete with them. The plaintiffs allegedly denied GFR and Friedman Group, LLC, the opportunity to purchase at least four specific properties and used trade secrets to compete with GFR and Friedman Group, LLC, on at least three specific properties. The allegations of fraud are thus essential to the breach of fiduciary duty counterclaim, and the six-year statute of limitations applies. South Shore Estates, Inc. v Guy Friedman Realty Corp., 2024 NY Slip Op 04156, Second Dept 8-7-24

Practice Point: Where allegations of fraud are essential to a breach of fiduciary duty cause of action, the six-year statute of limitations for fraud applies.

August 7, 2024

Contract Law, Corporation Law, Fraud

WITH THE EXCEPTION OF THE FRAUD CAUSE OF ACTION, THE NONRECOURSE CLAUSE PRECLUDED THIS LAWSUIT AGAINST THE PRINCIPALS OF DEFENDANT CORPORATION; PLAINTIFF HAD WON AN ARBITRATION AWARD AGAINST DEFENDANT FOR OVER $200 MILLION AND BROUGHT THIS ACTION AFTER DEFENDANT FILED FOR BANKRUPTCY (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Higgitt, determined the nonrecourse clause in the contract between two sophisticated, commercial parties precluded plaintiff’s action. Plaintiff had won an arbitration award for over $200 million against defendant (Footprint) and this suit against Footprint’s principals was brought after Footprint filed for bankruptcy:

Plaintiff, a sophisticated commercial actor, knew that it was entering into a significant contractual undertaking with a special-purpose entity, and the contract provided for a specific dispute-resolution mechanism — arbitration — that carried with it a risk that the special-purpose entity would not be able to satisfy an ensuing award. Plaintiff could have bargained for protections to avoid or mitigate losses occasioned by the conduct of a judgment-proof special-purpose entity (e.g., conditions on Footprint’s ability to draw on the letter of credit, a payment guaranty from one or more of defendants, a narrow nonrecourse provision), but it chose to enter into the contract as written … . We cannot provide rough justice to plaintiff by dint of distorting the plain meaning of the contract to relieve plaintiff of the consequences of its contractual arrangement … . Similarly, we cannot, under the guise of contractual interpretation, disturb the clear, detailed allocation-of-risk-of-economic-loss scheme agreed upon by the parties … . Ultimately, plaintiff got the benefit of its bargain: arbitration on its cognizable claims against Footprint, which proceeding yielded a sizable award that was converted to a judgment. Iberdrola Energy Projects v Oaktree Capital Mgt. L.P., 2024 NY Slip Op 03798, First Dept 7-11-24

Practice Point: Sophisticated corporate commercial parties will be held to an unambiguous nonrecourse provision in their contract.

July 11, 2024

Banking Law, Civil Procedure, Fraud, Negligence

PLAINTIFF, UNDER NEW JERSEY LAW, SUFFICIENTLY PLED A SPECIAL RELATIONSHIP WITH DEFENDANT BANK GIVING RISE TO A DUTY TO ENFORCE ITS ANTI-FRAUD PROCEDURES; PLAINTIFF WIRED $300,000 TO AN ACCOUNT WHICH HAD BEEN SET UP TO DEFRAUD PLAINTIFF (FIRST DEPT).

The First Department, over a comprehensive dissent, determined defendant JPMorgan Chase Bank owed a duty to plaintiff based upon its anti-fraud polices advertised on the bank’s website. Defendant David Tate opened an account at a New Jersey Chase bank in the name of his business, Alchemy. Tate did not provide any personal identification or any corporate documentation to the bank. Plaintiff, thinking she was investing in Alchemy, wired $300,000 to the Alchemy account which was appropriated by Tate:

Under New Jersey law, a bank and its depositor have an arm’s-length, debtor-creditor relationship … . Banks do not have a duty to protect depositors from the wrongful conduct of third parties with whom the bank has done business .. .

Nonetheless, a bank may have a duty of care “where a special relationship has been established from which a duty can be deemed to flow” … . A special relationship may be formed “by agreement, undertaking or contact” … . As pertinent here, an “undertaking” is “the willing assumption of an obligation by one party with respect to another or a pledge to take or refrain from taking particular action” … .

Crediting plaintiff’s factual allegations, construing the complaint liberally, and according it the benefit of every possible favorable inference …, we find that the complaint adequately pleaded that Chase assumed a duty to abide by the anti-fraud procedures that it publicized.

… [P]laintiff has adequately pleaded the existence of a special relationship with Chase, giving rise to a duty to plaintiff to enforce its anti-fraud procedures … . Plaintiff has likewise stated a claim against Chase in negligence, based on its alleged failure to abide by these safeguards when Tate opened Alchemy’s account with Chase … . Ben-Dor v Alchemy Consultant LLC, 2024 NY Slip Op 03797, Second Dept 7-11-24

Practice Point: In New Jersey, to sue a bank for the wrongful conduct of a third party, here the use of a bank account to defraud plaintiff, the bank must owe plaintiff a special duty. The majority held the anti-fraud policies on the bank’s website may be the basis for such a special duty. There was an extensive and comprehensive dissent.

July 11, 2024

Civil Procedure, Conversion, Corporation Law, Evidence, Fraud

AN ACTION AGAINST A CORPORATION AND AN ACTION AGAINST INDIVIDUAL PRINCIPALS OF THE CORPORATION DO NOT HAVE AN “IDENTITY OF PARTIES” WHICH WOULD ALLOW DISMISSAL OF ONE OF THE COMPLAINTS; TEXT MESSAGES DO NOT SUPPORT DISMISSAL OF A COMPLAINT BASED ON “DOCUMENTARY EVIDENCE;” THE COMPLAINT STATED A CAUSE OF ACTION FOR CONVERSION; THE COMPLAINT DID NOT STATE A CAUSE OF ACTION FOR FRAUD (FOURTH DEPT).

The Fourth Department, reversing (modifying) Supreme Court, determined certain causes of action should not have been dismissed. Dismissal of two causes action on the ground there existed identical causes of action in another lawsuit was error because the parties in the two lawsuits were not the same. It was error to dismiss a cause of action based on documentary evidence because text messages do not fit the definition of “documentary evidence.” It was also error to dismiss the action for conversion for failure to state a cause of action:

It is well settled that ” ‘[i]ndividual principals of a corporation are legally distinguishable from the corporation itself’ and a court may not ‘find an identity of parties by, in effect, piercing the corporate veil without a request that this be done and, even more importantly, any demonstration . . . that such a result is warranted’ ” … . * * *

… [T]he court erred in using text message excerpts to justify dismissal of the fourth cause of action or, indeed, any cause of action. Documents such as text messages “do not meet the requirements for documentary evidence” to support a CPLR 3211 (a) (4) motion … . To be considered documentary, evidence must be unambiguous and of undisputed authenticity, that is, it must be essentially unassailable” … . Here, the text messages do not even identify the person who is communicating with plaintiff. The names and numbers are redacted. Moreover, the text messages do not “conclusively establish[ ] a defense as a matter of law” with respect to the fourth cause of action … . * * *

The second cause of action alleges that defendants converted plaintiff’s personal property, including dental equipment, to their own use. “Two key elements of conversion are (1) plaintiff’s possessory right or interest in the property . . . and (2) [a] defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights” … . … [W]e conclude that the pleading includes sufficient allegations to support a cause of action for conversion. Plaintiff alleged that each defendant exerted dominion and control over property to which she had a possessory right or interest … . Nosegbe v Charles, 2024 NY Slip Op 02406, Fourth Dept 5-3-24

Practice Point: An action against a corporation and an action against individual principals of that corporation do not have “an identity of parties” which would subject one of the actions to dismissal.

Practice Point: Text messages are not “documentary evidence” which can be the basis for dismissal of a complaint.

May 3, 2024

Civil Procedure, Contract Law, Fraud

A BREACH OF CONTRACT ACTION SHOULD NOT BE CONSOLIDATED WITH A TORT ACTION (FIRST DEPT).

The First Department, reversing Supreme Court, determined the breach of contract action and the fraudulent conveyance action should not have been consolidated:

In 2016, plaintiff commenced a breach of contract action against defendant eCommission Solutions, LLC (eCommission). In 2022, plaintiff commenced a fraudulent conveyance action against eCommission and its president, Paul Hoffman, and his wife, alleging that Hoffman transferred millions from eCommission to himself with the intent to defraud creditors like plaintiff.

… When one action sounds in contract and the other in tort, it is inappropriate to grant consolidation … . Indeed, the breach of contract and fraudulent conveyance actions present different questions of law and fact … . Moreover, the fraudulent conveyance action will be moot if plaintiffs fail to win the breach of contract action … . Finally, the two actions are at different stages, so that consolidation would lead to delay in trying the breach of contract action … .

Discovery in the fraudulent conveyance action should be stayed until the breach of contract action is resolved … . 3B Assoc. LLC v Ecommission Solutions, LLC, 2024 NY Slip Op 02086, First Dept 4-18-24

Practice Point: A breach of contract action should not be consolidated with a tort action (here an action for fraudulent conveyance).

April 18, 2024

Accountant Malpractice, Civil Procedure, Fiduciary Duty, Fraud

THE COMPLAINT STATED CAUSES OF ACTION AGAINST AN ACCOUNTING FIRM FOR MALPRACTICE, FRAUD AND AIDING AND ABETTING BREACH OF A FIDUCIARY DUTY; BOTH MOTHER AND SON ARE OWNERS OF A RESTAURANT; IT WAS ALLEGED THE SON’S TAKING A LARGE SALARY AND RECEIVING MILLIONS IN LOANS AGAINST THE BUSINESS WERE DOCUMENTED BY THE ACCOUNTING FIRM BUT NOT DISCLOSED TO MOTHER (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Renwick, determined the malpractice, fraud and breach of fiduciary duty causes of action against defendant accounting firm should not have been dismissed. Both plaintiff Ellen and her son Kenneth are owners of a restaurant. The complaint alleged Kenneth was looting the restaurant by taking a large salary and talking out loans against the business without Ellen’s knowledge. It was alleged defendant accounting firm had a duty to inform Ellen of Kenneth’s financial dealings but did not. The accounting firm argued there was no duty-breach and no fraud because all of Kenneth’s financial activities were documented in the accountant’s records and in the business tax returns. The First Department simply held the complaint stated causes of action for accountant malpractice, fraud and aiding an abetting a breach of fiduciary duty:

Plaintiffs’ claims … are not that defendant was hired to discover Kenneth’s wrongdoing, but rather that information obtained by defendant during its business interactions with Kenneth and information used by defendant in order to prepare tax returns and financial statements put defendant on notice about the impropriety of Kenneth’s loans to himself such that defendant had a duty to inform plaintiffs of the questionable payments. The law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent … .

In addition, “[o]ne who aids and abets a breach of a fiduciary duty is liable for that breach as well, even if he or she had no independent fiduciary obligation to the allegedly injured party, if the alleged aider and abettor rendered ‘substantial assistance’ to the fiduciary in the course of effecting the alleged breaches of duty” … 1650 Broadway Assoc., Inc. v Sturm, 2024 NY Slip Op 01864, First Dept 4-4-24

Practice Point: An accounting firm has a duty to disclose fraud. Here the firm documented the potentially fraudulent financial activities of one of the owners of the restaurant but did not disclose those activities to the other owner. The allegations stated causes of action for accountant malpractice, fraud and aiding and abetting breach of a fiduciary duty.

April 4, 2024