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FRAUD CAUSE OF ACTION PROPERLY DISMISSED BECAUSE (1) IT WAS DUPLICATIVE OF THE BREACH OF CONTRACT CAUSE OF ACTION AND (2) PLAINTIFF, AS A SOPHISTICATED BUSINESS ENTITY, COULD NOT ARGUE IT RELIED ON ORAL REPRESENTATIONS WHICH CONTRADICTED THE WRITTEN CONTRACT; STRICT REQUIREMENTS FOR ATTACHMENT NOT MET.

The Third Department, affirming Supreme Court, determined plaintiff’s fraud cause of action was properly dismissed because (1) it was duplicative of the breach of contract cause of action, and (2), plaintiff, a sophisticated business entity,  could not be heard to rely upon alleged oral representations which contradicted the written contract.  In addition, the Third Department determined the requirements for attachment pursuant to CPLR 6201 (3) were not met by plaintiff. There was insufficient proof defendant was secreting assets of frustrate a potential judgment:

A cause of action for fraud does not exist where the alleged fraudulent act is premised upon a breach of a contractual obligation … . * * * … [A] sophisticated business entity cannot justifiably rely on oral representations when it thereafter enters into a contract containing terms that directly contradict those oral representations … . Accordingly, plaintiff’s fraud cause of action is subject to dismissal, either as duplicative of the contract cause of action or, in the alternative, based on plaintiff’s own allegations that it relied on oral representations that were contradicted by the terms of the contract that it thereafter entered into. Northeast United Corp. v Lewis, 2016 NY Slip Op 01713, 3rd Dept 3-10-16

CONTRACT LAW (SOPHISTICATED BUSINESS ENTITY CAN NOT ARGUE IT RELIED ON ORAL MISREPRESENTATIONS WHICH CONTRADICTED THE WRITTEN CONTRACT)/FRAUD (FRAUD CAUSE OF ACTION PROPERLY DISMISSED AS DUPLICATIVE OF BREACH OF CONTRACT CAUSE OF ACTION AND BECAUSE PLAINTIFF, A SOPHISTICATED BUSINESS ENTITY, COULD NOT BE HEARID TO HAVE RELIED UPON ORAL MISREPRESENTATIONS WHICH CONTRADICTED THE WRITTEN CONTRACT)/ATTACHMENT (STRICT REQUIREMENTS FOR ATTACHMENT PURSUANT TO CPLR 6201 (3) NOT MET)/CIVIL PROCEDURE (STRICT REQUIREMENTS FOR ATTACHMENT PURSUANT TO CPLR 6201 (3) NOT MET)

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STAND-ALONE EXECUTIVE LAW 63 (12) CAUSE OF ACTION FOR FRAUD REINSTATED AGAINST DONALD TRUMP ET AL.

In an action by the Attorney General against Donald Trump, alleging fraud in connection with the operation of Trump University, the First Department, overruling its own precedent, determined Executive law 63 (12) authorized a stand-alone fraud cause of action. The court further held that the three-year statute of imitations for causes of action created by statute did not apply because Executive Law 63 (12) did not create a cause of action which did not exist at common law, rather it merely authorized the Attorney General to bring a fraud cause of action. Applying the six-year statute of limitations, the First Department reinstated the Executive Law 63 (12) cause of action, and concluded questions of fact precluded summary judgment on both the statutory and common law fraud claims:

… [L]ike similar statutes that authorize causes of action, § 63(12) defines the fraudulent conduct that it prohibits, authorizes the Attorney General to commence an action or proceeding to foreclose that conduct, and specifies the relief, including equitable relief, that the Attorney General may seek. Indeed, the language of § 63(12) parallels the language of the Martin Act, under which the Attorney General is undisputedly authorized to bring a standalone cause of action for fraudulent conduct in the securities context … . * * *

… [W]e find … that the fraud claim under § 63(12) is not subject to the three-year statute of limitations imposed by CPLR 214(2), but rather, is subject to the residual six-year statute of limitations in CPLR 213(1) … . … § 63(12) does not create any liability nonexistent at common law, at least under the court’s equitable powers. … § 63(12) does not encompass a significantly wider range of fraudulent activities than were legally cognizable before the section’s enactment … .

Nevertheless, petitioner is not entitled to summary determination of its fraud claims, under either the common law or the statute, because material issues of fact exist as to those claims. Matter of People of the State of N.Y. by Eric T. Schneiderman v Trump Entrepreneur Initiative LLC, 2016 NY Slip Op 01430, 1st Dept 3-1-16

 

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EQUITABLE ACTION SEEKING RESCISSION BASED UPON FRAUD NEED NOT ALLEGE PECUNIARY LOSS.

The First Department, in a full-fledged opinion by Justice Tom, determined a triable issue of fact had been raised about whether defendant made misrepresentations in a contract for a condominium such that the contract could be rescinded. Defendant agreed the condominium was to be used for residential purposes, but sought to operate a day care center on the premises. The court noted that pecuniary damages need not be alleged in an equitable action to rescind a contract based upon fraud:

 

Fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment, and “unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed” … . Thus, the fourth cause of action alleging that misrepresentations in defendant’s purchase application induced plaintiff to forgo exercise of its right of first refusal has a sound basis in the record, and Supreme Court properly concluded that a triable issue is presented. Board of Mgrs. of the Soundings Condominium v Foerster, 2016 NY Slip Op 01273, 1st Dept 2-23-16

 

CONTRACT LAW (RESCISSION FOR MISREPRESENTATIONS NEED NOT BE SUPPORTED BY AN ALLEGATION OF PECUNIARY LOSS)/RESCISSION (ACTION FOR RESCISSION BASED UPON MISREPRESENTATIONS NEED NOT ALLEGE PECUNIARY LOSS)/FRAUD (ACTION FOR RESCISSION OF A CONTRACT BASED UPON MISREPRESENTATIONS NEED NOT ALLEGE PECUNIARY LOSS)/DAMAGES (ACTION FOR RESCISSION OF A CONTRACT BASED UPON MISREPRESENTATIONS NEED NOT ALLEGE PECUNIARY LOSS)

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FRAUD CAUSE OF ACTION STEMMING FROM THE SIGNING OF A DOCUMENT WITHOUT READING IT DISMISSED AS TIME BARRED; RELEVANT STATUTES OF LIMITATIONS AND BURDENS OF PROOF EXPLAINED.

The Second Department determined plaintiff’s cause of action for fraud was time-barred because it accrued when she signed the allegedly fraudulent document without reading it. The court explained the two statutes of limitations which apply to fraud and the related burdens of proof in a motion to dismiss:

 

An action alleging fraud must be commenced within “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” (CPLR 213[8]; see CPLR 203[g]…). “On a motion to dismiss a complaint pursuant to CPLR 3211(a)(5) on statute of limitations grounds, the moving defendant must establish, prima facie, that the time in which to commence the action has expired” … . “The burden then shifts to the plaintiff to raise a question of fact as to whether the statute of limitations is tolled or is otherwise inapplicable, or whether the plaintiff actually commenced the action within the applicable limitations period”… .

Where a plaintiff relies upon the two-year discovery exception to the six-year limitations period, ” [t]he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception'” * * *  … [A]lthough “mere suspicion” will not substitute for knowledge of the fraudulent act …, a plaintiff may not ” shut his [or her] eyes to facts which call for investigation … .

Here, the gravamen of the plaintiff’s complaint is fraud in the factum, that she was induced to sign documents without being advised of their contents … . However, “[a] party who signs a document without any valid excuse for not having read it is conclusively bound’ by its terms” … . In this case, the plaintiff admitted that she neither read nor inquired about the contents of the documents upon which she relies to establish the fraud before she signed them, yet she failed to proffer any valid excuse for her failure to do so. Under these circumstances, the plaintiff is conclusively presumed to have agreed to the terms of those documents … and, accordingly, cannot establish that she lacked knowledge from which she could have discovered the alleged fraud with reasonable diligence … . Cannariato v Cannariato, 2016 NY Slip Op 00650, 2nd Dept 2-3-16

 

FRAUD (TWO STATUTES OF LIMITATIONS EXPLAINED)/FRAUD (SIGNING DOCUMENT WITHOUT READING IT)/CONTRACT LAW (SIGNING DOCUMENT WITHOUT READING CONSTITUTES AGREEMENT)/CIVIL PROCEDURE (PROOF BURDENS RE: MOTION TO DISMISS FRAUD CAUSE OF ACTION AS TIME-BARRED)/STATUTES OF LIMITATIONS (FRAUD)

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AIDING AND ABETTING FRAUD CAUSE OF ACTION AGAINST TITLE INSURANCE COMPANY PROPERLY DISMISSED, THE ALLEGATIONS WERE CONCLUSORY WITH NO SUPPORTING DETAIL.

The Second Department determined a petition to set aside a deed was properly dismissed as against the title insurance company (Fidelity). Fidelity issued a policy to the purchaser of real property which was part of an estate. The petition alleged Fidelity aided and abetted fraud, in that the sale of the insured property was done without the consent of the administrator or Surrogate’s Court. The Second Department held that, absent fraud, a third party could not sue Fidelity for negligence and the allegations of aiding and abetting fraud did not meet pleading requirements:

 

“[A] title company hired by one party is not, absent evidence of fraud, collusion, or other special circumstance, subject to suit for negligent performance by one other than the party who contracted for its services” … . Contrary to the administrator’s contention, the petition fails to state a cause of action against Fidelity to recover damages for aiding and abetting fraud … . “To plead a cause of action to recover damages for aiding and abetting fraud,” the pleading “must allege 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” … . Here, the petition consists of bare, conclusory allegations, without any supporting detail, which do not meet the specificity requirements of CPLR 3016(b) to sufficiently plead the existence of an underlying fraud, knowledge thereof on the part of Fidelity, or substantial assistance in achievement of the fraud … . Matter of Woodson (Clarke), 2016 NY Slip Op 00698, 2nd Dept 2-3-16

 

FRAUD (CONCLUSORY ALLEGATIONS OF AIDING AND ABETTING FRAUD INSUFFICIENT)/CIVIL PROCEDURE (CONCLUSORY ALLEGATIONS OF AIDING AND ABETTING FRAUD INSUFFICIENT)/REAL ESTATE (TITLE INSURANCE COMPANY HIRED BY ONE PARTY, ABSENT FRAUD, CAN NOT BE SUED FOR NEGLIGENCE BY THIRD PARTY)/TITLE INSURANCE (TITLE INSURANCE COMPANY HIRED BY ONE PARTY, ABSENT FRAUD, CAN NOT BE SUED FOR NEGLIGENCE BY THIRD PARTY)

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LIABILITY OF MEMBERS OF A LIMITED LIABILITY COMPANY, PRECLUSION OF FRAUD AND NEGLIGENT MISREPRESENTATION CAUSES ACTION WHICH DUPLICATE BREACH OF CONTRACT ALLEGATIONS, AND CRITERIA FOR A RICO MAIL FRAUD CAUSE OF ACTION DISCUSSED IN SOME DEPTH.

In an action against a limited liability company alleging breach of contract and fraudulent inducement relating to the design, construction and marketing of a condominium, the Second Department included substantial discussions of, inter alia, the liability of members of limited liability companies, including the criteria for piercing the corporate veil in this context, the preclusion of fraud and negligent misrepresentation causes of action which are duplicative of breach of contract allegations, and the criteria for a RICO mail fraud cause of action. With respect to the liability of members of limited liability companies, the court explained:

 

… [A] member of a limited liability company will not be held liable for the liabilities of the company solely by reason of being a member of the company or acting in such capacity or participating in the conduct of the business of the company (see Limited Liability Company Law § 609[a]). “[M]embers of limited liability companies, such as corporate officers, may be held personally liable if they participate in the commission of a tort in furtherance of company business” … . * * *

A member of a limited liability company “cannot be held liable for the company’s obligations by virtue of his [or her] status as a member thereof” … . “[A] party may seek to hold a member of an LLC individually liable despite this statutory proscription by application of the doctrine of piercing the corporate veil” … .

To state a cause of action under the doctrine of piercing the corporate veil, the “plaintiff must allege facts that, if proved, indicate that the shareholder exercised complete domination and control over the corporation [or LLC] and abused the privilege of doing business in the corporate [or LLC] form to perpetrate a wrong or injustice'” … “Factors to be considered in determining whether an individual has abused the privilege of doing business in the corporate or LLC form include the failure to adhere to LLC formalities, inadequate capitalization, commingling of assets, and the personal use of LLC funds” … . Board of Mgrs. of Beacon Tower Condominium v 85 Adams St., LLC, 2016 NY Slip Op 00692, 2nd Dept 2-3-16

 

CORPORATION LAW (LIABILITY OF MEMBERS OF LIMITED LIABILITY COMPANIES)/LIMITED LIABILITY COMPANIES (LIABILITY OF MEMBERS)/PIERCING THE CORPORATE VEIL (LIMITED LIABILITY COMPANIES)/CONTRACT LAW (PRECLUSION OF DUPLICATIVE FRAUD AND MISREPRESENTATION CAUSES OF ACTION)/MAIL FRAUD (RICO PLEADING REQUIREMENTS)/RICO (CIVIL, MAIL FRAUD PLEADING REQUIREMENTS)

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FRAUD CAUSES OF ACTION DID NOT MEET PLEADING REQUIREMENTS.

The Second Department determined a fraud cause of action against defendant Ballard was duplicative of contract causes of action, and another fraud cause of action against other defendants did not meet pleading requirements. The court explained the applicable law:

 

… [T]he alleged misrepresentations set forth in the causes of action alleging fraud against Ballard … are not sufficiently distinct from the claims that Ballard breached that contract so as to constitute separate causes of action … . Not only did the fraud causes of action asserted against Ballard arise out of identical circumstances as the causes of action alleging breach of contract, but they were based upon identical allegations, and did not allege that a misrepresentation resulted in any loss independent of the damages allegedly incurred for breach of contract; indeed, the damages sought were identical … . …

A cause of action to recover damages for fraud requires allegations of: (1) a false representation of fact, (2) knowledge of the falsity, (3) intent to induce reliance, (4) justifiable reliance, and (5) damages … . Moreover, pursuant to CPLR 3016(b), where a cause of action is based upon fraud or aiding and abetting fraud, the “circumstances constituting the wrong” must be “stated in detail.” Here, inasmuch as the causes of action alleging fraud against [three of the defendants] contained only bare and conclusory allegations, without any supporting detail, they failed to satisfy the requirements of CPLR 3016(b). Doukas v Ballard, 2016 NY Slip Op 00474, 2nd Dept 1-27-16

 

FRAUD (FRAUD CAUSE OF ACTION DUPLICATIVE OF CONTRACT CAUSES OF ACTION)/FRAUD (ALLEGATIONS DID NOT MEET PLEADING REQUIREMENTS)/CONTRACT LAW (FRAUD CAUSE OF ACTION DISMISSED AS DUPLICATIVE OF CONTRACT CAUSES OF ACTION)/CIVIL PROCEDURE (FRAUD ALLEGATIONS DID NOT MEET PLEADING REQUIREMENTS)

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PLAINTIFF’S INABILITY TO SHOW ACTUAL OUT-OF-POCKET LOSS REQUIRED DISMISSAL OF THE FRAUDULENT-INDUCEMENT CAUSE OF ACTION.

The First Department, over a two-justice dissent, determined the complaint alleging fraudulent inducement was properly dismissed for failure to allege out-of-pocket damages. Plaintiff was hired as an at will employee to develop a ramen cuisine for defendant restaurant chain (Chipotle). Plaintiff subsequently learned defendant had entered an agreement with another chef to develop ramen cuisine, the deal had fallen apart and would probably end in litigation. Plaintiff alleged, had he known about the undisclosed agreement with another chef he would not have entered the agreement with Chipotle. Although it was anticipated at the outset plaintiff would work for defendant for three years, and thereafter be entitled to certain specified additional compensation, plaintiff was an at will employee and had been compensated for the work he completed before he was terminated. Therefore, the First Department held, plaintiff could not demonstrate the out-of-pocket loss required for a “fraudulent inducement” cause of action:

 

The facts alleged, even when viewed in a light most favorable to plaintiff, do not give rise to a reasonable inference that he sustained calculable damages based on defendants’ actions. Plaintiff’s employment was at will, and he has no claim of reasonable reliance on representations concerning continued employment … . Any claim that he was deprived of the promised Chipotle stock cannot succeed, given that is undisputed that the express terms of the parties’ agreement required him to be an employee for three years. Nor can he seek damages based on the alleged profits that would have been realized had there been no fraud. When a claim sounds in fraud, the measure of damages is governed by the “out-of-pocket” rule, which states that the measure of damages is “indemnity for the actual pecuniary loss sustained as the direct result of the wrong” … . In other words, damages are calculated to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained in the absence of fraud … . Additionally, plaintiff’s claim that he would have received better remuneration had he partnered with a different entity is inherently speculative and would require any factfinder to engage in conjecture … . Connaughton v Chipotle Mexican Grill, Inc., 2016 NY Slip Op 00273, 1st Dept 1-19-16

 

FRAUD (OUT-OF-POCKET DAMAGES REQUIREMENT)/DAMAGES (FRAUDULENT INDUCEMENT CAUSE OF ACTION MUST BE SUPPORTED BY ALLEGATIONS OF OUT OF POCKET LOSS)/CONTRACT LAW (FRAUDUENT INDUCEMENT CAUSE OF ACTION MUST BE SUPPORTED BY ALLEGATIONS OF OUT OF POCKET LOSS)/EMPLOYMENT LAW (FRAUDULENT INDUCEMENT, AT WILL EMPLOYEE CANNOT RECOVER AS DAMAGES COMPENSATION EMPLOYEE WOULD HAVE RECEIVED IN THE FUTURE BUT FOR THE FRAUD)

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PLENARY ACTION UNDER JUDICIARY LAW 487 ALLEGING ATTORNEYS ENGAGED IN DECEITFUL AND COLLUSIVE CONDUCT DURING A PRIOR CONTRACT ACTION PROPERLY SURVIVED MOTION TO DISMISS.

The First Department determined plaintiff (Melcher) properly brought a plenary action for fraud and deceit against a law firm pursuant to Judiciary Law 487. Plaintiff alleged the attorneys engaged in deceitful and collusive conduct in a prior contract action (the Apollo action) which had been settled. Plaintiff alleged the party-defendant in the prior contract action forged an amendment to the contract and then deliberately damaged the original instrument to obfuscate the forgery. The court rejected “claim-splitting” and “collateral estoppel” arguments because the precise issues raised in the Judiciary Law 487 complaint were not addressed in the prior Apollo action:

 

… [W]e find that under the circumstances presented, it was proper for Melcher to assert a Judiciary Law § 487 claim in a separate action, rather than seeking leave to assert a claim against the attorney defendants in the Apollo action.

Judiciary Law § 487(1) provides, among other things, that an attorney who is “guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party . . . forfeits to the party injured treble damages, to be recovered in a civil action.” A plaintiff may bring an action to recover damages for attorney deceit regardless of whether the attorney’s deceit was successful … . Further, the plaintiff in a section 487 case may recover the legal expenses incurred as a proximate result of a material misrepresentation in a prior action … . Melcher v Greenberg Traurig LLP, 2016 NY Slip Op 00274, 1st Dept. 1-19-16

ATTORNEYS (PLENARY ACTION FOR DECEITFUL AND COLLUSIVE CONDUCT UNDER JUDICIARY LAW 487 PROPERLY SURVIVED MOTION TO DISMISS)/FRAUD (PLENARY ACTION AGAINST ATTORNEYS ALLEGING DECEITFUL AND COLLUSIVE CONDUCT UNDER JUDICIARY LAW 487 PROPERLY SURVIVED MOTION TO DISMISS)/JUDICIARY LAW (PLENARY ACTION AGAINST ATTORNEYS ALLEGING DECEITFUL AND COLLUSIVE CONDUCT UNDER JUDICIARY LAW 487 PROPERLY SURVIVED MOTION TO DISMISS)

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ASSIGNMENT TO PLAINTIFF OF ALL RIGHT, TITLE AND INTEREST TO $626 MILLION IN RESIDENTIAL MORTGAGE-BACKED SECURITIES DID NOT SPECIFICALLY MENTION FRAUD CLAIMS; THE RIGHT TO SUE MORGAN STANLEY FOR FRAUD, THEREFORE, WAS NOT ASSIGNED TO PLAINTIFF.

In 2006 and 2007 plaintiff FSAM bought $626 million in residential mortgage-backed securities (RMBS) from defendant Morgan Stanley. “All right, title and interest” to those securities were then assigned to plaintiff Dexia, which paid FSAM the same amount FSAM paid Morgan Stanley. The plaintiffs, FSAM and Dexia, sued Morgan Stanley, alleging Morgan Stanley knew the RMBS were of poor quality but represented they were prudent AAA-rated securities. The First Department determined the fraud claims did not transfer to Dexia because no specific mention of them was made in the assignment. The court further determined FSAM did not have standing to assert the fraud claims because Dexia paid FSAM for them and FSAM, therefore, could not establish damages:

 

The Court of Appeals recently explained that “the right to assert a fraud claim related to a contract or note does not automatically transfer with the respective contract or note” … . “Thus, where an assignment of fraud or other tort claims is intended in conjunction with the conveyance of a contract or note, there must be some language — although no specific words are required — that evinces that intent and effectuates the transfer of such rights” … . “Without a valid assignment, only the . . . assignor may rescind or sue for damages for fraud and deceit’ because the representations were made to it and it alone had the right to rely on them” … .

We find that plaintiff FSAM’s agreement to deliver “all right, title and interest” in the RMBS to the Dexia plaintiffs did not include fraud claims, since FSAM only assigned rights in the subject securities without explicitly referencing any related tort claims or the overall transaction between FSAM and defendants … .

Because FSAM received from the Dexia plaintiffs the same amount it originally paid for the securities, FSAM cannot establish damages … . Dexia SA/NV v Stanley, 2016 NY Slip Op 00122, 1st Dept 1-12-16

 

CONTRACT LAW (FRAUD CLAIMS NOT SPECIFICALLY MENTIONED IN ASSIGNMENT ARE NOT ASSIGNED)/ASSIGNMENTS (FRAUD CLAIMS NOT SPECIFICALLY MENTIONED IN ASSIGNMENT ARE NOT ASSIGNED)/FRAUD (FRAUD CLAIMS NOT SPECIFICALLY MENTIONED IN ASSIGNMENT ARE NOT ASSIGNED)

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