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Fraud Cause of Action Seeking Only Lost Profits as Damages Must Be Dismissed

The Third Department determined that plaintiff’s fraud cause of action could not go forward because plaintiff sought only lost profits as damages.  Also dismissed and briefly discussed were “conspiracy to commit fraud (not a valid separate cause of action),” prima facie tort and a demand for punitive damages:

Plaintiff’s cause of action alleging fraud requires “a misrepresentation or omission of a material fact known to be false and made with the intent to deceive, as well as justifiable reliance and damages” … . * * * “The true measure of damage [for fraud] is indemnity for the actual pecuniary loss sustained as the direct result of the wrong or what is known as the out-of-pocket rule” … . Damages for fraudulent acts should “compensate plaintiffs for what they lost because of the fraud, not for what they might have gained” … . As plaintiff does not dispute that it seeks only the lost profit it anticipated earning as a result of conveying the property to BLP, defendants are entitled to summary judgment dismissing the first cause of action … .

Plaintiff’s second cause of action alleging a conspiracy to commit fraud must also be dismissed because “‘a mere conspiracy to commit a [tort] is never of itself a cause of action'” … . Plaintiff’s third cause of action for prima facie tort “requires a showing of an intentional infliction of harm, without excuse or justification, by an act or series of acts that would otherwise be lawful” … . Significantly, “[s]uch acts must be motivated solely by malevolence” … . Plaintiff … makes no claim that defendants were motivated — even in part — by malevolence. As for plaintiff’s fourth cause of action for declaratory relief, it too must be dismissed as entirely unnecessary under the circumstances here … .

Nor, in light of our determination that plaintiff failed to establish its causes of action for fraud and prima facie tort, is this a case for punitive damages. There is no basis upon which to conclude that defendants’ conduct “‘evince[s] a high degree of moral turpitude and demonstrate[s] such wanton dishonesty as to imply a criminal indifference to civil obligations'” … . Route 217, LLC v Greeg, 2014 NY Slip Op 04998, 3rd Dept 7-3-14

 

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Complaint Stated Causes of Action for Breach of Contract and Fraud—Plaintiff Agreed to Forgo Compensation for Work Done for Defendant in Return for a Stake in Defendant’s Business—Defendant Terminated the Relationship Without Paying Plaintiff

The Second Department determined plaintiff had stated causes of action for breach of contract and fraud.  The complaint alleged plaintiff had agreed to forego compensation for his construction and managerial work for defendant in return for a stake in defendant’s business.  The complaint further alleged defendant, after plaintiff had done the work, terminated the relationship without paying plaintiff:

The essential elements for pleading a cause of action to recover damages for breach of contract are the existence of a contract, the plaintiff’s performance pursuant to the contract, the defendant’s breach of his or her contractual obligations, and damages resulting from the breach … . According the plaintiff the benefit of every possible favorable inference, the complaint alleged that the defendants breached the parties’ agreement and that, as a result, the plaintiff was entitled to recover its normal fees and compensation for the subject work. …

“The elements of a cause of action sounding in fraud are a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation, and damages” … . Where the gravamen of the alleged fraud does not arise from the mere failure of a promisor to perform his or her obligations under a contract, but arises from a promisor’s successful attempts to induce a promisee to enter into a contractual relationship despite the fact that the promisor harbored an undisclosed intention not to perform under the contract, a proper cause of action sounding in fraud may be stated. “[A]; false statement, promissory in nature, may be deemed the statement of a material existing fact, because it falsely represents the [declarant’s]; state of mind and the state of his [or her]; mind is a fact'” … . “There is no doubt that a misrepresented intention to perform a contract may constitute actionable fraud” … , and “a statement of present intention is deemed a statement of a material existing fact, sufficient to support a fraud action” … .

Here, viewing the complaint in the light most favorable to the plaintiff, the third cause of action alleged that the defendants made a promise to give the plaintiff an equity stake in the maple syrup venture if the plaintiff agreed to forego its normal fees and compensation for the subject work, that the defendants made that promise while harboring an undisclosed intention never to give the plaintiff such an equity stake, and that the plaintiff detrimentally relied on the defendants’ representation of intent by performing the subject work for them. These allegations were sufficient to state a cause of action sounding in fraud. Neckles Bldrs Inc v Turner, 2014 NY Slip Op 03668, 2nd Dept 5-21-14

 

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Releases Effectively Prohibiting Decedent’s Exercise of a Power of Appointment In Favor of Decedent’s Wife Were Not Procured by Constructive Fraud

The First Department reversed Surrogate’s Court and determined that releases restricting decedent’s power of appointment were not procured by constructive fraud (as a matter of law) and were enforceable.  The releases allowed decedent to exercise powers of appointment re: a trust only in favor of a descendant. Decedent’s wife was the beneficiary of a codicil, executed by the decedent after the execution of the releases, which purported to award her 25% of the trust plus the income from 75% of the trust for life. In finding the wife had not raised a question of fact about whether the releases were procured by constructive fraud, the court wrote:

The principles underlying the concept of constructive fraud are of long-standing duration:

“It may be stated as universally true that fraud vitiates all contracts, but as a general thing it is not presumed but must be proved by the party seeking to relieve himself from an obligation on that ground. Whenever, however, the relations between the contracting parties appear to be of such a character as to render it certain that they do not deal on terms of equality but that either on the one side from superior knowledge of the matter derived from a fiduciary relation, or from an overmastering influence, or on the other from weakness, dependence, or trust justifiably reposed, unfair advantage in a transaction is rendered probable, there the burden is shifted, the transaction is presumed void, and it is incumbent upon the stronger party to show affirmatively that no deception was practiced, no undue influence was used, and that all was fair, open, voluntary and well understood. This doctrine is wellsettled.” …

“To avoid a release on the ground of fraud, a party must allege every material element of that cause of action with specific and detailed evidence in the record sufficient to establish a prima facie case … . “In the absence of a fiduciary relationship between the parties to the release, the party seeking to avoid the release bears the burden of proving such fraud or other vitiating circumstances”… . Moreover, a release should “not be treated lightly” and “should never be converted into a starting point for renewed litigation” except in cases of “grave injustice” and then, only under “the traditional bases of setting aside written agreements” … . * * *

It is well established that a “party who signs a document without any valid excuse for having failed to read it is conclusively bound by its terms” … . The record is devoid of any excuse, let alone a valid excuse, for failing to read the release prior to signing it … . * * * “[T]o hold a release forever hostage to legal afterthoughts basically vitiates the nature of the release” … .

 Matter of Aoki v Aoki, 2014 NY Slip Op 03433, 1st Dept 5-13-14

 

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Allegations of a “Conspiracty to Commit Fraud” Survived a Motion for Summary Judgment/Conspiracy Allegations Must Connect Individual Defendants with an Actionable Underlying Tort

The Second Department determined Supreme Court properly refused to grant summary judgment in favor of an attorney in an action based upon serious allegations of malpractice in connection with a real estate transaction.  Amony other allegations, it was claimed that the attorney allowed an employee to pose as him and caused the plaintiffs to (unknowingly)  sign documents accepting the premises as is. In affirming Supreme Court’s finding that a question of fact had been raised about the “conspiracy to commit fraud” allegations, the Second Department explained the nature of a civil conspiracy:

“New York does not recognize civil conspiracy to commit a tort . . . as an independent cause of action” … . However, “a plaintiff may plead the existence of a conspiracy in order to connect the actions of the individual defendants with an actionable, underlying tort and establish that those actions were part of a common scheme” … . “The allegation of conspiracy carries no greater burden, but also no less, than to assert adequately common action for a common purpose by common agreement or understanding among a group, from which common responsibility derives. Therefore, under New York law, [i]n order to properly plead a cause of action to recover damages for civil conspiracy, the plaintiff must allege a cognizable tort, coupled with an agreement between the conspirators regarding the tort, and an overt action in furtherance of the agreement. A bare conclusory allegation of conspiracy is usually held insufficient”… . Blanco v Polanco, 2014 NY Slip Op 02735, 2nd Dept 4-23-14

 

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​Monetary Award to Compensate Fraud Victims Ordered by a Czech Court in a Criminal Fraud Prosecution Entitled to Enforcement in New York as a “Foreign Country Judgment”

The First Department, in a full-fledged opinion by Justice Tom, determined a judgment in a Czech criminal proceeding ordering a monetary award to compensate fraud victims was entitled to recognition in New York pursuant to CPLR 5301(b) (a matter of first impression):

CPLR 5301(b) defines a “foreign country judgment” as “any judgment of a foreign state granting or denying recovery of a sum of money, other than a judgment for taxes, a fine or other penalty, or a judgment for support in matrimonial or family matters.” The judgment sought to be enforced in this case provides restitution …, directing … the criminal defendant, to pay a specific sum as “compensation for damages to the victim” of his scheme to defraud. Clearly, the judgment is not one for taxes or support obligations; nor is it a fine. Thus, the question is whether a judgment providing compensation to a crime victim (here, a victim of criminal fraud) should be regarded as a “penalty” and denied enforcement.

Where, as here, the purpose of a monetary judgment is to compensate the victim for actual damages, it represents “reparation to one aggrieved” … . Harvardsky Prumyslovy Holding AS -V Likvidaci v Kozeny, 2014 NY Slip Op 02250, 1st Dept 4-1-14

 

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Inexperience or Lack of Sophistication Does Not Toll the Statute of Limitations Re: the Discovery of Fraud/The Test for When the Fraud Should Have Been Discovered in an Objective One

The First Department determined the action alleging the fraudulent churning of trades by an employee of Morgan Stanley was untimely.  The plaintiff argued that plaintiff’s inexperience and lack of sophistication should toll the statute of limitations re: the discovery of the fraud.  The court explained that when the fraud should have been noticed is determined by an objective test:

“The test as to when fraud should with reasonable diligence have been discovered is an objective one,” and the duty of inquiry arises “where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he [or she] has been defrauded” … . Apt v Morgan Stanley DW Inc, 2014 NY Slip Op 01541, 1st Dept 3-11-14

 

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Question of Fact Whether Deed Procured by Fraud and Whether Mortgagee Had Notice of the Potential Fraud

The Second Department determined a question of fact had been raised about whether a property transfer was procured by fraud.  If so, the deed and the related mortgage would be void with respect to the mortgagee/incumbrancer (Wells Fargo).  There was evidence the mortgagee was on notice about the possible fraud and there was evidence of fraud in the factum:

Real Property Law § 266 protects the “title of a purchaser or incumbrancer for a valuable consideration, unless it appears that he [or she] had previous notice of the fraudulent intent of his [or her] immediate grantor, or of the fraud rendering void the title of such grantor.” Thus, a mortgagee is not protected in its title if it had previous notice of potential fraud by the immediate seller, or knowledge of facts which put it on inquiry notice as to the existence of a right in potential conflict with its own … . A mortgagee has a duty to inquire when it is aware of facts that would lead a reasonable, prudent lender to inquire into the circumstances of the transaction at issue … . A mortgagee who fails to make such an inquiry is not a bona fide incumbrancer for value … . Here, Wells Fargo’s submissions contain information regarding the plaintiff’s possession of the property that put it on inquiry notice as to the plaintiff’s potential right to the property … . Thus, Wells Fargo failed to establish its prima facie entitlement to judgment as a matter of law on the issue of whether it lacked notice of a potential fraud … . Real Property Law § 266 also does not protect a bona fide incumbrancer for value where there has been fraud in the factum, as the deed is void and conveys no title … . Such a conveyance conveys nothing, and a subsequent bona fide incumbrancer for value receives nothing … . Here, Wells Fargo failed to establish its prima facie entitlement to judgment as a matter of law on the issue of whether the subject deeds are void ab initio on the ground of fraud in the factum … . Williams v Mentore, 2014 NY Slip Op 01449, 2nd Dept 3-5-14

 

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Motion to Vacate Pursuant to CPLR 5015 Should Have Been Granted On “Subject Matter Jurisdiction” and “Fraud Upon the Court” Grounds

In a full-fledged opinion by Justice Centra, the Fourth Department determined Wells Fargo had either perpetrated a fraud upon the court or failed to reveal all the facts to the court which granted a nunc pro tunc order adding a second parcel to a foreclosure action. The Fourth Department noted that Wells Fargo knew the foreclosure action did not relate to the second parcel and therefore knew the nunc pro tunc order purporting merely to correct a mistake should not have been granted:

First, we agree … that the court … should have granted the motion to vacate the nunc pro tunc order because the court … was without subject matter jurisdiction to issue the nunc pro tunc order (see CPLR 5015 [a] [4]). Wells Fargo moved for the nunc pro tunc order pursuant to CPLR 2001, which provides that a “court may permit a mistake, omission, defect or irregularity . . . to be corrected, upon such terms as may be just, or, if a substantial right of a party is not prejudiced, the mistake, omission, defect or irregularity shall be disregarded.” The court erred in granting the nunc pro tunc motion because Wells Fargo was not seeking to correct a mere ministerial or clerical mistake… . * * *

…[W]e agree … that the court … also should have granted the motion to vacate the nunc pro tunc order based on “fraud, misrepresentation, or other misconduct of an adverse party” (CPLR 5015 [a] [3]…).. In its nunc pro tunc motion, Wells Fargo asserted that the “common address” of 124-128 East Main Street contained both Parcel No. 1 and Parcel No. 2. Wells Fargo failed to advise the court …., however, that the metes and bounds descriptions of the two parcels are different. Wells Fargo does not dispute that, “when there is a discrepancy between the street address and the legal description of a piece of real property, the legal description controls” … . Wells Fargo also failed to advise the court of the second mortgage that encumbered Parcel No. 2, which, as noted earlier, was executed on the same date as the first mortgage. Further, Wells Fargo failed to advise the court that there was a two-family dwelling on Parcel No. 1 and a separate four-family dwelling on Parcel No. 2. Had Wells Fargo made the court aware of those facts, the court may have realized that there was no clerical error in omitting Parcel No. 2 from schedule A. Wells Fargo Bank NA … v Podeswik…, 81, 4th Dept 2-14-14

 

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Documentary Evidence Can Be Considered In CPLR 3211(a)(7) Motion to Dismiss/Disclaimer Not Specific Enough to Preclude Fraud Cause of Action

In a full-fledged opinion by Justice Renwick, with a concurring opinion by Justice DeGrasse, the First Department determined that arbitration could not be compelled in the absence of a specific, written agreement and a fraud cause of action against Goldman Sachs based upon the sale of mortgage-backed securities to the plaintiff hedge fund could go forward. The court concluded that documentary evidence submitted by the defendant in support of a motion to dismiss pursuant to CPLR 3211(a)(7) was properly considered by Supreme Court, and the disclaimer relied upon by the defendant was not specific enough to warrant dismissal of the fraud cause of action:

A CPLR 3211(a)(7) motion may be used by a defendant to test the facial sufficiency of a pleading in two different ways. On the one hand, the motion may be used to dispose of an action in which the plaintiff has not stated a claim cognizable at law. On the other hand, the motion may be used to dispose of an action in which the plaintiff identified a cognizable cause of action but failed to assert a material allegation necessary to support the cause of action. As to the latter, the Court of Appeals has made clear that a defendant can submit evidence in support of the motion attacking a well-pleaded cognizable claim … When documentary evidence is submitted by a defendant “the standard morphs from whether the plaintiff has stated a cause of action to whether it has one”… . * * *

The law is abundantly clear in this state that a buyer’s disclaimer of reliance cannot preclude a claim of justifiable reliance on the seller’s misrepresentations or omissions unless (1) the disclaimer is made sufficiently specific to the particular type of fact misrepresented or undisclosed; and (2) the alleged misrepresentations or omissions did not concern facts peculiarly within the seller’s knowledge … . Accordingly, only where a written contract contains a specific disclaimer of responsibility for extraneous representations, that is, a provision that the parties are not bound by or relying upon representations or omissions as to the specific matter, is a plaintiff precluded from later claiming fraud on the ground of a prior misrepresentation as to the specific matter… . Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc, 2014 NY Sliip Op 00587, 1st Dept 1-30-14

 

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“Undue Influence” and “Fraud” Criteria Explained Re: Objections to Probate of a Will

The Second Department, in affirming Surrogate’s Court’s dismissal of objections to the probate of a will, explained the criteria for a demonstration of “undue influence” and “fraud:”

“An objectant contesting the admission of a propounded instrument to probate based on the alleged exercise of undue influence must show that the influence exercised amounted to a moral coercion, which restrained independent action and destroyed free agency, or which, by importunity which could not be resisted, constrained the testator to do that which was against his free will and desire, but which he was unable to refuse or too weak to resist'” … . “An objectant seeking to establish that a will is the product of fraud has the burden of proving by clear and convincing evidence that the proponent of the will knowingly made false statements to the testator to induce him or her to make a will which disposed of property in a manner different from that in which the testator would otherwise have disposed of the property” … . The petitioners demonstrated their prima facie entitlement to judgment as a matter of law by showing, among other things, that the will had been duly executed, that the decedent possessed testamentary capacity, and that no undue influence or fraud had been exercised upon the decedent … . In opposition, the objectants failed to submit any evidence, beyond conclusory allegations and speculation, that the petitioners actually exercised undue influence over the decedent or that any fraudulent statements were made to the decedent, that the proponents of the made statements they knew to be false, or that any such statements caused the decedent to change his will… . Matter of Mele, 2014 NY Slip Op 00512, 2nd Dept 1-29-14

 

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