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Attorney General’s Civil Suit Against Former Officers of AIG Survived Summary Judgment

In a full-fledged opinion by Judge Smith, the Court of Appeals determined the Attorney General’s civil suit, seeking equitable relief (based upon allegations of fraud) against two former officers of AIG, survived summary judgment.  The Court explained the nature of the suit as follows:

The Attorney General began this civil suit against AIG, Maurice Greenberg and Howard Smith in 2005. Until shortly before the suit was brought, Greenberg was the Chief Executive Officer, and Smith the Chief Financial Officer, of AIG. AIG has settled the case; Greenberg and Smith remain as defendants.

The Attorney General alleges that Greenberg and Smith violated section 63(12) of the Executive Law and Article 23-A of the General Business Law (the Martin Act), and committed common law fraud. The statutes on which the Attorney General relies are broadly worded anti-fraud provisions, prohibiting among other things “repeated fraudulent or illegal acts” (Executive Law § 63[12]), “persistent fraud or illegality” (id.), and “fraud, deception, concealment, suppression [or] false pretense” (General Business Law § 352-c [1] [a]). It is not disputed that the Attorney General is empowered to sue for violation of these statutes.

The gist of the Attorney General’s claim, to the extent that it is now before us, is that Greenberg and Smith participated in causing AIG to enter into a sham transaction with General Reinsurance Corporation (GenRe) in which AIG purported to reinsure GenRe on certain insurance contracts. The Attorney General asserts that the transaction transferred no real risk from GenRe to AIG, and therefore should not have been treated as an insurance transaction on AIG’s books; and that the transaction’s sole purpose was to increase the insurance reserves shown on AIG’s financial statements, thereby creating the impression of a healthy insurance business and bolstering AIG’s stock price.  People v Greenberg, et al, No 63, CtApp, 6-25-13

 

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Cause of Action for Fraud Based Upon Alleged Misrepresentation of Insurance Coverage Not Stated

The First Department determined plaintiff had not stated a cause of action for fraud.  The fraud cause of action was based upon defendant’s alleged misrepresentation that it had procured insurance to protect plaintiff against default by the largest subcontractor on the construction project.  It was not disputed that no such insurance was procured:

…[P]laintiff’s fraud claim fails, because “merely alleging that the breach of a contract duty arose from a lack of due care will not transform a simple breach of contract into a tort”…. Plaintiff’s “subjective claims of reliance on defendants’ expertise” do not give rise to a “confidential relationship” whose “requisite high degree of dominance and reliance” existed prior to the alleged fraud…. Defendants had no advisory capacity as to plaintiff, and a special relationship of trust and confidence does not arise merely from an arm’s-length business transaction…. In any event, to maintain a claim for fraud, plaintiff must show that its reliance on an alleged misrepresentation was justifiable or reasonable…. Here, plaintiff neither inquired of the subcontractor nor of the subguard provider if the subcontractor was covered… .Moreover, “[a]n actionable fraud claim requires proof that defendant made a misrepresentation of fact which was false and known to be false”…. A defendant’s knowledge of an allegedly false representation ….must be established…, and plaintiff’s affidavit stating that “it is inconceivable that [defendants] were unaware …was insufficient to establish scienter in this case. Waterscape Resort LLC v McGovern, 2013 NY Slip Op 04709, 1st Dept, 6-20-13

 

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Allegation Release Procured by Fraud Precluded Dismissal of Complaint

In reversing Supreme Court’s dismissal of a slip and fall complaint which was founded on plaintiff’s signing a release, the First Department determined plaintiff had sufficiently alleged the release was procured by fraud:

Under the particular facts of this case, dismissal of the causes of action against the owners at the pleading stage was premature because plaintiff has alleged facts showing that her release may have been fraudulently obtained. To make out the basic elements of a fraudulent inducement claim, a plaintiff must establish that the reliance on the false representation was justified…. Whether the plaintiff could justifiably rely on the false representation is an issue of fact…. “The question of what constitutes reasonable reliance is always nettlesome because it is so fact-intensive”…. Moreover, “[w]here fraud . . . in the procurement of a release is alleged, a motion to dismiss should be denied”….  A plaintiff’s reliance on a misrepresentation may be justified even if the plaintiff is represented by counsel … .  Gonzalez v 40 W Burnside Ave, LLC, 2013 NY Slip Op 04685, 1st Dept, 6-20-13

 

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Criteria for Fraudulent Inducement and Attachment

In a full-fledged opinion by Justice Feinman, the First Department outlined the criteria for fraudulent inducement where the parties are “sophisticated entities,” as well as the strict criteria for attachment:

The elements of fraud are a misrepresentation or a material omission of fact which was known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or omission, and injury …. In this case, the buyers have not sufficiently alleged justifiable reliance. “[R]eliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud”…. What constitutes reasonable reliance is “always nettlesome” because it is so fact-intensive…. Sophisticated investors must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time … . * * *

We conclude that, on the extant record which consists of competing affidavits, the grant of an attachment and its confirmation was an abuse of discretion. “[T]he mere fact that defendant is a non-domiciliary residing without the State of New York is not sufficient ground for granting an attachment”…. The sellers have shown no evidence that the buyers lack sufficient assets, or that they will choose to hide or otherwise dispose of their assets. We note that no hearing was held at which the credibility of the buyers’ averments regarding their financial status and resources could be evaluated. At most, the sellers’ affidavits establish that there is potentially a significant amount of bureaucracy involved in obtaining the assets as converted funds. This is not, in itself, sufficient to order an attachment. The orders of the motion court granting and confirming the orders of attachment, and granting discovery to aid in attachment, as well as the order that the buyers transfer assets into New York State, should therefore be reversed.  VisionChina Media Inc v Shareholder Representative Servs, LLC, 2013 NY Slip Op 04298, 1st Dept, 6-11-13

 

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“Crime-Fraud” Exception to Attorney-Client Privilege Re: Studies Funded by Defendant Casting Doubt on Relationship Between Asbestos and Cancer

In a full-fledged opinion by Justice Andrias, the First Department determined plaintiffs, as part of discovery in this asbestos litigation, were entitled to an in camera review of defendant’s internal communications and to the data underlying published research studies funded by the defendant. The studies purported to cast doubt on whether chrysotile asbestos caused cancer.  In the course of the opinion, the First Department explained the “crime-fraud” exception to the attorney-client privilege (the basis of the request for in camera review of defendant’s internal communications):

The motion court providently exercised its broad discretion …when it  …granted in camera review of the documents to determine whether the crime-fraud exception to the attorney-client privilege applied … .

The crime-fraud exception encompasses ” a fraudulent scheme, an alleged breach of fiduciary duty or an accusation of some other wrongful conduct'”…. “[A]dvice in furtherance of a fraudulent or unlawful goal cannot be considered sound.’ Rather advice in furtherance of such goals is socially perverse, and the client’s communications seeking such advice are not worthy of protection”….

A party seeking “to invoke the crime-fraud exception must demonstrate that there is a factual basis for a showing of probable cause to believe that a fraud or crime has been committed and that the communications in question were in furtherance of the fraud or crime” … .However, “[a] lesser evidentiary showing is needed to trigger in camera review than is required ultimately to overcome the privilege”… .

To permit in camera review of the documents to analyze whether the communications were used in furtherance of such wrongful activity, there need only be “a showing of a factual basis adequate to support a good faith belief by a reasonable person that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies” …. “Once that showing is made, the decision whether to engage in in camera review of the evidence rests in the sound discretion of the [] court” …. Matter of New York City Asbestos Litig, 2013 NY Slip Op 04127, 1st Dept, 6-6-13

 

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Statute of Limitations for Fraud Applies to Forgery​

The Second Department noted that the statute of limitations provisions for fraud are applied to forgery:

Contrary to the plaintiff’s contention, the statute of limitations for a fraud cause of action applies to a cause of action alleging forgery … .The statute of limitations for a fraud-based cause of action requires that the action be commenced within six years after the allegedly fraudulent act or within two years after discovery, whichever is later….   Faison v Lewis, 2013 NY Slip OP 03813, 2nd Dept, 5-29-13

 

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Negligence and Fraudulent Misrepresentation Causes of Action Can Not Be Based on Allegations of Breach of Contract 

In determining Supreme Court should have dismissed the negligence and fraudulent misrepresentations cause of action in a complaint based upon breach of contract, the Third Department wrote:

“[A] simple breach of contract claim is not to be considered a tort unless a legal duty independent of the contract itself has been violated . . .[, which] legal duty must spring from circumstances extraneous to, and not constituting elements of, the contract” ….  Plaintiffs have not demonstrated any special relationship or legal duty aside from the contractual relationship….   The  negligence and  fraudulent misrepresentation claims are based upon  the same  alleged wrongful conduct as the breach of contract claim, rendering them duplicative … . Rorok v Moore’s Flatwork…, 515459, 3rd Dept, 5-30-13

 

 

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Question of Fact About Whether Release Procured by Fraud or Duress

In upholding the denial of defendant’s (Countrywide’s) motion for summary judgment based upon the execution of a release, the Second Department determined that the allegations of fraud and duress in procurement of the release raised a question of fact:

 The Countrywide defendants’ motion was properly denied. Although the plaintiff’s execution of the release in favor of the defendants was “a jural act of high significance” …, “a motion to dismiss should be denied where fraud or duress in the procurement of the release is alleged”… . Here, the plaintiff sufficiently alleged that the Countrywide defendants procured the release by means of fraud or duress, so as to warrant denial of their motion.   Warmhold v Zagarino, 2013 NY Slip Op 03668, 2nd Dept, 5-22-13

 

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Action for Fraud Can Not Be Based Upon Same Allegations as Action for Breach of Contract​

The Second Department explained that an action for fraud can not be based on breach of contract allegations:

“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” …. However, “a cause of action premised upon fraud cannot lie where it is based on the same allegations as the breach of contract claim” …. Where a claim to recover damages for fraud is premised upon an alleged breach of contractual duties, and the allegations with respect to the purported fraud do not concern representations which are collateral or extraneous to the terms of the parties’ agreement, a cause of action sounding in fraud does not lie …. Further, “[g]eneral allegations that defendant entered into a contract while lacking the intent to perform it are insufficient to support [a] claim” of fraudulent inducement… .  Fromowitz v W Park Assoc, Inc, 2013 NY Slip Op 03633, 5-22-13

 

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Failure to Demonstrate When Plaintiff Should Have First Become Aware of Fraudulent Conveyance Precluded Dismissal on Statute of Limitations Grounds​

The Second Department determined that causes of action alleging fraudulent conveyances pursuant to Debtor & Creditor Law 276 should not have been dismissed on statute of limitations grounds because the defendants failed to establish when plaintiff should have first become aware of the alleged fraud:

“A cause of action based upon actual fraud under Debtor and Creditor Law § 276 must be brought within six years of the date that the fraud or conveyance occurs, or within two years of the date the fraud should have been discovered, whichever is longer” …. Here, it is undisputed that the verified complaint did not allege the occurrence of any fraudulent conveyances within six years prior to the commencement of the action. However, since it is unclear when the plaintiff should have first been aware of the alleged fraud, the defendants failed to establish that the causes of action alleging actual fraud under Debtor and Creditor Law § 276 should be dismissed as time-barred ….  Felshman v Yamali, 2013 NY Slip Op 03632, 2nd Dept, 5-22-13

 

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