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“Sophisticated and Well-Counseled Entity” Did Not Make Prima Facie Claim of Fraud; No Due Diligence Demonstrated

In reversing the motion court’s denial of defendant’s motion to dismiss plaintiff’s causes of action for fraud, the First Department, over a strong dissent, determined the complaint did not, as a matter of law, establish justifiable reliance upon alleged misrepresentation.  In essence, the First Department determined that “sophisticated and well-counseled entities,” to preserve a prima facie claim of fraud, must demonstrate due diligence in taking measures to protect against fraud:

Plaintiff alleges that it was fraudulently induced to issue a financial guaranty for a portion of an investment by defendant’s misrepresentation that a nonparty hedge fund was taking a long position in the investment when in fact, such fund was actually a short seller, which was influencing the selection of the reference portfolio it was effectively betting against. ……[P]laintiff’s amended complaint …fails to establish justifiable reliance as a matter of law. Indeed, plaintiff fails to plead that it exercised due diligence by inquiring about the nonpublic information regarding the hedge fund with which it was in contact prior to issuing the financial guaranty, or that it inserted the appropriate prophylactic provision to ensure against the possibility of misrepresentation…. ACA Fin Guar Corp v Goldman, Sachs, & Co, 2013 NY Slip Op 03429, 1st Dept, 5-14-13

 

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UCC Four-Year Statute of Limitations Applied to Breach of Warranty Cause of Action​

The Second Department affirmed Supreme Court’s determination that a guarantee which stated “if any defects in manufacturing, materials or workmanship occurred within 10 years the product would be repaired, replaced or purchase price refunded” was not a warranty which extended to future performance within the meaning of UCC 2-725[2]. The four-year UCC statute of limitations therefore applied to the warranty cause of action.  In addition, the Second Department affirmed the dismissal of the “fraudulent concealment” cause of action.  The Court’s discussion of the law concerning those two issues follows:

A cause of action alleging breach of warranty is governed by a four-year statute of limitations (see UCC 2-725[1]…). Generally, a breach of warranty action accrues “when tender of delivery is made” (UCC 2-725[2];…). As an exception to this general rule, the UCC provides that “where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance,” then “the cause of action accrues when the breach is or should have been discovered” (UCC 2-725[2];…). “A warranty of future performance is one that guarantees that the product will work for a specified period of time”… . However, “[w]arranties to repair or replace [a] product in the event that it fails to perform, without any promise of performance, do not constitute warranties of future performance” … . * * *

In pleading a cause of action to recover damages for fraud, “the circumstances constituting the wrong shall be stated in detail” (CPLR 3016[b];…) A cause of action sounding in fraud must allege that the defendant knowingly misrepresented or concealed a material fact for the purpose of inducing another party to rely upon it, and that the other party justifiably relied upon such misrepresentation or concealment to his or her own detriment…. “A cause of action to recover damages for fraudulent concealment requires, in addition to allegations of scienter, reliance, and damages, an allegation that the defendant had a duty to disclose material information and that it failed to do so”… Schwatka v Super Millwork, Inc, 2013 NY Slip Op 03470, 2nd Dept, 5-15-13

 

 

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Action for Fraud Cannot Be Based on Same Facts as Breach of Contract; Fraud Must Be Pled in Detail

After noting that a cause of action for fraud does not lie when it is based on the same allegations stated in a breach of contract cause of action, the Second Department explained the pleading requirements in a fraud action, including the need for “detail,” as follows:

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, CPLR 3016(b) requires that the circumstances underlying a cause of action based on fraud be stated “in detail” (CPLR 3016[b];…). Here, the allegations of fraud against the remaining defendants either were bare and conclusory or do not rise to the level of fraud. Consequently, the Supreme Court properly granted those branches of the separate motions of the remaining defendants which were pursuant to CPLR 3211(a)(7) to dismiss the third cause of action insofar as asserted against each of them. Genovese v State Farm Mut Auto Ins Co, 2013 NY Slip Op 03453, 2nd Dept, 5-15-13

 

 

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Criteria for Negligent Misrepresentation Action

In reversing the denial of defendant’s motion to dismiss an action for negligent misrepresentation concerning the underwriting of mortgage loans, the Fourth Department determined plaintiff had not demonstrated the requisite “privity-like” relationship:

A cause of action for negligent misrepresentation must allege “ ‘(1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information’ ”… . In this case, we agree … that plaintiffs failed to allege the requisite special relationship between it and plaintiff …to state a cause of action for negligent misrepresentation … .  Flaherty Funding Corporation … v Johnson …, CA 12-02018, 427, 4th Dept, 4-26-13

 

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Undue Influence and Constructive Fraud Causes of Action Against Attorney Should Not Have Been Dismissed

The First Department reversed Surrogate’s Court’s dismissal of undue influence and constructive fraud causes of action against an attorney who was the beneficiary of a one million dollar trust account created by the decedent.  In finding questions of fact had been raised concerning both causes of action, in part concerning whether the attorney had misrepresented his financial condition to the decedent, the First Department wrote:

Surrogate’s Court erred in dismissing the claim of undue influence as there were conflicting inferences of both undue influence and the lack thereof. For example, the evidence showed that, from September 2009 to January 2010, as decedent’s health continued to deteriorate, defendant repeatedly wrote and called decedent to request the creation of a $1 million trust account and suggested that he would suffer a financial crisis if he did not receive it, and decedent complained to plaintiff (his wife) that defendant would not stop asking him for money. … Under the circumstances presented, defendant failed to overcome the presumption of undue influence and failed to eliminate any triable issue of fact warranting dismissal of the count ….  * * *  The count of constructive fraud was also improperly dismissed. Defendant, who had a substantial net worth at the time of decedent’s death, nevertheless repeatedly represented that his savings were deteriorating and that he would suffer a financial crisis if decedent did not give him the $1 million. While decedent was aware of the salary paid to defendant over the years as counsel to decedent’s company, this alone did not amount to clear evidence to eliminate any triable issue of fact as to whether defendant had misrepresented his financial condition, and whether decedent relied upon it … .  Matter of Schneiderman, 2013 NY Slip Op 02687, 1st Dept, 4-23-13

 

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Fraud Cause of Action in Legal Malpractice Case Sufficiently Pled

In a legal malpractice action, the Second Department determined the cause of action for fraud should not have been dismissed:

…[T]he Supreme Court erred in granting that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the causes of action alleging fraud. “To properly plead a cause of action to recover damages for fraud, the plaintiff must allege that (1) the defendant made a false representation of fact, (2) the defendant had knowledge of the falsity, (3) the misrepresentation was made in order to induce the plaintiff’s reliance, (4) there was justifiable reliance on the part of the plaintiff, and (5) the plaintiff was injured by the reliance” …. Here, the complaint alleged that the defendants committed fraud by misrepresenting that they “made a motion for a default judgment” when they “never made, filed, or drafted” such a motion, that the plaintiff relied on the misrepresentation, and that the defendants billed the plaintiff for drafting the motion. Those allegations were sufficient to state a cause of action to recover damages for fraud …. Vermont Mut Ins Co v McCabe & Mack, LLP, 2013 NY Slip Op 02392, 2012-00566, Index No 4510/10, 2nd Dept, 4-10-13

 

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Usual Criteria for Piercing the Corporate Veil Applied in Fraudulent Conveyance Action

The First Department determined the “pierce the corporate veil” causes of action should be dismissed, applying the usual “pierce the corporate veil” criteria in a “fraudulent conveyance” case:

“In order for a plaintiff to state a viable claim against a shareholder of a corporation in his or her individual capacity for actions purportedly taken on behalf of the corporation, plaintiff must allege facts that, if proved, indicate that the shareholder exercised complete domination and control over the corporation and abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice” … . “Factors to be considered in determining whether the owner has abused the privilege of doing business in the corporate form include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use … . In opposition to the [defendants’] motion for summary judgment, plaintiff failed to proffer any evidence of the above factors. Contrary to plaintiff’s claim, the factors mentioned [above] remain relevant even in a fraudulent conveyance case … .  D’Mel & Associates v Athco, Inc, et al, 9713, 602486/09, 1st Dept 4-4-13

 

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Whether a Confidential Relationship Existed With Decedent Is a Question of Fact for the Jury; Application of Dead Man’s Statute Explained

In reversing the Surrogate’s Court verdict, the Third Department, in a decision by Justice Spain, determined that the existence of a confidential relationship with the decedent is a question of fact for the jury (Surrogate’s Court determined the existence of the relationship as a matter of law).  In addition, because the matter is to be retried, the Third Department included a useful discussion of how the Dead Man’s Statute (CPLR 4519) should be applied:

Under  the  doctrine of “‘constructive fraud,'” where  a  confidential relationship exists between  two parties to a transaction “‘such that they were dealing on unequal terms due to one party’s weakness, dependence or trust  justifiably reposed  upon  the  other  and  unfair advantage  is rendered  probable,'” the  burden  of proof  with  respect to allegations of undue influence will be shifted to the stronger party to show, by clear and convincing evidence, that no undue influence was used … In determining whether a confidential  relationship  exists,  “the  existence  of  a  family relationship does  not, per se, create a presumption  of undue influence; there must be evidence of other facts or circumstances showing  inequality  or  controlling influence” … ..The  existence of such a relationship will ordinarily be  a question of fact … . *  *  *

The [Dead Man’s] statute precludes an interested party from being “examined as a witness in his [or her] own behalf or interest . . . concerning a personal transaction or communication between the witness and  the deceased person” (CPLR 4519 …). Given that the “purpose of the rule is ‘to protect the estate of the deceased from claims of the living who, through their own perjury, could make factual assertions which the decedent could not refute in court’…, it   will not preclude any testimony elicited by the representative of the estate, nor does it preclude testimony of transactions between decedent and a non-interested third party …. Further, the statute’s protections with regard to a particular transaction may be waived where the representative “testifies in his [or her] own behalf concerning a personal transaction of his adversary with the deceased” or when he or she “elicits testimony from an interested party on the personal transaction in issue” …  .  Matter of Nealon, 513733, 3rd Dept 3-28-13

 

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No Proof Misrepresentation Caused Decedent to Disinherit Daughter

In reversing a jury verdict finding that a will had been procured by fraud, i.e., a misrepresentation made to the decedent by one daughter, Zucker, against the other daughter, Ranaldo, resulting in the disinheritance of Ranaldo, the Second Department wrote:

…[T]here was no evidence presented at trial to demonstrate that Zucker conveyed the alleged misrepresentation to the decedent with the intention of inducing the decedent to alter her estate plan …, or that the alleged misrepresentation in fact induced the decedent to change her testamentary plan. There was no evidence presented to show that the decedent considered or discussed disinheriting Ranaldo when she met with her attorney two weeks after the alleged misrepresentation. The decedent’s attorney, who drafted the will, testified that the first time the decedent mentioned disinheriting Ranaldo was at a subsequent meeting, approximately eight months after the alleged misrepresentation. In the absence of any evidence to establish that Zucker conveyed the alleged misrepresentation to the decedent with the intention of inducing the decedent to alter her estate plan, and that the alleged misrepresentation in fact induced the decedent to change her testamentary plan, no valid line of reasoning and permissible inferences could lead a rational person to the conclusion reached by the jury that the will and the first amendment to the Trust were the product of fraud … . Accordingly, the jury’s verdict was not supported by legally sufficient evidence … .  Matter of Ranaldo, 2013 NY Slip Op 01834, 2011-03624, 2011-03625, 2nd Dept. 3-20-13

 

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Flaws in Fraud and Negligent Misrepresentation Allegations in Complaint Explained

The First Department, in affirming the dismissal of fraud and negligent misrepresentation claims in a contract action, described the flaws in the complaint as follows:

The court properly dismissed the fraud claim for failure to plead fraud with the particularity required by CPLR 3016(b) and for failure to plead loss causation … .

The court properly dismissed the negligent misrepresentation claim for failure to plead a special relationship. An arm’s length business relationship, as existed here, is not generally considered to be the sort of confidential or fiduciary relationship that would support a cause of action for negligent misrepresentation … . Nor did [defendants] “possess unique or specialized expertise” … .  Greentech Reasearch LLC v Wissman, 2013 NY Slip Op 01787, 9561, 602477/09, 1st Dept. 3-19-13

 

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