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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.

 

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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.

 

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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.​

 

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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.

 

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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.

 

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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).

 

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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.

 

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THE TURNOVER PETITION SEEKING REAL PROPERTY AND FUNDS TRANSFERRED TO DEFRAUD JUDGMENT CREDITORS SHOULD HAVE BEEN GRANTED (SECOND DEPT).

The Second Department, reversing Supreme Court, determined the turnover petition seeking real property and funds transferred by judgment debtors to defraud judgment creditors should have been granted:

CPLR 5225(b) “‘provides for an expedited special proceeding by a judgment creditor to recover money or other personal property belonging to a judgment debtor against a person in possession or custody of money or other personal property in which the judgment debtor has an interest in order to satisfy a judgment'” … . A proceeding pursuant to CPLR 5225(b) “may also be maintained ‘against a person who is a transferee of money or other personal property from the judgment debtor'” …

Pursuant to CPLR 5227, “a special proceeding may be commenced by a judgment creditor ‘against any person who it is shown is or will become indebted to the judgment debtor'” … . In a proceeding pursuant to CPLR 5227, the “judgment creditor stands in the judgment debtor’s shoes, and may enforce the obligations owed to the judgment debtor by the indemnifying party” … .

… [T]he judgment creditors offered sufficient evidence to establish that [respondent] Nancy Barrick transferred the Barrick estate to the Barrick Trust with actual intent to hinder, delay, and defraud present or future creditors pursuant to Debtor and Creditor Law former § 276 … …. Nancy Barrick transferred title to the Barrick estate without adequate consideration to a trust for which she and her brother served as the trustees while retaining control over and possession of the property.

… [T]he judgment creditors also offered sufficient evidence to establish that the conveyances from the RMP judgment debtors to the RMP transferees were made with actual intent to defraud present and future creditors pursuant to Debtor and Creditor Law former § 276. … [T]he transfers were made without adequate consideration and evinced a distinct course of conduct after incurring large debts to the judgment creditors to render the RMP judgment debtors insolvent … . Matter of Argyle Funds SPC, Inc. v Barrick, 2024 NY Slip Op 01806, Second Dept 4-3-24

Practice Point: The CPLR provides a mechanism called a turnover petition which allows a judgment creditor to obtain property fraudulently transferred by the judgment debtor.

 

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DENYING A MOTION TO DISMISS ON FORUM NON CONVENIENS GROUNDS WAS NOT AN ABUSE OF DISCRETION DESPITE THE PRIOR GRANTING OF AN IDENTICAL MOTION BY ANOTHER DEFENDANT; HOWEVER PLAINTIFF BANK DID NOT DEMONSTRATE NEW YORK’S PERSONAL JURISDICTION OVER SEVERAL DEFENDANTS IN THIS INTERNATIONAL BANK-FRAUD AND MONEY-LAUNDERING CASE (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Pitt-Burke, determined the denial of a defendant’s motion to dismiss on forum-non-conveniens grounds was a proper exercise of discretion, despite the fact that the identical motion by another defendant had already been granted. The case stems from an elaborate international fraud and money-laundering scheme which allegedly resulted in the theft by hackers of $81 million from plaintiff bank. The opinion addresses forum non conveniens, long-arm “conspiracy” jurisdiction and conversion but is too complex and detailed to fairly summarize here. With respect to forum non conveniens, the court wrote:

Forum non conveniens is a common-law doctrine that presumes jurisdiction … . … [T]the initial question before this Court is whether Supreme Court had the discretion to deny the … defendants’ motion to dismiss the complaint on forum non conveniens grounds when it had already granted another defendant’s motion to dismiss under the same doctrine. We answer this question in the affirmative and find that the … defendants have not demonstrated that Supreme Court’s denial was an improvident use of discretion. * * *

… [W]e find Supreme Court’s determination to deny each defendant’s motion to dismiss on forum non conveniens grounds was not an abuse of discretion. However, this determination only represents half of our inquiry, as a finding that it was proper for Supreme Court to deny defendants’ motions to dismiss on forum non conveniens grounds does not equate to a finding that Supreme Court had personal jurisdiction over all … defendants. Indeed … , plaintiff has failed to establish personal jurisdiction over Reyes, Pineda, Capina, and Agarrado. Bangladesh Bank v Rizal Commercial Banking Corp. 2024 NY Slip Op 01112, 2-29-24

Practice Point: Whether to grant a motion to dismiss on forum non conveniens grounds is discretionary. Here the denial of the motion was not an abuse of discretion despite the prior granting of an identical motion brought by another defendant.

 

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PURSUANT TO THE BUSINESS JUDGMENT RULE, INDIVIDUAL CONDOMINIUM BOARD MEMBERS MAY BE LIABLE FOR UNEQUAL TREATMENT OF SHAREHOLDERS IN THE ASSESSMENT OF COMMON CHARGES (SECOND DEPT). ​

The Second Department, reversing (modifying) Supreme Court, determined individual condominium board members could be liable under the business judgment rule for unequal treatment of shareholders with respect to the assessment of common charges:

“The business judgment rule is applicable to the board of directors of cooperative and condominium corporations” … . The rule provides that “a court should defer to a [condominium] board’s determination ‘[s]o long as the board acts for the purposes of the [condominium], within the scope of its authority and in good faith'” … . Unequal treatment of shareholders is sufficient to overcome the directors’ insulation from liability under the business judgment rule … , and a director who participates in the commission of a tort committed by the board may be held individually liable … .

Here, the complaint sufficiently alleged a cause of action sounding in breach of fiduciary duty against the individual defendants. The complaint also sufficiently alleged a cause of action sounding in fraud against the individual defendants to the extent that the plaintiff seeks damages for the overassessment of common charges … . 72 Poplar Townhouse, LLC v Board of Mgrs. of the 72 Poplar St. Condominium, 2024 NY Slip Op 00606, Second Dept 2-7-24

Practice Point: Here the complaint stated causes of action for breach of fiduciary duty and fraud against individual condominium board members for unequal treatment of shareholders in the assessment of common charges.

 

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