Fraud – Page 9 – New York Appellate Digest

THE COMPLAINT STATED A CAUSE OF ACTION FOR FRAUD BASED UPON DEFENDANTS’ ALLEGED INFLATION OF THE VALUE OF THE BUSINESS PURCHASED BY PLAINTIFF; AND THE COMPLAINT STATED A CAUSE OF ACTION FOR BREACH OF CONTRACTUAL WARRANTIES WHICH DID NOT DUPLICATE THE FRAUD CAUSE OF ACTION (FIRST DEPT).

The First Department, reversing Supreme Court, determined the complaint adequately alleged fraud (inflating the value of defendants’ business which was purchased by plaintiff) and breach of contract:

… [T]he key … element of a claim for fraudulent concealment — duty to disclose — is met here, given the hidden nature of the fraud, which turned on falsified records and bribed auditors, and the practical impossibility of discovering the fraud through ordinary diligence … .

Defendants’ alleged deception also breached numerous warranties set forth in the governing stock purchase agreement, including that … financial statements were materially complete and correct, that its [earning] projections were reasonable and made in good faith, that it had no material undisclosed liabilities, and that it conducted its business in compliance with applicable law. Nevertheless, “[a] warranty is not a promise of performance, but a statement of present fact. Accordingly, a fraud claim can be based on a breach of contractual warranties notwithstanding the existence of a breach of contract claim” … . Thus, the fraud claim does not duplicate the contract claim … . VXI Lux Holdco, S.A.R.L. v SIC Holdings, LLC, 2021 NY Slip Op 03294, First Dept 5-25-21

May 25, 2021

Election Law, Fraud

THE DESIGNATING PETITION WAS PERMEATED BY FRAUD AND SHOULD HAVE BEEN INVALIDATED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined the designating petition was permeated by fraud and should have been invalidated:

… [P]etitioner submitted clear and convincing evidence demonstrating that several subscribing witnesses attested to many signatures on the designating petition that they had not actually witnessed, and thus we agree with petitioner that the candidate’s designating petition is permeated with fraud. The parties correctly agree that the candidate was required to obtain signatures from 600 voters registered in the Democratic Party … . Numerous subscribing witnesses, acting on the candidate’s behalf, gathered 1,657 signatures, approximately 700 of which the Board invalidated. Petitioner challenged the signatures collected by five subscribing witnesses, who collected the overwhelming majority of the signatures on the designating petition; indeed, only slightly less than 200 valid signatures were collected by all of the other people who circulated petitions for the candidate. Supreme Court concluded that numerous signatures collected by those five subscribing witnesses were fraudulently procured for various reasons, including that there was no such voter, the voter had died, the voter had signed the designating petition more than once, or the voter was not the person who signed the designating petition. …

It is well settled that, “where the court finds misrepresentations in numerous instances, as it finds here, and nothing is [established] in rebuttal, it may well indulge in the presumption that there were many other misrepresentations and irregularities which time did not permit to be uncovered … . ” Matter of Saunders v Mansouri, 2021 NY Slip Op 03157, Fourth Dept 5-18-21

May 18, 2021

Contract Law, Fraud, Negligence

PLAINTIFF RAISED GROUNDS TO INVALIDATE A RELEASE IN THIS TRAFFIC ACCIDENT CASE BASED ON FRAUD (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined plaintiff in this traffic accident case raised grounds to invalidate a release plaintiff had signed based upon fraud:

Defendants met their initial burden of establishing that they were released from any claims by submitting the release executed by plaintiff … . The burden thus shifted to plaintiff to show that the release was voidable based on fraud … . Plaintiff submitted an affidavit in which she averred that, in the midst of negotiating a settlement of her personal injury claim for pain and suffering, a representative of Morgan’s insurer told her that, “under New York Law, [plaintiff] would not be able to sue . . . because [she] did not have any major surgeries or life-threatening injuries.” Plaintiff further averred that, based on those representations, she agreed to sign the release in exchange for $1,500. Accepting plaintiff’s allegations as true … , we conclude that plaintiff sufficiently alleged grounds on which to invalidate the release … . Cain-Henry v Shot, 2021 NY Slip Op 02961, Fourth Dept 5-7-21

May 7, 2021

Attorneys, Fraud

ALTHOUGH THE COMPLAINT STATED CAUSES OF ACTION FOR NEGLIGENT MISREPRESENTATION AND FRAUD, THE JUDICIARY LAW 487 CAUSE OF ACTION SHOULD HAVE BEEN DISMISSED BECAUSE IT WAS NOT ALLEGED THE DECEIT OCCURRED DURING A JUDICIAL PROCEEDING (SECOND DEPT).

The Second Department, reversing Supreme Court, determined defendant-attorney’s motion to dismiss the Judiciary Law 487 cause of action should have been granted because the deceit or fraud was not alleged to have occurred during a judicial proceeding. Plaintiff alleged the misrepresentation concerned a guaranty for payment on a note related to the sale of plaintiff’s business:

Supreme Court should have granted that branch of the defendant’s motion which was to dismiss the fourth cause of action. “[A] Judiciary Law § 487 cause of action requires that the alleged deceit occurred during a judicial proceeding in which the plaintiff was a party” … . Here, the complaint failed to allege that the deceit occurred during a judicial proceeding or before any court … . Pszeniczny v Horn, 2021 NY Slip Op 02553, Second Dept 4-28-21

April 28, 2021

Contract Law, Fiduciary Duty, Fraud, Negligence, Securities, Trusts and Estates

IT IS NOT CLEAR FROM THE CONTRACT WHETHER DEFENDANT TRUSTEE WAS TO PERFORM A MERELY MINISTERIAL FUNCTION OR A GATEWAY FUNCTION IN ACCEPTING ASSETS FOR THE TRUST FROM A NONPARTY WHICH WAS ACTING FRAUDULENTLY; THERE ARE QUESTIONS OF FACT ABOUT WHETHER THE DAMAGES ASSOCIATED WITH ACCEPTING NON-NEGOTIABLE ASSETS WERE DIRECT OR INDIRECT AND WHETHER A FIDUCIARY DUTY WAS BREACHED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Mazzarelli, reversing Supreme Court, determined the breach of contract, breach of fiduciary duty action against defendant trustee, Wilmington, should not have been dismissed. Wilmington acted as a trustee for assets transferred to the trust by a nonparty. The contract stated Wilmington would be responsible only for its own negligence but also stated no non-negotiable assets were to be placed into the trust. The nonparty which transferred assets to the trust acted fraudulently and made risky investments rendering the trust assets out-of-compliance with state law. Plaintiff sued Wilmington for breach of contract and breach of fiduciary duty. Wilmington argued that any damages suffered by plaintiff from the assets transferred by the nonparty were indirect, not direct, and therefore barred by the trust agreements:

… [I]t can be argued that, in light of Wilmington’s promise not to accept nonnegotiable assets into the trusts, and to be responsible for its own negligence, maintaining the value of the assets in the trusts was inherent in the service Wilmington agreed to provide. Thus, there is merit to plaintiffs’ argument that when the assets proved not to be negotiable, they lost the benefit of their bargain and were entitled to recover as direct damages the diminution in value, and the concomitant costs of restoring the assets to negotiable status, such as professional fees. * * *

… [A]t this stage of the litigation, it is difficult to discern whether the parties contemplated that Wilmington would have to pay the damages sought by plaintiffs if it failed to perform under the trust agreements. Again, the agreements provided that Wilmington would be liable for “its own negligence,” which a reasonable factfinder could consider as recognition that Wilmington, if it did not perform its duties in accordance with a minimum level of care, would need to pay more than the nominal damages represented by its fee. * * *

Even though the breach of contract and breach of fiduciary duty claims involved the same conduct, the fiduciary duty claim alleges a breach of a noncontractual duty relating to the trustee’s independent duty to perform nondiscretionary ministerial duties with respect to the negotiability of assets. Thus, the fact that Wilmington’s failure to prevent nonnegotiable assets from entering the trusts breached both fiduciary and contractual duties does not bar plaintiffs from seeking damages related to the former … . Bankers Conseco Life Ins. Co. v Wilmington Trust, N.A., 2021 NY Slip Op 02355, First Dept 4-20-21

April 20, 2021

Civil Procedure, Evidence, Fraud

ALTHOUGH THE COMPLAINT WAS DEFECTIVE, AFFIDAVITS AND OTHER EVIDENCE DEMONSTRATE A POTENTIALLY MERITORIOUS CLAIM; THE COMPLAINT SHOULD NOT HAVE BEEN DISMISSED (FIRST DEPT).

The First Department, reversing Supreme Court, noted that a defective complaint will survive a motion to dismiss if affidavits or other evidence demonstrate a potentially meritorious claim:

The amended complaint is defective because it merely alleges that the Bluestone defendants participated in fraudulent transfers, without alleging that they were a transferee of the assets or benefited in any way from the transfers … . However, a defective complaint will not be dismissed where affidavits and other evidence amplify inartfully pleaded but potentially meritorious claims … . Plaintiffs rely on evidence submitted by the Goldman defendants in opposition to the Bluestone defendants’ motion to dismiss which suggests that the Bluestone defendants may have participated in and benefitted from the alleged fraudulent transfers. This evidence indicates that plaintiffs have potentially meritorious fraudulent conveyance claims against the Bluestone defendants. Ninth Space LLC v Goldman, 2021 NY Slip Op 01853, First Dept 3-25-21

March 25, 2021

Civil Procedure, Fiduciary Duty, Fraud

WHERE FRAUD IS THE BASIS OF A CLAIM FOR BREACH OF FIDUCIARY DUTY, THE STATUTE OF LIMITATIONS IS SIX YEARS (FIRST DEPT).

The First Department determined that where the basis of a claim for aiding and abetting breach of fiduciary duty is fraud, the statute of limitations is six years:

[Defendant] Katten contends that even if the claim for aiding and abetting breach of fiduciary duty is taken at face value, the statute of limitations is three years because plaintiff seeks damages, not equitable relief … . However, “a cause of action for breach of fiduciary duty based on allegations of actual fraud is subject to a six-year limitations period” … . Plaintiff’s claim against defendant Albert Hallac for breach of fiduciary duty is based on allegations of actual fraud; hence, the statute of limitations for the claim against Katten for aiding and abetting Hallac’s breach of fiduciary duty is six years. Wimbledon Fin. Master Fund, Ltd. v Hallac, 2021 NY Slip Op 01881, First Dept 3-25-21

March 25, 2021

Attorneys, Civil Procedure, Fraud

FRAUD WAS NOT ADEQUATELY PLED, THE SIX-YEAR STATUTE OF LIMITATIONS DID NOT APPLY TO THE FRAUD ALLEGATIONS, THE JUDICIARY LAW 487 CAUSE OF ACTION WAS NOT ADEQUATELY PLED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined the fraud and Judiciary Law 487 causes of action should have been dismissed. All of the elements of fraud were not pled with particularity, the six-year statute of limitations did not apply because the fraud allegations were identical to the injurious falsehood and tortious interference claims, and the Judiciary Law 487 causes of actions did not relate to any proceedings before the court:

Although fraud claims are generally governed by a six-year statute of limitations (see CPLR 213 [8]), “courts will not apply the fraud [s]tatute of [l]imitations if the fraud allegation is only incidental to the claim asserted; otherwise, fraud would be used as a means to litigate stale claims” … . “In classifying a cause of action for statute of limitations purposes, the controlling consideration is not the form in which the cause of action is stated, but its substance” … . Inasmuch as the gravamen of plaintiffs’ fraud claim is that plaintiffs suffered reputational damages and a loss of goodwill as a result of defendants’ conduct and that [plaintiff] lost its contract … as a result of defendants’ fraudulent scheme, we conclude that the fraud allegation is incidental to the injurious falsehood and tortious interference claims, which were dismissed by the court as time-barred.

… [T]he court erred in denying that part of the motion seeking to dismiss the ninth cause of action, for violations of Judiciary Law § 487 … .Under section 487 (1), an attorney who “[i]s guilty of any deceit or collusion . . . with intent to deceive the court or any party,” is guilty of a misdemeanor and is potentially liable for treble damages to be recovered in a civil action. A violation of the statute may be established by evidence of the defendant’s alleged deceit … but “alleged deceit that is not directed at a court must occur in the course of ‘a pending judicial proceeding’ ” … .

… The complaint failed to allege, however, that [defendant law firm] engaged in egregious misconduct or made a material false statement in the course of a judicial proceeding. The allegedly deceitful memorandum was not directed at the court, and the complaint failed to allege that it was promulgated during a pending judicial proceeding … . Dreamco Dev. Corp. v Empire State Dev. Corp., 2021 NY Slip Op 00952, Fourth Dept 2-11-21

February 11, 2021

Consumer Law, Contract Law, Fraud

PETITIONERS WERE ENTITLED TO SUMMARY DETERMINATION IN THIS EXECUTIVE LAW 63 SPECIAL PROCEEDING SOUNDING IN FRAUD STEMMING FROM UNCONSCIONABLE EQUIPMENT FINANCE LEASES AND OPPRESSIVE DEBT COLLECTION PRACTICES; RESPONDENTS’ REQUEST FOR FURTHER DISCOVERY, WHICH IS DISFAVORED IN SPECIAL PROCEEDINGS, WAS PROPERLY DENIED (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Webber, determined the respondents in this Executive Law 63 special proceeding were not entitled to additional discovery, including depositions, and petitioners were entitled to summary determination in this fraud and deceptive business practices action. The petition, brought by the NYS Attorney General, alleged respondents engaged in fraud and deception in having small businesses sign unconscionable equipment finance leases (EFLs) for credit card processing equipment leading to oppressive debt collection practices. The court noted that discovery in a special proceeding is disfavored and is permitted only on leave of court upon a showing of “ample need:”

Supreme Court correctly found that petitioners demonstrated respondents’ liability under Executive Law § 63(12). Under Executive Law § 63(12), “the test for fraud is whether the targeted act has the capacity or tendency to deceive or creates [*5]an atmosphere conducive to fraud” … . “Executive Law § 63(12) was meant to protect not only the average consumer, but also the ignorant, the unthinking, and the credulous” … . “[P]ublic reports and lawsuits of alleged fraud are sufficient to put a plaintiff on inquiry notice of fraud” … . * * *

We held in our prior decision that allegations that the [respondents] created legal obligations through misrepresentations and fraud and then attempted to enforce those obligations through abusive pre-litigation and litigation practices sufficiently demonstrated that the [respondents’] debt collection activities and procuring of default judgments were “objectively baseless” … . Matter of People of the State of New York v Northern Leasing Sys., Inc., 2021 NY Slip Op 00914, First Dept 2-11-21

February 11, 2021

Fraud, Landlord-Tenant, Municipal Law

THE FOUR-YEAR LOOKBACK CAN BE APPLIED TO DETERMINE WHETHER DEFENDANT ENGAGED IN A FRAUDULENT SCHEME TO DEREGULATE NYC APARTMENTS RECEIVING J-51 TAX BENEFITS (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Singh, over an extensive dissenting opinion, determined the four-year lookback period can be applied to determine whether there was a fraudulent scheme to deregulate apartments which, under Roberts (12 NY3d 270 [2009]) should not have been deregulated because the landlord was receiving “J-51” tax benefits. Defendant’s motion for summary judgment was properly denied and plaintiff’s motion to certify a class was properly granted:

… [I]n pre-Roberts cases where landlords relied on DHCR [NYC Division of Housing & Community Renewal] guidance there could be no fraudulent scheme to deregulate. * * *

[W]e have not extended this rule to cases decided after Roberts … . To the contrary, our jurisprudence holds that an owner may not flout the teachings of Roberts. * * *

The hallmarks of a fraudulent scheme to deregulate are present here. … Defendant deregulated the apartment after Roberts was decided and did not re-register with DHCR, despite receiving J-51 tax benefits … . During the four-year period preceding commencement of the lawsuit, plaintiff was still not given a rent-stabilized lease. … Defendant’s actions cannot be deemed to be prompt compliance. Rather, at this stage, plaintiff has sufficiently alleged a six-year scheme to illegally deregulate 27 units or approximately 32% of the building. Montera v KMR Amsterdam LLC, 2021 NY Slip Op 00805, First Dept 2-9-21

February 9, 2021