Claim for Conspiracy to Commit Fraud Allowed as Claim for Liability for Fraud on Part of Conspirators

On September 23, 2014, Justice Schmidt of the Kings County Commercial Division issued a decision in Nadelson v. Zakharchenko, 2014 NY Slip Op. 32552(U), declining to dismiss a claim for conspiracy to commit fraud.

In Nadelson, the plaintiffs sued the defendants over an investment in a restaurant. In denying the defendants’ motion to dismiss, the court explained its decision not to dismiss a claim for conspiracy to commit fraud:

The third cause of action for conspiracy to commit fraud is an ancillary claim to plaintiffs’ first and second causes of action. Essentially the claim is pled as a failsafe to ensure that both defendants’ are accountable to plaintiffs for the torts alleged in the first two causes of action, either as the primary tortfeasor or as a conspirator to the underlying tort. Although an independent cause of action for civil conspiracy is not recognized in this State, 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, in 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.

Here, plaintiffs’ complaint adequately alleges a cause of action sounding in conspiracy to commit fraud. First, as discussed above, plaintiffs’ second cause of action alleges a cognizable tort. Second, plaintiffs allege that the defendants acted in concert to sabotage the business with the intention of disregarding their contractual obligations so they could ultimately abscond with plaintiffs’ investment. Finally, plaintiffs (within their second cause of action) specify the alleged actions undertaken by defendants in furtherance of defendants’ intention not to perform.

(Internal quotations and citations omitted) (emphasis added).

Fraud Claim Reinstated When Inaction Based on Fraudulent Statements Could be Presumed

On October 2, 2014, the First Department issued a decision in Fidelity National Title Insurance Co. v. NY Land Title Agency LLC, 2014 NY Slip Op. 06649, reinstating a fraud claim that the trial court had dismissed.

In Fidelity National Title Insurance, the First Department reinstated a plaintiff’s fraud cause of action. In that claim, the “plaintiff title insurer . . . alleged fraud based on defendants’ failure to report a mortgage . . . in the certificate of title or title policy, and their misrepresentation that the insured mortgage would be a first position lien encumbering the property.” The First Department held, with respect to detrimental reliance, that the plaintiff’s inaction was sufficient basis for a fraud claim, explaining:

To show reliance, [the plaintiff] must demonstrate that it was induced to act or to refrain from acting to its detriment by virtue of the alleged misrepresentation or omission. At this stage, [the plaintiff] has sufficiently alleged that it was induced to refrain from taking steps to protect its interests, to its detriment, as a direct result of defendants’ failures to provide the certificate of title and disclose the Arbor mortgage prior to issuing the policy. The complaint alleges that in response to defendants’ belated request for authorization, Fidelity expressly raised the issue of the defendants’ omission of the Arbor mortgage on the certificate of title. This suggests that defendants’ earlier omissions and failures to disclose the Arbor mortgage did in fact induce [the plaintiff] to refrain from taking steps to protect its interests. Indeed, the motion court itself recognized that the failure to transmit the certificate of title to [the plaintiff] until after the policy had been improperly issued, proximately caused [the plaintiff’s] losses and denied [the plaintiff] the opportunity to cure the title problems or change the terms of the policy before it was issued.

[The plaintiff] relied upon defendant NY Land Title, its policy-issuing agent, and Land Title Associates, which ordered or obtained the title search, to determine whether there were any other pre-existing encumbrances on the property so as to assist it in determining whether, and under what conditions, to issue a title policy. Indeed, we have found, under similar circumstances, that the element of reliance should be presumed.

(Internal quotations and citations omitted) (emphasis added).

This decision touches on the difficulty of pleading reliance when the reliance causes the plaintiff to refrain from acting.

No Claim for Fraudulent Concealment Where no Duty to Disclose

On September 23, 2014, the First Department issued a decision in SSA Holdings LLC v. Kaplan, 2014 NY Slip Op. 06257, affirming the dismissal of a claim for fraudulent concealment.

In SSA Holdings, the First Department held that the plaintiff failed to state a claim against the defendants for fraudulent concealment because:

[The] defendants had no duty to disclose the alleged material information. Defendants — nonmanaging minority members of plaintiff, a Delaware limited liability company — owed no fiduciary duties to plaintiff or its manager, Stanley S. Arkin, a nonparty to this action. Nor did the duty to disclose arise under the special facts doctrine, as the complaint does not allege that defendants had superior knowledge of essential facts. Indeed, defendants allegedly failed to disclose that they considered themselves to have stopped practicing law with Mr. Arkin on a full-time basis as his partners as of January 6, 2012. While there may have been concealment of opinions, there was no concealment of the facts upon which those opinions were based and defendants were not bound to volunteer their opinions. Moreover, there was no allegation of superior knowledge, as defendants’ belief that AKR had been dissolved as of January 6, 2012 was based on Mr. Arkin’s own email of that date.

(Internal quotations and citations omitted) (emphasis added).

Fraud Claim Dismissed As Duplicative of Breach of Contract Claim

On September 4, 2014, the First Department issued a decision in Beta Holdings, Inc. v. Goldsmith, 2014 NY Slip Op. 06035, dismissing a fraud counterclaim as duplicative of the counterclaim-plaintiffs’ breach of contract claim.

In Beta Holdings, the plaintiffs, entities associated with a private equity fund, filed suit against the principals of a company the fund acquired, asserting claims for fraud and breach of contract arising from alleged misrepresentations regarding the financial condition of the company.  The defendants filed counterclaims, including a claim for fraud, arising from the plaintiffs’ failure to pay amounts due on a note that was issue in connection with the transaction.  New York Commercial Division Justice Jeffrey K. Oing denied the plaintiffs’ motion to dismiss the fraud counterclaim, and the First Department reversed, holding that the fraud claim was duplicative of the breach contract claim because the defendants did not “allege a duty separate from the terms of the agreement that was breached”:

The fraud counterclaims, insofar as based on the alleged misrepresentations by counterclaim defendants that they would honor the terms of the promissory notes, are duplicative of the breach of contract counterclaims; the allegations are essentially that they did not intend to honor the terms of the notes at the time they executed them. The allegations are insufficient to satisfactorily plead that counterclaim defendants, at the time the agreement was entered into, never intended to carry out the terms of the agreement. Neither do they allege a duty separate from the terms of the agreement that was breached by counterclaim defendants so as to support a claim of fraud, or that the damages sought to be recovered are based on lost opportunities arising from counterclaim plaintiffs having been induced to sell their company. Here, plaintiffs claim that counterclaim defendants orally promised to “grow the company” using methods such as geographic expansion, acquisition opportunities and better marketing, and that these promises are specific and not subject to the agreement’s merger provision. However, this overlooks the September 8, 2008 letter of intent, which includes a promise that the buyers “want to continue to grow the Company,” and briefly summaries how this would be done. The terms of the letter of intent are subject to the merger provision. In any event, the alleged promises are of a general nature and insufficiently specific to establish fraudulent inducement, even were they not barred by the agreement’s merger provision.

(Citations omitted.)  This decision illustrates that, under New York law, a claim arising from a failure to perform under an agreement usually sounds in contract not in tort, and the mere allegation that a party “never intended to perform” under the contract is not sufficient to transform a breach a contract claim into a fraud claim.


On August 6, 2014, Justice Sherwood of the New York County Commercial Division issued a decision in Remediation Capital Funding LLC v. Noto, 2014 NY Slip Op. 32157(U), dismissing a fraud claim for failure to show due diligence.

In Remediation Capital Funding , the plaintiffs asserted claims of fraud and fraudulent conveyance in connection with a failed real estate transaction. One of the defendants moved to dismiss. The court granted the motion, holding, among other things, that the plaintiff had failed to show that its reliance on the misrepresentations it alleged was justifiable because it failed to exercise due diligence, explaining:

To make a prima facie claim of fraud, the complaint must allege misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury. Reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud.

The essence of the fraud claim is based on the assertion that defendants misrepresented the value of the Properties upon which [the plaintiff] had made the Loan. [The plaintiff] emphasizes that it did not perform any due diligence of its own in assessing the Properties’ value, because [the plaintiff] lacked sufficient time to obtain its own appraisal. This assertion is unavailing as a basis for a finding of justifiable reliance for a sophisticated party . . . .

[The plaintiff] does not dispute the assertion that it had the means to discover the actual value of the Properties by conducling its own appraisal. That it chose not to so because it wanted to participate in a rushed transaction indicates that it willingly assumed the business risk that the facts may not be as represented. [The plaintiff] has not shown, or even alleged, that it was unable to obtain its own appraisal of the value of the Property so as to adhere to its strategy of maintaining a 50% loan-to-value to ensure an equity cushion that would protect it from market downturns. As stated by the Court of Appeals:

If the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing by the exercise of ordinary intelligence the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.

On the face of the complaint [the plaintiff’s] reliance on the alleged misrepresentations by [the moving defendant] was unreasonable as a matter of law. As such, [the plaintiff] has failed to establish reasonable reliance.

. . . Here, . . . the valuation of the Property was not something that was within the particular knowledge of Noto and the other defendants. Nevertheless, [the plaintiff] chose to rely on defendant’s rendition of the value of the Property.

(Internal quotations and citations omitted) (emphasis added).

Defendant Can Be Held Liable Statements in Preliminary Offering Materials it Later Disclaimed

On August 5, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in NRAM PLC v. Societe Generale Corp., 2014 NY Slip Op. 32155(U), holding that the plaintiff had stated a claim for fraud based on statements the defendant later had disclaimed. 

In NRAM PLC, the plaintiff brought “causes of action for fraud, breach of contract, and unjust enrichment in relation to a collateralized debt obligation” against several defendants. One defendant–Societe Generale Corporate and Investment Banking (SGCIB)–moved to dismiss. Among the issues the court addressed in denying SGCIB’s motion were its arguments that it was not liable for the misrepresentations alleged in the Complaint. The court rejected those arguments, explaining:

SGCIB contends that Northern Rock is pointing to alleged misrepresentations in the Pitchbook, and that both the Pitchbook and OC say the offering is being made only through the OC, and that material not contained in the OC may not be relied upon. It is certainly the case in complex financings that there are frequently preliminary and final offering documents that contain such language of limitation. Customarily, large portions of the preliminary document are not excised from the final. Fine tuning and completion is the purpose of the exercise. Not so here, where significant portions of the Pitchbook do not appear in the OC. Much of this material is said to contain misrepresentations made as part of a fraudulent marketing scheme.

The court knows of no precedent for allowing an offerer of securities to use such a mechanic to amble away from liability for key misrepresentations used to induce investors to urchase securities. Disclaimers are recognized in New York in limited situations, if specifically tailored to alert investors to known risks. Abandonment in plain view of essential pieces of a fraudulent marketing plan is a different animal. If tolerated, malefactors would rush to own one. Markets would be negatively impacted, and the cost of capital inefficiently increased. SGCIB’s position is unavailing.

SGCIB contends that the language of the OC shields it from liability because the OC attributes its contents to the Co-Issuers, legal entities just formed to hold the collateral and issue the Notes. Liability for misrepresentations is said to be quarantined to these corporate entities.
Regarding a similar provision, the court in Allstate Ins. Co. v Morgan Stanley & Co., 2013 NY Slip Op 31130(0), said that defendants may be liable for drafting and distributing statements they knew to be false, regardless of who they credit as the source of the information.

The group pleading doctrine supports Northern Rock’s position of SGCIB’s liability. The doctrine allows plaintiffs to rely on a presumption that statements in prospectuses, registration statements or other group-published information are the collective work of those individuals with direct involvement in the everyday business of the company. Under the doctrine, defendants are responsible for the documents they prepare and distribute because no specific connection between fraudulent representations in an offering memorandum and particular defendants is necessary where defendants are insiders or affiliates participating in the offer of the securities in question.

(Internal quotations and citations omitted) (emphasis added).

Lack of Due Diligence no Bar to Fraud Claim When no Amount of Diligence Would have Uncovered Fraud

On August 4, 2014, Justice Schweitzer of the New York County Commercial Division issued a decision in Higher Education Management Group, Inc. v. Aspen University Inc., 2014 NY Slip Op. 32106(U), declining to dismiss a fraud claim for lack of due diligence when no amount of diligence would have uncovered the fraud.

Counterclaim defendants contend that counterclaim plaintiffs are precluded from showing justifiable reliance because they were either aware of the allegedly false and undisclosed information, or such information was readily available to them. The law in New York is clear that if knowledge of the facts underlying the allegation of fraud are in the sole possession of counterclaim defendants, and due diligence would not have uncovered them, a counterclaim defendant cannot assert counterclaim plaintiffs’ lack of due diligence to defeat reliance. Here, it is alleged that Mr. Spada secretly pledged his stock to Aspen. No amount of due diligence is likely to have discovered this element of the alleged fraud. The court is satisfied that Aspen would not have been able to discover the alleged fraud at the time of the Merger. Aspen has plead the element of reasonable reliance with particularity, as the facts relating to the fraud were in the sole possession of Mr. Spada, and not discoverable through any investigation by Aspen.

(Internal quotations and citations omitted) (emphasis added).

Fraud Claim Dismissed for Failure to Exercise Due Diligence

On July 25, 2014, Justice Scarpulla of the New York County Commercial Division issued a decision in Northern Group Inc. v. Merrill, Pierce, Fenner & Smith, 2014 NY Slip Op. 31986(U), dismissing a fraud claim because of, among other reasons, the plaintiff’s failure to exercise due diligence.

In Northern Group, the defendant moved for summary judgment on the plaintiff’s fraud claim relating to the sale of commercial mortgage-backed securities. The court granted the motion for several reasons, including the plaintiff’s failure to exercise due diligence, explaining:

Plaintiffs’ assertion that Boris’ knowledge was inadequate, and the attempt to portray [the plaintiff] as victimizing a naive elderly woman and her son, are unavailing. The record establishes that the corporate shareholders and officers were sophisticated real estate operators who controlled properties worth hundreds of millions of dollars. That being the case, they were not entitled to blindly accept [the defendant’s]generalities about CMBS safety. A sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it. New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations by investigating the details of the transactions. If plaintiffs’ understanding of commercial mortgage securitization was imperfect, they could have retained qualified financial experts to evaluate their anticipated investments.

(Internal quotations and citations omitted) (emphasis added).

Court Examines Scope of Claim for Fraudulent Conveyance

On July 7, 2014, Justice Ramos of the New York County Commercial Division issued a decision in 135 E. 57th St., LLC v. 57th St. Day Spa, LLC, 2014 NY Slip Op. 31802(U), examining multiple alleged fraudulent conveyances.

In 135 E. 57th St., LLC, the plaintiff building owner and landlord brought an action to collect a judgment “for rent” obtained “against its former tenant, defendant 57th Street Day Spa, LLC (the Tenant),” “from the owners of the Tenant on theories of piercing the corporate veil, successor liability, civil conspiracy, and pursuant to Debtor and Creditor Law (DCL) § 270, et seq.” In deciding a motion for summary judgment brought by several defendants, the court analyzed the plaintiff’s fraudulent conveyance claims as follows:

Constructive fraud occurs when a conveyance is made without fair consideration by one who: 1) is insolvent or who is rendered insolvent by the conveyance; 2) is engaged or is about to engage in a business or transaction for which the property remaining after the conveyance is unreasonably small; or 3) intends or believes that it will incur debts beyond its ability to pay as they mature.

A creditor attempting to set aside a fraudulent conveyance is limited to setting aside the conveyance of the property which would have been available to satisfy the debt had there been no conveyance. The creditor can recover from the party who made the transfer or the party who received the transfer. A claim of fraudulent conveyance cannot be sustained against a nontransferee on the ground that it assisted in the transfer.

(Internal quotations and citations omitted) (emphasis added). The court went on to examine the five fraudulent conveyances alleged by the plaintiff.

The first conveyance failed to support a claim because the transfer was not made by its debtor.

The court denied summary judgment with respect to second and fourth conveyances, which involved payments that were due to the debtor being made to one of the defendants instead. Because “the monies belonged to and should have been paid to the Tenant, if the Tenant was bypassed and the monies paid directly to transferees, the transferees could have received a fraudulent conveyance.” Looking at the standard for whether a conveyance is fraudulent, the court explained:

In order for a conveyance not to be fraudulent, good faith is required of both the transferor and the transferee. A transfer without good faith is deemed to lack fair consideration. Transfers to controlling shareholders, officers, or directors of an insolvent corporation are deemed to be lacking in good faith and are presumptively fraudulent. Insolvency is presumed if fair consideration is lacking.

(Internal quotations and citations omitted) (emphasis added). The court found that there were questions of fact regarding whether the alleged transfer left the debtor insolvent.

The third conveyance failed to support a claim because the plaintiff failed to present evidence showing that the defendant did not receive fair consideration when it sold its 49% ownership interest in the Tenant.

The fifth conveyance

consists of the Tenant’s failure to insist on payment of the rent starting in January 2009, thereby benefitting the Lather companies and leaving the Tenant without any money. The Tenant did not demand the rent or sue the Lather entities, according to plaintiff. A waiver or release of an obligation can be a conveyance under DCL.

(Internal quotations and citations omitted) (emphasis added).

This decision illustrates several of the many applications of a claim of fraudulent conveyance, along with some of the limitations of such a claim.

Insurer Could Not Use Tort Theory to Transfer Back to Insured Risks the Insurer Had Assumed

On July 3, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in Assured Guaranty Municipal Corp. v. DLJ Mortgage Capital, Inc., 2014 NY Slip Op. 51044(U), dismissing fraud claims that sought to hold an insured liable, on a tort theory, for risks the insurer had assumed.

In Assured Guaranty, the plaintiff monoline insurer sued various defendants in connection with RMBS transactions. The court granted defendant Credit Suisse’s motion to dismiss the plaintiff’s fraud claims, explaining:

[The plaintiff] alleges it was fraudulently induced to issue the subject financial guarantee policies based on Credit Suisse’s countless misrepresentations about the loans in the transaction. Some of the alleged malfeasance expressly falls under the ambit of the PSA’s representations and warranties, such as lies about borrowers’ income. Other malfeasance, such as wholesale abandonment of underwriting standards, does not.

As discussed in DBSP, before a monoline agrees to guarantee revenue to RMBS investors, the monoline and the bank negotiate their risk of loss. Monolines take no risk on non-conforming loans and expressly negotiate the universe of loan defects that constitute non-conformance, negotiations which result in the representations and warranties. Banks want to limit their exposure by negotiating for as narrow a universe of representations as possible (even if banks can put-back non-conforming loans to originators under MLPAs, because originators pose more counterparty credit risk than global banks). The universe of representations ultimately agreed-to is the only universe of non-conformance coverage that monolines are entitled to. The monoline’s risk is every possible problem with the loans not covered by the representations and warranties. So, for instance, when [the plaintiff] does not negotiate for the inclusion of a “no fraud rep” (or any other representation not included in the PSA), perhaps, thereby, charging a higher premium, it makes a conscious decision to take the risk that if such non-included representations cause losses resulting in claims payments, [the plaintiff] will not be reimbursed by Credit Suisse via a put-back. Continue reading