Common Law Business Fraud in New York

Being that New York City has been the center of business and commerce for the country for well over a century, it is only logical that the state has a long history of case law regarding business torts. Among the most common of these torts is fraud. Over the course of business, fraud may come about through the following means:

1. Contract disputes,
2. The purchase and sale of goods, and
3. Securities transactions.[1]

Claims of fraud may take several forms but, in this article, we will only discuss common law fraud – meaning the body of law that has been developed in New York through cases and their precedents. In order to prove common law business fraud in New York, the following elements must be met:

1. A material misrepresentation of fact;
2. Knowledge of its falsity;
3. An intent to induce reliance;
4. Justifiable reliance by the plaintiff; and
5. Damages.[2]

Material Misrepresentation of Fact

The first element of fraud that must be proven is that there was a material misrepresentation of fact. What is a material misrepresentation of fact? A material misrepresentation of fact means that there was a representation made in a contract, or a statement regarding the quality or quantity of a certain product being sold, or an inaccurate statement regarding the offending parties' financial situation. A material misrepresentation of fact should be so egregious and deceitful as to meet the court’s standards. In a recent Third Department case, the Court found that a defendant who had claimed that his business had the potential to make $450,000 was not deemed to be a material misrepresentation of fact but merely “puffery” used in a negotiation or pitch.[3] Puffery, under New York law, is not a misrepresentation of fact, or else almost all negotiations could be deemed fraudulent. Plaintiffs should be careful when bringing forwards claims of fraud for simple exaggerations over the course of business.

Knowledge of Falsity and Intent (Scienter)

Knowledge and intent by the defendant in New York is a relatively low bar because, generally speaking, it is impossible to definitively know what is going on in someone’s head and, as a result, the courts have found that providing a rational basis for a defendant’s knowledge of the falsity of their statements or representations is enough to satisfy the two elements, when combined known as “scienter”.[4] Circumstantial evidence in certain cases is enough to satisfy the knowledge element at both trial and summary judgment. A chain of events or facts which can logically lead to a conclusion that there was in fact knowledge of a defendant’s falsity and the defendant intended to act upon it is enough to satisfy the element of scienter.[5] A defendant who at the eleventh hour try to sneak a provision into a Contract without explanation or reason can be found, via a reasonable inference, to be attempting to defraud the plaintiff.[6]

In addition to circumstantial evidence of knowledge, found recklessness or gross negligence can be used to infer scienter by the defendant and satisfy that element. The Court of Appeals has held that “heedlessness and reckless disregard of consequence may take the place of deliberate intention.”[7]

Justifiable Reliance

As the element suggests, not only must a plaintiff have relied on the misrepresentation, but it must also be found that a reasonable person in the same position would also rely on the misrepresentation.[8] One such example would be the financial statements of a defendant company looking to be sold, which had been altered or edited to induce reliance by the plaintiff looking to buy said company. Such statements are not made available to the plaintiff or public, and the plaintiff has no other means in which to access such statements.

In order to prevail on this claim, however, it is advised that the plaintiff had done their due diligence when doing business with the defendant. The Third Department had recently found that “prior to purchasing the assets, [the plaintiff] did not perform any due diligence,” in appraising the defendant’s assets which were to be sold to them.[9] This helped to persuade the court that the plaintiff could not have reasonably relied on this misrepresentation of fact.[10] When bringing claims against a defendant for business fraud, it is important for any plaintiff that they had done their due diligence, and that the misrepresentation of fact could have been reasonably relied on.

Damages

As with most civil suits, damages must be shown to prove common law fraud. In these cases, a concrete pecuniary loss resulting from the deception must be shown for a plaintiff to recover against the defendant. This is generally measured via the difference in values of what he was promised to what he actually received.[11] New York may also allow for punitive damages, or damages to punish the defendant, in cases where it can be found that the defendant acted with extreme malice or had a high degree of moral culpability.[12]

For more information on the law governing business fraud in New York, or for help with your particular commercial litigation matter, contact KI Legal’s knowledgeable litigation attorneys by calling (212) 404-8644 or emailing info@kilegal.com. We are here to help protect your business and interests.

This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team.

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