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Unreasonable Reliance is Fatal to a Fraud Claim

by | Insights

When a plaintiff sues for fraud, New York’s Civil Practice Law and Rules (CPLR) requires that the complaint provide sufficient facts to support the claim. CPLR § 3016(b) states that  “the circumstances constituting the wrong shall be stated in detail.” This is important because if the plaintiff fails to meet this burden, the lawsuit is subject to dismissal in the pleading stage of litigation (this is the period during which the initial paperwork is filed with the court when a case begins). Often, defendants will attempt to have the case dismissed on the grounds that the plaintiff did not provide enough information in the complaint, particularly with respect to the element of misrepresentation. Defendants will argue that the plaintiff did not set forth the required details of the misrepresentation, such as, who said what to whom and when.

However, defendants can also strike at whether the element of reliance is adequately set forth in the complaint. Fraud claims require showing that the plaintiff reasonably relied on the misrepresentation, but often the complaint fails to provide details showing that the reliance was reasonable. This provides an opportunity for a defense attorney to obtain early dismissal of the case as demonstrated in two  recent decisions achieved by this Firm during 2021 in United States Life Ins. Co., 192 A.D.3d 613 (1st Dep’t 2021) and Graphic Image, Inc. (Sup Ct. 2021).

In United States Life Ins. Co, the Appellate Division, First Department unanimously affirmed the decision of the lower court dismissing claims for fraudulent inducement, conspiracy to commit fraudulent inducement, and aiding and abetting fraudulent inducement. The plaintiff in the case had claimed that the defendant purportedly bribed a non-party witness to make false statements to help them obtain a favorable settlement and release in a prior action. The Appellate Division found “[p]laintiff’s reliance on a videotaped statement [of the non-party witness] was not reasonable as a matter of law since plaintiff was aware of the inconsistencies in the statements made in the video for months prior to entering into the settlement and failed to further investigate.” United States Life Ins. Co., 192 A.D.3d at 613. As the fraud claim failed, the conspiracy and aiding and abetting claims were also dismissed at the pleading stage.

Similarly, in Graphic Image, the court, inter alia, dismissed causes of action for fraud and constructive fraud against a former accounts-payable administrator accused of charging personal expenses on company credit cards. The plaintiff company alleged that it had relied upon the employee’s material misrepresentations regarding the company’s financial affairs, including its credit card and bank accounts. However, despite the alleged misrepresentations, the court explicitly stated that “a claim for fraud will not lie… if the misrepresentation allegedly relied upon was not a matter within the particular knowledge of the party against whom the fraud is asserted and could have been discovered by the party allegedly defrauded through the exercise of due diligence.”  Again, this Firm achieved the dismissal of the fraud claim at the pleading stage.

These successful defenses demonstrate the importance of counsel looking for opportunities to challenge  the adequacy of the plaintiff’s pleadings in fraud claims. Defense counsel should always be vigilant concerning whether a plaintiff should have known — or had the means to readily ascertain — if an alleged fraud was taking place. If a plaintiff has buried its head in the sand, its fraud claims will not lie, and counsel may be successful in procuring the dismissal of the action prior to discovery.

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