Absence of the “Who”, “What”, “When” and “How” of An Alleged Fraud Warrants Dismissal of the Claim

• Posted on: Nov 22 2021

By: Jeffrey M. Haber

In past articles, we have discussed the necessity of pleading the “who”, “what”, “when” and “how” of an alleged fraud. See, e.g., here. In many respects, the requirement to plead the “who”, “what”, “where”, and “how” of an alleged fraud, primarily relates to the first element of the claim – falsity.¹ In this regard, a plaintiff alleging fraud must allege the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. The failure to do so will result in dismissal of the claim, as in Inner Harbor Phase I, L.P. v. COR Inner Harbor Co., LLC, 2021 N.Y. Slip Op. 51083(U) (Sup. Ct., Onondaga County (Oct. 1, 2021) (here), the case that we examine today.

Inner Harbor involved the failure to make payments under a note issued in connection with an investment made under the EB-5 Immigrant Investor Program, which was created by Congress to encourage job creation and capital investment by foreign investors. Pursuant to the EB-5 Program, foreign investors can invest in qualified projects in the United States and thereby become eligible to obtain a Green Card. 

Various limited partners of Inner Harbor invested $4,000,000 in Inner Harbor for construction and development of the Hotel in accordance with the EB-5 Program. Inner Harbor used those funds to make loans to Defendant COR Inner Harbor Company LLC to finance the Hotel. COR was formed to carry out the Hotel Project and to own the Hotel after its development and construction. 

Between July 2014 and August 2014, plaintiff advanced $4,000,000 to Mannion & Copani to be held in escrow pursuant to a written Escrow Agreement. Under the terms of the Escrow Agreement, the proceeds were to be released to COR upon execution and delivery of, among other things, a Promissory Note and Executed Addendum evidencing the Loan. Plaintiff is the holder of four Promissory Notes and five Executed Addenda, each evidencing loans made by it to COR for the Hotel. Between September 2014 and February 2015, contemporaneously with delivery of each Executed Addendum, Mannion & Copani released the stated amount from the proceeds it held in escrow. Some of the escrowed funds were released to COR and some of the escrowed funds were released to COR West Kirkpatrick Street Company LLC (“COR Kirkpatrick”). The Hotel was completed and opened for business in or about July 2016. 

The Note and First Addendum became due and owing to plaintiff in September 2019. COR advised Inner Harbor that it did not have the ability to repay plaintiff the amount then due and sought an extension of the various loan maturity dates. To evaluate COR’s request, Inner Harbor sought information concerning COR’s financial condition. The information provided by COR demonstrated that COR transferred the proceeds of the loan to COR Kirkpatrick without consideration or obligation to repay. It also demonstrated that COR neither owned the Hotel nor held any interest in the Hotel. 

By summons and complaint, plaintiff asserted the following: (1) first cause of action against COR, breach of contract for failure to pay any portion of the principal amounts owed in accordance with the Promissory Notes; (2) second cause of action against all defendants, fraud regarding COR’s interest in the Hotel; (3) third cause of action against Mannion & Copani, for disbursement of funds contrary to the escrow agreement; (4) fourth cause of action against all defendants, fraudulent conveyance; and (5) fifth cause of action against all defendants, fraudulent conveyance.

Defendants moved to dismiss plaintiff’s second, third, fourth and fifth causes of action pursuant to CPLR § 3211(a)(1)(5) and (7). We examine the motion with regard to the second cause of action for fraud.

The Court dismissed the cause of action.

As noted, to state a fraud claim, a plaintiff must allege a misrepresentation of a material fact, scienter, justifiable reliance and damages.² Each element must be pleaded with specificity under CPLR § 3016(b).

The Court held that plaintiff failed to satisfy the pleading requirement as to the first element of the claim – falsity. The Court noted that “the entirety of plaintiff’s [falsity] allegation” was found in only one paragraph of the complaint.³ And, in that paragraph, plaintiff merely alleged: “[d]efendants made representations to [p]laintiff regarding [COR’s] interest in the Hotel Project and the Hotel and the distribution of Proceeds.”⁴

The Court explained that the allegation failed to include the “who”, “what”, “where” and “how of the alleged misrepresentation: “Wholly absent are any facts sufficiently specific as to the substance of any misrepresentation allegedly made, i.e., the words used, when any misrepresentation was allegedly made or the identity of the person who allegedly made the misrepresentation.”⁵ “Under these circumstances,” concluded the Court, the fraud cause of action had to be dismissed.⁶

It is worth noting that since plaintiff did not satisfy the first element of the claim, the Court declined to address the remaining elements of the cause of action: “Devoid of essential facts concerning the alleged misrepresentation(s), this Court cannot begin to address the sufficiency with which plaintiff pled the additional elements of fraud, i.e., scienter, justifiable reliance or injury.”⁷

Takeaway

When fraud is alleged, the plaintiff must plead the claim with particularity. Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.”⁸ To satisfy the particularity requirement, the plaintiff must allege such facts as the time, place, and content of the defendant’s false representations, as well as the details of the defendant’s fraudulent acts, including when the acts occurred, who engaged in them, and what was obtained as a result. In other words, the complaint must identify the “who, what, where, when and how” of the alleged fraud.

The Court of Appeals has explained, however, that CPLR § 3016(b) “should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.”⁹ Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.”¹⁰ Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct.¹¹

The cases show (including those that we have examined in this Blog (e.g., here, here, and here)), plaintiffs often have their fraud claim dismissed because they failed to plead sufficient facts to permit a “reasonable inference” that the fraud took place. As today’s discussion shows, factual allegations devoid of specificity will not suffice to satisfy CPLR § 3016(b).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

Footnotes

1. In addition to falsity, the plaintiff must allege “knowledge of [the representation’s] falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009)
2. See n.1, supra.
3. Slip Op. at *5.
4. Id.
5. Id.
6. Id. (citations omitted).
7. Id. 
8. Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008) (citation omitted).
9. Id. (internal quotation marks and citation omitted).
10. Id. at 492.
11.  Id.