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Board of Managers of the Soundings Condominium V. Foerster – Two Lessons: One Legal and The Other Practical

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  • Posted on: Jun 6 2016

Damages Or Rescission . . .
It Makes A Difference.

Most people think that they are entitled only to monetary relief when they are the victim of fraud.  That, however, is not always the case.  Sometimes rescission – that is, returning to the status quo ante – is the appropriate form of relief.  Indeed, there are times when a victim of fraud would rather be in the position he/she was in before the fraud occurred.  When that happens, can the victim of fraud assert a claim for equitable rescission? In Board of Managers of The Soundings Condominium v. Foerster, Index No. 153150/14 (1st Dept. Feb. 23, 2016), the Appellate Division, First Department said yes.

Foerster arose from the purchase of a condominium.  Under the condominium’s by-laws, the sale of any unit was subject to the condominium’s right of first refusal, giving the managers the right to acquire the unit for the contract price. In the application to purchase the unit submitted by the defendant, the defendant lied about her intended use of the apartment. She told management that she intended to use the apartment for her nanny/nurse; the defendant lived in a nearby building.  In reality, she intended to use, and did use, the apartment as a day care center.

The condo managers sued the buyer, seeking both rescission and monetary damages.  The managers claimed that had they known the truth about the defendant’s intention to operate a business in the apartment, they would have rejected the defendant’s application and exercised the condo’s right of first refusal.

The defendant moved for summary judgment, contending, among other things, that the managers’ fraud claim should be dismissed because the condo did not incur any monetary damages. The trial court denied the defendant’s motion, finding, among other things, that a triable issue was raised with respect to whether the defendant made any misrepresentation that might have impacted the validity of the purchase agreement.

On appeal, the defendant again argued that the managers could not claim fraud because “an essential element [of the claim], injury, does not exist.” The First Department rejected that argument, holding that pecuniary damages are unnecessary in an action for equitable rescission:

Fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment, and “unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed” (D’Angelo v Bob Hastings Oldsmobile, Inc., 89 AD2d 785, 785 [4th Dept 1982], aff’d, 59 NY2d 773 [1983]). Even an innocent misrepresentation will support rescission (see Seneca Wire & Mfg. Co. v Leach & Co., 247 NY 1, 8 [1928]).

Foerster is important because it reminds practitioners and litigants that equitable fraud can be a powerful claim. Unlike a fraud claim for money damages, equitable fraud is unencumbered by the limitations of pleading and proving scienter (i.e., intent to deceive) and damages.  In fact, the only limitation on a claim of equitable fraud is that the remedy being sought is equitable, like rescission.

The managers in Foerster understood the power and breadth of the claim, basing their complaint on extra-contractual representations (e.g., the purchase application), rather than the contract of sale itself.  Parties to a contract can try to avoid the situation in Foerster.  For example, they can try to negotiate a limit on the scope of any fraud claim to only the representations and warranties set forth in the contract (thereby excluding extra-contractual fraud claims), and requiring the claim to be based on conduct that was knowingly and deliberately taken with the intention of harming the other party.  To be sure, there are other available options. An experienced business lawyer and litigator can help explore the options.

Choosing the Relief that Matters Most
Is the Best Course of Action

Too often litigants seek relief that is duplicative and unrelated to what they really want.  This was the case with the managers of the condominium in Foerster.  Indeed, the First Department understood this point, distilling the multiple claims alleged in the action to just one – a claim “to rescind the conveyance of a condominium apartment ….”

In addition to the rescission claim, the managers sought damages for breach of contract and fraud, as well as other declaratory and equitable relief.  Those claims, however, arose from the same facts as the equitable fraud claim.  As such, under New York law, those claims were duplicative.  Consequently, as noted by the First Department, those claims should have been dismissed:

[P]laintiff’s first cause of action for fraud is virtually identical to its fourth cause of action for rescission, and is founded upon the same facts. A tort claim based upon the same facts underlying a contract claim is properly dismissed as merely a duplication of the contract cause of action (see Richbell Info. Servs. v Jupiter Partners, 309 AD2d 288, 305 [1st Dept 2003]).  The remainder of the complaint seeks various forms of injunctive, declaratory and monetary relief that a court of equity would provide in restoring the parties to status quo ante and duplicates the claim for rescission.

The practical litigation takeaway from Foerester, therefore, is to seek the relief that a litigant really wants when asserting a claim against another. An experienced business litigator can work with a litigant to ensure that the relief sought is consistent with the litigant’s objectives.

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