Court Upholds Fraudulent Inducement Claim on Particularity Grounds

• Posted on: Mar 27 2019

In McKissack Group, Inc. v. MacFarland, 2019 N.Y. Slip Op. 30694(U) (Sup. Ct. N.Y. County Mar. 18, 2019) (here), Justice Kathryn E. Freed of the Supreme Court, New York County, recently upheld a challenge to a claim for fraudulent inducement, finding that the plaintiff satisfied the elements of the claim and did so with the particularity required under CPLR § 3016(b).

A Quick Primer on Pleading A Fraudulent Inducement Claim

To state a claim for fraudulent inducement, “there must be a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury.” GoSmile, Inc. v. Levine, 81 A.D.3d 77, 81 (1st Dept. 2010), lv. dismissed, 17 N.Y.3d 782 (2011). See also Wyle Inc. v. ITT Corp., 130 A.D.3d 438, 439–41 (1st Dept. 2015); MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 A.D.3d 287, 294 (1st Dept. 2011). A plaintiff alleging fraud must satisfy each element in order to prevail, whether it be on a motion or at trial. Menaco v. New York Univ. Med. Ctr., 213 A.D.2d 167 (1st Dept. 1995). The failure to satisfy any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi, 120 A.D.3d 447 (1st Dept. 2014).

In addition, the allegations must be stated with particularity to satisfy CPLR § 3016(b). Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 558 (2009). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. Conclusory allegations will not suffice. Id. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”).

Although, CPLR § 3016(b) provides that “the circumstances constituting the [fraud] shall be stated in detail,” the New York Court of Appeals has “cautioned that section 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.” Pludeman v. Northern Leasing, Sys., Inc., 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286 (1987).

McKissack Group, Inc. v. MacFarland

Background

McKissack stemmed from a consulting agreement between Plaintiff, The McKissack Group, Inc. (“Plaintiff” or “McKissack”), and Defendant Rance Macfarland (“MacFarland”).

The agreement came about because of McKissack’s need for an experienced business leader to become its president. In furtherance thereof, McKissack conducted an executive search in March of 2017 pursuant to which MacFarland was referred to Plaintiff as a candidate for the position.

Plaintiff’s Chief Executive Officer, Cheryl McKissack Daniel (“Daniel”), interviewed MacFarland for the position. During the interview, Daniel allegedly advised MacFarland that, as a condition of employment, MacFarland had to be free from any activities and engagements that would jeopardize her confidence in his ability to perform the duties of the position consistent with “the standard of integrity and fiscal responsibility expected of and inherent in the position of President.” Slip Op. at *2 (internal quotations omitted).

Plaintiff alleged that MacFarland fraudulently induced it to hire him by “purposefully and intentionally” concealing substantial money judgments issued against him and “by giving … false and fraudulent assurances that his past business activities reflected a proven record of integrity and fiscal responsibility and were fully consistent with the professional and ethical standards required” by Daniel. Id. (internal quotations omitted). Plaintiff argued that MacFarland created Defendant MSK Business Solutions, LLC to coverup the judgments (issued in the Supreme Court, New York County in actions in which he was a named defendant) that were awarded against a different corporate entity named IBC Business Groups, LLC.

On or about March 8, 2017, Plaintiff entered into a Consultant Agreement with MSK pursuant to which MacFarland was hired as President. The Agreement was executed by MacFarland as a member of MSK. Plaintiff alleged that MacFarland and Defendant Melissa Kearns (“Kearns”), also a member of MSK, were parties to, and helped facilitate, MacFarland’s fraudulent misrepresentations.

During the fall of 2017, McKissack became aware of Defendants’ alleged misrepresentations when it received Marshal’s Notices, Garnishments, and Levies against MacFarland’s salary.

On December 1, 2017, Plaintiff commenced the action, asserting three causes of action for fraud in the inducement against MacFarland, Kearns, and MSK, respectively. Plaintiff claimed that it never would have hired MacFarland had it been aware of the judgments against him. Plaintiff alleged that as a result of the misrepresentations, it was damaged in the amount of at least $220,000.00.

On February 15, 2018, Defendants filed a pre-answer motion, pursuant to CPLR § 321l(a)(7), seeking to dismiss the complaint for failure to state a cause of action. Defendants maintained that (1) Plaintiff failed to plead fraud with particularity, (2) Plaintiff failed to plead any duty owed by Defendants to it, and (3) Plaintiff failed to plead justifiable reliance on any representations.

On March 18, 2019, the Court denied the motion as to MacFarland.

The Court’s Decision

The Court held that Plaintiff satisfied the elements of a claim for fraudulent inducement and did so with the requisite particularity required by CPLR § 3016(b). In so holding, the Court found that:

Mac[F]arland met with plaintiff’s CEO and intentionally failed to disclose to her material information regarding his background and finances; that his actions were calculated to defraud or mislead plaintiff; that plaintiff reasonably relied on MacFarland’s omission; and that plaintiff sustained damages as a result.

Slip Op. at *5.

The Court dismissed the claims against MSK and Kearns because Plaintiff failed to plead facts from which “a reasonable inference that MSK and Kearns committed fraud, or aided and abetted MacFarland in committing a fraud.” Id.  In the absence of such facts, the Court held that Plaintiff’s allegation that “Kearns and MSK were parties to and facilitated the fraudulent misrepresentations made by McFarland in an effort to fraudulently induce [plaintiff] to hire Macfarland ….” was merely conclusory. Id.

Takeaway

McKissack serves as a reminder that courts will sustain a fraud complaint when the plaintiff pleads sufficient facts to support a reasonable inference that the allegations of fraud are true. When this happens, it means that the plaintiff, as in McKissack, satisfied each element of a fraud claim.

Of course, McKissack also shows what happens when a plaintiff bases his/her fraud complaint on conclusions, as opposed to facts. The complaint will be dismissed, as was the case against MSK and Kearns.