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First Department Rejects “Group Pleading” Defense in Affirming the Denial of Motion to Dismiss a Fraud Claim

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  • Posted on: Dec 17 2018

It is not uncommon for practitioners to group multiple defendants together in a complaint when they are alleged to have collectively committed the wrong complained of. This form of pleading, commonly known as “group pleading,” generally runs afoul of the Federal Rules of Civil Procedure (“Federal Rules”) and the Civil Practice Law and Rules (“CPLR”). This is particularly so in the context of fraud.

Both the Federal Rules and the CPLR require a plaintiff to provide sufficient notice of the claims asserted against the defendants. Rule 8(a)(2) provides that a complaint “must contain” “a short and plain statement of the claim showing that the pleader is entitled to relief.” CPLR 3013 requires the pleader to provide the court and the parties notice of the transactions or occurrences intended to be proved together with the material elements of the plaintiff’s cause of action or the defendant’s defense. Generally, a motion to dismiss under Fed. R. Civ. P. 12(b)(6) or CPLR 3211(a)(7) may be granted if a court concludes that the plaintiff has failed to set forth fair notice of what the claim is and the grounds upon which it rests.

When fraud is alleged, the plaintiff must plead the claim with particularity. Under Rule 9(b), the circumstances constituting fraud must be stated with particularity. The Rule’s particularity requirement demands a higher degree of notice than that required for other claims and is intended to enable the defendant to respond specifically to the allegations. To satisfy the particularity requirement of Rule 9(b), the complaint must plead 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. Put another way, the complaint must identify the “who, what, where, when and how” of the alleged fraud.

Like Rule 9(b), CPLR 3016(b) requires the plaintiff to plead fraud with particularity.  But, unlike Rule 9(b), the pleading requirement is not as heightened. Thus, CPLR 3016(b) is satisfied when the facts in the complaint “permit a reasonable inference of the alleged conduct.” Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008).

In Pludeman, the Court of Appeals explained that the purpose of CPLR 3016(b) is to inform a defendant of the complained-of conduct. For that reason, 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.” 10 N.Y.3d at 491 (internal quotation marks and citation omitted). Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.” Id. at 492. Thus, a plaintiff will satisfy CPLR 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct. Id.

[This Blog previously wrote about the differences between Rule 9(b) and CPLR 3016(b) here.]

Despite the foregoing differences, in cases involving multiple defendants, particularity under the Federal Rules and the CPLR require the plaintiff to inform each defendant of the nature of his/her alleged participation in the fraud. Thus, a complaint that lumps together numerous defendants without differentiation will be dismissed on particularity grounds. See, e.g., Rule 9(b): DiVitorrio v. Equidyne Extractive Indus., Inc., 822 F.2d. 1242, 1247 (2d Cir. 1987) (“[w]here multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of [its] alleged participation in the fraud.”); Regnante v. Sec & Exch. Officials, 134 F. Supp. 3d 749, 771 (S.D.N.Y. 2015) (granting motion to dismiss for failing to particularize each defendant’s misconduct) (“Rule 9(b) requires that when fraud is alleged against multiple defendants, a plaintiff must set forth separately the acts complained of by each defendant”); CPLR 3016(b): Aetna Cas. & Sur. Co v. Merchants Mut. Ins. Co., 84 A.D.2d 736 (1st Dept. 1981) (affirming a dismissal of a complaint where the claims were “pleaded against all defendants collectively without any specification”); Ritchie v. Carvel Corp., 180 A.D.2d 786, 787 (2d Dept. 1992) (“allegations of fraud that refer only to the ‘defendants’ without connecting particular misrepresentations to the particular defendants are insufficient”); Excel Realty Advisers LP v. SCP Capital, Inc., 2010 N.Y. Slip Op. 33447 (U) (Sup Ct. Nassau Co. Dec. 2, 2010), aff’d., 101 A.D.3d 669 (2d Dept. 2012) (dismissing fraud claim “primarily based upon a series of oblique averments which . . . lump the defendants together without any specification as to the precise fraudulent conduct attributed to each….”).

On December 4, 2018, the Appellate Division, First Department, reversed the denial of a motion to dismiss on particularity grounds despite the plaintiff’s alleged failure to differentiate between the acts of different defendants. 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp., 2018 N.Y. Slip Op. 08239 (1st Dept. Dec. 4, 2018) (here).

47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp.

Background

Chystie involved a stock purchase agreement between 47-53 Chrystie Holdings LLC (“Chrystie”) and the majority shareholders of defendant Thuan Tam Realty Corp (“Realty”). Under the agreement, plaintiffs were afforded a 20-day due diligence period, during which they could terminate the agreement. In connection with the due diligence, defendants were required to give plaintiffs reasonable access to Realty’s books and records and to furnish information that plaintiffs reasonably requested.

The complaint alleged that plaintiffs requested Realty’s corporate documents and that the individual defendants represented, on a number of occasions, that no corporate documents existed. In that regard, according to the Court, the record contained an email from Realty’s manager to plaintiffs’ counsel stating that he had confirmed with the “different shareholders” that Realty did not have the requested corporate documents. The complaint alleged that plaintiffs relied on that representation and, based on the uncertainty concerning the existence of corporate documents, terminated the purchase agreement.

The parties continued to negotiate and agreed to revive the agreement on the condition that a court of competent jurisdiction issue a declaratory judgment as to the holdout shareholder’s rights, which would address the uncertainty created by the absence of corporate documents. The individual defendants then secured a higher purchase price from plaintiffs. After the second purchase agreement was signed, defendants disclosed that corporate documents did exist.

Plaintiffs brought suit, alleging, among other things, fraud against the individual defendants. The motion court granted the motion. The First Department reversed.

The First Department’s Decision

The Court found that “[t]he complaint state[d] a cause of action for fraud against the individual defendants.” Slip op. at 1. In doing so, the Court rejected defendants’ contention that the complaint “insufficiently particularized” the conduct “as to any of the individual defendants.” Id. The Court explained that the reference to “Individual Defendants” was not to a “diverse group of defendants to whom entirely different acts giving rise to the action may be attributed[,]” rather “it refer[ed] to the eight shareholders of the single corporate defendant, each of whom is alleged to have made the same false representation.…” Id.  Thus, “it [was] reasonable to infer that the individual shareholders knew whether this closely held corporation maintained corporate documents and thus that they participated in the alleged wrongful conduct by representing that no documents existed.” Id. at **1-2.

Takeaway

Pleadings that lump together multiple defendants and plead the same allegations against them collectively rather than individually are subject to dismissal for failure to differentiate which defendant took what action. Where the alleged misconduct of each defendant is the same, Chystie teaches that the failure to differentiate between defendants, at least at the pleading stage, will not result in dismissal on particularity grounds.

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