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Fraud Claim Dismissed Because Plaintiff Failed To Plead Claim With Particularity

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  • Posted on: Dec 18 2017

There is an old idiom that says: “the devil is in the details.” It generally means that although something may seem simple, the details are complicated and likely to cause problems. This aptly describes pleading a fraud claim under New York law.

To state a claim for fraud, a plaintiff must allege a material misrepresentation of fact, knowledge of its 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, 558 (2009). The allegations must be stated with particularity to satisfy CPLR 3016(b). Id. 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).

Recently, the New York Appellate Division, First Department, had the opportunity to apply these principles.

Fried v. Lehman Brothers Real Estate Associates III, L.P.

Background

The plaintiffs were each limited partners in one of eleven Delaware limited partnerships (the “Partnerships”) that collectively operated under the name Lehman Brothers Real Estate Partners III (“LBREP III”). The Partnerships were formed generally for the purpose of making investments in real estate assets.

Beginning in the fall of 2007, the Partnerships distributed private placement memoranda (“PPM”) to prospective investors. The PPMs generally described the investment opportunity and the Partnerships’ intended investment strategy, outlined the process for selecting investment properties, and set forth the Partnerships’ management structure. The PPMs also contained comprehensive risk disclosures and warnings.

Prior Proceedings and the New York Supreme Court Action

In October 2009, the plaintiffs filed an action under the federal securities laws against the defendants in federal court to recover the losses they sustained from their investment in the Partnerships. In March 2011, the district court dismissed the complaint. Among other things, the court held that the plaintiffs failed to plead scienter with particularity.  That decision was affirmed by the Second Circuit in 2012.

In May 2011, the plaintiffs commenced the action in state court. One month later, the defendants removed the action to federal court. Ultimately, the case was remanded back to state court.

The plaintiffs filed an amended complaint in February 2015, alleging, among other things, fraud in connection with the investment in the Partnerships. The defendants moved to dismiss, contending that, inter alia, the plaintiffs failed to plead fraud (and its elements) with the particularity demanded under CPLR 3016 (b). The Supreme Court granted the motion.  The plaintiffs appealed.

The First Department Ruling

In a pithy decision, the First Department unanimously affirmed the Supreme Court’s dismissal of the fraud claim. Fried v. Lehman Brothers Real Estate Associates III, L.P., 2017 NY Slip Op. 08638 (1st Dept. Dec. 12, 2017). (Here.) In doing so, the Court explained that the plaintiffs failed to plead fraud with particularity, and specifically, the scienter (or, intent to deceive) element of the claim:

The first and second causes of action, alleging fraudulent misrepresentation and gross negligence in misrepresentation, failed to satisfy the pleading requirements of CPLR 3016(b). The allegations of scienter here were not pleaded with the requisite particularity, but are conclusory, and scienter may not reasonably be inferred from the circumstantial evidence relied on by plaintiffs.

Internal citations omitted.

Takeaway

Business and commercial litigation often involve allegations of fraud. As noted, such claims must be alleged with particularity – remember, the devil is in the details. The failure to do so, as the plaintiffs in Fried learned, will result in the dismissal of the claim.

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