Fraud in the Execution

• Posted on: Apr 25 2022

By: Jeffrey M. Haber

Since inception of this Blog, we have written about many types of fraud, such as affinity fraud, common law fraud, fraud in the inducement, fraudulent concealment, and securities fraud.  Until today, we have not directly examined fraud in the execution.¹

Fraud in the execution, or fraud in the factum, arises where a party did not know the nature or the contents of the document being signed, or the consequences of signing it, and was nonetheless misled into executing it.² As one might expect, the failure to read the document before signing “prevents [the plaintiff] from establishing justifiable reliance, an essential element of fraud in the execution.”³ In other words, absent some impairment (e.g., “the signer is illiterate, blind, or not a speaker of the language in which the document is written”),⁴ a plaintiff cannot justifiably rely on another’s representation that the words used in the document means something other than what they plainly state.⁵ 

Importantly, the signer who claims to have some impairment, must be free of negligence.⁶ This means that disability by itself does not automatically excuse the signer from making a reasonable effort to learn the contents of the document being signed.⁷ “The cases consistently hold that a person” with a disability or an inability to speak and/or read the English language “must make a reasonable effort to have the document read to him.”⁸ 

With the foregoing principles in mind, we examine Paredes v. Vorhand, recently decided by the Appellate Division, Fourth Department (here).⁹

[Ed. Note: the factual background is taken from the parties’ briefs on appeal.]

Paredes arose from an alleged installment purchase contract concerning real property located in Buffalo, New York (the “Property”). Plaintiff contended that he entered a “lease to own” transaction through an “installment land contract” involving the Property (the “Contract”). 

According to the complaint, plaintiff is from Puerto Rico and lacks a fluency in the English language.

The Contract identified Hermann Vorhand as the seller of the Property. Defendant maintained, however, that Hermann was not the owner of the Property; instead, the Property was owned by defendant. Plaintiff signed the Contract, but the seller did not. 

Plaintiff became a tenant of the Property in July 2014. Plaintiff maintained that he made 62 monthly payments pursuant to the Contract. The rent was collected by defendant International Realty of WNY, LLC, a property management company that leases and collects rents for residential real properties, including the Property. 

Defendants denied the validity of the Contract and, upon demand for a warranty deed to the Property, refused to provide same. Thereafter, plaintiff commenced the action. 

In the complaint, plaintiff asserted claims for specific performance (i.e., breach of contract), fraudulent inducement, fraud in the execution, unjust enrichment, and wrongful eviction. Defendants moved to dismiss. With regard to the fraud claims, defendants argued that plaintiff failed to plead fraud with particularity under CPLR § 3016(b) and satisfy the justifiable reliance element of the fraud claims. Plaintiff opposed the motion and filed a cross motion for summary judgment, which defendants opposed. The motion court denied the motion and cross motion without decision. Defendants appealed.

The Fourth Department modified the motion court’s order with respect to the fraud in the execution claim.

In a pithy decision and order, the Court agreed with defendants that the motion court erred in not dismissing the fraud in the execution cause of action.¹⁰ The Court held that plaintiff failed to challenge the validity of the Contract, which is the essence of fraud in the execution claim: “the complaint fails to state a cause of action for fraud in the execution because it does not allege that plaintiff was induced to sign anything other than the installment land contract that he now seeks to enforce.”¹¹ Without such an allegation, the Court said that plaintiff was not induced “to sign something entirely different than what [he] thought [he] was signing.”¹²

Takeaway

Fraud in the execution generally concerns an attack upon the very existence of a contract from its inception. In effect, the allegation is that from the beginning there was no legal contract. The challenge is focused on the facts occurring at the time of the alleged execution of the agreement, upon which the validity of the agreement depends. For example, the claim would be that the signatory signed an instrument different from that which he was told or understood it to be.¹³ In Paredes, plaintiff could not meet this burden because he was relying on the existence of the Contract for his breach of contract and fraud in the inducement claims.

Fraud in the execution is different than fraud in the inducement. In the latter, the fraud is based on facts occurring prior or subsequent to the execution of a contract which tend to demonstrate that an agreement, valid on its face and properly executed, is to be limited or avoided. In Paredes, the Court affirmed the denial of the motion to dismiss the fraud in the inducement cause of action.

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.

References

1. In the article, “Second Department Finds Release Binding Despite Plaintiff’s Claim About Not Understanding The English Language” (here), this Blog discussed the principle of impairment (i.e., an inability to speak and/or read the English language for one reason or another) in the context of the enforcement of a release. 
2. Fleming v. Ponziani, 24 N.Y.2d 105, 111 (1969); Gilbert v. Rothschild, 280 N.Y. 66, 71-72 (1939).
3. Sorenson v. Bridge Capital Corp., 52 A.D.3d 265, 266 (1st Dept. 2008), lv. dismissed, 12 N.Y.3d 748 (2009).
4. Anderson v. Dinkes & Schwitzer, P.C., 150 A.D.3d 805, 806 (2d Dept. 2017).
5. Countrywide Home Loans, Inc. v. Gibson, 157 A.D.3d 853, 856 (2d Dept. 2018); see also Ackerman v. Ackerman, 120 A.D.3d 1279, 1280 (2d Dept. 2014); Dasz, Inc. v. Meritocracy Ventures, Ltd., 108 A.D.3d 1084, 1084-1085 (4th Dept. 2013); Sorenson, 52 A.D.3d at 266. See also Pimpinello v. Swift & Co., 253 N.Y. 159, 163 (1930) (holding, “[i]f the signer [of a document] is illiterate, or blind, or ignorant of the alien language of the writing, and the contents thereof are misread or misrepresented to him by the other party, or even by a stranger, unless the signer be negligent, the writing is void”).
6. Sofio v. Hughes, 162 A.D.2d 518, 520 (2d Dept. 1990).
7. Id.
8. Id. (citing, Albany Med. Center Hosp. v. Armlin, 146 A.D.2d 866, 867 (3d Dept. 1989), and Brian Wallach Agency v. Bank of N.Y., 75 A.D.2d 878, 879 (2d Dept. 1980)).
9. Paredes v. Vorhand, 2022 N.Y. Slip Op. 02732 (4th Dept. Apr. 22, 2022).
10. Slip Op. at *1.
11. Id.
12. Id. (quoting, ABR Wholesalers, Inc. v. King, 172 A.D.3d 1929, 1930 (4th Dept. 2019)).
13.  Under New York law, “[a] party to a writing is presumed to have read and understood the document which he [or she] signed.” Marine Midland Bank v. Idar Gem Distribs., 133 A.D.2d 525, 526 (4th Dept. 1987).