Fraud Notes: Fraud That Overcomes a Pleaded Defense and Impermissible Group Pleading

• Posted on: Jul 3 2023

By: Jeffrey M. Haber

Under the law, the perpetration of a fraud can be the great equalizer between winning and losing a case. For example, a court may relieve a party from the effects of a judgment against it upon, among other things, proof that the judgment was the result of the fraud, misrepresentation, or misconduct by an adverse party.[1] Similarly, a court may exercise its inherent power over its judgments to relieve a party from a judgment obtained through, among other things, fraud and mistake.[2] Additionally, a stipulation or a settlement agreement can be set aside in the face of fraudulent behavior.[3] The examples in which fraud may relieve a party of the consequences of its pleadings and/or actions are too many to discuss here. Suffice it to say, the perpetration of a fraud can neutralize the effects of a party’s inartful pleadings and/or actions.

In EPAC Tech. Ltd. v. Interforum S.A., 2023 N.Y. Slip Op. 03543 (1st Dept. June 29, 2023) (here), the Appellate Division, First Department considered whether the plaintiff adequately alleged fraud to overcome the economic interest defense (which plaintiff actually pleaded in its operative complaints) in a tortious interference with contract action. As discussed below, the Court held that plaintiff satisfied its burden.

In Barlow v. Skroupa, 2023 N.Y. Slip Op. 03541 (1st Dept. June 29, 2023) (here), the First Department examined the particularity requirement under CPLR § 3016(b). In particular, the Court examined the falsity element of the claim and whether plaintiffs’ group pleading satisfied CPLR § 3016(b). As discussed below, the Court held that plaintiffs failed to meet their burden.

EPAC Tech. Ltd. v. Interforum S.A.

As noted, EPAC involved a claim for tortious interference with contractual relations.

It is well settled that a person “who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.”[4]

To plead a claim for tortious interference with contractual relations, “the plaintiff must show the existence of its valid contract with a third party, defendant’s knowledge of that contract, defendant’s intentional and improper procuring of a breach, and damages.”[5]

“In response to such a claim, a defendant may raise the economic interest defense—that it acted to protect its own legal or financial stake in the breaching party’s business.”[6] However, “‘an interferer acting to protect its own direct interests, rather than its interests in the breaching party, may not raise the economic interest defense.’”[7]

The defense has been applied, for example, where defendants were significant stockholders in the breaching party’s business;[8] where defendant and the breaching party had a parent-subsidiary relationship;[9] where defendant was the breaching party’s creditor;[10] and where the defendant had a managerial contract with the breaching party at the time defendant induced the breach of contract with plaintiff.[11]

A plaintiff can overcome the economic interest defense by alleging that the interference was procured by malice or improper means.[12] “For purposes of a claim of tortious interference with business relations, misrepresentation constitutes an improper means.”[13]

The court may dismiss a tortious interference claim on the basis of the economic interest defense at the pleading stage where the defense is apparent from the face of the complaint.[14]

Background

[Eds. Note: the factual discussion below comes from the parties’ briefs on appeal.]

EPAC arose from a Master Facility Development and Services Agreement (“the Agreement”) between Plaintiff EPAC Technologies Ltd. (“EPAC”) and Interforum S.A. (“Interforum”) and Editis S.A. (“Editis”) (collectively the “Editis Defendants”), pursuant to which EPAC agreed to provide state-of-the-art, on-demand printing services (the “Online Production” system) at a French facility.

Because the development and installation of the system would take time, the parties contemplated that EPAC would produce books using a less efficient printing system (the “Micro-Inventory Production”) as an interim measure. The Agreement further provided that, once the Online Production system became operational, EPAC would be paid in accordance with a variable pricing formula tethered to EPAC’s “fixed and variable costs during applicable periods with allowed adjustments.”

Due to various installation delays and other problems, the parties amended the Agreement to, among other things, extend the installation phase of the deal through July 1, 2019, and delay variable price adjustments to February 1, 2020.

At the time the parties entered the Agreement, Editis and Interforum were owned by Planeta Corporacion S.R.L. On January 31, 2019, Vivendi announced that it closed on the purchase of Editis, which owns Interforum. Bolloré owns 27% of Vivendi’s shares, including 30% of its voting shares. After the acquisition, Vivendi and Bolloré took over operational control of the Agreement.

According to plaintiff, once Vivendi and Bolloré took control over the Editis Defendants’ performance under the Agreement, they undermined and interfered with it. For example, they allegedly (a) demanded that Editis fabricate complaints about plaintiff’s performance and costs; (b) tried to convince EPAC to revise the Agreement by claiming that Vivendi and/or Bolloré would soon increase their portfolio in European publishing, which would provide EPAC with a massive increase in printing work in France and throughout Europe – if EPAC agreed to price concessions; and (c) tried to convince EPAC that the Editis Defendants could withhold payments under the Agreement based on French tax law.

EPAC commenced the action against the Editis Defendants, alleging breach of contract. The Editis Defendants answered and counterclaimed.

On July 20, 2021, EPAC filed its first amended complaint, adding claims against Vivendi and Bolloré for tortious interference with contractual relations.

On September 30, 2021, Vivendi moved to dismiss the complaint for want of personal jurisdiction and failure to state a claim. Bolloré also moved on those bases. EPAC opposed both motions.

Also on September 30, 2021, the Editis Defendants filed an answer to the complaint, pleading counterclaims for fraudulent inducement, breach of contract, and wrongful termination. In response, EPAC moved to dismiss the fraudulent inducement counterclaim.

The motion court granted the Vivendi and Bolloré motions, finding, among other things, that given Vivendi’s and Bolloré’s ownership interests in the Editis Defendants, each had an economic interest in the Agreement such that the economic interest doctrine applied, thereby allowing Vivendi and Bolloré to protect their own legal or financial stake in the Editis Defendants’ business. The motion court rejected plaintiff’s arguments that Vivendi and Bolloré could not rely on the economic interest defense because they had acted to further their own interests, not their interests in the Editis Defendants, and because they had acted maliciously and employed fraudulent means.

The motion court also dismissed the Editis Defendants’ fraudulent-inducement counterclaim for failure to satisfy the particularity requirement of CPLR § 3016(b). EPAC also had moved to dismiss the counterclaim on the grounds that: (1) the claim was duplicative of the breach of contract counterclaim; and (2) it was “barred by the Agreement’s boilerplate merger clause.”

The motion court entered judgment on these claims on July 21, 2022.

The First Department’s Decision

On appeal, the First Department “unanimously reversed, on the law,” vacated the judgment, reinstated the tortious interference with contract claim, and “remanded [the matter] for further proceedings.”[15]

The Court held that “[p]laintiff stated a valid claim against [Bolloré] and Vivendi … for tortious interference with a contract.”[16] The Court noted that “[a]lthough plaintiff’s own allegations established that Vivendi and Bolloré ‘acted to protect [their] own legal or financial stake in the breaching part[ies’] business,’ thereby invoking the economic interest defense …, it also alleged facts sufficient to overcome this defense.…”[17] These facts, said the Court, included that “Vivendi and BollorÉ instructed the breaching parties to employ fraudulent or illegal renegotiation tactics — including lying about their desire to acquire additional publishers, fabricating complaints about plaintiff’s performance, and feigning concern about inapplicable French tax withholding requirements.…”[18] The Court also found that plaintiff “demonstrated malice by instructing nonpayment of monies duly owed.”[19] The Court further found that “[p]laintiff’s allegations of interference and causation with respect to BollorÉ were likewise sufficient.”[20]

Regarding the fraudulent inducement counterclaim, the Court held that the motion court properly dismissed the claim, noting that the Editis Defendants failed to satisfy the scienter element of the claim: “The fraudulent inducement counterclaim was properly dismissed for failure to sufficiently allege facts from which it may be reasonably inferred that plaintiff knew its representations regarding its projected costs were inaccurate when made.”[21] The Court also held that the Editis Defendants failed to satisfy the justifiable reliance element of the claim: “[t]he Editis Defendants’ argument that these facts are peculiarly within the knowledge of plaintiff is unavailing in view of the absence of any allegations that they undertook any due diligence to verify the cost projections (or took other steps to protect themselves) — thereby negating any claim of justifiable reliance.”[22]

“In view of the foregoing,” said the Court, the Court declined to address “the parties’ arguments with respect to whether the fraudulent inducement counterclaim was duplicative of the breach of contract counterclaim and/or was barred by the agreement’s merger clause.”[23]

Barlow v. Skroupa

As noted, Barlow concerned the particularity requirement of CPLR § 3016(b). In particular, it concerned pleading a false statement or omission and the practice of group pleading.

To state a claim for fraud, a plaintiff must allege “a misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.”[24] Importantly, “[t]o fulfill the element of misrepresentation of material fact, the party advancing the claim must allege a misrepresentation of present fact rather than of future intent.”[25] “General allegations of lack of intent to perform are insufficient; rather, facts must be alleged establishing that the adverse party, at the time of making the promissory representation, never intended to honor the promise.”[26]

Significantly, “[a] claim rooted in fraud must be pleaded with the requisite particularity under CPLR 3016 (b).”[27] Under CPLR § 3016(b), the circumstances constituting fraud must be stated with sufficient detail “to permit a reasonable inference of the alleged conduct.”[28] To satisfy the particularity requirement, the plaintiff must allege 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.[29]

Notwithstanding, the Court of Appeals has explained that 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.”[30] Therefore, at the pleading stage, a complaint need only “allege the basic facts to establish the elements of the cause of action.”[31] Thus, as noted, a plaintiff will satisfy CPLR § 3016(b) when the facts permit a “reasonable inference” of the alleged misconduct.[32]

If “sufficient factual allegations of even a single element are lacking,” the claim must be dismissed.[33]

It follows from the foregoing that group pleading, in which the plaintiff fails to attribute false statements to a particular defendant, does not meet the requirements of CPLR § 3016(b).[34] In fact, New York courts have dismissed complaints on particularity grounds, where a complaint lumps together numerous defendants without differentiation.[35]

Background

As a general matter, Barlow involved a failure to pay plaintiffs for services rendered to defendant Inspire Summits LLC, which does business as Skytop Strategies. According to plaintiffs, defendants Skytop, Christopher Skroupa, David Katz and Paula Luff engaged in fraudulent activity in which they induced consultants and employees to work for prolonged periods and provide substantial services to Skytop without payment of contractual fees, wages, commissions, bonuses, overtime, costs of reimbursable health insurance, and reimbursable business expenses.

Plaintiffs originally brought the action alleging a breach of contract by defendants Skytop and Skroupa, plus related claims. Plaintiffs amended the complaint multiple times thereafter; the operative complaint was before the First Department. In the complaint, plaintiffs added parties and causes of action, including fraud, claims under General Business Law § 350 and unspecified sections of the Labor Law, equitable claims, and intentional infliction of emotional distress, based on Skytop’s alleged failure to pay its employees and contractors, overcharging participants in its conferences, and related conduct.

Defendants Katz and Luff moved to dismiss all claims pleaded against them. Plaintiffs cross-moved to amend the complaint, submitting a proposed fourth amended class action complaint. Defendants Katz and Luff opposed the cross-motion.

Defendants argued that plaintiffs failed to identify any particular statement(s) that either defendant may have made. Instead, according to the moving defendants, plaintiffs generally referred to “Defendants.” Similarly, said defendants, plaintiffs failed to identify the particular plaintiff to whom such unidentified statement(s) may have been made. In fact, defendants argued that plaintiffs did not even attempt to explain how the undifferentiated group of defendants purportedly did so.

The motion court granted defendants’ motion to dismiss.

The motion court held that plaintiffs failed to credit Katz or Luff with any fraudulent statements. Instead, noted the motion court, “[p]laintiffs rest on their allegations that ‘defendants’ made material misrepresentations and fraudulent omissions to plaintiffs.” The motion court explained that “[t]he failure to distinguish among the various defendants regarding which misrepresentations and omissions each defendant made to each plaintiff, when, and where is ‘improper group pleading.’” “By pleading the fraud claim against all defendants collectively, without any specification of the conduct charged to particular defendants,” said the motion court, “plaintiffs deprive[d] defendants of the notice regarding ‘the material elements of each cause of action’ to which defendants are entitled under CPLR 3013.” Moreover, concluded the motion court, “[b]y referring to all defendants together, plaintiffs … fail[ed] to plead their fraud claim with the particularity required by CPLR 3016(b).”

The First Department’s Decision

On appeal, the First Department unanimously affirmed, holding that “Supreme Court properly dismissed that claim, as plaintiffs failed to plead fraud with particularity as required under CPLR 3016(b).”[36] The Court explained that “[t]he complaint fail[ed] to identify any specific and material misrepresentation of fact by either Katz or Luff, and offered only general and conclusory allegations that they made ‘false representations’ regarding Skytop’s revenues and its ability to pay wages and benefits.”[37]

____________________________

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.

[1] See CPLR § 5015(a)(3); Oppenheimer v. Westcott, 47 N.Y.2d 595, 602-604 (1979).

[2] Matter of McKenna v. County of Nassau, Off. of County Attorney, 61 N.Y.2d 739, 742 (1984) (internal quotation marks and citation omitted).

[3] E.g., Hallock v. State of New York, 64 N.Y.2d 224, 230 (1984); McCoy v. Feinman, 99 N.Y.2d 295, 302 (2002); Matter of Alsaede v. Kelly, 96 A.D.3d 495, 496 (1st Dept. 2012).

[4] White Plains Coat & Apron Co., Inc. v. Cintas Corp., 8 N.Y.3d 422, 425 (2007)) (quoting, Restatement (Second) of Torts § 766).

[5] Id. at 426.

[6] Id.

[7] Hudson Bay Master Fund Ltd. v. Patriot Nat’l, Inc., 2019 WL 1649983, at *16 (S.D.N.Y. Mar. 28, 2019) (quoting, Bausch & Lomb Inc. v. Mimetogen Pharms., Inc., 2016 WL 2622013, at *11 (W.D.N.Y. May 5, 2016)); see also Foster v. Churchill, 87 N.Y.2d 744 (1996); UMG Recordings, Inc. v. Escape Media Grp., Inc., 37 Misc. 3d 208, 224 (Sup. Ct., N.Y. County 2012).

[8] Felsen v. Sol Cafe Mfg. Corp., 24 N.Y.2d 682, 687 (1969); Morrison v. Frank, 81 N.Y.S.2d 743 (1948); see also Foster, 87 N.Y.2d at 751.

[9] American Protein Corp. v. AB Volvo, 844 F.2d 56, 63 (2d Cir 1988), cert. denied, 488 U.S. 852 (1988); WMW Mach. Co. v. Koerber AG., 240 A.D.2d 400, 401 (2d Dept. 1997); Koret, Inc. v. Christian Dior, S.A., 161 A.D.2d 156, 157 (1st Dept. 1990), lv. denied, 76 N.Y.2d 714 (1990).

[10] Ultramar Energy v. Chase Manhattan Bank, 179 A.D.2d 592, 592-593 (1st Dept. 1992).

[11] Don King Prods., Inc. v. Smith, 47 Fed. App’x 12 (2d Cir 2002).

[12] See UMG, 37 Misc. 3d at 225; Green Star Energy Solutions, LLC v. Edison Props., LLC, 2022 U.S. Dist. LEXIS 196738, at *48-49, 2022 WL 16540835, at *16 (S.D.N.Y. Oct. 28, 2022).

[13] Id. (citing, Carvel Corp. v. Noonan, 3 N.Y.3d at 191; Krinos Foods, Inc. v. Vintage Food Corp., 30 A.D.3d 332, 333 (1st Dept. 2006)).

[14] See, e.g., Johnson v. Cestone, 162 A.D.3d 526, 527 (1st Dept. 2018).

[15] Slip Op. at *1.

[16] Id.

[17] Id. (quoting, White Plains, 8 N.Y.3d at 426).

[18] Id. (citations omitted).

[19] Id.

[20] Id.

[21] Id. at *2-*3 (citing, Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 71-72 (1st Dept. 2017)).

[22] Id. at *3 (citing, MMCT, LLC v. JTR Coll. Point, LLC, 122 A.D.3d 497, 498 (1st Dept. 2014); Abrahami v. UPC Constr. Co., 224 A.D.2d 231, 234 (1st Dept. 1996)).

[23] Id.

[24] Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1996).

[25] Perella Weinberg Partners LLC v. Kramer, 153 A.D.3d 443, 449 (1st Dept. 2017).

[26] Id.; Meiterman v. Corp. Habitat, 173 A.D.3d 593, 594 (1st Dept. 2019).

[27] Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009).

[28] Pludeman v. Northern Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008) (citation omitted).

[29] Antigenics Inc. v. U.S. Bancorp Piper Jaffray, Inc., 2004 WL 51224, at *3 (S.D.N.Y. Jan. 9, 2004) (quoting, In re Initial Public Offering Sec. Litig., 241 F. Supp. 2d 281, 327 (S.D.N.Y. 2003)).

[30] Pludeman, 10 N.Y.3d at 491 (internal quotation marks and citation omitted).

[31] Id. at 492.

[32] Id.

[33] RKA Film Fin., LLC v. Kavanaugh, 2018 WL 3973391, at *3 (Sup. Ct., N.Y. County 2018) (quoting, Shea v. Hambros PLC, 244 A.D.2d 39, 46 (1st Dept. 1998)).

[34] Person v. PSI Sys., Inc., 73 Misc. 3d 1220(A) (Sup. Ct., N.Y. County Npv. 16, 2021).

[35] E.g., Principia Partners LLC v. Swap Fin. Group, LLC, 194 A.D.3d 584, 584 (1st Dept. 2021); 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….”). [Eds. Note: we examined Principia Partners here.]

[36] Slip Op. at *1 (citation omitted).

[37] Id. at *1-*2 (citing, Principia Partners, 194 A.D.3d at 584).