Fraud Notes: N.Y. Supreme Courts Address Fraud and Fraudulent Inducement Claims

• Posted on: Feb 10 2020

Readers of this Blog know that we like to write about fraud cases. After all, a fraud can be perpetrated in so many contexts. Indeed, the circumstances upon which one can deceive another are limited only by the imagination of the wrongdoer.

Sometimes, there are too many reported decisions for us to examine in the depth to which our readers have become accustomed. For this reason, we have created the “Fraud Notes” post in which we will examine multiple decisions addressing fraud claims that we think our readers will find interesting or instructive.

In today’s “Fraud Notes” post, we examine two cases involving allegations of fraud and/or fraudulent inducement: Yuen v. Branigan, 2020 N.Y. Slip Op. 30280(U) (Sup. Ct., N.Y. County Jan. 28, 2020) (here), and Maddali v. Annamaneni, 2019 N.Y. Slip Op. 33860(U) (Sup. Ct., Bronx County Dec. 23, 2019) (here).

Yuen v. Branigan

Yuen arose out of a dispute between plaintiff William Yuen (“Yuen”) and defendants Pangea Capital Management LP (“Pangea”) and Mark Branigan (“Branigan”) over their business relationship and the compensation/remuneration allegedly due and owing from that relationship.

In February 2008, Branigan founded Pangea, a hedge fund that conducted trades for outside investors. In or before July 2009, Branigan allegedly induced Yuen to join Pangea as its “Head of Trading” and falsely represented that Pangea had over $40 million in assets under management, and that it possessed a proprietary algorithm that would generate advantageous trade recommendations for its customers. Relying on these misrepresentations and in consideration of the offer to become a partner and Head of Trading, Yuen agreed to join the company, pursuant to which he would receive a compensation package that included a monthly payment of $15,000 for a minimum of three years, plus an additional sum based upon the amount of assets under management, as well as a 10% equity stake in Pangea. The parties did not sign any paperwork to memorialize their understanding.

After Yuen joined Pangea, he allegedly discovered that Branigan had inflated the amount of assets under management at Pangea, and instead of $40 million, Pangea only had $4 million. Also, Yuen purportedly learned that Branigan had mischaracterized the quality and capability of the trading algorithm.

In June 2010, Branigan purportedly terminated Yuen’s employment, and instructed Yuen to return all of Pangea’s equipment and files. Yuen claimed that he was “deprived of reimbursement of work-related expenses, agreed-to compensation of a minimum of $450,000 in monthly payments and an equitable stake [in Pangea] of no less than $1,000,000.”

In January 2013, Yuen commenced the action by serving a summons with notice. Following discovery, defendants moved for summary judgment to dismiss, among other claims, the fraudulent inducement cause of action.

Defendants argued that summary judgment was appropriate because Yuen was not damaged by the alleged misrepresentation about the assets Pangea had under management. Defendants contended that Yuen received $15,000 per month as required under the agreements even though the assets under management were significantly less than represented. Therefore, defendants argued, pursuant to Connaughton v. Chipotle Mexican Grill Inc., 29 N.Y.3d 137, 143 (2017), Yuen could not show any actual damages resulting from the alleged fraud.  

In Connaughton, the Court of Appeals explained that damages incurred by fraud should compensate the plaintiff “for what [he/she] lost because of the fraud,” not “what [he/she] might have gained.” 29 N.Y.3d at 142. Under the out-of-pocket rule, “‘[t]he true measure of damage is indemnity for the actual pecuniary loss sustained as the direct result of the wrong.’” Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996) (quoting Reno v. Bull, 226 N.Y. 546, 553 (1919)). Thus, held the Court, a plaintiff alleging fraud cannot recover damages “based on the loss of a contractual bargain,” which the Court explained are “completely undeterminable and speculative.” Connaughton, 29 N.Y.3d at 142-43 (quoting Dress Shirt Sales v. Hotel Martinique Assoc., 12 N.Y.2d 339, 344 (1963)).

Yuen did not address Connaughton in his opposition to defendants’ motion. Slip Op. at *10.

The Court found “Plaintiff’s contention [to be] unpersuasive in light of Connaughton.…” Id. (noting that Connaughton involved a plaintiff, who, like Yuen, claimed that he would not have taken the employment offer by the defendant had he known of certain concealed facts prior to his employment (citing Connaughton, 29 N.Y.3d at 141-142)).

Accordingly, the Court granted the motion to dismiss the fraudulent inducement cause of action.

Maddali v. Annamaneni

Maddali involved an alleged fraudulent scheme whereby defendants falsely promised to transfer the interests in six pharmacies to plaintiffs while concealing the fact they never intended to transfer the ownership interests in those pharmacies.

Beginning in 2002, plaintiffs, Venkateshwara Maddali (“VenkatM”) and Srinivas Maddali (“SrinivasM”), entered into a partnership with defendant, Ravinder Annamaneni (“RavA”), to open a number of pharmacies. SrinivasM and RavA are members of a close-knit community of Indian Americans from the same area in India. In time, plaintiff, Ravi Maddali (“RaviM”), VenkatM’s son and a New York licensed dentist and investor, invested in pharmacies established by VenkatM and RavA.

In late 2013, RavA and SrinivasM for himself, and as representative of VenkatM and RaviM, discussed revising the ownership structure of the initial six pharmacies in which VenkatM and RaviM held an interest. The agreement called for RavA to assume nominal ownership of the six pharmacies and to continue to share profits with VenkatM and RaviM, and at some point RavA would transfer those interests to SrinivasM. RavA was to purchase the interests of VenkatM and RaviM in each of the six pharmacies with loans ranging from $150,000 to $400,000 per pharmacy. VenkatM and RaviM would not receive a salary or share in profits in 2013, instead they would receive the “purchase price.” Notwithstanding their agreement, starting in 2014, VenkatM, RaviM, RavA, Padmaja Annamaneni (“PadA”), his wife, and their agents, continued to split profits in the same proportion as prior to the transfer, despite the change in record ownership; the six pharmacies continued to operate as in the past with respect to salaries and bonuses paid to the owners, including to VenkatM and RaviM. In addition to obtaining control of the six pharmacies, RavA took control of the additional pharmacies in which SrinivasM held an economic interest.

Plaintiffs alleged that, with intent to defraud them, RavA had sales contracts and supporting documents prepared which provided for the transfer of each of the pharmacies but did not contain the material terms of the agreement to which the parties had previously agreed. Plaintiffs claimed that neither VenkatM, nor RaviM, received copies of the sales contracts they signed or of the closing statements.

Plaintiffs further alleged that in December 2013, RavA transferred VenkatM and RaviM’s ownership interests in the pharmacies to himself, as well as to PadA, and his associates, and refused to fulfill his commitment to transfer the appropriate interest in those pharmacies to SrinivasM.

Defendants moved to dismiss, among other claims, the fraud and fraudulent inducement causes of action. The Court denied the motion as to those claims.

To state a claim for fraud and fraudulent inducement, a plaintiff must allege “a material representation [of present fact], known to be false, made with the intention of inducing reliance, upon which the victim actually relies, consequentially sustaining a detriment.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Wise Metals Group, LLC, 19 A.D.3d 273, 275, (1st Dept. 2005); Tsinias Enterprises Ltd. v. Taza Grocery, Inc., 172 A.D.3d 1271, 1273 (2d Dept. 2019). Notably, “[a]n expression or prediction as to some future event, known by the author to be false or made despite the anticipation that the event will not occur, is deemed a statement of a material existing fact, sufficient to support a fraud action.” Channel Master Corp. v Aluminium Ltd. Sales, 4 N.Y.2d 403, 407 (1958).

A plaintiff alleging fraud or fraudulent inducement 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 result in the dismissal of the action. Gregor v. Rossi, 120 A.D.3d 447 (1st Dept. 2014).

In addition, the plaintiff’s allegations must be stated with particularity. 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).

In denying the motion to dismiss the fraud causes of action, the Court noted that “Plaintiffs have stated both of the fraud claims by alleging, with sufficient detail, that Rav A created a fraudulent scheme to deprive VenkatM and RaviM of their ownership interests in the pharmacies by refusing to fulfill his material representation that he would transfer the shares to SrinivasM; that plaintiffs reasonably relied upon RavA’s misrepresentations; and, that they suffered damages as a result.” Slip Op. at **8-9.

The issue on which the Court focused its decision involved the duplication of claims doctrine – that is, whether plaintiffs’ fraud claims duplicated their contract claim.

Under the duplication of claims doctrine, New York courts will not permit fraud-based claims to survive a motion to dismiss when the claims arise from a breach of contract. Indeed, courts routinely dismiss fraud-based claims where “[t]he existence of a valid and enforceable written contract govern[s] a particular subject matter” and the recovery sought arises out of the same facts and circumstances. Clark-Fitzpatrick v. Long Is., 70 N.Y.2d 382 (1987). However, where “a legal duty independent of the contract itself has been violated[,]” or where the misrepresentation is “collateral or extraneous to the terms of the parties’ agreement,” a fraud-based claim can stand side-by-side with “a simple breach of contract” claim.  Dormitory Auth. v. Samson Constr. Co., 30 N.Y.3d 704 (2018) (citation omitted). See also McKernin v. Fanny Farmer Candy Shops, Inc., 176 A.D.2d 233, 234 (2d Dept. 1991).

What constitutes “a legal duty independent of a contract” is not a question easily answered.  Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 56 (1st Dept. 2017) (referring to the question as a “recurring” one). In trying to answer the question, the courts make the distinction between a misrepresentation of intention and a misrepresentation of present fact. Id. at 63. See also Demetre v. HMS Holdings Corp., 127 A.D.3d 493, 494 (1st Dept. 2015) (common law fraud is duplicative of breach of contract where the only misrepresentation alleged concerns an “intent to perform the contractual obligations at the time they were made.”). The former will result in dismissal, while the latter will not. Gosmile, Inc. v. Levine, 81 A.D.3d 77 (1st Dept. 2010).

Applying the foregoing principles, the Court found that the alleged promises to transfer the interests in the pharmacies were collateral to the sale agreements and, therefore, did not duplicate plaintiffs’ contract claim:

In the First Amended Complaint plaintiffs allege that RavA induced plaintiffs to transfer their ownership interests to him by promising that he would transfer VenkatM and RaviM’s ownership interests to SrinivasM, and that he would continue to pay to plaintiffs their share of the profits in six pharmacies. In the Complaint of the consolidated action, it is alleged that, in furtherance of the fraud, defendants have refused to acknowledge SrinivasM’s interest in all of the pharmacies, and to pay the sums to which he is entitled. The court finds that the promises were collateral to the sale agreements, and the alleged misrepresentations constitute fraudulent inducement, which is a breach of duty distinct from the breach of contract claim and is not duplicative.

Slip Op. at *9 (citing Deerfield Communications Corp. v. Chesebrough-Ponds, Inc., 68 N.Y.2d 954 (1986)).

Takeaway

As noted above, a plaintiff alleging fraud can recover only the actual pecuniary loss sustained as a result of the misrepresentation or omission, i.e., the plaintiff’s out-of-pocket damages. The damages recoverable under the rule are intended to compensate plaintiffs for what they lost because of the fraud, not for what they might have gained. See Lama Holding, 88 N.Y.2d at 421.

Yuen reinforces the out-of-pocket damages rule, making it clear that a plaintiff cannot recover what he/she might have gained had he/she not been defrauded. As the Court of Appeals explained, such damages are “completely undeterminable and speculative.” Connaughton, 29 N.Y.3d at 142-43.

The duplication of claims doctrine preserves the distinction between claims sounding in contract and those sounding in tort and protects defendants from disproportionate damages awards that a judgment in tort may impose. Maddali shows that promises related to matters outside the four corners of the contract at issue will suffice to establish an independent duty or a misrepresentation “collateral or extraneous to the terms of the parties’ agreement.” Dormitory Auth., supra.