Fraud Notes: Romantic Relationships and Business Relationships. What Could Go Wrong?

• Posted on: Aug 31 2020

Conducting business with family, friends, or neighbors can be a rewarding endeavor. But, like any relationship, it can also be painful, both emotionally and economically. When the latter occurs, lawsuits can follow.

The same is true with romantic relationships, especially when the health and well-being of a party to the relationship is at issue.

In today’s Fraud Notes, we examine two “relationship” cases. In Salimi v. Raffaelle, 2020 N.Y. Slip Op. 32749(U) (Sup. Ct., N.Y. County Aug. 21, 2020) (here), the relationship at issue concerned neighbors who had invested in Coffeed Corporation (“Coffeed”). Plaintiff alleged that to induce him into investing money in the company, defendant misrepresented his position with Coffeed and the assets that Coffeed owned. Plaintiff sued defendant for, among other things, fraudulent inducement. Defendant moved to dismiss the claim on, inter alia, particularity grounds. The Court denied the motion. In Guilllen v. Bober, 2020 N.Y. Slip Op. 32761(U) (Sup. Ct., N.Y. County Aug. 13, 2020 (here), the relationship at issue was an “on-again, off-again” romantic relationship that spanned more than 10 years. Plaintiff alleged that during their last affair, defendant misrepresented whether he had any sexually transmitted diseases/infections. Plaintiff sued defendant for, among other things, fraud. Defendant moved to dismiss the claim. The Court granted the motion.

Salimi v. Raffaelle

Plaintiff and defendant are neighbors in a residential building in New York City. Both were investors and officers in Coffeed. Their relationship, while initially friendly, deteriorated after plaintiff made two investments in Coffeed in 2018: the first for $50,000.00 and the second for $300,000.00. Plaintiff alleged that defendant misrepresented his position with Coffeed and the assets that Coffeed owned, to induce plaintiff to make these investments. In particular, plaintiff “allege[d] that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6.

Defendant moved to dismiss the complaint. In connection with the fraud claim, defendant argued that plaintiff failed to plead the elements of fraud with particularity. 

To state a cause of action for fraud, a plaintiff must allege “a material misrepresentation of a 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, 559 (2009); Braddock v. Braddock, 60 A.D.3d 86 (1st Dept.), appeal withdrawn, 12 N.Y.3d 780 (2009). Such a claim must be pleaded with particularity. CPLR § 3016(b); Eurycleia, 12 N.Y.3d at 559. This means that the plaintiff must provide the details of the alleged fraud. Scott v. Fields, 92 A.D.3d 666, 668 (2d Dept. 2012), citing Moore v. Liberty Power Corp., LLC, 72 A.D.3d 660, 661 (2d Dept. 2010). In situations where those details are peculiarly within the knowledge of an adverse party, “the heightened pleading requirements of CPLR § 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in the fraudulent scheme.” JP Morgan Chase Bank, N.A. v. Hall, 122 A.D.3d 576, 580 (2d Dept. 2014), quoting High Tides LLC v. DeMichele, 88 A.D.3d 954, 957 (2d Dept. 2011). 

Notably, “actual knowledge need only be pleaded generally, [given], particularly at the prediscovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant’s state of mind.” Oster v. Kirschner, 77 A.D.3d 51, 55-56 (1st Dept. 2010). After all, as the Oster Court noted, “Participants in a fraud do not affirmatively declare to the world that they are engaged in the perpetration of a fraud”; rather, “intent to commit fraud is to be divined from surrounding circumstances.” Id. at 77 A.D.3d at 55-56.

In short, CPLR § 3016(b) is satisfied when the alleged facts permit a “reasonable inference” of the claimed misconduct. Epiphany Community Nursery Sch. v. Levey, 171 A.D.3d 1, 9 (1st Dept. 2019). When the facts of the alleged fraud are not plainly observable, they may be supplemented by the surrounding circumstances. The test is whether the plaintiff’s allegations inform the defendant of the conduct about which he/she complains. Id.

In seeking dismissal of the fraud claim, defendant contended that plaintiff failed to identify the false and misleading statements that defendant allegedly made and failed to demonstrate justifiable reliance on any alleged misstatements. 

The Court denied the motion, holding that plaintiff satisfied the particularity requirement of CPLR § 3016(b). The Court found that plaintiff “specifie[d] each alleged misrepresentation by defendant and the monetary damages that plaintiff incurred from his two investments in Coffeed Corporation.” Slip Op. at *4-*5. In this regard, noted the Court, plaintiff “allege[d] that defendant misrepresented Coffeed Corporation’s ownership of the Marine Dining Hall, which another entity controlled by defendant owned; misrepresented Coffeed Corporation’s ownership of another restaurant and that restaurant’s revenue; and made these misrepresentations to induce plaintiff to invest $350,000.00 in Coffeed Corporation.” Slip Op. at *6. In other words, said the Court, plaintiff identified the who, what, where, how and why of the alleged fraud:

[T]he complaint alleges that defendant misrepresented a corporation’s revenue and assets to induce plaintiff to contract with the corporation and purchase corporate stock. The complaint supplies all the details. It names the corporation; identifies the times, places, parties to, and nature of the alleged deception; defendant’s alleged motive; and the amount of damages that the deception caused plaintiff to incur.

Id. at *6.

In denying the motion, the Court noted that defendant failed to identify the factual details that were “absent/or confusing” in the complaint. Instead, said the Court, defendant “impermissibly relie[d] on facts outside the complaint.…” Id. (citations omitted). 

The Court also rejected defendant’s argument that plaintiff failed to allege justifiable reliance on the alleged misrepresentations. Noting that the argument was predicated on alleged facts outside the complaint (e.g., “that plaintiff was offered unfettered access to Coffeed Corporation’s records before he invested in the corporation…”), the Court declined to consider them. To do so, said the Court “would require a factual inquiry into plaintiff’s access to the corporate records and his diligence in reviewing them.”  Id. at *7. 

“Even if the court accepted defendants alleged offer of unfettered access to the corporation’s records,” said the Court, “defendant cite[d] no support for the proposition that such an offer would negate plaintiff’s allegations of justifiable reliance.” Id.

[Ed. Note: The Court granted defendant’s motion to dismiss the breach of fiduciary duty claim. Slip Op. at *9. Plaintiff claimed that a fiduciary duty existed between the parties by reason of their friendship. Id. at *8 (describing the relationship as a “close personal friendship”). The Court held that plaintiff merely alleged a friendship with defendant, not any “‘special circumstances that might give rise to a fiduciary relationship.’” Id., quoting Benzies v. Take-Two Interactive Software. Inc., 159 A.D.3d 629, 630-31 (1st Dept. 2018).

Guilllen v. Bober

Plaintiff alleged that she and defendant had an over decade-long affair, during which defendant physically and emotionally abused her and caused her to develop stress-related alopecia. She alleged that defendant had a history of having unprotected sex with prostitutes. In 2017, after a hiatus, plaintiff and defendant resumed their relationship. During this time, plaintiff asked defendant whether he had any sexually transmitted diseases/infections to which defendant told her that she had “nothing to worry about.” Slip Op. at *2. The parties engaged in unprotected sexual intercourse. Plaintiff claimed that she found Herpes Simplex medication in defendant’s medicine cabinet. Soon thereafter, plaintiff was diagnosed with Herpes Simplex 2 (HSV-2). In 2018, plaintiff ended the relationship. 

Defendant denied the allegations, claiming, inter alia, that when he met plaintiff in August of 2006, she was a “call girl”, who advertised her services on Craigslist. Id. Defendant claimed that during their relationship, he “loaned” plaintiff tens of thousands of dollars and supported plaintiff, plaintiff’s family, and plaintiff’s various business ventures. Id. 

Plaintiff asserted causes of actions for, inter alia, fraudulent misrepresentation. Defendant moved to dismiss, claiming that plaintiff failed to plead scienter – that is the state of mind characterized by an intent to deceive, manipulate, or defraud. The Court agreed.

The Court held that “there [were] no facts to suggest that defendant intended to defraud the plaintiff.”  Slip Op. at *2. The Court found that defendant’s response to plaintiff’s question concerning exposure to sexually transmitted diseases – that she had “nothing to worry about” – without more was “insufficient to establish intent, as some carriers of the herpes virus are asymptomatic and consequently, would not know or have reason to know of their status.” Id. (footnote omitted). The Court also rejected plaintiff’s contention that the bottle of medication she claimed to have seen demonstrated fraud. Id. The Court said that it was “unclear how plaintiff knew the medication was herpes medication or why plaintiff did not confront the defendant contemporaneously concerning her discovery.” Id. Additionally, noted the Court, defendant’s alleged history of engaging in unprotected sex with prostitutes, as well as his manipulative and abusive conduct, “suggest[ed] that plaintiff’s reliance on defendant’s purported statement that she had ‘nothing to worry about’ was unreasonable.” Id. at *3. “Thus,” concluded the Court, “plaintiff failed to establish a prima facie claim of fraudulent representation.…” Id.