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Fraud Shorts: Pleading Deficiencies, Duplication of Claims, Respondeat Superior and Apparent Authority

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  • Posted on: Dec 4 2019

Decision day in the Appellate Division, First Department involved several cases in which the Court addressed allegations of fraud or fraudulent inducement. Many of the cases focused on the elements of the claim, while others focused on the absence of particularity and the duplication of claims doctrine.  We look at some of those cases in today’s post.

Lerner v. Newmark & Co. Real Estate, Inc.

In Lerner v. Newmark & Co. Real Estate, Inc., 2019 N.Y. Slip Op. 08611 (1st Dept. Dec. 3, 2019) (here), the Court considered, among others causes of action, a fraud claim in the context of an action to recover commissions alleged to be due and owing under two related employment agreements.

Plaintiff, Justin Lerner (“Lerner”), is a licensed real estate broker. Lerner alleged that, in November 2014, he and defendant, Newmark & Company Real Estate, Inc. (“Newmark”), entered into an agreement, for a two-year term, pursuant to which Lerner was to be paid commissions as set forth in the appended Schedule 1 (the “Engagement Agreement”). The Engagement Agreement provided that most of its terms, including Schedule 1, would survive its termination or expiration. Lerner alleged that the parties mutually agreed to his departure before the expiration of the two-year term. Lerner departed on or about March 14, 2016.

Lerner claimed that, under Schedule 1, he was entitled to be paid his share of any commissions received for pending transactions within a specified time after his departure. Lerner submitted a list of pending transactions by April 11, 2016, within 30 days of the termination date as provided for in Schedule 1. According to Lerner, defendants refused to pay him his share of the commissions.

In addition to the Engagement Agreement, defendants drafted a Termination Agreement, dated June 16, 2016, which did little more than confirm the Engagement Agreement’s post-termination provisions, including maintenance of confidentiality by Lerner and non-solicitation of defendants’ clients, and payment of commissions per the “pending list” mechanism of Schedule 1. Lerner alleged that he complied with his obligations thereunder, including submission of his list of pending transactions as of the date of his departure.

Lerner alleged that defendants accepted his resignation, drafted the Termination Agreement to lay out a framework for payment of commissions on transactions that he brokered but that closed only after his departure and then quibbled over the terms of payment, drawing out indefinitely the matter of payment, while controlling all information about which transactions had closed. Lerner further alleged that defendants’ goal was to obstruct and refuse to pay commissions that he had earned by virtue of brokering the transactions.

The Court held that Lerner stated a claim for breach of the Engagement Agreement and Termination Agreement.

In addition to the contract claims, Lerner contended that defendants induced him to enter into the Termination Agreement, knowing that they had no intention of carrying out their end of the bargain. The Court held, without specifically stating it, that Lerner’s fraudulent inducement claim duplicated his contract claims and was otherwise not particularized to state a claim.

New York courts will not permit a fraudulent inducement claim to survive a motion to dismiss when the claim arises from the same facts as an accompanying contract claim, seeks identical damages and does not allege a breach of any duty collateral to or independent of the parties’ agreement. Thus, the courts will dismiss such a claim as “redundant of the contract claim.” See Cronos Group Ltd. v. XComIP, LLC, 156 A.D.3d 54, 62-63 (1st Dept. 2017) (quoting Havell Capital Enhanced Mun. Income Fund, L.P. v. Citibank, N.A., 84 A.D.3d 588, 589 (1st Dept. 2011)).

Moreover, a plaintiff alleging fraud must do so with particularity. This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559-60 (2009). 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.”).

In Lerner, the Court noted that Lerner sought the same measure of damages in both his fraud and contract claims and made no detailed factual allegations to support the claim of fraud. Slip Op. at *1. Instead, said the Court, Lerner simply inferred a fraud “from the fact that negotiations were drawn out, and ended up with non-payment, [and] that the entire Termination Agreement was conceived of as a plot to withhold commissions that he had earned.” Id. Consequently, the Court held that Lerner “failed to state a cause of action for fraud.” Id.

Pritsker v. Oppenheimer Acquisition Corp.

In Pritsker v. Oppenheimer Acquisition Corp., 2019 N.Y. Slip Op. 08621 (1st Dept. Dec. 3, 2019) (here), the First Department considered a fraud claim in the context of an action for conversion involving an investment in a Madoff feeder fund.

[Ed. Note: the facts of the Pritsker action are taken from the decision of the motion court.]

Plaintiff, Robert L. Pritsker (“Pritsker”), filed the action to recover damages related to an investment (the “Investment”) of $586,000 in limited partnerships in which the general partner was defendant, Tremont International Insurance Fund, L.P. (“Tremont International”), a former Madoff feeder fund based in Rye, New York. The Investment comprised a portion of the excess cash value of Pritsker’s variable life annuity (the “Annuity”), which was underwritten by non-party American General Insurance Co. (“American General”).

Pritsker alleged that by August 2012, the Annuity had received restitution, of all but $102,788 (the “Remaining Balance”), after Tremont International’s settlement with the Madoff trustee (the “Settlement”).

Pritsker claimed that it was improper for Tremont International not to return the Remaining Balance because the Investment was made after December 31, 2007, the deadline for the clawback by the Madoff trustee.

In March 2009, Tremont International set aside a reserve of $11,740 from Pritsker’s account for the purpose of the trustee’s clawback efforts. In November 2009, Pritsker received communications from American General advising him that the Madoff trustee had asked that all Tremont funds of funds with Madoff exposure having assets that remained for distribution to not make any further distribution pending the completion of the trustee’s review and analysis. Pritsker claimed that these communications led him to believe that he had Madoff exposure beyond the $11,740 initial reserve, when, in fact, he did not have such exposure. According to the motion court, documentary evidence showed that at no time after the Investment did Tremont International have any investments in limited partnerships with Madoff exposure. Tremont International stopped making distributions to Pritsker after June 30, 2009.

Pritsker claimed that Tremont International either improperly applied the Remaining Balance to the clawback or converted the funds. Pritsker stated that he first learned that he did not have Madoff exposure when his claim was denied by the Madoff Victim Fund. Pritsker alleged that he was informed by the Madoff Victim Fund on December 13, 2016, that he was not entitled to restitution as an indirect investor in Maddoff investments, because any restitution had to come from funds assembled by the Madoff trustee as a result of setting aside fraudulent transfers, and that, because American General made the investment after December 31, 2007, the funds invested by American General on behalf of Pritsker could not be reached by the trustee as part of the clawback.

The complaint contained three causes of action: fraud, constructive fraud, and fraudulent conversion. In the fraud cause of action, Pritsker alleged that defendants knew the date of Pritsker’s investment and knew that his funds were not subject to clawback. He further alleged that defendants misled him into believing that he had Madoff exposure and that some of his balances would have to be diverted to the Settlement.

The motion court dismissed the fraud claim, finding that it was “insufficiently pleaded.” The motion court held that Pritsker failed to plead causation (which the First Department would describe as reliance). The reason, said the motion court, was because of the timing of the alleged misrepresentations – they occurred after the loss allegedly occurred. Pritsker’s claim was based on an alleged conversion of money on March 31, 2009, when $11,740 was reserved for the Madoff clawback and the misrepresentations were alleged to occur later in 2009.

The motion court also found that the complaint failed to adequately plead scienter – that is, Pritsker failed to allege facts that a misrepresentation of fact was knowingly made by any defendant to Pritsker, with knowledge of its falsity, and intent to deceive.

The First Department affirmed, holding that the complaint failed “to allege scienter and reliance.…” Slip Op. at *1. Both elements, said the Court, “are essential elements of fraud.” Id. (citing Lama Holdings Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996); Meyercord v. Curry, 38 A.D.3d 315, 316 (1st Dept. 2007).

[Ed. Note: The citation to Meyercord is notable. In that case, the First Department appeared to describe the causation and reliance elements interchangeably, holding that the plaintiff could not establish detrimental reliance (i.e., causation) “since he could not have changed his position or suffered a loss based on the alleged misrepresentations.” 38 A.D.3d at 316.]

Moore Charitable Found. v. PJT Partners, Inc.

In Moore Charitable Found. v. PJT Partners, Inc., 2019 N.Y. Slip Op. 08627 (1st Dept. Dec. 3, 2019) (here), the First Department dismissed fraud claims based upon the theories of respondeat superior and agency.

[Ed. Note: the facts of Moore are taken from the complaint and the motion court’s decision.]

Moore arose from an alleged fraud in which Andrew W.W. Caspersen (“Caspersen”), a senior executive of defendant, PJT Partners (“PJT”), an investment bank and advisory services firm, convinced The Moore Charitable Foundation (“The Foundation”), a nonprofit foundation with a mission to preserve and protect natural resources, to invest nearly $25 million of its endowed funds in a deal that PJT was sponsoring.

To make the opportunity appear legitimate, Caspersen allegedly made use of PJT’s name, reputation, resources, and personnel. The Foundation transferred its money according to the wire instructions that Caspersen provided. However, the money went to an account that Caspersen controlled, rather than a PJT-controlled account. He took more than $8 million of the money that had been wired and gave it to PJT; the remainder he took for himself.

After the Foundation detected and reported the alleged wrongdoing, federal authorities, including the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Southern District of New York, and the Securities and Exchange Commission, caught Caspersen trying to perpetrate a further fraud. He confessed to his role in defrauding the Foundation, entered a plea of guilty, and is currently serving a four-year sentence in federal prison.

PJT returned $8.6 million to the Foundation – money that was sitting in PJT’s own bank account – but only after PJT’s insurance carrier promised to make PJT whole for the amount. PJT’s insurer did not, however, promise to cover the millions of dollars that the Foundation lost.

The Foundation asserted causes of action for fraud against PJT and defendant, Park Hill Group, LLC (“Park Hill”), a division of PJT that provides asset advisory and fundraising services. The Foundation claimed that PJT and Park Hill were liable for Caspersen’s fraud under a theory of apparent authority and under a theory of respondeat superior. Defendants moved to dismiss the claims.  The motion court granted defendants’ motion to dismiss the cause of action for fraud based on respondeat superior and denied the motion as to the cause of action for fraud based on apparent authority. The First Department reversed the dismissal of the fraud claim based on apparent authority, and otherwise affirmed the dismissal on respondeat superior grounds.

In New York, an employer may be vicariously liable for its employees’ tortious acts on a theory of respondeat superior only if they were committed in furtherance of the employer’s business and within the scope of employment. Riviello v. Waldron, 47 N.Y.2d 297, 303 (1979); see also Bowman v. State of New York, 10 A.D.3d 315, 316 (1st Dept. 2004). The tortious conduct must be generally foreseeable and a natural incident of the employment.” Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 933 (1999). “If, however, an employee ‘for purposes of his own departs from the line of his duty so that for the time being his acts constitute an abandonment of his service, the master is not liable.’” Id.

Based upon the foregoing principles, the Court found that the corporate defendants were not liable for Caspersen’s fraud as Caspersen “orchestrated a fraudulent scheme through a fictitious transaction solely for personal gain.” Slip Op. at *1. “Thus,” held the Court, “defendants are not liable for that fraud under the doctrine of respondeat superior.” Id.

The Court held that the cause of action for fraud based on apparent authority should have been dismissed because the complaint failed to identify any words or conduct by the defendants that would give rise to a reasonable belief on plaintiffs’ part that Caspersen had the authority to enter into the transaction. Id. (citing Hallock v. State of New York, 64 N.Y.2d 224, 231 (1984)).

To show that an agent possesses apparent authority, the principal must communicate to a third party, through words or conduct, that the agent possesses the authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Hallock, 64 N.Y.2d at 231. “Rather, the existence of ‘apparent authority’ depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal — not the agent.” Ford v. Unity Hosp., 32 N.Y.2d 464, 473 (1972); see also Restatement, Agency 2d, § 27. Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable. Hallock, 64 N.Y.2d at 231 (citations omitted).

In Moore, the Court observed that “[a]t most, the allegations establish[ed] that defendants had imbued [Caspersen] with actual authority with respect to a somewhat related but different type of transaction.” Slip Op. at *1 (citing Standard Funding Corp. v. Lewitt, 89 N.Y.2d 546, 551 (1997).

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