Plaintiff’s Reliance on Third Party Insufficient to Establish Reliance Element of a Fraud Claim

• Posted on: Jun 8 2020

As readers of this Blog know, one of the elements of a fraud claim is reliance. In the typical case, the defendant makes a false or misleading statement directly to the plaintiff, which the plaintiff claims to rely on. In the less frequent case, the misrepresentation of fact is made to a third party that relied on the alleged fraudulent statement. The question is whether, in that circumstance, a plaintiff can state a fraud cause of action, despite the absence of direct reliance by the plaintiff on the alleged misrepresentation? In 2016, the New York Court of Appeals addressed the question. 

In Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817 (2016), the New York Court of Appeals held that third-party reliance does not satisfy the reliance element of a fraud claim unless the third party “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment.” Id. at 828. Prior to Pasternack, federal courts applying New York law and the Appellate Division Departments had reached varying conclusions as to whether a plaintiff could state a fraud claim, “despite the absence of reliance by the plaintiff on the alleged misrepresentations, where a non-plaintiff third party is alleged to have relied on the misrepresentations in a manner that caused injury to the plaintiff.” Id. at 827. 

In today’s article, this Blog examines Gui Qin Chen v. Li Zhu Chen, 2020 N.Y. Slip Op. 31691(U) (Sup. Ct., Queens County Apr. 27, 2020) (here), a case involving reliance on an alleged misrepresentation that was made to a third party.

Gui Qin Chen v. Li Zhu Chen

Background

Plaintiff commenced the action to recover damages for an alleged conspiracy “to displace her as beneficiary” of the proceeds of a $300,000.00 life insurance policy held by the decedent, Chit Hing Chau. The original policy was issued by Metropolitan Life Insurance Company (“MetLife”) to Chau in 1998, with his wife, Sau Wan Cheung, as the primary beneficiary, and their daughter, defendant Hong Yung Chau, as the sole contingent beneficiary.

In 2012, Chau designated plaintiff, Gui Qin Chen, his girlfriend, as the only beneficiary under the life insurance policy and changed the address for the policy from his marital residence in Queens to an address in Manhattan. Thereafter, Chau moved to China, where he died on May 8, 2017, never having returned to the United States.

Plaintiff alleged that on August 10, 2016, Chau executed a Change in Beneficiary Designation form, again designating his wife as beneficiary, and his daughter, Hong Yung Chau, as the contingent beneficiary, and changed the address of the policy back to his marital residence in Queens. Defendant, Li Zhu Chen, a former insurance agent for MetLife, claimed to have submitted the 2016 Change in Beneficiary form on behalf of decedent to MetLife. At the time the Change in Beneficiary form was executed, the decedent was residing in China. Li Zhu Chen allegedly brought to him, and witnessed the decedent’s signature on, the Change in Beneficiary form while both were in China, and subsequently filed it with MetLife when she returned to the United States. Plaintiff alleged that the signature on the 2016 Change in Beneficiary form was forged by defendant, Hong Yung Chau, and that defendant, Li Zhu Chen, conspired with the daughter, Chau, to submit the “forged” Change in Beneficiary form to deprive plaintiff of the proceeds of the insurance policy.

Plaintiff commenced the action in August 2019, alleging fraud, aiding and abetting fraud, and conspiracy to commit fraud against defendant, Li Zhu Chen. Defendant, Chen, moved to dismiss plaintiff’s complaint for, inter alia, failing to state a cause of action pursuant to CPLR § 3211 (a) (7). Plaintiff opposed.

The Court’s Decision

The Court granted the motion, holding that plaintiff failed to satisfy the reliance element of her fraud claim.

The Court found that the complaint only alleged that “Defendant, LI ZHU CHEN, committed fraud by making material misrepresentations of fact to MetLife.” Slip Op. at *3. It did not allege that MetLife “acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to [her] detriment.” Id. (quoting Pasternack, 27 N.Y.3d at 828). As such, held the Court, plaintiff failed to satisfy the reliance element of her fraud claim. Id.

Because the fraud claim did not survive defendant’s challenge, the Court dismissed plaintiff’s aiding and abetting claim. Id. (stating, “the complaint did not meet the specificity requirements to sufficiently plead the existence of an underlying fraud, and, as a result, the cause of action for aiding and abetting cannot survive.…”). 

Finally, the Court dismissed the conspiracy to commit fraud claim because “New York does not recognize an independent tort cause of action for civil conspiracy.” Id. (citations omitted).

Takeaway

We have often written about the difficulty plaintiffs encounter trying to satisfy the reliance element of a fraud claim. (E.g., here and here.)  Gui Qin Chen shows that this requirement can be even more difficult when the alleged misrepresentation is not made directly to the plaintiff. In that circumstance, the plaintiff must allege that the misrepresentation was made for the purpose of being communicated to the plaintiff in order to induce his/her reliance thereon or that the misrepresentation was relayed to the plaintiff, who then relied upon them. The failure to allege either will, as the plaintiff in Gui Qin Chen learned, result in dismissal of the fraud cause of action.