Q: What Do Get When You Add a Failure to Plead Justifiable Reliance, Loss Causation and a Duty Independent of a Contract? A: Dismissal of a Fraud Claim

• Posted on: Jun 9 2021

In P & HR Solutions, LLC v. Ram Capital Funding, LLC, 2021 N.Y. Slip Op. 03554 (1st Dept. June 8, 2021) (here), the Appellate Division, First Department was faced with the situation that is all too common in commercial litigation, plaintiffs trying to assert contract and fraud claims without differentiation. In fact, over the past few months, this Blog has written about numerous appellate cases in which the plaintiffs’ fraud claims were dismissed because they were indistinguishable from their contract claims (e.g., here, here, here and here).

In addition to the duplication of claims doctrine, the Court was asked to consider whether a sophisticated party took sufficient affirmative steps to protect itself from fraud. Under New York law, a sophisticated party must allege that it exercised due diligence and took affirmative steps “to protect itself against deception.” DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 154 (2010). This means, for example, that a sophisticated party must employ whatever “means of verification were available at the time” of the alleged misrepresentations. VisionChina Media, Inc. v. Shareholder Representative Servs., LLC, 109 A.D.3d 49, 57 (1st Dept. 2013) (citation omitted). Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas, 95 A.D.3d 614 (1st Dept. 2012). The Blog wrote about this aspect of the justifiable reliance element of a fraud claim here.

Finally, the Court was asked to examine the causation element of Plaintiffs’ fraud claim. Under New York law, a plaintiff must plead and prove both transaction causation and loss causation to withstand a challenge from the defendant. “Transaction causation means that the violations in question caused the [plaintiff] to engage in the transaction in question.” AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 209 (2d Cir. 2000) (citation and internal quotation marks omitted). Loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by [the] plaintiff.” Fin. Guar. Ins. Co. v. Putnam Advisory Co., 783 F.3d 395, 402 (2d Cir. 2015). It is synonymous with the proximate cause concept found in other tort cases and in the federal securities context. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 196-97 (2d Cir. 2003) (loss causation in common law fraud claims comparable to federal securities fraud claims); Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dept. 2002) (“[l]oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted). This Blog wrote about causation element of a fraud claim here.

P&HR arose from two merchant cash agreements (“MCAs”) between plaintiffs, P&HR Solutions LLC (“P&HR”) and Debra Ferguson (“Ferguson”), and defendant Ram Capital Funding LLC (“Ram Capital”). Plaintiffs alleged that defendants breached the MCAs and committed fraud in connection therewith. Relevant to the appeal, plaintiffs sought to hold defendant Jonathan Braun (“Braun”) personally liable for the alleged breach of contract and fraud.

The first MCA between Plaintiffs and Ram Capital was executed in August 2018. The agreement provided almost $660,000 worth of P&HR’s future receivables at a collection rate of 10% of its daily receivables, for a cash price of $440,000.00 (the “First Ram Capital Agreement”). As part of the agreement, P&HR had to pay various fees and expenses, among other charges and amounts due. 

In September 2018, P&HR entered into a second agreement with Ram Capital in which it refinanced the First Ram Capital Agreement. Under the terms of the September 2018 agreement, Ram Capital purchased almost $975,000.00 worth of P&HR’s future receivables at a collection rate of 10% of P&HR’s daily receivables, for a discounted price of $350,000.00 (“Second Ram Capital Agreement”). Like the first agreement, P&HR was required to pay various fees and expenses. 

Both agreements contained reconciliation provisions that required RAM to adjust its debits and credits from the account to meet the agreed upon percentage of monthly debits, while giving Plaintiffs the right to adjust their payments at Ram Capital’s sole discretion. 

According to Plaintiffs, from August 6, 2018, to September 28, 2018, Ram Capital had materially underpaid P&HR a total of $239,743.00.

Plaintiffs claimed that by December 2018, P&HR could not keep up with its payments. Rather than ask for a reconciliation from Ram Capital to lower the daily payments, Plaintiffs claimed they did nothing because they had discovered, through publicly available documents, that Ram Capital was actually owned by Braun, a person whom Plaintiffs alleged had made previous threats against Ferguson and her business.

Plaintiffs brought suit, alleging two causes of action against Braun. In the first cause of action, Plaintiffs claimed that Braun was liable for breach of contract, claiming that he was the alter-ego of Ram Capital and defendant Richmond Capital Group, LLC (“Richmond”). Plaintiffs claimed that Braun “completely dominated such entities and corporate formalities and separateness between such entities [were] ignored ….”  

Plaintiffs alleged that the MCAs were breached because, among other things: (1) Defendants overcharged Plaintiffs in connection with the fees and expenses due under the MCAs; (2) the receivables under the agreements were not taken by P&HR, but by Richmond, with whom Plaintiffs did not have an agreement; (3) Ram Capital materially miscalculated the amount that remained due under the First Ram Capital Agreement; and (4) Ram Capital materially underpaid what it owed Plaintiffs under the Second Ram Capital Agreement.

In the second cause of action, Plaintiffs sought to hold Braun liable for fraud, alleging, among other things, that he: (1) misrepresented the fees and expenses to be paid in entering the MCAs; (2) materially overstated the amount due under the First Ram Capital Agreement; (3) misrepresented the average monthly amount of receivables generated by Plaintiffs; and (4) misrepresented or concealed his affiliation with the corporate entities.

Braun moved to dismiss the action as against him under CPLR §§ 3211(a)(7) and 3016(b). The motion court denied Braun’s motion, finding, among other things, that “Braun’s assertion that the fraud claims [were] not sufficiently particularized … [was] unpersuasive,” because “the pleadings properly allege[d] that defendants fraudulently asserted to plaintiffs that Ram Capital was unaffiliated with Richmond.” 

On appeal, the Appellate Division, First Department unanimously reversed the decision and order of the motion court.

The Court held that the motion court properly dismissed the contract claims against Braun. The Court noted that the contracts at issue were between P&HR and Ram Capital. “Therefore,” said the Court, “unless [Ram Capital’s] veil is pierced to reach Braun, Braun [could not] be individually liable for breach of those contracts.” Slip Op. at *1 (citing Skanska USA Bldg. Inc. v. Atlantic Yards B2 Owner, LLC, 146 A.D.3d 1, 12-13 (1st Dept. 2016), aff’d, 31 N.Y.3d 1002 (2018); Andejo Corp. v. South St. Seaport Ltd. Partnership, 40 A.D.3d 407 (1st Dept. 2007); Sheridan Broadcasting Corp. v. Small, 19 A.D.3d 331, 332 (1st Dept. 2005)).

As to the alter ego allegations, the Court held that they were “insufficient.” Id. The Court explained that Plaintiffs simply “set[] forth conclusory allegations merely reciting typical veil-piercing factors.” Id. (citing Skanska, 146 A.D.3d at 12). Thus, while “Plaintiffs may have alleged that Ram [Capital] and defendant Richmond Capital Group, LLC (RCG) [were] alter egos”, they did not allege “that Ram [Capital] and Braun were alter egos.” Id.

Directing its attention to the fraud allegations, the Court held that all but one was “duplicative of the contract claim.” Id. [Ed. Note: Though not explained by the Court, it appears the Court found the allegations that defendants charged Plaintiffs exorbitant fees and underpaid the amount owed under the Second Ram Capital Agreement to be the foundation for both the contract claim and the fraud claim.] The exception, said the Court, concerned the allegation that Braun concealed or misrepresented his affiliation with Ram Capital. “However,” held the Court, “this fraud allegation fail[ed] to state a cause of action.” Id. 

First, the Court found that Plaintiffs failed to plead justifiable reliance because the information purportedly concealed was discoverable by reviewing publicly available documents. Indeed, noted the Court, “the complaint itself allege[d] that plaintiff Debra Fergerson (P & HR’s principal) confirmed Braun’s ownership of Ram [Capital] through publicly available documents and by speaking with people in the merchant cash advance industry.” Id. Thus, concluded the Court, because Plaintiffs failed to exercise any due diligence at the time of the alleged misrepresentation (which they conceded they could have performed by exercising such diligence after the fact), their fraud claim could not withstand scrutiny. Id. (citations omitted). 

Second, the Court held that Plaintiffs failed to show how the alleged misrepresentation about Braun’s involvement with Ram Capital was “‘the direct and proximate cause of the claimed losses.’” Id. (quoting Friedman v. Anderson, 23 A.D.3d 163, 167 (1st Dept. 2005)). “Plaintiffs may have alleged transaction causation,” said the Court, “but they did not allege loss causation.” Id. (citing Laub, 297 A.D.2d at 31). 

The Court found that “[e]ven if Braun had not been involved with Ram [Capital], plaintiffs would still have suffered loss due to the onerous terms of the contracts they signed.” Id. at *2. In other words, Plaintiffs could not demonstrate the causal link between the alleged misrepresentation about Braun’s involvement with Ram Capital and their losses.

Takeaway

Plaintiffs seeking to pierce the corporate veil carry a heavy burden. They must allege facts, not conclusion. As P&HR shows, merely parroting the elements of a veil piercing claim will not suffice.

P&HR is another example of the obstacles plaintiffs encounter when trying to allege a fraud claim with a contract claim. When the former merely masquerades as the latter, as in P&HR (that is, all but one of the fraud allegations), the fraud claim will be dismissed. And, even when the two claims are sufficiently different such that the fraud claim survives application of the duplication of claims doctrine, plaintiffs must still satisfy the particularity requirements of CPLR § 3016(b) as to each element of the claim. In P&HR, Plaintiffs could not do so with respect to the justifiable reliance and causation elements of the claim.