Court Dismisses Fraud Claim Due to Plaintiff’s Failure to Plead Loss Causation

• Posted on: Feb 27 2019

There are five elements to a fraud claim: “(1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009). A plaintiff alleging fraud must meet 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 meet any one element will, therefore, result in the dismissal of the action. Gregor v. Rossi, 120 A.D.3d 447 (1st Dept. 2014).

Recently, in Shainwald v. Professionals for Non-Profits, Inc., 2019 N.Y. Slip Op. 50209(U) (Sup. Ct. N.Y. County Feb. 25, 2019) (here), Justice Carmen Victoria St. George of the New York Supreme Court, New York County, dismissed a plaintiff’s fraud claim precisely because she failed to meet all the elements of her fraud claim.

Sybil Shainwald (“Shainwald” or “Plaintiff”) commenced the action against defendant, Professionals for Non-Profits, Inc. (“PNP”), a temporary employment staffing agency, to recover damages for fraud and negligent hiring.

Plaintiff alleged that she retained PNP to provide her with a personal assistant, primarily for administrative and organizational tasks. The assistant was to work out of Plaintiff’s New York City apartment during the summer of 2017, while she resided in her summer home on Long Island. According to the complaint, Shainwald requested that the assistant “have nothing checkered in his or her past given that [plaintiff] would not be present in her apartment.”

On or about July 13, 2017, PNP recommended Brooke Wright (“Wright”) to serve as Plaintiff’s assistant. PNP allegedly represented that it “had conducted due diligence into” Wright’s “background and confirmed that … Wright was trustworthy enough to be placed in Shainwald’s apartment for several months while Shainwald was not there.” Wright began performing administrative services for Plaintiff and continued to do so until September 22, 2017.

On August 1, 2017, while Plaintiff was residing at her Long Island home, Wright allegedly stole “approximately $100,000 worth of [plaintiff’s] jewelry.” Plaintiff alleged that she did not learn of the missing jewelry until approximately October 15, 2017, when she discovered a receipt from Federal Express showing that a package was shipped from her to Wright on August 1, 2017.

Thereafter, plaintiff commenced the action. Among other claims, Plaintiff alleged that PNP committed a fraud in placing Wright to perform as her assistant.

PNP moved to dismiss, arguing that Plaintiff’s fraud claim was not plead with the requisite particularity under CPLR § 3016(b). In that regard, PNP claimed that Plaintiff failed to satisfy the elements of her fraud claim, arguing, for example, that Plaintiff did not allege a misrepresentation of fact, justifiable reliance, and loss causation/damages.

The Court granted the motion because Plaintiff failed to plead loss causation/damages.

Analysis of the Court’s Decision

In a fraud action, the plaintiff must plead each element with particularity. CPLR § 3016(b). Thus, the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, 12 N.Y.3d at 558. 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). See also CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286 (1987).

Against the foregoing, the Court considered each element of Shainwald’s fraud claim.

Falsity and Knowledge of Falsity

At its core, a misrepresentation refers to a statement that is false or untrue. A fraud claim is pleaded with particularity under CPLR § 3016(b) when the complaint identifies “who made the misrepresentation [and] to whom, the date the misrepresentation was made, and its content.” El Entm’t U.S. LP v. Real Talk Entm’t, Inc., 85 A.D.3d 561, 562 (1st Dept. 2011).

In Shainwald, Plaintiff alleged that PNP materially misrepresented that it “conducted a background check on Ms. Wright and thoroughly vetted her in advance to ensure that it was appropriate to place Ms. Wright in [her] apartment while [plaintiff] was not living there.” The Court found that this allegation sufficed to satisfy the falsity element of Plaintiff’s fraud claim. In this regard, the Court observed that Plaintiff identified the “who”, “what”, “where” and “when” of the alleged misrepresentation with sufficient detail to inform PNP of the substance of her claims: “Plaintiff not only identified Brandel [of PNP] as the source of the material misrepresentations, but the date and the words used by Brandel.” Slip Op. at *6.

Therefore, the Court held that Plaintiff satisfied the particularity requirement of CPLR § 3016(b) in that she adequately detailed PNP’s misrepresentations in a manner that was sufficient “to inform PNP of the substance of plaintiff’s claims.” Id.

The Court also held that Plaintiff sufficiently alleged that PNP knew that its representations were false and that such representations were false when made. Id. (citing Black v. Chittenden, 69 N.Y.2d 665, 668 (1986) (allegations that defendant’s statements “were false and were known by the defendant to be false when made by [defendant] are sufficient to plead a defendant’s knowledge of falsity”)).

Scienter or Intent to Deceive

As a general matter, scienter refers to a defendant’s state of mind at the time he/she made the statement or omission. Courts look to whether the defendant possessed an intent “to deceive, manipulate, or defraud.” ECA & Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). In doing so, courts are mindful that “[f]raudulent intent, by its very nature, is rarely susceptible to direct proof and must be established by inference from the circumstances surrounding the allegedly fraudulent act.” Setters v. AI Props. & Devs. (USA) Corp., 139 A.D.3d 492, 493 (1st Dept. 2016).

In Shainwald, the Court held that Plaintiff adequately alleged intent, noting that PNP possessed sufficient motive to make the false statement: “Plaintiff alleges that [PNP] made the above statements ‘with the intent that plaintiff would rely upon them in permitting Ms. Wright to perform services in plaintiff’s apartment while plaintiff was not there, so that PNP could earn money.” Slip Op. at *6 (quoting complaint.)

Justifiable Reliance

In Ambac Assur. v. Countrywide, 31 N.Y.3d 569, 579 (2018) (here), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 (2015); see also id. at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”).

Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “[n]o two cases are alike ….” Id. For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans, 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322 (1959).

In Shainwald, the Court held that it was premature to decide the issue given the factual issues that needed to be decided:

Plaintiff states that these false statements were material to her decision to allow Ms. Wright in her apartment, that she justifiably relied on them, and permitted Ms. Wright to perform services in her apartment while she was not there. Moreover, plaintiff alleges that her reliance on Brandel’s assurances were reasonable in that she “had no knowledge of the falsity of the representations and had no reason to know that the representations were false.” Regardless, the reasonableness of plaintiff’s reliance “implicates factual issues whose resolution would be inappropriate at this early stage.” As such, PNP’s argument regarding justifiable reliance comes prematurely.

Id. (citation omitted).

Causation and Damages

There are two components of causation: transaction causation and loss causation. “To establish causation, [a] plaintiff must show both that [the] defendant’s misrepresentation induced [the] plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which [the] plaintiff complains (loss causation).” Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dept. 2002).

Transaction Causation

“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). The term is often used by the courts synonymously with “but for” causation. Moore v. PaineWebber, Inc., 189 F.3d 165, 172 (2d Cir.1999) (“To show transaction causation, the plaintiffs must demonstrate that but for the defendant’s wrongful acts, the plaintiffs would not have entered into the transactions that resulted in their losses.”) (citation omitted) (emphasis in original).

Loss Causation

The loss causation requirement 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, 297 A.D.2d at 31 (“[l]oss causation is the fundamental core of the common-law concept of proximate cause”) (citations omitted); accord AUSA Life Ins. Co., 206 F.3d at 209 (“Loss causation is causation in the traditional ‘proximate cause’ sense—the allegedly unlawful conduct caused the economic harm.”) (citation omitted). Thus, 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).

Whether the plaintiff satisfies the loss causation element requires a fact intensive analysis, making a decision on a motion to dismiss generally inappropriate. See Metro. Life Ins. Co. v. Morgan Stanley, 2013 WL 3724938, at *18 (Sup. Ct. N.Y. Cnty. June 8, 2013) (holding proximate cause was not an appropriate issue on a motion to dismiss); see also Schroeder v. Pinterest Inc., 133 A.D.3d 12, 26 n.7 (1st Dept. 2015) (noting that “issues of proximate cause are for the trier of fact….”).

Damages for fraud are calculated according to the “out-of-pocket” rule and must reflect “the actual pecuniary loss sustained as a direct result of the wrong.” Lama Holding Co. v. Smith Barney Inc., 88 N.Y.2d 413, 421 (1986). Under CPLR § 3016(b), “[i]t is not necessary that the measure of damages be pleaded, so long as the facts are alleged from which damages may be properly inferred.” Black, 69 N.Y.2d at 668.

In Shainwald, the Court found that Plaintiff failed to plead facts from which damages could be reasonably inferred. Specifically, the Court held that Plaintiff failed to allege facts demonstrating a direct causal link between PNP’s alleged misrepresentation and the alleged theft. “Put another way, even assuming Brandel made false representations regarding PNP’s vetting process, Plaintiff’s claim that Ms. Wright stole $100,000 worth of jewelry, which she claims is evidenced by a Federal Express receipt is far too attenuated for this Court to entertain.”

In so holding, the Court agreed with PNP’s argument that since Plaintiff failed to allege that Wright had a criminal record or a propensity to commit a crime, PNP’s alleged failure to perform a criminal background check caused Shainwald’s damages.

Consequently, the Court granted PNP’s motion to dismiss “based on plaintiff’s failure [to] sufficiently plead loss causation….” Slip Op. at *6.

Takeaway

In New York, a plaintiff alleging fraud must do so with particularity. This requirement applies to each element of the claim.  Shainwald is a good reminder that a plaintiff can get to the finish line but not cross it because of a failure to satisfy one of the elements of his/her fraud claim.

Tagged with: Business Litigation, Commercial Litigation, CPLR § 3016(B), Fraud, Justifiable Reliance, Loss Causation, Particularity