Earlier today, I got what was hands-down, the most ridiculous phone call seeking legal services in New York that I have ever received. Here are the pertinent facts:

This guy (we’ll call him “A’) was mistakenly over-billed by a company (we’ll call them “C”) for services that they rendered. Simple enough, right?

But this was no ordinary mistake. Instead of billing him $700, they billed him $700,000.

Oops.

C then tries to rectify the situation by reversing the process. Only now, they erroneously credit A with $700,000.

This is where I get called. A asks, “Shouldn’t C have to negotiate with me in order to get their money back?”  After I finish scanning the room for the Candid Camera and my laughter ebbs, I respond, “No; you realize you actually have to return the money because it was never yours to begin with.”

But wait – it gets better. (And here’s the REAL reason for the call).

“Well, Mr. Cooper, what if I told you that I already spent some of the money?” (More laughter ensues).

After my laughter subsides a second time and I got off the phone with this guy (and hopefully convinced him that he has to return every last penny) I was troubled by something he said. You see, he had started off our conversation by telling me that he read a lot of my articles online.  And, if what he said was true, I had to wonder: what – if anything – gave him the impression that I – or anyone for that matter – would help him?

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Lending further credence to our earlier article, “Why Many (If Not Most) Business Fraud Claims Are Dismissed By New York’s Courts,” a New York County trial judge recently dismissed a plaintiff’s fraudulent misrepresentation claims.

You might be inclined to ask, “Isn’t fraudulent misrepresentation materially different than garden-variety fraud (which was discussed in the article above)?”

The short answer is no, it’s not really different.

As the Court noted in North River Restaurant LLC v. Paratoree:

“The elements of a cause of action for fraudulent misrepresentation are the same as for fraud. Mandarin Trading Ltd. v. Wildenstein, 65 A.D. 3d 448, 459 (1st Dept 2009). The elements of a cause of action for fraud are: 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).”

(For more on the elements needed to prove a fraud claim under New York law, please see “How to Prove a Successful Business Fraud Claim Under NY Law“).

But in this case – as in many cases revolving around fraud, the Court found that the plaintiff failed to meet his burden of proof, stating:

“There is no indication or inference that would lead the court to believe that Plaintiff justifiably relied on Paratore’s statement. Eurycleia, 12 NY3d at 559. “As a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm’s length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it.” DDJ Mgt, LLC v. Rhone Group LLC, 60 A.D. 3d 421, 424 (1st Dept 2009).”

Having established that the plaintiff failed to meet one of the central criteria for a fraud claim, the court was obliged to dismiss the claim. Which it did.

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As noted in our earlier article, “Piercing the Corporate Veil – Critical Facts that You Will Need to Prove Your Case Under New York Law,” it is not an easy task to amass sufficient facts to survive an initial motion to dismiss a claim that seeks to pierce a corporation’s veil – let alone prove those facts at trial.

That’s why when a court allows those claims to survive – at least initially – the facts of those cases are noteworthy.

In Safety Management Systems, Inc.  v. Safety Software Unlimited, the defendant in this commercial litigation lawsuit sought court leave to amend its answer to assert additional counterclaims seeking to pierce the corporate veil. In support of its argument for allowing the amendment, the defendant claimed the following:

• That the plaintiff corporation was wholly owned by the individual plaintiff ;
• that the plaintiff paid herself and her employees unsustainably high salaries;
• That the plaintiff diverted corporate funds to her personal account;
• That the plaintiff co-mingled funds with her corporation.

Assuming these allegations are true is it any wonder that the court allowed this claim to survive?

I thought not.

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As you may recall from my earlier articles, “Why Many (If Not Most) Business Fraud Claims Are Dismissed” and “How to Prove a Successful Business Fraud Claim Under NY Law,” it is very tough to prevail on a fraud claim in New York, because the pleadings (i.e., the allegations you make in your court papers) require a lot of specificity, and your evidentiary burden is greater than most cases.

Adding to this pressure is another question: how much time do the courts allow you to start an action based on fraud?  After all, in many cases, the fraud is concealed, and you don’t learn about it until much later. So when does the clock start to run?

Fortunately, New York’s legislature foresaw this difficulty, and allowed for the possibility that some frauds may be hidden. Therefore, they articulated the rule as follows:

§ 213. Actions to be commenced within six years

The following actions must be commenced within six years:

***
8. an action based upon fraud; the time within which the action must be commenced shall be the greater of six years from the date the cause of action accrued or two years from the time the plaintiff or the person under whom the plaintiff claims discovered the fraud, or could with reasonable diligence have discovered it.

Bear in mind, however, that this two-year extension of time for the discovery only applies to cases involving actual fraud, but does not apply to cases involving constructive fraud, which is still limited to a six-year statute of limitations. See, e.g., Orr v. Kinderhill Corp., C.A.N.Y.1993, 991 F.2d 31. An example of this would include a lawsuit brought by creditors to set aside conveyances made without fair consideration.

For additional information on constructive fraud, please see “Constructive Fraud: A Lesser-Known, But Powerful Tool in New York to Recover Money That You’re Owed.”

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As a corollary to our blog article “When You Can Incur Personal Liability for a Debt in New York,” the question arises as to what New York’s courts will do when a claimant tries to hold a corporate officer personally liable in either breach of contract or fraud.

To that end, in a November 18 decision in Liang v. Sollecito, a Civil Court in New York County held that “The officers of a corporation may be held personally liable for torts committed on behalf of the corporation, but cannot be held personally liable on contracts provided that they did not bind themselves individually.” Thus, where there are no allegations that the officer had any direct involvement in the contract, or that he personally made any fraudulent misrepresentations with regard to the contract, then the complaint should be dismissed – even before formal discovery begins.

Which is precisely what happened in Liang.

And this should come as no surprise; After all, how often do you think corporate officers stick out their necks to render themselves personally liable? Even more challenging, of those times that it may have actually occurred, how easy do you think it will be to prove it?

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If I had to summarize what I love about what I do it’s that it affords me the opportunity to help people who’ve been legitimately wronged, and to earn a living while doing it. And in order to help some people who contact my office, I try to come up with creative billing solutions to help clients fulfill their legal needs while controlling costs.  So, naturally, when someone tries to take advantage of my good intentions, I don’t appreciate it. Here’s one example:

Last week I received a call from a small business owner who was bilked out of several hundred thousand dollars by his partner in a glaring breach of contract and breach of fiduciary duty case. And – get this – he was able to document it. But we both agreed that it was not only possible, but likely, that the money he invested would be difficult to recover for a myriad of reasons.

Recognizing that this gentleman was leery of throwing out good money after bad, I proposed that he enter into a hybrid retainer agreement (as opposed to a straight hourly retainer) – whereby the legal fees he would have to pay on the entire litigation would be capped at a small fraction of the overall anticipated cost of the litigation, in exchange for the attorney collecting a 20% contingent fee in the event of a recovery.

Sounds fair, doesn’t it?

But this man – whom I’ve never met in person – was not only unwilling to fund the limited legal fees that were requested, he wanted the contingent fee to be limited to 5% of any recovery. He wanted to bear none of the risk, but to reap all the rewards, or as the old joke goes, heads he wins, tails I lose.

Here was my gut reaction: if you could actually get an attorney to agree to those terms, do you really want that attorney to be the one litigating your six-figure breach of fiduciary duty case?

It would have been far more honest of this man to ask if I could represent him pro bono.

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While it is true that, generally speaking, you can’t recover in fraud or negligence against someone unless you actually have an agreement with them (or in legal terms, are “in privity”), there is a narrow – but important – exception to this rule.

And that is when the relationship is close enough that they’re no longer at arms’ length, or as the Appellate Court in its October 26 opinion in Seaview Mezzanine Fund, LP v. Ramson put it, “approaching privity.”

In Seaview, the Plaintiff, a funding corporation, extended a capital loan to the defendant corporation based, in large part, on the defendant’s accountants’ representations (which turned out to be misrepresentations) about the defendant’s economic situation. After the defendant defaulted, the plaintiff learned that the accountants willfully exaggerated the defendant’s net worth and financial condition, notwithstanding that they knew that the plaintiff intended to rely upon this information in deciding whether to extend the loan to their client (the defendant).

In denying the accountants’ motion to dismiss the claims against them, the Court stated, in pertinent part, as follows:

“[W]e agree with the motion court that plaintiff has alleged the existence of a relationship sufficiently approaching privity so as to allow plaintiff to assert claims against the [accountants] in the absence of a direct contractual relationship … Plaintiff also properly pled  … the causes of action for fraud … alleging that the [accountants] knowingly made false representations regarding the [defendant's] finances … including exaggerating their net worth and financial condition by underreporting a certain loan, failing to disclose the existence of another loan and misrepresenting the status of an arbitration proceeding.”

At this point, something should be made clear: this decision is only Round 1; it does not, by any means, suggest that the plaintiff has won this case.

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They may have been naive, but they’re entitled to a shot at vindication before a jury, held New York’s Court of Appeals in DDJ Management LLC v. Rhone Group, LLC.

In this case, the plaintiffs sued to recover their losses after learning that the $4o million loans they extended to the defendants turned out to be based on some seriously cooked books. The defendants raised an interesting defense, which can be summarized as follows: “our books were so bad that you had no right relying on them to lend us the money.”

As noted in “Why Fraudulent Concealment Claims Are So Tough to Win,” one of the essential elements that a plaintiff must prove in order to establish a fraud claim under New York law is that she reasonably relied to her detriment upon the defendant’s representations. Applying this rule, many New York courts have dismissed fraud claims where the plaintiff’s purported reliance on the defendants’ representations was clearly unjustified, such as in Global Mins. & Metals Corp. v Holme (35 AD3d 93 [1st Dept 2006]), where the plaintiff fired an officer whom it found to be untrustworthy, and then inexplicably trusted that same officer’s verbal assurances that a transaction was completely innocent.

Importantly, New York’s High Court carved out a clear exception, and stated that one way to prove a fraudulent concealment claim under New York law is as follows:

“Where, however, a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred. In particular, where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry.”

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Let there be no mistake: if you’re lying in order to stonewall your adversary, and it’s obvious to a Federal Judge, you do so at your own peril. That is the clear implication of the Court’s holding in Shcherbakovskiy v. Seitz, et al.

In that case, the defendant counterclaimed against the plaintiff, suing to recover damages they incurred in breach of contract and breach of fiduciary duty. The plaintiff, who was the chairman of the board of directors of the Russian conglomerate at issue in the case, refused to provide corporate documents notwithstanding several demands by the defendant’s attorneys, and despite a direct court order that he do so.  At first, he flatly refused on the grounds that “the demands were overly broad,” and a “fishing expedition.” Next, he claimed that the documents were immune from disclosure under Russian law. After the defendant summoned an expert on Russian law that de-bunked that theory, the plaintiff again refused on the grounds that he needed the permission of his company’s board of directors, which conveniently convened a meeting and issued a declaration barring him from disclosing the demanded documents.

Having had enough of this plaintiff’s dilatory tactics, the Judge stated as follows:

“I’m not going to allow anybody to come in here as a plaintiff and lie like that or take the position that I’m only here individually and I can’t access these Russian records because I don’t control the board, I’m only the chairman.”

And, after an appeal, sanctions against this plaintiff have now been re-affirmed; the counterclaims against them have been decided, and there is a judgment against the plaintiff in the amount of $1.78 million.

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If the unsubstantiated claims of this plaintiff are actually true, then I feel bad for the plaintiff.

But, as noted by the Court, therein lies the problem: the allegations are unsubstantiated.

In Lecce Penn Co. SPA v. Adrenaline Marketing & Promotions, Inc., the plaintiff sued in breach of contract and fraud to recover over $300,000 that they were purportedly owed. Fair enough.

But the plaintiff took it a step further: they tried to sue one of the shareholders of the defendant corporation personally.  Unfortunately for the plaintiff, they had no competent proof that this individual did anything that should have resulted in his being held personally liable for the corporate debt; in fact, the plaintiff did not even allege that he did anything that should have entitled them to pierce the corporate veil.

The thing that troubles me about this case is simply this: while I can understand that there are instances where the proof you expected to become available to support your claim doesn’t materialize, I don’t understand how the complaint itself can even fail to have any of the requisite allegations to support a claim seeking to pierce the corporate veil. That’s just poor draftsmanship.

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