In GoSmile, Inc. v. Levine, a decision that was handed down on December 21, New York’s Appellate Division, First Department (which covers New York and Bronx Counties) was confronted with the following question:  “whether a plaintiff is permitted to assert claims for both fraud and breach of contract, where the fraud claim is based upon allegations that defendant induced plaintiff to enter into that contract based on misrepresentations of present facts.”

The short answer: yes.

“Isn’t that kind of obvious?’, you ask. No, it isn’t.

Because there are some general rules at play in breach of contract cases in New York that would suggest the opposite conclusion:

(1) You can’t convert a breach of contract claim into a tort, such as fraud (which is an intentional tort); and,

(2) You can’t pursue a breach of contract or fraudulent misrepresentation or concealment claim if you waive those claims as part of a disclaimer or settlement agreement.

So why did the Court go the opposite way in this case?  Two reasons:

(1) “In the instant matter, plaintiff’s allegation that defendant knowingly misrepresented that he did not breach the confidentiality and non-compete provisions of the 2003 agreement is not merely an insincere promise of future performance. It was instead, a misrepresentation of then present facts that was collateral to the contract, and thus plaintiff sufficiently alleged a cause of action sounding in fraud“; and,

(2) The general release did not act as a bar to plaintiff’s fraud and breach of contract claims because plaintiff specifically sought defendant’s express warranty that he didn’t breach his non-compete agreement, and the general release stated clearly that it did not extend to claims which “[plaintiff] does not know or suspect to exist in his favor at the time of executing the release.” After reading the court’s rendition of the facts of this case (for more on this, see “When a Fiduciary Breaches a NY Non-Compete Agreement and Lies About It”), however, no one should be surprised at the outcome.

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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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Although I’m certainly no fan of the insurance industry, I can’t blame them for fighting this claim. And I don’t blame the Court for siding with them either.

Recently, in Rampersant v. Nationwide Mutual Fire Ins. Co., a Brooklyn  judge dismissed the lawsuit brought by a Kings County man against his auto insurer, which sought money to replace his stolen SUV. And, from all appearances, it was in fact stolen.

But the insured was penny-wise and pound foolish. In an effort to save a few dollars off of his insurance premium, he indicated that he resided in North Carolina rather than New York, where he actually lived. When the insurance company investigated his claim that his SUV was stolen from New York and found that he in fact lived, and kept his vehicle, in New York, they found that he made a material misrepresentation (i.e., “lied”) in his application for insurance, which led them to underwrite his policy at a lower premium than had he indicated his true residence in New York.  Therefore, in concluding that his policy was issued on fraudulent grounds, (in legalese, “misrepresentation“), the company voided his insurance contract retroactively and denied the claim.

Leaving aside the moral component to lying on an insurance application, this insured did something that was patently foolish: the entire purpose of having insurance is to cover you in the event of a loss; but by lying on the application in order to save a few dollars in the short run, he guaranteed that the policy would never cover him. In other words, he just threw money out the window.

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Before addressing how you prove a negligent misrepresentation claim, we first have to define what it is – and what it isn’t.

Unlike its cousin, the fraud claim, negligent misrepresentation does not require a showing of malicious intent or recklessness by the defendant; rather, it requires that the plaintiff prove the following by a preponderance of the evidence:

(1) awareness by the defendant that his statement was to be used for a particular purpose or purposes;

(2) reliance by a known party or parties in furtherance of that purpose;

(3) some conduct by the defendants linking them to the plaintiffs and evincing defendants’ awareness of their reliance;

(4) that defendant’s statements or conduct exaggerated or misstated certain facts;

(5) that these misstatements resulted from the defendant’s negligence and/or lack of due diligence;

(6) that plaintiff relied on defendant’s misstatements; and,

(7) as a result, plaintiff suffered damages.

An important caveat bears mention, though.

As a New York Federal Court recently held in Five Star Development Resort Communities v. iStar RC Paradise Valley, “Under New York law, in order to state a claim for negligent misrepresentation, a plaintiff is required to allege that the speaker is bound to the other party ‘by some relation or duty of care’” outside a contract that may be between the parties.

Therefore, the Court continued, “In ordinary commercial contexts…it is imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.”  In other words, “[i]f the only interest at stake is that of holding the defendant to a promise, the courts have said that the plaintiff may not transmogrify the contract claim into one for tort.” JP Morgan Chase Bank, 350 F. Supp. 2d at 401 (quoting Hargrave v. Oki Nursery, Inc., 636 F.2d 897, 899 (2d Cir. 1980)).

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