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?

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

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.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

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.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

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.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

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.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

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.”

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Although it is far from common knowledge, there is another option that may be available to recoup your losses in the breach of contract context, particularly in the event that a damages award will not make you whole. And that is through is the equitable doctrine of rescission, which aims to restore the “status quo ante,” or in other words, put the parties to the contract back into the same position before the contract was entered into.

A word of caution is in order here: this doctrine is only available in limited circumstances, such as where the parties never achieved a “meeting of the minds,” i.e., where both sides understood their respective obligations under the contract, or where one party was fraudulently induced into entering into the contract.

That said, here are some more grounds rules:

(1)               Rescission “is to be invoked only when there is lacking complete and adequate remedy at law and where the status quo may be substantially restored.” (Rudman v. Cowles Communications, Inc., 30 N.Y.2d 1, 13, 330 N.Y.S.2d 33, 280 N.E.2d 867);

(2)              If the other party to the agreement substantially changed their position in reliance on the agreement, and it would prove impractical – if not impossible to restore the other party to the position they were in pre-contract (such as where two companies were merged). (see, e.g., Gravenhorst v. Zimmerman, 236 N.Y. 22, 34-35, 139 N.E. 766; Kamerman v. Curtis, 285 N.Y. 221, 226, 33 N.E.2d 530).

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

This was just one of the issues that New York Federal Judge Jack Weinstein had to address in Globaltex Group Ltd. v. Trends Sportswear Ltd., a commercial litigation case where the plaintiff sought to recover payment for goods that it shipped.

The facts of this case were – and are – rather fascinating.

In this case, the plaintiff, a Hong Kong garment manufacturer, sold the defendant several large containers of clothing.  But here’s the interesting part:  instead of standard invoicing for the shipments, both parties to the deal used a “double invoicing” method in order to avoid United States customs duties. The first invoice, which understated the amount and value of the clothing, was presented to customs officials for purposes of calculating the amount of customs duties that were owed;  a second invoice which set forth the actual value of the goods seeking payment was then sent by plaintiff to the defendants.

When the defendants failed to pay on these invoices, leaving an outstanding balance totaling nearly $2 million, this lawsuit seeking recovery in breach of contract, business fraud, unjust enrichment, tortious interference and conversion followed.

The defendants in this case definitely merit the “chutzpah” award: they sought to dismiss the claim – and thereby avoid having to pay for the goods that they ordered, received, and presumably profited from – on the grounds that the contract between the parties was illegal, and therefore, unenforceable.

The Court articulated the general rule as follows:

“In New York ‘[i]llegal contracts are, as a general rule, unenforceable.’ Lloyd Capital Corp. v. Henchar, Inc., 80 N.Y.2d 124, 127 (1992) … An agreement which is lawful on its face and which does not contemplate or necessarily entail unlawful conduct in its performance is enforceable by the promisee even though he engages in unlawful activity in the agreement’s performance.”

Applying these rules to reject the defendants’ argument, the Court stated as follows:

“It appears that the double invoicing was only indirectly related to the contract, rather than being “central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract … Defendants’ invocation of the illegality doctrine is unpersuasive in that they seek to use the doctrine “as a sword for personal gain rather than a shield for the public good.”

I have no doubt that justice was achieved by this decision.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

In a strongly worded -- and educational -- opinion, a New York Federal Judge went out of his way to delineate what allegations suffice, and in White v. National Home Protection, Inc., what did not suffice, to survive dismissal on a claim seeking to pierce the corporate veil.

www.youtube.com/watch?v=qdvSBxFv6ko

In granting the defendants’ motions to dismiss these claims, the Court held as follows:

“[F]indings that corporation ‘fail[ed] to observe corporate formalities…had no contracts, no employees, and no independent office space…had no separate bank account…[and] no capital or assets at the time of trial’ insufficient to warrant finding of ‘domination’ … Indeed, plaintiff makes no allegation that the individual defendants intermingled personal and corporate funds, failed to deal with NHP on an arms-length basis, or in any meaningful way abused or disregarded the corporate form.

“Moreover, even if her allegations were sufficient with respect to domination, ‘complete domination of the corporation…standing alone, is not enough … Rather ‘[t]he party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.’ Here, plaintiff makes no such allegation, contending solely that the corporation—as a corporation—perpetrated a fraud. Such allegations do not warrant veil piercing.”

Just another reminder why it is so difficult to pierce the corporate veil.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Recently, I spoke with a gentleman who runs a small, but profitable, family-owned business that did a significant amount of custom work for a vendor, only to have that vendor – which is a much larger company – turn around and tell this man directly: “we’re not paying you, and if you don’t like it, we’ll tie the case up in the courts for years.”

Venting his frustration at the prospects for his case (like many small businesses, he made the “mistake” of taking the defendant-vendor at his word, and in hindsight, didn’t memorialize all of their understandings in writing as well as he could have) and the anticipated cost of litigating the breach of contract case in New York, the man responded as follows:

“This really, really sucks. Even more depressing is that this is the “American Way.” You know how it is done in the rest of the world? Well, for example, my mother in law in [Europe]  bit into a hard candy that she bought at a department store and chipped her front tooth, just last week. She complained about it to the manager and he said ‘Not to worry. Just you get that fixed and we’ll pay for it, whatever the cost…we take care of our customers here.’  Here they would first deny that the candy came from them, then deny that the candy caused the damage, then refer you to their legal department before even listening to whether the claim had any merit.”

It’s people like this gentleman that motivate me to do what I do. And he is precisely the type of person that the legal system (should be) designed to help.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.