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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Reading this decision, I can’t say I’m surprised; simply put, the plaintiff had absolutely no proof to support its claims other than rank speculation.

As the Appellate Court stated:

“This argument has no support in the record, which indicates that Tapestry approached defendant about joining its company after plaintiff rejected the partnership proposal. There is no evidence, other than plaintiff’s speculation, that defendant was negotiating during the two companies’ ultimately fruitless discussions (see Abrahami v UPC Constr. Co., 224 AD2d 231, 233 [1996] [fraud must be proven by clear and convincing evidence; "loose, equivocal or contradictory" evidence will not suffice] …

“The court properly dismissed the claim alleging that defendant acted as a faithless employee because there is no evidence that defendant was negotiating for his new position with Tapestry during the pendency of the business discussions between Tapestry and plaintiff. Nor is there any support for plaintiff’s contention that defendant was making use of confidential information while negotiating his employment with Tapestry.”

In fact, after reading this decision, and given how emphatic the appellate court’s opinion is, I can’t help but wonder: why did the plaintiff even bother appealing (or even bringing the claim in the first instance)?

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The difficulties with this type of claim do not end there.

In many instances, the parties have executed a detailed agreement that contains a disclaimer stating that the purchaser is not relying upon any of the seller representations, which often will sound the death knell to any claim that the plaintiff/purchaser reasonably relied upon the seller’s representations. “[W]here a party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed.” Grumman Allied Indus. Inc. v. Rohr Indus., Inc., 748 F.2d 729, 734-35 (2d Cir. 1984); see also, Danann Realty Corp. v. Harris, 5 NY2d 317 (1959).

Not surprisingly, there are exceptions to this rule as well, such as where the concealment pertains to matters that were exclusively within the defendants’ knowledge, and could only have been discovered by the plaintiff through great difficulty (this topic will hopefully be the subject of a separate article that I intend to publish shortly).

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According to the plaintiff in the Suffolk County case of Kimelstein v. Kimelstein, he was wrongfully frozen out of his 50% interest in a property that he and brother had acquired jointly through a non-party corporation.  More specifically, he contends that pursuant to an oral agreement he made with his brother in 2007, the plaintiff agreed to forgo his interest in the non-party corporation and sell his interest in the Defendant corporation as well as the real property it owned for the sum of $350,000, in exchange for his brother’s promise to make weekly payments in the amount of $850, until such time as Defendants were able to refinance the real property, after which the balance of the $350,000 would become due.

As I’m sure you can guess, the defendants stopped making payments, and now, they moved to dismiss the lawsuit on the grounds that the plaintiff’s claim is barred under New York’s Statute of Frauds because the claim pertains to real estate and there was no written contract.

Although the Court was constrained to dismiss the plaintiff’s breach of contract claims, the Court was clearly troubled by the facts of this case, and therefore allowed the plaintiff’s equitable claims for unjust enrichment and the imposition of a constructive trust to survive, stating:

“Plaintiff’s allegations that he was a family member, that Defendant promised him $350,000 to forego his interest in the property owned by L&J as well as the corporation, that Plaintiff spent time and money over seven years investing in L&J, are sufficient to withstand a motion to dismiss …

“Plaintiff has alleged that Defendants received valuable benefits, including his contributions over the years to the corporate entities and toward the purchase of the real property; that he has given up any claim to ownership of stock in at least one of the corporations and that it would be inequitable for the individual Defendant to hold title to both without affording plaintiff some sort of compensation.”

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In Robles v. Copstat Security, Inc., the plaintiffs brought a proposed class action on behalf of a class of all security guards employed by Copstat Security Inc. (Copstat Inc.), Copstat Security LLC, and Andrews International Inc. after the defendants allegedly failed to pay the plaintiffs’ earned overtime pay in violation of the Fair Labor Standards Act (FLSA) and New York’s Minimum Wage Act.

Although the Court noted that the plaintiffs’ allegations in support of their claim that the corporate veil should be pierced were rather “general and vague” (suggesting that these claims may later be dismissed unless additional facts are fleshed out), the Court also refused to dismiss the claims against the individual defendant Bellistri at the initial pleading stage. The Court cited plaintiffs’ claim that the defendants’ corporate veil should be pierced because Bellistri, as the lone shareholder of Copstat, exercised complete domination and control over Copstat, and in that role, Bellistri left the company terribly undercapitalized when he unilaterally took nearly all of Copstat’s assets, and thereby left the corporate defendants unable to satisfy any adverse judgment.

From a practical standpoint, it remains to be seen what the plaintiffs gain by the denial of the individual defendant’s motion to dismiss, because unless the plaintiffs have, or later uncover, facts that support their contention that the corporate veil should be pierced, they may be merely prolonging the ultimate dismissal of these claims.

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In this case, Oltchin SA v. Zebulon Industries, et al., the defendant manufacturers failed to pay for the materials that were furnished to them by the plaintiff, a Romanian corporation. At the binding arbitration that was held before an international tribunal of the ICC, plaintiff was awarded damages of over $1.5 million. Thereafter, the plaintiff corporation had the award confirmed by a New York State court, and the award became a collectible judgment. Or so the plaintiff thought.

When the plaintiff went to enforce the judgment, it learned that the defendants had divested their corporation of all its assets. Consequently, they brought this case seeking to set aside those transactions as fraudulent and to pierce the defendants’ corporate veil(s).

Although the Court’s opinion was rendered in a very matter-of-fact manner, you can’t help but sense that the following sentiment underlies the Court’s opinion: there is absolutely no way I’m going to let these defendants get away with this charade on some procedural technicality.

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A word of caution is in order, though, because New York’s courts have construed this exception  very narrowly - the adverse interest exception applies only when the agent has “totally abandoned” the principal’s interests and is acting entirely for his own or another’s purposes (see, e.g., Center v Hampton Affiliates, 66 NY2d at 785).

And, since this is an affirmative defense, you can probably guess who has the burden of proving that the employee acted for entirely selfish reasons: that’s right – the employer.

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Earlier today, New York Federal Judge Jed Rakoff issued a lengthy decision detailing why, despite the traditional deference granted to parties in determining the terms of their own settlements, he would not sign off on the S.E.C.’s willingness to accept a $33 million penalty from Bank of America for its alleged breach of fiduciary duty and fraud perpetrated against its investors – in other words, lying – in order to award over $3.5 billion in bonuses to the outgoing Merrill employees – the ones who nearly bankrupted Merrill to begin with.

As Judge Rakoff cynically observed, the proposed settlement reeks from top to bottom: the S.E.C. gets to showcase their supposed toughness on wrongdoing (even though the proposed settlement would amount to an infinitesimal penalty compared to the false and fraudulent statements that led to the multi-billion dollar merger), the Bank gets to claim that it is paying all too much as a result of being over-regulated, and, adding insult to injury, the ones who supposedly perpetrated this entire fraud – the executives – walk off scot-free, with the shareholders (their fiduciaries) picking up their tab for the executives’ lies.

For those outraged by the banks’ behavior (like me), this decision is a welcome breath of fresh air.

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The initial action, which sought monetary damages for these former employees’ alleged breach of fiduciary duty,   embezzlement and fraud was filed by Marciano roughly two years ago. Over the course of the last two years, however, Marciano disregarded numerous court orders directing that he provide certain discovery, such as appearing for his Court-ordered deposition, which ultimately led the presiding judge to “strike his complaint,” which is legalese for dismissing his case. Since he also refused to comply with the Court’s orders directing him to respond to the employees’ discovery demands on their respective counterclaims, the Court also struck his answer to their allegations, which essentially took away his attorneys’  ability to defend against the employees’ claims.

Lest you think that such conduct is regular, standard fare, Marciano apparently went through seventeen (17!!!) attorneys on this case over the past two years. This is simply unheard of.

At the damages portion of the trial (based on Marciano’s misconduct, the judge had already precluded him from contesting liabilty), Marciano made a surprise appearance, and was completely unapologetic: he conceded that he was on a crusade against these former employees.  Given the size of the verdict against him, it certainly seems that his testimony made quite an impression on the jury.

The moral of the story is clear: if you disregard with impunity a court’s orders and carry this arrogance before a jury, you do so at your own peril.

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