An unfortunate yet all too frequent dilemma for victims of fraud is how to obtain adequate compensation when the actual fraudsters over which claims of fraud are entirely provable are judgment-proof and have no identifiable assets from which to recover any money. The law does provide certain remedies to address this predicament, including, principally, the cause of action known as “aiding and abetting fraud.” Deeper pockets may be found in others who may not have directly perpetrated the fraud, but who knew about it and contributed substantial assistance to accomplish it. Establishing such claims, however, requires careful pleading and proof, lest they fail as well.
Aiding and Abetting Fraud
Although the cause of action for aiding and abetting fraud has three simple elements, establishing such a claim is not always easy. The three elements recognized by the courts have been stated succinctly as follows: “In order to plead properly a claim for aiding and abetting fraud, the complaint must allege: ‘(1) the existence of an underlying fraud; (2) knowledge of this fraud on the part of the aider and abettor; and (3) substantial assistance by the aider and abettor in achievement of the fraud’.” Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 (1st Dep’t 2009)(citation omitted). As I have explained in “Claims of Aiding and Abetting Fraud Require Proximate Cause”:
Within the third element of “substantial assistance,” however, courts also examine whether the acts that allegedly constitute the “assistance” were a “proximate cause” of the alleged damages. This element has been elaborated upon in many federal court decisions in New York. See, e.g., JP Morgan Chase Bank v Winnick, 406 F Supp. 2d 247, 256 (SDNY 2005)(“Whether the assistance is substantial or not is measured, in turn, by whether ‘the action of the aider and abettor proximately caused the harm on which the primary liability is predicated.’ In re WorldCom, Inc., at 560–61 (citations omitted). Essentially, ‘[t]he substantial assistance element has been construed as a causation concept, requiring that the plaintiff allege that the acts of the aider and abettor proximately caused the harm upon which the primary liability is predicated.’ Primavera Familienstiftung v. Askin, 173 F.R.D. 115, 126 (S.D.N.Y.1997).”); Pension Comm. of Univ. of Montreal Pension Plan v Banc of Am. Sec., LLC, 446 F Supp. 2d 163, 201-02 (SDNY 2006)(“the plaintiff must allege that the aiding and abetting defendant proximately caused the harm on which the primary liability is predicated. ‘But-for’ causation is insufficient; aider and abettor liability requires the injury to be a direct or reasonably foreseeable result of the conduct. At least with respect to an aiding and abetting fraud claim, the ‘substantial assistance’ and ‘causation’ elements are interrelated—‘[w]hether the assistance is substantial or not is measured … by whether the action of the aider and abettor proximately caused the harm on which the primary liability is predicated.’”); McDaniel v Bear Stearns & Co., Inc., 196 F Supp. 2d 343, 359 (SDNY 2002)(“Proximate cause exists where defendant’s actions were ‘a substantial factor in the sequence of responsible causation,’ and plaintiff’s injury was ‘reasonably foreseeable or anticipated as a natural consequence.’ First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d Cir.1994). Claimants’ injury must either have been ‘the natural and probable consequence of the fraud’ or an injury that [defendant] ‘ought reasonably to have foreseen as a probable consequence of the fraud;’ [Defendant] need not have foreseen or intended the damages suffered by Claimants. The City of New York v. Coastal Oil of New York, No. 96 Civ. 8667, 1999 WL 493355, at *12 (S.D.N.Y. July 12, 1999) (citing Citibank, N.A. v. K–H Corp., 968 F.2d 1489, 1496 (2d Cir.1992); Cumberland Oil Corp. v. Thropp, 791 F.2d 1037, 1044 (2d Cir.1986); Nat’l Commercial Bank v. Morgan Stanley Asset Mgmt. Inc., No. 94 Civ. 3167, 1997 WL 634292, at *7 (S.D.N.Y. Oct.15, 1997)).”).
In the New York State courts, the federal principles have been relied upon as well. See Stanfield Offshore Leveraged Assets, Ltd. v Metro. Life Ins. Co., 64 AD3d 472, 476 (1st Dep’t 2009)(“Substantial assistance exists ‘where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated’ (UniCredito Italiano, 288 F.Supp.2d at 502 [internal quotation marks omitted], quoting McDaniel v. Bear Stearns & Co., Inc., 196 F.Supp.2d 343, 352 [S.D.N.Y.2002] ).”).
Trying to hold financial institutions, such as banks and other lenders, liable for the fraud of their customers or borrowers has its own challenges, as I have reviewed in “Federal Court Dismisses Aiding and Abetting Fraud Claim Against Banks Arising from Customer’s Ponzi Scheme.” Yet courts have recognized this path in certain situations, as I reported in “First Department Very Lenient in Sustaining Allegations Against Bank for Aiding and Abetting Fraud of its Customer.”
A new decision of the Appellate Division, Second Department, had no trouble affirming the dismissal of attempted claims of fraud and aiding and abetting fraud against a lender in Weinstein v Levitin, 2022 NY Slip Op 04828 (2d Dep’t Decided Aug. 3, 2022).
Lender Escapes Liability for Fraud of Others
In Weinstein, plaintiffs alleged that certain individuals and their lawyers perpetrated a fraud by inducing plaintiffs into investing in illegitimate real estate transactions and convincing plaintiffs to borrow money for such from a third-party lender. Plaintiffs brought an action not only against these principal alleged fraudsters, but the lender as well, attempting to allege claims of fraud, aiding and abetting fraud and unjust enrichment. While the non-lawyer defendants defaulted in the action, the lender moved to dismiss all claims against it at the pleadings stage. The Kings County Commercial Division granted the lender’s motion to dismiss in its entirety and the Second Department affirmed.
The Second Department first laid out the basic applicable principles of law as follows:
“‘The elements of a cause of action for fraud require a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages'” (Emby Hosiery Corp. v Tawil, 196 AD3d 462, 464, quoting Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559). Further, “[t]o sustain a cause of action alleging fraudulent concealment, the plaintiff must allege that the defendant had a duty to disclose the material information” (Swartz v Swartz, 145 AD3d 818, 823; see Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d at 562). In addition, “[t]o recover for aiding and abetting fraud, the plaintiff must plead the existence of an underlying fraud, knowledge of the fraud by the aider and abettor, and substantial assistance by the aider and abettor in the achievement of the fraud” (Fox Paine & Co., LLC v Houston Cas. Co., 153 AD3d 678, 679; see Matter of Woodson, 136 AD3d 691, 693). “Where a cause of action is based upon fraud, the circumstances constituting the alleged wrong must be stated in detail” (Gruber v Donaldsons, Inc., 201 AD3d at 888-889; see CPLR 3016[b]; Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d at 559).
The Second Department then easily affirmed the dismissal of all claims against the lender by applying these basic legal requirements to the insufficient allegations of the complaint. (A review of the complaint e-filed in the lower court shows that it essentially lumped the lender into general allegations of claimed fraud against all named defendants, without specifying how the lender allegedly participated or what it knew. Whether more could have been alleged against the lender is unclear, but certainly what was alleged was conclusory and insufficient, as explained by the Second Department next.)
First, as to the direct fraud claim, the Second Department observed that the complaint did not identify any specific misrepresentations actually made by the lender to plaintiffs, a fatal defect on the fraud claim (citing a case in which I argued and prevailed on similar grounds): “Here, the Supreme Court properly determined that the plaintiffs failed to state a cause of action for fraud against Bordeaux [the lender], since the plaintiffs did not allege any specific misrepresentation made by Bordeaux to them (see Oppedisano v D’Agostino, 196 AD3d 497, 500; High Tides, LLC v DeMichele, 88 AD3d 954, 958).”
Next, the Second Department correctly recognized that the lender could not be held liable for failing to disclose information to the plaintiffs since it had no legal duty affirmatively to disclose information (again citing two cases in which I appeared and prevailed on such arguments): “The plaintiffs also failed to state a cause of action for fraudulent concealment, since they did not allege that Bordeaux [the lender] had a ‘special or privity-like relationship’ with them so as to impose a duty of disclosure upon Bordeaux (High Tides, LLC v DeMichele, 88 AD3d at 960 [internal quotation marks omitted]; see Swartz v Swartz, 145 AD3d at 824).”
Finally, the Second Department affirmed the dismissal of the aiding and abetting fraud claims, holding: “In addition, the plaintiffs failed to state a cause of action for aiding and abetting fraud against Bordeaux, since they did not allege that Bordeaux had knowledge of the alleged fraudulent real estate scheme by Sprei and Levitin (see Fox Paine & Co., LLC v Houston Cas. Co., 153 AD3d at 679; Matter of Woodson, 136 AD3d at 693). Moreover, neither the plaintiffs’ allegations nor the surrounding circumstances were sufficient to give rise to a reasonable inference that Bordeaux possessed such knowledge (see Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d at 560).”
Trying to find a deep pocket to answer for fraudulent conduct can be vexing at times. While there are remedies against others who know about the fraud and assist it, pleading such a case takes care and knowledge of the legal requirements. General or conclusory allegations will not sufficient. Specific conduct by the third-party must be adequately identified, alleged and established in order to prevail.