The typical scenario giving rise to a fraud claim involves a misrepresentation of existing fact that is communicated to the plaintiff with the intent to deceive the plaintiff upon which the plaintiff reasonably relies to its detriment. A recent decision of the United States District Court for the Southern District of New York addresses circumstances under which a defendant has a duty to disclose truthful information affirmatively – The Plumbing Supply, LLC v. ExxonMobil Oil Corp., 14 CV 3674, NYLJ 1202797948513, at *1 (SDNY, Decided September 5, 2017).
Liability for Omitting Material Information
Where the alleged fraud consists of omitting information rather than the misrepresentation of facts, courts typically require special circumstances in order to impose a duty to disclose. Thus, a fraud claim cannot ordinarily be based on the failure to disclose information rather than a false representation of facts. There are various circumstances, however, that do serve to impose a duty to disclose and thus liability for fraud if material information is not truthfully revealed. See generally NY PJI 3:20 Intentional Torts—Fraud And Deceit, N.Y. Pattern Jury Instr.–Civil 3:20.
These include the existence of a special relationship between plaintiff and defendant requiring the defendant to disclose information – such as where the defendant owes fiduciary duties to the plaintiff. See Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 178 (2011). There is also the “special facts” doctrine where one party has superior knowledge. See P.T. Bank Central Asia v ABN AMRO Bank N.V., 301 A.D.2d 373, 754 N.Y.S.2d 245 (1st Dep’t 2003)(defendant “had information, not readily available to plaintiff, demonstrating that the appraisal required by the Bridge Loan Agreement was overstated when it solicited plaintiff’s participation in the Bridge Loan [thereby] bring[ing] plaintiff’s complaint within the ‘Special Facts’ doctrine. Under that doctrine, a duty to disclose arises ‘where one party’s superior knowledge of essential facts renders a transaction without disclosure inherently unfair’ …”).
Another circumstance is where the disclosure of complete information is necessary to clarify a false impression made by defendant’s providing incomplete information. This is the scenario of the decision in the Plumbing Supply case.
In Plumbing Supply, plaintiff owned a piece of real property sandwiched between two gas stations – one a Gulf and the other Mobil. Plaintiff brought suit against the owners of both gas stations alleging that petroleum migrated onto plaintiff’s property from one or both gas stations for which plaintiff is entitled to remediation of the contamination.
The owner of the Mobil station then brought a third party action against the remediation company that it hired to clean up the contamination coming from its property. The interesting twist was that it turned out that there was evidence that the contamination only came from the Gulf station and the remediation company was actually hired by the Gulf station as well and concealed from the owner of the Mobil station that the leakage was coming from the Gulf station, not the Mobil station.
Third-party plaintiff Mobil owner (TPP) alleged that the third-party defendant remediation company (TPD) fraudulently induced it to enter into the remediation contract and falsely obtained payment of services that were actually not required because the source of the contamination was the Gulf station, which the remediation company concealed.
The remediation company moved to dismiss the fraud claims.
The Court Sustains Fraud Claim
The Court started its analysis with the standards applicable to fraud in general, and more specifically governing claims of concealment, as follows (emphasis added):
“Under New York law, to state a claim for fraud a plaintiff must demonstrate: (1) a misrepresentation or omission of material fact; (2) which the defendant knew to be false; (3) which the defendant made with the intention of inducing reliance; (4) upon which the plaintiff reasonably relied; and (5) which caused injury to the plaintiff.” Wynn v. AC Rochester, 273 F.3d 153, 156 (2d Cir. 2001) (citing Lama Holding Co. v. Smith Barney, Inc., 88 N.Y.2d 413, 421 (1996)). An omission is fraudulent “only if the non-disclosing party has a duty to disclose.” Remington Rand Corp. v. Amsterdam-Rotterdam Bank, N.V., 68 F.3d 1478, 1483 (2d Cir. 1995). A duty to disclose arises if, among other things, “one party makes a partial or ambiguous statement that requires additional disclosure to avoid misleading the other party.” Id. (internal quotation marks omitted).
The Court then found that the Mobil owner adequately alleged both the concealment and the duty to disclose:
[TPP] also pleads [TPD’s] alleged misleading omissions with particularity. According to the [third-party complaint], while negotiating the Agreement, [TPD’s] vice president never disclosed what [TPD] knew about the Gulf station’s role in contaminating [plaintiff’s property] even though [TPD’s] Phase 1 report indicated the Gulf station played no role. While reporting on [TPD’s] remediation efforts, [TPD’s] project manager never told [TPP] the Gulf station caused the contamination, even though the status reports and invoices solely attributed the contamination to the Mobil station. As a result, [TPP] has pleaded a duty to disclose this knowledge because [TPD] made “partial or ambiguous statement[s] that require[d] additional disclosure to avoid misleading” [TPP].
Misrepresentations of fact are certainly actionable in fraud claims. Omitting information is not as straightforward. Nevertheless, concealing or omitting information can be actionable where duties to disclose arise, such as where a fiduciary relationship requires affirmative disclosure, where the defendant has superior knowledge or “special facts” not available to plaintiff or where the defendant has created a false impression that can only be clarified with full information.