As anyone who has read this blog knows, or as can be gleaned from a review of the “View All Posts” tab, I have compiled a comprehensive collection of cases showing that courts straddle both sides of the fence when it comes to adjudicating fraud claims. One can find support for either the plaintiff’s side or the defense side on any given issue. This article discusses a new First Department decision that racks up the authorities on the plaintiff’s side.
MLMIC Premium Litigation
Much litigation has been generated surrounding the “demutualization” of Medical Liability Mutual Insurance Company (MLMIC), formerly a mutual insurance company, that issued professional liability insurance policies to many physician groups and practices. After MLMIC demutualized and was acquired by National Indemnity Company in October 2018, MLMIC sought to distribute $2.502 billion in cash consideration to eligible policyholders. For many practices, the premiums for those policies were paid by the employers, not the individual physicians directly.
Litigation ensued between the individual physicians and their employers as to who was entitled to be reimbursed for the premiums that were previously paid for the coverage of the physicians.
After various decisions were rendered in the lower courts, in May 2022, the New York Court of Appeals conclusively resolved the issue in Columbia Mem. Hosp. v. Hinds, 38 NY3d 253 (2022). In Hinds, the Court of Appeals ruled that even when the employer pays premiums to a mutual insurance company to obtain a policy for its employee, and the insurance company demutualizes, “absent contrary terms in the contract of employment, insurance policy, or separate agreement, the employee, who is the policyholder, is entitled to the proceeds” of the returned premiums.
Hinds did not, however, conclusively resolve all of the issues surrounding this scenario. … Enter the great and powerful species of fraud claims.
In Cordaro v. AdvantageCare Physicians, P.C., 2022 NY Slip Op 05267 (1st Dep’t Decided Sept. 27, 2022), the Appellate Division, First Department was tasked to decide an open issue: What if the “contrary terms” of the “separate agreement” in which the physicians relinquished their right to be reimbursed was challenged and claimed to be unenforceable? How would the reimbursement be handled there? In a decision that provides a comprehensive laundry list of plaintiff-friendly authority for fraud claims, the First Department reversed the dismissal of the physicians’ claims, rejecting every form of defense attempted by the employer.
Plaintiffs were physicians who signed forms designating their employer at the time as their policy administrator. Each form stated that “‘[t]he Policy Administrator is the agent of all Insureds herein for the paying of Premium[s], requesting changes in the policy, including cancellation thereof[,] and for receiving dividends and any return Premiums when due.’” In late 2012, plaintiffs’ former employers merged into the defendant professional corporation, which became plaintiffs’ employer and policy administrator. As required by the parties’ employment agreement, defendant then paid plaintiffs’ malpractice insurance premiums.
When MLMIC submitted its plan to demutualize to the State Department of Financial Services (DFS) for approval, defendant received a policyholder information statement from MLMIC. But rather than forward that document to plaintiffs, defendant sent them a letter and a consent form to have distributions paid to their “policy administrator” – defendant – stating that plaintiffs were required to sign the consent form and, if they did not do so and were paid directly, plaintiffs would need to forward payments to defendant. Shortly afterwards, defendant sent plaintiffs a notice from MLMIC. This notice informed plaintiffs that they could appoint policy administrators to receive distributions, and that the policyholder information statement was available on MLMIC’s website. On August 3, 2018, defendant sent plaintiffs an email repeating that the consent form was “‘needed in connection with [MLMIC’s] proposed transaction … .’”
Plaintiffs then signed the consent forms. Plaintiffs subsequently claimed, however, that they were not required to sign the consent form or to forward money to the defendant, and that they did not learn of this until after signing the consent form. After the DFS approved MLMIC’s transaction, plaintiffs demanded that defendant turn over their shares of the cash consideration. Defendant refused. Plaintiffs brought suit alleging various claims, including breach of fiduciary duty and fraud, but in the lower court, all of their claims were dismissed pursuant to CPLR 3211(a)(1) and (7).
The First Department reinstated all but one of the claims.
The First Department recognized the overriding threshold issue that was left open in Hinds, observing at the outset: “Plaintiffs allege that the forms by which they authorized MLMIC to distribute their demutualization proceeds to defendant are invalid because defendant obtained them in breach of its fiduciary duty, by fraud, or due to mutual mistake. If these forms are invalid, then the demutualization proceeds belong to plaintiffs (see Columbia Mem. Hosp. v Hinds, 38 NY3d 253 ).”
The First Department then proceeded to reject every argument that defendant attempted to assert in its effort to defeat each claim, except for unjust enrichment:
Breach of Fiduciary Duty
The First Department recognized the importance of the breach of fiduciary duty claim in this context and sustained it and the remedies that it offered. It first ruled there was a fiduciary relationship:
Supreme Court should not have dismissed the breach of fiduciary duty cause of action. The policy administrator forms, which say defendant is plaintiffs’ agent, establish a fiduciary relationship between the parties (see Schulhof v Jacobs, 157 AD3d 647, 648 [1st Dept 2018]; see also Riggs v Brooklyn Hosp. Ctr., 207 AD3d 405 [1st Dept 2022][*2][the defendant’s “conduct in holding itself out as [the] plaintiff’s agent with respect to the policy” might estop “it from denying the existence of a fiduciary or confidential relationship”]). Moreover, defendant had the power to request changes to plaintiffs’ policies and to cancel them, so it had the power to affect their legal relations (compare Northeast Gen. Corp. v Wellington Adv., 82 NY2d 158, 164  [finding that the plaintiff was not the defendant’s agent because, among other things, it “had no power to affect any legal relations” of the defendant]).
It then recognized the remedies:
Transactions between a fiduciary and beneficiary are voidable if the fiduciary acts in its own interest and does not fully disclose all material facts (Blue Chip Emerald v Allied Partners, 299 AD2d 278, 278-280 [1st Dept 2002] [internal quotation marks omitted]). [Footnote omitted.] Defendant is alleged not only to have withheld the policyholder information statement from plaintiffs, but to have significantly misrepresented their contents for its own gain. These allegations, which are not conclusively refuted by the documentary evidence, are sufficient to survive a motion to dismiss.
The First Department also ruled that the breach of fiduciary duty claim was not duplicative of the fraud claims:
Defendant contends that the cause of action for breach of fiduciary duty seeking damages, as opposed to a basis for voiding the consent forms, is duplicative of plaintiffs’ fraud claims. This claim alleges a duty to disclose potential conflicts of interest, which is not present in any of the fraud claims. Therefore, this claim “[is] based on particular acts different from the alleged fraudulent acts and [is] not duplicative of the fraud claim” (Goldin v TAG Virgin Is., Inc., 149 AD3d 467, 467-468 [1st Dept 2017]).
The First Department recognized the powerful remedy of rescission on the fraud claims:
Fraud is another basis for rescinding the consent forms (see McFarland v Salerno, 40 AD3d 514, 515 [1st Dept 2007]; Merrill Lynch, Pierce, Fenner & Smith, Inc. v Wise Metals Group, LLC, 19 AD3d 273, 275 [1st Dept 2005]). Plaintiffs also properly allege constructive fraud, because they were owed a fiduciary duty by defendant and so were “warranted to . . . relax the care and vigilance they would ordinarily exercise in the circumstances” (People v Credit Suisse Sec. [USA] LLC, 31 NY3d 622, 640 n 2  [Feinman, J., concurring] [internal quotation marks and brackets omitted]).
The First Department then rejected the defense of lack of justifiable reliance, taking a liberal view of the issues as follows:
Defendant contends that plaintiffs’ fraud claims fail due to lack of justifiable reliance. However, a fiduciary relationship is not at arm’s length, and a “principal is entitled to rely on the agent’s representations and [its] complete, undivided loyalty” (TPL Assoc. v Helmsley-Spear, Inc., 146 AD2d 468, 470-471 [1st Dept 1989] [internal quotation marks omitted]; see also Braddock v Braddock, 60 AD3d 84, 94 [1st Dept 2009] [“[T]he fiduciary relationship between the parties, with its concomitant mutual obligation to act in good faith, makes [the plaintiff’s] reliance on [the defendant’s] assurances all the more reasonable”]). In any event, as it generally is, justifiable reliance here is an issue of fact (see Braddock, 60 AD3d at 88; see also Kimmell v Schaeffer, 89 NY2d 257, 264 ).
The First Department also rejected defendant’s argument that it lacked intent to defraud so as to defeat the fraud claims:
Defendant contends that the fraud claims fail due to lack of scienter. Scienter is not an element of constructive fraud or negligent misrepresentation (see Credit Suisse, 31 NY3d at 640 n 2 [concurrence] [citing authority that constructive fraud does not require scienter]; see e.g. Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 180  [listing elements of negligent misrepresentation]). As to plaintiffs’ actual fraud claims, defendant’s receipt of the policyholder information statement permits the rational inference that its misstatements were knowing and intentional (see IKB Intl. S.A. v Morgan Stanley, 142 AD3d 447, 450 [1st Dept 2016]; ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 131 AD3d 427, 428-429 [1st Dept 2015]).
Pleading with Particularity
The First Department also flatly and summarily rejected an argument often asserted against fraud claims – that the allegations fail to satisfy CPLR 3016(b), ruling: “Defendant contends that plaintiffs fail to plead fraud with particularity, as required by CPLR 3016(b), but plaintiffs’ ‘allegations are sufficiently detailed to fairly apprise [defendant] of the circumstances constituting the wrong’ (Merrill Lynch, 19 AD3d at 275).”
The First Department’s decision in Cordaro is a very handy compilation of authorities favorable to a plaintiff asserting various claims and species of fraud, constructive fraud, negligent misrepresentation as well as breach of fiduciary duty, and the remedy of rescission.