During the course of my forty years in practice, I have seen a lot of pleadings that throw in all kinds of allegations of false statements or other claimed “fraudulent” conduct seeking to formulate a cause of action for the tort of fraud. But simply pointing to what might be thought of colloquially as fraudulent conduct or even outright false statements does not necessarily satisfy the legal elements sufficiently to state a cause of action for fraud. Pleading a viable cause of action for fraud requires strategic thought, legal precision and detail.
To properly state a claim for fraud, the false statement or fraudulent conduct must have been directed at the claimant and influence the claimant to its detriment.
As the New York Court of Appeals explained in Pasternack v. Laboratory Corporation of America Holdings, 27 NY3d 817, 829 (2016), “the tort of fraud is intended to protect a party from being induced to act or refrain from acting based on false representations—a situation which does not occur where … the misrepresentations were not communicated to, or relied on, by plaintiff. We, therefore, decline to extend the reliance element of fraud to include a claim based on the reliance of a third party, rather than the plaintiff.” For a more detailed commentary on Pasternack, see my post Fraud Claimant Can’t Rely on Reliance of Third Party on Misrepresentations.
This principle was recently addressed by the Appellate Division, Second Department, in Nieves-Schein v Permitech, Inc., 2024 NY Slip Op 03179 (2d Dep’t Decided June 12, 2024).
In Nieves-Schein, plaintiffs purchased real property from defendant seller. At the time the contract of sale was entered into, the property had open permits related to construction on the premises. As part of the contract, the permits needed to be “closed out” (submission of paperwork in order for the Town to issue a certificate of completion) before the sale was consummated.
To close out the permits, the seller retained certain professionals who filed “as built drawings” and supplemental documents. It turned out those papers contained various misrepresentations as to the condition of the premises, upon which the Town relied to issue the certificate of completion. It was only after the sale that plaintiffs learned that the certificate of completion did not reflect the condition of the premises, prior construction had not been completed in accordance with plans and specifications, and much of the work that was certified required modification or repair.
Plaintiffs initially only sued the seller, but later amended their complaint to assert claims for professional malpractice, negligent misrepresentation, and fraud against the professionals. Both sides then moved for summary judgment. The court below denied plaintiffs’ motion and granted summary judgment dismissing all claims against the professional defendants.
The Second Department first disposed of the claims for professional malpractice and negligent misrepresentation by relying upon long-standing law that there was no direct contractual relationship between plaintiffs and the professionals, or the “functional equivalent of privity” so as to impose a legal duty to plaintiffs. The Court observed that “the professional defendants’ general awareness that the premises were being sold and that their drawings and documents were to be used to further the sale of the premises does not constitute a relationship with the plaintiffs that approached the functional equivalent of privity, since the plaintiffs were not known parties to the professional defendants.”
As to the fraud claim, the Second Department made a similar finding. The Court first recited the elements of the cause of action for fraud: “‘The elements of a cause of action sounding in fraud are a material misrepresentation of an existing fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance upon the misrepresentation . . . and damages’ (Eva Chen Fine Jewelry, Inc. v Recovery Racing IX, LLC, 222 AD3d 840, 842 [internal quotation marks omitted]).”
The Court then focused on two key undisputed facts: (1) the professionals did not make any misrepresentations to the plaintiffs, but only to the Town; and (2) the plaintiffs were not even aware of those drawings and documents submitted to the Town until after the sale of the property closed:
Here, the evidence reveals that the drawings and documents were made by the professional defendants for the purpose of obtaining the certificate of completion from the Town. The drawings and documents were submitted to the Town, which issued the certificate of completion, and the plaintiffs became aware of them only after the sale of the premises had been completed. The professional defendants were not aware that the plaintiffs were planning on purchasing the premises at the time they created and submitted the drawings and documents. Thus, contrary to the plaintiffs’ contention, the professional defendants established that the misrepresentations were not made with the intent to induce the plaintiffs’ reliance thereon and that the plaintiffs did not rely on them (see Apollo H.V.A.C. Corp. v Halpern Const., Inc., 55 AD3d 855, 857; cf. Robles v Patel, 165 AD3d 858, 860). In opposition, the plaintiffs failed to raise a triable issue of fact.
Thus, plaintiffs were not able to satisfy the requirements that the false statements be made to the claimant and influence the claimant to act to its detriment.
Plaintiffs could have potentially fared better by trying an angle based upon reflections made by the Court of Appeals in Pasternack. In that decision the Court recognized case law approving fraud claims even though the false statements were not made directly to the claimants, observing “that indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it.” Pasternack, 27 NY3d at 828. While the professional defendants in Nieves-Schein apparently did not know specifically of plaintiffs, the evidence indicated they were aware that the property was being sold and that the documents they were preparing were being relied upon to get the sale consummated, i.e., to convince the purchaser to buy. That could arguably have constituted the “indirect” communication to an ultimate buyer so as to affect the buyers’ decision to close on the sale. In any event, the Second Department was not convinced that any such connection was sufficient to amount to fraud there.
Commentary
As is often the situation with many of the elements of the cause of action for fraud, even the most egregious fraudulent conduct or false representations may not be sufficient to constitute actionable fraud. There apparently was no dispute in Nieves-Schein that the documents submitted by the professionals contained misrepresentations at the very least. Under the circumstances, however, that was not sufficient to form the basis of any causes of action, including fraud.