In my last post, I explained that even omissions can form the basis of fraud claims under a number of circumstances, and therefore the New York Martin Act has not preempted claims of fraud that are based upon omissions to the extent they existed at common law apart from the required disclosures under the Martin Act.
The Appellate Division, First Department, has just rendered a decision relying upon one of the grounds for establishing a fraud claim even without alleging an affirmative misrepresentation of fact. In DirectTV, LLC v Nexstar Broadcasting, Inc., 2021 NY Slip Op 06539 (1st Dep’t Decided Nov. 23, 2021), the First Department sustained a fraud claim based upon the misleading partial disclosure doctrine.
Duty to Disclose
In my post “Fraud Claim Can be Based on Duty to Disclose Even Without Special Relationship,” I commented upon the decision in The Plumbing Supply, LLC v. ExxonMobil Oil Corp., 14 CV 3674 (S.D.N.Y 2017), which nicely summarized the law concerning the duties that arise to make truthful disclosures in order to clear up false impressions. In Plumbing, the Court explained:
“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 in Plumbing then found that the plaintiff adequately alleged both the concealment and the duty to disclose:
[Plaintiff] also pleads [Defendant’s] alleged misleading omissions with particularity. According to the [complaint], while negotiating the Agreement, [Defendant’s] vice president never disclosed what [Defendant] knew about the Gulf station’s role in contaminating [plaintiff’s property] even though [Defendant’s] Phase 1 report indicated the Gulf station played no role. While reporting on [Defendant’s] remediation efforts, [Defendant’s] project manager never told [Plaintiff] the Gulf station caused the contamination, even though the status reports and invoices solely attributed the contamination to the Mobil station. As a result, [Plaintiff] has pleaded a duty to disclose this knowledge because [Defendant] made “partial or ambiguous statement[s] that require[d] additional disclosure to avoid misleading” [Plaintiff].
Direct TV Decision
In Direct TV, the First Department affirmed the lower court’s decision granting plaintiff leave to file an amended complaint adding a fraud claim. The First Department rejected a number of arguments defendant had made in trying to convince the court that the amendment would be “palpably improper or insufficient as a matter of law.”
First, the Court ruled that the fraud claim was “not duplicative of the contract claim” because it was not based upon “a mere ‘insincere promise’ … (cf. RKA Film Fin., LLC v Kavanaugh, 171 AD3d 678, 679 [1st Dept 2019]).” Rather, the First Department noted that “[i]nstead, plaintiff relie[d] on the theory of a misleading partial disclosure, alleging that it would not have entered into this contract if it knew of the true facts (see e.g. Basis Yield Alpha Fund [Master] v Goldman Sachs Group, Inc., 115 AD3d 128, 135 [1st Dept 2014]).” The Court continued: “A misleading partial disclosure can be actionable as fraud (see e.g. Juman v Louise Wise Servs., 254 AD2d 72, 74 [1st Dept 1998]).”
In Juman, cited by the First Department in Direct TV, the Court clearly explained the doctrine:
We reject defendant’s contention that it had no duty to disclose to plaintiffs at the time of the placement that, among other things, the prospective adoptee’s natural mother had been diagnosed as a schizophrenic and had been confined to a mental institution for much of her life. Defendant’s partial disclosure of other information about the mother, assuming arguendo that all such disclosed information was literally true, created a false impression of the mother’s medical and mental condition. Given plaintiffs’ total dependency on defendant for the relevant facts, such a misleading partial disclosure, if the withheld facts are proven to have been material, would be actionable as fraud (see, Junius Constr. Corp. v Cohen, 257 N.Y. 393, 400; cf., Elghanian v Harvey, 249 AD2d 206). Because a duty to disclose would have arisen from the misleading partial disclosure, it is unnecessary to reach the questions of whether defendant would have had an affirmative duty to disclose the mother’s true condition if it had otherwise remained silent about her.
While misrepresentations of fact are certainly actionable in fraud claims, even allegations that information has been omitted 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.