Imposing Responsibility for the Fraud of Others—Let me Count the Ways
Love it or hate it, there are a number of ways that a person or entity can be held responsible for the fraudulent acts of others. A new decision rendered by the New York Appellate Division, Fourth Department, thoroughly analyzed the subject and is instructive and enlightening: Canfield Funding, LLC v Focalpointe Group, LLC, 2025 NY Slip Op 04374 (4th Dep’t Decided July 25, 2025). As shown by the doctrines and principles explained below, and the analysis applied in Canfield, employers and other principals have significant duties to oversee, monitor and control the acts of their employees and agents to avoid unsuspecting liability for fraudulent conduct.
First, some background. …
Doctrines Imposing Legal Responsibility for Fraud of Others
There are various legal doctrines and principles that provide the source for imposing legal responsibility upon persons or entities arising from or related to the fraudulent acts of others, including:
- Principal-Agency Concepts
- Actual Authority of Agent
- Apparent Authority of Agent
- Ratification of Agents’ Acts
- Vicarious Liability and Respondeat Superior
- Negligent Retention/Supervision of Agents/Employees
- Aiding and Abetting Fraud
These doctrines often overlap and are intermingled with each, and therefore are frequently alleged in combination as the basis for the relevant causes of action. Here are some useful case authorities on these doctrines and related issues:
The New York Pattern Jury Instructions addresses certain of the relevant factors on principal/agent liability as follows:
An actionable fraudulent representation need not have been made directly by defendant. A principal is liable for the fraudulent acts of the agent committed within the scope of authority, Fairchild v McMahon, 139 NY 290, 34 NE 779 (1893); Chase Manhattan Bank, N.A. v Perla, 65 AD2d 207, 411 NYS2d 66 (4th Dept 1978); see Standard Funding Corp. v Lewitt, 89 NY2d 546, 656 NYS2d 188, 678 NE2d 874 (1997); Adler v Helman, 169 AD2d 925, 564 NYS2d 828 (3d Dept 1991). A principal may also be liable for an agent’s acts outside the scope of authority if the principal ratifies the fraudulent acts and retains the benefits derived from them, see Elwell v Chamberlin, 31 NY 611 (1865); Adler v Helman, supra; Chase Manhattan Bank, N.A. v Perla, supra.
N.Y. Pattern Jury Instr.–Civil 3:20
In the Perla decision cited by the PJI, the court ruled in relevant part:
Inasmuch as the complaint alleges a cause of action in fraud against Samuel C. Perla, it was erroneously dismissed as to his wife, for it charges that he acted as his wife’s attorney and agent in acquiring the property in her name. If he did, she is liable as a principal for the fraudulent acts of her agent committed within the scope of his authority (Fairchild v. McMahon, 139 N.Y. 290, 34 N.E. 779). If he acted outside his authority, she is similarly liable if she later ratified his fraudulent acts and retained the benefits derived from them (see Elwell v. Chamberlin, 31 N.Y. 611, 619; Bailey v. Diamond Int. Corp., 47 A.D.2d 363, 367, 367 N.Y.S.2d 107, 111.
Chase Manhattan Bank, N.A. v Perla, 65 AD2d 207, 211 [4th Dept 1978]
In Adler v Helman, 169 AD2d 925, 926-27 [3d Dept 1991], another informative case on point, the Third Department observed:
A principal is liable for the fraudulent acts of his agent committed within the scope of his authority, and if the agent acted outside the scope of his authority, the principal is nevertheless liable if he later ratifies the fraudulent acts and retains the benefits derived from them (see, Chase Manhattan Bank N.A. v. Perla, 65 A.D.2d 207, 211, 411 N.Y.S.2d 66). “When an agent abandons the object of his agency and acts for himself, by committing a fraud for his own exclusive benefit, he ceases to act within the scope of his employment and, to that extent, ceases to act as agent” (Credit Alliance Corp. v. Sheridan Theatre Co., 241 N.Y. 216, 220, 149 N.E. 837; see, Henry v. Allen, 151 N.Y. 1, 45 N.E. 355). This case clearly falls within the latter rule. According to the allegations in the complaint, the agent was actually a creation of the fraud, formed for the purpose of protecting the legitimate agent, Eastern, from the consequences of the fraudulent scheme. Although the agent appeared to act within the scope of its authority in the preparation of the title report, the agent’s sole purpose was to induce plaintiff to purchase real property *927 owned by one of the agent’s officers and shareholders, and the fraud also induced the principal, Lawyers, to issue a fee title insurance policy to plaintiff without an exception for the restrictive covenant. There is no allegation that Lawyers did anything to mislead plaintiff into believing that the restrictive covenant had been removed or that Lawyers ratified Southeastern’s fraudulent acts and retained any benefit derived from the fraud. Irrespective of whatever liability Lawyers may have on the insurance policy (which is not an issue on this appeal), we conclude that Lawyers is not liable to plaintiff for Southeastern’s fraud.
As for “apparent authority,” the New York Court of Appeals in Hallock v State, 64 NY2d 224, 231-32 [1984] instructed:
Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. “Rather, the existence of ‘apparent authority’ depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal—not the agent.” (Ford v. Unity Hosp., 32 N.Y.2d 464, 473, 346 N.Y.S.2d 238, 299 N.E.2d 659; see, also, Restatement, Agency 2d, § 27.) Moreover, a third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable (see Wen Kroy Realty Co. v. Public Nat. ***514 Bank & Trust Co., 260 N.Y. 84, 92–93, 183 N.E. 73; Restatement, Agency 2d, § 8, Comment c; Conant, Objective Theory of Agency: Apparent Authority and the Estoppel **1182 of Apparent Ownership, 47 Neb.L.Rev. 678, 681).
Here, as a matter of law, Hallock clothed Quartararo with apparent authority to enter into the settlement. Quartararo had represented plaintiffs through the litigation, engaged in prior settlement negotiations for them and, in furtherance of the authority which had been vested in him, appeared at the final pretrial conference, his presence there constituting an implied *232 representation by Hallock to defendants that Quartararo had authority to bind him to the settlement (22 NYCRR 861.17; see, also, Di Russo v. Grant, 28 A.D.2d 847, 281 N.Y.S.2d 513; Continental Cas. Co. v. Chrysler Constr. Co., 80 Misc.2d 552, 554, 363 N.Y.S.2d 258). The attendance of the coplaintiff, Phillips, further enforced that appearance. In the circumstances, it necessarily fell to Phillips or Quartararo himself to reveal any restrictions on the attorney’s authority to settle, and absent such disclosure defendants’ reliance on the appearance of authority was entirely reasonable.
The concepts of respondeat superior, or vicarious liability, were cogently addressed by the New York Court of Appeals in Judith M. v Sisters of Charity Hosp., 93 NY2d 932, 933-34 [1999], as follows:
The doctrine of respondeat superior renders an employer vicariously liable for torts committed by an employee acting within the scope of the employment. Pursuant to this doctrine, the employer may be liable when the employee acts negligently or intentionally, so long as the tortious conduct is generally foreseeable and a natural incident of the employment (Riviello v. Waldron, 47 N.Y.2d 297, 304, 418 N.Y.S.2d 300, 391 N.E.2d 1278). If, however, an employee “for purposes of his own departs from the line of his duty so that for the time being his acts constitute an abandonment of his service, the master is not liable” (Jones v. Weigand, 134 App.Div. 644, 645, 119 N.Y.S. 441, quoted in Baker v. Allen & Arnink Auto Renting Co., 231 N.Y. 8, 13, 131 N.E. 551). Assuming plaintiff’s allegations of sexual abuse are true, it is clear that the employee here departed from his duties for solely personal motives unrelated to the furtherance of the Hospital’s business (see, Mataxas v. North Shore Univ. Hosp., 211 A.D.2d 762, 763, 621 N.Y.S.2d 683). Accordingly, the courts below properly dismissed plaintiff’s respondeat superior cause of action.
In a case that produced a vigorous dissent from Judge Singas, the New York Court of Appeals (Cannataro, J.), sustained claims for negligent retention and supervision, finding in relevant part:
Where the negligence claim relates to an employer’s retention and supervision of an employee, the complaint must include allegations that: (1) the employer had actual or constructive knowledge of the employee’s propensity for the sort of behavior which caused the injured party’s harm; (2) the employer knew or should have known that it had the ability to control the employee and of the necessity and opportunity for exercising such control; and (3) the employee engaged in tortious conduct on the employer’s premises or using property or resources available to the employee only through their status as an employee, including intellectual property and confidential information (see e.g. Restatement [Second] of Torts § 317, Comment b; Restatement [Second] of Agency § 219 [stating an employer is liable for the torts of employees acting outside the scope of their employment if, inter alia, the employee was “aided in accomplishing the tort by the existence of the agency relation”]; Kenneth R. v. Roman Catholic Diocese of Brooklyn, 229 A.D.2d 159, 161, 654 N.Y.S.2d 791 [2d Dept. 1997] [citing, inter alia, Hall v. Smathers, 240 N.Y. 486, 148 N.E. 654 (1925), Park v. New York Cent. & Hudson R.R. Co., 155 N.Y. 215, 49 N.E. 674 (1898), and Detone v. Bullit Courier Serv., Inc., 140 A.D.2d 278, 279, 528 N.Y.S.2d 575 (1st Dept. 1988)]).
Here, plaintiffs’ complaint adequately states a claim for negligent supervision and retention. Contrary to the holdings of the courts below, the complaint adequately alleges that defendants had notice of Caspersen’s propensity to commit fraud. Further, the Appellate Division erred in holding that a customer relationship is a prerequisite to duty in a negligent supervision claim. …
When an employer has notice of its employee’s propensity to engage in tortious conduct, yet retains and fails to reasonably supervise such employee, the employer may become liable for injuries thereafter proximately caused by its negligent supervision and retention (see 52 N.Y. Jur Employment Relations *158 § 391; Park, 155 N.Y. 215, 49 N.E. 674). As every Department of the Appellate Division has recognized, a defendant is on notice of an employee’s propensity to engage in tortious conduct when it knows or should know of the employee’s tendency to engage in such conduct (see e.g., Belcastro v. R.C. Diocese of Brooklyn, NY, 213 A.D.3d 800, 800, 184 N.Y.S.3d 367 [2d Dept. 2023]; Druger v. Syracuse Univ., 207 A.D.3d 1153, 1154, 172 N.Y.S.3d 304 [4th Dept. 2022]; Pirro v. Bd. of Trustees of the Vil. of Groton, 203 A.D.3d 1263, 1271, 164 N.Y.S.3d 699 [3d Dept. 2022]; Gibbs v. Léman Manhattan Preparatory Sch., 201 A.D.3d 569, 569, 157 N.Y.S.3d 704 [1st Dept. 2022]; 52 N.Y. Jur Employment Relations § 391).
Moore Charitable Found. v PJT Partners, Inc., 40 NY3d 150, 157-58 [2023]
Expressing concerns about “crushing liability to an indeterminate class of plaintiffs,” Judge Singas asserted in her dissent that the fraud theories of respondeat superior and apparent authority already addressed the subject of the case, advising against expansion with the negligent supervision theory:
The majority references plaintiffs’ allegations that “they were prospective customers who were solicited by Caspersen to participate in a financing arrangement related to one of defendants’ legitimate business deals” (majority op. at 163, 195 N.Y.S.3d at 446, 217 N.E.3d at 18), but plaintiffs have also acknowledged that the deal proposed to them was not legitimate; therefore, it is debatable whether plaintiffs were ever even prospective customers. Regardless, the fraud theories of respondeat superior and apparent authority already protect potential customers interacting with employees, so long as the employee’s conduct is within the scope of his employment and benefits the employer (respondeat superior) or the employer presented the employee to the potential customer as having authority to act on the employer’s behalf, and the potential customer reasonably relied on that presentation (apparent authority) (see Judith M. v. Sisters of Charity Hosp., 93 N.Y.2d 932, 933, 693 N.Y.S.2d 67, 715 N.E.2d 95 [1999]; Hallock v. State of New York, 64 N.Y.2d 224, 231, 485 N.Y.S.2d 510, 474 N.E.2d 1178 [1984]). The lower courts dismissed these claims below, correctly recognizing that plaintiffs’ allegations were insufficient to sustain them.
Moore, 40 NY3d at 166.
There also is a free-standing cause of action known as “aiding and abetting” fraud that can be asserted against those who may have been involved in or participated in the fraud with the principal fraudster(s). The elements of such a cause of action are 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).
New Canfield Decision of Fourth Department
The Fourth Department in the new Canfield decision addressed the issues in an interesting way, ultimately finding that the principal could be held liable for the fraud of its agents based upon “apparent authority,” but rejected a claim of negligent supervision of the same employees.
In Canfield, the plaintiff provided accounts receivable factoring to defendant Focalpointe, which was based upon the amount of Focalpointe’s receivables for the IT services it provided to its customers. Obviously, the nature and legitimacy of the receivables was essential to the amount of funds provided by plaintiff to Focalpointe and plaintiff’s right to receive repayment. Plaintiff alleged that Focalpointe generated fraudulent invoices for IT services allegedly provided to its customer, also named as a defendant. Plaintiff alleged the customer’s employees falsely verified these invoices, enabling the fraud. Focalpointe then used these verifications to obtain funds from plaintiff, forming part of a pyramid scheme.
Plaintiff sued those who allegedly were involved in this fraudulent billing and receivable scheme—Focalpointe, its principal, and the customer companies—asserting causes of action for fraudulent misrepresentation, aiding and abetting fraud, and negligent supervision. As relevant here, on appeal, the Fourth Department affirmed (a) the denial of the customer defendants’ motion to dismiss the fraud claims against them, and (b) the dismissal of the negligent supervision claim.
Interestingly, the Fourth Department found that the customer defendants could be liable for the acts of their employees falsifying the invoices through the doctrine of apparent authority, but ruled that the customers could not be held liable for allegedly failing to supervise the same employees who allegedly ran amok on the invoicing.
The Fourth Department observed on apparent authority:
“[A] principal may be held liable in tort for the misuse by its agent of [their] apparent authority to defraud a third party who reasonably relies on the appearance of authority, even if the agent commits the fraud solely for [their] personal benefit, and to the detriment of the principal” (Parlato v Equitable Life Assur. Socy. of U.S., 299 AD2d 108, 113 [1st Dept 2002], lv denied 99 NY2d 508 [2003]; see American Socy. of Mech. Engrs., Inc. v Hydrolevel Corp., 456 US 556, 566 [1982], reh denied 458 US 1116 [1982]; News Am. Mktg., Inc. v Lepage Bakeries, Inc., 16 AD3d 146, 148 [1st Dept 2005]). “[L]iability is based upon the fact that the agent’s position facilitates the consummation of the fraud, in that from the point of view of the third person the transaction seems regular on its face and the agent appears to be acting in the ordinary course of the business confided to [them]” (American Socy. of Mech. Engrs., Inc., 456 US at 566 [internal quotation marks omitted]). “The reason for this rule is that the principal, by virtue of its ability to select its agents and to exercise control over them . . . , is in a better position than third parties to prevent the perpetration of fraud by such agents through the misuse of their positions” (Parlato, 299 AD2d at 113). “Thus, the principal should not escape liability when an innocent third person suffers a loss as the result of an agent’s abuse, for [their] own fraudulent purposes, of the third person’s reasonable reliance on the apparent authority with which the principal has invested the agent” (id.). … “the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal—not the agent” (Hallock, 64 NY2d at 231 [internal quotation marks omitted]; see Regency Oaks Corp., 129 AD3d at 1456; Federal Ins. Co., 144 AD2d at 45).
The Fourth Department then found plaintiff had adequately alleged a basis to bind the customer defendants through the allegedly fraudulent acts of their employees:
[P]laintiff alleges that the four employees had apparent authority to bind UHG/Optum defendants. Plaintiff alleges that UHG/Optum defendants allowed the four employees to use email accounts and telephones of UHG/Optum defendants during work hours to communicate with plaintiff over a six-year period. The job titles and responsibilities that UHG/Optum defendants gave to the four employees aligned with the transaction that plaintiff sought to verify, i.e., payment for IT staffing, and UHG/Optum defendants, through employee number three, a Vice President, confirmed the existence of a debt owed to Focalpointe and that employee number one was the appropriate contact with respect to financial matters concerning UHG/Optum defendants (see generally Federal Ins. Co., 144 AD2d at 46-47). Thus, plaintiff sufficiently alleges that UHG/Optum defendants “created an appearance of authority on which . . . plaintiff reasonably relied, thereby enabling the agent[s] to successfully perpetrate the tort” of fraudulent misrepresentation (Parlato, 299 AD2d at 114).
But as to the cause of action for negligent supervision, after recognizing that the law of apparent authority is based on the fact that the principal’s “ability to select its agents and to exercise control over them [places it] in a better position than third parties to prevent the perpetration of fraud by such agents through the misuse of their positions,” the customer defendants nevertheless were not liable for negligently supervising the same employees:
Under New York law, to state a negligent supervision cause of action, the complaint “must include allegations that: (1) the employer had actual or constructive knowledge of the employee’s propensity for the sort of behavior which caused the injured party’s harm; (2) the employer knew or should have known that it had the ability to control the employee and of the necessity and opportunity for exercising such control; and (3) the employee engaged in tortious conduct on the employer’s premises or using property or resources available to the employee only through their status as an employee, including intellectual property and confidential information” (Moore Charitable Found. v PJT Partners, Inc., 40 NY3d 150, 157 [2023]). “[A] defendant is on notice of an employee’s propensity to engage in tortious conduct when it knows or should know of the employee’s tendency to engage in such conduct” (id. at 158). “An employer ‘should know’ of an employee’s dangerous propensity if it has reason to know of the facts or events evidencing that propensity, and may be liable if it nonetheless ‘place[s] the employee in a position to cause foreseeable harm’ ” (id.). “Put differently, the notice element is satisfied if a reasonably prudent employer, exercising ordinary care under the circumstances, would have been aware of the employee’s propensity to engage in the injury-causing conduct” (id. at 158-159).
Here, plaintiff does not allege that [the customer] defendants had actual or constructive knowledge of the four employees’ propensity to commit fraudulent acts (see 106 N. Broadway, LLC v Lawrence, 189 AD3d 733, 737 [2d Dept 2020]). At most, plaintiff alleges [the customer] defendants should have been aware of [Focalpointe’s principal’s] propensity for fraudulent conduct, but [he] was not their employee.
So, even though the employer-customer defendants avoided liability under a negligent supervision theory, they were exposed to liability for the allegedly fraudulent conduct of their employees through the doctrine of apparent authority as explained above.
Commentary
There are a number of ways that those who are not directly involved in fraudulent acts can nevertheless be held liable for such fraud. The legal theories and doctrines often intersect, as demonstrated by the case authorities summarized above. As shown by the Fourth Department’s decision in Canfield, both plaintiffs and defendants must understand the intricacies of these theories, as certain claims can survive whiles others may fail. Employers in particular must be vigilant to oversee, monitor and control acts of their employees to avoid liability for fraudulent conduct through a myriad of legal sources and doctrines.