I have explained that the cause of action for fraud is a civil “tort.” (See the topic heading for “Tort” in the “Select a Topic” feature of this Blog.) Torts are judicial-made causes of action that constitute a basis to be compensated for what the courts consider to be wrongs that society should recognize are actionable and compensable.
The tort of fraud comes with a robust package of dividends that affords victims of fraudulent misconduct added benefits and flexibility in seeking legal remedies. See, for example, my post, Fraud Breathes New Life Into Otherwise Time-Barred Causes of Action (listing punitive damages, rescission, discharge of debts in bankruptcy, and extending statutes of limitations not only for fraud but other causes of action). But as I have cautioned, with this great power comes significant legal responsibilities: What Do Fraud and Spiderman Have in Common? With Great Power Comes Great Responsibilities. So, for example, a cause of action for fraud must be alleged in a complaint with particularity. Under both New York rules of practice, CPLR 3016(b), and the Federal Rules of Civil Procedure, FRCP 9(b), the circumstances constituting the alleged fraud must be stated in detail in the pleading asserting this cause of action or claim. And proving a case of fraud requires the plaintiff to satisfy the highest standard of proof in civil court: clear and convincing evidence.
I have also detailed another responsibility of those who wish to establish a claim of fraud: That they themselves act prudently, diligently and carefully in protecting themselves from the fraudulent conduct of others. This is contained in the element of reasonable or justifiable reliance on a fraud claim and is embodied in the two-year discovery rule, which can extend the six year statute of limitations to two additional years if the fraud was not discovered or could with reasonable diligence [not] have [been] discovered.” CPLR 213(8).
While fraud comes with these powerful benefits and burdens, other torts could provide remedies where the stringent requirements of the fraud claim may stand in the way. One such cause of action is the claim for breach of fiduciary duty.
When a fiduciary duty exists, the normal legal burdens imposed on the victim of wrongful conduct are relaxed for the beneficiary of the duty. In effect, the higher duties with which a fiduciary is vested override obligations of the victim. These fiduciary duties have been described by the legendary Judge Cardoza, as “something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor most sensitive, is then the standard of behavior.” Meinhard v. Salmon, 249 N.Y. 458 (1928). As explained in the recent decision of the Appellate Division, First Department, in Manipal Educ. Ams., LLC v Taufiq, 2022 NY Slip Op 02200 (1st Dep’t Decided on Mar 31, 2022), even where reliance is not reasonable enough to establish a fraud claim, a claim for breach of fiduciary duty survives.
In Taufiq, plaintiff alleged that its former director of marketing, Taufiq, repeatedly contracted with an entity called Exit Editorial, Inc. (Exit), owned by another defendant, for video editing services. Plaintiff claimed that Taufiq falsely represented to it that he negotiated with Exit at arms length and that Exit’s prices were reasonable, when in fact its prices were well above market rate, he had an ownership interest in Exit, and he received a cash finder’s fee for each contract with Exit.
The court below grated defendants’ motion to dismiss the complaint on various grounds. While the First Department affirmed the dismissal of the fraud claims, it reversed the dismissal of a claim for breach of fiduciary duty.
As to the fraud claim against Taufiq, the First Department found that plaintiff did not reasonably rely on any alleged fraudulent misrepresentations that he made:
The fraud claim against him must also be dismissed because justifiable reliance was conclusively refuted by a series of emails exchanged between Taufiq and plaintiff’s executives in 2010 (the 2010 emails), the substance of which triggered a duty to investigate, which plaintiff admittedly failed to do (see Peach Parking Corp. v 346 W. 40th St., LLC, 42 AD3d 82, 87 [1st Dept 2007]; Global Mins. & Metals Corp. v Holme, 35 AD3d 93, 99-100 [1st Dept 2006], lv denied 8 NY3d 804 ).
However, the First Department took a different view of the claim for breach of fiduciary duty against Taufiq, finding that the fiduciary duties that Taufiq owed his employer overrode the element of reasonable reliance:
The breach of fiduciary duty claim against Taufiq should be reinstated, as an agent has a duty to make full disclosure to its principal of any conflicts of interest and there is no requirement of justifiable reliance for such a claim (see Frame v Maynard, 83 AD3d 599, 602 [1st Dept 2011]; TPL Assoc. v Helmsley-Spear, Inc., 146 AD2d 468, 470-471 [1st Dept 1989]; see also generally Besen v Farhadian, 195 AD3d 548, 549-550 [1st Dept 2021]). Contrary to defendants’ argument, the 2010 emails were not sufficient to meet this disclosure obligation. We find that the allegations supporting the breach of fiduciary duty claim were sufficiently particular, notwithstanding that plaintiff did not specifically list each individual transaction, because plaintiff’s allegations that the overcharging and illicit finder’s fees, and Taufiq’s misrepresentations regarding them, affected all of their contracts with Exit between 2010 and 2018 were sufficient to inform Taufiq of the nature of the claims and to enable him to mount a defense (see generally Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559 ).
While the tort of fraud provides enhanced legal benefits, even extending the statute of limitations for other claims, it comes with great legal responsibilities. In certain circumstances, powerful responsibilities imposed upon the alleged wrongdoer may override the normal duties of victims to protect themselves. One such scenario is the claim for breach of fiduciary duties, as shown by the recent decision in Taufiq.