A new, comprehensive, Appellate Division, Second Department decision confirms that the element of “intent” is not required for the remedy of rescission, and also adds other favorable commentary to sustain the subject fraud claim.  The decision was in the case of Air-Sea Packing Group, Inc. v. Applied Underwriters, Inc., 2024 NY Slip Op 02032 (2d Dep’t Decided April 17, 2024).

Air-Sea Packing

The Air-Sea Packing decision arose from a worker’s compensation insurance product being challenged in many actions across the country based upon allegations of fraud. Plaintiff was a company involved in providing packing, shipping, storage, and transportation services.  To comply with its legal obligation to provide workers’ compensation for its employees, plaintiff purchased what was called the EquityComp insurance program from defendants, affiliates of Berkshire Hathaway.

After plaintiff procured the insurance from defendants, the New York State Department of Financial Services (DFS) launched an investigation of defendants looking into whether they violated applicable New York law.  Defendants later entered into a consent order with the DFS in which it was declared that defendants violated New York law by selling unauthorized and unlicensed insurance products, barred the continued sale of such and imposed a $3 million civil penalty on defendants.

While the DFS investigation was pending, defendants sued plaintiff in Nebraska for not paying premiums, but that action was dismissed for lack of personal jurisdiction over plaintiff.

Plaintiff then commenced an action against defendants in New York alleging that the contract with defendants for the insurance was void and unenforceable under a number of legal theories, including that it was allegedly illegal and induced by fraud.

Defendants moved to dismiss several causes of action pursuant to CPLR 3211.  The lower court denied the motion.

The Second Department first decided that the forum selection clause in the contract setting Nebraska as the place for disputes was unenforceable as a matter of New York public policy.

The Second Department then addressed, among other things, and as relevant here, the claims for fraudulent inducement and common law fraud, seeking to rescind the contract.

Rescission Does Not Require Fraudulent Intent

As I have explained in prior posts, a somewhat lesser-known aspect of fraud is that the element of intent is not required in order to establish rescission based upon fraudulent inducement.  See, e.g., Intent to Defraud Not Necessary to Obtain Rescission of ContractCiting one of the decisions I explained in my post, the Second Department in Air-Sea Packing flatly ruled:

Contrary to the defendants’ contention, the fourth cause of action, seeking equitable rescission of the [contract in question], and the sixth cause of action, sounding in common-law fraud, are supported by sufficiently specific allegations. “Fraud sufficient to support [equitable] rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment . . . . Even an innocent misrepresentation will support rescission” (Board of Mgrs. of Soundings Condominium v Foerster, 138 AD3d 160, 164 [citation omitted]). Here, the plaintiff met its burden, in part, by asserting specific allegations that the defendants made knowing misrepresentations about  the EquityComp program and fraudulently induced the plaintiff to enter into the [contract in question].

Allegations Detailed Enough

The Second Department also ruled that the allegations of fraud contained in the complaint were sufficient to comply with the specificity requirements of CPLR 3016(b).

The Second Department gave the plaintiff the benefit of some forgiving concepts when it comes to pleading the details of fraud.  For example, the Court relaxed the standard because it found the details of the fraud were particularly with the knowledge of defendants:

Where a cause of action is based on fraud, “the circumstances constituting the wrong shall be stated in detail” (CPLR 3016[b]; see Mandarin Trading Ltd. v Wildenstein, 16 NY3d 173, 178). However, in certain circumstances, it may be “almost impossible to state in detail the circumstances constituting a fraud where those circumstances are peculiarly within the knowledge of [an adverse] party” (Jered Contr. Corp. v New York City Tr. Auth., 22 NY2d 187, 194; see Abraham v Torati, 219 AD3d 1275, 1280). “Under such circumstances, the heightened pleading requirements of CPLR 3016(b) may be met when the material facts alleged in the complaint, in light of the surrounding circumstances, ‘are sufficient to permit a reasonable inference of the alleged conduct’ including the adverse party’s knowledge of, or participation in, the fraudulent scheme” (High Tides, LLC v DeMichele, 88 AD3d 954, 957, quoting Pludeman v Northern Leasing Sys., Inc., 10 NY3d 486, 492). Here, the plaintiff met its burden by asserting specific allegations that the defendants fraudulently misled New York employers about the nature of the EquityComp program as discussed above.

The Second Department also gave the plaintiff the benefit of the doubt on another aspect of the fraud claim.  Often when a number of defendants are lumped in together in alleging fraud, the courts reject the allegations because they do not specify what each defendant actually did in connection with the fraud.  I have in fact successfully argued that defense.  See High Tides, LLC v. DeMichele, 88 AD3d 954 (2d Dep’t 2011).  Nevertheless, the Second Department in Air-Sea Packing rejected this “group-pleading” argument (while also ruling that the argument was improperly raised on appeal as to a number of the other causes of action):

Further, there is no merit to the defendants’ contention that the sixth cause of action, sounding in common-law fraud, should be dismissed on the ground that the plaintiff’s “group-pled allegations” do not provide sufficient notice of the tortious conduct committed by each of the defendants. “The test of the sufficiency of a pleading is whether it gives sufficient notice of the transactions, occurrences, or series of transactions or occurrences intended to be proved and whether the requisite elements of any cause of action known to our law can be discerned from its averments” (Dolphin Holdings, Ltd. v Gander & White Shipping, Inc., 122 AD3d 901, 902 [internal quotation marks omitted]). Here, the complaint provides sufficient notice to each of the defendants. Among other reasons, it details the alleged relationship between each defendant under their alleged joint fraudulent scheme and contains an allegation that the defendants “acted in concert as part of a common scheme in connection with the EquityComp program to misrepresent the EquityComp program to fraudulently induce plaintiff to enter into the relevant contracts, specifically omitting that the [contract] was prohibited by law and not a guaranteed cost policy.” It was further alleged that Applied Underwriters and the defendant Applied Risk Services, Inc., were both involved in the marketing and sale of the EquityComp program, including the preparation and presentation of various documents that misleadingly described the EquityComp program.


As I have lamented in the past, there is really no reasonable justification for dispensing with the element of fraudulent intent when the significant remedy of rescission is sought.  Yet, as confirmed by the Second Department in Air-Sea Packing, there remains solid authority for dispensing with that element for rescission.  As such, counsel would be wise to take advantage of this case law if rescission is a desired remedy.  As also reflected in the Air-Sea Packing decision, courts may find a way to sustain a claim of fraud when the circumstances greatly support inferences of fraudulent conduct.