• Fraud Claimants Satisfy Pleading Requirements under CPLR When Complaints Allows "Reasonable Inference" Of Knowledge of Fraud
  • December 10, 2009
  • Law Firm: Clausen Miller PC - Chicago Office
  • New York’s Highest Court, The New York Court of Appeals, recently held that where facts alleged in a complaint allow for a “reasonable inference” that corporate officers knew of a fraudulent scheme, the heightened pleading requirements for fraud under CPLR 3016(b) are satisfied.  In Pludeman, et al. v. Northern Leasing Systems, Inc., et al., 10 N.Y.3d 486, 860 N.Y.S.2d 422 (2008), Plaintiffs, small business owners from several states, brought suit against Northern Leasing Systems and its individual managers and corporate officers (“NLS”) alleging fraud, among other causes of action.  NLS was in the business of financing purchases of small business equipment and then leasing this equipment pursuant to lease agreements and personal guarantees.

    Plaintiffs alleged that the NLS lease agreements were deceptive and contained hidden and onerous terms including a requirement that the lessees insure the leased equipment. Absent proof of insurance, NLS was entitled to charge a fee under the contract. Additionally, the allegedly hidden pages contained a no-cancellation clause, a no-warranties clause and a late-charge clause.  However, on the bottom of the first page near the signature lines, the contract read “page 1 of 4” and the contract was described as a “printed booklet.” Id. at 10 N.Y.3d 496, 860 N.Y.S.2d 428.

    Defendants moved to dismiss the Complaint on the basis that Plaintiffs’ fraud claim was not sufficiently pleaded under CPLR 3016(b), among other bases.  Defendants argued that the individual Defendants’ participation in the alleged frauds was not set forth and thus the Complaint did not satisfy the specific pleading requirements for fraud under New York law.  Indeed, the only factual allegations with respect to the individual corporate Defendants were their titles.The motion court denied that portion of Defendants’ motion and a majority of the Appellate Division agreed on the basis that the individual Defendants’ role in the alleged fraud would be peculiarly within their knowledge and thus could not be pleaded by Plaintiffs without discovery.  Two Justices of the Appellate Division dissented reasoning that the absence of any allegations that the corporate Defendants were aware of the fraudulent practices on the part of the company’s sales representatives failed to satisfy fraud pleading requirements under 3016(b).  The Court of Appeals reviewed the Appellate Division’s decision and affirmed the Appellate Division majority.

    Under CPLR 3016(b), when a cause of action or defense is based on fraud, “the circumstances constituting the wrong shall be stated in detail.” The Court of Appeals noted that the purpose of Section 3016(b) was to inform a defendant about the incidents complained of, but the Court cautioned that this section was not to be interpreted so strictly as to stifle otherwise valid causes of actions where the details of the alleged fraud were within the knowledge of the party charged with the fraud.  The Court stressed that although section 3016(b) required sufficient detail regarding the allegedly fraudulent conduct, this “should not be confused with unassailable proof of fraud.”  Pludeman at 10 N.Y.3d 492, 860 N.Y.S.2d 426.

    The requirements under 3016(b) could be met when “facts are sufficient to permit a reasonable inference of the alleged conduct.”  Id.  The Court acknowledged that section 3016(b) necessarily required more than notice pleading applicable to other causes of action but stressed that in this case, the Complaint as drafted permitted “an inference that satisfies the purposes of the CPLR.”  Id. at FN3.  Factually, the Court focused on the breadth and scope of the alleged fraud, and noted that Plaintiffs did not complain of an isolated incident but a “nationwide scheme that took place over a number of years.”  Id. at 10 N.Y.3d 493, 860 N.Y.S.2d 426.  Additionally, Plaintiffs were unrelated to one another and all had similar complaints regarding the deceptive lease and the conduct of the salespeople.  These facts taken together, the Court stated, allowed for a “reasonable inference” that the corporate officers had knowledge or were involved in the fraud.

    The dissent pointed out that CPLR 3016(b) did not “require the impossible” but certainly required more than mere notice pleading required by other cases and disagreed with the majority’s result in this particular instance.  Id. at 10 N.Y.3d 494, 860 N.Y.S.2d 427.  The dissent noted that CPLR 3016(b) served important policy objectives in avoiding litigation of baseless claims and strike suits, and advocated for adoption of a standard closer to the federal standard applicable to Rule 9(b) of the Federal Rules of Civil Procedure, the federal statute upon which New York’s CPLR 3016(b) is based.  In the Second Circuit, a fraud complaint must set forth “particularized facts to support the inference that the defendants acted recklessly or with fraudulent intent.”  Id. at 10 N.Y.3d 495, 860 N.Y.S.2d 427 (citing Eternity Global Master Fund Ltd. v. Morgan Gaur. Trust Co. of N.Y., 375 F.3d 168, 187 [2d Cir.2004]). The dissent advocated for New York state courts to adopt the Second Circuit’s “strong inference” rule rather than the majority’s “reasonable inference” rule.  Id. Regardless of which rule was applied, the dissent found that the facts did not allow any inference of knowledge of the fraud or involvement in the fraud on the part of the individual corporate Defendants.  Among the facts supporting the dissent were that the salespeople alleged to have hidden the additional pages of the contract were not NLS employees, NLS was actually a lender which took title to the business equipment; the form agreement complained of was a printed booklet; the first page read “Page 1 of 4”; and the agreement was available for review by calling a 1-800 number listed on the company’s website.  Ultimately, the dissent concluded that Plaintiffs’ real objection to the NLS contract was that the terms of the agreement were unduly harsh.  Therefore, the dissent stated, Plaintiffs’ claims were actually for unconscionability not fraud.

    Learning Point
    New York Courts will allow a plaintiff to proceed with discovery in a fraud case as long as sufficient detail about the alleged fraudulent scheme is set forth in the Complaint and, in the case of fraud claims against individual corporate officers, will not require that the individual officer’s role in the fraud be set forth with detail as long as the Complaint allows a reasonable inference of knowledge of the fraudulent scheme. Litigants defending a fraud claim must be vigilant and move for dismissal when the Complaint, viewed as a whole, is factually deficient.  On the other hand, litigants prosecuting a fraud claim cannot wait for commencement of discovery and service of the Bill of Particulars to divulge critical facts as they may lose the ability to pursue their claims by operation of CPLR 3016(b).