Fraud claims can arise in a variety of settings. Businesses may be defrauded by owners, managers, employees, or outside parties, such as vendors and customers. Consumers may be victimized by businesses or individuals seeking to steal their money or cause other harm. For perpetrators, liability can be both criminal and civil.
What is Fraud?
Fraud is conduct which deliberately deceives someone with the intent of causing damage. Common types of fraud involve healthcare, tax, bankruptcy, insurance, securities, mail, telemarketing, and wire.
What Are the Requirements for Alleging Fraud?
To plead a claim for fraud In New York, a plaintiff must allege: (1) a material misrepresentation of a fact, (2) knowledge of its falsity, (3) an intent to induce reliance, (4) justifiable reliance by the plaintiff, and (5) damages.
The defendant must have made a statement that was false or untrue and the false statement must have been material, meaning that it was about something essential to the transaction. Fraud requires misconduct. As a result, the defendant must have known the statement was false when it was made and had an intent to deceive, manipulate, or defraud the plaintiff, or have acted so recklessly as to constitute an intent to defraud. The plaintiff must show that he or she justifiably relied on the misrepresentation and exercised ordinary intelligence in ascertaining the truth of the representation made by the defendant. Finally, there must be a direct link between the fraudulent act and the loss that the plaintiff alleges.
Special Considerations When Bringing a Fraud Case
In filing a civil fraud action in court, New York law requires that the plaintiff plead each element of the fraud claim in detail. Essentially, the plaintiff must provide enough facts to support a reasonable inference that the allegations of fraud are true. For example, the complaint must identify who made the misrepresentation, when it was made and what was communicated. Similarly, there must be specific allegations regarding the falsity of the allegations, the knowledge of the defendant, reliance by the plaintiff, and circumstantial evidence of an intent to defraud. With respect to causation and damages, the plaintiff must provide facts to show that but for the defendant’s wrongful acts, the plaintiff would not have entered into the transaction and the defendant’s fraud directly caused the harm. The plaintiff also must allege sufficient facts from which the amount of damages can be inferred.
While specificity is required in the complaint, New York courts do not require a plaintiff to provide the details of a fraud if those details are uniquely within the knowledge of the defendant.
How Can a Party Defend Against a Claim of Fraud?
There are a variety of defenses to fraud, including the following:
Statement was not false. As noted in the previous section, the plaintiff must demonstrate that the representation was false when it was made. Where there is no evidence that a statement was in fact false, it cannot be inferred.
No intent to deceive. Intent or scienter is typically inferred by the circumstances surrounding the allegedly fraudulent act. For example, in the bankruptcy context, intent to defraud creditors can be shown by certain badges of fraud such as transferring assets for less than fair market value or to insiders (family, friends, etc.). Intent may also be shown by reckless conduct. However, such conduct must be highly unreasonable and represent an extreme departure from the standards of care such as to show an actual intent to defraud.
The misrepresentation required for fraud must be of a present or historical material fact. Generally, statements of opinion, exaggeration, or future expectations do not qualify. They are considered puffery that no reasonable person would take seriously. Examples include claims of being the “best” or having the “lowest” cost. However, it can be difficult to establish when marketing claims cross the line into fraud. Among the considerations are the sophistication of the audience to whom the statements are targeted as well as the nature of the relationship between the parties. Where there are mixed statements of puffery and fact, however, fraud may exist if the misrepresentation of fact meets the requirements of fraud.
Reliance was not justified. As discussed previously, the plaintiff must have justifiably relied on the misrepresentation. Courts look at whether the plaintiff exercised ordinary intelligence in ascertaining the truth of the representation by the defendant. Where the plaintiff is “sophisticated” in the sense of having experience with similar transactions or having access to resources to verify statements by the defendant, this becomes more difficult. Such parties are held to a higher standard and expected to exercise more due diligence in a transaction as compared to someone less accustomed to business dealings. Sophisticated parties must show they took affirmative steps to protect themselves by employing what resources for verification were available at the time.
Fraud claim is duplicative of a breach of contract claim. Where fraud is alleged in the context of a breach of contract claim and arises out of the same facts, the two claims must be separate and not duplicative. The plaintiff must allege (1) that the fraud was collateral or extraneous to the contract, or (2) a breach of duty separate from a breach of the contract, or (3) there are special damages “not recoverable under a contract measure of damages. Essentially, the misrepresentation must involve a promise to undertake some action separate and apart from the party’s obligations under the contract to be viable. Otherwise, the fraud claim will be dismissed as duplicative of the contract claim.
Statute of limitations. The statute of limitations for fraud causes of action is the greater of (1) six years from the date of the fraud, or (2) two years from the date it was discovered or reasonably could have been discovered through due diligence. However, there are instances where the court may “toll,” or extend, the limitations period.
Fraud claims are very fact-specific and require extensive proof. The parties should compile all documentation regarding a transaction in order to substantiate their case and consult experienced counsel for assistance.
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