Two NY Court of Appeals Cases Illustrate Standard for Pleading Fraud

Posted on June 4, 2009 by Grace Healy

I don’t post blog entries with great regularity because I try to limit myself to things that in-house counsel or clients might find interesting.  But, I do look every day for things of interest.  Today, I hit gold – three interesting cases from the NY Court of Appeals.  Good thing as I probably won’t be posting anything for at least the next week and a half.  I was tempted to schedule the posts, but, if the law is out there….

Here is the third and final post of the day.

Two of today’s Court of Appeals decisions deal with the pleading requirements for fraud.  They offer a comparison of when the court is prepared to state that fraud has been adequately pled. 

In the first, Eurycleia Partners, LP v. Seward & Kissel, LLP   the court found that plaintiffs failed to plead fraud because the facts did not support an inference that defendant knew of the falsity of statements in an offering memorandum.  The court stated: “the strength of the requisite inference of fraud will vary based upon the and context of each case.”  Given that language, it is will be a rare fraud claim that won’t warrant a motion to dismiss. The court also took particular notice of the fact that the manager of the hedge fund – who had pled guilty to securities fraud – had supplied the plaintiffs with much of the factual basis for the claim. 

In a second case, Sargiss v. Magarelli, the court ruled that an inference of fraud was present in the pleading.  The complaint alleged that, in a 1998 divorce proceeding, the husband misrepresented his financial worth – he claimed that he had transferred a significant interest in a business to his brother.  After the former  husband’s death, his daughter came across documents strongly suggesting that he hadn’t really made the transfer.

The court found – based upon the documents – that  the fraud claim against the decedent’s estate, was stated with adequate particularity.  In addition, there was an adequate inference of fraud against his brother and the company; if the transfer wasn’t, in fact, made, the brother – who controlled the company – necessarily knew about it and was part of the scheme. 

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NY Court of Appeals Gives Example of Clear and Convincing Evidence

Posted on March 26, 2009 by Grace Healy

The New York Court of Appeals issued three interesting decisions this morning. One – a libel case – offers an analysis of “clear and convincing” evidence of actual malice.   Often when asked to explain that standard, the response is: “Well, it has to be clear and convincing.”  Or, "it is somewhere between a preponderance of the evidence and proof beyond a reasonable doubt."  Neither explanation is overly helpful.

Today’s decision in Shulman v. Hunderford   discusses the facts necessary for a finding that actual malice has been proven by clear and convincing evidence. The court, which normally only reviews law, not facts, was able to do so because of the libel standard articulated by the Supreme Court in New York Times v. Sullivan  – the statement must be made with actual malice, and the record must be examined to make certain that there is no constitutional violation.  Thus, this is a rare case in which the NY Court of Appeals could do a factual analysis.  It is interesting for citizens of Washington, as well, because there has been talk of the state legislature prohibiting untrue campaign statements.

Plaintiff brought the action alleging libel after he lost a local election. The basis of his claim was a pamphlet circulated on the eve of the election, which said that plaintiff had flagrantly broken the law.  The case went to a jury and defendant was found liable for $100,000 in punitive damages.  The trial court set aside the verdict, the Appellate Division reinstated it, and the Court of Appeals dismissed the action.

The Court of Appeals determined that, to prove libel, the evidence had to show actual malice with convincing clarity.  Because the record failed to show that defendant knew that his statement was untrue, or that defendant had no basis for thinking plaintiff guilty of any legal transgression, the evidence of actual malice was not clear and convincing – even though defendant “could not have believed every word in the statement”.  (That seems to relate to defendant's use of the word "flagrantly.")  Therefore, clear and convincing evidence of actual malice requires a showing that the defendant knew his statement was not true and had no basis for thinking it was true.

Given this ruling, clear and convincing evidence is a pretty stringent standard. 
Granted this is an analysis of whether actual malice is proven in the context of Constitutional free speech, but the clearly convincing standard applies in other civil contexts – such as fraud, which is a pretty common cause of action in commercial litigation.

I’m working on posts about the other two decisions. 

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