In NY, a complaint containing a fraud cause of action must allege the circumstances underlying the fraud in sufficient detail.[1] Typically, plaintiffs cannot claim a cause of action to recover damages for fraud and breach of contract where the fraud claimed arises from the breach of a contract.[2]

The Second Department revisited this issue in the recent decision Emby Hosiery Corp. v Tawil, ___AD3d___, 2021 NY Slip Op 04214 (2021).[3] In February 2019, plaintiff importer and distributor of goods sued corporate and individual owner defendants alleging the defendants failed to pay for products they had ordered from the plaintiff. The complaint also alleged that the individual defendants induced the plaintiff to continue selling and shipping products to the corporate defendants by misrepresenting that they would pay their debts to the plaintiff but later stopped payment on checks tendered to the plaintiff. The complaint, among other things, alleged causes of action for breach of contract and fraud. Defendants moved to dismiss the complaint under CPLR 3211. The lower court denied the motions, and the defendants appealed.

As stated above, the general rule is that a fraud claim cannot lie where the only fraud alleged arises from the breach of a contract. The Second Department noted the exception being when the complaint alleges a misrepresentation of “present facts that [are] collateral to the contract and served as an inducement to enter into the contract.”[4]

In the Emby Hosiery case, the Court found that although the fraud and breach of contract claims are based on the same facts, “plaintiff’s fraud cause of action alleges that the defendants induced the plaintiff to sell the defendants more product during the holiday season with a misrepresentation of a present fact collateral to the contract, i.e., that the defendants would pay the plaintiff all of the monies owed for prior orders despite knowing that the corporate defendants’ bank accounts did not have sufficient funds to cover those costs.”[5] The Court also added that the fraud allegation was pleaded with the particularity necessary to sustain a cause of action alleging fraud.

As a result, the Court affirmed the lower court’s decision denying the motions to dismiss the complaint.

If you have a similar claim or other business dispute, Yoars Law has experience helping clients understand their potential legal remedies. At Yoars Law, we focus on being proactive business and legal advisors for our clients, guiding them through the complex legal issues as they arise, and being zealot advocates when needed. We also provide transparent and predictable legal fees so our clients can consistently manage their budgets.

 

[1] See CPLR 3016(b).

[2] See Gorman v Fowkes, 97 AD3d 726 (2d Dept 2012).

[3] A full copy of the decision can be found here.

[4] Emby Hosiery Corp. v Tawil, ___AD3d___, 2021 NY Slip Op 04214, *2 quoting Did-it.com, LLC v Halo Grp., Inc., 174 AD3d 682, 683, 102 N.Y.S.3d 687.

 

[5] Emby Hosiery Corp. v Tawil, ___AD3d___, 2021 NY Slip Op 04214, *5-6 (citations omitted).

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