What is Fraud?

We often hear people say, “That’s false,” or “That’s a lie!” Yet, not every false statement or even lie is “fraud.”  Phrased differently, just because something may be false, incorrect or inaccurate doesn’t mean that a “fraud” has been committed. Rather, through the years, courts have distilled the common “elements” of what precise kind of behavior constitutes “fraud.”

Here are some of the characteristics of fraud:

  • A false representation was made as a statement of fact;
  • It was untrue and known to be untrue by the party making the statement at the time the statement was made;
  • It was made with the intent to induce the victim to act upon the misrepresentation;
  • The misrepresentation was material or concerned a material aspect of the transaction;
  • The victim reasonably relied upon the misrepresentation of fact;
  • The victim acted upon the misrepresentation of fact; and,
  • The victim sustained damages or other harm as a result.

See Mandarin Trading Co. v. Wildenstein, 16 N.Y.3d 173, 914 N.E.2d 1104 (2011).

Pleading Standard

“Fraud,” whether as a cause of action seeking monetary damages, rescission, or a declaratory judgment declaring a document null and void ab initio, must be plead with “particularity.” CPLR 3016(b).

Practice Commentary: “Particularity” does not mean “with specificity.”  See New York City Transit Auth. v. Morris J. Eisen, P.C., 276 A.D.2d 78 (1st Dept. 2000).  In other words, failure to plead the exact verbatim words uttered orally by a party is not fatal to the pleading, so long as the pleading communicates in non-general terms and with reasonable detail the sum and substance of the material communications and representations made by a party to induce the victim.  When the misrepresentation was made in writing, however, “particularity” does require a true and accurate reproduction of the written statements.

Burden of Proof

Fraud must be proven by clear and convincing evidence. Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966 (2d Cir. 1987).

Practice Commentary: Some conceptualize a preponderance of the evidence as “50% and a hair,” and go on to compare and contrast clear and convincing evidence as “something between a preponderance and beyond a reasonable doubt.” At the end of the day, “clear” means that one shouldn’t need to jump through complex and convoluted mental hoops to make heads and tails of what “the fraud” actually was, and “convincing” means that the fact-finder must end up feeling reasonably comfortable and secure in their common experience of human interaction to conclude that the behavior represents an intentional or calculated deviation from honest and truthful dealings (i.e., fraud).  Clear and convincing evidence with respect to fraud requires more than, “I don’t like how I was treated, I don’t think it’s fair, so I’m going to sue because I don’t feel like honest people should behave this way.” It requires enough evidence to place the question of fact outside the realm of individual subjective opinion and closer to what most people would objectively consider dishonest and fraudulent behavior and intent.

Statute of Limitations

A claim for fraud must be commenced no later than: (a) six years from the date the cause of action accrued, or (b) two years from discovery of the fraud or when it should have been discovered with reasonable diligence; whichever is greater (i.e., longer). CPLR 213(8).

Practice Commentary: Because of the mechanics of the statute of limitations applicable to fraud, it is very common for defense counsel to attempt to argue that the fraud should have been discovered sooner. This defense tactic is usually a very risky “Hail Mary” attempt to get the entire claim dismissed as untimely. In pursuing this tactic, defense counsel necessarily admits that a fraud has occurred. If the defense fails, and the claim is held to be timely, defense counsel cannot click the “undo” button. In practice, it is both conservative and more often the case that fraud claims be commenced within six years from the date the cause of action accrued rather than rely upon the two years from the date of discovery window.

Invalidating Contracts

The New York Court of Appeals, New York’s highest court, has stated:

“[T]here is no authority that we are required to follow in support of the proposition that a party who has perpetrated a fraud upon his neighbor may, nevertheless, contract with him in the very instrument by means of which it was perpetrated, for immunity against its consequences, close his mouth from complaining of it and bind him never to seek redress. Public policy and morality are both ignored if such an agreement can be given effect in a court of justice. The maxim that fraud vitiates every transaction would no longer be the rule but the exception. It could be applied then only in such cases as the guilty party neglected to protect himself from his fraud by means of such a stipulation.  Such a principle would in a short time break down every barrier which the law has erected against fraudulent dealing. In other words, the law does not temporize with trickery or duplicity. A contract, the making of which was induced by deceitful methods or crafty device, is nothing more than a scrap of paper, and it makes no difference whether the fraud goes to the factum, or whether it is preliminary to the execution of the agreement itself.” Sabo v. Delman, 3 N.Y.2d 155 (1957).

“A party is under an obligation to read a document before he or she signs it, and a party cannot generally avoid the effect of a [document] on the ground that he or she did not read it or know its contents.” Martino v. Kaschak, 208 A.D.2d 698 (2d Dept. 1994). “[T]here are situations[, however,] where an instrument will be deemed void because the signer was unaware of the nature of the instrument he or she was signing” (Green Point Sav. Bank v. Placid Life, Inc., 272 A.D.2d 441 (2d Dept. 2000), such as where “the contents thereof are misread or misrepresented to him by the other party, or even by a stranger.” Cash v. Titan Fin. Servs., Inc., 58 A.D.3d 785, 788 (2d Dept. 2009).

Fraud is so powerful that agreements signed with the victim’s own independent attorney as witness to the signing of the agreement have nevertheless still been invalidated. See Suttongate Holdings Limited v. Laconm Management N.V., 160 A.D.3d 464 (1st Dept. 2018) (invade; see also Cioffi-Petrakis v. Petrakis, 103 A.D.2d 766 (2d Dept. 2013).

Practice Commentary: Many attorneys misplace reliance upon “specific disclaimers” within a contract as somehow insulating a defendant from any claim of fraud. “Specific disclaimers” are valid tools to foreclose future disputes over specific facts (e.g., unpaid water and sewer bills, meter readings, real estate taxes), but they may not be used to bar all claims of fraud or a claim that the agreement should be invalidated because of fraud in the inducement. The leading cases on specific disclaimers is Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959), which did not purport to overrule or reverse Sabo v. Delman, 3 N.Y.2d 155 (1957).

Forged Documents

A forged document is void ab initio (i.e., from the very beginning). As such, it is incapable of conveying title or any other interest, even to a purchaser in good faith or holder in due course. See Faison v. Lewis, 2015 NY Slip Op 04026 (2015). More importantly, however, the statute of limitations applicable to “fraud” is not applicable to cases of “forged” documents. Id.

Practice Commentary: as a practical matter, there is no statute of limitations period on commencing an action seeking a declaratory judgment declaring a document void ab initio as a forgery.