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As noted in "How to Prove a Successful Business Fraud Claim Under NY Law," the general rule in New York regarding what you need to plead in a fraud case is well-established, and it is codified in New York Civil Practice Law & Rules 3016:

The General Rule

You must allege with great particularity the specific acts that constitute the fraud.

The (Narrow) Exception to the General Rule

As is true with many rules in life, there are some narrow exceptions to this rule (hence, the allusion in the title to this article to the classic line from the 1948 film, The Treasure of the Sierra Madre).

One such example is where the specific facts underlying the fraud are known only to the defendants, and the plaintiff has no way of knowing those facts without further discovery. Or, as New York's highest court has expressed it:

"[Dismissal at the initial pleading stage of the case is inappropriate where the specific facts are] peculiarly within the defendants' knowledge, and, at this early stage, it could potentially work an unnecessary injustice to dismiss this claim where if there is any pleading deficiency it may be cured later in this proceeding after some discovery." Pludeman v. Northern Leasing Sys., Inc., 10 NY3d at 491-492.

Rather, the Court continued, under these circumstances the plaintiff must only allege facts that "are sufficient to give rise to a reasonable inference of fraud."  

The Takeaway

If you think about it, this rule - and exception - make a lot of sense. Since this article is geared toward the exception, let's limit our analysis to that point:

It would be manifestly unfair to penalize a claimant - who very well may have been defrauded by the defendant - by dismissing his claim just because the defendant did a masterful job of ensuring that the plaintiff (in many instances, a fiduciary) would be denied access to the material facts that would sustantiate the claim. Indeed, if the rule were otherwise (and dismissal of such actions granted), dishonest defendants would be effectively encouraged and to double down on their fraud, by rewarding the concealment of their bad acts.

Jonathan Cooper
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Non-Compete, Trade Secret, Unfair Competition and School Negligence Lawyer
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