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Why Fraudulent Concealment Claims Are So Tough to Win in New York


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1/1/2016
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What is "Fraudulent Concealment"?

Under New York law, when a seller deliberately hides information that is critical to the buyer's decision to invest or not to invest, this is generally referred to as "fraudulent concealment."

Seems fair enough.

But that doesn't mean it's easy to win one of these claims. Not by a long shot.

In order to appreciate the challenges inherent in proving one of these claims, we first, and as a threshold matter, must clarify what does not qualify as fraudulent concealment under New York law.

Distinguishing What is - From What is Not - Fraudulent Concealment

In the first instance, a fraud claim must be based on a misrepresentation of an existing fact rather than an expression of future expectations. Sabo v Delman, 3 NY2d 155, 164 NYS2d 714, 143 NE2d 906 (1957); Adams v Clark, 239 NY 403, 146 NE 642 (1925).

Consequently, the mere failure to perform a contractual promise, or an unfulfilled statement about future expectations does not in and of itself support a cause of action in fraud. Roney v Janis, 77 AD2d 555, 430 NYS2d 333 (1st Dept 1980), aff'd, 53 NY2d 1025, 442 NYS2d 484, 425 NE2d 872 (1981); Brown v Lockwood, 76 AD2d 721, 432 NYS2d 186 (2d Dept 1980).

Importantly, and in the same vein, general allegations that a party entered into a contract while lacking the intent to perform it are insufficient to support a fraud claim. New York University v Continental Ins. Co., 87 NY2d 308, 639 NYS2d 283, 662 NE2d 763 (1995); Demetre v HMS Holdings Corp., 127 AD3d 493, 7 NYS3d 110 (1st Dept 2015); Lucker v Bayside Cemetery, 114 AD3d 162, 979 NYS2d 8 (1st Dept 2013).

Rather, to sustain such a fraud claim, the complaint must allege facts to show that defendant, at the time the promissory representation was made, never intended to honor or act on his/her statementRoney v Janis, supra.

Why Fraudulent Concealment Claims Are Very Tough to Win in New York

In addition to the challenges set forth above, fraudulent concealment claims are particularly tough to win because in addition to the traditional elements of proof required in a fraud case (including intent to defraud and reasonable reliance - neither of which are easy), a plaintiff alleging fraudulent concealment must also demonstrate that the defendant had a special, or fiduciary, relationship with the plaintiff that imposed upon the defendants a duty to disclose material information. See, e.g., Albion Alliance Mezzanine Fund, L.P. v. State Street Bank and Trust Co., 8 Misc. 3d 264, 269 (Sup. Ct., N.Y. Cty. 2003), aff'd 2 AD3d 162 (1st Dep't 2003).

The difficulties with this type of claim do not end there; in many instances, the parties have executed a detailed agreement that contains a disclaimer stating that the purchaser is not relying upon any of the seller representations, which often will sound the death knell to any claim that the plaintiff/purchaser reasonably relied upon the seller's representations. In that regard, the courts have expressly stated that

"[W]here a party specifically disclaims reliance upon a representation in a contract, that party cannot, in a subsequent action for fraud, assert it was fraudulently induced to enter into the contract by the very representation it has disclaimed."

Grumman Allied Indus. Inc. v. Rohr Indus., Inc., 748 F.2d 729, 734-35 (2d Cir. 1984); see also, Danann Realty Corp. v. Harris, 5 NY2d 317 (1959).

An Important Caveat

Not surprisingly, there are exceptions to this rule as well, such as where the concealment pertains to matters that were exclusively within the defendants' knowledge, and could only have been discovered by the plaintiff through great difficulty. This is referred to the "special facts" doctrine (and, given the breadth of that topic, will be the subject of a separate article).



Category: Breach of Fiduciary Duty

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

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