Making and Breaking Cases for Commercial Fraud in New York—The Elements of Commercial Fraud—Intentional Misrepresentation of a Material Fact

Practical insights from powerhouse attorney, author and speaker Bradley Bailyn.

Thornton Mellon (played by Rodney Dangerfield) famously quipped in the 1986 movie “Back to School,” “Jason, you don’t lie to me, you lie to girls.” Although this line evoked a smirk in the fictitious collegiate world of Grand Lakes University, the real-world consequences of misrepresentation in a commercial fraud case could mean the difference between sending your child to a top college and struggling just to afford to pay your own housing expenses.

“In order to sustain an action for actual fraud the plaintiff must prove: (1) that the defendant made a representation, (2) as to a material fact, (3) which was false, (4) and known to be false by the defendant, (5) that the representation was made for the purpose of inducing the other party to rely upon it, (6) that the other party rightfully did so rely, (7) in ignorance of its falsity (8) to his injury.” See, 24 N.Y. Jur., Fraud and Deceit, §14; 37 C.J.S. Fraud § 3; Brown v. Lockwood, 76 A.D.2d 721, 730 (2d Dept. 1980). These elements are essentially the same in both New York State and Federal Courts. See, Marketing Developments, Ltd. v. Genesis Import and Export, Inc., 2009 WL 4929419 *5 (E.D.N.Y. 2009).

Here, I focus on an amalgam of the first five—the intentional misrepresentation of a material fact, specifically on the important terms “intentional” and “material.”

The term “intentional” is not as simple as it seems. Indeed, my clients regularly visit me seeking to pursue fraud claims against another. They tell me, “He lied to me.” My response—“Prove it.” And that is where it gets tricky.

To prove intent, often referred to as “scienter” in the legal world, a plaintiff has the burden to prove “that the defendant knew of the falsity of the representation being made to the plaintiff.” See, IKB Intern. S.A. v. Morgan Stanley, 142 A.D.3d 447, 456, 36 N.Y.S.3d 452 (1st Dept. 2016). The difficulty lies in proving that the defendant “knew.” Without the ability to physically enter the mind of the person making the misrepresentation, it is a heavy burden to prove this fact in front of a judge or jury.

My success with clients in these cases arises out of my belief that “the devil is in the details.” Has the defendant been involved in other fraudulent acts? Did the defendant misrepresent anything at his deposition? Were other transactions canceled because of allegations of misrepresentation by this defendant? What motivation did this defendant have to conceal? It is this “outside the box” thinking that gives the victim of commercial fraud a much higher chance at success. I endeavor to find these answers through carefully prepared discovery demands and an artful series of questions at deposition and, if necessary, trial.

Likewise, when I represent defendants, I will use my vast experience and the detailed discovery I obtain to create a credible defense that will serve to poke significant holes in a plaintiff’s case, if not obliterate it entirely.

In its simplest form, the question of whether or not a fact is “material” is answered by asking the question: Would the party deceived have agreed to enter into the transaction had the misrepresenting disclosed the fact in question? If yes, the fact is material; if no, it is not.

As an example, a large real estate company entered into a $32.5 million contract to purchase a New York City property from another entity. During the period of due diligence (where questions are asked and facts are gathered), the selling entity failed to disclose that one tenant in this multitenant building owed $87,000.00 in rent arrears. Due to the small amount owed by that tenant in comparison to the $32.5 million purchase price, the Court ruled that, had the purchaser known of the rent arrears, it still would have concluded the purchase of the property. As the misrepresentation made no difference, it was deemed “not material” and, therefore, this element of commercial fraud was not met. See, West 17th Street and Tenth Avenue Realty, LLC v. The N.E.W. Corp., 155 A.D.3d 478, 65 N.Y.S.3d 132 (1st Dept. 2017).

On the other hand, if you apply for an automobile insurance policy and, on the application, you intentionally fail to include an accident you previously had, this would likely be deemed a material misrepresentation sufficient to satisfy this element of fraud. In other words, the insurance company would not likely have issued you the policy had you disclosed the prior accident.

As an attorney, it is my job to know what will satisfy the elements of fraud and work your case so that, if you are the plaintiff, the elements are satisfied and, if you are the defendant, they are not. It is through careful preparation and deep knowledge and experience that I am able to represent clients to a successful result.

The Bailyn Law Firm, P.C., founded by Bradley Bailyn, is a very hard-working law firm that provides excellent representation to people who are plaintiffs or defendants in New York commercial fraud cases. If you would like to come in for a free consultation, please fill the form on our website or call 646-326-9971.