Court of Appeals Accepts Certified Question on Whether Fraud Claim Can Be Based on Third-Party Reliance

On December 15, 2015, the Court of Appeals accepted a certified question from the Second Circuit in Pasternak v. Laboratory Corp. of America Holdings, on an unsettled issue of New York law of interest to commercial litigators – whether a fraud claim can be based on a third party's reliance on defendant's false statements, resulting in injury to the plaintiff.

In Pasternak, the plaintiff (a doctor) sued a laboratory company for falsely representing to the Federal Aviation Administration that he had refused to provide a required urine sample. As a result of actions taken by the FAA in reliance on the laboratory's statements, the plaintiff "was unable to pilot any flights or perform pilot medical examinations." The district court dismissed the plaintiffs fraud claim, relying "on a strand of Second Circuit cases holding that New York fraud law does not contemplate third party reliance." As the Second Circuit noted, despite those authorities, "Appellate Division courts as well as the federal district courts are divided on the issue." Further complicating the analysis, the Appellate Division decisions "that have endorsed third-party reliance have generally done so by relying on a line of cases originating with three New York Court of Appeals cases from the 1800s." Those cases, in turn, either dealt with the issue of third-party reliance in dicta or are distinguishable in that, unlike in this case, "the third parties acted as conduits to relay the false statements to the plaintiffs, who then relied on the false statements to their detriment."

Given the uncertain state of the law in this area, the Second Circuit certified the following question, which the Court of Appeals accepted:

whether a plaintiff may establish the reliance element of a fraud claim under New York law by showing that a third party relied on a defendant's false statements resulting in injury to the plaintiff.

The Court of Appeals' answer to this question could have significant implications for the scope of fraud claims in business litigation in New York.