Group Pleading Renders Fraud Claim Insufficient

On June 7, 2019, Justice Cohen of the New York County Commercial Division issued a decision in Arent Fox LLP v. JDN AA, LLC, 2019 NY Slip Op. 31593(U), holding that group pleading rendered a fraud claim insufficient, explaining:

The newly added causes of action reference alleged conduct by "Defendant" or "Defendants," without distinguishing between or among the Original and Proposed Additional Defendants. It does not indicate which "Defendant" was a transferee in any particular transaction in which "Defendants" are transferors. Such group pleading fails to give each defendant fair notice of what it is alleged to have done, which is particularly important when it comes to allegations of fraudulent behavior. The affidavit submitted in support of the motion does not remedy these deficiencies.

Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 491 (2008), is distinguishable. In that case, the nature of the fraud gave rise to a reasonable inference that the officers, as individuals were involved in the fraud. Accordingly, the Court of Appeals held that it was not necessary to state the details of the individual defendants' personal participation in, or actual knowledge of, the alleged concealment. Similarly, in 47-53 Chrystie Holdings LLC v. Thuan Tam Realty Corp., 167 A.D.3d 405 (1st Dep't 2018), the court found that it was reasonable to infer that each of the defendants were involved with the alleged fraud and that the specific act was common among the individuals. Accordingly, the reference in the complaint to "individual defendants" clearly referred to the eight shareholders of the defendant corporation. By contrast, the proposed amended complaint in this case does not address or establish a connection between the individuals amongst the Proposed Additional Defendants and the Defendant companies. The proposed amended complaint does not allege which corporate assets allegedly were transferred to or from which Defendant. The group pleading concerns extend beyond the new fraud claims. Because the defendants are grouped together, the complaint does not clearly articulate whether the five previous causes of action apply broadly to the Proposed Additional Defendants. The claims are asserted against "Defendants." Thus, it is unclear whether and to what extent the Proposed Additional Defendants are incorporated into the existing claims for relief and the basis upon which such claims might properly be made against them.

(Internal quotations and citations omitted).

Commercial litigation frequently involves fraud-based claims. Such claims have special pleading requirements. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have a question regarding a fraud-based claim.