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Posted: May 9, 2014

Fraud on the Court Must be Proved by Clear and Convincing Evidence

On May 8, 2014, the Court of Appeals issued a decision in CDR Creances S.A.S. v. Cohen, 2014 NY Slip Op. 03294, adopting a “clear and convincing evidence” standard for motions to strike an adversary’s pleadings under CPLR 3126.

CDR Creances S.A.S., concerned theft of loan funds by diverting them to fictitious entities. After two of the defendants were indicted in federal court in Florida for obstruction of justice and subornation of perjury, the plaintiffs moved to strike those defendants’ pleadings and for a default judgment. After finding that the defendants had, among other things “suborned perjury by providing [witnesses] with a ‘script’ containing false answers to be given to their attorneys and at their depositions; created . . . wholly fictitious individuals and intentionally implicated as controlling the defendant corporations; [and] forged the affidavits of others,” the Supreme Court granted the motion, struck the defendants’ answers, and granted default judgments.

The First Department affirmed. The Court of Appeals granted leave to appeal to address the proper evidentiary and legal standards for such a motion. The court reviewed a number of federal cases and imported the federal “clear and convincing evidence” standard into New York law:

The federal courts have applied the clear and convincing standard in determining whether the offending party’s actions constitute fraud on the court. Characteristic of federal cases finding such fraud is a systematic and pervasive scheme, designed to undermine the judicial process and thwart the non-offending party’s efforts to assert a claim or defense by the offending party’s repeated perjury or falsification of evidence . . . .

We adopt this standard and conclude that in order to demonstrate fraud on the court, the non-offending party must establish by clear and convincing evidence that the offending party has acted knowingly in an attempt to hinder the fact finder’s fair adjudication of the case and his adversary’s defense of the action. A court must be persuaded that the fraudulent conduct, which may include proof of fabrication of evidence, perjury, and falsification of documents concerns issues that are central to the truth-finding process. Essentially, fraud upon the court requires a showing that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system’s ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party’s claim or defense. A finding of fraud on the court may warrant termination of the proceedings in the non-offending party’s favor . . . . Therefore, once a court concludes that clear and convincing evidence establishes fraud on the court, it may strike a pleading and enter a default judgment.

We caution that dismissal is an extreme remedy that must be exercised with restraint and discretion. Dismissal is most appropriate in cases like this one, where the conduct is particularly egregious, characterized by lies and fabrications in furtherance of a scheme designed to conceal critical matters from the court and the nonoffending party; where the conduct is perpetrated repeatedly and wilfully, and established by clear and convincing evidence, such as the documentary and testimonial evidence found here. Dismissal is inappropriate where the fraud is not central to the substantive issues in the case or where the court is presented with an isolated instance of perjury, standing alone, which fails to constitute a fraud upon the court. In such instances, the court may impose other remedies including awarding attorney fees, awarding other reasonable costs incurred, or precluding testimony. In the rare case where a court finds that a party has committed fraud on the court warranting dismissal, the court should note why lesser sanctions would not suffice to correct the offending behavior.

(Internal citations and quotations omitted) (emphasis added).  The court rejected the defendants’ argument that it should apply a “conclusively demonstrated” standard, noting that “defendants’ standard would permit a party to escape a court’s consideration of claims of egregious acts of deceit by presenting bare denials of the truth of the allegations.”

Applying the “clear and convincing” standard to the facts of the case, the Court of Appeals then held that the lower courts correctly struck the principal defendants’ pleadings based upon the corroborated evidence and the pervasive nature of their deception.

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