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Current Developments in the Commercial Divisions of the
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Posted: July 5, 2016

Plaintiff Cannot Establish Reliance Element of Fraud Claim by Showing Only Third Party Reliance

On June 30, 2016, the Court of Appeals issued a decision in Pasternack v. Laboratory Corp. of America Holdings, 2016 NY Slip Op. 05179, holding that the reliance element of a fraud claim could not be based on reliance by a third party.

In Pasternack, the Second Circuit certified two questions to the Court of Appeals, one of which was “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 Appeals held that third party reliance was insufficient, explaining:

Federal courts applying New York law and the Appellate Division Departments have come to varying conclusions as to whether a plaintiff may state a fraud claim, despite the absence of reliance by the plaintiff on the alleged misrepresentations, where a non-plaintiff third-party is alleged to have relied on the misrepresentations in a manner that caused injury to the plaintiff. . . .

Similarly inconsistent is the Appellate Division case law, with the majority of cases declining to recognize third-party reliance and a few outliers adopting the opposite view.

The cases that recognize third-party reliance cite favorably to Eaton Cole & Burnham Co. v Avery (83 NY 31, 35 [1880]). However, as noted by the District Court and Second Circuit here, Eaton is distinguishable from this case because in Eaton the third party acted as a conduit to relay the false statement to plaintiff, who then relied on the misrepresentation to his detriment. Eaton and its progeny stand for the proposition that indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it. Eaton does not support plaintiff’s claim here, because Montalvo’s statements were not relayed to plaintiff, and he did not rely on them. . . .

Indeed, this Court has stated on a number of occasions that a fraud claim requires the plaintiff to have relied upon a misrepresentation by a defendant to his or her detriment. This view is both consistent with other rules governing fraud claims, and logical insofar as the tort of fraud is intended to protect a party from being induced to act or refrain from acting based on false representations — a situation which does not occur where, as here, the misrepresentations were not communicated to, or relied on, by plaintiff. We, therefore, decline to extend the reliance element of fraud to include a claim based on the reliance of a third party, rather than the plaintiff.

(Internal citations omitted).

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