Commercial Division Blog

Posted: April 24, 2017 / Categories Commercial, Fraud/Misrepresentation

Defendant Need Not Make Misrepresentations to be Liable for Aiding and Abetting Fraud

On April 13, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Universal Processing Services of Wisconsin v. Berger, 2017 NY Slip Op. 30747(U), upholding a claim for aiding abetting fraud even though there was no allegation that the defendants made any misrepresentations to the plaintiff, explaining:

To state a cause of action for aiding and abetting fraud, the plaintiff must allege (1) the existence of the underlying fraud, (2) actual knowledge, and (3) substantial assistance.

Regarding the first element, to assert the underlying occurrence of fraud, the Complaint must allege (1) a material misrepresentation of an existing fact, (2) made with knowledge of the falsity, (3) an intent to induce reliance thereon, (4) justifiable reliance upon the misrepresentation, and (5) damages. Notably, while a material misrepresentation of fact and justifiable reliance must be alleged with respect to the underlying fraud claim, neither must be alleged with respect to the defendants against whom the aiding and abetting claim is asserted.

Regarding the second element, a plaintiff alleging an aiding and abetting fraud claim may plead actual knowledge generally, particularly at the prediscovery stage, so long as such intent may be inferred from the surrounding circumstances.

Regarding the third element, substantial assistance exists where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated. The element of substantial assistance may similarly be inferred from the circumstances alleged in the complaint.

Finally, where a cause of action is based upon fraud or aiding and abetting fraud, the circumstances constituting the wrong must be stated in detail.

. . . . Defendants' arguments conflate the required elements of fraud with the elements aiding and abetting fraud. Indeed, false statements and reliance are not elements of an aiding and abetting claim, so the Complaint need not allege either with regards to the named Defendants. Rather, the Court concludes that the Complaint properly asserts that the underlying fraud was
committed by non-parties The Loft, Scorsetti, and Sungame, among others, by alleging the non-parties falsely represented to Plaintiff that the tablet purchases were valid, and by alleging that Plaintiff reasonably relied on these representations in processing the transactions.

To properly allege that Defendants aided and abetted The Loft, Scorsetti, and Sungame in this fraud, Plaintiff need only allege that Defendants (1) knew of the fraud and (2) offered substantial assistance. While the Complaint contains no direct factual allegations of Defendants knowledge or direct participation, the complaint nonetheless alleges a series of circumstances from which the Court can reasonably infer Defendants' knowing participation in the Merchants' fraudulent scheme.

(Internal quotations and citations omitted) (emphasis added).