Commercial Division Blog

Posted: September 2, 2018 / Categories Commercial, Negligence

Negligent Supervision Claim Dismissed For Lack of Allegations of Prior Knowledge

On August 13, 2018, Justice Sherwood of the New York County Commercial Division issued a decision in Moore Charitable Found. v. PJT Partners, Inc., 2018 NY Slip Op. 31980(U), dismissing a claim for negligent supervision for lack of allegations of prior knowledge, explaining:

Defendants argue that the negligent supervision claim fails because plaintiffs have not alleged defendants had any reason to suspect Caspersen had a propensity to commit fraud. Caspersen's alleged drinking and high risk trading behavior do not create inferences that he had a propensity to commit fraud. Nor were defendants alleged to have actual knowledge of those behaviors. Defendants are only accused of being negligent for not knowing of them. In fact, plaintiffs admit Caspersen functioned at the highest level in his job. He is alleged to have brought in a number of large transactions to PJT and earned the company millions of dollars in fees. Plaintiffs do not allege Caspersen had shown any propensity to commit fraud before he diverted the Irving Place transaction fees, and defendants could not be negligent in failing to investigate Caspersen's statements about why those fees were late, when he had shown no such prior propensity.

Plaintiffs argue they are not required to plead negligent supervision with specificity. However, defendants can be held liable even without actual knowledge of Caspersen's fraud, if they should have known of his propensity. Plaintiffs argue that a jury could easily find that the behaviors drinking, risky personal trading in which Caspersen was engaging were behaviors likely to correlate strongly with increased risk of fraud, and thus which put Defendants on notice of that propensity. Surely, they contend, Caspersen's diversion of the Irving Place fee from PJT to his own account would qualify, as would his transfer of the funds taken from the Foundation into PJT's account to conceal his fraud. These should have been red flags, and ought to have started an investigation which would have avoided harm to the Foundation.

Defendants contend that one kind of destructive behavior (risky personal trading and drinking) is insufficient to show a propensity for other kinds of destructive behavior (such as committing fraud). Further, plaintiffs' argument that Caspersen's diversion of defendants' funds illustrates Caspersen's propensity, without alleging defendants were aware of his actions, logically fails. Similar alleged red flags were dismissed in the related federal securities class action case. In instances where an employer cannot be held vicariously liable for its employee's torts, the employer can still be held liable under theories of negligent hiring, negligent retention, and negligent supervision. However, a necessary element of such causes of action is that the employer knew or should have known of the employee's propensity for the conduct which caused the injury. Plaintiffs rely on Caspersen's actions in performing excessive high-risk personal trading from his office and his diversion of the Irving Place fee into his own account, as well as drinking alcohol while working, as conduct which should have put defendants on notice of Caspersen' s alleged propensity.

Plaintiffs do not, however, allege defendants were aware of this conduct before Caspersen sold plaintiffs the fake investment. Engagement in high risk behaviors such as personal trading and excessive use of alcohol is not necessarily causally connected to fraudulent conduct. Further the complaint does not allege that the harm plaintiff suffered was related to Caspersens drinking habit or his personal trading. The negligent supervision claim shall be dismissed.

(Internal quotations and citations omitted).

Commercial disputes often concern contracts. However, disputes relating to commercial transactions also can give rise to tort claims, such as fraud, breach of fiduciary duty, tortious interference and, as here, negligence. Contact Schlam Stone & Dolan partner John Lundin at if you or a client face a situation where you have been injured in a commercial transaction but the injury did not involve a breach of a contract.