Pleading Fraud? Don't Forget Some Basic Rules
02/26/2021We have discussed in earlier blogs that claims of fraud rarely succeed when the conduct of the parties is already governed by a written contract. Most disputes between the parties fall under theories of “breach of contract,” and it is rare that some extraneous representation can support a claim of fraud.
But even when there is behavior that might qualify as a fraud or misrepresentation, there are other hurdles that can frustrate the assertion of a fraud claim. A recent appellate case out of Buffalo reminds us about some of the basic rules.
In Dreamco Development Corp. and Rosanne Dipizio v. Empire State Development Corp. and Erie Canal Harbor Development Corp., Fourth Dept., NY 2021, the Erie Canal Harbor Dev. Corp. (“Owner”) had entered into a contract with Dreamco to perform construction services to revitalize the waterfront in Buffalo. Dreamco entered into a subcontract with Dipizio to act as project manager for the project. The Owner quickly became disenchanted with the services being performed by Dreamco and terminated that contract. Dipizio, which then lost its subcontract in the process, sued the Owner for fraud.
The first trap to ensnare Dipizio concerned the level of detail one must allege when pleading fraud. The allegations must be pleaded “with particularity” (usually meaning that the actual words alleged to be fraudulent must be stated). Dipizio had alleged that individuals at the Owner had promised her there would be cooperation and fairness. According to the court, these were only “generic” allegations and not specific enough to support a fraud claim.
Dipizio also alleged that representatives of the Owner had maligned Dipizio to its Board of Directors about responsibility for project delays as a pretext for terminating Dreamco. Here, Dipizio fell afoul of the second trap in pleading fraud. To make out a claim of fraud, there must have been a misrepresentation that one relied upon to one’s detriment. Here, the court held that Difazio could not have “relied” upon a statement maligning Dipizio made to the Board of Directors of the Owner, not to Dipizio.
Dipizio further alleged that the Owner had deliberately withheld material information at the time of bid, namely, that the plans and specifications were not yet ready for bid. Unlike an actual misrepresentation, an “omission” claimed to mislead someone is judged by a higher standard. An omission does not constitute fraud unless there is a fiduciary or “special” relationship between the parties. In other words, one is not obligated to volunteer harmful information to the other unless there is a special relationship of trust between the two. Falling into this third trap, Dipizio had not alleged that the Owner owed any such fiduciary relationship to it (nor does such a special relationship usually exist between an owner/contractor/subcontractor on a typical construction project).
Three strikes and Dipizio was out. Its fraud claims were all dismissed, as was its entire complaint against the Owner.ATTORNEY: Randy J. Heller
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