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Media Source: www.nyfraudclaims.com

Claims seeking damages for allegedly being fraudulently induced to accept employment, while possible, are rarely sustained.  Recent case in point: the decision of the Federal Court in the Southern District of New York in Tellez v. OTG Interactive, LLC, 15 CV 8984, NYLJ 1202768822904, at *1 (SDNY, Decided September 26, 2016).

In Tellez, the plaintiff alleged that the CEO of his future employer concealed from him the facts that he had previously filed for personal bankruptcy and had been found to have made fraudulent transfers of his income prior to the plaintiff’s acceptance of employment.  Plaintiff further alleged that he would not have accepted the offer of employment had he known of the CEO’s background, and that he would have continued working for his former employer, a technology company.

Plaintiff sued, alleging that his subsequent demotion and ultimate termination from defendants’ employ violated the Sarbanes-Oxley Act, the Dodd-Frank Act, the severance provisions of his employment contract, and that he was fraudulently induced to join the defendant employer.

As to the fraudulent inducement claim, the Court noted: “Under New York law, a party seeking to establish a fraud claim independent of a breach of contract claim in the employment context must plead an ‘injury independent of termination.’ Smalley v. Dreyfuss Corp., 10 N.Y.3d 55, 59 (2008).”  Plaintiff was able to overcome this hurdle.  Plaintiff relied upon Laduzinski v. Alvarez & Marsal Tax and LLC, 132 A.D.3d 164 (1st Dep’t 2015), asserting that the “independent injury” requirement may be satisfied by a showing that plaintiff lost the benefits of his prior employment.  In Laduzinski, the plaintiff alleged that he was lured away from his job under false pretenses, specifically that the defendants hired him solely to get access to his contacts.  The court in Laduzinski held that this allegation was sufficient, because it established both a separate injury (the loss of the benefits of the plaintiff’s prior employment) and relied on actionable present statements, rather than future expectations.

The Court in Tellez continued: “As a general matter, fraudulent statements intended to lure an employee away from his current employer may support damages for the ‘injuries that resulted from [the employee’s] reliance on the defendants’ false statements,’ even though the plaintiff is not permitted to recover duplicative damages ‘for injuries caused by her termination.’ Stewart v. Jackson & Nash, 976 F.2d 86, 88 (2d Cir. 1992).  Here, Plaintiff’s fraudulent inducement claim relates to injuries separate and distinct from his termination, and therefore is not impermissibly duplicative of his breach of contract claim.”

This was not, however, the end of the matter. Plaintiff was still required to allege the elements of common law fraud, and particularly, fraud based upon the omission of relevant information upon which his claim was based.  The Court observed: “Under New York law, to plead a claim of fraudulent inducement by omission, a party must allege facts supporting each of the following four elements: ‘(1) the opposing party’s concealment of information that she had a duty to disclose; (2) the opposing party’s intention to defraud, or scienter; (3) the pleading party’s reliance on his resulting mistaken impression; and (4) damages.’ Nash v. The New School, No. 05 CV 7174, 2009 WL 1159166, at *3 (S.D.N.Y. Apr. 29, 2009).”

Defendants moved to dismiss this claim on the grounds that neither of the allegedly concealed facts was sufficient as a matter of law to support a claim for fraudulent inducement because there was no relationship between plaintiff and defendants that would have given rise to a duty to disclose.  See, e.g., Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993) (“A duty to speak cannot arise simply because two parties may have been on opposite sides of a bargaining table when a deal was struck between them, for under New York law the ancient rule of caveat emptor is still alive and well.”).

The fatal flaw to plaintiff’s claim was that the defendant employer had no legal duty to reveal information to him as he alleged.

The Tellez Court noted: “The New York Court of Appeals has recognized that a duty to disclose ‘has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance … is justified.’ Kimmell v. Schaefer, 89 N.Y.2d 257, 263 (1996).”

The Court then dismissed this claim, finding: “Here, Plaintiff has failed to plead facts that plausibly demonstrate that this was anything other than an arms-length contract negotiation between himself and Defendants regarding Plaintiff’s potential employment at [defendant employer].  Plaintiff has not identified any basis to conclude that Defendants were in a special position of trust and confidence that would have imposed upon them a duty to disclose …”

Lesson: While fraudulent inducement of employment claims are possible, all of the elements of common law fraud must be pled and proven.  When concealment is alleged (as opposed to a misrepresentation of existing fact), special circumstances are required — in which a duty to disclose is imposed.