Online Payments

Need to speak to someone?
Give us a call.

(800) 734-0565

Meyer, Suozzi, English & Klein, P.C.

By using our website, you agree to the terms of our Privacy Policy


Kevin Schlosser Authors, "Intent to Defraud Not Necessary to Obtain Rescission of Contract"

Mar 4, 2020Litigation & Dispute Resolution
As noted in my previous posts, one of the elements of an action seeking damages for fraud is pecuniary loss resulting from the fraud. In the new decision of the Appellate Division, First Department, in Sabby Healthcare Master Fund Ltd. v Microbot Med. Inc., 2020 NY Slip Op 01129 (1st Dep’t Decided Feb. 18, 2020), the Court made an innocuous enough observation: “no showing of pecuniary loss is needed to support a claim for fraudulent inducement based on rescission.” That is, if the plaintiff is seeking to rescind a contract based upon fraud, it need not show it sustained pecuniary damages. What is more surprising, however, is that the case law in support of the rather straightforward point that no pecuniary loss is required to obtain rescission also indicates that another critical element of the cause of action for fraud – intent to defraud or scienter – is also unnecessary to obtain rescission. This case law is set out below. There is really no reasonable justification for dispensing with this essential element of intent when the significant remedy of rescission is sought. Yet, there remains solid authority for the point, as explained below. As such, counsel would be wise to take advantage of this case law if rescission is a desired remedy. Court of Appeals State and Federal Authority Dispensing with “Intent” For Rescission The New York State court authority goes back to a decision rendered in 1874, in which the Court observed: “There can be no doubt that, in this aspect of the case, the defendant obtained the property of the plaintiff through misrepresentations which are material, even though it be assumed that they were made without bad intent on his part.” Hammond v Pennock, 61 NY 145, 152 (1874). The remainder of the decision dealt with whether the plaintiff was in fact entitled to rescission where the parties may not be restored to their pre-contract positon:

Assuming that there was evidence from which fraud could be found, the next inquiry is, whether the court, acting as a court of equity, should have rescinded the contract. It is objected on the part of the defendant that the plaintiff did not act promptly and restore, or offer to restore, what he received under the contract. It is, undoubtedly, a general rule of law, that a party who would rescind a contract, upon *153 the ground of fraud, must act promptly and restore, or offer to restore, to the other party what he received under it. But this rule only means that he must restore what he himself has received, and has, by force of the contract, under his own control. If the wrong-doer has, by his own act, complicated the case, so that full restoration cannot be made, he has but himself to blame. No one, perhaps, has stated this qualification more satisfactorily than the late Judge BEARDSLEY, in Masson v. Bovet (1 Denio, 69); he there said: “If a party defrauded would disaffirm the contract, he must do so at the earliest practicable moment after the discovery of the cheat. That is the time to make his election, and it must be done promptly and unreservedly. He must not hesitate; nor can he be allowed to deal with the subject-matter of the contract and afterward rescind it. The party who would disaffirm a fraudulent contract, must return whatever he has received upon it. This is on a plain and just principle. He can not hold on to such part of the contract as may be desirable on his part, and avoid the residue, but must rescind in toto, if at all.

**6 It was urged on the argument, that a contract cannot be rescinded by one of the parties, alone, so as to authorize a recovery by him of what had been paid on it, unless the other party is thereby fully restored to the condition in which he stood before. This is certainly the general rule, but in cases of fraud it can only mean that the party defrauded, if he would rescind the contract, must return, or offer to return, everything he received in execution of it. To retain the whole, or a part only, of what was received upon the contract, is incompatible with its rescission.

This is not exacted on account of any feeling of partiality or regard for the fraudulent party. The law cares very little what his loss may be, and exacts nothing for his sake. If, therefore, he has so entangled himself in the meshes of his own knavish plot that the party defrauded cannot unloose him, the fault is his own, and the law only requires the injured party to restore what he has received, and, as far as he *154 can, undo what had been done in the execution of the contract. This is all that the party defrauded can do, and all that honesty and fair dealing require of him. If this fail to extricate the wrong-doer from the position that he has assumed, it is in no sense the fault of his intended victim, and upon the principles of eternal justice whatever consequences may follow should rest on the head of the offender alone.”

Following this principle, it is to be considered whether the plaintiff has proceeded with due diligence in rescinding the contract, and when he did proceed, whether he offered to return whatever was in his power to restore.

Hammond, 61 NY at 152-54. This theme is picked up in some subsequent Court of Appeals decisions:

It is not necessary in order that a contract may be rescinded for fraud or misrepresentation that the party making the misrepresentation should have known that *8 it was false. Innocent misrepresentation is sufficient, and this rule applies to actions at law based upon rescission as well as to actions for rescission in equity. (Continental Insurance Co. v. Equitable Trust Co., 127 Misc. Rep. 45; 2 Williston on Sales [2d ed.], sec. 632; 2 Parsons on Contracts [9th ed.], p. 775; Montgomery Door & Sash Co. v. Atlantic Lumber Co., 206 Mass. 144; Mc Kinnon v. Vollmar, 75 Wis. 82; American Educational Co. v. Taggert, 124 Ill. App. 567; Helvetia Copper Co. v. Hart-Parr Co., 137 Minn. 321.) That a purchaser who has relied upon a material misrepresentation may rescind the transaction, if he acts without delay, is established by such authorities as Weigel v. Cook (237 N. Y. 136); Schank v. Schuchman (212 N. Y. 352); Vail v. Reynolds (118 N. Y. 297); Smith v. Countryman (30 N. Y. 655). A distinction in the nature of the proof, therefore, does not exist between the action at law and the action in equity, but does exist between the action in rescission and the action for damages based upon fraud and deceit. Here there must be proof of willful and fraudulent misrepresentation, knowingly made, resulting in damage. (Reno v. Bull, 226 N. Y. 546.) The complaint sets forth these representations in different causes of action. Why this was done I do not know. All the representations made by Bates led up to the sale and apparently were relied upon by the plaintiff. There is and was no necessity for dividing these various statements into separate causes of action. For instance, the statement that application would be made to list the securities led to the later statement that application had been made. The representation embodied in the latter statement would not exclude evidence of the former. All the conversations leading up to the purchase would be competent evidence bearing upon the nature of the representations. We think that when the plaintiff had finished its case, a cause of action had *9 been made out, entitling it to relief, and that it was improper to dismiss the complaint. A reversal, however, would still be necessary because of the improper exclusion of the proof above referred to.

Seneca Wire & Mfg. Co. v A.B. Leach & Co., 247 NY 1, 7-9 (1928). Followed by:

The law is settled that in an action for rescission in equity, or in an action at law based upon an executed rescission, the principal becomes liable to restore the consideration even though the representations made by the agent are innocent. (Seneca Wire & Mfg. Co. v. Leach & Co., 247 N.Y. 1.) There is substantial evidence, therefore, upon which these plaintiffs may base a prima facie case to follow the consideration paid.

African Metals Corp. v Bullowa, 288 NY 78, 85 (1942). The First, Second and Fourth Departments have all gotten into the act as well: First Department

Thus, it is asserted that plaintiff sustained no damage as a result of misrepresentations on defendant’s application to purchase the unit, and an essential element of plaintiff’s fraud claim is absent, requiring dismissal.

The obvious defect in defendant’s reasoning is that damages are not necessary to sustain a cause of action for equitable rescission. Fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment, and “unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed” (D’Angelo v Hastings Oldsmobile, 89 AD2d 785, 785 [4th Dept 1982], affd 59 NY2d 773 [1983]). Even an innocent misrepresentation will support rescission (see Seneca Wire & Mfg. Co. v Leach & Co., 247 NY 1, 8 [1928]). Thus, the fourth cause of action alleging that misrepresentations in defendant’s purchase application induced plaintiff to forgo exercise of its right of first refusal has a sound basis in the record, and Supreme Court properly concluded that a triable issue is presented.

Bd. of Managers of Soundings Condominium v Foerster, 138 AD3d 160, 164 (1st Dep’t 2016).

Of course, “[t]here is no hard and fast rule on the subject of rescission, for the right usually depends on the circumstances of the particular case” (Callanan v Keeseville, Ausable Chasm & Lake Champlain R.R. Co., 199 NY 268, 284 [1910]). Further, fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment; proof of scienter is not necessary and even an innocent misrepresentation is sufficient for rescission (see D’Angelo v Hastings Oldsmobile, 89 AD2d 785 [4th Dept 1982], affd 59 NY2d 773 [1983]; see also Seneca Wire & Mfg. Co. v Leach & Co., 247 NY 1, 8 [1928]). Accordingly, even assuming defendants were truly unaware that the CO prohibited commercial use of the premises and made an innocent misrepresentation, rescission may be appropriate (see e.g. New Talli Enters., Inc. v Van Gordon, 2003 NY Slip Op 51066[U] [Civ Ct, Richmond County 2003] [granting rescission of a lease where, unbeknownst to the parties, use of premises not permitted under the CO, even though the lease included boilerplate provision that the landlord had made no promises or representations with respect to the demised premises]).

Jack Kelly Partners LLC v Zegelstein, 140 AD3d 79, 85 (1st Dep’t 2016). Second Department

The plaintiff correctly argues that even an innocent misrepresentation is a sufficient ground for rescission (see Seneca Wire & Mfg. Co. v. Leach & Co., 247 N.Y. 1, 7-8, 159 N.E. 700, 702).

Brodsky v Nerud, 68 AD2d 876, 877 (2d Dep’t 1979). Fourth Department

Plaintiff commenced this action for equitable rescission based on fraud after he discovered that the “new” truck which he purchased from defendant was a “demonstrator”. In such an action, unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed (see Albany Motor Inn & Rest. v Watkins, 85 AD2d 797, 798; Commercial Credit Corp. v Third & Lafayette Sts. Garage, 226 App Div 235, 239-241); even an innocent misrepresentation is sufficient ground for rescission (see Seneca Wire & Mfg. Co. v Leach & Co., 247 NY 1, 8; Brodsky v Nerud, 68 AD2d 876, 877). Relief may not be denied because of a failure to tender before judgment restoration of the benefits received; “but the court may make a tender of restoration a condition of its judgment, and may otherwise in its judgment so adjust the equities between the parties that unjust enrichment is avoided (CPLR 3004; see, also, Goldsmith v National Container Corp., 287 NY 438; Holdeen v Rinaldo, 28 AD2d 947, 949).

D’Angelo v Bob Hastings Oldsmobile, Inc., 89 AD2d 785 (4th Dep’t 1982), affd, 59 NY2d 773 (1983). Federal Second Circuit Not to be outdone, the Second Circuit has acknowledged the point as well:

We agree with Satra that the New York law, which is concededly applicable here, is well settled that an innocent misrepresentation of a material fact permits rescission even though made without an intent to deceive. Seneca Wire and Manufacturing Co. v. A. B. Leach & Co., 247 N.Y. 1, 159 N.E. 700 (1928); Bloomquist v. Farson, 222 N.Y. 375, 118 N.E. 855 (1918). Both of these cases involved misrepresentations of objective fact. In Seneca there was a representation to a purchaser that application had been made to list certain notes on the Stock Exchange, when in fact none had been made. In Bloomquist a representation was made to a prospective purchaser of irrigation bonds that the irrigation work had been completed and that water was in the reservoir; in fact only sixty percent of the work was completed, and there was no water in the reservoir. On familiar equity principles rescission was appropriate whether the representation of fact was either mistaken or fraudulently made. Restatement of Contract s 476 (1932).

Stern v Satra Corp., 539 F2d 1305, 1308 (2d Cir 1976). The Second Circuit has, however, raised some issue by commenting later that the cases might be based upon the doctrine of mistake, and not fraud, but it fell short of resolving the issue:

On appeal, the parties dispute whether in New York scienter is a necessary element of a contract rescission claim premised on one party’s withholding material information from the other. Banque Arabe relies on a line of cases involving “innocent misrepresentation.” See, e.g., Seneca Wire & Mfg. Co. v. A.B. Leach & Co., 247 N.Y. 1, 159 N.E. 700 (1928). These cases generally hold that equitable considerations dictate that “an innocent misrepresentation of a material fact permits rescission even though made without the intent to deceive.” Stern v. Satra Corp., 539 F.2d 1305, 1308 (2d Cir.1976); see also Seneca Wire, 247 N.Y. at 7–8; D’Angelo v. Bob Hastings Oldsmobile, Inc., 89 A.D.2d 785, 453 N.Y.S.2d 503 (1982), aff’d, 59 N.Y.2d 773, 464 N.Y.S.2d 724, 451 N.E.2d 471 (1983); West Side Fed. Sav. & Loan Ass’n of N.Y. City v. Hirschfeld, 101 A.D.2d 380, 476 N.Y.S.2d 292, 295 (1984), appeal denied, 65 N.Y.2d 605, 493 N.Y.S.2d 1028, 482 N.E.2d 1230 (1985). The district court characterized these “innocent misrepresentation” cases as a variant of the doctrine of mutual mistake: because both parties act under a false assumption (transmitted by one party) regarding a material issue of fact, rescission or reformation is available without a showing of scienter. *154 The district court treated Banque Arabe’s allegations as a case of unilateral mistake, however, and held that Banque Arabe was therefore required to show either scienter or “wrongful conduct” on the part of MNB. See Allen v. WestPoint–Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991). Banque Arabe cites Sheridan Drive–In, Inc. v. State of New York, 16 A.D.2d 400, 228 N.Y.S.2d 576 (1962), for the proposition that “there is a right of rescission for a unilateral mistake if the mistake was known to the other party at the time of the negotiation of the contract and was not corrected by it.” Id. 228 N.Y.S.2d at 582. MNB responds that the facts in Sheridan describe the very type of “wrongful conduct” that the district court found lacking in this case.

The cases we have reviewed do not allow us to predict with confidence how the New York Court of Appeals would reconcile these lines of cases on the facts presented. We decline to guess, and see no reason to certify the question, because (among other reasons) we can affirm the judgment of the district court on grounds pressed in MNB’s cross-appeal. We hold that, under the circumstances of this case, MNB had no duty to disclose that the co-sponsorship issue might incrementally delay the approval of the conversion proposal for the Marceca Properties, and that Banque Arabe’s reliance on MNB to disclose such information was not reasonable.

Banque Arabe et Internationale D’Investissement v Maryland Nat. Bank, 57 F3d 146, 153-54 (2d Cir. 1995). Commentary Attorneys practicing in the area of civil fraud must be keenly aware of the various permutations of the case law. Depending upon the remedies sought, the elements and proof required may change drastically. Blanket statements of the elements of fraud and fraudulent inducement could be misleading to those who do not keep up or know about the ins and outs of the claim. As explained above, sometimes the result is surprising. Intent to defraud may often by difficult to prove with clear and convincing evidence. If rescission is sought, it may not be necessary. Click here for Kevin Schlosser's blog.