Kevin Schlosser Writes, “Challenging Judgments Procured by Fraud and Obtaining Resulting Damages”

As I have explained, the civil tort of fraud gives rise to a broad array of remedies and legal consequences, such as nullifying transactions (known as rescission), monetary damages, punitive damages, serving the predicate for federal statutory damages, preventing discharge in bankruptcy, voiding fraudulent conveyances and more. See “What Do Fraud and Spiderman Have in Common? With Great Power Comes Great Responsibilities.”

There are special rules that apply to efforts to challenge or seek damages from judgments in civil actions that are procured in some manner by acts of fraud. Failing to follow the “rules” and thereby take action at the right time in the right manner could squander the available remedies. As discussed below, normally, a party who desires to vacate a judgment rendered by fraud must seek that remedy in the same action in which the judgment was fraudulently obtained. There are exceptions. One, if the fraud that gave rise to the judgment was part of a larger fraudulent scheme, the judgment may be attacked in a subsequent lawsuit. Two, when only monetary damages are sought for the fraud, rather than vacating the prior judgment, a subsequent action can be instituted to seek those damages resulting from the fraud. In fact, New York has a specific statutory provision for actions against attorneys who intentionally use fraudulent means in civil litigation.

CPLR 5015

The straightforward way of challenging a judgment on the ground of fraud is pursuant to CPLR 5015. That section specifically requires the challenge to be brought before the court that rendered the judgment:

5015(a) On motion.  The court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of: …

3. fraud, misrepresentation, or other misconduct of an adverse party;  …

The language “with notice as the court may direct” has been interpreted to require such relief to be requested by order to show cause (rather than a notice of motion) so the court can direct the manner of notice and service. “While there is no specific time limit within which to move under this provision, the motion must be made within a reasonable time” (Empire State Conglomerates v. Mahbur, 105 A.D.3d 898, 899, 963 N.Y.S.2d 330; see Bank of N.Y. v. Stradford, 55 A.D.3d 765, 869 N.Y.S.2d 554; Aames Capital Corp. v. Davidsohn, 24 A.D.3d 474, 475, 808 N.Y.S.2d 229).

Subsequent Action to Challenge Judgment

Courts have recognized an exception to CPLR 5015(a)(3)’s requirement that the motion be made in the court in which the judgment was rendered – when the fraudulent conduct is part of a broader scheme of fraud. As explained in the Second Department’s recent decision in State Farm Mut. Auto. Ins. Co. v Anikeyeva, 2021 NY Slip Op 04728 (2d Dep’t Decided Aug. 18, 2021):

“‘Generally, a party who has lost an action as a result of alleged fraud or false testimony cannot collaterally attack the judgment in a separate action against the party who adduced the false evidence, and the plaintiff’s remedy lies exclusively in moving to vacate the judgment'” (McMahan v Belowich, 164 AD3d 1443, 1444, quoting DeMartino v Lomonaco, 155 AD3d 686, 688; see Newin Corp. v Hartford Acc. & Indem. Co., 37 NY2d 211, 217). However, “[a] cause of action for fraud and deceit will lie, even though perjury is present, where the perjury is merely a means to the accomplishment of a larger fraudulent scheme” (Newin Corp. v Hartford Acc. & Indem. Co., 37 NY2d at 217; see McMahan v Belowich, 164 AD3d at 1444; Specialized Indus. Servs. Corp. v Carter, 68 AD3d 750, 751-752). In alleging a larger fraudulent scheme, the plaintiff must proffer more than conclusory and unsubstantiated allegations (see DeMartino v Lomonaco, 155 AD3d at 688; North Shore Envtl. Solutions, Inc. v Glass, 17 AD3d 427, 428).

The reasoning for this exception was nicely explained by the Court of Appeals as follows:

Appellants’ chief contention is that the entire action is barred by the ancient rule that the courts of this State will not entertain civil actions for damages arising from alleged subornation of perjury in a prior civil proceeding (Ross v Preston, 292 N.Y. 433; Crouse v McVickar, 207 N.Y. 213, 219; Ross v Wood, 70 N.Y. 8; Adams v Sage, 28 N.Y. 103; Young v Leach, 27 App Div 293). That rule is based upon the policy that testimony on factual issues occurs with such frequency in litigation that to permit a judgment or a settlement made subsequent to the giving of such testimony to be challenged because it was allegedly tainted with perjury or subornation “would be productive of endless litigation * * * [as] it would * * * allow the losing party to try the cause over again in a counter suit, because he was not prepared to meet his adversary at the trial of the first suit.” (Smith v Lewis, 3 Johns 157, 168 [KENT, Ch. J., concurring].) Thus, the losing party’s remedy is limited to a direct appeal in the case where the alleged perjury occurs. (See McClintock, What Happens to Perjurers, 24 Minn L Rev 727.)

However, there is an exception: A cause of action for fraud and deceit will lie, even though perjury is present, where the perjury is merely a means to the accomplishment of a larger fraudulent scheme (Verplanck v Van Buren, 76 N.Y. 247; Oldham v McRoberts, 37 Misc 2d 979, affd 18 AD2d 773, mot for lv to app den 18 AD2d 884; see cases collected in Actionability of Conspiracy to Give or to Procure False Testimony or Other Evidence, Ann., 31 ALR3d 1423, 1438).

In Burbrooke Mfg. Co. v St. George Textile Corp. (283 App Div 640, 641, 643-644) then Justice (now Chief Judge) BREITEL outlined the policy considerations that apply in such cases:

“The distinction is based upon the principle that a fraudulent scheme which is greater in scope than the issues that were determined in the action or proceeding may become the 218*218 basis of an action. This is so, although some of the issues had been determined adversely to the plaintiff in a prior proceeding to which, normally, the doctrine of res judicata would apply.

* * *

“Involved is the need for separating two entirely different categories of problems with which courts are confronted. On the one hand, there is the profound and imbedded philosophy that decided issues remain decided, and that litigation come to an end. On the other hand, there is the equally compelling policy that fraud be frustrated, and consequently that one who defrauds not gain sanctuary merely because a narrow issue, by very reason of his fraud, has been determined in his favor * * * If the total objective of the scheme was the determined issue, then there is a bar; but if the total objective was greater than the determined issue, and the determined issue was but a step or a part of the total objective, then there is no bar”.

Newin Corp. v Hartford Acc. & Indem. Co., 37 NY2d 211, 217-218 (1975).

Seeking Damages for Fraud and Judiciary Law § 487

There are other circumstances for which courts will permit remedies arising from fraud in a subsequent action. New York Judiciary Law Section 487 is a statutory provision that recognizes independent remedies for fraud perpetrated by attorneys. Judiciary Law § 487(1) provides, among other things, that an attorney who is “guilty of any deceit or collusion, or consents to any deceit or collusion, with intent to deceive the court or any party forfeits to the party injured treble damages, to be recovered in a civil action.”

Courts have allowed such a claim to be asserted (as well as common law fraud) in a subsequent action if damages from the fraud are sought rather than vacating the prior judgment. Although the Second Circuit has interpreted this to mean that the party asserting the fraud actually won in the prior action, that would appear not necessarily required, so long as the prior judgment was not being challenged, whatever the outcome was. Thus, the situation was summarized by the Second Circuit as follows:

Upon de novo review, we conclude that the District Court erred in dismissing Oorah’s § 487 claim on the basis that “New York law requires that claims under Section 487 be brought in the underlying action where the attorney misconduct occurred, unless the misconduct is part of a broader fraudulent scheme.” SPA 8-9. Under New York law, the relevant distinction appears to be whether or not the party seeking relief under § 487 prevailed in the underlying action. Thus, where the plaintiff does not seek to collaterally attack the judgment because he prevailed in the underlying action, he may bring a separate, plenary action alleging a violation of § 487. See, e.g., Kimbrook Route 31, L.L.C. v. Bass, 47 N.Y.S.3d 203, 204 (4th Dep’t 2017) (“Although plaintiffs were aware of the alleged misconduct during the pendency of the prior foreclosure action, they are not precluded from bringing a plenary action alleging a violation of Judiciary Law § 487 provided that they are not collaterally attacking the judgment from the prior action. Indeed, the language of the statute does not require the claim to be brought in a pending action.” (internal citations omitted)). By contrast, where a losing party seeks to challenge or otherwise undo the underlying judgment, he must generally seek vacatur of the fraudulently procured judgment, unless he alleges that the attorney’s misconduct was part of a broader fraudulent scheme, greater in scope than the issues determined in the underlying proceeding. See Specialized Indus. Servs. Corp. v. Carter, 890 N.Y.S.2d 90, 92 (2nd Dep’t 2009) (“Generally, a party who has lost a case as a result of alleged fraud or false testimony cannot collaterally attack the judgment in a separate action for damages against the party who adduced the false evidence, and the plaintiff’s remedy lies exclusively in moving to vacate the default judgment. Under an exception to that rule, a separate lawsuit may be brought where the alleged perjury or fraud in the underlying action was merely a means to the accomplishment of a larger fraudulent scheme which was greater in scope than the issues determined in the prior proceeding.” (internal citations and quotation marks omitted)); see also Melcher v. Greenberg Traurig LLP, 24 N.Y.S.3d 249, 256 (1st Dep’t 2016) (“[Plaintiff] does not, in fact, seek by this action to collaterally attack any prior adverse judgment or order on the ground that it was procured by fraud; if that were the case, the appropriate remedy generally would be to seek vacatur under CPLR 5015.”); Seldon v. Bernstein, 503 F. App’x 32, 33 (2d Cir. 2012) (non-precedential summary order) (“[A] party who has lost a case as a result of alleged fraud or false testimony cannot collaterally attack the judgment in a separate action for damages against opposing counsel under § 487. The rule is generally limited to situations where . . . the losing party was aware of the alleged misconduct at the time of the prior action.” (emphasis added) (internal citations and quotation marks omitted)).

Oorah, Inc. v. Kane Kessler, PC, 768 Fed.Appx. 69 (Mem) (2d Cir. 2019)(summary order).

Commentary

Like many aspects of the law of fraud, knowing the ins and outs is essential. Remedies arising from or related to judgments procured by fraud or fraudulent conduct perpetrated in connection with lawsuits can be lost if not timely and properly asserted. As shown above, a party who desires to vacate a judgment rendered by fraud generally must seek that remedy in the same action in which the judgment was fraudulently obtained. If, however, the fraud that gave rise to the judgment was part of a larger fraudulent scheme, the judgment may be attacked in a subsequent lawsuit. Further, when monetary damages are sought for the fraud, rather than vacating the prior judgment, a subsequent action can be instituted to seek those damages resulting from the fraud. In fact, New York has a specific statutory provision for actions against attorneys who intentionally use fraudulent means in civil litigation: Judiciary Law Section 487.