Being that New York City has been the center of business and commerce for the country for well over a century, it is only logical that the state has a long history of case law regarding business torts. Among the most common of these torts is fraud. During the course of business, fraud may come about through the following means: (1) contract disputes, (2) the purchase and sale of goods, and (3) securities transactions.1 Claims of fraud may take several forms, but in this article, we will discuss equitable fraud, which is defined as fraud via an innocent mistake of the offending party.2
Because equitable fraud is fraud committed through an innocent mistake of one of the parties, the injured party does not need to show "scienter" in order to prevail. Scienter is the combination of two elements needed to prove common law fraud. The elements making up common law business fraud are: (1) knowledge of the fraud; and (2) an intent to induce reliance.3 In order for there to be said innocent mistake, it would be impossible for a defendant to have committed scienter. Despite there being an innocent mistake, and no scienter was committed, a plaintiff can still recover on the theory of equitable fraud.
Because scienter is not required, the elements that must be met in order for a party to recover under the theory of equitable fraud are simply: (1) a material misrepresentation of fact and (2) justifiable reliance by the plaintiff.4 The plaintiff must show that the material misrepresentation made could reasonably be relied on by the plaintiff, and as a result they suffered.5 For example, if two parties were negotiating the sale of a parking lot, and if the seller were to unknowingly or perhaps recklessly claim that the lot contained 500 spots but instead contained just over 400 spots, then a Court may find that such a misrepresentation was an honest mistake, but large enough of a discrepancy that action was warranted.6 Although courts have held that "puffery" during the course of negotiations is allowed, such a large discrepancy as well as a determinable and known value would likely not be considered "puffery" under New York law.7 If the buyer were to rely on the seller's representations, and buy the lot, planning for 500 spots, then upon purchase and inspection the buyer may attempt to recover under the theory of equitable fraud.
Despite the fact that the plaintiff was defrauded in these cases, they may not recover damages, but rather be able to recover via rescission of the contract.8 Because there was no evidence of scienter, there is no claim for common law fraud that can be made where a plaintiff would be entitled to damages. If found liable for equitable fraud, a defendant may be ordered by the court to return the value of which was exchanged if doing so would return the parties to their original positions before the contract was made.9
Footnotes
1. Omid H. Nasab, 2022 in New York Business Litigation 469–489, 469 (2022).
2. Id.
3. Spector v. Wendy, 63 A.D.3d 820, 821, 881 N.Y.S.2d 465, 467 (2009).
4. Id.
5. Albany Motor Inn & Rest., Inc. v. Watkins, 445 N.Y.S.2d 616, 617 (N.Y. App. Div. 1981).
6. See W. Side Fed. Sav. & Loan Ass'n of New York City v. Hirschfeld, 101 A.D.2d 380, 476 N.Y.S.2d 292 (1984).
7. See Ironwoods Troy, LLC v. OptiGolf Troy, LLC, 204 A.D.3d 1130, 1133, 166 N.Y.S.3d 730, 735 (2022) (defining "puffery" as opinions of value or future expectations, rather than false statements of value.)
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, 451 N.E.2d 471 (1983)
9. See id.
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