Pludeman v. Northern Leasing Systems, Inc.

• Citation: 10 N.Y.3d 486,890 N.E.2d 184
• Decision Date: 06 May 2008
• Docket Number: No. 64.,64.
• Parties: Kevin PLUDEMAN et al., Respondents, v. NORTHERN LEASING SYSTEMS, INC., et al., Appellants.
• Court: New York Court of Appeals

890 N.E.2d 184

10 N.Y.3d 486

Kevin PLUDEMAN et al., Respondents, v. NORTHERN LEASING SYSTEMS, INC., et al., Appellants.

No. 64.

Court of Appeals of New York.

May 6, 2008.

Moses & Singer LLP, New York City (Abraham Y. Skoff, Robert D. Lillienstein and Jayson D. Glassman of counsel), and Epstein Becker & Green, P.C. (Barry A. Cozier of counsel), for appellants.

Chittur & Associates, P.C., New York City (Krishnan S. Chittur, H. Rajan Sharma and Audrey Strutinskiy of counsel), for respondents.

Mayer Brown LLP, New York City (Philip Allen Lacovara, Lauren R. Goldman and Kwaku A. Akowuah of counsel), and National Chamber Litigation Center, Inc., Washington, D.C. (Robin S. Conrad of counsel), for Chamber of Commerce of the United States of America, amicus curiae.

OPINION OF THE COURT

JONES, J.

The sole issue before us is whether plaintiffs sufficiently pleaded a cause of action for fraud against individually-named corporate defendants pursuant to CPLR 3016(b). Under the circumstances presented, we hold that they have.

Plaintiffs are small business owners from various states, including Missouri, Texas, Washington and New York. Defendant Northern Leasing Systems, Inc. (NLS) and the individual defendants, its top management, are financiers of small business equipment.¹

Plaintiffs' amended complaint stated causes of action for, among other things, fraud. Specifically, plaintiffs alleged that they entered into lease agreements and personal guarantees (collectively, leases) for POS terminals that, through defendants' deceptive practices, hid material and onerous lease terms.

According to plaintiffs, defendants' sales representatives presented them with what appeared to be a one-page contract on a clipboard, thereby concealing three other pages below. This single page appeared to cover all of the material terms of a contract, including name, address, schedule of payments, bank and equipment authorizations, the lease term amount and a signature block for both parties. The first page, however, did not contain information plaintiffs later discovered in the other three pages. Among such concealed items was the requirement that the lessee insure the equipment against all risk of loss or damage and provide NLS with proof of insurance. In the absence of such proof, lessees were deemed to have purchased a loss and damage waiver (of their obligation to insure) for a fee that NLS could change from time to time. In addition, the undisclosed pages provided for automatic electronic deductions of potentially unlimited duration. The concealed pages also contained the following terms: a no cancellation clause, a no warranties clause, absolute liability for insurance obligations, a late charge clause, and provisions for attorneys' fees and New York as the chosen forum.

Further, although the paragraph authorizing automatic deductions found on the first page referenced paragraph 11, found on page three of the contract, it was in extremely small print. Plaintiffs acknowledge that the bottom of the first page of the contract read "Page 1 of 4." Nevertheless, plaintiffs' main contention is that the circumstances under which they were presented with the main first page, as described above, were allegedly fraudulent. First, plaintiffs alleged that the "Page 1 of 4" notation, allegedly in "microprint," was, under the circumstances, insufficient to apprise them of the lease's continuation.² Further, they alleged that they were rushed into signing the contract and were not given a complete, executed copy of the lease, much less affirmatively told, in context, that there was more to what they were signing. In order to obtain such a copy, plaintiffs had to use a 1-800 number to request one from NLS. Finally, plaintiffs alleged that they did not become aware of the hidden pages of the lease until they attempted to either cease the electronic deductions or terminate the lease altogether.

Pursuant to CPLR 3211, defendants moved to dismiss, among other things, plaintiffs' fraud claim as against the individual defendants. Supreme Court denied that branch of the motion, holding that the amended complaint sufficiently pleaded a cause of action for fraud against the individual defendants. On appeal, defendants argued that plaintiffs' allegations of fraud failed to satisfy the pleading requirements of CPLR 3016(b) as to the individual defendants.

Rejecting defendants' contention, the Appellate Division modified, on the law, and otherwise affirmed, determining that plaintiffs' amended complaint satisfied CPLR 3016(b). The court stated that "one can readily deduce, given the corporate positions and titles of the individual defendants, that these individuals actually operate the day-to-day business of [the] corporate defendant, and consequently were involved in or knew about the alleged fraudulent concealment of most of the lease" (Pludeman v. Northern Leasing Sys., Inc., 40 A.D.3d 366, 367, 837 N.Y.S.2d 10 [1st Dept.2007]). The court concluded that, given the procedural posture and unique facts alleged, CPLR 3016(b) should not be read to require plaintiffs to "state the details of the individual defendants' personal participation in, or actual knowledge of, the alleged concealment, as those facts are peculiarly within their knowledge" (id. at 368, 837 N.Y.S.2d 10 [internal quotation marks and citation omitted]).

Two Justices dissented and voted to grant defendants' motion to dismiss the cause of action for fraud as against the individual defendants. The dissenters reasoned that "no allegations [of fraud] were directed at any of the individual defendants" (id. at 371, 837 N.Y.S.2d 10). They posited that given the absence of an allegation that the individual corporate defendants knew about the alleged fraudulent practices of the company's sales representatives, defendants' motion to dismiss pursuant to CPLR 3016(b) should have been granted. The Appellate Division granted defendants leave to appeal, and we now affirm.

As relevant, CPLR 3016(b) provides that where a cause of action or defense is based upon fraud, "the circumstances constituting the wrong shall be stated in detail." In such an action, "corporate officers and directors may be held individually liable if they participated in or had knowledge of the fraud, even if they did not stand to gain personally" (Polonetsky v. Better Homes Depot, 97 N.Y.2d 46, 55, 735 N.Y.S.2d 479, 760 N.E.2d 1274 [2001]). The purpose of section 3016(b)'s pleading requirement is to inform a defendant with respect to the incidents complained of. We have cautioned that section 3016(b) should not be so strictly interpreted "as to prevent an otherwise valid cause of action in situations where it may be `impossible to state in detail the circumstances constituting a fraud'" (Lanzi v. Brooks, 43 N.Y.2d 778, 780, 402 N.Y.S.2d 384, 373 N.E.2d 278 [1977], quoting Jered Contr. Corp. v. New York City Tr. Auth., 22 N.Y.2d 187, 194, 292 N.Y.S.2d 98, 239 N.E.2d 197 [1968]). Thus, where concrete facts "are peculiarly within the knowledge of the party" charged with the fraud (Jered Contr. Corp., 22 N.Y.2d at 194, 292 N.Y.S.2d 98, 239 N.E.2d 197), it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings (see CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286, 519 N.Y.S.2d 804, 514 N.E.2d 116 [1987]; Houbigant, Inc. v. Deloitte & Touche, 303 A.D.2d 92, 97-98, 753 N.Y.S.2d 493 [1st Dept.2003]; see also Siegel, 2003 Supp. Practice Commentary, McKinney's Cons. Laws of N.Y., Book 7B, CPLR C3016:3, 2008 Pocket Part, at 17 ["Misrepresenters have not been known to keep elaborate diaries of their fraud for the use of the defrauded in court"]).

Critical to a fraud claim is that a complaint allege the basic facts to establish the elements of the cause of action. Although under section 3016(b) the complaint must sufficiently detail the allegedly fraudulent conduct, that requirement should not be confused with unassailable proof of fraud. Necessarily, then, section 3016(b) may be met when the facts are sufficient to permit a reasonable inference of the alleged conduct (see Polonetsky, 97 N.Y.2d at 55, 735 N.Y.S.2d 479, 760 N.E.2d 1274 [alleged facts sufficient to permit a jury to "infer (defendant's) knowledge of or participation in the fraudulent scheme"]; Jered, 22 N.Y.2d at 194, 292 N.Y.S.2d 98, 239 N.E.2d 197; Lanzi, 43 N.Y.2d at 780, 402 N.Y.S.2d 384, 373 N.E.2d 278).³

In Polonetsky, for example, the complaint alleged that Better Homes marketed substandard properties to potential buyers at inflated prices under the guise of foreclosures offered below market value. The complaint alleged that repairs would be made for observable defects, along with other false assurances, and that potential buyers were discouraged from consulting their own attorneys, and instead steered to attorneys with ties to Better Homes. Finally, the complaint alleged that Better Homes' president "participate[d] in [Better Homes'] operations on a day-to-day basis and [was] actively involved in its marketing and sales activities" (Polonetsky, 97 N.Y.2d at 55, 735 N.Y.S.2d 479, 760 N.E.2d 1274). Taking the allegations in the light most favorable to the complainant, we concluded that, under the circumstances, sufficient facts were alleged to permit a factfinder to infer that the individual defendant knew of or actually participated in Better Homes' alleged scheme to defraud its consumers (id.). Importantly, we noted that the inference was cognizable "given the degree of [the president's] personal activities [within the organization] and the nature and extent of the customers' dissatisfaction" (id.).

The facts of this case differ only in degree from Polonetsky. As alleged, the fraud in this case was not an isolated incident, but rather a nationwide scheme that took place over a number of years. The very nature of the scheme, as alleged, gives rise to the reasonable...