Intersection Between Common Law Fraud and the Martin Law – Criminal Law

A new decision of the Appellate Division, First Department (Council of Msgr. of Latitude Riverdale Condominium v ​​3585 Owner, LLC2021 NY Slip Op 06072 (1st Dep’t Decided on November 9, 2021), sparked a discussion of the intersection between common law fraud claims and New York State’s Martin Law…

The Martin Law

Section 23-A of New York’s General Business Law, commonly known as the Martin Act, is a so-called “blue sky” law, which empowers the New York Attorney General to prosecute a wide range of alleged offenses related to securities. Article 352-c prohibits “any person, partnership, corporation, corporation, trust or association, or any agent or employee thereof”, from engaging in various fraudulent practices in connection with “the issuance, distributing, exchanging, selling, dealing or buying into or from [New York] of any title or commodity.” 123-A NY Gen. Bus. Law §352-c. Unlike common law fraud, Section 352-c does not require the Attorney General to plead or prove that a alleged offender acted with science, and a number of other elements of common law fraud are not required. State c. Sonifer Realty Corp.212 AD2d 366, 367 (1st dept. 1995) (“[T]The fraudulent practices covered by the statute need not constitute fraud in the classic common law sense, and reliance need not be demonstrated to obtain relief.” (quoting People c. Royal Sec. Corp.165 NYS2d 907, 909 (Sup. Ct. NY County 1955)); People against Barysh408 NYS2d 190, 193 (Sup. Ct. NY County 1978) (stating that the Martin Act does not require trust or science); Dry. Royal. Corp., 165 NYS2d at 909 (scientist, reliance, and damages not required for violation of Martin law). A separate part of the Martin Act, Section 352-e, grants the Attorney General the power to regulate offers and sales of interests in cooperative and condominium buildings. Among other things, Section 352-e and its corresponding regulations require co-op and condominium developers to issue offering statements or prospectuses containing specific information about aspects of the project. See 23-A NY Gen. Bus. Law §352-e.

The Martin Act does not provide private causes of action based on its violation. CPC International Inc. v. McKesson Corp., 370 NY2d 268 (1987). In many cases, however, plaintiffs would try to base their assertion of common law claims on the same conduct that was prohibited by the Martin Act, primarily omissions of material information as opposed to outright misrepresentations. The defendants argued that these types of claims were “pre-empted” by the Martin Act because they were strictly limited to enforcement by the Attorney General. In Guar assured. [UK] ltd. vs. JP Morgan Inv. Management Inc.18 NY3d 341, 353 [2011], the New York Court of Appeals ultimately decided this issue, ruling that common law allegations of fraud could coexist with violations and enforcement of the Martin Act as long as there was a basis for the complaint regardless of Martin’s Law. The law was well summarized by Judge Edmead in the decision of 369 Harman Street Condominium Board of Directors c.369 Harman LLC, Donald Fellner and Steven NovakNo. 450386/2018, 2018 WL 3972359 (NYSup.), 2018 NY Slip Op. 32026(U) (August 20, 2018), as follows:

The Martin Act is a disclosure law intended to protect the public against fraud in the sale of real estate securities, and the Attorney General is responsible for enforcing its provisions and implementing regulations (to see Kerusa Co. LLC c. W10Z/515 Real Estate Ltd. Partnership12 NY3d 236, 243-44 [2009]; CPC Intl. vs. McKesson Corp.70 NY2d 268, 276-77 [1987]). A common law private cause of action for fraud may be brought by a plaintiff where its basis is distinct from the Martin Act and “is not entirely dependent on the Martin Act for its viability” (Guar assured. [UK] ltd. vs. JP Morgan Inv. Management Inc.18 NY3d 341, 353 [2011]). Thus, an applicant[‘]s claims are not preempted by the Martin Act where the plaintiff alleges “not that [the] defendant failed to disclose the information required under the Martin Law, but that he affirmatively misrepresented, within the framework of the offer plan, a material fact concerning the co-ownership” (Bhandari versus Ismael Leyva Architects, PC84 AD3d 607, 607 [1st Dept 2011]).

However, “a private litigant may not pursue a common law cause of action where the claim is based solely on a violation of the Martin Act or its regulations and would not exist but for the statute” (Guar assured. [UK] ltd.18 NY3d to 353). Thus, there is no private right of action where the plaintiff’s alleged fraud rests [sic] entirely on alleged omissions in the filings required by the Martin Act (Kerusa Co. LLC12 NY3d to 247; Berenger c. 261 W.LLC93 AD3d 175, 184
[1st Dept 2012]
).

Fraud based on omissions

Case after Insured seemed to draw the line on whether the fraud claim is based simply on “omissions” or affirmative misrepresentations, ruling that omissions (which must be disclosed by Martin law) could not be the sole basis a claim for common law fraud. Language of this nature was repeated in the recent decision of the First Department in Council of Msgr. of Latitude Riverdale Condominium v ​​3585 Owner, LLC2021 NY Slip Op 06072 (1st Dep’t Decided on November 9, 2021): “The Council’s fraudulent inducement claim is not preempted by the Martin Act because it is based on allegations of affirmative misrepresentation, not omission (Von Ancken vs. 7 E.14 LLC171 AD3d 440441 [2019]; see Council of Mgrs. of the S. Star v WSA Equities, LLC140 AD3d 405405 [1st Dept
2016]).”

This statement is correct on its face. But common law fraud may in fact be based on alleged material or misleading omissions, outside of any requirement of the Martin Act. I have often written about the circumstances in which the concealment or omission of information (as opposed to an affirmative misrepresentation of facts) can form the basis of a claim of fraud. See, for example, “Concealment or omission to disclose material information: when is it liable to prosecution in case of fraud?In addition, my ‘Concealment or Omission’ section more broadly collects relevant case law on this point. Thus, even ‘omissions’ could form the basis of a common law fraud claim without relying on the Martin Act. of short duration quickly describe the law should not be interpreted as barring legitimate claims of fraud based on omissions recognized under existing common law principles.

Remark

There are many circumstances in which claims of fraud may legitimately be based on omissions or cover-ups rather than simple factual misrepresentations. These existing common law claims – which have traditionally been recognized outside of any requirement of the Martin Act – should in fact be allowed to exist. Brief or awkward comments in court rulings should not be construed as barring such claims.

Originally published November 15, 2021

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