Pleading fraud in New York: CPLR 3016(b)'s heightened pleading standard and why it's important.

• Author: Cavoli, James G.
• Position: Civil Practice Law and Rules

1. INTRODUCTION

   For New York civil actions, the baseline standard for the content of all pleadings--often called the "notice" standard--is set forth in 3013 of the New York Civil Practice Law and Rules ("CPLR"). CPLR 3013 requires that "[s]tatements in a pleading shall be sufficiently particular to give the court and parties notice of the transactions, occurrences, or series of transactions or occurrences, intended to be proved and the material elements of each cause of action or defense." (1) Separately, CPLR 3016(b)--which is entitled "Particularity in specific actions"--provides that "[w]here a cause of action or defense is based upon misrepresentation, fraud, mistake, wilful default, breach of trust or undue influence, the circumstances constituting the wrong shall be stated in detail." (2)

   While explicit in its command, some have challenged the applicability and practical effect of 3016(b). The New York State Attorney General ("NYAG"), for example, has taken the position that 3016(b) does not apply to fraud claims under the Martin Act (3) and Executive Law ("EL") section 63(12). (4) And certain courts, as well as leading New York practice commentators, have maintained that the requirements of 3016(b) are "subordinate" to the lesser notice requirement of 3013. (5)

   These interpretations of 3016(b) ignore the plain meaning, underlying purpose, and significant import of the rule. On its face, 3016(b)'s "shall be stated in detail" requirement applies to all causes of action based on allegations of fraud and/or misrepresentation--there is no carve-out for certain claims, including those under the Martin Act and EL section 63(12). (6) Moreover, while the holdings of lower and intermediate New York courts vary significantly, a strong line of precedent, fully supported by the plain text of the rule and basic tenets of statutory construction, holds that 3016(b) does, in fact, impose requirements above and beyond those of 3013. This interpretation serves important policy goals that underpin 3016(b): not only "to inform a defendant with respect to the incidents complained of," (7) but to prevent "proliferating litigation of baseless claims." (8) The rule protects would-be defendants from being forced to defend, often at great cost, speculative allegations of fraud. Such allegations, especially when lodged by government regulators or in the context of class action litigation, can create significant settlement pressures (which often stem simply from reputational risk and the in terrorem effect of bad press) that may force defendants to abandon meritorious defenses. (9)

   In a trio of cases, the New York State Court of Appeals has recently addressed 3016(b). In so doing, the Court acknowledged that the rule imposes a heightened pleading requirement. Still, its application of the rule has left many unanswered questions. It remains to be seen whether New York courts will consistently construe 3016(b) to erect meaningful pleading requirements, beyond those contained in 3013, as the federal courts have done in applying Rule 9(b) of the Federal Rules of Civil Procedure ("FRCP").

   While a New York-centric issue, the application and meaning of 3016(b) has national implications given the NYAG's exhibited willingness to expand its regulatory efforts--which not infrequently involved allegations of fraud--beyond state borders in the past several years. Use of the Martin Act, New York's Blue Sky Law, was "revived" by former NYAG Eliot Spitzer, and its use persisted under former NYAG Andrew Cuomo, current New York State Governor. Indeed, some have suggested that this revival has transformed the NYAG's office into "'the country's second securities regulator.'" (10) Accordingly, understanding the requirements of 3016(b) is not only important for New York practitioners, it is increasingly important for litigators across the nation who may represent clients faced with allegations of securities and other types of fraud governed by the CPLR.

   This article reviews the current state of the law regarding 3016(b). It tracks the precedent in each of the four departments of the appellate division and analyzes the Court of Appeals' most recent pronouncements in this area, most notably in Pludeman v. Northern Leasing Systems, Inc. (11) This article also compares the application of 3016(b) by New York courts to the application of FRCP 9(b) by federal courts, and provides practical tips for assessing and applying the requirements of 3016(b) in a given case. We conclude that New York courts should apply the mandates of 3016(b) more consistently and in a more stringent manner if the purposes of 3016(b) are to be achieved.

2. THE APPELLATE DIVISION'S TREATMENT OF CPLR 3016(B)

   As noted, some have suggested that the standard contained in 3016(b) is no different than basic notice pleading under 3013. These suggestions are flawed as they ignore basic rules of statutory interpretation, as well as the original purpose underlying 3016(b). Precedent from several appellate division courts, as well as recent Court of Appeals precedent, explicitly recognizes that 3016(b) mandates a heightened pleading standard distinct from basic notice pleading.

   1. First Department Precedent "Subordinating" CPLR 3016(b) to CPLR 3013

      A line of authority has developed within the Appellate Division, First Department that seemingly stands for the proposition that 3016(b) does not impose a heightened pleading standard vis-a-vis 3013. The source for this proposition is Foley v. D'Agostino, a 1964 case involving claims for an injunction and accounting in the context of allegations of unfair competition and breach of fiduciary duties by corporate officers. (12) In Foley, the court recognized that 3016(b) is a "special provision[] for particularity to be followed in pleading," but stated that this

      special provision[] should not be given the effect of requiring more now by way of detail and specificity in pleadings in [fraud or misrepresentation] actions than was formerly required under the Civil Practice Act. Furthermore, bearing in mind that the sufficiency of a pleading statement primarily depends upon compliance with CPLR 3013's basic requirements, these special provisions in Rule 3016(b) constitute no more than a directive that "transactions and occurrences" constituting the "wrong" shall be pleaded in sufficient "detail" to give adequate notice thereof. (13) Nearly twenty years later, in Ackerman v. Vertical Club Corp., the First Department, citing Foley, held that "It]his court ... has subordinated the threshold pleading requirement of CPLR 3016(b) to the notice standard of CPLR 3013." (14) Relying on Ackerman, several decisions authored by First Department judges later reiterated this interpretation. (15) And, following this lead, prominent commentators on New York practice take the position that 3016(b) "has been salutarily subordinated to CPLR 3013 by Foley.... In other words, what's good enough for CPLR 3013 is good enough for CPLR 3016(b)." (16) They also state that "[i]t will usually be found, in fact, that noncompliance with 3016(b) also constitutes noncompliance with CPLR 3013, making 3016(b) superfluous." (17)

      But the proposition that the requirements of 3016(b) are coterminous with those set forth in 3013 is dubious, even within the First Department. First, Foley itself does not expressly hold that 3016(b) is "subordinate" to 3013. Nor does it hold that 3013 provides the exclusive standard by which to assess the sufficiency of pleadings with respect to fraud and/or misrepresentation. Moreover, the statement in Foley that 3016(b) should not be construed to "requir[e] more now by way of detail and specificity in pleadings ... than was formerly required under the Civil Practice Act" (18) makes little sense. The Civil Practice Act, which governed New York civil procedure prior to the enactment of the CPLR, contained no provision akin to 3016(b). (19) It is thus plain that, in enacting 3016(b), the New York legislature sought to fill that void. (20)

      Second, to interpret 3016(b) as coterminous with 3013 offends a fundamental canon of statutory construction, long recognized by New York courts: "Where the language of a statute is clear and unambiguous, courts must give effect to its plain meaning; words are not to be rejected as superfluous." (21) As the Court of Appeals has held, "we cannot interpret one statute to nullify another when both are part of the same statutory scheme." (22) To subordinate 3016(b) to 3013 has precisely this prohibited effect. Such an interpretation--that the more specific 3016(b) is nullified by the general 3013--also runs contrary to the well-settled tenet that "a specific statute will not be controlled or nullified by a general one, regardless of the priority of enactment." (23)

      Finally, other opinions by the First Department, which post-date Foley, make clear that 3016(b) is not superfluous--instead, it imposes a heightened pleading standard that should be given effect. In Edison Stone Corp. v. 42nd Street Development Corp. and Megaris Furs v. Gimbel Brothers, the First Department held that 3016(b) "imposes a more stringent standard of pleading" than the "notice" requirement in CPLR 3013. (24) And the court in Block v. Landegger, citing Foley itself, stated that "CPLR 3016(b) ... provides that a cause of action based on fraud and breach of trust shall be stated in detail, as distinguished from the notice pleading required by CPLR 3013," (25) clearly indicating that 3016(b) and 3013 have different meanings and, importantly, that Foley does not carry the import attributed to it by Ackerman. (26)

   2. Other Departments Recognize CPLR 3016(b)'s Heightened Pleading Standard

      In addition to the First Department, the Appellate Division, Second and Third Departments, have made it clear that 3016(b) imposes a heightened pleading standard vis-a-vis 3013. In Lanzi v. Brooks, for example, the Third Department held that:

      [E]ach of the[] essential elements...