Intersection Between Common Law Fraud And The Martin Act – Criminal Law

Irina Baranova

A new decision of the Appellate Division, First Department (Board of Mgrs. of the Latitude Riverdale
Condominium v 3585 Owner, LLC
, 2021 NY Slip Op 06072
(1st Dep’t Decided Nov. 9, 2021), has triggered a
discussion of the intersection between common law fraud claims and
the New York State Martin Act …

The Martin Act

A so-called “blue sky law,” Article 23-A of New
York’s General Business Law, commonly referred to as the Martin
Act, is a statute that empowers New York’s Attorney General to
prosecute a wide range of alleged securities-related offenses.
Section 352-c prohibits “any person, partnership, corporation,
company, trust or association, or any agent or employee
thereof,” from engaging in a variety of fraudulent practices
in connection with the “issuance, distribution, exchange,
sale, negotiation or purchase within or from [New York] of any
securities or commodities.” 123-A N.Y. Gen. Bus. Law
§352-c. Unlike common law fraud, Section 352-c does not
require the Attorney General to plead or prove that an alleged
violator acted with scienter, and a number of other elements of
common law fraud are not required. See State v. Sonifer Realty
Corp.
, 212 A.D.2d 366, 367 (1st Dept. 1995) (“[T]he
fraudulent practices targeted by the statute need not constitute
fraud in the classic common law sense, and reliance need not be
shown in order to obtain relief.”) (citing People v. Royal
Sec. Corp.
, 165 N.Y.S.2d 907, 909 (Sup. Ct. N.Y. County
1955)); People v. Barysh, 408 N.Y.S.2d 190, 193 (Sup. Ct.
N.Y. County 1978) (holding that the Martin Act does not require
reliance or scienter); Royal Sec. Corp., 165 N.Y.S.2d at
909 (scienter, reliance, and damages are not needed for Martin Act
violation). A separate part of the Martin Act, Section 352-e,
grants the Attorney General authority to regulate offers and sales
of interests in cooperative and condominium apartment buildings.
Among other things, Section 352-e and its corresponding regulations
require the sponsors of cooperatives and condominiums to issue
offering statements or prospectuses with specified disclosures
about aspects of the project. See 23-A N.Y. Gen. Bus. Law
§352-e.

The Martin Act does not provide for private causes of action
based upon its violation. CPC International Inc. v. McKesson
Corp.
, 370 N.Y.2d 268 (1987). In many cases, however,
plaintiffs would try to base their assertion of common law claims
on the same conduct that was barred by the Martin Act, principally,
omissions of material information as opposed to outright
misrepresentations. Defendants argued that those type of claims
were “preempted” by the Martin Act because they were
restricted strictly to enforcement by the Attorney General. In Assured Guar. [UK] Ltd. v. J. P. Morgan Inv.
Mgt. Inc.
, 18 NY3d 341, 353 [2011]
, the New York Court of
Appeals ultimately decided this issue, ruling that common law
claims of fraud could co-exist with Martin Act violations and
enforcement so long as there was a basis for the claim independent
of the Martin Act. The law was nicely summarized by Justice Edmead
in the decision in Board of Managers of The 369 Harman Street
Condominium v. 369 Harman LLC, Donald Fellner, and Steven
Novak
, No. 450386/2018, 2018 WL 3972359 (N.Y.Sup.), 2018 N.Y.
Slip Op. 32026(U) (Aug. 20 2018), as follows:

The Martin Act is a
disclosure statute which is designed to protect the public from
fraud in the sale of real estate securities, and the Attorney
General is charged with enforcing its provisions and implementing
regulations (see Kerusa Co. LLC v. W10Z/515 Real Estate Ltd.
Partnership
, 12 NY3d 236, 243-44 [2009]
; CPC Intl. v. McKesson Corp., 70 N.Y.2d
268, 276-77 [1987]
). A private common-law cause of action for
fraud may be brought by a plaintiff where its basis is distinct
from the Martin Act and it “is not entirely dependent on the
Martin Act for its viability” (Assured Guar. [UK] Ltd. v. J. P. Morgan Inv.
Mgt. Inc.
, 18 NY3d 341, 353 [2011]
). Thus, a
plaintiff[‘]s claims are not preempted by the Martin Act where
the plaintiff alleges “not that [the] defendant omitted to
disclose information required under the Martin Act but that it
affirmatively misrepresented, as part of the offering plan, a
material fact about the condominium” (Bhandari v. Ismael Leyva Architects,
P.C.
, 84 AD3d 607, 607 [1st Dept 2011]
).

However, “a
private litigant may not pursue a common-law cause of action where
the claim is predicated solely on a violation of the Martin Act or
its implementing regulations and would not exist but for the
statute” (Assured Guar. [UK] Ltd., 18 NY3d at
353
). Thus, there is no private right of action where the fraud
alleged by plaintiff rely [sic] entirely upon alleged omissions in
filings required by the Martin Act (Kerusa Co. LLC, 12 NY3d at 247; Berenger v. 261 W. LLC, 93 AD3d 175, 184
[1st Dept 2012]
).

Fraud Based Upon Omissions

Cases after Assured have seemed to draw the line on
whether the fraud claim is based simply upon “omissions”
or affirmative misrepresentations, ruling that omissions (required
to be disclosed by the Martin Act) could not form the sole basis of
a common law fraud claim. Language of this nature was repeated in
the First Department’s recent decision in Board of Mgrs. of the Latitude Riverdale
Condominium v 3585 Owner, LLC
, 2021 NY Slip Op 06072
(1st Dep’t Decided Nov. 9, 2021): “The
Board’s fraudulent inducement claim is not preempted by the
Martin Act because it is based upon allegations of affirmative
misrepresentations, not omissions (Von Ancken v 7 E. 14 L.L.C., 171 AD3d
440
, 441 [2019]; see Board of Mgrs. of the S. Star v WSA
Equities, LLC
, 140 AD3d 405
, 405 [1st Dept
2016]).”

This statement is correct on its face. But common law fraud can
in fact be based upon alleged material or misleading omissions,
apart from any requirements of the Martin Act. I have written often
about the circumstances under which concealing or omitting
information (as opposed to affirmatively misrepresenting facts) can
form the basis of a fraud claim. See, for example, “Concealing or Failing to Disclose Material
Information: When is it Actionable in Fraud?
” Also,
my Topic heading “Concealment or Omission” collects
relevant case law on this point more broadly. Thus, even
“omissions” could form the basis of a common law fraud
claim without depending upon the Martin Act. The short-hand way
courts quickly describe the law should not be interpreted to bar
legitimate fraud claims based upon omissions that are recognized
under existing principles of the common law.

Commentary

There are many circumstances under which fraud claims can
legitimately be based upon omissions or concealments rather than
simply factual misrepresentations. These existing common law claims
– that have been traditionally recognized apart from any
requirements of the Martin Act – should in fact be allowed to
exist. Short or inartful comments in court decisions should not
otherwise be interpreted to bar such claims.

Originally published Nov 15, 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

https://www.mondaq.com/unitedstates/white-collar-crime-anticorruption-fraud/1166120/intersection-between-common-law-fraud-and-the-martin-act

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