Pleading Fraud in New York: CPLR 3016(b)'s Heightened Pleading Standard and Why It's Important
Cavoli, James G., Laroche, Matthew J., Albany Law Review
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. …