Fraudulent Inducement Claim Survives Despite Defendant’s Argument That Plaintiff Failed to Exercise Due Diligence

In the past week, Schlam Stone & Dolan LLP's Commercial Division Blog has posted on a number of issues, including the May 25, 2021, decision by the First Department in VXI Lux Holdco, S.A.R.L. v. SIC Holdings, LLC, 2021 NY Slip Op. 03294, upholding a fraudulent inducement claim despite the defendant's argument that the plaintiff failed to exercise due diligence, explaining:

Plaintiff alleges that the $3 million tax underpayment, which was an unaccounted expense, had the effect of inflating Symbio's earnings before interest, taxes, deductions, and amortization (EBITDA) by the same amount. Thus, when Symbio presented its books to plaintiff, they contained several misrepresentations — expenses and tax liabilities were understated and EBITDA was overstated. The inflation of the EBITDA likewise inflated Symbio's apparent growth rate, which in turn inflated the company's market valuation.

Even though plaintiff inspected Symbio's financial statements and other corporate records during due diligence, plaintiff claims, given the nature of the deception, the fraud was essentially undetectable. Thus, plaintiff alleges, even though it retained a major accounting firm, that accounting firm was also duped and issued a report which did not find the social insurance tax fraud.

The social insurance tax fraud allegedly inflated Symbio's EBITDA, from about $3 million to a projected $8.8 million. The apparent EBITDA growth inflated the company's revenue prospects, resulting in plaintiff overpaying for Symbio S.A. Plaintiff alleges that, had it known all of the facts, it would have offered much less, and the resulting overpayment caused plaintiff to suffer significant financial loss.

On these allegations, plaintiff has sufficiently pleaded a cause of action for fraud against defendants. In particular, plaintiff adequately pleaded that it justifiably relied on the documents presented by Symbio during due diligence, taking diligent steps including retention of an accounting firm for review. Moreover, in addition to allegations that defendants Hsu and Lu directly participated in the fraud, defendants' knowledge can be inferred from its alleged pervasiveness.

Similarly, the key additional element of a claim for fraudulent concealment — duty to disclose — is met here, given the hidden nature of the fraud, which turned on falsified records and bribed auditors, and the practical impossibility of discovering the fraud through ordinary diligence.

(Internal citations omitted).

Other posts included:

On May 10, 2021, Justice Knipel of the Kings County Commercial Division issued a decision in Zelik v. Rubashkin, 2021 NY Slip Op. 31607(U), holding that service of a subpoena on one member of a partnership is insufficient to compel the appearance of another partner.

On May 19, 2021, the Second Department issued a decision in United Airconditioning Corp. v. Axis Piping, Inc., 2021 NY Slip Op. 03210, holding that the parties' course of dealing called into question the effect of a release.

On May 19, 2021, Justice Cohen of the New York County Commercial Division issued a decision in Hugo Boss Retail, Inc. v. A/R Retail, LLC, 2021 NY Slip Op. 50458(U), holding that the Covid-19 pandemic did not excuse a commercial tenant's obligations under its lease.

On May 25, 2021, the First Department issued a decision in Booston LLC v. 35 W. Realty Co., LLC, 2021 NY Slip Op. 03277, holding that a Yellowstone injunction undertaking cannot be used to pay use and occupancy.