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Damages Or Rescission . . . It Makes A Difference. Most people think that they are entitled only to monetary relief when they are the victim of fraud.  That, however, is not always the case.  Sometimes rescission – that is, returning to the status quo ante – is the appropriate form of relief.  Indeed, there are times when a victim of fraud would rather be in the position he/she was in before the fraud occurred.  When that happens, can the victim of fraud assert a claim for equitable rescission? In Board of Managers of The Soundings Condominium v. Foerster , Index No. 153150/14 (1st Dept. Feb. 23, 2016), the Appellate Division, First Department said yes. Foerster arose from the purchase of a condominium.  Under the condominium’s by-laws, the sale of any unit was subject to the condominium’s right of first refusal, giving the managers the right to acquire the unit for the contract price. In the application to purchase the unit submitted by the defendant, the defendant lied about her intended use of the apartment. She told management that she intended to use the apartment for her nanny/nurse; the defendant lived in a nearby building.  In reality, she intended to use, and did use, the apartment as a day care center. The condo managers sued the buyer, seeking both rescission and monetary damages.  The managers claimed that had they known the truth about the defendant’s intention to operate a business in the apartment, they would have rejected the defendant’s application and exercised the condo’s right of first refusal. The defendant moved for summary judgment, contending, among other things, that the managers’ fraud claim should be dismissed because the condo did not incur any monetary damages. The trial court denied the defendant’s motion, finding, among other things, that a triable issue was raised with respect to whether the defendant made any misrepresentation that might have impacted the validity of the purchase agreement. On appeal, the defendant again argued that the managers could not claim fraud because “an essential element , injury, does not exist.” The First Department rejected that argument, holding that pecuniary damages are unnecessary in an action for equitable rescission: Fraud sufficient to support the rescission requires only a misrepresentation that induces a party to enter into a contract resulting in some detriment, and “unlike a cause of action in damages on the same ground, proof of scienter and pecuniary loss is not needed” ( D’Angelo v Bob Hastings Oldsmobile, Inc ., 89 AD2d 785, 785 <4th dept 1982> , aff’d , 59 NY2d 773 <1983> ). Even an innocent misrepresentation will support rescission ( see Seneca Wire & Mfg. Co. v Leach & Co. , 247 NY 1, 8 <1928> ). Foerster is important because it reminds practitioners and litigants that equitable fraud can be a powerful claim. Unlike a fraud claim for money damages, equitable fraud is unencumbered by the limitations of pleading and proving scienter ( i.e. , intent to deceive) and damages.  In fact, the only limitation on a claim of equitable fraud is that the remedy being sought is equitable, like rescission. The managers in Foerster understood the power and breadth of the claim, basing their complaint on extra-contractual representations ( e.g. , the purchase application), rather than the contract of sale itself.  Parties to a contract can try to avoid the situation in Foerster .  For example, they can try to negotiate a limit on the scope of any fraud claim to only the representations and warranties set forth in the contract (thereby excluding extra-contractual fraud claims), and requiring the claim to be based on conduct that was knowingly and deliberately taken with the intention of harming the other party.  To be sure, there are other available options. An experienced business lawyer and litigator can help explore the options. Choosing the Relief that Matters Most Is the Best Course of Action Too often litigants seek relief that is duplicative and unrelated to what they really want.  This was the case with the managers of the condominium in Foerster .  Indeed, the First Department understood this point, distilling the multiple claims alleged in the action to just one – a claim “to rescind the conveyance of a condominium apartment ….” In addition to the rescission claim, the managers sought damages for breach of contract and fraud, as well as other declaratory and equitable relief.  Those claims, however, arose from the same facts as the equitable fraud claim.  As such, under New York law, those claims were duplicative.  Consequently, as noted by the First Department, those claims should have been dismissed: laintiff’s first cause of action for fraud is virtually identical to its fourth cause of action for rescission, and is founded upon the same facts. A tort claim based upon the same facts underlying a contract claim is properly dismissed as merely a duplication of the contract cause of action ( see Richbell Info. Servs. v Jupiter Partners , 309 AD2d 288, 305 <1st dept 2003> ).  The remainder of the complaint seeks various forms of injunctive, declaratory and monetary relief that a court of equity would provide in restoring the parties to status quo ante and duplicates the claim for rescission. The practical litigation takeaway from Foerester , therefore, is to seek the relief that a litigant really wants when asserting a claim against another. An experienced business litigator can work with a litigant to ensure that the relief sought is consistent with the litigant’s objectives.

Do mandatory arbitration clauses prevent class action lawsuits? The Consumer Financial Protection Bureau recently proposed a rule that would scale back mandatory arbitration clauses used by banks and other financial firms to limit their exposure to legal liabilities. While the new rule continues to allow arbitration in cases pursued by individual consumers, class actions would no longer be prevented. “Many banks and financial companies avoid accountability by putting arbitration clauses in their contracts that block groups of their customers from suing them,” CFPB Director Richard Cordray said in a statement. The rule applies to a wide range of consumer financial products and services currently under the Bureau's regulatory umbrella, including lending, storing and moving or exchanging money. The CFPB announced the highly anticipated rule after years of study required by the Dodd-Frank law. There is a 90 day comment period in play until August 5th, and a strong push back by industry groups is highly likely. “Our proposal seeks comment on whether to ban this contract gotcha that effectively denies groups of consumers the right to seek justice and relief for wrongdoing,” said Cordray. While arbitration clauses could still be included in contracts, they would have to state that arbitration cannot be used to stop consumers from joining a class action. In this regard, the CFPB will require  specific language to be used. The Bureau also intends to monitor the arbitration process by requiring firms to submit materials used in these proceedings. Some critics argue that lifting the ban will lead to a wave of litigation and that the only beneficiaries will be trial attorneys. Industry groups opposed to the proposed rule also note that a CFPB study found consumers using arbitration have more successful outcomes than members of a class-action. On the other hand, proponents of the rule contend low income families and students are frequently sold products with higher interest rates. Because they are more vulnerable these groups are forced to accept the restrictions of mandatory arbitration and forfeit their basic legal rights in the process. At this juncture, it is unclear if and when the new rule will be approved. Given the tenor of the times under the Dodd-Frank regime, however, it is likely that class action lawsuits will no longer be prevented by mandatory arbitration clauses. This will invariably pose risk management issues across the financial services sector. Moreover, banks and financial firms will be faced with increased compliance costs associated with revising contracts to contain the required language as well as providing documentation to the CFPB regarding arbitration proceedings. For these reasons, any business engaged in selling financial products to consumers is well advised to engage the services of an experienced arbitration attorney to prepare for the new rule.

What does the Labor Department fiduciary standard mean for financial advisors? After telegraphing its punch for almost 6 years, the Department of Labor recently announced the highly anticipated fiduciary standard regulation that will require financial advisors who provide investment recommendations for retirement accounts, such as 401(k)s and IRAs, to meet a fiduciary standard. These advisors are now required to put their clients’ interests before their own, rather than adhering to the previous standard requiring them to provide clients with suitable recommendations. The suitability standard, some have argued, allowed investment advisors to steer clients into products with higher fees as a means of padding commissions, regardless of whether or not the investments were well suited for the clients' retirement situation. The rule had strong backing from the Obama Administration as officials claimed inappropriate recommendations cost retirement investors $17 billion a year. While commissions and other fees are still permissible, financial firms must commit to charging "reasonable compensation" and cannot give financial incentives to advisors to make inappropriate recommendations.  The new rule is limited to tax-advantaged retirement accounts, however, and does not apply to advisors who manage other types of investments. Why This Matters This action comes in the long wake of the financial crisis of 2008 and continued efforts by the government to rein in the excesses of financial services sector.  While not as far reaching as the Dodd-Frank reform measure, the new fiduciary rule will pose compliance challenges to investment advisors, and there will be additional costs associated with establishing needed policies and procedures. Given the fact that the Labor Department has been working on this rule for years, the investment community has had plenty of time to prepare for the new regulatory regime. That being said, investment advisory firms have time to implement changes since the law becomes effective in 2017. Moreover, certain provisions do not become effective until 2018, such as the requirement that IRA investors enter into contracts with financial advisors in which they acknowledge their role as a fiduciary. At this juncture, it is unclear whether there will be legal challenges to the new rule.  In the meantime, however, investment advisors should speak to an experienced business law attorney for guidance on their new responsibilities as fiduciaries.