The People by Eric T. Schneiderman,, Respondent,v.Credit Suisse Securities (USA) LLC,, et al., Appellants.BriefN.Y.March 21, 2018 To be Argued by: Richard W. Clary (Time Requested: 30 Minutes) APL-2017-00056 New York County Clerk’s Index No. 451802/12 Court of Appeals of the State of New York PEOPLE OF THE STATE OF NEW YORK, BY ERIC T. SCHNEIDERMAN, ATTORNEY GENERAL OF THE STATE OF NEW YORK, Plaintiff-Respondent, -against- CREDIT SUISSE SECURITIES (USA) LLC, F/K/A “CREDIT SUISSE FIRST BOSTON LLC”, DLJ MORTGAGE CAPITAL, INC., CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORPORATION, ASSET BACKED SECURITIES CORPORATION AND CREDIT SUISSE MORTGAGE ACCEPTANCE CORPORATION, Defendants-Appellants. REPLY BRIEF FOR DEFENDANTS-APPELLANTS RICHARD W. CLARY MICHAEL T. REYNOLDS LAUREN A. MOSKOWITZ CRAVATH, SWAINE & MOORE LLP Attorneys for Defendants-Appellants Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Tel.: (212) 474-1000 Fax: (212) 474-3700 Date Completed: November 17, 2017 TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... iv PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 4 I. GAIDON II SETS THE CONTROLLING TEST FOR WHETHER THE MARTIN ACT AND EXECUTIVE LAW § 63(12) ARE SUBJECT TO CPLR § 214(2). ....................................................................... 4 II. WHETHER THIS COURT USES COMMON-LAW FRAUD OR FRAUD AT EQUITY AS THE BASELINE, CPLR § 214(2) APPLIES UNDER GAIDON II. ...................................................................... 6 A. CPLR § 214(2) Applies to the Martin Act and Any Standalone § 63(12) Claim under Gaidon II and Cortelle. ...................................... 6 1. Gaidon II requires the same result for the Attorney General’s § 63(12) claim as for the Martin Act. ......................... 6 2. Cortelle reinforces what Gaidon II compels, explaining that the Martin Act and any standalone § 63(12) claim contemplate “new liability”. ....................................................... 8 B. The Martin Act and § 63(12) Significantly Expand Liability under Gaidon II Compared to Common-Law Fraud. ......................... 10 1. The Martin Act and the § 63(12) claim here eliminate four elements required to impose liability for common-law fraud. ................................................................... 11 2. Eliminating “reliance” and “damages” are two additional ways the statutes here, under Gaidon II, create new liability. ..................................................................................... 12 a. Without the Martin Act or § 63(12), the Attorney General would need to establish all the elements of common-law fraud. ..................................... 12 ii b. Reliance and damages are essential elements of liability on non-statutory claims. .................................... 14 C. The Martin Act and § 63(12) Significantly Expand Liability under Gaidon II Compared to Fraud at Equity. .................................. 16 1. The Martin Act and the § 63(12) claim here eliminate four elements required to impose liability for fraud at equity. ........................................................................................ 16 a. Fraud at equity added elements relative to common-law fraud in exchange for eliminating scienter, which the Martin Act and § 63(12) do not. .................................................................................. 17 b. Fraud at equity required private-party reliance, which the Martin Act and § 63(12) do not. .................... 20 c. Fraud at equity required proof of damages or injury, which the Martin Act and § 63(12) do not. .................................................................................. 21 d. The “capacity or tendency to deceive” standard that applies to statutory fraud further expands liability as compared to both common-law fraud and equity. ....................................................................... 23 2. The Attorney General’s other arguments to avoid Gaidon II are unavailing. .......................................................... 25 a. CPLR § 213(1) does not apply to the new liability under the Martin Act or § 63(12). ..................... 25 b. The historical treatment of fraud at equity is not a basis for applying CPLR § 213(8). .............................. 27 III. THE ATTORNEY GENERAL’S ARGUMENT THAT IT ALLEGED—BUT DID NOT BRING A CLAIM FOR—COMMON- LAW FRAUD CANNOT SAVE ITS STATUTORY CLAIMS FROM BEING TIME-BARRED. .............................................................................. 27 iii IV. THERE IS NO POLICY REASON TO DEPART FROM THE LEGISLATURE’S CHOICE TO APPLY CPLR § 214(2). .......................... 29 CONCLUSION ........................................................................................................ 31 iv TABLE OF AUTHORITIES Page(s) Cases Matter of Badem Bldgs. v. Abrams, 70 N.Y.2d 45 (1987) ........................................................................................... 24 Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531 (1st Dep’t 2014) ....................................................................... 14 C3 Media & Mktg. Grp., LLC v. Firstgate Internet, Inc., 419 F. Supp. 2d 419 (S.D.N.Y. 2005) ................................................................ 19 Commercial Credit Corp. v. Third & Lafayette St. Garage, Inc., 226 A.D. 235 (4th Dep’t 1929) ........................................................................... 21 Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137 (2017) ......................................................................................... 22 E.T.C. Corp. v. Title Guar. & Tr. Co., 271 N.Y. 124 (1936) ........................................................................................... 19 Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 165 F. Supp. 2d 615 (S.D.N.Y. 2001) ................................................................ 22 Estados Unidos Mexicanos v. DeCoster, 229 F.3d 332 (1st Cir. 2000) ............................................................................... 13 Feldman v. Grant, 213 A.D.2d 340 (1st Dep’t 1995) ....................................................................... 11 Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330 (1999) ............................................................................... 5, 15, 23 Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201 (2001) ..................................................................................passim Haebler v. Crawford, 258 N.Y. 130 (1932) ........................................................................................... 21 Hammond v. Pennock, 61 N.Y. 145 (1874) ............................................................................................. 19 v Hartnett v. N.Y.C. Transit Auth., 86 N.Y.2d 438 (1995) ......................................................................................... 26 Laub v. Faessel, 297 A.D.2d 28 (1st Dep’t 2002) ................................................................... 13, 15 Loreley Fin. (Jersey) No. 28, Ltd. v. Merrill Lynch, 117 A.D.3d 463 (1st Dep’t 2014) ....................................................................... 19 Melcher v. Greenberg Traurig, LLP, 23 N.Y.3d 10 (2014) ........................................................................................... 26 Moore v. Crawford, 130 U.S. 122 (1889) ............................................................................................ 18 People ex rel. Cuomo v. Nationwide Asset Servs., Inc., 26 Misc. 3d 258 (Sup. Ct. Erie Cty. 2009) ......................................................... 14 People ex rel. Cuomo v. Wells Fargo Ins. Servs., Inc., 18 Misc. 3d 1117(A), (Sup. Ct. N.Y. Cty. Jan. 14, 2008) ............................ 14, 29 People ex. rel. Schneiderman v. Sec. Elite Grp., Inc., No. 450025/2015, 2015 WL 9271698 (Sup. Ct. N.Y. Cty. Dec. 18, 2015) ..................................................................................................................... 6 People ex rel. Schneiderman v. Trump Entrepreneur Initiative LLC, 2014 N.Y. Slip Op. 32685(U), (Sup. Ct. N.Y. Cty. Oct. 8, 2014) ............... 13, 14 People ex rel. Spitzer v. Coventry First LLC, No. 0404620/2006, 2007 WL 2905486 (Sup. Ct. N.Y. Cty. Sept. 25, 2007) .................................................................................................... 24 People ex rel. Spitzer v. Grasso, 42 A.D.3d 126 (1st Dep’t 2007) ......................................................................... 13 People ex rel. Spitzer v. H&R Block, Inc., 16 Misc. 3d 1124(A), (Sup. Ct. N.Y. Cty. July 9, 2007) .................................... 14 People v. Federated Radio Corp., 244 N.Y. 33 (N.Y. 1926) .................................................................................... 24 Purdue Pharma L.P. v. Kentucky, 704 F.3d 208 (2d Cir. 2013) ............................................................................... 13 vi Roni LLC v. Arfa, 18 N.Y.3d 846 (2011) ................................................................................... 19, 22 Rush v. Oppenheimer & Co., 650 F. Supp. 682 (S.D.N.Y. 1986) ..................................................................... 21 State ex rel. Abrams v. Gen. Motors Corp., 547 F. Supp. 703 (S.D.N.Y. 1982) ..................................................................... 13 State ex rel. Lefkowitz v. Colo. State Christian Coll. of the Church of Inner Power, 76 Misc. 2d 50 (Sup. Ct. N.Y. Cty. 1973) ............................................................ 5 Matter of State of New York v. Bevis Ind., 63 Misc. 2d 1088 (1970) ................................................................................. 9, 24 Matter of State of New York v. Interstate Tractor Trailer Training, 66 Misc. 2d 678 (1971) ......................................................................................... 9 Matter of State of New York v. ITM, Inc., 52 Misc. 2d 39 (1966) ........................................................................................... 9 State v. Cortelle Corp., 38 N.Y.2d 83 (1975) ....................................................................................passim State v. Daicel Chem. Indus., Ltd., 42 A.D.3d 301 (1st Dep’t 2007) ........................................................................... 6 State v. Seventh Regiment Fund, Inc., 98 N.Y.2d 249 (2002) ......................................................................................... 29 Stutman v. Chem. Bank, 95 N.Y.2d 24 (2002) ........................................................................................... 23 Urtz v. N.Y. Cent. & Hudson River R.R. Co., 202 N.Y. 170 (1911) ........................................................................................... 14 Statutes & Rules CPLR § 213(1) ............................................................................................. 10, 25, 26 CPLR § 213(8) ................................................................................................... 25, 27 CPLR § 214(2) ..................................................................................................passim vii Executive Law § 63(12) ....................................................................................passim Gen. Bus. Law § 349 .........................................................................................passim Martin Act .........................................................................................................passim Other Authorities Norman Fetter, Handbook of Equity Jurisprudence § 88 (1895) ............................ 15 David J. Kaufmann, Introduction and Commentary Overview, N.Y. Gen. Bus. Law § 23-A (McKinney 1996) ............................................................ 1 1 Joseph Story, Commentaries on Equity Jurisprudence (14th ed. 1918) ....................................................................................................... 17, 18, 21 3 John Norton Pomeroy, A Treatise on Equity Jurisprudence (5th ed. 1941) .................................................................................... 17, 20, 21, 22 55 N.Y. Jur. 2d Equity § 62 (2012) .......................................................................... 18 60A N.Y. Jur. 2d Fraud and Deceit § 2 (2011) ....................................................... 18 Credit Suisse submits this reply in support of reversing the First Department’s Decision and Order, in which a three-to-two panel applied a six-year limitations period instead of CPLR § 214(2)’s three-year limitations period to the Attorney General’s Martin Act and Executive Law § 63(12) claims. PRELIMINARY STATEMENT Neither common-law fraud, equitable fraud nor any other equitable cause of action ever enabled the Attorney General to impose liability on the sweeping terms allowed under the Martin Act or a standalone Executive Law § 63(12) claim. Holding that these statutes of “enormous breadth and unique dimensions whose scope has continually expanded”1 merely codify or implement common-law liability (at law or equity)—as urged by the Attorney General— would amount to an overruling of Gaidon II, and would make CPLR § 214(2)’s three-year limitations period a functional dead letter. In Gaidon II, in holding that G.B.L. § 349 imposes a liability that “would not exist but for the statute” under CPLR § 214(2), this Court considered two factors dispositive: under G.B.L. § 349, a plaintiff can impose liability (i) without establishing “scienter” (or intent) and (ii) based on a broader class of 1 Orestes J. Mihaly & David J. Kaufmann, General Business Law Act 23-A, in 19 McKinney’s Consolidated Laws of New York Annotated (1996) (Add. 30). 2 conduct than qualifies as a “misrepresentation” at common law. Gaidon v. Guardian Life Ins. Co. of Am., 96 N.Y.2d 201, 208-10 (2001) (“Gaidon II”). Gaidon II establishes that CPLR § 214(2) applies to the Martin Act and any standalone Executive Law § 63(12) cause of action. This is true whether the Court compares liability under the Martin Act and Executive Law § 63(12) to common-law fraud or, as the Attorney General advocates, fraud at equity: These statutes eliminate four elements necessary to establish common-law fraud liability: (1) “scienter”; (2) a “misrepresentation”—the two elements Gaidon II holds that if missing, CPLR § 214(2) applies—(3) “reliance”; and (4) “damages”. (Part II.B.1.) These statutes also eliminate four elements necessary to establish fraud at equity: (1) a “special relationship, unconscientious advantage” or other circumstance justifying equity’s intervention; (2) “reliance”; (3) a “misrepresentation”; and (4) “damages or injury”. (Part II.C.1.) By enabling the Attorney General to impose liability without establishing any of these elements, the Martin Act and any standalone § 63(12) claim “contemplate[] actionable conduct that does not necessarily rise to the level of fraud”, Gaidon II, 96 N.Y.2d at 209, meaning CPLR § 214(2) applies. This Court’s earlier Cortelle opinion anticipated that CPLR § 214(2) would apply to the 3 Martin Act and a standalone § 63(12) claim by expressly describing both as creating “new liability”. (Part II.A.2.) The Attorney General tries to evade the controlling Gaidon II framework. It tries to distinguish the Martin Act and a standalone § 63(12) claim from G.B.L. § 349—even though liability under these statutes is identically interpreted (Part I)—and proposes, contrary to precedent, that a “government enforcer” does not need to establish reliance and damages at common law (or that these are not “essential elements” of such liability) (Part II.B.2). Contrary to Gaidon II and this Court’s other precedents on CPLR § 214(2), the Attorney General seeks to make equitable “remedies” dispositive, when it is “liability” that controls, and to improperly rely on legislative attitudes about decisional law claims (Part II.C.2). Unable to escape CPLR § 214(2) under Gaidon II, the Attorney General makes a last-ditch effort to save its claims by relying on superfluous allegations in its Complaint that ostensibly sound in common-law fraud but that it will not need to prove. There is absolutely no basis for this. If this Court concludes—as Gaidon II and Cortelle require—“that the Martin Act and § 63(12) create new liability” (Brief and Addendum for Respondent (“Opp’n”) 70), it should reverse and remand for entry of judgment for Credit Suisse on both statutory causes of action. (Part III.) 4 ARGUMENT I. GAIDON II SETS THE CONTROLLING TEST FOR WHETHER THE MARTIN ACT AND EXECUTIVE LAW § 63(12) ARE SUBJECT TO CPLR § 214(2). Gaidon II is this Court’s authoritative statement on whether CPLR § 214(2) or CPLR § 213 applies. If a statute “merely codif[ies] or implement[s]” an existing liability, it is governed by “the Statute of Limitations applicable to [its] common-law source[]”, namely, CPLR § 213. Gaidon II, 96 N.Y.2d at 208-09. But when a statutory cause of action—even one that is “akin to common-law causes”—authorizes liability that “would not exist but for the statute”, it is subject to CPLR § 214(2). Id. The Attorney General acknowledges the Gaidon II framework determines when CPLR § 214(2) is “triggered”. (Opp’n 18-19.) But it makes a half-hearted argument why, supposedly, Gaidon II should not apply in this case. First, there are no “crucial differences between” the statutes here and G.B.L. § 349 (Opp’n 62), the statute at issue in Gaidon II. In Gaidon II, the Attorney General admitted that “the Martin Act [was] the statute on which Executive Law § 63(12) and GBL § 349 were modeled”. Br. of N.Y. St. Att’y Gen. as Amicus Curiae, Gaidon II, 96 N.Y.2d 201 (2001), 2001 WL 34903800, at *6. 5 Here, the Attorney General argues that the “deceptive acts or practices” covered by G.B.L. § 349 are a reason to distinguish that statute from § 63(12) and the Martin Act. But as the Attorney General explained in Gaidon I, “the meaning of deceptive practices under the GBL [§ 349] is accorded parallel construction to that of fraud under Executive Law § 63(12)”. Amicus Curiae Br. of Att’y Gen. of St. of N.Y., Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330 (1999) (“Gaidon I”), 1999 WL 33660089, at *5 (emphasis added). This is correct: the identical “capacity or tendency to deceive” test governs liability under the Martin Act, any standalone § 63(12) claim and G.B.L. § 349. See State ex rel. Lefkowitz v. Colo. State Christian Coll. of the Church of Inner Power, 76 Misc. 2d 50, 55-59 (Sup. Ct. N.Y. Cty. 1973). The idea now advanced by the Attorney General that G.B.L. § 349 drew influences from the Federal Trade Commission (FTC) (Opp’n 63-64), is no basis for distinguishing G.B.L. §349 from the statutes here; after looking to FTC cases to determine “the purposes of the sponsors” of G.B.L. § 349, courts settled on the “capacity to deceive” or “tendency to deceive” test (common to G.B.L. § 349, the Martin Act and § 63(12)) to carry out that purpose. Id. at 55-59. Second, that Gaidon II involved a private plaintiff, not an enforcement action (Opp’n 61-62, 65), is irrelevant. The plaintiff’s identity is irrelevant to whether a statute “merely codifies or implements” a pre-existing liability. Gaidon 6 II, 96 N.Y.2d at 210. This is why New York courts apply Gaidon II to the Attorney General (including to statutory-based § 63(12) claims). E.g., People ex. rel. Schneiderman v. Sec. Elite Grp., Inc., No. 450025/2015, 2015 WL 9271698, at *13 (Sup. Ct. N.Y. Cty. Dec. 18, 2015) (applying CPLR § 214(2) under Gaidon II to “all of the Attorney-General’s claims pursuant to Executive Law § 63(12)”); State v. Daicel Chem. Indus., Ltd., 42 A.D.3d 301 (1st Dep’t 2007) (same for § 63(12) and G.B.L. § 349 claims); see Brief for Defendants-Appellants (“CS Br.”) 23. The Attorney General’s proposed distinctions of Gaidon II are invalid, and this Court’s precedent applies to the Martin Act and any standalone Executive Law claim, just as it applies to any G.B.L. § 349 claim. II. WHETHER THIS COURT USES COMMON-LAW FRAUD OR FRAUD AT EQUITY AS THE BASELINE, CPLR § 214(2) APPLIES UNDER GAIDON II. A. CPLR § 214(2) Applies to the Martin Act and Any Standalone § 63(12) Claim under Gaidon II and Cortelle. 1. Gaidon II requires the same result for the Attorney General’s § 63(12) claim as for the Martin Act. The Attorney General has two causes of action—a Martin Act claim and § 63(12) claim. (A. 73.) An open question is whether a § 63(12) claim can act as a standalone claim or must always “piggyback” another claim. (CS Br. 46-48.) A “piggyback” Executive Law claim takes on the elements of the claim on which it 7 “piggybacks”. (CS Br. 46-47.) Here, the Attorney General seeks to “piggyback” its § 63(12) claim on the Martin Act. (See A. 73 (claiming “illegal acts (in violation of, inter alia, the Martin Act” under § 63(12)); Opp’n 7 n.2.) The Attorney General appears also to argue it is pursuing a standalone claim under § 63(12). (Opp’n 7-9, 73; see CS Br. 8). Regardless of whether the Attorney General is seeking only to “piggyback” on the Martin Act or also to pursue standalone liability under § 63(12), the analysis and result under Gaidon II are the same. The parties agree that any standalone § 63(12) claim would have the identically broad liability standard as the Martin Act. (See Opp’n 74 (standalone “§ 63(12) parallels that of the Martin Act”); CS Br. 50-51 (citing cases using liability under Martin Act and a standalone § 63(12) claim interchangeably)).2 Accordingly, under Gaidon II, if CPLR § 214(2) applies to (and bars) the Martin Act claim, then it applies to (and bars) a standalone § 63(12) claim as well, thus eliminating the need to resolve in this appeal whether § 63(12) permits standalone liability. (Opp’n 73; CS Br. 48.) 2 The Attorney General is not “piggybacking” its § 63(12) claim on common-law fraud liability. (Part III.) 8 2. Cortelle reinforces what Gaidon II compels, explaining that the Martin Act and any standalone § 63(12) claim contemplate “new liability”. This Court’s Cortelle opinion anticipated the result Credit Suisse urges here under Gaidon II. State v. Cortelle Corp., 38 N.Y.2d 83 (1975). Specifically, Cortelle explains that the Martin Act and any standalone § 63(12) claim authorize new (i.e., not merely a codification of pre-existing) liability—in other words, they are the kind of statutes to which CPLR § 214(2) applies under Gaidon II. The Attorney General cites Cortelle as support for applying a six-year limitations period. It argues that because Gaidon II “did not overrule Cortelle, or its holding on the limitations period for § 63(12)”, Gaidon II “rejected the attempt of the parties and the Attorney General to equate GBL § 349 to § 63(12)”. (Opp’n 64-65.) This argument misreads Cortelle as setting one single limitations period for § 63(12). 9 Cortelle explains two tracks for Executive Law § 63(12) claims. Executive Law § 63(12): “[(1)] may in part expand the definition of fraud so as to create a new liability in some instances, [(2)] it also incorporates already existing standards applied to fraudulent behavior always recognized as such (compare Matter of State of New York v Interstate Tractor Trailer Training, 66 Misc. 2d 678- 682; Matter of State of New York v Bevis Ind., 63 Misc. 2d 1088, 1090, with Matter of State of New York v ITM, Inc., 52 Misc. 2d 39, 50).” Cortelle, 38 N.Y.2d at 87 (emphasis added). As examples of the first track (“new liability”), Cortelle cited two cases, both of which involved standalone liability under § 63(12) and both of which equated standalone § 63(12) liability to Martin Act liability. See Interstate Tractor, 66 Misc. 2d at 682 (“fraud” under § 63(12) “is equivalent to that contained in” Martin Act, which “has been construed to include acts which tend to deceive or mislead . . . whether or not they are the product of scienter”); Bevis Indus., Inc., 63 Misc. 2d at 1090 (analogizing to the Martin Act, and holding that the ‘fraud’ proscribed by § 63(12) extended to “acts that go beyond those of the common cheat”). By contrast, Cortelle cited as the example of the second track (“already existing standards”) a case holding that “[t]he essential elements of fraud, namely, a representation, its falsity, scienter, reliance and damages were established by more than ample proof” during trial. ITM, Inc., 52 Misc. 2d at 50. 10 Cortelle itself involved the second track; there, the Attorney General sought to impose liability for its § 63(12) claim based on “a common-law theory of promissory fraud”. 38 N.Y.2d at 86-87. Because liability under that circumstance would require proof of common-law fraud liability, Cortelle applied the six-year common-law limitations period from CPLR § 213(1). See id. at 89. Consistent with the appropriate two-track reading of Cortelle, courts have distinguished between § 63(12) cases where (as here) the Attorney General seeks to use “new liability” (in which case CPLR § 214(2) applies), and those cases where the Attorney General is required to prove all the traditional elements of common-law liability (in which case a six-year period applies)—at least until the Trump decision, on which the majority below relied (A. 6-7; see A. 21). (CS Br. 46-48.) The Martin Act and § 63(12) claims here fall into the category of “new liability” under Cortelle. As such, both claims are subject to CPLR § 214(2). See Cortelle, 38 N.Y.2d at 87; Gaidon II, 96 N.Y.2d at 209. B. The Martin Act and § 63(12) Significantly Expand Liability under Gaidon II Compared to Common-Law Fraud. The Attorney General does not contest that the Martin Act and a statutory-based § 63(12) claim “contemplate[] actionable conduct that does not necessarily rise” to the level of common-law fraud. Gaidon II, 96 N.Y.2d at 209. (Part II.B.1.) Unable to dispute that the common-law fraud analysis under 11 Gaidon II renders its claims untimely, the Attorney General’s response is to try to run away from Gaidon II. (Part II.B.2.) 1. The Martin Act and the § 63(12) claim here eliminate four elements required to impose liability for common-law fraud. The Attorney General concedes that, to determine if liability would “not exist but for the statute”, Gaidon II focused “on the distinction between the deceptive acts and practices addressed by GBL § 349 and the narrower category of frauds . . . under a common-law fraud theory”. (Opp’n 66; see CS Br. 42-43.) The Attorney General also concedes that the Martin Act claim and a standalone Executive Law claim permit liability in “the absence of scienter and other elements of common-law damages claims”. (Opp’n 30.) These two points of agreement establish that if this Court applies Gaidon II on its terms—a precedent the Attorney General does not ask this Court to revisit—CPLR § 214(2)’s three-year period governs the Martin Act and § 63(12) claim here. By contrast to liability under common-law fraud, liability under the Martin Act or a standalone § 63(12) claim will exist even when the defendant acted innocently (as opposed to with scienter), when the individual investors did not actually or justifiably rely, when the statements or omissions do not qualify as a “misrepresentation”, and when there have been no damages. E.g., Feldman v. Grant, 213 A.D.2d 340, 341 (1st Dep’t 1995); Opp’n 21 (conceding common-law fraud “required proof of scienter, reliance, and damages”). Thus, those statutory 12 claims “contemplate[] actionable conduct that does not necessarily rise to the level of fraud” under Gaidon II, and CPLR § 214(2) applies. Gaidon II, 96 N.Y.2d at 209. 2. Eliminating “reliance” and “damages” are two additional ways the statutes here, under Gaidon II, create new liability. The Attorney General asks this Court to ignore the new liability created by the elimination of “reliance” and “damages” under the Martin Act and § 63(12). (Opp’n 35-40.) The Court can hold that CPLR § 214(2) applies without ever reaching these elements. Gaidon II found that it was dispositive that G.B.L. § 349 establishes new liability because of the lack of “scienter” and its “tendency or capacity to deceive test” (as opposed to a “misrepresentation”), and these twin pillars of the Gaidon II analysis fully apply to the Martin Act and the § 63(12) claim here. (CS Br. 20-21, 26.) But contrary to the Attorney General’s arguments, “reliance” and “damages” are additional ways in which these statutes broaden liability under Gaidon II, that further support application of CPLR § 214(2). a. Without the Martin Act or § 63(12), the Attorney General would need to establish all the elements of common-law fraud. The Martin Act and Executive Law do not “continue [the] tradition of recognizing the special nature of and relief sought by government enforcement 13 actions” (Opp’n 40). They confer on the Attorney General new ways to impose liability compared to common-law causes of action. The Attorney General’s federal caselaw about the SEC (Opp’n 36-38) does no more than confirm that liability without proof of “reliance” or “damages” can arise by statute, which is exactly what happened with the enactment of the Martin Act and § 63(12). E.g., People ex rel. Schneiderman v. Trump Entrepreneur Initiative LLC, 2014 N.Y. Slip Op. 32685(U), at *6 (Sup. Ct. N.Y. Cty. Oct. 8, 2014) (Attorney General’s citation of case involving federal agency and “statutory violations” for elements of common-law fraud claim, was “misplaced”), aff’d as modified, 137 A.D.3d 409 (1st Dep’t 2016); Laub v. Faessel, 297 A.D.2d 28, 31-32 (1st Dep’t 2002) (similar). Parens patriae does not change the analysis. (Opp’n 39-40.) That doctrine allows the State “to bring a cause of action that otherwise properly can be brought only by private parties”, but, “[t]he authority to assert a cause of action hardly entails the authority to amend the elements of a cause of action”. People ex rel. Spitzer v. Grasso, 42 A.D.3d 126, 141-42 (1st Dep’t 2007).3 3 The parens patriae cases the Attorney General cites (Opp’n 39-40) involve issues relating to whether a governmental plaintiff has the authority to bring a cause of action; the cases do not say the elements change. See Purdue Pharma L.P. v. Kentucky, 704 F.3d 208, 215 (2d Cir. 2013) (Kentucky bringing statutory and common-law claims); Estados Unidos Mexicanos v. DeCoster, 229 F.3d 332, 335 (1st Cir. 2000) (whether Mexico could bring statutory claims); State ex rel. Abrams v. Gen. Motors Corp., 547 F. Supp. 703, 706-07 & n.5 (S.D.N.Y. 1982) (New York not “nominal party”). 14 Indeed, when the Attorney General asserts common-law claims, courts routinely hold the Attorney General to an identical elemental burden as a private plaintiff. E.g., Trump, 2014 N.Y. Slip Op. 32685(U), at *6 (Attorney General’s claim that “it need not prove individual reliance by each consumer is without merit”); People ex rel. Cuomo v. Nationwide Asset Servs., Inc., 26 Misc. 3d 258, 278-80 (Sup. Ct. Erie Cty. 2009) (rejecting common-law fraud claim, citing absence of “actual and reasonable reliance” by consumers); People ex rel. Cuomo v. Wells Fargo Ins. Servs., Inc., 18 Misc. 3d 1117(A), at *3 (Sup. Ct. N.Y. Cty. Jan. 14, 2008) (same); People ex rel. Spitzer v. H&R Block, Inc., 16 Misc. 3d 1124(A), at *7 (Sup. Ct. N.Y. Cty. July 9, 2007) (same for “intent to defraud”). b. Reliance and damages are essential elements of liability on non-statutory claims. “[R]eliance” and “damages” are not aspects of “a plaintiff’s standing and remedies” (Opp’n 35); they are mandatory elements of a claim for common-law fraud, without which there can be no liability. For common-law fraud, “[p]ecuniary loss to the deceived party is absolutely essential to the maintenance of the action”. Urtz v. N.Y. Cent. & Hudson River R.R. Co., 202 N.Y. 170, 173 (1911); see Bank Hapoalim B.M. v. WestLB AG, 121 A.D.3d 531, 535 (1st Dep’t 2014) (claims “fatally defective” because “no out-of-pocket loss”). Establishing “damages” for common-law fraud 15 also requires “loss causation”—another element the Martin Act and a standalone § 63(12) claim eliminate. Laub, 297 A.D.2d at 30-31. Similarly, the “need to prove reliance in order to prevail” was one of the “traditional elements of common law fraud” that statutes, such as G.B.L. § 349, eliminated. Amicus Curiae Br. of Att’y Gen. of St. of N.Y. at *5, Gaidon I, 94 N.Y.2d 330, 1999 WL 33660089, at *5. The Attorney General denies that one of the ways the Martin Act and a standalone § 63(12) claim authorize new liability relative to decisional law is that they eliminate the need to link misstatements (or omissions) to “the sale or purchase of a particular security”. (Opp’n 46-47; CS Br. 33-34.) But this linkage to a security was inherent in the “reliance” element, which is essential for fraud both at law and equity. E.g., Laub, 297 A.D.2d at 31 (fraud plaintiff had to show that “misrepresentations concerned the financial condition of [one] of the companies whose stock [defendant] recommended to plaintiff”). Similarly, liability for omissions—without the requirement to establish a “duty to speak”—is another statutory expansion. See Norman Fetter, Handbook of Equity Jurisprudence § 88, at 137 (1895) (Reply Add. 1). By pursuing claims based on “omissions” in addition to affirmative statements and not limited to “specific investment decisions” (see Opp’n 11, A. 143), the Attorney General seeks to rely on these broader statutory bases to impose liability on Credit Suisse. 16 C. The Martin Act and § 63(12) Significantly Expand Liability under Gaidon II Compared to Fraud at Equity. The Attorney General asks the Court to use “the ‘decisional law’ recognizing fraud in equity” (Opp’n 69) in addition to common-law fraud as a baseline when applying Gaidon II. That does not save its claims. CPLR § 214(2) must still apply here because of “[t]he substantive differences” that separate fraud at equity from the vastly expanded liability of the Martin Act and standalone § 63(12) claims. See Gaidon II, 96 N.Y.2d at 209. (Part II.C.1; CS Br. 44-46.) The Attorney General repeatedly refers to “investor fraud” or “fraudulent conduct” (e.g., Opp’n 2, 20, 29) in an attempt to blur the differences between causes of action available at equity and under the Martin Act and § 63(12). This is an attempt by the Attorney General to return to the “essence” approach that Gaidon II rejected. See Gaidon II, 96 N.Y.2d at 208; CS Br. 19-20. Applying the Gaidon II framework, the Attorney General’s claims cannot survive. 1. The Martin Act and the § 63(12) claim here eliminate four elements required to impose liability for fraud at equity. No cause of action at equity authorizes liability to be imposed on anything close to the sweeping terms of the Martin Act and § 63(12). Causes of action at equity had additional elements, beyond what common-law fraud required, which justified the intervention of the court in equity. (Part II.C.1.a.) Fraud at 17 equity also required “reliance” (Part II.C.1.b), “injury or damages” (Part II.C.1.c) and a traditional “misrepresentation” (Part II.C.1.d). a. Fraud at equity added elements relative to common- law fraud in exchange for eliminating scienter, which the Martin Act and § 63(12) do not. The Attorney General argues that “[f]raud liability without proof of scienter is not unique to § 63(12) and the Martin Act”. (Opp’n 31; id. at 30 n.7.) This is true. However, the usual quid pro quo for excusing scienter was an additional element beyond what common-law fraud required, namely, “a special relationship or situation of ‘unconscientious advantage’”. (CS Br. 43.) The Martin Act and a standalone § 63(12) claim enable the Attorney General to establish liability without scienter and without this additional equitable factor. This additional element is not an “artificially limited conception of the scope of the courts’ equitable powers”. (Opp’n 47.) Treatises explain two variants of this additional element. In variant one, the “undue influence” or “unconscientious advantage” element was met when there was “external pressure on account of [the plaintiff’s] mental weakness, old age, ignorance, necessitous condition, and the like”. 3 John Norton Pomeroy, A Treatise on Equity Jurisprudence § 955, at 789 (5th ed. 1941) (Reply Add. 11) [hereinafter Pomeroy]. In variant two, there was a “fiduciary relation” that stood in for, or implied “the superiority occupied by one of the parties over the other”. Id.; accord 1 Joseph 18 Story, Commentaries on Equity Jurisprudence § 370, at 350 (14th ed. 1918) (Reply Add. 25) [hereinafter Story] (equitable fraud “arises most frequently in controversies which grow out . . . . fiduciary or confidential relations”); 55 N.Y. Jur. 2d Equity § 62, at 717 (2012) (Reply Add. 4) (equity “acts upon the principle that when a person, through the influence of a confidential relationship acquires title to property or obtains an advantage that cannot conscientiously be retained” (emphasis added)). In sum: “The elements of a cause of action to recover for constructive [or equitable] fraud[4] are the same as those to recover for actual fraud, with the crucial exception that the element of scienter on the part of the defendant . . . is replaced by a requirement that the plaintiff prove the existence of a fiduciary or confidential relationship warranting [the] consequent relaxation of the care and vigilance he or she would ordinarily exercise under the circumstances.” 60A N.Y. Jur. 2d Fraud and Deceit § 2, at 18 (2011) (emphasis added) (Reply Add. 7). The Attorney General admits that the Appellate Division cases Credit Suisse cited “require[d] the plaintiffs to prove the existence of a fiduciary or confidential relationship” for equitable fraud, but tries to distinguish their facts. (Opp’n 50.) But controlling law from this Court and the U.S. Supreme Court is in accord. E.g., Moore v. Crawford, 130 U.S. 122, 128 (1889) (fraud in equity “involve[s] a breach of legal or equitable duty, trust, or confidence, . . . or by which an undue and unconscientious advantage is taken of another” (emphasis 4 The Attorney General does not dispute that “constructive fraud” is another name for “equitable fraud”. (See CS Br. 43 n.9.) 19 added)); Roni LLC v. Arfa, 18 N.Y.3d 846, 848 (2011) (plaintiffs made “allegations of a fiduciary relationship [to] survive the dismissal motion” on equitable fraud). Instead of citing “equitable fraud” cases (which uniformly require a special relationship or undue advantage), the Attorney General relies solely on rescission cases for its view that a special relationship or undue advantage was not required. (Opp’n 47-49 (citing Hammond, Bloomquist, Haebler, Seneca and Canadian Agency).) However, it cannot be said that the Martin Act or § 63(12) “merely codify or implement” equitable rescission, Gaidon II, 96 N.Y.2d at 209, because that claim required two additional elements. First, equitable rescission required that the security be put back to the seller (or the contract unwound), which the Attorney General is not obligated to do here (and is not requesting for any RMBS investors). E.g., Hammond v. Pennock, 61 N.Y. 145, 153 (1874); E.T.C. Corp. v. Title Guar. & Tr. Co., 271 N.Y. 124, 126-27, 130 (1936) (rejecting plaintiff’s claim seeking rescission of mortgage certificates because plaintiff did not return those certificates to defendant before trial). Second, rescission would “not be granted unless plaintiff lacks an adequate remedy at law”. C3 Media & Mktg. Grp., LLC v. Firstgate Internet, Inc., 419 F. Supp. 2d 419, 435 (S.D.N.Y. 2005) (rescission is “extraordinary remedy”); see Loreley Fin. (Jersey) No. 28, Ltd. 20 v. Merrill Lynch, 117 A.D.3d 463, 468 (1st Dep’t 2014) (rescission claim involving RMBS non-actionable because of “adequate remedy at law”). Because the Martin Act and § 63(12) do not require the Attorney General to establish the special relationship or unconscientious advantage necessary for equitable fraud, or the elements justifying equity’s intervention for rescission, these statutes do much more than “merely codify or implement” liability at equity. Gaidon II, 96 N.Y.2d at 209. b. Fraud at equity required private-party reliance, which the Martin Act and § 63(12) do not. The Attorney General does not identify any equitable cause of action that authorized liability without proof of reliance by the party to whom the misstatements were directed. See Gaidon II, 96 N.Y.2d at 208. This is critically important: “reliance” is a clear way in which the Martin Act and a standalone § 63(12) claim “contemplate[] actionable conduct that does not necessarily rise to the level of fraud”. Id. at 209. As the dissenters in the opinion below recognized, “although equitable fraud does not require scienter, reliance is still an element”. A. 15 n.1; accord Pomeroy, § 890, at 501 (explaining that an element “without which there can be no remedy, legal or equitable, is that it must be relied upon by the party to whom it is made”) (Reply Add. 11); CS Br. 44-45. 21 The equity cases in the Attorney General’s brief uniformly require reliance. E.g., Haebler v. Crawford, 258 N.Y. 130, 135 (1932) (“[T]he evidence [must] establish[] [a] material misrepresentation upon which plaintiff relied”.); Commercial Credit Corp. v. Third & Lafayette St. Garage, Inc., 226 A.D. 235, 239 (4th Dep’t 1929) (statement “sufficient to sustain this action, if it was one of the things which influenced the plaintiff to buy this contract”); Rush v. Oppenheimer & Co., 650 F. Supp. 682, 683-84 (S.D.N.Y. 1986) (rescission required inquiry “whether Rush was justified in relying on the misrepresentation”)) (emphases added). The elimination of reliance as an element of Martin Act and § 63(12) liability—particularly since that element demanded that “the party [be] justified, under all the circumstances in thus relying”, Pomeroy § 891, at 505—significantly expands liability relative to anything available at equity. c. Fraud at equity required proof of damages or injury, which the Martin Act and § 63(12) do not. The rule at equity, like law, is that “damages” or “injury” are preconditions to liability. As the leading treatises on equity explain: “[A] party must have been misled to his prejudice or injury; for Courts of Equity do not, any more than Courts of Law, sit for the purpose of enforcing moral obligations or correcting unconscientious acts, which are followed by no loss or damage.” Story § 289, at 294 (emphasis added). 22 “Fraud without resulting pecuniary damage is not a ground for the exercise of remedial jurisdiction, equitable or legal”. Pomeroy, § 898a, at 535 (emphasis added). Equitable fraud—which is the claim the Attorney General contends these statutes codified (Opp’n 23-24, 31, 46, 51)—required this injury to take the form of “damages”, that is, “actual pecuniary loss”. Roni, 18 N.Y.3d at 849. The Martin Act and standalone § 63(12) claims do not require the Attorney General to establish loss by RMBS investors. (CS Br. 37-39.) Even rescission (Opp’n 34), which is an inapt parallel because the Attorney General is neither obligated nor seeking to rescind anything here, required that individual detriment or “injury” be established. See Connaughton v. Chipotle Mexican Grill, Inc., 29 N.Y.3d 137, 142 (2017) (“To give rise, under any circumstances, to a cause of action, either in law or equity, reliance on the false representation must result in injury” (citation omitted)). The statutes here do not. Courts additionally have required loss causation to be established for rescission in cases involving securities in the market, which likewise is not required under the Martin Act or § 63(12). E.g., Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 165 F. Supp. 2d 615, 627 n.2 (S.D.N.Y. 2001) (holding that proof of loss causation is required under New York law even where only rescission is sought). 23 d. The “capacity or tendency to deceive” standard that applies to statutory fraud further expands liability as compared to both common-law fraud and equity. The Attorney General disputes that the Martin Act and § 63(12) set a lower bar for “actionable ‘falsity’”. (Opp’n 40.) The Attorney General is wrong. In terms of common-law fraud, in Gaidon I, this Court made clear that “plaintiffs [had] not met the threshold element to support a fraud claim” (a traditional misrepresentation) because “[a] practice may carry the capacity to mislead or deceive a reasonable person but not be fraudulent”. Gaidon I, 94 N.Y.2d at 348 (emphasis added). “That distinction separate[d] plaintiffs’ fraud claims from their section 349 claims”. Id.; see also Stutman v. Chem. Bank, 95 N.Y.2d 24, 29 (2000) (citing Gaidon II, to explain that a “deceptive practice . . . need not reach the level of common-law fraud to be actionable under section 349”); CS Br. 20-21. The “tendency or capacity to deceive” test under the statutes similarly broadens liability relative to equitable fraud because, except for scienter, the same elements of common-law fraud, including a “misrepresentation”, are required for equitable fraud. (Part II.C.1.a; CS Br. 44-45.) 24 This Court’s 1926 Federated Radio decision is where the ever-broadening trajectory for the “tendency or capacity to deceive” test started.5 (CS Br. 29-30.) Federated Radio’s notion that the Martin Act is “broad enough to encompass ‘equitable fraud’ for which ‘scienter’ is not needed”, Matter of Badem Bldgs. v. Abrams, 70 N.Y.2d 45, 54 (1987), simply expresses that scienter “need not be alleged and proved in order to sustain Martin Act liability”; it does not limit liability under the Martin Act to equitable fraud. If this Court were to read Federated Radio as holding that the Martin Act “merely codifies” equitable fraud (as the Attorney General now urges), then a Martin Act claim would require all of the elements of equitable fraud, which is plainly not the case. (Part II.C.1.) The Attorney General is not asking this Court to require it to prove all elements of equitable fraud in exchange for a six-year limitations period. Instead, the Attorney General wants this Court to hold that for limitations purposes the Martin Act and a standalone § 63(12) claim “merely codify or implement an existing [equitable fraud] liability”, but that for liability purposes only the minimal elemental proof is required. This Court rejected this same gambit by the Attorney General in Gaidon II when, after arguing in Gaidon I that “GBL § 349 liberalized 5 Statutory “fraud” (Opp’n 26) sweeps broader than decisional law. E.g., People ex rel. Spitzer v. Coventry First LLC, No. 0404620/2006, 2007 WL 2905486, at *8 (Sup. Ct. N.Y. Cty. Sept. 25, 2007) (Attorney General’s inability to support “recovery for fraud . . . had no bearing on whether a claim is stated for fraudulent business practices under the Executive Law, since the term ‘fraud’ is used far more broadly in the statute than in the common law” (emphasis added)); Bevis Indus., 63 Misc. 2d at 1090 (same for § 63(12) and Martin Act). 25 the standard of proof required to establish deception under GBL § 349 beyond the standard applicable to common-law fraud”, the Attorney General returned to urge that “the essence of any deceptive practices claim [under G.B.L. § 349] is fraud and deceit, [such that] the . . . . statute of limitations [was] CPLR § 213(8)”. Br. of N.Y. St. Att’y Gen. as Amicus Curiae, Gaidon II, 96 N.Y.2d 201 (2001), 2001 WL 34903800, at *5, *15. This Court should reject the Attorney General’s attempt to do the same here with “equitable fraud”. 2. The Attorney General’s other arguments to avoid Gaidon II are unavailing. a. CPLR § 213(1) does not apply to the new liability under the Martin Act or § 63(12). The Attorney General’s invocation of CPLR § 213(1) (Opp’n 52-56) is misplaced. First, this “residual” or “catch-all” limitations provision applies only when “no limitation is specifically prescribed by law”. CPLR § 213(1). But as to the new liability under the Martin Act and Executive Law, a limitation is specifically prescribed by law: the three-year period in CPLR § 214(2) for “an action to recovery upon a liability, penalty or forfeiture created or imposed by statute”. Second, this Court has already rejected the Attorney General’s argument based on “relief that is primarily equitable in nature”. (Opp’n 54-56). Even before Gaidon II put the issue beyond dispute, this Court held that what 26 controls under CPLR § 214(2) is liability, not “remedies”. In Hartnett v. N.Y.C. Transit Authority, 86 N.Y.2d 438, 443 (1995), the issue was “whether a three-year (CPLR 214(2)) or six-year (CPLR 213(1)) Statute of Limitations applie[d]”. The Labor Commissioner “urged this Court to ascribe dispositive significance to the fact that [the statute’s] remedies are equitable in nature”. Id. Disagreeing, the Hartnett Court held that CPLR § 214(2) applied because the “action [was] manifestly one to recover upon a liability created by statute”. Id. at 444. This Court should adhere to Gaidon II and Hartnett in recognizing that liability, not remedies, govern under CPLR § 214(2). Third, the Attorney General’s citation of Melcher v. Greenberg Traurig, LLP, 23 N.Y.3d 10 (2014) (Opp’n 51), provides no basis to apply CPLR § 213(1) here. Melcher resolves a wholly separate issue: whether the fact that a New York statute derived from a pre-Colonial English statute made it subject to CPLR § 214(2). 23 N.Y.3d at 14 (statute not subject to CPLR § 214(2) “just because it may be traced back to the first Statute of Westminster”). CPLR § 214(2) did not apply in Melcher because English statutory law became New York common law “as part of the Colonial-era incorporation”. Id. at 15. Those issues are entirely absent from this case. 27 b. The historical treatment of fraud at equity is not a basis for applying CPLR § 213(8). In the alternative, the Attorney General contends that the Legislature wanted CPLR § 213(8) to apply to fraud actions arising under decisional law “at law or in equity”. (Opp’n 56-58.) This Court need not decide whether the Attorney General’s brief account of 169 years of history is correct. Neither the Martin Act nor a standalone § 63(12) claim confines the Attorney General to the liability available under pre-existing decisional law. The legislative attitude towards those decisional causes of action, which have much narrower liability than these statutes, is irrelevant under Gaidon II. III. THE ATTORNEY GENERAL’S ARGUMENT THAT IT ALLEGED— BUT DID NOT BRING A CLAIM FOR—COMMON-LAW FRAUD CANNOT SAVE ITS STATUTORY CLAIMS FROM BEING TIME- BARRED. As a final attempt to gut Gaidon II, the Attorney General seeks to obtain a six-year statute of limitations based on allegations alone. (Opp’n 4, 70- 72.) It makes two arguments based on its belief that it alleged common-law fraud elements: (1) that its otherwise time-barred Martin Act and a “piggyback” or standalone § 63(12) claim are somehow transformed into being timely through superfluous allegations; and (2) that a common-law fraud claim (a cause of action it did not assert) can go forward, along with an Executive Law claim that “piggybacks” on the supposed common-law fraud claim. (Id.) 28 First, the Attorney General cannot take advantage of the common-law fraud limitations period for its Martin Act claim or its § 63(12) claim simply by alleging elements of common-law fraud—elements it will not have to prove at summary judgment or at trial. The Attorney General specifically refused discovery regarding reliance and scienter on the basis that such topics “are not relevant because reliance by RMBS investors and Credit Suisse’s state of mind are not elements of either a Martin Act or an Executive Law 63(12) claim.” (Add. 7 (emphasis added).) It cannot be the law that the Attorney General can refuse to engage in discovery on common-law fraud elements, avoid having to prove those elements at summary judgment and trial, yet nevertheless obtain the statute of limitations for common-law fraud on the ground that it superfluously pled allegations sounding like those elements. The elements of the actually asserted causes of action determine what is discoverable and what must be proved in order to impose liability on such claims. Statutes of limitations would be meaningless if they simply attached to extra allegations in the complaint that do not relate to the elements of the causes of action being asserted. (CS Br. 38-42.) Second, the Attorney General has expressly represented that it is not “piggybacking” on common-law fraud, by disclaiming the need to prove the elements of that claim under § 63(12). (Opp’n 75; Add. 7.) The Attorney General here consciously chose not to assert a common-law fraud claim (A. 73) to pair with 29 § 63(12). Having elected to pursue liability under § 63(12) solely on broader and easier to prove, statutory bases, the Attorney General must take the bitter with the sweet, and abide by CPLR § 214(2)’s three-year period for liability “created or imposed” by statute. This Court should not allow the Attorney General to transform its statutory-based § 63(12) claim (subject to CPLR § 214(2)) into a common-law fraud-based § 63(12) claim now, five years into this litigation.6 IV. THERE IS NO POLICY REASON TO DEPART FROM THE LEGISLATURE’S CHOICE TO APPLY CPLR § 214(2). Contrary to the Attorney General’s suggestion, the New York Legislature wanted the CPLR’s limitations, including CPLR § 214(2), to apply to the Attorney General. Unlike the states in the cases cited by the Attorney General (Opp’n 59-60), New York rejects the “no time runs against the King” doctrine, which exempts the government from otherwise applicable limitations periods. State v. Seventh Regiment Fund, Inc., 98 N.Y.2d 249, 255 (2002). New York’s Legislature also decided to select three years for the Martin Act and any standalone § 63(12) claim—not the longer period applicable in some other states (Opp’n 6 Credit Suisse could not contest whether the Attorney General stated that claim at the motion to dismiss phase or in discovery. Courts dismiss common-law fraud claims when—as here—“[t]he complaint does not allege any specific instance of [a private purchaser] justifiably relying”. Wells Fargo, 18 Misc. 3d 1117(A), at *3; A. 44-75; CS Br. 42 n.8. 30 60)—by enacting CPLR § 214(2). The Attorney General offers no basis to override those decisions of the Legislature. This Court can credit that securities cases can be “complex, requiring considerable time and effort to investigate” (Opp’n 58) and still easily conclude that CPLR § 214(2)’s three-year period leaves unimpaired the Attorney General’s ability to safeguard the markets. The Attorney General has unparalleled investigatory tools under the Martin Act, and can enter into tolling agreements that give it more time to investigate. (CS Br. 54-55.) It also can decide to bring—and to prove—common-law causes of action (and a “piggyback” § 63(12) claim), if it believes it needs six years. What the Attorney General cannot do is seek to use the broad powers of the Martin Act and § 63(12) but ignore the Legislature’s statute of limitations on those broad powers. CONCLUSION The Decision and Order should be reversed and judgment entered for Credit Suisse because the Attorney General’s Martin Act claim and statutory-based Executive Law § 63(12) claim are time-barred under CPLR § 214(2). November 17, 2017 Respectfully submitted, CRAVATH, SWAINE & MOORE LLP, By Richard W. Clai/7 Michael T. Reynolds Lauren A. Moskowitz Members of the Firm Attorneys for Defendants-Appellants Credit Suisse Securities (USA) LLC, DLJ Mortgage Capital, Inc., Credit Suisse First Boston Mortgage Securities Corporation, Asset Backed Securities Corporation and Credit Suisse First Boston Mortgage Acceptance Corporation (sued herein as “Credit Suisse Mortgage Acceptance Corporation”) Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Tel.: (212) 474-1000 Fax: (212) 474-3700 31 NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 N.Y.C.R.R. § 500.13(c) that the foregoing brief was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 (body); 12 (footnotes) Line spacing: Double (body); single (footnotes) Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of authorities, proof of service, certificate of compliance, corporate disclosure statement, question presented, or any authorized addendum, is 6,988 words. Dated: November 17, 2017 Lauren A. MoskoNÿkz 32 REPLY ADDENDUM TABLE OF CONTENTS Page Norman Fetter, Handbook of Equity Jurisprudence (1895) (Excerpt) .................. REPLY ADD-1 55 N.Y. Jur. 2d Equity (2012) (Excerpt) ......... REPLY ADD-4 60A N.Y. Jur. 2d Fraud and Deceit (2011) (Excerpt) ...................................................... REPLY ADD-7 3 John Norton Pomeroy, A Treatise on Equity Jurisprudence (5th ed. 1941) (Excerpt) ...... REPLY ADD-11 1 Joseph Story, Commentaries on Equity Jurisprudence (14th ed. 1918) (Excerpt) .... REPLY ADD-25 REPLY ADD-1 NORMAN FETTER, HANDBOOK OF EQUITY JURISPRUDENCE (1895) (EXCERPT) [REPLY ADD-1–REPLY ADD-3] HANDBOOK OF EQUITY JURISPRUDENCE BY NORMAN FETTER ST. PAUL, MINN. WEST PUBLISHING CO. i895 REPLY ADD-2 137Ch. 7] FRAUD. nor claim that he did not learn the truth, and was in fact misled.107 And, if a misrepresentation is capable of several interpretations, it is for the plaintiff to show on which he relied. The court will not as¬ sume that he has been deceived merely because the circumstances are such that he might well have been.108 In addition to the foregoing elements, injury must result as the immediate, and not the remote, consequence of the misrepresenta¬ tion.100 SAME— WRONGFUL OMISSIONS. 88. Mere silence will not amount to fraud, unless the fact suppressed is material, and is one which the party concealing it is under some legal or equitable duty to dis¬ close. At the outset, it should be borne in mind that the question now to be discussed relates only to passive, though wrongful, concealment, as distinguished from cases of “active concealment,” where a person uses some contrivance to hide a defect in something offered for sale. These latter oases are really cases of wrongful acts, and fall within our first division of actual fraud. Indeed, a misrepresentation need not be made by language, spoken or written, but conduct calculated to convey a false impression is sufficient.110 In cases of mere omis¬ sion or silence, as in cases of wrongful acts, the fact concealed must be material, and must be instrumental in bringing about the con¬ tract. The only point of difference between wrongful acts and omissions is, therefore, as to the obligation to make disclosure; and this question will be now considered. Where parties deal at arms’ length, and there is no confidential or fiduciary relation between them, either of them may remain silent, and avail himself of his superior knowledge as to facts and circum¬ stances equally open to the observation of both, or equally within the IOT Colton v. Stanford, 82 Cal. 352, 23 Pac. 16; Southern Development Co. v. Silva, 125 U. S. 247, 8 Sup. Ct. 881; Billings v. Aspen Mining & Smelting Co., 2 C. 'C. A. 252, 51 Fed. 338; Jennings v. Broughton, 5 De Gex, M. & G. 126; Dyer v. Hargrave, 10 Ves. 505. los Smith v. Chadwick, 9 App. Cas. 187. IOO Holton v. Noble, 83 Cal. 7, 23 Pac. 58; Wells v. Waterhouse, 22 Me. 131; Branham v. Record, 42 Ind. 181; Barry v. Croskey, 2 Johns. & H. 1. no Lovell v. Hicks, 2 Young & C. Exch. 46; Denny v. Hancock, 6 Ch. App. 1. REPLY ADD-3 £Ch. 7138 GROUNDS FOR EQUITABLE RELIEF. reach of their ordinary diligence, and is under no obligation, either at law or in equity, to draw the attention of the other to circum¬ stances affecting the value of the property in question, though he may know him to be ignorant of them.111 Thus, a purchaser of land is not required to communicate his knowledge of something which gives it an exceptional value, such as a mineral deposit under it; 112 nor need the vendor communicate his information respecting defects rendering it less valuable than the purchaser supposes it to be.113 But if a vendor conceals a material fact, as to which, from the nature of the case, confidence is reposed in him, the transaction may be set aside on the mere ground of his silence.114 A distinction has also been made between patent and latent defects. A vendor is under no obligation to disclose a defect which is patent, or such as the buyer, having an opportunity to inspect, can discover by the exercise of ordinary vigilance; 110 but he should disclose latent defects, or such as the buyer has no means, or not equal means, of ascertain¬ ing. Contracts of a Fiduciary Nature. The foregoing rules are generally applicable, but certain contracts, from their very nature, are considered to be essentially fiduciary in ii« in Dambmann v. Schulting, 75 N. Y. 55; Graham v. Meyer, 99 N. Y. 611, 1 N. E. 143; Pennybacker v. Laldley, 33 W. Va. 624, 11 S. E. 39; Cleaveland v. Richardson, 132 U. S. 318, 329, 10 Sup. Ct 100; Goninan v. Stephenson. 24 Wis. 75; Wilde v. Gibson, 1 H. L. Cas. 605. ns Fox v. Mackreth, 2 Cox, 320, 2 Brown, Ch. 400, 420; Harris v. Tyson, 24 Pa. St 347; Williams v. Spurr, 24 Mich. 335. Failure of a purchaser of oil lands to disclose the output of a well on adjoining land operated by bimself is not such a fraud as entitles the vendor to rescission. Neill v. Shamburg, 158 Pa. St 263, 27 Atl. 992. in Haywood v. Cope, 25 Beav. 140; People’s Bank v. Bogart SI N. Y. 101; Laidlaw v. Organ, 2 Wheat 178. A sale of land for an extravagant price will not be rescinded at the suit of the purchaser who invested his money on the faith of his belief in the power of a third person to locate mineral deposits, when the vendor did nothing to create or strengthen the false opinions on which the purchaser acted. Law v. Grant, 37 Wis. 548. in Edwards v. McLeay, 2 Swanst 287; Ellard v. Llandaff, 1 Ball & B. 241; Howard v. Gould, 28 Vt 525; Brown v. Montgomery, 20 N. Y. 287. ns Leake, Cont 361; Brown v. Gray, 6 Jones (N. C.) 103. ns Turner v. Huggins, 14 Ark. 21; Lunn v. Shermer, 93 N. C. 164; George v. Taylor, 55 Tex. 97; Prout v. Roberts, 32 Ala. 427. REPLY ADD-4 55 N.Y. JUR. 2D EQUITY (2012) (EXCERPT) [REPLY ADD-4–REPLY ADD-6] New York Jurisprudence 2d Volume 55 Environmental Rights and Remedies to Escrows 2012 WEST® A Thomson Reuters business For Customer Assistance Call 1-800-328-4880 Mat #41135794 REPLY ADD-5 § 61 NEW YORK JURISPRUDENCE 2D to be inferred from the novelty of the question presented.8 Moreover, notwithstanding that equity acts upon equitable causes by the administration of equitable remedies, equitable jurisdiction does not necessarily depend upon an exact relation of the cause of action stated to some definite head of equitable relief.9 Where grounds calling for exercise of equitable power to furnish a remedy exists, the court will not hesitate to act.10 § 62 Fraud or bad faith; undue influence Research References West’s Key Number Digest, Equity <3>10 to 14 Am. Jur. Pleading and Practice Forms, Equity § 19 (Notice of motion— To set aside default judgment entered through extrinsic fraud or extrinsic mis¬ take) Bad faith, fraud, and other breaches of trust constitute a foundation for equitable relief.1 A court of equity has jurisdiction to provide relief against every species of fraud.2 ♦ Observation: Fraud in equity has a much broader connotation than at law and includes acts inconsistent with fair dealing and good conscience that result in a benefit conferred upon the one hold¬ ing a dominant position.3 and negligence causes of action had been McHugh v. Paley, 63 Misc. 2d 1092, 314 dismissed and the landowner submitted N.Y.S.2d 208 (Sup 1970). As to where the question presented the imposition of equitable relief. Troy is a novel one, see §§ 81, 82. News Co. Inc. v. City of Troy, 222 A.D.2d 981, 635 N.Y.S.2d 792 (3d Dep’t 1995). 8Livingston v. Bauchhens, 254 A.D. 692, 3 N.Y.S.2d 776 (2d Dep’t 1938). As to where the question presented is a novel one, see §§ 81, 82. °Empire Engineering Corporation v. Mack, 217 N.Y. 85, 111 N.E. 475 11916); Svenska Taendsticks Fabrik Aktiebolaget v. Bankers’ Trust Co. of New York, 239 A.D. 467, 268 N.Y.S. 186 list Dep’t 1933), affd, 268 N.Y. 73, 196 N.E. 748 (1935) (a finding that there is any particular ground of well-recognized 328, 365 N.Y.S.2d 681 (County Ct. 1975), equitable relief, as such, is not neces- judgment afFd, 84 Misc. 2d 782, 386 N.Y.S.2d 276 (App. Term 1975). 3In re Possick, 196 Misc. 2d 796, 692, 3 N.Y.S.2d 776 (2d Dep’t 1938); 763 N.Y.S.2d 902 (Sur. Ct. 2003). no proof that would, nonetheless, justify [Section 62] ’Kavanaugh v. Kavanaugh Knitting Co., 226 N.Y. 185, 123 N.E. 148 (1919). When breach of a fiduciary duty by the directors and majority shareholders of a corporation occurs, such action will be considered unlawful, and the ag¬ grieved shareholder may be entitled to equitable relief. Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 483 N.Y.S.2d 667, 473 N.E.2d 19(1984). 2Weidman v. Tomaselli, 81 Misc. 2d sary). 10Livingston v. Bauchhens, 254 A.D. 716 REPLY ADD-6 EQUITY § 63 Bad faith is, likewise, grounds for equitable relief,4 where such relief is required in the interests of justice and to alford the plaintiff an adequate remedy.5 A court of equity also acts upon the principle that when a person, through the influence of a confidential relationship, acquires title to property or obtains an advantage that cannot conscientiously be retained, the court will grant relief to prevent the abuse of this confidence.6 Accordingly, where fraud or undue influence may have been practiced and unjust enrichment achieved, especially within a confidential relationship, equity may be impelled to action.7 § 63 Preventing irreparable injury Research References West’s Key Number Digest, Equity @=3, 4, 43, 46 Am. Jur. Pleading and Practice Forms, Equity § 8 (Bill of complaint, complaint, or petition— Allegation— Irreparable injury to plaintiff) Neither an apprehension of injury1 nor a desire for quick relief is necessarily a sufficient reason for pursuing an action in equity.2 It is a cardinal rule that equity will not entertain jurisdiction where there is an adequate remedy at law or grant relief unless to prevent serious and irreparable injury.3 Thus, equity will only intervene by preventive measures when irreparable injury is threatened and the law does not afford an adequate remedy for the contemplated wrong.4 ♦ Illustration: In a putative class action arising out of a lessor’s automatic renewal of a lessee’s subscription agreement regarding certain computer equipment and software, the lessee, in addition to 4City Bank Farmers’ Trust Co. v. Hewitt Realty Co., 257 N.Y. 62, 177 N.E. Co., 123 Misc. 238, 205 N.Y.S. 45 (Sup 309, 76 A.L.R. 881 (1931). 1924)- 2Blank v. La Montagne-Chapman 3Thomas v. Musical Mut. Protective Union, 121 N.Y. 45, 24 N.E. 24 (1890); Fisher v. Health Ins. Plan of Greater New sKaminsky v. Kahn, 23 A.D.2d 231, 259 N.Y.S.2d 716 (1st Dep’t 1965). Congregation & Talmud Torah York, 67 Misc. 2d 674, 324 N.Y.S.2d 732 Sons of Israel of the Bronx v. Harlem 1971). Sav. Bank, 48 N.Y.S.2d 882 (Sup 1944). As to the requirement that oneseeking equitable relief must lack an Mann v. Mann, 45 Misc. 2d 19, 255 adequate remedy at law, see §§ 18 to 29. 4DiMarzo v. Fast Trak Structures, Inc., 298 A.D.2d 909, 747 N.Y.S.2d 637 (4th Dep’t 2002); Fisher v. Health Ins. . Plan of Greater New York, 67 Misc. 2d DiMarzo v. Fast Trak Structures, 674, 324 N.Y.S.2d 732 (Sup 1971); Jerome Inc., 298 A.D.2d 909, 747 N.Y.S.2d 637 Realty Co. v. Yankovich, 37 Misc. 2d 433, (4th Dep’t 2002); Fisher v. Health Ins. 235 N.Y.S.2d 498 (Sup 1962), judgment Plan of Greater New York, 67 Misc. 2d affd, 19 A.D.2d 697, 241 N.Y.S.2d 1009 674, 324 N.Y.S.2d 732 (Sup 1971). N.Y.S.2d 686 (Sup 1964), affd, 22 A.D.2d 992, 254 N.Y.S.2d 1010 (3d Dep’t 1964). [Section 63] (1st Dep’t 1963). 717 REPLY ADD-7 60A N.Y. JUR. 2D FRAUD AND DECEIT (2011) (EXCERPT) [REPLY ADD-7–REPLY ADD-10] * I t > l I REPLY ADD-8 FRAUD AND DECEIT §2 ulthough it may become a crime where so provided by law.12 Fraud is a fact the existence of which is ascertained like any other fact, by comparing and weighing the evidence.13 It is a serious charge14 and is not, as a rule, presumed but must be proved by the party alleg¬ ing it.1* Although fraud was historically associated with breach of contract, it has evolved into a cause of action in its own right, which does not require the existence of a contract for liability to ensue.19 A cause of action for fraud lies in tort, not contract, depending not on an agree¬ ment between the parties but rather on a deliberate misrepresenta¬ tion of fact relied on by the plaintiff to his or her detriment; in other words, the "legal relations” binding the parties are created by the ut¬ terance of a falsehood with a fraudulent intent and by reliance thereon,17 and the cause of action is entirely independent of contractual relations between the parties.18 § 2 Classifications and distinctions; actual, and constructive or legal, fraud Research References West’s Key Number Digest, Fraud ®=»1 to 7 The broadest classification of fraud is between actual fraud on the one hand and constructive fraud on the other. To constitute actual or positive fraud, there must fee an InteniAoaal deception.;’ in other words, active and positive fraud includes cases of the intentional and suc¬ cessful employment of any cunning, deception, or artifice to circum- 12People ex rel. Zupanice v. Giltner, 147 Misc. 157, 263 N.Y.S. 333 (County Ct. 1933). 13§ 270. 14Fein v. Starrett Television Corp., 280 A.D. 670, 116 N.Y.S.2d 571 (1st Dep’t 1952), judgment affd, 305 N.Y. 856, 114 N.E.2d 210 (1953). 1S§ 269. As to pleading fraud and deceit, see §§ 251 to 261. 1*Tarrytown House Condominiums, Inc. v. Hainje, 161 A.D.2d 310, 555 N.Y.S.2d 83 (1st Dep’t 1990); Meese v. Miller, 79 AJ1.2d 237, 436 N.Y.S.2d 496 (4th Dep’t 1981). In order to sustain a cause of ac¬ tion for fraud, it is not necessary that the allegedly fraudulent representation be set forth in a written contract. Lawlor v. Engley, 166 A.D.2d 799, 663 N.Y.S.2d 160 (3d Dep’t 1990). 17Amalfitano v. Rosenberg, 12 N.Y.3d 8, 874 N.Y.S.2d 868, 903 N.E.2d 265 (2009). 18Channel Master Corp. v. Aluminum Limited Sales, Inc., 4 N.Y.2d 403, 176 N.Y.S.2d 259, 151 N.E.2d 833 (1968). As to the distinction between li¬ ability for fraud and contractual liability, see § 7. As to whether a fraud action may be based on a breach of contract, see §§ 7, S, 22. [Section 2] 1Levin v. Kitsis, 82 A.D.3d 1051, 920 N.Y.S.2d 131 (2d Dep’t 2011). 17 §2 NEW YoRX JURISPRUDENCE 2n vent, cheat, or deceive another.2 In contrast, constructive, or ''legal," fraud consists of an act done or omitted that is tantamount to positive fraud, or is construed as a fraud by the court, because of its detrimental effect on public interests and public or private confidence although the act is not done or omitted with any actual design to perpetrate positive fraud or injury on other persons.3 Similarly, it has been said that constructive fraud may be defined as the breach of a duty which, irrespective of moral guilt and intent, the law declares fraudulent beeause of its tendency to deceive» to violate a confidence, or to injure public or private interests that the law deems worthy of special protection.4 Generally, constructive fraud requires a confiden tial or fiduciary relationship between the parties, or one party having superior knowledge over the other.8 The elements of a cause of action to recover for constructive fraud are the same as those to recover for actual fraud, with the crucial exception that the element of scienter on the part of the defendant, that is, knowledge of the falsity of his or her representation, is replaced by a requirement that the plaintiff prove the existence of a fiduciary or confidential relationship warrant ing his or her repose of confidence in the defendant and consequent relaxation of the care and vigilance he or she would ordinarily exercise under the circumstances. 9 Actual fraud, as distinguished from constructive fraud, involves the 2Marano v. LoCarro, 62 N.Y.S.2d 121 (Sup 1946), Judgment aifd, 270 A.D. 999, 63 N.Y.S 2d 829 (lat Dep't 1946). � v. :8ou4 or Bdttctlil6n or Ot½' of New York, 305 N.Y. 119, 111 N E.2d 238 (1963); AJettix Inc. v. Raub, 9 Misc. 3d 908, 804 N Y.S.2d 580 (Sup 2005). The terms "constructive fraud" and "legal fraud" both connote that m certain circumstances, one may be charged with the consequences of 1us words and acts, as though he has spoken or acted fraudu lently, although, properly speaking, his conduct does not merit this opprobrium. Cowee v. Cornell, 75 N.Y. 91, 1878 WL 12715 (1878). Constructive or legal fraud in cludes such contracts or acts as are prohibited by law because of the1r ten dency to deceive or mislead others or to violate private or public confidence al though not originating in any actual evtl design or contrivance to perpetrate a fraud. Spallholz v. Sheldon, 158 A D. 367, 143 N.Y.S. 41'1 {3d. Dep"t 1913), aff'd on 18 other grounds, 216 N.Y. 205, 110 N.E. 431 (1915). "Brown v. Lockwood, 76 AD.2d 721. � M.Y 81,11. � (24 P-ift J.�), Q,w,M v. Board of Regents ofUnivers1ty of Stat<> of N.Y., 266 A.D 629, 44 N.Y S.2d 911 (3d Dep't 1943), order aifd, 292 N.Y. 650, 66 N E.2d 515 (1944); Manheim Dairy Co. v Little Falls Nat Bank, 54 N.Y.S.2d 346 (Sup 1945). Under a charge of constructivo fraud, the plaintiff 1s not called upon to estabhsh that the fraud was iniquitously conceived and executed, since construc tive fraud, although a breach of duty, may be consistent with innocence; tho purpose to defraud need not enter into it because the law regards the act that gives nse to 1t as fraudulent per su. Costello v Costello, 209 N Y. 252, 103 N.E 148 (1913). 5Copland v. Nathaniel, 164 Misc. 2d 507, 624 N Y.S.2d 514 (Sup 1995). 8Levin v Kitsis, 82 A.D.3d 1061, 920 NY.S 2d 131 {'M Dep"t 2011); 'Brown REPLY ADD-9 ft'ttAUO AND DECEIT §2 t\loment of deceit practiced on the party defrauded. 7 Actual fraud nrises from deception practiced by means of the misrepresentation or concealment of a material fact, 8 whereas constructive fraud arises from a rule of public policy or from the existence of a confidential or fiduciary relationship between the parties. 9 While it is an essential olement of actual fraud that there has been an intent to deceive, 10 no positive dishonesty of purpose is required to show constructive fraud.11 Constructive fraud may result from reckless and heedless representa tions not made with a delibet'3t2 intent to �e.1� • Observation: If there is any distinction to be found between the terms "constructive" and "legal" as applied to fraud, it probably amounts to this: the breach of a fiduciary relationship or of a contract v. Lockwood, 76 A.D.2d 721,432 N.Y.S.2d 186 (2d Dep't 1980); Matter of Will of Klenk, 151 Misc. 2d 863, 574 N.Y.S.2d 438 (Sur. Ct. 1991), order aft"d in part, 204 A.D.2d 640, 612 N.Y.S.2d 220 (2d Dep't 1994). An action for constructive fraud may lie, irrespective of any actual intent to defraud, if it is demonstrated that the parties did not stand on an equal footing because of a confidential relationship and that, as a result, the plaintiff justifiably relied on the defendant's promise of future performance. Williams v. Lynch, 246 A.fl.U '7U, Ml 'N:Y.�.U 'f/Jj (� Dep't 1997). The existence of a fiduciary rela tionship between the parties will substi· tute only for the element of scienter on a fraud claim, not for the element of reli ance. Bibeau v. Ward, 228 A.D.2d 943, 645 N.Y.S.2d 107 (3d Dep't 1996). Regarding the abuse of a confiden tial or fiduciary relationship as giving rise to fraud, see §§ 16, 17. As to the representation of an opinion as fraud where trust or a confi dential relationship exists, see § 37. As to promissory statements as fraud where trust or a confidential rela tionship exists, see § 50. Regarding the representation of matters of law as fraud where a relation ship of trust or confidence exists, see § 55. As to concealment aa fraud where a confidential or fiduciary relationship ex ists, see§ 98. 7 Nasaba Corporation v. Harfred Realty Corporation, 287 N.Y. 290, 39 N.E.2d 243 (1942); Spallholz v. Sheldon, 158 A.D. 367, 143 N.Y.S. 417 (3d Dep't 1913), aff'd on other grounds, 216 N.Y. 205, 110 N.E. 431 (1915). 8 Levin v. Kitsis, 82 A.D.3d 1051, 920 N.Y.S.2d 131 (2d Dep'L 2011). 9Lefler v. Field, 52 N.Y. 621, 1873 WL 10314 (1873); Chun Hye Kang-Kim v. Feldman, 121 A.D.2d 590,503 N.Y.S.2d BU (M fi.ep't iff(§l, � -i. a,,� field, 123 N.Y.S.2d 19 (Sup 1953). A claim for constructive fraud is stated when, irrespective of actual intent to deceive, the plaintiff can show that a confidential or fiduciary relationship existed between the parties; such a rela tionship exists when one party reposes confidence m another and reasonably relies on the other's superior expertise or knowledge. Sears v. First Pioneer Farm Credit, ACA, 46 A.D.3d 1282, 850 N.Y.S.2d 219 (3d Dep't 2007). 10§§ 120, 122. 11Securities and Exchange Commis sion v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 84 S. Ct. 275, 11 L. Ed. 2d 237 (1963); Greenfield v. Green field, 123 N.Y.S.2d 19 (Sup 1953). 12§ 132. 19 REPLY ADD-10 ... REPLY ADD-11 3 JOHN NORTON POMEROY, A TREATISE ON EQUITY JURISPRUDENCE (5TH ED. 1941) (EXCERPT) [REPLY ADD-11–REPLY ADD-24] A TREATISE ON EQUITY JURISPRUDENCE AS ADMINISTERED IN THE UNITED STATES OF AMERICA ADAPTED FOB ALL TILE STATES AND TO THE UNION OF LEGAL AND EQUITABLE BEMEDIES UNDER THE REFORMED PROCEDURE BY JOHN NORTON POMEROY, LL.D. FIFTH EDITION BY SPENCER W. SYMONS IN FIVE VOLUMES VOLUME III BANCROFT-WniTNEY COMPANY SAN FRANCISCO THE LAWYERS CO-OPERATIVE PUBLISHING COMPANY ROCHESTER, N. Y. 1941 REPLY ADD-12 §890Sec. Ill] § 890. V. Effect of the Representation on the Party to Whom It is Made — His Reliance upon It. — Another ele¬ ment of a fraudulent misrepresentation, without which there can be no remedy, legal or equitable, is, that it must be relied upon by the party to whom it is made,8 and must ACTUAL. FRAUD-MISREPRESENTATIONS. 8. V. 8.— Lehigh Zinc & I. Co. v. Bamford, 150 U. S. 665, 37 L. ed. 1215, 14 S. Ct. 219 ; Farrar v. Church¬ ill, 135 U. S. 609, 34 L. cd. 246, 10 S. Ct. 771; Hoyt v. Hanbury (Shields v. Hanbury) 128 U. S. 584, 32 L. ed. 565, 9 S. Ct. 176 (holding that no relief can bo granted in equity to set aside a contract and conveyance on the ground of fraud where the evidence shows that no reliance was placed on the representations) ; Smith v. Richards, 13 Pet. 26, 10 L. ed. 42; Ingram v. Wesley (C. C. A. 5th) 37 F. (2d) 201, writ of certiorari de¬ nied in 282 U. S. 842, 75 L. ed. 747, 51 S. Ct. 26. Ala.— Georgia Home Ins. Co. v.Warten, 113 Ala. 479, 22 So. 288, 59 Am. St. Rep. 129. Ark.— Arkadelphia Lumber Co. v.Thornton, 83 Ark. 403, 104 S. W. 169; Kincaid v. Price, 82 Ark. 20, 100 S. W. 76; Harrell v. Hill, 19 Ark. 102, 68 Am. Dec. 202. Cal.— Morey v. Bovee, 218 Cal. 780, 25 P. (2d) 2; Rheingans v. Smith, 161 Cal. 362, 119 P. 494, Ann. Cas. 1913B, 1140; Estep v. Armstrong, 69 Cal. 536, 11 P. 132. Colo.— Colorado Springs Co. v. ' Wight, 44 Colo. 179, 96 P. 820, 16 Ann. Cas. 644; Sears v. Hicklin, 13 Colo. 143, 21 P. 1022. Conn.— Bradley v. Oviatt, 86 Conn. 63, 84 A. 321, 42 L. R. A. (N. S.) Flo.— Columbus Hotel Corp. v. Hotel Management Co. 116 Fla. 464, 156 So. 893. Ga.— Crawford v. Crawford, 134 Ga. 114, 67 S. E. 673, 28 L. R. A. (N. S.) 353, 19 Ann. Cas. 932. III.— Gillespie v. Fulton Oil & Gas Co. 236 111. 188, 86 N. E. 219; Hooker v. Midland Steel Co. 215 111. 444, 74 N. E. 445, 106 Am. St. Rep. 170; Hicks v. Stevens, 121 111. 186, 11 N. E. 241. Ind.— Fronzel v. Miller, 37 Ind. 1, 10 Am. Rep. 62. Iowa.— Haigh v. White Way Laun¬dry Co. 164 Iowa, 143, 145 N. W. 473, 50 L. R. A. (N. S.) 1091; Beach v. Beach, 160 Iowa, 346, 141 N. W. 921, 46 L. R. A. (N. 8.) 98, Ann. Cas. 1915D, 216. Kan.— Provident Loan Trust Co. v. McIntosh, 68 Kan. 452, 75 P. 498, 1 Ann, Cas. 906. Ky.— Hoffman v. Friedman, 171 Ky. 317, 188 S. W. 408; Southern Exp. Co. v. Fox, 131 Ky. 257, 115 S. W. 184, 117 S. W. 270, 133 Am. St. Rep. 241; Ruifner v. Ridley, 81 Ky. 165. Me.— Atlas Shoe Co. v. Bechard, 102 Me. 197, 66 A. 390, 10 L. R. A. (N. S.) 245; Greenleaf v. Gerald, 94 Me. 9L, 46 A. 799, 50 L. R. A. 542, 80 Am. St. Rep. 377; Severance v. Ash, 81 Me. 278, 17 A. 69. Md.— Rogers v. Dorrance, 140 Md. 419, 117 A. 564, 32 A. L. R. 573; Wegefartk v. Wiessner, 134 Md. 555, 828. Del.— Clough v. Cook, 10 Del. Ch. 175, 87 A. 1017. 501 REPLY ADD-13 §890 [Pt. II, Ch. IllEQUTTY JURISPRUDENCE. be an immediate cause of his conduct which alters his legal relations. Unless an untrue statement is believed and acted upon, it can occasion no legal injury. It is essen¬ tial, therefore, that the party addressed should trust the representation, and be so thoroughly induced by it that, judging from the ordinary experience of mankind, in the 107 A. 364, 6 A. 1/. R. 396; Diamond v. Shriver, 114 Md. 643, 80 A. 217; Cochrane v. Pascault, 54 Md. 1. Mass.— Whiting v. Price, 169 Mass. 576, 48 N. E. 772, 61 Am. St. Rep. 307 ; Lilienthal v. Suffolk Brewing Co. 154 Maas. 185, 28 N. E. 151, 12 L. R. A. 821, 26 Am. St. Rep. 234. Co. 67 N. J. L. 627, 52 A. 472, 91 Am. St. Rep. 445; Parker v. Hayes, 39 N. J. Eq. 469. . N. T.— Adams v. Gillig, 199 N. Y. 314, 92 N. E. 670, 32 L. R. A. (N. S.) 127, 20 Ann. Cas. 910; Kuel- ling v. Roderick Lean Mfg. Co. 183 N. Y. 78, 75 N. E. 1098, 2 L. R. A. (N. S.) 303, 111 Am. St. Rep. 691, 5 Ann. Cas. 124; Morris Canal Co. v. Emmett, 9 Paige, 168, 37 Am. Dec. Mich.— Smith v. Werlshoiser, 152 Mich. 177, 115 N. W. 964, 15 L. R. A. (N. S.) 1092, 125 Am. St. Rep. 388.406. N. C.— Robertson v. Ilalton, 156N. C. 215, 72 S. E. 316, 37 L. R. A. (N. S.) 298; Williamson v. Holt, 147 N. C. 515, 61 S. E. 384, 17 L. R. A. (N. S.) 240. Ohio.— Monroe v. Barclay, 17 Ohio St. 302, 93 Am. Dec. 620. Ohla.— Mt. Hope Nurseries v. Jack- son, 36 Okla. 273, 128 P. 250, 45 L. R. A. (N. S.) 243. Or.— Bailey v. Frazier, 62 Or. 142,124 P. 643. Pa.— Emery v. Third Nat. Bank, 314 Pa. 544, 171 A. S81; Rothermel v. Phillips, 292 Pa. 371, 141 A. 241, 61 A. L. R. 489; Levick v. Brother¬ line, 74 Pa. 149, 157. R. I.— Swift v. Rounds, 19 R. I. 527, 35 A. 45, 33 L. R. A. 561, 61 Am. St. Rep. 791. S. C.— Halsey v. Minnesota-South Carolina Land & Timber Co. 174 S. C. 97, 177 S. E. 29, 100 A. L. R. 1. Term.— Wynne v. Allen, 7 Baxt. 312, 32 Am. Rep. 562. Minn.— Meland v. Youngberg, 124 Minn. 446, 145 N. W. 167, Ann. Cas. 1915B, 775; Randall Printing Co. v. Sanitas Mineral Water Co. 120 Minn. 268, 139 N. W. 606, 43 L. R. A. (N. S.) 706. Miss.— Rimer v. Dugan, 39 Miss. 477, 77 Am. Dec. 687. Mo.— Younger v. Hoge, 211 Mo. 444, 111 S. W. 20, 18 L. R. A. (N. S.) 94; Wann v. Scullin, 210 Mo. 429, 109 S. W. 688; Webb v. Rockefeller, 195 Mo. 57, 93 S. W. 772, 6 L. R. A. (N. S.) 872; Powell v. Adams, 98 Mo. 598, 12 S. W. 295; Bryan v. Hitehcock, 43 Mo. 527. Neb.— Corny v. Paxton & G. Co. 78 Neb. 134, 110 N. W. 882, 10 L. R. A. (N. S.) 640. Nev.— Foulks Accelerating Air Mo- tOT Co. v. Thies, 26 Nev. 158, 65 P. 373, 99 Am. St. Rep. 684. N. R.— Ashuelot Sav. Bank v. Al- bee, 63 N. II. 152, 56 Am. Rep. 501. N. J.— Fivey v. Pennsylvania R. 502 REPLY ADD-14 Sec. Ill] §890ACTUAT. FRAUD— MISREPRESENTATIONS. absence of it he would not, in all reasonable probability, have entered into the contract or other transaction.9 Tex.— Buchanan v. Burnett, 102 Tex. 492, 119 S. W. 1141, 132 Am. St. Rep. 900; Goodrich v. Pendem Oil Corp. (Com. App.) 48 S. W. (2d) 606, reversing 29 S. W. (2d) 877; Corbett v. McGregor, 62 Civ. App. 354, 131 S. W. 422. Utah.— Hecht v. -Metzler, 14 Utah,408, 48 P. 37, 60 Am. St. Rep. 906. Vt.— Nichols v. Lane, 93 Vt. 87, 106 A. 592. Va.— Stuart Court Realty Corp. v. Gillespie, 150 Va. 515, 143 S. E. 741, 59 A. L. R. 334; Houghton v. Gray- bill, 82 Va. 573. IVash.— Conta v. Corgiat, 74 Wash. 28, 132 P. 746; Kohl v. Taylor, 62 Wash. 678, 114 P. 874, 35 L. R. A. (N. S.) 174. TV is.— German Nat. Bank v. Prince¬ton State Bank, 128 Wis. 60, 107 N. W. 454, 6 L. R. A. (N. S.) 556, 8 Ann. Cas. 502. Eng.— Pasley v. Freeman, 3 T. R. 51, 100 Eng. Reprint, 450, 12 Eng. Rul. Cas. 235. Annotation: 33 A. L. R. 944; 40 L. ed. 543. See 23 Am. Jur., Fraud and De¬ ceit, p. 939, § 141. 9. Grcenawalt v. Rogers, 151 Cal. 630, 91 P. 526 (citing the text); Spinks v. Clark, 147 Cal. 439, 82 P. 45 (quoting the text) ; Pennybacker v. Laidley, 33 W. Va. 624, 11 S. E. 39 (quoting the text). It is certainly incorrect to lay down this rule as it is often founj both in judicial opinions and text¬ books, namely: “The inducement must be so strong that without it the party would not have entered into the con¬ tract.” It is clearly impossible, from the nature of the case, to state such a future and contingent matter with absolute certainty; the mode in wLieh the rule is formulated in the text is the only one consistent with the truth, and is all that the law really means or can demand. In the great case of Attwood v. Small, 6 Clark & F. (Eng.) 232, 447, in which the whole doctrine of fraud was fully explained, Lord Brougham thus states this rule: “Now, my lords, what inference do 1 draw from these cases? It is this, that general fraudu¬ lent conduct signifies nothing; that general dishonesty of purpose signi¬ fies nothing; that attempts to over¬ reach go for nothing, unless all this dishonesty of purpose, all this fraud, all this intention and design, can bo connected with the particular trans¬ action, and not only connected with the particular transaction, but must be made to be the very ground upon which this transaction took place, and must have given rise to this contract.” The rule was also well expressed in Pulaford v. Richards, 17 Beav. 87, 96: “To use the expression of the Roman law, it must be a representa¬ tion dans locum contractui,— that is, a representation giving occasion to the contract,— the proper interpreta¬tion of which appears to me to be the assertion of a fact on which the person entering into the contract relied, and in the absence of which it is reasonable to infer that he would not have entered into it; or the sup¬ pression of a fact the knowledge of which it is reasonable to infer would have made him abstain from the con¬ tract altogether.” 503 REPLY ADD-15 Sec. Till §891ACTUAL FRAUD-MISREPRESENTATIONS. The misrepresentations must, however, be concerning something really material. Statements, although false, respecting matters utterly trifling, which cannot affect the value or character of the subject-matter, so that if the truth had been known the party would not probably have altered his conduct, are not an occasion for the interposi¬ tion of equity (see §898). [ Specific performance of a contract for the sale or ex¬ change of real property will in some jurisdictions be de¬ nied to a party who has made false statements in respect of a material matter, even though it appears that the other party did not rely on the statements.11] § 891. The Party Must be Justified in Relying on the Representation.— The foregoing requisite, that the represen¬ tation must be relied upon, plainly includes the supposition that the party is justified, under all the circumstances, in thus relying upon it. This branch of the rule presents by of conduct, it is impossible to say of any one sucb representation so made, that even if it had not been made, the same resolution would have been taken, or the same conduct followed. Where, therefore, in a negotiation be¬ tween two parties, one of them in¬ duces the other to contract on the faith of the representations made to him, any one of which has been un¬ true, the whole contract is considered in this court as having been obtained fraudulently. Who can say that the untrue statement may not have been precisely that which turned the scale in the mind of the party to whom it was addressed? The case is not at all varied by the circumstance that the untrue representation, or any of the untrue representations, may in the first instance have been the result of innoeent error. If, after the error has been discovered, the party who has innocently made the incorrect rep¬ resentation, suffers the other party to continue in error, and to act on the belief that no mistake has been made, this, from the time of the discovery, becomes, in the contemplation of this court, a fraudulent misrepresentation, even though it was not so originally.” The case of National Exch. Co. v. Drew, 2 Macq. 103, contains a very full and instructive discussion of fraud. The company sued defendants to recover a sum of money which it had advanced to enable them to pur¬ chase stocks of the company. De¬ fendants set up false representations, by which they were induced to make the purchase. The house of lords held that the loan and the purchase formed one transaction, and the fraud viti¬ ated the whole. 11. Shikes v. Gabelnick, 273 Mass. 201, 173 N. E. 495, 87 A. L. R. 1339. Annotation: 87 A. L. R. 1353. 505 REPLY ADD-16 [Pt. II, Ch. Ill§891 EQUITY JURISPRUDENCE. far the greatest practical difficulties in the decision of cases, because, although the rule is well settled, and is most clearly just, its application must depend upon the facts of each particular case, and upon evidence which is often obscure and conflicting. In determining the effect of a reliance upon representations, it is most important to ascertain, in the first place, whether the statement was such that the party was justified in relying upon it, or was such, on the other hand, that he was bound to inquire and examine into its correctness himself. In respect of this alternative, there is a broad distinction between statements of fact which really form a part of, or are essentially connected with, the substance of the transaction, and representations which are mere expressions of opinion, hope, or expectation, or are mere general commendations. It may be laid down as a general proposition that where the statements are of the first kind, and especially where they are concerning mat¬ ters which, from their nature or situation, may be assumed to be within the knowledge or under the power of the party making the representation, the party to whom it is made has a right to rely on them, he is justified in relying on them, and in the absence of any knowledge of his own, or of any facts which should arouse suspicion and cast doubt upon the truth of the statements, he is not bound to make inquiries and examination for himself.18 It docs not, 12. Cal.— Ferguson v. Koch, 204 Cal. 342, 268 P. 342, 58 A. L. R. 1176. Colo.— Jasper v. Bieknell, 62 Colo. 318, 162 P. 144. Conn.— Loverin y. Kuhne, 94 Conn. 219, 108 A. 554, 33 A. L. R. 848. Idaho.— Baird v. Gibberd, 32 Idaho, 796, 189 P. 56. III.— Kehl v. Abram, 210 111. 218, 71 N. E. 347, 102 Am. St. Rep. 158; Endsley v. Johns, 120 m. 469, 12 N. E. 247, 60 Am. Rep. 572. Kan.— International Harvester Co. v. Franklin County Hardware Co. 101 Kan. 488, 167 P. 1057. Ky.— Hanks v. M’Kee, 2 Lltt. 227, 13 Am. Dec. 265. Mass.— Lynch v. Palmer, 237 Mass. 150, 129 N. E. 374, 33 A. L. R. 842. N. U.— Stewart v. Steams, 63 N. H. 99, 56 Am. Rep. 496. Pa.— Bower v. Fenn, 90 Pa. 359, 35 Am. Rep. 662. S. I.— Handy v. Waldron, 18 R. I. 567, 29 A. 143, 49 Am. St. Rep. 794. Wash.— Pigott v. Graham, 48 Wash. 506 REPLY ADD-17 §891Sec. IT1] ACTUAL FRAUD— MISREPRESENTATIONS. under such circumstances, lie in the mouth of the person asserting the fact to object or complain because the other took him at his word ; if he claims that the other party was not misled, he is bound to show clearly that such party did know the real facts; the burden is on him of removing the presumption that such party relied and acted upon his statements.13 348, 93 P.(2d) 435, 14 L. R. A. (N. S.) 1176. R'ii.— International Mill. Co. v. Priem, 179 Wis. 622, 192 N. W. 68; Standard Mfg. Co. v. Slot, 121 Wis. 14, 98 N. W. 923, 105 Am. St. Rep. 1016. Annotation: 33 A. L. R. 897, et seq. j 61 A. L. R. 509. See 23 Am. Jur., Fraud and Deceit, p. 949, § 146; Am. Law Inst. Restate¬ ment, Torts, vol. 3, § 539. 13. U. S.— Patti* v. Semple (D. C.),12 F. (2d) 276, affirmed in (C. C. A. 7th) 18 F. (2d) 955; Odbert v. Mar- quet, 163 F. 892, affirmed, 175 F. 44, 99 C. C. A. 60. Ala.— King v. Livingston Mfg. Co. 180 Ala. 118, 60 So. 143 (that state¬ ments were incredible merely goes to the probability of their being relied upon) ; Wilks v. Wilks, 176 Ala. 151, 57 So. 776 (paraphrasing text) ; Sha- han v. Brown, 167 Ala. 534, 52 So. 737; Perry v. Boyd, 126 Ala. 162, 28 So. 711, 85 Am. St. Rep. 17. Arh.— Grant v. Ledwidge, 109 Ark. 297, 160 S. W. 200; Hunt v. Davis, 98 Ark. 44, 135 S. W. 458; Evatt v. Hudson, 97 Ark. 265, 133 S. W. 1023; Gammill v. Johnson, 47 Ark. 335, 1 S. W. 610. Cal.— Proctor v. Arakelian, 208 Cal.82, 280 P. 368; Ferguson v. Koch, 204 Cal. 342, 268 P. 342, 58 A. L. R. 1176; Tracy v. Smith, 175 Cal. 161, 165 P. 535; Davis v. Butler, 154 Cal. 623, 98 P. 1047; Wenzel v. Shulz, 78 Cal. 221, 20 P. 404; Bank of Wood¬ land v. Hiatt, 58 Cal. 234; Taber v. Piedmont Heights Bldg. Co. 25 Cal. App. 222, 143 P. 319; Brandt v. Krogh, 14 Cal. App. 39, 111 P. 275. Colo.— Jasper v. Bicknell, 62 Colo. 318, 162 P. 144. Conn.— Lovcrin v. Kuhne, 94 Conn. 219, 108 A. 554, 33 A. L. R. 848 (quoting the text) ; Lyman v. Lyman, 90 Conn. 399, 97 A. 312, L. R. A. 1916E, 643 (citing the text— facts pe¬ culiarly within knowledge of party making representations). III.— Hicks v. Stevens, 121 111. 186,11 N. E. 241 (quoting the text) ; Dill- man v. Nadlehoffer, 119 111. 567, 7 N. E. 88. Iowa.— Severson v. Kock, 159 Iowa, 343, 140 N. W. 220; Chase v. Wolga- mot, 137 Iowa, 128, 114 N. W. 614; Maine v. Midland Investment Co. 132 Iowa, 272, 109 N. W. 801. Kan.— Westcrman v. Cordcr, 86 Kan. 239, 119 P. 868, 39 L. A. A. (N. 8.) 500, Ann. Cas. 1913C, 60 (cit¬ ing the text) ; Circle v. Potter, 83 Kan. 363, 111 P. 479; Spoed v. Hol¬ lingsworth, 54 Kan. 436, 38 P. 496. Ky.— Western Mfg. Co. v. Cotton,126 Ky. 749, 104 8. W. 758, 12 L. R. A. (N. S.) 427; Morehead v. Fades, 3 Bush, 121 (a very instructive case). Mich.— Bailey v. Perkins, 224 Mich. 27, 194 N. W. 558; Smith v. Wcrk- heiser, 152 Mich. 177, 115 N. W. 964, 507 REPLY ADD-18 §891 [Pt. IT, Ch. IllEQUITY JURISPRUDENCE. The rule is equally well settled with respect to the second alternative. Where the representation consists of general commendations, or mere expressions of opinion, hope, ex¬ pectation, and the like, and where it relates to matters 15 L. R. A. (N. S.) 1092, 125 Am. St. Rep. 406. Ol-la.— Hood v. Wood, 61 Okla. 294, 161 P. 210 (statements as to value) j Halsell v. First Nat. Bank, 48 Olda. 535, 150 P. 4S9, L. R. A. 1916B, 697. Or.— Ziegler v. Stinson, 111 Or. 243, 224 P. 641; Davis v. Mitchell, 72 Or. 165, 142 P. 788; Bonelli v. Burton, 61 Or. 429, 123 P. 37; Steen v. Weis- ten, 51 Or. 473, 94 P. 834 (vendor’s statement as to quality of timber on land sold). Pa.— Sutton v. Morgan, 158 Pa. 204, 27 A. 894, 38 Am. St. Rep. 841. R. I.— Smith v. Rhode Island Co. 39 R. X. 146, 98 A. 1. Tex.— Buchanan v. Burnett, 102 Tex. 492, 119 S. W. 1141, 132 Am. St. Rep. 900; Labbe v. Corbett, 69 Tex. 503, 6 S. W. 808; A1 Parker Securi¬ ties Co. v. Owen (Com. App.) 1 S. W. (2d) 271; Graves v. Haynes (Com. App.) 231 8. W. 383; Bell v. Henson (Civ. App.) 74 S. W. (2d) 455; Cap- len v. Cox, 42 Civ. App. 297, 92 S. W. 1048. Vt.— Jones v. Stearns, 97 Vt. 37, 122 A. 116, 31 A. L. R. 653; Cromp¬ ton v. Beedle, 83 Vt. 287, 75 A. 331, 30 L. R. A. (N. S.) 748, Ann. Cas. 1912A, 399. Va.— Fitzgerald v. Frankel, 109 Va.603, 64 S. E. 941; Rorer Iron Co. v. Trout, 83 Va. 397, 2 S. E. 713, 5 Am. St. Rep. 285; Linhart v. Foreman's Adm’r, 77 Va. 540; Hull v. Fields, 76 Va. 594. Wash.— Fischer v. Hillman, 68 Wash. 222, 122 P. 1016, 39 L. R. A. (N. S.) 1140 (vendor’s assertion as to his title) ; McMullen v. Rousseau, Minn.— Maxfield v. Schwartz, 45 Minn. 150, 47 N. W. 448, 10 L. R. A. 606. Mo.— State ex rel. Union P. R. Co. , v. Bland, 324 Mo. 601, 23 S. W. (2d) 1029; Davis v. Forman, 229 Mo. 27, 129 S. W. 213; McGhee v. Bell, 170 Mo. 121, 70 S. W. 493, 59 L. R. A. 761; Cottrill v. Krum, 100 Mo. 397, 13 S. W. 753, 18 Am. St. Rep. 549; Brolaski v. Carr, 127 Mo. App. 279, 105 S. W. 284. Mont.— Post v. Liberty, 45 Mont. 1, 121 P. 475. Neb.— Hoock v. Bowman, 42 Neb. 80, 60 N. W. 389, 47 Am. St. Rep. 691. N. li.— Conway Nat. Bank v. Pease, 76 N. H. 319, 82 A. 1068. N. J.— Turner v. Kuehnle, 70 N. J. Eq. 61, 62 A. 327; MeMichaol v. Web¬ ster, 57 N. J. Eq. 295, 41 A. 714, 73 Am. St. Rep. 630. N. M..— Wilson v. Robinson, 21 N. M. 422, 155 P. 732, Ann. Cas. 1918C, ■1!'. N. Y.— Wilcox v. American Teleph.& Teleg. Co. 176 N. Y. 115, 68 N. E. 153, 98 Am. St. Rep. 650. N. C.— White Sewing Mach. Co. v.Bullock, 161 N. C. 1, 76 S. E. 634; Griffin v. Roanoke R. & Lumber Co. 140 N. C. 514, 53 S. E. 307, 6 L. R. A. (N. S.) 463. N. D.— Elliott Supply Co. v. Lish, 36 N. D. 640, 163 N. W. 271; Liland v. Tweto, 19 N. D. 551, 125 N. W. 1032 (statements as to value). 508 REPLY ADD-19 Sec. Ill] §891ACTUAL FRAUD— MISREPRESENTATIONS. which, from their nature, situation, or time, cannot be sup¬ posed to be within the knowledge or under the power of the party making the statement, the party to whom it is made is not justified in relying upon it and assuming it to be true; he is bound to make inquiry and examination for himself so as to ascertain the truth; and in the absence of evidence, it will be presumed that he has done so, and acted upon the result of his own inquiry and examination.14 Any repre- 40 Wash. 497, 82 P. 883; Mulholland v. Washington Match Co. 35 Wash. 315, 77 P. 497. Win.— Baker v. Becker, 153 Wis. 369, 141 N. W. 304. Eng.— Redgrave v. Hurd, L. R. 20 Ch. Div. 1, 51 L. J. Ch. N. S. 113, 45 L. T. N. S. 485, 30 Week. Rep. 251— C. A.; Reynoll v. Sprye, 1 De Gex, M. & G. 660, 42 Eng. Reprint, 710. Annotation: 33 A. L. R. 903, et seq.; 61 A. L. R. 497, 509. See 23 Am. Jur., Fraud and Deceit, pp. 948, 970, §§ 146, 161; Am. Law Inst. Restatement, Torts, vol. 3, § 538. Comment j; § 540. In Leyland v. Illingworth, 2 De Gex, F. & J. (Eng.) 248, 253, 254, in which it was held that the purchaser had a right to rely on a certain state¬ ment made by the vendor, and was not bound to inquire for himself, Turner, L. J., said: “If the question had been, whether the supply of water was adequate or inadequate, the case would probably have fallen within tho authorities referred to, in opposition to the purchaser’s claim. It would have been a question of opinion, not of fact, and the purchaser would have been put upon inquiry. But there is no such question in this case. The description is a representation of a fact/’ etc. 14. V. S.— Southern Development Co. v. Silva, 125 U. S. 247, 31 L. cd. 678, 8 S. Ct. 881; Dalhoff Constr. Co. v. Block (C. C. A. 8th) 157 F. 227, 85 C. C. A. 25, 17 L. R. A. (N. S.) 419 (estimate of cost of steel bars or¬ dered). Ala.— Camp v. Camp, 2 Ala. 632, 36 Am. Dec. 423. Ark.— McDonald v. Smith, 95 Ark. 523, 130 S. W. 515 (citing the text); Collins v. Southern Brick Co. 92 Ark. 504, 123 S. W. 652, 135 Am. St. Rep. 197, 19 Ann. Cas. 882 (promise to subscriber that he would be retained as manager of the company) ; Kin¬ caid v. Price, 82 Ark. 20, 100 S. W. 76 (citing the text— statement as to market value of hay). Cal.— Lee v. McClelland, 120 Cal. 147, 52 P. 300; Coleman v. Dawson, 110 Cal. App. 201, 294 P. 13. Fla.— Williams v. McFadden, 23 Fla. 143, 1 So. 618, 11 Am. St. Rep. 345. Ga.— Collier v. Harkness, 26 Ga. 362, 71 Am. Dec. 216 (expected prof¬ its of mill). Ind.— Foley v. Cowgill, 5 Blackf. 18, 32 Am. Dec. 49. Iowa.— Garrett v. Slavens, 129 Iowa, 107, 105 N. W. 369. Kan.— Parker v. Hutchinson Motor Car Co. 127 Kan. 765, 274 P. 1115; Field v. Reno County, 107 Kan. 397, 191 P. 315; Graffenstein v. Epstein & Co. 23 Kan. 443, 33 Am. Rep. 171. 509 REPLY ADD-20 [Pt. IT, Ch. Ill§891 EQUITY JURISPRUDENCE. sentation, in order that one may be justified in relying upon it, must be, in some degree at least, reasonable; at all events, it must not be so self-contradictory or absurd that no reasonable man could believe it. It must not, also, be so vague and general in its terms that it conveys no certain meaning.15 Me.— Thompson v. Phoenix Ins. Co. 75 Me. 55, 46 Am. Rep. 357. Mass.— Mabardy v. McHugh, 202Mass. 148, 88 N. E. 894, 23 L. R. A. (N. S.) 487, 132 Am. St. Rep. 484, 16 Ann. Cas. 500 (estimate of the area of a tract of land) ; Poland v. BrowneU, 131 Mass. 138, 41 Am. Rep. 215; Parker v. Moulton, 114 Mass. 99, 19 Am. Rep. 315. Miss.— Anderson v. Burnett, 5 How. 165, 35 Am. Dec. 425. IV. H.— Stewart v. Stearns, 63 N. H. 99, 56 Am. Rep. 496. N. J.— Industrial Savings & L. Co. v. Plummer, 84 N. J. Eq. 184, 92 A. 583, L. R. A. 1915C, 613. N. C.— Erskine v. Chevrolet Motors Co. 185 N. C. 479, 117 S. E. 706, 32 A. L. R. 196; Williamson v. Holt, 147 N. C. 515, 61 S. E. 384, 17 L. R. A. (N. S.) 240; National Cash Register Co. v. Townsend, 137 N. C. 652, 50 S. E. 306, 70 L. R. A. 349. I’a.— Fulton v. Hood, 34 Pa. 365, 75 Am. Dec. 664. R.1.— Smith v. Rhode Island Co. 39 R. I. 146, 98 A. 1 (citing the text). Tex.— Mitchell v. Zimmerman, 4 Tex. 75, 51 Am. Dec. 717. (general statements of the expecta¬ tions, prospects and capacities of a mine) ; Scott v. Hanson, 1 Sim. 13, 1 Russ & M. 128, 2 Chafee & Simpson, Cas. Eq. 1274 (statement that land sold “was uncommonly rich water- meadow” held only a general com¬ mendation) ; Hume v. Pocock, L. R. 1 Ch. 379, 1 Eq. 423 (mere assertion by a vendor that he had a good title) ; Fenton v. Browne, 14 Ves. 144. See 23 Am. Jur., Fraud and De¬ ceit, pp. 975, 976, §165; Am. Law Inst. Restatement, Torts, Vol. 3, § 542. See, also, §§ 878, et seq. 15. Bank of Havelock v. Western U. Teleg. Co. (C. C. A. 8th) 141 F. 522, 72 C. C. A. 580, 4 L. R. A. (N. S.) 181, 5 Ann. Cas. 515; McGar v. Williams, 26 Ala. 469, 62 Am. Dec. 739; Security Trust Co. v. O’Hair, 103 Ind. App. 56, 197 N. E. 694 (rehear¬ ing denied in 199 N. E. 602) ; Mt. Hope Nurseries Co. v. Jackson, 36 Okla. 273, 128 P. 250, 45 L. R. A. (N. S.) 243; Barndt v. Frederick, 78 Wis. 1, 47 N. W. 6, 11 L. R. A. 199. Scott v. Hanson, 1 Sim. (Eng.) 13, 1 Russ & M. 128, 2 Chafee & Simpson, Cas. Eq. 1274; Trower v. Newcome, 3 Mer. 704, 1 Ames, Cas. Eq. Juris, 352 (statement by an auctioneer at the sale of an advowson “that the living would be void on the death of a per¬ son aged 82,” when in fact the pres¬ ent incumbent was aged 32, but ex¬ pected to change to another living on the death of its incumbent, aged 82— Va.— Rorer Iron Co. v. Trout, 83 Va. 397, 2 S. E. 713, 5 Am. St. Rep. 285. Eng.— Pasley v. Freeman, 3 T. R.51, 100 Eng. Reprint, 450, 12 Eng. Rul. Cas. 235; Jennings v. Broughton, 5 De Gcx, M. & G. 126, 17 Beav. 234 510 REPLY ADD-21 Sec.mi § 898aACTUAL FRAUD-MISREPRESENTATIONS. [We have seen (§ 894) that it is not true as a general rule that recovery for fraud may only be had by one who has exercised the care of an ordinarily prudent man. Similarly, as expressed by the American Law Institute,8 “It is not essential to constitute fraud, . . . that the mis¬ take intended or expected shall be material, judged by the opinion of reasonable men. It is enough that the mistake is intended or expected to induce either affirmative or nega¬ tive conduct with reference to contractual relations. The law gives no privilege to cunning sharpers to induce foolish or ignorant persons to act or to refrain from acting by means of representations of facts to which wiser persons would attach no importance.”] §898a. Necessity for Pecuniary Injury or Damage.—The statement of facts of which the misrepresentation con¬ sists must not only be relied upon as an inducement to some action, but it must also be so material to the interests of the party thus relying and acting upon it that he is pecuniarily prejudiced by its falsity; is placed in a worse position than he otherwise would have been. The party must suffer some pecuniary loss or injury as the natural consequence of the conduct induced by the misrepresenta¬ tion. In short, the representation must be so material that its falsity renders it unconscientious in the person making it to enforce the agreement or other transaction which it has caused. Fraud without resulting pecuniary damage is not a ground for the exercise of remedial jurisdiction, equitable or legal; courts of justice do not act as mere tribunals of conscience to enforce duties which are purely moral.7 If any pecuniary loss is shown to have resulted, F. 922, 137 C. C. A. 492; In re Miley, 187 F. 177 (quoting the text) ; Seeley v. Reed, 25 F. 361. Ala.— Crooker v. White, 162 Ala. 476, 50 So. 227. Cal.— Davis v. Butler, 154 Cal. 623, 98 P. 1047 (not necessary for pur- 6. Restatement, Contracts, § 471, Comment i (copyright 1932 by the American Law Institute). 7. XJ. 8.— Clarke v. White, 12 Pet. 178, 9 L. ed. 1046; Whitcomb v. Shultz, 223 F. 268, 138 C. C. A. 510; National Leather Co. v. Roberts, 221 535 REPLY ADD-22 [Pt. TT, Ch. HI§ 898a EQUITY JURISPHUDENCE. the court will not inquire into the extent of the injury; it is sufficient if the party misled has been very slightly prejudiced, if the amount is at all appreciable. Eng.— Fellowes v. Gwydyr, 1 Sira. 63, 1 Russ. & M. 83. Annotation: 106 A. L. R. 136. Fellowes v. Lord Gwydyr, 1 Sim. 63, 1 Russ. & M. 83, is a very instruc¬ tive case. The defendant, as vendee, entered into a contract of purchase, as he supposed, with one B, through the active instrumentality of A, who falsely represented himself as an agent for B. It turned out that A was the real party in interest, and he sought to enforce the contract. The misrepresentation was set up as a defense. There was nothing proved from which it could be inferred that the defendant would not have made the same contract, on the same terms, with A himself ; nor was it shown that he had sustained any loss, dam¬ age, or inconvenience from the false statements. The court therefore held the misrepresentations to be imma¬ terial, and to be no defense. Compare New York Brokerage Co. v. Wharton, 143 Iowa, 61, 119 N. W. 969, as to mistake in identity of vendee as a defense to specific performance. That a mistake or fraud concerning the identity of a buyer or purchaser will prevent a seeming contract from becoming operative, sec annotation: 106 A. L. R. 164; and see 23 R. C. L. p. 1298, § 113. And see Olson v. Pettibone, 168 Minn. 414, 210 N. W. 149, 48 A. L. R. 913. 8. Sprockets v. Gorrill, 152 Cal. 383, 92 P. 1011; Wainscott v. Occi¬ dental, etc., Ass'n, 98 Cal. 253, 33 P. 88; Jakway v. Proudfit, 76 Neb. 62, 106 N. W. 1039, 109 N. W. 388, 14 Ann. Cas. 258; Bowker v. Cun- s chaser to show that property was worth less than he paid; sufficient that, if representations were true, property would have been worth more than it is actually worth); Marriner v. Dennison, 78 Cal. 202, 20 P. 386; Reay v. Butler, 69 Cal. 572, 580, 11 P. 463; Woodson v. Winchester, 16 Cal. App. 472, 117 P. 565; Eichelber- ger v. Mills Land & Water Co. 9 Cal. App. 628, 100 P. 117. Fla.— Pryor v. Oak Ridge Develop¬ ment Corp. 97 Fla. 1085, 119 So. 326. III.— Bartlett v. Blaine, 83 111. 25,25 Am. Rep. 346. Me.— Dubovy v. Woolf, 127 Me. 269, 143 A. 58 (rule stated). Neb.— Ilowells State Bank v. Ilekr- dle, 113 Neb. 561, 203 N. W. 1005; .Jakway v. Proudfit, 76 Neb. 62, 106 N. W. 1039, 109 N. W. 388, 14 Ann. Cas. 258 (quoting the text). N. H.— Record v. Rochester Trust Co. 89 N. H. 1, 192 A. 177, 110 A. L. R. 1218 (citing the text). N. J.— Marsh v. Cook, 32 N. J. Eq. 262. Or.— Ziegler v. Stinson, 111 Or. 243, 224 P. 641 (quoting the text). Tex.— Nance v. McClellan, 126 Tex. 580, 89 S. W. (2d) 774, 106 A. L. R. 117; Bryant v. Vaughan (Tex.), 33 S. W. (2d) 729, reversing (Tex. Civ. App.) 1 S. W. (2d) 667; Russell v. Industrial Transp. Co. 113 Tex. 441, 251 S. W. 1034, 258 S. W. 462, 51 A. L. R. 1 (stating that “the safe and true rule” is that announced by Professor Pomeroy) ; Hoeldtke v. liorstman, 61 Tex. Civ. App. 148, 128 S. W. 642 (quoting the text). 536 REPLY ADD-23 [Pt. IT, Ch. Ill§955 EQUITY JURISPRUDENCE. § 955. II. Transactions Presumptively Invalid between Persons in Fiduciary Relations.— It is of the utmost im¬ portance to obtain an accurate conception of the exact cir¬ cumstances under which the equitable principle now to be examined applies; otherwise the entire discussion of the doctrine will be confused and imperfect. In the various in¬ stances described in the preceding paragraphs there has been an actual undue influence consciously and designedly St. Rep. 450; Boynton v. Hubbard, 7 Mass. 112 (the opinion of Parsons, C. J., contains a full and admirable discussion of the doctrine concerning this class of contracts). Bcnyon v. Pitch, 35 Bcav. (Eng.) 570; Pennell v. Millar, 23 Beav. 172; In re Slater’s Trusts, L. R. 11 Ch. Div. 227; Aylesford v. Morris, L. R. 8 Ch. 484; Bernal v. Donegal, 3 Dow, 133, 1 Bligh, N. S. 594; Aldborough v. Trye, 7 Clark & P. 436, 462, 464; Crowe v. Ballard, 3 Brown Ch. 117, 120; Gwynne v. Heaton,1 Brown Ch. 1, 9; Davis v. Marlborough, 2 Swanst. 174; Pox v. Wright, 6 Madd. Ill; Curling v. Townshend, 19 Ves. 628; Wharton v. May, 5 Ves. 27; Chester¬ field v. Janssen, 2 Ves. Sr. 125, 157, 1 Lead. Cas. Eq., 4th Am. ed. 773, 809, 825. See 12 Am. Jur., Contracts, p. 686, § 184. It is unreasonable and against pub¬ lic policy that one should be allowed, by an irrevocable agreement, not only to denude himself of all control of all his property, of every nature whatever, which he at the time pos¬ sesses, but also of all he may after¬ ward acquire, and such an agreement will .not be enforced. See 12 Am. Jur., Contracts, p. 686, § 184. Where an expectant heir or suc¬ cessor, upon a present consideration, makes a secret agreement to convey or pay to the creditor a large but uncertain portion of the ostate which he may inherit or succeed to in case he survives his parent or other an¬ cestor, 9uch contract is equally ob¬ noxious to the equitable doctrine, and will be set aside. Boynton v. Hubbard, 7 Mass. 112. But an agreement by such an heir or successor, made with the consent of his ancestor, and for a fair con¬ sideration, to convey the property which may afterwards come to him by descent or succession, is valid. Pitch v. Pitch, 8 Pick. (Mass.) 480. As to fair and valid agreements among expectant heirs or successors to share the property which may come to them, see Trull v. Eastman, 3 Met. (Mass.) 121, 123, 37 Am. Dec. 126; Beckley v. Newlaud, 2 P. Wms. (Eng.) 182; Hyde v. White, 5 Sim. 524; Harwood v. Tooke, 2 Sim. 192; Wethered v. Wethered, 2 Sim. 183. In Edler v. Frazier, 174 Iowa, 46, 156 N. W. 182, an agreement for a contingent fee of twenty per cent of the total amount heirs would get on death of widow, when attorney rendered valuable services and avoided a lawsuit, was upheld. How far the various classes of agreements described in the fore¬ going paragraphs may be ratified, confirmed, and thus made valid, is considered in § 964. 788 REPLY ADD-24 §956See. IV] CONSTRUCTIVE FRAUD-INFERRED ETC. exerted upon a party who was peculiarly susceptible to ex¬ ternal pressure on account of his mental weakness, old age, ignorance, necessitous condition, and the like. The ex¬ istence of any fiduciary relation was unnecessary and im¬ material. The undue influence being established as a fact, any contract obtained or other transaction accomplished by its means is voidable, and is set aside without the neces¬ sary aid of any presumption. The single circumstance now to be considered is the existence of some fiduciary relation, some relation of confidence subsisting between two parties. No mental weakness, old age, ignorance, pecuniary distress, and the like, is assumed as an element of the transaction; if any such fact be present, it is incidental, not necessary,— immaterial, not essential. Nor does undue influence form a necessary part of the circumstances, except so far as undue influence, or rather the ability to exercise undue in¬ fluence, is implied in the very conception of a fiduciary re¬ lation, in the position of superiority occupied by one of the parties over the other, contained in the very definition of that relation. This is a most important statement, not a mere verbal criticism. Nothing can tend more to produce confusion and inaccuracy in the discussion of the subject than the treatment of actual undue influence and fiduciary relations as though they constituted one and the same doc¬ trine.8 § 956. The General Principle.— It was shown in the pre¬ ceding section (§§ 901, et seq.) that if one person is placed 2. The text is quoted or cited in many cases, including Cowen v. Adams (0. 0. A.), 78 F. 536, 552, 24 C. C. A. 198, 47 U. S. App. 676; Hemenway v. Abbott, 8 Cal. App. 450, 97 P. 190; Nichols v. McCarthy, 53 Conn. 299, 23 A. 93, 55 Am. Rep. 105; Stephens v. Collison, 249 111. 225, 94 N. E. 664; Beach v. Wilton, 244 111. 413, 91 N. E. 492; Gilmore v. Lee, 237 111. 402, 86 N. E. 568, 127 Am. St. Rep. 330; Thomas v. Whitney, 186 111. 225, 57 N. E. 808; Hill v. Hall, 193 Mass. 253, 77 N. E. 831; Pritchard v. Hutton, 187 Mich. 346, 153 N. W. 705; Thomas v. Thomas, 27 Olda. 784, 109 P. 825, 113 P. 1058, 35 L. R. A. (N. S.) 124, Ann. Cas. 1912C, 713 (husband and wife; review of cases); Holt v. Holt, 23 Okla. 639, 102 P. 187; Stringfellow v. Hanson, 25 Utah, 480, 71 P. 3052; Cheuvront v. Cheuvront, 54 W. Va. 171, 46 S. E. 233. 789 REPLY ADD-25 1 JOSEPH STORY, COMMENTARIES ON EQUITY JURISPRUDENCE (14TH ED. 1918) (EXCERPT) [REPLY ADD-25–REPLY ADD-28] COMMENTARIES ON EQUITY JURISPRUDENCE AS ADMINISTERED IN ENGLAND AND AMERICA BY JOSEPH STORY, LL.D. ONE OP THE JU8TICES OF THE SUPREME COURT OF THE UNITED STATES AND DANE PROFESSOR OF LAW IN HARVARD UNIVERSITY “Chancery is ordained to 6upply the Law, not to subvert the Law.’’ — LORD BACON.“ Iliscrgo ex partlbus juris, quldquid aut ex Ipsa re, ant ex elmlli, ant ox rnajore, mlnorove, nascl videbitur, attendere, atque ellcere, pertentando unamquamque partem juris, oporteblt." —Cio. De Invest. Lib. 2, cap. 22. FOURTEENTH EDITION BY W. H. LYON, JR., LL.B. 0/ the Raleigh, N.C., Bar ASSISTANT TO NORTH CAROLINA CODR COMMISSION OP 19C5 AUTHOR AND PUBLISHER OF A CIVIL DIQKST or NORTH CAROLINA DECISIONS IN THREE VOLUMES VOLUME I BOSTON LITTLE, BROWN, AND COMPANY 1918 REPLY ADD-26 §288] [CHAP. VI § 288. The Party Must Be Misled by the Misrepresentation. — In the next place the party must be misled by the misrepresenta¬ tion ; for if he knows it to be false when made, it cannot be said to influence his conduct, and it is his own indiscretion, and not any fraud or surprise, of which he has any just complaint to make under such circumstances.1 § 289. He Must Have Been Misled to His Injury. — And in the next place the party must have been misled to his prejudice or injury ; for Courts of Equity do not, any more than Courts of Law, sit for the purpose of enforcing moral obligations or correct¬ ing unconscientious acts, which are followed by no loss or damage. It has been very justly remarked, that to support an action at law for a misrepresentation there must be a fraud committed by the defendant, and a damage resulting from such fraud to the plaintiff.2 And it has been observed with equal truth by a very learned judge in equity, that fraud and damage coupled together will entitle the injured party to relief in any court of justice.3 § 290. [Fraudulent Conduct Must Result in Injury. — In order to sustain an action on a fraudulent contract, it is necessary that there be both allegation and proof of damage, at least to some extent. Fraud must concur with damage to be actionable. However grievous the fraudulent conduct may have been, no action will ordinarily lie if the defrauded party ratified the fraudu¬ lent act, whether with or without injury ; and so, if he was not cognizant of the real facts until the transaction was entirely con¬ summated, he cannot complain that a fraud has been perpetrated, if he has not been the loser thereby. It is fundamental, that no matter what the nature of the fraud or deceit, unless detriment has been occasioned thereby, plaintiff has no cause of action. If the deceit does not end in the making of the contract, but still further influences a party to the contract in his conduct under it, it is obviously a deceit of a continuous nature, of which the in¬ jured party may justly complain.4 Nor can the vitiating effect 1 See Pothier De Vente, n. 210. 8 Vernon v. Keys,12 East, 637, 638. J Bacon v. Bronson, 7 John. Chan. R. 201; Fellows v. Lord Gwydyr, 1 Simons, R. 63. t 4 Edward Barron Estate Co. v. Woodruff Co., 163 Cal. 561, 126 Pae. 351; Stacey v. Robinson, 184 Mo. App. 54, 168 S. W. 261; Donaldson v. Donaldson, 249 Mo. 228, 155 S. W. 791; Winkler v. Jerrue, 20 Cal. App. 555, 129 Pac. 804 ; McCarreU v. Hayes, 186 Ala. 323, 65 So. 62; Kuper v. Snethen, 96 Neb. 34, 146 N. W. 991; Morrison v. Martin, 84 Ct. 628, 80 Atl. 716; Wesselhoeft v. Schanze, 153 111. App. 443; Woodson v. Winchester, 16 Cal. App. 472, 117 Pac.565; Blumenfeld v.Stine, 42 Mise. ACTUAL OR POSITIVE FRAUD 294 REPLY ADD-27 § 369] [CHAP. VII tial or fiduciary relation between all the parties or between some of them, which is watched with especial jealousy and solicitude because it affords the power and the means of taking undue ad¬ vantage or of exercising undue influence over others. And others again are of a mixed character, combining in some degree the ingredients of the preceding with others of a peculiar nature ; but they are chiefly prohibited because they operate substantially as a fraud upon the private rights, interests, duties, or intentions of third persons, or uhconscientiously compromit, or injuriously affect the private interests, rights, or duties of the parties them¬ selves. § 370. [Constructive Fraud Defined. — What is called con¬ structive fraud does not necessarily negative integrity of purpose. It has been defined as an act which the law declares fraudulent without inquiry into its motive. Or, such contracts or acts as, though not originating in any actual evil design or contrivance to perpetrate a fraud, yet by their tendency to deceive or mislead, or to violate confidence, are prohibited by law. The use of the phrase “ constructive fraud ” has been severely criticized by the courts and law-writers as being misleading and unscientific, but it has become so fixed in the literature and terminology of the law that any attempt to substitute a more fitting name to the thing to which it is applied would result in confusion. The necessity of considering this phase of the law arises most frequently in con¬ troversies which grow out of dealings between persons when one occupies fiduciary or confidential relations to the other. As between such persons, a contract by which the one having the advantage of position profits at the expense of the other will be held presumptively fraudal and voidable, and the burden is placed. upon him who claims the benefits thereof to rebut that presump¬ tion by an affirmative showing that such contract was fairly procured without undue influence or other circumstance tending to impeach its fairness. Though strictly of differing signification, the phrases “ fiduciary relations” and “ confidential relations ” are ordinarily used as convertible terms and have reference to any relationship of blood, business, friendship, or association in which the parties repose special trust and confidence in each other and are in a position to have and exercise, or do have and exercise, influence over each other. The rule or presumption to which we have referred is more particularly applicable where one of the parties to such relation has by reason of his stronger character, greater ability, and wider experience, or by his hold upon the CONSTRUCTIVE FRAUD 350 REPLY ADD-28 [§ 372 affection, trust, and confidence of the other, obtained a dominat¬ ing influence over him.1] § 371. Cases of Contracts against Public Policy. — And in the first place let us consider the cases of constructive fraud which are so denominated on account of their being contrary to some general public policy or fixed artificial policy of the law.2 Among these may properly be placed contracts and agreements respecting marriage (commonly called marriage brokage contracts), by which a party engages to give another a compensation if he will negotiate an advantageous marriage for him. The civil law does not seem to have held contracts of this sort in such severe rebuke; for it allowed proxenetse, or match-makers, to receive a reward for their services, to a limited extent.3 And the period is comparatively modern in which a different doctrine was engrafted into the common law and received the high sanction of the House of Lords.4 § 372. Same. — The ground upon which Courts of Equity interfere in cases of this sort is not upon any notion of damage to the individuals concerned, but from considerations of public policy.5 Marriages of a suitable nature and upon the fairest 1 Lampman v. Lampman, 118 Iowa 140, 91 N. W. 1042; Rodes v. Bate, L. R. 1 Ch. 252; Frost v. Latham & Co., 181 Fed. 866; Mott v. Mott, 49 N. J. Eq. 192, 22 Atl. 997 ; Cole v. Getzinger, 96 Wis. 559, 71 N. W. 75; Madden v. Caldwell Land Co., 16 Idaho 59, 100 Pae. 358, 21 L. R. A. (N. S.) 332. 1 See Mr. Cox’s note to Osmond v. Fitzroy, 3 P. Will. 131 ; Newland on Contracts, ch. 33, p. 469, &e. By being contrary to public policy we are to understand that in the sense of the law they are injurious to, or subversive of, the public interests. See Chesterfiold v. Janssen, 1 Atk. 352; s. c. 2 Ves. 125. 3 Cod. Lib. 5, tit. 1, 1. 6. 4 Hall and Kean v. Potter, 3 P. Will. 76 ; 1 Eq. Cas. Abridg. 89, F ; s. c. 3 Lev. 411; Show. Pari. Cas. 76 ; 1 Fonbl. Eq. B. 1, ch. 4, § 10 ; Grisley v. CHAP. Vll] CASES OF CONTRACTS AGAINST PUBLIC POLICY Lother, Hob. R. 10; Law ». Law, Cas. temp. Talb. 140, 142; Vauxhall Bridge Company v. Spencer, Jae. R. 67. In Boynton v. Hubbard, 7 Mass. R. 112, Mr. Chief Justice Parsons said : “We do not recollect a contract which is relieved against in chancery as originally against public policy which has been sanctioned in Courts of Law as legally obligatory on the parties. For although it has been said in chancery that marriage brokage bonds are good at law but void in equity, yet no case has been found at law in which those bonds have been holden good.” But see Grisley v. Lother, Hob. R. 10, and a case cited in Hall v. Potter, 3 Levinz, R. 411, 412; 1 Fonbl. Eq. B. 1,‘ch. 4, § 10, note (r). 6 1 Fonbl. Eq. B. 1, ch. 4, § 10, note (r) ; Newland on Contracts, ch. 33, “Marriage brokage bonds which are not fraudulent onpp. 469 to 472. either party are yet void because they are a fraud on third persons, and a public misohief, as they have a tendency to'cause matrimony to be con¬ tracted on mistaken principles, and without the advice of friends, and they are relieved against as a general mischief for the sake of the public.” Per Parsons, Ch. Just, in Boynton v. Hubbard, 7 Mass. 112. 351