On June 18, 2024, Justice Ruchelsman of the Kings County Commercial Division issued a decision in Mind Ctrs. II, LLC v. Barr, 2024 NY Slip Op. 32111(U), upholding a recission claim because of alleged fraudulent inducement, explaining:
As a general rule, rescission of a contract is permitted for such a breach as. substantially defeats its purpose. It is not permitted for a slight, casual, or technical breach, but only for such as are material and willful, or, if not willful, so substantial and fundamental as to strongly tend to defeat the object of the parties in making the contract. Further, all parties to the agreement must be joined in any action for rescission.
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[A] rescission claim is improper if the plaintiff maintains an adequate remedy at law. Generally, actions for breach of contract that also contain rescission claims maintain an adequate remedy at law undermining the rescission claim. Thus, in order to justify the intervention of equity to rescind a contract, a party must allege fraud in the inducement of the contract; failure of consideration; an inability to perform the contract after it is made; or a breach in the contract which substantially defeats the purpose thereof. Thus, generally, a party’s unilateral mistake is a ground for rescission of a contract only where it was induced by fraud or other wrongful conduct by the other party. Consequently, it is not the mere monetary relief sought that bars a rescission claim on the grounds the plaintiff has an adequate remedy at law. Rather, where the entire contract was based upon a fraudulent misrepresentation then rescission is appropriate.
As noted, in this case, the complaint alleges the defendant’s committed fraud by omitting the debt that was owed.
It is well settled that to succeed upon a claim of fraud it must be demonstrated there was a material misrepresentation of fact, made with knowledge of the falsity, the intent to induce reliance, reliance upon the misrepresentation and damages. Further, to succeed upon a claim of fraudulent concealment it must be demonstrated that in addition to the above requirements there was a fiduciary or confidential relationship which would impose a duty upon the defendant to disclose material information. Moreover, even absent a fiduciary relationship a duty to disclose may arise under the special facts doctrine where one party maintains superior knowledge of essential facts as to render the entire transaction inherently unfair absent the disclosure. As with all fraud claims, these elements must each be supported by factual allegations containing details constituting the wrong alleged.
The complaint alleges that while Muir and MacMillan admitted debts were owned by the defendants they failed to disclose all the debts that were owed. These allegations are specific and detailed and are surely sufficient to survive a motion to dismiss.
Lastly, the defendants argue that a restoration of the status quo is impracticable and cannot be substantially restored. The defendants do not explain, in specific terms, why such restoration cannot take place other than to offer conclusory assertions about disruption and the fact the plaintiff has been running these companies for a year and a half. Thus, recission must return the parties to the same position they would have occupied had there been no contract. Moreover, the rule that rescission is not appropriate where the parties cannot be returned to the status quo is not applicable where the party against whom the rescission is sought is the wrongdoer exploiting the change in position to shield itself from the rescission. As the Court of Appeals
(Internal quotations and citations omitted).
observed in Butler v. Prentiss, 158 NY 49, 52 NE 652 [1899J, when, without fault on the part of the one defrauded it is impossible to restore the one guilty of the fraud to his original condition, the general rule of restoration is not strictly applied, because it would become a loophole for the escape of fraud. Equity takes a reasonable application of the rule by requiring whatever fair dealing requires under all the circumstances, but it does not permit the rule to become a shield for wrongdoing. In this case, the defendants, who have allegedly committed wrongdoing by concealing the debt owed cannot oppose rescission on the grounds the status quo cannot be restored.