Kevin Schlosser Writes, "Amended CPLR 503(a) Venue Provision in Fraud Actions"

Amended CPLR 503(a) In 2017, the New York Legislature amended CPLR 503 to provide a new and additional basis for venue of a lawsuit: “the county in which a substantial part of the events or omissions giving rise to the claim occurred.” Federal practitioners will recognize that ground for venue as it has been available in the federal courts for years. The New York Committee Report of the State Assembly explained the rationale for the amendment as follows:

In civil actions, venue refers to the correct county in which to bring an action. In New York State, in the absence of a prior agreement, the options on where to place venue for a lawsuit are restrictive. Other than for controversies concerning ownership or use of property or chattel or against governmental entities, choice of venue is limited to the county of residence of one of the parties. A problem arises if both plaintiff and defendant are residents of a different county from the county in which the cause of action arose. In that case, proper venue is either in the county of residence of the plaintiff or defendant, but not where the incident occurred. This means that, absent residence of a party in the subject county, that county’s court system has no authority to hear controversies about unsafe premises, unsafe worksites, unsafe driving and a myriad of other scenarios within its borders. Nor are jurors from the subject community, with the most interest in setting community standards, able to hear such controversies. In addition, witnesses are often located in county where the events that are the subject of the action occurred.

This bill will also bring New York into conformance with federal courts which currently allow venue in “a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred” 28 U.S.C. § 1391(b) (2).

2017 NY A.B. 8032 (NS), 2017 New York Assembly Bill No. 8032, New York Two Hundred Fortieth Legislative Session, NEW YORK COMMITTEE REPORT. If you are taking a quick look through the list of available venue options in Article 5 of the CPLR, you could easily miss this relatively new basis for venue, because, as Professor Alexander laments in his CPLR Practice Commentaries: “Sadly, the Legislature failed to change the title of CPLR 503, which remains ‘Venue based on residence.’” The new rule has been effective since October 23, 2017. Application in Fraud Actions Since this amended provision of CPLR 503(a) tracks the language of the federal venue provision, the New York courts have a body of prior case law to consider in applying this venue provision in New York actions. That is precisely what the Appellate Division, Fourth Department, did in its recent decision in Harvard Steel Sales, LLC v Bain, 2020 NY Slip Op 05635, (4^th Dep’t Decided Oct. 9, 2020). In Bain, plaintiff brought an action for damages alleging that the defendant fraudulently induced plaintiff to enter into an agreement through certain misrepresentations and omissions. Defendant claimed that plaintiff improperly set the venue of the action in Erie County, instead of New York County, where defendant (the only party that resided in New York) resided. Plaintiff sought to rely on the amended provision of CPLR 503(a), claiming that Erie was “the county in which a substantial part of the events or omissions giving rise to the claim occurred.” The court below granted defendant’s motion to change venue, and on appeal, the Fourth Department affirmed. Interestingly, the Fourth Department held plaintiff to the strict (albeit entirely ambiguous) language of the affidavit it submitted in support of its choice of venue, serving as a lesson to the lawyer as wordsmith. Case Facts Plaintiff, based in Cleveland, Ohio, purchases steel, galvanizes it, and resells it. (Galvanization involves applying a protective zinc coating to steel.) Plaintiff entered into an agreement with Galvstar, LLC, a company that operated a steel galvanizing plant in the Buffalo, Erie County. Galvstar’s sole member was the individual defendant, who resided in New York County. Pursuant to the agreement, Galvstar agreed to galvanize plaintiff’s steel at its Buffalo plant. Plaintiff’s alleged a single cause of action in fraud, alleging that defendant fraudulently induced plaintiff to enter into the agreement through misrepresentations and omissions, including that defendant met in person with plaintiff’s sole member and falsely told him that Galvstar had the ability to galvanize “.018 x 60 wide steel” and to consistently produce “prime” quality galvanized steel. Plaintiff also alleged that defendant concealed Galvstar’s perilous financial condition. Plaintiff alleged that Galvstar ultimately processed the steel using deficient processes, thereby devaluing the steel. Defendant moved to change the place of trial to New York County pursuant to CPLR 510(1). In support of his motion, defendant submitted an affidavit claiming that the meeting mentioned in the complaint, at which defendant made the allegedly false statements, occurred not in New York State, but in Cleveland, Ohio. Thus, defendant contended that, because he is the only party who resided within New York State, venue is proper under CPLR 503(a) only in the county in which he resides, i.e., New York County. In opposition to the motion, plaintiff submitted the affidavit of its sole member, who claimed that he met with defendant in Buffalo “multiple times” during “the relevant time period (late 2012 through mid-2013),” defendant “misrepresented that Galvstar could consistently produce ‘prime’ quality galvanized steel from its Buffalo facility,” and that Galvstar subsequently devalued plaintiff’s steel at its Buffalo facility. The Fourth Department then sought to determine in fraud actions, what constituted “a substantial part of the events or omissions giving rise to the claim.” The Fourth Department relied upon federal precedent:

The legislature only recently added a provision to CPLR 503 (a) that allows venue based on the location of the events underlying the claim (see L 2017, ch 366), but the Federal Rules of Civil Procedure [sic] contain an identical provision (see 28 USC § 1391 [b] [2]), doubtless the model for the amended language in CPLR 503 (a). In determining whether venue is proper under that provision, the Second Circuit applies a two-part inquiry. First, the court must “identify the nature of the claims and the acts or omissions that the plaintiff alleges give rise to those claims” (Daniel v American Bd. Of Emergency Medicine, 428 F3d 408, 432 [2d Cir 2005]; see Gulf Ins. Co. v Glasbrenner, 417 F3d 353, 357 [2d Cir 2005]). Second, the court must “determine whether a substantial part of those acts or omissions occurred in the district where suit was filed, that is, whether ‘significant events or omissions material to [those] claim[s] . . . have occurred in the district in question’ ” (Daniel, 428 F3d at 432). In a fraud claim, the act giving rise to the claim is the alleged making of the fraudulent statement (see generally PJI 3:20). Consistent with that, federal courts have found venue to be proper based upon “where the defendant allegedly made the fraudulent statements” (Borumand v Assar, 192 F Supp 2d 45, 52 [WD NY 2001]; see Trois v Apple Tree Auction Ctr., Inc., 882 F3d 485, 493 [5th Cir 2018]; Nabong v Paddayuman, 289 F Supp 3d 131, 136 [D DC 2018]; Siegel v Ford, 2017 WL 4119654, *7 [SD NY, Sept. 15, 2017, No. 16-CV-8077 (JPO)]; PI, Inc. v Quality Products, Inc., 907 F Supp 752, 762 [SD NY 1995]).

The Fourth Department then sought to determine where the alleged fraudulent statements “that materially contributed to plaintiff’s decision to enter into the agreement” were made. The Court credited defendant’s affidavit that showed that the critical misrepresentations attributed to him were actually made in Cleveland, Ohio—which plaintiff did not dispute. Rather, plaintiff’s affidavit did not attribute specific false statements to defendant, other than that defendant “misrepresented that Galvstar could consistently produce ‘prime’ quality galvanized steel from its Buffalo facility.” The Court found that reference to be ambiguous since the “‘Buffalo facility’ may refer to the place where defendant was when he made the allegedly false statements or to the place where the steel was to be produced.” Thus, the Court concluded, “[w]ithout unambiguous allegations of specific false statements made by defendant in Erie County that contributed to plaintiff’s decision to enter into the agreement, we cannot conclude that the court abused its discretion in granting defendant’s motion to change the place of trial to New York County.” Commentary In fraud actions, CPLR 503(a) offers an additional place to set trial of the action – the place where the allegedly false statement(s) that materially induced or defrauded the plaintiff occurred. This decision shows that other events or occurrences that may relate to the fraud will not suffice. Of course, in describing where the material false statements were made, the plaintiff would be well-advised to be clear and unambiguous so as to allow the Court to understand the basis of venue.