Legal Memorandum: Presumption of Fraud against a Fiduciary

Issue: Under New York law, when fraud is alleged against a fiduciary, is actual fraud presumed?

As stated in In re Hunter, 190 Misc. 2d 593, 599, 739 N.Y.S.2d 916, 920-21 (Surr. Ct. 2002, under New York law, when fraud is alleged against a fiduciary, then fraud is presumed.  The burden then shifts to the trustee or other fiduciary to show the absence of fraud.  190 Misc. 2d 593, 599, 739 N.Y.S.2d 916, 920-21 (Surr. Ct. 2002).  The fraud alleged under such circumstances is designated as “constructive” (as opposed to actual) fraud.

Under the doctrine of constructive fraud, where a fiduciary relationship existed between two parties such that they were dealing on unequal terms due to one party’s weakness, dependence or trust justifiably reposed upon the other and unfair advantage is rendered probable, “‘the burden is shifted, the transaction is presumed void, and it is incumbent upon the stronger party to show affirmatively that no deception was practiced, no undue influence was used, and that all was fair, open, voluntary and well understood.'”

Mazza v. Fleet Bank, 16 A.D.3d 761, 762, 790 N.Y.S.2d 730, 731 (3d Dep’t 2005) (citations omitted).  Accord Williams v. Lynch, 245 A.D.2d 715, 717, 666 N.Y.S.2d 749, 752 (3d Dep’t 1997).  The In re Hunter court has explained:

This shifting of the burden is consistent with the long-standing tenets of law in this State pertaining to the nature of certain duties a fiduciary owes to a beneficiary.  Among these duties [is] the duty of utmost loyalty in all instances.  Also, where, as here, the […]

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