Illuminex Diamonds Corp. v. Chou, 1:18-cv-01751

Background

In March–April 2016 a chauffeur (Irfan Zayee) sold a 6.29‑carat diamond that had belonged to Veronica Chou; the diamond changed hands several times and Illuminex purchased it for ~$144,142.
On April 2, 2016 Chou reported the diamond stolen and later sued Illuminex seeking its return, submitting an affidavit swearing the diamond was stolen and implicating a household employee.
Illuminex, relying on Chou’s sworn theft claim, entered a November 1, 2016 settlement: Illuminex returned the diamond to Chou in exchange for $55,000 and a general release of claims (while reserving enforcement of the agreement’s obligations).
In November 2017 criminal charges against the chauffeur were dropped after he told authorities that Klyucharev had given him the diamond to sell; evidence suggested Klyucharev used the proceeds for drugs/prostitutes and that Chou knew of his conduct.
Illuminex sued Chou and Klyucharev (Feb. 2018) for fraud and fraudulent inducement, alleging Chou falsely represented the diamond was stolen to induce the settlement; Chou moved to dismiss under Rules 12(b)(6) and 9(b).
The court denied Chou’s motion, concluding Illuminex sufficiently pleaded fraud and fraudulent inducement with the particularity Rule 9(b) requires, so the settlement release did not bar the action.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the settlement release bars Illuminex’s fraud claims	Release is voidable for fraud in the inducement; Chou’s sworn theft claim induced the settlement	General release precludes claims and should not be set aside on speculation; tabloid evidence is insufficient	Fraud exception applies if fraud is adequately pleaded; court found complaint sufficiently pleads fraud, so release does not preclude the suit
Whether the complaint states a claim for fraud under NY law	Chou materially misrepresented that the diamond was stolen, knew it was false, intended to induce settlement, Illuminex relied and was injured	Implied challenge: allegations speculative and rely on hearsay/tabloid; no competent evidence of intent	Complaint alleges each element (material misrepresentation, knowledge, intent, reasonable reliance, injury); court finds allegations sufficient to state fraud
Whether the complaint states a claim for fraudulent inducement	Same as fraud plus that statements were made to induce settlement and reliance was justifiable	Illuminex was sophisticated and had opportunities to investigate; reliance may be unreasonable	Court finds plaintiff pled elements of fraudulent inducement and reliance is a factual issue unsuited to dismissal
Whether the fraud allegations satisfy Fed. R. Civ. P. 9(b) particularity	Complaint identifies the false statements, speaker, where/when made (complaint and affidavit in Chou Action), explains falsity and alleges motive/opportunity	Evidence cited (Daily Mail) is hearsay/tabloid; insufficient to show intent with particularity	Complaint meets Rule 9(b): specifies statements, speaker, time/place, explains why false and pleads facts yielding a strong inference of intent (motive/opportunity)

Key Cases Cited

Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading must state a claim that is plausible on its face)
Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading standard requires more than labels and conclusions)
Lerner v. Fleet Bank, N.A., 459 F.3d 273 (2d Cir. 2006) (Rule 9(b) particularity requirements for fraud)
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (2d Cir. 2015) (need for strong inference of fraudulent intent)
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994) (motive and opportunity as means to infer intent)
Fin. Guar. Ins. Co. v. Putnam Advisory Co., LLC, 783 F.3d 395 (2d Cir. 2015) (elements of fraud under New York law)
Moore v. PaineWebber, Inc., 189 F.3d 165 (2d Cir. 1999) (materiality standard for misrepresentations)
Mangini v. McClurg, 24 N.Y.2d 556 (N.Y. 1969) (fraud is a ground to set aside a release)
Hallock v. State of N.Y., 64 N.Y.2d 224 (N.Y. 1984) (fraud, mistake or duress can relieve parties from stipulations in litigation)
Joint Venture Asset Acquisition v. Zellner, 808 F. Supp. 289 (S.D.N.Y. 1992) (releases may be attacked for fraud in the inducement)