Kevin Schlosser Authors, "Fraud Claims Can be Summarily Dismissed Where Reasonable Reliance is Lacking"

Every so often, courts use unfortunately loose language in their decisions that can be misconstrued or misapplied in subsequent cases. Broad, conclusory statements of certain propositions can then lead to the foundation of faulty conclusions: One decision uses the faulty language, then another decision relies on it, without explanation, and before you know it, the incorrect premise becomes the “law.”

The recent decision of the Appellate Division, First Department, in Securitized Asset Funding 2011-2, Ltd. v Canadian Imperial Bank of Commerce, 2018 NY Slip Op 08444 (1^st Dep’t Decided December 11, 2018) is an example of the use of a bit too broad and potentially misleading language.

First Department rules: “the issue of reasonable reliance is not subject to summary disposition”

The First Department issued a short and rather non-descript decision in a case in which the defendant asserted a “counterclaim for reformation or rescission of the [contract] based on unilateral mistake plus fraud.” Seeking summary judgment dismissing this counterclaim, the plaintiff argued that the element of reasonable reliance was lacking. In addressing that aspect of the appeal, the First Department ruled that plaintiff was not entitled to summary judgment because “the issue of reasonable reliance is not subject to summary disposition (see e.g. Brunetti v Musallam, 11 AD3d 280, 281 [1st Dept 2004]).”

Taken on its face, that ruling could potentially be misconstrued to mean that a case cannot be dismissed summarily based upon an argument that the element of reasonable reliance has not been established or adequately alleged. In fact, the First Department relied solely upon the Brunetticasecited above, which also was a rather conclusory decision with this misleadingly-broad language (emphasis added):

Furthermore, the motion court should not have resolved factual issues by determining, based on this record, that defendants established as a matter of law that plaintiff could not prove all the elements of his fraud claim. The issues of material misrepresentation and reasonable reliance, essential elements of a fraud claim, are not subject to summary disposition (see Texaco Inc. v Synergy Group Inc., 171 AD2d 788 [1991] [issue of materiality more properly left to jury to resolve]; Swersky v Dreyer & Traub, 219 AD2d 321 [1996], appeal withdrawn 89 NY2d 983 [1997] [issue of fact whether plaintiff reasonably relied on alleged statements]).

The two cases cited by the court in Brunetti do not support that broad proposition. Texaco Inc. v Synergy Group Inc. was a short Second Department decision that merely commented that “even if it is assumed that [defendant] misrepresented the status of the seven employees, the issue of whether it constituted a material misrepresentation is an issue more properly left to the jury to resolve.” The other decision, Swersky, was a thorough and detailed decision that itemized a series of issues of fact relating to the element of reasonable reliance, thereby simply showing that when there are such issues, summary judgment cannot be granted. That does not mean that summary dismissal can never be granted where the evidence of reasonable reliance is lacking.

Abundant Cases Show that Summary Dismissal is Appropriate Where Reasonable Reliance is Truly Absence

By way of example, there are decisions in every appellate court in New York – from the Court of Appeals to every Appellate Division — in which fraud claims were summarily dismissed based upon the lack of reasonable reliance:

Court of Appeals Decisions

Pappas v. Tzolis, 20 N.Y.3d 228, 233–34 (2012) (defendant’s motion to dismissed granted) (“Where a principal and fiduciary are sophisticated entities and their relationship is not one of trust, the principal cannot reasonably rely on the fiduciary without making additional inquiry. . . . Plaintiffs’ cause of action alleging fraud and misrepresentation must be dismissed for similar reasons. Plaintiffs principally allege that Tzolis represented to them that he was aware of no reasonable prospects of selling the lease for an amount in excess of $2,500,000. However, in the Certificate, plaintiffs ‘in the plainest language announced and stipulated that [they were] not relying on any representations as to the very matter as to which [they] now claim[ ] [they were] defrauded.’ Moreover, while it is true that a party that releases a fraud claim may later challenge that release as fraudulently induced if it alleges a fraud separate from any contemplated by the release, plaintiffs do not allege that the release was itself induced by any action separate from the alleged fraud consisting of Tzolis’s failure to disclose his negotiations to sell the lease.’” (internal citations omitted)

Centro Empresarial Cempresa S.A. v. America Movil, S.A.B., 17 N.Y.3d 269, 278–79 (2011) (defendant’s motion to dismiss granted) (“In addition to failing to allege that the release was induced by a separate fraud, plaintiffs have failed to allege that they justifiably relied on defendants’ fraudulent statements in executing the release. . . . Here, according to the facts alleged in the complaint, plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information. Yet they chose to cash out their interests and release defendants from fraud claims without demanding either access to the information or assurances as to its accuracy in the form of representations and warranties. In short, this is an instance where plaintiffs ‘have been so lax in protecting themselves that they cannot fairly ask for the law’s protection’.” (citation omitted)).

Arfa v. Zamir, 17 N.Y.3d 737, 739 (2011) (defendant’s motion to dismiss granted) (“Plaintiffs have failed to allege that the release was induced by a separate fraud (see Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 N.Y.3d 269 [2011] [decided today] ). Additionally, they have failed to allege that they justifiably relied on Zamir’s fraudulent misstatements in executing the release. By their own admission, plaintiffs, who are sophisticated parties, had ample indication prior to June 2005 that defendant was not trustworthy, yet they elected to release him from the very claims they now bring without investigating the extent of his alleged misconduct (see Centro, 17 N.Y.3d at 278; DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 153–154, 905 N.Y.S.2d 118, 931 N.E.2d 87 [2010] ). Dismissal of plaintiffs’ fraud cause of action is therefore appropriate.”)

J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 (2007) (defendants’ motion for summary judgment granted) (“A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information. Assuming that J.A.O. can meet the first two elements, we conclude that J.A.O. failed to raise a triable question of fact as to the reliance requirement because the evidence established that J.A.O.’s decision to purchase D.B. Brown’s stock was not dependent upon the payoff letter.” (internal citations omitted)).

First Department

Pate v. BNY Mellon-Alcentra Mezzanine III, LP, 163 A.D.3d 429, 430 (1st Dep’t 2018) (defendant’s motion to dismiss granted) (“The fraudulent inducement claim was correctly dismissed because the merger clause in the release is not a general merger clause but by its express terms supersedes ‘any prior term sheet or correspondence,’ which is the basis for plaintiff’s claims. Moreover, the release contains a ‘No Other Representations’ clause. For the foregoing reasons, the complaint fails to allege, in support of the fraudulent inducement claim, that plaintiff justifiably relied on defendants’ representations that he was entitled to a 10% participation interest in a certain nonparty entity.” (internal citations omitted)).

Johnson v. Cestone, 162 A.D.3d 526, 526–27 (1st Dep’t 2018) (defendants’ motion to dismiss granted) (“[T]he complaint fails to state a cause of action for fraud because plaintiff cannot show that in deciding to invest in WEP6 she reasonably relied on the alleged misrepresentations about the returns on her earlier investment in Worldview Entertainment Capital II. . . . “[P]laintiff acknowledged that there was no financial or operating history upon which to rely, that the investment was speculative, that the success of a film was dependent upon the uncertainties of public acceptance, and that the film might be abandoned and not completed. In light of these warnings, plaintiff, a sophisticated investor, should have known that the success of the film related to WEP2 would not be indicative of the success of films related to subsequent funds and that she should not rely on misrepresentations related to the returns on WEP2 in investing in WEP6 or the subsequent funds. . . . Given the failure to allege reasonable reliance, the complaint also fails to state a cause of action for negligent misrepresentation.” (internal citations omitted)).

Lantau Holdings Ltd. v. Orient Equal International Group Limited, 161 A.D.3d 714, 714–15 (1st Dep’t 2018) (defendants’ motion to dismiss granted) (“[P]laintiff’s failure to ask if the shares were subject to the lock-up negates the reasonable reliance element of negligent misrepresentation. For the same reasons, plaintiff has no cause of action for fraudulent concealment.” (internal citations omitted)).

MP Cool Investments Ltd. v. Forkosh, 142 A.D.3d 286, 288 (1st Dep’t 2016) (defendant’s motion to dismiss granted) (“[P]laintiff’s allegations do not establish justifiable reliance as required to prove fraud because plaintiff is a sophisticated investor that had the means available to it to learn the true nature and real quality of the investment it made.” (citation omitted)). 142 A.D.3d 286, 291–92 (defendant’s motion to dismiss granted) (“Plaintiff is an experienced and sophisticated investor. It did not plead facts to support the justifiable reliance element of fraud. Plaintiff had total, unfettered access to every aspect of DuCool’s company information both before and after its initial investment, even before it held a controlling interest in DuCool. Although learning through the due diligence conducted by its own technology and business consultants that there were frequent technological problems with DuCool products, some of them ‘severe,’ plaintiff proceeded to invest in the company. . . . There is no factual basis on which to conclude that the alleged fraud involved matters peculiarly within defendants’ knowledge, because plaintiff had the means to discover the truth behind any false claims about the condition of the company and whether this was a feasible investment.” (internal citations omitted)).

Second Department

Steinberg v. Armstrong Plumbing & Heating, Inc., 153 A.D.3d 1379, 1380 (2d Dep’t 2017) (defendants’ motion for summary judgment granted) (“[T]he plaintiff failed to establish, prima facie, that he reasonably relied on the alleged misstatement by the defendants’ employee. In addition, on their cross motion, the defendants established, prima facie, that the plaintiff did not reasonably rely on the alleged misstatement. In opposition, the plaintiff failed to raise a triable issue of fact.” (internal citations omitted)).

Jgk Industries, LLC v. Hayes NY Business, LLC, 145 A.D.3d 979, 980 (2d Dep’t 2016) (defendant’s motion to dismiss granted) (“[T]he complaint failed to sufficiently allege all of the elements of fraud. In particular, the complaint failed to allege sufficient facts to demonstrate that the plaintiff was justified in relying on the defendants’ alleged misrepresentations.” (internal citation omitted)).

Webb v. Greater New York Auto. Dealers Ass’n, Inc., 144 A.D.3d 1136, 1138–39 (2d Dep’t 2016) (defendant’s motion to dismiss granted) (“The plaintiff failed to state a cause of action for fraud or promissory fraud (first and third causes of action), as she merely alleged that the defendant entered into a contract with her concerning the terms and conditions of her employment lacking the intent to perform and, in any event, given her status as an at-will employee, she could not reasonably rely on the defendant’s alleged misrepresentations.” (internal citations omitted)).

Third Department

Lusins v. Cohen, 49 A.D.3d 1015, 1017–18 (3d Dep’t 2008) (defendants’ motion for summary judgment granted) (“Notably, the element of justifiable reliance has been found lacking ‘[w]here a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means.’. . . Inasmuch as the facts establish that the estate ‘could have discovered the underlying condition and true nature of [the entities] by ordinary intelligence or with reasonable investigation” by compelling a valuation, there can be no claim of justifiable reliance. Accordingly, Supreme Court properly dismissed the fraud cause of action.” (internal citations omitted)).

Scaturro v. Sutera, 57 A.D.3d 1283, 1284 (3d Dep’t 2008) (defendant’s motion for summary judgment granted) (“[T]he element of justifiable reliance is lacking here because the record shows that plaintiff did not rely on defendant’s indication of the property’s assessed value as a representation of its market value. Plaintiff testified that she believed the market value of the property was much higher than its assessed value, yet she agreed to the transfer at the lower amount in order to ‘get out of’ the stalemate with her sister. Accordingly, Supreme Court properly dismissed the fraud cause of action.”).

Marsh v. Hasbrouck, 37 A.D.3d 1010, 1011 (3d Dep’t 2007) (plaintiff’s motion for summary judgment dismissing defendants’ fraud counterclaim granted) (“Because reasonable inquiry could have established the true perimeters of the property, the allegation that plaintiff misrepresented the boundary line must fail. . . . That defendants’ own surveyors incorrectly depicted the boundary lines is not a failing attributable to plaintiff since the facts allegedly misrepresented were not peculiarly within his knowledge. The absence of reasonable reliance on plaintiff’s alleged representations distinguishes this case from Snyder v. Potter, 134 A.D.2d 664, 521 N.Y.S.2d 175 [1987], relied upon by Supreme Court.” (internal citations omitted)).

Fourth Department

Dolansky v. Frisillo, 92 A.D.3d 1286, 1288 (4th Dep’t 2012) (plaintiff’s motion for summary judgment dismissing defendant’s fraud counterclaim granted) (“[E]ven assuming, arguendo, that plaintiff or her broker misrepresented the condition of the garage, we conclude that defendants’ allegations of fraud on the part of plaintiff are insufficient to preclude an award of summary judgment dismissing the counterclaim. Defendants failed to raise a triable issue of fact with respect to whether they justifiably relied on the alleged misrepresentations, which is ‘a necessary element of any fraud claim’. There is no justifiable reliance ‘[w]here a party has the means to discover [a falsehood] by the exercise of ordinary intelligence, and fails to make use of those means’. Here, . . . defendants were given specific notice of possible defects in the garage, and “[t]here is nothing which demonstrates that [defendants were] in any way barred from making an adequate physical inspection of the [garage]’.” (internal citations omitted)).

Ruffino v. Neiman, 17 A.D.3d 998, 1000 (4th Dep’t 2005) (defendant’s motion for summary judgment granted) (“Reasonable reliance on the alleged misrepresentations is a necessary element of both fraudulent and negligent misrepresentation and, where the alleged misrepresentations conflict with the terms of a written agreement, there can be no reasonable reliance as a matter of law. Here, the alleged misrepresentations of defendant and his nurse directly conflict with the terms of the written consent and thus plaintiff ‘cannot be said to have justifiably relied on the alleged misrepresentation[s].’” (internal citations omitted)).

Commentary

Obviously, seemingly broad propositions of law in court decisions should be scrutinized. As the above shows, when the facts and circumstances of a case justify, fraud claims can and should be dismissed when the element of reasonable reliance has either not be adequately alleged or established by relevant evidence. *The Author wishes to thank Adreama Mackey-Ponte for her assistance in researching for this article.

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