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Court Declines to Determine Whether Due Diligence Could Have Uncovered an Alleged Fraud in Light of The Documents Provided to the Plaintiff

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  • Posted on: Jan 21 2019

To plead a fraud or fraudulent inducement claim, a plaintiff must allege the following: “a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817, 827 (2016) (internal citations and quotation marks omitted). Each element must be satisfied. Many plaintiffs, however, often fail to do so.

Today’s post looks at Levinson v. Twiage, LLC, 2019 N.Y Slip Op. 30131(U) (Sup. Ct. N.Y. Cnty. Jan. 14, 2019) (here), a case involving the justifiable reliance element of a fraud claim. In Levinson, the Court denied a motion dismiss, finding that the concealment of information in documents available to the plaintiffs negated a claim that the plaintiffs could have uncovered the fraud with reasonable diligence.

A Brief Primer on the Justifiable Reliance Element of a Fraud Claim

In a prior post, this Blog discussed the justifiable reliance element of a fraud claim and the difficulties encountered by sophisticated plaintiffs in defeating a motion to dismiss on that ground. (Here.) As noted in that post:

Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Curran, Cooney, Penney v. Young & Koomans, 183 A.D.2d 742, 743) (2d Dept. 1992) (“if the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”) (citation and internal quotation marks omitted). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322 (1959).  Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element. E.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas, 95 A.D.3d 614 (1st Dept. 2012).

Levinson v. Twiage, LLC


Plaintiffs brought an action for breach of an investment agreement, breach of fiduciary duty, and fraudulent inducement, seeking rescission of the parties’ agreement and restitution of their investments in Twiage, LLC (“Twiage” or the “Company”), a startup tech company.

Plaintiff, John Levinson (“Levinson”), invested $500,000 in Twiage, under four separate Simple Agreements for Future Equity (the “SAFE Agreements”). In connection with those investments, defendants, John Hui (“Hui”) and Gregory P. Santulli (“Santulli”), agreed to provide Levinson with a seat on Twiage’s Board of Managers (the “Board”).

Plaintiffs alleged that Levinson was fraudulently induced to invest in Twiage. Plaintiffs claimed that on four occasions during 2015 and 2016, Hui and Santulli met Levinson to solicit Levinson’s investment in the Company. During one of the meetings, Plaintiffs alleged that both Hui and Santulli represented that each contributed $200,000 in cash to Twiage. Based on these representations, which Plaintiffs alleged were material to Levison’s investment decision, Levinson invested $500,000 in the Company.

Plaintiffs alleged that they subsequently learned the truth from reading Twiage’s financial statements in 2017.  Those documents, Plaintiffs claimed, revealed that Hui and Santulli did not make cash contributions into the Company.

In September 2017, Hui and Santulli voted to remove Levinson from the Board. Plaintiffs maintained that Defendants did so to protect themselves from charges of misconduct.

The Motion to Dismiss

In their motion to dismiss, Defendants argued that the fraudulent inducement claim was precluded by the SAFE Agreements. In that regard, Defendants argued that the SAFE Agreements contained all the relevant terms and conditions of the parties’ agreement. As such, Plaintiffs could not claim to have been defrauded by representations that were not included in those agreements, especially since the SAFE Agreements integrated and memorialized the parties’ discussions and understandings. They also argued that Plaintiffs’ fraud in the inducement claim was actually a breach of contract claim as it concerned the terms and performance of the SAFE Agreements. Finally, Defendants argued that Plaintiffs were sophisticated investors and, as such, could not have relied on the alleged false statements given their “access … to relevant documents and information” before the investments were made and “in the five months from the initial investment.…” Slip op. at *4.

In opposition, Plaintiffs argued that Defendants’ misrepresentations were collateral to the SAFE Agreements – i.e., the SAFE Agreements did not reference any particular statement alleged to be false – and that, as a result, Defendants’ misrepresentations were not barred by the parole evidence rule.

The Court’s Decision

The Court ruled that “[t]he complaint state[d] a claim for fraudulent inducement against Hui and Santulli.” Slip op. at *4.

On the issue of justifiable reliance, the Court rejected Defendants’ argument that Levinson, as a sophisticated investor, “could and should have performed his due diligence to determine whether Hui and Santulli’s claims of investing $200,000 were true.” Id. In doing so, the Court found that even had Levinson performed due diligence, the documents “concealed Hui and Santulli’s failure to invest $200,000 each to Twiage.”

In any event, even if Levinson were a sophisticated investor, defendants would have this court determine what actions could, would, or should constitute reasonable due diligence for Levinson to uncover defendants’ alleged fraud in light of the documents provided to Levinson which concealed Hui and Santulli’s investment into the company.

Id. at *5. Because the SAFE Agreements showed “that Hui and Santulli both contributed $200,000 cash to Twiage and the financial statements initially reviewed by Levinson concealed Hui and Santulli’s failure to invest $200,000 each to Twiage,” the Court concluded that in the absence of evidence showing otherwise, there was no basis to find that Levinson did not reasonably rely on Defendants’ representations. Id.

Specifically, Exhibit A to the Operating Agreement showing that Hui and Santulli both contributed $200,000 cash to Twiage and the financial statements initially reviewed by Levinson concealed Hui and Santulli’s failure to invest $200,000 each to Twiage. Defendants have no evidence to show that plaintiffs had the means to discover defendants’ alleged untruthful statements.

Id. (citations omitted).

Finally, the Court rejected Defendants’ argument that parole evidence could not be used to support Plaintiffs’ fraudulent inducement claims.

Defendants argue that parole evidence may not be used to establish that plaintiffs were fraudulently induced into entering into the contract.  However, defendants do not cite to a merger clause within the SAFE Agreement, or any language indicating that Levinson disclaimed reliance on defendants’ representations that they each contributed $200,000 in cash to Twiage. Accordingly, the SAFE Agreements do not preclude the use of parole evidence to establish that defendants fraudulently induced Levinson from entering into the agreement.

Id. (citations omitted).


To prevail on the justifiable reliance element of a fraud claim, a plaintiff must demonstrate that he/she took steps “to protect [himself/herself] against deception.” DDJ Mgt., 15 N.Y.3d at 154. The cases are clear that the courts will not protect plaintiffs “who have been so lax in protecting themselves” from fraud. Id. However, when the plaintiff does not have the means to uncover the fraud, as alleged in Levinson, courts will not dismiss the claim.

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