Defendants’ Inconsistent Positions Suffice to Satisfy Justifiable Reliance Element of Fraud Claim

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Posted on: Nov 30 2022

One of the elements of a fraud claim that plaintiffs have difficulty satisfying is justifiable reliance. For this reason, the justifiable reliance element is most often cited by defendants to secure dismissal of the claim against them.

Justifiable reliance is considered by the courts to be one of the more “nettlesome” elements of a fraud claim.¹ Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry.² As the New York Court of Appeals observed, “[n]o two cases are alike ….” For this reason, the courts look to whether the plaintiff had the “means available to him for discovering, ‘by the exercise of ordinary intelligence,’ the true nature of a transaction he is about to enter into” and whether he made “use of those means”.³ If the plaintiff does not do so, “he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.”⁴ After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence.⁵

Whether a plaintiff exercised diligence in ascertaining the truth should not be determined by hindsight. As the Court of Appeals explained, when “a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred.”⁶

Sophisticated parties have a heightened duty to use the means available to them to verify the truth of the information upon which they rely and to use their sophistication to conduct due diligence.⁷ A sophisticated plaintiff cannot establish justifiable reliance on an alleged misrepresentation if the plaintiff failed to make use of the means of verification that were available to him.⁸ Thus, to sustain a claim of fraud, sophisticated parties must have discharged their own affirmative duty to exercise ordinary intelligence and conduct an independent appraisal of the risks they are assuming.⁹

[Ed. Note: This Blog had frequently written about the justifiable reliance element of a fraud claim. See, e.g., here, here, here, here, here, and here.]

The justifiable reliance element was at issue in Scarola Zubatov Schaffzin PLLC v. Dynamic Credit Partners, LLC, 2022 N.Y. Slip Op. 06772 (1st Dept. Nov. 29, 2022) (here).

In November 2017, plaintiff brought an action against defendant in the Civil Court for New York County, seeking to recover $10,585.39 in unpaid legal fees. In its answer, defendant maintained that during a telephone call, plaintiff had accepted defendant’s request to discount the amount owed by 50%.

In 2019, during discovery in the Civil Court action, plaintiff learned that the request to reduce its outstanding fees was based on an alleged false statement. According to plaintiff, defendants made the request because they had not been reimbursed for those fees by a counterparty in an underlying transaction; in reality, however, said plaintiff, defendant had been reimbursed in full.

With the new information, plaintiff moved to amend its complaint in Civil Court to add claims for fraudulent inducement against defendant and its principal, as the latter was the one who allegedly made the misrepresentation of fact at issue. On July 3, 2019, the Civil Court denied the motion to amend.

On November 22, 2019, plaintiff filed a complaint in the Supreme Court for New York County, asserting its fraud claim, as well as an unjust enrichment claim. In the complaint, plaintiff denied that it agreed to reduce its fees. Plaintiff also said that if it did agree to the reduction, then such an agreement was predicated on false representations.

In their answer, defendants asserted that the parties had reached a fee reduction agreement, and predicated an affirmative defense upon that alleged agreement.

In their summary judgment motion, however, defendants claimed that plaintiff did not agree to reduce its fees. As such, defendants argued that plaintiff could not show it relied on defendants’ alleged fraudulent statements in making any fee modification agreement because there was no such agreement.

Defendants also argued that plaintiff could not show reliance on any alleged false statements. In particular, defendants argued that plaintiff failed to allege that it relied on any alleged false statements, changed its legal position regarding the unpaid fees, and had agreed to reduce its fees.

In response, plaintiff argued that defendant could not have it both ways. Plaintiff maintained that defendants could not insist, on the one hand, that plaintiff agreed to waive its fees, while, at the same time, claim that plaintiff did not agree to reduce its fees. Plaintiff argued that either defendants admit that they were not truthful at the outset and concede that there was no agreement or concede that the alleged agreement was predicated on a fraud. As to reliance, plaintiff argued that defendants could not use this contradiction to claim that plaintiff could not show that it justifiably relied on defendants’ statements.

The motion court agreed with defendants, holding that plaintiff could not satisfy the justifiable reliance element of a fraud claim because plaintiff was asserting “alternative accounts of facts”:

Between the Civil Court su[it] [and] this action, Plaintiff’s position is, in effect, that it did not agree to write off the unpaid $10,000, but if it did, that agreement was [induced] by fraud. Plaintiff may not allege alternative accounts of facts like this. Either Plaintiff wrote off the $10,000, or it didn’t. If Plaintiff didn’t write it off, its remedy is breach of contract in the Civil Court action. The fraud claim here fails for lack of reliance. The unjust enrichment claim here fails as duplicative of enforceable contract. If Plaintiff did write it off, its remedy is the fraud claim here and the unjust enrichment claim in this action.

In addition, the motion court rejected defendants’ argument that the fraud cause of action should be dismissed because it was duplicative of the breach of contract claim:

With respect to the Defendant’s summary judgment motion, the Court is not persuaded by the argument that [plaintiff’s fraud] claim is duplicative of the contract claim. The fraud claim [is] based on the idea that [defendant] made [a] false statement of present fact to induce Plaintiff to write-off $10,000 of legal fees, otherwise owed under the contract[, is] separate and distinct from any failure of [defendant] to pay the legal fees it had previously agreed to pay.

Plaintiff appealed.

On appeal, the Appellate Division, First Department modified the motion court’s order to reinstate plaintiff’s fraud claim.

The Court held, without any explanation or reason, that “[s]ummary judgment should not have been granted to defendants” because “plaintiff could show reliance in support of its fraud cause of action”.¹⁰

The Court also held that the motion court “properly determined that the fraud cause of action was not duplicative of the breach of contract cause of action.”¹¹ The Court explained that the “fraud claim was based on a misrepresentation made in violation of a duty collateral to the fee contract”.¹² As such, said the Court, “plaintiff was entitled to maintain it in the alternative to the breach of contract cause of action, regardless of whether the causes of action sought the same damages”.¹³

Takeaway

It is interesting that none of the traditional justifiable reliance analyses were identified in the Court’s decision. In fact, as noted, the Court did not provide any analysis as to why it held that “plaintiff could show reliance in support of its fraud cause of action”.¹⁴ Instead, it appears the Court believed that plaintiff could not ascertain the truth of the alleged fraud with diligent efforts because of the inconsistent positions taken by defendants in the Civil Court and Supreme Court actions. Scarola is also notable because of the distinction made with prior cases in which the First Department has held that a fraud cause of action cannot stand side-by-side with a breach of contract claim even when the plaintiff successfully pleads a duty collateral to the contract if the relief sought by both claims is the same.¹⁵ The cases and authorities relied upon by the Court in Scarola¹⁶ show that where a plaintiff specifically alleges the fraud claim in the alternative, then the duplication in relief sought will not result in dismissal. After all, if the breach of contract claim fails for any reason, then the fraud claim may survive without concern for duplication.

Footnotes

DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted).
Id.
88 Blue Corp. v. Reiss Plaza Assoc., 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted).
Id. (internal quotation marks omitted).
KNK Enters. Inc. v Harriman Enters., Inc., 33 A.D.3d 872 (2d Dept. 2006).
DDJ Mgt., 15 N.Y.3d at 154.
McGuire Children, LLC v. Huntress, 24 Misc. 3d 1202(A), at *12 (Sup. Ct., Erie County), aff’d, 83A.D.3d 1418 (4th Dept. 2011).
Id.
Id.
Slip Op. at *1.
Id.
Id. (citations omitted).
Id. at *2 (citations omitted).
Id. at *1.
See, e.g., Demurjian v. Demurjian, 190 A.D.3d 410 (1st Dept. 2021), discussed by this Blog here.
See Shear Enters., LLC v. Cohen, 189 A.D.3d 423, 424 (1st Dept. 2020); Man Advisors, Inc. v. Selkoe, 174 A.D.3d 435 (1st Dept. 2019). See also CPLR § 3014.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.