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First and Fourth Departments Affirm Dismissal of Fraud Actions on Justifiable Reliance and Statute of Limitations Grounds, Respectively

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  • Posted on: Nov 11 2019

Last week, two Appellate Division courts affirmed the dismissal of fraud claims because the parties asserting the claims failed to demonstrate justifiable reliance, and assert their claim within the statute of limitations. Atlas MF Mezzanine Borrower, LLC v. Macquarie Tex. Loan Holder LLC, 2019 N.Y. Slip Op. 08009 (1st Dept. Nov. 7, 2019) (here), and Beacon Estates, LLC v. Ingrassia, 2019 N.Y. Slip Op. 08042 (4 th Dept. Nov. 8, 2019) (here). In today’s post, this Blog looks at each case.

A Primer on the Statute of Limitations and Justifiable Reliance

Statute of Limitations

In New York, an action for fraud must be commenced within “the greater of six years from the date the cause of action accrued or two years from the time the plaintiff … discovered the fraud, or could with reasonable diligence have discovered it.” CPLR § 213(8); Boardman v. Kennedy, 105 A.D.3d 1375, 1376 (4th Dept. 2013).

The defendant (i.e., the party most frequently making the motion) has the initial burden of establishing “that the time in which to commence the action has expired.” Zaborowski v. Local 74, Serv. Empls. Intl. Union, AFL-CIO, 91 A.D.3d 768, 768 (2d Dept. 2012). If the defendant meets that burden, the burden then shifts to the plaintiff to “aver evidentiary facts establishing that the action was timely or to raise a question of fact as to whether the action was timely.” Lessoff v. 26 Ct. St. Assoc., LLC, 58 A.D.3d 610, 611 (2d Dept. 2009).

Where a plaintiff relies on the two-year discovery rule of the statute of limitations, “[t]he burden of establishing that the fraud could not have been discovered prior to the two-year period before the commencement of the action rests on the plaintiff who seeks the benefit of the exception.” Von Blomberg v. Garis, 44 A.D.3d 1033, 1034 (2d Dept. 2007); Lefkowitz v. Appelbaum, 258 A.D.2d 563 (2d Dept. 1999) (“The burden of establishing that the fraud could not have been discovered before the two-year period prior to the commencement of the action rests on the plaintiff, who seeks the benefit of the exception.”). Accord Berman v. Holland & Knight, LLP, 156 AD3d 429, 430 (1st Dept. 2017); Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc., 137 A.D.3d 685, 689 (1st Dept. 2016); Brooks v. AXA Advisors, LLC (appeal No. 2), 104 A.D.3d 1178, 1180 (4th Dept. 2013).

“A cause of action based upon fraud accrues, for statute of limitations purposes, at the time the plaintiff ‘possesses knowledge of facts from which the fraud could have been discovered with reasonable diligence.’” Oggioni v. Oggioni, 46 A.D.3d 646, 648 (2d Dept. 2007) (quoting Town of Poughkeepsie v. Espie, 41 A.D.3d 701, 705 (2d Dept. 2007)).

“[W]here the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of the fraud will be imputed to him.” Gutkin v. Siegal, 85 A.D.3d 687, 688 (1st Dept. 2011) (citation and internal quotation marks omitted). Courts look at whether the plaintiff should have discovered the alleged fraud objectively. Prestandrea v. Stein, 262 A.D.2d 621, 622 (2d Dept. 1999); Gorelick v. Vorhand, 83 A.D.3d 893, 894 (2d Dept. 2011). Mere suspicion will not suffice as a substitute for knowledge of the fraudulent act. Erbe v. Lincoln Rochester Trust Co., 3 N.Y.2d 321, 326 (1957).

This inquiry “involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds.”  Berman, 156 A.D.3d at 430. “Instead, the question is one for the trier of-fact.” Id. See also Sargiss v Magarelli, 12 N.Y.3d 527, 532 (2009).

Justifiable Reliance

In Ambac Assur. v. Countrywide, 31 N.Y.3d 569, 579 (2018), the Court of Appeals described the justifiable reliance requirement as a “‘fundamental precept’ of a fraud cause of action.” As such, a “plaintiff must allege facts to support the claim that it justifiably relied on the alleged misrepresentations.” ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 (2015); see also id. at 1051 (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”).

Whether a plaintiff justifiably relied on a misrepresentation or omission is “always nettlesome” because it requires a fact-intensive analysis. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted). As the Court of Appeals observed, “[n]o two cases are alike ….” Id. For this reason, 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).

Sophisticated parties have a heightened responsibility. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed. See, e.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord, Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted).

Atlas MF Mezzanine Borrower, LLC v. Macquarie Tex. Loan Holder LLC

Background

[Ed. Note: The background section comes from the briefing before the motion court and the First Department.]

Atlas arose in connection with a foreclosure sale of a membership interest in a holding company (“HoldCo.”), which owned, through separate subsidiaries, eleven (11) apartment complexes (the “Properties”) in Texas (the “Auction”). Atlas MF Mezzanine Borrower, LLC (“Atlas”), through its holding company and subsidiaries, owned the Properties. Macquarie Texas Loan Holder LLC (“Macquarie”) loaned Atlas $71 million through a mezzanine loan that was secured by a pledge of Atlas’s membership interest in the holding company.

Atlas defaulted on the loan in January 2017. Atlas claimed the default was the result of its reliance on the representations of forbearance by Macquarie – according to Atlas, Macquarie lulled it to believe that Macquarie would grant the forbearance when it reality Macquarie wanted Atlas to default so that it could foreclose on the loan.

At the Auction (conducted on February 27, 2017), a dispute arose over whether Atlas had met the publicly disclosed requirements of the proceeding. As a result, Macquarie did not initially allow Atlas to bid. However, after Macquarie placed a credit bid for $73.5 million (reflecting the loan principal plus interest and fees), Macquarie “ma[d]e an exception” to the requirements and permitted Atlas to bid. Atlas and defendants KKR REPA AIV-2 L.P. and KKR Osprey Venture LLC (together, the “KKR Defendants”), thereafter competed in the Auction, until the KKR Defendants bid $76.75 million and Atlas responded with a bid of $77 million.

At that point, Macquarie suspended the Auction because Atlas was bidding millions of dollars in excess of the amount owed under the loan. The KKR Defendants alleged that Atlas did not intend to close on the purchase of HoldCo. and likely lacked the financial capacity to do so. Defendants contended that Atlas was trying to drive the KKR Defendants’ purchase price up as much as possible so that Atlas could receive any surplus above the amount owed under the loan. The KKR Defendants claimed that, at that point, they believed they would be declared the winning bidder at $76.75 million. Consequently, once the Auction resumed, the KKR Defendants did not attempt to surpass Atlas’s $77 million bid. Macquarie declared the KKR Defendants the winner based on their financial ability to close, which the KKR Defendants had disclosed pursuant to the publicly available terms of the Auction. Thereafter, the KKR Defendants and Macquarie executed a Contract of Sale for the holding company.

On October 30, 2017, Atlas filed its verified first amended complaint. On May 1, 2018, the KKR Defendants filed an answer in which they denied Atlas’s allegations. On May 21, 2018, the KKR Defendants filed an amended answer in which they asserted eight counterclaims: (1) declaratory judgment, (2) tortious interference with a prospective economic advantage, (3) tortious interference with contracts, (4) abuse of process, (5) trespass, (6) conversion, (7) unjust enrichment, and (8) fraud.

On June 25, 2018, Atlas moved to dismiss the counterclaims for tortious interference with contracts, abuse of process, trespass, conversion and fraud. On October 17, 2018, the motion court granted Atlas’s motion to dismiss the counterclaims from the bench. The KKR Defendants appealed the decision solely with respect to the dismissal of their fraud counterclaim.

The First Department’s Decision

The First Department unanimously affirmed.

In their counterclaim, the KKR Defendants alleged that Atlas knew before the Auction that “it could not close on a sale of the properties and had no intention of doing so.” The KKR Defendants further alleged that Atlas placed bids “it knew it could not pay” in order to “drive up the sale price of the properties” so that it could “receive any surplus above what it owed to Macquarie.” Thus, according to the KKR Defendants, “Atlas’ bidding strategy was a fraud: it was designed to mislead KKR and the other auction participants into bidding against Atlas’ sham bids in order to increase Atlas’ profits.”

Atlas claimed that these statements were not actionable as they were based on future events. The First Department agreed with the KKR Defendants. In particular, the Court held that “Plaintiff’s statement that its required deposit check was ‘on its way’ was an actionable statement of present fact, not of future expectation.” Slip Op. at *1.

Notwithstanding, the First Department agreed with the motion court that the KKR Defendants failed to satisfy the justifiable reliance element of their fraud counterclaim.

The KKR Defendants maintained that they relied on Atlas’s representation that the deposit check was “on its way”.  According to the KKR Defendants, because of the representation, they assumed the Atlas bids were legitimate and therefore made competing bids against Atlas. Had they known at the outset that Atlas was not a serious bidder, said the KKR Defendants, they would have stopped bidding at $73.75 million, which was the amount needed to beat Macquarie’s bid of $73.5 million.

The First Department held that the KKR Defendants’ reliance was not justifiable.

However, defendants’ allegations are insufficient to show reasonable reliance as a basis to continue bidding against plaintiff, where the fact that the check was not there was disclosed, the auctioneer disqualified plaintiff from bidding, and when the auctioneer later allowed bidding he stated that he was making “an exception” from the bidding procedures to allow plaintiff to bid (ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 NY3d 1043, 1044 [2015] [internal quotation marks omitted]).

Id.

The Court also rejected the KKR Defendants’ argument “that they reasonably relied on some implied representation about plaintiff’s financial condition.” Id.

Nor do defendants’ allegations that they reasonably relied on some implied representation about plaintiff’s financial condition fare any better. By their own admission, defendants knew that plaintiff had defaulted on the underlying debt, that it had failed to tender the required deposit check for the auction, and that it was bidding more than the amount of the underlying debt. Based on this information, defendants ceased bidding some 15 minutes into the auction. Defendants do not allege they obtained any further information before making the decision to stop bidding. They had all the information necessary to determine that plaintiff likely did not have the ability to close.

Id.

Beacon Estates, LLC v. Ingrassia

Background

Plaintiffs commenced the action in 2017, seeking damages and declaratory relief associated with a 2007 agreement between Daniel P. Cappa, Sr. (“Cappa”), the sole member of plaintiff Beacon Estates, LLC (“Beacon”), and defendant Angelo Ingrassia (“Ingrassia”), the sole member of defendant 1612 Ridge Road, LLC (“1612 Ridge Road”). In their amended complaint, Plaintiffs asserted causes of action sounding in, inter alia, breach of contract and fraud.

The fraud causes of action were based on, inter alia, the 2007 agreement between Cappa and Ingrassia whereby a permanent easement that allowed access to Beacon’s property by ingress and egress over property owned by 1612 Ridge Road was extinguished and replaced by a temporary easement. Plaintiffs alleged that Ingrassia misrepresented the terms of the 2007 agreement and exploited a personal relationship with Cappa to induce him into signing the 2007 document. Plaintiffs further alleged that, in October 2012, one of Cappa’s sons accompanied Cappa to a meeting with Ingrassia, during which Ingrassia indicated that Cappa’s easement was abandoned. Cappa questioned why the easement was abandoned, and Ingrassia told Cappa not to do anything until Ingrassia completed the sale of the property owned by 1612 Ridge Road. In 2013, 1612 Ridge Road sold its property to defendant Agree Rochester NY, LLC (“Agree”). Defendant L.A. Fitness International, LLC (“L.A. Fitness”) leases that property and operates a business thereon.

In separate motions, Ingrassia, 1612 Ridge Road, L.A. Fitness, and Agree (collectively, “Defendants”) moved to dismiss the amended complaint against them contending, inter alia, that the claims asserted therein were time-barred. The motion court granted Defendants’ motions with respect to the second, fourth, and fifth causes of action in the amended complaint, sounding in breach of contract and fraud. The Appellate Division, Fourth Department, affirmed.

The Court’s Decision

The Court held that “defendants established that the action was commenced more than six years from the dates of the alleged acts of fraud.” Slip Op. at *1. As noted, the alleged fraud occurred in 2007 and the action was commenced in 2017.

The Court also held that plaintiffs could not avail themselves of the two-year discovery rule, stating “that plaintiffs ‘possessed knowledge of facts from which they reasonably could have discovered the alleged fraud soon after it occurred, and in any event more than two years prior to the commencement of the action.’” Id., quoting Brooks, 104 A.D.3d at 1180.

Takeaway

Readers of this Blog know that courts will not sustain a fraud claim in which the plaintiff fails to avail himself/herself/itself of the means to discover the truth or falsity of representations and omissions made by the alleged wrongdoer. Although the determination of whether reliance is justified is a fact sensitive one, ignoring facts that are in plain sight (i.e., facts that are publicly available), as in Atlas, is a sufficient reason to dismiss a fraud claim. Atlas underscores this principle.

Beacon Estates highlights the need for litigants to act on facts and circumstances from which it could be reasonably inferred that they were the victims of a fraud. As Beacon Estates shows, the failure to bring suit when the facts indicate a fraud has occurred will result in dismissal. Thus, even though the discovery rule allows the victim of fraud to bring suit when the very nature of the fraud prevents him/her from knowing that he/she was defrauded, the courthouse doors will, nevertheless, close on the litigant who sits on his/her rights when the facts indicate that a wrong has be done.

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