First Department Affirms Dismissal of Fraud Claim Because The Plaintiff Had The Wherewithal to Protect Herself But Failed To Do So

• Posted on: Apr 24 2019

This Blog has written about cases in which the plaintiff claims to have been defrauded but fails to allege with particularity the elements of the claim. As readers of this Blog know, the element that most often spells failure for the plaintiff is reasonable reliance – that is, reliance on the alleged misrepresentation or omission. Today’s article looks at another case in which the plaintiff alleged reliance on alleged misrepresentations but failed to assert facts showing that such reliance was justified – that is, the plaintiff used the means available to discover the true nature of the transactions being challenged.  

In Rubin v. Sabharwal, 2019 N.Y. Slip Op. 02975 (1st Dept. Apr. 23, 2019) (here), the Appellate Division, First Department, affirmed the dismissal of a fraudulent inducement claim on the grounds that the plaintiff,  Shelley Rubin (“Rubin”), failed to allege sufficient facts to establish reasonable reliance,  i.e., Rubin failed to allege facts showing that she diligently inquired into the true value of the property at issue.

Justifiable Reliance is a “Fundamental Precept” of a Fraud Claim

In Ambac Assurance Corp. v. Countrywide Home Loans, Inc., 31 N.Y.3d 569 (2018), the New York Court of Appeals emphasized the importance of the justifiable reliance element, noting that it is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. As such, the justifiable reliance requirement is considered to be a necessary tool to weed out fraud claims by plaintiffs who “are lax in protecting themselves”. See ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds).

In assessing whether the plaintiff’s reliance was justified, the courts look to see whether the plaintiff’s reliance on the alleged misrepresentation was reasonable. Epifani v. Johnson, 65 A.D.3d 224, 230 (2d Dept. 2009). As stated by the Court of Appeals more than one hundred years ago, this means the plaintiff must exercise “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Schumaker v. Mather, 133 N.Y. 590, 596 (1892); see also ACA Fin. Guar., 25 N.Y.3d at 1044; DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 154 (2010). Thus, “where 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).

Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact-intensive. DDJ Mgt., 15 N.Y.3d at 155 (2010) (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). 

Rubin v. Sabharwal

Background

Rubin arose from a series of 80 transactions occurring over a five-year period during which Rubin, the co-founder and co-chair of a museum specializing in Himalayan and Indian art, purchased hundreds of pieces of jewelry for approximately $18.1 million from Defendant, Nisha Sabharwal (“Sabharwal”). Rubin claimed that, among other things, she was fraudulently induced to purchase the jewelry.

Defendants moved to dismiss the complaint, arguing, inter alia, that Rubin failed to allege the elements of a fraud claim with any specificity. The motion court agreed. (Here.)  

[Ed Note: To plead fraud with particularity, a plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559-60 (2009). Conclusory allegations will not suffice. Id. Neither will allegations based on information and belief. See Facebook, Inc. v. DLA Piper LLP (US), 134 A.D.3d 610, 615 (1st Dept. 2015) (“Statements made in pleadings upon information and belief are not sufficient to establish the necessary quantum of proof to sustain allegations of fraud.”).

Although, CPLR § 3016(b) provides that “the circumstances constituting the [fraud] shall be stated in detail,” the New York Court of Appeals has “cautioned that section 3016 (b) should not be so strictly interpreted as to prevent an otherwise valid cause of action in situations where it may be impossible to state in detail the circumstances constituting a fraud.” Pludeman v. Northern Leasing, Sys., Inc., 10 N.Y.3d 486, 491 (2008) (internal quotation marks and citations omitted). Thus, where the facts “are peculiarly within the knowledge of the party charged with the fraud,” and “it would work a potentially unnecessary injustice to dismiss a case at an early stage where any pleading deficiency might be cured later in the proceedings,” dismissal should be denied. Id. at 491-92 (internal quotation marks and citations omitted). See also CPC Intl. v. McKesson Corp., 70 N.Y.2d 268, 285-286 (1987).]

The motion court noted that Rubin did not provide any facts to reasonably support the inference that there was fraudulent conduct in all 80 of the transactions. Even as to the 10 transactions highlighted in the complaint, the motion court observed that the complaint contained only conclusory allegations of an alleged fraud.  

The motion court further noted that the alleged misrepresentations (e.g., “that pieces of jewelry were from the ‘same set’ as ones in a magazine, that the jewelry has ‘significance,’ that the jewelry came from a ‘friend or family’s’ collection, and that the pieces were ‘museum quality’ or ‘generational’”) were of a general nature (i.e., opinion or puffery) and, therefore, insufficiently specific to establish fraudulent inducement.

Rubin appealed.

The First Department’s Decision

The First Department unanimously affirmed, holding that Rubin’s “claims for fraudulent inducement, fraud, and conspiracy to commit fraud were properly dismissed.” Slip Op. at *1.

In particular, the Court held that “Plaintiff failed to assert sufficient facts to establish reasonable reliance and that she exercised due diligence to determine the value of the” jewelry that she purchased from Sabharwal.’ Id.  The Court explained that Rubin, “[a]s the co-founder and co-chair of a museum specializing, in part, in Indian art, … had the means to conduct an appraisal of the jewelry prior to purchasing [it], and yet … took no steps to verify the alleged  misrepresentations.” Id.

“Moreover,” observed the Court, “plaintiff had the wherewithal to conduct an appraisal several years after the first transaction when she wanted to sell some of the items and verify the authenticity of the jewelry” but failed to do so. Id. In fact, “Plaintiff could have discovered the truth had she conducted an inquiry into the value of the property during the many transactions at issue in this case.” Id. Rubin’s failure to use the means available to discover the true nature of the transactions by the exercise of ordinary intelligence, negated any allegation of justifiable reliance on the alleged misrepresentations. Id.

Finally, the Court held that the alleged misrepresentations – “that the items were of ‘museum quality,’ of ‘highest quality,’ and ‘generational’ – were nonactionable opinion and puffery. Id. (citations omitted).

Takeaway

As the Court explained in Rubin, a plaintiff cannot shut his/her eyes to the possibility that they may be the victim of a fraud. The plaintiff must take some action to show that the fraud was hidden or could not be discovered in the absence of extraordinary efforts. The Rubin Court determined that, in that case, extraordinary efforts were not necessary. Instead, Plaintiff could have sent the jewelry for appraisal before purchasing the items or at any time thereafter. After all, there were approximately 80 transactions over a five-year period. While the fraud seems egregious, Rubin stands for the proposition that to do nothing will not suffice to demonstrate justifiable reliance.