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Fraud and The Theater Food Concession

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  • Posted on: Sep 12 2022

By: Jeffrey M. Haber

One of the elements of a fraud claim that plaintiffs have difficulty satisfying is justifiable reliance. As evident from the reported decisions, the justifiable reliance element is most often used by defendants to secure dismissal of the claim against them. In LIK Hospitality LLC v. Otway, 2022 N.Y. Slip Op. 32979(U) (Sup. Ct., N.Y. County Aug. 31, 2022) (here), a case involving claims of, inter alia, fraudulent inducement, the justifiable reliance element was used by defendants to secure dismissal of the claim. As discussed below, their efforts were not met with success.

[Ed. Note: the background discussion of the case is derived from the motion court’s decision and order and the arguments asserted in the parties’ briefing of the motion.]

LIK Hospitality arose from an agreement to operate a food concession within a bar at a Manhattan theater. Plaintiff claimed that it never fully operated the concession within the space. According to plaintiff, after it agreed to operate the concession, it discovered that the kitchen was not actually a functional kitchen, proper flooring was missing, and the wiring and ventilation systems required extensive repairs. Plaintiff alleged that defendants were aware of, and fraudulently concealed, the poor condition of the premises in order to induce it into entering the agreement. 

Plaintiff further alleged that it incurred additional and unexpected costs to repair and renovate the premises and was nonetheless still unable to fully operate the business due to the poor condition of the premises, in addition to restrictions resulting from the COVID-19 pandemic and consequent restrictions. When renovations were finally completed, the fire department issued a safety violation for blocking an emergency exit path with a bartop, barstools and table and chairs. To cure the violation which, it alleged, defendants had known about, defendants removed all of plaintiff’s dining furniture except one small table rendering the space unusable as a food concession and then sold food directly to theatergoers using the name of Foxface without plaintiff’s permission, resulting in an additional loss of income to plaintiff.

Plaintiff alleged six causes of action – (1) fraudulent inducement (against defendants Otway, the bar and the theater), (2) breach of contract (against the bar), (3) quantum meruit (against the bar), (4) unjust enrichment (against the bar), (5) trademark infringement (against the bar), and (6) conversion (against all defendants). 

Defendants moved to dismiss. We discuss the motion as it related to the fraudulent inducement claim below.

Defendants claimed, among other things, that plaintiff failed to satisfy the justifiable reliance element of the claim. In that regard, defendants argued that plaintiff could not claim it justifiably relied on any misstatement because it could have discovered the alleged problems with ordinary diligence. 

As argued in its memorandum in opposition to the motion, plaintiff maintained that the problems were hidden such that a professional inspector could not have determined the true state of the premises. Relying on Dygert v. Leonard, 138 A.D.2d 793, 795 (3d Dept. 1988), plaintiff maintained that it was an issue of fact whether ordinary diligence could have discovered the poor condition of the premises and the obstruction of the emergency exit pathway. Dygert involved the purchase of a house. There, the plaintiff alleged that the defendants had performed extensive work on the foundation prior to the purchase. On the issue of fraud, the Court stated: “Whether representations were made to plaintiffs, whether such representations induced plaintiffs to purchase the house, what the actual condition of the house foundation was, whether defendants were aware of that condition and whether plaintiffs could have discovered such condition in the exercise of reasonable diligence, all constitute issues of fact which require resolution by trial, not motion.”1 

In LIK Hospitality, the motion court denied the motion. The court found that “the amended complaint [was] sufficiently detailed, for pleading purposes, to support a claim for fraudulent inducement.”2 The motion court explained that “plaintiff sufficiently allege[] that it justifiably relied on the defendants’ representations regarding the conditions and suitability of the premises for the operation of a food concession, that it would have exclusive rights to sell food at the theater, that those representations were false when made, that they were made with the purpose of inducing the plaintiff the enter the agreement, and that the plaintiff sustained damages as a consequence of such false representations.”3 

Takeaway

As noted in the introduction of this article, one of the more “nettlesome” elements of a fraud claim is justifiable reliance.4 Whether a plaintiff justifiably relied on a misrepresentation or omission is a fact-intensive inquiry.5 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”.6 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.”7 After all, a plaintiff cannot claim justifiable reliance on a misrepresentation when he or she could have discovered the truth with reasonable diligence.8

In LIK Hospitality, the motion court found that, for pleading purposes, plaintiff could not have discovered the truth about the condition of the premises with the exercise of ordinary diligence. While no explanation was provided by the motion court, it appears that the court was persuaded by plaintiff’s argument that even a professional inspector would not have been able to detect the problems. That argument was apparently based upon the factual allegations in the complaint. LIK Hospitality, therefore, highlights the importance of providing detailed facts in support of a fraud claim and the fact-specific nature of the court’s inquiry.


Footnotes

  1. Id. at 795.
  2. Slip Op. at *3.
  3. Id. at *3-*4.
  4. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted).
  5. Id.
  6. 88 Blue Corp. v. Reiss Plaza Assoc., 183 A.D.2d 662, 664 (1st Dept. 1992) (internal citations omitted).
  7. Id. (internal quotation marks omitted).
  8. KNK Enters. Inc. v Harriman Enters., Inc., 33 A.D.3d 872 (2d Dept. 2006).

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.

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