Fraud Notes: Misstatements of Material Fact and The Doctrine of Caveat Emptor

Print Article

Posted on: Aug 30 2021

By Jeffrey M. Haber

To state a claim for fraud, a plaintiff must satisfy each element of the claim; namely, “a material misrepresentation of fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages.”¹ The failure to satisfy each element will result in dismissal of the claim. Such was the case in Dreamco Dev. Corp. v. Empire State Dev. Corp., 2021 N.Y. Slip Op. 04792 (4th Dept. Aug. 26, 2021) (here), where plaintiff failed to allege the first element of the claim (i.e., a material misrepresentation of fact).

Dreamco involved a construction contract relating to a public works project (“Project”) in which Erie Canal Harbor Development Corporation (“Erie Canal”), the project owner and a public benefit corporation, terminated a contract with DiPizio Construction Company, Inc. (“DCC”), the general contractor for the Project and a non-party to the action.

Plaintiff, Dreamco Development Corporation (“Dreamco”) served as a subcontractor for DCC during the Project. Plaintiff filed the action alleging that DCC was wrongfully terminated as the general contractor of the Project. Plaintiff alleged, among other things, causes of action for fraud, tortious interference with business relations, prima facie tort, intentional and/or negligent infliction of emotional distress, and injurious falsehood.

Defendant, Maria Lehman, moved to dismiss the complaint on the grounds that the tort causes of action alleged against her were time-barred, and that they failed to state a cause of action. Relevant to the fraud claim, Defendant maintained that Plaintiff failed to identify any misstatement of material fact that she allegedly made. Plaintiff opposed the motion, arguing that there were issues of fact surrounding a communication Defendant had with another defendant concerning a payment (or lack thereof) by Erie Canal to DCC. Although the motion court dismissed all causes of action against Defendant, it sustained the fraud cause of action.

Defendant appealed the portion of the motion court’s order which denied the motion to dismiss the fraud cause of action. The Appellate Division, Fourth Department unanimously reversed.

In a pithy decision, the Court held that the motion court “should have granted that part of her motion seeking to dismiss the fraud cause of action against her on the ground that it failed to state a cause of action.”² The Court explained that “complaint [did] not set forth any material misrepresentations that defendant allegedly made to plaintiffs.”³

The Court also found that Plaintiff failed to state a claim for fraud under the third-party reliance doctrine.⁴ Under this doctrine, a plaintiff states a claim for fraud where he/she makes a misstatement of material fact to a third party “for the purpose of being communicated to the plaintiff in order to induce his[/her] reliance thereon or that these misrepresentations were relayed to the plaintiff, who then relied upon them.”⁵

In Chapman v. Jacobs, 2021 N.Y. Slip Op. 04794 (4th Dept. Aug. 26, 2021) (here), the Fourth Department also examined the first element of a fraud claim – material misstatement of fact – as well as the justifiable reliance element of the claim.

In Chapman, Plaintiff sought damages for, inter alia, fraud arising from his purchase of a home from defendants. Plaintiff claimed that Defendants represented that there was a certificate of occupancy for a pole barn situated on the property when, in fact, the Town voided the certificate of occupancy when it discovered that the barn encroached on the adjoining property. Although the record established that Plaintiff was aware of the encroachment prior to closing, Plaintiff alleged that he was unaware that the Town had voided the certificate of occupancy and believed that any issue regarding the barn had been resolved through a boundary line agreement between Defendants and the adjoining landowner. After Plaintiff purchased the home, however, the Town informed him that he would have to relocate or remove the barn.

Plaintiff filed suit, alleging three causes of action: (1) fraud by not disclosing changes to information in the certificate of occupancy; (2) fraud by way of silence or active concealment of information related to the revocation of a certificate of occupancy, and (3) negligent infliction of emotional distress. Defendants moved for summary judgment on the fraud claim, claiming, among other things, that (1) the status of the certificate of occupancy was readily ascertainable from the public record and, therefore, Plaintiff’s ability to conduct his own investigation into the property was not thwarted, and (2) Plaintiff failed to plead justifiable reliance.

The motion court granted the motion, holding that although Defendants failed to disclose that the pole barn’s certificate of occupancy had been revoked, Plaintiff knew about the issue – the encroachment of the barn on the neighbor’s property – before the closing due to his counsel’s title search of the property. Because of this knowledge, the motion court held that Plaintiff should have discovered the revocation of the certificate of occupancy. Plaintiff’s failure to discover the revocation, said the motion court, negated the justifiable reliance element of the fraud claim.

Plaintiff appealed and the Fourth Department affirmed.

The Court held that “defendants met their initial burden of establishing the absence of justifiable reliance on defendants’ alleged representations by submitting evidence that plaintiff was aware, prior to closing, that the barn encroached on the adjoining property.”⁶ In opposition, “Plaintiff failed to raise a triable issue of fact,” said the Court.⁷

The Court also held that even if Plaintiff could demonstrate that Defendants actively concealed the status of the certificate of occupancy, Plaintiff could not establish that such concealment “‘thwarted’ [his] ability to conduct his own investigation into the property” because “the status of the certificate of occupancy ‘was readily ascertainable from the public record.’”⁸ Under New York law, “[t]o maintain a cause of action to recover damages for active concealment [in a real estate transaction], the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.”⁹

The Court’s decision addressed, without using the term of art, the doctrine of caveat emptor. Under the doctrine, the buyer of real property is required to inspect the property and satisfy himself/herself as to the quality of his/her bargain.¹⁰ This means that where a buyer has the means available to discover, by the exercise of ordinary intelligence and diligence, the true nature of the transaction into which he/she is about to enter, he/she must make use of those means. The failure to do so will preclude him/her from arguing that he/she was fraudulently induced to enter into the transaction.¹¹

The doctrine of caveat emptor imposes no duty on the seller or the seller’s agent to disclose any information concerning the property when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent that constitutes active concealment.¹² The mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as a fraud.¹³

Takeaway

Dreamco highlights the importance of pleading and proving every element of a fraud claim. In Dreamco, the element at issue was falsity.

Chapman reinforces the application of the caveat emptor doctrine in New York real estate transactions. As noted, in such transactions, the law does not impose a duty on the seller or the seller’s agent to disclose information about the premises when the parties deal at arm’s length, unless the seller or the seller’s agent actively conceal material information. Instead, the buyer has a duty to satisfy himself/herself as to the quality of his/her bargain. And, even if the buyer successfully demonstrates active concealment, the buyer must satisfy the justifiable reliance element of a fraud claim – a task that, as we have noted on numerous occasions, is often difficult to achieve.

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.

Footnotes

Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 559 (2009); see also Morrow v. MetLife Invs. Ins. Co., 177 A.D.3d 1288, 1289 (4th Dept. 2019).
Slip Op. at *1.
Id. at *1-*2.
Id. at *2
Robles v. Patel, 165 A.D.3d 858, 860 (2d Dept. 2018); see also New York Tile Wholesale Corp. v. Thomas Fatato Realty Corp., 153 A.D.3d 1351, 1353-1354 (2d Dept. 2017).
Slip Op. at *1-*2 (citation omitted).
Id. at *2.
Id. at *1 (quoting Matos v. Crimmins, 40 A.D.3d 1053, 1055 (2d Dept. 2007)).
Jablonski v. Rapalje, 14 A.D.3d 484, 485 (2d Dept. 2005).
Glazer v. LoPreste, 278 A.D.2d 198, 198-99 (2d Dept. 2000) (“A buyer has the duty to satisfy himself as to the quality of his bargain.”).
Ittleson v. Lombardi, 193 A.D.2d 374, 376 (1st Dept. 1993).
Matos, 40 A.D.3d at 1055.
London v. Courduff, 141 A.D.2d 803, 804 (2d Dept. 1988).