Fraud Notes: Real Estate Fraud and the Misrepresentation of Material Facts

• Posted on: Feb 19 2020

In today’s Fraud Notes, we look at two fraud cases involving real estate: Lash v. Schleider, 2020 N.Y. Slip Op. 30406(U) (Sup. Ct., N.Y. County Feb. 11, 2020) (here); and Goff v. Parker, 2020 N.Y. Slip Op. 30396(U) (Sup. Ct., Suffolk County Feb. 10, 2020) (here).

Lash v. Schleider

Lash arose from a contract between plaintiffs, Lori Lash, Robert Lash, and Goldsholle, LLC (“Goldsholle”), and the moving defendants, Jeffrey Schleider (“Schleider”) and Miron Properties, LLC (“Miron”), to list plaintiffs’ Manhattan Avenue, Brooklyn, New York (the “Property”) for sale.

In or about August 2014, Schleider and Miron listed the Property for $4,995,000. Defendant, 977 Manhattan Avenue LLC (“977”), made an offer to purchase the Property for $5 million, which plaintiffs accepted. Thereafter, due to alleged deficiencies in the Property, 977 reduced its offer by approximately $1 million.

In September 2014, plaintiffs contracted to sell the Property to 977 for $4.1 million upon the advice of Schleider and Miron. On the February 9, 2015 closing date, Goldsholle, defendant Manhattan Group Properties, LLC (“MGP”) and 977 executed an assignment of contract of sale, pursuant to which 977 assigned its interest in the Property to MGP. In connection with the assignment, unbeknownst to plaintiffs, MGP paid $700,000 to 977 in addition to the $4.1 million purchase price. Plaintiffs alleged that Schleider and Miron, conspiring with MGP, had falsely advised plaintiffs that $4.1 million was the best price available. Plaintiffs further alleged that the moving defendants, in return for the alleged “flip,” retained Schleider and Miron as the exclusive broker for the sale of condominiums to be developed at the Property. In 2016, Miron was acquired by defendant Citi Habitats, a division of the Corcoran Group, Inc. (“Corcoran”), which is owned and operated by defendant NRT LLC (“NRT”).

On January 4, 2019, plaintiffs commenced the action against Schleider, Miron, Citi Habitats, Corcoran, NRT, MGP and B&B Global Development Corp. (“B&B”) and filed the original complaint on February 5, 2019.

On March 6, 2019, MGP and B&B moved to dismiss the original complaint as against them. On April 22, 2019, plaintiffs filed an amended complaint. Pursuant to an order and stipulation by the parties, on May 8, 2019, plaintiffs filed and served a second amended complaint (the “SAC”), adding 977 as a defendant. MGP and B&B elected to apply their previously filed motion to dismiss to the SAC.

In their fraud claim, plaintiffs alleged that defendants knowingly misrepresented material aspects as to the sale of the Property by inducing plaintiffs to sell the Property to 977 for $4,100,000 when Defendants intended to and did immediately “flip” the Property and/or the contract concerning the Property to MGP and/or defendant B&B for $4,800,000.

Plaintiffs argued that the contract price for the Property was a “material fact” and that defendant Schleider misrepresented that $4.1 million was “the best offer possible.”

The Court held that plaintiffs failed to plead facts with the requisite particularity that MGP and B&B were responsible for Schleider’s alleged false statements regarding the quality of the offer. The Court explained that “[a]ssertions that Schleider – who was plaintiffs’ property broker – ‘conspired’ or acted ‘on behalf of and in concert’ with MGP and B&B [were] conclusory and [were] entitled to zero weight.”  Slip Op. at *4.

Finally, the Court rejected plaintiffs’ attempt to demonstrate scienter by the purchase of the Property after the allegedly false statements were made, stating that “MGP and B&B’s later purchase of the Property for $4.8 million [was] insufficient to infer their knowledge of the falsity of statements made five months earlier.”

Consequently, the Court dismissed the fraud cause of action as against MGP and B&B.

Goff v. Parker

Goff arose in connection with a proposed joint venture to develop land in which defendant agreed to pay any and all of the outstanding tax liabilities, as well as any forthcoming tax liabilities, related to the parcels of land involved in the venture. Plaintiff alleged that after defendant represented that such outstanding tax liabilities were paid, he presented to her what he represented to be promissory notes, which plaintiff needed to sign to ensure that she would repay half the money defendant paid towards the tax liabilities. Instead, the documents given to plaintiff were deed which conveyed the land to defendant.

Plaintiff maintained that because she trusted defendant, she did not read the papers that defendant presented to her.  She also alleged that defendant forged her signature.

Defendant moved for summary judgment to dismiss the complaint, arguing that plaintiff had full knowledge of what she was doing and signed over title to the subject parcels. The Court agreed with defendant and dismissed the fraud claim.

The Court held that defendant met his burden of showing that plaintiff transferred ownership of the subject properties without the taint of fraud. Slip Op. at *4 (citation omitted). The Court explained that plaintiff admitted that she signed the deeds that conveyed her interest in the subject parcels to defendant, and as such, there were no issues as to whether the deeds were duly executed. Id. (citations omitted).

The Court further explained that since plaintiff admitted that she failed to read the deeds before signing them, she could not establish justifiable reliance on any of the alleged false statements which led her to do so. Id. at *5. The Court rejected plaintiff’s argument that she failed to read the documents because she trusted the defendant, noting that such an excuse was not a valid reason for failing to read the documents before signing them. Id. (citations omitted).

Finally, the Court held that even if defendant misrepresented what the documents were, she was precluded from asserting that her signature was fraudulently procured because she did not read the documents. Id. (citation omitted).

Takeaway

A plaintiff alleging fraud must do so with particularity. Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553, 558 (2009). This means that the plaintiff must provide sufficient facts to support a “reasonable inference” that the allegations of fraud are true. Id. at 559-60. 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.”).

In addition, a plaintiff claiming fraud must allege facts “from which it is possible to infer defendant[s’] knowledge of the falsity of [their] statements” when they were made. MP Cool Invs. Ltd. v. Forkosh, 142 A.D.3d 286 (1st Dept.), lv denied, 28 N.Y.3d 911(2016). In other words, the plaintiff must satisfy the scienter element of the claim.

In Lash, the Court held that plaintiffs failed to satisfy the foregoing requirements.

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).

In Goff, plaintiff failed to satisfy the justifiable reliance element of a fraud claim.