A Hint of Falsity Requires a Heightened Degree of Diligence by The Party to Whom the Misrepresentation Was Made Says the Second DepartmentPrint Article
- Posted on: Mar 7 2019
In Ambac Assur. v. Countrywide, 31 N.Y.3d 569, 579 (2018) (here), the Court of Appeals described the justifiable reliance requirement of a fraud claim as a “fundamental precept” of the cause of action. 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.”
[I]f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him [or her] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he [or she] must make use of those means, or he [or she] will not be heard to complain that he [or she] was induced to enter into the transaction by misrepresentations.
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).
When the plaintiff “has hints” that the statement is false, the courts impose a “heightened degree of diligence” on the plaintiff. Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 279 (2011) (quoting Global Mins. & Metals Corp. v. Holme, 35 A.D.3d 93, 100 (1st Dept. 20016)). Under such circumstances, the courts require the plaintiff to make an “additional inquiry to determine” the “accuracy” of the statement. Id. (citation and internal quotation marks omitted). If the plaintiff fails to make such an inquiry, as in ISS Action, Inc. v. Tutor Perini Corp., 2019 N.Y. Slip Op. 01577 (2d Dept. Mar. 6, 2019) (here), the plaintiff will not be found to have reasonably relied on the alleged misrepresentation.
ISS Action, Inc. v. Tutor Perini
Defendant, Tutor Perini Corporation (“Tutor Perini”), is a construction company that had a contract with the Port Authority of New York and New Jersey to make improvements to a runway at John F. Kennedy International Airport. In connection with the project, Tutor Perini hired the plaintiff, ISS Action, Inc. (“ISS”), as a subcontractor to provide security services at the job site.
On July 31, 2009, ISS and Tutor Perini entered into a one-page agreement (the “2009 Agreement”) in order for ISS to begin work immediately. Under the agreement, ISS was to receive various rates of compensation in exchange for the security services it was providing. Those rates were “subject to New York State Sales Tax.”
In accordance with the 2009 Agreement, ISS performed the required services and invoiced Tutor Perini for the work performed. Tutor Perini paid the full amount of the invoice, including charges for sales tax. According to ISS, “one or more [Tutor Perini] representatives” informed it that the security services ISS provided “were, as a matter of fact and law, exempt from New York State and local sales and use taxes.”
Subsequent to those representations, Tutor Perini provided ISS with a New York State and Local Sales and Use Tax Contractor Exempt Purchase Certificate (the “Tax Exemption Certificate”). The Tax Exemption Certificate was signed by an employee of Tutor Perini and stated that “[t]he tangible personal property or service[s] being purchased” by the defendant were “exempt from sales and use tax” and then listed a number of possible exemptions. The exemption which was marked on the Tax Exemption Certificate stated that “[t]he tangible personal property will be used . . . to improve real property . . . owned by an organization exempt under section 1116(a) of the Tax Law.”
After receiving the completed Tax Exemption Certificate, ISS refunded the sales tax paid by Tutor Perini in connection with the first invoice and did not charge Tutor Perini any further sales tax. A more formal subcontract between the two parties was executed on February 12, 2010 (the “2010 Agreement”).
The 2010 Agreement provided, among other things, that ISS would be responsible for “all payments of taxes,” including “sales and use taxes.” ISS alleged that “[i]n light of the representations made by [the defendant] . . . that the services being performed by [the plaintiff] on the runway [p]roject were exempt from sales and use taxes,” it signed the 2010 Agreement.
In March of 2013, ISS was audited by the New York State Department of Taxation and Finance, which determined that ISS owed approximately $125,000 in back taxes plus interest with respect to the work it performed for Tutor Perini. After Tutor Perini refused ISS’s demands to pay the back taxes, ISS commenced the action.
ISS asserted four causes of action against Tutor Perini. The first cause of action sought a declaration that Tutor Perini was legally obligated to pay all sales tax, including interest and penalties, if any, owed as a result of ISS’s provision of services to the defendant. The second, third, and fourth causes of action sought to recover damages for breach of contract, unjust enrichment, and fraudulent misrepresentation, respectively.
In the fourth cause of action, ISS sought to recover damages for fraudulent misrepresentation. ISS alleged that Tutor Perini’s misrepresentations as to the tax-exempt status of ISS’s services induced ISS to enter into the 2010 Agreement and forgo the collection of taxes from the defendant in connection with the runway project. Tutor Perini maintained that any reliance on the representations about the tax-exempt status of ISS’s services was unreasonable.
ISS subsequently moved for summary judgment on the first, third, and fourth causes of action. Tutor Perini cross-moved for summary judgment dismissing the complaint. The motion court denied ISS’s motion and granted Tutor Perini’s cross motion. ISS appealed.
The Appellate Division, Second Department affirmed.
The Court’s Decision
The Court held that Tutor Perini “established, prima facie,” that ISS’s reliance on Tutor Perini’s statements “was unreasonable as a matter of law.” Slip op. at *3. The Court noted that since ISS was “aware of the nature of the services it was providing to the defendant”, it did not “allege that the defendant was in the exclusive possession of any facts which bore upon the tax-exempt status of the plaintiff’s work.” Id. “As such, the only representation upon which the plaintiff could have relied was the defendant’s legal opinion as to the taxable status of the plaintiff’s work.” Id. That opinion and the law on which it was based, observed the Court, was equally available to ISS. Id. (“In that regard, the plaintiff was in an equal position to discover the applicable law.”) Since the applicable law was available to ISS, the Court held that ISS could not have reasonably relied on Tutor Perini’s legal opinion.
The Court also found that ISS had a “hint” of falsity from the “face” of the Tax Exemption Certificate because the certificate showed that ISS was providing services to Tutor Perini, rather than “tangible personal property.” Id. “Under such circumstances, a ‘heightened degree of diligence [was] required’ and yet the plaintiff failed to utilize the means it had to determine the truth of the defendant’s legal representations.” Id. (citations omitted).
In Ambac, the Court of Appeals reinforced the importance of satisfying the justifiable reliance element of a fraud claim. Thus, a plaintiff alleging fraud must exercise “ordinary intelligence” to ascertain “the truth of the subject of the alleged false representation.” The failure to do so will result in dismissal of the claim.
When the plaintiff has a “hint” of the falsity, he/she must exercise a heightened degree of diligence in ascertaining “the truth of the subject of the alleged false representation.” In ISS Action, the plaintiff could not satisfy this heightened burden.