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Justifiable Reliance: Blind Trust is No Substitute for Due Diligence

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  • Posted on: Jan 28 2022

By: Jeffrey M. Haber

To plead a cause of action for fraud or fraud in the inducement, a plaintiff must allege facts to support the claim that he or she justifiably relied on the alleged misrepresentation(s). As we have noted in prior articles, the justifiable reliance element of a fraud claim is often the most challenging one to satisfy.

To demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.”1 Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.”2 As the Court of Appeals explained more than a century ago:

if the facts represented are not matters peculiarly within the [defendant’s] knowledge, and the [plaintiff] has the means available to [it] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, [the plaintiff] must make use of those means, or [it] will not be heard to complain that [it] was induced to enter into the transaction by misrepresentations.3

In Sharma v. Walia, 2022 N.Y. Slip Op. 00524 (1st Dept. Jan. 27, 2022) (here), the Appellate Division, First Department affirmed the dismissal of a fraudulent inducement claim because the plaintiff failed to demonstrate justifiable reliance on the alleged misrepresentation. Similar to Carmen E. Maestro Family Trust v. 449 Washington LLC, 2020 N.Y. Slip Op. 32054(U) (Sup. Ct., Kings County June 22, 2020) (which we wrote about here), the Court found that the failure to read the operative documents, which included the information necessary to ascertain the truth, negated any claim of justifiable reliance.

Sharma arose out of the purchase of a three Subway franchises in New York City.

Plaintiff alleged that Defendant, a longtime family friend, increased the initial purchase prices for all three restaurants after informing her that the subleases contained options to renew, thus increasing the restaurants’ value. Based on Defendant’s representations about the sublease renewals, Plaintiff alleged that she paid an extra $575,000. Plaintiff contended that Defendant’s representations regarding the sublease renewals proved to be false, as two of the leases did not have renewal options at all and the third had a renewal option with a deadline that Plaintiff could not meet. Thus, Plaintiff maintained, although she had paid additional sums because of the purported options to renew, she was forced to vacate all three restaurants when the subleases expired.

Defendants moved to dismiss.

In opposition, Plaintiff claimed that Defendant had engaged in a pattern of fraud in which he would state a price for the restaurant and then demand additional monies after he discovered the sublease contained a renewal option, which allegedly made the restaurants more valuable. In an affidavit, Plaintiff explained that “While I had been given the subleases and the prime leases at the 3 closings, I had no reason to investigate whether the 3 subleases contained options to renew and whether same had actually been exercised because I trusted [Defendant] totally and he had represented that he knew as a matter of fact that the three subleases contained 5 year renewal options which had all been fully exercised.” Plaintiff alleged that she would not have paid the additional $575,000 (for the three transactions) if Defendant had not made the false claims.

In reply, Defendant claimed, in addition to the failure to plead justifiable reliance, that his statements were promissory in nature – that is, he procured a renewal of the underlying lease agreements.

The motion court granted the motion.

The motion court held that Plaintiff failed to demonstrate that she justifiably relied on the alleged misrepresentation. The motion court found Plaintiff’s admission that she did not read the releases and subleases because of her trust in Defendant to be dispositive of the issue:

Plaintiff’s claim is that she entered into three complicated transactions at a price of nearly half a million dollars but never sought any verification concerning the lease renewals. That does not constitute justifiable reliance. Plaintiff bizarrely admits that although she received the subleases and prime leases, she had no reason to read anything because she trusted Walia (who apparently used to be a close family friend). Blind trust in the seller that includes a failure to review the leases for the restaurants cannot support claims for fraud.  

The motion court concluded that Plaintiff’s admission, as well another, “foreclose[d] plaintiff’s fraud claims.” The motion court explained that “the issue of the leases and potential lease renewals for the restaurants [Plaintiff] was purchasing [was] fundamental to these transactions. It simply cannot constitute justifiable reliance to believe statements about the leases, admit to receiving the relevant documents and to pay substantially more money without looking at a single document.”

Consequently, the motion court rejected Plaintiff’s contention that the lease renewals “led her to pay more than what she originally agreed to pay” because “she never reviewed a single document supporting [Defendant’s] alleged statements.”

Finally, the motion court held that the alleged misrepresentations were nothing more than “mere promise[s] that [Defendant] could renew the leases at some point.” As such, the representations were inactionable promissory statements about what was to be done in the future.4

On appeal, the First Department affirmed.

The Court agreed with the motion court that Plaintiff’s blind faith in Defendant and failure to read the prime leases and subleases removed any notion that Plaintiff justifiably relied on Defendant’s alleged misrepresentation:

Plaintiff’s fraud claims fail because she failed to allege justifiable reliance on [Defendant’s] alleged misrepresentations about the sublease renewal options. The facts regarding the subleases were not peculiarly within [Defendant’s] knowledge; on the contrary, plaintiff could have known the relevant facts had she simply read the leases, which she concedes she did not do.

The Court also held that the alleged misrepresentation was not a misrepresentation at all:

Furthermore, plaintiff does not allege that [Defendant] misrepresented the contents of the relevant documents, but rather, simply told her that it was not necessary for her to read them before she signed them at the closings. Under these circumstances, plaintiff cannot be heard to complain that she was induced by misrepresentations to enter into the transactions.6

Takeaway

As noted, to demonstrate justifiable reliance, a plaintiff must allege (and prove) that he or she relied upon the misrepresentation to his or her detriment. Such reliance must be “justifiable” and “reasonable.” Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.”

In Sharma, plaintiff could not demonstrate reasonable reliance on the alleged misrepresentation because she failed to read the leases and subleases. As noted by the Court, the disclosures in the leases made it unreasonable to rely on any statement concerning renewal options. Such unreasonableness was underscored by Plaintiff’s admitted blind trust in Defendant.


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

[1] Daly v. Kochanowicz, 67 A.D.3d 78, 91 (2d Dept. 2009).

[2] Rosenblum v. Glogoff, 96 A.D.3d 514, 515 (1st Dept. 2012).

[3] Schumaker v. Mather, 133 N.Y. 590, 596 (1892); see also DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 154 (2010).

[4] Eastman Kodak Co. v. Roopak Enterprises, Ltd., 202 A.D.2d 220, 222 (1st Dept. 1994).

[5] Slip Op. at *1 (citations omitted).

[6] Id. (citations omitted).

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