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Justifiable Reliance Negated by the Terms of the Contract Executed by The Allegedly Defrauded Party

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  • Posted on: Dec 19 2022

By: Jeffrey M. Haber

As readers of this Blog know, we have often written about the justifiable reliance element of a fraud claim. Considered by the courts to be nettlesome,1 justifiable reliance is often the most difficult element for plaintiffs to satisfy. That was the case in FPG Maiden Lane, LLC v. Bank Leumi USA, 2022 N.Y. Slip Op. 07150 (1st Dept. Dec. 15, 2022) (here).

FPG concerned construction loans (the “Loan”) for FPG’s unfinished residential skyscraper in lower Manhattan (the “Property”).

After negotiating with various lenders, FPG agreed to a debt financing arrangement in 2015 with Bank Leumi USA (“BLUSA”). On May 26, 2016, FPG’s debt financing arrangement expanded to include Harel-Maiden Lane General Partnership (together, the “Lenders”). The relevant agreements with the Lenders are a Project Loan Agreement dated May 26, 2016, as amended (the “Project Loan Agreement”) and a Building Loan Agreement dated May 26, 2016, as amended (the “Building Loan Agreement” and collectively with the Project Loan Agreement, the “2016 Loan Agreements”).

The 2016 Loan Agreements provided that FPG could make requests for advances to cover the costs of construction and development of the Property (“Request for Advances”). Upon delivery of a Request for Advances, the Lenders were obligated to “fund the Request for Advance[s] within ten (10) business days,” subject to certain exceptions. One such exception was the existence of an Event of Default enumerated in Section 4.1 of the Loan Agreements. An Event of Default includes “if [FPG] fails to comply with … the terms, covenants or conditions of” the 2016 Loan Agreements.

As originally drafted, the 2016 Loan Agreements provided for a completion date for the Property of April 3, 2018. Due to problems in construction (including the original construction manager’s failure to perform), the Property was not completed on the anticipated timetable. FPG and the Lenders agreed to modify the terms of the 2016 Loan Agreements to account for the delays.

In September 2018 and in June 2019, FPG invested, in total, more than $22 million in additional equity pursuant to further amendments to the 2016 Loan Agreements. The completion date for the Property was extended to April 1, 2020.

By Fall 2019, it was apparent that the construction of the Property would not be completed by April 1, 2020. Plaintiff alleged that the delays were exacerbated by the Lenders’ delay of Loan draw requests. The parties agreed to engage in another renegotiation of the Loans, which culminated in the execution of the Third Amendments to the Loan Agreements on March 13, 2020.

Plaintiffs alleged that in the renegotiation of the Loans, the Lenders had two material requests. First, the Lenders wanted FPG to infuse an additional $20 million in cash into the Property to cover budget overruns. Second, the Lenders demanded that FPG obtain a Temporary Certificate of Occupancy (“TCO”) by a negotiated deadline from the New York City Department of Buildings. A TCO indicates “that the property is safe for occupancy, but … has an expiration date.” The Lenders proposed May 31, 2020, as the deadline for obtaining the TCO, with a 30-day grace period before an Event of Default could be triggered.

This round of negotiations continued into 2020. Plaintiffs alleged that the Lenders continued to point to the unbalanced budget as a reason to refuse funding any Request for Advances. FPG alleged that it became increasingly concerned it would run out of funds to pay the new construction manager and that all parties understood any delay in construction would adversely affect plaintiffs’ ability to meet the May 31, 2020 TCO deadline that the Lenders were proposing. FPG alleged that it was vocal about its concerns and repeatedly raised them from January 2020 through March 2020. 

FPG alleged that the Lenders made numerous false promises upon which FPG reasonably relied during negotiations in early 2020. Specifically, FPG alleged that over several telephone conversations in late February and early March 2020, BLUSA told plaintiffs that the May 31, 2020 TCO deadline was merely a formality, and that the banks would be flexible on these and other deadlines in the implementation of the contracts, just as the banks had been in the past with FPG. Among other promises, BLUSA allegedly assured plaintiffs that, if FPG agreed to provide the additional $20 million in equity for the Property, the Lenders (as they had been in the past) would be flexible and would not declare a default based upon the TCO deadline. 

FPG agreed to the third amendments to the 2016 Loan Agreements on March 13, 2020 (the “Third Amendments”), which included the new May 31, 2020 TCO deadline. The Third Amendments extended the completion date for the Property from April 1, 2020 to November 30, 2020 and the maturity date of the Loan from April 1, 2020 to December 31, 2020. The Third Amendments also altered the way the parties would handle budget overruns. Under as-amended Section 8.4 of the 2016 Loan Agreements, the Lenders agreed to fund the cost for any line item in the Property budget even if there were cost overruns on another line item or on the budget as a whole. 

FPG invested an additional $20 million in the project. FPG alleged that the Lenders were then supposed to, but failed to, fund the Requests for Advances. FPG maintained that, in June 2020, the Lenders manufactured an excuse to claim that an Event of Default existed as of June 2020. As a consequence, the Lenders claimed that they did not have to fund any outstanding Requests for Advances because FPG purportedly owed the Lenders money in unpaid interest on the Loan as of June 1, 2020. FPG alleged that more than twice this amount was available to the Lenders under the loan budget to cover the unpaid interest. Nevertheless, although FPG disputed that there was any unpaid interest, FPG wired money to the Lenders, which the latter returned the next day.

Finally, FPG alleged that on June 27, 2020, BLUSA admitted to plaintiffs during a telephone call that the Lenders never had any intention of funding any requests drawn from the Loan if the budget was out of balance. BLUSA allegedly further stated that the Lenders would not fund any requests drawn from the Loan unless FPG put up additional collateral and brought the budget into balance. BLUSA allegedly stated that it did not care, and never had cared, what the Third Amendments said.

Plaintiffs brough suit against defendants, asserting claims for, among others, fraud, negligent misrepresentation and breach of contract. In the fraud causes of action, FPG alleged that the Lenders fraudulently induced it to enter into the Third Amendments to the 2016 Loan Agreements by misrepresenting that the Lenders would be flexible about the TCO deadline and fund Requests for Advances if the budget for the Property that FPG was constructing was out of balance. In the breach of contract causes of action, FPG alleged that it submitted Requests for Advances before June 2020, i.e., before the TCO default, and defendants failed to honor those requests.

Defendants moved to dismiss. The motion court denied the motion. Plaintiffs appealed.

The Appellate Division, First Department modified the motion court’s order to reverse the denial of the motion to dismiss the fraud claims; the Court otherwise affirmed the motion court’s order.

With regard to the fraud causes of action, the Court held that FPG failed state a claim upon which relief could be granted. Through case citation, the Court held that FPG could not satisfy the justifiable reliance element of a fraud claim because the alleged false promises were “flatly contradicted by section 17 of the [T]hird [A]mendments.”2 

The Court further held that “[t]o the extent the fraud claim is based on a promise that the [L]enders would fund [R]equests for [A]dvances if the budget for the building was out of balance, that promise is reflected in section 8.4 of the [T]hird [A]mendments”.3 “Thus,” concluded the Court, “it is duplicative of the breach of contract claim”.4 

With regard to the negligent misrepresentation cause of action, the Court held that “because the borrower-lender relationship between the parties here does not constitute the special relationship required to support the claim”, the claim failed.5 

Finally, the Court held that the complaint stated claims for breach of contract. The Court explained that “the complaint alleges that FPG submitted requests for advances before June 2020, i.e., before the TCO default.”6 “Furthermore,” said the Court, defendants could not rely on their alleged creation of an event of default to defeat the breach of contract claim: “if an event of default was created by the [L]enders’ refusal to lend, they cannot rely on it to their benefit”.7 


As a general matter, a sophisticated party “cannot justifiably rely on oral representations when it thereafter enters into a contract containing terms that directly contradict those oral representations.”8 As discussed, FPG executed the Third Amendments relying on the Lenders’ alleged oral promises to refrain from exercising their contractual rights. Those promises, however, were contradicted by the terms of the amendments which FPG negotiated and agreed to. The Court in FPG found that those written provisions prevented FPG from satisfying the justifiable reliance element of its fraud-based claims. 

In modifying the motion court’s order, the Court reaffirmed New York law, which prevents a party that fails to satisfy its contractual obligations from escaping the consequences of its actions by claiming the defendant promised not to enforce the terms of the agreement between them. As the FPG Court observed, a plaintiff, especially a sophisticated one, cannot satisfy the justifiable reliance element of a fraud claim, when the oral representations claimed to be false are negated by the terms of the agreement between the parties.


  1. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted).
  2. Slip Op. at *1 (citing, Perrotti v. Becker, Glynn, Melamed & Muffly LLP, 82 A.D.3d 495, 498 (1st Dept. 2011) (“[A] party … cannot be said to have justifiably relied on a representation when that very representation is negated by the terms of a contract executed by the allegedly defrauded party”); Glenfed Fin. Corp., Commercial Fin. Div. v. Aeronautics & Astronautics Servs., 181 A.D.2d 575, 576 (1st Dept. 1992), lv. dismissed, 80 N.Y.2d 893 (1992)).
  3. Id.
  4. Id. (citing, New York City Waterfront Dev. Fund II, LLC v. Pier A Battery Park Assoc., LLC, 206 A.D.3d 565, 566 (1st Dept. 2022); ESBE Holdings, Inc. v. Vanquish Acquisition Partners, LLC, 50 A.D.3d 397, 398 (1st Dept. 2008)).
  5. Id. (citing, Korea First Bank of N.Y. v. Noah Enters., Ltd., 12 A.D.3d 321, 323 (1st Dept. 2004), lv. denied, 4 N.Y.3d 710 (2005); New York City Waterfront, 206 A.D.3d at 567)).
  6. Id. at *1-*2.
  7. Id. at *2 (citing, VXI Lux Holdco S.A.R.L. v. SIC Holdings, LLC, 171 A.D.3d 189, 195 (1st Dept. 2019)).
  8. Perrotti, 82 A.D.3d at 498.

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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