Negligent Misrepresentation, Fraud and the PPP Loan That Wasn’t

• Posted on: Oct 16 2023

By: Jeffrey M. Haber

Negligent misrepresentation and fraudulent inducement are, to some extent, cut from the same cloth. Both causes of action involve false statements. Often, though not always, the failure to satisfy the elements of one of the claims will result in the failure to satisfy the elements of the other. 

In Borovina v. ACAP Fund GP, LLC, 2023 N.Y. Slip Op. 05115 (2d Dept. Oct. 11, 2023) (here), the Appellate Division, Second Department affirmed the dismissal of a fraud claim on the ground that it mirrored the plaintiff’s negligent misrepresentation claim and was otherwise conclusory and violative of CPLR 3016(b).

“A claim for negligent misrepresentation requires the plaintiff to demonstrate (1) the existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff; (2) that the information was incorrect; and (3) reasonable reliance on the information.”¹ “‘[L]iability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party such that reliance on the negligent misrepresentation is justified.’”² Notably, the relationship “requires a closer degree of trust than an ordinary business relationship.”³ For this reason, arm’s-length transactions between sophisticated parties do not give rise to privity.⁴ 

A claim for fraudulent inducement requires the plaintiff to demonstrate that the defendant made a misrepresentation or omission of a material existing fact, which was false and known to be false by the defendant when made, for the purpose of inducing the plaintiff’s reliance thereon; that the plaintiff justifiably relied on such misrepresentation or omission; and that the plaintiff was injured thereby.⁵

Borovina v. ACAP Fund GP, LLC

According to the complaint, in January 2021, plaintiff registered with defendant The Loan Source, Inc. (“TLS”), and received access to the TLS online portal for the purposes of obtaining services to submit an application for a loan through the Payroll Protection Program (“PPP”). Plaintiff alleged that TLS and defendant ACAP Fund GP, LLC (“ACAP”), conducted business together as “ACAP + The Loan Source Team.” After plaintiff uploaded all documentation to the TLS online portal, TLS sent plaintiff a notice that there was an error or mismatch in the reporting of plaintiff’s social security and tax identification numbers with documentation previously submitted by plaintiff in support of a prior PPP loan application. In response, plaintiff provided TLS documentation to fix the error. TLS informed plaintiff that it had received the additional documentation and that his PPP loan application “should be all set.” 

Thereafter, plaintiff continued to receive error notices regarding his social security and tax identification numbers. TLS advised him to disregard those notices as they were “out of date.” 

Subsequently, in April 2021, TLS informed plaintiff that it was unable to obtain approval of his PPP loan application and that it could no longer provide PPP-related services to him.

Plaintiff commenced the action to recover damages for negligent misrepresentation and fraud against ACAP, TLS, and defendant Sterling National Bank. ACAP and TLS moved to dismiss the complaint, pursuant to CPLR 3211(a)(7), insofar as asserted against them. 

In an order dated October 19, 2021, the motion court, inter alia, granted the motion, finding that plaintiff failed to plead negligent misrepresentation and fraud with particularity. Plaintiff appealed. As noted, the Second Department affirmed the dismissal of the complaint.

The Court held that plaintiff did not demonstrate the existence of a special relationship with TLS and ACAP. Noting that a special relationship does not arise from an arm’s-length business transaction, the Court found that plaintiff failed to allege facts sufficient to “support an inference that a special relationship was created or existed between the plaintiff and ACAP or TLS.”⁶ 

“Further,” held the Court, “the Supreme Court properly granted that branch of the motion of ACAP and TLS … to dismiss the cause of action sounding in fraud insofar as asserted against them.”⁷ The Court found that the fraud allegations “were merely a recitation of the negligent misrepresentation cause of action.”⁸ In addition, said the Court, plaintiff failed to plead the claim with particularity, alleging in a “conclusory” way “that the defendants’ representations ‘were so reckless and wanton as to constitute fraud.’”⁹

Footnotes

1. J.A.O. Acquisition Corp. v. Stavitsky, 8 N.Y.3d 144, 148 (2007); see also Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 180 (2011).
2. Fresh Direct, LLC v. Blue Martini Software, Inc., 7 A.D.3d 487, 489 (2d Dept. 2004) (quoting Kimmell v. Schaefer, 89 N.Y.2d 257, 263 (1996).
3. Fleet Bank v. Pine Knoll Corp., 290 A.D.2d 792, 795 (3d Dept. 2002) (internal quotation marks and citation omitted).
4. See Greenberg, Trager & Herbst v. HSBC Bank USA, 17 N.Y.3d 565, 579 (2011).
5. Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996); see also New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318 (1995).
6. Slip Op. at *2 (citations omitted).
7. Id.
8. Id.
9. Id. (citations omitted).

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.