Publicly Available Information, Justifiable Reliance and The Caveat Emptor Doctrine

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Posted on: Mar 14 2024

The common law doctrine of caveat emptor is a well-accepted rule of law in New York. Under the doctrine, the courts will not impose liability on a seller of property for failing to disclose information material to the transaction when the parties deal at arm’s length,¹ unless there is some conduct on the part of the seller which constitutes active concealment.² “If, however, some conduct (i.e., more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property.”³

“To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his [or her] responsibilities fixed by the doctrine of caveat emptor.”⁴ “Where 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 or 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.”⁵

Where the falsity of a representation could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim under the caveat emptor doctrine.⁶The same is true under the justifiable reliance element of a fraud claim.⁷

[Eds. Note: This Blog examined the caveat emptor doctrine here and here and the impact of publicly available information on a fraud claim, in particular on the justifiable reliance element here and here.]

In 98 Gates Ave. Corp. v. Bryan, 2024 N.Y. Slip Op. 01284 (2d Dept., Mar. 13, 2024) (here), the Appellate Division, Second Department, examined the foregoing principles. As discussed below, 98 Gates Ave. involved an alleged breach of a contractual representation and the fraudulent concealment of defendant’s true ownership interest in certain real property (the “Premises”).

Plaintiff commenced the action in February 2020, claiming fraud and breach of contract arising out of a written agreement between plaintiff and defendant for the sale of defendant’s interest in certain real property located in Brooklyn, N.Y. that had been owned by defendant’s deceased father. Plaintiff alleged that, among other things, it purchased defendant’s purported 50% interest in the Premises based upon false representations by defendant that he was the sole heir and distributee of his father, that defendant was a 50% owner of the Premises, and that his father did not have a will. According to plaintiff, after the closing, plaintiff discovered the existence of a will of defendant’s father, which had been probated in New York County prior to plaintiff’s purchase and learned that defendant had owned only a 25% interest in the Premises.

Defendant moved to dismiss the complaint pursuant to CPLR 3211(a). In an order dated March 12, 2021, the motion court granted the motion. The Second Department affirmed.

The Court held that plaintiff failed to allege a misrepresentation of fact – that is, defendant’s father did not have a will.⁸ In so holding, the Court found that “evidence submitted by the defendant in support of his motion established that the will at issue was probated and a matter of public record.”⁹ As such, plaintiff could not have been misled by defendant’s representation.¹⁰

Moreover, the Court held that defendant’s failure to disclose the will to plaintiff did not constitute active concealment because the information that was allegedly withheld was not peculiarly within defendant’s knowledge or unlikely to be discovered by a prudent person exercising due care with respect to the subject transaction.¹¹ In other words, plaintiff failed to allege that defendant’s alleged concealment of information thwarted plaintiff’s ability to conduct its own investigation into the existence of a will or that it justifiably relied on the information allegedly concealed: “Since the will, which had been probated, was a matter of public record and not exclusively within the knowledge of the defendant, any failure by the defendant to disclose the will to the plaintiff did not constitute active concealment and was thus not actionable as fraud.”¹²

Takeaway

Under the doctrine of caveat emptor, the purchaser of real property has a duty to investigate the truth or the real quality of the subject of the representation and satisfy himself/herself as to the bona fides the transaction. The same is true under the justifiable reliance element of a fraud claim. The courts in New York will not hesitate to dismiss a fraud claim by a purchaser of real property where information alleged to have been concealed could have been reasonably discovered through an inspection or another form of due diligence. Since the seller has no duty to disclose, the seller will be liable only when he/she thwarts or prevents the purchaser from discovering the truth about the transaction through the exercise of due diligence. In 98 Gates Ave. plaintiff was unable to satisfy that pleading burden.

Footnotes

It is important to note that the caveat emptor doctrine applies not only to concealed conditions but also to claims relating to the ownership of property and other tangible attributes of the property. E.g., Clearmont Prop., LLC v. Eisner, 58 A.D.3d 1052, 1056 (3d Dept. 2009) (misrepresentations concerning legal ownership of the subject property); McDonald v. O’Connor, 189 A.D.3d 1208, 1211 (2d Dept. 2020) (misrepresentation concerning whether the property at issue was subject to landmark classification); Mosca v. Kiner, 277 A.D.2d 937, 938 (4th Dept. 2000) (misrepresentation concerning the existence of deeded lake rights).
Simone v. Homecheck Real Estate Servs., Inc., 42 A.D.3d 518, 520 (2d Dept. 2007); Razdolskaya v. Lyubarsky, 160 A.D.3d 994, 996 (2d Dept. 2018); Radushinsky v. Itskovich, 127 A.D.3d 838, 839 (2d Dept. 2015).
Hecker v. Paschke, 133 A.D.3d 713, 716 (2d Dept. 2015) (internal quotation marks omitted); see also Daly v. Kochanowicz, 67 A.D.3d 78, 92 (2d Dept. 2009).
Jablonski v. Rapalje, 14 A.D.3d 484, 485 (2d Dept. 2005); Razdolskaya, 160 A.D.3d at 996.
Rojas v. Paine, 101 A.D.3d 843, 845 (2d Dept. 2012).
E.g., Clearmont Prop., 58 A.D.3d at 1056 (ownership records were a matter of public record); McDonald, 189 A.D.3d at 1211 (property’s landmark status was a matter of public record); Mosca, 277 A.D.2d at 938 (the existence of deeded lake rights was a matter of public record.); Eisenthal v. Wittlock, 198 A.D.2d 395, 396 (2d Dept. 1993) (misrepresentations concerning the boundaries of the premises).
E.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 195 (1st Dept. 2012); see also Churchill Fin. Cayman, Ltd. v. BNP Paribas, 95 A.D.3d 614 (1st Dept. 2012).
Slip Op. at *2.
Id.
Id. (citing DeMartino v. Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara & Wolf, LLP, 189 A.D.3d 774, 775 (2d Dept. 2020); Glazer v. LoPreste, 278 A.D.2d 198, 199 (2d Dept. 2000)).
Id.
Id. (citing Chapman v. Jacobs, 197 A.D.3d 851, 851-852 (4th Dept. 2021); Rojas, 101 A.D.3d at 845).

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.