Publicly Available Information Negates Fraudulent Concealment Claim

• Posted on: Mar 1 2023

By: Jeffrey M. Haber

In 228 W. 72 LLC v. 228A W. 72 LLC, 2023 N.Y. Slip Op. 01057 (1st Dept. Feb. 28, 2023) (here), the Appellate Division, First Department dismissed a fraudulent inducement claim because the facts allegedly concealed were publicly available. We examine 228 W. 72 LLC below.

[Ed. Note: The factual discussion below comes from the parties’ briefing on appeal.]

228 W. 72 involved the purchase of real property (the “Premises”) by Plaintiff, 228 W. 72 LLC (“Plaintiff”), from Defendant, 228A W. 72 LLC (“Defendant”). 

Among other things, the contract of sale provided that Plaintiff was acquiring the Premises based upon “its own independent investigation and inspection of the property,” and “‘as is’ and ‘with all faults’”.  

Prior to the closing of the sale, Plaintiff conducted a search of the Premises to determine the condition of the property. Upon inspection, Plaintiff did not find any evidence that the property had an elevator. It was only after the closing that Plaintiff allegedly learned that the Premises had once been an elevator building and that Defendant took affirmative steps to hide this fact from Plaintiff through sealing the elevator doors, creating false walls in front of those doors, and removing all elevator buttons and signage. According to Plaintiff, those affirmative steps made it impossible for Plaintiff to learn of the elevator prior to the closing of the transaction. Plaintiff alleged that if Defendant had not taken affirmative steps to conceal the elevator, Plaintiff would not have closed on the Premises. Instead, Plaintiff would have required Defendant to restore the elevator to a working condition or provide Plaintiff with a credit to cover the cost of restoring the elevator. 

Plaintiff allegedly spent significant sums of money to restore the elevator and the elevator doors. 

Thereafter, Plaintiff sued Defendant, asserting causes of action for breach of contract, fraudulent inducement, and negligence. Plaintiff claimed damages in excess of $250,000.00. Plaintiff also sued other parties involved in the transaction. 

Defendant moved to dismiss the complaint. Relevant to this article, Defendant argued that it did not hide the elevator because it was purportedly open and obvious and because violations of NYC regulations concerning the elevator existed at the time of the transaction and were available for public inspection. 

In opposition, Plaintiff argued that Defendant had a duty to reveal hidden or concealed conditions, a duty to be honest, forthright, and truthful, and a duty to not willfully conceal defects in the Premises. Plaintiff also claimed that Defendant proffered no documentary evidence to refute Plaintiff’s claim of active concealment of the elevator shaft. Plaintiff further argued that Defendant knew of the concealed elevator shaft, which was a material fact, and intended to induce Plaintiff to enter into the contract by not disclosing its existence. 

The motion court granted Defendant’s motion. The motion court held that Plaintiff’s allegation that it was unaware that there was an elevator in the apartment building was not credible. The motion court found that Plaintiff’s assertion that the elevator shaft was covered and hidden was irrelevant because there were open violations relating to the elevator that “could have been ascertained by [Plaintiff].”¹ 

Plaintiff appealed.

As noted, the First Department affirmed the dismissal.

With regard to the fraudulent inducement claim, the Court held that Plaintiff could not satisfy the justifiable reliance element of the claim because it conducted an inspection of the Premises and was notified of the violations relating to the elevator, which violations were publicly available: 

Plaintiff cannot claim active concealment of the elevator or justifiable reliance on any false representations, as it inspected the premises prior to the closing and was notified of open and public New York City Department of Building (DOB) violations relating to the elevator. 

Takeaway

228 W. 72 is interesting because of its reliance on two related concepts pertaining to concealment and fraud: caveat emptor and justifiable reliance. 

Under the doctrine of caveat emptor, the buyer of real property is required to inspect the property and satisfy himself/herself as to the quality of his/her bargain.² This means that where a buyer has the means available to discover, by the exercise of ordinary intelligence and diligence, the true nature of the transaction into which he/she is about to enter, he/she must make use of those means (i.e., demonstrate justifiable reliance). The failure to do so will preclude him/her from arguing that he/she was fraudulently induced to enter into the transaction.³

The doctrine of caveat emptor imposes no duty on the seller or the seller’s agent to disclose any information concerning the property when the parties deal at arm’s length, unless there is some conduct on the part of the seller or the seller’s agent that constitutes active concealment. The mere silence of the seller, without some act or conduct which deceived the purchaser, does not amount to a concealment that is actionable as a fraud.⁵

In 228 W. 72, the Court held that, with respect to the breach of contract and negligence claims, Plaintiff did not allege a “duty independent of the contract for sale of the subject premises.”⁶ In the absence of a duty to disclose, there was no obligation to speak on the matter. [Ed. Note: This Blog examined the duty to disclose here.] 

The Court also highlighted the fact that Plaintiff purchased the Premises “as is” and subject to “all Violations” of state and municipal laws and ordinances.⁷ Based upon these findings, under the doctrine of caveat emptor, the Court seemed to be saying that Defendant’s silence as to the existence of the elevator did amount to a concealment that is actionable as a fraud.

[Ed. Note: This Blog examined the doctrine of caveat emptor and active concealment here.]

Even if there were active concealment, as alleged, the Court found that the claim would still be dismissed on justifiable reliance grounds.

As we have noted in prior articles, the justifiable reliance element is a “fundamental precept” of a fraud claim and is critical to the success of such a claim. Determining whether a plaintiff justifiably relied on a misrepresentation or omission, however, is “always nettlesome” because it is so fact intensive.⁸ Recognizing this difficulty, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.” Where the falsity of a representation⁹ could have been ascertained by reviewing “publicly available information,” courts have not hesitated to dismiss a fraud claim because of the failure to satisfy the justifiable reliance element.¹⁰ 

In 228 W. 72, the Court held that Plaintiff could not satisfy the justifiable reliance element because it inspected the Premises prior to the closing and was notified of violations of NYC regulations relating to the elevator – violations that were “open and public”.¹¹ 

[Ed. Note: This Blog examined the impact of publicly available information on a fraud claim here.]

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.

1. Slip Op. at *1 (citations omitted).
2. Glazer v. LoPreste, 278 A.D.2d 198, 198-99 (2d Dept. 2000). 
3. Ittleson v. Lombardi, 193 A.D.2d 374, 376 (1st Dept. 1993).
4. Matos v. Crimmins, 40 A.D.3d 1053, 1055 (2d Dept. 2007). 
5. London v. Courduff, 141 A.D.2d 803, 804 (2d Dept. 1988).
6. Slip Op. at *1.
7. Id.
8. DDJ Mgt., LLC v. Rhone Group L.L.C., 15 N.Y.3d 147, 155 (2010) (internal quotation marks omitted.
9. Curran, Cooney, Penney v. Young & Koomans, 183 A.D.2d 742, 743) (2d Dept. 1992). See also Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322 (1959).
10. 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).
11. Slip Op. at *1.