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Second Department Shorts: Two Cases, One Element of Fraud

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  • Posted on: May 24 2019

In today’s post, this Blog looks at two cases decided by the Appellate Division, Second Department, involving the first element of a common law fraud and insurance fraud cause of action: the making of a misrepresentation of material fact. In Tsinias Enters. Ltd. v. Taza Grocery, Inc., 2019 N.Y. Slip Op. 04020 (2d Dept. May 22, 2019) (here), the Court affirmed the dismissal of a fraud and fraudulent inducement action because the plaintiff failed to plead a misrepresentation of fact, and in 2900 Stillwell Ave., LLC v. U.S. Underwriters Ins. Co., 2019 N.Y. Slip Op. 03939 (2d Dept. May 22, 2019) (here), the Court affirmed the dismissal of an insurance action and rescission of an insurance policy because the defendant established that the plaintiff made a material misrepresentation on its insurance application.

Tsinias Enterprises Ltd. v. Taza Grocery, Inc.

Tsinias arose out of a landlord-tenant relationship at a commercial building located on Park Avenue South in New York City. The parties entered into four separate agreements related to that relationship: a ten-year lease and three extensions of the lease.

Plaintiff filed the action to rescind the three amendments on the ground that they were procured by fraud. In essence, plaintiff claimed that defendants made misrepresentations of material fact about the terms of the amendments (i.e., the rent) by concealing the amendments in a stack of documents that Nicholas Tsinias (“Nicholas”), plaintiff’s former general partner, signed but did not read. Specifically, plaintiff claimed that defendant, Jamil Yabroudi (“Yabroudi”), president of defendant Taza Grocery, Inc. (“Taza”), befriended Nicholas and began assisting Nicholas with the management of the building. Plaintiff contended that Yabroudi placed the first amendment (which extended his business’ lease at the building) in a stack of other documents for Nicholas to sign. Plaintiff claimed that Nicholas did not read this amendment or any of the other amendments extending Taza’s lease, although plaintiff conceded that Nicholas signed the documents. Plaintiff complained that Nicholas and Yabroudi never had any negotiations about the lease extensions.

Defendants moved to dismiss the complaint on the ground that plaintiff failed to plead fraud with the requisite particularity. Defendants contended that simply not reading documents before signing them, even if true, could not support a claim that Nicholas was misled. Defendants also claimed that plaintiff was bound by the terms of the agreements Nicholas signed. Moreover, defendants argued that the complaint failed to identify any false statements made by Yabroudi to Nicholas about the amendments and failed provide enough details to state a claim for fraud.

The motion court (Justice Arlene P. Bluth) granted the motion.

After noting the elements of a fraudulent inducement cause of action (e.g., “a knowing misrepresentation of material present fact, which is intended to deceive another party and induce that party to act on it, resulting in injury”), Justice Bluth held that plaintiff failed to identify any misrepresentation fact. The court noted that “[t]here is nothing on the face of these agreements that evidences a misrepresentation or an intent to deceive. Nor is there anything suspicious about them ….” “In fact,” noted the court, “each of these lease extensions include rent increases for each year through 2035.”

Justice Bluth rejected the argument that each amendment was procured by fraud simply because the rent under each amendment was below market: “The fact that plaintiff’s new general partner might have tried to bargain for a better deal for the third amendment does not establish that Yabroudi made a material misrepresentation.” Buyer’s remorse is not the basis for a fraud claim reasoned the court: “Just because plaintiff now regrets entering into these agreements does not mean they were procured by fraud.”

The court also rejected the argument that “Nicholas was deceived because he did not read” the agreements. “Nicholas, as a signatory to these documents, ‘is presumed to know the contents of the instrument [he] signed and to have assented to such terms.’” (Citation omitted.)

On appeal, the Second Department affirmed.

The Court held that “the complaint [did] not contain any specific allegations setting forth the misrepresentations allegedly made by the defendants.” Slip Op. at *1.

The Court also rejected the argument, like Justice Bluth, that Nicholas’ failure to read the agreements supported a fraud cause of action: “To the extent that the plaintiff alleged that Nicholas did not read the lease extensions, ‘[a] party who signs a document without any valid excuse for having failed to read it is conclusively bound by its term.’” Id. (citations omitted).

Accordingly, the Court affirmed the dismissal of the fraudulent inducement and fraud claims.

2900 Stillwell Avenue, LLC v. U.S. Underwriters Insurance Co.

In 2900 Stillwell Avenue, plaintiff sought to recover the proceeds of a commercial insurance policy. Before the Second Department was an appeal of an order granting defendant summary judgment and rescission of the insurance policy in question.

Although the Court did not provide a discussion of the factual background, the decision provides a good discussion of the law pertaining to the rescission of an insurance policy in the context of an alleged fraudulent insurance application.

“To establish the right to rescind an insurance policy, an insurer must show that its insured made a material misrepresentation of fact when securing the policy.” Slip Op. at *1. Under insurance law, “[a] representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof.” Id., citing Insurance Law § 3105(a); Piller v. Otsego Mut. Fire Ins. Co., 164 A.D.3d 534 (2d Dept. Aug. 1, 2018); Joseph v. Interboro Ins. Co., 144 A.D.3d 1105 (2d Dept. 2016). “A misrepresentation is material if the insurer would not have issued the policy had it known the facts misrepresented.” Id., citing Insurance Law § 3105(b). “To establish materiality as a matter of law, the insurer must present documentation concerning its underwriting practices, such as underwriting manuals, bulletins, or rules pertaining to similar risks, that show that it would not have issued the same policy if the correct information had been disclosed in the application.” Id. (citations omitted). However, “[c]onclusory statements by insurance company employees, unsupported by documentary evidence, are insufficient to establish materiality as a matter of law.” Schirmer v. Penkert, 41 A.D.3d 688, 691 (2d Dept. 2007).

Based upon these legal principles, the Court held that defendants met their burden of proving a material misrepresentation of fact at the time plaintiff secured the subject policy.

The defendants established their prima facie entitlement to judgment as a matter of law through evidence demonstrating that the plaintiff made a material misrepresentation on its application. That evidence included the affidavit of a senior vice president of corporate underwriting and a copy of the underwriting guidelines, which established that the plaintiff’s misrepresentation induced the defendants to issue a policy it otherwise would not have issued. The plaintiff failed to raise a triable issue of fact in opposition.

Slip Op. at *1 (citations omitted).

Accordingly, the Court affirmed the motion court’s grant of summary judgment and rescission of the insurance policy.

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