Summary Judgment Granted Because Reliance on Defendants’ Alleged Misrepresentations Was Not Justifiable

• Posted on: Dec 29 2024

By: Jeffrey M. Haber

The justifiable reliance element has been described as a “fundamental precept”[1] and a “venerable rule”.[2] The requirement is one of the five elements of a fraud cause of action: (1) a misrepresentation or a material omission of fact; (2) which was false and known to be false by the defendant(s); (3) made for the purpose of inducing another person to rely upon it; (4) justifiable reliance of the other party on the misrepresentation or material omission; and (5) damages.[3] 

Because the determination of whether a plaintiff justifiably relied on a misrepresentation or omission is a factually “nettlesome” one,[4] “[n]o two cases are alike ….”[5]  For this reason, the courts look to whether the plaintiff exercised “ordinary intelligence” in ascertaining “the truth or the real quality of the subject of the representation.”[6]  If the plaintiff fails to make use of the means available to discover the truth, his/her claim will be dismissed.[7] 

Similar to the scienter element, the justifiable reliance element is one of the more difficult elements of the cause of action to satisfy. Thus, for example, “when the party to whom a misrepresentation is made has hints of its falsity, a heightened degree of diligence is required of it. It cannot reasonably rely on such representations without making additional inquiry to determine their accuracy.”[8] 

Sophisticated parties also have a heightened responsibility to inquire of the truth. They must use due diligence and take affirmative steps to protect themselves from misrepresentations by employing whatever means of verification are available at the time. If they fail to do so, their complaint will be dismissed.[9] 

With the foregoing principles in mind, we examine Davidoff v. Hershfield, 2024 N.Y. Slip Op. 06560 (2d Dept. Dec. 24, 2024) (here).

[Eds. Note: the discussion of the facts comes from the briefs on appeal and the decision and order of the motion court and of the Appellate Division, Second Department.]

Davidoff involved alleged misrepresentations and omissions by defendants to deprive plaintiff of his claimed beneficial interest in, and to, his former marital residence, and other assets, including, but not limited to, funds in a fidelity account (“Fidelity Account”).

Defendants are the parents of plaintiff’s spouse (the “daughter”).[10] According to defendants, prior to plaintiff’s marriage to their daughter, defendants funded an account at Merrill Lynch by depositing $1 million therein. The account was later transferred to Fidelity. The Fidelity Account was held by defendants and their daughter as joint tenants with the right of survivorship. Defendants maintained that plaintiff did not contribute any money to the Fidelity Account.

In 2009, defendants and their daughter purchased property in Armonk, New York (the “marital residence”). The funds used to purchase the marital residence allegedly came from three sources: a mortgage, the Fidelity Account, and defendants’ personal accounts, as well as a non-collateralized loan from their accounts. According to defendants, plaintiff did not contribute any funds toward the purchase of the marital residence and was not named on the title.

On November 7, 2019, plaintiff commenced the action by filing a summons and complaint. Plaintiff asserted causes of action for, among other things, fraudulent misrepresentation against defendants for allegedly promising plaintiff an ownership interest in the marital residence (third cause of action), and fraud against defendants for not giving plaintiff an ownership interest in the marital residence.

Defendants later moved for summary judgment, seeking dismissal of, inter alia, the fraud causes of action asserted against them. Defendants argued that plaintiff failed to marshal evidence demonstrating that his reliance on the alleged misrepresentations and omissions was justifiable.

The motion court granted the motion. Plaintiff appealed. The Appellate Division, Second Department affirmed.

The Court held that the motion court “properly granted those branches of the defendants’ motion which were for summary judgment dismissing the third and fourth causes of action, alleging, respectively, fraudulent misrepresentation and fraud.”[11] The Court found that “defendants demonstrated that the plaintiff did not allege facts sufficient to plead the element of justifiable reliance on an alleged misrepresentation by the defendants.”[12] The Court explained, “that at the time the residence was purchased, the plaintiff knew that he did not have an ownership interest in the residence.”[13]

“Further,” said the Court, “to the extent that the plaintiff contended that the alleged misrepresentation by the defendants was that he would be entitled to a share in the proceeds of a future sale of the residence, the plaintiff did not allege nor does the record show that the residence was sold and the proceeds from the sale were withheld from the plaintiff.”[14]

Takeaway

In Davidoff, the Second Department affirmed the grant of summary judgment on the strength of a truism about the justifiable reliance element: a plaintiff cannot claim justifiable reliance on a misrepresentation if he/she already has knowledge of the truth. As noted by the Court, “[i]t [was] undisputed that at the time the [marital] residence was purchased, the plaintiff knew that he did not have an ownership interest in the residence.” Thus, plaintiff could not have relied on the alleged misrepresentations since, at the time, he was aware of the falsity of the alleged misrepresentations or omissions.[15]

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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] Ambac Assur. v. Countrywide, 31 N.Y.3d 569, 579 (2018).

[2] ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043, 1051 (2015) (Read, J., dissenting on other grounds) (describing the justifiable reliance requirement as “our venerable rule”).

[3] Pasternack v. Laboratory Corp. of Am. Holdings, 27 N.Y.3d 817, 827 (2016) (citation omitted).

[4] DDJ Mgt., LLC v. Rhone Group L.L.C., 15 NY3d 147, 155 (2010).

[5] Id.

[6] Curran, Cooney, Penney v. Young & Koomans, 183 A.D.2d 742, 743) (2d Dept. 1992).

[7] ACA Fin. Guar., 25 N.Y.3d at 1044.

[8] Centro Empresarial Cempresa S.A. v. América Móvil, S.A.B. de C.V., 17 N.Y.3d 269, 279 (2011) (quoting Global Mins. & Metals Corp. v. Holme, 35 A.D.3d 93, 100 (1st Dept. 2006), lv. denied, 8 N.Y.3d 804 (2007)).

[9] See, e.g., HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 194-95 (1st Dept. 2012). Accord, Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337-38 (2d Cir. 2011) (“An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.”) (internal quotation marks and citation omitted).

[10] Plaintiff and the daughter are engaged in divorce proceedings.

[11] Slip Op. at *2.

[12] Id.

[13] Id.

[14] Id.

[15] Slip Op. at *2.