The Failure to Read Offering Plan Negates Claim of Justifiable Reliance

• Posted on: Jul 6 2020

We have often written about the justifiable reliance element of a fraud claim (e.g., here, here, here, here, and here). Though the outcome of the issue is typically fact dependent, dismissals nevertheless occur because the plaintiff cannot demonstrate that reliance was reasonable or justified. Such was the case (for the most part) in Carmen E. Maestro Family Trust v. 449 Washington LLC, 2020 N.Y. Slip Op. 32054(U) (Sup. Ct., Kings County June 22, 2020) (here), the subject of today’s article.

Carmen E. Maestro Family Trust v. 449 Washington LLC

Background

Plaintiff, the Carmen E. Maestro Family Trust, commenced the action to recover damages relating to the purchase and sale of a condominium unit. Plaintiff alleged that it engaged defendant, The Corcoran Group (“Corcoran”), as a real estate broker to show apartments with two bedrooms, two bathrooms and open light and views in the Tribeca neighborhood of Manhattan. Corcoran was previously retained by defendant, 449 Washington LLC (“449 LLC”), as the listing agent to market condominium units in 449 LLC’s building. Defendant, M. Monica Novo (“Novo”), an agent employed by Corcoran, showed plaintiff an apartment in the building. Plaintiff alleged that 449 LLC and Corcoran/Novo falsely marketed the unit as a two-bedroom and two-bathroom apartment with three exposures, when in fact the unit was only a legal one-bedroom apartment with two exposures. Plaintiff claimed that defendants failed to disclose that the southern wall of the unit, which featured five windows, was actually on a “lot line,” and therefore any construction along this lot line taller than the third floor of the building would require the sealing of the windows in the southern wall of the unit and the consequential loss of light and air.

Plaintiff alleged that it relied on the misrepresentations of 449 LLC, Corcoran and Novo as to the number of legal bedrooms in closing on the unit and that if it was made aware of the fact that the unit was only a legal one-bedroom apartment and contained lot line windows that may require sealing, it would have exercised the contractual right of rescission and recovered its down payment. Plaintiff alleged that it suffered damages in that it could only sell the unit as a legal one-bedroom apartment (due to the loss of the lot line window of the second “bedroom”) at a price substantially lower than the sum plaintiff paid for the unit.

Plaintiff set forth a number of causes of action, including fraudulent inducement against 449 LLC and Corcoran/Novo (third). Each of the parties moved for summary judgment.

The Court’s Decision

Plaintiff alleged that it was fraudulently induced to buy the unit. According to the complaint, defendants misrepresented that the unit was a legal two-bedroom apartment, that the southern windows were not lot line windows, that the windows would not be blocked by the building constructed on the lot to the south and/or that the windows would not need to be sealed because the adjacent building would be set back 15 feet from the property line of 449 LLC’s building.

To establish a claim for fraudulent inducement, a plaintiff must show a “misrepresentation or a material omission of fact which was false and known to be false by defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.” Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996); Tsinias Enters. Ltd. v. Taza Grocery, Inc., 172 A.D.3d 1271, 1272 (2d Dept 2019). The Court held that plaintiff failed to satisfy the justifiable reliance element of the claim. Slip Op. at *9.

The Court rejected plaintiff’s claim that it relied on the brochure floor plan in purchasing the unit. Id. The Court observed that the floor plan was “devoid of any indication that the southern wall windows were lot line windows.” Id. “[S]uch reliance,” said the Court, was “not justifiable given that the brochure provided” an artist’s rendition of the floor plan and the Sponsor had made “no representations or warranties except as … set forth in the Offering Plan.” Id. “[T]he Offering Plan clearly stated that ‘[a]ll windows along the South facade, at the third, fourth, fifth, sixth and seventh floors, [were] ‘Lot Line’ windows,’” said the Court. Id. 

In light of the foregoing statement in the Offering Plan, the Court held that plaintiff’s admitted failure to read the Offering Plan before signing the Purchase Agreement “prevent[ed] plaintiff from establishing justifiable reliance.…” Id. (citing Stortini v. Pollis, 138 A.D.3d 977, 978 (2d Dept. 2016); Sorenson v. Bridge Capital Corp., 52 A.D.3d 265, 266 (1st Dept. 2008). “A party who signs a document without any valid excuse for not having read it,” said the Court, “is ‘conclusively bound’ by its terms.” Id. (quoting Ferrarella v. Godt, 131 A.D.3d 563, 567-568 (2d Dept. 2015) (internal quotation marks omitted), quoting Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 11 (1988)). The Court concluded that “[b]ased upon the express terms of the Offering Plan and the Purchase Agreement, plaintiff [could not] claim that it reasonably relied upon any purported misrepresentations contained in promotional materials or oral statements.” Id. at *10 (citations omitted). Therefore, as against 449 LLC, the Court dismissed the fraudulent inducement claim.

The Court also held that Corcoran/Novo demonstrated that no misrepresentation was made upon which plaintiff could have justifiable relied. Id. at *10. The Court explained that deposition testimony revealed that plaintiff merely relied on “predictions as to likelihood”, which are not actionable as a fraud. Id. at *12, *13 (citing Zanani v. Savad, 217 A.D.2d 696, 697 (2d Dept. 1995) (“In general, a representation of opinion or a prediction of something which is hoped or expected to occur in the future will not sustain an action for fraud”)). “According to the aforementioned testimony,” said the Court, “any representation by Novo that no building would be constructed on the adjoining lot was not a misrepresentation of a present fact but either a future prediction or a representation conditioned upon the nonoccurrence of a future action (e.g. a zoning variance).” Id. at *14.

The Court further held that “plaintiff could not have justifiably relied on any alleged misrepresentation by Corcoran/Novo regarding the unit’s location on a lot line given the clear statements in the Offering Plan which [plaintiff] admits having not read.” Id. 

Thus, concluded the Court, a claim of fraudulent misrepresentation could not be supported by “allegations of misrepresentations concerning the existence of lot line windows or whether construction was planned for the adjoining lot.” Id.

However, the Court sustained plaintiff’s fraudulent inducement claim concerning the legality of the apartment as a two-bedroom unit. Id. at *17. Plaintiff claimed that it purchased the unit based upon the representation in the marketing materials that the unit was a two-bedroom apartment, when, in fact, it was only a legal one-bedroom apartment. Id. Corcoran/Novo argued that despite any representations with respect to the number of legal bedrooms in the unit, such could not be the cause of plaintiff’s loss upon resale as apartments were priced according to square footage.

The Court rejected defendants’ evidence because it was “equivocal as to whether square footage was the sole motivator in pricing the apartment.” Id. at *16. The Court explained that “[t]here [was] no … proof offered to establish, as a matter of law, that the loss plaintiff took upon resale of the apartment was unrelated to the change in the number of legal bedrooms rather than, as Corcoran/Novo argue, ‘market forces.’” Id. 

Consequently, the Court found that “an issue of fact remain[ed] as to whether the subject apartment was improperly marketed and overvalued as a legal two-bedroom apartment, whether plaintiff was misled into believing that any potential neighboring structure would be set back from the unit’s lot line windows and whether plaintiff suffered actual damages when she submitted an offer based on said misrepresentations and was compelled to market and resell the unit as a one-bedroom apartment with endangered windows at a substantially lower price.” Id. at *17.

[Ed. Note: Plaintiff also alleged that defendants violated General Business Law §§ 349 and 350. A cause of action to recover damages for a violation of GBL § 349 must “identify consumer-oriented misconduct which is deceptive and materially misleading to a reasonable consumer, and which causes actual damages.” Wilner v. Allstate Ins. Co., 71 A.D.3d 155, 161-162 (2d Dept. 2010); Oswego Laborers’ Local 214 Pension Fund v. Marine Midland Bank, 85 N.Y.2d 20, 25 (1995). Defendants sought dismissal of these claims on the ground that the subject transaction was not consumer oriented. The Court rejected the argument, noting that a claim “under the Deceptive Practices Act based upon deceptive or misleading information in brochures and advertisements for the sale of condominiums and cooperative apartments to the public” is consumer-oriented conduct. Id. at *20 (quoting Board of Mgrs. of Beacon Tower Condominium v. 85 Adams St., LLC, 136 A.D.3d 680, 685 (2d Dept. 2016); see also B.S.L. One Owners Corp. v. Key Intl. Mfg., 225 A.D.2d 643, 644 (2d Dept. 1996); Board of Mgrs. of Bayberry Greens Condominium v. Bayberry Greens Assoc., 174 A.D.2d 595, 596 (2d Dept. 1991)). Consequently, the Court held that “Defendants fail[ed] to establish, as a matter of law, that the instant transaction [did] not fall within the ambit of the statutes, and there remain[ed] an issue of fact as to whether the materials indicating that the subject unit contain[ed] two legal bedrooms [was] deceptive or misleading.” Id.]

Takeaway

To demonstrate justifiable reliance, a plaintiff must demonstrate that he/she relied upon the misrepresentation to his/her detriment. Such reliance must be “justifiable” and “reasonable.” Daly v. Kochanowicz, 67 A.D.3d 78, 91 (2d Dept. 2009). Thus, where a party has the means to discover “the true nature of the transaction by the exercise of ordinary intelligence and fails to make use of those means, he cannot claim justifiable reliance on defendant’s misrepresentations.” Rosenblum v. Glogoff, 96 A.D.3d 514, 515 (1st Dept. 2012).

Although the Court in Carmen E. Maestro Family Trust sustained a portion of the fraudulent inducement claim against defendants Corcoran/Novo, plaintiff could not demonstrate reasonable reliance on the alleged lot line misrepresentations because it failed to read the Offering Plan. As noted by the Court, the disclosures in the Offering Plan made it unreasonable to rely on any statement concerning lot line windows. The law is settled that “a party will not be excused from his failure to read and understand the contents of a [relevant document].” Johnson v. Thruway Speedways, 63 AD2d 204, 205 (3d Dept. 19780 (citation omitted). For this reason, “the signer of a written agreement is conclusively bound by its terms unless there is a showing of fraud, duress or some other wrongful act on the part of any party to the contract.” Columbus Trust Co. v. Campolo, 110 A.D.2d 616, 617, aff’d 66 N.Y.2d 701. In Carmen E. Maestro Family Trust, there was no evidence of such conduct.