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The Fiduciary Duty of Candor, Fraudulent Inducement and No-Reliance Clauses

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  • Posted on: Jan 7 2024

By: Jeffrey M. Haber

It is often said that a fiduciary owes the duties of care, loyalty and candor to the person with whom the fiduciary has a relationship.

The duty of care requires the fiduciary to act as a reasonable and prudent person would act in a similar circumstance.

The duty of loyalty requires the fiduciary to act in good faith and with the best interests of the person or entity with whom the fiduciary relationship exists. This means that the fiduciary must put the interests of the person or entity above his/her own personal interests. As one court observed:

The reasons for the loyalty rule are evident. A man cannot serve two masters. He cannot fairly act for his interest and the interest of others in the same transaction. Consciously or unconsciously, he will favor one side or the other, and where placed in this position of temptation, there is always the danger that he will yield to the call of self-interest.[1]

The duty of candor requires the fiduciary to act with honesty. This means that the fiduciary must fully disclose information that may harm the person or entity that is owed the duty. In other words, the fiduciary cannot perpetrate a fraud on the person or entity with whom the fiduciary has a fiduciary relationship.

[Eds. Note: This Blog examined the foregoing duties here.]

The duty of candor was at issue in Chan v. Havemeyer Holdings LLC, 2024 N.Y. Slip Op. 00020 (1st Dept. Jan. 4, 2024) (here).

Chan involved the investment by plaintiffs in a real estate investment limited liability company.[2]

Plaintiffs are investors and minority members of Havemeyer Holdings LLC (“Havemeyer”), a real estate investment vehicle formed in 2016 for the purpose of developing a property located in Williamsburg, Brooklyn. Each of the plaintiffs – Dai Yu, Kai Cho Vincent Chan, and Allen Fu (collectively, the “Individual Plaintiffs”) – invested in the project at various times between 2016 and 2018, and Yuca Capital Partners LP (an entity controlled by Yu) in 2020.

Plaintiffs were passive investors in the project, which was run by TC Havemeyer Manager LLC (“TC Havemeyer”) and Tavros Holdings LLC (“Tavros”) of which Nicholas Silvers (“Silvers”) was a principal.

On February 27, 2020, Defendants sent an email solicitation to Plaintiffs offering an opportunity for them, as members of Havemeyer, to make a further investment in the project. Among other things, Defendants stated that refinancing was in process, by which Havemeyer was de-leveraging and de-risking its investment in the project, leading to a projected “sixty percent plus” rate of return (with a worst-case return of 47%) within twelve to fifteen months. On March 2, 2020, Plaintiffs spoke to Silvers about the opportunity set forth in the email. In response to their question as to the status of the refinancing, Silvers stated it was “already done”.

Based on the content of the solicitation, the representation about the status of the refinancing, and Defendants’ answers to Plaintiffs’ questions, and after consulting with industry experts and real estate investors about the investment, Plaintiffs invested a total of $3.1 million in Havemeyer.  

Within two months after their checks had cleared, Plaintiffs allegedly learned that the refinancing was not “done”. As a result, Plaintiffs demanded rescission of the transactions and the return of their money. Defendants refused to satisfy the demand.

Plaintiffs commenced the action, asserting that their March 2020 investments were induced by a materially false statement about the refinancing. The complaint at issue contained seven counts: Count 1 – rescission based on fraud against all defendants; Count 2 – fraud against all defendants; Counts 3 and 4 – violations of the federal securities laws, which were dismissed by agreement; Count 5 – breach of fiduciary duty against TC Havemeyer); Count 6 – negligent misrepresentation by TC Havemeyer; and Count 7 – unjust enrichment against all Defendants.

Defendants moved to dismiss. Relying on a no-reliance disclaimer in the subscription agreement, which Plaintiffs signed to make their investment, the motion court dismissed the fraud, rescission and negligent misrepresentation claims, while upholding plaintiffs’ claim for breach of fiduciary duty.

The Appellate Division, First Department modified the motion court’s order to deny Defendants’ motion insofar as the Individual Plaintiffs are concerned, and to strike Plaintiffs’ demands for lost profits and punitive damages, and otherwise affirmed the motion court’s order.

As an initial matter, the Court held that TC Havemeyer owed plaintiffs the fiduciary duty of candor and breached that duty by failing to provide “full disclosure about the refinancing opportunity.”[3] In this regard, the Court explained that “TC Havemeyer’s interest in enabling Havemeyer to quickly and easily obtain funds from existing investors allegedly conflicted with the Individual Plaintiffs’ efforts to obtain complete and accurate information about the refinancing opportunity.”[4]

Notably, the Court held that the no-reliance clause (which can bar a claim for fraud) in the subscription agreement did not bar the Individual Plaintiffs’ breach of fiduciary duty claim.[5] Under New York law, a disclaimer clause in a contract cannot defeat a claim of fraud if the defendant owes the plaintiff a fiduciary duty.[6] Under such circumstances, the contract itself –including the specific disclaimer clause – would be voidable because “a fiduciary cannot by contract relieve itself of the fiduciary obligation of full disclosure by withholding the very information the beneficiary needs in order to make a reasoned judgment whether to agree to the proposed contract.”[7] Thus, held the Court, the motion court “properly declined to dismiss the fifth cause of action with respect to the Individual Plaintiffs, who are the only plaintiffs alleging breach of fiduciary duty against TC Havemeyer.”[8]

“By contrast,” noted the Court, “TC Havemeyer did not owe a fiduciary duty to plaintiff Yuca Capital Partners LP, which, unlike the Individual Plaintiffs, was not a preexisting investor.”[9] Without being a pre-existing investor, Yuca entered into the transaction at arm’s length. As such, the no-reliance clause applied to bar Yuca’s fraud claim:

Because the plain language of section 4 says Yuca is relying solely on the Offering Materials, as a matter of law, Yuca could not have relied on defendant Nicholas Silvers’ statement that the refinancing was “already done”.[10]

Moreover, the Court held that there were hints of falsity (e.g., the conflicting statements about the refinancing) that required Yuca to “have exercised a heightened degree of diligence.”[11] Accordingly, the Court held that “Yuca’s claims for fraud and rescission based upon fraud … fail.”[12]

The Court also rejected Defendants’ arguments that Plaintiffs failed to plead the elements of their fraud claims.

“With respect to justifiable reliance,” said the Court, “the beneficiaries of a fiduciary relationship, such as the Individual Plaintiffs, are entitled to rely on their fiduciary’s ‘representations and [its] complete, undivided loyalty.’”[13] Thus, concluded the Court, Plaintiffs were “‘not required to perform independent inquiries … to reasonably rely on their fiduciary’s representations.’”[14]

“As to whether there was a false representation of existing fact,” the Court concluded that “the statement that ‘the refinancing was “already done”’ was a factual statement about the past, not an expression of hope about the future.”[15] Under New York law, to be actionable, the “representation relied upon must relate to a past or existing fact,” as opposed to a representation of what is “hoped or expected to occur in the future.”[16]

The Court also held that “Plaintiffs … sufficiently allege[d] scienter,” stating that “intent to commit fraud is [ordinarily] a question of fact which cannot be resolved on a motion to dismiss.”[17]

Finally, the Court held that Plaintiffs were not required to allege their demand for damages with particularity.[18] Unlike cases where the complaint did not contain any facts from which it could be inferred that the plaintiff incurred damages or where the claim of damages was conclusory and without any factual support, the Court held that Plaintiffs’ demand for the return of their investment sufficed to satisfy the damages element of the claim.[19]


Chan is notable for three reasons. First, it confirms that fiduciaries owe a duty of candor to those with whom they have a fiduciary relationship. Second, it makes clear that a defendant cannot use a no-reliance or disclaimer clause to bar a claim of fraud (i.e., a breach of the duty of candor claim) in the fiduciary duty context. Finally, it underscores the rule that a plaintiff pleading fraud does not have to plead damages with particularity.


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] Wachovia Bank & Trust Co. v. Johnston, 269 N.C. 701, 715, 153 S.E.2d 449, 459-60 (1967). See also Birnbaum v. Birnbaum, 73 N.Y.2d 461, 466 (1989) (“it is elemental that a fiduciary owes a duty of undivided and undiluted loyalty to those whose interests the fiduciary is to protect. This is a sensitive and ‘inflexible’ rule of fidelity, barring not only blatant self-dealing, but also requiring avoidance of situations in which a fiduciary’s personal interest possibly conflicts with the interest of those owed a fiduciary duty.”) (citations omitted).

[2] The facts discussed herein come from the motion court’s decision, the First Department’s decision and the parties’ briefing on appeal.

[3] Slip Op. at *1 (citing Birnbaum, 73 N.Y.2d at 466; Shatz v. Chertok, 180 A.D.3d 609, 610-611 (1st Dept. 2020)).

[4] Id.

[5] Id. (citing Dube-Forman v. D’Agostino, 61 A.D.3d 1255, 1257 (3d Dept. 2009); Salm v. Feldstein, 20 A.D.3d 469, 470 (2d Dept. 2005)).

[6] Dube-Forman, 61 A.D.3d at 1257; Salm, 20 A.D.3d at 470; see also Dubbs v. Stribling & Assoc., 96 N.Y.2d 337, 341 (2001).

[7] Blue Chip Emerald v. Allied Partners, 299 A.D.2d 278, 279-280 (1st Dept. 2002).

[8] Slip Op. at *1.

[9] Id.

[10] Id. (citing D’Artagnan, LLC v. Sprinklr Inc., 192 A.D.3d 475, 476-477 (1st Dept. 2021)).

[11] Id. (citing Centro Empresarial Cempresa S.A. v. AmÉrica MÓvil, S.A.B. de C.V., 17 N.Y.3d 269, 279 (2011) (“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.”) (internal brackets and quotation marks omitted)).

[12] Id. at *2.

[13] Id. (quoting Frame v. Maynard, 83 A.D.3d 599, 602 (1st Dept. 2011) (internal quotation marks omitted)).

[14] Id. (quoting Frame, at 602 (internal quotation marks omitted)).

[15] Id.

[16] Id. (quoting Zanani v. Savad, 217 A.D.2d 696, 697 (2d Dept. 1995)).

[17] Id. (citing ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., 131 A.D.3d 427, 428 (1st Dept. 2015)).

[18] Id.

[19] Id. (citations omitted).

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