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Source: www.nyfraudclaims.com

The First Department’s decision in Remediation Capital Funding LLC v Noto, 2017 NY Slip Op 01119 (1st Dep’t Feb.10, 2017) addresses some interesting issues involving (1) the effect of lack of due diligence, (2) reliance on a specific representation and (3) the duty of attorneys providing opinion letters to non-clients in a transaction.

In Noto, the plaintiff was a lender who provided a loan to the purchaser of real property.  The defendant was an attorney who represented the purchaser/borrower and its principal/guarantor of the loan.  The attorney gave the lender an opinion letter stating that the transactional documents on the real property purchase did not violate any other agreement.  The lender later discovered, after making the loan, that there was a secret side deal that was directly contrary to the terms presented to the lender, which placed the purchaser in default of that side arrangement from the outset.  The lender also alleged that the actual terms of the transaction, including the purchase price, were different from that represented to the lender.  The lender claimed to have relied on the purchase price represented to it by the borrower to determine the value of the property.

The plaintiff alleged that it did not have time to do due diligence because the borrower/purchaser told the lender that the transaction had to close within two weeks. Ordinarily, that would seem to be an inadequate excuse for not protecting oneself, especially here, where the total loan was about $6.6 million – not an insignificant amount. How did the plaintiff survive that seeming blunder? …

On plaintiff’s fraud claim against the attorney, the court below was not buying plaintiff’s excuses, and it dismissed the complaint while denying the plaintiff’s motion to amend to add a claim of negligent misrepresentation against the attorney. On appeal, the First Department reversed dismissal and permitted plaintiff to amend.

Lack of Due Diligence not Fatal

The First Department initially acknowledged: “A sophisticated party is generally required to exercise due diligence to verify the facts represented to it before entering into a business transaction (see e.g. Danaann Realty Corp. v Harris, 5 NY2d 317, 322 [1959]; Schumaker v Mather, 133 NY 590, 596 [1892]; MP Cool Invs. Ltd. v Forkosh, 142 AD3d 286, 291-292 [1st Dept 2016], lv denied 28 NY3d 911 [2016]).”

That is a well-recognized core principle. However, the interesting X-factor here was the specific representation that plaintiff obtained from the attorney, to save it from its own failure to perform due diligence.  In this regard, the First Department observed: “The Court of Appeals has recognized, however, that, ‘where a plaintiff has gone to the trouble to insist on a written representation that certain facts are true, it will often be justified in accepting that representation rather than making its own inquiry’ (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 154 [2010]).”

The First Department concluded: “Like the plaintiffs in DDJ Mgt., plaintiff in this case ‘made a significant effort to protect [itself] against the possibility of false[hood]’ (id. at 156) by obtaining a written opinion letter from [defendant attorney] Noto, the borrower’s attorney, making at least one material representation that, based on the allegations of the complaint, was inconsistent with the actual value of the property.”  Therefore, on a motion to dismiss, according to the First Department, the complaint should be reinstated:  “As in DDJ Mgt., on a motion addressed to the sufficiency of the pleadings, it cannot be “h[e]ld as a matter of law that plaintiff[] [was] required to do more” (id.), and whether plaintiff was justified in relying on [defendant attorney] Noto’s opinion letter is a question for the trier of fact.”

Specific Representation Trumps General Merger Clause

The First Department then addressed defendant’s argument that a general merger clause (disclaiming reliance on any representations) barred plaintiff’s claims against the attorney, ruling that the specific statements in the opinion letter trumped the general merger: “The general merger clause in the loan agreement does not afford [defendant attorney] Noto — who was not a party to the loan agreement — protection from liability for intentional or negligent misrepresentations in an opinion letter he signed and directed to plaintiff, allegedly knowing that they would rely on it; in any event, a general merger clause does not suffice to bar parol evidence of fraud in the inducement (see Hobart v Schuler, 55 NY2d 1023, 1024 [1982]).”

Attorney Has Duty to Third-Party Non-Client

Lastly, the First Department ruled that even though plaintiff was not the client of the defendant attorney, the allegations were sufficient to raise a duty to the plaintiff: “Finally, plaintiff’s allegations that Noto prepared the opinion letter at its request, provided the letter to plaintiff, and did so understanding that plaintiff would rely upon it in making the loan at issue, were sufficient to plead a privity-like relationship for purposes of its claim in the proposed amended complaint for negligent misrepresentation (see RBS Citizens, N.A. v Thorsen, 71 AD3d 1108 [2d Dept 2010]).”