Kevin Schlosser Authors, "Second Department Allows Fraud Claim Even Though Misrepresentation Could Have Been Discovered Through Public Records"

In my last post, I wrote about a Third Department decision allowing a fraud claim even though the plaintiff could have discovered the true facts allegedly misrepresented through a search of public information. The court there was not quick to allow the defendant lawyers get away with their explicit, repeated misrepresentations.

The Second Department has just followed suit.

Finding Available Information as part of Due Diligence

As explained in my prior post, one of the elements of fraud is “reasonable” reliance on the alleged misrepresentation, which implicates the ability to discover the fraud through available information: “If the true information could be discovered through publicly-available sources, plaintiff may be vulnerable on the fraud element of justifiable reliance. See, e.g., Auchincloss v. Allen, 211 A.D.2d 417 (1^st Dep’t 1995)(party asserting fraud cannot base it on alleged concealed information that was ‘a matter of public knowledge which … could have [been] discovered through the exercise of ordinary diligence had he made inquiry at the appropriate time’).”

As shown by the recent decisions in the Third and Second Departments, at least those courts seem to be forgiving in justifiable circumstances. (Interestingly, the Second Department’s decision discussed below was issued the same day of another decision rendered by a different panel of the same court in which the court rejected a fraud claim because the plaintiff had not acted diligently enough to ferret out the fraud (Pacella v RSA Consultants, Inc., 2018 NY Slip Op 05853 (2d Dep’t Decided on August 22, 2018), which will be the subject of another post on this blog).)

Second Department Decision

The latest case in the Second Department is Hiu Ian Cheng v Salguero, 2018 NY Slip Op 05831 (2d Dep’t Decided on August 22, 2018).

In Salguero, the plaintiff and the defendant, individually and in his capacity as president and sole shareholder of the defendant 42-53 Realty Corp., entered into a contract whereby the plaintiff agreed to purchase two adjacent lots for $1.63 million. In the contract, the defendants represented and warranted that they were “the sole owner[s] of the Premises and ha[d] the full right, power and authority to sell, convey and transfer the same in accordance with the terms of this contract.” The contract provided that if the defendants were unable to transfer title to the plaintiff in accordance with the contract by reason of defects to title, and if the plaintiff was unwilling to waive such defects, “[the defendants] shall have the right, at [the defendants’] sole election, either to take such action as [the defendants] may deem advisable to remove, remedy, discharge or comply with such Defects or to cancel this contract” (emphasis added). A rider to the contract provided that, in the event that the defendants were unable to deliver title in accordance with the contract, “the sole remedy of [the plaintiff] shall be to accept such title as [the defendants] shall be able to deliver without abatement in the purchase price, or in the alternative, to cancel this agreement and receive a refund of the contract down payment made hereunder.”

After signing the contract, the plaintiff obtained a title insurance report, which disclosed as an exception to coverage that title to one of the properties was subject to a federal court order, issued long before the contract was signed, awarding all right, title, and interest in that parcel to the United States of America. Thus, the information was publicly available prior to signing the contract. Typically, however, title reports are performed after real estate contracts are signed, not before, so, as discussed below, this apparently played in the mind of the Second Department, although the court did not say so explicitly.

Negotiations between the parties subsequently broke down, with the defendants (sellers) sending the plaintiff (buyer) a time-of-the-essence letter, and the plaintiff rejecting that letter. The defendants then elected to cancel the contract and returned the plaintiff’s down payment.

Plaintiff then commenced an action against the defendants asserting three causes of action. In the first cause of action, the plaintiff sought specific performance of the contract to the extent of directing the defendants to convey title to the one lot they did own, for half of the total contract price. In the second cause of action, the plaintiff alleged that the defendants fraudulently misrepresented that they owned and had the authority to convey the parcel in which the Government actually had control, and sought money damages. In the third cause of action, in the alternative, the plaintiff sought reformation of the contract, based upon mutual mistake, requesting the purchase of one of the parcels for half the total price in the contract.

The defendants moved pursuant to CPLR 3211(a)(1) and (7) to dismiss the complaint. The Supreme Court denied the motion, and the defendants appealed.

On appeal, the Second Department reversed the denial of the motion to dismiss the first and third causes of action based on the contractual limitations, ruling that “the parties’ contract, which limited the plaintiff’s remedies in the event that the defendants were unable to clear defects in title, established a complete defense as a matter of law to the first and third causes of action, seeking specific performance and reformation of the contract based upon mutual mistake, respectively (see Waldman v LDK Realty, Inc., 63 AD3d 828, 830; 101123 LLC v Solis Realty LLC, 23 AD3d 107, 108). Accordingly, the defendants were entitled to dismissal of the first and third causes of action … .”

As to the fraud claim, the Second Department affirmed the denial of the motion to dismiss. The Court did not focus on the element of reasonable reliance at all, simply upholding the allegations of misrepresentation of the ownership of the property. The court did not comment upon the fact that the Government’s control of the property could have been ascertained before the contract was signed, but as noted above, title reports are typically not obtained until after real estate contracts are signed, which explains why the court did not even see the need to address that issue:

[W]e agree with the Supreme Court’s determination to deny that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the plaintiff’s second cause of action, sounding in fraudulent misrepresentation. On a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must “accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (see Leon v Martinez, 84 NY2d 83, 87-88). “In order to establish fraud, a plaintiff must show a material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable reliance by the plaintiff and damages'” (Carbon Capital Mgt., LLC v American Express Co., 88 AD3d 933, 937, quoting Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553, 559). Where a cause of action is based on a misrepresentation or fraud, “the circumstances constituting the wrong shall be stated in detail” (CPLR 3016[b]). Here, the complaint sufficiently stated a cause of action to recover damages for fraudulent misrepresentation by alleging that the defendants misrepresented that they owned 42-55 27th Street and had the right to convey it, that they made this representation despite knowing that it was false, and that the plaintiff reasonably relied upon the representation to his detriment. Although the defendants contend that the complaint was not pleaded with the requisite specificity, the purpose of CPLR 3016(b)’s heightened pleading requirement “is to inform a defendant of the complained-of incidents” (Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d at 559), and there is no question in this case that the incident at issue was the defendants’ alleged representations made to induce the plaintiff into signing the contract. Accordingly, that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the second cause of action was properly denied.

Commentary

There is extensive case law concerning the element of justifiable or reasonable reliance in fraud cases. (A search of the topics function in this blog will assist in locating the relevant law.)

While a plaintiff is expected to act reasonably in protecting itself against fraud, the courts are willing to give the plaintiff leeway when the circumstances seem to justify, as shown by the Second and Third Department decisions discussed above.