The duty of self-protection is firmly embedded in the law of fraud. For example, even when demonstrable misrepresentations are made with an actual intent to defraud, the recipient of those false statements is not at liberty blindly to rely on those misrepresentations to its detriment and then obtain remedies in a civil action for fraud. The claimant must establish by clear and convincing evidence that it justifiably relied on those misrepresentations. See my Topic. Similarly, in order to take advantage of the more liberal statute of limitations governing actions for actual fraud, the claimant must act reasonably in attempting to discover the fraud as the CPLR extends the six-year statutory period to two years from the date the fraud was discovered or with reasonable diligence could have been discovered. CPLR 213(8).
These well-accepted principles run through many aspects of the law of fraud. Two recent decisions of the New York Appellate Divisions are good examples, both involving real property transactions.
In Lazar v. Mor, 2023 NY Slip Op 00814 (1st Dep’t Decided Feb.14, 2023), the First Department affirmed the dismissal of fraud claims based upon the statute of limitations because the plaintiff could have used publicly-available information concerning real estate transactions to protect itself and ascertain the truth more than two years before bringing suit.
In R. Vig Props., LLC v Rahimzada, 2023 NY Slip Op 00887 (2d Dep’t Decided Feb. 15, 2023), the Second Department relied upon the doctrine of caveat emptor in a real property sale transaction to sustain summary judgment dismissing the fraud claims there.
Lazar
In Lazar, plaintiffs had invested in real estate acquisitions through limited liability companies controlled by the defendants. After plaintiffs discovered discrepancies in the financial documents of the LLCs, plaintiffs demanded to review more documents, including the original closing statements, to reconstruct the accounting records of the LLCs. Plaintiffs alleged they had “serious concerns” regarding the sources of the capital contributions that defendants had purportedly made to the LLCs to purchase the properties, and demanded evidence as to the source of defendants’ contributions. After plaintiffs initially sued they eventually obtained the closing documents through a subpoena to the defendants’ lawyers in the transactions, and discovered that the properties were acquired for prices that were substantially lower than the amounts defendants had represented, resulting in their deposits being inflated as well. Plaintiffs then asserted fraud claims against defendants in their amended complaint.
Plaintiffs instituted the original lawsuit more than six years after the frauds occurred in 2012, so plaintiffs sought to rely upon the extended two-year period under CPLR 213(8). The Commercial Division dismissed the fraud claims based upon the statute of limitations, and the First Department affirmed. Noting that plaintiffs admittedly had serious concerns back in 2017 regarding the alleged fraudulent conduct, the First Department found that “they were on inquiry notice of defendants’ alleged fraud and misrepresentations with respect to those transactions, including the purchase prices paid for the properties more than two years before they commenced the action.”
In particular, the First Department pointed out that plaintiffs could have discovered the true purchase price for the properties through a publicly-available online database:
Although plaintiffs allege that defendants refused to provide requested information and documents, the purchase price information was publicly available through an online search of the City of New York’s Automated City Register Information System [“ACRIS”] since the time of the real estate purchases (see Mizrahi v YMZ Realty LLC, 203 AD3d 515 [1st Dept 2022]). Thus, reasonable diligence would have revealed the actual purchase prices of the properties more than two years before this action was commenced.
I have commented upon the Mirrahi decision cited above and others like it in previous posts. See Publicly-Available Information from ACRIS Dooms Fraud Claim Under Statute of Limitations; Publicly Available Information Sufficient to Put Plaintiff on Notice of Fraud for Statute of Limitations to Run.
Rahimzada
In Rahimzada, the transaction at issue was a contract to purchase three improved properties for $20,400,000. At that price, it is fair to say that the purchasers were people of means. Nevertheless, they alleged that they were duped into buying the properties. They claimed the sellers represented that the prime tenant at one of the properties had a “self-sustaining triple-net lease.” Plaintiffs claimed that defendants concealed from them that this tenant was actually experiencing financial difficulties and needed rent concessions to remain in good standing under the lease. Plaintiffs also contended that defendants concealed the bankruptcy of prior assignees under the lease, under which the assignees were still liable, and that they were actually discharged from such debt in the bankruptcy.
Granting summary judgment to defendants, the lower court found that the contract contained very clear and explicit disclaimers of plaintiffs’ reliance on any representations of the seller-defendants, including any income derived from the properties or the leases. The disclaimer provided:
Purchaser hereby acknowledges that Purchaser has inspected the Premises. …. Purchaser agrees to take the premises and all such property “as is” and in their present condition, subject to reasonable use, wear, tear and deterioration between now and Closing Date. Seller shall not be liable for any latent or patent defects in the Premises. Seller shall have the right to inspect the Premises prior to closing upon reasonable prior notice.
Purchaser acknowledges that neither Seller nor any representative or agent of Seller has made any representation or warranty (expressed or implied) as to the physical condition, state of repair, income, leases, expenses or operation of the Premises or any matter or thing affecting or relating to the Premises or this Agreement, except as specifically set forth herein. Purchaser has not been induced by or relied upon any statement, representation or agreement, whether express or implied, not specifically set forth in this Agreement. Seller shall not be liable or bound in any manner by any oral or written statement, broker’s “set-up”, representation, agreement or information pertaining to the Premises or this Agreement furnished by any broker, agent, employee or other person, unless specifically set forth herein.
The lower court also ruled that the plaintiffs could have discovered the bankruptcy of the assignees and other information through publicly-available means.
The Second Department affirmed summary judgment dismissing the fraud claims, based upon plaintiffs’ lack of justifiable reliance and by applying the doctrine of caveat emptor in real estate transactions, following the lower court’s analysis:
A plaintiff’s reliance must be reasonable (see ISS Action, Inc. v Tutor Perini Corp., 170 AD3d 686, 688; Epifani v Johnson, 65 AD3d 224, 230). If the facts represented are not matters peculiarly within the defendant’s knowledge, and the plaintiff has the means available to it of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, the plaintiff must make use of those means, or it will not be heard to complain that it was induced to enter into the transaction by misrepresentations (see ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 NY3d 1043, 1044; Danann Realty Corp. v Harris, 5 NY2d 317, 322; ISS Action, Inc. v Tutor Perini Corp., 170 AD3d at 688).
In the context of real estate transactions, a claim of fraudulent misrepresentation must be analyzed within the doctrine of caveat emptor (see Hecker v Paschke, 133 AD3d 713, 716). “‘New York adheres to the doctrine of caveat emptor and imposes no liability on a seller for failing to disclose information regarding the premises when the parties deal at arm’s length, unless there is some conduct on the part of the seller which constitutes active concealment'” (Razdolskaya v Lyubarsky, 160 AD3d 994, 996, quoting Simone v Homecheck Real Estate Servs., Inc., 42 AD3d 518, 520). “‘If however, some conduct (i.e., more than mere silence) on the part of the seller rises to the level of active concealment, a seller may have a duty to disclose information concerning the property'” (Razdolskaya v Lyubarsky, 160 AD3d at 996, quoting Hecker v Paschke, 133 AD3d at 716). “‘To maintain a cause of action to recover damages for active concealment, the plaintiff must show, in effect, that the seller or the seller’s agents thwarted the plaintiff’s efforts to fulfill his responsibilities fixed by the doctrine of caveat emptor'” (Razdolskaya v Lyubarsky, 160 AD3d at 996, quoting Jablonski v Rapalje, 14 AD3d 484, 485).
Here, the Supreme Court correctly determined that the causes of action sounding in fraud were barred, inter alia, by the specific terms of the parties’ contract of sale (see Danann Realty Corp. v Harris, 5 NY2d at 320-321; Comora v Franklin, 171 AD3d 851, 853; 114 W. 14 Realty LLC v Brandman, 147 AD3d 703, 703-704; Kim v Il Yeon Kwon, 144 AD3d 754, 756). Moreover, contrary to the plaintiffs’ contention, the facts alleged to have been misrepresented and/or improperly concealed were not matters peculiarly within the defendants’ knowledge which could not have discovered by the plaintiffs by the exercise of ordinary intelligence and/or which thwarted the plaintiffs in their efforts to fulfill their responsibilities imposed by the doctrine of caveat emptor (see 1810 E & J Rest. Corp. v Red & Blue Parrot, Inc., 150 AD3d 648, 649; Schottland v Brown Harris Stevens Brooklyn, LLC, 107 AD3d 684, 686; Perez-Faringer v Heilman, 95 AD3d 853, 854).
Commentary
The lesson learned from the Lazar case is very straightforward: As soon as any suspicion arises as to whether the information provided in a transaction was truthful, experienced legal counsel must be consulted so that the facts are adequately investigated and claims are brought in a timely manner. Waiting longer than two years from when such suspicions arose could be fatal to the fraud claim if the underlying fraudulent conduct occurred more than six years in the past. Also, tapping publicly-available information like the online ACRIS system is essential.
As far as the Rahimzada case, it once again shows how important it is to make sure any representations relied upon in a transaction are expressly contained in the contract, especially for a real estate purchase, where the doctrine of caveat emptor applies. If express representations are not documented, trying to establish fraud by claiming concealment of material information is extremely challenging, particularly if the contract contains express disclaimers of any reliance on the subject of the claimed concealment.