The August 10, 2016 decision in Amusement Industry, Inc. v. Stern, 07Civ.11586 (S.D.N.Y. Aug. 10, 2016) is quite an instructive analysis of fraud claims. This post will address the analysis on proving reasonable reliance.
The magistrate judge issued a report and recommendation recommending that plaintiffs’ motion for summary judgment be granted on their fraud cause of action, resulting in $13 million in damages.
In Stern, the defendants agreed to purchase a portfolio of eleven retail shopping centers for approximately $128 million. In the course of this transaction, the defendants had procured a loan by defrauding Citigroup, and one of the defendants pled guilty to committing wire fraud. Prior to the closing with Citigroup, one of the defendants had approached the plaintiffs and requested that they contribute money to the investment in the portfolio. Based upon representations made by defendants, plaintiffs eventually agreed to invest $13 million in the portfolio.
One defendant had repeatedly invoked his Fifth Amendment rights when questioned about the series of misrepresentations, forgeries, and manipulation of emails. (The court had previously determined that defendant’s invocation of the Fifth Amendment right could be used as an inference of wrongdoing.)
There were a number of alleged misrepresentations. Among them: The equity interest that defendants promised to plaintiffs turned out to conflict with the financing documents with Citigroup and therefore could not have been implemented. Defendants also misrepresented to plaintiffs that another sophisticated investor was involved in the deal and would guarantee plaintiffs’ investment.
In addressing plaintiffs’ motion for summary judgment, the court focused on the element of “reasonable reliance” among others, noting: “To succeed on a fraud claim under New York law, a plaintiff must show that it reasonably relied on a false statement made by or caused to be made by the defendant.” The court continued: “In determining whether a plaintiff reasonably relied on the misrepresentations of a defendant, courts ‘consider the entire context of the transaction, including factors such as its complexity and magnitude, the sophistication of the parties, and the content of any agreements between them.’…reasonable reliance does not require ‘due diligence’ but only that plaintiff performed ‘minimal diligence’ or care that ‘negat[es] its own recklessness.’…Nevertheless if ‘plaintiff has the means of knowing, by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations.’”
Based upon such law, the court found that a “reasonable jury could conclude only that [plaintiff] reasonably relied on the multiple representations that [the alleged third party investor], an experienced and financially stable investor, was a co-conspirator” on the portfolio deal. The court found that while there was “no evidence that [plaintiff] ever attempted to contact [the alleged third party investor] directly or to otherwise confirm his involvement in the transaction, the evidence is uncontroverted that [defendant], through [his attorney], provided [plaintiffs’] attorney with documents containing [the third party investor’s] signatures. … It would not be reasonable to expect that [plaintiff] should have then conducted an investigation into whether these signatures were forgeries. The court also ruled that plaintiffs could not reasonably be expected to have questioned Citigroup regarding the legitimacy of the overall arrangement.
As shown by the decision in Stern, the element of “justifiable reliance” is often analyzed in a highly fact-sensitive manner. The level of diligence expected of a plaintiff alleging fraud is often affected by the extent of the misrepresentations made and whether plaintiff had exercised “ordinary intelligence” in assessing the representations made.