I have commented frequently on the critical role of the element of justifiable reliance on the cause of action for fraud. See, e.g., the Topic “Justifiable/Reasonable Reliance.” In fact, I have shown that fraud claims can and should be summarily dismissed at the pleadings stage or on summary judgment if justifiable reliance is not adequately alleged or substantiated. See Fraud Claims Can be Summarily Dismissed Where Reasonable Reliance is Lacking.
In the new decision of the Appellate Division, First Department, in Markov v. Barrows, 2022 NY Slip Op 04780 (1st Dep’t Decided Aug. 2, 2022), contractual disclaimers refuted any claimed justifiable reliance thereby dooming both the underlying fraud claim and the legal malpractice action upon which it was based.
Legal Malpractice – Case Within the Case
Actions attempting to assert that an attorney committed malpractice in underlying litigation involve what is referred to as the “case within the case.” That is, the plaintiff must establish not only that the attorney was negligent in the underlying action, but that the underlying action itself would have been successful in the absence of the alleged malpractice. Thus, there are two hurdles: establishing all of the elements of the malpractice claim as well as the underlying cause of action in which the malpractice allegedly occurred. Courts impose this dual burden because the plaintiff asserting attorney malpractice must show that the malpractice actually damaged the plaintiff, i.e., that “but for” the malpractice the plaintiff would have been successful and prevailed in the underlying case.
As concisely stated by the Court of Appeals in Rudolf v Shayne, Dachs, Stanisci, Corker & Sauer, 8 NY3d 438, 442 (2007):
In an action to recover damages for legal malpractice, a plaintiff must demonstrate that the attorney “failed to exercise the ordinary reasonable skill and knowledge commonly possessed by a member of the legal profession” and that the attorney’s breach of this duty proximately caused plaintiff to sustain actual and ascertainable damages (McCoy v Feinman, 99 NY2d 295, 301-302  [internal quotation marks and citation omitted]). To establish causation, a plaintiff must show that he or she would have prevailed in the underlying action or would not have incurred any damages, but for the lawyer’s negligence (see Davis v Klein, 88 NY2d 1008, 1009-1010 ; Carmel v Lunney, 70 NY2d 169, 173 ).
This “but for” element is what doomed the malpractice claim in Markov.
Contractual Disclaimers Bar Underlying Fraud Claim
One very effective way to mitigate against a fraudulent inducement claim is to include in the subject contract or transactional agreements explicit provisions by which reliance upon any extraneous representation is disclaimed. These contractual disclaimers can serve to repudiate any claimed reliance on matters that are explicitly disclaimed. See, e.g., Broad Disclaimers Doom Fraud Claims Relating to M&A Transaction.
Such contractual disclaimers stood directly in the way of the attempted fraud claims in Markov, and thus the malpractice claims as well.
In Markov, the plaintiff’s case was based upon his purchase of certain specialized Russian military medals at an organized auction. Plaintiff claimed that the auctioneers represented in the auction catalog and at auction that the medal was comprised of “brilliants,” a term commonly understood in the numismatic trade to mean diamonds. Plaintiff further alleged “that the medal was sealed in plastic, restricting plaintiff’s ability to inspect the medal prior to auction; that plaintiff justifiably relied on the catalog representation that the medal was comprised of brilliants in bidding on the medal, including the winning bid of $600,000; that plaintiff discovered after the auction that the medal was not comprised of brilliants, but instead was comprised of inferior materials (i.e., glass or lead crystals), drastically affecting the value of the medal; and that plaintiff suffered both direct and consequential damages because he paid significantly more for the medal than its worth.”
Plaintiff engaged an attorney to pursue claims based upon the foregoing facts. Unfortunately, in the lawsuit on behalf of plaintiff, the attorney failed to name proper defendants within the statute of limitations, and thus his underlying claims of fraud were dismissed. The plaintiff then brought a malpractice action against the attorney, alleging that his negligence caused plaintiff to lose the underlying fraud claims and thus he failed to obtain the damages that he could have recovered for the fraud.
Both the lower court and the First Department on appeal held that the malpractice claim failed because plaintiff could not prove the underlying case of fraud in any event (even if the proper defendants were timely sued) because the disclaimers in the auction agreements were very specific and encompassing, thereby refuting any claimed justifiable reliance upon the description of the medal. Thus, in affirming the case dismissal, the First Department ruled:
Plaintiff could not have prevailed in the underlying action — and, therefore, cannot prevail in this legal malpractice action (see Warshaw Burnstein Cohen Schlesinger & Kuh, LLP v Longmire, 106 AD3d 536, 536 [1st Dept 2013]) — because plaintiff’s fraud and breach of contract claims against Stack’s and the auctioneers would have been flatly defeated by the various disclaimers and conditions in the terms of sale contained in the auction catalog.
By placing a bid in the auction, plaintiff, a numismatic dealer who buys, sells, and collects Russian coins and medals, acknowledged receipt of the auction catalog and agreed to adhere to the terms of sale (see Terms of Sale ¶¶ 5, 40). Bidders were “encouraged to carefully examine all lots prior to sale,” because the lots would not be shown at the sale (Terms of Sale ¶ 15, see Terms of Sale ¶ 26). Stack’s assumed no liability for the facts stated concerning the items in the auction, except as specified in the terms of sale (Terms of Sale ¶¶ 15, 18[k]; see Terms of Sale ¶ 31 [“Stack’s hereby disclaims all liability for damages, incidental, consequential or otherwise, arising out of or in connection with the sale of any property by Stack’s to purchaser”]). While offering a limited warranty “that any numismatic item sold is authentic (i.e., not counterfeit, that its date or mintmark has not been altered, and that the coin has not been repaired as those terms are used in the trade),” Stack’s made clear that “all other warranties of authenticity of authorship, whether express or implied, [were] disclaimed” (Terms of Sale ¶ 16). Elsewhere in the terms of sale, Stack’s warned bidders (in bold text) that, “[e]xcept as otherwise expressly stated in the Terms of Sale, Stack’s and its agents and employees make no warranties or guaranties or representations, and expressly disclaim all warranties and guaranties and representations, including, without limitation, a warranty of merchantability, in connection with any numismatic properties sold by Stack’s” (Terms of Sale ¶ 18[h]; see Terms of Sale ¶ 18[i] [“All oral and written statements made by Stack’s are statements of opinion only and are not warranties or representations of any kind, unless stated as a specific written warranty, and no employee or agent of Stack’s has authority to vary or alter these Terms of Sale . . .”]).
In light of the constellation of disclaimers and conditions in the terms of sale, plaintiff cannot demonstrate that, but for defendant’s alleged legal malpractice, plaintiff would have prevailed in the underlying action against Stack’s and the auctioneers.
Markov once again shows the critical importance of the element of justifiable reliance in fraud. Not only can fraud claims be summarily dismissed on the pleadings and pursuant to summary judgment motions based upon the lack of justifiable reliance, but such fatal flaws extend beyond the underlying fraud case to legal malpractice claims that must rely on success in the fraud action as well.