Those attempting to obtain various remedies by claiming to be victims of fraudulent conduct have a very strict duty to act reasonably and prudently to protect themselves. This duty of self-protection is a theme that runs through many aspects relating to fraud, which I have chronicled often in this Blog.
Two new decisions by the Appellate Division, Second Department, give no credence to those trying to obtain some powerful remedies by claiming fraud because they did not adequately protect themselves. One decision, Holder v Folsom PL Realty, Inc., 2022 NY Slip Op 03890 (2d Dep’t Decided June 15, 2022), refused to allow a deed to be set aside based upon alleged fraudulent inducement. The other decision, Maynard v Smith, 2022 NY Slip Op 04017 (2d Dep’t Decided June 22, 2022), refused to rescind an agreement to arbitrate based upon a claim of unilateral mistake.
Deed Cannot be Set Aside
In my February 14, 2022 blog post, “‘Void or Voidable’” in Fraud, Visited Again, I reviewed the law relating to claims seeking to set aside deeds to real property based upon alleged fraudulent inducement. In Holder, the Second Department applied the underlying principles in reversing the order below and rejecting a claim of fraudulent inducement.
In Holder, plaintiffs alleged that the defendant fraudulently procured from them a deed to real property by misrepresenting the nature of the documents that defendant arranged for them to sign. The lower court granted plaintiffs summary judgment on the causes of action alleging fraudulent inducement, unjust enrichment, and to quiet title, and the defendant appealed.
The Second Department reversed summary judgment on each claim, finding that plaintiffs did not adequately protect themselves in signing the deeds. As I have reviewed before, this duty of self-protection obviously includes the obligation to read documents about which fraudulent misrepresentations are allegedly relied upon.
The Second Department first cited the basic principles on a claim for fraud:
“‘In order to establish a prima facie case of fraud, the plaintiff must establish (1) that the defendant made material representations that were false, (2) that the defendant knew the representations were false and made them with the intent to deceive the plaintiff, (3) that the plaintiff justifiably relied on the defendant’s representations, and (4) that the plaintiff was injured as a result of the defendant’s representations'” (Cash v Titan Fin. Servs., Inc., 58 AD3d 785, 788, quoting Giurdanella v Giurdanella, 226 AD2d 342, 343).
The Court then zeroed in on plaintiffs’ own conduct in the transaction, finding they failed to show their own reasonable care:
In support of their motion, the plaintiffs submitted, inter alia, their affidavits, wherein they each averred that the defendant misled them into [*2]believing that they were signing documents to arrange a short sale of the property when, in fact, they executed documents that transferred the property to the defendant. One of the documents that the plaintiffs submitted with their motion was the deed to the property that the plaintiffs signed. The plaintiffs do not aver in their affidavits or in the complaint that they failed to read the documents they signed or that they were illiterate, blind, or did not read English, nor do they allege that they expressed any difficulty in understanding what they were signing (see Anderson v Dinkes & Schwitzer, P.C., 150 AD3d 805, 806). Instead, the plaintiffs contend that they were “overwhelmed by the paperwork” but do not allege any facts that would suggest that they were prevented from reading the documents prior to signing them or that they were forced to sign (see Matter of Augustine v BankUnited FSB, 75 AD3d 596, 597; Cash v Titan Fin. Servs., Inc., 58 AD3d at 788). Thus, the plaintiffs failed to establish, prima facie, that they were entitled to judgment as a matter of law on the causes of action alleging fraudulent inducement, unjust enrichment, and to quiet title (see Augustin v Park Slope Assoc. NY, LLC, 120 AD3d 527, 528; Cash v Titan Fin. Servs., Inc., 58 AD3d at 788). Accordingly, those branches of the plaintiffs’ motion should have been denied, regardless of the sufficiency of the opposing papers (see Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853).
Failure to Exercise Ordinary Care Dooms Claim of Unilateral Mistake
In Maynard, the underlying action was a claim for personal injuries from a car accident. After the action was instituted, plaintiff and defendant agreed to arbitrate the claim under a “high-low” agreement whereby any award would be restricted to “no less than $0.00 and no more than $50,000.” The plaintiff’s attorney thereafter refused to arbitrate, asserting that he had been mistaken as to the defendant’s policy limits. Defendant then moved to compel arbitration of the claim pursuant to CPLR 7503(a). The lower court denied the motion to compel arbitration, and the defendant appealed. The Second Department reversed and ordered arbitration.
After noting that the “‘enforceability of arbitration agreements is governed by the rules applicable to contracts generally’ (Sablosky v Gordon Co., 73 NY2d 133, 136; see Arboleda v White Glove Enter. Corp., 179 AD3d 632),” the Court focused on the doctrine of unilateral mistake, and how principles of fraud affect the claim. The Court noted that plaintiff’s attorney was notified twice of the precise policy limits so plaintiff could not rightly claim that any mistake relating to those limits was based upon any sort of fraud or other wrongful conduct of the defendant. The Second Department, therefore, reversed and ordered arbitration, ruling:
“Generally, a party’s unilateral mistake is a ground for rescission of a contract only where it was induced by fraud or other wrongful conduct by the other party” (Perlbinder v Vigilant Ins. Co., 190 AD3d 985, 988). Moreover, “the equitable remedy of rescission is not available to relieve an allegedly mistaken party of the consequences of their failure to exercise ordinary care” (id. at 988; see ATS-1 Corp. v Rodriguez, 156 AD3d 674, 676; 1810 E & J Rest. Corp. v Red & Blue [*2]Parrot, Inc., 150 AD3d 648, 649; Rosin v Weinberg, 107 AD3d 682; Yorker v Daniel Yorker, Ltd., 12 AD3d 506).
Contrary to the plaintiff’s contention, he failed to establish that the arbitration agreement was subject to the equitable remedy of rescission on the ground of unilateral mistake by his attorney regarding the policy limits (see Perlbinder v Vigilant Ins. Co., 190 AD3d at 988-989). The purported mistake in the high-low agreement at issue arose not from any fraudulent inducement by the defendant, but from the failure of the plaintiff’s attorney to exercise ordinary care under the circumstances. Accordingly, the Supreme Court should have granted the defendant’s motion pursuant to CPLR 7503(a) to compel arbitration.
Cases continue to show the critical importance of self-protection when it comes to fraud claims and related doctrines. While the respective lower courts in each of Holder and Maynard seemed to disregard plaintiffs’ lack of due and ordinary care in protecting themselves, the Second Department was quick to reverse both decisions in resounding rulings based upon the clear lack of self-protection.