Justifiable reliance is obviously a key element of the cause of action for fraud and misrepresentation. See, e.g., New York High Court Reinforces Justifiable Reliance and Loss Causation in Fraud. Courts are not, however, particularly consistent in assessing whether the reliance in any given case is justifiable enough to sustain a fraud claim—at the pleadings stage, on summary judgment, or at trial. See generally, the topic heading in this blog for Justifiable/Reasonable Reliance, and more specifically, e.g., Decisions Not Entirely Consistent in Addressing Justifiable Reliance for Fraud Claims.
Two recent decisions rendered on the same day by the New York Appellate Division, Second Department, show how vexing the element of justifiable reliance can be. In Feldman v Byrne, 2022 NY Slip Op 06113 (2d Dep’t Decided Nov. 2, 2022), the Second Department reversed the Commercial Division’s dismissal of a fraud claim, ruling that the question of justifiable reliance in that case was a factual issue that could not be decided at the pleadings stage. While in John v. Elefante, 2022 NY Slip Op 06120 (2d Dep’t Decided Nov. 2, 2022), the Second Department sustained the granting of summary judgment dismissing a fraud claim because the plaintiff had not shown he exercised reasonable diligence in relying upon alleged fraudulent false statements.
In Feldman, plaintiff was a radiologist who alleged that he took over a radiology practice based upon misrepresentations made to him by the individual defendant as to the source of the existing practice’s patients. In particular, plaintiff alleged that the defendant represented to him at a meeting that the “practice had a stable source of patients and otherwise benefitted from referrals from local practicing physicians,” that it was a “‘clean practice’” and that “the referrals it received ‘were not based on payoffs.’” Plaintiff further alleged that, in reliance on those representations, among others, he opened a radiological practice at that same location and with the existing support staff. Then, shortly after the plaintiff opened the practice, he claimed that defendant “advised him that he would have to give certain people ‘thousands of pineapples’ [apparently meaning payoffs or kickbacks] if he wanted the practice’s patient referral stream to continue unabated.” Instead doing so, plaintiff decided to close the practice.
Plaintiff then sued the defendant to recover damages for the period in which the practice operated, alleging fraudulent inducement and misrepresentation. The Commercial Division granted the defendant’s motion to dismiss pursuant to CPLR 3211(a)(7) for failure to state a cause of action.
The Second Department reversed that part of the decision dismissing the fraud claim, but affirmed the dismissal of the negligent misrepresentation claim.
In assessing whether the allegations were sufficient to show justifiable reliance, the Second Department first recognized the basic principles of applicable law:
Regarding reasonable reliance on a misrepresentation of a material fact, the “plaintiff is expected to exercise ordinary diligence and may not claim to have reasonably relied on a defendant’s representations [or silence] where he [or she] has means available to him [or her] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation” (Benjamin v Yeroushalmi, 178 AD3d 650, 654 [internal quotation marks omitted]; [*3]see Avery v WJM Dev. Corp., 197 AD3d 1141, 1144; Weiss v Hager, 151 AD3d 906, 909).
The Second Department then cited some of the more accommodating decisional commentary on the fact-sensitive nature of reliance:
The “question of what constitutes reasonable reliance is always nettlesome because it is so fact-intensive” (DDJ Mgt., LLC v Rhone Group L.L.C., 15 NY3d 147, 155 [internal quotation marks omitted]). The resolution of the issue of whether a plaintiff reasonably relied on a defendant’s misrepresentation in support of a cause of action alleging fraud in the inducement is ordinarily relegated to the finder of fact (see Lawson-Groome v Smalls, 144 AD3d 633, 634; Lunal Realty, LLC v DiSanto Realty, LLC, 88 AD3d 661, 665; Jablonski v Rapalje, 14 AD3d 484, 488). Thus, contrary to the defendants’ contention, the plaintiffs adequately stated a cause of action to recover damages for fraudulent inducement insofar as the determination of the reasonableness of Feldman’s reliance on Byrne’s alleged misrepresentations concerning, among other things, the source of the Lyons practice’s patient referrals itself entailed a question of fact not appropriate for summary disposition as a matter of law.
Accordingly, the Supreme Court should have denied that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the cause of action alleging fraudulent inducement.
As I have chronicled in this blog, notwithstanding this accommodating language, courts have recognized without hesitation that fraud claims can and should be dismissed summarily if justifiable reliance is not adequately alleged or proven. See, e.g., Fraud Claims Can be Summarily Dismissed Where Reasonable Reliance is Lacking.
The Second Department in Feldman did affirm dismissal of the negligent misrepresentation claim, agreeing with the Commercial Division that the arms-length relationship between the plaintiff and the defendant did not give rise to any special duty so as to support that claim.
In Elefante, plaintiff alleged that he agreed to sell and release his entire interest in an apartment complex in the Bronx based upon misrepresentations defendants gave to him regarding the financial status of the entities — fraudulent understatement of the funds available for distribution to the shareholders and a fraudulent overstatement of the amount plaintiff owed to the entity.
The defendants moved for summary judgment arguing that the release plaintiff signed disposed of all of his claims. Plaintiff then asserted that the release was induced by the foregoing fraud, so it was unenforceable. The lower court granted defendants’ motion for summary judgment, dismissing all claims, “reason[ing] that the ‘release entered into by [plaintiff] with the advice of counsel’ was binding on [plaintiff] and ‘effectively barr[ed]’ the complaint.”
The Second Department agreed with the lower court that plaintiff had not adequately established that the release was induced by fraud. After citing the recognized doctrine that releases must be enforced as written, unless fraudulent inducement is adequately established, the Second Department relied upon a body of decisions explaining that a plaintiff attempting to assert fraud must use the means available to it to learn the true facts, unless the information is particularly within the knowledge of the other party:
“Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release” (Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d 269, 276 [internal quotation marks omitted]; see Ivasyuk v Raglan, 197 AD3d 635, 636). “A release may be invalidated, however, for any of the traditional bases for setting aside written agreements,” including fraud (Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d at 276 [internal quotation marks omitted]; see Ivasyuk v Raglan, 197 AD3d at 637; Sacchetti-Virga v Bonilla, 158 AD3d 783, 784).
“A contract induced by fraud is subject to rescission, rendering it unenforceable by the culpable party” (1810 E & J Rest. Corp. v Red & Blue Parrot, Inc., 150 AD3d 648, 648 [internal quotation marks omitted]; see Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d at 276). “The elements of a cause of action sounding in fraud are a material misrepresentation of a fact, made with knowledge of the falsity, an intent to induce reliance thereon, justifiable reliance on the misrepresentation, and damages” (1810 E & J Rest. Corp. v Red & Blue Parrot, Inc., 150 AD3d at 648; see Matter of Hersh, 198 AD3d 766, 771). “Where ‘the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him [or her] of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he [or she] must make use of those means, or he [or she] will not be heard to complain that he [or she] was induced to enter into the transaction by misrepresentations'” (1810 E & J Rest. Corp. v Red & Blue Parrot, Inc., 150 AD3d at 648, quoting Schumaker v Mather, 133 NY 590, 596). A reviewing court may take into account the sophistication of the party seeking rescission on the basis of an alleged fraud or misrepresentation (see Centro Empresarial Cempresa S.A. v América Móvil, S.A.B. de C.V., 17 NY3d at 278; Perlbinder v Vigilant Ins. Co., 190 AD3d 985, 989).
Here, in opposition to the defendants’ prima facie showing (see Ivasyuk v Raglan, 197 AD3d at 636), [plaintiff] failed to raise a triable issue of fact as to whether the release was the product of fraud or misrepresentation. The facts alleged, even when viewed in the light most favorable to [plaintiff], do not establish that the alleged misrepresentations were peculiarly within the knowledge of the defendants and could not have been discovered by [plaintiff] upon the exercise of ordinary intelligence (see Vasquez v Soto, 61 AD3d 968, 969; see also 1810 E & J Rest. Corp. v Red & Blue Parrot, Inc., [*3]150 AD3d at 648).
The Second Department did reinstate, however, certain causes of action because they were not encompassed within the release.
On the element of justifiable reliance, when courts believe a fraud claim is potentially viable, they often cite, and support their decision to sustain the claim upon, some of the more forgiving decisional commentary indicating that justifiable reliance is such a fact-sensitive and nettlesome issue, not easily determined summarily. While on the other hand, courts do not hesitate to dismiss fraud claims summarily when they find that plaintiffs have not acted prudently in an effort to investigate and discover the true facts.