I have written often about the courts’ insistence that parties who seek to allege they have been defrauded do their own part in protecting themselves, especially by acting reasonably to ferret out any misrepresentations allegedly made to them. This is embodied in the element of reasonable or justifiable reliance required to establish a fraud claim.
In particular, courts insist that a party claiming fraud read available documents, such as contracts, that would have revealed false representations upon which the attempted fraud claim is based. See, e.g., Failure to Read Life Insurance Policies or Applications Renders Fraud Claim Against Broker Defective as a Matter of Law for Lack of Reasonable Reliance (“While it may seem obvious that there is a duty to read documents about which misrepresentations are made, many parties try to assert fraud claims based upon false descriptions of the documents without actually reading the documents. In the absence of special circumstances, such as fiduciary obligations for full and accurate disclosures and affording particular protections, courts do not lend much credence to claims of fraud if the party claiming the misrepresentation does not actually read the documents about which the misrepresentation was made”); Fraud Claims Barred by Signed Contracts Even if Not Read or Even Understood (“The courts do not have much patience for parties who enter into contracts and then claim that they should not be bound by the agreement they admittedly signed but allegedly did not read or understand. If you sign the contract, you are bound by it, because you have a duty to read and understand the contract before you sign it. This is essential to preserve the integrity of agreements and the law of contracts.”).
Notwithstanding these clear principles, the courts do not always paint a picture of consistency. Two decisions last week, one from the First Department, and the other from the Second Department, illustrate differing approaches in how the courts treat the duty to protect oneself from fraud.
First Department Affirms Dismissal Based on Failure to Read Available Leases
In Sharma v Walia, 2022 NY Slip Op 00524 (1st Dep’t Decided Jan. 27, 2022), Plaintiff entered into an agreement with defendants to buy three Subway franchises located in Manhattan. Plaintiff alleged that the individual defendant, a longtime family friend, insisted upon an increased purchase price for all three restaurants after informing Plaintiff that subleases held by the restaurants contained options to renew, thus increasing the restaurants’ value. Plaintiff alleged that based on these representations about the sublease renewals, she paid an extra $575,000 for the restaurants. (That in and of itself was not particularly astute, since Plaintiff could have simply declined the request for more money.)
Plaintiff then contended in the lawsuit that in actuality the representations regarding the sublease renewals proved to be false, as two of the leases did not have renewal options at all and the third had a renewal option with a deadline that Plaintiff could not meet. Plaintiff therefore had to vacate all three restaurants when the subleases expired.
Plaintiff attempted to assert fraud claims based upon the alleged misrepresentations about the sublease renewals. The trial court granted the defendants’ motion to dismiss the second amended complaint, and the First Department unanimously affirmed.
The First Department held that Plaintiff had not alleged the necessary element of justifiable reliance since she admittedly failed to read the subleases:
Plaintiff’s fraud claims fail because she failed to allege justifiable reliance on [defendant’s] alleged misrepresentations about the sublease renewal options. The facts regarding the subleases were not peculiarly within [defendant’s] knowledge; on the contrary, plaintiff could have known the relevant facts had she simply read the leases, which she concedes she did not do (see ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 NY3d 1043, 1044 [2015]; Mann v Thomas-Senior, 174 AD3d 444, 445 [1st Dept 2019]). Furthermore, plaintiff does not allege that [defendant] misrepresented the contents of the relevant documents, but rather, simply told her that it was not necessary for her to read them before she signed them at the closings. Under these circumstances, plaintiff cannot be heard to complain that she was induced by misrepresentations to enter into the transactions (see MBF Clearing Corp. v JPMorgan Chase Bank, N.A., 189 AD3d 546, 546-547 [1st Dept 2020], lv denied 36 NY3d 912 [2021]; see also OmniVere, LLC v Friedman, 174 AD3d 443, 444 [1st Dept 2019]).
This decision is rather straightforward and unremarkable. It is actually remarkable that a claim for fraud was even attempted given plaintiff’s own lack of care.
Second Department Allows Fraud Claim Even Though Plaintiff Did Not Use Publicly Available Information
The Second Department’s decision in Gruber v Donaldsons, Inc., 2022 NY Slip Op 00405 (2d Dep’t Decided Jan. 26, 2022) is a bit more questionable.
Along with insisting that parties read available documents to discover false statements, courts also often require fraud claimants to take advantage of publicly available information that could uncover the misrepresentations. See, e.g., Publicly Available Information and Due Diligence Play Prominent Role on Fraud Statute of Limitations and Reasonable Reliance Issues.
In Gruber, Plaintiffs attempted to assert, among other claims, fraud claims against a car dealership in connection with Plaintiff’s purchase of a vehicle, alleging that the dealership misrepresented that the owner of the purchased vehicle had no liability for use of the vehicle.
The factual context involved a bit of a twist: “On October 6, 2014, a vehicle registered to Kevin Gruber and being driven by Thomas Difolco was involved in an accident with a motorcycle driver who allegedly suffered serious injuries. The motorcycle driver commenced a personal injury action against Gruber and Difolco. … The motorcycle driver obtained summary judgment on the issue of liability, making Gruber potentially liable for any award of damages or settlement that went beyond the insurance policy limits.”
Gruber then sued the car dealership from whom he purchased the vehicle that was in the accident. “Specifically, the plaintiffs alleged that [the car dealership] fraudulently induced Gruber to purchase and become the registered owner of the vehicle, which was intended for the use of Difolco, by misrepresenting that only the person named in the insurance policy for the vehicle, and not the registered owner of the vehicle, had any liability for the vehicle. The complaint also alleged that [the car dealership] fraudulently secured insurance coverage for the vehicle through GEICO, in Difolco’s name and that GEICO issued a New York State Insurance identification card to Gruber, even though Gruber allegedly was not named in the insurance policy.”
The car dealership moved to dismiss all claims, including the fraud claim. The lower court denied the motion to dismiss the fraud claim, and the Second Department affirmed.
After reciting the basic elements of and pleadings requirements for the cause of action for fraud, the Second Department simply held in conclusory fashion:
Here, assuming the facts alleged to be true and according Gruber and Difolco the benefit of every favorable inference (see Goshen v Mutual Life Ins. Co. of N.Y., 98 NY2d at 326; Leon v Martinez, 84 NY2d 83, 87-88), Gruber and Difolco set forth a cognizable cause of action against [the car dealership] to recover damages for fraud, and stated in sufficient detail the facts constituting the alleged wrong (see Qureshi v Vital Transp., Inc., 173 AD3d 1076, 1077-1078; Minico Ins. Agency, LLC v AJP Contr. Corp., 166 AD3d at 608; Hiu Ian Cheng v Salguero, 164 AD3d 768, 770).
The allegedly false information Plaintiffs relied upon—that “only the person named in the insurance policy for the vehicle, and not the registered owner of the vehicle, had any liability for the vehicle”—was clearly independently verifiable through available sources. Yet, neither the trial court nor the Second Department seemed concerned about any potential lack of justifiable reliance. There was no mention at all by either court of any issue concerning this element of the claim.
Commentary
Clearly, failing to read available documents that contain information that would uncover false representations is fatal to fraud claims. On the other hand, as shown by the Gruber case, failing to tap publicly-available information or investigate independent sources that might disclose the fraudulent misrepresentations is not always damning to the fraud claim.