As I have explained in this Blog, one of the most fundamental elements of a claim for civil fraud is the requirement that the party claiming fraud must have acted reasonably in relying on what it alleges is a misrepresentation so as to avoid being duped into doing something that is detrimental. That is, if there are means of reasonably ascertaining the truth of the matter allegedly misrepresented, the party trying to claim fraud must use those means to vet the representation made.
When a contract contains provisions that contradict or refute the alleged misrepresentation(s), that will sound the death knell for any attempted fraud claim. Even when the contract is not read, the party claiming fraud is placed with the responsibility to read it and know what it says—including the substance of other documents or contracts referenced in it. See, e,g., Express Terms of Contract Render any Reliance on Alleged Contrary Representations Unreasonable; Fraud Claims Barred by Signed Contracts Even if Not Read or Even Understood.
Two recent companion decisions of the Appellate Division, Second Department, are graphic examples: Axos Bank v Michael Gangi Plumbing & Heating Contrs., Inc., 2026 NY Slip Op 01175 (2d Dep’t Decided March 4, 2026) and Michael Gangi Plumbing & Heating Contrs., Inc. v World Bus. Lender, 2026 NY Slip Op 01194 (2d Dep’t Decided March 4, 2026).
Gangi Cases
In the Michael Gangi cases, a mortgagor was seeking to foreclose on two mortgages. One of the defendants who had an interest in the mortgaged real property and who signed the mortgage claimed she was defrauded into agreeing to the mortgage because a notary at the mortgage closing represented that there would be no prepayment penalty associated with the loan.
Based upon a review of the appellate Record and the briefs, it is apparent that the Second Department appellate panel had little patience with the mortgagee’s position. More on that below.
The lower court dismissed the fraud claims at the pleadings stage. The Second Department affirmed in what on its face appeared to be a straightforward and sound decision.
The Second Department ruled:
“‘[A]n essential element of any fraud [claim] is that there must be reasonable reliance, to a party’s detriment, upon the representations made by the defendant against whom the fraud claim[ ] has been asserted'” (Goldberg v KOSL Bldg. Group, LLC, 236 AD3d 995, 997, quoting Nabatkhorian v Nabatkhorian, 127 AD3d 1043, 1044). “‘A party cannot claim reliance on a misrepresentation when he or she could have discovered the truth with due diligence'” (id., quoting KNK Enters., Inc. v Harriman Enters., Inc., 33 AD3d 872, 872).
Here, the second cause of action failed to allege facts from which it may be inferred that Theisen [the mortgagor] reasonably relied on a purported representation from a notary at the Bay Ridge mortgage closing that, in accordance with a HUD-1 statement, there would be no prepayment penalty associated with the Bay Ridge loan. The Bay Ridge mortgage agreement that Theisen signed indicated that, contrary to the above, there was in fact a prepayment penalty associated with the loan. Thus, the notary’s alleged misrepresentation pertained to facts that Theisen could have and should have verified with her own due diligence (see id.). Thus, the Supreme Court properly granted that branch of the defendants’ motion which was pursuant to CPLR 3211(a)(7) to dismiss the second cause of action [for fraud].
Based upon the appellate Record, however, this case was not as straightforward as the Second Department described it. First, there was considerable dispute as to whether the notary at the closing was an agent for or could in any way bind the mortgagee bank lender. Of course, if the lender had no responsibility for the statements of the notary, it could not be responsible for any alleged misrepresentation that the notary made about the mortgage. The Second Department seemed to dispense with those issues by, in effect, assuming the lender/mortgagee would be so responsible.
The Second Department then directly addressed whether the alleged statement of the notary about there being no prepayment penalty, which was also actually stated in the HUD-1 statement given to the mortgagor, could form the basis of a fraudulent misrepresentation regarding the mortgage. While the Second Department stated that the “mortgage agreement that [the [mortgagor] signed indicated … there was in fact a prepayment penalty associated with the loan,” that was a stretch of the actual facts shown in the Record.
Of course, a mortgage simply represents the security for the loan, which is typically separately documented by promissory note(s) signed by the borrower. In Michael Gangi, the real property securing repayment of the amount loaned was owned in part by an individual who was not a borrower and who did not sign the promissory note(s) that accompanied the loan and mortgage. In fact, the mortgagor claimed not to have been given the note(s). That was relevant because the prepayment penalty provisions were not contained in the mortgage, but only in the note(s). The mortgage, however, referred to the relevant notes.
So when the Second Department stated that the mortgage actually addressed the prepayment penalty, it was embellishing a bit because it was actually the separate note(s) that specified a prepayment penalty, and those note(s) were only referred to in the mortgage, and the mortgagor did not sign those notes(s). Nevertheless, the governing principles of the law of fraud still applied to these facts. The mortgagor could not have reasonably relied upon an alleged oral misrepresentation about there being no prepayment penalty when the mortgage referenced the note(s), and the notes contained the actual terms of the loan and obligations as to payment, including the prepayment penalty.
Commentary
My take from these two companion opinions of the Second Department is that the Appellate Courts have little patience with attempted fraud claims when the party claiming to have been defrauded and duped had the means available to ascertain the true facts—including by reading and/or understanding the contractual documents being signed. While the mortgagor in Michael Gangi claimed that she neither read nor received the note(s) related to the mortgage she signed, she was clearly on notice of the relevant note(s) and had the means to obtain them and read them or understand them herself or to obtain professional advice about them.